Constable VAT Focus 20 March 2020


Covid-19 Coronavirus has dominated the news in the past few weeks. The UK Government’s advice regarding Coronavirus continues to develop in response to a rapidly changing situation. The health and welfare of our staff, clients and suppliers is of the utmost importance to us at this difficult time.

We have released an update covering our continuity plan to ensure that we can continue to deliver our services as effectively as possible for our clients which can be read here.

Although I am sure VAT is not the most important matter on your mind at the moment please be assured that if you do need assistance with any VAT matter we are all available and able to help as usual. You should be able to reach your normal contact by phone but if you have difficulty getting through please send an email and we will respond as soon as we can.

A primary concern in these difficult times may be around paying any outstanding VAT due. The recent Budget information produced included the following statement, which applies to VAT payments along with other taxes.

“All businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service. These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities. These businesses can contact HMRC’s new dedicated COVID-19 helpline from 11 March 2020 for advice and support. To ensure ongoing support, HMRC have made a further 2,000 experienced call handlers available to support firms and individuals when needed. If you are concerned about being able to pay your tax due to COVID-19, call HMRC’s dedicated helpline on 0800 0159 559.”

Please let us know if you need any assistance in coming to Time to Pay arrangements with HMRC, or if you want to consider changing to Cash Accounting to assist with cash flow at this time.

Following last week’s Budget Constable VAT issued an update, which can be read here.


The Value Added Tax (Drugs & Medicines Order) 2020
HMRC has released a Policy Paper of the new measure which amends the scope of the VAT zero-rate for drugs dispensed on the prescription of an appropriate practitioner.

Notice 252: valuation of imported goods for customs purposes, VAT and trade statistics
HMRC has updated its Guidance to include an address to send requests to in order to operate simplified procedures for imports.

Partial Exemption Frameworks
The framework for Housing Association partial exemption special methods has been updated.


Court of Justice of the European Union


1. X-GmbH: Medical Exemption in Germany
X is a limited company in Germany. In 2014 it provided advice on various health issues through telephone consultations on behalf of statutory health insurers and conducted telephone patient support programmes for patients suffering from chronic or long-term illnesses. These services were provided by nurses and medical assistants. In more than a third of the cases, a doctor was called in to take over the advice or to give instructions or a second opinion when asked.

The insured could call X at any time and request medical advice. Upon receiving such a request, an X employee would carry out a computer assisted assessment of the patient which would enable to employee to give potential diagnoses and advise on any therapeutic measures which could be taken to aid in recovery. X treated these supplies as VAT exempt on the grounds that they were medical services meeting the conditions for exemption laid down in EU and German law.

The referring Court asked two questions. First, whether medical advice given over the phone, which takes place independently of a specific medical treatment, is a VAT exempt supply of medical care, or a standard, taxable supply of services akin to “wellness” or cosmetic treatments. Secondly, whether telephone consultations performed by nurses and medical assistants could qualify for VAT exemption without the presence of a qualified doctor – essentially whether nurses or medically trained staff were medically qualified enough to qualify for the exemption.

Noting that a supply is exempt if it is a supply of personal care given within the framework of the medical and paramedical professions, the Court considered the definition of “personal care” to be “… services intended to diagnose, treat and, as far as possible, cure illnesses or health anomalies […] medical services provided for the purpose of protecting, including maintaining or restoring the health of individuals…” The Court concluded that the supplies being made by X were capable of falling within this exemption, but that it would depend on the nature of the call itself and that this was a matter for X to deal with.

The Court noted, in response to the second question, that the calls where a doctor was called in would qualify for the exemption. It was observed that the second question referred to the Court was, essentially, whether the qualification of a nurse or health coach was sufficient for a supply of personal care by telephone to qualify for the VAT exemption. It commented that the EU provision allowed a degree of discretion to the Member State in this regard, stating that it was for each State to decide which medical qualifications were sufficient to gain the exemption. It also noted that the care must be of a sufficient standard. The Court concluded that it was for the Member State to decide if the exemption should exclude nurses and health coaches, but observed that Member States would need to consider the principle of fiscal neutrality when reaching these conclusions.

Constable Comment: This case is interesting on two levels. In our experience, HMRC has accepted that care provided in the manner examined can be VAT exempt, subject to meeting the normal conditions regarding the form of the service being to maintain or improve health. In this context, the UK is already operating in line with the decision. Similarly, the UK link exemption to the qualifications of the healthcare professional providing the service and extends this to include services performed by other staff under the supervision of a qualified professional. Whether this necessarily goes far enough to deal with the fiscal neutrality point may be more questionable. For example, we have dealt with the situation in which HMRC denied exemption to persons holding non-UK qualifications and only resolved that by successfully arguing that they were sufficiently supervised by UK healthcare professionals.

2. Supplies of Staff
This case concerned a supply of staff made by Avir S.p.A to one of its subsidiaries, San Domenico Vetraria S.p.A. (SDV). Italian law provides that “The lending or secondment of staff in respect of whom only the related cost is reimbursed shall not be regarded as relevant for the purposes of VAT” when provided between a parent company and its subsidiaries. This means that, conversely, where the reimbursement is greater in value than the cost of providing the workers, the supply is taxable.

In 2004, Avir seconded one of its directors to SDV and added VAT to its invoices. As it treated the supply as taxable, the input VAT associated with the secondment was recovered. The Italian tax authorities took the view that the supply was irrelevant for VAT and made an adjustment to recover the input VAT which Avir had reclaimed. The Italian Court referred the issue to the CJEU, asking if EU law, and the principle of fiscal neutrality, preclude national legislation which makes a distinction between “making available of labour” and “secondment of staff” and which treats the former as taxable and the latter as exempt.

Considering basic principles of VAT, the Court observed that a supply of services is taxable where there is a legal relationship between the supplier and the recipient and there is a direct link between a supply and the receipt of some consideration in exchange. The Italian Tax Authority disputed, however, the existence of a direct link between those two services, arguing that, in the absence of a requirement for remuneration higher than the costs borne by Avir, the secondment at issue in the main proceedings did not take place with the aim of receiving consideration.

The Court concluded that the Italian Tax Authority’s argument could not be followed. There is no requirement for a profit motive for a supply to be taxable for VAT purposes. As there is remuneration for a supply, the supply is subject to VAT. Therefore, it concluded that EU law must be interpreted as precluding national legislation which excludes from VAT the supply of staff in return for remuneration.

Constable Comment: Again, this decision is broadly supportive of existing UK VAT policy and a recurring issue we deal with is a failure to account for VAT on the recovery of payroll costs where one company is “the employer” and another, usually connected, company meets the payroll costs to reflect the fact that they are working on behalf of that second company. This problem can often be avoided with joint employment contracts (although care needs to be taken to ensure that the supply is of staff rather than a different service which is only valued by reference to employment costs). Also, paymaster arrangements may allow director salary costs to be recovered without VAT in some circumstances. The main points which we would draw form this decision are:

  • It does not directly undermine existing UK policies (a different decision might have)
  • It highlights how failing to consider the employment position for staff and directors can often lead to unrecognised VAT liabilities.

This is a problem we deal with often and if you have any concerns on the point we would be happy to assist.

Upper Tribunal


3. Option to Tax: Circularity in Law
This appeal by Moulsdale Properties (MP) concerned the application of the anti-avoidance provisions relating to the option to tax. MP owned a property which had been a Capital Goods Scheme (CGS) item when purchased but which, at the time of the relevant transaction, was no longer within the scheme (10 years had elapsed since the property first entered the scheme). An option to tax was made over the property by MP in May 2001 and it was subsequently leased to Optical Express (Wakefield) Limited (OEWL) in September 2001. OEWL was “connected” with MP for the purposes of the anti-avoidance provisions.

MP treated the lease as taxable until a VAT visit in 2007. OEWL was connected to MP and made mostly VAT exempt supplies. As a result, because the property was a capital item in the hands of MP, anti-avoidance provisions rendered the option to tax ineffective. MP then submitted a claim for overpaid output tax in relation to this lease and treated subsequent rent as VAT exempt.

In 2014 MP sold the property to CSPV (A special purpose vehicle established to hold property) OEWL remained in occupation. MP treated this disposal as exempt from VAT as it believed that the anti-avoidance provisions were still applicable. The property would be a capital item in the hands of the new purchaser (if VAT was charged) and was occupied for exempt purposes by OEWL. HMRC argued that the disposal should have attracted VAT.

A circularity arises on the key point of VAT law. Where land is opted, its disposal attracts VAT unless the option is disapplied. The option is disapplied if the developer of the land (MP) makes a grant of the opted building it will become a CGS item in the hands of the purchaser and will be occupied other than for mainly taxable purposes. When the option is disapplied in this way, no VAT is charged on the disposal to the purchaser which means that the building does not enter the CGS for the purchaser. Thus the circularity arises; as the item is not entering the CGS because the option is disapplied, the anti-avoidance provisions do not apply meaning that the option to tax is effective and the supply is taxable. As has been stated in previous case law, “The circularity is to be deplored”.

MP argued that the circularity can be resolved by only considering the intention of the grantor once, at the point of actually considering the disapplication test. Taking this approach, at the point it was considering the test, MP anticipated that it was selling land which was subject to the option to tax which it therefore expected to become a capital item in the hands of CSPV and would be occupied as exempt land by OEWL. The anti-avoidance provisions would bite so the transaction should be exempt from VAT owing to the disapplication of the option to tax.

HMRC argued that this was incorrect and reiterated its argument from the FTT that the test was not whether the transferred building would be within the CGS of the purchaser, but that it should be asked whether the transferor intends or expects that it will be. As MP did not ultimately intend for the disposal to create a capital item for CSPV, the option to tax would not be disapplied, rendering the transaction taxable.

The Tribunal held in favour of HMRC, commenting that the consideration process regarding the disapplication of the option to tax should not stop at the moment that the taxpayer considered the transaction to be exempt. It observed that if this were the case, it would mean that in cases where the sale price of the land and buildings was over £250,000 and the relevant person occupying it met the “exempt land test” there would be no charge to tax. This, it was noted, would create an invitation for tax avoidance.

Constable Comment: This is a complex area of VAT law which has continued to create difficulties for taxpayers. This case demonstrates that the anti-avoidance provisions regarding the option to tax are unclear on some fundamental points. Equally it shows that the anti-avoidance provisions are not limited to situations where avoidance is a motive. Before undertaking any high value property transaction, it is essential to seek professional advice.

First Tier Tribunal


4. DIY Housebuilders Refund Scheme
This case concerned two brothers (Stephen and Paul) who had inherited a plot of land and received planning permission in 2010 to build two properties. The issue at hand is the three-month time limit for submitting a claim for repayment of input VAT which applies to the DIY Housebuilder Scheme, an issue which is increasingly common in the First Tier Tribunal.

Between 2010 and 2012, various purchases were made by both brothers in order to carry out the construction work. Between December 2012 and March 2013, both brothers had moved into their uncompleted properties. At this point, in Paul’s house, three out of five bedrooms were functional and one of the four bathrooms was functional. Stephen’s was slightly further along but was still not completed in accordance with the plans.

Works continued to the properties after the brothers had moved in and a completion certificate was subsequently requested from the local Council. When the Council visited the properties, it would not issue such a certificate until further work was carried out and safety certificates were obtained for heaters and boilers. The brothers carried out the necessary work and sent the Council the safety certificates on 6 December 2017, and received a completion certificate dated 15 January 2018. Two claims were submitted, one for each property, on 28 February 2018. HMRC denied the claims on the grounds that they were out of time and sought to argue that the properties had been completed when they were “habitable, safe and hygienic”, following the ruling in Purdue.

The brothers argued against this point and sought to rely on other case law which indicates that the completion certificate being issued triggers the commencement of the three-month time limit to submit a claim such as Farquharson and Dunbar. It was also submitted that HMRC’s Guidance treats the time limit as running from the date of the document issued being used as evidence of completion.

The Tribunal observed that HMRC’s Guidance does not have the force of law and should not be relied upon. It was also noted that HMRC’s Guidance is incorrect. Agreeing with the brothers, the Tribunal concluded that the properties were not completed until December 2017 when the works had been sufficiently completed to obtain the certificate of completion. Therefore, the time limit ran from a date in December 2017 – even if it was 1st December, the claims would have been within the time limit. The Tribunal held in favour of the taxpayers.

Constable Comment: The three-month time limit is an issue which is in the Tribunal frequently with HMRC often seeking to argue that a building is complete when habitable. We assisted a client in winning a case on this point recently. There is a frustrating lack of clarity around this point; HMRC’s guidance is misleading and there is case law to support both the taxpayer’s and HMRC’s position in this case but none of it is binding. At the moment, we seem to be in a situation in which HMRC will happily throw taxpayer’s money at contesting refunds which look completely legitimate when considering the purpose of the tax and the relief for housebuilders.

Taxpayers are being forced to endure the stress and costs of what is rapidly becoming a lottery in terms of what any given Tribunal may decide. This must be viewed as an entirely unsatisfactory situation and, in our view, HMRC needs to grip this problem and also accept that the time limit should not be used to deny legitimate claims, bearing in mind cases like this will often refuse claims because the completion certificate has not been issued, creating a bizarre “Catch 22” situation.

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. 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 newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.