Constable VAT Focus 6 April 2023


Spring Finance Bill

The Government has published the Spring Finance Bill (Finance (No.2) Bill 2022-23) which can be read here. The bill was accompanied by explanatory notes which can be found here. VAT related content covers the new VAT measures on deposit schemes which is found under clause 314 and also various administration points such as; late payment interest (clause 333), penalties for failure to pay VAT (clause 334) and VAT credits: repayment interest due where evidence not provided (clause 335).

Government departments partial exemption framework
HMRC has developed frameworks for specific sectors in relation to business and non-business and partial exemption. HMRC has recently released a new framework which provides information about partial exemption special methods for government departments.

VAT on goods exported from the UK (VAT Notice 703)
The above guidance sets out how and when businesses can apply zero rated VAT to exported goods. Information on evidence relating to zero rating and direct exports has been updated in paragraphs 6.1, 6.5, 7.3 and 7.4.

Fulfilment House Due Diligence Scheme registered businesses list
The above guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme. The list has been updated with 7 additions and 5 removals.

Flat Rate Scheme for small businesses (VAT Notice 733)
The above guidance sets out how to use the Flat Rate Scheme, who can use it and how to apply to join the scheme. The email address to send VAT600FRS Flat Rate Scheme application forms has been updated to: . This will not affect any applications already submitted to the previous email address, these do not need to be resent.


50 years of VAT

50 years ago, on 1 April 1973, VAT was introduced in the UK to replace purchase tax. None of the current Constable VAT team remember purchase tax or have worked in VAT since its inception, but a few of us have nearly 40 years of VAT experience and have seen many changes over the years. We have released a blog covering some of these changes over the last 50 years which can be found here. Whether the next 50 years brings simplification or further complication remains to be seen.


Supreme Court

1. Disapplication of the option to tax

A dispute arose between Mr Moulsdale and HMRC whether VAT should have been charged on the sale of a property, which was owned by Mr Moulsdale and leased to one of his Optical Express companies, to an unconnected third party purchaser (Cumbernauld SPV Ltd). The issue was whether Mr Moulsdale should disapply his option to tax when selling the property to Cumbernauld.

Broadly, if Mr Moulsdale intended or expected Cumbernauld to incur VAT and have possession of a Capital Goods Scheme (CGS) item then the disapplication rules would apply and Mr Moulsdale should not have charged VAT. On the other hand, if Mr Moulsdale did not intend or expect Cumbernauld to incur VAT and have possession of a CGS item then VAT would be due on the sale as a result of the option to tax made by Mr Moulsdale. It was therefore for the Court to address this circularity within the option to tax provisions.

The Supreme Court took the view that the question of whether Cumbernauld incurred VAT or not, and therefore had a CGS item, should be determined by reference to other expenditure on the property, rather than merely on the cost of purchasing the property from Mr Moulsdale. The test does not turn on the transaction itself but what Mr Moulsdale intended or expected would happen in respect of the land in the hands of Cumbernauld and whether it would incur VAT bearing capital expenditure. Cumbernauld had no intentions of incurring any further capital expenditure on the property and therefore the option to tax was not disapplied. As a result, Mr Moulsdale should have charged VAT on the sale, the appeal was dismissed.

Constable Comment: This was a complex case involving the option to tax anti-avoidance provisions. The Court recognised that at the start that “Drafting tax legislation is a difficult and complex task so it is not surprising that sometimes the legislation does not quite work. It is common ground that this appeal arises because of one such occasion.”

Upper Tribunal

2. Recovery of residual input VAT

This case concerned Kingston Maurward College (KMC), a rural studies college supplying grant and fee funded education, as well as commercial activities. The FTT found that KMC’s supplies of fully funded education courses were VAT exempt. However, the FTT dismissed its appeal against HMRC’s rejection of its input VAT claim based on the grounds that all of its supplies constitute a single integrated supply and all the input VAT incurred is therefore residual which should be recoverable (except a small amount of de-minimis input VAT attributable to exempt supplies).

In addition, as KMC did not provide any alternative arguments as to how much input VAT is recoverable, in the event the FTT rejected its original grounds, the FTT ruled that no input VAT was recoverable. On appeal to the Upper Tribunal (UT), KMC contended it should have been permitted to argue that if not all, some of its input VAT was recoverable and:

  • The FTT was wrong to decide not to make any findings on the extent to which the claimed VAT constituted residual input tax. This was because the issue had not been properly raised and particularised by HMRC.
  • The FTT wrongly failed to treat the hearing as determining issues of principle rather than finally determining quantum.

The UT stated that KMC should have pleaded a case in the alternative, if the single business argument failed. It was open for KMC to indicate what kinds of input the claimed tax related to and what the inputs were used for. The UT concluded that if KMC had provided such evidence then HMRC would have had to consider it, however in the absence of it, HMRC’s statement of case was not inadequate and accordingly there was no error on the FTT’s part in deciding the issue as it did.

Alternatively, KMC tried to argue the FTT should have made a decision in principle and remitted the case back to the parties to agree what proportion of input VAT was recoverable, however the UT rejected this argument stating that KMC’s case was on all or nothing basis. The FTT had a discretion to allow KMC the opportunity to agree the extent of residual input VAT is recoverable however it chose not to which the UT considered to be clearly open to it. The appeal was therefore dismissed.

Constable Comment: In this case, KMC tried to argue that the FTT’s ruling was procedurally unfair, however without putting any alternative points forward to the FTT, it failed to argue this successfully. This case highlights the importance that parties to an appeal must put all of its arguments before the FTT from the outset.


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.

3. Whether municipalities carrying on economic activity

In the case of Gmina L (GL), a municipality in Poland offered asbestos removal services to homeowners free of charge. GL engaged third party contractors to carry out the removal services which were then invoiced to GL. GL sought to recover 40%-100% of the costs from the Polish Environmental Protection Fund.

GL contended that the services were not subject to VAT because it carried out the services in its capacity as a public authority. The Polish authorities took the view that GL was acting as a taxable person for VAT purposes. The CJEU stated in order to be treated as a taxable person, there must be a supply of services by GL for consideration and the services must be carried out in the course of an economic activity.

Whilst the CJEU stated that the grant funding could be considered third party consideration for the service, VAT would only be due if GL was carrying on an ‘economic activity’ for VAT purposes. However, GL did not employ staff, it does not seek customers, has no prospect to profit and also has to fund the third party contractors charges whilst waiting to be reimbursed from the Fund. In the light of these conclusions, the CJEU confirmed that that GL does not carry out an activity of an economic nature, and therefore the service is not subject to VAT.

The case of Gmina O (GO), was very similar to the case of Gmina L. GO is a municipality in Poland, and offered the supply and installation of renewable energy systems (RES) to homeowners to enable the transition to a low-carbon economy. 75% of the costs incurred by GO were grant funded; however, the remaining 25% was paid by the homeowner. In addition, the ownership of the RES passed to the owners only after the project was complete.

Again, GO took the view the supplies are not subject to VAT; however, the Polish authorities argued that there was an economic activity and therefore GO was making supplies that were subject to VAT.

The CJEU took a very similar approach as in the Gmina L case, stating that GO is not carrying out an economic activity because it does not supply RES on a regular basis, it does not employ staff, has no prospect to profit and had to fund the contractors’ costs while waiting for its funding applications to be processed. As a result, the supplies of RES by GO were not subject to VAT.

Constable Comment: In both cases above, GL and GO, the CJEU considered the question of what constitutes an ‘economic activity’ for VAT purposes. In both cases, the CJEU concluded that in the absence of staff, permanence and ability to profit there was no economic activity. Whilst CJEU decisions are no longer binding on UK businesses, UK courts may take these decisions into consideration when considering what constitutes an economic activity. It has often been a point of disagreement between organisations and HMRC as to whether a specific activity (or the activities) of a charity is a ‘business’ activity for VAT purposes. This is important because a ‘business’ classification may impact on an organisation’s VAT registration status, if the business supplies are taxable, or the right to claim certain reliefs.  HMRC issued a ‘policy paper’ on 1 June last year which is titled ‘VAT – business and non-business activities’.

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.