Tag Archives: VAT newsletter

Constable VAT Focus 13 June 2019

This VAT Focus provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Courts including judgments in relation to the liability of certain salary sacrifice schemes, payroll services supplied to vulnerable people and the recoverability of VAT on development costs where there could be one supply of a development project or two supplies of individual buildings.

 

HMRC NEWS

Changes to the VAT MOSS rate for other countries

HMRC has released information about changes to the rates for VAT Mini One Stop Shop (VAT MOSS) for other countries.

Domestic reverse charge for building and construction services

HMRC has released further information about the VAT domestic reverse charge for building and construction services that starts on 1 October 2019.

Constable VAT has covered this topic in a recent blog which can be viewed here. This will be of interest to anyone operating in the construction industry.

 

CONSTABLE VAT NEWS

 

We recently circulated a new VAT & Charities Newsletter which is available to read on our website.

In this publication we cover some of the most important and interesting areas of VAT for charities. Whilst some of the issues and cases have been discussed in our VAT Focuses, the charity edition of the newsletter aims to give a more directly relevant summary for those operating in the third sector.

If you would like to receive email notifications when there is a new VAT & Charities Newsletter then please reply to this email.

 

CASE UPDATE

 

Upper Tribunal

 

1. Leasing of Cars Under a Salary Sacrifice Scheme

This case concerned the Northumbria Healthcare NHS Foundation Trust (NHT). HMRC refused a claim for repayment of input VAT made by NHT. NHT had incurred this input VAT in respect of leased and maintained cars which it acquired for the purpose of providing them to NHS employees under a salary sacrifice scheme. Under UK law, where cars are leased to employees under such a scheme, not for the purposes of the employer’s business, there is no supply of goods or services by virtue of the “De-Supply Order”. Whilst there is deemed to be no supply, UK legislation (s43 VATA) entitles the employer to recover input VAT in relation to such car schemes supplied by Government bodies such as the NHS.

NHT contended that this order applied whilst HMRC argued that the car scheme was a business activity carried on by NHT and, therefore, that input VAT was restricted to 50% as the business was leasing vehicles. In support of its claim, NHT argued that the car scheme was operated so as to facilitate a more efficient delivery of the statutory obligations (non-business activities) of the Trust: to provide healthcare. HMRC observed that there is no actual restriction placed on the use of the cars by the employees and, therefore, that the De-Supply Order was not applicable.

The Tribunal observed that the key question, given the circumstances, was whether the car scheme operated by NHT is an “economic activity” within the meaning of EU law. If it is an economic activity then the De-Supply Order would not apply and, therefore, input VAT recovery on the cars would be restricted by virtue of the Blocking Order.

The Tribunal considered that the De-Supply Order meant that there was no supply of services in this instance and therefore that there was no economic activity being pursued by NHT with regard to the car scheme so there was no taxable supply. Therefore, NHT was entitled to recover all of the VAT incurred on the supplies of leased and maintained cars.

Constable Comment: This case was complex and reflects a problematic area of the law. The result has essentially led to a situation in which the NHS receives and subsequently makes a supply which is not a supply but it can recover 100% of the input VAT incurred in making that supply. This area of VAT is particularly difficult to deal with and anyone operating similar structures should seek VAT advice for clarity.

 

2.The Glasgow School of Art: Input Tax Recovery on Property Development

This appeal concerned the Glasgow School of Art (GSA) which contested a decision by HMRC to deny 100% input VAT recovery in relation to a refurbishment project on some campus buildings. The FTT had previously found in favour of HMRC’s original decision.

The GSA refurbished three buildings; the Assembly Building, the Foulis building and Newbery Building. The buildings were all adjacent and on one site, the refurbishment project took place at the same time in relation to all of the buildings. The Foulis and Newbery buildings were demolished and replaced with the Reid building which was “wrapped around” the Assembly building. The whole project was contracted as a single development.

The GSA initially treated the input VAT on invoices from the contractor undertaking the project as residual and recovered in line with its partial exemption percentage. However, it later sought to change its argument and claimed that two distinct buildings had been built and that GSA was making a wholly taxable supply by leasing the Assembly Building to the GSA Student’s Association whilst the input VAT relating to the development cost of the new Reid Building  was recoverable in line with the partial exemption percentage. GSA therefore sought to recover the input VAT which it had previously not done so under its partial exemption calculation. It submitted a significant VAT refund claim.

The FTT had previously dismissed this appeal on the grounds that there was, materially, only one supply by the contractor to the GSA and, therefore, that the input VAT had correctly been treated as residual. The Tribunal in this instance agreed with the FTT and dismissed the appeal, concluding that the original invoicing arrangement gave the best reflection of the economic reality of the situation.

The UT also agreed with the FTT that GSA was not carrying on an economic activity. The rent paid by the student’s union was set at a level which it could afford and it would take 500 years for the charity to recoup its outlay. This is not an economic activity.

Constable Comment: In order to support the claim that there were two separate supplies received by GSA, the School went back to the contractor and split the development and invoicing into two sections and two distinct buildings. This case shows that, whilst important, contracts and invoicing arrangements are not the ultimate deciding factor; regard will always be had to the commercial and economic reality of the situation.

 

First-Tier Tribunal

 

3. Welfare Exemption: Supplies Closely Connected

This appeal concerned Cheshire Centre for Independent Living (CCIL) and the liability of its supplies of payroll services to individuals with disabilities, which it believed to be VAT exempt. HMRC had ruled that the payroll services did not qualify for exemption as they were not closely associated with the provision of welfare services so they were liable to VAT at the standard rate.

Certain disabled persons may be eligible for financial assistance in order to facilitate their independent living. Some of the funding is handed to disabled individuals directly in order for the individual to take control of and pay for their own care and support services. Where a disabled individual receives these payments and uses them to pay assistants they become an employer of that person with all the relevant obligations for direct tax purposes.

CCIL offer a payroll service whereby it enters into contracts with local authorities and individuals and deals with issues such as PAYE and NIC on behalf of clients. CCIL contended that this supply should benefit from VAT exemption as it is closely associated with a supply of welfare services. HMRC believed that this supply was secondary to a supply of welfare services and, therefore, should be standard rated. This would, of course, have taken away 20% of the payments made to disabled individuals to support their independent living. Simply put, the individuals would have been left with less money to spend on receiving the support they need.

CCIL submitted that the services supplied were in the context of a supply by a charity to a disabled person whose needs had been formally assessed under the Care Act 2014, meaning that they were exempt.

The Tribunal considered that the payroll service, whilst not being an end in itself, is a means for enabling the support of disabled individuals through the services of assistants as a part of the care plan for that individual. Therefore it allowed the appeal and stated that the services in question were indeed exempt as they were services closely connected with a supply of welfare services.

Constable Comment: Interestingly this case focuses on funding provided directly to the disabled person but it acknowledges at least two other ways in which these funds are distributed; the money is held and distributed by the NHS or, alternatively, by an independent third party. The VAT liability of similar services provided in these circumstances is not commented on in this case. The treatment of such supplies and what constitutes “closely linked with a supply of welfare services” now requires clarification as it could have wide ranging impacts on a variety of service providers dealing with welfare. This case also serves as a reminder that HMRC construes the welfare exemption very narrowly.

 


 

Constable VAT: VAT & Charities Newsletter

Thank you for subscribing to our VAT Charity Newsletter. In this publication we cover some of the most important and interesting areas of VAT for charities. Some of the issues and cases have been discussed in our VAT Focuses, however the charity edition of the newsletter aims to give a more directly relevant summary for those operating in the third sector.

This issue of the Constable VAT & Charities Newsletter covers;

  1. YMCA Birmingham: Tribunal decision & HMRC’s behaviour
  2. The Wellcome Trust: Taxable Person or “acting as such”
  3. The Learning Centre Romford & LIFE Services: Welfare Services Exemption
  4. Loughborough Students Union: Supplies “closely concerned” with education
  5. HMRC Notice 317: Imports by charities free of duty and VAT
  6. HMRC VAT Notice 701/1

Also of interest to some of our readers will be one of our blogs which covers the recent case of Sandpiper Car Hire Limited and discusses some of the issues, highlighted by the Tribunal, with the way in which HMRC interact with disabled people. This can be viewed here.

 

1. VAT and the Supporting People Programme

The case of Birmingham YMCA and others (Leicester, Black Country and Burton upon Trent) deals with the VAT liability of supplies of services made under a contract entered into with local authorities (LAs). The case also gives a clear indication of how HMRC behaves in certain situations.

The Supporting People Programme (SPP) was introduced in 2003. The appellants in this case were supplying “housing related support services”. These services were aimed at helping vulnerable people live independently in the community. In the cases of Birmingham, Leicester and Black Country there was correspondence between the charities and HMRC. It was agreed that the funding received from LAs was consideration, payment of which was due under contractual obligations.

Burton, not unreasonably, followed what it believed to be the generally agreed practice and charged and accounted for VAT on its supplies.

In 2015 HMRC changed its mind and decided these supplies were VAT exempt. This was communicated in writing to Birmingham and Black Country by letter dated 19 June 2015. Leicester were advised of this volte-face in September 2016 and Burton in March 2017.

The practical implications of the position initially agreed with 3 of the 4 charities appealing the revised HMRC decision meant that they had accounted for output VAT on supplies to the LAs. The LAs recovered VAT incurred so the position would be VAT neutral. The charities would be able to recover VAT incurred on costs directly attributable to making these taxable supplies. In addition, the value of taxable supplies generated would be beneficial to all of the charities in terms of the recovery of VAT incurred on non-attributable costs, general overhead expenses.

Following HMRC’s revised opinion, the impact on input VAT recovery by the charities is likely to be significant. VAT incurred directly relating to exempt supplies will only be recoverable if the partial exemption de minimis limits are satisfied. These limits also take account of non-attributable VAT incurred and the threshold is not particularly generous, less than £7,500 in value per year (£1,875 per quarter, £625 per month) and less than 50% of total input tax incurred.

Constable VAT Comment: The decision in this failed appeal is interesting from a technical perspective but also in terms of HMRC’s approach. There are a number of cases where HMRC wish to refuse charities input VAT recovery where LAs have outsourced services. If the LA itself supplied the services, it would be able to reclaim VAT incurred on the delivery of these services. By denying charities the right to reclaim input VAT, HMRC is collecting more tax: irrecoverable VAT incurred by charities.

In these cases, because HMRC had initially agreed the VAT liability of supplies with 3 of the 4 appellants, its approach was as follows:

Regarding Birmingham, HMRC would apply the Tribunal outcome to the date of the relevant disputed HMRC decision letter on 19 June 2015. This means that, from that date, supplies made under the contract would be VAT exempt. The same date applied to Black Country. It is not clear from the Tribunal decision what practice either charity had adopted; however, if a policy of standard-rating supplies had been maintained, it is likely that retrospective VAT adjustments would be required. The charities would have to refund VAT charged in error to the LA. If VAT exempt supplies had been made, input Vat adjustment would be required.

The position regarding Leicester would be as above; however, the relevant date in this case was 27 September 2016, when the charity was notified by HMRC that its supplies were VAT exempt.

As far as Burton were concerned, HMRC took the view that it had never agreed its supplies were standard rated. This being so, HMRC’s decision letter was dated 27 March 2017 and, as such, VAT accounting adjustments will be made retrospectively to VAT accounting period 03/13. This was because HMRC had never agreed that Burton’s supplies were VAT exempt. HMRC would issue VAT assessments retrospectively in line with four-year capping legislation.

These joined cases demonstrate that HMRC can, and does, change its policy. The cases also clearly show the value of liaising with HMRC’s VAT Charities Team in cases of ambiguity. The position of 3 of the charities in this appeal were protected from retrospective treatment, from the date HMRC formally notified the change in its policy, because the VAT liability of supplies had been agreed. It is obviously disappointing that HMRC should resile on agreements made and upon which charities had relied. Unfortunately, in recent times, Constable VAT has dealt with situations where HMRC has sought to renege on agreements previously reached and apply VAT assessments retrospectively. If this is something which your charity has experienced and you would like to discuss, please do not hesitate to contact Constable VAT.

The important points to take from this decision are that each case must be judged on its own facts. It is dangerous for one charity to determine the VAT liability of its own supplies based on a decision notified to another party. It is not safe to assume that one charity can rely on an HMRC ruling given to a different charity operating in similar circumstances. It is also clear that HMRC refreshes and revises decisions previously given and it is important that charities protect their positions as far as possible.

 

 2. The Wellcome Trust: Taxable person or “acting as such”

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 awards grants for medical research in the UK. The majority of these grants are given from investment funds. The case focussed around the correct interpretation of what constitutes a taxable person for EU law and what would be considered to be acting as a taxable person. A taxable person, for VAT purposes, is a person who is or is required to be registered for VAT owing to their pursuit of an economic activity.

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

There was no dispute of facts in this hearing and the discussion focussed heavily 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 where the supplier belonged.

There has been much case law around the issue of what constitutes a business activity and where a charity is acting in a taxable capacity pursuing an economic activity. In considering whether the Trust was acting in a business capacity, HMRC submitted that any supply to any taxable person must be regarded as taxable. The Court considered that HMRC could not be correct in this assertion as such an interpretation would mean, without any further language excluding such a person, that a taxable person receiving supplies for private purposes would still fall within Article 44 and would be required to account for VAT under the reverse charge. Therefore, it was observed, that to make Wellcome Trust fit into the definition of a taxable person in relation to these investment activities, HMRC would have to argue that the words “acting as such” exclude taxable persons receiving supplies for private purposes from Article 44 but do not take out taxable persons receiving supplies for non-economic business purposes. This was simply not a logical position to adopt.

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 VAT Comment: This judgment will be welcomed by charities who have both business and non-business activities and can directly attribute some input VAT costs to exempt supplies. Whilst the facts of the case are quite specific to Wellcome Trust, the decision serves as a useful reminder to those accounting for VAT under the reverse charge mechanism to clarify the VAT accounting position of their charity. The issue here, of course, was that VAT accounted for by WTL under the reverse charge procedure was irrecoverable.

 

3. VAT Exemption for Welfare Services (for private companies)

The question before the Upper Tribunal in two cases (The Learning Centre Romford & LIFE Services) was whether the UK’s implementation of the VAT exemption for welfare services had been unlawful by infringing the EU principle of fiscal neutrality. Whilst the service providers were private companies they were seeking to rely on the charitable exemption for state regulated bodies.

The Learning Centre Romford (LCR) is a private company which provides vulnerable adults with education and entertainment. It also supplies meals and associated palliative care such as assistance with eating and administering medication with the aim of teaching the clients to be independent and to live healthy lives. It takes on as clients only those who have a care plan given by the local authority from which LCR receives funding. LCR had treated these supplies as VAT exempt as the provision of welfare services by a state regulated institution. HMRC believed these supplies to be taxable at the standard rate as they were provided by a private company.

LCR argued that they were state regulated as it was a requirement for them to DBS check staff members and, in any case, the fact that private welfare providers akin to itself are in fact exempt from VAT in Scotland and Northern Ireland. It was contended that this infringed the principle of fiscal neutrality.

LIFE Services provided the same type of care as LCR but as it did not provide care at the client’s home it did not fall within the statutory regulation regime and was therefore not exempt from VAT.

HMRC argued that it was not the UK’s implementation of the exemption which had caused a disparity between Scottish and English welfare providers but that this situation had arisen as a result of the devolved legislature’s actions. The Tribunal agreed with HMRC, finding that in a devolved system it is inevitable that certain matters will diverge and, therefore, the principle of fiscal neutrality was not infringed. In allowing HMRC’s appeal on this ground, both cases were dismissed and the services of both LIFE and LCR were held to be taxable. This overturned the First Tier Tribunal’s previous decision.

Constable VAT Comment: This decision will be interesting to charities which may wish to step outside of the VAT welfare exemption. For example, if VAT exempt welfare services supplied by a charity were carried out by a wholly owned trading subsidiary instead, generating taxable supplies this could be advantageous in producing a right to input VAT recovery.

 

4. VAT Exemption for Supplies Closely Linked with VAT exempt Supplies of Education

This appeal concerned whether sales of goods by a student’s union can benefit from the VAT exemption for supplies closely associated with education. The FTT had previously ruled in HMRC’s favour, holding that the supplies did not benefit from the exemption.

Loughborough Students Union (LSU) contended that it was an eligible body for the purposes of the exemption from VAT afforded to supplies of education of certain types and that its supplies were sufficiently closely connected with the overall supply of education offered by the University to receive the benefit of this exemption.

The Upper Tribunal considered that LSU could constitute an eligible body for the purposes of the exemption as it is a registered charity and any surplus cash generated is assigned to the continuance of its own, charitable activities.

However, despite being an eligible body, the Court considered that in order for the exemption to take effect the supplies being provided must be closely related to a supply of VAT exempt education. As LSU does not make supplies of education and does not make its supplies to an education provider but rather to individual students, it will not be able to benefit from the exemption.

The UT concluded that the supplies made by LSU were not closely linked to education in any event as the supplies of education provided by the University would be just as good without the supplies of household goods made by LSU. Other supplies which could be associated with education, such as stationery, were not shown adequately by LSU to benefit from the exemption.

Constable VAT Comment: This case demonstrates that a mere association with an eligible body, such as a University, does not mean that educational VAT exemptions extend to all supplies made by affiliates of that body. Where seeking to rely on a VAT exemption it is essential to ensure that it can be correctly applied. Failure to take due care in this regard could lead to large VAT bills for charities who sought to benefit from VAT exemption.

Interestingly, there was some consideration given to supplies of art materials by LSU which could be associated with education and benefit from the exemption. However LSU failed to show this to any substantial degree. The discussion around stationery and art supplies clarifies that, where it can be evidenced, exemptions can extend beyond supplies to universities where the supply relates closely itself to the education being supplied.

 

5. Update to Notice 317

HMRC has updated Notice 317: Imports by charities free of duty and VAT on 4 June 2019. Paragraph 1.3 has been updated with information about time limits if you disagree with a Customs decision.

 

6. Update to Notice 701/1

HMRC has updated VAT Notice 701/1 (How VAT effects Charities) on 1 May 2019. Section 5.9.6 has been added. This comments on the position where there is a mix of sponsorship income and donations received.

 


Constable VAT Consultancy LLP (CVC) is a specialist independent VAT practice with offices in London and East Anglia. We work together with many charities and not-for-profit bodies ranging from national charities, those working overseas, and regionally based local organisations. CVC has a nationwide client base. 

We understand that charities wish to achieve their objectives whilst satisfying the legal requirements placed upon them. Charities may be liable to account for VAT on supplies made and VAT will be payable on certain expenditure. As irrecoverable VAT represents an absolute cost to most charities, regardless of their VAT registration status, there is a need to review the position regularly and carefully. We offer advice with planning initiatives, technical compliance issues, complex transactions, help with innovative ideas on VAT saving opportunities, and liaising with HMRC. 

If you would like to discuss how VAT impacts on your organisation please contact Stewart Henry, Laura Krickova or Sophie Cox on 020 7830 9669, 01206 321029 or via email on stewart.henry@constablevat.com, laura.krickova@constablevat.com and  sophie.cox@constablevat.com.  Alternatively, please visit our website at www.constablevat.com where you can view some of the services we offer in more detail and subscribe to our free general and regular VAT alerts and updates. Visit our website for current news updates. You can also follow Constable VAT on Twitter. 

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.


 

Constable VAT Focus 16 May 2019

This VAT Focus provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Courts including judgments in relation to the deductibility of input VAT in different situations, where a tax point arises in relation to certain types of services and what constitutes “school or university education”.

HMRC NEWS

Update to Public Notice 701/41: How VAT applies if you give or get sponsorship.

This notice explains how VAT applies if you give or receive sponsorship. A new section on crowdfunding has been added.

Update to Compliance Checks for VAT

This factsheet contains information about the penalties HMRC may charge you for a VAT or excise wrongdoing.

Update to Public Notice 700/22: making Tax Digital for VAT

This notice explains the rules for Making Tax Digital for VAT and about the digital information you must keep if they apply to you.

VAT Single Entity and Disaggregation

HMRC has updated its list of useful legal decisions in its internal guidance for single entities and the rules around disaggregation.

CASE REVIEW

 

CJEU

1. When a Tax Point Arises for a Supply of Services

This case concerned Budimex S.A., a Polish company engaged in the provision of construction services. The question which arose was when a tax point arises for a supply of services under which payment only becomes due when the customer is satisfied with the works; when the services are “performed” or when the customer certifies their satisfaction. Polish law dictates that where an invoice has not been issued within 30 days after the completion of work then the tax point arises on this date. Budimex had not issued an invoice for the supplies it made to a customer as they had not yet certified their satisfaction so had not paid any money over, the Polish authorities sought to recover the output VAT as a de facto tax point had arisen after the passing of 30 days from the completion of the services.

In considering this question, the Court highlighted that, according to EU law, VAT is to become chargeable when the goods or services are supplied. However, it was also considered that, taking into account the economic and commercial realities of the industry, that the contractual term may incorporate part of the service offered.

That is to say that Budimex was supplying construction services which, contractually, would only be “performed” when the customer was satisfied with the work, a contractual term specifically allowed for by the Federation of Consulting Engineers. Therefore it was held that the requirement for the customer to be entirely satisfied is a part of the service being offered.

The Court held in favour of Budimex.

Constable Comment: The type of rule in question stating that a de facto tax point must arise at some stage seeks to combat avoidance by companies who deliberately do not create a tax point in order to defer VAT liabilities. However this case shows that it is possible for these rules to be circumvented where “customer satisfaction” is a specific provision of the supply made.


2. Fictitious Transactions: A Right to Deduct?

This Italian referral considered whether supplies which were fictional but created no loss to the Revenue bear a right to deduct input VAT.

EN.SA is an Italian company which produces and distributes electricity, the Italian tax authorities denied recovery of input VAT in relation to certain supplies as there was no actual transmission of energy. The question arose before the Court whether this refusal breached the principle of fiscal neutrality.

Whilst accepting that it was not the case in the current circumstances, the Court considered a situation in which the customer had acted in good faith in which case, it was hypothesized, that the right to deduct would have to arise owing to the underlying principles of the EU law. Therefore it was found that the Italian law which gave the Italian authorities the right to refuse the repayment of input VAT was not contrary to EU law.

However, in considering the question, the Court also pondered whether a fine may be levied equal to an amount of the deduction made. It was found that a fine of this amount would go against the EU principle of proportionality and, therefore, that domestic tax authorities are precluded from issuing this type of fine.

Constable Comment: this was an interesting case as, on the surface, a fictional transaction should clearly not give rise to a right to deduct VAT. However, the Court was forced to consider a situation in which a customer had acted in good faith in which it stated that the right to deduct must arise. Therefore this judgment applies to very specific facts and national legislation which prevents the right to recover more broadly may be incompatible with EU law.


3. The Exemption for Private Tuition

This case concerned whether the provision of driving tuition by a private company benefits from the exemption found in EU law for the provision of education in the public interest, typically provided by schools and universities, when provided by certain private bodies.

A&G Fahrschul-Akademie GmbH (A&G) is a German company which provides private driving tuition to students with an aim of ultimately earning a driving license. It applied to have its VAT debt cleared as it believed it was exempt from VAT but the German tax authorities refused on the grounds that the tuition provided is not normally taught by schools and universities. A&G appealed this point and the question was referred to the CJEU; does the concept of school or university education cover driving schools?

In considering this point at length the Court suggested a broad definition of what does constitute “school or university education” for the purposes of the exemptions:

“…an integrated system for the transfer of knowledge and skills covering a wide and diversified set of subjects, and to the furthering and development of that knowledge and those skills by the pupils and students in the course of their progress and their specialisation in the various constituent stages of that system.”

The Court then posited, in the light of this consideration, that driving tuition provided by a private body would be specialised tuition rather than a transfer of knowledge and skills covering a wide set of subjects.

Constable Comment: This judgment will be important in the future as it provides a reasonably solid framework for what constitutes a school or university education, a part of the legislation which comes without a definition. However, whilst a good starting point, this is a broad definition with plenty of constructive ambiguity meaning the issue is likely to surface in the Courts again.


4. Incorrectly Charged VAT: Recoverable?

This case concerned whether PORR, a Hungarian company involved in construction, was entitled to deduct input VAT on certain transactions in relation to which VAT had been incorrectly charged under the normal VAT system where the reverse charge mechanism should have been applied by the supplier.

PORR sought to argue that the supplies were not subject to the reverse charge mechanism and, in any case, the tax authority had denied it the fundamental right in the VAT system to deduct input VAT. The tax authorities contended that such a right had not been denied, indeed that it had been expressly provided for under the reverse charge procedure. PORR also put forward that the tax authorities had failed to ascertain if the suppliers could correct this mistake at no expense to PORR.

The Court considered the relevant EU law and concluded both that the tax authority had no obligation to seek corrections from the supplier and that PORR has failed, in a substantive way, to fulfil its obligations under the reverse charge mechanism. The VAT charged was, therefore, not deductible by PORR.

Constable Comment: Different to the EN.SA case which dealt with fictional transactions, the transactions in this instance took place but had been classified incorrectly as normal supplies rather than reverse charge supplies. This outcome may appear harsh to a customer who has acted in good faith but it is vital to ensure that input tax cannot be deducted twice; once by the supplier and once by the customer.


5. Restrictions on Recovery of Input VAT

This case concerned Grupa Lotos S.A., a parent company to a group of companies in Poland, operating in the fuel and lubricants sector. Polish law excludes the recovery of input VAT incurred on overnight accommodation and catering services with limited exceptions where the cost relates to a supply of tourism services or, in the case of food, the provision of microwave meals to passengers. This provision in domestic law predates Poland’s accession to the EU however it was extended in 2008 to further exclude all overnight accommodation.

The dispute in the domestic court concerned whether Grupa Lotos could deduct VAT incurred on accommodation and catering services purchased, in part, for its own use and part for its subsidiaries. Grupa believed it should be entitled to recover a portion as it was not the consumer of the services and VAT is a tax on the consumption of goods or services. The Polish tax authorities disagreed and claimed that the Polish law made no distinction between the consumption and purchase for resupply of these services.

The matter was referred to the CJEU, the question being whether EU law must be deemed to preclude legislation such as the Polish law in question after its accession to the EU and whether domestic law can extend pre-existing exclusions after accession to the EU.

Giving consideration to the nature of the VAT system and relevant case law such as Iberdrola, the Court turned to look to Article 176 which provides that Member States may maintain restrictions on recovery which were in force before their accession to the EU. It was held that the Polish law, as it was in place prior to Poland’s joining the EU, was valid but that EU law would preclude the introduction of legislation akin to this were it to be introduced whilst any given Member State was within the EU. Therefore the extension to the exclusion in 2008 was invalid.

The question of VAT recovery in this particular case has been referred back to the domestic courts to determine if the supplies involved are ‘tourism services’.

Constable Comment: This case serves as a reminder of how EU law works. Whilst “direct effect” means EU law takes precedence where domestic law is incompatible with new EU laws, where a country joins the EU and becomes a member state, direct effect does not apply retrospectively. This is interesting given the current climate with five nations seeking to join the EU; they may be allowed to keep certain restrictions but will not be allowed to extend them if they successfully enter the EU.


 

Constable VAT Focus 28 March 2019

HMRC NEWS

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.

 

CASE UPDATE

CJEU

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 28 February 2019

HMRC NEWS

Find Software that is Compatible with Making Tax Digital for VAT

Check which software packages are compatible with Making Tax Digital for VAT.

HMRC Impact Assessment for the Movement of Goods if the UK leaves the EU without A Deal

The impact assessment originally published on 4 December 2018 has been updated to include the impacts on the customs, VAT and excise regulations laid before Parliament in January 2019.

HMRC Impact Assessment for the VAT Treatment of Low Value Parcels

Again, the original impact assessment has been updated.

 

BREXIT ALERT

As the 29 March Brexit date approaches there is still uncertainty around whether there will be any deal in place by then. It is essential that any traders or businesses which may be affected by changes in VAT procedures make plans to ensure a smooth transition.

Businesses trading with the EU need to consider the following:

If goods are moved

  • Getting an EORI number
  • Registering for simplified import procedures

If electronic services are supplied

  • Registering for non-Union MOSS in an EU member state as soon as possible after 29 March if there is no deal.

If goods are supplied to consumers in the EU under distance selling rules

  • Maybe VAT registrations are required in other EU countries?

If VAT is paid in other EU member states

  • Claims for 2018 must be submitted before 29 March 2019
  • How will this VAT be claimed after Brexit?

HMRC has updated its online guidance on the above, which can be viewed here.

Contact Constable VAT if any of the above will affect you or your business, we are happy to advise on any VAT related matter.

 

CONSTABLE VAT NEWS

Remember to enrol for Making Tax Digital on time and during the right enrolment window for your VAT accounting periods. Constable VAT have analysed the enrolment windows and our summary can be found here.

 

CASE REVIEW

CJEU

 

1. The Exemption for Goods Imported to be dispatched to Another EU Member State

This case concerned whether the exemption for import VAT on goods arriving in an EU member state to be dispatched immediately to another EU member state and whether domestic tax authorities can disapply the exemption where tax evasion is involved.

Vetsch is an Austrian company which acted as a tax representative for two Bulgarian companies, “K” and “B”. Vetsch submitted declarations stating that goods imported from Switzerland, by K and B, benefited from the exemption for goods imported for subsequent dispatch. However, the subsequent dispatch did not occur and Vetsch became liable under Austrian law, as representative, for the import VAT which should have been paid.

Vetsch appealed against a decision from the domestic tax authorities to that effect but the appeal was refused. Vetsch brought an appeal on a point of law before the domestic Courts which led to the CJEU referral.

The Court came to the conclusion that, as Vetsch was unaware and there was no evidence to support the idea that it knew or ought to have known about the subsequent evasion that the exemption could not be refused.

Constable Comment: This case shows how at an EU level, the strict interpretation of the law is not always adhered to if it creates inequitable results. In finding that Vetsch did not know and would not have known if carrying on business as a reasonable person would, the Court has upheld the idea of equity.

 

2. Retroactive Application of Implementing Decisions

This case concerned the application of the Decision authorising the Hungarian Government to apply the reverse charge procedure enshrined in EU law. The Hungarian tax authorities were notified of their authorisation in December 2015 but sought to rely on the implemented provision to retroactively assess Human Operator Zrt. for the January 2015 VAT return.

The question before the Court in this instance was whether EU law precludes national legislation from retroactively applying measures authorised in an Implementing Decision where that Decision does not make a comment on the retroactive applicability of that Decision or give a date on which it comes into effect.

The Court gave consideration to the principles of legal certainty and the protection of legitimate interests. They concluded that the requirement of legal certainty must be observed very strictly when it comes to rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which the rules impose on them. It was also held that these principles must mean that EU law can only apply to situations after they have explicitly come into force.

In the absence of a provision in the Decision suggesting a different date for it to bite, the Court considered that it must be taken to be effective from the date on which it was published.

Constable Comment: This case is a good demonstration of how the CJEU seeks to protect the rights of individuals and businesses against the State. The fundamental principles of the EU and the spirit of the law are given a great degree of influence in the European Courts. This decision has prevented a seemingly unconscionable result.

 

First Tier Tribunal

3. Electric Blinds in a DIY Build

This case concerned the right to deduct input VAT incurred in relation to a DIY house build by Mr David Cosham. Mr Cosham designed an “eco-build” property and sought to recover input VAT on building materials used under the DIY housebuilders scheme. HMRC accepted certain elements of the claim but rejected the element which related to electric blinds installed at the property, asserting that electric blinds are not within the definition of “building materials” for VAT purposes associated with the scheme.

Appealing HMRC’s decision, Mr Cosham claimed that the blinds did fall within the definition as they are “ordinarily incorporated by builders in a building of that description”. He contended that “buildings of that description” should, in this case, be taken to mean “eco-builds”.

Giving some consideration to relevant case law, the Tribunal found that “eco-builds” were a well-established market sector and could be recognised as a distinct type of property. The onus was put on Mr Cosham to show that blinds such as those in question were “ordinarily incorporated” into properties of this description. Mr Cosham could produce no such evidence so his appeal was denied, the Tribunal holding HMRC’s decision to be correct.

Constable Comment: This conclusion drew on previous case law such as Taylor Wimpey and came to the conclusion that “eco-builds” are to be treated as a class of property in themselves. This is interesting as it could be argued that, compared to older housebuilding practices, the vast majority of new build homes are definable as “eco”. This case has opened up the question of what exactly is ordinarily incorporated into an “eco-build”. It is unsurprising that HMRC pursued this point. Blinds more generally are objected to by HMRC despite losing a previous case at the First Tier Tribunal on a related point.

 

4. Deception: A Supply of Goods or Services?

This case concerned Mr Owen Saunders who had been found guilty of taking money in exchange for work he promised to perform but never had the intention of performing. He had been found guilty as a criminal and been sentenced to time in prison as well as having been served a confiscation order for in excess of £60,000. The confiscated funds had been divided equally amongst his victims by way of compensation for their loss.

HMRC contended that Mr Saunders was engaged in a business activity and should have been registered for VAT. The Tribunal believed that the crucial issue was whether or not there had been a supply for a consideration made in the furtherance of business. Giving consideration to the examples of drug dealers (who can pass title in goods) and fences (who cannot as they never gained title) as well as the definition of a supply in accordance with VAT law, the Tribunal held that there was no supply by Mr Saunders for the monies he received.

The assessment and associated penalties against Mr Saunders were quashed, it was held that his conduct had led to a “total failure of consideration” which was evidenced by the fact that 100% of the confiscated money was paid back to the victims.

Constable Comment: This was an interesting case in that it analysed Mr Saunders as akin to a drug dealer or someone fencing stolen goods. A particularly interesting point raised was the fact that a drug dealer can pass title to his goods and thus his turnover represents supplies and consideration so, in turn, could create an obligation to register for VAT. This illustrates the point that a lack of compliance with the law does not discount the supplies made from turnover for VAT purposes.

 

Constable VAT Focus 01 February 2019

HMRC NEWS

Goods or Services Supplied to Charities

Find out when suppliers can apply the VAT zero rate VAT for advertisements and goods used for the collection of donations.

Software Suppliers for Sending VAT Returns

Find out which software packages support the Making Tax Digital pilots.

VAT Supply and Consideration

Payments that are not consideration: Grants. This section of guidance will help you determine whether a payment described as a grant is consideration for a supply of goods or services and will be of particular interest to charities and other not-for-profit organisations in receipt of grant funding.

Customs, VAT and Excise Regulations: Leaving the EU with No Deal

This collection brings together regulations, explanatory memoranda and an impact assessment in preparation for day one if the UK leaves the EU with no deal.

 

CASE REVIEW

 

CJEU

1. The Deductibility of Input Tax Incurred by Branches

This case concerned the Paris branch of Morgan Stanley and whether it was entitled to deduct input VAT it incurred on expenditure relating exclusively to the transactions of its principal establishment in another member state of the EU. The branch carries out banking and financial transaction for its local clients as well as supplying services to the UK principal establishment and had deducted in full the VAT incurred relating to both types of supply. The domestic tax authorities believed that this input VAT should not be fully deductible but that it should be apportioned using the principal establishments input VAT recovery fraction.

The main question which arose before the Court was whether the proportion of recoverable VAT incurred by the branch relating exclusively to the transactions of its principal establishment should be calculated in line with the branches or the principal’s input VAT recovery rate. It was also asked what rules should be applied in relation to expenditure relating to both transactions by the branch and by the principal.

Giving extensive consideration to the wealth of case law surrounding this subject, the Court decided that, in relation to the first question, that neither of the suggested calculations was correct. It was held that in relation to such expenditure, the associated input VAT is deductible in line with a fraction calculated as:

“Taxable transaction which would be deductible if carried out in branches states / Turnover (excl. VAT) made up of those transactions alone”

With regard to the second question of general costs of the branch which are used for both domestic transactions and transactions with the principal branch it was decided that account must be taken, in the denominator of the fraction, of the transactions carried out by both the branch and the principal establishment. The numerator of the fraction must represent the taxed transactions carried out by the branch and the taxed transaction carried out by the principal establishment.

Constable Comment: This confirms that VAT incurred by branches on expenses relating to supporting its head office are recoverable by looking thorugh to the supplies made by the head office. The calculations for the recoverable amount of input VAT are complicated, especially where the look through reveals the head office to be making both taxable and exempt supplies. If your business makes supplies to a head office it would be prudent to seek professional clarification of the correct treatment of input VAT incurred in relation to these supplies. 

 

Upper Tribunal

2. Welfare Services Exemption

The question before the Tribunal in two cases (The Learning Centre Romford & LIFE Services) was whether the UK’s implementation of the VAT exemption for welfare services had been unlawful by infringing the EU principle of fiscal neutrality.

The Learning Centre Romford (TLC) is a private company which provides vulnerable adults with education and entertainment. It also supplies meals and associated palliative care such as assistance with eating and administering medication with the aim of teaching the clients to be independent and to live healthy lives. It takes on as clients only those who have a care plan given by the local authority from which TLC receives funding. TLC had treated these supplies as exempt as the provision of welfare services by a state regulated institution. HMRC believed these supplies to be taxable at the standard rate as they were provided by a private company.

TLC argues that they were state regulated as it was a requirement for them to DBS check staff members and, in any case, the fact that private welfare providers akin to itself are in fact exempt from VAT in Scotland and Northern Ireland. It was contended that this infringed the principle of fiscal neutrality.

LIFE Services provided the same style of care as TLC but as it did not provide care at the client’s home it did not fall within the statutory regulation regime and was therefore not exempt from VAT.

HMRC argued that it was not the UK’s implementation of the exemption which had caused a disparity between Scottish and English welfare providers but that this situation had arisen as a result of the devolved legislature’s actions. The Tribunal agreed with HMRC, finding that in a devolved system it is inevitable that certain matters will diverge and, therefore, the principle of fiscal neutrality was not infringed. In allowing HMRC’s appeal on this ground, both cases were dismissed and the services of both LIFE and TLC were held to be taxable. This overturned the First Tier Tribunal’s previous decision.

Constable Comment: This was an interesting joint case which focussed on an area of disparity between the implementation of EU law in England and other devolved powers such as Scotland and Wales. Whilst there is a difference in the ways in which the law operates in different areas of the UK, the Tribunal found that this is as a result of the devolved powers implementations and not a failure of the UK to adhere to an EU Directive. This decision will also be interesting to charities which may wish to step outside of the VAT welfare exemption. For example, if VAT exempt welfare services supplied by a charity were carried out by a wholly owned trading subsidiary instead, would generating taxable supplies be advantageous?

 

First Tier Tribunal

3. Direct and Immediate Link with Taxable Supplies

This case concerned whether or not there was a direct and immediate link between input VAT incurred by Adullam Homes Housing Association (AHHA) and its taxable supplies of support services. AHHA is a partially exempt business making taxable supplies of support services and exempt supplies of accommodation.

The dispute arose with regard to whether input tax incurred on acquiring, maintaining, repairing and cleaning accommodation can be linked to the taxable supply of support services or if, as HMRC contend, there is no such link and this input VAT is wholly irrecoverable. AHHA sought to argue that the acquisition and maintenance of accommodation was necessary as part of the overall supply made of accommodation based support services.

The Tribunal gave extensive consideration to case law around the issue of attribution of input VAT incurred by a partially exempt business. The conclusion was reached that the costs, whilst related to the provision of accommodation, were incurred in order that the Appellant had clean, safe and secure premises to enable it to bid for accommodation based support contracts. This constituted a direct and immediate link with the provision of support services.

It follows from this conclusion that the inputs incurred by AHHA in relation to maintain the accommodation were residual and fell to be recovered in line with their partial exemption percentage.

Constable Comment: Certain difficulties present themselves when performing partial exemption calculations, one of the most common is in deciding whether particular inputs should be directly attributed to taxable or exempt supplies or if they fall to be apportioned. Where looking through to the recipients onward supplies it can become difficult to ascertain the correct treatment of input VAT in line with the principles highlighted in this case. If your business is partially exempt and the calculations are complicated it is advisable to regularly review the attribution of VAT incurred and to seek professional clarification to ensure compliance if any obligation exists.

 

 

Constable VAT Focus 29 November 2018

HMRC NEWS

Declaration on Future EU/UK Relationship

The UK Government has published a draft of the declaration on the future relationship between the EU and the UK.

HMRC has released its monthly exchange rates for 2018

Here you can find foreign exchange rates issued by HMRC in CSV and XML format.

Help and support for VAT

Get help with VAT by using videos, webinars, online courses and email updates from HMRC.

 

MAKING TAX DIGITAL UPDATE

Economic Affairs Finance Bill sub-committee calls for further delays of Making Tax Digital

The House of Lords Economic Affairs Finance Bill sub-committee has asked the Government to delay the introduction of Making Tax Digital for VAT by at least a further year to give businesses a chance to prepare.

 

 

CASE REVIEW

CJEU

 

1. The Right to Deduct Input Tax

This case concerned an individual, Mr Vadan, who undertook multiple property developments and around 70 property transactions between 2006 and 2009. During this time Mr Vadan’s turnover significantly exceeded the Romanian VAT registration threshold but he had failed to register for VAT. Owing to this the tax authorities sought to recover roughly EUR 4,000,000 in unpaid output tax, penalties and interest.

Mr Vadan appealed against the assessed amount on the basis that he had been refused the right to deduct input tax, despite not having any legible or valid invoices relating to the period. It was, in essence, his assertion that if he had been a taxable person at the time of the transactions and owed output tax to the authorities in regard of those supplies then the tax authorities necessarily owed him the right to reclaim input tax, despite his inability to provide proof by way of VAT invoices. He claimed that the assessment from the tax authorities which contained, inter alia, a Court commissioned Expert report, should create a right to deduct input tax relating to the relevant output tax.

The question referred to the CJEU was whether a taxable person who satisfies the substantive requirements for the right to deduction may be refused the right to deduct on the grounds that they can provide no substantive evidence.

Previously, the Court has held that the fundamental principle of the neutrality of VAT requires that deduction be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some formal conditions. In this instance the Court conceded that the strict application of the substantive requirement to produce invoices would conflict with the principle of neutrality. However, it is considered to be the taxpayer’s burden to prove his right to deduct VAT.

In concluding, the Court considered that the expert report on which Mr Vadan sought to rely to prove his right to deduct could not prove that he had actually paid any VAT so could not be used as proof of a right to deduct that input tax. It was held that a person cannot benefit from the right to deduct input VAT solely on the basis of an expert report.

Constable Comment: This conclusion demonstrates that whilst the right to deduct is absolute, as has been reaffirmed many times by the Court, an assessment to output VAT based on an expert report cannot, in circumstances such as these, give rise to a right to deduct an unquantifiable and unprovable amount of input VAT. Whilst the right to deduct exists, the requirements of proof to exercise that right are not expunged because a business has failed to keep records.

 

2. Calculating Taxable Turnover by Extrapolation

This appeal concerned a retrospective assessment to VAT served on the appellant, Ms. Fontana, which was based on a “sector study” ordered by the Italian tax authorities who, for several reasons, felt it necessary to do so as there were discrepancies in her own tax returns.

Ms. Fontana challenged the amount of VAT to which she was being assessed, arguing that the tax authorities had incorrectly interpreted her business as “accountancy and tax consultancy” rather than “HR and Management” and had so been incorrectly assessed. She also claimed that the sector study did not give a consistent or fair image of income generated by her company.

This was dismissed but a further question was raised which was referred to the CJEU; whether EU law precludes domestic legislation allowing Member States to assess VAT based on retrospective extrapolation.

The CJEU considered that if a taxable person fails to declare all of the turnover achieved in the course of their business, the tax authorities should not be hindered in collecting VAT as a result. It was concluded that as Member States have a margin of discretion with regard to their means of achieving the objectives and collection of VAT and preventing evasion.

Constable Comment: This result does not come as a surprise and follows the Opinion of the AG. In cases of under declaration of VAT or pure VAT evasion, it is necessary for tax authorities to be able to extrapolate and reasonably calculate estimates of amounts owing. The real question in this case was whether the Italian “sectoral method” was acceptable which the Court has confirmed it to be.

 

Upper Tribunal

 

3. Unjust Enrichment of HMRC

This case is an appeal against an HMRC tax assessment on J&B Hopkins Ltd (JHBL). JBHL had made supplies to Rok Building Ltd (Rok) who were in turn providing onward zero-rated supplies to a charity which had provided Rok with a zero-rating certificate for some building works stating that the intended use of the building would be a relevant residential purpose (RRP).

JHBL had incorrectly zero-rated its supplies to Rok believing that the certificate issued by the charity extended to sub-contractors. When this mistake was discovered, JHBL did not correct this by issuing VAT only invoices to Rok as Rok had become insolvent and gone into liquidation.

HMRC assessed JHBL for the VAT which it should have paid on supplies made to Rok. JHBL appealed the assessments on two grounds; primarily that HMRC would be unjustly enriched if JHBL had to pay over VAT which should have been paid by Rok, secondarily that HMRC had failed to exercise best judgment in raising the assessment.

The Tribunal considered on appeal that the correct analysis of the position as regarded the unjust enrichment of HMRC is that any enrichment gained by HMRC would be at the expense of the liquidated Rok, not JHBL who had failed to invoice correctly. Despite its contention that it was the only company “out of pocket”, this was only because Rok had not paid the full price to JHBL as JHBL had failed to invoice correctly. Giving some consideration to historic case law, the Tribunal held that JBHL had made an error in its invoicing and that the VAT owed was actually the expense of Rok, the VAT system does not have an obligation to insulate the taxpayer from making mistakes and therefore dismissed the appeal on these grounds.

Constable Comment: Errors in property transactions can cause significant VAT problems further down the line, as has been demonstrated by this case. It is essential when taking on development projects, especially where a zero-rating certificate is involved, to seek professional advice to ensure compliance from the start of the development. In this case Rok would have been able to recover VAT charged to it by JHBL as this VAT would be a cost component of its own taxable (zero-rated) supplies.

 

4. Legitimate Expectation – Judicial Review

Vacation Rentals (UK) Ltd (VRL) has been successful in its seeking of Judicial Review preventing a retrospective assessment to VAT. VRL is a booking agent for property owners who wish to lease their homes as holiday lets.

Holidaymakers could reserve properties and make payment online using credit and debit cards for which they were charged a small card handling fee. VRL, following HMRC guidance (BB 18/06), treated these fees as exempt from VAT. A subsequent development in the CJEU ruled that such fees were to be taxable and not exempt as had been HMRC’s published and accepted policy. On the grounds of this change in law, HMRC sought to retrospectively assess VRL to output VAT on all of the supplies of card handling which it had made.

VRL claimed that, whilst not enshrined in law, HMRC’s policy of treating the services of card handling services had created a legitimate expectation that they would not be taxed on these transactions.

In situations where HMRC create a legitimate expectation with the Commissioner’s guidance, HMRC are bound by that guidance even where that expectation has been incorrectly created according to the law. There is a particularly high burden on the taxpayer to prove that the expectation was created by HMRC guidance and that it would amount to an abuse of power by HMRC to not adhere to their own guidance.

This Judicial Review concluded that HMRC had created such an expectation, on which VRL had relied, and therefore that HMRC were bound by their own guidance meaning that VRL need not pay the VAT which it owed following a strict interpretation of the law.

Constable Comment: Whilst this is possibly an unusual result in that the taxpayer has not been ordered to pay VAT in line with the law, it is refreshing to see HMRC has been held to account for misleading businesses and the public with its own guidance. It seems unequitable for HMRC to issue one policy and then retroactively pursue a different one. The Court has here recognised this fact.

Constable VAT Focus 15 November 2018

 

This VAT Focus provides the usual updates of HMRC news, in particular updates on the availability of certain HMRC services in the upcoming planned downtime. We also cover some of the most recent developments from the Tax Tribunal and Court of Justice of the European Union including the decision in the C&D Foods Acquisitions ApS case.

 

HMRC NEWS

 

Service Availability of VAT Mini One Stop Shop

Check for any issues and service availability of the VAT Mini One Stop Shop.

Service Availability of EU VAT Refunds online

Check for any issues and service availability of EU VAT Refunds online.

Service Availability of VAT online

Check for any issues and service availability of VAT online.

Service Availability of EC Sales List

Check for any issues and service availability of ECSL.

Service Availability of Reverse Charge Sales List

Check for any issues and service availability of Reverse Charge Sales List

 

CASE REVIEW

CJEU

 

1. Holdings Companies Recovering VAT

C&D Foods Acquisition ApS was the Danish parent company in the Arovit group which included Arovit Holdings. Arovit Holdings controlled Arovit Petfood which, in turn, owned other companies within the group. C&D Foods provided management and IT services to Arovit Petfood in exchange for a fee to which VAT was added.

The Arovit group failed to repay a loan received from Kaupthing Bank so the group was acquired for EUR1 by the bank. The bank then entered into a number of consultancy agreements on behalf of C&D Foods in relation to selling the shares in Arovit Petfood to satisy the outstanding debt. Having paid the money over for the consultancy, C&D sought to recover the input VAT on the fees.

The Danish tax authorities refused this claim on the grounds that the expenditure by C&D did not relate to their taxable supplies or exhibit any connection with them at all.

The Court held that owing to the fact that there is no connection between the taxable activities of the company being sold and the input VAT incurred on consultancy relating to that company’s sale, the transactions are themselves outside the scope of VAT and, therefore, no right to deduct the VAT ever arose.

Constable Comment: This decision gave much consideration to the rules of holding companies seeking to recover VAT on activities other than purely holding and acquiring shares which is outside the scope of VAT. The rules are complicated and can easily lead to mistakes and there is significant case law relating to holding companies recovering VAT. It is always prudent to seek professional advice before making a VAT reclaim using a holding company involved in a complex business structure.

 

Upper Tribunal

 

2. Exemption for Supplies Closely Linked with Supplies of Education

This appeal concerned whether sales of goods by a student’s union can benefit from the VAT exemption for supplies closely associated with education. The FTT had previously ruled in HMRC’s favour, holding that the supplies did not benefit from the exemption.

The Upper Tribunal considered that Loughborough Student’s Union (LSU) could constitute an eligible body for the purposes of the exemption as it is a registered charity and any surplus cash generated is assigned to the continuance of its own, charitable activities.

However, despite being an eligible body, the Court considered that in order for the exemption to take effect the supplies being provided must be closely related to a supply of VAT exempt education. As LSU does not make supplies of education and does not make its supplies to an education provider but rather to individual students, it will not be able to benefit from the exemption.

The UT concluded that the supplies made by LSU were not closely linked to education in any event as the supplies of education provided by the University would be just as good without the supplies of household goods made by the SU. Other supplies which could be associated with education such as stationery were not shown adequately by LSU to benefit from the exemption.

The appeal was dismissed.

Constable Comment: This case demonstrates that a mere association with an eligible body such as a University does not mean that educational VAT exemptions extend to all supplies made by affiliates of that body. Interestingly there was some consideration given to supplies of art materials by LSU which could be associated with education and therefore benefit from the exemption, however LSU failed to show this to any substantial degree.

 

 

3. Amending Grounds of Appeal

This decision relates to an application by Ballards of Finchley Plc (Ballards) to amend its grounds of appeal relating to a historic Fleming claim for overpaid output VAT.

Ballards submitted a claim in 2003 claiming repayment of VAT overpaid during the period from 1 April 1973 to May 1999. Following the decision in Fleming, HMRC wrote in 2017 agreeing to pay part of the total amount claimed subject to certain confirmations and that, if the House of Lords were to overrule Fleming, an agreement to pay back the money to HMRC.

There was correspondence between the parties during which the accountants of the appellant wrote to HMRC seeking to adjust the amount of the reclaim, asserting that the retail price index used by HMRC failed to take into account times of great inflation. It was on these grounds that Ballards sought to amend their appeal. HMRC sought to deny the amendment on the grounds that the claims had already been settled and could, therefore, no longer be subject to the Tribunal’s discretion.

Giving consideration to case law, this decision revolved around whether the claims could be regarded as “completed” by the agreement in 2007. It is an established principle that where a claim has been paid in full the Tribunal has no jurisdiction to amend the grounds of appeal since it can no longer hear the appeal.

The Tribunal decided that, despite the fact that Ballards may have to pay the money back, the claims are to be seen as settled and there is no right to amend their grounds of appeal. The Tribunal also refused to employ discretion in this case on the grounds that “…it would be to no avail.”

Constable Comment: Legislation and case law both dictate that once a claim has been settled or “completed” then it is no longer within the jurisdiction of the Tribunal to analyse that claim. In this instance Counsel for the appellant sought to increase the value of a claim by asserting that incorrect inflation calculations had been performed when calculating the initial claim. This case reaffirms that once an agreement is reached between HMRC and the taxpayer, that agreement is, in most cases, conclusive.

 

 

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.

 

HMRC NEWS

 

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.

 

CVC NEWS

 

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.

 

CASE REVIEW

CJEU

 

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.

Constable VAT Budget Focus: Autumn 2018

 

Philip Hammond has delivered the last Budget before the UK leaves the EU in March 2019. He has based the Budget on an assumption of an average free trade deal being struck between the UK and the EU. However, if no agreement can be reached between the two parties, the Chancellor has stated that a different strategy would be necessary and the UK has been working on contingency plans for different possible Brexit negotiation outcomes. Here we look at the key VAT issues which have been covered in the announced Budget issued but will provide continued coverage of any progression in line with Brexit negotiation results.

 

VAT registration and deregistration thresholds

The VAT registration threshold of £85,000 has stayed at the same level again in this Budget, as has the de-registration threshold of £83,000. It has been confirmed that these will stay in place for the next two years. The effect of this measure, when inflation is factored in, is that there will be an increased number of smaller businesses that are required to register for VAT.

 

VAT grouping eligibility to be extended

The Government has announced that it will extend the eligibility to join a VAT group to certain non-corporate entities in the Finance Bill 2018-19. This extension will allow partnerships and sole traders to benefit from VAT grouping provided the entry criteria are met.

 

The treatment of vouchers from 1 January 2019

The Government intends to introduce legislation to give effect to an EU Directive in the UK providing for the VAT treatment of vouchers issued on or after 1 January 2019. It will impact vouchers for which payment has been made and which will be used to make a purchase.

The aim of the measure will be to harmonise the rules for the taxation of vouchers within the EU and, ideally, to prevent any non-taxation or double taxation of goods or services. This is not a true Budget measure as the new rules were agreed sometime after extensive discussions within the EU.

 

Specified Supplies Order

For a brief summary and an analysis of the Specified Supplies Order, we recently provided coverage of the issues presented by Brexit and the Specified Supplies Order on our website. There has been some clarification around some of the issues associated with the Order offered as part of the Budget 2018. In essence, the Order allows companies who export certain financial services from the EU to third countries to reclaim input VAT on what would normally be an exempt supply giving no right to recovery.

 

HMRC believe the Order is currently being abused by companies who form agreements with associates located outside the EU and re-supply those services back to UK consumers meaning that the company can reclaim the input VAT on the specified supply and gain a VAT advantage. This measure seeks to prevent “looping” by restricting the applicability of the Order to cases where the final consumer is not in the UK. We are not convinced that either existing UK measures or the proposed measures are compliant with the EU VAT directive and, were the UK to remain in the EU, we would be surprised to find that the proposed measure is not challenged in the Courts. Brexit may nullify this consideration.

 

VAT reverse charge anti-avoidance amendment

A measure has been introduced which allows for the disapplication of the existing anti-avoidance provision in relation to any specified reverse charge. Originally the provisions were introduced to prevent criminals avoiding reverse charge measures by supplying non-VAT registered businesses instead and charging VAT. This measure will allow regulations to be made to prevent unintended consequences for small businesses who trade below the VAT threshold which will remain at £85,000.

 

VAT and higher education

It has been announced that the Government will amend VAT law to enable bodies registered with the Office for Students, in the approved (fee cap) category, to exempt supplies of education. This is a measure aimed at ensuring continuity of VAT treatment for English higher education providers following the Higher Education and Research Act 2017. Constable VAT will follow the development of this policy, if your business is likely to be affected then please do not hesitate to contact Constable VAT.

 

Unfulfilled supplies and prepayments

HMRC’s policy around the VAT treatment of prepayments where customers have been charged for a supply but have failed to collect or use what they have paid for and have not received a refund. These prepayments will be brought into the scope of UK VAT from 1 March 2019 and VAT will be due on the prepayment.

 

Increase or decrease in consideration after supply (Regulation 38)

Regulation 38 requires businesses to adjust their VAT account where there has been a change in the value of the supply on which VAT is due, and a corresponding change in the amount of VAT charged.

 

It has been announced that legislation will be introduced to ensure that a credit note is issued to customers who receive a discount to ensure a higher degree of transparency with businesses, ensuring that they do not benefit by reclaiming VAT that should be refunded to either the customer or paid to HMRC.

 

Alternative method of VAT collection for online sales

Following a recent consultation, the Government is considering introducing a split payment model for collecting VAT on sales made online by overseas sellers. An industry Working Group is to be set up by HMRC to work with relevant stakeholders to consider this further.

 

The effects

If you require further information or assistance on any of the points raised above, please speak with your usual Constable VAT contact.

CVC VAT Focus 18 October 2018

HMRC NEWS

HMRC are having difficulty dealing with DIY Housebuilder VAT refund claims and that some claims are being approved and paid up to four months later than the usual 30 days. If you are a housebuilder or are considering submitting a VAT refund claim, in order to mitigate any cash flow issues which may arise as a result of this, please call Constable VAT to see if there is anything we can do to help your particular case.

VAT MOSS exchange rates for 2018

Find currency exchange rates for VAT Mini One Stop Shop (VAT MOSS) businesses registered in the UK to complete declarations.

Charity funded equipment for medical and veterinary uses (VAT Notice 701/6)

HMRC has updated its guidance regarding zero-rated supplies of medical and research goods and services that have been funded by charities.

Making Tax Digital Update

Making Tax Digital for VAT will now not be mandatory until 1 October 2019 for businesses falling into one of the following categories considered by HMRC to be ‘more complex’ businesses. Additionally HMRC has issued more guidance on making Tax Digital for VAT.  The businesses regarded as complex and a list of the new guidance can be found on our website.

 

CONSTABLE NEWS

Brexit Blog

We have a new article about the potential impact of Brexit on VAT recovery for businesses in the financial services and insurance sectors. In this piece we ask the question “If you had to make a guess on whether your business will be allowed to reclaim more VAT or less VAT if the UK leaves the EU without a withdrawal agreement what would you say?” Consideration is given to The VAT Specified Supplies Order 1999. If you are impacted by this legislation then this will be of particular interest to you.

Opinion of Advocate General

The Advocate General (AG) has handed down his opinion in the Morgan Stanley CJEU case, which considers VAT recovery rules for costs incurred by overseas branches. Our coverage of this opinion can be found on our website.

This opinion adds another dimension to Brexit planning, which can involve creating new EU businesses with multiple establishments as well as longstanding multi-establishment arrangements. Whilst the CJEU decision need not follow the opinion of the AG, in most cases it does.

If you operate using overseas branches then you should consider your input VAT recovery position now. Constable VAT will be happy to assist in this exercise.

 

CASE REVIEW

CJEU

1. Refusal of right to deduct input VAT by the tax authorities

This referral concerned whether EU law on VAT precludes tax authorities from refusing the right to deduct input VAT on the grounds that the company in question failed to submit VAT returns for the period in which the right to deduct VAT arose.

The company, Gamesa, was declared an “inactive taxpayer” by the Romanian tax authorities as it did not submit VAT returns for a six month period in 2011. In 2015 Gamesa was subject to a VAT inspection and was issued with an assessment for the output VAT which should have been declared on the missing VAT returns. The assessment did not allow the deduction of the relevant input tax. Gamesa alleged that this practice infringed the principle of proportionality and the principle of neutrality of VAT.

Giving regard to these principles and the relevant EU legislation on the matter, the Court reduced the issue to one question: is it permissible for the tax authorities to refuse, on account of a failure to submit tax returns, a taxable person the right to deduct input VAT? This was answered succinctly, “As the Court has repeatedly pointed out the right of deduction […] is an integral part of the VAT scheme and in principle may not be limited.”

The Court held in favour of Gamesa and stated that the relevant EU law precludes tax authorities from using this practice.

Constable Comment: This case illustrates the fundamental nature of the right to deduct input VAT in the EU VAT system. It confirms that even if a business has made VAT accounting errors or failed to disclose certain sales, a VAT assessment can be mitigated by demonstrating, accurately, the amount of input tax incurred in the period being assessed which relates to taxable supplies. If you have received a VAT assessment and are concerned about the amounts involved or the entitlement to deduct input VAT has not been taken into account, do not hesitate to contact Constable VAT.

 

First Tier Tribunal

2. HMRC Best Judgment

This case was an appeal by Derbyshire Motors Ltd (DM) against a best judgment VAT assessment issued by HMRC and a civil penalty for dishonesty. The appellant had declared taxable motor repair services as MOTs which are outside the scope of VAT. DM admitted that this had taken place after initially denying the wrongdoing, albeit not convincingly.

DM was struggling to stay afloat when the “credit crunch” began to take serious hold of the UK economy in 2008/09. Owing to a lack of capital reserves no more money could be pumped into DM to keep it going. Mr Derbyshire, the director and owner, made the decision to treat some repair works as MOT tests to improve the cash position of the business. When HMRC discovered this in 2014 DM no longer had VAT records for the relevant period. HMRC therefore relied on figures from later years to calculate the assessment for underpaid VAT. DM submitted that HMRC had not used best judgment as the assessment was based on material relating to other years.

Analysing previous case law and relevant tests for the application of best judgment were considered and the assessment was upheld. The penalty was also upheld in full.

Constable Comment:  This demonstrates well that simply not having records and not being compliant for years does not mean that tax evasion is untraceable. If taxpayers discover any irregularities or suppressed sales it is always best to be honest and notify HMRC. If you co-operate fully and make an un-prompted disclosure then penalties can be mitigated. Attempting to hide from and mislead HMRC is likely to result in the highest possible penalty being applied. Please contact Constable VAT if you are worried about notifying a disclosure to HMRC, we will be happy to be of assistance.

 

3. Calculating VAT when prompt payment discount is offered

Virgin Media Limited (VML) made supplies of telecommunications to its domestic customers. 95% of these customers paid a monthly subscription fee, the remaining 5% paid one lump sum for a 12 month subscription which amounted to less than 12 monthly instalments. Output VAT was calculated for all customers using the lower price based on the suggestion that if a “prompt payment discount” is offered then output VAT should be calculated using the discounted amount even if the customer did not take advantage of this discount.

HMRC disagreed with this assertion and stated that output VAT may only be accounted for on the discounted amount where this sum is paid within a specified time period and is taken to satisfy the full amount.

The FTT considered that VML’s supplies could, in theory, benefit from this prompt payment discount pricing. However it was considered that VML, in reality, makes two different supplies at different amounts albeit of the same services.  It was not disputed that where the prompt payment discount is taken by customers that this is the value which should be used for calculation of output VAT. However, since the change in the rules around prompt payment discounts in 2015 it is no longer permissible to account for VAT based on the reduced price unless taken within the time period specified.

Constable Comment: It used to be the case that offering a prompt payment discount allowed businesses to account for output VAT on the reduced price even if this were not taken by the customer. This has since changed and now the discount must be taken in order to account for VAT on the lower amount. If your business offers prompt payment discounts you should consider how to reflect these when accounting for VAT.

 

CVC VAT Focus 27 September 2018

HMRC NEWS

Trading Goods Regulated Under the “New Approach” if There Is No Brexit

How trading in harmonised goods regulated under the New Approach would be affected if the UK leaves the EU with no deal.

Software Suppliers Supporting Making Tax Digital for VAT

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

Customs Declaration Service

The Customs Handling of Import and Export Freight (CHIEF) process is being replaced by CDS, a modern and flexible system that can handle anticipated future import and export growth.

 

CHANGE OF WEBSITE AND EMAIL ADDRESSES

Constable VAT Consultancy is in the process of updating its website to make it easier to access information about our services and to keep you up to date all the upcoming changes in VAT. The first step in this process is a change in our website and email addresses from ukvatadvice.com to constablevat.com. You don’t need to do anything to continue to access our website or your usual contacts, all mail and website traffic will automatically be rerouted. However, you will notice that emails coming to you will show our new email addresses. If you are in any doubt at any time as to whether an email you receive from us is genuine please call our office on 01206 321029.

 

CASE REVIEW

 

Upper Tier Tribunal

 

1. Splitting Single Supplies

This appeal concerns whether the VAT legislation allows application of a reduced rate of VAT to a component of what is, for VAT purposes, otherwise regarded as a single, standard rated supply. The Appellant had received assessments from HMRC for underpaid output VAT owing to the fact that single supplies were being split between standard and reduced rates of VAT.

A N Checker supplied and installed boilers along with energy-saving materials in domestic properties. The question before the Tribunal was whether the supplies were single supplies subject to either one or two rates of VAT. A N Checker did not argue that the whole supply should benefit from the reduced rate because of the reduced-rated component of the supply but that the reduced-rated component should benefit from the reduced rate despite being part of a single, standard rated supply of the installation of boilers.

The Tribunal found that, in the absence of a legislative provision for apportionment, a component of a single supply does not benefit from a reduced rate when forming part of a single, standard rated supply. It was asserted that, despite ambiguity in the construction of the legislation, there is no presumption in favour of a more liberal application or interpretation of the reduced rating provisions. The appeal was dismissed.

Constable Comment: Whilst certain supplies may be clearly defined and their treatment definitively described in VAT legislation, there are businesses which may make complex supplies of combined goods and services. In light of this decision, these businesses may wish to refresh existing practices and seek professional advice around the VAT treatment of their supplies.

 

First Tier Tribunal

 

2. Alteration or Annexe

This decision concerned the VAT liability of construction works undertaken at a church building, the Roman Catholic Diocese of Westminster sought to argue that the construction of a new hall attached to the old building after the remodelling of the church constituted an annexe to an existing building and should qualify for zero-rating. HMRC argued that the new hall constituted an alteration, enlargement or extension and was excluded from the zero-rate.

Prior to the construction, the Church had been separated into two areas, a worship area and a hall. The two were distinct from each other. The new hall had its own doors and was kept separate from the Churches area of worship; the hall being used for social events such as whist drives. The Tribunal considered that the construction work had been carried out in order to expand worship space for the Church and therefore, that the hall was a supplementary structure and an annexe to an already existing building.

The FTT also considered that the annexe could operate separately from the main Church with its own doors, toilet facilities, kitchen and radiators. It is held that the costs incurred were correctly treated as zero-rated by the Diocese.

Constable Comment: This case will be of interest to anyone carrying out construction works. It is prudent to seek professional advice before works begin as if the incorrect rate of VAT is applied throughout a lengthy and expensive project, it is possible that HMRC will seek to recover any input VAT incorrectly claimed or issue VAT penalty assessments if a certificate is issued to a contractor claiming zero-rating in error.

 

3. DIY Housebuilder’s Scheme

This appeal is against a decision by HMRC to refuse a refund of VAT incurred on the construction of a building as a DIY Housebuilder.

The Appellant received planning permission in 2011 for a proposed building to be used for tourism purposes only. This was an explicit term in the permission and it was specifically stated that the property “…shall not be occupied on a permanent basis.” Following completion of the construction, the DIY VAT refund claim was submitted to HMRC seeking to recover the VAT incurred on the costs of the build.

The VAT repayment was denied on the grounds that the property was only for business purposes; one of the covenants attached to the planning permission being that the property be used for tourism purposes only. HMRC contended that this meant that the property had been constructed in the course of business and so the DIY housebuilders scheme was inapplicable.

Giving a reasonable amount of time to the Appellant’s submissions, the Tribunal found in favour of HMRC and upheld its refusal to repay VAT incurred on the grounds that the intention and planning permission for the development was specifically for business purposes and prohibited domestic use.

Constable Comment: The DIY Housebuilder’s scheme enables people wishing to build their own homes to put themselves on a level playing field with property developers who can recover their input tax provided that they intend to make taxable supplies. It can be a complex process and standards of proof can be very high. If you are considering submitting a DIY Housebuilder’s claim or beginning a project then please do not hesitate to contact Constable VAT. In this case the appellant could have VAT registered voluntarily, supplies of holiday accommodation being standard rated, and reclaimed VAT incurred. VAT would have to have been accounted for on supplies of holiday accommodation moving forward.

 

4. Personal Export Scheme

This is an appeal against a decision by HMRC to refuse to allow the personal export scheme to apply to the Appellant’s export of a vehicle.

Hofmanns Henley Limited (HHL) is a car dealership which agreed the sale of a car to a customer resident in Jersey. It was intended that the Personal Export Scheme be applied to export the car at the zero-rate of VAT. Having agreed the sale and sent the appropriate paperwork to HMRC, the car was supplied to the customer.

HMRC refused the application to use the scheme claiming that HHL did not have the necessary pre-approval to zero-rate the car’s export; whilst the forms had been sent off, they had not been approved prior to the car’s removal from the UK.

HHL conceded that it had made a mistake but asserted that it was, at least in part, the fault of HMRC’s misdirection given over the telephone. HMRC also concede that the incorrect information was given to the Appellant over the ‘phone but state that the complaints in relation to this had been handled separately through the formal grievance procedure.

The Tribunal held in favour of HMRC as the criteria for the application of the Personal Export Scheme had not been met.

Constable Comment: Whilst this case revealed mistakes by both sides it serves to prove an important point. HMRC telephone conversations and Public Notices are not to be relied on as the law. For any high value purchase or acquisition with a potentially complex cross-border transaction and application of a special scheme it is vital to seek professional advice to ensure the highest degree of compliance. In circumstances such as these, HMRC often state “the law is the law” even in cases of official error. Where doubt or ambiguity exists, submitting a non-statutory clearance application to HMRC is the safest approach because HMRC will be bound by this, provided full facts have been presented.

CVC VAT Focus 13 September 2018

HMRC NEWS

HMRC and online marketplaces agreement to promote VAT compliance

The list of signatories has been updated with a new addition.

Claim a VAT refund as an organisation not registered for VAT

Use this online service (VAT126) to claim back VAT if you are exempt from it as a local authority, academy, public body or eligible charity.

Software suppliers supporting Making Tax Digital

The list of software suppliers supporting Making Tax Digital has been updated.

Cash accounting scheme (VAT Notice 731)

Information on how to account for VAT if you leave the scheme voluntarily or because your turnover exceeds the threshold has been updated.


CVC MAKING TAX DIGITAL UPDATE

 

Paragraph 2.1 of HMRC Notice 700/22 (Making Tax Digital for VAT) states, “With effect from 1 April 2019, if your taxable turnover is above the VAT registration threshold you must follow the rules set out in this notice. If your taxable turnover subsequently falls below the threshold you will need to continue to follow the Making Tax Digital rules, unless you deregister from VAT or meet other exemption criteria (see paragraph 2.2 of this notice).

Only businesses with taxable turnover that has never exceeded the VAT registration threshold (currently £85,000) will be exempt from Making Tax Digital.

This paragraph appears to suggest that if a business has ever exceeded the VAT registration threshold (including prior to 1 April 2019) the business will be impacted by the new MTD rules. However, the Chartered Institute of Taxation (CIOT) has reported this month that HMRC has confirmed that MTD will only apply where the business’ turnover has exceeded the VAT registration threshold at any time after 1 April 2019. The CIOT are anticipating that HMRC will update the Notice to make this clearer.

Similarly, businesses registered for VAT under the ‘intending trader’ rules will only be subject to the MTD rules when their taxable supplies breach the VAT registration threshold, irrespective of the value of input tax claimed in the interim period.


 

CASE REVIEW

First Tier Tribunal

1. Colchester Institute (Lead Case) – Whether funded education is a business or non-business activity

This appeal by Colchester Institute Corporation (CIC) is against a decision of HMRC to reject an application for repayment of overpaid VAT. CIC receives government funding to provide education and vocational training.

Before the rules on this issue were changed in 2010, CIC wrote to HMRC requesting to use the Lennartz mechanism for input VAT recovery in relation to some construction work. Under this arrangement input VAT was reclaimed in respect of both the taxable business and outside the scope non-business activities. Private or non-business use of the building then gave rise to deemed supplies, chargeable to VAT as such use occurred. HMRC agreed to CIC’s proposal and until 2014 CIC paid over output VAT on non-business use of the building as it arose.

In 2014 CIC submitted a claim for repayment of output VAT on the grounds that the provision of education and vocational training should be regarded as a business activity, regardless of how it is funded, and no output VAT should have been due. Whilst this view would also point to CIC’s original refund claim of VAT on the construction costs being incorrect, the time limits that apply meant that HMRC’s ability to seek a refund of the input VAT was constrained. [HMRC did have an alternative arrangement to deal with this point but this was not considered by the Tribunal.] Effectively, CIC sought a windfall benefit because the output VAT refund it sought was sufficiently recent to allow a recovery from HMRC, whereas the input VAT over claim occurred too long ago for HMRC to seek a rebate.

Giving lengthy consideration to the relevant EU law and UK legislation and, in particular, the potential dissonance between the terms “economic activity” and “business activity, the Tribunal found in favour of HMRC, asserting that the provision of education and vocational training, to the extent that it is funded by the funding agencies, is not an “economic activity.” Therefore, the Lennartz mechanism as it then stood gave CIC a right to deduct VAT and an ongoing liability for the output VAT which CIC sought to reclaim. As a result the appeal was dismissed.

CVC Comment: This case was designated as a lead case and a number of other institutions had their cases stood behind it. It addressed a historical issue but on the underlying points concerning “business” and “economic activities” it highlighted once again how nebulous the legal position can be. It is increasingly difficult to see a clear logic and, as one case follows the other, it seems to us that often there is a great deal of subjectivity and often the position is being construed to deliver a “sensible” outcome rather than the application of clear law to facts. For example, HMRC guidance states quite clearly that an activity cannot simultaneously be both a business and non-business activity which, in some respects, is what HMRC argues with its proportional non-business approach. It is also interesting that more was not made in the case of the acceptability of the UK law leading to ongoing output VAT declarations, bearing in mind that this was a sticking plaster applied when the previous UK law was recognised to be defective following a decision of the CJEU.

 


2. Golden Cube – Whether output tax was understated

In this instance, the appellant trades as a franchisee of Subway. In 2016 it received a VAT assessment when HMRC took the view that certain supplies of food had been incorrectly treated as zero-rated cold take-away food. The Appellant appealed the assessment, stating that the zero-rated supplies were correctly classified.

Three HMRC invigilations took place at the franchise. These revealed a higher percentage of standard rated-sales than Golden Cube declared. The appellant sought to appeal against these invigilations as they took place during weekdays, so did not account for evening and weekend trade. It was also argued that the inspections were carried out at a cold time of year so more people would have been purchasing hot food and eating their food in the premises, leading to a higher degree of standard rated sales. It was also asserted that the till system used at the Franchise was automatic and linked to Subway itself, leaving no room for human error in terms of VAT calculation.

Hearing witness statements from employees and examining the till system used by the Appellant, the Tribunal concluded that there were no systematic issues with staff training and that the till had not been tampered with to display more zero-rated sales than it should. On this basis, it was held that the assessment issued to the Appellant was excessive. Deciding that the Appellant had accounted correctly for all sales and associated VAT, the appeal against the assessment was allowed.

CVC Comment: This case goes to show that the Tribunal will take more into consideration than just the content of an HMRC invigilation. It also highlights the benefits of an electronic till system which automatically records the VAT liability for each transaction individually as it can be used as effective evidence when defending or appealing against HMRC. HMRC is often inclined to collect detailed information for a limited period and extrapolate large under declarations. In our experience, HMRC is more likely to use this as a tool to seek more VAT than is actually due from businesses that have some level of suppression. However, hard evidence of sales is the best defence, bearing in mind that at the stage that HMRC carries out physical observations on sales, it is likely to already have reached the conclusion that the tax is being underpaid and will see everything through this prism. If you have any issues similar to the ones at hand, do not hesitate to make contact with Constable VAT.

 


3. Rowhildon Limited – Belated notification of an option to tax

This appeal is against a decision by HMRC to refuse a belated notification of an option to tax land and property.

The Chief Finance Officer for the appellant provided a witness statement in which she stated that the property was purchased after agreement by the board of the company and she had been asked to deal with the paperwork.

Having completed the form (VAT 1614A) on 1 July 2016 the notification was given to the company’s management accountant who missed the post that day and so posted it the next working day, 4 July. HMRC claim to have never received this notification and requested proof of postage for the form. The appellant conceded that the notification had not been sent recorded delivery. However, it submitted to HMRC the minutes of the board meeting in which there was a decision to opt to tax as well as computer records to evidence that the decision to opt to tax had been made and to show that the form had been completed on 1 July 2016 and their own retained copy of the form. HMRC were unsatisfied with this and refused to accept the notification.

At Tribunal, the appellant demonstrated that the form could not have been back-dated as HMRC’s website does not allow a past date to be inserted when completing the form. The fact that the retained copy showed 1 July 2016 as the date proved that the decision to opt had been made on that date.

The Tribunal found in favour of the appellant, holding that HMRC’s refusal to accept all of the evidence presented to it without proof of postage was remiss. It is concluded that HMRC had no good reason to not accept the notification and that its decision was not made reasonably.

CVC Comment: HMRC should seek to achieve a fair, just and reasonable result in all dealings with businesses and should act in good faith. There may be circumstances in which the law does not give any latitude to HMRC but this was not such a case. This case seems to us to have been unnecessary. As far as we can judge, there is absolutely no suggestion that refusing the taxpayer application was necessary to guard against an unfair tax loss. HMRC seemed to have no reason to question the veracity of the taxpayer’s explanations. Even more importantly, the taxpayer proved that HMRC’s own systems not only supported its assertion but proved them unambiguously. It is difficult to understand why, in supposedly straitened times, HMRC would waste taxpayers’ money and force the appellant to incur costs itself on a case of this kind. We would like to say this is unusual but unfortunately it is not.


 

CVC VAT Focus 23 August 2018

HMRC NEWS

Local authorities and similar bodies

Decide which activities are business or non-business for VAT purposes if you’re a local authority or other public body.

Apply for the Fulfilment House Due Diligence Scheme (Notice FH1)

Find out if you need to be registered to store goods in the UK for sellers established outside the EU.

Administrative agreements with trade bodies (VAT Notice 700/57)

Details of administrative agreements relating to VAT on certain specific transactions between members of trade bodies and HMRC.

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.

 


CASE REVIEW

CJEU

1. Estonian Sales Tax Illegal?

The issue before the court in this instance was whether Article 401 of the VAT Directive must be interpreted as barring the maintenance or introduction of a local sales tax. The City of Tallinn introduced a 1% local sales tax which affected Viking Motors and other appellants, Viking Motors challenged the legality of this tax on the basis that the EU law on VAT only allows one turnover tax: VAT.

Giving consideration to the nature of VAT and how it is applied, it was concluded that there were sufficient differences between EU VAT and local sales tax for the two to run in tandem. It was held that Article 401 does prevent the introduction of another turnover tax but in this instance, as the cost could be absorbed by the business rather than being passed on to the consumer, the two taxes are sufficiently different to not breach EU law.

CVC Comment: There is a very high degree of scrutiny offered by the Courts when it comes to challenging the legality of domestic laws and taxes under EU law. In this case it was held that the nature of how the tax is applied, despite being materially the same, made the two taxes sufficiently different.

 


2. VAT on Joint Venture Costs

 

TGE Gas Engineering GmbH (TGE) is a company established in Germany which entered into a joint venture with a company called Somague Engenharia SA in Portugal in order to expand a gas terminal in Portugal on behalf of a utility company. TGE obtained a Portuguese tax ID number as a non-established person in that country in order to create an economic interest group to carry out the joint venture.

After this TGE set up a branch in Portugal and obtained another tax ID from the Portuguese authorities. This branch provided services to the joint venture which were charged on to the utility company and it was also invoiced for the costs to TGE in Germany.

The Portuguese tax authorities had previously denied recovery of the input VAT incurred on these costs based on special domestic rules applying to joint ventures. The Court held that Articles 167 and 168 of the VAT Directive and the EU principle of neutrality must be interpreted as preventing domestic tax authorities from regarding a company which has its headquarters in another Member State and the branch which it has in the first of those States as constituting two separate taxable persons. For that reason, they are also prevented from refusing that branch the right to deduct the VAT on the expenses incurred on behalf of the joint venture/parent company.

CVC Comment: The UK tax authorities may view joint ventures as a taxable person in its own right for VAT purposes. In that scenario, it is the joint venture that has the right to recover any VAT incurred, rather than the parties to the joint venture. This serves as a useful reminder that purchase invoices should be addressed to the correct taxable person. The business activities of a joint venture should be considered in its own right, and an obligation for a joint venture to VAT register may arise if the parties arrangements are considered to form a partnership. A joint venture may choose to VAT register voluntarily in order to recover VAT incurred (subject to the usual VAT recovery rules).

 


3. Municipalities: Entitled to deduct?

 

The Polish municipality of Ryjewo constructed a building in Poland and the made a “cultural centre” responsible for the management of the property, allowing them to use the building free of charge. This was allocated as a non-taxable activity for the taxation authorities, despite The Municipalities’ VAT registration, as there was no charge made.

Four years later a part of the building was rented out commercially, The Municipality sought to adjust the deduction of input VAT paid for the building, now attributing this part of the building to a taxable supply. The relevant Polish Minister had reached a decision that VAT was not deductible for The Municipality as the building was not used for an economic activity. This is appealed against.

The Court find in favour of The Municipality, concluding that at the time the building was constructed it was acting in its capacity as a taxable entity and not as a non-taxable Government body. VAT is deductible despite the building having initially been put to 100% non-taxable use by a public body.

CVC Comment: Even though no intention to later use the building to make taxable supplies was declared and there was an argument for no economic activity having previously taken place, the deduction was allowed by the CJEU. This is because the right to deduct input VAT is a fundamental aspect of the VAT system. Ultimately, the first use of the building did not matter as this only determines the initial reclaim, adjustments are to be made in line with changes in taxable/non-taxable use. This case may be of interest to organisations that have made an initial non-business use of capital expenditure on property.

 


First Tier Tribunal

 

4. Gaming Machines and Fixed Odds Betting Terminals

 

The issue before the Tribunal in this instance concerned revisiting the EU principle of fiscal neutrality. The Rank Group (Rank) made supplies of gambling through gaming machines including fixed odds betting terminals (FOBTS) and “casino jackpot machines”. The casino jackpot machines were specifically excluded from the exemption to VAT but FOBTS were exempt from VAT before 6 December 2005 when the definition of “gaming machine” was extended.

Rank made a claim for repayment of VAT which it had charged and accounted for in relation to the jackpot machines on the grounds that the two machines were similar and treating their supplies differently for VAT purposes was contrary to the principle of fiscal neutrality.

After a detailed consideration of relevant case-law and analysing the different types of machines to draw similarities and differences between the two, the Tribunal concluded that, despite certain differences, these differences did not have a significant influence on the average consumer’s decision to use one or the other. The Tribunal found in favour of Rank and allowed the appeal against a decision to deny VAT recovery.

CVC Comment: This case shows that the Tribunal will have regard to how the consumer interprets what he/she is purchasing and the material aspect of the supply. It was observed in the judgment itself that to try to draw distinctions within individual gaming machines and games could lead to absurdities of different rates of tax being applicable to one machine. HMRC will often apply similar tests to that of the Tribunal although when analysing transactions.