Constable VAT Focus 29 October 2020


Accounting for VAT on goods moving between Great Britain and Northern Ireland from 1 January 2021
HMRC has released new guidance discussing the movement of goods between GB and Northern Ireland.

Revenue & Customs Brief 16: VAT liability of payroll services
HMRC has released a new Brief following the decision in Cheshire Centre for Independent Living which states that HMRC’s position regarding the supply of payroll services to disabled individuals is that they are taxable at the standard rate.

VAT Personal Export Scheme
HMRC has updated Public Notice 707 with new contact details for submission of Form VAT410.

VAT on New Means of Transport
HMRC has updated Public Notice 728 with new contact details for submission of Forms VAT415 and VAT411.


As the end of the Brexit transition period draws closer, it is essential that businesses stay up to date with ongoing developments. We continue to update our coverage of Brexit and how VAT and business will be impacted. Whilst the situation is still not perfectly clear, there are important steps which businesses should be taking as a matter of urgency if they have not yet. Our coverage can be read in full here.

We have also recently released a blog discussing some general considerations and common VAT accounting mistakes which we encounter when dealing with businesses. This piece aims to point out some helpful highlights which may be of assistance to businesses.



1. Bad Debt Relief

This referral concerned E, a Polish incorporated tax adviser whose supplies to domestic businesses attract VAT at the standard rate. It provided services to a client and furnished its client with a VAT invoice. Importantly, at the time the invoice was issued, the customer was registered for VAT and was not subject to insolvency or winding-up proceedings. However, within 150 days of the issue of the invoice, the client was wound up and no payment was made by the customer against the invoice.

As the invoice was neither settled nor assigned, E requested permission to apply bad debt relief. The Polish authority refused the application on the grounds that Polish law requires that both parties to a transaction continue to be VAT registered, and not subject to insolvency proceedings, until the day before that on which the tax return containing an adjustment is filed.

E appealed this decision in the Polish court system which referred the question of whether EU law precludes a domestic requirement as set out in the above paragraph.

The CJEU considered that domestic authorities are permitted to derogate, in some circumstances, from the VAT Directive in order to combat uncertainty or to deal with localised issues which may distort the VAT system of that economy. The question which it therefore posed for itself is whether the imposition of these extra requirements in Poland was justified by the need to combat uncertainty, for example around whether the non-payment of the debt is definitive.

Considering previous caselaw and the general principles of neutrality and proportionality, the CJEU concluded that the domestic provisions were too restrictive and prevented taxable persons from exercising their rights to bad debt relief. It noted that E was entitled to rely on the EU provisions over the Polish provisions owing to the principle of direct effect and the primacy of EU law.

Constable Comment: The Court also observed that this judgment implied that there are several other Polish domestic laws which may be ultra vires and that Polish companies can rely on EU law rather than the domestic provisions. Polish businesses should consider their bad debt relief position and if they may be able to benefit from this confirmation that they may rely on EU law. The decision should also act as a reminder to UK businesses that, if the cash accounting scheme is not operated which offers inbuilt protection against outstanding payments, that there is a VAT bad debt system available to deal with the non-payment of invoices by customers.   

Upper Tier Tribunal

2. VAT Liability of Payroll Services

Readers may remember the case of Cheshire Centre for Independent Living (CCIL) at the First Tier Tribunal (FTT). The FTT concluded that payroll services being supplied by CCIL were VAT exempt as they were ancillary to an underlying supply of VAT exempt welfare. Our coverage of the First Tier decision can be read here.

HMRC appealed this decision to the Upper Tribunal (UT) where, in its statement of case, HMRC introduced a new argument which it had not employed at the FTT. CCIL conceded that this new argument won the dispute for HMRC and withdrew its case before the (UT) hearing. However, it sought costs from HMRC arguing that it was wholly unreasonable of HMRC to not identify their “trump argument” which was available to the Commissioners prior to any Tribunal proceedings. Both CCIL and the FTT had proceeded on the basis that HMRC had accepted that the supply of care was VAT exempt and HMRC had not done anything to prevent this impression.

HMRC argued that it never actually confirmed that it believed the underlying supply to be VAT exempt and, on a careful analysis, the Tribunal noted that this was correct. However, it was observed that “… the subtlety of that point was lost on CCIL, who along with the FTT, clearly proceeded on the assumption that a concession had been made.” The suggestion here being that HMRC was aware of the assumption being made by the FTT and CCIL but did not correct either party. After assessing the rules around when a Tribunal may award costs, it was concluded that HMRC’s conduct in not approaching its position on the case in its original statement of case, and in continuing to fail to do so, amounted to unreasonable conduct.

In awarding the application for costs, The FTT commented that CCIL bore some responsibility for incurring its costs as it failed to evaluate fully the strength of its case when viewed “in the round” and for not taking steps to resolve the ambiguity around whether HMRC had conceded that there was a VAT exempt supply arising. However, owing to HMRC’s unreasonable conduct, the Tribunal awarded 30% of costs incurred to CCIL.

Constable Comment: Whilst it is positive to see that costs were awarded in this case, it seems harsh that CCIL were penalised for responding specifically to HMRC’s reasoning for making its original decision rather than attempting to envisage where HMRC may have taken the argument further down the line. To require a charity providing payroll services to disabled individuals to extrapolate HMRC’s reasoning for reaching a decision, and to try to deduce if HMRC may have any further arguments which it has not yet employed, may appear a restrictive standard for reasonableness. Indeed, the FTT did not comment specifically on whether HMRC had actually considered this argument prior to the UT appeal – a factor which seems relevant in concluding whether CCIL is to blame for not preparing a counterargument.

First Tier Tax Tribunal

3. Mid Ulster District Council

This recent First Tier Tribunal (FTT) decision in the case of Mid Ulster District Council considered the VAT liability of charges made by local authorities to the public for access to sports and leisure facilities in Northern Ireland. HMRC contended that the charges should be VAT exempt following the London Borough of Ealing case, after which HMRC accepts that the sporting exemption applies to such charges. The local authorities disagreed and suggested that the charges are outside the scope of VAT on one of two grounds:

  • The supplies of leisure facilities are not economic activities within the meaning of the PVD, or
  • The supplies are provided by the councils acting as public authorities under a special legal regime so are not made by a taxable person

Article13 of the Principal VAT Directive (PVD) provides that Government bodies shall not be regarded as taxable persons in respect of transactions in which they engage as public authorities, unless their treatment as non-taxable persons would lead to significant distortions of competition. The Council argued that its supply of leisure and recreational facilities fell within these criteria.

Previous CJEU caselaw indicates that a public body can be treated as non-taxable where it engages in an activity under a “special legal regime” applicable to bodies governed by public law or under the same legal conditions as those that apply to private economic operators. The Tribunal primarily suggested that, when deciding if an activity is being engaged in under a special regime, the following factors are irrelevant:

  • The subject matter of the activity
  • The purpose of the activity
  • The fact that private operators carry out similar services

The Council argued that it provided leisure and recreational facilities pursuant to a requirement to do so contained in the Recreation and Youth Service (Northern Ireland) Order 1986, which essentially provides that Councils are required to provide recreational facilities. Noting that this is the case, the Tribunal turned to consider whether Article 10 constitutes a “special legal regime”. Observing that the requirements of the Order do not apply to the private sector. It concluded that this criterion was satisfied and went on to consider whether the Councils being treated as non-taxable persons would distort competition.

The FTT agreed with the Council (it was acting under a special regime) which highlighted the specific challenges which are faced by Northern Irish Councils and the lengths to which they go to deliver community relations outcomes. It was stressed how any private operator would not be able to deliver facilities that went any way close to being comparable to the community-driven facilities demanded from Councils. Therefore, the Council’s treatment as a non-taxable person does not significantly distort competition.

Constable Comment: This case is not binding as it was only heard in the First Tier Tribunal. It is not known whether HMRC will appeal the decision as this was a lead nominated case with others stood behind it. It is estimated that between £50 million and £70 million will be repayable by HMRC to Northern Ireland councils. The decision is effective in Northern Ireland owing to special equality and diversity laws. It offers an interesting analysis of when a public body acts in its role as a public authority under a special legal regime which means that it is treated as a non-taxable person for VAT purposes. This will be of interest to all public bodies which may need to consider if they should be treating themselves as taxable regarding certain types of supply. The FTT rejected the Councils’ argument that operation of the leisure facilities was not an economic activity. 

4. Recovering VAT incurred on the installation of Roller Blinds

This case concerned Wickford Development Company Ltd (WDC), a UK property development company which is currently engaged in constructing 1,600 homes in Essex. The case centred around the supply by WDC of installed roller blinds in its new homes which it argued were building materials and so bore a right to input VAT recovery.

HMRC argued that blinds are not building materials and, as such, WDC was not allowed to recover the input VAT incurred owing to the “builder’s block”. This prevents construction companies recovering VAT incurred on non-building materials and supplying them onwards in one zero-rated supply. Therefore, the case turned on the definition of “building materials” for VAT purposes.

Readers may remember the case of John Price in which the FTT confirmed its belief that input VAT was recoverable on such blinds supplied by property construction companies as part of a new home development. However, following this case, HMRC issued a Brief which stated that its policy had not changed and that input VAT on blinds was still irrecoverable. Somewhat cynically, it did not appeal the John Price decision to the UT as, had the UT confirmed the FTT’s findings, the decision would have been binding on HMRC and taxpayers.

Counsel for WDC highlighted that installed roller blinds are a common feature which are included by builders in property developments and pointed towards marketing material from several different firms, all of which either had blinds fitted as standard or provided blinds as an optional extra. It seems clear from WDC’s submissions that blinds are ordinarily incorporated by builders in property developments and the Tribunal agreed with this despite HMRC’s insistence that WDC could not provide quantities for the number of blinds fitted by its competitors and so could not know what is ordinarily incorporated by them. WDC highlighted that it could not know exact quantities for its competitors but that it was aware of what they offered.

HMRC mounted a line of argument that suggested that blinds were caught by one of the exceptions to the provisions which discuss what supplies do give a right to VAT recovery when supplied by builders as part of one zero-rated supply. It argued that blinds should be regarded as chattels and, as such could not be regarded as building materials. Additionally, it suggested that blinds should be regarded as furniture. The Tribunal dismissed these arguments as “… obviously incorrect and patently untenable”.

The FTT concluded that blinds are building materials and that WDC was entitled to recover input VAT which it had incurred on them in order to make its onward zero-rated supply.

Constable Comment: It will be interesting to see how HMRC respond to this decision, having now lost two cases before the FTT. HMRC may decline to appeal again so that it doesn’t become a binding decision in the Upper Tribunal. However, the more FTT decisions which go in the taxpayers favour on the matter, it seems the weaker HMRC’s argument that blinds are not building materials will become. HMRC may need to change its guidance on this topic as it is, in the view of the Tribunal, incorrect. There could now be an opportunity for property development businesses that are constructing houses to sell to reclaim VAT incurred on roller blinds but have not reclaimed that VAT as input tax. It may be that some businesses in the sector were aware of HMRC’s policy and did not reclaim VAT incurred on these costs. It may be that some businesses that have reclaimed this VAT incurred as input VAT have received VAT assessments from HMRC disallowing an input VAT reclaim. We would remind readers that there is currently a 4-year cap in place which allows taxpayers and HMRC to make retrospective adjustments to VAT returns submitted. Therefore, if businesses have not reclaimed VAT incurred on the purchase and installation of roller blinds there may now be a chance to revisit VAT returns submitted in the last 4 years. Please do not hesitate to contact Constable VAT if you would like to discuss this potential opportunity.       

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.