There were no significant announcements on VAT in the budget.
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Category Archives: Law
VAT: DIY housebuilders can make more than one claim – The Ellis case
Latest from the courts
In the First Tier Tribunal (FTT) case of Andrew Ellis and Jane Bromley [2021] TC08277, the issue was whether a person constructing their own house can make more than one claim for VAT incurred.
Background
The DIY Housebuilder’s Scheme enables a DIY housebuilder to recover VAT incurred on the construction of a house in which the constructor will live. Details here.
In this case, the specific issue was whether, despite the HMRC guidance notes on the scheme claim form explicitly stating that only one claim can be made, whether two claims may be submitted and paid by the respondent.
The appellant constructed a house over a period of five years (he was a jobbing builder and the work was generally only undertaken at weekends and holidays). To aid cash flow, an initial claim was made, followed by a second two years later.
The relevant legislation is The VAT Act 1994 section 35.
Decision
The appeal was allowed. The FTT found that HMRC’s rule that only one claim could be made under the DIY housebuilder’s scheme was ultra vires and that multiple claims should be permitted.
The judge stated that “…there is no express indication that only one claim may be made. Like many provisions, section 35 VATA is drafted in the singular. Drafting in the singular is an established technique to assist in clarity and to enable the proposal to be dealt with succinctly. As there is no express indication to the contrary in section 35 VATA, section 6 Interpretation Act 1978 applies to confirm that the reference to “a claim” in section 35 VATA must be read as including “claims”.
Commentary
This is good news for claimants who often must wait a number of years for a house to be built and therefore carry the VAT cost until the end of the project.
This case presumably means that it is possible to make claims as the project progresses and there is no need to wait until completion.
We await comment on this case from HMRC, but it is hoped that clarification will be forthcoming on whether the result of this case will be accepted.
VAT: Are freemasons’ aims philosophical, philanthropic, or civic? The United Grand Lodge case
Latest from the courts
In the First Tier Tribunal (FTT) case of United Grand Lodge of England (UGLE) the issue was whether subscriptions paid by members of the freemasons are exempt via The VAT Act 1994, Schedule 9, Group 9, section 31, item 1(e) “Subscriptions to trade unions, professional and other public interest bodies” which exempts membership subscriptions paid to a non-profit making organisation which has objects which are of a political, religious, patriotic, philosophical, philanthropic or civic nature.
Background
So, in this case, for the subscriptions to be exempt, freemasonry’s aims must be philosophical, philanthropic, or civic. UGLE submitted input tax claims on the basis that its subscription income was exempt and HMRC declined to make the repayments.
An organisation which has more than one main aim can still come within the exemption if those aims are all listed and described in the legislation. The fact that the organisation has other aims which are not set out in law does not mean that its services to members are not exempt provided that those other aims are not main aims. If, however, the organisation has a number of aims, all equally important, some of which are covered by the exemption, and some of which are not, then the services supplied by the organisation to its members are wholly outside the exemption.
The contentions
The respondents stated that the aims were not UGLE’s sole main aim or aims, and, even if they were, the aims were not in the public domain.
UGLE claimed that its sole main aim was philosophical in nature; or, in the alternative, the main aims, taken together, were of a philosophical, philanthropic, or civic nature and it did not have any other main aims.
Decision
The appeal was dismissed. The judge decided that the supplies made by UGLE in return for subscription payments were properly standard rated.
It was common ground that the motives of the members in joining the organisation are irrelevant.
It was accepted that since 2000 freemasonry has become more outward looking and since then has become more involved in charitable work among those, and for the benefit of those, who are not freemasons or their dependants. That said, the judge was not satisfied that the charitable works of individual freemasons, such as volunteering to give time to a local charity, were undertaken by them as freemasons rather than simply as public-spirited members of the community.
It was found that UGLE did have aims of a philosophical, philanthropic and civic nature (the promotion of all aspects of the practice of freemasonry and charity was central to UGLE’s activities). However, it was not accepted that these were UGLE’s main or primary aims. At least 48% of payments made by UGLE were to freemasons and their dependants and in the FTT’s judgment such support remained one of the main aims of freemasonry and thus of UGLE. The importance of providing support for freemasons and their dependants who are in need is a central tenet of freemasonry – The duty to help other freemasons is clearly set out in the objects of the four central masonic charities. The evidence showed that the provision of relief to freemasons and their dependants was the more important than donations to good causes unconnected with freemasonry.
Civic aims
There was nothing in the evidence which indicates any civic aim. UGLE cannot be said to be an organisation that has aims pertaining to the citizen and the state. Indeed, freemasons are prohibited from discussing matters of religion and politics in lodges.
Consequently, as one of UGLE’s main aims could not be described as philosophical, philanthropic, or civic, its membership subscriptions were standard rated. Making payments to freemasons was more akin to self-insurance, rather than philanthropic in nature.
VAT: Zero rating of seeds and plants
HMRC have updated VAT Notice 701/38 Seeds and plants that can be zero-rated. This Notice explains how to zero rate supplies of of seeds and plants which are used to grow food for human consumption. The supply of most basic foodstuffs for human or animal consumption is zero-rated. Plants and seeds used for the production of foodstuffs are also zero-rated depending on how they are held out for sale. The Notice explains when the following items can be zero-rated:
- plants
- seeds or other means of propagation (spores, rhizomes) used to produce those plants
- seeds used directly as foods
The main amendments have been made to paragraph 3.5 – Trees and fruit bearing shrubs.
Any businesses supplying such goods (garden centres, nurseries etc) should ensure that the available zero rating is applied as widely as possible within these rules.
A VAT Did you know?
The sales of counterfeit (illegal) goods are subject to 20% VAT, but the sale of counterfeit banknotes is not.
VAT: Farm in business? The Babylon case
Latest from the courts
In the Upper Tribunal (UT) case of Babylon Farm Ltd (the farm) the issue was whether the appellant was in business and consequently was able to recover certain input tax.
Background
Yet another case on whether there was any business activity in a company. Please see here, here, here and here for previous cases on this issue. The farm sold hay which it cut from another person’s fields to a connected party. The value of the one-off annual sale was £440 pa. The appellant also contended that it was also undertaking preparatory acts for the new business activities and that it would be able to levy management charges. Another new business activity was the creation of an investment and insurance product.
The farm built a new barn on which it claimed input tax of £19,760.
HMRC considered that no business was being carried on and decided to deregister the farm thus refusing to pay the input tax claim. The farm challenged this decision and contended that taxable supplies were being made, and there was also an intention to make taxable supplies in the future.
Legislation
Paragraph 9 of Schedule 1 of the VAT Act 1994 requires HMRC to be satisfied that a person is either making taxable supplies or is carrying on a business and intends to make such supplies in the course or furtherance of a business in order to be registered for VAT. There are a number of tests set out in case law (mainly The Lord Fisher case) to establish whether a person is in business:
- 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?
- 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?
Decision
The appeal was dismissed. The farm was not in business and could not recover input tax on the costs of the new barn.
The judge stated that he could see no legal basis for the farm to be in business. The hay that the farm sold was taken from the customer’s own land and therefore belonged to him already. It was also noted that no invoices were raised, no payment for the hay had been made for a number of years and the single customer was a director of Babylon Farm Limited so the farm was not operating in an open market. The sale of hay had not been conducted on a basis that followed sound and recognised business principles or on a basis that was predominantly concerned with the making of taxable supplies for consideration. As a consequence, the farm was not operating as a business during the relevant period.
On the intention point; neither of the intended activities had yet resulted in any chargeable services being provided and both were to be carried on through companies that had been formed for these purposes (not the farm). Both businesses remained at a formative stage and neither company has generated any revenue. This was insufficient to retain the VAT registration.
Commentary
The decision was hardly a surprise and one wonders how it reached the UT. HMRC were always going to challenge an input tax claim of that quantum with no output tax (and such a low value of sales which may not have been made in any event).
VAT: Report on Tax Tribunal performance published
A new report reviewing the performance of the Tax Chamber of the First-tier Tribunals (FTT) has been published. It identifies the FTT’s strengths and areas for improvement It has been published by the independent the Tax Law Review Committee (TLRC)
The major causes of dissatisfaction among FTT users include:
- delay
- lack of communication by the FTT administration
- a lack of engagement by some judges during the hearing
- the allocation of cases to judges with the appropriate knowledge or skill.
Delay is the overriding concern among tribunal users surveyed: both delay between the hearing and the release of the decision (which sometimes is over one year) and delay caused by the FTT administration. Especially in relation to the FTT administration, the underlying cause of these problem seems to be a lack of funding, as there is a rapid staff-turnover with staff leaving for better renumerated jobs in other parts of the Civil Service.
Area of strength:
- how litigants in person are often assisted by judges taking an inquisitorial approach.
The report identifies potential for further improvements to access to justice for litigants in person, including allowing remote video-hearings as an alternative to having cases determined on paper without a hearing, and the possible establishment of a pro-bono advocacy scheme.
VAT: New rules for Uncertain Tax Treatments
The government have released draft legislation and guidance in respect of Uncertain Tax Treatments (UTT). In addition to VAT, this legislation also covers; corporation tax, income tax and PAYE.
Who is affected?
Large businesses with a:
- turnover of more than £200 million per annum
- balance sheet total over £2 billion
Threshold
A business must notify HMRC in cases of UTT where the tax advantage of the treatment is £5 million or more in a twelve-month period.
Start date
The new rules will be introduced from 1 April 2022.
Notification
There are three triggers for notification:
- Provision made in the accounts
The amount relates to a transaction which a provision has been made in the accounts, in accordance with GAAP, to reflect the probability that a different tax treatment will be applied to the transaction
2. HMRC’s known interpretation of the law
Reliance was placed on an interpretation or application of the law that is different to HMRC’s known interpretation or application.
3. Substantial possibility amount would be found to be incorrect
It is reasonable to anticipate that, if a court were to consider the way in which the amount was arrived at, there is a substantial possibility that the treatment would be found to be incorrect.
Tax advantage
The definition of tax advantage for VAT is:
- Less output tax is accounted for or is accounted for later, than would otherwise be the case
- If there is an input tax claim which would otherwise not be obtained; a larger claim, or a claim earlier than would otherwise be the case
- If input tax is recovered as a recipient of a supply before the supplier accounts for the output tax; the period between the time when the input tax is recovered or the time when the output tax is accounted for is greater than would otherwise be the case
- The amount of non-deductible tax is less than it otherwise would be
- An obligation to account for VAT is avoided
Exemptions
There are exemptions from notification. For VAT, exemption will apply where it is reasonable to conclude that HMRC is already aware of the information which would otherwise be required to be notified or in circumstances where a business has previously requested clearance and where HMRC agrees with the proposed treatment.
Penalties
The penalty for failure to make a notification will be £5k initially, £25k for
a second failure and £50k for a third failure within a three-year period. There
will be an opportunity to advance a reasonable excuse argument to avoid a
penalty.
A VAT Did you know?
Crisps: VAT is due on potato snacks, but maize and corn-based snacks are VAT free. (But Pringles are standard rated even though they contain corn, wheat and non-potato flours and the potato content is less than 50%).
VAT: Construction of a dwelling – zero-rated? The CMJ (Aberdeen) case
Latest from the courts
The First-Tier tribunal (FTT) considered the case of CMJ (Aberdeen) Limited (CMJ) and whether the supply of building services in respect of the construction of a dwelling were correctly zero rated by the appellant. HMRC deemed that the construction services were standard rated on the basis that the works were not carried out in accordance with the terms of the relevant statutory planning consent.
Background
HMRC’s view was that, although planning consent was in place at the time the construction services were supplied by the appellant, that planning consent permitted only the alteration or enlargement of a dwelling and did not allow for the construction of a dwelling. HMRC accept that the property was constructed as a new building, but that this was not permitted by the planning consent and so the construction was not carried out in accordance with it.
CMJ contended that statutory planning consent had been obtained for the construction via a combination of the planning consent and a construction building warrant which it had obtained from the relevant authority, and which allowed for the construction of a new building.
Legislation
The zero rating for the construction of new dwellings is contained in The VAT Act 1994, Schedule 8, Group 5, item 2
“The supply in the course of the construction of
(a) a building designed as a dwelling…”
Note 2 to Group 5 of Schedule 8 to the VAT Act include the following:
“(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied…
…(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.
Decision
The appeal was dismissed. It was judged that the building warrant did not comprise statutory planning consent for the purposes of note 2 (d) because:
- Planning consent and building warrants operate under different statutory regimes.
- Breach of planning consent is dealt with separately from a breach of the building warrant legislation, and each is dealt with by the specific statutory regime . If there is a breach of planning consent, it would not affect the validity of the building warrant, and vice versa.
- The Building Standards Handbook states that the purpose of the building standards system is setting out the standards to be met when building work takes place. This is different from planning consent which is consent to allow the authority to permit development on a piece of land. They are distinct and separate regimes aimed at distinct and separate issues. While planning permission is about how the house will look, a building warrant is about whether it meets building standards.
- Both planning permission and a building warrant is required. One is no substitute for the other.
- It is possible to obtain retrospective planning consent, the judge did not believe it is possible to get a retrospective building warrant.
It was not possible to carry out works of construction in accordance with a valid statutory consent, since no such consent had been given for construction at the time that the building works were carried out.
Commentary
The legislation covering building work is complex and there are many traps for the unwary. Even the seemingly straightforward matter of whether a new dwelling is constructed can produce difficulties, as in this case. We always counsel that proper VAT advice is sought in such circumstances.