Constable VAT Focus 02 August 2022


How to account for VAT and who to contact if you are an insolvency practitioner and you are appointed over insolvent VAT registered businesses
Section 13.2 has been added to give information on set-off and preferential debts.

Automatic sign up for making tax digital for VAT for all new VAT registrations from 1st August 2022
HMRC has developed a new VAT registration service which will see all new taxpayers automatically signed up for making tax digital for VAT from 1st August 2022.

HMRC’s change in approach to VAT assessments for overseas online marketplace traders
From September 2022 HMRC will change the way it carries out VAT assessments for overseas online marketplace traders. HMRC will issue assessments to traders in cases where the information held by HMRC indicates that VAT returns are inaccurate, rather than asking for additional information from traders in the first instance. This change will affect marketplace traders and online marketplace hosts.

HMRC guidance: steps to take before registering as a professional tax agent
HMRC has published new guidance on the steps to be taken before registering as a professional tax agent.

Second-hand motor vehicle export refund scheme delayed
HMRC have announced that the second-hand motor vehicle export refund scheme, which was due to start on 1st October 2022 has been delayed. HMRC’s guidance on preparing for the scheme will be updated in due course with a new start date.


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


1. Fraudulent transactions: right to input tax recovery

The issue in this appeal is whether a taxable person, Tower Bridge GP Ltd (TBGP) is entitled to deduct VAT incurred as input tax even though it held no valid VAT invoice in respect of the supply in relation to which it claims to make the deduction. Both the FTT and the UT found against TBGP.

TBGP is the representative member of the Cantor Fitzgerald group’s VAT group registration (CFG VAT group). Cantor Fitzgerald Europe Ltd (CFE) was a broker in equities, equity derivatives, foreign exchange markets and contracts for differences. Cantor CO2e Ltd (CO2e) provided brokerage, information and consulting services for products related to environmental markets, including selling carbon credits over the counter. Both CFE and CO2e were members of the CFG VAT group. CO2e arranged and undertook the relevant transactions and CFE executed the transactions, received, and issued invoices.

In 2009, CFE began trading in carbon credit transactions that were connected to VAT fraud. The FTT found that CFE neither knew nor should have known that the transactions it entered into before 15 June 2009 were connected to VAT fraud but that it should have known that its transactions were connected to VAT fraud from 15 June 2009. This appeal only related to transactions entered before that date.

CFE purchased carbon credits from Stratex in 17 separate transactions. The carbon credits were supplied to CFE and used for the purpose of its taxable business. Stratex was also a taxable person and VAT was due in respect of the supplies by Stratex to CFE.

The Stratex invoices issued to CFE in respect of the 17 transactions included amounts of VAT totalling £5,605,119.74 which CFE paid. TBGP, as the representative member of the group VAT registration, then claimed a deduction in respect of the VAT paid.

The Stratex invoices were not valid VAT invoices as they did not show a VAT registration number (VRN) for Stratex nor did the invoices name CFE as the customer. Stratex was a taxable person, but it was not registered for VAT, and it fraudulently defaulted on its obligation to account to HMRC for the sums it charged as VAT on its invoices.

At the time of transacting with Stratex, CFE did not know that Stratex was not registered for VAT or that it was a fraudulent trader. The FTT found that there was no effective verification by CFE of the validity of the invoices nor the VAT registration number (VRN) of Stratex.

CFE requested Stratex’s VRN and sought corrected invoices, however, these were never received. In September 2009 CFE confirmed to HMRC that it had not been provided with Stratex’s VRN. HMRC officers visited Stratex and found that its companies house registered address was the premises of a corporate service provider that was an agent for Stratex.

HMRC denied TBGP the recovery of the input tax on the Stratex invoices on the basis that the invoices did not meet the formal legal requirements to be valid VAT invoices. HMRC also refused to exercise its discretion to allow recovery of the VAT paid on the basis that Stratex was not registered for VAT, the transactions were connected to fraud and CFE failed to conduct reasonable due diligence in relation to the transactions.

The tribunal concluded that if TBGP were to be allowed to recover the VAT paid on the transactions with Stratex then there would be a loss to the public purse consisting of the input tax, with no corresponding gain to the public purse from the output tax that Stratex ought to have paid but fraudulently did not.

Therefore, the appeal was dismissed.

Constable Comment: This case highlights the importance of carrying out full due diligence checks when engaging suppliers. This includes checking that VAT registration numbers shown on invoices are valid. HMRC has a service available in order to check UK VAT registration numbers. This can be found here.


2. Roof insulation or new roof?

Conservatory Roofing (CR) appealed against a decision of the FTT, the appeal concerned the rate of VAT which applied to works the appellant carried out to home conservatories. The FTT rejected the appellants case that its supplies for VAT purposes were insulations for roofs and therefore subject to the reduced rate of 5% VAT. The FTT found that they were supplies of a composite insulated roofing system that were standard rated and subject to VAT at 20%.

The appellant submitted that in 80% of cases a new, external light-weight roof tile system is secured to the outside of the existing roof, whilst on the inside insulating material is provided and plasterboard applied to a bespoke frame ready for the application of decorative finishes and insertion of lights. In the remaining 20% of cases where the roof panels are too heavy to safely leave in situ, the roof panels are removed. Otherwise, no alteration is made to the existing conservatory roof structure.

The appellants marketing material referred to them as “the original conservatory roof replacement company”, “roofing specialists”. The material stated the benefits of its “bespoke conservatory roof system” which provided a “new insulated lightweight conservatory roof”. The FTT found that the purpose of the product was to provide insulation in cold weather and keep the conservatory cool in hot weather. It was emphasised that the specialised energy saving products were fitted to the existing roof structure which was left intact.

HMRC argued that before and after pictures of the work undertaken conveyed the impression that the customer was getting a new roof and this was reflected in the appellants own marketing. A typical consumer would have regarded the supply as a thermally efficient replacement roof rather than new insulation. The appellants solid roof system changed the character of a conservatory roof in a way that just insulating it would not.

The FTT ruled that the supplies made by CR extend far beyond installing insulation to a roof. The work is materially the construction of an entirely new roofing system. Therefore, it was concluded that the appellant does not make a supply of insulation for roofs and so the supplies can not be classified as reduced rated.

The UT considered that the reasons given in the FTT decision were inadequate and there was an error of law in the decision and so the appeal was allowed, the decision is set aside and remitted back to the FTT.

Constable Comment: The upper tribunal has remitted this case back to the FTT and it remains to be seen how this case will be concluded. As part of this decision the UT also commented on how the FTT had determined the predominant element of a composite supply. It decided that the FTT had been entitled to take into account that most of the materials used by CR were not energy-saving materials. We will keep readers up to date on the development of this case.


3. Input tax recovery on construction costs

Bletchingley Church House Charity (BCHC) appeals against the decision dated 11 May 2016 disallowing input tax in the sum of £87,002.75 on the grounds that BCHC is incapable of making a grant that qualifies for zero-rating, and goods and services on which the VAT has been charged cannot be used for the purpose of any taxable business activity, which carries the right to the recovery of VAT incurred. BCHC is incapable of making a grant that qualifies for zero-rating for two reasons –

  • Such a grant is not lawful without the approval of the Charity Commission and that approval has not been given.
  • Even if the Charity Commission approved the grant, the person to whom the grant will be made cannot issue a valid certificate.

BCHC argued that it, as the owner of Church House, and a registered charity that is using the building as a village hall, albeit it via Bletchingley Church House Administration Limited (BCHAL) which manages the lettings on its behalf. BCHC confirmed that Church House was built in 1907. It had been continuously used by the local community since construction. The works done to Church House in 2015/16 were not works of construction, but works of restoration, being work done to put Church House into a useable condition. However, some work was construction such as installing a lift and disabled facilities but ultimately no new building was constructed as a result of the works.

BCHC accepted that the lease between BCHC and BCHAL granted BCHAL the right to occupy and use Church House. BCHAL is not and was not intended to be a charity. Following the grant of the lease, BCHAL let Church House on behalf of BCHC to the local community (BCHAL was BCHC’s appointed representative/agent and BCHC used church house for a relevant charitable purpose). The lease was a lease to act as an agent but there was no management agreement between BCHC and BCHAL.

After the grant of the lease, all hirers of Church House booked via BCHAL and the schedules of lettings demonstrated use by residents. There was no record of BCHC using Church House after the grant of the lease meaning that BCHC’s name did not appear on the schedules. BCHAL did not charge BCHC for using Church House, if it did use it.

BCHC’s intention was to have Church House managed by a management committee and a commercial tenant was a way to reclaim VAT incurred on the works, or so it believed.

The project manager of the works that were carried out stated that the works did not involve the demolition and rebuilding of church house, the demolition to ground level of any external walls or the construction of a new building or extension. The works involved the alteration of Church House’s internal form. The works done to Church House were not works of construction.

BCHC did not ask the builder to zero-rate its supplies of services from the outset of the works because it was BCHC’s intention to reclaim VAT incurred on the works. However, when it became apparent that there was a potential difficulty with the intended plan, BCHC did ask the builder to zero-rate future supplies referable to disabled access. The purpose of BCHAL was to separate the running of a village hall from BCHC’s fundraising, to have a trading arm of BCHC and, via the rent, to build up a maintenance fund.

The lease is a commercial lease and gives BCHAL the right to exclusive use of Church House as tenant subject to the BCHAL’s contractual obligation to pay rent of £5000 per annum. BCHC does not charge VAT on the rent. The intended users of Church House were the local community of Bletchingley and not more than 95% of those were charities.

HMRC’s view was that Church House was not used as a village hall after the grant of the lease because it was not run by a charity. HMRC considered whether Church House was used exclusively by a charity and concluded, based on the schedules of use, that it was not.

The tribunal found that in 1907, BCHC constructed Church House. In 2008, Church House was only being used a few hours a week by user groups leading to rental income of less than £1,000 per annum. In 2009 BCHC set up the Church House appeal committee and BCHC became registered with the charity commission from 2011.

BCHC drew up a business plan in 2014 which confirmed that at the time Church House was used for an average of 2 hours per week by St Mary’s church, twice a week for around 3 hours by alcoholics anonymous and once a week for around 2 hours by the Bletchingley youth group. The redevelopment included a lift to all floors, rooms for meetings and other functions with storage space for regular users, smaller, rooms for counselling, surgeries and private meetings, modern kitchen facilities serving all three floors, toilets, including for the disabled, that are easily accessible from all parts of the building, office space for business and community users and the ability to securely close off those parts not in use whilst providing access to main facilities.

BCHC did not expect to have to pay the full VAT rate on the total construction because a significant proportion of the restoration related to improving facilities for the disabled.

In February 2015, BCHC entered into a contract with Hindscray Limited (Hindscray) for alterations and extensions at Church House. The alterations and extensions were more specifically described as “external repairs, internal alterations and re-ordering plus the construction of a single storey extension with associated external works and drainage” including the design and construction of structural connections and a lift. BCHC was required to pay Hindscray the VAT exclusive sum of £487,743.20.

The tribunal concluded that BCHC’s first grant of a major interest is not zero-rated because church house was not intended for use solely for a relevant charitable purpose, specifically:

  1. BCHC was and is a charity. Its use of Church House was not otherwise than in the course or furtherance of a business or as a village hall or similarly in providing social or recreational facilities for a local community.
  2. BCHAL was not and is not a charity. Also, its use of Church House was not otherwise than in the course or furtherance of a business or as a village hall or similarly in providing social or recreational facilities for a local community.
  3. Less than 95% of the hirers were charities. Its use of Church House was not otherwise than in the course or furtherance of a business or as a village hall or similarly in providing social or recreational facilities for a local community.

For the above reasons, the tribunal dismissed the appeal.

Constable Comment: This case highlights the complexities surrounding charitable reliefs for supplies of construction services received by charities. It is important to ensure that all conditions set out in the legislation are met so that the correct VAT rate can be secured. We would always recommend seeking professional advice before entering into any construction contracts for works to be carried out.

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