Constable VAT Focus 1 December 2022


Buildings and construction (VAT Notice 708)
HMRC has updated the section of Notice 708 that explains when a building falls into the category of village halls and similar buildings and may benefit from the zero-rate relief available for such buildings.

A building falls within the ‘village halls or similar’ buildings when all of the following apply:

  • Constructed and managed by a charity
  • Operated on a non-commercial basis for the benefit of a local community as a village hall or similar
  • Used solely to provide social or recreational facilities for a local community

This is a common point of dispute as HMRC interprets the provision increasingly strictly and the issue has been heard before the Tribunal, particularly in cases relating to charitable sports clubs.

Updates on VAT appeals
The above charts the progress of some important VAT disputes that have been taken to a Tax Tribunal, or a higher court on appeal.  The list has been updated with 3 additions, 9 amendments and 2 removals.  A business with similar activities to those under dispute may wish to monitor developments.  This is not an exhaustive list of current litigations.

Making Tax Digital for VAT: service availability and issues
Most businesses have now signed up to Making Tax Digital for VAT. HMRC will be signing up all remaining businesses automatically unless they are exempt or have applied for exemption.



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 and there may be occasions where they have a more binding effect.

1. VAT exemption: Medical care

This case concerned CIG Pannonia Eletbiztosito Nyrt (CPEN), a Hungarian insurance company, that markets a health insurance product and undertakes to provide medical care abroad.

CPEN engaged a Spanish organisation, Best Doctors Espana SAU (BD), to review the medical information of an insured person to check that person is entitled to benefit from the insurance provision as the policies contain entitlement restrictions (IC services). If the insured person is eligible under the policy, BD takes care of all the administrative formalities relating to care abroad including making appointments with the providers of medical services, organising medical treatment, hotel accommodation and travel, providing a customer assistance service and verifying whether the medical treatment is appropriate (FBC services).

BD issued invoices to CPEN.  It appears that (unless the service was exempt) CPEN was liable to account for VAT as a reverse charge and the Hungarian tax authorities raised assessments and penalties for the unpaid VAT.

CPEN argued that the services of BD, mainly the IC services has a therapeutic purpose in that it directly and unequivocally has a diagnosis aim. The FBC services are ancillary to the main diagnostic activity, consequently the services offered by BD are exempt from VAT.

The CJEU concluded that whilst a medical report may indirectly contribute to the protection of the insured person’s health, the principle purpose in this case is to fulfil a legal or contractual condition regarding a decision about whether the insured person is actually entitled to the services. As a result, the IC services do not fall within the VAT exemption as any healthcare benefit is indirect.

The CJEU then considered the FBC services and stated that such services are not to protect the insured person’s health but to ensure the organisation of the logistics linked to medical care abroad, essentially being administrative in nature and therefore it is not covered by VAT exemption under provision of medical care.

Constable Comment: In this case the CJEU ruled that where the essential aim of a supply is to aid decision making, even if there is an indirect healthcare benefit the overall supply will be subject to VAT, with any ‘medical supplies’ being ancillary. That is not controversial.  However, it was a difficult judgement to decipher and when the CJEU refers to establishing an entitlement to “receive services” it seems to mean “make a claim under the policy”.  When providing insurance, the supply usually occurs when the policy is granted not when a claim is made, although if an insurer provides goods and services in lieu of an indemnity payment that can constitute a supply.  In the UK the service provided by BD may have been capable of classification as an exempt claims handling service but there is insufficient detail in the judgment to evaluate that possibility.

2. Right to deduct VAT charged as input VAT

This case concerned the Appellant (A) who purchased a vehicle from C who claimed to be W.  C issued an invoice to W including VAT of EUR 9,899. Subsequently W sent A an invoice including VAT of EUR 12,294.  A recovered the VAT incurred as the car was used for business purposes, but W never entered the transaction into his accounts and did not pay the tax. This created a revenue loss.

Unpicking the alphabet of participants in these transactions is complex but the fundamental point is that A tried to reclaim VAT on a transaction within a supply chain that contained a tax fraud.  The German tax authorities considered A knew or should have known that.  However, the amount of VAT lost because of that fraud was less than the amount of VAT that A attempted to reclaim.  Therefore, the Court was asked to consider whether A’s VAT claim should only be disallowed to the extent required to compensate for the loss of tax caused by the fraudulent evasion, meaning that only EUR 2,395 would be disallowed (the difference between the sums shown on the two invoices issued).

The CJEU commented that A may be refused the benefit of deducting input VAT where he or she knew or ought to have known that that purchase was linked to VAT fraud. The acquisition of the car by A facilitated the fraud by enabling the disposal of the goods, which is sufficient to deny the right to deduct the VAT paid.   Furthermore, the CJEU concluded that where a taxpayer does not undertake the checks reasonably required to satisfy themselves a transaction is not within a supply chain involving VAT fraud then its input VAT claim may be refused in full.   The objective of preventing VAT fraud cannot be achieved in an effective manner if the consequences of facilitating a possible fraud can be mitigated as A sought.

Constable Comment: Input VAT deductions may be refused if a taxpayer knew or should have known that they are within a supply chain that involves VAT fraud.  It is essential to undertake appropriate due diligence to deal with the “should have known” point.  Turning a blind eye to any red flag issues is a high-risk strategy and if a deal seems to be too good to be true then it may well be.

Upper Tribunal

3. Procedure: Striking out an appeal

In 2020, HMRC refused to register GB Fleet Hire Limited (GFHL) for VAT, GFHL appealed this decision, but HMRC applied to the FTT to strike out the appeal. The FTT granted HMRC’s application and struck out the appeal.  GFHL appealed that decision to the Upper Tribunal (UT).

GFHL had been VAT registered but was deregistered in 2017, on the grounds that it was using its VAT registration principally or solely for abusive purposes. There were subsequent VAT assessments raised by HMRC.

GFHL appealed the VAT assessments from 2017 but not the decision to cancel its VAT registration.  When in 2020 GFHL applied to register for VAT again because the value of its taxable supplies exceeded the VAT registration threshold HMRC rejected the application on the grounds that GFHL’s previous VAT registration had been utilised solely or principally for abusive purposes.

The 2020 VAT registration application rejection was appealed to the FTT by GFHL. However, HMRC applied for it to be struck out on the grounds that because GFHL had not appealed the 2017 VAT registration cancellation that indicated its acceptance that it had been abusing its VAT registration.  Therefore, an appeal against the 2020 refusal had no reasonable prospect of success.  The FTT granted HMRC’s request and struck out GFHL’s appeal.

The UT found that the FTT was irrational to strike out GFHL’s appeal on the grounds that it had.  GFHL’s appeal against the VAT assessments HMRC issued in 2017 showed that GFHL thought (wrongly) that a successful appeal against a VAT assessment would result in the 2017 VAT de-registration notification “falling away”. GFHL may have had other reasons why it did not appeal the 2017 notification.  In addition, the FTT failed to consider in reaching its conclusion, that the 2020 VAT registration application rejection did not explain whether, let alone why, the 2017 risks were said by HMRC to persist in 2020, and to outweigh GFHL’s right to VAT register on the basis of the 2020 taxable supplies.

The UT concluded that GFHL’s case cannot be said to have no reasonable prospect of success and the appeal against the 2020 VAT registration application rejection is re-instated.

Constable Comment:  Taxpayers make all kinds of decisions for many different reasons, sometimes based on a misunderstanding of a complex tax system.  Often those decisions are driven entirely by pragmatism.

Before 2009 a taxpayer could obtain costs if it succeeded with a tribunal appeal.  Those cost seldom provided a full indemnity, but the logic was that with all of its resources and expertise HMRC should not be taking cases that it would lose and inflicting costs on often small and poorly resourced businesses.  HMRC did lose a lot of cases and faced spiralling cost awards. Rather than look to its own decision-making process, a decision was made to change the rules and stop paying costs to taxpayers who were successful at the First-tier Tribunal.   

Since 2009 our experience suggests that taxpayers routinely accept incorrect HMRC errors simply because the cost of challenging HMRC exceeds the amounts of tax in dispute.  A taxpayer might take the low-cost option of representing themselves at Tribunal – but even if they do that and win, how will they cope if HMRC appeals?   If lawyers, accountants, and barristers are to be engaged then costs can escalate significantly.  Advisers may find themselves saying to their clients “You would probably win an appeal, but it will cost you more than accepting HMRC’s incorrect decision”.  For HMRC to extrapolate from a failure to lodge an appeal that the taxpayer accepted an HMRC decision was correct, and then to say that this removes the right to revisit the point in a different context later is in our view an absurd rationalisation.  The UT’s decision seems to inject a degree of sanity into the situation.

First Tier Tribunal

4. Input VAT recovery on leases

Ashton Legal (AL) is a firm of solicitors and a trading partnership. AL found suitable premises for its operations and sought to lease those premises.  However, under the Law of Property Act 1925, a partnership can enter into a lease in the name of no more than four partners, therefore it was decided that Ashton Legal Limited (the Company) would be established to enter into the lease.  AL reclaimed VAT charged by the landlord on invoices addressed to the Company as input VAT and HMRC look the view that it should not as the Company was the recipient of the supply.

The landlord had made it clear that if it were to contract with a shell company with no assets then it required a guarantee from AL. The landlord knew that AL would be the sole occupant of the premises and would meet all obligations of the Company in terms of the leases, specifically paying the rent.

The rent invoices raised by the Landlord were addressed to the Company but sent to AL. AL processed and paid those invoices and reclaimed the VAT incurred through its VAT returns as input VAT.

HMRC argued that the contracting parties were the Company and the landlord.  The landlord therefore made its supplies to the Company, not AL. As the Company was not VAT registered and did not opt to tax, HMRC argued that the Company in effect made an onward supply to AL that was VAT exempt.  AL had no right to recover any VAT incurred by the company and the Company also had no right to input VAT recovery.

AL argued that the recipient of the supply should be identified by reference to the commercial and economic reality of the arrangements, considering all circumstances, and that the economic reality was that AL received the supplies.

The Tribunal first stated that payment is not decisive, so the mere fact that AL pays the rent does not mean that the supply, for VAT purposes, was made to AL. However, the Tribunal noted that AL was liable to pay rent to the landlord as everyone knew that a dormant company with £1 share capital and no assets or trade, was in no position to pay rent. If AL wished to lease the premise, it had to pay rent in order to secure the premises from which it made taxable supplies. This was the economic and commercial reality of the arrangement; the company was merely inserted to deal with the 1925 Act.

It was concluded that AL used, enjoyed, and benefitted from the rental of the premises and has vested interest in the supply of those premises for which it was paying. As a result, the Tribunal concluded that the VAT charged on the rent was input VAT of AL and was recoverable.

Constable Comment: In our view this case should not have been taken by HMRC.  There had been a previous case before the Tribunal on almost identical facts that HMRC lost.  That previous case was only binding on the parties involved and a common approach by HMRC is not to appeal FTT cases that it loses so that it can seemingly ignore those decisions and continue applying whatever policy the FTT has found to be wrong.  This practice may be legal but seems very unfair as it leaves taxpayers either continually refighting the same battle or obliged to accept HMRC decisions they perceive to be wrong because of the cost implications of an appeal (see comments above on GHFL).  If HMRC genuinely believes a FTT decision is wrong then in our view the correct approach should be to appeal that decision, not ignore it for fear of setting a binding precedent. 

5. Default surcharge: Reasonable excuse

This case concerned Kattrak International Limited (KIL)’s appeal against VAT default surcharges imposed in respect of two VAT accounting periods for late payment of VAT. KIL appealed to the FTT on the grounds that it had a reasonable excuse; therefore, the surcharges were not due.

KIL stated that the payments were late because there is only one person in the company authorised to make payments due to previous issues with an employee committing fraud. KIL tried setting up a direct debit to pay VAT; however, the mandate was cancelled, and the payment did not go through. KIL argued that it was likely that the direct debit was cancelled by HMRC, leading to a late manual payment.

HMRC stated that KIL provided no reasonable explanation about why payment could not be made on time, nor had it taken reasonable steps to avoid a late payment.  The appellant had not proved that there was a reasonable excuse for the late payment.

The FTT found that, on balance of probabilities, it was not HMRC that cancelled the direct debit. In addition, if KIL had issues with the direct debit at the first period in this appeal, the situation could and should have been solved by the next payment date. The FTT concluded there was nothing to prevent payment of VAT on time, and KIL did not prove it had a reasonable excuse and the appeal was dismissed.

Constable Comment: It is important to note that it is for the taxpayers to prove that it has a reasonable excuse and that the hurdle to cross is high.  We would also like to take this opportunity to remind readers that from January 2023 the penalty system that applies to late submission of VAT returns and payments will be changing to a points-based system that is perhaps fairer than the current default surcharge regime, which can impose very large penalties in relation to very short payment delays. If you would like more information on the new penalty system please do not hesitate to contact us.

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.