Constable VAT Focus 24 February 2022


Revenue and Customs Brief 3 (2022): postponed VAT accounting and businesses registered under the Flat Rate Scheme
HMRC has recently published this brief which explains how businesses registered under the Flat Rate Scheme should account for import VAT using postponed VAT accounting from 1st June 2022.

How to fill in and submit your VAT Return (VAT Notice 700/12)
HMRC have updated their guidance and from 1st June 2022, businesses registered under the Flat Rate Scheme should no longer include imports accounted for under postponed VAT accounting within their flat rate turnover. These should be accounted for separately, outside of the Flat Rate Scheme.

Check your transit guarantee balance
HMRC have published new guidance regarding how to check your New Computerised Transit System (NCTS) guarantee balance.

Investment gold coins (VAT Notice 701/21A)
The above notice is a summary of gold considered as investment gold coins for VAT exemption. The UK list of coins recognised as investment gold coins has been added recently.


Upper-tier Tax Tribunal

1. Taxable supplies and input tax recovery

The issue before the Tribunal was whether Y4 is entitled to credit for input VAT in connection with payments made to Mr Man and CL, to make good the costs they incurred by way of Royal Mail charges resulting from Y4’s use of Mr Man’s and CL’s Royal Mail accounts.  The FTT had previously held that Y4 was not entitled to input tax credit.  The UTT considered Y4’s appeal against that decision.

As established by the FTT, until 2013, Y4 used Royal Mail’s PPI service. The PPI scheme provided Y4 with access to preferential rates and required it to make daily declarations of the items it was sending by means of an online business account.  In June 2013 Royal Mail became concerned that Y4’s declarations were not accurate and suspended Y4’s access to the PPI scheme. Y4 agreed to pay Royal Mail £600,000 to compromise a claim for alleged under-declarations of postage.

To retain access to Royal Mail’s preferential rates, Y4 asked friends of Y4’s Company Secretary to set up Royal Mail accounts. This was done by Mr Pat Ning Man (Mr Man) and Colemead Limited (CL).

Mr Man opened the OBA account with Royal Mail in 2012 although this did not become active until July 2013. He then provided Y4 with the details of this account which enabled Y4 use it. Y4 made payments to Mr Man at least equal to sums that Royal Mail charged Mr Man. The FTT found that Y4 made other payments to Mr Man which were additional to the sums above.

Y4 prepared invoices, addressed to itself, recording sums payable to Mr Man. Mr Man played no part in dealing with Royal Mail and arranging for Y4’s goods to be delivered using Royal Mail’s network.  Mr Man had registered for VAT in 2013 but in 2015 cancelled that VAT registration with retroactive effect from the original registration date. The FTT made a finding that Mr Man never submitted any VAT returns.

CL opened an OBA with Royal Mail which was active from April 2014 until December 2016. CL also provided Y4 with access to their account so that Y4 could use the account as its own. Y4 paid CL by direct debit sums equal to those that Royal Mail charged CL. Y4 prepared invoices that were ostensibly then issued by CL to Y4.  CL played no active part in the arrangement. Y4 arranged for a firm of accountants to deal with CL’s VAT returns, which were signed by a director without being checked.

HMRC argued that neither Mr Man nor CL made taxable supplies to Y4 because there was no contractual relationship leading to reciprocal obligations.  As a result there was no direct link between the consideration that they received from Y4 and the provision of services. Accordingly, neither Mr Man nor CL was carrying on an economic activity. As a result, Y4 had no right to deduct input VAT.

Y4’s case was that Mr Man and CL had been undertaking an economic activity and made taxable supplies to Y4. The focus of Y4’s arguments appears to have been that payments made by Y4 exceeded the payments made by Mr Man and CL.

The FTT concluded that CL was not supplying services for a consideration and not carrying out an economic activity. Therefore, Y4 was not entitled to input tax credit on services received from CL. The FTT concluded similarly in respect of Mr Man. The FTT had concluded that Y4 was not carrying out an economic activity, basing that conclusion it appears in large part on the motivations of Mr Man and Colemead.  The relationship was entered into because of friendships and not as a means of obtaining income.

In dismissing the appeal, the UTT implied that Y4 perhaps omitted arguments at the FTT that would have required further findings of fact and may have had a better chance of success, stating:

Conceptually, Y4 could have chosen to make its case differently before the FTT. Instead of resting on the proposition that there was an arrangement for Y4 to pay Mr Man or Colemead “commission” or “income”, it might have chosen to argue that there was, at the very least, an arrangement for Y4 to pay “make whole” amounts. Even if those payments only enabled Mr Man or Colemead to secure cost recovery, rather than to make any kind of profit, Y4 might have sought to argue that the existence of an arrangement to pay these sums constituted consideration and indicated, moreover, that Mr Man and Colemead were carrying on economic activities.

However, the UTT went on to explain why it would not have allowed Y4 to introduce those different arguments on appeal to the UTT (had it sought to do so) and went on to reject the appeal broadly on the basis that it could not overturn findings of fact or consider new legal arguments.

Constable Comment:  This case adds little to the developed case law on what constitutes an economic activity.  What the case does clearly illustrate is the importance of ensuring that all relevant facts and legal arguments are addressed at the FTT.  We will never know whether the possible alternative arguments raised by the UTT in this case would have resulted in a different outcome.  The inference is that they may have done, otherwise why would the UTT have raised this tantalising point. It is also possible that the FTT’s written decision failed to capture faithfully all the nuance of Y4’s case.  A written decision is only a short distillation of the facts and legal arguments that have been made.     


2. Car boot sale pitch

This case concerned Rufforth Park Limited (RPL).  RPL appealed against a VAT assessment in the amount of £82,995. The point under appeal was whether the car boot sale pitches issued by RPL constitute to the grant of a VAT exempt interest in, right over or license to occupy land. Alternatively, was RPL’s supply a broader service and subject to the standard rate of VAT, as HMRC contended.

This has become an increasingly contentious area of VAT. Simplistically, most passive supplies of land are VAT exempt unless an option to tax has been made.  The issue is “At what point do other factors or additional services provided with the land change that classification?”

HMRC argued that the rental of the pitches at the car boot sale is more than a passive supply of land. They argued the supply is a provision of services, as RPL also supplies advertising, on site café, toilets, parking, capital improvements to the site to make it more attractive to buyers and cleaning of the site after events. HMRC argued that these events were expertly organised and run by RPL, relying on case law such as Craft Carnival, such that sellers were receiving a service rather than a pitch.

In considering the position the Tribunal contrasted the Craft Carnival case.  The Craft Carnival events were held at prestigious venues, electricity was available for all sellers, tables and chairs, as well as a choice of indoor or outdoor pitch was offered.

In RPL’s case, no chairs, tables, or electricity are provided. There is no provision of security. The toilet and refreshment facilities are basic. The related expenditure by RPL was maintenance rather than enhancing facilities. Therefore, the Tribunal concluded that the commercial and economic reality is that RPL supplies an exempt license to occupy a pitch. It observed that because the event was well organised and run for 40 years does not make it “expertly organised” in the terms HMRC suggested. RPL’s appeal against HMRC’s assessments was allowed.

Constable Comment:  This decision provides helpful guidance albeit, as a First-tier Tribunal case, it is not binding as far as HMRC’s dealing with other taxpayers is concerned.  However, it does not remove the fundamental problem that it has become almost impossible to identify a tipping point at which a supply of land becomes subject to VAT because of additional services enhancing that supply. This has become a real risk management issue, perhaps illustrated by the fact that HMRC had in the past ruled that RFL’s supplies are taxable, later withdrawing that ruling in favour of exemption (when RFL pointed out that competitors applied exemption) only to change its mind again. In that respect, it seems surprising that HMRC went on to assess VAT retroactively, having previously agreed exemption. The obvious question is “If HMRC keeps changing its mind and eventually makes the wrong decisions (based on this decision) how on earth are taxpayers expected to make the correct judgment?”  There is certainly a case to simplify the law but until that occurs it is wise to seek professional support in grappling with situations like this.

3. Evidence required for exports

The appellant carries on a business exporting designer goods to China.  HMRC raised an assessment for £379,280 on the grounds that the appellant did not hold satisfactory export evidence to allow zero-rating.

HMRC’s primary case for refusing zero-rating was that the requirement to clearly identify exported goods and their value within the export evidence was not met. The appellant used Parcelforce to export the goods and as part of the online booking they selected “personal effects” as the category and entered “clothes” into the description. HMRC considered this too vague. Also, the value of goods on the Parcelforce form was entered as £100 in every case, regardless of the contents of the package. The appellant explained that this was to reduce the risk that the goods would be stolen in transit, which was not questioned by the Tribunal.

In considering the arrangements, the Tribunal found that each parcel exported included the following details: the supplier, the client, tracking number, description of the items included and their individual price, and the total amount at the end of the list. These were referred to as packing lists and the appellant retained a copy of each packing lists and these were kept on a computer.

The Tribunal found that the packing lists can be cross referenced to the customer orders, the description of goods is not incorrect, and a more detailed description is identified in the packing lists.

With regards to the value of the goods, the Tribunal stated that the value is also stated clearly on the packing lists, therefore it concluded that both the goods and their value can be identified on supplementary evidence held by the appellant and therefore the goods can be zero rated.

Based on the above the appeal against HMRC’s assessments was allowed.

Constable Comment:  In this case there seems to have been no suggestion that the goods in question had not been exported and in previous dealings with HMRC the procedures/evidence had been acceptable.  Therefore, HMRC seems to have taken a very harsh approach to perceived procedural deficiencies.  Whatever the rights and wrongs of the appellants processes, there was clear evidence that exports had occurred and no indication of any revenue loss.  We would like to think that HMRC’s normal approach in that situation would be to ask the taxpayer to address the perceived deficiencies, not to raise assessments for VAT that HMRC probably realised was not due.  Compliance with administrative rules is important otherwise the VAT system is open to abuse.  However, historically HMRC tended to consider what those administrative rules are supposed to achieve and whether that purpose has been subverted.  In this case HMRC sought to penalise documentation errors that (on a broad evaluation) did not devalue the proof of export. The apparent shift of approach by HMRC certainly highlights the need to consider whether acceptable proof of export is held in relation to zero-rated export sales.      

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.