Indirect tax news from the past week
Kaplan International Colleges UK (KIC UK) incurred costs in 70 countries (principally China, Hong Kong, India, and Nigeria) recruiting overseas students for its UK colleges. Until 2014, it incurred these costs directly. It therefore had to account for UK VAT under the reverse charge, which it could not recover as it had formed a VAT group with the colleges whose activity was exempt. For sound commercial reasons, Kaplan then established a company in Hong Kong (KPS HK) which consolidated the recruitment costs before apportioning them between the colleges. The CJEU has ruled that this did not convert the recruitment costs into an exempt supply under the cost-sharing exemption (CSE). KPS HK was providing its services to the UK VAT group, one of whose members (KIC UK itself) was not a member of the cost-sharing group as it did not provide exempt education. If the CSE applied to charges from KPS HK to the UK VAT group (meaning that no reverse charge arose) then there was a risk that KIC UK would benefit from the exemption. This risk could not be tolerated, and therefore the CSE could not apply to any of KPS HK’s charges. (Contact: Laurie Pay).
VAT recovery on supplies of financial and insurance services to the EU
Earlier this month, the Chancellor of the Exchequer confirmed that, with effect from 1 January 2021, businesses will be entitled to recover VAT incurred in relation to specified supplies of financial services and insurance made to counterparties outside the UK (compared to outside the EU at present), a move which is expected to allow UK businesses to recover an additional £800m of input tax each year. This approach was originally set out in the VAT (Input Tax) (Specified Supplies) (EU Exit) (No. 2) Regulations 2019, which is expected to be the mechanism for achieving this objective. We understand that HMRC will be issuing guidance on how the change will apply, which may address how to calculate recovery rates for VAT quarters and partial exemption years which straddle 1 January, and whether taxpayers can re-attribute input tax already incurred to future specified supplies. Any business currently making exempt supplies of finance or insurance to EU clients should review the potential impact of this change on their partial exemption calculations. (Contact: Daniel Johnson).
The Core (Swindon) Ltd: juice cleanse programmes are not beverages – UT
The Core, a cafe in Swindon, sold four-packs of freshly prepared vegetable and fruit juices as daily meal replacements (“juice cleanse programmes” or JCPs). The Upper Tribunal has now endorsed the FTT’s decision that liquidising the ingredients created a drink that was not a “beverage”, and that the JCPs were therefore zero-rated as supplies of food. The FTT’s reasoning depended partly on how the product was marketed, and the UT was satisfied that this was an appropriate part of the FTT’s multifactorial assessment (alongside factors such as taste and texture, ingredients, and manufacturing process). Marketing can be an important indicator in food liability cases (not just as a tie-breaker where there might be different ways of using food), but it does not have special significance. A beverage is a drink which might slake someone’s thirst, or might be offered as a drink to a guest. The FTT had been entitled to find that the JCPs were not beverages, and HMRC’s appeal was dismissed. (Contact: Katy Broome).
RCB 18(2020): VAT liability of school holiday clubs
Parents who drop their children off at holiday camps want them to have some fun during the holidays, but they also need to park them somewhere during the working day. In November 2019, the FTT ruled in RSR Sports Ltd that the predominant purpose of holiday camps run under the Get Active Sports brand was childcare, and that they were therefore exempt from VAT. Judge Tony Beare described the question as "finely-balanced" (recognising earlier FTT decisions which had denied exemption) but seemed to be in little doubt overall that exemption should apply. HMRC have now issued RCB 18(2020) which describes when they will accept that holiday clubs run by other organisations that are also regulated (e.g. by OFSTED or the CQC) qualify for exemption. In their view, to qualify for exemption, members of staff should merely be supervising activities, should not hold any coaching or teaching qualifications, and should not be providing activities to an external standard. Any activities should be "merely an adjunct to the essential service of childcare". Providers who meet these conditions may be able to reclaim VAT overpaid in the last four years without risk of further challenge from HMRC. (Contact: David Walters).