Indirect Tax Conference Public Sector - Deloitte US...The case Longridge on the Thames...

Indirect Tax

Conference

Public Sector

Breakout

Mark Dyer

Ben Powell

Nick Comer

14 November 2014

© 2014 Deloitte LLP. All rights reserved.

Agenda

Public Sector Breakout

• Supplies of Staff

• Partial Exemption and “economic use”

• Longridge on the Thames

• Compliance Trends

2


Case Study

Supplies of Staff

3



Supplies of Staff – the “problem”

• A local authority is required to transfer its children's services activity into an

independent trust;

• Staff currently employed by the Council will be TUPE’d to the trust;

• Supplies of “welfare services” to be made by the trust to the Council will be

(largely) exempt from VAT;

• VAT incurred on costs in the hands of the trust will be (largely) irrecoverable;

and

• 60% of the staffing budget is spent on agency social workers.

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£60m

Property occupation costs – broadly VAT

neutral

Subcontracted

welfare costs –

broadly VAT neutral

TUPE staff

costs –

broadly VAT

neutral


Supplies of Staff – the Trust’s “problem”

Bought in

Costs:

IT, Facilities,

Agency Staff,

Expenses

+£3m of VAT



Supplies of Staff – the solution…?

Prior to 1 April 2009 the “Staff Hire Concession” allowed employment bureaux to

charge VAT only on their commission (i.e. not on wage related elements)

Present Position

• VAT charged on most supplies of staff from 1 April 2009

• Likely VAT charged prior to 1 April 2009

• Large irrecoverable VAT costs for charities

6




Reed Employment Limited: First Tier Tribunal decision

“ Was Reed making supplies of introductory services in return for commission or

of temporary staff in return for the whole payment received from the client?”

The Tribunal found that:

‒temporary workers were not obliged (either contractually or in practice) to

perform services for Reed or to perform services for the client under the

direction of Reed

‒as a result of this, Reed did not exercise control over the temps and could

not therefore cede that control to its clients.

Reed supplied introductory services and ancillary services - The consideration for

these services was the commission element of the charge only

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HMRC view

HMRC won on the other two points, so the question was would they “cross-appeal”

the point that they lost – they did not.

HMRC subsequently issued a Business Brief in August 2011.

No wider impact and no precedent - the Tribunal hearing was a First Tier tribunal

decision, relates only to the parties in question.

Deloitte view

There are significant uncertainties about whether HMRC’s position is legally

correct.

Opportunity for the Trust to approach temporary staff providers to request that the

provider submits a claim to HMRC for over-paid VAT.

8




Further litigation – The Test Case

Deloitte is taking a test case which is listed for hearing in May 2015

This case concerns the introduction of temporary workers to clients to carry out

various assignments. The issue is whether the supplies made by the appellant to

their clients are services of introducing temporary workers (which is the

appellant’s case) as opposed to supplies of staff hire (which is HMRC’s case).

The appellant’s case is that HMRC must repay overpaid output tax – because it

has been paying VAT on the full amount received from clients and not just the

commission element. The appellant’s position is that it should have paid VAT only

on the commission that it received for the introduction of temporary workers.

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Partial Exemption

The “economic use”

argument

10



Partial Exemption – a quick recap

11

‘Business’ incurs VAT

Business MixedNon-

bus

Taxable Mixed Exempt

Local Authority incurs VAT

Business MixedNon-

bus

Taxable Mixed Exempt



VAT Incurred on costs

“direct and immediate link”

VAT recovered

Partial Exemption and “economic use”




Case Study:

• Local Authority commissions a Charitable Trust to operate its Leisure and

Cultural Service, including Libraries, Tourist Information, Museums and Open

Spaces.

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£

SLA

£

Grant Funding

£ Budget



Cost of managing the

Leisure and Culture

Service

Taxable supply

under the SLA


Expenditure of grant

funding

Non-business

use of the VAT

incurred




“Direct and Immediate”

• Revenue & Customs Brief 32/14 published 25 September 2014. Policy

announcement post CoA decision in BAA.

• No change in HMRC policy, however a series of updated guidance regarding

VAT recovery by holding companies.

Not immediately apparent that this will impact the public sector,

but…HMRC’s view is that:

Costs will have a direct and immediate link to taxable supplies if they are:

• Used, or intended to be used, in the making of those taxable

supplies

• Cost components of the price of the taxable supplies

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Summary

• HMRC actively looking at partial exemption and the impact of recent case law

on “direct and immediate link” and “economic use”;

• In particular, where the costs of an activity are being subsidised.

• In our view, they have some challenges:

• UK VAT law silent on “cost component”

• “Combined methods” allow VAT attributable to non-business to be included in

the partial exemption method

Client Event in planning

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Longridge on the

Thames

Economic Activity

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Longridge on the Thames

The case

Longridge on the Thames (“Longridge”) is a charity that provides boating and

other water based activities to young people on the River Thames.

Longridge’s income from these activities is generated from fees charged to the

attendees and is also substantially subsidised by donations. Longridge relies on

a large body of volunteers in order to undertake these activities.

The issue under dispute was whether the construction costs of a training centre

were eligible for zero-rating by virtue of the building being ‘designed or intended

for use solely for a relevant charitable purpose’. HMRC originally challenged

zero-rating on the basis that Longridge was charging for these courses and was

therefore undertaking an economic activity.

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The Decisions

The F-tT concluded that the consideration charged for the courses was not

substantial enough for this to constitute an ‘economic activity’ for VAT purposes as

“the intrinsic nature of the Appellant’s [Longridge] activity or enterprise is not that

of a business, even though it is making supplies for a consideration”.

As a result, the F-tT concluded that Longridge was entitled to VAT zero-rating on

its construction costs.

The Upper Tribunal agreed with the F-tT decision focusing on the need to look at

the “totality of the ‘observable terms and features’ of the activities carried out by

Longridge at the site”. (Decision 11/11/14)

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Implications?

• Fact specific decision, but…

• Provides further guidance on the business v non-business question

• Availability of VAT reliefs

• Classification of income

Potential impact on partial exemption?

HMRC appeal?

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Compliance Trends

Open Discussion



Compliance Trends

22

How do you do it?

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Indirect Tax Conference Public Sector - Deloitte US...The case Longridge on the Thames...

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