Author Archives: Sophie Cox

When is a DIY Housebuilder Claim”Late”?

UPDATE: HMRC has amended the rules in relation to the Scheme, effective on 5 December 2023 and new guidance has been issued, which can be viewed on HMRC’s website. The updated rules extend the time limits for making a claim in respect of buildings completed on or after 5 December 2023 and also allow for claims to be submitted online.

A special VAT Refund Scheme allows DIY housebuilders and people converting non-residential buildings into dwellings to reclaim VAT incurred on construction or conversion costs. This scheme is available when the building will be used for a non-business purpose. Constable VAT can advise on alternative options where a building is intended for business use. More information on the scheme can be found here.

This blog considers a recent trend in Tribunal cases where HMRC is refusing claims on the basis that they are “late”.

Claims must be completed and submitted within a strict time limit and this can be difficult to achieve when combined with the other challenges a self-build or conversion offers. A claim must be submitted within three months of completion of the project. However, when a building is “complete” for VAT purposes is often an issue before the Tribunals and, increasingly, HMRC is challenging claims where the building is occupied more than three months before a claim is submitted.

Case Review: When is A Building Complete?

This appeal concerned a DIY Housebuilder’s claim for a refund of VAT made by Liam Dunbar who constructed a property and submitted a claim for repayment within three months from receiving a certificate of completion. Although the claim was submitted within the three-month time limit, HMRC rejected the claim on the basis that the house had been completed more than three months before receiving the claim and that the date of the certificate should be ignored.

In June 2017, the architect confirmed that the property was complete, so Mr Dunbar contacted the HMRC helpline to ask for guidance about making a refund claim for the VAT incurred whilst developing the new property. HMRC informed Mr Dunbar that he should wait until he had a formal certificate of completion and that the claim must be made within three months of that date. Following the receipt of a certificate of completion on 19 February 2018, Mr Dunbar sent his claim to HMRC on 8 May 2018 and it was received by HMRC on 15 May 2018; the claim was within the three-month time period after receiving the certificate of completion.

However, HMRC denied the claim on the grounds that the building had been complete for more than three months and argued that “completion”, for the purposes of the DIY Housebuilder Scheme, needs to be considered on a case-by-case basis. It was asserted that electricity was connected on 26 March 2017 and that this was the date of practical completion. In support of this, HMRC submitted that Mr Dunbar moved into the property in March 2017.

The Tribunal considered that the question which needed to be answered was “what is meant by the phrase “the completion of the building” in regulation 201(a) VATR”. It was stressed that it could not be made clearer by the regulations that the certificate of completion is the primary evidence of completion needed to support a claim to a refund. Regulation 201(b) requires the taxpayer to furnish HMRC with a “certificate of completion obtained from a Local Authority or such other documentary evidence of completion of the building as is satisfactory to the Commissioners”.

The conclusion of the Tribunal was that, for the purposes of a VAT DIY Housebuilder refund claim, the completion of a building takes place when a certificate of completion is issued or, if there is no certificate issued, on such other date as may be evidenced by documents produced to HMRC by the taxpayer. The appeal was allowed and the refund was paid to Mr Dunbar.

The Tribunal commented in this case that if, as HMRC contend, the date of completion depends on all the facts of the case, it would be almost impossible for the taxpayer to be sure when completion had taken place. Although in other areas of VAT law the date of completion may be given a different meaning, in the context of the DIY Housebuilder’s Scheme, this decision states that the date of the certificate is the date of completion. Unfortunately, this is only a First Tier Tribunal decision and does not set a wider precedent.

This appeal also considers the definition of “completion” for the purposes of the DIY Housebuilder Scheme. In 2007, Mr Farquharson obtained planning permission to construct his own home. Mr Farquharson moved into a rented property whilst the work was carried out to construct his new home. However, at a later date, he moved into the garage of his new home which had been converted into a flat.

For several years, works continued on the property as and when funds would allow until May 2012 when Mr Farquharson was made redundant. After some years of being self-employed, it was necessary for him to sell the property before it was completed in order to raise funds. The property was marketed as incomplete, as an opportunity for someone to put their stamp on a partially complete building.

Mr Farquharson’s solicitors advised him that, in order to sell the property, a certificate of completion would be required. To this end, he obtained such a certificate on 26 May 2017. On 7 August 2017, a date within the three-month time limit, Mr Farquharson submitted a claim for the refund of input VAT incurred on the construction of the property. Despite this, HMRC rejected the claim on the grounds that the claim which was submitted was outside the three-month time period and referred him to their internal guidance, VCONST02530.

Mr Farquharson appealed against this decision on the grounds that he had complied with every known requirement; provided a certificate of completion, applied within three months and only made one claim. He noted that there is no reference to VATCONST02530 on either the claim form or the accompanying notes and that it does not appear on google unless you specifically search for it as “VCONST02530” or are familiar with, and are good at navigating, HMRC’s internal guidance. He asserted that it is unreasonable to expect a layperson to be aware of this document, and in any light, he had complied with the conditions in the Regulation.

HMRC argued that the building was completed in December 2008, when Mr Farquharson first occupied the garage.

The Tribunal considered the definition of “completion” for the purposes of the DIY Scheme and concluded that “…the stipulation could not be clearer; it is either by way of ‘a certificate of completion obtained from a local authority’ or by alternative documentation as specified in the guidance notes. The proof of ‘completion’ for the purposes of reg 201is by way of documentation, and documentation alone.”

The Tribunal stated that there is nothing within the Regulations which states that occupation should, or ever could, be regarded as completion. The date of occupation, or the date of last purchases are not provided as possible alternative points of completion in the statute, not to mention that these are facts that need to be established by evidence that has no reference in the statute whatsoever.

Therefore, the Tribunal held in favour of Mr Farquharson and allowed the appeal, clarifying that the VAT refund claim, made on 7 August 2017, was made within the three-month time limit. Again, unfortunately, this decision does not set a precedent.

In contrast to the previous cases, Stewart Fraser lost his appeal against a decision of HMRC to refuse to refund VAT incurred on the construction of a new dwelling. A claim in the sum of £17,707.84 had been submitted under the DIY housebuilders scheme. This case dealt with the sole issue of whether the claim was made within 3 months of completion of the dwelling. The timeline can be summarised as follows:

  • Mr Fraser occupied the property from 23 December 2015
  • Council Tax Banding issued on 3 June 2016 (retrospective date for council tax of 23 December 2015)
  • Certificate of completion issued by local authority on 16 April 2018
  • VAT refund claim submitted to HMRC on 10 July 2018

The significant time lag between the occupation of the property and the issue of the certificate of practical completion concerned ventilation which was installed in June 2016.   A dispute arose between Mr Fraser and the local authority concerning a validation report as to the quality of the ventilation and gas membrane to protect future residents in the event of a gas leak. The dispute was resolved in April 2018.

Mr Fraser did not attend the hearing, but he agreed that he could not apply for a completion certificate until the validation of the gas membrane was accepted by the council. This was a matter beyond his control and the building was not completed until that point.

HMRC’s arguments were that the time limit is enshrined in law and the Commissioners have no discretion to extend it. The property was occupied in 2015. The only work completed since occupation was to change the fans in June 2016. The DIY refund claim was submitted 2 years after this. There was no requirement to await the issue of a completion certificate to submit a DIY housebuilders VAT refund claim.

The Tribunal Judge found in HMRC’s favour noting that neither VAT law nor HMRC guidance states that a VAT refund cannot be applied for until a completion certificate has been issued under the DIY housebuilders scheme.

This decision is slightly at odds with that in Farquharson where the FTT concluded that despite occupying the property for over 8 years, a DIY housebuilders claim was valid because it was made within 3 months of the completion of the dwelling. That said, each case must be judged on its own facts which are specific to it. This is a particularly ambiguous area of the law in its application and it is always worth seeking professional advice when initially considering the project rather than when it may be too late.  

We can advise on complex legal points that may prevent a successful claim as well as preparing and submitting a DIY claim on your behalf to help secure the maximum VAT refund on a given project and Constable VAT keeps a close eye on these cases and is well placed to assist if your claim is rejected.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. 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 newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.


Constable VAT Focus 15 July 2021


Pay less import duty and VAT when re-importing goods
HMRC has updated information about claiming Returned Goods Relief if you’re re-importing goods into the UK that have previously been exported or transported from the UK.

Register to report and pay VAT on distance sales of goods from Northern Ireland to the EU
HMRC has released guidance specifically covering how to register for the One Stop Shop (OSS) Union scheme to report and pay VAT due on distance sales of goods from Northern Ireland to consumers in the EU.

Revenue and Customs Brief 10 (2021): repayment of VAT to overseas businesses not established in the EU and not VAT registered in the UK
This brief explains the actions HMRC is taking to enable overseas (not established in the EU) businesses to claim VAT refunds where there has been difficulty getting a certificate of status. This brief applies specifically to claims arising in the year 1 July 2019 to 30 June 2020.


With effect from 1 July 2021, the EU introduced substantial changes to the VAT rules around ecommerce. The changes will impact businesses making business to consumer (B2C) supplies of goods. The new ecommerce rules will include 3 major changes:

  • Launch of the One-Stop Shop (OSS) EU VAT return,
  • End of low value import VAT exemption, and introduction of the Import One Stop Shop return (IOSS), and
  • Making online marketplaces deemed suppliers for VAT.

Make sure to read our coverage of the changes here to see if these changes could impact your business.


First Tier Tribunal

1. Assessments not made to best judgment

This case concerned Kong’s Restaurant Limited (Kong’s), a Chinese restaurant which received assessments for VAT from HMRC totalling £61,314 with associated 90% penalties of £54.923, arising from alleged deliberate and concealed under-declarations of sales. As the restaurant did not have records of the alleged transactions, HMRC’s assessments were made using ‘best judgment’. Kong’s appealed against the assessments on the basis that in its view best judgment had not been exercised in calculating the amounts owing.

HMRC conducted two “cashing up” exercises at the restaurant, a process whereby HMRC attends a business and check orders received against receipts issued and income recorded. The sales on these occasions were higher than those which were typically recorded by the business. As a result of this process, HMRC concluded that Kong’s was, on average, suppressing 30% of its sales. It was assisted in reaching this conclusion by Kong’s apparently excessive use of “void” and “cancel” functions within its till software.

In addition to suppressing its sales, HMRC concluded that Kong’s was also suppressing its purchases in order to make the gross profit margin achieved appear more reasonable. HMRC came to this conclusion after making an unannounced visit to observe a delivery from wholesalers to Kong’s. When asked to produce the paperwork relating to the delivery, the owner produced a single invoice addressed to the restaurant, recording a purchase of £601.09.  He also confirmed that he had not received any other invoices with the delivery that had just been received, and had not paid the delivery driver any cash, nor did he intend to do so.

The following day, HMRC attended the premises of the supplier which had made the delivery, TAF. They obtained data from the TAF computer system showing that on the previous day, in addition to the invoice which had previously been shown to them by Mr Kong, TAF had delivered other goods to a value of £202.93 at the same Route and Drop number, but which were subject to a separate cash invoice made out to “Cash444” rather than to a named customer.  A pattern of similar “dual delivering” could be seen which involved three separate dates prior to the Appellant’s cessation of business as well as a great many subsequent dates.

By grossing up the reported takings of £858,408 in respect of the total period from 1 April 2014 to 30 June 2017 to take account of this alleged 30% suppression, HMRC concluded that Kong’s turnover for that period was £1,226,297, an increase of £367,889. Accordingly, HMRC assessed for £61,314 of VAT at 20% allocated across the various VAT accounting periods between those two dates.

Kong’s appealed HMRC’s decision on three grounds:

  • the cash-up exercises were flawed and could not be relied on as a basis for imposing the very large liabilities in issue in the appeals;
  • the goods ordered on the cash sales invoices were for the personal consumption of the staff, their families and friends and were paid for by them, and the evidence relevant to the Appellant on this issue extended to just three invoices;
  • the high level of voids and cancellations on the Appellant’s till were easily explainable because it was such a complicated EPOS till which the poorly paid, inexperienced and badly qualified staff of the Appellant made repeated mistakes on.

However, the Tribunal only considered the cashing up exercises and observed that HMRC only attended the restaurant on two occasions; one of which was Chinese New Year and the other was a “midsummer payday”. It agreed with the appellant that extrapolating from only these two occasions that sales had been consistently suppressed was unreasonable as it is likely that both evenings would have attracted significant amounts of trade which would not be expected on, for example, regular Tuesday evenings.

The Tribunal observed that HMRC assumed the worst and sought subsequently to justify that approach by reference to evidence of three cash purchases from one of a number of known suppliers and numerous voids and cancellations on the Appellant’s till – including cancellations totalling £166.30 on the night of the June 2017 visit. It went on to comment that HMRC did not seem to have investigated these points.

Concluding, the Tribunal upheld Kong’s appeal against HMRC’s assessments. As a result the penalties are also cancelled as there is no “potential lost revenue”.

Constable Comment: This case is a demonstration of how HMRC’s assessment calculations can be flawed. It seems unreasonable to use two days on which turnover could be expected to be significantly higher than normal as a basis for an assessment of underdeclared VAT over several years. If you have received an assessment from HMRC which you think is unreasonable then please contact Constable VAT.

2. Option to tax: late notification

This case concerns William Newman who was involved in a purchase and sale of a property used as a pub. Mr Newman both purchased and sold the property on 22 May 2014. The purchase price was £1.3 million plus VAT of £234,000. Mr Newman provided a VAT invoice to his buyer for the sales price of £1.8 million including £360,000 VAT.

The sale of commercial properties which are older than three years is usually VAT exempt unless the vendor  has opted to tax the property. An option to tax normally leads to supplies of the opted property being subject to VAT at the standard rate. If there was an option to tax in place made by Mr Newman, he would be liable to pay £360,000 VAT on the sale invoice and as a result of that taxable sale would likely be able to reclaim £234,000 VAT on the purchase. The net VAT due to HMRC from Mr Newman as a result of this transaction would be £126,000.

However, Mr Newman did not notify HMRC of the option to tax within the time limit of 30 days and accordingly, HMRC took the view that the option to tax could not apply and as a result the sale was VAT exempt Mr Newman was not entitled to reclaim the £234,000 VAT he paid on the purchase. Additionally the £360,000 charged incorrectly as VAT is due to the Crown. Although Mr Newman did submit an option to tax, it was not within the time limit which allows for it to become effective. Mr Newman appealed this decision.

Section 83 (1) VATA provides a right of appeal against HMRC’s refusal to accept a late notification of option to tax. Mr Newman has provided evidence that his advisors at the time had a lack of understanding and took no action which the Tribunal accepted. The Tribunal stated that they have and accept evidence to show that Mr Newman did make an election before 21 May 2014 but it was not notified to HMRC and therefore was not effective.

The Tribunal accepted Mr Newman’s unfortunate situation regarding his previous adviser’s lack of understanding, alongside his wife being ill, as reasons for the delay in submitting the option to tax. However, the appeal against HMRC’s decision was only made in 2019. Mr Newman was not able to provide sufficient evidence as to why he took no action between 2016 and 2018. Therefore, the Tribunal stated that his advisor’s faults are not sufficient reason for an appeal to be heard so late. Therefore, the appeal against HRMC’s refusal to allow extra time was struck out.

Constable Comment: This case highlights the importance of ensuring that prior to a property transaction the buyer and seller are aware of the VAT implications of the transaction as well as being aware of all requirements for a particular VAT treatment to apply. We always recommend that when larger amounts of VAT are at stake or a transaction is unusual that a business seeks professional advice. At Constable VAT we are happy to assist with any property related queries. Another significant point this cases raises is the need to deal with any appeal against an HMRC decision in a timely manner. There are deadlines for both making appeals and dealing with the various stages of the process and failure to meet these could lead to a appeal that may have been successful, had it been made in time, being struck out

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.


Ecommerce VAT Changes from 1 July 2021

From 1 July 2021, the EU is introducing substantial changes to the VAT rules around ecommerce. The changes will impact businesses making business to consumer (B2C) supplies of goods. The new ecommerce rules will include 3 major changes:

  • Launch of the One-Stop Shop (OSS) EU VAT return,
  • End of low value import VAT exemption, and introduction of the Import One Stop Shop return (IOSS), and
  • Making online marketplaces deemed suppliers for VAT.

One Stop Shop

The OSS allows for a single, EU-wide VAT return for the intra-EU supply of goods to consumers throughout the EU. It will allow businesses registering for OSS to pay VAT on B2C supplies made within the EU through a single OSS VAT return.

Introduction of the OSS coincides with the lowering of the EU distance sales threshold to a total of €10,000 across the EU member states. Once this threshold is breached VAT must be charged at the rate in the customer’s country. However, to avoid the need to register for VAT in all countries where the threshold has been breached, the sales for all EU countries can be reported and paid through one OSS return.

UK businesses which make distance intra-EU B2C sales of goods will need to register for OSS in an EU member state in order to submit OSS returns as this facility is only available to businesses registered for VAT in the EU.

Import One Stop Shop

The VAT exemption on imports of small consignments of a value up to €22 will be abolished from 1 July 2021. This means all goods imported in the EU will now be subject to VAT. However, for UK (and other RoW) businesses importing low value goods (less than €150) into the EU on behalf of their customers, the IOSS simplifies the declaration and payment of VAT. The IOSS allows suppliers selling imported goods to consumers in the EU to collect, declare and pay the VAT to the tax authorities, instead of making the buyer pay VAT when the goods are imported into the EU. Like the OSS, an EU registration will be required. UK businesses will need to appoint an EU-established intermediary to fulfil their VAT obligations under IOSS.

Sellers registered for IOSS will need to collect VAT at the rate applicable in the EU Member State where the goods are to be delivered. This VAT is the import VAT which is due in the country of destination. IOSS returns will be submitted and paid monthly by the intermediary the business has appointed.

Where goods with a value of over €150 are imported for sale to a customer, a VAT registration may be required in the country of destination where a UK business (rather than the customer) imports goods into the EU and then makes the supply in the destination country. If the UK business does not have an establishment in that EU country, it will not benefit from a VAT registration threshold and will usually be required to register for VAT locally as soon as a sale arises.

Online Marketplaces

Starting 1 July 2021, new rules will apply to sales via electronic interfaces such as online marketplaces/platforms.  Marketplaces may become “deemed suppliers”, where certain conditions are met and they will have additional record keeping obligations.

The European Commission views a marketplace as a deemed supplier if it facilitates:

  • Distance sales of goods imported to the EU with a value not exceeding €150; and/or
  • Supplies of goods to customers in the EU, irrespective of their value, when the underlying supplier/seller is not established in the EU and the goods are already in the EU.

Where a marketplace is a deemed supplier in relation to a transaction, it is treated as if it has received and then supplied the goods itself and must make the associated VAT declarations and payment. Online marketplaces will be able to use both OSS and IOSS to assist with the increased VAT administrative burden.

Marketplaces will be required to keep records of all transactions, whether they are deemed suppliers or not, for at least ten years.


These changes will impact on many UK businesses selling goods to the EU, either directly or via online marketplaces such as Amazon. The EU has issued guidance on dealing with these changes, which can be accessed here and it is important that any business that may be affected ensures that it has taken account of the new rules.

Constable VAT can assist with this matter. Your business may be eligible to apply for the SME Brexit Support Fund. Smaller businesses can get up to £2,000 to pay for practical support, including training or professional advice to adjust to new customs, rules of origin and VAT rules when trading with the EU.

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



Constable VAT Focus 21 June 2021


VAT Notice 706: Partial Exemption
HMRC has updated this guidance with an email address to send proposals for a Partial Exemption Special Method to.

Revenue & Customs Brief 9 (2020)
HMRC has released this Brief following the judgments in LIFE Services and Romford TLC. Only charities, public bodies or those regulated by the relevant authority can exempt their supplies of daycare services.

Customs, VAT and Excise UK transition legislation from 1 January 2021
This collection brings together Customs, VAT and Excise EU Exit legislation and Customs notices that have the force of law applicable to UK transition.



1. Leasing property: a fixed establishment?

This case concerned Titanium Limited (Titanium), a Jersey company concerned with asset and property management. Between 2009 and 2010, it let a property in Austria which it elected to tax. In order to enable it to carry out those transactions, which were Titanium’s only activities in Austria, Titanium appointed an Austrian real estate management company to act as intermediary between the service providers and suppliers, to invoice rental payments and operating costs, to maintain business records and to prepare the VAT declaration data.

Despite having appointed an agent in Austria, Titanium retained the decision-making power to enter in to and terminate leases, to determine the economic and legal conditions of the tenancy agreements, to make investments and repairs and to appoint and oversee the real estate management company itself. Titanium did not declare any VAT in Austria as it maintained that it did not have an establishment there. However, the tax authorities disagreed with this assessment, citing domestic law, “…a trader who owns immovable property in Austria that he lets, subject to tax, must be treated as a national trader…”

The dispute was referred to the CJEU by the national Court which posed the question of whether the concept of “fixed establishment” is to be interpreted as meaning that the existence of human and technical resources is always necessary or can, in the specific case of the letting a property, that property constitute an establishment for VAT purposes?

The concept of ‘fixed establishment’, in accordance with the Courts settled case-law, implies a minimum degree of business stability derived from the permanent presence of both the human and technical resources necessary for the provision and receipt of services. It requires a sufficient degree of permanence and a structure adequate, in terms of human and technical resources, to supply the services in question on an independent basis and to, correspondingly, constitute a fixed establishment for VAT purposes.

Therefore, the Court held that, as a mere property does not possess the necessary resources to make and receive supplies without any staff, the property did not constitute a fixed establishment of Titanium in Austria.

Constable Comment: This position is already reflected in UK law. HMRC’s guidance is explicit that land or property does not in itself create a business or fixed establishment in the UK. There must be a head office from which business is carried out for there to be a business establishment, or sufficient human and technical resources permanently present for making or receiving the supply for there to be a fixed establishment within the UK. It may be possible to create an establishment by virtue of appointing an agent in the UK and taxpayers should always seek domestic advice where there is a possibility of exposure to overseas tax.

First Tier Tribunal

2. Receipt of subsidy – restriction on input VAT recovery?

This case concerned Colin Newell who has a business generating hot air by burning wood chips. The hot air generated is used to dry wood and other materials, belonging to Mr Newell and others. Mr Newell makes charges to third parties for this service. He also receives “periodical support payments” (PSPs) under the Renewable Heat Incentive Scheme for Northern Ireland (The RHI Scheme). Mr Newell had always treated his input tax as recoverable in full. This is on the basis that he makes exclusively taxable business supplies.

HMRC challenged Mr Newell’s right to deduct VAT incurred in its entirety, concluding during a compliance enquiry that subsidy funding received under The RHI Scheme is outside the scope of VAT. HMRC submitted to the Tribunal that Mr Newell is not entitled to recover the proportion of VAT incurred, which relates to the receipt of outside the scope PSPs, as input tax. All expenditure was a cost component of the generation of a mixture of taxable and outside the scope income, and VAT incurred is only recoverable as input tax when it is used (or to be used) in the making of taxable supplies, although VAT incurred in making VAT exempt business supplies may be recoverable if the partial exemption de minimis limits are satisfied.

Mr Newell referred to the CJEU decision in Kingdom of Spain which discussed Spanish restrictions on input VAT recovery for entities receiving subsidy funding. The CJEU held that such restrictions violated EU law. Mr Newell cited four further CJEU cases which confirmed this position. In addition, an alternative line of argument was established based on the Supreme Court decision in Frank A. Smart, a case which concluded that the deduction of input tax is not restricted by the receipt of Single Farm Payment Entitlement subsidies.

Mr Newell also submitted Kretztechnik as an example of a CJEU decision which concluded that the receipt of funds, which are outside the scope of VAT, does not prevent 100% deduction of input tax by a fully taxable trader where funding received is used to generate taxable supplies.

HMRC argued that it was the activities of Mr Newell in buying logs and then burning chips to generate heat that entitled him to claim PSPs under the RHI Scheme. It suggested that there is a direct and immediate link between the costs incurred by Mr Newell and both income streams and because of this, the general overheads of his business and the cost of the logs are a cost component of generating both taxable and outside the scope income. HMRC suggested that an apportionment based on income generated should be required.

In support of its argument, HMRC cited both University of Cambridge and Vehicle Control Services, both decisions of the CJEU. However, as the Tribunal observed, University of Cambridge does “…not provide any guidance on the question whether a taxpayer who receives outside the scope income but has not made an outside the scope supply nevertheless is conducting outside the scope activity”. Turning to consider Vehicle Control Services, The Tribunal noted the significant differences between the circumstances in that case and the present circumstance.

Considering that Mr Newell had a substantial quantity of caselaw in his favour, the Tribunal allowed his appeal against HMRC’s decision.

Constable Comment: An important part of this decision is that Mr Newell makes exclusively taxable supplies. If Mr Newell had engaged in non-business activities, which were supported by outside the scope funding, the recovery of VAT incurred may be restricted. However, HMRC has the discretion to allow a waiver of apportionment if non-business activities do not incur and consume a significant amount of VAT. Input VAT recovery is a fundamental right within the VAT system and a wholly taxable trader that incurs costs that bear VAT should be entitled to recover that VAT, even if outside the scope funding is received to support the making of those taxable business activities. The receipt of outside the scope grant funding is common in commercial sectors, the farming industry for example, and also charities and not-for-profit organisations.

3. Single or Multiple Supply?

This case concerned Black Cabs Services Limited (BCS), a taxi hire business which sought to recover overpaid VAT in relation to supplies of insurance. BCS leases London Black Cabs to self-employed drivers. All the vehicles owned by BCS in respect of the taxi hire are insured under a “motor fleet policy”. It sought to recover overpaid VAT of £43,245 in relation to charges which it had made to drivers for the use of the company’s insurance as it now believes that such charges are VAT exempt.

HMRC refused the VAT repayment claimed on the grounds that BCS is making a single, taxable supply of insured taxis and that it would be artificial to split the charges made to drivers between standard rated vehicle hire and VAT exempt insurance. It sought to make this argument on three key grounds:

  • The drivers did not have the choice to use their own insurance,
  • One payment is made by drivers to BCS and it would be artificial to split that payment,
  • A typical consumer would regard BCS’s supplies as single supplies of insured taxis.

The Tribunal considered previous decisions, including the judgment in BGZ which held that, generally, a leasing service and the supply of insurance for the leased item cannot be regarded as being so closely linked that they form a single transaction. This decision was applied in the case of Wheels before the Upper Tribunal which found, in very similar circumstances, that the ability of drivers to choose whether to pay the hirer for insurance or arrange their own cover was a significant (but not decisive) indicator that multiple supplies were being made. In the present case, HMRC submits that the drivers do not have any real choice in or option of using their own insurance cover.

The Tribunal observed that HMRC’s submission was incorrect. All the vehicle-hire agreements between BCS and drivers give the driver the option to use their own insurance and drivers were required to positively opt-in to using BCS’s insurance. In reality, no driver had ever used their own insurance owing to the cheaper pro rata cost of using the motor fleet policy. However, the Tribunal held in favour of BCS in relation to this point, noting that a failure to choose an option does not mean that the option does not exist.

Considering HMRC’s second argument regarding the single payments made by drivers to BCS, the Tribunal commented that it omitted to take in to account the evidence that the receipt given to the driver differentiates between the cost of hire and the cost of insurance. It further omits to consider the fact that the cost of insurance to each driver is separately itemised in the vehicle hire agreement. Therefore, the Tribunal dismissed this argument by HMRC.

Turning to consider the typical consumer’s perspective, the Tribunal noted that it was set out in the agreements with drivers and the receipts given to drivers that they were paying for two different supplies. Accordingly, the Tribunal held that the view of a typical consumer would be that two supplies are received for one payment.

Having dismissed each of HMRC’s arguments in favour of single supply treatment, the Tribunal held in favour of BCS and allowed its appeal against HMRC’s refusal to credit it for overpaid output VAT.

Constable Comment: The issue of whether a single or multiple supply is made often comes before the Courts and Tribunals. This is owing to the fact that there is no definitive answer, and a variety of factors must be considered in order to reach an “on balance” conclusion. This means that HMRC is normally able to challenge any arrangement. The only way to gain certainty around whether a business is making single or multiple supplies is to apply for a non-statutory clearance from HMRC.

4. New Dwelling Without Planning Permission

This case concerned the correct VAT rate to be applied on charges for construction services supplied by CMJ Aberdeen Ltd (CMJ) in relation to the construction of a residential property. CMJ zero-rated its supplies on the grounds that it had constructed a new residential building.

HMRC considered that the correct planning permission was not in place at the relevant time, which is a requirement under the zero-rating provisions for construction of new dwellings. HMRC concluded that CMJ’s supplies should have been standard rated for VAT purposes and issued VAT assessments totalling £59,167 for VAT accounting periods ending 09/13, 03/14 and 06/14.

In June 2012, CMJ made a general application for planning to Aberdeenshire Council, describing the proposed development as “demolition of existing dwelling and garage and reinstatement with new build dwelling and garage”. This application was then later withdrawn.

On 17th December 2012, CMJ made a further planning application, describing the proposed development as an “extension and a garage”. The detailed plans accompanying the application declared that they related to a ‘proposed extension’ at the property. On 24th January 2013, the Council granted planning “for alterations and extension to the property”.

Following discussions with the Council, CMJ was informed that a construction warrant, rather than a demolition warrant, was required as the property would not remain demolished as it was to be rebuilt. An application for a suitable building warrant was made by CMJ on 7th March 2013 and approved by the council on 17th June 2013 and building works to construct the new dwelling started in July 2013. The “Domestic New build (Other)” warrant was given in relation to the “erection of a detached 2 storey 9 apartment dwelling with attached double garage”.

In August 2014, a completion certificate was applied for in relation to the works. CMJ was informed by the Council that retrospective planning consent for the construction of a new build, as described on the warrant, would be required. Such retrospective permission was granted in November 2014.

CMJ argued that it was correct to zero-rate its fees for construction works. It constructed a new dwelling in line with the building warrant and verbal consent from the Council, which was given during correspondence between the parties. It argued that zero-rating should apply where a new building has been constructed, even if this is not in strict compliance with the written planning consent which was in place at the time of construction.

HMRC’s argument was simple; the legislation conferring zero-rating on construction costs in relation to the construction of a new dwelling requires that “statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.” As planning permission was only granted retrospectively, no planning permission for the construction of a new dwelling had been granted. Therefore, it submitted, that zero-rating could not apply.

Considering the planning permission, which was in place at the time of construction, the Tribunal noted that it permitted only alterations and not the construction of a new dwelling. Therefore, it found in favour of HMRC and upheld its assessments.

Constable Comment: This case serves as a reminder that zero-rating provisions, like VAT exemptions, are required to be construed as narrowly as possible. The fact that a new dwelling was constructed by CMJ did not guarantee zero-rating and it is important to always consider whether a VAT classification is dependent upon conditions. The law is clear in this case, planning permission must have been granted and any construction must be carried out in line with that permission. A planning permission that permits residential alterations is insufficient to support the application of the zero-rate.

5. Recovering input VAT: no consideration

This case concerned The Door Specialist Limited (TDS), a UK VAT registered company with the main activity of commercial letting. It owns commercial properties which are used for a mixture of supplies. TDS is under common ownership alongside five other companies, all trading under the name “Just Doors”.

HMRC raised an assessment to recover VAT of £80,096 that was claimed by TDS as input tax relating to the purchase of doors from China and advertising costs. HMRC decided that this amount was not recoverable because the costs on which VAT was incurred were not used by the business in the making of onward taxable supplies. The doors were given to the Just Doors companies in return for no consideration. TDS accepted that VAT incurred on advertising costs was not recoverable and so appealed only in relation to the purchase of doors.

HMRC’s argument stated that the amounts of VAT incurred by TDS on the purchases of doors can only be recovered as input tax when these purchases are used, or intended to be used, in the making of taxable supplies by a taxable person. They stated that TDS’ only taxable supplies are rents received from commercial properties under an option to tax. The doors purchased from China are not used to make onward taxable supplies and, accordingly, VAT incurred is not input tax that TDS could recover.

TDS claimed that it made gifts of the doors which it had imported and cited HMRC’s Guidance, VAT Notice 700, which states that a gift of goods is normally a taxable supply. Accordingly, it argued, TDS should be entitled to recover input VAT in relation to doors which are imported to be gifted to Just Doors companies.

The Tribunal was not persuaded by this argument and clarified that, to qualify as input tax, VAT must be incurred on goods or services used or to be used for the purpose of a business carried on or to be carried on by a taxable person.  Caselaw has highlighted that there must be a direct and immediate link between the purchase and the making of onward taxable supplies for VAT incurred on the purchase to be recoverable as input VAT.

The Tribunal considered that that TDS, whilst registered for VAT and making taxable supplies in respect of two opted properties, makes gifts of goods of doors separately to the economic activity of renting commercial properties. Therefore, it stated, the purchase of the doors is not connected in any way to a taxable supply made by TDS. Accordingly, the Tribunal held that input VAT on the imported doors was not recoverable and upheld HMRC’s assessments.

Constable Comment: It is a fundamental principle of the VAT system that, for a right to input VAT recovery to arise, there must be a direct and immediate link between the purchase and a taxable output. Whilst it is possible to recover input VAT on certain types of gifts, the rules are strict and normally require the declaration of associated output VAT. If your organisation often runs promotions or makes gifts then it is essential to consider the VAT ramifications.

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


Constable VAT Focus 4 June 2021


How to claim VAT relief on goods imported for onward supply to an EU country
If your organisation imports goods into Northern Ireland from outside the EU for onward supply to the EU, find out about claiming Onward Supply Relief.

Revenue & Customs Brief 8 (2021)
HMRC has released a new Brief which explains HMRC’s policy on the VAT treatment of public monies received by further education institutions in the light of the Colchester Institute case.

Revenue & Customs Brief 7 (2021)
HMRC has released a new Brief which covers the VAT treatment of charging electric cars at public charge points.

VAT Notice 701/14
HMRC has updated its guidance on food products to reflect the recent extension to the temporary reduced rate of 5% until 30 September 2021 and to inform businesses to prepare for a new rate of 12.5% from 1 October 2021 until 31 March 2022.


New EU Ecommerce Rules

The European Commission has published a statement in relation to the new “future-proof” VAT rules for ecommerce which come into effect on 1 July 2021. These rules will be particularly significant for anyone selling goods online or running an online marketplace.

The Commission has highlighted the following as the main changes:

  • The introduction of the new One Stop Shop (OSS). Online sellers and operators of marketplaces will be able to register in one EU member state to facilitate the payment of VAT on all distance sales, akin to the current MOSS for intra-community supplies of B2C services.
  • The abolition of the existing distance sales thresholds to be replaced with a uniform threshold of €10,000 throughout the EU. Below this threshold, supplies remain subject to VAT in the state from which goods are dispatched. Sales above this threshold can be reported using OSS, preventing the requirement to register for VAT in every state in which the distance sales threshold is broken.
  • Introduction of provisions making online marketplaces the “deemed supplier” where they facilitate distance sales of goods imported into the EU with a value not exceeding €150 and/or supplies of goods to customers in the EU, regardless as to their value, when the underlying supplier is not established in the EU. Online marketplaces will also be able to benefit from the OSS to handle the necessary VAT accounting.
  • Introduction of new record keeping requirements for online marketplaces which will be required to keep records for the transactions they facilitate, irrespective if they become deemed suppliers or not. Such records should be kept for 10 years.
  • Abolition of VAT exemption for importation of goods with a value up to €22, meaning all goods imported into the EU will be subject to VAT. However, the Import One Stop Shop (IOSS) will be introduced, allowing suppliers and electronic interfaces selling imported goods to buyers in the EU to collect, declare and pay VAT to the tax authorities, instead of making the buyer pay VAT at the moment the goods are imported into the EU. Registration is required in one EU state. The IOSS registration is valid for all distance sales of imported goods to buyers in the EU. Businesses can start using the IOSS only for the goods sold as from 1 July 2021.

These new rules, in tandem with the effects of Brexit, need to be carefully considered by UK sellers and online marketplaces. EU VAT registrations will be required in order to benefit from the schemes.


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



1. Interest on VAT repayments

This case concerned the right to claim interest from a tax authority where it has not provided a credit which is rightfully due in good time. The judgment relates to two appeals made by separate entities; an Austrian company (CS) which operates hotels and technoRent, a machinery vendor in Germany.

On its VAT return for August 2007, CS claimed credit for input VAT in the amount of EUR 60,689.28. However, by decision of 18 October 2007 following an audit made by the Austrian tax office, the input VAT payable to CS was reduced to EUR 14,689.28. The CJEU judgment does not discuss the underlying transactions or reasoning of the domestic Courts and tax authorities. CS brought an appeal against that decision and on 15 May 2013, that appeal was upheld and the total amount claimed as overpaid VAT was credited to CS’ tax account. CS subsequently submitted an application under the Austrian law (BAO) for a payment of interest on the amounts claimed from 1 January 2012 to 10 June 2013.

The other company included in this judgment is technoRent International (TI), this company is established in Germany. TI sold machines in Austria which were subject to VAT in Austria. In its VAT return for the period to 31 May 2005, TI claimed a VAT credit on the basis that it had reduced the sales price of some machines after they were sold. The VAT credit amounted to EUR 367,081.58.

Initially, TI received its VAT refund without issue. However, following an official audit by the tax authority it was decided that the sale price should not have been reduced and that, accordingly, no refund was owed to TI. The amount which had been credited was then taken from TI’s VAT account by the tax authority. TI successfully appealed this decision and on 10 May 2013, the full amount of EUR 367,081.58 was once again credited to its VAT account.

TI made an application for interest on the full amount from July 2005 to May 2013; however, it was only partly granted for the period from 1 January 2012 to 8 April 2013 as the BAO only came into force in 2012. TI’s case before the CJEU concerned whether interest was rightfully due for the entire period based on arguments founded in EU principles.

In reaching the judgment, it was necessary to consider specific EU legislation. Articles 22 – 27 of the VAT Directive discuss interest to be paid to taxpayers where domestic tax authorities make refunds not in good time. However, until the introduction of BAO in Austria, there was no domestic provision for such interest to be paid to taxpayers.

EU Member States have certain freedom to determine the conditions for the refund of VAT; however, it is important that domestic laws give effect to the EU provisions so far as is practicable. In this situation, it was apparent that the Austrian law failed to give effect to EU requirements to pay interest to taxpayers in situations envisioned by the EU provisions.

In making this decision, the CJEU observed that it is for the referring Court to do whatever lies within its jurisdiction to give full effect to those provisions by interpreting national law in conformity with EU law.

Constable Comment: It often feels like there are two standards, one for taxpayers and one for the tax authority. Where a taxpayer is late to pay, tax authorities generally charge interest and penalties. This demonstrates that there should be a level playing field and if tax authorities are late in making payments owing to taxpayers, interest should be due to the taxpayer in keeping with fundamental EU principles. Though taxpayers are entitled to interest in the UK, the UK has left the EU. That means that the domestic law may change in the future to the disadvantage of taxpayers. If you believe that you may be entitled to interest from HMRC, you should act immediately.

Supreme Court

2. Balhousie: Sale and Leaseback

This Supreme Court judgment considered the long-running case of Balhousie which concerns zero-rating provisions relating to relevant residential purpose (RRP) properties. Balhousie is a care provider and purchased a new care home from a developer. As the property was to be used for a relevant residential purpose, the developer zero-rated the disposal. In order to finance the acquisition of the care home, Balhousie entered into a sale and leaseback agreement with a finance house.

Owing to the sale and leaseback arrangement, HMRC sought to recover deemed VAT on the original purchase of the property pursuant to Schedule 10 VATA. The relevant legal provision, Part 2 of Schedule 10 to VATA provides for what may loosely be described as a form of claw-back of the benefit of zero-rating from the recipient (P) of the zero-rated supply, or supplies, if either of two stated events occurs within ten years from the completion of the building:

  • P has, since the beginning of the relevant period, disposed of its entire interest in the building,
  • Within the relevant period, the use of the building changes from qualifying to non-qualifying for zero-rating provisions.

Where either condition is met, a “self-supply” charge arises and VAT which was not incurred on the purchase must be declared as output VAT of the recipient of the supply.

It has already been established and affirmed throughout the process that Balhousie did not dispose of its interest by virtue of the sale and leaseback arrangement which HMRC had argued created a scintilla temporis (a moment in time where the sale has arisen, but the lease has not yet been assigned). HMRC suggested that there must be time between the sale and the subsequent lease. Therefore, Balhousie, during the relevant period, had disposed of its entire interest in the property. This point having been dismissed; the Court turned to the other strands of HMRC’s argument.

HMRC had successfully argued in the Upper Tribunal and the Scottish Inner House that the sale, regardless of the leaseback, was a disposal of Balhousie’s interest in the property. HMRC submitted that, viewed as a whole, the sale was a disposal of exactly the interest which Balhousie had acquired. It then obtained a new, different interest in the property in a form of a lease.

Applying the CJEU decision in Mydibel, The Supreme Court concluded that a sale and leaseback can be regarded as a single transaction in terms of its economic substance. The effect of the judgment is that, despite there being two suppliers (the vendor of the property and the new landlord of the property), a sale and leaseback is regarded as a single event. Where the single event arises but the occupant of the building loses no control over the operation of that building, the economic substance is that the interest was never truly disposed of.

Therefore, the Court concluded that Balhousie had not disposed of its interest in the property by agreeing a sale and leaseback to increase its liquidity as it had, at all material times, the benefit of the building and the right to occupy it.

Constable Comment: The Balhousie case has been progressing since 2011 and its outcome was uncertain throughout. However, following the CJEU decision in Mydibel which was handed down in 2019, the Supreme Court has been able to make a clear ruling in favour of Balhousie. The amounts of VAT at stake were large and this is a significant judgment for the taxpayer. However, any organisations which have entered into sale and leaseback agreements in order to improve liquidity, or for other reasons, may need to consider the terms of their agreements. This is a long judgment and should not be regarded as a “carte blanche” as, where insufficient agreements are in place or human error arises, it is still possible to create a scintilla temporis.


3. Zero-rated food or standard rated confectionary?

This case concerned the supermarket, Morrisons and the correct VAT classification of some of the products it offers for sale. The products in question were Organix Bars and Nakd Bars, products which the appellant believed to be zero-rated health foods or, alternatively, zero-rated cakes, but which HRMC argued were standard rated “confectionary”. The VAT involved was just under £1.1 million.

During the case, Morrisons often tried to place emphasis on the fact that the relevant products are healthy and could be characterised as “health foods”. The customers purchasing these products were health conscious and the bars are marketed as a “healthy alternative to confectionary”. HMRC argued that the intent of a customer is to purchase sweet snacks.

The tribunal agreed with HMRC, observing that the sweetest, chocolate covered unhealthy cake will benefit from zero rating, whilst the healthiest of low sugar, low fat confectionary will always be standard rated. Therefore, the tribunal considered whether the bars were confectionary using the multi-factorial test. This considers the following factors:

  • What is the sugar content?
  • Is it sweet to taste?
  • Subject to a process?
  • Is it normally eaten with fingers?
  • Is it held out as a snack?
  • When is it consumed?
  • Is it filling the same role as traditional confectionary?
  • How is the packaging?
  • Where is it placed in the supermarket?

Considering these different factors, it appears to have become evident to the FTT that both products are correctly classified as confectionary, there being minimal difference between an average item of confectionary and the products in question. The products are sweet, processed and normally eaten with fingers. As an alternative to confectionary, the products certainly seemed to fill the role of traditional confectionary and are packaged in a similar fashion to a classic chocolate bar.

This being the case, Morrisons went on to argue, in the alternative, that the products should be zero-rated as cakes. The Tribunal dismissed this argument promptly. It commented that the bars did not look like typical cakes, their ingredients are not those of typical cakes, they would look out of place on a plate of cakes and, less importantly, they are not held out for sale as cakes.

The appellant raised the point that one of the bars produced by Organix is called the “Carrot Cake Bar”, though the Tribunal made it clear that the name of a product does not create its classification for VAT purposes. Indeed, this follows as a carrot cake flavoured milkshake could not reasonably be regarded as a cake owing merely to its flavour. Accordingly, an item of confectionary which is cake flavoured is not a cake for VAT purposes where it does not fit the established definition of a cake.

The Tribunal held that there was no basis upon which to apply zero-rating to the products, concluding that both items are standard rated for VAT purposes.

Constable Comment: There have been several cases before the Tribunals in recent years regarding the correct VAT classification of different foodstuffs. Readers may remember our coverage of Corte Diletto which also considered the view of a typical consumer to be of importance when deciding matters of this nature. This upheld the reasoning outlined in the Ferrero case. Whilst the actual content of a foodstuff itself is significant, it is important to consider the marketing of that product because HMRC may use marketing to challenge a product’s classification. This is an area of VAT law which is often a cause of dispute between HMRC and taxpayers.

4. How to Determine Open Market Value

This case, Jupiter Asset Management Group Limited, concerned the correct VAT treatment of charges made between two VAT group registrations within one corporate structure, the JAMG group and the JIMG group. The decision relates to the input and output VAT consequences for the JAMG group of certain strategic and operational management services (the “Management Services”) which were supplied by members of the JAMG group to members of the JIMG group.

HMRC is entitled to issue a Notice dictating certain transactions must be treated as if made at “open market value” (OMV) where they are made between connected parties, the recipient cannot recover all its input VAT and the charges made were below market value. In this case, HMRC directed that JFM Plc (the representative member of the JAMG VAT group registration) needed to retrospectively correct the VAT position with regard to the supplies of management services. JAMG appealed against the direction and associated assessments, challenging the validity and the methodology used.

To treat transactions at OMV, it is necessary to calculate what the OMV actually is, or would be, if such a supply exists on the open market. The Tribunal observed the following around establishing OMV:

  • How is a comparable service to be determined? In this context, it was necessary to establish a comparable supply of management services made by a holding company from one VAT group to another where all parties are under common control.
  • Having determined the nature of a theoretical comparable service, it is necessary to consider whether a supply of services comparable to the supplies of the management services can be ascertained.
  • If comparable services can be practically established, what is the full amount which a customer would typically have to pay for the service and by what methodology is this calculated?
  • If comparable services cannot be established, what is the full cost to the supplier of making those services?

In this case, it was concluded that there is no service supplied between parties dealing at arm’s length which is comparable to the supplies of management services being made by JFM Plc. Therefore, it turned to consider the full cost to JFM of making those supplies in order to establish their value for VAT purposes. The Tribunal considered, at length, various aspects of the supplies and associated expenses being incurred in their provision.

The judgment and obiter dicta are lengthy and case specific, but the methodology used to establish OMV can be summarised as follows:

  • The full cost of making the supply is the cost upon which VAT is to be calculated in the absence of comparable supplies on the free market,
  • The full cost includes expenses incurred in making the supply, including overhead costs,
  • The full cost includes remuneration paid to directors specifically in relation to the delivery of the services

The Court found in favour of HMRC, upholding the assessments to output tax based on a open market valuation of the services being supplied.

Constable Comment: The reasoning in this case is particularly complex and the judgment is quite lengthy and very specific. Our coverage of the case aims to highlight to readers that there is a risk of making supplies between connected companies at below market value and in a situation where the recipient cannot recover all input VAT incurred. Charges and supplies made within corporate structures need to be considered carefully from a VAT perspective. If your organisation has any concerns around these issues please do not hesitate to contact Constable VAT.

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


Constable VAT Focus 19 April 2021


Paying VAT Deferred Due to Coronavirus
If you deferred VAT due to HMRC between 20 March 2020 and 30 June 2020 you can arrange to pay in instalments. HMRC has updated its guidance to clarify that you may be charged a 5% penalty or interest if you do not pay in full, or make an arrangement to pay by 30 June 2021.

Pay Less Import Duty and VAT When Re-importing Goods
More information has been added to this guidance about how to claim Returned Goods Relief. The ‘Goods in an EU member state on 31 December 2020’ section has been removed.


We have recently released our coverage of Revenue & Customs Brief 4 (2021). This Brief is important for partly exempt organisations whose trading activities have been impacted by the coronavirus pandemic, resulting in their existing partial exemption calculation methods no longer producing a “fair and reasonable result”. Read our coverage here.

Additionally, the CJEU has recently released its decision in the Danske Bank case (Case C 812/19).  The court considered whether supplies of services between the principal establishment of a company in one country, and a branch of that establishment located within another country, must be recognised as a supply for VAT purposes because the principal establishment is in a VAT group. Our coverage can be read here.


Upper Tribunal

1. VAT Bad Debt Relief

This case concerned a claim for VAT Bad Debt Relief (BDR) made by Saint-Gobain Building Distribution Limited (SGBD) which was rejected by HMRC. HMRC’s refusal to allow the claim was upheld by the FTT and SGBD appealed to the Upper Tribunal.

SGBD made a claim for BDR in 2014 for historic relief on VAT on supplies from 1989 – 1997, amounting to slightly less than £10million. At the relevant time, BDR claims in the UK were required to meet the “property condition”. That provided, that in the case of the supply of goods, the title or “property” in the goods had to have passed to the person to whom they were supplied or to a person deriving title from that person.

The property condition condition was later removed by s39(1) Finance Act 1997 for supplies made after 19 March 1997, as the provision was found to be unlawful in the case of GMAC. The justification offered by SGBD for bringing the claim out of time was that it was prevented from bringing the claim at the correct time as the unlawful property condition prevented it from being entitled to do so. This was owing to provisions in its sales agreements which prevented title from passing, referred to as “reservation of title clauses”. As the property condition had always been unlawful, it argued that it should be able to retrospectively amend the position by submitting out of time BDR claims.

HMRC argued it was, despite those clauses, legally possible for title to pass in relation to the relevant supplies because title passed when the goods were incorporated by the appellant’s customers into building projects. It went on to highlight that BDR claims would have been valid in the relevant period and that they may have been submitted. As the claims relate to historic periods, neither party has records of the claims being submitted, though in any event SGBD argued that such claims were never submitted.

In the absence of evidence that such claims had not been made in the relevant time period, HMRC and the FTT agreed that the burden of proof was on SGBD to show that claims were not submitted in the relevant period. It being notoriously difficult to prove a negative, the FTT dismissed SGBD’s appeal and concluded that the claims were eligible for BDR prior to the change in law after GMAC and that SGBD had failed to prove that those claims had not already been processed by HMRC.

SGBD appealed to the UT on the grounds that the FTT had made both legal and logical errors. It submitted that the FTT misconstrued the guidance which applied at the relevant time. Under that guidance, where a retention of title clause was used, the property condition could only be satisfied if:

  1. the goods were sold on to a third party
  2. formal notices relinquishing title were sent to customers.

SGBD argued that there was thus no scope to claim BDR in circumstances where goods were incorporated into building projects pursuant to its agreements with customers. No BDR could therefore have properly been claimed, and it would not be reasonable to assume that the claims had been made on this basis. When HMRC revised this position following GMAC, a claim became viable. The argument was essentially that BDR claims could not have been submitted as the guidance potentially precluded the relevant transactions from BDR.

The UT agreed with HMRC and considered that the claims would have been valid if submitted. Given that neither party had records of the claims being submitted, the burden of proof was on SGBD to prove, on the balance of probabilities, that BDR claims were not submitted in the past in relation to the period in question. SGBD was unable to demonstrate this. Therefore, the UT dismissed the appeal and held in favour of HMRC.

Constable Comment: In the UK, businesses and HMRC are required to keep certain records for specific periods for time. In this instance, the claims for VAT bad debt relief related to a period outside of this recordkeeping timeframe. Whilst SGBD claimed that it had never submitted claims for bad debt relief, it was impossible to prove that claims had not already been submitted. Therefore, on the balance of probabilities, it was held that SGDP was not entitled to bad debt relief for the relevant period.

First Tier Tribunal

2. Notices of Requirement

This case concerned an out of time appeal against a Notice of Requirement to Provide Security (NOR) in relation to VAT. The NOR was issued in November 2017 to Eunoia Initiatives (EI), both at the business address and the sole director’s home address. The appeal, if permitted, is made 16 months and 1 day late. Whilst both parties agreed that this delay is serious, EI contended that it had a reasonable excuse for appealing out of time.

HMRC object to the appeal on the grounds that the delay is very serious, the notice was properly served, and they submit that the director is trying to overturn a criminal conviction relating to trading without providing security.

EI had a good VAT compliance history until a major customer failed to make a payment. As a result, EI was unable to meet its VAT obligations and this culminated in the NOR being issued by HMRC. EI’s director originally claimed that she had not received either the NOR notification at the business or her home address, though HMRC produced evidence that the letters had been posted by recorder delivery and were showing as delivered. HMRC also produced ‘phone records which indicated that Mrs McLaughlin had called HMRC shortly after the NORs were sent and confirmed that she had passed them on to her solicitors.

Whilst the FTT found that the NOR had been received, it went on to comment that such a finding does not automatically preclude EI from having a reasonable excuse. It summarised that the reason for the delay in lodging the appeal against the NOR is that the director of the Appellant was not aware (despite the NOR setting it out) that there was a right of Appeal. From the evidence in the bundle, it was apparent that HMRC emailed EI’s solicitors in January to ask whether an Appeal had been made and received a reply in February that led to notes on HMRC’s system reading ‘reply from solicitors. No appeal to tribunal.’. The solicitors did not inform EI or Mrs McLaughlin of the right to appeal and, presumably, contacted HMRC to confirm no appeal would be made without her authority.

Whilst the FTT noted that, following the judgment in Katib, the failure of an agent to act properly is unlikely to amount to a reasonable excuse, it made a pragmatic decision in favour of the appellant. The Tribunal Chair stated, “I have read all three transcripts provided that contained interactions between Ms McLaughlin and HMRC. In each conversation Ms McLaughlin is shown to be engaging well with HMRC, to have also engaged professional advisers to help her and the company, and to show a willingness to sort the VAT affairs out as soon as possible.”

In making these considerations, the FTT observed the significant impact which a refusal to allow an appeal would have on EI and its director if the appeal were not permitted to go ahead. It also noted that Ms Mclaughlin was making her best efforts to cooperate with HMRC and had made it clear she wished to pay any VAT owing. It held in favour of EI, concluding that the overall circumstances of the matter merited the case being heard in full.

Constable Comment: This is an interesting decision as the Tribunals and Courts normally adhere to HMRC’s guidance around what is considered to be a reasonable excuse which can be found here. The facts of the case do not fall within the examples and definitions offered, yet the Tribunal adopted an equitable approach to making the decision in favour of the taxpayer.

3. Cancellation of VAT Registration

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

SBS provides training services under an agreement with Southern regional College (SRC), pursuant to this agreement, it provides work-based education and training through the operation of a restaurant. On 20 February 2018 SBS applied to de-register for VAT purposes on the grounds that it was making exclusively VAT exempt supplies of education and vocational training. It asserted that its supplies from its restaurant were ancillary to the overall VAT exempt activity of SBS.

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

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

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

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

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.


Revenue & Customs Brief 4 (2021) Technical Update

VAT and Partial Exemption

This Brief is important for partly exempt organisations whose trading activities have been impacted by the coronavirus pandemic, resulting in their existing partial exemption calculation methods no longer producing a “fair and reasonable result”.

Those organisations in the UK which make a mixture of both taxable and exempt supplies are partly exempt, for VAT purposes, and can only recover input tax to the extent that it relates to the provision of taxable supplies. Any VAT incurred exclusively in relation to making VAT exempt supplies is wholly irrecoverable (subject to de minimis rules) and any VAT incurred exclusively in relation to making taxable supplies is recoverable in full. VAT incurred on costs to support the business as a whole (used to make both taxable and exempt supplies) needs to be apportioned so that only VAT incurred in relation to taxable onward supplies is recoverable.  The VAT incurred relating to both taxable and exempt supplies is known as “non-attributable”.

The standard method of apportionment, bases the recovery of non-attributable VAT on the value of taxable supplies made as a proportion of all supplies made by the business. A Partial Exemption Special Method (PESM) may, however, be used if HMRC is satisfied that it would produce a fairer reflection of the use of residual input tax than the standard method. It is necessary to gain HMRC’s approval prior to switching from the standard method to a PESM or to alter an existing PESM.

There are many examples of where coronavirus has rendered existing methods unfair.

An organisation which generates a significant proportion of its taxable income through shops (including charity shops) may have seen a substantial reduction in trading over the course of the pandemic. For a partly exempt business, this might significantly restrict input VAT recovery. This point may be of particular interest to charities which generate taxable income through charity shops, the sale of donated goods by a charity being zero-rated.

Additionally, we advise several businesses which generate most of their annual taxable income from one major event such as a conference. Coronavirus may have prevented such events from taking place and this will leave many businesses with vastly different income streams.

There may also be cases where organisations that intended to make supplies covered by the VAT exemptions in relation to Cultural services, Sporting services, Education or Fund-raising events by charities and other qualifying bodies, did not make those supplies. There may be implications for these organisations regarding the recovery of non-attributable VAT incurred.

The fundamental point is that it is important to consider if your business has changed its ratio of taxable to overall supplies, or, if a PESM is in place, the effect of Covid is distortive.   In this context we have dealt with cases in which HMRC has accepted that the initial attribution of input tax to taxable supplies does not need to be revisited because those supplies did not arise (on the basis that the supplies were frustrated by circumstances outside the taxpayer’s control).  This is a complex area of VAT and we would recommend that any partly exempt business takes professional advice.

R&C Brief 4 (2021) outlines an accelerated process for VAT registered businesses to request temporary alterations to their partial exemption calculation methods to reflect changes to their trading activities because of the pandemic. HMRC will “…make sure coronavirus-related changes to partial exemption methods are considered, and where appropriate, approved swiftly”. Requests for such changes should be emailed to

HMRC has indicated that, in exceptional circumstances, it may consider the retrospective alteration of partial exemption methods. However, any alterations which are approved by HMRC under this accelerated process will have a default time limit of one tax year. If at the end of the year it is apparent that this will not be sufficient, you must submit a further request to continue the changes into a second tax year.

Capital Goods Scheme

The same accelerated process will be available to organisations which are required to recover input VAT on capital assets through the Capital Goods Scheme (CGS). HMRC has stated that a request for a change to a CGS calculation method is likely to be accepted where:

  • there is a Special CGS method in place and there has been a temporary change of use of the CGS item as a consequence of coronavirus, and the intention is to revert to the original use as soon as possible after the pandemic ends
  • an existing Special CGS method is in place and it becomes unreasonable, for example, due to no income arising from the capital item

However, HMRC is unlikely to accept changes to existing CGS methods where the change of use in the capital asset is planned to continue after the pandemic ends, for example, where a business has ceased trading from a premises, and does not intend to return to generating income at that location in the future.


If your organisation has been impacted by the coronavirus then it is essential to consider if your partial exemption calculations and any CGS calculations no longer produce a fair and reasonable outcome. This article lists some examples of the types of organisations which may be impacted but, in reality, it is essential that all partly exempt businesses consider this matter based on their own circumstances. Indeed, the taxpayer has an obligation to ensure that their partial exemption/CGS calculations produce an accurate result. Constable VAT can carry out a review of your current partial exemption and CGS calculations to establish if changes need to be implemented.

We have a successful history dealing with HMRC regarding CGS and partial exemption standard and special method applications and alterations and, where we conclude a more beneficial result for your organisation is achievable, are in a good position to prepare and submit the relevant paperwork to HMRC.

Please note that this blog post 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.


Danske Bank Technical Update

The CJEU has recently released its decision in the Danske Bank case (Case C 812/19).  The court considered whether supplies of services between the principal establishment of a company in one country and a branch of that establishment located within another country must be recognised as a supply for VAT purposes because the principal establishment is in a VAT group.

Danske Bank (DB) is a company with its principal place of busines in Denmark. It carries on activities in Sweden through a branch (DBDS).

DB’s principal establishment is part of a Danish VAT group.

DBDS is not part of that, or any, VAT group. Indeed, Danish law prevents the inclusion of overseas establishments in Danish VAT groups.

DB uses a computer platform in its activities in the Scandinavian countries. The costs associated with the use of that platform by DBDS are charged by DB to DBDS.

DBDS argued that it should not be required to recognise as supplies the services that it receives from DB. As DBDS is not in a Swedish VAT group and does not carry out any independent economic activity, it argued that both DBDS and DB are in effect one and the same person. Applying the simple formulation “You cannot make a supply to yourself” any ‘internal’ service provision between one establishment of Danske and another cannot be a supply on which VAT is due.

Considering previous caselaw such as FCE Bank, the Swedish Court had previously observed that DBDS, not being independent from DB’s principal establishment and not forming part of a Swedish VAT group, meant that both DBDS and DB were the same taxable person.  However, considering the CJEU’s judgment in Skandia, the Court observed that if DBDS were in a Swedish VAT group, the supplies would be treated as received not by DBDS as such but ‘by the Swedish VAT group’, treating the VAT group as a distinct legal entity. The inference being that DB’s inclusion in a Danish VAT group would have a similar consequence, i.e., the supply being considered must be viewed as made “by the Danish VAT group”, not “by DB’s Danish establishment”.   On that basis it placed the matter before the CJEU for its view on the treatment of services by DB to DBDS.

The CJEU concluded that, because DB’s principal establishment is in a Danish VAT group, ‘the Danish VAT group’ must be treated as a distinct ‘taxable person’.  In that context, the provision of services by DB to DBDS could not be viewed as a provision of services ‘by DB to DBDS’ and must be considered a provision of services ‘by the VAT group in Denmark to DBDS’.  As a result, a supply must be recognised, the effect being that DBDS is required to recognise and declare reverse charge VAT on supplies of services which it receives from DB.

Constable Comment: Under the UK’s VAT grouping provisions, a branch or establishment must have an establishment in the UK to join a UK VAT group. However, when a VAT group is in place the whole corporate entity is part of the VAT group, not just the establishment in the UK. Therefore, services provided between an overseas establishment and a UK establishment of the body (within a VAT group) are not normally regarded as supplies for UK VAT purposes, as they are transactions within the same taxable person. [There are some targeted anti-avoidance rules which we have not referenced.]

The main oddity of the CJEU’s Danske judgement is that it means that it is necessary to ‘import’ the rules of an overseas jurisdiction in assessing domestic VAT liabilities.

Had Danske’s principal establishment not been in a Danish VAT group then there would have been no recognition of a supply by DB to DBDS. So in effect the CJEU has said that Sweden must recognise the status of a company under a different country’s tax system as part of its own rules of taxation

As far as operations entirely within the EU are concerned this recognition of a company’s status in another EU territory is perhaps justifiable and possible to implement.  However, it is unclear whether this principle would or could apply when a non-EU country has granted “VAT group status”.  Hypothetically any non-EU territory could confer a special status as regards the taxation of supplies within a group of countries.  Is it then necessary to import that non-EU country’s ‘special status’ rules when considering whether services received by an EU establishment are subject to VAT?  If so, at what point are the rules of overseas tax authorities deemed to change the VAT treatment of services received by an EU establishment? 

Without a common framework of rules for VAT groups within the EU we are left with a confused situation.  A company operating in an EU territory that does not even allow VAT groups may find itself applying VAT to transactions based on a forced recognition of VAT group rules adopted in a different EU territory.           

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






Constable VAT Focus 11 March 2021


Pay back VAT deferred due to Coronavirus
Find out how to pay VAT payments deferred between 20 March and 30 June 2020. HMRC has updated its guidance – if your business is on the VAT Annual Accounting Scheme, or the VAT Payment on Account Scheme, you can join the scheme from 10 March 2021.The VAT deferral new payment scheme is open up to and including 21 June 2021.

VAT on sales of digital services in the EU
HMRC has updated its guidance to include links to guidance which is cited.

VAT EU exit transitional provisions
HMRC has added guidance to the Financial Services section of this guidance which now includes a link to the new detailed Transitional guidance for VAT specified supplies.

Completing VAT Return: Accounting for import VAT
Information about February entries on your January statement has been added.

Hotels and Holiday Accommodation (VAT Notice 709/3)
Information has been added about the extension to the temporary reduced rate for certain supplies of accommodation.

Catering, takeaway food (VAT Notice 709/1)
Information has been added about the extension to the temporary reduced rate for certain supplies.


Rishi Sunak has delivered the first budget since the end of the Brexit transition period. Prior to the budget, there was a significant amount of discussion around whether UK VAT rates would change to help assist the recovery of the UK economy following the coronavirus pandemic. Following the announcement of the Budget on 3 March 2021, we have released a special Budget Focus which offers our commentary on the VAT elements of the Budget. Our coverage can be read in full here.


Court of Justice of European Union

1. VAT Adjustments: Part or total non-payment

This case concerned a dispute between a Hungarian company, FGFZ, and the Hungarian tax authority. The latter refused to grant FGZF a right to make an output VAT reduction adjustment in relation to supplies for which it was not paid and where the customer had become insolvent.

Between October 2010 and January 2011, FGSZ sent EMFESZ Kft., a partner company, several invoices including VAT. During 2011, FGSZ declared and paid the VAT on those invoices to the tax authority. Before those invoices were paid, the debtor company was subject to winding up proceedings. On 13 December 2019, the liquidator of EMFESZ confirmed that the debt would not be paid. On 19 December 2019, FGSZ filed an application for the recovery of the VAT in respect of those invoices.

EU law provides 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 for the purpose of VAT accounting. However, Article 185 of the PVD states that “…no adjustment shall be made in the case of transactions remaining totally or partially unpaid or in the case of destruction, loss or theft of property…”. Despite this, it continues to give Member States the permission to require an adjustment to be made in the event of partial or non-payment.

The Hungarian tax authority refused to permit the adjustment on the grounds that such an adjustment would constitute “budgetary aid”. Under Hungarian law, taxpayers have a five-year time limit to apply for budgetary aid. This position was upheld by the first tier Hungarian Court and FGZV brought an appeal to a higher court on the grounds that, following EU caselaw such as Volkswagen and Biosafe, the time-limit should begin to run, not from the date on which the payment obligation originally provided for was to be fulfilled, but from the date on which the debt became irrecoverable. This matter was referred to the CJEU.

Considering the previous caselaw around this point in addition to the EU principles of legal certainty, fiscal neutrality and equivalence, the CJEU found that where a Member State lays down a limitation period after which a taxable person, who has a debt which has become definitively irrecoverable, can no longer assert his right to obtain a reduction in the taxable amount, that limitation period must begin to run not from the date of performance of the payment obligation initially provided for, but from the date on which the debt became definitively irrecoverable.

Constable Comment: This case confirms for taxpayers within the EU that if they receive part or total non-payment for a supply for which all of the output VAT has been accounted and that debt becomes formally irrecoverable, they will be able to adjust their output VAT position retrospectively, provided that such an adjustment is made in line with the time limit set by the relevant member state. This judgment confirms that the time limit begins to run once the debt is formally irrecoverable and not from the date of the tax point. Different states have the discretion to set different time limits so taxpayers should consider, carefully, the rules in any countries in which they may have a right to adjust.

Upper Tier Tribunal

2. Westow Cricket Club: Reasonable Excuse

Westow Cricket Club (WCC) appealed a decision of the FTT, which upheld an HMRC penalty imposed on it for incorrectly issuing a zero-rating certificate to a contractor in relation to the construction of a new cricket pavilion. At the time the certificate was issued, WCC was a community amateur sports club (CASC) but was not a charity. HMRC imposed a penalty on the basis that the certificate was issued incorrectly as WCC was not registered charity. The penalty was assessed in the amount of £20,937.

The Club raised funds to build a pavilion and sports hall adjacent to the cricket ground. Prior to any building work starting, on 22 March 2012, the Club wrote to HMRC giving details about the Club and the building project and seeking guidance on the zero rating of supplies to be made to the Club in the course of the construction of the pavilion and sports hall. HMRC’s response was not definitive and referred the Club to HMRC’s notice but was read by the Club as indicating that zero-rating was appropriate, and a certificate was issued to the contractors undertaking the work.

HMRC ruled that the certificate had been issued incorrectly and imposed a penalty but WCC appealed to the FTT on the grounds that it had a reasonable excuse for issuing the zero-rating certificate – it had relied on advice from HMRC, though later WCC accepted that it should not have issued the certificate. The FTT concluded that there was not a reasonable excuse on two grounds:

  • HMRC’s letter stated that it was not definitive advice and pointed the Club to consider further information.
  • The zero-rating certificate is explicit and asks for confirmation that the building will be used “solely for…a relevant charitable purpose, namely by a charity”. The requirement is expressly set out and there is no other objectively reasonable interpretation that might be applied. The Club is not a charity.

Considering that the FTT had failed to sufficiently consider what constitutes a reasonable excuse in this circumstance, the UT proceeded to remake the decision. It concluded that it was reasonable for a taxpayer in WCC’s position, run by a group of volunteers with little expertise on matters of indirect taxation, to rely on what was said in HMRC’s letter as constituting reliable advice. HMRC’s letter did not raise the issue of CASC/charitable status but commented that the pavilion appeared to meet the criteria for “village hall or similar”. This gave the impression, to an untrained eye, that HMRC was stating that the pavilion appeared to meet the criteria for zero-rating.

Therefore, the UT found that, in the circumstances, WCC had a reasonable excuse for issuing the zero-rating certificate as it had contacted HMRC for assistance and read the guidance to which HMRC directed it. It was reasonable, for charitable volunteers without any experience in indirect tax, to rely on what HMRC said, despite HMRC’s caveat that its advice was not reliable.

Constable Comment: This is an interesting decision as, it appears from the judgment, HMRC’s response to WCC’s enquiries explicitly stated that it was not reliable and drew its attention to public guidance to assist it in making a decision. However, the UT considered the roles and abilities of the volunteers running the charity and its conclusion that WCC had a reasonable excuse for its error indicates that the UT expects HMRC to adjust its conduct when dealing with different taxpayers.

3. Lilias Graham Trust: Exempt or Taxable?

This appeal by The Lilias Graham Trust (LGT) concerned whether its supplies are VAT exempt by virtue of their close association with a supply of welfare for children. LGT is a charity which operates a residential assessment centre where it assesses the parenting capabilities of those referred to it by a Local Authority (LA) in exchange for a fee which is charged to the referring LA. The FTT previously held that such supplies are VAT exempt as they relate directly to supplies of welfare for children. Whilst accepting that part of its service is VAT exempt LGT argued that the supply of accommodation or catering is specifically excluded from VAT exemption.

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

LGT argued that it was not necessary to consider whether there was a single, mixed or composite supply for the purposes of the exclusion from VAT exemption. The point being that there was no doubt that LGT was supplying accommodation and catering and that the finding that such supplies formed part of a larger supply did not preclude the different elements of that composite supply attracting different rates of VAT. This argument has previously been successful in the CJEU, albeit in different circumstances.

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

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

Constable Comment: The argument mounted by LGT is complex and revolves around European caselaw. Readers who have a particular interest in the composite/multiple/single supply issue may wish to read the judgment in detail alongside key cases such as Card Protection Programme and French Undertakers. Ultimately, the Tribunal found that LGT was supplying welfare services to local authorities, supplies of associated accommodation were ancillary and facilitative to these VAT exempt welfare services. It is unusual in a case of this type to see the taxpayer arguing for the addition of VAT, but in this instance there was a large amount of VAT on costs relating to the provision of the service that could be recovered by LGT if the supply were taxable and it is likely that the LA would have been able to recover any VAT charged to it.

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


Constable VAT Budget Focus March 2021

Welcome to this special Budget 2021 edition of Constable’s VAT Focus. In this edition of our regular newsletter, we focus on the VAT related announcements from today’s Budget.

Rishi Sunak has delivered the first budget since the end of the Brexit transition period. Prior to the budget, there was a significant amount of discussion around whether UK VAT rates would change to help assist the recovery of the UK economy following the coronavirus pandemic.

It was suggested that a decrease in the VAT rate could encourage consumer spending in an effort to help businesses which are struggling as a result of coronavirus and to generate additional tax income for HMRC.

However, no cut in the rate of VAT was announced. There are some VAT issues arising either from today’s Budget or that have already been announced and are to be legislated for in the Finance Bill 2021.

Reduced rate for Hospitality and Tourism

In July 2020, the Government announced a temporary VAT cut for certain supplies of hospitality, hotel and holiday accommodation, and admissions to certain attractions to apply from 15 July 2020 until 12 January 2021. This measure aimed to support businesses and jobs in the hospitality and tourism sector. In recognition of the extra assistance which establishments such as restaurants, pubs, bars and cafés needed to deal with the effects of the ongoing Covid-19 restrictions, this reduction was extended until 31 March 2021.

The Chancellor announced today that the reduced rate “for hard hit sectors” will be extended again until 30th September 2021. From this date, a new reduced rate of 12.5% VAT will apply until returning to the standard rate of 20% on 31st March 2022. HMRC has released Revenue & Customs Brief 2 (2021) which offers some clarity around the application of the temporary reduced rate.

VAT Registration

It was mooted that the Government could announce a reduction in the VAT registration threshold in order to increase the number of VAT registrations and correspondingly increase VAT revenue generated.

However, it was announced today that the VAT registration and deregistration thresholds will not change for a further period of two years from 1 April 2022. There will be no revisions to existing legislation and legislation will continue as follows:

  • the taxable turnover threshold which determines whether a person must be registered for VAT will remain at £85,000
  • the taxable turnover threshold which determines whether a person may apply for deregistration will remain at £83,000

The further 2 year period ends on 31 March 2024.

Extension of Making Tax Digital for VAT

As announced by Written Ministerial Statement on 20 July 2020, Finance Bill 2021 includes provisions that will enable the scope of Making Tax Digital for VAT to be extended to all VAT registered businesses with effect from 1 April 2022.

VAT Deferral New Payment Scheme

The VAT deferral new payment scheme was announced on 24 September 2020 and gives businesses the opportunity to make monthly payments of deferred VAT from March 2021.

This measure will be legislated for in Finance Bill 2021 for payment of the deferred VAT by instalments and for a penalty where the deferred VAT is not paid or there is no arrangement to pay.

The effect of this measure is that businesses that deferred VAT payments due between 20 March and 30 June 2020 now have the option to pay them in up to 11 interest-free instalments between 2021 to 2022.

Businesses that do not choose this option must pay any deferred VAT by 31 March 2021. Businesses may opt-in between February and June 2021 but with fewer instalments where take-up is in April (up to 10 instalments), May (up to nine instalments) and June (up to eight instalments), to ensure that full payment is received by the end of the financial year.

It is important that any businesses intending to take up this option act promptly. More information on how to opt to pay in instalments can be found here.

If any of these issues affect you and you would like further advice please contact us.

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


Constable VAT Focus 11 February 2021


Pay VAT deferred due to Coronavirus
HMRC has updated this guidance with information relating to the new scheme which allows businesses that deferred VAT payments between 20 March 2020 and 30 June 2020 to pay in 11 interest free instalments.

Claim VAT refunds in NI or the EU if you are established in NI or the EU
HMRC has updated its guidance on how Northern Ireland and EU businesses can claim refunds of VAT incurred on goods in the EU and Northern Ireland using the EU VAT refund system.

VAT Isle of Man
HMRC has updated its internal guidance advising its VAT Officers on dealing the control of UK businesses with establishments in the Isle of Man and Isle of Man businesses with establishments in the UK.

Value Added Tax EU Exit Transitional Provisions
Find out about the VAT treatment of transactions or movements of goods which span the end of the transition period.


The domestic reverse charge for construction services comes into effect in the UK on 1 March 2021. The reverse charge will apply to building contractors engaging sub-contractors and, similarly, to sub-contractors engaging others through the supply chain where the parties involved are registered for VAT in the UK and the payment for the supply is reported within the Construction Industry Scheme (CIS). It shifts the responsibility to account for VAT on the supply from the VAT registered supplier to their VAT registered customer.

It is essential that UK contractors, or anyone who is VAT registered and required to report transactions through the CIS, is familiar with this incoming change to UK VAT accounting. Read our guidance on this topic in full here.


Court of Appeal

1. Electronic Newspapers

This decision is the latest in the line of News Corp UK cases revolving around the VAT liability of electronically supplied newspapers from 2010 to 2016. Originally, the First Tier Tribunal held that such supplies did not attract the zero-rate of VAT for newspapers. The Upper Tribunal overturned this decision, concluding that the zero-rate did apply. HMRC appealed against that decision to the Court of Appeal (CoA).

The Upper Tribunal decision considered the “always speaking” doctrine of statutory interpretation which, in essence, suggests that statutes should be deemed to take account of relevant changes that have occurred since the statute was drafted. The argument mounted by News Corp revolved around how, when the law was drafted, electronic versions of newspapers were not available but that the purpose of the law (to encourage literacy, the sharing of information and democratic accountability) and the always speaking doctrine indicated that electronic newspapers should benefit from the zero-rate for newspapers.

In this instance at the Court of Appeal, HMRC reiterated its arguments from previous hearings. Its argument against the applicability of the zero-rate centred on the need for a strict interpretation of zero-rating provisions, meaning that the always speaking doctrine either does not apply, or applies in a different way, to zero-rating legislation which itself exists as a deviation from the harmonised system. The provisions of EU law which allow some zero-rating in the UK did not allow the UK legislation for zero-rating to be altered as zero-rating is a deviation from the harmonised system.

HMRC suggested that, when the zero-rate was drafted, Parliament could not have envisaged electronic newspapers falling within that rate as they did not exist. Based on an everyday interpretation of the word “newspaper” in the 1970s, HMRC argued that only a tangible hard-copy newspaper could fall within the rate. To support this position, HMRC highlighted that the relevant zero-rate for newspapers is contained in Schedule 8, Group 3 which only lists physical goods which, HMRC argued, shows that Parliament did not envisage any services being covered by the zero-rate for newspapers.

Ultimately, the Court held in favour of HMRC, considering that the language used to identify the specific tangible goods listed in Group 3 requires a narrow interpretation in line with a narrow and circumscribed Parliamentary intention. Adopting a broad and permissive interpretation of zero-rating provisions is unacceptable.

Constable Comment: Recently, the UK Government extended the zero-rating provisions to include electronically supplied publications from 1 May 2020. HMRC guidance on this topic can be read here.

This is permissible owing to the EU Directive 2018/1713 which specifically permits the inclusion of electronic versions of publications to be included in domestic zero-rating provisions. If your business or charity zero-rated electronic supplies of newspapers or other publications prior to 1 May 2020 then error corrections may be required. Constable VAT can assist with this.

Upper Tier Tribunal

2. Teaching Ceroc Dancing

This case concerned supplies of dance tuition made by Ms. Anna Cook. HMRC considered that such supplies are standard rated for VAT purposes whereas Ms Cook believed them to be exempt as supplies of tuition in a subject normally taught in school or university, supplied by an individual without an employer. The FTT had previously held in Ms Cook’s favour and HMRC appealed the decision to the Upper Tribunal.

The parties agreed that Ms Cook was making supplies of private tuition given by a teacher and that dance is a subject ordinarily taught in schools and universities. It is a well established principle in EU and UK law that, in order for the tuition exemption to apply, it is not necessary for the tuition to lead to formal examinations or qualifications, but the tuition must aim to develop the knowledge and skills of the student in a way that is not purely recreational.

However, HMRC argued that the supplies should attract VAT at 20% on the grounds that Ceroc is not ordinarily taught in schools or universities and, in any event, the classes were purely recreational and thus excluded from VAT exemption. HMRC’s argument is that Ms Cook does not, as the FTT concluded, make supplies of tuition in dance, but rather tuition in a specific style of dance, which is not ordinarily taught in schools and universities.

The Tribunal analysed the Ceroc dance tuition and found that there are roughly 500 moves involved, some with variations leading to roughly 900 pre-approved moves taught by Ms Cook. It also found that there are specific competitions and medals available for Ceroc dancers. Ceroc is advertised as a distinct activity – tuition is in Ceroc dancing and not “dancing” in general. The Tribunal concluded that Ceroc is a distinct form or style of dance. It then turned to consider if Ceroc is ordinarily taught in schools or universities, which it concluded, it is not. Therefore, it held in favour of HMRC that Ms Cook’s supplies were standard rated for VAT.

The Tribunal went on to consider the purely recreational point which, whilst having no bearing on the result of this case, may be of interest to readers. HMRC sought to argue that the transfer of knowledge and skill was not a key component of Ceroc dance classes and observed several factors which it believed pointed to Ceroc being purely recreational such as the presence of a bar and the relaxed atmosphere combined with the lack of academic course materials and the presence of “freestyle” sessions which lacked structured tuition.

The Tribunal did not agree with HMRC on these points, observing that, purely because an activity has a recreational element, it is not precluded from being tuition. It commented that all of the factors highlighted by HMRC were indicative of a recreational element but fell very far short of proving that the classes were “purely” recreational. This may be of interest to taxpayers who provide tuition in a relaxed or semi-recreational setting.

Constable Comment: The VAT exemption for private tuition can be a complex area of the law, especially around the requirement that the tutor is not acting as an employee and that classes should not be purely recreational. If you provide private tuition and would like to discuss whether VAT exemption is appropriate to your supplies, please contact Constable VAT.

First Tier Tribunal

3. Overpayments for Car Parks

This appeal concerned the VAT treatment of overpayments for parking at public authority pay and display off-street car parks. These overpayments typically occur when a customer of a public authority car park does not have the correct change for the parking tariff and the on-side payment machine cannot give change. The main issue is whether the overpayment should be treated as consideration for the supply of parking services and therefore subject to VAT, or whether, as the council argued, the payments are outside the scope of VAT.

In the case of NCP, on appeal from the Upper Tribunal, the Court of Appeal held that such an overpayment was part of the consideration where the customer uses a private car park. However, in a previous appeal by Borough Council of King’s Lynn and West Norfolk, the First Tier Tribunal concluded that overpayments are not proper consideration and therefore not subject to VAT if the car parking services were provided by a public authority.

HMRC argued that the present case cannot be distinguished from the decision in NCP which should therefore be applied.  The council argued that the decision In NCP should not bind the Tribunal as the council is a public authority and, although accepting that there is some contractual relationship between the council and a driver, the parking charges are set by statutory order and not by contract as they are by private operators who are free to charge whatever price they deem appropriate.

Following NCP, HMRC argued that the overpayment represents a counteroffer which is accepted by the on-site machine at the car park. This means that the machine is deemed to accept, on behalf of the council, the offer made by the customer to pay over the amount originally offered by the council tariff. The council argued that, as its prices are set by statute, that it does not make an offer to contract with the customer and it does not have the power to vary offer amounts or accept counteroffers and, as such, it cannot accept overpayments as counteroffers. This, it was suggested, indicates that the overpayments cannot be rightly regarded as consideration for a supply.

The Tribunal agreed with the Council’s submission that it cannot freely contract with customers as the prices are set by statute and, as such, the council cannot make counteroffers. However, it observed that there is nothing in the relevant UK legislation to prevent the Council from accepting counteroffers. Considering that there is a direct link between the amount received by the machine and the supply of a parking space and that the Council is legally capable of accepting counteroffers made by customers, the appeal was dismissed and the Council must regard overpayments for parking made at machines as taxable consideration for a supply.

Constable Comment: This case revolved around points of contract law as much as it did around VAT, with the deciding factor being the contractual position established between the council and a customer when an overpayment is made at an on-site parking machine. Advertised prices are typically “invitations to treat”; rather than constituting an offer in themselves, they invite the customer to make an offer which is then accepted by the supplier. In this case, the customer was deemed to have made an offer of the overpayment which the machine was then deemed to accept on behalf of the Council. A binding agreement is formed on acceptance of the offer made by the customer, in this case an agreement that the total amount paid represents consideration for a taxable supply of a parking space.

Please note that this blog post 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.


VAT Treatment of Early Termination Fees & Compensation Payments


Revenue and Customs Brief 2(2022), issued in February 2022, announced the long-awaited amendments to HMRC’s guidance on compensation and early termination payments.  This new guidance will become effective on 1 April 2022.

The new guidance describes various factors that will help determine whether a payment is compensation or consideration. These include whether the event giving rise to the charge was reasonably expected, and whether the charge is covering the supplier’s additional costs or is clearly punitive. Any existing rulings which are inconsistent with the new guidance cannot be relied on from 1 April 2022 and businesses should consider whether there is a need to change the VAT treatment of any payments received that may previously have been treated as outside the scope of VAT.


In response to developments in case law, in September 2020 HMRC announced an important change to its policy relating to the VAT treatment of early termination fees and compensation payments.  This announcement may be viewed here.

This change caused controversy and, after forceful representations by industry and trade bodies, HMRC has now withdrawn its requirement for a retrospective application of the change. Whilst the narrative in Revenue & Customs Brief 12(20) still (incorrectly) states a need for retroactive adjustments and error corrections, this is superseded by the rider:

After communication from businesses and their representatives, HMRC has decided to apply the updated VAT treatment set out in this brief from a future date.

We will issue revised guidance, and a new Revenue and Customs brief to explain what businesses need to do shortly. This will include guidance on what to do if they have already changed how they treat such payments because of this brief.

Until that guidance is issued businesses can either:

  • continue to treat such payments as further consideration for the contracted supply
  • go back to treating them as outside the scope of VAT, if that is how they treated them before this brief was issued

We anticipate that a likely implementation date will be February or March 2021 and there continues to be representations to HMRC not only on the implementation date but also the scope of the change, particularly as regards dilapidation payments due from departing tenants that have rented property.

As far as dilapidations are concerned it appears that these will seldom fall outside the scope of VAT where contracts require tenants to return the property at the end of a lease in the same condition as when it was first occupied, and if they do not do so the landlord may charge them for the costs incurred in doing remedial work.  HMRC is of the view that in most cases these payments are further consideration for the supply of the property because there is a direct link between the payment and the supply, and there is reciprocity as the tenant has signed up to return the property in the condition they obtained it. Where a landlord has not opted to tax and a tenant is fully taxable it may be more effective for the tenant to incur the cost of remedial work (to avoid the need to fund irrecoverable VAT if the landlord undertakes the work).  In other scenarios the final outcome will need to be considered on a case by case basis to evaluate the most effective approach from a VAT perspective.

As regards the broad question, “How should businesses deal with this issue?

If you have received early termination fees, liquidated damages or similar compensation payments from your customers in the past four years, it is especially important to consider if this change applies to you.  Any retroactive application will be voluntary but there may be cases in which it is advantageous to do so.  For example, if VAT should have been charged to someone with a right to reclaim it (for whom a retroactive VAT charge would not increase costs) recognising a taxable supply might lead to an ability to reclaim additional VAT on related costs – for example by increasing taxable turnover in partial exemption calculations.  Where it is not possible to charge VAT to customers retroactively, it may still be possible to agree an additional input VAT recovery with HMRC.  Any decision on this should be made only after a careful evaluation.

It is essential to consider new contracts in the context of these changes.  Taxpayers need to ensure that they do not lock themselves in to contract terms that do not provide the flexibility to deal with any new obligation to account for VAT.  It is important that this VAT can be passed on as a charge to customers if a supplier is not to suffer a large cost.

The final point is that if HMRC selects an implementation date this may not provide fair protection to all taxpayers.  For example, if a contract was signed in 2020 but runs for several years then that contract may not provide the supplier with the right to add VAT to charges.  In our view such a taxpayer has a legitimate expectation that they should not be penalised and a key point is HMRC’s policy at the time a contract was agreed.  Taxpayers may need to make representations on this point.

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


Constable VAT Focus 26 January 2021


How to import and export goods between Great Britain and the EU
HMRC continues to update its guidance for traders who are involved with movements of goods between GB and the EU from 1 January 2021.

Changes to VAT accounting for Northern Ireland and Great Britain
HMRC has updated this guidance which gives information about when you can, or need to, account for VAT on your tax return if you are UK VAT registered.

Notifying an option to tax
During the COVID-19 pandemic, HMRC extended the time limit for notifying an option to tax from 30 to 90 days. The applicable period has been extended. This now applies to decisions made between 15 February 2020 and 31 March 2021

R&C Brief 1 (2021): Introduction of zero-rate for women’s sanitary products
This brief sets out the changes in the VAT treatment of women’s sanitary products across the United Kingdom, following enabling legislation in Finance Bill 2016 and as announced at Budget 2020

Check if you are established in the UK for customs
Many businesses need to consider if they are established in the UK for customs purposes following the end of the Brexit transition period. HMRC has released this guidance to assist businesses in reaching a conclusion.


First Tier Tribunal

1. Reduced Rate for Energy Saving Materials

In this case the appellant was Conservatory Roofing System Limited (CRSL).  The debate was about whether the appellant’s supplies of “roof insulation systems” constitute a reduced rated supply of insulation in roofs. HMRC argued that CRSL was providing a new roof entirely and that its services should attract the standard rate of 20% whereas CRSL believed that its supplies were reduced rated as energy saving materials.

CRSL is a company that specialises in enhancing and insulating existing roofs. A selling point is that customers will be able to use their conservatory all year round because of the insulating properties of its products. CRSL stated that in around 80% of cases it does not remove existing poly-carbonate roof panels. Instead, a new external light-weight roof tile system is secured to the outside, whilst on the inside, insulating material is provided. Plasterboard is applied to a bespoke timber frame ready for the application of decorative finishes and the insertion of LED downlights. In the remaining 20% of cases, roof panels are removed because they are too heavy to safely leave in-situ. Otherwise, no alteration is made to the existing conservatory roof structure.

CRSL has invoiced its customers with 5% VAT on its supplies and 20% VAT on additional components. CRSL submitted a VAT return for the VAT accounting period 01/18 showing an input tax claim for £15,618.86 on the basis that 90% of its supplies were reduced rated. HMRC conducted a visit to the appellant’s premises to assess whether the claim was accurate.

HMRC concluded that CRSL provided replacement roofs, which were chargeable at the standard rate of 20% VAT, rather than an ‘installation of insulation’ which would have been chargeable at the reduced rate of 5% VAT. The input tax claim was reduced to nil and an assessment was issued against CRSL for underpaid output tax, amounting to £13,457.96.

CRSL appealed this decision, arguing that the objective view of a typical customer is that they are purchasing insulation for a roof rather than a replacement for the existing roof. However, HMRC noted that the CRSL’s marketing material includes a description of its business as “The original conservatory roof replacement company”. Further to this, on the appellant’s website under the “Our Solution” section it is stated “Our roof tile system replaces the existing polycarbonate or glass roof and uses a lightweight sectional high-performance composite insulation product to deliver its exceptional results”.

The Tribunal considered relevant case law, and clearly stated that the scope of reduced rating for supplies is not determined by whether or not the materials are “attached to or applied”, but by whether what is supplied is confined to insulation or extends further than that, as for example in this case , to a new roof or replacement cost.

The Tribunal considered the list of “energy saving materials” provided in the notes to Schedule 7A, Group 2, VATA 1994 and observed that the majority of what CRSL supplied was not energy saving materials. Therefore, the appeal is dismissed and HMRC’s assessment against CRSL is upheld.

Constable Comment: This is a second case on this topic in the last six months. In both instances, the Tribunal has been clear that the reduced rate applies only to the installation of energy saving materials and not the replacement of roofs, to which the supply and installation of energy saving materials is ancillary in this case. The marketing literature used by CRSL did not appear to lend itself to the argument that it was not replacing roofs. Taxpayers need to consider the criteria very carefully before applying a reduced rate of VAT in any case. If the position is ambiguous it may be necessary to take professional advice.  

2. Loan or Consideration for Services?

This case concerned GLS Ltd (GLS), a property development company which, in 2016, received seven payments from Midside Finances Services Limited (MFSL) amounting to £282,000. GLS did not report this as income on its VAT return and HMRC subsequently assessed for VAT of £47,000 calculated on a VAT inclusive basis i.e. £282k x 1/6.

GLS appealed against this assessment on the grounds that it received the funds by way of a loan and not as taxable income for a supply of services. GLS had a history of borrowing money from MFSL and the two companies held a common director as well as having other directors who had been personal friends for a long time. GLS explained to the Tribunal that the amounts received were used to cover operating expenses and to make loans to other associated companies.

HMRC inspected GLS and issued a ‘best judgment’ VAT assessment in relation to the loan amounts. GLS claims to have shown the loan agreements to HMRC when they visited its premises, but the visiting officer dismissed the documentation as insufficient evidence that the payments were a loan. Further evidence was submitted to HMRC after the initial meeting, but this was also dismissed as insufficient proof of a loan.

The loan agreements in question were presented to the Tribunal which considered them alongside the fact that GLS had not provided any services to MFSL in exchange for the amounts received. The reason why the HMRC officer did not view these agreements as bona fide loan agreements is not clear. The Tribunal concluded that the agreements were loan agreements and that the VAT assessments should not have been raised.

The Tribunal held in favour of GLS and dismissed HMRC’s assessment of £47,000.

Constable Comment: This is another decision where HMRC has exercised ‘best judgment’ when raising a VAT assessment. Such cases can incur the cost of a Tribunal hearing if a taxpayer is unable to persuade HMRC of its position. This decision reinforces the point that it is important that all businesses maintain thorough VAT accounting records and transactions are properly documented to avoid the potential for confusion.    

3. Whether goods transported “by or on behalf” of the supplier

This case concerned Healthspan Limited (Healthspan), a Guernsey company involved with the sale of non-prescription health products to retail customers who place orders by phone, internet or post. Between April 2012 and January 2016, the majority of Healthspan’s products were dispatched from a warehouse in the Netherlands and delivered to customers in the UK.

Prior to this, goods were shipped from the Channel Islands under the Low Value Consignment Relief provisions, as a result of which no VAT was due on importation into the UK. However, Healthspan moved its stock and operations to the Netherlands following the withdrawal of relief for goods being shipped from the Channel Islands.

HMRC decided that such supplies are delivered “by or on behalf of the supplier” meaning that Healthspan is deemed to transport the goods to the recipient country and make a domestic sale there. Healthspan applied for a review of this decision on the grounds that consumers contract with a third-party company for delivery of the goods and, therefore, that the place of supply for their sale of goods was the Netherlands. Whilst not discussed in the case, presumably Dutch VAT has been charged on sales.

HMRC upheld the decision and issued an assessment for slightly over £27million, retrospectively registering Healthspan for UK VAT with an effective date of registration (EDR) in 2012. Healthspan appealed this decision to the Tribunal which referred the matter to the CJEU where it was stayed behind the case of Krakvet (our coverage can be read here.) In this case, the Court considered that goods are dispatched or transported on behalf of the supplier if it is the supplier, rather than the customer, that effectively takes the decisions governing how those goods are to be dispatched or transported.

Regarding Healthspan, for some types of customers, their only contract was with Healthspan and there is no doubt that these supplies are delivered by or on behalf of Healthspan. However, there was some debate around sales made online or via postal orders where the customer would sign a separate agreement with a courier service. Ultimately, following the decision in Krakvet, the Tribunal held that the nature and extent of the arrangements in place between Healthspan and the couriers used indicated that the customer had no real choice in the matter and, in reality, the courier was arranged for by Healthspan.

The Tribunal held that the goods were delivered by or on behalf of Healthspan and, in light of the decision in Krakvet, upheld HMRC’s assessment for over £27million.

Constable Comment: Following the decision in Krakvet and based on the findings of fact in the original 2018 case, the Tribunal could not realistically come to a different conclusion on this matter. However, Healthspan has appealed the original decision to the Upper Tribunal to establish if the First Tier was incorrect to find that Healthspan is responsible for organising the delivery of the goods. We will report on any further appeal.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. 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 newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.


Partial exemption and input VAT recovery

This article was originally published in February 2020 and has been updated to reflect changes occurring as a result of the UK leaving the EU.

If a business or a charity makes (or intends to make) both taxable and VAT exempt supplies, it is ‘partly exempt’. Partly exempt businesses must complete partial exemption calculations to calculate how much input VAT incurred can be recovered.

Generally, a VAT registered business can recover VAT incurred on expenditure that relates to:

  • taxable supplies it makes (or intends to make)
  • ‘foreign supplies’ (supplies made outside the UK that would be taxable if made in the UK)
  • ‘specified supplies’ (financial services supplied to persons belonging outside the UK or directly related to an export of goods, insurance services supplied to persons belonging outside the UK or directly related to an export of goods, and the making of arrangements for these specified supplies)

VAT incurred on expenditure that directly relates to exempt business activities is irrecoverable.

Business activities that may fall within VAT exemption include supplies of:

  • Insurance
  • Education
  • Finance
  • Health and welfare
  • Certain supplies of membership
  • Residential lets
  • Certain supplies of land/buildings where an option to tax has not been made by the supplier

Businesses making supplies of this nature may need additional support to calculate how much VAT incurred they can recover.

Standard method

This is the method ordinarily used by businesses that have not agreed a different method with HMRC. It is not necessary to agree use of this method beforehand but very occasionally it may give a result that is ‘unfair’ and further action may be required. This is dealt with later in this article.

The first step in the standard method is direct attribution of VAT bearing costs to supplies made.

A proportion of any non-attributable VAT incurred (aka residual VAT or VAT incurred on overheads) can be recovered.

The standard method of partial exemption uses an income based method to calculate the proportion of non-attributable input VAT that can be recovered:

* The value of taxable supplies includes those supplies with a right to VAT recovery i.e. ‘foreign’ and ‘specified’ supplies. The value of supplies used in the calculation excludes VAT.

The value of supplies of capital goods, incidental financial or real estate transactions, and self-supplies should not be included in the calculation.

Deminimis limits

If input tax attributed to a business’ exempt supplies is insignificant it may recover all input VAT incurred. If exempt input VAT is not more than:

  • £625 per month on average
  • half of the total input tax in the relevant period

a business can be treated as fully taxable.

There are simplified de minimis tests that may be appropriate for some businesses and charities.

Annual adjustment

Partly exempt businesses recover VAT incurred provisionally throughout their VAT accounting year. Partly exempt businesses are then required to complete an annual adjustment calculation that takes account of supplies made and input tax incurred across the entire VAT year and an adjustment to the VAT claimed may be required. This adjustment is normally made on the VAT return following a business’ partial exemption year end.

Partial exemption simplifications

Some businesses and charities may benefit from simplifications in place, such as:

  • In-year provisional recovery rate
  • Early annual adjustment
  • Use based method for new partly exempt businesses

Standard method override (SMO)

The standard partial exemption method is not suitable for all businesses, at all times. The standard method override applies when the standard method does not provide a ‘fair and reasonable’ recovery of input VAT.

If input VAT recovered in the year under the standard method differs ‘substantially’ to recoverable input VAT based on ‘use’ an SMO adjustment is required.

A difference is ‘substantial’ if it exceeds:

  • £50,000 or
  • 50% of the residual input tax incurred and £25,000.

This is not a common situation, but it is important to consider particularly in larger businesses.

Partial exemption special method (PESM)

If the standard method does not provide a ‘fair and reasonable’ input VAT recovery a business or charity may apply to use a partial exemption special method (PESM). A PESM is unique to the business. HMRC’s written approval is required to use a PESM. A formal PESM application to HMRC is required. Some examples of allocations and apportionments that may be appropriate are provided by HMRC in its VAT Notice 706:

  • output values
  • numbers of transactions
  • staff time or numbers
  • inputs or input tax
  • floor area
  • costs allocations
  • management accounts

With effect from 1 January 2011 a business or charity may apply for a ‘combined method’ which combines the business/non-business VAT recovery calculation and partial exemption calculation.

How Constable VAT can help

Constable VAT can assist businesses and charities in many different ways tailored to the client’s specific need, including:

  • Partial exemption workshops/training
  • Review of partial exemption calculations/annual adjustment calculations
  • Review of partial exemption method
  • Partial exemption special method (PESM) applications to HMRC

If you require assistance with partial exemption and want to discuss how Constable VAT can help please do not hesitate to contact us at any time on 01206 321029 or email and we would be pleased to assist. You may also wish to read HMRC’s Notice 706 (Partial Exemption).



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

Constable VAT Focus 18 December 2020


Exporting Excise Goods to The EU from 1 January 2021
Check the changes coming into effect regarding how you export and declare excise goods – alcohol, tobacco and certain oils.

VAT Annual Statistics
HMRC has released an overview of VAT statistics, covering receipts information and the characteristics of the VAT trader population in the UK.

Trading and Moving Goods in and out of Northern Ireland
Information has been added about where there may be changes to some processes from 1 January 2021; bringing goods into Northern Ireland from Great Britain and from outside the EU, what you need to do if you import goods into Northern Ireland and want to declare your goods not ‘at risk’, making declarations for bringing or receiving goods into Northern Ireland, transporting and carrying goods if you’re a haulier or a carrier and moving goods under transit.

Revenue & Customs Brief 21 (2020)
HMRC has published R&C Brief 21 (2020), this confirms the withdrawal of ‘airside’ tax-free shopping in the UK and the VAT Retail Export Scheme from Great Britain, following the UK transition.

The Value Added Tax (Miscellaneous and Transitional Provisions, Amendment and Revocation) (EU Exit) Regulations 2020
This measure makes amendments to existing VAT legislation and introduces saving and transitional provisions to allow for a functioning UK VAT system that meets obligations under the Withdrawal Agreement.

Complete your VAT Return to account for import VAT from 1 January 2021
From 1 January 2021, find out how to account for import VAT on your VAT Return if you’re using postponed VAT accounting.


We will be closing our offices on the afternoon of Thursday 24 December and will reopen on Monday 4 January 2021 at 9am. If you have any urgent queries during the Christmas and New Year holiday period, please do not hesitate to contact your usual Constable VAT partner by email and they will respond to you as soon as possible. We are aware that some of our clients may have concerns around Brexit as the transition period ends and we will be available to assist and offer support if required.

We have not sent Christmas cards to clients and contacts this year and instead donated essential groceries and other items to a local food bank. We would like to take this opportunity to thank all our clients and regular readers for your support in this difficult year for everyone. We hope that you and your families have a safe and peaceful Christmas and a healthy new year that is less challenging than 2020!


First Tier Tribunal

1. Incorrectly Charged VAT

This case concerned Kang & Mand Limited (K&M), a fish and chip business which changed its business activities in 2017 to become an investment company, holding the freehold interest in various properties. In August 2016, K&M purchased a pub which had been converted into residential flats and which it continued to rent out to residential tenants.

The seller of the property in question charged VAT to K&M in addition to the purchase price of £315,000, creating a VAT charge to K&M of £63,000. The seller had not opted to tax the property and, as the Tribunal observed, HMRC would not have accepted an option to tax regarding the property. Following completion of the purchase, K&M submitted a VAT return seeking to recover the VAT incurred as input VAT in September 2016.

An HMRC VAT compliance inspection in August 2017 revealed that K&M did not hold a valid VAT invoice to support the input VAT claim and that, moreover, the VAT paid should not have been charged to K&M by the seller as the sale of existing residential properties is VAT exempt. HMRC therefore issued an assessment to K&M for the VAT which it had incorrectly recovered.

K&M appealed against the VAT assessment on the grounds that the seller was a VAT registered trader and was required to charge VAT in relation to the sale of the property to K&M and, if allowed to keep the money, HMRC would receive an illegal windfall.

However, when the hearing took place K&M, which was represented by one of its directors, accepted that the appeal was misconceived and it had failed to appreciate that VAT should not have been charged on the sale made to it as sales of existing residential properties are VAT exempt.

The director, Mr Singh, requested an adjournment so that the incorrectly paid VAT could be recovered from the seller and repaid to HMRC. It subsequently requested an extension of time, but nothing has been heard from K&M or its representatives since the request for an extension in early 2020. In its absence, the assessment against K&M was upheld by the Tribunal.

Constable Comment: This case demonstrates the importance of ensuring the correct VAT position of high value transactions prior to their execution. In this instance, a fish and chip business significantly changed its original business activities and did not appear to have an adequate or full understanding of the implications. VAT which is incorrectly charged can never be recovered as input VAT and it is essential for businesses to seek professional advice when undertaking property transactions.

2. Input VAT Recovery by Holding Company

This case concerned Bluejay Mining PLC (BM), a holding company which operates in the mineral exploration and mining industry. The company acquires licences to explore for minerals in Austria, Finland and Greenland. It then undertakes works in preparation of extracting any minerals found.

Owing to domestic laws, the licences to explore are held by subsidiaries of BM which are established in the relevant countries. The licences are therefore held by these entities locally. Once the local subsidiary has a licence to explore, BM assembles a technical team and provides technical services to the subsidiary. It also loans the subsidiary the money required to pay for these services.

In return, BM is repaid 115% of the costs incurred by the subsidiary, essentially meaning that it would only be paid if the subsidiary generated profit. In addition, the loans were described as repayable “when sufficient cash resources are available”. HMRC argued that this indicated that there was an unwritten term in the loan agreements to the effect that the subsidiary did not have to pay back the funds until it was profitable. BM denied this, arguing that the wording used in its accounts was merely a reflection of the reality of any loan, an assertion with which the Tribunal ultimately agreed.

HMRC refused to repay over £550,000 VAT to BM on the grounds that it was not making, or intending to make, taxable supplies for consideration to its subsidiaries and/or there was no economic activity being carried on by BM which carried out the sole activity of generating income through investments. HMRC suggested that BM was not supplying the services to the subsidiaries to generate income but rather as a method of further investing in the operation. HMRC also argued that the loan and services payments being due when profitable did not represent a price which had been agreed upon for the provision of services, but instead represented investment returns.

In addition to considering a wealth of caselaw around this subject, the Tribunal also considered the loan arrangements and agreements for the provision of services. Based on this analysis, it concluded that BM was supplying services for a consideration – 115% of the costs incurred by the company in providing those services. It noted that the fact that repayment to BM was contingent does not mean there is no consideration. This seems to follow given the amount of work which is done throughout the UK on a contingent basis which HMRC accepts is performed for a consideration.

BMP’s appeal was therefore allowed and BMP is entitled to receive credit for input VAT amounting to over £550,000.

Constable Comment: This case offered an in-depth discussion of the topic of whether a holding company can deduct VAT incurred as input VAT when providing services to subsidiaries. It must have bona fide agreements in place, services must actually be supplied and loans must be repayable. Some readers may be interested in the complexities of these points if they are operating as a holding company which provides services to its subsidiaries. To discuss this complex and involved area of VAT law, please contact Constable VAT.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. 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 newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.