Constable VAT Focus 17 October 2023


VAT guide (VAT Notice 700)
Section 21.2.1, 21.2.2 and 28 have been updated to remove old references and include language which is used for the new penalty regime.

Charity funded equipment for medical and veterinary uses (VAT Notice 701/6)
The above guidance provides information on when it’s possible to get zero-rated supplies on medical and research goods and services which have been funded by charities. Paragraphs 4.2.1, 4.2.8, 4.5.2, 4.10 and 4.11 have been updated and new entries have been added to the table under 4.11.

HMRC email updated, videos and webinars for VAT
Updated links have been added for the recorded webinars for the VAT 484 and VAT1 forms.



1. Supply of staff or supply of medical services?

This case concerned a dispute between the appellant, Mercy Global Consult Limited (MGC) and multiple defendants, regarding claims for equitable compensation and proprietary remedies in relation to VAT frauds allegedly committed by MGC. The defendants have applied for permission to amend their defences to advance a defence (the VAT defence) that MGC made VAT exempt medical supplies, and; therefore, as there is no VAT owing to HMRC, there can be no VAT fraud.

MGC employed healthcare professionals who were seconded to recruitment agencies. The agencies then sub-seconded MGC’s employees to end users including NHS trusts. When sub-seconded, MGC’s employees provided VAT exempt medical care to end users. MGC charged VAT to the agencies but did not account for all the VAT charged to customers to HMRC, resulting in an under-declaration and VAT assessments in the sum of £21million.

MGC claimed that VAT was misappropriated by the defendants who were shareholders in the business and seeks equitable compensation for fraudulent breach of duty and proprietary remedies from the defendants.

However, the defendants now wanted to advance the VAT defence, arguing that there is no distinction for VAT purposes between a supply of staff and a supply of the services performed by those staff. Rather, a supply of staff where the staff are to perform services of a given description is a supply of services of that description. Accordingly, they claimed that as the seconded healthcare professionals were making VAT exempt medical supplies, MGC’s supply of staff was also VAT exempt and there was no VAT fraud.

The Court refused the application of the VAT defence on the grounds it lacked realistic prospect of success because it is precluded by the case of Mainpay, previously decided by the Court of Appeal. This case concerned very similar supplies and the Court ruled that there is a distinction for VAT purposes between supplies of staff and supplies of services provided by those staff. The Court concluded that this was correctly decided and therefore binding on this decision. The appeal was dismissed.

Constable Comment: This is a complex case involving an alleged labour supply fraud. MGC was wound up in 2021 and liquidators were appointed. In this case the Court did not allow the defendants to advance a VAT defence because it was precluded by a previous decision, Mainpay. We covered the Court of Appeal’s decision of Mainpay in a previous VAT Focus containing a summary of the background, arguments made and conclusion reached which this Court relied on. The summary can be read here


2. VAT exemption: Insurance

This case concerned Intelligent Money Limited (IML)’s appeal against the FTT’s decision. We reported the FTT decision in an earlier VAT Focus which can be read here. The dispute between IML and HMRC was whether fees paid to the scheme administrator of a Self-Invested Pension Plan (“SIPP”) is consideration for a VAT exempt supply of insurance. The FTT previously ruled it was not.

IML appealed to the Upper Tribunal (UT) which confirmed, quoting various CJEU cases, that an insurance transaction must involve the assumption of risk or the coverage of risk.  IML argued that the reference to a “risk” from the essential features of an insurance transaction must be taken to mean simply a contingent “trigger event” for the payment or service in question rather than a specific financial risk.

The UT disagreed with IML and commented that even if it accepted IML’s view in relation to ‘risk’, a distinction must be made between IML’s SIPPs where the contributions remained substantially owned by the insured person as opposed to normal VAT exempt insurance transactions where premiums were owned by the insurer who had to pay out the benefits from its own resources.

In addition, IML argued that the administration fees and, to some extent, the contributions made into the SIPPS, should be considered as ‘premiums’; however, the UT disagreed confirming those payments cannot be properly described as ‘premiums’. The UT ruled that the fees were not VAT exempt insurance services, IML was merely administering a fund to provide benefits to those who invested in the SIPP. The appeal was dismissed.

Constable Comment: VAT exemption in relation to supplies of insurance is a complicated area of VAT with complex legislation and a wide range of case law to consider. If there is any ambiguity in relation to the VAT liability of an insurance supply, we would recommend seeking professional advice. Constable VAT has considerable relevant experience in advising insurance businesses with a number of clients in the sector. We would be pleased to assist with any insurance related VAT queries.

3. Judicial Review

This case concerned the order of two Linac radiotherapy machines in the sum of £4.1m by The Royal Surrey NHS Foundation Trust (the Trust). NHS Supply Chain (NSC) is the entity that operated a central purchasing function for the whole of the NHS. The NSC purchased the machines from the suppliers, and incurred VAT of £685,431. It then supplied the machines to the Trust VAT free.

However, after the orders were made but before the machines were delivered, the Trust changed its intention and decided to lease the machines to a subsidiary, Healthcare Partners Ltd (HPL), which agreed to provide the Trust with managed radiotherapy supplies. The Trust charged VAT on its leasing supply to HPL because it was making a taxable supply.

The Trust sought to recover the VAT incurred on the purchase of the machines under an HMRC concession that permits tax deduction for the business activities of entities in the NHS VAT Division, provided that NSC provides VAT acceptable alternative evidence. However, HMRC refused the application of the concession on the grounds that the intention of the Trust was that it will use the machines for its non-business activities.

The Trust appealed to the High Court for judicial review and provided clear evidence of the purchase orders, the delivery of the machines to the Trust, cost and payment of the machines and showing that before the supply of machines, the Trust had a business intention regarding them.

Following the Trust’s appeal, the Court found no reason to doubt the evidence and agreed that the Trust had a clear intention to use the machines for business purposes. It was entitled to the benefit of the HMRC concession to obtain a VAT refund. The claim for judicial review succeeded accordingly.

Constable Comment: The Court had little difficulty in concluding that HMRC failed to consider the decision within the correct framework of the Concession. HMRC even made a reference to it once as a ‘so-called concession’ which the Court picked up and specifically clarified that it does in fact exist and the Trust clearly fell within its terms.   


4. Supply of transport services

This case concerns an appeal by UK Funerals On-line Limited (UKFO) relating to the VAT treatment of services supplied by UKFO of repatriating the remains of deceased persons. This is another case, following on from Realreed Limited, where HMRC has had a change of opinion in the VAT liability of a taxpayer’s supplies. Although not explicitly stated, the impression the decision gives are that UKFO is VAT registered and is making mostly zero-rated supplies.

UKFO, trading as Mears Repatriation, provides services of repatriation of bodies of deceased persons. Most of the services supplied entail repatriation services provided from the UK to other countries. UKFO also provides services of repatriating bodies of persons who have died overseas, to transport their bodies to the UK; however, this is a smaller part of its business. UKFO’s customers are mainly the next of kin of the deceased.

UKFO argued that it is not supplying funeral services but is providing specialist transport services which should be zero-rated and not VAT exempt. This is because UKFO simply transport the bodies and does not have any involvement in the funeral arrangements that take place after the body has left its control. UKFO do not know what happens to the body after the body has left its control, and it is not its responsibility after the body boards the airline. The embalming services performed by UKFO is of a specific type which is only required for international transport, it is not the same as that which would be performed in the context of a funeral. UKFO argued that the overreaching activity is a zero-rated supply of the transport of goods under item 5(b), Group 8, Schedule 8, VATA 1994.

UKFO had received at least two previous VAT compliance visits from HMRC after which the zero-rating of its services was not challenged, and UKFO now feel that it is unfair for HMRC to change its mind as there has been no change in the law and no change in the nature of the services being supplied. The taxpayer commented that it was ‘disgusting’ that HMRC was now challenging the VAT liability of supplies that HMRC had agreed to on previous compliance inspections.

HMRC argued that the services supplied by UKFO fall into the exemption for “The making of arrangements for or in connection with the disposal of the remains of the dead”. The services being supplied by UKFO are services which are usually included in a funeral supply, including a coffin, embalming and the use of a chapel of rest. The choice of coffin or casket are more than simply crates for transport. Finally, HMRC argued that the entire service provided by UKFO was an exempt supply under the exemption for ‘making arrangements for or in connection with the disposal of the remains of the dead’.

The Tribunal explained that it must consider whether the activities undertaken by UKFO were sufficiently closely connected to the disposal of those remains to fall within the exemption or if the fact that UKFO is not involved in the actual disposal of the remains, and is only involved in transportation, is sufficient to conclude that the services are not connected with arrangements for the disposal of the remains of the dead. Taking all factors into account, the predominant element of UKFO’s supplies was one of specialist transport services, consisting of:

  • The supply of actual transport services within Item 5, Group 8, Schedule 8, VATA 1994 being the collection and delivery of the body to the airport; and
  • The making of arrangements for the supply of transport services within item 10, Group 8, Schedule 8, VATA 1994, being arranging all the documentation for the body to be transported out of the country, arranging the flight, and supervising the movement of the body onto the plane.

The Tribunal held that the zero-rating applies rather than the exemption and the appeal was allowed.

Constable VAT comment: This is an interesting case and follows the recent Reelreed High Court decision on the point of legitimate expectation. Where a taxpayer has received a routine VAT compliance inspection of its VAT accounting records it seems reasonable to assume that the visiting HMRC VAT officer will satisfy themselves that the taxpayer has identified the correct VAT liability of its supplies. In the case of UKFO and Realreed it seems that HMRC officers conducting more recent VAT inspections have disagreed with a colleague’s previous technical assessment of the VAT liability of the taxpayers’ suppliers. Where nothing has changed, in terms of a specific business activity or evolving case law, it is understandable why UKFO and Reelread, and any other taxpayer facing similar treatment, is disappointed with HMRC’s behaviour. Both cases act as a reminder that even when a VAT inspection has been concluded without challenge, it does not mean that the taxpayer has certainty that HMRC will not seek to revisit previous verbally agreed liabilities. It seems that the only way to avoid a possible dispute is to submit a non-statutory clearance application. It will be interesting to see if HMRC appeal the decision of the FTT.


5. Single or multiple supplies

This appeal concerned the imposition of VAT on the supply of tablets or smartphones by Deco Proteste (Deco) as subscription gifts for new subscribers to the magazines it sells. Deco is the appellant in this case and is a Portuguese established company, and its main activities are publishing and marketing magazines and other documents which provide information on consumer protection which are sold on a subscription only basis. The appellant gives new subscribers who sign up to a subscription plan a gift which could consist of a tablet or smartphone, of which the unit value is always below EUR 50.

The gift is sent to the subscriber along with their magazine after their first monthly subscription payment. There is no minimum subscription period and so customers may keep the gift without incurring any penalty even if the subscription is cancelled. Following a tax inspection, the tax and customs authority noted that the invoices issued by Deco at the time of the new subscriptions stated the amount of the subscription charging a reduced rate of 6% VAT applied without reference to the subscription gifts. The tax and customs authority considered that the subscription gifts constituted gifts within the meaning of Article 3(7) of the VAT code and found that the value of the gifts exceeded the maximum of 0.5% value of the businesses turnover of the previous calendar year. Therefore, the authorities subjected the supply of the gifts to VAT at the standard rate (23%). It assessed the amount of VAT due on this basis at EUR 3,472,125.38. The appellant carried out a self-assessment of the VAT and paid a total of EUR 2,851,551.41 which includes EUR 270,936.70 in interest. Deco then lodged an appeal seeking reimbursement of that sum, which was initially dismissed, and it brought proceedings before the referring court on 6 August 2021.

Deco argued that the provision of subscription gifts to new subscribers did not constitute a form of giving; in reality this was a commercial offer consisting of the provision of a service (the subscription) linked to a supply of goods (the subscription gift) with a financial consideration included in the value of the magazine subscription. They also argued that even if the subscription gift were to be considered as being ‘given’, as the unit value is less than EUR 50, it falls within the concept of a low-value gift and the maximum of 0.5% value of the previous year’s turnover is irrelevant to that concept.

The referring court was uncertain as to whether the subscription gift can be regarded as being given in exchange for value, even if that value is not identified. The Court was also uncertain as to whether ‘gifts of small value’ can be defined using both the unit value of each gift and a ratio of the overall gifts given by the taxable person, calculated in relation to the turnover in the previous year. The following question was referred to the Court:

  • Where new subscribers are given a gift when they subscribe to periodicals, should the making of that gift be considered to be:
  • a supply of goods made free of charge, separate from the subscription itself,
  • part of a single transaction for consideration, or
  • part of a commercial package, comprising a principal transaction (the subscription to the magazine) and an ancillary transaction (making the gift), in which the ancillary transaction is considered to be a supply for consideration instrumental to the subscription to the magazine?

The Court ruled that, the provision of a subscription gift in return for taking out a subscription to periodicals constitutes a supply that is ancillary to the principal service of supplying periodicals and must not be regarded as a disposal of goods free of charge.

Constable Comment: This case highlights the complexities surrounding the concepts of single and multiple supplies and business gifts and also the importance of ensuring that a businesses’ supplies are classified correctly as this can have a significant impact on the amount of VAT which is potentially payable. Incorrect classification of the supply could lead to penalties being imposed on the taxpayer if VAT is not declared correctly. This area of VAT can be ambiguous and often requires a non-statutory clearance application to be submitted to HMRC to deliver certainty and provide clarity. Constable VAT has considerable experience liaising with HMRC on complex technical matters and would be pleased to assist.

6. Reduced rate of VAT: ‘foodstuffs’

This appeal concerned the VAT rate applicable to YD’s sales of chocolate dairy beverages in YD’s establishments. YD operates a coffeehouse chain in Poland. It markets a beverage called ‘Classic Hot Chocolate’, in the form of hot chocolate prepared based on milk and a chocolate sauce. YD applied to the tax authority for a binding ruling on the VAT rate to be applied to sales of the beverage. The authority found that the sale of that beverage for both take away and consumption on the premises was regarded as a supply of goods accompanied by ancillary services, namely the preparation and serving of the beverage to customers and the supply was subject to a reduced VAT rate of 8%.

YD argued that it was appropriate to apply the reduced VAT rate of 5% by reference to the law which covers beverages using milk. Poland has two reduced rates of VAT with the lower of the reduced rates, the 5% rate, usually applying to basic foodstuffs and dairy products. The tax authority confirmed its opinion and stated that the beverages at issue were not interchangeable with dairy beverages offered for retail sale, which, as mentioned above, are taxed at the reduced VAT rate of 5%. It explained that this was because of the difference between a ready-to-drink beverage sold in shops and a hot beverage prepared by an employee. It confirmed, in its opinion, that the supply in question is a supply of goods accompanied by ancillary services that have an impact on the customer’s decision to purchase the product.

The following question was referred to the Court:

  • Should Article 98 of the VAT Directive be interpreted as precluding national legislation which provides that foodstuffs consisting of the same main ingredient and meeting the same need on the part of the average consumer are subject to two different reduced rates of VAT, depending upon whether they are sold by a retailer or are prepared and served hot to a customer at their request, with a view to them consuming the beverage immediately?

The court found in favour of the Polish tax authorities and confirmed that applying different VAT rates to separate dairy products is allowed.

Constable Comment: The VAT liability of ‘foodstuffs’ in the UK, and as this case demonstrates the EU, is a complicated area of VAT with lots of specific detailed rules within the legislation, which in the UK dates back as far as the 1991 decision in United Biscuits in which the Tribunal ruled that ‘Jaffa Cakes’ were cakes, rather than biscuits as argued by HMRC (HMC&E at that time) and zero-rated. In this more recent case, there were two different reduced rates of VAT which could have applied to the supplies of hot chocolate being made. The court concluded that the 8% reduced rate applied because the supply was being prepared and served hot to the customer, with the view that it would be consumed immediately rather than being sold by a retailer.

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.