VAT: Addressing borderline anomalies - response to HMRC consultation document
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VAT: Addressing borderline anomalies – response to HMRC consultation document Introduction Grant Thornton UK LLP (Grant Thornton) welcomes the opportunity to respond to H M Revenue & Customs' Consultation document VAT: Addressing borderline anomalies. The views expressed in this response are those of Grant Thornton UK LLP and are based on our practical experience. They are not intended to represent the views of any particular client or class of clients. We have not provided a response to all of the questions posed in this consultation. VAT: Addressing borderline anomalies – Catering – “hot take away food” and “premises” Comment We consider that the proposals relating to both hot takeaway food and to the definition of premises will create a new set of challenges. As drafted, the proposed legislation fails to address what, in our view, is HMRC's underlying but fundamental misconception that, by default, the heating of food transforms the supply from a supply of goods (the food) to one of services (food supplied in the course of catering). We are concerned that the current law and the new proposals may not be compatible with EU law. As a consequence, we consider that a better solution to the issue would be to adopt the clear guidance on ‘catering versus food’ laid down by the European Court of Justice in the case of Manfred Bog (and others) (Case C-497/09). In that case, the Court decided unequivocally that for a supply to be one of catering (i.e. a supply of services), there has to be a predominant service element that goes beyond the mere preparation, cooking and serving of food. Furthermore, the provision of rudimentary facilities, such as a few tables, is not of sufficient importance to change the nature of the supply from one of goods (food) to one of services (catering). It is recognised that if this position is to be adopted there would be a reduction in the amount of VAT collected from supplies of take away food (as such supplies would, as a supply of goods, benefit from the current zero-rate). We also recognise that there may be political implications arising from such a move. We consider that if the Government wishes to maintain the existing derogation for zero-rating the supply of basic food it should specify in legislation exactly which food is to benefit from zero-rating. In our view this would create more certainty and would simplify the issue for both tax payer and tax collector. We consider that until HMRC recognises and accepts that the existing policy is flawed, the resulting law in this regard will remain both confusing and difficult to implement. In our view, this will inevitably lead to further anomalies as the new proposals will only serve to create a new set of issues. We would urge HMRC to consider adopting the relatively clear guidance on the issue as laid down by the ECJ: It provides both clarity and certainty for affected businesses. © 2012 Grant Thornton UK LLP. All rights reserved. 1
Response to Questions Q1 – Does the proposed legislation meet its objective of ensuring that all hot takeaway food is taxed consistently at the standard rate of VAT? If not, why not and what changes are needed In light of our comments above, we do not consider that the proposed legislation meets its objective of ensuring that all hot take away food is taxed consistently at the standard rate of VAT. We consider that the proposed legislation will still create confusion and anomaly. In our view, the proposal that the taxation of something is based upon its ambient air temperature when it is provided to the customer is likely to be fraught with difficulties. For example, will the ambient air temperature have to be determined on the basis of a national average? Or will local variations be applied? Is the temperature relevant at the exact time of sale, or over an average period? The questions could go on and on. We are also concerned that the proposed legislation uses the expression 'when provided to the customer'. We are not clear whether the use of the word 'provided' is intended to be a substitute for the word 'supplied'. However, unless clarity is given to the meaning, we can envisage some unintended consequences and, potentially, some unforeseen planning. Q3 - Does the proposed legislation meet its objective of ensuring that food courts, tables and chairs outside a café and similar eating areas are included within the definition of premises? If not, why not and what changes are needed? Given that the proposed legislation fails to take account of the ECJ's guidance set out in the Manfred Bog judgment, we consider that, as drafted, the legislation is flawed and will, inevitably, lead to further anomalies and litigation. It seems that HMRC's concept of 'premises' is to include all possible places where the food supplied by a retailer can be consumed by the customer even if the facilities that are provided are not provided by the supplier or are of such a rudimentary nature that they should be disregarded in our view. As drafted, it seems to us that VAT would be chargeable on a supply of food in a case where the customer physically leaves one location (e.g. a shopping mall), and then consumes the food in another location using facilities provided by a 3rd party retailer. From a practical perspective we struggle to see how the first retailer is to know where the customer is intending to consume the food? The audit trail to determine liability of supply will be impossible to establish at times. We consider that HMRC needs to give further consideration to these issues. In particular, we consider that adopting the ECJ's guidance in Manfred Bog will go some way to addressing the anomalies. Given that the ECJ's judgment in Manfred Bog is the definitive interpretation of the law in this regard, it is our view that HMRC cannot choose to ignore it. This consultation is welcomed, but we consider that the proposals do not provide an appropriate solution. We would, therefore, suggest that, in light of the complexity, further consultation which examines the separate concepts of the supply of food (as a supply of goods) and the supply of food in the course of catering (as a supply of services) is required. VAT: Addressing borderline anomalies – approved alterations to listed buildings Comments As an initial comment, we would emphasise firstly that the availability of zero rating in the UK is enshrined in Article 110 of Directive 2006/112 (formerly the 6th VAT Directive) and secondly, that the UK is entitled to retain this relief in perpetuity unless and until the UK either gives up the relief or, along with all other member states, the UK votes to amend Article 110. In the past, the UK has fought hard to © 2012 Grant Thornton UK LLP. All rights reserved. 2
retain VAT reliefs and, therefore, we would urge the Commissioners to consider very carefully the impact of the proposed changes as, once removed, the relief can never be re-introduced. The current rules (paragraphs 42 to 44 of the consultation document) We would observe that the current legislation states that charities may use a listed building for business purposes and still be entitled to relief [note (3) of Group 6, Schedule 8, VAT Act 1994]. This would be the case if the building in question was to be used as a village hall or similar. The consultation document states that relief is available to charities (other than as a residential building) only if it is used for a non- business purpose. Most village halls receive small amounts of income from room lettings and the like, which are business supplies. We trust the Commissioners will correct this error. We would also observe that alterations to other types of buildings may not necessarily be standard rated, as the works may qualify for relief under Groups 6 or 7 of Schedule 7A of VAT Act 1994. The purpose of the proposed changes (paragraphs 45 to 46) Our understanding of the purpose of the proposed legislative changes is that the Commissioners have three main concerns: 1. Works undertaken are generally extensions which are not necessary for heritage purposes. 2. The present rules incentivise change as opposed to repair. 3. The present rules are complex, misunderstood and result in non-compliant behaviour. We consider that the Commissioners' concerns are all unfounded. Not necessary for heritage purposes Aside from ecclesiastical buildings, all alterations both require and must receive listed consent from the local planning authority. With regard to ecclesiastical buildings, listed consent is not required for relief but similar conditions apply. In our experience, planning and other authorities will not give approval to schemes that do not give due respect to the heritage of the existing building and we would question why the Commissioners believe that the current planning system is failing in this respect. Many approved alteration schemes are undertaken to breathe life into the building and to make it suitable for modern life whilst, of course, paying respect to the building's particular heritage. Examples would include works required to comply with health and safety legislation (such as kitchen alterations in residential buildings), the alteration of student accommodation to create en-suite facilities and the addition of bathrooms or other living accommodation. The proposed changes will also have a most noticeable impact on areas of the population that are impoverished, struggling for funding and highly VAT sensitive. Educational charities, religious organisations and non-VAT registered small charities will face substantial additional costs, in a time when other funding is under severe pressure. For example we are aware of a hospice charity that has been working on a project to add an extension to its building since 2009. The work is to create a room to be used by bereaved families to grieve in private as there are no separate facilities at present. Some funding has been obtained from charitable trusts to pay for the project, as the Department Of Health turned down a request for grant funding. Development work is not expected to start until at least 2013. At this stage, no contract has been signed with a builder. Transitional relief does not appear to apply. The VAT at stake is around £36,000. If an additional 20% funding is required to be raised to fund this irrecoverable VAT the scheme is potentially unviable. Large charities and educational establishments are significantly adversely affected too. For example, we are aware of a renowned college that has been planning a major development of a former hospital site since 2004, to create an additional 250 student rooms plus a lecture theatre and research annex. Planning constraints have prevented the college from levelling the site to construct a new building, and the planners have insisted on the retention of a listed building. Plans have been drawn up and approved to extend the © 2012 Grant Thornton UK LLP. All rights reserved. 3
existing listed building to create the additional space. Expenditure commenced on detailed design and planning consultations in 2008, funded by a major donor and the college is seeking additional funds from donors to fund the project, with the college potentially taking on a large bank loan to fund the balance of the project. Subject to funding being obtained, construction work is not expect to start until at least 2013/14. Agreement has been substantially reached with HMRC on the level of zero-rating. If VAT is to now apply, the additional cost is expected to be £4m. Even for a large charity or educational establishment this is a significant sum to try to raise from donors. The present rules incentivise change as opposed to repair Approved alterations to listed residential and charitable use buildings have been zero rated since 1 April 1973. Our understanding of the policy of granting the relief was to recognise that such works are often more expensive than undertaking general maintenance or repair works and that the relief helps owners to retain or regenerate the building's useful economic life. It was presumably considered relevant at that time that owners, faced with substantially higher costs in any case, plus the extra costs of VAT may choose to leave historic buildings in a state that was not conducive to their economic life. This matter has been debated in the House on a number of occasions. HL Deb 07 March 1987 vol 487 cc242-4 Lord Brabazon of Tara With regard to the relief on alterations and whether it may be an incentive to make undesirable changes, we do not believe that is so. Relief is available only for approved alterations. Planning authorities can always refuse a listed building consent for work that would affect the character of a listed building or destroy important features. HL Deb 19 July 1995 vol 566 cc28-9W A Lord Mackay of Ardbrecknish There can be some value in zero-rating alterations to listed buildings since it may help in regenerating their useful economic life. Lord Kennett asked Her Majesty's Government why new buildings and new construction, including alterations to listed buildings, are zero-rated for value added tax. Lord Mackay of Ardbrecknish As the recent white paper on housing makes clear, the Government's policy is to encourage home ownership. Zero-rating the costs of constructing new homes allows builders to sell at a lower price. Buildings used for commercial and industrial use are taxed at the standard rate. Buildings used for commercial and industrial use are taxed at the standard rate VAT zero-rating for all alteration work to existing buildings was abolished in 1984 as a revenue raising measure. However, the Government accepted the case for retaining the existing zero rating for alterations to listed buildings as a means of continuing their useful life. On the face of it, therefore, it seems that the Commissioners' policy in relation to the zero rating of approved alterations has turned 180 degrees and we would welcome an explanation from the Commissioners on this point. The commissioners refer to a "perverse incentive for change as opposed to repair". However, for the vast majority of projects, there is no borderline choice to make, other than to undertake a scheme or do nothing. For example, if an educational charity providing relevant residential buildings needs to accommodate more students within the listed college, it needs to create extra space, by means of a sympathetic extension in many cases. There is no means to undertake a repair of the existing space to achieve the same result. The same position applies to a church that wants to add kitchen facilities or lavatories to a building. They simply cannot do this without altering the building. However, the additional VAT cost may, in both of these examples, result in such projects not being undertaken at all. © 2012 Grant Thornton UK LLP. All rights reserved. 4
The present rules are complex, misunderstood and result in non-compliant behaviour We would observe that, if the present rules are complex, then better guidance and a more consistent approach by HMRC would be a better solution than simply removing the zero-rating relief. Transitional arrangements We have deep misgivings about the proposed transitional arrangements. Firstly, we would observe that the Minister responsible (David Gauke) made a Parliamentary statement on 21 March 2012 that stated that relief would be available for works contracted for or under way. However, the draft legislation refers only to works where a written contract is in place. In our experience, many alteration schemes are both complex and time consuming to implement. As a consequence, it can take many years for the relevant consents to be given, and for plans to be drawn up and agreed before the award of a building contract is even considered. Having a forward cut-off date of 20 March 2013 is, in our view, also unrealistic as projects can take many years to finalise. In one example we are dealing with, a college has been incurring substantial costs for 4 years already and plans to start construction, subject to reaching a fundraising target, in around 2014. As proposed, the transitional arrangements would not cover this project, and would have an estimated impact of around £3-4m additionally cost on the project. We note that a much more realistic transitional relief was afforded to local authorities in respect of the VAT recovery on Voluntary Aided schools, where relief was provided to projects already initiated before the date concerned. Relief was also possible, if the Commissioners gave their approval, for projects initiated after the relevant date, but funded on the basis of the prior rule. Revenue & Customs Brief 53/09 refers. As stated above, we believe there is no need to change the law at all in this area. However, if changes are made to remove the zero-rate, relief should be provided, without a forward cut-off date, for projects initiated before 21 March 2012 or funded before this date on the basis of the former rules. There was no prior public notice of this significant change and to the best of our knowledge no-one in the most impacted sectors had remotely considered that the Commissioners would remove this long standing relief. As a consequence, many projects will have been planned and funded on the basis that the project would benefit from zero-rating. By "initiated", we would suggest that any of the following actions would fall within this definition. - planning or listed consent applied for - plans drawn up - board or committee approval - approaching potential donors in respect of the specific project Response to Questions Q17 - The current Note 4(b) allows zero-rating for substantial reconstructions where the reconstructed buildings incorporate no more of the original building than the external walls together with any other features of architectural or historic interest. HMRC would welcome comments on how frequently this element of the relief is used, and if it is seldom used, whether it would be a useful simplification to also remove this relief? Our experience is that this element of the relief is not used that often. However, given the minimal revenue impact and our comments above about the relief not being able to be re-introduced if given up, we would suggest that the relief is retained as it is at present. © 2012 Grant Thornton UK LLP. All rights reserved. 5
Q18 - The transitional arrangements are intended to provide protection for contracts already in place on Budget day and allow sufficient time for the completion of work and the making of first grants by developers. HMRC would welcome comment on whether these transitional periods are sufficient and whether owners, builders and developers foresee any difficulties in their operation. As set out above, the proposed relief does not allow sufficient time for many projects to be completed, particularly complex projects, and the proposed legislation is also at odds with the promise made by the Minister in his parliamentary statement. Q19 - It is possible that some substantial reconstructions may be already underway at Budget Day without a written contract being in place. The proposed transitional arrangements therefore also provide relief where 10% of the reconstruction of the building was completed (measured by reference to cost) before budget day and the reconstruction meets the original tests for zero-rating. We would welcome views on how likely this set of circumstances is to occur and whether this additional transitional relief is necessary? In many cases, relief is also available on the basis of residential use or on the basis of charitable use, as defined. As set out above, our experience is that these types of reconstructions are less common. It is noteworthy that some relief is proposed for projects "under way" as promised by the Minister. However the commissioners have chosen to apply this to developments that rarely occur, as opposed to the most common developments. In any case, the proposed 10% test, and lack of a reasonable forward cut-off date, in our view, makes this provision unhelpful. Q 20 - We have considered impacts on businesses and consumers of the changes to alterations for listed buildings and these are set out in the Table of Impacts in Annex B. We would welcome comment on these impacts (including any specific impacts on small businesses) and would particularly welcome details of any impacts we have not identified. The consultation document refers to the present Listed Places of Worship Scheme (LPWS). We believe that adopting a grant based approach to relief is flawed for the following reasons, 1. The present scheme is itself insufficient in compensating churches for repair works and, therefore, there is no guarantee that funds would be available to cover projects. 2. The scheme is arguably discriminatory as, for example, a church providing education would receive relief but an educational institution would not. 3. Funds are provided in arrears, so planning expenditure is almost impossible when one does not know how much relief will be granted. 4. Grant schemes can be topped up or reduced at will by Governments, and for long term projects, this can be particularly troublesome. However using VAT as a means to encourage socially beneficial expenditure is very efficient as the relief is provided at source and covers all of the relevant expenditure. We would urge the Commissioners not to give away this relief. © 2012 Grant Thornton UK LLP. All rights reserved. 6
Contacts
For any queries in respect of our comments in this document, please contact:
Lorraine Parkin (email: lorraine.parkin@uk.gt.com)
Graham C Brearley (email : graham.c.brearley@uk.gt.com)
Wayne Neale (email : wayne.neale@uk.gt.com)
Grant Thornton UK LLP
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