Weekly VAT Update – 15 February 2017
Does Newcastle University have to account for VAT under the reverse charge procedure
Newcastle University entered into standard contractual arrangements with more than 100 agents worldwide, and paid commission to those agents for recruitment of students for the university. There was no obligation under the agreements for the agents to provide services to students. Further, there was no contract between the agents and the students and the students were not charged for the services.
The matters under dispute were summarised by the First Tier Tribunal as follows:
1. Were there two distinct supplies or a single supply
The University argued that the agents made two supplies: firstly, in supplying the University with recruitment services and, secondly, supplying the students with support services. It said that the commission paid by the University should therefore be apportioned between the consideration paid by the University for supplies of services to it, and that which was third party consideration for services supplied to the students. The supplies to students were not made in the UK and therefore were not subject to VAT.
The Judge disagreed with the University and concluded that it was an artificial split and did not accord with economic reality to suggest that such services were provided by the agent to the students. Therefore, there was a single supply of services to the University such that the full commission paid by the University was liable to VAT under the reverse charge provisions.
2. Place of supply – general rule or intermediary rule
The University claimed that the general place of supply rule in Article 43 of The Principal VAT Directive (PVD) applied to services supplied by the agents in the period up to 1 January 2010, whereby the place of supply was deemed to be the place where the supplier was established. Therefore, no VAT would be chargeable up to 1 January 2010 because the agents were outside the EU. It made a claim for repayment of VAT totalling £226,774 which was incorrectly accounted for by the University under the reverse charge procedure in VAT periods 10/08 to 01/10.
HMRC challenged the argument that the agents were intermediaries supplying services and acting in the name and on behalf the University under Article 44 PVD, such that the agents’ commissions were subject to UK VAT under the reverse charge mechanism.
In the light of case law and domestic and EU legislation, the Tribunal held that the agents were not acting in the name and on behalf of the University as the agents had no power to bind the University in any way. Therefore, the University was eligible for the repayment of the VAT from HMRC.
3. Input tax credit – direct and immediate link
The University contended that to the extent that the agents’ fees are subject to VAT, it was entitled to input tax recovery for a proportion of that VAT on the basis that it was residual input tax for the purposes of its partial exemption special method calculation.
HMRC’s view was that the University was not entitled to recover the VAT incurred on the agents’ fee as input tax since there was no direct and immediate link between the recruitment of non-EU students and the University’s taxable income streams or the economic activities of the University as a whole.
Based on the evidence adduced, the Judge supported HMRC’s arguments and disallowed the University’s input tax recovery on agents’ commission.
To that extent therefore the appeal was allowed. It is not yet known whether the case will be appealed to the Upper Tribunal.