Constable VAT Focus 13 August 2020


Zero-Rating Books & Printed Matter
HMRC has updated Public Notice 701/10 to incorporate guidance on the VAT liability of supplies of certain electronic publications that became zero-rated from 1 May 2020.

Pay No Import Duty and VAT When Importing Decorations & Awards
HMRC has released new Guidance discussing how to claim relief from Customs Duty and Import VAT if you are importing or presenting a decoration or award in the UK or EU.

VAT & SDLT When Existing Leases Are Varied
HMRC has released this brief which explains how changes to existing leases are treated for VAT and Stamp Duty purposes.


Upper Tribunal

1. Can HMRC assess for claims made under Contracted Out Services (COS) rules?

This case concerned an assessment made against Milton Keynes Hospitals NHS Foundation Trust (The Trust), by HMRC, relating to VAT which the Trust had claimed under special rules applying to certain bodies including NHS Trusts. The FTT upheld HMRC’s assessment and this is an appeal against the FTT decision. The point at issue was whether HMRC is entitled to recover this COS VAT under s73 of the VAT Act 1994, which allows HMRC to raise assessment for input VAT that has been incorrectly claimed.

The Trust is regarded as a Government department for the purposes of s41 VATA, which permits Government bodies to recover VAT which they are charged on purchases which do not relate to business activities. The Trust had recovered VAT incurred on IT equipment for financial years 2013/14, 2014/15 and 2015/16. HMRC argued that it was not entitled to recover this VAT, although neither Tribunal dealt with the reasoning for HMRC’s decision. Accordingly, it assessed for overclaimed VAT under s73 VATA.

The Trust submitted that HMRC is not entitled to assess for overclaimed VAT which was claimed through s41 VATA as it is not VAT in the true sense as it does not relate to a taxable supply. It argued that s41 exists outside the VAT system and that “COS VAT” is not input VAT at all. The right to recovery of this VAT operates as a special measure whereas s73 relates to input tax in its proper sense. To support this argument, the Trust also submitted that s73 only applies to taxable persons and that the Trust is not a taxable person as it does not pursue an economic activity.

HMRC contended that whether VAT claimed by virtue of s41 can be properly classified as input tax is irrelevant – it is VAT and s73 relates to VAT. It also rejected the suggestion that s73 may only be used to assess taxable people, referring the Tribunal to the wording of s73.

The Tribunal agreed that VAT which is recovered by virtue of s41 VATA is not input tax but rejected the claim that it is not VAT for the purposes of VAT legislation. As VAT was chargeable on the supplies purchased by the Trust, the amounts in question plainly represent VAT. It then turned to consider the question of whether s73 could apply to non-taxable persons.

The Tribunal observed that this submission must fail as s73 is not only applicable to taxable persons. The legislation states:

“In any case where, for any prescribed accounting period, there has been paid or credited to any person—

(a)as being a repayment or refund of VAT, or

(b)as being due to him as a VAT credit, an amount which ought not to have been

so paid or credited, or which would not have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly.”

The wording is quite clear that s73 applies to any person and that there is no requirement for a person to be taxable in order to be assessed for overclaimed VAT. The Tribunal had no hesitation in dismissing the argument mounted by the Trust that the draftsman of s73 must have meant to write “any taxable person acting as such”. It commented that the distinction between a person and a taxable person is fundamental to the VAT legislation.

Holding that VAT claimed pursuant to s41 VATA is VAT and that s73 may be used to assess any person, not just a ‘taxable person’, the Tribunal dismissed the Trust’s appeal and upheld HMRC’s assessment.

Constable Comment: COS VAT is a colloquial term used to describe the VAT incurred by public bodies who contract out for service provision. Whilst it does not represent input tax, the argument that it was not VAT at all was somewhat ambitious. It is not surprising that the Tribunal rejected the suggested interpretation of s73 – had the taxpayer been successful in its arguments, a situation would have arisen where public bodies could recover VAT and never be assessed by HMRC.

2. Agent or Principal?

This case concerned All Answers Limited (AAL), a business which assists customers in finding an academic expert to assist in providing ‘model answers’ for essays, dissertations or pieces of coursework. Other projects an expert may assist with include proof reading and preparing personal statements. None of the experts are employed by AAL.

AAL stated that the fee paid by the customer was proper to the expert, although it was collected by AAL on that expert’s behalf. Generally, AAL retained part of the money collected to cover its own commission and passed the remainder to the writer.

HMRC argued that AAL makes a single, standard-rated supply of academic work to a customer and should account for VAT on the full amount paid by the customer. It contended that when AAL passes the balance of the monies received to the expert, it is paying separate consideration for a supply made to itself.

AAL argued that it acts as agent with the supply of academic work being made by the expert to the customer. Therefore, AAL argued, is not liable to account for VAT on the full amount, but on the consideration which it retains. To support its case, AAL submitted that the legal relationship required for a supply to arise exists between the writer and the customer and not between itself and the customer.

The FTT had previously held in HMRC’s favour, concluding that AAL made its supplies directly to the customer.

Observing previous caselaw around the subject, the Tribunal considered that, in order to reach a satisfactory conclusion, it needed to review the contractual terms in place and whether or not the contracts reflected the commercial and economic reality of the situation.

It observed the contracts in detail and noted that AAL accepts a degree of personal liability to the customer in certain situations, for example if AAL were to negligently provide the customer with an insufficient writer. Equally, other provisions made it clear that AAL was liable to the customer if the work was delivered late. This, the Tribunal noted, indicated that there was a legal relationship between AAL and the customers.

It was also observed that the contracts between the writer and AAL provided that once the work was uploaded by the writer to AAL’s portal, copyright passed to AAL. It follows that once the writer had uploaded the work, AAL would be the only party in the arrangement with the legal right to supply that work on to the customer. Therefore, when the work was handed from AAL to the customer, it has to be AAL disposing of the intellectual property. The Tribunal noted that this is strongly indicative that AAL makes the supply to the customer itself and is, therefore, acting as a principal which purchases a product from a writer and resupplies it with a profit margin to an end customer.

Considering that the contracts placed the core obligations on AAL rather than the writers, the Tribunal concluded in favour of HMRC, stating that this interpretation of the contracts is entirely consistent with the economic reality of the situation. The appeal is dismissed.

Constable Comment: The FTT had previously held that the contracts were a deliberate smokescreen, designed to deceive and distract from the commercial reality. The UT disagreed with this interpretation, actually considering that the contracts in place treated AAL as a principal despite the wording and, therefore, did give rise to the economic and commercial reality. Whilst the conclusions reached were the same, the decisions are based on very different reasoning. The FTT was scathing of AAL and failed to consider the contractual position, instead electing to dismiss them entirely. It is good to see the UT correct the approach taken. The decision gives lengthy consideration to the contracts and comments on the various indicators of agent or principal which can be a complex area of the law with each case turning on its own facts. Any readers which would like to discuss whether they are an agent or a principal should contact Constable VAT – we will be pleased to assist.

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.