Constable VAT Focus 14 June 2024


GfC6 – Help with football agent’s fees and dual representation contracts
HMRC published guidelines for compliance 6, on football agents’ fees and dual representation contracts.  HMRC recognises that dual representation contracts can be complex and the purpose of the guidelines is to set out its recommended approach to help customers pay the correct amount of tax. The guidelines are for football agents, also known as intermediaries, and football clubs. They deal with football agents’ fees that are charged when a football player transfers from one club to another, or a playing contract is negotiated with their current club. It outlines HMRC’s views on dual representation contracts by:

  • helping clubs, players, coaching staff and agents understand approaches HMRC see as increasing or lowering compliance risk
  • providing advice on the audit trails, evidence and documents that should be kept to support any tax position
  • explaining HMRC’s view of the latest Football Association (FA) Football Agent Regulations which were published on 1 January 2024
  • explaining HMRC’s view of the latest Football Association (FA) Football Agent Regulations which were published on 1 January 2024

Revenue and Customs Brief 7 (2024): VAT Treatment of Voluntary Carbon Credits
This newly published brief explains the VAT treatment of voluntary carbon credits from 1 September 2024. A carbon credit is a tradable instrument issued by an independently verified carbon-crediting programme, and has been treated as outside the scope of UK VAT. However, following some significant changes in the voluntary carbon credit market, from 1 September 2024 VAT needs to be accounted for on certain trades of voluntary carbon credits at the standard rate. Certain supplies will remain outside the scope of UK VAT.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme and details 13 new additions and 7 removals.

Updates on VAT appeals
The above guidance contains a list of VAT appeals that HMRC has lost, or partially lost, that could have implications for other businesses. The list of VAT appeals has been updated with one removal, 5 amendments and 2 new additions.


Court of Appeal

1. VAT recovery on share sale for fundraising

This case concerned the input VAT incurred by Hotel LA Tour Ltd (HLT) on the sale of shares in its subsidiary, Hotel LA Tour Birmingham Ltd (HLTB). HLTB owned and operated a hotel in Birmingham and HLT supplied management services to HLTB.

HLT sold all of its shares in HLTB in order to raise funds for the building of a new luxury hotel, incurring professional fees on supplies received such as marketing, solicitors and accountants’ fees. HLT sought to recover the VAT incurred on these costs in full, but HMRC disallowed the input VAT claimed on the grounds that the costs related to the exempt share sale. HLT appealed arguing that the relevant services received were directly and immediately linked to its downstream taxable activities, mainly being fundraising for the development of a new luxury hotel. Both the First Tier Tribunal (FTT) and Upper Tribunal (UT) held that the input VAT was deductible. Our summary of the UT decision be read here.

HMRC appealed to the Court of Appeal (CoA), arguing that the FTT and UT erred in law in applying the two-stage test of input VAT recovery. HMRC stated that first, it must be considered whether the inputs in question were used in making a specific supply to which they could be directly attributed; and if not, and only if not, it should be considered whether the inputs in question were part of the overheads of the business attributable to the taxpayer’s downstream outputs.

After a very detailed analysis of applicable case law, the CoA agreed with HMRC concluding that the UT failed to apply the direct and immediate link test and erred in disregarding the existence of the exempt share sale. HLT incurred input VAT on professional fees which were used in, were cost components of, were directly and immediately linked with, the VAT exempt share sale. Therefore, the input VAT was not recoverable. The appeal was dismissed.

Constable VAT comment: It will be interesting to see if HLT appeals the decision to the Supreme Court which would finally resolve this on-going dispute. The most recent decision of the CoA focused on the fundamental principle of identifying if there is a direct and immediate link. It also demonstrates that the UK courts continue to rely on important CJEU decisions despite the fact these are no longer binding.

Upper Tribunal

2. VAT on recharges of card payment fees

In this case, SilverDoor Limited (SilverDoor) acted as a disclosed agent between accommodation providers and clients, who are usually businesses seeking short term accommodation for employees on temporary assignments. If a customer made payment via a corporate credit card, SilverDoor charged an additional 2.95% fee. The dispute in the case was the VAT treatment of this fee.

SilverDoor argued that it charged the card handling fee for providing the facility of being able to pay by corporate card, and this is a separate and distinct supply from the supply of accommodation and that this supply was a financial service within the VAT exemption. HMRC took the alternative view that that the fee was part of the supply of standard-rated accommodation services. The FTT agreed with HMRC, and our summary of the decision can be read here.

SilverDoor appealed to the Upper Tribunal (UT) and the issues to be decided by the UT could be summarised as follows:

  • On the characterisation issue, did the FTT err in law in holding that the fee was consideration for property reservation services (part of the accommodation service) rather than a separate service?
  • On the exemption point, if the fees are consideration for a separate service, does the supply by SilverDoor fall within Item 5, Group 5, Schedule 9, VATA 1994, i.e. are the supplies VAT exempt?

On the characterisation issue, the UT concluded that the 2.95% corporate card payment fee cannot be a distinct supply, but instead it is to be analysed as consideration for the reservation services provided by SilverDoor, meaning it forms part of its standard rated supply and output VAT is due.

This was sufficient to dismiss the appeal. The UT also considered the exemption issue and concluded that even if the card payment fee was a distinct supply it would not be a VAT exempt financial intermediary services under Item 5, Group 5, Schedule 9, VATA 1994, because there was no contract for the provision of a financial service by merchant acquirers to the businesses, and SilverDoor was not involved in negotiating any such service. The appeal was dismissed.

Constable Comment: In this case the Tribunal was required to analyse two distinct points. First, it had to determine whether the card handling fees charged by the taxpayer could be seen as a distinct supply, and if so, it was required to determine whether that supply would fall within the financial intermediary VAT exemption. This is a potentially complex area of VAT, and we would recommend seeking professional advice if you or your business is involved with complex financial services transactions.

First Tier Tribunal

3. VAT invoice requirements

In this brief case, Fount Construction Limited (FCL) appealed HMRC’s decision to disallow claims for the recovery of VAT incurred as input VAT on the basis that the corresponding invoices did not meet the relevant legislative requirements. The contested invoices each had a single description of ‘Building works at the above’ with a reference to the address of the building site. The three invoices from the supplier, Landcore Limited, charged VAT of £15,218.59.

HMRC argued that the invoices did not include a description of the building work and did not meet the requirements set out in regulation 14(1), paragraphs (g) and (h), of the Value Added Tax Regulations 1995.

The contested invoices each contained the single description ‘building works at the above’. The invoices included a box entitled ‘job address’ containing the address for the building site in question.

VAT was calculated at the standard rate and the invoices included a VAT-exclusive subtotal, the VAT amount, and the overall total.

Regulation 14(1) states that invoices must contain ‘a description sufficient to identify the goods or services supplied’ and ‘(h) for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency’.

HMRC’s solicitor argued that HMRC needed to be able to verify that the details on the invoices were correct, that the VAT incurred was for business purposes, and was charged at the correct rate.

In HMRC’s view the description was insufficient. It did not allow HMRC to assess the VAT liability of the supplies received or determine whether the correct rate of VAT had been applied by the supplier.

The tribunal referred to Deadoc Construction [2015] UKFTT 433 (TC) where the judges stated that ‘in the line of business of construction groundworks contractors it was common practice for less information to be provided’.

In addition, they stressed that ‘part of the purpose of reg 14 is to ensure that invoices contain sufficient information to enable an independent observer (typically HMRC) to be satisfied as to the identification and quantification of the goods and services supplied’.

The FTT noted: ‘We do not agree with HMRC’s suggestion that the invoice description needs to be in such detail as to enable HMRC to draw definitive views on the VAT treatment of the supply from the invoice alone’.

‘HMRC have wide-ranging powers to seek further information in relation to the supply, and to refuse recovery of input tax if such information is not supplied.

‘The invoice is the gateway into any enquiries by HMRC, rather than a repository for the answers to any questions that might be asked.

‘We conclude that a general short description of the nature of the services (such as ‘building services’), along with some further identifying information such as the name of the site, the contract, or the date of works, will be sufficient to meet the requirements of regulation 14.’ The appeal was allowed.

Constable Comment: This is an important area of VAT law that is often overlooked. It is a requirement that a valid VAT invoice is held to recover VAT incurred as input tax. Taxpayers must ensure that the invoice is a valid VAT invoice in accordance with regulation 14 of The VAT Regulations 1995. As demonstrated in this case, HMRC may refuse to refund any input VAT reclaimed if the invoice held by the customer does not satisfy the conditions in the above mentioned regulations. The construction sector is one which HMRC has targeted to improve compliance and mitigate VAT leakage, the introduction of the domestic reverse charge (DRC) for construction, as an example. However, the rules mentioned above apply to all businesses and it is not clear if this case is a move by HMRC to a more robust application of the law. HMRC does have the ability to consider alternative evidence to support an entitlement to reclaim VAT incurred as input VAT, and it would seem in everyone’s best interests for HMRC to take a pragmatic approach. In a case such as this, where the VAT involved does not seem material, £15k, it may be prohibitive to taxpayers (internal resource and external professional fees) to challenge a decision of HMRC in relation to a VAT assessment of this sum. Presumably, HMRC would have allowed Fount to reclaim the VAT incurred and paid if the supplier had reissued its invoices, whether this was via the submission of an error correction notice (ECN) or a current VAT return (on the basis Fount now held satisfactory evidence of an entitlement to deduct VAT incurred as input VAT). We welcome the FTT’s decision in this case, and would hope that HMRC would let the matter rest, rather than lodging an appeal at the UT.       

4. VAT exemption: Medical care or skin care

This interesting case concerned Gillian Graham trading as Skin Science (GG) appealing two decisions made by HMRC. The first decision being that GG would be compulsorily registered for VAT in respect of skin care treatments, HMRC’s letter dated 12 January 2018. The second decision was a VAT assessment issued on 18 March 2021 in the sum of £217,897 in respect of a single long period covering the period 1 November 2007 to 28 February 2018 (10 years and 4 months). This VAT assessment cancelled and replaced an earlier VAT assessment dated 7 September 2018 in the sum £270,649 which ran from 1 May 2007; however, GG’s effective date of VAT registration (EDR) was subsequently amended to 1 November 2007 by HMRC.

The background to this case can be summarised as follows. HMRC contacted GG by letter, 25 April 2017, after noting that the income recorded on self-assessment tax returns indicated that she had been trading and making supplies in excess of the compulsory VAT registration threshold. GG replied that the supplies of skin care treatments are exempt from VAT as they fall within Group 7, Schedule 9, VATA 1994 as ‘Medical Care’. With regards the second decision, GG contends that the VAT assessment is out of time under the rules regarding the time limits HMRC must adhere to when in possession of full facts to raise a VAT assessment. HMRC claims the supplies are subject to VAT and the assessment is valid.

This matter was subject to much correspondence and the alternative dispute resolution (ADR) route was followed, but no resolution was reached or agreed at a meeting held on 28 November 2018.

The First Tier Tribunal (FTT) initially dealt with the liability issue considering the nature of supplies made, the purpose of the treatments, a typical patient’s views and the advertising of the supplies. The FTT concluded that GG did not prove, to the required standard, that the principal purpose of the treatments is the protection, including the maintenance or restoration of health and therefore found that the supplies are standard rated, meaning the first decision is upheld. GG is a registered general nurse.

With regards to the second decision, there are dates and timings that need to be considered.

HMRC used estimated figures to determine the value of taxable supplies made and when GG breached the compulsory VAT registration threshold. HMRC based this on GG’s self-assessment returns and calculated that the EDR was 1 November 2007. This was notified to GG in a letter dated 26 March 2019 and replaced an earlier EDR of 1 May 2007,

On 3 May 2019 GG appealed the decision of 26 March 2019 on the basis that she did not believe that her supplies were taxable supplies, for VAT purposes, and therefore she was not required to be VAT registered.

FTT hearing dates were set for 19 – 20 February 2020 (GG’s barrister was unavailable and permission to postpone the hearing was granted) and a subsequent listing for 1 – 2 April 2020 was also postponed at GG’s request due to the COVID-19 pandemic.

On 23 October 2020 GG applied to amend the original grounds of appeal to the effect that HMRC’s decision to create a single prescribed VAT accounting period from 2007 to 2018 was invalid as a matter of domestic and EU law.

On 27 October 2020 GG submitted a ‘nil VAT return’ in respect of the VAT accounting period ending 28 February 2018 (02/18). HMRC issued a VAT assessment on 18 March 2021. GG lodged an appeal against this decision within a week on the basis that the new VAT assessment, which had a net VAT liability of £58k less than the original VAT assessment was out of time.

HMRC argued that the VAT assessment was issued one year from the time the last piece of evidence of the facts necessary to justify the making of the assessment became known and therefore it was in time, claiming that the nil VAT return was a new piece of evidence. The FTT disagreed concluding that HMRC had all the evidence when the first assessment was raised over a year ago, meaning the new assessment was out of time and therefore the appeal was allowed.

The FTT concluded that because the amended EDR was notified to GG on 26 March 2019 this was more than a year before the revised assessment was issued on 18 March 2021. HMRC had GG’s self-assessment returns on file and used these to calculate the EDR and VAT liability, therefore, HMRC was in possession of full facts and the submission of a ‘nil’ VAT return was not new information or evidence.

Constable Comment: This was an interesting case given that the FTT agreed with HMRC in respect of the liability issue in terms of supplies made but concluded that the VAT assessment was made out of time, therefore the taxpayer could not be assessed for the VAT due. Whilst HMRC lost on a procedural point, it was able to successfully argue that VAT exemption did not apply to the appellant’s supplies. This demonstrates that if there is ambiguity in relation to the correct VAT liability of a supply, seeking professional advice to determine the correct VAT treatment is worthwhile. It will be interesting to see if HMRC requests permission to appeal this decision of the FTT.

Other important points to consider from this case are that HMRC has strict time limits it must adhere to when raising VAT assessments, this case took a long time to be heard before the FTT and not all relevant dates are covered in the above summary; however, if taxpayers receive VAT assessments from HMRC, this point should always be considered, is HMRC within time to assess for VAT?

In addition, this case acts as a reminder to businesses which are not VAT registered that they do not benefit from the protection of the four-year capping rules in relation to VAT accounting adjustments for those businesses that are VAT registered. If a business, whether a sole proprietor (and HMRC cross referencing self-assessment tax returns to the VAT register as part of a credibility exercise), partnership or limited company has misclassified the VAT liability of its supplies, for example treating its supplies as VAT exempt rather than taxable (standard rated) then a VAT registration is required from the date the value of taxable supplies breached the compulsory VAT registration threshold. In some cases, this may be a ‘liable no longer liable’ VAT registration (the value of taxable supplies has fallen beneath the compulsory VAT deregistration threshold); however, HMRC does issue long period first VAT returns spanning a number of years in many cases.

Some businesses and organisations may view VAT registration as an administrative burden; however, a VAT registration can be beneficial in terms of risk management and to potentially avoid significant and unexpected VAT costs, as this case demonstrates. A business may VAT register on a voluntary or intending basis if the value of actual or intended taxable supplies is below the compulsory VAT registration threshold. If your business or charity is not VAT registered, and VAT registration is something that you would like to explore, please do not hesitate to contact Constable VAT. 

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.