Constable VAT Focus 26 January 2021


How to import and export goods between Great Britain and the EU
HMRC continues to update its guidance for traders who are involved with movements of goods between GB and the EU from 1 January 2021.

Changes to VAT accounting for Northern Ireland and Great Britain
HMRC has updated this guidance which gives information about when you can, or need to, account for VAT on your tax return if you are UK VAT registered.

Notifying an option to tax
During the COVID-19 pandemic, HMRC extended the time limit for notifying an option to tax from 30 to 90 days. The applicable period has been extended. This now applies to decisions made between 15 February 2020 and 31 March 2021

R&C Brief 1 (2021): Introduction of zero-rate for women’s sanitary products
This brief sets out the changes in the VAT treatment of women’s sanitary products across the United Kingdom, following enabling legislation in Finance Bill 2016 and as announced at Budget 2020

Check if you are established in the UK for customs
Many businesses need to consider if they are established in the UK for customs purposes following the end of the Brexit transition period. HMRC has released this guidance to assist businesses in reaching a conclusion.


First Tier Tribunal

1. Reduced Rate for Energy Saving Materials

In this case the appellant was Conservatory Roofing System Limited (CRSL).  The debate was about whether the appellant’s supplies of “roof insulation systems” constitute a reduced rated supply of insulation in roofs. HMRC argued that CRSL was providing a new roof entirely and that its services should attract the standard rate of 20% whereas CRSL believed that its supplies were reduced rated as energy saving materials.

CRSL is a company that specialises in enhancing and insulating existing roofs. A selling point is that customers will be able to use their conservatory all year round because of the insulating properties of its products. CRSL stated that in around 80% of cases it does not remove existing poly-carbonate roof panels. Instead, a new external light-weight roof tile system is secured to the outside, whilst on the inside, insulating material is provided. Plasterboard is applied to a bespoke timber frame ready for the application of decorative finishes and the insertion of LED downlights. In the remaining 20% of cases, roof panels are removed because they are too heavy to safely leave in-situ. Otherwise, no alteration is made to the existing conservatory roof structure.

CRSL has invoiced its customers with 5% VAT on its supplies and 20% VAT on additional components. CRSL submitted a VAT return for the VAT accounting period 01/18 showing an input tax claim for £15,618.86 on the basis that 90% of its supplies were reduced rated. HMRC conducted a visit to the appellant’s premises to assess whether the claim was accurate.

HMRC concluded that CRSL provided replacement roofs, which were chargeable at the standard rate of 20% VAT, rather than an ‘installation of insulation’ which would have been chargeable at the reduced rate of 5% VAT. The input tax claim was reduced to nil and an assessment was issued against CRSL for underpaid output tax, amounting to £13,457.96.

CRSL appealed this decision, arguing that the objective view of a typical customer is that they are purchasing insulation for a roof rather than a replacement for the existing roof. However, HMRC noted that the CRSL’s marketing material includes a description of its business as “The original conservatory roof replacement company”. Further to this, on the appellant’s website under the “Our Solution” section it is stated “Our roof tile system replaces the existing polycarbonate or glass roof and uses a lightweight sectional high-performance composite insulation product to deliver its exceptional results”.

The Tribunal considered relevant case law, and clearly stated that the scope of reduced rating for supplies is not determined by whether or not the materials are “attached to or applied”, but by whether what is supplied is confined to insulation or extends further than that, as for example in this case , to a new roof or replacement cost.

The Tribunal considered the list of “energy saving materials” provided in the notes to Schedule 7A, Group 2, VATA 1994 and observed that the majority of what CRSL supplied was not energy saving materials. Therefore, the appeal is dismissed and HMRC’s assessment against CRSL is upheld.

Constable Comment: This is a second case on this topic in the last six months. In both instances, the Tribunal has been clear that the reduced rate applies only to the installation of energy saving materials and not the replacement of roofs, to which the supply and installation of energy saving materials is ancillary in this case. The marketing literature used by CRSL did not appear to lend itself to the argument that it was not replacing roofs. Taxpayers need to consider the criteria very carefully before applying a reduced rate of VAT in any case. If the position is ambiguous it may be necessary to take professional advice.  

2. Loan or Consideration for Services?

This case concerned GLS Ltd (GLS), a property development company which, in 2016, received seven payments from Midside Finances Services Limited (MFSL) amounting to £282,000. GLS did not report this as income on its VAT return and HMRC subsequently assessed for VAT of £47,000 calculated on a VAT inclusive basis i.e. £282k x 1/6.

GLS appealed against this assessment on the grounds that it received the funds by way of a loan and not as taxable income for a supply of services. GLS had a history of borrowing money from MFSL and the two companies held a common director as well as having other directors who had been personal friends for a long time. GLS explained to the Tribunal that the amounts received were used to cover operating expenses and to make loans to other associated companies.

HMRC inspected GLS and issued a ‘best judgment’ VAT assessment in relation to the loan amounts. GLS claims to have shown the loan agreements to HMRC when they visited its premises, but the visiting officer dismissed the documentation as insufficient evidence that the payments were a loan. Further evidence was submitted to HMRC after the initial meeting, but this was also dismissed as insufficient proof of a loan.

The loan agreements in question were presented to the Tribunal which considered them alongside the fact that GLS had not provided any services to MFSL in exchange for the amounts received. The reason why the HMRC officer did not view these agreements as bona fide loan agreements is not clear. The Tribunal concluded that the agreements were loan agreements and that the VAT assessments should not have been raised.

The Tribunal held in favour of GLS and dismissed HMRC’s assessment of £47,000.

Constable Comment: This is another decision where HMRC has exercised ‘best judgment’ when raising a VAT assessment. Such cases can incur the cost of a Tribunal hearing if a taxpayer is unable to persuade HMRC of its position. This decision reinforces the point that it is important that all businesses maintain thorough VAT accounting records and transactions are properly documented to avoid the potential for confusion.    

3. Whether goods transported “by or on behalf” of the supplier

This case concerned Healthspan Limited (Healthspan), a Guernsey company involved with the sale of non-prescription health products to retail customers who place orders by phone, internet or post. Between April 2012 and January 2016, the majority of Healthspan’s products were dispatched from a warehouse in the Netherlands and delivered to customers in the UK.

Prior to this, goods were shipped from the Channel Islands under the Low Value Consignment Relief provisions, as a result of which no VAT was due on importation into the UK. However, Healthspan moved its stock and operations to the Netherlands following the withdrawal of relief for goods being shipped from the Channel Islands.

HMRC decided that such supplies are delivered “by or on behalf of the supplier” meaning that Healthspan is deemed to transport the goods to the recipient country and make a domestic sale there. Healthspan applied for a review of this decision on the grounds that consumers contract with a third-party company for delivery of the goods and, therefore, that the place of supply for their sale of goods was the Netherlands. Whilst not discussed in the case, presumably Dutch VAT has been charged on sales.

HMRC upheld the decision and issued an assessment for slightly over £27million, retrospectively registering Healthspan for UK VAT with an effective date of registration (EDR) in 2012. Healthspan appealed this decision to the Tribunal which referred the matter to the CJEU where it was stayed behind the case of Krakvet (our coverage can be read here.) In this case, the Court considered that goods are dispatched or transported on behalf of the supplier if it is the supplier, rather than the customer, that effectively takes the decisions governing how those goods are to be dispatched or transported.

Regarding Healthspan, for some types of customers, their only contract was with Healthspan and there is no doubt that these supplies are delivered by or on behalf of Healthspan. However, there was some debate around sales made online or via postal orders where the customer would sign a separate agreement with a courier service. Ultimately, following the decision in Krakvet, the Tribunal held that the nature and extent of the arrangements in place between Healthspan and the couriers used indicated that the customer had no real choice in the matter and, in reality, the courier was arranged for by Healthspan.

The Tribunal held that the goods were delivered by or on behalf of Healthspan and, in light of the decision in Krakvet, upheld HMRC’s assessment for over £27million.

Constable Comment: Following the decision in Krakvet and based on the findings of fact in the original 2018 case, the Tribunal could not realistically come to a different conclusion on this matter. However, Healthspan has appealed the original decision to the Upper Tribunal to establish if the First Tier was incorrect to find that Healthspan is responsible for organising the delivery of the goods. We will report on any further appeal.

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.