Weekly VAT News

Indirect tax news from the past week


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Target Group: outsourced loan servicing is subject to VAT – CA

Since the Court of Appeal’s judgment in EDS in 2003, HMRC have accepted that outsourced loan servicing is exempt from VAT provided that the servicer is involved in arranging the initial transfer of funds to the borrower. In Target Group, the CA has endorsed this approach. Target provided a complete loan administration service to banks: processing loan repayments, contacting borrowers where necessary, calculating interest, and maintaining loan accounts. However, its involvement only started once the bank had made the loan. Target was not involved in originating the loan, and the CA held that its other activities did not amount to exempt payment processing services in their own right. Target did not credit or debit accounts directly, and payments were executed by third parties (such as BACS) acting on its instructions, rather than by Target itself. Applying CJEU judgments such as DPAS, this was not an exempt payment processing service. The CA also rejected Target’s arguments that it was providing transactions concerning debt (which might, in any event, have been taxable debt collection), and that it was operating bank accounts. Target’s appeal was dismissed. See TaxScape for more commentary. (Contact: Daniel Johnson)

Terminal Markets Order to apply to UK Emissions Trading Scheme

In a written ministerial statement, the government has confirmed that emissions allowances traded on the UK Emissions Trading Scheme (UK ETS) are covered by the Terminal Markets Order (TMO) (where the relevant conditions are met) and that legislation will be introduced to this effect. Market participants can bid for UK ETS allowances on a UK auction platform or can acquire futures contracts in UK ETS allowances on the secondary market. The zero-rating afforded to such trades under the TMO minimises the administrative burden while ensuring that the correct amount of VAT is collected at the final stage of consumption. (Contact: Zoe Hawes) 

DHL Air: compliance history relevant to retroactive end use relief application – FTT

In 2016-17, DHL Air imported seven aircraft from the US. Its end use authorisation had expired the previous year, and HMRC issued a post-clearance demand notice (C18) for import duty of £3m. DHL appealed to the First-tier Tribunal, after HMRC rejected its application for retroactive authorisation. The FTT has ruled that the dispute needs to proceed to a full hearing. DHL Air considered that its application related to imports that had already taken place, and that under the Union Customs Code HMRC were therefore obliged to authorise it retroactively. However, the FTT thought that there was a respectable argument that retroactive authorisations are subject to the same requirements as prospective applications. DHL Air therefore had to provide the “necessary assurance of the proper conduct of the operations”, meaning that its compliance record would be a relevant matter for the tribunal to consider. The FTT also rejected other procedural arguments by which DHL Air sought to bar HMRC from parts of the appeal, and noted that DHL Air would need to prove that there were “exceptional circumstances” if its application was solely retroactive. (Contact: Bob Jones)

CB: turnover established by income tax investigation treated as VAT-inclusive – CJEU

CB owned the Lito Group, which provided orchestras to take part in religious and village festivals in Galicia. Neither Lito Group nor CB (who was paid a 10% personal agency fee by the company) declared cash they received for direct tax or VAT purposes. Following an investigation, the Spanish tax authorities established that CB had on average earned €64k annually, on which he should have paid income tax. The CJEU has now ruled that this amount included VAT that CB should have accounted for. If the VAT position could be corrected (i.e. invoices issued by CB to Lito, which could then recover input tax) then the €64k might have been seen as CB’s net annual turnover. However, on the basis that it was not possible to regularise the VAT position, then the amount established for income tax had to be treated as VAT-inclusive. (Contact: Adam Routledge)