Constable VAT Focus 15 December 2022

As this will be our final VAT Focus of 2022, we would like to take this opportunity to wish all our clients and readers a peaceful Christmas and Happy New Year.


Selling goods using an online marketplace or direct to customers in the UK
HMRC has recently issued the above new guidance which can be used to check when a business needs to pay VAT if it sells goods using an online marketplace or direct to customers in the UK.

VAT domestic reverse charge technical guide
The above guidance can be used to Find technical information about the VAT reverse charge if you buy or sell building and construction services. HMRC have recently updated the section ‘Scaffolding on zero-rated new build housing’ to confirm that there will be transitional period up to 1 February 2023 where businesses can use either reverse charge accounting or normal VAT rules.

HMRC email updates, videos and webinars for VAT
The above link can be used to learn more about VAT including accounting schemes, VAT Returns and keeping records. A live webinar about changes to the VAT 652 – Error Correction Notice form has been added. Another webinar was also added with an overview of the new VAT late submission, late payment penalties and interest changes.



Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration and there may be occasions where they have a more binding effect.

1. Adjustment of overpaid VAT

This case concerned P GmbH (P) a company which operates an indoor playground. P charged 20% VAT to its final consumers who were not entitled to deduct input VAT; however, the correct statutory rate applicable was 13%. P adjusted its VAT returns so that the excess VAT would be credited by the local tax authorities. However, this was refused on the grounds that as P did not correct the invoices it issued to reflect the correct amount of VAT, P is required to pay the VAT invoiced. In addition, the local authority argued that as the final customers have borne the higher VAT charge, P would be unjustly enriched if the adjustment was made.

P argued that it is entitled to make an adjustment because there is no risk of loss of tax revenue. The final consumers of P’s supplies were not entitled to recover the VAT charged, therefore there was no risk of tax revenue loss, where P would make an adjustment for the lower rate, but subsequently the customer would recover the higher rate of VAT, creating a tax revenue loss.

The CJEU initially confirmed that it is clear there is no risk of loss of tax revenue because all customers were exclusively final consumers who had no right to input VAT recovery.  As a result, it was confirmed by the CJEU that P is not liable for VAT calculated based on an incorrect rate if there is no risk of loss of tax revenue. Therefore, P should be entitled to make the adjustment.

Constable Comment: In this case the CJEU ruled that the taxpayer is not required to pay over VAT incorrectly charged at a higher rate because there is no risk of tax loss because the customer was not entitled to recover VAT. The ruling would have been different if the final customers were VAT registered businesses and had a right to recover VAT. In this case, there would be a risk of tax revenue loss if P did not re-issue a correct invoice but made an adjustment for the lower VAT rate (13%) but the customer recovers the higher, incorrect rate (20%) creating a loss of 7% for the local tax authority. In such cases it is unlikely that taxpayers would be entitled to make an adjustment.

Court of Appeal

2. Supplies of medical care or a supply of staff?

This case concerned Mainpay Ltd (Mainpay) appealing the decision of the Upper Tribunal which dismissed Mainpay’s appeal of the First Tier Tribunal. Mainpay employs, or treats as employed, various doctors, 80% being consultants and 20% GP specialists. All of the doctors were registered and regulated as medical practitioners. Mainpay supplied these consultants and GP specialists to an intermediary company called Accident & Emergency Agency Limited (A&E) which then supplied them on to various hospitals and clients, usually an NHS Trust. The issue in the appeals were whether supplies made by Mainpay to A&E were exempt from VAT as medical care.

The FTT found that the consultants were under the control, direction and supervision of the NHS Trust and functioned within their framework. They operated from the remit of local policies laid down by the NHS Trust and became part and parcel of the organisation. As a result, the FTT concluded that supply was of staff, and therefore taxable and subject to VAT, as opposed to a supply of medical services. The UT upheld the FTT’s decision that Mainpay was making taxable supplies of staff as opposed to VAT exempt supplies of medical care and also rejected all other grounds of appeal.

Mainpay appealed to the Court of Appeal arguing that the Upper Tribunal erred in law on the following grounds:

  • Not applying the correct test to determine whether the supply fell within the medical exemption or was a supply of staff
  • In reaching its conclusion on the correct test, not taking proper account of the purpose of the exemption
  • In reaching its conclusion on the correct test, not applying the principal of fiscal neutrality correctly
  • Failing to correct the FTT’s erroneous approach to making findings in relation to GP specialists

After a review of the evidence before it, the Court of Appeal found no fault in the approach of the FTT or UT to conclude that based on the contractual arrangements and the circumstances in which the consultants worked, the consultants effectively became part and parcel of the NHS Trusts which themselves provided medical care to patients. In consequence, and after detailed consideration of Mainpay’s submissions, the Court of Appeal found that the essence of the supply was that of staff, rather than medical services.

With regards the second ground, the Court stated that it is not clear if any VAT would increase the cost, as there was no evidence regarding the VAT status of the A&E. In addition, it was confirmed that if a medical supply is not exempt under VAT legislation, it cannot come within exemption simply because not to do so would increase the cost of the medical care.

With regards to Ground 3, Mainpay argued that if the consultants were self-employed then medical exemption would apply which is a comparable situation, therefore relying on principles of fiscal neutrality, the supply made by Mainpay should also be VAT exempt. The Court disagreed and confirmed that this was not established, rather an assumption and that the VAT liability would turn on the facts of the individual case.

Ground 4 was not necessary to consider because Mainpay’s appeal on the consultants point failed. As a result, the appeal was dismissed and the FTT and UT conclusion was upheld, Mainpay made supplies of staff which are subject to VAT.

Constable Comment: The Court ruled that based on the contractual arrangements and circumstances, the consultants were under the control, direction, and supervision of the NHS Trust, becoming part of the organisation. Therefore, Mainpay made a taxable supply of staff as opposed to VAT exempt medical care. It is important to note that the contractual arrangements and circumstances will often differ with each case, VAT being very ‘fact specific’. We would advise seeking professional advice regarding possible supplies of staff which can often be a complex area of VAT.  

Upper Tribunal

3. Overpayments: Consideration for VAT purposes?

This case concerned a dispute between the Borough Council of King’s Lynn and West Norfolk (the Council) and HMRC regarding overpayments made for off-street car parking. The Council provides off-street car parking, where charges are collected by a cash machine that does not offer change. The dispute concerns the VAT treatment of the overpayment made by the customer. For example, the first hour is charged at £1.40. A customer parking up to an hour with only £1 and 50 pence coin will make an overpayment of 10 pence. The FTT ruled that the overpayment was part of the consideration for a supply of car parking and subject to VAT. The Council appealed the decision to the Upper Tribunal.

The Council argued that it can only charge for off-street parking by exercising its powers within the statutory framework and it had no capacity to enter into a contract to provide parking at a fee that was different from that set out in the 2015 Order. An agreement at any other price was void. It argued that the overpayment was a voluntary contribution to the Council and not consideration for VAT purposes as there is no direct link with the supply.

HMRC argued that the FTT’s construction of the contract, being that the Council accepted the amount paid, including the overpayment, as consideration was correct. Alternatively, it argued that the payment was a counter offer made by the customer which the Council accepted; therefore, it is subject to VAT.

The Upper Tribunal took the view that service and value given can be ascertained from the legal relationship between the Council and customer. It concluded that under the agreement between the Council and the customer which is formed when the customer inserts money into the machine at the car park, the Council grants the customer the right to park their car for one hour in return for inserting coins with a value of not less than the advertised tariff, in this example, £1.40. If a customer accepts that offer by inserting coins of a higher value, in this case £1.50, that amount (including the 10 pence overpayment) is the value given by the customer and received by the Council under the legal relationship. That is the taxable amount for VAT purposes.

Constable Comment: In this case the Upper Tribunal concluded where a machine does not provide change for car parking facilities operated by the Council, any overpayment by customers will be subject to VAT as it is part of the consideration for the supply and not outside the scope of VAT. Readers are reminded that the grant of facilities for parking a vehicle is specifically excluded from exemption for UK VAT purposes.  


4. Subway: Best judgment assessment

This case concerned Neoterick UK Limited (NUL), a company operating a Subway restaurant. HMRC has raised VAT assessments in the sum of £45,024 in respect of the VAT accounting periods 01/14 – 07/17, on the grounds that NUL was under declaring output VAT by incorrectly treating hot take-away and eat-in meals as zero rated for VAT purposes. NUL has appealed the assessment by HMRC on the grounds that it was not made to the best of HMRC’s judgment.

The HMRC officer involved in this case is very experienced in dealing with Subway restaurants. The officer visited the premises to make an order of hot food, and another HMRC officer did the same. The HMRC officers confirmed that the till receipt showed the order as zero rated even though the standard rate of VAT should have been charged on supplies of hot food.

NUL’s  VAT returns showed standard rated sales being 55% – 78% which the HMRC officers deemed very low for a Subway restaurant. As a result, an invigilation exercise was carried out by HMRC at the premises of NUL. This involved HMRC officers actively working on the premises and observing customers and watching staff operating the tills and recording sales. The result of the invigilation exercise showed an average of standard rated sales being 92%. This percentage was applied to the turnover figures declared in the relevant VAT periods and the difference between these amounts and the VAT declared was the sum HMRC assessed for.

The FTT reviewed the evidence and concluded that the assessment was made to HMRC’s best judgment. There were no suggestions that the HMRC officers did not carry out their review honestly and bona fide. HMRC’s sample purchases and invigilation exercise provided material for the officers to base their assessment on. In addition, NUL were given the opportunity to provide evidence which would displace the HMRC officer’s conclusion however this did not happen. As a result, the appeal was dismissed.

Constable Comment: This decision highlighted the rules around a ‘best judgment assessment’ and the FTT concluded that all required conditions were met by HMRC in this case, therefore the VAT assessment was upheld. This case follows a long line of similar exercises carried out by HMRC on restaurants and similar establishments where HMRC believes that either sales are suppressed, and output VAT underdeclared or an incorrect VAT liability has been applied, usually standard rated supplies being treated as zero-rated resulting in an under declaration of output VAT. A ‘best judgement’ assessment is difficult to argue against in a case like this where HMRC has carried out an exercise and witnessed at first hand the supplies the business is making.  If HMRC issues a best judgment assessment to you or your business, we would recommend seeking professional advice to mitigate the risks involved.

5. Transfer of a going concern

This case concerned Apollinaire, a company registered for VAT in 2015. Its sole director and shareholder was Mr Hashmi. Apollinaire has an input VAT claim in the sum of around £98,000 for invoices of stock totalling £573,000 from an entity called Snow Whyte. HMRC denied the input VAT claim on the grounds that there was a transfer of a business as a going concern (TOGC) between Snow Whyte and Apollinaire. As a result, the input VAT claim was refused and penalties for deliberate errors in the sum of £65,801 was raised. HMRC then subsequently issued a personal liability notice (PLN) to Mr Hashmi.

HMRC believed there was a TOGC between Snow Whyte and Apollinaire because Snow Whyte was sold by Mr Hashmi to Mr Singh. HMRC were not satisfied with regards to the existence of Mr Singh. Both Snow Whyte and Apollinaire were trading under the same name, there was no break in trading and there was a transfer of tills and staff.

Mr Hashmi appealed to the FTT which found that Mr Hashmi was indeed the ‘controlling mind’ of both entities at all times, showing doubts over the existence of Mr Singh. The FTT agreed with HMRC on the grounds that both entities traded under the same name, from the same premises and had the same employees. As a result, there was a TOGC, and Apollinaire was not entitled to input VAT deductions.

The FTT also upheld HMRC’s PLN. This was on the grounds that Mr Hashmi had a history of dissolving companies but continuing to trade with the same name. There is also a history non-submission of tax returns or payments, and HMRC believed that the input VAT claimed was deliberately overstated. The FTT did not find evidence provided by Mr Hashmi and his accountant credible, as most assertions were not sufficiently supported. The FTT upheld the penalties and PLN, the appeal was dismissed.

Constable Comment: This case highlights that where a taxpayer is considered to be making ‘deliberate errors’, and the Tribunal supports HMRC’s position, the penalties imposed by HMRC can be significant. In addition, if certain conditions are met, HMRC can impose a personal liability notice (PLN) and the director would be liable for the penalty instead of the company. We would also flag that TOGC treatment is not optional, if the tests for a VAT free transfer of a business are met the transaction is outside the scope of VAT and HMRC will not usually refund as input VAT to the buyer of a business VAT that has been charged in error by the seller.

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.