CVC VAT Focus 14 December 2017

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Christmas Greetings

This is the last CVC VAT Focus of 2017. We will be closing on the afternoon of Friday 22 December and will reopen on Tuesday 2 January 2017 at 9am. If you have any urgent queries during this time please contact your usual CVC partner by email and they will respond to you as soon as possible.

We would like to take this opportunity to wish all our clients and regular readers a Merry Christmas and a happy and prosperous New Year.

CVC will not be sending Christmas cards this year; instead we have made donations to our local Food Bank.


VAT Information Sheet 07/17: construction services and zero-rated relief
HMRC has published an information sheet concerning how VAT is applied to the construction of buildings that keep, or make use of, parts of a building that previously stood on, or were adjacent to, the site where the works of a new construction (dwelling or building to be used solely for a relevant residential or relevant charitable purpose) are taking place.

HMRC’s position following the Supreme Court’s judgment in Littlewoods
Revenue & Customs Brief 05/17 sets out HMRC’s position following the Supreme Court’s ruling that statutory interest is sufficient to comply with the EU law right to adequate indemnity and that it is not necessary for compound interest to be paid. This litigation is now final. HMRC will invite claimants to withdraw their claims. There are a number of claims where the underlying tax litigation is not yet final and those underlying issues should now proceed.

VAT Notice 700/60: payments on account
This VAT notice has been updated about how to pay VAT by debit or credit.

VAT appeal updates
HMRC has updated its list of ongoing VAT appeals that may have implications for other businesses.

Compliance checks: unannounced visits for inspections
HMRC’s factsheet explains the checks on tax affairs when HMRC conduct an unannounced inspection.


Christmas parties, gifts & VAT
In CVC’s latest blog Helen Carey considers the VAT recovery implications of staff parties, client entertaining and gifts.


Court of Appeal

1. Fraudulent evasion of VAT – whether the director knew, or should have known

CCA Distribution Limited (CCA) is a case relating to Missing Trader Fraud (MTIC fraud). In this particular case the point at issue was whether CCA “knew or should have known” about the fraudulent evasion of VAT relating to its business transactions. HMRC was successful in its appeal against the decision of the FTT in favour of the taxpayer.

CVC comment: this decision highlights the due diligence that taxpayers must undertake when engaging new customers and suppliers.

2. Whether appeal is time-barred 

Iveco Limited is the representative member of a VAT group that includes companies that sell commercial vehicles. The issue before the CoA relates to promotional payments (or rebates) that the companies appear to have made to customers between 1978 and 1989. Iveco contend that these payments reduced the taxable value of the vehicles but Iveco did not make any VAT adjustments in respect of them. On this basis Iveco claims it is entitled to a VAT repayment of £73,361,865.

The CoA outlined the history concerning time limits for claims in circumstances such as Iveco’s. The UK failed to introduce legislation to give effect to European law concerning VAT due following a price reduction until 1 January 1990. With effect from 1 January 1990 a claim for repayment could be made within six years of the original payment. In 1997 the relevant legislation (Section 80 of VAT Act 1994) was amended to set a three year time limit for claims. This legislation was amended again by Finance Act 2008 to set a four year time limit for claims. Following the Fleming case, Section 80 could not apply to claims made before 1 April 2009.

The CoA found that Iveco’s claim must be time-barred in its entirety. The claim had to be brought by, at the very latest, the end of the Fleming window in 2009 and all of Iveco’s claims relating to price reductions occurring before the beginning of January 1984 were time-barred by 1 January 1990. Iveco’s appeal was dismissed.

CVC comment: there is no indication in HMRC’s latest ‘VAT appeal update’ document as to whether this case will be pursued further by Iveco.

Upper Tribunal

3. Evidence to support input tax claim – purchase of Apple iPhones without receiving VAT invoice 

Scandico Ltd is a phone trader specialising in acquiring newly released iPhones in the UK and selling them to customers in other countries where that model has yet to be released. The phones command a considerable premium. Apple’s policy is to prevent the sale of phones to traders who might sell them on in this way. Apple therefore only allows a person to purchase two phones. Scandico employs ‘runners’ who visit Apple stores to purchase two phones on as many occasions as they can manage. Initially HMRC accepted Scandico’s input tax claim; however, in January and February 2011 approximately 7,000 iPhones were purchased and in light of this increased turnover HMRC conducted an extended verification.

HMRC reduced Scandico’s input tax claim by £297,874 on the basis that Scandico did not hold sufficient evidence to support its input tax claim. Scandico held only till receipts. Till receipts do not constitute proper VAT invoices, each iPhone costs more than £250 plus VAT which is the limit for which a simplified VAT invoice can be issued in relation to a claim for input tax deduction. The UT commented that Scandico asked Apple to issue VAT invoices but this request was refused.

At issue before the UT was whether the FTT was correct in concluding that the decision of HMRC was reasonable. The UT found that the FTT has applied the correct test and that the analysis of the FTT was fair and unimpeachable. Scandico’s appeal was dismissed.

CVC comment: the UT commented that Scandico should have realised from the outset that they were not going to receive VAT invoices from Apple because their business model depended on Apple not knowing the ultimate destination of the iPhones. HMRC had not set an impossibly high standard for Scandico to meet in order to claim input tax. Scandico could have set up its business in a way that enabled it to provide clear and unequivocal information supporting their input tax claim.

First Tier Tribunal

4. Is a powdered food supplement zero-rated?

Carol Pannett appealed against the Director of Border Revenue’s decision to impose VAT on the import of Cellect unflavoured powder kit and Cellect unflavoured powder from the US. Ms Pannett has a terminal diagnosis of cancer and believes that Cellect could have a beneficial impact on her health. Ms Pannett uses Cellect as an ingredient in smoothies. Ms Pannett argued that Cellect is zero-rated under the VAT relief for certain supplies to disabled persons for personal use. The FTT examined the VAT legislation and found that Cellect did not fall within any of the items covered by the zero-rate. Ms Pannett also argued that Cellect is zero-rated as a food of a kind used for human consumption. The FTT considered the legislation and relevant case law and reached the conclusion that Cellect is not food. The appeal was dismissed. The FTT also considered customs duty which we have not commented on here.

CVC comment: the FTT considered several cases regarding the definition of ‘food’ for VAT purposes in reaching its decision.

5. Default surcharge appeal allowed

The FTT found that Mezzanine Floors (Hull) Limited (the Company) had a reasonable excuse for paying its VAT return for the period 11/16 three days late. The Company telephoned HMRC on 6 January 2017 (the day payment was due, as the deadline of the 7 January 2017 was a Saturday) to explain that the Company was expecting to receive approximately £60k payment under an invoice factoring arrangement that day; however, their accounts clerk did not work Fridays and therefore the payment would not be processed until Monday. HMRC told the Company, “not to worry, just ensure payment is made as soon as you can.”

The Company’s grounds of appeal were that the Company would have asked for time to pay (which given the circumstances would likely have been agreed) had the Company not been misled by the person at HMRC. The FTT therefore concluded that the Company had a reasonable excuse for the late payment and the default surcharge was discharged.

CVC comment: it is important to note that if the VAT return payment deadline falls on a weekend, payment is due on the Friday before the due date.

6. Two payments under a single contract – meaning of “consideration” for VAT purposes

Lloyds Banking Group (LBG) appealed against two VAT assessments raised totalling £5,640,025. The case before the FTT concerned the VAT treatment payments in respect of redundancy costs (Redundancy Payments) made by Bank of Scotland (BOS), a member of the LBG VAT group registration, to Certus (an Irish company). HMRC issued the VAT assessments on the basis that the Redundancy Payments were additional consideration for the services provided by Certus and that BOS should have accounted for VAT on those payments under the reverse charge provisions.

The FTT considered several cases in reaching its decision. The leading European case, Tolsma, provides the criteria to apply in determining whether a payment constitutes consideration for VAT purposes. Essentially, a direct link must exist between the services provided and the consideration received. The FTT surmised, the Redundancy Payments would only form part of the taxable amount for VAT purposes if they were paid by BOS in return for administrative services provided by Certus.

Following examination of the Service Agreements the FTT found that these were not artificial and Redundancy Payments were part of a separate, stand-alone obligation arising out of negotiation with the employees’ union. As there was no ‘direct link’ between the Redundancy Payments and the services provided by Certus, the Redundancy Payments were not consideration for VAT purposes. LBG’s appeal was allowed.

CVC comment: this decision considers in detail the preceding case law concerning “consideration” for VAT purposes. Tolsma remains the leading decision on such matters and the key question to ask is whether there is a “direct link” between payment and supply. The commercial and economic reality must also be considered alongside contractual arrangements to ensure the contracts are not artificial.