HMRC NEWS

Factsheet CC/FS69: How to avoid penalties for Making Tax Digital for VAT
HMRC has published new factsheet CC/FS69 with information for VAT registered businesses on how to avoid penalties for Making Tax Digital for VAT.

Partial exemption (VAT Notice 706)
This guidance details partial exemption and methods and calculations to use to see how much input tax businesses can recover. Section 6.2 and Appendix 2 have been updated with information about how to get an approval for a partial exemption special method by using either the online service, by writing to the VAT Written Enquiries team, or by sending an email.

Domestic reverse charge procedure (VAT Notice 735)
This guidance provides information about domestic reverse charge procedures which applies to the buying and selling of certain goods and services. From 1 July 2022 businesses registered or liable to be registered for VAT will no longer need to report information about sales of mobiles or computer chips in the UK.

Exemption and partial exemption from VAT
This guidance has been updated with information about what to do if businesses make supplies that are exempt from VAT when moving goods from Great Britain to Northern Ireland.

The VAT treatment of passenger transport (VAT Notice 744A)
This guidance has been updated and includes information about accounting for VAT on goods sold on board ferries between Great Britain and Northern Ireland.

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 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.

1. VAT Exemption: Education services supplementing school curriculum

This case concerns Happy Education SRL, a Romanian commercial company which provides educational services consisting of organising activities supplementing school curriculum such as homework support classes, educational programmes, foreign language classes, art classes, sporting activities, picking up children from school and the provision of after school meals.

EU VAT legislation exempts “the provision of children’s or young people’s education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objectives”.

The Romanian tax authorities took the view that Happy Education’s supplies fell outside of the exemption. Happy Education argued that its services are closely related to school education and VAT exempt.

As a result of the dispute, two questions were referred to the CJEU:

• Must Article 132(1)(i), Article 133 and Article 134 of [Directive 2006/112] be interpreted as meaning that educational services such as those contained in the national “School after school” programme can be brought within the concept of “services closely related to school education”, in the case where they are provided, in circumstances such as those obtaining in the main proceedings, by a private body, for commercial purposes and in the absence of a partnership concluded with an educational establishment?

• If the answer to the first question is in the affirmative, can the applicant be recognised as being an “organisation having similar objects”, for the purposes of Article 132(1)(i) of [Directive 2006/112] with reference to the public interest nature of the educational activities of the “School after school” type, which are aimed at prevention of school leaving and early school leaving, improvement of school results, remedial education, accelerated learning, personal development and social inclusion?’

The CJEU first considered the second question and, as Happy Education is not a body governed by public law, whether it is an organisation “recognised by the Member State concerned as having similar objects”. EU legislation does not specify conditions or procedures under which those similar objects may be recognised. It is for the national law of each Member State to lay down rules in accordance with which that recognition may be granted. Under Romanian law, recognition as an organisation with similar objects is granted primarily through the conclusion of a partnership with an educational establishment under the ‘School after school’ programme. It was apparent from the information submitted that Happy Education has not concluded such a partnership and therefore does not have the relevant recognition or authorisation required for that purpose under Romanian law.

The CJEU therefore concluded that VAT exemption cannot apply where the relevant entity does not satisfy the conditions under national law for obtaining such recognition. In the view of this it was not necessary for the Court to consider the first question.

Constable Comment: Whilst this case concerned EU and Romanian VAT law regarding VAT exemption, the UK has similar VAT legislation in relation to exemption and education. This is potentially a complex area of VAT and if an organisation makes any educational supplies, we recommend seeking professional advice to ensure the correct VAT treatment is applied.

FTT

2. Google costs not linked to VAT exempt insurance supplies

This case concerns Sofology Limited and DFS Furniture Company Limited (DFS) and the recovery of VAT incurred on PPC advertising services from Google. Each appellant is a specialist sofa retailer. In addition to the supplies of sofas, the appellants also make supplies of intermediary services in relation to sofa insurance which is sold along with the sofas. The supplies of sofas are taxable, and the supply of insurance intermediary services is exempt from VAT, consequently each appellant is partly exempt for VAT purposes. Each appellant treated VAT incurred on PPC advertising as directly attributable to taxable supplies and recovered the VAT incurred in full.

When potential customers use Google to search online for a new sofa, they might click on one of the appellants sponsored links shown at the top of the results page. The PPC advertising services involved the making of payments by the appellants to Google on each occasion that a potential customer clicks on that sponsored link and is directed to the relevant  website landing page.

HMRC took the view that the VAT incurred on PPC advertising was directly attributable both to the taxable supplies of sofas and the VAT exempt supplies of insurance intermediary services. An alternative argument from HMRC was that the input tax was not directly attributable to any supplies made by the appellants but instead should have been treated as relating to the business as a whole and therefore an overhead, subject to recovery in accordance with the partial exemption recovery rate. HMRC contended there were substantial economic links between the PPC adverts and both taxable and exempt supplies meaning that the cost of the adverts had a direct and immediate link with both types of supplies.

The appellants argued that the substantial economic links were not sufficient to establish a direct and immediate link, which would be necessary to treat it as directly attributable to the exempt supplies. The appellants stated that the contents of the adverts, the content and layout of landing pages and the manner in which the insurance was sold showed that the links between the costs of the adverts and supplies of insurance was indirect.

The Tribunal agreed with the appellants argument and concluded that the cost of the PPC advertising had a direct and immediate link with the taxable supplies of sofas but did not have a direct and immediate link with the exempt supplies of insurance intermediary services. The appeal was therefore upheld.

Constable Comment: This decision was very detailed and fact specific to the appellants. However, it considers the basic principles of input VAT recovery and establishing a direct and immediate link between VAT incurred and supplies made in order for the VAT incurred to be fully recoverable.

3. VAT Exemption: Self-Invested Pension Plans

This case concerned Intelligent Money Limited (“IML”) and whether fees paid to the scheme administrator of a Self-Invested Pension Plan (“SIPP”) is consideration for an exempt supply of insurance. IML has been the provider, operator, and administrators of the Intelligent Money SIPP (“IM SIPP”) since 2006. Until 2014 IML treated its supplies of services as subject to VAT but in 2016 IML submitted claims to HMRC in respect of VAT overdeclared on the basis that the supplies made were VAT exempt as “insurance or reinsurance”.

The defining characteristic of a SIPP is that the contractual holder or their financial advisor is responsible for the management of the funds held in the member’s SIPP. IML took the view that the provision of a pension is an activity constituting the provision of long-term insurance, the pension scheme represented a life assurance contract in respect of which consideration was payable by the member to IML. IML cited the EU insurance directives, the Financial Services and Markets Act 2000 and historic domestic case law on what constitutes insurance.

HMRC contended that the essential ingredients for there to be an insurance transaction, as previously identified by the CJEU, were not evident in respect of the IM SIPP. HMRC particularly focused on the absence of the any risk borne by IML. As a pension plan was a tax efficient form of saving there was no risk to the individual which required indemnification. The charges represented consideration for the provision of services and not the payment of a premium for the bearing of risk by IML.

The Tribunal initially considered whether the IM SIPP was a contract of life assurance. It considered as the investments decisions are made exclusively at the direction of the policy holder/member the value of the fund from which benefits are payable are at the risk of the insured, therefore the IM SIPP should be considered insurance.

The Tribunal then went on to determine whether the IM SIPP is an insurance transaction for VAT purposes. IML relied on HMRC guidance which implied that the provision of any life insurance contract meeting the Fuji test would constitute an insurance transaction for VAT purposes. The Tribunal advised HMRC guidance is not the law and considered the dispute further.

The Tribunal relied on the CJEU interpretation of the term “insurance transaction” which provides the essential features of insurance transactions for VAT purposes as “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 a service agreed when the contract was concluded”. The Tribunal concluded that the IM SIPP does not meet this definition because the annual fees payable by a member of the IM SIPP are paid as consideration for the provision of the services and they do not include any element of risk premium and IML does not need to accumulate capital from which to pay the benefits.

The Tribunal therefore dismissed the appeal holding that the fees payable to IML are not consideration for exempt insurance transactions.

Constable Comment: Insurance is often a very complex area of VAT and there is significant case law to consider and apply. This case is particularly interesting as, although not explicit, HMRC guidance implied that a supply meeting the conditions for insurance under Fuji case, is a VAT exempt supply of insurance, the Tribunal however ruled differently.

4. VAT Exemption: Installation of flexi vault burial chambers

This case involved Hodge and Deery Limited (“Hodge”) and whether a supply of services in connection with the installation of flexible pre-formed burial vaults at a burial site, made to RED Landscapes, was VAT exempt.  The vaulting system is installed in graveyards with unstable soil structures which can result in toxins from the decomposition of bodies escaping into the ground water, and in subsidence or an existing grave when another grave is dug in the adjacent plot.

UK VAT legislation exempts, “the making arrangements for or in connection with the disposal of the remains of the dead”.

Hodge contended that the installation of the flexible burial vaults should be treated as the advance digging of multiple graves, and it should not be regarded differently from the preparation of graves on demand. The sole purpose of the preparation of a grave is to dispose of the remains of the dead, therefore the supply should be VAT exempt.

HMRC rejected that the supplies fall within the VAT exemption because the making of arrangements for, or in connection with, the disposal of the remains of the dead, should only relate to supplies that are directly involved with the disposal of the remains of a dead person and application of exemption is limited to supplies directly made by the funeral director with care and custody of the deceased, it does not extend to subcontractors.

The Tribunal held supplies by Hodge resulted in the provision of many graves for the disposal of the remains of the dead. The result of the services satisfies the object of the exemption. The Tribunal concluded that it does not matter that the services are provided in advance, and nor does it matter that the services are not provided in connection with a specific funeral.

Constable Comment: Another interesting aspect of this case was that a new technology of pre-formed flexible vaults was used rather than brick retaining walls as mentioned in the legislation and guidance, which HMRC challenged. The Tribunal stated that the legislation must, in their opinion, be construed in a manner to enable new technology to be adopted to achieve the result expected by the legislation.

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

Revenue and Customs Brief 2 (2022): VAT early termination fees and compensation payments
HMRC has published a new brief to replace Revenue and Customs Brief 12(2020). It introduces a revised policy on VAT early termination payments and compensation payments.

Fulfilment House Due Diligence Scheme registered businesses list
The above guidance can be used to check if a business that stores goods in the UK on behalf of another business is registered with the Fulfilment House Due Diligence Scheme if that business is a trader based outside the EU. HMRC has recently updated the list with 14 additions and 9 removals.

Get your postponed import VAT statement
Along with providing general guidance regarding accessing postponed import VAT statements, HMRC has recently updated the above guidance by adding a section about archived postponed VAT statements. Users must request statements that are older than 6 months.

CASE REVIEW

FTT

1. Supply of room and services

This case concerned Errol Willy Salons Ltd (EWS), and the main issue to be determined was whether the business made an exempt supply of a license to occupy in respect of rooms used by beauticians or whether that supply should be classified a standard rated supply of facilities and services.

The premises consisted of two floors. The ground floor and front part of the first floor was occupied by EWS. The back part of the first floor had two rooms which were rented out to beauticians. The rent payable by the tenants were calculated as a percentage of their turnover.

HMRC has argued it was a standard rated supply of facilities and therefore raised an assessment in the sum of £18,649. The Tribunal considered European case law (Stichting ’Goed Wonen v Staatssecretaris van Financiën (Case C-326/99) ) where 4 fundamental characteristics of leasing or letting immovable property are considered. They are as follows:

• The arrangement must relate to a defined area of immovable property,
• It must confer a right to occupy that property, to the exclusion of all others,
• For an agreed period
• For payment

HMRC agreed that the defined area condition is met however stated that there was no evidence to show that the other 3 conditions have been met because it was uncertain whether there was a right to exclude others from the area, there was no evidence that the right of occupation was for an agreed period and as rent was charged on a turnover basis, the condition that payment must be given was not met.

The Tribunal disagreed with HMRC, it was evident that the rooms belonged to the beauticians and were theirs to do with as they chose, it was evident from the contracts that payment was due monthly therefore there was an agreed period of at least a month. The fact that there is a notional possibility that rent is not paid in a particular month due to no turnover did not change fact that the lease does contain provisions for the payment of rent, therefore the Tribunal concluded that all 4 characteristics are present.

In response, HMRC attempted to argue that the services were active exploitation of rooms, adding significant value therefore it cannot be regarded as a supply of land. The Tribunal considered whether the additional services such as receptionist services, the availability of toilets and staffroom amounted to “significant added value”. It was concluded that these services were ancillary to main supply of the room, the beauticians were not required to use those services, it was not essential to their business. The Tribunal concluded that the additional facilities did not change the intrinsic nature of the supply. Therefore the Tribunal concluded the supply was of a license to occupy land and therefore VAT exempt, the appeal was upheld.

Constable comment: This is a helpful case in an area that has long been contentious, but no doubt further similar cases will continue to appear at Tribunal. The case illustrates the benefit of clear written agreements considering a license to occupy land where there are other services being provided to the person occupying an area of a property. HMRC are often keen to characterise such relationships as a taxable supply of facilities rather than a VAT exempt supply of license to occupy land.

2. Private Tuition exemption

The key issue in dispute in this case is whether the appellant Ms Lalou’s (trading as Dogs Delight) supplies of dog grooming fall within the private tuition exemption. Ms Lalou operates a dog grooming and dog grooming courses business. Ms Lalou came to understand her supplies of the dog grooming courses were VAT exempt private tuition and therefore made an application to deregister from VAT. HMRC initially accepted her application and deregistered her from VAT, she then also submitted an error correction notice where she sought to reclaim £102,301 of overpaid VAT as a result of incorrectly treating the supplies as standard rated.

Following those events, HMRC disputed the treatment of the courses, stating that, as dog grooming is not ordinarily taught in a school or university, the supplies are standard rated, and therefore reinstated Ms Lalou’s VAT registration, rejected the error correction notice, assessed the appellant for £12,203 of unpaid VAT for periods in dispute and issued a surcharge notice for non payment and submission of VAT return.

Ms Lalou appealed many issues in this case including:

• The decision that dog grooming courses were standard rated rather than exempt supplies
• The reinstatement of the VAT number
• The rejection of the error correction notice
• The assessment for £12,203
• The surcharge warning

The appellant argued that dog grooming is ordinarily taught as 88 colleges out of 293, equating to 30%, offer dog grooming services. In contrast HMRC used the same research and argued that only 88 out of 293 teaches the subject therefore it is not ordinarily taught, the National Careers service shows 87 dog grooming services but 251 Pilates courses, which was recently held not to be a subject ordinarily taught in the UK.

The Tribunal stated that the appellant established that the supply was tuition as it involved transfer of skills and knowledge, it was made on her own account therefore it satisfied the private condition, the courses offered were educational.

However, the Tribunal stated that whilst the appellant proved that dog grooming is commonly taught in higher education in England, they stated that this is not the test. It was established in the “Premier Family Martial Arts” case that the relevant activity must be taught at a wide number of schools or universities in the EU. Ms Lalou provided no evidence about the position outside England or any other Member States, therefore the Tribunal concluded that the supply of dog grooming courses are standard rated.

As a result of the above conclusion, the error correction notice and VAT assessment aspects of this appeal also fails. Regarding HMRC reinstating the VAT registration number, the Tribunal found that as the supplies were not exempt HMRC were correct to reinstate the VAT registration. For all the reasons stated, the appeal was dismissed.

Constable comment: HMRC remain keen to challenge the application of the private tuition VAT exemption where the subject taught is not a ‘mainstream’ area. It is of note that the historic approach and approach today is somewhat different with a very strict interpretation of the exemption provisions compared to the past.

Court of Appeal

3. Bad Debt relief claim:

The issue on appeal is whether Regency Factors Ltd is entitled to bad debt relief in relation to VAT. The business provides invoice factoring services to other businesses seeking to improve cashflow. The FTT held that it was not entitled for the following reasons:

• There was no bad debt
• Regency had failed to comply with the procedural requirements for the making of such a claim.

The upper tribunal disagreed with the FTT on the first of those reasons but upheld the second. The upper tribunal held that the procedural requirements were compatible with EU law.

Regency appealed against the decision of the upper tribunal on the second question and HMRC sought to reinstate the decision of the FTT on the first question.

It was common ground that Regency did not maintain a single account as required by regulation 168 (3) VATA 1994, but it did retain the records required by regulation 168 (2), even though they were not contained in a single account.

Regency’s accounting system maintains a running account for each client containing “an admixture of funds” which makes it “impossible to apportion credits to particular invoices submitted by a client and receipts from their customer”. Instead, the claim for bad debt relief was made on a “pari passu” basis, as described by Regency. The court of appeal found that, in their judgement there is no foundation for such a claim basis in the legislation. Additionally, the keeping of a single bad debt relief account would have served a legitimate and useful purpose, namely that of ensuring that the particular supply which qualified for bad debt relief was properly identified, and in consequence that the correct amount of VAT was collected.

In concluding, the Court noted that perhaps other arguments might have been made but as they had not formed the basis of the appeal these need not to be considered. The appeal was dismissed.

Constable comment: This case illustrates the need to take simple administrative rules seriously and demonstrates the pitfalls of not doing so for bad debt relief. Serious issues can be caused by assuming that basic rules will not be strictly applied. HMRC has discretion in some matters but it is highly risky to rely on discretion when simply doing things correctly removes the need for this.

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.

Festive Closure

We will be closing on the afternoon of Friday 24 December and will reopen on Tuesday 4 January 2022 at 9am. If you have any urgent queries during this time, please contact your usual CVC partner by email and they will respond to you as soon as possible.

We have not sent Christmas cards this year and instead made a donation to a local food bank to support families struggling in these difficult times. However, we would like to take this opportunity to thank all our clients and regular readers for your support in 2021 despite the continuing challenges the year brought. We hope that you and your families have a safe and peaceful break and that 2022 is a good year for all.

HMRC NEWS

Changes to VAT and CT phone lines for December
In December, HMRC will be running a trial of reducing the hours on some of their telephone services so that they can dedicate the time to work on post that has built up over the past year. To test the approach, they closed their VAT and CT phone lines (with the exception of the bereavement line) on 3 December, and they will also be closing on 10 and 17 December.

VAT Group Registration Delays
HMRC is experiencing significant delays in many areas including processing applications for and changes to VAT group registrations. HMRC Policy team has given the following advice to businesses awaiting HMRC action in relation to delays in respect of VAT group applications where a prospective group member is either registered or unregistered for VAT and a return becomes due prior to the application being granted. That advice is as follows:

• If the business being added to a VAT group is already VAT registered then, until the application has been processed, customers must behave as if the business is not yet part of the VAT group.
• If VAT returns are completed incorrectly, on the basis that a proposed group change has taken place, then missing off supplies that are taxable even if they could be disregarded if the grouping request was agreed, is a deliberate error.
• A company/group cannot claim input VAT for an entity that has not yet been included as part of the VAT group registration, as it would not be that VAT group’s input VAT.
• If an entity is not VAT registered, then the grouping request is an application to register that entity and no other registration request is needed while it is being processed.
• HMRC should always backdate to the date the form was received (unless there is a valid reason that the change cannot be allowed) and corrective action can then be taken to restore the VAT position to give the outcome that would have occurred had the application been processed in advance of any transactions affected.

Refunds of UK VAT for non-UK businesses or EU VAT for UK businesses (VAT Notice 723A)
HMRC has recently updated its guidance on how to claim a VAT refund in the UK if a business is established outside the UK or how to claim back EU VAT if a business is established in the UK or Isle of Man. The Secure Data Exchange Service System (SDES) trial ended on 30^th November 2021 and, the information on electronic submission of VAT refund claims using SDES has been removed from the guidance.

Call for Evidence: Simplifying the VAT Land Exemption
In May, the government launched a call for evidence to assess potential options for simplifying the land and property VAT exemption. Respondents were invited to give an opinion on the current VAT rules related to land and property and share their views on the potential options for simplification that were presented, as well as providing any other ideas that were not included. HMRC received over 70 responses from a range of stakeholders.

HMRC has recently updated its guidance and published a summary of responses to the call for evidence. The summary document also sets out next steps and how HMRC will further engage with the sector.

Authorise an agent to form or amend a VAT group
HMRC have recently updated the VAT53 form to include a new email address to which completed, scanned copies of the form should be sent.

CASE REVIEW

Upper Tribunal

1. Gray & Farrar International LLP v HMRC

Gray & Farrar International LLP (G&F), the Appellant in this case, provides exclusive matchmaking services in several jurisdictions.

This case addresses the place of supply (POS) of the services provided by G&F to clients all over the world. G&F argued that its supplies to non-taxable (individuals) persons who reside outside the EU where outside the scope of UK VAT because the POS for consultancy services was where the supply was received. HMRC argued that G&F’s services did not fall within the required definition of “consultancy” and as a result the POS was where the business belonged. As G&F belonged in the UK, the relevant services were subject to VAT. The main issue was whether matchmaking could be regarded as a consultancy service or Data processing services and the provision of information, both of which would be treated as supplied where the individual customer belonged.

This case was heard initially heard by the FTT in 2019 and found in HMRC’s favour. It was held that G&F’s matchmaking services were not consultancy services as they included a level of support and advice from its liaison team which went beyond consultancy, and were liable to VAT in the country where the supplier belonged even when provided to a non-EU recipient It was a close decision, with the Judge having the casting vote when the other two Tribunal members did not agree. G&F appealed to the UTT.

The UTT disagreed and found that the FTT had failed to identify the “predominant element” of G&F’s services. The predominant element of G&F’s supply was making the introductions, which involved the provision of expert advice (interviewing clients and establishing who might be their ideal match) and information (putting clients in touch with prospective dates). This service, judged from the point of view of the “typical” consumer by reference to objective factors, should be categorised as consultancy for VAT purposes. G&F’s appeal was allowed. The Upper Tribunal (UT) found that matchmaking services were ‘services of consultants’ and/or ‘the provision of information’ and therefore outside the scope of UK VAT (where the place of supply rules allowed this) and its appeal was allowed.

Constable Comment: This case is important as the decision that the services supplied were of ‘consultancy’ has an impact of the VAT payable in the UK as a result of the place of supply rules applicable to VAT. It considers the types of services that can be identified as ‘consultancy’ and takes the definition for VAT purpose beyond services provided by the so called ‘liberal professions’, such as legal services. The case also shows the importance of identifying the ‘predominant element’ of a supply of services when determining the VAT treatment.

2. Mandarin Consulting Limited V HMRC

Mandarin Consulting Limited (Mandarin) supplies career coaching and support services to students of Chinese origin. It was held in an earlier hearing in the FTT that Mandarin’s services were of ‘consultancy’. VAT rules applicable to supplies of such services mean that Mandarin’s supplies would be outside the scope of VAT if supplied to private individuals whose usual residence was outside the EU. The usual residence being where the recipients of those supplies had their permanent address, or usually resided.

From 2016 onwards, Mandarin contracted with students’ parents rather than with the students themselves. It was common ground that students’ parents had their usual residence in China. So from July 2016 onwards Mandarin’s supplies were outside the scope of VAT.

However, the FTT’S conclusion was that until 2016 Mandarin supplied its services to the students who were undertaking their studies at UK universities and Mandarin could not evidence that these students were not ‘resident’ in the UK for the purposes of receiving these supplies.

The First Tier Tribunal held that these failings precluded Mandarin from establishing that its supplies prior to July 2016 were outside the scope of VAT.

Although the Upper Tribunal did not agree with the reasoning behind the FTT decision regarding the pre July 2016 supplies it was not satisfied that Mandarin could demonstrate that supplies to all of its students were made outside the EU and as a result held that. Mandarin’s appeal would be dismissed on the basis that it could not demonstrate, on the evidence that was placed before the FTT, that supplies to all of its students were made outside the EU.

Constable Comment:This is an important case, again involving place of supply and consultancy services. In this case the point at issue was the place of belonging of the recipient of a service. The decision emphasises the multi-factorial nature of the test of residence, which in this case would have required consideration of factors other than parental residence, such as romantic commitments.

3. Greenspace Limited V HMRC

Greenspace Limited’ business is to address the problem of conservatories being too hot in the summer and too cold in the winter by supplying a fitting insulated roof panels to its customers conservatories. The question raised in this appeal is whether the supply of these insulating panels is subject to a reduced rate of VAT on the basis that it is the installation of energy saving materials or if it is standard rated as a supply of a conservatory roof itself. The First Tier Tribunal held that Greenspace’s supplies were of roofs and so were standard rated. Greenspace appealed against that decision.

Greenspace’s principal business is the supply and installation of insulated roof panels to residential customers which are fitted onto customers’ pre-existing conservatory roofs. Before supplying or fitting the panels, Greenspace visits its customer, works out what the customer requires and takes detailed measurements. The panels are then made to measure.

The panels are not self-supporting and can be used only if the customer already has an existing conservatory roof structure. It was common ground that it was important that the installation of the panels disturbed as little as possible of a customer’s pre-existing roof structure after the removal of the existing panels in order to prevent leaks.

The FTT considered whether Greenspace was supplying a “new roof” or an “improved roof”. It concluded that Greenspace was supplying a “new roof” for the reason below:

Greenspace’s work involves the removal of existing glass or polycarbonate panels. No reasonable person looking at the structure remaining once those panels had been removed would consider that the conservatory in question had a roof. Also, the panels which Greenspace then fitted fulfilled the essential functions of a roof.

Greenspace appealed on the grounds that the FTT wrongly approached matters on the basis that, because the panels consisted, in part, of a roof covering, Greenspace was necessarily supplying a roof rather than ‘insulation for … roofs’.

The Upper Tribunal agreed with Greenspace that neither of the decisions in previous cases, which had looked at similar issues, established any rule of law to the effect that something which is or forms ‘part of’ a roof is incapable of being insulation for a roof because it also performs that function. However, it did not consider that the FTT made an error of law when the decision is read as a whole, although it is somewhat inaccurate. The FTT was doing no more than restating the proposition derived from a previous case, that if the panels together formed a roof rather than insulation ‘for’ a roof, they could not fall within the scope of reduced rate.

In most cases, when fitted, the panels would comprise the entirety of the roof covering for the conservatory in question and therefore the appeal was dismissed.

Constable comment: This case is useful in distinguishing when works can be considered to be fitting insulation to the building compared to forming part of the building’s structure beyond simply insulating it.

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

Goods and services that can be claimed for under the VAT DIY scheme

HMRC has updated its guidance on claiming a VAT refund under the DIY housebuilders’ scheme to add that manual window blinds and shutters are allowable building materials with effect from 5^th October 2020.

Agent Update

HMRC has published an agent update providing a round-up of recent developments. It can be found here. This includes information on the appeals process detailed below.

Updates to HMRC appeals processes

As part of the COVID-19 support package for customers, HMRC introduced a 3 month extended window to appeal against tax decisions and penalties from February 2020, if the delay was due to COVID-19. This extension ended on 30^th September 2021. For tax decisions and penalties dated up to and including 30^th September 2021, the extended window to appeal continues to be available. However, taxpayers should follow the normal process and times for appealing decisions dated on or after 1^st October 2021.

HM Revenue and Customs Brief 13 (2021)

HMRC has published a new VAT Brief which explains HMRC’s revised policy on the meaning of ‘entire interest’ in the context of the VAT treatment of the construction self-supply charge. This follows the decision of the Supreme Court on 31 March 2021 in Balhousie Holdings Limited 2021 UKSC 11.

The guidance applies to:

• organisations within the care home, NHS or charities sector
• businesses engaged in property transactions carried out for a relevant residential or relevant charitable purpose.

If you are concerned that this may affect your organisation please reach out to your usual Constable VAT contact.

CASE REVIEW

First Tier Tribunal

1. Silver Sea Properties

This case concerned Silver Sea Properties (Leamington Spa) Sarl (“PropCo”) which supplied certain items of furniture, fixtures and equipment (FFE) with a new care home known as Priors House. The care home was leased by PropCo to Care UK Community Partnerships Ltd (“OpCo”). The VAT in dispute in this appeal is £96,291. The matters in dispute were primarily:

• The extent to which PropCo is prevented from claiming credit for input tax on FFE because of the operation of the ‘Builders Block’
• Whether the FFE were supplied by PropCo to OpCo as an element of a single supply, the principal element of which was zero rated grant of a major interest in the Priors House building?

The builder’s block is in place to block claims for input tax on incorporated FFE unless they are building materials. This case is of interest as the Tribunal was required to consider whether the FFE were “building materials”? Building materials are goods of a description ‘ordinarily incorporated’ by builders. Certain items such as furniture, electrical and gas appliances and carpets are specifically excluded. The Tribunal stated, after considering relevant case law, that an item would be ‘ordinarily incorporated’ if it is commonplace or not out of the ordinary to include in the building, or the item is of a kind that you would expect a builder to incorporate without any special instruction.  Annexe 2 of the case is particularly useful as it provides a break-down of each FFE item and whether recovery of VAT on the item is blocked.

The Tribunal also considered the argument that the FFE qualified for zero rating as was part of a single supply of zero rated lease as a “turnkey” care home supplied under a single contract, the lease for the care home and noted that the fit out of the FFE only occurred after OpCo’s occupation and after issue of the Certificate of Practical Completion. After applying the tests used in the “Card Protection Plan” case to distinguish between a multiple and single supply, the Tribunal found that the Priors House building and the FFE do not form a single indivisible economic supply. The appeal was therefore dismissed.

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

Pay the VAT due on your One Stop Shop VAT Return
HMRC has released new guidance on how to pay the VAT due on your One Stop Shop (OSS) VAT Return including details on when to pay, different methods of payments available, how to pay later and what to expect after you have paid. For more information view the guidance in full.

Tell HMRC you’re registered for the VAT Import One Stop Shop in the EU
HMRC has also updated guidance on how to tell HMRC you’re registered for the VAT Import One Stop Shop (IOSS) in the EU, specifically including more information about intermediaries, who can now enter details for multiple businesses on the same form.

CONSTABLE NEWS

Update on the option to tax (OTT) unit

We recently shared that we had been advised by HMRC’s OTT unit that they were working to a ‘target’ of 120 working days to process OTT notifications. Following this we have now been advised by HMRC staff that the delay is 6 months to process OTT notifications.

HMRC has advised that it aims to improve this situation by the end of the financial year (31 March 2022) and also stated that they will be prioritising applications where evidence of commercial need is also provided.

We continue to recommend that any option to tax is notified by email as this will result in a receipt of that email, which may be accepted as evidence by a party who requires this.  However, if other evidence is available to show a sale or rental is imminent and that formal acknowledgement is required to complete the transaction this should also be forwarded to HMRC and emphasis should be given to this in the covering email.

Website Update

We have updated our website this week with pages covering the New Penalty Regime being introduced on 1 April 2022 and the introduction of rules in 2022 regarding notification of Uncertain Tax Treatments. We hope you find these informative.

CASE REVIEW

Since the end of the transitional period on 31 December 2020 European Court judgments 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. If you are concerned about the impact of any matters raised in the following cases please contact us.

CJEU

1. Supply of services for consideration and input tax deduction

Bulgarian National Television (BNT) is a national public provider of audiovisual media services. BNT does not receive any remuneration from its viewers and its activities are financed by a subsidy from the state budget. BNT’s activity is also financed by self-generated income from advertising and sponsorship, income from additional activities linked to the broadcasting activity, donations and legacies, interest, and other income linked to the broadcasting activity.

Since 2015, BNT has been applying a direct allocation method by examining, in isolation, for each purchase that it made, whether it was used or was capable of being used for an activity of a ‘commercial’ nature, such as entertainment programmes. It reclaimed all of the input tax directly attributable to activities of a commercial nature and made partial input tax deductions in respect of purchases used for both commercial and non-commercial purposes.

The Bulgarian tax authorities refused to recognise a right to a full deduction in respect of purchases made by BNT and found that it owed VAT amounting to EUR 801,455 together with interest. The authorities claimed that BNT’s programme broadcasting activity was an exempt transaction. The case was referred to the CJEU.

The first question the CJEU considered was whether the VAT Directive must be interpreted as meaning that the activity of a public national television provider, consisting in the supply of audiovisual media services to viewers, which is financed by the State in the form of subsidies and for which no fees for the broadcasting are payable by the viewers, constitutes a supply of services for consideration within the meaning of that provision.

The CJEU stated that the above does not constitute a service supplied for a consideration. Where audiovisual media services are supplied by a national public provider to viewers for free and it is financed by the state in the form of subsidiaries, there is no legal relationship between the supply of the service and the payment and therefore it is not a supply for consideration.

The CJEU then went on to consider whether the public national television provider is entitled to deduct, in whole or in part, input tax paid for purchases of goods and services used for the purposes of its activities which give rise to the right of deduction and its activities which do not fall within the scope of VAT.

It was stated that it is the use of the goods and services acquired that determines the input tax deduction and the way in which such purchases are financed, either by state budget or sponsorship income, is irrelevant for the purpose of determining the right of deduction. Therefore input VAT that is directly attributable to expenditure incurred in relation to non-economic activities cannot give rise to a right of deduction.

The CJEU stated that it is the Member States discretion to determine the apportionment of input VAT between economic and non-economic activities but they must provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed, respectively, to those two types of activities.

Constable Comment: This decision clarifies the European Court’s view that a public entity whose services are offered to the general public and which are financed essentially through public subsidies cannot constitute an economic activity for VAT purposes. However, it offers less clarity on attributing VAT on costs incurred in providing that service.

First Tier Tribunal

2. DIY New build claim for repayment of VAT on goods

Mr Ellis and Ms Bromley appealed against a refusal by HMRC to allow a second claim for repayment of VAT under the DIY housebuilder scheme.

Mr Ellis and Ms Bromley bought a property in 2002. An application for planning permission was made and permission was granted for demolition of the property and construction of a replacement dwelling. Mr Ellis is a builder and carried out much of the work himself over a 5 year period.

The valuation office agency issued a notice of alteration of the valuation list on 27^th December 2015, following a complaint from a local resident.  The valuation for council tax purposes does not refer to completion of the works and there was no suggestion that the works were completed but council tax was paid from 2015 onwards. The planning permission required more external works, including the erection of retaining garden walls, a balcony and appropriate access to the front door as well as substantial internal works. Mr Ellis and Ms Bromley made an interim claim for repayment of VAT under the DIY builder scheme in respect of £5,182.87 in April 2017 using the valuation notice to support the claim and the VAT was repaid in June 2017. In the 2017 claim, no claims were made for the construction of the garden walls, accessway to the property or kitchen and bathrooms. The second claim made on 2^nd May 2019 was rejected on the grounds that only one claim can be made for a particular building under the DIY builder scheme and it must be made within 3 months of completion of the construction work.

Mr Ellis and Ms Bromley’s argued that it is not unreasonable to expect that more than one claim can be made when the period of construction is likely to be years. They pointed out that there is no mention of the fact that only one claim can be made on HMRC website or in the section concerning eligibility or in the VAT form VAT 341NB. Additionally, HMRC made an error in processing the first claim because the valuation was made at least 15 months earlier and the valuation could not have been taken to provide evidence of completion. The 2015 notice from the valuation agency dated 27^th December 2015 is not evidence of completion. Furthermore, the works were not complete.

HMRC took the position that the claim for repayment of input tax must be disallowed because:

(a) s35 VATA 1994 provides that only a single claim for repayment of VAT by a DIY builder may be made under the VAT DIY builder scheme.

(b) s35(2) enables HMRC to prescribe by regulations the timing and evidence to support a claim.

Mr Ellis and Ms Bromley admit they made 2 claims and that they used the same evidence of being entitled to make the claim, a notice of council tax banding, dated December 2015 which was effective 1^st September 2015. HMRC assert that even if a second claim may be made the second claim was made later than 3 months after the evidence of completion.

Discussion and Decision

The Tribunal considered the wording of Section 35 VATA 1994 and the Regulations relating to claims. It concluded that section 35 does permit more than one claim in respect of a building, the Regulations which aim to prevent this are ultra vires as a matter of UK law.  Although section 35 is drafted in the singular this is an established technique to assist in clarity. As there is no express indication to the contrary in section 35, section 6 of the Interpretation Act 1978 applies to confirm that the reference to “a claim” in section 35 must be read as including “claims”.  The Tribunal also found that Regulation 201 is ultra vires to the extent that it limits a self-builder to make a single claim following completion of the dwelling, since neither section 35 nor any of the other provisions of the VAT Act 1994 give authority to introduce regulations that alter the scope of section 35(1) and restrict a self-builder to make a single claim upon completion of the dwelling. Finally, it found that the 2015 council tax valuation notice was not evidence of completion in this case, it is merely evidence that some building works had been undertaken and that the dwelling was capable of being inhabited. As the regulations are ultra vires in restricting the number of claims, the 2017 claim was a valid claim. The Tribunal also considered the position if HMRC were correct in their view of the meaning and application of section 35 and the regulations, which would be as follows:

(1) The re-banding of ‘Fox Way’ for council tax purposes in 2015 was not evidence of completion in this case. It is merely evidence that the building was capable of being inhabited. The 2017 claim was not a ‘valid’ claim within the meaning of section 35 and the regulations, and so would not prevent a subsequent claim.

(2) As the property was still not complete at the date of the hearing, and as the 2015 notice regarding council tax banding cannot be accepted as evidence of completion, the 2019 claim would be an invalid claim also.

(3) A further claim would be possible once the building is complete.

The tribunal allowed the appeal.

Constable Comment: This is a helpful case as it appears to offer scope for DIY housebuilders to make multiple claims during the course of a build. It will be interesting to see if HMRC appeal this decision or make any comment on it. If there is no appeal the case is only binding on the parties involved, so HMRC may be inclined to let it lie.

3. Rada In Business Limited (RIBL)

This is an appeal against a 5% VAT default surcharge, amounting to £2,281.13, imposed on 12^th March 2021 in relation to the late payment of VAT for the period 01/21. We have included this case as it considers the impact of a Covid-19 related factor on VAT return submission and payment.

RIBL has been in the VAT default surcharge regime since the period 07/20 following late filing of the 07/20 VAT return and the late payment of the VAT due.  No penalty arose on this first default.

There was a further default in the next period, 10/20, attracting a surcharge at the rate of 2% but charged at £0 because of HMRC policy relating to the collection of small sums.

The due date for filing of the VAT return and payment of any VAT due for the period 01/21 was 7^th March 2021. The return was received by HMRC on 1^st March 2021 but the payment wasn’t received by HMRC until 8^th March 2021 and, as a result, a 5% surcharge of £2,281.13 was added.

RIBL argued that the return was submitted on time and the payment was processed on 5^th March 2021, due to a staff member being away on furlough and only returning that day. The payment cleared RIBL’s bank account on 8^th March. RIBL stated that it always aimed to submit and pay its tax on time but due to the current pandemic had to adjust the way employees work.

The Tribunal dismissed that appeal noting that the penalty was lawfully imposed. The taxpayer was in the surcharge regime and there had been two previous defaults. The payment was not received until 8^th March 2021, which is a day late. The tribunal was not satisfied that the taxpayer did in fact dispatch a payment by faster payment on Friday 5^th March and the fact that the employee tasked to pay the VAT was on furlough and did not return to work until Friday 5^th March was not a reasonable excuse.

Constable Comment: This case indicates that the Tribunal will not accept staff shortages due to furlough as a reasonable excuse for late payment of VAT returns.

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.