Tag Archives: exempt

VAT: Is a cosmetic treatment exempt medical care? The Illuminate Skin Clinics Ltd case

By Marcus Ward 12 July 2023

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:

Botox
Dermal fillers
CoolSculpting
Microsclerotherapy
Prescription skincare
Chemical peels
Microdermabrasion
Thread lifting
Thermavein
Aqualyx
Platelet-rich plasma treatment.

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:

The register of medical practitioners…”

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.

VAT: Mind the gap – HMRC latest figures

By Marcus Ward 23 June 2023

GOV.UK has published details of the most recent measurement of the tax gap for 2021-2022.

What is the tax gap?

The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.

The figures

The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £35.8 billion in absolute terms, in the 2021 to 2022 tax year.

Total theoretical tax liabilities for the year were £739.3 billion.

There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.5% in the tax year 2005 to 2006 to 4.8% in 2021 to 2022 – remaining low and stable between the years 2017 to 2018 and 2021 to 2022.

Criminal activity and evasion accounted for £4.1billion loss in tax collected.

30% of all underpayments of tax were due to a failure to take reasonable care, while 13% of instances were down to evasion.

A massive 56% of the tax gap is made up by small businesses (up from 40% of the total in 2017-18). Whether this is down to HMRC improving collection from large businesses or an increasing failure to crack down on small business is a moot point. It remains to be seen how HMRC react to this new information, but experience insists that small businesses may expect increased attention for the authorities.

The VAT gap

VAT represents 21% of the overall tax gap.

The VAT tax gap is 5.4%.

The absolute VAT gap is £7.6 billion.

The VAT gap has reduced from 14.0% of theoretical VAT liability in 2005 to 2006 to 5.4% in 2021 to 2022.

More than two thirds of the theoretical VAT liability was estimated to be from household consumption. The remainder came from the expenditure by businesses that supply goods and services where the VAT is non-recoverable (they are exempt from VAT), and from the government and housing sectors.

Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).

So, £7.6 millions of VAT is missing. That seems an awful lot.

VAT refunds guidance

By Marcus Ward 13 June 2023

VAT Claims

HMRC has completely rewritten its manual VRM7000 on VAT repayments and set-off.

When a business makes a claim for VAT (for whatever reason) HMRC have the power to set-off a payment against other amounts due.

HMRC also has a discretion to take account of any taxpayer liabilities in other regimes HMRC administers such as corporation tax or excise duty.

In summary, the new guidance covers:

Inherent set-off via The VAT General Regulations 1995, Section 80(2A) and Regulation 29. This is where, say, a supply was incorrectly treated as standard rated when it was exempt. It would not be possible to claim the overcharged output tax (subject to unjust enrichment) without recognising the potential overclaim of input tax as a result of partial exemption.
Set-off under The VAT Gen Regs 1995, Section 81(3) HMRC. This covers HMRC liability to only pay a claim after setting off any VAT, penalties, interest or surcharge owed to it. Section 81(3) is mandatory and applies to the current liabilities of a taxpayer, regardless of the period incurred.
Set-off under section 81(3A). This is a special provision which requires HMRC to set any liabilities that would otherwise be out-of-time to assess, against any amounts for which HMRC is liable under a claim. It does this by disregarding the assessment time limit, to undo all the consequences of a mistake.
VAT group set-offs. When a company leaves a VAT group, it is still jointly and severally liable under section 43(1) VAT Act 1994 for any outstanding debts of the group incurred while the company was a member. Any VAT claim by the ex-member will be subject to set-off against these group debts.
Set-offs against other taxes and duties. HMRC has the discretion under Section 130 of the Finance Act 2008 to set-off debts due from any other tax regimes HMRC is responsible for. This is subject to the insolvency rules in section 131 Finance Act 2008. A taxpayer should always check that no further liabilities have arisen since the claim was made.
Transfers of rights to claim to another person (Section 133 of the Finance Act 2008) – A claim will be subject to set-off of any outstanding liabilities to HMRC from both transferor and transferee. NB: HMRC policy is to make reasonable efforts to recover outstanding debts from the original creditor before applying set-off to the current creditors claim.

VAT: Charity exemption for show admittance – The Yorkshire Agricultural Society case

By Marcus Ward 9 May 2023

Latest from the courts

In the Yorkshire Agricultural Society First Tier Tribunal (FTT) case the issue was whether payments for entry into the annual The Great Yorkshire Show qualified as exempt via The VAT Act 1994, Schedule 9, Group 12, item 1 –

“The supply of goods and services by a charity in connection with an event—

1. 1. that is organised for charitable purposes by a charity or jointly by more than one charity,
  2. whose primary purpose is the raising of money, and
  3. that is promoted as being primarily for the raising of money.”

HMRC raised an assessment on the grounds that the supply of admittance fell outwith the exemption so it was standard rated. It appears that this view was formed solely on the basis that the events were not advertised as fundraisers.

The exemption covers events whose primary purpose is the raising of money and which are promoted primarily for that purpose. HMRC contended that the events were not advertised as fundraisers and therefore the exemption did not apply. Not surprisingly, the appellant contended that all of the tests at Group 12 were fully met.

The FTT found difficulty in understanding HMRC’s argument. It was apparent from the relevant: tickets, posters and souvenir programmes all featured the words “The Great Yorkshire Show raises funds for the Yorkshire Agricultural Society to help support farming and the countryside”.

Decision

The FTT spent little time finding for the taxpayer and allowing the appeal. The assessment was withdrawn. There was a separate issue of the assessment being out of time, which was academic given the initial decision. However, The Tribunal was critical of HMRC’s approach to the time limit test (details in the linked decision). HMRC’s argument was that apparently, the taxpayer had brought the assessment on itself by not providing the information which HMRC wanted. The Judge commented: “That is not the same as HMRC being in possession of information which justified it in issuing the Assessment. It is an inversion of the statutory test”.

HMRC’s performance (or lack of it)

Apart from the clear outcome of this case, it also demonstrated how HMRC can get it so wrong. The FTT stated that it was striking that there was very little by way of substantive challenge by HMRC to the appellant’s evidence, nor any detailed exploration of it in cross-examination. The FTT, which is a fact-finding jurisdiction, asked a series of its own questions to establish some facts about the Society’s activities and the Show in better detail. No-one from HMRC filed a witness statement or gave evidence, even though HMRC, in its application to amend its Statement of Case, had said that the decision-maker would be giving evidence. The decision-maker did not give evidence. HMRC were wrong on the assessment and the time limit statutory test and did not cover itself in glory at the hearing.

Commentary

More evidence that if any business receives an assessment, it is always a good idea to get it reviewed. Time and time again we see HMRC make basic errors and misunderstand the VAT position. We have an excellent record on challenging HMRC decisions. Charities have a hard time of it with VAT, and while it is accurate to say that some of the legislation and interpretation is often complex for NFPs, HMRC do not help by taking such ridiculous cases.

VAT: Was an option to tax valid? The Rolldeen Estates Ltd case

By Marcus Ward 18 April 2023

Latest from the courts

In the First-Tier tribunal (FTT) case of Rolldeen Estates Ltd there were a number of issues, inter alia; whether the appellant’s option to tax (OTT) was valid, if not, whether HMRC had the power to deem it valid, whether HMRC acted unreasonably and whether appellant estopped from relying on earlier meeting with an HMRC officer.

Background

The letting of property is an exempt supply, however, a landlord the owner can OTT the property and charge VAT on that supply. If the OTT is exercised, the supplier is able to reclaim input VAT on costs such as repairs and maintenance, but charges output VAT on its supplies. The OTT provisions are set out at The VAT Act 1994, Schedule 10.

The appellant in this case had previously submitted an OTT form VAT1614A and charged VAT on the rent to its tenant. Subsequently, the property was sold without charging VAT. HMRC issued an assessment for output tax on the sale value.

Schedule 10

A taxpayer does not need HMRC’s permission to OTT, unless that person has already made exempt supplies in relation to that property – in particular, if the property has already been let without VAT having been charged. In that scenario, the person must apply to HMRC for permission to exercise the OTT, and permission will only be given if HMRC are satisfied that the input tax is fairly attributed as between the exempt period and the taxable period. When OTT the company stated that no previous exempt supplies of the relevant property had been made and this was also confirmed in subsequent correspondence with HMRC.

Appellant’s contentions

The company informed HMRC that the OTT was invalid so that no VAT was due on the sale. Evidence was provided which demonstrated that Rolldeen had made exempt supplies before the date of the OTT so that HMRC’s permission had therefore been required before it could be opted. No permission had been given and therefore there was no valid OTT in place even though the appellant had purported to exercise that option. Also, the appellant submitted that it was unreasonable of HMRC to have exercised the discretion to deem the OTT to have effect, because they had failed to take into account the fact that during an inspection, HMRC had known that Rolldeen had made exempt supplies before OTT.

HMRC’s view

VATA, Schedule 10, para 30 allows HMRC retrospectively to dispense with the requirement for prior permission, and to treat a “purported option as if it had instead been validly exercised”. HMRC issued a decision stating that it was exercising its discretion under Schedule 10, para 30 to treat the relevant property as opted with effect from the date of the VAT1614A and that VAT was due on the sale and the assessment was appropriate.

Decision

The FTT found that:

after an inspection by HMRC it knew that prior exempt supplies had been made
although HMRC knew exempt supplies had already been made Rolldeen was estopped* from relying on that fact, because both parties had shared a “common assumption” that the OTT had been valid
para 30 could be used to retrospectively validate the OTT (albeit only in relation to supplies made after 1 June 2008). In this case that was sufficient as the sale of the property occurred on in March 2015
HMRC had not acted unreasonably because they had not taken into account their own failure to carry out a compliance check
this is exactly the sort of situation for which para 30 was designed
it was entirely reasonable and appropriate of HMRC to deem the purported option to have been validly exercised

The appeal was rejected and the assessment was valid.

Commentary

Again, proof, if proof is needed, that OTT can be a complex and costly area of the tax and care must always be taken. Advice should always be sought, as once an OTT is made, there is usually no going back.

An interesting point in this case was that no case law was cited on this issue and the FTT was unable to identify any.

* The principle of “estoppel” means that a person may be prevented from relying on a particular fact or argument in certain circumstances.

VAT – What records must be kept by a business?

By Marcus Ward 5 April 2023

VAT Basics: Requirements for VAT records by taxable persons

I thought that it may be useful to round-up all the record-keeping requirements in one place and focus on what HMRC want to see. It is always good practice to carry out an ongoing review a business’ records to ensure that they comply with the rules.

General requirements

Every taxable person must keep such records as HMRC may require. Specifically, every taxable person must, for the purposes of accounting for VAT, keep the following records:

business and accounting records
VAT account
copies of all VAT invoices issued
VAT invoices received
certificates issued under provisions relating to fiscal or other warehouse regimes
copy documentation issued, and documentation received, relating to the transfer, dispatch or transport of goods overseas and/or imported
credit notes, debit notes and other documents which evidence an increase or decrease in consideration that are received, and copies of such documents issued
copy of any self-billing agreement to which the business is a party
where the business is the customer party to a self-billing agreement, the name, address and VAT registration number of each supplier with whom the business has entered into a self-billing agreement

Additionally

HMRC may supplement the above provisions by a Notice published by them for that purpose. They supplement the statutory requirements and have legal force.

Business records include, in addition to specific items listed above, orders and delivery notes, relevant business correspondence, purchases and sales books, cash books and other account books, records of daily takings such as till rolls, annual accounts, including trading and profit and loss accounts and bank statements and paying-in slips.

Unless the business mainly involves the supply of goods and services direct to the public and less detailed VAT invoices are issued, all VAT invoices must also be retained. Cash and carry wholesalers must keep all till rolls and product code lists.

Records must be kept of all taxable goods and services received or supplied in the course of business (standard and zero-rated), together with any exempt supplies, gifts or loans of goods, taxable self-supplies and any goods acquired or produced in the course of business which are put to private or other non-business use.

All records must be kept up to date and be in sufficient detail to allow calculation of VAT. They do not have to be kept in any set way but must be in a form which will enable HMRC officers to check easily the figures on the VAT return. Records must be readily available to HMRC officers on request. If a taxable person has more than one place of business, a list of all branches must be kept at the principal place of business.

Comprehensive records

In addition, we always advise businesses to retain full information of certain calculations such as; partial exemption, the Capital Goods Scheme, margin schemes, TOMS, business/non-business, mileage and subsistence claims, promotional schemes, vouchers, discounts, location of overseas customers, and OSS, amongst other records. The aim is to ensure that any inspector is satisfied with the records and that any information required is readily available. This avoids delays, misunderstandings and unnecessary enquiries which may lead to assessments and penalties.

If you have any doubts that your business records are sufficient, please contact us.

VAT: Exemption of fund management services

By Marcus Ward 8 February 2023

HM Treasury has published a consultation paper on the treatment of the service of management of special investment funds (SIFs).

SIF meaning in VAT terms

There is no definition of a SIF in existing legislation.

Morgan Fleming Claverhouse Trust plc (case C-363/05) ruled on the interpretation of the term ‘Special Investment Funds as defined by Member States’.

The key points in this judgment are:

the term ‘special investment funds’ is capable of including closed-ended investment funds, such as investment trust companies (ITCs)
Member States have a discretion to define ‘special investment funds’ for the VAT exemption but, in doing so, must pay due regard to:
the purpose of the exemption
the principle of fiscal neutrality.

According to the Court, the purpose of the exemption is to facilitate investment in securities for investors through investment undertakings. This requires there to be VAT neutrality between the direct investment in securities and investment through collective investment undertakings, as the latter incurs a management charge. Furthermore, there must be equality of VAT treatment for funds which are similar to, and in competition with, funds falling within the scope of the exemption.

As a result of the case, the exemption was extended so that there was a level VAT playing field for all similar collective investment undertakings which compete in the UK retail market. This includes closed and open-ended collective investment undertakings, umbrellas and sub-funds, as well as some pension schemes.

The fund management exemption is limited to the management of SIFs. Consequently, the management of other investment funds will generally be standard-rated.

Legislation

The current VAT fund management regime is provided for by UK legislation, retained EU law and case law. The VAT Act 1994 implemented the Directive. Schedule 9, Group 5, Items 9 and 10 of the Act lists specific types of funds, the management of which is exempted from VAT.

Place of supply

This is important for SIFs management as if the supply is in respect of overseas funds the services are excluded from the exemption (they are outside the scope of UK VAT) when received overseas. This means that there is no output tax on the supply, but unlike exemption, it affords full recovery on input tax incurred in the UK. The perfect VAT outcome.

HMRC Consultation

The technical consultation sets out proposed reform of the legislation that provides for the VAT treatment of fund management. This is required because the fund management industry continues to innovate and introduced new types of funds to the marketplace, and the existing approach has struggled to keep pace with the evolution of the industry and proliferation of fund types.

The purpose of the exercise is to improve the legislative basis of the current VAT treatment of fund management.

Danger?

It is proposed that the following criteria for a fund to be considered a SIF would be legislated for:

a) the fund must be a collective investment

b) the fund must operate on the principle of risk-spreading

c) the return on the investment must depend on the performance of the investments, and the holders must bear the risk connected with the fund; and

d) the fund must be subject to the same conditions of competition and appeal to the same circle of investors as a UCITS (Undertakings for Collective Investment in Transferable Securities), that is funds intended for retail investors

There is a danger that if the exemption is broadened, fund managers which can now recover input tax may be denied so in the future.

If you have any queries, please contact us.

VAT: Insurance partial exemption

By Marcus Ward 24 January 2023

HMRC has issued new guidance for the insurance sector. It will be relevant to those dealing with partial exemption for insurers, including business and HMRC when discussing how partial exemption applies in practice for an insurer.

The guidance is intended to help insurers agree a fair and reasonable partial exemption special method (PESM) with the minimum of cost and delay. It also helpfully sets out definitions of various insurance/reinsurance transactions and business structures.

Background

Insurance businesses usually make a mixture of exempt and taxable supplies and may also provide specified services to customers located outside of the UK which incur a right to recover input tax.

When determining how to calculate the recoverable elements of input tax, the starting point is with the standard partial exemption method, as defined within The VAT Regulations 1995, regulation 101, but this will rarely be suitable for the insurance sector.

Many insurance businesses are complex organisations that provide many different services of differing liabilities to customers, often in different countries, using costs form suppliers around the world in different proportions. In addition, certain costs may have little relation to the value of the supplies for which they are incurred.

Therefore, most insurance businesses will need to apply to HMRC for approval to use a PESM.

Fair and reasonable

Partial exemption is the set of rules for determining recoverable input tax on costs which are used, or intended to be used, in making taxable supplies which carry a right of deduction. The first step is usually allocating costs which are directly attributable to taxable or exempt supplies. The balance (overhead input tax, or “the pot”) is required to be apportioned by either a standard method (The “standard method” requires a comparison between the value of taxable and exempt supplies made by the business) or a PESM.

A PESM needs be fair and reasonable, namely:

robust, in that it can cope with reasonably foreseeable changes in business
unambiguous, in that it can deal, definitively with all input tax likely to be incurred
operable, in that the business can apply it without undue difficulty
auditable, in that HMRC can check it without undue difficulty
fair, in that it reflects the economic use of costs in making taxable and exempt supplies

HMRC will only agree the use of a PESM if a business declares that it has taken reasonable steps to ensure the method is fair and reasonable. HMRC cannot confirm that a special method is fair and reasonable but will make enquiries based on an assessment of risk and will never knowingly approve an unfair or unreasonable special method.

Attribution of input tax

In the insurance sector, relatively few costs are either used wholly to make taxable or exempt supplies.

The VAT regulations (see above) require direct attribution to be carried out before cost allocation to sectors. However, direct attribution at this stage can cause difficulties where tax departments are unaware of how particular costs are used and have a large number of such costs to review.

It has therefore been agreed between HMRC and the Association of British Insurers that, whilst direct attribution must still take place, it need not always be the first step, and could, for some costs, follow the allocation stage. Methods could refer to direct attribution both pre- and post-allocation, so that costs are dealt with in the most appropriate way. The underlying principle is that the method must be both fair and reasonable.

Types of PESMs

The guidance gives the following examples of special methods:

sectors and sub-sectors
multi pot
time spent
headcount
values
number of transactions
floor space
cost accounting system
pro-rata
combinations of the above methods

with descriptions of each method.

VAT: HMRC Toolkits updated

By Marcus Ward 4 June 2020

HMRC has updated the following online toolkits for June 2020:

Input tax

Output tax and

Partial exemption

The Toolkits

These toolkits can be a useful resource. Although designed for agents and advisers, they can equally be of assistance to businesses when completing VAT returns. The contents are based on HMRC’s view of how tax law should be applied, so they should not be used as a substitute for proper professional advice. These toolkits set out areas of risk, provide general checklists, details of record keeping and links to HMRC information. Many find that these toolkits are more user friendly than “traditional” HMRC guidance and they address many contentious areas.

Overview

For a helpful general guide to input tax and checklist please see here. And an introduction to partial exemption here.

VAT – Input tax claims. Latest from the courts

By Marcus Ward 1 June 2020

Latest from the courts

In the recent First Tier Tribunal (FTT) case of Aitmatov Academy an otherwise unremarkable case illustrates the care required when making input tax claims.

The quantum of the claim was low and the technical issues not particularly complex, however, it underlined some basic rules for making a VAT claim.

Background

A doctor organised a cultural event at the House of Lords for which no charge was made to attendees. The event organiser as shown on the event form was the doctor. Aitmatov Academy was shown as an organisation associated with the event. It was agreed that the attendees were not potential customers of Aitmatov Academy and that the overall purpose of the event was cultural and not advertising.

Issues

HMRC disallowed the claim. The issues were:

HMRC contended that the expenses were not incurred by the taxpayer but by the doctor personally (the doctor was not VAT registered)
that if the VAT was incurred by the Academy, it was not directly attributed to a taxable supply
that if the VAT was directly attributed to a taxable supply, it was business entertaining, on which input tax is blocked

Decision

The FTT found that the Academy incurred the cost and consequently must have concluded that the Academy was the recipient of the supply, not the doctor.

However, the judge decided that the awards ceremony was not directly or indirectly linked to taxable supplies made or intended to be made by the Academy, and therefore that the referable input tax should not be allowed. Consequently, the court did not need to consider whether the event qualified as business entertainment.

On a separate point, the appellant contended that, as a similar claim had been paid by HMRC previously, she could not see the difference that caused input VAT in this case to be disallowed. The Tribunal explained that its role is to apply the law in this specific instance and as such it cannot look at what happened in an early case which is not the subject of an appeal.

Commentary

A helpful reminder of some of the tests that need to be passed in order for an input tax claim to be valid. I have written about some common issues with claims and provided a checklist. Broadly, in addition to the tests in this case, a business needs to consider:

whether there was actually a supply
is the documentation correct?
time limits
the VAT liability of the supply
the place of supply
partial exemption
non-business activity – particularly charity and NFP bodies
if the claim is specifically blocked (eg; cars, and certain schemes)

I have also looked at which input tax is specifically barred.

Finally, “entertainment” is a topic all of its own. I have considered what is claimable here in article which includes a useful flowchart.

As always, the message is; if a business is to avoid penalties and interest, if there is any doubt over the validity of a claim, seek advice!