Constable VAT Focus 25 August 2022



HMRC have released the following updates to guidance.

VAT payments on account
This guidance sets out who has to pay VAT payments on account, how HMRC works out the payments, the alternatives and how and when to pay. The postal address to reach the payments on account team has been updated.

Revoke an option to tax for VAT purposes within the first 6 months
Taxpayers can choose to revoke an option to tax within the first 6 months, known as the ‘cooling off’ period where certain conditions are met. If they wish to revoke, they must submit form VAT1614C. The address for sending this completed form and any supporting documents have been updated.

Exclude a new building from an option to tax for VAT purposes
Taxpayers can use form VAT1614F to exclude a new building that’s been built on land they previously opted to tax for VAT purposes. The address for sending your completed form and any supporting documents has been updated.

Agent Update: Issue 99
HMRC has released this new agent update containing the latest guidance and information including:

  • New approach to VAT compliance for overseas based traders using online marketplaces
  • Making Tax Digital (MTD) for VAT – Make sure your clients are signed up and have the right software
  • Tax avoidance – don’t get caught out
  • Capital Gains Tax on UK Property Account
  • Making Tax Digital (MTD) for Income Tax – expanding the customer pilot


Upper Tribunal

1. Deliberate inaccuracy in VAT return

This was an appeal against a decision of the FTT granting an application by HMRC to strike out parts of the appellant’s, C F Booth Limited, appeal against a penalty assessment in the sum of £1,444,813.

The background to the penalty was that during an earlier 2017 decision (the 2017 decision), the FTT found that the appellant knew or should have known that a number of its transactions were connected to fraudulent evasion of VAT. Following this decision, in May 2018 the appellant claimed certain input VAT on its VAT returns and HMRC took the view that because of the result of the 2017 decision, the taxpayer knew (or should have known) the input tax credits were false as a result of artificial transactions connected to fraudulent tax losses. On that basis, HMRC concluded the return contained deliberate inaccuracies and issued a penalty of £1,444,813 in respect of the deliberate accuracy.

The above penalty was appealed to the FTT but the decision was upheld and the Upper Tribunal (UT) gave the appellant permission to appeal on 4 grounds.

(1) Deliberate conduct requires a conscious element which has to be proved by HMRC in these penalty proceedings, beyond the findings already reached in 2017.

(2) Applying the approach of the Court of Appeal in E Buyer, the conclusions of the FTT in 2017 on Kittel knowledge cannot be taken to have determined the question of deliberate conduct or the conscious element (alternatively, the element of dishonesty) which is inherent in that.

(3) Further and in any event, in these proceedings which are criminal proceedings for the purposes of Article 6 ECHR, the findings in the earlier civil proceedings should not be taken to determine any issue, whether by the application of a principle of issue estoppel or abuse of process or otherwise.

(4) The arguments on proportionality and special circumstances should be permitted to proceed, and should be taken into account, either to re-characterise the penalty as a penalty for “careless conduct” or otherwise to mitigate the amount of it.

Initially the UT considered ground the first two grounds together. Under these grounds, the appellant argued that the knowledge found by the FTT in the 2017 decision did not amount to deliberate conduct for the purpose of the penalty assessment. The appellant stated that HMRC had to prove the following three elements:

  • The appellant had completed its relevant VAT returns incorrectly, by claiming input VAT in excess to the amount to which it was entitled
  • The knowledge of the appellant, at the time, that the relevant VAT returns were completed incorrectly, that is to say, knowledge on the part of the appellant that in all the circumstances it was not entitled to claim input tax; and
  • That the appellant intended that HMRC should rely on the VAT returns as accurate documents.

The appellant agreed that the first point was present in this case, however the second and third were in dispute because the required mental or conscious elements had to be proven by HMRC.

The UT disagreed with this argument and stated that a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. The UT highlighted the fact that this condition was met when the appellant made the declaration that the return is correct and complete. The appellant must have envisaged and intended that HMRC would rely on the contents of the return being correct when it made such the return declaration. Accordingly, the UT dismissed grounds 1 and 2 of the appeal and upheld that the returns contained deliberate inaccuracies.

The UT went on to discuss Ground 3 and 4. Considering ground 3 it concluded that the appellant received a fair hearing as it took place in public on front of an independent tribunal, the appellant received a notice of HMRC’s strike out application and both sides were legally represented and therefore were able to present their cases to the FTT, therefore ground 3 was dismissed. Regarding ground 4, the appellant argued that the penalty was disproportionate and excessive offending against the principle of proportionality however the UT rejected this argument, and the appeal was dismissed.

Constable Comment: This case provides a very useful analysis of a ‘deliberate inaccuracy’ this being in summary that a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC will rely on it being an accurate document. We advise all taxpayers to ensure they do not fall within this test as such inaccuracies could in theory attract a penalty of up to 100% of the VAT involved.


2. Healthcare services in prisons

This case concerned Spectrum Community Health CIC (Spectrum) making a range of healthcare supplies to 13 prisons in England. The services are supplied to NHS England (NHSE) and they include GP, nursing, pharmacy, physiotherapy, substance misuse, mental health, dentistry and optometry services. Spectrum delivers some of the healthcare services in house and subcontracts the remainder, but Spectrum remains responsible for the services under the contract. This case concerns the VAT treatment of the supplies made by Spectrum.

Spectrum contends that whilst the majority of its supplies are VAT exempt as medical care, it also makes taxable supplies including zero rated supplies of dispensing drugs and reduced rated supplies of sexual health products. As a result, Spectrum believes it is required to be VAT registered and entitled to recover input VAT attributable to those taxable supplies. HMRC do not accept that Spectrum makes any taxable supplies, they take the view there is a single composite supply to NHSE which is exempt from VAT.

The first issue the Tribunal took into consideration was whether Spectrum makes a single composite supply or multiple separate supplies. HMRC contended that the supplies made by Spectrum to NHSE are viewed as a Levob type supply (where two or more elements or acts supplied by a person are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split) and therefore the Tribunal approached the issue by identifying the essential features or characteristic elements of the transaction and, amongst other factors, considers this from the perspective of the average consumer, or the typical recipient of the supply.

Whilst Spectrum argued the typical consumer being a prisoner, the Tribunal concluded that the customer was NHSE as specified under the contracts and supported by the economic reality of the transactions. From NHSE’s perspective it was important that the different elements of the prison healthcare services work smoothly together and therefore the Tribunal concluded that the essential feature was the provision of primary healthcare services in prisons that is equivalent to that provided by the NHS in the general community. It was concluded that there was a single composite supply of primary healthcare.

The Tribunal then considered whether the supply was VAT exempt under Item 1, Group 7 as medical care provided by registered doctors, nurses, or exempt under Item 4, Group 7 as the provision of care or medical or surgical treatments. Spectrum took the view that supplies of drugs and contraceptive products may be excluded under Item 1 and are therefore taxable. Whilst the Tribunal concluded that the supply was exempt under Item 1, because Spectrum was not recognised as an establishment of a similar nature to a hospital which was a condition under Item 4, it also rejected the argument that the drugs or contraceptive products are physically and economically dissociable from the medical care.

As a result of the above, it was concluded that Spectrum makes a single composite supply of medical care which is VAT exempt. It is not entitled to be VAT registered or recover any VAT incurred. The appeal was dismissed.

Constable Comment: This case considered the single and multiple supply rules and the Tribunal ruled that as the essential feature of the transaction from the perspective of NHSE, being the typical customer, is of primary healthcare services, there was a single composite supply and Spectrum should not split these into multiple supplies with different VAT liabilities. Where there is ambiguity regarding to whether a transaction is a single or multiple supply, we would always recommend seeking professional advice as this is potentially a complex area of VAT which may often lead to litigation with HMRC. Constable VAT will be happy to assist with any related queries.

3. Best judgment assessment on Subway franchise

This case concerned Peppermint Foods Limited (the appellant) which owns two Subway franchise which it exploits via two outlets, one based in a retail park and the other located at a shopping centre. The appellant sells hot toasted sandwiches, cold food and drink from those outlets. Food consumed at premises was treated as standard rated, as well as hot takeaway food. Cold takeaway food, other than confectionary, is zero rated.

HMRC took the view that the appellants staff have, at the point of sale, incorrectly entered hot takeaway food into the till as cold takeaway food, therefore reducing output VAT as these were treated as zero rate. The case was assigned to Officer Vaghela (HMRC officer) who has considerable experience regarding investigating the VAT position of Subway franchises. He considered that the average standard rated sale in the last 4 years, being 58%, seemed low and therefore decided to carry out test purchases.

There were some incorrect VAT treatments discovered followed by the test purchases, these were raised with the appellant. As a result, the appellant also provided some read reports to the HMRC officer. The next step in the process involved the HMRC officer carrying out an invigilation exercise which the appellant agreed to. This involved the officers attending the outlets and observing the way in which the sales were entered into the tills. The results of these exercises were discussed with the appellant. Following the lengthy procedure including internal reviews, HMRC’s final assessment was in the sum of £144,383 after taking into account various points raised by the appellant such as seasonal factors. This amount was reduced from an initial £214,854.

The Tribunal noted that the burden was on HMRC to prove that a valid assessment was made. If HMRC is successful, then the burden of demonstrating that the assessment is incorrect lies with the appellant.

The appellant submitted that the invigilation exercises were wholly unrepresentative of the overall period assessed. It does not take into account matters such as seasonal variations, staff errors which could not be foreseen, or accurately managed, significant construction works, disruptive software and IT upgrades and the respective locations of the outlets. The appellant stated that it did not provide any quantitative evidence to refute HMRC’s figures because it did not realise that is needed to do so.

The Tribunal went on to consider whether the assessment has been made to best judgment and concluded that the officer indeed made his assessment to best judgment. He took into account 4 things when making his assessment; firstly the 4 year average of 58% seemed low. Secondly, the test purchases carried out shown that hot takeaway food was incorrectly treated as zero rated cold takeaways. Thirdly, the Z readings provided by the appellant and finally the invigilation exercises. During all stages the officer shared his concerns with the appellant which the Tribunal found to be best practice.

As a result, the assessment was found to be evidence based, taking into account matters raised by the appellant, reflects an ongoing dialogue with the appellant, and evidences a justification for initially assessing on the basis of 94% and subsequently reducing it to 86%. The Tribunal concluded that the assessment was made to best judgment and was valid.

The burden was then on the appellant to show that the amount assessed was excessive. However, the appellant did not provide any alternative figures therefore the Tribunal could not reasonably reduce the assessment. The appellant also tried relying on a previous case law involving another Subway franchise, but the facts were different and therefore the Tribunal rejected this argument. In conclusion therefore the assessment was valid, in time, best of judgment and not been displaced by the appellant, accordingly the appeal was dismissed.

Constable Comment: This case demonstrates an evidence based best judgment assessment which the Tribunal held to be valid. The case highlights the importance of demonstrating to HMRC why the figures are incorrect, where the taxpayer disputes them, as it was stated by the Tribunal, that if HMRC’s assessment is valid, it is the burden of the taxpayer to show why the amount is incorrect. In this case, the appellant did not provide any alternative figures, and therefore the Tribunal could not reduce the assessment any further. Timely professional assistance in such scenarios can have a huge influence on end outcomes as can its absence.

4. Credit notes in Insolvency

In this case, London School of Accountancy and Management Limited (LSAM) appeals against a decision by HMRC regarding an adjustment for a VAT credit in the sum of £781,000, that was rejected. LSAM was in the business of making higher education supplies to students until 2012, after this point it went into liquidation. LSAM claimed to reduce the taxable amount charged to students for VAT purposes at a time after the company entered into liquidation for services said to have been invoiced to students but never supplied. The supplies of tuition were subject to VAT. LSAM made a deal with City of London College (CLC) to enable LSAM students to continue their studies after LSAM went into liquidation.

LSAM submitted that after going into liquidation, there had been a “total failure of consideration” and on that basis an entitlement to VAT credit arises. It argued that in terms of commercial reality the only way to deal with the situation that would have made sense to HMRC was to issue credit notes. LSAM also stated that if the claim was successful there will be money in the pot from which partial repayment can be made to students.

HMRC’s position was that there had been no overpaid VAT and there is no entitlement to a reduction in the taxable amount. It submitted that the appeal must fail for three sets of reasons as follows:

  • LSAM does not meet the basic requirement for a reduction in the taxable amount because it has received consideration and not made any refund to customers.
  • Secondly, even if LSAM might in principle have been able to obtain a reduction in the taxable amount, LSAM did not fulfil the formal requirements for a refund, including a failure to make a timeous claim.
  • Thirdly, insofar as the quantum issue may be relevant, HMRC raised concerns about the calculations of the overpaid VAT which appear to overstate the sums in question.

The Tribunal reviewed the evidence and found from the contractual relations giving rise to the supply, it was clear that the appellant was under no obligation to make any refunds under any circumstances. Also, it stated that in order for a reduction in price to take place, LSAM would have to be in funds to repay the students not only the VAT element of the course fee, but the actual course fees. In other words, the appellant would have to be in funds of £3.72m and had actually repaid the customer to meet the requirement of ‘reduction in the taxable amount’. The credit notes raised by LSAM were theoretical rather than presenting an actual decrease in consideration, as a result the appeal was dismissed.

Constable Comment: This case considered the rules around VAT repayment claims, specifically as a result of reduction in taxable amount. It highlights the complexity of these rules and the difficulty of successfully arguing that a VAT refund is due. If you or your business takes the view that a VAT refund is due to you, it is important that the relevant procedural and technical requirements are met in order that such a claim is successful.

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.