Constable VAT Focus 19 April 2021


Paying VAT Deferred Due to Coronavirus
If you deferred VAT due to HMRC between 20 March 2020 and 30 June 2020 you can arrange to pay in instalments. HMRC has updated its guidance to clarify that you may be charged a 5% penalty or interest if you do not pay in full, or make an arrangement to pay by 30 June 2021.

Pay Less Import Duty and VAT When Re-importing Goods
More information has been added to this guidance about how to claim Returned Goods Relief. The ‘Goods in an EU member state on 31 December 2020’ section has been removed.


We have recently released our coverage of Revenue & Customs Brief 4 (2021). This Brief is important for partly exempt organisations whose trading activities have been impacted by the coronavirus pandemic, resulting in their existing partial exemption calculation methods no longer producing a “fair and reasonable result”. Read our coverage here.

Additionally, the CJEU has recently released its decision in the Danske Bank case (Case C 812/19).  The court considered whether supplies of services between the principal establishment of a company in one country, and a branch of that establishment located within another country, must be recognised as a supply for VAT purposes because the principal establishment is in a VAT group. Our coverage can be read here.


Upper Tribunal

1. VAT Bad Debt Relief

This case concerned a claim for VAT Bad Debt Relief (BDR) made by Saint-Gobain Building Distribution Limited (SGBD) which was rejected by HMRC. HMRC’s refusal to allow the claim was upheld by the FTT and SGBD appealed to the Upper Tribunal.

SGBD made a claim for BDR in 2014 for historic relief on VAT on supplies from 1989 – 1997, amounting to slightly less than £10million. At the relevant time, BDR claims in the UK were required to meet the “property condition”. That provided, that in the case of the supply of goods, the title or “property” in the goods had to have passed to the person to whom they were supplied or to a person deriving title from that person.

The property condition condition was later removed by s39(1) Finance Act 1997 for supplies made after 19 March 1997, as the provision was found to be unlawful in the case of GMAC. The justification offered by SGBD for bringing the claim out of time was that it was prevented from bringing the claim at the correct time as the unlawful property condition prevented it from being entitled to do so. This was owing to provisions in its sales agreements which prevented title from passing, referred to as “reservation of title clauses”. As the property condition had always been unlawful, it argued that it should be able to retrospectively amend the position by submitting out of time BDR claims.

HMRC argued it was, despite those clauses, legally possible for title to pass in relation to the relevant supplies because title passed when the goods were incorporated by the appellant’s customers into building projects. It went on to highlight that BDR claims would have been valid in the relevant period and that they may have been submitted. As the claims relate to historic periods, neither party has records of the claims being submitted, though in any event SGBD argued that such claims were never submitted.

In the absence of evidence that such claims had not been made in the relevant time period, HMRC and the FTT agreed that the burden of proof was on SGBD to show that claims were not submitted in the relevant period. It being notoriously difficult to prove a negative, the FTT dismissed SGBD’s appeal and concluded that the claims were eligible for BDR prior to the change in law after GMAC and that SGBD had failed to prove that those claims had not already been processed by HMRC.

SGBD appealed to the UT on the grounds that the FTT had made both legal and logical errors. It submitted that the FTT misconstrued the guidance which applied at the relevant time. Under that guidance, where a retention of title clause was used, the property condition could only be satisfied if:

  1. the goods were sold on to a third party
  2. formal notices relinquishing title were sent to customers.

SGBD argued that there was thus no scope to claim BDR in circumstances where goods were incorporated into building projects pursuant to its agreements with customers. No BDR could therefore have properly been claimed, and it would not be reasonable to assume that the claims had been made on this basis. When HMRC revised this position following GMAC, a claim became viable. The argument was essentially that BDR claims could not have been submitted as the guidance potentially precluded the relevant transactions from BDR.

The UT agreed with HMRC and considered that the claims would have been valid if submitted. Given that neither party had records of the claims being submitted, the burden of proof was on SGBD to prove, on the balance of probabilities, that BDR claims were not submitted in the past in relation to the period in question. SGBD was unable to demonstrate this. Therefore, the UT dismissed the appeal and held in favour of HMRC.

Constable Comment: In the UK, businesses and HMRC are required to keep certain records for specific periods for time. In this instance, the claims for VAT bad debt relief related to a period outside of this recordkeeping timeframe. Whilst SGBD claimed that it had never submitted claims for bad debt relief, it was impossible to prove that claims had not already been submitted. Therefore, on the balance of probabilities, it was held that SGDP was not entitled to bad debt relief for the relevant period.

First Tier Tribunal

2. Notices of Requirement

This case concerned an out of time appeal against a Notice of Requirement to Provide Security (NOR) in relation to VAT. The NOR was issued in November 2017 to Eunoia Initiatives (EI), both at the business address and the sole director’s home address. The appeal, if permitted, is made 16 months and 1 day late. Whilst both parties agreed that this delay is serious, EI contended that it had a reasonable excuse for appealing out of time.

HMRC object to the appeal on the grounds that the delay is very serious, the notice was properly served, and they submit that the director is trying to overturn a criminal conviction relating to trading without providing security.

EI had a good VAT compliance history until a major customer failed to make a payment. As a result, EI was unable to meet its VAT obligations and this culminated in the NOR being issued by HMRC. EI’s director originally claimed that she had not received either the NOR notification at the business or her home address, though HMRC produced evidence that the letters had been posted by recorder delivery and were showing as delivered. HMRC also produced ‘phone records which indicated that Mrs McLaughlin had called HMRC shortly after the NORs were sent and confirmed that she had passed them on to her solicitors.

Whilst the FTT found that the NOR had been received, it went on to comment that such a finding does not automatically preclude EI from having a reasonable excuse. It summarised that the reason for the delay in lodging the appeal against the NOR is that the director of the Appellant was not aware (despite the NOR setting it out) that there was a right of Appeal. From the evidence in the bundle, it was apparent that HMRC emailed EI’s solicitors in January to ask whether an Appeal had been made and received a reply in February that led to notes on HMRC’s system reading ‘reply from solicitors. No appeal to tribunal.’. The solicitors did not inform EI or Mrs McLaughlin of the right to appeal and, presumably, contacted HMRC to confirm no appeal would be made without her authority.

Whilst the FTT noted that, following the judgment in Katib, the failure of an agent to act properly is unlikely to amount to a reasonable excuse, it made a pragmatic decision in favour of the appellant. The Tribunal Chair stated, “I have read all three transcripts provided that contained interactions between Ms McLaughlin and HMRC. In each conversation Ms McLaughlin is shown to be engaging well with HMRC, to have also engaged professional advisers to help her and the company, and to show a willingness to sort the VAT affairs out as soon as possible.”

In making these considerations, the FTT observed the significant impact which a refusal to allow an appeal would have on EI and its director if the appeal were not permitted to go ahead. It also noted that Ms Mclaughlin was making her best efforts to cooperate with HMRC and had made it clear she wished to pay any VAT owing. It held in favour of EI, concluding that the overall circumstances of the matter merited the case being heard in full.

Constable Comment: This is an interesting decision as the Tribunals and Courts normally adhere to HMRC’s guidance around what is considered to be a reasonable excuse which can be found here. The facts of the case do not fall within the examples and definitions offered, yet the Tribunal adopted an equitable approach to making the decision in favour of the taxpayer.

3. Cancellation of VAT Registration

This case concerned Step By Step (SBS), a charity registered in Northern Ireland and with a UK VAT registration. It was registered for VAT in 2011 but applied for that VAT registration to be cancelled on 20 February 2018 on the basis that it did not make, or intend to make, any taxable supplies. HMRC refused this deregistration, asserting that SBS made a combination of outside the scope supplies of grant-funded vocational training and taxable supplies of catering, by virtue of which its VAT registration was required.

SBS provides training services under an agreement with Southern regional College (SRC), pursuant to this agreement, it provides work-based education and training through the operation of a restaurant. On 20 February 2018 SBS applied to de-register for VAT purposes on the grounds that it was making exclusively VAT exempt supplies of education and vocational training. It asserted that its supplies from its restaurant were ancillary to the overall VAT exempt activity of SBS.

HMRC suggested that, as the education provided by SBS is grant-funded, though not ultimately government funded, it is not a supply made in the course or furtherance of business and is therefore outside the scope of VAT. HMRC claimed that, as there was no business supply of education arising, the supplies of the restaurant could not be viewed as ancillary or “closely related” to such a supply and, as such, the supplies from the restaurant represent taxable catering.

Following the case of Colchester Institute, the Upper Tribunal found that the provision of education and vocational training in exchange for the receipt of grant funding is capable of being a “supply for consideration”. In this light, the Tribunal held that SBS’s supplies to SRC were VAT exempt supplies of education and turned to consider if the supplies of the restaurant were ancillary or “closely linked” to the overall activity.

Considering the criteria in Brockenhurt, the Tribunal held that the supplies of the restaurant were sufficiently closely related to the overall activities of SBS which it had already ruled to be VAT exempt. Therefore, it held that SBS makes exclusively VAT exempt supplies. Accordingly, the appeal is allowed and the decision to refuse to cancel the VAT registration is quashed. HMRC shall re-make the decision.

Constable Comment: It seems that in the light of the Colchester Institute decision, the provision of education and vocational training in exchange for grant-funding may now be regarded, by default, as a VAT exempt business activity (a supply in exchange for consideration) albeit that consideration is provided by a third party.

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.