HMRC NEWS

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

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

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

CASE REVIEW

FTT

1. Alternative providers of higher education

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

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

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

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

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

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

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

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

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

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

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

2. Exemption: Fundraising events

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

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

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

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

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

3. Appeals: Hardship application

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

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

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

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

CJEU

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

4. Letting of permanently installed equipment

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

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

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

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

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

5. VAT on disposal of obsolete stock

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

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

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

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

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

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

HMRC NEWS

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

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

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

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme. The list has been updated with 10 additions.

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

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

CASE REVIEW

Upper Tribunal

1. Place of supply of football agent services

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

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

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

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

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

2. Appeal out of time

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

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

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

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

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

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

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

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

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

FTT

3. Are turmeric shots a beverage?

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

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

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

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

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

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

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

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

4. DIY Housebuilders scheme

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

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

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

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

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

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

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

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

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

CJEU

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

5. Recharging points for electric vehicles

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

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

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

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

Does a single complex supply consisting of:

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

constitute a supply of goods or a supply of services?

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

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

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

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

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

HMRC NEWS

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

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

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

• Pay no Customs Duty or VAT on blood grouping, tissue typing and therapeutic substances
• Pay no import duty or VAT on donated medical equipment
• Pay no import duties or VAT on importing goods for testing
• Pay no import duties or VAT on inherited goods
• Pay no import duty and VAT when importing decorations and awards
• Pay no import duty and VAT on importing commercial samples
• Pay no Customs Duty or VAT on goods for disabled people
• Pay less Customs Duty and VAT if you are importing capital goods

CASE REVIEW

FTT

1. Validity of option to tax

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

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

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

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

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

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

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

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

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

HMRC NEWS

Spring Finance Bill

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

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

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

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

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

CONSTABLE VAT NEWS

50 years of VAT

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

CASE REVIEW

Supreme Court

1. Disapplication of the option to tax

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

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

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

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

Upper Tribunal

2. Recovery of residual input VAT

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

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

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

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

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

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

CJEU

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

3. Whether municipalities carrying on economic activity

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

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

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

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

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

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

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

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

HMRC NEWS

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

Updates on VAT appeals
The above link can be used to check the list of VAT appeals that HMRC has lost, or partly lost, that could have implications for other businesses. The list of VAT appeals that HMRC has lost and that may have implications for other businesses has been updated with 2 amendments.

CONSTABLE NEWS

Constable VAT Budget Focus 2023

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

CASE REVIEW

Upper Tribunal

1. Deliberate or careless error

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

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

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

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

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

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

FTT

2. Admission to attraction: Driving experiences

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

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

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

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

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

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

3. Retrospective Bad Debt Relief claim

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

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

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

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

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

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

CJEU

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

4. VAT liability of car parts sold by insurer

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

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

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

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

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

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

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

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

HMRC NEWS

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

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

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

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

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

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

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

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

CASE REVIEW

Upper Tribunal

1. Supplies between VAT group members

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

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

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

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

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

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

FTT

2. Education or obtaining income

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

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

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

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

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

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

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

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

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

CJEU

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

3. Time limits for submission of evidence

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

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

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

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

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

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

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

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

4. VAT on online intermediary supplies

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

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

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

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

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

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

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

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

5. Construction of building by an association

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

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

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

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

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

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

HMRC NEWS

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

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

CASE REVIEW

Upper Tribunal

1. VAT refund on healthcare facilities

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

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

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

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

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

FTT

2. DIY Builders Scheme: Dwelling

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

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

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

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

3. Overpayment of VAT on sale of domestic fuel

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

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

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

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

4. VAT zero rating: Evidence of export

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

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

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

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

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

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

5. Default Surcharge: Reasonable excuse

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

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

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

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

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

HMRC NEWS

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.

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.

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.

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

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

1. 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.

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

HMRC NEWS

Buildings and construction (VAT Notice 708)
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

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

1. 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.

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

HMRC NEWS

VAT 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

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

1. 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.

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

HMRC NEWS

Revenue and Customs Brief 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

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

1. 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.

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.