HMRC BUSINESS BRIEF 21/05

23 Nov 2005 02:45 PM

Contents:
1. VAT: Clarification of the treatment of Foreign Exchange Transactions (Forex)

2. VAT: Liability of credit and debit card handling services - High Court decision in the case of Bookit Ltd

3. VAT: Further clarification of the VAT position of share issues following the ECJ decision in Kretztechnik

1. VAT - CLARIFICATION OF THE TREATMENT OF FOREIGN EXCHANGE TRANSACTIONS (FOREX)

This Business Brief clarifies HM Revenue & Customs' (HMRC) policy regarding forex transactions, following the Tribunal decision in Willis Pension Fund Trustees Limited (Willis) [VTD 19183]. HMRC has decided not to appeal this decision.

Background
Willis was the Trustee of the Willis Pension Fund, which was a pension scheme for the employees of the Willis Group Holding Limited group of companies. The scheme held various investments, including a number of overseas investments and equities. As a result, the sterling value of these assets was subject to exchange rate fluctuations. Willis entered into forex deals with various UK banks, using the services of a third party to conduct the transactions, in order to hedge or minimise the pension scheme's exposure to adverse exchange rate fluctuations. Willis did not offer a spread or charge a separate fee or commission, but relied on the movements in exchange rates in order to minimise their losses and, where possible, make a profit. The question before the Tribunal was whether in entering these transactions, Willis made a supply for VAT purposes.

Currently, HMRC's policy relies upon the European Court of Justice (ECJ) decision in First National Bank of Chicago (FNBC) [C-172/96]. FNBC entered forex transactions as a market maker. Although they did not charge a specific commission, they relied in part on the spread that they offered (that is, they set a buying price and selling price for each currency thereby offering a spread to the customer), in order to make a profit. The ECJ decided that the forex transactions entered into by FNBC were supplies of services and that the consideration for those services was the net result of the transactions over a period of time. HMRC applied this decision to all forex transactions and treated the supplies as exempt under Item 1 of Group 5 of Schedule 9 to the VAT Act 1994. As a result, businesses that entered into transactions with UK or EU institutions had a restriction placed on the recovery of any associated input tax. Conversely, businesses that entered into transactions with overseas institutions would have been entitled to recover the associated input tax in full under the VAT (Input Tax) (Specified Supplies) Order 1999.

The decision

The Tribunal had to decide whether Willis provided any service to the counterparty when it entered into a foreign exchange transaction. Willis did not charge a fee or commission on the deal and did not factor a spread into its arrangements. Willis simply made the best deals it could from counterparties such as banks. The Tribunal decided that any "profit" retained by Willis from the forex transactions was not the consideration for a supply because it simply resulted from fluctuations in market rates. Willis entered into foreign exchange transactions solely to hedge against currency risks on its investment holdings.

HMRC now accepts that there were no supplies made by Willis in respect of the hedging transactions and that this decision will apply to any business entering forex transactions on the same basis as Willis.

HMRC is considering whether this decision has wider application. Further guidance will be issued in due course.

Input Tax Treatment
HMRC now accepts that any VAT paid on associated costs of forex hedging transactions such as those carried out by Willis relates to the business as a whole. It is residual input tax, which can be recovered subject to the partial exemption method used.

Claims for Overpaid Input Tax
Claims for input tax in respect of past forex transactions can be made subject to the three-year capping rules. Public Notice 700/45, 'How to correct VAT errors and make adjustments or claims' provides further guidance on the capping rules and claim procedures. This will need to take into account any overclaim caused by recovery of the input tax relating to transactions with non-EU counterparties, under the specified supplies order.

Businesses that have recovered the associated input tax because they have entered into forex transactions in a similar way to Willis with non-EU counterparties, may need to consider whether all or part of that input tax should now be restricted following this decision.

2. VAT: LIABILITY OF CREDIT AND DEBIT CARD HANDLING SERVICES - HIGH COURT DECISION IN THE CASE OF BOOKIT LTD (BOOKIT)

This Business Brief announces HM Revenue and Customs' (HMRC) decision to appeal to the Court of Appeal following its High Court defeat in the case of Bookit ([2005] EWHC 1689 (Ch)). It also provides interim guidance for those businesses affected by the High Court decision.

Background
The Bookit case concerned the supply of Odeon cinema tickets. A customer wishing to purchase a ticket to a see a film at an Odeon cinema is able to do so either: (a) in person from an Odeon cinema, paying only the price of the ticket; or (b) remotely, e.g. by phone or Internet paying an additional fee over-and-above the price of the ticket (if booking remotely, the customer can only pay by credit or debit card).

If the customer uses one of the options set out in (b) he is redirected to Odeon's agent Bookit, which checks availability of the seats at the customer's requested cinema and takes the customer's credit or debit card details. These details are checked against a "hot list" and if authorisation is required this is obtained. The credit or debit card details are then transmitted to Girobank for processing. Bookit charges the customer an additional fee over-and-above the price of the ticket for their service.

The Tribunal and High Court decisions
The Tribunal found, in its decision dated 28 May 2004 (confirmed in its supplementary decision dated 7 December 2004), that Bookit was providing a taxable ticket booking service to Odeon as part of its agency agreement (although it was not clear what, if any, consideration they received for this), and a taxable credit card handling service to the customer (in return for the additional fee). Bookit appealed against the decision concerning the liability of the credit card handling service and the case was heard in the High Court in July 2005.

The High Court, in overturning the Tribunal's decision, found that Bookit was carrying out an essential preliminary service prior to a remote payment being effected which was exempt under European legislation as a transaction concerning transfers of money and exempt under UK legislation as the provision of financial intermediary services.

HMRC have now been granted leave to appeal this decision to the Court of Appeal.

HMRC's view and practical implications
It remains HMRC's view that the additional amount charged by Bookit to the cinema- goer is properly subject to VAT at the standard rate.

The High Court did not consider the liability of Bookit's services as agent of Odeon for the sale of cinema tickets. Supplies of such ticket booking services therefore remain standard rated as supported by the tribunal's finding in Scottish Exhibition Centre (VTD 18994).

The High Court found that services, such as the provision of technical or electronic assistance, or card handling services as an agent or a subcontractor to one of the parties to the transaction, did not fall within the exemption. Such services, therefore, remain standard-rated.

Information on making claims or adjustments
Until the liability of the supply made by Bookit to the cinema goer is finally settled, businesses making identical supplies to those of Bookit will not have to account for VAT in respect of these fees. Where businesses apply the exemption HMRC may issue assessments for the tax it believes is due to protect its position. No action will be taken to enforce payment of such assessments until the final outcome of the Bookit case is known. If the final decision is in HMRCs' favour, we will require payment of the assessed tax with interest.

Based on the High Court decision, businesses that have accounted for and paid VAT on similar supplies may submit claims for overpaid tax to their local Business Advice Centre. This will be subject to a three-year limitation period. All adjustments or claims must take into account any over-claimed input tax as well as any over declared output tax, and will be subject to the unjust enrichment provisions.

We will seek claimants' agreement that such claims be held over until the Court of Appeal's decision. Otherwise, HMRC will make a protective assessment for any amounts repaid. These assessments will have to be paid with interest if the High Court decision is overturned.

Further information about claims can be found in Public Notice 700/45 'How to correct VAT errors or make adjustments or claims' and Business Briefs 25/04 and 28/04.

3. VAT: FURTHER CLARIFICATION OF THE VAT POSITION OF SHARE ISSUES FOLLOWING THE EUROPEAN COURT OF JUSTICE'S DECISION IN KRETZTECHNIK

Business Brief 12/05 explained HM Revenue and Customs' position on the VAT treatment of share issues and subsequent input tax recovery, following the decision in Kretztechnik A.G. -v- Finanzamt Linz (Case C-465/03). This Business Brief article contains additional guidance, with specific implementation dates underlined.

Revised treatment of share issue transactions

Business Brief 12/05 advised that companies making a new issue of shares to raise capital for their business, in circumstances identical to those in Kretztechnik's case, were not making any supply but were entitled to treat the VAT on the costs of the issue as input tax. Companies that make both taxable and exempt supplies should recover a proportion of the input tax in accordance with their partial exemption method that applied at the time of the issue.

The following guidance explains the VAT position of share transactions where the circumstances differ from those in Kretztechnik.

Transactions involving issues of other types of shares
Businesses may issue shares of different types. For example, there may be an issue of preference shares, a special rights issue, a bonus issue or issue of scrip dividends. Kretztechnik principles are applicable to all such share issues and these are now to be regarded as non-supplies for VAT purposes.

Transactions involving issues by different types of companies Kretztechnik was a public limited company but the body issuing shares could be another type of company, a private company for example. Provided that the issuer's motivation is, like Kretztechnik's, the raising of capital, issues of shares by these other types of company will also be non-supplies for VAT purposes.

Transactions involving the issue of financial instruments or securities other than shares
The issue of other types of security, such as bonds, debentures or loan notes, should also be treated as non-supplies when the purpose of the issue is to raise capital for the issuer's business. The input tax consequences will be the same as for an issue of shares. Similarly, the issue of shares or units in collective investment funds such as open-ended investment companies or authorised unit trusts will not be supplies for VAT purposes.

Shares and other securities issued in other situations
An issue of shares or other securities may be one of several transactions that take place in the context of wider arrangements. For example, they may be issued in order to effect a company takeover or as part of a company restructuring through merger or demerger. When the issue does take place as part of such wider arrangements, it should still be regarded as a non-supply for VAT purposes.

Making claims

Claims for unrecovered input tax in respect of past issues of shares and other securities can be made subject to the three-year "capping" rules. Such claims need to take into account any input tax that has been over-claimed because it has been attributed to an issue of securities outside the EU. Public Notice 700/45'How to correct VAT errors and make adjustments or claims' gives detailed guidance on capping and claim procedures.

Transfers of existing shares
Transfers of existing shares for a consideration will continue to be exempt supplies provided that the supplies occur in the course of business activity. In such cases, the input tax that relates to the transfer will be exempt input tax and only recoverable to the extent that the shares have been sold to purchasers outside the EU.

Liability consequences
There are no changes to the exemption for financial services arising from the judgment. Transactions that are no longer supplies, such as issues of shares, will no longer have a corresponding VAT liability such as exemption. However, intermediary and underwriting services in relation to such transactions will continue to be exempt.

Consequences for the VAT (Input Tax) (Specified Supplies) Order 1999 Input tax on issues of shares made outside the EU
Prior to Kretztechnik, issues of shares and other securities to customers belonging outside the EU were treated as specified supplies. This meant that the input tax on related costs could be recovered. From the date of publication of this Business Brief this treatment will no longer apply unless:

(a) You have chosen to apply the Kretztechnik treatment to other issues before that date; or

(b) You are making a claim for retrospective recovery of input tax.

The changes announced in paragraph 2 of Business Brief 32/04 will still apply to other incidental financial transactions not affected by Kretztechnik.

Input tax incurred by intermediaries in share issues
The changes in this paragraph are effective only from 1 January 2006.

Previously, intermediaries could treat the following transactions as specified supplies:

(a) arranging an issue of shares or other securities on behalf of an issuer belonging outside the EU;

(b) arranging an issue of shares or other securities on behalf of an issuer (wherever they belonged) to recipients outside the EU.

This meant that the input tax on related costs could be recovered whether or not the intermediary's customer belonged outside the EU, provided the issue was made to someone belonging outside the EU. This was because this underlying issue of shares was treated as a supply for VAT purposes.

Following Kretztechnik, the situation has changed and, from 1 January 2006, only the services described at (a) above will be treated as specified supplies. This is because the underlying issue of shares by the intermediary's customer to the non-EU purchaser is no longer a supply. However, intermediary services to their own customers, as long as they belong outside the EU, is still a specified supply under the Specified Supplies Order.

There is no change to the position of intermediaries who arrange supplies of existing shares or other securities.

Impact of Kretztechnik upon the Water Hall Group decision

In Water Hall Group plc, a VAT Tribunal found that, when shares were issued to a UK company acting as nominee for purchasers belonging outside the EU, the input tax relating to those shares could not be reclaimed by the issuer because the supply was to the UK nominee rather than the non-EU purchasers. In Business Brief 02/05, HMRC announced that businesses should apply the Water Hall decision to issues of shares in the same circumstances. The situation would then be reviewed following release of the Kretztechnik decision.

This review has now been completed. HMRC's conclusion is that Water Hall no longer has any application. In Kretztechnik, an issue of shares was found not to be a supply for VAT purposes, so the question of who is making or receiving the supply no longer arises. We consider that transactions involving sales of existing shares are fundamentally different from share issues because they are capable of constituting supplies. Such transactions were not considered in Water Hall and that decision does not therefore apply to them. Supplies of existing shares are to be regarded as being made to or by the person who actually makes the purchase or sale of the shares. Where the actual purchaser is not known to the seller, the place of belonging of a nominee account for the purchaser, if known, may be used to determine the place of supply. If neither is known, you should treat the supply as made in the UK or refer to the special rules in paragraph 9.2 of Public Notice 701/49 'Finance and Securities'.

Further information
For further information and advice, please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

The views expressed in this Business Brief are those of HM Revenue & Customs.

GENERAL ENQUIRIES:
For general enquiries please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

This release and other information about HM Revenue & Customs can be found at our website: www.hmrc.gov.uk

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