Tag Archives: court

VAT: Wakefield College – Court of Appeal case

By Marcus Ward 1 June 2018

Latest from the courts

Further to my article on the Wakefield College case here the Court of Appeal (CA) has dismissed the college’s appeal that certain of its activities were non-business.

Background

The detailed background was set out in the above linked article, but to recap: In order for certain building works supplied to the appellant to be zero rated the resultant building has to be used for a “relevant charitable purpose” – that is; not for business purposes. This is the case even if there is a small amount of business activity in the building (as long as these can be shown to be insignificant; which is taken to be less than 5% of the activities in the whole building).

The issue

The issue here was whether the education provided by the college could be deemed non-business because, although the majority was grant funded, students were also required to make a contribution to their education. This is dependent upon whether the provision of courses by the college to students paying subsidised fees was, an economic activity carried on by it for the purposes of article 9 of the VAT Directive and consequently, a “business” within Note (6) of Group 5 in Schedule 8 to the VAT Act 1994.

The 1994 Act provides, at group 5 of schedule 8, for the zero-rating of various supplies made in the course of construction of certain buildings including:

“The supply in the course of construction of

(a) a building … intended solely for use for … a relevant charitable purpose…

of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity”.

Note (6) to group 5 provides:

“Use for a relevant charitable purpose means use by a charity… –

(a) otherwise than in the course or furtherance of a business.”

Decision

The CA found that the fact that the students paid for education (an exempt supply) meant that it was a business activity as consideration flowed in both directions. The proportion of the costs paid by the student amounted to between 25% and 30% of the total cost and could therefore not be deemed insignificant.

Commentary

It is worth reconsidering comments made by the judge in his summing up in the Upper Tribunal hearing.

“We cannot leave this appeal without expressing some disquiet that it should have reached us at all. It is common ground that the College is a charity, and that the bulk of its income is derived from public funds. Because that public funding does not cover all of its costs it is compelled to seek income from other sources; but its doing so does not alter the fact that it remains a charity providing education for young people. If, by careful management or good fortune, it can earn its further income in one way rather than another, or can keep the extent of the income earned in particular ways below an arbitrary threshold, it can escape a tax burden on the construction of a building intended for its charitable purpose, but if it is unable to do so, even to a trivial extent, it is compelled to suffer not some but all of that tax burden. We think it unlikely that Parliament intended such a capricious system. We consider it unlikely, too, that Parliament would consider it a sensible use of public money for the parties to litigate this dispute twice before the FTT and now twice before this tribunal. We do not blame the parties; the College is obliged to maximise the resources available to it for the pursuit of its charitable activities, just as HMRC are obliged to collect tax which is due. Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve 16 charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse”.

So, although the result may be seen as “unfair” on the college, the strict letter of the VAT legislation does not provide the courts with any alternative but to impose a VAT charge on the construction works – a charge which the college will have to bear as it is unable to recover it as input tax due to the partial exemption rules.

This illustrates the complexity with both the concept of business/non-business and property and construction issues. When the two technical areas collide, as in this case, matters can get very complicated and proper advice is vital. This is especially important with charities as they benefit from very few VAT reliefs and it is important to ensure that those available are correctly taken advantage of.

VAT: No such thing as a free meal (or drink) – The M&S case

By Marcus Ward 14 May 2018

Latest from the courts – Marks & Spencer First Tier Tribunal (FTT) case; what is the value of a “free” bottle of wine?

Background

I shall do this without the seductive TV ad voiceover… Like many retailers M&S has and does run various promotions designed to improve its financial performance. A number of those promotions are based on the proposition that a customer who buys certain products from M&S will receive something “free”. In this instant case, M&S sells a combination meal known as a “Dine In”. This comprises; a main course, a side dish and a pudding, along with a bottle of wine which is advertised as free: “Dine In for £10 with Free Wine”. I’m sure many have sampled these offers. The commercial rationale for the promotion involved M&S taking a calculated risk. It reached a decision to lower its aggregate profit margin on the separate items in the offer compared to their retail sales price in the expectation that this will be more than compensated for by changes in customer behaviour as a result of the promotion.

It is interesting to note that M&S anticipated the benefits could arise in a number of ways. Sales of the items included in the promotion might increase, which would improve turnover and put the retailer in a stronger negotiating position with its suppliers of those items. More casual customers might take up the promotion, increasing footfall. In doing so, they and other customers might take the opportunity to add other items to their shopping basket, the so-called “halo effect”. In a less tangible sense, the M&S’s brand might be generally enhanced.

In M&S’s online T&Cs the following narrative appears “For the avoidance of doubt, as the value attributed to the free wine in this deal is £0.00, if returned, no refund will be due…”

The aggregate shelf price of the three food items in the Dine In promotion, if bought separately, varied considerably but would always have been at least £10, and in most cases more.

The VAT issue

Should output tax be accounted for on the whole supply? Or, assuming that the food was zero rated, what, if any, output tax should be declared on the wine? Or should the entire supply be VAT free?

The contentions

M&S’s first contention was that the wine was free so no output tax was due. The reason why the wine was provided free was for M&S to receive certain benefits (set out above). Secondly, the Dine In Promotion is in fact two promotions. The first is an offer of three food items for £10. The second promotion, conditional on the first, is an offer of free wine. The former offer makes commercial sense both for M&S and the customer on its own terms. The food offer is complete in its own right, and the supply of wine for no consideration is a separate transaction. Thirdly, this is a multiple supply. The Dine In Promotion results in three or four separate supplies for VAT purposes, namely the three food items and the wine. This is not a case of what would otherwise be a single supply being artificially broken down. There are separate transactions, entitled to be valued separately for VAT. A further argument was that there is no separate or allocable consideration for the wine element of the Dine In Promotion. The free wine is an inducement, and is conditional on the food offer, but does not generate any separate identifiable consideration for VAT purposes.

Clearly HMRC disagreed and argued that the Dine In deal represented the sale of four items for £10. There was no free gift of the wine and consequently, an element of the £10 should be allocated to the value of the wine. Or put another way, it was a single promotional deal and is not a sale of food items for £10 plus a supply of wine for nil consideration. HMRC further contended that the duty to account for output tax and the right to deduct input tax form an “inseparable whole”. M&S’s position, if correct, would result in a failure to impose a charge to tax on the ultimate consumer, and untaxed (or, in effect, zero rated) consumption of standard rated goods and that militates very strongly against M&S’s position.

It was agreed that, by purchase value, the wine represented the most expensive part of the meal deal. HMRC proposed a value of output tax of 70 pence per meal deal was appropriate.

Decision

The judge agreed with HMRC and that output tax was due on the element of the £10 price attributable to the wine. Contractually, the meal deal was a single offer with a conditional element, ie; the provision of the wine was conditional on the customer paying £10 for the purchase of the food items. Although the customer may perceive the wine to be free (presumably as a result of the way in which the meal deal was held out and advertised) however, for VAT purposes, the customer paid £10 for all four elements of the deal. The Dine In promotion was a single offer, with all four items supplied simultaneously and in the same till transaction for consumption on the payment of £10. Receipt of the wine was conditional on payment of the £10 and the purchase of the food items. The wine was not provided unconditionally and with no strings attached.

Commentary

This was hardly a surprising decision. Similar retail offers have been considered in the past and the outcomes were broadly similar to this decision. The FTT distinguished Hartwell, Lex, Kuwait Petroleum, and Tesco plc cases in this respect which the appellants put forward to support their arguments. As always with VAT, promotions and offers can create valuation issues. It is important to consider VAT when marketing offers are provided.

UPDATE

July 2019

Via the Upper Tribunal (UT) case Marks and Spencer plc v Revenue and Customs Commissioners [2019] BVC 514 the UT upheld the FTT decision and dismissed M&S’s appeal.

VAT – Alternative Dispute Resolution (ADR) What is it? How does it work?

By Marcus Ward 14 May 2018

ADR and VAT

What is ADR?

ADR is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers. It is mainly used by SMEs and individuals for VAT purposes, although it is not limited to these entities. Its aim is to reduce costs for both parties (the taxpayer and HMRC) when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal.

The process

Practically, a typical process is; HMRC officials and the facilitator meet with the taxpayer and adviser in a room, and agree on what the disputes are. They then retire to two separate, private rooms, and the facilitator goes between the two parties and mediates on a resolution.

ADR is a free service and the only costs the taxpayer will incur are fees from their advisers on preparation and any representation they require on the day.

Features of ADR

Without prejudice discussions – Anything said or documents produced during the ADR process cannot be used in future proceedings without the express consent of both parties subject to the obligations placed on the parties by the operation of English law
Evidence is that ADR can work for both VAT and Direct Taxes disputes both before and after an appealable decision or assessment has been made. However, ADR for VAT disputes is more suited to post appealable decision and assessments
Memorandum of Understanding (MOU) and a Code of Conduct – a MOU is created to commit taxpayers/agents to the requirements of the ADR process
The average time for all completed ADR cases is 61 days. This figure is from application to resolution. The average elapsed time for VAT it is 53 days
The average age of VAT disputes is eight months
An ADR Panel has been created to accept or reject applications for ADR. It screens all applications and not just those where ADR was thought to be inappropriate.
Customer / Agent Questionnaire Summary – Findings from customers and agents included:
- An appreciation of the personal interaction that the ADR process allowed
- Facilitators were even handed and impartial in all cases and kept the taxpayer well informed
- ADR was particularly well suited to resolution of long standing disputes.

Is Tribunal preferable?

Taking a case to Tribunal is often an expensive, complicated and time consuming option, but used to be the only option open to a taxpayer to challenge a decision made to HMRC. From personal experience, the number of cases from which HMRC withdraw “on the steps of the court” illustrate a weakness in their legal procedures and possibly a lack of confidence in presenting their cases. This is very frustrating for our clients as they have already incurred costs and invested time when HMRC could have pulled out a lot earlier. Of course, our clients cannot apply for costs. The sheer number of cases going through the Tribunal process means that there are often very long and frustrating delays getting an appeal heard.

A true alternative?

Therefore, should we welcome ADR as a watered down version of a Tribunal hearing? Or is it actually something else entirely?

HMRC say that “ADR provides an excellent opportunity for Local Compliance to handle disputes in a modern and collaborative way. It is not intended to replace statutory internal review which is an already established process aimed at resolving disputes without a tribunal hearing. Review looks at legal challenges to decisions whereas ADR is more suitable for disputes where there might be more than one tenable legal outcome”.

Results so far

After an initial two-year pilot which shaped the final programme, and was guided by a Working Together group that included CIOT, AAT, ICAEW and legal representatives HMRC concluded that “ADR has shown that many disputes, where an impasse has been reached, can be resolved quickly without having to go to tribunal.” And “ADR is a fair and even-handed way of resolving tax disputes between HMRC and its customers and helps save time and costs for everyone.” Ignoring the dreadful use of the word “customers”… what has the profession made of the scheme?

Hui Ling McCarthy – Barrister has reported “HMRC’s ADR studies have produced extremely encouraging and positive results – owing in large part to HMRC’s willingness to engage with taxpayers, advisers and the professional bodies and vice versa. Taxpayers involved in a dispute with HMRC would be well-advised to take advantage of ADR wherever appropriate”.

Outcome

So what was the outcome of the two year scheme? The headline is that 58% of cases were successfully resolved, 8% were partially resolved and 34% were unresolved.

Of the fully resolved facilitations

33% were resolved by educating the taxpayer/agent about the correct tax position.
24% were resolved due to the facilitator obtaining further evidence.
23% were resolved by educating the HMRC decision maker about the correct tax position.
20% were resolved through facilitators restoring communication between both parties.

Conclusion

These figures are encouraging and the conclusion that; well planned, constructive meetings, with the intervention of an HMRC facilitator, do increase the chances of dispute resolution, appear to be well founded.

Further, the fact that the project team saw no evidence of any demand from HMRC, taxpayers or their agents for access to external mediators and that there is also conclusive evidence from taxpayers that HMRC facilitators have acted in a fair and even-handed manner add to the feeling that ADR is a useful new tool.

Commentary

The comments from HMRC on ADR is (probably understandable) positive. However, reactions from the profession and taxpayers who have gone through the process are equally generous on ADR as a mechanism for settling disputes.

My view is that any alternative to a Tribunal hearing is welcome and even if ADR works half as well as reports conclude then it should certainly be explored. It should definitely be considered as an alternative to simply accepting a decision from HMRC with which a taxpayer disagrees.

VAT: Latest from the courts – Are loan administration services exempt?

By Marcus Ward 1 May 2018

In the First Tier Tribunal (FTT) case of Target Group Limited (Target) the appeal was against a decision by HMRC that loan administration services supplied by Target to a UK bank, Shawbrook Bank Limited (Shawbrook) were standard rated.

Background

Target contracted with Shawbrook to provide services related to loans provided by Shawbrook to its customers in the course of its lending business. Target’s description of its services was “loan account administration services” which amounted to Shawbrook outsourcing the management of the loans to Target. The services that Target provided covered the entire lifecycle of the loans, apart from the making of the initial loan. Target established loan accounts using its own systems, communicates with borrowers as an undisclosed agent of Shawbrook, and dealt with payments by borrowers and all administrative issues that arose. Target had limited discretion. The terms of the loans, including interest rates, were set by Shawbrook. Although Target is involved in dealing with arrears, any enforcement action would be a decision for Shawbrook. Specifically, the contract described Target as being “a provider of loan origination and account operation services” which “performs activities including the functions of: payment processing and servicing and portfolio management services”

Issue

It was accepted that Shawbrook made the loans (not Target) and that the services provided by Target were to Shawbrook and comprised a single (composite) supply for VAT purposes, rather than multiple supplies. Details of the definition between the two types of supply have been hot news in the VAT world for some time. My commentary on relevant recent case law here here here here here and here

The issue was the precise nature of the supplies and whether they qualified for exemption. The areas of dispute included whether Target’s supplies were excluded from exemption as debt collection, and whether the loan accounts fall to be treated as current accounts.

Target’s case was that the principal supply it made to Shawbrook related to payments and transfers in the same way as in the Electronic Data Services Ltd (EDS) case, which related to similar customer-facing loan administration services. (EDS provided loan arrangement and execution services to banks in relation to the granting of personal loans. The services included the provision of a staffed call centre, the printing and despatch of loan agreement documentation, the transfer of funds via the BACS system on the release of loans and the administrative work related to handling loan accounts and repayments). In the alternative, the principal or core supply relates to the operation of accounts (specifically, current accounts), or amounts to transactions concerning debts.

Technical

Article 135(1)(d) of the Council Directive 2006/112/EC (the Principal VAT Directive, or “PVD”) requires Member States to exempt the following transactions: “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;”

This is transposed into UK legislation via VAT Act 1994, Schedule 9, Group 5, items 1 and 8:

“Item 1. The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money. …

Item 8. The operation of any current, deposit, or savings account.”

Decision

It was decided that Target’s supplies did not qualify for exemption and they therefore fell to be standard rated. What was fatal to the appellant’s case was the fact that there was an absence of any involvement in the initial loan. Consequently, although it was possible to view the services as “transactions concerning payments” they fell within the debt collection definition and accordingly were not exempt. The judge also ruled that the supplies may be loan accounts, these did not qualify as an exempt operation of a current account.

Commentary

Of course, this decision was important for the recipient of the supply (Shawbrook) as well as Target. Because its supplies were exempt, the VAT on the outsourcing expenditure would be irrecoverable thus creating an extra 20% cost.

This case once again demonstrates that even the smallest variation of facts can produce an unexpected VAT outcome. Care must be taken to analyse precisely what is being provided. Financial Services is a minefield for VAT and it is certainly one area that assumptions of the VAT treatment should be avoided and timely advice sought.

Picture: A loan arranger (apologies)

Tax Tribunal backlog continues to increase

By Marcus Ward 26 April 2018

Both the First Tier Tribunal (FTT) and the Upper Tribunal (UT) which both hear VAT cases, report an increase in the number of cases waiting to be heard. In the case of the FTT the increase is 507 last year which means 28,521 cases are outstanding. The increase of UT cases outstanding is around 40%.

These are not all VAT cases and it is likely that the backlog is predominantly caused by

HMRC’s increased willingness to attack what they see as tax avoidance and evasion (see here)
More businesses being prepared to go to court
HMRC’s determination to “win on every point” rather than, perhaps, seeking a negotiated settlement, and
The increasing complexity of cases heard.

This backlog works in HMRCs favour as in the majority of cases the disputed tax must be paid before a hearing can take place. Delays may also cause anxiety and the burden of devoting resources to appeals which may cause the applicant to withdraw. It is not usually an inexpensive process to go to court and some cases can take a number of years to resolve.

In the current climate, it is more important than ever to challenge HMRC’s decisions. We have found that in the majority of cases we have been able to reduce HMRC assessments, in many cases, to zero. We always work on the basis that it is very important to try to resolve matters with HMRC before going to Tribunal. This is an increasingly difficult task given the political pressure on HMRC to reduce the tax gap (the difference between the amount of tax that should, in theory, be collected by HMRC, against what is actually collected) and the seemingly common tactic of HMRC becoming “entrenched” and being unprepared to shift their position.

Please contact us if you have a dispute with HMRC or are being challenged on any technical points. It is better to deal with these as soon as possible to avoid going to court.

VAT: Longer prison sentences for tax fraud

By Marcus Ward 16 April 2018

The latest figures from the Ministry of Justice show that for fraud offences including; VAT, Excise Duty, and Custom Duty the average length of custodial sentences has increased by around 25%. The average sentence is now four years one month, up from three years three months as the government clamps down on tax evasion.

Why longer in jail?

It is thought that the reasons for this are that:

HMRC is demanding longer sentences
HMRC is pursuing an increasing number of suspected fraudsters
HMRC is devoting more resources to carrying out investigations
CPS has been pushing for tax frauds to be considered as a more serious offence (which, obviously, carry longer sentences).

Criminal prosecution has also increased enormously as a result of the Revenue and Customs Prosecutions Office being incorporated with the CPS. HMRC is no longer just interested in getting the VAT, it wants prosecutions, the convictions….and the tax. A person criminally prosecuted for evasion does not escape paying the tax and they will be chased for it. A fraudster may be prosecuted under the Proceeds of Crime Act 2002 and the Money Laundering Act 2007.

More resources

The news comes as companies including Amazon and eBay have agreed to give their data to HMRC in an effort to crack down on VAT evasion by overseas retailers. The deal will mean the companies will provide merchant’s data to tax officials so that fraudulent trends can be spotted.

HMRC have also been using increasingly technical procedures on data which was previously unavailable to them – details here

Naming and shaming

In addition, HMRC also publish details of people who deliberately “get their tax affairs wrong”. The current list is here

What is evasion, and what is the difference between that and avoidance?

I am often asked about the distinction between avoidance and evasion. Broadly, the difference between avoidance and evasion is legality. Tax avoidance is legally exploiting the tax system to reduce current or future tax liabilities by means not intended by Parliament. It often involves artificial transactions that are contrived to produce a tax advantage. Tax avoidance is not the same as tax planning or mitigation.

Tax evasion is to escape paying taxes illegally. This is usually when a person misrepresents or conceals the true state of their affairs to tax authorities, for example dishonest tax reporting.

Technical

The relevant legislation covering the offences of fraudulent evasion of VAT is under section 72(1) of the Value Added Tax Act 1994, furnishing false information under section 72(3) and committing evasion over a period under section 72(8). Section 72(8)(b) sets out that the offence is subject to”…imprisonment for a term not exceeding seven years…”.

Summary

The message is clear; after being criticised by the Public Accounts Committee for not have a clear strategy for dealing with tax fraud and not pursuing criminal prosecution in enough cases HMRC has demonstrated that it is prepared to go after more businesses and individuals and put more resources into detecting and prosecuting fraudulent activities.

Sleep tight

We always recommend full disclosure to HMRC, it is preferable to sleep at night (rather than trying to sleep in a prison cell). Of course, the very best course of action is not to commit tax fraud…

VAT – What is Reasonable Care?

By Marcus Ward 12 April 2018

What is reasonable care and why is it so important for VAT?

HMRC state that “Everyone has a responsibility to take reasonable care over their tax affairs. This means doing everything you can to make sure the tax returns and other documents you send to HMRC are accurate.”

If a taxpayer does not take reasonable care HMRC will charge penalties for inaccuracies.

Penalties for inaccuracies

HMRC will charge a penalty if a business submits a return or other document with an inaccuracy that was either as a result of not taking reasonable care, or deliberate, and it results in one of the following:

an understatement of a person’s liability to VAT
a false or inflated claim to repayment of VAT

The penalty amount will depend on the reasons for the inaccuracy and the amount of tax due (or repayable) as a result of correcting the inaccuracy.

How HMRC determine what reasonable care is

HMRC will take a taxpayer’s individual circumstances into account when considering whether they have taken reasonable care. Therefore, there is a difference between what is expected from a small sole trader and a multi-national company with an in-house tax team.

The law defines ‘careless’ as a failure to take reasonable care. The Courts are agreed that reasonable care can best be defined as the behaviour which is that of a prudent and reasonable person in the position of the person in question.

There is no issue of whether or not a business knew about the inaccuracy when the return was submitted. If it did, that would be deliberate and a different penalty regime would apply, see here It is a question of HMRC examining what the business did, or failed to do, and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.

Repeated inaccuracies

HMRC consider that repeated inaccuracies may form part of a pattern of behaviour which suggests a lack of care by a business in developing adequate systems for the recording of transactions or preparing VAT returns.

How to make sure you take reasonable care

HMRC expects a business to keep VAT records that allow you to submit accurate VAT returns and other documents to them. Details of record keeping here

They also expect a business to ask HMRC or a tax adviser if it isn’t sure about anything. If a business took reasonable care to get things right but its return was still inaccurate, HMRC should not charge you a penalty. However, If a business did take reasonable care, it will need to demonstrate to HMRC how it did this when they talk to you about penalties.

Reasonable care if you use tax avoidance arrangements*

If a business has used tax avoidance arrangements that HMRC later defeat, they will presume that the business has not taken reasonable care for any inaccuracy in its VAT return or other documents that relate to the use of those arrangements. If the business used a tax adviser with the appropriate expertise, HMRC would normally consider this as having taken reasonable care (unless it’s classed as disqualified advice)

Where a return is sent to HMRC containing an inaccuracy arising from the use of avoidance arrangements the behaviour will always be presumed to be careless unless:

The inaccuracy was deliberate on the person’s part, or
The person satisfies HMRC or a Tribunal that they took reasonable care to avoid the inaccuracy

* Meaning of avoidance arrangements

Arrangements include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable). So, whilst an arrangement could contain any combination of these things, a single agreement could also amount to an arrangement. Arrangements are `avoidance arrangements’ if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes of the arrangements.

NB: We at Marcus Ward Consultancy do not promote or advise on tax avoidance arrangements and we will not work with any business which seeks such advice.

Using a tax adviser

If a business uses a tax adviser, it remains that business’ responsibility to make sure it gives the adviser accurate and complete information. If it does not, and it sends HMRC a return that is inaccurate, it could be charged penalties and interest.

None of us are perfect

Finally, it is worth repeating a comment found in HMRC’s internal guidance “People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances…”

VAT – Latest on the Nesquik case

By Marcus Ward 23 February 2018

Latest from the courts

I covered the Nesquik first Tier Tribunal (FTT) case here Well, legal matters have since moved on and the case reached the Upper Tribunal (UT) recently. Nestlé UK Limited the manufacturer of Nesquik appealed against the FTT’s decision that its fruit flavoured products are subject to 20% VAT despite the chocolate flavour being zero rated.

Unfortunately for Nestlé , the UT decision went against it and banana and strawberry Nesquik remains standard rated. Similar contentions (to those in the FTT case) were advanced by the taxpayer, however the UT dismissed Nestlé’s appeal.

The Tribunal recognised that there is not currently a logical and consistent regime which applies to VAT on food (there is a long list of examples which include gingerbread men, smoothies, various types of crisps, not to mention Jaffa cakes….). I think most advisers could not agree more with the judge and I echo the comments I made after the FTT case: the entire legislation relating to food needs a complete overhaul.

Full details of the case here

VAT: Latest from the courts – Hastings Insurance Place Of Supply

By Marcus Ward 22 February 2018

In the First Tier Tribunal (FTT) case of Hastings Insurance the issue was where was the place of supply (POS) of services?

The POS rules determine under which VAT regime the supply is treated, whether the associated input tax may be recovered and how the services are reported. Consequently, determining the POS for any supply is vitally important because getting it wrong may not only mean that tax is overpaid in one country, but it is not declared in the appropriate country so that penalties and interest are levied. Getting it wrong also means that the input tax position is likely to be incorrect; meaning that VAT can be over or underclaimed. The rules for the POS of services are notoriously complicated and even subtle differences in a business’ situation can produce a different VAT outcome.

Background

Hastings is an insurance services company operating in the UK. The appeal relates to whether the appellant was able to recover input tax it incurred in the UK which was attributable to supplies of; broking, underwriting support and claims handling services made to a Gibraltar based insurance underwriter (Advantage) which supplied motor insurance to UK customers through Hastings. In order to obtain credit for the relevant input tax, the supply to Advantage must have a POS outside the EU, eg: the recipient had a place of belonging in Gibraltar and not the UK. HMRC argued that Advantage belonged in the UK so that the input tax could not have been properly recoverable. Consequently, the issue was where Advantage “belonged” for VAT purposes.

The POS rules set out where a person “belongs”.

A taxable person belongs:

where it has a business establishment, or;
if different, where it has a fixed establishment, or;
if it has both a business establishment and a fixed establishment (or several such establishments), where the establishment is located which is most directly concerned with the supply

Further details on this point are explained here

Contentions

It was not disputed that Advantage had a business establishment in Gibraltar. The question was whether it also had a fixed establishment in the UK and, if so, whether the supplies of services were made to that fixed establishment rather than to its business establishment in Gibraltar. HMRC contended that Advantage had a fixed establishment in the UK which was “more directly concerned with the supply of insurance” such that the POS was the UK. This was on the basis that Advantage had human and technical resources in the UK which were actually used to provide its services to UK customers. Hastings obviously argued to the contrary; that Advantage had no UK fixed establishment and that services were supplied to, and by, Advantage in Gibraltar.

Technical

It may be helpful to look briefly at CJEU case law which considered what an establishment other than a business establishment is. It is: “characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources”, where looking at the location of the recipient of the supply, “to enable it to receive and use the services supplied to it for its own needs” or, where looking at the location of the supplier, “to enable it to provide the services which it supplies”.

Decision

The FTT concluded that the input tax in dispute is recoverable because it was attributable to supplies made to Advantage on the basis that it belonged outside the EU (as interpreted in accordance with the relevant EU rules and case law). After a long and exhaustive analysis of the facts the summary was;

The appellant’s human and technical resources, through which it provided the services to Advantage, did not comprise a fixed establishment of Advantage in the UK, whether for the purposes of determining where Advantage made supplies of insurance or where the appellant made the supplies of its services.
Even if, contrary to the FTT’s view, those resources comprised a fixed establishment in the UK, there is no reason to depart from the location of Advantage’s business establishment in Gibraltar as the place of belonging/supply in the circumstances of this case.

Summary

If this case affects you or your clients it will be rewarding to consider the details of the arrangements which are helpfully set out fully in the decision. This was, in my opinion, a borderline case which could have been decided differently quiet easily. A significant amount of the evidence produced was deemed inadmissible; which is an interesting adjunct to the main issue in itself. Whether HMRC take this matter further remains to be seen. It is always worthwhile reviewing a business’ POS in depth and we are able to assist with this.

VAT – There is no such thing as a free lunch

By Marcus Ward 3 January 2018

Latest from the courts

In the Court of Appeal case of ING Intermediate Holdings Ltd the issue was whether the provision of “free” banking actually constituted a supply for VAT purposes.

Background

The appeal concerned the recoverability of input tax. ING wished to recover (via deduction against the outputs of a separate investment business) a proportion of VAT expenses incurred in connection with a “deposit-taking” business. ING contended that this activity did not involve any VATable supply. HMRC contended, and did so successfully before both prior tribunals, that it is more than a deposit-taking business and involved the provision of banking services.

The issue

The relevant services were supplied to the public, and the user of the services were not charged a fee. Consequently, the essential issue was; whether the “free” banking services were provided for consideration and, if so, how that consideration ought to be quantified for VAT purposes. If there was a consideration, there was a supply, and that supply would be exempt; thus not providing a right to recovery of input tax for the appellant.

Technical

There is no definition of consideration in either the EC Principal VAT Directive or the VAT Act 1994. In the UK, the meaning was originally taken from contract law, but the European Court of Justice (ECJ) has confirmed that the term is to be given the Community meaning and is not to be variously interpreted by Member States. The Community definition used in ECJ cases is taken from the EC 2nd VAT Directive Annex A13 as follows even though this Directive is no longer in force:

“…the expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc), that is to say not only the cash amounts charged but also, for example, the value of the goods received in exchange or, in the case of goods or services supplied by order of a public authority, the amount of the compensation received.”

NB: In order for there to be consideration, it must be able to be quantifiable and able to be expressed in monetary terms.

Decision

The CA decided that although there was no distinct charge to the users of the service, there was a supply of services for a consideration. That consideration was the difference between what the customer obtained from the relevant account, and what he could have obtained from an account which was not free, but provided better returns (the interest rate offered must have contained some deduction for the services provided). This was capable of being expressed in monetary terms (although it is interesting to note that the CA stated that it would be undesirable to say which method should be applied, although the court was “entirely satisfied” that it could be done).

Consequently there was a supply for VAT purposes and ING’s appeal was therefore dismissed.

Commentary

HMRC quite often argue that there is a supply when in fact, there is no supply. However, they did have a decent argument in this case and I understand that they are likely to apply this to a number of other long running disputes. Please contact us if you consider that this case could affect your business or your client’s business.