Author Archives: Krisztian Santa

Constable VAT Focus 27 January 2023

27th January 2023

HMRC NEWS

Insurance sector partial exemption framework
HMRC has released new guidance for those dealing with partial exemption for insurers, including businesses and HMRC when discussing how partial exemption applies in practice for an insurer. The guidance is intended to help insurers gain approval for a fair and reasonable partial exemption special method (PESM) with minimum cost and delay.

HMRC confirmed that the guidance is neither mandatory nor binding and HMRC will consider whether to approve any PESM that an insurer declares fair and reasonable.

Repayment interest on VAT credits or overpayments
The above guidance provides information on repayment interest. HMRC updated the guidance to confirm when a person is not eligible for repayment interest. In addition, HMRC has now clarified the end date for repayment interest.

The second hand motor vehicle payment scheme

The second hand motor vehicle payment scheme is a new scheme that is being introduced from 1 May 2023. The scheme will allow taxpayers to claim a VAT related payment if you buy an eligible second hand motor vehicle in Great Britain and:

Move that vehicle to Northern Ireland with the intention to resell it in the Northern Ireland
Export that vehicle to the EU with the intention to resell it in the EU

HMRC also released brand new guidance on how to check if the motor vehicles are eligible for the second hand motor vehicle payment scheme. In addition, new guidance was released on how to work out the value of a vehicle when calculating a payment using the scheme.

There is also new guidance to confirm which records should be retained for second hand vehicles exported to the EU for resale, and also the records required for vehicles moved to Northern Ireland for resale.

HMRC has confirmed that until the new scheme is introduced, on 1 May 2023, taxpayers should continue to follow the existing guidance.

CASE REVIEW

Upper Tribunal

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

This case concerned Morrison’s appeal against the First Tier Tribunal’s (FTT) decision which rejected Morrison’s argument that certain products (Organix and Nakd bars) were zero rated food items. As Morrison accounted for VAT at 20% on the sales, it sought a repayment from HMRC; however, this was rejected on the grounds that the products fell within the exception from zero rating as they were ‘confectionery’. The FTT upheld this decision.

Morrisons has appealed to the Upper Tribunal (UT) on two grounds. Firstly, it argued that the FTT erred in law excluding from its analysis of whether the products were confectionery, relevant considerations such as the actual or perceived ‘healthiness’ of the products and/or the marketing of the products as ‘healthy’ products. HMRC referred to various points the FTT raised around the healthiness of the products and argued it did not err in law. However, the UT rejected HMRC’s submission that the FTT did take into account healthiness and perceived healthiness in the way suggested.

Secondly, Morrisons argued that the FTT erred in law in failing to consider that the absence of ingredients associated with traditional confectionery (cane sugar, butter or flour) was a relevant factor. The FTT concluded that the absence of such ingredients is not a factor pointing to the products falling outside the meaning of confectionery. The UT disagreed stating that whilst there will no doubt be examples of confectionery which do not contain such ingredients, but are nevertheless confectionery, it does not mean that the consideration of ingredients, and the absence of such, will not add to the overall picture of a product’s classification. As a result, the UT concluded that the FTT also erred in law on this point.

For both points, HMRC argued neither outweighs the cumulative weight of all the other factors and submitted that the result would therefore be no different. The UT stated that the ‘would have been different’ test is the wrong approach, and the question is whether the decision ‘might have been different’ which it was satisfied to be the case here. The FTT’s decision was set aside and the case was remitted back to the FTT to take place before a new panel.

Constable Comment: In this case, the UT remitted the case back to the FTT for another hearing. It will be interesting to see the outcome as the UT took the view if the arguments raised by Morrisons were considered as relevant by the FTT, the decision ‘might have been different’. Nevertheless, this case highlights the importance of seeking professional advice regarding uncertain VAT liabilities of food items from the outset. If you or your business have any related queries, Constable VAT has experience in this area and would be pleased to assist.

2. Bad Debt Relief: Interest on historic claims

This case concerned HBOS and Lloyds Banking Group (“the appellants”) and HMRC’s liability for interest in respect of bad debt relief claims made in relation to car hire purchase supplies made by the appellants between 1989 and 1997. HMRC is liable to pay a person interest where “due to an error on the part of the Commissioners… a person has suffered delay in receiving payment of an amount due to him from them in connection with VAT..”. Historically, to claim bad debt relief on a supply of goods, property in the goods must have passed, which prevented the appellants making bad debt relief claims as title was retained by the appellants under the hire purchase agreements where customers defaulted on hire charges. However, this condition was held to be unlawful under EU law in 2016. The appellants made bad debt relief claims in 2007. HMRC accepted and paid these claims in 2019 in addition to interest in the sum of £872,147 for the period from 2007 to 2019.

The appellants argued that interest is due from an earlier date, being the date that all conditions for a bad debt relief claim were satisfied, other than the unlawful property condition. HMRC rejected this claim and the FTT upheld their decision on the grounds that the enactment of the property condition was not an ‘error on the part of the Commissioners’, and the reason the appellants did not make an earlier claim was their belief that the property condition was legally valid.

The Upper Tribunal (UT) held that VAT is within the collection and management powers of HMRC, as the relevant responsible State Body, and behaviour of HMRC that is derived from an erroneous statutory provision will clearly be something capable of fitting with the words ‘error on the part of the Commissioners’. The UT therefore overturned the FTT’s decision and concluded that the appellants are entitled to claim interest with effect from the date at which all conditions for a bad debt relief claim were satisfied. The appeal was allowed.

Constable Comment: In this case the appellants have successfully argued that if not for an error, on the part of HMRC, within UK legislation, they would have made claims at the earlier dates, therefore they are entitled to interest from such dates. The ultimate quantum of the interest claim based on the earlier dates is still to be determined between the parties; however, the estimate for the total disputed period is estimated at £9 million.

FTT

3. Tour Operators Margin Scheme: Negative margin

This case concerned The Squa.re Limited (TSL)’s calculations performed under the Tour Operators Margin Scheme (TOMS) and whether the TOMS operated in such a way as to permit a negative calculation resulting in a repayment to TSL. TOMS is a simplification measure and applies to supplies of designated travel services. VAT is accounted for on the margin between the selling and purchase price of the supply and input VAT is precluded on supplies bought in for onward supply under TOMS.

TSL provides serviced accommodation which it leases for extended periods from predominately non-VAT registered owners. In the period in question, TSL bought in (leased) accommodation which it could not supply profitably (“inventory sold at a loss”) or in some cases at all (“unsold inventory”). TSL contended that TOMS should provide a similar result to normal VAT accounting such that where input VAT exceeds output VAT, HMRC should repay the VAT cost of the negative margin and there is nothing within the terms of TOMS that precludes a negative margin scheme calculation.

HMRC contended that there is no basis for calculation of negative output VAT under TOMS and the scheme should be applied only to the extent necessary to achieve its aims. A taxable person rendering conventional VAT returns may be in a repayment position because their input tax exceeds their output tax, but output tax is always a positive amount.

The Tribunal agreed with HMRC and upheld that there has been a supply made by TSL, in return for consideration, and it is the taxable amount of that supply which is to be determined. A negative taxable amount is conceptual impossibility.

The Tribunal considered the application of inventory sold at a loss and concluded that where a supply is sold at a loss, the taxable value under TOMS will be £0. However, when the annual calculation is performed, the full purchase cost of a specific transaction would be permitted to be included, and to that extent permitting the use of a negative margin, as long as the overall calculation results in a positive taxable amount. If the overall result of the annual calculation is a negative margin, the sum due by way of output tax would be £0. The annual sum due under TOMS cannot be a repayment.

With regards to unsold inventory, the Tribunal noted that only input VAT incurred for the re-supply of a travel service is excluded from recovery. Therefore, VAT borne on inventory bought in, but unsold, would not be excluded from recovery. However, in this case, whilst the Tribunal considered that identified costs incurred in buying in goods and services which are not subject to onward supply should be excluded, costs associated with block booking of accommodation should be included. Where such costs exceed the value obtained for onward supply the negative margin forms part of the annual calculation; however, where the global calculation results in a negative margin, again, the tax due under the TOMS is £0 and there is no basis for a repayment to TSL.

Constable Comment: In this case, the Tribunal confirmed that a taxpayer operating TOMS is not entitled to a repayment as a result of the supplies not being profitable. It was stated that a negative margin can arise as a consequence of lack of profitability, but VAT is a transaction tax and not a profit tax.

4. Input VAT recovery on fundraising

This case concerned Ince Gordon Dadds LLP appealing HMRC’s decision to disallow input VAT in the sum of £73,238. The input VAT denied related to Project Kappa, being the flotation of Gordon Dadds Group Limited (previously known as and referred to a Culver) on the Alternative Investment Market (AIM) and the raising of £20million. The flotation was affected as part of a reverse takeover in which Works Group Plc (WG) acquired Culver. WG joined the Culver Holdings VAT group the same day that the takeover took effect.

WG incurred input VAT on services in relation to the takeover and sought to recover this via the VAT group representative member, Culver. HMRC took the view that WG did not make or intend to make supplies within the scope of VAT and therefore the input VAT is not recoverable.

WG contended that the services are treated as made to the representative member (Culver) which carried on the taxable activities of the group as a whole, and as the cost of the supplies formed part of the overheads of Culver, the input VAT incurred is recoverable, even considering the position prior to the takeover.

Alternatively, WG argued that input VAT was incurred by WG in fundraising to further downstream economic activity of WG, being the activity of Culver which is owned by WG. WG acquired these supplies in order to raise capital to support and fund the expansion of the taxable activities of the VAT group it intended to join and did join upon acquisition.

HMRC disagreed and stated that merely joining a VAT group does not give rise to an entitlement to recover VAT. It cannot change a non-economic activity into an economic activity, nor does it automatically create a direct and immediate link between all input costs of a holding company and the taxable outputs of other VAT group members.

The Tribunal considered the principles from Frank Smart and BAA to determine whether input VAT is recoverable and dismissed the appeal. Whilst the Tribunal accepted that WG had an intention to join the VAT group and its intention was fundraising, there was no evidence to prove that funds were intended to or had actually been used as working capital (to fund ‘downstream’ operations). Instead, the money from the fundraising was used to acquire other businesses that became customers of Culver’s management services. The Tribunal stated that this finding was fatal to the appeal as such use of funds is not within the reasoning of Frank Smart principles, and as a result it was concluded that input VAT incurred by WG on Project Kappa is not recoverable.

Constable Comment: This case highlights the importance of considering input VAT recovery rules prior to takeovers. There are complex rules around takeovers, holding companies and VAT groups and it is important that professional advice is sought in advance.

5. Car available for private use

This case concerned the recovery of VAT incurred by London Drylining Ltd (LDL) in relation to an Audi Q5 motor vehicle, which was purchased exclusively for business purposes. HMRC took the view that there was nothing preventing private use of the vehicle, therefore input VAT is blocked. As a result, HMRC raised a VAT assessment of £9,052.00 and penalty for a careless error of £1,357.80.

The appellant contended that the vehicle was used exclusively for business purposes. Whilst there is nothing that prevented the director of LDL from using the vehicle for personal reasons, the vehicle has only been used for business purposes. The director had access to other vehicles for private use and the appellant also provided a mileage log which accurately matched the vehicle’s mileage on the odometer.

The Tribunal highlighted that input VAT is blocked if the vehicle is available for private use, rather than if the vehicle was actually used privately. The Tribunal stated that there was nothing preventing the appellant from using the vehicle for personal reasons. The insurance of the vehicle permitted use of the car as ‘social, domestic, pleasure and commuting’ without any reference to business use. The Tribunal accepted the mileage log; however, the fact remains that the vehicle was available for private use and therefore input VAT is blocked. As a result, whilst HMRC agreed to suspend the penalty, the VAT assessment was upheld and the appeal was dismissed.

Constable Comment: This case highlights that even if a vehicle is not used for private purposes, but is available for such use, the input VAT is not recoverable. It is difficult to prove that a vehicle is not available for private use and HMRC recommends taking steps such as insuring the vehicle for business use only and agreeing to restrict the vehicle use by employees or directors to business use only.

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

Constable VAT Focus 13 January 2023

13th January 2023

HMRC NEWS

Revenue and Customs Brief 1(2023): Changes in processing option to tax forms
HMRC has recently released the above brief to confirm that from 1 February 2023, HMRC will stop issuing option to tax notification receipt letters. An automated response will be sent confirming the date when the notification was received. This should be kept by taxpayers for their records for at least 6 years.

HMRC will also no longer confirm the existence of an option to tax as it is the taxpayer’s responsibility to keep such information as part of business records. However, HMRC will respond if a request is made under the following conditions:

The effective opted date is likely to be over 6 years ago
If you have been appointed as a Land and Property Act receiver, or an insolvency practitioner to administer the property in question

VAT penalties and interest
For VAT accounting periods starting on or after 1 January 2023 there are new penalties for VAT returns that are submitted late and VAT liabilities which are paid late. The way interest is charged has also changed.

Penalty points and penalties if you submit your VAT Return late
From 1 January 2023, the VAT default surcharge has been replaced by new penalties for returns that are submitted late and VAT which is paid late. The newly published guidance above sets out the rules of the new penalty points.

There are also new rules on how late payment penalties work if you pay a VAT return liability late. HMRC issued a brand new guidance to help taxpayers find out how to avoid penalties and get help to pay in instalments. This guidance can be found here.

HMRC have also issued a new guidance on how to remove penalty points you have received after submitting your VAT return late to avoid further penalties. This guidance can be found here.

Late payment interest if you do not pay VAT or penalties on time
For VAT accounting periods starting on or after 1 January 2023, you’ll be charged late payment interest on overdue payments. This is one of several penalty and interest changes that replace the existing VAT default surcharge. The above guidance provides further details on the new late payment interest.

Repayment interest on VAT credits or overpayments
HMRC has recently published this new guidance which can be used to check when you’re eligible for repayment interest if HMRC are late in settling a repayment claim from a VAT return or VAT you’ve overpaid.

CASE REVIEW

FTT

1. Reasonable excuse: COVID 19 cashflow issues

This case concerns Bicester Property Interiors Limited (BPIL)’s appeal against HMRC’s decision to issue default surcharges for the VAT periods of 04/20, 01/21 and 04/21. It was not disputed that BPIL fell into default in a number of VAT periods, however BPIL took the view it had a reasonable excuse and therefore penalties should not be applied.

BPIL is an interior renovation company that fits kitchens and bathrooms and carries out other interior renovation work. The company began trading in August 2019. BPIL faced some cash flow difficulties due to the COVID 19 pandemic, specifically as a result of staff and customers having to isolate, which caused significant delays in the work being complete and therefore delays in getting paid. This led to lack of funds to meet its VAT obligations.

BPIL argued that the lack of available funds was directly linked to the effect COVID-19 had on the business and was the overriding reason for the defaults. BPIL had never tried to avoid its VAT obligations. VAT was paid to HMRC as soon as funds were available. COVID-19 was a rare event and outside of the control of the business. It could not be predicted when a customer or staff member would need to isolate. In some circumstances BPIL had chosen to pay staff rather than HMRC, but this was a choice forced upon it. BPIL had paid VAT as quickly as it possibly could, and in full.

HMRC did not accept that BPIL had demonstrated a causal link between the delays caused by COVID-19 and the failure to make payments on time. HMRC also noted that insufficiency of funds is specifically excluded from reasonable excuse unless it is rare and outside the taxpayer’s control. As BPIL admitted that it decided to pay HMRC late in order to pay staff and suppliers first, it did not accept that BPIL had insufficient funds. HMRC also noted that if BPIL opted to use cash accounting instead, it could have mitigated the risks, but it did not choose to do so.

The FTT applied the four step approach established in Perrin to conclude that COVID-19 did indeed impact the business as asserted on behalf of BPIL. The difficulties encountered as a result of the COVID-19 pandemic were particularly pronounced for a business such as that carried on by BPIL, which relied on staff being present in private homes for extended periods to carry out their work. The evidence presented to the FTT indicated that the cash flow pressures were considerable and brought about by factors outside BPIL’s control. The FTT found that the course of action pursued by BPIL was a reasonable one for it to take in the circumstances in which it found itself and as VAT was paid as soon as cash flow allowed, it was concluded that BPIL had a reasonable excuse, and the appeal was allowed.

Constable Comment: This is an interesting case as it demonstrates that where considerable cash flow issues arose as a result of COVID 19, the FTT may accept that the taxpayer had a reasonable excuse with regards to defaults in late payment of VAT. However, it is important to note that each case will have its own circumstances. In this case the taxpayer had a very good file of evidence containing correspondence with customers and staff which demonstrated significant delays in work due to isolations which was completely outside the control of BPIL. VAT payments were made as soon as cashflow allowed without unreasonable delays.

It is also important to note that from the 1 January 2023, the default surcharge regime has been replaced by the point based penalty system. For further information, refer to the HMRC News section of this VAT Focus.

2. Discount offered but not taken up

This case considered TalkTalk Telecom Limited (TalkTalk)’s appeal against HMRC’s assessments in the sum of £10,606,226 to recover VAT underpaid during a four month period between 1 January and 30 April 2014. During this period TalkTalk offered a ‘Speedy Payment Discount’ (SPD) which was a 15% discount on its services if their monthly bills were paid within 24 hours. TalkTalk accounted for VAT on the basis that consideration received was reduced by the discount whether or not the customer paid within the 24 hours.

TalkTalk considered its approach to be consistent with VATA 1994 Sch 6 Para 4(1) which at the time read: “Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken as reduced by the discount, whether or not payment is made in accordance with those terms.”

HMRC decided that the SPD offer only reduced the consideration for VAT purposes where customers had actually paid the reduced amount, and that there was no reduction when the discount was not taken up, then subsequently raised the assessments.

The First issue in the appeal was whether para 4(1) had the meaning contended by TalkTalk. The Tribunal ruled that TalkTalk was correct as the legislation was clear and, although not determinative, it was supported by HMRC guidance. It upheld that the meaning of para 4(1) was as TalkTalk understood.

The second issue was whether para 4(1) applied to TalkTalk and therefore it correctly accounted for VAT on the reduced amount. It was established by the Tribunal that in order for para 4(1) to apply, the following conditions must be met:

there has to be a supply of services;
that supply has to be for consideration in money;
there must be terms on which the supply is made;
those terms must allow a discount;
the discount must be for prompt payment; and
the terms must not include any provision for payment by instalments.

Whilst conditions 1-4 seemed to have been met, condition 5 and 6 required further consideration. HMRC argued that the position was different between services billed in advance and arrears and were therefore considered separately.

With regards to services billed in advance, the FTT upheld HMRC’s argument and agreed that the SPD was an offer by TalkTalk to vary the T&C on a month by month basis. The contractual variation happened at exactly the same moment as the supply and the payment, and thus there were no terms “allowing a discount for prompt payment” on a future date. The contractual variation therefore did not include an offer for the customer to pay a discounted amount at some point in the future, so Para 4(1) did not apply to services billed in advance.

In relation to services billed in arrears, customers accepted the SPD offer after delivery of the services. The supply had therefore been made on the terms set out in the T&C, and the customer was therefore contractually required to pay the full amount. The SPD option was an offer by TalkTalk to accept a lower sum with an earlier payment date to discharge that pre-existing contractual obligation. As a matter of VAT law, this was an offer to accept a post-supply rebate of consideration already due; it was not a discount in the context TalkTalk argued.

As a result, the FTT concluded that the SPD was not a discount for prompt payment, so para 4(1) cannot apply. This means TalkTalk should have accounted for VAT on the full amount as opposed to the reduced, and therefore the assessment was upheld, the appeal was dismissed.

Constable Comment: This case considered whether the consideration for VAT purposes can be reduced by a prompt payment discount offered, even if that discount was not taken up. Whilst this was possible at the time, the terms and conditions should highlight that the discount is offered for prompt payment which was not the case for TalkTalk therefore the appeal was dismissed.

It is also important to note that the rules have changed from 1 May 2014. The tax value is now calculated by reference to the amount paid. Suppliers must account for VAT on the amount actually received for the supply. It is important that taxpayers can no longer account for VAT on the reduced consideration if the customer does not take up the discount.

Constable VAT Focus 15 December 2022

15th December 2022

As this will be our final VAT Focus of 2022, we would like to take this opportunity to wish all our clients and readers a peaceful Christmas and Happy New Year.

HMRC NEWS

Selling goods using an online marketplace or direct to customers in the UK
HMRC has recently issued the above new guidance which can be used to check when a business needs to pay VAT if it sells goods using an online marketplace or direct to customers in the UK.

VAT domestic reverse charge technical guide
The above guidance can be used to Find technical information about the VAT reverse charge if you buy or sell building and construction services. HMRC have recently updated the section ‘Scaffolding on zero-rated new build housing’ to confirm that there will be transitional period up to 1 February 2023 where businesses can use either reverse charge accounting or normal VAT rules.

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. A live webinar about changes to the VAT 652 – Error Correction Notice form has been added. Another webinar was also added with an overview of the new VAT late submission, late payment penalties and interest changes.

CASE REVIEW

CJEU

1. Adjustment of overpaid VAT

This case concerned P GmbH (P) a company which operates an indoor playground. P charged 20% VAT to its final consumers who were not entitled to deduct input VAT; however, the correct statutory rate applicable was 13%. P adjusted its VAT returns so that the excess VAT would be credited by the local tax authorities. However, this was refused on the grounds that as P did not correct the invoices it issued to reflect the correct amount of VAT, P is required to pay the VAT invoiced. In addition, the local authority argued that as the final customers have borne the higher VAT charge, P would be unjustly enriched if the adjustment was made.

P argued that it is entitled to make an adjustment because there is no risk of loss of tax revenue. The final consumers of P’s supplies were not entitled to recover the VAT charged, therefore there was no risk of tax revenue loss, where P would make an adjustment for the lower rate, but subsequently the customer would recover the higher rate of VAT, creating a tax revenue loss.

The CJEU initially confirmed that it is clear there is no risk of loss of tax revenue because all customers were exclusively final consumers who had no right to input VAT recovery. As a result, it was confirmed by the CJEU that P is not liable for VAT calculated based on an incorrect rate if there is no risk of loss of tax revenue. Therefore, P should be entitled to make the adjustment.

Constable Comment: In this case the CJEU ruled that the taxpayer is not required to pay over VAT incorrectly charged at a higher rate because there is no risk of tax loss because the customer was not entitled to recover VAT. The ruling would have been different if the final customers were VAT registered businesses and had a right to recover VAT. In this case, there would be a risk of tax revenue loss if P did not re-issue a correct invoice but made an adjustment for the lower VAT rate (13%) but the customer recovers the higher, incorrect rate (20%) creating a loss of 7% for the local tax authority. In such cases it is unlikely that taxpayers would be entitled to make an adjustment.

Court of Appeal

2. Supplies of medical care or a supply of staff?

This case concerned Mainpay Ltd (Mainpay) appealing the decision of the Upper Tribunal which dismissed Mainpay’s appeal of the First Tier Tribunal. Mainpay employs, or treats as employed, various doctors, 80% being consultants and 20% GP specialists. All of the doctors were registered and regulated as medical practitioners. Mainpay supplied these consultants and GP specialists to an intermediary company called Accident & Emergency Agency Limited (A&E) which then supplied them on to various hospitals and clients, usually an NHS Trust. The issue in the appeals were whether supplies made by Mainpay to A&E were exempt from VAT as medical care.

The FTT found that the consultants were under the control, direction and supervision of the NHS Trust and functioned within their framework. They operated from the remit of local policies laid down by the NHS Trust and became part and parcel of the organisation. As a result, the FTT concluded that supply was of staff, and therefore taxable and subject to VAT, as opposed to a supply of medical services. The UT upheld the FTT’s decision that Mainpay was making taxable supplies of staff as opposed to VAT exempt supplies of medical care and also rejected all other grounds of appeal.

Mainpay appealed to the Court of Appeal arguing that the Upper Tribunal erred in law on the following grounds:

Not applying the correct test to determine whether the supply fell within the medical exemption or was a supply of staff
In reaching its conclusion on the correct test, not taking proper account of the purpose of the exemption
In reaching its conclusion on the correct test, not applying the principal of fiscal neutrality correctly
Failing to correct the FTT’s erroneous approach to making findings in relation to GP specialists

After a review of the evidence before it, the Court of Appeal found no fault in the approach of the FTT or UT to conclude that based on the contractual arrangements and the circumstances in which the consultants worked, the consultants effectively became part and parcel of the NHS Trusts which themselves provided medical care to patients. In consequence, and after detailed consideration of Mainpay’s submissions, the Court of Appeal found that the essence of the supply was that of staff, rather than medical services.

With regards the second ground, the Court stated that it is not clear if any VAT would increase the cost, as there was no evidence regarding the VAT status of the A&E. In addition, it was confirmed that if a medical supply is not exempt under VAT legislation, it cannot come within exemption simply because not to do so would increase the cost of the medical care.

With regards to Ground 3, Mainpay argued that if the consultants were self-employed then medical exemption would apply which is a comparable situation, therefore relying on principles of fiscal neutrality, the supply made by Mainpay should also be VAT exempt. The Court disagreed and confirmed that this was not established, rather an assumption and that the VAT liability would turn on the facts of the individual case.

Ground 4 was not necessary to consider because Mainpay’s appeal on the consultants point failed. As a result, the appeal was dismissed and the FTT and UT conclusion was upheld, Mainpay made supplies of staff which are subject to VAT.

Constable Comment: The Court ruled that based on the contractual arrangements and circumstances, the consultants were under the control, direction, and supervision of the NHS Trust, becoming part of the organisation. Therefore, Mainpay made a taxable supply of staff as opposed to VAT exempt medical care. It is important to note that the contractual arrangements and circumstances will often differ with each case, VAT being very ‘fact specific’. We would advise seeking professional advice regarding possible supplies of staff which can often be a complex area of VAT.

Upper Tribunal

3. Overpayments: Consideration for VAT purposes?

This case concerned a dispute between the Borough Council of King’s Lynn and West Norfolk (the Council) and HMRC regarding overpayments made for off-street car parking. The Council provides off-street car parking, where charges are collected by a cash machine that does not offer change. The dispute concerns the VAT treatment of the overpayment made by the customer. For example, the first hour is charged at £1.40. A customer parking up to an hour with only £1 and 50 pence coin will make an overpayment of 10 pence. The FTT ruled that the overpayment was part of the consideration for a supply of car parking and subject to VAT. The Council appealed the decision to the Upper Tribunal.

The Council argued that it can only charge for off-street parking by exercising its powers within the statutory framework and it had no capacity to enter into a contract to provide parking at a fee that was different from that set out in the 2015 Order. An agreement at any other price was void. It argued that the overpayment was a voluntary contribution to the Council and not consideration for VAT purposes as there is no direct link with the supply.

HMRC argued that the FTT’s construction of the contract, being that the Council accepted the amount paid, including the overpayment, as consideration was correct. Alternatively, it argued that the payment was a counter offer made by the customer which the Council accepted; therefore, it is subject to VAT.

The Upper Tribunal took the view that service and value given can be ascertained from the legal relationship between the Council and customer. It concluded that under the agreement between the Council and the customer which is formed when the customer inserts money into the machine at the car park, the Council grants the customer the right to park their car for one hour in return for inserting coins with a value of not less than the advertised tariff, in this example, £1.40. If a customer accepts that offer by inserting coins of a higher value, in this case £1.50, that amount (including the 10 pence overpayment) is the value given by the customer and received by the Council under the legal relationship. That is the taxable amount for VAT purposes.

Constable Comment: In this case the Upper Tribunal concluded where a machine does not provide change for car parking facilities operated by the Council, any overpayment by customers will be subject to VAT as it is part of the consideration for the supply and not outside the scope of VAT. Readers are reminded that the grant of facilities for parking a vehicle is specifically excluded from exemption for UK VAT purposes.

FTT

4. Subway: Best judgment assessment

This case concerned Neoterick UK Limited (NUL), a company operating a Subway restaurant. HMRC has raised VAT assessments in the sum of £45,024 in respect of the VAT accounting periods 01/14 – 07/17, on the grounds that NUL was under declaring output VAT by incorrectly treating hot take-away and eat-in meals as zero rated for VAT purposes. NUL has appealed the assessment by HMRC on the grounds that it was not made to the best of HMRC’s judgment.

The HMRC officer involved in this case is very experienced in dealing with Subway restaurants. The officer visited the premises to make an order of hot food, and another HMRC officer did the same. The HMRC officers confirmed that the till receipt showed the order as zero rated even though the standard rate of VAT should have been charged on supplies of hot food.

NUL’s VAT returns showed standard rated sales being 55% – 78% which the HMRC officers deemed very low for a Subway restaurant. As a result, an invigilation exercise was carried out by HMRC at the premises of NUL. This involved HMRC officers actively working on the premises and observing customers and watching staff operating the tills and recording sales. The result of the invigilation exercise showed an average of standard rated sales being 92%. This percentage was applied to the turnover figures declared in the relevant VAT periods and the difference between these amounts and the VAT declared was the sum HMRC assessed for.

The FTT reviewed the evidence and concluded that the assessment was made to HMRC’s best judgment. There were no suggestions that the HMRC officers did not carry out their review honestly and bona fide. HMRC’s sample purchases and invigilation exercise provided material for the officers to base their assessment on. In addition, NUL were given the opportunity to provide evidence which would displace the HMRC officer’s conclusion however this did not happen. As a result, the appeal was dismissed.

Constable Comment: This decision highlighted the rules around a ‘best judgment assessment’ and the FTT concluded that all required conditions were met by HMRC in this case, therefore the VAT assessment was upheld. This case follows a long line of similar exercises carried out by HMRC on restaurants and similar establishments where HMRC believes that either sales are suppressed, and output VAT underdeclared or an incorrect VAT liability has been applied, usually standard rated supplies being treated as zero-rated resulting in an under declaration of output VAT. A ‘best judgement’ assessment is difficult to argue against in a case like this where HMRC has carried out an exercise and witnessed at first hand the supplies the business is making. If HMRC issues a best judgment assessment to you or your business, we would recommend seeking professional advice to mitigate the risks involved.

5. Transfer of a going concern

This case concerned Apollinaire, a company registered for VAT in 2015. Its sole director and shareholder was Mr Hashmi. Apollinaire has an input VAT claim in the sum of around £98,000 for invoices of stock totalling £573,000 from an entity called Snow Whyte. HMRC denied the input VAT claim on the grounds that there was a transfer of a business as a going concern (TOGC) between Snow Whyte and Apollinaire. As a result, the input VAT claim was refused and penalties for deliberate errors in the sum of £65,801 was raised. HMRC then subsequently issued a personal liability notice (PLN) to Mr Hashmi.

HMRC believed there was a TOGC between Snow Whyte and Apollinaire because Snow Whyte was sold by Mr Hashmi to Mr Singh. HMRC were not satisfied with regards to the existence of Mr Singh. Both Snow Whyte and Apollinaire were trading under the same name, there was no break in trading and there was a transfer of tills and staff.

Mr Hashmi appealed to the FTT which found that Mr Hashmi was indeed the ‘controlling mind’ of both entities at all times, showing doubts over the existence of Mr Singh. The FTT agreed with HMRC on the grounds that both entities traded under the same name, from the same premises and had the same employees. As a result, there was a TOGC, and Apollinaire was not entitled to input VAT deductions.

The FTT also upheld HMRC’s PLN. This was on the grounds that Mr Hashmi had a history of dissolving companies but continuing to trade with the same name. There is also a history non-submission of tax returns or payments, and HMRC believed that the input VAT claimed was deliberately overstated. The FTT did not find evidence provided by Mr Hashmi and his accountant credible, as most assertions were not sufficiently supported. The FTT upheld the penalties and PLN, the appeal was dismissed.

Constable Comment: This case highlights that where a taxpayer is considered to be making ‘deliberate errors’, and the Tribunal supports HMRC’s position, the penalties imposed by HMRC can be significant. In addition, if certain conditions are met, HMRC can impose a personal liability notice (PLN) and the director would be liable for the penalty instead of the company. We would also flag that TOGC treatment is not optional, if the tests for a VAT free transfer of a business are met the transaction is outside the scope of VAT and HMRC will not usually refund as input VAT to the buyer of a business VAT that has been charged in error by the seller.

Constable VAT Focus 1 December 2022

1st December 2022

HMRC NEWS

Buildings and construction (VAT Notice 708)
HMRC has updated the section of Notice 708 that explains when a building falls into the category of village halls and similar buildings and may benefit from the zero-rate relief available for such buildings.

A building falls within the ‘village halls or similar’ buildings when all of the following apply:

Constructed and managed by a charity
Operated on a non-commercial basis for the benefit of a local community as a village hall or similar
Used solely to provide social or recreational facilities for a local community

This is a common point of dispute as HMRC interprets the provision increasingly strictly and the issue has been heard before the Tribunal, particularly in cases relating to charitable sports clubs.

Updates on VAT appeals
The above charts the progress of some important VAT disputes that have been taken to a Tax Tribunal, or a higher court on appeal. The list has been updated with 3 additions, 9 amendments and 2 removals. A business with similar activities to those under dispute may wish to monitor developments. This is not an exhaustive list of current litigations.

Making Tax Digital for VAT: service availability and issues
Most businesses have now signed up to Making Tax Digital for VAT. HMRC will be signing up all remaining businesses automatically unless they are exempt or have applied for exemption.

CASE REVIEW

CJEU

1. VAT exemption: Medical care

This case concerned CIG Pannonia Eletbiztosito Nyrt (CPEN), a Hungarian insurance company, that markets a health insurance product and undertakes to provide medical care abroad.

CPEN engaged a Spanish organisation, Best Doctors Espana SAU (BD), to review the medical information of an insured person to check that person is entitled to benefit from the insurance provision as the policies contain entitlement restrictions (IC services). If the insured person is eligible under the policy, BD takes care of all the administrative formalities relating to care abroad including making appointments with the providers of medical services, organising medical treatment, hotel accommodation and travel, providing a customer assistance service and verifying whether the medical treatment is appropriate (FBC services).

BD issued invoices to CPEN. It appears that (unless the service was exempt) CPEN was liable to account for VAT as a reverse charge and the Hungarian tax authorities raised assessments and penalties for the unpaid VAT.

CPEN argued that the services of BD, mainly the IC services has a therapeutic purpose in that it directly and unequivocally has a diagnosis aim. The FBC services are ancillary to the main diagnostic activity, consequently the services offered by BD are exempt from VAT.

The CJEU concluded that whilst a medical report may indirectly contribute to the protection of the insured person’s health, the principle purpose in this case is to fulfil a legal or contractual condition regarding a decision about whether the insured person is actually entitled to the services. As a result, the IC services do not fall within the VAT exemption as any healthcare benefit is indirect.

The CJEU then considered the FBC services and stated that such services are not to protect the insured person’s health but to ensure the organisation of the logistics linked to medical care abroad, essentially being administrative in nature and therefore it is not covered by VAT exemption under provision of medical care.

Constable Comment: In this case the CJEU ruled that where the essential aim of a supply is to aid decision making, even if there is an indirect healthcare benefit the overall supply will be subject to VAT, with any ‘medical supplies’ being ancillary. That is not controversial. However, it was a difficult judgement to decipher and when the CJEU refers to establishing an entitlement to “receive services” it seems to mean “make a claim under the policy”. When providing insurance, the supply usually occurs when the policy is granted not when a claim is made, although if an insurer provides goods and services in lieu of an indemnity payment that can constitute a supply. In the UK the service provided by BD may have been capable of classification as an exempt claims handling service but there is insufficient detail in the judgment to evaluate that possibility.

2. Right to deduct VAT charged as input VAT

This case concerned the Appellant (A) who purchased a vehicle from C who claimed to be W. C issued an invoice to W including VAT of EUR 9,899. Subsequently W sent A an invoice including VAT of EUR 12,294. A recovered the VAT incurred as the car was used for business purposes, but W never entered the transaction into his accounts and did not pay the tax. This created a revenue loss.

Unpicking the alphabet of participants in these transactions is complex but the fundamental point is that A tried to reclaim VAT on a transaction within a supply chain that contained a tax fraud. The German tax authorities considered A knew or should have known that. However, the amount of VAT lost because of that fraud was less than the amount of VAT that A attempted to reclaim. Therefore, the Court was asked to consider whether A’s VAT claim should only be disallowed to the extent required to compensate for the loss of tax caused by the fraudulent evasion, meaning that only EUR 2,395 would be disallowed (the difference between the sums shown on the two invoices issued).

The CJEU commented that A may be refused the benefit of deducting input VAT where he or she knew or ought to have known that that purchase was linked to VAT fraud. The acquisition of the car by A facilitated the fraud by enabling the disposal of the goods, which is sufficient to deny the right to deduct the VAT paid. Furthermore, the CJEU concluded that where a taxpayer does not undertake the checks reasonably required to satisfy themselves a transaction is not within a supply chain involving VAT fraud then its input VAT claim may be refused in full. The objective of preventing VAT fraud cannot be achieved in an effective manner if the consequences of facilitating a possible fraud can be mitigated as A sought.

Constable Comment: Input VAT deductions may be refused if a taxpayer knew or should have known that they are within a supply chain that involves VAT fraud. It is essential to undertake appropriate due diligence to deal with the “should have known” point. Turning a blind eye to any red flag issues is a high-risk strategy and if a deal seems to be too good to be true then it may well be.

Upper Tribunal

3. Procedure: Striking out an appeal

In 2020, HMRC refused to register GB Fleet Hire Limited (GFHL) for VAT, GFHL appealed this decision, but HMRC applied to the FTT to strike out the appeal. The FTT granted HMRC’s application and struck out the appeal. GFHL appealed that decision to the Upper Tribunal (UT).

GFHL had been VAT registered but was deregistered in 2017, on the grounds that it was using its VAT registration principally or solely for abusive purposes. There were subsequent VAT assessments raised by HMRC.

GFHL appealed the VAT assessments from 2017 but not the decision to cancel its VAT registration. When in 2020 GFHL applied to register for VAT again because the value of its taxable supplies exceeded the VAT registration threshold HMRC rejected the application on the grounds that GFHL’s previous VAT registration had been utilised solely or principally for abusive purposes.

The 2020 VAT registration application rejection was appealed to the FTT by GFHL. However, HMRC applied for it to be struck out on the grounds that because GFHL had not appealed the 2017 VAT registration cancellation that indicated its acceptance that it had been abusing its VAT registration. Therefore, an appeal against the 2020 refusal had no reasonable prospect of success. The FTT granted HMRC’s request and struck out GFHL’s appeal.

The UT found that the FTT was irrational to strike out GFHL’s appeal on the grounds that it had. GFHL’s appeal against the VAT assessments HMRC issued in 2017 showed that GFHL thought (wrongly) that a successful appeal against a VAT assessment would result in the 2017 VAT de-registration notification “falling away”. GFHL may have had other reasons why it did not appeal the 2017 notification. In addition, the FTT failed to consider in reaching its conclusion, that the 2020 VAT registration application rejection did not explain whether, let alone why, the 2017 risks were said by HMRC to persist in 2020, and to outweigh GFHL’s right to VAT register on the basis of the 2020 taxable supplies.

The UT concluded that GFHL’s case cannot be said to have no reasonable prospect of success and the appeal against the 2020 VAT registration application rejection is re-instated.

Constable Comment: Taxpayers make all kinds of decisions for many different reasons, sometimes based on a misunderstanding of a complex tax system. Often those decisions are driven entirely by pragmatism.

Before 2009 a taxpayer could obtain costs if it succeeded with a tribunal appeal. Those cost seldom provided a full indemnity, but the logic was that with all of its resources and expertise HMRC should not be taking cases that it would lose and inflicting costs on often small and poorly resourced businesses. HMRC did lose a lot of cases and faced spiralling cost awards. Rather than look to its own decision-making process, a decision was made to change the rules and stop paying costs to taxpayers who were successful at the First-tier Tribunal.

Since 2009 our experience suggests that taxpayers routinely accept incorrect HMRC errors simply because the cost of challenging HMRC exceeds the amounts of tax in dispute. A taxpayer might take the low-cost option of representing themselves at Tribunal – but even if they do that and win, how will they cope if HMRC appeals? If lawyers, accountants, and barristers are to be engaged then costs can escalate significantly. Advisers may find themselves saying to their clients “You would probably win an appeal, but it will cost you more than accepting HMRC’s incorrect decision”. For HMRC to extrapolate from a failure to lodge an appeal that the taxpayer accepted an HMRC decision was correct, and then to say that this removes the right to revisit the point in a different context later is in our view an absurd rationalisation. The UT’s decision seems to inject a degree of sanity into the situation.

First Tier Tribunal

4. Input VAT recovery on leases

Ashton Legal (AL) is a firm of solicitors and a trading partnership. AL found suitable premises for its operations and sought to lease those premises. However, under the Law of Property Act 1925, a partnership can enter into a lease in the name of no more than four partners, therefore it was decided that Ashton Legal Limited (the Company) would be established to enter into the lease. AL reclaimed VAT charged by the landlord on invoices addressed to the Company as input VAT and HMRC look the view that it should not as the Company was the recipient of the supply.

The landlord had made it clear that if it were to contract with a shell company with no assets then it required a guarantee from AL. The landlord knew that AL would be the sole occupant of the premises and would meet all obligations of the Company in terms of the leases, specifically paying the rent.

The rent invoices raised by the Landlord were addressed to the Company but sent to AL. AL processed and paid those invoices and reclaimed the VAT incurred through its VAT returns as input VAT.

HMRC argued that the contracting parties were the Company and the landlord. The landlord therefore made its supplies to the Company, not AL. As the Company was not VAT registered and did not opt to tax, HMRC argued that the Company in effect made an onward supply to AL that was VAT exempt. AL had no right to recover any VAT incurred by the company and the Company also had no right to input VAT recovery.

AL argued that the recipient of the supply should be identified by reference to the commercial and economic reality of the arrangements, considering all circumstances, and that the economic reality was that AL received the supplies.

The Tribunal first stated that payment is not decisive, so the mere fact that AL pays the rent does not mean that the supply, for VAT purposes, was made to AL. However, the Tribunal noted that AL was liable to pay rent to the landlord as everyone knew that a dormant company with £1 share capital and no assets or trade, was in no position to pay rent. If AL wished to lease the premise, it had to pay rent in order to secure the premises from which it made taxable supplies. This was the economic and commercial reality of the arrangement; the company was merely inserted to deal with the 1925 Act.

It was concluded that AL used, enjoyed, and benefitted from the rental of the premises and has vested interest in the supply of those premises for which it was paying. As a result, the Tribunal concluded that the VAT charged on the rent was input VAT of AL and was recoverable.

Constable Comment: In our view this case should not have been taken by HMRC. There had been a previous case before the Tribunal on almost identical facts that HMRC lost. That previous case was only binding on the parties involved and a common approach by HMRC is not to appeal FTT cases that it loses so that it can seemingly ignore those decisions and continue applying whatever policy the FTT has found to be wrong. This practice may be legal but seems very unfair as it leaves taxpayers either continually refighting the same battle or obliged to accept HMRC decisions they perceive to be wrong because of the cost implications of an appeal (see comments above on GHFL). If HMRC genuinely believes a FTT decision is wrong then in our view the correct approach should be to appeal that decision, not ignore it for fear of setting a binding precedent.

5. Default surcharge: Reasonable excuse

This case concerned Kattrak International Limited (KIL)’s appeal against VAT default surcharges imposed in respect of two VAT accounting periods for late payment of VAT. KIL appealed to the FTT on the grounds that it had a reasonable excuse; therefore, the surcharges were not due.

KIL stated that the payments were late because there is only one person in the company authorised to make payments due to previous issues with an employee committing fraud. KIL tried setting up a direct debit to pay VAT; however, the mandate was cancelled, and the payment did not go through. KIL argued that it was likely that the direct debit was cancelled by HMRC, leading to a late manual payment.

HMRC stated that KIL provided no reasonable explanation about why payment could not be made on time, nor had it taken reasonable steps to avoid a late payment. The appellant had not proved that there was a reasonable excuse for the late payment.

The FTT found that, on balance of probabilities, it was not HMRC that cancelled the direct debit. In addition, if KIL had issues with the direct debit at the first period in this appeal, the situation could and should have been solved by the next payment date. The FTT concluded there was nothing to prevent payment of VAT on time, and KIL did not prove it had a reasonable excuse and the appeal was dismissed.

Constable Comment: It is important to note that it is for the taxpayers to prove that it has a reasonable excuse and that the hurdle to cross is high. We would also like to take this opportunity to remind readers that from January 2023 the penalty system that applies to late submission of VAT returns and payments will be changing to a points-based system that is perhaps fairer than the current default surcharge regime, which can impose very large penalties in relation to very short payment delays. If you would like more information on the new penalty system please do not hesitate to contact us.

Constable VAT Focus 22 November 2022

22nd November 2022

HMRC NEWS

VAT domestic reverse charge technical guide
The above guidance provides technical information about the VAT reverse charge that may apply if you buy or sell building and construction services. HMRC has recently added a new section on scaffolding and also updated the content with guidance on the following:

Reverse charge exemption for end users and intermediary suppliers
How to tell the difference between ‘labour-only’ supplies of construction services and supplies of workers by employment businesses
Accounting for VAT where you supply or receive construction services together with other goods or services
Accounting for VAT on the hire, erection and dismantling of scaffolding
How the reverse charge affects supplies made by and to utility companies and how non-established taxable persons should account for VAT on construction services.

HMRC is holding a live webinar at 11.45 on 24 November 2022 for businesses operating in this sector and interested parties can register here. The webinar is stated to cover:

when to apply the VAT reverse charge
how to show the reverse charge on your invoices
how the reverse charge may affect your business
how to account for the reverse charge on your VAT return
what to do if you make a mistake when applying the reverse charge

Fuel and Power (VAT Notice 701/19)
HMRC has recently updated section 2 of this notice to include information about the VAT liability of payments made under the energy bills support schemes including the following:

The Energy Bill Relief Scheme
The Energy Price Guarantee
The Energy Bills Support Scheme

Payments made by the Government to energy suppliers under the Energy Bill Relief Scheme and the Energy Price Guarantee are grant payments and are outside the scope of VAT.

The Energy Bill Support Scheme is a payment made to the domestic users of fuel and power to support paying their bills. Energy suppliers are required to account for VAT under the normal rules as the payment is made for a taxable supply of energy and the value of that supply is not reduced as a result of the payment made under the scheme.

With respect to all three schemes, there will be no direct impact on the input VAT recovery as HMRC confirms that any VAT incurred by suppliers in relation to the operation of the schemes relates to the taxable supply of energy and is therefore recoverable subject to the normal rules.

Fulfilment House Due Diligence Scheme registered businesses list
Traders based outside of the UK can use the above list to check if the business that stores its goods in the UK is registered with the Fulfilment House Due Diligence Scheme. The Fulfilment House Due Diligence Scheme registered businesses list has been updated with 6 additions and 1 amendment.

Processing option to tax notifications

HMRC is currently undertaking a consultation on ceasing the issue of an Option to Tax (OTT) notification receipt letter. As it is the responsibility of the opter to correctly notify HMRC, it is now proposed by HMRC that where a taxpayer submits a VAT1614A by any means other than email, they will not receive a response. In the case of email, an automated email response will be provided.

In addition, HMRC also propose ceasing the processing of requests to confirm the existence of an OTT on land and buildings. HMRC states that the existence of an OTT forms part of a business’s records and should be kept for at least 6 years. Under the proposed changes, there will be two situations where HMRC will check to see if there is any record of an OTT. These are as follows:

The effective opted date is likely to be over 6 years ago, or
The person requesting the confirmation has been appointed as a Land and Property Act Receiver, or an Insolvency Practitioner to administer the property in question.

HMRC has stated that it will consider feedback on this consultation before proceeding with and communicating the changes.

Comments can be sent to HMRC by close of business 28 November 2022 using the email address hmrcoptiontotaxcontinuousimprovementconsultation@hmrc.gov.uk.

AUTUMN STATEMENT 2022

The Chancellor announced the Autumn Statement 2022 on 17 November . You can read the detail on the VAT items in that statement on our website.

CASE REVIEW

CJEU

1. Employee Reward Scheme vouchers

This case concerns a dispute between GE Aircraft Engine Services Ltd (GAES) and HMRC, regarding the VAT liability of retail vouchers awarded by GAES to its employees. GAES operates an award scheme known as ‘Above & Beyond’ to reward the most deserving and high performing employees. Under this scheme, an employee nominated for an award ranked at an intermediate level was offered retail vouchers.

The UK VAT legislation states that where a taxable person puts services to any private use or for a purpose other than a purpose of the business, the taxable person shall be treated as making a deemed supply and therefore account for VAT.

GAES was subject to VAT assessments raised by HMRC on the grounds that the retail vouchers are provided to employees free of charge and for personal use outside GAES’s commercial activity. HMRC stated that the fact that GAES has a business purpose for awarding the retail vouchers is irrelevant. As a result, HMRC concluded that the vouchers are subject to VAT.

GAES argued that the award of the retail vouchers to employees under the scheme does not constitute a taxable supply because that programme is linked to the economic activities of that company and the resulting advantage for the employees is secondary. A distinction must be drawn between the economic aim pursued by that company and the private use made of them by employees.

The referring court asked the CJEU whether the VAT directive must be interpreted as meaning that a supply of services consisting, for a business, in offering retail vouchers to its employees, as part of a programme set up by that company, intended to recognise and reward the most deserving and high-performing employees, falls within its scope and therefore subject to VAT.

The CJEU concluded that the scheme was designed with the aim of improving the performance of its employees and, therefore, of contributing to better profitability of the business. The scheme was dictated by the pursuit of additional profits and the resulting advantage for employees were merely incidental to the needs of the business. As a result, the provision of free retail vouchers to employees were not subject to a deemed supply of VAT.

Constable Comment: This case considered whether the provision of free retail vouchers to employees would be considered as private use or other than for business purposes, and it was concluded that where the main purpose of the scheme is to increase business efficiency and profits, there is no private use and therefore a deemed supply cannot arise.

Also, it is worth noting that this was an interesting decision in the sense that the CJEU no longer has jurisdiction to give rulings on requests from UK Tribunals unless the request was made before the end of the Brexit transition period, as was the position in this case.

Constable VAT Focus 3 November 2022

3rd November 2022

HMRC NEWS

Revenue and Customs Brief 11 (2022): VAT and children’s face masks
HMRC has published a new brief setting out their revised position regarding children’s face masks. HMRC now accept that face masks, specifically designed and held out for sale as being suitable for young children (under the age of 14), should properly be considered as items of clothing and therefore zero rated.

Change your VAT registration details
Form VAT484 can be used to tell HMRC if any business details for the VAT registration have changed. HMRC has updated its guidance to confirm that changes to business circumstances must be notified within 30 days of the change taking place.

Fulfilment House Due Diligence Scheme registered businesses list
Traders based outside of the EU can use the above list to check if the business that stores its goods in the UK is registered with the Fulfilment House Due Diligence Scheme.

CASE REVIEW

CJEU

1. VAT evasion: Place of supply of services

This case concerns a dispute between Climate Corporation Emissions Trading GmbH (Climate Corporation) and the Austrian tax authorities. In 2010, Climate Corporation, a business established and registered in Austria, supplied greenhouse gas emission allowances to Bauduin Handelsgesellschaft mbH (Bauduin), a business established in Germany. The place of supply of the services for VAT purposes was Germany, where Bauduin was established.

The Austrian tax authority contended that the supply was that of goods and Bauduin participated as a missing trader in a fraudulent VAT carousel and Climate Corporation knew or should have known that those allowances would be used for the purposes of VAT evasion. As a result, the Austrian tax authority sought to tax Climate Corporation on the supply in Austria. It was held by the courts that the supply by Climate Corporation must be one of services; however, the CJEU was asked whether the place of supply of services by a taxable person established in an EU member state (in this case, Austria) to a taxable person established in another Member State (Germany) can be deemed to be the supplier’s member state where that transaction involves VAT evasion.

The CJEU concluded that the place of supply of services cannot be altered in disregard of the clear wording of Article 44 of the VAT Directive on the ground that the transaction at issue is vitiated by VAT evasion. Whilst Member States may take measures to ensure the correct collection of VAT and prevent evasion, those measures must not go beyond what it necessary to attain such objectives.

Constable Comment: Whilst the CJEU ruled that the place of supply of services cannot be altered, Member States have the right to refuse benefits from the taxpayer if he or she knew or should have known VAT evasion was involved. The CJEU also noted that the law concerning goods and services are distinct; therefore, any argument based on the VAT treatment of the supply of goods are not relevant. Although CJEU decisions are no longer binding in the UK, HMRC have similar rights in the UK, including the application of joint and several liability and refusing input VAT recovery from taxpayers involved in fraudulent transactions.

The Supreme Court

2. Evidence to support input VAT claim

This case concerns the NHS Lothian Health Board (NHSL) and the recovery of VAT incurred in the period from 1974 to 1997. NHSL operates laboratories, primarily concerned with the provision of clinical services to NHS hospitals and clinics, a non-business activity for VAT purposes, but also the provision of services to external bodies for which a fee is charged, a business activity.

In 2009, NHSL submitted a claim to HMRC for repayment of input VAT incurred in relation to business activities undertaken from 1974 to 1997. NHSL did not have sufficient records to establish the apportionment between business and non-business activities; therefore it had to determine a reasonable methodology to calculate the VAT underclaimed for the period. NHSL contended that the percentage of taxable business activities in 2006/2007 was the typical level of taxable business activities and the most satisfactory base line for the calculation of this claim. The percentage was 14.70%.

HMRC rejected the claim and both the First Tier Tribunal (FTT) and Upper Tribunal (UT) upheld HMRC’s decision, holding that HMRC were entitled to conclude that NHSL had failed to establish how much input tax it was entitled to recover. The Court of Session overturned these decisions and remitted the case to be heard by a differently constituted FTT on the grounds that the FTT failed to adopt a flexible approach to the claim, particularly as there was no doubt that some input tax had been incurred over the claim period. This being so, the issue was only the quantification of the amount, not whether there was any right to deduct at all.

HMRC appealed to the Supreme Court which ruled in favour of HMRC holding that the FTT was entitled to conclude that it is not enough for the taxpayer to show it was engaged in business activities. The taxpayer must present either the specified documents showing input VAT incurred or devise a credible alternative method to estimate with reasonable certainty that the amount being claimed was at least close to the input VAT actually incurred.

The Court also considered the EU Principle of Effectiveness and concluded that there was nothing in the approach of HMRC or the reasoning of FTT that made NHSL’s claim ‘virtually impossible or excessively difficult’. As a result, HMRC’ appeal succeeded.

Constable Comment: We understand that there are many similar claims by other NHS Health Boards and Trusts pending before the FTT throughout the UK, with a combined value in the region of £38 million. This case highlighted the importance of holding sufficient evidence to support an input VAT claim or alternatively, in the absence of such evidence, the taxpayer must “devise a credible alternative method by which that amount can be estimated by HMRC with reasonable certainty that the amount now being claimed was at least close to the amount that had in fact been incurred.”

Upper Tier Tribunal

3. Car parking at hospital subject to VAT

This case concerns Northumbria Healthcare NHS Foundation Trust (the Trust) and whether VAT was chargeable on the supply of car parking made by the Trust at hospital and healthcare sites. The issue in this appeal was whether the Trust was a taxable person when making supplies of car parking (the FTT concluded it was) or whether it was acting as a public authority and such supplies were made pursuant to a “special legal regime”. Under the latter treatment, the Trust did not have to account for VAT on its supplies.

The UT was asked to consider, first, whether the Trust’s supplies of car parking are made pursuant to a “special legal regime” applicable to the Trust, and secondly, if so, whether treating the Trust as a non-taxable person would lead to a significant distortion of competition.

The UT considered the FTT did not err in law concluding that the Trust did not provide car parking under a “special legal regime”. The UT confirmed that the mere fact that the public authority is required to act in accordance with statutory powers is not sufficient, rather it is necessary to show that the pursuit of the specific activities in question involves or is closely linked to the exercise of rights and powers of the public authority, in order to fall within the special legal regime.

With regards to distortion of competition, the Trust argued that opportunities for competition was limited, and where it did arise, the Trust was required by guidance to take steps to avoid competition. The UT disagreed and concluded that there was competition with private car park operators, and the Trust not charging VAT would lead to a distortion of competition. Accordingly, the UT dismissed the appeal.

Constable Comment: This detailed analysis by the Tribunal, particularly in relation to the interaction between public law obligations and the special legal regime test, will be of interest to those involved in local authority VAT matters. The Tribunal’s comments on what constitutes unfair competition will be applicable across many wider aspects of VAT.

FTT

4. Amending grounds of appeal

This case concerns C4C Investments Limited (C4C) and penalties assessed by HMRC in respect of ‘deliberate’ inaccuracies on C4C’s VAT return. C4C claimed input VAT on purchases from DB Recycling Limited (DBR). DBR’s sole director was also the operation manager of C4C; however, DBR did not account for output VAT on supplies made to C4C. HMRC denied the input tax claim by C4C on the basis that C4C knew or should have known that the transaction was connected with fraudulent evasion of VAT.

In its original appeal, C4C accepted the inaccuracy was deliberate but appealed the amount of potential lost revenue on which the penalty was based, and the level of mitigation applied based on the assistance provided to HMRC. In this subsequent appeal C4C sought to clarify its grounds of appeal and obtain permission to amend these to the effect that the transactions on which VAT was claimed were not fraudulent and C4C neither knew nor it should have known the transactions were connected to the fraud.

The Tribunal found that the two statements by C4C could not co-exist. If C4C took the view that no fraud was involved, its initial appeal would have included this, but only the level of penalty was appealed initially. The Tribunal concluded that there was no realistic prospect of success, the application to amend the grounds of appeal was late and there was no good reason why the new grounds of appeal were not raised at an earlier stage. As a result, the appeal was dismissed.

Constable Comment: Whether to allow an amendment to the grounds of appeal is a matter of discretion of the Tribunal exercised with the objective of dealing with cases fairly and justly. An application to amend is normally refused if the proposed amendment has no reasonable prospect of success and this is highlighted in the above case.

Constable VAT Focus 20 October 2022

20th October 2022

HMRC NEWS

There have been a number of updates to HMRC guidance

Buildings and construction (VAT Notice 708)
The above guidance provides details about the VAT treatment of building works and materials for contractors, subcontractors and developers. The overview and section 2 has been updated to include information about the VAT domestic reverse charge. The certificate in section 18.1 for certain scenarios regarding zero and reduced rating has been updated to confirm it will be necessary to include the name and address of the organisation receiving the building work.

Cash Accounting Scheme (VAT Notice 731)
The above guidance sets out how the VAT Cash Accounting Scheme works and the conditions you must meet to use the scheme. HMRC has recently updated the guidance to include information about the interaction between the VAT domestic reverse charge and the cash accounting scheme. Full details can be found at section 2.8 of the above guidance.

Flat Rate Scheme for small businesses (VAT Notice 733)
HMRC has published updated guidance which provides information on how to use the Flat Rate Scheme, who can use it and how to apply to join the scheme.

Claim a VAT refund on a conversion if you’re a DIY housebuilder
Individuals can use form VAT431C to claim a VAT refund on the conversion of an existing building into a dwelling if you are a DIY housebuilder. The information in part G of VAT 431C form and notes about sending in your claim has been updated.

CASE REVIEW

CJEU

1. Adjustments to input VAT post liquidation

This case concerned UAB Vittamed Technologijos (Vittamed) and the Lithuanian tax authorities. Vittamed was a company engaged in technical scientific research and its application. In 2012 and 2013, Vittamed acquired goods and services in connection with a project to develop a prototype of a medical diagnostic and monitoring device and to subsequently place the device on the market. 8 invoices were issued to Vittamed incurring EUR 87,987 input VAT. Vittamed used the goods and services to produce capital goods, both licenses and actual prototype devices.

However, following the conclusion of the project, Vittamed was making losses and as a result of absence of orders and potential income, the sole shareholder discontinued the activities. On 2015, Vittamed acquired the status of ‘legal entity in liquidation’ and was removed from the register of VAT payers. In 2017, the Lithuanian tax authorities took the view that when the decision was made to place Vittamed into liquidation, it was under the obligation to adjust the deduction of input VAT in respect of those 8 invoices. Vittamed filed an objection to the decision on the grounds that where costs are incurred in preparation for an economic activity, deduction of any input VAT may be claimed even where that activity is not taken up and the intended taxable transactions ultimately do not take place.

The referring court expressed doubts to the existence of an obligation to adjust the deductions of VAT and therefore referred the question to CJEU, whether a taxable person is under an obligation to adjust deductions of input VAT relating to goods or services intended to produce capital goods in the case where, as a result of the decision of the sole shareholder, the company is placed into liquidation and removed from the register of VAT payers, the capital goods produced have not been used and will never be used in the course of taxable economic activities.

The CJEU stated that the effect that the right of deduction is retained even where an activity is brought to an end before it gives rise to any taxable transactions, must be combined with the rules of adjustments of deductions. The adjustment mechanism under Article 184-187 of the VAT directive aims to establish a close and direct relationship between the right to deduct input VAT and the use of the goods or services.

The CJEU confirmed that the wording of the VAT directive intends to make the obligation of making an adjustment as broad as possible and does not exclude any foreseeable situation of undue deductions. As Vittamed no longer has and will never have, any intention to use the capital goods produced, the close and direct relationship is broken, and the adjustment mechanism must be applied.

Constable Comment: In this case the CJEU has confirmed that where, as a result of the decision of the owner or sole shareholder a taxable person no longer has – and will never have – any intention of using capital goods for the purposes of taxable transactions, the deduction of input VAT must be adjusted. However, if during the liquidation Vittamed had made sales of the assets for purpose of discharging debts, the adjustment would not have been necessary.

2. VAT incorrectly charged by a now liquidated business

This case concerned HUMDA, attempting to recover VAT from the Hungarian tax authorities as a result of a tax inspection. BHA supplied construction services on a project in Italy. BHA charged Hungarian VAT to HUMDA, which was paid to BHA and subsequently over to the tax authorities. As a result of the tax inspection, the authorities found that VAT was not payable in Hungary, the place of supply was Italy, and therefore was invoiced in error.

BHA has since gone into liquidation and therefore HUMDA tried to recover VAT improperly charged from the Hungarian tax authorities, along with interest. The request was refused by various courts until the referring court asked the CJEU whether the VAT directive must be interpreted as precluding legislation of a Member State (MS) under which a taxable person cannot claim, directly from the tax authority, a refund of VAT in respect of a service which the supplier has unduly invoiced, where it is impossible or excessively difficult to claim that amount from the supplier because it went into liquidation.

The CJEU commented that if the refund of the VAT becomes impossible or excessively difficult, in particular due to insolvency of the supplier, the principles of VAT neutrality and effectiveness require the MS to provide for the instruments necessary to enable the recipient to recover the VAT which has been unduly invoiced and paid, in particular by addressing its application for reimbursement to the tax authorities directly. Therefore, HUMDA should be able to recover the VAT from the Hungarian tax authorities directly.

With regards to interest, the CJEU commented that the authority is obliged to pay interest where it has not made a refund within a reasonable period of time, after having been requested to do so. However, the rules for applying interest must be set by the MS taking into consideration the principles of equivalence and effectiveness. This means, the taxable person should not be deprived of adequate compensation in respect of loss caused by a late refund.

Constable Comment: This case has confirmed that where it is ‘impossible or excessively difficult’ to recover VAT from the supplier, then the taxpayer should be able to recover VAT incorrectly charged from the local tax authority. In this case, the supplier being placed into liquidation was sufficient to be considered as impossible or excessively difficult.

The Supreme Court

3. Time limits and repayment verification

This case concerned disputes between DCM (Optical Holdings) LTD (DCM) and HMRC regarding two questions. Firstly, whether HMRC were subject to a statutory time bar which invalidated their assessment for output tax and second, whether HMRC have power to refuse to accept a taxable person’s repayment claim while they verify the claim.

DCM is the representative member of a VAT group, and it is partially exempt as it makes taxable supplies of frames, lenses, accessories, and care plans, and also exempt supplies such as eye tests and laser surgery. The ‘Opticians: Apportionment of charges for supplies of spectacles and dispensing’ guidance sets out methods of apportionment that opticians can adopt. This can either be Full Cost Apportionment (FCA) or Separately Disclosed Charges (SDC). DCM claimed to be operating SDC however the conditions were not met and therefore should have accounted for output tax using FCA.

HMRC raised an output VAT assessment on 20 October 2005 for the periods from October 2002 to April 2005 also adjusting input VAT, following an inspection 1 September 2005 where HMRC for the first time obtained access to DCM’s VAT accounts. DCM argued that by the end of a meeting in January 2004, HMRC were aware that DCM was not using FCA and so knew that ‘something was wrong’, and therefore had one year from this date to raise an assessment.

The Court referred to the relevant law stating that the one year rule runs from the date when evidence, which is considered sufficient to justify the making of the assessment, comes to the knowledge of the Commissioners. In this case the Court ruled that such evidence was only available to HMRC after access was granted to the VAT account in September 2005, therefore the assessment was not out of time.

With regards the second issue, DCM argued that where a repayment trader makes a claim, HMRC must pay the claimed sum but have 5 options for the protection of revenue as follows:

HMRC can pay the sum claimed but impose conditions requiring the trader to repay any money which after verification is not due
HMRC can pay and if later they decide it is not due, they can raise an assessment
HMRC can make the provision of specific evidence the condition of payment
HMRC can make the provision of security the condition of payment
HMRC can ask the trader to amend its returns

The Court disagreed for various reasons including that HMRC have a power and duty to conduct a reasonable and proportionate investigation into the validity of the claim for a refund. Also, the obligation on HMRC to pay VAT credit arises only once it is established that a credit is due. The Court ruled that the power to verify and when justified, to refuse to pay claimed VAT credit is not inconsistent with the UK VAT legislation, therefore the appeal was dismissed.

Constable Comment: This case clearly set out the rules for the one year time rule and “evidence of facts” applicable to raising assessments in conjunction with HMRC’s power and duty to verify a repayment claim before being obliged to make payment. The Court made a clear distinction between payment traders and repayment traders. With regards to a payment trader, even if the input tax is overstated and therefore reducing the total VAT liability, HMRC is initially required to pay the sum which the trader discloses. In contrast, a repayment trader may not receive anything until the verification process is complete.

FTT

4. Input VAT recovery on vouchers

This case concerned Lucky Technology Limited (LTL). LTL buys and sells vouchers. Harrods was the supplier of the vouchers which can be used on the Steam website to purchase digital downloads of games. Up to May 2016, Harrods provided LTL with till receipts for each purchase, which were entered into a spreadsheet. At the end of the month, the bookkeeper of LTL would request VAT invoices for the entries on the spreadsheet. Harrods would then provide a ‘bulk’ invoice showing 20% VAT. However, after May 2016, Harrods provided invoices showing 0% VAT taking the view the vouchers are multi-purpose vouchers (MPV) and therefore did not account for any VAT on the onward sale.

However, LTL continued to claim input VAT on the grounds that the vouchers are single purpose vouchers (SPV) and subject to VAT (although actual invoice evidence was not held) and LTL paid the VAT to Harrods as part of the purchase price. HMRC took the view that the purchases were not subject to VAT because the vouchers are MPVs, and everyone in the supply chain consists as ‘agents’ between Steam and LTL therefore LTL was the first purchaser of the vouchers and therefore have no input VAT to recover.

As a result, the Tribunal had to determine the following:

Are the vouchers SPVs?
If not, was Harrods acting as an agent or as principal supplying the vouchers?
If Harrods was an agent, was it part of the supply chain and so made a taxable supply to LTL?
Was the VAT, if chargeable, paid by LTL?
If the VAT was chargeable and LTL paid it, did HMRC err in law in relation to their regulation 29(2) discretion.

The tribunal first considered whether the vouchers were SPV or MPV. It concluded that they cannot be SPV, because they could be redeemed for digital downloads of games, software, but also hardware goods such as controllers which are not only incidental, but an actual supply of goods. As a result, the Tribunal concluded that the vouchers were retail vouchers, and the next debate was whether Harrods acted as agent or principal. This is relevant because VAT is not due on the first issue of such vouchers.

Steam was the original issuer of the vouchers. If Harrods was acting only as an agent of Steam, then those were not subsequent supplies but rather still the first issue, therefore not subject to VAT. However, if Harrods was acting as principal, then it made a subsequent supply which would be in fact subject to VAT. The FTT reviewed multiple contractual agreements and considered various factors including such contracts, the text on physical voucher cards and the activation of the voucher at the till to reach an overall conclusion that Harrods was not acting as an agent but rather as principal in supplying the vouchers to LTL, therefore VAT was chargeable.

The Tribunal has then concluded that because the price was not changed by Harrods after May 2016, there was no evidence that VAT was previously wrongly charged. In addition the FTT confirmed that if VAT is properly chargeable (which it found it was) then the price paid must be assumed to have included VAT. As a result, the FTT concluded that VAT was incurred and paid by LTL. In addition, the FTT noted that HMRC erred in law because it failed to exercise the discretion to accept alternative evidence when LTL clearly indicated that it was not possible to obtain a valid VAT invoice from Harrods. As a result, the appeal was allowed.

It should be noted that the legislation and rules concerning vouchers changed from 1 January 2019. For voucher supplies after this, it is important that this is recognised as this may lead to different outcomes.

Constable Comment: This was a very lengthy and complex case but highlighted some important rules to reach certain decisions, including what constitutes a single or multi-purpose voucher. Vouchers is a complex area of VAT law that has relatively recently (and subsequently to this case) been altered and if you have any related queries, Constable VAT would be happy to assist.

Constable VAT Focus 6 October 2022

6th October 2022

HMRC NEWS

Option to tax
The print and post versions of form VAT 1614B, used to notify HMRC that a taxpayer is no longer a ‘relevant associate’ of a person who has opted to tax particular land or buildings and form VAT 1614E, used to tell HMRC about a real estate election for land or buildings, have now been removed from HMRC’s website and a link to HMRC’s accessibility statement for online forms has been added. These forms can now only be completed and submitted online.

Postage, delivery and direct marketing (VAT Notice 700/24)
The above guidance sets out how to apply VAT to charges for postage, delivery services and how to treat direct marketing services involving distribution of printed matter. HMRC recently updated the section “How to work out the VAT treatment for delivered goods” to clarify that where there is no extra charge for delivery, VAT is accounted for on the full sales price.

Check when you can account for import VAT on your VAT Return
If your business is registered for VAT in the UK, you can use the above guidance to find out when you can, or need to, account for import VAT on your VAT return. HMRC has updated the guidance to confirm that information about Customs Handling of Import and Export Freight (CHIEF) has been removed. Businesses can no longer use CHIEF for import declarations unless they have permission from HMRC.

CASE REVIEW

CJEU

1. Can a sale and leaseback contract be treated as an invoice?

This case concerns a transaction arising between Raiffeisen Leasing (RL) and RED.d.o.o (RED). RED owned some land in Slovenia with the intention of developing it. In order to finance the development, it entered into a sale and leaseback contract with RL. RED charged RL VAT on the sale of the land and RL recovered this VAT. VAT on the supplies from RL to RED was included in the contractual sale and leaseback agreement between RL and RED but RL did not raise a separate VAT invoice, nor did it declare and pay the VAT sum mentioned in the contract on its VAT return.

RED recovered the VAT stated in the contractual sale and leaseback agreement, contending that the agreement constituted an invoice in respect of supplies received from RL. The local tax authorities disagreed and refused the input VAT deduction. The question referred to the CJEU was whether a contractual sale and leaseback agreement which was not followed by a VAT invoice, may be regarded as an invoice, and if so, what details that contractual agreement must contain.

The CJEU ruled that the leaseback agreement was capable of being treated as a VAT invoice even in the absence of any taxable transaction, provided that it contained sufficient information for RED to substantiate its right to recover input tax. The fact that some of the details normally required on an invoice (such as the applicable VAT rate) were implied rather than express did not prevent the leaseback agreement from being treated as an invoice. The fact that RL never intended the leaseback to be treated as an invoice was irrelevant. As RL had effectively issued a VAT invoice in 2007 (when the contract was agreed) it should have accounted for output tax at that time.

The CJEU concluded that the local tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the conditions set out under the VAT Directive, if they have all the information to ascertain that the substantive conditions for input VAT recovery are met.

Constable Comment: The CJEU concluded that where the conditions of input VAT recovery are implied or expressly stated in a contractual agreement, the document may be regarded as an invoice. This effectively means output VAT is payable by a supplier and the customer has the right to deduct that input VAT.

FTT

2. Input VAT recovery by an intending trader

This case concerned Hedge Fund Management Investment Ltd (HFIM), a company which was set up to provide fund management services and introductory services to various funds. HFIM had produced a detailed prospectus intending to attract investment, however, the publication of the prospectus was delayed while HFIM resolved ongoing litigation against another company.

During this period and before trading began, HFIM incurred input VAT and recovered it. HMRC subsequently raised assessments disallowing those input VAT claims along with issuing a penalty for careless behaviour regarding inaccurate returns. HMRC argued that HFIM did not carry on any business activities in return for consideration during the relevant periods. Furthermore, there was no direct and immediate link between inputs and outputs for each of the periods under appeal.

HFIM argued that according to the Norseman Gold tests, it is required to show that in the period input VAT was incurred, it had the intention of making taxable supplies in the future in return for consideration. HFIM argued that the evidence shows that at all times it had the intention of making taxable supplies and those future supplies would be linked to the input VAT incurred in the past.

The FTT was presented with evidence including the detailed prospectus, various emails and documents showing HFIM pursuing research and introductory activities and the companies’ financial statements audited by a reputable firm demonstrating business activity. The evidence was sufficient for the FTT to rule that HFIM clearly had the intention to trade and therefore input associated VAT should be deductible.

As a result, the penalty was also dismissed as HFIM did not act carelessly. However, the FTT concluded that it does not hold enough evidence to determine whether the input VAT incurred is attributable to intended taxable supplies or overhead costs. The FTT was reluctant to rule on this point therefore it advised HFIM and HMRC to review the input claimed on the basis that HFIM was indeed an intending trader.

Constable Comment: The FTT confirmed in this case, that where a taxpayer can demonstrate that it has the intention of making taxable supplies in the future, it can recover input VAT incurred even if it is not yet making those supplies. However, the intention must be evidenced in order to support input VAT recovery. If you or your business intend to recover input VAT or register for VAT before trading begins, we recommend taking professional advice.

3. Import VAT Liability

This case concerned BMW Shipping Agents Limited (BMW), an international freight forwarding company. The question addressed by the Tribunal relates to the availability of onward supply relief (OSR) to BMW in relation to certain transactions. If OSR was available the imports BMW arranged would not be subject to Import VAT in the UK.

HMRC argued that BMW did not qualify for OSR because BMW could not have made a qualifying supply of the goods to the end customer as BMW did not own the goods. BMW accepted that OSR was not available and the Tribunal then had to determine whether it was BMW, rather than its customer (on whose behalf the goods were imported) who was liable for the import VAT due, which in this case was a substantial sum.

BMW argued that its customer is liable for import VAT as Box 14 of the Customs Declaration form identified BMW as acting as a direct representative on behalf of the customer, who was identified in Box 8 of the form. However, HMRC pointed out that BMW had completed Box 44 of the form, which relates to OSR as though BMW was importing goods in their own name. In addition, although the customer’s name was entered into Box 8, the address given was BMW’s and the VAT number specified also belonged to BMW.

Whilst the Tribunal correctly identified the inconsistency between Box 14 and Box 44, it concluded that Box 44 takes priority because there is a legal requirement to state in Box 44 whether the goods are being imported by a person on their own behalf or as an agent for somebody else. As BMW stated the prefix indicative of importing in their own name, the Tribunal had to dismiss the appeal and conclude that import VAT is due from BMW.

The Tribunal concluded that the guidance in VAT notice 702/7 in relation to the circumstances in which OSR is available to an agent is clear and that it was never going to be possible for BMW to maintain a claim to OSR. The Judge added that ‘If there is anything to be learnt from this sorry tale, it is that agents need to ensure that they take a great deal of care in understanding the circumstances in which they may be liable for import VAT and the requirements which need to be satisfied in order for a claim to OSR to be available’.

Constable Comment: Had the correct procedures been followed the liability could potentially have been prevented. Although this case relates to Customs procedures the principle applies equally to other areas of VAT and highlights the need to take care and fully understand the rules when seeking to take advantage of any relief from VAT.

4. Zero rated Mega Marshmallows

This case concerns Innovative Bites Limited (IBL) and the VAT treatment of its product ‘Mega Marshmallows’ (the product). IBL is a wholesaler of various American sweets and treats. HMRC ruled that the product was confectionery on the grounds that it can be eaten as a snack from the bag, it is generally eaten with fingers and the product is found on IBL’s website in the category of ‘sweets, candy and chocolate’. Such products are excluded from the zero-rating that applies to certain food items and as a result HMRC took the view the product is standard rated for VAT purposes and issued VAT assessments in the sum of £472,928.

IBL argued that the product is different from regular marshmallows (which are also sold by IBL and correctly treated as standard rated) on the grounds that the product needs to be roasted over a campfire or barbecue before eating or used as an ingredient in the traditional American sweet, “s’more”. IBL argued that a product that is subject to further cooking process would not be expected to be confectionery. The product was marketed as intended for roasting and the size of the product was indicative that it is to be roasted. Customers intending to ‘snack’ marshmallows would choose a regular size pack.

The Tribunal reviewed various evidence submitted by IBL, including the packaging of the product which included clear instructions that the product should be cooked, a warning to let the product cool down after cooking and a description on how to make s’mores using the cooked product. In addition, it was brought to the Tribunal’s attention that the product is placed in the ‘world foods section’ aisle and also at the barbecue section.

As a result of the evidence, the Tribunal concluded that the product is not confectionery because it is sold and purchased specifically for roasting, the marketing of the product confirms this purpose, the size of the product makes it particularly suitable for roasting and the fact that it is positioned in supermarket aisles in the barbecue and world foods section, leads to that conclusion.

Constable Comment: Confectionery items are subject to VAT and there have been many previous cases debating what constitutes ‘confectionery’. In this case, the appellant successfully argued its product is zero rated because it had sufficient evidence including packaging and marketing to prove that it requires further processing before it is consumed. If you or your business sells food items which could potentially be classed as ‘confectionery’ we would recommend seeking professional advice to ensure the product is treated correctly for VAT purposes to minimise the risk of assessments and penalties. Constable VAT has a great deal of experience in liaising with HMRC on the correct VAT treatment of food items and would be happy to assist with any related queries.

Constable VAT Focus 23 September 2022

23rd September 2022

HMRC NEWS

VAT-free shopping for overseas visitors
A new VAT-free shopping scheme was announced this morning in the latest ‘Mini-budget’ for overseas visitors. The specific details regarding the VAT-free shopping scheme are yet to be confirmed, but we will report any further updates when they are released.

How VAT affects charities (VAT Notice 701/1)
The above guidance provides information on how VAT affects charities, how to treat a charity’s income for VAT purposes and VAT reliefs available to charities. HMRC has recently updated the section on the ‘business-test’ to include new information about the “2-stage test”.

Postage stamps and philatelic supplies (VAT Notice 701/8)
The above guidance provides information on which postage stamps are free of VAT and when VAT must be applied to stamps, stamped stationery and other philatelic supplies. Royal Mail has now confirmed that stamps bearing the image of Her Majesty Queen Elizabeth II remain valid for use. The notice will be updated when the Royal Mail makes any further announcement.

CASE REVIEW

CJEU

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

Opinion of the Advocate General

1. Correcting overcharged VAT on supplies to consumers

P GmbH (P) operates an indoor playground in Austria. In 2019, P incorrectly accounted for VAT on its admission fees at the standard rate of VAT of 20% rather than the reduced rate of 13%. P issued a total of 22,557 invoices in 2019 and the customers were exclusively consumers who did not have the right to recover the VAT charged. P corrected its annual VAT return for the year 2019 to reclaim the VAT overdeclared. The Austrian tax authorities refused the correction on two grounds: P owed the higher amount of VAT as a result of accounting for it on its invoices without correction and it was P’s customers who had paid the VAT and P would be unjustly enriched if the VAT were refunded.

Ordinarily, if the amount of VAT showing on a VAT invoice issued is higher than the amount properly due, the business must account for that higher amount to the relevant tax authority. The rule is designed to prevent tax loss if invoices are issued to businesses who might recover the overstated VAT as input tax. In this opinion, Advocate General (AG) Julianne Kokott was required to consider whether:

Is VAT payable by the issuer of the invoice if there is no risk of loss of tax revenue because the recipients of the services are not entitled to the right of deduction?
If so, do the invoices need to be corrected if there is no risk of loss of tax revenue and the correction of such invoices is effectively impossible?
Does the fact that final consumers have borne the tax as part of the consideration, thereby enriching the taxable person by correcting the VAT, preclude the correction of the VAT?

AG Kokott concluded that P is not liable for VAT if its customers are not entitled to deduct input tax. If P was obliged to account for the VAT, the tax authority required P to collect VAT on its behalf, and should therefore be liable for the consequences of an error if P had acted in good faith. If P had overcharged VAT because the correct legal position was unclear, then it should be entitled to reclaim the VAT without the correction or reissue of VAT invoices. However, if the error resulted from P failing to consider the VAT position properly, then it would only be able to reclaim the VAT if it could demonstrate that there was no risk of tax loss.

AG Kokott also considered it unlikely that P’s claim could be denied on the basis of unjust enrichment. Provided that P had acted in good faith, it should be entitled to recover the overcharged VAT.

Constable Comment: This opinion highlights the importance of ensuring that VAT is correctly shown and accounted for on invoices issued. It also considers the potentially complex implications of seeking to correct the position where it may be impossible to correct the invoices already issued at a later date. If you have any concerns surrounding the correct VAT liability of your supplies, please do not hesitate to contact Constable VAT.

JUDGMENTS

2. The entitlement to input tax deduction for holding companies

This case concerns the refusal by the German tax authorities to allow W GmbH (WG) to deduct input VAT relating to a payment made to two limited partnerships, in which WG held 90% interest. The partnerships developed residential properties in Germany, the sale of which were exempt, therefore the partnerships would have been unable to recover VAT incurred on related construction services. Instead, WG procured EUR 40million of construction services and contributed these to the partnerships. WG treated the contribution as outside the scope of VAT but contended that the VAT incurred on the construction services was recoverable as input VAT as WG was a fully taxable business as a result of management fees charged.

The CJEU considered that in order to reclaim VAT incurred, two conditions must be met. First, the person concerned must be a taxable person and the goods or services must be used by a taxable person for the purposes of their taxable activities.

The acquisition and holding of shares in a company does not amount to an economic activity, therefore a holding company whose sole purpose is to acquire shares in other companies is not a taxable person and does not have the right to deduct VAT. In the present case, WG supplied accounting and management services to its two subsidiaries in exchange for payment, which constitute an economic activity. Consequently, the CJEU held WG must be regarded as a taxable person.

With regards to the second condition, the right to deduct input tax requires the goods and services obtained to be used for the purposes of taxable supplies. WG obtained the services required to fulfil its obligations relating to payment in kind of shareholder contributions to the partnerships (rather than a supply to the partnership). The fact that those services are intended to be used by WG’s subsidiaries confirms that there is no direct and immediate link with WG’s own economic activity. Those costs are not part, as general costs, of the components of WG’s management and accounting services.

The CJEU ruled that the constructions services were not incurred in order to carry out the management supplies of WG. Contributing to the partnerships activities was not a business activity and therefore the VAT incurred by WG was not recoverable.

Constable Comment: Holding companies have a range of structures and purposes. Some have minimal activities whilst others are actively concerned with the supervision and management of their subsidiaries. This case highlights that in order for a holding company to recover VAT incurred as input tax, demonstrating a direct and immediate link between input VAT incurred and a subsequent taxable activity is key.

3. Input tax recovery on the compulsory purchase of property

This case concerns the denial of the right to deduct VAT incurred on the purchase of a property on account of an alleged abuse of rights by HA.EN (H). In 2015 HA.EN purchased a secured loan which had been granted by a bank to a Lithuanian property developer. The developer was facing financial difficulties and was forced to sell the property to H for EUR 4.5million plus VAT (EUR 949,000) as a result of a compulsory purchase order. The sale proceeds reduced the outstanding loan but no cash changed hands.

As a result of the financial difficulties faced by the developer, whilst it accounted for output VAT on its VAT return, it could not pay the output VAT due and it was declared insolvent.

H reclaimed the VAT incurred on the purchase of the property. Following a tax inspection, the local tax authority held that H knew or should have known that the developer would not pay the output VAT due. This being so the tax authority considered H had acted in bad faith and committed an abuse of rights and the tax authority denied H the right to deduct the VAT incurred as input tax.

Two conditions must be met in order to find that an abusive practice exists. First, the transactions concerned must result in the obtaining of a tax advantage contrary to the intentions of the law. Second, the essential aim of the transactions is solely to obtain that tax advantage. The CJEU stated that even if the input VAT recovery by H is seen as a tax advantage, that advantage cannot be regarded as contrary to the intentions of the law.

Under the second condition, the CJEU confirmed that H was a creditor of the developer as it held a mortgage over the property which was subject to a compulsory sale. The essential aim of the compulsory sale was for H to recover its debt, rather than securing VAT advantages. The CJEU concluded that H should therefore not be denied input VAT recovery.

Constable Comment: This case highlighted the conditions for ‘abuse of rights’ to apply it must be proved that the tax advantage must be contrary to the intentions of the law and the essential aim of the transaction is solely to obtain that advantage. Whilst EU rules are no longer binding on UK businesses, these conditions may be taken into consideration by UK courts.

FIRST TIER TRIBUNAL

4. Zero rating of non-emergency ambulances

E-Zec Medical Services Limited provides Non-Emergency Patient Transport Services (NETPS), on behalf of various NHS trusts for sick and injured individuals to and from hospital and doctor’s appointments. It is common ground that the ambulance services in question are exempt from VAT. However, a dispute arose with HMRC as to whether the provision of NETPS could be zero-rated as passenger transport, therefore entitling E-Zec to VAT recovery.

Non-Emergency Patient Transport Services (NEPTS) involve transporting day patients, recurring treatment patients and patients on daily discharge and often involves taking multiple passengers in one journey either from or to multiple destinations. E-Zec can only zero-rate its services if the vehicles could carry 10 people, were it not for the wheelchair adaptations.

On a typical day, each vehicle of the appellant will carry at least one wheelchair passenger. On average, approximately 40 to 50% of all passengers carried by the appellant require a wheelchair, bring their own wheelchair, require a bariatric wheelchair or require a stretcher. Generally, E-Zec’s vehicles are configured with eight seats, allowing space for a ramp, winch, and storage pen for wheelchairs. An aluminium tracking system is also installed in the floor, to allow seats to be reconfigured according to how many wheelchair users will use the vehicle.

The First-tier tribunal considered how many people E-Zec’s vehicles could carry if only the wheelchair-specific adaptations were removed. This involved hypothetically adding some things back: in this case, the floor was adapted for wheelchairs, so the FTT had to imagine that the floor was replaced by a standard plywood floor. The FTT accepted-Zec’s vehicles without the wheelchair adaptions could be driven with ten passengers and comfortably within the vehicle’s maximum weight allowance of 3,500kg. E-Zec’s services therefore qualified for zero-rating.

Constable Comment: This case also highlights the importance of applying the correct VAT treatment to a supply. Zero-rating enables VAT recovery and it is important to remember that this takes precedence over VAT exemption. If you or your business have any ambiguity regarding the VAT treatment of your supplies, please do not hesitate to contact Constable VAT.

5. Whether VAT assessment by HMRC time barred

In the case of Nottingham Forest Football Club Limited (NFFC), NFFC appealed against a VAT assessment for the period 08/15 in the amount of £345,561 issued by HMRC on 29 April 2019

The issue was whether HMRC was time-barred from raising the assessment under section 73(6)(b) VATA 1994. That is, whether the assessment was made within one year after evidence of the facts, sufficient in the opinion of HMRC to justify the making of the assessment, came to their knowledge. HMRC argued that their knowledge of the facts was only complete on 9 May 2018 whereas NFFC contended that HMRC had the necessary knowledge of the facts on 20 April 2018.

HMRC visited NFFC on 20 April 2018 to discuss how the business operated and its accounting systems, examine invoices and download general ledger data. A back up memory stick containing data from NFFC’s previous accounting system was obtained on 9 May 2018. HMRC issued a VAT assessment on 29 April 2019.

The Tribunal confirmed that the burden of proof was on NFFC to demonstrate the assessment had been raised late. NFFC did not provide evidence which showed that the initial information provided on 20 April 2018 was sufficient to justify the making of the assessment.

The Tribunal could not conclude the information provided on 9 May 2018 was irrelevant to the assessment raised. The time limit for raising the assessment, therefore, expired on 9 May 2019 and the assessment, raised on 29 April 2019, was in time.

Constable comment: This case confirms that the burden of proof is on the taxpayer to demonstrate whether an assessment has been made out of time. It is important to remember the application of these time limits in relation to error corrections submitted to HMRC where an assessment is due to be raised.

Constable VAT Focus 9 September 2022

9th September 2022

HMRC NEWS

Fulfilment House Due Diligence Scheme registered businesses list
Businesses can use the above guidance to check if the business storing your goods in the UK is registered with the Fulfilment House Due Diligence Scheme if you’re a trader based outside the EU. The list has been updated with 19 additions and 5 removals.

HMRC email updates, videos and webinars for VAT
The above link provides information about VAT including accounting schemes, VAT returns and keeping records. The ‘How to apply the VAT reverse charge for construction services’ section has been updated because the way VAT is accounted for in the construction industry has now changed.

VAT refund scheme for museums and galleries reopening

This VAT refund scheme has been running since 2001and it was last open for new applicants in 2018/2019, it is estimated to have refunded up to around £1 billion to museums and galleries to date. The VAT refund scheme is set to reopen for new applicants from autumn 2022 and ministers encourage more museums and galleries to join the scheme to support free entry for the public.

Any museum and gallery open to the public free of charge for 30 hours a week can apply. It will help organisations boost their finances and open up their collections more regularly.

The full criteria for a museum and gallery to apply are:

Being open to the general public for at least 30 hours per week, without exception
Offering free entry without prior appointment
Holding collections in a purpose-built building
Displaying details of free entry and opening hours on the museum website

CASE REVIEW

FTT

1. Input VAT recovery: Lease rental invoices

This case concerned a VAT assessment in the sum of £26,250 raised by HMRC. The appellant, Star Services Oxford Ltd (SSO) operates a bed and breakfast business from a premises which is leased from Oxford City Council (OCC). However, prior to SSO being incorporated, Mr Latifi (owner of SSO) took out the lease with OCC in his personal capacity. Mr Latifi sublet parts of the building to Lola Zeng and Stitch, and the rest of the building was used for the bed and breakfast business by SSO.

The VAT assessment relates to input VAT claims made by SSO regarding VAT incurred on the lease for the building from OCC. HMRC identified an issue in that the lease from OCC is made to Mr Latifi as an individual rather than by SSO as the company, which is the VAT registered entity. HMRC noted that SSO has been reclaiming input VAT on invoices which are addressed to Mr Latifi.

HMRC raised the VAT assessment on the grounds that SSO does not hold valid VAT invoices which entitles it to deduct input VAT. OCC leases the premises to Mr Latifi who then sublets to SSO, Zola Zeng and Stitch, and therefore, the VAT charged was incurred by Mr Latifi not SSO.

The appellant argued that the lease was acquired in Mr Latifi’s name because SSO did not exist at the time the lease was entered into. The name on the lease was changed after HMRC notified this error. It was submitted that this was an innocent omission to transfer the lease from Mr Latifi’s name to SSO, and the delay was caused by forgetfulness. The appellant claims that HMRC is exploiting an administrative mistake and if Mr Latifi knew the consequences the lease would have been changed earlier.

The Tribunal considered whether the requirements for claiming input VAT has been met. It confirmed as a starting point that in order to reclaim input VAT the appellant must hold a valid VAT invoice to evidence that the supply is being received by the appellant. This means that the invoice needs to be addressed to the right legal entity and the supply needs to be made to that entity. VAT cannot be recovered on invoices in the name of the third parties.

The Tribunal concluded that the legal relationship was between OCC and Mr Latifi due to the lease agreement being in the name of Mr Latifi. As a result, SSO is not entitled to reclaim any input VAT incurred and the appeal was dismissed.

Constable Comment: This case shows the importance of taking care regarding administrative tasks when incorporating a business. In this case, HMRC raised a significant VAT assessment as a result of what appears to be a genuine administrative oversight of changing the name on the lease from Mr Latifi in his personal capacity, to SSO, the new incorporated business. Incorporating a business can have various VAT implications and we would recommend seeking professional advice. Constable VAT will be happy to assist with any incorporation related queries. The case also acts as a reminder that it is important that taxpayers hold all the evidence required to support an entitlement to reclaim VAT incurred.

2. Tribunal: Start proceedings or ‘entertained’?

This case concerned the SNM Pipelines (SNMP) appealing a decision of HMRC to deny input VAT claimed by SNMP and issuing VAT assessments to recover input VAT so claimed. In 2017 HMRC took the view that SNMP was not entitled to repayments of input VAT because it knew or should have known that the input VAT had been incurred in transactions which were connected with the fraudulent evasion of VAT. The VAT assessment was in the sum of £312,377.

SNMP appealed this decision, but the FTT returned the notice of appeal because the VAT in dispute had not been paid and SNMP had not made a hardship application. In the UK, an appeal shall not be entertained unless the amount which HMRC have determined to be payable as VAT has been paid or the Tribunal decides that the requirement to pay the amount would cause the appellant to suffer financial hardship.

SNMP has made another attempt to resubmit the notice of appeal, but the FTT then returned the notice of appeal again for the same reason but, unfortunately, to an incorrect email address. Therefore, 3 years elapsed with no action from neither party. Later, in 2020, SNMP made a hardship application to HMRC and resubmitted the notice of appeal to the FTT; however, HMRC filed a notice of objection to SNMP’s late appeal.

SNMP argued that the appeal was made in time. It was submitted that the appeal was still made or notified even if the disputed tax had not been paid, and a hardship application had not been made. HMRC argued that:

The delay of more than four years was serious and significant
SNMP did not have any good reason for such long delay
In all the circumstances, which includes prejudice to HMRC and the need to enforce compliance with the rules, the application should be refused

The Tribunal referred to various case law and made a distinction between a case being entertained and being validly made. Whilst payment needs to be made, or application for hardship is required for a case to be ‘entertained’ (The Tribunal begins to entertain a case when it lists it for a hearing), it is not required for a claim to be validly made. It was confirmed that starting proceedings is not the same as entertaining or proceeding with an appeal.

In summary, the Tribunal has ruled that SNMP’s 2017 appeal was made in time regardless the fact that disputed tax was not paid and no application for hardship was made at the time, it was still a valid notification of the appeal.

Constable Comment: This case highlighted the difference between starting proceedings and entertaining or proceeding with a case. The Tribunal confirmed that payment or application for hardship is not a requirement for making a valid notice of appeal; however, to entertain the case (process towards a hearing) it would be necessary. Therefore, the notice of appeal was valid, and also as HMRC has accepted SNMP’s application for hardship, the case can proceed towards a hearing. This case also reinforces the importance of ensuring all statutory, and other, deadlines are met. In the absence of confirmation of receipt of correspondence from HMRC or the Tribunal in a timely manner, we would recommend that taxpayers follow up to ensure that documents and paperwork have been received. If your business has any questions regarding the application of time limits in relation to HMRC’s or the Tribunals policies and any ‘out of time’ issues please do not hesitate to contact Constable VAT.

Constable VAT Focus 11 August 2022

11th August 2022

HMRC NEWS

Tell HMRC about any errors in your VAT Return
Taxpayers can now notify errors on VAT returns online rather than using form VAT652. A link to the new online form has been added to the above guidance. HMRC has also updated the details section and included information on how to use the online form.

Provide partnership details when registering for VAT
HMRC has updated form VAT1 and its associated notes with information about completing the VAT2 when VAT registering a partnership.

Complete your VAT Return to account for import VAT
The above guidance has been updated with information on checking previous VAT returns where businesses have experienced problems with monthly import VAT statements.

CASE REVIEW

CJEU

1. Boat trips on the Moselle: Principle of fiscal neutrality

This case concerned Navitours, a business established in Luxembourg which supplies boat trips on the Moselle, a river which forms part of the border between Luxembourg and Germany. The waters of the Moselle are under the joint sovereignty of both countries. As passenger transport services such as boat trips are subject to VAT where they take place, a dispute arose, as to the country in which the boat trips are subject to VAT.

The CJEU considered the boat trips are correctly classified as transport services. For VAT purposes, transport services are supplied where those services actually take place having regard to the distances covered.

The CJEU confirmed that it is for the Member States to determine the extensions and limits of what constitutes ‘within the territory of the country’; however, in this case both Germany and Luxembourg consider the Moselle to be within the territory of their country.

The CJEU concluded that the principle of fiscal neutrality prevents Navitours from accounting for VAT in both territories. As a result, the taxation of the boat trips in Luxembourg prevented Germany from also imposing VAT on the services supplied by Navitours.

Constable comment: This case is interesting as by following the strict application of the law, the CJEU has concluded that VAT could be due in both Germany and Luxembourg. This is an unfavourable position for the taxpayer as they would be subject to double taxation. However, applying the principle of fiscal neutrality the taxpayer VAT is only due in Luxembourg. Germany could no longer collect VAT on the boat trip taking place within a territory under the joint sovereignty of both countries.

2. Insurance claim handling services

This case concerned a dispute between Uniqa Asigurari SA (Uniqa), a Romanian insurance company, and the Romanian tax authorities, regarding the VAT treatment of insurance claims handling services. Uniqa offers international insurance policies covering risks relating to motor accidents and medical expenses occurring outside Romania. Uniqa entered into partnerships with 26 companies having registered offices outside Romania, these companies settle claims for Uniqa’s customers in the country in which the accident occurs.

The partner companies invoiced Uniqa for the claims handling and complaint resolution services delivered, but Uniqa did not declare VAT under the reverse charge regime in Romania on the grounds that the place of supply for those services was the place of establishment of the supplier of the services. The Romanian tax authorities took the view that the claims handling services came within the scope of ‘services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services, as well as data processing and the provision of information’, and as a result of the relevant place of supply rules at the time, 2007-2009, the place of supply was Romania and VAT should have been accounted for by Uniqa under the reverse charge mechanism.

The CJEU considered whether claims handling services can fall within any of the classifications contended by the Romanian tax authorities. The CJEU first considered ‘engineers’ and confirmed that whilst assessment of damage resulting from a road traffic accident may be carried out by an engineer, insurance claims handling clearly does not come within the scope of services carried out as part of the engineer profession.

The CJEU then considered the services of ‘lawyers’ and confirmed that these concern the representation or defence of the interests of a person or to ensure that a claim of legal nature succeeds, and supplies of claims handling made by the partner companies do not fall within the concept of services of lawyers.

The claims handling services did not fall within consultancy services because, unlike consultancy, claims handling involves the exercise of decision-making powers as regards to compensation or refusal to grant compensation, which amount to more than merely consultancy services. The CJEU also confirmed that claims handling was distinct from the above professions with different aims and therefore it cannot be classified as ‘similar services’ either. Finally, the CJEU concluded that claims handling cannot be similar to data processing services or be treated as equivalent to the provision of information.

As a result of the above considerations, the CJEU concluded that claim settlement services provided by the partner companies to Uniqa did not fall within the reverse charge regime in Romania.

Constable comment: This case concerned place of supply rules applicable in 2007-2009 and these have since changed. However, this case has provided a very helpful summary of the classification of services which remain relevant for UK and EU cross border supplies.

FTT

3. Car Safety testing

This case concerns car safety tests carried out by The Towards Zero Foundation (TZF) and whether these represented a non-business activity.

TZF is a charity with the objective of achieving zero road traffic fatalities through the operation of New Car Assessment Programmes (NCAPs). In each jurisdiction where an NCAP is established TZF anonymously purchases and crash tests individual models of cars manufactured in that jurisdiction. TZF will then publicise the results. The results often encourage the car manufacturers to improve the safety features of their vehicles and pay for further testing by TZF. The initial anonymous purchase and testing of vehicle is funded by TZF. The majority of costs incurred by TZF are non-UK costs but as they are established and operated from the UK it incurs UK VAT on overhead running costs, particularly in relation to marketing and consultancy costs.

HMRC argued that non-manufacturer funded testing are provided for free, therefore these tests cannot represent a supply for consideration and are therefore not supplies capable of representing a business activity applying the Wakefield test. As TZF is engaged in both business and non-business activities, HMRC stated that the recovery of VAT incurred on overheads is required to be restricted.

TZF contended that it is engaged exclusively in business activities. The testing of vehicles using its own resources represents a necessary investment for the establishment of that business activity with the car manufacturer and there is a direct link between the self-funded tests and the manufacturer funded testing such that there is a single business activity and, as a result, all input VAT incurred by TZF is recoverable.

The Tribunal confirmed there is no dispute that no consideration is received for the self-funded testing; however, the dispute cannot be determined by reference to the Wakefield analysis because, in this case, the critical question was whether the free testing represents an independent activity. The Tribunal concluded that it was clear from the evidence provided that a car manufacturer would not proactively seek to have vehicles tested without an initial unfavourable assessment that is provided by TZF via the self-funded testing. The Tribunal held that the self-funded testing represents a necessary precursor to making taxable supplies and therefore TZF is not engaged in any separate non-business activities. In this regard, the position is materially indistinguishable from that in Sveda. As a result of this conclusion, TZF can recover all input VAT incurred on its overheads.

Constable comment: This case highlights the complexities of classifying business and non-business activities and the inconsistencies in HMRC’s new approach in determining what is a business or a non-business activity by a charity. In this case HMRC argued that as no consideration was received, the free testing cannot be a business supply for VAT purposes. However, this appears to contradict HMRC’s position in its recent updated guidance. The Tribunal ruled against HMRC on the grounds that the free testing is not a distinct supply from the manufacturer funded testing which is a fully taxable supply. The initial investment has an underlying objective which forms the foundation from which to make taxable business supplies of testing.

4. VAT on recharges of merchant acquirer costs

This case concerned SilverDoor, a company acting as a disclosed agent between accommodation providers and clients, who are usually businesses seeking short term accommodation for employees on temporary assignments.

When a booking is made, the clients can either use their SilverDoor account to make payments for the accommodation or pay via bank transfer or corporate credit card. When a corporate credit card is used SilverDoor requires the client to pay an additional fee of 2.95% of the accommodation charge. SilverDoor believed this payment to be a disbursement and outside the scope of VAT, however HMRC took the view that this fee cannot be a disbursement as the merchant acquirer was not paid on behalf of the client, instead HMRC contended the fees are standard rated taxable supplies of reservation services.

SilverDoor argued that it charged the card handling fee for providing the facility of being able to pay by corporate card and this is a separate and distinct supply from the supply of accommodation, which is made by the accommodation provider and that this supply was a financial service within the VAT exemption.

After reviewing the terms and conditions of the agreements, the Tribunal took the view that the 2.95% fee charged by SilverDoor is a reservation fee and therefore subject to VAT at the standard rate. Although the appeal was dismissed on this basis the Tribunal went on to consider the VAT exemption for financial services.

The Tribunal found that SilverDoor’s actions were too remote to have an effect of transferring funds for the purposes of VAT exemption, its actions at best are to start a series of actions in which other parties at some point effect the transferring of funds.

SilverDoor contended that account holders can themselves make debits and credits by making online payments, rather than the regulated financial institution at which the account is held. The Tribunal rejected this argument by confirming that it was the bank that issued the card that authorised the withdrawal, debited corresponding amounts to the user of the machine’s bank account and transferred the ownership of the money directly to that user. It is not the account holder which is making the debits and credits in their bank account when the individual withdraws money from an ATM, it is the bank. The same applies when a person makes an online payment.

SilverDoor also made the argument that it supplies financial intermediary services because it brings together clients who wish to pay by credit card and the merchant acquirers, with a view to securing payment by this means for the accommodation. The Tribunal found that SilverDoor does not ‘bring together’ parties in any context required for the exemption to apply. SilverDoor did not do anything other than issue a payment request containing a website link which took the client to the merchant acquirer webpage in order to make payment.

Constable Comment: This case highlights the potential risk of not correctly identifying a VAT supply. The Tribunal confirmed that the supply, which SilverDoor believed to be an outside of scope disbursement, is a taxable supply of a reservation fee. The case also highlights the strict requirements to fall within the financial services exemption. Ensuring the correct VAT liability of all supplies made can avoid potential assessments and penalties by HMRC and this can often involve complex VAT rules.

Constable VAT Focus 14 July 2022

14th July 2022

HMRC NEWS

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

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

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

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

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

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

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

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

CASE REVIEW

CJEU

Late input VAT recovery

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

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

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

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

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

Reverse charge: sale of timber

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

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

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

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

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

Option to tax – Fiscal Neutrality

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

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

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

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

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

Upper Tribunal

Hire of pitch or league matches?

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

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

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

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

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

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

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

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

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

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

FTT

Demolition of an existing building

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

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

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

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

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

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

Exports: Denial of zero rating

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

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

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

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

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

Constable VAT Focus 30 June 2022

30th June 2022

HMRC NEWS

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

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

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

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

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

CONSTABLE NEWS

VAT Partial Exemption: Annual Adjustment

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

VAT & Charities Newsletter

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

CASE REVIEW

CJEU

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

1. Place of supply of services and abuse of rights

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

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

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

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

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

UTT

2. Chelmsford City Council: sports and leisure facilities

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

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

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

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

(iii) This outcome would not significantly distort competition.

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

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

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

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

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

Constable VAT & Charities Newsletter June 2022

23rd June 2022

INTRODUCTION

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

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

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

HMRC NEWS

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

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

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

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

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

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

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

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

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

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

HMRC guidance can be viewed here.

CASE REVIEW

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

COURT OF APPEAL

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

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

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

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

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

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

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

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

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

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

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

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

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

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

UPPER TRIBUNAL

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

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

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

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

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

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

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

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

3. Supplies of daycare services

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

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

The position can be briefly summarised as follows:

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

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

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

This is interesting because:

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

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

FIRST TIER TRIBUNAL

4. Accommodation for homeless people

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

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

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

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

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

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

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

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

The technical points to be considered were as follows:

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

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

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

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

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

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

5. Cancellation of VAT Registration

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

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

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

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

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

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

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

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

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

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

Constable VAT Focus 16 June 2022

16th June 2022

HMRC NEWS

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

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

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

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

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

The 2 stage tests are:

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

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

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

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

CASE REVIEW

FTT

1. Transfer of going concern: Property

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

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

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

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

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

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

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

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

2. Input VAT: Business expense or private use

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

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

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

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

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

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

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