VAT rules to change for 'advertising' services - Grant Thornton

Issue 15 /2016

10 May 2016

ITU Indirect Tax Update

VAT rules to change for 'advertising'

services

Summary

The basic VAT place of supply rules ? the rules that determine where a supply of goods or services takes place ? sometimes lead to an outcome which results in supplies not being taxed at all. As an example, the place of supply of advertising services is currently where the customer belongs. If this is not within the EU, then no EU VAT is charged by an EU supplier even though the advertisement in question may be targeted at EU consumers.

HMRC has begun a consultation process which may lead to the imposition of a 'use and enjoyment' rule which, it hopes, will ensure that, in such circumstances, the place of supply will be determined by reference to where the service is targeted and consumed rather than simply where the customer is established.

Place of supply of advertising services

Under the current place of supply rules, a supply of advertising services supplied to a business established outside the EU does not attract any EU VAT. This fact has not gone unnoticed by businesses in the financial services, insurance and betting and gaming sectors. By establishing a business entity outside the EU, such businesses do not incur VAT that would otherwise be unreclaimable. In the sectors concerned, where advertising costs are considerable, this rule provides a substantial saving.

HMRC has announced a consultation to consider amending the rule so that the place of supply of advertising services would be determined by reference to where the advertising is 'used and enjoyed'. For example ? where an advertisement [of the underlying service] is aimed at UK consumers, then the place of supply of that service would be the UK and the supply would be subject to UK VAT at the standard rate.

At a meeting on 3 May 2016 held in London, HMRC set out its plans for the consultation process. It seems clear from that meeting that there is a distance to go before the new law will be introduced (possibly late 2017).

The meeting with representatives of the accountancy profession posed as many questions as it answered. For example, presently, there are no legal definitions for the terms 'advertising services' or 'use and enjoyment'. Similarly, how will a supplier of an advertising service determine where the use and enjoyment of the service takes place? Will this fact need to be certificated by the recipient of the service (the customer) and, if so, how will HMRC verify and audit? Advertising to support a brand may be 'used and enjoyed' on a multi-jurisdictional basis and it may be necessary to apportion supplies between different Member States. How will this apportionment be undertaken and, again, how will it be verified? There are many other questions where the answers are not yet known. HMRC is to launch a wider consultation in the summer of 2016 with a view to producing draft legislation by the time of the Autumn statement in November 2016.

Comment ? the imposition of a use and enjoyment rule for advertising services sounds simple in concept but, in reality, it seems that there are a large number of hurdles to get over before any meaningful rules can be introduced. Businesses affected by these proposals are encouraged to let their views be known to HMRC as part of the consultation process.

? 2016 Grant Thornton UK LLP. All rights reserved.

Grand Entertainments Company

Upper Tribunal

The taxpayer in this case submitted a claim to HMRC for a repayment of VAT it considered had been overpaid. The issue under appeal was whether, as the taxpayer asserted, a document submitted after the initial claim was an amendment to the existing claim or whether, as HMRC contended, the document was a new claim. The Tribunal concluded on the evidence that the document was a new claim and that it was 'out of time'.

Following the decision in the 'Fleming' case, the taxpayer had submitted a claim for repayment of VAT overpaid on the provision of mechanised cash bingo (MCB) and gaming machines. Subsequently, following the Rank case, later in 2009, the taxpayer submitted what it considered was an amendment to the earlier claim to take account of the fact that it could claim for VAT overpaid on Main Stage Bingo (MSB). HMRC rejected that submission arguing that it was, in fact, a fresh claim not an amendment to the existing claim. According to HMRC, as a fresh claim, it had been submitted out of time.

The First-tier Tax Tribunal (FTT) dismissed the taxpayer's appeal and the Upper Tribunal upheld that decision. The purported amendment related to a completely separate head of claim not previously contemplated in the original claim. As such, the later claim could not be said to be an amendment to the original claim but was a new and distinct claim. The time limit for making the claim had expired.

IFX Investments Ltd ? Spot the Ball

Comment

The time limits for making claims for overpaid VAT are set out in VAT law.

An amendment to a claim can be made provided that it meets the test of being based on the same subject matter as the original claim. Here, the original claim was for VAT overpaid on MCB whereas the amendment was for an entirely different head of claim (being MSB).

Court of Appeal

Comment

IFX Investments Ltd operates a competition known as Spot the Ball. Participants are invited to mark a cross on a photograph of a football match where they consider the centre of the ball would be ? the ball having been removed from the photograph. IFX considered that the income it received from participants should have been exempt from VAT under the betting and gaming provisions of VAT law. For such a supply to be exempt from VAT, the competition had to be regarded as a game of chance. HMRC considered that Spot the Ball was neither a game nor one of chance. The taxpayer appealed to the FTT which allowed its appeal. HMRC appealed to the Upper Tribunal which overturned the FTT's decision and, finally, the taxpayer appealed to the Court of Appeal.

In a unanimous judgment, the Court of Appeal has reinstated the FTT's decision. It rejected HMRC's contention that, for there to be a 'game', it was necessary for there to be an interaction between two or more players or, where a single player was involved, there had to be a reaction to a change of circumstances by that player. The Court considered that there was no such requirement and, to the extent that the Upper Tribunal agreed with that view, it had made an error of law.

As a consequence, the operation of the Spot the Ball competition is, for the purposes of the Gaming Act, a game of chance and, in turn, this means that the income received by the promoter of the game was exempt from VAT.

? 2016 Grant Thornton UK LLP. All rights reserved.

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The tax at stake in this case is ?97 million so it is likely that HMRC will seek leave to appeal the judgment to the Supreme Court.

Whether or not leave to appeal will be granted remains to be seen. The FTT found as a fact that Spot the Ball was a game of chance and made no error of law in making that finding.

Accordingly the Upper Tribunal's judgment was wrong and the taxpayer's appeal was allowed.

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Contact

Stuart Brodie Karen Robb

Scotland

stuart.brodie@uk.

London & South East karen.robb@uk.

(0)14 1223 0683 (0)20 772 82556

grant-thornton.co.uk

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