Contents Limited Liability Partnerships VAT - 3 Year Cap Changes Court of Appeal Decision on Insurance

20 Feb 2001 12:00 AM

VAT POSITION OF LIMITED LIABILITY PARTNERSHIPS

This Business Brief is to help businesses who are considering forming Limited Liability Partnership (LLPs) and outlines Customs'' views on the VAT position of such partnerships. The contents of this Business Brief have been agreed with the Association of Partnership Practitioners and other interested parties.

What is a Limited Liability Partnership ?

The Limited Liability Partnership Act 2000 received Royal Assent on 20 July 2000. LLPs can be formed with effect from 6 April 2001.

A LLP will have a legal status distinct from its members, and will be able to enter into contracts in its own right. This means that individual members of the LLP will be protected from debts or liabilities arising from negligence, wrongful acts or misconduct of another member, employee or agent of the LLP.

Limited Liability Partnerships and VAT

The members of the LLP must prepare an incorporation document for the Registrar of Companies who, on acceptance, will issue a certificate of incorporation. This means that the LLP will be a corporate body, and that it, rather than the members will be the legal entity for VAT purposes. The LLP itself then becomes liable for VAT registration, subject to the normal registration rules.

As with unlimited partnerships this does not normally mean that the members will be seen as supplying their services to the LLPs and they therefore will not normally have to register for VAT.

VAT liability if an existing partnership changes to a Limited Liability Partnership

As the legal entity has changed from that of a partnership to a corporate body, the LLP may have to apply for VAT registration, subject to the normal rules. The normal Transfer of a Going Concern (TOGC) rules will then also apply, including those relating to any option to tax. If the general partnership ceases to exist, it may be possible for the VAT number to be transferred to the LLP (Notice 700/9, Transfer of a Going Concern, gives full details).

Membership of a VAT group

A LLP will be able to join a VAT group provided it meets the control conditions in section 43A of the Value Added Tax Act 1994. This section allows two or more corporate bodies to apply for VAT grouping if each is established or has a fixed establishment in the UK and one of them controls the others; or one person controls all of them; or two or more individuals carrying on a business in partnership control all of them.

A corporate body is ''controlled'' by its ''holding company''. Individuals can fulfil the definition of a ''holding company'' without actually being a corporate body themselves. So, for VAT grouping purposes, individuals can ''control'' a corporate body. The terms ''control'' and ''holding company'' are defined in section 736 of the Companies Act 1985.

Thus, if the LLP fulfils these control conditions with a number of subsidiary companies, it may form a VAT group with them. It is also possible that a group could be formed by two or more eligible companies and a LLP, where those eligible companies are controlling partners in the LLP.

Customs will also see the third of the above control conditions i.e. two or more individuals carrying on a business in partnership control all of them - being met when the members of a LLP control all of the corporate bodies to be grouped.

Further guidance

For further advice and information, businesses and their advisers should contact their local VAT office, listed under Customs & Excise in the telephone directory.

VAT 3 YEAR CAP: CHANGES TO CLAIMS SUBMITTED BY 4 DECEMBER 1996

The three year limit on VAT refund claims was announced on 18 July 1996 and received parliamentary consent on 4 December 1996.

This business brief announces changes to Customs'' policy regarding some claims submitted between these dates. This is a result of the Court of Appeal decision in the Building Society Ombudsman Company Ltd case. However, the three year cap on refund claims remains intact.

Application of court ruling

Businesses can now benefit from this decision if they meet all of the following criteria:

They applied to a VAT and Duties Tribunal against HM Customs'' policy of deferring claims for refunds of VAT, that were more than three years old before 19 November 1996.

They can provide a copy of the Trib 1 form (which the Tribunal centre sent them) as evidence.

They had already submitted refund claims which had been agreed i.e. there was no dispute on the amount or liability of the refund .

They received an order from the Tribunal allowing their appeal, and can provide a copy of this.

The deferred amount of the claim was capped and never paid.

Any businesses who think they can benefit from the Court of Appeal decision should write to their local VAT office enclosing all of the following information:

An explanation of why they consider they can benefit, together with details of the relevant figures.

Evidence that they appealed to a VAT Tribunal as detailed above, enclosing a copy of the Trib 1 form.

Evidence that they received an Order after 19 November 1996 from the Tribunal allowing the appeal.

Cases this ruling does not apply to:

Opticians, because their claims should already have been sorted out.

Businesses generally submitting repayment returns (not capped until 1 May 1997).

Businesses who already qualify for a full refund where the Commissioners of HM Customs exercised their discretion because of Departmental errors.

COURT APPEAL DECISION RULES PENSION REVIEW SERVICES ARE VAT EXEMPT

The Court of Appeal has ruled in the case of Century Life plc that the company''s pension review services are exempt from VAT, because they are insurance related services provided by insurance agents. The supplies at issue were pension review services, carried out as a result of the Financial Services Authority (FSA) inspired review of possible pension mis- selling.

Customs has decided not to seek leave to appeal to the House of Lords. This Business Brief explains the implications of the judgement for businesses which think they might be affected.

The judgement

Before this judgement, Customs'' view was that Century Life merely assisted an insurer, in this case Lincoln Assurance Limited, to comply with the regulatory requirements of the FSA. As a result, Customs believed that these services were not covered by the exemption as Century Life were not introducing or administering insurance contracts.

The Court said that Century Life''s services were ''intimately related to'' insurance policies and that there was ''a close nexus'' between them and the insurance transaction concerned. And since Customs had accepted that the day to day business of Century Life could properly be characterised as that of ''insurance agent'', the Court judged the services in question to be exempt.

Since pension review services of the kind performed by Century Life have been ruled to be sufficiently closely ''related to insurance'', it follows that they are exempt when the ''Century Life criteria'' are met. However, the judgement does not necessarily apply to other services which are outsourced by insurers to insurance brokers or agents. Each case must be treated on its merits.

The ''Century Life criteria''

When someone reviews an insurer''s personal pension policies for mis-selling, and during the course of this acts as an insurance broker or agent, having contact with insured persons on behalf of insurers, Customs will accept that the exemption applies to them.

If you think that your business meets these criteria, but you have already accounted for VAT on such services, you can make an adjustment to your VAT accounts as set out in paragraph 1.5 of Customs'' Notice 700/45 ''How to correct errors and make adjustments or claims''. Alternatively, you can make a claim for repayment of the VAT taking into account any overclaimed input tax. Such claims will be paid subject to the conditions set out below:

You must be able to produce suitable evidence that your case exactly fits the ''Century Life criteria''.

You must be able to substantiate the amount claimed.

You will need to look back at earlier attributions of input tax (any input tax incurred on goods and services used exclusively for these pension review services is now attributable to an exempt supply), substituting exempt values for taxable values in your partial exemption calculation and deducting the resulting ''exempt input tax'' from overpaid output tax in determining the amount of the claim.

Adjustments and refunds are subject to capping after 3 years.

If Customs can show that you effectively did not bear the burden of the tax, it may reject the claim on the grounds that it would unjustly enrich you. For example, this may have happened because you passed the tax on to someone else without losing profit by doing so, and are unable, or don''t intend, to pass on the repayment.

A notification to Customs that you intend making a claim in the future is not a valid claim.

If you have been charged VAT by businesses whose supplies were exempt as a result of this decision, you cannot treat it as your input tax. You will need to make an adjustment to your VAT account to reverse any overclaimed input tax.

Further information Further information can be found in Customs'' Public Notice 700/45, entitled ''How to correct VAT errors or make adjustments or claims''. Businesses and their advisors can also contact their local VAT Business Advice Centre, listed under Customs and Excise in the telephone directory.

NEW VAT PUBLICATIONS

A revised edition of Notice 700/12 Filling in your VAT return dated January 2001 is now available. It cancels and replaces the September 1995 version and Updates 1 and 2 to that version. The notice has been generally revised and updated and includes guidance on the completion of electronic returns.

Copies of these and other VAT publications are available from your local VAT office listed under Customs and Excise in the telephone book.

MEDIA ENQUIRIES ONLY TO THE HM CUSTOMS & EXCISE COMMUNICATIONS DIVISION, NEW KINGS BEAM HOUSE, 22 UPPER GROUND, LONDON SE1 9PJ. TEL: 020 7865 5472/5471. TO CONTACT THE DUTY PRESS OFFICER OUT OF HOURS PLEASE CALL 020 7620 1313.

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