HMRC NEWS

Record keeping (VAT Notice 700/21)
The above guidance can be used to find out what records must be kept and how to keep them if you are registered for VAT. This also includes the requirements of a ‘valid VAT invoice’. The ‘reason for any zero rate or exemption’ has been removed from the list of details you must include on a valid VAT invoice.

Opting to tax land and buildings (VAT Notice 742A)
This guidance sets out what happens when a taxpayer opts to tax land and buildings, when you need permission and when to notify HMRC about your decision. Section 4 has been updated to show that HMRC no longer sends an acknowledgement letter when you notify your option to tax. Under the new policy, if  notification of an option to tax is sent by email, businesses will receive an automated response from HMRC which should be retained. Notifications sent in by post will no longer be acknowledged. The list of authorised signatories in section 7 has been updated. If notifying an option to tax by email, we would recommend including the address of the property in the subject box of the email. This could be useful evidence to demonstrate that the property has been opted to tax when HMRC’s automated response is received.

Provide partnership details when you register for VAT
When a partnership intends to register for VAT, it must use form VAT2 to provide details of partners. Form VAT2 has now been updated and the revised version can be found using the above link.

Investment gold coins (VAT Notice 701/21A)
Certain investment gold coins are VAT exempt under Group 15, Schedule 9 of VATA 1994. The UK list of coins recognised as investment gold coins has been updated and can be found using the above link.

HMRC email updates, videos and webinars for VAT
The above guidance can be used to learn more about VAT including accounting schemes, VAT returns and keeping records. The link to the recorded webinar about VAT reverse charge for construction services has been updated.

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 and details 13 additions, 1 removal and 1 amendment.

CASE REVIEW

Court of Appeal

1. VAT groups and time of supply rules

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 registration. Under the agreement for such services, there were performance fees which were due to SCL if certain targets were met. These targets were met and therefore a fee was due to SCL, in 2015/2016 after it had left the VAT group.

A dispute arose as to whether VAT is chargeable on the performance fees or not. Supplies made between VAT group members are disregarded for VAT purposes. However, HMRC took the view that the payments were liable to VAT because the tax point for continuous supplies of services will be either the issue of an invoice by the supplier or the date it receives payment from the customer. As this occurred after SCL left the VAT group, the fees are subject to VAT.

The First-tier Tax Tribunal (FTT) ruled that the supplies are outside the scope of VAT as this supply was made between VAT group members. On the other hand, the Upper Tribunal (UT) found, on appeal, that VAT is due when the payment is made. Our summary of the UT decision can be read here. Prudential appealed the decision of the UT to the Court of Appeal.

This appeal considered in detail the ambiguous relationship, and interaction, between the rules of VAT grouping (specifically the ‘disregarded’ provisions) and the time of supply rules for continuous supplies of services. The Court referred to the matter as ‘something of a chicken and egg problem’ in the sense that if we apply the VAT grouping ‘disregarded’ rules, the time of supply is irrelevant as its outside the scope of VAT; however, if we apply the time of supply rules, SCL was no longer a member of the VAT group and the fees it charged are subject to VAT.

After careful consideration of the submissions, legislation and applicable case law, the Court reached the conclusion that the correct approach is to consider whether SCL was still a member of the VAT group registration when the rules on time of supply treated its services as supplied. As SCL was no longer a member of the VAT group by time the invoices were raised or payment was made, VAT must be due on the supply. The appeal was dismissed.

Constable Comment: This case demonstrates an ambiguous and complex point in VAT legislation as the FTT and UT reached different conclusions on the same facts. Whilst the Court of Appeal upheld the decision of the UT, this was reached on a 2-1 split decision of the Court, reinforcing the ambiguity present. It will be interesting to see whether Prudential pursues this case further and appeals to the Supreme Court which would conclude the matter. Both VAT grouping and time of supply rules are potentially complex, and we would therefore recommend seeking professional advice if needed. Where services are supplied between group members, and it is known that one member will be leaving the group VAT registration, this point is worth considering if the supply chain is not fully taxable.

Upper Tribunal

2. Insurance: VAT liability of vehicle black box devices

In this case, WTGIL Limited (formerly known as Ingenie), appeals the FTT’s decision in relation to its repayment of VAT incurred on the provision and fitting of black boxes (device) which are used to capture information about how the policyholder’s car is being driven. Ingenie collects and analyses the data from the device and provides this data to the policyholder and insurer. The information was used to review the insurance premium payable. Ingenie made a VAT repayment claim in the region of £2million for recovering the input VAT incurred on these devices. HMRC refused to make the VAT repayment. The FTT previously concluded that the input VAT incurred is not recoverable. Our summary of this case can be read here.

Ingenie appealed the decision of the FTT to the Upper Tribunal (UT). The UT agreed with the FTT that ‘supply of goods’ means the transfer of the right to dispose of tangible property as owner. The ownership of devices did not pass to the policyholder at the fitting stage, therefore there was no supply of goods. However, the UT found that the provision and fitting of the device can be a supply of services if made in return for consideration (payment) which does not qualify for exemption as a VAT exempt insurance intermediation service.

The UT went on to consider whether there was any monetary or non-monetary consideration and after a careful analysis of the evidence and submissions, it concluded that there was no direct link between the services provided and any consideration provided by the driver. Lastly, it also concluded that there is no deemed supply of the devices either, meaning Ingenie did not make any taxable supplies that would entitle it to recover the input VAT incurred on the provision and fitting of devices. The appeal was dismissed.

Constable Comment: Whilst the above sets out a brief summary of the case, this was a lengthy and difficult case with complex points being considered around VAT exemption, supply of goods or services, consideration and more. The UT’s commented that ‘in the VAT world, very little is straightforward’. In this case the taxpayer faces a significant irrecoverable VAT charge and the UT’s comments support our recommendation that in any case of ambiguity, seeking professional advice can help establish the VAT implications and minimise potential risks of disputes with HMRC.

FTT

3. Further education and business activity question

In this case, Colchester Institute Corporation (CIC) appealed against HMRC’s VAT assessment which relates underdeclared output tax under the Lennartz mechanism. CIC is a VAT registered further education corporation which delivers ‘vocational’ courses, with the aim of providing its students with technical knowledge and skills. In 2008, CIC reclaimed £2m VAT incurred on a major redevelopment project in relation to its campus.

Whilst at the time, HMRC took the view that the provision of education or vocational training is not a business activity, if funded by a relevant funding body, CIC recovered the VAT incurred in accordance with ‘Lennartz mechanism’, which was in place at the time.  This enabled CIC to recover VAT incurred in relation to its non-business activities, however CIC would subsequently be due to account for deemed output tax over the economic life of the buildings, to the extent that their use was for non-business purposes.

In 2014, CIC argued that the provision of education to its students was a business activity irrespective of how it was funded. On that basis, CIC concluded that the building was never put to any non-business use, and it had over declared output VAT under the Lennartz Mechanism. Logically, it also wrongly reclaimed input VAT under the Lennartz mechanism, and this was netted off reducing the claim to nil. However, CIC took the view that moving forward no further output tax is due under Lennartz. HMRC disagreed and raised VAT assessments for underdeclared output tax.

The consideration point was determined in the 2020 Upper Tribunal decision, Colchester Institute Corporation v HMRC, where it was concluded that if the relevant supplies were in return for consideration, they were an ‘economic activity’ carried on by CIC. The FTT was bound by this UT decision and therefore had to conclude that CIC is not required pay output tax under Lennartz because its supplies were VAT exempt business activities.

Constable Comment: In view of the earlier UT (2020) decision in CIC it seems that the FTT’s hands were tied, and it was bound by that earlier UT decision. This being so, it makes us wonder if HMRC will seek permission to appeal the FTT decision to the UT. A decision of the UT is binding. This means that, if on appeal, the UT were to conclude that supplies of funded further education is a VAT exempt business activity this may impact the sector’s right to reclaim important VAT reliefs such a receiving construction services VAT free when a building is constructed to be used for a ‘relevant charitable purpose’ i.e. a non-business purpose. The earlier decision in CIC can be viewed here.

4. Right to reclaim VAT incurred before VAT registered

This was another complex case concerning pre-VAT registration input tax recovery and HMRC’s ability to allow or provide for a degree of discretion. The appellant, Aspire In The Community Services Limited (AICS), is the representative member of a VAT group registration that provides residential care and transitional services for individuals with autism, learning difficulties and behavioural problems. Prior to 2021, AISC was only making VAT exempt supplies of state regulated welfare services. However, in 2021 AICS wrote to HMRC confirming it intended to restructure its business and would be making standard rated supplies of care on a non-regulated basis, which would be taxable (standard rated) and entitle AICS to recover some input tax incurred.

AICS submitted its first VAT return in relation to pre-registration input tax amounting to £31,727.29, calculated by using the use-base methodology for partial exemption, achieving a 77% recovery rate. However, HMRC initially considered whether this input tax is recoverable as there is no statutory entitlement to allow recovery of VAT incurred on pre- VAT registration costs where those costs were first used to make wholly VAT exempt supplies.  However, HMRC can exercise its ‘discretion’ where it is reasonable and permit pre-registration VAT to be treated as input tax.

Following detailed correspondence, HMRC used its discretion to allow pre- VAT registration input VAT recovery; however, it reduced the amount recoverable by almost £25k to £7,138 to take into account the initial exempt use of the costs incurred.

AICS appealed to the FTT arguing that HMRC’s discretion extends to not only deciding whether to treat pre-VAT registration VAT incurred as input tax but also to the quantification thereof. Alternatively, HMRC contends that its discretion is limited to deciding whether or not to allow pre-registration VAT to be treated as input tax, but the quantification of that is a matter of applying the relevant VAT principles of input VAT recovery.

As a result, AICS applied for disclosure of various documents including the name of HMRC officers involved and copies of relevant documents that shows how HMRC exercised its discretion is calculating the amount repayable. The FTT agreed with HMRC stating that such action is not appropriate at this stage, concluding that if HMRC had agreed to the principle of recovery the appeal about amounts should proceed along normal VAT rules and the question of how HMRC had reached its decision was not relevant.

Constable Comment: As an application for disclosure, this case considered some complex points around VAT litigation; however, an interesting aspect is the analysis of pre-VAT registration input tax and the recovery of such VAT incurred, where initially those costs were incurred to make VAT exempt supplies. The case confirms that there is no statutory entitlement to allow the recovery of VAT incurred prior to VAT registration, instead HMRC may exercise its discretion. Technically, VAT incurred before VAT registration is not input tax; however, this VAT incurred may be treated as input VAT if it meets the conditions provided for in Regulation 111 which is headed ‘Exceptional claims for VAT relief’ and is phrased such that the entitlement to reclaim VAT incurred prior to VAT registration is not an automatic right, reading ‘the Commissioners may authorise’….our emphasis. In headline terms, HMRC’s usual policy is to allow VAT incurred on services received 6 months prior to VAT registration to be reclaimed, and VAT incurred on goods on hand to be used to make taxable supplies once VAT registered, up to 4 years from the date of VAT registration.

The Tribunal decision also confirms that this is not an isolated case but is the lead case of seven (six are stayed behind the decision in AICS) and it will be interesting to see whether AICS appeals this decision to the Upper Tribunal or if any of the other six cases are heard before the FTT. 

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.

SPRING BUDGET 2024

The Chancellor of the Exchequer delivered the Spring Budget 2024 on 6 March 2024. We have highlighted the VAT related announcements below.

VAT registration thresholds

In attempt to support SME’s the VAT registration threshold has been increased to £90,000. This is the first time in 7 years that the VAT registration threshold has been amended as it has remained at £85,000 since 2017.

In addition, the VAT deregistration threshold will also be increased to £88,000 from £83,000. These changes will likely impact those trading close to the thresholds and businesses may wish to review their position in light of these changes.

The changes will take effect from 1 April 2024.

VAT Treatment of Private Hire Vehicles

The government will launch a consultation on the impacts of the July 2023 High Court ruling in Uber Britannia Ltd v Sefton MBC in April. The government has stated that it is committed to exploring a range of viable options to ensure that this court ruling does not have any undue adverse effects on the private hire vehicle sector and its passengers.

VAT Retail Export Scheme

The government will consider the OBR’s review of the original costing of the removal of tax-free shopping alongside industry representations and broader data, and welcomes any further submissions in response to the OBR’s findings.

HMRC NEWS

Revenue and Customs Brief 1 (2024): Live web streaming of funeral services
Due to recent media and technological developments there has been an increase in the provision of live web streaming of funeral, burial or cremation services, allowing mourners who are unable to attend in person, to view the proceedings in real time via live web streaming provided by an undertaker, cemetery or crematorium operator.

Whilst burial and cremation services are already exempt from VAT under Group 8, Schedule 9 VATA 1994, HMRC has now issued this brief to confirm that that the supply of such live web streaming of funeral, burial, or cremation services is also exempt from VAT under Group 8. However, HMRC highlighted that if web streaming is supplied by a third party for a separate consideration, that supply is not within the scope of this exemption, and will be subject to the standard rate of VAT.

Notice in accordance with Schedule 9ZE to the Value Added Tax Act 1994
HMRC has published this new notice in accordance with Schedule 9ZE to the Value Added Tax Act 1994 which has force of law. The notice provide guidance on what to do:

• when businesses opt to register for the Import One Stop Shop (“IOSS”) scheme;
• to complete and submit an IOSS scheme return;
• to pay the VAT due on an IOSS scheme return;
• when IOSS scheme registration details change; or
• when businesses cease making qualifying supplies under the IOSS scheme.

VAT: DIY Housebuilders Scheme request for evidence
This newly published tax information impact note gives the power to HMRC to request additional evidential documentation to verify a DIY housebuilders claim. Under the new process for DIY claims, HMRC no longer requires all relevant invoices to be submitted, therefore the legislation has been updated to allow the Commissioners to request further evidential documentation (including invoices) in order to validate a claim, even after submission of the claim.

Late payment interest if you do not pay VAT or penalties on time
From 1 January 2023, HMRC will charge VAT registered businesses late payment interest from the first day their payment is overdue until it is paid in full. The above guidance, specifically in relation to how taxpayers can object to late payment interest, has been updated.

Investment gold coins (VAT Notice 701/21A)
Certain investment gold coins are VAT exempt under Group 15, Schedule 9 of VATA 1994. The UK list of coins recognised as investment gold coins has been updated and can be found using the above link.

Updates on VAT appeals
The above guidance sets out 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 may impact other businesses has been updated with 2 removals, 3 amendments and 1 new addition.

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 and details 3 additions, 2 removals and 1 amendment.

CASE REVIEW

Court of Appeal

1. Hospital car parking subject to VAT?

This is a long-running appeal by Northumbria Healthcare NHS Foundation Trust (the Trust) in relation to HMRC’s refusal to repay overdeclared output VAT on the supply of car parking facilities operated by the Trust at their sites. The VAT at stake in this appeal is relatively limited, but around 50 similar appeals by other NHS bodies are stayed behind this case with total VAT at stake in the region of £70million.

Public authorities are not regarded as taxable persons for VAT purposes if the transactions in question are ones in which they “engage as public authorities”. However, this does not apply where that treatment “would lead to significant distortions of competition”. The Trust took the view that it’s supply of car park was not subject to VAT under these provisions; however, HMRC argued that, although the Trust is a body governed by public law, the Trust is not acting as a public authority and, even if it were, VAT would still be chargeable because there would otherwise be significant distortions of competition. The effect of the case law is that whether the Trust is acting as a public authority turns on whether car parking is provided under a “special legal regime”.

The FTT did not accept that car parking was supplied under a special legal regime and also concluded that treating the Trust as a non-taxable person would lead to actual or potential distortions of competition which are more than negligible and dismissed the appeal. The Upper Tribunal (UT) upheld the FTT’s decision, concluding that the provision of car parking by the Trust is subject to VAT. Our summary of the UT’s decision can be read here.

The Trust appealed to the Court of Appeal on the grounds that the UT erred in concluding that the Trust did not supply car parking under a special legal regime. The Court of Appeal considered whether the Trust was acting as a public authority and concluded that the test is whether the activities are engaged in under a special legal regime, or under the same legal conditions as private operators.

The Court raised the fact that the Trust has a legally enforceable duty to adhere to the guidance set out in the 2015 Parking Principles. After careful analysis of this guidance, the Court concluded that this legally enforceable duty on the Trust is capable of amounting to legal constraints on the way it carries on its car parking activities which satisfies the condition that the car parking was provided under a special legal regime. Therefore, the Trust was acting as a public authority.

The Court also found that the FTT and UT applied the incorrect test to conclude that there would be significant distortion of competition. It confirmed that HMRC requires facts, based on evidence, demonstrating that non-taxation of the Trust would create significant distortion of competition. The Court concluded that “Distortion, let alone significant distortion, cannot be assumed based on participation in the car parking market, or based on a finding that competition exists. The necessary findings of fact are not present in this case.”

As a result, the Court concluded that the FTT and UT decision must be set aside and allow the Trust’s claim for repayment of VAT.

Constable Comment: The Court of Appeal overturning the FTT and UT’s decision was a significant turn in this case and it will certainly be interesting to see whether HMRC pursues this decision further. Whilst the VAT repayment to the Trust in this appeal was in the region of £270k, the decision could be binding on over 50 other appeals by similar NHS bodies amounting to around £70million of VAT.  Similar bodies should consider the submission of protective claims if this has not been done already and bringing existing claims up to date.

FTT

2. Organix and Nakd bars: Zero rated or confectionery?

This appeal concerns whether sales of Organix and Nakd bars by the appellant, WM Morrisons Supermarket Plc (Morrisons), are of ‘confectionery’ and subject to VAT at the standard rate. It is common ground if the products are not confectionery, they are zero rated. This appeal has been ongoing since 2021 when the FTT initially concluded that the products were confectionery. However, in 2023, the Upper Tribunal (UT) overturned the decision, remitting the case back to the FTT to be heard by a new panel. Both the FTT and Upper Tribunal case summaries were included in previous VAT Focus newsletters.

The UT held that in analysing whether the products were confectionery, the FTT wrongly treated certain factors as irrelevant and should have considered the healthiness of the products and their marketing as healthy, as well as the fact that the products do not contain ingredients associated with traditional confectionery, such as cane sugar, butter or flour.

The FTT has now found that the products all look, feel and taste like confectionery items, they are small bars in a similar size to chocolate or candy bars and are clearly intended to be eaten with hands. The bars have the appearance, texture, mouthfeel, density and taste of confectionery and would be so regarded by the informed ordinary person in the street. With regards to the absence of traditional ingredients, the FTT commented that ‘confectionery’ encompasses items that are not made from traditional ingredients but alternatives or substitutes of such ingredients, such as the ingredients used in the Organix and Nakd bars. The FTT concluded that “the absence of traditional confectionery ingredients does not outweigh the fact that the Products have the most important characteristics of confectionery, namely they appear, feel and taste like confectionery.”

With regards to the ‘healthy’ aspect, the FTT gave little weight to the products marketing on the website commenting that such evidence is tempered by the fact that the primary aim of such marketing material is to maximise sales rather than to inform, and marketing cannot determine where the products fall on the confectionery/non-confectionery sweet snack continuum. The FTT also noted that all of the products fall within the Food Regulations 2021 as food which are ‘less healthy’ and their placement in stores is regulated. The FTT concluded the products are ‘confectionery’ and therefore subject to VAT.

Constable Comment: It will certainly be interesting to see whether Morrisons intends to take this case further given there has now been three Court rulings in relation to these products. The case provides further insight into how the Tribunals arrives at a decision in relation to a food item’s VAT liability, considering a multi-factorial assessment. This is an ambiguous area of VAT law with an increasing number of cases being heard by the Tribunal where HMRC disagrees with the VAT treatment applied by taxpayers. Constable VAT regularly advises on the VAT treatment of food items and would be pleased to assist with any related queries.

3. Tribunal appeal: Hardship application

This case concerned whether SC Business Gateway Ltd (SBG) should be permitted to pursue its appeal to Tribunal without having to pay the VAT in question, £273,857, to HMRC. SBG’s business activity was purchasing luxury merchandise and exporting these items to countries in Asia.  The sum owing resulted from HMRC raising assessments following its decision to disallow the input VAT claimed on the purchase of goods.

An appeal against the VAT assessment can only proceed if HMRC are satisfied that the requirement to pay, or deposit, the amount of VAT would cause SBG hardship. HMRC was not satisfied that this was met, therefore SBG appealed t]o the Tribunal.

The burden of establishing hardship lies with the appellant. In this case, SBG failed to provide documentary evidence to demonstrate that paying the VAT assessed would cause financial hardship. The appellant did not provide correspondence from banks to substantiate the balance of the accounts at the relevant time nor did they provide company accounts to assist with establishing the appellant’s true financial position. In addition, the Tribunal found the appellant’s evidence to contain inconsistencies in some respect. Considering this, together with the lack of documentary evidence, the Tribunal dismissed the appeal commenting that ‘The absence of contemporaneous accounting evidence may justify the Tribunal placing little, if any, weight on an oral assertion that the Appellant is unable to afford to pay’.

Constable Comment: Whilst this case did not consider the technical points in dispute, it is a useful reminder to all taxpayers that an appeal can only be entertained if the VAT disputed is either paid or deposited to HMRC, or the appellant is able to demonstrate either to HMRC or the Tribunal that by paying the VAT, the appellant would suffer financial hardship. This case highlighted that providing documentary evidence is crucial to demonstrate hardship, and in the absence of such evidence, HMRC or the Tribunal is unlikely to consider oral submissions or evidence.

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

HMRC NEWS

VAT Import One Stop Shop Scheme
HMRC has published new guidance to help taxpayers find out if you can register and use the VAT Import One Stop Shop (IOSS) Scheme to report and pay VAT on imports of low value goods to consumers in the EU, Northern Ireland, or both. HMRC published further guidance about who can register, how to register and what to do after registration. All guidance is available from the link above.

Health professionals and pharmaceutical products (VAT Notice 701/57)
This guidance sets out how to account for VAT on goods and services provided by registered health professionals, including doctors, dentists, nurses and pharmacists. Section 10.1 has been updated to remove a reference to orthodontic appliances.

Making Tax Digital for VAT
HMRC will now sign up all new VAT registered businesses to Making Tax Digital for VAT automatically unless they are exempt or have applied for exemption.

Who should register for VAT (VAT Notice 700/1)
Information has been added in section 2.7 of VAT Notice 700/1 to confirm what needs to be included during the application process when describing business activities, specifically in relation to specified supplies.

CASE REVIEW

Supreme Court

1. Removal of low value consignment relief

Following the High Court and Court of Appeal’s decision to strike out the appeal, Jersey Choice Ltd’s  (JCL) appeal was considered by the Supreme Court. JCL grew horticultural products which were sold and imported into the UK from the Channel Islands. Prior to 2012, JCL benefitted from an import VAT exemption, the low value consignment relief (LVCR) which applied to goods valued below £15. The relief was exploited by online retailers and the government removed LVCR from 2012 from the Channel Islands only (no other territories were affected).

JCL was adversely impacted by the removal of LVCR and instigated proceedings against HM Treasury arguing that the removal of the LVCR breached its rights under EU law, resulting in damages in the sum of £15million.

JCL argued that the charge to VAT on imports into the UK from the Channel Islands was the equivalent to customs duty; however, the Channel Islands were within the EU Customs Union (but outside the EU for VAT purposes) and such a charge was contrary to the EU customs regime which should provide free movement of goods.

The Supreme Court concluded that JCL should be treated as a third country in the context of the EU VAT regime as opposed to considering the EU customs regime, and under the VAT regime, the EU principles of equal treatment and proportionality could not apply, and the appeal was accordingly dismissed.

Constable Comment: Whilst the UK has left the EU since these proceedings began, this was an interesting and complex case of the UK Court’s interpretation of how EU laws are applicable.

FTT

2. Sports nutrition products – zero rated?

This appeal concerned whether ‘the product’ sold by Duelfuel Nutrition Limited (DNL) is zero rated for VAT purposes. DNL developed a product marketed as assisting exercise. The product contains two items packaged and sold together. One of the items is a flapjack designed to assist with ‘performance’ and recommended to be consumed prior to exercise, followed by a cake or a brownie designed to assist with post exercise ‘recovery’, being high in protein. The product was marketed as ‘Two fuels. One system.’

DNL sought a non-statutory clearance (NSC) ruling from HMRC as to the VAT treatment of the products and HMRC responded advising the product is standard rated confectionary and not zero-rated as DNL desired. After a request for an independent review, the original decision was upheld by HMRC, DNL appealed this decision to the FTT. The Tribunal initially considered whether the product is ‘cake’, meaning it cannot be a confectionary and is zero rated for VAT purposes.

The FTT applied a multifactorial test and concluded the product is not a cake. Whilst it found the size and appearance of the product to be consistent with a cake, the taste and texture were different. In addition, the Tribunal found the packaging (two items together) is not what an ordinary person would expect of a cake and also the product was marketed to be a ‘healthy product’ which is not strongly indicative of an ordinary cake. The pattern of consumption, being before and after exercise was not indicative of a cake either. After weighing all the relevant factors, the FTT concluded the product was not a cake.

Following this conclusion , the FTT had to determine whether the product is confectionary (standard rated). VAT legislation states ‘confectionery’ includes chocolates, sweets and biscuits; drained, glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers. The FTT concluded that the product is sweetened prepared food, which is normally eaten with fingers, therefore it is confectionary. The FTT also applied the multifactorial test and concluded that an ordinary person would find that the products are not confectionery.

However, given that the products fall within the legislative definition of ‘confectionary’, the FTT concluded the product is standard rated for VAT purposes and the appeal was dismissed.

Constable Comment: This is another complicated case on a subject that is often a source of dispute between taxpayers and HMRC. It will be interesting to see if the appellant wishes to pursue this decision with the Upper Tribunal, given that the decision suggests production of the product ceased during this dispute around the correct VAT treatment of the product because it would not be profitable if the appellant had to account for VAT at 20% on its supplies. The appellant took this into consideration during the planning stages, concluding that zero rated VAT treatment was essential, and carried out VAT research as well as taking professional advice. HMRC and the Tribunal disagreed with the VAT treatment sought or identified by DNL.

The case acts as an important reminder that there is a lot of ambiguity and debatable points regarding the zero rating of food items and HMRC will often challenge zero rating. It is therefore important to carefully consider the position and to seek professional advice to mitigate the potential risk of HMRC challenging the proposed VAT (zero-rating) treatment of a product.

3. VAT zero rate: Evidence for exports

In this case, H Ripley & Co Limited (HR) appealed HMRC’s decision to deny it’s claim to zero rate supplies and output tax in the sum of £1,176,161. HR is a UK VAT registered business which exports scrap metal to EU Member States. The claim was denied on the basis that HR had not provided evidence to satisfy the requirements of VAT Public Notice 725 (VN 725) which has force of law. The appeal relates to 72 supplies and 91 loads of scrap metal.

The Tribunal highlighted that the burden of proof is on HR to show that it satisfied the conditions set out in VN 725 to zero-rate its supplies and provided documentation to show that the goods were removed from the UK within the required time limits (3 months).

HR argued that the evidence of removal of the goods from the UK is demonstrated by the production of a combination of various documents and the inferences to be drawn from them. The documents are consistent with each other and so corroborate each other and accurately record the 72 transactions. The combination of documents included sales invoices, bank statements, weighbridge tickets, CMRs, Annex VII documents, P&O boarding cards, emails, and WhatsApp messages.

The Tribunal reviewed each category of documents provided. Whilst the sales invoices and bank statements showed there were sales made to a company in Belgium and payment was received from a Belgian bank account, this does not evidence that goods were removed from the UK. With regards to the weighbridge tickets, a significant number of these were unsigned and did not contain a carrier name. UK registered vehicles number plates were recorded on some; however, these did not appear on any subsequent documents provided as evidence of export.

The CMRs provided were not fully completed by the haulier and were not signed by the receiving consignee. The Annex VII Documents were incomplete and incorrect as it showed the UK as both the exporting and importing country. Whilst HR argued this is an international trait of the industry to prevent the seller from finding out who the final purchaser is, the Tribunal did not accept these as complete evidence of export. With regards to email and WhatsApp messages, the Tribunal also considered these were not obtained within 3 months, and also do not evidence that the scrap metal was exported.

As a result of the above, the Tribunal found that none of the documents, individually or taken as a whole, relied upon by HR evidence the export of scrap metal per the requirements of VN 725. Accordingly, the appeal was dismissed.

Constable Comment: This case is a reminder that there are strict requirements to be met regarding record keeping in relation zero rated exports. VN 725 sets out the required records taxpayers must obtain and the applicable time frames, plus other rules. It is important to remember that this VAT notice has the force of law. If these requirements are not met, the taxpayer may be expected to account for output VAT as if the sales were made domestically, and not exports, which could have significant impacts on a business. The VAT sums involved in this case were significant.   

4. Input VAT recovery disallowed

In this case, the appellant, Passion Incorporated Ltd (PIL) supplied consultancy, advertising, and marketing services. HMRC disallowed VAT incurred and reclaimed as input tax on various VAT returns and raised ‘best judgment’ VAT assessments on the grounds that the appellant failed to demonstrate that the expenditure giving rise to the VAT incurred and reclaimed, was done so for the purpose of its business.

Whilst the appellant made some arguments that the information submitted should have been sufficient for HMRC to determine the nature of the expenditure, this was considered insufficient and HMRC upheld its original decision. There were multiple reasons the input VAT claims were invalid, including invoices not addressed to the company, double counting of invoices and claims for expenditure in relation to which no VAT had been incurred.

The Tribunal agreed with HMRC and commented that it appears the appellant did not appreciate some key principles in relation to input VAT recovery such as in order to recover input VAT on costs there must be a direct and immediate link between those costs and taxable supplies made (or intended to be made) by the business. It is for the taxpayer to demonstrate that the link between the expenditure incurred, and taxable supplies exists, rather than for HMRC to demonstrate that it does not. Input VAT incurred for personal rather business usage is irrecoverable. Lastly, input VAT is generally not recoverable where it has been incurred on business entertainment expenditure.

As the appellant was unable to demonstrate there was sufficient link between the VAT incurred and taxable supplies, and it appeared that certain costs were for personal usage, the Tribunal dismissed the appeal.

Constable Comment: Whilst this case may not impact many other taxpayers, it acts a useful reminder of the general and basic principles of input VAT recovery. It is important that there is a direct link between input VAT incurred and a taxable supply. VAT incurred on personal expenses is unlikely to be classified as input tax, VAT being a transaction-based business tax, and will not be recoverable if relating to personal use or non-business activities. If you have any questions or queries around recovering VAT incurred or input VAT recovery generally, what may or may not be considered a business activity (for VAT purposes) please do not hesitate to get in touch and Constable VAT would be pleased to assist.

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

HMRC NEWS

Energy-saving materials and heating equipment (VAT Notice 708/6)
This guidance details how to account for VAT if you’re a contractor or subcontractor installing energy saving materials and grant funded heating equipment. From 1 February 2024, the scope of the energy-saving materials relief is being extended to include installations in buildings used solely for relevant charitable purposes. The list of energy-saving materials is extended to include, water source heat pumps, electrical storage batteries and smart diverters. The supply of services and materials required to install a ground or water source heat pump (for residential accommodation or buildings used solely for relevant charitable purposes) are also eligible for the relief.

Buildings and construction (VAT Notice 708)
The above guidance details how to work out the VAT on building work and materials if you’re a contractor, subcontractor or developer. Sections 18.1 and 18.2 of the notice and the certificates in those sections have been updated to show they have force of law under Note 12 Group 5 Schedule 8 VATA 1994.

Claim a VAT refund for a new home or charity building if you’re a DIY housebuilder
DIY housebuilders can use the new online service to reclaim VAT. However, the paper form (VAT431NB or VAT431C) can still be used if desired. HMRC has now updated the address to send a completed paper form to. The address was also updated for conversions.

Group and divisional registration (VAT Notice 700/2)
The above guidance can be used to find out about group and divisional VAT registration and the forms that should be used to apply. The list of automatic notifications taxpayers may receive while waiting for a VAT group registration number has been updated at section 2.17.  HMRC confirm that when waiting for confirmation of grouping,  submissions under a current standalone VAT registration should not be made if these relate to the period within which grouping was requested. HMRC have detailed that certain automatic notifications will occur on the existing VAT registration but should be ignored. A new section about late payment submission penalties has also been added at section 5.11 confirming how these penalties and the points system work for VAT groups.

Claim a VAT refund as an organisation not registered for VAT
This online service (VAT126) can be used to claim back VAT if you undertake non-business activities  and are a local authority, academy, public body or eligible charity. Specific legislation allows VAT recovery for these entities in relation to non-business activities where the normal rules would preclude VAT recovery. HMRC has now confirmed that where claiming a refund for 6 or more invoices, you will need to upload one spreadsheet or document providing information for all invoices.

Repayment interest on VAT credits or overpayments
The above can be used to check when a taxpayer is eligible for repayment interest if HMRC are late in settling a repayment claim from a VAT return or VAT overpaid. Information on eligibility criteria for repayment interest on overpayments and start dates when VAT is not paid to HMRC has been updated. Information on repayment interest end dates when HMRC sets it off against your debts has also been updated.

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 and details 4 additions and 1 removal.

CASE REVIEW

Upper Tribunal 

1. Special Method Override: Floorspace

In this case HMRC challenged the FTT’s ruling in relation to Hippodrome Casino Ltd’s (HCL) floor space based partial exemption standard method override calculation giving a more accurate input VAT recovery methodology than the standard method based upon income. Depending upon specific objective tests, the standard partial exemption method must be overridden  if a logical use based method delivers a more accurate result.

HCL operates a casino making VAT exempt gaming and betting activities, however it also makes taxable supplies of hospitality and entertainment including a theatre, bars and restaurants. In 2022, the FTT  concluded that HCL’s means of apportioning and recovering input VAT on HCL’s overhead expenditure by reference to floorspace more accurately reflected the economic use of that expenditure than the standard turnover-based method of recovery. We released a summary of the FTT decision in an earlier VAT Focus which can be read here.

HMRC now appealed to the Upper Tribunal (UT), arguing that the FTT failed to address their central contention that floorspace used for taxable supplies such as entertainment were also being used for VAT exempt supplies of gaming, meaning there was a dual use of floorspace. HMRC argued that gaming customers did want the ability to have a break, drink, eat some food or smoke a cigarette, and so those ‘non-gaming’ areas which were treated as taxable in the floorspace methodology, were, in part, used economically for the VAT exempt gaming business. HMRC’s view was that the FTT expressed a conclusion on an incorrect test, namely whether or not the hospitality and entertainment businesses were “merely an adjunct to, or amenity for, gaming”, which is not the test for economic use.

The UT was satisfied that the FTT has failed to address and give reasons for rejecting HMRC’s contention that the areas allocated to bars, restaurant and theatre were also used in part for the purposes of HCL’s gaming business, such that there was dual use of those areas. The UT found this to be a material error of law and concluded that the FTT decision must be remade.

The UT considered HCL and HMRC’s submission in relation to the override calculation, and agreed with HMRC that the economic reality is that the floor areas of the Hippodrome casino allocated for hospitality and entertainment have significant dual use for gaming as well. The UT made this conclusion for various reasons including that the bar and restaurant areas provided important amenities to gaming customers, they also helped to increase dwell time for gamer increasing the length of time they spent gaming. The attractiveness of the bars or restaurants ‘in their own right’ served to enhance the attractiveness of the same as an amenity for those who are gaming.

As a result, the UT concluded that the duality of use means that the floor-based method is fundamentally flawed and it does not guarantee a more precise determination than the standard turnover method. The UT’s dismissed HCL’s appeal.

Constable Comment: This was a lengthy case involving complex points to consider around the partial exemption standard method which may in certain circumstances be overridden to provide a more accurate outcome. The UT has now overturned the FTT’s decision in allowing the floorspace based methodology, concluding that the dual use of the hospitality and entertainment areas was not considered. The case acts as a great example that it is crucial to be able to demonstrate that a proposed partial exemption approach provides a more precise determination of the economic use and deductible proportion of the input VAT than the standard method or a previously agreed partial exemption special method (PESM). Where the standard income based method delivers an unfair result,  it is possible and desirable to agree a PESM with HMRC in advance for certainty. Constable VAT has significant experience dealing with PESMs and would be pleased to assist with any related queries.

FTT

2. Zero rated food items: Poppadoms

In this case, Walkers appealed HMRC’s decision in relation to the VAT treatment of it’s ‘Sensation Poppadoms’ product. The questions for the FTT was to determine whether the products were zero rated food items, as Walkers contend, or standard rated.

Walkers argued the products are ‘food of a kind used for human consumption’ and they do not fall within the excepted items. HMRC contends that the products were similar to potato crisps and made from potato, potato flour or potato starch and were packaged for human consumption without further preparation, therefore they are standard rated product.

The FTT initially considered whether the products are made from potato by observing the ingredient list and found that there is more than enough potato content for it to be reasonable to conclude that the products fall within the meaning of ‘made from potato, or from potato starch’.

Subsequently, the FTT applied a multifactorial assessment to determine whether the products were similar to potato crisps. It noted that the products were marketed to be eaten in an environment and manner dissimilar to a potato crisp. In addition, the packaging was consistent with other products in the same range including potato crisps. In terms of appearance, the size, texture and colour were found to be very similar to crisps. The flavours of the products were also not distinct from those used in potato crisps. On balance of all factors, the FTT found that the product is similar to potato crisps and as a result it is a standard rated food item.

Walkers tried to argue that fiscal neutrality should be used to ensure the UK does not discriminate between objectively similar supplies, and as poppadoms are zero rated, the products in dispute should also be zero rated. HMRC’s response was that other supplies described as ‘poppadoms’ were not objectively similar as they were not made from potato. The FTT agreed with HMRC concluding there was no breach of fiscal neutrality. The appeal was dismissed.

Constable Comment: In this case Walkers tried to argue that its poppadom products were zero rated as specifically mentioned in HMRC guidance. However, the FTT agreed with HMRC that it was irrelevant whether the products were poppadoms if it is made from potato and it is similar to a potato crisp, as in this case the product will be standard rated. The VAT rules around food items can be complex and often there is ambiguity leading to disputes between taxpayers and HMRC. We would always recommend seeking professional advice if there is any ambiguity. Constable VAT has much experience in agreeing zero-rating and would be pleased to assist with any related queries.

3. Input VAT on qualifying motor vehicles

In this case, Three Shires Trailers Limited (TST) purchased two Land Rover Discovery vehicles which were considered to be commercial vehicles for VAT purposes, and TST reclaimed the input VAT incurred. Subsequently to purchasing the vehicles, TST converted them to cars for VAT purposes by adding rear seats, the side and back windows which had been blacked out were cleared.

HMRC initially disallowed the input VAT on the purchase as a result of the conversion recategorizing the vehicles to input VAT blocked cars. However, following a review, the input VAT was allowed but HMRC then took the view there is an output VAT liability on the self-supply of the cars as a result of converting them from commercial vehicles to cars.

The Tribunal agreed with HMRC that the commercial vehicles had been converted to cars. However, it confirmed that a self-supply would only be due if the use of the vehicles post conversion was such that input tax would have been disallowed at the time of purchase, meaning there is private use.

The Tribunal concluded based on the evidence provided that the vehicles were only used for business purposes and were not available for private use, therefore it is a qualifying motor vehicle eligible for input VAT recovery. Therefore, the conversion did not trigger a self-supply and no output VAT was due. The appeal was allowed.

Constable Comment: This case is another example to demonstrate that HMRC will often challenge the VAT treatment of vehicles. There are strict conditions and rules to satisfy in order to recover input VAT incurred which must be observed by all taxpayers prior to making a claim for input VAT and these should be considered, particularly where there is an unusual aspect such as in this case.

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

Christmas and New Year closure

We will be closing at 5.30 pm on Friday 22nd December and will reopen on Tuesday 2 January 2024 at 9am. If you have any urgent queries during this time please contact your usual CVC partner by email and they will respond to you as soon as possible.

We have not sent Christmas cards this year and instead donated to our local food bank. However, we would like to take this opportunity to wish all our clients and regular readers a Merry Christmas and a happy and prosperous New Year.

HMRC NEWS

VAT refunds using the DIY housebuilder scheme
The above guidance has been published by HMRC as part of implementing the changes to the DIY Housebuilder Scheme. There is now guidance released in relation to VAT refunds for new builds, conversions and new charity buildings. HMRC also added the links to the new online system to make a claim for a VAT refund.

The new guidance clarified that the extended time limit of 6 months to submit a claim will only apply to projects which were completed on or after 5 December 2023. The 3 month time limit will continue to apply to any projects which received a completion certificate prior to 5 December 2023.

VAT group registration delays
A number of taxpayers applying for a group VAT registration have faced issues in relation to the effective date of VAT registration (EDR), due to some delays in HMRC’s processing. HMRC has found a solution to provide the correct EDR for taxpayers who have been affected by VAT grouping registration delays. A process has now been identified that will provide the correct EDR and resolve any related issues. HMRC has a list of impacted taxpayers and will be contacting those affected to discuss next steps.

HMRC email updates, videos and webinars for VAT
The above guidance can be used to learn more about VAT including accounting schemes, VAT Returns and keeping records. Recorded webinar links for ‘the new VAT late submission late payment penalties and interest charges’ and ‘Changes to the VAT 652 – error correction notice form’ have been updated.

Who should register for VAT (VAT Notice 700/1)
The above guidance explains when you must register for VAT and how to do it. In most cases the online VAT registration service must be used. The paper VAT1 form can no longer be downloaded from HMRC’s website and you must now call HMRC to request this.

VAT Refund Scheme for charities (VAT Notice 1001)
The above guidance can be used to find out if a qualifying charity (as defined in section 33D of the VAT Act 1994) is eligible for a refund on goods and services under a VAT Refund Scheme. The address to send claims has been updated. The address in relation to local authorities and similar bodies also been updated which can be found here.

CASE REVIEW

FTT

1. VAT Exemption: Medical care

This case concerned a dispute between Vision Dispensing Limited (VDL) and HMRC, regarding its supplies of services in connection with the online sale of contact lenses. VDL argued it was making supplies of medical care which were VAT exempt. However, HMRC took the view the supplies were not medical care and should be subject to VAT at the standard rate.

VDL delivered services to another Dutch company (part of the same group) which actually owned and sold contact lenses. VDL was responsible for online customer enquiry facilities, some of which was clinical in nature, through an online chat on the website, customer service line or email. In addition, it sent prompts and reminders to customers. VDL also operated the warehouse on behalf of the Dutch company including selecting and dispatching customer orders.

HMRC argued that supplies made by VDL cannot be described as professional clinical advice or therapeutic care. HMRC stated that clinical advice cannot be delivered in an impersonal or generic way such as VDL’s customer service facility online.

The Tribunal recognised that there were two points in question and the answer to both must be ‘yes’ if the appeal is to be allowed. The questions were:

• Do VDL’s services constitute medical care?
• Are VDL’s services wholly performed or directly supervised by appropriate persons?

The Tribunal stated that  for services to qualify as “medical care” they must have as their purpose “the diagnosis, treatment and, in so far as possible, cure of diseases or health disorders”. The Tribunal reviewed all the evidence presented and came to the conclusion that the services cannot fairly be described as ‘medical care’. The service was the provision of a customer support facility covering a range of issues, which can include issues of a clinical nature, although these were very limited, and also ‘dispensing’ goods in the terms of packing and posting products which is standard rated.

This was sufficient to dismiss the appeal, however the Tribunal also went on to consider whether VDL’s services were wholly performed or directly supervised by appropriate persons. The Tribunal concluded, that whilst VDL had some optician employees, there was no evidence to support that these opticians delivered the required level of supervision and therefore the appeal would have been dismissed even if VDL was making supplies of medical care.

Constable Comment: This was a complex case with many factors and evidence being considered, however the Tribunal had no difficulty in reaching the conclusion that the ‘dispensing services’ made by the appellant do not fall within the meaning of ‘medical care’ for VAT exemption. VAT exemption in relation to health and welfare is a complex area of VAT with strict conditions to satisfy. If there is any ambiguity in relation to the VAT treatment of a supply, we would always recommend seeking professional advice.

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

HMRC NEWS

VAT gap estimates
The above guidance includes HMRC statistics relating to VAT gap estimates, the difference between the VAT theoretical liability, estimated using national accounts data, and actual cash receipts. HMRC has now published preliminary and secondary estimates of the VAT gap for the tax year 2022 to 2023.

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 5 additions and 3 removals.

AUTUMN STATEMENT

The Chancellor of the Exchequer delivered the Autumn Statement on 22 November 2023. We have highlighted the VAT related announcements below.

Reforms to Energy-Saving Materials VAT Relief

The government will expand the VAT relief available on the installation of energy-saving materials by extending the relief to additional technologies such as water-source heat pumps and bringing buildings used solely for a relevant charitable purpose within the scope of the relief. These reforms will be implemented in the UK from February 2024. Further details on these reforms will be published shortly.

Women’s Sanitary Products

The government will extend the scope of the current VAT zero rate relief on women’s sanitary products to include reusable period underwear from 1 January 2024.

VAT Retail Export Scheme

The government will continue to accept representations on the VAT Retail Export Scheme and the associated airside scheme (tax-free shopping) and consider this new information carefully, alongside broader data.

VAT Treatment of Private Hire Vehicles

Following the High Court ruling in Uber Britannia Ltd v Sefton MBC, the government will consult in early 2024 on the impacts of the case. The aim of the consultation is to clarify the question of whether the supply to the passenger is made by the driver or by the operator and follows a number of cases concerning non-VAT matters such as the licensing of vehicles and employment status of drivers.

CASE REVIEW

FTT

1. Single or multiple supply

This case concerned a dispute between Gap Group Limited (GAP) and HMRC in relation to the VAT treatment of the supply of red diesel fuel made by GAP. GAP is a plant and machinery hire company. The issue for the Tribunal to determine was whether the supplies of plant and machinery (standard rated) and supplies of red diesel (at the time, reduced rated) constitute a single supply required to follow the VAT liability of the supply of plant hire, or multiple supplies, which should be afforded their own VAT treatment.

GAP argued that the plant hire and the supply of fuel are separate supplies for VAT purposes, therefore the supply of red diesel should attract a reduced rate of VAT at 5% applicable to supplies of fuel below the de minimis threshold. HMRC took the view that the supply of plant hire and fuel constitutes a single supply which should be subject to VAT at the standard rate of 20%.

The Tribunal reviewed the party’s submission and relied on case law concerning single and multiple supplies. GAP supplied plant and equipment, if appropriate, with fuel included and the customers had the choice of refuelling using their own, or third party, fuel, in which case there was no supply of fuel at the point the plant was returned. Alternatively, customers may return the plants with fuel missing in which case GAP makes a charge for the fuel used.

It was clear that the supply of plant and fuel are linked, the Tribunal had to determine whether they were so closely linked as to be found a single supply.

The Tribunal noted that the cost of the plant hire and the fuel are separately identified on invoices. The customers had a genuine economic choice as to whether or not to have the fuel provided by GAP, realistic and practical alternatives were available. The Tribunal considered the customer’s aim in paying for the fuel and concluded it cannot be a better enjoyment of the principal supply of hire because that already finished at the point it was determined whether a fuel charge is due or not. The aim was the convenience of not having to refuel. At the outset of the hire, neither GAP nor the customer knew whether there would ultimately be a supply of fuel.

The Tribunal found that fuel was acquired at the moment the customer chose not to refuel. Any customer choosing not to refuel had the unfettered freedom to make that choice and therefore there were separate independent supplies. The appeal was allowed.

Constable Comment: It should be noted that until April 2022 (when the use of red diesel in construction equipment was prohibited) GAP’s supplies of diesel qualified for the reduced rate of VAT, as it was providing less than 2,300 litres of fuel which meant that the fuel was deemed to be provided for ‘domestic use’ (under Note 5 to Group 1, Schedule 7A, VATA 1994).  This is a helpful case highlighting a scenario where distinct supplies are made for VAT purposes even though those supplies are clearly linked. Identifying whether a transaction  is a single composite supply or consists of multiple supplies can be a complex area of VAT and often involves some ambiguity. We therefore always recommend seeking professional advice to ascertain the VAT treatment applicable. Constable VAT would be pleased to assist with any relevant queries. 

2. Non-monetary consideration

In the case of Simple Energy Limited, “Bulb” supplied energy to business and retail customers and operated a ‘refer a friend’ (RAF) scheme. Existing customers (“referrers”) were able to share a personalised electronic link with anyone, and if new customers signed up using that link, both the referrer and new customer would receive a ‘reward’ in the form of a credit against their energy bill. The question for the Tribunal was whether a successful referral under the RAF scheme amounted to the provision of a service to Bulb made by the referrer, such service constituting non-monetary consideration for the supply of energy. If so, VAT would be due on the full amount received, including the value of ‘reward’ credited against the bill.

Bulb argued that the ‘reward’ should be treated as a discount that reduced the value of the energy supplies by Bulb and therefore VAT is due only on the reduced amount paid by the customer. Bulb argued that from the customer’s point of view the credits were clearly a reduction in the price payable rather than consideration for delivering a service. Bulb contended that whether the ‘reward’ was formally described as a discount or not does not affect the position. The ‘service’ of sharing a link was at best de-minimis in terms of effort. In addition, Bulb stated that consideration requires a specific benefit or advantage being delivered to Bulb directly, however, in order to obtain the reward, the referrer only had to share the link with others, but there was nothing provided directly to Bulb at this stage.

The Tribunal relied on a wide range of case law to conclude that the tests for ‘contractual exchange’ required to establish the element of ‘consideration’ were met. There was a direct link between the action of referrers and the RAF credits provided by Bulb. In addition, the Tribunal highlighted that the VAT treatment of the credit received by the referrer could be distinguished from the credit received by the new customer because the referrer received a reduction in their energy costs to reward them for doing something which was additional to what was required of them as customers of Bulb.

The Tribunal therefore concluded that the RAF credits should be considered as non-monetary consideration and VAT is due on the full amount, including the value of the ‘reward’. The appeal was dismissed.

Constable Comment: In this case the Tribunal considered what can amount to non-monetary consideration. The threshold for what the referrer had to do for their reward was low but this did not stop the Tribunal from holding that this amounts to non-monetary consideration. Although a FTT decision is non-binding, it reinforces the complexities of ‘business promotion schemes’ and businesses involved in similar supplies should fully consider these from a VAT perspective. This is an important factor to consider because the implication is that where there is consideration in return for a supply, VAT is due on that consideration, whether it is monetary or not. Where non-monetary considerations are involved there may be further implications with valuation of such consideration. If you or your business requires any assistance, Constable VAT would be pleased to assist.

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

HMRC NEWS

VAT: Digitisation of claims and extending time limit for DIY Housebuilders Scheme
A person who builds their own home, or converts a non-residential building to their own home, can reclaim VAT incurred by completing a claim under the DIY Housebuilder Scheme. HMRC now proposes to change the scheme by introducing the option of submitting DIY housebuilders VAT refund claims digitally. HMRC also intends to extend the time limit for such claims from 3 months to 6 months after completion of the build.

The aim of the measure is to make administration easier for both HMRC and the claimant. The existing process for making paper-based claims will remain as an option for those that wish to use it. Also, extending the time limit will allow claimants more time to gather their documents and complete their claim, which should result in fewer omissions or errors.

Register for VAT by post
HMRC has now removed the VAT1 paper application, it is now only available to those who qualify as digitally excluded. If you or your business is digitally excluded or there is any other reason why an online application is not possible, you will need to contact HMRC to request a paper form VAT1 and confirm your reason for requesting that paper form.

Revoke an option to tax after 20 years have passed
An option to tax can be revoked for VAT purposes after 20 years have passed using form VAT1614J. The address for sending the completed form and any supporting documents has been updated with the new details on the link above.

HMRC email updates, videos and webinars for VAT
The above link can be used to learn more about VAT including accounting schemes, VAT returns and keeping records. HMRC has updated the above page with links to live webinars for ‘VAT Accounting Schemes’ and VAT – the basics and the VAT return’.

Fuel and power (VAT Notice 701/19)
The above guidance can be used to find out how VAT should be charged on supplies of fuel and power if you’re a supplier or user. HMRC has now updated the guidance to fix some broken links and section 6.1 ‘Supplies taxed at the reduced rate’ has been updated to clarify the qualifying uses of fuel oil, gas oil or kerosene.

CASE REVIEW

Upper Tier Tribunal

1. Margin claim for demonstrator cars

This case concerned a historic claim made by Cambria Automobiles and Invicta Motors (the appellants) in relation to overdeclared output VAT on the sale of demonstrator vehicles in 1973 to 1996 under the VAT margin scheme. In 2003, the appellants made a claim to recover overpaid VAT as a result of the Italian Republic case. HMRC initially rejected this claim and the appellants appealed to the Tribunal, however, after lengthy negotiations, the appellants and HMRC came to an agreement in 2006, under Section 85 VATA 1994, to make a repayment.

However, the calculation for the claim was based on the ‘Italian tables’ from the Italian Republic case, produced for the purpose of estimating claims as it was unlikely that business records dating back to 1973 are still available or complete for persons. Subsequently to the 2006 agreement, it was discovered that the Italian tables contained errors, and if the appellants were to recalculate their claims with the corrected methodology, they considered that their original claims had been significantly understated. As a result, the appellants submitted the ‘2009 claim’ to make good the shortfall. HMRC rejected the 2009 claims and the FTT also upheld HMRC’s decision. The appellants now appealed to the Upper Tribunal (UT).

The appellants argued that the FTT erred in law to conclude that the Section 85 agreement with HMRC in 2006 was full and that it was a final settlement in relation to the vehicles in the 2003 appeal. HMRC argued that the 2009 claims were simply an attempt to amend the 2003 claims, however since the 2003 claims had been settled, it was not open for the appellants to attempt to resuscitate them by arguing that the 2009 claims were entirely new.

The UT considered both parties’ submissions however it stated that a reasonable person having all the background knowledge at the time of the Section 85 agreement, would have understood the agreement as contended by HMRC, meaning that the agreement extends to all overpayments pursuant to the Italian Republic case in relation to the vehicles in the relevant period. The UT agreed with HMRC, concluding that the Section 85 agreement made in 2006, precludes the appellants from making any further claims in relation to the same period. Therefore, the 2009 claims were invalid and the appeal was dismissed.

Constable Comment: In this case, the Tribunal concluded that the appellants were not able to amend their historic claims as they have previously reached a negotiated agreement with HMRC. Whilst the matter was more involved with complex rules and case law being considered, it is a good example to highlight the fact that taxpayers must consider facts of their circumstances in great detail before submitting a claim to HMRC. If you or your business is intending to submit a claim to HMRC for overpaid VAT, we would recommend seeking professional advice in advance.

FTT

2. Cultural VAT exemption: Live events

This case concerned Derby Quad Limited’s (DQ) appeal against HMRC’s assessment for underdeclared VAT in relation to admission charges to broadcasts of live event performances. DQ had contracts with theatre companies for licences to a non-exclusive right to exhibit certain plays performed on stage in selected theatres. The right to present the screenings by way of digital production on DQ cinema screens was ‘near simultaneous’ or ‘non-simultaneous’.

Under Group 13, Schedule 9 VATA 1994, admission charges to cultural events such as theatre performances are exempt from VAT where certain specified criteria are met, however cinema screenings are subject to VAT at 20%. DQ treated its live events as VAT exempt under Group 13 on the grounds that the events were different to a cinema screening, arguing it is an extension of theatre through digital innovation and new technology, allowing audience participation and interaction even remotely. As DQ was an eligible body, and it supplied an admission charge to a performance of cultural nature, DQ took the view its supplies should be VAT exempt.

HMRC disagreed, stating that ‘theatrical performance’ refers to the actual live performance in a theatre rather than a recording of it, emphasising that ‘performance’ is different to ‘showing or screening’. HMRC defined performance as having both a temporal and live requirement but also a geographical one so that it could only take place in one geographical location at a time.

The Tribunal agreed with HMRC, and it found it crucial that the actors and performers received no feedback from the audience at DQ’s live event. The audience cannot convey their reactions and responses to the actors and performers hence a different experiential event for both parties. The Tribunal upheld HMRC’s decision and concluded that the live events are not a ‘theatrical performance’ in terms of Group 13, Schedule 9 VATA 1994, and therefore it is not VAT exempt.

Constable Comment: This case considered the cultural VAT exemption which is often a complex area of VAT. In order to avoid under declaring VAT, it is crucial that the relevant conditions for VAT exemption are satisfied and if there is any ambiguity we would recommend seeking professional advice.

3. Strike out application

In this case the Tribunal considered HMRC’s appeal to strike out Vistry Homes Ltd’s (current representative member of the Vistry VAT group) appeal on the grounds that the principle of cause of action estoppel, issue estoppel and abuse of process apply in respect of the appeal.

In 2018, Linden Limited (LL, previous representative member of the VAT group) made supplies of land with a back to back supply of construction services to Housing Associations (HA). LL treated this supply as a single indivisible supply which is zero rated for VAT purposes, however, HMRC took the view there was a separate supply of VAT exempt land and zero rated construction services. This decision was appealed (the 2018 appeal) and LL provided an example contract with the Merlin Housing Society Ltd (Merlin Agreement) to be considered. However, LL subsequently withdrew its appeal and therefore the matter was concluded in favour of HMRC.

However, in 2022 the Vistry VAT group wrote to HMRC to confirm in VAT periods during 2018-2019, it recovered input VAT on the basis that it entered into agreements with HA to make a single taxable supply for the construction of dwellings which included the land on which the dwellings were built, essentially applying a similar VAT treatment as LL previously. HMRC issued assessments for the input VAT and Vistry, following a statutory review upholding HMRC’s decision, appealed to the Tribunal (the 2022 appeal).

HMRC took the view that LL’s withdrawal of the 2018 appeal had established that there was a separate supply of VAT exempt land and zero rated construction services, this set a general precedent for those parties. Section 85, VAT Act 1994 provides that when an appeal is withdrawn, the parties are deemed to have “come to an agreement…that the decision under appeal should be upheld without variation”, and a Tribunal is then deemed to have “determined the appeal in accordance with the terms of the agreement”. Based upon the “deemed” Tribunal decision and considering Estoppel principles relevant HMRC applied to strike out the 2022 appeal.

Following deliberation, the Tribunal rejected all of HMRC’s grounds of appeal, confirming that the withdrawal of the 2018 appeal was limited to the particular supplies under the Merlin Agreement. It was not a general ruling which HMRC could apply to all supplies between the appellant and HA. The Tribunal concluded that it would be inequitable to prevent the appellants bringing their 2022 appeal before a Tribunal to consider the contractual arrangements, and commercial and economic realities surrounding those arrangements in detail. HMRC’s strike out appeal was dismissed.

Constable Comment: In this case the Tribunal considered whether the appellant can be prevented from arguing points which have been the subject of a prior deemed agreement and deemed Tribunal determination due to the taxpayer withdrawing an appeal. The Tribunal concluded that the prior agreement/determination in this case only relates to the specific supply in that previous instance and cannot be considered a general ruling. Instead, where there are distinct contracts and agreements in dispute, such agreements should be considered and a conclusion must be reached based on the nature of the supplies under those agreements.  As a result the appeal was not struck out and a Tribunal will consider the 2022 appeal.

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

HMRC NEWS

Removal of VAT1 paper application
HMRC have confirmed that the ability for most taxpayers to register for VAT using the VAT1 form will be removed from 13 November 2023. From that date, the paper VAT1 form will only be available to those who qualify as digitally excluded or where the online VAT registration service (VRS) cannot be used. The aim of the removal is to encourage businesses, or their agents, to use HMRC’s online VAT registration service. This could speed up processing times for VAT registration insofar as HMRC must manually transfer information from each paper VAT 1 to its VAT registration system.

Revenue and Customs Brief 7 (2023): Change to the VAT treatment of drugs and medicines supplied under patient group directions
The government announced at Spring Budget 2023 that it would be extending the use of the zero rate of VAT on prescriptions to drugs and medicines supplied through patient group directions.

The scope of the VAT zero rate for supplies of drugs and medicines dispensed to individuals for their personal use is being temporarily extended (from 9 October 2023 to 31 March 2027) to include the supply of drugs and medicines which are dispensed in accordance with a patient group direction issued under the Human Medicines Regulation 2012.

The brief explains in more detail the change to the VAT treatment of drugs and medicines supplied through a patient group direction and where businesses can find more information.

Apply to join the VAT Flat Rate Scheme
Taxpayers can apply to join the Flat Rate Scheme using form VAT600FRS. HMRC has updated the above guidance by adding a link to the online form.

HMRC email updates, videos and webinars for VAT
The above link can be used to learn more about VAT including accounting schemes, VAT Returns and keeping records. HMRC now added recorded webinars about VAT – using the Flat Rate Scheme, VAT Accounting Scheme and VAT – the basics and the VAT return.

Motoring expenses (VAT Notice 700/64)
The above guidance provides information on how to account for VAT on vehicles and fuel you use for your business. HMRC updated the guidance with new information to explain VAT rules when your business sells a second-hand vehicle in Northern Ireland that was purchased in Great Britain.

Fulfilment House Due Diligence Scheme registered businesses list
The above guidance can be used to check if the business that stores your goods in the UK is registered with the Fulfilment House Due Diligence Scheme if you’re a trader based outside of the UK. The list has been updated with 11 additions and 1 removal.

CASE REVIEW

Supreme Court

1. VAT exemption: Financial services

Target Group Ltd (Target) administers loans made by Shawbrook, a loan and mortgage provider, including operating individual loan accounts and instigating and processing payments due from borrowers. VAT exemption applies to ‘transactions concerning payments, transfers, debts but excluding debt collection’. Target argued that it’s services falls within this provision and are therefore VAT exempt, particularly relying on the fact that it procures payments from borrower’s bank accounts to Shawbrook’s bank account by giving instructions for payment which are then automatically and inevitably carried out through the BACS system.

HMRC took the view that VAT exemption does not apply because CJEU case law clearly established that the exemption only applies to the execution of an order for transfer or payment. Giving instructions for payment is a prior step to execution, rather than the part of the process of execution. Therefore, Target’s supply is not VAT exempt in HMRC’s opinion.

The Court worked through a number of CJEU decisions and ultimately concluded that Target did not actually debit and credit accounts, this was executed by a third party on its instruction. The conditions under the narrow interpretation of exemption were not met and therefore the supplies are not VAT exempt. The appeal was dismissed and the previous decisions of the Court of Appeal and the UTT were upheld.  On this basis the Court did not need to consider whether the supply fell outside exemption on the basis that it was debt collection, as held by the FTT.

Constable Comment: This ruling now concludes a dispute which has been going on some time.  The case has passed through the First-tier Tax Tribunal (FTT), the Upper-tier Tax Tribunal (UTT) and the Court of Appeal before the Supreme Court finally concluded the matter. The case demonstrates the complexity of VAT exemption in relation to financial services. If there is any ambiguity in relation to the VAT implications of financial supplies, we would recommend seeking professional advice. Constable VAT has relevant experience and would be pleased to assist with any relevant queries.

Upper-tier Tax Tribunal

2. Retrospective VAT grouping

Dollar Finance UK Limited (Dollar) wanted to amend the date on which its USA parent company, Dollar Financial Group Inc (DFGI) joined the Dollar VAT group. DFGI seconded staff to Dollar from 2011-12 but only joined the VAT group in 2013.  It later transpired that it had created a fixed establishment in the UK at an earlier date than previously recognised and for a period prior to joining the Dollar VAT group had been making taxable supplies on which UK VAT was chargeable.

An application was made in 2016 to amend the date on which DFGI joined the UK VAT group to 1 July 2012.  Dollar also claimed £2.2m which it considered to have been overpaid under the reverse charge between 2012 – 2013 as a result of DFGI not being part of the VAT group from that earlier date.

HMRC refused to backdate DFGI’s VAT group membership and Dollar appealed to the FTT. The FTT struck out the appeal on the grounds that it did not have jurisdiction in relation to the proceedings because there was no valid application by Dollar and therefore there was no appealable decision. Dollar appealed to the UTT.

The UTT upheld the FTT’s decision to strike out the appeal. It first confirmed that an application made to HMRC (such as the one made by Dollar in 2016) must be for an additional body corporate to be treated as a member of the group. An existing member of the group cannot apply again therefore Dollar did not make a valid application. The legislation does not include any provision to amend the date on which DFGI joined the Dollar VAT group.

The UTT also confirmed that even if Dollar had made a valid application, because HMRC didn’t refuse it within 90 days, it would not be backdated but could only take effect from the date of receipt (2016) a time when DFGI was already a member of the VAT group. In simple terms, even if Dollar made a valid application, it could not apply retrospectively. Finally, Dollar tried to argue that its appeal related to VAT registration rather than VAT group application however this was also rejected by the UTT and the appeal was dismissed.

Constable Comment: This case reinforces the fact that VAT group registration applications can only be backdated in special circumstances and therefore it is vital that the application is made at the appropriate time. If you or your business has any VAT group registration related queries, Constable VAT would be pleased to assist.

First Tier Tribunal

3. Single and multiple supplies

This case concerns the treatment of supplies by JPMorgan Chase Bank (CBNA) within a VAT group to JPMorgan Securities plc (“SPLC”).  This is a complex case and the full decision may be viewed here.  As a FTT decision its application is restricted to the parties to the case, unlike decisions of the UTT that have a general application as regards other taxpayers. However, HMRC is likely to apply the decision widely.

Ordinarily transactions within a VAT group are treated as outside the scope of VAT.  In this case HMRC argued that the anti-avoidance provisions of s 43(2A) and (2B) VATA brought them within the scope of VAT.  These provisions apply when the intra-VAT group supply utilises taxable services that were received outside the UK.  This provision was not considered in detail, presumably on the basis that CBNA’s view that it did not apply rested on a finding that the intra-VAT group supply was exempt.

The primary points considered were:

1. The “Supply Issue” regarding whether:

• CBNA made a single supply comprising both “Support Services” (back-office services) and “Business Delivery Services”; or
• whether Support Services Business Delivery Services should be viewed as separate supplies.

2. The “Exemption Issue” concerned whether a supply of Business Delivery Services was exempt from VAT.

CBNA argued that the matter should not be evaluated on the basis of the contracts between the parties but on the basis of economic substance, taking the view that it is common for contracts between connected parties to contain less detail than contracts between unconnected parties.  On this point, the FTT found that while there was a lack of detail in the contracts that this was not sufficient to conclude that they do not reflect economic reality. Therefore, it was not necessary to “go behind” them.

On the Supply Issue, the FTT went on to conclude that “Taking the contractual documents as a whole it is clear that CBNA makes a single supply to SPLC providing everything that it (SPLC) needs to enable it to achieve its aim of regulatory compliant trading in globalised markets…” and that it must follow that the different elements of the supply are indivisible and indispensable in order to achieve the aim of the supply.

Having concluded that there was a single supply the FTT went on to find that the supply was standard rated, not exempt as CBNA argued. It was common ground that the VAT liability could not be determined by the use to which the service was put.  A number of cases were considered and the basic principle that VAT exemption must be interpreted strictly meant that the entire supply must be considered as a whole in applying the exemption provisions. Crudely stated, “a non-exempt element” taints the entire supply as far as a strict application of exemption.

Although not strictly necessary (based on the finding that CBNA’s Support Services and Business Delivery Services constitute a single taxable supply) the FTT went on to consider how it would have decided the matter had it found that CBNA made separate supplies. It concluded that, evaluated as a separate supply, Business Delivery Services would still be treated as taxable on the basis that they are a technical or administrative services that do not alter the legal and financial situation between SPLC and its clients or create, alter or extinguish those parties’ rights and obligations in respect of securities.

Constable Comment: This case is difficult to read because of its length and the complex issues considered.  It does not seem to break new ground, the outcome is not in that sense surprising.  However, with the proviso that all agreements must reflect economic reality the decision underlines the importance of taking care not to bundle exempt supplies with taxable services if the result is potentially a single taxable supply, although in this case the Business Delivery Service assessed in isolation was not considered exempt and that point may be moot.  

The direction of travel of recent cases on exemption is likely to result in additional VAT costs for business.  However, the treatment of bundled services as a single supply is potentially a double-edged sword for HMRC. For example, there will be scenarios in which businesses that suffer significant input tax disallowances would prefer their supplies to be taxable (to obtain a VAT recovery right). If you feel that you may be in that position, please contact us and we may be able to help.       

4. VAT zero rating: biscuit or confectionery

This case considered whether United Biscuits (UK) Ltd’s (UB) product, Blissfuls, is a zero rated biscuit which has a chocolate ‘layer or filling’, or is it a chocolate covered biscuit which is a standard rated confectionery item.

The product in dispute contained a biscuit base with a layer of chocolate on top of it. At the top, there was a logo made out of biscuit however the logo was smaller than the base therefore it did not cover all of it. UB argued that the biscuit logo on top ‘covered’ the biscuit, making the chocolate layer a filling in the middle of ‘sandwich biscuit’, and therefore the biscuit can be zero rated.

However, the Tribunal agreed with HMRC that it must consider whether the top layer, being the biscuit logo, covers the entire biscuit. If it doesn’t, it raises the question: “If the biscuit logo does not cover the whole, what covers the remaining area?”. The practical answer was clearly chocolate, and the legislation confirms that even if the covering is only “to some extent”, the product is a chocolate covered confectionery and therefore standard rated. The appeal was dismissed.

Constable Comment: This case is a very good example of the complexities involved in zero rating food items. Very minor details and facts can change the VAT implications of food items and therefore we would suggest that if there is any ambiguity, seek professional advice to ensure the correct VAT treatment is established. Constable VAT has relevant experience and would be pleased to assist.

5. Partial Exemption Special Method

In this case, the representative member of a VAT group, KRS Finance Ltd (KRS), appealed HMRC’s decision to reject its proposal for a partial exemption special method (PESM). KRS offers advice and related services, including VAT exempt Equity Release Mortgages (ER) and also standard rated Estate Planning (EP) services, therefore it was not in dispute that KRS is partly exempt. KRS operated the standard method for recovery of residual input tax and this resulted in a 10% recovery.

KRS argued that a PESM based on transaction count would be more ‘fair and reasonable’ because each EP service consumes broadly the same amount of residual input, therefore the standard method does not produce a fair and reasonable recovery. HMRC rejected this argument and KRS appealed to the FTT.

Before considering the apportionment issue, the FTT first turned to an attribution issue regarding some marketing expenditure. KRS treated the contested marketing expenditure as an overhead arguing that it was incurred by the business as a whole supporting both ER  and EP services. However, the FTT found there was a direct and immediate link solely with the VAT exempt ER services therefore it cannot be treated as residual.

The FTT then turned to the apportionment issue and agreed with HMRC that the proposed PESM was not more fair and reasonable then the standard method because KRS failed to produce objective evidence that the different supplies used the same amount of residual inputs. In addition KRS grouped together a range of very disparate transactions which suggested the transactions are not broadly similar and therefore costs attributable to these transactions will likely differ. The appeal was dismissed.

Constable Comment: This case highlights the importance of providing evidence which proves that the proposed partial exemption special method will produce a more fair and reasonable outcome than the standard method. Constable VAT has considerable experience with preparing PESMs and would be pleased to assist with any related queries.

6. Import VAT recovery

Piramal Healthcare UK Limited (PH), a pharmaceutical company in the UK, imports pharmaceuticals goods from customers outside the UK to carry out work on those goods, such as converting them into tablets and carrying out research or testing. PH makes a charge for these services and accounts for VAT on the supply. However, although PH is the importer of goods, and paid import VAT, it never owned them. Once PH carried out its work, the goods were returned to the owners.

In January 2018 PH contacted HMRC via webchat seeking confirmation that its recovery of import VAT was correct.  The HMRC Officer confirmed that it was.

After a VAT inspection in April 2018, on 2 August 2018 HMRC notified PH that it could not reclaim VAT and that an assessment disallowing earlier claims would be made.  A formal, appealable, decision was eventually issued in October 2018 and, after review requested by PH, that decision was upheld on 15 November 2018.

In April 2019, an assessment disallowing input tax claimed in VAT period 11/18 was issued and in May 2019 an assessment was raised disallowing claims made in VAT period 02/19.  PH appealed to the FTT.

At the FTT, HMRC argued that as the goods continued to belong to PH’s customers they do not form a cost component in the supplies made by PH.  The import VAT paid is not PH’s input tax.

In response, PH argued that input tax is recoverable because the goods were used for the purposes of the taxpayer’s business and the import VAT was directly attributable to a taxable supply.

Although the FTT had some sympathy with PH’s arguments based on UK legislation, it was compelled to agree with HMRC and follow binding case law; concluding that whilst the goods were used in relation to PH’s business, they were not a cost component of any onward supply made by PH. Therefore import VAT incurred by PH is not available as an input tax credit.

As a supplementary point, in April 2019 HMRC released a Revenue and Customs brief confirming its view that import VAT can only be reclaimed by a person that owns the imported goods. Because previous guidance was unclear, HMRC allowed a transition period of 3 months and 3 days to taxpayers to implement this guidance. PH argued that under the general principle of equal treatment of taxpayers, it was also entitled to apply that transition period.

The FTT agreed that the principle of equal treatment applied. However, whereas the transition period for other taxpayers ran from the date of the April 2019 Revenue and Customs Brief, for PH the FTT considered that it should run from 2 August 2018 – i.e. up to and including 5 November 2018.  This is on the basis that PH was made aware of HMRC’s policy on 2 August 2018 (before other taxpayers were notified by means of HMRC’s Brief).

Constable Comment:  When a business imports goods that it does not own then there is usually a way to avoid an irrecoverable VAT cost.  That might involve the use of a relief, such as Inward Processing Relief, an import arrangement that allows the true owner of the goods to reclaim VAT, or the use of an agency arrangement within S47(1) of the VAT Act 1994 [HMRC will allow a recovery of VAT by an agent that is accounting for VAT as if it is a principal on the goods imported].  In recent times we have encountered several cases in which taxpayers have failed to apply this rule correctly, particularly when import agents have failed to make correct declarations in relation to goods imported for processing.  To minimise the risk of an avoidable VAT cost professional advice should be sought before the import occurs.

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

HMRC NEWS

VAT guide (VAT Notice 700)
Section 21.2.1, 21.2.2 and 28 have been updated to remove old references and include language which is used for the new penalty regime.

Charity funded equipment for medical and veterinary uses (VAT Notice 701/6)
The above guidance provides information on when it’s possible to get zero-rated supplies on medical and research goods and services which have been funded by charities. Paragraphs 4.2.1, 4.2.8, 4.5.2, 4.10 and 4.11 have been updated and new entries have been added to the table under 4.11.

HMRC email updated, videos and webinars for VAT
Updated links have been added for the recorded webinars for the VAT 484 and VAT1 forms.

CASE REVIEW

COURT OF APPEAL

1. Supply of staff or supply of medical services?

This case concerned a dispute between the appellant, Mercy Global Consult Limited (MGC) and multiple defendants, regarding claims for equitable compensation and proprietary remedies in relation to VAT frauds allegedly committed by MGC. The defendants have applied for permission to amend their defences to advance a defence (the VAT defence) that MGC made VAT exempt medical supplies, and; therefore, as there is no VAT owing to HMRC, there can be no VAT fraud.

MGC employed healthcare professionals who were seconded to recruitment agencies. The agencies then sub-seconded MGC’s employees to end users including NHS trusts. When sub-seconded, MGC’s employees provided VAT exempt medical care to end users. MGC charged VAT to the agencies but did not account for all the VAT charged to customers to HMRC, resulting in an under-declaration and VAT assessments in the sum of £21million.

MGC claimed that VAT was misappropriated by the defendants who were shareholders in the business and seeks equitable compensation for fraudulent breach of duty and proprietary remedies from the defendants.

However, the defendants now wanted to advance the VAT defence, arguing that there is no distinction for VAT purposes between a supply of staff and a supply of the services performed by those staff. Rather, a supply of staff where the staff are to perform services of a given description is a supply of services of that description. Accordingly, they claimed that as the seconded healthcare professionals were making VAT exempt medical supplies, MGC’s supply of staff was also VAT exempt and there was no VAT fraud.

The Court refused the application of the VAT defence on the grounds it lacked realistic prospect of success because it is precluded by the case of Mainpay, previously decided by the Court of Appeal. This case concerned very similar supplies and the Court ruled that there is a distinction for VAT purposes between supplies of staff and supplies of services provided by those staff. The Court concluded that this was correctly decided and therefore binding on this decision. The appeal was dismissed.

Constable Comment: This is a complex case involving an alleged labour supply fraud. MGC was wound up in 2021 and liquidators were appointed. In this case the Court did not allow the defendants to advance a VAT defence because it was precluded by a previous decision, Mainpay. We covered the Court of Appeal’s decision of Mainpay in a previous VAT Focus containing a summary of the background, arguments made and conclusion reached which this Court relied on. The summary can be read here

UPPER TRIBUNAL

2. VAT exemption: Insurance

This case concerned Intelligent Money Limited (IML)’s appeal against the FTT’s decision. We reported the FTT decision in an earlier VAT Focus which can be read here. The dispute between IML and HMRC was whether fees paid to the scheme administrator of a Self-Invested Pension Plan (“SIPP”) is consideration for a VAT exempt supply of insurance. The FTT previously ruled it was not.

IML appealed to the Upper Tribunal (UT) which confirmed, quoting various CJEU cases, that an insurance transaction must involve the assumption of risk or the coverage of risk.  IML argued that the reference to a “risk” from the essential features of an insurance transaction must be taken to mean simply a contingent “trigger event” for the payment or service in question rather than a specific financial risk.

The UT disagreed with IML and commented that even if it accepted IML’s view in relation to ‘risk’, a distinction must be made between IML’s SIPPs where the contributions remained substantially owned by the insured person as opposed to normal VAT exempt insurance transactions where premiums were owned by the insurer who had to pay out the benefits from its own resources.

In addition, IML argued that the administration fees and, to some extent, the contributions made into the SIPPS, should be considered as ‘premiums’; however, the UT disagreed confirming those payments cannot be properly described as ‘premiums’. The UT ruled that the fees were not VAT exempt insurance services, IML was merely administering a fund to provide benefits to those who invested in the SIPP. The appeal was dismissed.

Constable Comment: VAT exemption in relation to supplies of insurance is a complicated area of VAT with complex legislation and a wide range of case law to consider. If there is any ambiguity in relation to the VAT liability of an insurance supply, we would recommend seeking professional advice. Constable VAT has considerable relevant experience in advising insurance businesses with a number of clients in the sector. We would be pleased to assist with any insurance related VAT queries.

3. Judicial Review

This case concerned the order of two Linac radiotherapy machines in the sum of £4.1m by The Royal Surrey NHS Foundation Trust (the Trust). NHS Supply Chain (NSC) is the entity that operated a central purchasing function for the whole of the NHS. The NSC purchased the machines from the suppliers, and incurred VAT of £685,431. It then supplied the machines to the Trust VAT free.

However, after the orders were made but before the machines were delivered, the Trust changed its intention and decided to lease the machines to a subsidiary, Healthcare Partners Ltd (HPL), which agreed to provide the Trust with managed radiotherapy supplies. The Trust charged VAT on its leasing supply to HPL because it was making a taxable supply.

The Trust sought to recover the VAT incurred on the purchase of the machines under an HMRC concession that permits tax deduction for the business activities of entities in the NHS VAT Division, provided that NSC provides VAT acceptable alternative evidence. However, HMRC refused the application of the concession on the grounds that the intention of the Trust was that it will use the machines for its non-business activities.

The Trust appealed to the High Court for judicial review and provided clear evidence of the purchase orders, the delivery of the machines to the Trust, cost and payment of the machines and showing that before the supply of machines, the Trust had a business intention regarding them.

Following the Trust’s appeal, the Court found no reason to doubt the evidence and agreed that the Trust had a clear intention to use the machines for business purposes. It was entitled to the benefit of the HMRC concession to obtain a VAT refund. The claim for judicial review succeeded accordingly.

Constable Comment: The Court had little difficulty in concluding that HMRC failed to consider the decision within the correct framework of the Concession. HMRC even made a reference to it once as a ‘so-called concession’ which the Court picked up and specifically clarified that it does in fact exist and the Trust clearly fell within its terms.   

FIRST TIER TRIBUNAL

4. Supply of transport services

This case concerns an appeal by UK Funerals On-line Limited (UKFO) relating to the VAT treatment of services supplied by UKFO of repatriating the remains of deceased persons. This is another case, following on from Realreed Limited, where HMRC has had a change of opinion in the VAT liability of a taxpayer’s supplies. Although not explicitly stated, the impression the decision gives are that UKFO is VAT registered and is making mostly zero-rated supplies.

UKFO, trading as Mears Repatriation, provides services of repatriation of bodies of deceased persons. Most of the services supplied entail repatriation services provided from the UK to other countries. UKFO also provides services of repatriating bodies of persons who have died overseas, to transport their bodies to the UK; however, this is a smaller part of its business. UKFO’s customers are mainly the next of kin of the deceased.

UKFO argued that it is not supplying funeral services but is providing specialist transport services which should be zero-rated and not VAT exempt. This is because UKFO simply transport the bodies and does not have any involvement in the funeral arrangements that take place after the body has left its control. UKFO do not know what happens to the body after the body has left its control, and it is not its responsibility after the body boards the airline. The embalming services performed by UKFO is of a specific type which is only required for international transport, it is not the same as that which would be performed in the context of a funeral. UKFO argued that the overreaching activity is a zero-rated supply of the transport of goods under item 5(b), Group 8, Schedule 8, VATA 1994.

UKFO had received at least two previous VAT compliance visits from HMRC after which the zero-rating of its services was not challenged, and UKFO now feel that it is unfair for HMRC to change its mind as there has been no change in the law and no change in the nature of the services being supplied. The taxpayer commented that it was ‘disgusting’ that HMRC was now challenging the VAT liability of supplies that HMRC had agreed to on previous compliance inspections.

HMRC argued that the services supplied by UKFO fall into the exemption for “The making of arrangements for or in connection with the disposal of the remains of the dead”. The services being supplied by UKFO are services which are usually included in a funeral supply, including a coffin, embalming and the use of a chapel of rest. The choice of coffin or casket are more than simply crates for transport. Finally, HMRC argued that the entire service provided by UKFO was an exempt supply under the exemption for ‘making arrangements for or in connection with the disposal of the remains of the dead’.

The Tribunal explained that it must consider whether the activities undertaken by UKFO were sufficiently closely connected to the disposal of those remains to fall within the exemption or if the fact that UKFO is not involved in the actual disposal of the remains, and is only involved in transportation, is sufficient to conclude that the services are not connected with arrangements for the disposal of the remains of the dead. Taking all factors into account, the predominant element of UKFO’s supplies was one of specialist transport services, consisting of:

• The supply of actual transport services within Item 5, Group 8, Schedule 8, VATA 1994 being the collection and delivery of the body to the airport; and
• The making of arrangements for the supply of transport services within item 10, Group 8, Schedule 8, VATA 1994, being arranging all the documentation for the body to be transported out of the country, arranging the flight, and supervising the movement of the body onto the plane.

The Tribunal held that the zero-rating applies rather than the exemption and the appeal was allowed.

Constable VAT comment: This is an interesting case and follows the recent Reelreed High Court decision on the point of legitimate expectation. Where a taxpayer has received a routine VAT compliance inspection of its VAT accounting records it seems reasonable to assume that the visiting HMRC VAT officer will satisfy themselves that the taxpayer has identified the correct VAT liability of its supplies. In the case of UKFO and Realreed it seems that HMRC officers conducting more recent VAT inspections have disagreed with a colleague’s previous technical assessment of the VAT liability of the taxpayers’ suppliers. Where nothing has changed, in terms of a specific business activity or evolving case law, it is understandable why UKFO and Reelread, and any other taxpayer facing similar treatment, is disappointed with HMRC’s behaviour. Both cases act as a reminder that even when a VAT inspection has been concluded without challenge, it does not mean that the taxpayer has certainty that HMRC will not seek to revisit previous verbally agreed liabilities. It seems that the only way to avoid a possible dispute is to submit a non-statutory clearance application. It will be interesting to see if HMRC appeal the decision of the FTT.

CJEU

5. Single or multiple supplies

This appeal concerned the imposition of VAT on the supply of tablets or smartphones by Deco Proteste (Deco) as subscription gifts for new subscribers to the magazines it sells. Deco is the appellant in this case and is a Portuguese established company, and its main activities are publishing and marketing magazines and other documents which provide information on consumer protection which are sold on a subscription only basis. The appellant gives new subscribers who sign up to a subscription plan a gift which could consist of a tablet or smartphone, of which the unit value is always below EUR 50.

The gift is sent to the subscriber along with their magazine after their first monthly subscription payment. There is no minimum subscription period and so customers may keep the gift without incurring any penalty even if the subscription is cancelled. Following a tax inspection, the tax and customs authority noted that the invoices issued by Deco at the time of the new subscriptions stated the amount of the subscription charging a reduced rate of 6% VAT applied without reference to the subscription gifts. The tax and customs authority considered that the subscription gifts constituted gifts within the meaning of Article 3(7) of the VAT code and found that the value of the gifts exceeded the maximum of 0.5% value of the businesses turnover of the previous calendar year. Therefore, the authorities subjected the supply of the gifts to VAT at the standard rate (23%). It assessed the amount of VAT due on this basis at EUR 3,472,125.38. The appellant carried out a self-assessment of the VAT and paid a total of EUR 2,851,551.41 which includes EUR 270,936.70 in interest. Deco then lodged an appeal seeking reimbursement of that sum, which was initially dismissed, and it brought proceedings before the referring court on 6 August 2021.

Deco argued that the provision of subscription gifts to new subscribers did not constitute a form of giving; in reality this was a commercial offer consisting of the provision of a service (the subscription) linked to a supply of goods (the subscription gift) with a financial consideration included in the value of the magazine subscription. They also argued that even if the subscription gift were to be considered as being ‘given’, as the unit value is less than EUR 50, it falls within the concept of a low-value gift and the maximum of 0.5% value of the previous year’s turnover is irrelevant to that concept.

The referring court was uncertain as to whether the subscription gift can be regarded as being given in exchange for value, even if that value is not identified. The Court was also uncertain as to whether ‘gifts of small value’ can be defined using both the unit value of each gift and a ratio of the overall gifts given by the taxable person, calculated in relation to the turnover in the previous year. The following question was referred to the Court:

• Where new subscribers are given a gift when they subscribe to periodicals, should the making of that gift be considered to be:
• a supply of goods made free of charge, separate from the subscription itself,
• part of a single transaction for consideration, or
• part of a commercial package, comprising a principal transaction (the subscription to the magazine) and an ancillary transaction (making the gift), in which the ancillary transaction is considered to be a supply for consideration instrumental to the subscription to the magazine?

The Court ruled that, the provision of a subscription gift in return for taking out a subscription to periodicals constitutes a supply that is ancillary to the principal service of supplying periodicals and must not be regarded as a disposal of goods free of charge.

Constable Comment: This case highlights the complexities surrounding the concepts of single and multiple supplies and business gifts and also the importance of ensuring that a businesses’ supplies are classified correctly as this can have a significant impact on the amount of VAT which is potentially payable. Incorrect classification of the supply could lead to penalties being imposed on the taxpayer if VAT is not declared correctly. This area of VAT can be ambiguous and often requires a non-statutory clearance application to be submitted to HMRC to deliver certainty and provide clarity. Constable VAT has considerable experience liaising with HMRC on complex technical matters and would be pleased to assist.

6. Reduced rate of VAT: ‘foodstuffs’

This appeal concerned the VAT rate applicable to YD’s sales of chocolate dairy beverages in YD’s establishments. YD operates a coffeehouse chain in Poland. It markets a beverage called ‘Classic Hot Chocolate’, in the form of hot chocolate prepared based on milk and a chocolate sauce. YD applied to the tax authority for a binding ruling on the VAT rate to be applied to sales of the beverage. The authority found that the sale of that beverage for both take away and consumption on the premises was regarded as a supply of goods accompanied by ancillary services, namely the preparation and serving of the beverage to customers and the supply was subject to a reduced VAT rate of 8%.

YD argued that it was appropriate to apply the reduced VAT rate of 5% by reference to the law which covers beverages using milk. Poland has two reduced rates of VAT with the lower of the reduced rates, the 5% rate, usually applying to basic foodstuffs and dairy products. The tax authority confirmed its opinion and stated that the beverages at issue were not interchangeable with dairy beverages offered for retail sale, which, as mentioned above, are taxed at the reduced VAT rate of 5%. It explained that this was because of the difference between a ready-to-drink beverage sold in shops and a hot beverage prepared by an employee. It confirmed, in its opinion, that the supply in question is a supply of goods accompanied by ancillary services that have an impact on the customer’s decision to purchase the product.

The following question was referred to the Court:

• Should Article 98 of the VAT Directive be interpreted as precluding national legislation which provides that foodstuffs consisting of the same main ingredient and meeting the same need on the part of the average consumer are subject to two different reduced rates of VAT, depending upon whether they are sold by a retailer or are prepared and served hot to a customer at their request, with a view to them consuming the beverage immediately?

The court found in favour of the Polish tax authorities and confirmed that applying different VAT rates to separate dairy products is allowed.

Constable Comment: The VAT liability of ‘foodstuffs’ in the UK, and as this case demonstrates the EU, is a complicated area of VAT with lots of specific detailed rules within the legislation, which in the UK dates back as far as the 1991 decision in United Biscuits in which the Tribunal ruled that ‘Jaffa Cakes’ were cakes, rather than biscuits as argued by HMRC (HMC&E at that time) and zero-rated. In this more recent case, there were two different reduced rates of VAT which could have applied to the supplies of hot chocolate being made. The court concluded that the 8% reduced rate applied because the supply was being prepared and served hot to the customer, with the view that it would be consumed immediately rather than being sold by a retailer.

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

HMRC NEWS

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.

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.    

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

HMRC NEWS

How 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:

1. 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:

1. 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?
2. 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:

1. 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?
2. 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:

1. 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.
2. 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.

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

HMRC NEWS

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:

1. was unreasonable, conspicuously unfair and/or vitiated by the unlawful frustration of a legitimate expectation held by the Claimant;
2. was contrary to general principles of EU law; and/or
3. 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

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.

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.

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

HMRC NEWS

Revenue and Customs Brief 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.

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 3 additions and 1 removal.

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.

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

HMRC NEWS

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

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. 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.

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.