Constable VAT Focus 2 November 2023


Removal of VAT1 paper application
HMRC have confirmed that the ability for most taxpayers to register for VAT using the VAT1 form will be removed from 13 November 2023. From that date, the paper VAT1 form will only be available to those who qualify as digitally excluded or where the online VAT registration service (VRS) cannot be used. The aim of the removal is to encourage businesses, or their agents, to use HMRC’s online VAT registration service. This could speed up processing times for VAT registration insofar as HMRC must manually transfer information from each paper VAT 1 to its VAT registration system.

Revenue and Customs Brief 7 (2023): Change to the VAT treatment of drugs and medicines supplied under patient group directions
The government announced at Spring Budget 2023 that it would be extending the use of the zero rate of VAT on prescriptions to drugs and medicines supplied through patient group directions.

The scope of the VAT zero rate for supplies of drugs and medicines dispensed to individuals for their personal use is being temporarily extended (from 9 October 2023 to 31 March 2027) to include the supply of drugs and medicines which are dispensed in accordance with a patient group direction issued under the Human Medicines Regulation 2012.

The brief explains in more detail the change to the VAT treatment of drugs and medicines supplied through a patient group direction and where businesses can find more information.

Apply to join the VAT Flat Rate Scheme
Taxpayers can apply to join the Flat Rate Scheme using form VAT600FRS. HMRC has updated the above guidance by adding a link to the online form.

HMRC email updates, videos and webinars for VAT
The above link can be used to learn more about VAT including accounting schemes, VAT Returns and keeping records. HMRC now added recorded webinars about VAT – using the Flat Rate Scheme, VAT Accounting Scheme and VAT – the basics and the VAT return.

Motoring expenses (VAT Notice 700/64)
The above guidance provides information on how to account for VAT on vehicles and fuel you use for your business. HMRC updated the guidance with new information to explain VAT rules when your business sells a second-hand vehicle in Northern Ireland that was purchased in Great Britain.

Fulfilment House Due Diligence Scheme registered businesses list
The above guidance can be used to check if the business that stores your goods in the UK is registered with the Fulfilment House Due Diligence Scheme if you’re a trader based outside of the UK. The list has been updated with 11 additions and 1 removal.


Supreme Court

1. VAT exemption: Financial services

Target Group Ltd (Target) administers loans made by Shawbrook, a loan and mortgage provider, including operating individual loan accounts and instigating and processing payments due from borrowers. VAT exemption applies to ‘transactions concerning payments, transfers, debts but excluding debt collection’. Target argued that it’s services falls within this provision and are therefore VAT exempt, particularly relying on the fact that it procures payments from borrower’s bank accounts to Shawbrook’s bank account by giving instructions for payment which are then automatically and inevitably carried out through the BACS system.

HMRC took the view that VAT exemption does not apply because CJEU case law clearly established that the exemption only applies to the execution of an order for transfer or payment. Giving instructions for payment is a prior step to execution, rather than the part of the process of execution. Therefore, Target’s supply is not VAT exempt in HMRC’s opinion.

The Court worked through a number of CJEU decisions and ultimately concluded that Target did not actually debit and credit accounts, this was executed by a third party on its instruction. The conditions under the narrow interpretation of exemption were not met and therefore the supplies are not VAT exempt. The appeal was dismissed and the previous decisions of the Court of Appeal and the UTT were upheld.  On this basis the Court did not need to consider whether the supply fell outside exemption on the basis that it was debt collection, as held by the FTT.

Constable Comment: This ruling now concludes a dispute which has been going on some time.  The case has passed through the First-tier Tax Tribunal (FTT), the Upper-tier Tax Tribunal (UTT) and the Court of Appeal before the Supreme Court finally concluded the matter. The case demonstrates the complexity of VAT exemption in relation to financial services. If there is any ambiguity in relation to the VAT implications of financial supplies, we would recommend seeking professional advice. Constable VAT has relevant experience and would be pleased to assist with any relevant queries.

Upper-tier Tax Tribunal

2. Retrospective VAT grouping

Dollar Finance UK Limited (Dollar) wanted to amend the date on which its USA parent company, Dollar Financial Group Inc (DFGI) joined the Dollar VAT group. DFGI seconded staff to Dollar from 2011-12 but only joined the VAT group in 2013.  It later transpired that it had created a fixed establishment in the UK at an earlier date than previously recognised and for a period prior to joining the Dollar VAT group had been making taxable supplies on which UK VAT was chargeable.

An application was made in 2016 to amend the date on which DFGI joined the UK VAT group to 1 July 2012.  Dollar also claimed £2.2m which it considered to have been overpaid under the reverse charge between 2012 – 2013 as a result of DFGI not being part of the VAT group from that earlier date.

HMRC refused to backdate DFGI’s VAT group membership and Dollar appealed to the FTT. The FTT struck out the appeal on the grounds that it did not have jurisdiction in relation to the proceedings because there was no valid application by Dollar and therefore there was no appealable decision. Dollar appealed to the UTT.

The UTT upheld the FTT’s decision to strike out the appeal. It first confirmed that an application made to HMRC (such as the one made by Dollar in 2016) must be for an additional body corporate to be treated as a member of the group. An existing member of the group cannot apply again therefore Dollar did not make a valid application. The legislation does not include any provision to amend the date on which DFGI joined the Dollar VAT group.

The UTT also confirmed that even if Dollar had made a valid application, because HMRC didn’t refuse it within 90 days, it would not be backdated but could only take effect from the date of receipt (2016) a time when DFGI was already a member of the VAT group. In simple terms, even if Dollar made a valid application, it could not apply retrospectively. Finally, Dollar tried to argue that its appeal related to VAT registration rather than VAT group application however this was also rejected by the UTT and the appeal was dismissed.

Constable Comment: This case reinforces the fact that VAT group registration applications can only be backdated in special circumstances and therefore it is vital that the application is made at the appropriate time. If you or your business has any VAT group registration related queries, Constable VAT would be pleased to assist.

First Tier Tribunal

3. Single and multiple supplies

This case concerns the treatment of supplies by JPMorgan Chase Bank (CBNA) within a VAT group to JPMorgan Securities plc (“SPLC”).  This is a complex case and the full decision may be viewed here.  As a FTT decision its application is restricted to the parties to the case, unlike decisions of the UTT that have a general application as regards other taxpayers. However, HMRC is likely to apply the decision widely.

Ordinarily transactions within a VAT group are treated as outside the scope of VAT.  In this case HMRC argued that the anti-avoidance provisions of s 43(2A) and (2B) VATA brought them within the scope of VAT.  These provisions apply when the intra-VAT group supply utilises taxable services that were received outside the UK.  This provision was not considered in detail, presumably on the basis that CBNA’s view that it did not apply rested on a finding that the intra-VAT group supply was exempt.

The primary points considered were:

  1. The “Supply Issue” regarding whether:
  • CBNA made a single supply comprising both “Support Services” (back-office services) and “Business Delivery Services”; or
  • whether Support Services Business Delivery Services should be viewed as separate supplies.
  1. The “Exemption Issue” concerned whether a supply of Business Delivery Services was exempt from VAT.

CBNA argued that the matter should not be evaluated on the basis of the contracts between the parties but on the basis of economic substance, taking the view that it is common for contracts between connected parties to contain less detail than contracts between unconnected parties.  On this point, the FTT found that while there was a lack of detail in the contracts that this was not sufficient to conclude that they do not reflect economic reality. Therefore, it was not necessary to “go behind” them.

On the Supply Issue, the FTT went on to conclude that “Taking the contractual documents as a whole it is clear that CBNA makes a single supply to SPLC providing everything that it (SPLC) needs to enable it to achieve its aim of regulatory compliant trading in globalised markets…” and that it must follow that the different elements of the supply are indivisible and indispensable in order to achieve the aim of the supply.

Having concluded that there was a single supply the FTT went on to find that the supply was standard rated, not exempt as CBNA argued. It was common ground that the VAT liability could not be determined by the use to which the service was put.  A number of cases were considered and the basic principle that VAT exemption must be interpreted strictly meant that the entire supply must be considered as a whole in applying the exemption provisions. Crudely stated, “a non-exempt element” taints the entire supply as far as a strict application of exemption.

Although not strictly necessary (based on the finding that CBNA’s Support Services and Business Delivery Services constitute a single taxable supply) the FTT went on to consider how it would have decided the matter had it found that CBNA made separate supplies. It concluded that, evaluated as a separate supply, Business Delivery Services would still be treated as taxable on the basis that they are a technical or administrative services that do not alter the legal and financial situation between SPLC and its clients or create, alter or extinguish those parties’ rights and obligations in respect of securities.

Constable Comment: This case is difficult to read because of its length and the complex issues considered.  It does not seem to break new ground, the outcome is not in that sense surprising.  However, with the proviso that all agreements must reflect economic reality the decision underlines the importance of taking care not to bundle exempt supplies with taxable services if the result is potentially a single taxable supply, although in this case the Business Delivery Service assessed in isolation was not considered exempt and that point may be moot.  

The direction of travel of recent cases on exemption is likely to result in additional VAT costs for business.  However, the treatment of bundled services as a single supply is potentially a double-edged sword for HMRC. For example, there will be scenarios in which businesses that suffer significant input tax disallowances would prefer their supplies to be taxable (to obtain a VAT recovery right). If you feel that you may be in that position, please contact us and we may be able to help.       

4. VAT zero rating: biscuit or confectionery

This case considered whether United Biscuits (UK) Ltd’s (UB) product, Blissfuls, is a zero rated biscuit which has a chocolate ‘layer or filling’, or is it a chocolate covered biscuit which is a standard rated confectionery item.

The product in dispute contained a biscuit base with a layer of chocolate on top of it. At the top, there was a logo made out of biscuit however the logo was smaller than the base therefore it did not cover all of it. UB argued that the biscuit logo on top ‘covered’ the biscuit, making the chocolate layer a filling in the middle of ‘sandwich biscuit’, and therefore the biscuit can be zero rated.

However, the Tribunal agreed with HMRC that it must consider whether the top layer, being the biscuit logo, covers the entire biscuit. If it doesn’t, it raises the question: “If the biscuit logo does not cover the whole, what covers the remaining area?”. The practical answer was clearly chocolate, and the legislation confirms that even if the covering is only “to some extent”, the product is a chocolate covered confectionery and therefore standard rated. The appeal was dismissed.

Constable Comment: This case is a very good example of the complexities involved in zero rating food items. Very minor details and facts can change the VAT implications of food items and therefore we would suggest that if there is any ambiguity, seek professional advice to ensure the correct VAT treatment is established. Constable VAT has relevant experience and would be pleased to assist.

5. Partial Exemption Special Method

In this case, the representative member of a VAT group, KRS Finance Ltd (KRS), appealed HMRC’s decision to reject its proposal for a partial exemption special method (PESM). KRS offers advice and related services, including VAT exempt Equity Release Mortgages (ER) and also standard rated Estate Planning (EP) services, therefore it was not in dispute that KRS is partly exempt. KRS operated the standard method for recovery of residual input tax and this resulted in a 10% recovery.

KRS argued that a PESM based on transaction count would be more ‘fair and reasonable’ because each EP service consumes broadly the same amount of residual input, therefore the standard method does not produce a fair and reasonable recovery. HMRC rejected this argument and KRS appealed to the FTT.

Before considering the apportionment issue, the FTT first turned to an attribution issue regarding some marketing expenditure. KRS treated the contested marketing expenditure as an overhead arguing that it was incurred by the business as a whole supporting both ER  and EP services. However, the FTT found there was a direct and immediate link solely with the VAT exempt ER services therefore it cannot be treated as residual.

The FTT then turned to the apportionment issue and agreed with HMRC that the proposed PESM was not more fair and reasonable then the standard method because KRS failed to produce objective evidence that the different supplies used the same amount of residual inputs. In addition KRS grouped together a range of very disparate transactions which suggested the transactions are not broadly similar and therefore costs attributable to these transactions will likely differ. The appeal was dismissed.

Constable Comment: This case highlights the importance of providing evidence which proves that the proposed partial exemption special method will produce a more fair and reasonable outcome than the standard method. Constable VAT has considerable experience with preparing PESMs and would be pleased to assist with any related queries.

6. Import VAT recovery

Piramal Healthcare UK Limited (PH), a pharmaceutical company in the UK, imports pharmaceuticals goods from customers outside the UK to carry out work on those goods, such as converting them into tablets and carrying out research or testing. PH makes a charge for these services and accounts for VAT on the supply. However, although PH is the importer of goods, and paid import VAT, it never owned them. Once PH carried out its work, the goods were returned to the owners.

In January 2018 PH contacted HMRC via webchat seeking confirmation that its recovery of import VAT was correct.  The HMRC Officer confirmed that it was.

After a VAT inspection in April 2018, on 2 August 2018 HMRC notified PH that it could not reclaim VAT and that an assessment disallowing earlier claims would be made.  A formal, appealable, decision was eventually issued in October 2018 and, after review requested by PH, that decision was upheld on 15 November 2018.

In April 2019, an assessment disallowing input tax claimed in VAT period 11/18 was issued and in May 2019 an assessment was raised disallowing claims made in VAT period 02/19.  PH appealed to the FTT.

At the FTT, HMRC argued that as the goods continued to belong to PH’s customers they do not form a cost component in the supplies made by PH.  The import VAT paid is not PH’s input tax.

In response, PH argued that input tax is recoverable because the goods were used for the purposes of the taxpayer’s business and the import VAT was directly attributable to a taxable supply.

Although the FTT had some sympathy with PH’s arguments based on UK legislation, it was compelled to agree with HMRC and follow binding case law; concluding that whilst the goods were used in relation to PH’s business, they were not a cost component of any onward supply made by PH. Therefore import VAT incurred by PH is not available as an input tax credit.

As a supplementary point, in April 2019 HMRC released a Revenue and Customs brief confirming its view that import VAT can only be reclaimed by a person that owns the imported goods. Because previous guidance was unclear, HMRC allowed a transition period of 3 months and 3 days to taxpayers to implement this guidance. PH argued that under the general principle of equal treatment of taxpayers, it was also entitled to apply that transition period.

The FTT agreed that the principle of equal treatment applied. However, whereas the transition period for other taxpayers ran from the date of the April 2019 Revenue and Customs Brief, for PH the FTT considered that it should run from 2 August 2018 – i.e. up to and including 5 November 2018.  This is on the basis that PH was made aware of HMRC’s policy on 2 August 2018 (before other taxpayers were notified by means of HMRC’s Brief).

Constable Comment:  When a business imports goods that it does not own then there is usually a way to avoid an irrecoverable VAT cost.  That might involve the use of a relief, such as Inward Processing Relief, an import arrangement that allows the true owner of the goods to reclaim VAT, or the use of an agency arrangement within S47(1) of the VAT Act 1994 [HMRC will allow a recovery of VAT by an agent that is accounting for VAT as if it is a principal on the goods imported].  In recent times we have encountered several cases in which taxpayers have failed to apply this rule correctly, particularly when import agents have failed to make correct declarations in relation to goods imported for processing.  To minimise the risk of an avoidable VAT cost professional advice should be sought before the import occurs.

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.