Constable VAT Focus 16 July 2020


Revenue & Customs Brief 4 (2020)
This Brief (Temporary VAT zero-rating of Personal Protective Equipment) has been updated. The end date for the temporary VAT zero rating has been changed from 31 July 2020 to 31 October 2020.

Revenue & Customs Brief 10 (2020)
This brief explains the changes in the VAT treatment of certain supplies of hospitality, hotel and holiday accommodation and admission to certain attractions announced by the government on 8 July 2020. The changes take effect from 15 July 2020.

Information on Temporary Reduced Rate
HMRC has released a new policy paper discussing the temporary reduced rate of VAT for hospitality, holiday accommodation, and attractions.

VAT Government & Public Bodies
HMRC has updated its internal guidance to ensure section 33E bodies know how to make applications and how to make claims once legally entitled to do so.

Payments on Account
This guidance has been updated as the option to defer VAT payments during coronavirus has come to an end and businesses can no longer defer VAT payments.


Following the announcement by The Chancellor on Wednesday 8th July, we have released our initial coverage of the VAT related measures. However, whilst HMRC will be issuing full guidance over the coming days, the fine detail around some of the measures is not yet available. We have tried to cover the salient points which relate to VAT, and we will continue to update this coverage as promptly ass possible following further updates. The coverage can be read here.

We have also recently released the second edition of our Land & Property Focus. This newsletter is intended for readers with an interest in the land and property sector and provides a summary of recent updates and significant judgments from the Tribunals and Courts which may be relevant to you or your business. The edition can be read in full here.



1. Blackrock: Special Investment Fund Management

The CJEU has handed down its judgment in the BlackRock case concerning the VAT liability of fund management services provided to BlackRock UK by BlackRock Financial Management Inc (BFMI), a company incorporated in the US and with no UK establishment.

This decision is a significant one and may lead businesses providing investment management services packages to investment businesses to alter the way in which they conduct business. It is therefore important for businesses operating in this sector to understand the underlying facts and the reasoning behind the decision

BFMI supplies services to BlackRock UK through a software platform called Aladdin. These services comprise a combination of hardware, software and human resources. Aladdin provides portfolio managers with market analysis and monitoring to assist in the making of investment decisions.

Using the reverse charge VAT accounting mechanism applicable to imported services, BlackRock UK is responsible for declaring output VAT due on supplies it receives from international suppliers where these supplies would be subject to VAT if supplied by a UK based business. As the majority of BlackRock’s onward supplies are VAT exempt, it cannot recover a significant portion of its input VAT and as a result output VAT due on supplies received that are subject reverse charges is largely a cost to the business. The important point in this case was that there is a VAT exemption for the management of Special Investment Funds (SIFs) and the services provided by BMFI were partly used to manage SIFs. There was potentially an opportunity to treat part of the cost as VAT exempt and as a result reduce the VAT cost on these services.

Between 1 January 2010 and 31 January 2013, BlackRock UK treated a portion of supplies received from BFMI as VAT exempt on the grounds that it used the services to manage Special Investment Funds. It accounted for reverse charge VAT only on that part of BFMI’s service used to manage regular investment funds, the value of which was calculated pro rata according to the total funds managed. HMRC disagreed with this approach and issued assessments for VAT due.

At the First Tier Tax Tribunal, HMRC argued that all of the services received by BlackRock from BFMI must be subject to the reverse charge since the majority of the funds managed by BlackRock are not special investment funds. The FTT concluded that it was impossible to determine between the use of the services received from BFMI and both parties appealed to the Upper Tribunal which referred the matter to the CJEU.

Accepting that the services received constitute a single supply for VAT purposes, the CJEU considered whether the EU provisions must be interpreted as meaning that a single supply of management services, which is used to manage both SIFs and regular funds, comes within the VAT exemption and, if so, what are the rules for the application of the exemption.

It was noted that, according to UK law, where there is a single supply comprising of two parts, a principal and an ancillary element, the ancillary element of the supply follows the VAT liability of the principal element. However, the supply in the main proceedings is not split into such elements, it is merely used for two different purposes. Blackrock argued that, while the law precludes the various elements of a single supply from being treated differently, it does not prevent the tax treatment of a single supply from differing depending on the use made of the supply received.

To support this position it cited Luxembourg which considers the supply of “…services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity”. However, the CJEU noted that the exemption in question in the Luxembourg case specifically provides for different VAT treatment depending on the final use, whereas the exemption for SIF management does not permit the VAT treatment of a single supply to be dissociated according to its end use.

Finally, the Court considered the appropriate way to decide whether the single supply was totally VAT exempt or totally taxable, given its view that multiple rates cannot apply to a single supply. Usually, the principal element would be the aspect of the supply which is the most valuable or highest quantity – in this case, BlackRock manages more non-SIFs than it does SIFs so the whole supply would be taxable. However, the Court considered that this would be inappropriate in the circumstances as it would permit for an investment manager who manages 51% SIFs to treat all of his supplies as VAT exempt – a perverse result.

Therefore, it concluded that the decision must be made on other factors. It observed that the services received by BlackRock UK from BFMI were designed for the purpose of managing investments of various kinds and that, in particular, may be used in the same way for the management of both SIFs and non-SIFs. Consequently, the services received cannot be regarded as specifically for the management of SIFs and as a result the entire supply should be taxable. The matter will be referred back to the UK Court system to apply this decision.

Constable Comment: This was a complicated case which considered an unclear area of the law. BlackRock had initially apportioned the supplies it received from BFMI which was inappropriate but the correct course of action was not overtly apparent. This decision has a potentially significant ramification in that it may cause many overseas businesses providing investment management services packages to UK businesses and domestic providers to alter the way in which they conduct business. Moving forward, one would expect to see management companies making clear and distinct supplies in relation to SIFs to ensure VAT exempt treatment.  


2. Mandarin Consulting

This case concerned the place of supply of services supplied by a UK company to Chinese students living in the UK. Mandarin Consulting provides careers consultancy or “career coaching support” which aims to assist students of Chinese origin to gain jobs and internships in the UK marketplace at major commercial organisations. Mandarin treated its supplies as outside the scope of VAT as it contracted with individuals, usually parents, located in China. HMRC assessed for VAT on the basis that the supplies arose in the UK.

HMRC argued that Mandarin’s supplies were educational in nature as they involved a “transfer of knowledge or skill”, meaning that the place of supply would be the UK as this is where the service is performed. Mandarin contended that they provided consultancy services which, when supplied to a consumer, take place where the recipient belongs – in this case, Mandarin argued that the customers “belonged” in China making the supply outside the scope of VAT. However, HMRC submitted that even if the Tribunal were to find that the services were consultancy services, Mandarin made supplies to Chinese students who resided in the UK and not to their parents in China, meaning the place of supply would still be the UK.

The Tribunal considered the regular meaning given to educational supplies in VAT law and observed that educational services are characterised with reference to school and university education, not merely the transferring of knowledge which is a phrase “…so wide that it would cover almost any form of instruction…” Therefore, it accepted that the services were consultancy services. It was then necessary to establish who Mandarin’s customers were, the students or their parents.

Mandarin argued that the economic reality was that it made supplies to “pushy parents” who wanted to push their child in an overly competitive system. HMRC argued that Mandarin supplied the services to the student in the UK and for VAT purposes, the supplies arose in the UK. Observing that the contractual position should be the concluding point on this matter unless the contracts did not reflect the economic reality of the supplies, the Tribunal turned to consider the terms of the contracts which Mandarin had entered into as these had changed in July 2016

Prior to July 2016, Mandarin contracted directly with the student and received payments from the student’s bank account. Accordingly, the Tribunal decided that these supplies were made to the student, However, after July 2016, Mandarin began entering contracts with the parents in China. Considering that the contracts were not distortive of the economic reality in either case, the Tribunal found that prior to July 2016 the supplies were made to the students and after July 2016, the supplies were made to the parents.

HMRC has taken the view that students on a university course are ordinarily resident in the country of study, the UK in this case. The implication would be that if the student rather than the parent received the supply it would be within the scope of UK VAT on that basis.

The place of supply rules for services dictate that the supplier must verify the location where the customer “belongs”. This is normally the place of “usual residence”. Prior to July 2016, Mandarin had not done this is any significant way for the supplies to the students with whom it contracted at that time. Although the Tribunal concluded that HMRC were wrong to consider a foreign student as usually resident in the UK, Mandarin did not hold sufficient evidence for the pre-July 2016 supplies to corroborate “usual residence” outside the UK. The Tribunal allowed Mandarin’s appeal against the assessments relating to periods after July 2016 as the supplies were contracted with the overseas parents. However, as Mandarin had not sufficiently satisfied itself that its customers before July 2016 were outside of the UK, the assessments for those periods were upheld.

Constable Comment: There is very little case law around what constitutes “usual residence” for establishing the place of supply of consultancy services when supplied B2C and the facts of this case were reasonably novel. In this instance, the Tribunal considered that supplies to both the Chinese parents and the students in the UK were capable of arising in China as it could not be said that a temporary VISA enabling a student to study in the UK made the UK their “place of belonging”. The only reason that the assessments were, in part, upheld was that Mandarin had failed to adhere to its administrative obligations in the Tribunals eyes. One might argue that where HMRC’s policy insisted that the student was ordinarily resident in the UK in any case that a later absence of evidence to that purpose might be expected.

3. Whether Legal Services Used for Business Purposes

This appeal related to a decision by HMRC, refusing to allow input tax credit requested by T&C Bainbridge Farming Partnership. The input tax in question is VAT incurred on legal fees in bringing proceedings to the High Court to rescind certain transfers of land to a discretionary trust.

In 2011 the partners to T&C were Tom Bainbridge, his son Colin Bainbridge and Colin’s son, Peter Bainbridge. At that time, the partnership was farming three pieces of land. The original core land of the farm was vested in Tom Bainbridge. Two other plots were registered to Colin and Tom and Colin respectively. All three plots of land were moved into a discretionary trust.

At the time, Tom was ill and there were concerns that claims to the land may be made by other family members following his death. The discretionary trust was established to prevent this. It was believed by the Bainbridges that no capital gains tax (CGT) liability would arise on the transfers of property into the new trust, However, they subsequently found out that this was incorrect and that CGT was due on the transfers. Upon realising this, proceedings were successfully brought before the High Court to rescind the transfers of those properties to the trustees of the discretionary trust, and to rescind the trust itself. The facts of that decision are not relevant here, but as a result of the High Court judgment, no CGT was due.

T&C sought to recover the input VAT incurred on the legal fees on the grounds that, had the discretionary trust not been set aside by the Court, the disposal of the land to the discretionary trust would have been a disposal by the partnership for CGT purposes and liability would have fallen on T&C. Therefore, it argued, the input VAT was incurred for the benefit of the business and should be recoverable.

HMRC argued against this point, suggesting that the legal services were supplied to the individuals who incurred the costs in taking action as a result of individual concerns around the land being split up. HMRC suggested that the benefit to the business was incidental and the legal fees did not relate to the functioning and carrying on of the business. It also stressed that there is no clear link between the expenditure on legal fees and the taxable outputs of the partnership.

The Tribunal found that the creation of the discretionary trust was for the purpose of determining which individuals would benefit from land owned by Tom, after Tom’s death. Whilst the business may have benefitted from the creation of the new discretionary trust, there was no nexus between the expenditure and the activities of the business. For that reason, the partnership would not have been able to claim the input VAT incurred in setting up the discretionary trust.

It was observed that the purpose of the High Court proceedings, to rescind the trust, must be characterised by reference to the purpose for which the trust was established, not some incidental benefit to the business. As the establishment of the trust was for personal reasons (identifying the beneficial owners of land), its dissolution cannot be a business expense. The Tribunal held in favour of HMRC.

Constable Comment: Input VAT is only deductible if it can be shown that there is a sufficient degree of connection between the cost incurred and the taxable activities of the business. There is a lot of case law around this subject and, in certain circumstances where it can be shown that general costs support the business as a whole, input VAT may be recoverable despite no direct connection with a specific taxable output. However, in this circumstance, the trust was established to convey personal benefits to individuals and there was no suggestion that the trust was formed to assist the business as a whole. This decision affirms the position that a mere incidental benefit to a business is not sufficient to afford a right to VAT recovery.

4. Supply of Rental Car With Children’s Car Seat

This case concerned whether or not supplies made by Europcar were single, standard rated supplies or two supplies; standard rated car hire and the reduced rated hire of a children’s car seat. In 2015, Europcar sought to recover overpaid VAT, having treated all of its supplies as standard rated. HMRC denied these repayments, asserting that the supplies in question were single supplies of rental cars. This appeal is against that HMRC decision.

Europcar is in the business of renting cars to consumers in Europe. As an optional extra, a customer can hire a child car seat at the same time as renting the car for an added cost. Typically, customers who took this extra were families on holiday with children who pick up the car from locations such as airports.

HMRC argued that the aim of the customer hiring a car seat is not really to hire a children’s car seat, but to hire a car in which all intended passengers can travel safely and lawfully (car seats are a requirement for children below a certain age). To support this argument, it highlighted that customers did not enter into a separate contract for the provision of the car seat and that it was not possible to hire a car seat without also, simultaneously, hiring a car. Europcar argued that the “predominant criterion” which needs to be considered is whether there is a real freedom of choice afforded to the consumer.

The Tribunal considered that the booking process which customers go through clearly indicates that hiring a car seat is an optional extra for which an additional fee must be paid. It was also noted that customers have an alternative option; to bring their own car seat. Therefore, it commented that, whilst the supplies are linked, there is still a real choice to the customer and the supplies should be regarded as distinct.

It held in favour of Europcar, considering that it makes two distinct supplies with regard to cars supplied with optional car seats. This confirmed Europcar’s treatment and the appeal was upheld.

Constable Comment: This case covered a topic which frequently presents difficulty for taxpayers as it can be difficult to decide if there are multiple supplies or one supply and, if there is only one, what the principal element of that supply is. In the present case the key consideration was whether the customer had a genuine choice as to whether to hire the car seat even though it is a legal requirement for children under a certain age. The Tribunal gave consideration to a wealth of case law discussing the relevant principles to consider when reaching a decision of this nature. If you would like to discuss the single/multiple supply issue, please contact Constable VAT.

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.