Constable VAT Focus 8 August 2019

This VAT Focus provides a summary of the most recent updates regarding VAT from HMRC who are currently updating a substantial amount of guidance. All of the updates can be found as they come out here. We also comment on some of the recent decisions from the Tax Tribunals and Courts.


Help and Support for VAT
Get help with VAT by using videos, webinars, online courses and email updates from HMRC.  A new webinar has been added about the incoming reverse charge for construction services.

VAT Transport
HMRC has updated its guidance so that it now functions correctly.

VAT Margins Scheme
HMRC has updated its guidance on the margin scheme for second hand vehicles to improve functionality.

VAT Single Entity and Disaggregation
HMRC has updated its guidance to reflect all of the requirements of what must be sent to the VAT Registration Service in the event of a disaggregation.

Education and Vocational Training (VAT Notice 701/30)
HMRC has updates its guidance regarding the definition of an eligible body for the purposes of educational and vocational VAT exemptions.


This month HMRC have emailed tax advisers to confirm that businesses who have missed their window to sign up for Making Tax Digital (MTD) will not be penalised this time. This should be a relief to any business which was worrying about incurring a penalty charge for late MTD registration. However, HMRC has clarified that you must still submit the VAT return through the old portal to avoid late filing penalties.

Whilst this is a pleasing concession to see, HMRC is unlikely to be so generous again. Any business who has failed to register for MTD on time needs to address the issue immediately. If you would like to discuss your obligations and how to go about fulfilling them, please contact Constable VAT.


The new reverse charge for subcontractors operating in the construction industry comes into effect in October 2019. Constable VAT have previously produced some coverage of this area which can be read here.

This will mean, essentially, that building contractors will not pay VAT to their sub-contractors but will account for it themselves. It is important that all affected parties familiarise themselves with the new rules before they are introduced. If you would like to discuss any questions about the new provisions, please do not hesitate to contact Constable VAT.



1. DIY Housebuilders

This case concerned a claim for repayment of VAT which was incurred on materials in the course of construction of a house by Mr Darren Luke. Mr Luke had been granted planning permission for “the demolition of an existing dwelling and stable block and erection of a new dwelling and detached garaging”. Attached to this permission was a condition:

“On the first occupation of the replacement dwelling, the accommodation on the first floor of the detached garage, hereby permitted, shall be brought into ancillary use solely for the purposes incidental to the enjoyment of the dwelling house and for no further purpose.”

Following the terms of the planning permission, Mr Luke built a garage with some first-floor accommodation where he lived whilst constructing the replacement dwelling, once this was finished, he began working on the replacement dwelling. When work had been completed, he submitted a claim for repayment of VAT to HMRC under the DIY housebuilders scheme for VAT. HMRC allowed the claim in part but refused some items on the grounds that materials which form part of an annexe which cannot be disposed of separately to the main dwelling do not qualify for the scheme.

Mr Luke appealed this decision on the grounds that the garage and house were covered by the same planning permission; the Council had intended that Mr Luke live in the garage whilst reconstructing the main dwelling. Therefore, the project was framed as “…demolition of an existing dwelling and erection of replacement dwelling and garage.” At no point did the planning permission refer to an annexe as the garage was part of the main residence.

Drawing on a wealth of caselaw surrounding the subject, the Tribunal concluded on the basis of the decision in Catchpole which states that two or more buildings are capable of making up one dwelling. Once HMRC had accepted that this was the case, it was agreed by all parties that, as the planning permission was for one project incorporating two buildings, the zero-rate should apply and Mr Luke’s appeal was allowed.

Constable Comment: This case provides useful clarification around the definition of an annexe and where a DIY Housebuilder is unable to make a full claim for repayment of VAT. However, it is likely that HMRC will continue to be strict in its interpretation of what is an annex in order to prevent the floodgates opening to a stream of repayment claims in relation to what is, essentially, an annex but with single planning permission.

2. Professional Fees: A General Overhead?

This appeal by Newmafruit Farms Limited (NFL) concerned a claim for repayment of input tax it had incurred on professional fees whilst pursuing unpaid loans. NFL is a fruit picking and packaging business based in Kent. It had accumulated surplus profit and wished to invest its cash reserves to gain interest on them. To this end, NFL made short term loans to third parties using its surplus profit.

The borrowers did not pay back the loans in time and NFL incurred professional fees relating to legal proceedings in pursuing these debts. NFL applied to recover this VAT incurred as input tax but HMRC refused the application on the grounds that it related to exempt supplies of loans. NFL claimed that as the loans turned bad, no consideration was received for the supply and the provision of goods or services without consideration is not, for VAT purposes, a supply; as no exempt grant of credit was made, the costs incurred must be regarded as a general overhead of the business.

The Tribunal observed that, on ordinary principles, a contract comes into existence upon the acceptance of an offer and not on complete performance of the terms of the contract by both parties. It found that NFL did make an exempt supply of loans, noting that failed consideration and no consideration are different things. Concluding that NFL made exempt supplies of loans, the Tribunal held the VAT to be irrecoverable as it did not relate to the general business activity of the company – to pick and pack fruit.

Constable Comment: This case reached a reasonably predictable result but is interesting because of some of the arguments which NFL pursued, the whole case is worth a read. NFL argued that the legal fees were incurred years after the loans had been made and that the time which had passed created as “temporal disconnect” between the two. In mounting this argument, NFL sought to rely on the judgment in Becker that “a causal link cannot be considered to constitute a direct and immediate link for the purposes of input VAT recovery.

This was an interesting line of argument but, ultimately, it failed. The Tribunal considered that lenders must regard loan administration (checking payment amounts, pursuit of debt, bringing legal proceedings) as a cost component of the loan itself. Therefore, a lenders costs of bringing legal proceedings against a borrower for breach of a loan agreement is a cost component of the supply itself and there is a direct and immediate link between the costs incurred and that supply. This case reinforces the principle that, wherever possible, VAT incurred must be directly attributed.

If you would like to discuss how VAT impacts on your organisation please contact Constable VAT on 01206 321029. Alternatively, please visit our website at where you can view some of the services we offer in more detail and subscribe to our free general and regular VAT alerts and updates. Visit our website for current news updates. You can also follow Constable VAT on Twitter. 

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. 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 newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.