Tag Archives: VAT-Upper-Tier

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.

VAT: How to characterise a supply – The tests

By Marcus Ward 27 June 2023

In the age-old matter of whether a supply is separate/composite/compound for VAT purposes which and what is the nature of that supply, the Court of Appeal case of Gray & Farrar International LLP has provided very helpful guidance. A background to facts of the initial hearing here (although this decision was overturned by both the UT and the CoA).

I have previously considered these types of supply here, here, here, here, and here. Although not specifically concerning composite/separate supplies, the case sets out a hierarchy of tests to be applied in characterising a single supply for VAT purposes which now sets the standard. These test are:

The Mesto predominance test should be the primary test to be applied in characterising a supply for VAT purposes.
The principal/ancillary test is an available, though not the primary, test. It is only capable of being applied in cases where it is possible to identify a principal element to which all the other elements are minor or ancillary. In cases where it can apply, it is likely to yield the same result as the predominance test.
The “overarching” test is not clearly established in the ECJ jurisprudence, but as a consideration the point should at least be taken into account in deciding averments of predominance in relation to individual elements, and may well be a useful test in its own right.

Comments

The Mesto Test

CJEU Mesto Zamberk Financini (Case C-18/12)

The primary test to be applied when characterising a single supply for VAT purposes is to determine the predominant element from the point of view of the typical consumer with regard to the qualitative and not merely the quantitative importance of the constituent elements.

Principal/ancillary

If a distinct supply represents 50% or more of the overall cost, it can not be considered ancillary to the principal supply. In such cases an apportionment will usually be required.

Overarching

A generic description of the supply which is distinct from the individual elements. In many cases the tax treatment of that overarching single supply according to that description will be self-evident.

CPP

One must also have regard to the Card Protection Plan Ltd case. This has become a landmark case in determining the VAT treatment for single and multiple supplies. In this case the ECJ ruled that standard rated handling charges were not distinct from the supply of exempt insurance. It was noted that ‘a supply that comprises a single service from an economic point of view should not be artificially split’. Notably many subsequent court decisions have since followed this outcome thereby suggesting a general lean towards viewing cases as single supplies where there are reasonable grounds to do so.

VAT: Zero rated books? The Thorstein Gardarsson UT case

By Marcus Ward 14 April 2020

Latest from the courts

In The Thorstein Gardarsson T/A Action Day A Islandi Upper Tribunal (UT) case the issue was whether supplies of an “Action Day Planner” (ADP) were zero-rated as supplies of a book.

Legislation

The VAT Act 1994, Schedule 8, Group 3, item 1 zero rates – “Books, booklets, brochures, pamphlets and leaflets.” The words in Group 3 are used in their ordinary, everyday sense.

Background

The Appellants (HMRC) appealed against a decision of the First Tier Tribunal (FTT) which determined that the ADP is a “book” with the result that supplies of it made by Thorstein Gardarsson (TG) were zero-rated for VAT purposes. TG belonged outside the EU but sold its products B2C via the Amazon platform to consumers in the UK.

HMRC argued that the ADP was properly to be considered a ‘diary’ and thereby stationery which is standard rated. Predictably, TG asserted that the ADP is not a diary and despite it having space in which the ‘student’ seeking to master skills of time management may enter information, doing so is merely part of the learning taught through the narrative sections of the book.

The FTT allowed TG’s earlier appeal and considered the judgment of the High Court in Colour Offset Ltd. [1995] BVC 31 to be binding. The FTT concluded that the main function of the ADP is to teach the user how to better or more effectively manage time. The writing space was no different from a student filling out answers to practice papers or someone completing a crossword puzzle. The ADP was therefore a book and zero rated.

Appeal

In this UT case HMRC appealed the FTT decision on the grounds that whilst Colour Offset was binding on the FTT, it failed to:

identify the correct test set out in Colour Offset
apply the test correctly to the facts it had found

The Product

The external appearance if the ADP is that of a black leather covered book. It had an elastic strap attached to the inside of the back cover that can be wrapped around the front to hold it closed. Inside it has 115 pages. The ADP is described as a time management tool developed to “help people to grow; to teach and instruct people time management skills”. The first 16 pages contain text setting out a narrative of the ethos articulated by the appellant for effective time management. The remainder of the ADP is taken up with 52 double page planners. At the back is a cardboard slip pocket.

Decision

The UT noted that the FTT had quoted from VAT Notice 701/10 and this had led the FTT into error. In the Notice ‘crossword books, exam study guides etc.’ are considered books although the statutory provisions do not mention these at all. The Notice only records HMRC’s practice in this regard and does not have force of law. However, the FTT concluded that because crossword books and exam study guides are referred to as books, it should follow that any item with the necessary physical characteristics ‘which has as its main function informing/educating or recreational enjoyment’ is also a book. The tests in Colour Offset do not refer at all to whether the main function of an item is to inform or educate; nor does it refer to recreational enjoyment.

The UT considered that the FTT approached its task by applying a test that was different from that articulated in Colour Offset and this had the ability to produce a different outcome from the correct test. In doing so, he FTT made an error of law. It also concluded that the ADP is not a book as its main function is to be written in (as distinct from being read or looked at) and that the comparison to crossword puzzles or revision guides is irrelevant. Therefore, ADPs were standard rated and output tax was due on the sale of them.

HMRC’s appeal was allowed, the FTT decision is set aside and directed the matter back to the FTT for reconsideration. It was directed that the FTT makes a decision predicated on the basis that the ADP is not a book.

Commentary

The zero rating of printed matter has long been a moot point in VAT and the amount of detail that the guidance goes into demonstrates this. It should be noted that HMRC guidance set out in Public Notice 701/10 is purely that, and does not have the force of law. This logic extends to all HMRC published guidance unless the narrative specifically states that it has the force of law. A lot of the guidance is based on case law, but certain definitions are unhelpful.

Even the FTT can get it wrong and apply the wrong tests, so if you or your clients have any doubts about the VAT liabilities of supplies made, it is worthwhile having these reviewed by a specialist.