Category Archives: Latest from the Courts

VAT: EC AG’s Opinion – Are aphrodisiacs food?

By Marcus Ward 2 March 2020

Latest from the courts

It’s rare to come across anything vaguely sexy about VAT, but hey ho, aphrodisiacs were the subject of the AG’s opinion in the case of “X” – the name of the Dutch business. The document was published by the European Commission (EC) and is here but unavailable in the English language, presumably as a result of Brexit, unless anyone knows of any other reason.

Opinion

The AG, M. Maciej Szpunar decided that no, aphrodisiacs cannot be treated as food via Directive 2006/112/CE – Article 98 and are therefore not subject to a reduced rate (which would have been zero rated in the UK). The relevant element was:

“Foodstuffs” intended for human consumption “refers to products containing nutrients, and which are in principle consumed for the purpose of supplying said nutrients to the human body”. Products which are normally used to supplement or replace foodstuffs “Means products which are not foodstuffs, but which contain nutrients and are consumed in place of foodstuffs to supply these nutrients to the body, as well as products ingested in order to stimulate the nutritional functions of food or products used to replace them.

Therefore, in the AG’s opinion, the powders and capsules sold by X are different to foodstuffs and supplements and were not subject to the reduced rate. The fact that they may contain elements of nutrition did not override that they were intended to stimulate sexual desire and it was not the intention of the legislation that such products should be subject to the reduced rate as they were not “essential goods”.

That, of course, does not mean that foods which are said to contain aphrodisiac properties such as; asparagus, oysters, watermelons, celery and pomegranates are not reduced rated.

I doubt that Aphrodite – the Greek goddess of love and beauty, knew that ultimately there would be a court case on the rate of indirect tax applicable to such, err; “stimulants”.

AG’s Opinion

The Court of Justice of the European Union (CJEU) consists of one judge from each member state, assisted by eleven Advocates General whose role is to consider the written and oral submissions to the court in every case that raises a new point of law, and deliver an impartial opinion to the court on the legal solution.

VAT overpayments – HMRC to consider changes

By Marcus Ward 24 February 2020

VAT overpayments – New direct claims?

If a recipient of a supply makes an overpayment of VAT (usually as a result of standard rated tax being charged when a supply is reduced rated, zero rated or exempt) the remedy for the customer is to go to the supplier to obtain a new invoice/VAT only credit note and. repayment of the VAT paid. However, this can cause practical problems, disputes and an actual cost if a supplier has ceased business or become insolvent. HMRC has recognised that if the supplier has paid output tax on the supply then there is an inherent unfairness.

Following the decision in PORR Építési Kft. (C 691/17) which considered the principles of; proportionality, fiscal neutrality and effectiveness, HMRC invited interested parties to discuss a direct HMRC claim process where the taxpayer has pursued a refund via its supplier for overpaid incorrectly charged VAT but where, as stated in the cases, “recovery is impossible or excessively difficult”. In such cases the taxpayer “must be able to address its application for reimbursement to the tax authority directly”. In the past, HMRC has directed that such claims from them are pursued via the High Court (or County Court if under £30,000). The meeting discussed the new route to direct claims without initial court action including guidance, time limits and claim processes.

We await the outcome eagerly as this situation is quite common, I have found it is an issue particularly in; property and construction supplies, Financial Services and cross-border transactions (place of supply issues). If HMRC are minded to introduce a “direct claim” this will bring welcome relief to taxpayers and introduce fairness for all parties and do away with windfalls received by HMRC.

VAT: Payment handling charges – The Virgin Media case

By Marcus Ward 5 February 2020

Latest from the courts

In the Virgin Media Ltd First Tier Tribunal (FTT) case a number of issues were considered. These were:

whether payment handling charges were exempt via: The VAT Act 1994, Schedule 9, Group 5, items (1) and (5)
whether the supply was separate from other media services
which VAT group member made the supply?
whether there was an intra-group supply
whether there was an abuse of rights

Background

Virgin Media Limited (VML) provided cable TV, broadband and telephone services (media services) to members of the public. It was the representative member of a VAT Group which also contained Virgin Media Payment Limited (VMPL).

If customers choose not to pay by direct debit, they were required to pay a £5 “handling charge”. The handling charge was paid to VMPL and passed to VML on a daily basis. The issue was; what was the correct VAT treatment of the charge?

Contentions

The appellant argued that the £5 charge was optional for the customer and the collection of it was carried out by VMPL and was exempt as the transfer or receipt of, or any dealing with, money. Further, that, despite being members of the same VAT group, there was nothing in the legislation which forced the VAT group to treat supplies by separate entities within that group as a single supply to a recipient outside the group.

HMRC contended that there was a single taxable supply and thus no exempt services were provided and, in fact, VMPL was not making a supply at all (and therefore not to VML as the group representative member). In the first alternative, if it were decided that there was a supply, such a supply was an ancillary component of a single taxable supply by VML as representative group member and not by VMPL as per the Card Protection Plan case. In the second alternative, if both decisions above went against HMRC, that the service provided by VMPL fell outside the exemption so that it was taxable in its own right.

Decision

It was found that:

there was a single supply made to customers
the supply was made by VML as the representative member of the VAT group
the £5 handling charge was an integral part of the overall supply
if not integral, the handling charge was an ancillary supply such that it took on the VAT treatment of the substantive supply
therefore, VMPL does not make any supply to the end users of the overall service
if VMPL does make a supply, it is an intra-group supply to VML which s disregarded for VAT purposes
VMPL does not have a free-standing fiscal identity for VAT purposes
if the FTT is wrong on the above points and VMPL does make a supply of payment handling services to customers, these supplies are taxable and not exempt (per Bookit and NEC) as the supply is simply technical and administrative and does not amount to debt collection
the arrangements do not constitute an abusive practice. The essential aim of the transactions are not to secure a tax advantage so HMRC’s argument on abuse fails

Therefore, the appeal was dismissed and a reference to the CJEU was considered inappropriate and output tax was due on the full amount received by the group from customers.

Summary

This was a complex case which suffered significant delays. It does help clarify a number of interconnected issues and demonstrates the amount of care required when planning company structures and the VAT analysis of them.

VAT: Subjects normally taught in schools – The Premier Family Martial Arts case

By Marcus Ward 20 January 2020

Latest from the courts

In the First Tier Tribunal (FTT) case of Premier Family Martial Arts LLP the issue was whether kickboxing was a subject that is ordinarily taught in schools (or universities). If it was, then the education exemption at VAT Act 1994, Schedule 9, group 6, item 2 would apply as it was supplied by a partnership. If not, the tuition would be subject to VAT.

Background

The FTT found that kickboxing is a “striking” martial art. In terms of its physical attributes, kickboxing involves a mixture of boxing, karate and taekwondo and therefore includes all elements of the striking”martial arts. All martial arts involve common physical attributes such as co-ordination and balance. It also stated that; perhaps more significantly, all martial arts emphasise, in addition to the physical aspects of the various forms of martial arts, aspects of personal development such as self-discipline, respect for others, confidence, manners, teamwork and focus which meant it should be considered more than recreational. There was also evidence to the mental and social benefits of the practice of martial arts.

However, this was insufficient to qualify it as a subject “ordinarily” taught in schools. The subject does not feature on the national curriculum, there is no formal qualification or external accreditation requirement to become a kickboxing teacher and there was no formal external validation of the qualifications achieved by children who attend the Appellant’s classes.

Decision

Consequently, the tuition failed the exemption test, the appeal was dismissed and the charges for tuition were therefore subject to VAT.

Commentary

This case demonstrates that there are fine lines between different types of tuition and to which the education exemption applies. It is never safe to simply assume that a subject is ordinary taught in schools. Although many subjects are (to my mind; surprisingly) considered as exempt, it is always better to check.

As the old joke goes: two men punching each other – what’s that a bout?

VAT: Digital newspapers zero-rated. The News Corp case

By Marcus Ward 10 January 2020

Latest from the courts

Hot on the heels of the update to e-publications here comes new from the Upper Tribunal (UT) in the News Corp UK and Ireland Ltd case.

Background

The issue was whether electronic editions of The Times (plus other e-newspapers from the same company: The Sunday Times, The Sun and The Sun on Sunday) were “newspapers” within the meaning of The VAT Act 1994, Schedule 8, Group 3, Item 2 and could therefore be treated as zero rated.

The relevant part of Schedule 8, Group 3 (where relevant), lists the following items:

“1 Books, booklets, brochures, pamphlets and leaflets.

2 Newspapers, journals and periodicals…”,

At the First Tier Tribunal (FTT) the appeal was dismissed, and the decision went in favour of HMRC. Details here. The facts were consistent throughout both hearings.

Decision

The UT agreed with the FTT in that there was no material difference between the two types of supply despite the sale of e-newspapers being supplies of services and the sale of physical newspapers being supplies of goods.

That being the case, it was possible to interpret Schedule 8, Group 3. Item 2 as extending to e-publications, which, of course, did not exist when the legislation was drafted in 1972. Consequently, the appeal was allowed, and the e-newspapers were zero rated. Such treatment did not extend the scope of UK zero rating which would not be permitted by the EU.

The UT also indicated that the zero rating would be subject to some restrictions in respect of what may be treated as e-publications.

It was observed that it is important that the legislation should be interpreted in a way that maintained its relevance and that the “always speaking” * principle is preserved.

Commentary

The EC European Council (EC) has previously agreed to allow Member States to apply reduced VAT rates to electronic publications. This UT case appears to confirm that this will extend to UK zero rating. Other Members States have already applied reduced rates or are in the process of doing so. The UK have not previously announced its approach, so this decision is likely to force their hand (notwithstanding the fallout from Brexit…).

Action

Supplies or e-publications should review their sales and decide whether their supplies are on fours with this case. If so, it may be possible to make a retrospective claim for overpaid output tax, subject to certain conditions.

Recipients of such supplies should consider approaching their suppliers and obtain a repayment of overpaid VAT if it represents a cost to them.

“Always speaking” is an influential principle that is recited in materials on legislative drafting as the justification for using the present tense, adopted in many common law jurisdictions as a principle of interpretation, and accepted as a foundation for the linguistic analysis of the use of tense in statutes. It is particularly relevant where technology has outpaced the law.

VAT: New guidance on Cryptoassets

By Marcus Ward 9 January 2020

HMRC Guidance

Further to my articles on cryptocurrencies here, here and here HMRC have update their guidance on cryptoassets which was published on 20 December 2019.

Background

VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens.

The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place.

Definition

Cryptocurrency (an example being Bitcoin) is a line of computer code that holds monetary value. Cryptocurrency is also known as digital currency and it is a form of money that is created by mathematical computations. In order for a Bitcoin transaction to take place, a verification process is needed, this is provided by millions of computer users called miners and the monitoring is called mining. Transactions are recorded in the blockchain which is public and contains records of each and every transaction that takes place. Cryptocurrency is not tangible, although they may be exchanged for traditional cash. It is a decentralised digital currency without a central bank or single administrator (which initially made it attractive) and can be sent from user to user on the peer-to-peer network without the need for intermediaries.

Cryptoassets

For VAT purposes, bitcoin and similar cryptoassets are to be treated as follows:

exchange tokens received by miners for their exchange token mining activities will generally be outside the scope of VAT on the basis that:

- the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration; and
- there is no customer for the mining service

when exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself
charges (in whatever form) made over and above the value of the exchange tokens for arranging any transactions in exchange tokens that meet the conditions outlined in VAT Finance manual (VATFIN7200), will be exempt from VAT under The VAT Act 1994, Schedule 9, Group 5, item

The VAT treatments outlined above are provisional pending further developments; in particular, in respect of the regulatory and EU VAT positions.

Bitcoin exchanges

In 2014, HMRC decided that under The VAT Act 1994, Schedule 9, Group 5, item 1, the financial services supplied by bitcoin exchanges – exchanging bitcoin for legal tender and vice versa – are exempt from VAT.

This was confirmed in the Court of Justice of the EU (CJEU) in the Swedish case, David Hedqvist (C-264/14). The appellant planned to set up a business which would exchange traditional currency for Bitcoin and vice versa. It was not intended to charge a fee for this service but rather to derive a profit from the spread (the difference between his purchase and sell price).

Questions were referred to the CJEU on whether such exchange transactions constitute a supply for VAT purposes and if so, would they be exempt.

The CJEU referred to the judgment in First National Bank of Chicago (C-172/96) and concluded that the exchange transactions would constitute a supply of services carried out for consideration.

The Court also ruled that the exchange of traditional currencies for non-legal tender such as Bitcoin (and vice versa) are financial transactions and fall within the exemption under VAT Directive Article 135(1) (e).

A supply of any services required to exchange exchange tokens for legal tender (or other exchange tokens) and vice versa, will be exempt from VAT under The VAT Act Schedule 9, Group 5 item 1.

Commentary

As always, the legislation and case law often struggles to keep pace with technology and new business activities. Although the focus of the guidance is more towards direct taxes, it is a helpful summary of HMRC’s interpretation of UK and EU law and decided case law.

VAT: Issue of zero-rating certificate – The Westow Cricket Club case

By Marcus Ward 18 December 2019

Issue an incorrect certificate to obtain zero rated building work at your peril! Don’t get caught out – A warning.

In the First Tier Tribunal (FTT) case of Westow Cricket Club (WCC) the appeal was against a penalty levied by HMRC for issuing a certificate to a contractor erroneously under The VAT Act 1994, Section 62 (1).

Background

WCC was an entity run by volunteers but was not a charity, although it was a Community Amateur Sports Club (“CASC”). It decided to build a new pavilion and wished to take advantage of certain zero rating which was available for the construction of a building that the

“…organisation (in conjunction with any other organisation where applicable) will use the building, or the part of the building, for which zero-rating is being sought …..solely for

a relevant charitable purpose, namely by a charity in either or both of the following ways:

….(b) As a village hall or similarly in providing social or recreational facilities for a local community.”

– Public Notice 708 para 14.7.1.

To ensure that the issue of such a certificate was appropriate, the appellant wrote to HMRC giving details about the building project and seeking guidance on the zero rating of supplies to WCC in the course of the construction of the pavilion. The response was important in this case as WCC sought to rely on it as a reasonable excuse. Part or the reply stated:

“HM Revenue & Customs policy prevents this Department from providing a definitive response where we believe that the point is covered by our Public Notices or other published guidance, which, in this case, I believe it is. In view of the above, please refer to section 16 of Public Notice 708 Buildings and construction. This explains when you can issue a certificate. Section 17 includes the certificates. Furthermore, I would refer you to sub-paragraph 14.7.4 which covers what is classed as a village hall or similar building. Providing the new pavilion meets the conditions set out, and it appears to do so, the construction work will be zero-rated for VAT purposes…”

Decision

Regrettably, the FTT found that, despite HMRC’s letter expressing a ‘non definitive’ view; which was wrong, this was insufficient to provide reasonable excuse and could not be relied upon. The FTT made references to the fact that the club was not a charity and could not therefore issue the certificate. Consequently, the 100% penalty was applicable and not disproportionate (the penalty imposed is nothing more than the VAT that would have been paid by any other CASC seeking to build a pavilion incurring a vatable supply of a similar sum).

Commentary

HMRC was criticised for potentially leaving taxpayers in ‘no man’s land’ by expressing a view whilst at the same time saying that this was not a definitive response. This is a common tactic used by HMRC and one which many commentators, including myself, have criticised.

Tribunal’s unease

The judge commented that he trusted that HMRC will take note of his concerns and if this is a matter of policy to revisit it in light of the comments made in this decision. Let us hope HMRC listens. It is also an important case for charities (and others) to note when considering if they are able to obtain the construction of buildings VAT free. This is not a straightforward area, and the penalty for getting it wrong is clearly demonstrated here.

Always get proper advice – and don’t rely on vague rulings from HMRC!

VAT: The extent of exempt childcare. The RSR Sports case

By Marcus Ward 3 December 2019

Latest from the courts

In the RSR Sports Limited First Tier Tribunal (FTT) case the issue was whether the provision of holiday camps for children was exempt healthcare via VAT Act 1994, Schedule 9, Group 7, item 9 – “services… closely linked to the protection of children and young persons” and supplies of “welfare services”

Background

The Appellant traded under the name of Get Active Sports. It provided various services including the provision of school holiday camps which were the subject of the appeal.

The holiday camps were Ofsted registered and “pupils will be safe and receiving the best possible childcare”. The appellant worked with children aged 4-16 and had specially designed programmes from multi-sports and games to themed arts and crafts. The staff that provided the holiday camp services were not required to have any teaching or coaching qualifications (but needed to be DBS checked). They were just required to ensure that the children were kept busy with a variety of activities and were kept safe.

The appellant considered that these supplies constituted supplies of “ services…closely linked to the protection of children and young persons” – within the meaning of Article 132(1)(h) of Council Directive 2006/112/EEC and supplies of “welfare services” under UK legislation as above. HMRC submitted that the predominant element of that single composite supply was the provision of activities because, weighing up objectively, from the position of the parents whose children attended the holiday camps, the importance to those parents of the childcare aspects of the holiday camps in comparison to the importance to them of the various activities which were made available at the holiday camps, the latter outweighed the former. The supplies did not fall within the exemption and should have therefore properly been treated as standard-rated as the primary aim of the appellant in running the camps was to offer sports and activities to the attendees and that the childcare was simply a by-product of the activity-based courses.

Decision

It was decided that the holiday camp services involved the provision of activities in the course of caring for children during the school holidays. In other words, the holiday camp services included both an activities element and a childcare element.

Although the judge commented that; it was fair to say that this case was finely-balanced, the services provided by RSR amounted to a single composite supply of which the predominant element was childcare (as opposed to the provision of activities) and therefore they fell within the scope of the above provisions and qualified for the exemption

The FTT agreed with HMRC that one element of the holiday camp services was the provision of activities, but it did not agree with the proposition that just because the provision of activities was an element of the services, that inevitably means that the provision of those activities, as opposed to the provision of childcare, was the predominant element of its supply.

Commentary

It looks like another close call, but the Tribunal appears to have got it right. An interesting aspect was RSR considering it strange that by offering activities to the children, as opposed to sitting them down in front of a television, the appellant was to deprive itself of the ability to bring the its services within the scope of the exemption. The mere fact that the appellant was encouraging parents to choose active childcare arrangements over more passive ones should not cause the relevant services to fall outside the exemption. So a “bit” of sport was OK, but not too much…

VAT: The importance of accurate accounts – The Euro Systems case

By Marcus Ward 3 December 2019

Latest from the courts

In the First Tier Tribunal (FTT) case of Euro Systems (Scotland) Ltd (ESSL) the issue was whether the systems and controls of the appellant could be relied on, or whether an exercise carried out by HMRC which reconciled VAT declarations with unaudited accounts was to be preferred.

Background

HMRC issued an assessment which was a combination of input VAT claimed being overclaimed, and output tax being understated. This was on the basis that the inspector had concerns over the accuracy of records being kept, these were mainly spreadsheets and Sage. A comparison between annual accounts and the relevant returns was made leading to the assessed amount. ESSL had grown quickly, and HMRC considered that the record keeping had not kept pace. An additional point was; why was the business continuing in a VAT repayment situation if it was growing steadily and making profits as per the annual accounts?

The bookkeeping and other administration was carried out by an unqualified and unsupervised receptionist.

The appellant’s director said that the information used to generate the VAT returns was the same as that provided to a firm of chartered accountants to prepare the annual accounts for ESSL, additionally, it had several corruptions within the Sage system, which resulted in a loss of data.

Decision

It was accepted that the appellant had carried out a lot of work to investigate the records due to the corruption of Sage and manually listing many thousand invoices to support input tax claims. However, due to the number of errors and inaccuracies, the records could not be relied on and the figures from HMRC were to be preferred as the accounts had some inherent integrity from being based on double-entry accounting.

The assessment was consequently made in HMRC’s “best judgement”.

Best judgement is set out in the Van Boeckel test:

Van Boeckel “does not envisage that burden being placed on the commissioners of carrying out exhaustive investigations”.

“What the words “best of their judgment” envisage … is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due.”

Subject to an adjustment for the duplication of some figures by HMRC the appeal was dismissed.

Commentary

Similar reconciliations to the one carried out here, plus bank reconciliations and similar, are a staple in a standard VAT inspection. How these are carried out, and the weight given to them can be contentious and they are often used for more than a broad-brush credibility exercise. We have a good track record in having this type of assessment reduced or removed and, in nearly every case, it is worthwhile challenging any such assessment.

Of course, this case provides a reminder, should one be required, that accurate and timely records are vital to ensure tax compliance and, as we always say: Right Tax, Right Time!

VAT: Input tax claim – business or personal? The Taylor Pearson (Construction) Ltd case

By Marcus Ward 3 December 2019

Latest from the courts

In the Taylor Pearson (Construction) Ltd (TPCL) First Tier Tribunal (FFT) case the issue was whether input tax incurred on professional fees in respect of tax planning and the issue of new (E Class) shares to directors was for business purposes or for the benefit of the directors in their personal capacity.

Background

The overall issue in this appeal was whether the company was entitled to deduct input VAT in relation to services provided by tax advisers as to how the company might reduce its tax and NIC liabilities in rewarding its directors and reduce the income tax liabilities of the directors. There are two specific issues:

Whether the services supplied were used for the purpose of the company’s business within the meaning of VATA 1994, section 24.
Whether the services supplied do not have a direct and immediate link with taxable output supplies because they have a direct and immediate link with exempt supplies, being the issue of share capital in the company.

HMRC argued that this appeal is similar to Customs and Excise Commissioners v Rosner [1994] STC 228 and Finanzamt Köln-Nord v Becker (Case C-104/12) in which input VAT incurred in defending the sole trader or individual employees personally, in criminal proceedings entirely unconnected to the business, was held not to be deductible.

Another issue, which was dealt with fairly perfunctory, was whether the issue of new shares was a supply for VAT purposes to which an element of the input tax could be attributed. As per the Kretztechnik ECJ case and subsequent HMRC guidance – the issue of shares was not a supply and the company was entitled to recover the associated input tax to the extent that its business activities generated taxable supplies (business of making supplies of construction goods and services in TPCL’s case).

Decision

In respect of whether the expenditure was for the benefit of the business, the judge stated that “...The advice in question was provided to the company and although the directors were significant beneficiaries of the arrangements that was entirely in their capacity as directors and employees of the company and not in any personal capacity.”

Further:

“…HMRC argued that the incentivisation of employees did not have a direct and immediate link with the purposes of the business I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward. This concerns me.”

It is no wonder that the judge commented on this. This appeal was completely on all fours with the FTT case of Doran Bros (London) which HMRC did not appeal.

Consequently, it was decided that:

the services were used for the purposes of the company’s business, and
they did not have a direct and immediate connection with the issue of share capital.

The appeal was therefore allowed.

Commentary

It was a surprising decision by HMRC to take this to FTT. Case law in respect of Kretztechnik is well established and the purpose to which the funds created by a new share issue were put appears irrelevant. I also find it difficult to see how HMRC could ignore Doran Bros which was very clear and on all fours with this case, while referencing cases in which companies defended its directors against accusations of wrongdoings. In this case, the business purpose was to reward and incentivise TPCL’s directors.

This can be a difficult area of the tax and HMRC’s approach in this case demonstrates that it is prepared take these cases as far as possible. It is nearly always the case that VAT incurred on expenditure which is designed to increase staff morale and performance is a business expense.