Category Archives: Tribunal

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.

VAT: Place of supply of matchmaking. The Gray & Farrar case

By Marcus Ward 26 November 2019

Latest from the courts

The Gray & Farrar International LLP (G&F) First Tier Tribunal (FTT) case.

The romantic side of VAT (well…if romance comes at a cost of £15,000 a time).

The issue here was the place of supply (POS) of the services provided by G&F to clients all over the world.

Background

The Appellant ran an exclusive matchmaking business. It provides its services to clients in many jurisdictions. It argued that its supplies to non-taxable (individuals) persons who reside outside the EU where outside the scope of UK VAT because the POS was where the supply was received. HMRC formed the view that these services did not fall within the required definition of “consultancy” such that the POS was where the business belonged. As G&F belonged in the UK, the relevant services were subject to VAT. So, the issue was: whether matchmaking could be regarded as a consultancy service.

Legislation

The EU legislation is found at The Principal VAT Directive, Article 59(c) (“para(c)”) and in the UK law at The VAT Act 1994, Schedule 4A para 16(2)(d).

In the words of para (c):

“the services of consultants, engineers, consultancy firms, lawyers, accountants and other similar services, as well as data processing and the provision of information”

So, did G&F’s services fall within para (c)?

Decision

The judge stated that “… the services provided by the appellant must be compared with services “principally and habitually” provided by a consultant…and that such similarity is achieved when both types of service serve the same purpose.” And that consultancy is “advice based on a high degree of expertise” or “specialist and expert advice by someone with extensive experience/qualifications on the subject”. Was matchmaking that?

Well, the FTT decided that services would fall within para(c) if they are services of the sort which are primarily and habitually supplied by one or more of the specifically listed suppliers and that “consultants” are not limited to persons who are members of the liberal professions but to persons who are in ordinary usage “consultants” and typically act in an independent manner – that is to say are not dependent on, or integrated with, their client.

HMRC argued that what G&F were providing was the possibility of entering into a long-term happy relationship: and that was what the Appellant was selling. The FTT accepted that that dream was what the typical client would want, but saw a difference between what is provided and the reason the service is wanted. It gave the example of a school providing education, not the hope of a good job.

Further, HMRC contended that G&F’s activities went far beyond the provision of advice and information because they involved all the other elements that go into the service of matchmaking. Those activities included ascertaining and executing the needs of the client, reading the non-verbal clues, reading body language, and the inexplicable magic of applying knowledge based on intuition and experience to identify people who may be compatible. The FTT said that that was all very well but drew a distinction between the skills required by the seller and what was sold.

Split decision

A first Tribunal member concluded that the material elements of the supply consisted only of the provision of information and expert advice, and the supply fell within para (c).

Another Tribunal member considered that the actions of the liaison team in G&F promoted and helped the making of a successful relationship, but he was not persuaded that the support provided by the liaison team assisted the provision of information about a potential partner or served the supply of G&F’s MD’s advice that a particular person might be suitable. It was support in the developing of a relationship – support in addition to the use of the information and expert advice received – and was not shown to be sufficiently inconsequential to say that it was just part of those elements. The liaison team provided a form of ready-made confidante for the client with whom he or she could discuss a relationship and his or her hopes and concerns for it or for other relationships. It enabled him or her to obtain the kind of support one might obtain from a friend – a listening ear or sounding board – and informal advice.

As two members of the Tribunal disagreed on the outcome, it fell to the judge to give a casting vote; which he did in favour of dismissing the appeal.

So, in this case at least, matchmaking is not consultancy. (Although I like the definition of the service being “inexplicable magic”).

Commentary

If it easy to make assumptions about the precise nature of a type of service. In order for certain services to be UK VAT free they need to meet the relevant criteria fully. “Consultancy” is a bit of a catch all, but this case illustrates the dangers of a lack of analysis. This was a close case and I could see the decision going the other way on another day quite easily.

VAT: HMRC Requirement for security – The BPF Tanks Ltd case

By Marcus Ward 1 November 2019

Latest from the courts

The BPF Tanks Ltd First Tier Tribunal (FTT) case considered whether the imposition of a Notice Of Requirement (NOR) to provide security in respect of VAT was appropriate.

What is a NOR?

If HMRC decide that a business’s past history presents a risk to the revenue, it may issue a NOR via The VAT Act 1994, Schedule 11 para 4. Such a bond (or cash deposit) can cover a number of taxes, but if one is received for VAT it is as a result of HMRC believing that a business represents a risk of non-payment of its liability.

A NOR is commonly issued in situations where a business and/or a previous business connected to the same individual(s) has failed to meet its VAT obligations, eg; submitting returns or not paying VAT due. If no action is taken by the business in respect of the NOR, HMRC will issue a penalty and prevent the business trading until the security is paid. Continuing to trade when HMRC have prevented this via the NOR rules is a criminal offence.

Amount of security

The amount of security is be based on the estimated VAT liability of six months plus any existing arrears from a previous business. If the new business is yet to submit any VAT returns, these estimates will be based on turnover levels in the previous business.

Penalties

If a business continues to trade without settling the NOR matter, the penalty is £5,000 for every transaction carried without paying security.

Case background

The sole director of the appellant had also been a director of two previous companies in the same business. The first went into administration owing a significant amount of VAT. The second bought the assets of the first out of the administration but was wound up two years later, also owing HMRC a substantial amount of VAT. Because of the appellant’s compliance history, unsurprisingly, HMRC issued a NOR to the latest company.

The appellant essentially argued that HMRC had been ‘unreasonable’ in demanding the security and that no commissioners, properly directed, could have reached the decision to issue a NOR. He contended that it was unreasonable to require security when he had a time to pay (TTP) arrangement with HMRC and unreasonable to take into account the two previous companies.

NB: Unfortunately for the appellant, the TTP agreement was in respect of PAYE and not VAT, despite what the appellant understood.

Decision

The judge accepted that the appellant misunderstood the terms of the TTP but that misunderstanding did not mean that HMRC was unreasonable in reaching the conclusion to issue the NOR.

On the previous companies point; it was decided that it was not unreasonable for HMRC to take into account the two predecessor companies. This was because they;

were both run by the appellant
traded in the same industry
were run from the same address
traded in the same financial climate and
had the same customers

Consequently, there was sufficient links to the previous two companies to be taken into account and the history of them to be a relevant consideration when considering the risk presented by the appellant to the revenue.

For the above reasons the appeal was dismissed.

Commentary

An obvious outcome and the judge didn’t really have any other option. It does underline that to ignore the mantra; right tax, right time is a recipe for disaster and can lead to HMRC ending a business. It is worth bearing this in mind if you have clients that may be “reluctant” to meet their VAT obligations.

If you, or a client receives a NOR, the options are to:

pay the security in full
negotiate a TTP arrangement
appeal against the NOR. (This is usually a very difficult route and there must be genuine grounds to contend that HMRC’s decision either contained an error of law or was so unreasonable that no Commissioner could have reached those decisions).
cease the business

Clearly, the best thing is to avoid one in the first place!

VAT: What’s a TOGC (and what’s not)? – The General Distribution Storage case

By Marcus Ward 7 October 2019

Latest from the courts

A Transfer of a Going Concern (TOGC) is an area of VAT which produces a lot of issues and is a subject which is returned to on a regular basis in the courts. The General Distribution Storage Ltd (GDSL) First Tier Tribunal (FTT) TC 07352 [2019] case provides a warning that getting it wrong can be costly.

Background

The appellant owned the freehold of a commercial property. This property was rented to a third party. Subsequently, the property was sold with the benefit of the existing lease, to Hartlone Scaffolding Ltd (HSL). Output tax was charged and paid on the value of the sale as the property was subject to an option to tax. HSL also opted to tax before the date of completion. On the same day, HSL sold on the property to Foundry Investments Ltd (FIL) and again, VAT was charged and paid.

FIL made a claim for the input tax charged which caused a pre-credibility enquiry from HMRC. During the inspection, HMRC noted that, although GDSL had charged VAT, it had neither declared, nor paid the VAT to HMRC. An assessment was issued to recover this output tax.

The appellant claimed that no VAT was due because the sale of the tenanted building qualified as a VAT free TOGC, ie; it was not a taxable sale of an opted commercial property, but rather, it was the sale of a property letting business which was a going concern.

Technical

TOGC provisions

Normally the sale of the assets of a VAT registered business will be subject to VAT at the appropriate rate. A TOGC, however is the sale of a business including assets which must be treated as a matter of law, as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions (summarised below). It is always the seller who is responsible for applying the correct VAT treatment. Transfer Of a Going Concern treatment is not optional. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control. Full details of TOGCs here.

TOGC Conditions

The conditions for VAT free treatment of a TOGC:

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

Where the transfer includes property which is standard-rated, either because the seller has opted to tax it or because it is a ‘new’ or uncompleted commercial building the purchaser must opt to tax the property and notify this to HMRC no later than the date of the supply.

Please note that the above list has been compiled for this article from; the legislation, HMRC guidance and case law. Specific advice must be sought.

Decision

It was decided that TOGC could not apply in these circumstances. The buyer, HSL, at the time of the sale, could not have intended to carry on the property letting business as it immediately sold on the freehold (at a profit) on the same day. As above, TOGC treatment does not apply if there is a “series of immediately consecutive transfers”. The appeal was consequently dismissed, and output tax was therefore properly due.

Commentary

This appears to have been the only available conclusion. It illustrates the importance of considering VAT whenever a supply of property is made. It is unclear why VAT was initially charged and why this was not declared to HMRC (and it if was thought a TOGC, why the VAT position was not subsequently corrected by the issue of a VAT only credit note). This is a complex area of the tax and an easy issue to miss when there are a considerable number of other factors to consider when a business (or property) is sold. Extensive case law (example here and changes to HMRC policy here ) insists that there is often a dichotomy between a commercial interpretation of a going concern and HMRC’s view.

Contracts are important in most TOGC cases, so it really pays to review them from a VAT perspective.

I very strongly advise that specialist advice is obtained in cases where a business, or property is sold. Yes, I know I would say that!

VAT: ‘Intention’ – The Euro Beer case

By Marcus Ward 7 October 2019

Latest from the courts, the Euro Beer Distribution Ltd First Tier Tribunal (FTT) case.

The intention of a taxpayer is extremely important for a number of reasons. It is relevant where:

a VAT registration is requested
input tax is claimed
and in this case; whether deregistration is compulsory

Broadly, immediate action is dependent upon whether a business intends to make taxable supplies in the future. This intention dictates whether registration is possible, whether input tax may be claimed, and whether a business may remain VAT registered. Even if a business has the intention to make taxable supplies, it is sometimes difficult to evidence this to HMRC’s satisfaction.

Background

Euro Beer was in the business of importing and selling alcoholic drinks. It had been in business since 2004 and was also approved and registered as an owner of duty suspended goods under the Warehousekeepers and Owners of Warehoused Goods Regulations 1999.

Technical

HMRC compulsorily deregistered Euro Beer via VAT Act 1994, Schedule 1, para 13 (2) on the grounds that it believed that the appellant had ceased making taxable supplies. Nil returns had been submitted since 2016 and, after enquires, formed the view that there was no intention to make supplies in the future.

Euro Beer contended, unsurprisingly, that there was an intention to make taxable supplies in the future such that continued VAT registration was appropriate. Additionally, the reason for the nil returns was simply, at that time, business had dried up. The appellant provided limited evidence to support its intention. This comprised; emails between the directors and third-party contacts.

Decision

The appeal was dismissed and Euro Beer’s VAT deregistration (and revocation of approval from the Warehousekeepers and Owners of Warehoused Goods Regulations 1999) was confirmed as appropriate.

Commentary

This was hardly a surprising decision and one wonders why it got to court. It does, however, emphasise the importance of the concept of intention. This can be a subjective matter and HMRC place significant weight on documentary evidence. There is no question in law that HMRC must register/maintain registration/repay input tax if it is satisfied that there is a business which does not make taxable supplies but ‘intends to make such supplies in the course or furtherance of that business’ – VAT Act 1994, Schedule 1, para 9 (b). However, ensuring HMRC is satisfied is often problematic.

This is specifically difficult in the area of land and property. VAT registration and the associated input tax claims of a property developer is often the source of disputes. It is important to differentiate between an intention, and what actually happens. Often business plans change, or the original intention is not fulfilled. In such cases, there is a mechanism for repaying input tax claimed (VAT Gen regs 1995 reg 108) but this is only applicable in certain circumstances. The case of Merseyside Cablevision Ltd (MAN/85/327, VTD 2419) demonstrates that if an intention to make taxable supplies is thwarted, input tax claimed is not clawed back (a person who carries on activities which are preparatory to the carrying on of a business is to be treated as in business and is a taxable person).

It should be noted that a business does not have to specify a date by which it expects to make taxable supplies, or to estimate the value of them.

The lesson is; to document every business decision made:

board minutes, emails, business plans, letters etc
retain all correspondence with; third-parties
provide written advice from legal advisers, accounts etc
invoices demonstrating expenditure in respect of a new venture are persuasive
budgets and considered estimates can be of use
retain all advertising media, offers, promotions and other publicity.

Clearly for land and property additional; planning permission, land registry details, plans, surveys, fees, etc will build up a picture that there is an intention to make taxable supplies.

These are just examples and different business may have alternative evidence.

In commercial terms, it will be difficult for HMRC to be unsatisfied if a business is incurring costs in relation to a project – why would they devote time/staff/advisers/financial resources to something when there is no intention of deriving income?

One final point on the Euro Beer case. The judge stated; ‘an intention to make supplies requires more than a mere hope to be in a position to make supplies at some unspecified time in the future’. It is not enough for a business to ‘generally’ state that there is an intention.

VAT: Apportionment and best judgement – The Homsub case

By Marcus Ward 3 October 2019

Latest from the courts

In the Homsub Ltd case the issue was the apportionment of values when a supply comprises goods at different VAT rates.

Further to the M & S case here is another First Tier Tribunal (FTT) case on the value of food and drink in meal deals. It also considered whether HMRC exercised ‘best judgement’ when it carried out an invigilation exercise to establish the percentage split between supplies subject to VAT and those which were not.

Background

Homsub is a franchisee in respect of Subway products, essentially being hot and cold food, which can be consumed either on or off their premises.

HMRC had concerns that the correct amount of output tax was being declared on sales. Consequently, it carried out an invigilation exercise as follows: The invigilators recorded, in respect of each of the five outlets, each sale made and annotated it with whether it was eat in or take out. A record was also made as to whether the food was hot or cold. Those differences needed to be recorded because of the different VAT treatment in respect of hot food and cold food on the one hand and eat in and take out food on the other. All eat in food is taxable, while some takeaways are zero rated. Further information here.

Contentions

Homsub complained that the methodology adopted by HMRC was flawed as it was not sufficiently refined to give rise to a reasonably reliable overall picture. It was argued that the exercise should have been undertaken by reference to transaction values, rather than the number of transactions. That is – HMRC should have looked at the value of supplies made which did attract VAT as compared to the value of supplies made which did not attract VAT.

The court identified that the true area of concern on the part of the respondents was that Subway sometimes had promotions called “Meal Deals” whereby several products would be bundled together for a single headline price.

Homsub contended that a meal deal offer was available to customers whereby for the all in price of £3 a customer could purchase a sandwich (hot or cold) and a drink (which could be a fizzy drink or hot beverage upon which VAT would be due). If the meal deal involved hot food, then it would be subject to VAT.

HMRC’s issue was that because of the way in which the appellant’s till was set up, it treated £2.99 of each meal deal as attributable to the sandwich (VAT free if cold) and only 1p to the accompanying drink which, if subject to VAT, would mean that the VAT would be one fifth of one penny.

Outcomes

Homsub stated that it is entitled to run its business as it sees fit and to make such commercial decisions as best suit its business. The appellant said that it is entitled to sell loss leaders, as do many major retailers, or to sell stock at less than cost price if that somehow serves the best overall commercial interests of the business.

The court ruled that this was not a true loss leader situation. This was a transaction were goods are packaged together to be sold at a single price. What must be done is to look at the reality of the transaction when apportioning the part of the money paid by the customer between the various components within the package of goods sold. Consequently, Homsub needed to apportion the sales value in a different way. This would not necessarily be on the basis of the relevant retail prices. This is because accurate apportionment is difficult, especially as, as Homsub explained, that labour is by far the largest cost component within the cost of a sandwich and the overall meal deal package, that is; much more staff labour was devoted to preparing sandwiches than serving drinks.

If the case stopped there, there would be additional output tax for Homsub to pay. However…

Methodology and best judgement

The court decided that the assessment methodology adopted by HMRC was significantly flawed and potentially misleading. A simple count of transactions that did attract VAT and those which did not attract VAT might be capable of being appropriate in certain kinds of business, but not in this case. Further, a statistician or forensic accountant would be ‘alarmed to find that the methodology used by HMRC was considered to be either acceptable or such as to give rise to a reasonably reliable result’. In court, the representative of HMRC was forced to agree with this interpretation- which must have caused embarrassment. The court also said that it was not its function to go on to undertake any kind of assessment to ascertain what, if any, additional VAT might be due.

Decision

In the court’s judgement the methodology was flawed to such an extent that it would be wholly unreasonable, and unfair to the appellant, to base a best judgement assessment thereon. The appeal was therefore allowed.

Commentary

Always have assessments of this sort reviewed. There is significant case law on ‘best judgement’ most salient being: Van Boeckel v C&E [1981] and Rahman v HMRC. Additionally, HMRC often make certain assumptions on assessments based on invigilation and mark up exercises. These can be challenged, as can the methodology. As examples, HMRC need to recognise, inter alia;

seasonal trade variations
discounts
customer preferences (in this case, Homsub explained that at some of its shops’ locations a lot of customers were students and preferred to take away rather than eating in)
representative periods
sales/special offers
the times invigilations were carried out (were they representative of all trade?)
the number of invigilations and ‘test meals’ – were they sufficient to establish a fair overall picture of the business?
own and staff use
business promotions
loss of goods (destroyed, waste, stolen etc)
gross/net
gifts to customers
alternative methods
HMRC staff experience etc

All of these and other situations can affect expected sale values.

I have further set out how HMRC operate in these situations here.

I have a success rate of over 90% in getting these types of assessments reduced or completely withdrawn. Please do not simply accept HMRC’s decision, nor the, increasingly, bullying stance they can adopt. Always challenge!

VAT: Extent of welfare exemption – The Lilias Graham Trust case

By Marcus Ward 3 October 2019

Latest from the courts

Certain welfare services are exempt from VAT via VAT Act 1994, Schedule 9, Group 7, Item 9 – services which are directly connected with the care or protection of children. In the The Lilias Graham Trust (LGT) First Tier Tribunal case, the scope of the exemption was considered.

Background

LGT, which has charitable status, operated residential assessment centres, which supported parents (many of whom had mental health issues) in learning how to care for their children.

It was common ground that LGT’s services were as summarised in a letter from Glasgow City Council (where relevant):

LGT is an assessment centre providing assessment services on the parenting capacity of those referred to the service
The assessment services cover families where there is an uncertainty about whether the parent(s) can safely look after their children
LGT is simply acting as an observer watching the parent’s care for their own children and providing information in the form of advice
LGT is not providing any treatment in the form of medical care for any illness or injury
LGT’s recommendation following the assessment provides a recommendation to social workers around whether the parent(s) has sufficient capacity to keep their child safe and healthy
GCC viewed the residential accommodation as a fundamental part of the provision of the assessment services on the parenting capacity of those families which were referred to LGT.

Although the major part of LGT’s income came from the Local Authority fees, it is also subsidised to a degree by grants and donations.

Technical

In this case the odd position was that HMRC was arguing for exemption because, in learning how to care for their children, the services were “closely linked” to welfare services or “directly connected” to them as provided for by the Principal VAT Directive and the VAT Act in turn.

LGT contended that their supplies to a Local Authority (which could recover any VAT charged) were taxable as they did not fall within the welfare definition. LGT admitted that there was a causal relationship between the services provided and the care and protection of children, but the connection was too remote to be deemed to be a direct connection – There were several intervening factors and intermediaries between the service provided and the care and protection of children.

At issue was net input tax of circa £400,000 which would be recoverable by LGT if its supplies were taxable, but not if they were exempt. Guide to partial exemption here.

Decision

The court found that the essential purpose of the supplies made by LGT was to ensure that the child was better cared for and had optimal protection. That is precisely why the Local Authority employed LGT. Its supplies are both closely linked and directly connected with the protection of children as also to their care. Accordingly, the appellant made supplies of welfare services which are exempt from VAT. The fact that LGT provided its services to the Local Authority rather than the parents did not mean that its services should be taxable. Therefore, there was no output tax chargeable to the Local Authority and no input tax recovery by LGT on expenditure attributable to those exempt supplies.

Commentary

In this case, HMRC originally ruled that the services were taxable and LGT were required to VAT register, it even issued a late registration penalty. HMRC clearly subsequently changed its view which put input tax which LGT had recovered at risk. There are often disputes on the extent of the exemption, and sometimes debates on whether a service is supplied, or simply staff providing their services. It is important to understand these sometimes subtle differences as getting it wrong can be costly, as LGT found out.