HMRC NEWS

VAT domestic reverse charge technical guide
The above guidance provides technical information about the VAT reverse charge that may apply if you buy or sell building and construction services. HMRC has recently added a new section on scaffolding and also updated the content with guidance on the following:

• Reverse charge exemption for end users and intermediary suppliers
• How to tell the difference between ‘labour-only’ supplies of construction services and supplies of workers by employment businesses
• Accounting for VAT where you supply or receive construction services together with other goods or services
• Accounting for VAT on the hire, erection and dismantling of scaffolding
• How the reverse charge affects supplies made by and to utility companies and how non-established taxable persons should account for VAT on construction services.

HMRC is holding a live webinar at 11.45 on 24 November 2022 for businesses operating in this sector and interested parties can register here. The webinar is stated to cover:

• when to apply the VAT reverse charge
• how to show the reverse charge on your invoices
• how the reverse charge may affect your business
• how to account for the reverse charge on your VAT return
• what to do if you make a mistake when applying the reverse charge

Fuel and Power (VAT Notice 701/19)
HMRC has recently updated section 2 of this notice to include information about the VAT liability of payments made under the energy bills support schemes including the following:

• The Energy Bill Relief Scheme
• The Energy Price Guarantee
• The Energy Bills Support Scheme

Payments made by the Government to energy suppliers under the Energy Bill Relief Scheme and the Energy Price Guarantee are grant payments and are outside the scope of VAT.

The Energy Bill Support Scheme is a payment made to the domestic users of fuel and power to support paying their bills. Energy suppliers are required to account for VAT under the normal rules as the payment is made for a taxable supply of energy and the value of that supply is not reduced as a result of the payment made under the scheme.

With respect to all three schemes, there will be no direct impact on the input VAT recovery as HMRC confirms that any VAT incurred by suppliers in relation to the operation of the schemes relates to the taxable supply of energy and is therefore recoverable subject to the normal rules.

Fulfilment House Due Diligence Scheme registered businesses list
Traders based outside of the UK can use the above list to check if the business that stores its goods in the UK is registered with the Fulfilment House Due Diligence Scheme. The Fulfilment House Due Diligence Scheme registered businesses list has been updated with 6 additions and 1 amendment.

Processing option to tax notifications

HMRC is currently undertaking a consultation on ceasing the issue of an Option to Tax (OTT) notification receipt letter. As it is the responsibility of the opter to correctly notify HMRC, it is now proposed by HMRC that where a taxpayer submits a VAT1614A  by any means other than email, they will not receive a response. In the case of email, an automated email response will be provided.

In addition, HMRC also propose ceasing the processing of requests to confirm the existence of an OTT on land and buildings. HMRC states that the existence of an OTT forms part of a business’s records and should be kept for at least 6 years. Under the proposed changes, there will be two situations where HMRC will check to see if there is any record of an OTT. These are as follows:

• The effective opted date is likely to be over 6 years ago, or
• The person requesting the confirmation has been appointed as a Land and Property Act Receiver, or an Insolvency Practitioner to administer the property in question.

HMRC has stated that it will consider feedback on this consultation before proceeding with and communicating the changes.

Comments can be sent to HMRC by close of business 28 November 2022 using the email address hmrcoptiontotaxcontinuousimprovementconsultation@hmrc.gov.uk.

AUTUMN STATEMENT 2022

The Chancellor announced the Autumn Statement 2022 on 17 November . You can read the detail on the VAT items in that statement on our website.

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. Employee Reward Scheme vouchers

This case concerns a dispute between GE Aircraft Engine Services Ltd (GAES) and HMRC, regarding the VAT liability of retail vouchers awarded by GAES to its employees. GAES operates an award scheme known as ‘Above & Beyond’ to reward the most deserving and high performing employees. Under this scheme, an employee nominated for an award ranked at an intermediate level was offered retail vouchers.

The UK VAT legislation states that where a taxable person puts services to any private use or for a purpose other than a purpose of the business, the taxable person shall be treated as making a deemed supply and therefore account for VAT.

GAES was subject to VAT assessments raised by HMRC on the grounds that the retail vouchers are provided to employees free of charge and for personal use outside GAES’s commercial activity. HMRC stated that the fact that GAES has a business purpose for awarding the retail vouchers is irrelevant. As a result, HMRC concluded that the vouchers are subject to VAT.

GAES argued that the award of the retail vouchers to employees under the scheme does not constitute a taxable supply because that programme is linked to the economic activities of that company and the resulting advantage for the employees is secondary. A distinction must be drawn between the economic aim pursued by that company and the private use made of them by employees.

The referring court asked the CJEU whether the VAT directive must be interpreted as meaning that a supply of services consisting, for a business, in offering retail vouchers to its employees, as part of a programme set up by that company, intended to recognise and reward the most deserving and high-performing employees, falls within its scope and therefore subject to VAT.

The CJEU concluded that the scheme was designed with the aim of improving the performance of its employees and, therefore, of contributing to better profitability of the business. The scheme was dictated by the pursuit of additional profits and the resulting advantage for employees were merely incidental to the needs of the business. As a result, the provision of free retail vouchers to employees were not subject to a deemed supply of VAT.

Constable Comment: This case considered whether the provision of free retail vouchers to employees would be considered as private use or other than for business purposes, and it was concluded that where the main purpose of the scheme is to increase business efficiency and profits, there is no private use and therefore a deemed supply cannot arise.

Also, it is worth noting that this was an interesting decision in the sense that the CJEU no longer has jurisdiction to give rulings on requests from UK Tribunals unless the request was made before the end of the Brexit transition period, as was the position in this case.

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 11 (2022): VAT and children’s face masks
HMRC has published a new brief setting out their revised position regarding children’s face masks. HMRC now accept that face masks, specifically designed and held out for sale as being suitable for young children (under the age of 14), should properly be considered as items of clothing and therefore zero rated.

Change your VAT registration details
Form VAT484 can be used to tell HMRC if any business details for the VAT registration have changed. HMRC has updated its guidance to confirm that changes to business circumstances must be notified within 30 days of the change taking place.

Fulfilment House Due Diligence Scheme registered businesses list
Traders based outside of the EU can use the above list to check if the business that stores its goods in the UK is registered with the Fulfilment House Due Diligence Scheme.

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. VAT evasion: Place of supply of services

This case concerns a dispute between Climate Corporation Emissions Trading GmbH (Climate Corporation) and the Austrian tax authorities. In 2010, Climate Corporation, a business established and registered in Austria, supplied greenhouse gas emission allowances to Bauduin Handelsgesellschaft mbH (Bauduin), a business established in Germany. The place of supply of the services for VAT purposes was Germany, where Bauduin was established.

The Austrian tax authority contended that the supply was that of goods and Bauduin participated as a missing trader in a fraudulent VAT carousel and Climate Corporation knew or should have known that those allowances would be used for the purposes of VAT evasion. As a result, the Austrian tax authority sought to tax Climate Corporation on the supply in Austria. It was held by the courts that the supply by Climate Corporation must be one of services; however, the CJEU was asked whether the place of supply of services by a taxable person established in an EU member state (in this case, Austria) to a taxable person established in another Member State (Germany) can be deemed to be the supplier’s member state where that transaction involves VAT evasion.

The CJEU concluded that the place of supply of services cannot be altered in disregard of the clear wording of Article 44 of the VAT Directive on the ground that the transaction at issue is vitiated by VAT evasion. Whilst Member States may take measures to ensure the correct collection of VAT and prevent evasion, those measures must not go beyond what it necessary to attain such objectives.

Constable Comment: Whilst the CJEU ruled that the place of supply of services cannot be altered, Member States have the right to refuse benefits from the taxpayer if he or she knew or should have known VAT evasion was involved. The CJEU also noted that the law concerning goods and services are distinct; therefore, any argument based on the VAT treatment of the supply of goods are not relevant. Although CJEU decisions are no longer binding in the UK, HMRC have similar rights in the UK, including the application of joint and several liability and refusing input VAT recovery from taxpayers involved in fraudulent transactions.

The Supreme Court

2. Evidence to support input VAT claim

This case concerns the NHS Lothian Health Board (NHSL) and the recovery of VAT incurred in the period from 1974 to 1997. NHSL operates laboratories, primarily concerned with the provision of clinical services to NHS hospitals and clinics, a non-business activity for VAT purposes, but also the provision of services to external bodies for which a fee is charged, a business activity.

In 2009, NHSL submitted a claim to HMRC for repayment of input VAT incurred in relation to business activities undertaken from 1974 to 1997. NHSL did not have sufficient records to establish the apportionment between business and non-business activities; therefore it had to determine a reasonable methodology to calculate the VAT underclaimed for the period. NHSL contended that the percentage of taxable business activities in 2006/2007 was the typical level of taxable business activities and the most satisfactory base line for the calculation of this claim. The percentage was 14.70%.

HMRC rejected the claim and both the First Tier Tribunal (FTT) and Upper Tribunal (UT) upheld HMRC’s decision, holding that HMRC were entitled to conclude that NHSL had failed to establish how much input tax it was entitled to recover. The Court of Session overturned these decisions and remitted the case to be heard by a differently constituted FTT on the grounds that the FTT failed to adopt a flexible approach to the claim, particularly as there was no doubt that some input tax had been incurred over the claim period. This being so, the issue was only the quantification of the amount, not whether there was any right to deduct at all.

HMRC appealed to the Supreme Court which ruled in favour of HMRC holding that the FTT was entitled to conclude that it is not enough for the taxpayer to show it was engaged in business activities. The taxpayer must present either the specified documents showing input VAT incurred or devise a credible alternative method to estimate with reasonable certainty that the amount being claimed was at least close to the input VAT actually incurred.

The Court also considered the EU Principle of Effectiveness and concluded that there was nothing in the approach of HMRC or the reasoning of FTT that made NHSL’s claim ‘virtually impossible or excessively difficult’. As a result, HMRC’ appeal succeeded.

Constable Comment: We understand that there are many similar claims by other NHS Health Boards and Trusts pending before the FTT throughout the UK, with a combined value in the region of £38 million. This case highlighted the importance of holding sufficient evidence to support an input VAT claim or alternatively, in the absence of such evidence, the taxpayer must “devise a credible alternative method by which that amount can be estimated by HMRC with reasonable certainty that the amount now being claimed was at least close to the amount that had in fact been incurred.”

Upper Tier Tribunal

3. Car parking at hospital subject to VAT

This case concerns Northumbria Healthcare NHS Foundation Trust (the Trust) and whether VAT was chargeable on the supply of car parking made by the Trust at hospital and healthcare sites. The issue in this appeal was whether the Trust was a taxable person when making supplies of car parking (the FTT concluded it was) or whether it was acting as a public authority and such supplies were made pursuant to a “special legal regime”. Under the latter treatment, the Trust did not have to account for VAT on its supplies.

The UT was asked to consider, first, whether the Trust’s supplies of car parking are made pursuant to a “special legal regime” applicable to the Trust, and secondly, if so, whether treating the Trust as a non-taxable person would lead to a significant distortion of competition.

The UT considered the FTT did not err in law concluding that the Trust did not provide car parking under a “special legal regime”. The UT confirmed that the mere fact that the public authority is required to act in accordance with statutory powers is not sufficient, rather it is necessary to show that the pursuit of the specific activities in question involves or is closely linked to the exercise of rights and powers of the public authority, in order to fall within the special legal regime.

With regards to distortion of competition, the Trust argued that opportunities for competition was limited, and where it did arise, the Trust was required by guidance to take steps to avoid competition. The UT disagreed and concluded that there was competition with private car park operators, and the Trust not charging VAT would lead to a distortion of competition. Accordingly, the UT dismissed the appeal.

Constable Comment: This detailed analysis by the Tribunal, particularly in relation to the interaction between public law obligations and the special legal regime test, will be of interest to those involved in local authority VAT matters. The Tribunal’s comments on what constitutes unfair competition will be applicable across many wider aspects of VAT.

FTT

4. Amending grounds of appeal

This case concerns C4C Investments Limited (C4C) and penalties assessed by HMRC in respect of ‘deliberate’ inaccuracies on C4C’s VAT return. C4C claimed input VAT on purchases from DB Recycling Limited (DBR). DBR’s sole director was also the operation manager of C4C; however, DBR did not account for output VAT on supplies made to C4C. HMRC denied the input tax claim by C4C on the basis that C4C knew or should have known that the transaction was connected with fraudulent evasion of VAT.

In its original appeal, C4C accepted the inaccuracy was deliberate but appealed the amount of potential lost revenue on which the penalty was based, and the level of mitigation applied based on the assistance provided to HMRC. In this subsequent appeal C4C sought to clarify its grounds of appeal and obtain permission to amend these to the effect that the transactions on which VAT was claimed were not fraudulent and C4C neither knew nor it should have known the transactions were connected to the fraud.

The Tribunal found that the two statements by C4C could not co-exist. If C4C took the view that no fraud was involved, its initial appeal would have included this, but only the level of penalty was appealed initially. The Tribunal concluded that there was no realistic prospect of success, the application to amend the grounds of appeal was late and there was no good reason why the new grounds of appeal were not raised at an earlier stage. As a result, the appeal was dismissed.

Constable Comment: Whether to allow an amendment to the grounds of appeal is a matter of discretion of the Tribunal exercised with the objective of dealing with cases fairly and justly. An application to amend is normally refused if the proposed amendment has no reasonable prospect of success and this is highlighted in the above case.

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

There have been a number of updates to HMRC guidance

Buildings and construction (VAT Notice 708)
The above guidance provides details about the VAT treatment of building works and materials for contractors, subcontractors and developers. The overview and section 2 has been updated to include information about the VAT domestic reverse charge. The certificate in section 18.1 for certain scenarios regarding zero and reduced rating has been updated to confirm it will be necessary to include the name and address of the organisation receiving the building work.

Cash Accounting Scheme (VAT Notice 731)
The above guidance sets out how the VAT Cash Accounting Scheme works and the conditions you must meet to use the scheme. HMRC has recently updated the guidance to include information about the interaction between the VAT domestic reverse charge and the cash accounting scheme. Full details can be found at section 2.8 of the above guidance.

Flat Rate Scheme for small businesses (VAT Notice 733)
HMRC has published updated guidance which provides information on how to use the Flat Rate Scheme, who can use it and how to apply to join the scheme.

Claim a VAT refund on a conversion if you’re a DIY housebuilder
Individuals can use form VAT431C to claim a VAT refund on the conversion of an existing building into a dwelling if you are a DIY housebuilder. The information in part G of VAT 431C form and notes about sending in your claim has been updated.

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. Adjustments to input VAT post liquidation

This case concerned UAB Vittamed Technologijos (Vittamed) and the Lithuanian tax authorities. Vittamed was a company engaged in technical scientific research and its application. In 2012 and 2013, Vittamed acquired goods and services in connection with a project to develop a prototype of a medical diagnostic and monitoring device and to subsequently place the device on the market. 8 invoices were issued to Vittamed incurring EUR 87,987 input VAT. Vittamed used the goods and services to produce capital goods, both licenses and actual prototype devices.

However, following the conclusion of the project, Vittamed was making losses and as a result of absence of orders and potential income, the sole shareholder discontinued the activities. On 2015, Vittamed acquired the status of ‘legal entity in liquidation’ and was removed from the register of VAT payers. In 2017, the Lithuanian tax authorities took the view that when the decision was made to place Vittamed into liquidation, it was under the obligation to adjust the deduction of input VAT in respect of those 8 invoices. Vittamed filed an objection to the decision on the grounds that where costs are incurred in preparation for an economic activity, deduction of any input VAT may be claimed even where that activity is not taken up and the intended taxable transactions ultimately do not take place.

The referring court expressed doubts to the existence of an obligation to adjust the deductions of VAT and therefore referred the question to CJEU, whether a taxable person is under an obligation to adjust deductions of input VAT relating to goods or services intended to produce capital goods in the case where, as a result of the decision of the sole shareholder, the company is placed into liquidation and removed from the register of VAT payers, the capital goods produced have not been used and will never be used in the course of taxable economic activities.

The CJEU stated that the effect that the right of deduction is retained even where an activity is brought to an end before it gives rise to any taxable transactions, must be combined with the rules of adjustments of deductions. The adjustment mechanism under Article 184-187 of the VAT directive aims to establish a close and direct relationship between the right to deduct input VAT and the use of the goods or services.

The CJEU confirmed that the wording of the VAT directive intends to make the obligation of making an adjustment as broad as possible and does not exclude any foreseeable situation of undue deductions. As Vittamed no longer has and will never have, any intention to use the capital goods produced, the close and direct relationship is broken, and the adjustment mechanism must be applied.

Constable Comment: In this case the CJEU has confirmed that where, as a result of the decision of the owner or sole shareholder a taxable person no longer has – and will never have – any intention of using capital goods for the purposes of taxable transactions, the deduction of input VAT must be adjusted. However, if during the liquidation Vittamed had made sales of the assets for purpose of discharging debts, the adjustment would not have been necessary.

2. VAT incorrectly charged by a now liquidated business

This case concerned HUMDA, attempting to recover VAT from the Hungarian tax authorities as a result of a tax inspection. BHA supplied construction services on a project in Italy. BHA charged Hungarian VAT to HUMDA, which was paid to BHA and subsequently over to the tax authorities. As a result of the tax inspection, the authorities found that VAT was not payable in Hungary, the place of supply was Italy, and therefore was invoiced in error.

BHA has since gone into liquidation and therefore HUMDA tried to recover VAT improperly charged from the Hungarian tax authorities, along with interest. The request was refused by various courts until the referring court asked the CJEU whether the VAT directive must be interpreted as precluding legislation of a Member State (MS) under which a taxable person cannot claim, directly from the tax authority, a refund of VAT in respect of a service which the supplier has unduly invoiced, where it is impossible or excessively difficult to claim that amount from the supplier because it went into liquidation.

The CJEU commented that if the refund of the VAT becomes impossible or excessively difficult, in particular due to insolvency of the supplier, the principles of VAT neutrality and effectiveness require the MS to provide for the instruments necessary to enable the recipient to recover the VAT which has been unduly invoiced and paid, in particular by addressing its application for reimbursement to the tax authorities directly. Therefore, HUMDA should be able to recover the VAT from the Hungarian tax authorities directly.

With regards to interest, the CJEU commented that the authority is obliged to pay interest where it has not made a refund within a reasonable period of time, after having been requested to do so. However, the rules for applying interest must be set by the MS taking into consideration the principles of equivalence and effectiveness. This means, the taxable person should not be deprived of adequate compensation in respect of loss caused by a late refund.

Constable Comment: This case has confirmed that where it is ‘impossible or excessively difficult’ to recover VAT from the supplier, then the taxpayer should be able to recover VAT incorrectly charged from the local tax authority. In this case, the supplier being placed into liquidation was sufficient to be considered as impossible or excessively difficult.

The Supreme Court

3. Time limits and repayment verification

This case concerned disputes between DCM (Optical Holdings) LTD (DCM) and HMRC regarding two questions. Firstly, whether HMRC were subject to a statutory time bar which invalidated their assessment for output tax and second, whether HMRC have power to refuse to accept a taxable person’s repayment claim while they verify the claim.

DCM is the representative member of a VAT group, and it is partially exempt as it makes taxable supplies of frames, lenses, accessories, and care plans, and also exempt supplies such as eye tests and laser surgery. The ‘Opticians: Apportionment of charges for supplies of spectacles and dispensing’ guidance sets out methods of apportionment that opticians can adopt. This can either be Full Cost Apportionment (FCA) or Separately Disclosed Charges (SDC). DCM claimed to be operating SDC however the conditions were not met and therefore should have accounted for output tax using FCA.

HMRC raised an output VAT assessment on 20 October 2005 for the periods from October 2002 to April 2005 also adjusting input VAT, following an inspection 1 September 2005 where HMRC for the first time obtained access to DCM’s VAT accounts. DCM argued that by the end of a meeting in January 2004, HMRC were aware that DCM was not using FCA and so knew that ‘something was wrong’, and therefore had one year from this date to raise an assessment.

The Court referred to the relevant law stating that the one year rule runs from the date when evidence, which is considered sufficient to justify the making of the assessment, comes to the knowledge of the Commissioners. In this case the Court ruled that such evidence was only available to HMRC after access was granted to the VAT account in September 2005, therefore the assessment was not out of time.

With regards the second issue, DCM argued that where a repayment trader makes a claim, HMRC must pay the claimed sum but have 5 options for the protection of revenue as follows:

• HMRC can pay the sum claimed but impose conditions requiring the trader to repay any money which after verification is not due
• HMRC can pay and if later they decide it is not due, they can raise an assessment
• HMRC can make the provision of specific evidence the condition of payment
• HMRC can make the provision of security the condition of payment
• HMRC can ask the trader to amend its returns

The Court disagreed for various reasons including that HMRC have a power and duty to conduct a reasonable and proportionate investigation into the validity of the claim for a refund. Also, the obligation on HMRC to pay VAT credit arises only once it is established that a credit is due. The Court ruled that the power to verify and when justified, to refuse to pay claimed VAT credit is not inconsistent with the UK VAT legislation, therefore the appeal was dismissed.

Constable Comment: This case clearly set out the rules for the one year time rule and “evidence of facts” applicable to raising assessments in conjunction with HMRC’s power and duty to verify a repayment claim before being obliged to make payment. The Court made a clear distinction between payment traders and repayment traders. With regards to a payment trader, even if the input tax is overstated and therefore reducing the total VAT liability, HMRC is initially required to pay the sum which the trader discloses. In contrast, a repayment trader may not receive anything until the verification process is complete. 

FTT

4. Input VAT recovery on vouchers

This case concerned Lucky Technology Limited (LTL). LTL buys and sells vouchers. Harrods was the supplier of the vouchers which can be used on the Steam website to purchase digital downloads of games. Up to May 2016, Harrods provided LTL with till receipts for each purchase, which were entered into a spreadsheet. At the end of the month, the bookkeeper of LTL would request VAT invoices for the entries on the spreadsheet. Harrods would then provide a ‘bulk’ invoice showing 20% VAT. However, after May 2016, Harrods provided invoices showing 0% VAT taking the view the vouchers are multi-purpose vouchers (MPV) and therefore did not account for any VAT on the onward sale.

However, LTL continued to claim input VAT on the grounds that the vouchers are single purpose vouchers (SPV) and subject to VAT (although actual invoice evidence was not held) and LTL paid the VAT to Harrods as part of the purchase price. HMRC took the view that the purchases were not subject to VAT because the vouchers are MPVs, and everyone in the supply chain consists as ‘agents’ between Steam and LTL therefore LTL was the first purchaser of the vouchers and therefore have no input VAT to recover.

As a result, the Tribunal had to determine the following:

• Are the vouchers SPVs?
• If not, was Harrods acting as an agent or as principal supplying the vouchers?
• If Harrods was an agent, was it part of the supply chain and so made a taxable supply to LTL?
• Was the VAT, if chargeable, paid by LTL?
• If the VAT was chargeable and LTL paid it, did HMRC err in law in relation to their regulation 29(2) discretion.

The tribunal first considered whether the vouchers were SPV or MPV. It concluded that they cannot be SPV, because they could be redeemed for digital downloads of games, software, but also hardware goods such as controllers which are not only incidental, but an actual supply of goods. As a result, the Tribunal concluded that the vouchers were retail vouchers, and the next debate was whether Harrods acted as agent or principal. This is relevant because VAT is not due on the first issue of such vouchers.

Steam was the original issuer of the vouchers. If Harrods was acting only as an agent of Steam, then those were not subsequent supplies but rather still the first issue, therefore not subject to VAT. However, if Harrods was acting as principal, then it made a subsequent supply which would be in fact subject to VAT. The FTT reviewed multiple contractual agreements and considered various factors including such contracts, the text on physical voucher cards and the activation of the voucher at the till to reach an overall conclusion that Harrods was not acting as an agent but rather as principal in supplying the vouchers to LTL, therefore VAT was chargeable.

The Tribunal has then concluded that because the price was not changed by Harrods after May 2016, there was no evidence that VAT was previously wrongly charged. In addition the FTT confirmed that if VAT is properly chargeable (which it found it was) then the price paid must be assumed to have included VAT. As a result, the FTT concluded that VAT was incurred and paid by LTL. In addition, the FTT noted that HMRC erred in law because it failed to exercise the discretion to accept alternative evidence when LTL clearly indicated that it was not possible to obtain a valid VAT invoice from Harrods. As a result, the appeal was allowed.

It should be noted that the legislation and rules concerning vouchers changed from 1 January 2019. For voucher supplies after this, it is important that this is recognised as this may lead to different outcomes.

Constable Comment: This was a very lengthy and complex case but highlighted some important rules to reach certain decisions, including what constitutes a single or multi-purpose voucher. Vouchers is a complex area of VAT law that has relatively recently (and subsequently to this case) been altered and if you have any related queries, Constable VAT would be happy to assist.

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

Option to tax
The print and post versions of form VAT 1614B, used to notify HMRC that a taxpayer is no longer a ‘relevant associate’ of a person who has opted to tax particular land or buildings and form VAT 1614E, used to tell HMRC about a real estate election for land or buildings, have now been removed from HMRC’s website and a link to HMRC’s accessibility statement for online forms has been added. These forms can now only be completed and submitted online.

Postage, delivery and direct marketing (VAT Notice 700/24)
The above guidance sets out how to apply VAT to charges for postage, delivery services and how to treat direct marketing services involving distribution of printed matter. HMRC recently updated the section “How to work out the VAT treatment for delivered goods” to clarify that where there is no extra charge for delivery, VAT is accounted for on the full sales price.

Check when you can account for import VAT on your VAT Return
If your business is registered for VAT in the UK, you can use the above guidance to find out when you can, or need to, account for import VAT on your VAT return. HMRC has updated the guidance to confirm that information about Customs Handling of Import and Export Freight (CHIEF) has been removed.  Businesses can no longer use CHIEF for import declarations unless they have permission from HMRC.

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. Can a sale and leaseback contract be treated as an invoice?

This case concerns a transaction arising between Raiffeisen Leasing (RL) and RED.d.o.o (RED).  RED owned some land in Slovenia with the intention of developing it. In order to finance the development, it entered into a sale and leaseback contract with RL. RED charged RL VAT on the sale of the land and RL recovered this VAT.  VAT on the supplies from RL to RED was included in the contractual sale and leaseback agreement between RL and RED but RL did not raise a separate VAT invoice, nor did it declare and pay the VAT sum mentioned in the contract on its VAT return.

RED recovered the VAT stated in the contractual sale and leaseback agreement, contending that the agreement constituted an invoice in respect of supplies received from RL. The local tax authorities disagreed and refused the input VAT deduction.  The question referred to the CJEU was whether a contractual sale and leaseback agreement which was not followed by a VAT invoice, may be regarded as an invoice, and if so, what details that contractual agreement must contain.

The CJEU ruled that the leaseback agreement was capable of being treated as a VAT invoice even in the absence of any taxable transaction, provided that it contained sufficient information for RED to substantiate its right to recover input tax. The fact that some of the details normally required on an invoice (such as the applicable VAT rate) were implied rather than express did not prevent the leaseback agreement from being treated as an invoice. The fact that RL never intended the leaseback to be treated as an invoice was irrelevant. As RL had effectively issued a VAT invoice in 2007 (when the contract was agreed) it should have accounted for output tax at that time.

The CJEU concluded that the local tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the conditions set out under the VAT Directive, if they have all the information to ascertain that the substantive conditions for input VAT recovery are met.

Constable Comment: The CJEU concluded that where the conditions of input VAT recovery are implied or expressly stated in a contractual agreement, the document may be regarded as an invoice. This effectively means output VAT is payable by a supplier and the customer has the right to deduct that input VAT.

FTT

2. Input VAT recovery by an intending trader

This case concerned Hedge Fund Management Investment Ltd (HFIM), a company which was set up to provide fund management services and introductory services to various funds. HFIM had produced a detailed prospectus intending to attract investment, however, the publication of the prospectus was delayed while HFIM resolved ongoing litigation against another company.

During this period and before trading began, HFIM incurred input VAT and recovered it. HMRC subsequently raised assessments disallowing those input VAT claims along with issuing a penalty for careless behaviour regarding inaccurate returns. HMRC argued that HFIM did not carry on any business activities in return for consideration during the relevant periods. Furthermore, there was no direct and immediate link between inputs and outputs for each of the periods under appeal.

HFIM argued that according to the Norseman Gold tests, it is required to show that in the period input VAT was incurred, it had the intention of making taxable supplies in the future in return for consideration. HFIM argued that the evidence shows that at all times it had the intention of making taxable supplies and those future supplies would be linked to the input VAT incurred in the past.

The FTT was presented with evidence including the detailed prospectus, various emails and documents showing HFIM pursuing research and introductory activities and the companies’ financial statements audited by a reputable firm demonstrating business activity. The evidence was sufficient for the FTT to rule that HFIM clearly had the intention to trade and therefore input associated VAT should be deductible.

As a result, the penalty was also dismissed as HFIM did not act carelessly. However, the FTT concluded that it does not hold enough evidence to determine whether the input VAT incurred is attributable to intended taxable supplies or overhead costs. The FTT was reluctant to rule on this point therefore it advised HFIM and HMRC to review the input claimed on the basis that HFIM was indeed an intending trader.

Constable Comment: The FTT confirmed in this case, that where a taxpayer can demonstrate that it has the intention of making taxable supplies in the future, it can recover input VAT incurred even if it is not yet making those supplies. However, the intention must be evidenced in order to support input VAT recovery. If you or your business intend to recover input VAT or register for VAT before trading begins, we recommend taking professional advice.

3. Import VAT Liability

This case concerned BMW Shipping Agents Limited (BMW), an international freight forwarding company. The question addressed by the Tribunal relates to the availability of onward supply relief (OSR) to BMW in relation to certain transactions. If OSR was available the imports BMW arranged would not be subject to Import VAT in the UK.

HMRC argued that BMW did not qualify for OSR because BMW could not have made a qualifying supply of the goods to the end customer as BMW did not own the goods. BMW accepted that OSR was not available and the Tribunal then had to determine whether it was BMW, rather than its customer (on whose behalf the goods were imported) who was liable for the import VAT due, which in this case was a substantial sum.

BMW argued that its customer is liable for import VAT as Box 14 of the Customs Declaration form identified BMW as acting as a direct representative on behalf of the customer, who was identified in Box 8 of the form. However, HMRC pointed out that BMW had completed Box 44 of the form, which relates to OSR as though BMW was importing goods in their own name. In addition, although the customer’s name was entered into Box 8, the address given was BMW’s and the VAT number specified also belonged to BMW.

Whilst the Tribunal correctly identified the inconsistency between Box 14 and Box 44, it concluded that Box 44 takes priority because there is a legal requirement to state in Box 44 whether the goods are being imported by a person on their own behalf or as an agent for somebody else. As BMW stated the prefix indicative of importing in their own name, the Tribunal had to dismiss the appeal and conclude that import VAT is due from BMW.

The Tribunal concluded that the guidance in VAT notice 702/7 in relation to the circumstances in which OSR is available to an agent is clear and that it was never going to be possible for BMW to maintain a claim to OSR. The Judge added that ‘If there is anything to be learnt from this sorry tale, it is that agents need to ensure that they take a great deal of care in understanding the circumstances in which they may be liable for import VAT and the requirements which need to be satisfied in order for a claim to OSR to be available’.

Constable Comment: Had the correct procedures been followed the liability could potentially have been prevented. Although this case relates to Customs procedures the principle applies equally to other areas of VAT and highlights the need to take care and fully understand the rules when seeking to take advantage of any relief from VAT.

4. Zero rated Mega Marshmallows

This case concerns Innovative Bites Limited (IBL) and the VAT treatment of its product ‘Mega Marshmallows’ (the product). IBL is a wholesaler of various American sweets and treats. HMRC ruled that the product was confectionery on the grounds that it can be eaten as a snack from the bag, it is generally eaten with fingers and the product is found on IBL’s website in the category of ‘sweets, candy and chocolate’. Such products are excluded from the zero-rating that applies to certain food items and as a result HMRC took the view the product is standard rated for VAT purposes and issued VAT assessments in the sum of £472,928.

IBL argued that the product is different from regular marshmallows (which are also sold by IBL and correctly treated as standard rated) on the grounds that the product needs to be roasted over a campfire or barbecue before eating or used as an ingredient in the traditional American sweet, “s’more”. IBL argued that a product that is subject to further cooking process would not be expected to be confectionery. The product was marketed as intended for roasting and the size of the product was indicative that it is to be roasted. Customers intending to ‘snack’ marshmallows would choose a regular size pack.

The Tribunal reviewed various evidence submitted by IBL, including the packaging of the product which included clear instructions that the product should be cooked, a warning to let the product cool down after cooking and a description on how to make s’mores using the cooked product. In addition, it was brought to the Tribunal’s attention that the product is placed in the ‘world foods section’ aisle and also at the barbecue section.

As a result of the evidence, the Tribunal concluded that the product is not confectionery because it is sold and purchased specifically for roasting, the marketing of the product confirms this purpose, the size of the product makes it particularly suitable for roasting and the fact that it is positioned in supermarket aisles in the barbecue and world foods section, leads to that conclusion.

Constable Comment: Confectionery items are subject to VAT and there have been many previous cases debating what constitutes ‘confectionery’. In this case, the appellant successfully argued its product is zero rated because it had sufficient evidence including packaging and marketing to prove that it requires further processing before it is consumed. If you or your business sells food items which could potentially be classed as ‘confectionery’ we would recommend seeking professional advice to ensure the product is treated correctly for VAT purposes to minimise the risk of assessments and penalties. Constable VAT has a great deal of experience in liaising with HMRC on the correct VAT treatment of food items and would be happy to assist with any related queries.

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-free shopping for overseas visitors
A new VAT-free shopping scheme was announced this morning in the latest ‘Mini-budget’ for overseas visitors. The specific details regarding the VAT-free shopping scheme are yet to be confirmed, but we will report any further updates when they are released.

How VAT affects charities (VAT Notice 701/1)
The above guidance provides information on how VAT affects charities, how to treat a charity’s income for VAT purposes and VAT reliefs available to charities. HMRC has recently updated the section on the ‘business-test’ to include new information about the “2-stage test”.

Postage stamps and philatelic supplies (VAT Notice 701/8)
The above guidance provides information on which postage stamps are free of VAT and when VAT must be applied to stamps, stamped stationery and other philatelic supplies. Royal Mail has now confirmed that stamps bearing the image of Her Majesty Queen Elizabeth II remain valid for use. The notice will be updated when the Royal Mail makes any further announcement.

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. If you are concerned about the impact of any matters raised in the following cases, please contact us.

Opinion of the Advocate General

1. Correcting overcharged VAT on supplies to consumers

P GmbH (P) operates an indoor playground in Austria. In 2019, P incorrectly accounted for VAT on its admission fees at the standard rate of VAT of 20% rather than the reduced rate of 13%. P issued a total of 22,557 invoices in 2019 and the customers were exclusively consumers who did not have the right to recover the VAT charged. P corrected its annual VAT return for the year 2019 to reclaim the VAT overdeclared. The Austrian tax authorities refused the correction on two grounds: P owed the higher amount of VAT as a result of accounting for it on its invoices without correction and it was P’s customers who had paid the VAT and P would be unjustly enriched if the VAT were refunded.

Ordinarily, if the amount of VAT showing on a VAT invoice issued is higher than the amount properly due, the business must account for that higher amount to the relevant tax authority. The rule is designed to prevent tax loss if invoices are issued to businesses who might recover the overstated VAT as input tax. In this opinion, Advocate General (AG) Julianne Kokott was required to consider whether:

• Is VAT payable by the issuer of the invoice if there is no risk of loss of tax revenue because the recipients of the services are not entitled to the right of deduction?
• If so, do the invoices need to be corrected if there is no risk of loss of tax revenue and the correction of such invoices is effectively impossible?
• Does the fact that final consumers have borne the tax as part of the consideration, thereby enriching the taxable person by correcting the VAT, preclude the correction of the VAT?

AG Kokott concluded that P is not liable for VAT if its customers are not entitled to deduct input tax. If P was obliged to account for the VAT, the tax authority required P to collect VAT on its behalf, and should therefore be liable for the consequences of an error if P had acted in good faith. If P had overcharged VAT because the correct legal position was unclear, then it should be entitled to reclaim the VAT without the correction or reissue of VAT invoices. However, if the error resulted from P failing to consider the VAT position properly, then it would only be able to reclaim the VAT if it could demonstrate that there was no risk of tax loss.

AG Kokott also considered it unlikely that P’s claim could be denied on the basis of unjust enrichment. Provided that P had acted in good faith, it should be entitled to recover the overcharged VAT.

Constable Comment: This opinion highlights the importance of ensuring that VAT is correctly shown and accounted for on invoices issued. It also considers the potentially complex implications of seeking to correct the position where it may be impossible to correct the invoices already issued at a later date. If you have any concerns surrounding the correct VAT liability of your supplies, please do not hesitate to contact Constable VAT.

JUDGMENTS

2. The entitlement to input tax deduction for holding companies

This case concerns the refusal by the German tax authorities to allow W GmbH (WG) to deduct input VAT relating to a payment made to two limited partnerships, in which WG held 90% interest. The partnerships developed residential properties in Germany, the sale of which were exempt, therefore the partnerships would have been unable to recover VAT incurred on related construction services. Instead, WG procured EUR 40million of construction services and contributed these to the partnerships. WG treated the contribution as outside the scope of VAT but contended that the VAT incurred on the construction services was recoverable as input VAT as WG was a fully taxable business as a result of management fees charged.

The CJEU considered that in order to reclaim VAT incurred, two conditions must be met. First, the person concerned must be a taxable person and the goods or services must be used by a taxable person for the purposes of their taxable activities.

The acquisition and holding of shares in a company does not amount to an economic activity, therefore a holding company whose sole purpose is to acquire shares in other companies is not a taxable person and does not have the right to deduct VAT. In the present case, WG supplied accounting and management services to its two subsidiaries in exchange for payment, which constitute an economic activity. Consequently, the CJEU held WG must be regarded as a taxable person.

With regards to the second condition, the right to deduct input tax requires the goods and services obtained to be used for the purposes of taxable supplies. WG obtained the services required to fulfil its obligations relating to payment in kind of shareholder contributions to the partnerships (rather than a supply to the partnership). The fact that those services are intended to be used by WG’s subsidiaries confirms that there is no direct and immediate link with WG’s own economic activity. Those costs are not part, as general costs, of the components of WG’s management and accounting services.

The CJEU ruled that the constructions services were not incurred in order to carry out the management supplies of WG. Contributing to the partnerships activities was not a business activity and therefore the VAT incurred by WG was not recoverable.

Constable Comment: Holding companies have a range of structures and purposes. Some have minimal activities whilst others are actively concerned with the supervision and management of their subsidiaries. This case highlights that in order for a holding company to recover VAT incurred as input tax, demonstrating a direct and immediate link between input VAT incurred and a subsequent taxable activity is key.

3. Input tax recovery on the compulsory purchase of property

This case concerns the denial of the right to deduct VAT incurred on the purchase of a property on account of an alleged abuse of rights by HA.EN (H). In 2015 HA.EN purchased a secured loan which had been granted by a bank to a Lithuanian property developer. The developer was facing financial difficulties and was forced to sell the property to H for EUR 4.5million plus VAT (EUR 949,000) as a result of a compulsory purchase order. The sale proceeds reduced the outstanding loan but no cash changed hands.

As a result of the financial difficulties faced by the developer, whilst it accounted for output VAT on its VAT return, it could not pay the output VAT due and it was declared insolvent.

H reclaimed the VAT incurred on the purchase of the property. Following a tax inspection, the local tax authority held that H knew or should have known that the developer would not pay the output VAT due. This being so the tax authority considered H had acted in bad faith and committed an abuse of rights and the tax authority denied H the right to deduct the VAT incurred as input tax.

Two conditions must be met in order to find that an abusive practice exists. First, the transactions concerned must result in the obtaining of a tax advantage contrary to the intentions of the law. Second, the essential aim of the transactions is solely to obtain that tax advantage. The CJEU stated that even if the input VAT recovery by H is seen as a tax advantage, that advantage cannot be regarded as contrary to the intentions of the law.

Under the second condition, the CJEU confirmed that H was a creditor of the developer as it held a mortgage over the property which was subject to a compulsory sale. The essential aim of the compulsory sale was for H to recover its debt, rather than securing VAT advantages. The CJEU concluded that H should therefore not be denied input VAT recovery.

Constable Comment: This case highlighted the conditions for ‘abuse of rights’ to apply it must be proved that the tax advantage must be contrary to the intentions of the law and the essential aim of the transaction is solely to obtain that advantage. Whilst EU rules are no longer binding on UK businesses, these conditions may be taken into consideration by UK courts.

FIRST TIER TRIBUNAL

4. Zero rating of non-emergency ambulances

E-Zec Medical Services Limited provides Non-Emergency Patient Transport Services (NETPS), on behalf of various NHS trusts for sick and injured individuals to and from hospital and doctor’s appointments. It is common ground that the ambulance services in question are exempt from VAT. However, a dispute arose with HMRC as to whether the provision of NETPS could be zero-rated as passenger transport, therefore entitling E-Zec to VAT recovery.

Non-Emergency Patient Transport Services (NEPTS) involve transporting day patients, recurring treatment patients and patients on daily discharge and often involves taking multiple passengers in one journey either from or to multiple destinations. E-Zec can only zero-rate its services if the vehicles could carry 10 people, were it not for the wheelchair adaptations.

On a typical day, each vehicle of the appellant will carry at least one wheelchair passenger. On average, approximately 40 to 50% of all passengers carried by the appellant require a wheelchair, bring their own wheelchair, require a bariatric wheelchair or require a stretcher. Generally, E-Zec’s vehicles are configured with eight seats, allowing space for a ramp, winch, and storage pen for wheelchairs. An aluminium tracking system is also installed in the floor, to allow seats to be reconfigured according to how many wheelchair users will use the vehicle.

The First-tier tribunal considered how many people E-Zec’s vehicles could carry if only the wheelchair-specific adaptations were removed. This involved hypothetically adding some things back: in this case, the floor was adapted for wheelchairs, so the FTT had to imagine that the floor was replaced by a standard plywood floor. The FTT accepted-Zec’s vehicles without the wheelchair adaptions could be driven with ten passengers and comfortably within the vehicle’s maximum weight allowance of 3,500kg. E-Zec’s services therefore qualified for zero-rating.

Constable Comment: This case also highlights the importance of applying the correct VAT treatment to a supply. Zero-rating enables VAT recovery and it is important to remember that this takes precedence over VAT exemption. If you or your business have any ambiguity regarding the VAT treatment of your supplies, please do not hesitate to contact Constable VAT.

5. Whether VAT assessment by HMRC time barred

In the case of Nottingham Forest Football Club Limited (NFFC), NFFC appealed against a VAT assessment for the period 08/15 in the amount of £345,561 issued by HMRC on 29 April 2019

The issue was whether HMRC was time-barred from raising the assessment under section 73(6)(b) VATA 1994. That is, whether the assessment was made within one year after evidence of the facts, sufficient in the opinion of HMRC to justify the making of the assessment, came to their knowledge. HMRC argued that their knowledge of the facts was only complete on 9 May 2018 whereas NFFC contended that HMRC had the necessary knowledge of the facts on 20 April 2018.

HMRC visited NFFC on 20 April 2018 to discuss how the business operated and its accounting systems, examine invoices and download general ledger data. A back up memory stick containing data from NFFC’s previous accounting system was obtained on 9 May 2018. HMRC issued a VAT assessment on 29 April 2019.

The Tribunal confirmed that the burden of proof was on NFFC to demonstrate the assessment had been raised late. NFFC did not provide evidence which showed that the initial information provided on 20 April 2018 was sufficient to justify the making of the assessment.

The Tribunal could not conclude the information provided on 9 May 2018 was irrelevant to the assessment raised. The time limit for raising the assessment, therefore, expired on 9 May 2019 and the assessment, raised on 29 April 2019, was in time.

Constable comment: This case confirms that the burden of proof is on the taxpayer to demonstrate whether an assessment has been made out of time. It is important to remember the application of these time limits in relation to error corrections submitted to HMRC where an assessment is due to be raised.

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

Fulfilment House Due Diligence Scheme registered businesses list
Businesses can use the above guidance to check if the business storing your goods in the UK is registered with the Fulfilment House Due Diligence Scheme if you’re a trader based outside the EU. The list has been updated with 19 additions and 5 removals.

HMRC email updates, videos and webinars for VAT
The above link provides information about VAT including accounting schemes, VAT returns and keeping records. The ‘How to apply the VAT reverse charge for construction services’ section has been updated because the way VAT is accounted for in the construction industry has now changed.

VAT refund scheme for museums and galleries reopening

This VAT refund scheme has been running since 2001and it was last open for new applicants in 2018/2019, it is estimated to have refunded up to around £1 billion to museums and galleries to date. The VAT refund scheme is set to reopen for new applicants from autumn 2022 and ministers encourage more museums and galleries to join the scheme to support free entry for the public.

Any museum and gallery open to the public free of charge for 30 hours a week can apply. It will help organisations boost their finances and open up their collections more regularly.

The full criteria for a museum and gallery to apply are:

• Being open to the general public for at least 30 hours per week, without exception
• Offering free entry without prior appointment
• Holding collections in a purpose-built building
• Displaying details of free entry and opening hours on the museum website

CASE REVIEW

FTT

1. Input VAT recovery: Lease rental invoices

This case concerned a VAT assessment in the sum of £26,250 raised by HMRC. The appellant, Star Services Oxford Ltd (SSO) operates a bed and breakfast business from a premises which is leased from Oxford City Council (OCC). However, prior to SSO being incorporated, Mr Latifi (owner of SSO) took out the lease with OCC in his personal capacity. Mr Latifi sublet parts of the building to Lola Zeng and Stitch, and the rest of the building was used for the bed and breakfast business by SSO.

The VAT assessment relates to input VAT claims made by SSO regarding VAT incurred on the lease for the building from OCC. HMRC identified an issue in that the lease from OCC is made to Mr Latifi as an individual rather than by SSO as the company, which is the VAT registered entity. HMRC noted that SSO has been reclaiming input VAT on invoices which are addressed to Mr Latifi.

HMRC raised the VAT assessment on the grounds that SSO does not hold valid VAT invoices which entitles it to deduct input VAT. OCC leases the premises to Mr Latifi who then sublets to SSO, Zola Zeng and Stitch, and therefore, the VAT charged was incurred by Mr Latifi not SSO.

The appellant argued that the lease was acquired in Mr Latifi’s name because SSO did not exist at the time the lease was entered into. The name on the lease was changed after HMRC notified this error. It was submitted that this was an innocent omission to transfer the lease from Mr Latifi’s name to SSO, and the delay was caused by forgetfulness. The appellant claims that HMRC is exploiting an administrative mistake and if Mr Latifi knew the consequences the lease would have been changed earlier.

The Tribunal considered whether the requirements for claiming input VAT has been met. It confirmed as a starting point that in order to reclaim input VAT the appellant must hold a valid VAT invoice to evidence that the supply is being received by the appellant. This means that the invoice needs to be addressed to the right legal entity and the supply needs to be made to that entity. VAT cannot be recovered on invoices in the name of the third parties.

The Tribunal concluded that the legal relationship was between OCC and Mr Latifi due to the lease agreement being in the name of Mr Latifi. As a result, SSO is not entitled to reclaim any input VAT incurred and the appeal was dismissed.

Constable Comment: This case shows the importance of taking care regarding administrative tasks when incorporating a business. In this case, HMRC raised a significant VAT assessment as a result of what appears to be a genuine administrative oversight of changing the name on the lease from Mr Latifi in his personal capacity, to SSO, the new incorporated business. Incorporating a business can have various VAT implications and we would recommend seeking professional advice.  Constable VAT will be happy to assist with any incorporation related queries. The case also acts as a reminder that it is important that taxpayers hold all the evidence required to support an entitlement to reclaim VAT incurred.

2. Tribunal: Start proceedings or ‘entertained’?

This case concerned the SNM Pipelines (SNMP) appealing a decision of HMRC to deny input VAT claimed by SNMP and issuing VAT assessments to recover input VAT so claimed. In 2017 HMRC took the view that SNMP was not entitled to repayments of input VAT because it knew or should have known that the input VAT had been incurred in transactions which were connected with the fraudulent evasion of VAT. The VAT assessment was in the sum of £312,377.

SNMP appealed this decision, but the FTT returned the notice of appeal because the VAT in dispute had not been paid and SNMP had not made a hardship application. In the UK, an appeal shall not be entertained unless the amount which HMRC have determined to be payable as VAT has been paid or the Tribunal decides that the requirement to pay the amount would cause the appellant to suffer financial hardship.

SNMP has made another attempt to resubmit the notice of appeal, but the FTT then returned the notice of appeal again for the same reason but, unfortunately, to an incorrect email address. Therefore, 3 years elapsed with no action from neither party.  Later, in 2020, SNMP made a hardship application to HMRC and resubmitted the notice of appeal to the FTT; however, HMRC filed a notice of objection to SNMP’s late appeal.

SNMP argued that the appeal was made in time. It was submitted that the appeal was still made or notified even if the disputed tax had not been paid, and a hardship application had not been made. HMRC argued that:

• The delay of more than four years was serious and significant
• SNMP did not have any good reason for such long delay
• In all the circumstances, which includes prejudice to HMRC and the need to enforce compliance with the rules, the application should be refused

The Tribunal referred to various case law and made a distinction between a case being entertained and being validly made. Whilst payment needs to be made, or application for hardship is required for a case to be ‘entertained’ (The Tribunal begins to entertain a case when it lists it for a hearing), it is not required for a claim to be validly made. It was confirmed that starting proceedings is not the same as entertaining or proceeding with an appeal.

In summary, the Tribunal has ruled that SNMP’s 2017 appeal was made in time regardless the fact that disputed tax was not paid and no application for hardship was made at the time, it was still a valid notification of the appeal.

Constable Comment: This case highlighted the difference between starting proceedings and entertaining or proceeding with a case. The Tribunal confirmed that payment or application for hardship is not a requirement for making a valid notice of appeal; however, to entertain the case (process towards a hearing) it would be necessary. Therefore, the notice of appeal was valid, and also as HMRC has accepted SNMP’s application for hardship, the case can proceed towards a hearing. This case also reinforces the importance of ensuring all statutory, and other, deadlines are met. In the absence of confirmation of receipt of correspondence from HMRC or the Tribunal in a timely manner, we would recommend that taxpayers follow up to ensure that documents and paperwork have been received. If your business has any questions regarding the application of time limits in relation to HMRC’s or the Tribunals policies and any ‘out of time’ issues 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

Tell HMRC about any errors in your VAT Return
Taxpayers can now notify errors on VAT returns online rather than using form VAT652. A link to the new online form has been added to the above guidance. HMRC has also updated the details section and included information on how to use the online form.

Provide partnership details when registering for VAT
HMRC has updated form VAT1 and its associated notes with information about completing the VAT2 when VAT registering a partnership.

Complete your VAT Return to account for import VAT
The above guidance has been updated with information on checking previous VAT returns where businesses have experienced problems with monthly import VAT statements.

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. If you are concerned about the impact of any matters raised in the following cases, please contact us.

1. Boat trips on the Moselle: Principle of fiscal neutrality

This case concerned Navitours, a business established in Luxembourg which supplies boat trips on the Moselle, a river which forms part of the border between Luxembourg and Germany. The waters of the Moselle are under the joint sovereignty of both countries. As passenger transport services such as boat trips are subject to VAT where they take place, a dispute arose, as to the country in which the boat trips are subject to VAT.

The CJEU considered the boat trips are correctly classified as transport services. For VAT purposes, transport services are supplied where those services actually take place having regard to the distances covered.

The CJEU confirmed that it is for the Member States to determine the extensions and limits of what constitutes ‘within the territory of the country’; however, in this case both Germany and Luxembourg consider the Moselle to be within the territory of their country.

The CJEU concluded that the principle of fiscal neutrality prevents Navitours from accounting for VAT in both territories. As a result, the taxation of the boat trips in Luxembourg prevented Germany from also imposing VAT on the services supplied by Navitours.

Constable comment: This case is interesting as by following the strict application of the law, the CJEU has concluded that VAT could be due in both Germany and Luxembourg. This is an unfavourable position for the taxpayer as they would be subject to double taxation. However, applying the principle of fiscal neutrality the taxpayer VAT is only due in Luxembourg. Germany could no longer collect VAT on the boat trip taking place within a territory under the joint sovereignty of both countries. 

2. Insurance claim handling services

This case concerned a dispute between Uniqa Asigurari SA (Uniqa), a Romanian insurance company, and the Romanian tax authorities, regarding the VAT treatment of insurance claims handling services. Uniqa offers international insurance policies covering risks relating to motor accidents and medical expenses occurring outside Romania. Uniqa entered into partnerships with 26 companies having registered offices outside Romania, these companies settle claims for Uniqa’s customers in the country in which the accident occurs.

The partner companies invoiced Uniqa for the claims handling and complaint resolution services delivered, but Uniqa did not declare VAT under the reverse charge regime in Romania on the grounds that the place of supply for those services was the place of establishment of the supplier of the services. The Romanian tax authorities took the view that the claims handling services came within the scope of ‘services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services, as well as data processing and the provision of information’, and as a result of the relevant place of supply rules at the time, 2007-2009, the place of supply was Romania and VAT should have been accounted for by Uniqa under the reverse charge mechanism.

The CJEU considered whether claims handling services can fall within any of the classifications contended by the Romanian tax authorities. The CJEU first considered ‘engineers’ and confirmed that whilst assessment of damage resulting from a road traffic accident may be carried out by an engineer, insurance claims handling clearly does not come within the scope of services carried out as part of the engineer profession.

The CJEU then considered the services of ‘lawyers’ and confirmed that these concern the representation or defence of the interests of a person or to ensure that a claim of legal nature succeeds, and supplies of claims handling made by the partner companies do not fall within the concept of services of lawyers.

The claims handling services did not fall within consultancy services because, unlike consultancy, claims handling involves the exercise of decision-making powers as regards to compensation or refusal to grant compensation, which amount to more than merely consultancy services. The CJEU also confirmed that claims handling was distinct from the above professions with different aims and therefore it cannot be classified as ‘similar services’ either. Finally, the CJEU concluded that claims handling cannot be similar to data processing services or be treated as equivalent to the provision of information.

As a result of the above considerations, the CJEU concluded that claim settlement services provided by the partner companies to Uniqa did not fall within the reverse charge regime in Romania.

Constable comment: This case concerned place of supply rules applicable in 2007-2009 and these have since changed. However, this case has provided a very helpful summary of the classification of services which remain relevant for UK and EU cross border supplies.

FTT

3. Car Safety testing

This case concerns car safety tests carried out by The Towards Zero Foundation (TZF) and whether these represented a non-business activity.

TZF is a charity with the objective of achieving zero road traffic fatalities through the operation of New Car Assessment Programmes (NCAPs). In each jurisdiction where an NCAP is established TZF anonymously purchases and crash tests individual models of cars manufactured in that jurisdiction. TZF will then publicise the results. The results often encourage the car manufacturers to improve the safety features of their vehicles and pay for further testing by TZF. The initial anonymous purchase and testing of vehicle is funded by TZF. The majority of costs incurred by TZF are non-UK costs but as they are established and operated from the UK it incurs UK VAT on overhead running costs, particularly in relation to marketing and consultancy costs.

HMRC argued that non-manufacturer funded testing are provided for free, therefore these tests cannot represent a supply for consideration and are therefore not supplies capable of representing a business activity applying the Wakefield test.  As TZF is engaged in both business and non-business activities, HMRC stated that the recovery of VAT incurred on overheads is required to be restricted.

TZF contended that it is engaged exclusively in business activities. The testing of vehicles using its own resources represents a necessary investment for the establishment of that business activity with the car manufacturer and there is a direct link between the self-funded tests and the manufacturer funded testing such that there is a single business activity and, as a result, all input VAT incurred by TZF is recoverable.

The Tribunal confirmed there is no dispute that no consideration is received for the self-funded testing; however, the dispute cannot be determined by reference to the Wakefield analysis because, in this case, the critical question was whether the free testing represents an independent activity. The Tribunal concluded that it was clear from the evidence provided that a car manufacturer would not proactively seek to have vehicles tested without an initial unfavourable assessment that is provided by TZF via the self-funded testing. The Tribunal held that the self-funded testing represents a necessary precursor to making taxable supplies and therefore TZF is not engaged in any separate non-business activities. In this regard, the position is materially indistinguishable from that in Sveda. As a result of this conclusion, TZF can recover all input VAT incurred on its overheads.

Constable comment: This case highlights the complexities of classifying business and non-business activities and the inconsistencies in HMRC’s new approach in determining what is a business or a non-business activity by a charity. In this case HMRC argued that as no consideration was received, the free testing cannot be a business supply for VAT purposes. However, this appears to contradict HMRC’s position in its recent updated guidance. The Tribunal ruled against HMRC on the grounds that the free testing is not a distinct supply from the manufacturer funded testing which is a fully taxable supply. The initial investment has an underlying objective which forms the foundation from which to make taxable business supplies of testing.

4. VAT on recharges of merchant acquirer costs

This case concerned SilverDoor, a company acting as a disclosed agent between accommodation providers and clients, who are usually businesses seeking short term accommodation for employees on temporary assignments.

When a booking is made, the clients can either use their SilverDoor account to make payments for the accommodation or pay via bank transfer or corporate credit card. When a corporate credit card is used SilverDoor requires the client to pay an additional fee of 2.95% of the accommodation charge. SilverDoor believed this payment to be a disbursement and outside the scope of VAT, however HMRC took the view that this fee cannot be a disbursement as the merchant acquirer was not paid on behalf of the client, instead HMRC contended the fees are standard rated taxable supplies of reservation services.

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, which is made by the accommodation provider and that this supply was a financial service within the VAT exemption.

After reviewing the terms and conditions of the agreements, the Tribunal took the view that the 2.95% fee charged by SilverDoor is a reservation fee and therefore subject to VAT at the standard rate.   Although the appeal was dismissed on this basis the Tribunal went on to consider the VAT exemption for financial services.

The Tribunal found that SilverDoor’s actions were too remote to have an effect of transferring funds for the purposes of VAT exemption, its actions at best are to start a series of actions in which other parties at some point effect the transferring of funds.

SilverDoor contended that account holders can themselves make debits and credits by making online payments, rather than the regulated financial institution at which the account is held. The Tribunal rejected this argument by confirming that it was the bank that issued the card that authorised the withdrawal, debited corresponding amounts to the user of the machine’s bank account and transferred the ownership of the money directly to that user. It is not the account holder which is making the debits and credits in their bank account when the individual withdraws money from an ATM, it is the bank. The same applies when a person makes an online payment.

SilverDoor also made the argument that it supplies financial intermediary services because it brings together clients who wish to pay by credit card and the merchant acquirers, with a view to securing payment by this means for the accommodation. The Tribunal found that SilverDoor does not ‘bring together’ parties in any context required for the exemption to apply. SilverDoor did not do anything other than issue a payment request containing a website link which took the client to the merchant acquirer webpage in order to make payment.

Constable Comment: This case highlights the potential risk of not correctly identifying a VAT supply. The Tribunal confirmed that the supply, which SilverDoor believed to be an outside of scope disbursement, is a taxable supply of a reservation fee. The case also highlights the strict requirements to fall within the financial services exemption. Ensuring the correct VAT liability of all supplies made can avoid potential assessments and penalties by HMRC and this can often involve complex VAT rules.

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 rates on different goods and services
The above includes a list of goods and services showing which rates of VAT apply and which items are exempt or outside the scope of VAT. It has now been updated to reflect that the VAT rate for energy-saving materials in residential buildings in Great Britain is now 0%.

Apply to use Simplified Import VAT Accounting
The above guidance sets out how to apply for Simplified Import VAT Accounting to lower financial guarantees required for duty deferment schemes.

From 1 October 2022, taxpayers will not be able to make import declarations on the Customs Handling of Import and Export Freight (CHIEF) system. Instead, if a taxpayer imports goods, they will need to use the Customs Declaration Service (CDS).

More information can be accessed on the guidance by clicking here.

How to apply for a repayment of import duty and VAT if you’ve overpaid (C285)
The above guidance sets out which service to use for import declarations made on the Customs Declaration Service (CDS) or Customs Handling of Import and Export Freight (CHIEF). It was updated to confirm that VAT registered importers cannot use form C285 to reclaim overpayments of import VAT.

Apply to receive non-financial VAT registration data from HMRC
Credit reference agencies and other qualifying applicants can apply for VAT registration data for use in making financial assessments. The application period to get non-financial VAT registration data is now from 1 April to 31 October. A new section about the ‘length of term’ has been added.

Funded pension schemes (VAT Notice 700/17)
The above provides guidance on how to claim input tax on funded pension scheme expenditure for both employers and trustees. A new section has been added which covers insolvent companies.

Register for VAT if supplying goods under certain directives
The above provides guidance regarding VAT registration if you’re making supplies of goods under Directive 2008/9 or 113^th Directive using form VAT1C, the notes for the form have now been updated.

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. If you are concerned about the impact of any matters raised in the following cases, please contact us.

Late input VAT recovery

This case concerned a company which the CJEU referred to as ‘X’ and the tax authorities of Netherlands. In 2006, Company B sold 10 plots of land to X.  The intention was that Company B would carry out development work by building mobile homes and would receive 50% of the sale proceeds.    At the time of the land sale, Company B invoiced VAT to X which X paid but did not deduct as input VAT. Due to economic circumstances the development was not carried out, X resold two plots to B, VAT was charged on the invoice but X neither declared or paid the VAT.

Consequently, the tax authorities sent X an adjustment notice relating to the VAT on the two plots of land and collected the VAT. X brought an appeal against the adjustment claiming that it should be reduced by the amount of VAT it originally paid in 2006 that it  had not reclaimed at that time.  X’s position was originally upheld but when the case was escalated to the Supreme Court of the Netherlands it referred the following question to the CJEU:

Must Article 184 and 185 of the VAT Directive be interpreted as precluding a taxable person who failed to exercise, before the expiry of the limitation period laid down by national law, the right to deduct VAT, from being denied the possibility of subsequently making that deduction, by way of an adjustment, at the time when those goods or services are first used for the purposes of taxed transactions, even where no abuse of rights, fraud or loss of tax revenue has been established.

The CJEU concluded that the adjustment mechanism is applicable only where there is a right of deduction.  It followed that where a taxable person has lost the right to deduct VAT as a result of the expiry of a time limit, X cannot rely on Article 184 or 185 to reduce the VAT payable on its own supply.

Constable VAT comment – It would have been surprising had the CJEU reached a different conclusion.  One can question whether the time limits on VAT deductions are fair.  However, there were two distinct transactions and the fact that one had occurred several years before the second meant that by the time the second transaction occurred it was too late to deduct VAT on the first.  A different decision would have undermined the effectiveness of the time limit applied to VAT deductions. 

Reverse charge: sale of timber

This case concerned VB, the owner of forest land in Romania.  The Romanian tax authorities found that VB’s turnover exceeded the VAT registration threshold in 2011. The authorities have revised, retroactively, the calculation of the VAT due from 2011 applying the method which takes the view that sale prices also included VAT.

VB appealed this on the grounds that the sale of standing timber is subject to the reverse charge mechanism, the application of which is subject only to the fact that the two traders are taxable persons, but not necessarily to the existence of a VAT registration number on the part of the supplier.

The Romanian tax authorities rejected this view, stating that the reverse charge mechanism was subject to the condition that both the supplier and the purchaser were registered for VAT.

The CJEU confirmed that Article 199(2) of the VAT Directive allows Member States to define the categories of suppliers or recipients to whom the reverse charge procedure may apply. It then stated that the restricting the reverse charge to VAT registered traders only had precisely the effect of limiting the scope of reverse charge, which it found to be acceptable. In addition, there was a requirement to obtain the supplier’s VAT registration number which enabled customers to identify when to apply the reverse charge applied.  The CJEU found this to be a proportionate measure which did not breach the principle of fiscal neutrality.

To conclude, the CJEU confirmed that Romania is entitled to require VB to account for VAT retrospectively and considered that limiting the application of the reverse charge to suppliers that are VAT registered (as compared to “liable to be VAT registered”) is a legitimate measure.

Option to tax – Fiscal Neutrality

This case concerned the Lithuanian tax authorities ordering UAB Arvi (Arvi) to repay VAT, plus penalties and interest as a result of incorrectly treating the sale of a gym to UAB Fondas (Fondas) as taxable. Arvi had opted to tax the building and therefore recovered input VAT incurred on the basis that it related to a taxable sale.

In Lithuania, it is a condition of the option to tax that the buyer must be a VAT registered business and the seller is required to obtain the buyer’s VAT registration number before the sale. The Lithuanian authorities argued that although Fondas applied for a VAT registration, it was only issued with a VAT registration number a month after the sale took place, therefore Arvi could not correctly opt to tax, meaning it should have adjusted the amount of input VAT deducted in its VAT return.

The first question referred to the CJEU was whether the VAT directive and the principles of fiscal neutrality and effectiveness must be interpreted as precluding national legislation from making the right of opting to charge VAT on a property conditional on the buyer being VAT registered at the time of the transfer. The CJEU stated that Lithuania’s legislation merely laid down detailed rules around the option to tax and did not adversely affect a right to input tax deduction. It was confirmed that the condition laid down for the option to tax does not contravene the principles of fiscal neutrality. As a result, the CJEU concluded that the VAT directive does not prevent national legislation making the option to tax conditional.

The CJEU also confirmed that intention of taxable use of the property by Fondas cannot affect Arvi’s right to deduct the input VAT.  The businesses are separate taxable persons each pursuing their own economic activity.  Fondas business activities do not impact on Arvi’s VAT recovery rights.  Therefore, although Fondas became VAT registered one month after the sale by Arvi the fact that its VAT number had not been issued at the time of the sale meant that Arvi’s option to tax did not apply to the sale.

Constable VAT comment – The VB and UAB Arvi cases both illustrate the importance of dealing with compliance measures in a timely way.  It is a universal principle of VAT that “If something that should have been done at the time of a transaction has not been done, then it will usually be too late to rectify the resultant problem.”  Both cases relate to fiscal neutrality and the outcomes supported by the CJEU involve a VAT cost in the supply chain that should not exist.  However, natural justice and fiscal neutrality seem increasingly less important than compliance with rules.     In the UAB Arvi case it seems unfair that the company had applied to be VAT registered at the time of the supply.  The judgement seems to make the VAT liability of a supply potentially contingent on the efficiency of the VAT authorities in processing VAT registration applications and commercial transactions may be disrupted as a result of failings that a taxpayer has no control over.

Upper Tribunal

Hire of pitch or league matches?

This Upper Tribunal case concerned HMRC appealing the FTT’s decision regarding Netbuster’s supplies. Netbusters organised competitive football and netball leagues and also supplied the pitches for these matches to be played upon. The FTT concluded that the supply of league management services, which the appellant identified as 12.5% of the supply, was an additional ancillary service to the fundamental nature of the supply being the pitch hire, therefore exempt from VAT.

HMRC were granted permission to argue five grounds of appeal as follows:

• The FTT failed to have any proper regard to the relevant case law.
• The FTT failed to properly consider and apply the ‘passivity principle’.
• The FTT failed to properly consider the objective character/economic reality of the supplies made by Netbusters.
• The FTT erred in finding that 87.5% of the value of the Netbuster’s supply was attributable to pitch hire and 12.5% to league management services.
• The FTT failed to correctly analyse the true nature of the rights granted to Netbusters by third parties.

Regarding the first ground of appeal, despite HMRC having been granted permission to appeal on the point, the UT concluded that it was unarguable. HMRC  failed to identify how the FTT have misinterpreted or misapplied the law. The FTT did consider the relevant case law.

Under the second ground of appeal, the ‘passivity principle’ considers whether there is significant added value by services in addition to the land.  HMRC took the view that there was a provision of service rather than simply making available of property. HMRC relied on the Luc Varenne case for this argument.  The UT rejected this on the grounds that the FTT correctly distinguished its conclusion from the facts of Luc Varenne as the additional services in that case were 80% of the total charge, whereas the league management services in this case accounted for only 12.5%.

On the third ground of appeal, HMRC argued that the provision of league competitions was the most important part of the supplies. The teams and individuals were seeking to play competitive and test themselves against other players, rather than simply hiring a pitch for a ‘kick around’. In addition, the key selling point of Netbusters was that a league structure was already in place, with customers only having to sign up and pay. The UT confirmed their view that the FTT correctly recognised that there were two elements, pitch hire and league administration.  Each enhanced the enjoyment of the other but the league management services were of modest value and did not change the fundamental structure of the supply.

The fourth ground of appeal concerned HMRC rejecting that only 12.5% of the supply is attributable to league management services.  However, there was no other evidence regarding this and HMRC did not challenge the point with the FTT. The UT agreed with the FTT’s conclusion that the value added was modest and therefore cannot change fundamental characterisation of the supply.

With regards to the final ground of appeal HMRC, argued that an agreement with King Solomon Academy (KSA) for the rent of a sports hall did not grant exclusive use of the sports hall to Netbusters and that there was a conceptual confusion between a supply of the right to use the facilities and the right to occupy land. The UT concluded that HMRC’s suggestion that Netbusters had no right to exclude others during the hiring is not a realistic reading of the agreement nor of the practical reality.

For the reasons set out above, each of the grounds of appeal failed and HMRC’s appeal was dismissed.

Constable Comment: HMRC’s policy in relation to what is or is not a supply of land has become increasingly confusing in recent years.  HMRC seems to have litigated almost randomly on the point that services supplied alongside supplies of land change the nature of the supply.  In this case HMRC’s position has been found to be wrong but there was at least a rationale for its position.  However, increasingly taxpayers are left making judgements in the absence of easy to follow criteria.  Most will never be challenged and it has almost become a lottery with some unfortunate taxpayers being told that what seems a minor additional service or entitlement (such as a licence to hold weddings) changes the VAT liability of their supplies. If there is ambiguity around what is actually being supplied, we would always recommend seeking professional advice and often a non-statutory clearance.

FTT

Demolition of an existing building

This case concerned the appellant was a building company who received supplies from a sub-contractor called Sword.  Sword charged VAT on its invoice to the appellant. The appellant argued that the supply was zero rated as a construction of a new dwelling with the subsidiary argument that if it failed on that point the reduced rate of 5% applied.

The construction of a new dwelling can be zero rated for VAT purposes.  However, there are strict rules to consider when deciding whether a replacement dwelling can be considered “new”.  In this case there was already an existing building, but after lengthy planning procedures, planning permission was granted to demolish the existing building and construct a new dwelling. However, based on Note (18) of Group 5, Schedule 8, a building only ceases to be an existing building if it is demolished to ground level, which was not the case, or ‘the part remaining above ground level consist of no more than a single façade or where a corner site, a double façade, the retention of which is a condition or requirement of statutory planning consent or similar permission’. In this case, as part of the planning permission, the front elevation and part flank return walls together with a section of the front roof were protected and retained.

Initially, HMRC challenged zero rating on the grounds that the condition as to lawful development was not met. The Tribunal rejected this argument and confirmed it was satisfied that the works were carried out in accordance with the planning permission and did not present any breach of planning control.

However, the Tribunal took the view that what was retained, in accordance with the planning permission, was more than a single façade, hence the development was ineligible for zero-rating because the existing building did not cease to be a building. It arrived at this conclusion on the grounds that the façade does not include a roof slope. These are different structures, with different names, made of different materials and have different aspects. The Tribunal rejected the appellants argument that the roof was part of the façade simply because it can be seen by passers-by or approaching visitors. This was sufficient to dismiss the appeal with regards to zero rating.

The Tribunal went on to conclude that the supply was in the course of the renovation or alteration of a qualifying residential premises of qualifying services related to the renovation or alteration where the premises met the empty home condition, as it has been empty for a 2 year period ending with the commencement of the relevant works. As a result, the construction works carried on by Sword should have been subject to the reduced rate of VAT at 5%, instead of the standard rate.

Constable Comment: This case highlights the importance of meeting the conditions set out in the legislation regarding construction works in order to treat them as zero rated. Often a property owner’s hands will be tied by planning restrictions that cannot be removed.  However, understanding the VAT impact in advance may allow a dialogue with planners that will allow the development proceed in a way that delivers VAT savings.  

Exports: Denial of zero rating

This case concerned a dispute between Maron Plant Limited (MPL) and HMRC regarding an assessment of VAT in the sum of £201,024. The assessment was raised on the basis that MPL had not provided sufficient evidence of removal of goods from the UK to allow it to zero rate the supplies for VAT purposes.

The goods included 29 items of plant and machinery allegedly sent to the Republic of Ireland (Ireland) on 16 occasions involving 20 invoices. The goods were sold to BSM, a company which MPL had no previous dealings with. There is an additional dispute between the parties concerning whether MPL knew or should have known it was involved with fraudulent evasion of VAT but this appeal only concerned the issue whether MPL held sufficient evidence of the removal of goods to Ireland to zero rate its supplies.

The FTT reviewed the evidence presented and stated it had problems with MPL’s evidence. Part of MPL’s argument was that it did not know proof or removal was required therefore it agreed to prepare ‘Confirmation of shipping’ documents.  Unfortunately, these had no details on the consignee, carrier or route so did not comply with conditions set out in Notice 725 which has force of law.

In addition, MPL failed to produce any evidence of the route taken.  The fact that the invoice stated there had been a shipment from the UK to Ireland did not prove anything. MPL produced no CMRs, no Bill of Lading or any other evidence of the goods being booked on a ship and no evidence regarding the mode of transport, route of movement nor the destination.  The Tribunal concluded that MPL has not obtained or retained valid commercial evidence of export to support zero rating of the relevant transactions, MPL should have therefore charged VAT at the standard rate. The appeal was dismissed.

Constable Comment:  The environment has changed since Brexit with only NI to EU shipments being equivalent to “intracommunity shipments” and shipments from the rest of the UK being “exports”.  If the rules are complied with, the requirement for export and import declarations should result in businesses holding “export evidence”.  Nevertheless, there are a variety of ways to export goods and we still see cases in which the export evidence is insufficient and in particular where it was not obtained and kept within the window of time available – for example while it can be downloaded from a courier’s systems.  If evidence of a despatch or export is not available HMRC will raise an assessment for underdeclared 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

Change to HMRC Option to Tax process
Many of our readers will be aware that there have been significant delays in receiving a response from HMRC’s Option to Tax unit following the submission of an option to tax (OTT). To try to address this issue HMRC is trialling a new system. This trial began at the end of May 2022 and will last 6 weeks. Previously when a taxpayer notified HMRC of an intention to opt to tax a property, HMRC acknowledged the notification confirming that the option was in place.

During the trial period HMRC will only acknowledge the receipt of the OTT. Our full article covering this change in HMRC procedure can be read here. We will update readers on any extension to the trial, or any further comment from HMRC on the subject, in future editions of VAT Focus.

If you or your business require assistance on any issues involving an Option to Tax, Constable VAT has a great deal of experience in this area and would be happy to assist with any queries.

Agent Update: Issue 97
HMRC has released this new agent update containing the latest guidance and information including:

• Increase in National Insurance Threshold
• Residency and the remittance basis charge
• Changes to VAT penalties
• P11D and P11D(b) filing and payment deadlines
• Making Tax Digital (MTD) for Income Tax Self-Assessment

CONSTABLE NEWS

VAT Partial Exemption: Annual Adjustment

Partly exempt businesses recover VAT incurred provisionally throughout their VAT accounting year. Those businesses are then required to complete an annual adjustment calculation that takes account of supplies made, and input tax incurred, across the entire VAT year and an adjustment to the VAT claimed may be required. This adjustment is normally made on the VAT return following a business’ partial exemption year end. Many taxpayers will be required to calculate and declare these adjustments shortly. Constable VAT can assist with this. Our guidance on partial exemption may be useful.

VAT & Charities Newsletter

We have recently released a new Constable VAT & Charities Newsletter. This newsletter covers some important and interesting areas of VAT for charities. Whilst some of the issues and cases have been discussed in our VAT Focus, the newsletter aims to give a more detailed summary of those items specifically impacting on the Charity sector.

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. Place of supply of services and abuse of rights

This case concerned DuoDecad, a Hungarian registered company which provided technical support services allowing access to entertainment services via websites.  The question was whether DuoDecad was providing its services cross border to a Portuguese business or locally to an associated Hungarian Company. The local Hungarian tax authorities ordered DuoDecad to pay significant amounts of VAT, a tax fine and interest in respect of unpaid VAT, on the grounds that the recipient of the services provided by DuoDecad was its Hungarian associate WebMindLicences Kft (WML).

WML is a company registered in Hungary, which has few resources of its own. WML licensed its know-how to Lalib (a Portuguese entity) allowing Lalib to charge consumers for access to its websites. DuoDecad provided the necessary IT support and contractually this support was provided to Lalib as provider of the online services. The Hungarian tax authorities argued that the online service was provided not by Lalib but by WML, from Hungary, and that the licence agreement was in its view ‘fictitious’. As a result, Duodecad’s service was supplied to WML and Hungarian VAT was due on the supplies.

DuoDecad argued that Lalib had available to it the human and material resources necessary for the provision of the services supplied. DuoDecad also stated it provides its services directly to Lalib and not to WML. In addition they added that Lalib appeared to the outside world as the provider of the services, it concluded contracts in its own name, held a database of customers and many other factors demonstrating that Lalib was the recipient of those supplies.

The CJEU was asked to determine whether WML or Lalib were supplying the entertainment services and therefore receiving the technical support from DuoDecad. The CJEU confirmed that if there was abuse of rights, meaning the contractual relationship, between Lalib and DuoDecad was solely to obtain a tax advantage, then the contractual relationship should be redefined. However it concluded that the CJEU has no jurisdiction to apply rules of law to a particular situation, therefore it refused to rule which company should be treated as supplying the services instead determining that this is a matter for the national courts to determine.

Constable Comment: This case highlights issues around applying place of supply rules and also briefly discusses abuse of rights. Whilst the Advocate General’s opinion issued earlier this year indicated that part of the role of the CJEU was to resolve conflicts such as those arising in this case, even if it meant pronouncing on questions such as whether an abuse of law had, in fact, taken place, the Court in the end declined to comment on the correct VAT treatment of this supply.

UTT

2. Chelmsford City Council: sports and leisure facilities

The main issue of the appeal is the VAT liability of admission charges for sports and leisure facilities (the facilities) provided by Chelmsford City Council (CCC). HMRC contends that CCC was acting as a taxable person when providing the facilities.

Under Section 41A of the VAT Act 1994, supplies of goods and services made by certain public bodies are not regarded as being made by way of business, and they are therefore outside the scope of VAT, if:

(i) The public bodies form a part of the public administration.

(ii) The public bodies in question engage as public authorities when they make the supplies in question. This happens when they act under a special legal regime applicable to them, that is, under different legal conditions from those that apply to private traders, typically carrying out public interest activities for the service of the community.

(iii) This outcome would not significantly distort competition.

The benefit for a public body in agreeing that an activity is outside the scope of VAT is that this treatment brings with it a right to recover VAT on associated costs, which may not be the case if a supply was within the scope of VAT but was VAT exempt.

CCC argued that it was acting as a public authority when providing the facilities and the question that followed was whether the CCC was acting pursuant to a special legal regime applicable only to the public authority and not to private operators providing similar facilities. The FTT agreed with CCC that its services were provided under a special legal regime and so the supplies did not bear VAT. HMRC appealed on that issue. You can read more about the FTT case on our website where we have a blog on this topic.

The particular features which the FTT relied on its decision were pricing (including setting of concessions) and location and scope of facilities. The FTT’s reasoning was that, in providing its services, the authority was subject to different requirements when deciding what services to provide, at what price, where to provide them and to whom, by comparison with a private sector operator. The provision of the facilities involves the use of public powers and is subject to a public law regime. The Upper Tribunal agreed with the FTT that the legal conditions under which CCC provides leisure facilities amount to a special legal regime because private operators providing such facilities are not subject to those same conditions.

HMRC’s appeal on the special legal regime issue is dismissed; however the question of distortion of competition, which could impact on VAT treatment, has been deferred to a separate hearing and so the matter is not yet concluded.

Constable comment: As the question of distortion of competition is an important factor in determining whether a transaction undertaken by a Public Body falls within the scope of VAT it will be interesting to see how the courts decide on that factor. Only once this point has been addressed will it be completely clear if the supply of leisure facilities by a Public Body is outside the scope of 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

Monitoring businesses’ awareness of Making Tax Digital
HMRC commissioned research to survey awareness of and preparedness for Making Tax Digital (MTD) amongst VAT registered businesses with turnovers below the compulsory VAT registration threshold. From April 2022 the MTD rules will also apply to these businesses. The result of this research was recently published in the above guidance. The research suggested, that although there was a general awareness of MTD, the knowledge of the compulsory requirements and preparedness was low.

Apply for permission to opt to tax land or buildings
In certain circumstances taxpayers need to apply to HMRC for permission to opt to tax land or buildings for VAT purposes using form VAT1614H. This form has recently been updated.

Revenue and Customs Brief 10 (2022): VAT – business and non-business activities
This business brief was recently published by HMRC, it sets out the HMRC approaches to determining if an activity is a business activity for VAT purposes.

Historically HMRC has used the principles laid down in the cases of Lord Fisher [1981] and Morrison’s Academy Boarding Houses Association [1978], to determine whether an activity is business or economic activity for VAT purposes. The 6 criteria emerging from these cases, known as the ‘business test’ are referenced within the brief and have been a significant influencer of decisions around whether something is a business activity for many years.

In the light of recent cases, HMRC confirmed that it will no longer specifically apply the “Lord Fisher” business test, in determining whether an activity is business. Whilst the 6 indicators can be used as a set of tools designed to help identify those factors which should be considered, businesses can no longer rely on them. Instead, HMRC will use a new 2 stage test, emerging from the Wakefield College [2018] case.

The 2 stage tests are:

Stage 1: The activity results in a supply of goods or services for consideration.

This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

The Court of Appeal in Wakefield emphasised that a ‘supply for consideration’ is a necessary condition but not a sufficient condition for an ‘economic activity’.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration).

In very summary terms, where there is a direct or sufficient ‘link’ between the supplies made and the payments given, the activity is regarded as economic and thus a business activity. On some occasions, the decision as to what forms a business activity or not is marginal and this may create significant discussions with HMRC. HMRC’s position is given in the Brief which may be accessed through the link above.

CASE REVIEW

FTT

1. Transfer of going concern: Property

This case concerns Haymarket Group Properties Limited (HGPL), the appeal being against a notice of assessment for VAT raised by HMRC in the sum of £17,000,000. The assessment was in the consequence of the ruling by HMRC which concluded that the sale of land and property at Teddington Studios, Middlesex (The Property) was a supply of an asset and not a transfer of a business as a transfer of a going concern (TOGC).

The property in dispute, the “Teddington property”, was to be sold by HGPL with a planning permission for the demolition of the existing building and construction of over 200 new flats and houses. The issue for determination was whether the sale of the property with planning permission was a TOGC as it was the transfer of a property development or property lettings business (steps had been taken to create an in situ tenant across the transfer) or whether as an alternative this was the sale of a development business. There was no dispute in case the transaction was not a TOGC the VAT payable of £17 million was fully recoverable by Pinenorth (the purchaser). The “sticking” tax at stake was £680,000 of SDLT as a result of including or excluding VAT from the calculations along with negative cashflow outcomes in paying and then recovering the large sum of VAT that would apply to the sale.

HGPL contends it was carrying on a business before the sale of the property consisting of two elements, property development and property lettings. HGPL argues it took the property and improved its value for future sales including by obtaining planning permission, the property was then transferred to Pinenorth as a going concern with the benefit of planning and other preliminary development arrangements who continued to operate it as a property development business. Also, the property generated letting income and steps were taken to put in place tenants (albeit connected to the buyer) across the transfer.

The property rental business had been the initial focus of discussions with HMRC with later thoughts around a property development business transfer. Regarding the TOGC of a property rental business, HMRC argued that the leases were only entered into after the exchange of contracts for the purpose of achieving TOGC. Essentially, this was not the transfer of the existing business of HPGL. HMRC also considered the property development argument and responded that the contract for sale was for a sale of property not a business. HMRC took the view that the alleged property development business was an ‘afterthought’ merely to facilitate the TOGC conditions.

The Tribunal initially considered the property development business aspect of the appeal and concluded that it was not HGPL’s intention to carry on a property development business for various reasons including that HGPL has never been in the business of property development, the property was held as an investment as part of its portfolios of freehold estates, HGPL never intended to develop the property prior to the sale or had the capital available to do so.

The Tribunal then also considered whether there was a property letting business and concluded there was not. The reason why there could not have been a property letting business was because to the complete the sale, the property must have been transferred to Pinenorth with vacant possession at the point of exchange of contracts. The leases entered into as part of the sale (commencing between exchange of contracts and completion) was purely to play its assigned role to structure the transaction as a TOGC, which was evidenced by discussion between HGPL and advisors, HGPL was not entirely content with this approach (advisors cautioned it might be questioned) and required assurance through specific terms incorporated into the Sale Agreement to protect HGPL’s position in the event that the TOGC structure was challenged.

As a result of the above, it was clear to the Tribunal there was neither a property development nor a property letting business transferred, therefore the appeal was dismissed. VAT, in the sum of £17,000,000 was due on the sale, as it was not a TOGC.

Constable Comment: VAT of £17 million was due as a result of the sale of property not falling within the TOGC provisions. Although the VAT charges were subsequently recoverable by the purchaser there will be a significant SDLT implication with this being due on the VAT element of the sale value. This case highlights the risks of structuring transactions for a VAT advantage with superficial arrangements to create the desired outcome. If VAT is incorrectly charged and / or recovered, there is potential for assessments and penalties, therefore we would always recommend seeking professional advice regarding the transfer of a going concern particularly as this so often involves material values.

2. Input VAT: Business expense or private use

This appeal concerned Maddison and Ben Firth (trading as Church Farm) (CF) and a VAT return amended by HMRC to disallow input VAT totalling £28,374.14 on the basis that some of the items claimed were not allowable business expenses including two vehicles, a personalised number plate and clothing.

CF argued that the two vehicles (Audi Q8 and an Audi TT) were for business purposes and that as such HMRC were incorrect to disallow the input VAT on their purchase. HMRC argued they were correct to disallow the input tax on the grounds that, even if the vehicles were not used for private purposes, they were available for private use. This was evidenced by the fact that the insurance of the vehicles included SDP use. Perhaps the more salient point would have been that the cars were stated to be for use for private hire and registered with the council as such but that the insurance certificates stipulated that they were not covered for commercial travelling including the carriage of passengers for hire or reward. Perhaps it was also unhelpful that the although the Audi TT had backseats the Tribunal noted “the likely impracticability of using what was described as, in practical terms, a two-seat car for this purpose”.

The Tribunal considered the evidence and confirmed that a car is used exclusively for business purposes if it is used only for business journeys and is not available for any private use. The Tribunal was not satisfied that the vehicles were not available for private use, as at the time of purchase the insurance included SDP use and a locked compound (to ensure only business use) was only considered later after the purchase of cars, therefore the Tribunal upheld HMRC’s decision, input VAT on the two vehicles was correctly disallowed.

The case also considered whether the purchase of a private number plate was recoverable. One of the partners of the business was named Mr Ben Firth and CF acquired a number plate (BS70 BEN) for a motor bike used in the business. CF argued this was a form of advertising for the business as it reflects a name of a partner, and therefore an allowable expense of CF. HMRC argued that the number plate has not been demonstrated as a legitimate business expense, stating the business is Church Farm, not Ben Firth, therefore the number plate cannot be a business advertisement. The Tribunal agreed with HMRC, stating that the number plate did not refer to the name/business of CF therefore it is not a business expense, input VAT was blocked.

Lastly, input VAT incurred on clothing purchased for Pilates. Maddison Firth, a partner of the business, was undertaking a teacher training course for Pilates and the clothing was purchased to support this and should qualify under the “perks of an accepted business expense”. HMRC relied on their guidance which confirms that normally a person is responsible for the cost of their own clothing at work, and also it is not a unfirm or protective clothing which would be allowable. HRMC contended they were correct to reject the input VAT claim but had accepted a 50-50 apportionment and considered this reasonable.

The Tribunal accepted that the clothes would aid the comfort of performing the tasks, the relevant factors failed to prove that the cost was sufficiently for the purposes of a business. The appeal was dismissed.

Constable Comment: This case demonstrates that input VAT is only recoverable if the recipient intends to use the goods or services for the purpose of their business. The general rule regarding cars is that input VAT is blocked if there is the potential for private use (although there is some relaxation of this rule for certain bona fide uses such as a taxi, driving instruction etc). CF seemed to argue that no private use took place, however as confirmed by the Tribunal, this is not sufficient. The vehicles must not be available for private use, in order to meet the business use tests. The CF case illustrates that HMRC inspectors will apply a critical eye to VAT claims and that acceptance of doubtful claims is unlikely. There is a significant risk of careless or deliberate behaviour penalties where an overly optimistic view of business use is applied. The rules for cars and input VAT are quite specific but for other items of input VAT an apportionment between business and private use may be possible and advice may be helpful in arriving at such a split.

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

Prepare for upcoming changes to VAT penalties and VAT interest charges
This is newly published guidance provides more information about the new VAT penalties and interest charges that will apply to everyone who submits a VAT return from 1 January 2023.

Fulfilment House Due Diligence Scheme registered businesses list
This guidance allows traders from outside the EU to check if the business storing their goods in the UK is registered with the Fulfilment House Due Diligence scheme. The list has been updated with 31 additions, 22 removals and 1 amendment.

How to value goods for Import VAT
This guidance advises businesses how to value their goods to help when working out the VAT due when importing goods into the UK. Additional information has been added about moving goods into Northern Ireland.

Investment Gold Coins
The UK list of coins recognised as investment gold coins for exemption has been updated.

Revenue and Customs brief 8 (2022): Single DIY Claim
This brief clarifies HMRC’s position in relation to making a claim under the DIY Housebuilders scheme. This case specifically considered the implication of multiple DIY claims submitted for the same building. We have covered this brief in more detail which you can read here.

CONSTABLE VAT NEWS

Constable VAT has recently released a new blog regarding Land Promotions.

Our new Land Promotion blog considers Land Promotion Agreements and key VAT considerations including whether it is beneficial to opt to tax, is permission to opt to tax required, understanding legal and beneficial ownership and more. The full blog can be read here.

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.

CJEU

1. Rate of VAT applicable to lift repair and maintenance services

DSR is a Portuguese company which produces lifts, hoists and conveyor belts and provides lift repair and maintenance services. In 2007, DSR applied a reduced rate of VAT to the lift refitting and repair services supplied by it, while invoicing the materials incorporated in connection with those supplies at the standard rate of VAT. Following a tax inspection in 2011, the tax authority found that DSR had wrongly applied the reduced rate of VAT to those services.

In a judgement on 16 October 2017, the administrative and tax court held that lifts are an integral part of the buildings in which they are installed and therefore, the application of the reduced rate of VAT isn’t precluded in respect of the repair and maintenance services for such lifts, provided that those services are carried out under a works contract and that rate is only applied to the labour.

The tax authority brought an appeal against the judgement of 16 October 2017 before the supreme administrative court. In support of its appeal, the tax authority submits that the reduced rate of VAT is to be applied to certain works contracts relating to immovable property for residential use, excluding materials which constitute a significant part of the service supplied. The referring court is asking the CJEU whether ‘renovation and repairing of private dwellings’ covers repair and renovation services for lifts in residential buildings.

The reduced rate of VAT is authorised to apply to services relating to the ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the services supplied’. These words must be interpreted uniformly and in accordance with their meaning in everyday language. The words ‘repairing’ and ‘renovation’ refer to the restoration of a damaged object and the refurbishment of an object. Such services are characterised by their occasional nature so that maintenance services supplied on a regular and continuous basis cannot fall within the reduced rate provisions. Accordingly, it must be concluded that the provision covers repair and renovation services for lifts in residential buildings, excluding maintenance services for such lifts.

Constable Comment: This case highlights the complexity of the VAT law regarding land and buildings and installed goods. Certain services within the construction industry can be either zero rated or reduced rated, however these are always subject to strict conditions. If a business applies the wrong VAT treatment it could potentially incur VAT assessments and penalties. Therefore, where there is significant amounts of VAT involved in a land and building related service, we would always recommend seeking professional advice. Constable VAT has relevant experience and have VAT land and property specialists who would be happy to assist.

Supreme Court 

2. Right to input tax recovery and exempt postage services

The case concerns the right of Zipvit to deduct input VAT due or paid by it on supplies of services to it by Royal Mail, so far as those supplies are used for Zipvit’s taxable supplies of goods or services to a consumer.

The general terms and conditions governing the supply contract between the supplier and Zipvit provided that it should pay the commercial price for the supply, plus such amount of VAT as was chargeable in respect of the supply. The supply should have been treated as standard rated for VAT purposes. Zipvit should have been charged VAT assessed at the relevant percentage of the commercial price for the supply.

However, at the time of the supply, Zipvit and Royal Mail understood that the supply was exempt from VAT. Zipvit was only charged, and it only paid, a sum equal to the commercial price for the supply. The invoices relating to the supplies specified the supplies as VAT exempt and indicated that no VAT was due in respect of them. However, this was incorrect. HMRC also misunderstood the position in believing that the supplies were VAT exempt. HMRC also contributed to that misunderstanding by issuing guidance containing statements to the effect that the supplies in question were VAT exempt.

The effect of the mistake is that Zipvit has only paid the amounts equivalent to the commercial price for each supply, and there is now no prospect that it can be made to pay the additional amount equivalent to the VAT element of the total price which should have been charged and paid in respect of the supplies. Similarly, Royal Mail has not accounted for or paid any VAT due in respect of the supplies made, and there is no prospect that it can now be made to account for the VAT it should have charged to HMRC.

Zipvit maintains that it is entitled to make a claim to deduct as input VAT the VAT due in respect of the supplies in question, or a VAT element deemed by law to be included in the price charged by Royal Mail for each supply. This is Zipvit’s position even though no VAT was paid by it to Royal Mail.

HMRC contend that in the circumstances of this case there is no VAT due or paid in respect of the supplies so no claim can be made to recover input tax in relation to them.  The invoices relating to the supplies did not show that VAT was due, and since Zipvit at no stage held invoices which showed that VAT was due and its amount, it is not entitled to recover input tax in relation to the supplies.

Zipvit’s position is that VAT must have been treated as having been paid as part of the overall price, and that as all relevant facts are now known, and it can prove by other means the amount of VAT due or paid on each supply. The sums claimed by Zipvit as input VAT on the supplies received from Royal Mail amount to £415,746 plus interest.

The Supreme Court dismissed Zipvit’s appeal. Technical arguments involved issues around invoicing, whether VAT was due or paid, and HMRC’s discretion. The Supreme Court agreed with the Tribunals and Court of Appeal that any payment of VAT to Zipvit would have been an ‘unmerited windfall’ and concluded that ‘there was no sound basis on which it would have been appropriate to use public monies to make any such payment’.

Constable Comment: This case has been ongoing for 13 years following Zipvit’s initial request in 2009 for a refund of input VAT on supplies that were incorrectly treated as VAT exempt, and for which no VAT invoice was held, or VAT charged by Royal Mail. Zipvit argued that the prices it paid for supplies received must be treated as having included a VAT element because these are standard rated supplies. The Courts disagreed with this technical assessment and this case demonstrates how interesting and complex VAT can be.

The decision notes that this is a test case and whilst Zipvit’s claim is not insignificant, £415,746 plus interest, there are several cases stood behind this lead decision with estimated total claims of between £500million and £1 billion which could had been a costly outcome if Zipvit had been successful, and those other claims succeeded.   

FTT

3. Time limits and Assessments

50 Five (UK) Limited appealed to the FTT in respect of assessments raised by HMRC against the company prior to the date on which it was purchased by the present owners. The present owners were not made aware of the assessment at the time of purchase as it had not been disclosed to them as part of the due diligence undertaken at the time.

50 Five (UK) Limited’s business is that of supply and installation of heating and hot water systems pursuant to which customers are supplied with fully installed systems. The appellant does not ask its customers to separately source the parts for such systems and then simply fit them.

50 Five (UK) Limited accepted that they are fitters/installers of heating and water systems who supply the parts as a composite element of what they do, HMRC were correct to assess them to VAT and the VAT assessment will become payable with interest.

The tribunal decided that there was no reasonable prospect of the appeal succeeding and that accordingly the appeal should be struck out.

Constable Comment: This was an unfortunate case involving the purchase of a business which received a VAT assessment. The new owners were not aware of the VAT assessment because this was not disclosed to them as part of the due diligence process. Whilst the Tribunal had sympathy that the VAT assessment was a surprise to the new owners, the FTT can be of no assistance in resolving this dispute, it can only make a ruling based on the correct VAT treatment. This case certainly shows the importance of performing a high-level due diligence exercise before purchasing a business, including VAT, to avoid any potential hidden VAT liabilities, the business has. Constable VAT has significant experience of carrying out due diligence for business sales and verifying the VAT accounting history and liabilities of the business. Constable VAT recently issued a blog on VAT due diligence which can be viewed 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

Certificate of status of taxable person
A UK business registered for VAT that is claiming a VAT refund in another country can ask HMRC for a certificate of status to confirm they are trading in the UK. From 1 May 2022, HMRC has changed the way it issues a certificate of status of taxable person to UK businesses and the above guidance has been updated to include the new process for obtaining a certificate.

Apply for the Fulfilment House Due Diligence Scheme
The guidance above helps sellers established outside the UK find out if they need to register to store goods in the UK. HMRC has updated this guidance for new owners of existing approved businesses.

Motoring expenses (VAT Notice 700/64)
HMRC has recently updated the above guidance to include changes that came into effect from 1 April 2022 regarding early terminations of leases and the 50% block.

VAT road fuel scale charges from 1 May 2022 to 30 April 2023
The VAT road fuel scale charges have been amended with effect from 1 May 2022. Businesses must use the new scales from the start of the next prescribed accounting period beginning on or after 1 May 2022.

Register for the VAT Agricultural Flat Rate Scheme
HMRC has updated the above guidance to confirm that businesses already VAT registered will not need to submit a VAT1 but must still complete a VAT98 to register for the Agricultural Flat Rate Scheme.

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.

CJEU

1. Multi-Purpose Vouchers

This case concerned DSAB Destination Stockholm AB (DSAB) and the supply of a ‘city card’ to tourists visiting Stockholm, Sweden. The card gives the cardholder the right to be admitted to around 60 attractions, as well as passenger transport services, for a limited period of time and up to a certain value. The card can be used as a means of payment for the attractions and services, some of which are subject to VAT at 6% to 25% whilst some are VAT exempt.

The Swedish tax authorities took the view that the card issued is not a “multi-purpose voucher” (MPV) under the EU law. It argued that the definition of voucher states it must have a certain nominal value or relate to certain specified supplies of goods or services.

DSAB on the other hand argued that the card was a voucher, arguing that the suppliers were obliged to accept the card as a means of payment and that the conditions applicable to the cardholders state which services may be paid for with the card. Additionally, the card qualified as an MPV as it can be used to obtain supplies chargeable to differing VAT rates. As a result of the dispute, the question referred to the CJEU was:

• Must Article 30(a) of the VAT Directive, be interpreted as meaning that a card which gives the cardholder the right to receive various services at a given place for a limited period of time and up to a certain value constitutes a voucher and, in such circumstances, constitutes a multi-purpose voucher?’

The CJEU first considered whether the card is a voucher. It stated that there are two conditions for a card to be a voucher. First, there should be an obligation to accept it as consideration and second, the goods or services to be supplied, or the identity of the supplier, is indicated on the card or terms and conditions relating to the card. The CJEU confirmed that the card issued by DSAB met both these conditions.

With regards to the question of whether the card is an MPV, the CJEU stated that any vouchers that are not single purpose vouchers, should be considered as multi-purpose vouchers. A single purpose voucher is one where the place of supply and VAT due on the goods and services is known at the time of issue. The card issued by DSAB allows access to various supplies of services which are subject to different rates of VAT or are VAT exempt, therefore it is impossible to predict in advance which supplies of services will be selected by the cardholder, on this basis the card should be considered a multipurpose voucher.

The CJEU concluded that Article 30a of the VAT Directive must be interpreted as meaning that an instrument which gives the bearer thereof the right to benefit from various services at a given place, for a limited period and up to a certain amount, may constitute a ‘voucher’ even if on account of the limited validity period of that instrument, an average consumer cannot take advantage of all the services offered. That instrument constitutes a ‘multi-purpose voucher’ since the VAT due on those services is not known at the time of issuance of that instrument.

Constable Comment:  This is the first time the CJEU has ruled on the new definitions of “voucher” and “multi-purpose voucher” for VAT purposes as described in the new voucher rules of the VAT Directive applicable from 1 January 2019. The CJEU confirmed the fact that there is a limited period of validity of the card is not relevant for its classification as a voucher. Additionally, it classifies as a MPV as the VAT payable on those services is not known at the time of issue of the card.

FTT

2. Insurance intermediary supplies – supply of Black Boxes?

This case concerned WTGIL Limited (“Ingenie”), an insurance intermediary which develops, markets, and sells telematics car insurance (known as black box insurance). Ingenie is not an insurer. As a condition of the insurance, a telematics device must be fitted to the policyholder’s car. Ingenie provides the telematics device and arranges for it to be fitted in the customers vehicles. The device captures information about how the car is being driven, Ingenie collects and analyses the data from the device and provides this data to the policyholder and insurer. The purpose of providing such data is to enable the policyholder to improve their driving and thus obtain cheaper car insurance.

In 2018 Ingenie made a claim for a refund of £2,084,149 input tax incurred in relation to the provision and fitting of the devices. This was on the basis that the provision of fitting of devices were taxable supplies, whether or not for consideration, and the input tax was attributable to such taxable supplies. HMRC rejected the claim on the grounds that the commission paid by the insurers to Ingenie was consideration for exempt supplies of insurance intermediary services and any input tax directly linked to the supply of the device was irrecoverable.

The first issue before the Tribunal was whether Ingenie makes supplies of the device and related services to the policyholders for consideration. Both the contractual arrangements and the economic and commercial reality of the transactions were considered, and the Tribunal held there is no supply of the devices or any services relating to the devices by Ingenie to the policyholder for VAT purposes.

The Tribunal considered that there was no supply of goods by Ingenie and noted that the Principal VAT Directive provides that a supply of goods for VAT purposes means the transfer of the right to dispose of tangible property as owner. The policy booklet confirmed that the policyholder does not obtain any right to dispose of the device at any point during the time of policy. Additionally, the device did not pass to the insurer.

The Tribunal stated that although there was no supply of goods that does not mean that there is no supply in relation to the device. Ingenie agreed to arrange for a device to be installed in the policyholder’s car and then to use it to collect the telematics data which Ingenie used to give feedback to the policyholder and to provide more detailed information to the insurer. Those activities may constitute supplies of services but only if made in return for consideration. However, the Tribunal noted that the contract between the insurer and the policyholder states that the policyholder will not be charged for their first device, or its fitting, provided they do not cancel their policy during the first period of insurance. The policy booklet also states that the policyholder is not liable for the cost of transmitting data to and from the device.

As the Tribunal considered that there was no supply of the devices or any services relating to the devices by Ingenie to the policyholder for VAT purposes, the second issue before the Tribunal was whether Ingenie made a deemed supply of goods when it provided the device to the policyholders. It considered a deemed supply only arises where the taxable person is entitled to a full or partial recovery of the input VAT incurred on the assets concerned and the deemed supply is necessary to ensure that the goods are not retained or consumed without bearing VAT. As Ingenie did not recover any input VAT in relation to the devices, there was no deemed supply of goods when title to a device passes to the policyholder after the insurance has lapsed or been cancelled. The Tribunal also considered that the devices were acquired and provided to the policyholder by Ingenie for the purposes of its own business in order to meet its obligations under the terms and conditions. It appeared to the Tribunal that rather than disposing of the device when the insurance ends, Ingenie merely abandons any claim to it because it no longer has any value or serves any purpose for Ingenie.

As Ingenie was not viewed as making supplies or deemed supplies to the policyholders the appeal was dismissed.

Constable Comment: This case considered whether a business had made taxable supplies or deemed supplies to the insurance policyholder to allow input VAT recovery. Had the court decided that a taxable supply or deemed supply had been made it would have been necessary to consider how the VAT chargeable on such a supply should be calculated. In this case, as Ingenie was not viewed as making supplies to the policyholder, the Tribunal did not need to address the submissions made by counsel on the value of any non-monetary consideration and whether it could be expressed in money terms.

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

Energy-saving materials and heating equipment (VAT Notice 708/6)
The above guidance sets out how to account for VAT for contractors or subcontractors when installing energy saving materials and grant funded heating equipment. It has recently been updated with information about legislative changes effective from 1 April 2022 to include guidance on when the zero, reduced and standard rates apply to the installation of energy saving materials in Great Britain and Northern Ireland.

Get your postponed import VAT statement
Information about how to access statements older than 6 months old has been temporarily removed due to a technical issue with older statements not being available automatically. An alternative method for accessing statements older than 6 months will be published soon.

RCB 7 2022 Repayment of VAT on imports of dental prostheses
The government announced at Autumn Budget 2021, that the import of dental prostheses would be exempt from VAT if the prostheses are imported on behalf of or by registered:

• dentists
• dental care professionals

Importers who fell within that description can now retrospectively reclaim overpaid VAT from 1 January 2021.

This brief explains how businesses can claim a repayment of any overpaid import VAT on imports made between 1 January 2021 and 27 October 2021

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.

CJEU

1. Place of supply of services and fixed establishment

The dispute in this case was between Berlin Chemie A. Menarini SRL (‘BC Romania’) and the Romanian tax authorities. BC Romania is a subsidiary of Berlin Chemie AG (‘BC Germany’) which was the sole shareholder. BC Romania had a contract to actively promote the products of BC Germany (its only customer) in Romania through marketing activities.  BC Romania made charges to BC Germany for its services and did not charge Romanian VAT as BC Germany had no Romanian fixed establishment and the services were treated as outside the scope of Romanian VAT.

The Romanian tax authorities took the view that BC Germany had a fixed establishment in Romania as a result of its ownership of BC Romania, which the taxpayer disputed.  If this were the case BC Romania would have to add Romanian VAT to its charges. The question referred to the CJEU was whether it is necessary for the human and technical resources employed by a company in that Member State, to belong to it, or is it sufficient for the company to have immediate and permanent access to such human and technical resources through another affiliated company which it controls.

The CJEU confirmed that the legal provisions do not provide any detail as to whether human and technical resources must belong to a company in order for a fixed establishment to arise. However, it highlighted that a fixed establishment required a sufficient degree of permanence and a suitable structure in terms of technical and human resources. The classification of a fixed establishment cannot depend solely on the legal status of the entity, meaning that merely owning a subsidiary does not create a fixed establishment.

The CJEU stated that it is assumed a company would use the technical and human resources at its disposal for its own needs. In the absence of contractual provisions allowing the German company to use the technical and human resources of the Romanian company as if they were owned by the German company, the Germany company does not have a fixed establishment in Romania.

The CJEU concluded that a company which has its registered office in one Member State does not have a fixed establishment in another Member State where it owns a subsidiary there that makes available to it human and technical resources under contracts by means of which that subsidiary provides, exclusively to it, marketing, regulatory, advertising and representation services that are capable of having a direct influence on the volume of its sales.

Constable Comment: This case considered whether a subsidiary of a company could create a fixed establishment for that company in another Member State. Had the court decided that it did this would have had implications for companies receiving cross border supplies from subsidiary companies and could have led to more businesses having fixed establishments in other EU locations.  This would impact on the place of supply of services and the VAT treatment. Where a business makes cross border supplies of goods or services, we would recommend seeking professional advice to ensure the correct place of supply rules are followed, including fixed establishment implications.

First Tier Tax Tribunal

2. Dishonest Input VAT deductions

This case concerned HMRC’s refusal of Grantham Ceilings and Interiors Ltd’s (GC’s) claim for recovery of input tax of £268,429 incurred on supplies received from an associated company, Grantham Holdings Limited (Holdings).  GC and Holdings had common directors. Holdings charged GC a management fee for the provision of services, which was subject to VAT. GC claimed the VAT charged as input VAT, but Holdings went into liquidation after less than a year and did not pay output VAT due to HMRC.

HMRC denied the input tax claim by GC on the grounds that either GC exercised the right to deduct for fraudulent or abusive ends, or the transactions were connected with fraudulent evasion of VAT and GC knew or should have known that this was the case.

GC appealed HMRC’s decision on the following grounds:

• Holdings was established in order to manage and implement a new payment bonus scheme, there was no intention to use the company for fraud or abusive ends,
• Where GC has not paid Holdings in full, bad debt relief provisions were applied and the liquidator of Holdings is pursuing GC for settlement of the outstanding amounts as a debtor,
• At the time of supplies made by Holdings to GC it was not known that, due to a serious problem with the contracts being undertaken by GC, substantial cash flow issues would occur. Therefore, GC could not have reasonable known that the commercial issues of one contract would cause the liquidation of Holdings. The facts did not involve fraud but unfortunate commercial pressures.

HMRC argued that the input tax claims were fraudulent and the companies’ common directors would have known that Holdings would not account for output VAT due on the management fees charged to GC.

The Tribunal reviewed the evidence presented to them and concluded that GC made the VAT reclaim knowing that Holdings would not account for the output VAT to HMRC, which was considered dishonest. The Tribunal recognised that GC was facing real commercial and financial pressures but despite advice to do so, it failed to take the open and honest course of contacting HMRC to explain the problems faces. The appeal was therefore dismissed and GC is not entitled to the input tax claimed.

Constable Comment: This case highlights the importance of VAT compliance. If a taxpayer knew or should have known they were involved with fraudulent transactions, HMRC can deny input tax claims and penalties may also arise.  We always recommend, as established in this case, that businesses take an open and honest approach in dealing with HMRC seeking professional advice and contacting HMRC to discuss any VAT issues in order to minimise the risk of VAT liabilities and penalties.

3. VAT on take-away food and drink

Mangio Ltd (Mangio) sells hot and cold food and drink both for take-away and for consumption at a small number of seats on its premises

HMRC raised a ‘best judgement’ assessment of £18,063 on the basis that it did not accept Mangio’s breakdown of sales between standard rated items, such as hot food, and zero rated items including cold take away foods. Mangio appealed arguing that the assessment was too high and it should be £8,096.

Take away businesses need to be able to distinguish between different items sold as they may attract different VAT liabilities. Mangio’s till system did not distinguish between customers eating in the shop (giving rise to standard rated supplies) and zero-rated sales such as cold take away food.  HMRC identified the following errors leading to the assessment:

• Eat in sales were not recorded and as a result cold food consumed on premises was incorrectly zero rated.
• Toasted sandwiches (which should have been standard rated as hot food) were recorded as cold food and were zero rated.
• All orders for delivery were zero rated despite the sales involving cold and hot food.
• Pasta meals with salad and bread were considered a single supply for VAT purposes and subject to standard rate VAT.

The Officer’s best judgment assessment was calculated by selecting five days, analysing the sales data and working out the standard rated sales, as a proportion of overall sales during that period. HMRC found that 82% of the sales were standard rated and the percentage was applied to the periods in dispute to calculate the VAT due.

Mangio argued that best judgement had not been used as the business had expanded substantially since the period considered and the calculation did not take into consideration factors such as weather conditions.

The Tribunal considered the assessment and upheld that it was made to best judgment and there was no suggestion of any wrongdoing by HMRC. The assessment was not arbitrary in nature, the test days considered were within the relevant periods and there was no evidence submitted from Mangio on the ratio of standard to zero rated sales applied.

The Tribunal also stated that whilst it was accepted that the business underwent considerable expansions during the relevant periods, Mangio’s analysis does not reveal a change in the ratio of standard to zero rated sales which could affect the assessment. Therefore, the appeal was dismissed.

Constable Comment: This case highlights the importance of correctly identifying the VAT liability of supplies where this is complex, such as in the case of supplies of food where VAT treatment may vary depending on whether the items are for take-away or are consumed on the premises. Errors can lead to VAT liabilities and potential penalties. If your business supplies food or catering services you should ensure that your accounting processes are robust and can support the VAT treatment of supplies made. Constable VAT are happy to provide assistance in both determining the VAT liability of supplies and advice on calculating the amount of VAT due.

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.