Category Archives: Law

VAT: Car boot sale pitches are exempt – The Rufforth Park case

By   14 February 2022
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Latest from the courts

In the Rufforth Park Limited (RPL) First Tier Tribunal (FTT) case the issue was whether pitches for car boot and auto jumble sales were subject to VAT or were they a simple licence to occupy land and exempt?

Background

The appellant has been running car boot sales at Rufforth Park for the more than forty years. When RPL began the car boot sales, the VAT office was asked to confirm that it did not need to charge VAT on the fees for the pitches. It was told that it should charge VAT, and did so. After a number of years, RPL demonstrated to the VAT office that other businesses in a similar position were not charging VAT. HMRC then agreed and the VAT the company had paid was refunded with interest. The company has not charged VAT on the pitch fees since. After a routine inspection HMRC formed the view that there were a number of services that, together, formed a standard rated supply and assessed for VAT on that basis. RPL appealed against this decision.

Technical

HMRC concluded that the fees for the pitches should be standard rated because the supply of the pitches was provided with other goods and services which constituted a single overarching supply of a service, not merely the right to occupy land. The reasons were:

  • Forty years of running car boot sales had built up a reputation which is a tangible benefit to stallholders. The reputation of regular events is part of the supply the stall holder receives.
  • Advertising to bring buyers to the site for the benefit of stall holders is part of the supply.
  • The amenities on site enable buyers better to enjoy their time at the car boot sale and are part of the supply.
  • The sellers benefit from the amenities as well as the activities undertaken by RPL to attract buyers to the site to buy items from the sellers. Those activities include:
  1. advertising
  2. on site café
  3. toilets
  4. parking
  5. capital improvements to the site to make it more attractive to buyers
  6. provision of some pitches under cover
  7. cleaning the site after the events
  8. RPL had real and significant responsibilities to the sellers (although HMRC did not specify what they were)

This was said to show there was more to the supply than the exempt passive supply of land for a stall to sell items.

The appellant submitted that the supply in this case is a single supply of a pitch rental and one must look at all the circumstances in order to establish its nature. Regard must be had to the commercial and economic realities. The renting of a pitch in a car boot sale in the present case was a relatively passive activity linked to the passage of time and not generating any significant added value and so is VAT free.

Decision

The court found that that the nature of the supply provided in return for the pitch fees is a licence to occupy land within The VAT Act, Schedule 9, Group 1, Item 1 and accordingly the fees were exempt. The appeal was allowed.

Commentary

Yet another case demonstrating the uncertainty in this area. Superficially, there is little difference in the facts of this case to those in the Upper Tribunal (UT) case of Zombory-Moldovan (trading as Craft Carnival) which found that supplies of pitches at craft fairs were standard rated. However, the court found that this case could be distinguished on its facts. Which may be summarised as:

  • there was no formal contract between RPL and its sellers
  • it was not possible to book in advance
  • there was no selection of sellers. Anyone who arrived and paid would get a space, allocated by RPL
  • the advertising on the company’s website, local TV, and Facebook provided only basic information to both buyers and sellers about times and prices
  • RPL had no obligation to put on the car boot sales or the auto jumbles. Sellers have no right to attend. If there was no sale, they would have no recompense.
  • no tables, chairs or electricity were provided, even for an extra fee
  • there was no provision of security
  • the toilet and refreshment facilities were basic
  • the Appellant had carried out such maintenance as is required but had not attempted to enhance the facilities
  • whilst the car boot sales and auto jumbles might be efficiently run, they are simple events involving only the Appellant’s land and its employees and not requiring any particular organisational or management skills. Well run is not the same thing as “expertly organised and expertly run”.

It is important when considering these two decisions to establish precisely what is being supplied, as small differences in facts can affect the VAT treatment. The more “basic” the supply, the more likely that exemption will apply, but it is a question of small degrees of difference.

VAT: Latest on early termination and compensation payments

By   8 February 2022
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HMRC has published a new Revenue and Customs Brief 2(2022) which replaces Revenue and Customs Brief 12 (2020): VAT early termination fees and compensation payments.

It introduces a revised policy on early termination payments and compensation fees. Following representations from industry the Brief issued in September 2020 was suspended in January 2021. HMRC has reviewed the policy in the light of those representations and is adopting a revised policy which will take effect from 1 April 2022. The new policy will result in fewer early termination payments being subject to VAT than in the 2020 guidance.

The new Brief also advises businesses that adopted the treatment outlined in Brief 12 (2020) on what action they should now take.

Background

Whether a payment is for a VAT supply depends on whether anything is being done in return for a consideration. Where a party agrees to do something in return for a fee there is a supply. How that fee is described does not affect whether there is a supply for VAT. What matters is whether something is done and if there is a direct link between what is done and the payment received, and reciprocity between the supplier and the customer (see VATSC05100).

Previous HMRC guidance stated that when customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT.

Following the Court of Justice of the European Union (CJEU) judgments in Meo (C-295/17) and most recently in Vodafone Portugal (C-43/19), it is evident that some of these charges are additional consideration for the supply of goods or services. Most early termination fees and some cancellation fees are therefore liable for VAT if the goods or services for which the fees have been paid are liable for VAT, even if they are described as compensation or damages.

The main impact of the revised policy is that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. For example, if a customer is charged a fee for exiting a mobile phone contract early, or if they terminate a car hire contract early, it will be liable for VAT.

The new guidance can be found at VATSC05910, VATSC05920 and VATSC05930.

VAT: Bad Debt Relief. The Regency Factors case

By   7 February 2022
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Latest from the courts

In the Regency Factors plc Court Of Appeal (CoA) case the issue was the validity of the appellant’s claim for Bad Debt Relief (BDR) on amounts it had not received after the issue of an invoice.

Technical

BDR is a mechanism which goes some way to protect a business from payment defaulters. Under the normal rules of VAT, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). The specific relief for unpaid VAT is via the BDR scheme.

A guide to BDR here.

Commentary on the Upper Tribunal (UT) hearing in this case here.

Background

In the CoA case the issue was whether the appellant met the conditions in The VAT General Regulations 1995, Reg 168 for claiming BDR via The VAT Act 1994, section 36.

Regency provided a factoring service to its clients for which it is paid a fee. VAT invoices for those fees were issued to clients when the invoices which are being factored are assigned to Regency for collection.

Regency appealed against a decision of the Upper Tribunal (UT) which dismissed Regency’s appeal against VAT assessments made by HMRC to withdraw BDR which Regency had claimed in its VAT returns.

The UT held that the BDR claim was not valid because

  • there was no bad debt; and
  • Regency had failed to comply with the procedural requirements for the making of a claim. 

Regency appealed against the decision of the UT on the second point.

Decision

The CoA decided that as Regency’s record keeping was insufficient to support a BDR claim. Specifically, although it did keep the records required by Regulation 168 (2), it did not keep a single VAT BDR account which is required by Regulation 168 (3). The ruling commented that this requirement was a legitimate feature of the scheme as it enables an inspector to check the claim easily. It is not acceptable for a claimant to simply have a pile of unsorted documents which may, or may not, evidence a valid claim.

The court also said that it was possible for HMRC to allow a discretionary claim (clearly, they did not use that discretion in this case) and that the legal requirement was not a barrier to Regency making a proper BDR claim. The appeal was dismissed.

“In short, Regency had the opportunity to prove its claim for bad debt relief in the FTT… but it failed to do so. It is not entitled to a second opportunity”.

Commentary

As always with VAT, accurate record-keeping is essential. As the tax is transaction based, it is vital to keep comprehensive evidence of those transactions and associated payments. Failure to do so may result in:

  • assessments and penalties
  • give HMRC the opportunity to refuse otherwise legitimate input tax recovery
  • refuse other VAT claims (in this case BDR).
  • confusion and uncertainty which often creates costs in time and other resources, and extended relations with HMRC, which is in no business’ interest.

If Regency had taken “one step further” with its record keeping, BDR would have been paid by HMRC.

Is room hire subject to VAT? – The Errol Willy Salons case

By   24 January 2022
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Latest from the courts

In the First Tier Tribunal (FTT) case of Errol Willy Salons Ltd (2022) TC 08370 the issue was whether the rent of two rooms were an exempt right over land, or the standard rated supply of facilities.

Background

Room hire is usually exempt from VAT unless it is subject to an option to tax. However, it can be subsumed into a different rated another supply if something more than a “bare” room is provided. In such cases, it would follow the VAT treatment of the composite supply.

The Issue

In the Errol Willy Salons case, HMRC formed the view that what was being supplied was facilities (the room occupation being a minor part of the supply) and therefore subject to VAT. In its opinion the economic and social reality was that the beauticians were provided with a licence to trade from the premises. The appellant occupied the ground floor – operating a hairdressing business. The rooms over the saloon were rented to third party beauticians. The occupants furnished the rooms themselves, provided their own equipment, set their own pricing and opening hours. They did have use of certain services and facilities; a receptionist and toilets, but it was understood that the services were rarely used. Unsurprisingly, the appellant disagreed and contended that the other services were incidental or subsidiary to the exempt supply of the room rental.

The decision

The Tribunal allowed the appeal against the assessment. It found that “non-rent” services provided to the beauticians were limited in nature and not essential to the beauticians’ businesses Consequently, the arrangements amounted to a supply of property (a licence to occupy the rooms) rather than a supply of taxable facilities and was therefore exempt.

Commentary

This is the latest in a long line of issues on composite/separate supplies and room hire/facilities disputes, especially in relation to weddings. It is important to establish precisely what is being provided to establish the correct VAT treatment and advice should be ought if there is any doubt about the VAT liability.

The CIOT has long advocated that it is not the case that every package of supplies involving room hire and other things must be a composite supply of something other than an exempt letting of land.

NB: This case is different to hairdresser chair rentals which remain standard rated.

Splitting a business to avoid VAT registration: Disaggregation

By   11 January 2022
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Earlier this month, I wrote an article on VAT registration.  A query which commonly follows an initial registration query is: can I split my business into separate parts which are all under the VAT registration turnover limit to avoid registering? Prima facie, this seems a straightforward planning point. But is it possible?

You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.

What HMRC will consider to be artificial separation:

HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly, it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:

Separate entities supply registered and unregistered customers

  • In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

Same equipment/premises used by different entities on a regular basis

  • In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally, the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.

Splitting up of what is usually a single supply

  • This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.

Artificially separated businesses which maintain the appearance of a single business

  • A simple example of this type of separation is; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations

  • In this type of separation, a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic, and organisational links

Again, each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

  • financial support given by one part to another part
  • one part would not be financially viable without support from another part
  • common financial interest in the proceeds of the business

Economic links

  • seeking to realise the same economic objective
  • the activities of one part benefit the other part
  • supplying the same circle of customers

Organisational links

  • common management
  • common employees
  • common premises
  • common equipment

HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.

As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.

VAT Inspections …and how to survive them

By   5 January 2022
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VAT Inspections

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

Background

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

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

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

More details on certain inspections/investigations here

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

The inspection – how to prepare

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

The inspection – during the visit

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

The inspection – at the end of the visit

The inspector should:

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

You should:

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

After the inspection

HMRC will write to you confirming:

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

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

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

VAT: Trading with the EU from 1 January 2022

By   14 December 2021
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Further to my article on the new changes from next year, HMRC has published information on the rules of origin for trade between the UK and EU.

The Bulletin covers the rules of origin and the forthcoming changes to the requirement for supplier declarations to support proof of origin.

Uber to charge VAT

By   7 December 2021
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Latest from the courts

Further to my article on the Supreme Court case, Uber went to the High Court seeking to challenge this decision, but the High Court has now upheld it.

This means it is very likely that Uber will be required to charge VAT on its supplies as the court found that taxi firms make contracts directly with their customers because Uber drivers should be treated as workers not contractors. This means that Uber make to supply of taxi services to the fare and not the individual drivers.

The High Court agreed with the Supreme Court and stated that: “… in order to operate lawfully under the Private Hire Vehicles (London) Act 1998 a licensed operator who accepts a booking from a passenger is required to enter as principal into a contractual obligation with the passenger to provide the journey which is the subject of the booking.”

A spokesperson for Uber said: “Every private hire operator in London will be impacted by this decision, and should comply with the verdict in full.”

Although not a VAT case itself, this decision is the latest in a long list of VAT agent/principal cases, the most important being:

Secret Hotels 2 Ltd

Hotels4U.com Ltd

Low Cost Holidays Ltd

Adecco

All Answers Limited

It is crucial that businesses review their position if there is any doubt at all whether agent status applies to their business model.

VAT: Roof panels are not insulation. The Greenspace case

By   2 December 2021
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Latest from the courts

In the Upper Tribunal (UT) case of Greenspace Limited the issue was whether insulated roof panels were “energy-saving materials” per VAT Act 1994, sect 29A, Schedule 7A, group 2, items 1 and 2 and thus liable at the reduced rate of 5%. Or rather at the standard rate of 20% on the basis that they were a supply of a roof itself.

Background

The appellant supplied and installed roof panels for conservatories which comprised a layer of close-cell extruded polystyrene foam (Styrofoam) around 71mm thick. The Styrofoam was covered with a thin aluminium layer and a protective powder coating which are together around 2mm thick. The supplies were made to residential customers and the panels were fitted onto their pre-existing conservatory roofs. The Panels were slotted into place on the existing roof structure and Greenspace did not replace its customers’ existing roof framework when doing this; the struts and glazing bars that supported the previous glass or polycarbonate panels were left in place. Consequently, the Panels were not self-supporting and could only be used if the customer already had an existing conservatory roof structure.

The decision

The First-tier Tribunal (FTT) decided in 2020 that the panels were not “insulation for a roof” but were a new roof in their own right, and that the appellant’s supplies did not therefore qualify for the reduced rate of VAT (unlike insulation that could be separately attached to a roof, the panels actually formed the roof).

The UT dismissed the new appeal and found that the FTT had not been obliged to compare the roof after Greenspace had installed its panels to the original roof. The frame that was retained could not itself be described as a roof, and the provision of the Thermotec panels which made the conservatory weatherproof as well as insulating it could properly be categorised as the provision of a new roof.

One of Greenspace’s grounds of appeal was that the FTT decision was vitiated by the assumption that because the panels took the form of roof coverings, they were necessarily incapable of constituting “insulation for … roofs”. The appellant argued that as this was a flawed assumption (that Greenspace’s supplies “must” be treated as something more than insulation) the decision should be set aside. This contention was rejected by the UT judge.

Commentary

A fine distinction is often required to be made to establish the correct VAT treatment of a supply. In this case a degree of semantics was required to determine whether the panels were energy-saving materials (even when they certainly saved energy). On such small things turned the assessment of £2.6 million here. It always pays to double check VAT treatments rather than making assumptions.