VAT Focus 11 September 2014



HMRC has issued the following:

  • Updated notice 700/62 Self Billing. There do not appear to be any significant changes to this notice.
  • VAT Notes 3/2014 This latest edition of the VAT Notes includes items on businesses bringing vehicles to the UK from abroad; place of supply rule changes and introduction of Mini One Stop Shop; improvements to online registration.



Brockenhurst College (“the College”) provides education to students, including the teaching of courses in (a) catering and hospitality, and (b) performing arts. To enable students enrolled in catering and hospitality courses to learn skills in a practical context, the College runs a restaurant. The catering functions of the restaurant are all undertaken by students of the College, under the supervision of their tutors, and members of the public attend the restaurant and pay for their meal, the charge being around 80% of the cost of the meal. Similarly, for the performing arts course the College stages concerts and performances for paying members of the public.

The issue in this appeal is whether the supplies of restaurant and entertainment services are, as the College claims, exempt for VAT purposes or, as HMRC maintain, standard rated. The case had already been decided by the First Tier Tribunal (FTT) in favour of the taxpayer. The Upper Tier Tribunal (UTT) upheld the FTT decision, holding that the FTT was right to conclude, on the basis of its findings, that the restaurant and entertainment services are exempt as supplies of services and goods closely related to the provision of education.

The UTT agreed that there is no requirement under EU law that the goods or services must be consumed by the student. Supplies may be closely related if they are a means whereby the students better enjoy the supply of education; the requirement for direct use denotes no more than a need for the goods or services to be for the direct benefit of the student.



Lincoln Smith was registered from 1 August 2001 and ran a wine bar. In early 2008 his supplies fell below the VAT registration threshold and he stopped submitting VAT returns. No application to deregister from VAT was made until 12 January 2012 by which time HMRC were pursuing a large debt outstanding as a result of Estimated Assessments issued.
Mr Smith argued that his registration should be cancelled from March 2008 as at that point his turnover was below the compulsory registration limit. However, HMRC stated that as Mr Smith had continued to trade he was entitled to be registered and as he had not requested that the registration be cancelled the registration must remain in place until such a request was made. The Tribunal agreed with HMRC. The legal position was that the registration was effective until the date the request for deregistration was received.


Boxmoor Constrution Ltd  (Boxmoor) carried out work constructing a dwelling on the site of an existing residential property. The new dwelling was self contained, had no internal access to any other dwelling and had no restrictions on separate use or disposal. However, a small portion of the front façade of the existing dwelling was retained and the planning consent described the works as ‘extensions’.

During a VAT inspection HMRC took the view that the works supplied by Boxmoor could not be zero-rated as the construction of a new dwelling as the retention of the façade was not a specific requirement of planning consent. The Tribunal held that as the works were described as extension rather than demolition it is unlikely that any requirement would have been made to protect part of the building from demolition. As a result while the works may in substance have amounted to construction of a new dwelling the lack of any specific requirement to retain a façade meant that the conditions for zero-rating were not fulfilled.

HSM Law Ltd  purchased assets from a firm of solictors, Brooke North (BN), that was wound up due to financial problems. HSM was specifically set up by the partners of BN to try to recover monies due to them and to this reduce their indebtedness to the bank. HMS paid £200,000 to BN for those assets and VAT was charged on the transfer. HSM attempted to recover this VAT as input tax. HMRC refused to repay this VAT arguing that as HSM had acquired part of the assets of BN, it had effectively acquired part of its business. The purchase was therefore a transfer of a going concern and no VAT should have been charged. As a result the VAT charged in error was not input tax and no repayment was due to HSM.

As part of the arrangements for closing down BN, it had been decided that BN’s remaining assets would be purchased by HSM and that HSM would be responsible for collecting the appropriate funds from those solicitors to whom BN’s clients had been passed. However, no business was to be carried on by HSM and there were no staff employed.

The tribunal was in no doubt that the partners intended to wind down the BN business in as orderly a manner as they could. As a result, they arranged for all the clients’ businesses to be transferred to other solicitors. They arranged for all the staff to be reemployed elsewhere. All that was left was to obtain as much money as they could for the work which had been carried out by BN and pay it to the bank, to reduce the partnership debt and thereby their liabilities under their personal guarantees. There was no way that activity could be viewed as forming part of a solicitors’ business, nor could it be part of a going concern as the concern had already gone. Taking all the facts into account, including the intention of the parties, HSM’s appeal was allowed.



GMAC claimed bad debt relief of more than £2,000,000, covering the period from 1978 to 1997, in relation to hire purchase contracts for motor vehicles terminated early on default without full payment and without the buyer becoming owner. HMRC rejected the claim on the basis that the effect of VATA 1994, s 36(4)(b), as originally enacted and prior to its amendment by FA 1997, was that no relief was due. GMAC appealed, contending that the relevant conditions contravened EU law and should be treated as invalid and ineffective. The First-tier Tribunal accepted this contention and allowed the appeal.

HMRC appealed to the Upper Tribunal, arguing that GMAC was not entitled to the repayment which it had claimed, because the effect of the decision in C & E Commrs v General Motors Acceptance Corporation (UK) plc (No 2) was that GMAC was to be treated as having made the original supply for a lower consideration than it had actually obtained. The repossessed cars had been sold at auction and those sales were outside the scope of VAT (applying the VAT (Cars) Order 1992.

Effectively HMRC’s position was that it would defeat the purpose of EU VAT law if GMAC was allowed to:

  • Refrain from declaring VAT on the full value of the original supply (relying on the direct effect of EU law to claim VAT bad debt relief).
  • Refrain from declaring VAT on sales at auction (relying on UK law, the Cars Order).

It was this potential ‘windfall’ issue that the UTT referred to the CJEU.

The CJEU ruled that the money received by GMAC when selling cars at auction related to an entirely different transaction to the original supply under the HP agreement (in relation to which bad debt relief was claimed). The fact that a taxpayer elected to rely on EU law having direct effect on one transaction (because UK law incorrectly implemented EU law) did not mean that it could not apply UK VAT law to a different transaction. The fact that the cumulative effect of this approach led to an outcome that neither EU law or national law intended was not sufficient to allow HMRC to prevent the taxpayer relying on EU law having direct effect in relation to one of those transactions.