HMRC NEWS

Zero-Rating Books & Printed Matter
HMRC has updated Public Notice 701/10 to incorporate guidance on the VAT liability of supplies of certain electronic publications that became zero-rated from 1 May 2020.

Pay No Import Duty and VAT When Importing Decorations & Awards
HMRC has released new Guidance discussing how to claim relief from Customs Duty and Import VAT if you are importing or presenting a decoration or award in the UK or EU.

VAT & SDLT When Existing Leases Are Varied
HMRC has released this brief which explains how changes to existing leases are treated for VAT and Stamp Duty purposes.

CASE REVIEW

Upper Tribunal

1. Can HMRC assess for claims made under Contracted Out Services (COS) rules?

This case concerned an assessment made against Milton Keynes Hospitals NHS Foundation Trust (The Trust), by HMRC, relating to VAT which the Trust had claimed under special rules applying to certain bodies including NHS Trusts. The FTT upheld HMRC’s assessment and this is an appeal against the FTT decision. The point at issue was whether HMRC is entitled to recover this COS VAT under s73 of the VAT Act 1994, which allows HMRC to raise assessment for input VAT that has been incorrectly claimed.

The Trust is regarded as a Government department for the purposes of s41 VATA, which permits Government bodies to recover VAT which they are charged on purchases which do not relate to business activities. The Trust had recovered VAT incurred on IT equipment for financial years 2013/14, 2014/15 and 2015/16. HMRC argued that it was not entitled to recover this VAT, although neither Tribunal dealt with the reasoning for HMRC’s decision. Accordingly, it assessed for overclaimed VAT under s73 VATA.

The Trust submitted that HMRC is not entitled to assess for overclaimed VAT which was claimed through s41 VATA as it is not VAT in the true sense as it does not relate to a taxable supply. It argued that s41 exists outside the VAT system and that “COS VAT” is not input VAT at all. The right to recovery of this VAT operates as a special measure whereas s73 relates to input tax in its proper sense. To support this argument, the Trust also submitted that s73 only applies to taxable persons and that the Trust is not a taxable person as it does not pursue an economic activity.

HMRC contended that whether VAT claimed by virtue of s41 can be properly classified as input tax is irrelevant – it is VAT and s73 relates to VAT. It also rejected the suggestion that s73 may only be used to assess taxable people, referring the Tribunal to the wording of s73.

The Tribunal agreed that VAT which is recovered by virtue of s41 VATA is not input tax but rejected the claim that it is not VAT for the purposes of VAT legislation. As VAT was chargeable on the supplies purchased by the Trust, the amounts in question plainly represent VAT. It then turned to consider the question of whether s73 could apply to non-taxable persons.

The Tribunal observed that this submission must fail as s73 is not only applicable to taxable persons. The legislation states:

“In any case where, for any prescribed accounting period, there has been paid or credited to any person—

(a)as being a repayment or refund of VAT, or

(b)as being due to him as a VAT credit, an amount which ought not to have been

so paid or credited, or which would not have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly.”

The wording is quite clear that s73 applies to any person and that there is no requirement for a person to be taxable in order to be assessed for overclaimed VAT. The Tribunal had no hesitation in dismissing the argument mounted by the Trust that the draftsman of s73 must have meant to write “any taxable person acting as such”. It commented that the distinction between a person and a taxable person is fundamental to the VAT legislation.

Holding that VAT claimed pursuant to s41 VATA is VAT and that s73 may be used to assess any person, not just a ‘taxable person’, the Tribunal dismissed the Trust’s appeal and upheld HMRC’s assessment.

Constable Comment: COS VAT is a colloquial term used to describe the VAT incurred by public bodies who contract out for service provision. Whilst it does not represent input tax, the argument that it was not VAT at all was somewhat ambitious. It is not surprising that the Tribunal rejected the suggested interpretation of s73 – had the taxpayer been successful in its arguments, a situation would have arisen where public bodies could recover VAT and never be assessed by HMRC.

2. Agent or Principal?

This case concerned All Answers Limited (AAL), a business which assists customers in finding an academic expert to assist in providing ‘model answers’ for essays, dissertations or pieces of coursework. Other projects an expert may assist with include proof reading and preparing personal statements. None of the experts are employed by AAL.

AAL stated that the fee paid by the customer was proper to the expert, although it was collected by AAL on that expert’s behalf. Generally, AAL retained part of the money collected to cover its own commission and passed the remainder to the writer.

HMRC argued that AAL makes a single, standard-rated supply of academic work to a customer and should account for VAT on the full amount paid by the customer. It contended that when AAL passes the balance of the monies received to the expert, it is paying separate consideration for a supply made to itself.

AAL argued that it acts as agent with the supply of academic work being made by the expert to the customer. Therefore, AAL argued, is not liable to account for VAT on the full amount, but on the consideration which it retains. To support its case, AAL submitted that the legal relationship required for a supply to arise exists between the writer and the customer and not between itself and the customer.

The FTT had previously held in HMRC’s favour, concluding that AAL made its supplies directly to the customer.

Observing previous caselaw around the subject, the Tribunal considered that, in order to reach a satisfactory conclusion, it needed to review the contractual terms in place and whether or not the contracts reflected the commercial and economic reality of the situation.

It observed the contracts in detail and noted that AAL accepts a degree of personal liability to the customer in certain situations, for example if AAL were to negligently provide the customer with an insufficient writer. Equally, other provisions made it clear that AAL was liable to the customer if the work was delivered late. This, the Tribunal noted, indicated that there was a legal relationship between AAL and the customers.

It was also observed that the contracts between the writer and AAL provided that once the work was uploaded by the writer to AAL’s portal, copyright passed to AAL. It follows that once the writer had uploaded the work, AAL would be the only party in the arrangement with the legal right to supply that work on to the customer. Therefore, when the work was handed from AAL to the customer, it has to be AAL disposing of the intellectual property. The Tribunal noted that this is strongly indicative that AAL makes the supply to the customer itself and is, therefore, acting as a principal which purchases a product from a writer and resupplies it with a profit margin to an end customer.

Considering that the contracts placed the core obligations on AAL rather than the writers, the Tribunal concluded in favour of HMRC, stating that this interpretation of the contracts is entirely consistent with the economic reality of the situation. The appeal is dismissed.

Constable Comment: The FTT had previously held that the contracts were a deliberate smokescreen, designed to deceive and distract from the commercial reality. The UT disagreed with this interpretation, actually considering that the contracts in place treated AAL as a principal despite the wording and, therefore, did give rise to the economic and commercial reality. Whilst the conclusions reached were the same, the decisions are based on very different reasoning. The FTT was scathing of AAL and failed to consider the contractual position, instead electing to dismiss them entirely. It is good to see the UT correct the approach taken. The decision gives lengthy consideration to the contracts and comments on the various indicators of agent or principal which can be a complex area of the law with each case turning on its own facts. Any readers which would like to discuss whether they are an agent or a principal should contact Constable VAT – we will be pleased to assist.

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

VAT Reduced Rate for Hospitality, Holiday Accommodation and Attractions
HMRC has updated its guidance on the temporary reduced rate to include a new section about Retail Schemes.

Amendment to VAT Refund Scheme
HMRC has released a new policy paper covering a measure which amends the VAT refund scheme to include S4C, the Welsh television provider, as an eligible body.

Changes to VAT Treatment of Overseas Goods Sold to Customers from 1 January 2021
This policy paper gives information on the changes to the VAT treatment of overseas goods sold to UK consumers which will take place after the end of the Brexit transition period.

Pay No Import Duty and VAT on Goods for Charity
HMRC has published new guidance discussing the VAT relief available to certain bodies importing goods for charitable use.

Pay No Customs Duty or VAT on Goods for Disabled People
HMRC has released new guidance covering the relief from customs duties and import VAT which is available to certain people and bodies importing goods specially designed or adapted to assist disabled people, including people who are blind or partially sighted.

CONSTABLE VAT NEWS

We have recently released the second edition of our 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. The edition can be read in full here.

Currently we are seeking an apprentice or trainee VAT consultant to begin training in September 2020. More information can be found on our website. This is a great opportunity for someone looking for a career in tax and may suit a school or university leaver considering the accountancy or legal professions. If you would like to discuss career opportunities with Constable VAT, please contact us.

CASE REVIEW

CJEU

1. Are Lawyers “Taxable Persons”

This case concerned a Romanian dispute between UR, a Romanian law firm, and the domestic tax authority in Romania. UR made a request that it be removed from the Romanian register of taxable persons for VAT purposes and requested repayment of the VAT which it had paid previously, on the grounds that it is not a taxable person within the definition of EU law.

UR sought to rely on the legal doctrine of res judicata, which states that no person may be sued twice whilst acting in the same capacity, for the same cause of action, and with the same subject matter. Attached to this submission is a judgment from a Romanian court which stated that a taxpayer acting in a similar capacity to UR did not engage in an economic activity and so could not be considered a taxable person.

The Romanian court referred two questions to the CJEU, the first of which being whether lawyers are taxable people for the purposes of EU VAT law. The second question was whether the doctrine of res judicata is overridden by the primacy of EU law.

In response to the first question, the Court considered the EU law provisions around what constitutes a taxable person for VAT purposes. Article 9 of the Principal VAT Directive defines a taxable person as anyone who independently carries out an economic activity. It goes on to clarify that this includes persons supplying services, including “activities of the professions”. Therefore, it considered that lawyers are taxable persons for VAT purposes.

Considering the second issue, the Court observed that EU law does not require a Court to disapply domestic rules of procedure conferring finality on a judgment, even if to do so would make it possible to remedy a domestic situation which is incompatible with EU law. However, it commented that the doctrine of res judicata does not apply where the decision which UR seeks to rely on relates to different tax periods and different subject matter. It also observed that res judicata cannot reasonably apply to decisions where there is an error of law, such as that in the case being cited by UR which stated that lawyers are not taxable people.

The Court found against UR on both points, considering that it is a taxable person and it cannot rely on res judicata to positively gain a tax advantage as a result of a previous error in law.

Constable Comment: The contention that UR was not providing services was based on the idea that it was providing legal assistance to its clients and that the contracts were not for the provision of legal services – this was the case in previous caselaw which was cited. It sought to say that it could not be challenged on this position as a Court had already reached an identical ruling. However, the Court found in this instance that unless a decision relates to the exact same tax periods and subject matter, that res judicata does not apply. This is a complex and somewhat ethereal area of legal principle rather than VAT law, though readers with an interest in due process may wish to read the full judgment.

Court of Appeal

2. Northumbria NHS Trust: Salary Sacrifice and Cars

This appeal by HMRC concerned the Northumbria NHS Foundation Trust (the Trust). As part of a salary sacrifice scheme, the Trust provides some of its employees with motor cars. The issue is whether the Trust is entitled to a refund of the VAT which it incurs when acquiring these cars. The Upper Tribunal has previously held that it was entitled to such a deduction and our coverage of that judgment can be read here.

The Trust incurred VAT in respect of leased and maintained cars which it acquired for the purpose of providing to NHS employees under a salary sacrifice scheme. Under UK law, where cars are leased to employees under such a scheme, not for the purposes of the employer’s business, there is no supply of goods or services by virtue of the “De-Supply Order”. Whilst there is deemed to be no supply, UK legislation (s43 VATA) entitles the employer to recover input VAT in relation to such car schemes supplied by Government bodies such as the NHS.

HMRC argue that whilst by virtue of the De-Supply Order there is no supply, the concepts of “supply” and “economic activity” are distinct and that it is not a precondition of economic activity that a supply has taken place. To support this position, HMRC cited the case of Ghent Coal Terminal NV.

In this case, Ghent Coal Terminal purchased land for the purposes of its business and carried out improvement works. It was subsequently compelled to exchange the land for other land with the consequence that it never operated its business from the land that it had acquired. The Court ruled that it was entitled to recover the VAT incurred on the improvement works to the site even though no taxable supplies arose from the site as a taxable person, acting as such, is entitled to deduct the VAT incurred on expenses related to an intention to make taxable supplies.

The Court rejected this argument, noting that if VAT is incurred on goods or services which are intended to be used in activities which do not constitute supplies for VAT purposes, Ghent Coal is not relevant. Despite this, the Court continued to consider the suggestion that a supply is not a precondition of an economic activity. This is a point which had been considered by the Upper Tribunal, which concluded that whilst an activity which is not a supply is capable of supporting an overall economic activity, the provision of cars to NHS staff pursuant to a salary sacrifice scheme is not an economic activity.

Agreeing with the position of the Upper Tribunal, the Court held in favour of the Trust, upholding its right to recover 100% of the VAT it incurs on the provision of cars to its staff under a salary sacrifice scheme.

Constable Comment: This case considers the interesting idea that supplies do not need to arise in order for there to be an economic activity taking place. Conversely, it is important to consider the De-Supply order when operating salary sacrifice schemes. Organisations offering salary sacrifice schemes, especially those operating in the public sector, should consider if their VAT treatment of the benefits offered to employees is correct.

First Tier Tribunal

3. 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.

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

Revenue & Customs Brief 4 (2020)
This Brief (Temporary VAT zero-rating of Personal Protective Equipment) has been updated. The end date for the temporary VAT zero rating has been changed from 31 July 2020 to 31 October 2020.

Revenue & Customs Brief 10 (2020)
This brief explains the changes in the VAT treatment of certain supplies of hospitality, hotel and holiday accommodation and admission to certain attractions announced by the government on 8 July 2020. The changes take effect from 15 July 2020.

Information on Temporary Reduced Rate
HMRC has released a new policy paper discussing the temporary reduced rate of VAT for hospitality, holiday accommodation, and attractions.

VAT Government & Public Bodies
HMRC has updated its internal guidance to ensure section 33E bodies know how to make applications and how to make claims once legally entitled to do so.

Payments on Account
This guidance has been updated as the option to defer VAT payments during coronavirus has come to an end and businesses can no longer defer VAT payments.

CONSTABLE VAT NEWS

Following the announcement by The Chancellor on Wednesday 8^th July, we have released our initial coverage of the VAT related measures. However, whilst HMRC will be issuing full guidance over the coming days, the fine detail around some of the measures is not yet available. We have tried to cover the salient points which relate to VAT, and we will continue to update this coverage as promptly ass possible following further updates. The coverage can be read here.

We have also recently released the second edition of our 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. The edition can be read in full here.

CASE REVIEW

CJEU

1. Blackrock: Special Investment Fund Management

The CJEU has handed down its judgment in the BlackRock case concerning the VAT liability of fund management services provided to BlackRock UK by BlackRock Financial Management Inc (BFMI), a company incorporated in the US and with no UK establishment.

This decision is a significant one and may lead businesses providing investment management services packages to investment businesses to alter the way in which they conduct business. It is therefore important for businesses operating in this sector to understand the underlying facts and the reasoning behind the decision

BFMI supplies services to BlackRock UK through a software platform called Aladdin. These services comprise a combination of hardware, software and human resources. Aladdin provides portfolio managers with market analysis and monitoring to assist in the making of investment decisions.

Using the reverse charge VAT accounting mechanism applicable to imported services, BlackRock UK is responsible for declaring output VAT due on supplies it receives from international suppliers where these supplies would be subject to VAT if supplied by a UK based business. As the majority of BlackRock’s onward supplies are VAT exempt, it cannot recover a significant portion of its input VAT and as a result output VAT due on supplies received that are subject reverse charges is largely a cost to the business. The important point in this case was that there is a VAT exemption for the management of Special Investment Funds (SIFs) and the services provided by BMFI were partly used to manage SIFs. There was potentially an opportunity to treat part of the cost as VAT exempt and as a result reduce the VAT cost on these services.

Between 1 January 2010 and 31 January 2013, BlackRock UK treated a portion of supplies received from BFMI as VAT exempt on the grounds that it used the services to manage Special Investment Funds. It accounted for reverse charge VAT only on that part of BFMI’s service used to manage regular investment funds, the value of which was calculated pro rata according to the total funds managed. HMRC disagreed with this approach and issued assessments for VAT due.

At the First Tier Tax Tribunal, HMRC argued that all of the services received by BlackRock from BFMI must be subject to the reverse charge since the majority of the funds managed by BlackRock are not special investment funds. The FTT concluded that it was impossible to determine between the use of the services received from BFMI and both parties appealed to the Upper Tribunal which referred the matter to the CJEU.

Accepting that the services received constitute a single supply for VAT purposes, the CJEU considered whether the EU provisions must be interpreted as meaning that a single supply of management services, which is used to manage both SIFs and regular funds, comes within the VAT exemption and, if so, what are the rules for the application of the exemption.

It was noted that, according to UK law, where there is a single supply comprising of two parts, a principal and an ancillary element, the ancillary element of the supply follows the VAT liability of the principal element. However, the supply in the main proceedings is not split into such elements, it is merely used for two different purposes. Blackrock argued that, while the law precludes the various elements of a single supply from being treated differently, it does not prevent the tax treatment of a single supply from differing depending on the use made of the supply received.

To support this position it cited Luxembourg which considers the supply of “…services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity”. However, the CJEU noted that the exemption in question in the Luxembourg case specifically provides for different VAT treatment depending on the final use, whereas the exemption for SIF management does not permit the VAT treatment of a single supply to be dissociated according to its end use.

Finally, the Court considered the appropriate way to decide whether the single supply was totally VAT exempt or totally taxable, given its view that multiple rates cannot apply to a single supply. Usually, the principal element would be the aspect of the supply which is the most valuable or highest quantity – in this case, BlackRock manages more non-SIFs than it does SIFs so the whole supply would be taxable. However, the Court considered that this would be inappropriate in the circumstances as it would permit for an investment manager who manages 51% SIFs to treat all of his supplies as VAT exempt – a perverse result.

Therefore, it concluded that the decision must be made on other factors. It observed that the services received by BlackRock UK from BFMI were designed for the purpose of managing investments of various kinds and that, in particular, may be used in the same way for the management of both SIFs and non-SIFs. Consequently, the services received cannot be regarded as specifically for the management of SIFs and as a result the entire supply should be taxable. The matter will be referred back to the UK Court system to apply this decision.

Constable Comment: This was a complicated case which considered an unclear area of the law. BlackRock had initially apportioned the supplies it received from BFMI which was inappropriate but the correct course of action was not overtly apparent. This decision has a potentially significant ramification in that it may cause many overseas businesses providing investment management services packages to UK businesses and domestic providers to alter the way in which they conduct business. Moving forward, one would expect to see management companies making clear and distinct supplies in relation to SIFs to ensure VAT exempt treatment.  

FTT

2. Mandarin Consulting

This case concerned the place of supply of services supplied by a UK company to Chinese students living in the UK. Mandarin Consulting provides careers consultancy or “career coaching support” which aims to assist students of Chinese origin to gain jobs and internships in the UK marketplace at major commercial organisations. Mandarin treated its supplies as outside the scope of VAT as it contracted with individuals, usually parents, located in China. HMRC assessed for VAT on the basis that the supplies arose in the UK.

HMRC argued that Mandarin’s supplies were educational in nature as they involved a “transfer of knowledge or skill”, meaning that the place of supply would be the UK as this is where the service is performed. Mandarin contended that they provided consultancy services which, when supplied to a consumer, take place where the recipient belongs – in this case, Mandarin argued that the customers “belonged” in China making the supply outside the scope of VAT. However, HMRC submitted that even if the Tribunal were to find that the services were consultancy services, Mandarin made supplies to Chinese students who resided in the UK and not to their parents in China, meaning the place of supply would still be the UK.

The Tribunal considered the regular meaning given to educational supplies in VAT law and observed that educational services are characterised with reference to school and university education, not merely the transferring of knowledge which is a phrase “…so wide that it would cover almost any form of instruction…” Therefore, it accepted that the services were consultancy services. It was then necessary to establish who Mandarin’s customers were, the students or their parents.

Mandarin argued that the economic reality was that it made supplies to “pushy parents” who wanted to push their child in an overly competitive system. HMRC argued that Mandarin supplied the services to the student in the UK and for VAT purposes, the supplies arose in the UK. Observing that the contractual position should be the concluding point on this matter unless the contracts did not reflect the economic reality of the supplies, the Tribunal turned to consider the terms of the contracts which Mandarin had entered into as these had changed in July 2016

Prior to July 2016, Mandarin contracted directly with the student and received payments from the student’s bank account. Accordingly, the Tribunal decided that these supplies were made to the student, However, after July 2016, Mandarin began entering contracts with the parents in China. Considering that the contracts were not distortive of the economic reality in either case, the Tribunal found that prior to July 2016 the supplies were made to the students and after July 2016, the supplies were made to the parents.

HMRC has taken the view that students on a university course are ordinarily resident in the country of study, the UK in this case. The implication would be that if the student rather than the parent received the supply it would be within the scope of UK VAT on that basis.

The place of supply rules for services dictate that the supplier must verify the location where the customer “belongs”. This is normally the place of “usual residence”. Prior to July 2016, Mandarin had not done this is any significant way for the supplies to the students with whom it contracted at that time. Although the Tribunal concluded that HMRC were wrong to consider a foreign student as usually resident in the UK, Mandarin did not hold sufficient evidence for the pre-July 2016 supplies to corroborate “usual residence” outside the UK. The Tribunal allowed Mandarin’s appeal against the assessments relating to periods after July 2016 as the supplies were contracted with the overseas parents. However, as Mandarin had not sufficiently satisfied itself that its customers before July 2016 were outside of the UK, the assessments for those periods were upheld.

Constable Comment: There is very little case law around what constitutes “usual residence” for establishing the place of supply of consultancy services when supplied B2C and the facts of this case were reasonably novel. In this instance, the Tribunal considered that supplies to both the Chinese parents and the students in the UK were capable of arising in China as it could not be said that a temporary VISA enabling a student to study in the UK made the UK their “place of belonging”. The only reason that the assessments were, in part, upheld was that Mandarin had failed to adhere to its administrative obligations in the Tribunals eyes. One might argue that where HMRC’s policy insisted that the student was ordinarily resident in the UK in any case that a later absence of evidence to that purpose might be expected.

3. Whether Legal Services Used for Business Purposes

This appeal related to a decision by HMRC, refusing to allow input tax credit requested by T&C Bainbridge Farming Partnership. The input tax in question is VAT incurred on legal fees in bringing proceedings to the High Court to rescind certain transfers of land to a discretionary trust.

In 2011 the partners to T&C were Tom Bainbridge, his son Colin Bainbridge and Colin’s son, Peter Bainbridge. At that time, the partnership was farming three pieces of land. The original core land of the farm was vested in Tom Bainbridge. Two other plots were registered to Colin and Tom and Colin respectively. All three plots of land were moved into a discretionary trust.

At the time, Tom was ill and there were concerns that claims to the land may be made by other family members following his death. The discretionary trust was established to prevent this. It was believed by the Bainbridges that no capital gains tax (CGT) liability would arise on the transfers of property into the new trust, However, they subsequently found out that this was incorrect and that CGT was due on the transfers. Upon realising this, proceedings were successfully brought before the High Court to rescind the transfers of those properties to the trustees of the discretionary trust, and to rescind the trust itself. The facts of that decision are not relevant here, but as a result of the High Court judgment, no CGT was due.

T&C sought to recover the input VAT incurred on the legal fees on the grounds that, had the discretionary trust not been set aside by the Court, the disposal of the land to the discretionary trust would have been a disposal by the partnership for CGT purposes and liability would have fallen on T&C. Therefore, it argued, the input VAT was incurred for the benefit of the business and should be recoverable.

HMRC argued against this point, suggesting that the legal services were supplied to the individuals who incurred the costs in taking action as a result of individual concerns around the land being split up. HMRC suggested that the benefit to the business was incidental and the legal fees did not relate to the functioning and carrying on of the business. It also stressed that there is no clear link between the expenditure on legal fees and the taxable outputs of the partnership.

The Tribunal found that the creation of the discretionary trust was for the purpose of determining which individuals would benefit from land owned by Tom, after Tom’s death. Whilst the business may have benefitted from the creation of the new discretionary trust, there was no nexus between the expenditure and the activities of the business. For that reason, the partnership would not have been able to claim the input VAT incurred in setting up the discretionary trust.

It was observed that the purpose of the High Court proceedings, to rescind the trust, must be characterised by reference to the purpose for which the trust was established, not some incidental benefit to the business. As the establishment of the trust was for personal reasons (identifying the beneficial owners of land), its dissolution cannot be a business expense. The Tribunal held in favour of HMRC.

Constable Comment: Input VAT is only deductible if it can be shown that there is a sufficient degree of connection between the cost incurred and the taxable activities of the business. There is a lot of case law around this subject and, in certain circumstances where it can be shown that general costs support the business as a whole, input VAT may be recoverable despite no direct connection with a specific taxable output. However, in this circumstance, the trust was established to convey personal benefits to individuals and there was no suggestion that the trust was formed to assist the business as a whole. This decision affirms the position that a mere incidental benefit to a business is not sufficient to afford a right to VAT recovery.

4. Supply of Rental Car With Children’s Car Seat

This case concerned whether or not supplies made by Europcar were single, standard rated supplies or two supplies; standard rated car hire and the reduced rated hire of a children’s car seat. In 2015, Europcar sought to recover overpaid VAT, having treated all of its supplies as standard rated. HMRC denied these repayments, asserting that the supplies in question were single supplies of rental cars. This appeal is against that HMRC decision.

Europcar is in the business of renting cars to consumers in Europe. As an optional extra, a customer can hire a child car seat at the same time as renting the car for an added cost. Typically, customers who took this extra were families on holiday with children who pick up the car from locations such as airports.

HMRC argued that the aim of the customer hiring a car seat is not really to hire a children’s car seat, but to hire a car in which all intended passengers can travel safely and lawfully (car seats are a requirement for children below a certain age). To support this argument, it highlighted that customers did not enter into a separate contract for the provision of the car seat and that it was not possible to hire a car seat without also, simultaneously, hiring a car. Europcar argued that the “predominant criterion” which needs to be considered is whether there is a real freedom of choice afforded to the consumer.

The Tribunal considered that the booking process which customers go through clearly indicates that hiring a car seat is an optional extra for which an additional fee must be paid. It was also noted that customers have an alternative option; to bring their own car seat. Therefore, it commented that, whilst the supplies are linked, there is still a real choice to the customer and the supplies should be regarded as distinct.

It held in favour of Europcar, considering that it makes two distinct supplies with regard to cars supplied with optional car seats. This confirmed Europcar’s treatment and the appeal was upheld.

Constable Comment: This case covered a topic which frequently presents difficulty for taxpayers as it can be difficult to decide if there are multiple supplies or one supply and, if there is only one, what the principal element of that supply is. In the present case the key consideration was whether the customer had a genuine choice as to whether to hire the car seat even though it is a legal requirement for children under a certain age. The Tribunal gave consideration to a wealth of case law discussing the relevant principles to consider when reaching a decision of this nature. If you would like to discuss the single/multiple supply issue, 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.

HMRC NEWS

End of VAT Payment Holiday
HMRC announced that UK taxpayers could defer payments of VAT which are due between 20 March and 30 June 2020. This deferral period will end soon and taxpayers will need to begin payments again. Those who have cancelled a direct debit for VAT will need to reinstate this at least 3 working days before a VAT return is filed.

Option to Tax: Extension to Time Limit
HMRC has revised its temporary change to the time limit for notifying an option to tax. Taxpayers now have 90 days to notify HMRC. This measure applies to decisions to opt made between 15 February 2020 and 31 October 2020.

Revenue & Customs Brief 9 (2020)
HMRC has released a new Brief informing overseas businesses about the current delay in processing and refunding VAT claims submitted under the Overseas Refund Scheme.

Pay No Import Duty or VAT on Visual & Auditory Goods
HMRC has released new Guidance explaining how public, educational, scientific and cultural establishments, which are approved by HMRC, may claim relief from duty and VAT on certain items.

Pay Less Duty and VAT if Importing Capital Goods
HMRC has released new Guidance on claiming relief from duty and VAT when transferring a business to the UK in certain circumstances.

VAT Notice 708: Buildings and Construction
New information has been added regarded charges for change of use as a result of COVID-19.

Help & Support For VAT
Recorded webinars about VAT accounting schemes and the VAT Flat Rate Scheme have been updated.

CASE REVIEW

CJEU

1.Vodafone: VAT Liability of Early Termination Charges

This CJEU referral considered the correct VAT liability of fees levied by Vodafone against customers who terminate their contracts early. Vodafone entered into contracts with consumers, many of which include special promotions subject to the condition that the customer is tied in for a minimum period. If a customer ceases to make payments during this period, Vodafone charges the consumer a fee.

In 2016, Vodafone declared VAT on monies which it received from consumers who had failed to comply with the tie-in period. However, in 2017, it subsequently sought to change its position as it no longer considered that the amounts in question were ever subject to VAT. The case of MEO states that such payments are liable to VAT where the amount of the payment corresponds to the remaining value of the contract as this constitutes consideration for a supply of services. However, Vodafone calculates these amounts in line with a formula which does not relate to the remaining value of the contract and so argued that MEO was not entirely relevant as the payments received represented damages rather than consideration for a supply of services.

The Court observed that a supply of services is carried out for a consideration where there is a legal relationship between the provider of the service and the recipient, pursuant to which there is reciprocal performance. Therefore, the fundamental question before the Court was whether amounts received by a service provider in the event of early termination of a contract for the provision of services must be judged to be further consideration for the underlying services.

The referring Court made it clear that the amounts charged to consumers who terminate the contract early reflect the recovery of some of Vodafone’s costs associated with making the supply. The CJEU remarked that, consequently, the amounts received by Vodafone must be considered to represent part of the cost of providing the service. It was noted that the amount due upon early termination seeks to guarantee a minimum contractual remuneration for Vodafone which, it stated, indicates that those payments must be regarded as part of the consideration for the supply as this is the economic reality.

Concluding that fees charged to consumers who terminate their contract early do constitute consideration for a supply of services, the Court noted that just because the amount is calculated by reference to a formula rather than the remaining instalments does not change the fact that there is consideration for a supply of services.

Constable Comment: Damages received as a result of breach of contract are normally outside of the VAT regime as they usually represent compensation and not consideration. However, for this to be the case, the damages awarded must be truly compensatory and not relate to an underlying supply for which a supplier has not yet received payment. This line can often be difficult to draw in practical terms and this case seemed to be a genuinely grey area. Hopefully this judgment will help provide some clarity on this topic but, when reaching a decision of this nature, regard must always be had for the economic reality of the transactions in question. As Vodafone sought to recover the costs it incurred by levying charges against consumers, the CJEU concluded that the economic reality was that the payments received represented a further, if reduced, consideration for the underlying supply. At the current time the COVID 19 pandemic has had an impact on the economy. If your business is restructuring existing arrangements with suppliers or customers and there is uncertainty around the correct VAT treatment of income received or payments made please do not hesitate to contact Constable VAT.

2. KrakVet: Place of Supply of Goods

This referral from the Hungarian Courts concerned the place of supply of goods and a technical disagreement between the Hungarian and Polish Tax Authorities as to the correct place where KrakVet should pay VAT on its supplies.

KrakVet is a Polish company which sells animal products online. It advertises in Hungary and has made sales to many Hungarian customers. During 2012, it offered the possibility for purchasers to conclude a contract with a Polish transport company to deliver the goods to Hungary; KrakVet was not a party to these contracts. Customers were also free to collect the goods from KrakVet or to choose their own carrier of the goods. Where necessary, the goods were delivered by the Polish transport company to the warehouses of two Hungarian couriers. The goods were then subsequently distributed to Hungarian customers.

KrakVet applied to the Polish Tax Authority for a ruling, seeking to clarify that it was supposed to treat its sales as Polish. The Polish Tax Authority took the view that the supplies arose in Poland and that VAT should be paid at 8% in Poland. However, in August 2016, the Hungarian Tax Authority concluded that deliveries had been made in Hungary on behalf of KrakVet and that it had exceeded the Distance Sales threshold. It assessed Krakvet for unpaid output VAT at a rate of 27% with an associated penalty and default interest. The Hungarian Tax Authority also imposed a fine for failure to comply.

The technical liability difficulty arose as a combined effect of the wording of the distance sales provisions, and the fact that the shipping contracts were with the third-party Polish transport company. The usual place of supply of goods is where the goods are located when they are dispatched. However, there is an exception to this rule when goods are dispatched or transported “…by or on behalf of the supplier” between member states and the customer is a non-taxable individual which switches the place of supply to the ultimate destination of the goods. Therefore, the question before the Court was whether the goods being transported by the third party which was recommended by the supplier, but with whom the purchasers were free to contract or not, should be considered as dispatched or transported “… by or on behalf of the supplier.”

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. It clarified that this means that a supply of goods falls within the distance selling provisions where “… the role of the supplier is predominant in terms of initiating and organising the essential stages of the dispatch or transport of the goods.”

Whilst the arrangements need to be considered in the light of this judgment, the Court stressed that the contractual arrangements should be taken into consideration, but that the economic and commercial reality underlying the transaction must be the primary consideration. It noted that the contractual terms in the present case do not reflect the economic reality where the purchasers merely endorse the pre-arranged shipping choices made by the supplier. Therefore, it seems that the supplies will be regarded as arising in Hungary by virtue of the distance sales provisions.

Constable Comment: This complex case also considered whether the objectives of preventing jurisdictional conflicts between Member States and double taxation preclude the tax authorities of one Member State from being able to unilaterally subject transactions to VAT treatment different from that under which they have already been taxed in another Member State. There is a lengthy discussion on this point in the released decision and readers with an interest in the functioning of EU law may be interested to read this. The Court concluded that such practices are not precluded.

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

SI 2020/578: New Order Amending SI 2019/892
This order formally delays the introduction of the domestic reverse charge for construction services from 1 October 2020 to 1 March 2021.

Revenue & Customs Brief 8 (2020)
HMRC has released a new Brief advising businesses who supply goods by way of hire purchase of HMRC’s suggested method for apportionment of VAT incurred on overheads following the judgment in VWFS.

Check How to Get Your Import VAT Certificate (C79)
HMRC has updated its guidance to clarify what certificates should be used in relation to March 2020 imports and apologise for any inconvenience caused by a previous lack of clarity.

VAT Registration Manual
HMRC has updated its internal guidance to reflect the fit and proper conditions for tax representatives which are found at s. 11.4 of Notice 700/1.

Civil Evasion Penalties for Customs, Excise and VAT
HMRC has repaired the broken link contained within this guidance.

CONSTABLE VAT NEWS

As the ongoing COVID-19 pandemic continues to impact businesses across the world, many countries are using VAT as a measure to provide reliefs to businesses which are struggling. Our coverage of the measures being taken by different European countries aims to provide a synopsis of the VAT related measures being taken to aid those struggling to meet financial obligations. We continue to update our coverage of this topic which can be read here.

PARTIAL EXEMPTION REMINDER

Partly exempt businesses recover VAT incurred provisionally throughout the VAT accounting year. At the end of the VAT year they must perform an annual adjustment calculation to determine the amount of input VAT recoverable in the VAT year. The provisional input VAT deduction is compared with the actual recovery allowed and, if necessary, the position must be adjusted. This adjustment is normally made on the VAT return following a business’ partial exemption year end, although it is possible to make an ‘in year’ adjustment. A business submitting calendar quarterly VAT returns, with a VAT year end of 31 March, usually includes its partial exemption annual adjustment on the VAT return in respect of the VAT accounting period ending 30 June.

Many taxpayers will imminently need to perform their annual adjustment calculations. This can often be a particularly difficult and time-consuming exercise which often poses problems for businesses. It is advisable to seek professional advice when performing partial exemption annual adjustments, particularly at uncertain times such as now where the values of taxable or VAT exempt supplies may have fluctuated unexpectedly. Our coverage of partial exemption can be read in full here. For assistance with any partial exemption query, please do not hesitate to contact Constable VAT.

CASE REVIEW

First Tier Tribunal

1. Landlinx: VAT & Options Over Property

This appeal by Landlinx considered the correct VAT liability of the release of an option to purchase land. HMRC, despite its published guidance and the wording of UK law, argued that such a surrender constitutes a taxable supply of services, not an exempt supply of land. The taxpayer argued that the law, and HMRC’s guidance, were clear on the matter in stating that transactions involving options over property are exempt from VAT.

In 2015, Landlinx signed an option agreement as the buyer relating to Loxwood Nurseries, an area of land in West Sussex. The property was not opted to tax by the seller. The option agreement was entered into with a view to obtaining planning permission. Such permission was received and subsequently the parties agreed to release the obligations under the agreement for a payment of £1,425,000 made by the seller to Landlinx. It treated the receipt of this income as exempt from VAT. HMRC assessed for £237,500 output VAT (treating the amount received as inclusive of VAT) on the grounds that the income was taxable consideration for the surrender of the option. HMRC, rather surprisingly, argued that this constitutes a supply of services.

The Tribunal considered the relevant European law which the UK law seeks to enact. The VAT Directive exempts from VAT the supply of buildings and parts thereof, and the land on which buildings stand. This is enshrined in UK law at Schedule 9 VATA 1994, which exempts “The grant of any interest in or right over land, or of any licence to occupy…” The notes to this clarify that ““Grant” includes an assignment or surrender and the supply made by the person to whom an interest is surrendered when there is a reverse surrender.

The taxpayer had relied on UK law and both HMRC’s Guidance Manuals and Public Notice 742, all of which dictate that the supply of an option over land is exempt from VAT.

HMRC argued that the relevant EU law only exempts from VAT supplies of goods i.e. the land itself, and not derivative interests in that land (services).  In this context, a supply of goods means the transfer of the right to dispose of the property. Therefore, the payment in relation to the surrender of an option should be treated as a taxable supply of services as the right to dispose of the property does not change hands on the surrender.

The Tribunal observed that, if HMRC were correct, the outcome would be peculiar – two economically identical transactions would be taxed in different ways. The Tribunal noted that this was not the intention of the EU law and, in any event, such an outcome would infringe the EU principle of fiscal neutrality. It also noted that the EU law and UK law have existed alongside each other, without challenge, for 42 years. It concluded that based on; EU law, UK law, HMRC Public Notices and its Internal Guidance, Landlinx had every reason to believe that the grant and surrender of the land was exempt from VAT.

The Tribunal held in favour of Landlinx, concluding that the surrender of the option was exempt from VAT.

Constable Comment: The Tribunal commented that the view adopted by the taxpayer was correct and should be axiomatic for most VAT practitioners. Interestingly, both HMRC and an opinion given by the AG suggested that the EU provisions only apply to goods and not services. As the Tribunal noted, there was no reasoning underlying this idea and, in its view,  the EU law comprehends both supplies which comprise the transferor’s entire interest in the land and buildings but also the transfer of a lesser or derivative interest in the land and buildings i.e.an option. It will be interesting to see if HMRC appeal this decision further and risk the Upper Tier Tribunal setting a binding precedent that land options are exempt from UK VAT.

2. Appeal Against HMRC Decision That Business Should be VAT Registered

This case considered whether a nail bar run by Mr and Mrs Nguyen should have been registered for VAT. HMRC argued that the nail bar should have registered for VAT in January 2013 based on investigations carried out by HMRC officers. Mr and Mrs Nguyen disputed HMRC’s arguments and produced CCTV as well as written statements from customers to challenge HMRC’s assertions.

HMRC conducted clandestine investigations into the nail bar and requested that Mrs Nguyen undertake a “self-invigilation” exercise. Mrs Nguyen had to record all the takings from each customer over a week and give this report to HMRC. Following the investigation and Mrs Nguyen’s self-invigilation, HMRC concluded that the nail bar was only declaring approximately 50% of its sales. This decision considered several factors such as the volume of customers, the length of treatments and the average price of a treatment.

The Tribunal noted that HMRC’s investigation concluded that around 14 customers were served on 29 January 2018. CCTV and extensive till evidence produced by the nail bar showed that only 9 were served. HMRC also suggested that the shop was open on a Sunday, which the CCTV showed it was not. HMRC’s argument also commented that, during one of seven covert visits, an HMRC officer observed 7 sales amounting to £175 in a 90-minute period. However, the Tribunal noted that this factored in only sales of acrylic nails and not the length of time taken to treat a customer. It would not be reasonable to extrapolate from this observation that the nail bar made £175 every 90 minutes by serving 7 customers. In any event, the CCTV showed that this was clearly not the case.

Giving some consideration to the average price paid per customer and the average length of time each treatment took, the Tribunal concluded that the annual turnover from the nail bar could not have been more than £76,500. This is below the compulsory VAT registration threshold. Therefore, it held in favour of the nail bar and allowed the appeal against retrospective VAT registration.

Constable Comment: HMRC also issued an assessment against the nail bar for output VAT amounting to over £90,000 for which Mr and Mrs Nguyen have applied for hardship in order to appeal the decision without having to pay the VAT initially. The Tribunal noted that the Coronavirus pandemic has led to the delay of processing of this application for hardship but commented that it would be unjust to delay further the provision of a decision in relation to the VAT registration 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.

HMRC NEWS

VAT Toolkits
HMRC has updated the Agent Toolkits for input tax, output tax and partial exemption with minor changes.

VAT Government & Public Bodies
New specific bodies have been added to s33E VATA 1994 to reflect SI (2020/185)

Importing Animals for Scientific Research
HMRC has issued new Guidance explaining how to import animals for research free of duty and VAT.

Importing biological and chemical substances for research purposes
HMRC has issued new Guidance on how to get duty and VAT relief if you are importing biological and chemical substances for research purposes from outside the EU and UK.

CONSTABLE VAT NEWS

As the ongoing COVID-19 pandemic continues to impact businesses across the world, many countries are using VAT as a measure to provide reliefs to businesses which are struggling. Our coverage of the measures being taken by different European countries aims to provide a synopsis of the VAT related measures being taken to aid those struggling to meet financial obligations. We continue to update our coverage of this topic which can be read here.

CASE REVIEW

Upper Tier Tribunal

1. Acquisitions into Warehouses in Other Member States

This case concerned Ampleaward Ltd which is an alcohol wholesaler in the UK. Ampleaward had been assessed for £1,308,648.00 unpaid acquisition VAT with regard to purchases of alcohol it had made from a supplier in a different member state, which were delivered to a bonded warehouse in a third member state of the EU. Ampleaward believed that the acquisitions were exempt by virtue of s18 VATA, HMRC argued that s18 did not apply in the present circumstances.

Ampleaward argued that its acquisition of alcohol was not subject to VAT as s18 of VATA provides that where dutiable goods, such as alcohol, are acquired from another member state and are entered into a warehousing regime, no acquisition VAT is due. HMRC argued that s18 could not apply as the warehouse into which Ampleaward entered the alcohol was not within the UK.

Whilst s18 is quite clear that the warehouse into which goods are entered does not need to be located in the UK, HMRC argued that the law must be read in line with the purpose of the EU provision which entitles member states to exempt intra-community acquisitions of goods into warehousing regimes. It suggested that, on such a purposive interpretation, s18 should not apply and that acquisition VAT was due in the UK on the purchase made by Ampleaward.

The Tribunal considered the EU provisions and agreed with HMRC’s interpretations that the EU law does not dictate that the relevant provisions apply to warehousing regimes in any member state. Therefore, HMRC urged the Tribunal to “read down” the purposive interpretation of the EU provision to override the UK statute. This is something of a surprising argument as it goes against the constitutional principles of the UK legal system.

The Tribunal observed that, whilst it may agree with HMRC’s interpretation of the EU provisions, to “read down” and essentially override the UK statute would be unacceptable and would violate the principle of legal certainty. Whilst EU law should be read purposively, the Tribunal observed that there is a line which must not be crossed between interpretation of legislation and amendments to the law.

The Tribunal held in favour of Ampleaward, holding that no acquisition VAT was due in the UK on the purchase of alcohol which was delivered to a bonded warehouse in a third member state.

Constable Comment: This case considered the correct way in which to read EU law and how this should be applied in the UK. Whilst the debate within the obiter dicta around this point is interesting, the position in UK law is clear and it does not infringe on the rights given to member states by the EU legislation so HMRC’s argument did not succeed.

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

Revenue & Customs Brief 5 (2020)
HMRC has now issued Brief 5 (2020): VAT treatment on fixed odds betting terminals and gaming machines. Explains what taxpayers with appeals relating to The Rank Group and Done Brothers should now do following the decisions in these cases.

Monthly Exchange Rates
HMRC has released the foreign exchange rates to be used when converting foreign currency for VAT purposes.

No Import Duty or VAT on Certain Documents & Articles
HMRC has released Guidance detailing how to claim relief from import duty and VAT when importing miscellaneous documents and related articles into the UK.

Conditions for Zero-rating: Exports Affected by COVID19
HMRC has updated its internal guidance regarding time limits on exports and removals. This guidance explains the circumstances in which HMRC can agree to additional time for the export or removal before any VAT is collected.

CONSTABLE VAT NEWS

Constable VAT has been able to assist many DIY builders who have had claims for repayment of VAT rejected by HMRC. We can help by liaising with and drafting letters to HMRC. We can assist with appealing decisions to Tribunal. In the recent case of Andrew Fuller, our client was successful in representing himself at Tribunal with support from Constable VAT.

This case is yet another in a long line of decisions revolving around the question “When is a building complete?”. Our detailed coverage of the appeal can be read in full here.

PARTIAL EXEMPTION REMINDER

Partly exempt businesses recover VAT incurred provisionally throughout the VAT accounting year. At the end of the VAT year they must perform an annual adjustment calculation to determine the amount of input VAT recoverable in the VAT year. The provisional input VAT deduction is compared with the actual recovery allowed and, if necessary, the position must be adjusted. This adjustment is normally made on the VAT return following a business’ partial exemption year end, although it is possible to make an ‘in year’ adjustment. A business submitting calendar quarterly VAT returns, with a VAT year end of 31 March, usually includes its partial exemption annual adjustment on the VAT return in respect of the VAT accounting period ending 30 June.

Many taxpayers will imminently need to perform their annual adjustment calculations. This can often be a particularly difficult and time-consuming exercise which often poses problems for businesses. It is advisable to seek professional advice when performing partial exemption annual adjustments, particularly at uncertain times such as now where the values of taxable or VAT exempt supplies may have fluctuated unexpectedly. Our coverage of partial exemption can be read in full here. For assistance with any partial exemption query, please do not hesitate to contact Constable VAT.

CASE REVIEW

Upper Tribunal

1. Supply of Staff or Medical Care?

This appeal by Mainpay Limited concerned an assessment raised by HMRC in the sum of £164,866. Mainpay, a Channel Islands umbrella company, had treated its UK supplies as VAT exempt medical care. HMRC believed that Mainpay made standard rated supplies of staff and sought to assess for undeclared output VAT.

Mainpay operates in various sectors where temporary workers are often used, including supplying locum doctors and other hospital staff, referred to as consultants. It contracts with A&E Agency Ltd, a UK recruitment company, which subsequently contracts with NHS Trusts for the supply of temporary staff.

The issue in this case was whether Mainpay makes VAT exempt supplies of medical care, or if it makes taxable supplies of staff. This issue (supplies of staff or a supply of services) has come before the Tribunal before and there is a significant amount of case law which was considered. It was common ground that the key issue was whether, in the light of the contractual framework, whether the staff being supplied came under the direction and control of the NHS Trusts to which they were provided or if they were under the control of Mainpay.

Mainpay argued that it always retained control of the staff, claiming in particular that it:

• Dictates which consultant provides medical care
• Can dismiss a consultant for breach of contract
• Can replace a consultant with a suitable alternative
• Determines the rate of pay for consultants employed by them
• Determines the hours which consultants it supplies work

HMRC argued that Mainpay provided little more than a tax efficient payroll service to medical consultants in the UK and, in reality, it was not making VAT exempt medical supplies. To support this argument, it submitted that, as Mainpay is based in Sark, it could not exercise the necessary physical level of control over the medical consultants in England for its supplies to be consistent with a supply of medical care.

Attention was also drawn to Mainpay’s advertising which described its activities as “…providing temporary workers to recruitment agencies and end clients…” and as “…operating a high quality and tax-efficient payroll structure.”. HMRC were also not satisfied that Mainpay had professional indemnity insurance for medical care which is fatal to the contention that Mainpay was making supplies of medical care. It was also highlighted that Mainpay did not verify the consultants’ qualifications so could not realistically believe itself to be providing medical care.

The Tribunal agreed with HMRC, noting that the consultants had no real contact with Mainpay and effectively became “part and parcel” of the NHS. This is a view which aligned with that of the consultants themselves who, when interviewed by HMRC, regarded Mainpay as a payroll service and not their employer.

Constable Comment: This case will be of interest to comparable umbrella organisations which treat their supplies as VAT exempt medical care. The facts of this case were quite specific, and a significant amount of attention was paid to the contractual framework between the various parties as well as the lack of Mainpay’s insurance. Cases of this nature will always turn on their own merits and regard must be had to the overall situation. Those operating such arrangements may wish to consider reviewing the agreements currently in place. The case also demonstrates that HMRC do consider in detail the nature of supplies and whether it can be classified as the delivery of a service or more correctly assessed as a supply of staff.     

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

Zero-rating: Exports affected by the COVID-19 Emergency
HMRC has released guidance to assist businesses which may struggle to meet the time limit for removing the goods from the UK which must be met in order for the export to be zero-rated.

Software Suppliers for VAT & EC Sales Lists
Certain contact details have been updated for specific suppliers to assist taxpayers in finding recognised suppliers of compliant software for submitting VAT Returns and EC Sales Lists.

Option to Tax: Change to Time Limit
As a result of COVID-19, taxpayers now have 90 days to notify HMRC of an option to tax, rather than the usual 30. This applies to elections being made between 15 Feb and 31 May.

Revoking An Option to Tax
The address for sending completed forms and supporting documentation has been updated.

EU VAT Refunds: Service Availability
The Republic of Ireland have told HMRC that they require scanned documentation when claims are submitted, or they will be automatically rejected. A 5 MB limit is in place so you should attach the highest value VAT invoices first. If they need sight of any additional invoices or other documents, they will contact you to ask for them.

CONSTABLE VAT NEWS

Partly exempt businesses recover VAT incurred provisionally throughout the VAT accounting year. At the end of the VAT year they must perform an annual adjustment calculation to determine the amount of input VAT recoverable in the VAT year. The provisional input VAT deduction is compared with the actual recovery allowed and, if necessary, the position must be adjusted. This adjustment is normally made on the VAT return following a business’ partial exemption year end, although it is possible to make an ‘in year’ adjustment. A business submitting calendar quarterly VAT returns, with a VAT year end of 31 March, usually includes its partial exemption annual adjustment on the VAT return in respect of the VAT accounting period ending 30 June.

Many taxpayers will imminently need to perform their annual adjustment calculations. This can often be a particularly difficult and time-consuming exercise which often poses problems for businesses. It is advisable to seek professional advice when performing partial exemption annual adjustments, particularly at uncertain times such as now where the values of taxable or VAT exempt supplies may have fluctuated unexpectedly. Our coverage of partial exemption can be read in full here. For assistance with any partial exemption query, please do not hesitate to contact Constable VAT.

CASE REVIEW

CJEU

1. Agrobet: Deferral of Repayment of VAT to Taxpayer

This Czech referral concerned the practice of the tax authorities in the Czech Republish to defer payment of a legitimate VAT refund until it has inspected each individual transaction which makes up part of the claim, even in a situation where it is clear that the majority of the claim posed no problems.

Agrobet is a business which imports and re-exports rapeseed oil to and from Poland. It submitted two repayment VAT returns relating to the periods December 2015 and January 2016. The tax authority doubted the suggested regularity of these transactions and, in any event, disputed whether the zero-rating conditions had been met where oil from Poland was unmodified by Agrobet and subsequently sold within the Polish market. These disputed transactions made up a small quantity of the overall claims but the tax authority withheld both claims in full pending investigation.

Agrobet appealed against this, arguing that this practice infringes the principle of proportionality. Specifically, it suggested that the principle only allows the reimbursement of VAT to be postponed following the opening of a tax audit procedure to the extent necessary to achieve the objective of that procedure. In this case, the objective of the audit was to establish the veracity of the disputed rapeseed transactions. It stated that, as soon as part of the claim is not called into question by the tax authorities and is not the subject of an audit investigation, it should be repayable to the taxpayer.

The question before the CJEU in this instance was whether the EU principle of proportionality prevents member states from withholding payments of VAT which are known to be legitimate, but form part of an overall investigation into that taxpayer.

The Court concluded that no EU law or principle prevents tax authorities from reimbursing, or only making partial reimbursements of VAT to taxpayers where the tax authority cannot identify legitimate input VAT forming part of an overall disputed claim. However, it commented that where the tax authority is unable to identify VAT which is legitimately due to the taxpayer, even if it is aware that some amount of the claim is likely to be legitimate, the taxpayer’s assertion that certain aspects of the claim are non-contentious is insufficient to compel the tax authority to make such a payment.

It held that the practice of deferring repayment of VAT during a VAT audit is not incompatible with the EU principle of proportionality. However, it ruled that it is for the referring Court to decide if the tax authorities have, or should have, identified a legitimate element of the claim which it should have repaid.

Constable Comment: This judgment highlights that, even when under a tax investigation, taxpayers have the right to repayment of any part of a claim that is clearly identified as undisputed. However, where there is any element of a claim which is disputed, tax authorities can seek to withhold the entire repayment amount pending the result of the investigation. This case confirms that this is an unacceptable practice, although leaves the ultimate decision in the hands of the domestic court as to whether the VAT which there is any of the amount of the claim that was clearly non-contentious.

If you have a claim that is currently being withheld in full even though it is clear that part of it is non-contentious then this case could be helpful.

2. European Commission v UK

This case concerned an application by the European Commission to the CJEU, asking that it declares the UK’s amendments to its derogated zero-rating provisions regarding terminal markets mean that it has failed to fulfil its obligations to notify the EU of any derogations from general Union law.

In 1977, the UK notified the EU of several measures which it had introduced by way of derogation from EU law, including a zero-rate of VAT for certain sales through eleven futures terminal markets and simplifications to the associated record keeping requirements.

The UK subsequently made some amendments to this derogation without notifying the EU, such as adding the International Petroleum Exchange of London and the London Platinum and Palladium Market to the markets included within the special zero-rating measures. In 2018, the European Commission formally notified the UK of its belief that it had breached EU rules by not notifying the Commission that it was making alterations.

The Commission claimed, more specifically, that by introducing new simplification measures which extended the zero-rating and the exception to the normal requirement to keep VAT records, without sending an application to the Commission with a view to seeking the Council’s authorisation, the United Kingdom had failed to fulfil its obligations under Article 395(2) of Directive 2006/112.

The UK responded that the amendments which had been made were not substantive enough to have breached the obligation to notify the EU. It suggested that, perhaps, the European Commission had failed to account for the exceptionally complex nature of the subject matter, noting that futures trading had developed significantly since the original notification in 1977.

The Court observed that, regardless as to the complexity as to the functioning of futures markets themselves, the UK made a notification of a derogation in 1977 which “specifically authorised ‘transactions on the eleven “futures” markets for trade in the commodities referred to in those orders, involving defined market members to be traded free of VAT through zero-rating and of the recording requirements of VAT.” It went on to comment that the amendments which the UK had made to this derogation, such as including extra markets, were substantial changes and should have been notified to the Commission.

The Court held in favour of the Commission, stating that the UK had breached its obligations to notify any derogations or amendments to existing derogations.

Constable Comment: The decision in this case ultimately turned on whether or not the alterations which the UK had made were substantial enough to be notifiable to the EU. The original derogation applies to futures traded through eleven specific terminal markets, the argument that adding several markets with all of their associated transactions to a special measure which zero-rates the transactions conducted was not substantial, unsurprisingly, failed to persuade the Court.

The question before the Court in this instance was purely whether the UK had breached its obligation to notify the Commission of amendments to derogations. However, it will be interesting to see the outcome of any infraction proceedings which the Commission issues against the UK, especially given the current on-going situation with Brexit.

First Tier Tribunal

3. Ultrasound for Pregnant Women: Taxable or Exempt?

This is a lead appeal and concerned several companies which provide ultrasounds scanning services to pregnant women. The business operates as a franchise called Window to The Womb and their shops are in high street locations. They sell “baby bonding experiences”.

The appellants all contended that their supplies are VAT exempt supplies of medical services. the appellants had procedures and pathways for referral to the NHS. It is also the case that, whilst not for all matters, the images produced by the appellants could be used by the NHS when the customer/patient was referred. Following a scan, a “foetal wellbeing” report would be given to the mother.

HMRC argued that the supplies are standard rated supplies of “bonding experiences” or “reassurance”, a contention in line with the marketing of the companies. In order for a supply to be exempt from VAT as a supply of medical care, its primary purpose must be to diagnose, monitor, treat or prevent illness. NHS scans on pregnant women are at set intervals throughout the pregnancy; these intervals are based on research and expertise. HMRC argued that NHS scans have two potential purposes; to screen or to diagnose. It suggested that the appellants’ scans had no such clinical application.

It also contended that the scans supplied by the appellants were not supplied alongside any medical elements such as blood tests or references to previous medical records which, in the view of HMRC, significantly reduces any medical benefit to the scans.

The Tribunal considered that the majority of expectant mothers attending the appellants’ shops and attaining scans were doing so with the primary objective of receiving the wellbeing report, which would reassure the mother as to the health of the foetus. It considered that the situation was less clear regarding those scans where 4D imagery of the baby is paid for, but conceded that these scans were too exempt from VAT.

It held in favour of the taxpayer, stating that supplies of ultrasound scans are capable of being exempt from VAT as medical care.

Constable Comment: The Tribunal has been less restrictive than it has been previously with regard to the interpretation of the medical exemption. It is a well-established principle that, for something to be exempt as a supply of medical care, its primary aim must be to diagnose or treat illness. In this case, the lack of any medical testing or any defined medical benefit makes the decision somewhat surprising. However, as it was noted, the customer receives a foetal wellness report which a hospital could consider in the event that the customer needed medical attention.

4. When is A Building Complete?

This case concerned the DIY Housebuilder Scheme for VAT, under which people who construct their own properties are entitled to reclaim VAT which they incur on costs. Taxpayers are only permitted to make one claim per property, and this must be submitted to HMRC within three months of completion of the building.

In this case, Mr Sansom had constructed a house in Essex, into which he and his family moved in July 2013. Between 2013 and 2018, Mr Sansom exchanged correspondence with the local authority, which refused to issue a certificate of completion on various grounds, including that the property did not meet energy efficiency requirements. Following various measures to make his property compliant, on 19 June 2018, Mr Sansom finally received his completion certificate. On 1 September 2018, he submitted a claim under the DIY Housebuilder VAT Scheme seeking to recover £17,641.48 of VAT; this claim was submitted within three months of Mr Sansom receiving his certificate of completion.

HMRC denied the claim on the grounds that it was submitted more than three months after the building had been completed, stating that “completion” is not decided by reference to a certificate of completion, but by applying a multi-factorial” test. Having applied its test, HMRC had concluded that the building was complete owing to the fact that no invoices for construction dated later than October 2016 had been included with the claim.

Mr Sansom appealed against this decision, claiming that the property was not complete enough to receive an EPC, and that there was an issue with whether the building was compliant with building regulations. He highlighted that between October 2016 and June 2018 he had incurred costs on fixing these issues but that, as the invoices represented professional services, they were not included in the claim as such costs are not permissible. He stressed that, given the “one-off” nature of the DIY reclaim scheme, until the completion certificate was issued, there was no way for him to know if he still had to incur significant building costs on the property.

The Tribunal discussed the significant wealth of recent case law around this point including Farquharson and Dunbar and observed that the VAT regulations relating to the DIY Housebuilder Scheme specifically link the start of the three-month time limit to the provision of the certificate of completion. It also accepted that Mr Sansom was unaware as to whether or not he would need to incur significant further costs to meet building regulations until he had received a completion certificate.

The Tribunal held in favour of Mr Sansom and allowed his reclaim of over £17,000.

Constable Comment: The Tribunal commented in this case that “HMRC cannot refuse to accept claims within three months of the issuance of the certificate on the basis that the individual has failed to meet some uncertain and imprecise multifactorial test.” Previous decisions have also highlighted that HMRC’s Guidance states that the certificate of completion should be the starting point when considering completion for the purposes of the scheme. Equally, the VAT Regulations make it clear that it is only in the absence of such a certificate that other evidence needs to be considered.

It seems unfair that taxpayers are frequently having to make appeals and defend themselves at Tribunal, at cost to themselves, for following the regulations and submitting valid claims on time. It is positive to see the Tribunal remark on the strange nature of HMRC’s uncodified and imprecise test.

Constable VAT recently assisted a client to succeed at Tribunal on this point. In that instance, our client received planning permission in May 2006 to build a dwelling with an attached garage. Between 2005 and 2016, he purchased materials and associated services relating to the construction of the new properties; however, only four invoices were dated later than 2 November 2011. A DIY claim was submitted on 11 January 2019, following the receipt of a certificate of completion on 4 January 2019. HMRC rejected the claim on the grounds that it was outside of the three-month time limit to make such a claim. Our coverage of the case and the way in which a successful argument was mounted against HMRC can be read in full here.

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

Making Tax Digital for VAT
Planned downtime from 7:45pm on Saturday 16 May 2020 to 5pm on Sunday 18 May 2020 has been added.

VAT Appeals
HMRC has updated its list of appeals to reflect the result in the Royal Opera House decision.

HMRC Disclosure Service
Updates have now been completed to this service which is now working as normal again.

Simplified Import VAT Accounting
Information has been added regarding making an application to use SIVA by email during the Coronavirus pandemic.

CONSTABLE VAT NEWS

COVID-19 VAT reliefs

As the ongoing COVID-19 pandemic continues to impact businesses across the world, many countries are using VAT as a measure to provide reliefs to businesses which are struggling. Our coverage of the measures being taken by different European countries aims to provide a synopsis of the VAT related measures being taken to aid those struggling to meet financial obligations. We continue to update our coverage of this topic which can be read here.

Partial Exemption Annual adjustments

Partly exempt businesses recover VAT incurred provisionally throughout the VAT accounting year. At the end of the VAT year they must perform an annual adjustment calculation to determine the amount of input VAT recoverable in the VAT year. The provisional input VAT deduction is compared with the actual recovery allowed and, if necessary, the position must be adjusted. This adjustment is normally made on the VAT return following a business’ partial exemption year end, although it is possible to make an ‘in year’ adjustment. A business submitting calendar quarterly VAT returns, with a VAT year end of 31 March, usually includes its partial exemption annual adjustment on the VAT return in respect of the VAT accounting period ending 30 June.

Many taxpayers will imminently need to perform their annual adjustment calculations. This can often be a particularly difficult and time-consuming exercise which often poses problems for businesses. It is advisable to seek professional advice when performing partial exemption annual adjustments, particularly at uncertain times such as now where the values of taxable or VAT exempt supplies may have fluctuated unexpectedly. Our coverage of partial exemption can be read in full here. For assistance with any partial exemption query, please do not hesitate to contact Constable VAT.

EU UPDATE

The European Commission has proposed an extension to a number of deadlines relating to the Directive for Administrative Cooperation. The proposed changes would inter alia defer the deadlines for reporting on cross-border tax arrangements for six months. The proposal also suggests a postponement of the VAT e-commerce package by six months. If approved, the rules will apply from 1 July 2021 instead of 1 January 2021. The proposal can be read here.

CASE REVIEW

Court of Justice of the European Union

1. Place of Supply of Services: “Fixed Establishment”

This referral concerned a dispute between Dong Yang Electronics sp. Z o.o (DY) and the Polish Tax Authority. DY is a Polish company which has a contract for the supply of assembly services to LG Korea Ltd., a Korean company. Pursuant to this arrangement, materials were sent to Poland and were re-supplied on to DY by a subsidiary of LG Korea, LG Polska. DY performed its assembly services and handed over completed circuit boards to LG Polska which then sent them to LG Display Germany.

DY invoiced LG Korea for these assembly services and treated the supplies as outside the scope of VAT, on the basis that it was a B2B supply of services falling under the general place of supply rules, making the place of supply the country in which the recipient of the services is established. LG Korea had given DY an assurance that it did not have a fixed establishment in Poland, which would be more closely concerned with the supply, confirming that the VAT treatment being applied was correct.

The Polish Tax Authority disagreed with this arrangement, arguing that the personnel and the technical resources of LG Polska are available to LG Korea by virtue of a contractual relationship between LG Korea and LG Poland. It argued that as a result LG Polska constitutes a permanent establishment of LG Korea and DY had made Polish domestic supplies. It also informed DY that it was not entitled to rely on a statement from LG Korea that it had no fixed establishment in Poland and that it should have investigated the contractual position between LG Korea and LG Polska to establish the nature of the relationship.

The question which is referred to the Court is whether the mere fact that a company established outside of the EU has a subsidiary in Poland makes it possible to deduce the existence of a fixed establishment in Poland and, if not, is a third party such as DY required to examine the contractual terms between the other companies involved in a transaction.

In considering this question, the Court observed the meaning of a fixed or permanent establishment for the purposes of VAT place of supply rules. It observed that, in line with the EU Regulations, a fixed establishment is any establishment which has a sufficient degree of permanence and an appropriate level of human and technical resource to enable it to receive and use the services being received. It noted that it is a fundamental aspect of the VAT system that regard must be had to the economic and commercial reality of any situation. Therefore, it was observed that whether a subsidiary constitutes a fixed establishment is a decision which must be taken on the facts of each case and it cannot be concluded that the mere presence of a subsidiary creates a fixed establishment.

With regard to the second aspect of the question, The Court considered that while EU law, specifically Article 22 of the Principal VAT Directive, requires that suppliers consider certain criteria to identify a customer’s fixed establishment it does not require them to examine the contractual relationships between other companies established in other countries and their subsidiaries. The Court also reiterated the opinion of the AG, stating that a requirement to inquire into the contractual relationship between a parent company and its subsidiary cannot be imposed on the service provider when this information is not, in theory, accessible to it.

The Court held that the existence of a subsidiary does not, necessarily, create a fixed establishment and that service providers are not required to inquire into the contractual position of its customers and their subsidiaries.

Constable Comment: The rules relating to VAT and the place of supply of services are complex, with different treatments for business customers and individuals and several exceptions to the general rules. This means this is often an area of contention between supplier and customer and also the tax authorities. Determining which of a customer’s establishments a supply is being made to is a fundamental part of the process of applying the complex place of supply VAT rules relating to supplies of services.

This is a common issue and can lead to errors. It is therefore important to take advice where supplies are being made to a customer with establishments in several different countries to ensure VAT is declared correctly. EU law requires that suppliers consider the nature and use of the service provided alongside contracts, orders and payment mechanisms to determine where a supply is received. However, this case indicates that it is not necessary to delve more deeply into contracts between associated companies to determine which establishment is receiving a supply.

Constable VAT has experience in this area and can advise on transactions where there is uncertainty around the VAT treatment of a supply of services

First Tier Tribunal

2. DIY Housebuilder Scheme: When is a Building Complete?

This appeal by Mr & Mrs McGarry concerned HMRC’s decision to refuse to repay input VAT under the DIY Housebuilder Scheme on the grounds that the claim was out of time. There is a three-month time limit for submitting a claim under this scheme which runs from the date on which the property in question is complete. This case considers when a property is “complete” for the purposes of the scheme.

Mr & Mrs McGarry submitted a claim dated 30 January 2018, following the receipt of a certificate of completion from the local authority which was dated 3 November 2017; well within the three-month time limit. HMRC denied this claim on the grounds that the property had been occupied for at least a year prior to the issue of the certificate, essentially arguing that the building was complete when occupied. It supported its argument by noting that, in April 2017, Mr McGarry was told that all that was required for the completion certificate to be issued was for him to supply Building Control with energy installation certificates and not to carry out and further works to the property. Observing this and that the property had been occupied since 2014, HMRC denied the claim for repayment of the VAT.

Mr and Mrs McGarry argued that they had followed HMRC’s Guidance and the explanatory notes on all of the relevant paperwork which were clear in informing them to include a copy of a certificate of completion along with the claim and associated invoices. They sought to rely on Farquharson which, whilst not authoritative over the Tribunal, states that the reference to “completion” in the law is referential to the completion certificate and it is only in the absence of such a certificate that other evidence should be considered, such as occupation.

The Tribunal agreed with the decision in Farquharson and noted that Mr and Mrs McGarry had read HMRC’s Guidance and relied on the explanatory notes on the forms which are used to make a claim. This led them to believe that they needed a completion certificate to include with their claim. They had looked into what was required to obtain a completion certificate and had, within a year, obtained this certificate and submitted a claim within three months of this date.

The Tribunal held in favour of the taxpayer and upheld the appeal; Mr and Mrs McGarry will now resubmit their claim for consideration.

Constable Comment: This is an area of the law which is frequently before the First Tier Tribunal, with HMRC often seeking to argue that a certificate of completion is not particularly significant for DIY Housebuilders even though their Guidance and the necessary paperwork for making a claim indicates that it is a necessity for a claim to be successful. Whilst it has been confirmed that alternative evidence can be considered when deciding if a building is complete, this should not be the starting point.

Whilst this is a positive result for Mr and Mrs McGarry, the result does not set a precedent so is not binding on the Tribunal when considering this issue again in the future. There is a wealth of caselaw around this subject which is inconsistent and does not provide a precedent. Which way the Tribunal rules on this question has become something of an unacceptable lottery for taxpayers and clarity on “completion” is urgently needed.

3. Input VAT Recovery: Relevant Date

This case concerned Premspec and its sister companies, Dean and Swanson. Premspec applied to recover input VAT on supplies made to it by the other companies, but HMRC denied this claim on the grounds that the consideration for those supplies remained unpaid six months after the “relevant date” for the purposes of input VAT recovery. HMRC argued that the six-month time limit to make a claim for repayment ran from the dates on which supplies were made to Premspec. Premspec argued that, as the payments were not contractually due, the “relevant date” had not been reached.

Premspec was incorporated in 2012 to import electrical goods from China and sell them on to UK wholesalers. As it had a weak credit status when first established, the sister companies, Dean and Swanson, bought goods and services on behalf of Premspec and charged the cost to Premspec without a requirement for immediate payment. The invoices which were raised showed the VAT which was owed but did not expressly state any payment terms.

Relying on oral evidence, Premspec argued that the consideration for the supplies was payable no later than ten years from the commencement of Premspec’s business (July 2013). HMRC emphasised the lack of evidence to support this claim and argued that, in the absence of any evidence to the contrary, the position must be that the time of supply is the “relevant date” for these purposes.

The Tribunal considered that the consideration was payable by Premspec and turned to the question of when the payments were due. In the absence of any documentary evidence, it was considered that no such evidence existed as all three companies were under the common control of Mr Bosely, the director of all three, and it was not necessary to draw up payment terms between the sister companies.

It held in favour of Premspec and asserted that it is entitled to reclaim input VAT relating to supplies received from its sister companies for which it has not yet paid.

Constable Comment: When supplying lines of credit to related companies, even if it is not necessary internally, it is always advisable to document these arrangements. Equally important to the “relevant date” for the consideration falling due is the fact that the consideration is legitimately due. In this case, the Tribunal considered that it was genuinely due as the amounts owed to the sister companies had been entered in their accounts as receivable. However, there have been several instances where the Court and Tribunals have held that charges made by parent companies were never bona fide and should not give rise to input VAT recovery for the recipient as it never intended to pay for those supplies.

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

Temporary Zero-rate for Personal Protective Equipment
HMRC has updated its recent Brief on the temporary zero-rate for personal protective equipment to include information on import VAT.

VAT Finance Manual
VATFIN5100 has been updated to reflect the changes to the VAT treatment of VAT fund management which came into effect on 1 April 2020.

Health Professionals & Pharmaceutical Products
This Notice has been updated to give more information about relevant imports that the temporary zero-rate will apply to.

Upcoming Hearings
The FTT has released a list of hearings which are going ahead at the moment and the medium through which they will be conducted.

CONSTABLE VAT NEWS

Partly exempt businesses recover VAT incurred provisionally throughout the VAT accounting year. At the end of the VAT year they must perform an annual adjustment calculation to determine the amount of input VAT recoverable in the VAT year. The provisional input VAT deduction is compared with the actual recovery allowed and, if necessary, the position must be adjusted. This adjustment is normally made on the VAT return following a business’ partial exemption year end, although it is possible to make an ‘in year’ adjustment. A business submitting calendar quarterly VAT returns, with a VAT year end of 31 March, usually includes its partial exemption annual adjustment on the VAT return in respect of the VAT accounting period ending 30 June.

Many taxpayers will imminently need to perform their annual adjustment calculations. This can often be a particularly difficult and time-consuming exercise which often poses problems for businesses. It is advisable to seek professional advice when performing partial exemption annual adjustments, particularly at uncertain times such as now where the values of taxable or VAT exempt supplies may have fluctuated unexpectedly. Our coverage of partial exemption can be read in full here. For assistance with any partial exemption query, please do not hesitate to contact Constable VAT.

CASE REVIEW

CJEU

1. Retrospective Adjustments of VAT Deductions

This case concerned Correios de Portugal (CDP) and its right to retrospectively adjust claims for input VAT deduction. CDP is a Portuguese postal service; some of its supplies are taxable courier services, others are VAT exempt universal postal services. This means that CDP is partly exempt for VAT purposes.

In 2015, following a clarification within the Portuguese system that many of the services being treated as exempt were, in fact, taxable, CDP altered its partial exemption calculation for that year and changed the method which it used. Rather than a “pro rata” method, it sought to recover VAT incurred through a use-based method. It then attempted to retrospectively apply the new rate, which showed a higher degree of taxable supplies, thus affording increased input VAT recovery. Having netted the calculations off, CDP submitted a claim for repayment of the input VAT which it has never recovered, amounting to EUR 1,967,567.82.

Following an inspection, the Portuguese tax authority refused to make this repayment, asserting that once a recovery has already been made for a period, taxpayers are not permitted to retrospectively change the method that was used. The question before the CJEU in this instance is whether a domestic tax authority is prohibited form preventing a taxpayer from retrospectively changing the method which was used to calculate recoverable input VAT. It was also asked whether a Member State may prevent such a change in method where the taxpayer was not aware that the domestic law was incorrect.

It concluded that the EU law precludes Member States from enforcing such restrictions and held that the taxpayer’s behaviour was appropriate, and would be appropriate where:

–        “the Member State concerned authorises taxable persons to deduct VAT on the basis of the use made of all or part of the goods and services used both for transactions in respect of which VAT is deductible and for transactions in respect of which VAT is not deductible, pursuant to Article 173(2)(c) of that directive;

–        the taxable person was unaware, and acting in good faith, when choosing the deduction method, that a transaction which it regarded as exempt was in fact taxable

–        the general limitation period fixed by the national law for the purposes of adjusting deductions has not yet expired, and

–        the change in the deduction method makes it possible to establish more precisely the proportion of VAT relating to transactions in respect of which VAT is deductible.”

Constable Comment: This is a positive decision for the taxpayer but applies to very specific circumstances in which a taxpayer has acted in good faith when choosing a deduction method for transactions which it regarded as exempt which were, in fact, taxable. It should also be the case that the general time limit for adjusting the period has not passed – in the UK this is usually four years. To discuss this judgment or how it may apply to your business, please do not hesitate to contact Constable VAT.

Upper Tribunal

2. YMCA: Housing Support Services

This is a compound appeal by four different YMCA organisations against a decision of the FTT which concluded that supplies of “housing related support services” were exempt from VAT.

The appellants entered into contracts with local authorities to provide welfare and housing services to vulnerable individuals – the supplies were not made to the local authorities themselves. The Tribunal found that “housing support services” encapsulates support services which are provided to any person for the purpose of developing that person’s capacity to live independently in accommodation or sustaining their capacity to do so. The individuals who received support services from the appellants also received formal care plans and were appointed key workers to assist with their development and adherence to the plan.

UK VAT law exempts the supply by a charity, state-regulated, or public body of welfare services directly connected with the provision of care, treatment or instruction designed to promote the physical or mental welfare of distressed people. The appellants argued before the FTT that its supplies fell outside of this exemption as the vulnerable people who received the services were not paying for the supply. It also argued that the services were not directly linked with the provision of instruction designed to promote the welfare of distressed people as the recipients of the services were not “distressed” once they were receiving services from the YMCA and, in any light, that there was no “instruction” of the vulnerable individuals.

The FTT dismissed these contentions and held the services to be exempt from VAT. They now appeal to the UT on the following grounds;

• The services being supplied did not fall within the definition or purpose of the VAT exemption; the supply of services is made to a third party which pays no consideration and is not directly linked with the instruction of distressed people,
• If its services were exempt, it would increase the cost of those services to the local authorities as it would no longer be entitled to deduct input VAT. This would go against the purpose of the VAT Directive which aims to reduce the cost of welfare provision
• The recipients of the services were not “distressed” within the meaning of the VAT law

With regard to the third-party argument, the UT concluded that the exemption for welfare services does not exclude supplies to third parties. It also agreed with the FTT in holding that the services were supplied to distressed people and were directly linked to their instruction with a view to improving their physical and mental wellbeing. In reaching this conclusion, it was considered that “instruction” does not imply compulsion and that the educational development plans given to the individuals, which were overseen by keyworkers, do qualify as “instruction”. It was also noted that the effect on the cost of the services being provided was not sufficiently “perverse” to influence the Tribunal’s decision on this matter.

Turning to the “distressed” point, the UT observed the definition employed by the FTT, the dictionary definition, “…someone who is suffering severe mental or emotional pain, anguish or financial straits. It denotes severe, rather than mild, emotional or physical discomfort.” The appellants argued that their services were not being provided to “distressed” individuals as, once being assisted by the YMCA, they were no longer distressed. The Tribunal dismissed this argument, commenting that “distress” is not a legal state of being but a question of objective fact; the people receiving support from the YMCA were people in distress.

The Tribunal held in favour of HMRC, dismissing the appeal and confirming that supplies of housing support services, made by the YMCA to distressed individuals, are exempt from VAT.

Constable Comment: An interesting element of the appeal was the attempt by the taxpayer to rely on a purposive interpretation of an EU Directive. HMRC benefits as a result of this decision because input VAT being incurred by the YMCA’s in making these supplies will not be recoverable. HMRC had previously given rulings to 3 of the 4 appellants that these were taxable (standard-rated) supplies.

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.