Constable VAT Focus 9 March 2023


VAT guide (VAT Notice 700)
Notice 700 is HMRC’s basic guide to VAT rules and procedures. Section 31 ‘Apportionment of output tax’ has been updated with two basic methods of apportioning output tax. One of them is based on selling prices and the other is based on cost values. This follows Revenue and Customs Brief 2 (2023):  VAT and value shifting consultation update, which is discussed below.

Revenue and Customs Brief 2 (2023):  VAT and value shifting consultation update
Between January and March 2021, the government ran a consultation on ‘VAT and value shifting’. The consultation proposed fixed rules for how the consideration (amount paid) must be apportioned when items with different VAT liabilities are supplied for a single price.

HMRC has concluded that the most effective way to address valuation concerns is to provide businesses with practical guidance on apportionment methods. This is through Guidelines for Compliance and improvements to other guidance. No changes will be made to the legislation.

HMRC has now published GFC2 (2023): Guidelines for Compliance – VAT apportionment of consideration. These guidelines on apportionment of consideration are for businesses that sell any goods or services with different VAT liabilities for a single price as part of a package or bundle.

Revenue and Customs Brief 3 (2023): Changes to VAT treatment of local authority leisure services
HMRC has recently released the above brief, explaining the changes in the VAT treatment of leisure services provided by local authorities.

Local authorities have historically been treated as undertaking a business activity if they provide leisure services to members of the public. This treatment was challenged and the matter was considered by courts. The litigation has now concluded and the courts have found that local authorities’ leisure services are provided under a statutory framework and can be treated as non-business for VAT purposes.

Local authorities can now revisit the historic VAT treatment of such supplies and apply the non-business treatment to their supplies of leisure services. They can also submit claims to HMRC. Claims should be sent to: and should include ‘2023 LA VAT non-business’ in the subject line of the email.

Animals and animal food (VAT Notice 701/15)
The above guidance explains which live animals and animal foods or feeding stuff are zero-rated for VAT purposes. Assistance dogs are now mentioned in the ‘6.4 Food for working dogs’ section.


Upper Tribunal

1. Supplies between VAT group members

Silverfleet Capital Ltd (SCL) supplied investment management services to The Prudential Assurance Company Ltd (Prudential) while SCL and Prudential were both members of the same VAT group. However, some of the payments for the services were invoiced and paid after SCL had ceased to be a member of that VAT group.

Under the agreement for the investment management services, there were performance fees which were due to SCL if certain targets were met. These were met and therefore a fee was due to SCL, in 2015/2016 after it had left the VAT group. Prudential considered that those payments were outside the scope of VAT because they fell to be disregarded under the rules for supplies between members of a VAT group. HMRC took the view that the payments were liable to VAT because the tax point for the supply arose after SCL had left the VAT group under the provisions governing the time of supply of continuous supplies of services.

The First-tier Tax Tribunal (FTT) allowed Prudential’s appeal against HMRC’s decision and the latest case deals with HMRC’s appeal against that FTT decision to the Upper Tribunal (UT).

The UT’s decision contains a detailed analysis of the law but in simplistic terms the key points are:

  • In SCL’s view the fact that the service was (in the sense of its performance date) provided while the parties were in a VAT group means that there was no “supply” to which the relevant tax point rules could apply.
  • In HMRC’s view the fact that the parties had previously been in a VAT group did not override the need to assess when supplies occurred under tax point rules. Only after determining the date on which a supply would otherwise arise would it be correct to go on to judge whether “The parties are in a VAT group on that date” (so the supply should be disregarded)” or, in the case of the disputed charge “The parties are not within a VAT group on that date” so a supply should be recognised.
  • The FTT had agreed with SCL’s view, its judgement being in large part influenced by the BJ Rice House of Lords decision, which held that services performed at a time a business is not VAT registered cannot be made liable to VAT simply because the payment received for those services is received after the business has VAT registered.
  • In allowing HMRC’s appeal, the UT considered it was a material error of law for the FTT to regard the position of SCL as being indistinguishable from BJ Rice. Not being VAT registered being factually different from being a member of a VAT group.  Therefore, HMRC’s view that the disputed supply occurred while SCL was outside of the VAT group was correct.

Constable Comment: This case is an interesting read for a VAT specialist, particularly as regards the evaluation of previous cases.  The fact that judgements are finely balanced is well illustrated by the number of dissenting opinions referred to in those earlier cases.  In overturning the FTT’s decision the UT stated that because the facts in the SCL case were not identical to those addressed in previous cases the FTT should have placed more weight on the dissenting opinions of judges in those earlier cases.  Perhaps that is correct to the extent that those dissenting opinions addressed a factual difference of relevance.  However, one is left with the impression that the UT had more sympathy with those dissenting opinions than the actual majority decisions that had been delivered, particularly in the BJ Rice case. Although it is true that “not being VAT registered” is factually different from “being a member of a VAT group”, the UT seemed rather keen to dismiss the FTT’s reliance on BJ Rice.  SCL’s case is not “indistinguishable” from BJ Rice’s (as the FTT stated).  However, the contextual parallel seems to us stronger than the UT accepted.      


2. Education or obtaining income

Fareham College (FC) appealed HMRC’s refusal to repay £69,757 of VAT that FC claimed to have overpaid. FC is a further and higher education college which offers courses including catering, hair and beauty and performing arts. Students work in a training restaurant, hair and beauty salon and performing arts centre, operated by FC. FC accounted for output VAT on all supplies made to the public however it now considers that the supplies were exempt under Item 4 Group 6, on the basis that they were closely related to exempt supplies of education. This follows from the Brockenhurst College decision of the Court of Justice of the European Union (CJEU).

HMRC argued, and the Tribunal agreed, that Item 4 of Group 5 to Schedule 9 VAT Act 1994 is to be construed as excluding from exemption supplies where the basic purpose of the supply is to obtain additional income for the body through transactions which are in direct competition with those of commercial enterprises subject to VAT.  Article 134(b) of the Principal VAT Directive provides for this exclusion but is not written into UK law.  The Tribunal decided that it was reasonable to “imply the words of Article 134(b) into Item 4”.  Therefore, it was for the Tribunal to determine whether FC’s supplies are excluded from the exemption on the basis that their basic purpose was to generate additional income in direct competition to other businesses.

The Tribunal concluded that FC’s basic purpose of operating the restaurant was not to obtain additional income. The FTT reached this decision on the basis that it was essential for FC to operate the training restaurant for the students to successfully complete their courses. The restaurant had limited opening hours, charges were low for the quality of the food and set with a view to covering the cost of ingredients.  Therefore, it was clear that the basic purpose was not to obtain additional income, but to provide students with realistic work experience.

The FTT then turned to the hair and beauty salons. Unlike the restaurant, the FTT was not satisfied that the beauty salons did not have a basic purpose of obtaining additional income.  FC offered no evidence that it was essential that two salons to be operated. The salons operated normal opening hours throughout the year and the only evidence regarding low pricing was that occasionally a 10% discount was available for services provided by hair trainees. In addition, there was no evidence to show how supplies made might differ from those in a commercial salon, the FTT therefore concluded that income from the hair and beauty salon is excluded from exemption, and it is subject to VAT.

With regards to the performing arts centre,  FC made no submissions therefore the FTT could not be satisfied that that it was not the appellant’s basic purpose to obtain additional income from the supplies, or that the supplies were not in direct competition with those of commercial enterprises. As a result, VAT was due on the supplies.

Constable Comment: Our view on this case starts with sympathy with HMRC’s position in relation to the Brokenhurst College decision. Ordinarily a supply is assessed in terms of “what service is received” by the customer.  Irrespective of the motive of the supplier, customers visiting a student operated restaurant or salon are not themselves receiving education (as HMRC argued unsuccessfully in the Brockenhurst case).  However, in attempting to limit the effect of the Brockenhurst judgement, HMRC seems to have taken us down a different rabbit hole.

Article 134(b) was not written into UK law, presumably because the need to do so was not envisaged.  There is a long-standing principle that EU law can be used to interpret ambiguities in UK law but HMRC cannot act as if EU law applies simply because it failed to adopt it correctly into domestic legislation.  If it is now necessary to pretend that UK law contains an enactment of Article 134(b) that seems to cross a boundary.  Logically one would also need to consider the “basic purpose” of all supplies covered by Article 134(b), not only supplies within one narrow subset.  There are in UK law nine different Items within Group 6 to Schedule 9 VAT Act 1994 (Education) and Article 134(b) covers several exemptions, not only education.   

We also have some problems with the approach the Tribunal has taken to evaluating what “basic purpose” means and when a service is in direct competition with commercial enterprises.   

A FTT decision is only binding on the parties and it remains to be seen whether this decision will be appealed.  However, it has the potential to have unforeseen consequences if the Tribunal is correct that HMRC and taxpayers are supposed to operate as if Article 134(b) (and potentially other unenacted provisions of the Principal VAT Directive) are “by implication” contained in UK law.         


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.

3. Time limits for submission of evidence

This case concerned Nec Plus Ultra Cosmetics AG (Nec), a company established in Switzerland. In 2017, Nec supplied cosmetic products to a customer established in Croatia. A purchaser in Croatia or a third party, acting on behalf of the purchaser, took charge of those goods, which were located in a warehouse in Slovenia. They were transported from Slovenia to another Member State (MS), with the result that the supplies were exempt from VAT.

During a tax inspection in  February 2019, the local authorities invited Nec to submit all the documentation relating to the supply.  Nec submitted invoices and copies of consignment notes demonstrating that goods were transported from Slovenia to another MS. The delivery notes and other documents mentioned in the consignment notes had not, at that stage, been produced, since Nec did not possess all the documents and was attempting to obtain them.

Slovenian law requires that following completion of a tax inspection the tax authority has to produce a report within 10 days.  That report must outline the possibility of providing new evidence within 20 days.  It is possible to obtain an extension of that 20 day period with sufficient justification.

On 1 April 2019, the local authorities issued a report on the tax inspection. Subsequently, Nec produced copies of quotes and delivery notes, which showed that the goods had been supplied in a MS other than Slovenia. Nec justified the late submission of evidence by asserting that its office in Germany, which was responsible for deliveries in Croatia, had closed in August 2018 and had not provided it with all the necessary documentation within the prescribed period.

The local tax authorities raised an assessment for VAT, ignoring the evidence submitted after the report was issued because that evidence had been submitted late.   The CJEU was asked to consider whether the domestic law imposing this cut-off deadline is compatible with EU law.

The CJEU reviewed the evidence and stated that whilst it is true that the right of exemption from VAT may be refused in certain situations, the fact remains that where the tax authority refuses VAT exemption at an early stage of the tax procedure, it must ensure strict compliance with the principle of tax neutrality.

In this case, it was for the referring court to determine whether or not the refusal to take evidence into consideration at the relevant stage complies with the principle of effectiveness. The CJEU stated that the referring court must also take into account that the tax inspection report does not close the inspection procedure and is merely an interim procedural act intended to inform the taxable person of the factual situation. However, it also found that providing that all underpinning legal considerations are taken into account, there is nothing to prevent national legislation that prevents new evidence being introduced after a decision has been made.

Constable Comment: In essence the CJEU has said that the domestic law that Slovenia operates is acceptable providing that it fairly balances a number of underpinning legal principles.  Perhaps the main takeaway from this judgement is how different tax administration rules can be and the need to fully understand them and ensure that they can be complied with.  The deadlines set in Slovenia for both the tax authority and the taxpayer seem rather unrealistic to us, although that may in turn depend on when a tax inspection is considered to be “complete”.   It would be interesting to see how HMRC might manage a 10 day deadline to produce a report following a VAT inspection!    

4. VAT on online intermediary supplies

This case concerned Fenix International Limited (Fenix), a UK company registered for VAT purposes, operating a social media platform known as ‘Only Fans’. The platform is offered to users throughout the world who are divided into creators and fans. Creators have profiles to which they upload and publish content, such as photos, videos, and messages. Fans can access content uploaded by the creators by making ad hoc payments or by paying a monthly subscription. Fans can also pay ‘tips’ or donations which do not give rise to the provision of any return content.

Fenix provides not only the platform but also the device enabling financial transactions to be carried out. Fenix is responsible for collecting and distributing the payments made by fans, using a third-party entity which supplies payment services. Fenix also sets the general terms and conditions for use of the platform.

Fenix levies 20% on any sum paid to a creator to whom it charges the corresponding amount. On the sum which it levies in this way, Fenix applies VAT at a rate of 20%, which appears on the invoices which it issues.

HMRC raised VAT assessments taking the view that Fenix is deemed to be acting in its own name pursuant to Article 9a(1) of Implementing Regulation No 282/2011, and therefore had to pay VAT on all of the sum received from a fan and not only on the 20% of that sum which it retained.

To put this in context, Article 28 of the Principal VAT Directive deals with what in the UK would be termed “an agent acting it its own name”, requiring that agent to treat itself as both making and receiving the underlying supply of the principal for whom the agent is acting.  Article 9a(1) of the Implementing Regulation mandates that Article 28 applies to electronic services supplied via an electronic interface, portal or market place unless certain stipulated conditions are met. Those stipulated conditions being linked to a high level of transparency about the true supplier of the service and the value of that supply.

Fenix appealed the validity of this legal framework, arguing that in adopting Article 9a(1) of the Implementing Regulation the European Council supplemented or amended the Principal VAT Directive thus exceeding the implementing powers conferred on it.

The CJEU concluded that Article 9a(1) complies with the general aim of the VAT Directive and cannot be viewed as amending Article 28. It simply clarifies that Article 28 will apply in a specific circumstance.  It also ruled that the fact that a final customer knows that an agency exists, and the identity of the principal, is not enough to prevent the application of Article 28.

Constable Comment: The CJEU gave a ruling in this case only because the First-tier Tax Tribunal made a referral before the end of the Brexit transition period.   The case made by Fenix was interesting but in our view it was always unlikely that the CJEU would conclude that Article 28 had been altered by Article 9a(1).  

5. Construction of building by an association

The appellant, ASA and its sister company, PP, were co-owners of land in Romania. They entered into a contract relating to an association without a legal personality with BP and MB to construct and subsequently sell a building complex consisting of 56 apartments. BP and MB were to jointly bear the costs of building the complex. Other design and admin costs were to be met equally by all parties. Following completion of constructions, the majority of flats were sold, however they were all sold by ASA and/or PP as title of ownership did not transfer to BP and MB.

Following a tax inspection, the Romanian tax authority took the view that ASA and PP should have been VAT registered as a result of selling the apartments and raised an assessment. ASA argued that BP and MB should also be liable for VAT as they were a taxable person in regard to the transaction.

The CJEU stated that to be considered as a taxable person, it is necessary to review whether BP and MB carried out an economic activity in their own name, on their own account and under their own responsibility, and whether they bear the economic risk associated with the pursuit of those activities. The CJEU concluded that as only ASA and PP were mentioned as owners in the contract, BP and MB cannot be regarded as taxable persons in respect of the sale of apartments, therefore only ASA and PP are liable for the VAT assessment.

In addition, ASA argued for the right to reclaim input VAT on invoices addressed to BP and MB for the construction of the building complexes. The CJEU stated that a taxable person is required to provide objective evidence that goods and services have been supplied to him for the purposes of his own taxable transactions. It concluded that in absence of such evidence, it is not a requirement that ASA be granted the right to deduct input VAT.

Constable Comment: Joint ventures can be difficult to characterise and there have been many UK cases on the matter.  A key point is whether the different parties can be “aggregated” and treated as a taxable person or whether there is a need to recognise supplies between the parties.  In most cases where land ownership is held by only some of the parties we suspect that in the UK we would see a similar outcome to this case, although perhaps there would have been a need to identify supplies by BP and MP to the land owners, a point that was not addressed in this case.  There are situations in which the treatments are very unclear and we would always recommend trying to agree a position with HMRC when large sums are involved.

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.