Constable VAT Focus 12 June 2020


SI 2020/578: New Order Amending SI 2019/892
This order formally delays the introduction of the domestic reverse charge for construction services from 1 October 2020 to 1 March 2021.

Revenue & Customs Brief 8 (2020)
HMRC has released a new Brief advising businesses who supply goods by way of hire purchase of HMRC’s suggested method for apportionment of VAT incurred on overheads following the judgment in VWFS.

Check How to Get Your Import VAT Certificate (C79)
HMRC has updated its guidance to clarify what certificates should be used in relation to March 2020 imports and apologise for any inconvenience caused by a previous lack of clarity.

VAT Registration Manual
HMRC has updated its internal guidance to reflect the fit and proper conditions for tax representatives which are found at s. 11.4 of Notice 700/1.

Civil Evasion Penalties for Customs, Excise and VAT
HMRC has repaired the broken link contained within this guidance.


As the ongoing COVID-19 pandemic continues to impact businesses across the world, many countries are using VAT as a measure to provide reliefs to businesses which are struggling. Our coverage of the measures being taken by different European countries aims to provide a synopsis of the VAT related measures being taken to aid those struggling to meet financial obligations. We continue to update our coverage of this topic which can be read here.


Partly exempt businesses recover VAT incurred provisionally throughout the VAT accounting year. At the end of the VAT year they must perform an annual adjustment calculation to determine the amount of input VAT recoverable in the VAT year. The provisional input VAT deduction is compared with the actual recovery allowed and, if necessary, the position must be adjusted. This adjustment is normally made on the VAT return following a business’ partial exemption year end, although it is possible to make an ‘in year’ adjustment. A business submitting calendar quarterly VAT returns, with a VAT year end of 31 March, usually includes its partial exemption annual adjustment on the VAT return in respect of the VAT accounting period ending 30 June.

Many taxpayers will imminently need to perform their annual adjustment calculations. This can often be a particularly difficult and time-consuming exercise which often poses problems for businesses. It is advisable to seek professional advice when performing partial exemption annual adjustments, particularly at uncertain times such as now where the values of taxable or VAT exempt supplies may have fluctuated unexpectedly. Our coverage of partial exemption can be read in full here. For assistance with any partial exemption query, please do not hesitate to contact Constable VAT.


First Tier Tribunal

1. Landlinx: VAT & Options Over Property

This appeal by Landlinx considered the correct VAT liability of the release of an option to purchase land. HMRC, despite its published guidance and the wording of UK law, argued that such a surrender constitutes a taxable supply of services, not an exempt supply of land. The taxpayer argued that the law, and HMRC’s guidance, were clear on the matter in stating that transactions involving options over property are exempt from VAT.

In 2015, Landlinx signed an option agreement as the buyer relating to Loxwood Nurseries, an area of land in West Sussex. The property was not opted to tax by the seller. The option agreement was entered into with a view to obtaining planning permission. Such permission was received and subsequently the parties agreed to release the obligations under the agreement for a payment of £1,425,000 made by the seller to Landlinx. It treated the receipt of this income as exempt from VAT. HMRC assessed for £237,500 output VAT (treating the amount received as inclusive of VAT) on the grounds that the income was taxable consideration for the surrender of the option. HMRC, rather surprisingly, argued that this constitutes a supply of services.

The Tribunal considered the relevant European law which the UK law seeks to enact. The VAT Directive exempts from VAT the supply of buildings and parts thereof, and the land on which buildings stand. This is enshrined in UK law at Schedule 9 VATA 1994, which exempts “The grant of any interest in or right over land, or of any licence to occupy…” The notes to this clarify that ““Grant” includes an assignment or surrender and the supply made by the person to whom an interest is surrendered when there is a reverse surrender.

The taxpayer had relied on UK law and both HMRC’s Guidance Manuals and Public Notice 742, all of which dictate that the supply of an option over land is exempt from VAT.

HMRC argued that the relevant EU law only exempts from VAT supplies of goods i.e. the land itself, and not derivative interests in that land (services).  In this context, a supply of goods means the transfer of the right to dispose of the property. Therefore, the payment in relation to the surrender of an option should be treated as a taxable supply of services as the right to dispose of the property does not change hands on the surrender.

The Tribunal observed that, if HMRC were correct, the outcome would be peculiar – two economically identical transactions would be taxed in different ways. The Tribunal noted that this was not the intention of the EU law and, in any event, such an outcome would infringe the EU principle of fiscal neutrality. It also noted that the EU law and UK law have existed alongside each other, without challenge, for 42 years. It concluded that based on; EU law, UK law, HMRC Public Notices and its Internal Guidance, Landlinx had every reason to believe that the grant and surrender of the land was exempt from VAT.

The Tribunal held in favour of Landlinx, concluding that the surrender of the option was exempt from VAT.

Constable Comment: The Tribunal commented that the view adopted by the taxpayer was correct and should be axiomatic for most VAT practitioners. Interestingly, both HMRC and an opinion given by the AG suggested that the EU provisions only apply to goods and not services. As the Tribunal noted, there was no reasoning underlying this idea and, in its view,  the EU law comprehends both supplies which comprise the transferor’s entire interest in the land and buildings but also the transfer of a lesser or derivative interest in the land and buildings option. It will be interesting to see if HMRC appeal this decision further and risk the Upper Tier Tribunal setting a binding precedent that land options are exempt from UK VAT.

2. Appeal Against HMRC Decision That Business Should be VAT Registered

This case considered whether a nail bar run by Mr and Mrs Nguyen should have been registered for VAT. HMRC argued that the nail bar should have registered for VAT in January 2013 based on investigations carried out by HMRC officers. Mr and Mrs Nguyen disputed HMRC’s arguments and produced CCTV as well as written statements from customers to challenge HMRC’s assertions.

HMRC conducted clandestine investigations into the nail bar and requested that Mrs Nguyen undertake a “self-invigilation” exercise. Mrs Nguyen had to record all the takings from each customer over a week and give this report to HMRC. Following the investigation and Mrs Nguyen’s self-invigilation, HMRC concluded that the nail bar was only declaring approximately 50% of its sales. This decision considered several factors such as the volume of customers, the length of treatments and the average price of a treatment.

The Tribunal noted that HMRC’s investigation concluded that around 14 customers were served on 29 January 2018. CCTV and extensive till evidence produced by the nail bar showed that only 9 were served. HMRC also suggested that the shop was open on a Sunday, which the CCTV showed it was not. HMRC’s argument also commented that, during one of seven covert visits, an HMRC officer observed 7 sales amounting to £175 in a 90-minute period. However, the Tribunal noted that this factored in only sales of acrylic nails and not the length of time taken to treat a customer. It would not be reasonable to extrapolate from this observation that the nail bar made £175 every 90 minutes by serving 7 customers. In any event, the CCTV showed that this was clearly not the case.

Giving some consideration to the average price paid per customer and the average length of time each treatment took, the Tribunal concluded that the annual turnover from the nail bar could not have been more than £76,500. This is below the compulsory VAT registration threshold. Therefore, it held in favour of the nail bar and allowed the appeal against retrospective VAT registration.

Constable Comment: HMRC also issued an assessment against the nail bar for output VAT amounting to over £90,000 for which Mr and Mrs Nguyen have applied for hardship in order to appeal the decision without having to pay the VAT initially. The Tribunal noted that the Coronavirus pandemic has led to the delay of processing of this application for hardship but commented that it would be unjust to delay further the provision of a decision in relation to the VAT registration appeal.

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.