HMRC NEWS
Check how to tell HMRC about VAT Return errors
The above guidance can be used to determine how to tell HMRC about VAT return errors and has been updated. This will normally be either adjusting your next VAT return (subject to certain thresholds), making the correction online or sending the correction in writing. If you need any support with notifying VAT return errors to HMRC, please get in touch and Constable VAT would be pleased to assist. We believe it is important that the error notification process is carefully managed to mitigate any penalty risks as far as possible.
Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if the business that stores your goods in the UK is registered with the Fulfilment House Due Diligence Scheme if you’re a trader based outside of the UK. The list has been updated with 7 additions and 8 removals.
Provide partnership details when you register for VAT
When a partnership is being VAT registered, Form VAT2 must be used to provide details of the partners. The above guidance has now been updated to confirm that Form VAT2 now asks for each partner’s date of birth.
Pay VAT after telling HMRC about goods sold to pay off a debt
This is a newly published guidance with assistance on what taxpayer’s will need to pay HMRC from a UK or overseas bank account, after telling HMRC about VAT due on goods sold to pay off a debt.
CASE REVIEW
Supreme Court
1. VAT groups and time of supply rules
The Supreme Court has now delivered the final decision in respect of the long running dispute concerning interaction of the VAT grouping provisions with the time of supply rules. The case of Prudential Assurance Company Ltd has progressed through the Tribunals and Courts creating significant ambiguity, with the Upper Tribunal (UT) overturning the First Tier Tribunal’s decision, and subsequently the Court of Appeal upholding the UT’s decision, although doing so in a 2-1 split decision. Our summary of the Court of Appeal decision can be read here.
Silverfleet performed investment fund management services for Prudential when they were both members of a VAT group. There is no ambiguity that supplies whilst VAT grouped were disregarded. However, many years after Silverfleet had stopped managing the funds for Prudential and left the VAT group, a success fee became payable due to exceeding targets in 2015/2016.
The question that arose was whether VAT is payable on the success fee? Very briefly put, HMRC’s point was VAT is due because at the time Silverfleet invoiced Prudential for the success fee they were no longer in the same group. On the other hand, Prudential’s view has been that the fee arose out of the services that were all performed whilst they were in the group, therefore, it is not subject to VAT.
The Supreme Court has stated that the VAT grouping rules (Section 43) must be read alongside the time of supply rules (Regulation 90) and there is no basis for inferring a separate rule for VAT groups that depends on when the services were actually performed. The Court of Appeal was correct to apply Regulation 90 to determine the time of supply.
Following a very detailed analysis of the applicable legislation, including both domestic and the EU Principal VAT Directive, as well as case law, the Supreme Court ultimately concluded that the success fee must be regarded as a “successive payment” which relates to the earlier supply; therefore, that supply is only regarded as being completed at the end of the period to which the payment relates. On the basis that the chargeable event which gave rise to the success fee occurred after Silverfleet left the VAT group, VAT was correctly charged and HMRC’s decision was upheld.
Constable VAT Comment: Whilst not favourable to Prudential, this is a long awaited conclusion to the dispute concerning the relationship between the VAT grouping and time of supply rules. The case was heard by the FTT, UT, Court of Appeal and ultimately by The Supreme Court which now put the matter to rest. Interestingly, there were disagreements between Courts, demonstrated by the UT overturning the FTT’s decision, as well as the Court of Appeal concluding with a 2-1 split decision. This demonstrates the difficulty in interpreting complex legislation, and the difficulty in their application when presented with a unique scenario such as the one faced by Prudential. VAT is highly fact specific and each case will vary based on individual circumstances. Timings of supplies and VAT grouping has been a point regularly challenged by HMRC. In the case of ambiguity we would always recommend seeking professional VAT advice.
Court of Appeal
2. Partial Exemption: Special Method Override
The dispute between Hippodrome Casino Ltd (HCL) and HMRC progressed to the Court of Appeal, following the FTT’s and UT’s decisions. HCL operates a casino where most income arises from VAT exempt gaming and betting, but it also makes taxable supplies through its theatre, bars, and restaurants. Because many of its overheads such as rent, utilities, maintenance and security relate to both taxable and exempt activities, HCL sought to recover input VAT using a floor space based standard method override (SMO) calculation, arguing that this better reflected the true economic use of its VAT bearing costs than the standard turnover-based method.
In 2022, the FTT agreed with HCL finding that the floor space approach provided a fairer and more reasonable apportionment; however, HMRC appealed the decision of the FTT to the UT on the grounds that the FTT erred in law failing to consider that areas allocated to taxable activities such as bars and restaurants were also economically used by gaming customers, creating dual use of that space. The UT agreed, setting aside the FTT’s decision on the basis that the floor space method was flawed because it did not reflect the duality of use. Our summary of the UT decision can be read here.
HCL appealed to the Court of Appeal on various grounds. First, the Court considered whether the UT was right to set aside the decision of the FTT on grounds of material error. After hearing submissions from both parties, the Court concluded that the FTT failed to adequately address either aspect of the dual use arguments advanced by HMRC and therefore the UT correctly directed itself. The Court also stated that it would have arrived at the same conclusion as the UT, if it had to make a new decision.
HCL no longer contends that the floorspace method was more reliable than the standard method; however, it argued that the UT should have considered the standard method in isolation concluding that it is not fair and reasonable, and on that basis an alternative method should have been discussed. The Court rejected these grounds stating that UT was right simply to allow the appeal once it had concluded HCL’s floorspace method was discredited, which meant that the standard method applied by default. The burden was on HCL to show otherwise and it failed to do that. There were additional considerations around the calculation of input tax block on business entertainment which mostly consisted of complimentary food and drink given away to most valued customers. The Court agreed with HMRC on this matter also; therefore, the appeal was dismissed on all ground.
Constable VAT Comment: Similarly to Prudential, this is another well known case in the VAT sphere which has progressed through each Tribunal and Court. This case concerns input VAT recovery, specifically the complexity of a standard method override (SMO) where the standard turnover based method fails to produce a fair and reasonable outcome in relation to the recovery of VAT incurred; also highlighting the complexities in agreeing a special method with HMRC, as this would normally require detailed worked examples to prove that any proposed method is more fair and reasonable than the standard method. It will be interesting to see if HCL appeals the decision and progresses to the Supreme Court where the decision will be final and concludes this long disputed matter.
3. HMRC’s discretion: Alternative input VAT evidence
In this case, Hotelbeds UK Ltd (HUL), appealed HMRC’s refusal of two of the four error correction notices (ECNs) submitted for underclaimed input VAT. HUL is a long-established wholesale supplier of hotel rooms. Following the industry practices, HUL shifted to a ‘virtual credit card’ (VCC) payment system which made it very difficult to obtain valid VAT invoices from hotels (suppliers) as there was no real incentive for the hotels to complete the additional administration.
As a result, HUL maintained detailed records of all transactions and was regularly pursuing its supplier hotels for VAT invoices, amounting to over 5,000 chaser emails, 800 telephone calls, to several suppliers exceeding 1,000 in total. HUL submitted four ECNs to HMRC to reclaim underclaimed input VAT, relying on HMRC’s discretion to accept alternative evidence. Whilst HMRC allowed the first two claims, it rejected ECN 3 and 4. The amount of VAT involved was significant, in excess of £10million.
HUL relied on three policy guidance statements, which HMRC accepted to be current at the relevant time. These were VIT31200, HMRC’s Statement of Practice (SOP) and VAT Notice 700. All of these documents were supportive of HUL’s arguments that HMRC must consider alternative evidence where it was not possible to obtain a valid VAT invoice. HUL had the majority (if not all) of the required evidence as set out in the policy documents, and on that basis it argued that HMRC’s rejection is unreasonable and unlawful. This is supported by the fact that the first two ECNs were accepted which were materially very similar, if not the same as ECN 3 and 4. HMRC’s view was that HUL had ‘systematically failed’ to obtain VAT invoices from its hotel suppliers.
The Court had no real difficulty in dismissing HMRC’s arguments stating that HMRC misapplied its own guidance and unfairly fettered its discretion by refusing to consider the extensive alternative evidence HUL provided. The Court addressed the issue that the policy documents refer to ‘invalid VAT invoices’ as opposed to the absence of VAT invoices; however, the documents should apply to both scenarios equally. Whilst HMRC has an obligation to protect the Revenue, the Court held that there was no suggestion of fraud, no missing suppliers, and no ongoing risk to the VAT system. On that basis, it was concluded that the decision to withhold the repayment of VAT incurred as input VAT was irrational, inconsistent, and contrary to public law principles, also breaching the EU principle of effectiveness. The application for judicial review was allowed.
Constable VAT Comment: This is a helpful case for input VAT recovery where taxpayers have difficulties in obtaining valid VAT invoices from their suppliers. It is a welcome reminder that HMRC must exercise discretion in such cases as “The purpose of the discretion is to recognise, necessarily, that the neutrality of the tax is important. Failure to recover input tax is non-neutral.” Taxpayers should not pay more tax than is required. However, we would also flag that HUL had very good alternative evidence that supplies had been received and paid for, satisfying almost all HMRC’s checklist set out in policy documents for alternative evidence to support an entitlement to deduct VAT incurred as input VAT. Where a taxpayer wishes to rely on alternative evidence to reclaim input VAT, it is important this is considered first in great detail and whether a robust defence can be mounted to any challenge from HMRC. We would recommend seeking professional advice in a situation where VAT invoices are not held. On a wider point, and not withstanding HMRC’s duty to collect tax, it is a cause of regret that HMRC should chose to pursue the matter in this case where the taxpayer has done all it can to obtain supporting evidence to allow it to claim input VAT, and a pragmatic approach taken and a degree of judgement exercised.
FTT
4. Fitting of carpet: Single or separate supply?
The appellant, United Carpets (Franchisor) Ltd (UC), sells flooring products and offers customers the option of being referred to an independent, self-employed fitter to install the flooring. Each store has a pool of fitters who take on fitting work referred to them by UC. In terms of allocating fitters to particular jobs, it is UC who determines which fitter is allocated to which customer in the fitting diary. Customers pay the fitter directly and the rates charged by the fitters are determined by the fitters themselves. UC receives no part of the fitting fee. UC considered the fitting service to be a separate supply and only accounted for output VAT on the sale of goods. However; HMRC raised VAT assessments totalling £496,823, arguing that the fitting services formed part of a single composite supply of goods and associated fitting services by UC and output VAT is due on the entire consideration including the goods and fitting service.
The Tribunal first considered who made the supply of the fitting services for VAT purposes, whether it was the independent fitter or UC making a single supply (the “Supply Issue”). The Tribunal adopted a three-stage test in considering the contractual documentation and the economic and commercial reality. Following this, the Tribunal concluded that there were two separate supplies, the first of which comprised of the supply of goods by UC to the customer, and the second of which comprised the supply of services (fitting) by the independent fitter to the customer.
For the above reasons, the appeal was allowed on the ‘Supply Issue’. UC also made an alternative argument on ‘legitimate expectation’ due to HMRC’s behaviour during the inspection; however, the Tribunal decided against UC on this issue. Nevertheless, the decision in relation to the ‘Supply Issue’ was sufficient to allow the appeal and HMRC’s output VAT assessments were cancelled.
Constable VAT Comment: This was another lengthy decision considering who supplied what, to who, in return for what consideration. The Tribunal relied on extensive case law concerning single and multiple supplies in reaching its decision to allow UC’s appeal. However, perhaps the ‘legitimate expectation’ issue and the Tribunal’s analysis of this would be crucial to those dealing with ongoing HMRC inspections. During the inspection, prior to raising VAT assessments, HMRC wrote to UC stating:
“HMRC has reviewed the current business contractual arrangements implemented in August 2020 as per your letter dated 23rd November 2020 and has decided to take no further at this time. However, this is a finely balanced decision. HMRC will be considering how the sector more broadly arranges its supplies, and this further review may result in HMRC clarifying its view of common contractual arrangements both in this sector and beyond.”
UC attempted to argue the above would create a legitimate expectation, arguing that an ordinarily sophisticated taxpayer would have understood the above to mean that HMRC had deliberated the matter internally, reviewed the Appellant’s contractual arrangements and decided to take no further action, including raising assessments.
Whilst the Tribunal appreciated UC put all of its cards ‘face up’, it stressed the importance of the phrase ‘at this time’ in HMRC’s wording. The Tribunal found there was no “clear and unambiguous statement” creating a legitimate expectation on which UC may rely. This is very important for all those dealing with ongoing HMRC inspections as it demonstrates that HMRC has the power to revisit previous inspections where a firm and definitive conclusion was not reached.
5. VAT Zero Rating: Is nitrous oxide food?
In this case, Telamara Limited (TL) appealed HMRC’s assessment for underdeclared output VAT in respect of supplies of nitrous oxide (N2O), in the sum of circa £1.5million. TL supplies metal chargers containing N2O designed for use by the catering industry in machinery for whipping cream and also making other foam-like foods.
The case turned on a deceptively simple question: were the metal chargers “food of a kind used for human consumption” eligible for zero-rating under Item 1, Group 1 of Schedule 8 to the VAT Act 1994 or were they standard-rated goods? TL contended that because the N2O was food grade, regulated as E942 under EU food law, and used exclusively in preparing edible products such as whipped cream and foams, it should qualify as food, whilst HMRC took the view that although the gas was used in food preparation, it was not itself food.
After reviewing detailed expert advice on N2O, the Tribunal found that N2O is not a food substance noting that it is colourless, odourless, tasteless, non-nutritious, and cannot be eaten or drunk. Its effects are purely mechanical, not culinary in the sense of altering the food’s composition. On that basis the Tribunal concluded the supplies were standard rated.
Constable VAT Comment: Whilst the Tribunal had little difficulty in reaching this conclusion, and it is unlikely that the specific facts of this case will be binding on many taxpayers, the case is a reminder to all those in the catering/food industry that there has been an increasing number of Tribunal cases concerning the VAT liability of ‘food’ items. This has been a popular topic of litigation, implying that HMRC takes a strict interpretation of the applicable legislation. Where significant sums are involved or the VAT implications are ambiguous, we would always recommend seeking professional advice. Constable VAT has considerable experience in agreeing zero-rating of food products with HMRC and we would be pleased to assist with any related queries.
6. VAT Exemption: Medical care
In this case, the Isle of Wight NHS Trust (The Trust) appealed HMRC’s decision, from August 2021, that the supply of locum medical practitioners by staffing agencies (Locums) is not VAT exempt under Item 5, Group 7, Schedule 9, Value Added Tax 1994. HMRC argued that the exemption had to be interpreted narrowly in light of the EU Principal VAT Directive (PVD). In their view, the exemption covered only the personal service of a deputy, a temporary replacement for an identified GP, rather than the broader supply of staff as part of a deputising arrangement.
The Trust disagreed with HMRC. Item 5, Group 7, Schedule 9 exempts the “the provision of a deputy for a person registered in the register of medical practitioners.” The Trust maintained the view that the locum doctors were clearly acting as deputies for registered medical practitioners and that the exemption therefore applied.
The FTT rejected HMRC’s arguments, holding that the ordinary wording of the UK legislation was decisive. The phrase “provision of a deputy” was found to mean what it says: the supply of a person appointed to act on behalf of another registered medical practitioner. Nothing in the legislative history or wider context indicated that this straightforward reading should be displaced. On that basis, the Tribunal concluded that The Trust received services which should have been VAT exempt. The appeal was allowed.
Constable VAT Comment: This case considered the interpretation of Item 5, Group 7, Schedule 9 VATA 1994, concerning medical VAT exemption. Whilst discussions will be of particular interest those involved in the medical sector; the full decision also offers useful commentary on the continued application of EU law, conforming construction and key principles of statutory interpretation which will be of interest to those involved in VAT litigation and advisory. The case was designated as a lead appeal, with around 20 similar disputes awaiting its outcome; therefore, we will await any further developments, specifically whether HMRC will seek to appeal the decision. The line between taxable supplies of staff or services covered by the medical VAT exemption remains a point of contention with HMRC, an appeal by HMRC seems quite possible. HMRC might have strategized that the FTT is only binding to the parties involved and not appeal rejecting the position for others as continued policy but that is more difficult as a lead case with others stood behind.
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.