Constable VAT Focus 9 February 2024


Energy-saving materials and heating equipment (VAT Notice 708/6)
This guidance details how to account for VAT if you’re a contractor or subcontractor installing energy saving materials and grant funded heating equipment. From 1 February 2024, the scope of the energy-saving materials relief is being extended to include installations in buildings used solely for relevant charitable purposes. The list of energy-saving materials is extended to include, water source heat pumps, electrical storage batteries and smart diverters. The supply of services and materials required to install a ground or water source heat pump (for residential accommodation or buildings used solely for relevant charitable purposes) are also eligible for the relief.

Buildings and construction (VAT Notice 708)
The above guidance details how to work out the VAT on building work and materials if you’re a contractor, subcontractor or developer. Sections 18.1 and 18.2 of the notice and the certificates in those sections have been updated to show they have force of law under Note 12 Group 5 Schedule 8 VATA 1994.

Claim a VAT refund for a new home or charity building if you’re a DIY housebuilder
DIY housebuilders can use the new online service to reclaim VAT. However, the paper form (VAT431NB or VAT431C) can still be used if desired. HMRC has now updated the address to send a completed paper form to. The address was also updated for conversions.

Group and divisional registration (VAT Notice 700/2)
The above guidance can be used to find out about group and divisional VAT registration and the forms that should be used to apply. The list of automatic notifications taxpayers may receive while waiting for a VAT group registration number has been updated at section 2.17.  HMRC confirm that when waiting for confirmation of grouping,  submissions under a current standalone VAT registration should not be made if these relate to the period within which grouping was requested. HMRC have detailed that certain automatic notifications will occur on the existing VAT registration but should be ignored. A new section about late payment submission penalties has also been added at section 5.11 confirming how these penalties and the points system work for VAT groups.

Claim a VAT refund as an organisation not registered for VAT
This online service (VAT126) can be used to claim back VAT if you undertake non-business activities  and are a local authority, academy, public body or eligible charity. Specific legislation allows VAT recovery for these entities in relation to non-business activities where the normal rules would preclude VAT recovery. HMRC has now confirmed that where claiming a refund for 6 or more invoices, you will need to upload one spreadsheet or document providing information for all invoices.

Repayment interest on VAT credits or overpayments
The above can be used to check when a taxpayer is eligible for repayment interest if HMRC are late in settling a repayment claim from a VAT return or VAT overpaid. Information on eligibility criteria for repayment interest on overpayments and start dates when VAT is not paid to HMRC has been updated. Information on repayment interest end dates when HMRC sets it off against your debts has also been updated.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme and details 4 additions and 1 removal.


Upper Tribunal 

1. Special Method Override: Floorspace

In this case HMRC challenged the FTT’s ruling in relation to Hippodrome Casino Ltd’s (HCL) floor space based partial exemption standard method override calculation giving a more accurate input VAT recovery methodology than the standard method based upon income. Depending upon specific objective tests, the standard partial exemption method must be overridden  if a logical use based method delivers a more accurate result.

HCL operates a casino making VAT exempt gaming and betting activities, however it also makes taxable supplies of hospitality and entertainment including a theatre, bars and restaurants. In 2022, the FTT  concluded that HCL’s means of apportioning and recovering input VAT on HCL’s overhead expenditure by reference to floorspace more accurately reflected the economic use of that expenditure than the standard turnover-based method of recovery. We released a summary of the FTT decision in an earlier VAT Focus which can be read here.

HMRC now appealed to the Upper Tribunal (UT), arguing that the FTT failed to address their central contention that floorspace used for taxable supplies such as entertainment were also being used for VAT exempt supplies of gaming, meaning there was a dual use of floorspace. HMRC argued that gaming customers did want the ability to have a break, drink, eat some food or smoke a cigarette, and so those ‘non-gaming’ areas which were treated as taxable in the floorspace methodology, were, in part, used economically for the VAT exempt gaming business. HMRC’s view was that the FTT expressed a conclusion on an incorrect test, namely whether or not the hospitality and entertainment businesses were “merely an adjunct to, or amenity for, gaming”, which is not the test for economic use.

The UT was satisfied that the FTT has failed to address and give reasons for rejecting HMRC’s contention that the areas allocated to bars, restaurant and theatre were also used in part for the purposes of HCL’s gaming business, such that there was dual use of those areas. The UT found this to be a material error of law and concluded that the FTT decision must be remade.

The UT considered HCL and HMRC’s submission in relation to the override calculation, and agreed with HMRC that the economic reality is that the floor areas of the Hippodrome casino allocated for hospitality and entertainment have significant dual use for gaming as well. The UT made this conclusion for various reasons including that the bar and restaurant areas provided important amenities to gaming customers, they also helped to increase dwell time for gamer increasing the length of time they spent gaming. The attractiveness of the bars or restaurants ‘in their own right’ served to enhance the attractiveness of the same as an amenity for those who are gaming.

As a result, the UT concluded that the duality of use means that the floor-based method is fundamentally flawed and it does not guarantee a more precise determination than the standard turnover method. The UT’s dismissed HCL’s appeal.

Constable Comment: This was a lengthy case involving complex points to consider around the partial exemption standard method which may in certain circumstances be overridden to provide a more accurate outcome. The UT has now overturned the FTT’s decision in allowing the floorspace based methodology, concluding that the dual use of the hospitality and entertainment areas was not considered. The case acts as a great example that it is crucial to be able to demonstrate that a proposed partial exemption approach provides a more precise determination of the economic use and deductible proportion of the input VAT than the standard method or a previously agreed partial exemption special method (PESM). Where the standard income based method delivers an unfair result,  it is possible and desirable to agree a PESM with HMRC in advance for certainty. Constable VAT has significant experience dealing with PESMs and would be pleased to assist with any related queries.


2. Zero rated food items: Poppadoms

In this case, Walkers appealed HMRC’s decision in relation to the VAT treatment of it’s ‘Sensation Poppadoms’ product. The questions for the FTT was to determine whether the products were zero rated food items, as Walkers contend, or standard rated.

Walkers argued the products are ‘food of a kind used for human consumption’ and they do not fall within the excepted items. HMRC contends that the products were similar to potato crisps and made from potato, potato flour or potato starch and were packaged for human consumption without further preparation, therefore they are standard rated product.

The FTT initially considered whether the products are made from potato by observing the ingredient list and found that there is more than enough potato content for it to be reasonable to conclude that the products fall within the meaning of ‘made from potato, or from potato starch’.

Subsequently, the FTT applied a multifactorial assessment to determine whether the products were similar to potato crisps. It noted that the products were marketed to be eaten in an environment and manner dissimilar to a potato crisp. In addition, the packaging was consistent with other products in the same range including potato crisps. In terms of appearance, the size, texture and colour were found to be very similar to crisps. The flavours of the products were also not distinct from those used in potato crisps. On balance of all factors, the FTT found that the product is similar to potato crisps and as a result it is a standard rated food item.

Walkers tried to argue that fiscal neutrality should be used to ensure the UK does not discriminate between objectively similar supplies, and as poppadoms are zero rated, the products in dispute should also be zero rated. HMRC’s response was that other supplies described as ‘poppadoms’ were not objectively similar as they were not made from potato. The FTT agreed with HMRC concluding there was no breach of fiscal neutrality. The appeal was dismissed.

Constable Comment: In this case Walkers tried to argue that its poppadom products were zero rated as specifically mentioned in HMRC guidance. However, the FTT agreed with HMRC that it was irrelevant whether the products were poppadoms if it is made from potato and it is similar to a potato crisp, as in this case the product will be standard rated. The VAT rules around food items can be complex and often there is ambiguity leading to disputes between taxpayers and HMRC. We would always recommend seeking professional advice if there is any ambiguity. Constable VAT has much experience in agreeing zero-rating and would be pleased to assist with any related queries.

3. Input VAT on qualifying motor vehicles

In this case, Three Shires Trailers Limited (TST) purchased two Land Rover Discovery vehicles which were considered to be commercial vehicles for VAT purposes, and TST reclaimed the input VAT incurred. Subsequently to purchasing the vehicles, TST converted them to cars for VAT purposes by adding rear seats, the side and back windows which had been blacked out were cleared.

HMRC initially disallowed the input VAT on the purchase as a result of the conversion recategorizing the vehicles to input VAT blocked cars. However, following a review, the input VAT was allowed but HMRC then took the view there is an output VAT liability on the self-supply of the cars as a result of converting them from commercial vehicles to cars.

The Tribunal agreed with HMRC that the commercial vehicles had been converted to cars. However, it confirmed that a self-supply would only be due if the use of the vehicles post conversion was such that input tax would have been disallowed at the time of purchase, meaning there is private use.

The Tribunal concluded based on the evidence provided that the vehicles were only used for business purposes and were not available for private use, therefore it is a qualifying motor vehicle eligible for input VAT recovery. Therefore, the conversion did not trigger a self-supply and no output VAT was due. The appeal was allowed.

Constable Comment: This case is another example to demonstrate that HMRC will often challenge the VAT treatment of vehicles. There are strict conditions and rules to satisfy in order to recover input VAT incurred which must be observed by all taxpayers prior to making a claim for input VAT and these should be considered, particularly where there is an unusual aspect such as in this case.

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