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ITU
Summary
Budget week sees the
introduction of new legislation
to make certain charities fall
within the "section 33" VAT
refund scheme. A welcome move
which recognises the essential
role that these charities perform.
The Budget also introduces
proposals that will affect UK
partly exempt businesses with
branches established overseas.
The proposed legislation intends
to prevent UK businesses from
including taxable supplies made
by overseas branches from being
included in the partial exemption
formula.
The First-tier Tribunal has also
issued a number of fresh and
interesting decisions.
23 March 2015
2015 Budget – indirect tax provisions
Although there was not a great deal to shout about from an indirect tax point of view
in last week's Budget, the Chancellor did announce a number of welcome measures
aimed at helping certain qualifying charities to reclaim VAT they incur on non-business
activities. Historically, the activities of these charities have been regarded as not
constituting an 'economic' or business activity which has meant that VAT incurred on
the purchase of goods or services has been an absolute cost. The new arrangements
are intended to alleviate that problem and will be welcomed by all concerned.
Charities involved in search and rescue (defined as charities whose main purpose is to
search for and rescue people at risk of death or serious injury or whose main purpose
is to support, develop or promote such charities), will, from 1 April 2015, be entitled to
submit a claim to HMRC for VAT incurred in relation to non-business activities.
Similarly, air ambulance charities, medical courier charities and charities which provide
palliative care services (hospices) will also benefit from the refund scheme.
Due to the timing of this year's General Election, the Finance Bill will become the
Finance Act in record time and will make charities, which meet certain legal conditions,
'qualifying' charities. In essence, for search and rescue charities, the main condition is
that the activities will have to be co-ordinated by a 'relevant' authority (such as the
Secretary of State, a Police force or, in Scotland, a Fire and Rescue Service). An air
ambulance charity will need to provide air ambulance services pursuant to
arrangements made with an NHS body. Medical courier charities will be required to
provide services for the transportation of items intended for use for medical purposes,
such as blood, medicines and other medical supplies and palliative care charities will be
required to provide palliative care to terminally ill patients at the direction of, or under
the supervision of a registered medical practitioner or a registered nurse.
Provided the conditions are met, qualifying charities will be entitled to submit a claim
for the VAT they incur. Some of the charities will also provide goods or services that
are regarded as business activities and, in that situation, the new law will require
qualifying charities to apportion the VAT between business and non-business activities
so that only the input tax attributable to the non-business activities is claimed.
VAT at 20% can represent a significant cost to the affected charities which provide
essential services. By introducing the refund scheme, the Chancellor has, clearly,
recognised the value of these services.
Issue11|2015
A charitable Chancellor!
Indirect Tax Update

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Partial exemption methods
Draft legislation
HMRC has announced that it intends to introduce legislation which will limit the recovery of input
tax by UK businesses with foreign branches. Currently, UK law allows VAT incurred on the
purchase of goods or services, which is attributable to supplies made outside the UK, but which
would be taxable if made in the UK, to be reclaimed. The proposed legislation will alter the basis of
VAT recovery in such situations.
The draft legislation is intended to bring the UK law into line with the judgment of the Court of
Justice in the recent case involving Credit Lyonnais. In that case, the Court confirmed that the
taxpayer was not entitled to include taxable turnover generated by foreign branches in either the
numerator or the denominator of its partial exemption formula.
According to HMRC's explanatory notes accompanying the draft statutory instrument, these
amendments will mean that deduction of input tax on overhead costs used to support the activities of
foreign establishments of a business can only be calculated by reference to supplies made by that
business’s UK establishments.
Assuming the draft proposals are adopted, businesses that currently include 'foreign' supplies in their
partial exemption formulae will, in due course, need to amend their methods and, where necessary,
agree a new special method with HMRC.
Comment
The VAT Directive
provides for input VAT
recovery where the cost
is attributable to taxable
supplies wherever they
are made. This ensures
the neutrality of the
VAT system.
The CJEU confirmed
in Credit Lyonnais that
the formula to
determine the
deductible proportion
of input tax cannot
include turnover
generated from
overseas
establishments.First-tier Tribunal round up
Comment
The first case highlights
the fact that HMRC
occasionally require
information. If they do
not receive it, they are
acting reasonably if the
refuse an application.
The second case
demonstrates the
importance of keeping
a contemporaneous
note of any dealings
with HMRC.
The final case confirms
that VAT can only be
reclaimed as input tax if
it relates to supplies
made by a taxable
person.
The FTT has been busy this week releasing a number of interesting decisions. In the case of RCM
Worldwide Trading Ltd, the taxpayer had appealed against HMRC's refusal to grant it a WOWGR
(effectively permission to operate an Excise warehouse). The question was whether HMRC's
decision was reasonable. The Tribunal considered that the taxpayer's inability or refusal to provide
information requested by HMRC in order to consider the application meant that HMRC's decision
was not unreasonable.
In R. McDonald & A. McDevitt t/a The Picnic Basket, the issue was whether the taxpayer had
operated the correct retail scheme. The taxpayer claimed that its accountant had agreed the use of the
method in a phone call with an HMRC officer. HMRC denied that the alleged phone call had taken
place and argued that a much greater proportion of the taxpayer's supplies were standard rated than
had been declared. The taxpayer could provide no evidence that the phone call had taken place, but
even if it had, the Tribunal concluded that there was sufficient information published in the retail
scheme public notices, to have informed the taxpayer that the retail scheme it had chosen was
incorrect. The appeal was dismissed.
In Charles Dorian Lissack, the taxpayer had claimed input VAT on legal fees incurred in respect of a
dispute which related to a supply made by him in a period before he was voluntarily registered for
VAT. The Tribunal dismissed his appeal. The supply by the Appellant was made at a time when the
VAT registration was not effective and as such the VAT on the legal fees fails to constitute input tax.
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
Richard Gilroy London & South East richard.gilroy@uk.gt.com (0)20 7728 3170