Constable VAT Focus 3 November 2022


Revenue and Customs Brief 11 (2022): VAT and children’s face masks
HMRC has published a new brief setting out their revised position regarding children’s face masks. HMRC now accept that face masks, specifically designed and held out for sale as being suitable for young children (under the age of 14), should properly be considered as items of clothing and therefore zero rated.

Change your VAT registration details
Form VAT484 can be used to tell HMRC if any business details for the VAT registration have changed. HMRC has updated its guidance to confirm that changes to business circumstances must be notified within 30 days of the change taking place.

Fulfilment House Due Diligence Scheme registered businesses list
Traders based outside of the EU can use the above list to check if the business that stores its goods in the UK is registered with the Fulfilment House Due Diligence Scheme.



Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration and there may be occasions where they have a more binding effect.

1. VAT evasion: Place of supply of services

This case concerns a dispute between Climate Corporation Emissions Trading GmbH (Climate Corporation) and the Austrian tax authorities. In 2010, Climate Corporation, a business established and registered in Austria, supplied greenhouse gas emission allowances to Bauduin Handelsgesellschaft mbH (Bauduin), a business established in Germany. The place of supply of the services for VAT purposes was Germany, where Bauduin was established.

The Austrian tax authority contended that the supply was that of goods and Bauduin participated as a missing trader in a fraudulent VAT carousel and Climate Corporation knew or should have known that those allowances would be used for the purposes of VAT evasion. As a result, the Austrian tax authority sought to tax Climate Corporation on the supply in Austria. It was held by the courts that the supply by Climate Corporation must be one of services; however, the CJEU was asked whether the place of supply of services by a taxable person established in an EU member state (in this case, Austria) to a taxable person established in another Member State (Germany) can be deemed to be the supplier’s member state where that transaction involves VAT evasion.

The CJEU concluded that the place of supply of services cannot be altered in disregard of the clear wording of Article 44 of the VAT Directive on the ground that the transaction at issue is vitiated by VAT evasion. Whilst Member States may take measures to ensure the correct collection of VAT and prevent evasion, those measures must not go beyond what it necessary to attain such objectives.

Constable Comment: Whilst the CJEU ruled that the place of supply of services cannot be altered, Member States have the right to refuse benefits from the taxpayer if he or she knew or should have known VAT evasion was involved. The CJEU also noted that the law concerning goods and services are distinct; therefore, any argument based on the VAT treatment of the supply of goods are not relevant. Although CJEU decisions are no longer binding in the UK, HMRC have similar rights in the UK, including the application of joint and several liability and refusing input VAT recovery from taxpayers involved in fraudulent transactions.

The Supreme Court

2. Evidence to support input VAT claim

This case concerns the NHS Lothian Health Board (NHSL) and the recovery of VAT incurred in the period from 1974 to 1997. NHSL operates laboratories, primarily concerned with the provision of clinical services to NHS hospitals and clinics, a non-business activity for VAT purposes, but also the provision of services to external bodies for which a fee is charged, a business activity.

In 2009, NHSL submitted a claim to HMRC for repayment of input VAT incurred in relation to business activities undertaken from 1974 to 1997. NHSL did not have sufficient records to establish the apportionment between business and non-business activities; therefore it had to determine a reasonable methodology to calculate the VAT underclaimed for the period. NHSL contended that the percentage of taxable business activities in 2006/2007 was the typical level of taxable business activities and the most satisfactory base line for the calculation of this claim. The percentage was 14.70%.

HMRC rejected the claim and both the First Tier Tribunal (FTT) and Upper Tribunal (UT) upheld HMRC’s decision, holding that HMRC were entitled to conclude that NHSL had failed to establish how much input tax it was entitled to recover. The Court of Session overturned these decisions and remitted the case to be heard by a differently constituted FTT on the grounds that the FTT failed to adopt a flexible approach to the claim, particularly as there was no doubt that some input tax had been incurred over the claim period. This being so, the issue was only the quantification of the amount, not whether there was any right to deduct at all.

HMRC appealed to the Supreme Court which ruled in favour of HMRC holding that the FTT was entitled to conclude that it is not enough for the taxpayer to show it was engaged in business activities. The taxpayer must present either the specified documents showing input VAT incurred or devise a credible alternative method to estimate with reasonable certainty that the amount being claimed was at least close to the input VAT actually incurred.

The Court also considered the EU Principle of Effectiveness and concluded that there was nothing in the approach of HMRC or the reasoning of FTT that made NHSL’s claim ‘virtually impossible or excessively difficult’. As a result, HMRC’ appeal succeeded.

Constable Comment: We understand that there are many similar claims by other NHS Health Boards and Trusts pending before the FTT throughout the UK, with a combined value in the region of £38 million. This case highlighted the importance of holding sufficient evidence to support an input VAT claim or alternatively, in the absence of such evidence, the taxpayer must “devise a credible alternative method by which that amount can be estimated by HMRC with reasonable certainty that the amount now being claimed was at least close to the amount that had in fact been incurred.”

Upper Tier Tribunal

3. Car parking at hospital subject to VAT

This case concerns Northumbria Healthcare NHS Foundation Trust (the Trust) and whether VAT was chargeable on the supply of car parking made by the Trust at hospital and healthcare sites. The issue in this appeal was whether the Trust was a taxable person when making supplies of car parking (the FTT concluded it was) or whether it was acting as a public authority and such supplies were made pursuant to a “special legal regime”. Under the latter treatment, the Trust did not have to account for VAT on its supplies.

The UT was asked to consider, first, whether the Trust’s supplies of car parking are made pursuant to a “special legal regime” applicable to the Trust, and secondly, if so, whether treating the Trust as a non-taxable person would lead to a significant distortion of competition.

The UT considered the FTT did not err in law concluding that the Trust did not provide car parking under a “special legal regime”. The UT confirmed that the mere fact that the public authority is required to act in accordance with statutory powers is not sufficient, rather it is necessary to show that the pursuit of the specific activities in question involves or is closely linked to the exercise of rights and powers of the public authority, in order to fall within the special legal regime.

With regards to distortion of competition, the Trust argued that opportunities for competition was limited, and where it did arise, the Trust was required by guidance to take steps to avoid competition. The UT disagreed and concluded that there was competition with private car park operators, and the Trust not charging VAT would lead to a distortion of competition. Accordingly, the UT dismissed the appeal.

Constable Comment: This detailed analysis by the Tribunal, particularly in relation to the interaction between public law obligations and the special legal regime test, will be of interest to those involved in local authority VAT matters. The Tribunal’s comments on what constitutes unfair competition will be applicable across many wider aspects of VAT.


4. Amending grounds of appeal

This case concerns C4C Investments Limited (C4C) and penalties assessed by HMRC in respect of ‘deliberate’ inaccuracies on C4C’s VAT return. C4C claimed input VAT on purchases from DB Recycling Limited (DBR). DBR’s sole director was also the operation manager of C4C; however, DBR did not account for output VAT on supplies made to C4C. HMRC denied the input tax claim by C4C on the basis that C4C knew or should have known that the transaction was connected with fraudulent evasion of VAT.

In its original appeal, C4C accepted the inaccuracy was deliberate but appealed the amount of potential lost revenue on which the penalty was based, and the level of mitigation applied based on the assistance provided to HMRC. In this subsequent appeal C4C sought to clarify its grounds of appeal and obtain permission to amend these to the effect that the transactions on which VAT was claimed were not fraudulent and C4C neither knew nor it should have known the transactions were connected to the fraud.

The Tribunal found that the two statements by C4C could not co-exist. If C4C took the view that no fraud was involved, its initial appeal would have included this, but only the level of penalty was appealed initially. The Tribunal concluded that there was no realistic prospect of success, the application to amend the grounds of appeal was late and there was no good reason why the new grounds of appeal were not raised at an earlier stage. As a result, the appeal was dismissed.

Constable Comment: Whether to allow an amendment to the grounds of appeal is a matter of discretion of the Tribunal exercised with the objective of dealing with cases fairly and justly. An application to amend is normally refused if the proposed amendment has no reasonable prospect of success and this is highlighted in the above case.

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.