A new Tribunal case ruled that marshmallows of an unusual size are zero rated, while normal sized marshmallows continue to be standard rated.
Tag Archives: vat-tribunal
VAT: Updates on appeals to courts
Latest from the courts
HMRC has published an update on taxpayers’ appeals. This is a round up of the status of recent cases.
It is helpful for businesses which operate in similar areas, or have tax issues with HMRC and for a general overview on how the courts are approaching certain matters.
The cases which HMRC lose often provide opportunities for retrospective claims for other businesses.
VAT: Business or non-business? The Towards Zero Foundation case
Latest from the courts
In the The Towards Zero Foundation First Tier Tribunal case the issue was whether part of the appellant’s activities could be “stripped out”, classified as non-business, and therefore result in a loss of input tax.
This case follows a long succession of recent cases on the distinction between business (economic activity) and non-business. I have considered these in other articles:
Wakefield College (referred to at this Tribunal)
Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft
and new HMRC guidance on the subject.
VAT attributable to non-business activities is not input tax and cannot be reclaimed. However, if the non-business activity is part of wider business activities then it may be recovered as input tax.
Background
The Appellant is a charity. Its primary objective is to achieve zero road traffic fatalities principally through the operation of New Car Assessment Programmes (NCAP) – testing car safety.
When it received money as consideration for carrying out the testing, it was agreed by all parties that that this represented economic activity.
As part of this activity, the charity purchased new cars (so called “mystery shopping” exercises) and carried out tests at its own expense. In this start-up phase for an NCAP it is necessary to test vehicles without manufacturer support as the independence of the testing programme is critical in order to establish consumer credibility.
The results of the tests (usually giving rise to substandard or unsatisfactory outcomes) are published and the Appellant generates publicity of the results through social media, news coverage, trade press etc. These results inform and influence customer buying behaviour which in turn drives manufacturers to improve the safety features.
As the market sophistication increases the NCAP star ratings for vehicles are used by the manufacturers in promotion of its vehicles.
The aim of the Appellant is for each jurisdictional NCAP to ultimately become self-funding through manufacturer testing fees.
Contentions
HMRC argued that when the appellant carried out tests on purchased vehicles this should be recognised as a specific activity which could not be a business as it generated no income – the tests should be considered in isolation. Consequently, the input tax which was recovered was blocked and an assessment was issued to disallow the claim.
The Foundation contended that it published the results of those tests, and this resulted in the commercial need for manufacturers to improve safety standards by way of commissions for further research. This research was funded by the car makers and was therefore economic activity. The “free” testing needed to be undertaken so as to create a market for manufacturer funded testing – the initial testing was just one element of the overall taxable supply. Consequently, all residual input tax incurred is attributed to its taxable business activities and fully recoverable.
Decision
The FTT found that it was clear that manufacturers would not proactively seek to have vehicles tested without an initial unfavourable baseline assessment. If the free testing had been a genuinely independent activity HMRC would be correct, but the evidence did not support this analysis. It found that the provision of free testing was an inherent and integral part of the appellant’s business activity.
This being the case there was no reason to attribute any VAT to non-business activities, and the input tax weas fully claimable.
Commentary
Another reminder, if one were needed, of the importance of correctly establishing whether the activities of a body (usually charities, but not exclusively) are business or non-business. The consequences will affect both the quantum of output tax and claiming VAT on expenditure. More on the topic here.
The decision was as anticipated, but this case illustrates HMRC’s willingness to challenge (often unsuccessfully) VAT treatment in similar situations.
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: 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: Are preparatory ground works for burial chambers exempt? The Hodge case
Latest from the courts
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: 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.
VAT: Is dog grooming taught in schools? The Dogs Delight case
Latest from the courts
In the Julie Lalou t/a Dogs Delight First Tier Tribunal (FTT) case the issue was whether the teaching of dog grooming qualified as private tuition and was therefore exempt.
Background
The Appellant operated a business providing dog grooming and dog grooming courses. The appeal was concerned only with the supplies of dog grooming tuition as it was accepted that dog grooming in itself is taxable.
Technical
The sole issue in dispute in this appeal was whether the supplies fall within the private tuition exemption as for provided by The Value Added Tax Act 1994, Schedule 9, Group 6, item 2 “The supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer”.
HMRC’s view was that “to be eligible for exemption dog grooming would need to be a course that is ‘ordinarily’ taught in schools and universities which it is not…”
The appellant wrote to HMRC giving a list of seven “local Colleges and Universities where the Level 3 Dog Grooming Diploma is ordinarily taught”. The appellant went on to state “There are many more within the UK” which were said to represent around 30% of English colleges. Further it was stated that the business was a City & Guilds approved centre and that the courses were not recreational.
Decision
It was accepted that the courses that the appellant taught involved her making supplies of tuition in that she transferred to her students skills and knowledge.
But, unsurprisingly, the appeal was dismissed. The appellant had failed to demonstrate that dog grooming is taught at a wide number of schools and universities
The court also determined that the appellant needed to provide some evidence of whether dog grooming was taught at schools and universities in the EU (again, something she had failed to do).
Commentary
The exemption for private tuition is fraught with complexities and the amount of case law on the subject is significant, which indicates the difficulties in analysing the VAT position. An example here. It is important to establish what is being provided and that research is carried out to consider the degree of ubiquity of the subject in education. A general guide to education here. The phrase “ordinarily taught” is rather nebulous and it would be prudent to obtain as much evidence as possible that a subject is s commonly or ordinarily taught in schools and universities if a supply is treated as exempt.
Is room hire subject to VAT? – The Errol Willy Salons case
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.
VAT: Input tax recovery. The Mpala Mufwankolo case
Latest from the courts
In the First Tier Tribunal (FTT) case of Mr Mufwankolo the dispute was whether the appellant was able to recover VAT charged by the landlord of the property from which he ran his business – a licenced retail outlet on Tottenham High Road.
Background
The landlord had opted to tax the commercial property and charged VAT on the rent. The appellant was a sole proprietor; however, the lease was in the name of Mr Mufwankolo’s wife, and the rent demands showed her name and not that of the sole proprietor. It was contended by the appellant, but not evidenced, that the lease had originally been in both his and his wife’s names, despite his wife being the sole signatory.
The issues
Could the appellant recover input tax?
- Did the business receive the supply?
- Was there appropriate evidence?
It was clear that the business operated from the relevant property and consequently, in normal circumstances, the rent would be a genuine cost component of the business.
The Decision
The FTT found that there was no entitlement to an input tax claim and the appeal was dismissed. The lease was solely in the wife’s name and the business was the applicant as a sole proprietor. (There was an obvious potential for a partnership and an argument that a partnership was originally intended was advanced. The status of registration was challenged in 2003, but, crucially, not pursued).
It was possible for the property to be sub-let by the wife to the husband, however, this did not affect the VAT treatment as matters stood. Additionally, there was no evidence that the appellant actually paid any of the rent, as this was done by the tenant. There were no VAT invoices addressed to the sole proprietor.
Given the facts, there was no supply to the appellant, so there was no input tax to claim, and the issue of acceptable evidence fell away.
It was a certainty that the appeal could not succeed.
Commentary
There were a number of ways that this VAT cost could have easily been avoided had a little thought been given to the VAT arrangements. An oversight that created an avoidable tax hit.
A helpful guide to input tax considerations here: Care with input tax claims.
Legislation
The VAT Act 1994 Section 3 – Taxable person
The VAT Act 1994 Section 4 – Taxable supply
The VAT Act 1994 Section 24 (1) – Input tax
The VAT Act 1994 Section 24 (6) – Input tax claim evidence