Enter Your E-mail

VAT Voice by VAT Solutions (UK) Ltd

An update on some recent VAT developments by VAT Solutions (UK) Ltd.

Court of Session finds for HMRC on private tuition issue

The long-awaited decision of the Scottish Court of Session in the case of EMPOWERMENT ENTERPRISES LTD was delivered on 11 October 2006. Unfortunately, and in our opinion, surprisingly, the Court found for HMRC and overturned the earlier decision of the VAT Tribunal.

Case Overview

The case concerned training courses in 'craniosacral therapy', which involves a therapist placing their hands lightly on a patients' body and tuning in to what is happening by ‘listening’ with their hands. The tuition in giving this treatment is supplied through the appellant limited company, which employed its principal as a full-time teacher and other teachers on a part-time basis as required.

The disputed matter is the UK law implementation of Article 13A.1(j) 'tuition given privately by teachers and covering school or university education'. It was accepted that the training courses satisfy the last part of these words, so the particular dispute is the correct interpretation of the words 'tuition given privately by teachers'.

The Tribunal Chairman found that the UK law (Exemption Group 6 Item 2) was over-restrictive in its reference to a 'teacher acting independently of an employer' and was not compatible with European law, which places no restriction based on the legal form of the taxable person. The Chairman took the view that, even where the tuition is supplied through a limited company, exemption is still available for the tuition supplied by all the teachers provided that the tuition is given privately by the teacher (i.e. European law defines exemption in that way to the exclusion of, for example, distance learning and internet-based learning but, once a right to exemption on that basis is established, national law cannot restrict exemption by reference to the legal form of the taxable person supplying the tuition). The Chairman decided that the taxpayer could claim direct effect of European law and allowed the appeal.

In the Court of Session, Lord Macfadyen dismissed the Tribunal's reasoning that the word 'privately' connoted all face-to-face tuition as distinct from distance learning. Counsel for HMRC argued that 'tuition given privately by teachers' connoted tuition given by a teacher acting on his or her own behalf, in a private or personal capacity, and not as the agent or employee of a body or organisation which was the supplier of the service. In other words, this is a case where the identity of the supplier does dictate the VAT treatment. Support for this interpretation was found in the wording of the French, Italian and Spanish versions of the Sixth Directive. Counsel for the respondents argued that the exemption was not as restrictive as argued by HMRC, but applied to any situation, irrespective of the capacity in which the teacher was acting, where there was 'legal or physical specificity' in the relationship between the teacher and the student, as distinct from tuition made available to students generally.

In the end, the judge preferred the HMRC argument, both because he believed it to be the better interpretation of the law, and because he saw great practical difficulty in adopting the interpretation advanced by the respondents. He also decided that is was not necessary to make a referral to the European Court of Justice on the issue.

Comment:

This will be a big disappointment to any companies supplying private tuition, and also to sole traders/partnerships using employees or contractors to provide the said tuition. It is not known at this point whether Empowerment Enterprises will appeal to the Court of Appeal. In the meantime, the Court of Session ruling applies, so anyone that has not declared VAT on such supplies, or has not registered due to the belief it was making exempt supplies, will now have to take the appropriate action. (HMRC issued Business Brief 16/06 on 12.10.06 to point out the requirement to either register for VAT or make a voluntary disclosure).

HMRC invite refund claims for VAT wrongly declared on pinball machines

HMRC issued Business Brief 16/06 on 12 October 2006 which included the following item:

'CHANGES TO VAT LAW IN LIGHT OF THE GAMBLING ACT

In Business Brief 23/05 (issued on 5 December 2005), we advised that the definition of 'gaming machine' for VAT liability purposes in Group 4 of Schedule 9 to the VAT Act was to be amended by Treasury Order. This was intended to ensure that all gaming machines were excluded from the exemption, and so liable to VAT. In the process of doing this, we updated some of the elements of the definition by reference to the Gambling Act 2005. Section 23 of the VAT Act 1994, which includes a corresponding definition of a gaming machine in the provision which determines the value on which VAT is accounted for on gaming machine takings, was amended in Finance Act 2006, with retrospective effect from 6 December 2005.

Two new Treasury Orders have been laid before Parliament that will come into effect on 1 November 2006. The new Orders continue to update VAT law in light of the Gambling Act, and will:

* remove the separate definition of 'gaming machine' from Group 4, replacing it by a cross-reference to the identical definition in section 23;

* provide a new definition of 'game of chance' in Group 4 and Section 23, replacing the cross reference to the Gaming Act 1968 definition;

* ensure that the definition of 'game of chance' is the same across the UK for both Group 4 and Section 23;

* restore the application of VAT to pinball machines; and

* ensure that any game of chance which is not played for a prize does not fall within the exemption.

Definition of 'gaming machine'

At present, section 23 and Group 4 contain identical definitions of 'gaming machine'. The new Group 4 Order replaces the definition of 'gaming machine' in Group 4 with a cross-reference to the section 23 definition, which is itself amended by the other Order.

New definitions of 'gambling' and 'game of chance'

The definition of 'gambling' was introduced into Group 4 and section 23 by inserting cross-references to the definitions of 'betting' and 'gaming' in the Gambling Act. The new Order amending section 23 replaces the cross-references to the Gambling Act with stand-alone definitions of 'game of chance', based on provisions in section 6 and section 239 of the Gambling Act. 'Betting' is no longer to be defined. The new definition of 'game of chance' in Group 4 applies for the use of the term in defining the scope of the exemption whether or not the game is played on a machine.

Pinball machines and other games of chance not played for a prize

The takings from pinball machines had inadvertently been brought within the scope of the exemption by the PBR Order, when the Gambling Act concept of gaming was imported into VAT legislation dealing with gaming machines. VAT exemption is currently available for the provision of facilities for playing a game of chance, whether or not for a prize. Gaming machines are excluded from the scope of this exemption. Before the PBR order was introduced, pinball machines were taxed as gaming machines as it was not a requirement for a gaming machine to offer a prize. However, the PBR order applied Section 6(1) of the Gambling Act, which provides that gaming is playing a game of chance for a prize, to the definition of gaming machines. Although this meant that pinball machines were excluded from the definition of gaming machines, as they do not offer prizes, they still qualified for VAT exemption as the provisions of facilities for playing a game of chance. .In future, only a game of chance played for a prize, whether or not played on a machine, will qualify for exemption in any event. 'Prize' will be defined so as to exclude the opportunity to play the game again ('free plays').

Consequently, traders who have been accounting for VAT on pinball machines takings in the period from 6 December 2005 to 31 October 2006 may make a claim to HMRC for a repayment of output tax incorrectly paid, subject to the conditions set out below, by using one of the following (full details can be found in VAT Notice 700/45 'How to correct VAT errors or make adjustments or claims :

* Where the total of previous errors does not exceed £2000 net tax, an adjustment may be made to your current VAT return.

* Where the total of previous errors exceeds £2000 net tax a separate claim should be submitted to HMRC (in these cases the errors must not be corrected through your VAT returns). Details of where to send your claim can be obtained from the HM Revenue & Customs National Advice Service on 0845 010 9000.

All adjustments or claims will be subject to the following conditions:

* All claims must take into account input tax that has been claimed, but which, while pinball machine takings were exempt, did not relate to taxable supplies.

* Businesses must be able to produce evidence that they accounted for VAT in the circumstances described above, and must be able to substantiate the amount claimed. Any claim should be for all prescribed accounting periods in which the liability error occurred.

In short, HMRC acknowledge that, in making the law changes at 5 December 2006, they inadvertently created a situation where takings for the playing of pinball machines are exempt from that date to 31 October 2006, after which the first SI above duly returns them to the intended standard-rating. The Brief thus has no option but invite refund claims to be made.

Comment:

Presumably good news for operators of amusement arcades!

VAT solutions wins tribunal case on outsourced insurance-related services

VAT Solutions (UK) Ltd has just won a Tribunal case that may be of interest to businesses providing outsourced services to insurance companies.

Our client supplies a service to life insurance companies of carrying out telephone interviews of persons, who have submitted life insurance cover proposals, as to their medical history and condition. The interviews last between 20 and 40 minutes and are conducted by qualified nurses. A written report containing the information obtained is submitted to the life insurance company but the appellant makes no recommendation as to whether the proposal should be accepted or declined. The issue at Tribunal was whether or not our client service was exempt from VAT, which we contended it was.

The Tribunal Chairman found that the service was not exempt under European law, but was exempt under UK law as an insurance-related service carried out by an insurance agent which had sufficient nexus to the contract of insurance provided by the insurer. Our appeal was thus upheld.

The full written decision can be obtained from the Finance & Tax Tribunals website under 'Morganash Limited' (VTD 19,777).

October 2006

VAT Solutions (UK) Ltd
1 Dundonald Avenue
Stockton Heath
Warrington
WA4 6JT

(T) 01925 212244
(F) 01925 212255
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via their website: