Constable VAT Focus 16 June 2022


Monitoring businesses’ awareness of Making Tax Digital
HMRC commissioned research to survey awareness of and preparedness for Making Tax Digital (MTD) amongst VAT registered businesses with turnovers below the compulsory VAT registration threshold. From April 2022 the MTD rules will also apply to these businesses. The result of this research was recently published in the above guidance. The research suggested, that although there was a general awareness of MTD, the knowledge of the compulsory requirements and preparedness was low.

Apply for permission to opt to tax land or buildings
In certain circumstances taxpayers need to apply to HMRC for permission to opt to tax land or buildings for VAT purposes using form VAT1614H. This form has recently been updated.

Revenue and Customs Brief 10 (2022): VAT – business and non-business activities
This business brief was recently published by HMRC, it sets out the HMRC approaches to determining if an activity is a business activity for VAT purposes.

Historically HMRC has used the principles laid down in the cases of Lord Fisher [1981] and Morrison’s Academy Boarding Houses Association [1978], to determine whether an activity is business or economic activity for VAT purposes. The 6 criteria emerging from these cases, known as the ‘business test’ are referenced within the brief and have been a significant influencer of decisions around whether something is a business activity for many years.

In the light of recent cases, HMRC confirmed that it will no longer specifically apply the “Lord Fisher” business test, in determining whether an activity is business. Whilst the 6 indicators can be used as a set of tools designed to help identify those factors which should be considered, businesses can no longer rely on them. Instead, HMRC will use a new 2 stage test, emerging from the Wakefield College [2018] case.

The 2 stage tests are:

Stage 1: The activity results in a supply of goods or services for consideration.

This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

The Court of Appeal in Wakefield emphasised that a ‘supply for consideration’ is a necessary condition but not a sufficient condition for an ‘economic activity’.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration).

In very summary terms, where there is a direct or sufficient ‘link’ between the supplies made and the payments given, the activity is regarded as economic and thus a business activity. On some occasions, the decision as to what forms a business activity or not is marginal and this may create significant discussions with HMRC. HMRC’s position is given in the Brief which may be accessed through the link above.



1. Transfer of going concern: Property

This case concerns Haymarket Group Properties Limited (HGPL), the appeal being against a notice of assessment for VAT raised by HMRC in the sum of £17,000,000. The assessment was in the consequence of the ruling by HMRC which concluded that the sale of land and property at Teddington Studios, Middlesex (The Property) was a supply of an asset and not a transfer of a business as a transfer of a going concern (TOGC).

The property in dispute, the “Teddington property”, was to be sold by HGPL with a planning permission for the demolition of the existing building and construction of over 200 new flats and houses. The issue for determination was whether the sale of the property with planning permission was a TOGC as it was the transfer of a property development or property lettings business (steps had been taken to create an in situ tenant across the transfer) or whether as an alternative this was the sale of a development business. There was no dispute in case the transaction was not a TOGC the VAT payable of £17 million was fully recoverable by Pinenorth (the purchaser). The “sticking” tax at stake was £680,000 of SDLT as a result of including or excluding VAT from the calculations along with negative cashflow outcomes in paying and then recovering the large sum of VAT that would apply to the sale.

HGPL contends it was carrying on a business before the sale of the property consisting of two elements, property development and property lettings. HGPL argues it took the property and improved its value for future sales including by obtaining planning permission, the property was then transferred to Pinenorth as a going concern with the benefit of planning and other preliminary development arrangements who continued to operate it as a property development business. Also, the property generated letting income and steps were taken to put in place tenants (albeit connected to the buyer) across the transfer.

The property rental business had been the initial focus of discussions with HMRC with later thoughts around a property development business transfer. Regarding the TOGC of a property rental business, HMRC argued that the leases were only entered into after the exchange of contracts for the purpose of achieving TOGC. Essentially, this was not the transfer of the existing business of HPGL. HMRC also considered the property development argument and responded that the contract for sale was for a sale of property not a business. HMRC took the view that the alleged property development business was an ‘afterthought’ merely to facilitate the TOGC conditions.

The Tribunal initially considered the property development business aspect of the appeal and concluded that it was not HGPL’s intention to carry on a property development business for various reasons including that HGPL has never been in the business of property development, the property was held as an investment as part of its portfolios of freehold estates, HGPL never intended to develop the property prior to the sale or had the capital available to do so.

The Tribunal then also considered whether there was a property letting business and concluded there was not. The reason why there could not have been a property letting business was because to the complete the sale, the property must have been transferred to Pinenorth with vacant possession at the point of exchange of contracts. The leases entered into as part of the sale (commencing between exchange of contracts and completion) was purely to play its assigned role to structure the transaction as a TOGC, which was evidenced by discussion between HGPL and advisors, HGPL was not entirely content with this approach (advisors cautioned it might be questioned) and required assurance through specific terms incorporated into the Sale Agreement to protect HGPL’s position in the event that the TOGC structure was challenged.

As a result of the above, it was clear to the Tribunal there was neither a property development nor a property letting business transferred, therefore the appeal was dismissed. VAT, in the sum of £17,000,000 was due on the sale, as it was not a TOGC.

Constable Comment: VAT of £17 million was due as a result of the sale of property not falling within the TOGC provisions. Although the VAT charges were subsequently recoverable by the purchaser there will be a significant SDLT implication with this being due on the VAT element of the sale value. This case highlights the risks of structuring transactions for a VAT advantage with superficial arrangements to create the desired outcome. If VAT is incorrectly charged and / or recovered, there is potential for assessments and penalties, therefore we would always recommend seeking professional advice regarding the transfer of a going concern particularly as this so often involves material values.

2. Input VAT: Business expense or private use

This appeal concerned Maddison and Ben Firth (trading as Church Farm) (CF) and a VAT return amended by HMRC to disallow input VAT totalling £28,374.14 on the basis that some of the items claimed were not allowable business expenses including two vehicles, a personalised number plate and clothing.

CF argued that the two vehicles (Audi Q8 and an Audi TT) were for business purposes and that as such HMRC were incorrect to disallow the input VAT on their purchase. HMRC argued they were correct to disallow the input tax on the grounds that, even if the vehicles were not used for private purposes, they were available for private use. This was evidenced by the fact that the insurance of the vehicles included SDP use. Perhaps the more salient point would have been that the cars were stated to be for use for private hire and registered with the council as such but that the insurance certificates stipulated that they were not covered for commercial travelling including the carriage of passengers for hire or reward. Perhaps it was also unhelpful that the although the Audi TT had backseats the Tribunal noted “the likely impracticability of using what was described as, in practical terms, a two-seat car for this purpose”.

The Tribunal considered the evidence and confirmed that a car is used exclusively for business purposes if it is used only for business journeys and is not available for any private use. The Tribunal was not satisfied that the vehicles were not available for private use, as at the time of purchase the insurance included SDP use and a locked compound (to ensure only business use) was only considered later after the purchase of cars, therefore the Tribunal upheld HMRC’s decision, input VAT on the two vehicles was correctly disallowed.

The case also considered whether the purchase of a private number plate was recoverable. One of the partners of the business was named Mr Ben Firth and CF acquired a number plate (BS70 BEN) for a motor bike used in the business. CF argued this was a form of advertising for the business as it reflects a name of a partner, and therefore an allowable expense of CF. HMRC argued that the number plate has not been demonstrated as a legitimate business expense, stating the business is Church Farm, not Ben Firth, therefore the number plate cannot be a business advertisement. The Tribunal agreed with HMRC, stating that the number plate did not refer to the name/business of CF therefore it is not a business expense, input VAT was blocked.

Lastly, input VAT incurred on clothing purchased for Pilates. Maddison Firth, a partner of the business, was undertaking a teacher training course for Pilates and the clothing was purchased to support this and should qualify under the “perks of an accepted business expense”. HMRC relied on their guidance which confirms that normally a person is responsible for the cost of their own clothing at work, and also it is not a unfirm or protective clothing which would be allowable. HRMC contended they were correct to reject the input VAT claim but had accepted a 50-50 apportionment and considered this reasonable.

The Tribunal accepted that the clothes would aid the comfort of performing the tasks, the relevant factors failed to prove that the cost was sufficiently for the purposes of a business. The appeal was dismissed.

Constable Comment: This case demonstrates that input VAT is only recoverable if the recipient intends to use the goods or services for the purpose of their business. The general rule regarding cars is that input VAT is blocked if there is the potential for private use (although there is some relaxation of this rule for certain bona fide uses such as a taxi, driving instruction etc). CF seemed to argue that no private use took place, however as confirmed by the Tribunal, this is not sufficient. The vehicles must not be available for private use, in order to meet the business use tests. The CF case illustrates that HMRC inspectors will apply a critical eye to VAT claims and that acceptance of doubtful claims is unlikely. There is a significant risk of careless or deliberate behaviour penalties where an overly optimistic view of business use is applied. The rules for cars and input VAT are quite specific but for other items of input VAT an apportionment between business and private use may be possible and advice may be helpful in arriving at such a split.

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.