Constable VAT Focus 6 June 2022


Factsheet CC/FS69: How to avoid penalties for Making Tax Digital for VAT
HMRC has published new factsheet CC/FS69 with information for VAT registered businesses on how to avoid penalties for Making Tax Digital for VAT.

Partial exemption (VAT Notice 706)
This guidance details partial exemption and methods and calculations to use to see how much input tax businesses can recover. Section 6.2 and Appendix 2 have been updated with information about how to get an approval for a partial exemption special method by using either the online service, by writing to the VAT Written Enquiries team, or by sending an email.

Domestic reverse charge procedure (VAT Notice 735)
This guidance provides information about domestic reverse charge procedures which applies to the buying and selling of certain goods and services. From 1 July 2022 businesses registered or liable to be registered for VAT will no longer need to report information about sales of mobiles or computer chips in the UK.

Exemption and partial exemption from VAT
This guidance has been updated with information about what to do if businesses make supplies that are exempt from VAT when moving goods from Great Britain to Northern Ireland.

The VAT treatment of passenger transport (VAT Notice 744A)
This guidance has been updated and includes information about accounting for VAT on goods sold on board ferries between Great Britain and Northern Ireland.



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 when reaching their own conclusions and there may be occasions where they have a more binding effect. We will therefore continue to include summaries of any European judgements that we consider to be relevant. If you are concerned about the impact of any matters raised in the following cases, please contact us.

1. VAT Exemption: Education services supplementing school curriculum

This case concerns Happy Education SRL, a Romanian commercial company which provides educational services consisting of organising activities supplementing school curriculum such as homework support classes, educational programmes, foreign language classes, art classes, sporting activities, picking up children from school and the provision of after school meals.

EU VAT legislation exempts “the provision of children’s or young people’s education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objectives”.

The Romanian tax authorities took the view that Happy Education’s supplies fell outside of the exemption. Happy Education argued that its services are closely related to school education and VAT exempt.

As a result of the dispute, two questions were referred to the CJEU:

  • Must Article 132(1)(i), Article 133 and Article 134 of [Directive 2006/112] be interpreted as meaning that educational services such as those contained in the national “School after school” programme can be brought within the concept of “services closely related to school education”, in the case where they are provided, in circumstances such as those obtaining in the main proceedings, by a private body, for commercial purposes and in the absence of a partnership concluded with an educational establishment?
  • If the answer to the first question is in the affirmative, can the applicant be recognised as being an “organisation having similar objects”, for the purposes of Article 132(1)(i) of [Directive 2006/112] with reference to the public interest nature of the educational activities of the “School after school” type, which are aimed at prevention of school leaving and early school leaving, improvement of school results, remedial education, accelerated learning, personal development and social inclusion?’

The CJEU first considered the second question and, as Happy Education is not a body governed by public law, whether it is an organisation “recognised by the Member State concerned as having similar objects”. EU legislation does not specify conditions or procedures under which those similar objects may be recognised. It is for the national law of each Member State to lay down rules in accordance with which that recognition may be granted. Under Romanian law, recognition as an organisation with similar objects is granted primarily through the conclusion of a partnership with an educational establishment under the ‘School after school’ programme. It was apparent from the information submitted that Happy Education has not concluded such a partnership and therefore does not have the relevant recognition or authorisation required for that purpose under Romanian law.

The CJEU therefore concluded that VAT exemption cannot apply where the relevant entity does not satisfy the conditions under national law for obtaining such recognition. In the view of this it was not necessary for the Court to consider the first question.

Constable Comment: Whilst this case concerned EU and Romanian VAT law regarding VAT exemption, the UK has similar VAT legislation in relation to exemption and education. This is potentially a complex area of VAT and if an organisation makes any educational supplies, we recommend seeking professional advice to ensure the correct VAT treatment is applied.


2. Google costs not linked to VAT exempt insurance supplies

This case concerns Sofology Limited and DFS Furniture Company Limited (DFS) and the recovery of VAT incurred on PPC advertising services from Google. Each appellant is a specialist sofa retailer. In addition to the supplies of sofas, the appellants also make supplies of intermediary services in relation to sofa insurance which is sold along with the sofas. The supplies of sofas are taxable, and the supply of insurance intermediary services is exempt from VAT, consequently each appellant is partly exempt for VAT purposes. Each appellant treated VAT incurred on PPC advertising as directly attributable to taxable supplies and recovered the VAT incurred in full.

When potential customers use Google to search online for a new sofa, they might click on one of the appellants sponsored links shown at the top of the results page. The PPC advertising services involved the making of payments by the appellants to Google on each occasion that a potential customer clicks on that sponsored link and is directed to the relevant  website landing page.

HMRC took the view that the VAT incurred on PPC advertising was directly attributable both to the taxable supplies of sofas and the VAT exempt supplies of insurance intermediary services. An alternative argument from HMRC was that the input tax was not directly attributable to any supplies made by the appellants but instead should have been treated as relating to the business as a whole and therefore an overhead, subject to recovery in accordance with the partial exemption recovery rate. HMRC contended there were substantial economic links between the PPC adverts and both taxable and exempt supplies meaning that the cost of the adverts had a direct and immediate link with both types of supplies.

The appellants argued that the substantial economic links were not sufficient to establish a direct and immediate link, which would be necessary to treat it as directly attributable to the exempt supplies. The appellants stated that the contents of the adverts, the content and layout of landing pages and the manner in which the insurance was sold showed that the links between the costs of the adverts and supplies of insurance was indirect.

The Tribunal agreed with the appellants argument and concluded that the cost of the PPC advertising had a direct and immediate link with the taxable supplies of sofas but did not have a direct and immediate link with the exempt supplies of insurance intermediary services. The appeal was therefore upheld.

Constable Comment: This decision was very detailed and fact specific to the appellants. However, it considers the basic principles of input VAT recovery and establishing a direct and immediate link between VAT incurred and supplies made in order for the VAT incurred to be fully recoverable.

3. VAT Exemption: Self-Invested Pension Plans

This case concerned Intelligent Money Limited (“IML”) and whether fees paid to the scheme administrator of a Self-Invested Pension Plan (“SIPP”) is consideration for an exempt supply of insurance. IML has been the provider, operator, and administrators of the Intelligent Money SIPP (“IM SIPP”) since 2006. Until 2014 IML treated its supplies of services as subject to VAT but in 2016 IML submitted claims to HMRC in respect of VAT overdeclared on the basis that the supplies made were VAT exempt as “insurance or reinsurance”.

The defining characteristic of a SIPP is that the contractual holder or their financial advisor is responsible for the management of the funds held in the member’s SIPP. IML took the view that the provision of a pension is an activity constituting the provision of long-term insurance, the pension scheme represented a life assurance contract in respect of which consideration was payable by the member to IML. IML cited the EU insurance directives, the Financial Services and Markets Act 2000 and historic domestic case law on what constitutes insurance.

HMRC contended that the essential ingredients for there to be an insurance transaction, as previously identified by the CJEU, were not evident in respect of the IM SIPP. HMRC particularly focused on the absence of the any risk borne by IML. As a pension plan was a tax efficient form of saving there was no risk to the individual which required indemnification. The charges represented consideration for the provision of services and not the payment of a premium for the bearing of risk by IML.

The Tribunal initially considered whether the IM SIPP was a contract of life assurance. It considered as the investments decisions are made exclusively at the direction of the policy holder/member the value of the fund from which benefits are payable are at the risk of the insured, therefore the IM SIPP should be considered insurance.

The Tribunal then went on to determine whether the IM SIPP is an insurance transaction for VAT purposes. IML relied on HMRC guidance which implied that the provision of any life insurance contract meeting the Fuji test would constitute an insurance transaction for VAT purposes. The Tribunal advised HMRC guidance is not the law and considered the dispute further.

The Tribunal relied on the CJEU interpretation of the term “insurance transaction” which provides the essential features of insurance transactions for VAT purposes as “that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with a service agreed when the contract was concluded”. The Tribunal concluded that the IM SIPP does not meet this definition because the annual fees payable by a member of the IM SIPP are paid as consideration for the provision of the services and they do not include any element of risk premium and IML does not need to accumulate capital from which to pay the benefits.

The Tribunal therefore dismissed the appeal holding that the fees payable to IML are not consideration for exempt insurance transactions.

Constable Comment: Insurance is often a very complex area of VAT and there is significant case law to consider and apply. This case is particularly interesting as, although not explicit, HMRC guidance implied that a supply meeting the conditions for insurance under Fuji case, is a VAT exempt supply of insurance, the Tribunal however ruled differently.

4. VAT Exemption: Installation of flexi vault burial chambers

This case involved Hodge and Deery Limited (“Hodge”) and whether a supply of services in connection with the installation of flexible pre-formed burial vaults at a burial site, made to RED Landscapes, was VAT exempt.  The vaulting system is installed in graveyards with unstable soil structures which can result in toxins from the decomposition of bodies escaping into the ground water, and in subsidence or an existing grave when another grave is dug in the adjacent plot.

UK VAT legislation exempts, “the making arrangements for or in connection with the disposal of the remains of the dead”.

Hodge contended that the installation of the flexible burial vaults should be treated as the advance digging of multiple graves, and it should not be regarded differently from the preparation of graves on demand. The sole purpose of the preparation of a grave is to dispose of the remains of the dead, therefore the supply should be VAT exempt.

HMRC rejected that the supplies fall within the VAT exemption because the making of arrangements for, or in connection with, the disposal of the remains of the dead, should only relate to supplies that are directly involved with the disposal of the remains of a dead person and application of exemption is limited to supplies directly made by the funeral director with care and custody of the deceased, it does not extend to subcontractors.

The Tribunal held supplies by Hodge resulted in the provision of many graves for the disposal of the remains of the dead. The result of the services satisfies the object of the exemption. The Tribunal concluded that it does not matter that the services are provided in advance, and nor does it matter that the services are not provided in connection with a specific funeral.

Constable Comment: Another interesting aspect of this case was that a new technology of pre-formed flexible vaults was used rather than brick retaining walls as mentioned in the legislation and guidance, which HMRC challenged. The Tribunal stated that the legislation must, in their opinion, be construed in a manner to enable new technology to be adopted to achieve the result expected by the legislation.

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.