Constable VAT Focus 5 April 2024


Record keeping (VAT Notice 700/21)
The above guidance can be used to find out what records must be kept and how to keep them if you are registered for VAT. This also includes the requirements of a ‘valid VAT invoice’. The ‘reason for any zero rate or exemption’ has been removed from the list of details you must include on a valid VAT invoice.

Opting to tax land and buildings (VAT Notice 742A)
This guidance sets out what happens when a taxpayer opts to tax land and buildings, when you need permission and when to notify HMRC about your decision. Section 4 has been updated to show that HMRC no longer sends an acknowledgement letter when you notify your option to tax. Under the new policy, if  notification of an option to tax is sent by email, businesses will receive an automated response from HMRC which should be retained. Notifications sent in by post will no longer be acknowledged. The list of authorised signatories in section 7 has been updated. If notifying an option to tax by email, we would recommend including the address of the property in the subject box of the email. This could be useful evidence to demonstrate that the property has been opted to tax when HMRC’s automated response is received.

Provide partnership details when you register for VAT
When a partnership intends to register for VAT, it must use form VAT2 to provide details of partners. Form VAT2 has now been updated and the revised version can be found using the above link.

Investment gold coins (VAT Notice 701/21A)
Certain investment gold coins are VAT exempt under Group 15, Schedule 9 of VATA 1994. The UK list of coins recognised as investment gold coins has been updated and can be found using the above link.

HMRC email updates, videos and webinars for VAT
The above guidance can be used to learn more about VAT including accounting schemes, VAT returns and keeping records. The link to the recorded webinar about VAT reverse charge for construction services has been updated.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme and details 13 additions, 1 removal and 1 amendment.


Court of Appeal

1. VAT groups and time of supply rules

Silverfleet Capital Ltd (SCL) supplied investment management services to The Prudential Assurance Company Ltd (Prudential) while SCL and Prudential were both members of the same VAT group registration. Under the agreement for such services, there were performance fees which were due to SCL if certain targets were met. These targets were met and therefore a fee was due to SCL, in 2015/2016 after it had left the VAT group.

A dispute arose as to whether VAT is chargeable on the performance fees or not. Supplies made between VAT group members are disregarded for VAT purposes. However, HMRC took the view that the payments were liable to VAT because the tax point for continuous supplies of services will be either the issue of an invoice by the supplier or the date it receives payment from the customer. As this occurred after SCL left the VAT group, the fees are subject to VAT.

The First-tier Tax Tribunal (FTT) ruled that the supplies are outside the scope of VAT as this supply was made between VAT group members. On the other hand, the Upper Tribunal (UT) found, on appeal, that VAT is due when the payment is made. Our summary of the UT decision can be read here. Prudential appealed the decision of the UT to the Court of Appeal.

This appeal considered in detail the ambiguous relationship, and interaction, between the rules of VAT grouping (specifically the ‘disregarded’ provisions) and the time of supply rules for continuous supplies of services. The Court referred to the matter as ‘something of a chicken and egg problem’ in the sense that if we apply the VAT grouping ‘disregarded’ rules, the time of supply is irrelevant as its outside the scope of VAT; however, if we apply the time of supply rules, SCL was no longer a member of the VAT group and the fees it charged are subject to VAT.

After careful consideration of the submissions, legislation and applicable case law, the Court reached the conclusion that the correct approach is to consider whether SCL was still a member of the VAT group registration when the rules on time of supply treated its services as supplied. As SCL was no longer a member of the VAT group by time the invoices were raised or payment was made, VAT must be due on the supply. The appeal was dismissed.

Constable Comment: This case demonstrates an ambiguous and complex point in VAT legislation as the FTT and UT reached different conclusions on the same facts. Whilst the Court of Appeal upheld the decision of the UT, this was reached on a 2-1 split decision of the Court, reinforcing the ambiguity present. It will be interesting to see whether Prudential pursues this case further and appeals to the Supreme Court which would conclude the matter. Both VAT grouping and time of supply rules are potentially complex, and we would therefore recommend seeking professional advice if needed. Where services are supplied between group members, and it is known that one member will be leaving the group VAT registration, this point is worth considering if the supply chain is not fully taxable.

Upper Tribunal

2. Insurance: VAT liability of vehicle black box devices

In this case, WTGIL Limited (formerly known as Ingenie), appeals the FTT’s decision in relation to its repayment of VAT incurred on the provision and fitting of black boxes (device) which are used to capture information about how the policyholder’s car is being driven. Ingenie collects and analyses the data from the device and provides this data to the policyholder and insurer. The information was used to review the insurance premium payable. Ingenie made a VAT repayment claim in the region of £2million for recovering the input VAT incurred on these devices. HMRC refused to make the VAT repayment. The FTT previously concluded that the input VAT incurred is not recoverable. Our summary of this case can be read here.

Ingenie appealed the decision of the FTT to the Upper Tribunal (UT). The UT agreed with the FTT that ‘supply of goods’ means the transfer of the right to dispose of tangible property as owner. The ownership of devices did not pass to the policyholder at the fitting stage, therefore there was no supply of goods. However, the UT found that the provision and fitting of the device can be a supply of services if made in return for consideration (payment) which does not qualify for exemption as a VAT exempt insurance intermediation service.

The UT went on to consider whether there was any monetary or non-monetary consideration and after a careful analysis of the evidence and submissions, it concluded that there was no direct link between the services provided and any consideration provided by the driver. Lastly, it also concluded that there is no deemed supply of the devices either, meaning Ingenie did not make any taxable supplies that would entitle it to recover the input VAT incurred on the provision and fitting of devices. The appeal was dismissed.

Constable Comment: Whilst the above sets out a brief summary of the case, this was a lengthy and difficult case with complex points being considered around VAT exemption, supply of goods or services, consideration and more. The UT’s commented that ‘in the VAT world, very little is straightforward’. In this case the taxpayer faces a significant irrecoverable VAT charge and the UT’s comments support our recommendation that in any case of ambiguity, seeking professional advice can help establish the VAT implications and minimise potential risks of disputes with HMRC.


3. Further education and business activity question

In this case, Colchester Institute Corporation (CIC) appealed against HMRC’s VAT assessment which relates underdeclared output tax under the Lennartz mechanism. CIC is a VAT registered further education corporation which delivers ‘vocational’ courses, with the aim of providing its students with technical knowledge and skills. In 2008, CIC reclaimed £2m VAT incurred on a major redevelopment project in relation to its campus.

Whilst at the time, HMRC took the view that the provision of education or vocational training is not a business activity, if funded by a relevant funding body, CIC recovered the VAT incurred in accordance with ‘Lennartz mechanism’, which was in place at the time.  This enabled CIC to recover VAT incurred in relation to its non-business activities, however CIC would subsequently be due to account for deemed output tax over the economic life of the buildings, to the extent that their use was for non-business purposes.

In 2014, CIC argued that the provision of education to its students was a business activity irrespective of how it was funded. On that basis, CIC concluded that the building was never put to any non-business use, and it had over declared output VAT under the Lennartz Mechanism. Logically, it also wrongly reclaimed input VAT under the Lennartz mechanism, and this was netted off reducing the claim to nil. However, CIC took the view that moving forward no further output tax is due under Lennartz. HMRC disagreed and raised VAT assessments for underdeclared output tax.

The consideration point was determined in the 2020 Upper Tribunal decision, Colchester Institute Corporation v HMRC, where it was concluded that if the relevant supplies were in return for consideration, they were an ‘economic activity’ carried on by CIC. The FTT was bound by this UT decision and therefore had to conclude that CIC is not required pay output tax under Lennartz because its supplies were VAT exempt business activities.

Constable Comment: In view of the earlier UT (2020) decision in CIC it seems that the FTT’s hands were tied, and it was bound by that earlier UT decision. This being so, it makes us wonder if HMRC will seek permission to appeal the FTT decision to the UT. A decision of the UT is binding. This means that, if on appeal, the UT were to conclude that supplies of funded further education is a VAT exempt business activity this may impact the sector’s right to reclaim important VAT reliefs such a receiving construction services VAT free when a building is constructed to be used for a ‘relevant charitable purpose’ i.e. a non-business purpose. The earlier decision in CIC can be viewed here.

4. Right to reclaim VAT incurred before VAT registered

This was another complex case concerning pre-VAT registration input tax recovery and HMRC’s ability to allow or provide for a degree of discretion. The appellant, Aspire In The Community Services Limited (AICS), is the representative member of a VAT group registration that provides residential care and transitional services for individuals with autism, learning difficulties and behavioural problems. Prior to 2021, AISC was only making VAT exempt supplies of state regulated welfare services. However, in 2021 AICS wrote to HMRC confirming it intended to restructure its business and would be making standard rated supplies of care on a non-regulated basis, which would be taxable (standard rated) and entitle AICS to recover some input tax incurred.

AICS submitted its first VAT return in relation to pre-registration input tax amounting to £31,727.29, calculated by using the use-base methodology for partial exemption, achieving a 77% recovery rate. However, HMRC initially considered whether this input tax is recoverable as there is no statutory entitlement to allow recovery of VAT incurred on pre- VAT registration costs where those costs were first used to make wholly VAT exempt supplies.  However, HMRC can exercise its ‘discretion’ where it is reasonable and permit pre-registration VAT to be treated as input tax.

Following detailed correspondence, HMRC used its discretion to allow pre- VAT registration input VAT recovery; however, it reduced the amount recoverable by almost £25k to £7,138 to take into account the initial exempt use of the costs incurred.

AICS appealed to the FTT arguing that HMRC’s discretion extends to not only deciding whether to treat pre-VAT registration VAT incurred as input tax but also to the quantification thereof. Alternatively, HMRC contends that its discretion is limited to deciding whether or not to allow pre-registration VAT to be treated as input tax, but the quantification of that is a matter of applying the relevant VAT principles of input VAT recovery.

As a result, AICS applied for disclosure of various documents including the name of HMRC officers involved and copies of relevant documents that shows how HMRC exercised its discretion is calculating the amount repayable. The FTT agreed with HMRC stating that such action is not appropriate at this stage, concluding that if HMRC had agreed to the principle of recovery the appeal about amounts should proceed along normal VAT rules and the question of how HMRC had reached its decision was not relevant.

Constable Comment: As an application for disclosure, this case considered some complex points around VAT litigation; however, an interesting aspect is the analysis of pre-VAT registration input tax and the recovery of such VAT incurred, where initially those costs were incurred to make VAT exempt supplies. The case confirms that there is no statutory entitlement to allow the recovery of VAT incurred prior to VAT registration, instead HMRC may exercise its discretion. Technically, VAT incurred before VAT registration is not input tax; however, this VAT incurred may be treated as input VAT if it meets the conditions provided for in Regulation 111 which is headed ‘Exceptional claims for VAT relief’ and is phrased such that the entitlement to reclaim VAT incurred prior to VAT registration is not an automatic right, reading ‘the Commissioners may authorise’….our emphasis. In headline terms, HMRC’s usual policy is to allow VAT incurred on services received 6 months prior to VAT registration to be reclaimed, and VAT incurred on goods on hand to be used to make taxable supplies once VAT registered, up to 4 years from the date of VAT registration.

The Tribunal decision also confirms that this is not an isolated case but is the lead case of seven (six are stayed behind the decision in AICS) and it will be interesting to see whether AICS appeals this decision to the Upper Tribunal or if any of the other six cases are heard before the FTT. 

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.