CVC VAT Focus 22 February 2018


‘Reasonable care’ guidance

HMRC has issued guidance on what it considers to be ‘reasonable care’. If a taxpayer fails to take reasonable care HMRC can and will issue penalties.


CVC client wins case before Tribunal – construction of clubhouse for community use is zero-rated

In CVC’s latest blog Stewart Henry is pleased to report that CVC’s client, the registered charity Greenisland Football Club (GFC), has successfully won its appeal against the issue of a VAT penalty assessment by HMRC in the First Tier Tax Tribunal (FTtT).


First Tier Tribunal

1. Construction of clubhouse is zero-rated

In 2010 Greenisland Football Club (GFC) commenced an ambitious project to construct a clubhouse which it intended would be a multi-purpose facility for use by the local community. In 2011 the charity issued a zero-rating certificate to the appointed contractor. The certificate was issued on the basis that the building would be used for a relevant charitable purpose (RCP) as a village hall or similarly in providing social or recreational facilities for a local community. GFC is not VAT registered. VAT incurred on construction works would have been an absolute cost to the charity.

In 2014 HMRC issued a penalty assessment on GFC in the sum £53,101 on the basis the building did not satisfy the RCP test.

The First Tier Tribunal allowed GFC’s appeal. The Tribunal found that GFC was correct to issue a zero-rating certificate to the contractor. The Tribunal also found that, had it reached a different conclusion on this entitlement, the charity had a reasonable excuse for issuing the certificate.

Stewart Henry considers this decision in detail in his blog.

CVC comment: for a number of years now it has been difficult to be certain when HMRC will accept sports pavilions/clubhouses are intended to be used ‘similarly’ to village halls. The UT in Caithness Rugby Football Club (Caithness) and New Deer Community Association (and now the FTT in this case) do not accept the majority of HMRC’s interpretations set out in either VAT Notice 708 (buildings and construction) or HMRC internal guidance manuals.

If you are involved with a charitable or not-for-profit sports club or association (or any other charity) and are in dispute with HMRC over a technical VAT matter or interpretation of VAT law please do not hesitate to contact CVC. We would be pleased to help.


Upper Tribunal

2. Banana and strawberry flavoured Nesquik held to be standard rated (HMRC accept that chocolate Nesquik is zero-rated)

Nestle UK Limited appealed the FTT’s decision that its banana and strawberry flavoured Nesquik is standard rated for VAT purposes. HMRC accept that chocolate Nesquik should be zero-rated (as a preparation of cocoa).

Beverages and products for the preparation of beverages are specifically excluded from the zero-rate for food (subject to certain exceptions including milk). Nestlé presented two arguments before the UT. First, Nestlé argued that the legislation should be read purposively so that the meaning of the legislation was to remove milk and preparations thereof from the concept of beverage. Milk is zero-rated for a defined social reason. The supply of a ready-mixed milk drink flavoured with Nesquik would be zero-rated. Nestlé contended that Parliament could not sensibly have intended that an ingredient to be added to a zero-rated drink to create a drink that if sold in its pre-prepared form would be zero-rated, should be subject to VAT at the standard rate. The UT could see no indication of any wider purpose or intent to zero-rate the separate supply of powders that are added to milk.

Nestlé’s second argument was that unless the powder created a new or different beverage, the powder could not be for the “preparation of beverages” and therefore did not fall within exceptions to the zero-rate. The UT also dismissed this argument. The only use to which Nesquik is intended to be put is in the preparation of flavoured milk drinks.

CVC comment: this case serves as a reminder as to the difficulty of interpreting the VAT legislation regarding the application of the zero-rate to food.

3. Supercar driving experience – VAT liability of collision damage waiver payments

The Tribunal considered the VAT treatment of collision damage waivers offered by Supercar Drive Days Limited (SDDL) in connection with its main business of providing supercar driving experiences. The issue before the Tribunal was whether the waivers qualified for VAT exemption as supplies of insurance. HMRC ruled that the waivers were taxable at the standard rate.

SDDL’s customers are liable to pay for any damage to a vehicle up to a value of £2,500. If the customer chooses to pay a fee for a collision damage waiver the £2,500 liability would not arise. SDDL argued that the waivers are supplies of insurance. SDDL does not hold the relevant authorisation to permit it to underwrite insurance.

The Tribunal found that the waivers were not insurance. The waiver simply varies the potential liability of the customer under the contract.

CVC comment: suppliers that offer waivers for additional payment may need to consider the VAT treatment of such payments in light of this case.

4. Branches found to be independent for VAT purposes

The National Federation of Occupational Pensioners (NFOP) challenges a decision by HMRC that branch rebates collected by NFOP form part of the taxable consideration received by NFOP for VAT purposes. There were two issues before the Tribunal: (1) whether NFOP’s branches are separate taxable persons for VAT purposes, and (2) whether the branch rebate should be included in the membership subscriptions paid to NFOP for VAT purposes, or should be treated as an amount collected on behalf of branches and belonging to them.

The Tribunal found that the branches are separate entities from NFOP for VAT purposes. NFOP’s role is more support, guidance and coordination, rather than direction or control. The existing branches were all established before NFOP was incorporated. There are significant variations between the individual branches which supports the finding that the branches are independent. In reality a branch decides how it conducts its activities and spends its money.

However, despite succeeding on the first issue, NFOP was unable to demonstrate that the branch rebates are collected on behalf of branches. Therefore, branch rebates received form part of NFOP’s taxable income for VAT purposes.

CVC comment: the Tribunal’s decision regarding branches may have wider implications. It is possible this case will be heard before the Tribunals again as there appear to remain unresolved issues.

5. Whether HMRC assessment made to best judgment

HMRC raised an assessment in the sum of £29,539 following a visit to Southgates UK’s premises. HMRC took the view that Southgate UK’s losses were unsustainable. It was not conceivable that someone would be able to continue to trade in such circumstances. HMRC found it impossible to reconcile VAT returns submitted with the business’ underlying records and invoices. HMRC’s assessment was based on “capital introduced” or “deficits” in SAGE accounts. HMRC assumed that these figures were under-declared sales.

Southgates UK’s accountant explained that there had been problems with the business. Due to a decline in business, the appellant’s son had left in 2010. The appellant struggled to maintain records while running the business and dealing with ill-health. There was also an ongoing problem with a spare parts supplier which resulted in court action.

The accountant could not explain why his analysis of the records of the business produced a lower sales figure than those in the submitted VAT returns. The accountant did explain that the “capital introduced” transactions in SAGE were to ‘true up’ the accounts and zero out losses.

The Tribunal found the appellant to be a credible witness. HMRC’s assessment was based on one set of figures. The Tribunal therefore found that the VAT assessment was not made to best judgment. HMRC did not use other information in its possession to confirm whether or not it was reasonable to base the assessment on a single accounts entry. The Tribunal directed that the VAT assessments should be reviewed by HMRC.

CVC comment: taxpayers should always ensure any VAT assessments HMRC issue are made to best judgment. This is particularly important where the matter is ambiguous and not straightforward. 

6. Supply of lift passes for main ski slope – whether reduced rated transport

Snow Factor Limited (SFL) operates an indoor snow sport resort. The appeal before the Tribunal relates to the VAT liability of lift passes for the main ski slope. SFL argues that the lift passes are subject to VAT at the reduced rate (5%) as a cable suspended passenger transport system. HMRC disagreed and raised two VAT assessments in the sum of £156,160 plus interest and £138,555 plus interest.

The Tribunal found that SFL’s supplies are excluded from the reduced rate because the legislation provides that the reduced rate does not apply to the transport of passengers within a place of entertainment, recreation or amusement by the person who supplied a right of admission to, or a right to use the facilities at, such a place.

CVC comment: This case demonstrates the importance of determining the correct VAT liability of supplies made. SFL has received VAT assessments totalling £294,000 (including interest) in the three years to 29 February 2016. An HMRC enquiry arose in this case because SFL submitted an Error Correction Notice to HMRC to recover output VAT it believed it believed incorrectly declared in the VAT accounting period ending 31 May 2013. 



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