HMRC NEWS

VAT energy-saving materials relief
This guidance deals with an extension of the VAT relief for the installation of energy-saving materials to include buildings used solely for relevant charitable purposes, such as village halls, and to bring additional equipment within the scope of the relief.

Fuel and power (VAT Notice 701/19)
The above guidance has been updated to include information about VAT treatment of charging electric vehicles using charging points.

Claim a VAT refund as an organisation not registered for VAT
The above online service can be used to claim back VAT if you are a local authority, academy, public body or eligible charity. The updated guidance confirms the need for a bank statement for a first claim and the need to use a Government Gateway user ID for future claims.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK is registered with the Fulfilment House Due Diligence Scheme and details 8 additions and 2 removals.

Updates on VAT appeals
The above link can be used to check the current position of noteworthy VAT appeals. The updated list shows 2 additions, 4 amendments and 5 removals.

CASE REVIEW

Upper Tribunal

1. Repayment supplement on input VAT credit

This case concerned a repayment supplement sought by Bollinway Properties Ltd (BPL), in the sum of £3.5million. Acepark Ltd bought Toys R Us Properties Ltd (TRUP) and transferred its properties to BPL for £355million. Subsequently, BPL claimed £71million of input VAT incurred on the transfer and asked HMRC to offset this amount against TRUP’s corresponding output VAT liability.

The FTT rejected BPL’s argument that a repayment supplement was due. BPL appealed to the Upper Tribunal on the grounds that the FTT erred in law in finding that:

1. BPL assigned its entitlement to its VAT credit to TRUP;
2. a repayment supplement can become due only where HMRC make an actual payment; and
3. 26 days should be left out of account for the purposes of calculating the 30 days period. [HMRC is required to make payments within 30 days but is permitted to “stop the clock” for the time it takes to undertake reasonable enquiries.]

It was agreed that ground 3 must succeed before it was worth considering ground 1 and 2.  Therefore the UT first considered whether HMRC delayed repayment beyond 30 days.

The VAT return was submitted on 2 November and a repayment was made on 18 December, however during this period HMRC had requested a full set of backing documents.  BPL provided various documents, but the property transfer forms (TR1) were only provided on 18 December.

The UT upheld the FTT’s decision.  It considered that the request for TR1s by HMRC was reasonable and that the FTT had reached a reasonable conclusion on the facts.  The UT is limited to evaluating the law and cannot disturb findings of fact by the FTT unless those findings are clearly unreasonable, which they were not in this case. Therefore there was no delay beyond the 30 days and BPL was not entitled to a repayment supplement.

Constable Comment: The repayment supplement referred to in this case relates to VAT accounting periods starting on or before 31 December 2022. From 1 January 2023, HMRC introduced repayment interest as a substitute for the repayment supplement. Taxpayers may be due repayment interest if HMRC is late in making a payment.

First Tier Tribunal

2. Supplies of serviced accommodation

The appellant, Realreed, owns a property, Chelsea Cloister, containing 235 self-contained serviced apartments. The question before the FTT was whether these supplies were VAT exempt, as Realreed believed, or standard rated.  The appeal also addressed whether HMRC was entitled to apply a penalty, a point that may be of significantly wider interest than the narrow VAT liability point.  Not only did Realreed think that it had acted with reasonable care, but it also considered that it had a legitimate expectation that HMRC would not issue retroactive VAT assessments because of an historic acceptance by HMRC of Realreed’s VAT accounting policies. Therefore, not only was HMRC taking a revised position on the VAT liability, but it was also arguing that it was careless of Realreed not to have declared VAT when this VAT liability had apparently been accepted as reasonable by several HMRC VAT inspectors.

This is a long decision that sets out a great deal of case law.  It may be sensible for any business operating in a similar way to read the full judgement.  However, the underlying VAT liability question was whether Realreed’s supplies are removed from the VAT exemption because its supplies are “the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation”. Note 9 to the relevant exemption Group provides that “similar establishment” “includes premises in which there is provided furnished sleeping accommodation whether with or without the provision of board or facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers”

Realreed’s contention was that it made supplies of accommodation only.  Customers did receive additional services but those related services were at all times were supplied separately by Chelsea Cloister Services Limited (CCSL), a company under common ownership with Realreed.  CCSL’s services were treated as fully taxable.  Thus, a complex point regarding the type of accommodation that is excluded from exemption was complicated further by a question about what service the customer received from Realreed and whether allied services provided by a different party could impact on their classification.

Realreed’s contention was that if CCSL’s and Realreed’s services are evaluated separately then Realreed’s supply contained none of the elements that might bring the exclusion from VAT exemption into effect.

The FTT accepted that the services of CCSL had been “carved out” and Realreed was only supplying the property. However, it also considered that the ancillary services provided by CCSL should be taken into account when considering whether Chelsea Cloisters was similar to a hotel. Most of Realreed’s customers stayed for less than 28 days and the FTT concluded that this in conjunction with the additional CCSL services, meant that Chelsea Cloisters was an establishment operating in competition with hotels.

Turning to the imposition of penalties, these had been applied because in HMRC’s view Realreed had not taken reasonable care.  As the written decision states: “…Realreed’s submission is that it acted reasonably and diligently and submitted its VAT returns consistently with what it believed to be the correct treatment, as endorsed by HMRC by their actions during previous inspections. HMRC did not challenge Realreed’s treatment during previous visits, nor did it advise Realreed to seek specialist advice on the proper VAT treatment of its supplies. HMRC’s dealings with Realreed included issuing a decision making corrections which can only be consistent with HMRC’s acceptance of Realreed’s approach to the VAT treatment of its supplies. Realreed says that it was reasonable for it to derive substantial comfort from the outcome of HMRC’s inspections and it had no reason to think it had done anything wrong.

In practice the penalty raised by HMRC had been suspended but Realreed took exception to the fact that given the historic HMRC “sign-off” of its accounting policies the penalty should still be appealed.

Realreed had separately sought a Judicial Review on whether it was entitled to protection from an HMRC decision to raise VAT assessments.  This is a lengthy decision that can be viewed here and fully sets out the history of HMRC inspections and the complex legal issues that were considered before Realreed’s application was dismissed.  However, noteworthy to most readers is the fact that HMRC officers inspected Realreed’s business in 1992, 1993, 1995 and 2005.  They inspected CCSL’s business in 1985, 1988, 1990, 1994, 1995, 2005 and 2014.   Nevertheless, the FTT found in HMRC’s favour (that

Realreed’s VAT accounting errors resulted from careless behaviour) concluding that:

• Although HMRC had not in the past challenged Realreed’s VAT liability position, there had never been a clearly stated acceptance by HMRC that it was correct.
• The conclusion that Realreed’s supplies were exempt dated back to 1991, or at least that is a point at which Realreed appears to have taken advice. Although Realreed’s business has not fundamentally changed since 1991, there have been enough changes in the way it was carried on that a person taking reasonable care might begin to wonder whether the VAT analysis (even if the assumed position in 1991was correct) had changed.
• Tax law and practice evolves. It was unreasonable to assume that (even if the business had not changed) that the tax position in 1991 remained the same in 2019.
• Whether or not a business wishes to incur the cost of professional advice or carry out its own research. “… it is, of course, also possible to obtain reassurance from HMRC. They operate a non-statutory clearance service, and it may also be possible for a taxpayer, after a dialogue with HMRC, to feel confident that the VAT or other tax analysis they have adopted is correct (or at least is accepted by HMRC). There is, however, no evidence of Realreed having engaged in any discussion of this sort.”

Constable Comment: This was an important case which considered the VAT liability of the supply of serviced accommodation. Perhaps of most interest as regards the liability decision was the FTT’s view that the supplies made by CCSL needed to be included in an evaluation of determining the VAT liability of Realreed’s supplies. 

As far as the penalty decision is concerned, we are often told by taxpayers “HMRC has inspected our VAT accounting records and raised no concerns so we must be doing things right”.  Perhaps reasonably, most taxpayers believe that HMRC’s VAT inspectors are experts that would spot a fundamental VAT liability mistake impacting on a significant percentage of the business’s turnover.  The simple truth is that the fact that HMRC has carried out VAT inspections does not mean that the VAT accounting treatments applied are correct or that if HMRC wished to raise retrospective VAT assessments the taxpayer is protected.  

This decision should be viewed as a reminder to any business that believes it is safe from VAT assessments and penalties because it has a history of “clean” VAT audits. Very little reliance can be placed on the result of HMRC VAT compliance inspections unless they have been handled with great care.  In most cases we find that taxpayers do not even keep detailed notes of the meeting with HMRC, let alone try to manage the inspection to try and protect themselves.   

 As far as the FTT’s decision is concerned, we do not agree entirely with the FTT’s suggestion that taxpayers can easily approach HMRC and request VAT liability rulings.  The reality is that any business that uses that service appreciates that obtaining a VAT liability decision from HMRC is very difficult. However, it can be done and even if HMRC does not give a conclusive ruling it cannot then suggest that the taxpayer in question demonstrated a lack of care if it has proactively attempted to clarify the position beyond doubt. 

3. TOMS: Mobile ride hailing services

This case concerned the VAT treatment of the mobile ride hailing services supplied by Bolt Services UK Limited (Bolt). Mobile ride-hailing services are on-demand, private hire passenger transport services ordered and paid for through a smartphone application. Self employed private hire vehicle (PHV) drivers deliver services to Bolt who resupplies this service to passengers booking a trip through Bolt’s app.

Bolt asked HMRC for a non-statutory ruling that the Tour Operator Margins Scheme (TOMS) applied to the supply made by Bolt, and therefore VAT due is calculated on the margin, being the difference between amount paid by the customer and the costs to Bolt, as opposed to the total amount paid by the customer. HMRC disagreed and Bolt appealed to the FTT.

HMRC took the view that tour operators and travel agents do not provide on demand transport services from anywhere at any time to anywhere. HMRC’s case was that, on any ordinary understanding, tour operators and travel agents are traders who cater for those wishing to make pre-booked journeys. Bolt’s services do not fit that description and, therefore, Bolt is not a ‘tour operator’ for the purposes of the TOMS. In addition, HMRC argued that the supplies fell outside of TOMS because they were in-house supplies or they were materially altered / further processed supplies.

The FTT confirmed it was common ground that most of TOMS conditions were met, however it disputed whether Bolt provides services of a kind commonly provided by tour operators and whether Bolt makes an onward supply of the PHV drivers to its customers without material alteration or further processing.

The FTT confirmed that  the correct approach is to take a high level or general view when considering whether services are of a kind commonly provided by tour operators or travel agents.  It concluded that passenger transport services are of a kind commonly provided by tour operators.

The FTT then concluded that Bolt’s supplies were not in-house, as in-house supplies are those made from the travel agent’s own resources. In this case, the FTT found that, the PHV driver’s services directly benefitted the travellers and, they were not inhouse services or materially altered or processed. As a result, the supply of mobile ride-hailing services, without any additional elements, to a traveller is a provision of travel facilities falling within TOMS. The appeal was allowed.

Constable Comment: It will be interesting to see whether HMRC pursues this case and appeals to the Upper Tribunal.  A point of interest is that post Brexit TOMS could be viewed as an unnecessary scheme.  When introduced TOMS was an EU wide scheme designed to prevent the need for multiple VAT registrations within the EU.  Limited to UK supplies alone it seems to serve little purpose as standard VAT accounting could apply without a huge amount of difficulty.  It may be that its use in the UK was maintained because the removal of TOMS would have been disruptive to businesses whose accounting processes had been designed around it.  If HMRC decides that TOMS reduces the amount of tax that it collects (as compared to standard VAT accounting rules) we wonder if it may reconsider the position.  In this particular case the overall effect of TOMS on tax collection was not considered but if the self-employed PHV drivers are not VAT registered (Bolt would not incur irrecoverable VAT under TOMS) the overall level of tax collected would be reduced.  That does not mean that the outcome is unfair.  For example, a similar outcome would result from PHV drivers contracting directly with customers if Bolt acted as a disclosed agent.  However, that is probably not how HMRC sees the position and if the continued use of TOMS does materially reduce the amount of tax that HMRC collects then perhaps it may have a short shelf-life.

CJEU

4. Renovation and repair of private dwellings

HPA is a commercial company incorporated in Portugal, making civil construction supplies. In 2007 it entered into five contracts for works relating to the renovation of urban buildings with three commercial companies that owned the buildings on which the works were carried out.

Article 106 of the Principal EU VAT Directive allows member states to apply a reduced rate of VAT to certain supplies.  Annex IV to the VAT Directive contains a list of the services referred to in Article 106 of that directive. Point 2 of that annex allows the reduced rate in relation to: ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied’.

In Portugal this resulted in the law providing for a 5% rate of VAT on:

‘Works contracts for the improvement, refurbishment, renovation, restoration, repair or conservation of immovable properties and independent parts of immovable properties used for residential purposes, with the exception of cleaning services, grounds maintenance services and works on buildings which cover all or part of the constituent elements of swimming pools, saunas, tennis courts, golf courses or minigolf courses or similar facilities.

The reduced rate shall not apply to the materials incorporated unless their value exceeds 20% of the total value of the service supplied.’

HPA applied this reduced rate of VAT at 5% to its supplies in relation to the disputed contracts. The local tax authorities disagreed with this decision and raised assessments in the sum of EUR 374,750.

The referring court asked the CJEU whether point 2 of Annex IV must be interpreted as precluding national legislation which provides for the application of a reduced rate of VAT to services relating to the renovation and repair of private dwellings on condition that these actually be used for residential purposes at the time when those works are carried out.

The CJEU highlighted that the word ‘dwelling’ generally refers to immovable property intended for residential use, therefore it follows that  the renovation and repairing services must relate to property actually being used for private residential purposes, whereas services relating to property used for other purposes, such as commercial purposes, are not covered by that provision.

It was also noted by the CJEU that for a trader entitled to deduct input VAT, it is irrelevant whether or not the renovation or repair services are taxed at the standard or at the reduced rate, since that trader will recover the VAT incurred. By contrast, reduce rating those services benefits the final consumer who actually resides in the immovable property and who is not entitled to deduct input VAT.

The CJEU concluded that the Portuguese limitation of the reduced rate to work to property that was actually at the time of the work dwellings that are used for residential purposes was not prohibited by EU law.

Constable Comment:  Were the UK still a member of the EU this decision could have been of relevance to whether the UK’s reduced rate conformed with EU law. In the UK there is a reduced rate that applies to a changed number of dwellings conversion, including the conversion of a non-residential property into dwellings and refurbishment work to an existing dwelling that has been empty for more than two years. The judgement that the VAT Directive “does not prohibit” the limitation adopted in Portugal is not quite the same as saying “mandates the limitation”.   However, some of the courts comments on how the relief must benefit the final consumer would perhaps have had implications.  As the UK is no longer a member of the EU this means the UK provisions should not need to be reconsidered.    

5. VAT treatment of director fees

TP is a member of the board of directors of several public limited companies incorporated in Luxembourg and carries out many assignments in that regard including receiving reports from senior managers of the companies concerned, discussing strategic proposals, the choice of operational managers, questions related to the accounts of those companies and their subsidiaries as well as the risks that they face. TP also takes part in the decision-making regarding the accounts of the companies and the proposals to be submitted to shareholder meetings, risk policy as well as decisions as to the strategy to be followed. TP’s fees were typically set at a shareholders’ meeting, either as a percentage of the company’s profits or a lump sum.

The local tax authorities took the view that TP carried out economic activities subject to VAT therefore raised assessments. Following multiple appeals, the referring court now asked:

• whether Article 9(1) of the VAT Directive must be interpreted as meaning that a member of the board of directors of a public limited company under Luxembourg law is carrying out an economic activity, within the meaning of that provision.
• whether the first subparagraph of Article 9(1) of the VAT Directive must be interpreted as meaning that the activity of a member of the board of directors of a public limited company under Luxembourg law is carried out independently, within the meaning of that provision.

The CJEU initially confirmed that if TP supplies services to a company in return for consideration, providing that the activity is effected on a continuing basis and for a remuneration, then the VAT directive must be interpreted as meaning that a member of the board is carrying out an economic activity.

However, as regards the second point, the CJEU highlighted that if a person such as TP brings his expertise and know-how to the board of directors of a company and votes on that board, he does not appear to bear the economic risk linked to his own activity.  It is the company itself that will have to confront the negative consequences of the decisions adopted by the board of directors and that will accordingly bear the economic risk resulting from the activity of the members of that board. As stated in the judgement, “The same also applies if their liability in tort is only ancillary to the liability of the company or of the board of directors as a body thereof.”  This seems to say that the if a director such as TP was exposed to a potential non-contractual liability (they owe a duty of care and act negligently) that potential liability cannot be viewed as “bearing the economic risk” of their decisions.

This conclusion will apply in particular if the members of the board do not assume any personal obligations concerning the debts of the company. As a result, the CJEU concluded that the activities of a member of the board is not carried out independently, despite the fact TP acts in his own name and is not subject to an employer – employee relationship. A member of the board does not act on their own behalf or under their own responsibility and does not bear the economic risks linked to that activity, therefore the remuneration received is not subject to VAT.

Constable Comment: The usual starting position in the UK is that most Directors are not required to treat their remuneration as taxable income for VAT purposes.  That said HMRC guidance does state:

• “The direct tax treatment of office holders either as an employee or as a self- employed person should not be used as the basis for determining whether the activity is undertaken by way of business for VAT purposes”; and
• Section 94 of the VAT Act 1994 (meaning of business) states at paragraph (4): Where a person, in the course or furtherance of a trade, profession or vocation, accepts any office, services supplied by him as the holder of that office are treated as supplied in the course or furtherance of the trade, profession or vocation.

In a sense this is in line with the CJEU’s consideration of the economic activity point but the UK does not then consider whether an office holder is acting independently.

The UK removes from the scope of Section 94 many types of office holder situation.  Therefore, in practice it does not seem that the reasoning of the CJEU would lead to a result that is wholly out of line with UK policy. However, this may be a case of “a right answer for the wrong reasons” and there may be cases in which UK policy is not in line with the logic of the decision. Whether this decision can be applied post Brexit may be open to debate.  On its face it may be considered but is not binding.  However, the underlying principle considered concerns when to identify a supply for VAT purposes, and that is core to the fabric of the VAT system.  

Please note that this newsletter 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.

HMRC NEWS

Health professionals and pharmaceutical products (VAT Notice 701/57)
HMRC have updated their guidance contained in VAT Notice 701/57 to reflect the following changes:

• Pharmacy technicians (only in England, Scotland and Wales) have been added to the meaning of a health professional list in section 2.1.
• Services directly supervised by a pharmacist has been removed from section 2.5 (services that are not exempt from VAT)
• Section 4.7 has been updated to make it clear when forensic physicians services are exempt healthcare.
• Services supervised by pharmacists are now included when referring to a health professional under section 5.2 (Exemption of care services performed by a person not enrolled on a statutory medical register)

Updates on VAT appeals
HMRC have updated the list of ongoing VAT appeals with 1 removal, 4 amendments and 3 new additions.  These amendments may have implications for other businesses with similar ongoing disputes.

CASE REVIEW

First Tier Tribunal

1. Permission to grant an appeal out of time

Bull Brand Limited (the appellant) applied for permission to appeal out of time in respect of HMRC’s rejection of an error correction notice (ECN). The appellant is a wholesale supplier of e-cigarettes and tobacco products; they were contacted by a major customer who advised that they were intending to enter into a dispute with HMRC as to the correct VAT rate of the products. The customer informed the appellant to ensure that they had the opportunity to file an ECN to protect its position in the event that the customer was successful in its appeal with HMRC.

The appellant submitted the ECN amounting to £273,000 in October 2018 and also advised its suppliers that they should similarly file an ECN as the appellant would seek to recover any overpaid VAT. HMRC sent a letter rejecting the ECN in December 2018 and the appellant claims that they did not receive this letter or hear anything from HMRC regarding the claim and if they had received the letter they would have taken action to appeal as the letter advised. The appellant also stated that they had taken their accountants’ advice when filing the ECN and the accountant did not mention any requirement to follow up on the claim.

HMRC wrote to the appellant in May 2022 advising them that they were approaching the four-year limit for any further claims of a similar nature and inviting them to make a protective claim. The letter also indicated that any ECN would be rejected but an appeal could be submitted in respect of that rejection and that the previous ECN submitted had been rejected.

The appellant argued that they would have made an appeal in time if they had received the letter from HMRC and they acted promptly once they received the letter from HMRC in May 2022. HMRC argued that the appellant failed to exercise appropriate due diligence regarding their claim as they failed to follow up on the progress of the claim for over 3 years.  HMRC considered it should be entitled to consider the matter closed as there had been no contact from the appellant regarding the claim in over 3 years. HMRC also argued that if the appellant is allowed to appeal out of time then HMRC will be required to divert resources to consider the appeal, to the prejudice of other taxpayers.

The Tribunal concluded that, given the significant and substantial delay on the appellant’s part and the fact that the appellant did not establish that there was a good reason for such delay, the Tribunal did not consider that the potential financial consequences for the appellant and the limited prejudice to HMRC resources is sufficient to displace the underlying point that time limits should be respected and that permission to appeal out of time should not be granted. The application was therefore refused.

Constable Comment: In this case, the appellant sought to appeal the decision of HMRC but were outside of the statutory time limits within which they were required to submit such an appeal. The Tribunal ruled that permission to appeal out of time should not be granted and that statutory time limits should be adhered to. This highlights the importance of ensuring that statutory deadlines are adhered to as this can have significant consequences for the taxpayer.

2. Evidence for repayment of input tax

This appeal by Heartlands House Limited (HHL) is against a decision by HMRC to disallow three input tax repayment claims submitted for the VAT periods 09/19, 06/20 and 09/20. The input tax repayment was refused as HMRC considered that HHL had not provided sufficient evidence to support the claim or support that they had the intention of making taxable supplies. The dispute before the Tribunal was in respect of the 09/19 assessment totalling £28,221.96.

HHL is a company in the construction sector that secures projects and uses subcontractors to carry out the works. The company engaged in four projects in the period under appeal and it was the input VAT which was claimed in respect of three of these projects which led to the assessment.

HHL argued that it had provided clear evidence of taxable supplies and it was clear from the invoices and bank statements that the input tax had been incurred in respect of those supplies. HMRC argued that they could not see evidence of any taxable supplies in the period covered by the first VAT return or proof that any payments made by HHL were connected to taxable supplies. HMRC also argued that there was no planning permission for some of the projects and no correspondence or invoices that made clear what HHL clients were paying for.

The question for the Tribunal was whether the purchases had been made in connection with actual or intended taxable supplies. The Tribunal found that although there was poor management of the business in failing to ensure that it was registered for VAT and the CIS at the correct time, taking longer than it should have to take steps to enforce payments from customers and failing to understand that a pro forma invoice is not the same as a stage payment invoice; that was not enough to outweigh the evidence that supplies were actually made. Poor management does not mean that there was any lack of intention to make taxable supplies.

The Tribunal held that the appellant has provided sufficient evidence of an intention to make taxable supplies and provided evidence that it did make supplies despite the projects not necessarily being completed. The appeal was upheld.

Constable Comment: In this case, HMRC denied the recovery of input tax by the appellant on the basis that there wasn’t sufficient evidence to support the reclaim or support that they had the intention of making taxable supplies. The Tribunal found that there was sufficient evidence to support the repayment of input tax and that poor management of the business did not have any impact on the evidence which was available to support the fact that supplies were actually made. However, this case does highlight the importance of retaining evidence of an intention to make taxable supplies, or that taxable supplies have been made to which a VAT cost can be linked, in order to avoid a similar dispute with HMRC.

3. Whether an agency relationship is present

This case concerned All Answers Limited (AAL), a company operating an internet based business where customers, in return for payment to AAL, order academic work such as ‘model answer’ essays written by third party writers. AAL and the writers shared the fee paid by the customer. HMRC argued that the total fee was subject to VAT, however AAL took the view that only the amount retained was subject to VAT, meaning the sum paid to the writers should be excluded from AAL’s turnover for VAT purposes. This arrangement had already been subject to appeal and the Upper Tribunal (UT) concluded that AAL was acting as principal in the transaction and as such must account for VAT on the entire amount paid by the customer. The UT case was considered fully in a previous VAT Focus.

AAL had updated its contracts prior to the UT case and it considered these to be consistent with the agency relationship they understood they held with the writers and customers. This new case considered the impact of these updated contracts on HMRC’s assessments.

The updated contracts included terms to the effect that the copyright remains with the writer. Previously this was not the case and the UT considered this to support their conclusion in relation to the ‘core’ obligations under the contracts. However, the FTT was not satisfied that the contractual changes altered the ‘core’ obligation on AAL to deliver a product, in the appropriate time scale, to the requisite standard.

In addition, the FTT considered the commercial and economic reality of the case and concluded that the circumstances of transactions and overall business operations remained the same and the reality was that AAL delivers the academic work not the writers. The appeal was dismissed.

Constable Comment: This case considered whether an agency relationship exists between three parties to a transaction. The FTT ruled that contractual changes in relation to copyright was not sufficient to alter the core obligation of the appellant and also the commercial and economic reality did not change, therefore the appeal was dismissed. It is important when considering the VAT position in respect of agency relationships that both contracts and actual business practices are taken into account.

4. Default surcharge: Reasonable excuse

This case concerned Echo Construction Ltd’s (ECL) appeal against default surcharges issued by HMRC. ECL’s grounds of appeal included the fact that surcharge notices were not received and HMRC were invited to provide proof of delivery. In addition, ECL was awaiting funds in order to be able to pay the VAT due and the default periods relate to a time that ECL had opted to use the VAT deferral scheme in operation during the Covid 19 pandemic.

The Tribunal initially upheld that ECL was in default, shifting the burden to ECL to prove it had a reasonable excuse. In relation to the postage issue of the notices, the Tribunal confirmed there is a statutory presumption that if HMRC posts documents to the principal place of business, these are deemed to be delivered unless evidence to the contrary is provided. ECL was unable to provide such evidence, and as notices were never returned undelivered, the FTT ruled these must have been delivered.

In relation to ECL’s submission that the fact that it was waiting for funds in order to pay the VAT amounts to a reasonable excuse, the FTT highlighted that insufficiency of funds or relying on any other person to perform any task is not a reasonable excuse. The Tribunal commented that ECL could have easily contacted HMRC to appraise them of the situation, therefore the late payment was ultimately due to ECL’s simple error of judgment.

Lastly, the Tribunal found that any deferral of VAT would have been for payments that were due between 20 March 2020 and 30 June 2020. ECL’s defaults were in periods subsequent to this and it should have joined the VAT deferral new payment scheme, which was open from 23 February 2021 to 21 June 2021. ECL did not join the scheme, and the Tribunal concluded that ignorance of law cannot constitute a reasonable excuse. The appeal was dismissed.

Constable Comment: This is another case where the appellant failed to establish it had a reasonable excuse in relation to its defaults, which was common with the old default surcharge regime. Although the scheme has been replaced, an important point was considered in relation to the statutory presumption around postal services confirming that where HMRC sends something by post to the principal business address, it is deemed to have been delivered unless evidence to the contrary can be provided. The default surcharge regime in the above case has been replaced by the New VAT Penalty regime which commenced from 1 January 2023. Constable VAT has released an article covering the new regime which can be read here.

Please note that this newsletter 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.

HMRC NEWS

Union Customs Code (UCC) Redraft
There has been a proposal to amend the UCC, the primary legislation for the EU’s customs regime. As part of this redraft, there are some proposed amendments to the VAT rules for E-commerce. COM(23)262 amends the principal VAT Directive to remove the EUR150 per consignment limit currently applying to the ‘deemed supplier’ (online marketplace liability rules) and related administrative provisions, from 1 March 2028.

This proposed change is linked to various other custom measures, with the intention that all e-commerce operator sales into the EU, regardless of value, will have both VAT and customs duty paid for by the e-commerce operator rather than the individual consumer.

This will also have implications for the application of the Import One Stop Shop (IOSS) in the EU widening the application of the scheme for cross border EU sales B2C.

Insurance (VAT Notice 701/36)
The above guidance has been updated to provide a new definition of ‘insurance’ at section 2.2. That updated definition is as follows:

“…the essentials of an insurance transaction are… that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded.”

CASE REVIEW

First-Tier Tribunal

1. Default surcharge: Payment allocation

This case considered whether the appellant, Dresser & Co Ltd (DCL) made payments of VAT late and therefore the default surcharges imposed by HMRC were due. The Tribunal established that payments were in fact made late and DCL did not have a reasonable excuse or a Time to Pay (TTP) agreement in place, therefore the surcharges were due.

Whilst the case was straightforward and the penalty mechanism now less relevant, as the default surcharge regime has been replaced by the new VAT penalty regime introduced from 1 January 2023, there was an important question considered.

DCL argued that VAT payments made should have been allocated to the specific VAT quarter the payment was intended for rather than to earlier liabilities. If HMRC allocated payments as DCL intended, the total surcharges payable would have been less. However HMRC argued that where no allocation has been made by DCL, HMRC is entitled to allocate payments to the oldest debts.

The Tribunal agreed with HMRC on this point concluding that as DCL failed to allocate payments, HMRC were at liberty to allocate the payments as they did. In addition, DCL had not even submitted the VAT return when those payments were made, therefore HMRC could not reasonably allocate it to that quarter as the net VAT liability was not even established yet. The appeal was dismissed and surcharges were properly due.

Constable Comment: This case is a useful reminder for all taxpayers that payment allocation must be made prior to making payment (HMRC must be notified of the taxpayers intended allocation). If this is not done in advance, HMRC will apply the normal rules that payments are allocated to the earliest debt first. If this is overlooked, it can potentially lead to a shortfall in more recent payments causing further implications.

Please note that this newsletter 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.

HMRC NEWS

Group and Divisional registration (VAT notice 700/2)
Section 7.5 of the above guidance has been updated to clarify the position regarding the anti-avoidance provisions relating to intra-group charges on supplies of services. In addition, information relating to exempt financial or insurance supplies to customers outside the UK or the EU made by businesses in Northern Ireland has been removed from section 2.5.

CASE REVIEW

Supreme Court

1. VAT Treatment of digital publications

The Supreme Court has delivered its judgment in the case of News Corp UK & Ireland Ltd on the VAT treatment of digital newspapers. This case has been covered in previous Constable VAT updates and considers whether supplies of digital publications that would be zero-rated in paper formats could be zero-rated when published in electronic form in the period prior to 30 April 2020.

The Supreme Court decision was that the taxpayer’s appeal should be dismissed. The Judges concluded that the term “newspapers” in Item 2, Group 3, Schedule 8 of the VAT Act does not include the digital editions, with the result that the supplies of the digital editions by News Corp during the relevant period (in the case of this appeal between 30 August 2010 and 4 December 2016) were not zero-rated.

The judgment stated that it is common ground that the decision in relation to the period in question will also be applicable to the period up to 1 May 2020. However, it is clear that, unless falling within the specific exceptions, digital editions of newspapers are zero-rated as from 1 May 2020, when the VAT legislation was changed to allow this.

Constable Comment: This decision will impact on any businesses that made protective claims to HMRC in respect of digital publications or who have appeals stood behind this case.

Court of Appeal

2. Supplies of insulation or roof panels?

This case concerned an appeal by Greenspace (UK) Limited (GUL) against the decision of the Upper Tribunal (UT) to dismiss GUL’s appeal against VAT assessments raised by HMRC totalling £2,581,092. The issue in this case is whether installation of the roof panels which GUL is supplying falls under the reduced rate of VAT applicable to the installation of energy saving materials. The findings of the UT are covered in a previous Constable VAT Focus.

GUL argued that the issue is whether the supply is of insulation for a roof or something more extensive, namely the installation of the roof itself. GUL also argued that its supplies were properly characterised as a means of providing insulation for roofs as the predominant feature of the product being supplied was the Styrofoam insulation.

HMRC argued that both the FTT and UT had correctly concluded that the appellant’s supplies were of a roof and not insulation. Even though 95% of the volume of the product consisted of insulating material, there needed to be a pre-existing roof for the appellant to succeed in its argument. However,  in this case there was no pre-existing roof to which the insulating panels were applied because the panels themselves formed the roof.

Both GUL and HMRC agreed that the supplies in issue in this case amounted to a single supply which comprised the panels and their insulation. However, the appeal was dismissed as the reduced rate of VAT does not apply to supplies of roof panels by the appellant because those supply is of a roof and  is not of insulation for roofs.

Constable Comment: This case highlights the importance of correctly identifying the nature of a supply and then applying the correct rate of VAT. GUL owes HMRC a substantial amount of VAT as a result of incorrectly classifying the nature of its supplies. The VAT law surrounding the supply of insulation and other energy savings materials can be complex and it would be advisable to seek professional advice where there is any doubt.

3. VAT on matchmaking services

This appeal concerns the VAT liability of Gray & Farrar International LLP’s (G&F) supplies of matchmaking services provided to clients outside the UK and EU. The issue is whether the supplies constitutes services of consultants and other similar services and the provision of information as if so, any supplies to clients outside the UK and EU are treated as outside the scope of VAT.

G&F did not charge VAT on its supplies to clients belonging outside the EU on the basis that the service was outside the scope of UK VAT as it was providing consultancy services. HMRC took the view that G&F’s supplies of matchmaking services did not qualify as consultancy and were therefore within the scope of UK VAT. G&F appealed to the FTT who agreed with HMRC and dismissed the appeal. On further appeal, the Upper Tribunal (UT) found that the FTT had erred in law by failing to apply the correct ‘predominant element test’ for characterising the single service supplied and as a result held that G&F’s services were consultancy services or similar services and the provision of information, therefore the supplies are outside the scope of VAT. The details of these earlier hearings are considered in an earlier VAT Focus.

HMRC argued before the Court of Appeal that the ‘predominant element test’ which was applied by the UT in reaching their conclusion was not a legal requirement and is purely interpretative guidance. They also argued that if it was necessary to consider the predominant element test then the supply was a single service concerned with the provision of introductions and this single introductory service was artificially split by the UT. The typical client contracted for a minimum number of introductions to potentially suitable, prospective partners, and not to receive advice from G&F or to be provided with information. The provision of information and advice were simply the means of performing the introductory service.

G&F argued that its supply consisted of consultancy services, the provision of information and the provision of customer liaison team support and that those elements did not constitute separate supplies but formed one composite supply. It was therefore necessary to determine the overall character of the supply.

The Court held that the service provided by G&F was not a service habitually supplied by consultants or consultancy firms giving expert advice to a client. Also, the service was not data processing nor supply of information. The Court allowed HMRC’s appeal and restored the decision of the FTT meaning that the service supplied by G&F to clients belonging outside the UK and EU was within the scope of UK VAT.

Constable Comment: This case considered the VAT liability of matchmaking services and the Court concluded it does not fall within consultancy or similar, therefore it is subject to VAT. It will be interesting whether G&F appeals the Court of Appeal’s decision, as initially the FTT agreed with HMRC, the UT then overturned that decision and the Court of Appeal has now restored the FTT’s original decision.

First Tier Tribunal

4. Construction of a building for relevant charitable purposes

Between June 2017 and June 2019, The Zoological Society of Hertfordshire (“ZSH”) engaged the Appellant, Paradise Wildlife Park Limited (“PWP”), to construct a lion enclosure, an outside exhibition called the “World of Dinosaurs” and a shop called the “Dino Store” at Paradise Wildlife Park (the “Park”). PWP zero-rated this work on the basis that it supplies were of constructing a building intended for use solely for a relevant charitable purpose.

HMRC disagreed and raised an assessment for £411,641, the amount of VAT at the standard rate on PWP’s construction services. PWP agreed that the work relating to the Dino Store should be standard rated and the appeal concerned the work to construct the lion enclosure and the World of Dinosaurs Exhibition.

The Tribunal considered two questions. The main question was whether PWP was constructing buildings designed solely for a relevant charitable purpose, which turned largely on whether ZSH is carrying on a business and, if it is, whether these buildings are used to some extent in that business. There secondary issue was whether the “World of Dinosaurs”, which is an outside exhibition, is a building.

The Tribunal dismissed the appeal finding that:

(1) ZSH is carrying on a business of operating and charging for admission to the Park;

(2) The lions’ enclosure and the World of Dinosaurs were intended for use at least in part for the purposes of that business; and

(3) The World of Dinosaurs is not a building.

As a result, it was concluded that that the services PWP supplied in the construction of the lions’ enclosure and the World of Dinosaurs were not supplies in the course of construction of a building intended for use solely for a relevant charitable purpose within Item 2(a) of Group 5, Schedule 8 VATA and as such could not be zero-rated.

Constable Comment: This case considers the question of when a charity is carrying on ‘business’ activities in some detail and may be useful for other charities considering construction work.

CJEU

Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration and there may be occasions where they have a more binding effect.

5. VAT refund on assignments of bad debts

This case concerned Euler Hermes SA Magyarorszagi Fioktelepe (EH). EH is an insurance company which pays compensation to policyholders in the event of non-payment by their customers of a given debt. The amount of the compensation is 90% of the value of the unpaid debt including VAT. Under the contract, all the policyholder’s rights were transferred to EH.

EH made an application for a refund of the VAT included in the amounts paid on the grounds that in connection with the insurance product, it had paid the compensation including VAT, in respect of debts which had become definitively irrecoverable. The Hungarian tax authorities rejected the application on the grounds that the transactions which gave rise to the irrecoverable debts had not been carried out by EH.

EH appealed to the courts but the decision was upheld on the grounds that EH was not the insured person’s successor under insurance contracts and accordingly one of the substantive conditions for a refund of the VAT had not been met. The case was further appealed and referred to the CJEU.

The CJEU concluded that as the policyholders have received consideration in the form of compensation from EH, there can be no reduction of the consideration in the event of non-payment. In addition, the CJEU stated that a bad debt relief claim would infringe the principle of fiscal neutrality since the VAT paid to the tax authorities would not be exactly proportional to the price actually received by the taxable customer.

Constable Comment: The CJEU has ruled that EH was not entitled to claim bad debt relief on the debts assigned to it under the insurance contracts. There are certain conditions to be met in order to claim bad debt relief and it is important to consider these before making a claim. This supports HMRC policy regarding debts assigned to factors set out in its notice regarding Bad Debt Relief

Please note that this newsletter 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.

HMRC NEWS

HMRC email updates, videos and webinars for VAT
Form VAT 484 should be used to notify HMRC about any required changes to bank account details, contact details or VAT return periods. HMRC have released a live webinar about using this form to report changes. You can view this by following the link above.

Goods or services supplied to charities (VAT Notice 701/58)
This guidance relates to when the zero-rate VAT applies to charity advertisements and goods used for the collection of donations. HMRC has updated the following sections:

• “Media where charities can advertise VAT free”
• “What the term ‘the public’ covers”
• “Information on the internet”
• “Relief on the design or production of an advertisement”

Reporting VAT accounting mistakes to HMRC
HMRC has recently improved its VAT652 Error Correction Notice form by launching a new online form. The ‘print and post’ form has not been replaced and can still be used.  However, the online form is now HMRC’s preferred option.

The online form aims to reduce incomplete or incorrect forms, reducing customer contact and leading to a more efficient processing. If you or your business have any queries about the new online form, please contact Constable VAT and we will be happy to assist.

CASE REVIEW

CJEU

Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration and there may be occasions where they have a more binding effect.

1. Reduced rating of sports supplies

Escape Center BVBA (TEC) is the operator of a fitness centre, providing access to facilities and equipment. The equipment is used either by individuals or groups, with or without coaching. TEC also offers personal training and group classes. TEC accounted for VAT at 21% on its supplies but sought a reimbursement of previously declared VAT, taking the view that a 6% reduced rate should have applied. The Belgian tax authorities rejected that claim which led, initially, to consideration of the issue in the Belgium courts.

The court in Belgium noted that the Belgian tax authorities do not follow a uniform practice.  Some inspectors considered that standard rate VAT of 21% should be applied and others accepted a reduced rate of 6%.  As a result, the court referred a question to the CJEU.

The CJEU confirmed that the use of sporting facilities should cover the right to use facilities for the practice of sport and supplies linked to the use of those facilities. The CJEU commented that the reduced rating is to encourage the effective practice of sport rather than to focus on access to sport facilities. The CJEU considered whether the activities of TEC form a single supply and concluded that a supply of permission to use sporting facilities in a fitness centre and the supply of individual or group coaching may be subject to a reduced rate of VAT where that coaching is linked to the use of those facilities and is necessary for the practice of sports or where that coaching is ancillary to the use of those facilities or to their actual use.

Constable Comment: This case is not relevant to the UK in the sense that the reduced rate is an option not a mandated rule in relation to the supplies in question.  The UK never adopted the reduced rate for comparable supplies.  The UK offers VAT exemption for certain sport supplies however strict conditions needs to be met.  The main relevance of the judgement may be regarding a determination of when a bundle of services must be treated as a composite supply (the same VAT rate applying to the full package) or should be broken down with component elements attracting different rates of VAT.  This is a complex point that arises frequently in many different contexts and should always be considered by businesses that provide a bundle of services when the components in isolation could be subject to different VAT liabilities or place of supply outcomes.   

Upper Tier Tribunal

2. Personal Liability Notice – burden of proof

Mr Zaman, appealed a personal liability notice (PLN) issued by HMRC, imposing a penalty of £1.7million to the First-tier Tax Tribunal (FTT).  The PLN had been issued to transfer a liability on Zamco Ltd (Zamco), a company of which Mr Zaman was the sole director, to Mr Zaman.  FTT had allowed Mr Zaman’s appeal, which led to HMRC appealing to the Upper-tier Tax Tribunal (UT) on the grounds:

• The FTT erred in its approach to the burden of proof because it held that the burden rested solely with HMRC
• The FTT erred in its evaluation of the evidence because it failed to draw the correct inference from its findings of fact

The burden of proof on a dispute regarding HMRC’s appeal against VAT assessments rests with the taxpayer.  However, if HMRC elects to impose a PLN the burden of proof as regards HMRC’s rights to hold an individual director responsible for a company’s mistakes shifts to HMRC.

The UT considered the FTT’s decision and stated that it is for the taxpayer to prove, by evidence, that an assessment to VAT issued by HMRC is incorrect. The UT commented that the FTT lost sight of that fact.  After establishing whether the PLN was validly issued, the evidential burden in relation to the assessment to VAT on Zamco shifted to Mr Zaman.  It therefore allowed HMRC’s appeal on the first ground of appeal.  HMRC invited the UT to remake the decision in such way that the appeal against the PLN is dismissed. However, the UT concluded it did not hear sufficient evidence to do so, therefore the most appropriate course was to remit the case back to the panel of the FTT.

Constable Comment:  It can be difficult in cases like this to unpick the position and establish rights of appeal.  The underlying tax liability will rest with the company (which should usually lodge an appeal if it is wrong) and there can be no issue of a PLN if there is no underlying tax liability.  Once a PLN has been issued this does not shift the burden to prove that an underlying tax liability exists to HMRC.  The burden of proof only sits with HMRC insofar as it must show that the actions of the director allow HMRC to hold the director liable (in effect) for the actions of the company. 

First Tier Tribunal

3. VAT exemption: payment service provider

The appellant EMPL and EMPO are in the same corporate group called eMerchantPay Group. EMPO makes supplies to EMPL. HMRC ruled that these services are subject to VAT at the standard rate, therefore raised an assessment in the sum of £64,618. EMPL claimed that the supplies made by EMPO are VAT exempt financial services.

EMPL is a payment service provider (PSP) which provides businesses with the ability to accept card payments. EMPL agrees to market the PSP’s card acquiring services to merchants, guarantee the PSP’s debts to merchants, carry out due diligence and ongoing monitoring, provide payment processing, support and customer service. However, most of the underlying work in relation to these activities is undertaken by EMPO as a subcontractor.

HMRC argued that EMPO’s services were merely clerical or administrative services and therefore subject to VAT at the standard rate.

The FTT considered the evidence before it and stated that the ‘economic reality’ is that EMPO’s service consists of bringing together merchant acquirers and merchants with a view to the former providing financial services to the latter. This is because from a merchant’s perspective, the end goal was to enter into a contract with one or more merchant acquirers to enable card payments to be taken.  The FTT concluded that EMPO’s supply is the provision of intermediary services and therefore exempt from VAT. The appeal was allowed.

Constable Comment: As a FTT decision, this judgment is only binding on the parties concerned and the summary of facts provides insufficient detail to gauge its wider relevance.  The main point we took from this case is that it seems that it was recognised that EMPO was operating on the boundary of exemption EMPL took steps to seek a ruling and manage any risk proactively.  Many businesses prefer not to confront arguable points of law in this way. 

How much EMPL’s proactive approach influenced the outcome of the Tribunal is impossible to know.  However, this seems to us a case that could have gone either way and EMPL won.  Being prepared in advance and having all the legal and factual arguments ready may have made the difference between success and failure.  

Please note that this newsletter 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.

HMRC NEWS

HMRC have released the following updates to guidance.

VAT payments on account
This guidance sets out who has to pay VAT payments on account, how HMRC works out the payments, the alternatives and how and when to pay. The postal address to reach the payments on account team has been updated.

Revoke an option to tax for VAT purposes within the first 6 months
Taxpayers can choose to revoke an option to tax within the first 6 months, known as the ‘cooling off’ period where certain conditions are met. If they wish to revoke, they must submit form VAT1614C. The address for sending this completed form and any supporting documents have been updated.

Exclude a new building from an option to tax for VAT purposes
Taxpayers can use form VAT1614F to exclude a new building that’s been built on land they previously opted to tax for VAT purposes. The address for sending your completed form and any supporting documents has been updated.

Agent Update: Issue 99
HMRC has released this new agent update containing the latest guidance and information including:

• New approach to VAT compliance for overseas based traders using online marketplaces
• Making Tax Digital (MTD) for VAT – Make sure your clients are signed up and have the right software
• Tax avoidance – don’t get caught out
• Capital Gains Tax on UK Property Account
• Making Tax Digital (MTD) for Income Tax – expanding the customer pilot

CASE REVIEW

Upper Tribunal

1. Deliberate inaccuracy in VAT return

This was an appeal against a decision of the FTT granting an application by HMRC to strike out parts of the appellant’s, C F Booth Limited, appeal against a penalty assessment in the sum of £1,444,813.

The background to the penalty was that during an earlier 2017 decision (the 2017 decision), the FTT found that the appellant knew or should have known that a number of its transactions were connected to fraudulent evasion of VAT. Following this decision, in May 2018 the appellant claimed certain input VAT on its VAT returns and HMRC took the view that because of the result of the 2017 decision, the taxpayer knew (or should have known) the input tax credits were false as a result of artificial transactions connected to fraudulent tax losses. On that basis, HMRC concluded the return contained deliberate inaccuracies and issued a penalty of £1,444,813 in respect of the deliberate accuracy.

The above penalty was appealed to the FTT but the decision was upheld and the Upper Tribunal (UT) gave the appellant permission to appeal on 4 grounds.

(1) Deliberate conduct requires a conscious element which has to be proved by HMRC in these penalty proceedings, beyond the findings already reached in 2017.

(2) Applying the approach of the Court of Appeal in E Buyer, the conclusions of the FTT in 2017 on Kittel knowledge cannot be taken to have determined the question of deliberate conduct or the conscious element (alternatively, the element of dishonesty) which is inherent in that.

(3) Further and in any event, in these proceedings which are criminal proceedings for the purposes of Article 6 ECHR, the findings in the earlier civil proceedings should not be taken to determine any issue, whether by the application of a principle of issue estoppel or abuse of process or otherwise.

(4) The arguments on proportionality and special circumstances should be permitted to proceed, and should be taken into account, either to re-characterise the penalty as a penalty for “careless conduct” or otherwise to mitigate the amount of it.

Initially the UT considered ground the first two grounds together. Under these grounds, the appellant argued that the knowledge found by the FTT in the 2017 decision did not amount to deliberate conduct for the purpose of the penalty assessment. The appellant stated that HMRC had to prove the following three elements:

• The appellant had completed its relevant VAT returns incorrectly, by claiming input VAT in excess to the amount to which it was entitled
• The knowledge of the appellant, at the time, that the relevant VAT returns were completed incorrectly, that is to say, knowledge on the part of the appellant that in all the circumstances it was not entitled to claim input tax; and
• That the appellant intended that HMRC should rely on the VAT returns as accurate documents.

The appellant agreed that the first point was present in this case, however the second and third were in dispute because the required mental or conscious elements had to be proven by HMRC.

The UT disagreed with this argument and stated that a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. The UT highlighted the fact that this condition was met when the appellant made the declaration that the return is correct and complete. The appellant must have envisaged and intended that HMRC would rely on the contents of the return being correct when it made such the return declaration. Accordingly, the UT dismissed grounds 1 and 2 of the appeal and upheld that the returns contained deliberate inaccuracies.

The UT went on to discuss Ground 3 and 4. Considering ground 3 it concluded that the appellant received a fair hearing as it took place in public on front of an independent tribunal, the appellant received a notice of HMRC’s strike out application and both sides were legally represented and therefore were able to present their cases to the FTT, therefore ground 3 was dismissed. Regarding ground 4, the appellant argued that the penalty was disproportionate and excessive offending against the principle of proportionality however the UT rejected this argument, and the appeal was dismissed.

Constable Comment: This case provides a very useful analysis of a ‘deliberate inaccuracy’ this being in summary that a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC will rely on it being an accurate document. We advise all taxpayers to ensure they do not fall within this test as such inaccuracies could in theory attract a penalty of up to 100% of the VAT involved.

FTT

2. Healthcare services in prisons

This case concerned Spectrum Community Health CIC (Spectrum) making a range of healthcare supplies to 13 prisons in England. The services are supplied to NHS England (NHSE) and they include GP, nursing, pharmacy, physiotherapy, substance misuse, mental health, dentistry and optometry services. Spectrum delivers some of the healthcare services in house and subcontracts the remainder, but Spectrum remains responsible for the services under the contract. This case concerns the VAT treatment of the supplies made by Spectrum.

Spectrum contends that whilst the majority of its supplies are VAT exempt as medical care, it also makes taxable supplies including zero rated supplies of dispensing drugs and reduced rated supplies of sexual health products. As a result, Spectrum believes it is required to be VAT registered and entitled to recover input VAT attributable to those taxable supplies. HMRC do not accept that Spectrum makes any taxable supplies, they take the view there is a single composite supply to NHSE which is exempt from VAT.

The first issue the Tribunal took into consideration was whether Spectrum makes a single composite supply or multiple separate supplies. HMRC contended that the supplies made by Spectrum to NHSE are viewed as a Levob type supply (where two or more elements or acts supplied by a person are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split) and therefore the Tribunal approached the issue by identifying the essential features or characteristic elements of the transaction and, amongst other factors, considers this from the perspective of the average consumer, or the typical recipient of the supply.

Whilst Spectrum argued the typical consumer being a prisoner, the Tribunal concluded that the customer was NHSE as specified under the contracts and supported by the economic reality of the transactions. From NHSE’s perspective it was important that the different elements of the prison healthcare services work smoothly together and therefore the Tribunal concluded that the essential feature was the provision of primary healthcare services in prisons that is equivalent to that provided by the NHS in the general community. It was concluded that there was a single composite supply of primary healthcare.

The Tribunal then considered whether the supply was VAT exempt under Item 1, Group 7 as medical care provided by registered doctors, nurses, or exempt under Item 4, Group 7 as the provision of care or medical or surgical treatments. Spectrum took the view that supplies of drugs and contraceptive products may be excluded under Item 1 and are therefore taxable. Whilst the Tribunal concluded that the supply was exempt under Item 1, because Spectrum was not recognised as an establishment of a similar nature to a hospital which was a condition under Item 4, it also rejected the argument that the drugs or contraceptive products are physically and economically dissociable from the medical care.

As a result of the above, it was concluded that Spectrum makes a single composite supply of medical care which is VAT exempt. It is not entitled to be VAT registered or recover any VAT incurred. The appeal was dismissed.

Constable Comment: This case considered the single and multiple supply rules and the Tribunal ruled that as the essential feature of the transaction from the perspective of NHSE, being the typical customer, is of primary healthcare services, there was a single composite supply and Spectrum should not split these into multiple supplies with different VAT liabilities. Where there is ambiguity regarding to whether a transaction is a single or multiple supply, we would always recommend seeking professional advice as this is potentially a complex area of VAT which may often lead to litigation with HMRC. Constable VAT will be happy to assist with any related queries.

3. Best judgment assessment on Subway franchise

This case concerned Peppermint Foods Limited (the appellant) which owns two Subway franchise which it exploits via two outlets, one based in a retail park and the other located at a shopping centre. The appellant sells hot toasted sandwiches, cold food and drink from those outlets. Food consumed at premises was treated as standard rated, as well as hot takeaway food. Cold takeaway food, other than confectionary, is zero rated.

HMRC took the view that the appellants staff have, at the point of sale, incorrectly entered hot takeaway food into the till as cold takeaway food, therefore reducing output VAT as these were treated as zero rate. The case was assigned to Officer Vaghela (HMRC officer) who has considerable experience regarding investigating the VAT position of Subway franchises. He considered that the average standard rated sale in the last 4 years, being 58%, seemed low and therefore decided to carry out test purchases.

There were some incorrect VAT treatments discovered followed by the test purchases, these were raised with the appellant. As a result, the appellant also provided some read reports to the HMRC officer. The next step in the process involved the HMRC officer carrying out an invigilation exercise which the appellant agreed to. This involved the officers attending the outlets and observing the way in which the sales were entered into the tills. The results of these exercises were discussed with the appellant. Following the lengthy procedure including internal reviews, HMRC’s final assessment was in the sum of £144,383 after taking into account various points raised by the appellant such as seasonal factors. This amount was reduced from an initial £214,854.

The Tribunal noted that the burden was on HMRC to prove that a valid assessment was made. If HMRC is successful, then the burden of demonstrating that the assessment is incorrect lies with the appellant.

The appellant submitted that the invigilation exercises were wholly unrepresentative of the overall period assessed. It does not take into account matters such as seasonal variations, staff errors which could not be foreseen, or accurately managed, significant construction works, disruptive software and IT upgrades and the respective locations of the outlets. The appellant stated that it did not provide any quantitative evidence to refute HMRC’s figures because it did not realise that is needed to do so.

The Tribunal went on to consider whether the assessment has been made to best judgment and concluded that the officer indeed made his assessment to best judgment. He took into account 4 things when making his assessment; firstly the 4 year average of 58% seemed low. Secondly, the test purchases carried out shown that hot takeaway food was incorrectly treated as zero rated cold takeaways. Thirdly, the Z readings provided by the appellant and finally the invigilation exercises. During all stages the officer shared his concerns with the appellant which the Tribunal found to be best practice.

As a result, the assessment was found to be evidence based, taking into account matters raised by the appellant, reflects an ongoing dialogue with the appellant, and evidences a justification for initially assessing on the basis of 94% and subsequently reducing it to 86%. The Tribunal concluded that the assessment was made to best judgment and was valid.

The burden was then on the appellant to show that the amount assessed was excessive. However, the appellant did not provide any alternative figures therefore the Tribunal could not reasonably reduce the assessment. The appellant also tried relying on a previous case law involving another Subway franchise, but the facts were different and therefore the Tribunal rejected this argument. In conclusion therefore the assessment was valid, in time, best of judgment and not been displaced by the appellant, accordingly the appeal was dismissed.

Constable Comment: This case demonstrates an evidence based best judgment assessment which the Tribunal held to be valid. The case highlights the importance of demonstrating to HMRC why the figures are incorrect, where the taxpayer disputes them, as it was stated by the Tribunal, that if HMRC’s assessment is valid, it is the burden of the taxpayer to show why the amount is incorrect. In this case, the appellant did not provide any alternative figures, and therefore the Tribunal could not reduce the assessment any further. Timely professional assistance in such scenarios can have a huge influence on end outcomes as can its absence.

4. Credit notes in Insolvency

In this case, London School of Accountancy and Management Limited (LSAM) appeals against a decision by HMRC regarding an adjustment for a VAT credit in the sum of £781,000, that was rejected. LSAM was in the business of making higher education supplies to students until 2012, after this point it went into liquidation. LSAM claimed to reduce the taxable amount charged to students for VAT purposes at a time after the company entered into liquidation for services said to have been invoiced to students but never supplied. The supplies of tuition were subject to VAT. LSAM made a deal with City of London College (CLC) to enable LSAM students to continue their studies after LSAM went into liquidation.

LSAM submitted that after going into liquidation, there had been a “total failure of consideration” and on that basis an entitlement to VAT credit arises. It argued that in terms of commercial reality the only way to deal with the situation that would have made sense to HMRC was to issue credit notes. LSAM also stated that if the claim was successful there will be money in the pot from which partial repayment can be made to students.

HMRC’s position was that there had been no overpaid VAT and there is no entitlement to a reduction in the taxable amount. It submitted that the appeal must fail for three sets of reasons as follows:

• LSAM does not meet the basic requirement for a reduction in the taxable amount because it has received consideration and not made any refund to customers.
• Secondly, even if LSAM might in principle have been able to obtain a reduction in the taxable amount, LSAM did not fulfil the formal requirements for a refund, including a failure to make a timeous claim.
• Thirdly, insofar as the quantum issue may be relevant, HMRC raised concerns about the calculations of the overpaid VAT which appear to overstate the sums in question.

The Tribunal reviewed the evidence and found from the contractual relations giving rise to the supply, it was clear that the appellant was under no obligation to make any refunds under any circumstances. Also, it stated that in order for a reduction in price to take place, LSAM would have to be in funds to repay the students not only the VAT element of the course fee, but the actual course fees. In other words, the appellant would have to be in funds of £3.72m and had actually repaid the customer to meet the requirement of ‘reduction in the taxable amount’. The credit notes raised by LSAM were theoretical rather than presenting an actual decrease in consideration, as a result the appeal was dismissed.

Constable Comment: This case considered the rules around VAT repayment claims, specifically as a result of reduction in taxable amount. It highlights the complexity of these rules and the difficulty of successfully arguing that a VAT refund is due. If you or your business takes the view that a VAT refund is due to you, it is important that the relevant procedural and technical requirements are met in order that such a claim is successful.

Please note that this newsletter 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.

HMRC NEWS

How to account for VAT and who to contact if you are an insolvency practitioner and you are appointed over insolvent VAT registered businesses
Section 13.2 has been added to give information on set-off and preferential debts.

Automatic sign up for making tax digital for VAT for all new VAT registrations from 1^st August 2022
HMRC has developed a new VAT registration service which will see all new taxpayers automatically signed up for making tax digital for VAT from 1^st August 2022.

HMRC’s change in approach to VAT assessments for overseas online marketplace traders
From September 2022 HMRC will change the way it carries out VAT assessments for overseas online marketplace traders. HMRC will issue assessments to traders in cases where the information held by HMRC indicates that VAT returns are inaccurate, rather than asking for additional information from traders in the first instance. This change will affect marketplace traders and online marketplace hosts.

HMRC guidance: steps to take before registering as a professional tax agent
HMRC has published new guidance on the steps to be taken before registering as a professional tax agent.

Second-hand motor vehicle export refund scheme delayed
HMRC have announced that the second-hand motor vehicle export refund scheme, which was due to start on 1^st October 2022 has been delayed. HMRC’s guidance on preparing for the scheme will be updated in due course with a new start date.

CASE REVIEW

Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration when reaching their own conclusions and there may be occasions where they have a more binding effect. We will therefore continue to include summaries of any European judgements that we consider to be relevant. If you are concerned about the impact of any matters raised in the following cases, please contact us.

COURT OF APPEAL

1. Fraudulent transactions: right to input tax recovery

The issue in this appeal is whether a taxable person, Tower Bridge GP Ltd (TBGP) is entitled to deduct VAT incurred as input tax even though it held no valid VAT invoice in respect of the supply in relation to which it claims to make the deduction. Both the FTT and the UT found against TBGP.

TBGP is the representative member of the Cantor Fitzgerald group’s VAT group registration (CFG VAT group). Cantor Fitzgerald Europe Ltd (CFE) was a broker in equities, equity derivatives, foreign exchange markets and contracts for differences. Cantor CO2e Ltd (CO2e) provided brokerage, information and consulting services for products related to environmental markets, including selling carbon credits over the counter. Both CFE and CO2e were members of the CFG VAT group. CO2e arranged and undertook the relevant transactions and CFE executed the transactions, received, and issued invoices.

In 2009, CFE began trading in carbon credit transactions that were connected to VAT fraud. The FTT found that CFE neither knew nor should have known that the transactions it entered into before 15 June 2009 were connected to VAT fraud but that it should have known that its transactions were connected to VAT fraud from 15 June 2009. This appeal only related to transactions entered before that date.

CFE purchased carbon credits from Stratex in 17 separate transactions. The carbon credits were supplied to CFE and used for the purpose of its taxable business. Stratex was also a taxable person and VAT was due in respect of the supplies by Stratex to CFE.

The Stratex invoices issued to CFE in respect of the 17 transactions included amounts of VAT totalling £5,605,119.74 which CFE paid. TBGP, as the representative member of the group VAT registration, then claimed a deduction in respect of the VAT paid.

The Stratex invoices were not valid VAT invoices as they did not show a VAT registration number (VRN) for Stratex nor did the invoices name CFE as the customer. Stratex was a taxable person, but it was not registered for VAT, and it fraudulently defaulted on its obligation to account to HMRC for the sums it charged as VAT on its invoices.

At the time of transacting with Stratex, CFE did not know that Stratex was not registered for VAT or that it was a fraudulent trader. The FTT found that there was no effective verification by CFE of the validity of the invoices nor the VAT registration number (VRN) of Stratex.

CFE requested Stratex’s VRN and sought corrected invoices, however, these were never received. In September 2009 CFE confirmed to HMRC that it had not been provided with Stratex’s VRN. HMRC officers visited Stratex and found that its companies house registered address was the premises of a corporate service provider that was an agent for Stratex.

HMRC denied TBGP the recovery of the input tax on the Stratex invoices on the basis that the invoices did not meet the formal legal requirements to be valid VAT invoices. HMRC also refused to exercise its discretion to allow recovery of the VAT paid on the basis that Stratex was not registered for VAT, the transactions were connected to fraud and CFE failed to conduct reasonable due diligence in relation to the transactions.

The tribunal concluded that if TBGP were to be allowed to recover the VAT paid on the transactions with Stratex then there would be a loss to the public purse consisting of the input tax, with no corresponding gain to the public purse from the output tax that Stratex ought to have paid but fraudulently did not.

Therefore, the appeal was dismissed.

Constable Comment: This case highlights the importance of carrying out full due diligence checks when engaging suppliers. This includes checking that VAT registration numbers shown on invoices are valid. HMRC has a service available in order to check UK VAT registration numbers. This can be found here.

UPPER TRIBUNAL

2. Roof insulation or new roof?

Conservatory Roofing (CR) appealed against a decision of the FTT, the appeal concerned the rate of VAT which applied to works the appellant carried out to home conservatories. The FTT rejected the appellants case that its supplies for VAT purposes were insulations for roofs and therefore subject to the reduced rate of 5% VAT. The FTT found that they were supplies of a composite insulated roofing system that were standard rated and subject to VAT at 20%.

The appellant submitted that in 80% of cases a new, external light-weight roof tile system is secured to the outside of the existing roof, whilst on the inside insulating material is provided and plasterboard applied to a bespoke frame ready for the application of decorative finishes and insertion of lights. In the remaining 20% of cases where the roof panels are too heavy to safely leave in situ, the roof panels are removed. Otherwise, no alteration is made to the existing conservatory roof structure.

The appellants marketing material referred to them as “the original conservatory roof replacement company”, “roofing specialists”. The material stated the benefits of its “bespoke conservatory roof system” which provided a “new insulated lightweight conservatory roof”. The FTT found that the purpose of the product was to provide insulation in cold weather and keep the conservatory cool in hot weather. It was emphasised that the specialised energy saving products were fitted to the existing roof structure which was left intact.

HMRC argued that before and after pictures of the work undertaken conveyed the impression that the customer was getting a new roof and this was reflected in the appellants own marketing. A typical consumer would have regarded the supply as a thermally efficient replacement roof rather than new insulation. The appellants solid roof system changed the character of a conservatory roof in a way that just insulating it would not.

The FTT ruled that the supplies made by CR extend far beyond installing insulation to a roof. The work is materially the construction of an entirely new roofing system. Therefore, it was concluded that the appellant does not make a supply of insulation for roofs and so the supplies can not be classified as reduced rated.

The UT considered that the reasons given in the FTT decision were inadequate and there was an error of law in the decision and so the appeal was allowed, the decision is set aside and remitted back to the FTT.

Constable Comment: The upper tribunal has remitted this case back to the FTT and it remains to be seen how this case will be concluded. As part of this decision the UT also commented on how the FTT had determined the predominant element of a composite supply. It decided that the FTT had been entitled to take into account that most of the materials used by CR were not energy-saving materials. We will keep readers up to date on the development of this case.

FIRST TIER TRIBUNAL

3. Input tax recovery on construction costs

Bletchingley Church House Charity (BCHC) appeals against the decision dated 11 May 2016 disallowing input tax in the sum of £87,002.75 on the grounds that BCHC is incapable of making a grant that qualifies for zero-rating, and goods and services on which the VAT has been charged cannot be used for the purpose of any taxable business activity, which carries the right to the recovery of VAT incurred. BCHC is incapable of making a grant that qualifies for zero-rating for two reasons –

• Such a grant is not lawful without the approval of the Charity Commission and that approval has not been given.
• Even if the Charity Commission approved the grant, the person to whom the grant will be made cannot issue a valid certificate.

BCHC argued that it, as the owner of Church House, and a registered charity that is using the building as a village hall, albeit it via Bletchingley Church House Administration Limited (BCHAL) which manages the lettings on its behalf. BCHC confirmed that Church House was built in 1907. It had been continuously used by the local community since construction. The works done to Church House in 2015/16 were not works of construction, but works of restoration, being work done to put Church House into a useable condition. However, some work was construction such as installing a lift and disabled facilities but ultimately no new building was constructed as a result of the works.

BCHC accepted that the lease between BCHC and BCHAL granted BCHAL the right to occupy and use Church House. BCHAL is not and was not intended to be a charity. Following the grant of the lease, BCHAL let Church House on behalf of BCHC to the local community (BCHAL was BCHC’s appointed representative/agent and BCHC used church house for a relevant charitable purpose). The lease was a lease to act as an agent but there was no management agreement between BCHC and BCHAL.

After the grant of the lease, all hirers of Church House booked via BCHAL and the schedules of lettings demonstrated use by residents. There was no record of BCHC using Church House after the grant of the lease meaning that BCHC’s name did not appear on the schedules. BCHAL did not charge BCHC for using Church House, if it did use it.

BCHC’s intention was to have Church House managed by a management committee and a commercial tenant was a way to reclaim VAT incurred on the works, or so it believed.

The project manager of the works that were carried out stated that the works did not involve the demolition and rebuilding of church house, the demolition to ground level of any external walls or the construction of a new building or extension. The works involved the alteration of Church House’s internal form. The works done to Church House were not works of construction.

BCHC did not ask the builder to zero-rate its supplies of services from the outset of the works because it was BCHC’s intention to reclaim VAT incurred on the works. However, when it became apparent that there was a potential difficulty with the intended plan, BCHC did ask the builder to zero-rate future supplies referable to disabled access. The purpose of BCHAL was to separate the running of a village hall from BCHC’s fundraising, to have a trading arm of BCHC and, via the rent, to build up a maintenance fund.

The lease is a commercial lease and gives BCHAL the right to exclusive use of Church House as tenant subject to the BCHAL’s contractual obligation to pay rent of £5000 per annum. BCHC does not charge VAT on the rent. The intended users of Church House were the local community of Bletchingley and not more than 95% of those were charities.

HMRC’s view was that Church House was not used as a village hall after the grant of the lease because it was not run by a charity. HMRC considered whether Church House was used exclusively by a charity and concluded, based on the schedules of use, that it was not.

The tribunal found that in 1907, BCHC constructed Church House. In 2008, Church House was only being used a few hours a week by user groups leading to rental income of less than £1,000 per annum. In 2009 BCHC set up the Church House appeal committee and BCHC became registered with the charity commission from 2011.

BCHC drew up a business plan in 2014 which confirmed that at the time Church House was used for an average of 2 hours per week by St Mary’s church, twice a week for around 3 hours by alcoholics anonymous and once a week for around 2 hours by the Bletchingley youth group. The redevelopment included a lift to all floors, rooms for meetings and other functions with storage space for regular users, smaller, rooms for counselling, surgeries and private meetings, modern kitchen facilities serving all three floors, toilets, including for the disabled, that are easily accessible from all parts of the building, office space for business and community users and the ability to securely close off those parts not in use whilst providing access to main facilities.

BCHC did not expect to have to pay the full VAT rate on the total construction because a significant proportion of the restoration related to improving facilities for the disabled.

In February 2015, BCHC entered into a contract with Hindscray Limited (Hindscray) for alterations and extensions at Church House. The alterations and extensions were more specifically described as “external repairs, internal alterations and re-ordering plus the construction of a single storey extension with associated external works and drainage” including the design and construction of structural connections and a lift. BCHC was required to pay Hindscray the VAT exclusive sum of £487,743.20.

The tribunal concluded that BCHC’s first grant of a major interest is not zero-rated because church house was not intended for use solely for a relevant charitable purpose, specifically:

1. BCHC was and is a charity. Its use of Church House was not otherwise than in the course or furtherance of a business or as a village hall or similarly in providing social or recreational facilities for a local community.
2. BCHAL was not and is not a charity. Also, its use of Church House was not otherwise than in the course or furtherance of a business or as a village hall or similarly in providing social or recreational facilities for a local community.
3. Less than 95% of the hirers were charities. Its use of Church House was not otherwise than in the course or furtherance of a business or as a village hall or similarly in providing social or recreational facilities for a local community.

For the above reasons, the tribunal dismissed the appeal.

Constable Comment: This case highlights the complexities surrounding charitable reliefs for supplies of construction services received by charities. It is important to ensure that all conditions set out in the legislation are met so that the correct VAT rate can be secured. We would always recommend seeking professional advice before entering into any construction contracts for works to be carried out.

Please note that this newsletter 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.

HMRC NEWS

Factsheet CC/FS69: How to avoid penalties for Making Tax Digital for VAT
HMRC has published new factsheet CC/FS69 with information for VAT registered businesses on how to avoid penalties for Making Tax Digital for VAT.

Partial exemption (VAT Notice 706)
This guidance details partial exemption and methods and calculations to use to see how much input tax businesses can recover. Section 6.2 and Appendix 2 have been updated with information about how to get an approval for a partial exemption special method by using either the online service, by writing to the VAT Written Enquiries team, or by sending an email.

Domestic reverse charge procedure (VAT Notice 735)
This guidance provides information about domestic reverse charge procedures which applies to the buying and selling of certain goods and services. From 1 July 2022 businesses registered or liable to be registered for VAT will no longer need to report information about sales of mobiles or computer chips in the UK.

Exemption and partial exemption from VAT
This guidance has been updated with information about what to do if businesses make supplies that are exempt from VAT when moving goods from Great Britain to Northern Ireland.

The VAT treatment of passenger transport (VAT Notice 744A)
This guidance has been updated and includes information about accounting for VAT on goods sold on board ferries between Great Britain and Northern Ireland.

CASE REVIEW

CJEU

Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration when reaching their own conclusions and there may be occasions where they have a more binding effect. We will therefore continue to include summaries of any European judgements that we consider to be relevant. If you are concerned about the impact of any matters raised in the following cases, please contact us.

1. VAT Exemption: Education services supplementing school curriculum

This case concerns Happy Education SRL, a Romanian commercial company which provides educational services consisting of organising activities supplementing school curriculum such as homework support classes, educational programmes, foreign language classes, art classes, sporting activities, picking up children from school and the provision of after school meals.

EU VAT legislation exempts “the provision of children’s or young people’s education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objectives”.

The Romanian tax authorities took the view that Happy Education’s supplies fell outside of the exemption. Happy Education argued that its services are closely related to school education and VAT exempt.

As a result of the dispute, two questions were referred to the CJEU:

• Must Article 132(1)(i), Article 133 and Article 134 of [Directive 2006/112] be interpreted as meaning that educational services such as those contained in the national “School after school” programme can be brought within the concept of “services closely related to school education”, in the case where they are provided, in circumstances such as those obtaining in the main proceedings, by a private body, for commercial purposes and in the absence of a partnership concluded with an educational establishment?

• If the answer to the first question is in the affirmative, can the applicant be recognised as being an “organisation having similar objects”, for the purposes of Article 132(1)(i) of [Directive 2006/112] with reference to the public interest nature of the educational activities of the “School after school” type, which are aimed at prevention of school leaving and early school leaving, improvement of school results, remedial education, accelerated learning, personal development and social inclusion?’

The CJEU first considered the second question and, as Happy Education is not a body governed by public law, whether it is an organisation “recognised by the Member State concerned as having similar objects”. EU legislation does not specify conditions or procedures under which those similar objects may be recognised. It is for the national law of each Member State to lay down rules in accordance with which that recognition may be granted. Under Romanian law, recognition as an organisation with similar objects is granted primarily through the conclusion of a partnership with an educational establishment under the ‘School after school’ programme. It was apparent from the information submitted that Happy Education has not concluded such a partnership and therefore does not have the relevant recognition or authorisation required for that purpose under Romanian law.

The CJEU therefore concluded that VAT exemption cannot apply where the relevant entity does not satisfy the conditions under national law for obtaining such recognition. In the view of this it was not necessary for the Court to consider the first question.

Constable Comment: Whilst this case concerned EU and Romanian VAT law regarding VAT exemption, the UK has similar VAT legislation in relation to exemption and education. This is potentially a complex area of VAT and if an organisation makes any educational supplies, we recommend seeking professional advice to ensure the correct VAT treatment is applied.

FTT

2. Google costs not linked to VAT exempt insurance supplies

This case concerns Sofology Limited and DFS Furniture Company Limited (DFS) and the recovery of VAT incurred on PPC advertising services from Google. Each appellant is a specialist sofa retailer. In addition to the supplies of sofas, the appellants also make supplies of intermediary services in relation to sofa insurance which is sold along with the sofas. The supplies of sofas are taxable, and the supply of insurance intermediary services is exempt from VAT, consequently each appellant is partly exempt for VAT purposes. Each appellant treated VAT incurred on PPC advertising as directly attributable to taxable supplies and recovered the VAT incurred in full.

When potential customers use Google to search online for a new sofa, they might click on one of the appellants sponsored links shown at the top of the results page. The PPC advertising services involved the making of payments by the appellants to Google on each occasion that a potential customer clicks on that sponsored link and is directed to the relevant  website landing page.

HMRC took the view that the VAT incurred on PPC advertising was directly attributable both to the taxable supplies of sofas and the VAT exempt supplies of insurance intermediary services. An alternative argument from HMRC was that the input tax was not directly attributable to any supplies made by the appellants but instead should have been treated as relating to the business as a whole and therefore an overhead, subject to recovery in accordance with the partial exemption recovery rate. HMRC contended there were substantial economic links between the PPC adverts and both taxable and exempt supplies meaning that the cost of the adverts had a direct and immediate link with both types of supplies.

The appellants argued that the substantial economic links were not sufficient to establish a direct and immediate link, which would be necessary to treat it as directly attributable to the exempt supplies. The appellants stated that the contents of the adverts, the content and layout of landing pages and the manner in which the insurance was sold showed that the links between the costs of the adverts and supplies of insurance was indirect.

The Tribunal agreed with the appellants argument and concluded that the cost of the PPC advertising had a direct and immediate link with the taxable supplies of sofas but did not have a direct and immediate link with the exempt supplies of insurance intermediary services. The appeal was therefore upheld.

Constable Comment: This decision was very detailed and fact specific to the appellants. However, it considers the basic principles of input VAT recovery and establishing a direct and immediate link between VAT incurred and supplies made in order for the VAT incurred to be fully recoverable.

3. VAT Exemption: Self-Invested Pension Plans

This case concerned Intelligent Money Limited (“IML”) and whether fees paid to the scheme administrator of a Self-Invested Pension Plan (“SIPP”) is consideration for an exempt supply of insurance. IML has been the provider, operator, and administrators of the Intelligent Money SIPP (“IM SIPP”) since 2006. Until 2014 IML treated its supplies of services as subject to VAT but in 2016 IML submitted claims to HMRC in respect of VAT overdeclared on the basis that the supplies made were VAT exempt as “insurance or reinsurance”.

The defining characteristic of a SIPP is that the contractual holder or their financial advisor is responsible for the management of the funds held in the member’s SIPP. IML took the view that the provision of a pension is an activity constituting the provision of long-term insurance, the pension scheme represented a life assurance contract in respect of which consideration was payable by the member to IML. IML cited the EU insurance directives, the Financial Services and Markets Act 2000 and historic domestic case law on what constitutes insurance.

HMRC contended that the essential ingredients for there to be an insurance transaction, as previously identified by the CJEU, were not evident in respect of the IM SIPP. HMRC particularly focused on the absence of the any risk borne by IML. As a pension plan was a tax efficient form of saving there was no risk to the individual which required indemnification. The charges represented consideration for the provision of services and not the payment of a premium for the bearing of risk by IML.

The Tribunal initially considered whether the IM SIPP was a contract of life assurance. It considered as the investments decisions are made exclusively at the direction of the policy holder/member the value of the fund from which benefits are payable are at the risk of the insured, therefore the IM SIPP should be considered insurance.

The Tribunal then went on to determine whether the IM SIPP is an insurance transaction for VAT purposes. IML relied on HMRC guidance which implied that the provision of any life insurance contract meeting the Fuji test would constitute an insurance transaction for VAT purposes. The Tribunal advised HMRC guidance is not the law and considered the dispute further.

The Tribunal relied on the CJEU interpretation of the term “insurance transaction” which provides the essential features of insurance transactions for VAT purposes as “that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with a service agreed when the contract was concluded”. The Tribunal concluded that the IM SIPP does not meet this definition because the annual fees payable by a member of the IM SIPP are paid as consideration for the provision of the services and they do not include any element of risk premium and IML does not need to accumulate capital from which to pay the benefits.

The Tribunal therefore dismissed the appeal holding that the fees payable to IML are not consideration for exempt insurance transactions.

Constable Comment: Insurance is often a very complex area of VAT and there is significant case law to consider and apply. This case is particularly interesting as, although not explicit, HMRC guidance implied that a supply meeting the conditions for insurance under Fuji case, is a VAT exempt supply of insurance, the Tribunal however ruled differently.

4. VAT Exemption: Installation of flexi vault burial chambers

This case involved Hodge and Deery Limited (“Hodge”) and whether a supply of services in connection with the installation of flexible pre-formed burial vaults at a burial site, made to RED Landscapes, was VAT exempt.  The vaulting system is installed in graveyards with unstable soil structures which can result in toxins from the decomposition of bodies escaping into the ground water, and in subsidence or an existing grave when another grave is dug in the adjacent plot.

UK VAT legislation exempts, “the making arrangements for or in connection with the disposal of the remains of the dead”.

Hodge contended that the installation of the flexible burial vaults should be treated as the advance digging of multiple graves, and it should not be regarded differently from the preparation of graves on demand. The sole purpose of the preparation of a grave is to dispose of the remains of the dead, therefore the supply should be VAT exempt.

HMRC rejected that the supplies fall within the VAT exemption because the making of arrangements for, or in connection with, the disposal of the remains of the dead, should only relate to supplies that are directly involved with the disposal of the remains of a dead person and application of exemption is limited to supplies directly made by the funeral director with care and custody of the deceased, it does not extend to subcontractors.

The Tribunal held supplies by Hodge resulted in the provision of many graves for the disposal of the remains of the dead. The result of the services satisfies the object of the exemption. The Tribunal concluded that it does not matter that the services are provided in advance, and nor does it matter that the services are not provided in connection with a specific funeral.

Constable Comment: Another interesting aspect of this case was that a new technology of pre-formed flexible vaults was used rather than brick retaining walls as mentioned in the legislation and guidance, which HMRC challenged. The Tribunal stated that the legislation must, in their opinion, be construed in a manner to enable new technology to be adopted to achieve the result expected by the legislation.

Please note that this newsletter 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.