HMRC NEWS

HMRC’s One-to-many email to charities regarding non-business income
HMRC’s One-to-many team commenced sending out a brief educational email to small VAT registered charities with a turnover of up to £2million. The aim of the exercise is to raise awareness in the small VAT registered charities sector about the obligation of carrying out business/non-business apportionment calculations where necessary. If a charity has non-business activities (usually the free supply of goods and services), or receives income which is outside the scope of VAT, grant funding, for example, it may be required to consider a business/non-business apportionment when determining how much VAT incurred can be reclaimed. Constable VAT works with a number of charities and not-for-profit organisations across a wide range of sectors and we would be pleased to assist with any VAT queries on this or any other VAT matters.

Health professionals and pharmaceutical products (VAT Notice 701/57)
The above guidance sets out how to account for VAT on goods and services provided by registered health professionals, including doctors, dentists, nurses and pharmacists. HMRC has updated the guidance to add anaesthesia associates and physician associates to the list of health professionals in section 2.1.

Revenue and Customs Brief 3 (2024): VAT on cladding remediation work
HMRC has released Revenue and Customs Brief 3 (2024)(RCB3) which aims to clarify HMRC’s policy on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings. To support this brief, HMRC also released Guidelines for Compliance GfC11 – Help with VAT treatment of remedial works, which provides more detail on the VAT treatment of remediation works, including HMRC’s policy on what constitutes snagging, and includes examples of how to apply HMRC’s rules on the VAT treatment of remediation work and the recoverability of input tax incurred.

CASE REVIEW

Upper Tribunal

1. Tour Operators Margin Scheme (TOMS)

In this case, the appellant, Sonder Europe Limited (Sonder), leased self-contained apartments from third party landlords, it then granted licenses to corporate and leisure travellers to occupy the furnished apartments, usually for around five nights. Sonder accounted for VAT only on its profit margin in accordance with TOMS, i.e. the difference between the total amount charged to travellers and the cost to Sonder payable to the third-party landlords. Given that no input VAT was incurred on the cost from third party landlords, accounting for output VAT due under TOMS was more beneficial to Sonder than standard VAT accounting. HMRC argued that Sonder’s supplies did not fall within TOMS and output VAT is due on the entire consideration received from customers and therefore assessed Sonder to VAT in the sum of £252,229. The VAT assessment was appealed and the FTT held that the supplies fell within TOMS. Our summary of the FTT decision can be read here.

HMRC appealed the FTT’s decision to the Upper Tribunal (UT) and the question for UT to determine was whether the supplies received by Sonder from third party landlords were supplied onwards for the benefit of travellers without material alteration or further processing. HMRC’s position was that a supply, where a taxpayer acquires an exempt supply and then makes a taxable supply of travel facilities, cannot fall within TOMS. HMRC also raised the point that Sonder acquired interests in lands for terms of several years (up to ten years in some cases) but supplied short term holiday accommodation.

The Tribunal considered both parties submissions; however, it agreed with HMRC. The UT accepted the FTT’s conclusion that there were no material alterations in respect of the apartments; however, the FTT focused solely on any physical alterations to the supply such as furnishing and decorating when making its decision. The UT concluded that the FTT erred in law by not comparing the alterations to the full bundle, including the rights and interests in land. It concluded that the service which was supplied by Sonder to the traveller was materially altered from that which was supplied by the third party landlord to Sonder. Sonder acquired long terms leases usually 2-10 years, whereas it made supplies of short term holiday accommodation. The travellers could not directly purchase short term holiday accommodation from the landlords therefore there must have been a material alteration to the actual supply made.

Constable Comment: In this case, the Upper Tribunal disagreed and therefore overturned the FTT’s decision, meaning Sonder’s appeal against the assessments is dismissed and VAT is due on the total consideration received. As no input VAT was incurred on the leases from third party landlords, the VAT liability to Sonder is significantly more compared to the VAT due under the TOMS. The UT concluded that the FTT focused solely on the physical alterations to the accommodation in isolation, not giving thought to the fact that the supplies bought in were VAT exempt long leases, but Sonder was making supplies of short-term taxable holiday accommodation, meaning there must have been a degree of alteration, a short-term licence to occupy for a couple of days being different to the long-term leases supplied to Sonder by the property owners. On that basis, it was concluded that Sonder was making its own in-house supplies to travellers which falls outside the TOMS. It will be interesting to see whether Sonder decided to appeal the case further, and this decision is obviously a boost to HMRC.

2. Evidence to support input VAT claim

FS Commercial Ltd (FSC) submitted a VAT repayment return in respect of the VAT accounting period ending 31 August 2018 (08/18). HMRC carried out a pre-VAT repayment credibility check prior to authorising the VAT refund requested.

Correspondence ensued but, in headline terms, FSC did not provide the information specifically requested by HMRC, in particular invoices from suppliers supporting an entitlement to reclaim VAT in respect of supplies received.

In February 2019 HMRC raised VAT assessments in accordance with section 73, VATA 1994. This part of the law allows HMRC to raise VAT assessments and reads ‘Where a person has failed….to keep any documents and afford the facilities necessary to verify such returns…..they may assess the amount of VAT due from him to the best of their judgment and notify it to him’. HMRC’s preferred decision was to raise VAT assessments totalling £19m in respect of VAT accounting periods 05/16 to 11/18 on the basis that there was insufficient evidence to support the claims to input VAT.

HMRC’s alternative decision is to issue VAT assessments of £15m in relation to VAT accounting periods 11/16 to 11/18 because FSC had not provided satisfactory evidence of payment to suppliers.

A decision of the FTT released in July 2023 (we cannot see that this decision was reported) seems to have focussed on the scope of its jurisdiction. When FSC prepared its case for a hearing at the FTT it sought to include ‘tens of thousands of invoices in its List of Documents’, presumably on the basis to evidence its right to deduct input VAT.

HMRC objected to this approach on the basis that the FTT’s jurisdiction was supervisory, and these documents had not been given to the HMRC decision maker and were not available to the officer when making the decision to raise VAT assessments. HMRC argued that these invoices were irrelevant to the substantive issue that the FTT had to decide i.e. was it reasonable for the HMRC officer to refuse an entitlement to input VAT deductions with the evidence presented and to hand at the time of the enquiry, and the decision to raise VAT assessments was made.

The FTT concluded that it did not have the legal power to consider new evidence presented by FSC to support its input VAT claims. The FTT decided that based on the evidence available to the officer at the time the decision to assess was made there were reasonable grounds for HMRC to refuse to allow the input VAT claimed. The VAT assessments were upheld. FSC appealed to the UT which confirmed its agreement with the decision of the FTT.

The UT decision includes a strong and forceful statement at paragraph 123 which we have reproduced in its entirety below:

‘We agree with Mr Watkinson (counsel for HMRC) that the operation of the VAT system is not a game to be played by taxpayers. When HMRC requests or requires that a taxpayer produces a valid VAT invoice in support of its claim to input tax deduction, it is doing nothing more than enforcing the European and domestic law that requires that such an invoice be held at the time of the exercise of the right to deduct. Where the taxpayer refuses a lawful and reasonable request, it puts itself in a position whereby the claim to input tax deduction is then a matter for the discretion of HMRC. If HMRC exercises that discretion against the taxpayer, the taxpayer cannot then, on appeal to the FTT, produce the invoice, as a surprise or ambush, even if it truly held the invoice all along, and so side-step the exercise of HMRC’s discretion’.

Constable comment: This is an interesting decision as we have dealt with cases where HMRC has, in the absence of supplier invoices, allowed input VAT recovery on the basis of satisfactory alternative evidence, a taxpayer usually incurs VAT to support onward taxable outputs, and HMRC generally exercises a degree of discretion, in our experience at least. The decision also reinforces that when dealing with HMRC it is important that any agreed deadlines are met. If there are problems collating information requested by HMRC, it is important for taxpayers to deal with matters proactively and engage with HMRC and seek to agree an extension of time to provide the information requested. A decision of the UT of this nature does, perhaps, give HMRC the opportunity to take a stricter approach in similar circumstances, moving forward; however, we hope that HMRC will continue to take a pragmatic approach and make decisions on a case-by-case basis.   

First-Tier Tribunal

3. VAT zero rating: Sports drink

This appeal concerned three powder based products supplied by Global by Nature Limited (GBN). The products (Sunwarrior Classic, Plus and Warrior) were powder based and could be used as a food supplement; however, the generic impression from marketing and packaging is that the products are primarily used for preparation of drinks. GBN submitted an error correction notification (ECN) to HMRC for overdeclared output VAT in relation to these products, taking the view, they were zero rated food items.  HMRC rejected part of the ECN on the basis that the products were ‘sport drinks’ and therefore excluded from zero rating under Item 4A of Group 1 Schedule 8 VATA 1994. The decision was upheld following a statutory review, and GBN appealed to the FTT.

There is no statutory definition of ‘sports drink’ in VAT legislation. With regards to the interpretation of Item 4A, HMRC’s position was that all drinks advertised or marketed as designed to enhance physical performance, accelerate recovery after exercise or build bulk were “sports drinks” as long as there was a reference in the advertising and marketing to “sports”.

GBN adopted a two-stage test, arguing it was first necessary to establish whether a product was a “sports drink”, and only in the case if it was, the second stage was to decide whether it was advertised or marketed as set out above in HMRC’s interpretation. The FTT agreed with GBN’s two stage approach and went on to consider whether the products are ‘sport drinks’.

The FTT found that the meaning of a ‘sports drink’ in Item 4A is a drink which contains significant amount of carbohydrate (usually sugar) and may contain salts (such as sodium and potassium). Having considered the ingredients, the FTT noted that the products contained a maximum of 5% carbohydrate and therefore it cannot be a ‘sports drink’. On that basis, the products cannot fall within Item 4A and therefore are zero rated for VAT purposes. The appeal was allowed.

However, the Tribunal also went on to consider the products’ VAT liability, in the alternative view if HMRC’s interpretation of Item 4A was correct, rather than the two-stage approach, meaning as long as the products were advertised and marketed to:

• Enhance physical performance
• Accelerate recovery after exercise; or
• Build bulk

then any drink will be standard rated in accordance with Item 4A, even if it does not fall within the meaning of ‘sports drink’. The FTT reviewed websites, the customer base, the product catalogue and the overall brand and concluded that the ‘Classic’ and ‘Plus’ products do not satisfy those requirements, meaning these are zero rated in any event. However, the ‘Warrior’ product was advertised and marketed accordingly to fit into Item 4A, meaning in the alternative event that HMRC’s interpretation of Item 4A is correct then this product only would be standard rated.

Constable Comment: This was an interesting case where the Tribunal considered an alternative decision in the event that its statutory interpretation of Item 4A were to be wrong, and this alternative decision found one of the three disputed products to be standard rated. However, as long as the FTT’s interpretation of Item 4A stands, meaning a product must be a ‘sport drink’ in order for Item 4A to apply, it suggests all products are zero rated because they cannot be a sport drink due to their negligible levels of carbohydrates. On that basis, no further thought needs to be given to the advertising and marketing of the products. Zero rating food or similar items often attracts queries and challenges from HMRC; and the sums involved can be significant. In this case, GBN originally submitted an ECN in February 2021 in the sum £1,246,566 owing (covering the period 1 October 2016 to 30 September 2020), this seems to have been adjusted and a revised figure of £798k is mentioned in the decision. When making similar supplies we would recommend seeking professional advice to ensure that the correct VAT liability of the product is identified, and to avoid potential disputes with HMRC. Constable VAT has relevant experience in dealing with zero rated food items and would be pleased to assist with any queries.

4. VAT: Legitimate expectation

 In the decision of Treasures of Brazil (TOB) the taxpayer applied to VAT register with effect from 1 October 2022 on 21 September 2022. Following receipt of the VAT registration application HMRC emailed the appellant on the same day (21 September 2022) and specifically advised TOB ‘you should wait until your VAT registration is confirmed before you charge customers for VAT’. The taxpayer, not unreasonably, took this to mean that it should only charge customers VAT once it had conformation its VAT registration had been approved, and it had received its VAT registration number.  

 TOB received a letter from HMRC confirming its VAT registration application had been approved and confirming its VAT registration number. This letter was dated10 October 2022; however, the letter was not received by TOB until 28 December 2022. HMRC later confirmed that its systems show that the letter was, in fact, issued on 17 December 2022, no explanation was offered by HMRC as to why this letter was dated incorrectly, and this point was not pursued by the FTT. Similarly, HMRC did not explain why it took almost three months to process the VAT registration application.

TOB submitted its VAT return for the period 1 October 2022 to 31 December 2022 (12/22) which declared no output VAT and requested a VAT refund of £4.5k, which HMRC queried. HMRC subsequently assessed for VAT due (in a letter dated 23 May 2023) of £14,256.95 on standard rated sales (TOB supplies jewellery and bags) made from 1 October 2022, TOB’s effective date of VAT registration (EDR). In addition, the input VAT figure was increased by HMRC to £7,744.93, meaning a net VAT liability owing to HMRC of £6,512.02, rather than a refund of VAT TOB expected.

TOB appealed this decision (that it owed £6.5k VAT to HMRC) to the First-tier Tribunal (FTT) and HMRC defended its behaviour. HMRC argued that the FTT does not have jurisdiction to hear a case on legitimate expectation. This led the FTT to consider 3 points:

(1) Does this Tribunal have jurisdiction to consider matters of legitimate expectation in the present appeal?

(2) Did the Appellant have a legitimate expectation?

(3) If the Appellant did have a legitimate expectation, what is the effect on the assessment?

The FTT considered each point in turn and concluded that it does have jurisdiction to consider TOB’s legitimate expectation claim. It also agreed with TOB that it had a legitimate expectation finding that HMRC’s instruction email was clearly intended to contradict and override HMRC guidance (accompanying notes to the VAT registration application and VAT Notices) and there was no cross reference in HMRC’s email to other guidance and the email gave no detail or qualification.

TOB can only rely on its legitimate expectation argument if the outcome produces an unfair result. The FTT found that this was the case. TOB could have charged its customers VAT from 1 October 2022; however, on 21 September 2021 HMRC specifically instructed it not to do so. This meant that TOB would have to account for output VAT from its own funds because HMRC gave incorrect advice. The appeal was allowed and the assessment set aside.

Constable comment: We are pleased that TOB was successful in its appeal as the legitimate expectation hurdle can be a difficult argument to win; however, the facts in this case seem overwhelmingly in TOB’s favour. In terms of HMRC’s behaviour, it is not clear why resource would be expended when HMRC’s advice in its instruction email to the taxpayer was clearly incorrect. We would imagine that this case has cost more to defend than the VAT at stake, and no doubt caused TOB a considerable amount of worry and stress. This case was not heard until 19 July 2024, and the decision released on 17 October 2024. It is disappointing that HMRC’s SOLS team did not consider the facts and take a pragmatic approach, looking at the bigger picture, rather than proceed to a hearing and defend HMRC’s position on the basis that the FTT did not have the jurisdiction to consider a case dealing with legitimate expectation. The other important point that this decision highlights, which may have not been in the wider public domain had HMRC taken a more reasonable approach, is the fact that HMRC official correspondence contains worrying inaccuracies. The decision reads as follows at paragraph 14. ‘The letter from HMRC confirming VAT registration with effect from 1 October 2022 was dated 10 October 2022. HMRC accept that the date on the letter was incorrect. HMRC’s systems indicate that the letter was issued on 17 December 2022. Ms Brambila gave evidence that the letter was not in fact received until 28 December 2022. We accept Ms Brambila’s evidence and find accordingly.’ It is obviously a concern that a letter from HMRC, which may impact a taxpayer’s statutory appeal rights, is not dated the day that document is finalised and issued but backdated to a date over two months earlier. We would expect that HMRC had robust systems in place to prevent such mistakes happening; however, the evidence that has come to light in this case only serves, naturally, to make taxpayers and advisors wonder how many times this has happened before. We have dealt with cases where it has seemingly taken a considerable amount of time for HMRC postal correspondence to be received by us or clients and emailed correspondence would appear to be the way forward and offering a clear audit trail.

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC NEWS

VAT on private school fees
Following the release of the Technical Note on 29 July 2024, it has been confirmed that from 1 January 2025, school and boarding fees for private schools will be taxable at the standard rate of VAT (20%). Further to the technical note, HMRC has now released new guidance as follows:

• Check if you must register for VAT if receive private school fees
• Charging and reclaiming VAT on goods and services related to private school fees

The newly published guidance provides information on who must register for VAT and when, considering the date of payments received and the VAT registration threshold. The guidance also covers voluntary VAT registration with some commentary on how to register, including group VAT registrations. HMRC also provides some useful commentary around charging VAT on supplies of education in particular scenarios such as welfare, grants, bursary payments, local authority placements etc. In addition, the guidance briefly covers input VAT recovery following VAT registration.

Help with VAT compliance controls – Guidelines for Compliance GfC8
These guidelines are for UK VAT registered businesses who use invoice accounting, meaning they generally account for VAT when invoices are issued and received. The guidelines set out HMRC’s recommended approach and are designed to help you understand HMRC’s expectations as you plan, carry out, and review the accounting and compliance processes that ensure VAT is accurately declared by your business. The guidelines and control points:

• help you make informed decisions and consider if you have sufficient controls within your systems and processes
• should be applied to reflect the complexity and scale of your own business
• are not intended to be exhaustive or expected to apply equally to all businesses
• help you identify risks and enable you to develop a robust strategy to reduce those risks

Qualitative research on VAT registration
HMRC commissioned Ipsos, an independent research agency, to conduct qualitative research to explore perceptions and experiences of VAT registration. The research also examined linked barriers or pressures on businesses in respect of growth. Similar research was also carried out for VAT deregistration which can be found here. The research around registration and de-registration contains awareness, knowledge and perception and experiences in dealing with HMRC.

The Value Added Tax (Caravans) Order 2024
This newly published guidance is likely to be of interest to manufacturers, retailers and suppliers of residential caravans and people who buy them for residential use. The conditions for the zero rate of VAT to apply to a residential caravan include the requirement for the caravan to be manufactured to standard 3632 issued by the British Standards Institution (BSI). The BSI reviewed and updated this standard in 2023, and it was therefore necessary to amend the Value Added Tax Act 1994 (VATA) to ensure that caravans manufactured to the new standard can qualify for the zero rate. The measure also zero rates caravans that meet new versions of the same standard which may be issued in future by the BSI.

Claim a VAT refund as an organisation not registered for VAT
Certain organisations which are not VAT registered can make a claim for a VAT refund by submitting a VAT126 to HMRC. This usually applies to local authorities and similar bodies, museums and galleries that offer free admission etc. HMRC has updated their guidance to confirm that the VAT126 can now be completed online.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme and details 6 new additions and 2 removals.

CASE REVIEW

Upper Tribunal

1. VAT: Prompt Payment Discount

In this case, TalkTalk Telecom Limited (TTL) appealed against the FTT’s decision to uphold HMRC’s assessment in the sum of £10,606,226 for underpaid VAT during a four month period between 1 January and 30 April 2024. During this period TTL offered a ‘Speedy Payment Discount’ (SPD) which was a 15% discount on its services if their monthly bills were paid within 24 hours.

At the time, in accordance with the legislation, if the terms and conditions (T&Cs) allowed a discount for prompt payment, the consideration was taken as reduced by that discount whether or not the discount is taken up. TTL accounted for output VAT on the discounted amounts even though only 3% of their customers paid within 24 hours. HRMC took the view that the T&Cs did not allow for prompt payment discount and therefore VAT was due on the full amounts and raised assessments accordingly. TTL appealed to the FTT, however the decision was upheld. The summary of the FTT’s decision can be read here.

TTL appealed to the Upper Tribunal (UT) however the decision was once again upheld. The UT has concluded that the T&Cs did not include a discount for prompt payment, but rather agreed, on a month by month basis, to accept a lesser sum if paid within 24 hours.  For those customers who did not pay within 24 hours, the T&Cs did not change at all. Therefore, the supplies to any customer not taking advantage of the discount, was not supplied on T&Cs which allowed for a prompt payment discount, as a result output VAT is due on the full amount (except in the limited cases where the discount was taken up) and the appeal was dismissed.

Constable VAT comment: This case considered previous legislation which were revised since and is therefore historical interest only, however, it acts as an important reminder that for VAT purposes HMRC will consider both the contractual agreements as well as the commercial reality of a supply.

First-Tier Tribunal

2. VAT penalties: Reasonable excuse

This is the first case concerning the new point-based penalty system and penalties for late payment of VAT introduced from 1 January 2023. In this case, the appellant,  Sandra Krywald, engaged the services of a bookkeeper to prepare and submit VAT return figures to HMRC, however, the appellant was reluctant to sign VAT returns due to doubts of its accuracy. The appellant was in contact with HMRC and was told that she is required ‘opening and closing balances’ to submit a VAT return. The appellant discussed this with the bookkeeper who then resigned ceasing to act for the appellant. Subsequently, the appellant engaged the services of a VAT specialist who confirmed that HMRC’s advice was incorrect. VAT returns were then prepared and submitted retrospectively with the aid of a VAT specialist.

However, HMRC has charged penalties for late payments of VAT and issued penalty points for late submission of VAT returns. The appellant has appealed to the Tribunal arguing it had a reasonable excuse on the grounds that she was entitled to, and did, rely on the bookkeeper to supply her with competent staff which they failed to do and once she realised that the bookkeepers did not provide accurate figures, she made every effort to resolve the situation including contracting HMRC who also provided misleading information.

HMRC argued that it is statutorily provided that reliance on another person to do anything is not a reasonable excuse, therefore the penalties were correctly charged.

The Tribunal had no difficulty in deciding that the appellant had a reasonable excuse concluding that the appellant took reasonable care to avoid the failures by the firm, and by HMRC, and then remedied the failings without unreasonable delay once the excuse ceased. The appellant made reasonable efforts to rectify the failings of various other parties on which she relied on. Once it was established that HMRC provided incorrect advice, with the assistance of a VAT specialist the position was promptly rectified without unreasonable delay and therefore the appellant had a reasonable excuse.

Furthermore, the Tribunal also went on to confirm that even if it was not a reasonable excuse, the penalty would have been reduced to nil due to ‘special circumstances’. The combination of failings from the bookkeeper together with HMRC’s incorrect advice leading to far more work than is required, has led to the late submissions and payments, and the Tribunal considered this to be special circumstances. The appeal was allowed.

Constable Comment: This is a helpful case demonstrating how a person can succeed on the ‘reasonable excuse’ argument. In addition, it is particularly helpful given that the new penalty system was considered.  Although it is not a reasonable excuse to rely on third parties such as bookkeepers and advisors, it becomes a reasonable excuse if the taxpayer ‘takes reasonable care to avoid the failures by the firm, and by HMRC, and then remedied the failings without unreasonable delay once the excuse ceased’.

In this case, the appellant made significant efforts to attempt to rectify failings by her bookkeepers, as well as failings on HMRC’s behalf. The VAT returns were submitted promptly once these failings were remedied, demonstrating a reasonable excuse. It is of note that HMRC failed to consider a “Special Reduction” either, HMRC seldom consider this provision in earnest.

It appears that reliance on a competent VAT advisor was essential in this case to rectify the issues and has helped the appellant to succeed with the reasonable excuse argument, with the Tribunal concluding ‘Taking this advice is in our view taking reasonable care to avoid HMRC’s failings.’ Taking professional VAT advice is often seen as ‘reasonable’ and therefore mitigates the risks of any penalties from HMRC for ‘careless’ errors.

3. Input VAT recovery on legal fees

This case concerned Visual Investments International Limited’s (Visual) appeal against HMRC’s refusal to accept input VAT claims. Visual’s main business activity was investing in start-up businesses and providing consultancy services to help them reach their full potential. Prior to such supplies, Visual incurred professional fees on legal proceedings protecting their investments as it has been denied the value of their shares in two companies together with the dividend payments. It was confirmed that the business activities of Visual would restart upon receipt of the money arising from the legal proceedings therefore the input VAT incurred on legal fees have a direct and immediate link to its taxable supplies of management consultancy. HMRC did not accept this argument and denied input VAT accordingly.

The First-Tier Tribunal (FTT) agreed with HMRC concluding that the legal fees did not have a direct and immediate link to making taxable supplies of management consultancy. The purpose of the legal services was the realisation of value of by selling the equity and making a large profit. The invoices provided the following narrative: “Shareholder dispute relating to the fraudulent removal of assets from Streaming Investment PLC”.

In addition, the FTT also concluded that Visual was not the sole recipient of the legal services. There were three recipients of the legal services and therefore an apportionment would have been required even in  the event that the FTT concludes there was a direct and immediate link between the legal services and taxable supplies. However, that was not the case and the appeal was therefore dismissed.

Constable VAT comment: This case was determined in accordance with its own specific facts and it is unlikely to directly impact other taxpayers, however it offers a careful analysis of the ‘direct and immediate link’ principle which is a key aspect of input VAT recovery. If you or your business incurred input VAT and there is ambiguity whether it is recoverable, we would recommend seeking professional advice to ensure input VAT is not over-claimed as in certain cases this may lead to assessments, careless penalties and interest amounts due to HMRC.

4. VAT DIY Claim eligibility

This case concerned a refund claimed under the DIY Housebuilders Scheme. The DIY Scheme allows private individual housebuilders to reclaim input VAT incurred on the goods and services purchased on the construction or conversion of dwellings. In this case, the appellant, Brian Lawton, converted a barn into a dwelling, however, this was done in two phases with separate planning permission, one being for ‘conversion of a barn to a dwelling’ and the other ‘extension to existing barn conversion’. Due to uncertainty caused by the COVID pandemic, the appellant sought a completion certificate in relation to the first phase of constructions and submitted a DIY claim to HMRC. This was an eligible claim which was not disputed.

Subsequently, the remainder of the conversion was complete, and the appellant submitted a second DIY claim to HMRC in the sum of £2,582.38. HMRC refused this claim on the basis that only one single VAT DIY claim is allowed in relation to one conversion. The appellant argued that due to the financial and economic impacts of the Covid pandemic, the restrictions which followed and its impact on the building industry, and the limited availability and increased costs of labour and materials, he decided it would be sensible to obtain a completion certificate for the part of the project that was completed, even though the entire project was not complete and habitable at this stage. However, given that a completion certificate was issued, in accordance with HMRC guidance, a DIY claim had to be submitted within 30 days, hence the appellant submitted two DIY claims, in phases.

Whilst the Tribunal was sympathetic towards the appellant, it concluded that the second DIY claim related to the extension of an existing dwelling as opposed to the conversion, which is ineligible for a refund under the DIY scheme. The appeal was dismissed.

Constable Comment: This case is concluded on the specific facts and its unique circumstance therefore its unlikely to impact other taxpayers directly, however it certainly acts as an important reminder that submitting a DIY claim involves various rules and conditions and if these are not met and complied with, HMRC may refuse any refunds due, therefore, we advise all statutory conditions are considered carefully well in advance of completion and submitting the claim. HMRC apply little or no discretion when reviewing claims and expend a great deal of resource scrutinising such claims.

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC NEWS

GfC6 – Help with football agent’s fees and dual representation contracts
HMRC published guidelines for compliance 6, on football agents’ fees and dual representation contracts.  HMRC recognises that dual representation contracts can be complex and the purpose of the guidelines is to set out its recommended approach to help customers pay the correct amount of tax. The guidelines are for football agents, also known as intermediaries, and football clubs. They deal with football agents’ fees that are charged when a football player transfers from one club to another, or a playing contract is negotiated with their current club. It outlines HMRC’s views on dual representation contracts by:

• helping clubs, players, coaching staff and agents understand approaches HMRC see as increasing or lowering compliance risk
• providing advice on the audit trails, evidence and documents that should be kept to support any tax position
• explaining HMRC’s view of the latest Football Association (FA) Football Agent Regulations which were published on 1 January 2024
• explaining HMRC’s view of the latest Football Association (FA) Football Agent Regulations which were published on 1 January 2024

Revenue and Customs Brief 7 (2024): VAT Treatment of Voluntary Carbon Credits
This newly published brief explains the VAT treatment of voluntary carbon credits from 1 September 2024. A carbon credit is a tradable instrument issued by an independently verified carbon-crediting programme, and has been treated as outside the scope of UK VAT. However, following some significant changes in the voluntary carbon credit market, from 1 September 2024 VAT needs to be accounted for on certain trades of voluntary carbon credits at the standard rate. Certain supplies will remain outside the scope of UK VAT.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK are registered with the Fulfilment House Due Diligence Scheme and details 13 new additions and 7 removals.

Updates on VAT appeals
The above guidance contains a list of VAT appeals that HMRC has lost, or partially lost, that could have implications for other businesses. The list of VAT appeals has been updated with one removal, 5 amendments and 2 new additions.

CASE REVIEW

Court of Appeal

1. VAT recovery on share sale for fundraising

This case concerned the input VAT incurred by Hotel LA Tour Ltd (HLT) on the sale of shares in its subsidiary, Hotel LA Tour Birmingham Ltd (HLTB). HLTB owned and operated a hotel in Birmingham and HLT supplied management services to HLTB.

HLT sold all of its shares in HLTB in order to raise funds for the building of a new luxury hotel, incurring professional fees on supplies received such as marketing, solicitors and accountants’ fees. HLT sought to recover the VAT incurred on these costs in full, but HMRC disallowed the input VAT claimed on the grounds that the costs related to the exempt share sale. HLT appealed arguing that the relevant services received were directly and immediately linked to its downstream taxable activities, mainly being fundraising for the development of a new luxury hotel. Both the First Tier Tribunal (FTT) and Upper Tribunal (UT) held that the input VAT was deductible. Our summary of the UT decision be read here.

HMRC appealed to the Court of Appeal (CoA), arguing that the FTT and UT erred in law in applying the two-stage test of input VAT recovery. HMRC stated that first, it must be considered whether the inputs in question were used in making a specific supply to which they could be directly attributed; and if not, and only if not, it should be considered whether the inputs in question were part of the overheads of the business attributable to the taxpayer’s downstream outputs.

After a very detailed analysis of applicable case law, the CoA agreed with HMRC concluding that the UT failed to apply the direct and immediate link test and erred in disregarding the existence of the exempt share sale. HLT incurred input VAT on professional fees which were used in, were cost components of, were directly and immediately linked with, the VAT exempt share sale. Therefore, the input VAT was not recoverable. The appeal was dismissed.

Constable VAT comment: It will be interesting to see if HLT appeals the decision to the Supreme Court which would finally resolve this on-going dispute. The most recent decision of the CoA focused on the fundamental principle of identifying if there is a direct and immediate link. It also demonstrates that the UK courts continue to rely on important CJEU decisions despite the fact these are no longer binding.

Upper Tribunal

2. VAT on recharges of card payment fees

In this case, SilverDoor Limited (SilverDoor) acted as a disclosed agent between accommodation providers and clients, who are usually businesses seeking short term accommodation for employees on temporary assignments. If a customer made payment via a corporate credit card, SilverDoor charged an additional 2.95% fee. The dispute in the case was the VAT treatment of this fee.

SilverDoor argued that it charged the card handling fee for providing the facility of being able to pay by corporate card, and this is a separate and distinct supply from the supply of accommodation and that this supply was a financial service within the VAT exemption. HMRC took the alternative view that that the fee was part of the supply of standard-rated accommodation services. The FTT agreed with HMRC, and our summary of the decision can be read here.

SilverDoor appealed to the Upper Tribunal (UT) and the issues to be decided by the UT could be summarised as follows:

• On the characterisation issue, did the FTT err in law in holding that the fee was consideration for property reservation services (part of the accommodation service) rather than a separate service?
• On the exemption point, if the fees are consideration for a separate service, does the supply by SilverDoor fall within Item 5, Group 5, Schedule 9, VATA 1994, i.e. are the supplies VAT exempt?

On the characterisation issue, the UT concluded that the 2.95% corporate card payment fee cannot be a distinct supply, but instead it is to be analysed as consideration for the reservation services provided by SilverDoor, meaning it forms part of its standard rated supply and output VAT is due.

This was sufficient to dismiss the appeal. The UT also considered the exemption issue and concluded that even if the card payment fee was a distinct supply it would not be a VAT exempt financial intermediary services under Item 5, Group 5, Schedule 9, VATA 1994, because there was no contract for the provision of a financial service by merchant acquirers to the businesses, and SilverDoor was not involved in negotiating any such service. The appeal was dismissed.

Constable Comment: In this case the Tribunal was required to analyse two distinct points. First, it had to determine whether the card handling fees charged by the taxpayer could be seen as a distinct supply, and if so, it was required to determine whether that supply would fall within the financial intermediary VAT exemption. This is a potentially complex area of VAT, and we would recommend seeking professional advice if you or your business is involved with complex financial services transactions.

First Tier Tribunal

3. VAT invoice requirements

In this brief case, Fount Construction Limited (FCL) appealed HMRC’s decision to disallow claims for the recovery of VAT incurred as input VAT on the basis that the corresponding invoices did not meet the relevant legislative requirements. The contested invoices each had a single description of ‘Building works at the above’ with a reference to the address of the building site. The three invoices from the supplier, Landcore Limited, charged VAT of £15,218.59.

HMRC argued that the invoices did not include a description of the building work and did not meet the requirements set out in regulation 14(1), paragraphs (g) and (h), of the Value Added Tax Regulations 1995.

The contested invoices each contained the single description ‘building works at the above’. The invoices included a box entitled ‘job address’ containing the address for the building site in question.

VAT was calculated at the standard rate and the invoices included a VAT-exclusive subtotal, the VAT amount, and the overall total.

Regulation 14(1) states that invoices must contain ‘a description sufficient to identify the goods or services supplied’ and ‘(h) for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency’.

HMRC’s solicitor argued that HMRC needed to be able to verify that the details on the invoices were correct, that the VAT incurred was for business purposes, and was charged at the correct rate.

In HMRC’s view the description was insufficient. It did not allow HMRC to assess the VAT liability of the supplies received or determine whether the correct rate of VAT had been applied by the supplier.

The tribunal referred to Deadoc Construction [2015] UKFTT 433 (TC) where the judges stated that ‘in the line of business of construction groundworks contractors it was common practice for less information to be provided’.

In addition, they stressed that ‘part of the purpose of reg 14 is to ensure that invoices contain sufficient information to enable an independent observer (typically HMRC) to be satisfied as to the identification and quantification of the goods and services supplied’.

The FTT noted: ‘We do not agree with HMRC’s suggestion that the invoice description needs to be in such detail as to enable HMRC to draw definitive views on the VAT treatment of the supply from the invoice alone’.

‘HMRC have wide-ranging powers to seek further information in relation to the supply, and to refuse recovery of input tax if such information is not supplied.

‘The invoice is the gateway into any enquiries by HMRC, rather than a repository for the answers to any questions that might be asked.

‘We conclude that a general short description of the nature of the services (such as ‘building services’), along with some further identifying information such as the name of the site, the contract, or the date of works, will be sufficient to meet the requirements of regulation 14.’ The appeal was allowed.

Constable Comment: This is an important area of VAT law that is often overlooked. It is a requirement that a valid VAT invoice is held to recover VAT incurred as input tax. Taxpayers must ensure that the invoice is a valid VAT invoice in accordance with regulation 14 of The VAT Regulations 1995. As demonstrated in this case, HMRC may refuse to refund any input VAT reclaimed if the invoice held by the customer does not satisfy the conditions in the above mentioned regulations. The construction sector is one which HMRC has targeted to improve compliance and mitigate VAT leakage, the introduction of the domestic reverse charge (DRC) for construction, as an example. However, the rules mentioned above apply to all businesses and it is not clear if this case is a move by HMRC to a more robust application of the law. HMRC does have the ability to consider alternative evidence to support an entitlement to reclaim VAT incurred as input VAT, and it would seem in everyone’s best interests for HMRC to take a pragmatic approach. In a case such as this, where the VAT involved does not seem material, £15k, it may be prohibitive to taxpayers (internal resource and external professional fees) to challenge a decision of HMRC in relation to a VAT assessment of this sum. Presumably, HMRC would have allowed Fount to reclaim the VAT incurred and paid if the supplier had reissued its invoices, whether this was via the submission of an error correction notice (ECN) or a current VAT return (on the basis Fount now held satisfactory evidence of an entitlement to deduct VAT incurred as input VAT). We welcome the FTT’s decision in this case, and would hope that HMRC would let the matter rest, rather than lodging an appeal at the UT.       

4. VAT exemption: Medical care or skin care

This interesting case concerned Gillian Graham trading as Skin Science (GG) appealing two decisions made by HMRC. The first decision being that GG would be compulsorily registered for VAT in respect of skin care treatments, HMRC’s letter dated 12 January 2018. The second decision was a VAT assessment issued on 18 March 2021 in the sum of £217,897 in respect of a single long period covering the period 1 November 2007 to 28 February 2018 (10 years and 4 months). This VAT assessment cancelled and replaced an earlier VAT assessment dated 7 September 2018 in the sum £270,649 which ran from 1 May 2007; however, GG’s effective date of VAT registration (EDR) was subsequently amended to 1 November 2007 by HMRC.

The background to this case can be summarised as follows. HMRC contacted GG by letter, 25 April 2017, after noting that the income recorded on self-assessment tax returns indicated that she had been trading and making supplies in excess of the compulsory VAT registration threshold. GG replied that the supplies of skin care treatments are exempt from VAT as they fall within Group 7, Schedule 9, VATA 1994 as ‘Medical Care’. With regards the second decision, GG contends that the VAT assessment is out of time under the rules regarding the time limits HMRC must adhere to when in possession of full facts to raise a VAT assessment. HMRC claims the supplies are subject to VAT and the assessment is valid.

This matter was subject to much correspondence and the alternative dispute resolution (ADR) route was followed, but no resolution was reached or agreed at a meeting held on 28 November 2018.

The First Tier Tribunal (FTT) initially dealt with the liability issue considering the nature of supplies made, the purpose of the treatments, a typical patient’s views and the advertising of the supplies. The FTT concluded that GG did not prove, to the required standard, that the principal purpose of the treatments is the protection, including the maintenance or restoration of health and therefore found that the supplies are standard rated, meaning the first decision is upheld. GG is a registered general nurse.

With regards to the second decision, there are dates and timings that need to be considered.

HMRC used estimated figures to determine the value of taxable supplies made and when GG breached the compulsory VAT registration threshold. HMRC based this on GG’s self-assessment returns and calculated that the EDR was 1 November 2007. This was notified to GG in a letter dated 26 March 2019 and replaced an earlier EDR of 1 May 2007,

On 3 May 2019 GG appealed the decision of 26 March 2019 on the basis that she did not believe that her supplies were taxable supplies, for VAT purposes, and therefore she was not required to be VAT registered.

FTT hearing dates were set for 19 – 20 February 2020 (GG’s barrister was unavailable and permission to postpone the hearing was granted) and a subsequent listing for 1 – 2 April 2020 was also postponed at GG’s request due to the COVID-19 pandemic.

On 23 October 2020 GG applied to amend the original grounds of appeal to the effect that HMRC’s decision to create a single prescribed VAT accounting period from 2007 to 2018 was invalid as a matter of domestic and EU law.

On 27 October 2020 GG submitted a ‘nil VAT return’ in respect of the VAT accounting period ending 28 February 2018 (02/18). HMRC issued a VAT assessment on 18 March 2021. GG lodged an appeal against this decision within a week on the basis that the new VAT assessment, which had a net VAT liability of £58k less than the original VAT assessment was out of time.

HMRC argued that the VAT assessment was issued one year from the time the last piece of evidence of the facts necessary to justify the making of the assessment became known and therefore it was in time, claiming that the nil VAT return was a new piece of evidence. The FTT disagreed concluding that HMRC had all the evidence when the first assessment was raised over a year ago, meaning the new assessment was out of time and therefore the appeal was allowed.

The FTT concluded that because the amended EDR was notified to GG on 26 March 2019 this was more than a year before the revised assessment was issued on 18 March 2021. HMRC had GG’s self-assessment returns on file and used these to calculate the EDR and VAT liability, therefore, HMRC was in possession of full facts and the submission of a ‘nil’ VAT return was not new information or evidence.

Constable Comment: This was an interesting case given that the FTT agreed with HMRC in respect of the liability issue in terms of supplies made but concluded that the VAT assessment was made out of time, therefore the taxpayer could not be assessed for the VAT due. Whilst HMRC lost on a procedural point, it was able to successfully argue that VAT exemption did not apply to the appellant’s supplies. This demonstrates that if there is ambiguity in relation to the correct VAT liability of a supply, seeking professional advice to determine the correct VAT treatment is worthwhile. It will be interesting to see if HMRC requests permission to appeal this decision of the FTT.

Other important points to consider from this case are that HMRC has strict time limits it must adhere to when raising VAT assessments, this case took a long time to be heard before the FTT and not all relevant dates are covered in the above summary; however, if taxpayers receive VAT assessments from HMRC, this point should always be considered, is HMRC within time to assess for VAT?

In addition, this case acts as a reminder to businesses which are not VAT registered that they do not benefit from the protection of the four-year capping rules in relation to VAT accounting adjustments for those businesses that are VAT registered. If a business, whether a sole proprietor (and HMRC cross referencing self-assessment tax returns to the VAT register as part of a credibility exercise), partnership or limited company has misclassified the VAT liability of its supplies, for example treating its supplies as VAT exempt rather than taxable (standard rated) then a VAT registration is required from the date the value of taxable supplies breached the compulsory VAT registration threshold. In some cases, this may be a ‘liable no longer liable’ VAT registration (the value of taxable supplies has fallen beneath the compulsory VAT deregistration threshold); however, HMRC does issue long period first VAT returns spanning a number of years in many cases.

Some businesses and organisations may view VAT registration as an administrative burden; however, a VAT registration can be beneficial in terms of risk management and to potentially avoid significant and unexpected VAT costs, as this case demonstrates. A business may VAT register on a voluntary or intending basis if the value of actual or intended taxable supplies is below the compulsory VAT registration threshold. If your business or charity is not VAT registered, and VAT registration is something that you would like to explore, please do not hesitate to contact Constable VAT. 

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC NEWS

VAT energy-saving materials relief
This guidance deals with an extension of the VAT relief for the installation of energy-saving materials to include buildings used solely for relevant charitable purposes, such as village halls, and to bring additional equipment within the scope of the relief.

Fuel and power (VAT Notice 701/19)
The above guidance has been updated to include information about VAT treatment of charging electric vehicles using charging points.

Claim a VAT refund as an organisation not registered for VAT
The above online service can be used to claim back VAT if you are a local authority, academy, public body or eligible charity. The updated guidance confirms the need for a bank statement for a first claim and the need to use a Government Gateway user ID for future claims.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance can be used to check if businesses storing goods in the UK is registered with the Fulfilment House Due Diligence Scheme and details 8 additions and 2 removals.

Updates on VAT appeals
The above link can be used to check the current position of noteworthy VAT appeals. The updated list shows 2 additions, 4 amendments and 5 removals.

CASE REVIEW

Upper Tribunal

1. Repayment supplement on input VAT credit

This case concerned a repayment supplement sought by Bollinway Properties Ltd (BPL), in the sum of £3.5million. Acepark Ltd bought Toys R Us Properties Ltd (TRUP) and transferred its properties to BPL for £355million. Subsequently, BPL claimed £71million of input VAT incurred on the transfer and asked HMRC to offset this amount against TRUP’s corresponding output VAT liability.

The FTT rejected BPL’s argument that a repayment supplement was due. BPL appealed to the Upper Tribunal on the grounds that the FTT erred in law in finding that:

1. BPL assigned its entitlement to its VAT credit to TRUP;
2. a repayment supplement can become due only where HMRC make an actual payment; and
3. 26 days should be left out of account for the purposes of calculating the 30 days period. [HMRC is required to make payments within 30 days but is permitted to “stop the clock” for the time it takes to undertake reasonable enquiries.]

It was agreed that ground 3 must succeed before it was worth considering ground 1 and 2.  Therefore the UT first considered whether HMRC delayed repayment beyond 30 days.

The VAT return was submitted on 2 November and a repayment was made on 18 December, however during this period HMRC had requested a full set of backing documents.  BPL provided various documents, but the property transfer forms (TR1) were only provided on 18 December.

The UT upheld the FTT’s decision.  It considered that the request for TR1s by HMRC was reasonable and that the FTT had reached a reasonable conclusion on the facts.  The UT is limited to evaluating the law and cannot disturb findings of fact by the FTT unless those findings are clearly unreasonable, which they were not in this case. Therefore there was no delay beyond the 30 days and BPL was not entitled to a repayment supplement.

Constable Comment: The repayment supplement referred to in this case relates to VAT accounting periods starting on or before 31 December 2022. From 1 January 2023, HMRC introduced repayment interest as a substitute for the repayment supplement. Taxpayers may be due repayment interest if HMRC is late in making a payment.

First Tier Tribunal

2. Supplies of serviced accommodation

The appellant, Realreed, owns a property, Chelsea Cloister, containing 235 self-contained serviced apartments. The question before the FTT was whether these supplies were VAT exempt, as Realreed believed, or standard rated.  The appeal also addressed whether HMRC was entitled to apply a penalty, a point that may be of significantly wider interest than the narrow VAT liability point.  Not only did Realreed think that it had acted with reasonable care, but it also considered that it had a legitimate expectation that HMRC would not issue retroactive VAT assessments because of an historic acceptance by HMRC of Realreed’s VAT accounting policies. Therefore, not only was HMRC taking a revised position on the VAT liability, but it was also arguing that it was careless of Realreed not to have declared VAT when this VAT liability had apparently been accepted as reasonable by several HMRC VAT inspectors.

This is a long decision that sets out a great deal of case law.  It may be sensible for any business operating in a similar way to read the full judgement.  However, the underlying VAT liability question was whether Realreed’s supplies are removed from the VAT exemption because its supplies are “the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation”. Note 9 to the relevant exemption Group provides that “similar establishment” “includes premises in which there is provided furnished sleeping accommodation whether with or without the provision of board or facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers”

Realreed’s contention was that it made supplies of accommodation only.  Customers did receive additional services but those related services were at all times were supplied separately by Chelsea Cloister Services Limited (CCSL), a company under common ownership with Realreed.  CCSL’s services were treated as fully taxable.  Thus, a complex point regarding the type of accommodation that is excluded from exemption was complicated further by a question about what service the customer received from Realreed and whether allied services provided by a different party could impact on their classification.

Realreed’s contention was that if CCSL’s and Realreed’s services are evaluated separately then Realreed’s supply contained none of the elements that might bring the exclusion from VAT exemption into effect.

The FTT accepted that the services of CCSL had been “carved out” and Realreed was only supplying the property. However, it also considered that the ancillary services provided by CCSL should be taken into account when considering whether Chelsea Cloisters was similar to a hotel. Most of Realreed’s customers stayed for less than 28 days and the FTT concluded that this in conjunction with the additional CCSL services, meant that Chelsea Cloisters was an establishment operating in competition with hotels.

Turning to the imposition of penalties, these had been applied because in HMRC’s view Realreed had not taken reasonable care.  As the written decision states: “…Realreed’s submission is that it acted reasonably and diligently and submitted its VAT returns consistently with what it believed to be the correct treatment, as endorsed by HMRC by their actions during previous inspections. HMRC did not challenge Realreed’s treatment during previous visits, nor did it advise Realreed to seek specialist advice on the proper VAT treatment of its supplies. HMRC’s dealings with Realreed included issuing a decision making corrections which can only be consistent with HMRC’s acceptance of Realreed’s approach to the VAT treatment of its supplies. Realreed says that it was reasonable for it to derive substantial comfort from the outcome of HMRC’s inspections and it had no reason to think it had done anything wrong.

In practice the penalty raised by HMRC had been suspended but Realreed took exception to the fact that given the historic HMRC “sign-off” of its accounting policies the penalty should still be appealed.

Realreed had separately sought a Judicial Review on whether it was entitled to protection from an HMRC decision to raise VAT assessments.  This is a lengthy decision that can be viewed here and fully sets out the history of HMRC inspections and the complex legal issues that were considered before Realreed’s application was dismissed.  However, noteworthy to most readers is the fact that HMRC officers inspected Realreed’s business in 1992, 1993, 1995 and 2005.  They inspected CCSL’s business in 1985, 1988, 1990, 1994, 1995, 2005 and 2014.   Nevertheless, the FTT found in HMRC’s favour (that

Realreed’s VAT accounting errors resulted from careless behaviour) concluding that:

• Although HMRC had not in the past challenged Realreed’s VAT liability position, there had never been a clearly stated acceptance by HMRC that it was correct.
• The conclusion that Realreed’s supplies were exempt dated back to 1991, or at least that is a point at which Realreed appears to have taken advice. Although Realreed’s business has not fundamentally changed since 1991, there have been enough changes in the way it was carried on that a person taking reasonable care might begin to wonder whether the VAT analysis (even if the assumed position in 1991was correct) had changed.
• Tax law and practice evolves. It was unreasonable to assume that (even if the business had not changed) that the tax position in 1991 remained the same in 2019.
• Whether or not a business wishes to incur the cost of professional advice or carry out its own research. “… it is, of course, also possible to obtain reassurance from HMRC. They operate a non-statutory clearance service, and it may also be possible for a taxpayer, after a dialogue with HMRC, to feel confident that the VAT or other tax analysis they have adopted is correct (or at least is accepted by HMRC). There is, however, no evidence of Realreed having engaged in any discussion of this sort.”

Constable Comment: This was an important case which considered the VAT liability of the supply of serviced accommodation. Perhaps of most interest as regards the liability decision was the FTT’s view that the supplies made by CCSL needed to be included in an evaluation of determining the VAT liability of Realreed’s supplies. 

As far as the penalty decision is concerned, we are often told by taxpayers “HMRC has inspected our VAT accounting records and raised no concerns so we must be doing things right”.  Perhaps reasonably, most taxpayers believe that HMRC’s VAT inspectors are experts that would spot a fundamental VAT liability mistake impacting on a significant percentage of the business’s turnover.  The simple truth is that the fact that HMRC has carried out VAT inspections does not mean that the VAT accounting treatments applied are correct or that if HMRC wished to raise retrospective VAT assessments the taxpayer is protected.  

This decision should be viewed as a reminder to any business that believes it is safe from VAT assessments and penalties because it has a history of “clean” VAT audits. Very little reliance can be placed on the result of HMRC VAT compliance inspections unless they have been handled with great care.  In most cases we find that taxpayers do not even keep detailed notes of the meeting with HMRC, let alone try to manage the inspection to try and protect themselves.   

 As far as the FTT’s decision is concerned, we do not agree entirely with the FTT’s suggestion that taxpayers can easily approach HMRC and request VAT liability rulings.  The reality is that any business that uses that service appreciates that obtaining a VAT liability decision from HMRC is very difficult. However, it can be done and even if HMRC does not give a conclusive ruling it cannot then suggest that the taxpayer in question demonstrated a lack of care if it has proactively attempted to clarify the position beyond doubt. 

3. TOMS: Mobile ride hailing services

This case concerned the VAT treatment of the mobile ride hailing services supplied by Bolt Services UK Limited (Bolt). Mobile ride-hailing services are on-demand, private hire passenger transport services ordered and paid for through a smartphone application. Self employed private hire vehicle (PHV) drivers deliver services to Bolt who resupplies this service to passengers booking a trip through Bolt’s app.

Bolt asked HMRC for a non-statutory ruling that the Tour Operator Margins Scheme (TOMS) applied to the supply made by Bolt, and therefore VAT due is calculated on the margin, being the difference between amount paid by the customer and the costs to Bolt, as opposed to the total amount paid by the customer. HMRC disagreed and Bolt appealed to the FTT.

HMRC took the view that tour operators and travel agents do not provide on demand transport services from anywhere at any time to anywhere. HMRC’s case was that, on any ordinary understanding, tour operators and travel agents are traders who cater for those wishing to make pre-booked journeys. Bolt’s services do not fit that description and, therefore, Bolt is not a ‘tour operator’ for the purposes of the TOMS. In addition, HMRC argued that the supplies fell outside of TOMS because they were in-house supplies or they were materially altered / further processed supplies.

The FTT confirmed it was common ground that most of TOMS conditions were met, however it disputed whether Bolt provides services of a kind commonly provided by tour operators and whether Bolt makes an onward supply of the PHV drivers to its customers without material alteration or further processing.

The FTT confirmed that  the correct approach is to take a high level or general view when considering whether services are of a kind commonly provided by tour operators or travel agents.  It concluded that passenger transport services are of a kind commonly provided by tour operators.

The FTT then concluded that Bolt’s supplies were not in-house, as in-house supplies are those made from the travel agent’s own resources. In this case, the FTT found that, the PHV driver’s services directly benefitted the travellers and, they were not inhouse services or materially altered or processed. As a result, the supply of mobile ride-hailing services, without any additional elements, to a traveller is a provision of travel facilities falling within TOMS. The appeal was allowed.

Constable Comment: It will be interesting to see whether HMRC pursues this case and appeals to the Upper Tribunal.  A point of interest is that post Brexit TOMS could be viewed as an unnecessary scheme.  When introduced TOMS was an EU wide scheme designed to prevent the need for multiple VAT registrations within the EU.  Limited to UK supplies alone it seems to serve little purpose as standard VAT accounting could apply without a huge amount of difficulty.  It may be that its use in the UK was maintained because the removal of TOMS would have been disruptive to businesses whose accounting processes had been designed around it.  If HMRC decides that TOMS reduces the amount of tax that it collects (as compared to standard VAT accounting rules) we wonder if it may reconsider the position.  In this particular case the overall effect of TOMS on tax collection was not considered but if the self-employed PHV drivers are not VAT registered (Bolt would not incur irrecoverable VAT under TOMS) the overall level of tax collected would be reduced.  That does not mean that the outcome is unfair.  For example, a similar outcome would result from PHV drivers contracting directly with customers if Bolt acted as a disclosed agent.  However, that is probably not how HMRC sees the position and if the continued use of TOMS does materially reduce the amount of tax that HMRC collects then perhaps it may have a short shelf-life.

CJEU

4. Renovation and repair of private dwellings

HPA is a commercial company incorporated in Portugal, making civil construction supplies. In 2007 it entered into five contracts for works relating to the renovation of urban buildings with three commercial companies that owned the buildings on which the works were carried out.

Article 106 of the Principal EU VAT Directive allows member states to apply a reduced rate of VAT to certain supplies.  Annex IV to the VAT Directive contains a list of the services referred to in Article 106 of that directive. Point 2 of that annex allows the reduced rate in relation to: ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied’.

In Portugal this resulted in the law providing for a 5% rate of VAT on:

‘Works contracts for the improvement, refurbishment, renovation, restoration, repair or conservation of immovable properties and independent parts of immovable properties used for residential purposes, with the exception of cleaning services, grounds maintenance services and works on buildings which cover all or part of the constituent elements of swimming pools, saunas, tennis courts, golf courses or minigolf courses or similar facilities.

The reduced rate shall not apply to the materials incorporated unless their value exceeds 20% of the total value of the service supplied.’

HPA applied this reduced rate of VAT at 5% to its supplies in relation to the disputed contracts. The local tax authorities disagreed with this decision and raised assessments in the sum of EUR 374,750.

The referring court asked the CJEU whether point 2 of Annex IV must be interpreted as precluding national legislation which provides for the application of a reduced rate of VAT to services relating to the renovation and repair of private dwellings on condition that these actually be used for residential purposes at the time when those works are carried out.

The CJEU highlighted that the word ‘dwelling’ generally refers to immovable property intended for residential use, therefore it follows that  the renovation and repairing services must relate to property actually being used for private residential purposes, whereas services relating to property used for other purposes, such as commercial purposes, are not covered by that provision.

It was also noted by the CJEU that for a trader entitled to deduct input VAT, it is irrelevant whether or not the renovation or repair services are taxed at the standard or at the reduced rate, since that trader will recover the VAT incurred. By contrast, reduce rating those services benefits the final consumer who actually resides in the immovable property and who is not entitled to deduct input VAT.

The CJEU concluded that the Portuguese limitation of the reduced rate to work to property that was actually at the time of the work dwellings that are used for residential purposes was not prohibited by EU law.

Constable Comment:  Were the UK still a member of the EU this decision could have been of relevance to whether the UK’s reduced rate conformed with EU law. In the UK there is a reduced rate that applies to a changed number of dwellings conversion, including the conversion of a non-residential property into dwellings and refurbishment work to an existing dwelling that has been empty for more than two years. The judgement that the VAT Directive “does not prohibit” the limitation adopted in Portugal is not quite the same as saying “mandates the limitation”.   However, some of the courts comments on how the relief must benefit the final consumer would perhaps have had implications.  As the UK is no longer a member of the EU this means the UK provisions should not need to be reconsidered.    

5. VAT treatment of director fees

TP is a member of the board of directors of several public limited companies incorporated in Luxembourg and carries out many assignments in that regard including receiving reports from senior managers of the companies concerned, discussing strategic proposals, the choice of operational managers, questions related to the accounts of those companies and their subsidiaries as well as the risks that they face. TP also takes part in the decision-making regarding the accounts of the companies and the proposals to be submitted to shareholder meetings, risk policy as well as decisions as to the strategy to be followed. TP’s fees were typically set at a shareholders’ meeting, either as a percentage of the company’s profits or a lump sum.

The local tax authorities took the view that TP carried out economic activities subject to VAT therefore raised assessments. Following multiple appeals, the referring court now asked:

• whether Article 9(1) of the VAT Directive must be interpreted as meaning that a member of the board of directors of a public limited company under Luxembourg law is carrying out an economic activity, within the meaning of that provision.
• whether the first subparagraph of Article 9(1) of the VAT Directive must be interpreted as meaning that the activity of a member of the board of directors of a public limited company under Luxembourg law is carried out independently, within the meaning of that provision.

The CJEU initially confirmed that if TP supplies services to a company in return for consideration, providing that the activity is effected on a continuing basis and for a remuneration, then the VAT directive must be interpreted as meaning that a member of the board is carrying out an economic activity.

However, as regards the second point, the CJEU highlighted that if a person such as TP brings his expertise and know-how to the board of directors of a company and votes on that board, he does not appear to bear the economic risk linked to his own activity.  It is the company itself that will have to confront the negative consequences of the decisions adopted by the board of directors and that will accordingly bear the economic risk resulting from the activity of the members of that board. As stated in the judgement, “The same also applies if their liability in tort is only ancillary to the liability of the company or of the board of directors as a body thereof.”  This seems to say that the if a director such as TP was exposed to a potential non-contractual liability (they owe a duty of care and act negligently) that potential liability cannot be viewed as “bearing the economic risk” of their decisions.

This conclusion will apply in particular if the members of the board do not assume any personal obligations concerning the debts of the company. As a result, the CJEU concluded that the activities of a member of the board is not carried out independently, despite the fact TP acts in his own name and is not subject to an employer – employee relationship. A member of the board does not act on their own behalf or under their own responsibility and does not bear the economic risks linked to that activity, therefore the remuneration received is not subject to VAT.

Constable Comment: The usual starting position in the UK is that most Directors are not required to treat their remuneration as taxable income for VAT purposes.  That said HMRC guidance does state:

• “The direct tax treatment of office holders either as an employee or as a self- employed person should not be used as the basis for determining whether the activity is undertaken by way of business for VAT purposes”; and
• Section 94 of the VAT Act 1994 (meaning of business) states at paragraph (4): Where a person, in the course or furtherance of a trade, profession or vocation, accepts any office, services supplied by him as the holder of that office are treated as supplied in the course or furtherance of the trade, profession or vocation.

In a sense this is in line with the CJEU’s consideration of the economic activity point but the UK does not then consider whether an office holder is acting independently.

The UK removes from the scope of Section 94 many types of office holder situation.  Therefore, in practice it does not seem that the reasoning of the CJEU would lead to a result that is wholly out of line with UK policy. However, this may be a case of “a right answer for the wrong reasons” and there may be cases in which UK policy is not in line with the logic of the decision. Whether this decision can be applied post Brexit may be open to debate.  On its face it may be considered but is not binding.  However, the underlying principle considered concerns when to identify a supply for VAT purposes, and that is core to the fabric of the VAT system.  

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC NEWS

Health professionals and pharmaceutical products (VAT Notice 701/57)
HMRC have updated their guidance contained in VAT Notice 701/57 to reflect the following changes:

• Pharmacy technicians (only in England, Scotland and Wales) have been added to the meaning of a health professional list in section 2.1.
• Services directly supervised by a pharmacist has been removed from section 2.5 (services that are not exempt from VAT)
• Section 4.7 has been updated to make it clear when forensic physicians services are exempt healthcare.
• Services supervised by pharmacists are now included when referring to a health professional under section 5.2 (Exemption of care services performed by a person not enrolled on a statutory medical register)

Updates on VAT appeals
HMRC have updated the list of ongoing VAT appeals with 1 removal, 4 amendments and 3 new additions.  These amendments may have implications for other businesses with similar ongoing disputes.

CASE REVIEW

First Tier Tribunal

1. Permission to grant an appeal out of time

Bull Brand Limited (the appellant) applied for permission to appeal out of time in respect of HMRC’s rejection of an error correction notice (ECN). The appellant is a wholesale supplier of e-cigarettes and tobacco products; they were contacted by a major customer who advised that they were intending to enter into a dispute with HMRC as to the correct VAT rate of the products. The customer informed the appellant to ensure that they had the opportunity to file an ECN to protect its position in the event that the customer was successful in its appeal with HMRC.

The appellant submitted the ECN amounting to £273,000 in October 2018 and also advised its suppliers that they should similarly file an ECN as the appellant would seek to recover any overpaid VAT. HMRC sent a letter rejecting the ECN in December 2018 and the appellant claims that they did not receive this letter or hear anything from HMRC regarding the claim and if they had received the letter they would have taken action to appeal as the letter advised. The appellant also stated that they had taken their accountants’ advice when filing the ECN and the accountant did not mention any requirement to follow up on the claim.

HMRC wrote to the appellant in May 2022 advising them that they were approaching the four-year limit for any further claims of a similar nature and inviting them to make a protective claim. The letter also indicated that any ECN would be rejected but an appeal could be submitted in respect of that rejection and that the previous ECN submitted had been rejected.

The appellant argued that they would have made an appeal in time if they had received the letter from HMRC and they acted promptly once they received the letter from HMRC in May 2022. HMRC argued that the appellant failed to exercise appropriate due diligence regarding their claim as they failed to follow up on the progress of the claim for over 3 years.  HMRC considered it should be entitled to consider the matter closed as there had been no contact from the appellant regarding the claim in over 3 years. HMRC also argued that if the appellant is allowed to appeal out of time then HMRC will be required to divert resources to consider the appeal, to the prejudice of other taxpayers.

The Tribunal concluded that, given the significant and substantial delay on the appellant’s part and the fact that the appellant did not establish that there was a good reason for such delay, the Tribunal did not consider that the potential financial consequences for the appellant and the limited prejudice to HMRC resources is sufficient to displace the underlying point that time limits should be respected and that permission to appeal out of time should not be granted. The application was therefore refused.

Constable Comment: In this case, the appellant sought to appeal the decision of HMRC but were outside of the statutory time limits within which they were required to submit such an appeal. The Tribunal ruled that permission to appeal out of time should not be granted and that statutory time limits should be adhered to. This highlights the importance of ensuring that statutory deadlines are adhered to as this can have significant consequences for the taxpayer.

2. Evidence for repayment of input tax

This appeal by Heartlands House Limited (HHL) is against a decision by HMRC to disallow three input tax repayment claims submitted for the VAT periods 09/19, 06/20 and 09/20. The input tax repayment was refused as HMRC considered that HHL had not provided sufficient evidence to support the claim or support that they had the intention of making taxable supplies. The dispute before the Tribunal was in respect of the 09/19 assessment totalling £28,221.96.

HHL is a company in the construction sector that secures projects and uses subcontractors to carry out the works. The company engaged in four projects in the period under appeal and it was the input VAT which was claimed in respect of three of these projects which led to the assessment.

HHL argued that it had provided clear evidence of taxable supplies and it was clear from the invoices and bank statements that the input tax had been incurred in respect of those supplies. HMRC argued that they could not see evidence of any taxable supplies in the period covered by the first VAT return or proof that any payments made by HHL were connected to taxable supplies. HMRC also argued that there was no planning permission for some of the projects and no correspondence or invoices that made clear what HHL clients were paying for.

The question for the Tribunal was whether the purchases had been made in connection with actual or intended taxable supplies. The Tribunal found that although there was poor management of the business in failing to ensure that it was registered for VAT and the CIS at the correct time, taking longer than it should have to take steps to enforce payments from customers and failing to understand that a pro forma invoice is not the same as a stage payment invoice; that was not enough to outweigh the evidence that supplies were actually made. Poor management does not mean that there was any lack of intention to make taxable supplies.

The Tribunal held that the appellant has provided sufficient evidence of an intention to make taxable supplies and provided evidence that it did make supplies despite the projects not necessarily being completed. The appeal was upheld.

Constable Comment: In this case, HMRC denied the recovery of input tax by the appellant on the basis that there wasn’t sufficient evidence to support the reclaim or support that they had the intention of making taxable supplies. The Tribunal found that there was sufficient evidence to support the repayment of input tax and that poor management of the business did not have any impact on the evidence which was available to support the fact that supplies were actually made. However, this case does highlight the importance of retaining evidence of an intention to make taxable supplies, or that taxable supplies have been made to which a VAT cost can be linked, in order to avoid a similar dispute with HMRC.

3. Whether an agency relationship is present

This case concerned All Answers Limited (AAL), a company operating an internet based business where customers, in return for payment to AAL, order academic work such as ‘model answer’ essays written by third party writers. AAL and the writers shared the fee paid by the customer. HMRC argued that the total fee was subject to VAT, however AAL took the view that only the amount retained was subject to VAT, meaning the sum paid to the writers should be excluded from AAL’s turnover for VAT purposes. This arrangement had already been subject to appeal and the Upper Tribunal (UT) concluded that AAL was acting as principal in the transaction and as such must account for VAT on the entire amount paid by the customer. The UT case was considered fully in a previous VAT Focus.

AAL had updated its contracts prior to the UT case and it considered these to be consistent with the agency relationship they understood they held with the writers and customers. This new case considered the impact of these updated contracts on HMRC’s assessments.

The updated contracts included terms to the effect that the copyright remains with the writer. Previously this was not the case and the UT considered this to support their conclusion in relation to the ‘core’ obligations under the contracts. However, the FTT was not satisfied that the contractual changes altered the ‘core’ obligation on AAL to deliver a product, in the appropriate time scale, to the requisite standard.

In addition, the FTT considered the commercial and economic reality of the case and concluded that the circumstances of transactions and overall business operations remained the same and the reality was that AAL delivers the academic work not the writers. The appeal was dismissed.

Constable Comment: This case considered whether an agency relationship exists between three parties to a transaction. The FTT ruled that contractual changes in relation to copyright was not sufficient to alter the core obligation of the appellant and also the commercial and economic reality did not change, therefore the appeal was dismissed. It is important when considering the VAT position in respect of agency relationships that both contracts and actual business practices are taken into account.

4. Default surcharge: Reasonable excuse

This case concerned Echo Construction Ltd’s (ECL) appeal against default surcharges issued by HMRC. ECL’s grounds of appeal included the fact that surcharge notices were not received and HMRC were invited to provide proof of delivery. In addition, ECL was awaiting funds in order to be able to pay the VAT due and the default periods relate to a time that ECL had opted to use the VAT deferral scheme in operation during the Covid 19 pandemic.

The Tribunal initially upheld that ECL was in default, shifting the burden to ECL to prove it had a reasonable excuse. In relation to the postage issue of the notices, the Tribunal confirmed there is a statutory presumption that if HMRC posts documents to the principal place of business, these are deemed to be delivered unless evidence to the contrary is provided. ECL was unable to provide such evidence, and as notices were never returned undelivered, the FTT ruled these must have been delivered.

In relation to ECL’s submission that the fact that it was waiting for funds in order to pay the VAT amounts to a reasonable excuse, the FTT highlighted that insufficiency of funds or relying on any other person to perform any task is not a reasonable excuse. The Tribunal commented that ECL could have easily contacted HMRC to appraise them of the situation, therefore the late payment was ultimately due to ECL’s simple error of judgment.

Lastly, the Tribunal found that any deferral of VAT would have been for payments that were due between 20 March 2020 and 30 June 2020. ECL’s defaults were in periods subsequent to this and it should have joined the VAT deferral new payment scheme, which was open from 23 February 2021 to 21 June 2021. ECL did not join the scheme, and the Tribunal concluded that ignorance of law cannot constitute a reasonable excuse. The appeal was dismissed.

Constable Comment: This is another case where the appellant failed to establish it had a reasonable excuse in relation to its defaults, which was common with the old default surcharge regime. Although the scheme has been replaced, an important point was considered in relation to the statutory presumption around postal services confirming that where HMRC sends something by post to the principal business address, it is deemed to have been delivered unless evidence to the contrary can be provided. The default surcharge regime in the above case has been replaced by the New VAT Penalty regime which commenced from 1 January 2023. Constable VAT has released an article covering the new regime which can be read here.

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC NEWS

Union Customs Code (UCC) Redraft
There has been a proposal to amend the UCC, the primary legislation for the EU’s customs regime. As part of this redraft, there are some proposed amendments to the VAT rules for E-commerce. COM(23)262 amends the principal VAT Directive to remove the EUR150 per consignment limit currently applying to the ‘deemed supplier’ (online marketplace liability rules) and related administrative provisions, from 1 March 2028.

This proposed change is linked to various other custom measures, with the intention that all e-commerce operator sales into the EU, regardless of value, will have both VAT and customs duty paid for by the e-commerce operator rather than the individual consumer.

This will also have implications for the application of the Import One Stop Shop (IOSS) in the EU widening the application of the scheme for cross border EU sales B2C.

Insurance (VAT Notice 701/36)
The above guidance has been updated to provide a new definition of ‘insurance’ at section 2.2. That updated definition is as follows:

“…the essentials of an insurance transaction are… that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded.”

CASE REVIEW

First-Tier Tribunal

1. Default surcharge: Payment allocation

This case considered whether the appellant, Dresser & Co Ltd (DCL) made payments of VAT late and therefore the default surcharges imposed by HMRC were due. The Tribunal established that payments were in fact made late and DCL did not have a reasonable excuse or a Time to Pay (TTP) agreement in place, therefore the surcharges were due.

Whilst the case was straightforward and the penalty mechanism now less relevant, as the default surcharge regime has been replaced by the new VAT penalty regime introduced from 1 January 2023, there was an important question considered.

DCL argued that VAT payments made should have been allocated to the specific VAT quarter the payment was intended for rather than to earlier liabilities. If HMRC allocated payments as DCL intended, the total surcharges payable would have been less. However HMRC argued that where no allocation has been made by DCL, HMRC is entitled to allocate payments to the oldest debts.

The Tribunal agreed with HMRC on this point concluding that as DCL failed to allocate payments, HMRC were at liberty to allocate the payments as they did. In addition, DCL had not even submitted the VAT return when those payments were made, therefore HMRC could not reasonably allocate it to that quarter as the net VAT liability was not even established yet. The appeal was dismissed and surcharges were properly due.

Constable Comment: This case is a useful reminder for all taxpayers that payment allocation must be made prior to making payment (HMRC must be notified of the taxpayers intended allocation). If this is not done in advance, HMRC will apply the normal rules that payments are allocated to the earliest debt first. If this is overlooked, it can potentially lead to a shortfall in more recent payments causing further implications.

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC NEWS

Group and Divisional registration (VAT notice 700/2)
Section 7.5 of the above guidance has been updated to clarify the position regarding the anti-avoidance provisions relating to intra-group charges on supplies of services. In addition, information relating to exempt financial or insurance supplies to customers outside the UK or the EU made by businesses in Northern Ireland has been removed from section 2.5.

CASE REVIEW

Supreme Court

1. VAT Treatment of digital publications

The Supreme Court has delivered its judgment in the case of News Corp UK & Ireland Ltd on the VAT treatment of digital newspapers. This case has been covered in previous Constable VAT updates and considers whether supplies of digital publications that would be zero-rated in paper formats could be zero-rated when published in electronic form in the period prior to 30 April 2020.

The Supreme Court decision was that the taxpayer’s appeal should be dismissed. The Judges concluded that the term “newspapers” in Item 2, Group 3, Schedule 8 of the VAT Act does not include the digital editions, with the result that the supplies of the digital editions by News Corp during the relevant period (in the case of this appeal between 30 August 2010 and 4 December 2016) were not zero-rated.

The judgment stated that it is common ground that the decision in relation to the period in question will also be applicable to the period up to 1 May 2020. However, it is clear that, unless falling within the specific exceptions, digital editions of newspapers are zero-rated as from 1 May 2020, when the VAT legislation was changed to allow this.

Constable Comment: This decision will impact on any businesses that made protective claims to HMRC in respect of digital publications or who have appeals stood behind this case.

Court of Appeal

2. Supplies of insulation or roof panels?

This case concerned an appeal by Greenspace (UK) Limited (GUL) against the decision of the Upper Tribunal (UT) to dismiss GUL’s appeal against VAT assessments raised by HMRC totalling £2,581,092. The issue in this case is whether installation of the roof panels which GUL is supplying falls under the reduced rate of VAT applicable to the installation of energy saving materials. The findings of the UT are covered in a previous Constable VAT Focus.

GUL argued that the issue is whether the supply is of insulation for a roof or something more extensive, namely the installation of the roof itself. GUL also argued that its supplies were properly characterised as a means of providing insulation for roofs as the predominant feature of the product being supplied was the Styrofoam insulation.

HMRC argued that both the FTT and UT had correctly concluded that the appellant’s supplies were of a roof and not insulation. Even though 95% of the volume of the product consisted of insulating material, there needed to be a pre-existing roof for the appellant to succeed in its argument. However,  in this case there was no pre-existing roof to which the insulating panels were applied because the panels themselves formed the roof.

Both GUL and HMRC agreed that the supplies in issue in this case amounted to a single supply which comprised the panels and their insulation. However, the appeal was dismissed as the reduced rate of VAT does not apply to supplies of roof panels by the appellant because those supply is of a roof and  is not of insulation for roofs.

Constable Comment: This case highlights the importance of correctly identifying the nature of a supply and then applying the correct rate of VAT. GUL owes HMRC a substantial amount of VAT as a result of incorrectly classifying the nature of its supplies. The VAT law surrounding the supply of insulation and other energy savings materials can be complex and it would be advisable to seek professional advice where there is any doubt.

3. VAT on matchmaking services

This appeal concerns the VAT liability of Gray & Farrar International LLP’s (G&F) supplies of matchmaking services provided to clients outside the UK and EU. The issue is whether the supplies constitutes services of consultants and other similar services and the provision of information as if so, any supplies to clients outside the UK and EU are treated as outside the scope of VAT.

G&F did not charge VAT on its supplies to clients belonging outside the EU on the basis that the service was outside the scope of UK VAT as it was providing consultancy services. HMRC took the view that G&F’s supplies of matchmaking services did not qualify as consultancy and were therefore within the scope of UK VAT. G&F appealed to the FTT who agreed with HMRC and dismissed the appeal. On further appeal, the Upper Tribunal (UT) found that the FTT had erred in law by failing to apply the correct ‘predominant element test’ for characterising the single service supplied and as a result held that G&F’s services were consultancy services or similar services and the provision of information, therefore the supplies are outside the scope of VAT. The details of these earlier hearings are considered in an earlier VAT Focus.

HMRC argued before the Court of Appeal that the ‘predominant element test’ which was applied by the UT in reaching their conclusion was not a legal requirement and is purely interpretative guidance. They also argued that if it was necessary to consider the predominant element test then the supply was a single service concerned with the provision of introductions and this single introductory service was artificially split by the UT. The typical client contracted for a minimum number of introductions to potentially suitable, prospective partners, and not to receive advice from G&F or to be provided with information. The provision of information and advice were simply the means of performing the introductory service.

G&F argued that its supply consisted of consultancy services, the provision of information and the provision of customer liaison team support and that those elements did not constitute separate supplies but formed one composite supply. It was therefore necessary to determine the overall character of the supply.

The Court held that the service provided by G&F was not a service habitually supplied by consultants or consultancy firms giving expert advice to a client. Also, the service was not data processing nor supply of information. The Court allowed HMRC’s appeal and restored the decision of the FTT meaning that the service supplied by G&F to clients belonging outside the UK and EU was within the scope of UK VAT.

Constable Comment: This case considered the VAT liability of matchmaking services and the Court concluded it does not fall within consultancy or similar, therefore it is subject to VAT. It will be interesting whether G&F appeals the Court of Appeal’s decision, as initially the FTT agreed with HMRC, the UT then overturned that decision and the Court of Appeal has now restored the FTT’s original decision.

First Tier Tribunal

4. Construction of a building for relevant charitable purposes

Between June 2017 and June 2019, The Zoological Society of Hertfordshire (“ZSH”) engaged the Appellant, Paradise Wildlife Park Limited (“PWP”), to construct a lion enclosure, an outside exhibition called the “World of Dinosaurs” and a shop called the “Dino Store” at Paradise Wildlife Park (the “Park”). PWP zero-rated this work on the basis that it supplies were of constructing a building intended for use solely for a relevant charitable purpose.

HMRC disagreed and raised an assessment for £411,641, the amount of VAT at the standard rate on PWP’s construction services. PWP agreed that the work relating to the Dino Store should be standard rated and the appeal concerned the work to construct the lion enclosure and the World of Dinosaurs Exhibition.

The Tribunal considered two questions. The main question was whether PWP was constructing buildings designed solely for a relevant charitable purpose, which turned largely on whether ZSH is carrying on a business and, if it is, whether these buildings are used to some extent in that business. There secondary issue was whether the “World of Dinosaurs”, which is an outside exhibition, is a building.

The Tribunal dismissed the appeal finding that:

(1) ZSH is carrying on a business of operating and charging for admission to the Park;

(2) The lions’ enclosure and the World of Dinosaurs were intended for use at least in part for the purposes of that business; and

(3) The World of Dinosaurs is not a building.

As a result, it was concluded that that the services PWP supplied in the construction of the lions’ enclosure and the World of Dinosaurs were not supplies in the course of construction of a building intended for use solely for a relevant charitable purpose within Item 2(a) of Group 5, Schedule 8 VATA and as such could not be zero-rated.

Constable Comment: This case considers the question of when a charity is carrying on ‘business’ activities in some detail and may be useful for other charities considering construction work.

CJEU

Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration and there may be occasions where they have a more binding effect.

5. VAT refund on assignments of bad debts

This case concerned Euler Hermes SA Magyarorszagi Fioktelepe (EH). EH is an insurance company which pays compensation to policyholders in the event of non-payment by their customers of a given debt. The amount of the compensation is 90% of the value of the unpaid debt including VAT. Under the contract, all the policyholder’s rights were transferred to EH.

EH made an application for a refund of the VAT included in the amounts paid on the grounds that in connection with the insurance product, it had paid the compensation including VAT, in respect of debts which had become definitively irrecoverable. The Hungarian tax authorities rejected the application on the grounds that the transactions which gave rise to the irrecoverable debts had not been carried out by EH.

EH appealed to the courts but the decision was upheld on the grounds that EH was not the insured person’s successor under insurance contracts and accordingly one of the substantive conditions for a refund of the VAT had not been met. The case was further appealed and referred to the CJEU.

The CJEU concluded that as the policyholders have received consideration in the form of compensation from EH, there can be no reduction of the consideration in the event of non-payment. In addition, the CJEU stated that a bad debt relief claim would infringe the principle of fiscal neutrality since the VAT paid to the tax authorities would not be exactly proportional to the price actually received by the taxable customer.

Constable Comment: The CJEU has ruled that EH was not entitled to claim bad debt relief on the debts assigned to it under the insurance contracts. There are certain conditions to be met in order to claim bad debt relief and it is important to consider these before making a claim. This supports HMRC policy regarding debts assigned to factors set out in its notice regarding Bad Debt Relief

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC NEWS

HMRC email updates, videos and webinars for VAT
Form VAT 484 should be used to notify HMRC about any required changes to bank account details, contact details or VAT return periods. HMRC have released a live webinar about using this form to report changes. You can view this by following the link above.

Goods or services supplied to charities (VAT Notice 701/58)
This guidance relates to when the zero-rate VAT applies to charity advertisements and goods used for the collection of donations. HMRC has updated the following sections:

• “Media where charities can advertise VAT free”
• “What the term ‘the public’ covers”
• “Information on the internet”
• “Relief on the design or production of an advertisement”

Reporting VAT accounting mistakes to HMRC
HMRC has recently improved its VAT652 Error Correction Notice form by launching a new online form. The ‘print and post’ form has not been replaced and can still be used.  However, the online form is now HMRC’s preferred option.

The online form aims to reduce incomplete or incorrect forms, reducing customer contact and leading to a more efficient processing. If you or your business have any queries about the new online form, please contact Constable VAT and we will be happy to assist.

CASE REVIEW

CJEU

Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration and there may be occasions where they have a more binding effect.

1. Reduced rating of sports supplies

Escape Center BVBA (TEC) is the operator of a fitness centre, providing access to facilities and equipment. The equipment is used either by individuals or groups, with or without coaching. TEC also offers personal training and group classes. TEC accounted for VAT at 21% on its supplies but sought a reimbursement of previously declared VAT, taking the view that a 6% reduced rate should have applied. The Belgian tax authorities rejected that claim which led, initially, to consideration of the issue in the Belgium courts.

The court in Belgium noted that the Belgian tax authorities do not follow a uniform practice.  Some inspectors considered that standard rate VAT of 21% should be applied and others accepted a reduced rate of 6%.  As a result, the court referred a question to the CJEU.

The CJEU confirmed that the use of sporting facilities should cover the right to use facilities for the practice of sport and supplies linked to the use of those facilities. The CJEU commented that the reduced rating is to encourage the effective practice of sport rather than to focus on access to sport facilities. The CJEU considered whether the activities of TEC form a single supply and concluded that a supply of permission to use sporting facilities in a fitness centre and the supply of individual or group coaching may be subject to a reduced rate of VAT where that coaching is linked to the use of those facilities and is necessary for the practice of sports or where that coaching is ancillary to the use of those facilities or to their actual use.

Constable Comment: This case is not relevant to the UK in the sense that the reduced rate is an option not a mandated rule in relation to the supplies in question.  The UK never adopted the reduced rate for comparable supplies.  The UK offers VAT exemption for certain sport supplies however strict conditions needs to be met.  The main relevance of the judgement may be regarding a determination of when a bundle of services must be treated as a composite supply (the same VAT rate applying to the full package) or should be broken down with component elements attracting different rates of VAT.  This is a complex point that arises frequently in many different contexts and should always be considered by businesses that provide a bundle of services when the components in isolation could be subject to different VAT liabilities or place of supply outcomes.   

Upper Tier Tribunal

2. Personal Liability Notice – burden of proof

Mr Zaman, appealed a personal liability notice (PLN) issued by HMRC, imposing a penalty of £1.7million to the First-tier Tax Tribunal (FTT).  The PLN had been issued to transfer a liability on Zamco Ltd (Zamco), a company of which Mr Zaman was the sole director, to Mr Zaman.  FTT had allowed Mr Zaman’s appeal, which led to HMRC appealing to the Upper-tier Tax Tribunal (UT) on the grounds:

• The FTT erred in its approach to the burden of proof because it held that the burden rested solely with HMRC
• The FTT erred in its evaluation of the evidence because it failed to draw the correct inference from its findings of fact

The burden of proof on a dispute regarding HMRC’s appeal against VAT assessments rests with the taxpayer.  However, if HMRC elects to impose a PLN the burden of proof as regards HMRC’s rights to hold an individual director responsible for a company’s mistakes shifts to HMRC.

The UT considered the FTT’s decision and stated that it is for the taxpayer to prove, by evidence, that an assessment to VAT issued by HMRC is incorrect. The UT commented that the FTT lost sight of that fact.  After establishing whether the PLN was validly issued, the evidential burden in relation to the assessment to VAT on Zamco shifted to Mr Zaman.  It therefore allowed HMRC’s appeal on the first ground of appeal.  HMRC invited the UT to remake the decision in such way that the appeal against the PLN is dismissed. However, the UT concluded it did not hear sufficient evidence to do so, therefore the most appropriate course was to remit the case back to the panel of the FTT.

Constable Comment:  It can be difficult in cases like this to unpick the position and establish rights of appeal.  The underlying tax liability will rest with the company (which should usually lodge an appeal if it is wrong) and there can be no issue of a PLN if there is no underlying tax liability.  Once a PLN has been issued this does not shift the burden to prove that an underlying tax liability exists to HMRC.  The burden of proof only sits with HMRC insofar as it must show that the actions of the director allow HMRC to hold the director liable (in effect) for the actions of the company. 

First Tier Tribunal

3. VAT exemption: payment service provider

The appellant EMPL and EMPO are in the same corporate group called eMerchantPay Group. EMPO makes supplies to EMPL. HMRC ruled that these services are subject to VAT at the standard rate, therefore raised an assessment in the sum of £64,618. EMPL claimed that the supplies made by EMPO are VAT exempt financial services.

EMPL is a payment service provider (PSP) which provides businesses with the ability to accept card payments. EMPL agrees to market the PSP’s card acquiring services to merchants, guarantee the PSP’s debts to merchants, carry out due diligence and ongoing monitoring, provide payment processing, support and customer service. However, most of the underlying work in relation to these activities is undertaken by EMPO as a subcontractor.

HMRC argued that EMPO’s services were merely clerical or administrative services and therefore subject to VAT at the standard rate.

The FTT considered the evidence before it and stated that the ‘economic reality’ is that EMPO’s service consists of bringing together merchant acquirers and merchants with a view to the former providing financial services to the latter. This is because from a merchant’s perspective, the end goal was to enter into a contract with one or more merchant acquirers to enable card payments to be taken.  The FTT concluded that EMPO’s supply is the provision of intermediary services and therefore exempt from VAT. The appeal was allowed.

Constable Comment: As a FTT decision, this judgment is only binding on the parties concerned and the summary of facts provides insufficient detail to gauge its wider relevance.  The main point we took from this case is that it seems that it was recognised that EMPO was operating on the boundary of exemption EMPL took steps to seek a ruling and manage any risk proactively.  Many businesses prefer not to confront arguable points of law in this way. 

How much EMPL’s proactive approach influenced the outcome of the Tribunal is impossible to know.  However, this seems to us a case that could have gone either way and EMPL won.  Being prepared in advance and having all the legal and factual arguments ready may have made the difference between success and failure.  

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC NEWS

HMRC have released the following updates to guidance.

VAT payments on account
This guidance sets out who has to pay VAT payments on account, how HMRC works out the payments, the alternatives and how and when to pay. The postal address to reach the payments on account team has been updated.

Revoke an option to tax for VAT purposes within the first 6 months
Taxpayers can choose to revoke an option to tax within the first 6 months, known as the ‘cooling off’ period where certain conditions are met. If they wish to revoke, they must submit form VAT1614C. The address for sending this completed form and any supporting documents have been updated.

Exclude a new building from an option to tax for VAT purposes
Taxpayers can use form VAT1614F to exclude a new building that’s been built on land they previously opted to tax for VAT purposes. The address for sending your completed form and any supporting documents has been updated.

Agent Update: Issue 99
HMRC has released this new agent update containing the latest guidance and information including:

• New approach to VAT compliance for overseas based traders using online marketplaces
• Making Tax Digital (MTD) for VAT – Make sure your clients are signed up and have the right software
• Tax avoidance – don’t get caught out
• Capital Gains Tax on UK Property Account
• Making Tax Digital (MTD) for Income Tax – expanding the customer pilot

CASE REVIEW

Upper Tribunal

1. Deliberate inaccuracy in VAT return

This was an appeal against a decision of the FTT granting an application by HMRC to strike out parts of the appellant’s, C F Booth Limited, appeal against a penalty assessment in the sum of £1,444,813.

The background to the penalty was that during an earlier 2017 decision (the 2017 decision), the FTT found that the appellant knew or should have known that a number of its transactions were connected to fraudulent evasion of VAT. Following this decision, in May 2018 the appellant claimed certain input VAT on its VAT returns and HMRC took the view that because of the result of the 2017 decision, the taxpayer knew (or should have known) the input tax credits were false as a result of artificial transactions connected to fraudulent tax losses. On that basis, HMRC concluded the return contained deliberate inaccuracies and issued a penalty of £1,444,813 in respect of the deliberate accuracy.

The above penalty was appealed to the FTT but the decision was upheld and the Upper Tribunal (UT) gave the appellant permission to appeal on 4 grounds.

(1) Deliberate conduct requires a conscious element which has to be proved by HMRC in these penalty proceedings, beyond the findings already reached in 2017.

(2) Applying the approach of the Court of Appeal in E Buyer, the conclusions of the FTT in 2017 on Kittel knowledge cannot be taken to have determined the question of deliberate conduct or the conscious element (alternatively, the element of dishonesty) which is inherent in that.

(3) Further and in any event, in these proceedings which are criminal proceedings for the purposes of Article 6 ECHR, the findings in the earlier civil proceedings should not be taken to determine any issue, whether by the application of a principle of issue estoppel or abuse of process or otherwise.

(4) The arguments on proportionality and special circumstances should be permitted to proceed, and should be taken into account, either to re-characterise the penalty as a penalty for “careless conduct” or otherwise to mitigate the amount of it.

Initially the UT considered ground the first two grounds together. Under these grounds, the appellant argued that the knowledge found by the FTT in the 2017 decision did not amount to deliberate conduct for the purpose of the penalty assessment. The appellant stated that HMRC had to prove the following three elements:

• The appellant had completed its relevant VAT returns incorrectly, by claiming input VAT in excess to the amount to which it was entitled
• The knowledge of the appellant, at the time, that the relevant VAT returns were completed incorrectly, that is to say, knowledge on the part of the appellant that in all the circumstances it was not entitled to claim input tax; and
• That the appellant intended that HMRC should rely on the VAT returns as accurate documents.

The appellant agreed that the first point was present in this case, however the second and third were in dispute because the required mental or conscious elements had to be proven by HMRC.

The UT disagreed with this argument and stated that a deliberate inaccuracy occurs when a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. The UT highlighted the fact that this condition was met when the appellant made the declaration that the return is correct and complete. The appellant must have envisaged and intended that HMRC would rely on the contents of the return being correct when it made such the return declaration. Accordingly, the UT dismissed grounds 1 and 2 of the appeal and upheld that the returns contained deliberate inaccuracies.

The UT went on to discuss Ground 3 and 4. Considering ground 3 it concluded that the appellant received a fair hearing as it took place in public on front of an independent tribunal, the appellant received a notice of HMRC’s strike out application and both sides were legally represented and therefore were able to present their cases to the FTT, therefore ground 3 was dismissed. Regarding ground 4, the appellant argued that the penalty was disproportionate and excessive offending against the principle of proportionality however the UT rejected this argument, and the appeal was dismissed.

Constable Comment: This case provides a very useful analysis of a ‘deliberate inaccuracy’ this being in summary that a taxpayer knowingly provides HMRC with a document that contains an error with the intention that HMRC will rely on it being an accurate document. We advise all taxpayers to ensure they do not fall within this test as such inaccuracies could in theory attract a penalty of up to 100% of the VAT involved.

FTT

2. Healthcare services in prisons

This case concerned Spectrum Community Health CIC (Spectrum) making a range of healthcare supplies to 13 prisons in England. The services are supplied to NHS England (NHSE) and they include GP, nursing, pharmacy, physiotherapy, substance misuse, mental health, dentistry and optometry services. Spectrum delivers some of the healthcare services in house and subcontracts the remainder, but Spectrum remains responsible for the services under the contract. This case concerns the VAT treatment of the supplies made by Spectrum.

Spectrum contends that whilst the majority of its supplies are VAT exempt as medical care, it also makes taxable supplies including zero rated supplies of dispensing drugs and reduced rated supplies of sexual health products. As a result, Spectrum believes it is required to be VAT registered and entitled to recover input VAT attributable to those taxable supplies. HMRC do not accept that Spectrum makes any taxable supplies, they take the view there is a single composite supply to NHSE which is exempt from VAT.

The first issue the Tribunal took into consideration was whether Spectrum makes a single composite supply or multiple separate supplies. HMRC contended that the supplies made by Spectrum to NHSE are viewed as a Levob type supply (where two or more elements or acts supplied by a person are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split) and therefore the Tribunal approached the issue by identifying the essential features or characteristic elements of the transaction and, amongst other factors, considers this from the perspective of the average consumer, or the typical recipient of the supply.

Whilst Spectrum argued the typical consumer being a prisoner, the Tribunal concluded that the customer was NHSE as specified under the contracts and supported by the economic reality of the transactions. From NHSE’s perspective it was important that the different elements of the prison healthcare services work smoothly together and therefore the Tribunal concluded that the essential feature was the provision of primary healthcare services in prisons that is equivalent to that provided by the NHS in the general community. It was concluded that there was a single composite supply of primary healthcare.

The Tribunal then considered whether the supply was VAT exempt under Item 1, Group 7 as medical care provided by registered doctors, nurses, or exempt under Item 4, Group 7 as the provision of care or medical or surgical treatments. Spectrum took the view that supplies of drugs and contraceptive products may be excluded under Item 1 and are therefore taxable. Whilst the Tribunal concluded that the supply was exempt under Item 1, because Spectrum was not recognised as an establishment of a similar nature to a hospital which was a condition under Item 4, it also rejected the argument that the drugs or contraceptive products are physically and economically dissociable from the medical care.

As a result of the above, it was concluded that Spectrum makes a single composite supply of medical care which is VAT exempt. It is not entitled to be VAT registered or recover any VAT incurred. The appeal was dismissed.

Constable Comment: This case considered the single and multiple supply rules and the Tribunal ruled that as the essential feature of the transaction from the perspective of NHSE, being the typical customer, is of primary healthcare services, there was a single composite supply and Spectrum should not split these into multiple supplies with different VAT liabilities. Where there is ambiguity regarding to whether a transaction is a single or multiple supply, we would always recommend seeking professional advice as this is potentially a complex area of VAT which may often lead to litigation with HMRC. Constable VAT will be happy to assist with any related queries.

3. Best judgment assessment on Subway franchise

This case concerned Peppermint Foods Limited (the appellant) which owns two Subway franchise which it exploits via two outlets, one based in a retail park and the other located at a shopping centre. The appellant sells hot toasted sandwiches, cold food and drink from those outlets. Food consumed at premises was treated as standard rated, as well as hot takeaway food. Cold takeaway food, other than confectionary, is zero rated.

HMRC took the view that the appellants staff have, at the point of sale, incorrectly entered hot takeaway food into the till as cold takeaway food, therefore reducing output VAT as these were treated as zero rate. The case was assigned to Officer Vaghela (HMRC officer) who has considerable experience regarding investigating the VAT position of Subway franchises. He considered that the average standard rated sale in the last 4 years, being 58%, seemed low and therefore decided to carry out test purchases.

There were some incorrect VAT treatments discovered followed by the test purchases, these were raised with the appellant. As a result, the appellant also provided some read reports to the HMRC officer. The next step in the process involved the HMRC officer carrying out an invigilation exercise which the appellant agreed to. This involved the officers attending the outlets and observing the way in which the sales were entered into the tills. The results of these exercises were discussed with the appellant. Following the lengthy procedure including internal reviews, HMRC’s final assessment was in the sum of £144,383 after taking into account various points raised by the appellant such as seasonal factors. This amount was reduced from an initial £214,854.

The Tribunal noted that the burden was on HMRC to prove that a valid assessment was made. If HMRC is successful, then the burden of demonstrating that the assessment is incorrect lies with the appellant.

The appellant submitted that the invigilation exercises were wholly unrepresentative of the overall period assessed. It does not take into account matters such as seasonal variations, staff errors which could not be foreseen, or accurately managed, significant construction works, disruptive software and IT upgrades and the respective locations of the outlets. The appellant stated that it did not provide any quantitative evidence to refute HMRC’s figures because it did not realise that is needed to do so.

The Tribunal went on to consider whether the assessment has been made to best judgment and concluded that the officer indeed made his assessment to best judgment. He took into account 4 things when making his assessment; firstly the 4 year average of 58% seemed low. Secondly, the test purchases carried out shown that hot takeaway food was incorrectly treated as zero rated cold takeaways. Thirdly, the Z readings provided by the appellant and finally the invigilation exercises. During all stages the officer shared his concerns with the appellant which the Tribunal found to be best practice.

As a result, the assessment was found to be evidence based, taking into account matters raised by the appellant, reflects an ongoing dialogue with the appellant, and evidences a justification for initially assessing on the basis of 94% and subsequently reducing it to 86%. The Tribunal concluded that the assessment was made to best judgment and was valid.

The burden was then on the appellant to show that the amount assessed was excessive. However, the appellant did not provide any alternative figures therefore the Tribunal could not reasonably reduce the assessment. The appellant also tried relying on a previous case law involving another Subway franchise, but the facts were different and therefore the Tribunal rejected this argument. In conclusion therefore the assessment was valid, in time, best of judgment and not been displaced by the appellant, accordingly the appeal was dismissed.

Constable Comment: This case demonstrates an evidence based best judgment assessment which the Tribunal held to be valid. The case highlights the importance of demonstrating to HMRC why the figures are incorrect, where the taxpayer disputes them, as it was stated by the Tribunal, that if HMRC’s assessment is valid, it is the burden of the taxpayer to show why the amount is incorrect. In this case, the appellant did not provide any alternative figures, and therefore the Tribunal could not reduce the assessment any further. Timely professional assistance in such scenarios can have a huge influence on end outcomes as can its absence.

4. Credit notes in Insolvency

In this case, London School of Accountancy and Management Limited (LSAM) appeals against a decision by HMRC regarding an adjustment for a VAT credit in the sum of £781,000, that was rejected. LSAM was in the business of making higher education supplies to students until 2012, after this point it went into liquidation. LSAM claimed to reduce the taxable amount charged to students for VAT purposes at a time after the company entered into liquidation for services said to have been invoiced to students but never supplied. The supplies of tuition were subject to VAT. LSAM made a deal with City of London College (CLC) to enable LSAM students to continue their studies after LSAM went into liquidation.

LSAM submitted that after going into liquidation, there had been a “total failure of consideration” and on that basis an entitlement to VAT credit arises. It argued that in terms of commercial reality the only way to deal with the situation that would have made sense to HMRC was to issue credit notes. LSAM also stated that if the claim was successful there will be money in the pot from which partial repayment can be made to students.

HMRC’s position was that there had been no overpaid VAT and there is no entitlement to a reduction in the taxable amount. It submitted that the appeal must fail for three sets of reasons as follows:

• LSAM does not meet the basic requirement for a reduction in the taxable amount because it has received consideration and not made any refund to customers.
• Secondly, even if LSAM might in principle have been able to obtain a reduction in the taxable amount, LSAM did not fulfil the formal requirements for a refund, including a failure to make a timeous claim.
• Thirdly, insofar as the quantum issue may be relevant, HMRC raised concerns about the calculations of the overpaid VAT which appear to overstate the sums in question.

The Tribunal reviewed the evidence and found from the contractual relations giving rise to the supply, it was clear that the appellant was under no obligation to make any refunds under any circumstances. Also, it stated that in order for a reduction in price to take place, LSAM would have to be in funds to repay the students not only the VAT element of the course fee, but the actual course fees. In other words, the appellant would have to be in funds of £3.72m and had actually repaid the customer to meet the requirement of ‘reduction in the taxable amount’. The credit notes raised by LSAM were theoretical rather than presenting an actual decrease in consideration, as a result the appeal was dismissed.

Constable Comment: This case considered the rules around VAT repayment claims, specifically as a result of reduction in taxable amount. It highlights the complexity of these rules and the difficulty of successfully arguing that a VAT refund is due. If you or your business takes the view that a VAT refund is due to you, it is important that the relevant procedural and technical requirements are met in order that such a claim is successful.

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.

HMRC NEWS

How to account for VAT and who to contact if you are an insolvency practitioner and you are appointed over insolvent VAT registered businesses
Section 13.2 has been added to give information on set-off and preferential debts.

Automatic sign up for making tax digital for VAT for all new VAT registrations from 1^st August 2022
HMRC has developed a new VAT registration service which will see all new taxpayers automatically signed up for making tax digital for VAT from 1^st August 2022.

HMRC’s change in approach to VAT assessments for overseas online marketplace traders
From September 2022 HMRC will change the way it carries out VAT assessments for overseas online marketplace traders. HMRC will issue assessments to traders in cases where the information held by HMRC indicates that VAT returns are inaccurate, rather than asking for additional information from traders in the first instance. This change will affect marketplace traders and online marketplace hosts.

HMRC guidance: steps to take before registering as a professional tax agent
HMRC has published new guidance on the steps to be taken before registering as a professional tax agent.

Second-hand motor vehicle export refund scheme delayed
HMRC have announced that the second-hand motor vehicle export refund scheme, which was due to start on 1^st October 2022 has been delayed. HMRC’s guidance on preparing for the scheme will be updated in due course with a new start date.

CASE REVIEW

Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration when reaching their own conclusions and there may be occasions where they have a more binding effect. We will therefore continue to include summaries of any European judgements that we consider to be relevant. If you are concerned about the impact of any matters raised in the following cases, please contact us.

COURT OF APPEAL

1. Fraudulent transactions: right to input tax recovery

The issue in this appeal is whether a taxable person, Tower Bridge GP Ltd (TBGP) is entitled to deduct VAT incurred as input tax even though it held no valid VAT invoice in respect of the supply in relation to which it claims to make the deduction. Both the FTT and the UT found against TBGP.

TBGP is the representative member of the Cantor Fitzgerald group’s VAT group registration (CFG VAT group). Cantor Fitzgerald Europe Ltd (CFE) was a broker in equities, equity derivatives, foreign exchange markets and contracts for differences. Cantor CO2e Ltd (CO2e) provided brokerage, information and consulting services for products related to environmental markets, including selling carbon credits over the counter. Both CFE and CO2e were members of the CFG VAT group. CO2e arranged and undertook the relevant transactions and CFE executed the transactions, received, and issued invoices.

In 2009, CFE began trading in carbon credit transactions that were connected to VAT fraud. The FTT found that CFE neither knew nor should have known that the transactions it entered into before 15 June 2009 were connected to VAT fraud but that it should have known that its transactions were connected to VAT fraud from 15 June 2009. This appeal only related to transactions entered before that date.

CFE purchased carbon credits from Stratex in 17 separate transactions. The carbon credits were supplied to CFE and used for the purpose of its taxable business. Stratex was also a taxable person and VAT was due in respect of the supplies by Stratex to CFE.

The Stratex invoices issued to CFE in respect of the 17 transactions included amounts of VAT totalling £5,605,119.74 which CFE paid. TBGP, as the representative member of the group VAT registration, then claimed a deduction in respect of the VAT paid.

The Stratex invoices were not valid VAT invoices as they did not show a VAT registration number (VRN) for Stratex nor did the invoices name CFE as the customer. Stratex was a taxable person, but it was not registered for VAT, and it fraudulently defaulted on its obligation to account to HMRC for the sums it charged as VAT on its invoices.

At the time of transacting with Stratex, CFE did not know that Stratex was not registered for VAT or that it was a fraudulent trader. The FTT found that there was no effective verification by CFE of the validity of the invoices nor the VAT registration number (VRN) of Stratex.

CFE requested Stratex’s VRN and sought corrected invoices, however, these were never received. In September 2009 CFE confirmed to HMRC that it had not been provided with Stratex’s VRN. HMRC officers visited Stratex and found that its companies house registered address was the premises of a corporate service provider that was an agent for Stratex.

HMRC denied TBGP the recovery of the input tax on the Stratex invoices on the basis that the invoices did not meet the formal legal requirements to be valid VAT invoices. HMRC also refused to exercise its discretion to allow recovery of the VAT paid on the basis that Stratex was not registered for VAT, the transactions were connected to fraud and CFE failed to conduct reasonable due diligence in relation to the transactions.

The tribunal concluded that if TBGP were to be allowed to recover the VAT paid on the transactions with Stratex then there would be a loss to the public purse consisting of the input tax, with no corresponding gain to the public purse from the output tax that Stratex ought to have paid but fraudulently did not.

Therefore, the appeal was dismissed.

Constable Comment: This case highlights the importance of carrying out full due diligence checks when engaging suppliers. This includes checking that VAT registration numbers shown on invoices are valid. HMRC has a service available in order to check UK VAT registration numbers. This can be found here.

UPPER TRIBUNAL

2. Roof insulation or new roof?

Conservatory Roofing (CR) appealed against a decision of the FTT, the appeal concerned the rate of VAT which applied to works the appellant carried out to home conservatories. The FTT rejected the appellants case that its supplies for VAT purposes were insulations for roofs and therefore subject to the reduced rate of 5% VAT. The FTT found that they were supplies of a composite insulated roofing system that were standard rated and subject to VAT at 20%.

The appellant submitted that in 80% of cases a new, external light-weight roof tile system is secured to the outside of the existing roof, whilst on the inside insulating material is provided and plasterboard applied to a bespoke frame ready for the application of decorative finishes and insertion of lights. In the remaining 20% of cases where the roof panels are too heavy to safely leave in situ, the roof panels are removed. Otherwise, no alteration is made to the existing conservatory roof structure.

The appellants marketing material referred to them as “the original conservatory roof replacement company”, “roofing specialists”. The material stated the benefits of its “bespoke conservatory roof system” which provided a “new insulated lightweight conservatory roof”. The FTT found that the purpose of the product was to provide insulation in cold weather and keep the conservatory cool in hot weather. It was emphasised that the specialised energy saving products were fitted to the existing roof structure which was left intact.

HMRC argued that before and after pictures of the work undertaken conveyed the impression that the customer was getting a new roof and this was reflected in the appellants own marketing. A typical consumer would have regarded the supply as a thermally efficient replacement roof rather than new insulation. The appellants solid roof system changed the character of a conservatory roof in a way that just insulating it would not.

The FTT ruled that the supplies made by CR extend far beyond installing insulation to a roof. The work is materially the construction of an entirely new roofing system. Therefore, it was concluded that the appellant does not make a supply of insulation for roofs and so the supplies can not be classified as reduced rated.

The UT considered that the reasons given in the FTT decision were inadequate and there was an error of law in the decision and so the appeal was allowed, the decision is set aside and remitted back to the FTT.

Constable Comment: The upper tribunal has remitted this case back to the FTT and it remains to be seen how this case will be concluded. As part of this decision the UT also commented on how the FTT had determined the predominant element of a composite supply. It decided that the FTT had been entitled to take into account that most of the materials used by CR were not energy-saving materials. We will keep readers up to date on the development of this case.

FIRST TIER TRIBUNAL

3. Input tax recovery on construction costs

Bletchingley Church House Charity (BCHC) appeals against the decision dated 11 May 2016 disallowing input tax in the sum of £87,002.75 on the grounds that BCHC is incapable of making a grant that qualifies for zero-rating, and goods and services on which the VAT has been charged cannot be used for the purpose of any taxable business activity, which carries the right to the recovery of VAT incurred. BCHC is incapable of making a grant that qualifies for zero-rating for two reasons –

• Such a grant is not lawful without the approval of the Charity Commission and that approval has not been given.
• Even if the Charity Commission approved the grant, the person to whom the grant will be made cannot issue a valid certificate.

BCHC argued that it, as the owner of Church House, and a registered charity that is using the building as a village hall, albeit it via Bletchingley Church House Administration Limited (BCHAL) which manages the lettings on its behalf. BCHC confirmed that Church House was built in 1907. It had been continuously used by the local community since construction. The works done to Church House in 2015/16 were not works of construction, but works of restoration, being work done to put Church House into a useable condition. However, some work was construction such as installing a lift and disabled facilities but ultimately no new building was constructed as a result of the works.

BCHC accepted that the lease between BCHC and BCHAL granted BCHAL the right to occupy and use Church House. BCHAL is not and was not intended to be a charity. Following the grant of the lease, BCHAL let Church House on behalf of BCHC to the local community (BCHAL was BCHC’s appointed representative/agent and BCHC used church house for a relevant charitable purpose). The lease was a lease to act as an agent but there was no management agreement between BCHC and BCHAL.

After the grant of the lease, all hirers of Church House booked via BCHAL and the schedules of lettings demonstrated use by residents. There was no record of BCHC using Church House after the grant of the lease meaning that BCHC’s name did not appear on the schedules. BCHAL did not charge BCHC for using Church House, if it did use it.

BCHC’s intention was to have Church House managed by a management committee and a commercial tenant was a way to reclaim VAT incurred on the works, or so it believed.

The project manager of the works that were carried out stated that the works did not involve the demolition and rebuilding of church house, the demolition to ground level of any external walls or the construction of a new building or extension. The works involved the alteration of Church House’s internal form. The works done to Church House were not works of construction.

BCHC did not ask the builder to zero-rate its supplies of services from the outset of the works because it was BCHC’s intention to reclaim VAT incurred on the works. However, when it became apparent that there was a potential difficulty with the intended plan, BCHC did ask the builder to zero-rate future supplies referable to disabled access. The purpose of BCHAL was to separate the running of a village hall from BCHC’s fundraising, to have a trading arm of BCHC and, via the rent, to build up a maintenance fund.

The lease is a commercial lease and gives BCHAL the right to exclusive use of Church House as tenant subject to the BCHAL’s contractual obligation to pay rent of £5000 per annum. BCHC does not charge VAT on the rent. The intended users of Church House were the local community of Bletchingley and not more than 95% of those were charities.

HMRC’s view was that Church House was not used as a village hall after the grant of the lease because it was not run by a charity. HMRC considered whether Church House was used exclusively by a charity and concluded, based on the schedules of use, that it was not.

The tribunal found that in 1907, BCHC constructed Church House. In 2008, Church House was only being used a few hours a week by user groups leading to rental income of less than £1,000 per annum. In 2009 BCHC set up the Church House appeal committee and BCHC became registered with the charity commission from 2011.

BCHC drew up a business plan in 2014 which confirmed that at the time Church House was used for an average of 2 hours per week by St Mary’s church, twice a week for around 3 hours by alcoholics anonymous and once a week for around 2 hours by the Bletchingley youth group. The redevelopment included a lift to all floors, rooms for meetings and other functions with storage space for regular users, smaller, rooms for counselling, surgeries and private meetings, modern kitchen facilities serving all three floors, toilets, including for the disabled, that are easily accessible from all parts of the building, office space for business and community users and the ability to securely close off those parts not in use whilst providing access to main facilities.

BCHC did not expect to have to pay the full VAT rate on the total construction because a significant proportion of the restoration related to improving facilities for the disabled.

In February 2015, BCHC entered into a contract with Hindscray Limited (Hindscray) for alterations and extensions at Church House. The alterations and extensions were more specifically described as “external repairs, internal alterations and re-ordering plus the construction of a single storey extension with associated external works and drainage” including the design and construction of structural connections and a lift. BCHC was required to pay Hindscray the VAT exclusive sum of £487,743.20.

The tribunal concluded that BCHC’s first grant of a major interest is not zero-rated because church house was not intended for use solely for a relevant charitable purpose, specifically:

1. BCHC was and is a charity. Its use of Church House was not otherwise than in the course or furtherance of a business or as a village hall or similarly in providing social or recreational facilities for a local community.
2. BCHAL was not and is not a charity. Also, its use of Church House was not otherwise than in the course or furtherance of a business or as a village hall or similarly in providing social or recreational facilities for a local community.
3. Less than 95% of the hirers were charities. Its use of Church House was not otherwise than in the course or furtherance of a business or as a village hall or similarly in providing social or recreational facilities for a local community.

For the above reasons, the tribunal dismissed the appeal.

Constable Comment: This case highlights the complexities surrounding charitable reliefs for supplies of construction services received by charities. It is important to ensure that all conditions set out in the legislation are met so that the correct VAT rate can be secured. We would always recommend seeking professional advice before entering into any construction contracts for works to be carried out.

Please note that this newsletter is intended to provide a general overview of the subject. 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 blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.