HMRC NEWS

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

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

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

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

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

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

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

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

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

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

CASE REVIEW

Court of Appeal

1. Extra Statutory Concession

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

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

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

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

In summary:

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

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

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

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

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

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

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

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

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

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

HMRC NEWS

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

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

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

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

CASE REVIEW

Upper-tier Tax Tribunal

1. Taxable supplies and input tax recovery

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

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

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

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

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

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

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

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

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

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

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

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

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

FTT

2. Car boot sale pitch

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

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

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

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

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

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

3. Evidence required for exports

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

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

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

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

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

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

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

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

HMRC NEWS

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

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

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

CASE REVIEW

FTT

1. Accommodation for homeless people

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

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

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

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

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

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

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

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

The technical points to be considered were as follows:

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

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

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

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

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

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

2. Exporting a vehicle

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

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

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

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

3. Refusal to deduct input tax

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

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

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

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

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

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

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

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

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

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

HMRC NEWS

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

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

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

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

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

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

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

CASE REVIEW

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

CJEU

1. Right to deduct input tax

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

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

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

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

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

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

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

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

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

First Tier Tribunal

2. VAT and aircrafts

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

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

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

The “Crowsnest project” includes:

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

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

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

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

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

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

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

3. Spiritual welfare services VAT exemption

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

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

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

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

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

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

Constable News

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

HMRC News

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

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

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

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

CASE REVIEW

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

CJEU

1. Reduction of taxable amount

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

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

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

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

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

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

First Tier Tribunal

2. Flat Rate Scheme operation

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

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

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

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

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

3. Comply with tax obligations

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

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

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

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

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

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

Constable News

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

HMRC News

Food products (VAT Notice 701/14)
This notice has been updated to reflect the fact that the temporary reduced rate of VAT changed from 5% to 12.5% from 1 October 2021. This reduced rating will be in place until 31 March 2022. The supplies to which the temporary reduced rates will apply remain the same.

Pay the VAT due on your One Stop Shop VAT Return
HMRC has updated its guidance on reporting and paying VAT on distance sales of goods from Northern Ireland to cover businesses whose turnover is below the UK VAT registration threshold.

Revenue and Customs Brief 14 (2021): Changes to the VAT treatment of importations of dental prostheses into the United Kingdom
The government announced in the Autumn Budget 2021 that the import of dental prostheses by registered dentists or registered dental care professionals would be exempt from VAT, applied retrospectively to 1^st January 2021. HMRC has now published a new VAT brief explaining the changes, how businesses can claim repayment of any overpaid import VAT paid after 1^st January 2021 and how businesses can declare the correct VAT value for imports of dental prostheses.

VAT (Distance Selling and Miscellaneous Amendments) Regulations 2021 and VAT (Distance Selling and Miscellaneous Amendments No.2) Regulations 2021
The distance selling provisions amended by these regulations were enacted by FA 2021 to implement the e-commerce package in relation to VAT. This included the introduction of the OSS scheme and the IOSS scheme. The schemes are designed to simplify VAT accounting for the sale of goods direct to consumers by suppliers based in the EU and by suppliers who import goods into the EU for sale. These regulations come into force on 1^st December 2021.

CASE REVIEW

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

CJEU

1. Payments by instalments

This case concerned the German tax authorities and X-Beteiligungsgesellschaft mbH (X-B) regarding the sale of a plot of land by X-B to T-GmbH. T-GmbH entered a fee arrangement with X-B on 7 November 2012. The sale of the land was for EUR 1,000,000 plus VAT. The fee arrangement stated that the fee was payable by instalments at yearly intervals for 5 years, and each amount was EUR 200,000 plus VAT. An invoice was issued at each interval and the VAT was paid corresponding to the amount received at each interval. The tax office took the view that the supply took place in 2012 and X-B should have paid the VAT on the entire amount of EUR 1,000,000 in 2012.

Article 64(1) of Directive 2006/112 provides that where a supply gives rise to successive payments, that supply of goods or services shall be regarded as being completed on expiry of the periods to which such payments relate. The question referred to the CJEU was whether Article 64(1) can be interpreted to include transactions arising on the basis of an agreement to pay by instalments.

In response to this question, the CJEU stated that VAT is to become chargeable when the goods or services are supplied, that is when the transaction takes place, regardless of whether consideration was received or not, therefore accordingly VAT is due to the authorities when the supply was made, even if the full consideration was not received for that transaction. The CJEU concluded that Article 64(1) must be interpreted as meaning that a supply arising on a single occasion, remunerated by way of instalment payments, does not fall within the scope of that provision. This means that for a single land transaction, VAT is due on the entire amount when the supply takes place not when the instalment payments are made, therefore VAT should have been accounted for on the EUR 1,000,000 in 2012.

As an alternative, given that the conclusion to this question was not favourable, another question referred to the CJEU regarding the transaction was whether, in a case of payment by instalments, the fact that an instalment of the consideration has not been paid before its terms must be regarded as non-payment of the price and as a result would lead to a reduction of the taxable amount.

The CJEU have stated that such a payment plan does not change the amount of consideration that the taxable person is supposed to receive, the taxable amount remains unchanged. If there is a non-payment without rescission or annulment of the contract, the purchaser of goods or services remains liable to pay the agreed price, and therefore the same amount of VAT remains due. In conclusion the CJEU stated that the above situation cannot lead to a reduction of the taxable amount.

Constable Comment: This case provides interesting analysis of the distinction between a continuous supply (with separate tax points arising) and payment by instalments (where a single tax point arises at the time of the initial supply).

Upper Tribunal

2. VAT Exemption: Supply of consultants and GP specialists

Mainpay Limited (Mainpay) appealed against the decision of the First Tier Tribunal on 29th April 2020. The question at issue in the appeal is whether Mainpay is supplying medical care within the meaning of Group 7 schedule 9 VATA 1994, so that its supplies are exempt from VAT or whether it is making a standard rated supply of staff.

Mainpay (an umbrella company) supplied medical consultants and specialist general practitioners to an intermediary company called accident and emergency Limited (A&E). A&E then supplied the consultants and GP specialists to various hospital clients, generally NHS trusts. The supplies were made in the period 1st November 2010 to 31st January 2014. The FTT held that Mainpay’s supplies were not VAT exempt medical services, but were standard rated supplies of staff.

Mainpay employed various doctors. 80% of the doctors which it placed indirectly with hospitals were consultants and the remaining 20% were GP specialists. Mainpay assumed various obligations to its medical practitioners such as pensions and sick pay and accounted for PAYE and National Insurance contributions. Consultants were employed on fixed term assignments which could be renewed.

The FTT concluded that it was not satisfied that Mainpay did arrange professional indemnity insurance for consultants. The absence of any evidence that Mainpay itself was insured against liability for professional negligence suggested that it was supplying staff and not medical care.

The Upper Tribunal concluded that the FTT considered all relevant evidence and it was correct to reject Mainpay’s argument that control over clinical decision making was the key test to distinguish between a supply of staff or medical care. That test is impractical to apply in the context of highly skilled and specialised workers. Taking into account all the facts and circumstances surrounding the supply, paying particular attention to the contractual provisions, the FTT applied the correct analysis and did not take into account irrelevant considerations.

The appeal was dismissed.

Constable Comment: The distinction between a supply of staff and a supply of medical services is an important one as it impacts on whether VAT is added to a supply. Where the supply is made to a customer that is unable to recover the VAT charged, such as a GP surgery or hospital, this can increase the cost to the customer by 20%.  If there is to be a successful argument for exemption of the supply of the medical practitioner, contracts and underlying facts would have to support the fact that the supplier is itself making supplies of medical services.

First Tier Tribunal

3. Consideration for grant of lease

This case concerned Polo Farm Sports Club (PFSC). PFSC constructed an indoor sports centre and received a capital contribution of £2 million towards the works from Canterbury Christ Church University (CCCU). PFSC also contributed £2 million to carry out the development. PFSC retained the freehold of the land and charges £250,000 per annum to CCCU as rent and service charge for use of the building. The dispute concerned whether the £2 million capital contribution from CCCU was consideration for the grant of a leasehold interest in the development in which case VAT is due at the standard rate on that consideration.

HMRC’s argument was that the payment of £2 million represented a consideration for the grant of the leasehold interest and is therefore subject to VAT on the basis that there is a direct link between the agreement to pay the monies and the grant of the lease

The Tribunal and HMRC had some difficulty in understanding the appellant’s arguments as on the one hand he argued that the word premium is simply a label and should be disregarded but on the other hand he argued that the term was important and referred to case law to advance an argument that the word premium has a technical meaning which the Tribunal should apply.

Following the appellant’s argument, the Tribunal and HMRC stated that it appears that PFSC made the following points:

• CCCU did not account for the £2 million as a premium for the lease, but for the construction of the building, and so it cannot be for the lease.

• The appellant’s accounts supported by the appellant’s calculations show that the rental was sufficient to cover the costs associated with the building, so the £2 million cannot be a premium (in a technical sense) for the lease or use of the facilities, as essentially CCCU would then be overpaying.

The Tribunal reviewed the evidence presented to them and found that the Heads of Terms stated that CCCU is to pay £2 million as a premium for the grant of the CCCU lease which is to be used for the construction of the building. Furthermore, the Tribunal  found that PFSC’s VAT consultant advised them to seek HMRC confirmation as to whether or not the £2 million payment should be taxable. PFSC did not act on the recommendation, it did not clarify the position with HMRC. Also CCCU was advised that the £2 million should be described as a premium for Stamp Duty Land Tax purposes.

In conclusion the Tribunal stated that the £2 million and the grant of the lease are inextricably linked on an economic and commercial basis, it found that:

• There is a legal relationship between the parties
• There is a reciprocal performance
• There is a direct link between the lease and the consideration
• The consideration, being the £2 million, was for the grant of the lease.

For all the reasons set out above the appeal was dismissed and the Tribunal held that VAT is due on the £2 million as it is consideration for the grant of a lease on a building on which an option to tax had been notified.

Constable comment: This case highlights the importance of ensuring the correct VAT treatment of any complex land and building transaction from the outset in order to avoid VAT disputes and potential penalties. Constable VAT is happy to assist with any relevant queries.

4. Sporting VAT exemption: True beneficiaries

This case concerned Cambridge University Boathouse Limited (CUBL) which constructed a boathouse. CUBL licenses the use of the boathouse to three clubs, each of which is a limited company by guarantee and the clubs provide training to individual athletes taking part in certain rowing competitions. CUBL incurred VAT of £575,000 in relation to constructing the boathouse.

HMRC refused repayment of the VAT incurred arguing that the supplies of the boathouse were subject to the sporting exemption and as a result associated input tax was not recoverable as it was directly attributable to an exempt supply. The legislation provides that the supply by an eligible body to an individual of services closely linked with and essential to sport in which the individual is taking part is exempt from VAT. CUBL appealed this decision

HMRC relied on the “Canterbury Hockey Club” case which established that a corporate body could fall into the exemption too if the true beneficiaries of the supply was the individuals. This means that if HMRC was successful in persuading the Tribunal that the true beneficiaries of the supplies were the individual rowers rather than the clubs, the supplies would be VAT exempt and associated input tax irrecoverable.

The Tribunal considered the facts of this case to determine whether the clubs or the rowers were the true beneficiaries. Firstly, HMRC argued that the rowers are the beneficiaries because they pay £150 for accessing the boathouse. CUBL responded that £150 charge is simply a fee for “putting yourself up for selection” as it was payable even by those rowers who did not make it into the final team and therefore had no actual connection with use of the boathouse, on the other hand the clubs made considerable payments to CUBL for the use of the facilities.

Also, it was the clubs that had the right of use of the boathouse not the rowers. The rowers were not permitted to enter the boathouse without an invitation or permission of the clubs and their employees. The rowers did not have the benefit of using the boathouse, it was the clubs who were enjoying the right of use and who trained the individuals. Similarly, it was the clubs that were allowed to make use of the facilities for storage of club equipment and boats. Individual rowers were not permitted to store personal equipment in the boathouse.

Taking the above points into account, the Tribunal concluded that the true beneficiaries of the supply of the boathouse were the clubs, not the rowers. For that reason, the VAT exemption does not apply because the supply was made to corporate bodies rather than individuals.

Constable Comment: This case considers the sporting VAT exemption and how to determine who the true beneficiaries are. This can be important as a business may benefit from VAT exemption even if it is a corporate body, if the supplies are ultimately to individuals. We recommend seeking advice in relation to supplies where it is uncertain whether this particular VAT exemption will apply or not.

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 on movements of goods between Northern Ireland and the EU
HMRC has recently updated its guidance with additional information in section 6 to reflect the changes to the VAT treatment of distance selling between Northern Ireland and the EU, including the One Stop Shop (OSS). The OSS enables a business to submit a single quarterly VAT return for all their sales to the EU through an online portal. This avoids businesses having to register for VAT in each member state in which they make supplies.

If you or your business, make supplies to customers in EU member states, we recommend you seek advice to ensure the correct and most efficient VAT treatment, Constable VAT will be happy to assist with any related queries.

Accounting for import VAT on the VAT return
HMRC has identified a problem where imports are not being allocated to the correct monthly VAT Postponed VAT Accounting statements and they are seeking a solution to the problem. In the meantime, their recently updated guidance, states that businesses have the following two options:

• They can use the figures on their import VAT statement to complete their VAT return
• If they can identify the affected entries, they can reallocate them to the correct monthly statement and use these figures to complete their VAT return.

Care should be taken to avoid duplicate entries.

HMRC training

HMRC has been publicising the following training designed to raise awareness of upcoming customs webinars and CDS training. HMRC’s information on this training is reproduced below and may be helpful to readers newly involved in the process of import declarations.

HMRC Webinars – How to make a delayed import supplementary declaration using CHIEF

HMRC has recorded a webinar on making supplementary declarations that has been uploaded to YouTube at the following link: How to make a delayed import supplementary declaration using CHIEF – YouTube

HMRC – Taxpayer Training for the new Customs Declaration Service (CDS) system for importers/exporters

As you will no doubt be aware HMRC’s new Customs Declaration Service (CDS) is live and we require businesses to migrate away from CHIEF and to the new service as soon as possible. However, HMRC fully recognises that the move to the new service brings with new and a different set of declaration completion rules as dictated by the Union Customs Code (UCC) which came into effect in 2016. HMRC are also aware that businesses are finding this challenging.

The Training Offer – With that in mind we have developed a comprehensive online training-package which we would like to offer you to help with your readiness to migrate. It consists of a number of modules designed to explain how the new Customs Tariff should be used to ensure you have access to the information you need to correctly complete your declaration.

Course detail – The modules (listed in the attached document) will provide practical steps to allow you to determine the correct customs procedure codes to be used as well as the specific data elements, additional information codes and document codes required in specific scenarios. The course will also provide step by step declaration completion examples based on the guidance and is supported by manual workbooks and content to support the learning. All sessions will also be recorded for future reference.

Course length and attendee requirements – The duration of the full course will be five full days, spread over the course of five weeks; attendees must commit to attending all five training sessions. The training is in a ‘train-the-trainer’ format, which will allow you to send your own trainers, compliance officers, or managers and subsequently cascade the learning within your business. As such, attendees require a base level of customs knowledge.

Course dates – Sessions run online from 9-5, will begin on 12^th October, and will take place every Tuesday for a further four weeks. We reserve the right to limit or refuse places.

How to apply – We ask that you or your members express interest by forwarding the below information to jccc.secretariat@hmrc.gov.uk  by 17^th September so that we can review uptake and reply to those that have registered interest with further details and joining instructions.

Autumn Budget 2021

The Chancellor has recently announced that the Autumn Budget will be on 27 October 2021. The government spending plans are to be set out at the Spending Review along with the Autumn Budget.

CONSTABLE NEWS

Option To Tax (OTT)

Constable VAT has recently been in contact with HMRC’s option to tax team and they have stated that they are currently working towards a target of 120 working days to process an OTT notification. Furthermore, individual HMRC officers have advised that they have been told of delays of up to 6 months.  This is a significant amount of time, something that you or your business should take into consideration when notifying an option to tax.  In particular it is important to retain evidence of the submission of the option to show prospective tenants and buyers of a property, in the absence of a formal acknowledgment from HMRC. Constable VAT has experience with dealing with OTT applications and would be happy to assist in cases of difficulty.

CASE REVIEW

Upper Tribunal

1. Disallowing Input tax

Babylon initially appealed to the FTT against HMRC’s decision to disallow 2 input tax claims totalling £19,760.50 and reduce Babylon’s input VAT claim in the relevant period to nil. The basis for denying the input tax claim was that HMRC did not consider that Babylon carried on a business for VAT purposes in that period. Babylon claimed that it was carrying on a business, comprising the activity of selling hay to the co-owner and director of Babylon (Mr McLaughlin). The claims for input tax in the period arose mainly from costs incurred in building a new barn to replace outbuildings which it had sold and which was to be used to store equipment used in carrying out haymaking activities. Babylon also challenged HMRC’s decision to deregister Babylon for VAT on the basis that it business.

The FTT concluded that the appellant’s activities during the relevant period were confined to haymaking and the sale of buildings and these activities had not been conducted on a basis that followed sound and recognised business principles or on a basis that was predominantly concerned with the making of taxable supplies for consideration. Therefore, the appellant was not operating as a business during the relevant period. Babylon appealed these findings and although the UT set aside some of the FTT findings on the basis that the FTT had erred in its approach, it agreed that Babylon was not carrying on an economic activity during the relevant period. This conclusion was reached for a number of reasons:

(1) Babylon’s activity was not being conducted in a regular manner and on sound and recognised principles. There was no evidence of the commercial basis on which the appellant was able to carry out the cutting of the hay or any other activity on Mr and Mrs McLaughlin’s land.

(2) there was no direct link between Babylon’s activities and the income which it received, Mr McLaughin was Babylon’s only customer. There was also no evidence that it made any efforts to obtain other customers. Babylon’s income was not determined by the value of Babylon’s supplies, or by reference to Babylon’s business costs.

(3) the profitability of the appellant’s hay making activities were entirely dependent on Mr McLaughlin’s subjective judgement as to where costs and revenue should be allocated between his various activities.

(4) Babylon raised no invoices for payment and no payment for the hay was made for a number of years, there was no evidence that Babylon maintained any insurance in respect of its activities and Babylon had only one customer, with its income during the relevant period being only £440 per annum. This lead to the conclusion that Babylon’s activities were not carried out for the purposes of obtaining income.

In conclusion, the UT agreed with the FTT decision that Babylon was not carrying on an economic activity during the relevant period and the appeal was dismissed.

First Tier Tribunal

2. VAT exempt or zero rate: reconstruction of a residential listed building.

This case concerns Richmond Hills Developments (Jersey) LTD, (RHD). RHD has purchased a listed building called The Royal Star and Garter Home (RSGH) in 2013 with a view to converting the building into 86 residential units (flats) which would be sold. The issue in the appeal was whether the onward supply of the flats was zero rated or VAT exempt. If zero rated, RHD would be able to recover all the input tax incurred on the conversion works, however if the input VAT related to a VAT exempt supply, it could not.

RSGH was originally constructed in 1920 and was used as nursing facilities for servicemen returning from war and was sold to RHD in 2013. Prior to conversion the building consisted of five storeys on some parts and up to 9 storeys on other parts, with space for some 60 rooms on each floor. Post conversion the building consisted of 86 self-contained residential units. The works were substantial; they took over two and half years and cost £95 million plus VAT.

Schedule 8 Group 6 Item 1 of VATA 1994 allows the first grant by a person ‘substantially reconstructing’ a protected building, of a major interest in, or in any part of, the building or its site to be zero rated. It was evident in this case that the reconstruction was substantial, the issue was related to Note 4 of item 1 which states that a protected building is not to be regarded as substantially reconstructed for the purposes of zero-rating unless the reconstructed building incorporated no more of the original building than the external walls, together other external features of architectural or historic interest.

During the reconstruction, as part of the planning consents, RHD left the walls and roofs intact but also retained some internal features including a chapel, a marble staircase, majority of reinforced concrete floor slabs and the chimney stacks. HMRC’s argument was that the retention of those parts of the existing building deprived RHD of the benefit of zero rating under Note 4.

In response to HMRC, RHD argued that the provisions of Note 4 permit the retention of those internal features which forms part of the external walls, or are structurally necessary to provide them. They stated that “external walls “cannot just mean the external skin of the building because there is an interior element to any wall. Something which is a component of an external wall, and in particular is necessary for its stability, is part of the wall.

The Tribunal stated that they agree with RHD on that “external walls” does not mean only the outside skin of the wall. They accept that foundations of a wall and a buttress are properly regarded as part of a wall, however floor slabs are different because they t also provides floors to walk and place objects on. For that reason, the Tribunal stated the retained floor slabs were not part of walls. They reached the same conclusion on all items retained meaning that the building is not substantially reconstructed.

In case the Tribunal was wrong to conclude that the parts retained were not part of the of the external wall or features it considered whether the other retained features, such as the staircase, could be ignored as de minimis in determining if Note 4 is satisfied. RHD stated that in the context of the extraordinary scale of the works the retained items were de minims and should be ignored as they are only a handful of items, each of which was only a small fraction of the building.

The Tribunal responded that even when considering the scale of the whole building, the retention of the original marble lined grand entrance and staircase and the passage to the formal garden were three significant features of the building both before and after the construction and on that ground, it found that the de minimis exemption would not apply.

For those reasons the Tribunal concluded that on domestic construction of Note 4 the reconstruction works were not a substantial reconstruction, therefore the onward sale of the flats was not zero rated but exempt, meaning that input tax incurred on the conversion was not recoverable.

Constable Comment: This case highlights the fact that the legislation around buildings and construction can be quite complex and not following the guidelines could result in additional, unexpected, VAT liabilities. Constable VAT has experience in dealing with land and property transactions and will be able to assist with your queries.

3. VAT Exemption – philosophical, philanthropic or civic nature

This case involved United Grand Lodge of England (UGLE), the governing body for the majority of Freemasons in England and Wales. UGLE charges VAT on their membership fees to Freemasons, but made two claims for the repayment of £2.38 million VAT accounted for in VAT periods 06/10 – 03/18 on the basis that the membership fees were exempt because its main aims were of a philosophical, philanthropic or civic nature.

HRMC rejected the claims on the grounds that the supplies were properly taxable, UGLE has appealed to FTT against HMRC’s refusal to pay the amount claimed. Although HMRC did accept that UGLE’s aims include aims of a philosophical, philanthropic or civic nature, they argued that its membership fees cannot be VAT exempt because such aims were not UGLE’s sole main aim and even if they were the aims were not in the public domain.

This was not the first time that UGLE has appealed to the FTT, in 2013 it appealed an earlier decision of HMRC that the supplies were not exempt, concerning the VAT accounted for between 1973 and 1996. In their first case the FTT dismissed the appeal on the conclusion that UGLE had a variety of different aims, some of which fell within the scope of VAT exemption but also had other aims such as social, self-improvement and promotion of Masonic ritual and ceremony which were found significant and was sufficient to cause UGLE’s membership income to fall outside exemption.

VAT legislation provides for VAT exemption for certain activities in the public interest, including those of a philosophical, philanthropic or civic nature, provided that this exemption is not likely to cause distortion of competition. In this current case the Tribunal have followed the findings in the “British Association for Shooting and Conservation Limited” case which clearly set out the criteria applied to determine whether supplies fall within the exemption. Applying these criteria the Tribunal determined that UGLE must show that:

• It is a non-profitmaking organisation;
• It makes supplies of services;
• The services are supplied to its members in their common interest, i.e. for the benefit of all the members;
• The services are supplied in return for a subscription fixed in accordance with its rules;
• It has aims of a philosophical, philanthropic or civic nature; and
• The exemption of those services is not likely to cause distortion of competition.

The Tribunal has agreed that UGLE makes a single supply of services to its members in their common interest in return for a subscription fixed in accordance with its rules and there is no dispute that it is a non-profit-making organisation and that exemption is not likely to cause distortion of competition. Therefore, the only criteria in dispute was whether UGLE has aims of a philosophical, philanthropic or civic nature.

HMRC argued that the aim of the legislation is to exempt from VAT certain activities which are in the public interest, stating that for any aim to fall within the exemption it must be one of the aims listed in the legislation as well as being in the public interest. UGLE disagreed stating that there was no additional test of public interest. The Tribunal considered the “IMI” case in which it was determined that public interest is not an additional test to be met, it merely indicates the nature of the transactions and for that reason the Tribunal rejected HMRC’s argument that UGLE must prove its aims are in the public interest.

The Tribunal then considered whether the aims of UGLE were philanthropic. It stated that an aim of benefitting a group of persons with specified characteristics such as orphans, can properly be regarded as promoting the well-being of people and society, which meets the accepted definition of philanthropy. However, the Tribunal distinguished UGLE’s supply from philanthropy on the ground that it is benefitting only those who contributed to the organisation providing the benefits, this is a form of self-insurance and it is not philanthropy. The Tribunal also stated it does not believe UGLE has a civic aim.

The Tribunal went on to consider whether UGLE’s philosophical aim was a main aim.  UGLE provided information about the nature of its activities and discussed the importance of rituals, the Tribunal accepted that the rituals are primarily intended to teach the philosophy of Freemasonry. The emphasis placed on the learning and performance of the ritual and the fact that it embodies and instils the values and principles of Freemasonry indicate that philosophy is a main aim of the organisation.

However, from the evidence provided the Tribunal also found that a central tenet of  Freemasonry is the provision of  “relief” to other Freemasons and their dependants. This relief took the form of donations to good causes unconnected with Freemasonry and supporting Freemasons and their dependants in distress. The Tribunal therefore found that the provision of “relief” was a further main aim of UGLE. On that basis the Tribunal agreed with HMRC’s argument that philosophy was not the sole main aim of UGLE therefore its membership subscriptions do not fall within VAT exemption. The appeal was therefore dismissed.

Constable Comment: This case shows the difficulty of establishing the correct VAT treatment of membership fees and in particular the application of the VAT exemption and shows the importance of seeking advice when there is any doubt. Constable VAT has the relevant experience of dealing with VAT exemptions as they apply to membership organisations and are happy to assist with any 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

Updates to DIY housebuilder claim forms
If you are a DIY housebuilder you may be able to  claim VAT back on building materials and services you have purchased to build a new dwelling or convert an existing non-residential building into a dwelling, using forms VAT431NB  or VAT431C. These forms have been updated and the latest editions are available on HMRC’s website.

Please note there are strict guidelines to claim a VAT refund and you must submit your claim within 3 months of the building work being completed. If these guidelines are not met you may not be entitled to a VAT refund. If you are planning to claim a refund please contact us and Constable VAT will be happy to advise and assist.

Opting to tax land and buildings (VAT Notice 742A)
HMRC has updated their guidance relating to situations where HMRC’s permission is required to opt to tax. Specifically, it is now stated that interim letters will no longer be issued, instead if HMRC are satisfied they will issue an acknowledgment of the option to tax and its effective date.

This follows two other changes to this Notice earlier this month; these being the end of the temporary change to the time limit for notifying an option to tax and making the temporary change to allow options to tax to be signed electronically permanent.

Apply for a Partial Exemption Special Method
If you or your business make both taxable and exempt supplies, then you must consider the partial exemption rules to determine how much input tax is recoverable. Where the standard method of calculation does not provide a fair and reasonable VAT recovery a business may apply for partial exemption special method (PESM). You can now apply for a PESM online. To apply you will need the following:

• a proposal document
• a worked example of your proposal
• your latest annual adjustment calculation
• your declaration
• any additional documents

You can find further information about making a PESM application in Appendix 2 of VAT Notice 706.

CASE REVIEW

Upper Tribunal

1. VAT Exemption: Insurance and related services

This case concerned Claims Advisory Group Limited (CAGL), a company making claims on behalf of individual customers who may have been mis-sold payment protection insurance (PPI) by financial institutions. PPI was generally offered by financial institutions and provided by insurers. The financial institutions received commissions for selling PPI from the insurers. This resulted in some institutions encouraging their customers to take out the insurance unnecessarily. CAGL would make a claim on behalf of its client on the basis that PPI had been mis-sold and, if successful, the client would receive compensation. CAGL would charge a fee for its services calculated as a percentage of the compensation received. CAGL described their main business activity as “Recovery, on behalf of customers, of overcharged fees levied by banks and other financial institutions. “

In 2019 the First Tier Tribunal (FTT) concluded that the services provided by CAGL fell outside the scope of the VAT exemption applicable to certain supplies related to insurance. As a result the commissions received were liable to VAT at the standard rate. CAGL appealed this decision on two grounds as follows:

Firstly, that the FTT erred in law in concluding from the facts that the services CAGL supplied were neither:

• Exempt from VAT on the basis that they were insurance transactions; nor
• Exempt from VAT on the basis that they were supplied by a broker, agent or intermediary and were related to insurance transactions.

CAGL argued that the supplies were VAT exempt insurance transactions because the cancellation of the original PPI policy was an integral and necessary pre-cursor to the return of the premiums paid and therefore the commercial reality and economic purpose was the cancellation of PPI and the return of the premiums paid in respect of it. CAGL stated it was an “insurance agent” in that has an agency role in operating between insurer and insured.

Secondly, CAGL also argued that it is an insurance agent and its supplies are related to insurance transactions because the supply of the service provided related to original insurance transaction as the original premium was returned and/or it was involved the termination of the PPI.

HMRC argued in response to the first point that CAGL’s economic purpose was making a compensation claim rather than that of an insurance transaction. With regards to the second ground of appeal, HMRC stated that CAGL could not be an insurance agent, because it did not perform the essential nature of that role in that it did not bring together potential clients and insurers for the purpose of providing insurance.

The Tribunal rejected the first ground of appeal and agreed with HMRC that the economic purpose and commercial reality of CAGL’s supplies was not that of an insurance transaction and also stated that there is no CJEU or domestic authority which provides that the cancellation of an insurance contract constitutes an insurance transaction and therefore it concluded that the FTT did not err in law to state that CAGL’s supplies were not insurance transactions.

The Tribunal then considered whether CAGL was an insurance agent supplying services relating to insurance transactions. The Tribunal stated that for this to be the case, CAGL must satisfy both the conditions for being an “insurance agent” as well as supplying “services related to insurance transactions”.  In reaching its decisions the Tribunal considered the CJEU case “Card Protection Plan” in which it is stated that an insurance agent is a business “whose named professional activity comprises the bringing together of insurance undertakings and persons seeking insurance.” It also referred to the “Taskatorringen” case which confirms that the essential activity of an insurance agent is to introduce or put in touch person seeking insurance and insurance companies. The Tribunal confirmed that CAGL is not an insurance agent and as a result the second ground of appeal is also rejected.

The Upper Tribunal upheld the decision of the FTT and stated it did not err in law to conclude that CAGL’s supplies fell outside the exemption of VAT. The case was dismissed.

Constable Comment: This case has highlighted the difficulty of VAT exemption regarding insurance related services, this can be a complex area of law and we always recommend seeking advice to ensure correct VAT treatment. Here at Constable VAT we have experience in the application of VAT in the insurance industry and will be happy to assist you with any 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

Option to tax: End of temporary 90 days to notify extension
HMRC has previously extended the notification period for an option to tax to 90 days, which was effective between 15 February 2020 and 31 July 2021. This extension has now ended, an option to tax must be notified to HMRC within 30 days of the decision to opt to tax being made.

Also, due to Coronavirus HMRC allowed businesses or agents to notify an option to tax with electronic signatures, this change is now permanent. Conditions for this can be found in Paragraph 7.7 of VAT Notice 742A.

If you or your business needs assistance with an option to tax or should you have any queries regarding it, please do not hesitate to contact Constable VAT, we will be happy to assist and advise on the wider implications of opting to tax land or buildings.

Appoint a tax representative if you’re distance selling into Northern Ireland
If you are distance selling into Northern Ireland you may have to appoint a UK tax representative. This has to be done using form VAT1TR. HMRC have now released the latest version of the VAT1TR Notes to help you complete the form.

Agent Update: issue 86
The VAT deferral new payment scheme is now closed. If your business is unable to pay an outstanding VAT debt HMRC suggests going to GOV.UK and searching “if you cannot pay your tax bill on time “.

If assistance is needed in making a time to pay arrangement with HMRC please contact Constable VAT.

CASE REVIEW

Court of Appeal

1. VAT exemption: Supplies of loan administration

This case concerned Target, a company supplying services to Shawbrook Bank Limited (Shawbrook). These services are loan administration services including the operation of individual loan accounts and processing payments received from borrowers. Target created a “loan account” on receipt of loan origination data from Shawbrook. Target recorded the account information on file including the initial loan advance and identified the balance of the loan, the next repayment date, and the amounts, including interest, to be applied to the next payment. Then it interacted with borrowers, in the name of Shawbrook, including taking steps to facilitate timely repayment. Target was responsible for managing these loan accounts but was not involved in the making of any loans.

Target submitted a non-statutory clearance application (NSC) to HMRC in which it stated that its services are composite supplies of payment processing, and therefore exempt from VAT.  HMRC took the view that the supplies made by Target to Shawbrook were composite supplies of the management of the loan accounts and taxable at the standard rate.

Target’s appeal to the First Tier and Upper Tier Tribunals were dismissed. Following the FTT and UT’s decisions, Target was granted permission to appeal to the Court of Appeal, on three grounds:

• The Upper Tribunal erred in law by unduly narrowing the scope of the exemption for “transactions concerning payments, transfers”
• The Upper Tribunal erred in failing to consider full scope of the exemption for “transactions concerning debts”
• The Upper Tribunal erred in law by unduly narrowing the scope of “current accounts” so as to exclude the loan accounts operated by Target from exemption.

Firstly, the Court of Appeal addressed the issue regarding the payments and transfers. Target argued that the services supplied are transactions concerning payments and transfers, and are therefore VAT exempt. In response to the first point the Court of Appeal stated that following previous CJEU cases, to qualify for this aspect of exemption there must be “execution of an order of transfer” of a sum of money by the taxpayer and the services supplied must have the “effect of transferring funds” and “entail changes in ownership”. The Court of Appeal found that as Target does not debit or credit an account directly or intervene by way of accounting entries on customers’ accounts, and its role is limited to giving instructions or orders that are executed by a different party, the services supplied by Target are not transactions concerning payments or transfer.

On the third point Target have made the argument that there is no EU law definition for “current account “but it is “running accounts” and the loan accounts created meet this definition. The Tribunal rejected Target’s submission that a current account is just simply a running account on the basis that the essential characteristic of a current account, and the functionality that distinguishes a current account from a loan account, is the customer’s ability, not only to pay in and draw out funds, but also the ability of the customer to pay third parties by drawing on funds or credit available in the account.

In dismissing the appeal, the Court of Appeal stated that given the conclusion regarding the issues discussed above it was unnecessary to deal with the exclusion of debt collection from the exemption, taking the view that resolution of another difficult question was not necessary given its findings on the other points.

Constable Comment:  This case demonstrates the complexity involved regarding VAT exemption applying to financial services, and the importance of seeking advice to ensure the correct VAT treatment regarding supplies of financial services. At Constable VAT we are happy to assist with any financial services related queries. This is a sector in which we have a number of clients and experience in liaising with HMRC.

First Tier Tribunal

2. Default Surcharge: Reasonable excuse

This case is an appeal against VAT surcharge penalties. The appellant, One Motion Logistics LTD (OML), has been VAT registered since 25 February 2014 and it entered the surcharge regime in the 08/16 VAT accounting period for making a late payment. On 22 November 2017 the appellant has received a letter from HMRC directing it to make payments on account for VAT as the appellant’s VAT liability in qualifying period exceeded £2.3m. This letter contained guidance and information around making payments on account, including advising the appellant it was no longer entitled to the seven-day extension for filing its VAT return and paying any VAT owing to HMRC. OML has filed its VAT return and paid VAT owing to HMRC late for both the 02/18 and 05/18 VAT accounting periods. There was no dispute as to when the VAT return and payment was made, nor as to the fact that they were made late. The question for the Tribunal was whether the appellant has a reasonable excuse for the defaults.

OML argued two points it believed gave it a reasonable excuse for its defaults. Firstly, the reminder and surcharge liability notice letter for the 02/18 VAT accounting period was not received by the appellant. It stated that HMRC has been sending correspondence to a wrong postcode. Letters and forms were sent to a postal code ending 7HG instead of 7HJ, which does not exist. As a result of not receiving this correspondence OML argued it was wrong to assume the seven-day extension is available, but this was a genuine mistake. Furthermore, the decision reports that there had been an inadequate handover within the appellant’s accountancy firm, which meant that the new engagement manager was also not aware that the seven-day extension is no longer available.

In addition, OML stated that the penalty was disproportionate and that this case could be distinguished from Trinity Mirror (Upper Tribunal case binding on the First Tier Tribunal) because that, or any similar cases, made no reference to what relation the penalty bore to profitability or the corporate tax liability. The appellant stated the penalty was 6-7% of its profit and 88% of its corporation tax liability, which it found disproportionate, given that the infringements were relatively minor and were honest mistakes.

HMRC argued that the incorrect postcode did not mean the correspondence had not been properly served. It has never been returned undelivered to HMRC, and other its correspondence addressed to the same postcode in the same time period has been received. Furthermore, HMRC stated that a letter received on 22 November 2017 clearly outlined that the seven-day extension no longer applied. Whilst overlooking this detail is accepted as a genuine error, it is not a reasonable excuse for the failure. With regards to the penalty being disproportionate HMRC argued that this case is not wholly exceptional. OML had failed to meet its tax obligation and had been issued with penalties in accordance with the legislation.

The Tribunal stated that following a binding decision from the case “Perrin” it held that to be a reasonable excuse, the excuse must not only be genuine, but also objectively reasonable when the circumstances and attributes of the actual taxpayer are considered.  The Tribunal commented that it was clear that the appellant and its accountant believed the seven-day extension was available, but the fact that they did not appear to pay much attention to the letter it confirmed to have received from HMRC on 22 November 2017 cannot provide OML with a reasonable excuse. To conclude the debate around the reasonable excuse, the Tribunal stated that a taxpayer acting reasonably would not be reliant on a reminder from HMRC to comply with its obligations, therefore it is concluded the appellant did not have a reasonable excuse.

With regards to proportionality of the penalty, the Tribunal stated that the fact that the penalty could be considered large in comparison to the appellant’s profit and corporation tax liability does not make this an exceptional case. Therefore, the Trinity Mirror case must be taken into consideration, in which it is made clear that the default surcharge regime is not made disproportionate by the penalty being based on the relevant VAT and for that reason the appeal is dismissed.

Constable Comment:  This case identifies the importance of administrative compliance and the difficulty of successfully promoting an argument for a reasonable excuse in relation to a default under the default surcharge regime. If an individual or business enters the surcharge regime it is important to ensure that any VAT accounting obligations are met to avoid potential penalties. If you or your business have any queries or require assistance regarding the default surcharge regime, or any other HMRC compliance issues, please do not hesitate to contact Constable VAT and we will be able to assist.

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