Constable VAT Focus 6 January 2022


Check when you can account for import VAT on your VAT Return
HMRC has recently updated its guidance and indicated that the existing arrangements for customs checks on goods from Ireland will continue after 1 January 2022. Changes have been made to when you must account for import VAT on your VAT return and how to complete your customs declaration account for import VAT.

Completing a One Stop Shop VAT Return
HMRC has added to its guidance the sections ‘How to correct a previous return’ and ‘If you have over-declared on your return’ to their One Stop Shop guidance.

Revenue and Customs Brief 15 (2021): Repayment of VAT to overseas businesses not established in the EU and not registered in the UK
HMRC has published a brief which gives guidance on VAT refund claims by overseas businesses not established in the EU where there has been difficulty getting a certificate of status.

Using a VAT margin scheme if you buy and sell goods between Northern Ireland and the EU
HMRC has released new guidance.  If you buy and sell goods between Northern Ireland and the EU, you can use the guidance to find out when and how to use a margin scheme to account for VAT.

In addition, HMRC has released new guidance relating to second-hand goods margin and global accounting scheme. If this relates to you or your business, we advise you to read VAT Notice 718.

Update to HMRC’s Notice 701/57: Health professionals and pharmaceutical products

HMRC has updated this Notice with information about umbrella companies in section 6.6 ‘Supplies of nurses, nursing auxiliaries and care assistants by state regulated agencies (the nursing agencies’ concession)’. The updated guidance confirms that the exemption of nursing staff and nursing auxiliaries supplied as a principal to a third party does not apply to umbrella companies supplying services of staff to a recruitment agency. It only applies to the direct provision of staff.


Since the end of the transitional period on 31 December 2020 European Court judgments are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration when reaching their own conclusions and there may be occasions where they have a more binding effect. If you are concerned about the impact of any matters raised in the following cases, please contact us.


1. Right to deduct input tax

This case concerned Amper Metal Kft (AM), a Hungarian company trading in the electrical installations sector. The company contracted with an advertising company which fixed advertising stickers bearing AM’s name to cars at a motor racing championship. AM received invoices showing a VAT charge of EUR 35,970, which it reclaimed as input tax incurred.

The Hungarian tax authority rejected AM’s input VAT deduction as it did not consider that the advertising services concerned led to an increase in taxable turnover and considered the amount paid excessive in comparison to similar advertising services, therefore not deductible in accordance with Article 80(1) of the VAT Directive, because the taxable amount should have been at open market value.

In taking this view, the tax authority relied on the opinions of experts in tax and advertising matters, according to whom, the advertising services were too expensive and of no use to AM as AM’s customers, namely paper factories, hot-lamination workshops and other industrial plants, were unlikely to be influenced by self-adhesive stickers on racing cars.

AM appealed the decision, and the questions referred to the CJEU were, broadly as follows:

Must, or may, Article 168(a) of the VAT directive be interpreted as allowing a deduction of input tax to be refused on the basis that the service received is insufficiently beneficial to the taxable activities of the claimant to justify the expenditure?

Must, or may, Article 168(a) of the VAT directive be interpreted as meaning that the right of deduction may be refused on the ground that in the opinion of tax authorities, the charge made for the service provided is above its open market value?

The CJEU stated that whilst the expenditure incurred must be of business nature, and the goods or services acquired must be used for taxable transactions, the right to deduct is not subject to a requirement that the expenditure increases the claimant’s turnover or profitability. The CJEU stated that it is for the referring court to decide whether the advertising services have a direct and immediate link with a taxable transaction and therefore whether input tax is deductible. However, a deduction cannot be refused on the grounds that no benefit (in terms of increased taxable supplies) results from the expenditure in question.

With regards to the second question, the CJEU stated that a taxable amount includes everything which constitutes consideration received by the supplier.  Therefore, the taxable amount is the consideration established between AM and the advertising company, rather than a market value. Article 80 was established to prevent tax evasion by providing the taxable amount to be the open market value of the transaction, however this only applicable to  transactions between connected parties. AM and the advertising company are not connected therefore the right of deduction cannot be refused on the grounds that the price was excessive.

The CJEU agreed that AM had a right to reclaim VAT.  Had it not done so then the door would have been open to tax authorities second guessing business decisions and making their own value judgements on whether expenditure was justified and what businesses  should pay for a given service.  Businesses seldom spend money without an expectation of a benefit.  In practice benefits may not arise and not all decisions will succeed.  However, the idea that tax authorities should be granted the right to impose “a better judgement” on when and how much to pay for a service, perhaps with the benefit of hindsight, was in our view  not a proposition the CJEU could ever accept.

First Tier Tribunal

2. VAT and aircrafts

The appellant (LMUK) appealed against HMRC’s decision that supplies it made to the Ministry of Defence (MoD) were standard rated. The issue for determination was whether the supply by LMUK of the “Crowsnest project” or “Crowsnest programme” falls within item 2, group 8, schedule 8 of the value added tax act 1994, which provides for the zero rating of:

The supply, repair or maintenance of a qualifying aircraft or the modification or conversion of any such aircraft provided that when so modified or converted it will remain a qualifying aircraft.

A “qualifying aircraft” is defined to include an aircraft that is used by a state institution, has a weight of not less than 8000kg and is nether designed nor adapted for use for recreation or pleasure. The aircraft in question is a qualifying aircraft as they belong to a state institution, their mass is 14.6 tonnes and they are neither designed nor adapted for pleasure or recreation.

The “Crowsnest project” includes:

  • Incorporation of the Crowsnest enhancements into the Merlin MK2 product
  • Delivery of role-fit equipment sets
  • Delivery of ground support systems
  • Delivery of aircraft servicing and support equipment
  • Merlin training system update to incorporate the Crowsnest mission capability
  • Delivery of spares provisioning data
  • Delivery of technical publications

LMUK and HMRC agreed that the supply made by LMUK to the ministry of defence is a complex single supply. Therefore, the predominant element of the supply needed to be determined to classify the supply for VAT purposes.

HMRC argued that the predominant element of the supply made by LMUK was of goods (namely the equipment comprising the role-fit kits).

LMUK argued that the supply made is of the Crowsnest system, comprising various elements. These elements are interdependent and not distinct, and for HMRC to treat the role-fit kit as distinct, separate and the most important element is to misunderstand the nature of the supply being made, which was in its essential nature a modification service.

The tribunal’s ability to make findings of fact was severely constrained due to the absence of reliable detailed evidence as to what LMUK had actually supplied to the MoD, or what it is that they have agreed to supply. Also, neither of the witnesses representing LMUK were able to inform the tribunal exactly what elements of the Crowsnest capability are to be role-fittable and what elements are to be permanently installed on the aircraft.

The tribunal reached the conclusion that the predominant element of LMUK’s supply is the supply of the role-fit kits, and that this element is a supply of goods, not a modification to or conversion of the aircraft (a supply of services). LMUK’s appeal was dismissed.

Constable Comment: In our view, LMUK appeared to have a persuasive case.  However, as the Tribunal observed: “Ultimately, it is for LMUK to satisfy us, on the balance of probabilities, that the single complex supply being made to the MoD is of modification (or conversion services) within Item 2, Group 8, Schedule 8, VAT Act, or paragraph (11) Annex X, Part B, PVD. That, on any basis, they have failed to do”.  Therefore, it is difficult to discern from the decision the potential for a different outcome had LMUK been able to present more detailed evidence on the facts.

3. Spiritual welfare services VAT exemption

Reverend Jane Taylor appealed against a review decision of HMRC. She contended that Mill House Retreats provides spiritual welfare services that are exempt from VAT under item 9, group 7, schedule 9, VAT Act 1994.

Rev Taylor is an active priest in the Church of England, ministering in the Exeter diocese. She conducts services in the Exeter diocese but her primary work is a director of the retreat centre, Mill House Retreats. Through the Church of England, Rev Taylor has received training in spiritual direction and her Mill House Retreat activities are supervised by the Church of England. Rev Chitty is an ordained deacon of the Church of England and assists Rev Taylor at Mill House Retreats.

Mill House Retreats provides spiritual welfare through the provision of Christian retreats. As well as ministering to individuals, it also hosts retreats for Church of England organisations. Rev Taylor’s evidence was that she operates Mill House Retreats on a non-profit making basis.

Rev Taylor acknowledged that Mill House Retreats is neither a registered charity nor a public body but she submitted that Mill House Retreats is state-regulated for the purposes of the exemption, Mill House Retreats being regulated by the church of England.  As the church of England is an established church, it forms part of the state. Therefore, Mill House Retreats is state-regulated.

The Tribunal found that Mill House Retreats is regulated by the state. However, the requirement for the exemption to apply is that the entity providing the services is “state-regulated”, not that it is regulated by the state. This is not an irrelevant distinction because “state-regulated” is a defined term and requires that the regulation be by a “Minister or other authority pursuant to a provision of a public general act”. “Act” is further defined for the purposes of the exemption as “public general acts”. As the church of England legislation is not public general acts, Mill House Retreats is not “state-regulated” for the purposes of the exemption.  The appeal was dismissed.

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.