Constable VAT Focus 20 October 2022


There have been a number of updates to HMRC guidance

Buildings and construction (VAT Notice 708)
The above guidance provides details about the VAT treatment of building works and materials for contractors, subcontractors and developers. The overview and section 2 has been updated to include information about the VAT domestic reverse charge. The certificate in section 18.1 for certain scenarios regarding zero and reduced rating has been updated to confirm it will be necessary to include the name and address of the organisation receiving the building work.

Cash Accounting Scheme (VAT Notice 731)
The above guidance sets out how the VAT Cash Accounting Scheme works and the conditions you must meet to use the scheme. HMRC has recently updated the guidance to include information about the interaction between the VAT domestic reverse charge and the cash accounting scheme. Full details can be found at section 2.8 of the above guidance.

Flat Rate Scheme for small businesses (VAT Notice 733)
HMRC has published updated guidance which provides information on how to use the Flat Rate Scheme, who can use it and how to apply to join the scheme.

Claim a VAT refund on a conversion if you’re a DIY housebuilder
Individuals can use form VAT431C to claim a VAT refund on the conversion of an existing building into a dwelling if you are a DIY housebuilder. The information in part G of VAT 431C form and notes about sending in your claim has been updated.



Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration and there may be occasions where they have a more binding effect.

1. Adjustments to input VAT post liquidation

This case concerned UAB Vittamed Technologijos (Vittamed) and the Lithuanian tax authorities. Vittamed was a company engaged in technical scientific research and its application. In 2012 and 2013, Vittamed acquired goods and services in connection with a project to develop a prototype of a medical diagnostic and monitoring device and to subsequently place the device on the market. 8 invoices were issued to Vittamed incurring EUR 87,987 input VAT. Vittamed used the goods and services to produce capital goods, both licenses and actual prototype devices.

However, following the conclusion of the project, Vittamed was making losses and as a result of absence of orders and potential income, the sole shareholder discontinued the activities. On 2015, Vittamed acquired the status of ‘legal entity in liquidation’ and was removed from the register of VAT payers. In 2017, the Lithuanian tax authorities took the view that when the decision was made to place Vittamed into liquidation, it was under the obligation to adjust the deduction of input VAT in respect of those 8 invoices. Vittamed filed an objection to the decision on the grounds that where costs are incurred in preparation for an economic activity, deduction of any input VAT may be claimed even where that activity is not taken up and the intended taxable transactions ultimately do not take place.

The referring court expressed doubts to the existence of an obligation to adjust the deductions of VAT and therefore referred the question to CJEU, whether a taxable person is under an obligation to adjust deductions of input VAT relating to goods or services intended to produce capital goods in the case where, as a result of the decision of the sole shareholder, the company is placed into liquidation and removed from the register of VAT payers, the capital goods produced have not been used and will never be used in the course of taxable economic activities.

The CJEU stated that the effect that the right of deduction is retained even where an activity is brought to an end before it gives rise to any taxable transactions, must be combined with the rules of adjustments of deductions. The adjustment mechanism under Article 184-187 of the VAT directive aims to establish a close and direct relationship between the right to deduct input VAT and the use of the goods or services.

The CJEU confirmed that the wording of the VAT directive intends to make the obligation of making an adjustment as broad as possible and does not exclude any foreseeable situation of undue deductions. As Vittamed no longer has and will never have, any intention to use the capital goods produced, the close and direct relationship is broken, and the adjustment mechanism must be applied.

Constable Comment: In this case the CJEU has confirmed that where, as a result of the decision of the owner or sole shareholder a taxable person no longer has – and will never have – any intention of using capital goods for the purposes of taxable transactions, the deduction of input VAT must be adjusted. However, if during the liquidation Vittamed had made sales of the assets for purpose of discharging debts, the adjustment would not have been necessary.

2. VAT incorrectly charged by a now liquidated business

This case concerned HUMDA, attempting to recover VAT from the Hungarian tax authorities as a result of a tax inspection. BHA supplied construction services on a project in Italy. BHA charged Hungarian VAT to HUMDA, which was paid to BHA and subsequently over to the tax authorities. As a result of the tax inspection, the authorities found that VAT was not payable in Hungary, the place of supply was Italy, and therefore was invoiced in error.

BHA has since gone into liquidation and therefore HUMDA tried to recover VAT improperly charged from the Hungarian tax authorities, along with interest. The request was refused by various courts until the referring court asked the CJEU whether the VAT directive must be interpreted as precluding legislation of a Member State (MS) under which a taxable person cannot claim, directly from the tax authority, a refund of VAT in respect of a service which the supplier has unduly invoiced, where it is impossible or excessively difficult to claim that amount from the supplier because it went into liquidation.

The CJEU commented that if the refund of the VAT becomes impossible or excessively difficult, in particular due to insolvency of the supplier, the principles of VAT neutrality and effectiveness require the MS to provide for the instruments necessary to enable the recipient to recover the VAT which has been unduly invoiced and paid, in particular by addressing its application for reimbursement to the tax authorities directly. Therefore, HUMDA should be able to recover the VAT from the Hungarian tax authorities directly.

With regards to interest, the CJEU commented that the authority is obliged to pay interest where it has not made a refund within a reasonable period of time, after having been requested to do so. However, the rules for applying interest must be set by the MS taking into consideration the principles of equivalence and effectiveness. This means, the taxable person should not be deprived of adequate compensation in respect of loss caused by a late refund.

Constable Comment: This case has confirmed that where it is ‘impossible or excessively difficult’ to recover VAT from the supplier, then the taxpayer should be able to recover VAT incorrectly charged from the local tax authority. In this case, the supplier being placed into liquidation was sufficient to be considered as impossible or excessively difficult.

The Supreme Court

3. Time limits and repayment verification

This case concerned disputes between DCM (Optical Holdings) LTD (DCM) and HMRC regarding two questions. Firstly, whether HMRC were subject to a statutory time bar which invalidated their assessment for output tax and second, whether HMRC have power to refuse to accept a taxable person’s repayment claim while they verify the claim.

DCM is the representative member of a VAT group, and it is partially exempt as it makes taxable supplies of frames, lenses, accessories, and care plans, and also exempt supplies such as eye tests and laser surgery. The ‘Opticians: Apportionment of charges for supplies of spectacles and dispensing’ guidance sets out methods of apportionment that opticians can adopt. This can either be Full Cost Apportionment (FCA) or Separately Disclosed Charges (SDC). DCM claimed to be operating SDC however the conditions were not met and therefore should have accounted for output tax using FCA.

HMRC raised an output VAT assessment on 20 October 2005 for the periods from October 2002 to April 2005 also adjusting input VAT, following an inspection 1 September 2005 where HMRC for the first time obtained access to DCM’s VAT accounts. DCM argued that by the end of a meeting in January 2004, HMRC were aware that DCM was not using FCA and so knew that ‘something was wrong’, and therefore had one year from this date to raise an assessment.

The Court referred to the relevant law stating that the one year rule runs from the date when evidence, which is considered sufficient to justify the making of the assessment, comes to the knowledge of the Commissioners. In this case the Court ruled that such evidence was only available to HMRC after access was granted to the VAT account in September 2005, therefore the assessment was not out of time.

With regards the second issue, DCM argued that where a repayment trader makes a claim, HMRC must pay the claimed sum but have 5 options for the protection of revenue as follows:

  • HMRC can pay the sum claimed but impose conditions requiring the trader to repay any money which after verification is not due
  • HMRC can pay and if later they decide it is not due, they can raise an assessment
  • HMRC can make the provision of specific evidence the condition of payment
  • HMRC can make the provision of security the condition of payment
  • HMRC can ask the trader to amend its returns

The Court disagreed for various reasons including that HMRC have a power and duty to conduct a reasonable and proportionate investigation into the validity of the claim for a refund. Also, the obligation on HMRC to pay VAT credit arises only once it is established that a credit is due. The Court ruled that the power to verify and when justified, to refuse to pay claimed VAT credit is not inconsistent with the UK VAT legislation, therefore the appeal was dismissed.

Constable Comment: This case clearly set out the rules for the one year time rule and “evidence of facts” applicable to raising assessments in conjunction with HMRC’s power and duty to verify a repayment claim before being obliged to make payment. The Court made a clear distinction between payment traders and repayment traders. With regards to a payment trader, even if the input tax is overstated and therefore reducing the total VAT liability, HMRC is initially required to pay the sum which the trader discloses. In contrast, a repayment trader may not receive anything until the verification process is complete. 


4. Input VAT recovery on vouchers

This case concerned Lucky Technology Limited (LTL). LTL buys and sells vouchers. Harrods was the supplier of the vouchers which can be used on the Steam website to purchase digital downloads of games. Up to May 2016, Harrods provided LTL with till receipts for each purchase, which were entered into a spreadsheet. At the end of the month, the bookkeeper of LTL would request VAT invoices for the entries on the spreadsheet. Harrods would then provide a ‘bulk’ invoice showing 20% VAT. However, after May 2016, Harrods provided invoices showing 0% VAT taking the view the vouchers are multi-purpose vouchers (MPV) and therefore did not account for any VAT on the onward sale.

However, LTL continued to claim input VAT on the grounds that the vouchers are single purpose vouchers (SPV) and subject to VAT (although actual invoice evidence was not held) and LTL paid the VAT to Harrods as part of the purchase price. HMRC took the view that the purchases were not subject to VAT because the vouchers are MPVs, and everyone in the supply chain consists as ‘agents’ between Steam and LTL therefore LTL was the first purchaser of the vouchers and therefore have no input VAT to recover.

As a result, the Tribunal had to determine the following:

  • Are the vouchers SPVs?
  • If not, was Harrods acting as an agent or as principal supplying the vouchers?
  • If Harrods was an agent, was it part of the supply chain and so made a taxable supply to LTL?
  • Was the VAT, if chargeable, paid by LTL?
  • If the VAT was chargeable and LTL paid it, did HMRC err in law in relation to their regulation 29(2) discretion.

The tribunal first considered whether the vouchers were SPV or MPV. It concluded that they cannot be SPV, because they could be redeemed for digital downloads of games, software, but also hardware goods such as controllers which are not only incidental, but an actual supply of goods. As a result, the Tribunal concluded that the vouchers were retail vouchers, and the next debate was whether Harrods acted as agent or principal. This is relevant because VAT is not due on the first issue of such vouchers.

Steam was the original issuer of the vouchers. If Harrods was acting only as an agent of Steam, then those were not subsequent supplies but rather still the first issue, therefore not subject to VAT. However, if Harrods was acting as principal, then it made a subsequent supply which would be in fact subject to VAT. The FTT reviewed multiple contractual agreements and considered various factors including such contracts, the text on physical voucher cards and the activation of the voucher at the till to reach an overall conclusion that Harrods was not acting as an agent but rather as principal in supplying the vouchers to LTL, therefore VAT was chargeable.

The Tribunal has then concluded that because the price was not changed by Harrods after May 2016, there was no evidence that VAT was previously wrongly charged. In addition the FTT confirmed that if VAT is properly chargeable (which it found it was) then the price paid must be assumed to have included VAT. As a result, the FTT concluded that VAT was incurred and paid by LTL. In addition, the FTT noted that HMRC erred in law because it failed to exercise the discretion to accept alternative evidence when LTL clearly indicated that it was not possible to obtain a valid VAT invoice from Harrods. As a result, the appeal was allowed.

It should be noted that the legislation and rules concerning vouchers changed from 1 January 2019. For voucher supplies after this, it is important that this is recognised as this may lead to different outcomes.

Constable Comment: This was a very lengthy and complex case but highlighted some important rules to reach certain decisions, including what constitutes a single or multi-purpose voucher. Vouchers is a complex area of VAT law that has relatively recently (and subsequently to this case) been altered and if you have any related queries, Constable VAT would be happy to assist.

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.