Indirect Tax Update for week ending 01 February 2017

1. © 2017 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
The higher courts in Europe and
the UK have been relatively
quiet. The Indirect Tax highlight
this week is HMRC’s response to
the Making Tax Digital (MTD)
consultation.
HMRC has listened to the
responses to the consultation and
as a result, has announced a
number of amendments to the
proposals.
It is clear that MTD is going to
happen and UK businesses need
to be prepared for the changes.
In an Hungarian referral, the
Court of Justice has issued an
order in connection with the
recovery of input VAT by a
holding company which actively
manages its subsidiaries but does
not make a charge for those
services.
Finally, the FTT dismisses yet
another appeal by a DIY
Housebuilder.
03 February 2017
HMRC’s Response to MTD consultation
Following the announcement last year that HMRC is to press ahead with plans to
make tax digital, businesses were invited to participate in a consultation exercise. That
part of the process has now ended and HMRC has published its response to the 1,200
or so contributions. The response document provides an overview of the key themes
from the responses to the consultations and summarises some of the main decisions
the government has taken as a result of listening to stakeholders.
Whilst welcoming the initiative, most businesses that responded were concerned about
the proposed pace of change and the impact that MTD would have on the smallest of
businesses which might struggle with digital technology. Businesses were also
concerned with digital data security while advocating that their tax agents should be
given direct access.
As a result of these concerns, HMRC has announced that:
• businesses will be able to continue to use spreadsheets for record keeping
• businesses eligible for three line accounts will be able to submit a quarterly
update with only three lines of data (income, expenses and profit
• free software will be available to businesses with the most straightforward tax
affairs
• the requirement to keep digital records does not mean that businesses will also
have to make and store invoices and receipts digitally
• charities (but not their trading subsidiaries) will not need to keep digital records
• partnerships with a turnover above £10 million, MTD is deferred until 2020 due
to the complexity of their tax affairs.
Comment - The fact that HMRC has consulted on the implications of the MTD
project is commendable. The publication of the responses also shows that
HMRC is listening and is prepared to make changes to its proposals to
accommodate the needs of affected businesses. Affected businesses should
continue to contribute to the process but, more importantly, perhaps, they
should be preparing for the impending changes to any systems and accounting
software.
Issue03/2017
Making Tax Digital – HMRC
responds
Indirect Tax Update

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GRT100456
MVM
Court of Justice of the European Union
The issue in this case was whether VAT input tax incurred by a holding company could be reclaimed.
The referral to the Court of Justice was from the Hungarian courts which sought guidance from the
Court of Justice on whether VAT incurred by a holding company was eligible for reclaim in
circumstances where the holding company made no charges to its subsidiaries.
The Court had previously ruled in the case of Larentia & Minerva that a holding company which
actively managed its subsidiaries in return for management fees was undertaking an economic activity
for VAT purposes and was entitled to recover VAT it had incurred provided that the economic
activity in question led to taxable supplies being made. In that case, the imposition of management
charges was a taxable activity and input VAT could be reclaimed. However, in the MVM case, the
holding company incurred costs relating to its active management of its subsidiaries but had chosen
not to make any recharges of those costs to its subsidiaries or to make any management charges.
In the circumstances, the Court of Justice decided not to proceed to a judgment but to issue a
reasoned order of the court. The Court decided that MVM did not undertake any economic activity
for VAT purposes and, consequently, was not entitled to reclaim the VAT it had incurred on the
various costs. The taxpayer argued that it was entitled to a reclaim because, although it did not make
any direct recharges, it did receive enhanced dividends.
Comment
Under the EU VAT
regime, recoverability
of input VAT is
dependent on the
claimant being involved
in the making of
taxable supplies (ie
being a taxable person).
Here, there were no
charges made to the
subsidiaries to recoup
costs. As such, there
were no supplies made
for consideration ie
there was no economic
activity against which
the input tax could be
claimed.Another DIY appeal fails
Comment
Here is another case
where what was
constructed was
designed as and was
clearly meant to be the
private residence of a
private individual and
his family.
Failure to comply fully
with the planning
consent meant that
HMRC was unable to
allow the DIY VAT
claim.
In this case, the VAT at
stake was over £7,000.
A costly mistake that
the Tribunal refused to
remedy.
First-tier Tribunal
The construction of a dwelling in the UK is zero-rated for VAT purposes provided that certain
conditions are met. This zero-rating fulfils a long standing ‘public interest’ policy in the UK of not
charging VAT in relation to the supply of domestic housing. With the advent of DIY house-builder
projects, zero-rating was, effectively, extended to construction and conversion projects undertaken by
private individuals. Zero-rating is dependent on the project meeting certain conditions, one of which
is that the project must both receive and comply with statutory planning consents.
The First-tier Tax Tribunal (FTT) is littered with cases where HMRC has refused to allow a DIY
house-builder from claiming VAT relief. This week is no exception. In the case of Jason Campbell
(Case TC05621), the Tribunal dismissed the claimant’s appeal against HMRC’s refusal to pay. HMRC
refused to pay the claim on the basis that the planning permission did not allow for the separate use
of the dwelling and did not, therefore, meet the statutory definition of a building designed as a
dwelling. The Tribunal agreed with HMRC. The planning permission was subsequently amended to
remove the separate use condition. However, the Tribunal confirmed that the removal of the
condition did not alter the fact that, at the time the claim for a refund was submitted, the planning
permission restricted the separate use of the building. A subsequent amendment cannot rectify that
fault and, accordingly, the appeal was dismissed.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556
Vinny
McCullagh
London & South East vinny.mccullagh@uk.gt.com (0)20 7383 5100