A new Tribunal case ruled that marshmallows of an unusual size are zero rated, while normal sized marshmallows continue to be standard rated.
Category Archives: Disputes
VAT: Which entity receives a supply? The Star Services case
Latest from the courts
In the Star Services Oxford Limited (Star) First Tier Tribunal (FTT) case the issue was the identity of the entity receiving the supply, whether it held a valid tax invoice, and whether input tax could be claimed.
Background
The appellant claimed input tax incurred on rental payments to Oxford City Council. This was disallowed by HMRC on the grounds that the rental agreement was with Mr Latifi (a sole proprietor in a property rental business) and not the company which was VAT registered.
After the rental agreement was signed the business was incorporated and carried on a bed and breakfast activities from the premises, along with two separate sub-lets to third parties. One party paid rent to Star and one directly to Mr Latifi.
Contentions
HMRC argued that:
- Mr Latifi and the Appellant are separate legal entities, both of whom are required to register for VAT separately if carrying on taxable business activities
- the assessment was correct as the company was not entitled to an input tax credit as it was not the person who had incurred the liability
- the Appellant did not hold a valid VAT invoice, which entitles it to deduct the input tax
Star contended:
- there was a technical error in the lease agreement
- the assessment was excessive
- subsequent to the assessment, the lease was registered to the Appellant
- the lease was acquired in Mr Latifi’s name because the Appellant did not exist at the time that the lease agreement was entered into. At the relevant time there was an innocent omission to transfer the lease from Mr Latifi’s name to the Appellant’s name, and the delay was caused by forgetfulness
- a company may, under The VAT Act 1994 s. 24(6)(c) and if permitted by Regulations, claim input tax on the pre-incorporation supplies received for its business
- the Appellant has accounted for the VAT (therefore there was no loss of tax)
- the fact that Mr Latifi is beneficial owner of both “the company” (by virtue of controlling shares and directorship) and “the property” must have an impact on the decision to assess
Decision
The appeal was dismissed.
The Appellant was not entitled to claim input tax on the invoices and HMRC were correct to disallow input tax. It did not receive the supply and it did not hold a VAT invoice.
It was decided that the legal relationship was between Oxford City Council and Mr Latifi. This is because the lease agreement was between these parties and not the Appellant.
It was found that the rent from one sub-tenant was paid to Mr Latifi directly and is not accounted for by the Appellant and that the reassigned lease has no bearing on the property rental activities undertaken by Mr Latifi prior to the reassignment.
The rules on pre-incorporation supplies* do not apply in this case because Mr Latifi, as sole proprietor, and the Appellant, are separate legal entities, requiring separate VAT registration.
Interestingly, a recent case was relied on: In Tower Bridge GP Ltd the Court of Appeal ruled that absent a valid VAT invoice showing the supplier’s VAT number and the customer’s name, the right to deduct input tax on that invoice could not be exercised.
Summary
An unfortunate oversight was sufficient for HMRC to refuse the input tax claim. This case does have a whiff of unfairness about it, but by applying the letter of the law the outcome is unarguable. The contentions here are similar to those in the Aitmatov Academy case.
Another case of taking care with claims.
* A business may, generally, claim the VAT incurred on services it has purchased for its taxable business purposes during the six months prior to VAT registration .
The VAT Act 1994, s 24(6) (c) and The Value Added Tax Regulations 1995, Reg 111.
VAT: No invoice – no claim. The Tower Bridge GP Ltd case
Latest from the courts
In the Court of Appeal (CoA) case of Tower Bridge GP Ltd the issue was whether the appellant could claim input tax in a situation where it did not (and does not) hold a valid tax invoice.
Background
Tower Bridge was the representative member of a VAT group which contained Cantor Fitzgerald Europe Ltd (CFE). CFE traded in carbon credits. These carbon credit transactions were connected to VAT fraud.
The First Tier Tribunal (FTT) found that CFE neither knew, nor should have known, that the transactions it entered into before 15 June 2009 were connected to VAT fraud but that it should have known that its transactions were connected to fraud from 15 June 2009. The appeal relates only to transactions entered into before that date.
CFE purchased carbon credits from Stratex Alliance Limited (“Stratex”) The carbon credits supplied to CFE were to be used by the business for the purpose of its own onward taxable transactions (in carbon credits). The total of VAT involved was £5,605,119.74.
The Stratex invoices were not valid VAT invoices. They did not show a VAT registration number for Stratex, nor did they name CFE as the customer. Although Stratex was a taxable person, it transpired that Stratex was not registered for VAT (and therefore could not include a valid VAT number on its invoices) and that it fraudulently defaulted on its obligation to account to HMRC for the sums charged as output tax on these invoices.
Subsequent investigations by HMRC resulted in Stratex not being able to be traced.
Contentions
The appellant contended that it is entitled to make the deduction either as of right, or because HMRC unlawfully refused to use its discretion to allow the claim by accepting alternative evidence.
HMRC denied Tower Bridge the recovery of the input tax on the Stratex invoices on the basis that the invoices did not meet the formal legal requirements to be valid VAT invoices. HMRC also refused to exercise their discretion to allow recovery of the input tax on the basis that:
- Stratex was not registered for VAT
- the transactions were connected to fraud
- CFE failed to conduct reasonable due diligence in relation to the transactions
Decision
Dismissing this appeal, the CoA ruled that where an invoice does not contain the information required by legislation (The Value Added Tax Regulations 1995 No 2518 Part III, Regulation 14), or contains an error in that information, which is incapable of correction, the right to deduct cannot be exercised. The appellant did not have the ability to make a claim as of right.
The Court then considered whether HMRC ought to have permitted Tower Bridge to make a claim using alternative evidence. It found that the attack on HMRC’s exercise of discretion fails for the reasons contended by HMRC (above). These were perfectly legitimate matters for HMRC to take into account in deciding whether to exercise the first discretion in the taxable person’s favour.
CFE had failed to carry out “the most basic of checks on Stratex”.
So, the appeal was dismissed.
Commentary
This was hardly a surprising outcome considering that if an exception were to be made, there would be a loss to the public purse consisting of the input tax, with no corresponding gain to the public purse from the output tax that Stratex ought to have paid, but fraudulently did not.
This case demonstrates the importance of obtaining a proper tax invoice and to carry out checks on its validity. Additionally, there is a need to conduct accurate due diligence on the supply chain. I have summarised the importance of Care with input tax claims which includes a helpful list of checks which must be carried out.
VAT: Updated guidance – Non-Statutory Clearances Service
HMRC has published new guidance on the non-statutory clearance service available for all businesses and their advisers.
Non-Statutory clearances
A Non-Statutory clearance is a mechanism where a person can ask HMRC in writing for guidance or advice in certain circumstances. The guidance sets out how to use this procedure. The service is limited, however, and HMRC will only advise if the applicant:
- has fully read the relevant guidance or contacted the relevant helpline
- has not been able to find the information required
- is uncertain about HMRC’s interpretation of tax legislation
However, HMRC will not respond if
- it is not given all the necessary information —checklists at Annex D (for VAT) provide details of what is required
- it does not think that there are genuine points of uncertainty – it will explain why HMRC think this and direct the applicant to the relevant online guidance
- if HMRC think the clearance request is to give tax planning advice, or to approve tax planning products or arrangements
- the application is about treatment of transactions which, in HMRC’s view, are for the purposes of avoiding tax
- HMRC is checking the applicant’s position for the period in question, in which case queries must be directed to the officer dealing with the inspection
- it is a clearance on matters of fact, such as if certain activities constitute a business
- there is a statutory clearance applicable to the relevant transaction
HMRC is currently not dealing with postal applications, so a request must be sent by email to nonstatutoryclearanceteam.hmrc@hmrc.gov.uk
HMRC will usually reply within 28 days, but say where difficult or complicated issues are involved it may take longer. If this is the case, HMRC will acknowledge a request and tell the applicant when they can expect a full reply. VAT non-statutory clearance requests are currently taking around 12 weeks to process.
Appeal
There is no general right of appeal against advice given by HMRC, except where rights to appeal are set out in statute.
Appeal rights are usually against decisions HMRC take, such as issuing an assessment for underpaid tax or a penalty.
However, some VAT related decisions are classed as ‘appealable decisions’ by statute. The letter HMRC sends will explain if the applicant is able to appeal and what to do if the applicant disagrees with a VAT decision.
Relying on HMRC advice
There has been changes to such reliance, set out here. HMRC explain when its advice is not binding here.
VAT: Exempt insurance intermediation. The Staysure case
Latest from the courts
In the Staysure.Co.UK Limited First Tier Tribunal (FTT) case the issue was whether services of service of generating insurance leads for the appellant fell within the insurance exemption or whether the reverse charge (please see guide below) should be applied.
Background
Staysure is an FCA regulated insurance broker based in the UK which provided travel insurance for people aged 50 or over, home insurance, cover for holiday homes and motor vehicles. It received services from an associated company belonging in Gibraltar.
The services amounted to:
- the provision of insurance leads online and offline
- placing targeted advertising in the press, television and online
- owning and operating the domain and related website: staysure.co.uk
- providing insurance quotations via a bespoke quote engine which employed complex algorithms to produce a personalised price for each customer and resulted in an offer which was competitive from the customer’s perspective while also maximising profit for Staysure, the underwriter, and the service provider
- reporting on where prospective customers were falling out of the quotation and lead selection process, and in so doing demonstrate opportunities for further product development
If the services were not covered by the relevant exemption, they would be subject to a reverse charge via The Value Added Taxes Act 1994 section 8 by Staysure. As the recipient was not fully taxable, this would create an actual cost when the charge was applied. HMRC considered the service taxable and:
- registered Staysure on the strength of the deemed self-supply
- assessed for the input tax which was created by the reverse charge.
The assessment was circa £8 million, penalties of over £1 million plus interest. This was on the basis that HMRC concluded that the supply was taxable marketing rather than exempt intermediary services.
Decision
The court decided that the marketing and technology was used to find clients and introduce them to the insurer. The supplier was not supplying advertising, but qualified leads produced by that advertising. The quote engine was not merely technical assistance, but a sophisticated technology which assessed the conditions on which customers might be offered insurance. Consequently, these services were exempt as the supplies of an insurance intermediary (The VAT Act 1994, Schedule 9, Group 2, item 4) and Staysure was not required to account for UK VAT under the reverse charge.
The appeal was allowed. The services were within the insurance exemption, essentially because they were linked to essential aspects of the work carried out by Staysure, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts.
Technical
This is another case on the application of the reverse charge. I looked at a previous case here
However, the judge helpfully summarised the following principles on insurance intermediation after considering previous case law.
- whether a person is an insurance broker or an insurance agent depends on what they do. How they choose to describe themselves or their activities is not determinative
- it is not necessary for a person to be carrying out all the functions of an insurance agent or broker for the exemption to be satisfied
- it is essential that the person has a relationship with both the insurer and the insured party, but this does not need to be a contractual relationship. The requirement that the person has a relationship with the insurer is satisfied where the person is the subcontractor of a broker, which in turn has a relationship with the insurer
- where the person is a subcontractor of a broker, the exemption is satisfied:
- where the relationship with the customer is indirect or where the subcontractor is one of a chain of persons bringing together an insurance company and a potential insured, but;
- the subcontractor’s services must be linked to the essential aspects of the work of an insurance broker or agent, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts
Commentary
Care should always be taken when outsourcing/offshoring services or in fact, when any business restructuring takes place. The VAT impact of doing so could provide costly. In this case, the distinction between intermediary and marketing services was considered. It went in the taxpayer’s favour, but slightly different arrangements could have created a large VAT hit.
Guide
Reverse charge on services received from overseas
Normally, the supplier of a service is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. This is known as the ‘Reverse Charge’ procedure. Generally, the Reverse Charge must be applied to services which are received by a business in the UK VAT free from overseas.
Accounting for VAT and recovery of input tax.
Where the Reverse Charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.
Value of supply
The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply.
The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.
The outcome
The effect of the provisions is that the Reverse Charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus the charge aims to avoid cross border VAT rate shopping. It is not possible to attribute the input tax created directly to the deemed (taxable) supply.
VAT: The importance of Transfer of a Going Concern rules. The Haymarket case
Latest from the courts
In the First Tier Tribunal (FTT) case of Haymarket Media Group Limited (Haymarket) the issue was whether the sale of Teddington TV Studios qualified as a VAT free Transfer of a Going Concern (TOGC).
Background
The site in question was subjected to an Option To Tax (OTT) by the supplier. The sale of the property was with the benefit of planning consent for the development of flats and houses on the site after demolition of the TV studios.
Subject of the appeal
The transferor/vendor had previously let a small building on the site to the purchaser’s advisers and, on this basis, the sale was structured to be a TOGC as a property rental business. HMRC raised an assessment as it considered that neither a property rental business, nor a property development business had been transferred.
Decision
The appeal was dismissed. The FTT found that, despite the short lived and minor letting, this did not constitute a business. Further, that even if this had been a business, the contract required vacant possession so a business could not have been continued.
The contention that a property development business was being carried on was also rejected. Despite significant costs being incurred by Haymarket in obtaining the planning permission, the intention* was always to sell the site to a developer, rather than the appellant carrying out the development itself (there was no meaningful work being carried out on the site). The fact that planning permission was obtained did not mean that there was an ongoing property development business which could be transferred.
* The importance of “intention” in VAT is considered here and here.
Technical
In order for a transaction to qualify for a VAT free TOGC, ALL of the following conditions must be met:
- the assets must be sold as a business, or part of a business, as a going concern
- the assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
- there must be no break in trading
- where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
- where only part of a business is sold it must be capable of separate operation
- there must not be a series of immediately consecutive transfers
In this case, the first, second and third tests was failed leaving the supply to be VAT-able as a result of the OTT.
More on the complex subject of TOGCs including case law here, here, here, and here.
Commentary
TOGCs are often a minefield for taxpayers and their advisers, especially if property is involved. Not only is land law and the relevant VAT legislation complex, but property transactions are usually high value, with a lot of VAT at stake (the VAT in this case was £17 million). Additionally, they are often “one-offs” and frequently outside the usual commercial expertise of people running the business. We strongly advise that comprehensive technical advice is always obtained when TOGC is mooted by one side or the other, particularly when the relevant asset is involved in property letting or development.
VAT: Are preparatory ground works for burial chambers exempt? The Hodge case
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In the First-Tier tribunal (FTT) case of Hodge and Deery Limited the issue was whether ground works preparatory to installing flexi vault burial chambers exempt via The VAT Act 1994, Schedule 9, group 8, item 2 – “The making of arrangements for or in connection with the disposal of the remains of the dead.”
Background
The vaulting system was installed in graveyards with unstable soil structures which can result in issues with toxins and in subsidence of an existing grave when another grave is dug in the adjacent plot. The burial plots are ready for use and the element above the plots is landscaped (which was undertaken by a third-party).
The appellant’s case
The appellant considered that the installation of the flexible burial vaults should be treated as the advance digging of multiple graves. It should not be regarded differently from the preparation of “normal” graves. The sole purpose of the preparation of a grave is to dispose of the remains of the dead and it should not matter that the undertaker does not prepare the grave himself.
HMRC’s case
HMRC considered that the installation of flexible burial vaults do not fall within the exemption because:
- item 2 must be construed to confine the exemption to those supplies directly involved with the disposal of the remains of a particular dead person
- item 2 is confined to supplies directly made by the funeral director with care and custody of the deceased. It does not extend to sub-contractors of the funeral director
- the appellant had no responsibility for the deceased
- although the availability of zero rating in connection with the provision of new housing can be available to sub-contractors involved in the supply of new housing, this exemption cannot extend to sub-contractors in the same way, as the sub-contractors cannot be concerned with the body of the deceased
Decision
The judge considered that the services resulted in the provision of many graves for the disposal of the remains of the dead and that the result of the services satisfied the object of the exemption. The digging of graves is central to the disposal of the remains of the dead, the services are made in connection with the disposal of the remains of the dead and within Item 2.
Commentary
In this case, it did not matter that the services are provided in advance, and nor did it matter that the services are not provided in connection with a specific funeral. It also confirms that the funeral director or undertaker need not provide all the services themselves. It seems obvious that the digging of graves is pivotal to the disposal of the remains of the dead and once it was established that a third party could dig the grave, the appeal was bound to be successful.
VAT: The importance of due diligence. The 50 Five (UK) Limited case
Latest from the courts
In the First Tier Tribunal (FTT) case of 50 Five (UK) Limited the issue was the VAT rate applicable to energy saving materials. An additional twist was that there was a sale of the business between the tax point of the relevant supplies and HMRC’s assessment.
Background
The appeal was brought in the name of the Appellant in respect of assessments raised by HMRC against the company prior to the date on which it was purchased by the present owners. The present owners were not made aware of the assessment at the time of purchase. It had not been disclosed to them as part of the due diligence which was undertaken.
The Appellant’s business was that of supply and installation of heating and hot water systems. The customers were supplied with fully installed systems. The Appellant did not ask the customers to separately source the parts for such systems and then simply fit them. These supplies were treated as those of energy saving materials and the reduced rate of 5% was applied.
HMRC raised an assessment after taking the view that the supply should have properly been standard rated at 20%.
Decision
The FTT decided that legislation which permits the sale of energy saving materials at the reduced rate of VAT apply only where the supply of those materials is independent of an installation service. In this case, as the Appellant was the provider of the goods, and also the installer, the supply to the end customer was standard rated (a composite supply).
It was noted that this outcome was counter intuitive and the result does indeed seem unfair to the taxpayer, but as there was no reasonable prospect of the appeal succeeding, it was struck out. The assessment and interest was now payable by the new owners.
Commentary
An unfortunate outcome for the new owners, but it highlights three VAT issues:
- always carry out appropriate due diligence when buying a business. VAT is often an issue and if the buyer had discovered the assessment, it could have either abandoned the purchase, or negotiated on the price
- never assume that a lesser rate of VAT applies without carrying out appropriate research or seeking advice
- always consider whether a supply is separate or composite. This is a difficult area of the tax as the amount of case law testifies
The only recourse the new owners have now is taking action against the sellers of the business.
A VAT Did you know?
Aphrodisiacs can be food and therefore VAT free. Capsules, drops, powders and sprays presented as aphrodisiacs that stimulate libido are intended for human consumption and are taken orally. The fact that consumption of the product may have positive effects on the sexual desire of the person ingesting it is irrelevant.
VAT: Avoiding a Default Surcharge. Reasonable Excuse – Update
I have looked at the Default Surcharge regime in detail here but as statistics show more business to be in default (which is probably accurately attributable, inter alia, to the pandemic) I consider how a penalty may be mitigated, by the provision of a “Reasonable Excuse”. HMRC has updated its internal guidance on Reasonable Excuse this month.
Specifically: HMRC state that “…where a person has not been able to meet an obligation on time due to the impact of COVID-19, HMRC will usually accept that they will have a reasonable excuse.”
What is a Default Surcharge?
The Default Surcharge is a civil penalty issued by HMRC to encourage businesses to submit their VAT returns and pay the tax due on time.
A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.
More on late returns here and on late payments here.
New rules forthcoming
It is noted that there is a new regime for penalties, details here although these changes have been delayed until 1 January 2023
Reasonable Excuse
If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge. The onus is on a business to satisfy HMRC that it has a Reasonable Excuse.
Definition
There’s no statutory definition of Reasonable Excuse and it will depend on the particular circumstances of a case. A Reasonable Excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a Reasonable Excuse.
What may count as a Reasonable Excuse?
HMRC give the following examples:
- “your partner or another close relative died shortly before the tax return or payment deadline
- you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
- you had a serious or life-threatening illness
- your computer or software failed just before or while you were preparing your online return
- service issues with HMRC online services
- a fire, flood or theft prevented you from completing your tax return
- postal delays that you could not have predicted
- delays related to a disability (including mental health) you have”
This list is not exhaustive.
What is NOT a reasonable excuse
Statute identifies two specific situations that are not a reasonable excuse:
- lack of funds to pay any VAT due, or
- reliance on any other person to perform a task, where there has been a delay or inaccuracy on that person’s part.
There can be exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.
HMRC also states that these situations would not normally be accepted, on their own, as a reasonable excuse:
- pressure of work
- lack of information
- lack of a reminder from HMRC
Facts
HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:
- the taxpayer’s beliefs
- the taxpayer’s own experiences and relevant attributes
- the situation of the taxpayer at any relevant time
- acts carried out by the taxpayer or someone else
- acts that the taxpayer or someone else should have carried out but did not.
Case Law
Although not a VAT issue, in the Upper Tribunal (UT) case of Christine Perrin [2018] UKUT 156 [TC], the judge provided guidance on how the Tribunal should approach a Reasonable Excuse defence. There are four steps:
- establish what facts the taxpayer asserts give rise to a reasonable excuse
- decide which of those facts are proven
- if those proven facts amount to an objectively reasonable excuse for the default
- having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time
Appeal
If HMRC refuse to accept an advance of a Reasonable Excuse and the Default Surcharge is maintained, there are two potential remedies:
If a business disagrees with a decision that it is liable to a surcharge or how the amount of surcharge has been calculated, it is possible to:
- ask HMRC to review your case (A Statutory Review)
- have your case heard by the Tax Tribunal
If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension (SLNE) was sent. The letter should give the reasons why a business disagrees with the decision.
We are able to assist with all disputes with HMRC and have an enviable record of succeeding in having Default Surcharges removed.