Author Archives: cvc-user

Are you ready for the new Construction Industry Reverse Charge?


HMRC views the construction industry as a sector that presents a significant risk to the Exchequer. As a result, a reverse charge for building work is to be introduced to combat fraud. This was originally due to be introduced on 1 October 2019, but its implementation has been delayed several times. Once implemented the new legislation will mean, essentially, that building contractors will not pay VAT to their VAT registered sub-contractors but will account for it themselves. It is important that all affected parties familiarise themselves with the new rules before they are introduced on 1 March 2021.

Reverse charge accounting already exists in other areas seen as susceptible to fraud, notably mobile phones and computer chips. The reverse charge also applies (for reasons not associated with combating avoidance) to some goods and services received from outside the UK. The proposed construction reverse charge mechanism is therefore sometimes referred to specifically as the ‘domestic reverse charge’, or DRC.

How will the new reverse charge work in practice?

The reverse charge will apply to building contractors engaging sub-contractors and, similarly, to sub-contractors engaging others through the supply chain where the parties involved are registered for VAT and the payment for the supply is reported within the Construction Industry Scheme (CIS). It shifts the responsibility to account for VAT on the supply from the VAT registered supplier to their VAT registered customer. A final customer (‘End user’) for building work, such as an occupier or a developer, does not have to apply the reverse charge, and can continue to incur VAT in the same way as now. This also applies to “intermediary suppliers” who purchase and re-supply construction services without any substantial input. Both end users and intermediate suppliers are discussed in greater detail below. It should be noted that normal accounting will only apply if customer notifies the supplier that it is an end user or intermediary supplier and that this notification will apply on a contract by contract basis.

The reverse charge is aligned with the Construction Industry Scheme (CIS), and will only apply to supplies that are within the scope of the CIS. However, not all supplies within the CIS will be subject to the reverse charge. There are several exceptions relating to the status of the customer which are covered in greater detail below but, in addition:

  • The reverse charge will not apply to zero-rated supplies.
  • The reverse charge will extend to building materials included within a supply of building work.
  • Deductions under the CIS do not affect the amount of VAT due.

The DRC will not apply where a customer advises that, for the purposes of a particular supply being made to it, it is an:

  • “End User”; or,
  • An “Intermediary Supplier”

HMRC defines end users as ‘…businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered, but do not make onward supplies of the building and construction services supplied to them.’ Intermediary suppliers are VAT and Construction Industry Scheme registered businesses that are ‘connected’ or ‘linked’ to end users.

Parties are “connected” or “linked” in the context of the DRC, where they are in a group of companies or where the intermediary has an interest in the land where works are taking place e.g. landlord and tenant.

When contracting, the onus is on the customer to notify, in writing, its status to the supplier. In these circumstance a VAT invoice should be raised. Without notification from the customer that it is an end user or intermediary supplier VAT should not be charged by the supplier from 1 March 2021. HMRC Guidance on end users, intermediaries and notification can be read here.

Where the DRC is payable, the invoice issued by a supplier to their customer, from 1 March 2021, should be net of any VAT due. The invoice must show that the reverse charge applies and the relevant VAT rate and should make clear that it is the customer’s responsibility to account for output VAT and HMRC’s suggested wording is as follows:

Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked ‘reverse charge’ at the relevant VAT rate as shown above.

For the purposes of the reverse charge, contractors and sub-contractors include anyone who is acting in that capacity by making a supply of building work, whether or not this is their normal activity. HMRC have confirmed that staff agencies acting as such are not seen as supplying building work, so that their services are outside the scope of the reverse charge.

If a supplier charges VAT, the customer needs to be satisfied that it is actually due. If VAT is charged incorrectly it will not be recoverable as input tax. This is particularly important because when HMRC disallows a VAT refund claim, the customer will need to seek a recovery of overcharged VAT from the supplier which may be straightforward but can be difficult or impossible, for example, if the supplier is no longer trading. In this context it is important to note that, despite CJEU judgments to the effect that customers who cannot obtain rebates from suppliers should have available a mechanism to obtain a refund from HMRC, HMRC has, at time of writing, refused to accommodate this and whilst accepting claims may be possible it has adopted a policy of requiring businesses to make claims via the High Court, an expensive and uncertain approach. In essence HMRC is only too pleased to accept windfalls, collecting VAT from suppliers that have charged it incorrectly whilst refusing to offer any practical solution to reclaiming that VAT other than via the supplier.

There are various situations, set out in the relevant legislation, where the reverse charge will not apply, otherwise, the presumption is that the reverse charge does apply. In particular, there will be no de minimis threshold.

The supplier should not charge VAT unless:

  • The payment is outside the scope of the CIS; or
  • The customer is not (and is not required to be) VAT-registered; or
  • The customer has notified that it is an End User or Intermediary Supplier.

Additionally the supplier should not charge VAT if the supply is zero-rated, or if it is not VAT registered or required to be registered.

Accounting for the reverse charge

If the reverse charge is applicable to a particular supply, the accounting procedure is relatively straightforward. No VAT will be due on payments from customers where the supply is covered by the reverse charge. The net value of the sale should be included in the VAT return which covers the period in which the supply is made. If you are receiving a supply subject to the reverse charge the VAT due should be shown in Box 1 of the VAT return, the net value of the supply in Box 7 and input VAT should be recovered, in accordance with the normal rules, in box 4.

As highlighted, the onus is on the customer to confirm its status as either an end user or intermediary if the reverse charge is not to apply. If you are a supplier and do not receive such a notification then your supply should be treated as subject to the reverse charge.

Where a supplier receives a notification from its VAT registered customer that it is either an end user or a qualifying intermediary, then VAT should be charged and declared as usual.

Impact of the reverse charge

The reverse charge may have some significant commercial implications, particularly for small sub-contractors. There will be an impact on cash flow where businesses have previously used VAT collected to finance their business. Additionally if a business is in a repayment position as a consequence of no longer having to pay VAT to HMRC they will have to wait for the refund to be processed by HMRC rather than offsetting input VAT against output VAT on a VAT return. Businesses that expect to be regularly in a repayment position may wish to switch to monthly VAT returns.

Contracts for building work will need to accommodate the new regime and in cases of uncertainty professional advice should be sought. This blog is intended to give an overview and where there is uncertainty Constable VAT would be happy to assist further.

Please note that this blog post is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.




Constable VAT Focus 19 September 2019

Thank you for subscribing to our VAT Focus. This edition provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Tribunals and Courts. This version discusses the rulings in American Express Services Europe, KPC Herning and The Lilias Graham Trust. Issues covered include the place of supply for international services and what constitutes “closely linked” for the purposes of VAT. 


VAT Mini One Stop Shop for Agents
HMRC has updated its guidance to reflect changes which will take effect after Brexit. 

Refunds of VAT for UK Businesses
Guidance has been updated to reflect the way in which cross-border reclaims will function after Brexit. 

VAT Government and Public Bodies
HMRC has made some minor amendments to its internal guidance on VAT and public bodies. 




1. Supplies of Land: Taxable or Exempt 

This case concerned the VAT exemption for supplies of land and the categorisation of a supply of land as “building land”. Danish law excludes certain supplies of land from the exemption, including “the supply of building land, whether developed or not, and in particular the supply of built-on land”. The Danish legislation explains the meaning of “building land” and clarifies that “The supply of buildings and the land on which the buildings stand is not subject to VAT where they are not new buildings. If the supply is made for the purpose of a new building, however, the supply shall be considered to be a supply of building land.” 

A Danish property development company, KPC Herning, decided to develop social housing for young people and worked alongside Boligforeningen Kristiandal (BK), a low rent housing body. KPC purchased land with a warehouse on it from the Port of Odense, which BK was to demolish in order for KPC to build a new residential property on the site. KPC subsequently transferrred the land to BK. The dispute in the Danish Court arose because KPC believed the sale of the land by the Port of Odense was exempt from VAT and the Danish tax authority disagreed as it believed it was a supply of building land. 

The question posed to the CJEU was whether the relevant EU law must be interpreted as meaning that a supply of land supporting a building at the time of sale may be classified as “building land” where the parties intention was that the building be demolished and replaced with a new building. KPC’s main contention was that it was inappropriate to classify the property in question as building land as, at the time of the sales, there was a building on the land. The Danish tax authority argued, essentially, that the economic reality of the transactions made them one transaction, which it would be artificial to split, of land for the purpose of construction. Therefore, the sale to KPC and the sale by KPC should have attracted VAT.  

The Court considered that the relevant EU law precludes land with a building on it from being classified as “building land” where the transaction is economically independent from other services, such as demolition, even where it is the parties intention that the building on the land is demolished to make way for a new one. The transactions were, therefore exempt as KPC had contended. 

Constable Comment: This case is reasonably useful in demonstrating that where a chain of transactions exists which provides a benefit to a taxpayer, the Court will almost always consider the nature of the supply chain and assess each individual transaction. Whilst in this case the taxpayer was successful, this is not always the case and taxpayers should be careful about using artificial links in chains to gain a tax advantage. 



2. Whether supplies were closely linked with exempt supplies of welfare 

This appeal by The Lilias Graham Trust (LGT) concerned whether supplies by LGT were VAT exempt by virtue of their close association with a supply of welfare. LGT makes its supplies to a Local Authority. The service offered is to act as an observer watching the parent care for the child, in a residential assessment centre, and offering advice to the parent as appropriate.  

Families are sent to LGT through social worker referrals and LGT invoices the local authority. LGT argued that its supplies were not directly connected with exempt supplies of welfare as there are intermediaries between its supply and the care of children (The Local Authority) 

HMRC argued that the supplies are exempt as they are closely linked with, or directly connected to, exempt supplies of welfare services; namely the care and protection of children. To support this claim it contended that the supplies by LGT guarantee, insofar as possible, the care and protection of the children. Whilst any judgments about the child being taken into care were not made by LGT, it was argued that this did not prevent LGT’s supplies from being directly related to the care and protection of children. 

Drawing on a wealth of caselaw, the Tribunal assessed what constitutes “directly connected. LGT sought to split the words apart and give them their dictionary meaning, contending that their supplies are blocked from being directly related to the supply of welfare as the local authority is an intermediary. The Tribunal, and HMRC, disagreed with this approach, asserting that the “essential purpose” of LGT’s supplies is to ensure the care and protection of children and, therefore, that its supplies are both closely linked and directly connected with exempt supplies of welfare. The appeal was, therefore, dismissed. 

Constable Comment: It may appear that HMRC would argue for exemption given that, after deducting claimed input tax, LGT would be due a net VAT repayment of £400,490.97. However, LGT would usually only be able to make such a claim if it refunds the overdeclared output VAT to its customer which, in turn, would need to refund an equal amount to HMRC which it had previously claimed as input tax. Therefore, looking at the supply chain as a whole, this is a beneficial judgment for HMRC.


3. International Services: Place of Supply 

This appeal by American Express Services Europe Limited (AESEL) concerned the place of supply of VAT exempt payment services. AESEL believed it made its supplies to TRSCo, a company established outside the EU. By virtue of The Specified Supplies Order 1999, AESEL could recover input VAT on costs relating to the supplies made to TRSCo. HMRC argued that AESEL actually made its supplies to AESPL, a company established within the EU; supplies of VAT exempt payment services between AESEL and AESPL would not give a right to input VAT recovery for AESEL. 

The Tribunal drew on the vast quantity of caselaw relating to place of supply issues including Airtours and Adecco. As a starting point it was highlighted that identifying the correct recipient of the supply is a two-step process; first the contractual position is assessed and then the economic reality of the transactions. Whilst there were many agreements in place between various AMEX Group entities, the main agreement in question was the Card Issuer Agreement. Whilst HMRC tried to dilute the terms of the main contract with pieces from other contracts, the Tribunal found that the Card Issuer Agreement was, in fact, the correct point of focus and that, contractually, there was no doubt that the supplies made by AESEL were to TRSCo 

The Tribunal went on to assess the economic and commercial reality of the transactions. HMRC sought to argue that a payment which passed from AESEL to AESPL under one of the contracts which was not discussed at great length showed that the supply was to AESPL and not to TRSCo. The Tribunal asserted that it is not necessary for the payment to pass between AESEL and TRSCo and that the entire transaction must be considered. It was concluded that the economic reality of the transaction corresponded to the contractual position and that, therefore, AESEL was making supplies of VAT exempt payment services to TRSCo outside of the EU. It was entitled to input VAT recovery on associated costs. 

Constable Comment: This appeal related to input tax reclaims which amounted to £57,633,216.00 so represents a significant loss for HMRC. As the Tribunal has granted leave to appeal, we would expect HMRC to appeal this decision further. With this in mind, the discussion is a useful reminder of the two-step process in determining place of supply for services. Whilst the contractual position is important, it is not the decisive factor if the contracts do not reflect the economic realityWhen business is making international supplies within a complex supply chain it is always worth seeking VAT advice to clarify the VAT position and often worth submitting a non-statutory clearance to HMRC to obtain certainty on HMRC’s view. Litigation on issues of this kind can be hugely expensive and, when unsuccessful, can expose a business to unexpected and unplanned VAT liabilities. 


Construction reverse charge delayed

HMRC has announced that the Domestic Reverse Charge for construction services, due to be implemented on 1 October 2019 will be delayed again until 1 March 2021.

In the intervening year, HMRC says it will focus additional resource on identifying and tackling existing perpetrators of the fraud. It will also work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date.

You can read more about the introduction of the DRC in our blog.

Constable VAT Focus 5 September 2019


Revenue & Customs Brief 8/2019
HMRC has issued a new Brief following its recent review of the VAT Cost-Sharing exemption. It clarifies that HMRC will continue to apply the exemption to groups established by social housing associations but with certain new conditions.

Notice 701/7: VAT reliefs for disabled and older people
HMRC has updated its guidance to reinstate guidance relating to the restoration of lost space after bathrooms or washrooms have been installed, extended or adapted in a disabled person’s private residence.

Notice 708/6: Energy saving materials and heating equipment
This notice has been updated to reflect the changes taking effect from 1 October including restrictions and confirmations on the applicability of the reduced rate and the introduction of a new test for applying the reduced rate in line with social policy objectives.

No-Deal Brexit Planning
The guidance around importing for UK businesses who move goods from Ireland to Northern Ireland following a no-deal Brexit has been updated to clarify points of confusion around the registration of new vehicles.


We have recently published a new VAT & Charities Newsletter which is available to read here. In this edition we cover the following recent VAT developments in the Courts and Tribunals:

  1. VAT Welfare Exemption: Supplies Closely Connected
  2. University of Cambridge
  3. Partial Exemption “Direct and Immediate Link”
  4. Zero-Rating Construction: Relevant Charitable Purpose, Business or Non-Business
  5. Glasgow School of Art
  6. Call for Evidence: Simplification of Partial Exemption and the Capital Goods Scheme




1. Exemption for Insurance Intermediaries

This is an appeal against decisions made by HMRC that supplies made by Claims Advisory Group Limited (CAG) were taxable at the standard rate of VAT. CAG describes itself as in the business of “…recovery, on behalf of consumers, of overcharged fees levied by banks and other financial institutions.” The fees being pursued related to mis-sold PPI, the issue at hand was whether, as CAG contended, this could constitute either an insurance transaction or a service performed by an insurance broker or, as HMRC argued, that it is a standard rated transaction.

The Tribunal primarily addressed the question of whether the supplies made were insurance transactions. In order to conclude on this topic, the characteristics of insurance transactions were assessed. Drawing on the judgment in Card Protection Plan, the Tribunal observed that an insurance transaction is where “… the insurer undertakes to indemnify another, the insured, against the risk of loss (including liability for losses for which the insured may become liable to a third party) in consideration of the payment of a sum of money called a premium.” The Tribunal observed that the supplies made by CAG clearly did not fall within this description so the ruling focusses on whether CAG could be correctly characterised as an insurance intermediary.

The Tribunal analysed the idea that CAG could be an insurance intermediary and in so doing reflected on the judgment in It was observed that “It is an essential characteristic of an insurance broker or an insurance agent […] that they are engaged in the business of putting insurance companies in touch with potential clients or, more generally, acting as intermediaries between insurance companies and clients or potential clients.” CAG argued that it terminates insurance contracts (PPI contracts) on behalf of its clients and that, therefore, it acts in the capacity of an insurance agent as it is assessing the suitability of and terminating insurance contracts.

This argument was dismissed as, according to case law, the termination of contracts as a service on its own does not mean that the agent terminating the contract is carrying out the business to which to contracts relate. For completeness the Tribunal discussed what constitutes an insurance broker but the conclusion became quite clear before the end of the Tribunal’s deliberations: the appeal was dismissed.

Constable Comment: Whilst after significant reflection the outcome of this hearing seems simple, the case itself was detailed and considered a lot of previous caselaw. What is interesting is that both parties have been given the right to appeal, we would anticipate a ruling in the Upper Tribunal as this decision could have wide ranging ramifications for a number of businesses.


2. Botox and Nail Fungus treatment: VAT Exempt?

This is an appeal by Skin Rich Limited (SRL) against decisions by HMRC to the effect that botox injections and laser nail fungus treatment are standard rated for VAT; SRL had treated the supplies as exempt. HMRC raised assessments against SRL in excess of £20,000, against which it also appeals. SRL operates a skin culture and aesthetics clinic in Richmond which offers a range of specialist skin treatments. Among these services are inter alia botox injections and nail fungus treatments.

For UK VAT purposes, services consisting in the provision of medical care by a person registered on enrolled in the register of medical practitioners are exempt, as is the provision of “care” or medical or surgical treatment in any hospital or state-regulated institution. The dispute before the Tribunal in this instance was whether the supplies made by SRL fit within the exemptions.

The Tribunal considered that the botox injections, despite submissions by SRL that they benefit the overall wellbeing of the patient, were cosmetic is nature and could not benefit from the exemption for medical care provided by doctors. It was also highlighted that the nail treatments were not medical care. The question then turned to whether the botox treatments and the nail fungus treatment were capable of being regarded as “care” provided in a hospital or state regulated institution. It was observed, correctly, that this exemption had a wider application.

In concluding, the Tribunal drew on the judgment in Kingscrest Associated Ltd and observed that, despite its wider application, “care” must be construed for VAT purposes as being restricted to care of a medical or surgical nature. Again considering, at length, previous judgments, the Tribunal asserted that services may fall within the concept of “care” when they are actually supplied as a service ancillary to the hospital or medical care received. It was also noted that the provision of services which are aimed at improving comfort and well-being as opposed to health, as a general rule, will not be capable of benefiting from a VAT exemption aimed at the provision of medical or surgical care. Accordingly, the appeal was dismissed.

Constable Comment: We would expect to see this decision appealed as it represents a significant set back for many clinics offering vanity treatments such as botox injections. Given the significance for the cosmetic and beauty sector, this ruling has attracted quite a lot of media attention. Whilst botox has been available for decades in the UK, it seems that it has been treated incorrectly for VAT purposes by many and this has previously gone unchallenged by HMRC.


3. Recovering VAT on Cars

This case concerned the refusal of VAT credit on the purchase of three cars by Mr Graham, a specialist in mainframe computers who runs his own business. Given the nature of his work, he often has to travel to visit clients and, given his significant fees, he felt that the vehicles he used for work should reflect his success and to instil faith in the business. He sought to recover the VAT on the purchase of three expensive cars which were provided to him, his wife and his daughter for business purposes, but never for personal use.

HMRC denied the claim for repayment of input VAT as the cars were parked at the driver’s home addresses and, therefore, that there was no physical barrier to prevent the personal use of the cars; HMRC reminded the Tribunal that the question is not whether private use takes place, but whether the cars are available for private use. HMRC also noted that there was also a period for which the cars were insured for only social, rather than business use and that this constituted the cars being made available for private use.

Drawing on the previous ruling in Elm Milk, the Tribunal observed that “Unavailability for private use could be achieved by appropriate restrictions.” It went on to assess the contracts between Mr Barry and his family members with access to the cars; the contracts clearly prohibited private use of the cars. The Tribunal then turned to the question of the social-only insurance. Mr Graham answered this by stating that his wife had been responsible for the insuring of the cars and that at the time, although they did not know this, she was suffering from brain cancer and this was the start of many uncharacteristic mistakes that she made.

In concluding, the Tribunal commented that HMRC had produced no evidence at all that the cars had been used privately and went on to clarify that even though for a brief period the cars were available for only social use, it was never the intent to make the cars available for private purposes and, therefore, that the input VAT was recoverable.

Constable Comment: This case is a useful reminder that, despite the blocking order, input VAT recovery on cars is, occasionally, possible where they are only available for business purposes. However, businesses should tread carefully when recovering VAT on cars and ensure that use is restricted entirely to business use and that private use is expressly prohibited.


Constable VAT Focus 22 August 2019

Thank you for subscribing to our VAT Focus. This edition provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Tribunals and Courts. This version discusses the rulings in Pertemps and Koolmove. Pertemps revolves around whether a salary sacrifice scheme offered to employees constitutes an economic activity. Koolmove relates to the recovery of pre-incorporation input VAT.


Manage your client’s details for Making Tax Digital for VAT
If you are a tax agent, use this service to manage your client’s details if they have signed up to, or opted out of, Making Tax Digital for VAT.

VAT online services for agents
How to register for and use VAT for agents, VAT EU Refunds, EC Sales List and Reverse Charge Sales List online services.

How to make a voluntary disclosure to HMRC
HMRC has updated its guidance on making a voluntary disclosure to HMRC if you are an individual or company and are not eligible for an HMRC campaign.

VAT payment deadline calculator
HMRC has updated its VAT payment deadline calculator. You cannot use this calculator if you make payments on account or use the annual accounting system.

Making Tax Digital for VAT: Service Availability and Issues
Check the availability of and any issues affecting Making Tax Digital for VAT.



We have recently published a new VAT & Charities Newsletter which is available to read here. In this edition we cover the following recent VAT developments in the Courts and Tribunals:

  1. VAT Welfare Exemption: Supplies Closely Connected
  2. University of Cambridge
  3. Partial Exemption “Direct and Immediate Link”
  4. Zero-Rating Construction: Relevant Charitable Purpose, Business or Non-Business
  5. Glasgow School of Art
  6. Call for Evidence: Simplification of Partial Exemption and the Capital Goods Scheme



Upper Tribunal


1. Salary Sacrifice Schemes: Economic Activity?

In this case, HMRC appealed against an FTT decision in favour of Pertemps Ltd (Pertemps) which held that a salary sacrifice scheme operated by Pertemps was not an economic activity and, therefore, that no VAT was owed by Pertemps.

Pertemps employees were offered the option of being paid a salary, out of which they would have to meet any travel and subsistence expenses, or participating in the scheme under which their expenses would be paid but they would receive a reduced salary. The advantage of using the scheme is that expenses are reimbursed tax-free. HMRC considered that Pertemps was making taxable supplies to its employees and assessed for the perceived VAT debt. On appeal, the FTT held in favour of Pertemps as it held that whilst it was supplying services to its employees, it was not doing so by way of an economic activity and therefore the scheme was outside the scope of VAT. HMRC appealed this decision to the UT.

The UT agreed with the FTT that the correct approach to take was to apply to Wakefield tests; does Pertemps make a supply of services for consideration and is the supply part of an economic activity? In order to establish whether an undertaking is economic in nature, the entire circumstance must be analysed but the essential test is whether a supply is made for the purpose of obtaining income on a continuing basis.

Following the case of Banque Bruxelles Lambert SA, one of the factors to be considered when reaching a conclusion of this nature is whether the services identified were offered on the general market or likely to be carried on by a private undertaking. The Tribunal considered this and agreed with the FTT that through operating such a scheme, Pertemps was acting as an employer in making deductions of tax and NIC in accordance with the law; it was not carrying on this scheme with a view to generating income; any income generated was merely incidental. Indeed, it was observed that “The fact that other employers offered schemes similar to the MAP does not show that there is a general market but many individual markets because each employer could only offer the scheme to its own employees”. After reflection, the UT was in agreement with the FTT that whilst a service was being provided, there was no economic activity and, accordingly, dismissed HMRC’s appeal.

Constable Comment: This case is useful in demonstrating the ways in which the Wakefield judgment is applied by the Tribunal in the context of establishing what is an economic activity. Whilst a supply in return for a consideration is normally indicative of a business activity, there is no specific test and the judgment highlights the importance of having regard for the whole situation rather than just the accounting entry. What constitutes a business activity for VAT purposes can be a particularly difficult concept to define which is why there is no specific test and may explain why this issue arises so frequently.


2. Recovering Pre-Incorporation VAT

This appeal related to the denial by HMRC of a claim for input VAT repayment relating to legal costs incurred by Mr McKee in defending himself against a claim made by a third party, Jumar. Mr McKee worked for Jumar and during his employment he privately worked on software known as “The McKee Software”. After Mr McKee left his employment at Jumar, Jumar sought to sue him for infringement of copyright, breach of confidence and breach of contract. Jumar believed he was going to develop a product which infringed it’s copyright.

Mr McKee won those proceedings on various grounds. In defending himself he incurred significant legal costs and sought to recover the input VAT from HMRC through the new company he established to exploit the software after winning the case. To do this he relied on the legislation which allows a business to recover input VAT incurred for business purposes six months prior to its incorporation. HMRC claimed that the services were provided to Mr McKee in his personal capacity as his new company had not yet been formed at the time of the legal proceedings. It also asserted, in support of its argument, that the engagement letter with the lawyers was with Mr McKee and not his new company.

Mr Mckee mounted the argument that defending himself against the claims made by Jumar were business costs as he intended to sell his software through a limited company (Koolmove, The Appellant) which he incorporated as soon as was reasonably practicable following his success against Jumar. He stressed that had he not intended to commercialise the software in the future, he would have simply conceded to Jumar and sought employment elsewhere. He also highlighted that he did not incorporate Koolmove until after the proceedings as, if he had lost, it would have been a pointless exercise. Owing to the lack of incorporated company, the engagement with the lawyers was, necessarily, with him directly.

The Tribunal accepted Mr McKee’s argument and agreed that there was a direct and immediate link between the services supplied and the business to be carried on by Mr McKee. Therefore, they allowed his appeal and Mr McKee is allowed to recover all of the input VAT incurred on these legal costs in the six months prior to incorporation of Koolmove.

Constable Comment: This is an interesting area of the law which has generated many shades of grey and a deep collection of caselaw. In this instance HMRC relied on the fact that the supplies of the lawyer’s services were made to Mr McKee and not Koolmove. The Tribunal observed that, whilst this is the case, HMRC seems to have lost sight of the fact that the whole point of the regulation at hand is to allow VAT on services supplied, in broad terms, to the incorporator prior to the incorporation (but for the benefit) of the limited company and for the purposes of the business to be carried on by it. The Tribunal remarked on HMRC’s lack of understanding of this area of the law and noted that the case mounted by HMRC was “somewhat confused”. The whole area around the recovery of VAT incurred prior to VAT registration (pre-registration input VAT) was subject to much discussion a few years ago as HMRC appeared to be revisiting a long-standing policy. HMRC sought to clarify its position with the issue of HMRC Business Brief 16/16.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.

Constable VAT & Charities Newsletter August 2019

Thank you for subscribing to our VAT Charity Newsletter. In this publication we cover some of the most important and interesting areas of VAT for charities. Some of the issues and cases have been discussed in our VAT Focuses, however the charity edition of the newsletter aims to give a more directly relevant summary for those operating in the third sector. There are some case law developments which may have an impact on the recovery of VAT incurred by all VAT registered charities.

This issue of the Constable VAT & Charities Newsletter covers;

  1. VAT Welfare Exemption: Supplies Closely Connected
  2. University of Cambridge
  3. Partial Exemption “Direct and Immediate Link”
  4. Zero-Rating Construction: Relevant Charitable Purpose, Business or Non-Business
  5. Glasgow School of Art
  6. Call for Evidence: Simplification of Partial Exemption and the Capital Goods Scheme

1. VAT Welfare Exemption: Supplies Closely Connected

This appeal concerned Cheshire Centre for Independent Living (CCIL) and the liability of its supplies of payroll services to individuals with disabilities, which it believed to be VAT exempt. HMRC had ruled that the payroll services did not qualify for exemption as they were not closely associated with the provision of welfare services so they were liable to VAT at the standard rate.

Certain disabled persons may be eligible for financial assistance from the Government in order to facilitate their independent living. The funding is handled in one of three ways;

  • The money is held and controlled by the Local Authority or NHS
  • The money is paid to a special organisation whose purpose is to receive and control funds for those people receiving funding for welfare
  • The money is paid to the individual directly, affording a higher degree of autonomy in determining the individual’s own care.

In this instance, the funding is handed to disabled individuals directly in order for the individual to take control of and pay for their own care and support services. Where a disabled person receives these payments and uses them to pay personal assistants, they become an employer of that person with all the relevant obligations for direct tax purposes.

CCIL offer a payroll service. It enters into contracts with local authorities and individuals receiving funds for their care and deals with issues such as PAYE and NIC on behalf of clients. CCIL contended that this supply should benefit from VAT exemption as it is closely associated with a supply of welfare services. HMRC believed that this supply was secondary to a supply of welfare services and, therefore, should be standard rated as a “payroll service” akin to that which may be supplied by an accountant. This would, of course, have taken away 20% of the payments made to disabled individuals to support their independent living. Simply put, the individuals would have been left with less money to spend on receiving the support they need.

CCIL submitted that the services supplied were in the context of a supply by a charity to a disabled person whose needs had been formally assessed under the Care Act 2014, meaning that they were VAT exempt. The supplies in dispute, it claimed, were in the context of a supply by a charity to a disabled person, not a supply of payroll services to a regular employer. It was observed that the disabled individuals were de facto employers by way of their disability, not because they were seeking to employ people for their own profit.

The Tribunal considered that the payroll service, whilst not being an end in itself, is a means for enabling the support of disabled individuals through the services of assistants as a part of the care plan for that individual. It observed that, in previous caselaw, that it had been found that psychotherapeutic treatment given in out-patient facilities by qualified psychologists (who are not doctors) is an exempt activity, but only when closely related to hospital care. It pondered, therefore, whether or not CCIL’s supplies could be capable of being a “stand alone” service which would be standard rated. The Tribunal concluded that the supply was not a stand-alone supply, nor was it really capable of being one. Therefore, it allowed the appeal and stated that the services in question were indeed exempt as they were services closely connected with a supply of welfare services.

Constable Comment: Interestingly this case focusses on funding provided directly to the disabled person but it acknowledges at least two other ways in which these funds are distributed; the money is held and distributed by the NHS or, alternatively, by an independent third party.

The VAT liability of similar services provided in these circumstances is not commented on in this case. Despite this, the result will, no doubt, create some uncertainty as to the VAT liability of the funds received by the charities on behalf of the disabled person. The treatment of such supplies and what constitutes “closely linked with a supply of welfare services” now requires clarification as it could have wide ranging impacts on a variety of service providers dealing with welfare. The Tribunal Chairman comments that The VAT position of supplies by the Appellant to Local Authorities is not before the Tribunal.” The issue was whether payroll service provided by the charity to the recipients of Direct Payments is exempt for VAT purposes. This point is not elaborated on, but it is not clear why there should be a difference in VAT treatment.

This case also serves as a reminder that HMRC construes the welfare exemption, amongst others, very narrowly. It is always recommended that, when seeking to rely on a VAT exemption, professional advice should be sought.

A final point of interest is that it took 6 years for this case to be heard. HMRC issued its decision in January 2013 and the case was heard over two days in January 2019. Constable VAT has been advised by HMRC Solicitor’s Office that The Commissioners have sought leave to appeal the decision of the First Tier tribunal to the Upper Tribunal.

2. University of Cambridge

This case concerned the deductibility of VAT incurred by the University of Cambridge in relation to fees incurred on investment management. The University receives donations and endowments as part of its financing, when these payments are received, the amounts are paid into an investment fund which is managed by a third-party fund manager. The University submitted an application to recover this input VAT as, it believed, the income generated was used to fund the whole range of its activities. Therefore, the input VAT was reclaimable in line with the University’s partial exemption as a general overhead.

The FTT and UT had found in favour of the University. The Court of Appeal referred the matter to the CJEU for clarification as to whether a taxable person, carrying on both taxable and exempt activities, invests donations received by placing them into a fund and uses the income generated to cover the costs of all of its activities is entitled to deduct as an overhead input VAT paid in respect of the costs associated with that investment.

Only activities which are economic in nature give rise to a right to deduct VAT incurred and, moreover, in order for a taxable person to have a right to deduct VAT, there must be a direct and immediate link between a particular input and output transaction. Therefore, the Court observed that it is necessary to determine whether the collection of donations, and their subsequent investment, constitutes an economic activity.

Reflecting on this point, the Court posited that, when collecting donations, the University is not acting as a taxable person as there is no supply in return for a consideration. It follows that the input VAT paid in respect of any costs incurred in connection with the collection of donations is not deductible. For VAT purposes, there is no regard paid to the reason why the money was received. Therefore, the VAT was not recoverable by the University.

Constable Comment: This decision deals with the matter of the recovery of VAT incurred on investment management fees. The key point is whether a charity can consider the costs as an overhead of its business activities or solely a direct cost of a non-business investment activity. In this case, the CJEU found that the costs were not an overhead of charitable activities but were directly related to the non-business investment activity and not the making of any taxable supplies.

We understand that some charities had submitted protective input VAT claims on the basis of the First and Upper Tier Tribunal decisions in this case. Those charities may now wish to reconsider the position and may feel it appropriate to notify HMRC of an error correction. HMRC may pursue and issue VAT assessments against charities who have been making partial input VAT claims on investment management fees.

Whilst this decision concentrates on a narrow point, there is obviously concern about the possible broader effect this decision may have on HMRC policy. Following the High Court decision in Church of England Children’s Society in 2005 (and HMRC Business Brief 19/05) there has been an assumption that where VAT has been incurred on fundraising costs, that VAT is partially recoverable via the agreed input VAT recovery method on the basis that the funds are not restricted to support only non-business or VAT exempt business supplies but are also supporting taxable business activities.

This firm confirmed with HMRC in 2011 that this principle still applied. The CJEU decision in this case may cause HMRC to revisit the position and we would recommend all charities claiming VAT incurred on fundraising costs refresh their specific circumstances.

3. Partial Exemption – “Direct and Immediate Link”: Royal Opera House Covent Garden Foundation

This case concerned the recoverability of VAT incurred by the Royal Opera House Covent Garden Foundation (The Foundation) in relation to productions which it put on and charged for admission to. It was accepted that admission to the events was exempt for VAT purposes owing to the cultural exemption. However, the Foundation sought to argue that some of its production costs had a direct and immediate link with taxable supplies it made, such as catering income and ice cream sales, meaning that some of the VAT incurred should be recoverable as it related, in part, to taxable supplies being made.

The issue which arose was whether costs incurred had a direct and immediate link with the following, taxable, supplies:

  • Catering Income
  • Shop income
  • Commercial Venue hire
  • Production work for other companies
  • Ice cream sales

If there were such a link found then the costs would have been residual for partial exemption purposes meaning that a percentage of the input VAT could be recovered in line with the percentage of the overall supplies made by the Foundation which were taxable: 30% taxable sales would lead to 30% input VAT recovery on residual input VAT.

The Court observed that, as per case law, the decisive factor in determining a direct and immediate link is that the cost of the input transaction, in this case the production costs, is incorporated in the cost of the individual output transaction, in this case the taxable supplies. Each type of taxable supply was assessed individually in order to establish whether the production costs were incorporated into the supplies.

Catering income was found to have a direct and immediate link with the production costs, a conclusion aided by the fact that restaurant menus for more expensive evenings are set at higher prices. It was also concluded that for ice cream sales, similarly to supplies of catering, there is a direct and immediate link. Therefore, The Foundation will be able to treat the income VAT associated with these supplies as residual for the purposes of partial exemption; put simply, it can now recover more input VAT.

However, not every conclusion went in favour of The Foundation. Where the supplies of catering and ice cream sales were largely dependent on the productions being staged by the Foundation, and the costs were incorporated into the price of attending the event, the shop sales, commercial venue hire and production work for other companies were found not to be. It was considered that the costs of production were not “bundled” into the income derived from these streams. Therefore, there is not a sufficient link between the production costs and these taxable supplies to give rise to input VAT recovery as they relate to the exempt supply of admission to a cultural event.

Constable Comment: Where previous case law has observed that a direct and immediate link is established simply through the bundling of costs into the ultimate charge made to the consumer, this case was interesting in seeming to deviate somewhat from this precedent; assessing more where there is a business link between the cost and the supply.

For example, with regard to the catering, it was observed that few people would attend the Royal Opera House merely to eat dinner. People ate there as part of their evening and would not, but for the performance, be buying food in that restaurant. The logic for the ice cream sales was the same despite there being little discussion around the income from ice cream containing an element of the cost of the production.

Whilst this was not a total victory for the Foundation, the decision heralds a welcome shift away from HMRC’s rigid application of the “direct and immediate” criteria that costs be bundled into the final charge to the consumer. We await to see if HMRC will appeal this decision further.  

4. Zero-Rating Construction: Relevant Charitable Purpose, Business or Non-Business

This case concerned the VAT liability of construction costs incurred by Yeshivas Lubavitch Manchester (YLM) when constructing a new building for its school to use. YLM owns and maintains Oholei Yosef Yitzchok (OYY), which provides a day nursery for boys and girls between the ages of 3 and 5 and a day school for girls aged 5 – 16.

YLM acquired a site, which was previously a residential building, and added a new single-storey area to the rear of the building, only some minor works were carried out to the existing structure. The new building and old building did not use the same party wall; they were built slightly apart from each other and then the external walls were used to create internal corridors. YLM argued that the construction of the new structure was zero-rated under items 2 and 4 of Group 5, Schedule 8 VATA 1994. HMRC contended that the work should be standard rated as it was performed under a single contract for converting the old building. HMRC also disputed whether the building was for a “relevant charitable purpose” for the zero-rate to apply as YLM received money from parents in exchange for providing a children’s nursery.

HMRC sought to argue that the work undertaken was performed under one contract by a single contractor, that a shared boiler meant the new building and existing structure were incapable of functioning separately (a criteria for the zero-rate to apply) and that the use of the building would be a business use rather than a non-business charitable one. Readers may remember the decisions in both Yarburgh and St Pauls, which led to HMRC’s Business Brief 02/05, commenting on whether charities which offer nurseries/creches would be regarded as being in business for VAT. HMRC believed that this was not applicable in the present case as OYY also provided a day school and OYY ran things differently to the way Yarburgh did.

In its deliberating, the Tribunal considered that the point regarding the single contract did not prevent the application of the zero-rate as there is no legislative provision which insists a single construction contract cannot relate to two independent projects on the same site. Therefore, the question revolved around whether or not YLM were found to be in business through operating OYY.

The Tribunal considered a wealth of caselaw to establish whether YLM/OYY was in business. In considering Wakefield (our coverage here), the Tribunal observed that HMRC accept that up to 5% business use of a building can be ignored as de minimis.   It was accepted that any office use of the building would be less than 5% of the overall use of the building so, following Wakefield, the question was whether or not OYY were in business purely through operating the nursery. Various factors were weighed against each other to establish if the nursery was run “in return for remuneration”.

After significant consideration the Tribunal reached the conclusion that the nursery was not a business activity and, therefore, that the construction work qualified for the zero-rate of VAT. However, it was also confirmed that any work which was carried out to the existing structure should be standard rated. The key factors in concluding as it did seem to be that the nursery is run on a not for profit basis. A “significant number” of children using the charity’s services are from disadvantaged families. In November 2018 a total of 36% of parents were paying reduced or subsidised fees.

Constable Comment: The conclusion is pleasing to see as it confirms that the Tribunals are willing to find room for the judgments in Wakefield and Longridge to exist alongside the ruling in Yarburgh. This will be a welcome decision for many charities who are not on all fours with the judgments but operate a broadly similar model. Despite the fact money was received in exchange for the provision of the nursery, and the Tribunal agreed it wasn’t a donation, when the whole picture was considered it was apparent that the activity was charitable and not business. The area of business/non-business is particularly grey with a vast wealth of caselaw muddying the water significantly and HMRC have been observed by this consultancy to use cases such as Finland and Borsele to make opposing points. At best this shows that HMRC also finds the area challenging.

Paragraphs 122 and 123 of the judgment are interesting and useful in demonstrating the way in which Tribunals will consider the question of business/non-business. Whilst HMRC argued that OYY took a lot more in fees than Yarburgh or St Pauls, the Tribunal found that this was not strictly relevant as it was the basis on which the fees are charged that is important and OYY sought only to cover costs; “…the difference between the two cases seem to be differences of scale or degree rather than of principle.” This is, overall, a positive result for charitable nursery operators who benefit from their supplies being regarded as non-business. However, it should also be remembered that this is a decision of the First tier Tribunal so does not create a binding precedent. It will be interesting to see if HMRC appeals this decision.

5. The Glasgow School of Art: Input Tax Recovery on Property Development

This appeal concerned the Glasgow School of Art (GSA) which contested a decision by HMRC to deny 100% input VAT recovery in relation to a refurbishment project on some campus buildings. The FTT had previously found in favour of HMRC’s original decision.

The GSA refurbished three buildings; the Assembly Building, the Foulis Building and Newbery Building. The buildings were all adjacent and on one site, the refurbishment project took place at the same time in relation to all of the buildings. The Foulis and Newbery buildings were demolished and replaced with the Reid building which was “wrapped around” the Assembly building. The whole project was contracted as a single development.

The GSA initially treated the input VAT on invoices from the contractor undertaking the project as residual and recovered in line with its partial exemption percentage. However, it later sought to change its argument and claimed that two distinct buildings had been built and that GSA was making a wholly taxable supply by leasing the Assembly Building to the GSA Student’s Association whilst the input VAT relating to the development cost of the new Reid Building  was recoverable in line with the partial exemption percentage. GSA therefore sought to recover the input VAT which it had previously not done so under its partial exemption calculation. It submitted a significant VAT refund claim.

The FTT had previously dismissed this appeal on the grounds that there was, materially, only one supply by the contractor to the GSA and, therefore, that the input VAT had correctly been treated as residual. The Tribunal in this instance agreed with the FTT and dismissed the appeal, concluding that the original invoicing arrangement gave the best reflection of the economic reality of the situation.

The UT also agreed with the FTT that GSA was not carrying on an economic activity. The rent paid by the student’s union was set at a level which it could afford, and it would take 500 years for the charity to recoup its outlay. This is not an economic activity.

Constable Comment: In order to support the claim that there were two separate supplies received by GSA, the charity went back to the contractor and split the development and invoicing into two sections and two distinct buildings. This case shows that, whilst important, contracts and invoicing arrangements are not the ultimate deciding factor; regard will always be had to the commercial and economic reality of the situation.

6. Simplification of Partial Exemption & Capital Goods Scheme

On 18 July 2019, HMRC issued a call for evidence consultation document on the potential simplification of Partial Exemption (PE) and VAT Capital Goods Scheme (CGS). The closing date for comments is 26 September 2019 and Constable VAT intends to respond. We would recommend all clients, and contacts, consider whether they would like to respond directly to HMRC or if you would like to incorporate comments into Constable VAT’s response. Some of the points to consider include:

  • Partial Exemption De Minimis Limits
  • Partial Exemption Special Methods
  • CGS thresholds and interval lengths

The consultation document can be viewed here.

Constable VAT Consultancy LLP (CVC) is a specialist independent VAT practice with offices in London and East Anglia. We work together with many charities and not-for-profit bodies ranging from national charities, those working overseas, and regionally based local organisations. CVC has a nationwide client base. 

We understand that charities wish to achieve their objectives whilst satisfying the legal requirements placed upon them. Charities may be liable to account for VAT on supplies made and VAT will be payable on certain expenditure. As irrecoverable VAT represents an absolute cost to most charities, regardless of their VAT registration status, there is a need to review the position regularly and carefully. We offer advice with planning initiatives, technical compliance issues, complex transactions, help with innovative ideas on VAT saving opportunities, and liaising with HMRC. 

If you would like to discuss how VAT impacts on your organisation please contact Stewart Henry, Laura Krickova or Sophie Cox on 020 7830 9669, 01206 321029 or via email on,, or Alternatively, please visit our website at where you can view some of the services we offer in more detail and subscribe to our free general and regular VAT alerts and updates. Visit our website for current news updates. You can also follow Constable VAT on Twitter. 

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.



Constable VAT Focus 8 August 2019

This VAT Focus provides a summary of the most recent updates regarding VAT from HMRC who are currently updating a substantial amount of guidance. All of the updates can be found as they come out here. We also comment on some of the recent decisions from the Tax Tribunals and Courts.


Help and Support for VAT
Get help with VAT by using videos, webinars, online courses and email updates from HMRC.  A new webinar has been added about the incoming reverse charge for construction services.

VAT Transport
HMRC has updated its guidance so that it now functions correctly.

VAT Margins Scheme
HMRC has updated its guidance on the margin scheme for second hand vehicles to improve functionality.

VAT Single Entity and Disaggregation
HMRC has updated its guidance to reflect all of the requirements of what must be sent to the VAT Registration Service in the event of a disaggregation.

Education and Vocational Training (VAT Notice 701/30)
HMRC has updates its guidance regarding the definition of an eligible body for the purposes of educational and vocational VAT exemptions.


This month HMRC have emailed tax advisers to confirm that businesses who have missed their window to sign up for Making Tax Digital (MTD) will not be penalised this time. This should be a relief to any business which was worrying about incurring a penalty charge for late MTD registration. However, HMRC has clarified that you must still submit the VAT return through the old portal to avoid late filing penalties.

Whilst this is a pleasing concession to see, HMRC is unlikely to be so generous again. Any business who has failed to register for MTD on time needs to address the issue immediately. If you would like to discuss your obligations and how to go about fulfilling them, please contact Constable VAT.


The new reverse charge for subcontractors operating in the construction industry comes into effect in October 2019. Constable VAT have previously produced some coverage of this area which can be read here.

This will mean, essentially, that building contractors will not pay VAT to their sub-contractors but will account for it themselves. It is important that all affected parties familiarise themselves with the new rules before they are introduced. If you would like to discuss any questions about the new provisions, please do not hesitate to contact Constable VAT.



1. DIY Housebuilders

This case concerned a claim for repayment of VAT which was incurred on materials in the course of construction of a house by Mr Darren Luke. Mr Luke had been granted planning permission for “the demolition of an existing dwelling and stable block and erection of a new dwelling and detached garaging”. Attached to this permission was a condition:

“On the first occupation of the replacement dwelling, the accommodation on the first floor of the detached garage, hereby permitted, shall be brought into ancillary use solely for the purposes incidental to the enjoyment of the dwelling house and for no further purpose.”

Following the terms of the planning permission, Mr Luke built a garage with some first-floor accommodation where he lived whilst constructing the replacement dwelling, once this was finished, he began working on the replacement dwelling. When work had been completed, he submitted a claim for repayment of VAT to HMRC under the DIY housebuilders scheme for VAT. HMRC allowed the claim in part but refused some items on the grounds that materials which form part of an annexe which cannot be disposed of separately to the main dwelling do not qualify for the scheme.

Mr Luke appealed this decision on the grounds that the garage and house were covered by the same planning permission; the Council had intended that Mr Luke live in the garage whilst reconstructing the main dwelling. Therefore, the project was framed as “…demolition of an existing dwelling and erection of replacement dwelling and garage.” At no point did the planning permission refer to an annexe as the garage was part of the main residence.

Drawing on a wealth of caselaw surrounding the subject, the Tribunal concluded on the basis of the decision in Catchpole which states that two or more buildings are capable of making up one dwelling. Once HMRC had accepted that this was the case, it was agreed by all parties that, as the planning permission was for one project incorporating two buildings, the zero-rate should apply and Mr Luke’s appeal was allowed.

Constable Comment: This case provides useful clarification around the definition of an annexe and where a DIY Housebuilder is unable to make a full claim for repayment of VAT. However, it is likely that HMRC will continue to be strict in its interpretation of what is an annex in order to prevent the floodgates opening to a stream of repayment claims in relation to what is, essentially, an annex but with single planning permission.

2. Professional Fees: A General Overhead?

This appeal by Newmafruit Farms Limited (NFL) concerned a claim for repayment of input tax it had incurred on professional fees whilst pursuing unpaid loans. NFL is a fruit picking and packaging business based in Kent. It had accumulated surplus profit and wished to invest its cash reserves to gain interest on them. To this end, NFL made short term loans to third parties using its surplus profit.

The borrowers did not pay back the loans in time and NFL incurred professional fees relating to legal proceedings in pursuing these debts. NFL applied to recover this VAT incurred as input tax but HMRC refused the application on the grounds that it related to exempt supplies of loans. NFL claimed that as the loans turned bad, no consideration was received for the supply and the provision of goods or services without consideration is not, for VAT purposes, a supply; as no exempt grant of credit was made, the costs incurred must be regarded as a general overhead of the business.

The Tribunal observed that, on ordinary principles, a contract comes into existence upon the acceptance of an offer and not on complete performance of the terms of the contract by both parties. It found that NFL did make an exempt supply of loans, noting that failed consideration and no consideration are different things. Concluding that NFL made exempt supplies of loans, the Tribunal held the VAT to be irrecoverable as it did not relate to the general business activity of the company – to pick and pack fruit.

Constable Comment: This case reached a reasonably predictable result but is interesting because of some of the arguments which NFL pursued, the whole case is worth a read. NFL argued that the legal fees were incurred years after the loans had been made and that the time which had passed created as “temporal disconnect” between the two. In mounting this argument, NFL sought to rely on the judgment in Becker that “a causal link cannot be considered to constitute a direct and immediate link for the purposes of input VAT recovery.

This was an interesting line of argument but, ultimately, it failed. The Tribunal considered that lenders must regard loan administration (checking payment amounts, pursuit of debt, bringing legal proceedings) as a cost component of the loan itself. Therefore, a lenders costs of bringing legal proceedings against a borrower for breach of a loan agreement is a cost component of the supply itself and there is a direct and immediate link between the costs incurred and that supply. This case reinforces the principle that, wherever possible, VAT incurred must be directly attributed.

If you would like to discuss how VAT impacts on your organisation please contact Constable VAT on 01206 321029. Alternatively, please visit our website at where you can view some of the services we offer in more detail and subscribe to our free general and regular VAT alerts and updates. Visit our website for current news updates. You can also follow Constable VAT on Twitter. 

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.