HMRC has published updated partial exemption guidance in Manual PE21500.
The main changes are in respect of updated case law, including the Royal Opera House Court of Appeal case dealing with the attribution of input tax.
In that case the CoA considered: the test of direct and immediate link, economic necessity, business/non-business, and chains of transactions.
We know that burying a deceased person is exempt, but exhumation is standard rated and we now know, thanks to the UK Funerals On-line Ltd FTT case, that the service of the repatriation of the body of a deceased person can be viewed as either an exempt supply of funeral services or a zero-rated supply of transport services.
This being the case, zero rating trumps exemption via of The VAT Act 1994, section 30(1).
Information provided by the Office for National Statistics has revealed that the number of UK businesses registering for VAT and PAYE dropped by over 40,000. This is probably a result of a number of issues (I presume):
This is the first drop in registrations since 2011 with the current number being 2.7 million. The most likely business to deregister are sole proprietors and other small businesses. The most negatively affected trade sectors were transport and storage, IT and the sciences.
From November 2023 HMRC is removing the paper version of the VAT 1 Form – applying for VAT registration.
Around 95% of applicants (or their agents) currently use the online registration service: How to register for VAT and in order to improve processing time HMRC is removing the paper VAT 1 Form.
From November only a very limited number of businesses will be able to use the Form VAT 1 and these will only be available by specific request from the VAT Helpline. Those businesses are:
HMRC has updated VAT Notice 701/57 – Health professionals and pharmaceutical products.
The changes, in summary, are:
Para 2.1 – Pharmacy technicians (only in England, Scotland and Wales) has been added to the meaning of a health professional list.
Para 2.5 – Services directly supervised by a pharmacist has been removed: Services that are not exempt from VAT.
Para 4.7 has been updated to make it clear when forensic physicians services are exempt healthcare.
Para 5.2 – Services supervised by pharmacists are now included when referring to a health professional: Exemption of care services performed by a person not enrolled on a statutory medical register.
The exemptions covered in the health and welfare area are complex and even slight differences in circumstances can change the VAT liability of a supply. Additionally, there are further exemptions for charities and NFP bodies and the age-old issue of business/non-business.
We advise that specialist advice is sought when considering the VAT position of supplies in this area.
Businesses registered for VAT at a high-volume address will be asked by HMRC to prove they are established in the UK.
High-Volume Addresses
A high-volume address is where a single UK address is listed as the principal place of business (PPOB) for many VAT-registered businesses. We understand that many thousands of businesses are registered at single addresses in the UK.
HMRC will require proof of a place of belonging in the UK to avoid online marketplaces failing to account for output tax.
Online marketplaces
Online marketplaces are liable for the output VAT from sales on their platforms by overseas traders. HMRC understand that Non Established Taxable Persons (NETPs) have incorporated in the UK and provided UK address details to marketplaces. Since they are then no longer “overseas traders” these rules do not apply. In these situations, the NETP does not declare VAT and the marketplace does not become liable for it.
HMRC is writing to all VAT registered businesses with a PPOB at a high-volume address to ask for evidence to demonstrate that the business is actually established in the UK. If the business does not respond, by default, HMRC will consider the business to be a NETP and seek to recover VAT from the online marketplace business.
Evidence of UK establishment
HMRC will outline what specific evidence it will accept in their letter.
Dance classes in some EU countries are subject to different VAT rates depending on whether the dance style is considered artistic or entertainment. In the UK, belly dancing and ceroc lessons are standard rated, but ballet is exempt.
Latest from the courts
In the First Tier Tribunal (FTT) case of Spani v HMRC [2023] UKFTT 00727 (TC) the issue was whether a claim under the DIY Housebuilders’ Scheme (the scheme) was valid.
Mr Spani appealed against HMRC’s decision to refuse a claim. It was rejected as the respondents concluded that the property was to be used for business purposes because Planning Permission was for a holiday let rather than residential own use. To claim under the scheme, the relevant the property must be used “otherwise than in the course of furtherance of business” – VAT Act 1994, section 35)
Background
The cottage was constructed in Seaford – within the Souths Down National Park and, in order to obtain planning consent, it was required to be made available for letting on a commercial basis for 140 days a year. The appellant contended that it was his primary residence in the UK and any letting (which was interrupted by covid in any case) was/would be incidental to this primary purpose.
The property was listed on Air BnB in order to satisfy the requirements of the planning consent, but the property had not been actively marketed and no lettings had taken place.
Mr Spani contended that the use of the cottage “falls far short of the HMRC’s position that it was the appellant’s intention to use the property for a wholly commercial purpose”. It was simply the appellant’s home in the UK and that an identical property built outside the National Park would not have the Planning Permission holiday let requirement.
Further, if it was a commercial enterprise, Mr Spani could have could have used another reclaim route, viz: registering for VAT and recovering an element of the input tax incurred.
Decision
The appeal was dismissed – The judge opined that “none of these events subsequent to the grant of the Planning Permission and completion certificate detract from the fact that the property was built to be a holiday let (as stipulated by the planning consent) and was therefore constructed in furtherance of a FHL* business”.
Additionally, the FTT stated that: it is plain that the appellant’s plan to live in the property within the FHL regulations does not (and cannot) alter the property into a dwelling… when there is the express prohibition placed on the property to be a dwelling.
The conclusion was that the property was built in furtherance of a business which prohibited a claim.
Commentary
Yet another case highlighting precise requirements of a claim under the scheme and HMRC’s strict application of the rules. Care must always be taken in such cases and we advise professional advice is sought prior to a submission of a claim.
More on similar cases here and here and Top Ten Tips for the scheme.
VAT Notice 706 has been updated on he option to send an email to get an approval for a partial exemption special method has been removed from sections 6.2, Appendix 2 and how to apply.
Para 6.2 – “Get approval for a special method
You cannot change your method without our prior approval. You must continue to use your current method, whether that is the standard method or a special method, until we approve or direct the use of another method or direct termination of its use.
You can get approval for a special method by using the online service.
If you are unable to use the online service, contact VAT Written Enquiries team by post.
You must explain clearly how your proposed method will work, you should see Appendix 2 in this guide.
When you propose a special method you must include a declaration that the method is fair from its effective date of application, and for the foreseeable future so that from its effective date a fair amount of input tax is recovered”.
Examples of special methods (PESM) are:
Partial Exemption guidance here
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
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
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.