Constable VAT Focus 1 September 2021


Updates to DIY housebuilder claim forms
If you are a DIY housebuilder you may be able to  claim VAT back on building materials and services you have purchased to build a new dwelling or convert an existing non-residential building into a dwelling, using forms VAT431NB  or VAT431C. These forms have been updated and the latest editions are available on HMRC’s website.

Please note there are strict guidelines to claim a VAT refund and you must submit your claim within 3 months of the building work being completed. If these guidelines are not met you may not be entitled to a VAT refund. If you are planning to claim a refund please contact us and Constable VAT will be happy to advise and assist.

Opting to tax land and buildings (VAT Notice 742A)
HMRC has updated their guidance relating to situations where HMRC’s permission is required to opt to tax. Specifically, it is now stated that interim letters will no longer be issued, instead if HMRC are satisfied they will issue an acknowledgment of the option to tax and its effective date.

This follows two other changes to this Notice earlier this month; these being the end of the temporary change to the time limit for notifying an option to tax and making the temporary change to allow options to tax to be signed electronically permanent.

Apply for a Partial Exemption Special Method
If you or your business make both taxable and exempt supplies, then you must consider the partial exemption rules to determine how much input tax is recoverable. Where the standard method of calculation does not provide a fair and reasonable VAT recovery a business may apply for partial exemption special method (PESM). You can now apply for a PESM online. To apply you will need the following:

  • a proposal document
  • a worked example of your proposal
  • your latest annual adjustment calculation
  • your declaration
  • any additional documents

You can find further information about making a PESM application in Appendix 2 of VAT Notice 706.


Upper Tribunal

1. VAT Exemption: Insurance and related services

This case concerned Claims Advisory Group Limited (CAGL), a company making claims on behalf of individual customers who may have been mis-sold payment protection insurance (PPI) by financial institutions. PPI was generally offered by financial institutions and provided by insurers. The financial institutions received commissions for selling PPI from the insurers. This resulted in some institutions encouraging their customers to take out the insurance unnecessarily. CAGL would make a claim on behalf of its client on the basis that PPI had been mis-sold and, if successful, the client would receive compensation. CAGL would charge a fee for its services calculated as a percentage of the compensation received. CAGL described their main business activity as “Recovery, on behalf of customers, of overcharged fees levied by banks and other financial institutions. “

In 2019 the First Tier Tribunal (FTT) concluded that the services provided by CAGL fell outside the scope of the VAT exemption applicable to certain supplies related to insurance. As a result the commissions received were liable to VAT at the standard rate. CAGL appealed this decision on two grounds as follows:

Firstly, that the FTT erred in law in concluding from the facts that the services CAGL supplied were neither:

  • Exempt from VAT on the basis that they were insurance transactions; nor
  • Exempt from VAT on the basis that they were supplied by a broker, agent or intermediary and were related to insurance transactions.

CAGL argued that the supplies were VAT exempt insurance transactions because the cancellation of the original PPI policy was an integral and necessary pre-cursor to the return of the premiums paid and therefore the commercial reality and economic purpose was the cancellation of PPI and the return of the premiums paid in respect of it. CAGL stated it was an “insurance agent” in that has an agency role in operating between insurer and insured.

Secondly, CAGL also argued that it is an insurance agent and its supplies are related to insurance transactions because the supply of the service provided related to original insurance transaction as the original premium was returned and/or it was involved the termination of the PPI.

HMRC argued in response to the first point that CAGL’s economic purpose was making a compensation claim rather than that of an insurance transaction. With regards to the second ground of appeal, HMRC stated that CAGL could not be an insurance agent, because it did not perform the essential nature of that role in that it did not bring together potential clients and insurers for the purpose of providing insurance.

The Tribunal rejected the first ground of appeal and agreed with HMRC that the economic purpose and commercial reality of CAGL’s supplies was not that of an insurance transaction and also stated that there is no CJEU or domestic authority which provides that the cancellation of an insurance contract constitutes an insurance transaction and therefore it concluded that the FTT did not err in law to state that CAGL’s supplies were not insurance transactions.

The Tribunal then considered whether CAGL was an insurance agent supplying services relating to insurance transactions. The Tribunal stated that for this to be the case, CAGL must satisfy both the conditions for being an “insurance agent” as well as supplying “services related to insurance transactions”.  In reaching its decisions the Tribunal considered the CJEU case “Card Protection Plan” in which it is stated that an insurance agent is a business “whose named professional activity comprises the bringing together of insurance undertakings and persons seeking insurance.” It also referred to the “Taskatorringen” case which confirms that the essential activity of an insurance agent is to introduce or put in touch person seeking insurance and insurance companies. The Tribunal confirmed that CAGL is not an insurance agent and as a result the second ground of appeal is also rejected.

The Upper Tribunal upheld the decision of the FTT and stated it did not err in law to conclude that CAGL’s supplies fell outside the exemption of VAT. The case was dismissed.

Constable Comment: This case has highlighted the difficulty of VAT exemption regarding insurance related services, this can be a complex area of law and we always recommend seeking advice to ensure correct VAT treatment. Here at Constable VAT we have experience in the application of VAT in the insurance industry and will be happy to assist you with any queries.

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.