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Constable VAT Focus 15 September 2023

15th September 2023

HMRC NEWS

Partial Exemption (VAT Notice 706)
The above guidance has been updated and the option to send an email to get an approval for a partial exemption special method has been removed.

CASE REVIEW

CJEU

1. Recovery of input tax where VAT has been incorrectly charged

Michael Schutte is a farmer and forester. Between 2011 and 2013, Mr Schutte purchased timber, resold and delivered it to his customers as firewood. His suppliers charged and accounted for VAT at the standard rate of 19%; however, Mr Schutte charged and accounted for VAT at the reduced rate of 7%. Following an audit, the German tax authorities concluded that the sales should have been subject to VAT at 19% rather than 7%.

The Finance Court in Germany found that the sales were liable to VAT at 7% but also the purchases made by Mr Schutte should have been liable to VAT at 7%, not 19%. As a result of this judgment, the input tax reclaimed by Mr Schutte was reduced and the German tax authorities sought to recover the VAT overclaimed for the years 2011 to 2013, plus interest. Mr Schutte contacted his suppliers and asked them to correct the invoices which were issued to him and refund the difference.

The suppliers did not correct the invoices or refund the VAT overcharged and so Mr Schutte applied to the German tax authorities for discharge from the additional VAT recovery which had been sought as well as the interest. The German tax authorities rejected the application on the grounds that the applicant was responsible for the situation.

The question before the CJEU was whether the principle of fiscal neutrality and the principle of effectiveness require that the applicant has a right to claim reimbursement of the VAT overpaid by him to his suppliers, including interest, directly from the tax authorities, even though there is still a possibility that the suppliers will at a later point in time take action against the tax authorities on the basis of a correction of the invoices, and the tax authorities may then no longer have a right of recourse against the applicant, with the result that there is a risk that those authorities will have to reimburse the same VAT twice?

The CJEU ruled that a receiver of supplies of goods has a direct right to claim from the tax authorities the reimbursement of improperly invoiced VAT paid to his or her suppliers and paid by those suppliers to the tax authorities, together with related interest, in circumstances where that receiver can not be criticised for fraud, abuse or negligence but can not claim that reimbursement from those suppliers and there is a procedural possibility of those suppliers subsequently claiming reimbursement of the overpaid tax from the tax authorities after having adjusted the invoices that were issued initially to the receiver of those supplies. If the VAT improperly charged is not reimbursed by the tax authorities within a reasonable time, the damage suffered must be compensated by the payment of default interest.

Constable Comment: The right to deduction of VAT is an integral part of the VAT system and in principle should not be limited. The system is intended to relieve taxable persons entirely of the burden of VAT in the course of its taxable business activities. However, this case emphasises the importance of ensuring that the rate of VAT charged on invoices to customers is correct at the time the supply is made as it can cause a significant administrative burden on both the customer and supplier if VAT is overdeclared to HMRC.

Upper Tribunal

2. Disapplication of VAT registration: Facilitation of VAT fraud

This appeal concerned Impact Contracting Solutions Limited (ICSL) which operated in the labour provision market. ICSL’s customers were temporary work agencies, and its suppliers were approximately 3000 mini-umbrella companies (MUCs) which supplied labour. On 16 September 2019 HMRC cancelled ICSL’s VAT registration number with immediate effect. HMRC considered that ICSL was registered for VAT solely to abuse the VAT system by facilitating VAT fraud and therefore they were empowered by the principle established in the case of Ablessio to cancel the VAT registration. HMRC considered that the arrangements between ICSL and MUCs were contrived with the effect that the MUCs failed to properly account for VAT on their supplies to ICSL.

ICSL argued that they were entitled and required to be registered for VAT. HMRC are only able to cancel a VAT registration where they are satisfied that a registered person has ceased to be registerable. It is never permissible for HMRC to rely on the Ablessio principle where the person in question has taxable supplies unconnected with fraud which exceed the threshold for registration.

HMRC argued that the Ablessio principle does not require domestic legislation to apply in the UK and the application of the Ablessio principle was not against the law. Also, the EU abuse principle, including Ablessio, has a statutory basis in UK law and so is deemed to have always applied.

The UT concluded:

The application by HMRC of the Ablessio principle is not against the law or otherwise prohibited by the VAT legislation where it is applied to deregister a taxpayer who has either fraudulently defaulted on its VAT obligations or facilitated the VAT fraud of another party and at the relevant time has also made taxable supplies unconnected with fraud which would result in a liability to be registered.
The principle in Ablessio applies:

– to the deregistration for VAT purposes by HMRC of a person as well as to a refusal by HMRC to register a person.

– to enable the deregistration of a person for VAT purposes who has facilitated the VAT fraud of another, where the person to be deregistered knew or should have known that it was facilitating the VAT fraud of another.

– irrespective of whether the person whom HMRC seeks to deregister has also made taxable supplies unconnected with the facilitation of fraud and which would result in a liability to be registered.

The UT held that HMRC’s action was not disproportionate, and the appeal was dismissed in relation to the preliminary points raised.

Constable Comment: This case demonstrates the impact of EU cases on UK courts post Brexit. ICSL must now convince the FTT that HMRC’s deregistration was not appropriate based on its own facts.

First-Tier Tribunal

3. Error Correction: Tour Operators Margin Scheme

In this case, the appellant, Golf Holidays Worldwide Limited) (GHWL) filed an error correction notice (ECN) for the periods 03/17 to 03/21 on the basis that it had incorrectly accounted for VAT on its wholesale supplies within the Tour Operators Margin Scheme (TOMS). The ECN was filed to reverse that position but HMRC rejected it on the grounds that there had been no error made by GHWL. The question before the Tribunal was whether there had been an error which can be corrected by way of an ECN or whether GHWL’s original position was lawful which could not be reversed by way of an ECN.

In 2013, the ECJ ruled that wholesale supplies were within the scope of TOMS. Following this case HMRC issued Brief 05/2014 which stated there would be no changes to the operation of TOMS in the UK but UK businesses could choose to apply the direct effect of the EU law and treat wholesale supplies as within TOMS.

GHWL argued that the correct legal position is that UK law excludes wholesale supplies from TOMS and requires a taxable person to apply the normal VAT rules. Therefore, under UK law, TOMS was not applicable to GHWL’s wholesale supplies to non-UK customers and it had made an error that could be corrected by way of an ECN.

HMRC argued that there was no error made by GHWL when it chose to account for VAT under TOMS on its wholesale supplies as this was consistent with EU law and therefore GHWL had applied a VAT position which, although may not have been favourable, was lawfully available to them.

The Tribunal agreed with HMRC and confirmed that an incorrect assessment of the most advantageous position, which is within the law, is not an error of fact or law which could be corrected through the use of an ECN.

GHWL also argued that HMRC could not refuse to allow the error correction on the grounds that the VAT declared was in accordance with EU law because doing so would be an unauthorised imposition of direct effect. HMRC contended that it had not enforced or imposed direct effect on GHWL, because it was GHWL who decided to apply the EU rules to its supplies. HMRC have just acknowledged that GHWL made a lawful choice and refused to process the ECN accordingly.

The Tribunal concluded that GHWL had not made an error which was capable of being corrected by way of an ECN and the rejection of it by HMRC does not mean that they are enforcing direct effect. There was also no breach of fiscal neutrality as there was a choice of methods available to GHWL. The appeal was dismissed.

Constable Comment: In this case the appellant chose to account for VAT on wholesale supplies under the TOMS rather than applying the normal VAT accounting principles. It is important to ensure that all VAT treatments available are considered at the outset because, as this case showed, it is not necessarily possible to reverse a decision in the future by way of an error correction notice where a lawful but less advantageous option is chosen.

4. Hardship Application

This case concerns whether the appellant, Waynefleet, should be permitted to appeal without having to pay the VAT in question to HMRC. The appellant contended that they were unable to pay the VAT of £170,344.78 to HMRC; however, HMRC denied the application for hardship.

The main business activities of Waynefleet comprise journalism and writing, business management, marketing consultancy and the purchase of game shooting. Following an enquiry by HMRC, HMRC raised assessments covering the periods 03/18 to 09/21 in the sum of £161,012 on the basis that the supply of pheasant shooting was a commercial activity and subject to VAT.

HMRC issued a statement of the appellant’s VAT account showing tax due of £161,012 plus interest of £9,332.78 totalling £170,344.78. The appellant wrote to HMRC requesting that they apply the hardship provisions on the VAT assessment. HMRC requested the appellant to provide evidence in support of the application for hardship. The appellant responded stating that if the VAT had to be paid then the business would be inoperable. However, in the absence of financial records or information HMRC were not satisfied that the company would suffer hardship.

As part of the appeal process, the appellant provided a Statement of Facts, copy correspondence and a photocopy of a diary entry which related to HMRC’s enquiry. Copies of two bank statements were also lodged showing balances of £943.49 and £198.86, the total cash balance being £1,142.35, as well as a Balance Sheet as at 30 June 2022 and the company accounts to 20 June 2022.

The burden of proof in establishing hardship lies with the appellant. HMRC explained that the appellant was unable to trade because if it did so then it would be trading whilst insolvent. The appellant must show that, on the balance of probabilities, it would suffer hardship if it were required to pay the £161,012. The Tribunal found that the company had no immediately or readily available resources and that the appellant simply has nothing from which it can pay the VAT at stake in its appeal. The Tribunal concluded that the appellant would suffer hardship if it were required to pay the VAT and the appellants’ application for hardship was allowed.

Constable Comment: Where a company or an individual has received an assessment from HMRC for payment of tax and this is the subject of an appeal to the First Tier Tax Tribunal, HMRC can request that payment of the assessment be made in full prior to the Tribunal hearing the appeal. It is for the taxpayer to demonstrate that payment of the disputed tax would cause them to suffer financial hardship and each case should be considered on the basis of the facts. It is therefore important that sufficient information can be provided at the outset to avoid an unnecessary dispute ahead of any hearing on the disputed decision.

5. VAT registration: penalties

GB-Gadgets Ltd (GB Gadgets) appealed against a penalty totalling £46,726.79 for failing to notify an obligation to register for VAT. The penalty related to unpaid VAT in the period 1 September 2013 to 31 March 2018.

GB Gadgets imported goods for resale online and registered for VAT from 1 April 2018. In January 2020 HMRC began a VAT compliance check on GB Gadgets and requested certain information. HMRC requested further information in February 2020 which was not supplied by GB Gadgets so HMRC issued an information notice on 9 November 2020.

In September 2020 HMRC issued eBay with a joint and several liability notice relating to GB Gadgets. As a result of this, eBay blocked GB Gadgets from trading on its platform and GB Gadgets ceased trading entirely. In December 2021 HMRC issued a VAT assessment for £208,173 for the period 1 September 2013 to 31 March 2018 which was calculated on the basis of sales records supplied to HMRC including those from eBay.

The amount of the penalty applied by HMRC is a percentage of the potential lost revenue (PLR) which in these circumstances means the amount of VAT which GB Gadgets was liable to pay for the period beginning on the date when it was required to be registered until the date on which HMRC were notified of the liability to be registered.

Based on the limited evidence given to the Tribunal by both HMRC and GB Gadgets, the Tribunal concluded that it was more likely than not that GB Gadgets should have been registered for VAT from 1 September 2013 and that HMRC calculated the PLR on the basis of actual sales records. The Tribunal were also satisfied that the penalty was assessed within the time limit and was correctly notified.

GB Gadgets’ grounds of appeal were that the penalty should be reduced because there were special circumstances, being that GB Gadgets opened its first bank account in September 2016 and before this period the account was used by another individual and his company. The Tribunal found that the fact the company underwent a change in ownership at the end of 2017 did not remove its liability to the penalty as it was imposed on the company and not the individual.

The Tribunal ruled that there were no relevant factors which should be taken into account in determining whether there were special circumstances in this case. Therefore, the penalty was confirmed and the appeal was dismissed.

Constable Comment: In this case, the appellant failed to notify HMRC of their liability to be registered for VAT within the required statutory time limits which resulted in them being liable to penalties and as they did not successfully argue that they had special circumstances which applied, the full amount of the penalty was due. This demonstrates the importance of notifying HMRC within the required statutory time limits in order to avoid incurring unnecessary penalties.

6. DIY claim: Dwelling constructed for business purpose

This case concerned Mr Spani’s appeal against HMRC’s refusal of his claim for a repayment of input VAT incurred on the construction of a dwelling under the DIY Housebuilder Scheme. HMRC rejected the DIY claim on the grounds that the dwelling will be used for business purposes as the planning permission was granted for a holiday let.

The appellant argued that the property was made available for letting solely due to the fact that it falls within the Souths Down National Park and in order to obtain planning consent, it was required to be made available for letting, even though it was the appellants primary residence in the UK. The appellant did not actually let the property as these plans were frustrated by Covid, instead he used the property as his main residence in the UK. The appellant contended that merely listing it for letting falls short of HMRC’s position that the intention was to use it for wholly commercial purposes. If this was the case, the appellant could have registered for VAT and recovered the VAT incurred; however, he did not because the property was never intended to be a commercial endeavour.

HMRC’s position was that in order for a DIY claim to be refunded, the property must be used otherwise than in the course of furtherance of business. The planning permission granted permission for a holiday let because a residential home would not be permitted. A holiday let is classified as a business for VAT purposes and therefore not eligible for a refund under the DIY claim. The fact that the property is listed for lettings means it is capable of earning business income.

The Tribunal agreed with HMRC confirming that the appellant’s plan to live in the property does not alter the property into a dwelling that is eligible for a refund. The appeal was dismissed.

Constable Comment: This case reinforces that HMRC will not make a refund in relation to a commercial property, such as a holiday let, under a DIY claim. Taxpayers should consider alternative methods to recover VAT incurred on commercial properties such as VAT registration, option to tax etc. It is important to consider all rules in relation to a DIY claim before it is submitted to HMRC. Constable VAT has relevant experience and would be pleased to assist with DIY claims or any land and property related queries.

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 4 August 2023

4th August 2023

HMRC NEWS

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme. The list has been updated with 4 additions and 2 removals.

CASE REVIEW

Upper Tribunal

1. Input VAT incurred on sale of shares

This case concerned the input VAT incurred by Hotel LA Tour Ltd (HLT) on the sale of shares in its subsidiary, Hotel LA Tour Birmingham Ltd (HLTB). HLTB owned and operated a hotel in Birmingham and HLT supplied management services to HLTB.

HLT sold all of its shares in HLTB in order to raise funds for the building of a new luxury hotel. HLT incurred professional fees including marketing, solicitors and accountants fees in relation to the sale of shares and it sought to recover the VAT incurred on these costs in the sum of £76,822. HMRC disallowed the input VAT claimed on the grounds that the costs related to the exempt share sale. HLT appealed this decision arguing that the relevant services received were directly and immediately linked to its downstream taxable activities, mainly being the development of the new luxury hotel.

The FTT ruled in the favour of HLT, and HMRC appealed the FTT’s decision. HMRC referenced the BLP Group Plc decision where the costs incurred were attributed to the exempt share sale rather than to BLP’s wider taxable activities. However, the Upper Tribunal (UT) considered various other cases such as SKF and Frank A Smart, in which it was ruled that a VAT exempt share sale in order to raise funds did not prevent input VAT deduction if:

The purpose in fund-raising was to fund its economic activity.
The funds are later used to make taxable supplies.
The cost of the services are cost components of downstream activities which are taxable

The UT concluded that the FTT was correct when it applied the above approach. HLT’s share sale was to fund its development of a new hotel and all proceeds generated from the share sale were in fact allocated to this activity. Therefore, the input VAT incurred on marketing and legal fees was recoverable and HMRC’s appeal was dismissed.

Constable Comment: This case considered whether input VAT incurred on the sale of shares is recoverable, given that the proceeds from the sale will be allocated to a taxable activity of developing a new hotel. Both the FTT and UT ruled in favour of the taxpayer.

This decision may have a wider implication than initially anticipated as this will not only affect businesses operating in the hotel sector but potentially any businesses considering the sale of shares in a subsidiary. Any business that has not recovered VAT on the sale of shares in the previous 4 years, where the funds raised from the share sale were used, or intended to be used, in making taxable supplies, should give due consideration to the decision in this case and seek professional advice if necessary. In the wider context, and potentially impacting on other sectors including charities and organisations with non-business activities, if the eventual intention of funds raised in a particular transaction is to generate taxable supplies (in the case of HLT selling shares to construct a hotel in Milton Keynes) this decision suggests that VAT incurred in the original transaction can be viewed as a cost component of taxable business supplies.

FTT

2. Medical care or cosmetic treatments

This case concerned Epem Limited’s (EL) appeal against HMRC’s decision to compulsorily register EL for VAT on the grounds that EL was making standard rated supplies in excess of the VAT registration threshold. EL argued that it was providing exempt medical services and the value of taxable supplies has never exceeded the VAT registration threshold.

HMRC initially contacted EL in 2009 to establish its VAT status, requesting a breakdown of services provided. EL did not provide the requested information, and HMRC registered EL for VAT and issued assessments for VAT. However, EL appealed to the FTT on the grounds that it made VAT exempt supplies. The issue for determination by the FTT was whether the services were exempt medical services provided for the primary purpose of the protection, maintenance, or restoration of health of individuals.

The FTT reviewed all submissions and concluded that EL did not discharge the burden of proof upon it to show that it should not be VAT registered. The FTT reached this conclusion for various reasons including that the Care Quality Commission (CQC) refused EL’s registration application on the grounds it was not providing regulated services. Whilst not definitive, this suggested to the FTT that EL’s services is not medical care for VAT purposes.

The FTT discussed the difference between clinical treatments and cosmetic treatments as EL argued it was treating issues which were affecting the patients life. The FTT stated that it is possible that, in some cases, a physical condition may cause clinical psychological problems for a patient; however, dissatisfaction with appearance does not automatically mean that the patient has a health disorder.

The FTT concluded that EL did not provide sufficient documentary evidence to prove that its services were VAT exempt medical care. As a result, EL should have been VAT registered and the appeal was dismissed.

Constable Comment: This decision provides some useful analysis on what constitutes clinical treatments as opposed to cosmetic treatments and beautician services. This is an interesting case for businesses involved in this industry. There can be potential ambiguity regarding the correct VAT treatment of such services, and we would recommend seeking professional advice to establish the correct VAT liability of services. A final point to note is that this case was heard, and decision released recently; however, the disputed decision dates to 2013 and HMRC raised VAT assessments from 1 May 2007, over sixteen years ago. This case acts as a reminder that it is very important for any business to establish its correct effective date of VAT registration (EDR). If a businesses EDR is wrong, HMRC will amend this and seek to reclaim output VAT that should have been accounted for, less any input VAT properly reclaimable.

Constable VAT Focus 21 July 2023

21st July 2023

HMRC NEWS

How VAT affects charities (VAT Notice 701/1)
In the above guidance, section 6.1.3 ‘Construction’ has been updated to include information about the 2-stage test that is used to assess whether a charity is conducting a business and, in that context, can benefit from the zero-rate relief that applies to some construction services. Section 6.1.4 has been added dealing with ‘Certificates issued to get certain construction works at zero rate’.

Barristers and advocates (VAT Notice 700/44)
In the above guidance, the VAT811 form has been replaced as the legislation quoted on the form has been updated.

CASE REVIEW

First Tier Tribunal

1. Tour Operators Margin Scheme

This appeal concerns the Tour Operators Margin Scheme (TOMS) which is a special VAT scheme that applies to certain supplies made by travel agents and tour operators for the benefit of travellers.

From 2017, Sonder Europe Limited (Sonder) provided accommodation (self-contained apartments) in the UK to corporate and leisure travellers. Sonder leased the accommodation from third party landlords and in effect sublet the apartments to travellers for different periods, ranging from a single night to a month or more.

In VAT accounting periods ending 10/17, 01/18 and 04/18, Sonder accounted for VAT on the basis that its supplies fell within the scope of the TOMS. In 2019, HMRC decided that the TOMS did not apply to the supplies made by Sonder, with the result that the full value of those supplies was subject to VAT at the standard rate, with VAT totalling £252,229.29 being due. The issue considered in this appeal was whether Sonder’s supplies fell within the scope of the TOMS.

For its supplies to come within the scope of the TOMS, Sonder needed to establish that:

it was a tour operator as defined by Section 53(3), VATA 1994, and
its supplies were designated travel services within Article 3(1) of the TOMS order.

Sonder was a tour operator for the purposes of the TOMS, and its supplies were designated travel services, if Sonder:

acquired the accommodation for the purposes of its business;
provided the accommodation for the benefit of travellers and without material alteration or further processing, and
the accommodation was of a kind commonly provided by tour operators.

Sonder argued that it was a tour operator because its position was indistinguishable from that of tour operators. Sonder brought in supplies of accommodation and made onward supplies of that accommodation to travellers.

HMRC argued that renting exempt residential accommodation and then subletting it to travellers does not fall within the TOMS. HMRC’s primary case was that a trader who made supplies of travel accommodation from its own resources was essentially a hotelier, not a tour operator.

The Tribunal first considered whether Sonder was a tour operator for the purposes of the TOMS. The apartments were used by Sonder as serviced apartments for the residential occupation of travellers. There was no suggestion that the apartments were used as permanent accommodation and the average length of stay was five nights. The Tribunal concluded that such persons were travellers and the apartments were travel facilities and for the benefit of travellers. It also concluded that Sonder acquired services (leased apartments) provided by the landlords for the purposes of its business.

Some of the apartments that Sonder leased were unfurnished. To fall within TOMS a purchased supply must be resold “without material alteration or further processing”. HMRC took the position that in furnishing and equipping the unfurnished apartments Soder was making a sufficiently material alteration to the supplies that it was receiving to take the subsequent supply by Sonder outside the scope of TOMS. The Tribunal disagreed deciding that the words “material alteration or further processing” must refer to more than minor changes or processes which do not affect the fundamental character of the particular goods or services.’

As a consequence of its findings on these two points, the Tribunal found that during the relevant periods Sonder was a tour operator and its supplies were designated travel services that fall within TOMS. Sonder’s appeal was allowed.

Constable Comment: Under a TOMS calculation it is not possible to reclaim VAT incurred on goods and services purchased for use by the traveller (as opposed to general business overheads).

When the costs purchased for use by the traveller are subject to VAT the VAT declared on the margin is broadly the same as the net VAT liability that would arise if the VAT on those costs was reclaimed and VAT is declared on the full sales (standard VAT accounting rules). When the costs of goods and services purchased (before being sold on to the traveller) do not attract VAT then applying VAT to the margin results in a lower overall VAT cost to the business. Thus accounting for VAT on the margin achieved resulted in a lower net liability because Sonder incurred no irrecoverable input VAT as a result of applying TOMS.

This case involves several interesting points and two stand out.

a) The nature of “in-house supplies”

The term “in-house” supplies usually refers to supplies that are made using a suppliers “own resources” within the framework of a TOMS calculation. For example, HMRC policy is that when a supplier who is operating TOMS owns a hotel and supplies accommodation, they are making an “in-house” supply of accommodation. Therefore, by implication the decision goes a step further than saying TOMS should apply to Sonders supplies and is relevant to businesses that is unquestionably liable to operate a TOMS calculation (as regards which elements of a package should be treated as “in-house” when applying that TOMS calculation).

Where a TOMS operator owns the property that it is supplying (e.g. a freehold) then there is no “service received” that can be resold and its supplies would be “in-house”. However, the question arising in that context is what constitutes ownership. Current HMRC guidance states that if the supplier hires, leases or rent accommodation under an agreement that gives them responsibility for maintenance of the fabric of the building the supplier is making an in-house supply of accommodation. In this case Sonder’s had basic maintenance obligations in relation to the properties that it leased. The Tribunal did not view that as a barrier to applying a margin scheme calculation.

The Tribunal held “the nature or characteristics for VAT purposes of the goods and services supplied by third parties to the tour operators do not determine whether onward supplies fall within the TOMS”. This suggests that the dividing line that HMRC has drawn between “in-house” and “margin scheme” supplies is wrong. This could have wide implications, not only in relation to accommodation.

b) Material alteration and processing

To fall within TOMS a purchased supply must be resold “without material alteration or further processing”. The Tribunal decided that ‘“material alteration or further processing” must refer to more than minor changes or processes which do not affect the fundamental character of the particular goods or services.’ The fact that accommodation was leased in an unfurnished state and then supplied after furnishing did not amount to “material alteration or further processing.”

There are many situations in which HMRC takes the view that “assembling the components” of the onward supply converts a “bought in” supply into an “in-house” supply. The judgement therefore may have implications that go beyond the lease and resupply of accommodation.

Assessing the impact of this case is difficult. It considered a period in which the UK was in the EU. That said, it is hard to see how the interpretation of UK law would magically change because of Brexit.

The decision is a First-tier Tribunal Decision. This means that it is only binding on the parties to the case. HMRC could decide not to appeal and simply ignore the decision, forcing other taxpayers that wish to apply the decision to litigate.

Finally, TOMS was introduced as a simplification measure intended to remove the need for EU tour operators to VAT register in every EU member state in which they provide travel services. Post Brexit, the use of the TOMS as an EU scheme is no longer available to businesses established in the UK. It serves no purpose insofar as the simplification benefit that it once delivered to UK businesses. We understand that it was retained in the UK only because of industry representations to HMRC along the lines “It would be disruptive for us to change the way that we are currently accounting for VAT.” However, HMRC could simply decide to abolish TOMS if it starts to deliver VAT outcomes that it dislikes, although clearly that could not be done retroactively.

In our view this decision is likely to be appealed but where businesses feel they may have overdeclared VAT then they should certainly lodge protective claims, bearing in mind that there is a 4-year cap on seeking refund claims and if they wait to do so pending any appeal then they will find that claims that could be made today will fall out of time due to the statutory 4-year cap.

CJEU

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

2. Tourist tax: Consideration for a supply?

This case concerns a state-recognised air spa town (Gemeinde A) whose spa administration is managed as a government-operated business under municipal law and qualifies as a commercial business for the purposes of corporation tax laws. Gemeinde A collects a spa tax in order to cover the costs of erecting and maintaining the facilities provided for spa and leisure purposes and for the events organised for that purpose. The following are subject to the spa tax:

Persons staying in the municipality who are not resident in the municipality and who are offered the opportunity to use those facilities and to participate in those events
Residents of the municipality, the focal point of whose life is in a different municipality
Non-local persons staying in the municipality for professional reasons to attend conferences or other events

The spa tax is not collected from day visitors, non-local persons or residents working or undergoing training in the municipality. The spa tax is set, for non-local persons, at a certain amount per day of stay and, for resident persons, at an annual flat-rate amount payable irrespective of the duration of their stay.

Between 2009 and 2012 Gemeinde A financed the erection, maintenance and renovation of the spa park, spa building and footpaths (the spa facilities) with the revenue from the collection of that tax. Gemeinde A took the view that the spa tax constituted remuneration for an activity subject to VAT, namely the operation of a spa establishment, and claimed a deduction of the VAT paid on all the input services which had been provided to it and which were connected with tourism.

An audit was carried out and the auditor disregarded the amounts of input VAT paid which were not linked to the operation of the spa business and took into account the amounts of input VAT paid which related to the spa building only in so far as that building was leased for a fee. Therefore, VAT amendment notices were issued in accordance with the findings of the audit.

Gemeinde A brought an appeal to the Federal finance Court in Germany which is the referring court. The court referred the following questions to the Court of Justice:

Does a municipality which imposes a ‘spa tax’ on visitors staying in the municipality (spa guests) for the provision of spa facilities carry out, by providing the spa facilities to the spa guests in return for a spa tax, an economic activity if the spa facilities are in any event freely accessible to everyone?

The court concluded that Article 2(1)(c) of the VAT directive must be interpreted as meaning that the provision of spa facilities by a municipality does not constitute a ‘supply of services for consideration’. The obligation to pay the spa tax is not linked to the use of those facilities but to the stay in the municipal territory and the spa facilities are freely and gratuitously accessible to everyone.

Constable Comment: The court’s decision in this case seems to us to have been predictable. For there to be a supply there needs to be “something provided”, “consideration paid” and a “direct link between those two elements. That link is missing if someone is obliged to make a payment irrespective of whether they will receive a service. Whether there may have been an alternative argument to support a recovery of VAT is hard to say but on the narrow point of whether the tourist tax was consideration for a supply it is difficult to argue with the court’s reasoning.

3. VAT margin scheme for intra-community art supplies

Mr Mensing is an art dealer established in Germany who operates art galleries in a number of German cities. In 2014, works of art originating from artists established in other Member States were supplied to him and those supplies were declared in the Member States where the artists are established as exempt intra-community supplies. Mr Mensing paid acquisition VAT in Germany on those supplies.

The following questions were referred to the Court of Justice:

In circumstances such as those at issue, in which a taxable person relies, on the basis of the judgement on the fact that the supply of works of art that were supplied to him or her in the context of an exempt intra-community supply by the creator also falls under the margin scheme is the taxable amount to be determined exclusively on the basis of EU law, with the result that it is not permissible for the national court adjudicating at last instance to interpret a provision of national law to the effect that the tax due on the intra-community acquisition does not form part of the taxable amount?
Should Articles 312 and 315 be interpreted as meaning that the VAT paid by a taxable dealer in respect of the intra-community acquisition of a work of art, the subsequent supply of which is subject to the margin scheme under Article 316(1), forms part of the taxable amount of that supply?

After considering the facts, the court ruled that the VAT paid by a taxable dealer in respect of the intra-community acquisition of a work of art, where the subsequent supply is subject to the margin scheme, does form part of the taxable amount of that supply.

This is convoluted language and may be confusing to the reader. In essence the question can be considered as “Does the acquisition VAT incurred and paid to the German tax authorities form part of the “purchase price”. If it can be treated as part of the purchase price, then that will reduce the margin on which VAT is payable in respect of the sale. If it does not the acquirer is paying acquisition tax on the purchase and also declaring VAT on an increased margin, a form of double taxation.

The relevant legislation, in setting the purchase price, refers to consideration paid to the supplier. Acquisition VAT paid to the German tax authority is not consideration paid to the supplier from whom the goods have been purchased and cannot be treated as part of the purchase price.

The court held that the acquisition VAT that Mr Mensing paid and could not reclaim could not be treated as part of the purchase price.

Constable Comment: The point of most interest in this case is its implication on how EU law should be interpreted. Both Mr Mensing and the European Commission took the view that that a strictly literal interpretation of Articles 312 and 315 and the first paragraph of Article 317 of the VAT Directive fails to take account of the objectives pursued by those provisions. In particular, the Commission noted that to interpret Article 312 of the VAT Directive as meaning that the purchase price of a work of art should include acquisition VAT (as Mr Mensing argued) would avoid double taxation and distortion of competition. The court accepted that point but held that “where the meaning of a provision of EU law is absolutely plain from its very wording, the Court cannot depart from that interpretation”. Although that is in line with previous decisions it is a point of general application.

4. The VAT treatment of directors’ fees

In the UK the remuneration paid to directors is treated as outside the scope of VAT (effectively they are treated as employee who are not conducting an independent economic activity). That approach is not adopted uniformly within the EU. However, a case has been referred from Luxembourg to the CJEU that may clarify the situation. At this stage a decision has not been delivered but the Advocate General has provided an opinion, which in most cases the court will follow, see Opinion of Advocate General Case C-288/22

TP is a lawyer and a member of the board of directors of several public limited companies incorporated under Luxembourg law. As a member of those boards, he undertakes decision making in relation to the accounts, risk management policy and in developing proposals to be put to shareholders’ meetings. The day-to-day management of two of the companies is caried out by an executive committee made up of the chief executive officers or executive directors. The implementation of decisions taken by the company is generally entrusted to the employees of the company and not to individual members of the board of directors.

In 2020, the tax authority in Luxembourg subjected the directors’ fees received by TP in 2019 to VAT and this was later confirmed on the grounds that a member of the board of directors of a company carries out an economic activity independently since it is permanent and gives rise to remuneration in return for the activity carried out.

The tax authority argued that the permanent nature of the activity results from the fact that members of the board of directors are appointed for a term of up to six years. TP receives remuneration which is decided upon by the general meeting of shareholders on a proposal of the board of directors. The remuneration means that the members of the board of directors, even if they are not shareholders, have an interest in the success of the activities of the company.

TP brought an action before the District Court in Luxembourg who then referred the following questions to the Court of Justice:

Is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out an ‘economic’ activity within the meaning of Article 9 of the VAT Directive? Also, are percentage fees received by that person to be regarded as remuneration paid in return for services provided to that company?
Is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out his or her activity ‘independently’, within the meaning of Articles 9 and 10 of the VAT Directive?

The Advocate General has proposed that the court answers these questions as follows:

Article 9(1) of the VAT Directive must be interpreted as meaning that the existence of an independent economic activity must be determined by means of a typological comparison. The decisive factor in that regard is whether, in the context of the necessary overall assessment, the person concerned, as a typical taxable person does, bears an economic risk personally and acts on his own economic initiative, which it is for the referring court to ascertain.
In that regard, it follows from the principle of neutrality of legal form that a natural person who is a member of a body of a company which is required by law and who receives remuneration for that activity as a member of that body cannot in this respect be regarded as carrying out an independent economic activity.

In short, VAT should not be chargeable on directors remuneration.

Constable Comment: This seems to us a reasonable conclusion and in line with existing UK policy. In our opinion it is unlikely that the UK would change its stance regardless of the court’s decision in this case. However, for businesses operating in the EU a decision that directors fees attract VAT would be problematic for VAT exempt businesses and a decision that required a case-by-case evaluation of the facts would create uncertainty, unnecessary work for businesses and potentially encourage convoluted remuneration structures.

Constable VAT Focus 6 July 2023

6th July 2023

HMRC NEWS

Get your postponed import VAT statement
If you account for your import VAT on your VAT Return using Postponed VAT Accounting, you will need access to the Customs Declaration Service to obtain a postponed import VAT statement online. Information about how long it takes to get access to the Customs Declaration Service has been updated.

Register to report and pay VAT on distance sales of goods from Northern Ireland to the EU
The above guidance details how to register for the One Stop Shop (OSS) Union Scheme to report and pay VAT due on distance sales of goods from Northern Ireland to consumers in the EU. The guidance has been updated to confirm that you can now view and amend your One Stop Shop (OSS) Union Scheme registration details through your HMRC business tax account.

CASE REVIEW

High Court

1. Legitimate expectation

This case concerned Realreed Limited (RL), a company which made supplies of serviced accommodation in over 200 flats which were treated as VAT exempt. In 2019, HMRC took the view that RL was making taxable supplies of accommodation and raised assessments for unpaid VAT in the sum of £4.8million. This decision regarding the VAT treatment of the supply is under appeal to the FTT and the case is yet to be heard, however RL also proceeded to the High Court to request judicial review and it is the outcome of that request which is considered in this appeal. Three grounds were advanced in arguing for judicial review. These were that HMRC’s decision to raise the disputed assessments:

was unreasonable, conspicuously unfair and/or vitiated by the unlawful frustration of a legitimate expectation held by the Claimant;
was contrary to general principles of EU law; and/or
disproportionately infringed the Claimant’s rights under Article 1 of the Protocol 1 to the European Convention on Human Rights.

It was the first of these grounds, ‘legitimate expectation’, that was considered in most detail. RL argued that HMRC carried out VAT inspections on multiple previous occasions and was aware that RL was treating the supplies of serviced accommodation as VAT exempt and this was never challenged. In addition, HMRC had previously raised assessments which were based on amending partial exemption calculations, leading RL to assume that HMRC was content with the VAT treatment of the supplies. HMRC contended that RL had no legitimate expectation that the supplies could be treated as VAT exempt.

The High Court highlighted that the HMRC officers, during the VAT inspection, did not specifically examine whether the VAT exemption applied and also took the view that even if HMRC had ruled that the supplies were subject to VAT, RL would have challenged this ruling (as its currently doing so to the FTT). As a result, the Court concluded that RL made its own decision regarding the liability of its supplies and did not do anything in reliance on the alleged legitimate expectation. Alternatively, RL did not prove that anything which it claims that it might have done in reliance on the alleged legitimate expectation resulted in a detriment to RL. The application for judicial review was dismissed.

Constable Comment: This hearing did not consider the VAT liability of the supply in question or whether HMRC’s assessments were correct, this will be determined by the FTT. However, RL argued, as a result of HMRC’s inspections, it had a legitimate expectation to assume its supplies are correctly treated as VAT exempt. However, the Court ruled that the officers did not specifically consider whether the supplies were VAT exempt or not and that the RL made its own decision on this point. If a taxpayer wishes certainty over the VAT treatment of certain supplies, we suggest submitting a Non-Statutory Clearance (NSC) to HMRC in which all the relevant facts are set out. RL’s situation highlights the point that businesses cannot assume that the fact that HMRC does not pick up a liability issue during a VAT inspection means the VAT treatment is correct and is not protection against future assessments. Constable VAT has relevant experience and would be pleased to assist with any NSC.

FTT

2. Health and Welfare VAT Exemption

This case concerned Illuminate Skin Clinics Ltd (ISC), a business running a private clinic offering a range of aesthetic, skincare and wellness treatments. HMRC refused a VAT repayment claim in relation to ISC’s VAT return for the period 12/16 and raised best judgment assessments for underpaid output tax on the grounds that ISC’s supplies should have been standard rated for VAT purposes and had been treated as VAT exempt.

The treatments offered by ISC included Botox, dermal fillers, CoolSculpting, prescription skincare, chemical peels, thread lifting, aqualyx and more. The appellant’s accountant advised in a letter that these supplies should be treated as VAT exempt.

The supply of services consisting in the provision of medical care by a person registered or enrolled in the register of medical practitioners is VAT exempt in the UK. It was agreed between HMRC and ISC that the sole director and shareholder of ISC complies with the VAT exemption rules in relation to their qualification as a medical practitioner, therefore the only dispute was whether the supplies were of ‘medical care’.

The FTT relied on case law and confirmed that medical care includes the ‘diagnosis, treating and, in so far as possible, curing diseases or health disorders’, therefore it had no hesitation in deciding that the services which ISC offers are not VAT exempt within the proper meaning and effect of the legislation. The FTT highlighted that ISC customers use its services because they want to, not because they are encouraged to do so by a medical practitioner as a result of a disease or health disorder.

Constable Comment: This case considered whether certain aesthetic treatments could qualify for VAT exemption. This is a complex area of VAT law and we would recommend seeking professional advice if there is any ambiguity. Constable VAT would be pleased to assist with any queries.

CJEU

3. What constitutes a fixed establishment?

This case concerned Cabot Plastic Belgium SA (Cabot P)’s supply to an associated company Cabot Switzerland GmbH (Cabot S), a company which has its place of business in Switzerland but is identified for VAT purposes in Belgium for selling carbon-based products. Cabot S entered into a tolling contract in 2012 (the agreement) with the Belgian company Cabot P.

Under the agreement, Cabot P stored raw materials (owned by Cabot S) which it then manufactured, using its own equipment, into articles used in making plastic and stored the finished goods until Cabot S sold them. Cabot P also provided additional services to Cabot S including managing products stored in third-party warehouses, making recommendations to optimise manufacturing process, carrying out internal and external technical checks and assessments and facilitating customs formalities.

Following a tax inspection in 2017, the Belgian tax authority took the view that Cabot S had a fixed establishment in Belgium for VAT purposes within the premises of Cabot P. It arrived at this conclusion because Cabot P put its production plant, distribution centre and warehouses at disposal of Cabot S. In addition, Cabot P made its operational staff available to Cabot S. As a consequence of concluding that Cabot S had a fixed establishment in Belgium, the Belgian tax authority concluded Belgian VAT should have been charged by Cabot P in the sum of €10,609,844 in the relevant period.

Cabot P argued that the place of supply of the services to Cabot S was in fact Switzerland, where Cabot S has established its place of business. If this were the case, no Belgian VAT would be due.

The CJEU highlighted that the fact that Cabot P owns the human and technical resources concerned does not preclude the possibility of Cabot S having a fixed establishment in Belgium provided it has immediate and permanent access to those resources as if it was its own. However, the CJEU concluded that since Cabot P remains responsible for its own resources and provides the services at its own risk, the resources of Cabot P do not become resources of Cabot S in this case, even if the agreement is exclusive and Cabot S is the only customer of Cabot P.

As a result, the CJEU concluded that Cabot S does not have a fixed establishment in Belgium and therefore the place of supply was correctly identified by Cabot P as Switzerland, meaning no Belgian VAT is due.

Constable Comment: In this case the CJEU considered whether a company had sufficient degree of permanence and a suitable structure in terms of human and technical resources to give rise to a ‘fixed establishment’ for VAT purposes. The CJEU provided some useful analysis in reaching its conclusion and this case will be of interest to anyone involved with cross border supplies.

Constable VAT Focus 23 June 2023

23rd June 2023

HMRC NEWS

Revenue and Customs Brief 6 (2023): VAT liability of digital publications – Supreme Court decision in News Corp and Ireland Ltd
This newly released brief follows on from Revenue and Customs Brief 3 (2021) and gives an update on the VAT treatment of supplies of digital newspapers and other digital publications before 1 May 2020. Prior to this date, HMRC took the view that only physical newspapers were zero rated and all digital versions of newspapers should be standard rated.

News Corp has challenged HMRC’s policy and submitted claims for overpaid VAT on granting access to digital versions of publications. However, the Supreme Court dismissed this appeal by its decision released in February 2023. HMRC has now released this brief to confirm that supplies of digital publications before 1 May 2020 are standard rated.

This brief has no impact on the Government’s introduction of a new zero rate for supplies of certain digital publications, including e-newspapers, which came into effect from 1 May 2020.

Check if you need to report errors in your VAT Return
This newly published guidance can be used to check if taxpayers need to notify HMRC about errors that are over the error reporting threshold on VAT returns and find out how to report them using form VAT652. Taxpayers can enter the relevant figures (net error and turnover) and they will receive further guidance based on the figures provided.

VAT payment plan
Taxpayers can now set up a payment plan for VAT through the Government Gateway account where they are unable to pay the VAT owing and:

have filed the latest VAT return;
owe £20,000 or less;
are within 28 days of the payment deadline;
do not have any other payment plans or debts with HMRC; and
plan to pay the debt off within the next 6 months

HMRC have confirmed taxpayers will not be able to set up a VAT payment plan online if using the cash accounting or annual accounting scheme or are within the payments on account regime.

Updates on VAT appeals
The above link can be used to check the list of VAT appeals that HMRC has lost, or partly lost, that could have implications for other businesses. The list of VAT appeals that HMRC has lost and that may have implications for other businesses has been updated with 5 removals, 5 amendments and one new addition.

Fuel and power (VAT Notice 701/19)
The above guidance can be used to find out the correct VAT rate that should be charged on supplies of fuel and power. HMRC has recently amended section 4.1 with examples of minor impurities.

CASE REVIEW

FTT

1. Input tax incurred on business activity?

This case concerned 3D, a community interest company (CIC) incorporated in March 2020. It was set up by a small group of volunteers to donate personal protection equipment (PPE) to NHS and care homes in response to the COVID 19 pandemic. However, the number of volunteers grew significantly into thousands of volunteers and over 200,000 articles of PPE were donated to the NHS. 3D incurred VAT on supplies made to it, including seeking CE certification, general overhead costs and materials. 3D sought to recover this VAT incurred however HMRC denied the claim.

Whilst HMRC was sympathetic towards 3D and was aware of the importance of their actions, HMRC denied the claim on the grounds that 3D did not carry out a business activity because the PPE was ultimately given away by 3D. Therefore the costs incurred cannot be said to have been incurred for any business activity.

3D argued that it had the intention of making taxable supplies of PPE however it was first required to obtain BSI accreditation in order to sell PPE as opposed to donate. Although it was not able to fulfil this intention, as the accreditation was delayed and other suppliers fulfilled the need for PPE, input VAT should be recoverable as the CIC had the intention of making taxable supplies in return for consideration.

The Tribunal first concluded that it was clear 3D had the intention of making taxable supplies in return for consideration as otherwise there was no benefit to incur the costs on getting BSI accreditation (BSI was not necessary in order to donate, but was a requirement to sell PPE). As a result, any VAT incurred on immediate cost of CE/BSI accreditation was incurred solely for intended business purposes and is recoverable as input tax in full.

Referring to relevant case law, the Tribunal concluded the fact that 3D did not fulfil its plans of taxable supplies does not, in the absence of fraud or abuse, impact its ability to recover input tax as an intending trader. However, at a certain point, 3D was aware that it would not be able to sell all of the PPE and knew some must be donated, therefore the business purpose was not the only purpose of 3D. As a result, the Tribunal concluded that VAT incurred on general overhead costs and materials will need to be apportioned to reflect the non-business activity of donating PPE.

Constable Comment: This case considered whether there was an intention by 3D to undertake a business activity supplying PPE and, if so, whether the VAT incurred by 3D was for the purpose of making those supplies in the future. It also considered whether it matters if those intended taxable supplies are never made. Whilst HMRC made it clear that were sympathetic to 3D’s position and aware of this importance of 3D’s actions, they were bound by the legislation and unable to act outside of this. The case provides some useful detailed analysis on what constitutes a business activity applying various case law. Where there is ambiguity if VAT was incurred for business purposes, we would recommend seeking professional advise to reduce the risk of HMRC challenging the VAT treatment. Constable VAT has experience in this area and would be pleased to assist with any related queries.

2. Default surcharge: Reasonable excuse

This case concerned W.W.M.Rose & Sons Ltd (the appellant) appealing against a VAT default surcharge issued by HMRC. The appellant is a wholesaler of agricultural machinery, equipment and supplies. The payment for the 01/21 VAT return was made late and the appellant was issued a Surcharge Liability Notice (SLN) by HMRC. Subsequently, a payment for the 01/22 VAT return was also made late and HMRC issued a 2% surcharge.

The appellant argued that it had a reasonable excuse as it contacted HMRC on 10/03/2022 and agreed a time-to-pay (TTP) agreement. In addition, it argued that it was unable to pay the VAT as a result of a shortage of delivery equipment from supplying manufacturers. The appellant was unable to purchase equipment which would have offset the VAT due by recovering the input VAT incurred on the equipment.

The Tribunal found that even if a TTP was agreed, this was only requested on 10/03/2022 when the appellant first contacted HMRC and the statutory due date for payment of the 01/22 VAT return was 07/03/2022. The Tribunal stated the appellant would have been aware of this as a result of correspondence when it received the SLN for the 01/21 VAT period. As the TTP was not agreed prior to the due date, the appellant did not have a reasonable excuse for the late payment of the 01/22 VAT return.

With regards to cashflow problems as a result of equipment shortage, the Tribunal did not accept this as a reasonable excuse because the appellant had raised these concerns in the past for previous periods and it seems this issue is an ongoing hazard of trade for the appellant. The Tribunal found it reasonable to expect the appellant to have put measures in place to ensure compliance with its VAT obligations. As a result, the appellant did not have a reasonable excuse and the appeal was dismissed.

Constable Comment: Reasonable excuse is not defined in legislation and the Courts have to rely on case law and carefully consider the specific facts of each case. In this case the Tribunal confirmed that where an issue has been raised before and therefore can be considered ‘ongoing’, a reasonable taxpayer would put measures in place to avoid further defaults. This would include agreeing a TTP with HMRC prior to the due date for payment.

Whilst the above case provides some useful analysis on what constitutes a reasonable excuse, it is important to note that the default surcharge regime in the above case has been replaced by the New VAT Penalty regime which commenced from 1 January 2023. Constable VAT has released an article covering the new regime which can be read here.

Constable VAT Focus 6 June 2023

6th June 2023

HMRC NEWS

Buildings and construction (VAT Notice 708)
The above guidance sets out how to work out the VAT on building work and materials if you are a contractor, subcontractor or developer. HMRC has now updated sections 13.8.1 and 13.9 to clarify that electrical blinds are not ordinarily incorporated in dwellings.

CASE REVIEW

Upper Tribunal

1. Historical bad debt relief claims

In 2009, British Telecommunications PLC (BT) submitted bad debt relief (BDR) claims to HMRC for the period 1978 to 1989 however these were rejected because under the old BDR rules BT did not satisfy the then in place insolvency conditions. BT appealed HMRC’s refusal, however both the UT and the Court of Appeal ruled that BT’s claim for BDR was time barred and therefore BT was unable to make the claim.

BT then returned to the FTT with the question whether its claim should be properly characterised as a claim under s.80 VATA 1994, regarding repayments of overpaid VAT, however HMRC applied for BT’s appeal to be struck out on the grounds that the statement disclosed no reasonable prospect of success and the FTT agreed.

BT has now challenged the FTT’s decision to strike out its appeal however the UT has upheld the FTT’s decision. The UT concluded that it was correctly ruled by the Court of Appeal, that the correct mechanism for claiming BDR was the old BDR scheme appropriately moulded to ignore the insolvency condition. Section 80 cannot be utilised for the purposes of claiming for bad debts and as a result the UT held there is no reasonable prospect of BT’s appeal succeeding and therefore it is struck out.

Constable Comment: This case considered whether BT’s appeal had reasonable prospects of success and the UT concluded it did not. It considered the application of the old bad debt relief scheme and these are now redundant therefore it is unlikely this case will have significant importance when considering bad debt reliefs.

CJEU

2. VAT treatment of vehicles sold ‘for parts’

This case concerned a dispute between IT and the Belgian tax authorities regarding the VAT treatment of selling second hand vehicles that are written off, purchased from insurance companies, and reselling them to third parties as wrecks or ‘for parts’. IT has been accounting for VAT under the margin scheme however the local tax authorities took the view that cars sold for parts or wrecks are excluded from the margin scheme because they do not fall under ‘second hand goods’ as they are no longer suitable for further use and no longer maintains the characteristics they possessed when new.

The CJEU has previously ruled in the case of Sjelle Autogenburg that parts salvaged from written off cars can be taxed under the margin scheme. However, the facts were different in that case, as IT does not salvage parts, rather it sells the vehicle as ‘for parts’ to a third party. Also, the CJEU noted as a fact that the vehicles purchased by IT are all definitively end-of-life motor vehicles.

In this case, the CJEU ruled that the referring court would have to ascertain that:

The vehicles still include components that retain the functionalities that they had when new so they can be reused as they are or after repair
The vehicles have not been sold simply in order to be scrapped or transformed into another object.

Provided that the above two requirements were met, the vehicles sold ‘for parts’ or wrecks can be taxed under the margin scheme and therefore account for VAT on the profit margins.

Constable Comment: This case considered how the second hand margin scheme is applicable to the sale of written off vehicles for parts. There is a second hand margin scheme in the UK that also applies to the sale of second hand motor vehicles. If there is any ambiguity how the scheme applies to your business, we would recommend seeking professional advice.

3. Input VAT recovery on fictitious transaction?

This case concerned, M. Sp. Z.o.o S.K.A (M) issuing an invoice for an assignment of trade marks to W which was subject to VAT. The VAT was declared and paid by W. Subsequently the local tax authority questioned the right to deduct the VAT on the ground that the assignment of trade marks in question was invalid in that it was contrary to the rules of “social conduct”. The director of the tax authority confirmed that the assignment of trade marks at issue was a fictitious transaction.

The referring court noted that it is not apparent that a taxable person may lose their right to deduct VAT invoiced to them on the ground that the transaction at issue does not comply with the national law. The right to deduct VAT must only be refused where it is established that it is being relied on for fraudulent or abusive ends.

The question referred by the national court is whether a taxable person can be deprived of the right to deduct input VAT solely because that transaction is regarded as fictitious and is invalid under the provisions of national law, without it being necessary to establish that the transaction is the result of VAT evasion or abuse of rights.

The CJEU held that the provisions of EU VAT Directive 2006/112 precludes relying upon “national legislation under which a taxable person is deprived of the right to deduct input value added tax solely because a taxable economic transaction is regarded as fictitious and invalid under the provisions of national civil law, without it being necessary to establish that the criteria for classifying, under EU law, that transaction as fictitious are met or, where that transaction has actually been carried out, that it is the result of value added tax evasion or abuse of rights”.

Constable Comment: This case considered how provisions of local national law may affect input VAT recovery. As these laws do not apply in the UK now, it is less likely this decision will have significant importance for taxpayers in the UK.

4. Calculation of VAT penalties

This case concerned a dispute between SA CEZAM (CEZAM), a Belgian carpentry company, and the local tax authorities. CEZAM appealed three decisions of the local tax authorities relating to assessments and fines and it disputes the amount of the fines, which was calculated as 20% of the amount of VAT which would have been due before subtracting deductible VAT.

CEZAM argues that to calculate the amount of the fines, the tax authorities should have taken account of the amount of the VAT which actually had to be paid to them, being the amount after the subtraction of deductible VAT.

The Belgian state maintains that CEZAM has been penalised for an infringement of the obligation to declare and pay VAT. By not paying the VAT collected from its customers, CEZAM has obtained an advantage. The right of VAT deduction is a right which the taxable person may exercise by entering the VAT to be deducted in their periodic VAT returns. The referring court observed that the penalties imposed were determined in accordance with the Belgian VAT law intended to penalise infringements committed without any intention to evade VAT.

The CJEU found that the infringements that CEZAM committed are not as a result of an error relating to the application of the VAT mechanism, over a prolonged period and despite several interventions by the tax authorities, the company neither declared nor paid the VAT due. The company also had not made good the shortfall in VAT voluntarily. The CJEU held that it does not appear that the imposition of penalties amounting to 20% of the VAT which would have been due before subtracting deductible VAT goes beyond what is necessary to ensure the correct levying and collection of the tax and to prevent fraud.

Constable Comment: This case highlights the importance of ensuring that returns are submitted and VAT is paid on time in order to avoid penalties. The UK has different rules for late payment of VAT or late filing of returns which commenced from 1 January 2023. Constable VAT has released an article covering these rules which can be read here.

Constable VAT Focus 23 May 2023

23rd May 2023

HMRC NEWS

VAT registration helpline
From 22 May 2023, HMRC have closed the VAT registration helpline. This line was assisting taxpayers with VAT registration applications; however, HMRC have confirmed that over 85% of the calls were from taxpayers seeking an update on the progress of their VAT registration application. Taxpayers can now make use of the ‘Where’s my reply’ tool rather than making phone calls, allowing HMRC to allocate resources more efficiently and processing more applications. Taxpayers should expect a reply to VAT registration applications within 40 workings days.

Fuel and power (VAT Notice 701/19)
This above guidance provides information about the VAT treatment of supplies of fuel and power to both suppliers and users. Clarification of the requirement for certificates by charities has been added.

Claim a VAT-related payment if you buy second-hand motor vehicles in Great Britain and export them to the EU for resale
The above guidance sets out how to use the second-hand motor vehicle payment scheme to make a claim if you are VAT registered in the EU. Information has been added as you must keep records showing that at the time you exported the vehicle to an EU country, you were registered for VAT in that country, for claims you make on your UK VAT return if you have a business establishment in the UK.

CASE REVIEW

FTT

1. Alternative providers of higher education

This appeal concerns the exemption from VAT for certain supplies of education. The appellants were all providers of higher education courses and contend that UK legislation does not properly implement Article 132(1)(i) of the principal VAT directive (PVD), which deals with education exemption, therefore the appellants are entitled to rely on the direct effect of the PVD and their supplies are exempt from VAT. Alternatively, they argue that some of their supplies are exempt pursuant to UK law.

The education provided by each of the appellants in the relevant period can be briefly summarised as follows:

SPIC operated a further and higher education college in London providing a range of higher national certificates and higher national diplomas in business management, tourism and hospitality, technology and health and social care
LCCA was a provider of further and higher education courses in fashion, visual arts, media, business and hospitality.
IMAN offered undergraduate and postgraduate degree courses, higher national certificate and diploma courses, professional programmes and certain English language courses.

Not all the topics on these complex appeals arise in relation to each appellant. The issues are as follows:

Were the appellants entitled to rely on the direct effect of Article 132? The appellants believe that they made similar supplies to universities, colleges of universities and further education colleges but are being treated differently for VAT purposes.
If the appellants were entitled to rely on the direct effect of Article 132, did their supplies qualify for exemption because the appellants have similar objects to bodies governed by public law which provide education?
Were SPIC and LCCA entitled to exemption in any event, pursuant to item 5B, Group 6, Schedule 9, VATA 1994 (funding for supplies of education ultimately funded by the Secretary of State)?
Was IMAN an “eligible body” within Note 1(b) on the basis that it was a college of a UK university?
IMAN was an “eligible body” within Note 1(f) on the basis that it provided some teaching of English as a foreign language. Was it entitled to exemption for all its supplies of education?

The first issue considered by the tribunal was whether Group 6, Schedule 9, VATA 1994 properly implements Article 132(1)(i). The appellants argued that Group 6 fails to give effect to the object of the exemption because the definition of an ‘eligible body’ should depend on the organisations objectives but instead it depends on whether the organisation falls within a number of prescribed categories.

The Tribunal noted that the question was whether by failing to recognise the appellants as eligible bodies, the UK had breached the principle of fiscal neutrality. In addition, it considered whether the appellants are sufficiently similar to universities, colleges of universities or further education colleges (FECs) such that their supplies of education should have the same treatment. The Tribunal considered whether from the point of view of students, the supplies by the appellants are sufficiently similar to the supplies of eligible bodies, whether they meet the same needs of the consumer and whether the suppliers are comparable.

The FTT held that the exclusion of the appellants from the exemption does not breach the principle of fiscal neutrality and the UK was entitled to recognise universities and their colleges as having similar objects to bodies governed by public law. The regulatory regime for degree awarding powers (DAPs) and university title did not apply to the appellants and they were not in a comparable position to a university or a college of a university, therefore the supplies were not VAT exempt.

The appellants also argued that their supplies are exempt under Item 5B Group 6, as they provide education for persons under the age of 19 or who were under that age when the education or training began. The dispute is whether the course fees paid in respect of such education is ultimately “a charge to funds provided by the secretary of state”. The tribunal found that Item 5B did not apply to the supplies of education because funds provided by way of loans to students do not fall within the meaning of the phrase “a charge to funds provided by the secretary of state”.

IMAN argued it was a college of a university, however the Tribunal rejected this as it was not satisfied that there was a sufficient degree of integration. As a result, only its supplies of teaching English as a foreign language was VAT exempt.

Constable Comment: This case involved various arguments put forward by the appellants regarding the application of the VAT education exemption. Supplies of education can often be a complex area of VAT and it is recommended to seek professional advice to ensure the correct VAT treatment is applied. This is particularly important when taking account of the relatively recent decisions in cases such as Colchester Institute.

2. Exemption: Fundraising events

This case considered the VAT implications of the annual Great Yorkshire Show (the show) organised by the Yorkshire Agricultural Society (the Society). The society initially treated its admission income as standard rated; however, it subsequently submitted a VAT accounting error correction for overdeclared output tax regarding its admission income on the basis that the show is VAT exempt under the fundraising exemption available for charities and certain other qualifying bodies where specific tests are met. Corresponding input VAT adjustments were made to take account of VAT exempt supplies. HMRC rejected the VAT refund claim and subsequently raised an additional VAT assessment. The VAT sums involved were just short of £300,000.

The supply of goods and services by a charity (or another qualifying body) in connection with an event that is organised for charitable purposes, whose primary purpose is the raising of money and that is promoted as being primarily for the raising of money, is exempt from VAT where these two conditions are satisfied.

Whilst it was common ground that the show was organised for charitable purposes by a charity, HMRC took the view the show was of a commercial nature to promote farming in the community and generate profits. The Tribunal concluded that fundraising was not the exclusive purpose of the show as there were two main purposes, being fundraising and education. However, neither can be ranked in order of importance and it was concluded that the ‘primary purpose’ (raising funds) condition was met.

With regards to the ‘promoted as being primarily for the raising of money’ test, the Tribunal relied on case law to conclude this condition is an incorrect transposition of the EU VAT Directive in its entirety and therefore should be ignored. Alternatively, at least the use of the word ‘primarily’ should be ignored. As the event was promoted on fliers and admission tickets as a fundraising event, the Tribunal concluded all conditions for exemption were met and admission to the show was VAT exempt. The appeal was allowed.

Constable Comment: The Tribunal considered the fundraising exemption conditions and provided some useful commentary specifically on item 1(c), regarding the ‘promoted primarily for the raising of money’ condition. It was concluded that this went beyond the requirement of the EU VAT Directive, therefore should be deleted, or the word ‘primarily’ removed. This is a particularly interesting decision for charities and other qualifying bodies (wholly owned trading subsidiaries, trade unions, professional bodies, other public interest bodies, charitable sports clubs, and cultural bodies) and there may be scope for these organisations to revisit the VAT accounting treatment of events over the last 4 years, subject to the unjust enrichment rules and taking account of the partial exemption position. This is a decision of the FTT and does not set a wider precedent; however, it covers interesting points and references a case which did not proceed to a hearing because HMRC’s Solicitors Office concluded that “Having considered the evidential weight the Tribunal is likely to attach to the Appellant’s witness evidence in this appeal, the Respondents have concluded the evidence is, on balance, insufficient for successful litigation. The Respondents no longer intend to defend this appeal and accordingly notify their withdrawal from proceedings and respectfully request the Tribunal allows the appeal.” This also acts to remind us that not all decisions appealed do lead to a hearing.

3. Appeals: Hardship application

This case concerned ABA Motors Limited (ABA), a company selling used cars and light motor vehicles. HMRC raised VAT assessments on the basis that ABA was involved in missing trader fraud and was not entitled to a repayment of VAT which it incurred on its purchases, amounting to £110,310.

ABA appealed against the assessment and also made an application for hardship. Taxpayers are normally required to pay any VAT due on a VAT assessment before they can appeal to the Tribunal, unless HMRC are satisfied, or the Tribunal decides that the requirement to pay the VAT would cause the appellant to suffer hardship.

HMRC rejected the application and the Tribunal agreed that based on the evidence presented to HMRC, it was correct to refuse hardship. However, the Tribunal heard additional oral evidence by the taxpayer, and it accepted that ABA currently has no assets, cannot generate income, it cannot trade, it has a liability to make loan repayments and has no ability to borrow further funds. The Tribunal ruled this was not just a question of hardship, ABA simply cannot pay the VAT. The appeal was allowed, and hardship was granted.

Constable Comment: This case highlights that the Tribunal may waive the requirement to pay the VAT to those taxpayers who can put forward genuine evidence that paying the VAT would cause hardship.

CJEU

4. Letting of permanently installed equipment

This case concerned a dispute between the appellant, Y, and the local tax authorities regarding the VAT treatment of permanently installed equipment. Y let, in the context of a lease, a turkey-rearing shed with permanently installed equipment and machinery. It included an industrial spiral conveyor belt, a heating, ventilation and lighting system. The equipment and machinery were specially adapted for the use of the building.

Y received a single payment for the provision of the rearing shed and equipment and machinery. Y took the view the whole of its leasing service was exempt from VAT. The local tax authorities considered that the leasing of the equipment and machinery was not exempt from VAT and that the agreed one-off remuneration, 20% of which corresponded to the leasing of machinery and equipment, had to be subject to VAT.

The CJEU noted the facts that the case concerns the leasing of a rearing shed and permanently fixed equipment in that building, specifically adapted. The rental contract has been concluded between the same parties and giving rise to a single remuneration. The CJEU concluded that it is for the referring Court to ascertain whether those services constitute to a single economic supply.

It was concluded that if the referring court views the lease as a single economic supply it then follows from case law that, where there is a single economic supply consisting of a principal supply which is exempt from VAT, being the leasing or letting of immovable property, and an ancillary supply, inseparable from the principal supply, which is excluded from that exemption, the ancillary service follows the tax treatment of the principal supply, meaning that the letting of permanently installed equipment would also be VAT exempt.

Constable Comment: In this decision the CJEU confirmed that in the case of a single economic supply, any ancillary supply that is inseparable from the principal supply would follow the tax treatment of that principal supply. However, it was for the referring court to determine whether the provision of permanently installed equipment would constitute a supply ‘ancillary’ to the supply of the lease.

5. VAT on disposal of obsolete stock

This case concerned Balgarska Telekomunikatsionna Kompania (BTK), a Bulgarian company operating in the telecommunications sector. It makes taxable supplies of telecommunication services. For the purposes of its activities, it acquires various capital goods and, with a view to their resale, mobile communication devices and various items of equipment necessary or ancillary to the use of the services it provides. VAT incurred is recovered on those acquisitions as input tax.

During a period between 2014 and 2017, BTK wrote off various obsolete goods and subsequently disposed of them by either selling it as waste, destroying or disposing of them. The Bulgarian law required BTK refund input VAT claimed on the stock unless certain conditions were met, including if the goods were destroyed.

With regards to the stock sold as waste, which was subject to VAT, the CJEU concluded it does not constitute to a change in the factors used to determine the amount to be deducted, regardless that the sale of waste is not one of BTK’s usual economic activities. As a result, there was no requirement to adjust the input VAT reclaimed on the stock sold as waste.

With regards to stock voluntarily disposed of, the CJEU concluded that there is a change in the factors used to determine the amount to be deducted and therefore an adjustment of the input tax previously reclaimed would be reasonable. However, this disposal would fall under ‘destruction’ which is one of the exceptions, irrespective of its voluntary nature. As a result, provided BTK could prove the stock was destroyed and confirm that the goods had objectively lost all usefulness in the taxable person’s economic activities, there was no requirement to adjust the input VAT recovered on the stock disposed of.

Constable Comment: This case considered the VAT treatment on the disposal of obsolete stock, specifically any adjustments necessary to the input VAT recovered on the original purchase. The case involved strict local laws which may not be applicable in the UK.

Constable VAT Focus 4 May 2023

4th May 2023

HMRC NEWS

Revenue and Customs Brief 5 (2023): Change to the VAT treatment of medical services carried out by non-registered staff directly supervised by pharmacists
During the Spring Budget 2023, the government announced that the VAT treatment of medical services carried out by staff directly supervised by pharmacists will be exempt from VAT from 1 May 2023. The brief explains:

The changes to the VAT treatment of services directly supervised by pharmacists
Where businesses can find more information

Pay the VAT due on your One Stop Shop VAT Return
The above guidance can be used to find out how to pay the VAT due on your One Stop Shop VAT (OSS) Return. HMRC has updated the guidance to confirm that taxpayers can now access the OSS Union scheme through their HMRC business tax account.

Energy-saving materials and heating equipment (VAT Notice 708/6)
The above guidance can be used to find out how to account for VAT if you’re a contractor or subcontractor installing energy-saving materials and grant-funded heating equipment. Guidance on the time-limited zero rate of VAT for installations of energy-saving materials installed in residential accommodation in Northern Ireland, with effect from 1 May 2023, has been added.

Sales of second-hand motor vehicles in Northern Ireland
From 1 May 2023, the second hand motor vehicle payment scheme to claim VAT-related payments can be used. The scheme can be used by dealers who sell second hand motor vehicles in Northern Ireland that have come from Great Britain. In addition, the scheme can be used if you are VAT registered in the EU. Further information about that can be found here. Both guidance have been updated with information about what should be included in your stock book.

CASE REVIEW

Upper Tribunal

1. Place of supply of football agent services

This appeal related to the VAT treatment of a payment of EUR 4 million received by Sports Invest UK limited (SI), the appellant, from Football Club Internazionale Milano SpA (Inter), an Italian football club, in relation to the transfer, in August 2016, of a Portuguese football player (Joao Mario Naval da Costa Eduardo) from Sporting Clube de Portugal (Sporting), a Portuguese football club, to Inter.

SI is in business as an intermediary in the football industry, established and VAT registered in the UK. It sought out opportunities to represent football players and also sought out opportunities to represent or advise football clubs. SI signed a player representation agreement with the player in 2016 which included a remuneration clause for 10% of the player’s total gross income from Inter, which was estimated to be around EUR 3 million; however, a waiver letter was issued which waived all fees in that agreement. Instead, SI was paid by Inter (the club who purchased the player). Under the ‘inter agreement’ the fee was 10% of the EUR 40million transfer fee payable by Inter to Sporting (EUR 4 million).

HMRC took the view that SI supplied services to both the player and Inter and VAT was due on EUR 3 million (supply made to player)as this was third party consideration paid by Inter for a supply made by SI to the player which was a supply made in the UK, therefore subject to VAT. The remaining EUR 1 million was assumed to relate to services made to Inter. This place of supply for this is Italy, therefore not subject to VAT. However, SI took the view that all of the payment (EUR 4million) was consideration for services supplied to Inter and the place of supply was Italy, meaning no VAT was due.

The FTT initially considered the terms of the relevant contracts; however, it then went on to consider whether the economic and commercial reality of the case reflects the contractual terms. Having done so, the FTT concluded that the payment was made in consideration for the services supplied to Inter and not as consideration for services supplied to the player. As a result, the place of supply was Italy and no VAT was due. The appeal was allowed.

Constable Comment: This was a ‘who supplied what to whom’ case involving complex ‘agency’ contracts in the football industry. The FTT highlighted the importance of considering both the contractual as well as the economic and commercial reality of a situation. In addition, it considered an alternative argument of SI regarding paragraph 10 of Schedule 4A VATA 1994. Even though there was no need to conclude on this point, the full decision contains in brief terms, the FTT’s view of the application of paragraph 10.

2. Appeal out of time

This case considered two appeals which were heard at a joint appeal. Mr Uddin is the sole director and shareholder of the second appellant, Kazitula Limited (The Company) which ran a restaurant business. HMRC imposed VAT and corporation tax assessments and deliberate inaccuracy penalties on the company, totalling around £532,266 due to suppressed sales. Shortly afterwards, the company went into liquidation. HMRC issued a personal liability notice (PLN) to Mr Uddin totalling £212,506. Mr Uddin and the liquidators of the company lodged their respective appeals to the FTT between 16-18 months outside of the 30 day time limit.

Mr Uddin appealed to the FTT on the grounds that his accountant (representative) mislead him. He asked his accountant to handle the assessments and made regular checks on the progress of the case. Each time he was assured it was being handled.

The FTT had previously rejected the appeal on the grounds that the Tribunal was provided only with cursory information about communications with the accountant and no copies of correspondence was provided. In addition, the PLN issued stated all the relevant time limits, therefore there was no reasonable excuse and the FTT did not grant permission for a late appeal.

Mr Uddin now bought an appeal to the Upper Tribunal (UT), arguing that the FTT failed to deal with his core submission. He argued that the FTT only considered that Mr Uddin had relied on his accountant, as opposed to being mislead by him.

The UT concluded the FTT did not err in law. Whilst it did not specifically address whether Mr Uddin was mislead or not, the cursory enquiries on progress he made were insufficient to displace the general rule that the taxpayer should bear the consequences of the representative’s failings. Therefore, whether he was misled or not would not have altered the outcome.

The company had also appealed to the FTT, which rejected its argument. It appealed to the UT on two grounds. First, it argued the FTT failed to take account of the practical difficulties that are generally faced when a company goes into liquidation, in complying with the 30 day time limit and therefore reached an unjust result. Second, it argued the FTT failed to recognise that the issue of whether Mr Uddin was misled by his accountant was a relevant factor to consider when it came to considering all circumstances of the case.

The UT has rejected both grounds of appeal and concluded that the FTT was correct to reach the conclusion that the appeal was out of time.

Both Mr Uddin and the company’s appeal was dismissed by the UT.

Constable Comment: This case highlights the importance of lodging an appeal with the Tribunal within the 30 day time limit. A Tribunal may refuse to hear an appeal if it is out of time and there is no reasonable excuse for the delay.

FTT

3. Are turmeric shots a beverage?

This case concerned Innate-Essence Limited, trading as The Turmeric Co (TTC) ‘s appeal against HMRC refusal of an error correction in the sum of £80,730.52 for overcharged VAT. TTC supplied turmeric shots and it contends that they fall within Group 1, Schedule 8, VATA 1994 and are a zero rated food item.

HMRC took the view that the turmeric shot falls within the excepted item of beverages and it is subject to VAT at 20%.

The term ‘beverage’ is not defined in UK legislation therefore the FTT referred to various case law and applied a multifactorial assessment to reach a conclusion. The FTT initially considered the Bioconcepts test. Whilst it agreed with HMRC that the shots were a drinkable liquid commonly used, it failed on other aspects of the test, in particular that a beverage increases bodily liquid levels and it is taken to slake thirst. The shots are sold in 60ml quantity, include flax oil and pepper, therefore the FTT considered it highly unlikely that a typical consumer would use the product to increase liquid levels or slake thirst.

HMRC also argued that the shots are consumed to give pleasure. The FTT rejected this argument. Various customer reviews confirmed that customers did not like the taste. It was very strong and sharp. However, TTC confirmed that the shots are not to taste ‘synthetic’ but rather they aim to reflect the product’s freshness of ingredients. The FTT agreed that the shots are not consumed for pleasure but for the claimed long terms health and wellbeing benefits.

The FTT also considered the ‘unexpected guest’ test and took the view the shots are not a beverage that would be offered to a guest by a host.

HMRC argued the marketing of shots confirmed they compete in the same market as many other beverages. However, the FTT disagreed stating that the shots are marketed on the basis of the nutritional content of the high-quality ingredients that are stated to support health and wellbeing. In addition, the most popular method of purchasing is on a subscription service and the shots are expensive when compared to other common beverages.

As a result of all of the above considerations, the FTT took the view that shots should be properly zero rated for VAT purposes as a food but not a beverage. The appeal was allowed.

Constable Comment: This case considered various factors to determine what constitutes a ‘beverage’. If there is any ambiguity regarding the VAT liability of a food item, we recommend obtaining professional advice to mitigate the risks of HMRC challenging the VAT treatment applied. Constable VAT has considerable experience dealing with zero rated food items and would be pleased to assist with any relevant queries.

4. DIY Housebuilders scheme

This case concerned a DIY claim made by Mr Steven James Mort (The appellant) in the sum of £135,671.72 regarding a new dwelling.

HMRC refused to refund VAT charged on some invoices on the grounds that these related to supplies of services and should have been zero-rated. As the VAT was not properly charged, it is not eligible for a refund under the DIY scheme.

The appellant argued these were building materials only, and VAT was due at 20% which is due for a refund. The total sum of VAT originally under appeal was £37,439.82

The FTT reviewed each invoice and sought to identify the predominant element of the supply, taking the view of a typical customer and considering the qualitative and quantitative importance of the different elements being supplied.

With regards to some of the invoices, the FTT ruled that the predominant element of the supply was the building materials. Even though it may have included installation services those services were not sufficiently significant to prevent the supply being classified as “goods”. As a result, VAT incurred on these invoices was properly charged and therefore due for a refund under the DIY scheme. However, with regards to some invoices the FTT ruled the predominant supply was the services. As a result, these should have been zero rated by the supplier and therefore were not due for a refund under the DIY claim.

In addition, HMRC had disallowed claims relating to furniture that was not considered to be building materials, such as bedside cabinets, mirrored wall and master dressing room furniture including lighting to wardrobes. The FTT agreed with HMRC regarding the furniture issue.

Constable Comment: In this case the FTT provided a useful analysis regarding whether the predominant element of a supply is the building material or the installation of the building materials. The point at which a supply of “installed goods” becomes part of a “construction service” is an interesting point that is seldom considered.

Perhaps the most interesting comments in the decision concern the FTT’s observations concerning the fact that HMRC was arguing that VAT could not be claimed when suppliers had charged VAT incorrectly but also took no action to refund overcharged VAT to those suppliers or notify them of their error. The FTT said: ‘The effect of HMRC’s approach to these proceedings is to seek to retain VAT to which HMRC has no ultimate entitlement. This is inherently unsatisfactory.’ The FTT also stated ‘Questions could legitimately be asked as to whether HMRC’s approach accords with HMRC’s collection and management obligations and the effective use of Tribunal time.’

Whether (as the FTT seems to suggest) HMRC’s approach amounts to an abuse of power and could be subject to a judicial review is hard to judge. It is certainly standard HMRC practice to take no action to correct overpayments of VAT unless the supplier who has made the VAT accounting error proactively seeks a refund. It also refuses to get involved if the matter is raised by a customer to whom VAT has been overcharged. This policy is difficult to reconcile with HMRC’s Charter undertaking “We’ll work within the law to make sure everyone pays the right amount of tax and gets their benefits and other entitlements”.

CJEU

5. Recharging points for electric vehicles

This case concerned P. in W, (PW) a company planning to install and operate electric vehicle charging stations accessible to the public. Stations would be equipped with both quick charge connectors and slow charge connectors. The price billed to users would be based on the duration of the charging session as well as the standard (quick or slow) of the connectors chosen.

PW also intends to provide the necessary technical support and a platform (website or application) that enables users to reserve a connector in advance and to view transactions and payment history.

PW took the view that this single supply was a ‘supply of services’ because the supply consisted of access to technologically advanced recharging devices which offer quicker and more efficient recharging. The users were billed for the time they had access to the devices rather than the amount of electricity used.

On the other hand, the national courts took the view it was a ‘supply of goods’ as the principal supply was the electricity required to charge the vehicles, and any other services offered by PW had to be regarded as ancillary. The referring Court therefore asked the following question:

Does a single complex supply consisting of:

The provision of access to recharging devices
The supply of electricity, within duly adjusted parameters, to the batteries of the vehicle
The necessary technical support for users, and
The provision of a platform whereby users can reserve a connector and view their transactions and payment history

constitute a supply of goods or a supply of services?

The CJEU highlighted that a supply of good is defined so as to include a supply of electricity. It stated that the supply of electricity to the batteries constitutes a supply of goods, in so far as the supply enables the user of the recharging station to consume the electricity transferred in order to propel their vehicle. The other element of the supply constitute a minimal supply of service that necessarily accompanies the supply of electricity and are not an end in itself but a means of better enjoying the supply of the electricity.

As a result of the above, the CJEU concluded that the single complex supply made by PW, consisting of access to recharging devices, the supply of electricity, technical support and the provision of IT platform constitutes a supply of goods.

Constable Comment: In our view this was always a likely outcome to this referral to the CJEU.

Whilst CJEU decisions are no longer binding in the UK, the principles applied by the CJEU remain relevant in interpreting UK law and a case heard in the UK would probably have delivered the same decision.

Constable VAT Focus 20 April 2023

20th April 2023

HMRC NEWS

Revenue and Customs Brief 12 (2021): VAT treatment of gaming machines from 6 December 2005 to 31 January 2013
RCB 12 (2021) was originally released in August 2021, explaining HMRC’s position after the decision of the First Tier Tribunal cases; The Rank Group Plc and 2016 G1 Ltd. In these cases, the FTT held that the operation of certain gaming machines should have been VAT exempt between 6 December 2005 and 31 January 2013. In the original Brief, HMRC confirmed it would repay overpaid VAT to businesses with valid claims. However, the Brief has now been updated to state that HMRC will not pay any claims relating to crane grab, coin pusher and penny fall machines as these were not held to be VAT exempt under the FTT cases and so no VAT repayments are due in relation to their operation.

VAT portal closure
The ATT has reported that HMRC is now contacting taxpayers who file annual VAT returns to confirm that the pre-MTD online VAT return portal is closing from 15 May 2023. The portal has already been closed for quarterly filers but was kept open for an extended period of time for those operating annual VAT accounting. From 15 May 2023, all VAT registered persons (subject to limited exceptions) must now submit their VAT returns using MTD compatible software.

Importing as freight
HMRC has recently updated the following guidance with information on how to claim relief if you are importing items as freight or in baggage:

CASE REVIEW

FTT

1. Validity of option to tax

This case concerned the validity of an option to tax (OTT) made by Rolldeen Estates Ltd (REL) in respect of the Jubilee Business Centre (the Centre). REL opted to tax the Centre in February 2008 and consequently recovered input VAT incurred on repairs and maintenance of the building. The Centre was sold in 2015 but REL did not charge VAT. HMRC raised assessments for £50,000 relating to REL’s failure to charge VAT on the sale of the opted property.

REL argued that it made VAT exempt supplies of leases of the centre prior to making the option and therefore HMRC’s permission was required to opt to tax. No permission was requested or granted. REL argued that as a result the OTT was not effective and VAT was not due on the sale.

HMRC relied on the provisions in the VAT Act 1994 at Schedule 10, para 30, which allow HMRC to retrospectively dispense with the permission requirements and treat a ‘purported option as if it has been validly exercised’.

The first issue before the FTT was whether REL had the right to appeal against HMRC’s decision to rely on para 30. Whilst both REL and HMRC took the view there was a right to appeal, the FTT concluded there was no such right. The FTT set out that an appeal right exists where HMRC have refused to do something which a person has asked HMRC to do, however in this case HMRC have not refused to do anything, they have instead deemed the purported OTT to have effect. As a result, there was no right to appeal. However, the FTT went on to consider in the alternative, what the position would be if it was wrong, and REL did have a right to appeal.

The FTT stated that, even if REL had a right of appeal, it would be refused because REL’s situation is exactly what para 30 was designed to address. Both REL and HMRC operated on the basis that the OTT has been valid. If HMRC were prevented from retrospectively deeming the OTT effective, there would be a significant tax loss as REL was allowed to recover input VAT based on an effective OTT but did not pay output VAT on the sale arguing the OTT was not effective.

As a result of the above, the FTT concluded REL had ‘purportedly exercised’ the OTT and it was entirely reasonable and appropriate for HMRC to deem the OTT to have been validly exercised. The appeal was dismissed and the £50,000 assessment for the sale of the centre is valid.

Constable Comment: This case considered VAT Act 1994, Schedule 10, paragraph 30 which allows HMRC to retrospectively dispense the permission conditions for an option to tax. In practice, if VAT exempt supplies of a property have been made prior to the proposed date of an option to tax, HMRC’s permission is required before the option is effective. However, as this case confirms, if this requirement is overlooked and both HMRC and a taxpayer operate on the basis that the OTT is effective (by recovering input VAT or charging VAT on supplies of the property) then HMRC is allowed, under paragraph 30, to dispense the permission rule.

Opting to tax a property involves complex VAT rules and it is important these are considered prior to making any option. It is always easier to address any potential VAT issues prior to making decisions regarding a transaction than to try to resolve errors afterwards. Constable VAT has relevant experience and would be pleased to assist with any option to tax or property related queries.

Constable VAT Focus 6 April 2023

6th April 2023

HMRC NEWS

Spring Finance Bill

The Government has published the Spring Finance Bill (Finance (No.2) Bill 2022-23) which can be read here. The bill was accompanied by explanatory notes which can be found here. VAT related content covers the new VAT measures on deposit schemes which is found under clause 314 and also various administration points such as; late payment interest (clause 333), penalties for failure to pay VAT (clause 334) and VAT credits: repayment interest due where evidence not provided (clause 335).

Government departments partial exemption framework
HMRC has developed frameworks for specific sectors in relation to business and non-business and partial exemption. HMRC has recently released a new framework which provides information about partial exemption special methods for government departments.

VAT on goods exported from the UK (VAT Notice 703)
The above guidance sets out how and when businesses can apply zero rated VAT to exported goods. Information on evidence relating to zero rating and direct exports has been updated in paragraphs 6.1, 6.5, 7.3 and 7.4.

Fulfilment House Due Diligence Scheme registered businesses list
The above guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme. The list has been updated with 7 additions and 5 removals.

Flat Rate Scheme for small businesses (VAT Notice 733)
The above guidance sets out how to use the Flat Rate Scheme, who can use it and how to apply to join the scheme. The email address to send VAT600FRS Flat Rate Scheme application forms has been updated to: frsapplications.vrs@hmrc.gov.uk . This will not affect any applications already submitted to the previous email address, these do not need to be resent.

CONSTABLE VAT NEWS

50 years of VAT

50 years ago, on 1 April 1973, VAT was introduced in the UK to replace purchase tax. None of the current Constable VAT team remember purchase tax or have worked in VAT since its inception, but a few of us have nearly 40 years of VAT experience and have seen many changes over the years. We have released a blog covering some of these changes over the last 50 years which can be found here. Whether the next 50 years brings simplification or further complication remains to be seen.

CASE REVIEW

Supreme Court

1. Disapplication of the option to tax

A dispute arose between Mr Moulsdale and HMRC whether VAT should have been charged on the sale of a property, which was owned by Mr Moulsdale and leased to one of his Optical Express companies, to an unconnected third party purchaser (Cumbernauld SPV Ltd). The issue was whether Mr Moulsdale should disapply his option to tax when selling the property to Cumbernauld.

Broadly, if Mr Moulsdale intended or expected Cumbernauld to incur VAT and have possession of a Capital Goods Scheme (CGS) item then the disapplication rules would apply and Mr Moulsdale should not have charged VAT. On the other hand, if Mr Moulsdale did not intend or expect Cumbernauld to incur VAT and have possession of a CGS item then VAT would be due on the sale as a result of the option to tax made by Mr Moulsdale. It was therefore for the Court to address this circularity within the option to tax provisions.

The Supreme Court took the view that the question of whether Cumbernauld incurred VAT or not, and therefore had a CGS item, should be determined by reference to other expenditure on the property, rather than merely on the cost of purchasing the property from Mr Moulsdale. The test does not turn on the transaction itself but what Mr Moulsdale intended or expected would happen in respect of the land in the hands of Cumbernauld and whether it would incur VAT bearing capital expenditure. Cumbernauld had no intentions of incurring any further capital expenditure on the property and therefore the option to tax was not disapplied. As a result, Mr Moulsdale should have charged VAT on the sale, the appeal was dismissed.

Constable Comment: This was a complex case involving the option to tax anti-avoidance provisions. The Court recognised that at the start that “Drafting tax legislation is a difficult and complex task so it is not surprising that sometimes the legislation does not quite work. It is common ground that this appeal arises because of one such occasion.”

Upper Tribunal

2. Recovery of residual input VAT

This case concerned Kingston Maurward College (KMC), a rural studies college supplying grant and fee funded education, as well as commercial activities. The FTT found that KMC’s supplies of fully funded education courses were VAT exempt. However, the FTT dismissed its appeal against HMRC’s rejection of its input VAT claim based on the grounds that all of its supplies constitute a single integrated supply and all the input VAT incurred is therefore residual which should be recoverable (except a small amount of de-minimis input VAT attributable to exempt supplies).

In addition, as KMC did not provide any alternative arguments as to how much input VAT is recoverable, in the event the FTT rejected its original grounds, the FTT ruled that no input VAT was recoverable. On appeal to the Upper Tribunal (UT), KMC contended it should have been permitted to argue that if not all, some of its input VAT was recoverable and:

The FTT was wrong to decide not to make any findings on the extent to which the claimed VAT constituted residual input tax. This was because the issue had not been properly raised and particularised by HMRC.
The FTT wrongly failed to treat the hearing as determining issues of principle rather than finally determining quantum.

The UT stated that KMC should have pleaded a case in the alternative, if the single business argument failed. It was open for KMC to indicate what kinds of input the claimed tax related to and what the inputs were used for. The UT concluded that if KMC had provided such evidence then HMRC would have had to consider it, however in the absence of it, HMRC’s statement of case was not inadequate and accordingly there was no error on the FTT’s part in deciding the issue as it did.

Alternatively, KMC tried to argue the FTT should have made a decision in principle and remitted the case back to the parties to agree what proportion of input VAT was recoverable, however the UT rejected this argument stating that KMC’s case was on all or nothing basis. The FTT had a discretion to allow KMC the opportunity to agree the extent of residual input VAT is recoverable however it chose not to which the UT considered to be clearly open to it. The appeal was therefore dismissed.

Constable Comment: In this case, KMC tried to argue that the FTT’s ruling was procedurally unfair, however without putting any alternative points forward to the FTT, it failed to argue this successfully. This case highlights the importance that parties to an appeal must put all of its arguments before the FTT from the outset.

CJEU

3. Whether municipalities carrying on economic activity

In the case of Gmina L (GL), a municipality in Poland offered asbestos removal services to homeowners free of charge. GL engaged third party contractors to carry out the removal services which were then invoiced to GL. GL sought to recover 40%-100% of the costs from the Polish Environmental Protection Fund.

GL contended that the services were not subject to VAT because it carried out the services in its capacity as a public authority. The Polish authorities took the view that GL was acting as a taxable person for VAT purposes. The CJEU stated in order to be treated as a taxable person, there must be a supply of services by GL for consideration and the services must be carried out in the course of an economic activity.

Whilst the CJEU stated that the grant funding could be considered third party consideration for the service, VAT would only be due if GL was carrying on an ‘economic activity’ for VAT purposes. However, GL did not employ staff, it does not seek customers, has no prospect to profit and also has to fund the third party contractors charges whilst waiting to be reimbursed from the Fund. In the light of these conclusions, the CJEU confirmed that that GL does not carry out an activity of an economic nature, and therefore the service is not subject to VAT.

The case of Gmina O (GO), was very similar to the case of Gmina L. GO is a municipality in Poland, and offered the supply and installation of renewable energy systems (RES) to homeowners to enable the transition to a low-carbon economy. 75% of the costs incurred by GO were grant funded; however, the remaining 25% was paid by the homeowner. In addition, the ownership of the RES passed to the owners only after the project was complete.

Again, GO took the view the supplies are not subject to VAT; however, the Polish authorities argued that there was an economic activity and therefore GO was making supplies that were subject to VAT.

The CJEU took a very similar approach as in the Gmina L case, stating that GO is not carrying out an economic activity because it does not supply RES on a regular basis, it does not employ staff, has no prospect to profit and had to fund the contractors’ costs while waiting for its funding applications to be processed. As a result, the supplies of RES by GO were not subject to VAT.

Constable Comment: In both cases above, GL and GO, the CJEU considered the question of what constitutes an ‘economic activity’ for VAT purposes. In both cases, the CJEU concluded that in the absence of staff, permanence and ability to profit there was no economic activity. Whilst CJEU decisions are no longer binding on UK businesses, UK courts may take these decisions into consideration when considering what constitutes an economic activity. It has often been a point of disagreement between organisations 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 an organisation’s VAT registration status, if the business supplies are taxable, or the right to claim certain reliefs. HMRC issued a ‘policy paper’ on 1 June last year which is titled ‘VAT – business and non-business activities’.

Constable VAT & Charities Newsletter Spring 2023

31st March 2023

HMRC NEWS

VAT Guide (VAT Notice 700)
Notice 700 is HMRC’s basic guide to VAT rules and procedures. Section 31 ‘Apportionment of output tax’ has been updated with two basic methods of apportioning output tax. One of them is based on selling prices and the other is based on cost values. This follows Revenue and Customs Brief 2 (2023): VAT and value shifting consultation update, which is discussed below.

This will be of interest to those charities that are membership organisations and apportion subscription income received from members to reflect the value and VAT liability of the individual benefits afforded to members, where a package or range of benefits are supplied to members, in return for payment of their subscription.

Revenue and Customs Brief 3 (2023): Changes to VAT treatment of local authority leisure services
HMRC has recently released the above brief, explaining the changes in the VAT treatment of leisure services provided by local authorities.

Local authorities have historically been treated as undertaking a business activity if they provide leisure services to members of the public. This treatment was challenged and the matter was considered by the courts. The litigation has now concluded and the courts have found that local authorities’ leisure services are provided under a statutory framework and can be treated as non-business activities for VAT purposes.

Local authorities can now revisit the historic VAT treatment of such supplies and apply the non-business treatment to their supplies of leisure services. They can also submit claims to HMRC. Claims should be sent to: lasector.mailbox@hmrc.gov.uk and should include ‘2023 LA VAT non-business’ in the subject line of the email.

Education and Vocational training (VAT Notice 701/30)
The above guidance provides information on how VAT applies to education, research, vocational training, examination services and goods and services connected with these activities when supplied by a charity.

Certain building works for educational establishments can be zero or reduced rated. Paragraph 15.1 has been updated to remove ‘carrying out an approved alteration to a listed building’ as zero rated work.

CASE REVIEW

First Tier Tribunal

1. Construction of a building for relevant charitable purposes

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

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

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

The Tribunal dismissed the appeal finding that:

ZSH is carrying on a business of operating and charging for admission to the park;
The lions’ enclosure and the World of Dinosaurs were intended for use at least in part for the purposes of that business; and
The World of Dinosaurs is not a building.

As a result, it was concluded that the services PWP supplied in the construction of the lions’ enclosure and the World of Dinosaurs were not supplies in the course of construction of a building intended for use solely for a relevant charitable purpose within Item 2(a) of Group 5, Schedule 8 VATA 1994 and as such could not be zero-rated.

Constable Comment: This case considers the question of when a charity is carrying on ‘business’ activities for VAT purposes in some detail and may be useful for other charities considering construction work and building projects. HMRC issued a ‘policy paper’ on 1 June last year which is titled ‘VAT – business and non-business activities’. This case was heard on 7 December 2022 and the decision released on 10 February 2023; however, the VAT assessments in question were issued on 1 May 2020 and before HMRC issued its revised guidance.

2. Education or obtaining income?

Fareham college (FC) appealed HMRC’s refusal to repay £69,757 of VAT that FC claimed to have overpaid. FC is a further and higher education college which offers courses including catering, hair and beauty and performing arts. Students work in a training restaurant, hair and beauty salon and performing arts centre, operated by FC. FC accounted for output VAT on all supplies made to the public; however, it now considers that the supplies were exempt under item 4, group 6, Value Added Tax Act 1994, on the basis that they were closely related to exempt supplies of education. This follows from the Brockenhurst College decision of the Court of Justice of the European Union (CJEU).

HMRC argued, and the tribunal agreed, that Item 4 of Group 5 to Schedule 9 VAT Act 1994 is to be construed as excluding from exemption supplies where the basic purpose of the supply is to obtain additional income for the body through transactions which are in direct competition with those of commercial enterprises subject to VAT. Article 134(b) of the Principal VAT Directive provides for this exclusion but is not written into UK law. The tribunal decided that it was reasonable to “imply the words of Article 134(b) into Item 4”. Therefore, it was for the Tribunal to determine whether FC’s supplies are excluded from the exemption on the basis that their basic purpose was to generate additional income in direct competition to other businesses.

The Tribunal concluded that FC’s basic purpose of operating the restaurant was not to obtain additional income. The FTT reached this decision on the basis that it was essential for FC to operate the training restaurant for the students to successfully complete their courses. The restaurant had limited opening hours, charges were low for the quality of the food and set with a view to covering the cost of ingredients. Therefore, it was clear that the basic purpose was not to obtain additional income, but to provide students with realistic work experience.

The FTT then turned to the hair and beauty salons. Unlike the restaurant, the FTT was not satisfied that the beauty salons did not have a basic purpose of obtaining additional income. FC offered no evidence that it was essential for two salons to be operated. The salons operated normal opening hours throughout the year and the only evidence regarding low pricing was that occasionally a 10% discount was available for services provided by hair trainees. In addition, there was no evidence to show how supplies made might differ from those in a commercial salon, the FTT therefore concluded that income from the hair and beauty salon is excluded from exemption, and is subject to VAT.

With regards to the performing arts centre, FC made no submissions therefore the FTT could not be satisfied that it was not the appellant’s basic purpose to obtain additional income from the supplies, or that the supplies were not in direct competition with those of commercial enterprises. As a result, VAT was due on the supplies.

Constable Comment: Ordinarily a supply is assessed in terms of “what service is received” by the customer. Irrespective of the motive of the supplier, customers visiting a student operated restaurant or salon are not themselves receiving education (as HMRC argued unsuccessfully in the Brockenhurst case).

Article 134(b) was not written into UK law, presumably because the need to do so was not envisaged. There is a long-standing principle that EU law can be used to interpret ambiguities in UK law but HMRC cannot act as if EU law applies simply because it failed to adopt it correctly into domestic legislation. If it is now necessary to pretend the UK law contains an enactment of Article 134(b) that seems to cross a boundary. Logically, one would also need to consider the “basic purpose” of all supplies covered by Article 134(b), not only supplies within one narrow subset. There are in UK law nine different Items within Group 6 to Schedule 9 VAT Act 1994 (Education) and Article 134(b) covers several exemptions, not only education.

An FTT decision is only binding on the parties and it remains to be seen whether this decision will be appealed. However, it has the potential to have unforeseen consequences if the Tribunal is correct that HMRC and taxpayers are supposed to operate as if Article 134(b) (and potentially other unenacted provisions of the principal VAT directive) are “by implication” contained in UK law.

3. Appealing decisions: out of time

The Golden Grove Trust (“the Trust”) is a registered charity. In 2019, HMRC issued the Trust with a significant VAT assessment totalling £92,644 and a decision that VAT incurred on constructing a café and toilets was not recoverable as input tax. The Trust applied for permission to make late appeals against both the assessment and the decision to refuse input tax recovery.

If a party wishes to appeal against a VAT decision made by HMRC then the law requires that a Notice of Appeal reaches the Tribunal within 30 days of the date on which the decision appealed against was issued.

The appellant gave evidence that a paper notice of appeal form had been sent to the Tribunal, it had been lost in the post or lost by the Tribunal, and the Tribunal had been contacted to establish what had happened to that Notice of Appeal. There seems to have been some confusion and misunderstanding of procedures and what had happened. This occurred during the COVID pandemic and lockdown restrictions were in place.

The tribunal found that on the facts:

- In relation to the VAT assessment, the delay in appealing was over two years and four months; in relation to the decision to refuse input tax recovery the delay in appealing was over one year and three months. These delays were very serious and significant.
- They occurred because of the failure to make the appeals by the statutory time limits.
- Although the consequence of refusing permission is that the Trust cannot challenge the VAT Assessment and the decision to refuse input tax recovery at the Tribunal, the circumstances of the case were in favour of refusing permission. This is because there was no good reason for the long delays and allowing cases to proceed when the appeal has been made out of time prejudices both HMRC and other taxpayers.

As a result of this, the tribunal refused permission for the Trust to make late appeals.

Constable Comment: This case highlights the importance of being aware of statutory time limits and remaining up to date in dealing with statutory deadlines such as those at issue in this case. Failure to comply with the relevant statutory deadlines can result in serious consequences for the taxpayer. In this case the Trust was not able to present the technical arguments in its favour and it was unable to present its case and have its position heard by the Tribunal. If Charities are in a VAT dispute with HMRC it is important that all time limits are met and adhered with. As this case demonstrates, It is not always possible to persuade HMRC or the Tribunal that an appeal against an HMRC decision should be heard out of time.

Upper Tribunal

4. VAT refund on healthcare facilities

This case concerned the appellant, Gloucestershire Hospitals NHS Foundation Trust (the trust), applying for a judicial review of HMRC’s decision that the Trust was not entitled to a VAT refund. Contracted-Out Services Direction (COSD) allows VAT refunds on the operation of healthcare facilities and the provision of any related services. The Trust had an agreement in place with Genmed. Under this agreement, Genmed supplied managed surgical theatre facility services including various different elements.

Genmed also supplied some goods under the agreement such as structural items, furniture, re-usable operating equipment and machinery. HMRC allowed the Trust to recover VAT paid on such goods; however, it refused a VAT refund on ‘consumable’ goods such as single use goods including bandages, sutures and protheses, such as hip and knee joints, which are provided to patients during surgery. HMRC refused the recovery of VAT incurred on consumable goods on the grounds that they fell to be considered a separate supply of goods from the supply of services provided. HMRC also did not consider the supply of those goods to be closely related to the supply of those services.

The trust was granted permission to pursue four grounds for judicial review challenging the lawfulness of HMRC’s decision. The Trust succeeded on ground two. It argued that all of the component parts of a fully managed theatre facility, including consumables, are integral to each other and indispensable to the achievement of the Trust’s aims. Therefore, the Trust argued there was a single supply made by Genmed, and VAT incurred was recoverable under COSD.

The Tribunals reviewed both parties submissions and agreed with the Trust. It stated that on an objective basis and from the point of view of a typical consumer, the supply of the services and consumables are so closely linked that they form a single composite supply, being a fully managed theatre facility, that it would be artificial to split. The Tribunal then stated that the single supply of services falls under COSD, therefore HMRC’s decision to refuse a VAT refund was unlawful. It was concluded that the Trust is entitled to a VAT refund.

Constable Comment: This case considered a refund of VAT under the Contracted-Out Services Direction (COSD). There is no statutory or other rights of appeal to the First Tier Tribunal (FTT) against a decision to refuse a refund under the COSD, therefore the Trust’s only remedy, in the absence of an assessment raised by HMRC, was to challenge the decision by way of a judicial review which was heard by the Upper Tribunal (UT).

Constable VAT Focus 23 March 2023

23rd March 2023

HMRC NEWS

Complete your VAT Return to account for import VAT
The above guidance has been updated and may be used to determine how to account for import VAT on a VAT return when using postponed VAT accounting. Information about what to do if there are specific entries missing from your statement has been added to the ‘how to complete a VAT return if you’re having problems with your monthly statements’ section.

CONSTABLE NEWS

Constable VAT Budget Focus 2023

We have recently released our special Budget VAT Focus which covers the VAT elements of the 2023 Spring Budget announcement. Make sure to check our coverage here to see if your business is affected.

CASE REVIEW

Upper Tribunal

1. Deliberate or careless error

This case concerned CPR Commercials Limited (CPR), a company which sold commercial vehicles to VAT registered customers based in Ireland. CPR treated these sales as zero rated exports. HMRC was not satisfied that CPR had provided sufficient evidence that goods supplied had been dispatched/exported outside of the UK. HMRC assessed CPR for VAT of £98,820 and penalties of £58,340. The penalty assessments were issued on the ground that CPR’s VAT returns contained inaccuracies in that they treated supplies as zero-rated when CPR did not hold evidence it knew it required to support zero-rating of those supplies. HMRC calculated the penalties on the basis that the inaccuracies were deliberate.

CPR appealed to the FTT against the assessment and penalties. The FTT found that CPR had not obtained and retained appropriate evidence of export to support zero-rating of the supplies and that CPR should, therefore, have charged and accounted for VAT at the standard rate on those supplies. In relation to the penalties, the FTT found that the behaviour of CPR was deliberate as the returns has been submitted when CPR was at least reckless as to whether it had the required evidence to zero rate.

CPR appealed to the Upper Tribunal (UT) only regarding the deliberate penalty. It argued that the FTT erred because it did not find that CPR had subjective knowledge that the VAT returns were inaccurate. CPR argued that anything short of actual knowledge, including recklessness, is not sufficient to support a finding of deliberate behaviour.

HMRC submitted that the FTT’s findings of fact were that CPR had actual or, at the very least, blind-eye knowledge that the returns submitted contained inaccuracies. Accordingly, the FTT did not err in dismissing CPR’s appeal and confirming the deliberate penalties.

However, the UT stated that the conclusion that CPR was “at least reckless” is not a finding that CPR had actual or blind eye knowledge of any error in the VAT returns and therefore concluded that the FTT’s findings of fact do not support a conclusion that the inaccuracies in CPR’s VAT returns were deliberate. The Tribunal replaced the deliberate penalty with a careless penalty classification.

Constable Comment: The UT found that the FTT made an error on a point of law to conclude that the error was deliberate. As a result, the UT re-made the decision, and ruled that CPR is liable to a penalty for failure to take reasonable care (careless error) attracting a lower percentage for calculating the penalty due.

FTT

2. Admission to attraction: Driving experiences

This case considered whether the supplies made by The Young Driver Training Limited (the appellant) were subject to VAT at the temporary reduced rate introduced in response to the Covid-19 pandemic. The appellant provides driving experiences for 4 to 17 year olds including 2 seater miniature electric cars, as well as conventional cars, classic cars and a fire engine. The experience takes place at a fenced off private land.

The appellant argued that the experiences cannot be classified as ‘real’ driving lessons as the children are not aged 17 years old, they have not taken the driving theory test and are ineligible to take the practical driving test. The experiences are bought for reasons of entertainment and fun and therefore the appellant is in the amusement and attractions industry in the same way as theme parks, amusement parks, funfairs and circuses. As a result, the appellant took the view the supply fell under ‘admission to attractions’ which was temporarily reduce rated.

HMRC disagreed, stating that the appellant’s supplies are not “rights of admission” and, even if they are, they are not rights of admission falling within Group 16.

The FTT accepted that the appellant’s supply includes admission to the fenced off area, however, the supply comprises considerably more than a “right of admission” when one looks to the plain and ordinary meaning of the wording. The supply includes not only a “right of admission” to the fenced off area but also the use of a vehicle, driving tuition and supervision. What is being supplied is a package of benefits over and above a right of admission to the fenced off area.

In addition, the FTT also concluded that the experience is not an event or venue specified in Group 16 or an event or facility of sufficient similarity. As a result, the FTT concluded the supplies were not rights of admission to an event that fell under the temporary reduced rating.

Constable Comment: This case considered the temporary reduced rating for admission to certain events. The Tribunal concluded that driving experiences extend beyond a right to admission as the supply comprises considerably more than that. As a result, the appeal was dismissed and the appellant was required to account for VAT at standard rate.

3. Retrospective Bad Debt Relief claim

This case concerned Allegion (UK) Limited (AUL), appealing to the FTT against HMRC’s decision to refuse AUL’s claim for retrospective VAT bad debt relief (BDR) dating back from 1989 to 1997. In the relevant period, AUL made supplies of security systems, products and services for domestic and commercial premises. Following litigation, it had previously been decided that the historic conditions for BDR were disproportionate thus claims could be made in the period referenced not subject to time capping. However, HMRC refused the claim on the grounds that AUL could not satisfy the evidential requirements for a valid BDR claim.

AUL argued that its standard contracts included a retention of title (RoT) clause which prevented a BDR claim in cases where goods were repossessed pursuant to the RoT clause. AUL stated that the recovery was prevented by non-compliant UK law, and confirmed that no previous recovery of BDR has been made except in certain specific circumstances. The previous incorrect HMRC property condition requirements around RoT were ruled disproportionate in GMAK UK Plc [2017] STC 1247 thus not a barrier to BDR.

HMRC argued, and the Tribunal agreed that the RoT clause would not have prevented AUL from claiming BDR. In addition, the FTT found more likely than not that AUL’s terms and conditions did not contain a RoT clause. They reached this conclusion based on a lack of evidence, as the earliest terms and conditions located by AUL was dated 2000 which post dated the relevant period.

The FTT concluded that AUL did not discharge the burden of proof to demonstrate that the conditions for a valid BDR claim were satisfied. In addition, the only evidence the FTT could rely on confirmed that AUL had previously claimed BDR and used debt factoring. As a result, the appeal was dismissed.

Constable Comment: VAT law and HMRC’s guidance on BDR at the time stipulated that relief is not available where retention of title clauses were present in the contracts, AUL argued this was the case. However, in a previous case, Saint Gobain, the appellant tried to argue the same but the FTT and UT dismissed stating that there was no evidence to show that previous claims for the period have not been made.

In addition, in that case, the FTT stated that where building materials had been incorporated into various buildings, the retention of title clauses were rendered irrelevant. In the case of AUL, the FTT followed this case closely stating it was similar, therefore applied the same reasoning and concluded that the RoT clauses, even if there was evidence they were present, would have not prevented AUL from making a valid BDR claim.

CJEU

4. VAT liability of car parts sold by insurer

This case concerned Generali Seguros SA (GS), an insurance undertaking which, in the course of its business, purchases vehicle parts from written-off motor vehicles damaged in accidents involving the persons whom it insures and subsequently sells them to third parties, without accounting for VAT on those sales.

The Portuguese tax authorities took the view that the sale of car parts is subject to VAT and therefore raised assessments. However, GS argued that its supplies were VAT exempt on various grounds. The following questions were referred to the CJEU:

Must Article 135(1)(a) be interpreted as meaning that ‘insurance and reinsurance transactions’ include related or supplementary activities such as sale of parts from written off motor vehicles?
Must Article 136(a) be interpreted as meaning that parts from written off motor vehicles are regarded as being purchased and sold solely for an exempt activity, where those goods have not given rise to the right to deduction of VAT?
Is it contrary to the principle of VAT neutrality for the sale of parts from written-off motor vehicles by insurance companies not to be exempt from VAT where there was no right to deduction of VAT?’

With regards to the first question, the CJEU highlighted that the value of the parts constitutes the residual value, after the accident, of the insured vehicle and is therefore not part of the damage suffered by the insured person. Consequently, that price does not form part of the insurance compensation itself, and is paid to the insured person under a contract of sale separate from the insurance agreement and separable from it. As a result, it was concluded that the sale of parts by the insurer does not fall within Article 135(1)(a).

With regards to the second question, the CJEU concluded that sale of parts will not be exempt under Article 136(a) as GS had no intention of using the parts in the course of its insurance business, but rather intended to sell them in an unaltered state.

To conclude the CJEU stated that that principle of neutrality cannot extend the scope of an exemption in the absence of clear wording to that effect. That principle is not a rule of primary law which can condition the validity of an exemption, but a principle of interpretation, to be applied concurrently with the principle of strict interpretation of exemptions. It was therefore concluded that the exclusion of the transactions above from VAT exemption is not contrary to the principal of fiscal neutrality.

Constable Comment: In this case the CJEU has ruled that the sale of car parts from written off motor vehicles, purchased from insured individuals, by the insurer cannot be VAT exempt. Whilst this is not binding on UK businesses, there are similar provisions in the UK. More generally, the UK also has complex VAT rules around insurance, and it is recommended to seek professional advice if there is any ambiguity regarding insurance related supplies.

Constable VAT Budget Focus March 2023

15th March 2023

Spring Budget 2023

The Chancellor has delivered the Spring Budget, which included the following VAT related items:

Services supervised by pharmacists

The VAT exemption on healthcare will be extended to include medical services carried out by staff directly supervised by registered pharmacists. This change will take effect from 1 May 2023.

Treatment of Patient Group Directions

The zero-rate applicable to prescriptions will be extended to medicines supplied through Patient Group Directions.

Fund management reform

Following the recently closed consultation on the proposed reform of the VAT rules on fund management, the government is considering the responses and continuing to discuss the proposals with interested stakeholders. The government will publish its response to the consultation in the coming months.

Review of the VAT treatment of financial services

Building on the recommendations of the Industry Working Group established to consider the future of VAT and financial services, the government will continue working with industry stakeholders to consider possible reforms to simplify the VAT treatment of financial services, with the aim of reducing inconsistencies and providing businesses with greater clarity and certainty.

VAT relief for energy saving materials

The government has published a call for evidence on options to reform the VAT relief for the installation of energy saving materials in the UK. The call for evidence will consider the inclusion of additional technologies and the possible extension of the relief to include buildings used solely for a relevant charitable purpose.

VAT and Deposit Return Schemes

The government will legislate to simplify the VAT treatment of deposits charged under a deposit return scheme for drinks containers. The rules for accounting for this VAT will be set out in the subsequent secondary legislation and a VAT Notice.

DIY Housebuilders Scheme Digitisation Project

The government will legislate to digitise the DIY housebuilders’ scheme and will also extend the time limit for making claims from 3 to 6 months. These measures should improve the overall customer experience and reduce the administrative burden for claimants and HMRC.

Minor Technical changes to late payment interest and penalty rules

Minor technical changes have been made to the new harmonised interest rules and late payment penalties that apply to VAT, which took effect from 1 January 2023. These can be viewed using the link above.

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 9 March 2023

9th March 2023

HMRC NEWS

VAT guide (VAT Notice 700)
Notice 700 is HMRC’s basic guide to VAT rules and procedures. Section 31 ‘Apportionment of output tax’ has been updated with two basic methods of apportioning output tax. One of them is based on selling prices and the other is based on cost values. This follows Revenue and Customs Brief 2 (2023): VAT and value shifting consultation update, which is discussed below.

Revenue and Customs Brief 2 (2023): VAT and value shifting consultation update
Between January and March 2021, the government ran a consultation on ‘VAT and value shifting’. The consultation proposed fixed rules for how the consideration (amount paid) must be apportioned when items with different VAT liabilities are supplied for a single price.

HMRC has concluded that the most effective way to address valuation concerns is to provide businesses with practical guidance on apportionment methods. This is through Guidelines for Compliance and improvements to other guidance. No changes will be made to the legislation.

HMRC has now published GFC2 (2023): Guidelines for Compliance – VAT apportionment of consideration. These guidelines on apportionment of consideration are for businesses that sell any goods or services with different VAT liabilities for a single price as part of a package or bundle.

Local authorities have historically been treated as undertaking a business activity if they provide leisure services to members of the public. This treatment was challenged and the matter was considered by courts. The litigation has now concluded and the courts have found that local authorities’ leisure services are provided under a statutory framework and can be treated as non-business for VAT purposes.

Animals and animal food (VAT Notice 701/15)
The above guidance explains which live animals and animal foods or feeding stuff are zero-rated for VAT purposes. Assistance dogs are now mentioned in the ‘6.4 Food for working dogs’ section.

CASE REVIEW

Upper Tribunal

1. Supplies between VAT group members

Silverfleet Capital Ltd (SCL) supplied investment management services to The Prudential Assurance Company Ltd (Prudential) while SCL and Prudential were both members of the same VAT group. However, some of the payments for the services were invoiced and paid after SCL had ceased to be a member of that VAT group.

Under the agreement for the investment management services, there were performance fees which were due to SCL if certain targets were met. These were met and therefore a fee was due to SCL, in 2015/2016 after it had left the VAT group. Prudential considered that those payments were outside the scope of VAT because they fell to be disregarded under the rules for supplies between members of a VAT group. HMRC took the view that the payments were liable to VAT because the tax point for the supply arose after SCL had left the VAT group under the provisions governing the time of supply of continuous supplies of services.

The First-tier Tax Tribunal (FTT) allowed Prudential’s appeal against HMRC’s decision and the latest case deals with HMRC’s appeal against that FTT decision to the Upper Tribunal (UT).

The UT’s decision contains a detailed analysis of the law but in simplistic terms the key points are:

In SCL’s view the fact that the service was (in the sense of its performance date) provided while the parties were in a VAT group means that there was no “supply” to which the relevant tax point rules could apply.
In HMRC’s view the fact that the parties had previously been in a VAT group did not override the need to assess when supplies occurred under tax point rules. Only after determining the date on which a supply would otherwise arise would it be correct to go on to judge whether “The parties are in a VAT group on that date” (so the supply should be disregarded)” or, in the case of the disputed charge “The parties are not within a VAT group on that date” so a supply should be recognised.
The FTT had agreed with SCL’s view, its judgement being in large part influenced by the BJ Rice House of Lords decision, which held that services performed at a time a business is not VAT registered cannot be made liable to VAT simply because the payment received for those services is received after the business has VAT registered.
In allowing HMRC’s appeal, the UT considered it was a material error of law for the FTT to regard the position of SCL as being indistinguishable from BJ Rice. Not being VAT registered being factually different from being a member of a VAT group. Therefore, HMRC’s view that the disputed supply occurred while SCL was outside of the VAT group was correct.

Constable Comment: This case is an interesting read for a VAT specialist, particularly as regards the evaluation of previous cases. The fact that judgements are finely balanced is well illustrated by the number of dissenting opinions referred to in those earlier cases. In overturning the FTT’s decision the UT stated that because the facts in the SCL case were not identical to those addressed in previous cases the FTT should have placed more weight on the dissenting opinions of judges in those earlier cases. Perhaps that is correct to the extent that those dissenting opinions addressed a factual difference of relevance. However, one is left with the impression that the UT had more sympathy with those dissenting opinions than the actual majority decisions that had been delivered, particularly in the BJ Rice case. Although it is true that “not being VAT registered” is factually different from “being a member of a VAT group”, the UT seemed rather keen to dismiss the FTT’s reliance on BJ Rice. SCL’s case is not “indistinguishable” from BJ Rice’s (as the FTT stated). However, the contextual parallel seems to us stronger than the UT accepted.

FTT

2. Education or obtaining income

Fareham College (FC) appealed HMRC’s refusal to repay £69,757 of VAT that FC claimed to have overpaid. FC is a further and higher education college which offers courses including catering, hair and beauty and performing arts. Students work in a training restaurant, hair and beauty salon and performing arts centre, operated by FC. FC accounted for output VAT on all supplies made to the public however it now considers that the supplies were exempt under Item 4 Group 6, on the basis that they were closely related to exempt supplies of education. This follows from the Brockenhurst College decision of the Court of Justice of the European Union (CJEU).

HMRC argued, and the Tribunal agreed, that Item 4 of Group 5 to Schedule 9 VAT Act 1994 is to be construed as excluding from exemption supplies where the basic purpose of the supply is to obtain additional income for the body through transactions which are in direct competition with those of commercial enterprises subject to VAT. Article 134(b) of the Principal VAT Directive provides for this exclusion but is not written into UK law. The Tribunal decided that it was reasonable to “imply the words of Article 134(b) into Item 4”. Therefore, it was for the Tribunal to determine whether FC’s supplies are excluded from the exemption on the basis that their basic purpose was to generate additional income in direct competition to other businesses.

The FTT then turned to the hair and beauty salons. Unlike the restaurant, the FTT was not satisfied that the beauty salons did not have a basic purpose of obtaining additional income. FC offered no evidence that it was essential that two salons to be operated. The salons operated normal opening hours throughout the year and the only evidence regarding low pricing was that occasionally a 10% discount was available for services provided by hair trainees. In addition, there was no evidence to show how supplies made might differ from those in a commercial salon, the FTT therefore concluded that income from the hair and beauty salon is excluded from exemption, and it is subject to VAT.

With regards to the performing arts centre, FC made no submissions therefore the FTT could not be satisfied that that it was not the appellant’s basic purpose to obtain additional income from the supplies, or that the supplies were not in direct competition with those of commercial enterprises. As a result, VAT was due on the supplies.

Constable Comment: Our view on this case starts with sympathy with HMRC’s position in relation to the Brokenhurst College decision. Ordinarily a supply is assessed in terms of “what service is received” by the customer. Irrespective of the motive of the supplier, customers visiting a student operated restaurant or salon are not themselves receiving education (as HMRC argued unsuccessfully in the Brockenhurst case). However, in attempting to limit the effect of the Brockenhurst judgement, HMRC seems to have taken us down a different rabbit hole.

Article 134(b) was not written into UK law, presumably because the need to do so was not envisaged. There is a long-standing principle that EU law can be used to interpret ambiguities in UK law but HMRC cannot act as if EU law applies simply because it failed to adopt it correctly into domestic legislation. If it is now necessary to pretend that UK law contains an enactment of Article 134(b) that seems to cross a boundary. Logically one would also need to consider the “basic purpose” of all supplies covered by Article 134(b), not only supplies within one narrow subset. There are in UK law nine different Items within Group 6 to Schedule 9 VAT Act 1994 (Education) and Article 134(b) covers several exemptions, not only education.

We also have some problems with the approach the Tribunal has taken to evaluating what “basic purpose” means and when a service is in direct competition with commercial enterprises.

A FTT decision is only binding on the parties and it remains to be seen whether this decision will be appealed. However, it has the potential to have unforeseen consequences if the Tribunal is correct that HMRC and taxpayers are supposed to operate as if Article 134(b) (and potentially other unenacted provisions of the Principal VAT Directive) are “by implication” contained in UK law.

CJEU

3. Time limits for submission of evidence

This case concerned Nec Plus Ultra Cosmetics AG (Nec), a company established in Switzerland. In 2017, Nec supplied cosmetic products to a customer established in Croatia. A purchaser in Croatia or a third party, acting on behalf of the purchaser, took charge of those goods, which were located in a warehouse in Slovenia. They were transported from Slovenia to another Member State (MS), with the result that the supplies were exempt from VAT.

During a tax inspection in February 2019, the local authorities invited Nec to submit all the documentation relating to the supply. Nec submitted invoices and copies of consignment notes demonstrating that goods were transported from Slovenia to another MS. The delivery notes and other documents mentioned in the consignment notes had not, at that stage, been produced, since Nec did not possess all the documents and was attempting to obtain them.

Slovenian law requires that following completion of a tax inspection the tax authority has to produce a report within 10 days. That report must outline the possibility of providing new evidence within 20 days. It is possible to obtain an extension of that 20 day period with sufficient justification.

On 1 April 2019, the local authorities issued a report on the tax inspection. Subsequently, Nec produced copies of quotes and delivery notes, which showed that the goods had been supplied in a MS other than Slovenia. Nec justified the late submission of evidence by asserting that its office in Germany, which was responsible for deliveries in Croatia, had closed in August 2018 and had not provided it with all the necessary documentation within the prescribed period.

The local tax authorities raised an assessment for VAT, ignoring the evidence submitted after the report was issued because that evidence had been submitted late. The CJEU was asked to consider whether the domestic law imposing this cut-off deadline is compatible with EU law.

The CJEU reviewed the evidence and stated that whilst it is true that the right of exemption from VAT may be refused in certain situations, the fact remains that where the tax authority refuses VAT exemption at an early stage of the tax procedure, it must ensure strict compliance with the principle of tax neutrality.

In this case, it was for the referring court to determine whether or not the refusal to take evidence into consideration at the relevant stage complies with the principle of effectiveness. The CJEU stated that the referring court must also take into account that the tax inspection report does not close the inspection procedure and is merely an interim procedural act intended to inform the taxable person of the factual situation. However, it also found that providing that all underpinning legal considerations are taken into account, there is nothing to prevent national legislation that prevents new evidence being introduced after a decision has been made.

Constable Comment: In essence the CJEU has said that the domestic law that Slovenia operates is acceptable providing that it fairly balances a number of underpinning legal principles. Perhaps the main takeaway from this judgement is how different tax administration rules can be and the need to fully understand them and ensure that they can be complied with. The deadlines set in Slovenia for both the tax authority and the taxpayer seem rather unrealistic to us, although that may in turn depend on when a tax inspection is considered to be “complete”. It would be interesting to see how HMRC might manage a 10 day deadline to produce a report following a VAT inspection!

4. VAT on online intermediary supplies

This case concerned Fenix International Limited (Fenix), a UK company registered for VAT purposes, operating a social media platform known as ‘Only Fans’. The platform is offered to users throughout the world who are divided into creators and fans. Creators have profiles to which they upload and publish content, such as photos, videos, and messages. Fans can access content uploaded by the creators by making ad hoc payments or by paying a monthly subscription. Fans can also pay ‘tips’ or donations which do not give rise to the provision of any return content.

Fenix provides not only the platform but also the device enabling financial transactions to be carried out. Fenix is responsible for collecting and distributing the payments made by fans, using a third-party entity which supplies payment services. Fenix also sets the general terms and conditions for use of the platform.

Fenix levies 20% on any sum paid to a creator to whom it charges the corresponding amount. On the sum which it levies in this way, Fenix applies VAT at a rate of 20%, which appears on the invoices which it issues.

HMRC raised VAT assessments taking the view that Fenix is deemed to be acting in its own name pursuant to Article 9a(1) of Implementing Regulation No 282/2011, and therefore had to pay VAT on all of the sum received from a fan and not only on the 20% of that sum which it retained.

To put this in context, Article 28 of the Principal VAT Directive deals with what in the UK would be termed “an agent acting it its own name”, requiring that agent to treat itself as both making and receiving the underlying supply of the principal for whom the agent is acting. Article 9a(1) of the Implementing Regulation mandates that Article 28 applies to electronic services supplied via an electronic interface, portal or market place unless certain stipulated conditions are met. Those stipulated conditions being linked to a high level of transparency about the true supplier of the service and the value of that supply.

Fenix appealed the validity of this legal framework, arguing that in adopting Article 9a(1) of the Implementing Regulation the European Council supplemented or amended the Principal VAT Directive thus exceeding the implementing powers conferred on it.

The CJEU concluded that Article 9a(1) complies with the general aim of the VAT Directive and cannot be viewed as amending Article 28. It simply clarifies that Article 28 will apply in a specific circumstance. It also ruled that the fact that a final customer knows that an agency exists, and the identity of the principal, is not enough to prevent the application of Article 28.

Constable Comment: The CJEU gave a ruling in this case only because the First-tier Tax Tribunal made a referral before the end of the Brexit transition period. The case made by Fenix was interesting but in our view it was always unlikely that the CJEU would conclude that Article 28 had been altered by Article 9a(1).

5. Construction of building by an association

The appellant, ASA and its sister company, PP, were co-owners of land in Romania. They entered into a contract relating to an association without a legal personality with BP and MB to construct and subsequently sell a building complex consisting of 56 apartments. BP and MB were to jointly bear the costs of building the complex. Other design and admin costs were to be met equally by all parties. Following completion of constructions, the majority of flats were sold, however they were all sold by ASA and/or PP as title of ownership did not transfer to BP and MB.

Following a tax inspection, the Romanian tax authority took the view that ASA and PP should have been VAT registered as a result of selling the apartments and raised an assessment. ASA argued that BP and MB should also be liable for VAT as they were a taxable person in regard to the transaction.

The CJEU stated that to be considered as a taxable person, it is necessary to review whether BP and MB carried out an economic activity in their own name, on their own account and under their own responsibility, and whether they bear the economic risk associated with the pursuit of those activities. The CJEU concluded that as only ASA and PP were mentioned as owners in the contract, BP and MB cannot be regarded as taxable persons in respect of the sale of apartments, therefore only ASA and PP are liable for the VAT assessment.

In addition, ASA argued for the right to reclaim input VAT on invoices addressed to BP and MB for the construction of the building complexes. The CJEU stated that a taxable person is required to provide objective evidence that goods and services have been supplied to him for the purposes of his own taxable transactions. It concluded that in absence of such evidence, it is not a requirement that ASA be granted the right to deduct input VAT.

Constable Comment: Joint ventures can be difficult to characterise and there have been many UK cases on the matter. A key point is whether the different parties can be “aggregated” and treated as a taxable person or whether there is a need to recognise supplies between the parties. In most cases where land ownership is held by only some of the parties we suspect that in the UK we would see a similar outcome to this case, although perhaps there would have been a need to identify supplies by BP and MP to the land owners, a point that was not addressed in this case. There are situations in which the treatments are very unclear and we would always recommend trying to agree a position with HMRC when large sums are involved.

Constable VAT Focus 10 February 2023

10th February 2023

HMRC NEWS

Education and vocational training (VAT Notice 701/30)
The above guidance provides information on how VAT applies to education, research, vocational training, examination services and goods and services connected with these activities.

Certain building works for educational establishments can be zero or reduced rated. Paragraph 15.1 has been updated to remove ‘carrying out of an approved alteration to a listed building’ as zero rated work.

CASE REVIEW

Upper Tribunal

1. VAT refund on healthcare facilities

This case concerned the appellant, Gloucestershire Hospitals NHS Foundation Trust (the Trust), applying for a judicial review of HMRC’s decision that the Trust was not entitled to a VAT refund. Contracted-Out Services Direction (COSD) allows VAT refunds on the operation of healthcare facilities and the provision of any related services. The Trust had an agreement in place with Genmed. Under this agreement, Genmed supplied managed surgical theatre facility services including various different elements.

The Trust was granted permission to pursue four grounds for judicial review challenging the lawfulness of HMRC’s decision. The Trust succeeded on ground two. It argued that all of the component parts of a fully managed theatre facility, including consumables, are integral to each other and indispensable to the achievement of the Trust’s aims. Therefore, the Trust argued there was a single supply made by Genmed, and VAT incurred was recoverable under COSD.

FTT

2. DIY Builders Scheme: Dwelling

This case concerned Mr Dunne’s (the appellant) appeal against HMRC’s refusal of a refund of VAT under the DIY housebuilders scheme. The claim was in the sum £6,075. The VAT refund claim was made in respect of works undertaken at a residential property owned by the appellant. The planning permission allowed for a ‘single storey rear extension’ connected by a corridor to the existing dwelling. However, due to a change of circumstances, the plans were informally changed (agreed by the local authorities) so that the extension became a standalone detached building, unconnected to the existing property. As a result, the appellant made a DIY claim for a detached bungalow, taking the view that a new dwelling was created.

HMRC refused a refund under the DIY scheme on the grounds that the planning permission was for an extension of the existing dwelling and not for the construction of a separate dwelling. Extensions are specifically excluded from construction of a new dwelling, which applies to the DIY scheme. In addition, HMRC argued the property could not be disposed of separately to the existing building, therefore it was not a new dwelling.

The Tribunal reviewed the evidence and whilst it was aware that the proposed connecting corridor was not built, it stated that in order for a DIY claim to succeed it is not sufficient that a standalone building is created, the planning permission must be for a dwelling. The agreed informal amendment cannot be interpreted as a grant of permission for a new dwelling. As a result, the Tribunal concluded that the planning permission was granted for an extension and the appeal cannot succeed.

Constable Comment: This case highlights the importance of works being carried out in accordance with the planning permission, in order to claim a VAT refund under the DIY scheme. In this case, due to time constraints, the original planning permission was not amended formally to state a new dwelling is created. As a result, the VAT incurred was not recoverable. If you or your business would like assistance with a DIY claim, Constable VAT has relevant experience in this and the construction sector generally and would be pleased to assist.

3. Overpayment of VAT on sale of domestic fuel

This case concerned Mr McKiernan’s (the appellant) appeal against HMRC’s refusal of a claim for a repayment of VAT in the sum of £61,106. The appellant owns a small shop which sells coal and fuel. It was discovered during a routine VAT compliance inspection of the businesses VAT accounting records by HMRC that the appellant kept very basic records, in particular there was no VAT invoices issued in respect of sales. The appellant accounted for VAT on the sales at 20% and calculated sales by applying a mark-up to the purchase invoices received.

After the visit, HMRC informed the appellant of the record keeping requirements and also that reduced rating (VAT at 5%) can applied to supplies for domestic use (less than one tonne) of coal. The appellant sought a repayment of VAT overdeclared on the grounds that the reduced rate was applicable, and it had historically accounted for VAT at 20%. HMRC rejected the VAT repayment claim advising that as there was no contemporaneous records or clear audit trail, the reduced rate cannot be applied.

The Tribunal agreed with HMRC and confirmed that VAT law clearly sets out that a business seeking relief from the standard rate of VAT must have evidence to support its claim. The appellant argued that by rejecting the claim, HMRC’s position is that all supplies were in excess of a tonne (not domestic use) but there was evidence to the contrary. The Tribunal rejected this view concluding that VAT law states that 20% VAT is applicable unless a taxpayer has sufficient evidence to show it can account for VAT at 5%. This does not deem coal supplies were in excess of a tonne, it simply means that there is insufficient evidence to show what those supplies were. The appeal was dismissed.

Constable Comment: This case highlighted the importance of adequate record keeping and the maintenance of a clear audit trail to evidence all transactions, supplies and purchases. The appellant was refused a substantial VAT repayment because there was not sufficient evidence to support the VAT liability of the supplies concerned. It is important that all taxpayers maintain all records legally required for a minimum of 6 years to avoid any VAT assessments and penalties based on insufficient records. Similarly, if a taxpayer has declared VAT at an incorrect (higher) rate than is legally correct, it will be necessary to ensure that the reason for any VAT accounting error can be explained and demonstrated to HMRC’s satisfaction before any VAT refund claim is authorised.

4. VAT zero rating: Evidence of export

This case concerned Pavan Trading Limited’s (PTL) appeal against HMRC’ decision to raise VAT assessments in the sum of £70,652 on the grounds that PTL failed to provide ‘evidence of export’ or provide such evidence within the 3 month time limit for supplies made to customers based in the United States (US). As a result, HMRC disallowed the zero rating of such supplies and treated the sales as being subject to VAT at 20%.

PTL made wholesale supplies of derma fillers, beauty products and orthopaedic products to a customer in the US. Exports of goods are zero rated for VAT purposes provided that the goods are actually exported, and evidence of export is obtained within 3 months from the time of supply.

HMRC took the view in this case that the supply is not zero rated because there was no evidence of payment, the goods were delivered to a different address than the customers principal place of business, supplier information was incomplete, the values stated on each parcel was less than the sales invoice value, and inaccurate descriptions and incorrect quantities were given. In addition, HMRC argued that the 3-month requirement to obtain evidence, is the time within which the taxpayer must provide evidence to HMRC to demonstrate that the goods have been exported. As PTL did not provide evidence within 3 months, zero rating was refused.

PTL challenged HMRC’s position and claimed HMRC had made an error that the 3-month period for obtaining evidence does not mean it has to be provided to HMRC, it simply means that the taxpayer has to have that evidence in its possession. In addition, PTL referred to the decision in Arkeley, a 2013 case where it was held that evidence does not need to be in a specific document provided evidence of export is clear. PTL argued that sufficient evidence was in its possession within 3 months of the relevant supply, including all information and detail required under the law.

The Tribunal agreed and confirmed that the 3-month rule means the taxpayer had to have obtained and have in its possession valid evidence of export within the 3 months from the time of supply. In addition, the evidence provided was reviewed and the Tribunal concluded it fulfils the statutory requirements, therefore the exports were correctly zero rated. The appeal was allowed with the Tribunal commenting ‘we have absolutely no hesitation in allowing this appeal’.

Constable Comment: It seems that this case was straightforward and the appellant has complied with all of its VAT accounting obligations regarding exports. The Tribunal stated the only reason for this appeal was due to HMRC’s erroneous view of law and overlooking principles set out in the Arkeley case. It was concluded that “If there was ever a counsel of perfection for the provision of export documentation, then this appellant has achieved it.” It does make us wonder why HMRC pursued this case to a Tribunal, bearing in mind the time, cost and effort involved for all parties in preparing for a hearing.

5. Default Surcharge: Reasonable excuse

This case concerned Mrs Mitchell (the appellant) appealing a default surcharge issued by HMRC for late payment of VAT. The appellant argued that there was a reasonable excuse, as the online banking fob required to make payments stopped working. The bank sent a replacement; however, it took two days to arrive, and payment was made late. In addition, the appellant argued that it was unfair to charge a large amount of penalty for a payment only two days late.

The Tribunal stated that a ‘reasonable trader’ would have attempted to make payment by telephone as opposed to online banking or contact HMRC when it became apparent that the payment cannot be made in time. As a result, the appellant did not have a reasonable excuse for late payment of VAT. With regards to proportionality, the Tribunal concluded that there may be ‘exceptional’ circumstances in which a default surcharge could be disproportionate; however, there was no such circumstances in this case. The penalty was due, the appeal was dismissed.

Constable Comment: This case showed that in order to avoid a default surcharge under the ‘reasonable excuse’ argument, the taxpayer must prove that the actions taken were reasonable for a responsible business conscious of and intending to comply with its VAT accounting obligations.

It is important to note that the default surcharge regime applied because the period in question was dated in 2021. From 1 January 2023 a new penalty system applies for both late VAT returns and payments. Further information can be found on our blog here.