Category Archives: Court

VAT: Exempt insurance intermediation. The Staysure case

By Marcus Ward 8 June 2022

Latest from the courts

In the Staysure.Co.UK Limited First Tier Tribunal (FTT) case the issue was whether services of service of generating insurance leads for the appellant fell within the insurance exemption or whether the reverse charge (please see guide below) should be applied.

Background

Staysure is an FCA regulated insurance broker based in the UK which provided travel insurance for people aged 50 or over, home insurance, cover for holiday homes and motor vehicles. It received services from an associated company belonging in Gibraltar.

The services amounted to:

the provision of insurance leads online and offline

placing targeted advertising in the press, television and online

owning and operating the domain and related website: staysure.co.uk

providing insurance quotations via a bespoke quote engine which employed complex algorithms to produce a personalised price for each customer and resulted in an offer which was competitive from the customer’s perspective while also maximising profit for Staysure, the underwriter, and the service provider

reporting on where prospective customers were falling out of the quotation and lead selection process, and in so doing demonstrate opportunities for further product development

If the services were not covered by the relevant exemption, they would be subject to a reverse charge via The Value Added Taxes Act 1994 section 8 by Staysure. As the recipient was not fully taxable, this would create an actual cost when the charge was applied. HMRC considered the service taxable and:

registered Staysure on the strength of the deemed self-supply

assessed for the input tax which was created by the reverse charge.

The assessment was circa £8 million, penalties of over £1 million plus interest. This was on the basis that HMRC concluded that the supply was taxable marketing rather than exempt intermediary services.

Decision

The court decided that the marketing and technology was used to find clients and introduce them to the insurer. The supplier was not supplying advertising, but qualified leads produced by that advertising. The quote engine was not merely technical assistance, but a sophisticated technology which assessed the conditions on which customers might be offered insurance. Consequently, these services were exempt as the supplies of an insurance intermediary (The VAT Act 1994, Schedule 9, Group 2, item 4) and Staysure was not required to account for UK VAT under the reverse charge.

The appeal was allowed. The services were within the insurance exemption, essentially because they were linked to essential aspects of the work carried out by Staysure, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts.

Technical

This is another case on the application of the reverse charge. I looked at a previous case here

However, the judge helpfully summarised the following principles on insurance intermediation after considering previous case law.

whether a person is an insurance broker or an insurance agent depends on what they do. How they choose to describe themselves or their activities is not determinative

it is not necessary for a person to be carrying out all the functions of an insurance agent or broker for the exemption to be satisfied

it is essential that the person has a relationship with both the insurer and the insured party, but this does not need to be a contractual relationship. The requirement that the person has a relationship with the insurer is satisfied where the person is the subcontractor of a broker, which in turn has a relationship with the insurer

where the person is a subcontractor of a broker, the exemption is satisfied:
- where the relationship with the customer is indirect or where the subcontractor is one of a chain of persons bringing together an insurance company and a potential insured, but;
- the subcontractor’s services must be linked to the essential aspects of the work of an insurance broker or agent, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts

Commentary

Care should always be taken when outsourcing/offshoring services or in fact, when any business restructuring takes place. The VAT impact of doing so could provide costly. In this case, the distinction between intermediary and marketing services was considered. It went in the taxpayer’s favour, but slightly different arrangements could have created a large VAT hit.

Guide

Reverse charge on services received from overseas

Normally, the supplier of a service is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. This is known as the ‘Reverse Charge’ procedure. Generally, the Reverse Charge must be applied to services which are received by a business in the UK VAT free from overseas.

Accounting for VAT and recovery of input tax.

Where the Reverse Charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.

Value of supply

The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.

Time of supply.

The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

The outcome

The effect of the provisions is that the Reverse Charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus the charge aims to avoid cross border VAT rate shopping. It is not possible to attribute the input tax created directly to the deemed (taxable) supply.

VAT: The importance of Transfer of a Going Concern rules. The Haymarket case

By Marcus Ward 6 June 2022

Latest from the courts

In the First Tier Tribunal (FTT) case of Haymarket Media Group Limited (Haymarket) the issue was whether the sale of Teddington TV Studios qualified as a VAT free Transfer of a Going Concern (TOGC).

Background

The site in question was subjected to an Option To Tax (OTT) by the supplier. The sale of the property was with the benefit of planning consent for the development of flats and houses on the site after demolition of the TV studios.

Subject of the appeal

The transferor/vendor had previously let a small building on the site to the purchaser’s advisers and, on this basis, the sale was structured to be a TOGC as a property rental business. HMRC raised an assessment as it considered that neither a property rental business, nor a property development business had been transferred.

Decision

The appeal was dismissed. The FTT found that, despite the short lived and minor letting, this did not constitute a business. Further, that even if this had been a business, the contract required vacant possession so a business could not have been continued.

The contention that a property development business was being carried on was also rejected. Despite significant costs being incurred by Haymarket in obtaining the planning permission, the intention* was always to sell the site to a developer, rather than the appellant carrying out the development itself (there was no meaningful work being carried out on the site). The fact that planning permission was obtained did not mean that there was an ongoing property development business which could be transferred.

* The importance of “intention” in VAT is considered here and here.

Technical

In order for a transaction to qualify for a VAT free TOGC, ALL of the following conditions must be met:

the assets must be sold as a business, or part of a business, as a going concern
the assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
there must be no break in trading
where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
where only part of a business is sold it must be capable of separate operation
there must not be a series of immediately consecutive transfers

In this case, the first, second and third tests was failed leaving the supply to be VAT-able as a result of the OTT.

More on the complex subject of TOGCs including case law here, here, here, and here.

Commentary

TOGCs are often a minefield for taxpayers and their advisers, especially if property is involved. Not only is land law and the relevant VAT legislation complex, but property transactions are usually high value, with a lot of VAT at stake (the VAT in this case was £17 million). Additionally, they are often “one-offs” and frequently outside the usual commercial expertise of people running the business. We strongly advise that comprehensive technical advice is always obtained when TOGC is mooted by one side or the other, particularly when the relevant asset is involved in property letting or development.

VAT: Are preparatory ground works for burial chambers exempt? The Hodge case

By Marcus Ward 23 May 2022

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: The importance of due diligence. The 50 Five (UK) Limited case

By Marcus Ward 10 May 2022

Latest from the courts

In the First Tier Tribunal (FTT) case of 50 Five (UK) Limited the issue was the VAT rate applicable to energy saving materials. An additional twist was that there was a sale of the business between the tax point of the relevant supplies and HMRC’s assessment.

Background

The appeal was brought in the name of the Appellant in respect of assessments raised by HMRC against the company prior to the date on which it was purchased by the present owners. The present owners were not made aware of the assessment at the time of purchase. It had not been disclosed to them as part of the due diligence which was undertaken.

The Appellant’s business was that of supply and installation of heating and hot water systems. The customers were supplied with fully installed systems. The Appellant did not ask the customers to separately source the parts for such systems and then simply fit them. These supplies were treated as those of energy saving materials and the reduced rate of 5% was applied.

HMRC raised an assessment after taking the view that the supply should have properly been standard rated at 20%.

Decision

The FTT decided that legislation which permits the sale of energy saving materials at the reduced rate of VAT apply only where the supply of those materials is independent of an installation service. In this case, as the Appellant was the provider of the goods, and also the installer, the supply to the end customer was standard rated (a composite supply).

It was noted that this outcome was counter intuitive and the result does indeed seem unfair to the taxpayer, but as there was no reasonable prospect of the appeal succeeding, it was struck out. The assessment and interest was now payable by the new owners.

Commentary

An unfortunate outcome for the new owners, but it highlights three VAT issues:

always carry out appropriate due diligence when buying a business. VAT is often an issue and if the buyer had discovered the assessment, it could have either abandoned the purchase, or negotiated on the price
never assume that a lesser rate of VAT applies without carrying out appropriate research or seeking advice
always consider whether a supply is separate or composite. This is a difficult area of the tax as the amount of case law testifies

The only recourse the new owners have now is taking action against the sellers of the business.

VAT: What is consideration and why is it important?

By Marcus Ward 18 March 2022

VAT Basics

Consideration – background

There is no definition of consideration in legislation. The meaning was originally taken from contract law, but after the European Court of Justice ruled that the term is to be given the Community meaning and is not to be variously interpreted by Member States the UK adopted that approach.

The expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc). Consideration is a payment for the supply of goods or services. It is usually a payment in money, but can also be of a “non-monetary” nature, such as goods or services supplied in return.

The phrase “in return for the supply” is interpreted to mean that there must be a direct link between the supply and the consideration.

Therefore, in order that a supply for a consideration can be made, there must be at least two parties and a written or oral agreement between them under which something is done or supplied for the consideration. There is a direct link between the supply and the consideration because the supplier expects something in return for his supply and would not fulfil his obligation unless he thought that payment would be forthcoming.

Profit

It is important to recognise that the concept of consideration and profit are wholly different, and the fact that a business makes no profit on a supply does not mean that there is no consideration for it. Whether payment yields a profit or loss is immaterial and has no bearing on whether or not it is consideration for VAT purposes.

Importance

If consideration is not recognised, or undervalued, a business can expect HMRC assessments and penalties. Overstating consideration will result in an overpayment of tax.

if there is no consideration, there is no supply.

Consideration hallmarks

Consideration is defined widely to bring within the tax everything which the taxable person receives as consideration for the goods or services supplied.
The consideration must be capable of being expressed in money.
There must be some form of bargain or transaction between the parties.
A payment should be related to what the payer receives although the fact that people pay the same amount for varying benefits does not stop it from being consideration.

Consequently, if the provision of goods or services is incapable of being expressed in money, it is not consideration and is outside the scope of VAT.

Indicators of no consideration

The absence of any consensual element on the part of the payer.
A lack of control by the payer over the services provided.

Valuation of consideration

This may seem obvious, but as the amount of case law demonstrates, this is not always the case. The starting point is:

Monetary consideration

Monetary consideration includes cash and payment by cheque, credit card, bank transfer, contactless payment, deduction from pay, etc. This is set out in The VAT Act 1994, section 19(2).

Non-monetary consideration

Non-monetary consideration includes goods or services supplied as payment, for example in a “barter” (including part exchange) agreement. Services provided include the giving up of a right, refraining from doing something, agreeing to suffer some loss etc in return for the supply. At first sight these may appear to be merely conditions of an agreement, but are in fact consideration for a supply. If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributable to it.

In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised. Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.

What is not consideration

Donations

If a monetary donation is freely given, it is not consideration for any supply and so is outside the scope of VAT. In this situation, the donation has to be unconditional, and the following points dictate whether this is the case.

Does the donor receive anything in return for the payment?
Are there any conditions attached to the payment?
What will the payments be used for?
If the donor does not benefit directly, does any third party receive a benefit?
Is there a contract and what are the terms and conditions?

Donations must be contrasted to sponsorship.

It is necessary to distinguish between donations and sponsorship payments. Whereas a donation means the donor does not expect anything in return, sponsorship involves the sponsor receiving identifiable benefits. These benefits may include advertising, publicity or use of facilities and any sponsorship payment is within the scope of VAT.

Open Market Value

The VAT Act 1994, section 19 (5) states that “…the open market value of a supply of goods or services shall be taken to be the amount that would fall to be taken as its value …if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration”.

Difficult areas

Commonly, areas which give rise to VAT consideration problems include, but are not limited to:

when consideration is provided in return for supplies of differing VAT liabilities
Special Valuation Provisions in The VAT Act 1994, Schedule 6
supplies to staff or goods for own use
discounts and special offers (eg; persons providing selling or introductory services to traders who receive goods for a reduced cash payment, or BOGOF)
barter transactions – when each supply has a different value
part-exchange
apportionment of monetary consideration
separate/composite supplies
supplies between connected parties
direct selling structures
gifts, prizes, and reward goods.
imports
prompt payment discounts
deemed supplies
non-business use of business assets or of services supplied to a business
reverse charges
reduced rate accommodation
supplies expressed in foreign currencies
transfer pricing
business gifts/samples
caravans sold with contents
self supplies
club membership benefits
correspondence courses
opticians and hearing aid dispensers (exempt services vs standard rated goods)
rebates/refunds
disbursements
tour operators (TOMS)
partial exemption

Further reading

For purposes of research or interest, the following cases on consideration are worth reading:

Staatssecretaries van Financien v Cooperatieve Aardapplenbewarr-plaats ((1981) ECR 445; (1981) – The Dutch Potato case for ease!

BAZ Bausystem Gmbh v Finanzamt Munchen Fur Korperschaften

Apple & Pear Development Council (APDC), (ECJ (1988) STC 221; (1988)2 CMLR 394)

Tolsma C-16/93 (1994 STC 509)

Naturally Yours Cosmetics Ltd

Empire Stores Ltd

VAT: Avoiding a Default Surcharge. Reasonable Excuse – Update

By Marcus Ward 14 March 2022

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.

Crime doesn’t pay……..VAT. Is there tax on illegal activities?

By Marcus Ward 14 March 2022

A number of people have been surprised to find that crime does pay tax, thank you very much. It seems bad enough that the police should chase and catch you, put you in the dock and send you to prison, without finding that your first visitor is HMRC…. Let’s look at some examples:

Dodgy perfume?

Goodwin & Unstead were in business selling counterfeit perfume. They were also up-front about what they were doing. Unstead claimed that “Everything I can carry in my vehicle, everything I trade in and sell, is a complete copy of the real thing. I do not sell goods as the real thing. In fact I sell my goods for a quarter of the original price. I am not out to defraud or con the public. I only appeal to the poseurs in life.”

The real manufacturers might have sued these men for passing off the product of their chemistry experiments in trademarked bottles, but it was HMRC who sent them to jail – for failing to register and pay VAT on their sales. The amount they should have collected was estimated at £750,000, which shows that they must have appealed to a great many poseurs.

If they had paid the VAT, Customs would have had no problem with them. Their customers must have been reasonably satisfied – if your counterfeit perfume smells something like the real thing, why worry?
They tried to get out of jail with an ingenious argument – if the sale of the perfume was illegal, surely there shouldn’t be VAT on it. It wasn’t legitimate business activity, so it wasn’t something that ought to be taxable. The European Court had no time for this. They pointed out that it would give lawbreakers an advantage over lawful businesses; they wouldn’t have to charge VAT. The judges suggested that maybe people would even deliberately break the law so they could get out of tax; in this case, the only thing that made the trade illegal was treading on someone’s trademark rights, and that was something that might happen at any time in legitimate businesses. The judges said that VAT would apply to any trade which competed in a legal marketplace, even if the particular sales broke the law for some reason. Counterfeit perfume is VATable because real perfume is too. Of course, Customs have traditionally had two main roles – looking for drug smugglers, and dealing with VAT-registered traders. They have generally treated both with much the same suspicion, but the ECJ made it clear in this case that the two sets of customers are completely separate.

“Personal” services?

Customers paid the escort £130, of which £30 was paid to the agency. VAT on £130 or VAT on £30?

The first hearing before the Tribunal went something like this (this may be using artistic licence, but the published summary implies it was so):

HMRC: “We think the VAT should be on £130 because the escorts are acting as agents of the escort business.”
Trader: “No, it’s just £30, the £100 belongs to the escort and is nothing to do with me.”
Tribunal chairman: “All right, tell me a bit about how the business operates.”
Customs: “No.”
Tribunal chairman: “What?”
Customs: “You don’t want to know.”
Tribunal chairman: “How can I decide whether the escorts are acting as agent or principals without knowing how the business operates?”
Customs: “Don’t go there, just give us a decision.”
Tribunal chairman: “Trader, you tell me how the business operates.”
Trader: “I agree with him, you don’t want to know.”
The Tribunal seems to have been a bit baffled by this. They were aware that Customs had a great deal more evidence which had been collected during the course of a thorough investigation, and they asked the parties to go away and decide whether they might let the Tribunal see a bit more of it so they could make a judgement rather than a guess.

What about drugs then?

It’s well-known that you are allowed to smoke dope in some establishments in Amsterdam, although the Dutch authorities are thinking about restricting this to Netherlands’ residents. They may find that such a rule contravenes the European Law on freedom of movement – under the EU treaty, you can’t be meaner to foreigners than you are to your own people just because they are foreign. That’s a nice idea, but individuals and governments keep trying it on. Anyway, the Coffeeshop Siberie rented space to drug dealers who would sell cannabis at tables for people to take advantage of the relaxed atmosphere. Presumably they are preparing to examine passports or local utility bills before making the sale, if only the Dutch are to be allowed to get stoned. Anyway, the Dutch authorities asked the coffee shop’s owners for VAT on the rent paid by the dealers, and the owners appealed to the ECJ. This time, surely, it was sufficiently illegal. Although the consumption of drugs was tolerated, it was still against the law, and it must therefore be not VATable.
The judges pointed out that the coffee shop was not actually selling drugs. They were just providing the space for other people to sell drugs. Although selling drugs was completely illegal, and there was no legitimate market in cannabis, renting space was a normal business activity. Renting space to someone who did something illegal with it was in the same category as the dodgy perfume sales in Goodwin & Unstead: it was a bit illegal, but not illegal enough. The VAT was still due.

Counterfeiting?

In a German case, the ECJ ruled that the importation of counterfeit money was outside the scope of VAT. The Advocate-General observed that a line must be drawn between, on the one hand, transactions that lie so clearly outside the sphere of legitimate economic activity that, instead of being taxed, they can only be the subject of criminal prosecution, and, on the other hand, transactions which though unlawful must nonetheless be taxed, if only for ensuring in the name of fiscal neutrality, that the criminal is not treated more favourably than the legitimate trader’.

So, there you have it, if you are of a criminal disposition, and you want to avoid VAT, funny money is the way to go. Please note, this does not constitute advice…..

VAT: Is dog grooming taught in schools? The Dogs Delight case

By Marcus Ward 15 February 2022

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.

VAT: Bad Debt Relief. The Regency Factors case

By Marcus Ward 7 February 2022

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 Marcus Ward 24 January 2022

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.