Indirect tax news from the past week
End of the Transition Period
With only days left before the end of the Transition Period, the UK and the EU agreed the terms of a future economic partnership in the EU-UK Trade and Cooperation Agreement. The UK passed the Taxation (Post-transition Period) Act 2020, the EU (Future Relationship) Act 2020, and the UK Internal Market Act 2020. Appointed Day Orders brought parts of TCTA 2018 into effect, as well as a raft of Statutory Instruments (for customs, VAT, and excise duty, many of which were drafted in case of a no-deal Brexit but remained fit for purpose). Volumes of new and updated guidance appeared on Gov.uk. We will be holding a webinar entitled Post-Brexit UK – are you ready for the new trading environment? at 11:00 GMT/12:00 CET on Friday 8 January 2021, hosted by Amanda Tickel, our Brexit Insight lead, during which our panel of experts will reflect on recent developments and explore the immediate impacts and implications of the new trading environment for the UK, and the practical actions businesses need to take to ensure they are able to continue compliant trading. Click here to register.
RCB 1(2021): Tampon tax abolished as UK introduces first new post-Brexit zero rate
As set out in RCB 1(2021), FA 2016 provided that a new zero rate should apply to women’s sanitary products in place of the 5% reduced rate, from the earliest date that was consistent with the UK’s EU obligations. Article 3 of SI 2020/1642 has now brought this into effect from 1 January 2021. HM Treasury’s press release notes that this only became possible when the end of the Transition Period meant that the UK was no longer bound by the Principal VAT Directive. As an expression of UK sovereignty, the measure is relatively affordable, as the government has been ring-fencing VAT on sanitary products for several years and allocating it to the Tampon Tax Fund. The new zero rate, although welcome in its own right, may not lead to widespread acceptance of many other requests for new or extended zero rates that have been submitted to the government since the Brexit process began. (Contact: Chris Cherrill).
Colchester College: fully-funded education is a business activity – UT
Colchester College reclaimed part of the VAT on its 2008 campus redevelopment, applying the Lennartz mechanism which allowed VAT recovery on costs relating to non-business activities, subject to a balancing output tax charge over the next ten years. In 2014, the College decided that the provision of fully-funded education was an exempt rather than a non-business activity, and reclaimed £1.5m of output tax that it had accounted for since the project completed. The Upper Tribunal agreed that the provision of fully-funded education was an exempt business activity (overruling the FTT’s decision in HMRC’s favour on this point). The funding formulae used by funding agencies were highly specific to the College’s outputs – in effect it was paid for educating students, even if they could not be identified at the time the funding was made available. Despite this, the College’s claim failed - whilst HMRC were out of time to assess the VAT recovered on the redevelopment, yet the College was in time to reclaim much of the output tax accounted for since then, the UT decided that the set-off provisions applied. HMRC were entitled to take the £2m over-recovered into account and deduct it from the College’s £1.5m claim, reducing it to nil. (Contact: Jacqui Nicholls).
Franck: no VAT on reverse factoring fees – CJEU
Konzum, a Croatian supermarket, could not borrow further funds from domestic banks in 2012 because of its level of indebtedness, so had to find alternative finance. Franck, a coffee processor, stepped in to help through a “reverse factoring” structure. It was prepared to pay Konzum for a bill of exchange (an IOU promising repayment at a future date), which it factored for 95-100% of its face value. Franck passed the funds received from the factor to Konzum, and guaranteed that Konzum would repay the factor. Various fees were payable in relation to this – Konzum had to pay any fees and interest that Franck incurred, plus 1% of the bill of exchange. The Croatian tax authorities thought that Franck was acting as a debt collector, and should have charged VAT of €2m to Konzum. The CJEU has concluded that its service was exempt. The principal feature of Franck’s service was making funds available to Konzum. The fact that Franck was not a bank, did not receive Konzum’s repayments, and was (curiously) described as a borrower rather than a lender in one agreement did not alter the economic and commercial reality. Charges for providing funds in return for the issue of a negotiable instrument like a bill of exchange were consideration for an exempt financial supply. (Contact: David Walters).