HMRC NEWS
Revenue and Customs Brief 8 (2024): removal of VAT exemption for private school fees and boarding fees
Following the Chancellor’s announcement on 29 July 2024, HMRC has published this brief to confirm that as of 1 January 2025, all education services and vocational training supplied by a private school, or a connected person, for a charge will be subject to VAT at the standard rate of 20%. Boarding services provided by a private school, or a connected person, will also be subject to VAT at 20%.
HMRC also published draft legislation, an explanatory note and an accompanying technical note on the changes, which can be read here.
HMRC launches VAT Registration Estimator
HMRC has launched a VAT registration estimator which is a digital tool designed to help businesses estimate what registering for VAT may mean for them. The VAT Registration Estimator has been developed after feedback from small businesses suggested an online tool would be helpful to show when their turnover could require a business to register for VAT and its effect on profits.
HMRC has also published a recorded webinar about the VAT Registration Estimator which can be viewed here.
VAT Refund Scheme for museums and galleries (VAT Notice 998)
The above guidance can be used to find out which museums or galleries offering free admission are eligible for refunds under the VAT Refund Scheme. The list of qualifying museums and galleries has been updated to reflect changes to the Value Added Tax (Refund of Tax to Museums and Galleries) (Amendment) Order 2024.
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 11 new additions, 15 removals and 1 amendment.
CASE REVIEW
FTT
1. Input VAT recovery on purchase of property
In this case the appellant, Kenthouse Properties Limited (KPL) appealed HMRC’s disallowance of the recovery of VAT incurred on the purchase of a property. The amount of VAT reclaimed was £183,600. Abdul Ghafar (AG) purchased the property which consisted of a pub with residential accommodation above. AG incorporated KPL to undertake the conversion of the property into six one-bedroom flats and the property was subsequently transferred to KPL. When AG transferred the property to KPL, VAT was not charged on the transfer. KPL registered for VAT on a compulsory basis and submitted an option to tax to HMRC in relation to the property. KPL submitted its first VAT return with a repayment of £183,600 relating to VAT incurred on the purchase of the property. HMRC denied the input VAT claim and the decision was upheld on review.
KPL argued that its intention has always been to make taxable supplies, being zero-rated supplies of the first grant of a major interest in the building. At the hearing it became apparent that the appellant was making submissions on the basis that the transfer of the property from AG to KPL should have been treated as a TOGC. However, the notice of appeal was submitted on the basis that KPL submitted a VAT return to HMRC in which it claimed it had suffered input tax on the purchase of the property and that this was repayable to it.
HMRC disallowed the VAT reclaimed by KPL on the basis that KPL made wholly exempt supplies of short-term rentals of the flats and not zero-rated supplies. HMRC contended that this was always KPL’s intention as form VAT5L was submitted along with its VAT registration application confirming there was no intention to sell the properties but instead for the flats to be let out on short leases.
The Tribunal confirmed there is no basis to consider whether the transaction could have been a TOGC as KPL is appealing the decision as to whether the VAT incurred is recoverable or not. If KPL believed there was a TOGC, but HMRC rejected this, KPL should have appealed that decision, as opposed to recovering the input VAT incurred and appealing the disallowance of that input VAT.
The Tribunal then went on to consider the evidence of intention provided and identified inconsistencies in the arguments put forward by KPL, predominately from the VAT registration application and form VAT5L submitted. The Tribunal considered the actual supplies that took place (VAT exempt short lets) and also the intentions of the taxpayer at the time of the transfer of the property and concluded that in circumstances where only VAT exempt supplies have been made, no zero-rated (taxable) supplies have been made and there is an absence of evidence of a clear intention to make such zero-rated supplies, the input VAT is not available for credit. The appeal was dismissed.
Constable Comment: This case considers the input VAT recovery rules in detail with the Tribunal reviewing the actual supplies that took place and also the evidence available of the taxpayer’s original intentions at the time the input VAT was incurred. In this case, the appellant suffered significant amounts of irrecoverable input VAT. Where a taxpayer intends to make a significant VAT repayment claim professional advice should be sought to ensure the input VAT will be recoverable. This case highlights the importance of having a clear intention at the time VAT is incurred.
2. VAT Zero rating: Collagen drink product
Whilst there have been many cases recently which consider whether a food product is standard or zero rated, this case considered whether the supply in question was a food product for the purposes of VAT legislation. The appellant, Bottled Science Limited (BSL) manufacturers and supplies a collagen drink product, ‘Skinade’, which BSL states is a “uniquely formulated drink using advanced technology and high-quality ingredients for skin”. The product is consumed in a liquid form, and the dispute concerned whether the product is a zero rated food item or a standard rated skincare or aesthetic beauty product.
BSL submitted an error correction for overdeclared output VAT in the region of £1.2million on the basis that the ‘Skinade’ product is a zero-rated food item. BSL argued that Skinade is consumed by drinking the liquid, the taste and texture was palatable to make the drink easy to consume, the product was manufactured in a food processing facility which is compliant with, and regularly inspected by, the Food Standards Agency.
Based on the product’s palatability, ingredients, low nutritional values, marketing and packaging, HMRC took the view that the product is not one of food, but a skincare or aesthetic beauty product which is standard rated.
Whilst the Tribunal accepts that ‘food’ for VAT purposes includes drinks, it does not automatically mean that any liquid for human consumption is a zero-rated food item. The Tribunal weighed the packaging and marketing of the product as most important stating that whilst some of the wording, for example nutritional information, might be found on food packaging, its overall appearance was much more akin to something one might find in a chemist’s shop than a grocer’s. In addition, whilst the product was marketed as a ‘drink’, it was also marketed as an “effective and bioavailable anti-ageing skincare product” and an alternative approach to a person’s skincare regime.
The Tribunal concluded that Skinade is sold not for the general purposes of keeping the body alive or its development or functioning, but for the very specific, limited purpose of keeping skin looking young. On that basis, a broad-minded VAT payer’s answer to the question whether the product is a food would be ‘No, Skinade is not a food’. The appeal was dismissed.
Constable Comment: This was an interesting case where the Tribunal was required to determine whether the product is a food item or not. In this case, the Tribunal considered the packaging and marketing the most significant when considering a multi-factorial assessment, however, this would vary depending on a specific product and its unique circumstances. We have seen a significant number of cases recently relating to the VAT treatment of food items and recommend seeking professional advice to ensure zero rating is applicable to products not clearly covered within HMRC guidance.
3. VAT zero rating: Hair treatment
This case concerned the VAT liability of a system for hair loss (“the Kinsey System”) developed by the appellant, Mark Glen Ltd. The total VAT amount appealed was £270,083 relating to VAT assessments and amendments to VAT returns by HMRC after taking the view the supply of the system is standard rated. The appellant treated the supply as a zero-rated aid to a disabled person in accordance with Group 12, Schedule 8, VATA 1994.
The sole issue in the dispute was whether the Kinsey System qualifies for zero rating or if it is standard rated for VAT purposes. The supply was a complex system consisting of an initial consultation, manufacture of the wig, fitting and adaptation of the wig, and ongoing periodic maintenance.
The Tribunal initially concluded that the supply was one of services rather than goods, then went on to consider whether the customers of the appellant could be considered ‘disabled’ for VAT purposes. However, the Tribunal concluded that significant hair loss or baldness in itself would not be a chronic sickness or disability.
The appellant also contended that the Kinsey System is a supply to a disabled person of ‘services of adapting goods to suit his condition’, and therefore zero rated, however the Tribunal disagreed stating that the system cannot be seen as the adaptation of a wig. The Tribunal found that the supply is a labour-intensive system, and the ongoing maintenance is an essential part of the supply. As a result, the Tribunal concluded that the supply does not qualify for zero-rating under Group 12 Schedule 8 VATA 1994 and that supplies of the Kinsey System are standard rated for VAT purposes.
Constable Comment: Whilst this case considered a niche supply, it acts as an important reminder that zero rating provisions are derogations from the general principle that supplies of goods and services are taxable and that the provisions should be interpreted strictly. Therefore, if there is any ambiguity in relation to the application of a relief from VAT professional advice should be sought.
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.