Monthly Archives: May 2017

VAT: Latest from the courts – are services by a CIC business?

By   May 19, 2017

This case considers the perpetual difficulty of deciding whether activities represent a business… or not.

In the First Tier Tribunal (FTT) case of Healthwatch Hampshire CIC (HH) here the issue was whether HH made taxable supplies by way of business to a Local Authority – Hampshire County Council (HCC)


Under certain prescribed new arrangements, local authorities, including HCC, were required to enter into contractual arrangements with a body corporate, which was required to be a social enterprise and a Community Interest Company (CIC) for the provision of various services.

These services comprised, inter alia:

  • Promoting, and supporting, the involvement of local people in the commissioning, provision and scrutiny of local care services
  • Information, signposting and advice
  • Advocacy services

HH is a company limited by guarantee but is not a charity. It is however non-profit making in its objectives, and any profits which do arise can only be spent for the benefit of the local community.  HH was formed by a consortium comprising; three organisations all of which are charities. These charities effectively carried out the work via a sub-contract arrangement and charged HH with the addition of VAT.  The issue is the VAT treatment of HH’s charge to HCC. Was this a business activity on which VAT is charged? Or, as HMRC contended, was the money paid to HH was outside the scope of VAT because it represented something which was not consideration for taxable supplies and thus non-business.

This was important as if the services provided by the CIC are deemed to be non-business, the VAT charged to HH by the three consortium members would represent an absolute VAT cost as it could not be VAT registered and therefore not able to recover the input tax.

Technical Note

Because of the special VAT rules which apply to local authorities, input tax incurred by them may be recovered if it relates to their non-business activities (their statutory activities). This is via VAT Act 1994, s33 and this legislation turns “normal” VAT rules on their head. In this particular case, if HH charged HCC VAT, HCC would be in a position to recover it meaning that VAT would be neutral for all parties.


The matter of whether HH’s activities amounted to a business was considered with significant references to the Longridge On The Thames.  Case commentary here

As a starting point, the judge commented on previous CJEU cases that it “…would seem to be a clear demonstration that simply because an activity is normally carried on by the state does not automatically mean that, per se, it cannot be economic activity”.  It was also decided that we have come to the conclusion that HH is not a body governed by public law.”  So this strand of HMRC’s argument did not lead anywhere.

The court decided in the taxpayer’s favour; which appears to be common sense all round.  The supplies were by way of business despite the arrangements having features which may not necessarily be found in a more commercial environment (including the fact that LAs were legally required to outsource certain of its functions) . Ultimately, consideration was flowing in both directions; HCC paid for supplies which it required and those were supplied by a third party such that VAT was properly chargeable.  The fact that HCC met its statutory obligations in structuring transactions in this way did not preclude them being an economic activity.


This case (and Longbridge) demonstrates that where charities, LAs, CICs, NFP entities and similar bodies are concerned, it is crucial to review all agreements from a VAT perspective. It is insufficient to assume the correct VAT treatment is how it is desired and slight differences in arrangements can, and do, produce different VAT outcomes. After Longbridge HMRC are looking more closely at similar arrangements (not limited to LAs) and we expect more of these types of cases to be heard in the future.

For more on the EC aspect of business/non-business please see here

VAT: Latest from the courts – Brockenhurst College

By   May 19, 2017

The Court of Justice of the European Union (CJEU) has released its decision in Brockenhurst College here

Unusually, it has gone against the Advocate General (AG) Kokott’s opinion (here) and concurs with previous decisions reached by the UK courts. This is good news for the taxpayer and other providers of educational services. The decision has been referred back to the Court of Appeal (CoA) for it to consider points such as the distortion of competition and the fulfilment of a separate function, however, it is likely that this will not affect the decision by the CJEU and HMRC’s appeal will be dismissed.


The case considered two types of supply made by Brockenhurst College:

  • The supplies made from its restaurant, used for training chefs, restaurant managers and hospitality students. The claim was made on the basis that these were exempt supplies of education and not standard rated supplies of catering
  • Tickets for concerts and other live performances put on by students as part of their educational courses. These were similarly claimed to be exempt.

Students were enrolled in performing arts and catering and hospitality courses.  As part of their course of study they were required to run a restaurant and stage live performances. Persons not enrolled on the relevant courses would pay for and attend these events. The services were usually supplied to a limited public including; parents, siblings, friends etc, and were supplied at a reduced cost as part of the practical element of the students’ education. The appellant argued that the experience was invaluable to their studies and should be regarded as ‘closely related’ to the principal supply of education.  HMRC considered that the services in question were supplied to third parties in return for payment. Consequently, the services, whilst of benefit and practical experience to the students were separate VATable supplies made to third parties and the supplies cannot, therefore, be closely related to the supply of education to the student.

The First Tier Tribunal (FTT) concluded that the supplies in question were exempt as being closely linked to education because:

  • the College was an eligible body and so its principal supplies were exempt supplies of education
  • the supplies were integral and essential to those principal exempt supplies
  • the supplies were made at less than their cost
  • the supplies were not advertised to the general public. Instead, there was a database of local groups and individuals who might wish to attend the restaurant or performances
  • the supplies were not intended to create an additional source of income for the College

HMRC disagreed with the conclusion on the basis that the supplies were outside the education exemption because the students were not the beneficiaries of the supplies in question, but only benefitted from making them. HMRC appealed to the Upper Tribunal (UT).

The UT rejected HMRC’s argument and agreed with the FTT. It held that the supplies were closely related to the exempt supplies of education because they enabled the students to enjoy better education. The requirement in the domestic law for the supplies to be for the direct use of the student was met because they were of direct benefit to him.

HMRC subsequently appealed to the CoA which referred it to the CJEU.

The AG’s opinion was that closely related transactions are to be regarded as independent supplies to the principal supply, but do not include the supply of restaurant or training services supplied to third parties who are not themselves receiving the principal supply of training. The third parties pay for their own consumption (of either the catering or performance) and do not pay for the provision of education. It is very rare that the CJEU makes a decision that goes against the AG’s opinion.

CJEU Decision

The CJEU ruled that activities consisting of students of a higher education establishment supplying, for consideration and as part of their education, restaurant and entertainment services to third parties, may be regarded as supplies closely related to the principal supply of education and accordingly be exempt from VAT – provided that those services are essential to the students’ education and that their basic purpose is not to obtain additional income for that establishment by carrying out transactions which are in direct competition with those of commercial enterprises liable for VAT, which it is for the national court to determine.


We understand that there are a number of cases stood behind Brockenhurst.  Any other colleges, FE, universities or other eligible bodies carrying out similar activities to Brockenhurst need to consider their tax position. It is possible that retrospective claims may be made, depending on specific circumstances. Treating such supplies as exempt may also impact on a body’s partial exemption position and could create business/non-business implications. This may also impact on activities like hairdressing, motor maintenance and beauty treatments which colleges provide on a similar basis to the activities in this instant case.

We are happy to discuss the implications of this case with you.


VAT: Hardship applications

By   May 15, 2017

The recent case of Elbrook (Cash & Carry) Ltd here brings into focus the concept of “hardship”.  In this case Elbrook successfully appealed to the Upper Tribunal (UT) against HMRC decision that the appellant should seek additional finance to pay the VAT said to be due rather than allow the case to be heard without that payment on the grounds of hardship.

So what is the process and what is “hardship”?


If a taxpayer wishes to appeal to the Tribunal against a decision made by HMRC he must pay any disputed VAT before the case can be heard. The reason for this is understandable, without this rule taxpayers could make an appeal merely to delay the payment of tax and it is a difficult test to satisfy. However, if the applicant is able to demonstrate that payment of the VAT would cause financial hardship the rule may be waived  by HMRC. This decision is an appealable matter. (NB: There is no requirement to pay interest or penalties before appealing but interest will continue to accumulate on an assessment).  If a business believes that paying the amount it wishes to appeal against would cause it hardship it can ask HMRC not to collect the payment due until the appeal has been considered by the tribunal. It will need to:

  • write to the officer who made the original decision
  • explain how paying this amount before the appeal hearing would cause the business hardship

Depending on the size of the business, the explanation should include detailed evidence of its financial position and the impact of paying the disputed tax. I have seen many applications fail as a result of incomplete evidence, or general statements that are not evidenced by documentation.  It pays to put a comprehensive application together and have this reviewed by an adviser before it is submitted.

HMRC will write and tell you whether or not they agree with delaying the payment. If they do not, the business can go to Tribunal

The law

The rules where applicable are set out in the VAT Act 1994, section 84(3)

 “Where the appeal is against a decision… it shall not be entertained unless—

 “(a) the amount which the Commissioners have determined to be payable as VAT has been paid or deposited; or

 (b) on being satisfied that the appellant would otherwise suffer hardship the Commissioners agree or the tribunal decides that it should be entertained notwithstanding that that amount has not been so paid or deposited.”

Section 84(3) is intended to strike a balance between, on the one hand, the desire to prevent abuse of the appeal mechanism by employing it to delay payment of the disputed tax, and on the other to provide relief from the stricture of an appellant having to pay or deposit the disputed sum as the price for entering the appeal process, where to do so would cause hardship.


Unhelpfully, this term is not defined in the legislation, nor in HMRC guidance. Consequently, we must look at case law.  The following comments in the “original” Elbrook case – (2016) UKFTT 0191 (citing various previous cases, mainly “ToTel 1 and 2”) assist in understanding a hardship appeal:

  • Decisions on hardship should not stifle meritorious appeals
  • The test is one of capacity to pay without financial hardship, not just capacity to pay
  • The time at which the question is to be asked is the time of the hearing. This may be qualified if the appellant has put themselves in a current position of hardship deliberately (eg; by extraction of funds otherwise readily available from a company by way of dividend), or if there is significant delay on the part of the appellant
  • The question should be capable of decision promptly from readily available material
  • The enquiry should be directed to the ability of an appellant to pay from resources which are immediately or readily available (a business is not expected to seek funding outside its normal sources, nor sell assets)
  • The test is all or nothing. The ability to pay part of the VAT without hardship does not matter
  • If the Tribunal has fixed a cut off point for the admission of material, it is not an error of law for the Tribunal to ignore any later furnished evidence
  • The absence of contemporaneous accounting information is a justification for the Tribunal to conclude that it can place little if any weight on the appellant’s assertion that it is unable to afford to pay

The onus of proof in such cases is on the taxpayer to demonstrate hardship and without persuasive evidence such applications are unlikely to succeed.


If your business, or your client’s business is the subject of a disputed decision, it should review its financial position and consider appealing against the decision even if paying the disputed amount would cause hardship.  A business should not be put off appealing just because it would suffer hardship. We are able to assist in any review required.

VAT – Input tax recovery by holding companies

By   May 10, 2017

HMRC has published updated guidance on the recovery of input tax incurred by holding companies.

The guidance may be found here

It is important for holding companies and/or their advisers to read and understand the changes to the VAT recovery rules as costs are often significant. The changes are a result of various UK and CJEU case law which, in general, considered; the definition of economic activity, the direct and immediate link to taxable supplies made by a holding company, the contractual and payment arrangements and the use of the input tax.

Key Points

The guidance considers:

  • When a shareholding is used as part of an economic activity
  • Is the Holding Company the recipient of the supply?
  • Is the Holding Company undertaking economic activity for VAT purposes?
  • Shareholding acquired as a direct, continuous and necessary extension
  • Intention to make taxable supplies
  • Contingent consideration for management services
  • The effect of a holding company joining a VAT Group
  • Stewardship costs
  • Mixed economic and non-economic activities


In order to recover the relevant input tax, it must be incurred by a taxable person in the course of an economic activity and have a direct and immediate link to taxable supplies made by that person. This has been a long settled definition and the guidance seeks to apply these tests to holding companies.  This means that, in order to receive a supply, a holding company must;

  • Contract for it
  • Use it
  • Be invoiced for it
  • Pay for it


The publication considers previously disputed situations such as:

  • Services provided on contingent terms are not an economic activity because the necessary reciprocity between the obligations of the holding company and of the subsidiary is absent
  • How input tax incurred by holding companies which make taxable supplies to some subsidiaries and not to others and those that make taxable supplies and exempt loans should be dealt with
  • If a shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company the input tax incurred on acquisition costs may be deducted even if management charges are not made
  • A holding company joining a VAT group cannot change a non-economic activity into an economic one or create an automatic link between holding company costs and the taxable outputs of other group members (For VAT to be deductible, the holding company must provide management services to the companies acquired in the VAT group, or earn interest from loans granted to them, and these must support taxable supplies made by the VAT group)
  • If a member of a VAT group incurs costs for non-economic (“business”) activity, the supplies are treated as being used by the representative member for non-economic purposes
  • Stewardship costs (group audit, legal, brand defence, bid defence etc) are costs for the purposes of the VAT group as a whole rather than for the purposes of the holding company activities


The previous input tax position of holding companies should be reviewed in light of the above guidance and adjustments made as necessary.  In some cases, the guidance may provide additional opportunities to reclaim input tax which was previously thought to be barred, and conversely, it is possible that VAT claimed as a result of the understanding of the position at the time may need to be repaid.

We can assist in reviewing the input tax position of holding companies and advising on structures for future intended acquisitions.  The four year cap applies to such adjustments of input tax, so the clock is ticking for past transactions.


Image: company stamps

VAT Inspections …and how to survive them

By   May 5, 2017

VAT Inspections

The first point to make is that inspections are usually quite standard and routine and generally there is nothing to worry about.  They are hardly enjoyable occasions, but with planning they can be made to go as smoothly as possible. As an inspector in my previous life, I am in a good position to look at the process from “both sides”.  If you are concerned that the inspection is not routine (for any reason) please contact us immediately.


Typically, the initial meeting will begin with an interview with the business owner (and/or adviser) to go through the basic facts.  The inspector will seek to understand the business and how it operates and will usually assess the answers with specific tests (further tests will be applied to the records).  After the interview the inspector(s) will examine the records and will usually have further queries on these. More often than not they will carry out; bank reconciliations, cash reconciliations, mark-up exercises, and often “references” which are the testing of transactions using information obtained from suppliers and customers.  There are many other exercises that may be carried out depending on the type of business.  Larger businesses have more regular inspections where one part of the business is looked at each meeting.  The largest businesses have more or less perpetual inspections (as one would expect).  The length of the inspection usually depends on:

  • Size of the business
  • Complexity of the business
  • Type of business (HMRC often target; cash businesses, the construction industry, property investment, partially exempt businesses, charities and NFP entities, cross-border transactions and financial services providers amongst others)
  • Compliance history
  • Associated/past businesses
  • Intelligence received
  • Errors found
  • Credibility of the business owner and records

The above measurements will also dictate how often a business is inspected.

More details on certain inspections/investigations here

The initial inspection may be followed by subsequent meetings if required, although our aim is to conclude matters at the time of the first meeting.

The inspection – how to prepare 

  • Ensure that both the person who completes the VAT returns and the person who signs the VAT returns will be available for all of the day(s) selected
  • Arrange with your adviser, to be available to you and the inspector on the days of the inspection
  • Thoroughly review your VAT declarations and have ready, if relevant, any disclosures or other declarations you consider you need to make to HMRC at the start of the inspection (this should avoid penalties)
  • Have available all VAT returns and working papers for the last four years or the period since you were registered for VAT including:
    • Annual accounts
    • The VAT account and all related working papers
    • All books and accounts, cashbook, petty cashbook, sales and purchases day books
    • Sales and purchase invoices
    • All supporting documentation, eg; contracts, correspondence, etc.
    • Bank statements
    • VAT certificate and certificate of registration
    • Any other documentation relating to “taxable supplies”
  • Have available the full VAT correspondence files ensuring that they are fully up-to-date
  • Ensure you have full information on any; one-off, unusual or particularly high value transactions

 The inspection – during the visit 

  • Ask the inspector(s) to identify themselves by name on arrival (they carry identity cards)
  • Be polite, friendly and hospitable as far as possible
  • Make a desk or space available for them to work near to you – in this way you can oversee/overlook what they do
  • Only allow access to the files that form part of your “VAT Records”
  • Enable the VAT inspector, if they ask, to inspect your business premises (and have someone accompany them)
  • Be cautious with your answers to seemingly “innocent” questions and comments. If in doubt ask for time to check, or that the question be put in writing (never guess or provide an answer which you think HMRC want)
  • If something inconsistent is found (or suggested) ask for full details and take note of all of the documentation to which the query relates – this will enable you to provide necessary information to your adviser

The inspection – at the end of the visit

The inspector should:

  • Explain the main work they have done. For example which VAT accounting periods they reviewed
  • Explain any areas of concern they have, discuss them and seek to agree any future action that needs to be taken; and
  • Illustrate as fully as possible the size and reason for any adjustment to the VAT payable, and describe how the adjustment will be made

You should:

  • Obtain a summary of the inspection from HMRC (not always an easy task)
  • Ask the inspector to put all of HMRC’s concerns about your business to you in writing
  • Confirm with the inspector all time limits for providing additional information to HMRC

After the inspection

HMRC will write to you confirming:

  • Any issues identified
  • Further information required
  • Improvements required to record keeping
  • Any corrections required
  • Whether VAT has been over or under paid
  • Any penalties and interest which will be levied
  • Deadlines for payment.

On a final point: Never simply assume that the inspector is correct in his/her decision.  It always pays to seek advice and challenge the decision where possible.  Even if it is clear that an error has been made, mitigation may be possible.

We can provide a pre-inspection review as well as attending inspections if required.  It is quite often the case that many HMRC enquiries may be nipped in the bud at the time of the inspection rather than becoming long drawn out sagas. We can also act as negotiator with HMRC and handle disputes on your behalf.

VAT: Global Accounting simplification

By   May 2, 2017

VAT: Second Hand Scheme  – Global Accounting simplification


The problem with the VAT Second-Hand Goods Scheme is that details of each individual item purchased, and then later sold, has to be recorded. This requirement can lead to a lot of paperwork and an awful lot of administration which, obviously, many businesses are not too keen to comply with.

Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme (Margin Scheme).

It differs from the standard Margin Scheme because rather than accounting for the margin achieved on the sale of individual items VAT is calculated on the margin achieved between the total purchases and total sales in a particular accounting period without the requirement to establish the mark up on each individual item.  It is beneficial if a business buys and sells bulk volume, low value eligible goods, and is unable to maintain the detailed records required of businesses who use the standard Margin Scheme

There two significant differences in respect of Global Accounting compared to the standard Margin Scheme. The first difference is that losses on an item are automatically offset against profits on items. Thus losses and profits are offset together in the period. In the standard Margin Scheme no VAT is due if a loss is made on an item, but that loss cannot be offset against any other profit.  There is also a timing advantage with Global Accounting because all purchases made in the period are included, even if those goods are not actually sold in the same period.

Goods which may be included in Global Accounting

Global Accounting can be used for all items which are eligible under the standard Margin Scheme.  However, the following goods cannot be included in Global Accounting:

  • individual items costing more than £500 (although these can be accounted for via the standard Margin Scheme)
  • aircraft, boats and outboard motors,
  • caravans and motor caravans,
  • horses and ponies, and
  • motor vehicles, including motorcycles; except those broken up for scrap.

Starting to use the scheme

When a business starts using Global Accounting, it may find that it already has eligible stock on hand.  It may include the value of this stock when it calculates the total purchases at the end of the first period.  If a business does not take its stock on hand into account, it will have to pay VAT on the full price, rather than on the margin achieved, when it is sold.

Note: any goods bought on an invoice which shows a separate VAT figure are not eligible for resale under the scheme.

The calculation

VAT is calculated at the end of each tax period. Because you can take account of opening stock in your scheme calculations, you may find that you produce a negative margin at the end of several periods. In other words, your total purchases may exceed your total sales. In such cases, no VAT is due. But you must carry the negative margin forward to the next period as in the following example:

Period One

  1. a)      Total purchase value of stock on hand 10,000
  2. b)      Total purchases 2,000
  3. c)      Total sales 8,000

Margin = c – (a+b) = (4,000)

Because this is a negative margin there is no VAT to pay.  However, negative margin must be carried forward into the next period as follows:

Period Two

  1. a)      Negative margin from previous period 4,000
  2. b)      Total purchases 1,000
  3. c)      Total sales 7,000
  4. d)      Margin = c – (a + b), sales minus (purchases plus negative margin), £7,000 – (£1,000 + £4,000) 2,000
  5. e)      VAT due = margin (£2,000) × VAT fraction (1/6) 333.33

There is no negative margin to carry forward this time. Therefore, in the third period, the margin is calculated solely by reference to sales less purchases.

The negative margin may only be offset against the next Global Accounting margin. It cannot be offset against any other figure or record.

Global Accounting Records and Accounts

A business does not need to keep all the detailed records which are required under the normal Margin Scheme – for instance, you do not have to maintain a detailed stock book.

Global Accounting records do not have to be kept in any set way but they must be complete, up to date and clearly distinguishable from any other records.  A business must keep records of purchases and sales as set out below, together with the workings used to calculate the VAT due.

If HMRC cannot check the margins declared from the records, VAT will be due on the full selling price of the goods sold, even if they were otherwise eligible for the scheme.

Buying goods under Global Accounting

When a business buys goods which it intends to sell under Global Accounting it must:

  • check that the goods are eligible for Global Accounting
  • obtain a purchase invoice. If a business buys from a private individual or an unregistered entity, the purchaser should make out the invoice at the time the goods are purchased.  If purchased from another VAT-registered dealer, the dealer must make out the invoice at the time of sale, and
  • enter the purchase details of the goods in your Global Accounting purchase records.  The purchase price must be the price on the invoice which has been agreed between you and the seller.

You cannot use the scheme if VAT is shown separately on the invoice.

if you are buying from a private individual or an unregistered business, you must make out the purchase invoice yourself.

When selling goods under Global Accounting

If the purchase conditions above apply, Global Accounting may be used when the goods are sold by:

  • recording the sale in the usual way
  • issuing a sales invoice for sales to other VAT-registered dealers and keeping a copy of the invoice, and
  • transferring totals of copy invoices to the Global Accounting sales record or summary
  • you must be able to distinguish at the point of sale between sales made under Global Accounting and other types of transaction

Leaving the scheme

If a business stops using Global Accounting for any reason, it must make a closing adjustment to take account of purchases for which it has taken credit, but which have not been sold (closing stock on hand). The adjustment required does not apply if the total VAT due on stock on hand is £1,000 or less. In the final period for which the business uses the scheme, it must add the purchase value of its closing stock to the sales figure for that period.  In this way VAT will be paid (at cost price) on the stock for which the business previously had credit under the scheme.

Items sold outside the scheme

If goods are sold which had been included in a business’ Global Accounting purchase (for example, they are exported), a business must adjust its records accordingly.  This is done by subtracting the purchase value of the goods sold outside the scheme from the total purchases at the end of the period.

Stolen or destroyed goods

If a business loses any goods through breakage, theft or destruction, it must subtract their purchase price from your Global Accounting purchase record.

Repairs and restoration costs

A business may reclaim the VAT it is charged on any business overheads, repairs, restoration costs, etc. But it must not add any of these costs to the purchase price of the goods sold under the scheme.

For further advice on any global accounting, used goods schemes, or any other special VAT schemes please contact me.