CVC VAT Focus 9 August 2018

HMRC News 

VAT Notices

HMRC has updated the following VAT Notices:

Health professionals and pharmaceutical products (VAT Notice 701/57)
Physiotherapist and podiatrist independent prescribers have been added to the list of relevant practitioners.

Postage stamps and philatelic supplies (VAT Notice 701/8)
The VAT calculation for imported collector’s items has been updated in order to maintain the effective rate of 5%.

The single market (VAT Notice 725)
Improved guidance on amending VAT return periods to coincide with EC Sales List submission. 

Joint and several liability for unpaid VAT (VAT Notice 726)
Updated with information on how to spot missing trader VAT fraud.

Cost Sharing Exemption

HMRC has published Revenue and Customs Brief 10 (2018): VAT – cost share exemption. HMRC has changed its policy following CJEU judgments and amended the test for “directly necessary” services which enables cost sharing groups to ignore certain non-qualifying supplies for the cost sharing exemption. 

Overseas business selling goods in the UK

HMRC guidance has been updated to include information about online marketplaces.

Businesses selling goods in the UK using online marketplaces

HMRC guidance concerning VAT registration has been updated.                                                      

Case Review 

Court of Justice of the European Union 

  1. VAT exemption for transactions concerning payments and transfers

DPAS Limited designs, implements and manages dental plans in the UK. These plans are provided to dentists. Patients make monthly payments to DPAS’s bank account in return for dental care provided by their dentist and insurance cover. The monthly payment includes the amount due from the patient to the dentist, the amount due from the patient to the insurer and the amount due from the patient to DPAS. Each month, DPAS pays to the dentists the aggregate amount payable to them in respect of all of their patients who have paid the agreed monthly amount less an amount retained by DPAS as a charge for its services.

Until 2012 HMRC took the view that the services DPAS provided to the dentists was exempt from VAT. Following the decision of the CJEU in AXA UK which concerned the VAT liability of Denplan Limited’s services (a competitor of DPAS) that found that Denplan provided debt collection services which are subject to VAT at the standard rate, DPAS restructured its contracts so that it contracted with patients as well as dentists.

HMRC contend that the services DPAS supply to dentists and patients are subject to VAT at the standard rate. DPAS appealed this decision before the FTT. The FTT found that DPAS supplied its services to patients and those services were exempt from VAT. HMRC appealed the FTT’s decision before the UT. The UT referred questions to the CJEU.

The CJEU found that VAT exemption for transactions concerning payments and transfers does not apply to the services provided by DPAS. DPAS’ services consist of requesting from the relevant financial institutions money to be transferred from the patient’s bank account to DPAS’ bank account and, following a deduction for DPAS’ services, the remaining balance to be transferred to the patient’s dentist and insurer.

CVC comment: this judgement is the latest in a long line of cases concerning the extent of the VAT exemption for transactions concerning payments and transfers. Other notable cases include Bookit Limited and National Exhibition Centre (NEC). In those cases the CJEU found that booking fees are subject to VAT at the standard rate. 

Supreme Court 

  1. Requirement to pay VAT assessments in advance of appeal

Businesses wishing to appeal a VAT assessment must pay the VAT assessment in advance of the appeal, unless the business can demonstrate that paying the VAT assessment would cause hardship. Totel Limited seeks to appeal a number of VAT assessments. Totel has been unable to demonstrate it would suffer hardship if it were to pay the VAT assessments in advance its appeals. Totel has argued that the requirement to pay the disputed VAT as a pre-condition for an appeal infringes the EU law principle of equivalence, which requires that the rules regulating the right to recover taxes levied in breach of EU law must be no less favourable than those governing similar domestic actions.

The Supreme Court commented in its Press Release that none of the domestic taxes are comparable with VAT. A business seeking to appeal a VAT assessment is in a different position from a taxpayer seeking to appeal an assessment to any other domestic tax. The economic burden of VAT falls to the consumer, not the business. The business collects VAT and passes this onto HMRC. In respect of other domestic taxes the economic burden is on the business.

The Supreme Court dismissed Totel’s appeal.

CVC comment: if a taxpayer can evidence that payment of a VAT assessment would cause financial hardship the appeal may proceed without the disputed VAT being paid to HMRC. In some instances it may be possible to persuade HMRC that the economic burden is in the business, for example when the business has treated a supply as VAT exempt and has not collected VAT from the consumer. 

Court of Appeal 

  1. The value of supplies for VAT purposes – employment bureaux supplying temporary staff

Adecco UK Limited supplies its clients with temporary staff (temps). The First Tier Tribunal (FTT) and Upper Tribunal (UT) have previously found that the full fees received by Adecco from its clients are subject to VAT. Adecco argues that VAT is not payable on the full fee received from its clients. VAT is only payable on the element attributable to the introduction and ancillary services supplied by Adecco (the majority of the fee relates to payment of the temps’ services).

The Court of Appeal agreed with the FTT and UT. The full fees received by Adecco from its clients are subject to VAT. Important points to note: the temps did not have a contract with the Adecco’s clients, the contract between Adecco and the temps referred to the temps providing services to the client “through Adecco”, Adecco paid the temps on its own behalf (not as an agent of the client), and Adecco charged a single sum for each hour a temp worked (it did not split the fee between remuneration for the temps’ service and commission for itself).

CVC comment: this case highlights the importance of contractual terms in determining correct VAT liabilities particularly where an ‘agent’ is involved. 

Upper Tribunal

  1. Whether certain supplies of emergency ambulance services qualify for zero-rating

Jigsaw Medical Services Limited supplies ambulance services. The supply of transport services for sick or injured persons in vehicles specially designed for that purpose is exempt from VAT. It is common ground that the ambulance services provided by Jigsaw are exempt. The issue before the Upper Tribunal was whether “emergency ambulance services” by Jigsaw qualified for zero-rating. If a supply can qualify for both exemption and zero-rating, zero-rating takes precedence. The benefit of zero-rating is that such supplies generate a right to VAT recovery. It was accepted that “patient transport ambulance services” provided by Jigsaw are both exempt and zero-rated (with zero-rating taking precedence).

Zero-rating applies to the transport of passengers in a vehicle designed or adapted to carry not less than 10 persons. Zero-rating also applies to a vehicle designed or adapted to carry a person(s) in a wheelchair that, if it had not be so designed or adapted, would be capable of carrying 10 persons or more. Jigsaw’s emergency transport vehicles were capable of carrying 7 or 8 persons. No seats were taken out of Jigsaw’s emergency transport vehicles in order to adapt the vehicle for wheelchair use. The First Tier Tribunal (FTT) considered that because additional seats could be added so that the vehicle could carry 10 persons meant that Jigsaw’s supplies of emergency transport were zero-rated; however, the Upper Tribunal disagreed and adopted a narrow interpretation of the law. HMRC’s appeal against the FTT decision was allowed. Jigsaw’s supplies of emergency transport ambulance services are exempt.

CVC comment: this decision demonstrates that VAT reliefs (such as exemption or zero-rating) are only available subject to strict conditions. Businesses and charities applying VAT reliefs to their supplies should ensure all conditions are met. We recommend reviewing activities frequently to ensure VAT treatments remain correct.

  1. Application to admit new evidence

Kyriakos Karoulla, trading as Brockley’s Rock, appealed against the decision of the FTT to uphold a ‘best judgement’ assessment by HMRC for under-declared VAT in respect of takings from its fish and chip shop. Karoulla’s application for permission to appeal the FTT’s decision was twice refused by the UT. Upon applying for permission to appeal for a third time, the judge granted permission to appeal in one respect only. This appeal relates to the extent credit card transactions were reflected in HMRC’s best judgement assessment.

Following a VAT inspection and several test purchases by HMRC in 2015 HMRC concluded that card sales after 8pm were not being entered on the till. The business used daily till records to prepare its VAT return. HMRC issued a VAT assessment in the sum £28,323.00 and an associated penalty of £26,913.18.

Karoulla sought to admit new evidence, originals of tills rolls and records relating to card purchases. These documents were only returned by HMRC to Karoulla shortly before the hearing of Karoulla’s application for permission to appeal.

The UT reviewed correspondence between Karoulla’s representatives and HMRC. Karoulla requested the return of the original documents numerous times in advance of the FTT hearing. HMRC either ignored or refused such requests. The UT commented that the only attempted justification given at any stage by HMRC for their refusal was that HMRC was under no obligation to assist Karoulla with its case. The UT said in its decision:

“That was a totally inappropriate response to a proper request from the taxpayer for the return of documents which he himself had provided to HMRC during the course of its enquiries and which the taxpayer plainly required in order to answer HMRC’s case. To this day, HMRC have provided no explanation as to why they believe that such a response was appropriate. The observation of the FTT at [27] of the Decision, as set out at [14] above that the failure to produce the till rolls was “unfortunate” was a gross understatement.

HMRC cannot hide behind the absence of any tribunal order for disclosure to argue that the evidence “could have been obtained with reasonable due diligence”. The many repeated requests by Karoulla for HMRC to return the documents are due diligence enough without the needless expense and use of resource generated by requiring an order for disclosure.” 

Karoulla accepts that some suppression of card purchases did occur. The UT considered the new evidence which covered around a dozen days. For reasons unknown, HMRC chose only to take account of three days when calculating the VAT assessments. The new evidence showed that the suppression of card sales was inconsistent, it was not the case that card payments were being omitted from the till every day after 8pm.

The UT found that the decision of the FTT should be set aside and a fresh hearing should take place.

CVC comment: HMRC’s refusal to provide original documents to the taxpayer was clearly unacceptable. In another example the recent decision in Sandpiper Car Hire Limited saw the Tribunal criticise HMRC’s approach to dealing with disabled people, see CVC’s commentary here. Taxpayers have several options they can pursue if they have difficulties with HMRC such as the complaints procedure or dispute resolution.