Constable VAT Focus 19 January 2024


VAT energy-saving materials relief
This guidance deals with an extension of the VAT relief for the installation of energy-saving materials to include buildings used solely for relevant charitable purposes, such as village halls, and to bring additional equipment within the scope of the relief.

Fuel and power (VAT Notice 701/19)
The above guidance has been updated to include information about VAT treatment of charging electric vehicles using charging points.

Claim a VAT refund as an organisation not registered for VAT
The above online service can be used to claim back VAT if you are a local authority, academy, public body or eligible charity. The updated guidance confirms the need for a bank statement for a first claim and the need to use a Government Gateway user ID for future claims.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK is registered with the Fulfilment House Due Diligence Scheme and details 8 additions and 2 removals.

Updates on VAT appeals
The above link can be used to check the current position of noteworthy VAT appeals. The updated list shows 2 additions, 4 amendments and 5 removals.


Upper Tribunal

1. Repayment supplement on input VAT credit

This case concerned a repayment supplement sought by Bollinway Properties Ltd (BPL), in the sum of £3.5million. Acepark Ltd bought Toys R Us Properties Ltd (TRUP) and transferred its properties to BPL for £355million. Subsequently, BPL claimed £71million of input VAT incurred on the transfer and asked HMRC to offset this amount against TRUP’s corresponding output VAT liability.

The FTT rejected BPL’s argument that a repayment supplement was due. BPL appealed to the Upper Tribunal on the grounds that the FTT erred in law in finding that:

  1. BPL assigned its entitlement to its VAT credit to TRUP;
  2. a repayment supplement can become due only where HMRC make an actual payment; and
  3. 26 days should be left out of account for the purposes of calculating the 30 days period. [HMRC is required to make payments within 30 days but is permitted to “stop the clock” for the time it takes to undertake reasonable enquiries.]

It was agreed that ground 3 must succeed before it was worth considering ground 1 and 2.  Therefore the UT first considered whether HMRC delayed repayment beyond 30 days.

The VAT return was submitted on 2 November and a repayment was made on 18 December, however during this period HMRC had requested a full set of backing documents.  BPL provided various documents, but the property transfer forms (TR1) were only provided on 18 December.

The UT upheld the FTT’s decision.  It considered that the request for TR1s by HMRC was reasonable and that the FTT had reached a reasonable conclusion on the facts.  The UT is limited to evaluating the law and cannot disturb findings of fact by the FTT unless those findings are clearly unreasonable, which they were not in this case. Therefore there was no delay beyond the 30 days and BPL was not entitled to a repayment supplement.

Constable Comment: The repayment supplement referred to in this case relates to VAT accounting periods starting on or before 31 December 2022. From 1 January 2023, HMRC introduced repayment interest as a substitute for the repayment supplement. Taxpayers may be due repayment interest if HMRC is late in making a payment.

First Tier Tribunal

2. Supplies of serviced accommodation

The appellant, Realreed, owns a property, Chelsea Cloister, containing 235 self-contained serviced apartments. The question before the FTT was whether these supplies were VAT exempt, as Realreed believed, or standard rated.  The appeal also addressed whether HMRC was entitled to apply a penalty, a point that may be of significantly wider interest than the narrow VAT liability point.  Not only did Realreed think that it had acted with reasonable care, but it also considered that it had a legitimate expectation that HMRC would not issue retroactive VAT assessments because of an historic acceptance by HMRC of Realreed’s VAT accounting policies. Therefore, not only was HMRC taking a revised position on the VAT liability, but it was also arguing that it was careless of Realreed not to have declared VAT when this VAT liability had apparently been accepted as reasonable by several HMRC VAT inspectors.

This is a long decision that sets out a great deal of case law.  It may be sensible for any business operating in a similar way to read the full judgement.  However, the underlying VAT liability question was whether Realreed’s supplies are removed from the VAT exemption because its supplies are “the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation”. Note 9 to the relevant exemption Group provides that “similar establishment” “includes premises in which there is provided furnished sleeping accommodation whether with or without the provision of board or facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers

Realreed’s contention was that it made supplies of accommodation only.  Customers did receive additional services but those related services were at all times were supplied separately by Chelsea Cloister Services Limited (CCSL), a company under common ownership with Realreed.  CCSL’s services were treated as fully taxable.  Thus, a complex point regarding the type of accommodation that is excluded from exemption was complicated further by a question about what service the customer received from Realreed and whether allied services provided by a different party could impact on their classification.

Realreed’s contention was that if CCSL’s and Realreed’s services are evaluated separately then Realreed’s supply contained none of the elements that might bring the exclusion from VAT exemption into effect.

The FTT accepted that the services of CCSL had been “carved out” and Realreed was only supplying the property. However, it also considered that the ancillary services provided by CCSL should be taken into account when considering whether Chelsea Cloisters was similar to a hotel. Most of Realreed’s customers stayed for less than 28 days and the FTT concluded that this in conjunction with the additional CCSL services, meant that Chelsea Cloisters was an establishment operating in competition with hotels.

Turning to the imposition of penalties, these had been applied because in HMRC’s view Realreed had not taken reasonable care.  As the written decision states: “…Realreed’s submission is that it acted reasonably and diligently and submitted its VAT returns consistently with what it believed to be the correct treatment, as endorsed by HMRC by their actions during previous inspections. HMRC did not challenge Realreed’s treatment during previous visits, nor did it advise Realreed to seek specialist advice on the proper VAT treatment of its supplies. HMRC’s dealings with Realreed included issuing a decision making corrections which can only be consistent with HMRC’s acceptance of Realreed’s approach to the VAT treatment of its supplies. Realreed says that it was reasonable for it to derive substantial comfort from the outcome of HMRC’s inspections and it had no reason to think it had done anything wrong.

In practice the penalty raised by HMRC had been suspended but Realreed took exception to the fact that given the historic HMRC “sign-off” of its accounting policies the penalty should still be appealed.

Realreed had separately sought a Judicial Review on whether it was entitled to protection from an HMRC decision to raise VAT assessments.  This is a lengthy decision that can be viewed here and fully sets out the history of HMRC inspections and the complex legal issues that were considered before Realreed’s application was dismissed.  However, noteworthy to most readers is the fact that HMRC officers inspected Realreed’s business in 1992, 1993, 1995 and 2005.  They inspected CCSL’s business in 1985, 1988, 1990, 1994, 1995, 2005 and 2014.   Nevertheless, the FTT found in HMRC’s favour (that

Realreed’s VAT accounting errors resulted from careless behaviour) concluding that:

  • Although HMRC had not in the past challenged Realreed’s VAT liability position, there had never been a clearly stated acceptance by HMRC that it was correct.
  • The conclusion that Realreed’s supplies were exempt dated back to 1991, or at least that is a point at which Realreed appears to have taken advice. Although Realreed’s business has not fundamentally changed since 1991, there have been enough changes in the way it was carried on that a person taking reasonable care might begin to wonder whether the VAT analysis (even if the assumed position in 1991was correct) had changed.
  • Tax law and practice evolves. It was unreasonable to assume that (even if the business had not changed) that the tax position in 1991 remained the same in 2019.
  • Whether or not a business wishes to incur the cost of professional advice or carry out its own research. “… it is, of course, also possible to obtain reassurance from HMRC. They operate a non-statutory clearance service, and it may also be possible for a taxpayer, after a dialogue with HMRC, to feel confident that the VAT or other tax analysis they have adopted is correct (or at least is accepted by HMRC). There is, however, no evidence of Realreed having engaged in any discussion of this sort.”

Constable Comment: This was an important case which considered the VAT liability of the supply of serviced accommodation. Perhaps of most interest as regards the liability decision was the FTT’s view that the supplies made by CCSL needed to be included in an evaluation of determining the VAT liability of Realreed’s supplies. 

As far as the penalty decision is concerned, we are often told by taxpayers “HMRC has inspected our VAT accounting records and raised no concerns so we must be doing things right”.  Perhaps reasonably, most taxpayers believe that HMRC’s VAT inspectors are experts that would spot a fundamental VAT liability mistake impacting on a significant percentage of the business’s turnover.  The simple truth is that the fact that HMRC has carried out VAT inspections does not mean that the VAT accounting treatments applied are correct or that if HMRC wished to raise retrospective VAT assessments the taxpayer is protected.  

This decision should be viewed as a reminder to any business that believes it is safe from VAT assessments and penalties because it has a history of “clean” VAT audits. Very little reliance can be placed on the result of HMRC VAT compliance inspections unless they have been handled with great care.  In most cases we find that taxpayers do not even keep detailed notes of the meeting with HMRC, let alone try to manage the inspection to try and protect themselves.   

 As far as the FTT’s decision is concerned, we do not agree entirely with the FTT’s suggestion that taxpayers can easily approach HMRC and request VAT liability rulings.  The reality is that any business that uses that service appreciates that obtaining a VAT liability decision from HMRC is very difficult. However, it can be done and even if HMRC does not give a conclusive ruling it cannot then suggest that the taxpayer in question demonstrated a lack of care if it has proactively attempted to clarify the position beyond doubt. 

3. TOMS: Mobile ride hailing services

This case concerned the VAT treatment of the mobile ride hailing services supplied by Bolt Services UK Limited (Bolt). Mobile ride-hailing services are on-demand, private hire passenger transport services ordered and paid for through a smartphone application. Self employed private hire vehicle (PHV) drivers deliver services to Bolt who resupplies this service to passengers booking a trip through Bolt’s app.

Bolt asked HMRC for a non-statutory ruling that the Tour Operator Margins Scheme (TOMS) applied to the supply made by Bolt, and therefore VAT due is calculated on the margin, being the difference between amount paid by the customer and the costs to Bolt, as opposed to the total amount paid by the customer. HMRC disagreed and Bolt appealed to the FTT.

HMRC took the view that tour operators and travel agents do not provide on demand transport services from anywhere at any time to anywhere. HMRC’s case was that, on any ordinary understanding, tour operators and travel agents are traders who cater for those wishing to make pre-booked journeys. Bolt’s services do not fit that description and, therefore, Bolt is not a ‘tour operator’ for the purposes of the TOMS. In addition, HMRC argued that the supplies fell outside of TOMS because they were in-house supplies or they were materially altered / further processed supplies.

The FTT confirmed it was common ground that most of TOMS conditions were met, however it disputed whether Bolt provides services of a kind commonly provided by tour operators and whether Bolt makes an onward supply of the PHV drivers to its customers without material alteration or further processing.

The FTT confirmed that  the correct approach is to take a high level or general view when considering whether services are of a kind commonly provided by tour operators or travel agents.  It concluded that passenger transport services are of a kind commonly provided by tour operators.

The FTT then concluded that Bolt’s supplies were not in-house, as in-house supplies are those made from the travel agent’s own resources. In this case, the FTT found that, the PHV driver’s services directly benefitted the travellers and, they were not inhouse services or materially altered or processed. As a result, the supply of mobile ride-hailing services, without any additional elements, to a traveller is a provision of travel facilities falling within TOMS. The appeal was allowed.

Constable Comment: It will be interesting to see whether HMRC pursues this case and appeals to the Upper Tribunal.  A point of interest is that post Brexit TOMS could be viewed as an unnecessary scheme.  When introduced TOMS was an EU wide scheme designed to prevent the need for multiple VAT registrations within the EU.  Limited to UK supplies alone it seems to serve little purpose as standard VAT accounting could apply without a huge amount of difficulty.  It may be that its use in the UK was maintained because the removal of TOMS would have been disruptive to businesses whose accounting processes had been designed around it.  If HMRC decides that TOMS reduces the amount of tax that it collects (as compared to standard VAT accounting rules) we wonder if it may reconsider the position.  In this particular case the overall effect of TOMS on tax collection was not considered but if the self-employed PHV drivers are not VAT registered (Bolt would not incur irrecoverable VAT under TOMS) the overall level of tax collected would be reduced.  That does not mean that the outcome is unfair.  For example, a similar outcome would result from PHV drivers contracting directly with customers if Bolt acted as a disclosed agent.  However, that is probably not how HMRC sees the position and if the continued use of TOMS does materially reduce the amount of tax that HMRC collects then perhaps it may have a short shelf-life.


4. Renovation and repair of private dwellings

HPA is a commercial company incorporated in Portugal, making civil construction supplies. In 2007 it entered into five contracts for works relating to the renovation of urban buildings with three commercial companies that owned the buildings on which the works were carried out.

Article 106 of the Principal EU VAT Directive allows member states to apply a reduced rate of VAT to certain supplies.  Annex IV to the VAT Directive contains a list of the services referred to in Article 106 of that directive. Point 2 of that annex allows the reduced rate in relation to: ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied’.

In Portugal this resulted in the law providing for a 5% rate of VAT on:

‘Works contracts for the improvement, refurbishment, renovation, restoration, repair or conservation of immovable properties and independent parts of immovable properties used for residential purposes, with the exception of cleaning services, grounds maintenance services and works on buildings which cover all or part of the constituent elements of swimming pools, saunas, tennis courts, golf courses or minigolf courses or similar facilities.

The reduced rate shall not apply to the materials incorporated unless their value exceeds 20% of the total value of the service supplied.’

HPA applied this reduced rate of VAT at 5% to its supplies in relation to the disputed contracts. The local tax authorities disagreed with this decision and raised assessments in the sum of EUR 374,750.

The referring court asked the CJEU whether point 2 of Annex IV must be interpreted as precluding national legislation which provides for the application of a reduced rate of VAT to services relating to the renovation and repair of private dwellings on condition that these actually be used for residential purposes at the time when those works are carried out.

The CJEU highlighted that the word ‘dwelling’ generally refers to immovable property intended for residential use, therefore it follows that  the renovation and repairing services must relate to property actually being used for private residential purposes, whereas services relating to property used for other purposes, such as commercial purposes, are not covered by that provision.

It was also noted by the CJEU that for a trader entitled to deduct input VAT, it is irrelevant whether or not the renovation or repair services are taxed at the standard or at the reduced rate, since that trader will recover the VAT incurred. By contrast, reduce rating those services benefits the final consumer who actually resides in the immovable property and who is not entitled to deduct input VAT.

The CJEU concluded that the Portuguese limitation of the reduced rate to work to property that was actually at the time of the work dwellings that are used for residential purposes was not prohibited by EU law.

Constable Comment:  Were the UK still a member of the EU this decision could have been of relevance to whether the UK’s reduced rate conformed with EU law. In the UK there is a reduced rate that applies to a changed number of dwellings conversion, including the conversion of a non-residential property into dwellings and refurbishment work to an existing dwelling that has been empty for more than two years. The judgement that the VAT Directive “does not prohibit” the limitation adopted in Portugal is not quite the same as saying “mandates the limitation”.   However, some of the courts comments on how the relief must benefit the final consumer would perhaps have had implications.  As the UK is no longer a member of the EU this means the UK provisions should not need to be reconsidered.    

5. VAT treatment of director fees

TP is a member of the board of directors of several public limited companies incorporated in Luxembourg and carries out many assignments in that regard including receiving reports from senior managers of the companies concerned, discussing strategic proposals, the choice of operational managers, questions related to the accounts of those companies and their subsidiaries as well as the risks that they face. TP also takes part in the decision-making regarding the accounts of the companies and the proposals to be submitted to shareholder meetings, risk policy as well as decisions as to the strategy to be followed. TP’s fees were typically set at a shareholders’ meeting, either as a percentage of the company’s profits or a lump sum.

The local tax authorities took the view that TP carried out economic activities subject to VAT therefore raised assessments. Following multiple appeals, the referring court now asked:

  • whether Article 9(1) of the VAT Directive must be interpreted as meaning that a member of the board of directors of a public limited company under Luxembourg law is carrying out an economic activity, within the meaning of that provision.
  • whether the first subparagraph of Article 9(1) of the VAT Directive must be interpreted as meaning that the activity of a member of the board of directors of a public limited company under Luxembourg law is carried out independently, within the meaning of that provision.

The CJEU initially confirmed that if TP supplies services to a company in return for consideration, providing that the activity is effected on a continuing basis and for a remuneration, then the VAT directive must be interpreted as meaning that a member of the board is carrying out an economic activity.

However, as regards the second point, the CJEU highlighted that if a person such as TP brings his expertise and know-how to the board of directors of a company and votes on that board, he does not appear to bear the economic risk linked to his own activity.  It is the company itself that will have to confront the negative consequences of the decisions adopted by the board of directors and that will accordingly bear the economic risk resulting from the activity of the members of that board. As stated in the judgement, “The same also applies if their liability in tort is only ancillary to the liability of the company or of the board of directors as a body thereof.”  This seems to say that the if a director such as TP was exposed to a potential non-contractual liability (they owe a duty of care and act negligently) that potential liability cannot be viewed as “bearing the economic risk” of their decisions.

This conclusion will apply in particular if the members of the board do not assume any personal obligations concerning the debts of the company. As a result, the CJEU concluded that the activities of a member of the board is not carried out independently, despite the fact TP acts in his own name and is not subject to an employer – employee relationship. A member of the board does not act on their own behalf or under their own responsibility and does not bear the economic risks linked to that activity, therefore the remuneration received is not subject to VAT.

Constable Comment: The usual starting position in the UK is that most Directors are not required to treat their remuneration as taxable income for VAT purposes.  That said HMRC guidance does state:

  • “The direct tax treatment of office holders either as an employee or as a self- employed person should not be used as the basis for determining whether the activity is undertaken by way of business for VAT purposes”; and
  • Section 94 of the VAT Act 1994 (meaning of business) states at paragraph (4): Where a person, in the course or furtherance of a trade, profession or vocation, accepts any office, services supplied by him as the holder of that office are treated as supplied in the course or furtherance of the trade, profession or vocation.

In a sense this is in line with the CJEU’s consideration of the economic activity point but the UK does not then consider whether an office holder is acting independently.

The UK removes from the scope of Section 94 many types of office holder situation.  Therefore, in practice it does not seem that the reasoning of the CJEU would lead to a result that is wholly out of line with UK policy. However, this may be a case of “a right answer for the wrong reasons” and there may be cases in which UK policy is not in line with the logic of the decision. Whether this decision can be applied post Brexit may be open to debate.  On its face it may be considered but is not binding.  However, the underlying principle considered concerns when to identify a supply for VAT purposes, and that is core to the fabric of the VAT system.  

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.