Constable VAT Focus 21 January 2022


Penalties for late submission
HMRC recently announced that the new late submission penalties have been delayed, they will now begin on 1 January 2023. HMRC guidance has been updated accordingly.

Making Tax Digital for VAT is coming – are you ready?
HMRC have published new guidance to support businesses that need to prepare for Making Tax Digital (MTD). These VAT registered businesses are urged to sign up for MTD for VAT before 1 April 2022.

Revenue and Customs Brief 1 (2022): reviewing how to claim VAT when charging electric vehicles for business purposes
This is a brand new brief released by HMRC informing businesses that HMRC is reviewing how VAT is claimed on the cost of charging electric vehicles, and how to account for VAT on any private use.



1. Accommodation for homeless people

This case concerns City YMCA London (CYL), a registered charity, that appealed HMRC’s classification of the supply of services made by CYL to young people of hostel accommodation in return for payment.

As with many VAT cases, the position is not straightforward and can be complicated. In late 2010 CYL lost its ‘supporting people’ grant funding which meant that it would be supplying minimal welfare services.

To continue its support of those in need CYL makes a charge for its services, which consist primarily of accommodation and advice. Each individual resident is responsible for paying their room fee; however, this is most likely met by Housing Benefit, Universal Credit or Disability allowance.

The decision helpfully sets out the chain of events that followed after CYL lost its ‘supporting people’ funding. These can be broadly summarised as follows:

  • January 2011 – CYL writes to HMRC seeking clarification of the VAT liability of its supplies moving forward now it is not receiving the ‘supporting people’ grant.
  • March 2011 – HMRC confirms CYL’s supplies of accommodation and general advice was subject to VAT at the standard rate. The charity applied the 28-day rule which allows it to charge VAT at a reduced value to residents for stays over 4 weeks.
  • September 2014 – HMRC carries out a routine VAT compliance visit to verify the charity’s VAT accounting records, specifically ensuring that the 28-day rules were being correctly applied.
  • August 2017 – HMRC conducts a VAT compliance inspection which is followed by a letter advising that its supplies are VAT exempt supplies of welfare.
  • October 2017 – HMRC revises its position and confirms that the charity’s supplies are standard rated as CYL is supplying sleeping accommodation and is “a similar establishment” to a hotel or boarding house.
  • October 2018 – HMRC writes to CYL requesting more information about the services it supplies, whilst advising that HMRC did not now consider that it met the ‘hotel like’ accommodation criteria which (potentially) may not allow the charity to account for a reduced rate of VAT for stays for a continuous period of more than four weeks.
  • January 2019 – HMRC writes to the charity and advises that its supplies are VAT exempt, not of welfare but of land (accommodation).
  • March 2019 – HMRC writes to CYL reversing its decision of 2 months earlier and advises that the charity’s supplies are standard rated supplies of land (accommodation) and are specifically excluded from exemption. However. The charity’s supplies are not ‘hotel like’ and it cannot take advantage of the reduced rate where a guest stays for a continuous period of more than four weeks.

The benefit of the 28-day rule is that, provided certain conditions are met, including the provision of sleeping accommodation in hotels, inns, boarding houses and similar establishments is that from the 29th day of the stay VAT is only due on meals, drinks, service charges and other facilities provided apart from the right to occupy the accommodation. The value of the accommodation is excluded from any calculation to determine output VAT due.

HMRC confirmed that the new ruling would take effect from 1 March 2019, there would be no VAT assessments raised for the incorrect application of ‘the previously under declared VAT’ under the long stay rules.

CYL sought an independent HMRC review of this final decision. The charity is advised by a letter dated 18 July 2019 that the March 2019 decision is upheld. This led to CYL’s appeal to the Tribunal.

The technical points to be considered were as follows:

  1. Is the charity’s supply one of a ‘licence to occupy land’ and a VAT exempt supply?
  2. If the charity’s supply is initially held to be a VAT exempt ‘licence to occupy land’, does the exclusion from VAT exemption as ‘the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering’ apply?

In practical terms if a) above applies, the charity does not have to account for output VAT on supplies made/income received and it may be unable to reclaim VAT incurred on directly related costs. If b) above is correct, and CYL’s supplies are excluded from exemption on the basis that it is a ‘similar establishment’ to a hotel etc then it can reclaim in full VAT incurred that directly relates to making these supplies, and account for VAT on a reduced sum received because the majority of its residents stay for over 28 days.

HMRC’s preferred analysis is that the charity’s supply is one of a range of facilities (sleeping accommodation, access to communal facilities [kitchens, lounges] and oversight and control, signposting etc. As such, the charity’s supplies are standard rated, and it does not meet the ‘similar establishment’ to a hotel test in order to allow it to apply the reduced rate for long stays.

The Tribunal found that the preponderant element of the supply is the provision of sleeping accommodation. Any other facilities or services supplied are ancillary and provided in the course of making the main supply of accommodation. The commercial and economic reality is that the supply is of a bedroom which characterises the liability of the supply.

The second point is whether CYL is a ‘similar establishment’ to a hotel, boarding house etc. The Tribunal found that the charity’s supply is by a ‘similar establishment of sleeping accommodation’ because its intended purpose is providing temporary accommodation to homeless young people. In particular, the Tribunal noted that the temporary nature of the accommodation provided sets CYL supplies apart from VAT exempt long-term lettings of residential accommodation. Therefore, the charity’s supply is similar to the provision in the hotel sector.

Constable VAT comment: This is an interesting case, and it remains to be seen whether HMRC will lodge an appeal to the Upper Tribunal. A decision of the First-tier Tribunal is only binding on the parties involved and does not set a wider precedent. The decision demonstrates the benefit to CYL of clarifying the VAT liability of its supplies with HMRC in 2011. If any taxpayer submits a non-statutory clearance application to HMRC then, provided full facts are provided, HMRC are bound by its decision and cannot take retrospective action. This explains why, when in 2019, HMRC gave its final decision it only applied the amended VAT liability from a current date and did not seek to raise retrospective VAT assessments to 2015. If any business desires certainty as to the correct VAT liability of its supplies, and where there are potentially different interpretations, we would recommend pro-actively liaising with HMRC. Unfortunately, HMRC may refuse to give an opinion in all cases but an approach to HMRC is something that should be considered.

2. Exporting a vehicle

This case concerned Mr Denton who purchased a vehicle in the UK with the intention of exporting it to Jersey. He was charged VAT on this vehicle and attempted to reclaim the VAT after exporting it on the basis an export is zero rated for VAT purposes. HMRC rejected the appeal for a VAT refund on the basis that the Personal Export Scheme is a pre-approval scheme only, it cannot be applied retrospectively. Therefore, as Mr Denton did not apply for it, VAT was correctly charged, and a VAT refund cannot be given.

Mr Denton requested the Tribunal to take his personal circumstances into account and that a retrospective claim for a refund should be allowed. The Tribunal and HMRC both stated that if Mr Denton applied for the Personal Export Scheme prior to exporting the purchased vehicle, the transaction could have been zero rated; however, it is clear from VAT law that HMRC have no authority to allow a scheme to be used retrospectively.

The Tribunal has no power to change this decision based on personal circumstances; therefore, the appeal was dismissed.

Constable VAT comment: Whilst HMRC and the Tribunal had sympathy for Mr Denton’s personal circumstances, a VAT refund could not be legally allowed in this case. 

3. Refusal to deduct input tax

This appeal concerned Turquoise 2 Limited (T2), and whether it knew or should have known, that certain of its purchases and the immediate onward sale of electronic goods were connected with the fraudulent evasion of VAT. HMRC denied a total input tax deduction of £2,061,733 for the VAT accounting period ended 07/16 and 10/16 in respect of 29 purchases of electrical goods.

The purchases were supplied to T2 by BJWP, and the sales occurred back-to-back on the same day with a markup of around 0.35% to 1% applied. The goods were never physically received by T2, and it did not pay for the goods acquired until it had been paid by the customer on the onward sale.

Mr Blomfield was the sole director of T2, and he provided evidence during the hearing. Mr Blomfield was approached by Mr Hendry who recommended Mr Blomfield to take up trading in electronic goods through T2. Mr Hendry offered another business proposal to Mr Blomfield prior to this, however after discussions with HMRC and research Mr Blomfield did not proceed due to Missing Trader Intra Community (MTIC) fraud risks.  As Mr Blomfield had no previous experience in electronic trading, Mr Hendry asked him to merely take care of administrative procedures such as setting up the bank accounts, and another US company referred to as “Adam” (the only known factor about the other company) would take care of trading whilst Mr Blomfield would be trained, so he can eventually be fully involved in the business.

T2 proceeded to set up a new bank account and granted access to Adam’s company, Mr Blomfield did not have any contact with the company he granted access to. Mr Blomfield subsequently discovered suspicious activities, and he reached out to Adam with the intention of requesting an immediate explanation or resigning as a director. Those concerns included trading totalling over a million Euros which he knew nothing about and was not informed of.

In response to Mr Blomfield’s concerns Mr Hendry and Adam confirmed that the transactions were merely to get things primed in the industry, any VAT due will be paid and Adam’s organisation will soon train and support Mr Blomfield so he could take control of the process.

It was later discovered that the supplier of T2, BJWP committed fraudulent VAT evasion. Therefore, input tax recovery claimed by T2 has been refused by HMRC on the grounds of the “Kittel principle” established in case law. This states that taxable persons who “knew or should have known” that supplies in which input tax was incurred were connected with the fraudulent evasion of VAT would not be entitled to claim credit in respect of that input tax.

Therefore, it was for the Tribunal to determine whether T2 knew or should have known it was involved with fraudulent VAT evasion. The Tribunal states it was evident that Adam’s organisation knew it was fraudulent VAT evasion and following the “Sandham case law” T2 if fixed with that knowledge therefore T2 knew. In addition, the Tribunal stated that the circumstances, including giving access to bank accounts or allowing transactions to be made in T2’s name, and keeping the shadowy organisation away from HMRC’s knowledge was very suspicious and enough to satisfy the condition of “should have known” that the transaction is involved with fraudulent VAT evasion.

The Tribunal concluded that T2 has chose to ignore the obvious inferences from the facts and circumstances, therefore the purchases were connected with fraudulent VAT, T2 both knew and should have known, so the input tax claim is refused, and the appeal was dismissed.

Constable VAT comment: This case represents yet another success for HMRC in an area in which fraud is reported to have cost EU taxpayers billions of £ or €.

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.