Tag Archives: tribunal

VAT: Evidence for retrospective claims – new guidance

By Marcus Ward 14 March 2023

HMRC has updated its Manual VRM9300 on historic VAT claims.

These types of claims are often called “Fleming” claims and refer to those made before the introduction of the four (once three) year time cap. Such claims extend beyond the period that businesses were required to keep business records and so these were less likely to have remained available.

Standard of Proof where records are unavailable

Where detailed records are unavailable it does not mean there is a lower standard of proof for a claim. The civil standard of proof (on a balance of probabilities) remains.

However, taxpayers’ estimates, assumptions and extrapolations must be sufficiently robust to support a claim. HMRC and the Tribunals must have regard to the evidence that is available, and each claim must be considered on its individual merits.

HMRC state that it “…is not obliged to accept a figure simply because some input tax is due or because it is the claimant’s ‘best guess’ based on the material available”. The claimant must first establish that its method of valuing the claim is reasonable and provide an identifiable repayable amount.

The guidance considers the judgement in the NHS Lothian [2022] UKSC 28 case and its impact on claims where full evidence is unavailable.

Alternative evidence

It is also worth noting that HMRC have the discretion to accept alternative evidence.

VAT: Alternative Dispute Resolution (ADR) new guidance

By Marcus Ward 14 February 2023

HMRC has published an updated Internal Manual which provides guidance on the ADR mechanism. I have written about this in detail here.

What is ADR?

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

Changes

The changes are mainly in connection with disagreements about whether a case is suitable for ADR. These include cases where requests have been made for ADR, for example:

requests from taxpayers for ADR where the HMRC decision is that the case is not suitable for ADR
requests from taxpayers for ADR where some of the HMRC case team believe the case is unsuitable, but other members of the team believe the case may be suitable
referrals from HMRC for complex or sensitive cases where they would like to offer ADR to the taxpayer

An ADR Panel, which consists of senior personnel from HMRC, will consider requests for ADR in circumstances where there is uncertainty about the suitability of a case for ADR. The ADR Panel will aim to provide assurance that applications by taxpayers in the most complex or potentially contentious cases for ADR are properly assessed and that decisions are consistent and principled.

VAT: DIY Housebuilders’ Scheme – The Dunne case

By Marcus Ward 6 February 2023

Latest from the courts

The First-Tier Tribunal (FTT) case of Daniel Dunne demonstrates the fact that the details of the construction are very important when making a claim under the DIY Housebuilders’ Scheme (the scheme)

Background

Mr Dunne applied for planning permission (PP) for a rear extension to his existing house, which was granted. After completion of the building works a Building Control Completion Certificate was issued which described the relevant works as “construction of a single storey extension to the rear” of the property. The appellant submitted a scheme claim which HMRC rejected.

Technical

Superficially, the legislation covering the scheme: The VAT Act 1994 section 35 states, as relevant:

“(1) Where—

(a) a person carries out works to which this section applies,

(b) his carrying out of the works is lawful and otherwise than in the course or furtherance of any business, and

(c) VAT is chargeable on the supply. or importation of any goods used by him for the purposes of the works,

the Commissioners shall, on a claim made in that behalf, refund to that person the amount of VAT so chargeable.

(1A) The works to which this section applies are—

- the construction of a building designed as a dwelling or number of dwellings…
- The notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group.

The notes to Group 5 of Schedule 8 state, as relevant:

…(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied—

(a) the dwelling consists of self-contained living accommodation;

(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and

(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent….

…For the purpose of this Group, the construction of a building does not include—

(a) the conversion, reconstruction or alteration of an existing building; or

(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or

(c)…, the construction of an annexe to an existing building…”

excludes a claim as the construction was an extension rather than a “dwelling”. The PP plans showed the extension as a square building connected to the existing residential property by a corridor.

However, Mr Dunne’s evidence was that although the initial plan had been for the rear extension to be attached to the existing property, the plans were changed so that it became a standalone detached building, unconnected to the existing property and the building is therefore a detached bungalow. He discussed the changes informally with the local authority building control, who agreed that he did not need to build the corridor connecting the building to the existing property. The fact that they had issued the planning certificate was, he contended, evidence that the building was compliant with the planning department requirements and so should be regarded as being PP for a dwelling.

HMRC contended that, even without the corridor, the PP was for an extension of the existing building and not for a separate dwelling. An extension is specifically precluded from being the construction of a building by note 16 of the notes to The VAT Act 1994, Schedule 8, Group 5. The construction was not in accordance with the planning consent given by the local authority and so the claim could not be accepted.

The respondents further submitted that the building could not be disposed of separately to the existing building and that although the building had a separate postal address this did not create a separate dwelling.

Decision

The FTT found that for a claim to succeed, it is not sufficient that a standalone building was created; the PP must be for a dwelling. The PP, as informally amended, was for the extension of an existing dwelling and not for the creation of a new dwelling.

The relevant PP correspondence did not contemplate, let alone confirm, that approval was given for a new dwelling. The agreed informal amendment, to remove the connecting corridor from the plans, cannot be interpreted to imply a grant of permission for a dwelling.

The statutory requirements for a claim include the requirement that PP has been granted in respect of a dwelling and that the construction is in accordance with that planning consent. It was found that PP (and its informal amendment) was granted for an extension and not a dwelling, and so it followed that appeal could not succeed.

Commentary

It is crucial for a claim to succeed that all of the conditions of the scheme are met. Any deviation will result in a claim being rejected. It is usually worthwhile having any claim reviewed professionally before submission.

Further

More information and Scheme case law here, here and here, here and here.

VAT: TOMS – negative margin permitted? The Square case

By Marcus Ward 31 January 2023

Latest from the courts

In the First-Tier Tribunal (FTT) case of The Squa.re Limited (TSL) the issue was whether unsold inventory or inventory sold at a loss could affect the calculation of the Tour Operators’ Margin Scheme (TOMS).

Background

TSL provided serviced apartments to travellers. The company leased accommodation from the owners of the properties who were frequently, if not exclusively, private individuals who were not registered for VAT.

These leases were often for an extended period, eg; annual leases, such that the appellant is committed under the terms of the lease even where the accommodation cannot then be on supplied or not supplied for a profit.

The Issue

The issue was whether TOMS operated in such a way as to permit a negative calculation resulting in repayment to the appellant. HMRC issued an assessment because, while they accepted that there may be a zero margin on a TOMS supply, they considered that a negative margin was not permitted by the scheme. TSL maintained that a repayment of overdeclared output tax was appropriate if a loss was made (an “overall negative margin”) as TOMS does not exclude the possibility of a negative margin.

The dispute between the parties was a technical one only and concerned the interpretation of the statutory provisions implementing TOMS into UK law.

Legal

The domestic implementation of the TOMS is authorised by The Value Added Tax Act 1994, Section 53 and found in Value Added Tax (Tour Operators’) Order 1987 (SI1987/1806). Guidance is provided via Notice 709/5 and Sections 8 to 13 have the force of law.

Decision

The Tribunal determined that it was clear from the legislation that the taxable amount is concerned with the supply made, and not the VAT incurred on the various cost components. Under normal VAT accounting the output tax charged on supplies is calculated by reference to the consideration received by the supplier from the customer. There can realistically be no concept of negative consideration.

The FTT considered that there is no basis inherent within TOMS which would permit a calculation of a negative sum. There had been a supply (of a designated travel service) for a consideration, and it is the taxable amount of that supply which was to be determined. A negative taxable amount is a “conceptual impossibility”. A negative margin arises as a consequence of a lack of profitability, but VAT is a transaction tax and not a tax on profit.

When sold at a loss where the total calculation resulted in a negative margin the annual sum due by way of output tax would be nil (not a repayment).

Where the accommodation is not sold at all, the FTT noted that this cost represented a cost of doing business but, on the basis that there has been no onward supply, there is no supply which meets the definition of a designated travel service. The relevant accommodation is not for the direct benefit of any traveller so there is no supply and TOMS is irrelevant.

Whilst the FTT considered that were it the case that identified costs incurred in buying in goods and services which are not then the subject of an onward supply should be excluded from TOMS calculations, costs associated with the block booking of accommodation of the type incurred by TSL were to be included. Where such costs exceed the value obtained by onward supply, the negative margin forms part of the annual calculation. However, where the global calculation results in a negative margin the tax due for the year under TOMS is nil and there was no basis for a repayment to TSL.

There was no basis on which to permit an overall TOMS negative margin and the appeal was dismissed.

Commentary

Another demonstration of the complexities of TOMS and the potential pitfalls.

It may be useful to note that input tax claims are not permitted in TOMS calculations, however, any VAT incurred on any bought in, but unsold, services would not be excluded from recovery as there is no TOMS supply. The input tax on unsold inventory was a general cost of doing business and, as such, recoverable in the normal way. Consequently, there may be circumstances for businesses using TOMS where input tax incurred on unsold elements may be claimed outside of TOMS

VAT: Is dog grooming taught in schools? The Dogs Delight case

By Marcus Ward 15 February 2022

Latest from the courts

In the Julie Lalou t/a Dogs Delight First Tier Tribunal (FTT) case the issue was whether the teaching of dog grooming qualified as private tuition and was therefore exempt.

Background

The Appellant operated a business providing dog grooming and dog grooming courses. The appeal was concerned only with the supplies of dog grooming tuition as it was accepted that dog grooming in itself is taxable.

Technical

The sole issue in dispute in this appeal was whether the supplies fall within the private tuition exemption as for provided by The Value Added Tax Act 1994, Schedule 9, Group 6, item 2 “The supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer”.

HMRC’s view was that “to be eligible for exemption dog grooming would need to be a course that is ‘ordinarily’ taught in schools and universities which it is not…”

The appellant wrote to HMRC giving a list of seven “local Colleges and Universities where the Level 3 Dog Grooming Diploma is ordinarily taught”. The appellant went on to state “There are many more within the UK” which were said to represent around 30% of English colleges. Further it was stated that the business was a City & Guilds approved centre and that the courses were not recreational.

Decision

It was accepted that the courses that the appellant taught involved her making supplies of tuition in that she transferred to her students skills and knowledge.

But, unsurprisingly, the appeal was dismissed. The appellant had failed to demonstrate that dog grooming is taught at a wide number of schools and universities

The court also determined that the appellant needed to provide some evidence of whether dog grooming was taught at schools and universities in the EU (again, something she had failed to do).

Commentary

The exemption for private tuition is fraught with complexities and the amount of case law on the subject is significant, which indicates the difficulties in analysing the VAT position. An example here. It is important to establish what is being provided and that research is carried out to consider the degree of ubiquity of the subject in education. A general guide to education here. The phrase “ordinarily taught” is rather nebulous and it would be prudent to obtain as much evidence as possible that a subject is s commonly or ordinarily taught in schools and universities if a supply is treated as exempt.

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!

VAT: Intention is crucial – The Sonaecom case

By Marcus Ward 18 May 2020

We cannot control the future…

The Sonaecom case

In the opinion* of the CJEU AG (C-42/19) the importance of a taxpayer’s intention was of utmost importance, regardless of whether that intention was achieved.

Background

Sonaecom intended to acquire a telecoms provider company. As is usual in such cases, input tax was incurred on consultancy received, from, amongst others; accountants and legal service providers. The intention post acquisition was for Sonaecom to make certain charges to the acquired co. These would have been taxable supplies.

Unfortunately, the intended purchase was aborted.

The issue

The issue before the AG was; as no taxable supplies took place as the deal fell through – to what should the input tax incurred on advice be attributed?

Opinion

In the AG’s view the fact that the acquisition was aborted was no reason for the claim for input tax to denied. This was based on the fact that:

Sonaecom was not a “pure holding company”
There was a genuine intention to make taxable supplies (to the acquired co)
There was a direct and immediate link between the costs and the intended supplies
Although the acquisition costs would exceed the proposed management charges, this was not a reason to invalidate the claim
The above analysis was not affected by the fact that the transaction did not take place

Commentary

There are often issues in relation to intentions of a taxpayer. It is clear, and was emphasised in this case, that intention is all important. Of course, intentions can change over a period of time and commercial and political events may thwart or cause intentions to be re-evaluated. There is often an issue about evidencing an intention. HMRC usually require comprehensive documentary evidence to demonstrate an objective. Such evidence is sometime not available for various reasons. Consequently, it is prudent for businesses to record (board meeting minutes etc at the very least) the commercial reasons for taking a certain course of action. This issue quite often arises in transactions in land and property – which can create additional technical issues.

There is legislation in place to cover situations when intentions, or actual events change and which affect the original input tax position: The Capital Goods Scheme (CGS) and The Value Added Tax Regulations 1995, Regs 108 and 109.

Other areas of VAT which often to raise issues are management charges and holding companies. HMRC apparently continue to be eager to attack taxpayers in these areas and I have looked at the role of holding companies and the VAT treatment here, here and here.

I think it is useful to bear in mind a question which, in itself does not evidence an intention, but provides commercial coherence – Why were the costs incurred if there was no intention to make the acquisition? This does leave aside the future management charges position but goes some way to provide business logic.

It will be interesting to see how this case proceeds, but I would find it very surprising if the court diverges from this AG opinion.

* AG’s Opinion

The Court of Justice of the European Union (CJEU) consists of one judge from each Member State, assisted by eleven Advocates General whose role is to consider the written and oral submissions to the court in every case that raises a new point of law, and deliver an impartial opinion to the court on the legal solution.

VAT Notice 700/57 Administrative agreements with trade bodies – Update

By Marcus Ward 5 May 2020

HMRC has published an updated version of VAT Notice 700/57: Administrative agreements with trade bodies.

This is an unusual publication as it lists situations where there are, or can be, deviations from “normal” VAT rules.

The agreements in the Notice permit members of trade bodies to use procedures which take into account their individual circumstances so they may meet their obligations under VAT law. The agreements apply only to areas where HMRC can exercise discretion, and HMRC say that they convey no direct financial advantage or relief from the legal requirements of the tax. However, there can be benefits a business can derive from the arrangements, including, but not limited to; simplification, cashflow, compliance and management.

The agreements can provide unique solutions to particular problems and reduce the burdens on businesses. Some of them might usefully be applied by other businesses, but it should be born in mind that a business cannot adopt any special method based on these agreements unless HMRC has given approval in advance.

The trade bodies covered in the Notice are:

London Bullion Market Association

Brewers’ Society

Association of British Factors and Discounters

Finance Houses Association Ltd

Association of British Insurers

Association of Investment Trust Companies

British Printing Industries Federation

Marine, Aviation and Transport Insurance Underwriters

Association of British Insurers, Lloyd’s of London, the Institute of London Underwriters and British Insurance and Investment Association

National Caravan Council Limited and the British Holiday and Home Park Association Limited

Association of Unit Trust and Investment Managers

British Bankers’ Association

British Vehicle Rental and Leasing Association

Society of Motor Manufacturers and Traders

Gaming Board for Great Britain and the British Casino Association

British Phonographic Industry

Thoroughbred Breeders Association and the British Horseracing Board

Meat and Livestock Commission

Society of Motor Manufacturers and Traders Limited

Retail Motor Industry Federation

if you or your clients are involved in business covered by, or similar to, the above entities, it maybe worthwhile considering whether any specialised trade agreements may be of benefit.

VAT: zero rating of e-publications brought forward – to tomorrow

By Marcus Ward 30 April 2020

Further to the history of objection to reduce rating e-publications, and the 2020 budget announcement which stated that e-publications will be zero rated from 1 December 2020, the Chancellor of the Exchequer has today announced that this date is brought forward and zero rating will now apply from 1 May 2020 – which is of course tomorrow.

Further details of the measure here.

Zero rating

This brings electronically supplied sales in line with traditional printed matter. The zero rate will apply to:

books
booklets
brochures
pamphlets
leaflets
newspapers
journals and periodicals (which include magazines)
children’s picture and painting books

What supplied electronically means

The term ‘supplied electronically’ is not defined in legislation. It falls to be interpreted in accordance with its generally accepted meaning and includes supplies made over the internet and by e-mail.

Excluded items

Items that are not entitled to the VAT zero rate:

Advertising

If more than half of an e-publication is devoted to advertising, audio or video content, its supply will remain standard rated for VAT purposes.

Audiobooks

The zero rating extension only applies to the supply of electronic versions of books already zero rated in UK law. As such, zero-rating is limited to electronic versions of books that can be read or looked at. Supplies of audiobooks remain taxable at the standard rate whether supplied in a physical or digital format.

Intellectual property

e-book readers

e-book readers are one form of hardware to which e-books can be downloaded before being read but are not in themselves e-books. Therefore, supplies of e-book readers are standard rated

Software

Software, eg: an app is used to access e-publications but is not in itself an e-publication. Therefore, supplies of such software are standard rated.

Lending of electronic publications

The lending of any of the zero rated e-publications for a charge (for example, by a library) is zero rated.

Summary

Although welcome, as zero rating is VAT nirvana, the short lead in time could catch out some business which make such online supplies. Businesses which provide e-publications may want to consider making a retrospective claim as a result of the News Corp case.

VAT: Retrospective claims – standard of proof. NHS Lothian case

By Marcus Ward 24 April 2020

Latest from the courts

An interesting and helpful comment was made by the judge in the NHS Lothian Health Board Court of Session (the Scottish equivalent of the Court of Appeal) case.

Background

The case involved a claim for overpaid VAT going back to 1974. The primary issue was not the existence of the taxpayer’s claim to recover overpaid VAT, but the quantification of that claim, and in particular whether the claim can be quantified with sufficient accuracy to permit an order for repayment of tax to be made. In the previous case it was held that the onus of proving that an amount of tax had been paid and not recovered rested upon the taxpayer and that the standard of proof was the balance of probabilities and Lord Drummond Young agreed with that proposition here.

Judgement

The specific comments which will be of assistance with businesses with similar clams were:

“The fundamental problem in such cases is that primary evidence does not exist owing to the lapse of time. The absence of such evidence, at least in cases such as the present, is not the fault of the taxpayer, and the lack of evidence should not be held against the taxpayer,”

Outcome

The court urged Tax Tribunals (First Tier Tribunal – FTT and Upper Tribunal – UT) to apply a flexible approach to the burden and standard of proof when making decisions in similar cases; of which there is a considerable number. This approach should apply to so called “Fleming” claims and others in respect of overpaid output tax. We understand that 700 such claims were made by NHS authorities in Great Britain alone, and circa 200 of these remain unresolved.

Commentary

In most cases, a taxpayer is only required to retain records for six years. So the comments made in this case should bolster the chances of success for claims made by other businesses, whether they be for overpaid output tax or underclaimed input tax. There are many and varied reasons why sufficiently detailed could be unavailable; we are looking at a potential 46-year time span. In 1974 record keeping was a different world and physical/manual records were usually the only option. It seems only reasonable that HMRC should make the allowances suggested in this case when it is agreed that a claim is valid in all other respects.

Action

If you, or your client, have had a claim rejected on the basis of insufficient supporting primary evidence, it may be worthwhile revisiting it on the basis of this decision. It sets out helpful and clear guidance and provides businesses with effective, appropriate tax relief where applicable.