Constable VAT Focus 23 September 2022

HMRC NEWS

VAT-free shopping for overseas visitors
A new VAT-free shopping scheme was announced this morning in the latest ‘Mini-budget’ for overseas visitors. The specific details regarding the VAT-free shopping scheme are yet to be confirmed, but we will report any further updates when they are released.

How VAT affects charities (VAT Notice 701/1)
The above guidance provides information on how VAT affects charities, how to treat a charity’s income for VAT purposes and VAT reliefs available to charities. HMRC has recently updated the section on the ‘business-test’ to include new information about the “2-stage test”.

Postage stamps and philatelic supplies (VAT Notice 701/8)
The above guidance provides information on which postage stamps are free of VAT and when VAT must be applied to stamps, stamped stationery and other philatelic supplies. Royal Mail has now confirmed that stamps bearing the image of Her Majesty Queen Elizabeth II remain valid for use. The notice will be updated when the Royal Mail makes any further announcement.

CASE REVIEW

CJEU

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 when reaching their own conclusions and there may be occasions where they have a more binding effect. If you are concerned about the impact of any matters raised in the following cases, please contact us.

Opinion of the Advocate General

 

1. Correcting overcharged VAT on supplies to consumers

P GmbH (P) operates an indoor playground in Austria. In 2019, P incorrectly accounted for VAT on its admission fees at the standard rate of VAT of 20% rather than the reduced rate of 13%. P issued a total of 22,557 invoices in 2019 and the customers were exclusively consumers who did not have the right to recover the VAT charged. P corrected its annual VAT return for the year 2019 to reclaim the VAT overdeclared. The Austrian tax authorities refused the correction on two grounds: P owed the higher amount of VAT as a result of accounting for it on its invoices without correction and it was P’s customers who had paid the VAT and P would be unjustly enriched if the VAT were refunded.

Ordinarily, if the amount of VAT showing on a VAT invoice issued is higher than the amount properly due, the business must account for that higher amount to the relevant tax authority. The rule is designed to prevent tax loss if invoices are issued to businesses who might recover the overstated VAT as input tax. In this opinion, Advocate General (AG) Julianne Kokott was required to consider whether:

  • Is VAT payable by the issuer of the invoice if there is no risk of loss of tax revenue because the recipients of the services are not entitled to the right of deduction?
  • If so, do the invoices need to be corrected if there is no risk of loss of tax revenue and the correction of such invoices is effectively impossible?
  • Does the fact that final consumers have borne the tax as part of the consideration, thereby enriching the taxable person by correcting the VAT, preclude the correction of the VAT?

AG Kokott concluded that P is not liable for VAT if its customers are not entitled to deduct input tax. If P was obliged to account for the VAT, the tax authority required P to collect VAT on its behalf, and should therefore be liable for the consequences of an error if P had acted in good faith. If P had overcharged VAT because the correct legal position was unclear, then it should be entitled to reclaim the VAT without the correction or reissue of VAT invoices. However, if the error resulted from P failing to consider the VAT position properly, then it would only be able to reclaim the VAT if it could demonstrate that there was no risk of tax loss.

AG Kokott also considered it unlikely that P’s claim could be denied on the basis of unjust enrichment. Provided that P had acted in good faith, it should be entitled to recover the overcharged VAT.

Constable Comment: This opinion highlights the importance of ensuring that VAT is correctly shown and accounted for on invoices issued. It also considers the potentially complex implications of seeking to correct the position where it may be impossible to correct the invoices already issued at a later date. If you have any concerns surrounding the correct VAT liability of your supplies, please do not hesitate to contact Constable VAT.

JUDGMENTS

 

2. The entitlement to input tax deduction for holding companies

This case concerns the refusal by the German tax authorities to allow W GmbH (WG) to deduct input VAT relating to a payment made to two limited partnerships, in which WG held 90% interest. The partnerships developed residential properties in Germany, the sale of which were exempt, therefore the partnerships would have been unable to recover VAT incurred on related construction services. Instead, WG procured EUR 40million of construction services and contributed these to the partnerships. WG treated the contribution as outside the scope of VAT but contended that the VAT incurred on the construction services was recoverable as input VAT as WG was a fully taxable business as a result of management fees charged.

The CJEU considered that in order to reclaim VAT incurred, two conditions must be met. First, the person concerned must be a taxable person and the goods or services must be used by a taxable person for the purposes of their taxable activities.

The acquisition and holding of shares in a company does not amount to an economic activity, therefore a holding company whose sole purpose is to acquire shares in other companies is not a taxable person and does not have the right to deduct VAT. In the present case, WG supplied accounting and management services to its two subsidiaries in exchange for payment, which constitute an economic activity. Consequently, the CJEU held WG must be regarded as a taxable person.

With regards to the second condition, the right to deduct input tax requires the goods and services obtained to be used for the purposes of taxable supplies. WG obtained the services required to fulfil its obligations relating to payment in kind of shareholder contributions to the partnerships (rather than a supply to the partnership). The fact that those services are intended to be used by WG’s subsidiaries confirms that there is no direct and immediate link with WG’s own economic activity. Those costs are not part, as general costs, of the components of WG’s management and accounting services.

The CJEU ruled that the constructions services were not incurred in order to carry out the management supplies of WG. Contributing to the partnerships activities was not a business activity and therefore the VAT incurred by WG was not recoverable.

Constable Comment: Holding companies have a range of structures and purposes. Some have minimal activities whilst others are actively concerned with the supervision and management of their subsidiaries. This case highlights that in order for a holding company to recover VAT incurred as input tax, demonstrating a direct and immediate link between input VAT incurred and a subsequent taxable activity is key.

3. Input tax recovery on the compulsory purchase of property

This case concerns the denial of the right to deduct VAT incurred on the purchase of a property on account of an alleged abuse of rights by HA.EN (H). In 2015 HA.EN purchased a secured loan which had been granted by a bank to a Lithuanian property developer. The developer was facing financial difficulties and was forced to sell the property to H for EUR 4.5million plus VAT (EUR 949,000) as a result of a compulsory purchase order. The sale proceeds reduced the outstanding loan but no cash changed hands.

As a result of the financial difficulties faced by the developer, whilst it accounted for output VAT on its VAT return, it could not pay the output VAT due and it was declared insolvent.

H reclaimed the VAT incurred on the purchase of the property. Following a tax inspection, the local tax authority held that H knew or should have known that the developer would not pay the output VAT due. This being so the tax authority considered H had acted in bad faith and committed an abuse of rights and the tax authority denied H the right to deduct the VAT incurred as input tax.

Two conditions must be met in order to find that an abusive practice exists. First, the transactions concerned must result in the obtaining of a tax advantage contrary to the intentions of the law. Second, the essential aim of the transactions is solely to obtain that tax advantage. The CJEU stated that even if the input VAT recovery by H is seen as a tax advantage, that advantage cannot be regarded as contrary to the intentions of the law.

Under the second condition, the CJEU confirmed that H was a creditor of the developer as it held a mortgage over the property which was subject to a compulsory sale. The essential aim of the compulsory sale was for H to recover its debt, rather than securing VAT advantages. The CJEU concluded that H should therefore not be denied input VAT recovery.

Constable Comment: This case highlighted the conditions for ‘abuse of rights’ to apply it must be proved that the tax advantage must be contrary to the intentions of the law and the essential aim of the transaction is solely to obtain that advantage. Whilst EU rules are no longer binding on UK businesses, these conditions may be taken into consideration by UK courts.

FIRST TIER TRIBUNAL

4. Zero rating of non-emergency ambulances

E-Zec Medical Services Limited provides Non-Emergency Patient Transport Services (NETPS), on behalf of various NHS trusts for sick and injured individuals to and from hospital and doctor’s appointments. It is common ground that the ambulance services in question are exempt from VAT. However, a dispute arose with HMRC as to whether the provision of NETPS could be zero-rated as passenger transport, therefore entitling E-Zec to VAT recovery.

Non-Emergency Patient Transport Services (NEPTS) involve transporting day patients, recurring treatment patients and patients on daily discharge and often involves taking multiple passengers in one journey either from or to multiple destinations. E-Zec can only zero-rate its services if the vehicles could carry 10 people, were it not for the wheelchair adaptations.

On a typical day, each vehicle of the appellant will carry at least one wheelchair passenger. On average, approximately 40 to 50% of all passengers carried by the appellant require a wheelchair, bring their own wheelchair, require a bariatric wheelchair or require a stretcher. Generally, E-Zec’s vehicles are configured with eight seats, allowing space for a ramp, winch, and storage pen for wheelchairs. An aluminium tracking system is also installed in the floor, to allow seats to be reconfigured according to how many wheelchair users will use the vehicle.

The First-tier tribunal considered how many people E-Zec’s vehicles could carry if only the wheelchair-specific adaptations were removed. This involved hypothetically adding some things back: in this case, the floor was adapted for wheelchairs, so the FTT had to imagine that the floor was replaced by a standard plywood floor. The FTT accepted-Zec’s vehicles without the wheelchair adaptions could be driven with ten passengers and comfortably within the vehicle’s maximum weight allowance of 3,500kg. E-Zec’s services therefore qualified for zero-rating.

Constable Comment: This case also highlights the importance of applying the correct VAT treatment to a supply. Zero-rating enables VAT recovery and it is important to remember that this takes precedence over VAT exemption. If you or your business have any ambiguity regarding the VAT treatment of your supplies, please do not hesitate to contact Constable VAT.

5. Whether VAT assessment by HMRC time barred

In the case of Nottingham Forest Football Club Limited (NFFC), NFFC appealed against a VAT assessment for the period 08/15 in the amount of £345,561 issued by HMRC on 29 April 2019

The issue was whether HMRC was time-barred from raising the assessment under section 73(6)(b) VATA 1994. That is, whether the assessment was made within one year after evidence of the facts, sufficient in the opinion of HMRC to justify the making of the assessment, came to their knowledge. HMRC argued that their knowledge of the facts was only complete on 9 May 2018 whereas NFFC contended that HMRC had the necessary knowledge of the facts on 20 April 2018.

HMRC visited NFFC on 20 April 2018 to discuss how the business operated and its accounting systems, examine invoices and download general ledger data. A back up memory stick containing data from NFFC’s previous accounting system was obtained on 9 May 2018. HMRC issued a VAT assessment on 29 April 2019.

The Tribunal confirmed that the burden of proof was on NFFC to demonstrate the assessment had been raised late. NFFC did not provide evidence which showed that the initial information provided on 20 April 2018 was sufficient to justify the making of the assessment.

The Tribunal could not conclude the information provided on 9 May 2018 was irrelevant to the assessment raised. The time limit for raising the assessment, therefore, expired on 9 May 2019 and the assessment, raised on 29 April 2019, was in time.

Constable comment: This case confirms that the burden of proof is on the taxpayer to demonstrate whether an assessment has been made out of time. It is important to remember the application of these time limits in relation to error corrections submitted to HMRC where an assessment is due to be raised.


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.