Constable VAT Focus 21 May 2020


Zero-rating: Exports affected by the COVID-19 Emergency
HMRC has released guidance to assist businesses which may struggle to meet the time limit for removing the goods from the UK which must be met in order for the export to be zero-rated.

Software Suppliers for VAT & EC Sales Lists
Certain contact details have been updated for specific suppliers to assist taxpayers in finding recognised suppliers of compliant software for submitting VAT Returns and EC Sales Lists.

Option to Tax: Change to Time Limit
As a result of COVID-19, taxpayers now have 90 days to notify HMRC of an option to tax, rather than the usual 30. This applies to elections being made between 15 Feb and 31 May.

Revoking An Option to Tax
The address for sending completed forms and supporting documentation has been updated.

EU VAT Refunds: Service Availability
The Republic of Ireland have told HMRC that they require scanned documentation when claims are submitted, or they will be automatically rejected. A 5 MB limit is in place so you should attach the highest value VAT invoices first. If they need sight of any additional invoices or other documents, they will contact you to ask for them.


Partly exempt businesses recover VAT incurred provisionally throughout the VAT accounting year. At the end of the VAT year they must perform an annual adjustment calculation to determine the amount of input VAT recoverable in the VAT year. The provisional input VAT deduction is compared with the actual recovery allowed and, if necessary, the position must be adjusted. This adjustment is normally made on the VAT return following a business’ partial exemption year end, although it is possible to make an ‘in year’ adjustment. A business submitting calendar quarterly VAT returns, with a VAT year end of 31 March, usually includes its partial exemption annual adjustment on the VAT return in respect of the VAT accounting period ending 30 June.

Many taxpayers will imminently need to perform their annual adjustment calculations. This can often be a particularly difficult and time-consuming exercise which often poses problems for businesses. It is advisable to seek professional advice when performing partial exemption annual adjustments, particularly at uncertain times such as now where the values of taxable or VAT exempt supplies may have fluctuated unexpectedly. Our coverage of partial exemption can be read in full here. For assistance with any partial exemption query, please do not hesitate to contact Constable VAT.



1. Agrobet: Deferral of Repayment of VAT to Taxpayer

This Czech referral concerned the practice of the tax authorities in the Czech Republish to defer payment of a legitimate VAT refund until it has inspected each individual transaction which makes up part of the claim, even in a situation where it is clear that the majority of the claim posed no problems.

Agrobet is a business which imports and re-exports rapeseed oil to and from Poland. It submitted two repayment VAT returns relating to the periods December 2015 and January 2016. The tax authority doubted the suggested regularity of these transactions and, in any event, disputed whether the zero-rating conditions had been met where oil from Poland was unmodified by Agrobet and subsequently sold within the Polish market. These disputed transactions made up a small quantity of the overall claims but the tax authority withheld both claims in full pending investigation.

Agrobet appealed against this, arguing that this practice infringes the principle of proportionality. Specifically, it suggested that the principle only allows the reimbursement of VAT to be postponed following the opening of a tax audit procedure to the extent necessary to achieve the objective of that procedure. In this case, the objective of the audit was to establish the veracity of the disputed rapeseed transactions. It stated that, as soon as part of the claim is not called into question by the tax authorities and is not the subject of an audit investigation, it should be repayable to the taxpayer.

The question before the CJEU in this instance was whether the EU principle of proportionality prevents member states from withholding payments of VAT which are known to be legitimate, but form part of an overall investigation into that taxpayer.

The Court concluded that no EU law or principle prevents tax authorities from reimbursing, or only making partial reimbursements of VAT to taxpayers where the tax authority cannot identify legitimate input VAT forming part of an overall disputed claim. However, it commented that where the tax authority is unable to identify VAT which is legitimately due to the taxpayer, even if it is aware that some amount of the claim is likely to be legitimate, the taxpayer’s assertion that certain aspects of the claim are non-contentious is insufficient to compel the tax authority to make such a payment.

It held that the practice of deferring repayment of VAT during a VAT audit is not incompatible with the EU principle of proportionality. However, it ruled that it is for the referring Court to decide if the tax authorities have, or should have, identified a legitimate element of the claim which it should have repaid.

Constable Comment: This judgment highlights that, even when under a tax investigation, taxpayers have the right to repayment of any part of a claim that is clearly identified as undisputed. However, where there is any element of a claim which is disputed, tax authorities can seek to withhold the entire repayment amount pending the result of the investigation. This case confirms that this is an unacceptable practice, although leaves the ultimate decision in the hands of the domestic court as to whether the VAT which there is any of the amount of the claim that was clearly non-contentious.

If you have a claim that is currently being withheld in full even though it is clear that part of it is non-contentious then this case could be helpful.

2. European Commission v UK

This case concerned an application by the European Commission to the CJEU, asking that it declares the UK’s amendments to its derogated zero-rating provisions regarding terminal markets mean that it has failed to fulfil its obligations to notify the EU of any derogations from general Union law.

In 1977, the UK notified the EU of several measures which it had introduced by way of derogation from EU law, including a zero-rate of VAT for certain sales through eleven futures terminal markets and simplifications to the associated record keeping requirements.

The UK subsequently made some amendments to this derogation without notifying the EU, such as adding the International Petroleum Exchange of London and the London Platinum and Palladium Market to the markets included within the special zero-rating measures. In 2018, the European Commission formally notified the UK of its belief that it had breached EU rules by not notifying the Commission that it was making alterations.

The Commission claimed, more specifically, that by introducing new simplification measures which extended the zero-rating and the exception to the normal requirement to keep VAT records, without sending an application to the Commission with a view to seeking the Council’s authorisation, the United Kingdom had failed to fulfil its obligations under Article 395(2) of Directive 2006/112.

The UK responded that the amendments which had been made were not substantive enough to have breached the obligation to notify the EU. It suggested that, perhaps, the European Commission had failed to account for the exceptionally complex nature of the subject matter, noting that futures trading had developed significantly since the original notification in 1977.

The Court observed that, regardless as to the complexity as to the functioning of futures markets themselves, the UK made a notification of a derogation in 1977 which “specifically authorised ‘transactions on the eleven “futures” markets for trade in the commodities referred to in those orders, involving defined market members to be traded free of VAT through zero-rating and of the recording requirements of VAT.” It went on to comment that the amendments which the UK had made to this derogation, such as including extra markets, were substantial changes and should have been notified to the Commission.

The Court held in favour of the Commission, stating that the UK had breached its obligations to notify any derogations or amendments to existing derogations.

Constable Comment: The decision in this case ultimately turned on whether or not the alterations which the UK had made were substantial enough to be notifiable to the EU. The original derogation applies to futures traded through eleven specific terminal markets, the argument that adding several markets with all of their associated transactions to a special measure which zero-rates the transactions conducted was not substantial, unsurprisingly, failed to persuade the Court.

The question before the Court in this instance was purely whether the UK had breached its obligation to notify the Commission of amendments to derogations. However, it will be interesting to see the outcome of any infraction proceedings which the Commission issues against the UK, especially given the current on-going situation with Brexit.

First Tier Tribunal

3. Ultrasound for Pregnant Women: Taxable or Exempt?

This is a lead appeal and concerned several companies which provide ultrasounds scanning services to pregnant women. The business operates as a franchise called Window to The Womb and their shops are in high street locations. They sell “baby bonding experiences”.

The appellants all contended that their supplies are VAT exempt supplies of medical services. the appellants had procedures and pathways for referral to the NHS. It is also the case that, whilst not for all matters, the images produced by the appellants could be used by the NHS when the customer/patient was referred. Following a scan, a “foetal wellbeing” report would be given to the mother.

HMRC argued that the supplies are standard rated supplies of “bonding experiences” or “reassurance”, a contention in line with the marketing of the companies. In order for a supply to be exempt from VAT as a supply of medical care, its primary purpose must be to diagnose, monitor, treat or prevent illness. NHS scans on pregnant women are at set intervals throughout the pregnancy; these intervals are based on research and expertise. HMRC argued that NHS scans have two potential purposes; to screen or to diagnose. It suggested that the appellants’ scans had no such clinical application.

It also contended that the scans supplied by the appellants were not supplied alongside any medical elements such as blood tests or references to previous medical records which, in the view of HMRC, significantly reduces any medical benefit to the scans.

The Tribunal considered that the majority of expectant mothers attending the appellants’ shops and attaining scans were doing so with the primary objective of receiving the wellbeing report, which would reassure the mother as to the health of the foetus. It considered that the situation was less clear regarding those scans where 4D imagery of the baby is paid for, but conceded that these scans were too exempt from VAT.

It held in favour of the taxpayer, stating that supplies of ultrasound scans are capable of being exempt from VAT as medical care.

Constable Comment: The Tribunal has been less restrictive than it has been previously with regard to the interpretation of the medical exemption. It is a well-established principle that, for something to be exempt as a supply of medical care, its primary aim must be to diagnose or treat illness. In this case, the lack of any medical testing or any defined medical benefit makes the decision somewhat surprising. However, as it was noted, the customer receives a foetal wellness report which a hospital could consider in the event that the customer needed medical attention.

4. When is A Building Complete?

This case concerned the DIY Housebuilder Scheme for VAT, under which people who construct their own properties are entitled to reclaim VAT which they incur on costs. Taxpayers are only permitted to make one claim per property, and this must be submitted to HMRC within three months of completion of the building.

In this case, Mr Sansom had constructed a house in Essex, into which he and his family moved in July 2013. Between 2013 and 2018, Mr Sansom exchanged correspondence with the local authority, which refused to issue a certificate of completion on various grounds, including that the property did not meet energy efficiency requirements. Following various measures to make his property compliant, on 19 June 2018, Mr Sansom finally received his completion certificate. On 1 September 2018, he submitted a claim under the DIY Housebuilder VAT Scheme seeking to recover £17,641.48 of VAT; this claim was submitted within three months of Mr Sansom receiving his certificate of completion.

HMRC denied the claim on the grounds that it was submitted more than three months after the building had been completed, stating that “completion” is not decided by reference to a certificate of completion, but by applying a multi-factorial” test. Having applied its test, HMRC had concluded that the building was complete owing to the fact that no invoices for construction dated later than October 2016 had been included with the claim.

Mr Sansom appealed against this decision, claiming that the property was not complete enough to receive an EPC, and that there was an issue with whether the building was compliant with building regulations. He highlighted that between October 2016 and June 2018 he had incurred costs on fixing these issues but that, as the invoices represented professional services, they were not included in the claim as such costs are not permissible. He stressed that, given the “one-off” nature of the DIY reclaim scheme, until the completion certificate was issued, there was no way for him to know if he still had to incur significant building costs on the property.

The Tribunal discussed the significant wealth of recent case law around this point including Farquharson and Dunbar and observed that the VAT regulations relating to the DIY Housebuilder Scheme specifically link the start of the three-month time limit to the provision of the certificate of completion. It also accepted that Mr Sansom was unaware as to whether or not he would need to incur significant further costs to meet building regulations until he had received a completion certificate.

The Tribunal held in favour of Mr Sansom and allowed his reclaim of over £17,000.

Constable Comment: The Tribunal commented in this case that “HMRC cannot refuse to accept claims within three months of the issuance of the certificate on the basis that the individual has failed to meet some uncertain and imprecise multifactorial test.” Previous decisions have also highlighted that HMRC’s Guidance states that the certificate of completion should be the starting point when considering completion for the purposes of the scheme. Equally, the VAT Regulations make it clear that it is only in the absence of such a certificate that other evidence needs to be considered.

It seems unfair that taxpayers are frequently having to make appeals and defend themselves at Tribunal, at cost to themselves, for following the regulations and submitting valid claims on time. It is positive to see the Tribunal remark on the strange nature of HMRC’s uncodified and imprecise test.

Constable VAT recently assisted a client to succeed at Tribunal on this point. In that instance, our client received planning permission in May 2006 to build a dwelling with an attached garage. Between 2005 and 2016, he purchased materials and associated services relating to the construction of the new properties; however, only four invoices were dated later than 2 November 2011. A DIY claim was submitted on 11 January 2019, following the receipt of a certificate of completion on 4 January 2019. HMRC rejected the claim on the grounds that it was outside of the three-month time limit to make such a claim. Our coverage of the case and the way in which a successful argument was mounted against HMRC can be read in full here.

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.