Tag Archives: default surcharge

Constable VAT Focus 28 March 2019


Trading With the EU if the UK Leaves Without a Deal

HMRC has updated its guidance on  leaving the EU  in particular to reflect the fact that there is to be an extension to arrangements already announced regarding the use of Transitional Simplified Procedures (TSP), which will make importing goods easier.

Impact Assessment for VAT and Services if the UK Leaves Without a Deal

HMRC has released an impact assessment on the effect on businesses of amendments to existing VAT legislation and the introduction of transitional provisions for the supply of services between the UK and the EU.

VAT Treatment of Pension Fund Management

The policy of allowing insurers to treat all pension fund management services as exempt from VAT under the insurance exemption is to be discontinued. This policy change applies from 1 April 2019.




1. Exemption for Letting Immovable Property

This case concerned the interpretation and applicability of the VAT exemption for the letting or leasing of immovable property. The Portuguese tax authorities assessed Mr. Mesquita for VAT on contracts relating to the transfer of the use of vineyards for agricultural purposes for a period of one year. These transactions had been treated as exempt from VAT.

The question before the Court was whether the exemption for letting immovable property related to this contract.

The Court considered that the purpose of the EU law conferring the exemption on certain transactions was owing to the fact that the leasing of immovable property is normally a relatively passive activity which does not generate a large amount of income.

Where services are supplied along with the immovable property in a single transaction, such as supervision or maintenance, then the whole transaction is subject to VAT. However, the Court found that there were no services provided with the vineyards so the exemption could be applicable.

Constable Comment: The contract in the main Portuguese proceedings led to what the tax authorities believed to be a transfer of assets thus creating a taxable supply. The Court held that even if assets are transferred in this type of contract, they are ancillary to the main supply and the exemption still applies to the whole contract value.


Supreme Court

2. Education Exemption: Meaning of “eligible body”

This appeal concerned the criteria to be applied when determining if a particular body is eligible for the purposes of the VAT exemption afforded to certain bodies providing education to students.

The appellant, SEL, the English subsidiary of a Dutch company, contended that its supplies of UK education were exempt from VAT as it was a college of Middlesex University (MU). It appealed against assessments to VAT raised by HMRC. The appeal was allowed in the First Tier Tax Tribunal but it was escalated by HMRC and eventually ascended to the Supreme Court.

MU is a UK university and as such benefits from the exemption from VAT. This exemption is, under UK law, extended to “… a university and any college, school or hall of a university”. The Court, therefore, gave some consideration to what constituted a college of a university and observed that the “integration test” employed initially by the First Tier Tribunal was correct. The following five factors must be considered in arriving at a conclusion as to whether a particular undertaking can be considered a college of a university:

  • Whether they have a common understanding that the body is a college of the university
  • Whether the body can enrol students as students of the university
  • Whether those students are generally treated as students of the university
  • Whether the body provides courses of study which are approved by the university
  • Whether the body can present its students for examination for a degree from the university

In examining whether or not these criteria applied to SEL and its arrangements with MU, the Court concluded that the exemption did apply to SEL which had been referring students for degrees from MU since the beginning of their arrangement in the 1980s. It was found that there is no need for there to be a constitutional association with a university in order to be a college of that university.

Constable Comment: The criteria laid down in this instance for determining whether or not a body is eligible are not intended to be definitive and the Court observed that, in each instance, regard must be had to the individual facts of each arrangement between a university and an associated body.


Court of Appeal

3. Deductibility of VAT on Criminal Defence Costs

This case concerned whether or not input VAT incurred by a company in defending its director was deductible by that company as input tax. Mr. Ranson left a company, CSP, and set up his own rival firm in the same area, taking three employees with him. It was alleged by CSP that he had breached his fiduciary duties and also that he had misused a contact list from CSP for establishing his own business. CSP sought an account of profits earned by Mr. Ranson as a result of his breach of duty and sought to recover funds from Praesto.

In defending against these claims, Mr. Ranson instructed solicitors who were successful in his defence. The issue arose as a result of the solicitors addressing one invoice to Praesto and a further eight to Mr. Ranson individually. HMRC did not dispute the deductibility of the input VAT in relation to the invoice addressed to the firm but disputed the others as a result of the addressee.

VAT incurred is deductible so far as it has a “direct and immediate” link with the company’s taxable supplies. However where the legal costs form a part of the cost components of the company’s supplies it is also accepted that they have a direct link with the company’s economic activity as a whole.

HMRC placed a lot of emphasis on the fact that the invoices being disputed were addressed to Mr Ranson. Mr Ranson argued that Praesto were party to the proceedings in all but name and there was a direct benefit to the company in defending him. The economic reality of the situation was the solicitors were defending both Mr Ranson and Praesto.

The Court agreed with Mr Ranson that there was a direct benefit to Praesto in defending claims against him as if the claims had succeeded against Mr Ranson, CSP would have sought to recover profits made by Praesto. It was concluded that the VAT incurred by Praesto in mounting a defence against the allegations of CSP was, indeed, deductible.

Constable Comment: This is an interesting topic as, more often than not, the actual receipts and contracts are looked through to the economic reality of the supply. Whilst this appeal was allowed, one judge dissented, believing the fact that the invoices were addressed to Mr Ranson personally to be fatal to the appeal. This type of case will always need to be considered carefully, it is prudent to seek professional advice in relation to input VAT recovery in this scenario.


4. Default Surcharge: Reasonable Excuse

This appeal against a default surcharge turned on whether or not the applicant had a reasonable excuse for late payment. The appellant argued that he was unable to log in to the online gateway necessary for making VAT payments.

Mr Farrell received a notice of liability to surcharge which required payment by 7 May 2017. He was unable to log in to the Gateway using the information he previously saved in his computer. When he contacted the webchat he was told that he needed to speak to technical support. Technical support informed Mr Farrell that they could not deal with his enquiry until after 8 May 2017; after the due date for payment of the surcharge.

On the 8 May he spoke to the technical support team and was told that he had been using an incorrect User ID, a new one was sent to him but it turned out to be the first ID he was given before having it changed by HMRC when the Commissioners updated the system. Based on the changing of his logon details, he contended that he was not to blame for missing the payment date.

HMRC denied that his logon details had ever been changed and said there was no record of the webchat which Mr Farrell claimed to have had. Mr Farrell had clear evidence that this was not the case in the form of a saved conversation with Alexander form HMRC’s webchat and his “Browser Password Recovery Report”. This showed that his ID had indeed been changed when HMRC updated their system and that it had changed back to the original.

HMRC sought to argue that Mr Farrell had been using an incorrect ID number and therefore that he was responsible and did not have a reasonable excuse.

The Court held that Mr Farrell made reasonable efforts to pay the VAT due and that it was not clear why HMRC did not have the facilities to deal with Mr Farrell’s enquiry. The appeal was allowed; there was a reasonable excuse.

Constable Comment: This case demonstrated that HMRC do make mistakes when dealing with the taxpayers. It is a useful reminder that it is always prudent to maintain your own records of conversations with HMRC officers in order to evidence advice given or any mistakes made on HMRC’s behalf. We would recommend obtaining an officer name and a “call reference number” when speaking with HMRC.

Constable VAT Focus 14 February 2019


Check When a Business Must Follow the Rules for Making Tax Digital for VAT

Find out if and when you (or your clients) need to follow the rules for Making Tax Digital for VAT.

Use Software to Submit Your VAT Returns

If you submit VAT returns as a sole trader, limited company, partnership or as part of a VAT group, you may be eligible to join the Making Tax Digital Pilot for VAT.

Making Tax Digital for VAT as an Agent

Follow these steps if you are an agent and you want to submit VAT returns for your clients digitally.




We have an upcoming Breakfast on 27th February where we will discuss the impact of Brexit on VAT. Please book yourself a spot as food will be provided for those with reserved spaces. For details, please see here.

The CIOT have released a useful illustration of when businesses must register for the Making Tax Digital pilot for VAT. Our analysis can be found here.






1. Evidence in Criminal Prosecutions

This case concerned the EU law around the collection of VAT as well as the general EU principle of effectiveness. The main case focusses on a Bulgarian VAT offence but the questions before the CJEU in this instance concerned whether EU law must be interpreted as precluding a national court from applying a national provision excluding evidence which was obtained illegally.

Petar Dzivev and others were charged with having committed fraud in Bulgaria and sought to profit by not paying over tax owed to the Bulgarian tax authorities. A Bulgarian Court ordered that telecommunications between Mr. Dzivev and others involved should be intercepted.

It is common ground that the Court which authorised the interception did not have the necessary jurisdiction to do so, therefore the interceptions were not in accordance with the law of the Charter of Fundamental Human Rights.

The CJEU held that in cases such as this, EU law cannot require a national court to disapply a procedural rule preventing the state’s reliance on illegally obtained evidence. It was observed that even in situations where only this type of evidence is capable of proving that the offences were committed, EU law still may not prevent a national court from excluding evidence obtained illegally.

Constable Comment: In this instance the right to privacy given to individuals under the Charter of Fundamental Human Rights was given priority over the ability of the state to effectively collect taxes under the principle of effectiveness. It is not a surprising result but it is demonstrative of the EU’s tendency to confer rights on individuals over member states.




2. Agent or Principal?

This case concerned whether or not Mr Bryn Williams was acting as an agent or a principal in relation to the taxi business which he operates. He takes bookings for and tenders for contracts with local authorities who provide cab travel. He sends his drivers out to complete the contracts he signs.

HMRC contended that he acts as a principal, supplying taxi services to local authorities and, in turn, receiving taxi services from drivers, all for a consideration. They stated that Mr. Williams owns some of the cars himself and he bears the running costs of the contracts, which were negotiated without driver input. Mr. Williams argued that he was an agent, highlighting various factors pointing to this such as the fact that drivers could negotiate fess with him and keep their cars at home.

As with all agent or principal cases, regard was given to the material aspects of the operation as opposed to the strict wording of contracts. The Tribunal considered the nature of the connection between the driver and the local authority who Mr. Williams paired up. A typical agency situation would involve Mr. Williams negotiating on behalf of a driver, ultimately to form a contract between the driver and the local authority.

It was found that when Mr. Williams was negotiating the contracts with the local authorities there was no pre-determined driver meaning that there was no relationship between the local authority and the driver. Therefore it was held that Mr. Williams must be acting as a principal as there was no driver on whose behalf he was acting.

Constable Comment: This case shows the delicate balance of factors that determine whether someone is an agent or a principal. Due regard must be had to the contracts in place but also the commercial reality of the transaction. This case highlighted some useful areas of consideration and if your business operates in a similar way to Mr William’s, it is essential to ensure it is operating correctly to avoid unexpected VAT bills in the future.



3. Reasonable Excuse: Default Surcharge

This case concerned Ms. Chandler, a VAT registered sole trader who used the Flat Rate Scheme (FRS) to account for her VAT. In 2015 HMRC visited her and discovered that she had failed to increase the FRS percentage used in line with both statutory increases and the expiration of the “first year reduction” of 1%. HMRC sought to penalise Mr. Chandler but she contended that the default surcharge should not apply to her as HMRC had not taken all payments made by Ms. Chandler into account.

Ms. Chandler had made payments to HMRC but had made them to the wrong account; she had previously traded using a different registration number and mistakenly paid her VAT liability into this account meaning the funds were suspended and held by HMRC. HMRC did not accept this as payment, asserting that in order for a payment to be effective it had to be credited to the correct account. The Tribunal found this to be incorrect. It was found that the VAT regulations only require VAT to be paid to the Controller: which taxpayer account is not mentioned.

Despite this, there were still some historic accounting periods which attracted a default surcharge. For these periods Ms. Chandler argued that she had a reasonable excuse for the lack of funds which rendered her incapable of making payments to HMRC. Whilst an inability to pay cannot constitute a reasonable excuse, the Tribunal is willing to accept that the underlying cause of a lack of funds may indeed constitute such an excuse. Accepting that a fraud committed against Ms. Chandler constituted a reasonable excuse for the remaining periods, the Tribunal held that all surcharges against her were cancelled.

Constable Comment: This case is a useful example of where there is a reasonable excuse for having made late payments to HMRC. Whilst HMRC and the Tribunals are normally reluctant to accept a lack of funds as an excuse for late payment, in this instance there was a clear reason for the insufficiency of funds, the effects of which were being felt later.


If these cases raise any points that you would like to clarify or discuss, or you have any other VAT related concerns, please do not hesitate to contact Constable VAT and we will be pleased to assist.




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 31 May 2018


Imports and VAT (Notice 702)

One must now report imports that are over £873 in value on a Single Administrative Document.



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

VAT 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 input 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. Retrospective application of VAT exemption schemes

In this matter, the domestic Courts of Hungary ask whether EU law precludes national legislation prohibiting retroactive application of a special VAT exemption scheme for small traders to an eligible, taxable person but who did not declare the commencement of his taxable activities and did not, therefore, opt for the application of that scheme.


In the main proceedings, Mr. Dávid Vámos had made taxable supplies from 2007 until January 2014 seeking to support his usual income. However, he failed to register this activity with the tax authorities, also failing to raise invoices and keep receipts. Following an investigation into his tax affairs, Mr Vámos registered for VAT on 22 January 2014 and opted for application of the exemption. A secondary investigation by the domestic tax authorities revealed a VAT debt. The tax authority took the view that national law did not allow retrospective application of the option to be exempt from VAT and so imposed the relevant penalties.


The question before the Court is whether national legislation preventing the retrospective application of a VAT exemption scheme is contrary to EU law. Mr Vámos contended that he should have been asked if he wished to retrospectively exercise the option when he registered as he was eligible for the scheme.


The Opinion of the Court in this instance is that, given exemption can lead to mixed results for businesses, it cannot be assumed that all taxable persons entitled to an exemption intend to opt for it. Taking into account the effect retrospective application of the exemption would have on previous transactions and other businesses, the Court held it reasonable that the domestic tax authorities require taxable persons to make an express choice of the VAT regime they wish to have applied if it is different to the default regime.


The Court also agreed with Hungarian tax authorities that allowing taxable persons who failed to declare the commencement of their activities to retrospectively exercise that option would give an unfair advantage, distorting competition in their favour, breaking the principle of fiscal neutrality. Concluding, it is asserted that EU law does not preclude national legislation prohibiting retrospective application of special exemption schemes, even in cases where the taxable person fulfils all the material conditions for using the scheme.


CVC Comment: This case should serve as a reminder of the importance of considering tax and legal obligations before, as opposed to after, beginning to carry on what is or could be considered to be a trade.

2. Divergent criminal thresholds for taxation

Mauro Scialdone

This request for a preliminary ruling concerned interpretation of the EU law relating to criminal penalties for failing to pay VAT within the time limit prescribed by domestic (Italian) law. The General Provisions of the PFI Convention provide that in cases of serious fraud involving more than €50,000, penalties including imprisonment must be available to Member States.


Italian law provided for the penalty of imprisonment in cases where the taxpayer failed to pay, within the relevant time limits, any VAT owed over €50,000. The same penalties applied to other taxes such as income tax. Subsequent updates to Italian law saw the threshold for imprisonment increase for failure to pay VAT to €250,000.00 and for income tax to €150,000.00.


Whilst much consideration was given to other issues, the questions relating to VAT before the CJEU concerned whether EU law precludes domestic legislation from prescribing different thresholds for criminalising failure to pay VAT and income tax. Consideration was given to the principles of effectiveness and equivalence. The Italian authorities contended that as the two taxes have different collection and administrative regimes and differing degrees of identifiability of fraud, the distinction in penalties was justified.


It was held that neither principle precludes domestic legislation such as that in the main proceedings which provides that failure to pay, within the given time limit, the VAT resulting from the annual tax return constitutes a criminal offence only when the amount of unpaid VAT exceeds €250,000.00 whereas a threshold of €150,000.00 applies to failure to pay income tax.


CVC Comment: This case makes clear that seriously non-compliant taxpayers can face custodial sentences as well as fines. It highlights some of the differences between direct and indirect tax regimes and the judgment reflects an understanding of this.

Upper Tribunal


3.Student Accommodation: Zero-rating Certificate

This appeal concerned the liability of supplies made by Summit Electrical Installations Limited (Summit) as a sub-contractor to a development of student accommodation. Create Construction (Create) had appointed Summit after receiving a zero-rating certificate from the developer stating that the development was for a relevant residential purpose (RRP). As the certificate stated RRP, HMRC contended that only supplies by Create to the developer could be zero-rated and Summit’s supplies should be standard rated as they were sub-contractors. Summit refuted this stating that they could rely on zero-rating provisions as the supplies were made in the course of the construction of a building designed as a number of dwellings.


The FTT agreed with Summit, also considering an issue of planning conditions which HMRC contended prohibited zero-rating; as the buildings must be let to students of certain Universities, there was a prohibition of separate use or disposal of the flats. The FTT dismissed this as the flats could be sold separately so long as students lived in them.


HMRC appealed to the Upper Tribunal (UT) against the decision in relation to the prohibition of separate use or disposal, asserting that the development failed to qualify as “dwellings” due to the alleged prohibition on separate use or disposal. The UT found that, in accordance with case law, for there to be a prohibition on separate use for the purposes at hand there must be a prohibition on the use of the premises separate from the use of some other specific land, a connection to the Universities mentioned in the planning consent was not sufficient. The UT upheld the decision of the FTT and dismissed HMRC’s appeal, allowing Summit’s supplies to be zero-rated as in the course of construction of a building to be used as a number of dwellings.


CVC Comment: This is a positive result for Summit as well as, potentially, for other sub-contractors appointed by Create. This judgment shows the importance of planning before taking on any development projects. Had the Tribunal found differently, Summit and other contractors may have been burdened with a VAT debt.


First Tier Tribunal


4. Adjustments, agreements and time limits

HMRC sought here to strike out an appeal by Buckingham Bingo Limited (BBL) on the grounds that BBL were appealing against a letter from HMRC which did not contain any appealable decision. In 2012, BBL submitted a VAT return which included a reclaim for £1,616,384.44 overpaid output VAT. HMRC promptly issued a decision denying this reclaim and BBL did not appeal on the basis of costs.


Following developments in case law (KE Entertainments Ltd) BBL wrote to HMRC seeking to recover the original amount. HMRC replied on 5 January 2017 stating that they had already ruled on this matter and that BBL had decided not to appeal. It was also noted that there are time limits on adjustments to VAT returns, out of which BBL found itself.


The FTT agreed with HMRC that the time limits relating to adjustments applied and that the letter dated 5 January 2017 did not contain an appealable decision but more reaffirmed an earlier one. BBL argued that it would be unfair if it were not allowed to make an adjustment in the same way as Carlton Clubs and KE Entertainment Limited and so should be granted an extension to make an appeal. The Tribunal dismissed this, placing great weight on the need for finality in decisions and stressing that BBL had already stated in 2012 that it would not appeal the original decision based on costs.


The Tribunal agreed with HMRC, on all grounds, and BBL’s appeal was struck out. It is not granted any extension to amend its notice of appeal.


CVC Comment: It is essential to be aware of all relevant time limits when it comes to making adjustments to VAT returns. This case shows that the Tribunal takes due process seriously and will not agree with the taxpayer because their position might seem unfair. It is also a useful reminder to make sure all communications should be carefully and appropriately worded to prevent interpretive issues arising.


5. Appeal by post: letter not received by Tribunal

This decision relates to an appeal made by Porter & Co (Porter) challenging VAT surcharge liability for VAT periods 05/13 and 11/13, of which it was informed on 4 March 2014. Porter was originally given the right to appeal the surcharge notices within 30 days of receipt.


Porter apparently responded with a notice of appeal on 2 April 2014, however the Tribunal has no record of having received this letter. Indeed, a notice was received but on 31 July 2017. As well as relevant case law, legislation dictates that when “serving” something by post, the service takes place at the time of postage so long as the postage is done correctly. Whilst the appeal was not sent tracked or special delivery, this is not a legal requirement. On the balance of probabilities, the Tribunal found in favour of Porter but in determining when this would have been received, it was concluded that the appeal, had it arrived, would have arrived a day out of time anyway.


The Tribunal needed to consider, therefore, whether permission should be given for the notice of appeal to be given late. As it was only one day out of time and in the interest of not offering prejudice to HMRC, the Tribunal were inclined to give permission for the late notice and held in favour of Porter.


CVC Comment: The Tribunal gave this ruling a caveat that, had they not found the original notice for appeal was only one day out of time, it would not have been inclined to give permission. Had the Tribunal ruled it received the notice on 31 July 2017 then it would have been three years late and this would have been too long. This is a demonstration that the Tribunal will take timing and intention into account when dealing with taxpayers.


CVC VAT Focus 22 March 2018


It is around this time of year that those businesses that are partially exempt are required to calculate their annual adjustment.  This adjustment must be made in the VAT return period ending June, July or August but can be made in the prior period (March/April/May) if a business wishes.  CVC is able to calculate or check these annual adjustments for businesses if required.


Revenue & Customs Brief 3 (2018): Changes to the VAT exemption for cost sharing groups.
This brief and the related VAT information sheet explain the immediate changes that are taking place in HMRC’s policy following recent judgments

VAT Notes 2018 Issue 1
HMRC has published its 2018 VAT Notes Issue 1.

VAT: businesses that sell goods in the UK using online marketplaces
Updated with changes announced in the Autumn 2017 Budget for sellers that use online marketplaces.

VAT returns and EC Sales Lists Online: VAT
How to use the test service: 4.1 guidance has been updated with version 4.2.

Draft legislation: The Value Added Tax (Amendment) Regulations 2018
Response to consultation has been published.


Spring Statement 2018 and VAT

In the Spring Statement, the Chancellor announced details of two consultations with implications for the future operation of VAT. Please see our news item for further information.


Upper Tribunal

1.Planning Permission Post-Sale

Cavendish Green Limited (Cavendish) appealed against a previous decision that the sale of a building did not qualify for zero-rating as the structure present at the point of transfer did not have automatic statutory planning permission and had not received planning permission from elsewhere. In the absence of the necessary planning permission, the sale should have been treated as VAT exempt and Cavendish should not be able to claim back input VAT relating to the project.

The First Tier Tribunal made it clear that planning permission must be sufficient at the time of supply in order for the sale of a building to benefit from zero-rating. In the Upper Tribunal, Cavendish sought to introduce new evidence to show that the structure in question did in fact have statutory planning permission at the time of sale and was thus able to benefit from the zero-rate. The Tribunal refused to admit this evidence as it found the behaviour of Cavendish to be “most unsatisfactory” as it failed to make a formal written application with evidence to support its claims and the addition of new evidence would not be fair and just.

The appeal was dismissed as the taxpayer had no proof to demonstrate that the structure met the conditions for automatic statutory planning permission, this case may have had a different outcome had Cavendish approached the Tribunal differently. 

First Tier Tribunal

2. Sales of properties; TOGCs?

In this case the Tribunal considered whether the sale of four properties by Clark Hill Limited satisfied the necessary criteria to be treated as transfers of going concerns and, therefore, be outside the scope of VAT as neither a supply of goods nor services. The main issue between the parties is the interpretation of “relevant date” in the VAT law.

The Tribunal issued four decisions, relating to one property each. In three from the four transactions before the court, the transfer was held not to be a TOGC as HMRC had not been informed of the exercising of the option to tax by the “relevant date” which is held to be the date on which the deposit is received by the seller’s solicitors. The fourth property transaction presented its own unique circumstances which led to a different conclusion. The deposit was paid to the auctioneers of the property on the 3rd of December, the seller’s solicitors received the funds on the 16th. The point on which this question turns is the capacity in which the auctioneers held the deposit; agent or stakeholder.

HMRC contend that the funds were held by the auctioneers as an agent for the seller and therefore that Clark Hill should be treated as having received the deposit when the auctioneers did, on the 3rd December. Clark Hill refuted this, claiming that there is no evidence to support the claim that the auctioneers were agents. The Tribunal agreed and this transaction was treated as a TOGC.

3. Appealing an assessment out of time

In Homechoice Flooring Limited (HFL), the appellant’s director, Mr. Singh, sought permission to make a late appeal in respect of a VAT assessment. Mr. Singh was over two years late in making this appeal, his explanation being that he believed he had in fact, through his former accountants, lodged an appeal already. He sought to contend that as he believed HFL’s accountants were dealing with the appeal, he had no cause to believe any further action was required on his or HFL’s behalf.

In response, HMRC looked to whether or not there was a reasonable excuse for the delay, arguing that HFL’s contention that an appeal had been made is not supported by any documents and there is no record of an appeal at HMRC in relation to this matter. It was also put forward that as Mr. Singh had changed accountants twice since the assessment, he could reasonably have been expected to make enquiries into the status of the appeal he believed to be ongoing.

As Mr. Singh made no effort to check on the status of HFL’s appeal, the Tribunal found that his excuse could not be seen as reasonable and therefore dismissed his appeal. They also stated that poor trading results do not amount to a reasonable excuse.

4. Bridge between buildings: does it make an annexe?

St Brendan’s Sixth Form College (St. Brendan’s) appealed against a decision made by HMRC that certain construction works carried out for St Brendan’s were liable for VAT at the standard rate, not zero-rated as St Brendan’s believed. A new block was built in order to provide extra space for teaching, a café and a staff room. The question is whether the new building qualified for zero-rating under Item 2, Group 5, Schedule 8 Value Added Tax Act 1994.

HMRC argued that the new building was not a separate building because of a link bridge between the new building and a pre-existing building. It was also contended that as the activities that will take place in the building are similar to those already taking place on the site in other buildings, the new building is actually an extension of the existing buildings. To refute this, St Brendan’s contended that the building is a separate building with its own access and facilities and is a different type of building and constructed of different materials, and serving different purposes.

After considering all points and taking into account the relevant case law, the appeal was allowed on the grounds that the new building was a new building and was not merely an extension of, or annexe to, the pre-existing buildings on site.

5. Zero rating hot food

Pegasus (Manchester) Limited (Pegasus) appealed against a VAT assessment relating to food sales which HMRC deemed to be hot and therefore standard rated. The appellant sold takeaway food in spill-proof containers which were not intended to retain heat. Pegasus contend that the food served is not intended to be hot at all but is served warm as a result of storage at 56C in a bain-marie, in order to comply with  the food safety and hygiene regulations 2013. Before being placed in the bain-marie the food is cooled to 19-20C which is below the ambient temperature of the restaurant which is claimed to be 28-30C.

HMRC submitted that as the cooked food is kept in a bain marie with a temperature of 56C, the food is hot as it is above the ambient temperature; “hot” does not need to mean piping hot. It is also submitted that the main purpose of the bain marie is to sell hot food and moreover that compliance the food safety and hygiene regulations 2013 is only required where food is to be sold as hot. The provision by the appellant of napkins and cutlery to customers imply that the food is to be consumed as it is sold and it is sold as hot food.

The Tribunal found in favour of HMRC in this instance as the food is kept hot before being served and is hot as defined in the relevant legislation when it is supplied. The supply should therefore be standard rated.

6. Default surcharge direct debit not taken

Crown Blinds Limited appeal against a VAT default surcharge relating to late payment of VAT. The appellant does not dispute that the VAT for the relevant time period was paid late but submits that he had a reasonable excuse as he had a direct debit instruction in place for the payment of VAT but HMRC had failed to process this.

The appellant had cancelled the direct debit and reinstated it several times between September 2016 and March 2017 and HMRC had contacted the appellant on each of these occasions to state that if payment of VAT is to be taken by direct debit then a new instruction must be set up online or by sending paper instruction.  Despite an email from the appellant’s bank manager stating that the direct debit had been reinstated on 5th June 2017, the payment was not processed as the instruction was not reinstated on HMRC’s systems. HMRC had already advised that a new mandate would be required in correspondence in March 2017 and submit that a prudent trader would have acknowledged the correspondence and used an alternative method to make payment for the relevant periods.

The Tribunal found in favour of HMRC, stating that the appellant should have paid closer attention to the correspondence from HMRC which made clear that the direct debit was not being processed. The appellant cannot be said to have a reasonable excuse so the penalties were confirmed in full.


CVC VAT Focus 22 December 2015

The latest CVC VAT Focus is now available on our website.

This newsletter contains the latest VAT news from HMRC and a summary of recent VAT cases including:

  • VAT exemption for membership subscriptions.
  • DIY housebuilder VAT refund scheme.
  • Single or composite supply of construction.
  • Cross-border refund claim.
  • Default surcharge.
  • Zero-rated conversion.
  • Relevant charitable purpose – zero-rate certificates.
  • Intending trader – input VAT recovery.