Tag Archives: tribunal

VAT – Latest from the courts: impact of outside the scope income

By   25 July 2016
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Outside the scope (of VAT)  income leads to loss of input tax: Upper Tribunal (UT) decision

In the recent UT case of VCS it was decided that input tax relating to outside the scope activities of the appellant was not recoverable.

Background

VCS is a car park operator, which manages and operates car parking for its clients on private land. Inter alia, providing parking control services, including the issue of parking permits and enforcement action (solely at the discretion of VCS).

In practice, most of VCS’s revenue is derived not from providing parking permits, but from parking charge notices (“PCNs”) which it issues to motorists who are in breach of the rules for parking in the car parks. In the period considered, approximately 92% of VCS’s income came from PCNs, and just 8% from parking permits. In March 2013 the Court of Appeal (CoA) decided that the PCN revenue was not subject to VAT. This was because VAT is chargeable only in respect of revenue from the supply of goods or services. The CoA held that the PCN revenue was not earned in respect of supplies of services liable to VAT. Rather, the PCN revenue represented damages for breach of contracts between VCS and the motorists and/or damages for trespass by the motorists.

Decision

The UT agreed with the First-tier Tribunal’s decision that that VCS was not entitled to recover input tax that related to outside the scope (PCN) income and that it was reasonable to assume that since 92% of the income generated by VCS was outside the scope of VAT, only 8% of the input tax incurred on its costs should be deductible.

Commentary

It is clear that there is a direct link between the general overheads of the business in respect of which VCS incurred input VAT and both VCS’s taxable supplies of parking permits and the PCN income.  The appellant’s contention that a taxable person (such as VCS) is entitled to deduct all the input tax if the goods or services are used to any extent for the purposes of taxed transactions was doomed to failure and the chairman stated that “…we accept HMRC’s interpretation of Article 168 PVD. Accordingly, where purchased goods or services are used by a taxable person both for transactions in respect of which VAT is deductible (ie; taxable supplies) and for transactions in respect of which VAT is not deductible (ie; where the transactions do not constitute economic activity or do not constitute taxable supplies (even though they may be transactions undertaken in the course of a taxable person’s business) or where the supplies are exempt), VAT may only be deducted in so far as (that is, to the extent that) it is attributable to taxable supplies.”.

There are no surprises in this decision, but it serves as a timely reminder that not only is “VAT free” income not always a beneficial treatment, but any income that does not relate to a business’s’ taxable supplies can create costs and complexities, whether it be outside the scope, non-business, or exempt.

Outside the scope income can be received by any business in certain circumstances, and it must be recognised in its VAT reporting as this case demonstrates that not all input tax may be recovered and there is no de minimis for input tax attributed to outside the scope and non-business, it is simply not input tax.

Full case Vehicle Control Services Limited (VCS)

VAT – The “business” of shooting; a tale

By   15 July 2016
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Sometimes one is involved in a dispute which goes to the core of the tax.  This is a case which highlights basic VAT principles, HMRC’s approach to an issue and the lengths to which a taxpayer has to go to defend his position.

Are you sitting comfortably?

A day out in the countryside; striding across beautiful landscape, amongst friends, enjoying each other’s’ company and a bit of sport – can this really be the subject of such intense debate with HMRC? Well, unfortunately this seems to be the case when it comes to the operation of a day’s shooting. In the eyes of the taxman, whether or not a profit or a surplus is achieved, shooting, conducted in the course of furtherance of a business is subject to VAT.

This is not usually an issue which shooting syndicates find themselves having to address; they are not concerned with the ins and outs of what constitutes a business for the purposes of the VAT legislation. However, HMRC was pursuing this issue in earnest and they have a team devoted solely to attacking shoots.

Who is HMRC targeting?

HMRC seem to be focusing on syndicate run shoots which are not registered for VAT but who HMRC believe are operating on business principles. If an organisation is operating as a business then it may be liable to register for VAT if certain income thresholds are exceeded. The shoot will then have to charge output VAT on the supplies it makes.  In my case there would have been a significant assessment plus penalties and interest which could double the past VAT bill.

How is HMRC attacking the issue?

HMRC is looking closely at the specific activities of syndicate shoots in order to build an argument demonstrating that the organisation of the shoot is run on “sound business principles”.  The reason that there is room for debate on this matter is that what constitutes a business is not explicitly defined anywhere in the VAT legislation either in UK or EC law. Rather, the issue has been defined in case law.

The defining case was Lord Fisher, which co-incidentally also concerned a shoot. This case is relied upon throughout the VAT world to give guidance on what constitutes a business – and not just in respect of shoots but for all types of activity.

Anyway, back to this syndicate…

I was involved in a battle lasting four years which concerned a local shoot run for over five decades by a group of friends and which was provided only for the benefit of the syndicate members. The shoot was not open to the common commercial market place or members of the public and the shoot did not advertise. HMRC spent a great deal of time trying to understand the finer details of the running of this shoot and concluded that it was a business

We advised The Shoot to appeal to the VAT Tribunal against HMRC’s decision to levy VAT on its activities.

They key to the syndicate’s defence was to demonstrate that no true business would operate commercially in the way that The Shoot does.  If it did, it would be completely unprofitable and would soon be out of business. To demonstrate this effectively, every aspect of the shoot was examined in detail and compared and contrasted with the way a commercial shoot operates. This involved everything from the lunch arrangements, CVs of the gamekeepers and how beautiful the land is, right through to whether chicks or poults are purchased and whether local deer were sold to the highest bidder. However, the most important factor was the demonstration that the syndicate does not have a profit built in to the cost structure and the amounts that the syndicate members contribute. The syndicate is 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.”

It all sounds so simple to those familiar with the industry but unfortunately from a VAT ‘business’ perspective it has been a long, stressful and costly argument for the appellant to make.  A few days before the case was to be heard at the Tribunal, HMRC withdrew their assessment and conceded the case.

HMRC had seen the many witness statements filed by the members of the syndicate waxing lyrical about how this was an age-old hobby run by a few friends and in no way could it be considered a commercial business. They had seen the expert witness report written by a specialist in the field. The distinctions made between commercial and syndicate shooting were made very clear. They had also seen the powerful argument which concluded that the shoot “cannot seriously be suggested to amount to a ‘business’ for the purpose of the VAT code”.

What this means?

Of course this victory over HMRC was a fantastic result for the members of the The Shoot, but from a practical point of view quite frustrating in that the case was not heard; denying other entities the benefit of the predicted victory.  Alas, it was one case that HMRC could not afford to lose.

It is therefore likely that HMRC will continue to target other shoots where they think they can ‘win’ or at least not be challenged.

Have you been affected? – What should you do next?

If this makes for frighteningly familiar reading and you or your local syndicate shoot are, or have been, under HMRC investigation then it is vital that you should take professional advice.  As we orchestrated the defence for The Shoot we are the leading advisers in such matters.

 For completeness, the six tests derived from the Lord Fisher case (and others) are: 
  1. Is the activity a serious undertaking earnestly pursued?
  2. Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  3. Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  4. Is the activity conducted in a regular manner and on sound and recognised business principles?
  5. Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  6. Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
 The recent case of Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft is also helpful in looking at what a business is details here

VAT – Latest from the courts: Royal Mail claims (Zipvit)

By   4 July 2016
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The Upper Tribunal (UTT) decided that VAT incurred on the receipt of certain postal services is not recoverable.

 Brief background

It is estimated that businesses could have recovered more than £220 million of credit for input tax on RM’s postal services had the decision gone in their favour.

It has previously been decided that certain supplies made by Royal Mail (RM), including Parcelforce, to its customers were taxable. This was on the basis of the TNT CJEU case. RM had treated them as exempt. HMRC was out of time to collect output tax, but claims made by recipients of RM’s services were able to make retrospective claims. These claims were predicated on the basis that the amount paid to RM included VAT at the appropriate rate (it was embedded in the charge) and that UK VAT legislation stipulates that the “taxable amount” for any supply, is the amount paid by the customer including any VAT included in the price.

Decision

The UTT has agreed with the verdict in the FTT hearing that the appellant: Zipvit Limited (along with many other taxpayers) was unable to recover input tax claimed to be embedded the value of the supply by RM.  Regardless of the arguments on the embedded input tax point (and interesting comments on the absence of a correspondingly equal amount declared as output tax by RM) the UTT agreed with the overall finding by the FTT.  Although a This is a highly technical issue, the deciding point was the simple fact that as the claimant did not have valid tax invoices to support the claim it was invalid.  Additionally, it was decided that although HMRC may consider alternative evidence, in these circumstances they were not obliged to accept other documentation and that Zipvit’s claim therefore failed.

Action

We are aware of many appeals being stood behind Zipvit. This case clearly is unhelpful for claims, but it may not be the end of the process.  We will advise on any further progress of the appeal when that information is available.

Please contact us if you have any queries on this case.

Full case here Zipvit Limited

VAT Latest from the courts – what is a business?

By   8 June 2016
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In the CJEU case of * * takes a deep breath * * Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft the court considered whether these Not For Profit companies were making taxable supplies (economic activity). This then dictated whether input tax incurred by them was recoverable.

As a starting point, it may be helpful to look at what the words “economic activity”, “business”, “taxable supplies” and “taxable person” mean:  The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning.  Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have only recently ended a dispute over this definition for a (as it turns out) very happy client.  In the UK the tests were set out as long ago as 1981 and may be summarised as follows:

Is the activity a serious undertaking earnestly pursued?
Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind that exempt supplies can also be business)?
Is the activity conducted in a regular manner and on sound and recognised business principles?
Is the activity predominately concerned with the making of taxable supplies for a consideration?
Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

If there is no business, an entity cannot be making taxable supplies.

In EC Legislation,  Article 9(1) of Directive 2006/112 provides: that “a ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.”

The case

The case involved the Not For Profit companies constructing and operating a water disposal system. When complete, it was intended to charge a “modest” fee to users of the system.  The companies engaged in economic activities that were not intended to make a profit and only engaged in a commercial activity on an ancillary basis.

The majority of the funding for the work was provided by State (Hungarian) and EC aid.  The Hungarian authority formed the view that, because a nominal fee was charged this did not amount to an economic activity and so there was no right to deduct input tax incurred on the costs of getting the system operational.  The CJEU went straight to judgement and decided that the construction and operation of the system could rightly be regarded as an economic activity and found for the taxpayer. It also provided a very helpful and clear summary in respect of “business” by commenting that “… the fact that the price paid for an economic transaction is higher or lower than the cost price, and, therefore, higher or lower than the open market value, is irrelevant for the purpose of establishing whether it was a transaction effected for consideration …”.

NB: The one area that the CJEU did refer back to the National Court however, was whether the transaction at issue in the case was a wholly artificial arrangement which did not reflect economic reality and was set up with the sole aim of obtaining a tax advantage.

It is interesting to compare this finding with the UK case law above, especially the points concerning “a certain measure of substance in terms of the quarterly or annual value of taxable supplies made” and “sound and recognised business principles”. I strongly suspect that what constitutes a business will continue to occupy advisers and HMRC and throw up disputes until the end of time (and/or the end of VAT….).

Full case here

VAT – Latest from the courts. More on separate and composite supplies and land exemption

By   17 May 2016
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TC05078 Blue Chip Hotels Ltd

This is a FTT case which considered the VAT analysis of a supply in two ways. The appellant was an hotel which offered a wedding “package”. The package comprised; a room which was licensed for civil wedding ceremonies, the hire of other rooms, catering, accommodation, car parking and the use of the grounds for photographs.  The only activity carried out in the “wedding room” was the wedding ceremony itself.  The hotel treated the hire of the wedding room as exempt and added VAT to the remainder of the package.

The two technical points were:

  1.  Was the supply of the wedding room a separate supply to the rest of the wedding package as advanced by the taxpayer, or was it one element of the overall package to which standard rating applied?, and;
  2. If an independent supply, was it an exempt supply of land under VAT Act, Schedule 9, Group 1 as argued by the appellant?

Somewhat to the puzzlement of the Tribunal, HMRC had accepted that if the wedding room was supplied without any other element of the wedding package it could be treated as an exempt supply of land.

On the first point the Tribunal decided that the hire of the wedding room should be treated as a separate supply for VAT purposes. However, this was only relevant if the taxpayer could demonstrate that the provision of the wedding room was a supply of land.

On the second point, the issue was whether what the hotel supplied was more than the mere hire of the wedding room as a passive letting of land. The tribunal was of the view that an additional service was being provided, this being the service of a legal wedding ceremony which could be carried out only because of the licensed nature of the wedding room.  That is; what was being paid for was the right to participate in a particular event, only part of which entailed the provision of the physical space in which that event occurred.

The Tribunal concluded that the supply of the wedding room could not be treated as an exempt supply of land via VAT Act, Schedule 9, Group 1, the provision of licensed premises in which a civil wedding could legally be carried out went beyond the passive letting of land and was outside the scope of the exemption.

This seems to go against the decision in Drumtochty Castle Ltd (TC2111) inter alia, where the Tribunal found that in similar circumstances to those in this instant case that what was being offered was a single package such that exemption could not be applied to certain elements. Although it may simply demonstrate that even subtle differences in the facts can result in a different VAT outcome.  As previously observed in a number of these types of cases, it is crucial to analyse precisely what is being provided, even in cases where the VAT treatment has remained unchanged for a number of years.  Case law develops at a very fast rate and legislation changes regularly, both of which can affect the tax position.

VAT – Spot The Ball – Latest from the courts

By   9 May 2016
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Is Spot The Ball a game? And if it is, is it a game of chance? (And therefore exempt from VAT).

In the case of IFX Investment Company Ltd & ORS the main issue was whether the First-tier Tribunal (FtT) were wrong to hold that the appellants’ “Spot The Ball” competitions was exempt under the gaming exemption in Value Added Tax Act 1994, Schedule 9 Group 4. To fall within the gaming exemption, Spot The Ball must be a “game of chance” within the meaning of the Gaming Act 1968. The dispute was over the word “game” and the words “of chance”.

The Court of Appeal (CoA) considered whether the FtT decision in favour of the appellant that the supply was exempt or whether HMRC’s successful appeal to the Upper-tier Tribunal (UtT) should stand.

The court heard form the promoters that while there was an element of skill in determining roughly where the panel that decided where the ball should be would actually place it, the precise placement of the cross was essentially a matter of chance.  HMRC insisted that the competitors were not “playing a game” as they advanced the argument that a “game” required interaction between the players. and therefore Spot The Ball could not be considered playing a game of chance such that the supply is standard rated.

The UtT  deemed that Spot The Ball is “played” in “solitary isolation” and does not involve any interaction between competitors. The only contract is between the operator and the individual competitor. Additionally the act of placing a cross on the coupon was not “playing”

The CoA disagreed with the UtT’s decision and concluded that the FtT made a finding that Spot The Ball was a game of chance and there was no reason to disturb this decision. The FtT was correct to hold that there is no inter-player interaction rule. Previous case law clearly contemplates that there can be a game without the contestants being in communication with each other. Consequently, it restored the FtT’s decision and the supplies are exempt.

This case has brought home to me two (non-VAT) things; 1) That Spot The Ball is still around, and that 2) I always thought that one had to actually put a cross where the ball actually was, rather than where a judging panel thought the ball was likely to be.  One lives and learns. I’m also constantly surprised that “the pools” still exist in these days of lotteries and lotto and other promotions.

Case here

VAT – Latest from the courts; use and enjoyment provisions

By   25 April 2016
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Telefonica Europe Plc and Telefonica UK Limited 

The VAT Use and Enjoyment provisions set out an additional layer of rules which establish the place of supply of certain services. They apply to; telecommunications and broadcasting services; electronically supplied services (for business customers); hired goods; and hired means of transport. Broadly, effective use and enjoyment takes place where a recipient actually consumes the services, regardless of any contractual arrangements, payment, or beneficial interest. The intention of this provision is to correct instances of distortion which remain as a result of considering only where the provider and the customer belong. HMRC give the example of supplies such as telecommunications services which are actually consumed outside the EC, to be subject to UK VAT. Of course, the converse is that it would be distortive for there to be no EC VAT on such services where they are consumed in the UK.

In the Upper Tribunal case of Telefonica Europe Plc and Telefonica UK Limited the dispute involved the way in which the appellant calculated the value of its mobile telephone services which were used and enjoyed outside the EC (and thus UK VAT free). Over a number of years Telefonica had an agreement with HMRC whereby the amount of outside the EC supplies was calculated by reference to revenue, ie; comparing call, text and data income relating to non-EC supplies to total income.

HMRC subsequently formed the view that this method of calculation was distortive because higher charges were made to non-EC users than EC consumers.  HMRC proposed a “usage methodology” which used call times, texts sent and volume of data used. As may be expected, this resulted in a lower percentage of supplies that were outside the scope of UK VAT thus increasing HMRC’s VAT take.

The appellant contended that the usage methodology was contrary to EC and UK VAT legislation.  Not surprisingly, the UTT rejected this argument, deciding that Telefonica had not established that HMRC’s proposal was unlawful.

So then the outcome would be expected to be that the usage methodology should be used, but no.  It was decided that the most accurate method would be one based on the time a customer has access to the network outside the EC; which differs from both the usage and revenue methods. 

This type of dispute is quite common and also appears regularly in partial exemption situations. There are nearly always alternative ways to view apportionment calculations and it pays to obtain professional advice; not only to ensure that a fair result is achieved, but as assistance with negotiations (which may avoid having to go to Tribunal).  

VAT Latest from the courts: Stocks Fly Fishery – single or multiple supply?

By   19 April 2016
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As many will know, there is a significant amount of case law concerning what may be treated as a composite supply at one VAT rate, and what are separate supplies at different VAT rates.  The latest in this series is the First Tier Tribunal case of Stocks Fly Fishery

The appellant is a trout fishery  in the Forest of Bowland. They argued that they supplied standard rated fishing and a distinct zero rated supply of fish for human consumption.

They provided two types of daily ticket which was required to fish the reservoir. The first was a sporting ticket, which entitled an angler to fish, but any fish caught must be returned to the water. The second was a take ticket which also enabled a person to fish but any fish caught (up to a certain number) may be taken away for food.  A take ticket was more expensive than a sporting ticket. The more fish that were taken away, the more expensive the take ticket was.  The taxpayer formed the opinion that it made two supplies; one of fishing which was agreed to be standard rated, and one of food for human consumption (the trout) which was zero rated. The value of the zero rated element was said to be the difference between the sporting ticket price and that of the take ticket.

The issue was whether the ability to take away the fish for food was a separate supply, or ancillary to the substantive supply of fishing.

The appellant cited  Hughes v Pendragon Sabre Ltd (t/a Porsche Centre Bolton) while HMRC relied on Chalk Springs Fisheries (1987) (LON/86/706) Roger Cambrai Haynes (1988) (LON/87/624) and Card Protection Plan Ltd v Commissioners of Customs and Excise.

As an observation, the chairman in the Chalk Springs Fisheries case stated “…No trout is, in my view, supplied to him at all. Instead the fisherman must go out and catch them, if he can.”  This was obviously quite unhelpful to the appellant. Additionally, the chairman was obliged to follow the well-known Card Protection Plan case which sets out guidance on matters such as this.

Decision

The FTT decided that the essential feature of the transaction was fishing and the dominant motive of anglers going to the fishery was to fish, regardless of which type of ticket was purchased. Therefore, the right to fish had to be regarded as constituting the principal service and the right to kill and keep the trout fish, if caught, should be regarded as ancillary to that principal purpose. Therefore there was a single standard rated supply of fishing.

It is always worth reviewing whether supplies made by a business can, and ought, to be treated separately, or as a single bundle. The existence of such a massive amount of case law on this subject indicates that this issue will continue to run and run.

Please contact us should this matter raise any concerns or present a possible opportunity.

VAT – Latest from the courts: Frank A Smart & Son Limited

By   4 April 2016
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Recovery of input tax incurred on the purchase of Single Farm Payment Entitlement (SFPE) units.

HMRC often reject claims for input tax as they consider that they relate to non-business activities, or more nebulously the costs are not reflected in the prices of supplies made by the claimant (the so called “cost component” approach).  This very helpful Upper Tribunal (UT) case provides insight into the logic applied by HMRC in reaching a decision to disallow a claim for VAT incurred.

This was a company which farmed land and also paid VAT on the purchase of SFPE units.  These units entitled the company to receive benefits via the EC Single Farm Payment Scheme.  HMRC contended that the receipt of the SFPE payments was non-business, or in the alternative, they were not a cost component of any taxable supply made by the farming company.

The UT refused HMRC’s appeal against the initial FT-T decision in favour of the appellant.  It found that there was sufficient evidence that the purchase of the SFPE units (and the income which resulted in the acquisition of them) was not a separate activity to the farming supplies so the non-business argument did not apply.  Further, the Chairman stated that “…it is unnecessary for the company to prove that the cost in question was actually built into the price charged for the supply”. Therefore the cost component contention put forward by HMRC also failed.

The Chairman’s comments appear to go against HMRC’s published guidance on “direct and immediate link with the taxable person’s business”, particularly in respect of holding companies.

If you are aware of any situation where HMRC have disallowed claims for input tax for either non-business or non-cost component reasons please contact us as this case may be of benefit.

Full decision here

VAT Latest from the courts – importance of invoicing requirements

By   16 March 2016
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In the recent case of Gradon Construction Ltd the validity of invoices was considered and whether input tax could be recovered in respect of them.

HMRC disallowed a claim for input tax on the basis that the supplier had retrospectively deregistered on a date prior to the date shown on the invoices.  The Tribunal decided that this was not a reason to disallow the claim.  However, it decided that the claim should be disallowed on the grounds that the invoices did not contain a description sufficient to identify the goods or services supplied, nor did they provide the quantity of the goods or the extent of the services as required by legislation.  Consequently, the documents did not meet the requirements of a valid tax invoice with the result that the recipient could not recover the amount on the documents which purported to be VAT.  HMRC has the discretion to accept alternative evidence in lieu of an invoice, but in this case the Tribunal decided that HMRC acted reasonably in not accepting any other documentation, so the recipient of the supply could not recover the input tax.

This case again highlights the crucial importance of primary documentation when it comes to VAT.  A full guide to invoices here

Information on input tax that it is not possible to claim here https://www.marcusward.co/what-vat-cant-you-claim-2/

It is crucial that a business’ invoices meet all the requirements, and that a procedure is in place to check the validity of invoices received in order to determine whether the input tax is claimable, or whether the invoice issuer should be contacted so that a valid tax invoice may be obtained.