Constable VAT Focus 29 November 2018

HMRC NEWS

Declaration on Future EU/UK Relationship

The UK Government has published a draft of the declaration on the future relationship between the EU and the UK.

HMRC has released its monthly exchange rates for 2018

Here you can find foreign exchange rates issued by HMRC in CSV and XML format.

Help and support for VAT

Get help with VAT by using videos, webinars, online courses and email updates from HMRC.

 

MAKING TAX DIGITAL UPDATE

Economic Affairs Finance Bill sub-committee calls for further delays of Making Tax Digital

The House of Lords Economic Affairs Finance Bill sub-committee has asked the Government to delay the introduction of Making Tax Digital for VAT by at least a further year to give businesses a chance to prepare.

 

 

CASE REVIEW

CJEU

 

1. The Right to Deduct Input Tax

This case concerned an individual, Mr Vadan, who undertook multiple property developments and around 70 property transactions between 2006 and 2009. During this time Mr Vadan’s turnover significantly exceeded the Romanian VAT registration threshold but he had failed to register for VAT. Owing to this the tax authorities sought to recover roughly EUR 4,000,000 in unpaid output tax, penalties and interest.

Mr Vadan appealed against the assessed amount on the basis that he had been refused the right to deduct input tax, despite not having any legible or valid invoices relating to the period. It was, in essence, his assertion that if he had been a taxable person at the time of the transactions and owed output tax to the authorities in regard of those supplies then the tax authorities necessarily owed him the right to reclaim input tax, despite his inability to provide proof by way of VAT invoices. He claimed that the assessment from the tax authorities which contained, inter alia, a Court commissioned Expert report, should create a right to deduct input tax relating to the relevant output tax.

The question referred to the CJEU was whether a taxable person who satisfies the substantive requirements for the right to deduction may be refused the right to deduct on the grounds that they can provide no substantive evidence.

Previously, the Court has held that the fundamental principle of the neutrality of VAT requires that deduction be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some formal conditions. In this instance the Court conceded that the strict application of the substantive requirement to produce invoices would conflict with the principle of neutrality. However, it is considered to be the taxpayer’s burden to prove his right to deduct VAT.

In concluding, the Court considered that the expert report on which Mr Vadan sought to rely to prove his right to deduct could not prove that he had actually paid any VAT so could not be used as proof of a right to deduct that input tax. It was held that a person cannot benefit from the right to deduct input VAT solely on the basis of an expert report.

Constable Comment: This conclusion demonstrates that whilst the right to deduct is absolute, as has been reaffirmed many times by the Court, an assessment to output VAT based on an expert report cannot, in circumstances such as these, give rise to a right to deduct an unquantifiable and unprovable amount of input VAT. Whilst the right to deduct exists, the requirements of proof to exercise that right are not expunged because a business has failed to keep records.

 

2. Calculating Taxable Turnover by Extrapolation

This appeal concerned a retrospective assessment to VAT served on the appellant, Ms. Fontana, which was based on a “sector study” ordered by the Italian tax authorities who, for several reasons, felt it necessary to do so as there were discrepancies in her own tax returns.

Ms. Fontana challenged the amount of VAT to which she was being assessed, arguing that the tax authorities had incorrectly interpreted her business as “accountancy and tax consultancy” rather than “HR and Management” and had so been incorrectly assessed. She also claimed that the sector study did not give a consistent or fair image of income generated by her company.

This was dismissed but a further question was raised which was referred to the CJEU; whether EU law precludes domestic legislation allowing Member States to assess VAT based on retrospective extrapolation.

The CJEU considered that if a taxable person fails to declare all of the turnover achieved in the course of their business, the tax authorities should not be hindered in collecting VAT as a result. It was concluded that as Member States have a margin of discretion with regard to their means of achieving the objectives and collection of VAT and preventing evasion.

Constable Comment: This result does not come as a surprise and follows the Opinion of the AG. In cases of under declaration of VAT or pure VAT evasion, it is necessary for tax authorities to be able to extrapolate and reasonably calculate estimates of amounts owing. The real question in this case was whether the Italian “sectoral method” was acceptable which the Court has confirmed it to be.

 

Upper Tribunal

 

3. Unjust Enrichment of HMRC

This case is an appeal against an HMRC tax assessment on J&B Hopkins Ltd (JHBL). JBHL had made supplies to Rok Building Ltd (Rok) who were in turn providing onward zero-rated supplies to a charity which had provided Rok with a zero-rating certificate for some building works stating that the intended use of the building would be a relevant residential purpose (RRP).

JHBL had incorrectly zero-rated its supplies to Rok believing that the certificate issued by the charity extended to sub-contractors. When this mistake was discovered, JHBL did not correct this by issuing VAT only invoices to Rok as Rok had become insolvent and gone into liquidation.

HMRC assessed JHBL for the VAT which it should have paid on supplies made to Rok. JHBL appealed the assessments on two grounds; primarily that HMRC would be unjustly enriched if JHBL had to pay over VAT which should have been paid by Rok, secondarily that HMRC had failed to exercise best judgment in raising the assessment.

The Tribunal considered on appeal that the correct analysis of the position as regarded the unjust enrichment of HMRC is that any enrichment gained by HMRC would be at the expense of the liquidated Rok, not JHBL who had failed to invoice correctly. Despite its contention that it was the only company “out of pocket”, this was only because Rok had not paid the full price to JHBL as JHBL had failed to invoice correctly. Giving some consideration to historic case law, the Tribunal held that JBHL had made an error in its invoicing and that the VAT owed was actually the expense of Rok, the VAT system does not have an obligation to insulate the taxpayer from making mistakes and therefore dismissed the appeal on these grounds.

Constable Comment: Errors in property transactions can cause significant VAT problems further down the line, as has been demonstrated by this case. It is essential when taking on development projects, especially where a zero-rating certificate is involved, to seek professional advice to ensure compliance from the start of the development. In this case Rok would have been able to recover VAT charged to it by JHBL as this VAT would be a cost component of its own taxable (zero-rated) supplies.

 

4. Legitimate Expectation – Judicial Review

Vacation Rentals (UK) Ltd (VRL) has been successful in its seeking of Judicial Review preventing a retrospective assessment to VAT. VRL is a booking agent for property owners who wish to lease their homes as holiday lets.

Holidaymakers could reserve properties and make payment online using credit and debit cards for which they were charged a small card handling fee. VRL, following HMRC guidance (BB 18/06), treated these fees as exempt from VAT. A subsequent development in the CJEU ruled that such fees were to be taxable and not exempt as had been HMRC’s published and accepted policy. On the grounds of this change in law, HMRC sought to retrospectively assess VRL to output VAT on all of the supplies of card handling which it had made.

VRL claimed that, whilst not enshrined in law, HMRC’s policy of treating the services of card handling services had created a legitimate expectation that they would not be taxed on these transactions.

In situations where HMRC create a legitimate expectation with the Commissioner’s guidance, HMRC are bound by that guidance even where that expectation has been incorrectly created according to the law. There is a particularly high burden on the taxpayer to prove that the expectation was created by HMRC guidance and that it would amount to an abuse of power by HMRC to not adhere to their own guidance.

This Judicial Review concluded that HMRC had created such an expectation, on which VRL had relied, and therefore that HMRC were bound by their own guidance meaning that VRL need not pay the VAT which it owed following a strict interpretation of the law.

Constable Comment: Whilst this is possibly an unusual result in that the taxpayer has not been ordered to pay VAT in line with the law, it is refreshing to see HMRC has been held to account for misleading businesses and the public with its own guidance. It seems unequitable for HMRC to issue one policy and then retroactively pursue a different one. The Court has here recognised this fact.