Tag Archives: VAT-FTT

VAT: Zero-rated exports. The Procurement International case

By Marcus Ward 7 November 2024

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In the First-Tier Tribunal (FTT) case of Procurement International Ltd (PIL) the issue was whether the movement of goods constituted a zero-rated export.

Background

Both parties essentially agreed the facts: The Appellant’s business is that of a reward recognition programme fulfiller. The Appellant had a catalogue of available products, and it maintained a stock of the most ordered items in its warehouse. PIL supplied these goods to customers who run reward recognition programmes on behalf of their customers who, in turn, want to reward to their customers and/or employees (reward recipients – RR). The reward programme operators (RPOs) provide a platform through which those entitled to receive rewards can such rewards. The RPO will then place orders PIL for the goods.

A shipper collected the goods from PIL in the UK and shipped them directly to the RR (wherever located). The shipper provided the services of delivery including relevant customs clearances etc. on behalf of the Appellant. PIL had zero-rated the supply of goods sent to RRs located overseas. All goods delivered to RRs outside the UK are delivered duty paid (DDP) or delivered at place (DAP). As may be seen by Incoterms the Appellant remained at risk in respect of the goods and liable for all carriage costs and is responsible for performing or contracting for the performance of all customs (export and import) obligations. The Appellant was responsible for all fees, duties, tariffs, and taxes. Accordingly, the Appellant is responsible for, and at risk until, the goods are delivered “by placing them at the disposal of the buyer at the agreed point, if any, or at the named place of destination or by procuring that the goods are so delivered”.

Contentions

HMRC argued that in situations where the RPO was UK VAT registered, the appellant was making a supply of goods to the RPO at a time when the goods were physically located in the UK, and consequently there was a standard-rated supply. It issued an assessment to recover the output tax considered to be underdeclared.

PIL contended that there was a supply of delivered goods which were zero-rated when the goods were removed to a location outside the UK. It was responsible (via contracts which were accepted to reflect the reality of the transactions) for arranging the transport of the goods.

Decision

The FTT held that there was a single composite supplies of delivered goods, and these were a zero-rated supply of exported goods by PIL. The supplies were not made on terms that the RPOs collected or arranged for collection of the goods to remove them from the UK. The Tribunal found that the RPOs took title to the goods at the time they were delivered to the RR, and not before such that it was PIL and not the RPOs who was the exporter. This meant that the RPOs would be regarded as making their supplies outside the UK and would be responsible for overseas VAT as the Place Of Supply (POS) would be in the country in which it took title to the goods (but that was not an issue in this case).

The appeal was allowed, and the assessment was withdrawn.

Legislation

Domestic legislation relevant here is The VAT Act 1994:

Section 6(2) which fixes the time of supply of goods involving removal as the time they are removed
Section 7 VATA sets out the basis on which the place of supply is determined. Section 7(2) states that: “if the supply of any goods does not involve their removal from or to the United Kingdom they shall be treated as supplied in the United Kingdom if they are in the United Kingdom and otherwise shall be treated as supplied outside the United Kingdom”.
Section 30(6) VATA provides that a supply of goods is zero-rated where such supply is made in the UK and HMRC are satisfied that the person supplying the goods has exported them
For completeness, VAT Regulations 1995, regulation 129 provides the framework for the zero-rating goods removed from the UK by and on behalf of the purchaser of the goods.

Some paragraphs of VAT Notice 703 have the force of law which applies here, namely the sections on:

direct and indirect exports
conditions which must be met in full for goods to be zero-rated as exports
definition of an exporter
the appointment of a freight forwarder or other party to manage the export transactions and declarations on behalf of the supplier of exporter.
the conditions and time limits for zero rating
a situation in which there are multiple transactions leading to one movement of goods

Commentary

The Incoterms set out in the relevant contracts were vital in demonstrating the responsibilities of the parties and consequently, who actually exported the goods. It is crucial when analysing the VAT treatment of transactions to recognise each party’s responsibilities, and importantly, when (and therefore where) the change in possession of the goods takes place.

VAT: Second-hand goods scheme and best judgement – The Ancient & Modern Jewellers Limited case

By Marcus Ward 7 October 2024

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The second-hands of time.

In the First-tier Tribunal (FTT) case, the issue was whether the second-hand goods margin scheme (margin scheme) was applicable and whether HMRC’s assessments for £5,474,249 (later reduced to £5,004,595) of underdeclared of output tax were issued in best judgement.

Background

The Ancient & Modern Jewellers Limited (A&M) sold second-hand wristwatches with the majority of the sales properly accounted for via the margin scheme. However, from information obtained from Italian tax authorities in respect of supply chain fraud, HMRC issued the assessments on the basis that supplies of certain goods did not meet the conditions of the margin scheme so that output tax was due on the full value of the watches rather than the difference between the purchase and sale values. HMRC decided to penalise A&M because the errors were deliberate and prompted and subsequently to issue a PLN on the basis that such conduct was attributable to the director. A&M is a “High Value Dealer” for anti-money laundering purposes.

Contentions

Appellant

The appellant claimed that HMRC did not use best judgement on the grounds that:

the inspector did not impartially consider the evidence
HMRC lacked sufficient evidence to raise an assessment thereby failing to meet the Van Boeckel test
the calculated amounts were no more than unreasonable and random guesses
the inspector did not approach the investigation with an open mind to such an extent that it could not be said that the assessments and penalties were the product of the reasonable behaviours of HMRC
put in terms of the case law: HMRC had acted in a way which no reasonable body of commissioners could have acted or, put another way, had been vindictive, dishonest or capricious

so the assessments and penalties were invalid.

Whilst accepting that a best judgment challenge is a high bar A&M contended that the conduct and mindset of HMRC’s investigating and assessing officer was so unreasonable that it vitiated the whole assessment.

Respondent

HMRC contended that the assessments were based on best judgement and that its focus was not on the supply chain fraud claims (as claimed by A&M). Additionally, a previous inspection in 2014 had raised prior concerns which provided adequate grounds for the assessments. Moreover, A&M was aware of the terms of operation of the second-hand margin scheme and considered that A&M had wilfully misused the scheme in several regards. The scheme had been incorrectly used for goods purchased by way of intracommunity supplies – which had been imported with the appellant claiming input tax on the imports and then including them in the margin scheme. A&M wilfully failed to carry out due diligence on its suppliers.

Best Judgement

It may be helpful if we consider what the words “best judgement” mean. This was best described by Woolf J in Van Boeckel v CEC [1981] STC 290

“What the words ‘best of their judgement’ envisage, in my view, is that the commissioners will fairly consider all material before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act, then they are not required to carry out investigations which may or may not result in further material being placed before them.”

Technical

The second-hand margin scheme is provided for under The VAT Act 1994, Section 50A, The Value Added Tax (Special Provisions) Order 1995 and certain paragraphs of VAT Notice 718 which have force of law.

Decision

The appeal was dismissed. It was found that A&M deliberately rendered inaccurate VAT returns. The director of the company was aware both of how the margin scheme worked and that the terms of the scheme had to be complied with if a supply was to be taxed under the it. A&M was found to have acted deliberately in misusing the scheme by including ineligible supplies. A&M had been lax in the completion of its stock book, and it had not met the record-keeping requirements necessary to use the scheme for the relevant transactions. Additionally, some of its EU suppliers were not registered for VAT, a fact A&M did not take steps to discover, and so related purchases could not qualify for the scheme. Also, it was likely that some of the purchases were of new watches which made them ineligible for the margin scheme.

Re, evidence; the FTT found much of the A&M director’s evidence to have been self-serving and, in parts, evasive and that it did not consider that the integrity of HMRC could be impugned. The court determined that; the inspector was diligent and thorough, HMRC had legitimate concerns regarding A&M’s use of the margin scheme generally and specifically and there was a wider concern that the company was a participant in fraudulent supply chains. The FTT considered that the investigation was proportionately carried out considering these concerns and the assessments raised in exercise of best judgment.

Penalties and PLN

The case further considered penalties: whether the appellant’s conduct was deliberate (yes – appeal dismissed). Whether the Personal Liability Notice (PLN) [Finance Act 2007, Schedule 24, 19(1)] was appropriate for the conduct attributed to the director – whether his conduct led to penalty (yes – appeal dismissed).

Commentary

This case is a long read, but worthwhile for comments on; the margin scheme use, HMRC’s inspection methods, best judgement, evidence and MTIC amongst other matters.

The VAT treatment of sightseeing passes. The Go City Limited case

By Marcus Ward 3 September 2024

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In the First-Tier Tribunal (FTT) case of Go City Ltd the issue was the VAT treatment of passes (“sightseeing packages”) sold by the appellant. Should they be outside the scope of VAT as multi-purpose vouchers (MPVs) or whether “functioning as a ticket”? The difference being the time of supply (tax point).

The issues

The appellant sells passes which enables the buyer to enter London attractions and travel on certain types of transport. The passes were sold at a price lower than the usual admittance price at the attractions. HMRC originally accepted that the supplies were of “face value vouchers” (MPV – see below) via The VAT Act, Schedule 10A, and latterly Schedule 10B, but later changed its view. It raised assessments for the deemed underdeclarations.

Tax point

The difference in VAT treatment is, essentially:

Face value vouchers (FVV) that can be used for more than one type of good or service (multi-purpose – “MPV”) – No VAT due when sold (if sold at or below their monetary value).
FVVs that can only be used for one type of good or service (single-purpose) – VAT due on the value of the voucher when issued.

Moreover, the above means that for single purpose vouchers, VAT is due whether the voucher is actually redeemed or not – there is no way to reduce output tax previously accounted for if the voucher is not used. Whereas for MPVs VAT is only due when they are redeemed. More background on vouchers below.

Contentions

Go City Ltd argued that what was being sold was MPV and output tax was only due when the voucher was redeemed.

HMRC contended that the sale was of a “ticket” (effectively a single purpose voucher) and that output tax was due “up-front”.

Decision

The appeal allowed. The Tribunal concluded that he passes were MPVs and their sale was consequently outside the scope of VAT. No output tax was due at the time they were sold.

The passes were not only outside the scope of VAT because they are MPVs, but also because the supplies take place when the customer uses the pass, and not when it is purchased. The position is essentially the same as in Findmypast and MacDonald Resorts .

Furthermore, the FTT considered the validity of a number of the assessments HMRC issued. These were raised “to protect HMRC’s position” in respect of the alleged underdeclaration of output tax. The court ruled that these assessments were invalid because, at the time they were raised, HMRC did not have a view that the appellant’s returns were incorrect, as a final decision had yet to be made.

Commentary

The correct decision I feel. A long read, but well worth it for interested parties.

Technical background

Face value vouchers

Recent changes, radically alter the UK rules for face value vouchers (FVV). FVVs are vouchers, tokens, stamps (physical or electronic) which entitle the holder to certain goods or services up to the value on the face of the vouchers from the supplier of those goods or services. Examples of FVVs would include vouchers sold by popular group discount websites, vouchers sold by high street retailers, book tokens, stamps and various high street vouchers.

Single or multi-purpose

The most important distinction for FFVs is whether a voucher is a single purpose voucher or multi-purpose voucher. If it is a multi-purpose voucher, then little has changed. If it is a single purpose voucher, however, HMRC will now require output tax to be accounted for at the date it is issued. Single purpose vouchers are vouchers which carry the right to receive only one type of goods or services which are all subject to a single rate of VAT. Multi-purpose vouchers are anything else. The differences can be quite subtle.

For example:

a voucher which entitles you to download an e-book from one seller will be a single purpose voucher. A voucher which entitles you to purchase books (zero rated) or stationery (standard rated) from the same seller will be multi-purpose.
a voucher which entitles you to £100 of food at a restaurant which does not sell takeaways is probably single purpose, whereas if the restaurant has a cold salad bar and the buyer can buy a zero-rated take-away with the voucher (and/or standard rated hot food) then it would likely to be multi-purpose.

VAT: Tax point of telecommunications – The Lycamobile case

By Marcus Ward 7 August 2024

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In the Lycamobile UK Ltd First-Tier Tribunal (FTT) case, the issue was whether VAT was chargeable on the supply of a “Plan Bundle” at the time when it was sold and by reference to the whole of the consideration that was paid for it, or whether VAT was instead chargeable only when, and only to the extent that, the allowances in the Plan Bundle were actually used. The time of supply (tax point) was important because not only would it dictate when output tax was due, but more importantly here, if the appeal succeeded, there would be no supply of the element of the bundle which was not used, so no output tax would be due on it.

Background

The Plan Bundles comprised rights to future telecommunication services; telephone calls, text messages and data (together, “Allowances”). There were hundreds of different Plan Bundles sold by the Appellant and the precise composition of those Plan Bundles varied.

Contentions

Lycamobile considered that that the services contained within each Plan Bundle were supplied only as and when the Allowances were used, so that the consideration which was received for each Plan Bundle would be recognised for VAT purposes only to the extent that the Plan Bundle was actually used. In the alternative, these supplies could be considered as multi-purpose vouchers such that output tax was not due when they were issued, but when the service was used. Very briefly, the contention was that it was possible that not all of the use would be standard rated in the UK.

Unsurprisingly, HMRC argued that that those services were supplied when the relevant Plan Bundle was sold (up-front) and output tax was due on the amount paid, regardless of usage.

Decision

The Tribunal placed emphasis on “the legal and economic context” and “the purpose of the customers in paying their consideration”.

It decided that the terms of the Plan Bundle created a legal relationship between Lycamobile and the customer. The Bundle was itself the provision of telecommunication services when sold. The customers were aware that they were entitled to use their Allowances and could decide whether to, or not. As a consequence, consumption was aligned with payment and created a tax point at the time of that payment. There was a direct link between those services and the consideration paid by the customer.

The Tribunal also considered the vouchers point. There were significant changes to the rules for Face Value Vouchers on 1 January 2019 (the supplies spanned this date), but the FTT found that the Plan Bundles were not monetary entitlements for future services under either set of rules, so the tax point rules for vouchers did not apply here.

The appeal was dismissed and HMRC assessments totalling over £51 million were upheld.

Commentary

Not an unexpected result, but an illustration of the importance of; tax points, legal and economic realities, and what customers think they are paying for. All important aspects in analysing what is being provided, and when.

Tax points and VAT groups – The Prudential Assurance Company Ltd CoA case

By Marcus Ward 11 April 2024

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In the The Prudential Assurance Company Limited (Pru) Court of Appeal (CoA) case the issues were the “difficult” questions in respect of the relationship between the VAT grouping rules and the time of supply (tax point) legislation. Is VAT is applicable on a continuous supply of services where these services were supplied while the companies were VAT grouped, but invoices were issued after the supplier left the VAT group?

Background

Pru was at the relevant time carrying on with-profits life and insurance business. Silverfleet Capital Limited (Silverfleet) provided Pru with investment management services. Under an agreement dated 30 August 2002, the consideration which Silverfleet received for its services comprised a management fee calculated by reference to the amount of investments made during the period in which services were provided and performance fees, payable in the event that the performance of certain funds exceeded a set benchmark rate of return.

When Silverfleet was rendering its investment management services, Pru was the representative member of a VAT group of which Silverfleet was also a member. However, in 2007 a management buy-out was effected, as a result of which Silverfleet ceased to be a member of Pru’s VAT group. It also ceased to provide management services to Pru.

During 2014 and 2015, the hurdle rate set under the 2002 agreement was passed. Silverfleet accordingly invoiced Prudential at various dates between 2015 and 2016 for fees totalling £9,330,805.92 (“the Performance Fees”) plus VAT at 20%.

The Issues

The CoA considered whether the Performance Fees are subject to VAT.

The First-tier Tribunal (FTT) decided the point in favour of Pru. However, HMRC succeeded in an appeal to the Upper Tribunal (UT). In a decision that decision, the UT concluded that VAT was chargeable on the Performance Fees.

In its decision, the FTT queried whether regulation 90 of the VAT Regulations went so far as to direct that Silverfleet’s services had not been provided within a VAT group and had been “supplied in the course or furtherance of a business that in the VAT group world was not being carried on”. Further, the FTT was “unable to see what feature distinguishes [Prudential’s] case from that of the taxpayer in [B J Rice & Associates v Customs and Excise Commissioners]”.

In contrast, the UT considered that, pursuant to regulation 90 of the VAT Regulations, Silverfleet’s services were to be treated as having been supplied when invoiced and, hence, at a time when Silverfleet and Prudential were no longer members of the same VAT group. That being so, section 43 of VATA 1994 was not, in the UT’s view, in point. The UT also considered that the FTT had erred in regarding itself as bound by B J Rice & Associates v Customs and Excise Commissioners [1996] STC 581 (“B J Rice”) to allow the appeal. Unlike Mr Rice, the UT said in its decision, Silverfleet “was not entirely outside the scope of VAT when the Services were rendered, but rather it was subject to a specific set of assumptions and disregards”.

Pru contended that Silverfleet should not be considered to have made the supply in the course or furtherance of any business carried on by it. The business will instead be assumed to have been carried on by Pru. This was important because if VAT was applicable to the services Pru would not be in a position to recover it (in full at least) due to partial exemption which represented a large VAT cost.

Unsurprisingly, HMRC considered that output tax was due because at the tax point, Silverfleet as no longer part of the VAT group.

Legislation

The VAT Act 1994, section 43 lays down the rules in respect of VAT groups, and The VAT Regulations 1995, regulation 90 makes provision with respect to the time at which continuous supplies of services are to be treated as supplied for VAT purposes.

Section 43 explains that any supply by one member of a VAT group to another is to be “disregarded” and that “any business carried on by a member of the group shall be treated as carried on by the representative member”. Does this mean that no VAT is chargeable on an intra-group supply regardless of whether the supplier has left the group by the time consideration for the supply is the subject of a VAT invoice and paid? Or is section 43 inapplicable in respect of continuous supplies insofar as the consideration is invoiced and received only after the supplier is no longer a member of the VAT group because regulation 90 provides for the services to be treated as supplied at the time of the invoice or payment?

Decision

The appeal was dismissed and HMTC’s assessment was upheld. It was not possible to disregard the supply as intra-group and the tax point rules for the continuous supply of services meant that it was a taxable supply. The decision was not unanimous, with the decision by the judges being a 2:1 majority.

Commentary

This was a close decision and highlights the necessity of considering the interaction between VAT groups and tax points and the implications of timings. The case makes interesting reading in full (well, for VAT people anyway!) for the technical discussions and the disagreement between the judges.

VAT: Evidence for exports. The H Ripley case

By Marcus Ward 13 February 2024

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In the H Ripley & Co Limited First Tier Tribunal (FTT) case the issue was whether the appellant had satisfactory evidence to support the zero rating of the export of goods (scrap metal).

Background

HMRC denied zero rating on the basis that the appellant did not provide satisfactory evidence to support the fact that the scrap metal was removed from the UK.

The requirements are set out in VAT Notice 725 para 5 and acceptable documentary evidence may include:

the customer’s order – including customer’s name and delivery address
inter-company correspondence
copy sales invoice
advice note
packing list
commercial transport documents from the carrier responsible for removing the goods from the UK, for example an International Consignment Note (CMR) fully completed by the consignor, the haulier and signed by receiving consignee
details of insurance or freight charges
bank statements as evidence of payment
receipted copy of the consignment note as evidence of receipt of goods abroad
a signed CMR document or note
a bill of lading
an airfreight invoice
an invoice from the carrier of the goods
official documents issued by a public authority, such as a notary, confirming the arrival of the goods
any other documents relevant to the removal of the goods in question which you would normally get in the course of business

or a combination of the above.

HMRC advised the appellant that it had received an information request from the Belgian tax authorities in respect of certain transactions and consequently, HMRC required information on the company’s documents in connection with the supplies. On receipt of the information HMRC concluded that the evidence was insufficient to support zero-rating so the sales were treated as standard rated and the appellant’s repayment claim was reduced to reflect this.

In these circumstances the burden of proof is on the appellant to show that it has satisfied the conditions set out in Notice 725 to zero-rate its supplies and provide documentation to show that the goods were removed from the UK.

Decision

The court noted that it was not HMRC’s position that supplementary evidence could not be provided post the required three-months period but that it was entitled to decline the additional evidence when it was provided some 18 to 30 months after the three-month period. It was clear that the evidence of removal must be obtained within three months and not that the valid evidence is brought into existence within the three-month time limit and obtained at some future date.

Notice 725 sets out the conditions which attach to the entitlement to zero-rate supplies. The FTT considered it to be clear from paragraph 4.3 and 4.4 (which have the force of law) that the onus is on the exporter company claiming zero-rating to gather sufficient evidence of removal within three months of the date of the supply. If it does not do so, it is not entitled to zero-rate the supplies.

Specifically, the court considered:

Sales Invoices – did not provide clear evidence that the goods were removed from the UK. Despite the invoices confirming the sale of scrap metal to a Belgium registered company it did not follow that the address of the purchaser is the same address as the destination that the goods were sent to.
Bank Statements – simply provided proof of payment they did not confirm who received the goods nor where the goods were delivered.
Weighbridge Tickets – merely confirm a consignment of scrap metal was sold to a Belgium based company and the goods were collected by a UK registered vehicle.
CMRs – none of the CMRs were fully completed by the haulier and signed by the receiving consignee.
P&O Boarding Cards –a taxpayer must have in its possession valid evidence of export within three months from the time of supply. The boarding cards were not provided to HMRC until 30 May 2018, some 18 to 30 months after the disputed consignments took place. It was not disproportionate for HMRC to state that the time limit for obtaining valid evidence of removal was three months and that the substantive requirements of Notice 725 had not been met. In any event, the court did not accept that the boarding cards evidence the exports of the scrap metal; none of the reference numbers on the boarding card match those used in any of the other documents and none of the lead names on the boarding cards match any of the other names in any other document. The boarding cards do not have any identifying features such that they may be matched with any of the disputed consignments.
E-mails and WhatsApp messages –none of the messages evidence that the loads were exported. At best they evidence a request from the buyer to a carrier to collect goods from the supplier’s yard and the WhatsApp messages were silent on whether the loads were exported from the UK.

The appeal was dismissed, and the assessments were upheld because none of the documents either individually or taken as a whole, were sufficient evidence to support zero-rating.

Commentary

Yet another case illustrating the importance of insuring correct documentation is held. It is not sufficient that goods leave the UK, but the detailed evidence requirements must always be met.

VAT: Input tax claim on Land Rovers. The Three Shires Trailers case

By Marcus Ward 9 February 2024

Latest from the courts

In the Three Shires Trailers Limited First Tier Tribunal (FTT) case the issues were whether an input tax claim on the purchase of two Land Rover Discoveries was appropriate when they were converted from commercial vehicles to cars, or was a self-supply triggered?

Background

The vehicles were commercial vehicles when purchased and input tax was recovered. Subsequently, they were converted by the addition of three fold up seats with seat belts behind the driver seat and removing materials which had blacked out the rear windows which reclassified them as cars. This would have subjected them to an input tax block if purchased in that state.

The purpose of buying the vehicles was for the transport of trailers to customers, the collection of trailers from suppliers and to enable personnel of the appellant to attend trade fairs all over the country.

Technical

“A Motor Car” is defined as:

“any motor vehicle of a kind used on public roads which has three or more wheels and either:

(a) is constructed or adapted solely or mainly for the carriage of passengers; or

(b) has to the rear of the driver’s seat roofed accommodation which is fitted with side windows or which is constructed or adapted for the fitting of side windows…”

Issues

The appellant stated that the vehicles were used only for business purposes. Employees were not permitted to use the vehicles for private purposes and did not do so. The vehicles were kept at the business’s premises. He also explained that the vehicles were not converted to cars, if they were cars, they were qualifying cars and if they were non-qualifying cars, the use was only temporary, and they were converted back to commercial vehicles.

Initially, HMRC disallowed the claim because the vehicles became cars and subject to the input tax block.

Subsequently, HMRC’s case was that the vehicles had been converted from commercial vehicles to non-qualifying cars which triggers an irreversible self-supply under Article 5 of the Value Added Tax (Cars) Order 1992 so output tax equalling the claimed input tax was due.

Decision

The FTT decided that, at the time when the vehicles were acquired, they were indisputably commercial vehicles and the appellant was entitled to deduct the input tax on them.

The judge found that, after conversion, the vehicles were intended for use, and were used, only for business purposes. The appellant did not intend that the vehicles should be used for private purposes and so far as he was aware, there was no private use. The vehicles were therefore qualifying motor vehicles eligible for input VAT recovery. No output tax was due on a self-supply.

The appeal was allowed.

Commentary

Another case on the recovery of input tax on car purchases and the difference between commercial vehicles and cars. It is notoriously difficult to persuade HMRC that there is no private use of cars, but it is possible.

VAT treatment of serviced apartments: The Realreed Limited case

By Marcus Ward 11 January 2024

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In this First-Tier Tribunal (FTT) case the issue was whether serviced apartments qualify for exemption.

Background

Realreed owns a property called Chelsea Cloisters in Sloane Avenue, London. The property comprises; 656 self-contained apartments and some commercial units. 421 of these apartments are let on long leases (no VAT issues arise from these supplies). The appeal concerned the VAT treatment of the letting of the remaining 235 apartments, which include studio, one-bedroom or two-bedroom self-contained rooms. The appellant has, at all times, received a significant number of occupiers from corporate customers when they relocate their employees to London for a specified period, such as a secondment.

The contentions

Realreed argued that the letting of the apartments is a supply of accommodation which is exempt under The VAT Act 1994, Schedule 9, Group 1, Item 1. Chelsea Cloisters operates like a ‘home from home’ for its tenants: it provides residential accommodation. The physical appearance of the building is very similar to that of other residential buildings in the vicinity. It does not have signage suggesting the serviced accommodation is a hotel or similar establishment. It is rare for hotels (or similar establishments) at the booking point to offer long-term availability in the same way as Realreed does. Chelsea Cloisters does not offer room service, or catering of any form. Tenants have fully functioning kitchens and other self-catering facilities within their apartments and have washing machines and dryers to do all their own laundry. Tenants can, and do, stay for extended periods of time (one for around 20 years). The business has always involved the provision of residential accommodation on a longer-term basis than would typically be found in a hotel, with a much higher degree of personal autonomy for the occupant.

HMRC contended that the use of the Apartments is carved out of the exemption in Item 1 by excepted item (d), which applies to “the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation”. Note 9 to Group 1 provides that “similar establishment” “includes premises in which there is provided furnished sleeping accommodation whether with or without the provision of board or facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers”.

Decision

The court considered that Realreed provided sleeping accommodation in an establishment which is similar to a hotel. The two hallmarks of short-term accommodation coupled with additional services (daily maid service, linen changing, cleaning at the end of a stay, residents bar, concierge) mean that Chelsea Cloisters is an establishment in potential competition with the hotel sector, which also offers short-term accommodation with services.

The FTT found that Realreed provided furnished sleeping accommodation, so the remaining question was whether Chelsea Cloisters is used by or held out as being suitable for use by “visitors or travellers” per Note 9.

The FTT interpreted ‘visitor or traveller’ as referring to a person who is present in a particular place without making it their home, ie; they are not staying there with any degree of permanence. The average length of visit was less than a fortnight which must mean that the apartments were indeed made available to visitors or travellers.

The supplies were therefore standard rated.

Commentary

There is a distinction between leases and other room lettings for VAT. The most important issue is the degree of “permanence”, although other factors have a bearing. Businesses which let rooms should consider the nature of their supplies with reference to this case which helpfully sets out which factors need to be considered.

VAT: Contact lens services – taxable or exempt? The Vision Direct case

By Marcus Ward 8 December 2023

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In the First-Tier Tribunal (FTT) case of Vision Dispensing Limited the issue was whether services linked to the online sale of prescription contact lenses were covered by the exemption at The VAT Act 1994, Schedule 9, group 7, item 1 (b) – the provision of medical care.

Generally speaking, opticians provide two types of supply

exempt medical care; sight tests, measuring and fitting
the standard rated supply of goods; spectacles, contact lenses, accessories etc

Almost always a customer pays a single amount which covers the services as well as the goods, so an apportionment is required. HMRC updated guidance on apportionment here.

Background

The Appellant “VDL” supplies services in connection with the online sale of contact lenses and this appeal was concerned with the question whether those supplies are subject to VAT at the standard rate.

The legislation provides for exemption for medical care by a person registered or enrolled in either of the registers of Ophthalmic Opticians or the register of Dispensing Opticians kept under the Opticians Act 1989. The exemption is also extended to persons who are not registered/enrolled under the Act but are directly supervised by a person who is so registered or enrolled.

VDL is a UK incorporated company and a member of the Vision Direct corporate group. VDL has a sister group company called Vision Direct BV (“VDBV”) which is based in The Netherlands. VDL operates a warehouse facility in the UK. Goods (contact lenses and other optical products) belonging to VDBV were stored in the warehouse and dispatched to purchasers by VDL, using its own workforce. VDL also employed customer assistants, who deal with a range of enquiries from customers. VDBV operates the website visiondirect.co.uk through which prescription contact lenses and other optical goods are supplied to UK customers. Customers purchasing prescription contact lenses or other optical products online enter two contracts; one with VDBV for the supply of contact lenses and one with VDL for the supply of dispensing services. There is also a contract between VDL and VDBV. VDL is not paid a fee by VDBV, its income comprises by the fee paid by customers.

The arguments

HMRC contended that there is little evidence to support that there was advice being provided to customs by VDL and consequently, there were serious questions about whether healthcare services are being supplied. The supplies fall short of a number of regulatory requirements and that the supplies described as dispensing services cannot properly be described as professional clinical advice or therapeutic care. HMRC stated that VDL has never seen a single customer. Clinical advice cannot be delivered in an impersonal or generic way.

HMRC pointed out that:

the website makes it clear that VDL does not provide advice on which customers can depend. Consequently, it cannot rely on the website as evidence of medical care
there is no direct link between the use of the website and payments to VDL. For there to be a supply, there must be a direct link between the supplier and the recipient

VDL contended that its dispensing services are superior to those available on the High Street. Contrary to HMRC’s case, it is able to identify multiple examples of clinical advice and the purpose of its supplies is to assist in the treatment of defective eyesight. All services are directly supervised by those with the appropriate qualifications.

Deliberation

The FTT was required to determine whether VDL’s services constituted medical care and were those services wholly performed or directly supervised by appropriate persons?

It was agreed that the advice does not need to be complex or personalised to be covered by the exemption as long as it contributes to the efficacy of the overall therapeutic process. The material provided on the website was comprehensive and covered the entire process from an eye test, the diagnosis of an eye defect, and then the selection, measuring and fitting of spectacles or lenses to the supply of those spectacles or lenses.

It was concluded by the FTT that the provision of the website was by VDBV as in the T&Cs VDBV operates it and owns the intellectual property rights to its content. Consequently, the provision of the website could not be part of the supply by VDL. VDL supplied the material or reviewed its content for VDBV pursuant to a contract between the two companies.

Decision

The FTT concluded that:

the quality, quantity, and nature of the optical information on the website was such that its provision could amount to medical care, but;
the information on the website is not provided by VDL (but by VDBV)
even if it were provided by VDL, the terms on which it is made available mean that it is not part of any supply made by VDL to customers and must be left out of account when it comes to characterising the supplies VDL does make
what VDL does do is choose the correct lenses and dispatch them. There is no element of medical care in VDL’s supply
there was little evidence as to how the opticians monitored the performance of the staff so that they could satisfy themselves that their performance was of a suitable standard, so it could not be said that there was direct supervision.

As a result, VDL did not provide medical care and in any case, the services were not wholly performed or directly supervised by appropriately qualified individuals so exemption could not apply

The appeal was dismissed.

Commentary

Opticians have long produced VAT challenges since the cases of Leightons and Eye-Tech in the 1990s. Any businesses using a similar business model are advised to review the treatment of their supplies in light of this case.

VAT: Powers of HMRC – The Impact Contracting Solutions Limited UT case

By Marcus Ward 5 September 2023

Latest from the courts

In the Impact Contracting Solutions Limited (ICS) Upper Tribunal (UT) case the issue was whether HMRC had the power to cancel the VAT registration where that person has facilitated the VAT fraud of another ie; the scope of the “Ablessio” principle. It also illustrates the impact of EU cases on UK courts.

Background

ICS’s customers were temporary work agencies, and its suppliers were approximately 3,000 mini-umbrella companies (“MUCs”) which supplied labour. HMRC decided to cancel ICS’s VAT registration number with reliance on the principle in the decision of the Court of Justice of the European Union (CJEU) in Valsts ienemumu dienests v Ablessio SIA (C-527/11) (“Ablessio”). HMRC considered that ICS was registered for VAT principally or solely to abuse the VAT system by facilitating VAT fraud, and that, in such circumstances, they were empowered by the principle in Ablessio to cancel the registration. In particular, HMRC considered that the arrangements between ICSL and the MUCs were contrived, with the effect that the MUCs failed properly to account for VAT on their supplies to ICS.

ICS appealed against HMRC’s decision to cancel its registration.

The Issues

Does the principle in Ablessio apply only to a party that has itself fraudulently defaulted on its VAT obligations, or does it similarly apply to a party who has facilitated the VAT fraud of another party?

If the Ablessio principle does apply to a party who has facilitated the VAT fraud of another party, is simple facilitation sufficient, or must it additionally be proved that:

(a) the facilitating party was itself dishonest, or

(b) the facilitating party knew that it was facilitating the fraud, and/or

The First Tier Tribunal (FTT) decided that Ablessio applies both to a party that has fraudulently defaulted on its VAT obligations and to a party who has facilitated the VAT fraud of another party. Further that simple facilitation by a party of the VAT fraud of another is not sufficient to apply the Ablessio principle. However, it is not necessary to prove that the facilitating party was itself dishonest. It must, however, be proved that the facilitating party knew or should have known that it was facilitating the VAT fraud of another party.

Decision

The appeal was rejected an the FTT’s decision was upheld. HMRC powers are not contrary to UK VAT legislation.

The application by HMRC of Ablessio is not contra legem or otherwise prohibited by the VAT legislation where it is applied to deregister a taxpayer who has either fraudulently defaulted on its VAT obligations or facilitated the VAT fraud of another party and at the relevant time has also made taxable supplies unconnected with such fraud or facilitation of fraud and which would result in a liability to be registered.

Ablessio applies to the deregistration by HMRC of a person as well as to a refusal by HMRC to register a person. It also provides for the deregistration of a person who has facilitated the VAT fraud of another, where the person to be deregistered knew or should have known that it was facilitating the VAT fraud of another.

Commentary

This decision was released this month and illustrates the ongoing influence of EU legislation and cases, “despite” Brexit

EU legislation does not, by itself, fall within the scope of retained EU law (see below). However, domestic legislation implementing EU rules forms part of EU-derived domestic legislation and is preserved in domestic law.

The VAT Act 1994 is not affected by Brexit because it is an Act of Parliament and, therefore, remains effective unless it is changed by Parliament.

Overview of the impact of EU legislation

Post-Brexit, the UK could have decided that UK courts should not be bound by EU case law. However, this would have resulted in a situation where the UK courts effectively had to begin with a blank piece of paper in deciding how a piece of retained EU law should be interpreted or applied. This approach would have resulted in considerable uncertainty for business over how retained EU law would operate. In order avoid this, section 6 of the European Union (Withdrawal) Act 2018 provides that:

CJEU judgments made on or before 31 December 2020 are binding on UK courts
CJEU judgments made after that date are not binding, but the UK courts are free to have regard to them, so far as they are relevant to the matter before the court.

Going forward

Helpful guidance is provided in the e-Accounting Solutions vs Global Infosys case (not a VAT case).

The Retained EU Law (Revocation and Reform) Act 2023 means that the principle of EU-law conforming construction is a corollary of the supremacy of EU law (which is abolished under Section 3 of the Act) and will therefore no longer apply from 2024.

The principles of statutory construction under English Law require a purposive interpretation of legislation, whether or not EU law principles are engaged. This involves considering the context in which the legislation was made. Depending on the legislation concerned, this process may be guided by “external aids”. External aids referred to in the judgment include Explanatory Notes and Government White Papers, and could also presumably include references to Hansard where seen as appropriate by the courts. To the extent that domestic enactments were made for the purpose of implementing EU law, the EU law position is such an “external aid” and the UK law should be construed accordingly.

Where Parliament used the same language as the Directive, one may assume that it intended to mean the same – accordingly, the CJEU interpretation of Directive-terms informs the interpretation of the UK statute.

However, the statutory language remains paramount – “external aids”, to which EU law instruments are effectively downgraded in UK law from 2024, cannot displace unambiguous statutory language in UK enactments that is inconsistent with EU law.