Constable VAT Focus 27 September 2023


Health professionals and pharmaceutical products (VAT Notice 701/57)
HMRC have updated their guidance contained in VAT Notice 701/57 to reflect the following changes:

  • Pharmacy technicians (only in England, Scotland and Wales) have been added to the meaning of a health professional list in section 2.1.
  • Services directly supervised by a pharmacist has been removed from section 2.5 (services that are not exempt from VAT)
  • Section 4.7 has been updated to make it clear when forensic physicians services are exempt healthcare.
  • Services supervised by pharmacists are now included when referring to a health professional under section 5.2 (Exemption of care services performed by a person not enrolled on a statutory medical register)

Updates on VAT appeals
HMRC have updated the list of ongoing VAT appeals with 1 removal, 4 amendments and 3 new additions.  These amendments may have implications for other businesses with similar ongoing disputes.


First Tier Tribunal

1. Permission to grant an appeal out of time

Bull Brand Limited (the appellant) applied for permission to appeal out of time in respect of HMRC’s rejection of an error correction notice (ECN). The appellant is a wholesale supplier of e-cigarettes and tobacco products; they were contacted by a major customer who advised that they were intending to enter into a dispute with HMRC as to the correct VAT rate of the products. The customer informed the appellant to ensure that they had the opportunity to file an ECN to protect its position in the event that the customer was successful in its appeal with HMRC.

The appellant submitted the ECN amounting to £273,000 in October 2018 and also advised its suppliers that they should similarly file an ECN as the appellant would seek to recover any overpaid VAT. HMRC sent a letter rejecting the ECN in December 2018 and the appellant claims that they did not receive this letter or hear anything from HMRC regarding the claim and if they had received the letter they would have taken action to appeal as the letter advised. The appellant also stated that they had taken their accountants’ advice when filing the ECN and the accountant did not mention any requirement to follow up on the claim.

HMRC wrote to the appellant in May 2022 advising them that they were approaching the four-year limit for any further claims of a similar nature and inviting them to make a protective claim. The letter also indicated that any ECN would be rejected but an appeal could be submitted in respect of that rejection and that the previous ECN submitted had been rejected.

The appellant argued that they would have made an appeal in time if they had received the letter from HMRC and they acted promptly once they received the letter from HMRC in May 2022. HMRC argued that the appellant failed to exercise appropriate due diligence regarding their claim as they failed to follow up on the progress of the claim for over 3 years.  HMRC considered it should be entitled to consider the matter closed as there had been no contact from the appellant regarding the claim in over 3 years. HMRC also argued that if the appellant is allowed to appeal out of time then HMRC will be required to divert resources to consider the appeal, to the prejudice of other taxpayers.

The Tribunal concluded that, given the significant and substantial delay on the appellant’s part and the fact that the appellant did not establish that there was a good reason for such delay, the Tribunal did not consider that the potential financial consequences for the appellant and the limited prejudice to HMRC resources is sufficient to displace the underlying point that time limits should be respected and that permission to appeal out of time should not be granted. The application was therefore refused.

Constable Comment: In this case, the appellant sought to appeal the decision of HMRC but were outside of the statutory time limits within which they were required to submit such an appeal. The Tribunal ruled that permission to appeal out of time should not be granted and that statutory time limits should be adhered to. This highlights the importance of ensuring that statutory deadlines are adhered to as this can have significant consequences for the taxpayer.

2. Evidence for repayment of input tax

This appeal by Heartlands House Limited (HHL) is against a decision by HMRC to disallow three input tax repayment claims submitted for the VAT periods 09/19, 06/20 and 09/20. The input tax repayment was refused as HMRC considered that HHL had not provided sufficient evidence to support the claim or support that they had the intention of making taxable supplies. The dispute before the Tribunal was in respect of the 09/19 assessment totalling £28,221.96.

HHL is a company in the construction sector that secures projects and uses subcontractors to carry out the works. The company engaged in four projects in the period under appeal and it was the input VAT which was claimed in respect of three of these projects which led to the assessment.

HHL argued that it had provided clear evidence of taxable supplies and it was clear from the invoices and bank statements that the input tax had been incurred in respect of those supplies. HMRC argued that they could not see evidence of any taxable supplies in the period covered by the first VAT return or proof that any payments made by HHL were connected to taxable supplies. HMRC also argued that there was no planning permission for some of the projects and no correspondence or invoices that made clear what HHL clients were paying for.

The question for the Tribunal was whether the purchases had been made in connection with actual or intended taxable supplies. The Tribunal found that although there was poor management of the business in failing to ensure that it was registered for VAT and the CIS at the correct time, taking longer than it should have to take steps to enforce payments from customers and failing to understand that a pro forma invoice is not the same as a stage payment invoice; that was not enough to outweigh the evidence that supplies were actually made. Poor management does not mean that there was any lack of intention to make taxable supplies.

The Tribunal held that the appellant has provided sufficient evidence of an intention to make taxable supplies and provided evidence that it did make supplies despite the projects not necessarily being completed. The appeal was upheld.

Constable Comment: In this case, HMRC denied the recovery of input tax by the appellant on the basis that there wasn’t sufficient evidence to support the reclaim or support that they had the intention of making taxable supplies. The Tribunal found that there was sufficient evidence to support the repayment of input tax and that poor management of the business did not have any impact on the evidence which was available to support the fact that supplies were actually made. However, this case does highlight the importance of retaining evidence of an intention to make taxable supplies, or that taxable supplies have been made to which a VAT cost can be linked, in order to avoid a similar dispute with HMRC.

3. Whether an agency relationship is present

This case concerned All Answers Limited (AAL), a company operating an internet based business where customers, in return for payment to AAL, order academic work such as ‘model answer’ essays written by third party writers. AAL and the writers shared the fee paid by the customer. HMRC argued that the total fee was subject to VAT, however AAL took the view that only the amount retained was subject to VAT, meaning the sum paid to the writers should be excluded from AAL’s turnover for VAT purposes. This arrangement had already been subject to appeal and the Upper Tribunal (UT) concluded that AAL was acting as principal in the transaction and as such must account for VAT on the entire amount paid by the customer. The UT case was considered fully in a previous VAT Focus.

AAL had updated its contracts prior to the UT case and it considered these to be consistent with the agency relationship they understood they held with the writers and customers. This new case considered the impact of these updated contracts on HMRC’s assessments.

The updated contracts included terms to the effect that the copyright remains with the writer. Previously this was not the case and the UT considered this to support their conclusion in relation to the ‘core’ obligations under the contracts. However, the FTT was not satisfied that the contractual changes altered the ‘core’ obligation on AAL to deliver a product, in the appropriate time scale, to the requisite standard.

In addition, the FTT considered the commercial and economic reality of the case and concluded that the circumstances of transactions and overall business operations remained the same and the reality was that AAL delivers the academic work not the writers. The appeal was dismissed.

Constable Comment: This case considered whether an agency relationship exists between three parties to a transaction. The FTT ruled that contractual changes in relation to copyright was not sufficient to alter the core obligation of the appellant and also the commercial and economic reality did not change, therefore the appeal was dismissed. It is important when considering the VAT position in respect of agency relationships that both contracts and actual business practices are taken into account.

4. Default surcharge: Reasonable excuse

This case concerned Echo Construction Ltd’s (ECL) appeal against default surcharges issued by HMRC. ECL’s grounds of appeal included the fact that surcharge notices were not received and HMRC were invited to provide proof of delivery. In addition, ECL was awaiting funds in order to be able to pay the VAT due and the default periods relate to a time that ECL had opted to use the VAT deferral scheme in operation during the Covid 19 pandemic.

The Tribunal initially upheld that ECL was in default, shifting the burden to ECL to prove it had a reasonable excuse. In relation to the postage issue of the notices, the Tribunal confirmed there is a statutory presumption that if HMRC posts documents to the principal place of business, these are deemed to be delivered unless evidence to the contrary is provided. ECL was unable to provide such evidence, and as notices were never returned undelivered, the FTT ruled these must have been delivered.

In relation to ECL’s submission that the fact that it was waiting for funds in order to pay the VAT amounts to a reasonable excuse, the FTT highlighted that insufficiency of funds or relying on any other person to perform any task is not a reasonable excuse. The Tribunal commented that ECL could have easily contacted HMRC to appraise them of the situation, therefore the late payment was ultimately due to ECL’s simple error of judgment.

Lastly, the Tribunal found that any deferral of VAT would have been for payments that were due between 20 March 2020 and 30 June 2020. ECL’s defaults were in periods subsequent to this and it should have joined the VAT deferral new payment scheme, which was open from 23 February 2021 to 21 June 2021. ECL did not join the scheme, and the Tribunal concluded that ignorance of law cannot constitute a reasonable excuse. The appeal was dismissed.

Constable Comment: This is another case where the appellant failed to establish it had a reasonable excuse in relation to its defaults, which was common with the old default surcharge regime. Although the scheme has been replaced, an important point was considered in relation to the statutory presumption around postal services confirming that where HMRC sends something by post to the principal business address, it is deemed to have been delivered unless evidence to the contrary can be provided. The default surcharge regime in the above case has been replaced by the New VAT Penalty regime which commenced from 1 January 2023. Constable VAT has released an article covering the new regime which can be read 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.