Constable VAT Focus 22 February 2024


VAT Import One Stop Shop Scheme
HMRC has published new guidance to help taxpayers find out if you can register and use the VAT Import One Stop Shop (IOSS) Scheme to report and pay VAT on imports of low value goods to consumers in the EU, Northern Ireland, or both. HMRC published further guidance about who can register, how to register and what to do after registration. All guidance is available from the link above.

Health professionals and pharmaceutical products (VAT Notice 701/57)
This guidance sets out how to account for VAT on goods and services provided by registered health professionals, including doctors, dentists, nurses and pharmacists. Section 10.1 has been updated to remove a reference to orthodontic appliances.

Making Tax Digital for VAT
HMRC will now sign up all new VAT registered businesses to Making Tax Digital for VAT automatically unless they are exempt or have applied for exemption.

Who should register for VAT (VAT Notice 700/1)
Information has been added in section 2.7 of VAT Notice 700/1 to confirm what needs to be included during the application process when describing business activities, specifically in relation to specified supplies.


Supreme Court

1. Removal of low value consignment relief

Following the High Court and Court of Appeal’s decision to strike out the appeal, Jersey Choice Ltd’s  (JCL) appeal was considered by the Supreme Court. JCL grew horticultural products which were sold and imported into the UK from the Channel Islands. Prior to 2012, JCL benefitted from an import VAT exemption, the low value consignment relief (LVCR) which applied to goods valued below £15. The relief was exploited by online retailers and the government removed LVCR from 2012 from the Channel Islands only (no other territories were affected).

JCL was adversely impacted by the removal of LVCR and instigated proceedings against HM Treasury arguing that the removal of the LVCR breached its rights under EU law, resulting in damages in the sum of £15million.

JCL argued that the charge to VAT on imports into the UK from the Channel Islands was the equivalent to customs duty; however, the Channel Islands were within the EU Customs Union (but outside the EU for VAT purposes) and such a charge was contrary to the EU customs regime which should provide free movement of goods.

The Supreme Court concluded that JCL should be treated as a third country in the context of the EU VAT regime as opposed to considering the EU customs regime, and under the VAT regime, the EU principles of equal treatment and proportionality could not apply, and the appeal was accordingly dismissed.

Constable Comment: Whilst the UK has left the EU since these proceedings began, this was an interesting and complex case of the UK Court’s interpretation of how EU laws are applicable.


2. Sports nutrition products – zero rated?

This appeal concerned whether ‘the product’ sold by Duelfuel Nutrition Limited (DNL) is zero rated for VAT purposes. DNL developed a product marketed as assisting exercise. The product contains two items packaged and sold together. One of the items is a flapjack designed to assist with ‘performance’ and recommended to be consumed prior to exercise, followed by a cake or a brownie designed to assist with post exercise ‘recovery’, being high in protein. The product was marketed as ‘Two fuels. One system.’

DNL sought a non-statutory clearance (NSC) ruling from HMRC as to the VAT treatment of the products and HMRC responded advising the product is standard rated confectionary and not zero-rated as DNL desired. After a request for an independent review, the original decision was upheld by HMRC, DNL appealed this decision to the FTT. The Tribunal initially considered whether the product is ‘cake’, meaning it cannot be a confectionary and is zero rated for VAT purposes.

The FTT applied a multifactorial test and concluded the product is not a cake. Whilst it found the size and appearance of the product to be consistent with a cake, the taste and texture were different. In addition, the Tribunal found the packaging (two items together) is not what an ordinary person would expect of a cake and also the product was marketed to be a ‘healthy product’ which is not strongly indicative of an ordinary cake. The pattern of consumption, being before and after exercise was not indicative of a cake either. After weighing all the relevant factors, the FTT concluded the product was not a cake.

Following this conclusion , the FTT had to determine whether the product is confectionary (standard rated). VAT legislation states ‘confectionery’ includes chocolates, sweets and biscuits; drained, glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers. The FTT concluded that the product is sweetened prepared food, which is normally eaten with fingers, therefore it is confectionary. The FTT also applied the multifactorial test and concluded that an ordinary person would find that the products are not confectionery.

However, given that the products fall within the legislative definition of ‘confectionary’, the FTT concluded the product is standard rated for VAT purposes and the appeal was dismissed.

Constable Comment: This is another complicated case on a subject that is often a source of dispute between taxpayers and HMRC. It will be interesting to see if the appellant wishes to pursue this decision with the Upper Tribunal, given that the decision suggests production of the product ceased during this dispute around the correct VAT treatment of the product because it would not be profitable if the appellant had to account for VAT at 20% on its supplies. The appellant took this into consideration during the planning stages, concluding that zero rated VAT treatment was essential, and carried out VAT research as well as taking professional advice. HMRC and the Tribunal disagreed with the VAT treatment sought or identified by DNL.

The case acts as an important reminder that there is a lot of ambiguity and debatable points regarding the zero rating of food items and HMRC will often challenge zero rating. It is therefore important to carefully consider the position and to seek professional advice to mitigate the potential risk of HMRC challenging the proposed VAT (zero-rating) treatment of a product.

3. VAT zero rate: Evidence for exports

In this case, H Ripley & Co Limited (HR) appealed HMRC’s decision to deny it’s claim to zero rate supplies and output tax in the sum of £1,176,161. HR is a UK VAT registered business which exports scrap metal to EU Member States. The claim was denied on the basis that HR had not provided evidence to satisfy the requirements of VAT Public Notice 725 (VN 725) which has force of law. The appeal relates to 72 supplies and 91 loads of scrap metal.

The Tribunal highlighted that the burden of proof is on HR to show that it satisfied the conditions set out in VN 725 to zero-rate its supplies and provided documentation to show that the goods were removed from the UK within the required time limits (3 months).

HR argued that the evidence of removal of the goods from the UK is demonstrated by the production of a combination of various documents and the inferences to be drawn from them. The documents are consistent with each other and so corroborate each other and accurately record the 72 transactions. The combination of documents included sales invoices, bank statements, weighbridge tickets, CMRs, Annex VII documents, P&O boarding cards, emails, and WhatsApp messages.

The Tribunal reviewed each category of documents provided. Whilst the sales invoices and bank statements showed there were sales made to a company in Belgium and payment was received from a Belgian bank account, this does not evidence that goods were removed from the UK. With regards to the weighbridge tickets, a significant number of these were unsigned and did not contain a carrier name. UK registered vehicles number plates were recorded on some; however, these did not appear on any subsequent documents provided as evidence of export.

The CMRs provided were not fully completed by the haulier and were not signed by the receiving consignee. The Annex VII Documents were incomplete and incorrect as it showed the UK as both the exporting and importing country. Whilst HR argued this is an international trait of the industry to prevent the seller from finding out who the final purchaser is, the Tribunal did not accept these as complete evidence of export. With regards to email and WhatsApp messages, the Tribunal also considered these were not obtained within 3 months, and also do not evidence that the scrap metal was exported.

As a result of the above, the Tribunal found that none of the documents, individually or taken as a whole, relied upon by HR evidence the export of scrap metal per the requirements of VN 725. Accordingly, the appeal was dismissed.

Constable Comment: This case is a reminder that there are strict requirements to be met regarding record keeping in relation zero rated exports. VN 725 sets out the required records taxpayers must obtain and the applicable time frames, plus other rules. It is important to remember that this VAT notice has the force of law. If these requirements are not met, the taxpayer may be expected to account for output VAT as if the sales were made domestically, and not exports, which could have significant impacts on a business. The VAT sums involved in this case were significant.   

4. Input VAT recovery disallowed

In this case, the appellant, Passion Incorporated Ltd (PIL) supplied consultancy, advertising, and marketing services. HMRC disallowed VAT incurred and reclaimed as input tax on various VAT returns and raised ‘best judgment’ VAT assessments on the grounds that the appellant failed to demonstrate that the expenditure giving rise to the VAT incurred and reclaimed, was done so for the purpose of its business.

Whilst the appellant made some arguments that the information submitted should have been sufficient for HMRC to determine the nature of the expenditure, this was considered insufficient and HMRC upheld its original decision. There were multiple reasons the input VAT claims were invalid, including invoices not addressed to the company, double counting of invoices and claims for expenditure in relation to which no VAT had been incurred.

The Tribunal agreed with HMRC and commented that it appears the appellant did not appreciate some key principles in relation to input VAT recovery such as in order to recover input VAT on costs there must be a direct and immediate link between those costs and taxable supplies made (or intended to be made) by the business. It is for the taxpayer to demonstrate that the link between the expenditure incurred, and taxable supplies exists, rather than for HMRC to demonstrate that it does not. Input VAT incurred for personal rather business usage is irrecoverable. Lastly, input VAT is generally not recoverable where it has been incurred on business entertainment expenditure.

As the appellant was unable to demonstrate there was sufficient link between the VAT incurred and taxable supplies, and it appeared that certain costs were for personal usage, the Tribunal dismissed the appeal.

Constable Comment: Whilst this case may not impact many other taxpayers, it acts a useful reminder of the general and basic principles of input VAT recovery. It is important that there is a direct link between input VAT incurred and a taxable supply. VAT incurred on personal expenses is unlikely to be classified as input tax, VAT being a transaction-based business tax, and will not be recoverable if relating to personal use or non-business activities. If you have any questions or queries around recovering VAT incurred or input VAT recovery generally, what may or may not be considered a business activity (for VAT purposes) please do not hesitate to get in touch and Constable VAT would be pleased 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.