Category Archives: Disputes

VAT: Discounts – value of supply. The TalkTalk case

By   11 January 2023
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In the First Tier tribunal (FTT) case of TalkTalk Telecom Limited the issue was the amount of consideration received on which output tax was due. Specifically, whether “prompt payment discounts” which were offered, but not taken up by customers, reduced the value of a supply.

Background

TalkTalk offered most of its retail customers the option of receiving a 15% discount on its services if their monthly bills were paid within 24 hours.

TalkTalk accounted for output tax on the basis that the consideration received was reduced by the discount, whether or not customers had in fact paid within the 24 hours. In other words; whether or not the discount had actually been applied so that customers paid less.

The appellant considered that this approach was consistent with Value Added Tax Act 1994, Schedule 6 Para 4(1), which provides:

“Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms.”

HMRC’s contention was that the offer only reduced the consideration for VAT purposes where customers had actually paid the reduced amount, and that there was no reduction when the discount was not taken up.

Decision

The above legislation only applies to services supplied “on terms allowing a discount for prompt payment”. In deciding whether this was the case in this appeal the FTT analysed the contractual position.

The contracts were governed by terms and conditions (T&Cs) published on TTL’s website. This discount was not referred to in the T&Cs, but on a separate dedicated page within the same website.

The judge decided that the discount contractual term comes into existence at exactly the same moment as the payment and the supply. There was not a contractual term under the T&C’s under which a lower amount was payable if payments were made earlier. On this point, TalkTalk contended that the T&Cs were varied by the subsequent discount option, and, as a result, the services had been “supplied…on terms allowing a discount for prompt payment” as required by Para 4(1), but this argument was rejected.

As per the Virgin Media Upper Tribunal case the Tribunal considered that the position was different between services billed in advance, and services billed in arrears.

Advance payments

The contractual variation did not include an offer for the customer to pay a discounted amount at some point in the future, so Para 4(1) did not apply to services billed in advance.

Payment in arrears

The FTT ruled that customers accepted the discount offer after delivery of the services. The supply had therefore been made on the terms set out in the T&Cs, and the customer was therefore contractually required to pay the full amount. The discount option was an offer by the appellant to accept a lower sum with an earlier payment date to discharge that pre-existing contractual obligation. As a matter of law, this was an offer to accept a post-supply rebate of consideration already due and therefore it could not be a discount.

The appeal was dismissed.

Commentary

Another case which highlights both the complexity of the rules on consideration and the importance of contracts. At stake here was VAT of £10,606,226.00 which was deemed to be underpaid during a four-month period only. If in doubt – take advice!

VAT: TOGC and deliberate errors – The Apollinaire case

By   19 December 2022
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Latest from the courts

In the First -Tier Tribunal (FTT) case of Apollinaire Ltd and Mr Z H Hashmi the issues were:

  • whether the appellant’s input tax claim was valid
  • were the director’s actions “deliberate”
  • was a Personal Liability Notice (PLN) appropriate?

Background

Mr Hashmi (the sole director of Apollinaire) asserted that he sold his business, Snow Whyte Limited to a Mr Singh as a going concern, together with the trading name “Benny Hamish”. The purchase price was never paid.  He alleged that Mr Singh traded for approximately one month and then sold stock worth £573,756 to Apollinaire. The appellant submitted an input tax claim for the purchase of the goods. HMRC refused to make the repayment and raised penalties for deliberate errors. HMRC subsequently issued a PLN to Mr Hashmi.

Issues

Initially HMRC stated that Mr Singh may not have existed, that there was no sale of Snow Whyte Ltd by Mr Hashmi to Mr Singh and similarly, no sale back to Mr Hashmi. However, this submission was later amended to argue that Mr Hashmi controlled the movement of the stock at all times and that the issue was whether the transfer of stock from Snow Whyte Limited was a Transfer Of a Going Concern (TOGC), whether or not Mr Singh existed.

Mr Hashmi appealed, contending that the transactions took place as described to HMRC.

Decision

Unsurprisingly, given Mr Hashmi’s previous history of dissolving companies, but continuing to trade under the same name as those companies (listed at para 14 of the decision) and failing to submit returns and payments, the FTT accepted HMRC’s version of events. Further, there was insufficient evidence to support the transactions (if they took place) and the judge fund that the appellant’s evidence was not credible. If the events did take place, there was no input tax to claim as all the tests (where relevant here) for a TOGC (Value Added Tax (Special Provisions) Order 1995, Regulation 5) were met:

  • the assets were sold as a business as a going concern
  • the assets were used by the transferee in carrying on the same kind of business
  • there was no break in trading
  • both entities traded under the same name
  • both entities operated from the same premises
  • both entities had the same employees and tills

The appeal was dismissed.

Penalties

The FTT further decided that HMRC’s penalties and PLN [Finance Act 2007, Schedule 24, 19(1)] were appropriate. The claim for input tax was deliberately overstated and that Mr Hashmi was the controlling mind of both entities and was personally liable as the sole company director of Apollinaire.

HMRC relied on case law: Clynes v Revenue and Customs[2016] UKFTT 369 (TC) which reads as follows:

“On its normal meaning, the use of the term indicates that for there to be a deliberate inaccuracy on a person’s part, the person must have acted consciously, with full intention or set purpose or in a considered way…

…Our view is that, depending on the circumstances, an inaccuracy may also be held to be deliberate where it is found that the person consciously or intentionally chose not to find out the correct position, in particular, where the circumstances are such that the person knew he should do so.” 

Commentary

This case is a reverse of the usual TOGC disputes as HMRC sought to establish that there was no taxable supply so no VAT was due. It underlines that:

  • care should always be taken with applying TOGC treatment (or appreciating the results of failing to recognise a TOGC)
  • penalties for deliberate errors can be significant and swingeing
  • directors can, and are, held personally responsible for actions taken by a company

VAT: What is unjust enrichment?

By   2 November 2022
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If a business has overdeclared output tax on past returns then it seems reasonable that this should be corrected, either by adjusting a current return or submitting a form VAT652 if the “error” is over £10,000 net.

If it is a genuine adjustment, surely HMRC must recognise the correction and either make a repayment or offset the overdeclaration against a current amount of VAT due.

The answer is yes, but… “unjust enrichment”…

Unjust enrichment

HMRC has a defence of unjust enrichment via The VAT Act 1994, sect 80(3)

“It shall be a defence, in relation to a claim under this section by virtue of subsection (1) or (1A) above, that the crediting of an amount would unjustly enrich the claimant.” 

This means that HMRC can refuse to repay a claim if they can show that it would unjustly enrich the taxpayer.

It should always be borne in mind that if a claimant absorbed the burden of the wrongly charged VAT himself then unjust enrichment cannot be used as a defence against refusal to repay the claim. Loss or damage to a business due to overpaid VAT is considered in detail here.

Meaning

A refusal to repay a VAT claim using the unjust enrichment contention is to prevent a business becoming enriched at the expense of other entities who actually bore the cost of the incorrectly charged VAT. The authorities consider that a taxpayer should not be put into a better position by recovering the VAT than if VAT had not been charged at all. HMRC regard it as appropriate for unjust enrichment to be considered every time a claim is made.

The recipients of the corrected supply may be final consumers but can also be businesses, charities, etc, who were unable to deduct the overcharged VAT as input tax.

The salient point being whether the VAT was added to the price charged by the claimant or whether the claimant would have charged less had he known that his supplies were not liable to VAT.

HMRC consider that the process of establishing whether a claimant will be unjustly enriched by payment of his claim is two-stage procedure.

First stage

Whether the burden of the overdeclared VAT being claimed was passed on to the claimant’s customers, that is, whether the claimant charged the market rate* plus VAT. This is done on the basis of an economic analysis of the market in which the claimant is operating see; Berkshire Golf Club [2015] UKFTT 627 (TC).

If the customer deducted the wrongly invoiced output tax as input tax, HMRC is entitled to assume that the supplier passed the economic burden of the tax charge on to its customers. In this case, the VAT wrongly accounted for is a cost neither to the supplier nor to the customer.

Second stage

This stage occurs if the claimant accepts that he passed the burden of the tax charge on to his customers but argues that doing that caused loss or damage to his business, for example, by loss of customers or of profits, ie; has the taxpayer been economically damaged by having to bear the VAT cost?

The burden of proof of establishing that there is unjust enrichment falls upon HMRC. The standard of proof is the civil standard of proof; on a balance of probabilities.

HMRC will require the claimant to provide all of the relevant information on; pricing, policy and any other relevant documentation that establishes the pricing strategy**. It is to the taxpayer’s advantage to demonstrate that their margins have been depressed, as they have been required to charge VAT incorrectly.

Factors that HMRC consider:

  • who are the claimant’s competitors?
  • what is its market? (comparisons made with other competitors’ products)
  • how does the business set its prices?
  • what are the business’ overheads?
  • any other factors that may affect the prices

The reimbursement scheme

This is an undertaking to comply with certain reimbursement arrangements. The full text of the required undertaking is set out here.

This scheme applies where a business accepts, or HMRC prove, that by receiving a refund of sums incorrectly accounted for as output tax the business would be unjustly enriched at its customers’ expense and it wishes to refund the money they overpaid. If a customer was able to deduct all of the mistaken VAT charge as input tax HMRC will not regard them as having borne the burden of the charge.

In such cases HMRC will only make a refund of overpaid VAT if the taxpayer agrees to reimburse those customers in accordance with the terms of the scheme. More details Notice 700/45.

If HMRC repay a claim and the claimant is unable or unwilling to reimburse its customers (who bore the cost) with any amounts paid to him by HMRC then unjust enrichment will always apply. See The Deluxe High Court case.

Prices after a claim

It is worth bearing in mind that where a claimant has kept prices the same after he has found out that no VAT was due on the supplies in question, courts are likely to assume that that is because the business was charging the market rate. That assumption is made on the basis that, if the market rate were less, he would be compelled to reduce his prices. HMRC often check any post-claim price changes (or lack thereof).

Case law (summary)

The salient points from European Court of Justice case law may be summarised as:

  • a person who has wrongly accounted for VAT is entitled to recover it
  • HMRC is entitled to refuse to repay where it can show that the claimant did not bear the economic burden of the wrongly paid tax but passed it on to its customers
  • the invocation of the unjust enrichment defence is the restriction of a personal right derived from EU law, and so it is something that should be done only exceptionally
  • the unjust enrichment defence cannot be invoked simply on the grounds that the VAT was shown separately on an invoice
  • before HMRC can invoke the unjust enrichment defence it must carry out an economic analysis of the market in which the claimant is operating
  • the case law of both the European and the UK courts assumes that, in a free market economy, a trader required to account for a transaction-based tax will charge the market rate, not market rate plus tax

*  The case law of the European Court of Justice and of the courts in the UK begin with the assumption that in a free market economy (and probably even in a managed economy) a business will charge the market rate and account for any VAT out of his profit margin.

** A pricing strategy is a business’s approach to determining the price at which it offers goods or services to the market. Pricing policies ensure businesses remain profitable and they give them the flexibility to price separate products differently.

Pricing policies refer to the processes and methodologies a businesses uses to set prices for their supplies. There are various pricing strategies that may be used, but some of the more common ones include:

  • value-based pricing
  • competitive pricing
  • price skimming
  • cost-plus pricing
  • penetration pricing
  • economy pricing
  • dynamic pricing

Further reading

A VAT Did you know?

By   26 October 2022
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In the Spearmint Rhino case it was ruled that there is no VAT on lap dances, however in Wilton Park Ltdthe decision was that VAT was due.

A VAT Did you know? – Latest from the courts

By   5 October 2022
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A new Tribunal case ruled that marshmallows of an unusual size are zero rated, while normal sized marshmallows continue to be standard rated. 

VAT: Which entity receives a supply? The Star Services case

By   8 September 2022
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Latest from the courts

In the Star Services Oxford Limited (Star) First Tier Tribunal (FTT) case the issue was the identity of the entity receiving the supply, whether it held a valid tax invoice, and whether input tax could be claimed.

Background

The appellant claimed input tax incurred on rental payments to Oxford City Council. This was disallowed by HMRC on the grounds that the rental agreement was with Mr Latifi (a sole proprietor in a property rental business) and not the company which was VAT registered.

After the rental agreement was signed the business was incorporated and carried on a bed and breakfast activities from the premises, along with two separate sub-lets to third parties. One party paid rent to Star and one directly to Mr Latifi.

Contentions

HMRC argued that:

  • Mr Latifi and the Appellant are separate legal entities, both of whom are required to register for VAT separately if carrying on taxable business activities
  • the assessment was correct as the company was not entitled to an input tax credit as it was not the person who had incurred the liability
  • the Appellant did not hold a valid VAT invoice, which entitles it to deduct the input tax

Star contended:

  • there was a technical error in the lease agreement
  • the assessment was excessive
  • subsequent to the assessment, the lease was registered to the Appellant
  • the lease was acquired in Mr Latifi’s name because the Appellant did not exist at the time that the lease agreement was entered into. At the relevant time there was an innocent omission to transfer the lease from Mr Latifi’s name to the Appellant’s name, and the delay was caused by forgetfulness
  • a company may, under The VAT Act 1994 s. 24(6)(c) and if permitted by Regulations, claim input tax on the pre-incorporation supplies received for its business
  • the Appellant has accounted for the VAT (therefore there was no loss of tax)
  • the fact that Mr Latifi is beneficial owner of both “the company” (by virtue of controlling shares and directorship) and “the property” must have an impact on the decision to assess

Decision

The appeal was dismissed.

The Appellant was not entitled to claim input tax on the invoices and HMRC were correct to disallow input tax. It did not receive the supply and it did not hold a VAT invoice.

It was decided that the legal relationship was between Oxford City Council and Mr Latifi. This is because the lease agreement was between these parties and not the Appellant.

It was found that the rent from one sub-tenant was paid to Mr Latifi directly and is not accounted for by the Appellant and that the reassigned lease has no bearing on the property rental activities undertaken by Mr Latifi prior to the reassignment.

The rules on pre-incorporation supplies* do not apply in this case because Mr Latifi, as sole proprietor, and the Appellant, are separate legal entities, requiring separate VAT registration.

Interestingly, a recent case was relied on: In Tower Bridge GP Ltd the Court of Appeal ruled that absent a valid VAT invoice showing the supplier’s VAT number and the customer’s name, the right to deduct input tax on that invoice could not be exercised.

Summary

An unfortunate oversight was sufficient for HMRC to refuse the input tax claim. This case does have a whiff of unfairness about it, but by applying the letter of the law the outcome is unarguable. The contentions here are similar to those in the Aitmatov Academy case.

Another case of taking care with claims.

* A business may, generally, claim the VAT incurred on services it has purchased for its taxable business purposes during the six months prior to VAT registration .

The VAT Act 1994, s 24(6) (c) and The Value Added Tax Regulations 1995, Reg 111.

VAT: No invoice – no claim. The Tower Bridge GP Ltd case

By   9 August 2022
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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: Updated guidance – Non-Statutory Clearances Service

By   21 July 2022
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HMRC has published new guidance on the non-statutory clearance service available for all businesses and their advisers.

Non-Statutory clearances

A Non-Statutory clearance is a mechanism where a person can ask HMRC in writing for guidance or advice in certain circumstances. The guidance sets out how to use this procedure. The service is limited, however, and HMRC will only advise if the applicant:

  • has fully read the relevant guidance or contacted the relevant helpline
  • has not been able to find the information required
  • is uncertain about HMRC’s interpretation of tax legislation

However, HMRC will not respond if

  • it is not given all the necessary information —checklists at Annex D (for VAT) provide details of what is required
  • it does not think that there are genuine points of uncertainty – it will explain why HMRC think this and direct the applicant to the relevant online guidance
  • if  HMRC think the clearance request is to give tax planning advice, or to approve tax planning products or arrangements
  • the application is about treatment of transactions which, in HMRC’s view, are for the purposes of avoiding tax
  • HMRC is checking the applicant’s position for the period in question, in which case queries must be directed to the officer dealing with the inspection
  • it is a clearance on matters of fact, such as if certain activities constitute a business
  • there is a statutory clearance applicable to the relevant transaction

HMRC is currently not dealing with postal applications, so a request must be sent by email to nonstatutoryclearanceteam.hmrc@hmrc.gov.uk

HMRC will usually reply within 28 days, but say where difficult or complicated issues are involved it may take longer. If this is the case, HMRC will acknowledge a request and tell the applicant when they can expect a full reply. VAT non-statutory clearance requests are currently taking around 12 weeks to process.

Appeal

There is no general right of appeal against advice given by HMRC, except where rights to appeal are set out in statute.

Appeal rights are usually against decisions HMRC take, such as issuing an assessment for underpaid tax or a penalty.

However, some VAT related decisions are classed as ‘appealable decisions’ by statute. The letter HMRC sends will explain if the applicant is able to appeal and what to do if the applicant disagrees with a VAT decision.

Relying on HMRC advice

There has been changes to such reliance, set out here. HMRC explain when its advice is not binding here.

VAT: Exempt insurance intermediation. The Staysure case

By   8 June 2022
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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   6 June 2022
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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.