Constable VAT Focus 1 May 2020


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HMRC has updated its internal guidance, replacing an administrative agreement which will be withdrawn from 1 May 2020.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


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.


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 4th 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 4th 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.