Category Archives: Court

VAT: Unjust enrichment. The Deluxe case

By   13 January 2021
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Latest from the courts

In the Deluxe Property Holdings Limited High Court case (Deluxe) the issue was whether a VAT claim needed to be passed back to the supplier after a correction – whether the unjust enrichment applied.

Background

Deluxe employed SCL Construction Limited (SCL) to carry out building works. SCL raised invoices in respect of the construction of student accommodation at 20%. It was, however, common ground that the works were in fact zero-rated. SCL recovered the overcharged VAT from HMRC via a VAT Act 1994 Section 80 claim. SCL undertook to repay the amount of VAT to Deluxe via section 10 of VAT Notice 700/45. Without such written reimbursement undertaking, HMRC would have been entitled to refuse the claim. SCL did not make the payment to Deluxe.

Issue

The issue between the parties was whether:

  • SCL holds the accounting credit obtained from HMRC on trust for Deluxe, or;
  • the claim is only in debt, in which case SCL sought to set-off such the claim against other monies that it alleges are owed by Deluxe

Decision

The court ruled that SCL had undertaken to reimburse its customer all of the amount credited by HMRC without any deduction, for whatever purpose. Further, SCL had undertaken that it could not use the credit for any other purpose. It was a payment made by HMRC for the sole and express purpose of allowing SCL to reimburse the mistakenly charged VAT to Deluxe and was clearly intended to restrict SCL’s freedom of disposal so that the credit was to be exclusively used for the stated purpose without set-off.

Although SCL gave its undertaking to HMRC rather than to Deluxe to pass on the money, it held the repayment on trust for Deluxe and gave rise to a Quistclose Trust*

Additionally, a constructive trust arose because it would be unacceptable for SCL to derive a benefit of the VAT repayment.

The court found that SCL has acted in breach of trust and is liable as trustee to restore the trust fund and transfer to Deluxe the balance of the trust property without offsetting it against amounts that it claimed it was owed by Deluxe.

Commentary

This is a logical and expected decision and the reasoning is helpful for similar disputes.

*  A trust may arise where one person, A, advances money to another, B, on the understanding that B is not to have the free disposal of the money and that it may only be applied for the purpose stated by A. The effect of the trust is to reserve in A the beneficial interest in the money, so providing him with some proprietary security for his advance.

VAT: Is the supply of football pitches an exempt right over land? The Netbusters case.

By   11 November 2020
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Latest from the courts.

In the First-tier Tribunal (FTT) case of Netbusters (UK) Limited the issue was whether the supply was the standard rated provision of sporting facilities, or an exempt right over land.

Background

Netbusters organised football and netball leagues and provided the playing facilities (artificial pitches for football and courts for netball). The hire of the facilities was for a defined period of time and no other party had the right to access the pitches during those times. The hire could be a block, or one-off booking. The appellant contended that the supplies were exempt via VAT Act 1994, Sch 9, Group 1 – “The grant of any interest in or right over land or of any licence to occupy land…”  However, item 1 Note (para m) excludes the “the grant of facilities for playing any sport or participating in any physical recreation” in which case they become standard rated. To add complexity, Note 16 overrides the exception for sporting facilities (so they are exempt) if the grant of the facilities is for:

“(a) a continuous period of use exceeding 24 hours; or

(b) a series of 10 or more periods, whether or not exceeding 24 hours in total, where the following conditions are satisfied—

(i) each period is in respect of the same activity carried on at the same place;

(ii) the interval between each period is not less than one day and not more than 14 days;

(iii) consideration is payable by reference to the whole series and is evidenced by written agreement;

(iv) the grantee has exclusive use of the facilities; and

(v) the grantee is a school, a club, an association or an organisation representing affiliated clubs or constituent associations.”

I have a simplified flowchart which may assist if you, or your clients, need to look at these types of supplies further.

Another issue was whether Netbusters’ league/tournament management services which were, in principle, available independently of pitch hire, but in practice rarely were provided in that way, were separate supplies or composite. There was a single price payable for both pitch hire and league management services.

The appellant contended that its supplies were exempt via VAT Act 1994, Sch 9, Group 1 or that Revenue and Customs Brief 8 (2014): sports leagues, is applicable which states “HMRC accepts that the decision of the FTT is applicable to all traders who operate in circumstances akin to Goals Soccer Centres plc. This includes traders who hire the pitches from third parties such as local authorities, schools and clubs…”

HMRC argued that there was no intention to create a tenancy and the agreements between the parties did not provide for exclusive use of the premises, so the supplies fell to be standard rated.

Decision

The appeal was allowed; the supply was a singe exempt supply because the objective character of the supplies were properly categorised as the granting of interests in, rights over or licenses to occupy land. It was found to be significant Netbusters (or its customers) had the ability to exclude others from the pitches during the period of the matches.

It was therefore unnecessary to consider whether Netbusters’ supplies grants of facilities satisfy all the conditions set out in Note 16 (although the FTT were disinclined to do this anyway as a consequence of the way respondent prepared its case).

Commentary

The issue of the nature sporting rights has a long and acrimonious history both in the UK and EU courts. Any business providing similar services are advised to review the VAT treatment applied.

VAT: Education and catering – University Of Southampton Students’ Union case

By   6 November 2020
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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.

A VAT Did you know?

By   30 October 2020
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Latest from the courts.

The rolls used in Subway’s hot sandwiches are not bread. According to a recent ruling by Ireland’s Supreme Court, because of the high level of sugar in the rolls, they cannot be taxed as bread, so the VAT zero rate cannot apply.

VAT: Are aphrodisiac products food? – The X case

By   1 October 2020
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Latest from the courts

Can products designed to, errr… stimulate sexual desire be treated as foodstuffs?  – Only in VAT do such questions ahem arise eh?

Background

X (the name of the business), sold items in its sex shop which included; capsules, drops, powders and sprays presented as aphrodisiacs that stimulate libido. Those products, which are composed essentially of elements of animal or vegetable origin, were intended for human consumption and were to be taken orally.

X applied the reduced rate to these products (the rate in The Netherlands, certain food in the UK is zero rated) treating the sexual stimulants as foodstuffs.

This was challenged by the tax authorities as it was not considered that they fell within the definitions of ‘foodstuffs for human consumption’. Assessments were issued for the difference between the reduced rate and the standard rate. The case was referred to the ECJ – C-331/19  Staatssecretaris van Financiën vs X

The Gerechtshof den Haag (Court of Appeal, The Hague, Netherlands) found in favour of X, ruling that the use of the products in question as aphrodisiacs did not preclude them from being taxed at the reduced rate applicable to foodstuffs. This was broadly on the basis that the products were intended to be consumed orally and were made from ingredients that may be found in foodstuffs.

The VAT Directive contains no definition of the concepts of ‘foodstuffs for human consumption’ or ‘products normally used to supplement foodstuffs or as a substitute for foodstuffs, so that is, at the least, unhelpful, although it was emphasised that the words must be interpreted in accordance with the usual meaning of them in everyday language.

Decision

It was ruled that any product intended for human consumption which provides the human body with the nutrients necessary to keep the human body alive and enable it to function and develop comes within the scope of the category set out in point 1 of Annex III to the VAT Directive, even if the consumption of that product also aims to produce other effects.

Further; the nutritional role was a decisive factor for a product to be classed as a ‘foodstuff for human consumption’/ The question whether that product has health benefits, its ingestion entails a certain pleasure for the consumer, or its use is part of a certain social context, is irrelevant. Consequently, the fact that consumption of that product has positive effects on the libido of the person ingesting it is irrelevant.

So, aphrodisiacs can be food.

Action

If any business which sell such products which, incidentally, contain nutrients may have a VAT claim based on this case.

VAT: Changes to early termination fees and compensation payments

By   10 September 2020
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HMRC has announced changes to the treatment of “compensation” and similar payments in its Revenue and Customs Brief 12 (2020).

This is as a result of recent judgments of the Court of Justice of the European Union (CJEU), specifically Meo (C-295/17) and Vodafone Portugal (C-43/19).

Background

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

New treatment

Now, as a result of the CJEU cases, it is apparent that such charges are considered as being payment for the supply of goods or services for which the customer originally contracted. Consequently, most early termination and cancellation fees are standard rated. HMRC comment that this is the case even if they are described as compensation or damages (which, if an accurate description, remain VAT free). An example of this is given as; charges made when exiting one contract and entering into another to upgrade a mobile telephone package or handset.

Action

Any businesses which have not accounted for output tax on receipt of these payments are required to amend past declarations.

Commentary

The retrospective nature of this announcement seems unfair and is likely to cause administrative problems for a lot of businesses. The other issue is that HMRC have not said how far back such adjustments apply, is it: The usual four-year cap? The earlier of the two EJEU cases mentioned (2018)? The June 2020 Vodafone case? Some other date?

It does not appear that the relevant date will be the date of issue of the changes – 2 September 2020 as HMRC say that this date will only apply to certain businesses (those that have received a specific written ruling) so where does that leave the majority of other taxpayers? HMRC remain silent on this and it does not help those affected at all. It is possible that retrospection may be challengeable via judicial review.

While the application of the new rules seems logical and consistent with case law, the implementation and lack of detail is really, to be polite, unhelpful.

VAT: Staff costs – The San Domenico Vetraria SpA case

By   24 August 2020
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Latest from the courts

In the San Domenico Vetraria SpA CJEU case the issue was the treatment of the secondment of staff by an Italian parent company to its subsidiary and the reimbursement by the subsidiary company of the costs incurred. Was there a VAtable supply?

Background

The issue was whether the relevant payment represented a supply of services ‘for consideration’. The parent company seconded one of its directors to its subsidiary and a charge was made based solely on a reimbursement of actual costs. The Italian domestic court ruled that the transaction was outside the scope of VAT on the basis that there was no consideration paid or received and therefore no supply of services.

Decision

The court ruled that despite the fact that the value of the payment to the parent company was limited to the parent company’s costs this did not mean that consideration for the director’s secondment was absent. Therefore, as consideration flowed in both directions, a taxable supply took place such that VAT was due, the claim of input tax made by the subsidiary was correct and the Italian authorities were incorrect to deny credit for it.

The President of the Chamber stated in the ruling that “The amount of the consideration, in particular the fact that it is equal to, greater or less than, the costs which the taxable person incurred in providing his service, is irrelevant in that regard”. It was immaterial that no profit was made, and the absence of such profit did not affect the VAT treatment.

There was a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.

Commentary

This is a useful clarification/confirmation. The supply was not a disbursement (details here) so it was a supply by the parent company. More on inter-company charges here.

Planning

If the recipient company was partly exempt or unable to reclaim the input tax for any reason, the VAT would have represented a real cost. So, would there be a way to avoid this charge? The answer (in the UK at least) is yes. If the director had a joint contract of employment with both companies, there would be no supply. Also, if the two companies were part of the same VAT group, the “supply” would be disregarded, so there would be no VAT cost for the subsidiary.

VAT: Whether a person “in business”. The Y4 Express Ltd case

By   7 August 2020
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Latest from the courts

In the Y4 Express Ltd (Y4) First Tier Tax Tribunal (FTT) case the issue was whether an individual was in business such that he was entitled to be VAT registered.

Background

Y4 imported goods from China on behalf of UK customers. This entailed collecting the goods from the airport, storing them and then arranging delivery of them to the final customers. Y4 had an arrangement with Royal Mail (RM) for a discounted delivery rate. RM subsequently withdrew this discount resulting in Y4 incurring increased delivery costs. In order to mitigate this, Y4 put a structure in place using an individual (Mr Man) to contract with RM for the discount and letting Y4 use the account to take advantage of the reduced rates: RM invoiced Mr Man and Y4 would arrange payment from its own funds via direct debit. Y4 dealt with Mr Man’s VAT compliance and raised self-billing documents to itself on which it recovered input tax. It was reported that Mr Man considered this as a favour to a friend rather than as a business venture with a view to making a profit, and indeed, the charges made by RM were not marked up. Mr Man was not involved with the arrangement of deliveries of Y4 carried out by RM.

HMRC disallowed the input tax claimed as it considered that the individual was not in business, so no VAT was due on the charge made to Y4. This was on the basis that the individual was not carrying on an ‘economic activity’.

Decision

The FTT agreed with the respondent and upheld the decision to disallow Y4’s claim for input tax. This was on the basis that Mr Man was not in business so could not make supplies to Y4, which in turn meant that there was no input tax for Y4 to claim.

Commentary

The issue of whether an entity is “in business” goes back to the earliest days of VAT. I have considered the issue and recent case law here here here here and here.   HMRC relied heavily on the age-old (well, 1981) tests in the Lord Fisher case:

  • Is the activity a serious undertaking earnestly pursued?
  • Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  • Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies?
  • Is the activity conducted in a regular manner and on sound and recognised business principles?
  • Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  • Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

The judge found that the tests were not met by Mr Man and, even if they were, the evidence; the self-billing documents, were insufficient. It was also found that a penalty was due, although the quantum was reduced to reflect the cooperation of the taxpayer during the enquiries.

This appeal further demonstrates the ambiguity that often surrounds the definition of a business, and/or an economic activity (the EU legal definition). This is often an issue for charities and NFP bodies, but can extend to other areas such as in this case.

VAT Taxable Supply – Definition

By   3 July 2020
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What is a taxable supply and who is a taxable person?

A VAT Back To Basics

Taxable supply

It is sometimes useful when considering a transaction to “go back to basics” for VAT purposes. There are certain tests to determine whether a supply is taxable, and these are set out below. Broadly, the tests establish whether UK VAT is payable on a sale and they determine whether an entity is “in business”, that is; carrying on an economic activity.

A transaction is within the scope of UK VAT if all four of the following conditions are satisfied:

  • It is a supply of goods or services.

There is a distinction between the two types of supply as different VAT treatments may apply.  Generally, everything that is not tangible goods is services. However, if no goods or services are actually provided, there is no supply.  Indeed, if there is no consideration for a supply, in most cases it is not a taxable supply.

  • It takes place in the UK.

There are quite complex tests to consider when analysing the “place of supply”, especially where services are concerned.  If the place of supply is outside the UK then usually no UK VAT is due, however, the supply may be subject to VAT in another country.

  • It is made by a taxable person.

A taxable person is any legal entity which is, or should be, registered for VAT in the UK.

  • It is made in the course or furtherance of any business carried on by that person

Business

The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than “business” and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning.  Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have only recently ended a dispute over this definition for a (as it turns out) very happy client.  The tests were set out as long ago as 1981 and may be summarised as follows:

  • Is the activity a serious undertaking earnestly pursued?
  • Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  • Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind that exempt supplies can also be business)?
  • Is the activity conducted in a regular manner and on sound and recognised business principles?
  • Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  • Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

So, if these tests are passed a taxable supply exists. The next step is to establish which VAT rate applies. In an often quoted comment from the judge in the Morrison’s Academy Boarding Houses Association 1978 STC1 Court Of Session case “…In my opinion it will never be possible or desirable to define exhaustively ‘business’ ”. Which what it lacks in helpfulness, makes up for in candour.

There was something of a deviation from the Lord Fisher tests in the Longbridge Court of Appeal case, however, that appears to be a blip and HMRC seem to have reverted to Lord Fisher in subsequent hearings on the same topic. A bit of a: watch this space area of VAT.

Recent cases on business

Recent case law on this issue here and here and HMRC Internal guidance on the Lord Fisher tests here

Commentary

Tip: It is often easier to consider what isn’t a taxable supply to establish the correct VAT treatment.  Specific examples of situations which are not taxable supplies are; donations, certain free supplies of services, certain grants or funding, some compensation and some transactions which are specifically excluded from the tax by legislation, eg; transfers of going concerns (TOGC).

I think that it is often the case that the basic building blocks of the tax are overlooked, especially in complex situations and I find it helps to “go back to the first page” sometimes.