Constable VAT Focus 10 February 2022


Revenue and Customs Brief 2 (2022): VAT early termination fees and compensation payments
HMRC has published a new brief to replace Revenue and Customs Brief 12(2020). It introduces a revised policy on VAT early termination payments and compensation payments.

Fulfilment House Due Diligence Scheme registered businesses list
The above guidance can be used to check if a business that stores goods in the UK on behalf of another business is registered with the Fulfilment House Due Diligence Scheme if that business is a trader based outside the EU. HMRC has recently updated the list with 14 additions and 9 removals.

Get your postponed import VAT statement
Along with providing general guidance regarding accessing postponed import VAT statements, HMRC has recently updated the above guidance by adding a section about archived postponed VAT statements. Users must request statements that are older than 6 months.



1. Supply of room and services

This case concerned Errol Willy Salons Ltd (EWS), and the main issue to be determined was whether the business made an exempt supply of a license to occupy in respect of rooms used by beauticians or whether that supply should be classified a standard rated supply of facilities and services.

The premises consisted of two floors. The ground floor and front part of the first floor was occupied by EWS. The back part of the first floor had two rooms which were rented out to beauticians. The rent payable by the tenants were calculated as a percentage of their turnover.

HMRC has argued it was a standard rated supply of facilities and therefore raised an assessment in the sum of £18,649. The Tribunal considered European case law (Stichting ’Goed Wonen v Staatssecretaris van Financiën (Case C-326/99) ) where 4 fundamental characteristics of leasing or letting immovable property are considered. They are as follows:

  • The arrangement must relate to a defined area of immovable property,
  • It must confer a right to occupy that property, to the exclusion of all others,
  • For an agreed period
  • For payment

HMRC agreed that the defined area condition is met however stated that there was no evidence to show that the other 3 conditions have been met because it was uncertain whether there was a right to exclude others from the area, there was no evidence that the right of occupation was for an agreed period and as rent was charged on a turnover basis, the condition that payment must be given was not met.

The Tribunal disagreed with HMRC, it was evident that the rooms belonged to the beauticians and were theirs to do with as they chose, it was evident from the contracts that payment was due monthly therefore there was an agreed period of at least a month. The fact that there is a notional possibility that rent is not paid in a particular month due to no turnover did not change fact that the lease does contain provisions for the payment of rent, therefore the Tribunal concluded that all 4 characteristics are present.

In response, HMRC attempted to argue that the services were active exploitation of rooms, adding significant value therefore it cannot be regarded as a supply of land. The Tribunal considered whether the additional services such as receptionist services, the availability of toilets and staffroom amounted to “significant added value”. It was concluded that these services were ancillary to main supply of the room, the beauticians were not required to use those services, it was not essential to their business. The Tribunal concluded that the additional facilities did not change the intrinsic nature of the supply. Therefore the Tribunal concluded the supply was of a license to occupy land and therefore VAT exempt, the appeal was upheld.

Constable comment: This is a helpful case in an area that has long been contentious, but no doubt further similar cases will continue to appear at Tribunal. The case illustrates the benefit of clear written agreements considering a license to occupy land where there are other services being provided to the person occupying an area of a property. HMRC are often keen to characterise such relationships as a taxable supply of facilities rather than a VAT exempt supply of license to occupy land.

2. Private Tuition exemption

The key issue in dispute in this case is whether the appellant Ms Lalou’s (trading as Dogs Delight) supplies of dog grooming fall within the private tuition exemption. Ms Lalou operates a dog grooming and dog grooming courses business. Ms Lalou came to understand her supplies of the dog grooming courses were VAT exempt private tuition and therefore made an application to deregister from VAT. HMRC initially accepted her application and deregistered her from VAT, she then also submitted an error correction notice where she sought to reclaim £102,301 of overpaid VAT as a result of incorrectly treating the supplies as standard rated.

Following those events, HMRC disputed the treatment of the courses, stating that, as dog grooming is not ordinarily taught in a school or university, the supplies are standard rated, and therefore reinstated Ms Lalou’s VAT registration, rejected the error correction notice, assessed the appellant for £12,203 of unpaid VAT for periods in dispute and issued a surcharge notice for non payment and submission of VAT return.

Ms Lalou appealed many issues in this case including:

  • The decision that dog grooming courses were standard rated rather than exempt supplies
  • The reinstatement of the VAT number
  • The rejection of the error correction notice
  • The assessment for £12,203
  • The surcharge warning

The appellant argued that dog grooming is ordinarily taught as 88 colleges out of 293, equating to 30%, offer dog grooming services. In contrast HMRC used the same research and argued that only 88 out of 293 teaches the subject therefore it is not ordinarily taught, the National Careers service shows 87 dog grooming services but 251 Pilates courses, which was recently held not to be a subject ordinarily taught in the UK.

The Tribunal stated that the appellant established that the supply was tuition as it involved transfer of skills and knowledge, it was made on her own account therefore it satisfied the private condition, the courses offered were educational.

However, the Tribunal stated that whilst the appellant proved that dog grooming is commonly taught in higher education in England, they stated that this is not the test. It was established in the “Premier Family Martial Arts” case that the relevant activity must be taught at a wide number of schools or universities in the EU. Ms Lalou provided no evidence about the position outside England or any other Member States, therefore the Tribunal concluded that the supply of dog grooming courses are standard rated.

As a result of the above conclusion, the error correction notice and VAT assessment aspects of this appeal also fails. Regarding HMRC reinstating the VAT registration number, the Tribunal found that as the supplies were not exempt HMRC were correct to reinstate the VAT registration. For all the reasons stated, the appeal was dismissed.

Constable comment: HMRC remain keen to challenge the application of the private tuition VAT exemption where the subject taught is not a ‘mainstream’ area. It is of note that the historic approach and approach today is somewhat different with a very strict interpretation of the exemption provisions compared to the past.

Court of Appeal

3. Bad Debt relief claim:

The issue on appeal is whether Regency Factors Ltd is entitled to bad debt relief in relation to VAT. The business provides invoice factoring services to other businesses seeking to improve cashflow. The FTT held that it was not entitled for the following reasons:

  • There was no bad debt
  • Regency had failed to comply with the procedural requirements for the making of such a claim.

The upper tribunal disagreed with the FTT on the first of those reasons but upheld the second. The upper tribunal held that the procedural requirements were compatible with EU law.

Regency appealed against the decision of the upper tribunal on the second question and HMRC sought to reinstate the decision of the FTT on the first question.

It was common ground that Regency did not maintain a single account as required by regulation 168 (3) VATA 1994, but it did retain the records required by regulation 168 (2), even though they were not contained in a single account.

Regency’s accounting system maintains a running account for each client containing “an admixture of funds” which makes it “impossible to apportion credits to particular invoices submitted by a client and receipts from their customer”. Instead, the claim for bad debt relief was made on a “pari passu” basis, as described by Regency. The court of appeal found that, in their judgement there is no foundation for such a claim basis in the legislation. Additionally, the keeping of a single bad debt relief account would have served a legitimate and useful purpose, namely that of ensuring that the particular supply which qualified for bad debt relief was properly identified, and in consequence that the correct amount of VAT was collected.

In concluding, the Court noted that perhaps other arguments might have been made but as they had not formed the basis of the appeal these need not to be considered. The appeal was dismissed.

Constable comment: This case illustrates the need to take simple administrative rules seriously and demonstrates the pitfalls of not doing so for bad debt relief. Serious issues can be caused by assuming that basic rules will not be strictly applied. HMRC has discretion in some matters but it is highly risky to rely on discretion when simply doing things correctly removes the need for this.

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.