Constable VAT Focus 21 June 2021


VAT Notice 706: Partial Exemption
HMRC has updated this guidance with an email address to send proposals for a Partial Exemption Special Method to.

Revenue & Customs Brief 9 (2020)
HMRC has released this Brief following the judgments in LIFE Services and Romford TLC. Only charities, public bodies or those regulated by the relevant authority can exempt their supplies of daycare services.

Customs, VAT and Excise UK transition legislation from 1 January 2021
This collection brings together Customs, VAT and Excise EU Exit legislation and Customs notices that have the force of law applicable to UK transition.



1. Leasing property: a fixed establishment?

This case concerned Titanium Limited (Titanium), a Jersey company concerned with asset and property management. Between 2009 and 2010, it let a property in Austria which it elected to tax. In order to enable it to carry out those transactions, which were Titanium’s only activities in Austria, Titanium appointed an Austrian real estate management company to act as intermediary between the service providers and suppliers, to invoice rental payments and operating costs, to maintain business records and to prepare the VAT declaration data.

Despite having appointed an agent in Austria, Titanium retained the decision-making power to enter in to and terminate leases, to determine the economic and legal conditions of the tenancy agreements, to make investments and repairs and to appoint and oversee the real estate management company itself. Titanium did not declare any VAT in Austria as it maintained that it did not have an establishment there. However, the tax authorities disagreed with this assessment, citing domestic law, “…a trader who owns immovable property in Austria that he lets, subject to tax, must be treated as a national trader…”

The dispute was referred to the CJEU by the national Court which posed the question of whether the concept of “fixed establishment” is to be interpreted as meaning that the existence of human and technical resources is always necessary or can, in the specific case of the letting a property, that property constitute an establishment for VAT purposes?

The concept of ‘fixed establishment’, in accordance with the Courts settled case-law, implies a minimum degree of business stability derived from the permanent presence of both the human and technical resources necessary for the provision and receipt of services. It requires a sufficient degree of permanence and a structure adequate, in terms of human and technical resources, to supply the services in question on an independent basis and to, correspondingly, constitute a fixed establishment for VAT purposes.

Therefore, the Court held that, as a mere property does not possess the necessary resources to make and receive supplies without any staff, the property did not constitute a fixed establishment of Titanium in Austria.

Constable Comment: This position is already reflected in UK law. HMRC’s guidance is explicit that land or property does not in itself create a business or fixed establishment in the UK. There must be a head office from which business is carried out for there to be a business establishment, or sufficient human and technical resources permanently present for making or receiving the supply for there to be a fixed establishment within the UK. It may be possible to create an establishment by virtue of appointing an agent in the UK and taxpayers should always seek domestic advice where there is a possibility of exposure to overseas tax.

First Tier Tribunal

2. Receipt of subsidy – restriction on input VAT recovery?

This case concerned Colin Newell who has a business generating hot air by burning wood chips. The hot air generated is used to dry wood and other materials, belonging to Mr Newell and others. Mr Newell makes charges to third parties for this service. He also receives “periodical support payments” (PSPs) under the Renewable Heat Incentive Scheme for Northern Ireland (The RHI Scheme). Mr Newell had always treated his input tax as recoverable in full. This is on the basis that he makes exclusively taxable business supplies.

HMRC challenged Mr Newell’s right to deduct VAT incurred in its entirety, concluding during a compliance enquiry that subsidy funding received under The RHI Scheme is outside the scope of VAT. HMRC submitted to the Tribunal that Mr Newell is not entitled to recover the proportion of VAT incurred, which relates to the receipt of outside the scope PSPs, as input tax. All expenditure was a cost component of the generation of a mixture of taxable and outside the scope income, and VAT incurred is only recoverable as input tax when it is used (or to be used) in the making of taxable supplies, although VAT incurred in making VAT exempt business supplies may be recoverable if the partial exemption de minimis limits are satisfied.

Mr Newell referred to the CJEU decision in Kingdom of Spain which discussed Spanish restrictions on input VAT recovery for entities receiving subsidy funding. The CJEU held that such restrictions violated EU law. Mr Newell cited four further CJEU cases which confirmed this position. In addition, an alternative line of argument was established based on the Supreme Court decision in Frank A. Smart, a case which concluded that the deduction of input tax is not restricted by the receipt of Single Farm Payment Entitlement subsidies.

Mr Newell also submitted Kretztechnik as an example of a CJEU decision which concluded that the receipt of funds, which are outside the scope of VAT, does not prevent 100% deduction of input tax by a fully taxable trader where funding received is used to generate taxable supplies.

HMRC argued that it was the activities of Mr Newell in buying logs and then burning chips to generate heat that entitled him to claim PSPs under the RHI Scheme. It suggested that there is a direct and immediate link between the costs incurred by Mr Newell and both income streams and because of this, the general overheads of his business and the cost of the logs are a cost component of generating both taxable and outside the scope income. HMRC suggested that an apportionment based on income generated should be required.

In support of its argument, HMRC cited both University of Cambridge and Vehicle Control Services, both decisions of the CJEU. However, as the Tribunal observed, University of Cambridge does “…not provide any guidance on the question whether a taxpayer who receives outside the scope income but has not made an outside the scope supply nevertheless is conducting outside the scope activity”. Turning to consider Vehicle Control Services, The Tribunal noted the significant differences between the circumstances in that case and the present circumstance.

Considering that Mr Newell had a substantial quantity of caselaw in his favour, the Tribunal allowed his appeal against HMRC’s decision.

Constable Comment: An important part of this decision is that Mr Newell makes exclusively taxable supplies. If Mr Newell had engaged in non-business activities, which were supported by outside the scope funding, the recovery of VAT incurred may be restricted. However, HMRC has the discretion to allow a waiver of apportionment if non-business activities do not incur and consume a significant amount of VAT. Input VAT recovery is a fundamental right within the VAT system and a wholly taxable trader that incurs costs that bear VAT should be entitled to recover that VAT, even if outside the scope funding is received to support the making of those taxable business activities. The receipt of outside the scope grant funding is common in commercial sectors, the farming industry for example, and also charities and not-for-profit organisations.

3. Single or Multiple Supply?

This case concerned Black Cabs Services Limited (BCS), a taxi hire business which sought to recover overpaid VAT in relation to supplies of insurance. BCS leases London Black Cabs to self-employed drivers. All the vehicles owned by BCS in respect of the taxi hire are insured under a “motor fleet policy”. It sought to recover overpaid VAT of £43,245 in relation to charges which it had made to drivers for the use of the company’s insurance as it now believes that such charges are VAT exempt.

HMRC refused the VAT repayment claimed on the grounds that BCS is making a single, taxable supply of insured taxis and that it would be artificial to split the charges made to drivers between standard rated vehicle hire and VAT exempt insurance. It sought to make this argument on three key grounds:

  • The drivers did not have the choice to use their own insurance,
  • One payment is made by drivers to BCS and it would be artificial to split that payment,
  • A typical consumer would regard BCS’s supplies as single supplies of insured taxis.

The Tribunal considered previous decisions, including the judgment in BGZ which held that, generally, a leasing service and the supply of insurance for the leased item cannot be regarded as being so closely linked that they form a single transaction. This decision was applied in the case of Wheels before the Upper Tribunal which found, in very similar circumstances, that the ability of drivers to choose whether to pay the hirer for insurance or arrange their own cover was a significant (but not decisive) indicator that multiple supplies were being made. In the present case, HMRC submits that the drivers do not have any real choice in or option of using their own insurance cover.

The Tribunal observed that HMRC’s submission was incorrect. All the vehicle-hire agreements between BCS and drivers give the driver the option to use their own insurance and drivers were required to positively opt-in to using BCS’s insurance. In reality, no driver had ever used their own insurance owing to the cheaper pro rata cost of using the motor fleet policy. However, the Tribunal held in favour of BCS in relation to this point, noting that a failure to choose an option does not mean that the option does not exist.

Considering HMRC’s second argument regarding the single payments made by drivers to BCS, the Tribunal commented that it omitted to take in to account the evidence that the receipt given to the driver differentiates between the cost of hire and the cost of insurance. It further omits to consider the fact that the cost of insurance to each driver is separately itemised in the vehicle hire agreement. Therefore, the Tribunal dismissed this argument by HMRC.

Turning to consider the typical consumer’s perspective, the Tribunal noted that it was set out in the agreements with drivers and the receipts given to drivers that they were paying for two different supplies. Accordingly, the Tribunal held that the view of a typical consumer would be that two supplies are received for one payment.

Having dismissed each of HMRC’s arguments in favour of single supply treatment, the Tribunal held in favour of BCS and allowed its appeal against HMRC’s refusal to credit it for overpaid output VAT.

Constable Comment: The issue of whether a single or multiple supply is made often comes before the Courts and Tribunals. This is owing to the fact that there is no definitive answer, and a variety of factors must be considered in order to reach an “on balance” conclusion. This means that HMRC is normally able to challenge any arrangement. The only way to gain certainty around whether a business is making single or multiple supplies is to apply for a non-statutory clearance from HMRC.

4. New Dwelling Without Planning Permission

This case concerned the correct VAT rate to be applied on charges for construction services supplied by CMJ Aberdeen Ltd (CMJ) in relation to the construction of a residential property. CMJ zero-rated its supplies on the grounds that it had constructed a new residential building.

HMRC considered that the correct planning permission was not in place at the relevant time, which is a requirement under the zero-rating provisions for construction of new dwellings. HMRC concluded that CMJ’s supplies should have been standard rated for VAT purposes and issued VAT assessments totalling £59,167 for VAT accounting periods ending 09/13, 03/14 and 06/14.

In June 2012, CMJ made a general application for planning to Aberdeenshire Council, describing the proposed development as “demolition of existing dwelling and garage and reinstatement with new build dwelling and garage”. This application was then later withdrawn.

On 17th December 2012, CMJ made a further planning application, describing the proposed development as an “extension and a garage”. The detailed plans accompanying the application declared that they related to a ‘proposed extension’ at the property. On 24th January 2013, the Council granted planning “for alterations and extension to the property”.

Following discussions with the Council, CMJ was informed that a construction warrant, rather than a demolition warrant, was required as the property would not remain demolished as it was to be rebuilt. An application for a suitable building warrant was made by CMJ on 7th March 2013 and approved by the council on 17th June 2013 and building works to construct the new dwelling started in July 2013. The “Domestic New build (Other)” warrant was given in relation to the “erection of a detached 2 storey 9 apartment dwelling with attached double garage”.

In August 2014, a completion certificate was applied for in relation to the works. CMJ was informed by the Council that retrospective planning consent for the construction of a new build, as described on the warrant, would be required. Such retrospective permission was granted in November 2014.

CMJ argued that it was correct to zero-rate its fees for construction works. It constructed a new dwelling in line with the building warrant and verbal consent from the Council, which was given during correspondence between the parties. It argued that zero-rating should apply where a new building has been constructed, even if this is not in strict compliance with the written planning consent which was in place at the time of construction.

HMRC’s argument was simple; the legislation conferring zero-rating on construction costs in relation to the construction of a new dwelling requires that “statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.” As planning permission was only granted retrospectively, no planning permission for the construction of a new dwelling had been granted. Therefore, it submitted, that zero-rating could not apply.

Considering the planning permission, which was in place at the time of construction, the Tribunal noted that it permitted only alterations and not the construction of a new dwelling. Therefore, it found in favour of HMRC and upheld its assessments.

Constable Comment: This case serves as a reminder that zero-rating provisions, like VAT exemptions, are required to be construed as narrowly as possible. The fact that a new dwelling was constructed by CMJ did not guarantee zero-rating and it is important to always consider whether a VAT classification is dependent upon conditions. The law is clear in this case, planning permission must have been granted and any construction must be carried out in line with that permission. A planning permission that permits residential alterations is insufficient to support the application of the zero-rate.

5. Recovering input VAT: no consideration

This case concerned The Door Specialist Limited (TDS), a UK VAT registered company with the main activity of commercial letting. It owns commercial properties which are used for a mixture of supplies. TDS is under common ownership alongside five other companies, all trading under the name “Just Doors”.

HMRC raised an assessment to recover VAT of £80,096 that was claimed by TDS as input tax relating to the purchase of doors from China and advertising costs. HMRC decided that this amount was not recoverable because the costs on which VAT was incurred were not used by the business in the making of onward taxable supplies. The doors were given to the Just Doors companies in return for no consideration. TDS accepted that VAT incurred on advertising costs was not recoverable and so appealed only in relation to the purchase of doors.

HMRC’s argument stated that the amounts of VAT incurred by TDS on the purchases of doors can only be recovered as input tax when these purchases are used, or intended to be used, in the making of taxable supplies by a taxable person. They stated that TDS’ only taxable supplies are rents received from commercial properties under an option to tax. The doors purchased from China are not used to make onward taxable supplies and, accordingly, VAT incurred is not input tax that TDS could recover.

TDS claimed that it made gifts of the doors which it had imported and cited HMRC’s Guidance, VAT Notice 700, which states that a gift of goods is normally a taxable supply. Accordingly, it argued, TDS should be entitled to recover input VAT in relation to doors which are imported to be gifted to Just Doors companies.

The Tribunal was not persuaded by this argument and clarified that, to qualify as input tax, VAT must be incurred on goods or services used or to be used for the purpose of a business carried on or to be carried on by a taxable person.  Caselaw has highlighted that there must be a direct and immediate link between the purchase and the making of onward taxable supplies for VAT incurred on the purchase to be recoverable as input VAT.

The Tribunal considered that that TDS, whilst registered for VAT and making taxable supplies in respect of two opted properties, makes gifts of goods of doors separately to the economic activity of renting commercial properties. Therefore, it stated, the purchase of the doors is not connected in any way to a taxable supply made by TDS. Accordingly, the Tribunal held that input VAT on the imported doors was not recoverable and upheld HMRC’s assessments.

Constable Comment: It is a fundamental principle of the VAT system that, for a right to input VAT recovery to arise, there must be a direct and immediate link between the purchase and a taxable output. Whilst it is possible to recover input VAT on certain types of gifts, the rules are strict and normally require the declaration of associated output VAT. If your organisation often runs promotions or makes gifts then it is essential to consider the VAT ramifications.

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.