Constable VAT Focus 4 June 2021


How to claim VAT relief on goods imported for onward supply to an EU country
If your organisation imports goods into Northern Ireland from outside the EU for onward supply to the EU, find out about claiming Onward Supply Relief.

Revenue & Customs Brief 8 (2021)
HMRC has released a new Brief which explains HMRC’s policy on the VAT treatment of public monies received by further education institutions in the light of the Colchester Institute case.

Revenue & Customs Brief 7 (2021)
HMRC has released a new Brief which covers the VAT treatment of charging electric cars at public charge points.

VAT Notice 701/14
HMRC has updated its guidance on food products to reflect the recent extension to the temporary reduced rate of 5% until 30 September 2021 and to inform businesses to prepare for a new rate of 12.5% from 1 October 2021 until 31 March 2022.


New EU Ecommerce Rules

The European Commission has published a statement in relation to the new “future-proof” VAT rules for ecommerce which come into effect on 1 July 2021. These rules will be particularly significant for anyone selling goods online or running an online marketplace.

The Commission has highlighted the following as the main changes:

  • The introduction of the new One Stop Shop (OSS). Online sellers and operators of marketplaces will be able to register in one EU member state to facilitate the payment of VAT on all distance sales, akin to the current MOSS for intra-community supplies of B2C services.
  • The abolition of the existing distance sales thresholds to be replaced with a uniform threshold of €10,000 throughout the EU. Below this threshold, supplies remain subject to VAT in the state from which goods are dispatched. Sales above this threshold can be reported using OSS, preventing the requirement to register for VAT in every state in which the distance sales threshold is broken.
  • Introduction of provisions making online marketplaces the “deemed supplier” where they facilitate distance sales of goods imported into the EU with a value not exceeding €150 and/or supplies of goods to customers in the EU, regardless as to their value, when the underlying supplier is not established in the EU. Online marketplaces will also be able to benefit from the OSS to handle the necessary VAT accounting.
  • Introduction of new record keeping requirements for online marketplaces which will be required to keep records for the transactions they facilitate, irrespective if they become deemed suppliers or not. Such records should be kept for 10 years.
  • Abolition of VAT exemption for importation of goods with a value up to €22, meaning all goods imported into the EU will be subject to VAT. However, the Import One Stop Shop (IOSS) will be introduced, allowing suppliers and electronic interfaces selling imported goods to buyers in the EU to collect, declare and pay VAT to the tax authorities, instead of making the buyer pay VAT at the moment the goods are imported into the EU. Registration is required in one EU state. The IOSS registration is valid for all distance sales of imported goods to buyers in the EU. Businesses can start using the IOSS only for the goods sold as from 1 July 2021.

These new rules, in tandem with the effects of Brexit, need to be carefully considered by UK sellers and online marketplaces. EU VAT registrations will be required in order to benefit from the schemes.


Partly exempt businesses recover VAT incurred provisionally throughout their VAT accounting year. Those businesses are then required to complete an annual adjustment calculation that takes account of supplies made, and input tax incurred, across the entire VAT year and an adjustment to the VAT claimed may be required. This adjustment is normally made on the VAT return following a business’ partial exemption year end. Many taxpayers will be required to calculate and declare these adjustments shortly. Constable VAT can assist with this. Our guidance on partial exemption may be useful.



1. Interest on VAT repayments

This case concerned the right to claim interest from a tax authority where it has not provided a credit which is rightfully due in good time. The judgment relates to two appeals made by separate entities; an Austrian company (CS) which operates hotels and technoRent, a machinery vendor in Germany.

On its VAT return for August 2007, CS claimed credit for input VAT in the amount of EUR 60,689.28. However, by decision of 18 October 2007 following an audit made by the Austrian tax office, the input VAT payable to CS was reduced to EUR 14,689.28. The CJEU judgment does not discuss the underlying transactions or reasoning of the domestic Courts and tax authorities. CS brought an appeal against that decision and on 15 May 2013, that appeal was upheld and the total amount claimed as overpaid VAT was credited to CS’ tax account. CS subsequently submitted an application under the Austrian law (BAO) for a payment of interest on the amounts claimed from 1 January 2012 to 10 June 2013.

The other company included in this judgment is technoRent International (TI), this company is established in Germany. TI sold machines in Austria which were subject to VAT in Austria. In its VAT return for the period to 31 May 2005, TI claimed a VAT credit on the basis that it had reduced the sales price of some machines after they were sold. The VAT credit amounted to EUR 367,081.58.

Initially, TI received its VAT refund without issue. However, following an official audit by the tax authority it was decided that the sale price should not have been reduced and that, accordingly, no refund was owed to TI. The amount which had been credited was then taken from TI’s VAT account by the tax authority. TI successfully appealed this decision and on 10 May 2013, the full amount of EUR 367,081.58 was once again credited to its VAT account.

TI made an application for interest on the full amount from July 2005 to May 2013; however, it was only partly granted for the period from 1 January 2012 to 8 April 2013 as the BAO only came into force in 2012. TI’s case before the CJEU concerned whether interest was rightfully due for the entire period based on arguments founded in EU principles.

In reaching the judgment, it was necessary to consider specific EU legislation. Articles 22 – 27 of the VAT Directive discuss interest to be paid to taxpayers where domestic tax authorities make refunds not in good time. However, until the introduction of BAO in Austria, there was no domestic provision for such interest to be paid to taxpayers.

EU Member States have certain freedom to determine the conditions for the refund of VAT; however, it is important that domestic laws give effect to the EU provisions so far as is practicable. In this situation, it was apparent that the Austrian law failed to give effect to EU requirements to pay interest to taxpayers in situations envisioned by the EU provisions.

In making this decision, the CJEU observed that it is for the referring Court to do whatever lies within its jurisdiction to give full effect to those provisions by interpreting national law in conformity with EU law.

Constable Comment: It often feels like there are two standards, one for taxpayers and one for the tax authority. Where a taxpayer is late to pay, tax authorities generally charge interest and penalties. This demonstrates that there should be a level playing field and if tax authorities are late in making payments owing to taxpayers, interest should be due to the taxpayer in keeping with fundamental EU principles. Though taxpayers are entitled to interest in the UK, the UK has left the EU. That means that the domestic law may change in the future to the disadvantage of taxpayers. If you believe that you may be entitled to interest from HMRC, you should act immediately.

Supreme Court

2. Balhousie: Sale and Leaseback

This Supreme Court judgment considered the long-running case of Balhousie which concerns zero-rating provisions relating to relevant residential purpose (RRP) properties. Balhousie is a care provider and purchased a new care home from a developer. As the property was to be used for a relevant residential purpose, the developer zero-rated the disposal. In order to finance the acquisition of the care home, Balhousie entered into a sale and leaseback agreement with a finance house.

Owing to the sale and leaseback arrangement, HMRC sought to recover deemed VAT on the original purchase of the property pursuant to Schedule 10 VATA. The relevant legal provision, Part 2 of Schedule 10 to VATA provides for what may loosely be described as a form of claw-back of the benefit of zero-rating from the recipient (P) of the zero-rated supply, or supplies, if either of two stated events occurs within ten years from the completion of the building:

  • P has, since the beginning of the relevant period, disposed of its entire interest in the building,
  • Within the relevant period, the use of the building changes from qualifying to non-qualifying for zero-rating provisions.

Where either condition is met, a “self-supply” charge arises and VAT which was not incurred on the purchase must be declared as output VAT of the recipient of the supply.

It has already been established and affirmed throughout the process that Balhousie did not dispose of its interest by virtue of the sale and leaseback arrangement which HMRC had argued created a scintilla temporis (a moment in time where the sale has arisen, but the lease has not yet been assigned). HMRC suggested that there must be time between the sale and the subsequent lease. Therefore, Balhousie, during the relevant period, had disposed of its entire interest in the property. This point having been dismissed; the Court turned to the other strands of HMRC’s argument.

HMRC had successfully argued in the Upper Tribunal and the Scottish Inner House that the sale, regardless of the leaseback, was a disposal of Balhousie’s interest in the property. HMRC submitted that, viewed as a whole, the sale was a disposal of exactly the interest which Balhousie had acquired. It then obtained a new, different interest in the property in a form of a lease.

Applying the CJEU decision in Mydibel, The Supreme Court concluded that a sale and leaseback can be regarded as a single transaction in terms of its economic substance. The effect of the judgment is that, despite there being two suppliers (the vendor of the property and the new landlord of the property), a sale and leaseback is regarded as a single event. Where the single event arises but the occupant of the building loses no control over the operation of that building, the economic substance is that the interest was never truly disposed of.

Therefore, the Court concluded that Balhousie had not disposed of its interest in the property by agreeing a sale and leaseback to increase its liquidity as it had, at all material times, the benefit of the building and the right to occupy it.

Constable Comment: The Balhousie case has been progressing since 2011 and its outcome was uncertain throughout. However, following the CJEU decision in Mydibel which was handed down in 2019, the Supreme Court has been able to make a clear ruling in favour of Balhousie. The amounts of VAT at stake were large and this is a significant judgment for the taxpayer. However, any organisations which have entered into sale and leaseback agreements in order to improve liquidity, or for other reasons, may need to consider the terms of their agreements. This is a long judgment and should not be regarded as a “carte blanche” as, where insufficient agreements are in place or human error arises, it is still possible to create a scintilla temporis.


3. Zero-rated food or standard rated confectionary?

This case concerned the supermarket, Morrisons and the correct VAT classification of some of the products it offers for sale. The products in question were Organix Bars and Nakd Bars, products which the appellant believed to be zero-rated health foods or, alternatively, zero-rated cakes, but which HRMC argued were standard rated “confectionary”. The VAT involved was just under £1.1 million.

During the case, Morrisons often tried to place emphasis on the fact that the relevant products are healthy and could be characterised as “health foods”. The customers purchasing these products were health conscious and the bars are marketed as a “healthy alternative to confectionary”. HMRC argued that the intent of a customer is to purchase sweet snacks.

The tribunal agreed with HMRC, observing that the sweetest, chocolate covered unhealthy cake will benefit from zero rating, whilst the healthiest of low sugar, low fat confectionary will always be standard rated. Therefore, the tribunal considered whether the bars were confectionary using the multi-factorial test. This considers the following factors:

  • What is the sugar content?
  • Is it sweet to taste?
  • Subject to a process?
  • Is it normally eaten with fingers?
  • Is it held out as a snack?
  • When is it consumed?
  • Is it filling the same role as traditional confectionary?
  • How is the packaging?
  • Where is it placed in the supermarket?

Considering these different factors, it appears to have become evident to the FTT that both products are correctly classified as confectionary, there being minimal difference between an average item of confectionary and the products in question. The products are sweet, processed and normally eaten with fingers. As an alternative to confectionary, the products certainly seemed to fill the role of traditional confectionary and are packaged in a similar fashion to a classic chocolate bar.

This being the case, Morrisons went on to argue, in the alternative, that the products should be zero-rated as cakes. The Tribunal dismissed this argument promptly. It commented that the bars did not look like typical cakes, their ingredients are not those of typical cakes, they would look out of place on a plate of cakes and, less importantly, they are not held out for sale as cakes.

The appellant raised the point that one of the bars produced by Organix is called the “Carrot Cake Bar”, though the Tribunal made it clear that the name of a product does not create its classification for VAT purposes. Indeed, this follows as a carrot cake flavoured milkshake could not reasonably be regarded as a cake owing merely to its flavour. Accordingly, an item of confectionary which is cake flavoured is not a cake for VAT purposes where it does not fit the established definition of a cake.

The Tribunal held that there was no basis upon which to apply zero-rating to the products, concluding that both items are standard rated for VAT purposes.

Constable Comment: There have been several cases before the Tribunals in recent years regarding the correct VAT classification of different foodstuffs. Readers may remember our coverage of Corte Diletto which also considered the view of a typical consumer to be of importance when deciding matters of this nature. This upheld the reasoning outlined in the Ferrero case. Whilst the actual content of a foodstuff itself is significant, it is important to consider the marketing of that product because HMRC may use marketing to challenge a product’s classification. This is an area of VAT law which is often a cause of dispute between HMRC and taxpayers.

4. How to Determine Open Market Value

This case, Jupiter Asset Management Group Limited, concerned the correct VAT treatment of charges made between two VAT group registrations within one corporate structure, the JAMG group and the JIMG group. The decision relates to the input and output VAT consequences for the JAMG group of certain strategic and operational management services (the “Management Services”) which were supplied by members of the JAMG group to members of the JIMG group.

HMRC is entitled to issue a Notice dictating certain transactions must be treated as if made at “open market value” (OMV) where they are made between connected parties, the recipient cannot recover all its input VAT and the charges made were below market value. In this case, HMRC directed that JFM Plc (the representative member of the JAMG VAT group registration) needed to retrospectively correct the VAT position with regard to the supplies of management services. JAMG appealed against the direction and associated assessments, challenging the validity and the methodology used.

To treat transactions at OMV, it is necessary to calculate what the OMV actually is, or would be, if such a supply exists on the open market. The Tribunal observed the following around establishing OMV:

  • How is a comparable service to be determined? In this context, it was necessary to establish a comparable supply of management services made by a holding company from one VAT group to another where all parties are under common control.
  • Having determined the nature of a theoretical comparable service, it is necessary to consider whether a supply of services comparable to the supplies of the management services can be ascertained.
  • If comparable services can be practically established, what is the full amount which a customer would typically have to pay for the service and by what methodology is this calculated?
  • If comparable services cannot be established, what is the full cost to the supplier of making those services?

In this case, it was concluded that there is no service supplied between parties dealing at arm’s length which is comparable to the supplies of management services being made by JFM Plc. Therefore, it turned to consider the full cost to JFM of making those supplies in order to establish their value for VAT purposes. The Tribunal considered, at length, various aspects of the supplies and associated expenses being incurred in their provision.

The judgment and obiter dicta are lengthy and case specific, but the methodology used to establish OMV can be summarised as follows:

  • The full cost of making the supply is the cost upon which VAT is to be calculated in the absence of comparable supplies on the free market,
  • The full cost includes expenses incurred in making the supply, including overhead costs,
  • The full cost includes remuneration paid to directors specifically in relation to the delivery of the services

The Court found in favour of HMRC, upholding the assessments to output tax based on a open market valuation of the services being supplied.

Constable Comment: The reasoning in this case is particularly complex and the judgment is quite lengthy and very specific. Our coverage of the case aims to highlight to readers that there is a risk of making supplies between connected companies at below market value and in a situation where the recipient cannot recover all input VAT incurred. Charges and supplies made within corporate structures need to be considered carefully from a VAT perspective. If your organisation has any concerns around these issues please do not hesitate to contact Constable VAT.

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.