HMRC has updated its list of VAT appeals, which sets out the status of HMRC appeals and recent cases which they consider have potential implications for other taxpayers.
This is a list of VAT appeals that HMRC has lost, or partly lost, that could have implications for other businesses.
The list is updated regularly and details of finalised cases are retained for six months.
The legislation for the DRC for electricity was designed to exclude supplies of electricity made under supply licences (supply electricity). It also excludes resale supplies of electricity made between the person holding the supply licence and the person making the supply to the consumer of the electricity (the vehicle user).
This means that the reverse charge does not apply to the supply of electricity at a charging point for EVs. This is because either the vehicle user is not VAT registered, or because it is not a wholesale supply. This applies whether or not the electricity is supplied at a public charging point.
Wholesale has an ordinary meaning where the supply is business to business and there is little or no consumption of the supply. EV charging does not fall within this definition.
For the latest case law on public EV charging see here.
Latest from the courts
Reduced VAT rate for public EV charging
In the First-tier Tribunal (FTT) case of Charge My Street Limited (CMS) the issue was whether the supply of electric vehicle (EV) charging in public places qualified for the reduced rate of VAT – 5%.
The appellant contended that the reduced rate applied to its supplies because they were provided at a premises and were below the de minimis – 1000 kilowatt hours (kWh) a month applicable to domestic use of electricity.
HMRC formed the view that these supplies were standard rated at 20% on the basis that what was being provided was not for ‘domestic use’. Furthermore, the de minimis was breached because the supply should be calculated by reference only to the period during which the electricity was actually being provided, rather than to a specific person at any premises in a month.
Legislation
The relevant legislation is found at The VAT Act 1994, Schedule 7A, Group 1, Item 1, Note 5(g),
Decision
The FTT found that ‘premises’ for this purpose did not require any concept of legal ownership by the recipient of the electricity, nor was it confined to buildings, but could include defined public spaces, such as car parks. The judge also accepted CMS’s argument that the de minimis limit is measured in terms of how much electricity is provided by a supplier to a person at any premises in the relevant month. It was accepted that public EV charging would always be under the 1000 kWh limit.
The FTT allowed appellant’s appeal in principle.
Crisps – spot the difference: Doritos, Monster Munch, Wotsits and poppadums are standard rated, however Pringles, Skips and Twiglets, are VAT free.
Latest from the courts
In the First-Tier tribunal (FTT) case of Telamara Limited the issue was whether Nitrous Oxide (N₂O) used exclusively for culinary use can be zero-rated.
Background
The appellant supplied N₂O canisters which were used as cream chargers. These were used for whipping cream and creating foams and mousses, and to infuse liquids. The relevant invoices described the product as; “Dairy products misc. Cream/beverage infusers 600 x 8g cylinder”. The chargers were not for medical use. The chargers were certified as Halal products.
Telamara’s customers were wholesalers and the units in which the chargers were sold were in boxes of 600. The packaging states that the contents of the chargers should not be inhaled. If consumed on its own N₂O is tasteless and all but imperceptible and its only effect is on the consistency of the whipped food.
The contentions
Telamara considered that the sale of the canisters should be zero-rated because they were for culinary use as food of a kind for human consumption via The VAT Act 1994, Schedule 8 VAT Act 1994, Group 1, Item 1. It was accepted that the N₂O would not be “eaten on its own” but it nevertheless was said to form an ingredient of all of the food substances into which it was incorporated by infusion or by use of the cream whipper, changing the state and nature of those foods. Furthermore, the appellant claimed unfairness because HMRC had been unable to provide clear guidance on the correct VAT treatment when the business started but HMRC subsequently became certain the supplies were standard rated.
Unsurprisingly, HMRC disagreed, formed a view that the supplies were not of food, and raised an assessment for the output tax it deemed to be due on the standard rated supplies.
Decision
The appeal was dismissed. It was found that the chargers were not food because N₂O:
The Tribunal concluded that the gases were standard rated as they were not food of a kind used for human consumption. It concluded that no informed and broad-minded person considering whether the gases were food would conclude that they were.
Commentary
Yet another “Is it food?” case adding to a long list. The Tribunal helpfully set out (drawing from an extensive and thorough review of the very many cases which have considered the scope of zero-rating of food) the required exercise considering and weighing up the following factors to answer the question of whether something is food:
(1) Nutritional value
(2) Palatability
(3) Form of the product
(4) Manner of/directions for consumption
(5) Frequency of consumption
(6) Marketing
(7) Purpose of the product
(8) Range of uses
(9) Constituent ingredients
(10) Dictionary definition of food
Summary
Is it food? is not as a straightforward question as it may seem!
We recommend that any business which is involved in ‘food” or “food-like” products should undertake a review in light of this case. We can, of course, help with this .
Normally the sale of the assets of a VAT registered business will be subject to VAT at the appropriate rate. A TOGC, however is the sale of a business including assets which must be treated as a matter of law, as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions. It is always the seller who is responsible for applying the correct VAT treatment and will be required to support their decision.
Where the sale meets the conditions, the supply is outside the scope of VAT and therefore VAT is not chargeable.
The word ‘business’ has the meaning set out in The VAT Act 1994, section 94 and ‘going concern’ has the meaning that at the point in time to which the description applies, the business is live or operating and has all parts and features necessary to keep it in operation, as distinct from its being only an inert aggregation of assets.
TOGC Conditions
The conditions for VAT free treatment of a TOGC:
Please note that the above list has been compiled for this article from; the legislation, HMRC guidance and case law. Specific advice must be sought.
Property transfer
The sale of a property may qualify for TOGC if the above tests are met. Usually, but not exclusively, a TOGC sale is the sale of a tenanted building when the sale is with the benefit of the existing lease(s) – (the sale of a property rental business rather than of the property itself). Another example of a property TOGC is where a property under construction is sold (a development business). As may be seen, timing with a property TOGC is of utmost importance. For example, an option to tax one day late will invalidate TOGC treatment. A guide to land and property.
What purpose do the TOGC rules serve?
The TOGC provisions are intended to simplify accounting for VAT when a business changes hands. The main purposes are to:
What if it goes wrong?
TOGC treatment is not optional. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control.
Add VAT when TOGC treatment applies:
Often, the TOGC point can be missed, especially in complex property transactions.
The addition of VAT is sometimes considered a “safe” VAT position. However, output tax will have been charged incorrectly, which means that when the buyer claims VAT shown on the relevant invoice, this will be disallowed. This can lead to;
Sale treated as a TOGC when it is a taxable supply:
When VAT free TOGC treatment is applied to a taxable supply (possibly as one, or more of the TOGC conditions are not met) then there is a tax underdeclaration. The seller will be assessed by HMRC and penalties and interest are likely to be levied. There is then the seller’s requirement to attempt to obtain the VAT payment from the buyer. Similarly to above, this is not always straightforward or possible and it may be that the contract prohibits additional payment. There is likely to be unexpected funding issues for the buyer if (s)he does decide to make the payment.
Considering the usually high value of sales of businesses, the VAT cost of getting it wrong can be significant.
Summary
This is a complex area of the tax and an easy issue to miss when there are a considerable number of other factors to consider when a business is sold. Extensive case law (example here and changes to HMRC policy here) insists that there is often a dichotomy between a commercial interpretation of a going concern and HMRC’s view. I sometimes find that the buyer’s intentions change such that the TOGC initially applied becomes invalid when the change in the use of assets (from what was notified to the seller) actually takes place. HMRC is not always sympathetic in these situations. One of the questions I am often asked is: “How long does the buyer have to operate the business after purchase so that TOGC treatment applies?” Unsurprisingly, there is no set answer to this and HMRC do not set a specific period. My view, and it is just my view, is that an absolute minimum time is one VAT quarter.
Contracts are important in most TOGC cases, so it really pays to review them from a VAT perspective.
I very strongly advise that specialist advice is obtained in cases where a business, or property is sold. And yes, I know I would say that!
Latest from the courts
Yet more on composite or separate supplies. As a background to the issue please see previous relevant cases here here here and here. This is the latest the seemingly endless and conflicting series of cases on whether certain supplies are multiple or single.
In the First-Tier Tribunal case (FTT) of United Carpets (Franchisor) Limited (UC) the issue was whether the appellant made a single supply of flooring and fitting or whether there were two separate supplies
Background
UC is a retailer of flooring (including carpets, underlay, vinyl and wood flooring), as well as beds. A customer who purchased flooring from the appellant was given the option to have an independent, self-employed, fitter to carry out the fitting of the purchased flooring. Each store has a pool of fitters who take on fitting work referred to them by the appellant. If the customer chooses, the fitter will attend the customer’s home to fit the flooring, as directed by the customer. The fitter is then paid by the customer for that work, with the money being received and retained, in full, by the fitter.
The fitters are self-employed and they use their own tools, and drive their own vehicles. They also have their own public liability insurance and are not covered by any of the appellant’s insurance policies. They are not paid by the UC and are not on the UC’s payroll. Since they are self-employed, the fitters have no ongoing obligations to the appellant (or vice versa) and can take on referrals as they please. The appellant does not hold any formal records for the fitters and is not aware of how much the fitters earn by way of the referrals. The rates charged by the fitters are determined by the fitters themselves.
The appellant’s Terms and Conditions of Sale included the following statements:
“The carpet fitting and delivery services provided by the Installer are supplied under a separate contract from the supply of goods to the Customer by the Company (UC). The Company is not responsible for the delivery or fitting of the Goods to the Customer.
“Full payment for the fitting services is due upon fitting payable by cash or cheque directly to the Installer. As detailed on the invoice, payment for the carpet fitting is made directly to the Installer under a separate contractual agreement between the Customer and the Installer…”
The issue
Whether the supplies of fitting services made to customers following the referral to the fitter by UC were supplies made by the self-employed carpet fitters who performed the services, or by UC as a single supply of flooring and fitting such that output tax was due from UC on both the retail sales and the fitting fees.
Contentions
HMRC determined that the appellant had incorrectly treated the supply of carpet fitting and contended that it supplied fitting services via sub-contractors and assessed the appellant for output tax on the fitting fees. HMRC further contend that the appellant made those supplies as part of a single supply, comprising both the flooring and the fitting services. Assessments were raised to recover the deemed underdeclared output tax.
UC’s position is that the self-employed fitters were completely independent, and that the fitting services do not form a single supply. Consequently, VAT was only due on the retail sales and not the fitting income.
Decision
The FTT concluded that there were two separate supplies:
After a review of the contractual documentation and the economic and commercial reality, the court was satisfied that there were three agreements:
The fitter provided services to the end consumer who was liable to pay the fitter.
Consequently, the appeal was allowed, and the assessments were set aside.
A significant amount of case law was cited (a list too long to reproduce here) but included were the cases of: Secret Hotels 2 Limited v HMRC; All Answers Ltd v HMRC and Tolsma v Inspecteur der Omzetbelasting Leeuwarden which were considered and applied.
Commentary
Yet another case on the perennial composite/single supply issue. This case was more straightforward than many on this subject and the outcome was no surprise. It is essential that businesses that potentially deal with agent/principal matters or make supplies at different VAT rates consider their position. Both contracts, other documentation and the commercial reality need to be considered. We recommend that in such circumstances a review is carried out specifically to establish the proper VAT position .
Latest from the courts.
In the Generic Maths Limited First Tier Tribunal case the issue was whether the appellant’s product; ‘ConquerMaths’ amounted to examination services so to be exempt via The VATA 1994, Schedule 9, Group 6, Item 3.
Background
Generic Maths provided an online tool which was intended to be of benefit to students or their parents/teachers. The following facts concerning ConquerMaths were found:
The issue
Simply put; was the product predominantly a tool that provides assessments enabling those using the product to determine what level of maths ability the student has reached and identify any gaps in knowledge and therefore an exempt supply since it falls into the category “examination services”? Or, as HMRC contended, was it an online mathematical tutorial tool which was standard rated as it was a composite supply the predominant element of which was education and that the supply was not one of examination services? (There was no argument that these were exempt educational services).
The tests
The FTT considered that the correct test for determining the nature of the appellant’s supplies was an objective test, based on how they would be characterised by the typical consumer. On that basis, ConquerMaths was a teaching product designed to improve maths understanding, not an examination service.
Additionally, if the correct test was rather a functional test, the result would be the similar.
Decision
The Tribunal did not consider that the product was a supply of examination services within Item 3. It found that the assessment had been made using best judgment by HMRC and accordingly that the appeal should be dismissed.
Commentary
This is probably the correct decision, although the examination and education exemptions are open to interpretation. Care should be taken by taxpayers that the exemption is correctly applied. Although the definition of examination services is wider than formal public examinations, it was not wide enough to encompass ConquerMaths.
Latest from the courts
In the First Tier Tribunal (FTT) case of Eurolaser IT Ltd regarding Kittel and Mecsek assessments and penalties:
one interesting aspect was the award of costs.
Generally, in FTT cases the rule is that each party will usually bear its own costs.
However, it is worth recapping how the award of costs works via The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. In this instant case, the Appellant had not ‘opted out’ of the costs protection regime set out in rule 10(c)(ii) of the Rules. Consequently, the FTT ordered that Eurolaser must pay HMRC’s costs – a sting in the tail. So, what are the rules? (Where relevant here)
Orders for costs
“10.—(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses)—
(a) under section 29(4) of the 2007 Act (wasted costs) [and costs incurred in applying for such costs];
(b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings;
(c) if—
(i) the proceedings have been allocated as a Complex case under rule 23 (allocation of cases to categories); and
(ii) the taxpayer (or, where more than one party is a taxpayer, one of them) has not sent or delivered a written request to the Tribunal, within 28 days of receiving notice that the case had been allocated as a Complex case, that the proceedings be excluded from potential liability for costs or expenses under this sub-paragraph”
So, in “Complex” cases, an Appellant must submit a request that the case is excluded from the potential liability of costs being awarded, and HMRC must request repayment of its costs incurred in defending the case.
What are Complex cases?
These are complicated cases which:
such cases are allocated to a ‘track’ within the FTT system.
Other cost awards
It is also worth remembering that costs can be awarded if the appeal is brought unreasonably. This usually means that it is vexatious or frivolous, so proper advice should be sought when considering an appeal.