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Constable VAT Focus 14 July 2022

HMRC NEWS

VAT rates on different goods and services
The above includes a list of goods and services showing which rates of VAT apply and which items are exempt or outside the scope of VAT. It has now been updated to reflect that the VAT rate for energy-saving materials in residential buildings in Great Britain is now 0%.

Apply to use Simplified Import VAT Accounting
The above guidance sets out how to apply for Simplified Import VAT Accounting to lower financial guarantees required for duty deferment schemes.

From 1 October 2022, taxpayers will not be able to make import declarations on the Customs Handling of Import and Export Freight (CHIEF) system. Instead, if a taxpayer imports goods, they will need to use the Customs Declaration Service (CDS).

More information can be accessed on the guidance by clicking here.

How to apply for a repayment of import duty and VAT if you’ve overpaid (C285)
The above guidance sets out which service to use for import declarations made on the Customs Declaration Service (CDS) or Customs Handling of Import and Export Freight (CHIEF). It was updated to confirm that VAT registered importers cannot use form C285 to reclaim overpayments of import VAT.

Apply to receive non-financial VAT registration data from HMRC
Credit reference agencies and other qualifying applicants can apply for VAT registration data for use in making financial assessments. The application period to get non-financial VAT registration data is now from 1 April to 31 October. A new section about the ‘length of term’ has been added.

Funded pension schemes (VAT Notice 700/17)
The above provides guidance on how to claim input tax on funded pension scheme expenditure for both employers and trustees. A new section has been added which covers insolvent companies.

Register for VAT if supplying goods under certain directives
The above provides guidance regarding VAT registration if you’re making supplies of goods under Directive 2008/9 or 113th Directive using form VAT1C, the notes for the form have now been updated.

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. If you are concerned about the impact of any matters raised in the following cases, please contact us.

Late input VAT recovery

This case concerned a company which the CJEU referred to as ‘X’ and the tax authorities of Netherlands. In 2006, Company B sold 10 plots of land to X.  The intention was that Company B would carry out development work by building mobile homes and would receive 50% of the sale proceeds.    At the time of the land sale, Company B invoiced VAT to X which X paid but did not deduct as input VAT. Due to economic circumstances the development was not carried out, X resold two plots to B, VAT was charged on the invoice but X neither declared or paid the VAT.

Consequently, the tax authorities sent X an adjustment notice relating to the VAT on the two plots of land and collected the VAT. X brought an appeal against the adjustment claiming that it should be reduced by the amount of VAT it originally paid in 2006 that it  had not reclaimed at that time.  X’s position was originally upheld but when the case was escalated to the Supreme Court of the Netherlands it referred the following question to the CJEU:

Must Article 184 and 185 of the VAT Directive be interpreted as precluding a taxable person who failed to exercise, before the expiry of the limitation period laid down by national law, the right to deduct VAT, from being denied the possibility of subsequently making that deduction, by way of an adjustment, at the time when those goods or services are first used for the purposes of taxed transactions, even where no abuse of rights, fraud or loss of tax revenue has been established.

The CJEU concluded that the adjustment mechanism is applicable only where there is a right of deduction.  It followed that where a taxable person has lost the right to deduct VAT as a result of the expiry of a time limit, X cannot rely on Article 184 or 185 to reduce the VAT payable on its own supply.

Constable VAT comment – It would have been surprising had the CJEU reached a different conclusion.  One can question whether the time limits on VAT deductions are fair.  However, there were two distinct transactions and the fact that one had occurred several years before the second meant that by the time the second transaction occurred it was too late to deduct VAT on the first.  A different decision would have undermined the effectiveness of the time limit applied to VAT deductions. 

Reverse charge: sale of timber

This case concerned VB, the owner of forest land in Romania.  The Romanian tax authorities found that VB’s turnover exceeded the VAT registration threshold in 2011. The authorities have revised, retroactively, the calculation of the VAT due from 2011 applying the method which takes the view that sale prices also included VAT.

VB appealed this on the grounds that the sale of standing timber is subject to the reverse charge mechanism, the application of which is subject only to the fact that the two traders are taxable persons, but not necessarily to the existence of a VAT registration number on the part of the supplier.

The Romanian tax authorities rejected this view, stating that the reverse charge mechanism was subject to the condition that both the supplier and the purchaser were registered for VAT.

The CJEU confirmed that Article 199(2) of the VAT Directive allows Member States to define the categories of suppliers or recipients to whom the reverse charge procedure may apply. It then stated that the restricting the reverse charge to VAT registered traders only had precisely the effect of limiting the scope of reverse charge, which it found to be acceptable. In addition, there was a requirement to obtain the supplier’s VAT registration number which enabled customers to identify when to apply the reverse charge applied.  The CJEU found this to be a proportionate measure which did not breach the principle of fiscal neutrality.

To conclude, the CJEU confirmed that Romania is entitled to require VB to account for VAT retrospectively and considered that limiting the application of the reverse charge to suppliers that are VAT registered (as compared to “liable to be VAT registered”) is a legitimate measure.

Option to tax – Fiscal Neutrality

This case concerned the Lithuanian tax authorities ordering UAB Arvi (Arvi) to repay VAT, plus penalties and interest as a result of incorrectly treating the sale of a gym to UAB Fondas (Fondas) as taxable. Arvi had opted to tax the building and therefore recovered input VAT incurred on the basis that it related to a taxable sale.

In Lithuania, it is a condition of the option to tax that the buyer must be a VAT registered business and the seller is required to obtain the buyer’s VAT registration number before the sale. The Lithuanian authorities argued that although Fondas applied for a VAT registration, it was only issued with a VAT registration number a month after the sale took place, therefore Arvi could not correctly opt to tax, meaning it should have adjusted the amount of input VAT deducted in its VAT return.

The first question referred to the CJEU was whether the VAT directive and the principles of fiscal neutrality and effectiveness must be interpreted as precluding national legislation from making the right of opting to charge VAT on a property conditional on the buyer being VAT registered at the time of the transfer. The CJEU stated that Lithuania’s legislation merely laid down detailed rules around the option to tax and did not adversely affect a right to input tax deduction. It was confirmed that the condition laid down for the option to tax does not contravene the principles of fiscal neutrality. As a result, the CJEU concluded that the VAT directive does not prevent national legislation making the option to tax conditional.

The CJEU also confirmed that intention of taxable use of the property by Fondas cannot affect Arvi’s right to deduct the input VAT.  The businesses are separate taxable persons each pursuing their own economic activity.  Fondas business activities do not impact on Arvi’s VAT recovery rights.  Therefore, although Fondas became VAT registered one month after the sale by Arvi the fact that its VAT number had not been issued at the time of the sale meant that Arvi’s option to tax did not apply to the sale.

Constable VAT comment – The VB and UAB Arvi cases both illustrate the importance of dealing with compliance measures in a timely way.  It is a universal principle of VAT that “If something that should have been done at the time of a transaction has not been done, then it will usually be too late to rectify the resultant problem.”  Both cases relate to fiscal neutrality and the outcomes supported by the CJEU involve a VAT cost in the supply chain that should not exist.  However, natural justice and fiscal neutrality seem increasingly less important than compliance with rules.     In the UAB Arvi case it seems unfair that the company had applied to be VAT registered at the time of the supply.  The judgement seems to make the VAT liability of a supply potentially contingent on the efficiency of the VAT authorities in processing VAT registration applications and commercial transactions may be disrupted as a result of failings that a taxpayer has no control over.

Upper Tribunal

Hire of pitch or league matches?

This Upper Tribunal case concerned HMRC appealing the FTT’s decision regarding Netbuster’s supplies. Netbusters organised competitive football and netball leagues and also supplied the pitches for these matches to be played upon. The FTT concluded that the supply of league management services, which the appellant identified as 12.5% of the supply, was an additional ancillary service to the fundamental nature of the supply being the pitch hire, therefore exempt from VAT.

HMRC were granted permission to argue five grounds of appeal as follows:

  • The FTT failed to have any proper regard to the relevant case law.
  • The FTT failed to properly consider and apply the ‘passivity principle’.
  • The FTT failed to properly consider the objective character/economic reality of the supplies made by Netbusters.
  • The FTT erred in finding that 87.5% of the value of the Netbuster’s supply was attributable to pitch hire and 12.5% to league management services.
  • The FTT failed to correctly analyse the true nature of the rights granted to Netbusters by third parties.

Regarding the first ground of appeal, despite HMRC having been granted permission to appeal on the point, the UT concluded that it was unarguable. HMRC  failed to identify how the FTT have misinterpreted or misapplied the law. The FTT did consider the relevant case law.

Under the second ground of appeal, the ‘passivity principle’ considers whether there is significant added value by services in addition to the land.  HMRC took the view that there was a provision of service rather than simply making available of property. HMRC relied on the Luc Varenne case for this argument.  The UT rejected this on the grounds that the FTT correctly distinguished its conclusion from the facts of Luc Varenne as the additional services in that case were 80% of the total charge, whereas the league management services in this case accounted for only 12.5%.

On the third ground of appeal, HMRC argued that the provision of league competitions was the most important part of the supplies. The teams and individuals were seeking to play competitive and test themselves against other players, rather than simply hiring a pitch for a ‘kick around’. In addition, the key selling point of Netbusters was that a league structure was already in place, with customers only having to sign up and pay. The UT confirmed their view that the FTT correctly recognised that there were two elements, pitch hire and league administration.  Each enhanced the enjoyment of the other but the league management services were of modest value and did not change the fundamental structure of the supply.

The fourth ground of appeal concerned HMRC rejecting that only 12.5% of the supply is attributable to league management services.  However, there was no other evidence regarding this and HMRC did not challenge the point with the FTT. The UT agreed with the FTT’s conclusion that the value added was modest and therefore cannot change fundamental characterisation of the supply.

With regards to the final ground of appeal HMRC, argued that an agreement with King Solomon Academy (KSA) for the rent of a sports hall did not grant exclusive use of the sports hall to Netbusters and that there was a conceptual confusion between a supply of the right to use the facilities and the right to occupy land. The UT concluded that HMRC’s suggestion that Netbusters had no right to exclude others during the hiring is not a realistic reading of the agreement nor of the practical reality.

For the reasons set out above, each of the grounds of appeal failed and HMRC’s appeal was dismissed.

Constable Comment: HMRC’s policy in relation to what is or is not a supply of land has become increasingly confusing in recent years.  HMRC seems to have litigated almost randomly on the point that services supplied alongside supplies of land change the nature of the supply.  In this case HMRC’s position has been found to be wrong but there was at least a rationale for its position.  However, increasingly taxpayers are left making judgements in the absence of easy to follow criteria.  Most will never be challenged and it has almost become a lottery with some unfortunate taxpayers being told that what seems a minor additional service or entitlement (such as a licence to hold weddings) changes the VAT liability of their supplies. If there is ambiguity around what is actually being supplied, we would always recommend seeking professional advice and often a non-statutory clearance.

FTT

Demolition of an existing building

This case concerned the appellant was a building company who received supplies from a sub-contractor called Sword.  Sword charged VAT on its invoice to the appellant. The appellant argued that the supply was zero rated as a construction of a new dwelling with the subsidiary argument that if it failed on that point the reduced rate of 5% applied.

The construction of a new dwelling can be zero rated for VAT purposes.  However, there are strict rules to consider when deciding whether a replacement dwelling can be considered “new”.  In this case there was already an existing building, but after lengthy planning procedures, planning permission was granted to demolish the existing building and construct a new dwelling. However, based on Note (18) of Group 5, Schedule 8, a building only ceases to be an existing building if it is demolished to ground level, which was not the case, or ‘the part remaining above ground level consist of no more than a single façade or where a corner site, a double façade, the retention of which is a condition or requirement of statutory planning consent or similar permission’. In this case, as part of the planning permission, the front elevation and part flank return walls together with a section of the front roof were protected and retained.

Initially, HMRC challenged zero rating on the grounds that the condition as to lawful development was not met. The Tribunal rejected this argument and confirmed it was satisfied that the works were carried out in accordance with the planning permission and did not present any breach of planning control.

However, the Tribunal took the view that what was retained, in accordance with the planning permission, was more than a single façade, hence the development was ineligible for zero-rating because the existing building did not cease to be a building. It arrived at this conclusion on the grounds that the façade does not include a roof slope. These are different structures, with different names, made of different materials and have different aspects. The Tribunal rejected the appellants argument that the roof was part of the façade simply because it can be seen by passers-by or approaching visitors. This was sufficient to dismiss the appeal with regards to zero rating.

The Tribunal went on to conclude that the supply was in the course of the renovation or alteration of a qualifying residential premises of qualifying services related to the renovation or alteration where the premises met the empty home condition, as it has been empty for a 2 year period ending with the commencement of the relevant works. As a result, the construction works carried on by Sword should have been subject to the reduced rate of VAT at 5%, instead of the standard rate.

Constable Comment: This case highlights the importance of meeting the conditions set out in the legislation regarding construction works in order to treat them as zero rated. Often a property owner’s hands will be tied by planning restrictions that cannot be removed.  However, understanding the VAT impact in advance may allow a dialogue with planners that will allow the development proceed in a way that delivers VAT savings.  

Exports: Denial of zero rating

This case concerned a dispute between Maron Plant Limited (MPL) and HMRC regarding an assessment of VAT in the sum of £201,024. The assessment was raised on the basis that MPL had not provided sufficient evidence of removal of goods from the UK to allow it to zero rate the supplies for VAT purposes.

The goods included 29 items of plant and machinery allegedly sent to the Republic of Ireland (Ireland) on 16 occasions involving 20 invoices. The goods were sold to BSM, a company which MPL had no previous dealings with. There is an additional dispute between the parties concerning whether MPL knew or should have known it was involved with fraudulent evasion of VAT but this appeal only concerned the issue whether MPL held sufficient evidence of the removal of goods to Ireland to zero rate its supplies.

The FTT reviewed the evidence presented and stated it had problems with MPL’s evidence. Part of MPL’s argument was that it did not know proof or removal was required therefore it agreed to prepare ‘Confirmation of shipping’ documents.  Unfortunately, these had no details on the consignee, carrier or route so did not comply with conditions set out in Notice 725 which has force of law.

In addition, MPL failed to produce any evidence of the route taken.  The fact that the invoice stated there had been a shipment from the UK to Ireland did not prove anything. MPL produced no CMRs, no Bill of Lading or any other evidence of the goods being booked on a ship and no evidence regarding the mode of transport, route of movement nor the destination.  The Tribunal concluded that MPL has not obtained or retained valid commercial evidence of export to support zero rating of the relevant transactions, MPL should have therefore charged VAT at the standard rate. The appeal was dismissed.

Constable Comment:  The environment has changed since Brexit with only NI to EU shipments being equivalent to “intracommunity shipments” and shipments from the rest of the UK being “exports”.  If the rules are complied with, the requirement for export and import declarations should result in businesses holding “export evidence”.  Nevertheless, there are a variety of ways to export goods and we still see cases in which the export evidence is insufficient and in particular where it was not obtained and kept within the window of time available – for example while it can be downloaded from a courier’s systems.  If evidence of a despatch or export is not available HMRC will raise an assessment for underdeclared VAT.


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.


 

Constable VAT Focus 30 June 2022

HMRC NEWS

Change to HMRC Option to Tax process
Many of our readers will be aware that there have been significant delays in receiving a response from HMRC’s Option to Tax unit following the submission of an option to tax (OTT). To try to address this issue HMRC is trialling a new system. This trial began at the end of May 2022 and will last 6 weeks. Previously when a taxpayer notified HMRC of an intention to opt to tax a property, HMRC acknowledged the notification confirming that the option was in place.

During the trial period HMRC will only acknowledge the receipt of the OTT. Our full article covering this change in HMRC procedure can be read here. We will update readers on any extension to the trial, or any further comment from HMRC on the subject, in future editions of VAT Focus.

If you or your business require assistance on any issues involving an Option to Tax, Constable VAT has a great deal of experience in this area and would be happy to assist with any queries.

Agent Update: Issue 97
HMRC has released this new agent update containing the latest guidance and information including:

  • Increase in National Insurance Threshold
  • Residency and the remittance basis charge
  • Changes to VAT penalties
  • P11D and P11D(b) filing and payment deadlines
  • Making Tax Digital (MTD) for Income Tax Self-Assessment

CONSTABLE NEWS

VAT Partial Exemption: Annual Adjustment

Partly exempt businesses recover VAT incurred provisionally throughout their VAT accounting year. Those businesses are then required to complete an annual adjustment calculation that takes account of supplies made, and input tax incurred, across the entire VAT year and an adjustment to the VAT claimed may be required. This adjustment is normally made on the VAT return following a business’ partial exemption year end. Many taxpayers will be required to calculate and declare these adjustments shortly. Constable VAT can assist with this. Our guidance on partial exemption may be useful.

VAT & Charities Newsletter

We have recently released a new Constable VAT & Charities Newsletter. This newsletter covers some important and interesting areas of VAT for charities. Whilst some of the issues and cases have been discussed in our VAT Focus, the newsletter aims to give a more detailed summary of those items specifically impacting on the Charity sector.

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. Place of supply of services and abuse of rights

This case concerned DuoDecad, a Hungarian registered company which provided technical support services allowing access to entertainment services via websites.  The question was whether DuoDecad was providing its services cross border to a Portuguese business or locally to an associated Hungarian Company. The local Hungarian tax authorities ordered DuoDecad to pay significant amounts of VAT, a tax fine and interest in respect of unpaid VAT, on the grounds that the recipient of the services provided by DuoDecad was its Hungarian associate WebMindLicences Kft (WML).

WML is a company registered in Hungary, which has few resources of its own. WML licensed its know-how to Lalib (a Portuguese entity) allowing Lalib to charge consumers for access to its websites. DuoDecad provided the necessary IT support and contractually this support was provided to Lalib as provider of the online services. The Hungarian tax authorities argued that the online service was provided not by Lalib but by WML, from Hungary, and that the licence agreement was in its view ‘fictitious’. As a result, Duodecad’s service was supplied to WML and Hungarian VAT was due on the supplies.

DuoDecad argued that Lalib had available to it the human and material resources necessary for the provision of the services supplied. DuoDecad also stated it provides its services directly to Lalib and not to WML. In addition they added that Lalib appeared to the outside world as the provider of the services, it concluded contracts in its own name, held a database of customers and many other factors demonstrating that Lalib was the recipient of those supplies.

The CJEU was asked to determine whether WML or Lalib were supplying the entertainment services and therefore receiving the technical support from DuoDecad. The CJEU confirmed that if there was abuse of rights, meaning the contractual relationship, between Lalib and DuoDecad was solely to obtain a tax advantage, then the contractual relationship should be redefined. However it concluded that the CJEU has no jurisdiction to apply rules of law to a particular situation, therefore it refused to rule which company should be treated as supplying the services instead determining that this is a matter for the national courts to determine.

Constable Comment: This case highlights issues around applying place of supply rules and also briefly discusses abuse of rights. Whilst the Advocate General’s opinion issued earlier this year indicated that part of the role of the CJEU was to resolve conflicts such as those arising in this case, even if it meant pronouncing on questions such as whether an abuse of law had, in fact, taken place, the Court in the end declined to comment on the correct VAT treatment of this supply.

UTT

2. Chelmsford City Council: sports and leisure facilities

The main issue of the appeal is the VAT liability of admission charges for sports and leisure facilities (the facilities) provided by Chelmsford City Council (CCC). HMRC contends that CCC was acting as a taxable person when providing the facilities.

Under Section 41A of the VAT Act 1994, supplies of goods and services made by certain public bodies are not regarded as being made by way of business, and they are therefore outside the scope of VAT, if:

(i) The public bodies form a part of the public administration.

(ii) The public bodies in question engage as public authorities when they make the supplies in question. This happens when they act under a special legal regime applicable to them, that is, under different legal conditions from those that apply to private traders, typically carrying out public interest activities for the service of the community.

(iii) This outcome would not significantly distort competition.

The benefit for a public body in agreeing that an activity is outside the scope of VAT is that this treatment brings with it a right to recover VAT on associated costs, which may not be the case if a supply was within the scope of VAT but was VAT exempt.

CCC argued that it was acting as a public authority when providing the facilities and the question that followed was whether the CCC was acting pursuant to a special legal regime applicable only to the public authority and not to private operators providing similar facilities. The FTT agreed with CCC that its services were provided under a special legal regime and so the supplies did not bear VAT. HMRC appealed on that issue. You can read more about the FTT case on our website where we have a blog on this topic.

The particular features which the FTT relied on its decision were pricing (including setting of concessions) and location and scope of facilities. The FTT’s reasoning was that, in providing its services, the authority was subject to different requirements when deciding what services to provide, at what price, where to provide them and to whom, by comparison with a private sector operator. The provision of the facilities involves the use of public powers and is subject to a public law regime. The Upper Tribunal agreed with the FTT that the legal conditions under which CCC provides leisure facilities amount to a special legal regime because private operators providing such facilities are not subject to those same conditions.

HMRC’s appeal on the special legal regime issue is dismissed; however the question of distortion of competition, which could impact on VAT treatment, has been deferred to a separate hearing and so the matter is not yet concluded.

Constable comment: As the question of distortion of competition is an important factor in determining whether a transaction undertaken by a Public Body falls within the scope of VAT it will be interesting to see how the courts decide on that factor. Only once this point has been addressed will it be completely clear if the supply of leisure facilities by a Public Body is outside the scope of VAT.


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.


 

Constable VAT & Charities Newsletter June 2022

INTRODUCTION

The last two and a half years have been very challenging for everyone, and charities are no different. Constable VAT advises many charities operating in various sectors. Some clients are large national and international charities, others are smaller locally based organisations. In our experience, the COVID-19 pandemic has impacted them all.

This may have been an adverse effect on income generated, service delivery, illness among staff and volunteers, Government restrictions, and a general level of uncertainty. However, charities have demonstrated that they are resilient organisations that have adapted to the different circumstances faced. The pandemic has also reinforced what a positive impact the sector has, and continues to have, on society generally offering support across many levels.

In terms of VAT, HMRC introduced various schemes designed to help businesses which charities benefited from, and which was welcomed.

HMRC NEWS

Change of policy – Business and non-business activities
It has often been a point of disagreement between a charity and HMRC as to whether a specific activity (or the activities) of a charity is a ‘business’ activity for VAT purposes. This is important because a ‘business’ classification may impact on a charity’s VAT registration status, if the business supplies are taxable, or the right to claim charitable reliefs, the construction of a building for a relevant charitable purpose (RCP) for example. If a charity’s business activities are VAT exempt business activities, this will impact on the amount of VAT incurred that it is able to recover.

HMRC’s preferred cases when considering whether a charity is undertaking a business activity has, for many years, been the decisions in Morrison’s Academy Boarding Houses Association (Morrison’s), and Lord Fisher. These decisions are referred to in HMRC guidance and are both over 40 years old. These cases considered six factors which indicated whether a charity was undertaking a business activity. Morrison’s was accepted by the (then) Inland Revenue as a charity when the case was heard and decided in the late 1970’s.

As case law has evolved it seemed that Morrison’s and Lord Fisher had become outdated, nevertheless, these remained HMRC’s preferred source of reference and were quoted regularly and relied upon by HMRC. On 1 June 2022 HMRC issued Revenue & Customs Brief 10/22 which updates this guidance.

The new guidance takes account of two more recent cases (Longridge on Thames and Wakefield College) and HMRC has confirmed that two tests derived from these decisions will now be the key indicators in determining whether an activity is undertaken by way of ‘business’ for VAT purposes. These tests are as follows:

Stage 1: The activity results in a supply of goods or services for consideration

This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

The Court of Appeal in Wakefield emphasised that a ‘supply for consideration’ is a necessary condition but not a sufficient condition for an ‘economic activity’.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration)

Where there is a direct or sufficient ‘link’ between the supplies made and the payments given, the activity is regarded as economic. The Court in Wakefield College [2018] made a distinction between consideration and remuneration. Simply because a payment is received for a service provided does not itself mean that the activity is economic. For an activity to be regarded as economic it must be carried out for the purpose of obtaining income (remuneration) even if the charge is below cost.

We would suggest that all readers take an opportunity to refer to HMRC’s updated guidance which may be of interest to organisations in receipt of grant funding and charities supplying goods and/or services that are subsidised or supplied at cost. If there were any specific funding arrangements or transactions that you would like to discuss please do not hesitate to contact Stewart Henry at stewart.henry@constablevat.com or Laura Krickova at laura.krickova@constablevat.com

HMRC guidance can be viewed here.

CASE REVIEW

We consider below cases that have been heard by the courts. Most involve charities and two, whilst not directly involving a registered charity, may be of interest.

COURT OF APPEAL

1. Input VAT recovery – attribution of VAT incurred to supplies made

The Court of Appeal (CoA) has handed down its decision in the Royal Opera House Covent Garden Foundation (ROH). The case concerned the recovery of VAT incurred on ‘Production Costs’. These costs included fees for guest performers, sets, props, costumes etc. The claim made relates to VAT incurred totalling £532,069 between 1 June 2011 and 31 August 2012.

ROH is a charity staging highly acclaimed ballet and opera performances. ROH also makes supplies of catering. Customers attending performances can reserve a table at one of ROH’s various catering facilities.

Income generated from ROH’s ticket sales is exempt from VAT. Catering income is taxable. Generally speaking:

  • VAT incurred on costs directly relating to exempt supplies is irrecoverable.
  • VAT incurred on costs directly relating to taxable supplies is recoverable.
  • VAT incurred that is not directly attributable to a specific supply or activity (usually overhead costs) falls to be apportioned and is recovered in part.

To determine the recovery of VAT incurred on costs it is necessary to establish for what purpose the expense has been incurred. The Court of Justice of the European Union (CJEU) has established that for costs to be used for the purposes of an onward supply there must be a ‘direct and immediate link’ between them.

In ROH it was HMRC’s position that the only ‘direct and immediate link’ of the Production Costs was with the sale of tickets and other supplies associated with productions (such as programme sales).

ROH argued that VAT incurred on its Production Costs also related to supplies of catering, on the basis that the Production Costs functioned, partly, to attract customers to use the catering facilities. The effect of this being that an increased proportion of VAT incurred on Production Costs was recoverable.

The question to be decided before the First Tier Tribunal (FTT) was by reference to what income streams should VAT incurred on Production Costs be recovered (ROH used the standard partial exemption method to calculate its input VAT recovery but triggered the Standard Method Override [SMO] which required it to calculate VAT recovery based on use).

ROH succeeded at the FTT in part (the FTT found there was a direct and immediate link to catering supplies, production specific commercial venue hires and shop sales of recordings of ROH productions). HMRC appealed the FTT’s decision in respect of catering supplies only. The Upper Tribunal (UT) set aside the FTT’s decision and exercised its power to re-make the decision. The UT rejected ROH’s submission that a ‘direct and immediate link’ was established because the Production Costs were incurred to attract customers to both attend the performances and use the catering facilities. The UT commented, “The fact that the Production Costs ‘enabled’ the ROH to make the Catering Supplies by attracting customers who bought tickets to the opera or ballet [to] partake of the Catering Supplies is not sufficient to establish a direct and immediate link.” The UT accepted HMRC’s contention that the link between the Production Costs and the catering supplies was no more than indirect.

The ROH appealed the decision of the UT on the basis that it had applied the wrong approach to the application of the ‘direct and immediate link’ test. The COA upheld the UT’s decision; however, the judgment provides an interesting examination of case law in this area. The COA noted the CJEU ruling in Sveda, which ROH relied on in support of its argument.

The CJEU ruled in Sveda that VAT incurred on the costs of constructing a recreational path (for which it received funding on the condition that the path would be free to access by members of the public) was recoverable on the basis that there was a ‘direct and immediate link’ to Sveda’s taxable activity of catering and retail supplies made along the path. The Advocate General commented that the ‘direct and immediate link’ would not exist in this case if either: the public were charged to access the path and such supplies were exempt (this is because the ‘direct and immediate link’ would be to exempt supplies) or if Sveda’s primary use of the path was for non-economic activity.

Interestingly, the COA briefly contemplated a scenario whereby ROH’s tickets to performances were free of charge. In such a situation, it may be arguable (based on Sveda) that a ‘direct and immediate link’ existed between the Production Costs and the catering supplies. Perhaps suggesting that full recovery of VAT incurred on Production Costs could be possible in this circumstance.

Constable VAT comment: The ROH case demonstrates just how complicated attributing VAT incurred by a charity can be, and how difficult the ‘direct and immediate link’ test can be to satisfy and interpret. In many cases charities and HMRC are required to make an objective judgment based on the facts relating to the circumstances at hand, unfortunately, charities and HMRC do not always reach the same conclusion and opinions differ. 

UPPER TRIBUNAL

2. VAT Exempt or Taxable supplies of accommodation and catering?

An appeal by The Lilias Graham Trust (LGT) concerned whether its supplies are VAT exempt by virtue of their close association with a supply of welfare for children. LGT is a registered charity which operates a residential assessment centre where it assesses the parenting capabilities of those referred to it by a Local Authority (LA). LGT charges a fee to the referring LA. The First-tier Tribunal (FTT) previously held that such supplies are VAT exempt as they relate directly to supplies of welfare services for children. Whilst accepting that part of its service is VAT exempt welfare, LGT argued that the supply of accommodation or catering is specifically excluded from VAT exemption and should be taxed at the standard rate.

This may seem an unusual perspective; however, LAs and other public bodies can often recover VAT incurred in delivering their statutory duties (non-business activities), despite not making taxable supplies. A taxable supply by LGT would allow it to recover VAT incurred on costs directly associated with making those taxable supplies. Increased taxable supplies would be beneficial when calculating the recovery of VAT incurred on costs that cannot be directly attributed to a specific activity or supply, general overhead expenses following the VAT partial exemption rules.

LGT’s appeal to the UT was on the grounds that the FTT was wrong to conclude that the supplies of accommodation are ancillary to a supply of welfare.  LGT had incurred a large amount of VAT on costs relating to these supplies and in seeking to agree that these supplies were taxable LGT hoped to secure a right to input VAT recovery in relation to these supplies to LA’s. The UK VAT legislation states that the VAT exemption for welfare does not apply to accommodation or catering “… except where it is ancillary to the provision of care, treatment or instruction.”

LGT argued that it was not necessary to consider whether there was a single, mixed, or composite supply for the purposes of the exclusion from VAT exemption. There was no doubt that LGT was supplying accommodation and catering, and that the finding that such supplies formed part of a larger supply did not preclude the different elements of that composite supply attracting different rates of VAT.

HMRC suggested that the FTT was correct to conclude that there is a single supply made by LGT to the LAs which should be correctly regarded as VAT exempt as a supply of welfare services. Therefore, there is no need to consider the exclusion from exemption for supplies of accommodation and catering as there is no supply of these services; there is a single supply of welfare services.

Considering the nature of single, multiple, and composite supplies, the Tribunal concluded that the purpose of the exclusion from exemption is to prevent supplies of accommodation being treated as VAT exempt when, in reality, those supplies are part of a main taxable supply. In the present case, the Upper Tribunal held that the FTT was correct to conclude that the supplies of accommodation and catering are ancillary to the supply of welfare services. The entire purpose of LGT’s services was to ensure the welfare of children and their parents, which included providing accommodation and food.

Constable VAT Comment: The argument mounted by LGT is complex and revolves around European caselaw. Readers who have a particular interest in the composite/multiple/single supply issue may wish to read the judgment in detail alongside key cases such as Card Protection Plan and French Undertakers. Ultimately, the Tribunal found that LGT was supplying welfare services to local authorities, supplies of associated accommodation were ancillary and facilitative to these supplies of VAT exempt welfare services.

3. Supplies of daycare services

The Upper Tribunal has overturned two decisions of the First tier Tribunal in circumstances where bodies which did not have charitable status may be able to treat as VAT exempt supplies of daycare services. These decisions were upheld by the Court of Appeal and the Supreme Court refused the taxpayers leave to appeal.

In the cases of Learning Centre (Romford) Limited and LIFE Services Limited the issue to be decided was whether supplies of daycare services could be treated as VAT exempt supplies even though the tests for VAT exemption were not strictly met.

The position can be briefly summarised as follows:

  • Supplies of daycare services are VAT exempt welfare services if supplied by a charity or public body, regardless of whether the services are regulated by the CQC.
  • If the daycare services are supplied by an organisation that is not a charity (the law refers to a state-regulated private welfare institution or agency, but this may apply to a CIC that does not have charitable status or a wholly owned trading subsidiary of a charity) and the services are not regulated by the CQC, the supplies are taxable.

The position is interesting because, basically, daycare services are not regulated in England or Wales, but they are in Scotland. This means that, potentially, commercial providers of daycare services in England and Wales are at a disadvantage when competing to supply services with charities, public bodies, or Scottish private businesses because they are obliged to VAT register and charge VAT if the value of taxable supplies exceeds the compulsory VAT registration threshold. Similarly, a Scottish supplier of daycare services does not have an opportunity to make its supplies taxable. A Scottish charity could not form a trading subsidiary to carry out the activities, and make taxable supplies, because daycare services are regulated in Scotland, regardless of the status of the supplier.

The First tier Tribunal decided in both cases (the cases were heard independently at this stage) that VAT exemption did apply to these supplies of services. This was based on ‘fiscal neutrality’ (LIFE Services Limited) and the inequality between Scottish and English VAT treatment. The Upper Tribunal reversed the decision in LIFE and the Scottish difference point was considered in a combined appeal of both cases to the Upper Tribunal which found in HMRC’s favour. The Court of Appeal has upheld the decision of the Upper Tribunal.

This is interesting because:

  • There may be businesses that are not VAT registered that perhaps should be.
  • There are likely to be organisations that are VAT registered but that are treating these supplies as VAT exempt.
  • There may be an opportunity for charity to form a CIC or trading subsidiary to deliver these supplies and generate taxable income, and a right to reclaim VAT incurred on associated costs.
  • If the customer is a local authority there may not be a problem if it can reclaim any VAT charged; however, the application of penalties for VAT accounting errors or a belated VAT registration may be an issue.
  • One problem already identified is if the local authority or clinical commissioning groups wish to promote the use of Personal Budgets and Direct Payments. If a service user with a Personal Budget purchases day care services using a Direct Payment that service may be 20% more expensive for the service user because they will not be able to recover any VAT charged by the supplier. If the daycare service is commissioned by the local authority, we would usually expect them to be able to reclaim the VAT charged.

There may be a wider application to all non-regulated services delivered by organisations such as CIC’s and commercial providers other than daycare. A link to HMRC’s brief released after the decision is here.

FIRST TIER TRIBUNAL

4. Accommodation for homeless people

This case concerns City YMCA London (CYL), a registered charity, that appealed HMRC’s classification of the VAT liability of supplies of services made by CYL to young people of hostel accommodation in return for payment.

As with many VAT cases, the position is not straightforward and can be complicated. In late 2010 CYL lost its ‘supporting people’ grant funding which meant that it would be supplying minimal welfare services.

To continue its support of those in need CYL makes a charge for its services, which consist primarily of accommodation and advice. Each individual resident is responsible for paying their room fee; however, this is most likely met by Housing Benefit, Universal Credit or Disability allowance.

The decision helpfully sets out the chain of events that followed after CYL lost its ‘supporting people’ funding. These can be broadly summarised as follows:

  • January 2011 – CYL writes to HMRC seeking clarification of the VAT liability of its supplies moving forward now it is not receiving the ‘supporting people’ grant.
  • March 2011 – HMRC confirms CYL’s supplies of accommodation and general advice was subject to VAT at the standard rate. The charity applied the 28-day rule which allows it to charge VAT at a reduced value to residents for stays over 4 weeks.
  • September 2014 – HMRC carries out a routine VAT compliance visit to verify the charity’s VAT accounting records, specifically ensuring that the 28-day rules were being correctly applied.
  • August 2017 – HMRC conducts a VAT compliance inspection which is followed by a letter advising that its supplies are VAT exempt supplies of welfare.
  • October 2017 – HMRC revises its position and confirms that the charity’s supplies are standard rated as CYL is supplying sleeping accommodation and is “a similar establishment” to a hotel or boarding house.
  • October 2018 – HMRC writes to CYL requesting more information about the services it supplies, whilst advising that HMRC did not now consider that it met the ‘hotel like’ accommodation criteria which (potentially) may not allow the charity to account for a reduced rate of VAT for stays for a continuous period of more than four weeks.
  • January 2019 – HMRC writes to the charity and advises that its supplies are VAT exempt, not of welfare but of land (accommodation).
  • March 2019 – HMRC writes to CYL reversing its decision of 2 months earlier and advises that the charity’s supplies are standard rated supplies of land (accommodation) and are specifically excluded from exemption. The charity’s supplies are not ‘hotel like’ and it cannot take advantage of the reduced rate where a young person stays for a continuous period of more than four weeks.

The benefit of the 28-day rule is that, provided certain conditions are met, including the provision of sleeping accommodation in hotels, inns, boarding houses, and similar establishments is that from the 29th day of the stay VAT is only due on meals, drinks, service charges and other facilities provided apart from the right to occupy the accommodation. The value of the accommodation is excluded from any calculation to determine output VAT due.

HMRC confirmed that the new ruling would take effect from 1 March 2019, there would be no VAT assessments raised for the incorrect application of ‘the previously under declared VAT’ under the long stay rules.

CYL sought an independent HMRC review of this final decision. The charity is advised by a letter dated 18 July 2019 that the March 2019 decision is upheld. This led to CYL’s appeal to the Tribunal.

The technical points to be considered were as follows:

  1. Is the charity’s supply one of a ‘licence to occupy land’ and a VAT exempt supply?
  2. If the charity’s supply is initially held to be a VAT exempt ‘licence to occupy land’, does the exclusion from VAT exemption as ‘the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering’ apply?

In practical terms if a) above applies, the charity does not have to account for output VAT on supplies made/income received and it may be unable to reclaim VAT incurred on directly related costs. If b) above is correct, and CYL’s supplies are excluded from exemption on the basis that it is a ‘similar establishment’ to a hotel etc then it can reclaim in full VAT incurred that directly relates to making these supplies, and account for VAT on a reduced sum received because most of its residents stay for over 28 days.

HMRC’s preferred analysis is that the charity’s supply is one of a range of facilities (sleeping accommodation, access to communal facilities [kitchens, lounges] and oversight and control, signposting etc). As such, the charity’s supplies are standard rated, and it does not meet the ‘similar establishment’ to a hotel test to allow it to apply the reduced rate for long stays.

The Tribunal found that the preponderant element of the supply is the provision of sleeping accommodation. Any other facilities or services supplied are ancillary and provided while making the main supply of accommodation. The commercial and economic reality is that the supply is of a bedroom which characterises the VAT liability of the supply.

The second point is whether CYL is a ‘similar establishment’ to a hotel, boarding house etc. The Tribunal found that the charity’s supply is by a ‘similar establishment of sleeping accommodation’ because its intended purpose is providing temporary accommodation to homeless young people. In particular, the Tribunal noted that the temporary nature of the accommodation provided sets CYL’s supplies apart from VAT exempt long-term lettings of residential accommodation. Therefore, the charity’s supply is like the provision in the hotel sector.

Constable VAT comment: This is an interesting case, and it remains to be seen whether HMRC will lodge an appeal to the Upper Tribunal. A decision of the First-tier Tribunal is only binding on the parties involved and does not set a wider precedent. The decision demonstrates the benefit to CYL of clarifying the VAT liability of its supplies with HMRC in 2011. If any taxpayer submits a non-statutory clearance application to HMRC then, provided full facts are provided, HMRC are bound by its decision and cannot take retrospective action. If any business desires certainty as to the correct VAT liability of its supplies, and where there are potentially different interpretations, we would recommend pro-actively liaising with HMRC. Unfortunately, HMRC may refuse to give an opinion in all cases but an approach to HMRC is something that should be considered. The decision also emphasises how difficult it can be to agree the VAT liability of a supply, bearing in mind HMRC changed its opinion a number of times.  

5. Cancellation of VAT Registration

This case concerned Step by Step (SBS), a charity registered in Northern Ireland and with a UK VAT registration. It registered for VAT in 2011 but applied for that registration to be cancelled on 20 February 2018 on the basis that it did not make any taxable supplies. HMRC refused this VAT deregistration application, believing that SBS made a combination of outside the scope supplies of grant-funded vocational training and taxable supplies of catering, by virtue of which its VAT registration was required.

SBS supplies training services under an agreement with Southern Regional College (SRC). It provides work-based education and training through the operation of a restaurant. SBS applied to de-register for VAT on the grounds that it was making exclusively VAT exempt supplies of education and vocational training. It felt that its supplies from its restaurant were ancillary to the overall VAT exempt business activity of SBS and that VAT deregistration was appropriate.

HMRC suggested that, as the education provided by SBS is grant-funded, though not ultimately government funded, it is not a supply made in the course or furtherance of a business activity and is therefore outside the scope of VAT. HMRC claimed that, as there was no business supply of education arising, the supplies of the restaurant could not be viewed as ancillary or “closely related” to such a supply and, as such, the supplies made from the restaurant represent taxable supplies of catering.

Following the case of Colchester Institute, the Upper Tribunal found that the provision of education and vocational training in exchange for the receipt of grant funding is capable of being a “supply for consideration”. In this light, the Tribunal held that SBS’s supplies to SRC were VAT exempt supplies of education and considered whether the supplies of the restaurant were ancillary or “closely linked” to the overall activity.

Considering the criteria set out in Brockenhurt College, the Tribunal held that the supplies of the restaurant were sufficiently closely related to the overall activities of SBS which it had already ruled to be VAT exempt. Therefore, it held that SBS makes exclusively VAT exempt supplies. Accordingly, the appeal is allowed and the decision to refuse to cancel the VAT registration is quashed. HMRC shall re-make the decision.

Constable VAT Comment: It seems that in the light of the Colchester Institute decision, the provision of education and vocational training in exchange for grant-funding could now be regarded, by default, as a business activity (a supply in exchange for consideration) albeit that consideration is provided by a third party.

Following the judgment in Brockenhurst College, certain educational bodies are entitled to treat certain supplies to the general public as being made in the course of education or vocational training, usually rendering them VAT exempt supplies. HMRC are likely to apply the judgment in the case to other cases where the facts similarly indicate that the services are not being provided in competition with commercial enterprises. This will be the case where the services are not offered to the general public through advertising, including over the internet, and the costs of providing the supplies to the general public clearly exceeds any income generated from that activity.

Subsequent to the decision in Colchester Institute HMRC issued Brief 8 (2021) which can be found here.

We would also take this opportunity to remind readers that VAT registration does give a degree of protection in the event VAT accounting errors occur. If a charity mistakenly classifies a supply as zero-rated or VAT exempt, and HMRC challenges that on the basis that the supply is standard-rated and VAT at 20% should have been accounted for on income received, there is a statutory 4-year time limit in which the error can be corrected. A mistake made in 2017 cannot be adjusted now, the only exception is in cases of fraud. However, if a charity is not VAT registered, the 4-year capping rules do not apply. If a charity is not currently VAT registered but should have been VAT registered some time ago because it is making taxable supplies, a retroactive VAT registration will be required. This will usually involve the completion of a long-period first VAT return spanning several years. HMRC can also apply a belated notification penalty for a late VAT registration.

Charities can register for VAT on a voluntary basis even if the value of taxable supplies made is below the compulsory VAT registration threshold, although a voluntary VAT registration may need to be balanced against the administrative burden of maintaining VAT accounting records, submitting VAT returns etc.


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.


 

Constable VAT Focus 16 June 2022

HMRC NEWS

Monitoring businesses’ awareness of Making Tax Digital
HMRC commissioned research to survey awareness of and preparedness for Making Tax Digital (MTD) amongst VAT registered businesses with turnovers below the compulsory VAT registration threshold. From April 2022 the MTD rules will also apply to these businesses. The result of this research was recently published in the above guidance. The research suggested, that although there was a general awareness of MTD, the knowledge of the compulsory requirements and preparedness was low.

Apply for permission to opt to tax land or buildings
In certain circumstances taxpayers need to apply to HMRC for permission to opt to tax land or buildings for VAT purposes using form VAT1614H. This form has recently been updated.

Revenue and Customs Brief 10 (2022): VAT – business and non-business activities
This business brief was recently published by HMRC, it sets out the HMRC approaches to determining if an activity is a business activity for VAT purposes.

Historically HMRC has used the principles laid down in the cases of Lord Fisher [1981] and Morrison’s Academy Boarding Houses Association [1978], to determine whether an activity is business or economic activity for VAT purposes. The 6 criteria emerging from these cases, known as the ‘business test’ are referenced within the brief and have been a significant influencer of decisions around whether something is a business activity for many years.

In the light of recent cases, HMRC confirmed that it will no longer specifically apply the “Lord Fisher” business test, in determining whether an activity is business. Whilst the 6 indicators can be used as a set of tools designed to help identify those factors which should be considered, businesses can no longer rely on them. Instead, HMRC will use a new 2 stage test, emerging from the Wakefield College [2018] case.

The 2 stage tests are:

Stage 1: The activity results in a supply of goods or services for consideration.

This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

The Court of Appeal in Wakefield emphasised that a ‘supply for consideration’ is a necessary condition but not a sufficient condition for an ‘economic activity’.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration).

In very summary terms, where there is a direct or sufficient ‘link’ between the supplies made and the payments given, the activity is regarded as economic and thus a business activity. On some occasions, the decision as to what forms a business activity or not is marginal and this may create significant discussions with HMRC. HMRC’s position is given in the Brief which may be accessed through the link above.

CASE REVIEW

FTT

1. Transfer of going concern: Property

This case concerns Haymarket Group Properties Limited (HGPL), the appeal being against a notice of assessment for VAT raised by HMRC in the sum of £17,000,000. The assessment was in the consequence of the ruling by HMRC which concluded that the sale of land and property at Teddington Studios, Middlesex (The Property) was a supply of an asset and not a transfer of a business as a transfer of a going concern (TOGC).

The property in dispute, the “Teddington property”, was to be sold by HGPL with a planning permission for the demolition of the existing building and construction of over 200 new flats and houses. The issue for determination was whether the sale of the property with planning permission was a TOGC as it was the transfer of a property development or property lettings business (steps had been taken to create an in situ tenant across the transfer) or whether as an alternative this was the sale of a development business. There was no dispute in case the transaction was not a TOGC the VAT payable of £17 million was fully recoverable by Pinenorth (the purchaser). The “sticking” tax at stake was £680,000 of SDLT as a result of including or excluding VAT from the calculations along with negative cashflow outcomes in paying and then recovering the large sum of VAT that would apply to the sale.

HGPL contends it was carrying on a business before the sale of the property consisting of two elements, property development and property lettings. HGPL argues it took the property and improved its value for future sales including by obtaining planning permission, the property was then transferred to Pinenorth as a going concern with the benefit of planning and other preliminary development arrangements who continued to operate it as a property development business. Also, the property generated letting income and steps were taken to put in place tenants (albeit connected to the buyer) across the transfer.

The property rental business had been the initial focus of discussions with HMRC with later thoughts around a property development business transfer. Regarding the TOGC of a property rental business, HMRC argued that the leases were only entered into after the exchange of contracts for the purpose of achieving TOGC. Essentially, this was not the transfer of the existing business of HPGL. HMRC also considered the property development argument and responded that the contract for sale was for a sale of property not a business. HMRC took the view that the alleged property development business was an ‘afterthought’ merely to facilitate the TOGC conditions.

The Tribunal initially considered the property development business aspect of the appeal and concluded that it was not HGPL’s intention to carry on a property development business for various reasons including that HGPL has never been in the business of property development, the property was held as an investment as part of its portfolios of freehold estates, HGPL never intended to develop the property prior to the sale or had the capital available to do so.

The Tribunal then also considered whether there was a property letting business and concluded there was not. The reason why there could not have been a property letting business was because to the complete the sale, the property must have been transferred to Pinenorth with vacant possession at the point of exchange of contracts. The leases entered into as part of the sale (commencing between exchange of contracts and completion) was purely to play its assigned role to structure the transaction as a TOGC, which was evidenced by discussion between HGPL and advisors, HGPL was not entirely content with this approach (advisors cautioned it might be questioned) and required assurance through specific terms incorporated into the Sale Agreement to protect HGPL’s position in the event that the TOGC structure was challenged.

As a result of the above, it was clear to the Tribunal there was neither a property development nor a property letting business transferred, therefore the appeal was dismissed. VAT, in the sum of £17,000,000 was due on the sale, as it was not a TOGC.

Constable Comment: VAT of £17 million was due as a result of the sale of property not falling within the TOGC provisions. Although the VAT charges were subsequently recoverable by the purchaser there will be a significant SDLT implication with this being due on the VAT element of the sale value. This case highlights the risks of structuring transactions for a VAT advantage with superficial arrangements to create the desired outcome. If VAT is incorrectly charged and / or recovered, there is potential for assessments and penalties, therefore we would always recommend seeking professional advice regarding the transfer of a going concern particularly as this so often involves material values.

2. Input VAT: Business expense or private use

This appeal concerned Maddison and Ben Firth (trading as Church Farm) (CF) and a VAT return amended by HMRC to disallow input VAT totalling £28,374.14 on the basis that some of the items claimed were not allowable business expenses including two vehicles, a personalised number plate and clothing.

CF argued that the two vehicles (Audi Q8 and an Audi TT) were for business purposes and that as such HMRC were incorrect to disallow the input VAT on their purchase. HMRC argued they were correct to disallow the input tax on the grounds that, even if the vehicles were not used for private purposes, they were available for private use. This was evidenced by the fact that the insurance of the vehicles included SDP use. Perhaps the more salient point would have been that the cars were stated to be for use for private hire and registered with the council as such but that the insurance certificates stipulated that they were not covered for commercial travelling including the carriage of passengers for hire or reward. Perhaps it was also unhelpful that the although the Audi TT had backseats the Tribunal noted “the likely impracticability of using what was described as, in practical terms, a two-seat car for this purpose”.

The Tribunal considered the evidence and confirmed that a car is used exclusively for business purposes if it is used only for business journeys and is not available for any private use. The Tribunal was not satisfied that the vehicles were not available for private use, as at the time of purchase the insurance included SDP use and a locked compound (to ensure only business use) was only considered later after the purchase of cars, therefore the Tribunal upheld HMRC’s decision, input VAT on the two vehicles was correctly disallowed.

The case also considered whether the purchase of a private number plate was recoverable. One of the partners of the business was named Mr Ben Firth and CF acquired a number plate (BS70 BEN) for a motor bike used in the business. CF argued this was a form of advertising for the business as it reflects a name of a partner, and therefore an allowable expense of CF. HMRC argued that the number plate has not been demonstrated as a legitimate business expense, stating the business is Church Farm, not Ben Firth, therefore the number plate cannot be a business advertisement. The Tribunal agreed with HMRC, stating that the number plate did not refer to the name/business of CF therefore it is not a business expense, input VAT was blocked.

Lastly, input VAT incurred on clothing purchased for Pilates. Maddison Firth, a partner of the business, was undertaking a teacher training course for Pilates and the clothing was purchased to support this and should qualify under the “perks of an accepted business expense”. HMRC relied on their guidance which confirms that normally a person is responsible for the cost of their own clothing at work, and also it is not a unfirm or protective clothing which would be allowable. HRMC contended they were correct to reject the input VAT claim but had accepted a 50-50 apportionment and considered this reasonable.

The Tribunal accepted that the clothes would aid the comfort of performing the tasks, the relevant factors failed to prove that the cost was sufficiently for the purposes of a business. The appeal was dismissed.

Constable Comment: This case demonstrates that input VAT is only recoverable if the recipient intends to use the goods or services for the purpose of their business. The general rule regarding cars is that input VAT is blocked if there is the potential for private use (although there is some relaxation of this rule for certain bona fide uses such as a taxi, driving instruction etc). CF seemed to argue that no private use took place, however as confirmed by the Tribunal, this is not sufficient. The vehicles must not be available for private use, in order to meet the business use tests. The CF case illustrates that HMRC inspectors will apply a critical eye to VAT claims and that acceptance of doubtful claims is unlikely. There is a significant risk of careless or deliberate behaviour penalties where an overly optimistic view of business use is applied. The rules for cars and input VAT are quite specific but for other items of input VAT an apportionment between business and private use may be possible and advice may be helpful in arriving at such a split.


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.


 

Constable VAT Focus 19 May 2022

HMRC NEWS

Prepare for upcoming changes to VAT penalties and VAT interest charges
This is newly published guidance provides more information about the new VAT penalties and interest charges that will apply to everyone who submits a VAT return from 1 January 2023.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance allows traders from outside the EU to check if the business storing their goods in the UK is registered with the Fulfilment House Due Diligence scheme. The list has been updated with 31 additions, 22 removals and 1 amendment.

How to value goods for Import VAT
This guidance advises businesses how to value their goods to help when working out the VAT due when importing goods into the UK. Additional information has been added about moving goods into Northern Ireland.

Investment Gold Coins
The UK list of coins recognised as investment gold coins for exemption has been updated.

Revenue and Customs brief 8 (2022): Single DIY Claim
This brief clarifies HMRC’s position in relation to making a claim under the DIY Housebuilders scheme. This case specifically considered the implication of multiple DIY claims submitted for the same building. We have covered this brief in more detail which you can read here.

CONSTABLE VAT NEWS

Constable VAT has recently released a new blog regarding Land Promotions.

Our new Land Promotion blog considers Land Promotion Agreements and key VAT considerations including whether it is beneficial to opt to tax, is permission to opt to tax required, understanding legal and beneficial ownership and more. The full blog can be read here.

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.

CJEU

1. Rate of VAT applicable to lift repair and maintenance services

DSR is a Portuguese company which produces lifts, hoists and conveyor belts and provides lift repair and maintenance services. In 2007, DSR applied a reduced rate of VAT to the lift refitting and repair services supplied by it, while invoicing the materials incorporated in connection with those supplies at the standard rate of VAT. Following a tax inspection in 2011, the tax authority found that DSR had wrongly applied the reduced rate of VAT to those services.

In a judgement on 16 October 2017, the administrative and tax court held that lifts are an integral part of the buildings in which they are installed and therefore, the application of the reduced rate of VAT isn’t precluded in respect of the repair and maintenance services for such lifts, provided that those services are carried out under a works contract and that rate is only applied to the labour.

The tax authority brought an appeal against the judgement of 16 October 2017 before the supreme administrative court. In support of its appeal, the tax authority submits that the reduced rate of VAT is to be applied to certain works contracts relating to immovable property for residential use, excluding materials which constitute a significant part of the service supplied. The referring court is asking the CJEU whether ‘renovation and repairing of private dwellings’ covers repair and renovation services for lifts in residential buildings.

The reduced rate of VAT is authorised to apply to services relating to the ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the services supplied’. These words must be interpreted uniformly and in accordance with their meaning in everyday language. The words ‘repairing’ and ‘renovation’ refer to the restoration of a damaged object and the refurbishment of an object. Such services are characterised by their occasional nature so that maintenance services supplied on a regular and continuous basis cannot fall within the reduced rate provisions. Accordingly, it must be concluded that the provision covers repair and renovation services for lifts in residential buildings, excluding maintenance services for such lifts.

Constable Comment: This case highlights the complexity of the VAT law regarding land and buildings and installed goods. Certain services within the construction industry can be either zero rated or reduced rated, however these are always subject to strict conditions. If a business applies the wrong VAT treatment it could potentially incur VAT assessments and penalties. Therefore, where there is significant amounts of VAT involved in a land and building related service, we would always recommend seeking professional advice. Constable VAT has relevant experience and have VAT land and property specialists who would be happy to assist.

Supreme Court 

2. Right to input tax recovery and exempt postage services

The case concerns the right of Zipvit to deduct input VAT due or paid by it on supplies of services to it by Royal Mail, so far as those supplies are used for Zipvit’s taxable supplies of goods or services to a consumer.

The general terms and conditions governing the supply contract between the supplier and Zipvit provided that it should pay the commercial price for the supply, plus such amount of VAT as was chargeable in respect of the supply. The supply should have been treated as standard rated for VAT purposes. Zipvit should have been charged VAT assessed at the relevant percentage of the commercial price for the supply.

However, at the time of the supply, Zipvit and Royal Mail understood that the supply was exempt from VAT. Zipvit was only charged, and it only paid, a sum equal to the commercial price for the supply. The invoices relating to the supplies specified the supplies as VAT exempt and indicated that no VAT was due in respect of them. However, this was incorrect. HMRC also misunderstood the position in believing that the supplies were VAT exempt. HMRC also contributed to that misunderstanding by issuing guidance containing statements to the effect that the supplies in question were VAT exempt.

The effect of the mistake is that Zipvit has only paid the amounts equivalent to the commercial price for each supply, and there is now no prospect that it can be made to pay the additional amount equivalent to the VAT element of the total price which should have been charged and paid in respect of the supplies. Similarly, Royal Mail has not accounted for or paid any VAT due in respect of the supplies made, and there is no prospect that it can now be made to account for the VAT it should have charged to HMRC.

Zipvit maintains that it is entitled to make a claim to deduct as input VAT the VAT due in respect of the supplies in question, or a VAT element deemed by law to be included in the price charged by Royal Mail for each supply. This is Zipvit’s position even though no VAT was paid by it to Royal Mail.

HMRC contend that in the circumstances of this case there is no VAT due or paid in respect of the supplies so no claim can be made to recover input tax in relation to them.  The invoices relating to the supplies did not show that VAT was due, and since Zipvit at no stage held invoices which showed that VAT was due and its amount, it is not entitled to recover input tax in relation to the supplies.

Zipvit’s position is that VAT must have been treated as having been paid as part of the overall price, and that as all relevant facts are now known, and it can prove by other means the amount of VAT due or paid on each supply. The sums claimed by Zipvit as input VAT on the supplies received from Royal Mail amount to £415,746 plus interest.

The Supreme Court dismissed Zipvit’s appeal. Technical arguments involved issues around invoicing, whether VAT was due or paid, and HMRC’s discretion. The Supreme Court agreed with the Tribunals and Court of Appeal that any payment of VAT to Zipvit would have been an ‘unmerited windfall’ and concluded that ‘there was no sound basis on which it would have been appropriate to use public monies to make any such payment’.

Constable Comment: This case has been ongoing for 13 years following Zipvit’s initial request in 2009 for a refund of input VAT on supplies that were incorrectly treated as VAT exempt, and for which no VAT invoice was held, or VAT charged by Royal Mail. Zipvit argued that the prices it paid for supplies received must be treated as having included a VAT element because these are standard rated supplies. The Courts disagreed with this technical assessment and this case demonstrates how interesting and complex VAT can be.

The decision notes that this is a test case and whilst Zipvit’s claim is not insignificant, £415,746 plus interest, there are several cases stood behind this lead decision with estimated total claims of between £500million and £1 billion which could had been a costly outcome if Zipvit had been successful, and those other claims succeeded.   

FTT

3. Time limits and Assessments

50 Five (UK) Limited appealed to the FTT in respect of assessments raised by HMRC against the company prior to the date on which it was purchased by the present owners. The present owners were not made aware of the assessment at the time of purchase as it had not been disclosed to them as part of the due diligence undertaken at the time.

50 Five (UK) Limited’s business is that of supply and installation of heating and hot water systems pursuant to which customers are supplied with fully installed systems. The appellant does not ask its customers to separately source the parts for such systems and then simply fit them.

50 Five (UK) Limited accepted that they are fitters/installers of heating and water systems who supply the parts as a composite element of what they do, HMRC were correct to assess them to VAT and the VAT assessment will become payable with interest.

The tribunal decided that there was no reasonable prospect of the appeal succeeding and that accordingly the appeal should be struck out.

Constable Comment: This was an unfortunate case involving the purchase of a business which received a VAT assessment. The new owners were not aware of the VAT assessment because this was not disclosed to them as part of the due diligence process. Whilst the Tribunal had sympathy that the VAT assessment was a surprise to the new owners, the FTT can be of no assistance in resolving this dispute, it can only make a ruling based on the correct VAT treatment. This case certainly shows the importance of performing a high-level due diligence exercise before purchasing a business, including VAT, to avoid any potential hidden VAT liabilities, the business has. Constable VAT has significant experience of carrying out due diligence for business sales and verifying the VAT accounting history and liabilities of the business. Constable VAT recently issued a blog on VAT due diligence which can be viewed here.


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


 

Land Promotion – What are the key VAT considerations ?

Land Promotion Agreements have become a widely used model by landowners for delivering a maximised return for potential development land, by utilising a promoter to navigate the often-complex planning process to achieve planning permission and market the land ahead of an eventual sale.

The promoter will promote the land within the context of a local development framework plan and will apply for planning permission. It will be responsible for the associated costs and, once planning permission is granted, the promoter will also usually fund the marketing costs in respect of the land for sale. The promoter is often remunerated based on a pre-agreed percentage share of the development site’s sale value. This is usually a significant VAT bearing cost to the landowner, payment of which is due once the site is sold, with the benefit of planning permission, to a developer.

There are several considerations for a landowner when entering into such an agreement. A fundamental consideration is the VAT implications and, in particular, the ‘option to tax’. Timing is of the utmost importance, and it is imperative that advice is sought early, and all necessary steps implemented diligently. In this article we explore some of the considerations surrounding VAT and the option to tax for landowners entering into a land promotion agreement.

VAT

VAT incurred on expenditure can only be recovered to the extent that the expenditure relates to taxable supplies a business makes or intends to make. The intention will normally dictate whether or not the business can recover the VAT incurred on the development costs.

The grant or surrender of an interest in, right over or licence to occupy land (such as land for development) is generally exempt from VAT; however, it is possible for a landowner to opt to tax the land to make an onward taxable supply.

The option to tax provisions allows for a person to tax certain supplies of land which would otherwise be exempt from VAT. The purpose of the option to tax is to allow the recovery of input tax which may otherwise be lost. Therefore, opting to tax should allow the landowner recovery of VAT incurred on costs (such as promoter fees) incurred in relation to the eventual taxable sale of the land.

There are two stages in opting to tax:

  1. Making the decision to opt which may take place at a board meeting or similar, or less formally.
  2. Notifying HMRC of the decision within strict time limits.

Key considerations

There are a number of key points to be considered ahead of any land sale and the making of an option to tax. This is not an exhaustive list but some of the key considerations can include:

Is it beneficial to opt to tax?

Whilst opting to tax should allow the recovery of input VAT incurred on the promoter’s fees and other sales related costs there are some supplies where, even if an option to tax has been made and notified, the option to tax will be disapplied and a VAT exempt supply will still occur. This includes certain supplies to housing associations and DIY builders for development, as well as supplies falling within VAT anti-avoidance provisions involving connected parties where certain complex conditions are satisfied.

Is permission to opt to tax required?

If the landowner has made, or intends to make, any exempt supplies of the land or buildings within the ten years prior to the date it wishes the option to take effect, the landowner will need HMRC’s written permission to opt to tax unless they meet one or more of the automatic permission conditions.

Understanding legal and beneficial ownership – who should VAT register and opt to tax the land?

Where there is a legal owner of the land but the benefit of the income from the land passes to a different beneficial owner, for VAT purposes, it is the beneficial owner who is making the supply of the land or building. There are two potential issues that can arise in scenarios such as this, involving legal and beneficial owners.

  • Input tax – If the parties entering into the promotion agreement do not match those who will benefit from the income this can raise the question of who will be receiving any supplies under that agreement. This can potentially impact an entitlement to input tax recovery.
  • Option to tax – Another issue that may arise is if the promotion agreement does not recognise that the land is an asset belonging to the beneficial owners, this could lead to questions at the time of sale if VAT is to be added to the price. This should be possible to address at the time of the sale, but it is important that this process is managed carefully.

Timing?

It is important to remember that once an option to tax has been made it cannot normally be revoked for 20 years. Therefore, even if the land was not sold as intended in this situation or planning permission was not obtained, any future supplies by the landowner of this land will likely be subject to VAT at the standard rate, except in very limited circumstances. In terms of timings, the landowner may wish to wait until planning permission is granted before opting to tax (and seeking permission to opt to tax from HMRC if necessary), this is sometimes the preferred approach as the option will apply even if the intended sale does not go ahead.

Whether the landowner should opt to tax now or later will depend on how firm the landowner’s intentions are, whether they wish to claim back VAT incurred promptly and whether permission to opt to tax is required.

A purchaser will typically want a copy of HMRC’s written acknowledgment accepting the landowner’s option to tax. At the time of writing there are significant delays across HMRC departments and the processing of option to tax notifications. It is possible to request that a notification can be dealt with urgently where a sale is dependent on the option to tax and certain condition met and information provided. This should be factored into the process when determining the most appropriate time to make an option to tax.

Assistance

Constable VAT liaises closely with the landowners’ advisers to ensure that all the necessary points are considered and any changes to the structure or timing of the sale is reflected in the VAT implementation.

If you are entering into a land promotion agreement, then specialist VAT assistance will be highly beneficial. Sums involved can be significant and it is important VAT advice is sought from the outset of a potential deal. Please contact Laura Krickova, or your usual Constable VAT partner, if you would like to discuss how Constable VAT can offer help with this process.


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


 

Constable VAT Focus 5 May 2022

HMRC NEWS

Certificate of status of taxable person
A UK business registered for VAT that is claiming a VAT refund in another country can ask HMRC for a certificate of status to confirm they are trading in the UK. From 1 May 2022, HMRC has changed the way it issues a certificate of status of taxable person to UK businesses and the above guidance has been updated to include the new process for obtaining a certificate.

Apply for the Fulfilment House Due Diligence Scheme
The guidance above helps sellers established outside the UK find out if they need to register to store goods in the UK. HMRC has updated this guidance for new owners of existing approved businesses.

Motoring expenses (VAT Notice 700/64)
HMRC has recently updated the above guidance to include changes that came into effect from 1 April 2022 regarding early terminations of leases and the 50% block.

VAT road fuel scale charges from 1 May 2022 to 30 April 2023
The VAT road fuel scale charges have been amended with effect from 1 May 2022. Businesses must use the new scales from the start of the next prescribed accounting period beginning on or after 1 May 2022.

Register for the VAT Agricultural Flat Rate Scheme
HMRC has updated the above guidance to confirm that businesses already VAT registered will not need to submit a VAT1 but must still complete a VAT98 to register for the Agricultural Flat Rate Scheme.

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.

CJEU

1. Multi-Purpose Vouchers

This case concerned DSAB Destination Stockholm AB (DSAB) and the supply of a ‘city card’ to tourists visiting Stockholm, Sweden. The card gives the cardholder the right to be admitted to around 60 attractions, as well as passenger transport services, for a limited period of time and up to a certain value. The card can be used as a means of payment for the attractions and services, some of which are subject to VAT at 6% to 25% whilst some are VAT exempt.

The Swedish tax authorities took the view that the card issued is not a “multi-purpose voucher” (MPV) under the EU law. It argued that the definition of voucher states it must have a certain nominal value or relate to certain specified supplies of goods or services.

DSAB on the other hand argued that the card was a voucher, arguing that the suppliers were obliged to accept the card as a means of payment and that the conditions applicable to the cardholders state which services may be paid for with the card. Additionally, the card qualified as an MPV as it can be used to obtain supplies chargeable to differing VAT rates. As a result of the dispute, the question referred to the CJEU was:

  • Must Article 30(a) of the VAT Directive, be interpreted as meaning that a card which gives the cardholder the right to receive various services at a given place for a limited period of time and up to a certain value constitutes a voucher and, in such circumstances, constitutes a multi-purpose voucher?’

The CJEU first considered whether the card is a voucher. It stated that there are two conditions for a card to be a voucher. First, there should be an obligation to accept it as consideration and second, the goods or services to be supplied, or the identity of the supplier, is indicated on the card or terms and conditions relating to the card. The CJEU confirmed that the card issued by DSAB met both these conditions.

With regards to the question of whether the card is an MPV, the CJEU stated that any vouchers that are not single purpose vouchers, should be considered as multi-purpose vouchers. A single purpose voucher is one where the place of supply and VAT due on the goods and services is known at the time of issue. The card issued by DSAB allows access to various supplies of services which are subject to different rates of VAT or are VAT exempt, therefore it is impossible to predict in advance which supplies of services will be selected by the cardholder, on this basis the card should be considered a multipurpose voucher.

The CJEU concluded that Article 30a of the VAT Directive must be interpreted as meaning that an instrument which gives the bearer thereof the right to benefit from various services at a given place, for a limited period and up to a certain amount, may constitute a ‘voucher’ even if on account of the limited validity period of that instrument, an average consumer cannot take advantage of all the services offered. That instrument constitutes a ‘multi-purpose voucher’ since the VAT due on those services is not known at the time of issuance of that instrument.

Constable Comment:  This is the first time the CJEU has ruled on the new definitions of “voucher” and “multi-purpose voucher” for VAT purposes as described in the new voucher rules of the VAT Directive applicable from 1 January 2019. The CJEU confirmed the fact that there is a limited period of validity of the card is not relevant for its classification as a voucher. Additionally, it classifies as a MPV as the VAT payable on those services is not known at the time of issue of the card.

FTT

2. Insurance intermediary supplies – supply of Black Boxes?

This case concerned WTGIL Limited (“Ingenie”), an insurance intermediary which develops, markets, and sells telematics car insurance (known as black box insurance). Ingenie is not an insurer. As a condition of the insurance, a telematics device must be fitted to the policyholder’s car. Ingenie provides the telematics device and arranges for it to be fitted in the customers vehicles. The device captures information about how the car is being driven, Ingenie collects and analyses the data from the device and provides this data to the policyholder and insurer. The purpose of providing such data is to enable the policyholder to improve their driving and thus obtain cheaper car insurance.

In 2018 Ingenie made a claim for a refund of £2,084,149 input tax incurred in relation to the provision and fitting of the devices. This was on the basis that the provision of fitting of devices were taxable supplies, whether or not for consideration, and the input tax was attributable to such taxable supplies. HMRC rejected the claim on the grounds that the commission paid by the insurers to Ingenie was consideration for exempt supplies of insurance intermediary services and any input tax directly linked to the supply of the device was irrecoverable.

The first issue before the Tribunal was whether Ingenie makes supplies of the device and related services to the policyholders for consideration. Both the contractual arrangements and the economic and commercial reality of the transactions were considered, and the Tribunal held there is no supply of the devices or any services relating to the devices by Ingenie to the policyholder for VAT purposes.

The Tribunal considered that there was no supply of goods by Ingenie and noted that the Principal VAT Directive provides that a supply of goods for VAT purposes means the transfer of the right to dispose of tangible property as owner. The policy booklet confirmed that the policyholder does not obtain any right to dispose of the device at any point during the time of policy. Additionally, the device did not pass to the insurer.

The Tribunal stated that although there was no supply of goods that does not mean that there is no supply in relation to the device. Ingenie agreed to arrange for a device to be installed in the policyholder’s car and then to use it to collect the telematics data which Ingenie used to give feedback to the policyholder and to provide more detailed information to the insurer. Those activities may constitute supplies of services but only if made in return for consideration. However, the Tribunal noted that the contract between the insurer and the policyholder states that the policyholder will not be charged for their first device, or its fitting, provided they do not cancel their policy during the first period of insurance. The policy booklet also states that the policyholder is not liable for the cost of transmitting data to and from the device.

As the Tribunal considered that there was no supply of the devices or any services relating to the devices by Ingenie to the policyholder for VAT purposes, the second issue before the Tribunal was whether Ingenie made a deemed supply of goods when it provided the device to the policyholders. It considered a deemed supply only arises where the taxable person is entitled to a full or partial recovery of the input VAT incurred on the assets concerned and the deemed supply is necessary to ensure that the goods are not retained or consumed without bearing VAT. As Ingenie did not recover any input VAT in relation to the devices, there was no deemed supply of goods when title to a device passes to the policyholder after the insurance has lapsed or been cancelled. The Tribunal also considered that the devices were acquired and provided to the policyholder by Ingenie for the purposes of its own business in order to meet its obligations under the terms and conditions. It appeared to the Tribunal that rather than disposing of the device when the insurance ends, Ingenie merely abandons any claim to it because it no longer has any value or serves any purpose for Ingenie.

As Ingenie was not viewed as making supplies or deemed supplies to the policyholders the appeal was dismissed.

Constable Comment: This case considered whether a business had made taxable supplies or deemed supplies to the insurance policyholder to allow input VAT recovery. Had the court decided that a taxable supply or deemed supply had been made it would have been necessary to consider how the VAT chargeable on such a supply should be calculated. In this case, as Ingenie was not viewed as making supplies to the policyholder, the Tribunal did not need to address the submissions made by counsel on the value of any non-monetary consideration and whether it could be expressed in money terms.


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.


 

Constable VAT Focus 21 April 2022

HMRC NEWS

Energy-saving materials and heating equipment (VAT Notice 708/6)
The above guidance sets out how to account for VAT for contractors or subcontractors when installing energy saving materials and grant funded heating equipment. It has recently been updated with information about legislative changes effective from 1 April 2022 to include guidance on when the zero, reduced and standard rates apply to the installation of energy saving materials in Great Britain and Northern Ireland.

Get your postponed import VAT statement
Information about how to access statements older than 6 months old has been temporarily removed due to a technical issue with older statements not being available automatically. An alternative method for accessing statements older than 6 months will be published soon.

RCB 7 2022 Repayment of VAT on imports of dental prostheses
The government announced at Autumn Budget 2021, that the import of dental prostheses would be exempt from VAT if the prostheses are imported on behalf of or by registered:

  • dentists
  • dental care professionals

Importers who fell within that description can now retrospectively reclaim overpaid VAT from 1 January 2021.

This brief explains how businesses can claim a repayment of any overpaid import VAT on imports made between 1 January 2021 and 27 October 2021

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.

CJEU

1. Place of supply of services and fixed establishment

The dispute in this case was between Berlin Chemie A. Menarini SRL (‘BC Romania’) and the Romanian tax authorities. BC Romania is a subsidiary of Berlin Chemie AG (‘BC Germany’) which was the sole shareholder. BC Romania had a contract to actively promote the products of BC Germany (its only customer) in Romania through marketing activities.  BC Romania made charges to BC Germany for its services and did not charge Romanian VAT as BC Germany had no Romanian fixed establishment and the services were treated as outside the scope of Romanian VAT.

The Romanian tax authorities took the view that BC Germany had a fixed establishment in Romania as a result of its ownership of BC Romania, which the taxpayer disputed.  If this were the case BC Romania would have to add Romanian VAT to its charges. The question referred to the CJEU was whether it is necessary for the human and technical resources employed by a company in that Member State, to belong to it, or is it sufficient for the company to have immediate and permanent access to such human and technical resources through another affiliated company which it controls.

The CJEU confirmed that the legal provisions do not provide any detail as to whether human and technical resources must belong to a company in order for a fixed establishment to arise. However, it highlighted that a fixed establishment required a sufficient degree of permanence and a suitable structure in terms of technical and human resources. The classification of a fixed establishment cannot depend solely on the legal status of the entity, meaning that merely owning a subsidiary does not create a fixed establishment.

The CJEU stated that it is assumed a company would use the technical and human resources at its disposal for its own needs. In the absence of contractual provisions allowing the German company to use the technical and human resources of the Romanian company as if they were owned by the German company, the Germany company does not have a fixed establishment in Romania.

The CJEU concluded that a company which has its registered office in one Member State does not have a fixed establishment in another Member State where it owns a subsidiary there that makes available to it human and technical resources under contracts by means of which that subsidiary provides, exclusively to it, marketing, regulatory, advertising and representation services that are capable of having a direct influence on the volume of its sales.

Constable Comment: This case considered whether a subsidiary of a company could create a fixed establishment for that company in another Member State. Had the court decided that it did this would have had implications for companies receiving cross border supplies from subsidiary companies and could have led to more businesses having fixed establishments in other EU locations.  This would impact on the place of supply of services and the VAT treatment. Where a business makes cross border supplies of goods or services, we would recommend seeking professional advice to ensure the correct place of supply rules are followed, including fixed establishment implications.

First Tier Tax Tribunal

2. Dishonest Input VAT deductions

This case concerned HMRC’s refusal of Grantham Ceilings and Interiors Ltd’s (GC’s) claim for recovery of input tax of £268,429 incurred on supplies received from an associated company, Grantham Holdings Limited (Holdings).  GC and Holdings had common directors. Holdings charged GC a management fee for the provision of services, which was subject to VAT. GC claimed the VAT charged as input VAT, but Holdings went into liquidation after less than a year and did not pay output VAT due to HMRC.

HMRC denied the input tax claim by GC on the grounds that either GC exercised the right to deduct for fraudulent or abusive ends, or the transactions were connected with fraudulent evasion of VAT and GC knew or should have known that this was the case.

GC appealed HMRC’s decision on the following grounds:

  • Holdings was established in order to manage and implement a new payment bonus scheme, there was no intention to use the company for fraud or abusive ends,
  • Where GC has not paid Holdings in full, bad debt relief provisions were applied and the liquidator of Holdings is pursuing GC for settlement of the outstanding amounts as a debtor,
  • At the time of supplies made by Holdings to GC it was not known that, due to a serious problem with the contracts being undertaken by GC, substantial cash flow issues would occur. Therefore, GC could not have reasonable known that the commercial issues of one contract would cause the liquidation of Holdings. The facts did not involve fraud but unfortunate commercial pressures.

HMRC argued that the input tax claims were fraudulent and the companies’ common directors would have known that Holdings would not account for output VAT due on the management fees charged to GC.

The Tribunal reviewed the evidence presented to them and concluded that GC made the VAT reclaim knowing that Holdings would not account for the output VAT to HMRC, which was considered dishonest. The Tribunal recognised that GC was facing real commercial and financial pressures but despite advice to do so, it failed to take the open and honest course of contacting HMRC to explain the problems faces. The appeal was therefore dismissed and GC is not entitled to the input tax claimed.

Constable Comment: This case highlights the importance of VAT compliance. If a taxpayer knew or should have known they were involved with fraudulent transactions, HMRC can deny input tax claims and penalties may also arise.  We always recommend, as established in this case, that businesses take an open and honest approach in dealing with HMRC seeking professional advice and contacting HMRC to discuss any VAT issues in order to minimise the risk of VAT liabilities and penalties.

3. VAT on take-away food and drink

Mangio Ltd (Mangio) sells hot and cold food and drink both for take-away and for consumption at a small number of seats on its premises

HMRC raised a ‘best judgement’ assessment of £18,063 on the basis that it did not accept Mangio’s breakdown of sales between standard rated items, such as hot food, and zero rated items including cold take away foods. Mangio appealed arguing that the assessment was too high and it should be £8,096.

Take away businesses need to be able to distinguish between different items sold as they may attract different VAT liabilities. Mangio’s till system did not distinguish between customers eating in the shop (giving rise to standard rated supplies) and zero-rated sales such as cold take away food.  HMRC identified the following errors leading to the assessment:

  • Eat in sales were not recorded and as a result cold food consumed on premises was incorrectly zero rated.
  • Toasted sandwiches (which should have been standard rated as hot food) were recorded as cold food and were zero rated.
  • All orders for delivery were zero rated despite the sales involving cold and hot food.
  • Pasta meals with salad and bread were considered a single supply for VAT purposes and subject to standard rate VAT.

The Officer’s best judgment assessment was calculated by selecting five days, analysing the sales data and working out the standard rated sales, as a proportion of overall sales during that period. HMRC found that 82% of the sales were standard rated and the percentage was applied to the periods in dispute to calculate the VAT due.

Mangio argued that best judgement had not been used as the business had expanded substantially since the period considered and the calculation did not take into consideration factors such as weather conditions.

The Tribunal considered the assessment and upheld that it was made to best judgment and there was no suggestion of any wrongdoing by HMRC. The assessment was not arbitrary in nature, the test days considered were within the relevant periods and there was no evidence submitted from Mangio on the ratio of standard to zero rated sales applied.

The Tribunal also stated that whilst it was accepted that the business underwent considerable expansions during the relevant periods, Mangio’s analysis does not reveal a change in the ratio of standard to zero rated sales which could affect the assessment. Therefore, the appeal was dismissed.

Constable Comment: This case highlights the importance of correctly identifying the VAT liability of supplies where this is complex, such as in the case of supplies of food where VAT treatment may vary depending on whether the items are for take-away or are consumed on the premises. Errors can lead to VAT liabilities and potential penalties. If your business supplies food or catering services you should ensure that your accounting processes are robust and can support the VAT treatment of supplies made. Constable VAT are happy to provide assistance in both determining the VAT liability of supplies and advice on calculating the amount of VAT due.


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.


 

Constable VAT Focus 7 April 2022

HMRC NEWS

Hospitality, holiday accommodation and attractions

The temporary reduced rate which applied to hospitality, holiday accommodation and attractions, introduced as a result of COVID-19, ended on 31 March 2022. From 1 April 2022 the normal VAT rules apply for these supplies and VAT should be charged at the standard rate.

The end of reduced rating will affect areas such as entrance to attractions, pitches for holiday caravans and associated facilities, catering and takeaway food, hotels and holiday accommodation. The relevant guidance has been updated to reflect the end of the temporary application of reduced rating.

Making Tax Digital
The HMRC guidance about Making Tax Digital (MTD) has been updated to reflect that VAT registered businesses with taxable turnover below the registration threshold will now also need to follow the MTD rules from 1 April 2022 for VAT. Additionally, as further support to those not already MTD compliant, HMRC has released a new guidance which sets out when you should sign up and start using MTD for VAT. This new guidance can be found here.

Completing a One Stop Shop VAT Return
The above guidance sets out how to fill in a One Stop Shop (OSS) VAT return if you are registered for the Union scheme and make distance sales from Northern Ireland to the EU. HMRC has now updated the guidance with new information about what should not be included on the OSS VAT return.

Prepare for the second-hand motor vehicle export refund scheme
HMRC has now published guidance about the new scheme to claim a VAT refund if you are a motor dealer who buys second hand motor vehicles in Great Britain and moves them to Northern Ireland or the EU for resale.

CASE REVIEW

FTT

1. VAT Zero rating: cake or confectionery

This case concerned Glanbia Milk Limited, appealing against HMRC making an assessment of VAT as a result of concluding that certain supplies of food goods by a company in the appellants VAT group had been incorrectly zero rated rather than standard rated.

The goods were varieties of food products described as flapjacks containing oats, syrups and protein. The goods were all confectionery detailed within Excepted Items, Item 2, Group 1, Schedule 8 VATA 1994, however the dispute was whether the products were ‘cakes’ or confectionery, if cakes, they were correctly zero rated or they were confectionary in which case they were to be standard rated.

Within the appellants VAT group, there were multiple companies and the supply chain involved Glanbia Performance Nutrition (UK) Limited (GNUK) and Glanbia Nutritionals (Ireland) Limited (GNIL). GNUK manufactured the products and sold it to GNIL, which then sold some to third parties and supplied some of them back to GNUK. GNUK then sold the products acquired back to third party customers.

The appellant’s grounds of appeal were that:

  • The products were correctly zero rated as cakes within the meaning of excepted items Item 2, Group 1, Schedule 8, VATA 1994
  • Alternatively, if the products did fall to be standard rated, the VAT assessments should be reduced by the amount of input tax that would inevitably arise from that classification.

The Tribunal first examined the product to determine whether it has sufficient characteristics of a cake to fall within that definition for zero rating. The Tribunal considered various factors, previously set out in relevant case law, to confirm its view including:

Ingredients and manufacturing technique: It was established that an ordinary person would consider a cake to be something which is baked, made from a thin batter containing flour and eggs. The appellants product differed from this perception in that they contained no or only very small amount of flour, oil, eggs. In addition, an ordinary person would consider it highly unusual for a cake to contain protein let alone in large quantities and the product does not undergo any baking as part of the production.

Texture and appearance: The Tribunal was satisfied that an ordinary person would view the product as a bar, fruit bar or an energy bar.

Function and typical consumption: A cake would ordinarily be consumed sitting down, for example as a dessert to a meal or at an afternoon tea, it can be consumed as a snack on the go but that is not the typical method of consumption. It was stated that the appellant’s products would be wholly out of place as a dessert, at an afternoon tea or a casual social function.

Marketing: All the products were targeted at consumers in the sports nutrition category and the brands were affiliated to sports nutrition. The products were not placed in the cake sections of supermarkets along with other cake products. Also, the word ‘cake’ does not appear on the wrapping of the product, but the word ‘protein’ was featured prominently on the wrapping of the product.

As a result of the above, the Tribunal concluded that the products were not cakes but confectionery and therefore standard rated. With regards to input VAT recovery, the Tribunal confirmed that the appellant cannot recover input tax deemed to have been paid by GNUK in the absence of a fully compliant VAT invoice issued by GNIL showing the correct amount of VAT paid in relation to those supplies. There were no such invoices present, therefore the appeal was dismissed.

Constable Comment: This case demonstrates the importance of examining all relevant factors to be taken into consideration when determining the VAT liability of a food product. Often these are quite subjective. HMRC has previously challenged many ‘confectionery’ products wrongly classified as zero rated cakes, as they should have been standard rated food products. This could lead to significant VAT assessments raised and potential penalties. We recommend that if your business is unclear on the correct VAT liability of certain food products, it is important to seek professional advice. Constable VAT has a wide range of relevant experience in dealing with zero rated food products and would be happy to assist with any queries.

2. Partial Exemption: Standard Method Override

This case concerned the method for the recovery of residual input tax by the appellant, Hippodrome Casino Limited (HCL). HCL makes taxable supplies of hospitality and entertainment including a 326 seat theatre, restaurants and bars. However, the majority of HCL’s income was from VAT exempt gaming and betting activities from the casino.

HCL incurred large amounts of residual input tax on expenses that cannot be directly attributed either to taxable or exempt activities such as rent, utilities, security and other costs. HCL argued that the actual economic use of its overhead expenditure in making taxable and exempt supplies, based on a floor space apportionment, differs substantially from a standard method attribution based on the turnover, as a result of that an override calculation is necessary (the floor space approach was rational and fairer). Revenue generated from the area in a restaurant compared to the revenue generated by gaming areas was not proportionate. Floorspace better represented use of input VAT on costs.

According to legislation, a difference is ‘substantial’ if it exceeds £50,000 or is greater than £25,000 and 50% of the amount of residual input tax. HCL presented the Tribunal with a partial exemption method calculation primarily based on the floor area of the building premises and set out the figures calculated based on the standard method override (SMO) use based calculation and the standard method (SM). The average difference per annum was £548,000 clearly exceeding the £50,000.

The Tribunal have reviewed the business activities and agreed with HCL, the standard method does not provide a fair and reasonable apportionment of residual input tax because the VAT exempt gaming activities generated a much higher turnover compared to the area used for that specific activity. For example, an electronic roulette machine could generate up to £400,000 turnover per annum and it would take up less space than a table at HCL’s steakhouse, that table generating £50,000 per annum.

As a result of this and other related discussions, the Tribunal concluded that the floor space method as set out in HCL’s SMO calculation provided was a fairer and reasonable proxy of its economic use of its overhead expenditure than the turnover based standard method, particularly given that the most of those overheads are all property related. HCL’s appeal was allowed.

Constable Comment: This case demonstrates the importance to businesses of reviewing their partial exemption recovery methods. Often the standard turnover-based methodology does not provide a fair and reasonable apportionment of residual input tax and could lead to large amounts of VAT becoming unfairly irrecoverable. A special method may offer a fairer and logical higher VAT recovery. HMRC will often agree such a special method produces a logical, fair and reasonable outcome but facilitating the process with evidence and suitable presentation is of huge benefit. If you or your business wishes to review partial exemption methods Constable VAT would be happy to assist.

3. VAT Penalty: deliberate or careless

This case concerned the appellant, Atlas Garage (Morpeth) Limited (Atlas), appealing against a penalty issued by HMRC, on the grounds that its behaviour was not deliberate and that the percentage reductions for quality of disclosure has not been correctly applied. Atlas did not dispute that there were inaccuracies in the VAT return. Atlas is a car dealership and HMRC carried out a pre-arranged VAT assurance visit at their premises. HMRC raised a VAT assessment which was appealed by Atlas and the following issues are to decided by the Tribunal:

  • Whether the behaviour of Atlas met the standard of ‘deliberate behaviour’
  • Whether HMRC’s application of reductions to the penalties for telling, helping and giving has been made correctly
  • Whether a 10% restriction on the reductions was correctly applied for the length of delay in remedying the inaccuracy
  • Whether the potential lost revenue (PLR) for the penalties has been correctly calculated

With regards to the deliberate behaviour, HMRC argued this on the grounds that Atlas made inaccuracies of the same nature in 2014 and was advised how to account for hire purchase sales correctly but had not made any changes to the procedures and was still accounting for hire purchase in the same incorrect method. Atlas argued that, whilst it agrees there are inaccuracies, they are not deliberate. Atlas confirmed that the errors were caused by limitations in the system of particular finance providers, which do not allow them to put the appropriate figures in the relevant boxes, so that the automatically generated information that flows into their VAT returns system is incorrect. The Tribunal concluded that HMRC’s arguments did not meet the burden of demonstrating that Atlas consciously and intentionally submitted incorrect returns therefore the errors are careless not deliberate.

Atlas argued that the correct reduction of penalties was not given. HMRC provided part mitigation for telling and helping. Their argument for part mitigation was documents not provided and was slow to be produced. Atlas provided emails as evidence where the officer was grateful for obtaining the files promptly and that confirmed that full reductions for telling and helping will be given. As a result, the Tribunal have stated full mitigation for telling and helping must be offered.

Where there is a significant delay between date of inaccuracy and date of disclosure, HMRC will restrict the maximum reduction by 10%. The Tribunal confirmed that there is nothing irrational about the policy and does not infringe on the statutory minimum and maximum penalty reductions therefore the application of the 10% restriction was affirmed.

The Tribunal substituted HMRC’s decision concluding the correct penalty was a penalty for a careless inaccuracy with full mitigation for telling, helping and giving, but the penalty mitigation is restricted by 10% as a result of the period between the inaccuracy and the disclosure.

The Tribunal having concluded that the deliberate penalty imposed by HMRC was incorrect set out the approach to apply a careless penalty of 10%. The calculation of potential lost revenue (PLR) and the net quarterly VAT errors amount were discussed in order that HMRC would apply the revised penalty rate the Tribunal had determined as appropriate.

Constable Comment: This case highlights the fact that the burden is on HMRC to prove that a taxable person has acted deliberately regarding inaccuracies and if the taxable person can demonstrate the inaccuracy arose as a result of careless behaviour, the penalty rate will be significantly lower. If your business receives a VAT assessment it is essential that the penalty risk is considered and managed. Careless penalties may range, depending on circumstances, between 0% and 30% of the potential lost revenue. Deliberate but unconcealed penalties may range from 20% to 70%. The penalty may be a significant value. Where we are asked to assist with regard to VAT errors, the penalty risk is an area which we seek to proactively manage seeking the best outcome possible.


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.


 

Constable VAT Focus 24 March 2022

HMRC NEWS

Changes to the VAT treatment of the installation of Energy Saving Materials in in Great Britain
HMRC has released The Value Added Tax (Installation of Energy-Saving Materials) Order 2022. This new measure introduces a time limited zero rate of VAT for the installation of certain types of energy saving materials (ESMs) in residential accommodation. The zero rate will be available for a period of 5 years and will then revert to the 5% reduced rate of VAT.

Revenue and Customs Brief 6 (2022): Lennartz mechanism and VAT accounting
HMRC has recently published this brand-new guidance. This explains what you must do if you have chosen to continue using the Lennartz mechanism and you have entered the arrangement before 22 January 2010.

Health professionals and pharmaceutical products (VAT Notice 701/57)
The above guidance sets out how to account for VAT on goods and services provided by registered health professionals, including doctors, dentists, nurses, and pharmacists. The notice has been updated with information, about nursing agencies’ concession, that was confirmed recently by the Court of Appeal.

VAT on compensation and early termination payments – upcoming changes from 1 April 2022

Revenue and Customs Brief 2(2022), issued earlier this year, announced the long-awaited amendments to HMRC’s guidance on compensation and early termination payments (see our blog on this topic here). We are now approaching the date when this new guidance will become effective.

The new guidance describes various factors that will help determine whether a payment is compensation or consideration. These include whether the event giving rise to the charge was reasonably expected, and whether the charge is covering the supplier’s additional costs or is clearly punitive. Any existing rulings which are inconsistent with the new guidance cannot be relied on from 1 April 2022 and businesses should consider whether there is a need to change the VAT accounting treatment of any payments received that may previously have been treated as outside the scope of VAT.

One area that may be impacted by these rule changes is fines levied for unauthorised parking, which have previously been accepted by HMRC to be outside the scope of VAT. The CJEU recently decided a Danish case, Apcoa Parking Danmark v Skatteministeriet (Case C-90/20) that may be relevant.

Apcoa operated car parks on behalf of their owners. It charged penalty fees for breaches of parking conditions. The case concerned the VAT treatment of those penalty fees. The CJEU decided the penalties were consideration for a VATable supply of services, being an extension of the original parking fee.

Prior to the revised guidance now outlined in HMRC guidance at VATSC05910 HMRC looked to the decision in Vehicle Control Services v HMRC (VCS) to determine the VAT treatment of parking fines. In VCS the Court held that such fees were outside the scope of VAT as damages for trespass or breach of contract.

The CJEU’s approach in Apcoa suggests that the analysis in VCS may have been wrong, with the CJEU stating that ‘the assessment of whether payment of a fee is made as consideration for a supply of services is a question of EU law which needs to be determined independently of the assessment made under national law.’

Following Brexit, the impact (or otherwise) of CJEU judgements is complex.  There are elements of EU law that are now “retained law” in the UK.  It is commonly accepted that all judgements pre-Brexit continue to have effect and that post Brexit judgements are to be considered.  HMRC considers parking fines in its new guidance stating:

Another example of a situation in which additional fees may be charged is parking. If the fee is for the additional use of the parking space it is further consideration for the supply of parking. HMRC’s policy position is that where a fine is substantial and punitive and is designed to deter a breach of the terms and conditions of parking it will be outside the scope of VAT as the reciprocity needed to link it to the supply is lacking. If on the other hand it is effectively an additional charge for occupying a space, then it would be a standard rated supply. The level of the fee for breaching the parking terms in comparison to the standard parking fee may be indicative of which category a particular fine would be in.

This indicates that the VAT treatment of parking fines will depend on whether the charge is a genuine fine or an additional charge for parking.

This is just one example of the complexities this new treatment will bring, and it is important that all businesses that may receive compensation or termination payments consider the guidance fully and take advice where necessary.

Constable Comment: Clarity on the VAT treatment of compensation and termination payments will take time, despite HMRC’s guidance. If the position is not clear there may be a multitude of commercial arrangements leaving plenty of scope for a difference of opinion and advice may be required.

CASE REVIEW

Upper Tribunal

1. HSBC VAT Grouping: Fixed Establishment?

This case concerned HSBC Bank Plc and 5 entities (referred to as the GSC’s) within the HSBC group carrying out global services for the group. The group companies were incorporated outside the UK and undertook various back-office operations, including call centre functions and payment processing. HMRC removed the GSC’s from the VAT group registration with effect from 1 October 2013 on the grounds that GCS’s have not been established or had a fixed establishment in the UK since that date and accordingly ceased to be eligible to be a member of the HSBC group VAT registration.

Article 11 of the Principal VAT Directive (PVD) requires two persons wishing to be in a VAT group registration to be ‘established in the territory of that Member State’ and section 43A of VATA states that two bodies are eligible ‘if each is established or has a fixed establishment’. HSBC argued that article 11 refers to the persons within the group collectively instead of each person individually; however, if it refers to each member, that means no more than the physical presence of a body corporate through its branch which it had in the UK which were also incorporated in the UK, therefore meeting the fixed establishment criteria.

HMRC argued that since there is no set definition of the above phrases regarding where a company is established, the expression should follow relevant case law instead. HMRC referred to cases which set out that a fixed establishment would require a real and genuine trading presence in the UK, and it must supply goods or services in its own right. A fixed establishment must also have sufficient permanent resources to be able to supply and receive goods and services.

The Upper Tribunal (UT) held that each person separately must be established in the UK. The UT has stated that the Implementing Regulations are not directly applicable as they relate to determining the place of supply, however confirmed that ‘they provide a helpful starting point’ when read in conjunction with CJEU case law. Unfortunately, the UT did not provide a meaning to the above expressions instead it confirmed that the ‘precise meaning of the terms “established” and “fixed establishment” in any given case is highly fact sensitive, and better determined in the context of all the relevant circumstances in any given case”.

In addition to the above, HSBC tried to argue that the measures which a member state may adopt under Article 11 to prevent tax evasion or avoidance, are limited to those needed to prevent tax evasion caused by an abusive practice under Halifax principles. Essentially, HSBC argued that HMRC’s protection of the revenue powers are limited to artificial Halifax abuse cases, this was not present in this case, therefore HRMC should not have been able to remove the members from the VAT group registration. The UT has rejected this argument and stated that HMRC’s protection of the revenue powers extend to the concept of avoidance arising from the Direct Cosmetics case which ‘confirmed that tax avoidance does not require an intention on the part of the taxpayer to avoid tax.’ This confirms that HMRC were not limited in this case and had the authority to remove the members from the VAT group registration.

The UT only agreed with HSBC regarding the final preliminary issue, it argued that where HMRC has changed its policy in relation to fixed establishment and VAT grouping, it should not terminate membership from a date before the change in policy took effect. The UT agreed with HSBC and concluded that HMRC’s primary decision notice could not reasonably have specified a date before the Commissioners 2014 policy change.

Constable VAT Comment: There are potential benefits and disadvantages to VAT grouping and careful consideration should be given to forming a group VAT registration or withdrawing or adding members to an existing group VAT registration. An advantage of VAT grouping is that supplies between group members are disregarded for VAT purposes. No VAT is charged on supplies of goods or services made between members of the VAT group registration. This can reduce the risk of VAT leakage if companies or businesses are not fully taxable for VAT purposes. Similarly, VAT grouping reduces the risk of VAT accounting errors arising in a situation where connected businesses overlook charging VAT on taxable supplies if the entities are separately VAT registered. With effect from 1 November 2019, the VAT group registration rules were amended to allow a VAT group to include partnerships and individuals who meet the VAT grouping requirements. HMRC has experienced significant delays in processing VAT group registration applications and issued updated guidance last month which can be viewed here.


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


 

Constable VAT Focus 10 March 2022

HMRC NEWS

Group and divisional registration (VAT Notice 700/2)
HMRC has recently updated its guidance on what to do while you are waiting for a response to a VAT group registration.   This was necessary due to significant delays by HMRC in processing applications.  A key point is that businesses that are already VAT registered are advised not to submit returns that fall due under their current VAT registration while waiting for their VAT group application to be processed.  The updated guidance states:

While you are waiting to receive your VAT grouping registration number, you may receive:

  • an automated assessment letter
  • letters asking for payment of any automated assessments
  • notification of a default surcharge because you have not filed your tax return

If you do, you will not be required to take any action in response to any of these notices because HMRC will automatically cancel them once your application is fully processed. HMRC will not take recovery action for any debts which come about as a result of you following this guidance, though other VAT debts may still subject to recovery actions.

This advice is welcome as previously HMRC had been giving conflicting guidance.  However, delays in processing applications may create problems that the revised guidance does not address, particularly for partly exempt businesses or where applicants have acted on previous instructions by HMRC to submit returns under an existing VAT registration number.  Taxpayers facing processing delays are advised to seek professional advice.

Revenue and Customs Brief 4 (2022): end-customer claim refunds of VAT wrongly charged
It has always been the case that a person who has been overcharged VAT by a supplier must seek a refund of that VAT from the supplier, not HMRC. Only the supplier would have a right to seek a rebate from HMRC.  However, the Court of Justice of the European Union had placed an obligation on HMRC to make direct refunds in exceptional circumstances, for example a supplier becoming insolvent.   Essentially this Brief announces that HMRC will in no circumstances make refunds to anyone other than the person that declared VAT in error.  It feels that it can take this stance because of Brexit.

This change will impact on few taxpayers.  It is frustrating, however, because HMRC failed to meet its legal obligation to introduce a straightforward refund system while the UK was within the EU.

As a wider point, it is worrying to see that HMRC has started to roll back taxpayer protections because of Brexit.  There are several instances of HMRC seeking to introduce unfair laws and policies and being prevented from doing so by the principle of equity enshrined in EU law.

Value Added Tax (Enforcement Related to Distance Selling and Miscellaneous Amendments) Regulations 2022
This is new guidance released by HMRC and the information and impact note is about the issues identified in amendments made to legislation to implement the VAT e-commerce package.

Notifying HMRC of an option to tax land and buildings
Form VAT1614A is required to notify HMRC of an option to tax land or buildings. HMRC has recently updated this form so that it can now be filled in online and printed afterwards. Also, the form has been updated at the “Previous exempt supplies” section and requires more information (bearing in mind that previous exempt supplies create the need to either meet an “automatic approval” condition or obtain HMRC’s permission to opt to tax).

CASE REVIEW

Court of Appeal

1. Extra Statutory Concession

This appeal concerned assessments raised by HMRC in the sum of £221,325 to First Alternative Medical Staffing Ltd and in the sum of £1,865,246 to Delta Nursing Agency, together referred to as the Appellants.

The Appellants provide nurses and other medical staff on temporary basis to hospitals and care homes.  They charged and accounted for VAT on the basis that they were acting as agents. This means they charged VAT only on the commission element of the amounts paid by their clients, not the full amount charged.

HMRC raised assessments on the basis that, as a matter of law, the full charge by the Appellants should have been subject to VAT.  In the past it had been possible to account for VAT on the commission element of the supply in such circumstances but HMRC policy had changed several years earlier.

In 2010 HMRC introduced a nursing agencies’ concession” (NAC).  The NAC allows nursing agencies (or employment businesses that provide nurses and midwives, as well as other health professionals) to exempt qualifying supplies of nursing staff and nursing auxiliaries supplied as a principal.   The Appellants took the view that in the period covered by the HMRC assessments the NAC was available and sought to apply it retroactively.

In summary:

  • the Appellants accounted for VAT on part of their charge operating an arrangement that had been withdrawn;
  • at the time the supplies were made, the Appellants failed to exempt supplies under a non-statutory concession (the NAC) that was available at that time; and
  • faced with large HMRC assessments, the Appellants argued that they should be allowed to apply the NAC retroactively.

The Court proceeded on the basis that the supplies would have been eligible for the NAC had it been applied at the time the services were supplied.

A non-statutory concession is, by definition, not a right enshrined in law.  It is a concessionary treatment that overrides the law.  If a taxpayer chooses not to apply it then that is not an error in the same way as a VAT accounting error, that the taxpayer can undo.  This fundamental principle underpinned the dispute.

The Appellants argued that the NAC gave rise to a legitimate expectation that they could exempt supplies to their clients retrospectively. They argued that the NAC contains no express references to a time limit, or qualification as to when reliance may be placed on it.  Had such a limitation been intended, this would have been easy to state.

HMRC’s position was that the NAC must be interpreted from the perspective of the ordinarily sophisticated taxpayer. With that in mind, HMRC argued that an ordinarily sophisticated taxpayer would understand perfectly well that to exempt a supply means neither charging, nor accounting for VAT on that supply.

The Court of Appeal agreed with HMRC, reaching the conclusion that an ordinarily sophisticated taxpayer would understand that the NAC required a choice to be made by a taxpayer at the latest by the time it invoices its client for that supply. The choice to exempt a supply under a concession must be made at the time of the supply.  If a different decision is made there is no legal basis to revisit the choice that was made.

The Court dismissed the appeal and held that the NAC cannot be relied on retrospectively.

Constable VAT’s comments:  This seems an unfair decision in the sense that if the appellants failed from the outset to charge VAT on the bulk of their charges then allowing them to operate a concession that would remove VAT from the entire charge would not seem unreasonable.  However, applying the law is not a matter of fairness and there was no basis in law to exempt the charge. 

We have sympathy for the Appellants’ position; however, the most important learning point is that VAT decisions often cannot be undone later however unfair the outcome of those decisions.   HMRC sees its duty as to simply apply the law – not to deliver a fair tax outcome.    Therefore when large sums of money are involved it is essential to understand all of the options and the implications of decisions before they are made.


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.


 

Constable VAT Focus 24 February 2022

HMRC NEWS

Revenue and Customs Brief 3 (2022): postponed VAT accounting and businesses registered under the Flat Rate Scheme
HMRC has recently published this brief which explains how businesses registered under the Flat Rate Scheme should account for import VAT using postponed VAT accounting from 1st June 2022.

How to fill in and submit your VAT Return (VAT Notice 700/12)
HMRC have updated their guidance and from 1st June 2022, businesses registered under the Flat Rate Scheme should no longer include imports accounted for under postponed VAT accounting within their flat rate turnover. These should be accounted for separately, outside of the Flat Rate Scheme.

Check your transit guarantee balance
HMRC have published new guidance regarding how to check your New Computerised Transit System (NCTS) guarantee balance.

Investment gold coins (VAT Notice 701/21A)
The above notice is a summary of gold considered as investment gold coins for VAT exemption. The UK list of coins recognised as investment gold coins has been added recently.

CASE REVIEW

Upper-tier Tax Tribunal

1. Taxable supplies and input tax recovery

The issue before the Tribunal was whether Y4 is entitled to credit for input VAT in connection with payments made to Mr Man and CL, to make good the costs they incurred by way of Royal Mail charges resulting from Y4’s use of Mr Man’s and CL’s Royal Mail accounts.  The FTT had previously held that Y4 was not entitled to input tax credit.  The UTT considered Y4’s appeal against that decision.

As established by the FTT, until 2013, Y4 used Royal Mail’s PPI service. The PPI scheme provided Y4 with access to preferential rates and required it to make daily declarations of the items it was sending by means of an online business account.  In June 2013 Royal Mail became concerned that Y4’s declarations were not accurate and suspended Y4’s access to the PPI scheme. Y4 agreed to pay Royal Mail £600,000 to compromise a claim for alleged under-declarations of postage.

To retain access to Royal Mail’s preferential rates, Y4 asked friends of Y4’s Company Secretary to set up Royal Mail accounts. This was done by Mr Pat Ning Man (Mr Man) and Colemead Limited (CL).

Mr Man opened the OBA account with Royal Mail in 2012 although this did not become active until July 2013. He then provided Y4 with the details of this account which enabled Y4 use it. Y4 made payments to Mr Man at least equal to sums that Royal Mail charged Mr Man. The FTT found that Y4 made other payments to Mr Man which were additional to the sums above.

Y4 prepared invoices, addressed to itself, recording sums payable to Mr Man. Mr Man played no part in dealing with Royal Mail and arranging for Y4’s goods to be delivered using Royal Mail’s network.  Mr Man had registered for VAT in 2013 but in 2015 cancelled that VAT registration with retroactive effect from the original registration date. The FTT made a finding that Mr Man never submitted any VAT returns.

CL opened an OBA with Royal Mail which was active from April 2014 until December 2016. CL also provided Y4 with access to their account so that Y4 could use the account as its own. Y4 paid CL by direct debit sums equal to those that Royal Mail charged CL. Y4 prepared invoices that were ostensibly then issued by CL to Y4.  CL played no active part in the arrangement. Y4 arranged for a firm of accountants to deal with CL’s VAT returns, which were signed by a director without being checked.

HMRC argued that neither Mr Man nor CL made taxable supplies to Y4 because there was no contractual relationship leading to reciprocal obligations.  As a result there was no direct link between the consideration that they received from Y4 and the provision of services. Accordingly, neither Mr Man nor CL was carrying on an economic activity. As a result, Y4 had no right to deduct input VAT.

Y4’s case was that Mr Man and CL had been undertaking an economic activity and made taxable supplies to Y4. The focus of Y4’s arguments appears to have been that payments made by Y4 exceeded the payments made by Mr Man and CL.

The FTT concluded that CL was not supplying services for a consideration and not carrying out an economic activity. Therefore, Y4 was not entitled to input tax credit on services received from CL. The FTT concluded similarly in respect of Mr Man. The FTT had concluded that Y4 was not carrying out an economic activity, basing that conclusion it appears in large part on the motivations of Mr Man and Colemead.  The relationship was entered into because of friendships and not as a means of obtaining income.

In dismissing the appeal, the UTT implied that Y4 perhaps omitted arguments at the FTT that would have required further findings of fact and may have had a better chance of success, stating:

Conceptually, Y4 could have chosen to make its case differently before the FTT. Instead of resting on the proposition that there was an arrangement for Y4 to pay Mr Man or Colemead “commission” or “income”, it might have chosen to argue that there was, at the very least, an arrangement for Y4 to pay “make whole” amounts. Even if those payments only enabled Mr Man or Colemead to secure cost recovery, rather than to make any kind of profit, Y4 might have sought to argue that the existence of an arrangement to pay these sums constituted consideration and indicated, moreover, that Mr Man and Colemead were carrying on economic activities.

However, the UTT went on to explain why it would not have allowed Y4 to introduce those different arguments on appeal to the UTT (had it sought to do so) and went on to reject the appeal broadly on the basis that it could not overturn findings of fact or consider new legal arguments.

Constable Comment:  This case adds little to the developed case law on what constitutes an economic activity.  What the case does clearly illustrate is the importance of ensuring that all relevant facts and legal arguments are addressed at the FTT.  We will never know whether the possible alternative arguments raised by the UTT in this case would have resulted in a different outcome.  The inference is that they may have done, otherwise why would the UTT have raised this tantalising point. It is also possible that the FTT’s written decision failed to capture faithfully all the nuance of Y4’s case.  A written decision is only a short distillation of the facts and legal arguments that have been made.     

FTT

2. Car boot sale pitch

This case concerned Rufforth Park Limited (RPL).  RPL appealed against a VAT assessment in the amount of £82,995. The point under appeal was whether the car boot sale pitches issued by RPL constitute to the grant of a VAT exempt interest in, right over or license to occupy land. Alternatively, was RPL’s supply a broader service and subject to the standard rate of VAT, as HMRC contended.

This has become an increasingly contentious area of VAT. Simplistically, most passive supplies of land are VAT exempt unless an option to tax has been made.  The issue is “At what point do other factors or additional services provided with the land change that classification?”

HMRC argued that the rental of the pitches at the car boot sale is more than a passive supply of land. They argued the supply is a provision of services, as RPL also supplies advertising, on site café, toilets, parking, capital improvements to the site to make it more attractive to buyers and cleaning of the site after events. HMRC argued that these events were expertly organised and run by RPL, relying on case law such as Craft Carnival, such that sellers were receiving a service rather than a pitch.

In considering the position the Tribunal contrasted the Craft Carnival case.  The Craft Carnival events were held at prestigious venues, electricity was available for all sellers, tables and chairs, as well as a choice of indoor or outdoor pitch was offered.

In RPL’s case, no chairs, tables, or electricity are provided. There is no provision of security. The toilet and refreshment facilities are basic. The related expenditure by RPL was maintenance rather than enhancing facilities. Therefore, the Tribunal concluded that the commercial and economic reality is that RPL supplies an exempt license to occupy a pitch. It observed that because the event was well organised and run for 40 years does not make it “expertly organised” in the terms HMRC suggested. RPL’s appeal against HMRC’s assessments was allowed.

Constable Comment:  This decision provides helpful guidance albeit, as a First-tier Tribunal case, it is not binding as far as HMRC’s dealing with other taxpayers is concerned.  However, it does not remove the fundamental problem that it has become almost impossible to identify a tipping point at which a supply of land becomes subject to VAT because of additional services enhancing that supply. This has become a real risk management issue, perhaps illustrated by the fact that HMRC had in the past ruled that RFL’s supplies are taxable, later withdrawing that ruling in favour of exemption (when RFL pointed out that competitors applied exemption) only to change its mind again. In that respect, it seems surprising that HMRC went on to assess VAT retroactively, having previously agreed exemption. The obvious question is “If HMRC keeps changing its mind and eventually makes the wrong decisions (based on this decision) how on earth are taxpayers expected to make the correct judgment?”  There is certainly a case to simplify the law but until that occurs it is wise to seek professional support in grappling with situations like this.

3. Evidence required for exports

The appellant carries on a business exporting designer goods to China.  HMRC raised an assessment for £379,280 on the grounds that the appellant did not hold satisfactory export evidence to allow zero-rating.

HMRC’s primary case for refusing zero-rating was that the requirement to clearly identify exported goods and their value within the export evidence was not met. The appellant used Parcelforce to export the goods and as part of the online booking they selected “personal effects” as the category and entered “clothes” into the description. HMRC considered this too vague. Also, the value of goods on the Parcelforce form was entered as £100 in every case, regardless of the contents of the package. The appellant explained that this was to reduce the risk that the goods would be stolen in transit, which was not questioned by the Tribunal.

In considering the arrangements, the Tribunal found that each parcel exported included the following details: the supplier, the client, tracking number, description of the items included and their individual price, and the total amount at the end of the list. These were referred to as packing lists and the appellant retained a copy of each packing lists and these were kept on a computer.

The Tribunal found that the packing lists can be cross referenced to the customer orders, the description of goods is not incorrect, and a more detailed description is identified in the packing lists.

With regards to the value of the goods, the Tribunal stated that the value is also stated clearly on the packing lists, therefore it concluded that both the goods and their value can be identified on supplementary evidence held by the appellant and therefore the goods can be zero rated.

Based on the above the appeal against HMRC’s assessments was allowed.

Constable Comment:  In this case there seems to have been no suggestion that the goods in question had not been exported and in previous dealings with HMRC the procedures/evidence had been acceptable.  Therefore, HMRC seems to have taken a very harsh approach to perceived procedural deficiencies.  Whatever the rights and wrongs of the appellants processes, there was clear evidence that exports had occurred and no indication of any revenue loss.  We would like to think that HMRC’s normal approach in that situation would be to ask the taxpayer to address the perceived deficiencies, not to raise assessments for VAT that HMRC probably realised was not due.  Compliance with administrative rules is important otherwise the VAT system is open to abuse.  However, historically HMRC tended to consider what those administrative rules are supposed to achieve and whether that purpose has been subverted.  In this case HMRC sought to penalise documentation errors that (on a broad evaluation) did not devalue the proof of export. The apparent shift of approach by HMRC certainly highlights the need to consider whether acceptable proof of export is held in relation to zero-rated export sales.      


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.


 

Constable VAT Focus 21 January 2022

HMRC NEWS

Penalties for late submission
HMRC recently announced that the new late submission penalties have been delayed, they will now begin on 1 January 2023. HMRC guidance has been updated accordingly.

Making Tax Digital for VAT is coming – are you ready?
HMRC have published new guidance to support businesses that need to prepare for Making Tax Digital (MTD). These VAT registered businesses are urged to sign up for MTD for VAT before 1 April 2022.

Revenue and Customs Brief 1 (2022): reviewing how to claim VAT when charging electric vehicles for business purposes
This is a brand new brief released by HMRC informing businesses that HMRC is reviewing how VAT is claimed on the cost of charging electric vehicles, and how to account for VAT on any private use.

CASE REVIEW

FTT

1. Accommodation for homeless people

This case concerns City YMCA London (CYL), a registered charity, that appealed HMRC’s classification of the supply of services made by CYL to young people of hostel accommodation in return for payment.

As with many VAT cases, the position is not straightforward and can be complicated. In late 2010 CYL lost its ‘supporting people’ grant funding which meant that it would be supplying minimal welfare services.

To continue its support of those in need CYL makes a charge for its services, which consist primarily of accommodation and advice. Each individual resident is responsible for paying their room fee; however, this is most likely met by Housing Benefit, Universal Credit or Disability allowance.

The decision helpfully sets out the chain of events that followed after CYL lost its ‘supporting people’ funding. These can be broadly summarised as follows:

  • January 2011 – CYL writes to HMRC seeking clarification of the VAT liability of its supplies moving forward now it is not receiving the ‘supporting people’ grant.
  • March 2011 – HMRC confirms CYL’s supplies of accommodation and general advice was subject to VAT at the standard rate. The charity applied the 28-day rule which allows it to charge VAT at a reduced value to residents for stays over 4 weeks.
  • September 2014 – HMRC carries out a routine VAT compliance visit to verify the charity’s VAT accounting records, specifically ensuring that the 28-day rules were being correctly applied.
  • August 2017 – HMRC conducts a VAT compliance inspection which is followed by a letter advising that its supplies are VAT exempt supplies of welfare.
  • October 2017 – HMRC revises its position and confirms that the charity’s supplies are standard rated as CYL is supplying sleeping accommodation and is “a similar establishment” to a hotel or boarding house.
  • October 2018 – HMRC writes to CYL requesting more information about the services it supplies, whilst advising that HMRC did not now consider that it met the ‘hotel like’ accommodation criteria which (potentially) may not allow the charity to account for a reduced rate of VAT for stays for a continuous period of more than four weeks.
  • January 2019 – HMRC writes to the charity and advises that its supplies are VAT exempt, not of welfare but of land (accommodation).
  • March 2019 – HMRC writes to CYL reversing its decision of 2 months earlier and advises that the charity’s supplies are standard rated supplies of land (accommodation) and are specifically excluded from exemption. However. The charity’s supplies are not ‘hotel like’ and it cannot take advantage of the reduced rate where a guest stays for a continuous period of more than four weeks.

The benefit of the 28-day rule is that, provided certain conditions are met, including the provision of sleeping accommodation in hotels, inns, boarding houses and similar establishments is that from the 29th day of the stay VAT is only due on meals, drinks, service charges and other facilities provided apart from the right to occupy the accommodation. The value of the accommodation is excluded from any calculation to determine output VAT due.

HMRC confirmed that the new ruling would take effect from 1 March 2019, there would be no VAT assessments raised for the incorrect application of ‘the previously under declared VAT’ under the long stay rules.

CYL sought an independent HMRC review of this final decision. The charity is advised by a letter dated 18 July 2019 that the March 2019 decision is upheld. This led to CYL’s appeal to the Tribunal.

The technical points to be considered were as follows:

  1. Is the charity’s supply one of a ‘licence to occupy land’ and a VAT exempt supply?
  2. If the charity’s supply is initially held to be a VAT exempt ‘licence to occupy land’, does the exclusion from VAT exemption as ‘the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering’ apply?

In practical terms if a) above applies, the charity does not have to account for output VAT on supplies made/income received and it may be unable to reclaim VAT incurred on directly related costs. If b) above is correct, and CYL’s supplies are excluded from exemption on the basis that it is a ‘similar establishment’ to a hotel etc then it can reclaim in full VAT incurred that directly relates to making these supplies, and account for VAT on a reduced sum received because the majority of its residents stay for over 28 days.

HMRC’s preferred analysis is that the charity’s supply is one of a range of facilities (sleeping accommodation, access to communal facilities [kitchens, lounges] and oversight and control, signposting etc. As such, the charity’s supplies are standard rated, and it does not meet the ‘similar establishment’ to a hotel test in order to allow it to apply the reduced rate for long stays.

The Tribunal found that the preponderant element of the supply is the provision of sleeping accommodation. Any other facilities or services supplied are ancillary and provided in the course of making the main supply of accommodation. The commercial and economic reality is that the supply is of a bedroom which characterises the liability of the supply.

The second point is whether CYL is a ‘similar establishment’ to a hotel, boarding house etc. The Tribunal found that the charity’s supply is by a ‘similar establishment of sleeping accommodation’ because its intended purpose is providing temporary accommodation to homeless young people. In particular, the Tribunal noted that the temporary nature of the accommodation provided sets CYL supplies apart from VAT exempt long-term lettings of residential accommodation. Therefore, the charity’s supply is similar to the provision in the hotel sector.

Constable VAT comment: This is an interesting case, and it remains to be seen whether HMRC will lodge an appeal to the Upper Tribunal. A decision of the First-tier Tribunal is only binding on the parties involved and does not set a wider precedent. The decision demonstrates the benefit to CYL of clarifying the VAT liability of its supplies with HMRC in 2011. If any taxpayer submits a non-statutory clearance application to HMRC then, provided full facts are provided, HMRC are bound by its decision and cannot take retrospective action. This explains why, when in 2019, HMRC gave its final decision it only applied the amended VAT liability from a current date and did not seek to raise retrospective VAT assessments to 2015. If any business desires certainty as to the correct VAT liability of its supplies, and where there are potentially different interpretations, we would recommend pro-actively liaising with HMRC. Unfortunately, HMRC may refuse to give an opinion in all cases but an approach to HMRC is something that should be considered.

2. Exporting a vehicle

This case concerned Mr Denton who purchased a vehicle in the UK with the intention of exporting it to Jersey. He was charged VAT on this vehicle and attempted to reclaim the VAT after exporting it on the basis an export is zero rated for VAT purposes. HMRC rejected the appeal for a VAT refund on the basis that the Personal Export Scheme is a pre-approval scheme only, it cannot be applied retrospectively. Therefore, as Mr Denton did not apply for it, VAT was correctly charged, and a VAT refund cannot be given.

Mr Denton requested the Tribunal to take his personal circumstances into account and that a retrospective claim for a refund should be allowed. The Tribunal and HMRC both stated that if Mr Denton applied for the Personal Export Scheme prior to exporting the purchased vehicle, the transaction could have been zero rated; however, it is clear from VAT law that HMRC have no authority to allow a scheme to be used retrospectively.

The Tribunal has no power to change this decision based on personal circumstances; therefore, the appeal was dismissed.

Constable VAT comment: Whilst HMRC and the Tribunal had sympathy for Mr Denton’s personal circumstances, a VAT refund could not be legally allowed in this case. 

3. Refusal to deduct input tax

This appeal concerned Turquoise 2 Limited (T2), and whether it knew or should have known, that certain of its purchases and the immediate onward sale of electronic goods were connected with the fraudulent evasion of VAT. HMRC denied a total input tax deduction of £2,061,733 for the VAT accounting period ended 07/16 and 10/16 in respect of 29 purchases of electrical goods.

The purchases were supplied to T2 by BJWP, and the sales occurred back-to-back on the same day with a markup of around 0.35% to 1% applied. The goods were never physically received by T2, and it did not pay for the goods acquired until it had been paid by the customer on the onward sale.

Mr Blomfield was the sole director of T2, and he provided evidence during the hearing. Mr Blomfield was approached by Mr Hendry who recommended Mr Blomfield to take up trading in electronic goods through T2. Mr Hendry offered another business proposal to Mr Blomfield prior to this, however after discussions with HMRC and research Mr Blomfield did not proceed due to Missing Trader Intra Community (MTIC) fraud risks.  As Mr Blomfield had no previous experience in electronic trading, Mr Hendry asked him to merely take care of administrative procedures such as setting up the bank accounts, and another US company referred to as “Adam” (the only known factor about the other company) would take care of trading whilst Mr Blomfield would be trained, so he can eventually be fully involved in the business.

T2 proceeded to set up a new bank account and granted access to Adam’s company, Mr Blomfield did not have any contact with the company he granted access to. Mr Blomfield subsequently discovered suspicious activities, and he reached out to Adam with the intention of requesting an immediate explanation or resigning as a director. Those concerns included trading totalling over a million Euros which he knew nothing about and was not informed of.

In response to Mr Blomfield’s concerns Mr Hendry and Adam confirmed that the transactions were merely to get things primed in the industry, any VAT due will be paid and Adam’s organisation will soon train and support Mr Blomfield so he could take control of the process.

It was later discovered that the supplier of T2, BJWP committed fraudulent VAT evasion. Therefore, input tax recovery claimed by T2 has been refused by HMRC on the grounds of the “Kittel principle” established in case law. This states that taxable persons who “knew or should have known” that supplies in which input tax was incurred were connected with the fraudulent evasion of VAT would not be entitled to claim credit in respect of that input tax.

Therefore, it was for the Tribunal to determine whether T2 knew or should have known it was involved with fraudulent VAT evasion. The Tribunal states it was evident that Adam’s organisation knew it was fraudulent VAT evasion and following the “Sandham case law” T2 if fixed with that knowledge therefore T2 knew. In addition, the Tribunal stated that the circumstances, including giving access to bank accounts or allowing transactions to be made in T2’s name, and keeping the shadowy organisation away from HMRC’s knowledge was very suspicious and enough to satisfy the condition of “should have known” that the transaction is involved with fraudulent VAT evasion.

The Tribunal concluded that T2 has chose to ignore the obvious inferences from the facts and circumstances, therefore the purchases were connected with fraudulent VAT, T2 both knew and should have known, so the input tax claim is refused, and the appeal was dismissed.

Constable VAT comment: This case represents yet another success for HMRC in an area in which fraud is reported to have cost EU taxpayers billions of £ or €.


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.


 

Constable VAT Focus 6 January 2022

HMRC NEWS

Check when you can account for import VAT on your VAT Return
HMRC has recently updated its guidance and indicated that the existing arrangements for customs checks on goods from Ireland will continue after 1 January 2022. Changes have been made to when you must account for import VAT on your VAT return and how to complete your customs declaration account for import VAT.

Completing a One Stop Shop VAT Return
HMRC has added to its guidance the sections ‘How to correct a previous return’ and ‘If you have over-declared on your return’ to their One Stop Shop guidance.

Revenue and Customs Brief 15 (2021): Repayment of VAT to overseas businesses not established in the EU and not registered in the UK
HMRC has published a brief which gives guidance on VAT refund claims by overseas businesses not established in the EU where there has been difficulty getting a certificate of status.

Using a VAT margin scheme if you buy and sell goods between Northern Ireland and the EU
HMRC has released new guidance.  If you buy and sell goods between Northern Ireland and the EU, you can use the guidance to find out when and how to use a margin scheme to account for VAT.

In addition, HMRC has released new guidance relating to second-hand goods margin and global accounting scheme. If this relates to you or your business, we advise you to read VAT Notice 718.

Update to HMRC’s Notice 701/57: Health professionals and pharmaceutical products

HMRC has updated this Notice with information about umbrella companies in section 6.6 ‘Supplies of nurses, nursing auxiliaries and care assistants by state regulated agencies (the nursing agencies’ concession)’. The updated guidance confirms that the exemption of nursing staff and nursing auxiliaries supplied as a principal to a third party does not apply to umbrella companies supplying services of staff to a recruitment agency. It only applies to the direct provision of staff.

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. Right to deduct input tax

This case concerned Amper Metal Kft (AM), a Hungarian company trading in the electrical installations sector. The company contracted with an advertising company which fixed advertising stickers bearing AM’s name to cars at a motor racing championship. AM received invoices showing a VAT charge of EUR 35,970, which it reclaimed as input tax incurred.

The Hungarian tax authority rejected AM’s input VAT deduction as it did not consider that the advertising services concerned led to an increase in taxable turnover and considered the amount paid excessive in comparison to similar advertising services, therefore not deductible in accordance with Article 80(1) of the VAT Directive, because the taxable amount should have been at open market value.

In taking this view, the tax authority relied on the opinions of experts in tax and advertising matters, according to whom, the advertising services were too expensive and of no use to AM as AM’s customers, namely paper factories, hot-lamination workshops and other industrial plants, were unlikely to be influenced by self-adhesive stickers on racing cars.

AM appealed the decision, and the questions referred to the CJEU were, broadly as follows:

Must, or may, Article 168(a) of the VAT directive be interpreted as allowing a deduction of input tax to be refused on the basis that the service received is insufficiently beneficial to the taxable activities of the claimant to justify the expenditure?

Must, or may, Article 168(a) of the VAT directive be interpreted as meaning that the right of deduction may be refused on the ground that in the opinion of tax authorities, the charge made for the service provided is above its open market value?

The CJEU stated that whilst the expenditure incurred must be of business nature, and the goods or services acquired must be used for taxable transactions, the right to deduct is not subject to a requirement that the expenditure increases the claimant’s turnover or profitability. The CJEU stated that it is for the referring court to decide whether the advertising services have a direct and immediate link with a taxable transaction and therefore whether input tax is deductible. However, a deduction cannot be refused on the grounds that no benefit (in terms of increased taxable supplies) results from the expenditure in question.

With regards to the second question, the CJEU stated that a taxable amount includes everything which constitutes consideration received by the supplier.  Therefore, the taxable amount is the consideration established between AM and the advertising company, rather than a market value. Article 80 was established to prevent tax evasion by providing the taxable amount to be the open market value of the transaction, however this only applicable to  transactions between connected parties. AM and the advertising company are not connected therefore the right of deduction cannot be refused on the grounds that the price was excessive.

The CJEU agreed that AM had a right to reclaim VAT.  Had it not done so then the door would have been open to tax authorities second guessing business decisions and making their own value judgements on whether expenditure was justified and what businesses  should pay for a given service.  Businesses seldom spend money without an expectation of a benefit.  In practice benefits may not arise and not all decisions will succeed.  However, the idea that tax authorities should be granted the right to impose “a better judgement” on when and how much to pay for a service, perhaps with the benefit of hindsight, was in our view  not a proposition the CJEU could ever accept.

First Tier Tribunal

2. VAT and aircrafts

The appellant (LMUK) appealed against HMRC’s decision that supplies it made to the Ministry of Defence (MoD) were standard rated. The issue for determination was whether the supply by LMUK of the “Crowsnest project” or “Crowsnest programme” falls within item 2, group 8, schedule 8 of the value added tax act 1994, which provides for the zero rating of:

The supply, repair or maintenance of a qualifying aircraft or the modification or conversion of any such aircraft provided that when so modified or converted it will remain a qualifying aircraft.

A “qualifying aircraft” is defined to include an aircraft that is used by a state institution, has a weight of not less than 8000kg and is nether designed nor adapted for use for recreation or pleasure. The aircraft in question is a qualifying aircraft as they belong to a state institution, their mass is 14.6 tonnes and they are neither designed nor adapted for pleasure or recreation.

The “Crowsnest project” includes:

  • Incorporation of the Crowsnest enhancements into the Merlin MK2 product
  • Delivery of role-fit equipment sets
  • Delivery of ground support systems
  • Delivery of aircraft servicing and support equipment
  • Merlin training system update to incorporate the Crowsnest mission capability
  • Delivery of spares provisioning data
  • Delivery of technical publications

LMUK and HMRC agreed that the supply made by LMUK to the ministry of defence is a complex single supply. Therefore, the predominant element of the supply needed to be determined to classify the supply for VAT purposes.

HMRC argued that the predominant element of the supply made by LMUK was of goods (namely the equipment comprising the role-fit kits).

LMUK argued that the supply made is of the Crowsnest system, comprising various elements. These elements are interdependent and not distinct, and for HMRC to treat the role-fit kit as distinct, separate and the most important element is to misunderstand the nature of the supply being made, which was in its essential nature a modification service.

The tribunal’s ability to make findings of fact was severely constrained due to the absence of reliable detailed evidence as to what LMUK had actually supplied to the MoD, or what it is that they have agreed to supply. Also, neither of the witnesses representing LMUK were able to inform the tribunal exactly what elements of the Crowsnest capability are to be role-fittable and what elements are to be permanently installed on the aircraft.

The tribunal reached the conclusion that the predominant element of LMUK’s supply is the supply of the role-fit kits, and that this element is a supply of goods, not a modification to or conversion of the aircraft (a supply of services). LMUK’s appeal was dismissed.

Constable Comment: In our view, LMUK appeared to have a persuasive case.  However, as the Tribunal observed: “Ultimately, it is for LMUK to satisfy us, on the balance of probabilities, that the single complex supply being made to the MoD is of modification (or conversion services) within Item 2, Group 8, Schedule 8, VAT Act, or paragraph (11) Annex X, Part B, PVD. That, on any basis, they have failed to do”.  Therefore, it is difficult to discern from the decision the potential for a different outcome had LMUK been able to present more detailed evidence on the facts.

3. Spiritual welfare services VAT exemption

Reverend Jane Taylor appealed against a review decision of HMRC. She contended that Mill House Retreats provides spiritual welfare services that are exempt from VAT under item 9, group 7, schedule 9, VAT Act 1994.

Rev Taylor is an active priest in the Church of England, ministering in the Exeter diocese. She conducts services in the Exeter diocese but her primary work is a director of the retreat centre, Mill House Retreats. Through the Church of England, Rev Taylor has received training in spiritual direction and her Mill House Retreat activities are supervised by the Church of England. Rev Chitty is an ordained deacon of the Church of England and assists Rev Taylor at Mill House Retreats.

Mill House Retreats provides spiritual welfare through the provision of Christian retreats. As well as ministering to individuals, it also hosts retreats for Church of England organisations. Rev Taylor’s evidence was that she operates Mill House Retreats on a non-profit making basis.

Rev Taylor acknowledged that Mill House Retreats is neither a registered charity nor a public body but she submitted that Mill House Retreats is state-regulated for the purposes of the exemption, Mill House Retreats being regulated by the church of England.  As the church of England is an established church, it forms part of the state. Therefore, Mill House Retreats is state-regulated.

The Tribunal found that Mill House Retreats is regulated by the state. However, the requirement for the exemption to apply is that the entity providing the services is “state-regulated”, not that it is regulated by the state. This is not an irrelevant distinction because “state-regulated” is a defined term and requires that the regulation be by a “Minister or other authority pursuant to a provision of a public general act”. “Act” is further defined for the purposes of the exemption as “public general acts”. As the church of England legislation is not public general acts, Mill House Retreats is not “state-regulated” for the purposes of the exemption.  The appeal was 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.


 

Constable VAT Focus 25 November 2021

Constable News

We have recently released our special Autumn Budget 2021 VAT Focus, covering all the VAT related announcements and updates. Click here to read in full and see also further documents issued by HMRC in the HMRC News below.

HMRC News

Check how to pay duties and VAT on imports
HMRC has updated this notice to show how to use the flexible accounting system when your goods move across the UK border if you want to pay by bank transfer, guaranteed cheque or bank draft and are using the Customs Handling of Import and Export Freight system.

Help and support for Making Tax Digital
HMRC has now added a recording of a webinar about Making Tax Digital.

Complete your VAT Return to account for import VAT
This guidance has been recently updated to include more information about how to adjust for errors for import VAT.

Tell HMRC about changes to your VAT IOSS registration in the EU
HMRC have published new guidance, you can use this to tell HMRC you’ve deregistered from using the VAT Import One Stop Shop (IOSS) in an EU country or have changed your business details.

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. Reduction of taxable amount

This case concerned ELVOSPOL and the Czech Republic tax authorities. ELVOSPOL has made supplies to a company which was later declared, by the Czech court, insolvent. The courts determined the manner in which it was to be wound up. ELVOSPOL had adjusted its taxable amount on the basis of national law, arguing that the insolvent company had not paid the invoice for the supply made. The national court; however, took the view that the appellants interpretation of national law was incorrect because the unpaid claim had arisen during the 6 months period preceding the declaration of insolvency.

However, Article 90 of the VAT directive states that in the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States. Therefore, the question referred to the CJEU is whether national legislation is contrary to the purpose of Article 90 if it prevents taxpayers from making a correction to the amount of output tax, if that claim arose less than 6 months before a court decision declaring the other company insolvent.

The CJEU stated that Member States may derogate from the VAT directive only to enable them to counteract the uncertainty associated with the recovery of sums owed. It also stated that a Member State must allow the taxable amount for VAT purposes to be reduced where the taxable person is able to demonstrate that his, or her, claim against the debtor is definitely irrecoverable.

It was considered whether the fact that a company has been declared insolvent is sufficient for a taxpayer to demonstrate that the claim will definitely not be recoverable, and, therefore, it should be able to adjust the output tax even if 6 months have not elapsed, in accordance with Article 90 of the VAT directive.

The CJEU concluded that Article 90 of the VAT Directive must be interpreted as precluding a national provision which makes adjustment of the amount of VAT, subject to the condition that the partially or totally unpaid claim must not have arisen during the six-month period preceding the declaration of insolvency of the debtor company where it is not ruled out under that condition that such a claim may ultimately be definitively irrecoverable.

Constable Comment: The UK’s national law also has a rule that 6 months must have elapsed before a bad debt claim can be made. This is the general rule and would usually apply in most circumstances; however, if you feel that a claim is appropriate within 6 months we recommend seeking professional advice to avoid any potential assessments or penalties from HMRC.

First Tier Tribunal

2. Flat Rate Scheme operation

This appeal concerns the operation of the VAT flat rate scheme (FRS). Under FRS, a taxpayer declares output VAT calculated by applying a percentage, based on the trading sector of the business, to the VAT inclusive turnover of the business and input tax is not usually deductible.

Swiss Dawn Consultants Limited (SDCL) was registered for VAT with effect from 5 August 2014 and it was also authorised by HMRC to operate the FRS from that date. The trading sector was “management consultancy” and the appropriate percentage was 14%. This was reduced to 13% as it operated the FRS in its first year of VAT registration.

HMRC issued a VAT “best judgment” assessment for £8,474. The assessment was upheld following an internal HMRC review. SDCL have applied the appropriate percentage to its net turnover, rather than VAT inclusive gross turnover. Therefore, SDCL had under calculated the output tax due. In addition, it has reclaimed input VAT in two VAT accounting periods.

The tribunal concluded that, other than a reduction of the assessment by £39 to take account of the withdrawal of the input tax claim by SDCL, it confirmed the assessment of the amended sum of £8,435 and allowed the appeal in part.

Constable Comment: Whilst this case did not involve complex VAT liability issues, it highlights the importance of operating all VAT accounting schemes correctly to avoid assessments and penalties. If you or your business does, or intends, to operate a VAT scheme we suggest advice is taken. We would also recommend periodic reviews of the mechanics of the operation of the scheme to ensure that there are no VAT accounting errors. There is currently a four-year cap in place that allows HMRC and taxpayers to revisit VAT returns rendered and a review within this timeframe may be beneficial to business accounting for VAT using a margin scheme.   

3. Comply with tax obligations

There has been a recent case which helps to define what knowledge a non-tax specialist is required to have if running a business. The case involved Mr Osman, the sole director of Salford Santos Kebab Limited (SSKL), which operated a takeaway food shop selling burgers, pizza, kebabs, and similar foods.

HMRC raised VAT assessments and after agreeing a reduction, HMRC issued a personal liability notice (PLN) of £29,473 to Mr Osman. This was on the basis that his actions had been entirely responsible for the deliberate inaccuracy which led to the VAT assessment. The inaccuracy was treating standard rated food items as zero rated, therefore not accounting for output tax due. The business submitted VAT returns showing an average of 84% of sales being zero-rated. This is not credible for this type of business. As a fast-food takeaway shop, HMRC would expect very limited zero-rated sales.

Mr Osman argued that he knew nothing about VAT requirements, did not understand the difference between standard rated and zero-rated sales. He had done nothing other than appoint an accountant and provide them with some figures as requested.

The Tribunal concluded that it did not consider Mr Osman acted dishonestly regarding the VAT treatment of sales, but he taken no steps to establish whether information provided by his accountant was accurate. The Tribunal stated that a person running a business is obliged to establish what is required of them to comply with their tax obligation and, therefore, upheld that the PLN was correctly issued.

Constable Comment: This case was straightforward regarding the VAT issue that supplies of catering services of hot take-away food should not be zero-rated; however, it highlights the importance that a person running a business is expected to have a basic understanding of their VAT compliance responsibilities. In this case Mr Osman had engaged the professional services of an accountant and, unfortunately VAT accounting errors had arisen. The Tribunal found that it was the taxpayers responsibility to have a knowledge and understanding of the VAT liability of its businesses supplies.


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.