Common Reporting Standard – Deadline looming
UK entities that need to report under the Common Reporting Standard (“CRS”) have until 31 May 2018 to make reports to HMRC in respect of the year ended 31 December 2017.
The CRS was implemented as a global mechanism to prevent tax evasion via the use of offshore accounts and structures. It provides for the automatic exchange of financial account information between jurisdictions.
The regulations, which first came into force in the UK for the year ended 31 December 2016, require UK Financial Institutions to undertake due diligence checks and obtain a self-certification form (which confirms tax residency information) from account holders, which includes grant beneficiaries. This information then needs to be reviewed to determine if a report needs to be made to HMRC of any payments made to non-UK tax residents.
Under the rules, charities may be classified as Financial Institutions, even though they would not consider themselves as such. This will be the case where a charity meets the criteria of being managed by a financial institution and more than 50% of its income is received from investments (interest, dividends, royalties and annuity income), for example endowed charities.
University of Cambridge
This is the long running case re VAT recovery on investment management (IM) fees.
The issue, broadly, is whether VAT suffered on IM fees is wholly non – recoverable as a cost of managing the investments (direct cost of non – business activity) or whether partial recovery is available as an overhead cost of the organisation.
The First Tier and Upper Tribunals sided with the University and ruled they were overhead costs.
HMRC applied to The Court of Appeal who have referred the case to the European Court (CJEU) – an interesting decision given Brexit!!
So, in short, there is still no conclusion and charities are advised to submit protective claims.
We expect that the CJEU will hear the case early next year and it may be another couple of years before we get the final answer.
Online charity advertising
One of the general reliefs for charities is the zero rating of advertising services.
The relief, broadly, allows charities to receive advertising on a third-party’s media to be zero rated provided that it is aimed at the public in general.
This allows zero rating for adverts placed in newspapers, TV, radio etc.
However, zero rating will not apply if the member of the public has been “selected” by or on behalf of the charity.
It appears that HMRC are taking the view that adverts placed on online platforms, in particular on social media platforms do not qualify for zero rating as the persons that receive them have been “selected” according to their browsing history.
This may be an issue that particularly affects the major national charities but it does affect any charity.
The impact on charities is that they may be required to pay VAT on this type of advertising in future, and, depending on the contractual arrangements with the owners of the online platforms they may receive VAT only invoices for the last 4 years.
Cost sharing groups
The cost sharing exemption (CSE) was introduced into the UK in 2012.
The CSE allows organisations such as charities that have VAT exempt and/or non – business activities to form cost sharing groups (CSG) and receive supplies of services from the CSG on a VAT exempt basis. In the absence of a CSG such services are likely to be standard rated and consequently an irrecoverable VAT cost arises.
The conditions for forming and operating CSG’s are strict and onerous, due, in part, to the fact that the activities of banks and financial services companies are exempt from VAT and the Government did not want them to take advantage of the exemption.
Since 2012 there has been much litigation in the CJEU around the scope of the CSE and HMRC have recently announced changes to their policy in this area.
In brief the changes are as follows;
1.The CSE only applies to organisations with non – business activities eg charities and to organisations engaging in exempt activities within Article 132 (1) of the Principle VAT Directive.
In other words the “social exemptions”:
– postal services
– education
– health & welfare
– subscriptions to trade unions and professional bodies
– sport
– cultural services
– fund raising by charities
Organisations in the sectors listed below can no longer apply the exemption:
– banking
– insurance
– betting & gaming
– financial services
– land & property
– investment gold
2.The CSE can only apply to services supplied by a CSG to its members in the same EU member state. If there is a member based in another EU member state or indeed outside the EU then normal VAT rules apply. I suspect that this was mainly a banking/insurance sector issue.
- 3.One of the conditions of the CSE is that services have to be recharged at cost. The CJEU confirmed that this is still the case but provided no further guidance as to what this means – so uncertainty and confusion still surrounds this issue.
4.Housing Associations (HA’s) are the charity subsector which appears to have taken advantage of the CSE the most and as you can see according to the judgements the CSE does not apply to land & property. HMRC are continuing to allow HA’s to benefit from the CSE until they provide further guidance in due course.
We suspect that they are looking at the possibility that although HA’s provide low cost housing for rent they are really operating in the health & welfare sector – a bit of a stretch but watch this space!!
5.One of the requirements of the CSE is that the services provided by the CSG to its members must be “directly necessary” for the provision of the exempt/non – business activities of the member. Where the member also has taxable activities then the CSG cannot exempt services to the member that relate to the taxable activities unless those taxable activities are insignificant.
The changes apply from 22nd March 2018.
Existing CSG’s that do not meet the new requirements may rely on the old rules until 31st May 2018 when they must cease and apply normal VAT rules.
Anyone who will struggle to meet the 31st May deadline must contact HMRC by 1st May 2018 at the latest.
News Corp Case
News Corp publish newspapers such as The Times and The Sun.
As well as publishing hard copies which are zero rated they also publish online versions.
The issue at stake is whether the online versions may be similarly zero rated or are they standard rated.
The Tribunal decided that they were standard rated which was an unsurprising decision given that this issue has also been considered in the CJEU who had also arrived at the same conclusion.
The decision is not new in any way but the case provides a reminder that where charities have a membership fee and one of the benefits is, say, a quarterly magazine they need to consider the VAT treatment of the fee.
By concession charities may apportion membership fees to reflect the different VAT liabilities of the benefits. So, if one of the benefits is a magazine sent in the post to the member part of the fee is zero rated.
However, there is obviously a cost of the production and postage of the magazine etc.
Many charities try to reduce these costs by distributing the magazine digitally but forget the VAT impact of this decision which is that the VAT status of the magazine changes from zero rated to standard rated.