HMRC NEWS

Value Added Tax (Disclosure of Information Relating to VAT Registration) (Appointed Day) (EU Exit) Regulations 2020 (SI 2020/2013)
These EU Exit Regulations appoint 1 December 2020 as the day on which the Value Added Tax (Disclosure of Information Relating to VAT Registration) (EU Exit) Regulations, SI 2018/1228 will come into force.

List of customs agents and fast parcel operators
HMRC has updated its lists which help UK businesses find customs agents and fast parcel operators who can help submit customs declarations from 1 January 2021.

VAT and overseas goods sold to customers in Great Britain using online marketplaces from 1 January 2021
HMRC has published new guidance on how online marketplaces will deal with VAT for goods from overseas that are sold to customers in Great Britain from 1 January 2021.

VAT and overseas goods sold directly to customers in Great Britain from 1 January 2021
HMRC has also published guidance on how sellers will deal with VAT for goods from overseas that they sell direct to customers in Great Britain from 1 January 2021.

Pay VAT deferred due to coronavirus (COVID-19)
Find out how to pay VAT payments deferred between 20 March and 30 June 2020. HMRC has updated this guidance with details of how to opt-in to the new payment scheme under which, instead of paying the full amount owed by the end of March 2021, taxpayers can make up to 11 smaller monthly instalments, interest free. All instalments must be paid by the end of March 2022. Businesses and charities cannot opt in yet. The online opt in process will be available in early 2021. Taxpayers must opt in themselves; agents cannot do this.

CONSTABLE VAT NEWS

As the end of the Brexit transition period draws closer, it is essential that businesses monitor ongoing developments. We continue to update our coverage of Brexit and how VAT and business will be impacted. The situation, unfortunately, is still not perfectly clear; however, there are important steps which businesses should be taking as a matter of urgency if they have not yet done so. Our coverage can be read in full here.

Following the recent decisions in Chelmsford City Council and Mid-Ulster District Council, we have released updated coverage of Local Authority Leisure Facilities and VAT. The VAT liability of charges made by local authorities for use of sporting and recreational facilities has been brought into question. Our coverage can be read in full here.

CASE REVIEW

Court of Justice of the European Union

1. Entitlement to deduct VAT Incurred by Holding Company

This case concerned the right to deduct VAT incurred by Sonaecom SGPS SA (Sonaecom) in relation to expenditure incurred on the commissioning of a market research report with a view to acquiring shares in a telecommunications business and, secondly, VAT incurred on a commission paid to a bank for organising a bonded loan to enable the purchase of those shares. No acquisition occurred and the capital secured through the bonded loan was, instead, made available to the parent company of the group which Sonaecom is in.

Sonaecom is a mixed holding company which acquires and holds shares in businesses. It also provides ongoing, taxable, support services. It sought to deduct the VAT incurred on the market research report based on its intention to provide ongoing management and consultancy services to the telecommunications business which it intended to purchase. Considering previous caselaw such as Ryanair, the Court found that Sonaecom was permitted to deduct this VAT incurred as input VAT as it related to a genuine intention to provide taxable services to the business being acquired.

However, it turned to consider the VAT incurred on the commission paid to an investment bank for arranging a bonded loan. Following the Principal VAT Directive, VAT incurred can be deducted based on the use to which it was consumed. In the present circumstances, the bonded loan was used to make extra capital available for Sonaecom’s parent company.

The Court observed that this expenditure was incurred with a view to investing in new business segments and that, therefore, this expenditure did not relate to any intention to make taxable supplies of management services to subsidiaries. Indeed, the use to which the loan was put (making extra capital available to the parent company), is not taxable. Therefore, the Court held in favour of the authorities in relation to this point, confirming that this VAT incurred was not recoverable as input VAT.

Constable Comment: This is an interesting decision in an area where there is already extensive caselaw. In order for a holding company to deduct VAT incurred on market research based on an intention to provide management services to the new subsidiary, the arrangements must be bona fide and enshrined in contract. Payments should also actually pass from the subsidiary to the holding company. However, where VAT is incurred on commissions for the arrangement of loans to permit the purchase of specific shares, but that loan is not used to buy those shares but is instead passed through to a parent company, no taxable supply arises and the VAT incurred is not recoverable. We would always recommend that where holding companies do incur VAT on expenses that thought is given to whether that VAT incurred can be reclaimed.

Upper Tier Tribunal

2. VAT Liability of Juice Cleanse Meal Replacement Products

This recent appeal in The Core (Swindon) Limited considered the correct VAT liability of meal replacement shakes made from juicing raw fruits and vegetables. The Core offers “Juice Cleanse Programmes”, under which customers replace all of their meals over a set period of time with smoothies and shakes supplied by the company. In 2018, the FTT held that the meal replacement products were liable to the zero-rate as a food and not a beverage. HMRC were given permission to appeal to the UT on the grounds that the FTT had erred in law.

HMRC appealed against this decision on the grounds that the FTT had given too much weight to the way the product was marketed and the purpose for which the products were purchased. It commented that the FTT had set too much store by the tests in Bioconcepts which HMRC have adopted. The beverages test is in five parts:

• it must be a drinkable liquid that is commonly consumed; and it must be
• characteristically taken to increase bodily liquid levels; or
• taken to slake the thirst; or
• consumed to fortify; or
• consumed to give pleasure.

The FTT had relied heavily on this decision and HMRC argued that these tests are not definitive. It suggested that the FTT erred in concluding that because the products were marketed as meal replacements, that they could not be beverages. Representing HMRC, Mr Vicary drew an analogy to a retailer marketing a chocolate bar as a meal replacement and, therefore, being allowed to zero-rate the product and highlighted how this would be an unacceptable result.

However, in this instance, the UT concluded that it had not erred in law and dismissed HMRC’s appeal. It considered that equal weight had been given to the way the products were consumed, and why they were used, as well as the way that they were marketed.  The juice cleanse products sold by The Core were, and continue to be, correctly VAT zero-rated.

Constable Comment: This case demonstrates that marketing material, and the purpose for which a typical consumer would purchase the product, are important factors to think about when reaching a conclusion on whether a product is a beverage or not and should be considered closely, albeit that other considerations should be made. This principle applies more broadly in all cases of classification for VAT purposes, where all of the facts must be considered and sometimes an ‘on balance’ conclusion formed. In cases of genuine uncertainty within the law and HMRC guidance then it is possible to apply to HMRC for a non-statutory clearance.

We act as VAT advisors to many businesses supplying similar products to the taxpayer in this case. If you have any doubts as to the correct VAT liability of the supplies your business makes please do not hesitate to 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.

HMRC NEWS

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.

Prepare to import goods from the EU to GB from 1 January 2021
HMRC has released useful step-by-step guidance to assist businesses which, after the end of the transition period, will continue to bring goods into GB from the EU. Businesses and Charities in England, Wales and Scotland need to complete the following actions to continue importing from EU countries from 1 January 2021.

Prepare to export goods from GB to the EU from 1 January 2021
HMRC has issued detailed step-by-step guidance to assist businesses which, after the end of the transition period, will continue to ship goods to the EU from GB. Businesses in England, Wales and Scotland need to complete the following actions to continue exporting to EU countries from 1 January 2021.

List of customs agents and fast parcel operators
From 1 January 2021, many businesses will require a customs agent in the UK. HMRC has provided a list of customs agents and fast parcel operators who can assist with the submission of customs declarations.

CONSTABLE VAT NEWS

As the end of the Brexit transition period draws closer, it is essential that businesses stay up to date with ongoing developments. We continue to update our coverage of Brexit and how VAT and business will be impacted. The situation is still not perfectly clear; however, there are important steps which businesses should be taking as a matter of urgency if they have not yet done so. Our coverage can be read in full here.

We have also recently released a blog which discusses deferred VAT payments owing to COVID-19 and how they interact with businesses including scenarios such as joining a VAT group registration or deregistering for VAT. This will be of interest to any business which is considering changing its operations and has deferred VAT payments throughout the pandemic. Read in full here.

Some readers may also be interested in our coverage of the recent decision in the Mid Ulster District Council VAT case which considered the VAT liability of charges made by local authorities to the public for access to sports and leisure facilities in Northern Ireland. HMRC contended that the charges should be VAT exempt following the London Borough of Ealing case, after which HMRC accepts that the sporting exemption applies to such charges. The local authorities disagreed and suggested that the charges are outside the scope of VAT.

CASE REVIEW

First Tier Tribunal

1. VAT Liability of Pitch Hire

This case considered Netbusters UK, a company which organises various football and netball leagues and the associated supply of pitches for those games to take place. It argued that its supplies were VAT exempt, HMRC believed them to be standard rated. It enters into agreements with third parties, such as local authorities and schools, to hire venues belonging to those third parties for set periods of time. It then hires those venues to its customers. Usually there is a toilet and changing room at the venue, although not always, and other facilities are not provided.

Netbusters UK had treated supplies of pitches as standard rated but, in 2016, submitted a claim to HMRC for the repayment of overpaid output VAT for 2013-2016 in relation to the supply of pitches. It also began treating its supplies as VAT exempt from 2017 onwards. HMRC refused the VAT repayment and assessed for unpaid VAT for those VAT accounting periods where supplies were treated as VAT exempt. The overall VAT amount in dispute was just over £600,000.

Schedule 9, Group 1, VATA 1994 exempts from VAT the grant of any interest in or right over land or any licence to occupy land other than the listed exceptions, one of which is the grant of facilities for playing sport which is standard rated for VAT. However, Note 16 to Group 1 states that the exception for sports facilities does not apply where the grant of the facilities is for:

(a)a continuous period of use exceeding 24 hours; or

(b)a series of 10 or more periods, whether or not exceeding 24 hours in total, where the following conditions are satisfied—

(i)each period is in respect of the same activity carried on at the same place;

(ii)the interval between each period is not less than one day and not more than 14 days;

(iii)consideration is payable by reference to the whole series and is evidenced by written agreement;

(iv)the grantee has exclusive use of the facilities; and

(v)the grantee is a school, a club, an association or an organisation representing affiliated clubs or constituent associations.

HMRC argued that Netbusters UK’s supplies did not satisfy criteria (iv) and (v) as the supplies it receives from local authorities are properly classified as “permission to use sporting facilities”. In support of this, HMRC submitted that the agreements in place between Netbusters and the third-party pitch providers do not create a tenancy and do not provide for exclusive use of the facilities. As Netbusters does not receive the right to exclusive use of the facilities, it cannot confer that right to another. Further, HMRC argued that Netbusters is not a school, club, an association or an organisation representing affiliated clubs or consistent associations, and neither are its customers.

Netbusters referenced HMRC’s guidance, issued after the decision in Goals Soccer Centres plc which concluded that supplies of pitches by a league management company were VAT exempt, which states that HMRC accepts the decision applies to all businesses who operate in similar circumstances, including traders who hire pitches from third parties such as local authorities, schools and clubs. Pointing to historic caselaw, Netbusters highlighted that what it receives from the third-party providers is a licence to occupy and not something else as HMRC had suggested.

The Tribunal agreed with Netbusters that it was receiving licences to occupy. It also agreed that HMRC’s argument was fundamentally misconceived as the question in hand related to supplies made by Netbusters, not received by it. Therefore, for the purposes of Note 16, Netbusters is the grantor and not the grantee.

HMRC then mounted a new argument which was not contained in its statement of case, stating that the customers of Netbusters, i.e. the grantees, are not schools or associations but individuals and sports teams formed for the purpose of playing in that league. Netbusters claimed that it was unacceptable and unfair of HMRC to introduce a new argument at this stage, especially given as the dispute has been ongoing for four years. Considering the Tribunal rules and previous comments made by judges, the Tribunal refused to hear or rule on that part of HMRC’s argument as there would be clear prejudice to the appellant.

Therefore, Netbusters appeal is allowed and the overpaid VAT should be repaid and the VAT assessments for later VAT accounting periods expunged.

Constable Comment: Previous caselaw states that there is clear prejudice to an appellant in not knowing HMRC’s case and that litigation should not be conducted by ambush. The appellant always has a right to be put in a position where it can properly prepare its case. Introducing this argument during the Tribunal hearing meant that Netbusters had no evidence to hand, nor any time to obtain such evidence, to argue about the status of its customers and so could not respond to HMRC’s argument at all – this would be patently unfair. It will be interesting to see if HMRC appeal this decision to the Upper Tier Tribunal. Organisations making supplies of sporting services may wish to consider the VAT liability of such supplies. Please do not hesitate to contact Constable VAT should you wish to discuss the potential implications of this decision.

2. VAT Mini One Stop Shop

This case concerned Krystal Hosting Ltd (KHL), A UK company which supplies web hosting services across the EU. Through its agent, GrowFactor (GF), it registered for the VAT MOSS scheme in July 2017. It failed to submit its first three MOSS returns on time and, as a result, HMRC cancelled its MOSS registration in May 2018. Following a two-year suspension from the MOSS scheme, KHL re-registered for VAT MOSS.

It now appeals against the original cancellation of its VAT registration in order to enable it to account for the VAT due on its supplies (around £25,000). If the appeal is unsuccessful, KHL will have to account for VAT in each of the EU member states in which it has made supplies at an estimated cost of around £50,000. The basis for the appeal is that reminder notices sent by HMRC were inadequate and so did not entitle HMRC to cancel the VAT registration.

GF has acted as KHL’s agent throughout the entire period. A taxpayer’s agent can access the taxpayer’s online tax account but cannot view HMRC communications sent to the taxpayer. Essentially, KHL argues that it abdicated its responsibilities to GF and, therefore, never received any notification that it had defaulted as GF was not privy to these communications. Whilst KHL received generic emails which stated that it had received an online communication from HMRC, it did not think it could be expected to log into HMRC’s online system itself to check the messages. Instead, it assumed its agent’s silence, following the receipt of that email by KHL to mean that there had been no important communication.

KHL submitted that it receives numerous emails every day in relation to all sorts of different taxes and that, in circumstances where the taxpayer has delegated all of its tax compliance to an agent, such a generic email alerting it that there had been online communication was not sufficient to alert KHL to the existence of an important message.

Responding to this argument, HMRC observed that it is only required to issue reminders to taxpayers regarding overdue VAT returns, it does not require them to have been read. Indeed, this follows the general postal rule of UK law. HMRC further submitted that it was clear that the reminders were received by KHL, even if it declined to read them. It was stressed that, ultimately, the taxpayer is responsible for tax compliance and cannot relinquish all responsibility to an agent.

The Tribunal agreed with HMRC and concluded that KHL had received sufficient reminder notifications from HMRC, all of which had been received by KHL and in time. KHL’s belief that it had no responsibility for its own tax compliance does not excuse it from its obligations. It will now have to account for VAT in a number of EU countries.

Constable Comment: This case is a reminder to businesses that simply appointing an agent does not absolve them of tax responsibilities. Indeed, if a business receives several messages from HMRC and its agent does not contact them regarding anything over several years, one might imagine a reasonable taxpayer wishing to fulfil its obligations would clarify its position with its agent or at least check its HMRC online account periodically. The VAT MOSS is a useful and efficient simplification which, as is demonstrated, can save businesses substantial amounts of money. After the end of the transition period, UK businesses will not be able to report their EU sales of digital services through their current Union MOSS registrations and should consider registering in a different EU member state for Non-Union MOSS to continue supplying digital services across the EU.

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.

HMRC NEWS

Accounting for VAT on goods moving between Great Britain and Northern Ireland from 1 January 2021
HMRC has released new guidance discussing the movement of goods between GB and Northern Ireland.

Revenue & Customs Brief 16: VAT liability of payroll services
HMRC has released a new Brief following the decision in Cheshire Centre for Independent Living which states that HMRC’s position regarding the supply of payroll services to disabled individuals is that they are taxable at the standard rate.

VAT Personal Export Scheme
HMRC has updated Public Notice 707 with new contact details for submission of Form VAT410.

VAT on New Means of Transport
HMRC has updated Public Notice 728 with new contact details for submission of Forms VAT415 and VAT411.

CONSTABLE VAT NEWS

As the end of the Brexit transition period draws closer, it is essential that businesses stay up to date with ongoing developments. We continue to update our coverage of Brexit and how VAT and business will be impacted. Whilst the situation is still not perfectly clear, there are important steps which businesses should be taking as a matter of urgency if they have not yet. Our coverage can be read in full here.

We have also recently released a blog discussing some general considerations and common VAT accounting mistakes which we encounter when dealing with businesses. This piece aims to point out some helpful highlights which may be of assistance to businesses.

CASE REVIEW

CJEU

1. Bad Debt Relief

This referral concerned E, a Polish incorporated tax adviser whose supplies to domestic businesses attract VAT at the standard rate. It provided services to a client and furnished its client with a VAT invoice. Importantly, at the time the invoice was issued, the customer was registered for VAT and was not subject to insolvency or winding-up proceedings. However, within 150 days of the issue of the invoice, the client was wound up and no payment was made by the customer against the invoice.

As the invoice was neither settled nor assigned, E requested permission to apply bad debt relief. The Polish authority refused the application on the grounds that Polish law requires that both parties to a transaction continue to be VAT registered, and not subject to insolvency proceedings, until the day before that on which the tax return containing an adjustment is filed.

E appealed this decision in the Polish court system which referred the question of whether EU law precludes a domestic requirement as set out in the above paragraph.

The CJEU considered that domestic authorities are permitted to derogate, in some circumstances, from the VAT Directive in order to combat uncertainty or to deal with localised issues which may distort the VAT system of that economy. The question which it therefore posed for itself is whether the imposition of these extra requirements in Poland was justified by the need to combat uncertainty, for example around whether the non-payment of the debt is definitive.

Considering previous caselaw and the general principles of neutrality and proportionality, the CJEU concluded that the domestic provisions were too restrictive and prevented taxable persons from exercising their rights to bad debt relief. It noted that E was entitled to rely on the EU provisions over the Polish provisions owing to the principle of direct effect and the primacy of EU law.

Constable Comment: The Court also observed that this judgment implied that there are several other Polish domestic laws which may be ultra vires and that Polish companies can rely on EU law rather than the domestic provisions. Polish businesses should consider their bad debt relief position and if they may be able to benefit from this confirmation that they may rely on EU law. The decision should also act as a reminder to UK businesses that, if the cash accounting scheme is not operated which offers inbuilt protection against outstanding payments, that there is a VAT bad debt system available to deal with the non-payment of invoices by customers.   

Upper Tier Tribunal

2. VAT Liability of Payroll Services

Readers may remember the case of Cheshire Centre for Independent Living (CCIL) at the First Tier Tribunal (FTT). The FTT concluded that payroll services being supplied by CCIL were VAT exempt as they were ancillary to an underlying supply of VAT exempt welfare. Our coverage of the First Tier decision can be read here.

HMRC appealed this decision to the Upper Tribunal (UT) where, in its statement of case, HMRC introduced a new argument which it had not employed at the FTT. CCIL conceded that this new argument won the dispute for HMRC and withdrew its case before the (UT) hearing. However, it sought costs from HMRC arguing that it was wholly unreasonable of HMRC to not identify their “trump argument” which was available to the Commissioners prior to any Tribunal proceedings. Both CCIL and the FTT had proceeded on the basis that HMRC had accepted that the supply of care was VAT exempt and HMRC had not done anything to prevent this impression.

HMRC argued that it never actually confirmed that it believed the underlying supply to be VAT exempt and, on a careful analysis, the Tribunal noted that this was correct. However, it was observed that “… the subtlety of that point was lost on CCIL, who along with the FTT, clearly proceeded on the assumption that a concession had been made.” The suggestion here being that HMRC was aware of the assumption being made by the FTT and CCIL but did not correct either party. After assessing the rules around when a Tribunal may award costs, it was concluded that HMRC’s conduct in not approaching its position on the case in its original statement of case, and in continuing to fail to do so, amounted to unreasonable conduct.

In awarding the application for costs, The FTT commented that CCIL bore some responsibility for incurring its costs as it failed to evaluate fully the strength of its case when viewed “in the round” and for not taking steps to resolve the ambiguity around whether HMRC had conceded that there was a VAT exempt supply arising. However, owing to HMRC’s unreasonable conduct, the Tribunal awarded 30% of costs incurred to CCIL.

Constable Comment: Whilst it is positive to see that costs were awarded in this case, it seems harsh that CCIL were penalised for responding specifically to HMRC’s reasoning for making its original decision rather than attempting to envisage where HMRC may have taken the argument further down the line. To require a charity providing payroll services to disabled individuals to extrapolate HMRC’s reasoning for reaching a decision, and to try to deduce if HMRC may have any further arguments which it has not yet employed, may appear a restrictive standard for reasonableness. Indeed, the FTT did not comment specifically on whether HMRC had actually considered this argument prior to the UT appeal – a factor which seems relevant in concluding whether CCIL is to blame for not preparing a counterargument.

First Tier Tax Tribunal

3. Mid Ulster District Council

This recent First Tier Tribunal (FTT) decision in the case of Mid Ulster District Council considered the VAT liability of charges made by local authorities to the public for access to sports and leisure facilities in Northern Ireland. HMRC contended that the charges should be VAT exempt following the London Borough of Ealing case, after which HMRC accepts that the sporting exemption applies to such charges. The local authorities disagreed and suggested that the charges are outside the scope of VAT on one of two grounds:

• The supplies of leisure facilities are not economic activities within the meaning of the PVD, or
• The supplies are provided by the councils acting as public authorities under a special legal regime so are not made by a taxable person

Article13 of the Principal VAT Directive (PVD) provides that Government bodies shall not be regarded as taxable persons in respect of transactions in which they engage as public authorities, unless their treatment as non-taxable persons would lead to significant distortions of competition. The Council argued that its supply of leisure and recreational facilities fell within these criteria.

Previous CJEU caselaw indicates that a public body can be treated as non-taxable where it engages in an activity under a “special legal regime” applicable to bodies governed by public law or under the same legal conditions as those that apply to private economic operators. The Tribunal primarily suggested that, when deciding if an activity is being engaged in under a special regime, the following factors are irrelevant:

• The subject matter of the activity
• The purpose of the activity
• The fact that private operators carry out similar services

The Council argued that it provided leisure and recreational facilities pursuant to a requirement to do so contained in the Recreation and Youth Service (Northern Ireland) Order 1986, which essentially provides that Councils are required to provide recreational facilities. Noting that this is the case, the Tribunal turned to consider whether Article 10 constitutes a “special legal regime”. Observing that the requirements of the Order do not apply to the private sector. It concluded that this criterion was satisfied and went on to consider whether the Councils being treated as non-taxable persons would distort competition.

The FTT agreed with the Council (it was acting under a special regime) which highlighted the specific challenges which are faced by Northern Irish Councils and the lengths to which they go to deliver community relations outcomes. It was stressed how any private operator would not be able to deliver facilities that went any way close to being comparable to the community-driven facilities demanded from Councils. Therefore, the Council’s treatment as a non-taxable person does not significantly distort competition.

Constable Comment: This case is not binding as it was only heard in the First Tier Tribunal. It is not known whether HMRC will appeal the decision as this was a lead nominated case with others stood behind it. It is estimated that between £50 million and £70 million will be repayable by HMRC to Northern Ireland councils. The decision is effective in Northern Ireland owing to special equality and diversity laws. It offers an interesting analysis of when a public body acts in its role as a public authority under a special legal regime which means that it is treated as a non-taxable person for VAT purposes. This will be of interest to all public bodies which may need to consider if they should be treating themselves as taxable regarding certain types of supply. The FTT rejected the Councils’ argument that operation of the leisure facilities was not an economic activity. 

4. Recovering VAT incurred on the installation of Roller Blinds

This case concerned Wickford Development Company Ltd (WDC), a UK property development company which is currently engaged in constructing 1,600 homes in Essex. The case centred around the supply by WDC of installed roller blinds in its new homes which it argued were building materials and so bore a right to input VAT recovery.

HMRC argued that blinds are not building materials and, as such, WDC was not allowed to recover the input VAT incurred owing to the “builder’s block”. This prevents construction companies recovering VAT incurred on non-building materials and supplying them onwards in one zero-rated supply. Therefore, the case turned on the definition of “building materials” for VAT purposes.

Readers may remember the case of John Price in which the FTT confirmed its belief that input VAT was recoverable on such blinds supplied by property construction companies as part of a new home development. However, following this case, HMRC issued a Brief which stated that its policy had not changed and that input VAT on blinds was still irrecoverable. Somewhat cynically, it did not appeal the John Price decision to the UT as, had the UT confirmed the FTT’s findings, the decision would have been binding on HMRC and taxpayers.

Counsel for WDC highlighted that installed roller blinds are a common feature which are included by builders in property developments and pointed towards marketing material from several different firms, all of which either had blinds fitted as standard or provided blinds as an optional extra. It seems clear from WDC’s submissions that blinds are ordinarily incorporated by builders in property developments and the Tribunal agreed with this despite HMRC’s insistence that WDC could not provide quantities for the number of blinds fitted by its competitors and so could not know what is ordinarily incorporated by them. WDC highlighted that it could not know exact quantities for its competitors but that it was aware of what they offered.

HMRC mounted a line of argument that suggested that blinds were caught by one of the exceptions to the provisions which discuss what supplies do give a right to VAT recovery when supplied by builders as part of one zero-rated supply. It argued that blinds should be regarded as chattels and, as such could not be regarded as building materials. Additionally, it suggested that blinds should be regarded as furniture. The Tribunal dismissed these arguments as “… obviously incorrect and patently untenable”.

The FTT concluded that blinds are building materials and that WDC was entitled to recover input VAT which it had incurred on them in order to make its onward zero-rated supply.

Constable Comment: It will be interesting to see how HMRC respond to this decision, having now lost two cases before the FTT. HMRC may decline to appeal again so that it doesn’t become a binding decision in the Upper Tribunal. However, the more FTT decisions which go in the taxpayers favour on the matter, it seems the weaker HMRC’s argument that blinds are not building materials will become. HMRC may need to change its guidance on this topic as it is, in the view of the Tribunal, incorrect. There could now be an opportunity for property development businesses that are constructing houses to sell to reclaim VAT incurred on roller blinds but have not reclaimed that VAT as input tax. It may be that some businesses in the sector were aware of HMRC’s policy and did not reclaim VAT incurred on these costs. It may be that some businesses that have reclaimed this VAT incurred as input VAT have received VAT assessments from HMRC disallowing an input VAT reclaim. We would remind readers that there is currently a 4-year cap in place which allows taxpayers and HMRC to make retrospective adjustments to VAT returns submitted. Therefore, if businesses have not reclaimed VAT incurred on the purchase and installation of roller blinds there may now be a chance to revisit VAT returns submitted in the last 4 years. Please do not hesitate to contact Constable VAT if you would like to discuss this potential opportunity.       

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.

Welcome to the third 2020 edition of the Constable VAT Land & Property Focus. This newsletter is intended for readers with an interest in the land and property sector and provides a summary of recent updates and significant judgments from the Tribunals and Courts which may be relevant to you or your business.

HMRC NEWS

Revenue & Customs Brief 6 (2020)
This Brief concerns the VAT treatment of property search fees charged by solicitors and conveyancers. From 1 December 2020, the postal concession will be withdrawn. Since 1991, this concession has allowed solicitors and conveyancers to treat such fees as disbursements when property searches are conducted by post, even though the formal conditions for such treatment are not met. The First-tier Tribunal decision in Brabners LLP (2017) TC 06093, agreed with HMRC that electronic (online) search fees were not disbursements. Allowing postal search fees to continue to be treated as VAT disbursements in all cases is inconsistent with that decision.

Revenue & Customs Brief 11 (2020)
HMRC has released this brief which explains how changes to existing leases are treated for VAT and Stamp Duty Land Tax purposes. As a result of the current COVID-19 pandemic, many tenants are suffering a loss of income and want to vary the terms of their lease with their landlord. This brief has guidance on the appropriate VAT and Stamp Duty Land Tax treatment of the most common lease variations.

Revenue & Customs Brief 12 (2020): VAT Early Termination Fees and Compensation Payments
HMRC has released a new Brief, following recent judgments from the CJEU, which announces an important change to policy. Fees and payments charged where a contract is terminated early were previously outside the scope of VAT, now HMRC regards them as taxable in line with the main contract. Further commentary can be found in our blog here.

DOMESTIC REVERSE CHARGE

The domestic reverse charge for construction services was due to be implemented on 1 October 2019. However, in September 2019, HMRC announced that this would be delayed for 12 months for further consultation following concerns which had been expressed by industry representatives that some businesses in the construction sector were not ready to implement the procedure by this date.

As a result of the COVID-19 pandemic, HMRC has again delayed the introduction of the domestic reverse charge for construction services until 1 March 2021.  Whilst there is still some time, it is very unlikely that HMRC will extend this deadline again, so it is vital that your business is ready before March. If you are unfamiliar with the domestic reverse charge you can read more in our blog. However, if you are not yet prepared for the introduction, Constable VAT will be happy to assist.

HMRC will hold a live webinar about how to apply the domestic reverse charge. Registration for this webinar is now open.

OPTION TO TAX

Earlier this year, HMRC announced that taxpayers would be granted an extension to the time limit for notifying HMRC of an option to tax. Normally, HMRC must be notified within 30 days of making the decision to opt a building. However, the COVID-19 pandemic made that rule challenging to follow so the time limit for notifying HMRC of a decision to opt to tax was extended to 90 days. This measure only applies to decisions made between 15 February and 31 October 2020. As we approach 31 October, taxpayers wishing to notify HMRC of an option to tax need to consider the time limits in order to avoid any costly mistakes.

CASE REVIEW

1. DIY Housebuilder Scheme: Are Houseboats “Buildings designed as dwellings”?

This case concerned Mr Edward Burrell’s claim for repayment of VAT incurred on the construction of a houseboat. He submitted a claim under the DIY Housebuilder scheme which HMRC denied on the grounds that a houseboat is not a building designed as a dwelling and is, therefore, not within the scope of the DIY Housebuilders VAT refund scheme.

Mr Burrell argued that the foundations of the construction project were built on land as was the structure of the boat. Concrete was added to the foundations and a crane was used to lift the concrete-based houseboat into the river where it remains. This, he suggested, made it a concrete based home which is designed as a dwelling, in line with the planning permission he had received.

HMRC argued that the DIY scheme applies to “… the construction of a building designed as a dwelling or a number of dwellings…” and that this definition does not encompass houseboats as “building” is the operative word in the provision. Considering previous caselaw around houseboats, the Tribunal agreed with HMRC and observed that a houseboat is not a building within the usual sense of the word.

The Tribunal considered the planning permission which Mr Burrell had received which specifically stated that “No permanent structures or buildings placed on the land are permitted”. It found that the express prohibition in the planning permission on building permanent buildings was fatal to Mr Burrell’s argument and held in favour of HMRC.

Constable Comment: The DIY Scheme is a topic which is often seen in the Tribunals for a variety of reasons. However, what counts as a building for VAT purposes is not such a common issue. The Tribunal relied on the Oxford Dictionary’s definition of building – “A permanent fixed thing built for occupation, such as a house, school or factory”.  If you are wondering whether a building you are constructing, or have constructed, could be eligible for the scheme, please do not hesitate to get in touch with Constable VAT.

2. Insulation for roofs, or something more?

This appeal concerned supplies of insulated roof panels being made by Greenspace Ltd which it treated as reduced rated for VAT. HMRC disagreed with this analysis, believing that the supplies were standard rated. Therefore, HMRC assessed Greenspace for £2,581,092 of VAT relating to the periods from 12/17 – 12/19. Greenspace appeal against that assessment.

UK VAT law affords a reduced rate of VAT (5%) to the installation of energy saving materials. The explanatory notes to Schedule 7A, VATA explain that this includes insulation for walls, floors, ceilings, roofs and lofts. Greenspace believed that it was supplying roof insulation and so charged the reduced rate of VAT to its customers.

HMRC disagreed with this analysis and suggested that Greenspace was supplying more than insulation as it was selling roof panels which, whilst insulated to improve insulation, represented more than a supply of merely energy saving materials and amounted to the supply of a new roof. The supply of a new roof on an old building does not benefit from the reduced rate of VAT.

In considering the dispute, the Tribunal turned to previous case law which has considered this area such as Pinevale which considered the supply of energy efficient roof panels. That case concluded that supplies of such panels are standard rated as they were used to form the roof itself rather than to insulate an existing roof. Arguments about the aim of the customer in fitting the panels were not taken into account as it is the underlying supply and not the intent of the consumer which must be assessed for VAT.

Greenspace sought to differentiate this case from its own, claiming that the panels in Pinevale were not comparable as they did not have the same extensive insulating properties as Greenspace’s. It suggested that the primary purpose of a Pinevale style panel was to cover the roof, whereas the enhanced properties of a Greenspace panel meant that the primary purpose of fitting one would be to gain the insulative benefit.

The Tribunal rejected this argument, noting that, in form, what is supplied by Greenspace is a form of roof covering and not merely insulation for an existing roof. In order to benefit from the reduced rate, suppliers must supply insulation to existing roofs and not essentially replace the roof with new panels, regardless as to how insulative the new panels may be. The appeal was dismissed and the assessments are upheld.

Constable Comment: This case serves as a reminder of the principle that VAT exemptions and reduced rating provision must always be interpreted strictly. Greenspace sought to distinguish a “strict” interpretation from a “restrictive” interpretation. This argument was unlikely to be successful as it was not providing insulation for roofs, it was providing insulated roof panels. The two products are distinct from each other, and would be in the eyes of a typical consumer, so it does not seem restrictive to regard the two as different for VAT classification purposes. Any organisation which is applying a VAT exemption or reduction needs to ensure that it is entitled to do so in order to avoid a situation such as that in this case where Greenspace owe over £2mil in 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.

HMRC NEWS

Changes to VAT Treatment of Overseas Goods Sold to Customers
At the end of the transition period, the Government will introduce a new model for the VAT treatment of goods arriving to GB from outside the UK. HMRC’s note gives information on the changes to VAT treatment of overseas goods sold to customers from 1 January 2021.

Revenue & Customs Brief 15 (2020)
HMRC has now released this Brief about a review of the correct treatment for the deduction of import VAT paid by a taxable person who is not the owner of the relevant goods.

Deferral of VAT Payments Due to Coronavirus
On 24 September 2020, the Chancellor announced that businesses who deferred VAT due from 20 March to 30 June 2020 will now have the option to make smaller payments over a longer period. This Guidance has been updated to reflect the changes.

VAT Reverse Charge Technical Guide
HMRC has released some new Guidance which covers technical information about the VAT reverse charge if you buy or sell building and construction services.

CASE REVIEW

CJEU

Foodstuff or Supplement?

This case concerns the correct VAT rate to be applied to certain products sold by a Dutch company, X. X is a VAT registered sex shop in the Netherlands and sells products including capsules, drops, powders and sprays which are marketed as aphrodisiacs. Those products, which are composed essentially of elements of animal or vegetable origin, are intended for human consumption and are designed to be taken orally.

X treated its supplies of these products as reduced rated for VAT purposes as the Netherlands provides a reduced rate for foodstuffs which are fit for human consumption. The Dutch tax authorities challenged the application of the reduced rate, adopting the view that the products in question were not foodstuffs, so were liable to the standard rate of VAT. The lower Courts agreed with X but the Dutch Court of Appeal referred the matter to the CJEU.

The CJEU considered whether “foodstuffs for human consumption” should be interpreted as meaning any substance or product which is intended to be consumed by people and, if not, how the term must be defined. Noting that neither the VAT Directive nor Implementing Regulations gives a definition of foodstuffs, the Court turned to consider the everyday meaning of the word.

It observed that any product intended for human consumption which provides the human body with the necessary nutrients to keep it alive and to enable it to function and develop comes within the idea of a foodstuff, even if the consumption of that product also produces other effects. By contrast, it noted that a product which does not contain nutrients, or contains a negligible amount thereof, the consumption of which serves solely to produce other effects other than sustaining the human body, cannot be considered a foodstuff.

In concluding, the Court observed that foodstuffs refers to all products containing nutrients which serve as building blocks, generate energy and regulate functions which are necessary to keep the human body alive and enable it to operate and develop. The CJEU commented that it would appear that the aphrodisiacs in question fall into the second camp of supplies which may contain some nutrients, but which is consumed solely for the other effect generated. However, this matter will be referred back to the Dutch courts for a final decision.

Constable Comment: All reduced rates and exemptions from VAT must be interpreted strictly in line with the general principles of the VAT system. It seems to follow that a reduced rate for foodstuffs should not apply to powders and drops taken with the primary purpose of enhancing sexual drive, purely because they happen to contain some nutritional value. However, X might argue that increasing libido and encouraging sexual stimulation is enabling the human body to function properly and develop.

Deductibility of VAT

Vos Aannemingen (VA) constructs and sells apartment buildings. It constructs these buildings on land belonging to third parties; VA sells the property and the landowners sell the land corresponding to the apartment which is being purchased. VA purchases in all expenses including advertising and administrative costs as well as paying agent’s fees – it then deducts the VAT incurred on these expenses through its VAT return.

Following a tax inspection, the Belgian tax authority restricted the input VAT which VA was claiming, applying a fraction to the claim amount. The numerator of this calculation was the price of the building and the denominator was the price of the building and land combined. VA disagreed with this assessment, believing it could deduct the input VAT incurred in full, claiming that the benefit to the landowner did not prevent it from being able to recover input VAT that it had incurred and which benefitted both parties. It argued that there is a direct and immediate link between the expenditure and its own economic activity and that the benefit to the third party was ancillary to VA’s own business purposes.

The Court considered the cases of Iberdrola and AES-3C. The Court concluded that where, in the context of the sale of land owned and where a third party also derives a benefit from services supplied to the taxable person, this cannot have the effect of limiting the scope of the taxable person’s right to deduct input VAT.

The Court went on to observe that where it is possible for the taxable person (VA) to pass through costs to the third party, that the situation is less clear as this situation would give support to the conclusion that the expenditure being incurred does not relate wholly to a taxable output transaction. However, the ability to pass through costs is not, in isolation, sufficient for the purposes of determining VA’s right to deduct VAT as it is necessary to consider all of the circumstances for the purposes of the “direct link test” – the carrying out of this test is left for the Belgian court to carry out.

Constable Comment: This decision confirms that input VAT is deductible where a third party also benefits from the expenses incurred, provided that there is a direct and immediate link between the input cost and a taxable output. However, it will be interesting to see if the direct and immediate link test is met in cases where the costs can be passed on to the third party as this may remove the direct link with a taxable output transaction. The Court noted correctly that a decision of this nature must always be made on the unique facts of any given case so referred the matter back to the Belgian Court.  

Issues with Invoices

This case concerned Vikingo, a Hungarian company involved with the sweets and confectionery industry. It entered into two agreements with Freest Kft for the supply of several packaging and filling machines between 2012 and 2013. Under the terms of these agreements the machines were purchased by Freest from a third company, which had itself purchased the machines from a fourth company. Vikingo recovered the input VAT which it incurred on these purchases.

Following a tax inspection, the Hungarian tax authority assessed Vikingo, disallowing the input VAT which it had recovered in relation to these transactions. This was on the grounds that the machines had been purchased from an unidentified party, with the result that those transactions had not taken place between the persons identified on the invoices, or in the manner indicated on them. Essentially, the supply chain contained companies without sufficient human or technical resource to be engaged in business.

The dispute ascended through the Court system, with the tax authority continuing to infer that because the content of the invoices was implausible, there must be tax evasion. Vikingo argued that the right to deduct input VAT, read in tandem with the principles of fiscal neutrality, effectiveness and proportionality, meant that it was entitled to deduct the VAT it had incurred unless the tax authority could prove to a sufficient legal standard that tax evasion was occurring.

The question referred to the Court was whether the abovementioned principles must be interpreted as precluding a national practice, by which tax authorities refuse the right to deduct VAT incurred, on the grounds that credence cannot be given to the invoices relating to the purchases as those invoices were issued by parties without sufficient human or technical resource to have made the supplies described on those invoices.

Considering previous caselaw, as well as wider points about statutory interpretation and broad principles of EU law, the Court considered that whilst the facts in the case may contain evidence that Vikingo knew or should have known that it was participating in VAT fraud, it is the responsibility of the domestic tax authority and Court system to adduce if there is sufficient proof of tax evasion for the right to deduct to be refused. A mere possibility that tax evasion may exist in a chain of transactions is not sufficient for the tax authority to refuse repayment. If there is a sufficient level of proof that Vikingo knew or should have known it was involved in fraud then the right will, of course, be refused.

Constable Comment: This judgment essentially relates to the extent to which a tax authority needs to prove involvement in tax evasion to deny the right to recover input VAT. The approach of the Hungarian tax authority did not seem sustainable as, if agreed by the CJEU, tax authorities throughout the EU would have been able to refuse input VAT repayments based on a mere suspicion that something may be wrong, without having to actually prove that anything was. This would be an unacceptable result from the view of both the taxpayer and also the legal system.

This article is intended to give general guidance only and cannot be relied on in respect of any individual business. The facts may change as more information on the application of the reduced rate in particular circumstances is issued by HMRC. If you require advice specific to your business please contact Constable VAT or your usual adviser.

HMRC NEWS

Revenue & Customs Brief 14 (2020)
HMRC has released this new Brief which discusses changes to the methods used by opticians and sellers of hearing aids to account for VAT on their supplies. The changes described take place on 1 October 2020. Businesses which are affected need to familiarise themselves promptly.

Revenue & Customs Brief 11 (2020)
HMRC has released this brief which explains how changes to existing leases are treated for VAT and Stamp Duty Land Tax (SDLT) purposes. As a result of the current COVID-19 pandemic, many tenants are suffering a loss of income and want to vary the terms of their lease with their landlord. This brief has guidance on the appropriate VAT and SDLT treatment of the most common lease variations.

Help & Support for VAT
HMRC will hold a live webinar about how to apply the domestic reverse charge, registration for this webinar is now open. The domestic reverse charge for construction services comes into effect on 1 March 2021. Those businesses operating in the construction sector may want to consider attending this webinar. Those unfamiliar with the domestic reverse charge which will come into effect may wish to consider reading our coverage of the topic which can be found here.

Transfers of Going Concerns: Reallocation of VAT Registration Number
HMRC has updated its Guidance to include an extra condition that the transferor in such a situation should have no VAT debt.

CONSTABLE VAT NEWS

Following The Chancellor’s recent announcement, we have released our coverage of the VAT related measures. These include the extension to the temporary reduced rate for hospitality and tourism and businesses being given extra time to pay any VAT debt which has been deferred during the Coronavirus outbreak. Read in full here.

We have received enquiries from many businesses asking about how the temporary reduced rate of VAT for certain supplies of hospitality, hotels and holiday accommodation applies to their operations. One of the most common areas of confusion is in relation to wedding packages. Readers may wish to see our coverage of how the temporary reduced rate of VAT interacts with wedding packages here.

Following HMRC’s announcement in R&C Brief 13 (2020) that its policy regarding early termination fees has changed, to now regard these fees as taxable in line with the main contract, we have drafted the following piece which aims to assist businesses in determining the key points to consider and whether they need to take any action. Any organisations which is concerned that this policy change may affect it should contact Constable VAT. Read in full here.

CASE REVIEW

CJEU

1. Capital Goods Scheme Adjustments

This case concerned the Capital Goods Scheme (CGS) as it applies to immovable property. The request to the CJEU has been made in Dutch proceedings between Stichting Schoonzicht (SS) and the Secretary of State for Finance concerning single step CGS adjustments. Such adjustments must be made where input VAT has been recovered in full in relation to a property the first use of which is VAT exempt.

SS constructed a block of flats comprising seven residential apartments. At the time of construction, SS intended for the whole development to be used to generate taxable supplies and recovered the input VAT associated with the build in full in 2013. From 1 August 2014, SS made VAT exempt leases of four out of the seven apartments. Owing to the VAT exempt first use of these apartments, SS was required to adjust its input VAT deduction and to pay, in a single step, the entire portion of that tax attributable to those four apartments, amounting to slightly less that €80,000.

SS argued that the Dutch legal provision requiring such an adjustment was contrary to the Principal VAT Directive (PVD). The PVD states that input VAT attributable to immovable property should be recovered in line with intention and is then to be adjusted over a period of no fewer than five years. Therefore, the question which was referred to the CJEU was whether the PVD precludes national CGS adjustment regimes which require a single step adjustment, where the first use of the property in question means that the initial deduction which was made is no longer accurate.

The Court considered the various provisions of the PVD which create the CGS and concluded that the PVD states that a Member State may provide that the adjustment period for the CGS begins with the first use of the capital goods in question, and the period must be no fewer than five years up to a maximum of twenty years. It commented that the two types of adjustment were distinguishable – the PVD requires Member States to adjust input VAT recovery based on changes in use once the terms of the CGS “bite” but it is up to Member States to implement provisions which deal with changes of intention prior to first use of the capital goods.

The PVD states that Member States must implement their own rules to govern the scheme. The Court concluded that requiring a single step adjustment where the first use of the capital goods differed from the intent on which a deduction was made is within the discretion afforded to Member States by the PVD.

Constable Comment: Put simplistically, this case confirms that Member States are permitted to require that the adjustment period for the Capital Goods Scheme only begins after the first use of the capital goods in question. A business cannot construct a property with an intention to use it for taxable purposes and recover all the VAT incurred only to make VAT exempt leases of the property and then be given up to twenty years to pay the VAT back. This would create an unfair advantage, essentially giving property developers the option to take up interest free VAT credit from the State.

First Tier Tribunal

2. Roof Insulation or Something More?

This appeal concerned supplies of insulated roof panels being made by Greenspace Ltd which it treated as reduced rated for VAT. HMRC disagreed with this analysis, believing that the supplies were standard rated. Therefore, HMRC assessed Greenspace for £2,581,092 of VAT relating to the periods from 12/17 – 12/19. Greenspace appeal against that assessment.

UK VAT law affords a reduced rate of VAT (5%) to the installation of energy saving materials. The explanatory notes to Schedule 7A, VATA explain that this includes insulation for walls, floors, ceilings, roofs and lofts. Greenspace believed that it was supplying roof insulation and so charged the reduced rate of VAT to its customers.

HMRC disagreed with this technical analysis. HMRC suggested that Greenspace was supplying more than insulation as it was selling roof panels which, whilst made to improve insulation, represented more than a supply of merely energy saving materials and amounted to the supply of a new roof. The supply of a new roof on an existing building does not benefit from the reduced rate of VAT.

In considering the dispute, the Tribunal turned to previous case law which has considered this area such as Pinevale which considered the supply of energy efficient roof panels. That case concluded that supplies of such panels are standard rated as they were used to form the roof itself rather than to insulate an existing roof. Arguments about the aim of the customer in fitting the panels were not taken into account as it is the underlying supply, and not the intent of the consumer, which must be assessed for VAT purposes in a case such as this.

Greenspace sought to differentiate this case from its own, claiming that the panels in Pinevale were not comparable as they did not have the same extensive insulating properties as Greenspace’s. It suggested that the primary purpose of a Pinevale style panel was to cover the roof, whereas the enhanced properties of a Greenspace panel meant that the primary purpose of fitting one would be to gain the insulative benefit.

The Tribunal rejected this argument, noting that, in form, what is supplied by Greenspace is a form of roof covering and not merely insulation for an existing roof. In order to benefit from the reduced rate, suppliers must supply insulation to existing roofs and not essentially replace the roof with new panels, regardless as to how insulative the new panels may be. The appeal was dismissed and the VAT assessments are upheld.

Constable Comment: This case serves as a reminder of the principle that VAT exemptions and reduced rating provisions must always be interpreted strictly. Greenspace sought to distinguish a “strict” interpretation from a “restrictive” interpretation. This argument was perhaps unlikely to be successful as it was not providing insulation for roofs, it was supplying insulated roof panels. The two products are distinct from each other and would be in the eyes of a typical consumer, so it does not seem restrictive to regard the two as different for VAT classification purposes. Any organisation which is applying a VAT exemption or reduction needs to ensure that it is entitled to do so in order to avoid a situation such as that in this case where Greenspace owe over £2million in VAT assessments.

This article is intended to give general guidance only and cannot be relied on in respect of any individual business. The facts may change as more information on the application of the reduced rate in particular circumstances is issued by HMRC. If you require advice specific to your business please contact Constable VAT or your usual adviser.

HMRC NEWS

Revenue & Customs Brief 13 (2020): VAT Charity Digital Advertising Relief
HMRC has released a new Brief which discusses HMRC’s policy in respect of the VAT treatment of digital advertising when supplied to charities.

This is an important Brief  and good news for charities as it confirms that VAT is no longer considered due on internet search browsing advertisements, except where they appear on personal social media accounts. In addition HMRC now accepts that ‘Location Targeting’ is also within the zero rate.  Full details of the application of the new rules can be found in the Brief.

We will issue more detailed guidance on this brief shortly, in the meantime if you have any questions as to how this may benefit your organisation please contact us

Revenue & Customs Brief 12 (2020): VAT Early Termination Fees and Compensation Payments
HMRC has released a new Brief, following recent judgments from the CJEU, which announces an important change to policy. Fees and payments charged where a contract is terminated early were previously outside the scope of VAT, now HMRC regards them as taxable in line with the main contract.

Pay Less Import Duty & VAT When Re-importing Goods to The UK and EU
HMRC has published new Guidance discussing how to claim Returned Goods Relief in order to pay less duty and VAT when re-importing goods.

CONSTABLE VAT NEWS

We have received enquiries from many businesses asking about how the temporary reduced rate of VAT for certain supplies of hospitality, hotels and holiday accommodation applies to their operations. One of the most common areas of confusion is in relation to wedding packages. Readers may wish to read our coverage of how the temporary reduced rate of VAT interacts with wedding packages here.

Following HMRC’s announcement in R&C Brief 13 (2020) that its policy regarding early termination fees has changed to now regard these fees as taxable in line with the main contract, we have drafted the following piece which aims to assist businesses in determining the key points to consider and whether they need to take any action. Any organisations which is concerned that this policy change may affect it should contact Constable VAT. Read in full here.

We have recently released a blog entitled “Does the Temporary Reduced Rate Apply to Me?” This piece discusses the way in which the temporary reduced rate of VAT interacts with supplies of food and beverages and aims to assist taxpayers in identifying the key points to consider. Additionally we have now released a blog on the related topic of whether the reduced rate applies to ‘Wedding Packages’.

To discuss the temporary reduced rate and how it may impact on your business, please do not hesitate to contact Constable VAT.

CASE REVIEW

First Tier Tribunal

1. Default Surcharge: Whether Reasonable Excuse

In this case, Concept Multi-Car Ltd (CMC) appealed against a default surcharge amounting to £4,090.90. issued in respect of the 04/19 VAT period.

CMC entered the default surcharge regime from the 10/18 period onwards after its VAT return due on 7 December 2018 was received late by HMRC, on 3 January 2019. The direct debit payment for the 10/18 period failed. CMC argued that HMRC cancelled the direct debit but HMRC denied this and produced a letter dated 9 January 2019 from HMRC to CMC which stated that the direct debit had been returned as unpaid as the direct debit instruction had been cancelled with CMC’s bank. The letter also made clear that if CMC wished to pay its VAT by direct debit again in the future, it would need to issue a new direct debit instruction to its bank.

Following this the 01/19 return, payment of which was due on 7 March, was paid late on 12 March and a default surcharge was issued against CMC. CMC argued that it thought that the VAT would be taken by direct debit but when it realised that it had not been, it paid the amount in full immediately via CHAPS. VAT for the 04/19 period was due on 7 June but payment was not received by HMRC until 11 June. Therefore, a second default surcharge was imposed on CMC.

In its Notice of Appeal, CMC stated that it issued a new direct debit instruction when submitting its 04/19 return and so believed that payment would be taken. However, as the Tribunal commented, CMC produced no evidence to support this claim. The director of CMC, Mrs Shortland, claimed that she had been told by HMRC on the phone that if she paid the 04/19 return on 11 June that CMC would not be in default. However, HMRC produced a transcript of this conversation which showed that she had not been told this, but rather had been assured that the payment was late and a 5% surcharge would be imposed.

The Tribunal considered whether CMC’s submissions were capable of representing a reasonable excuse, observing that a reasonable excuse can only apply where the actions of the taxpayer were the actions of a responsible trader, conscious of and intending to comply with his obligations regarding tax.

Noting that CMC was aware that its direct debit was not functional for the 01/19 return as it received a surcharge for this period, the Tribunal commented that a reasonable and responsible trader would have made sure that such an instruction had been given and would have made sure that it was given in good time for the payment to be made on time.

In the absence of any evidence that CMC attempted to set up a new direct debit instruction, the Tribunal found that CMC did not have a reasonable excuse and upheld the default surcharge amounts.

Constable Comment: Within the obiter of this decision, there is some interesting discussion about what constitutes a reasonable excuse with regard to the default surcharge regime. The judgment in The Clean Car Company Limited is repeated to stress that just because a taxpayer honestly and genuinely believes that what it did was in accordance with its obligations does not give that taxpayer a reasonable excuse. It is essential that all businesses and charities familiarise themselves with their tax duties and operate as a responsible and reasonable trader which is conscious of all of its obligations – ignorance is no excuse.

This article is intended to give general guidance only and cannot be relied on in respect of any individual business. The facts may change as more information on the application of the reduced rate in particular circumstances is issued by HMRC. If you require advice specific to your business please contact Constable VAT or your usual adviser.

HMRC NEWS

Check When You Can Account for Import VAT on Your VAT Return
HMRC has updated its guidance. If you are a UK VAT-registered business, find out when you can, or need to, account for import VAT on your VAT Return (also called postponed VAT accounting) from 1 January 2021 onwards

VAT Notice 700/11: Cancelling VAT Registration
Details on how to cancel a VAT registration online have been updated in this Public Notice.

Revenue & Customs Brief 8 (2020): Change to Partial Exemption VAT Treatment
Following the legal judgment C-153/17 Volkswagen Financial Services (UK) Ltd this brief explains HMRC’s suggested method for apportionment of VAT incurred on overheads by businesses who supply goods by way of hire purchase agreements. HMRC have updated the calculation under the heading ‘HMRC position’ to confirm that where the amount of credit is less than the total value of the asset, then both the amount shown as value of the asset and value of the exempt credit would be reduced.

Changes to VAT MOSS Rates
From 1 September 2020 until 28 February 2021, Ireland will be reducing their standard VAT rate from 23% to 21%. HMRC has updated its guidance to reflect this change.

The Value Added Tax (Refund of Tax to Museums and Galleries (Amendment) Order 2020
HMRC have opened a consultation on draft legislation which lists additions and changes to the list of museums and galleries which are allowed to reclaim VAT. This consultation gives an opportunity for those museums and galleries affected to check that the proposed changes and additions are correct. The consultation closes on 15 September 2020.

CONSTABLE VAT NEWS

We have recently released a blog entitled “Does the Temporary Reduced Rate Apply to Me?” This piece discusses the way in which the temporary reduced rate of VAT interacts with supplies of food and beverages and aims to assist taxpayers in identifying the key points to consider. To discuss the temporary reduced rate and how it may impact on your business, please do not hesitate to contact Constable VAT.

Read the piece in full here.

CASE REVIEW

We have not seen as many cases as usual recently as the CJEU is currently on its summer break which lasts from 16 July until 31 August. The amount of decisions issued by the UK Court and Tribunal system has also slowed down recently given the difficulties with hearings and the coronavirus outbreak.

First Tier Tribunal

1. Smart Organiser Limited

Smart Organiser Limited (SOL) is a UK based company which describes itself as an employment agency which provides temporary workers alongside accounting, book-keeping and tax services. In this case, SOL appeal against HMRC’s decision to disallow input VAT totalling £110,529.08.

SOL was involved in the refurbishment of several properties. At the start of these projects, SOL had been dealing with 47 different entities which were providing various workers to the different refurbishments. As this became impractical, three intermediate companies were set up to manage the various subcontractors.

These three companies invoiced SOL for supplies of workers, charging VAT on invoices raised and SOL sought to recover the VAT amount charged as input VAT. HMRC denied this claim on the grounds that the intermediate companies were not making supplies to SOL, contending that supplies were made by the subcontractor workers themselves directly to SOL. In addition, SOL paid the workers directly as the intermediate companies had no bank accounts. As these workers were registered as sub-contractors, they are not capable of making supplies of staff but could (under rules relating to the CIS scheme) only provide their services as employees.

HMRC argued that the amounts charged as VAT on the invoices raised by the intermediate company were not actually VAT as the supply was not one that those companies could legally make and as a result they were not entitled to raise VAT invoices and SOL was not entitled to reclaim amounts shown as VAT on these invoices.

The Tribunal considered that the evidence which was provided was not sufficient to uphold SOL’s appeal, concluding that there was no evidence to suggest that, in substance, supplies of staff were made by any of the intermediate companies to SOL. The appeal was dismissed.

Constable Comment: This appeal considered the case of Genius Holdings. Whilst the facts of these cases are different, the principle established in Genius Holdings is that a claim for input tax must be on the basis of a substantive supply having been made, not merely on the basis of VAT having been shown on an invoice. Any companies in the construction sector which operate similar models should review their positions and seek professional advice if there are any concerns.

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.