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VAT: DIY housebuilders can make more than one claim – The Ellis case
Latest from the courts
In the First Tier Tribunal (FTT) case of Andrew Ellis and Jane Bromley [2021] TC08277, the issue was whether a person constructing their own house can make more than one claim for VAT incurred.
Background
The DIY Housebuilder’s Scheme enables a DIY housebuilder to recover VAT incurred on the construction of a house in which the constructor will live. Details here.
In this case, the specific issue was whether, despite the HMRC guidance notes on the scheme claim form explicitly stating that only one claim can be made, whether two claims may be submitted and paid by the respondent.
The appellant constructed a house over a period of five years (he was a jobbing builder and the work was generally only undertaken at weekends and holidays). To aid cash flow, an initial claim was made, followed by a second two years later.
The relevant legislation is The VAT Act 1994 section 35.
Decision
The appeal was allowed. The FTT found that HMRC’s rule that only one claim could be made under the DIY housebuilder’s scheme was ultra vires and that multiple claims should be permitted.
The judge stated that “…there is no express indication that only one claim may be made. Like many provisions, section 35 VATA is drafted in the singular. Drafting in the singular is an established technique to assist in clarity and to enable the proposal to be dealt with succinctly. As there is no express indication to the contrary in section 35 VATA, section 6 Interpretation Act 1978 applies to confirm that the reference to “a claim” in section 35 VATA must be read as including “claims”.
Commentary
This is good news for claimants who often must wait a number of years for a house to be built and therefore carry the VAT cost until the end of the project.
This case presumably means that it is possible to make claims as the project progresses and there is no need to wait until completion.
We await comment on this case from HMRC, but it is hoped that clarification will be forthcoming on whether the result of this case will be accepted.
VAT: Construction of a dwelling – zero-rated? The CMJ (Aberdeen) case
Latest from the courts
The First-Tier tribunal (FTT) considered the case of CMJ (Aberdeen) Limited (CMJ) and whether the supply of building services in respect of the construction of a dwelling were correctly zero rated by the appellant. HMRC deemed that the construction services were standard rated on the basis that the works were not carried out in accordance with the terms of the relevant statutory planning consent.
Background
HMRC’s view was that, although planning consent was in place at the time the construction services were supplied by the appellant, that planning consent permitted only the alteration or enlargement of a dwelling and did not allow for the construction of a dwelling. HMRC accept that the property was constructed as a new building, but that this was not permitted by the planning consent and so the construction was not carried out in accordance with it.
CMJ contended that statutory planning consent had been obtained for the construction via a combination of the planning consent and a construction building warrant which it had obtained from the relevant authority, and which allowed for the construction of a new building.
Legislation
The zero rating for the construction of new dwellings is contained in The VAT Act 1994, Schedule 8, Group 5, item 2
“The supply in the course of the construction of
(a) a building designed as a dwelling…”
Note 2 to Group 5 of Schedule 8 to the VAT Act include the following:
“(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied…
…(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.
Decision
The appeal was dismissed. It was judged that the building warrant did not comprise statutory planning consent for the purposes of note 2 (d) because:
- Planning consent and building warrants operate under different statutory regimes.
- Breach of planning consent is dealt with separately from a breach of the building warrant legislation, and each is dealt with by the specific statutory regime . If there is a breach of planning consent, it would not affect the validity of the building warrant, and vice versa.
- The Building Standards Handbook states that the purpose of the building standards system is setting out the standards to be met when building work takes place. This is different from planning consent which is consent to allow the authority to permit development on a piece of land. They are distinct and separate regimes aimed at distinct and separate issues. While planning permission is about how the house will look, a building warrant is about whether it meets building standards.
- Both planning permission and a building warrant is required. One is no substitute for the other.
- It is possible to obtain retrospective planning consent, the judge did not believe it is possible to get a retrospective building warrant.
It was not possible to carry out works of construction in accordance with a valid statutory consent, since no such consent had been given for construction at the time that the building works were carried out.
Commentary
The legislation covering building work is complex and there are many traps for the unwary. Even the seemingly straightforward matter of whether a new dwelling is constructed can produce difficulties, as in this case. We always counsel that proper VAT advice is sought in such circumstances.
VAT: Certificate of Status
Claiming VAT in another country
If a UK business wishes to claim VAT incurred in a country outside the UK it will need a Certificate of Status (a “Certificate of Status of Taxable Person”). This certificate, known as a VAT66A, may be obtained from HMRC and certifies that an entity is in business (engaged in an economic activity).
Changes from 8 March 2021
HMRC has announced HMRC changes to the way it issues VAT66As to UK businesses. From 8 March 2021, HMRC will send the certificate by email. A small, but helpful nod to 21st Century technology. A business must first complete an informed consent form before HMRC will correspond by email. The VAT66A only lasts for 12 months, so it is prudent to set a reminder to renew.
However, and there is usually a however, some countries require a “wet stamped” document to support a claim, in which case, HMRC will continue to issue these by post. It makes sense to check what actual documentation each country in which a claim is made requires, as it does vary. It is usually also necessary to make a claim in the language of the country in which the VAT was incurred.
Who can request a certificate of status?
The authorised persons (director or secretary) of the businesses which is registered in the UK for VAT, or an agent which has a letter of authority from a UK VAT-registered business – form 64-8 to act on its behalf.
Requesting a certificate
Send an email to vat66@hmrc.gov.uk with “VAT certificate of status request” in the subject line and the following information:
- business name
- VAT registration number
- business address
- applicant’s name and role in the business
- contact telephone number
- the country (or countries) where the VAT refund claim is being made
- number of certificates required (one for each country in which a claim is to be made)
- if the certificate should be sent to you by post or by email
Agent application
Write ‘VAT certificate of status – agent request’ in the subject line of the email, and provide the following information:
- agent’s name
- agent’s business address
- the name of the business to which the certificate relates
- an attachment with a letter of authority from an authorised signatory of the business you are requesting a certificate for – a list of authorised signatories here; VAT Notice 742A
- VAT registration number of the business
- business address
- the country (or countries) where the VAT refund claim is being made
- the number of certificates required
- if the certificate should be sent by post or by email to you or the business you are requesting a certificate for
HMRC say that a certificate will be sent within 15 working days of an application.
Oh for the days of a single electronic application to HMRC which covered all 27 Member States…
How to deal with VAT debt
In the current climate many businesses are struggling to make payments to HMRC. This clearly can have serious consequences and reduced income due to the Covid 19 coronavirus adds more problems.
This article looks at how to manage a VAT debt position; what can be done, and what not to do.
The first, and most important point to make is; do not ignore a tax debt. It will not go away and, in VAT there is, in most cases a four-year limit for assessing tax, but once assessed or declared, there is no time bar for collecting the debt.
HMRC look for a taxpayer to be taking steps to make a payment, or for a disclosure of the reason funds are unavailable. If HMRC’s Debt Management & Banking team have no idea of the cause of non-payment they will assume that the matter is being ignored and the full force of their powers are likely to be invoked. For background on HMRC’s VAT recovery procedures and powers see here. It is no surprise to learn that the extent of their powers is sweeping and formidable.
Is the VAT debt correct?
The first step is to establish whether a VAT debt is accurate. If it is a result of a normal return, then ensure the declaration is correct. If it is the result of an assessment by HMRC, always challenge it. In the majority of cases, we can assist with getting an assessment reduced or removed completely. A debt may be made up of a combination of; actual VAT, surcharges, penalties and interest
Time To Pay (TTP)
Such an arrangement with HMRC enables a debt to be spread over a period of time. This is usually, but not always, the most beneficial course of action. The process is that the taxpayer submits a proposal for settling the debt over a set period (a “best offer”) in instalments. HMRC may accept the offer, refuse it outright or make a “counter-offer”.
Matters to consider when submitting a VAT TTP proposal:
- The shorter the payment period proposed the more likely HMRC is to accept
- The sooner a TTP proposal is made the better
- HMRC is unlikely to agree a TTP longer than 12 months and most are for a significant shorter period
- An offer of an up-front payment also increases the chance of agreement
- An agreed TTP avoids penalties for late payment (as long as it is adhered to, otherwise penalties will apply)
- If payments are missed HMRC will withdraw from the TTP and the entire debt (plus penalties and interest) will become due immediately
- A TTP will avoid HMRC using its debt collection powers
- HMRC is likely to request sight of; cash flow forecasts, management accounts and company cash reserve details to evidence a ‘best offer”
- Also, information on; management of costs, potential sale of assets, availability of loans, other debts, ability to pay future VAT liabilities may be requested
- A business with a history of previous TTPs is less likely to be able to agree a new one
- If a formal TTP cannot be agreed, it is still beneficial for a business to make payments as and when they can be afforded. This keeps HMRC onside and may make discussions about future payment more fruitful
What HMRC expect
HMRC look for various ways a business can raise funds to pay a VAT debt, these include:
- Sale of assets
- Anticipated income, eg; large customer payment, contract or other demonstrable future income
- Bank or similar loans (including family members)
- Charge on home
- Alternative fundraising methods
The Debt Management & Banking staff have experience and knowledge of these methods and also use credit agencies.
Summary
It is always important to talk to HMRC. An ongoing dialogue can improve the debt situation and avoid HMRC taking unilateral action – which is nearly always detrimental to a business. Check that the debt is correct. Consider a TTP arrangement or alternative ways to raise funds. Talk to your advisers.
A debt is often the result of an assessment and penalties. A look at penalties (and how to avoid them) here and an article on how to survive HMRC’s enforcement powers here.
VAT: Education and catering – University Of Southampton Students’ Union case
Latest from the courts
In the University Of Southampton Students’ Union (USSU) First Tier Tribunal (FTT) case the issue was the VAT treatment of supplies of hot food and coffee; whether the appellant was an eligible institution making principal supplies of education or vocational training and/or whether supplies of hot food and coffee closely related to such principal supplies.
Background
USSU argued that both the supply of hot food and coffee by the USSU shop are exempt via The VAT Act 1994 Schedule 9, group 6, Item 4(a) and note 1(e) as supplies made by an eligible body which makes principal supplies of vocational training, and which are closely related to the (exempt) principal supply of education by the University of Southampton or vocational training by USSU. In the alternative, exemption applies for matters closely related to supplies of education by a third party via a published HMRC concession (and its supplies were within HMRC’s conditions for such a concession).
HMRC disagreed and claimed that these supplies were not closely related to education and that USSU was not an eligible body (no ring fencing of the profits such that they were not necessarily reinvested in its own supplies of education). Therefore, the supplies were properly taxable, and they declined to pay the appellant’s claim of overpaid output tax. The respondent also cited the Loughborough Students’ UnionUpper Tribunal (UT) case.
Decision
The appeal was dismissed for the following reasons:
- USSU did not satisfy the definition of vocational training
- the supplies of hot food and coffee were not closely related to a supply of education or vocational training
- USSU did not satisfy the definition of an “eligible body”
Commentary
Superficially, the claim seemed good. Para 5.5 of PN 709/1 states: “If you’re a student union and you’re supplying catering (including hot takeaway food) to students both on behalf, and with the agreement, of the parent institution, as a concession you can treat your supplies in the same way as the parent institution itself. This means that you can treat your supplies as exempt when made by unions at universities.. This means that most supplies of food and drink made by the union, where the food is sold for consumption in the course of catering will be exempt… For example, food and drink sold from canteens, refectories and other catering outlets (excluding bars), plus food and drink sold from vending machines situated in canteens and similar areas.”
However, the Notice then goes on to add “But it does not cover food and drink sold from campus shops, bars, tuck shops, other similar outlets and certain vending machines…”
This appeal looks a close-run thing, but it demonstrates that small differences in detail can produce different VAT outcomes. We urge all Student Unions and other entities “attached” to education providers to review their position.
Agent or principal? Latest from The Supreme Court
There is a very important distinction in VAT terms between agent and principal as it dictates whether output tax is due on the entire amount received by a “middle-man” or just the amount which the middle-man retains (usually a commission). It is common for the relationship between parties to be open to interpretation and thus create VAT uncertainty in many transactions. It appears to me that this uncertainty has increased as a result of the increasing amount of on-line sales and different parties being involved in a single sale.
A very helpful recent case; Secret Hotels 2 Ltd (formerly Med Hotels) heard at the Supreme Court, has clarified some grey areas in agent/principal relationships.
Very broadly, in this case which the taxpayer won, the judgement tips the balance back into the favour of common law as opposed to civil law principles for UK taxpayers and that the nature of a supply is to be determined by the construction of the contract – unless it is a ‘sham’.
This Supreme Court Judgment helpfully indicates that we must place far greater emphasis on the form of the arrangement (contract) as opposed to the economic substance (as often argued by HMRC).
The full decision is available here: http://www.supremecourt.uk/decided-cases/docs/UKSC_2013_0036_PressSummary.pdf
Although there will always be disputes over agent/principal relationships, this decision goes some way to clarifying the analysis and demonstrating the importance of the contract over what HMRC describe as “economic reality”.
Please contact us if you are, or have been, in dispute with HMRC on this point as it provides additional ammunition for the taxpayer.
Please click here for information on disbursements for agents