Constable VAT Focus 24 January 2020


Updates on VAT Appeals

HMRC has updated its list of VAT appeals which it has lost, or partly lost, which could have implications for other businesses.

Quarterly VAT Statistics

HMRC has released its three-monthly VAT bulletin which provides information on quarterly VAT receipts, composed of domestic VAT and Import VAT.

Point of Sale VAT Retail Scheme

HMRC has updated Notice 727/3 with information about changes in the treatment of vouchers.  


Constable VAT has just released a new blog covering some compliance points around distance selling. Distance sales arise where a business in one EU member state sells goods to a consumer (not VAT registered) in another EU member state. We have recently encountered several cases of businesses failing to comply with EU distance sales regulations. If you think that your business may have made an error or misunderstood the rules regarding distance sales obligations, please get in touch with Constable VAT as we will be happy to assist.



1. Supply of Transport or Admission

This case concerned the appropriate rate of VAT which should be charged by Snow Factor Limited (SFL) when selling passes to use the ski-lifts which are available at the snow dome which it operates. The use of the ski-slope itself was not charged for; there is no argument that this would be standard rated. SFL argued that the supplies should be reduced rated as supplies of passenger transport; HMRC argued that the supplies made should properly be characterised as a right to make use of the ski-slope and as such should be standard rated for VAT purposes.

The FTT had previously ruled in HMRC’s favour but SFL appealed on the grounds that, whilst the main reason that customers came to the slope was to ski, the only service which was charged for was the transport on the lift.

HMRC argued that the FTT had been correct as the primary reason for customers to attend the ski slope was to ski and not to make use of the lifts. It argued, in line with Card Protection Plan, that the single supply made by SFL, which should not be artificially split, was a supply of admission to the ski slope which was chargeable to VAT at the standard rate.

SFL argued that, as access to the slope was free, that this was not a supply at all for VAT purposes, which arises where something is done in favour for consideration or reciprocal performance, such as a barter transaction. Therefore, it rejected the Card protection Plan argument as there were not two supplies; there was one supply of use of the lift.

The Tribunal held in favour of SFL and allowed the appeal.

Constable Comment: This case is a useful illustration of the principle of a supply for VAT purposes. Something which is freely given does not create an obligation to account for output tax unless input tax has been recovered in relation to that supply (this is a deemed supply). Allowing consumers to use an asset without charging them, and with no degree of reciprocation, does not satisfy the supply criteria for VAT purposes.


2. Input VAT Recovery on Set-up Costs

This case concerned the recovery of input tax by the appellant, Melford Capital General Partners (MCGP) which is the general partner of Melford Special Situations LP (MSS), an English limited partnership.

Acting through MCGP, MSS holds shares in an Isle of Man company called Hyde Park Hayes Ltd (HPH) which, in turn, holds the shares in a number of special purpose vehicles (SPVs). Each of these SPVs holds a separate asset such as commercial property. MCGP is owned by Melford Capital Partners LLP (MCP) which is contracted to provide advisory and property management services to MSS. MCP supplies these services to the SPVs in return for a fee payable from the SPV to MCP.

MSS incurs costs, through MCGP, relating to the operation of the structure including the costs of setting up and attracting investors and the operating costs of running the business. MCP and MCGP constitute a VAT group registration, HPH and the SPVs are in a separate VAT group.

HMRC issued a decision refusing to repay VAT incurred by MCGP on set-up costs on the grounds that VAT recovery by MCGP should be nil because these costs related solely to investment activities (which do not constitute an economic activity for VAT purposes). It also argued that the operating costs were recoverable but subject to apportionment to reflect that they relate partly to taxable supplies and partly to non-economic investment activities of the VAT group.

MCGP argued that it should be allowed to recover this VAT as the costs were incurred with a view to supplying advisory and management services to the SPVs and that there was no separate non-economic activity. It suggested that the costs were to be properly classified as a general overhead of the VAT group and that the VAT group only made the abovementioned taxable supplies. Therefore, it argued, that all of the VAT incurred was recoverable in full.

The Tribunal considered European caselaw around these issues and the discussion of the issues is complex. Ultimately, the Tribunal held in favour of MCGP and agreed that the costs incurred by the appellant related exclusively to taxable supplies. This is an interesting decision and businesses which may have restricted recovery of VAT, or have been treated similarly by HMRC, may wish to revisit the position.

3. Private Tuition Exemption

This appeal relates to the VAT exemption for supplies of private tuition and whether it applies to tuition in kickboxing. The appellant, Premier Family Martial Arts LLP (PFMA), offered classes in kickboxing and had treated its supplies as VAT exempt since its formation. HMRC investigated PFMA and issued a decision that its supplies were standard rated. HMRC assessed PFMA for output tax owing.

Following the ADR process, the assessment for output tax was cancelled and HMRC decided that PFMA should be registered for VAT, retrospectively, from 1 April 2018. Prior to the ADR process, the effective date of registration suggested by HMRC was 1 September 2011 and the assessment was for over £400,000; this was a successful ADR outcome for PFMA. However, PFMA appealed against the decision that its supplies should be standard rated for VAT purposes and argued that it was not required to be registered for VAT. HMRC argued that kickboxing is not commonly taught in schools and universities.

The Tribunal gave lengthy consideration to the EU judgment in Haderer and considered that, in order for a supply of tuition to be exempt, it must be of a subject which is “commonly taught at schools and/or universities in the EU”. It also derived from the judgment that the subject being taught must not be purely recreational and without educational benefit. The pivotal question before the Tribunal was, therefore, whether kickboxing is commonly taught at schools in the EU. PFMA sought to rely on a survey which had been sent to schools and academies but this did not work in its favour as HMRC, and the Tribunal, believed the figures were too low to claim that kickboxing was commonly taught in schools and/or universities.

This was fatal to the argument that the supplies should be exempt, and the Tribunal held against the appellant before considering whether kickboxing is purely recreational.

Constable Comment: Even though there was no requirement to do so, the Tribunal still came to a conclusion on the “purely recreational” point. Looking to previous judgments on this point, it was observed that subjects such as pilates have been held to be sufficiently educational to benefit from the exemption and that kickboxing is significantly less purely recreational than such activities. Interestingly it was stated that, had kickboxing been more commonly taught in schools, it would not have been barred from VAT exemption by being recreational in nature. The private tuition exemption area of VAT law is one which HMRC appears to have taken a keen interest in over the last few years.

4. Illegal Sales: When was threshold breached?

This is an appeal against a decision by HMRC that the appellant, Mr Kendrick, had a historic VAT registration obligation by virtue of his illegal sales of imported tobacco. HMRC assessed Mr Kendrick for £220,000 VAT and charged a penalty of a similar proportion as, it was asserted, that he should have been registered for VAT from March 2010. Mr Kendrick admitted that he had sold some illegally imported tobacco to his family and friends but challenged this assessment, claiming that he had never sold enough tobacco to breach the VAT registration threshold.

Between December 2009 and August 2013, HMRC seized a number of packages of tobacco addressed to Mr Kendrick amounting to nearly 50kg; the largest of these packages contained 22kg. HMRC used these figures and dates to establish the average amount sold per day and calculated that, in the relevant period, Mr Kendrick had a turnover of roughly £1.3million.

Mr Kendrick accepted that he made some sales to friends and family but highlighted that he never received the packages which had been seized by HMRC and that he did not request the amounts; a stranger he met on a boat in Holland would send him unspecified amounts of tobacco and Mr Kendrick would, in turn, post cash to one of several addresses given to him by his supplier. The Tribunal found this assertion to be not credible but accepted Mr Kendrick’s claim that he had not received the amount of tobacco necessary to make the value of supplies HMRC claimed he had.

To support his argument, Mr Kendrick stated that in order to make the quantity of sales which HMRC were suggesting, he would had to have supplied over half of all the rolling tobacco smoked in his town (Morecambe), consistently. Given that he lived in a static caravan, he claimed that he had neither the space nor the working capital to fund such a venture.

The Tribunal considered that Mr Kendrick had not breached the VAT registration threshold based on the evidence which was before them and therefore allowed his appeal against the assessment. However, the Tribunal did state that they could not conclude that Mr Kendrick was not liable to have registered for VAT from the date HMRC were suggesting. It was observed that Mr Kendrick may have breached the threshold by virtue of other sales but stressed that this was a matter for HMRC to consider.

Constable Comment: This case was interesting as it highlights that the VAT registration threshold can be breached as a result of illegal sales. There is no requirement in the law that the turnover of £85,000 needs to be gained through legal means; HMRC can assess for VAT on anyone who makes taxable supplies in excess of the VAT registration threshold and should have been registered.

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.