Constable VAT Focus 24 March 2022


Changes to the VAT treatment of the installation of Energy Saving Materials in in Great Britain
HMRC has released The Value Added Tax (Installation of Energy-Saving Materials) Order 2022. This new measure introduces a time limited zero rate of VAT for the installation of certain types of energy saving materials (ESMs) in residential accommodation. The zero rate will be available for a period of 5 years and will then revert to the 5% reduced rate of VAT.

Revenue and Customs Brief 6 (2022): Lennartz mechanism and VAT accounting
HMRC has recently published this brand-new guidance. This explains what you must do if you have chosen to continue using the Lennartz mechanism and you have entered the arrangement before 22 January 2010.

Health professionals and pharmaceutical products (VAT Notice 701/57)
The above guidance sets out how to account for VAT on goods and services provided by registered health professionals, including doctors, dentists, nurses, and pharmacists. The notice has been updated with information, about nursing agencies’ concession, that was confirmed recently by the Court of Appeal.

VAT on compensation and early termination payments – upcoming changes from 1 April 2022

Revenue and Customs Brief 2(2022), issued earlier this year, announced the long-awaited amendments to HMRC’s guidance on compensation and early termination payments (see our blog on this topic here). We are now approaching the date when this new guidance will become effective.

The new guidance describes various factors that will help determine whether a payment is compensation or consideration. These include whether the event giving rise to the charge was reasonably expected, and whether the charge is covering the supplier’s additional costs or is clearly punitive. Any existing rulings which are inconsistent with the new guidance cannot be relied on from 1 April 2022 and businesses should consider whether there is a need to change the VAT accounting treatment of any payments received that may previously have been treated as outside the scope of VAT.

One area that may be impacted by these rule changes is fines levied for unauthorised parking, which have previously been accepted by HMRC to be outside the scope of VAT. The CJEU recently decided a Danish case, Apcoa Parking Danmark v Skatteministeriet (Case C-90/20) that may be relevant.

Apcoa operated car parks on behalf of their owners. It charged penalty fees for breaches of parking conditions. The case concerned the VAT treatment of those penalty fees. The CJEU decided the penalties were consideration for a VATable supply of services, being an extension of the original parking fee.

Prior to the revised guidance now outlined in HMRC guidance at VATSC05910 HMRC looked to the decision in Vehicle Control Services v HMRC (VCS) to determine the VAT treatment of parking fines. In VCS the Court held that such fees were outside the scope of VAT as damages for trespass or breach of contract.

The CJEU’s approach in Apcoa suggests that the analysis in VCS may have been wrong, with the CJEU stating that ‘the assessment of whether payment of a fee is made as consideration for a supply of services is a question of EU law which needs to be determined independently of the assessment made under national law.’

Following Brexit, the impact (or otherwise) of CJEU judgements is complex.  There are elements of EU law that are now “retained law” in the UK.  It is commonly accepted that all judgements pre-Brexit continue to have effect and that post Brexit judgements are to be considered.  HMRC considers parking fines in its new guidance stating:

Another example of a situation in which additional fees may be charged is parking. If the fee is for the additional use of the parking space it is further consideration for the supply of parking. HMRC’s policy position is that where a fine is substantial and punitive and is designed to deter a breach of the terms and conditions of parking it will be outside the scope of VAT as the reciprocity needed to link it to the supply is lacking. If on the other hand it is effectively an additional charge for occupying a space, then it would be a standard rated supply. The level of the fee for breaching the parking terms in comparison to the standard parking fee may be indicative of which category a particular fine would be in.

This indicates that the VAT treatment of parking fines will depend on whether the charge is a genuine fine or an additional charge for parking.

This is just one example of the complexities this new treatment will bring, and it is important that all businesses that may receive compensation or termination payments consider the guidance fully and take advice where necessary.

Constable Comment: Clarity on the VAT treatment of compensation and termination payments will take time, despite HMRC’s guidance. If the position is not clear there may be a multitude of commercial arrangements leaving plenty of scope for a difference of opinion and advice may be required.


Upper Tribunal

1. HSBC VAT Grouping: Fixed Establishment?

This case concerned HSBC Bank Plc and 5 entities (referred to as the GSC’s) within the HSBC group carrying out global services for the group. The group companies were incorporated outside the UK and undertook various back-office operations, including call centre functions and payment processing. HMRC removed the GSC’s from the VAT group registration with effect from 1 October 2013 on the grounds that GCS’s have not been established or had a fixed establishment in the UK since that date and accordingly ceased to be eligible to be a member of the HSBC group VAT registration.

Article 11 of the Principal VAT Directive (PVD) requires two persons wishing to be in a VAT group registration to be ‘established in the territory of that Member State’ and section 43A of VATA states that two bodies are eligible ‘if each is established or has a fixed establishment’. HSBC argued that article 11 refers to the persons within the group collectively instead of each person individually; however, if it refers to each member, that means no more than the physical presence of a body corporate through its branch which it had in the UK which were also incorporated in the UK, therefore meeting the fixed establishment criteria.

HMRC argued that since there is no set definition of the above phrases regarding where a company is established, the expression should follow relevant case law instead. HMRC referred to cases which set out that a fixed establishment would require a real and genuine trading presence in the UK, and it must supply goods or services in its own right. A fixed establishment must also have sufficient permanent resources to be able to supply and receive goods and services.

The Upper Tribunal (UT) held that each person separately must be established in the UK. The UT has stated that the Implementing Regulations are not directly applicable as they relate to determining the place of supply, however confirmed that ‘they provide a helpful starting point’ when read in conjunction with CJEU case law. Unfortunately, the UT did not provide a meaning to the above expressions instead it confirmed that the ‘precise meaning of the terms “established” and “fixed establishment” in any given case is highly fact sensitive, and better determined in the context of all the relevant circumstances in any given case”.

In addition to the above, HSBC tried to argue that the measures which a member state may adopt under Article 11 to prevent tax evasion or avoidance, are limited to those needed to prevent tax evasion caused by an abusive practice under Halifax principles. Essentially, HSBC argued that HMRC’s protection of the revenue powers are limited to artificial Halifax abuse cases, this was not present in this case, therefore HRMC should not have been able to remove the members from the VAT group registration. The UT has rejected this argument and stated that HMRC’s protection of the revenue powers extend to the concept of avoidance arising from the Direct Cosmetics case which ‘confirmed that tax avoidance does not require an intention on the part of the taxpayer to avoid tax.’ This confirms that HMRC were not limited in this case and had the authority to remove the members from the VAT group registration.

The UT only agreed with HSBC regarding the final preliminary issue, it argued that where HMRC has changed its policy in relation to fixed establishment and VAT grouping, it should not terminate membership from a date before the change in policy took effect. The UT agreed with HSBC and concluded that HMRC’s primary decision notice could not reasonably have specified a date before the Commissioners 2014 policy change.

Constable VAT Comment: There are potential benefits and disadvantages to VAT grouping and careful consideration should be given to forming a group VAT registration or withdrawing or adding members to an existing group VAT registration. An advantage of VAT grouping is that supplies between group members are disregarded for VAT purposes. No VAT is charged on supplies of goods or services made between members of the VAT group registration. This can reduce the risk of VAT leakage if companies or businesses are not fully taxable for VAT purposes. Similarly, VAT grouping reduces the risk of VAT accounting errors arising in a situation where connected businesses overlook charging VAT on taxable supplies if the entities are separately VAT registered. With effect from 1 November 2019, the VAT group registration rules were amended to allow a VAT group to include partnerships and individuals who meet the VAT grouping requirements. HMRC has experienced significant delays in processing VAT group registration applications and issued updated guidance last month which can be viewed here.

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.