Constable VAT Focus 10 March 2022


Group and divisional registration (VAT Notice 700/2)
HMRC has recently updated its guidance on what to do while you are waiting for a response to a VAT group registration.   This was necessary due to significant delays by HMRC in processing applications.  A key point is that businesses that are already VAT registered are advised not to submit returns that fall due under their current VAT registration while waiting for their VAT group application to be processed.  The updated guidance states:

While you are waiting to receive your VAT grouping registration number, you may receive:

  • an automated assessment letter
  • letters asking for payment of any automated assessments
  • notification of a default surcharge because you have not filed your tax return

If you do, you will not be required to take any action in response to any of these notices because HMRC will automatically cancel them once your application is fully processed. HMRC will not take recovery action for any debts which come about as a result of you following this guidance, though other VAT debts may still subject to recovery actions.

This advice is welcome as previously HMRC had been giving conflicting guidance.  However, delays in processing applications may create problems that the revised guidance does not address, particularly for partly exempt businesses or where applicants have acted on previous instructions by HMRC to submit returns under an existing VAT registration number.  Taxpayers facing processing delays are advised to seek professional advice.

Revenue and Customs Brief 4 (2022): end-customer claim refunds of VAT wrongly charged
It has always been the case that a person who has been overcharged VAT by a supplier must seek a refund of that VAT from the supplier, not HMRC. Only the supplier would have a right to seek a rebate from HMRC.  However, the Court of Justice of the European Union had placed an obligation on HMRC to make direct refunds in exceptional circumstances, for example a supplier becoming insolvent.   Essentially this Brief announces that HMRC will in no circumstances make refunds to anyone other than the person that declared VAT in error.  It feels that it can take this stance because of Brexit.

This change will impact on few taxpayers.  It is frustrating, however, because HMRC failed to meet its legal obligation to introduce a straightforward refund system while the UK was within the EU.

As a wider point, it is worrying to see that HMRC has started to roll back taxpayer protections because of Brexit.  There are several instances of HMRC seeking to introduce unfair laws and policies and being prevented from doing so by the principle of equity enshrined in EU law.

Value Added Tax (Enforcement Related to Distance Selling and Miscellaneous Amendments) Regulations 2022
This is new guidance released by HMRC and the information and impact note is about the issues identified in amendments made to legislation to implement the VAT e-commerce package.

Notifying HMRC of an option to tax land and buildings
Form VAT1614A is required to notify HMRC of an option to tax land or buildings. HMRC has recently updated this form so that it can now be filled in online and printed afterwards. Also, the form has been updated at the “Previous exempt supplies” section and requires more information (bearing in mind that previous exempt supplies create the need to either meet an “automatic approval” condition or obtain HMRC’s permission to opt to tax).


Court of Appeal

1. Extra Statutory Concession

This appeal concerned assessments raised by HMRC in the sum of £221,325 to First Alternative Medical Staffing Ltd and in the sum of £1,865,246 to Delta Nursing Agency, together referred to as the Appellants.

The Appellants provide nurses and other medical staff on temporary basis to hospitals and care homes.  They charged and accounted for VAT on the basis that they were acting as agents. This means they charged VAT only on the commission element of the amounts paid by their clients, not the full amount charged.

HMRC raised assessments on the basis that, as a matter of law, the full charge by the Appellants should have been subject to VAT.  In the past it had been possible to account for VAT on the commission element of the supply in such circumstances but HMRC policy had changed several years earlier.

In 2010 HMRC introduced a nursing agencies’ concession” (NAC).  The NAC allows nursing agencies (or employment businesses that provide nurses and midwives, as well as other health professionals) to exempt qualifying supplies of nursing staff and nursing auxiliaries supplied as a principal.   The Appellants took the view that in the period covered by the HMRC assessments the NAC was available and sought to apply it retroactively.

In summary:

  • the Appellants accounted for VAT on part of their charge operating an arrangement that had been withdrawn;
  • at the time the supplies were made, the Appellants failed to exempt supplies under a non-statutory concession (the NAC) that was available at that time; and
  • faced with large HMRC assessments, the Appellants argued that they should be allowed to apply the NAC retroactively.

The Court proceeded on the basis that the supplies would have been eligible for the NAC had it been applied at the time the services were supplied.

A non-statutory concession is, by definition, not a right enshrined in law.  It is a concessionary treatment that overrides the law.  If a taxpayer chooses not to apply it then that is not an error in the same way as a VAT accounting error, that the taxpayer can undo.  This fundamental principle underpinned the dispute.

The Appellants argued that the NAC gave rise to a legitimate expectation that they could exempt supplies to their clients retrospectively. They argued that the NAC contains no express references to a time limit, or qualification as to when reliance may be placed on it.  Had such a limitation been intended, this would have been easy to state.

HMRC’s position was that the NAC must be interpreted from the perspective of the ordinarily sophisticated taxpayer. With that in mind, HMRC argued that an ordinarily sophisticated taxpayer would understand perfectly well that to exempt a supply means neither charging, nor accounting for VAT on that supply.

The Court of Appeal agreed with HMRC, reaching the conclusion that an ordinarily sophisticated taxpayer would understand that the NAC required a choice to be made by a taxpayer at the latest by the time it invoices its client for that supply. The choice to exempt a supply under a concession must be made at the time of the supply.  If a different decision is made there is no legal basis to revisit the choice that was made.

The Court dismissed the appeal and held that the NAC cannot be relied on retrospectively.

Constable VAT’s comments:  This seems an unfair decision in the sense that if the appellants failed from the outset to charge VAT on the bulk of their charges then allowing them to operate a concession that would remove VAT from the entire charge would not seem unreasonable.  However, applying the law is not a matter of fairness and there was no basis in law to exempt the charge. 

We have sympathy for the Appellants’ position; however, the most important learning point is that VAT decisions often cannot be undone later however unfair the outcome of those decisions.   HMRC sees its duty as to simply apply the law – not to deliver a fair tax outcome.    Therefore when large sums of money are involved it is essential to understand all of the options and the implications of decisions before they are made.

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.