Tag Archives: FTT

VAT: When is the building of a house complete? (And why is it important?)

By Marcus Ward 11 June 2019

Completion of a residential dwelling

A technical point which comes up surprisingly often and seems innocuous is: when is a building “complete”? The following case is helpful, and I thank Les Howard for bringing it to my attention.

The date that the construction of a dwelling is deemed to be complete is important for a number of reasons. The issue in the case of Mr and Mrs James was whether certain works could be zero rated via the VAT Act Schedule 8 Group 5 Item 2 (The supply in the course of the construction of a building designed as a dwelling…) or as HMRC contended, they were the reconstruction or alteration of an existing building and the work should be standard rated.

Background

The James used a contractor to plaster the entire interior of their house in the course of its construction. However, the work was demonstrably defective to such an extent that the James commenced legal proceedings. A surveyor advised that all of the old plaster needed to be hacked off and replaced by new plastering installed by a new firm. The stripping out and replacement works took place after the Certificate of Completion had been issued.

The James claimed input tax on the house construction via the DIY Housebuilders’ Scheme.

Technical

HMRC refused the James’ claim to have the remedial work zero-rated because, in their view, the re-plastering works amounted to the reconstruction or alteration of the house which was, when the supplies were made, an “existing building”. They proffered Note 16 of Schedule 5 which provides that “the construction of a building” does not include “(a) … the conversion, reconstruction or alteration of an existing building”.

They stated that zero-rating only applied if the work formed part of the construction of a zero-rated building. They had previously decided that the work of snagging or correction of faults carried out after the building had been completed could only be zero-rated if it was carried out by the original contractors and correction of faults formed part of the building contract. When the snagging is carried out by a different contractor, the work is to an existing building and does not qualify for zero rating.

The James stated that the Customs’ guidelines on snagging do not take into account extraordinary circumstances. Their contention was that the re-plastering works were zero rated because they had no choice but to engage the services of a different contractor other than the one who carried out the original works.

Decision

The judge found for the appellant – the re-plastering works were zero rated.

There was a query as to why The James applied for a Certificate of Completion before the plastering was completed. In nearly all cases such a certificate would crystallise the date the building was complete.

The reasons were given as:

the need for funds. The James could not remortgage the house without the certificate and they needed to borrow a substantial amount
they could not reclaim VAT under the DIY Housebuilders’ Scheme until the Certificate of Completion had been issued
they were aware that the building inspector was beginning to wonder why the building works were taking such a long time
they needed the house assessed for Council Tax which could only happen when the certificate had been issued
the Certificate was issued as part of the procedure required by the Building Act 1984 and the Building Regulations of 2000

These reasons were accepted by the judge.

Despite the respondents stating that:

for the reasons given above
the fact that the James had been living in the house for some time
they had obtained the Certificate of Completion
the new plastering work had been done by the new plasterer such that the house had been constructed before supply of the new plasterer’s services had been made
the house was an “existing building”

the judge was satisfied that in the circumstances the new plastering work was supplied in the course of the construction of the building as a dwelling house and that there was no reconstruction or alteration of an existing building in the sense contemplated by Note (16) to Group 5 Schedule 8.

He observed that the Certificate of Completion records that the substantive requirements of the Building Regulations have been satisfied. But to the naked eye the old plasterwork was obviously inadequate and dangerous ad he could not possibly consider that the construction project had finished until the new plasterwork was installed. The James’ construction project was to build a new dwelling house. Plasterwork of an acceptable standard was an integral part of the construction works. The new plasterwork was done at the earliest practicable opportunity.

Commentary

Care should be taken when considering when the completion of a house build takes place. There are time limits for DIY Housebuilders’ Scheme clams and clearly, as this case illustrates, usually work done to a house after completion does not qualify for zero rating. So, if the owner of a house is thinking of, say, building a conservatory for example, it is more prudent in VAT terms to construct it at the same time as a new house is built, and certainly before completion.

I would say that the appellant in this case achieved a surprisingly good result.

VAT: What is a TOGC? Why is it important?

By Marcus Ward 6 June 2019

What is a Transfer of a Going Concern (TOGC)?

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. It is always the seller who is responsible for applying the correct VAT treatment and will be required to support their decision.

Where the sale meets the conditions, the supply is outside the scope of VAT and therefore VAT is not chargeable.

The word ‘business’ has the meaning set out in The VAT Act 1994, section 94 and ‘going concern’ has the meaning that at the point in time to which the description applies, the business is live or operating and has all parts and features necessary to keep it in operation, as distinct from its being only an inert aggregation of assets.

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. This may be the date of completion or, if earlier, the date of receipt of payment or part payment (eg; a deposit). There are additional anti-avoidance requirements regarding the buyer’s option to tax

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.

Property transfer

The sale of a property may qualify for TOGC if the above tests are met. Usually, but not exclusively, a TOGC sale is the sale of a tenanted building when the sale is with the benefit of the existing lease(s) – (the sale of a property rental business rather than of the property itself). Another example of a property TOGC is where a property under construction is sold (a development business). As may be seen, timing with a property TOGC is of utmost importance. For example, an option to tax one day late will invalidate TOGC treatment. A guide to land and property.

What purpose do the TOGC rules serve?

The TOGC provisions are intended to simplify accounting for VAT when a business changes hands. The main purposes are to:

relieve the buyer from the burden of funding VAT on the purchase, helping businesses by improving their cash flow and avoiding the need to separately value assets which may be liable at different rates or are exempt and which have been sold as a whole
protect government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid to HMRC, for example, where a business charges tax, which is claimed by the new business but not paid by the selling business

What if it goes wrong?

TOGC 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.

Add VAT when TOGC treatment applies:

Often, the TOGC point can be missed, especially in complex property transactions.

The addition of VAT is sometimes considered a “safe” VAT position. However, output tax will have been charged incorrectly, which means that when the buyer claims VAT shown on the relevant invoice, this will be disallowed. This can lead to;

potential penalties and interest from HMRC
the buyer having to recover the VAT payment (often the seller, having sold a business can be difficult to track down and then obtain payment from)
significant cash flow issues (HMRC will need to be repaid the input tax claim immediately)
if a property sale, SDLT is likely to be overpaid

Sale treated as a TOGC when it is a taxable supply:

When VAT free TOGC treatment is applied to a taxable supply (possibly as one, or more of the TOGC conditions are not met) then there is a tax underdeclaration. The seller will be assessed by HMRC and penalties and interest are likely to be levied. There is then the seller’s requirement to attempt to obtain the VAT payment from the buyer. Similarly to above, this is not always straightforward or possible and it may be that the contract prohibits additional payment. There is likely to be unexpected funding issues for the buyer if (s)he does decide to make the payment.

Considering the usually high value of sales of businesses, the VAT cost of getting it wrong can be significant.

Summary

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 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. I sometimes find that the buyer’s intentions change such that the TOGC initially applied becomes invalid when the change in the use of assets (from what was notified to the seller) actually takes place. HMRC is not always sympathetic in these situations. One of the questions I am often asked is: “How long does the buyer have to operate the business after purchase so that TOGC treatment applies?” Unsurprisingly, there is no set answer to this and HMRC do not set a specific period. My view, and it is just my view, is that an absolute minimum time is one VAT quarter.

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: Zero rating of prescriptions

By Marcus Ward 29 April 2019

Latest from the courts

The UK is unique in the EU for the zero rating of medicines prescribed by a registered medical practitioner.

In the First Tier Tribunal (FTT) case of Pearl Chemist Ltd (Pearl) the issue was whether the development of new technology and legislation affected the zero rating of prescriptions written by UK registered and non-UK registered doctors and the interpretation of “registered medical practitioner”.

Background

Pearl is authorised to dispense medicines prescribed online by doctors based in countries based in the European Economic Area. It contracted with a third party which operated websites which offered medical screening and services, primarily for conditions such as erectile dysfunction, hair loss and obesity/weight loss.

Customers of the third party could obtain an online consultation with qualified doctors. If the doctor decided to issue a prescription, the written prescription would be sent to Pearl who would then despatch the medicine directly to the individual customer on behalf of the third party. Pearl treated all these supplies as zero-rated. The relevant law covering such prescriptions changed in 2008 such that it was now possible to dispense drugs prescribed by a qualified doctor based outside the UK.

HMRC formed the view that these supplies were not covered by the UK zero rating on the basis that an EU qualified doctor who is not registered with the GMC is not a registered medical practitioner. An assessment for output tax was issued in respect of supplies made against prescriptions written by non-UK doctors.

The issues

The issues, broadly were:

Are qualified doctors based outside the UK covered by the description “registered medical practitioner” in UK legislation?
If not, does this breach of the principle of fiscal neutrality? (Whether there is clear discrimination between identical supplies made on the prescription of UK doctors and doctors from other EU countries)

Decision

The judge ruled that the UK zero rating does not cover prescriptions written by non-UK doctors as they are not within the definition of “registered medical practitioner” Consequently, the supplies must be standard rated in the UK. However, the exclusion of medicines prescribed by overseas doctors from the zero-rating constitutes a breach of the principle of fiscal neutrality. This seemed good news for Pearl, but…the Tribunal stated that it was unable to provide an effective remedy for that breach and accordingly dismissed the appeal and affirmed HRMC’s assessment.

Commentary

This decision seems rather harsh on the appellant. It appears that the judge ruled that she had no power to override UK Parliament’s intention despite the inherent “unfairness” of the outcome of this intention where identical supplies were treated differently depending on where the prescription was written.

Certainly an odd one and I wonder if this is the last of this matter. Any business in a similar situation may need to review its position on the basis of this decision.

VAT Success Stories

By Marcus Ward 1 April 2019

I often write about how it is important to seek VAT advice at the right time, see triggerpoints. So, I thought that I’d give some practical examples on where we have saved our clients money, time and aggravation.

Investment company

HMRC denied claims for input tax incurred on costs relating to the potential acquisition of an overseas business and threatened to deregister the plc as it was not, currently, making taxable supplies. Additionally, HMRC contended that even if VAT registration was appropriate, the input tax incurred did not relate to taxable supplies and was therefore blocked.

We were able to persuade HMRC that our client had a right to be VAT registered because It intended to make taxable supplies (supplies with a place of supply outside the UK which would have been taxable if made in the UK) and that the input tax was recoverable as it related to these intended taxable supplies (management charges to the acquired business). This is a hot topic at the moment, but we were able to eventually demonstrate, with considerable and detailed evidence that there was a true intention.

This meant that UK VAT registration was correct and input tax running into hundreds of thousands of pounds incurred in the UK was repaid.

Restaurant

We identified and submitted a claim for a West End restaurant for nearly £200,000 overpaid output tax. We finally agreed the repayment with HMRC after dealing with issues such as the quantum of the claim and unjust enrichment.

Developer

Our property developing client specialises in very high-end residential projects in exclusive parts of London. They built a dwelling using an existing façade and part of a side elevation. We contended that it was a new build (zero rated sale and no VAT on construction costs and full input tax recovery on other costs). HMRC took the view that it was work on an existing dwelling so that 5% applied and input tax was not recoverable. After site visits, detailed plans, current and historical photograph evidence HMRC accepted the holy grail of new build. The overall cost of the project was tens of millions.

Charity

A charity client was supplying services to the NHS. The issue was whether they were standard rated supplies of staff or exempt medical services. We argued successfully that, despite previous rulings, the supplies were exempt, which benefited all parties. Our client was able to deregister from VAT, but not only that, we persuaded HMRC that input tax previously claimed could be kept. This was a rather pleasant surprise outcome. We also avoided any penalties and interest so that VAT did not represent a cost to the charity in any way. If the VAT was required to be repaid to HMRC it is likely that the charity would have been wound up.

Shoot

A group of friends met to shoot game as a hobby. They made financial contributions to the syndicate in order to take part. HMRC considered that this was a business activity and threatened to go back over 40 years and assess for output tax on the syndicate’s takings which amounted to many hundreds of thousands of pounds and would have meant the shoot could not continue. We appealed the decision to retrospectively register the syndicate.

After a four-year battle HMRC settled on the steps of the Tribunal. We were able to demonstrate that the syndicate was run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.” – A happy client.

Chemist

We assisted a chemist client who, for unfortunate reasons, had not been able to submit proper VAT returns for a number of years. We were able to reconstruct the VAT records which showed a repayment of circa £500,000 of VAT was due. We successfully negotiated with HMRC and assisted with the inspection which was generated by the claim.

The message? Never accept a HMRC decision, and seek good advice!

VAT: Partial exemption, the N Brown case

By Marcus Ward 18 March 2019

Latest from the courts.

Partial exemption has always been, and probably always will be, the most complex and oft debated area of the tax.

Attribution

In the First Tier Tribunal (FTT) case of N Brown Group plc the issue was how to attribute input tax incurred on marketing. This included:

online
catalogues and leaflets
parcel packs
inserts in magazines and newspapers
direct mailings
advertisements in publications
TV advertisements
telemarketing
brand development
PR
celebrity endorsements
market research
photo shoots

Background

N Brown, as you may know, sells clothing and household goods online to the public. It has only a few retail stores so does not have the facility that a “bricks and mortar” retailer would have of displaying goods in its stores. It therefore has to incur significant marketing costs to bring its products to the attention of its customers and present them in an attractive way that encourages sales. The activities of the appellant include the sale of these goods, which is standard-rated for VAT purposes, and the provision of finance, which is exempt for VAT purposes. The finance element is the provision of credit which produces significant income from the interest on monthly balances which consumers do not pay off.

Issue

The issue was whether the input tax incurred on the marketing was attributable to the sale of goods which were advertised or, as HMRC contended; to both its taxable and exempt income (so that it was residual). If HMRC were correct an element of the input tax would fall to be irrecoverable via the appellants’ partial exemption calculation. HMRC’s position was that the input tax which N Brown incurred in respect of the marketing is residual because, although they did not seek to deny the existence of a “direct and immediate link” between the relevant goods and services and taxable supplies that the appellant made, they consider that there is also a direct and immediate link to the exempt credit provided.

Unsurprisingly, N Brown’s position was that the vast majority of goods and services received in connection with the marketing had a “direct and immediate link” only with taxable supplies that it made and so the relevant input tax was not residual and is therefore recoverable in full.

A subtle distinction, however, as £42 million of VAT was at stake, quite a vital one!

Technical

A general guide to partial exemption is available here

Broadly, a partially exempt business is required to attribute input tax incurred to three categories:

Taxable activities (here, the sale of goods) fully recoverable
Exempt activities (here the provision of credit) not recoverable
Non-attributable (residual) – input tax attributable to both taxable and exempt activities, or neither. This input tax must be apportioned either by the “standard method” or special method agreed with HMRC.

Decision

The judge found that there was a two-way relationship between the sale of the goods and the provision of credit terms. As a consequence, the input tax fell into the category of non-attributable (residual) even if the relevant advertisements made no mention of credit at all. It was also found that the standard method (used by HMRC) did not produce a reasonable outcome so the assessment issued by HMRC would need adjustment in the taxpayer’s favour. This required a different method to be devised and that certain elements of exempt income could be ignored in the calculation. I suspect that negotiations on an agreeable method might take some time…

Commentary

This case demonstrates that care is always required when costs are attributed to a business’ activities. This is especially important when the costs are significant. There tends to be a lot of “debate” with HMRC on such matters and slight nuances can affect attribution and thus the outcome of the calculation. It is an area which always requires specialised advice.

VAT: Input tax recovery on director’s costs

By Marcus Ward 18 March 2019

Latest from the courts: Directors expenditure – what may be recovered as input tax?

The Praesto Consulting UK Limited Court of Appeal (CoA) case.

This is a subject that pops up every now and again: Is a purchase for the director’s business purposes (input tax usually recoverable by the company) or for a director personally (so non-business and not recoverable)?

Background

Mr Ranson was an ex-employee of a claimant in civil proceedings; Customer Systems plc (“CSP”). Mr Ranson resigned to set up a company of which he was sole director, “Praesto”, which then carried on a consultancy business competing with CSP. CSP issued proceedings against Mr Ranson (and three other employees) over the nature of the departure from the company, but not against Praesto itself. The acting solicitor firm issued eight invoices (containing the VAT in question) to Mr Ranson personally, and not his company. The invoices were paid by Praesto

Issue

Praesto paid the legal fees relating to the defence of the civil proceedings brought by CSP against its sole director. Is the company entitled to credit for VAT input tax charged in relation to those fees? That is, was it proper business expenditure by the company, or was the defence of the case a personal cost of the director as a (distinct) individual?

HMRC laid great stress on the fact that the invoices were addressed to Mr Ranson personally, that they related to services provided in relation to the claim brought by CSP against him and that Praesto was never joined as a party to the proceedings.

Decision

The CoA ruled that Praesto could recover VAT on the fees. The action against Mr Ranson was the first phase of litigation which would ultimately seek damages from Praesto (and therefore Praesto had a direct interest in CSP’s claim being dismissed). This was an indication that there was a direct and immediate link between the legal services provided and the business. In reality, Praesto was throughout the proceedings, the main target of the litigation: It was Praesto which had made the profits which CSP sought to claim.

The fact that the invoices were addressed to Mt Ranson provided no legal bar to the company recovering the associated input tax. The judge observed that there was a joint retainer whereby the solicitor firm was being instructed by, and acting on behalf of, both Mr Ranson and Praesto. Under such a retainer both Mr Ranson and Praesto would be entitled to the solicitor’s’ services and both would be jointly and severally liable for the fees. That is a legal relationship involving reciprocal performance. As both parties were jointly and severally liable for the fees, there would be no particular significance in addressing invoices to only one of the parties so liable.

This seems an entirely sensible decision.

Commentary

This has echoes of the P&O case: P&O Ferries (Dover) Ltd v Commissioners of Customs & Excise [1992] VATTR 221 referred to in this case, where criminal proceedings were brought against various P&O employees and the company itself arising out of the Herald of Free Enterprise Zeebrugge disaster – the company paid for the legal representation of all the individual defendants and claimed input tax on the costs of so doing. It was held that the conviction of even one of the individual employees would have caused severe damage to the public perception of the company’s business. To mitigate the real risk of being driven out of business the board took the view that the company had to take every step available to it to guard against the successful prosecution of each of the individual employees. The legal services in question were, therefore, used for the purpose of the company’s business.

Another area where VAT on costs invoiced to a (future) director personally are recoverable is in pre-incorporation cases where (obviously) the company does not exist so cannot, at that time, recover the VAT. HMRC permit recovery in such cases if the recipient of the invoice does indeed become a director of the company and the supply is used by that company for business purposes

Please contact us if you have any queries.

VAT: Input tax claims – alternative evidence

By Marcus Ward 7 March 2019

What can be used to make a claim?

It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can HMRC accept any other evidence to support a claim? Well, the answer is yes… sometimes.

HMRC has discretion provided by EC law. The right to deduct is given by Article 167 of the Principal VAT Directive (via VAT Regulations 1995/2518 Reg 29(2) in the UK). Specifically, the wording most relevant here is “…such other documentary evidence of the charge to VAT as the Commissioners may direct.” Broadly, a business must hold the correct evidence before being able to exercise the right to deduct.

Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff are required to consider whether there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff should not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. However, this obligation is balanced against a duty to protect the public revenue.

Full details of tax invoices here.

What HMRC consider

HMRC staff are required to work through the following checklist:

Does the business have alternative documentary evidence other than an invoice (for example a supplier statement)?
Does the business have evidence of receipt of a taxable supply on which VAT has been charged?
Does the business have evidence of payment?
Does the business have evidence of how the goods/services have been consumed or evidence regarding their onward supply?
How did the business know the supplier existed?
How was the business relationship with the supplier established? For example: How was contact made?
Does the business know where the supplier operates from (have staff visited?)
How did the business contact them?
How does the business know the supplier can supply the goods or services?
If goods, how does the business know they are not stolen?
How does the business return faulty supplies?

Outcome

If the responses to the above tests are credible, HMRC staff should exercise their discretion to allow the taxpayer to deduct the input tax. Overall, HMRC are required to be satisfied that sufficient evidence is held by the business which demonstrates that VAT has been paid on a taxable supply of goods or services received by that business and which were used by that business for its taxable activities

Challenge HMRC’s decision

A business may only challenge HMRC’s decision not to allow a claim (did not exercise its discretion) if it acted in an unfair or unreasonable way. In these cases, the onus is on the taxpayer to demonstrate that HMRC have been unreasonable in not using the available discretion. This is quite often a difficult thing to do.

Case law

Not surprisingly, there is significant case law on this subject. The most relevant and recent being the Upper Tribunal (UT) cases of James Boyce and Scandico Ltd.

Tips

If possible, always obtain a proper tax invoice from a supplier, and don’t lose it! The level of evidence required when no invoice is held usually depends on the value of the claim. There would be a difference between persuading an inspector that £20 input tax on stationery is recoverable and the claiming of £200,000 VAT on a property purchase is permissible. As always in VAT, if you get it wrong and claim VAT without the appropriate evidence there is likely to be a penalty to pay.

If you, or your clients are in dispute with HMRC on input tax claims, please contact us.

VAT: More on the Mercedes Benz Financial Services case – PCP

By Marcus Ward 1 March 2019

Further to my article on the Mercedes Benz Financial Services (MBFS) case on Personal Contract Purchase (PCP), HMRC has published a Briefing Note – Changes to the VAT treatment of PCPs

HMRC has fully implemented the findings in the MBFS CJEU case. In summary, HMRC state that:

“The correct treatment of PCP and similar contracts depends on the level at which the final optional payment is set:

if, at the start of the contract, it is set at or above the anticipated market value of the goods at the time the option is to be exercised, the VAT treatment of the contract will follow the MBFS It is a supply of leasing services from the outset and VAT must be accounted for on the full value of each instalment, there is no advance, or credit, so there is no finance
if, at the start of the contract, it is set below the anticipated market value, such that a rational customer would buy the asset when they exercise the option, it is a supply of goods, with a separate supply of finance. VAT is due on the supply of goods in full at the outset of the contract, the finance is exempt from VAT”

This treatment must be used by 1 June 2019. Past declarations which have been in error must be adjusted per PN 700/45. Businesses affected by the changes may also need to consider adjustments to input tax claimed, or forgone in respect of partial exemption. A guide to partial exemption here.

VAT: Yet more cases on food

By Marcus Ward 11 February 2019

Latest from the courts

Like London buses, few cases on the VAT liability of food, then a veritable deluge (although I am unsure whether there can be a deluge of buses…).

Following Eat Ltd and my summary, two further food cases have been heard at First Tier Tribunal (FTT). These are on the subjects of juicing and brownies.

Juice

In The Core (Swindon) the issue was whether fruit and vegetable juices sold as meal replacements were beverages and therefore standard rated or whether they were not beverages and therefore zero-rated as food.

Background

The appellant provides “juice cleanse programmes” (JCPs) which consist of fresh drinkable products made from juicing raw fruits and vegetables and are intended to replace normal meals. The relevant test was how the product was objectively “held out for sale” by the supplier.

What needed to be considered was:

How is the product marketed?
Why it is consumed by the customer?
What is the use to which it is put?

Case law

Similar products were considered in Fluff, Ltd. Roger Skinner and Bioconcepts where the above tests were set out.

Decision

Judging the JCPs by reference to the above tests the Tribunal found that the purchasers of the JCPs purchase them as meal replacements. Customers do not purchase them as beverages (they drink water in addition to consuming the products). They do not therefore purchase them in order to increase their bodily fluid, or to slake their thirst, or to fortify themselves or to give pleasure. The products are deliberately made palatable, in order not to deter consumers from drinking them, and they are not unpleasant to drink, but they are not consumed for pleasure. Customers purchase and consume them as a meal replacement, not as a beverage. As a consequence, they were zero rated food.

Brownies

In Pulsin’ Ltd the issue was whether a raw choc brownies was a cake (zero rated) or a biscuit (standard rated). So, shades of the infamous Jaffa Cake case.

Background

The products in question were individually wrapped bars produced by cold compression of predominantly: dates, cashews, cacao, various syrups, concentrated grape juice and brown rice bran. All ingredients used are intended to be as natural, unprocessed, hypoallergenic and as nutritionally beneficial as possible.

Case law

The cases set out above were also referred to in this case, along with Kinnerton which I considered here although the judge dismissed HMRC’s contention that the decision in that case was helpful in this.

Decision

The judge formed the view that the products do show enough characteristics of cakes to be so categorised. Therefore, all variants of the raw choc brownies were properly classified as cakes and are therefore eligible to be zero rated.

Commentary

What was interesting here was the judge’s comments on the current position regarding food and VAT.

“It is the Tribunal’s view that the current state of the law on the taxation of food items is not fit for purpose and will necessarily present apparently anomalous results as tastes and attitudes to eating change. The Tribunal fundamentally disagrees with HMRC’s guidance that the borderline between cake and confectionary presents few problems. The lines set and perceived by HMRC in the application of this out of date provision (as recognised by them in their anguished consideration of flapjacks and cereal bars) drives anomalous outcomes….”

And so say all of us…

The zero rating of food is complicated as the provision under VAT Act 1994, Schedule 8, Group 1 provide for a wide general description (qualifying for zero rating) subject to excepted items (which must therefore be standard rated) with exclusions and overriding items to those exceptions (which then requalify to be zero rated).

VAT: What’s hot and what’s not?

By Marcus Ward 4 February 2019

Latest from the courts

In the seemingly never-ending series of cases on hot/cold food comes the latest instalment in the Eat Limited (Eat) First Tier Tribunal (FTT) case.

Issue

Via VAT Act 1994 Schedule 8, Group 1, the sale of certain food is zero rated. However, there is an exception for supplies in the course of catering. Anything coming within the definition of catering reverts to the general rule and is taxable at the standard rate.

The definition of catering includes “any supply of hot food for consumption off those premises…” Note 3 (b).

So, the issue here was whether grilled ciabatta rolls and breakfast muffins which were heated by Eat were hot… or not. HMRC decided that the relevant sales were the standard rated sale of hot food and disallowed a retrospective claim by Eat that they should have been correctly zero rated.

The issue here was whether the products had been heated for the purpose of enabling them to be consumed at a temperature above ambient air temperature. In considering the purpose of the heating, the Tribunal needed to ascertain the common intention of Eat and the customer.

Background

Eat sells a range of hot and cold food and drink products through its outlets in the UK. The food and drink can either be consumed at the outlet or be taken away for consumption elsewhere.

The breakfast muffins are filled bread rolls. The rolls are supplied to the appellant by a bakery in a condition that enables Eat to finish baking the rolls at their outlets. The specification requires the rolls to be “pale and 90% baked”. The muffin is assembled at a central kitchen from various ingredients, bagged, and then distributed to Eat’s retail outlets. The ciabatta rolls are also supplied to Eat part-baked and a similar process applied. If a customer purchases a breakfast muffin or a ciabatta roll, the product is “finished-off” in the outlet’s grill.

For zero rating to apply, Eat had to prove that its intention and that of its customers, was that the breakfast muffins and grilled ciabatta rolls were not supplied to customers in order to be eaten “hot”.

The products are treated as “hot” if:

They have been heated for the purposes of enabling them to be consumed at a temperature above the ambient air temperature; and
They are above that temperature at the time they are provided to the customer.

It was not disputed that the products were above ambient air temperature at the time they were provided to customers,

Case law

There has been considerable litigation on the meaning of hot food. The decision of the Court of Appeal in Sub One Limited (t/a Subway) (in liquidation) v 30 HMRC [2014] EWCA Civ 773 reviews the meaning of the legislation, and in particular whether the “purpose” test in the legislation should be construed objectively or purposively.

Submissions

Eat contended that the common intention of the parties was that the supply of the products was to be finished as being “fresh” rather than partially complete. Any residual heat in the products was merely incidental to that common intention.

HMRC submitted that it was part of the deal between Eat and its customers that the products should be sold hot (and obviously so). Further, that no customer seeks to enter into a bargain in a takeaway restaurant containing a term that the food he or she is to purchase is “to be finished as fresh rather than partially complete”. The customer either wants hot food or does not. Either the supplier proposes to supply hot food, or it does not. It was also noted that in Eat’s advertising (at the point of sale and on its website) that the products were described as “hot”

Decision

The judge decided that this was a “hopeless appeal” and that it was the common intention of Eat and its customers that the products were heated for the purpose of enabling them to be consumed at a temperature above ambient air temperature. Further, that they were wrapped in foil-backed sheets that keep them warm. This showed an intention on the part of Eat that the products should be consumed whilst they were hot. So, they were hot and standard rated.

Commentary

Only in the world of VAT can something too hot to touch be treated as cold (as certain foods are). However, in this case common sense prevailed and not unsurprisingly, food which was sold hot was treated as hot food! There is a lesson here however. In such cases, the outcome depends on the precise facts of the relevant transactions and that it is unhelpful to make assumptions.

Now, about that proposed pasty tax…