Latest from the courts, the Euro Beer Distribution Ltd First Tier Tribunal (FTT) case.
The intention of a taxpayer is extremely important for a number of reasons. It is relevant where:
- a VAT registration is requested
- input tax is claimed
- and in this case; whether deregistration is compulsory
Broadly, immediate action is dependent upon whether a business intends to make taxable supplies in the future. This intention dictates whether registration is possible, whether input tax may be claimed, and whether a business may remain VAT registered. Even if a business has the intention to make taxable supplies, it is sometimes difficult to evidence this to HMRC’s satisfaction.
Background
Euro Beer was in the business of importing and selling alcoholic drinks. It had been in business since 2004 and was also approved and registered as an owner of duty suspended goods under the Warehousekeepers and Owners of Warehoused Goods Regulations 1999.
Technical
HMRC compulsorily deregistered Euro Beer via VAT Act 1994, Schedule 1, para 13 (2) on the grounds that it believed that the appellant had ceased making taxable supplies. Nil returns had been submitted since 2016 and, after enquires, formed the view that there was no intention to make supplies in the future.
Euro Beer contended, unsurprisingly, that there was an intention to make taxable supplies in the future such that continued VAT registration was appropriate. Additionally, the reason for the nil returns was simply, at that time, business had dried up. The appellant provided limited evidence to support its intention. This comprised; emails between the directors and third-party contacts.
Decision
The appeal was dismissed and Euro Beer’s VAT deregistration (and revocation of approval from the Warehousekeepers and Owners of Warehoused Goods Regulations 1999) was confirmed as appropriate.
Commentary
This was hardly a surprising decision and one wonders why it got to court. It does, however, emphasise the importance of the concept of intention. This can be a subjective matter and HMRC place significant weight on documentary evidence. There is no question in law that HMRC must register/maintain registration/repay input tax if it is satisfied that there is a business which does not make taxable supplies but ‘intends to make such supplies in the course or furtherance of that business’ – VAT Act 1994, Schedule 1, para 9 (b). However, ensuring HMRC is satisfied is often problematic.
This is specifically difficult in the area of land and property. VAT registration and the associated input tax claims of a property developer is often the source of disputes. It is important to differentiate between an intention, and what actually happens. Often business plans change, or the original intention is not fulfilled. In such cases, there is a mechanism for repaying input tax claimed (VAT Gen regs 1995 reg 108) but this is only applicable in certain circumstances. The case of Merseyside Cablevision Ltd (MAN/85/327, VTD 2419) demonstrates that if an intention to make taxable supplies is thwarted, input tax claimed is not clawed back (a person who carries on activities which are preparatory to the carrying on of a business is to be treated as in business and is a taxable person).
It should be noted that a business does not have to specify a date by which it expects to make taxable supplies, or to estimate the value of them.
The lesson is; to document every business decision made:
- board minutes, emails, business plans, letters etc
- retain all correspondence with; third-parties
- provide written advice from legal advisers, accounts etc
- invoices demonstrating expenditure in respect of a new venture are persuasive
- budgets and considered estimates can be of use
- retain all advertising media, offers, promotions and other publicity.
Clearly for land and property additional; planning permission, land registry details, plans, surveys, fees, etc will build up a picture that there is an intention to make taxable supplies.
These are just examples and different business may have alternative evidence.
In commercial terms, it will be difficult for HMRC to be unsatisfied if a business is incurring costs in relation to a project – why would they devote time/staff/advisers/financial resources to something when there is no intention of deriving income?
One final point on the Euro Beer case. The judge stated; ‘an intention to make supplies requires more than a mere hope to be in a position to make supplies at some unspecified time in the future’. It is not enough for a business to ‘generally’ state that there is an intention.