Eels, salmon and trout are VAT free when sold dead or alive, but bream, perch, pike and tench are standard rated.
Category Archives: Court
VAT: Was an option to tax valid? The Rolldeen Estates Ltd case
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: Evidence for retrospective claims – new guidance
HMRC has updated its Manual VRM9300 on historic VAT claims.
These types of claims are often called “Fleming” claims and refer to those made before the introduction of the four (once three) year time cap. Such claims extend beyond the period that businesses were required to keep business records and so these were less likely to have remained available.
Where detailed records are unavailable it does not mean there is a lower standard of proof for a claim. The civil standard of proof (on a balance of probabilities) remains.
However, taxpayers’ estimates, assumptions and extrapolations must be sufficiently robust to support a claim. HMRC and the Tribunals must have regard to the evidence that is available, and each claim must be considered on its individual merits.
HMRC state that it “…is not obliged to accept a figure simply because some input tax is due or because it is the claimant’s ‘best guess’ based on the material available”. The claimant must first establish that its method of valuing the claim is reasonable and provide an identifiable repayable amount.
The guidance considers the judgement in the NHS Lothian [2022] UKSC 28 case and its impact on claims where full evidence is unavailable.
Alternative evidence
It is also worth noting that HMRC have the discretion to accept alternative evidence.
VAT: Alternative Dispute Resolution (ADR) new guidance
HMRC has published an updated Internal Manual which provides guidance on the ADR mechanism. I have written about this in detail here.
What is ADR?
ADR is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers. It is mainly used by SMEs and individuals for VAT purposes, although it is not limited to these entities. Its aim is to reduce costs for both parties (the taxpayer and HMRC) when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal. The facilitator is impartial and independent and aims to assist both parties in resolving the tax dispute.
Changes
The changes are mainly in connection with disagreements about whether a case is suitable for ADR. These include cases where requests have been made for ADR, for example:
- requests from taxpayers for ADR where the HMRC decision is that the case is not suitable for ADR
- requests from taxpayers for ADR where some of the HMRC case team believe the case is unsuitable, but other members of the team believe the case may be suitable
- referrals from HMRC for complex or sensitive cases where they would like to offer ADR to the taxpayer
An ADR Panel, which consists of senior personnel from HMRC, will consider requests for ADR in circumstances where there is uncertainty about the suitability of a case for ADR. The ADR Panel will aim to provide assurance that applications by taxpayers in the most complex or potentially contentious cases for ADR are properly assessed and that decisions are consistent and principled.
VAT: DIY Housebuilders’ Scheme – The Dunne case
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
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
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!
VAT: TOGC and deliberate errors – The Apollinaire case
Latest from the courts
In the First -Tier Tribunal (FTT) case of Apollinaire Ltd and Mr Z H Hashmi the issues were:
- whether the appellant’s input tax claim was valid
- were the director’s actions “deliberate”
- was a Personal Liability Notice (PLN) appropriate?
Background
Mr Hashmi (the sole director of Apollinaire) asserted that he sold his business, Snow Whyte Limited to a Mr Singh as a going concern, together with the trading name “Benny Hamish”. The purchase price was never paid. He alleged that Mr Singh traded for approximately one month and then sold stock worth £573,756 to Apollinaire. The appellant submitted an input tax claim for the purchase of the goods. HMRC refused to make the repayment and raised penalties for deliberate errors. HMRC subsequently issued a PLN to Mr Hashmi.
Issues
Initially HMRC stated that Mr Singh may not have existed, that there was no sale of Snow Whyte Ltd by Mr Hashmi to Mr Singh and similarly, no sale back to Mr Hashmi. However, this submission was later amended to argue that Mr Hashmi controlled the movement of the stock at all times and that the issue was whether the transfer of stock from Snow Whyte Limited was a Transfer Of a Going Concern (TOGC), whether or not Mr Singh existed.
Mr Hashmi appealed, contending that the transactions took place as described to HMRC.
Decision
Unsurprisingly, given Mr Hashmi’s previous history of dissolving companies, but continuing to trade under the same name as those companies (listed at para 14 of the decision) and failing to submit returns and payments, the FTT accepted HMRC’s version of events. Further, there was insufficient evidence to support the transactions (if they took place) and the judge fund that the appellant’s evidence was not credible. If the events did take place, there was no input tax to claim as all the tests (where relevant here) for a TOGC (Value Added Tax (Special Provisions) Order 1995, Regulation 5) were met:
- the assets were sold as a business as a going concern
- the assets were used by the transferee in carrying on the same kind of business
- there was no break in trading
- both entities traded under the same name
- both entities operated from the same premises
- both entities had the same employees and tills
The appeal was dismissed.
Penalties
The FTT further decided that HMRC’s penalties and PLN [Finance Act 2007, Schedule 24, 19(1)] were appropriate. The claim for input tax was deliberately overstated and that Mr Hashmi was the controlling mind of both entities and was personally liable as the sole company director of Apollinaire.
HMRC relied on case law: Clynes v Revenue and Customs[2016] UKFTT 369 (TC) which reads as follows:
“On its normal meaning, the use of the term indicates that for there to be a deliberate inaccuracy on a person’s part, the person must have acted consciously, with full intention or set purpose or in a considered way…
…Our view is that, depending on the circumstances, an inaccuracy may also be held to be deliberate where it is found that the person consciously or intentionally chose not to find out the correct position, in particular, where the circumstances are such that the person knew he should do so.”
Commentary
This case is a reverse of the usual TOGC disputes as HMRC sought to establish that there was no taxable supply so no VAT was due. It underlines that:
- care should always be taken with applying TOGC treatment (or appreciating the results of failing to recognise a TOGC)
- penalties for deliberate errors can be significant and swingeing
- directors can, and are, held personally responsible for actions taken by a company
VAT: What is unjust enrichment?
If a business has overdeclared output tax on past returns then it seems reasonable that this should be corrected, either by adjusting a current return or submitting a form VAT652 if the “error” is over £10,000 net.
If it is a genuine adjustment, surely HMRC must recognise the correction and either make a repayment or offset the overdeclaration against a current amount of VAT due.
The answer is yes, but… “unjust enrichment”…
Unjust enrichment
HMRC has a defence of unjust enrichment via The VAT Act 1994, sect 80(3)
“It shall be a defence, in relation to a claim under this section by virtue of subsection (1) or (1A) above, that the crediting of an amount would unjustly enrich the claimant.”
This means that HMRC can refuse to repay a claim if they can show that it would unjustly enrich the taxpayer.
It should always be borne in mind that if a claimant absorbed the burden of the wrongly charged VAT himself then unjust enrichment cannot be used as a defence against refusal to repay the claim. Loss or damage to a business due to overpaid VAT is considered in detail here.
Meaning
A refusal to repay a VAT claim using the unjust enrichment contention is to prevent a business becoming enriched at the expense of other entities who actually bore the cost of the incorrectly charged VAT. The authorities consider that a taxpayer should not be put into a better position by recovering the VAT than if VAT had not been charged at all. HMRC regard it as appropriate for unjust enrichment to be considered every time a claim is made.
The recipients of the corrected supply may be final consumers but can also be businesses, charities, etc, who were unable to deduct the overcharged VAT as input tax.
The salient point being whether the VAT was added to the price charged by the claimant or whether the claimant would have charged less had he known that his supplies were not liable to VAT.
HMRC consider that the process of establishing whether a claimant will be unjustly enriched by payment of his claim is two-stage procedure.
First stage
Whether the burden of the overdeclared VAT being claimed was passed on to the claimant’s customers, that is, whether the claimant charged the market rate* plus VAT. This is done on the basis of an economic analysis of the market in which the claimant is operating see; Berkshire Golf Club [2015] UKFTT 627 (TC).
If the customer deducted the wrongly invoiced output tax as input tax, HMRC is entitled to assume that the supplier passed the economic burden of the tax charge on to its customers. In this case, the VAT wrongly accounted for is a cost neither to the supplier nor to the customer.
Second stage
This stage occurs if the claimant accepts that he passed the burden of the tax charge on to his customers but argues that doing that caused loss or damage to his business, for example, by loss of customers or of profits, ie; has the taxpayer been economically damaged by having to bear the VAT cost?
The burden of proof of establishing that there is unjust enrichment falls upon HMRC. The standard of proof is the civil standard of proof; on a balance of probabilities.
HMRC will require the claimant to provide all of the relevant information on; pricing, policy and any other relevant documentation that establishes the pricing strategy**. It is to the taxpayer’s advantage to demonstrate that their margins have been depressed, as they have been required to charge VAT incorrectly.
Factors that HMRC consider:
- who are the claimant’s competitors?
- what is its market? (comparisons made with other competitors’ products)
- how does the business set its prices?
- what are the business’ overheads?
- any other factors that may affect the prices
The reimbursement scheme
This is an undertaking to comply with certain reimbursement arrangements. The full text of the required undertaking is set out here.
This scheme applies where a business accepts, or HMRC prove, that by receiving a refund of sums incorrectly accounted for as output tax the business would be unjustly enriched at its customers’ expense and it wishes to refund the money they overpaid. If a customer was able to deduct all of the mistaken VAT charge as input tax HMRC will not regard them as having borne the burden of the charge.
In such cases HMRC will only make a refund of overpaid VAT if the taxpayer agrees to reimburse those customers in accordance with the terms of the scheme. More details Notice 700/45.
If HMRC repay a claim and the claimant is unable or unwilling to reimburse its customers (who bore the cost) with any amounts paid to him by HMRC then unjust enrichment will always apply. See The Deluxe High Court case.
Prices after a claim
It is worth bearing in mind that where a claimant has kept prices the same after he has found out that no VAT was due on the supplies in question, courts are likely to assume that that is because the business was charging the market rate. That assumption is made on the basis that, if the market rate were less, he would be compelled to reduce his prices. HMRC often check any post-claim price changes (or lack thereof).
Case law (summary)
The salient points from European Court of Justice case law may be summarised as:
- a person who has wrongly accounted for VAT is entitled to recover it
- HMRC is entitled to refuse to repay where it can show that the claimant did not bear the economic burden of the wrongly paid tax but passed it on to its customers
- the invocation of the unjust enrichment defence is the restriction of a personal right derived from EU law, and so it is something that should be done only exceptionally
- the unjust enrichment defence cannot be invoked simply on the grounds that the VAT was shown separately on an invoice
- before HMRC can invoke the unjust enrichment defence it must carry out an economic analysis of the market in which the claimant is operating
- the case law of both the European and the UK courts assumes that, in a free market economy, a trader required to account for a transaction-based tax will charge the market rate, not market rate plus tax
* The case law of the European Court of Justice and of the courts in the UK begin with the assumption that in a free market economy (and probably even in a managed economy) a business will charge the market rate and account for any VAT out of his profit margin.
** A pricing strategy is a business’s approach to determining the price at which it offers goods or services to the market. Pricing policies ensure businesses remain profitable and they give them the flexibility to price separate products differently.
Pricing policies refer to the processes and methodologies a businesses uses to set prices for their supplies. There are various pricing strategies that may be used, but some of the more common ones include:
- value-based pricing
- competitive pricing
- price skimming
- cost-plus pricing
- penetration pricing
- economy pricing
- dynamic pricing
A VAT Did you know?
In the Spearmint Rhino case it was ruled that there is no VAT on lap dances, however in Wilton Park Ltdthe decision was that VAT was due.