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.

HMRC NEWS

Revenue and Customs Brief 2 (2022): VAT early termination fees and compensation payments
HMRC has published a new brief to replace Revenue and Customs Brief 12(2020). It introduces a revised policy on VAT early termination payments and compensation payments.

Fulfilment House Due Diligence Scheme registered businesses list
The above guidance can be used to check if a business that stores goods in the UK on behalf of another business is registered with the Fulfilment House Due Diligence Scheme if that business is a trader based outside the EU. HMRC has recently updated the list with 14 additions and 9 removals.

Get your postponed import VAT statement
Along with providing general guidance regarding accessing postponed import VAT statements, HMRC has recently updated the above guidance by adding a section about archived postponed VAT statements. Users must request statements that are older than 6 months.

CASE REVIEW

FTT

1. Supply of room and services

This case concerned Errol Willy Salons Ltd (EWS), and the main issue to be determined was whether the business made an exempt supply of a license to occupy in respect of rooms used by beauticians or whether that supply should be classified a standard rated supply of facilities and services.

The premises consisted of two floors. The ground floor and front part of the first floor was occupied by EWS. The back part of the first floor had two rooms which were rented out to beauticians. The rent payable by the tenants were calculated as a percentage of their turnover.

HMRC has argued it was a standard rated supply of facilities and therefore raised an assessment in the sum of £18,649. The Tribunal considered European case law (Stichting ’Goed Wonen v Staatssecretaris van Financiën (Case C-326/99) ) where 4 fundamental characteristics of leasing or letting immovable property are considered. They are as follows:

• The arrangement must relate to a defined area of immovable property,
• It must confer a right to occupy that property, to the exclusion of all others,
• For an agreed period
• For payment

HMRC agreed that the defined area condition is met however stated that there was no evidence to show that the other 3 conditions have been met because it was uncertain whether there was a right to exclude others from the area, there was no evidence that the right of occupation was for an agreed period and as rent was charged on a turnover basis, the condition that payment must be given was not met.

The Tribunal disagreed with HMRC, it was evident that the rooms belonged to the beauticians and were theirs to do with as they chose, it was evident from the contracts that payment was due monthly therefore there was an agreed period of at least a month. The fact that there is a notional possibility that rent is not paid in a particular month due to no turnover did not change fact that the lease does contain provisions for the payment of rent, therefore the Tribunal concluded that all 4 characteristics are present.

In response, HMRC attempted to argue that the services were active exploitation of rooms, adding significant value therefore it cannot be regarded as a supply of land. The Tribunal considered whether the additional services such as receptionist services, the availability of toilets and staffroom amounted to “significant added value”. It was concluded that these services were ancillary to main supply of the room, the beauticians were not required to use those services, it was not essential to their business. The Tribunal concluded that the additional facilities did not change the intrinsic nature of the supply. Therefore the Tribunal concluded the supply was of a license to occupy land and therefore VAT exempt, the appeal was upheld.

Constable comment: This is a helpful case in an area that has long been contentious, but no doubt further similar cases will continue to appear at Tribunal. The case illustrates the benefit of clear written agreements considering a license to occupy land where there are other services being provided to the person occupying an area of a property. HMRC are often keen to characterise such relationships as a taxable supply of facilities rather than a VAT exempt supply of license to occupy land.

2. Private Tuition exemption

The key issue in dispute in this case is whether the appellant Ms Lalou’s (trading as Dogs Delight) supplies of dog grooming fall within the private tuition exemption. Ms Lalou operates a dog grooming and dog grooming courses business. Ms Lalou came to understand her supplies of the dog grooming courses were VAT exempt private tuition and therefore made an application to deregister from VAT. HMRC initially accepted her application and deregistered her from VAT, she then also submitted an error correction notice where she sought to reclaim £102,301 of overpaid VAT as a result of incorrectly treating the supplies as standard rated.

Following those events, HMRC disputed the treatment of the courses, stating that, as dog grooming is not ordinarily taught in a school or university, the supplies are standard rated, and therefore reinstated Ms Lalou’s VAT registration, rejected the error correction notice, assessed the appellant for £12,203 of unpaid VAT for periods in dispute and issued a surcharge notice for non payment and submission of VAT return.

Ms Lalou appealed many issues in this case including:

• The decision that dog grooming courses were standard rated rather than exempt supplies
• The reinstatement of the VAT number
• The rejection of the error correction notice
• The assessment for £12,203
• The surcharge warning

The appellant argued that dog grooming is ordinarily taught as 88 colleges out of 293, equating to 30%, offer dog grooming services. In contrast HMRC used the same research and argued that only 88 out of 293 teaches the subject therefore it is not ordinarily taught, the National Careers service shows 87 dog grooming services but 251 Pilates courses, which was recently held not to be a subject ordinarily taught in the UK.

The Tribunal stated that the appellant established that the supply was tuition as it involved transfer of skills and knowledge, it was made on her own account therefore it satisfied the private condition, the courses offered were educational.

However, the Tribunal stated that whilst the appellant proved that dog grooming is commonly taught in higher education in England, they stated that this is not the test. It was established in the “Premier Family Martial Arts” case that the relevant activity must be taught at a wide number of schools or universities in the EU. Ms Lalou provided no evidence about the position outside England or any other Member States, therefore the Tribunal concluded that the supply of dog grooming courses are standard rated.

As a result of the above conclusion, the error correction notice and VAT assessment aspects of this appeal also fails. Regarding HMRC reinstating the VAT registration number, the Tribunal found that as the supplies were not exempt HMRC were correct to reinstate the VAT registration. For all the reasons stated, the appeal was dismissed.

Constable comment: HMRC remain keen to challenge the application of the private tuition VAT exemption where the subject taught is not a ‘mainstream’ area. It is of note that the historic approach and approach today is somewhat different with a very strict interpretation of the exemption provisions compared to the past.

Court of Appeal

3. Bad Debt relief claim:

The issue on appeal is whether Regency Factors Ltd is entitled to bad debt relief in relation to VAT. The business provides invoice factoring services to other businesses seeking to improve cashflow. The FTT held that it was not entitled for the following reasons:

• There was no bad debt
• Regency had failed to comply with the procedural requirements for the making of such a claim.

The upper tribunal disagreed with the FTT on the first of those reasons but upheld the second. The upper tribunal held that the procedural requirements were compatible with EU law.

Regency appealed against the decision of the upper tribunal on the second question and HMRC sought to reinstate the decision of the FTT on the first question.

It was common ground that Regency did not maintain a single account as required by regulation 168 (3) VATA 1994, but it did retain the records required by regulation 168 (2), even though they were not contained in a single account.

Regency’s accounting system maintains a running account for each client containing “an admixture of funds” which makes it “impossible to apportion credits to particular invoices submitted by a client and receipts from their customer”. Instead, the claim for bad debt relief was made on a “pari passu” basis, as described by Regency. The court of appeal found that, in their judgement there is no foundation for such a claim basis in the legislation. Additionally, the keeping of a single bad debt relief account would have served a legitimate and useful purpose, namely that of ensuring that the particular supply which qualified for bad debt relief was properly identified, and in consequence that the correct amount of VAT was collected.

In concluding, the Court noted that perhaps other arguments might have been made but as they had not formed the basis of the appeal these need not to be considered. The appeal was dismissed.

Constable comment: This case illustrates the need to take simple administrative rules seriously and demonstrates the pitfalls of not doing so for bad debt relief. Serious issues can be caused by assuming that basic rules will not be strictly applied. HMRC has discretion in some matters but it is highly risky to rely on discretion when simply doing things correctly removes the need for this.

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.

Festive Closure

We will be closing on the afternoon of Friday 24 December and will reopen on Tuesday 4 January 2022 at 9am. If you have any urgent queries during this time, please contact your usual CVC partner by email and they will respond to you as soon as possible.

We have not sent Christmas cards this year and instead made a donation to a local food bank to support families struggling in these difficult times. However, we would like to take this opportunity to thank all our clients and regular readers for your support in 2021 despite the continuing challenges the year brought. We hope that you and your families have a safe and peaceful break and that 2022 is a good year for all.

HMRC NEWS

Changes to VAT and CT phone lines for December
In December, HMRC will be running a trial of reducing the hours on some of their telephone services so that they can dedicate the time to work on post that has built up over the past year. To test the approach, they closed their VAT and CT phone lines (with the exception of the bereavement line) on 3 December, and they will also be closing on 10 and 17 December.

VAT Group Registration Delays
HMRC is experiencing significant delays in many areas including processing applications for and changes to VAT group registrations. HMRC Policy team has given the following advice to businesses awaiting HMRC action in relation to delays in respect of VAT group applications where a prospective group member is either registered or unregistered for VAT and a return becomes due prior to the application being granted. That advice is as follows:

• If the business being added to a VAT group is already VAT registered then, until the application has been processed, customers must behave as if the business is not yet part of the VAT group.
• If VAT returns are completed incorrectly, on the basis that a proposed group change has taken place, then missing off supplies that are taxable even if they could be disregarded if the grouping request was agreed, is a deliberate error.
• A company/group cannot claim input VAT for an entity that has not yet been included as part of the VAT group registration, as it would not be that VAT group’s input VAT.
• If an entity is not VAT registered, then the grouping request is an application to register that entity and no other registration request is needed while it is being processed.
• HMRC should always backdate to the date the form was received (unless there is a valid reason that the change cannot be allowed) and corrective action can then be taken to restore the VAT position to give the outcome that would have occurred had the application been processed in advance of any transactions affected.

Refunds of UK VAT for non-UK businesses or EU VAT for UK businesses (VAT Notice 723A)
HMRC has recently updated its guidance on how to claim a VAT refund in the UK if a business is established outside the UK or how to claim back EU VAT if a business is established in the UK or Isle of Man. The Secure Data Exchange Service System (SDES) trial ended on 30^th November 2021 and, the information on electronic submission of VAT refund claims using SDES has been removed from the guidance.

Call for Evidence: Simplifying the VAT Land Exemption
In May, the government launched a call for evidence to assess potential options for simplifying the land and property VAT exemption. Respondents were invited to give an opinion on the current VAT rules related to land and property and share their views on the potential options for simplification that were presented, as well as providing any other ideas that were not included. HMRC received over 70 responses from a range of stakeholders.

HMRC has recently updated its guidance and published a summary of responses to the call for evidence. The summary document also sets out next steps and how HMRC will further engage with the sector.

Authorise an agent to form or amend a VAT group
HMRC have recently updated the VAT53 form to include a new email address to which completed, scanned copies of the form should be sent.

CASE REVIEW

Upper Tribunal

1. Gray & Farrar International LLP v HMRC

Gray & Farrar International LLP (G&F), the Appellant in this case, provides exclusive matchmaking services in several jurisdictions.

This case addresses the place of supply (POS) of the services provided by G&F to clients all over the world. G&F argued that its supplies to non-taxable (individuals) persons who reside outside the EU where outside the scope of UK VAT because the POS for consultancy services was where the supply was received. HMRC argued that G&F’s services did not fall within the required definition of “consultancy” and as a result the POS was where the business belonged. As G&F belonged in the UK, the relevant services were subject to VAT. The main issue was whether matchmaking could be regarded as a consultancy service or Data processing services and the provision of information, both of which would be treated as supplied where the individual customer belonged.

This case was heard initially heard by the FTT in 2019 and found in HMRC’s favour. It was held that G&F’s matchmaking services were not consultancy services as they included a level of support and advice from its liaison team which went beyond consultancy, and were liable to VAT in the country where the supplier belonged even when provided to a non-EU recipient It was a close decision, with the Judge having the casting vote when the other two Tribunal members did not agree. G&F appealed to the UTT.

The UTT disagreed and found that the FTT had failed to identify the “predominant element” of G&F’s services. The predominant element of G&F’s supply was making the introductions, which involved the provision of expert advice (interviewing clients and establishing who might be their ideal match) and information (putting clients in touch with prospective dates). This service, judged from the point of view of the “typical” consumer by reference to objective factors, should be categorised as consultancy for VAT purposes. G&F’s appeal was allowed. The Upper Tribunal (UT) found that matchmaking services were ‘services of consultants’ and/or ‘the provision of information’ and therefore outside the scope of UK VAT (where the place of supply rules allowed this) and its appeal was allowed.

Constable Comment: This case is important as the decision that the services supplied were of ‘consultancy’ has an impact of the VAT payable in the UK as a result of the place of supply rules applicable to VAT. It considers the types of services that can be identified as ‘consultancy’ and takes the definition for VAT purpose beyond services provided by the so called ‘liberal professions’, such as legal services. The case also shows the importance of identifying the ‘predominant element’ of a supply of services when determining the VAT treatment.

2. Mandarin Consulting Limited V HMRC

Mandarin Consulting Limited (Mandarin) supplies career coaching and support services to students of Chinese origin. It was held in an earlier hearing in the FTT that Mandarin’s services were of ‘consultancy’. VAT rules applicable to supplies of such services mean that Mandarin’s supplies would be outside the scope of VAT if supplied to private individuals whose usual residence was outside the EU. The usual residence being where the recipients of those supplies had their permanent address, or usually resided.

From 2016 onwards, Mandarin contracted with students’ parents rather than with the students themselves. It was common ground that students’ parents had their usual residence in China. So from July 2016 onwards Mandarin’s supplies were outside the scope of VAT.

However, the FTT’S conclusion was that until 2016 Mandarin supplied its services to the students who were undertaking their studies at UK universities and Mandarin could not evidence that these students were not ‘resident’ in the UK for the purposes of receiving these supplies.

The First Tier Tribunal held that these failings precluded Mandarin from establishing that its supplies prior to July 2016 were outside the scope of VAT.

Although the Upper Tribunal did not agree with the reasoning behind the FTT decision regarding the pre July 2016 supplies it was not satisfied that Mandarin could demonstrate that supplies to all of its students were made outside the EU and as a result held that. Mandarin’s appeal would be dismissed on the basis that it could not demonstrate, on the evidence that was placed before the FTT, that supplies to all of its students were made outside the EU.

Constable Comment:This is an important case, again involving place of supply and consultancy services. In this case the point at issue was the place of belonging of the recipient of a service. The decision emphasises the multi-factorial nature of the test of residence, which in this case would have required consideration of factors other than parental residence, such as romantic commitments.

3. Greenspace Limited V HMRC

Greenspace Limited’ business is to address the problem of conservatories being too hot in the summer and too cold in the winter by supplying a fitting insulated roof panels to its customers conservatories. The question raised in this appeal is whether the supply of these insulating panels is subject to a reduced rate of VAT on the basis that it is the installation of energy saving materials or if it is standard rated as a supply of a conservatory roof itself. The First Tier Tribunal held that Greenspace’s supplies were of roofs and so were standard rated. Greenspace appealed against that decision.

Greenspace’s principal business is the supply and installation of insulated roof panels to residential customers which are fitted onto customers’ pre-existing conservatory roofs. Before supplying or fitting the panels, Greenspace visits its customer, works out what the customer requires and takes detailed measurements. The panels are then made to measure.

The panels are not self-supporting and can be used only if the customer already has an existing conservatory roof structure. It was common ground that it was important that the installation of the panels disturbed as little as possible of a customer’s pre-existing roof structure after the removal of the existing panels in order to prevent leaks.

The FTT considered whether Greenspace was supplying a “new roof” or an “improved roof”. It concluded that Greenspace was supplying a “new roof” for the reason below:

Greenspace’s work involves the removal of existing glass or polycarbonate panels. No reasonable person looking at the structure remaining once those panels had been removed would consider that the conservatory in question had a roof. Also, the panels which Greenspace then fitted fulfilled the essential functions of a roof.

Greenspace appealed on the grounds that the FTT wrongly approached matters on the basis that, because the panels consisted, in part, of a roof covering, Greenspace was necessarily supplying a roof rather than ‘insulation for … roofs’.

The Upper Tribunal agreed with Greenspace that neither of the decisions in previous cases, which had looked at similar issues, established any rule of law to the effect that something which is or forms ‘part of’ a roof is incapable of being insulation for a roof because it also performs that function. However, it did not consider that the FTT made an error of law when the decision is read as a whole, although it is somewhat inaccurate. The FTT was doing no more than restating the proposition derived from a previous case, that if the panels together formed a roof rather than insulation ‘for’ a roof, they could not fall within the scope of reduced rate.

In most cases, when fitted, the panels would comprise the entirety of the roof covering for the conservatory in question and therefore the appeal was dismissed.

Constable comment: This case is useful in distinguishing when works can be considered to be fitting insulation to the building compared to forming part of the building’s structure beyond simply insulating it.

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

Goods and services that can be claimed for under the VAT DIY scheme

HMRC has updated its guidance on claiming a VAT refund under the DIY housebuilders’ scheme to add that manual window blinds and shutters are allowable building materials with effect from 5^th October 2020.

Agent Update

HMRC has published an agent update providing a round-up of recent developments. It can be found here. This includes information on the appeals process detailed below.

Updates to HMRC appeals processes

As part of the COVID-19 support package for customers, HMRC introduced a 3 month extended window to appeal against tax decisions and penalties from February 2020, if the delay was due to COVID-19. This extension ended on 30^th September 2021. For tax decisions and penalties dated up to and including 30^th September 2021, the extended window to appeal continues to be available. However, taxpayers should follow the normal process and times for appealing decisions dated on or after 1^st October 2021.

HM Revenue and Customs Brief 13 (2021)

HMRC has published a new VAT Brief which explains HMRC’s revised policy on the meaning of ‘entire interest’ in the context of the VAT treatment of the construction self-supply charge. This follows the decision of the Supreme Court on 31 March 2021 in Balhousie Holdings Limited 2021 UKSC 11.

The guidance applies to:

• organisations within the care home, NHS or charities sector
• businesses engaged in property transactions carried out for a relevant residential or relevant charitable purpose.

If you are concerned that this may affect your organisation please reach out to your usual Constable VAT contact.

CASE REVIEW

First Tier Tribunal

1. Silver Sea Properties

This case concerned Silver Sea Properties (Leamington Spa) Sarl (“PropCo”) which supplied certain items of furniture, fixtures and equipment (FFE) with a new care home known as Priors House. The care home was leased by PropCo to Care UK Community Partnerships Ltd (“OpCo”). The VAT in dispute in this appeal is £96,291. The matters in dispute were primarily:

• The extent to which PropCo is prevented from claiming credit for input tax on FFE because of the operation of the ‘Builders Block’
• Whether the FFE were supplied by PropCo to OpCo as an element of a single supply, the principal element of which was zero rated grant of a major interest in the Priors House building?

The builder’s block is in place to block claims for input tax on incorporated FFE unless they are building materials. This case is of interest as the Tribunal was required to consider whether the FFE were “building materials”? Building materials are goods of a description ‘ordinarily incorporated’ by builders. Certain items such as furniture, electrical and gas appliances and carpets are specifically excluded. The Tribunal stated, after considering relevant case law, that an item would be ‘ordinarily incorporated’ if it is commonplace or not out of the ordinary to include in the building, or the item is of a kind that you would expect a builder to incorporate without any special instruction.  Annexe 2 of the case is particularly useful as it provides a break-down of each FFE item and whether recovery of VAT on the item is blocked.

The Tribunal also considered the argument that the FFE qualified for zero rating as was part of a single supply of zero rated lease as a “turnkey” care home supplied under a single contract, the lease for the care home and noted that the fit out of the FFE only occurred after OpCo’s occupation and after issue of the Certificate of Practical Completion. After applying the tests used in the “Card Protection Plan” case to distinguish between a multiple and single supply, the Tribunal found that the Priors House building and the FFE do not form a single indivisible economic supply. The appeal was therefore dismissed.

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

Pay the VAT due on your One Stop Shop VAT Return
HMRC has released new guidance on how to pay the VAT due on your One Stop Shop (OSS) VAT Return including details on when to pay, different methods of payments available, how to pay later and what to expect after you have paid. For more information view the guidance in full.

Tell HMRC you’re registered for the VAT Import One Stop Shop in the EU
HMRC has also updated guidance on how to tell HMRC you’re registered for the VAT Import One Stop Shop (IOSS) in the EU, specifically including more information about intermediaries, who can now enter details for multiple businesses on the same form.

CONSTABLE NEWS

Update on the option to tax (OTT) unit

We recently shared that we had been advised by HMRC’s OTT unit that they were working to a ‘target’ of 120 working days to process OTT notifications. Following this we have now been advised by HMRC staff that the delay is 6 months to process OTT notifications.

HMRC has advised that it aims to improve this situation by the end of the financial year (31 March 2022) and also stated that they will be prioritising applications where evidence of commercial need is also provided.

We continue to recommend that any option to tax is notified by email as this will result in a receipt of that email, which may be accepted as evidence by a party who requires this.  However, if other evidence is available to show a sale or rental is imminent and that formal acknowledgement is required to complete the transaction this should also be forwarded to HMRC and emphasis should be given to this in the covering email.

Website Update

We have updated our website this week with pages covering the New Penalty Regime being introduced on 1 April 2022 and the introduction of rules in 2022 regarding notification of Uncertain Tax Treatments. We hope you find these informative.

CASE REVIEW

Since the end of the transitional period on 31 December 2020 European Court judgments 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. If you are concerned about the impact of any matters raised in the following cases please contact us.

CJEU

1. Supply of services for consideration and input tax deduction

Bulgarian National Television (BNT) is a national public provider of audiovisual media services. BNT does not receive any remuneration from its viewers and its activities are financed by a subsidy from the state budget. BNT’s activity is also financed by self-generated income from advertising and sponsorship, income from additional activities linked to the broadcasting activity, donations and legacies, interest, and other income linked to the broadcasting activity.

Since 2015, BNT has been applying a direct allocation method by examining, in isolation, for each purchase that it made, whether it was used or was capable of being used for an activity of a ‘commercial’ nature, such as entertainment programmes. It reclaimed all of the input tax directly attributable to activities of a commercial nature and made partial input tax deductions in respect of purchases used for both commercial and non-commercial purposes.

The Bulgarian tax authorities refused to recognise a right to a full deduction in respect of purchases made by BNT and found that it owed VAT amounting to EUR 801,455 together with interest. The authorities claimed that BNT’s programme broadcasting activity was an exempt transaction. The case was referred to the CJEU.

The first question the CJEU considered was whether the VAT Directive must be interpreted as meaning that the activity of a public national television provider, consisting in the supply of audiovisual media services to viewers, which is financed by the State in the form of subsidies and for which no fees for the broadcasting are payable by the viewers, constitutes a supply of services for consideration within the meaning of that provision.

The CJEU stated that the above does not constitute a service supplied for a consideration. Where audiovisual media services are supplied by a national public provider to viewers for free and it is financed by the state in the form of subsidiaries, there is no legal relationship between the supply of the service and the payment and therefore it is not a supply for consideration.

The CJEU then went on to consider whether the public national television provider is entitled to deduct, in whole or in part, input tax paid for purchases of goods and services used for the purposes of its activities which give rise to the right of deduction and its activities which do not fall within the scope of VAT.

It was stated that it is the use of the goods and services acquired that determines the input tax deduction and the way in which such purchases are financed, either by state budget or sponsorship income, is irrelevant for the purpose of determining the right of deduction. Therefore input VAT that is directly attributable to expenditure incurred in relation to non-economic activities cannot give rise to a right of deduction.

The CJEU stated that it is the Member States discretion to determine the apportionment of input VAT between economic and non-economic activities but they must provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed, respectively, to those two types of activities.

Constable Comment: This decision clarifies the European Court’s view that a public entity whose services are offered to the general public and which are financed essentially through public subsidies cannot constitute an economic activity for VAT purposes. However, it offers less clarity on attributing VAT on costs incurred in providing that service.

First Tier Tribunal

2. DIY New build claim for repayment of VAT on goods

Mr Ellis and Ms Bromley appealed against a refusal by HMRC to allow a second claim for repayment of VAT under the DIY housebuilder scheme.

Mr Ellis and Ms Bromley bought a property in 2002. An application for planning permission was made and permission was granted for demolition of the property and construction of a replacement dwelling. Mr Ellis is a builder and carried out much of the work himself over a 5 year period.

The valuation office agency issued a notice of alteration of the valuation list on 27^th December 2015, following a complaint from a local resident.  The valuation for council tax purposes does not refer to completion of the works and there was no suggestion that the works were completed but council tax was paid from 2015 onwards. The planning permission required more external works, including the erection of retaining garden walls, a balcony and appropriate access to the front door as well as substantial internal works. Mr Ellis and Ms Bromley made an interim claim for repayment of VAT under the DIY builder scheme in respect of £5,182.87 in April 2017 using the valuation notice to support the claim and the VAT was repaid in June 2017. In the 2017 claim, no claims were made for the construction of the garden walls, accessway to the property or kitchen and bathrooms. The second claim made on 2^nd May 2019 was rejected on the grounds that only one claim can be made for a particular building under the DIY builder scheme and it must be made within 3 months of completion of the construction work.

Mr Ellis and Ms Bromley’s argued that it is not unreasonable to expect that more than one claim can be made when the period of construction is likely to be years. They pointed out that there is no mention of the fact that only one claim can be made on HMRC website or in the section concerning eligibility or in the VAT form VAT 341NB. Additionally, HMRC made an error in processing the first claim because the valuation was made at least 15 months earlier and the valuation could not have been taken to provide evidence of completion. The 2015 notice from the valuation agency dated 27^th December 2015 is not evidence of completion. Furthermore, the works were not complete.

HMRC took the position that the claim for repayment of input tax must be disallowed because:

(a) s35 VATA 1994 provides that only a single claim for repayment of VAT by a DIY builder may be made under the VAT DIY builder scheme.

(b) s35(2) enables HMRC to prescribe by regulations the timing and evidence to support a claim.

Mr Ellis and Ms Bromley admit they made 2 claims and that they used the same evidence of being entitled to make the claim, a notice of council tax banding, dated December 2015 which was effective 1^st September 2015. HMRC assert that even if a second claim may be made the second claim was made later than 3 months after the evidence of completion.

Discussion and Decision

The Tribunal considered the wording of Section 35 VATA 1994 and the Regulations relating to claims. It concluded that section 35 does permit more than one claim in respect of a building, the Regulations which aim to prevent this are ultra vires as a matter of UK law.  Although section 35 is drafted in the singular this is an established technique to assist in clarity. As there is no express indication to the contrary in section 35, section 6 of the Interpretation Act 1978 applies to confirm that the reference to “a claim” in section 35 must be read as including “claims”.  The Tribunal also found that Regulation 201 is ultra vires to the extent that it limits a self-builder to make a single claim following completion of the dwelling, since neither section 35 nor any of the other provisions of the VAT Act 1994 give authority to introduce regulations that alter the scope of section 35(1) and restrict a self-builder to make a single claim upon completion of the dwelling. Finally, it found that the 2015 council tax valuation notice was not evidence of completion in this case, it is merely evidence that some building works had been undertaken and that the dwelling was capable of being inhabited. As the regulations are ultra vires in restricting the number of claims, the 2017 claim was a valid claim. The Tribunal also considered the position if HMRC were correct in their view of the meaning and application of section 35 and the regulations, which would be as follows:

(1) The re-banding of ‘Fox Way’ for council tax purposes in 2015 was not evidence of completion in this case. It is merely evidence that the building was capable of being inhabited. The 2017 claim was not a ‘valid’ claim within the meaning of section 35 and the regulations, and so would not prevent a subsequent claim.

(2) As the property was still not complete at the date of the hearing, and as the 2015 notice regarding council tax banding cannot be accepted as evidence of completion, the 2019 claim would be an invalid claim also.

(3) A further claim would be possible once the building is complete.

The tribunal allowed the appeal.

Constable Comment: This is a helpful case as it appears to offer scope for DIY housebuilders to make multiple claims during the course of a build. It will be interesting to see if HMRC appeal this decision or make any comment on it. If there is no appeal the case is only binding on the parties involved, so HMRC may be inclined to let it lie.

3. Rada In Business Limited (RIBL)

This is an appeal against a 5% VAT default surcharge, amounting to £2,281.13, imposed on 12^th March 2021 in relation to the late payment of VAT for the period 01/21. We have included this case as it considers the impact of a Covid-19 related factor on VAT return submission and payment.

RIBL has been in the VAT default surcharge regime since the period 07/20 following late filing of the 07/20 VAT return and the late payment of the VAT due.  No penalty arose on this first default.

There was a further default in the next period, 10/20, attracting a surcharge at the rate of 2% but charged at £0 because of HMRC policy relating to the collection of small sums.

The due date for filing of the VAT return and payment of any VAT due for the period 01/21 was 7^th March 2021. The return was received by HMRC on 1^st March 2021 but the payment wasn’t received by HMRC until 8^th March 2021 and, as a result, a 5% surcharge of £2,281.13 was added.

RIBL argued that the return was submitted on time and the payment was processed on 5^th March 2021, due to a staff member being away on furlough and only returning that day. The payment cleared RIBL’s bank account on 8^th March. RIBL stated that it always aimed to submit and pay its tax on time but due to the current pandemic had to adjust the way employees work.

The Tribunal dismissed that appeal noting that the penalty was lawfully imposed. The taxpayer was in the surcharge regime and there had been two previous defaults. The payment was not received until 8^th March 2021, which is a day late. The tribunal was not satisfied that the taxpayer did in fact dispatch a payment by faster payment on Friday 5^th March and the fact that the employee tasked to pay the VAT was on furlough and did not return to work until Friday 5^th March was not a reasonable excuse.

Constable Comment: This case indicates that the Tribunal will not accept staff shortages due to furlough as a reasonable excuse for late payment of VAT returns.

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.