Weekly VAT Update – 6 June 2017
Is VAT refund and interest subject to Corporation Tax
This case involved a company that incorrectly accounted for output tax on supplies that should have been zero-rated. It put in a claim under the s 80 Value Added Tax Act for a refund and duly received £411,230 of VAT, as well as £949,452 interest from HMRC. In its accounts it disclosed both the VAT refund and the interest below the figure for post-tax profit as not subject to corporation tax. Both HMRC and, on appeal, the First Tier Tax Tribunal declared that both items were subject to corporation tax. The trader, known as CAD, accepted that the interest was taxable but appealed to the Upper Tribunal in respect of the tax status of the VAT refund.
HMRC’s case was very simple. It argued that CAD has had its restitutionary payment in full. Such a payment, as the Supreme Court decided in the case of Shop Direct, must be brought into profit as a trading receipt in the year of receipt. There is no basis, in the law of restitution – in UK domestic law or in European law – on which a profit made in this way must be insulated from tax. CAD’s right has been satisfied, and the profit of which it was deprived at the time the overpayments were made, and on which it did not bear tax at the time, has now been received and has been taxed, in accordance with the ordinary law. In that context it makes no difference whether the repayment is received as the result of a s 80 claim, or for some other reason.
The Upper Tier sided with HMRC and referred to two cases, San Giorgio and Littlewoods, in which the CJEU made it clear that, in the absence of a European law mechanism for the making of repayments – and there is none – the payment must be made in accordance with national rules. The Tribunal said: “We agree [with HMRC] in particular, that the primary flaw in CAD’s argument is that it is attempting to treat tax on profits as if it was a deduction from the repayment. We do not consider that it is possible to do so. The profits, whatever their derivation, shown in CAD’s accounts are taxable because they are profits.” The appeal by CAD was therefore dismissed.
Is the provision of systems to enable payment of bills at shops standard rated or exempt?
In this case, the appellants, PayPoint Collections Limited (“Collections”) and PayPoint Network Limited (“Network”), operate a payment scheme which allows customers of utility companies, mobile telephone companies and others to make credit top-ups, e.g. for mobile phone services, and charge up pre-payment devices for electric or gas to be supplied by the clients, (“pre-payment” transactions or services) and/or pay invoices or bills issued by the clients (“post-payment” transactions or services), over the counter at shops or other retail outlets (the “Agents”).
Paypoint argued that HMRC’s decision that post-payment services supplied by Network are exempt under Item 1 of Group 5 of schedule 9 to the Value Added Tax Act 1994 (VATA), and that they should be standard rated. The Tribunal identified a list of seven points to consider when deciding whether a service was exempt under VATA, Sch 9, Grp 5, item 1:
- the financial service exemption is to be construed strictly (SEM, SDC);
- the service provided must have the effect of transferring funds and entail changes in the legal and financial situation (SDC);
- it must be distinguished from a mere physical or technical supply, such as a data-handling system available to a bank (SDC);
- a functional transfer (e.g. netting off accounts) leading to the change in the legal and financial position is indistinguishable from a real transfer for the purposes of the exemption (FDR, ATP)
- electronic messaging services simply intended to transmit information do not perform any of the functions of one of the financial transactions within the exemption (Nordea)
- the importance if the financial consequences cannot be relevant (Nordea)
- the services must, viewed broadly, form a distinct whole, fulfilling the specific essential functions of a transfer and having the effect of transferring funds and entailing changes in the financial and legal situation (Bookit II v HMRC, NEC).
The Tribunal stated that it is clear that when a customer hands over his or her money to pay a utility bill to an agent, there is a change in the legal and financial position between that customer and Network’s client – the customer no longer owes the client the amount stated on that utility bill. The customer, having settled the outstanding amount in accordance with the instructions on the bill, would have an absolute defence if the client was to issue proceedings to recover that sum. It is therefore necessary to consider whether the service provided by Network has the effect of transferring funds from a customer to a client, albeit via an agent.
Having concluded that any cash payment handed over by a customer to an agent is received on behalf of a client, not Network, and that any “netting off” is undertaken by a client, not Network, it follows that the polling of PayPoint terminals located in an agent’s premises by Network – and the transmission of the information extracted to its clients which enables them to net off the appropriate accounts – cannot fall within the exemption. The post-payment service was held to be standard rated, and the appeal was therefore allowed.