The Shop Direct Group – Corporation Tax on reclaimed VAT
In a relatively high profile case, shop direct group (SDG) has lost its third successive challenge to HMRC’s argument that it should pay corporation tax on £300m of VAT repayments and related interest. The latest court of appeal ruling has upheld earlier decisions which backed HMRC’s position that VAT repayments received by SDG represented part of its trading income and therefore should have been subject to corporation tax.
This case will have implications for many tax payers and although further litigation is likely, taxpayers who have received a VAT repayment (possibly with interest) or hope to receive a VAT repayment should seek tax advice in order to consider their position.
The basic facts of the case are as follows:
- SDG discovered that they had incorrectly accounted for VAT on certain retail sales at a number of companies within the group.
- The company made a claim for a repayment of VAT in the sum of c£125m.
- In addition to receiving this repayment the company also received interest in the sum of c£175m.
- As the repayment was of VAT previously paid the group treated the receipts as being outside the scope of corporation tax.
- HMRC disagreed. They contended that the repayment of VAT arose out of the group’s trading activities and should be included within their trading receipts for corporation tax purposes. Furthermore, they contended that the statutory interest received represented a taxable loan relationship credit.
HMRC’s latest victory in the case would suggest that they are in pretty strong position should the group wish to take it to the Supreme Court.
Please note this case does not necessarily mean that refunds of VAT arising from reclaimed input VAT are taxable.
This case highlights the need for businesses to take quality professional advice in connection with their VAT affairs so as to account for VAT correctly the first time around. Specifically advice should be obtained when a business includes VAT in its headline price rather than stating the cost plus VAT.
Our specialist tax team includes both corporation tax and VAT specialists who can provide your business with combined commercial tax advice. If you have received a VAT repayment, or you are about to apply for a repayment please contact us to start the advisory process.
Entrepreneur’s Relief – don’t take it for granted
The 10% capital gains tax rate afforded by Entrepreneur’s Relief is often the target when tax planning for the disposal of a business or shares in a trading company. For the relief to apply a number of qualifying conditions need to be met, however, all too often business owners/shareholders either assume the relief applies or leave it too close to the completion of the transaction to resolve any issues.
All business owners and company shareholders should periodically review their position with regards to this valuable relief, and advice should be sought as early as possible when any disposal, transfer or gift is being considered. Failure to do this could see capital gains tax being charged at the 28% rate rather than the desired 10% rate.
A recent tribunal case highlights the need for business owners to take advice in connection with their entrepreneur’s relief position before disposing of an asset or shares in a trading company. In this instance a taxpayer disposed of a property from where he had performed his business. In order to claim entrepreneur’s relief on the disposal of a single asset, the asset in question must have been used in the business, and the disposal of it must occur within 3 years of a “material disposal” (in most cases a sale of all or part of a business, or the cessation of a business).
In this case the taxpayer ceased operations from the premises in question and started a “new” business very closely linked to the “old” business. HMRC attempted to argue that the business in fact had not ceased and therefore entrepreneur’s relief could not apply to the disposal of the property as no material disposal had taken place. The taxpayer successfully argued that the business had ceased and that the sale of the property had occurred within 3 years of the cessation of the business.
Although the taxpayer won in this instance, the case highlights the need for tax advice in connection with entrepreneur’s relief. For business owners (sole traders & partnerships) if a disposal of business assets is envisaged on which a chargeable gain will arise, it is imperative to understand what constitutes a material disposal. It is also imperative to understand the position for assets held outside the business (perhaps individually by one of the partners) but used in the business. Failure to address these could result in a tax charge of 28% rather than the 10% afforded by entrepreneur’s relief.
For shareholders in trading companies, danger signals can include non-trading assets in the company (perhaps some property rental investments), having a shareholding of less than 5%, not owning the shares for less than 1 year, or not being an employee or office holder in the company. Again, failure to address these points risks a capital gains tax rate of 28%.
Our tax team provide proactive and commercial tax planning services in relation to asset and share disposals and can help you to plan a sale of business assets as tax efficiently as possible.
In many cases if there is an issue with the availability of Entrepreneur’s Relief things can be done to rectify it. The message is don’t assume the relief will apply, and don’t leave it until the last minute to get it checked.
Accelerated tax payments – Update
The Finance (No2) Bill 2014, which has now received royal assent, contains legislation which will enable HMRC to demand payment upfront of disputed tax. The rules will apply where either:
- There is a ruling by the tribunals or courts in a case that is similar to the position of the taxpayer and the taxpayer does not accept that result, or
- The disputed tax relates to a case where a DOTAS (disclosure of tax avoidance schemes) number has been issued.
In the event that a taxpayer receives an accelerated payment notice, HMRC will expect payment of the disputed tax within 90 days.
Any taxpayer (corporate, individual or trustee) who has entered into any arrangements that they believe constitutes a “scheme” in order to save tax should seek advice, as to whether or not these rules could apply to them.
These new rules, which have caused great consternation amongst taxation professionals, could see up to 43,000 taxpayers receiving a demand for the disputed tax. It is expected that the first demands are likely to be issued as early as September 2014.
In the event that a taxpayer receives an accelerated payment notice, the due date for the tax will be 90 days from the date of the notice. If the taxpayer disagrees with the calculation of the payment, the payment may be delayed by a further 30 days. The taxpayer is free to continue to dispute the tax if they wish, and if successful the amount will be returned to them with interest.
The taxpayer will have no right to appeal the notice itself other than the calculation of the tax due. As such, it is very important that they consider their options as early as possible. This may include negotiating a settlement with HMRC, or if the tax savings have been reinvested in the business, attempting to negotiate a time to pay arrangement.
In some cases taxpayers who have entered into tax “scheme” arrangements will have been given assurances by the scheme provider on the level of service they receive post implementation. In those cases taxpayers may have received advice from the provider itself.
Alternatively, many taxpayers were advised by their scheme provider that the arrangements being offered were not caught by DOTAS. Even if no DOTAS number was provided. if the scheme is found to be caught by the new General Anti-Abuse Rule, an accelerated payment notice may be issued.
There is no possibility to appeal against the issuing of an accelerated payment notice (although legal challenges to the law itself are expected), therefore, taxpayers who believe they will may be affected by these new rules should contact one of our specialist tax advisers now in order to consider their position as early as possible.
VAT and telecommunications, broadcasting and electronic service
Changes to the VAT legislation that will come into force in January 2015 will have a significant impact on businesses that make supplies of telecommunications, broadcasting & electronic services to customers in the EU. The changes shift the place of supply from the location of the supplier, to the location of the customer, so the effect is that VAT will be due in every member state that the business makes supplies to. This new legislation will apply to all businesses which supply apps, music streaming, and any service which is an ‘electronically supplied’ services to final consumers.
The change in VAT rules from January will mean VAT will be charged at the rate of the customers' country. This will apply whether it is an EU or non-EU business doing the sale. So a customer living in Copenhagen will be charged the Danish VAT rate, regardless of whether the supplier is from Denmark, the UK or the USA.
Under current rules for e-services within the EU, VAT is due where the supplier is based, and at the rate set by that member state. With the standard rate of VAT varying from 15% to 27% across the EU, businesses frequently establish in a member state with a low standard rate, which then applies for the e-services they supply to all private customers throughout Europe.
This change to the legislation brings the VAT treatment of these services in line with one of the main principles of VAT, in that, as a consumption tax, it accrues to the country in which the goods or services are consumed.
Although this will mean that smaller businesses will be more competitive, there will be significant additional VAT reporting responsibilities. In the light of this, a Mini One Stop Shop (MOSS) will be introduced at the same time, so that business can declare and pay all of their EU VAT in one member state. It will allow the supplier to register, declare and pay the VAT due on supplies of telecommunications, broadcasting and electronic services to consumers in other member states via a web portal
Businesses affected by these changes may also wish to consider whether to alter the price of their services to reflect the prevailing VAT rate in each member state.
HMRC have provided further guidance on the types of services that will be caught under these new rules:
‘Broadcasting Services’: this includes audio and audio-visual content provided to the general public via communications networks by a media service provider, for simultaneous listening or viewing, on the basis of a programme schedule. It also includes ‘quasi-simultaneous listening’ i.e. time-lag, or where the customer is able to record for later listening, pause, forward or rewind. It does not include services where the customer can demand the program they want to watch from a list individually, and they are paying a fee for this extra service.
‘Electronically supplied services’: these include services delivered over the internet or an electronic network, the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of IT.
‘Telecommunications services’: means services relating to the transmission, emission or reception of signals, words, images and sounds or information of any nature by wire, radio, optical or other electromagnetic systems, including the transfer or assignment of the right to use capacity for such transmission.
Any business that makes supplies of telecommunications, broadcasting & electronic services to customers in the EU should review their position specifically in relation to this new legislation. Those businesses that are affected can then take steps to ensure that the transition is handled a smoothly as possible.
Our VAT specialists would be happy to discuss the effect of these changes on your business with you, and help you plan and implement a system to ensure your VAT affairs are correct and handled as expediently as possible.
If you would like to discuss any of the articles in Talking Tax, please contact Tim Adcock, Tax Partner at firstname.lastname@example.org