Indirect Tax Update for week ending 2 November 2016

1. © 2016 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
With the Court of Justice on
judicial vacation this week, we
turn to the UK First-tier Tax
Tribunal for our news.
The question of whether a
business acts as principal or as
agent was the key issue in the
case of Hotels4U.com. HMRC
considered that the business
acted as a principal meaning that
its supplies should have been
subject to the Tour Operators'
Margin Scheme (TOMS).
The FTT has also issued a
decision in the case of Water
Property Ltd – a case relating to
whether an 'option to tax'
exercised by the taxpayer should
have been disapplied under the
anti-avoidance rules.
Finally, we report that importers
from six countries need to take
action to ensure that, from 1
January 2017, they can continue
to import goods under the duty
preference regime.
4 November 2016
Hotels4U.com v HMRC - FTT
Whether a business acts as a principal or as an agent is a crucial consideration not only
from a commercial perspective but also from a VAT perspective. Under the Tour
Operators' Margin Scheme (TOMS), where designated travel services are supplied by a
business acting as a principal, those supplies are deemed to take place in the country
where that business is established and VAT is due on those supplies in that country.
In the Hotels4U.com case, HMRC asserted that the business was acting as a principal.
This meant that the company was required to account for UK VAT on its supplies of
hotel bedrooms located in other EU countries. Hotels4U.com argued that, in fact, it
acted at all times as an agent of the hotel meaning that its supply of agency services
were not within the scope of UK VAT but were liable to VAT in the country where
the hotel principal belongs.
This issue – the question of whether the business is acting as a principal or as an agent
– is a re-run of the issue in the case of SecretHotels2. In that case – a case which went
all the way to the UK's Supreme Court - the court decided that, on the evidence, the
company was acting as an agent. HMRC argued that, despite what was set out in the
terms and conditions of the contracts, the economic reality was that the business was
acting as a principal. The Supreme Court said no! Absent a sham arrangement, it is
necessary to take account of the contractual agreement between the parties. On the
evidence, and after a proper analysis of the contracts, it was clear that the parties
intended that SecretHotels2 was to act as an agent.
Faced with the same question in the Hotels4U case, it was hardly surprising that the
FTT followed the dictum of the Supreme Court. The evidence and the contractual
arrangements were such that the FTT could only conclude that, under UK law,
Hotels4U.com acted as an agent and its supplies of services were not taxable under the
Margin Scheme.
Comment – given the clear similarity between this case and the earlier
SecretHotels2 case, the outcome was almost inevitable. However, the matter is
not quite dead and buried just yet as the FTT may refer the matter to the Court
of Justice to establish whether there is any difference between "acting as an
intermediary" in EU law or "acting as an agent" in UK law. The FTT has
deferred that decision for another day.
Issue32/2016
Principal v Agent – it matters!
Indirect Tax Update

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GRT100456
Water Property Ltd
First-tier Tax Tribunal
The Tribunal has issued a decision this week in relation to whether an option to tax exercised by the
taxpayer in relation to a property should be disapplied under the anti-avoidance provisions of the
UK's VAT Act. In this case, the company purchased an old public house and intended to convert it
into a day nursery (on the ground floor) and residential accommodation (on the first floor). It was to
grant a lease of the ground floor to the operator of the nursery (a company jointly owned by the
director of the developer company and his wife).
HMRC took the view that the aggregate of the acquisition cost and the cost of the refurbishment
brought the property within the Capital Goods Scheme (CGS). As a consequence, as the nursery
operator and the developer were "connected" and the nursery activity was a VAT exempt activity,
HMRC contended that the developer's option to tax should be disapplied. This meant that Water
Property Ltd was not entitled to reclaim the VAT it had incurred on the property.
The Tribunal considered that the building was not a capital item under the CGS. It also took the view
that, for the option to tax to be disapplied, there had to be avoidance or abuse at the heart of the
taxpayer's arrangements. On the basis that there was no evidence whatsoever of such avoidance or
abuse, the option to tax should not be disapplied.
Comment
An option to tax can be
disapplied in a number
of circumstances. One
instance is where
parties to a transaction
are connected with
each other and the land
in question is expected
to be used for a VAT
exempt purpose.
The Tribunal in this
case has said that there
must also be an abuse
or avoidance motive if
the option to tax is to
be disapplied. HMRC
may appeal this
decision.Importers – are you ready fro REX?
Comment
REX is an IT change
which has been
mandated by the
introduction of the
Union Customs Code
("UCC"). The EU
Commission considers
it to be a facilitation
measure to make
international trade
documentation
electronic.
Failure to comply with
the new REX scheme
may result in a loss of
GSP benefit for the
importer meaning that
the full rate of customs
duty may be payable.
New Import regime from January 2017
Six countries – (Congo, Democratic Republic of Congo, India, Kenya, Laos, and the Solomon
Islands) will begin to use the new REX (Registered Exporters) scheme from 1 January 2017. REX is
a new system which requires exporters in GSP beneficiary countries to make invoice declarations
rather than (as currently), issuing a "GSP Form A" certificate.
Exporters established in these affected countries need to register for REX with their local competent
authority, and this information will be shared electronically with EU customs systems. Registration
under the REX scheme will mean that "GSP Form A" certificates will eventually disappear.
Businesses that currently benefit from GSP preference when importing from the six countries listed
above should ensure that their suppliers in those countries are registered for REX as a matter of
urgency. GSP certificates are likely to disappear quickly after launch, and as such, any imports from
traders not registered under the REX scheme will not benefit from a duty reduction when the goods
arrive in the EU.
It is also important to stress that REX will not remove an importer's obligation to ensure that goods
for which preference is claimed actually meet the relevant rules of origin.
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