HMRC NEWS

Zero-rate of VAT For Electronic Publications
HMRC has announced that the zero-rate for electronic publications, originally intended to take effect from 1 December 2020, will now be applicable from 1 May 2020. This guidance discusses this zero-rate and lists types of electronically supplied publications which are now eligible to benefit from it. HMRC has also released a Revenue & Customs brief explaining the changes which can be read here.

Temporary Zero-rate For PPE
HMRC has released a Brief announcing changes to UK VAT, introducing a temporary zero rate for supplies of PPE for use for protection from COVID-19. The zero-rate applies from 1 May to 31 July 2020. This has also led to several Notices and versions of HMRC’s internal guidance to be updated accordingly.

VAT Partial Exemption Guidance
HMRC has updated its internal guidance, replacing an administrative agreement which will be withdrawn from 1 May 2020.

Exporting PPE During COVID-19 Outbreak
HMRC has published guidance about the changes around exporting personal protective equipment (PPE) during the coronavirus pandemic.

HMRC Monthly Exchange Rates
HMRC has released the exchange rates to be used for May 2020 when converting currency.

Deferral of VAT Payments Due to COVID-19
HMRC has updated its guidance on deferring VAT payments, including payments on account and monthly and quarterly payments.

CONSTABLE VAT NEWS

We recently released coverage of some of the different measures being taken across Europe to assist businesses which are facing difficulties meeting their VAT obligations as a result of the COVID-19 crisis. The last week has seen a significant increase in the measures being taken which will be of interest to those businesses operating in different countries. We have updated our coverage to reflect these updates which can be read here.

CASE UPDATE

Court of Appeal

1. Rank Group: Input VAT Recovery Out of Time?

This appeal by The Rank Group concerned HMRC’s refusal to make a repayment of overpaid VAT, the claim for which Rank made after it was confirmed that its supplies of bingo should have been treated as VAT exempt. HMRC made substantial repayments in relation to ¾ of the claims made by Rank, but rejected its 4^th claim on the grounds that it was out of time as it was made more than 4 years after the end of the VAT accounting periods contained within the claim (1996-2002). The claim was made in November 2011.

Typically, there is a four-year time limit in place allowing HMRC and taxpayers to retrospectively adjust VAT accounting errors, unless there is a criminal element to any unpaid tax. Different provisions apply where an amount falls to be paid as a result of a mistake previously made about whether amounts were payable; any time limitations on HMRC are disregarded in determining the sum required to be paid or repaid under s81 3A.

Rank argued that HMRC were out of time to assess for the input tax which it was (wrongly) allowed to deduct from its computation of VAT for the first three, successful, claims. It suggested that to allow this, HMRC had necessarily relied on the provisions which allowed it to go back further than four years (s81 3A). It was suggested that this meant Rank also had the right to go back further than 4 years; this follows a decision in Birmingham Hippodrome.

HMRC argued that it had not relied on these provisions to raise an out of time assessment as it had no need to raise an assessment to off-set input tax credits against a claim for recovery of overpaid output VAT; it accepted that if it had raised such an assessment, Rank would be entitled to bring the relevant period into account.

The Court held in favour of HMRC, observing that Rank had no entitlement to recover the net amount of the 4^th claim and the argument that this outcome could be achieved using the current provisions involved “… a distortion of basic VAT accounting principles for which there is no warrant…” HMRC had not relied on s81 3A to make an out of time assessment so Rank could not rely on it either.

Constable Comment: This case is useful as it confirms that if HMRC make a retrospective assessment which is out of time, the taxpayer can then adjust that period in line with the EU principle of equivalence. However, it also confirms that “netting off” a claim made by a taxpayer does not constitute an assessment for the tax. In this case, the taxpayer was seeking to recover output tax which it had incorrectly paid and HMRC offset the input VAT which had previously been recovered; this is not an assessment.

The arguments and the analysis are both complex and apply to very limited circumstances. However, it will be of interest to any readers with an interest in the functioning of VATA, specifically s25-26 and s80-83. To discuss input VAT recovery and the associated time limits, please do not hesitate to contact Constable VAT.

Upper Tribunal

2. Partial Exemption standard method override: Fair and Reasonable?

This appeal by HMRC concerned an earlier decision made by the FTT which held that there was a direct and immediate link between input VAT incurred on production costs and taxable supplies of catering made by The Royal Opera House Covent Garden Foundation (The Foundation). If such a link were present, a higher degree of input VAT recovery would be afforded to The Foundation as VAT incurred on overheads would relate directly to more taxable supplies.

The Foundation puts on productions such as plays and ballets, admission to which is exempt from VAT. However, it also makes some other taxable supplies such as catering from its bars and restaurants when staging productions. Input VAT incurred which cannot be directly attributed to either a taxable or exempt supply falls to be apportioned. The Foundation operates the partial exemption standard method. It was common ground between HMRC and The Foundation that the input VAT incurred on production costs was residual. The dispute is around the extent to which the residual input VAT incurred on production costs is recoverable.

The Foundation argued before the FTT that there was a direct link between the following supplies; (i) catering, (ii) ice cream sales, (iii) shop sales, (iv) commercial venue hire and (v) production work for other companies, and its productions. It had submitted an input VAT repayment claim to HMRC in the sum £532k (for the period 1 June 2011 to 31 August 2012) which HMRC had refused to repay on the grounds that the standard method did not produce a fair outcome and an override calculation was required.

The FTT considered this issue and held in favour of the taxpayer with regard to supplies of catering and ice cream sales. However, it did not consider that a sufficient link existed between the productions which were staged by The Foundation and the other supplies.

HMRC appealed against the FTT’s decision with regard to the supplies of catering and ice cream, arguing that the FTT had erred in law by failing to apply the “cost component” test to the catering supplies and ice cream sales. It argued that the FTT had failed to show that VAT incurred by the Foundation that related to its VAT exempt productions had anything other than an indirect link to taxable supplies of catering and ice cream sales; merely showing an economic or commercial association is not sufficient to demonstrate a direct and immediate link.

The Upper Tribunal considered the decisions in recent cases including University of Cambridge and Frank A Smart, before arriving at the conclusion that, in order for an overhead cost to bear a right to input VAT recovery, that cost must be factored into a charge for a taxable output.

In University of Cambridge, the issue was whether there was a sufficient link between the management of donations and endowments invested in the fund concerned and a taxable output; it was held that there was not. Similarly, in this case, whilst The Foundation makes some taxable supplies, The Tribunal noted that the cost of staging productions was not factored into one taxable output and, therefore, upheld HMRC’s appeal.

Constable Comment: This is an interesting case concerning the partial exemption standard method override (SMO) provisions which consider the use of VAT incurred. In this case HMRC accepted that production costs were not wholly and directly attributable to a VAT exempt cultural performance. Zero-rated programme sales and production specific sponsorship meant that VAT incurred was residual and falls to be apportioned. The question was what sums (and supplies) should be included in the calculation. If The Foundation was able to include income generated from items (i) to (v) above in its partial exemption standard method calculation then, it follows, that it would have been able to reclaim a greater percentage of the VAT incurred in respect of its production costs. HMRC did not think that this was fair or reasonable hence the decision to refuse the £532k input VAT claim.

Charities and businesses operating the partial exemption standard method should always consider if this produces a fair result and whether the SMO provisions should be considered. The SMO only usually applies where a difference between the standard method and an override calculation is substantial and exceeds £50k.    

At the FTT, this case was interesting as it deviated from previous case law which observed that a direct and immediate link is established simply through the bundling of costs into the ultimate charge made to the consumer, assessing more where there is a business link between the cost and the supply.

The decision saw a shift away from HMRC’s rigid interpretation of the “direct and immediate” link requirement that input costs must be bundled into income derived from a taxable output.

However, the overturning of the FTT’s decision supports the recent decisions in Frank A Smart and The University of Cambridge. It seems that the test to establish a direct and immediate link for partial exemption purposes will continue to be the “cost component” test.

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

EC Sales List: Service Issues & Availability
HMRC has announced that the online EC Sales List service will be down 6pm to 11:45pm on Tuesday 28 April 2020.

Health Professionals & Pharmaceutical Products
HMRC has updated its guidance to include EEA health professionals in the list of relevant practitioners.

Call Off Stock: Draft Legislation
HMRC has published draft legislation and an updated policy paper on the changes to the rules for call off stock arrangements between the UK and the EU. The legislation has a retrospective element. This means that businesses are able to take advantage of the new arrangements from 1 January 2020 and are required to correct returns where this has not been done.

Road Fuel Scale Charges
The VAT road fuel scale charges are amended with effect from 1 May 2020. Businesses must use the new scales from the start of the next prescribed accounting period beginning on or after 1 May 2020.

FIRST-TIER TRIBUNAL UPDATE

The FTT has issued directions for a further general stay in relation to cases which the Tribunal received prior to issuing an initial stay on proceedings on 24 March. Those cases which were assigned to the standard or complex categories have been further stayed up to and including 30 June and the dates of all hearing windows and for compliance with all time limits in those proceedings have been further extended by 70 days. The full Directions can be read here.

CONSTABLE VAT NEWS

We have recently released our coverage of some of the most recent VAT developments and decisions which may be of particular interest to those operating in the third sector and can be read here.

In addition, we released a new newsletter covering the DIY Housebuilder VAT refund scheme. The special VAT Refund Scheme allows DIY housebuilders and people converting non-residential buildings into dwellings to reclaim VAT incurred on construction or conversion costs. This scheme is available when the building will be used for a non-business purpose. This can be read here.

In relation to DIY housebuilder claims, we have recently been advised by HMRC that due to the Covid-19 crisis, HMRC is currently unable to carry out the detailed review of invoices submitted with claims within its usual timescales. As a result, in some cases, HMRC is confirming the claimant’s basic entitlement to make a claim and initially repaying 70% of the value of the claim.  The balance of the claim will be paid once HMRC is able to check the supporting tax invoices and fully verify the amount. HMRC is unable to give a timescale on when it will be able to conduct full checks and repay the remaining 30% of claims but it is trying to restructure its operations to expedite verification checks However, it has also clarified that it will continue to carry out full checks before making payments on high value claims. We will keep readers informed via future newsletters and our website.

CASE REVIEW

Upper Tribunal

1. Done Brothers and Rank: VAT Liability of FOBTs

This appeal by HMRC concerned the VAT liability of supplies to retail customers of the ability to play various games of chance on gaming machines. It appeals against the decisions in The Rank Group and Done Brothers. Whilst these cases are not identical, the appeal at hand relates to a single issue which is common to both and the parties had requested a single judgement,

The background to this long running matter was a change in UK law which took place in December 2005; the supply of gambling by means of a fixed odds betting terminal (FOBT) was changed from exempt to standard rated for VAT. The effect of this change was that identical games, such as roulette, when played using different mediums, attracted different rates of VAT. Rank reclaimed the output tax which it paid on these supplies on the grounds that the UK position infringed the EU principle of fiscal neutrality. This position was upheld in the CJEU and UK Supreme Court.

As a result of Rank, the UK law was changed in 2013 to affirm supplies of gambling through FOBTs as VAT exempt. Done claimed repayment of VAT which it had paid on FOBT supplies between 2005 and 2013 on the same grounds as in Rank, that the UK law during the relevant period had infringed the EU principle of fiscal neutrality. HMRC refused this repayment and the taxpayer appealed. Done Brothers were successful in the First Tier Tribunal, which considered that the principle of fiscal neutrality had been breached, upholding the position in Rank. It held that the average consumer viewed the game on the various platforms as similar and interchangeable and that supplies from FOBTs were VAT exempt.

HMRC appeal broadly against this position, alleging that the FTT had failed to accurately consider the characteristics of an average consumer of gambling services. The UT were rather disparaging of HMRC’s appeal, noting that “… the sand of HMRC’s argument had begun to shift…” and “the skeleton argument contained no assertion or discussion as to which “characteristics” of the average consumer in these appeals should have been considered and determined by the FTT”.

It was clarified that HMRC alleged that the FTT had erred in the way in which it had determined the needs of the average consumer, as it had considered evidence which showed average behaviour without also considering evidence as to the possible preferences of different consumers. It noted that FOBTs were perceived differently by consumers as they provide the opportunity to place higher bets than other machines. It argued, in essence, that data on average use of the machines was misleading as the average consumer may value the ability to place a higher bet and would change between machines depending on how much they felt like wagering.

Done Brothers argued that there was nothing in any of the authorities, including those cited by HMRC, to support HMRC’s contention that the Tribunal needs to consider the reasoning underlying the behaviour of an average consumer. The Tribunal confirmed this point, noting that the FTT does not need to consider the reasons and possible preferences of individual consumers.

The Tribunal held in favour of the taxpayer, dismissing HMRC’s appeal.

Constable Comment: This decision is the most recent in a long-running debate between HMRC and the taxpayer around the correct VAT liability of supplies of gambling made through FOBTs. Readers who have an interest in EU law may wish to  read the entire judgment as it offers discussion of the way in which issues of fiscal neutrality should be considered by the Courts.

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

Option to Tax
The contact details for submission of an option to tax have been updated in Public Notice 742A.

VAT Payment Deadline Calculator
HMRC has added information to the page, clarifying that VAT payments due between 20 March and 30 June can be deferred until 31 March 2021.

COVID-19: Guidance for Employees, Employers and Businesses
HMRC continues to update its guidance for businesses throughout the COVID-19 pandemic.

VAT and Imports
HMRC issued a statement via the CIOT on 10 April 2020 regarding VAT payable on imports. This can be read in detail here, and will be of interest to all parties importing goods during the Covid-19 pandemic.

Service of Legal Proceedings to HMRC
HMRC has stated that the service of new legal proceedings and pre-action letters on HMRC should be via email during the COVID-19 pandemic. New legal proceedings in England and Wales which are required to be served on the Solicitor for HMRC can be sent by email to newproceedings@hmrc.gov.uk.

CONSTABLE VAT NEWS

As the ongoing situation with COVID-19 continues to impact businesses, charities and individuals alike, European countries have implemented various measures to assist in reducing the financial consequences. Our coverage aims to provide a synopsis of the VAT related measures being taken in different Member States to aid those struggling to meet financial obligations.  We have not confirmed everything directly with all of the tax authorities concerned and local advice/confirmation is recommended.  The situation is so fluid that changes and additional measures can be anticipated and we continue to update our coverage, which can be read here.

We also continue to update our table which provides answers to frequently asked questions regarding VAT and COVID-19 as well as other useful information which is useful to businesses and charities throughout the COVID-19 pandemic. This can be read here.

CASE REVIEW

Court of Session

1. Quantification of Fleming Claims

The decision in NHS Lothian Health Board (NHSL) concerned a claim for recovery of input VAT relating to the periods between 1974 and 1997. This claim was made as a result of the House of Lords’ judgements in January 2008 in the cases of Fleming and Conde Nast, which concerned the way that the three year time limit on making claims had been introduced.

NHSL operated 44 laboratories, most of the work performed in these labs during the relevant period was non-business activity, being clinical work carried out for the NHS. However, the labs also performed some business activities through carrying out additional work for third parties. It was agreed between all parties that input VAT paid by NHSL in respect of providing the taxable lab services had not been reclaimed, but that it was recoverable.

The FTT and The UT had previously held in favour of HMRC, rejecting the claim for repayment on the grounds that the claim could not be sufficiently quantified and evidenced to be authorised. NHSL appealed to the Court of Session, arguing that the refusal to authorise the claim infringed the EU principle of Effectiveness – that requirements of national law must not make it excessively difficult to exercise one’s rights.

The claim was based on the first year of accurate records which were available to NHSL, 06/07. The VAT recovery fraction shown in these accounts is 14.7% and NHSL sought to extrapolate this figure backwards to the other periods. HMRC argued that there was insufficient evidence to support this methodology and, as the claim could not be reliably quantified and evidenced, the taxpayer could not make such a claim.

The key question before the Court of Session was whether this percentage could reasonably be extrapolated backwards, bearing in mind the principle of effectiveness. The Court also considered NHSL’s proposal that, where the taxpayer’s methodology for calculating a claim is rejected, HMRC and the Tribunals must assist the taxpayer in quantifying a claim rather than preventing the taxpayer from exercising their right to VAT recovery.

The Court observed that, looked at holistically, the critical question was whether the taxpayer’s calculations are more likely to amount to a proper quantification of the claim than the alternative, which dictates that no input VAT is recoverable because of the impossibility of perfect quantification.

It concluded that, ultimately, the difficulties of proof were not sufficient to reject the possibility of quantification and, where such difficulties exist, The FTT must attempt to identify a satisfactory methodology to permit quantification of the amount. It also considered that the Tribunals and HMRC should adopt a flexible approach to the burden of proof in connection with historical claims for repayment.

The previous decisions of the FTT and UT are set aside and the matter is referred back to a differently constituted First Tier Tribunal for reconsideration.

Constable Comment: This case is from a Scottish Court but is interesting to taxpayers throughout the entire UK. This claim is worth nearly £1million, and it is estimated that there are still around 200 unsettled Fleming claims relating to NHS trusts. This case is good news for those claimants who, it seems, will now receive the assistance of the Tribunals in reaching a quantification where HMRC has previously rejected the claim outright. It is also interesting that the Court considered that the Tribunals and HMRC should adopt a flexible approach to the burden of proof in these cases; this shows a degree of pragmatism in favour of the taxpayer. This is useful in relation to estimated claims in general.

Upper Tier Tribunal

2. Prompt Payment Discount or Separate Contract?

Virgin Media Limited (VML) made supplies of telecommunications to its domestic customers. 95% of these customers paid a monthly subscription fee, the remaining 5% paid one lump sum for a 12-month subscription which amounted to less than 12 monthly instalments. Output VAT was calculated for all customers using the lower price based on the suggestion that if a “prompt payment discount” is offered then output VAT should be calculated using the discounted amount even if the customer did not take advantage of this discount.

HMRC disagreed with this position and assessed VML, which appealed. The First Tier Tribunal dismissed the appeal, holding that VML’s supplies to the monthly customers were not “supplied on terms allowing a discount for prompt payment” as the supply to monthly customers and the supply to annual customers were different supplies on different terms. Essentially, the 12-month saver option was a wholly different product to the monthly payment contracts. VML appealed this decision to the Upper Tribunal.

The Upper Tribunal considered that, in order for the “prompt payment discount” legislation to take effect:

• There must be terms on which the supply is made
• A discount must be offered by those terms
• The discount offered is for prompt payment

Therefore, it was necessary to analyse the contractual position between VML and its customers. The key question was whether there is a single contract which provides for two possibilities as to payment (monthly payment or saver basis) for the same supply, as VML contends, or are there two possible contracts, each with different terms, as HMRC contend?

The Tribunal observed that there are different contracts in place between the two types of customer; the contract for the monthly customer does not offer the opportunity to pay for all 12 months in advance. Rather, monthly customers were entitled to switch their contract to a different one and pay £120 for the upcoming 12-month period; the monthly customer only becomes subject to the contractual terms relating to the saver basis on making the payment for 12 months.

As a result, the Tribunal held in favour of HMRC and dismissed VML’s appeal as the discounted amount was for a separate contract, even though the customers received the same services.

Constable Comment: The relevant legislation dictates that where a discount is offered for prompt payment of an invoice, the VAT is calculated on the reduced amount, as if the customer took the discount. This decision seems logical; the option to change your monthly contract to a cheaper annual contract does not constitute a discount for prompt payment.  

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

Correcting Errors on Your VAT Return
Due to temporary measures put in place to stop the spread of COVID-19, you can no longer submit Form VAT652 by post. HMRC has set up an email address for taxpayers to submit error correction documents: inbox.btcnevaterrorcorrection@hmrc.gov.uk.

VAT Registration Contacts
HMRC has updated its guidance on the correct contact information to use to apply for VAT registration, or an exception to it, as well as making changes to existing registration.

VAT Notice 700/44—Barristers and advocates
This notice updates the June 2007 version with details of the temporary changes introduced in response to the coronavirus (COVID-19) pandemic. Until further notice, any forms, returns or correspondences must be sent to HMRC by email instead of post. Any payments should be made electronically.

First-tier Tribunal Tax Chamber administrative centre reduced service
In response to the impact of COVID-19, some temporary changes to the working arrangements at the First-tier Tribunal (Tax Chamber) administrative centre in Birmingham have been announced. Appellants should, where possible, submit notices of appeal online or by email.

Making Tax Digital: Digital Links
HMRC has updated Public Notice 700/22 to reflect the recently announced extension to the deadline for the implementation of digital links. Previously, the deadline was 1 April 2020, this has now been moved to 1 April 2021.

VAT MOSS Exchange Rates
HMRC has released the VAT MOSS exchange rates for 2020 to be used by businesses registered in the UK to complete declarations.

CONSTABLE VAT NEWS

Many businesses and charities are currently adapting their usual business practices in response to the COVID-19 outbreak measures. Some are seeking to improve cash flow and are taking various measures to do so including diversifying from their normal business activities. Whilst business development and sales diversification can certainly create additional income, it is necessary to consider the potential VAT impacts.

Our recent blog on this topic aims to provide an overview of some of the main VAT issues which a business or charity may wish to consider when offering new products for sale or carrying out its activities in a different way. This can be read in full here.

As the ongoing situation with COVID-19 continues to impact businesses, charities and individuals alike, European countries have implemented various measures to assist in reducing the financial consequences. We continue to update our coverage of the various measures being taken in different countries. This can be read here.

Constable VAT are pleased to announce that Laura Krickova has been promoted to partner from 1 April 2020. Laura joined Constable VAT directly from 6^th form college in 2008 and we are delighted that she has accepted this new role in the firm and are looking forward to celebrating with her soon.

CASE REVIEW

Supreme Court

1. Supreme Court Judgment in Zipvit

Readers may be familiar with the case of Zipvit, which concerned whether Zipvit, a trader selling vitamins via mail order, was entitled to recover VAT on postal services supplied to it by Royal Mail (RM). RM had treated its supplies to Zipvit as VAT exempt; however, the CJEU subsequently held that the individually negotiated mail services made by RM to Zipvit should have been standard rated for VAT. Zipvit claimed that it was entitled to deduct, as input VAT, the VAT deemed to be included within the invoices which had previously been issued.

HMRC argued that as RM had not charged VAT, Zipvit did not hold valid VAT invoices, meaning that it could not make a valid claim for recovery of that VAT. The matter has been appealed through the Tribunals and Courts, with HMRC being successful in each instance. The matter was appealed to The Supreme Court.

The Supreme Court considered the point and decided unanimously that the legal position under EU law is not clear. Therefore, it referred the following questions to the Court of Justice of The European Union:

• Is the effect of EU law that, in circumstances such as those at present, the price actually paid by the customer is to be regarded as the combination of a net amount plus VAT, thus allowing the customer to deduct the VAT it has “paid” as input VAT?
• Whether where the domestic tax authority, the supplier and the customer all misinterpret EU law and treat a taxable supply as exempt, resulting in a non-compliant VAT invoice which stated that no VAT was due, the customer is entitled to recover input tax.

Constable Comment: Zipvit is a lead case with several others stood behind it. In total, the decision is worth around £1billion so the outcome is certainly significant. It will be interesting to see how the CJEU responds to these questions; as The Supreme Court has observed, the law is fundamentally unclear at an EU level. Whilst the UK Court system has consistently held in favour of HMRC, if the CJEU considers that Zipvit is entitled to recover the “deemed” input VAT, there will be potentially significant ramifications throughout the whole EU.

Upper Tribunal

2. VAT Liability of “Day Planners”

This appeal by HMRC is against an FTT decision which determined the VAT liability of “action day planners” to be zero-rated as a book. Thorstein Gardarsson (T/a Action Day A Islandi) sold planners which it described as a time management tool, developed to “help people to grow; to teach and instruct people time management skills”. It is an interactive tool intended to facilitate the discipline of time management. The planners contain a mix of empty pages to be filled in, and pages of text which detail the ethos associated with the planner’s approach to time management.

The FTT had previously observed that the planners should be regarded as books, noting that blank crossword puzzles are books for the purposes of VAT zero-rating, and these contain a mixture of text and blank space to be filled in. HMRC appealed against this on the grounds that, following previous caselaw, a “book” is something which has a main function of being read, not being written in. It contended that the main function of the day planner was to be written in, meaning the planner should be correctly regarded as a standard rated supply.

The Tribunal observed that, where an item can be both read and written in, there must be some form of “tie-breaker” which determines what the main function of the item. Considering that there is significantly more space to be written in than text to be read, the Tribunal held in favour of HMRC. It also noted that this decision is supported as the planners are produced to academic years, suggesting that the main function is to hold written entries relating to a specific academic year.

The appeal was upheld in favour of HMRC.

Constable Comment: This decision goes against the previous ruling of the FTT in this case. The UT found that the FTT had made errors of law in reaching its conclusions. Therefore, the original decision is set aside entirely and will be reconsidered by the FTT in the light of the UT’s direction that the planner is not a book. However, as there is currently a general stay in place over all hearings before the FTT, we do not know when this decision will be reached.

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 Payments on Account
Information about deferring VAT payments because of COVID-19 has been updated. Payments due between 20 March and 30 June 2020 can be deferred. Deferred payments must be paid on or before 31 March 2021.

Deferral of VAT payments due to Coronavirus
HMRC continues to update its Guidance on deferring payments of VAT during the COVID-19 outbreak. VAT MOSS payments cannot be deferred.

Import VAT on Medical Supplies, Equipment and Protective Garments (COVID-19)
Find out how to import protective equipment, relevant medical devices or equipment brought into the UK from non-EU countries VAT and duty free during the coronavirus (COVID-19) outbreak.

CONSTABLE VAT NEWS

As the ongoing situation with COVID-19 continues to impact businesses, charities and individuals alike, European countries have implemented various measures to assist in reducing the financial consequences. We have recently released a blog covering the various VAT measures being taken by different countries to assist businesses throughout the ongoing situation regarding the Coronavirus which can be read here.

As the Government continues to implement restrictive measures, which are impacting cash flow for businesses, we have released a blog covering the VAT Cash Accounting Scheme. The Scheme is available to some businesses and allows payment and recovery of VAT based on payments rather than invoices. This can be useful if customers are slow to pay and your business pays more VAT than it recovers. Read our coverage here.

Over the coming days we will be issuing more information on how VAT could impact on the changes to normal business practice during this time.

CASE REVIEW

Court of Appeal

1. VAT Liability of Day-care Services

This case concerned the ongoing appeals of L.I.F.E Services Limited (LSL) and The Learning Centre Romford (LCR) relating to the provision of day-care services to vulnerable adults. Previously, the Upper Tribunal had held that supplies by both companies should attract VAT at the standard rate. The companies argued that their supplies were VAT exempt supplies of welfare. Our coverage of the previous judgment can be read here.

In the UK, welfare services are exempt from VAT when provided by either a charity or a state regulated welfare agency. Neither LCR nor LSL are charities, nor are they registered with the CQC. Having failed at the Upper Tribunal to contend that it was state regulated, LCR, along with LSL, advanced this appeal to the Court of Appeal based on the principle of fiscal neutrality.

LCR claimed that the VAT exemption infringed the principle of fiscal neutrality by imposing a differential VAT treatment between supplies made by two types of body: charities and private operators. However, the Court rejected this argument on the grounds that, in the eyes of consumers, welfare services provided by charities and private companies appear significantly different enough for the variance in VAT treatment to not infringe the principle of fiscal neutrality. LCR also mounted an argument based around the strict interpretation of the EU law which provides an exemption for bodies “…devoted to social wellbeing.” It alleged that the UK implementation was flawed as it allows exemption for charities which are not solely devoted to social wellbeing. This argument was rejected.

The final submission, which was mounted by both LCR and TLC, is that the English exemption infringes the principle of fiscal neutrality because of the differential treatment of providers of day care services in England and Wales on the one hand, and those in Scotland and Northern Ireland on the other. In Scotland and Northern Ireland, the provision of day-care services is a state regulated activity and supplies made by private companies are exempt.

The Court rejected this argument and agreed with the ruling offered by the Upper Tribunal that whilst there is a variance in VAT treatment between providers in different countries within the UK, the principle of fiscal neutrality was not infringed. The law was implemented uniformly across the UK and applied to both types of provider. The fact that the UK having devolved regulation of this sector has created the divergence, rationally and lawfully, does not mean that there is a distortion created within the VAT system.

The Court held in favour of HMRC, asserting that the services provided by both LCR and LSL were taxable at the standard rate of VAT.

Constable Comment: This decision upholds the Upper Tribunal’s judgment that VAT is chargeable on supplies of welfare services where the provider is not a charity or registered with the CQC. Being approved by the Local Authority and being required to DBS check staff were both held not to be sufficient to make a provider “state-regulated”.

To discuss the impact of this decision on your organisation, please contact Constable VAT, our charities experts will be pleased to assist.

First Tier Tribunal

2. HMRC Assessment: Made to “Best Judgment”?

In this appeal, the taxpayer, FW Services Ltd (FWS), appealed against HMRC best judgment assessments which were raised following an investigation into a petrol station operated by the appellant. HMRC alleged that FWS had underdeclared sales of fuel and assessed for £686,054 of VAT, relating to the periods 08/15 to 10/17.

HMRC conducted several visits to the petrol station where sales at the station were monitored and apportioned between diesel and unleaded petrol. There was a consistent skew in favour of diesel sales of around 80:20 which was not reflected in previously declared sales for the company which had shown a reasonably consistent 60:40 split. The HMRC Officer who conducted the investigations concluded that sales of diesel were being systematically underdeclared by FWS and concluded that the average throughput of diesel was 360 litres per hour. The Officer assessed based on the difference between FWS’s declared sales and the figure which he had extrapolated.

FWS claim that for the assessment to be correct in relation to the relevant period, it would have to have suppressed cash sales of over £5000 every day, amounting to over £4,000,000 received in cash in the period. It noted that in order for it to receive this much cash to suppress it would require the cooperation of the general public.

Further to this argument, it observed that HMRC only carried out inspections on Thursday mornings which did not give an accurate picture of the business as a whole throughout the entire period. Equally, it argued that HMRC failed to consider the shorter opening times on Saturdays and offered no explanation for assuming that sales on Sundays were exactly 50% of sales on weekdays.

The Tribunal observed that, in order to find that an assessment was not made to best judgment, it must find that HMRC’s assessment was a “… spurious estimate or guess in which all elements of judgment are missing; or is wholly unreasonable”. It found that as HMRC had no evidence for the volume of diesel sales during the evenings and weekends, an important element of its calculations was missing. It found that, in the absence of any evidence that FWS received an extra £5000 per day in cash through the period, the assessment was excessive and that it was, therefore, not made to best judgment. The Tribunal held in favour of the taxpayer and upheld the appeal.

Constable Comment: There have been several cases recently where HMRC assessments have been held to have not been made to best judgment. In this instance it seems reasonable to conclude that a small petrol station in Northern Ireland was not suppressing over £5000 in sales every day for three years. In the current climate, we have already seen indications that HMRC may have advised its staff to raise assessments immediately based on HMRC’s “best judgement” of the sums due rather than delay until a situation has been fully resolved and liabilities agreed. This means that clients with open enquiries/disputes may start to receive VAT assessments that are incorrect or inaccurate. If you receive an assessment in these circumstances please contact us.

3. Occupational Health: Exempt or Standard Rated Services?

This case concerned the VAT liability of “occupational health services”, RPS Health in Business Ltd argued that it was making standard rated supplies and HMRC contended that the supplies made were VAT exempt medical services.

Throughout the business’s negotiations with HMRC and in both party’s applications to the Tribunal, there was significant disagreement from both parties to the proceedings, as well as the Tribunal, around whether or not the issue of single/multiple supply should be considered. At different stages of the process, both parties changed their arguments on this point and the Tribunal necessarily debated with itself whether it was appropriate to rule on this point. Ultimately, it concluded that it could.

RPS provides occupational health services to businesses such as medicals, health surveillance, vaccinations, sickness absence management and drug/alcohol testing. It sometimes provides its clients with an Occupational Health (OH) practitioner, such as a doctor or nurse, who delivers a range of onsite, or mobile, services. For this service, RPS charges a fixed price. It also provides its customers with specific services on a bespoke basis.

The Tribunal considered that where one fixed price was paid for the delivery of all of the services in question, the supply was one, composite, VAT exempt supply of medical services. However, it observed that where RPS provides single supplies on a bespoke basis, whilst the majority of those services are exempt, some of them are standard rated such as medico-legal services and training courses. This ruling supports neither party’s submissions entirely but, substantially, the Tribunal agreed with HMRC and held the majority of RPS’s activities to be VAT exempt.

Constable Comment: This case supports the VAT treatment of general contracts for the provision of occupational health services as VAT exempt. However, it is useful in highlighting some specific services which are standard rated, when provided individually, despite falling under the umbrella of occupational health. The Tribunal observed that pre-employment medicals, pension scheme medicals, ergonomic assessments, laboratory services and administration charges are all standard rated.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.

CONSTABLE VAT NEWS

In the week since our last VAT focus the position has changed rapidly. We have taken the decision to issue our bulletins more regularly to keep our readers abreast of any important VAT issues that may be missed at a time when we are focused on other, more important, matters.

Constable VAT continues to operate as normally as possible, with most of our staff and partners now working remotely. We are holding meetings with clients using Zoom and are still contactable on our usual numbers so please let us know if we can be of any help at this time. Some of you may be busier than usual because of the nature of your business, others may be restructuring or diversifying. If this gives rise to any VAT questions we would be happy to help and we will be issuing a special bulletin on such matters in the next few days, which will address some of points likely to arise.

To assist throughout this difficult period, the UK Government has made a wide range of reliefs available for businesses and individuals alike. With regard to VAT, the Chancellor has announced that VAT payments by businesses will be suspended until the end of June, as explained below. However, deferring payment of a bill does not ensure that a business will be able to cover its VAT liability when payment is due.

Therefore, businesses which are eligible may wish to consider the VAT Cash Accounting Scheme which allows certain businesses to account for VAT on the basis of cash paid and received, rather than on invoices. This can be particularly helpful if customers are often late paying, or you are concerned that your customers may soon fall behind on prompt payments. Our coverage of the scheme can be read here.

We hope that you are all managing to adapt to the new circumstances we find ourselves in and continue to keep safe and well.

HMRC NEWS

The Chancellor has announced that VAT payments will be deferred between 20 March and 30 June 2020. Businesses taking up this option will be given until the end of the financial year to clear any VAT due, which is not paid in the suspension period.

However, VAT returns must still be filed. If your business has a Direct Debit in place, the submission of the return will trigger the VAT payment. You should ensure that you cancel your Direct Debit before you submit your VAT return if you wish to take advantage of the deferment option!

On a cautionary note, we have already seen indications that HMRC may have advised its staff to raise assessments immediately based on HMRC’s “best judgement” of the sums due rather than delay until a situation has been fully resolved and liabilities agreed. This means that clients with open enquiries/disputes may start to receive VAT assessments that are incorrect or wildly inaccurate.

If businesses have open enquiries but have not yet received an assessment it may be prudent to consider whether there are steps that could be taken to:

• prevent an assessment being raised; or
• ensure that any assessment HMRC issues is not wildly inaccurate to reduce the risk of costs on a future dispute.

If you have any concerns on this particular point please reach out to you usual Constable VAT contact.

HMRC VAT UPDATES

HMRC Non-Statutory Clearance Service Update
Due to COVID-19, HMRC are currently unable to process applications for Non-Statutory Clearances which are made by post. Applications should be submitted to the following email address: nonstatutoryclearanceteam.hmrc@hmrc.gov.uk

COVID-19 Guidance
The UK Government continues to update its Guidance for businesses and employees during the COVID-19 outbreak. It is important to stay abreast of the most recent updates.

Late Payment Interest Rates
HMRC has announced that, following the Bank of England’s decision to reduce interest rates further to 0.1%, HMRC late payment interest rates are to be revised.

HMRC Contact: Is It Genuine?
HMRC has updated its guidance on recognising phishing emails and texts. There seems to have been an increase in these types of emails and texts during the current crisis and extra care should be taken if you receive contact unexpectedly from HMRC and others.

The Value Added Tax (Drugs and Medicines) Order 2020 Tax Information Impact Note
HMRC has released an Information and Impact Note about amendments to the scope of the zero-rate for drugs dispensed on the prescription of an appropriate practitioner.

Making Tax Digital
HMRC has released an evaluation of the Making Tax Digital service for VAT and an update on the Income Tax service.

CASE REVIEW

First Tier Tribunal

1. Input Tax: Direct & Immediate Link

This appeal concerns HMRC’s decision to disallow claims for input tax recovery relating to invoices for the provision of legal advice to the appellant, Mr Malde, in relation to a freezing order over his assets. The freezing order was originally for £8.8M but was subsequently expanded to over £22M. The freezing order was placed over Mr Malde’s assets following the issue of personal liability notices (PLNs) on the basis of Mr Malde’s alleged involvement with overseas tax evasion.

Mr Malde incurred significant legal costs in defending against the allegations that he was involved with overseas companies, which had been found guilty of tax evasion and sought to recover the VAT on these costs through his UK sole proprietorship, which held rental properties in the UK. HMRC denied this VAT recovery on the grounds that the input VAT did not relate to Mr Malde’s business and the services supplied by the solicitors were to him in his personal capacity.

The appellant argued that, as the freezing order covers all of his assets, he was unable to invest in and grow his UK sole proprietorship. Mounting an argument similar to that in Kretztechnik, Mr Malde argued that the cost of fighting the freezing order over all of his assets would have a benefit to his UK business and, therefore, the legal fees should form part of his sole proprietorship’s general overheads. HMRC argued that the legal fees were incurred to establish that Mr Malde was not the director of overseas companies and that he failed to demonstrate a sufficient link between the VAT incurred and the taxable outputs of his UK property rental business.

The Court considered that there was not a sufficient link between the input tax and the business activities of the sole proprietorship. The solicitors were engaged by Mr Malde in a personal capacity to prove that he was not involved in the management of overseas companies and this does not create a sufficient nexus between the input tax and a taxable output.

Constable Comment: This case is useful as it illustrates a fundamental principle of VAT being applied in complex circumstances. There are a number of previous decisions which discuss the principle that in order for VAT to be recoverable as input VAT, it must be directly linked with the taxable supplies of a business.

2. DIY Housebuilders Scheme: Time Limits

This case concerned Neil Proffitt who had constructed a property and sought to recover input VAT incurred on the project through the DIY Housebuilder’s VAT Refund Scheme. HMRC refused his claim for recovery. The issue at hand is the three-month time limit for submitting a claim for repayment of input VAT which applies to the DIY Housebuilder Scheme, an issue which is increasingly common in the First Tier Tribunal.

Mr Proffitt obtained planning permission in 1998 to erect a detached dwelling and double garage. Initially, Mr Proffitt did not have sufficient funds to carry out the complete build so he and his wife continued to work full time and worked on the property where possible. This continued and, in 2010, Mr Proffitt attended a VAT seminar where he received advice regarding making DIY claims. He understood from the advice that he had unlimited time to complete his home but that it was essential that a Completion Certificate should be provided to HMRC along with the claim itself.

Mr Proffitt and his wife were evicted from their main residence in 2010 and moved into the incomplete property. After speaking to the local council, they were informed that a Completion Certificate could not be issued until further specified works had been completed. Between 2010 and 2017, various works were carried out to the property until a Completion Certificate was issued on 9 February 2018, following the receipt of a Gas Safe Certificate. Mr Proffitt submitted the claim to HMRC on 27 March 2018; well within the three-month time period for submitting a claim. Following discussion with HMRC, the claim was formally rejected in September 2018 on the grounds that the claim was out of time as the building had been habitable for some time, 2016 at the latest, judging from the schedule of construction works. Mr Proffitt appealed against this decision as there is no reference in the VAT Regulations relating to the scheme to the building being habitable, but the Completion Certificate is highlighted as evidence required for a claim unless other evidence is available that the building is complete.

The Tribunal considered a wide selection of case law on the subject which highlights the frustrating nature of this point of law; there is case law to support both the taxpayer and HMRC’s arguments, but none of it is binding as it is all related to First Tier Tribunal decisions. Some previous decisions suggest that a building is “complete” for the purposes of the scheme when the Certificate of Completion is issued, others suggest that “completion” is a subjective concept and must be decided on a case by case basis. Which way the Tribunal rules on this point has become something of an unsatisfactory lottery for taxpayers.

In this instance, The Tribunal held in favour of Mr Proffitt, commenting that a building should be regarded as complete when it is complete in line with the building regulations and requirements. This is evidenced by the Certificate of Completion. Therefore, the three-month time limit for submitting a claim runs from the issue of the Certificate of Completion.

Constable Comment: As mentioned in our review of another along similar lines in our last VAT focus there is a frustrating lack of clarity around this point; HMRC’s guidance is misleading and there is case law to support both the taxpayer’s and HMRC’s position in this case but none of it is binding.

This must be viewed as an entirely unsatisfactory situation and, in our view, HMRC needs to grip this problem and also accept that the time limit should not be used to deny legitimate claims, bearing in mind HMRC will often refuse claims because the completion certificate has not been issued, creating a bizarre “Catch 22” situation.

This blog is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.

CONSTABLE VAT NEWS

Covid-19 Coronavirus has dominated the news in the past few weeks. The UK Government’s advice regarding Coronavirus continues to develop in response to a rapidly changing situation. The health and welfare of our staff, clients and suppliers is of the utmost importance to us at this difficult time.

We have released an update covering our continuity plan to ensure that we can continue to deliver our services as effectively as possible for our clients which can be read here.

Although I am sure VAT is not the most important matter on your mind at the moment please be assured that if you do need assistance with any VAT matter we are all available and able to help as usual. You should be able to reach your normal contact by phone but if you have difficulty getting through please send an email and we will respond as soon as we can.

A primary concern in these difficult times may be around paying any outstanding VAT due. The recent Budget information produced included the following statement, which applies to VAT payments along with other taxes.

“All businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service. These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities. These businesses can contact HMRC’s new dedicated COVID-19 helpline from 11 March 2020 for advice and support. To ensure ongoing support, HMRC have made a further 2,000 experienced call handlers available to support firms and individuals when needed. If you are concerned about being able to pay your tax due to COVID-19, call HMRC’s dedicated helpline on 0800 0159 559.”

Please let us know if you need any assistance in coming to Time to Pay arrangements with HMRC, or if you want to consider changing to Cash Accounting to assist with cash flow at this time.

Following last week’s Budget Constable VAT issued an update, which can be read here.

HMRC NEWS

The Value Added Tax (Drugs & Medicines Order) 2020
HMRC has released a Policy Paper of the new measure which amends the scope of the VAT zero-rate for drugs dispensed on the prescription of an appropriate practitioner.

Notice 252: valuation of imported goods for customs purposes, VAT and trade statistics
HMRC has updated its Guidance to include an address to send requests to in order to operate simplified procedures for imports.

Partial Exemption Frameworks
The framework for Housing Association partial exemption special methods has been updated.

CASE UPDATE

Court of Justice of the European Union

1. X-GmbH: Medical Exemption in Germany
X is a limited company in Germany. In 2014 it provided advice on various health issues through telephone consultations on behalf of statutory health insurers and conducted telephone patient support programmes for patients suffering from chronic or long-term illnesses. These services were provided by nurses and medical assistants. In more than a third of the cases, a doctor was called in to take over the advice or to give instructions or a second opinion when asked.

The insured could call X at any time and request medical advice. Upon receiving such a request, an X employee would carry out a computer assisted assessment of the patient which would enable to employee to give potential diagnoses and advise on any therapeutic measures which could be taken to aid in recovery. X treated these supplies as VAT exempt on the grounds that they were medical services meeting the conditions for exemption laid down in EU and German law.

The referring Court asked two questions. First, whether medical advice given over the phone, which takes place independently of a specific medical treatment, is a VAT exempt supply of medical care, or a standard, taxable supply of services akin to “wellness” or cosmetic treatments. Secondly, whether telephone consultations performed by nurses and medical assistants could qualify for VAT exemption without the presence of a qualified doctor – essentially whether nurses or medically trained staff were medically qualified enough to qualify for the exemption.

Noting that a supply is exempt if it is a supply of personal care given within the framework of the medical and paramedical professions, the Court considered the definition of “personal care” to be “… services intended to diagnose, treat and, as far as possible, cure illnesses or health anomalies […] medical services provided for the purpose of protecting, including maintaining or restoring the health of individuals…” The Court concluded that the supplies being made by X were capable of falling within this exemption, but that it would depend on the nature of the call itself and that this was a matter for X to deal with.

The Court noted, in response to the second question, that the calls where a doctor was called in would qualify for the exemption. It was observed that the second question referred to the Court was, essentially, whether the qualification of a nurse or health coach was sufficient for a supply of personal care by telephone to qualify for the VAT exemption. It commented that the EU provision allowed a degree of discretion to the Member State in this regard, stating that it was for each State to decide which medical qualifications were sufficient to gain the exemption. It also noted that the care must be of a sufficient standard. The Court concluded that it was for the Member State to decide if the exemption should exclude nurses and health coaches, but observed that Member States would need to consider the principle of fiscal neutrality when reaching these conclusions.

Constable Comment: This case is interesting on two levels. In our experience, HMRC has accepted that care provided in the manner examined can be VAT exempt, subject to meeting the normal conditions regarding the form of the service being to maintain or improve health. In this context, the UK is already operating in line with the decision. Similarly, the UK link exemption to the qualifications of the healthcare professional providing the service and extends this to include services performed by other staff under the supervision of a qualified professional. Whether this necessarily goes far enough to deal with the fiscal neutrality point may be more questionable. For example, we have dealt with the situation in which HMRC denied exemption to persons holding non-UK qualifications and only resolved that by successfully arguing that they were sufficiently supervised by UK healthcare professionals.

2. Supplies of Staff
This case concerned a supply of staff made by Avir S.p.A to one of its subsidiaries, San Domenico Vetraria S.p.A. (SDV). Italian law provides that “The lending or secondment of staff in respect of whom only the related cost is reimbursed shall not be regarded as relevant for the purposes of VAT” when provided between a parent company and its subsidiaries. This means that, conversely, where the reimbursement is greater in value than the cost of providing the workers, the supply is taxable.

In 2004, Avir seconded one of its directors to SDV and added VAT to its invoices. As it treated the supply as taxable, the input VAT associated with the secondment was recovered. The Italian tax authorities took the view that the supply was irrelevant for VAT and made an adjustment to recover the input VAT which Avir had reclaimed. The Italian Court referred the issue to the CJEU, asking if EU law, and the principle of fiscal neutrality, preclude national legislation which makes a distinction between “making available of labour” and “secondment of staff” and which treats the former as taxable and the latter as exempt.

Considering basic principles of VAT, the Court observed that a supply of services is taxable where there is a legal relationship between the supplier and the recipient and there is a direct link between a supply and the receipt of some consideration in exchange. The Italian Tax Authority disputed, however, the existence of a direct link between those two services, arguing that, in the absence of a requirement for remuneration higher than the costs borne by Avir, the secondment at issue in the main proceedings did not take place with the aim of receiving consideration.

The Court concluded that the Italian Tax Authority’s argument could not be followed. There is no requirement for a profit motive for a supply to be taxable for VAT purposes. As there is remuneration for a supply, the supply is subject to VAT. Therefore, it concluded that EU law must be interpreted as precluding national legislation which excludes from VAT the supply of staff in return for remuneration.

Constable Comment: Again, this decision is broadly supportive of existing UK VAT policy and a recurring issue we deal with is a failure to account for VAT on the recovery of payroll costs where one company is “the employer” and another, usually connected, company meets the payroll costs to reflect the fact that they are working on behalf of that second company. This problem can often be avoided with joint employment contracts (although care needs to be taken to ensure that the supply is of staff rather than a different service which is only valued by reference to employment costs). Also, paymaster arrangements may allow director salary costs to be recovered without VAT in some circumstances. The main points which we would draw form this decision are:

• It does not directly undermine existing UK policies (a different decision might have)
• It highlights how failing to consider the employment position for staff and directors can often lead to unrecognised VAT liabilities.

This is a problem we deal with often and if you have any concerns on the point we would be happy to assist.

Upper Tribunal

3. Option to Tax: Circularity in Law
This appeal by Moulsdale Properties (MP) concerned the application of the anti-avoidance provisions relating to the option to tax. MP owned a property which had been a Capital Goods Scheme (CGS) item when purchased but which, at the time of the relevant transaction, was no longer within the scheme (10 years had elapsed since the property first entered the scheme). An option to tax was made over the property by MP in May 2001 and it was subsequently leased to Optical Express (Wakefield) Limited (OEWL) in September 2001. OEWL was “connected” with MP for the purposes of the anti-avoidance provisions.

MP treated the lease as taxable until a VAT visit in 2007. OEWL was connected to MP and made mostly VAT exempt supplies. As a result, because the property was a capital item in the hands of MP, anti-avoidance provisions rendered the option to tax ineffective. MP then submitted a claim for overpaid output tax in relation to this lease and treated subsequent rent as VAT exempt.

In 2014 MP sold the property to CSPV (A special purpose vehicle established to hold property) OEWL remained in occupation. MP treated this disposal as exempt from VAT as it believed that the anti-avoidance provisions were still applicable. The property would be a capital item in the hands of the new purchaser (if VAT was charged) and was occupied for exempt purposes by OEWL. HMRC argued that the disposal should have attracted VAT.

A circularity arises on the key point of VAT law. Where land is opted, its disposal attracts VAT unless the option is disapplied. The option is disapplied if the developer of the land (MP) makes a grant of the opted building it will become a CGS item in the hands of the purchaser and will be occupied other than for mainly taxable purposes. When the option is disapplied in this way, no VAT is charged on the disposal to the purchaser which means that the building does not enter the CGS for the purchaser. Thus the circularity arises; as the item is not entering the CGS because the option is disapplied, the anti-avoidance provisions do not apply meaning that the option to tax is effective and the supply is taxable. As has been stated in previous case law, “The circularity is to be deplored”.

MP argued that the circularity can be resolved by only considering the intention of the grantor once, at the point of actually considering the disapplication test. Taking this approach, at the point it was considering the test, MP anticipated that it was selling land which was subject to the option to tax which it therefore expected to become a capital item in the hands of CSPV and would be occupied as exempt land by OEWL. The anti-avoidance provisions would bite so the transaction should be exempt from VAT owing to the disapplication of the option to tax.

HMRC argued that this was incorrect and reiterated its argument from the FTT that the test was not whether the transferred building would be within the CGS of the purchaser, but that it should be asked whether the transferor intends or expects that it will be. As MP did not ultimately intend for the disposal to create a capital item for CSPV, the option to tax would not be disapplied, rendering the transaction taxable.

The Tribunal held in favour of HMRC, commenting that the consideration process regarding the disapplication of the option to tax should not stop at the moment that the taxpayer considered the transaction to be exempt. It observed that if this were the case, it would mean that in cases where the sale price of the land and buildings was over £250,000 and the relevant person occupying it met the “exempt land test” there would be no charge to tax. This, it was noted, would create an invitation for tax avoidance.

Constable Comment: This is a complex area of VAT law which has continued to create difficulties for taxpayers. This case demonstrates that the anti-avoidance provisions regarding the option to tax are unclear on some fundamental points. Equally it shows that the anti-avoidance provisions are not limited to situations where avoidance is a motive. Before undertaking any high value property transaction, it is essential to seek professional advice.

First Tier Tribunal

4. DIY Housebuilders Refund Scheme
This case concerned two brothers (Stephen and Paul) who had inherited a plot of land and received planning permission in 2010 to build two properties. The issue at hand is the three-month time limit for submitting a claim for repayment of input VAT which applies to the DIY Housebuilder Scheme, an issue which is increasingly common in the First Tier Tribunal.

Between 2010 and 2012, various purchases were made by both brothers in order to carry out the construction work. Between December 2012 and March 2013, both brothers had moved into their uncompleted properties. At this point, in Paul’s house, three out of five bedrooms were functional and one of the four bathrooms was functional. Stephen’s was slightly further along but was still not completed in accordance with the plans.

Works continued to the properties after the brothers had moved in and a completion certificate was subsequently requested from the local Council. When the Council visited the properties, it would not issue such a certificate until further work was carried out and safety certificates were obtained for heaters and boilers. The brothers carried out the necessary work and sent the Council the safety certificates on 6 December 2017, and received a completion certificate dated 15 January 2018. Two claims were submitted, one for each property, on 28 February 2018. HMRC denied the claims on the grounds that they were out of time and sought to argue that the properties had been completed when they were “habitable, safe and hygienic”, following the ruling in Purdue.

The brothers argued against this point and sought to rely on other case law which indicates that the completion certificate being issued triggers the commencement of the three-month time limit to submit a claim such as Farquharson and Dunbar. It was also submitted that HMRC’s Guidance treats the time limit as running from the date of the document issued being used as evidence of completion.

The Tribunal observed that HMRC’s Guidance does not have the force of law and should not be relied upon. It was also noted that HMRC’s Guidance is incorrect. Agreeing with the brothers, the Tribunal concluded that the properties were not completed until December 2017 when the works had been sufficiently completed to obtain the certificate of completion. Therefore, the time limit ran from a date in December 2017 – even if it was 1st December, the claims would have been within the time limit. The Tribunal held in favour of the taxpayers.

Constable Comment: The three-month time limit is an issue which is in the Tribunal frequently with HMRC often seeking to argue that a building is complete when habitable. We assisted a client in winning a case on this point recently. There is a frustrating lack of clarity around this point; HMRC’s guidance is misleading and there is case law to support both the taxpayer’s and HMRC’s position in this case but none of it is binding. At the moment, we seem to be in a situation in which HMRC will happily throw taxpayer’s money at contesting refunds which look completely legitimate when considering the purpose of the tax and the relief for housebuilders.

Taxpayers are being forced to endure the stress and costs of what is rapidly becoming a lottery in terms of what any given Tribunal may decide. This must be viewed as an entirely unsatisfactory situation and, in our view, HMRC needs to grip this problem and also accept that the time limit should not be used to deny legitimate claims, bearing in mind cases like this will often refuse claims because the completion certificate has not been issued, creating a bizarre “Catch 22” situation.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.

Welcome to this special Budget 2020 edition of Constable’s VAT Focus. In this version of our regular newsletter, we focus on the VAT related announcements from the Budget.

Rishi Sunak has delivered the first budget since the UK formally left the European Union. Prior to the budget, there was a significant amount of discussion around what, if any, action would be taken around VAT in the UK.

It was suggested by many commentators that a decrease in the VAT rate would be announced in order to encourage consumer spending in an effort to help businesses which are struggling as a result of the coronavirus. Coronavirus, or COVID-19, has already had a significant impact in international supply chains and it is anticipated that it will continue to have a significant economic effect with up to 20% of the UK’s working population potentially being off work at any given point during the pandemic.

However, no cut in the rate of VAT was announced and there is no change to the VAT registration and deregistration thresholds. However, there were two significant announcements which relate to VAT:

1. VAT on Electronic Publications

The recent Upper Tribunal decision in the case of News Corp UK & Ireland concluded that electronic editions of newspapers are zero-rated for VAT purposes. Our coverage of this case can be found here.

Following this decision, HMRC released Revenue & Customs Brief 1 (2020), announcing that, despite all of its guidance being incorrect (based on News Corp UK & Ireland), that it would not alter its position on the zero-rate for electronic publications, confirming that it still believed that supplies of digital publications were standard rated. The reason for this position was that HMRC had received permission to appeal the issue to the Court of Appeal.

However, it was announced today that, from 1 December 2020, VAT will be removed from electronic publications, levelling the playing field for consumers who previously had to bear a VAT cost in order to download an electronic version of a publication.

Constable Comment: This is a welcome change, albeit rather cynically framed as a “giveaway” when the Upper Tribunal has already set a legal precedent dictating that electronic publications are, and always should have been, zero-rated for VAT. Cynicism aside, this is a VAT measure which assists in the delivery of the Government’s green objectives and helps businesses and charities who produce both electronic and hard copies of their publications.

2. VAT on Sanitary Products

For a long time there has been a debate around whether it is fair to charge VAT on women’s sanitary products such as tampons and sanitary towels. It has been argued that this “tampon tax” unfairly penalised women.

Historically, VAT has been charged at a reduced rate of 5% on women’s sanitary products whilst the UK has been a member of the EU. Once the transition period is over (31 December 2020), the UK will have the freedom to deviate from the harmonised EU system of VAT. Whilst it was a member of the EU, the UK was not permitted to alter the rate of VAT on sanitary products.

It was confirmed today that VAT on sanitary products such as tampons and sanitary pads will be scrapped on 1 January 2021 and they will, instead, be zero-rated.

Constable Comment: This is another welcome change in the world of VAT. It is good to see the UK Government using its new freedom to control VAT regulation to affect positive and progressive social changes. The EU’s classification of tampons and sanitary towels as “luxury items” has seemed somewhat regressive for a long while now.

Aside from the announcement speech made, the supplementary documentation discusses other areas of VAT reform and comments on the Government’s plans for the future of VAT in the UK:

Postponed VAT Accounting

From 1 January 2021, Postponed Accounting for VAT will apply to all imports of goods, including from the EU. This will provide a cashflow benefit to UK businesses which are VAT registered and deal with imports of goods. This will also assist in larger international supply chains, within which the UK business is just one link in a chain.

Under Postponed Accounting, importers of goods do not pay import VAT at the point of importation, but instead declare the import VAT on their VAT returns. At the same time, the import VAT can be reclaimed in accordance with the normal recovery rate for the business, thus reducing, or neutralising, any cashflow effect.

Cross-Border Goods policy

The Government will launch an informal consultation, over Spring 2020, on the VAT and excise treatment of duty and tax-free goods carried by travellers for personal use crossing UK borders after the EU transition period has ended.

VAT on Financial Services

The Government will set up an industry working group to review how financial services are treated for VAT purposes.

VAT on Fund Management

As was announced earlier this month, the Government is currently in the process of legislating to provide a wider VAT exemption for the management of special investment funds.

VAT Partial Exemption

Following a recent call for evidence on the simplification of the VAT rules on partial exemption and the Capital good Scheme, the Government will continue to engage with stakeholders in relation to their responses and will publish a response in due course. When this is published, Constable VAT will report on the findings.

VAT Quick Fixes Directive

The EU recently introduced new measures called “quick fixes” which are aimed at simplifying the EU VAT system. These changes came into effect on 1 January 2020 and our coverage can be read here. The UK must continue to implement EU law during the transition period or face fines.

Therefore, as announced on 31 December 2019, the UK Government will introduce simplified rules for the VAT treatment of EU movements of call-off stock, allowing businesses to delay accounting for VAT until goods are “called off” by the customer. The measure has a retrospective element as it applies to goods removed from the EU to the UK on or after 1 January 2020.

VAT Agricultural Flat Rate Scheme (AFRS)

Following informal consultations with stakeholders in 2019, the Government will introduce new entry and exit rules for the AFRS. This could impact a small number of businesses in the agricultural sector who have opted to use this special scheme.

The following changes will be implemented from 1 January 2021:

• businesses can join the AFRS when their annual turnover for farming related activities is below £150,000
• businesses must notify HMRC once their annual turnover for farming related activities exceeds £230,000, to be deregistered from the scheme and register for VAT instead
• businesses with turnover that exceeds £85,000 for non-farming related activities will still be required to register for VAT and will be ineligible for the scheme.

Conclusion

If you would like to discuss the potential impacts on your business or charity then please do not hesitate to get in contact with Constable VAT. We will be happy 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

Help & Support for VAT
HMRC has added new live webinars for; VAT accounting schemes, VAT Flat Rate Scheme, how to do your VAT Return, new VAT reverse charge for construction services. A new recorded webinar has also been added about the VAT reverse charge.

Find Software Suppliers for VAT and EC Sales List
Information has been added to this list to show whether suppliers provide a Making Tax Digital compliant product.

Domestic Reverse Charge Procedure
HMRC has updated its guidance on what information should be submitted with a Reverse Charge Sales List.

CONSTABLE VAT NEWS

From 1^st January 2020, several “quick fixes” were introduced to the VAT system by the EU. One of the quick fixes relates to where, in a chain of transactions supporting one movement of goods, the zero-rate for an intra-EU supply should be applied.

Many businesses seem to be unaware of the new rules regarding intra-EU supplies of goods but it is important to familiarise yourself with them. The new rules will be in effect until the end of the Brexit transition period on 31 December 2020. Our illustrated blog can be read in full here.

CASE REVIEW

FTT

 1. DIY Housebuilders Scheme – Planning Permission Not for New Build
This case concerned a decision by HMRC to reject David Stewart’s DIY Housebuilder VAT reclaim. Mr Stewart had attained planning permission to convert an old workshop in his garden into a dwelling for his disabled wife which would be suitable for her to manage with her disabilities.

The planning permission granted was for “Alterations and extensions including change of use from workshop to dwelling house”. Mr Stewart engaged an engineer to carry out the work but was advised that the workshop was structurally unsound and should be demolished and rebuilt. The old building was demolished and a new building, which complied with the planning permission, was built on new foundations.

A certificate of completion was issued on 21 August 2018 and a claim for repayment of VAT was received by HMRC on 30 August 2018; the claim was submitted within the three-month time limit after the issue of the certificate of completion. HMRC rejected this claim on the grounds that, for a valid DIY Housebuilder claim to be refunded, the applicant must have constructed a dwelling in line with the planning permission extant at the time of completion. As Mr Stewart did not have planning permission to construct a new dwelling, he did not meet this criterion. Mr Stewart argued that HMRC misunderstood the rules of the scheme and stressed that a completion certificate was received for both sets of work; the work as per the planning permission and the additional demolition and reconstruction work.

The Tribunal accepted that a new dwelling had been constructed and that Mr Stewart had received a completion certificate for the completion of the new property. However, it was also observed that appropriate planning permission was never sought for the construction of a new dwelling. Therefore, the Tribunal agreed with HMRC and dismissed Mr Stewart’s appeal.

Constable Comment: The DIY Housebuilder scheme is often before the Tribunals at the moment, usually in relation to the three-month time limit to submit a claim after the completion of the building. This case related instead to the interpretation of the rules of the scheme. Despite having obtained planning permission, built a new dwelling and received a certificate of completion, Mr Stewart was not entitled to a VAT refund as the planning permission received was not for the construction of a new dwelling.

2. Food or Confectionary?
The case of Corte Diletto UK Limited (CDL) concerned the VAT liability of food products referred to as “vegan healthy balls”. The balls are made of dates, nuts and other natural ingredients and have no added sugar. CDL submitted a non-statutory clearance application seeking confirming that its product should be zero-rated for VAT. HMRC decided that the products should be standard rated. This case is an appeal against that HMRC decision.

“Food” is zero-rated for VAT purposes, whereas “confectionary” is standard rated. The case revolved around whether the products in question should be rightly classified as “confectionary” or not. HMRC’s Public Notice 701/14 highlights HMRC’s perspective on this matter:

“4.6.3 Cereal and fruit bars

Standard-rated items include compressed fruit bars, consisting mainly of fruit and nuts, and also sweet tasting cereal bars, whether or not coated with chocolate, with the exception of bars which qualify as cakes”

HMRC claimed that the items were quite clearly confectionary. CDL argued that the products were to be regarded as a meal replacement or something to be eaten as a dessert. CDL offered no evidence to support this claim and the Tribunal observed that the advertising and marketing materials for the product suggested the opposite – that the product is confectionary. The advertisements described the products as luxurious and indulgent, being displayed with images of champagne. The CEO of CDL had also given an interview to the “Midlands Traveller” website in which she stated that “…our [CDL’s] goal is to be recognised as one of the main players in the confectionary market.”

Considering all factors, the Tribunal concluded that the test to be applied was “what is the view of the ordinary person?” “The ordinary person” is a legal concept which has been applied through the years and has been taken to mean both “the man in the street” and “the man on the Clapham omnibus”. In this context, the Tribunal found that the man in the street would consider the product to be confectionary. Therefore, the Tribunal held in favour of HMRC, ruling that the standard rate of VAT should apply to CDL’s “healthy vegan balls”.

Constable Comment: This case considers an area of the law which can be confusing. The VAT provisions around food include exceptions and overrides; in many cases there is often a strong argument to be made on either side of the fence. Whilst this case was reasonably straightforward, it serves as a reminder that the view of the consumer is important when classifying supplies for VAT. Had the balls not been advertised as luxurious and indulgent “sweet treats”, CDL may have been able to mount a much stronger argument in favour of zero-rating.

3. Penalty: Deliberate or Careless
This case is an appeal by Mr Ansar Ali against a best judgment assessment and associated penalty raised by HMRC against his restaurant, Indian Voojan. HMRC alleged that the restaurant’s takings had been suppressed and assessed for £36,585 underdeclared VAT. HMRC sought to impose a 75% penalty of £27,440 on the basis of deliberate and concealed behaviour.

Indian Voojan appeared to show a low amount of sales when taking into account its location and reputation. Therefore, HMRC undertook two unannounced visits in September and November 2012. Following the unannounced visits, HMRC continued to suspect suppression of sales and decided to conduct covert investigations. Eight HMRC officers secretly attended the restaurant on the same night and paid for meals in cash. The meals purchased were not recorded in the restaurant’s VAT accounting records, indicating suppression. Observations made during the covert visit noted that 95 diners were served whilst HMRC officers were in the restaurant; however, when HMRC checked the restaurant’s VAT accounting records, only 54 meal tickets related to that evening.

As the restaurant was subject to a wider investigation, HMRC’s Financial Intelligence Service (FIS) prevented the results of HMRC’s investigations being put to Mr Ali until a meeting on 10 August 2016. Following the meeting, HMRC raised VAT assessments on 31 October 2016. The Tribunal noted that the assessments were made to HMRC’s best judgment. As the assessments were based on receipts from the merchant acquirer which were obtained in November 2015, the Tribunal held that the assessments were also in time. This had been a matter of dispute.

Mr Ali disputed the classification of the penalty as “deliberate and concealed”, arguing that he had acted in good faith and he had always passed the restaurant’s records over to his accountant to prepare VAT returns. He highlighted that he often delegated the task of “cashing up” to former employees of the business and that there was ample opportunity for cash to be removed from his takings before he submitted the restaurant’s records to his accountants. In order for a taxpayer’s behaviour to be considered deliberate, it must be shown that the taxpayer knew the information which was being submitted to HMRC was incorrect.

The Tribunal observed that “… it is more likely than not that the amount of VAT assessed by HMRC is correct. The Restaurant received more in takings from customers than it declared to HMRC. But that does not mean that the appellant knew that to be the case.” HMRC was not able to show that Mr Ali knew that the returns being submitted to HMRC were incorrect. Therefore, the Tribunal replaced the 75% penalty for deliberate and concealed behaviour with a penalty for careless behaviour (30%) which reduced the penalty amount to £5,487.75.

Constable Comment: This case serves as a demonstration that the threshold for HMRC to impose a “deliberate” penalty is a high one. It must be shown that the taxpayer actually knows that returns being submitted to HMRC are incorrect. The Tribunal commented explicitly on this matter, “It is insufficient to show that simply because the appellant was in overall control of, and had responsibility for the business, that he is deemed to have that actual knowledge.”

The representative sample was accepted as such and was used to calculate a retroactive VAT assessment. The period of assessment covered 1 April 2011 to 30 June 2016, indicating significant suppression. The total unrecorded takings would have been in the region on £220k over a 5 year period. HMRC also undertook a credibility exercise where the ratio of food to drinks on bills was analysed against purchases. This also suggested suppression by the restaurant. However, the Tribunal did not think that HMRC had done enough to support their position that Mr Ali had deliberately suppressed takings. HMRC had not, for example, carried out lifestyle checks to see if the living standards of Mr Ali could be supported by his drawings from the business.

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.