Category Archives: Disputes

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

By Marcus Ward 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 Inspections – How do HMRC choose which businesses to visit and what is “Connect”?

By Marcus Ward 2 May 2023

Big Brother is watching you…

It always used to be the case that “Control Visits” aka VAT inspections were decided by a business’

turnover
VAT complexity
business complexity
structure
compliance history
previous errors

The more ticks a business gets the more inspections it will receive. Consequently, a business with a high turnover (a “Large Trader”) with many international branches providing complicated financial services worldwide which has failed to file returns by the due date and has received assessments in the past will be inspected almost constantly. Tick only a few of the boxes and a sole trader with a low turnover building business will still generate HMRC interest if it has received assessments in the past or is constantly late with its returns.

These visits are in addition to what is known as “pre-credibility” inspections (pre-creds). Pre-creds take place in cases where a business has submitted a repayment claim. HMRC will check whether the claim is valid before they release the repayment. These may be done via telephone, email, or in person, and may lead to a full-blown inspection.

In addition, there was always a random element with inspections generated arbitrarily. The usual cycles were: six monthly, annually, three yearly, five yearly, or less frequently. On occasions, the next inspection would depend on the previous inspector’s report (they may, for instance, have recommended another inspection after a future event has occurred).

The Connect System

Although elements of the above “tests” may still apply, many inspections now are based on intelligence obtained from many sources. The main resource is a data system which HMRC call “Connect”. This system feeds from many bases and forms the basis of many decisions made by HMRC. Instead of HMRC relying on information provided by businesses on VAT returns, Connect draws on statistics from myriad government and corporate sources to create a profile of each VAT registered business. If this data varies from that submitted on returns it is more likely that that business will be inspected. As an example: HMRC obtains anonymised information on all Visa and MasterCard transactions, enabling it to identify areas of likely VAT underpayments which it can then target further. Other sources of information are: online marketplaces – websites such as eBay and Gumtree, as well as Airbnb can be accessed to identify regular traders who may not be VAT registered. Additionally, it can also access Land Registry records, so these can be checked not only to see what properties have been sold (and ought to have been subject to output tax) but what properties have been purchased (in order to determine whether a taxpayer is likely to be able to afford such properties).

The Connect system can also examine public social media account information, such as; Twitter, Facebook and Instagram using sophisticated mechanisms along with being able to access individual’s digital information such as web browsing and emails.

It is understood that less than 10% of all inspections are now random.

The £100 million plus Connect project is, and will be, increasingly important as HMRC is losing significant resources; particularly well trained and experienced inspectors. With many local VAT offices closing there is also a concern on the ground that a lot of “local knowledge” of businesses has been lost.

Big Brother really is watching you…. And if you are on the receiving end of an inspection, there is a circa 90% chance that there is a reason for it!

For information on how to survive a VAT inspection, please see here.

I always suggest that if notification of an impending inspection is received a pre-visit review is undertaken to identify and deal with any issues before HMRC arrive and levy penalties and interest.

VAT: Credit notes – what are they and how are they treated?

By Marcus Ward 18 April 2023

VAT Basics

There can be confusion about credit notes and how they are used and accounted for, so I thought it worthwhile to pull together, in one place, an overview of the subject.

What are credit notes for?

A VAT credit note is a document issued by a supplier to a customer. It amends or corrects a previously issued invoice. Invoices are documents which evidence a taxable supply. The credit note is documentary evidence of a change to that supply, or of a decrease in the consideration for that supply. A reduction in consideration may be as a result of; cancellation, discount, refund, prompt payment, bulk order or other commercial reasons.

Why are VAT credit notes important?

The information given on a credit note is the basis for establishing the adjusted VAT figure on the supply of taxable goods or services. It also enables the customer to adjust the figures for the total VAT charged to them on their purchases.

If a business issues a credit note showing a lesser amount of VAT than is correct, it is liable for the deficiency.

Legislation

The UK Law that covers credit notes is found in VAT Regulations 1995, Regulations 15, 24 and 38 of. Regulation 24A defines the term “increase (or decrease) in consideration”.

Conditions of a valid credit note

Requirements for a credit note to be considered valid:

be issued to the customer
correct a genuine mistake or overcharge
reflect an agreed reduction in the value of a supply
give value to the customer
not be issued for a bad debt
be issued in good faith

HMRC also require for credit notes to:

be issued within 14 days of the decrease in consideration
contain all the details specified in Notice 700, Paragraph 18.2.2.

Accounting

HMRC has issued guidance on how to correct VAT errors and make adjustments or claims – VAT Notice 700/45.

When you issue a credit note you must adjust:

the records of the taxable supplies you have made
your output tax

The accounts or supporting documents must make clear the nature of the adjustment and the reason for it.

Where the adjustment is not in respect of an error in the amount of VAT declared on a VAT return, you should make any VAT adjustment arising from the issue or receipt of a credit or debit note in the VAT account in the accounting period in which the decrease in price occurs.

This will be the accounting period where the refunded amount is paid to the customer.

If you have charged an incorrect amount of VAT and have already declared it on a VAT return you can only correct an error in your declaration by adopting the appropriate method of error correction procedures.

Specific cases

Credits and contingent discounts

When a business allows a credit or contingent discount to a customer who can reclaim all the tax on the relevant supply, it does not have to adjust the original VAT charge – provided both it and its customer agree not to do so. Otherwise, both parties should both adjust the original VAT charge. A business should issue a credit note to its customer and keep a copy.

Prompt payment discounts

If the discount is taken up within the specified time you may adjust the consideration and amount of VAT accounted for by issuing a credit note. If you choose not to use a credit note, the original invoice must have the following information:

the discount terms (which must include, but need not be limited to, the time by which the discounted price must be paid)
a statement that the customer can only recover as input tax the VAT paid to the supplier

VAT rate change

Where a VAT invoice showed VAT at the old higher rate, then a credit note should be issued for the element of overcharged VAT. However, there is no way to charge VAT at the lower rate if:

VAT invoices for supplies were issued before the lower rate took effect, and
the supplies were actually made (delivered or performed) before then.

In such circumstances, VAT cannot be saved by issuing a credit note for the old VAT invoice and then issuing a new invoice charging VAT at the lower rate.

The deadline for issuing a credit note following a rate change is 45 days. Any credit notes issued after this 45-day deadline are invalid, so the old higher rate would apply to the affected supplies.

Case law – further reading

There is a significant amount of case law on credit notes as this is an area that often creates disputes. Some of the most salient cases are:

British United Shoe Machinery Company Ltd (1977 VATTR p187)
Silvermere Golf and Equestrian Centre Ltd (1981 VATTR p 106)
Robin Seamon Brindley Macro (MAN/83/100)
Highsize Ltd (LON 90/945)
Kwik Fit (GB) Ltd (1992 VATTR p427)
British Telecommunications plc (LON/95/3145)
The Robinson Group of Companies Ltd (MAN/97/348)
General Motors Acceptance Corporation UK Ltd (GMAC)(LON/01/242)

NB: A business can only reduce the output VAT on its return if it has made an actual refund. This could be by making a payment to the customer or offsetting the credit against other invoices.

Finally

Failing to issue a credit note is a mistake that needs to be corrected under the error correction procedures.

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

By Marcus Ward 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: Evidence for retrospective claims – new guidance

By Marcus Ward 14 March 2023

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.

Standard of Proof where records are unavailable

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: Updated guidance on deliberate behaviour

By Marcus Ward 21 February 2023

HMRC has published updated guidance on deliberate behaviour. It clarifies the definition of these actions in respect of extended time limits.

What is deliberate behaviour?

A deliberate inaccuracy in a document occurs when a person (or another person acting on behalf of that person) knowingly gives HMRC an inaccurate document.

“A person who submits a document containing a deliberate inaccuracy might assert that they did not intend to cause a loss of tax. For the purpose of assessing this loss of tax, the person or any persons acting on their behalf will be treated as deliberately causing the loss of tax if they consciously intended to mislead HMRC”.

Examples

knowingly failing to record all sales
describing transactions inaccurately or in a way likely to mislead
lodging a VAT return that includes a figure of net VAT due that is too low because the person does not have the cash at that time to pay the full amount, and later telling HMRC the true figure when he has the funds to pay
similarly declaring less tax due for aggregates levy, climate change levy, landfill tax or excise duty because the person does not have the funds at that time to pay the full amount

(This list is not exhaustive and HMRC provide more examples in the guidance).

Why is it important?

Mainly, there are different time limits within which HMRC can take action.

A 20 year time limit applies where tax has been underdeclared, or over-repaid, as a result of a deliberately inaccurate return or other document. The normal cap is four years.

Other action

Although HMRC can make assessments to recover any tax lost, it also have a criminal investigation policy and will refer the most serious cases for consideration of criminal proceedings where appropriate.

If you or your clients are subject to an investigation, please seek professional advice immediately. There is a dark side to VAT.

VAT: Alternative Dispute Resolution (ADR) new guidance

By Marcus Ward 14 February 2023

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

By Marcus Ward 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 Marcus Ward 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 Marcus Ward 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!