Tag Archives: Aer Lingus

Constable VAT Focus 1 November 2018


This VAT Focus provides the usual updates of HMRC news, in particular some of the issues presenting themselves and hindering the implementation of the VAT Mini One Stop Shop and Making Tax Digital. Some of the most recent developments from the Tax Tribunal and Court of Justice of the European Union including the decision in the Volkswagen Financial Services UK case and the Ryanair decision are also considered.




Brexit Update

HMRC has issued a partnership pack designed to help support businesses preparing for day one in the event of a “no deal” Brexit. This includes detailed information about importing and exporting goods in the event of a “no deal” Brexit alongside advice and guidance letters to traders and technical notices to support communications between businesses and their customers. We recommend that you read this pack to be best prepared for the event of “no deal”.

Software suppliers supporting Making Tax Digital

Find out which software suppliers HMRC is working with to produce suitable Making Tax Digital for VAT software for businesses and their agents.

VAT Mini One Stop Shop (MOSS): Service availability and issues

Check the availability and any issues affecting the VAT Mini One Stop Shop (MOSS) online service.

VAT Government Information and National Health Trusts (GIANT): service availability and issues

Check the availability and any issues affecting the VAT GIANT online service.

Making Tax Digital for VAT: service availability and issues

Check the availability and any issues affecting Making Tax Digital for VAT.

Making Tax Digital for VAT change of business details: service availability and issues

Check the availability and any issues affecting Making Tax Digital for VAT change of business details service.




Our coverage and analysis of the Budget is found on our website. The last Budget announcement before the UK is scheduled to leave the EU took place on 29 October 2018 but is of particular interest given the current lack of clarity around the UK’s future trading position with the EU. Constable VAT will offer continued coverage of all VAT related issues and updates in the run up to the UK’s scheduled exiting of the EU.





1. The recoverability of input VAT incurred in a failed takeover bid

This case concerns Ryanair’s bid to take over Aer Lingus. Despite failing with its bid, Ryanair incurred significant VAT costs in relation to consultancy services. Ryanair claimed a deduction of this VAT, which was denied by the Irish tax authorities on the grounds that acquisition and holding of shares does not constitute an economic activity within EU law.

Two questions were before the CJEU in this instance; whether an intention to provide management services to a takeover target is sufficient to establish that the acquirer is involved in an economic activity for the purposes of VAT recovery and if there can be a direct and immediate link between professional services rendered in the context of such a potential takeover and the potential provision of management services giving rise to a right to deduct input VAT.

Giving regard to previous case law and relevant EU law, the Court agreed with the previous Opinion of the AG that the activity of preparing for a takeover is a taxable activity giving rise to a right to deduct input VAT incurred, even where the takeover did not take place, when the intent of the acquiring company is to make taxable supplies with the company being acquired.

Constable Comment: Whilst this decision works in favour of Ryanair immediately, it will be interesting to see how HMRC interpret and legislate this. It seems from this decision that the right to deduct input tax may apply in such instances where input VAT is incurred in relation to intended taxable supplies which never actually take place.


2. Method of attribution of input VAT in hire purchase agreements

This referral from the UK Supreme Court concerned the correct method of attribution of VAT on overhead costs associated with the provision of hire purchase cars.

Volkswagen Financial Services (VWFS) is a UK company which makes supplies of cars on hire purchase terms, this type of transaction is regarded as two supplies; one taxable supply of goods and another exempt supply of credit. The dispute arose between VWFS and HMRC around the extent to which ‘residual’ input tax related to taxable supplies and, therefore, was recoverable by VWFS.

HMRC contended, in line with its policy, that the overheads must be built into the price charged for the supply of credit as VWFS made no profit on the sale of the actual car itself (it sold the car at cost only additionally charging for credit), therefore residual input tax was irrecoverable as it was directly attributable to an exempt supply of credit. VWFS sought to apply a 50% recovery rate to the residual input VAT by giving equal weight to the two parts of the transaction using a partial exemption special method.

The Court held that there are two supplies in hire purchase agreements such as those in the proceedings, a point which was never in dispute. However, it was found that VWFS should be entitled to recover a proportion of the residual input VAT on the basis that it related to a hire purchase agreement as a whole which is, by its nature, a supply of both taxable and exempt supplies. It suggested that the best method of calculating the recovery percentage for residual input VAT is a turnover based partial exemption calculation and this should only be deviated from where a different method guarantees a more accurate result.

Constable Comment: HMRC have historically not allowed recovery of input VAT which cannot be associated with the price of a taxable output. In this case the taxable output was zero as there was no profit margin on the sale of the car by VWFS. This judgment will be of relief to hire purchase providers of cars who have now received some clarification around their position in terms of residual input VAT recovery.


First Tier Tribunal


3. Place of supply issues with non-business activities

This was an appeal against HMRC’s decision to refuse claims for repayment of overpaid VAT to Wellcome Trust Limited (WTL) amounting to £13,113,822. WTL is the sole trustee of a charitable trust which makes grants for medical research in the UK, the majority of these grants are given from investment funds.

The question at hand related to a place of supply issue, HMRC contending that WTL was liable to account for output VAT in the UK under the reverse charge provisions on investment management services they had received from non-EU suppliers and WTL arguing that the place of supply of was not the UK and, therefore, that no output VAT should have been accounted for.

There was no dispute of facts in this hearing and the result focussed entirely around the meaning of “acting as such” within the EU law which states that “The place of supply of services to a taxable person acting as such shall be the place where that person has established his business”. HMRC’s contention was that WTL were acting in a taxable capacity whilst WTL argued that the investment management services were provided in relation to its non-economic activity of grant distribution meaning that the place of supply, pursuant to the EU law, would be outside the UK.

The FTT gave much consideration to EU legislation as well as case law and concluded that WTL was not liable to account for VAT on the supplies received under the reverse charge procedure as it was not receiving the services in connection with any taxable activity, the place of supply rule determined by where the supplier belongs rather than WTL.

Constable Comment: This case is likely to escalate further up the Tribunal and Court system as the amounts involved are substantial. Any businesses who incur irrecoverable VAT on supplies received from overseas in relation to economic but non-business activities should consider the potential impact of this judgment on their potential to make a historic reclaim of overpaid VAT.


4. Reasonable excuses for failure to pay

This appeal is against a VAT default surcharge for Chameleon Technology’s failure to submit payments of VAT due by the relevant due dates. Chameleon lacked funds to make the payments which, whilst not a reasonable excuse in itself, case law has established a principle that the underlying cause of an insufficiency of funds may constitute such a reasonable excuse.

Chameleon did not dispute its payments being late but claimed that their application for “Time to Pay” was not considered by HMRC which meant it did not have an opportunity to discuss the cash flow issues or agree a payment plan.

The cause of Chameleon’s cash flow issues were unforeseeable and uncontrollable, the first being Typhoon Nida, a sever tropical storm which caused manufacturing in China as well as local supply chains to halt for an extended period. The second was Apple “block-booking” air freight from China to the UK in preparation for release of the iPhone 7 which presented a further breakdown in the supply chain outside of Chameleon’s control. HMRC sought to argue that insufficiency of funds was not a reasonable excuse for late payment.

The Tribunal established that the reasons for Chameleon’s late payment were two unforeseeable and unexpected events outside of their own control. Chameleon had done everything in its power to be compliant and exercise reasonable foresight and, therefore, the surcharge was dismissed.

Constable Comment: There are well established reasonable excuses that are regarded as acceptable and insufficiency of funds is specifically not included in the list of allowable excuses. However, this case shows that where events entirely out of a business’s control lead to an insufficiency of funds then there is a need to look through the facts to the causes.

CVC VAT Focus 17 May 2018



VAT on antiques or art from historic houses (Notice 701/12)

This explains which disposals of assets from historic houses are within the scope of VAT.

HMRC and online marketplaces agreement to promote VAT compliance

HMRC has committed to working with online marketplaces to set out a cooperation agreement to promote VAT compliance.

VAT: missing trader fraud

Find out how to spot VAT missing trader fraud and how to protect yourself or your business from organised criminals.

Revoke an option to tax after 20 years have passed

Form VAT1614J has been updated.



We understand that HMRC has begun to contact firms directly regarding the VAT treatment of electronic searches following the Brabners LLP VAT case summarised on our website. The Law Society has issued guidance which can be viewed here.


VAT recovery, supplying insurance and the benefits of customer location

Exempt supplies do not normally provide a right to reclaim VAT on costs incurred in making such supplies. However, certain supplies that would ordinarily give no right to VAT recovery may be ‘specified’ to do so when the customer is located outside the EU. Follow the link to read our most recent blog, by Robert Thorpe, which explains this further.




1. Right of deduction after a tax inspection

This request for a preliminary ruling concerns the interpretation of EU law and the principles of fiscal neutrality, effectiveness and proportionality. In the main proceedings, Zabrus Siret filed VAT returns following tax inspections requesting repayment of VAT. The national tax authorities refused to reimburse this tax as the amounts being claimed related to a tax period which had already been subject to an inspection by the domestic tax authority. Zabrus Siret appealed this decision.

There were two questions before the court in this instance, amounting to one main question, being whether EU law precluded national legislation which the right to reclaim VAT in respect of a tax period which had previously been subject to a tax inspection.

As the Court has held previously, the right of deduction is an integral part of the VAT system and may not, in general, be limited. The right to deduct VAT in Romania is subject to a five year limitation period which is shortened in the event of a tax inspection. The effect of this is that the taxpayer cannot correct VAT returns for tax periods which have been subject to an inspection. Whilst the Romanian authorities argued that this was a legitimate practice, the Court held that the EU law principles does preclude national legislation which prevent, in circumstances such as those in the main proceedings, a taxable person from claiming his right of deduction following a tax inspection.


CVC Comment: The right of deduction is fundamental and can only be limited in very specific circumstances. This ruling demonstrates that even where domestic laws seem to preclude this right in line with EU law, the CJEU are prepared to rule in favour of the taxpayer in matters such as those at hand. In practice this decision will have no impact on UK taxpayers as the UK rule preventing recovery of VAT once a VAT period is more than four years old is considered proportionate to the needs of the State to have certainty on its fiscal position.


2. Deductibility of VAT in a failed takeover

This case concerns Ryanair’s bid to take over Aer Lingus. Despite failing with its bid, Ryanair incurred significant VAT costs. Ryanair claimed a deduction of this VAT, which was denied by the Irish tax authorities on the grounds that acquisition and holding of shares does not constitute an economic activity within EU law.

Two questions are before the CJEU in this instance; whether an intention to provide management services to a takeover target is sufficient to establish that the acquirer is involved in an economic activity and if there can be a direct and immediate link between professional services rendered in the context of such a potential takeover and the potential provision of management services.

The Court has yet to issue a judgment but the Advocate General has issued a preliminary opinion, that input tax recovery was justified by Ryanair, not as a holding company, but because it was seeking to take over Aer Lingus in order to extend an operating business.

CVC Comment: We await a CJEU decision but if this follows the AG’s opinion then this would suggest that HMRC’s policies on input tax recovery are, in some cases, too restrictive.

 Court of Appeal


3. VAT recovery: VAT incurred in relation to investment activity

The Court of Appeal has referred matters raised in The Chancellor, Master and Scholars of the University of Cambridge case to the CJEU for guidance. The Court of Appeal proposes to ask the CJEU for guidance on the following:

  • Where management fees are incurred in relation to a non-taxable investment activity is it possible to make the necessary link between those costs and the economic activities which are subsidised with the investment income.
  • The Court of Appeal also seeks confirmation that its reading of the Sveda decision is correct and that no distinction is to be made between exempt and non-taxable transactions for deciding whether input tax is deductible.

CVC comment: the First Tier and Upper Tribunal previously ruled that the input tax incurred in relation to investment management fees could be treated as residual input tax and is recoverable to the extent that income derived supports taxable business activities. Taxpayers must hope that the CJEU agree.


4. Zero-rating the construction of a relevant charitable purpose building

Wakefield College, a charity, appealed against the Upper Tribunal’s decision that construction services provided to it in the course of constructing a new building were not zero-rated for VAT purposes. The supply in the course of construction of a building intended for use for a relevant charitable purpose i.e. a non-business activity, may be zero-rated.

The issue in this case was whether subsidised fees charged to students prevents the zero-rate from applying because it renders the education a business activity.

The Court of Appeal found that the supply of courses by Wakefield College to students paying subsidised fees is a business activity. The Court of Appeal provided the following reasons for its decisions:

  • The sole activity of the College is the provision of educational courses, this is not an ancillary activity.
  • The provision of courses to students paying subsidised fees is significant.
  • The fees paid by subsidised students are significant in amount.
  • The subsidised fees made a significant contribution to the cost of providing courses.
  • The level of course fees was fixed by reference to the cost of the courses.
  • The fees were not fixed by reference to the means of the student.

The College’s appeal was dismissed.

CVC comment: Wakefield College previously won its case before the First Tier Tribunal; however, HMRC succeeded in appealing the FTT’s decision to the Upper Tribunal. This decision provides further clarification of ‘non-business’ for VAT purposes. The Court of Appeal considered the CJEU decisions in Borsele and Finland, as well as the decision in Longridge on the Thames.

Upper Tribunal


5. Third party consideration in a points reward scheme

This appeal by Marriot Rewards LLC & Whitbread Group PLC concerned whether payments made by Marriot Rewards (MR) to hotels participating in the loyalty scheme were consideration as a supply to MR or, alternatively, represented third party consideration paid by MR for supplies to customers redeeming points earned on the scheme, the reward being a “free” stay in a hotel. MR had submitted a reclaim of input VAT on the basis that payments made to participating hotels were consideration for services supplied.

A further issue arose; if payments were not third party consideration then were they payments for services relating to immovable property or advertising. This was relevant to the issue of where the supplies arose under VAT place of supply rules.

Upholding the decision of the FTT, the UT held that payments made by MR to hotels participating in the scheme were for supplies of services to MR. As regards the question of whether the supplies were related to land (immovable property) or advertising, the UT held that the supplies fell into neither description. This was relevant because for periods prior to 2010 Whitbread had sought to recover overpaid output VAT on the basis that it was, as a participating hotel operator, supplying services that fell outside the scope of VAT. Conversely, for periods after 2010, HMRC argued that the supplies should not have attracted VAT under the general place of supply rule, such that MR was ineligible to reclaim that VAT under the 13th Directive (MR wanted the services to be land related such that UK VAT charged could be reclaimed.

CVC Comment: This was a complex case involving three parties with different interests in the outcome. However, as far as the fundamental question of who redeems supplied services to it further undermines HMRC’s attempts to view the beneficiary of business promotion schemes as the recipient of supplies, a preferred analysis if HMRC in seeking to block VAT refunds. Whilst there are aspects of this case and appeal which are unique, those operating points rewards schemes should consider and clarify the VAT position in relation to any supplies made between parent groups and “redeeming” participating parties. It is also important to consider carefully exactly what supplies are being made and where they are being made for tax purposes.

First Tier Tribunal


6. Requirement to provide security for VAT

This appeal concerns a requirement to provide security to HMRC in respect of, amongst other taxes, VAT. Owing to historic non-compliance by the appellant and on-going non-compliance following entering into a “Time to Pay” arrangement with HMRC for substantial arrears, HMRC served a Notice to Derby Access Scaffolding (DAS), the appellant, requiring security for future VAT.

It was submitted by the appellant that the Notices requiring security to be provided were flawed and unreasonable. HMRC had failed to enter into dialogue with the appellant and had therefore made unreasonable projections of profit for DAS. It was also submitted that HMRC’s internal reviews could not be fair as they were internal and that the principle that decisions be made in a fair and reasonable manner had not been followed in this case. HMRC contended that it was reasonable to require security in the given circumstances, especially when considering historic non-compliance.

The Tribunal gave very little consideration to the notion that HMRC’s internal reviews were not partial. It also held that there is no obligation on HMRC to enter into dialogue with those to whom it serves notices of requirement of security and that for the purposes of protection of the revenue the amounts required in security were not unreasonable. Ultimately DAS failed to satisfy the Tribunal on any aspect of its appeal and the appeal was therefore dismissed.

CVC Comment: In cases of serious non-compliance, HMRC will seek security against not only VAT but all other taxes. This case illustrates that when the obstacles to challenging such a judgment are exceedingly high and the Tribunal has shown no enthusiasm for involving itself in matters of detail and respects HMRC’s discretion.