Category Archives: Latest from the Courts

VAT: Business or non-business? The 3D Crowd CIC case

By   4 July 2023

Latest from the courts

Business or non-business?

In the First-Tier Tribunal (FTT) case of 3D Crowd CIC (3D) the issue was whether a donation of goods, with a subsequent intention to sell similar goods constituted a business activity such that input tax incurred in relation to it was recoverable.

Background

3D was formed at the beginning of the Covid 19 pandemic to produce face protection via the process of 3D printing. Such protection was in high demand, but there was a shortage of suitable products for healthcare workers. The appellant produced 130,000 face shields in the first six weeks of production; which was an admirable feat. However, it was not possible to sell this equipment without the appropriate accreditation. Consequently, to alleviate demand, 3D donated the PPE to the NHS.

By the time accreditation was given the demand for PPE had reduced so it was not possible to sell the 3D printed face coverings as initially intended.

Technical

The issue of business versus non-business has been a contentious issue in the VAT world from day one. This classification is important for two reasons. If an activity is a business (an economic activity) it could be subject to VAT and, as in this case, if an activity is non-business there is usually a restriction of input tax.

Contentions

3D said that input tax could be recovered on costs which involved no direct onward supply of goods or services, but which laid the groundwork for them. That is, the input tax could be attributed to an intended taxable supply, even though that intention was not fulfilled by circumstances outside its control.

HMRC argued that per Longbridge the correct test for determining whether an activity is a business activity is whether there is a direct link between the services or goods supplied and a payment received by the supplier. In this case, there was not so no input tax was reclaimable. HMRC also referred to the decision in Wakefield College, supporting the proposition that an activity is only a business activity if it results in the supply of goods or services for a consideration.

Decision

The FTT found that the VAT incurred on supplies made to 3D, constituted elements:

  • in connection with 3D seeking CE certification
  • related to general overheads
  • related to VAT incurred on materials bought to produce the PPE

Input tax incurred on the costs of accreditation is recoverable because these were incurred in order to sell PPE in the future and for no other purpose. The fact that these costs are not linked to a particular supply (and is in the nature of preparing the ground for future supplies) was irrelevant per The VAT Act 1994, Schedule 1, para 10.

The VAT incurred on the general overhead costs and on the costs of producing the PPE was incurred in part for business purposes and party for non-business (donations) and should be apportioned using a method agreed between 3D and HMRC.

Commentary

Another case highlighting the difficulty in identifying the distinction between business and non-business and the complexity of input tax attribution. The altruistic efforts of the CIC is to be admired, but such charitable (in the broad sense) activities do not always get their just reward in VAT terms.

VAT: How to characterise a supply – The tests

By   27 June 2023

In the age-old matter of whether a supply is separate/composite/compound for VAT purposes which and what is the nature of that supply, the Court of Appeal case of Gray & Farrar International LLP has provided very helpful guidance. A background to facts of the initial hearing here (although this decision was overturned by both the UT and the CoA).

I have previously considered these types of supply here, here, here, here, and here. Although not specifically concerning composite/separate supplies, the case sets out a hierarchy of tests to be applied in characterising a single supply for VAT purposes which now sets the standard. These test are:

  1. The Mesto predominance test should be the primary test to be applied in characterising a supply for VAT purposes.
  2. The principal/ancillary test is an available, though not the primary, test. It is only capable of being applied in cases where it is possible to identify a principal element to which all the other elements are minor or ancillary. In cases where it can apply, it is likely to yield the same result as the predominance test.
  3. The “overarching” test is not clearly established in the ECJ jurisprudence, but as a consideration the point should at least be taken into account in deciding averments of predominance in relation to individual elements, and may well be a useful test in its own right.

Comments

The Mesto Test

CJEU Mesto Zamberk Financini (Case C-18/12)

The primary test to be applied when characterising a single supply for VAT purposes is to determine the predominant element from the point of view of the typical consumer with regard to the qualitative and not merely the quantitative importance of the constituent elements.

Principal/ancillary

If a distinct supply represents 50% or more of the overall cost, it can not be considered ancillary to the principal supply. In such cases an apportionment will usually be required.

Overarching

A generic description of the supply which is distinct from the individual elements. In many cases the tax treatment of that overarching single supply according to that description will be self-evident.

CPP

One must also have regard to the Card Protection Plan Ltd case. This has become a landmark case in determining the VAT treatment for single and multiple supplies. In this case the ECJ ruled that standard rated handling charges were not distinct from the supply of exempt insurance. It was noted that ‘a supply that comprises a single service from an economic point of view should not be artificially split’. Notably many subsequent court decisions have since followed this outcome thereby suggesting a general lean towards viewing cases as single supplies where there are reasonable grounds to do so.

VAT: Charity exemption for show admittance – The Yorkshire Agricultural Society case

By   9 May 2023

Latest from the courts

In the Yorkshire Agricultural Society First Tier Tribunal (FTT) case the issue was whether payments for entry into the annual The Great Yorkshire Show qualified as exempt via The VAT Act 1994, Schedule 9, Group 12, item 1

The supply of goods and services by a charity in connection with an event—

      1. that is organised for charitable purposes by a charity or jointly by more than one charity,
      2. whose primary purpose is the raising of money, and
      3. that is promoted as being primarily for the raising of money.”

HMRC raised an assessment on the grounds that the supply of admittance fell outwith the exemption so it was standard rated. It appears that this view was formed solely on the basis that the events were not advertised as fundraisers.

The exemption covers events whose primary purpose is the raising of money and which are promoted primarily for that purpose. HMRC contended that the events were not advertised as fundraisers and therefore the exemption did not apply. Not surprisingly, the appellant contended that all of the tests at Group 12 were fully met.

The FTT found difficulty in understanding HMRC’s argument. It was apparent from the relevant: tickets, posters and souvenir programmes all featured the words “The Great Yorkshire Show raises funds for the Yorkshire Agricultural Society to help support farming and the countryside”.

Decision

The FTT spent little time finding for the taxpayer and allowing the appeal. The assessment was withdrawn. There was a separate issue of the assessment being out of time, which was academic given the initial decision. However, The Tribunal was critical of HMRC’s approach to the time limit test (details in the linked decision). HMRC’s argument was that apparently, the taxpayer had brought the assessment on itself by not providing the information which HMRC wanted. The Judge commented: “That is not the same as HMRC being in possession of information which justified it in issuing the Assessment. It is an inversion of the statutory test”.

HMRC’s performance (or lack of it)

Apart from the clear outcome of this case, it also demonstrated how HMRC can get it so wrong. The FTT stated that it was striking that there was very little by way of substantive challenge by HMRC to the appellant’s evidence, nor any detailed exploration of it in cross-examination. The FTT, which is a fact-finding jurisdiction, asked a series of its own questions to establish some facts about the Society’s activities and the Show in better detail. No-one from HMRC filed a witness statement or gave evidence, even though HMRC, in its application to amend its Statement of Case, had said that the decision-maker would be giving evidence. The decision-maker did not give evidence. HMRC were wrong on the assessment and the time limit statutory test and did not cover itself in glory at the hearing.

Commentary

More evidence that if any business receives an assessment, it is always a good idea to get it reviewed. Time and time again we see HMRC make basic errors and misunderstand the VAT position. We have an excellent record on challenging HMRC decisions. Charities have a hard time of it with VAT, and while it is accurate to say that some of the legislation and interpretation is often complex for NFPs, HMRC do not help by taking such ridiculous cases.

VAT: Place of supply – The Sports Invest case

By   5 May 2023

Latest from the courts

In the First-Tier Tribunal case of Sports Invest UK Ltd the issue was the place of supply (POS) of a football agent’s services (commission received for a player’s transfer).

The POS is often complex from a VAT perspective and depends on the place of belonging (POB) of the supplier and the recipient of the supply. These rules determine if VAT is charged, where VAT is charged and the rate of VAT applicable, additionally, they may impose requirements to register for VAT in different jurisdictions.

Background

Sports Invest was a football agent based in the UK. It received fees in respect of negotiating the transfer of a player: João Mário from a Portuguese club: Sporting Lisbon to an Italian club: Internazionale (Inter Milan). The appellant signed a representation contract with the player which entitled it to commission, and a separate agreement with Inter Milan entitling it to a fee because the player was permanently transferred.

The Issues

To whom did Sports Invest make a supply – club or player? What was the supply? Was there one or two separate supplies? What was the POS?

As appears normal for transactions in the world of football the contractual arrangements were complex, but, in essence as a matter of commercial and economic reality, Sports Invest had agreed the commission with the player in case it was excluded from the deal. However, this did not occur, and the deal was concluded as anticipated. Inter Milan paid The Appellant’s fee in full, but did this affect the agreement between Sports Invest and the player? That is, as HMRC contended, did Inter Milan pay Sports Invest on the player’s behalf (third party consideration) such that there were two supplies; one to the player and one to the cub?

The FTT stated that there was no suggestion that the contracts were “sham documents”.

VAT Liability

The arrangements mattered, as pre-Brexit, a supply of services by a business with a POB in the UK to an individual (B2C) in another EU Member State would have been subject to UK VAT; the POS being where the supplier belonged. HMRC assessed for an element of the fee that it saw related to the supply to the player. The remainder of the fee paid by the club was accepted to be consideration for a UK VAT free supply by the agent to the club (B2B).

Decision

The court found that there was one single supply by The Appellant to Inter Milan. This being the case, the supply was B2B and the POS was where the recipient belonged and so that the entire supply was UK VAT free. There was no (UK) supply to the individual player as that agreement was superseded by the contractual arrangements which were actually put in place and the player owed the agent nothing as the potential payment under that contract was waived.

The appeal against the assessment was upheld.

Commentary

The court’s decision appears to be logical as the supply was to the club who were receiving “something” (the employment contract with the player) and paying for it. The other “safeguarding” agreement appeared to be simple good commercial practice and was ultimately “not required”. This case highlights the often complex issues of; establishing the nature of transactions, the identity of the recipient(s), agency arrangements, the POS and the legal, commercial and economic reality of contracts.

 

 

VAT: Are Turmeric shots zero rated food? The Innate-Essence Limited case

By   5 May 2023

Latest from the courts

In the Innate-Essence Limited (t/a The Turmeric Co) First Tier tribunal (FTT) case the issue was whether turmeric shots were zero rated food via The VAT Act 1994, Schedule 8, Group 1, general item 1 or a standard rated beverage per item 4 of the Excepted items.

The Legislation

“General items Item No 1 Food of a kind used for human consumption. …

Excepted Items Item No … 4 Other beverages (including fruit juices and bottled waters) and syrups, concentrates, essences, powders, crystals or other products for the preparation of beverages.”

The Product

Turmeric roots are crushed and the pulp sieved to extract the liquid. No additional liquids such as apple juice, orange juice or water are added during the production process.

The Shots contain:

  • small quantities of crushed, whole fresh watermelon and lemons which act as a base and provides a natural preservative effect
  • fresh pineapple juice
  • flax oil and black pepper

All the ingredients are cold pressed to retain the maximum nutritional value of the raw ingredients. The Shots are not pasteurised as this would negatively affect the nutritional content of the Shots. No sugar or sweeteners are added to the Shots. The Shots are sold in small 60ml plastic bottles and it was stated that they  provided long term health benefits.

The court applied the many tests derived from case law on similar products, and as is usual in these types of cases, the essence of the decision was on whether the Exception for beverages applied to The Shots.

Whether a product is a beverage (standard rated) is typically based on tests established in the Bioconcepts case (via VFOOD7520) as there is no definition of “beverage” in the legislation. The tests:

  • it must be a drinkable liquid that is commonly consumed
  • it must be characteristically taken to increase bodily liquid levels, or
  • taken to slake the thirst, or
  • consumed to fortify, or
  • consumed to give pleasure

The principle of the tests is based on the idea that a drinkable liquid is not automatically a beverage, but could be a liquid food that is not a beverage.

The Tribunal found that the Shots were not beverages but zero rated food items. As The judge put it: “In our view, the marketing and customer reviews demonstrate clear consistency in the use to which the Shots are put. The Shots are consumed in one go on a regular, long-term basis for the sole purpose of the claimed health and wellbeing benefits. The purpose of the Shots is entirely functional: to maximise the consumers daily ingestion of curcumin which is achieved by cold pressing the raw ingredients into a liquid. We consider it highly unlikely that a consumer would attempt to ingest the same quantity of raw turmeric in solid form.

The Shots are marketed on the basis of the nutritional content of the high-quality ingredients (primarily raw turmeric) that are stated to support health and wellbeing. The Shots contain black pepper and flax oil, two ingredients that are not commonly found in beverages. The Shots are marketed as requiring regular daily consumption over a long period of time (at least three months) to provide the consumer with the claimed long-term health and wellbeing benefits. A one-off purchase of a Shot would not achieve the stated benefits of drinking a Shot”.

The Tribunal also went to consider the “lunch time pints in pubs” (The Kalron case) issue, but I would rather not comment on whether this is a usual substitute for a lunch…

The appeal was allowed.

Commentary

Yet another food/beverage case. Case law insists that each product must be considered in significant detail to correctly identify the VAT liability and even then, a dispute with HMRC may not be avoided. Very small differences in content, marketing, processes etc can affect the VAT treatment. As new products hit the shop shelves at an increasing rate I suspect that we will be treated to many more such cases in the future. If your business produces or sells similar products, it will be worth considering whether this case assists in any contention for zero rating.

VAT: Charging EVs ruled to be goods not services

By   24 April 2023

Latest from the courts

In the Court of Justice of the European Union (CJEU) it was ruled that electric vehicle charging via public charging points, was a supply of goods, regardless that some elements of the supply were services, ie; access technical support, reservation of a charging point, and a parking space while charging. The overriding supply was the provision of electricity which is classified as goods.

The full P. In W. case here.

It is unlikely that the UK authorities will form a different view.

Although in most cases there is unlikely to be a significant difference, although there could be issues with the time of supply (tax point).

VAT: Was an option to tax valid? The Rolldeen Estates Ltd case

By   18 April 2023

Latest from the courts

In the First-Tier tribunal (FTT) case of Rolldeen Estates Ltd there were a number of issues, inter alia; whether the appellant’s option to tax (OTT) was valid, if not, whether HMRC had the power to deem it valid, whether HMRC acted unreasonably and whether appellant estopped from relying on earlier meeting with an HMRC officer.

Background

The letting of property is an exempt supply, however, a landlord the owner can OTT the property and charge VAT on that supply.  If the OTT is exercised, the supplier is able to reclaim input VAT on costs such as repairs and maintenance, but charges output VAT on its supplies.  The OTT provisions are set out at The VAT Act 1994, Schedule 10.

The appellant in this case had previously submitted an OTT form VAT1614A and charged VAT on the rent to its tenant. Subsequently, the property was sold without charging VAT. HMRC issued an assessment for output tax on the sale value.

Schedule 10

A taxpayer does not need HMRC’s permission to OTT, unless that person has already made exempt supplies in relation to that property – in particular, if the property has already been let without VAT having been charged.  In that scenario, the person must apply to HMRC for permission to exercise the OTT, and permission will only be given if HMRC are satisfied that the input tax is fairly attributed as between the exempt period and the taxable period. When OTT the company stated that no previous exempt supplies of the relevant property had been made and this was also confirmed in subsequent correspondence with HMRC.

Appellant’s contentions

The company informed HMRC that the OTT was invalid so that no VAT was due on the sale. Evidence was provided which demonstrated that Rolldeen had made exempt supplies before the date of the OTT so that HMRC’s permission had therefore been required before it could be opted. No permission had been given and therefore there was no valid OTT in place even though the appellant had purported to exercise that option. Also, the appellant submitted that it was unreasonable of HMRC to have exercised the discretion to deem the OTT to have effect, because they had failed to take into account the fact that during an inspection, HMRC had known that Rolldeen had made exempt supplies before OTT.

HMRC’s view

VATA, Schedule 10, para 30 allows HMRC retrospectively to dispense with the requirement for prior permission, and to treat a “purported option as if it had instead been validly exercised”.  HMRC issued a decision stating that it was exercising its discretion under Schedule 10, para 30 to treat the relevant property as opted with effect from the date of the VAT1614A and that VAT was due on the sale and the assessment was appropriate.

Decision

The FTT found that:

  • after an inspection by HMRC it knew that prior exempt supplies had been made
  • although HMRC knew exempt supplies had already been made Rolldeen was estopped* from relying on that fact, because both parties had shared a “common assumption” that the OTT had been valid
  • para 30 could be used to retrospectively validate the OTT (albeit only in relation to supplies made after 1 June 2008).  In this case that was sufficient as the sale of the property occurred on in March 2015
  • HMRC had not acted unreasonably because they had not taken into account their own failure to carry out a compliance check
  • this is exactly the sort of situation for which para 30 was designed
  • it was entirely reasonable and appropriate of HMRC to deem the purported option to have been validly exercised

The appeal was rejected and the assessment was valid.

Commentary

Again, proof, if proof is needed, that OTT can be a complex and costly area of the tax and care must always be taken. Advice should always be sought, as once an OTT is made, there is usually no going back.

An interesting point in this case was that no case law was cited on this issue and the FTT was unable to identify any.

* The principle of “estoppel” means that a person may be prevented from relying on a particular fact or argument in certain circumstances.

VAT: DIY Housebuilders’ Scheme – The Dunne case

By   6 February 2023

Latest from the courts

The First-Tier Tribunal (FTT) case of Daniel Dunne demonstrates the fact that the details of the construction are very important when making a claim under the DIY Housebuilders’ Scheme (the scheme)

Background

Mr Dunne applied for planning permission (PP) for a rear extension to his existing house, which was granted. After completion of the building works a Building Control Completion Certificate was issued which described the relevant works as “construction of a single storey extension to the rear” of the property. The appellant submitted a scheme claim which HMRC rejected.

Technical

Superficially, the legislation covering the scheme: The VAT Act 1994 section 35 states, as relevant:

“(1) Where—

(a) a person carries out works to which this section applies,

(b) his carrying out of the works is lawful and otherwise than in the course or furtherance of any business, and

(c) VAT is chargeable on the supply. or importation of any goods used by him for the purposes of the works,

the Commissioners shall, on a claim made in that behalf, refund to that person the amount of VAT so chargeable.

(1A) The works to which this section applies are—

    • the construction of a building designed as a dwelling or number of dwellings…
    • The notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group.

The notes to Group 5 of Schedule 8 state, as relevant:

…(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied—

(a) the dwelling consists of self-contained living accommodation;

(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and

(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent….

…For the purpose of this Group, the construction of a building does not include—

(a) the conversion, reconstruction or alteration of an existing building; or

(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or

(c)…, the construction of an annexe to an existing building…”

excludes a claim as the construction was an extension rather than a “dwelling”. The PP plans showed the extension as a square building connected to the existing residential property by a corridor.

However, Mr Dunne’s evidence was that although the initial plan had been for the rear extension to be attached to the existing property, the plans were changed so that it became a standalone detached building, unconnected to the existing property and the building is therefore a detached bungalow. He discussed the changes informally with the local authority building control, who agreed that he did not need to build the corridor connecting the building to the existing property. The fact that they had issued the planning certificate was, he contended, evidence that the building was compliant with the planning department requirements and so should be regarded as being PP for a dwelling.

HMRC contended that, even without the corridor, the PP was for an extension of the existing building and not for a separate dwelling. An extension is specifically precluded from being the construction of a building by note 16 of the notes to The VAT Act 1994, Schedule 8, Group 5. The construction was not in accordance with the planning consent given by the local authority and so the claim could not be accepted.

The respondents further submitted that the building could not be disposed of separately to the existing building and that although the building had a separate postal address this did not create a separate dwelling.

Decision

The FTT found that for a claim to succeed, it is not sufficient that a standalone building was created; the PP must be for a dwelling. The PP, as informally amended, was for the extension of an existing dwelling and not for the creation of a new dwelling.

The relevant PP correspondence did not contemplate, let alone confirm, that approval was given for a new dwelling. The agreed informal amendment, to remove the connecting corridor from the plans, cannot be interpreted to imply a grant of permission for a dwelling.

The statutory requirements for a claim include the requirement that PP has been granted in respect of a dwelling and that the construction is in accordance with that planning consent. It was found that PP (and its informal amendment) was granted for an extension and not a dwelling, and so it followed that appeal could not succeed.

Commentary

It is crucial for a claim to succeed that all of the conditions of the scheme are met. Any deviation will result in a claim being rejected. It is usually worthwhile having any claim reviewed professionally before submission.

Further

More information and Scheme case law here, here and here, here and here.

VAT: TOMS – negative margin permitted? The Square case

By   31 January 2023

Latest from the courts

In the First-Tier Tribunal (FTT) case of The Squa.re Limited (TSL) the issue was whether unsold inventory or inventory sold at a loss could affect the calculation of the Tour Operators’ Margin Scheme (TOMS).

Background

TSL provided serviced apartments to travellers. The company leased accommodation from the owners of the properties who were frequently, if not exclusively, private individuals who were not registered for VAT.

These leases were often for an extended period, eg; annual leases, such that the appellant is committed under the terms of the lease even where the accommodation cannot then be on supplied or not supplied for a profit.

The Issue

The issue was whether TOMS operated in such a way as to permit a negative calculation resulting in repayment to the appellant. HMRC issued an assessment because, while they accepted that there may be a zero margin on a TOMS supply, they considered that a negative margin was not permitted by the scheme. TSL maintained that a repayment of overdeclared output tax was appropriate if a loss was made (an “overall negative margin”) as TOMS does not exclude the possibility of a negative margin.

The dispute between the parties was a technical one only and concerned the interpretation of the statutory provisions implementing TOMS into UK law.

Legal

The domestic implementation of the TOMS is authorised by The Value Added Tax Act 1994, Section 53 and found in Value Added Tax (Tour Operators’) Order 1987 (SI1987/1806). Guidance is provided via Notice 709/5 and Sections 8 to 13 have the force of law.

Decision

The Tribunal determined that it was clear from the legislation that the taxable amount is concerned with the supply made, and not the VAT incurred on the various cost components. Under normal VAT accounting the output tax charged on supplies is calculated by reference to the consideration received by the supplier from the customer. There can realistically be no concept of negative consideration.

The FTT considered that there is no basis inherent within TOMS which would permit a calculation of a negative sum. There had been a supply (of a designated travel service) for a consideration, and it is the taxable amount of that supply which was to be determined. A negative taxable amount is a “conceptual impossibility”. A negative margin arises as a consequence of a lack of profitability, but VAT is a transaction tax and not a tax on profit.

When sold at a loss where the total calculation resulted in a negative margin the annual sum due by way of output tax would be nil (not a repayment).

Where the accommodation is not sold at all, the FTT noted that this cost represented a cost of doing business but, on the basis that there has been no onward supply, there is no supply which meets the definition of a designated travel service. The relevant accommodation is not for the direct benefit of any traveller so there is no supply and TOMS is irrelevant.

Whilst the FTT considered that were it the case that identified costs incurred in buying in goods and services which are not then the subject of an onward supply should be excluded from TOMS calculations, costs associated with the block booking of accommodation of the type incurred by TSL were to be included. Where such costs exceed the value obtained by onward supply, the negative margin forms part of the annual calculation. However, where the global calculation results in a negative margin the tax due for the year under TOMS is nil and there was no basis for a repayment to TSL.

There was no basis on which to permit an overall TOMS negative margin and the appeal was dismissed.

Commentary

Another demonstration of the complexities of TOMS and the potential pitfalls.

It may be useful to note that input tax claims are not permitted in TOMS calculations, however, any VAT incurred on any bought in, but unsold, services would not be excluded from recovery as there is no TOMS supply. The input tax on unsold inventory was a general cost of doing business and, as such, recoverable in the normal way. Consequently, there may be circumstances for businesses using TOMS where input tax incurred on unsold elements may be claimed outside of TOMS

VAT: Discounts – value of supply. The TalkTalk case

By   11 January 2023

In the First Tier tribunal (FTT) case of TalkTalk Telecom Limited the issue was the amount of consideration received on which output tax was due. Specifically, whether “prompt payment discounts” which were offered, but not taken up by customers, reduced the value of a supply.

Background

TalkTalk offered most of its retail customers the option of receiving a 15% discount on its services if their monthly bills were paid within 24 hours.

TalkTalk accounted for output tax on the basis that the consideration received was reduced by the discount, whether or not customers had in fact paid within the 24 hours. In other words; whether or not the discount had actually been applied so that customers paid less.

The appellant considered that this approach was consistent with Value Added Tax Act 1994, Schedule 6 Para 4(1), which provides:

“Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms.”

HMRC’s contention was that the offer only reduced the consideration for VAT purposes where customers had actually paid the reduced amount, and that there was no reduction when the discount was not taken up.

Decision

The above legislation only applies to services supplied “on terms allowing a discount for prompt payment”. In deciding whether this was the case in this appeal the FTT analysed the contractual position.

The contracts were governed by terms and conditions (T&Cs) published on TTL’s website. This discount was not referred to in the T&Cs, but on a separate dedicated page within the same website.

The judge decided that the discount contractual term comes into existence at exactly the same moment as the payment and the supply. There was not a contractual term under the T&C’s under which a lower amount was payable if payments were made earlier. On this point, TalkTalk contended that the T&Cs were varied by the subsequent discount option, and, as a result, the services had been “supplied…on terms allowing a discount for prompt payment” as required by Para 4(1), but this argument was rejected.

As per the Virgin Media Upper Tribunal case the Tribunal considered that the position was different between services billed in advance, and services billed in arrears.

Advance payments

The contractual variation did not include an offer for the customer to pay a discounted amount at some point in the future, so Para 4(1) did not apply to services billed in advance.

Payment in arrears

The FTT ruled that customers accepted the discount offer after delivery of the services. The supply had therefore been made on the terms set out in the T&Cs, and the customer was therefore contractually required to pay the full amount. The discount option was an offer by the appellant to accept a lower sum with an earlier payment date to discharge that pre-existing contractual obligation. As a matter of law, this was an offer to accept a post-supply rebate of consideration already due and therefore it could not be a discount.

The appeal was dismissed.

Commentary

Another case which highlights both the complexity of the rules on consideration and the importance of contracts. At stake here was VAT of £10,606,226.00 which was deemed to be underpaid during a four-month period only. If in doubt – take advice!