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LEAD ARTICLE REPORT SHOWS MORE THAN HALF OF HMRC’S PENALTIES ARE OVERTURNED ON REVIEW In January 2011, the Financial Times published an article which reported that more than half of the VAT penalties issued by HMRC had been overturned on appeal. This was according to a recent study which indicated that HMRC’s penalty review procedure introduced in 2009 was making it easier to query their decisions. The fact that over half of the penalties were overturned suggests that some VAT Officers might be acting over-zealously, and issuing penalties inappropriately. Conversely, it could also mean that the penalty review procedure is being applied fairly by HMRC, and that taxpayers can have a degree of confidence in it. According to official data obtained by UHY Hacker Young under the Freedom of Information Act, HMRC carried out 28,912 internal VAT reviews between April 2009 and September 2010. Out of this number, 16,270 decisions were then subsequently reversed. UHY Hacker Young said the figures were disturbing, with one of their VAT partners commenting that VAT Officers appeared to be handing out penalties like traffic wardens hand out parking tickets. He said he could understand a small percentage of penalties being overturned, but a rate of over 50% was staggering. HMRC has responded to the criticism by rejecting claims that its staff are under pressure to issue fines, stating that the majority of the penalties related to surcharges for late returns which were subsequently withdrawn or reduced because taxpayers had reasonable excuses for late filing. HMRC believes the statistics show that the internal review procedure was working well, with a spokesman commenting “The internal review process is there because we are listening to our customers. It saves unnecessary hassle in the long run.” A similar pattern has emerged from the statistics covering all taxes during the first year of the review period. Just over half of HMRC’s penalty decisions and one-third of other disputed decisions were changed or cancelled upon review. HMRC said its assessment decisions were less likely to be reversed than late filing penalties because they resulted from enquiries and research made in advance of the decision. HMRC said that only a small proportion of the millions of decisions it makes each year are actually queried. Furthermore, the removal of a penalty after someone gives a reasonable excuse did not mean that the penalty was wrongly levied to begin with.
COURT CASES UPPER TRIBUNAL SAYS FACILITIES FOR CHILDREN’S PARTIES WAS A SINGLE TAXABLE SUPPLY
This case concerns the provision of facilities for children’s parties, and whether there is a separate supply of food and use of the hall.
The Appellant’s premises, known as ‘The Barn’, is hired out for children’s parties, and can be booked for an inclusive price per head comprising the use of the hall for 75 minutes followed by a basic buffet. A staff member greets the children at the beginning of the session, and tidies up at the end in order to make sure the hall is ready for the next party. However, it is the responsibility of the parents to supervise the children. At the end of the 75-minute play session, the children move to a separate area to enjoy the buffet. The First-Tier Tribunal (FTT) had previously held that the use of the hall and the provision of refreshments were two separate supplies, and that the supply of the hall was an exempt grant of a licence to occupy land. HMRC appealed on the basis that there was a single taxable supply, and that even if there were separate supplies, the provision of the play barn facilities fell short of being an exempt right to occupy land.
In its analysis, the Upper Tribunal (UT) said the FTT had made a significant error and had misdirected itself. The FTT held that the use of the hall and the provision of refreshments were both of use to customers and could each serve an economic purpose if supplied in isolation. As such, they were two separate supplies. However, the UT said the correct test was the one established in the Weightwatchers and Baxendale cases, neither of which were referred to in the FTT decision. These cases established that the issue of whether a single supply existed should be viewed objectively from the perspective of a customer, which includes all the ancillary elements ignored by FTT. Bringing these elements into account, the UT found that, from a typical customer’s perspective, there was a single standard-rated supply of facilities for a children’s party. The Court’s finding of a single supply meant HMRC’s appeal was allowed. However, the UT still went on to consider whether exemption would apply to the provision of the hall if treated as a separate supply. The Judge found that the right to use the hall fell short of a right to occupy land, and so would not have fallen within the exemption. The main reasons for this were that the customers paid a charge per child, and could not bring extra children beyond the numbers paid for. This was incompatible with a rental agreement, where the only limitations on numbers would be those imposed by health and safety rules. As such, even if the Appellant had successfully argued for two separate supplies, she still would have lost on the basis that both supplies would have been taxable anyway. Diana Bryce t/a ‘The Barn’ [2010] UKUT 26 (TCC)
UPPER TRIBUNAL SAYS DELIVERIES OF HOT FOOD WERE NOT SUPPLIES OF CATERING
This case concerns whether deliveries of takeaway food which had been kept hot were zero-rated supplies of freshly cooked food, or standard-rated supplies of catering.
The Appellant supplied a range of foods from around the world including European, Indian and Chinese options. Only delivered food was offered. Whilst most of the items had a clear VAT liability (e.g. burgers were standard-rated and salads zero-rated), a dispute arose over a small number of items such as prawn toast, crispy duck pancakes, onion bhajis, and spring rolls. These were cooked on the premises and kept heated, but only for health and safety reasons. They could be enjoyed hot or cold.
Previously, the First Tier Tribunal (FTT) had found for HMRC by concluding that the food was heated above ambient temperature and was therefore ‘hot food’. The Appellant appealed on a point of law, contending that the items were not ‘hot food’ for the purpose of catering. The primary purpose of the heating was to demonstrate that the food had been freshly cooked rather than enabling it to be consumed hot.
In its analysis, the Upper Tribunal (UT) firstly considered the decision in John Pimblett and Sons, a taxpayer win in a similar case. The test applied in that case was to determine the supplier’s subjective purpose in heating the items. It is not part of the test that the supplier knows that the items will or may be consumed hot. In Pimblett, the primary purpose was held to be the cooking of the pies, rather than the supply of them hot to customers. The two key differences from this case were that the pies were not kept hot with any kind of heating apparatus, and that the customer came to the supplier’s premises to buy the pies, and enjoy the atmosphere and aroma. The UT also considered the Malik case, where the taxpayer lost. In this case the food was heated as part of the cooking process, but the primary purpose was to supply food for hot consumption. In that case, there were steps taken to keep the food hot for reasons of consumer enjoyment. This differed from the current case in that, due to food safety regulations, the food needed to be kept either above 63C or be blast-chilled (commercially unfeasible in the current case) to 8C.
The UT Tribunal looked at the findings of fact from the FTT, and found that in this particular case, the purpose of heating the food was plainly to demonstrate to the customer that it had been freshly cooked. The purpose of the subsequent heating was to comply with food safety regulations and to avoid treating the items differently from other hot items. This meant the Pimblett test had not been correctly applied by the FTT. HMRC had stated in its skeleton argument that “the intention is that all customers get hot food and they get it because the Appellant intends to provide it to them while it is still hot.” The issue was in HMRC’s use of the word ‘intention’, as a distinction had been drawn between intention and purpose, with the former suggesting an inevitable consequence. The UTT noted that a clear distinction was made in Pimblett and Malik between the purpose of the supplier and the consequence of heating. To illustrate this point, it is not enough for a baker to supply fresh baked bread; it must also appear fresh baked. It may be eaten hot, but that is not the purpose of the bread being provided hot.
The UT subsequently accepted the Appellant’s reasons for keeping the items hot. In terms of general principles, the purpose of demonstrating food was freshly-baked and the purpose of enabling the food to be consumed hot, were held to be separate concepts, despite one being a consequence of the other.
Deliverance Ltd ([2011] UKUT 58 (TCC)
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HMRC NEWS REVENUE & CUSTOMS BRIEF 01/11
VAT and AMLD: HMRC's treatment of electronic lottery machines and bingo machines Clarification of HMRC’s position following last year’s First Tier Tribunal decision in Oasis Technologies (UK) Ltd (TC00581). The Brief also explains the treatment of electronic bingo machines.# 1. Lottery machines VAT In the Oasis Technologies case, the Tribunal held that the Oasis Electronic Lottery Ticket Vending Machine (ELTVM) is a gaming machine within Note 1(d) Group 4 Sch 9 VATA 1994, and that it also grants a right to participate in a lottery within Item 2 Group 4 Sch 9. It ruled that the supplies made from it are exempt from VAT.
In light of the Tribunal’s findings, HMRC now accepts that a machine operating in the same way as the Oasis ELTVM shall be treated as granting the right to participate in a lottery. The income received will be exempt if the machine has all of the following characteristics:
The Brief says refund claims can be made where VAT has been accounted for on the income of qualifying machines, subject to the normal rules on capping and unjust enrichment. AMLD Although the Tribunal did not consider the liability of the machines to Amusement Machine Licence Duty (AMLD), it did find that the machines in question were gaming machines. HMRC says this is consistent with its view that the machines are liable to AMLD, and so will continue to issue AMLD assessments on lottery machines without an appropriate AMLD licence.
2. Bingo machines
HMRC says it is aware that a number of manufacturers in the gaming industry have recently developed machines which are used to play an electronic version of bingo. Where a machine meets the characteristics of bingo machines listed in guidance published by the Gambling Commission in June 2009 ('Key Characteristics of Bingo'), HMRC will accept that for VAT and gambling duties purposes, the machine is designed or adapted for playing bingo. The income derived from the machine is therefore exempt from VAT under Item 1 Group 4 Sch 9 VATA 1994. The Brief closes by pointing out that a machine which only allows the playing of bingo does not require an AMLD licence.
REVENUE & CUSTOMS BRIEF 03/11
VAT: Changes to the option to tax for supplies of land and buildings (anti-avoidance rule) The Brief outlines the introduction of a new ‘2% occupation rule’, and a change in the way that occupation by reference to Automatic Teller Machines (ATMs) is treated. It explains how minor changes will be made to the option to tax anti-avoidance rule, effective 1 March 2011. Currently, the option to tax is disapplied where the grantor, or a person connected to the grantor, is in exempt occupation of the land and other conditions in the anti-avoidance rule are met. The changes will mean that an option to tax will no longer be disapplied where the grantor or persons connected with the grantor only occupy minor parts of buildings (no more than 2%), even if the other conditions of the anti-avoidance rule are met. The Brief says the treatment of ATMs will also be amended from 1 March 2011, whereupon occupation of any building solely by way of ATMs will not be treated as occupation for the purposes of the anti-avoidance test.
Under the anti-avoidance provision in Schedule 10 of the VAT Act, an option to tax is disapplied where two key tests are satisfied:
As a result of the disapplication, the grantor’s supplies are exempt from VAT. This can affect the amount of VAT the grantor is able to reclaim on costs. The amendment concerns the second of the above tests – the meaning of 'exempt land'.
Under paragraph 15 Sch 10 VATA 1994, land is 'exempt land' if it is to be occupied by the grantor, the 'development financier', or a person connected to either the grantor or financier, and the occupation is not 'wholly or substantially wholly for eligible purposes'. To be in eligible occupation, a person must be making predominantly taxable supplies, with 'Wholly or substantially wholly' being defined as at least 80%.
The rigid nature of the anti-avoidance test has caused concerns about its effect on certain transactions. Following representations to HMRC, the test was amended from 1 April 2010, and a new '10% occupation test' was introduced. This allowed occupation of no more than 10% of a building by a person providing finance for its purchase or development to be ignored. HMRC have subsequently been made aware of instances where minor occupation by the grantor (or a person connected to the grantor) can cause an option to be disapplied, even though there is no deliberate attempt to avoid tax. The introduction of a further 2% occupation rule', applicable where the grantor or person connected to the grantor is to be in occupation, addresses the concerns raised, and supplements the existing 10% rule.
From 1 March 2011, a grantor is not treated as being in occupation where the conditions of the ‘2% occupation rule’ are met. The new rule works as follows:
REVENUE & CUSTOMS BRIEF 04/11
VAT: Treatment of commercially operated sports leagues Confirmation of HMRC's view on the VAT treatment of commercially operated sports leagues, issued in response to enquiries from organisations that run football leagues. The Brief reflects what HMRC's policy has always been, rather than being a change of policy.
The Brief says that a number of commercial organisations run football and other sports leagues (SLP). Typically, SLPs will do most or all of the following:
Payments for such supplies are collected in a variety of ways. For example, the SLP may charge a one off 'admin fee' to teams plus a 'match fee' for each game that is played. HMRC says some SLPs have suggested they are making supplies of land that are exempt under Group 1, Sch 9 VATA 1994 (i.e. a series of lets of sports pitches).
HMRC disagrees with this analysis. It says the supplies made by SLPs consist of a bundle of elements which are integral to each other, but without any individual one being a principal element to which all others are ancillary. As such, it is necessary to establish the character of the overarching supply to determine whether it falls within the exemption. In HMRC's view, the overarching supply is of participation in a sports league, not a supply of land. Such supplies are standard-rated. However, supplies made by certain non-profit making bodies may qualify for exemption under Group 10 Sch 9.
The Brief closes by saying that some SLPs have asked HMRC to consider whether they have received misleading advice from VAT Officers in the past on the liability of their supplies. Such cases must be considered on an individual basis by the appropriate HMRC Complaints Team. The Brief recommend SLPs to contact their Complaints Team if they:
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