Constable VAT Focus 6 June 2023


Buildings and construction (VAT Notice 708)
The above guidance sets out how to work out the VAT on building work and materials if you are a contractor, subcontractor or developer. HMRC has now updated sections 13.8.1 and 13.9 to clarify that electrical blinds are not ordinarily incorporated in dwellings.


Upper Tribunal

1. Historical bad debt relief claims

In 2009, British Telecommunications PLC (BT) submitted bad debt relief (BDR) claims to HMRC for the period 1978 to 1989 however these were rejected because under the old BDR rules BT did not satisfy the then in place insolvency conditions. BT appealed HMRC’s refusal, however both the UT and the Court of Appeal ruled that BT’s claim for BDR was time barred and therefore BT was unable to make the claim.

BT then returned to the FTT with the question whether its claim should be properly characterised as a claim under s.80 VATA 1994, regarding repayments of overpaid VAT, however HMRC applied for BT’s appeal to be struck out on the grounds that the statement disclosed no reasonable prospect of success and the FTT agreed.

BT has now challenged the FTT’s decision to strike out its appeal however the UT has upheld the FTT’s decision. The UT concluded that it was correctly ruled by the Court of Appeal, that the correct mechanism for claiming BDR was the old BDR scheme appropriately moulded to ignore the insolvency condition. Section 80 cannot be utilised for the purposes of claiming for bad debts and as a result the UT held there is no reasonable prospect of BT’s appeal succeeding and therefore it is struck out.

Constable Comment: This case considered whether BT’s appeal had reasonable prospects of success and the UT concluded it did not. It considered the application of the old bad debt relief scheme and these are now redundant therefore it is unlikely this case will have significant importance when considering bad debt reliefs.


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.

2. VAT treatment of vehicles sold ‘for parts’

This case concerned a dispute between IT and the Belgian tax authorities regarding the VAT treatment of selling second hand vehicles that are written off, purchased from insurance companies, and reselling them to third parties as wrecks or ‘for parts’. IT has been accounting for VAT under the margin scheme however the local tax authorities took the view that cars sold for parts or wrecks are excluded from the margin scheme because they do not fall under ‘second hand goods’ as they are no longer suitable for further use and no longer maintains the characteristics they possessed when new.

The CJEU has previously ruled in the case of Sjelle Autogenburg that parts salvaged from written off cars can be taxed under the margin scheme. However, the facts were different in that case, as IT does not salvage parts, rather it sells the vehicle as ‘for parts’ to a third party. Also, the CJEU noted as a fact that the vehicles purchased by IT are all definitively end-of-life motor vehicles.

In this case, the CJEU ruled that the referring court would have to ascertain that:

  • The vehicles still include components that retain the functionalities that they had when new so they can be reused as they are or after repair
  • The vehicles have not been sold simply in order to be scrapped or transformed into another object.

Provided that the above two requirements were met, the vehicles sold ‘for parts’ or wrecks can be taxed under the margin scheme and therefore account for VAT on the profit margins.

Constable Comment: This case considered how the second hand margin scheme is applicable to the sale of written off vehicles for parts. There is a second hand margin scheme in the UK that also applies to the sale of second hand motor vehicles. If there is any ambiguity how the scheme applies to your business, we would recommend seeking professional advice.

3. Input VAT recovery on fictitious transaction?

This case concerned, M. Sp. Z.o.o S.K.A  (M) issuing an invoice for an assignment of trade marks to W which was subject to VAT. The VAT was declared and paid by W. Subsequently the local tax authority questioned the right to deduct the VAT on the ground that the assignment of trade marks in question was invalid in that it was contrary to the rules of “social conduct”. The director of the tax authority confirmed that the assignment of trade marks at issue was a fictitious transaction.

The referring court noted that it is not apparent that a taxable person may lose their right to deduct VAT invoiced to them on the ground that the transaction at issue does not comply with the national law. The right to deduct VAT must only be refused where it is established that it is being relied on for fraudulent or abusive ends.

The question referred by the national court is whether a taxable person can be deprived of the right to deduct input VAT solely because that transaction is regarded as fictitious and is invalid under the provisions of national law, without it being necessary to establish that the transaction is the result of VAT evasion or abuse of rights.

The CJEU held that the provisions of EU VAT Directive 2006/112 precludes relying upon “national legislation under which a taxable person is deprived of the right to deduct input value added tax solely because a taxable economic transaction is regarded as fictitious and invalid under the provisions of national civil law, without it being necessary to establish that the criteria for classifying, under EU law, that transaction as fictitious are met or, where that transaction has actually been carried out, that it is the result of value added tax evasion or abuse of rights”.

Constable Comment: This case considered how provisions of local national law may affect input VAT recovery. As these laws do not apply in the UK now, it is less likely this decision will have significant importance for taxpayers in the UK.

4. Calculation of VAT penalties

This case concerned a dispute between SA CEZAM (CEZAM), a Belgian carpentry company, and the local tax authorities. CEZAM appealed three decisions of the local tax authorities relating to assessments and fines and it disputes the amount of the fines, which was calculated as 20% of the amount of VAT which would have been due before subtracting deductible VAT.

CEZAM argues that to calculate the amount of the fines, the tax authorities should have taken account of the amount of the VAT which actually had to be paid to them, being the amount after the subtraction of deductible VAT.

The Belgian state maintains that CEZAM has been penalised for an infringement of the obligation to declare and pay VAT. By not paying the VAT collected from its customers, CEZAM has obtained an advantage. The right of VAT deduction is a right which the taxable person may exercise by entering the VAT to be deducted in their periodic VAT returns. The referring court observed that the penalties imposed were determined in accordance with the Belgian VAT law intended to penalise infringements committed without any intention to evade VAT.

The CJEU found that the infringements that CEZAM committed are not as a result of an error relating to the application of the VAT mechanism, over a prolonged period and despite several interventions by the tax authorities, the company neither declared nor paid the VAT due. The company also had not made good the shortfall in VAT voluntarily. The CJEU held that it does not appear that the imposition of penalties amounting to 20% of the VAT which would have been due before subtracting deductible VAT goes beyond what is necessary to ensure the correct levying and collection of the tax and to prevent fraud.

Constable Comment: This case highlights the importance of ensuring that returns are submitted and VAT is paid on time in order to avoid penalties. The UK has different rules for late payment of VAT or late filing of returns which commenced from 1 January 2023. Constable VAT has released an article covering these rules which can be read here.

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.