Constable VAT Focus 6 October 2022


Option to tax
The print and post versions of form VAT 1614B, used to notify HMRC that a taxpayer is no longer a ‘relevant associate’ of a person who has opted to tax particular land or buildings and form VAT 1614E, used to tell HMRC about a real estate election for land or buildings, have now been removed from HMRC’s website and a link to HMRC’s accessibility statement for online forms has been added. These forms can now only be completed and submitted online.

Postage, delivery and direct marketing (VAT Notice 700/24)
The above guidance sets out how to apply VAT to charges for postage, delivery services and how to treat direct marketing services involving distribution of printed matter. HMRC recently updated the section “How to work out the VAT treatment for delivered goods” to clarify that where there is no extra charge for delivery, VAT is accounted for on the full sales price.

Check when you can account for import VAT on your VAT Return
If your business is registered for VAT in the UK, you can use the above guidance to find out when you can, or need to, account for import VAT on your VAT return. HMRC has updated the guidance to confirm that information about Customs Handling of Import and Export Freight (CHIEF) has been removed.  Businesses can no longer use CHIEF for import declarations unless they have permission from HMRC.



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.

1. Can a sale and leaseback contract be treated as an invoice?

This case concerns a transaction arising between Raiffeisen Leasing (RL) and RED.d.o.o (RED).  RED owned some land in Slovenia with the intention of developing it. In order to finance the development, it entered into a sale and leaseback contract with RL. RED charged RL VAT on the sale of the land and RL recovered this VAT.  VAT on the supplies from RL to RED was included in the contractual sale and leaseback agreement between RL and RED but RL did not raise a separate VAT invoice, nor did it declare and pay the VAT sum mentioned in the contract on its VAT return.

RED recovered the VAT stated in the contractual sale and leaseback agreement, contending that the agreement constituted an invoice in respect of supplies received from RL. The local tax authorities disagreed and refused the input VAT deduction.  The question referred to the CJEU was whether a contractual sale and leaseback agreement which was not followed by a VAT invoice, may be regarded as an invoice, and if so, what details that contractual agreement must contain.

The CJEU ruled that the leaseback agreement was capable of being treated as a VAT invoice even in the absence of any taxable transaction, provided that it contained sufficient information for RED to substantiate its right to recover input tax. The fact that some of the details normally required on an invoice (such as the applicable VAT rate) were implied rather than express did not prevent the leaseback agreement from being treated as an invoice. The fact that RL never intended the leaseback to be treated as an invoice was irrelevant. As RL had effectively issued a VAT invoice in 2007 (when the contract was agreed) it should have accounted for output tax at that time.

The CJEU concluded that the local tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the conditions set out under the VAT Directive, if they have all the information to ascertain that the substantive conditions for input VAT recovery are met.

Constable Comment: The CJEU concluded that where the conditions of input VAT recovery are implied or expressly stated in a contractual agreement, the document may be regarded as an invoice. This effectively means output VAT is payable by a supplier and the customer has the right to deduct that input VAT.


2. Input VAT recovery by an intending trader

This case concerned Hedge Fund Management Investment Ltd (HFIM), a company which was set up to provide fund management services and introductory services to various funds. HFIM had produced a detailed prospectus intending to attract investment, however, the publication of the prospectus was delayed while HFIM resolved ongoing litigation against another company.

During this period and before trading began, HFIM incurred input VAT and recovered it. HMRC subsequently raised assessments disallowing those input VAT claims along with issuing a penalty for careless behaviour regarding inaccurate returns. HMRC argued that HFIM did not carry on any business activities in return for consideration during the relevant periods. Furthermore, there was no direct and immediate link between inputs and outputs for each of the periods under appeal.

HFIM argued that according to the Norseman Gold tests, it is required to show that in the period input VAT was incurred, it had the intention of making taxable supplies in the future in return for consideration. HFIM argued that the evidence shows that at all times it had the intention of making taxable supplies and those future supplies would be linked to the input VAT incurred in the past.

The FTT was presented with evidence including the detailed prospectus, various emails and documents showing HFIM pursuing research and introductory activities and the companies’ financial statements audited by a reputable firm demonstrating business activity. The evidence was sufficient for the FTT to rule that HFIM clearly had the intention to trade and therefore input associated VAT should be deductible.

As a result, the penalty was also dismissed as HFIM did not act carelessly. However, the FTT concluded that it does not hold enough evidence to determine whether the input VAT incurred is attributable to intended taxable supplies or overhead costs. The FTT was reluctant to rule on this point therefore it advised HFIM and HMRC to review the input claimed on the basis that HFIM was indeed an intending trader.

Constable Comment: The FTT confirmed in this case, that where a taxpayer can demonstrate that it has the intention of making taxable supplies in the future, it can recover input VAT incurred even if it is not yet making those supplies. However, the intention must be evidenced in order to support input VAT recovery. If you or your business intend to recover input VAT or register for VAT before trading begins, we recommend taking professional advice.

3. Import VAT Liability

This case concerned BMW Shipping Agents Limited (BMW), an international freight forwarding company. The question addressed by the Tribunal relates to the availability of onward supply relief (OSR) to BMW in relation to certain transactions. If OSR was available the imports BMW arranged would not be subject to Import VAT in the UK.

HMRC argued that BMW did not qualify for OSR because BMW could not have made a qualifying supply of the goods to the end customer as BMW did not own the goods. BMW accepted that OSR was not available and the Tribunal then had to determine whether it was BMW, rather than its customer (on whose behalf the goods were imported) who was liable for the import VAT due, which in this case was a substantial sum.

BMW argued that its customer is liable for import VAT as Box 14 of the Customs Declaration form identified BMW as acting as a direct representative on behalf of the customer, who was identified in Box 8 of the form. However, HMRC pointed out that BMW had completed Box 44 of the form, which relates to OSR as though BMW was importing goods in their own name. In addition, although the customer’s name was entered into Box 8, the address given was BMW’s and the VAT number specified also belonged to BMW.

Whilst the Tribunal correctly identified the inconsistency between Box 14 and Box 44, it concluded that Box 44 takes priority because there is a legal requirement to state in Box 44 whether the goods are being imported by a person on their own behalf or as an agent for somebody else. As BMW stated the prefix indicative of importing in their own name, the Tribunal had to dismiss the appeal and conclude that import VAT is due from BMW.

The Tribunal concluded that the guidance in VAT notice 702/7 in relation to the circumstances in which OSR is available to an agent is clear and that it was never going to be possible for BMW to maintain a claim to OSR. The Judge added that ‘If there is anything to be learnt from this sorry tale, it is that agents need to ensure that they take a great deal of care in understanding the circumstances in which they may be liable for import VAT and the requirements which need to be satisfied in order for a claim to OSR to be available’.

Constable Comment: Had the correct procedures been followed the liability could potentially have been prevented. Although this case relates to Customs procedures the principle applies equally to other areas of VAT and highlights the need to take care and fully understand the rules when seeking to take advantage of any relief from VAT.

4. Zero rated Mega Marshmallows

This case concerns Innovative Bites Limited (IBL) and the VAT treatment of its product ‘Mega Marshmallows’ (the product). IBL is a wholesaler of various American sweets and treats. HMRC ruled that the product was confectionery on the grounds that it can be eaten as a snack from the bag, it is generally eaten with fingers and the product is found on IBL’s website in the category of ‘sweets, candy and chocolate’. Such products are excluded from the zero-rating that applies to certain food items and as a result HMRC took the view the product is standard rated for VAT purposes and issued VAT assessments in the sum of £472,928.

IBL argued that the product is different from regular marshmallows (which are also sold by IBL and correctly treated as standard rated) on the grounds that the product needs to be roasted over a campfire or barbecue before eating or used as an ingredient in the traditional American sweet, “s’more”. IBL argued that a product that is subject to further cooking process would not be expected to be confectionery. The product was marketed as intended for roasting and the size of the product was indicative that it is to be roasted. Customers intending to ‘snack’ marshmallows would choose a regular size pack.

The Tribunal reviewed various evidence submitted by IBL, including the packaging of the product which included clear instructions that the product should be cooked, a warning to let the product cool down after cooking and a description on how to make s’mores using the cooked product. In addition, it was brought to the Tribunal’s attention that the product is placed in the ‘world foods section’ aisle and also at the barbecue section.

As a result of the evidence, the Tribunal concluded that the product is not confectionery because it is sold and purchased specifically for roasting, the marketing of the product confirms this purpose, the size of the product makes it particularly suitable for roasting and the fact that it is positioned in supermarket aisles in the barbecue and world foods section, leads to that conclusion.

Constable Comment: Confectionery items are subject to VAT and there have been many previous cases debating what constitutes ‘confectionery’. In this case, the appellant successfully argued its product is zero rated because it had sufficient evidence including packaging and marketing to prove that it requires further processing before it is consumed. If you or your business sells food items which could potentially be classed as ‘confectionery’ we would recommend seeking professional advice to ensure the product is treated correctly for VAT purposes to minimise the risk of assessments and penalties. Constable VAT has a great deal of experience in liaising with HMRC on the correct VAT treatment of food items and would be happy to assist with any related queries.

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.