Constable VAT Focus 10 February 2023


Education and vocational training (VAT Notice 701/30)
The above guidance provides information on how VAT applies to education, research, vocational training, examination services and goods and services connected with these activities.

Certain building works for educational establishments can be zero or reduced rated. Paragraph 15.1 has been updated to remove ‘carrying out of an approved alteration to a listed building’ as zero rated work.


Upper Tribunal

1. VAT refund on healthcare facilities

This case concerned the appellant, Gloucestershire Hospitals NHS Foundation Trust (the Trust), applying for a judicial review of HMRC’s decision that the Trust was not entitled to a VAT refund. Contracted-Out Services Direction (COSD) allows VAT refunds on the operation of healthcare facilities and the provision of any related services. The Trust had an agreement in place with Genmed. Under this agreement, Genmed supplied managed surgical theatre facility services including various different elements.

Genmed also supplied some goods under the agreement such as structural items, furniture, re-usable operating equipment and machinery. HMRC allowed the Trust to recover VAT paid on such goods; however, it refused a VAT refund on ‘consumable’ goods such as single use goods including bandages, sutures and protheses, such as hip and knee joints, which are provided to patients during surgery. HMRC refused the recovery of VAT incurred on consumable goods on the grounds that they fell to be considered a separate supply of goods from the supply of services provided. HMRC also did not consider the supply of those goods to be closely related to the supply of those services.

The Trust was granted permission to pursue four grounds for judicial review challenging the lawfulness of HMRC’s decision. The Trust succeeded on ground two. It argued that all of the component parts of a fully managed theatre facility, including consumables, are integral to each other and indispensable to the achievement of the Trust’s aims. Therefore, the Trust argued there was a single supply made by Genmed, and VAT incurred was recoverable under COSD.

The Tribunals reviewed both parties submissions and agreed with the Trust. It stated that on an objective basis and from the point of view of a typical consumer, the supply of the services and consumables are so closely linked that they form a single composite supply, being a fully managed theatre facility, that it would be artificial to split. The Tribunal then stated that the single supply of services falls under COSD, therefore HMRC’s decision to refuse a VAT refund was unlawful. It was concluded that the Trust is entitled to a VAT refund.

Constable Comment: This case considered a refund of VAT under the Contracted-Out Services Direction (COSD). There is no statutory or other rights of appeal to the First Tier Tribunal (FTT) against a decision to refuse a refund under the COSD, therefore the Trust’s only remedy, in the absence of an assessment raised by HMRC, was to challenge the decision by way of a judicial review which was heard by the Upper Tribunal (UT).


2. DIY Builders Scheme: Dwelling

This case concerned Mr Dunne’s (the appellant) appeal against HMRC’s refusal of a refund of VAT under the DIY housebuilders scheme. The claim was in the sum £6,075. The VAT refund claim was made in respect of works undertaken at a residential property owned by the appellant. The planning permission allowed for a ‘single storey rear extension’ connected by a corridor to the existing dwelling. However, due to a change of circumstances, the plans were informally changed (agreed by the local authorities) so that the extension became a standalone detached building, unconnected to the existing property. As a result, the appellant made a DIY claim for a detached bungalow, taking the view that a new dwelling was created.

HMRC refused a refund under the DIY scheme on the grounds that the planning permission was for an extension of the existing dwelling and not for the construction of a separate dwelling. Extensions are specifically excluded from construction of a new dwelling, which applies to the DIY scheme. In addition, HMRC argued the property could not be disposed of separately to the existing building, therefore it was not a new dwelling.

The Tribunal reviewed the evidence and whilst it was aware that the proposed connecting corridor was not built, it stated that in order for a DIY claim to succeed it is not sufficient that a standalone building is created, the planning permission must be for a dwelling. The agreed informal amendment cannot be interpreted as a grant of permission for a new dwelling. As a result, the Tribunal concluded that the planning permission was granted for an extension and the appeal cannot succeed.

Constable Comment: This case highlights the importance of works being carried out in accordance with the planning permission, in order to claim a VAT refund under the DIY scheme. In this case, due to time constraints, the original planning permission was not amended formally to state a new dwelling is created. As a result, the VAT incurred was not recoverable. If you or your business would like assistance with a DIY claim, Constable VAT has relevant experience in this and the construction sector generally and would be pleased to assist.

3. Overpayment of VAT on sale of domestic fuel

This case concerned Mr McKiernan’s (the appellant) appeal against HMRC’s refusal of a claim for a repayment of VAT in the sum of £61,106. The appellant owns a small shop which sells coal and fuel. It was discovered during a routine VAT compliance inspection of the businesses VAT accounting records by HMRC that the appellant kept very basic records, in particular there was no VAT invoices issued in respect of sales. The appellant accounted for VAT on the sales at 20% and calculated sales by applying a mark-up to the purchase invoices received.

After the visit, HMRC informed the appellant of the record keeping requirements and also that reduced rating (VAT at 5%) can applied to supplies for domestic use (less than one tonne) of coal. The appellant sought a repayment of VAT overdeclared on the grounds that the reduced rate was applicable, and it had historically accounted for VAT at 20%. HMRC rejected the VAT repayment claim advising that as there was no contemporaneous records or clear audit trail, the reduced rate cannot be applied.

The Tribunal agreed with HMRC and confirmed that VAT law clearly sets out that a business seeking relief from the standard rate of VAT must have evidence to support its claim. The appellant argued that by rejecting the claim, HMRC’s position is that all supplies were in excess of a tonne (not domestic use) but there was evidence to the contrary. The Tribunal rejected this view concluding that VAT law states that 20% VAT is applicable unless a taxpayer has sufficient evidence to show it can account for VAT at 5%. This does not deem coal supplies were in excess of a tonne, it simply means that there is insufficient evidence to show what those supplies were. The appeal was dismissed.

Constable Comment: This case highlighted the importance of adequate record keeping and the maintenance of a clear audit trail to evidence all transactions, supplies and purchases. The appellant was refused a substantial VAT repayment because there was not sufficient evidence to support the VAT liability of the supplies concerned. It is important that all taxpayers maintain all records legally required for a minimum of 6 years to avoid any VAT assessments and penalties based on insufficient records. Similarly, if a taxpayer has declared VAT at an incorrect (higher) rate than is legally correct, it will be necessary to ensure that the reason for any VAT accounting error can be explained and demonstrated to HMRC’s satisfaction before any VAT refund claim is authorised.  

4. VAT zero rating: Evidence of export

This case concerned Pavan Trading Limited’s (PTL) appeal against HMRC’ decision to raise VAT assessments in the sum of £70,652 on the grounds that PTL failed to provide ‘evidence of export’ or provide such evidence within the 3 month time limit for supplies made to customers based in the United States (US). As a result, HMRC disallowed the zero rating of such supplies and treated the sales as being subject to VAT at 20%.

PTL made wholesale supplies of derma fillers, beauty products and orthopaedic products to a customer in the US. Exports of goods are zero rated for VAT purposes provided that the goods are actually exported, and evidence of export is obtained within 3 months from the time of supply.

HMRC took the view in this case that the supply is not zero rated because there was no evidence of payment, the goods were delivered to a different address than the customers principal place of business, supplier information was incomplete, the values stated on each parcel was less than the sales invoice value, and inaccurate descriptions and incorrect quantities were given. In addition, HMRC argued that the 3-month requirement to obtain evidence, is the time within which the taxpayer must provide evidence to HMRC to demonstrate that the goods have been exported. As PTL did not provide evidence within 3 months, zero rating was refused.

PTL challenged HMRC’s position and claimed HMRC had made an error that the 3-month period for obtaining evidence does not mean it has to be provided to HMRC, it simply means that the taxpayer has to have that evidence in its possession.  In addition, PTL referred to the decision in Arkeley, a 2013 case where it was held that evidence does not need to be in a specific document provided evidence of export is clear. PTL argued that sufficient evidence was in its possession within 3 months of the relevant supply, including all information and detail required under the law.

The Tribunal agreed and confirmed that the 3-month rule means the taxpayer had to have obtained and have in its possession valid evidence of export within the 3 months from the time of supply. In addition, the evidence provided was reviewed and the Tribunal concluded it fulfils the statutory requirements, therefore the exports were correctly zero rated. The appeal was allowed with the Tribunal commenting ‘we have absolutely no hesitation in allowing this appeal’.  

Constable Comment: It seems that this case was straightforward and the appellant has complied with all of its VAT accounting obligations regarding exports. The Tribunal stated the only reason for this appeal was due to HMRC’s erroneous view of law and overlooking principles set out in the Arkeley case. It was concluded that “If there was ever a counsel of perfection for the provision of export documentation, then this appellant has achieved it.” It does make us wonder why HMRC pursued this case to a Tribunal, bearing in mind the time, cost and effort involved for all parties in preparing for a hearing. 

5. Default Surcharge: Reasonable excuse

This case concerned Mrs Mitchell (the appellant) appealing a default surcharge issued by HMRC for late payment of VAT. The appellant argued that there was a reasonable excuse, as the online banking fob required to make payments stopped working. The bank sent a replacement; however, it took two days to arrive, and payment was made late. In addition, the appellant argued that it was unfair to charge a large amount of penalty for a payment only two days late.

The Tribunal stated that a ‘reasonable trader’ would have attempted to make payment by telephone as opposed to online banking or contact HMRC when it became apparent that the payment cannot be made in time. As a result, the appellant did not have a reasonable excuse for late payment of VAT. With regards to proportionality, the Tribunal concluded that there may be ‘exceptional’ circumstances in which a default surcharge could be disproportionate; however, there was no such circumstances in this case. The penalty was due, the appeal was dismissed.

Constable Comment: This case showed that in order to avoid a default surcharge under the ‘reasonable excuse’ argument, the taxpayer must prove that the actions taken were reasonable for a responsible business conscious of and intending to comply with its VAT accounting obligations.

It is important to note that the default surcharge regime applied because the period in question was dated in 2021. From 1 January 2023 a new penalty system applies for both late VAT returns and payments. Further information can be found on our blog here. 

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.