Latest from the courts
In the Impact Contracting Solutions Limited (ICS) Upper Tribunal (UT) case the issue was whether HMRC had the power to cancel the VAT registration where that person has facilitated the VAT fraud of another ie; the scope of the “Ablessio” principle. It also illustrates the impact of EU cases on UK courts.
Background
ICS’s customers were temporary work agencies, and its suppliers were approximately 3,000 mini-umbrella companies (“MUCs”) which supplied labour. HMRC decided to cancel ICS’s VAT registration number with reliance on the principle in the decision of the Court of Justice of the European Union (CJEU) in Valsts ienemumu dienests v Ablessio SIA (C-527/11) (“Ablessio”). HMRC considered that ICS was registered for VAT principally or solely to abuse the VAT system by facilitating VAT fraud, and that, in such circumstances, they were empowered by the principle in Ablessio to cancel the registration. In particular, HMRC considered that the arrangements between ICSL and the MUCs were contrived, with the effect that the MUCs failed properly to account for VAT on their supplies to ICS.
ICS appealed against HMRC’s decision to cancel its registration.
The Issues
Does the principle in Ablessio apply only to a party that has itself fraudulently defaulted on its VAT obligations, or does it similarly apply to a party who has facilitated the VAT fraud of another party?
If the Ablessio principle does apply to a party who has facilitated the VAT fraud of another party, is simple facilitation sufficient, or must it additionally be proved that:
(a) the facilitating party was itself dishonest, or
(b) the facilitating party knew that it was facilitating the fraud, and/or
(c) the facilitating party should have known that it was facilitating the fraud?
The First Tier Tribunal (FTT) decided that Ablessio applies both to a party that has fraudulently defaulted on its VAT obligations and to a party who has facilitated the VAT fraud of another party. Further that simple facilitation by a party of the VAT fraud of another is not sufficient to apply the Ablessio principle. However, it is not necessary to prove that the facilitating party was itself dishonest. It must, however, be proved that the facilitating party knew or should have known that it was facilitating the VAT fraud of another party.
Decision
The appeal was rejected an the FTT’s decision was upheld. HMRC powers are not contrary to UK VAT legislation.
The application by HMRC of Ablessio is not contra legem or otherwise prohibited by the VAT legislation where it is applied to deregister a taxpayer who has either fraudulently defaulted on its VAT obligations or facilitated the VAT fraud of another party and at the relevant time has also made taxable supplies unconnected with such fraud or facilitation of fraud and which would result in a liability to be registered.
Ablessio applies to the deregistration by HMRC of a person as well as to a refusal by HMRC to register a person. It also provides for the deregistration of a person who has facilitated the VAT fraud of another, where the person to be deregistered knew or should have known that it was facilitating the VAT fraud of another.
Commentary
This decision was released this month and illustrates the ongoing influence of EU legislation and cases, “despite” Brexit
EU legislation does not, by itself, fall within the scope of retained EU law (see below). However, domestic legislation implementing EU rules forms part of EU-derived domestic legislation and is preserved in domestic law.
The VAT Act 1994 is not affected by Brexit because it is an Act of Parliament and, therefore, remains effective unless it is changed by Parliament.
Overview of the impact of EU legislation
Post-Brexit, the UK could have decided that UK courts should not be bound by EU case law. However, this would have resulted in a situation where the UK courts effectively had to begin with a blank piece of paper in deciding how a piece of retained EU law should be interpreted or applied. This approach would have resulted in considerable uncertainty for business over how retained EU law would operate. In order avoid this, section 6 of the European Union (Withdrawal) Act 2018 provides that:
Going forward
Helpful guidance is provided in the e-Accounting Solutions vs Global Infosys case (not a VAT case).
The Retained EU Law (Revocation and Reform) Act 2023 means that the principle of EU-law conforming construction is a corollary of the supremacy of EU law (which is abolished under Section 3 of the Act) and will therefore no longer apply from 2024.
The principles of statutory construction under English Law require a purposive interpretation of legislation, whether or not EU law principles are engaged. This involves considering the context in which the legislation was made. Depending on the legislation concerned, this process may be guided by “external aids”. External aids referred to in the judgment include Explanatory Notes and Government White Papers, and could also presumably include references to Hansard where seen as appropriate by the courts. To the extent that domestic enactments were made for the purpose of implementing EU law, the EU law position is such an “external aid” and the UK law should be construed accordingly.
Where Parliament used the same language as the Directive, one may assume that it intended to mean the same – accordingly, the CJEU interpretation of Directive-terms informs the interpretation of the UK statute.
However, the statutory language remains paramount – “external aids”, to which EU law instruments are effectively downgraded in UK law from 2024, cannot displace unambiguous statutory language in UK enactments that is inconsistent with EU law.
Hard or soft? Stiff or floppy?
Sssh at the back, this is important…
Whether cakes and biscuits go hard or soft when stale helps to determine whether they are indeed cakes or biscuits (cakes go hard, biscuits go soft). This is the difference between VAT at 20% and zero rating for some products – yes… Jaffa Cakes!.
Whether printed matter is stiff or floppy can also result in either 20% or zero rated treatment. In this case, for single sheet products, eg; leaflets, limp is good and hard can result in the VAT hit.
What did you think I was talking about? Stop making up your own jokes…
Introduction
The tour operators’ margin scheme (TOMS) is a special scheme for businesses that buy in and re-sell travel, accommodation and certain other services as principals or undisclosed agents (ie; that act in their own name). In many cases, it enables VAT to be accounted for on travel supplies without businesses having to register and account for VAT in every country in which the services and goods are enjoyed. It does, however, apply to travel/accommodation services enjoyed within the UK and wholly outside the UK.
Under the scheme:
Who must use the TOMS?
TOMS does not only apply to ‘traditional’ tour operators. It applies to any business which is making the type of supplies set out below even if this is not its main business activity. For example, it must be used by
The CJEC has confirmed that to make the application of the TOMS depend upon whether a trader was formally classified as a travel agent or tour operator would create distortion of competition. Ancillary travel services which constitute ‘a small proportion of the package price compared to accommodation’ would not lead to a hotelier falling within the provisions, but where, in return for a package price, a hotelier habitually offers his customers travel to the hotel from distant pick-up points in addition to accommodation, such services cannot be treated as purely ancillary.
Supplies covered by the TOMS
The TOMS must be used by a person acting as a principal or undisclosed agent for
‘Margin scheme supplies’ are those supplies which are
by a tour operator in an EU country in which he has established his business or has a fixed establishment.
A ‘traveller’ is a person, including a business or local authority, who receives supplies of transport and/or accommodation, other than for the purpose of re-supply.
Examples
If meeting the above conditions, the following are always treated as margin scheme supplies.
Other supplies meeting the above conditions may be treated as margin scheme supplies but only if provided as part of a package with one or more of the supplies listed above. These include
This scheme is complex and specialist advice should always be sought before advising clients.
Whether a service is “related to land” is important because there are distinct rules for this type of supply compared to the General Rule. The place of supply (POS) of land related services is where the land is located, regardless of where the supplier or recipient belong.
The rule applies only to services which relate directly to a specific site of land. This means a service where the land is a central and essential part of the service or where the service is intended to legally or physically alter a property.
It does not apply if a supply of services has only an indirect connection with land, or if the land related service is only an incidental component of a more comprehensive supply of services.
What is land?
For the purpose of determining the POS, land (also called immoveable property in legislation) means:
What services directly relate to land?
HMRC provide the following examples:
The following HMRC examples are not deemed to be land related services:
These examples are mainly derived from case law and the department’s understanding of the legislation and they are not exhaustive.
The Reverse Charge
If an overseas supplier provides land related services in GB, the POS is GB and the reverse charge applies if the recipient is GB VAT registered.
If a GB supplier provides services directly related to land where the land is located outside GB, the POS is not GB. This means that there is a supply in another country. VAT rules in different countries vary (even across the EU) – some countries use the reverse charge mechanism, but others require the GB supplier to VAT register in the country of the POS (where the land is physically located).
HMRC have updated information (on 30 June 2023) on how to use its guidance. This includes when a taxpayer can rely on information and/or advice provided by HMRC. This is the first update since the original publication in March 2009.
The document covers; how to check the advice and information given give applies to a business, what a taxpayer can expect from HMRC, and what to do if you think you have incorrect information.
This covers enquiries made via:
HMRC publishes information and guidance that can address common issues, but this does not always provide a definitive answer in every situation. If this is the case, a business can:
Reliance on incorrect information
HMRC says:
“You may be able to rely on incorrect advice and information from HMRC, if it’s both:
HMRC will take a number of things into account when considering this. In some cases, there may be a strong reason for HMRC to act in a different way from the advice and information given.
Where relevant, HMRC will generally consider whether:
Once it is clear HMRC’s advice and/or information was incorrect, a taxpayer must make sure to use the correct advice and information going forward.
Right of appeal
There is no general right of appeal against the advice and information HMRC provides, except where rights of appeal are set out in statute.
NB: It is always worth considering the HMRC Charter which sets out what a taxpayer can expect from HMRC and what HMRC expects from a taxpayer.
That is all well and good, but I have written about this: VAT – Do as HMRC say…. and if you do… they may still penalise you!
Land and property transactions are often complex and high value for VAT purposes. One area which we have been increasingly involved with is overages.
What is an overage?
An overage is an agreement whereby a purchaser of land agrees to pay the vendor an additional sum of money, in addition to the purchase price, following the occurrence of a future specified event that enhances the value of the land. This entitles the seller to a proportion of the enhanced value following the initial sale. Overages may also be called clawbacks, or uplifts.
Overages are popular with landowners who sell with the benefit of development potential and with buyers who may be able to purchase land at an initial low price with a condition that further payment will be made contingent on land increasing in value in the future – this may be as a result, of, say, obtaining Planning Permission.
VAT Treatment
This is not free from doubt. HMRC’s current view is that the VAT treatment of the overage follows the VAT treatment of the initial supply. This means that it is deemed to be additional consideration for the original supply, so if the land was subject to an Option To Tax (OTT) when originally disposed of the overage payment would be subject to VAT at 20%. Conversely, if the land was sold on an exempt basis, the overage is similarly VAT free and it is important to recognise this and not to charge VAT unnecessarily which would create difficulties for the buyer (because it would not be a VAT-able supply, HMRC would disallow a claim for input tax).
It is crucial to identify this VAT outcome, especially as there could be a long period between the original sale and the overage and there may be a succession of overage payments. Comprehensive records should be made and retained on the VAT status of land sold.
Uncertainty
Uncertainty arises because HMRC have changed its view on overages. The original interpretation was that there were two separate supplies, each with distinct VAT treatments. As there was no link to the original supply, the overage was mandatorily standard rated, even if the initial supply was exempt.
Additionally, take the position where the original sale was standard rated due to an OTT on the land, and the buyer subsequently built and sold new dwellings (which effectively disapplies the OTT via para 3, Notice 742A) it could be argued that the overage should be exempt as it is linked to the sale of the new houses.
We understand that HMRC’s analysis is that VAT treatment of overages is determined at the time of the original supply such that it cannot be affected by subsequent events.
In our view, the “new” HMRC view may be open to challenge – We await updated published guidance on this.
Latest from the courts
In the Illuminate Skin Clinics Ltd First-Tier Tribunal (FTT) case the issue was whether cosmetic procedures qualified as exempt medical treatment.
Background
The Appellant runs a private, ie; non-NHS clinic offering a range of aesthetic, skincare and wellness treatments advertised as: fat freezing, thread lifts, chemical peels, fillers, facials, intravenous drips and boosters. The Appellant’s sole director and shareholder, Dr Shotter, complies with Item 1 (below) in terms of qualifications, ie; she is enrolled on the register of medical professionals.
The list of treatments included:
HMRC contended that these supplies were standard rated because there is no medical purpose behind the treatments, and they are carried out for purely cosmetic purposes. An assessment was raised for output tax on this income.
The Appellant argued that what it provided was exempt medical care via The VAT Act 1994, Schedule 9, Group 7, item 1 – “The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following:
And its contention was that the primary purpose of the treatments was “the protection, maintenance or restoration of the health of the person concerned”
In the Mainpay case it was established that “medical” care means “diagnosing, treating and, in so far as possible, curing diseases or health disorders”
Decision
Although there may have been a beneficial psychological impact on undergoing such treatments and this may have been the reason for a patient to proceed (and they may be recommended by qualified medical professionals) this, in itself, was insufficient to persuade the judge that the services were exempt. Consequety, the appeal was rejected and the assessment was upheld.
The FTT found that there was very little evidence of diagnosis. This was important to the overall analysis because diagnosis is the starting point of medical care. Without diagnosis, “treatment”, in the sense of the exemption, is not something which is being done responsively to a disease or a health disorder.
The fact that people go to the clinic feeling unhappy with some aspect of their appearance, and (at least sometimes) are happier when something is done at the clinic about that aspect of their appearance, does not mean that the treatment is medical, or has a therapeutic aim.
It was telling that the differentiation, in Dr Shotter’s own words, between what the clinic does from what “a GP or other health professional” does is; diagnosis. It also highlighted the general trend or purpose of the clinic’s activity – helping people to feel better about their appearance, in contexts where their appearance is not itself a health condition, or threatening to their health in a way which mandates treatment of their appearance by a GP or another health professional.
Helping someone to achieve goals in relation to their appearance, which is what this clinic did, is not treating someone’s mental health status, but is going to their self-esteem and self-confidence. It is a misuse of language to say that this is healthcare in the sense that it would fall within Item 1 of Group 7.
Commentary
There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…
It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.
Further recent cases on medical exemption here and here.
Latest from the courts
Business or non-business?
In the First-Tier Tribunal (FTT) case of 3D Crowd CIC (3D) the issue was whether a donation of goods, with a subsequent intention to sell similar goods constituted a business activity such that input tax incurred in relation to it was recoverable.
Background
3D was formed at the beginning of the Covid 19 pandemic to produce face protection via the process of 3D printing. Such protection was in high demand, but there was a shortage of suitable products for healthcare workers. The appellant produced 130,000 face shields in the first six weeks of production; which was an admirable feat. However, it was not possible to sell this equipment without the appropriate accreditation. Consequently, to alleviate demand, 3D donated the PPE to the NHS.
By the time accreditation was given the demand for PPE had reduced so it was not possible to sell the 3D printed face coverings as initially intended.
Technical
The issue of business versus non-business has been a contentious issue in the VAT world from day one. This classification is important for two reasons. If an activity is a business (an economic activity) it could be subject to VAT and, as in this case, if an activity is non-business there is usually a restriction of input tax.
Contentions
3D said that input tax could be recovered on costs which involved no direct onward supply of goods or services, but which laid the groundwork for them. That is, the input tax could be attributed to an intended taxable supply, even though that intention was not fulfilled by circumstances outside its control.
HMRC argued that per Longbridge the correct test for determining whether an activity is a business activity is whether there is a direct link between the services or goods supplied and a payment received by the supplier. In this case, there was not so no input tax was reclaimable. HMRC also referred to the decision in Wakefield College, supporting the proposition that an activity is only a business activity if it results in the supply of goods or services for a consideration.
Decision
The FTT found that the VAT incurred on supplies made to 3D, constituted elements:
Input tax incurred on the costs of accreditation is recoverable because these were incurred in order to sell PPE in the future and for no other purpose. The fact that these costs are not linked to a particular supply (and is in the nature of preparing the ground for future supplies) was irrelevant per The VAT Act 1994, Schedule 1, para 10.
The VAT incurred on the general overhead costs and on the costs of producing the PPE was incurred in part for business purposes and party for non-business (donations) and should be apportioned using a method agreed between 3D and HMRC.
Commentary
Another case highlighting the difficulty in identifying the distinction between business and non-business and the complexity of input tax attribution. The altruistic efforts of the CIC is to be admired, but such charitable (in the broad sense) activities do not always get their just reward in VAT terms.
Further to our guide to the recovery of input tax on motoring expenses we are often asked about the specifics of a business acquiring a motor car. So, this article sets out the different rules.
Purchase of a car
If a business purchases a car outright, regardless of how this is funded, no input tax is claimable at all. However, If the taxpayer is either a taxi or driving instructor business, VAT falls to be 100% recoverable.
Hire Purchase (HP)
This is treated as a supply of goods as the ownership of the car passes at the end of the agreement. Similarly, to an outright purchase, input tax is blocked for all taxpayers except taxi and driving instructor businesses.
Lease hire
If the car is ‘qualifying car’, and is returned at the end of the agreement it is a supply of services; a lease. There is a specific rule which means that 50% of the VAT is recoverable on the rental payments if it is used for business purpose. The 50% block is to cover the private use of the car. Again, a 100% reclaim is possible if it is to be used for hire with a driver for carrying passengers or providing driving instruction.
The 50% block applies to all the VAT on charges paid for the rental of the car. This includes:
Personal Contract Purchase (PCP)
This is a little more complex because a PCP can either be treated as a supply of goods (the car), or a supply of services (a lease) depending on the terms of the contract. The following treatment is based on the Mercedes Benz Financial Services case.
The difference between services or goods:
This distinction depends on the level of the final payment. This is known as the Guaranteed Minimum Future Value (GMFV).
Services
Goods
The distinction
It is often difficult to distinguish between services and goods in relation to PCP cars. We find that the wording of contracts is often arcane and unhelpful (and not particularly drafted with VAT in mind). If the supply is not determinable by reference to the agreement documentation, a simple and practical solution is to consider the invoice. Broadly, if it is a lease the supplier will charge VAT on the monthly payments, but a purchase would mean VAT is charged in full up front at the tax point.
Input tax on repairs
If a vehicle is used for business purposes, there is a 100% reclaim of the VAT charged on repairs and maintenance as long as the business paid for the work and the vehicle is used for some business purposes. It does not matter if the vehicle is used for some private motoring or if a business has chosen not to reclaim input tax on road fuel.