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Tolley’s Tax Digest

Value Added Tax - An Update

Hugh Mitchell ACA CTA Issue 131 | September 2013

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Contents Author

Introduction 1 Hugh Mitchell ACA CTA

VAT registration 2 Hugh qualified as a chartered accountant in 1990 with
one of the “big four” accountancy firms. He then worked
Online VAT 3 for national and regional accountancy practices while
specialising in VAT. In 2001 he qualified as a chartered
2013 Budget 4 tax adviser on the VAT route. In 2011 he set up his own
VAT consultancy mainly advising small and mediumsized
Land and buildings 5 accountancy practices in the West Country but also advising
charities and businesses in the construction sector.
Transfer of Going Concern 6
He was involved in the pilot of the HM Customs & Excise
Financial services – the tectonic plates are shifting 7 Working Together initiative in the South West prior to the
creation of HM Revenue & Customs and he is currently a
The education exemption – private tuition 8 member of the VAT Technical Committee of the Association
of Taxation Technicians (ATT).
Single supply or multiple supplies – clarity or
confusion 9 Throughout his career Hugh has been advising SMEs
and with a general accountancy background he is used to
Recovery of input tax on costs of company 10 understanding VAT issues in the context of the accounting
and direct tax requirements that these businesses face.
acquisition – the Court of Appeal grounds BAA’s
Hugh lives in the West Country with his wife and two sons,
claim spending his spare time gardening, engaged in property
maintenance and supporting Yeovil Town.
Partial exemption – Volkswagen Financial 11
Services (UK) Ltd

What is acceptable tax planning? The Ocean 12
Finance case pushes the boundaries

Mundays blues – when can you claim VAT on 13
accountancy fees?

Other cases and recent changes 14

Looking into the future 15

And finally…whatever happened to 'Spot The 16
Ball' competitions?

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

1 Introduction 2 VAT registration

It was 40 years ago that VAT was introduced in the UK. 2.1 2013 Budget changes
There was a standard rate of 10% and we were promised
that it would be a ‘simple tax’. How things change. Continuing the trend of the past few years, the registration
and deregistration thresholds were each raised by £2,000.
In the last year there have been no headline-grabbing With effect from 1 April 2013 the registration threshold
changes announced in the Autumn Statement or in the is £79,000 (previously £77,000) and the deregistration
Budget, and by contrast the tax profession has been almost threshold is £77,000 (previously £75,000).
overwhelmed by consultation documents in advance of
proposed changes. However, despite being around for 40 2.2 Other aspects of registration
years, the basic principles of VAT still continue to evolve
and sometimes it is unclear whether the decisions of the Remember that recharged expenses such as travel,
courts clarify our understanding or just muddy the waters accommodation and subsistence are included in turnover
further. when working out whether the threshold has been crossed.

Tribunal cases have dealt with perennially difficult areas A liability to be registered can also arise because the value of
and I have looked at some of these in detail covering what goods acquired (imported) from other EU countries exceeds
is, or is not, a ‘building designed as a dwelling’ and deciding the threshold or, even more unexpectedly, because the
whether a transaction is a Transfer of a Going Concern. level of deemed supplies accounted for under the reverse
There have also been several cases regarding whether a charge exceeds the threshold. The latter can be particularly
supply comprising several elements is one supply for VAT difficult to spot and for businesses to understand.
purposes or a multiple supply with each supply having its
own VAT liability. There is now also the possibility that a Example 1
single supply may have elements that are liable to different
VAT liabilities. You might have thought that this issue was A firm of financial advisers, which provides exempt
largely decided with the Card Protection Plan case in 1999 financial advice, receives consultancy services from
but it is something that continues to evolve, as seen in an American company valued at £100,000 on 30
Colaingrove and other cases. September 2012. The American company is based
solely in America and so does not charge VAT on its
Another area where the long-established boundaries fees. However, the services follow the general rule
are changing is the exemption for finance. The Retail on business services and are deemed to be supplied
Distribution Review has already forced financial advisers in the UK and the recipient is liable to account for
to look hard at the VAT liability of the services they provide output tax on the value of the services using the
and more changes are on the way that may extend standard reverse charge mechanism. As the value of the fees
rating to more financial services. has exceeded the current VAT threshold the firm of
financial advisers is liable to register for VAT and
The difference between acceptable tax planning and pay output tax of £20,000 on fees that it has incurred!
unacceptable tax avoidance remains at the forefront of
public debate and VAT is no different from the other taxes This can be a serious issue because the recipient may
in this regard. The European Court decision in the Ocean claim input tax on these services only insofar as the
Finance case has confirmed that in certain circumstances services are used for making taxable supplies, so a
the strict contractual position can be disregarded if this business can unwittingly create a VAT liability. In
does not reflect the ‘economic and commercial reality’ the example, the firm of financial advisers makes
of the transactions, but we are not yet sure what those only exempt supplies so it cannot claim any of the
circumstances might be. £20,000 VAT it has paid to HMRC. A business that
considers itself fully exempt, and so is probably not
Advisers providing general tax and accountancy services aware of the existence of the VAT reverse charge
should also look at the Mundays case for an instance of procedure, has become liable to be registered and
where VAT on fees for accountancy and tax services was what is more has landed itself with a £20,000 VAT
disallowed. liability that it was not expecting.

Whatever changes have taken place in the world of VAT Note that a business making wholly taxable supplies can
over the past 40 years one thing has remained the same: claim all the VAT it accounts for under reverse charge as
it is a challenging place for the adviser juggling with the input tax subject to the normal rules.
pressures of client expectations, complex legislation, and
the demands of HMRC. 2.3 Businesses selling to the public

For a typical service business that sells to the general public
rather than to other businesses the requirement to account

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax –An Update

for VAT on selling prices can be a serious disadvantage. VAT can still make a claim. The timing of expenditure
In the current economic climate in particular the business around the time of registration is crucial because the
will find it difficult, if not impossible, to increase prices by input tax incurred before the date of registration
20%. This makes it more important than ever for a business may be eligible for a claim for pre-registration input
whose turnover is approaching the registration threshold tax, but it will not be recoverable if incurred after the
to monitor its monthly sales. date of registration unless it is for a single purchase
of capital assets that cost £2,000 or more, including
2.4 Measures to mitigate the effect of registering VAT.
for VAT
Example 2
• Make use of the month’s interval between exceeding
the threshold and the effective date of registration. A business is approaching the VAT threshold and
wants to use the Flat Rate Scheme. The business will
Note that this does not apply where turnover in the be registered for VAT and for the Flat Rate Scheme
next 30 days alone will exceed the threshold. with effect from 1 December 2013. The business
knows it will be purchasing equipment costing
• Consider using the Flat Rate Scheme for small £1,800 including VAT in the next two months. If the
businesses if annual turnover is expected to be below expenditure is incurred before 1 December the input
the thresholds for entry into the scheme. tax of £300 can be claimed on the first return after
registration as part of a claim for pre-registration
The scheme allows a simplified way of calculating VAT. However, if it is not purchased until after
the VAT payable to HMRC and avoids the need for 1 December 2013 no input tax can be claimed as
detailed VAT records (although adequate records must generally input tax cannot be claimed under the flat
be kept for other tax purposes). In essence, a business rate scheme.
in the scheme simply applies a fixed percentage to its
business income (including VAT where applicable) to Therefore capital expenditure should be brought
work out the VAT it pays to HMRC. The percentage forward to before the date of registration. However,
varies according to the type of business. There is also if a single purchase of capital expenditure is £2,000
a useful 1% reduction in the flat rate for businesses in or more the related input VAT can still be claimed
their first year of VAT registration. It is not suitable for under the scheme.
all businesses and so the calculations must be done
first to ensure that the business is better off using the 2.5 Businesses temporarily exceeding the
scheme. Businesses with exempt or zero-rated sales registration threshold
should not use the scheme, nor should businesses
involved in EU acquisitions. Advisers are aware that if a business temporarily exceeds
the registration threshold, usually due to a large one-off
• Maximise the claim for pre-registration input tax. sale, it can apply to the VAT Commissioners for exception
from registration. The business must provide evidence that
When a business registers for VAT it can claim the its turnover over the next twelve months will not exceed
input VAT on certain expenditure it incurred before the deregistration threshold in effect at the time it became
it was registered. This is a one-off claim and so liable to be registered.
the business must ensure that it is as complete as
possible. The case of Mark Mills-Henning [2012] UKFTT 444 (TC) offers
a cautionary tale of a business that temporarily exceeded the
VAT can be claimed on assets (including stock) on VAT threshold. In the summer of 2007 Mr Mills-Henning
hand at the date of registration that are to be used was very busy and his turnover exceeded the threshold,
in the business for making taxable supplies. The although at the time he was not aware of this. Later when
assets must have been purchased in the four years his accountant was preparing the annual accounts he noted
before registration and the business must hold VAT that the business had exceeded the threshold but that its
invoices as evidence of the purchase. turnover had subsequently fallen so that it was below the
deregistration threshold. The accountant did not advise his
The input tax on services received for business client that he should have registered for VAT and neither
purposes in the six months before registration can did he notify HMRC.
also be claimed as long as they have not been used
in making goods that have been supplied before the Unfortunately the exception from registration is not
date of registration. automatic; it can only be granted by HMRC and so they
must be notified when the registration threshold is crossed.
There are special provisions to deal with expenditure In the Mark Mills-Henning case HMRC saw from his self-
incurred before a company is formed. assessment tax return that he should have been registered

The claim for pre-registration input tax is made on
the first VAT return.

A business registering for the Flat Rate Scheme for
small businesses at the same time as registering for

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

from December 2007. Mr Mills-Henning duly registered of 1 January 2012, believing that he would be able to claim
and tried to recover the output tax he should have the VAT on all pre-registration expenditure incurred in the
accounted for by raising VAT-only invoices on his main previous four years. HMRC accepted the application and
customer. To make matters worse this customer went into allocated a registration date of 1 January 2012. The director
liquidation and did not pay the invoices so he had to bear soon became aware that most of the input tax had been
most of the VAT as he could claim bad debt relief only on incurred on services received more than six months before
the VAT fraction of the outstanding invoices. the date of registration and that this VAT was irrecoverable.
On 1 February 2012 he asked HMRC if they would backdate
Planning points the date of registration to 1 April 2009. Unsurprisingly,
HMRC refused, explaining that they would backdate the
Businesses making taxable supplies must monitor registration only if there had been a ‘departmental error’ in
their monthly turnover to ensure that a liability to dealing with the application, or if Cambrian Hydro had been
register for VAT is recognised at the right time. liable to be registered from an earlier date.

If claiming exception from registration the business Cambrian Hydro appealed on the basis that if, during the
should not inadvertently apply for registration by online registration process, they had been made aware
completing form VAT 1, the circumstances should of the six month limit on claims for pre-registration VAT
be set out in writing to HMRC. on services, they would clearly have requested an earlier
registration date. They also claimed that the difference
2.6 Backdating the effective date of registration between goods and services for VAT purposes had not been
explained during the registration process.
A point that is sometimes missed when considering
registration is that it can either be from the date a business The tribunal clearly felt that Cambrian Hydro’s position
becomes liable to be registered or from an agreed earlier was ‘unfair and unjust’ after having made a genuine error
date. This is useful where there is a long lead time between and looked for any other basis on which HMRC should
starting to set up a business and making the first supply. allow backdating. They found it in HMRC’s Manual V1-
A potential business may incur considerable costs in, for 28, Volume 1: Registration, where section 33.1.2 allows
example, planning applications, product development, or additional criteria to be taken into account when deciding
training well over six months before it has to register for to permit a late request for backdating if there are thought
VAT. In order to claim the VAT on these costs the business to be ‘mitigating circumstances’. The tribunal considered
should register from the date it can show a clear intention that in this case there were mitigating circumstances in
to trade. HMRC will need to be sent adequate evidence of that if the significance of the director’s action in choosing
the intention to trade, for example, a copy of the business 1 January 2012 had been made clear to him at the time of
plan, an agreement to lease business premises, applications making the online application he would have chosen a
for finance, etc. Note that the date of registration cannot be different date. The online registration process does not allow
backdated by more than four years. for explanations or comments to be added to the form and
so there had been no opportunity for HMRC to see that a
An important point to note is that HMRC take a ‘one bite mistake had been made. Nevertheless the tribunal decided
of the cherry’ approach when agreeing an effective date of that in the interests of fairness and justice the decision not
registration. Once a business has registered for VAT HMRC to allow the late backdating should be revised in the light
will generally refuse a later request to backdate the date of the information now available.
of registration. Backdating is sometimes allowed where
HMRC have made an error in processing the application or This decision seems to put HMRC’s officers in the
if the applicant has made a genuine error in a few restricted unenviable position of having to read the minds of
circumstances. applicants and dealing with information submitted on the
basis of what the applicant meant to submit rather than
But in the case of Cambrian Hydro Power Limited v Revenue what they actually did submit!
and Customs Comrs [2012] UKFTT 764 (TC) TC02423
(‘Cambrian Hydro’) the Tribunal decided that HMRC Planning points
should allow a late request for backdating in circumstances
in which HMRC would normally refuse it. When advising on VAT registrations consider
whether there is any benefit in backdating the
Cambrian Hydro is a company that was formed to pursue a effective date of registration.
hydro-electric power project and from 2009 has been incurring
costs on reports required for various planning purposes. At Consider if it is worth looking at any cases where a
the end of 2011 a director of the company applied online for a request for backdating has been rejected. As this is a
voluntary VAT registration and requested a registration date First Tier Tribunal decision it is binding only on the
parties involved, but in an identical situation it may
be worth appealing.

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

2.7 Non-resident businesses making supplies in submit EC Sales Lists online the trader must register for the
the UK online service, although they can then appoint an agent to
submit the returns on their behalf.
From 1 December 2012 the registration threshold is not
available to any business that is based outside the UK but 3.1 Payment by electronic means
which makes supplies in the UK. See 14.5 below.
The easiest method is to set up a direct debit and this
2.8 Online VAT registration also extends the payment date by three days. However,
payment can be made by:
Most types of VAT registration can now be completed
online. This should speed up the registration process. • CHAPS;
However, there are some cases where a paper submission
should be made, principally where the applicant is claiming • BACS;
exception from registration. Applications involving
distance selling in the UK, acquisition of goods from other • Internet or telephone banking, including Faster
EU countries and other unusual circumstances should also Payments;
be made on paper. Check the HMRC website for the current
position. • credit card or debit card using Billpay; and

Applications to join the Flat Rate Scheme for small • bank giro.
businesses can also be made online at the same time. If you
are completing an application to join the Flat Rate Scheme Note that payment deadlines refer to the date that HMRC
you must be careful in how you describe your business is in cleared funds. So if payment is due by a Monday the
activities in the business classification section. HMRC will business must allow for clearance time so that HMRC
automatically assign a business to a particular flat-rate has the cleared funds in their account on the Monday.
sector based on the description of the business and it may Payments due on a Saturday or Sunday must be cleared
be difficult to change this later. by the preceding Friday. Depending on the clearance times
operated by the business’s bank the payment may have
Online registration can also include an application to join to be initiated a few days earlier and must allow for the
the Annual Accounting Scheme, and the additional forms Saturday and Sunday. If the Monday is a bank holiday the
for creating a group registration, as well as notification of payment should be brought forward so that HMRC is in
an option to tax. cleared funds by the preceding Friday.

If the business involves making supplies of property an 3.2 Other online VAT services
additional VAT Form 5L may have to be completed.
In October 2012 the online service was expanded so that
in addition to registration the following tasks can now be
done online:

3 Online VAT • change registration details; for example, change the
principal place of business address;
All VAT returns due for periods starting on or after 1 April
2012 must be filed electronically and payments of VAT to • download a copy of the certificate of registration;
HMRC must be made by one of the electronic methods.
Very few exceptions will be allowed to the requirement to • apply to deregister.
file and pay electronically, the most common exemption
being because of the taxpayer’s religious beliefs. Note that some services are not available to agents.

EC Sales Lists (ESLs) and Intrastat returns must also be The new scheme for notifying HMRC of vehicles brought
filed electronically. into the UK (Notification of Vehicle Arrivals, or NOVA) was
introduced in April 2013 and this is also mainly an online
Businesses no longer receive paper returns and so if system (see 14.11 below).
they have not signed up to online filing they will not be
receiving a prompt to make a return. Consequently they One area that remains paper-based is the disclosure of
may be racking up penalties for late filing. misdeclarations of VAT. This makes it all the more important
to check online returns carefully before submission. It can
If traders cannot file online they can appoint an agent to take several weeks for a correction to be processed. HMRC
file on their behalf. The agent can arrange this without the say that they do not expect ‘careless’ errors to be formally
trader having to register for the online service. Note that disclosed (unless they are too big to be corrected on the next
the agent can only use this procedure when he or she is return), but if a careless error is not disclosed to them as soon
going to file VAT returns on behalf of the trader. In order to as it is discovered, and HMRC subsequently discover the
error, there is the possibility that a penalty will be imposed.

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

4 2013 Budget • Review of the Retail Export Scheme. This is the
scheme that allows visitors from non-EU countries
Perhaps because the VAT changes announced in last year’s to reclaim VAT on goods that they buy in the UK and
Budget were somewhat less than universally welcomed which they take home in their luggage. HMRC want
there was very little in the 2013 Budget regarding VAT. Most to redesign the scheme to make it easier to understand
of the announcements related to current or forthcoming and use, so reducing errors and opportunities for
consultations and changes that have previously been fraud. They have been undertaking a consultation
announced. on how this can be done during the summer of 2013.

A summary of the Budget VAT announcements: • Consultation on treatment of refunds made
by manufacturers. The Government intends to
• Registration and deregistration thresholds increased introduce changes that will allow manufacturers
(see 2.1 above). to take into account refunds that they make direct
to customers in respect of faulty goods, etc when
• Slight changes were introduced to the operation of calculating their VAT liabilities. However, no change
road fuel scale charges to take effect from the date of is expected until the 2014 Budget.
Royal Assent.
• In 2014 the Government intend to add Health
• As previously announced, from 1 April 2013 the Education England and the Health Research
reduced rate of VAT (currently 5%) applies to Authority to the bodies that can use the VAT Refund
passenger transport provided by small cable-based Scheme under the VAT Act 1994 s 41.
systems. On transport systems where each car
or gondola can carry ten passengers or more the 5 Land and buildings
transport was already zero-rated.
This is a very complicated area of VAT and an area
• Withdrawal of the reduced rate for the supply and where a mistake is likely to be very expensive. HMRC’s
installation of energy-saving materials in buildings guidance regarding land (VAT Notice 741) and buildings
used for relevant charitable purposes. Supplies and construction (VAT Notice 708) grows ever longer as
made on or after 1 August 2013 will be standard changes to the legislation and the testing of the boundaries
rated. The reduced rate will continue to apply to the in the courts refine and alter the interpretation of the law.
supply and installation of energy-saving materials in
residential accommodation. The long-term future of 5.1 Definition of ‘dwelling’
the application of the reduced rate to energy-saving
materials is in doubt because the EU Commission The meaning of ‘dwelling’ for VAT purposes is important
believes that this is beyond the scope of the supplies because buildings designed as dwellings, together with
which can be reduced-rated, as laid down in EU buildings used for a ‘relevant residential purpose’ or a
legislation. The Commission has begun infraction ‘relevant charitable purpose’, receive a favourable VAT
proceedings against the UK, but it may take a year treatment.
or so before it actually gets to court. In the meantime
the UK Government has stated that it does not agree 5.1.1 Background
with the Commission’s view and the reduced rate
will continue to apply. Construction services are generally standard rated but
there are some important exceptions.
• Withdrawal of the exemption for business research
supplied by one eligible body to another. This was Construction services supplied in the course of constructing
the subject of a consultation and subject to the a building ‘designed as a dwelling or number of dwellings’
responses to the consultation the government will or constructing a building used for a relevant residential
proceed with this change with effect from 1 August purpose may be zero-rated. If the construction services are
2013 (see 14.13 below). supplied in the course of a ‘qualifying conversion’ they are
reduced rated. If the construction services are supplied in
• Consultation on the proposed changes to the place the course of constructing a building used for a relevant
of supply of broadcasting, telephone and electronic charitable purpose they may also be zero-rated. I am not
services (see 15.3 below). covering the zero-rating of work comprising approved
alterations to listed buildings as this has been withdrawn
• Consultation on changes to the zero-rating of exports. – see above for transitional arrangements.
The government is proposing to extend zero-rating
to supplies of goods to businesses that are registered A claim under the Do-it-yourself Housebuilders Scheme
for VAT in the UK but which do not have a business can be made only in respect of a building designed as a
establishment in the UK and which arrange for the dwelling or buildings to be used for relevant residential or
export of those goods outside the EU. This would relevant charitable purposes.
bring the UK into line with EU law and is expected
to help a small number of businesses. The changes
will take effect from 1 October 2013.

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

Note that ‘construction services’, ‘qualifying conversion’, Note that a planning restriction on who can occupy a
‘relevant residential purpose’ and ‘relevant charitable dwelling generally does not constitute a restriction on
purpose’ have specific meanings for VAT purposes. Before separate use. However, if a condition links the occupant of
advising on the VAT status of construction services you the dwelling very closely to associated business premises it
must make sure that the services are construction services may be regarded as such so that the building does not meet
and that you understand the status of the building that is the definition of ‘designed as a dwelling’.
being constructed or converted. VAT Notice 708 Buildings
and construction is a good starting point. 5.2 Live-work units – a nasty VAT trap

In the case of the construction of buildings to be used for As local authorities try to encourage the re-use of older
relevant residential or relevant charitable purposes the buildings while at the same time encouraging businesses,
customer must issue a certificate to the main contractor there have been more cases involving properties that combine
confirming the status of the building. The contractor must residential and business use. Many of these are designated
hold a certificate in these circumstances in order to zero-rate ‘live-work’ units by the terms of the planning consent and
his or her supplies. No certificate is required where buildings there are usually conditions in the consent that are designed
designed as dwellings are being constructed or created to prevent the business part of the property from being used
by conversion. A consequence of this is that only the main for other purposes or by someone different from the occupier
contractor can zero-rate the supplies where a certificate is of the residential area. Commonly it is forbidden to sell one
required; certificates cannot be issued to sub-contractors and part separately from the other. This leads to a VAT problem for
so they charge VAT at the standard rate to the main contractor. the developer or, frequently, the self-build claimant because
As no certificates are required in the case of buildings designed HMRC do not regard the typical live-work unit as a dwelling
as dwellings any supplier of construction services relating to a for VAT purposes. This means that VAT at the standard rate is
new dwelling may be able to zero-rate their supplies. due on the construction or conversion costs and also possibly
on the onward sale, and it is not eligible for a claim under the
In addition, the first grant of a major interest (the sale Do It Yourself Housebuilder Scheme. Unfortunately HMRC’s
of the freehold or the grant of a long lease) in a building guidance in Notice 708 Building and Construction on the
designed as a dwelling or dwellings or in a building used construction of live-work units is not altogether clear and this
for a relevant residential or relevant charitable purpose by was brought to a head in the case of Adrian and Jane Holden v
the ‘person constructing’ is zero-rated. Revenue and Customs Comrs [2012] UKFTT 357, (TC) TC02043.

5.1.2 Dwellings Mr and Mrs Holden owned premises that comprised
a photographer’s studio and workshop, an office and
There is no legal definition of ‘dwelling’. For VAT purposes a garage. They demolished the office and garage and
a building ‘designed as a dwelling or number of dwellings’ replaced it with a flat, so creating a live-work unit. One of
is a building where each dwelling in it: the conditions imposed by the planning permission for the
construction of the flat stated:
• consists of self-contained accommodation;
‘The flat hereby permitted shall be occupied only in
• has no provision for direct internal access to any conjunction with the operation of the photographic
other dwelling or part of a dwelling; studio from 240a Highbridge Road.’

• is not subject to any covenant, statutory planning Mr and Mrs Holden submitted a housebuilder’s claim in respect
consent or similar provision that prohibits its of the VAT incurred on the materials used in the construction
separate use or disposal; and of the flat. As mentioned above, a claim can be made only in
respect of the construction of a dwelling as defined for VAT
• has been granted statutory planning consent and purposes, or in respect of the conversion of a non-residential
it has been constructed or created by conversion in building into a dwelling. HMRC denied the claim on the basis
accordance with that consent. that the flat failed the separate use or disposal condition and so
was not a dwelling for these purposes.
All these conditions must be met for the accommodation
to be a dwelling. Despite these conditions having been Mr Holden referred to the published guidance on live-
applied for many years there are frequent disagreements work units in Notice 708, paragraph 15.4. This paragraph
with HMRC as to their meaning and application. The describes a live-work unit and then states that: ‘Zero rating
third condition regarding ‘separate use or disposal’ in or reduced rating is only available to the extent that the unit
particular is the cause of many disputes that often arise on comprises the dwelling, provided that the dwelling meets
the meaning and interpretation of the restrictive clauses the normal conditions…’. Mr Holden’s argument was that
that planning authorities use in planning consents. There a live-work unit could never qualify for the zero rate or
have been some recent cases concerning ‘live-work’ units the reduced rate as by definition the residential part could
that show just how difficult it can be to decide whether a not be separated from the non-residential. The legislation
building is a dwelling. HMRC’s guidance on the subject is
not altogether clear, adding to the confusion.

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

should be interpreted so as to apply the zero rate to the view on the restriction. The planning authority replied that
creation of the new residential property. in their view there was one live-work unit and that separate
disposal of the residential part would not be permitted.
Although the tribunal was sympathetic to Mr Holden’s
argument it could only ‘construe and apply the legislation The tribunal was having none of it and looked at the
as it stands’. Therefore the Holdens’ appeal was dismissed. actual wording of the condition 6. It dismissed HMRC’s
interpretation of the condition and also ignored the
HMRC’s view of VAT and live-work units is given in their VAT planning authority’s comments as having no legal effect.
Construction Manual at VCONST14210. HMRC state that the
residential part of a live-work unit will qualify for zero-rating In practical terms, the restriction prevented the separate
only if that part meets all the conditions as a dwelling. The disposal and use of the commercial building because if the
manual notes that, as planning consent often prevents separate residential building was sold separately, the commercial
use or disposal of the residential part from the commercial building could not be used. However, there was nothing
part, live-work units often do not qualify for zero-rating. The in the planning permission to prevent Mr Barkas from
residential part will qualify if it there are no restrictions on doing just that. He could choose to sell the house and keep
separate use or disposal, or if there is no separate designated the commercial building, leaving it unused. Therefore
area that has to be used for business purposes. condition 6 did not prevent the separate use or disposal of
the residential building and so it was eligible for a claim
5.3 Separate use – what does the planning under the DIY Housebuilders Scheme.
permission actually say? The Barkas case
HMRC are clearly unhappy with this decision and intend
However, the conditions in planning permissions have to to appeal to the Upper Tribunal
be read carefully and the right wording may mean that
there is no restriction on the separate use or disposal of the Planning points
residential part of the building.
When intending to build residential accommodation
The actual wording of the planning permission was the or convert non-residential buildings into residential
issue in the case of Barkas v Revenue and Customs Comrs accommodation it is essential to check the planning
[2013] UKFTT 186, (TC) TC02601. Mr Barkas owned two consent and in particular any conditions to the
adjacent barn-like buildings which had both been used for consent for any restrictions on use or disposal.
commercial purposes. There was no internal access from
one building to the other. He applied for permission to If restrictions are to be imposed on use, they should
convert one building into a dwelling and proposed that be imposed on the commercial part of the business
the other building remain in commercial use. In order to rather than the residential part.
comply with the planning authority’s development policies
it was proposed that the dwelling and commercial building 5.4 Residential conversions – a setback for
should be used as a live-work facility. HMRC in the case of Alexandra Countryside
Investments
Planning permission was granted for the conversion and
among the conditions was the following: The cases involving property conversions continue to
surprise. The decision in the case of Alexandra Countryside
‘6. The workshop/office within the application site shall Investments Limited v Revenue and Customs Comrs [2013]
only be used/operated by the occupiers of the dwelling UKFTT 348, (TC) TC02751 contradicts HMRC’s longstanding
hereby granted permission.’ policy regarding the conversion of non-residential property
that already contains a residential part. The policy was a
On completion of the conversion Mr Barkas made a claim result of the Calam Vale case in 2001, when it was decided that
for the VAT incurred on materials used in the conversion where a mixed-use building was converted into dwellings
under the Do It Yourself Housebuilders Scheme. The claim the first grant of a major interest in those dwellings by the
was rejected on the basis that the effect of condition 6 was person converting was zero-rated only if the additional
that it was ‘not possible to use the dwelling separately from dwelling or dwellings created were created from the non-
the working space’ and therefore the residential building residential parts. If the additional dwelling or dwellings
did not qualify as a dwelling. created included an area that had been part of the residential
part of the original building then any onward supply would
HMRC admitted that there was no condition prohibiting be exempt. Therefore a developer who divided a mixed-use
separate sale of the residential building. However, it building in the wrong way in the course of converting it to
contended that there was a restriction on separate use of dwellings could find that none of the VAT on the conversion
the residential area even though the planning condition costs was recoverable.
referred only to separate use of the commercial area.
HMRC also wrote to the planning authority to obtain their

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The first chink in HMRC’s armour was opened in Revenue holiday lettings and the management of the hotel and
and Customs Comrs v Jacobs [2005] EWCA Civ 930, [2005] grounds were carried out by a management company
STC 1518 where a developer claiming input VAT under s 35 appointed by the developer. The management company
(the Do-It-Yourself Housebuilders Scheme) was successful acted as undisclosed agent in letting the apartments, so that
in establishing that the meaning of the restrictions in Note 9 as a far as the guests were concerned they were not renting
to Group 5 Schedule 8 of VAT Act 1994 was that if a building the apartment from Mr and Mrs Roden.
already contained a residential part, the conversion must
merely result in an additional dwelling, or additional Under the terms of their lease from the developers of the St
dwellings, being created in the building to qualify for Moritz Hotel the Rodens could not reside in the apartment
zero-rating. There was no requirement that the additional themselves for more than eight weeks a year.
dwelling or dwellings should be created from just the
non-residential parts. HMRC realised the seriousness of VAT at the standard rate had been charged on the lease
this case by fighting it all the way to the Court of Appeal. from the developers to the Rodens. HMRC and the Rodens
However, they lost and in a damage-limitation exercise did not contest this.
issued a business brief stating that the revised treatment
applied only to claims under s 35 and not to zero-rating The Rodens had then registered for VAT on the basis that they
under s 30. would be making supplies of ‘sleeping accommodation in a
hotel’, which are standard rated under Item 1(d) of Group
I suppose it was only a matter of time before someone 1, Schedule 9 of VAT Act 1994. On this basis they claimed
challenged the different treatment of conversions carried input VAT of £70,000 on the lease premium. HMRC ruled
out by a self-builder from conversions carried out by a that the supply of the accommodation was exempt and
developer. The Alexandra case involved the conversion of therefore disallowed the claim for the input VAT. HMRC
a former public house into two dwellings. The public house contended that the supply was not standard-rated because
had contained a flat and each new dwelling was created their supply was to the management company. The supply
partly out of the flat and partly out of the commercial areas. of the accommodation by the management company to
According to HMRC’s policy the first grant of a major the guests was standard-rated but the Rodens’ supply was
interest in neither new dwelling would qualify for zero- exempt because the management company did not actually
rating; the grants would be exempt and hence none of the use the accommodation itself. The Rodens appealed.
VAT incurred on the conversion costs would be recoverable.
This was because each new dwelling incorporated a part of The main argument of their appeal was that the VAT status
the building that had previously been residential. of the supply could not be altered because it was made
via an undisclosed agent (the management company).
Applying the principle used in the Jacobs case the tribunal UK VAT law allows HMRC to treat a supply made via an
noted that before the conversion there was one dwelling undisclosed agent to be treated as made to and by that
in the building and after the conversion there were two agent. They asserted that the VAT status of the supply to
dwellings. Therefore the condition in Note 9 was met and and by the undisclosed agent must be the same.
the first grant of a major interest in the new dwellings was
zero-rated. Their secondary argument was that Item 1(d) made no
mention of the recipient of the supply and that HMRC were
So far there has been no response from HMRC. As a First incorrect in inferring that the supply of accommodation had
Tier Tribunal decision it is only binding on the parties to be made to the actual user in order to be standard-rated.
involved and so it may take a further case to establish the
new principle or for HMRC to appeal to the Upper Tribunal. The main argument rested on the decision in the Court of
However, in view of their defeat in the Court of Appeal in Justice of the European Union (‘CJEU’) case of Belgium v
the Jacobs case HMRC may not wish to take it further. Henfling (acting as administrators in the insolvency of Tiercé
Franco-Belge SA): C-464/10, [2011] STC 1851. (CJEU is the
5.5 Supply of sleeping accommodation in an inn, new name for The European Court of Justice (‘ECJ’). Both
hotel or similar terms are used in this update.) The general principles of
the treatment of agents and principles under EU law and
Roden v Revenue and Customs Comrs [2012] UKFTT 586, (TC) UK law were discussed at length. The tribunal noted the
TC02263 covered the scope of the standard rate with regard difficulty in applying EU law to the situation where the
to the supply of accommodation as well as highlighting the agent is undisclosed, or ‘acting in his own name’ in EU
differences in the legal status of supplies via undisclosed terms. In contrast to UK law, in EU law the undisclosed
agents in EU law and UK law. agent is regarded as the principal when he makes the
supply to the customer; there is a deemed supply from the
Mr and Mrs Roden bought a holiday apartment in a hotel supplier to the agent but there is no deemed supply from
development. The St Moritz Hotel, which, despite the name, the agent of his own services to the supplier.
is in Cornwall, sold apartments on long leases to private
investors who could then let them to holiday-makers. The

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Be that as it may, the tribunal decided that the decision in 6.1 Transfer of Going Concern – general
Henfling did not preclude the deemed supply to the agent
from being of a different VAT status from the supply by the The fundamental principle is that if assets comprising a
agent. taxable business or part of a taxable business are transferred
to a person who is VAT registered, or becomes liable to be
However, the tribunal did agree with the Rodens’ registered as a result of the transfer, and who then operates
secondary argument. The judge could find nothing in that business with no significant break, then no VAT is due
Item 1(d) or in Article 135(2) of Directive 2006/112, on the sale of those assets. The supply of the assets is treated
to which it corresponds, that supported HMRC’s as outside the scope of VAT. The detailed conditions that
contention that the accommodation had to be supplied must be met for TOGC treatment are set out at 6.2 below.
to the actual user. Therefore the supply of the apartment
from the Rodens to the management company was Although the law governing TOGCs is relatively short and
standard-rated. seemingly simple, the interpretation of what constitutes a
TOGC is often far from straightforward and is the subject
The sting in the tail of detailed guidance from HMRC in Notice 700/9 Transfer
of business as a going concern. This includes a number of
As has already been stated, both parties agreed that the decisions in tribunal and court cases.
lease from the developer to the Rodens was standard-
rated. However, the judge questioned why this should It is crucial to establish whether a transfer of assets
be. The lease was not zero-rated as it was in relation constitutes a TOGC for VAT purposes because VAT must
to a ‘building designed as a dwelling’ but which could not be charged on assets in a TOGC, but there is a major
not be used for permanent residence. Should it then exception for land subject to an option to tax, as explained
have been exempt? The judge thought this to be the below.
case unless the developer had exercised an option
to tax over it – and there was no evidence of this. If If a transaction is wrongly construed as a TOGC, the
the lease was exempt then the VAT had been charged transferor is liable for the output VAT that has not been
incorrectly and the Rodens were not entitled to claim charged. This may not be recoverable from the transferee.
it as input tax.
On the other hand if a transaction is not treated as a
What was not mentioned was whether the hotel was a TOGC but should have been, the transferee has been
‘new’ building at the time of the grant of the lease. If it was charged VAT incorrectly and so is not entitled to recover
under three years old when the grant was made it would be it as input tax. There have been many cases where VAT on
standard-rated under Item 1(e) of Group1 Schedule 9 of the assets purchased has been disallowed by HMRC because
VAT Act 1994. If it was over three years old then the lease they viewed the transaction as a TOGC but the parties to
should have been exempt unless an option to tax had been it did not. The transferee’s first course of redress is to try
exercised. to recover the VAT from the transferor, who by then has
often moved on and sometimes cannot be traced. However,
Planning point HMRC may allow the transferee to treat it as input tax if the
transferor has declared and paid the output tax to HMRC.
All this goes to show that advice should always be
taken in relation to transactions involving land and This makes it extremely important that written sale and
buildings, especially if they involve dwellings that purchase of business agreements are used and that they
cannot be used for permanent residence. cover the liability for omitted or disallowed VAT and
consequent interest and penalties.

6 Transfer of Going Concern Note that in certain circumstances TOGC can take place
without any assets being transferred. This is important as
This is a perennial source of confusion and potential the transferee may be required to be registered from the
loss of VAT. However, following Robinson Family Limited date of the transfer, but may fail to do this because he is
[2012] UKFTT 360, (TC) TC02046 last year there has been unaware that a TOGC has taken place if there has been no
a welcome slight relaxation in the definition of a Transfer direct transfer of assets to him (see 6.4 below).
of Going Concern (TOGC) of a property-letting business.
6.2 Conditions for TOGC treatment of a supply of
Note: ‘Transfer of Going Concern’ or ‘TOGC’ refers to the assets
special meaning these terms have for VAT purposes and are
not used in their general sense. All the following conditions must be met:

• The assets are supplied to the person to whom the
business or part of a business is transferred as a
going concern. If a part of a business is transferred it

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must be capable of separate operation. The meaning from being a TOGC. If a business normally closes
of ‘going concern’ is covered in more detail below. as part of a seasonal pattern of trade this is not
considered a break in trade.
• The purchaser intends to use the assets in the same
kind of business. This can cause problems because Other features such as the transfer of goodwill, premises,
of the interpretation of ‘same kind of business’. For staff, and stocks strongly indicate that a TOGC has taken
instance, a restaurant may be sold to someone who place, but the absence of one or more of these features does
wants to convert it into a bar; this is not the same not mean that a TOGC has not taken place (see 6.4 below
type of business (and so TOGC does not apply to the for an example).
sale), but an Italian restaurant that is sold to someone
who runs it as a Greek restaurant is a TOGC. Before It is sometimes possible to obtain a ruling from HMRC as to
the transfer the purchaser does not need to have been whether a transaction is a TOGC, but often the timetable for
running the same type of business as the vendor. a transaction is not long enough to allow for this. Moreover,
in the recent case of the Royal College of Paediatricians and
Another consequence of this is that consecutive transfers Child Health v Revenue and Customs Comrs [2013] UKFTT
do not constitute a TOGC. For example, if Andrew sells 202, (TC) TC02617 HMRC helpfully confirmed that they
his business to Barry, who immediately sells it on to Colin, did not give TOGC clearances in transfers involving a
there can be no TOGC treatment of the assets because Barry property business nor post-transaction rulings.
does not actually use the assets in his business.
6.4 TOGC – there does not have to be a transfer of
• If the vendor is a taxable person the purchaser must assets
be a taxable person or must become one as a result
of the transfer. Remember that a ‘taxable person’ is This is, perhaps, a surprising aspect of TOGC, but it was
a person that is registered or is liable to be registered brought into focus by the case of Mark Young t/a The St
for VAT. This means that, in a TOGC, if the vendor Helens v Revenue and Customs Comrs [2012] UKFTT 702,
is registered, or should have been registered, because (TC) TC02371. I think it is worth looking at this case in
his turnover is above the registration threshold the detail because it shows how difficult it can sometimes be
purchaser is automatically liable to be registered from to identify a TOGC.
the date of the transfer. If the vendor is voluntarily
registered for VAT the purchaser does not have to 6.4.1 Background
register from the date of the transfer, although in that
case there is no TOGC and VAT is charged on the The St Helens restaurant had been operated by Mr Young’s
assets transferred in the normal way. company, Bonne Bouchee Caterers Limited (‘Bonne
Bouchee’). Bonne Bouchee had leased the premises,
6.3 What is a ‘going concern’? furniture and equipment and so owned no assets of its own
except the stock and possibly goodwill. Mr Young was the
A going concern for VAT purposes may not be a going chef at the restaurant. Bonne Bouchee became insolvent and
concern as it is commonly understood. There is no firm ceased to trade at the end of January 2009. On 4 February
definition of a TOGC; it is a matter of fact, although over 2009 the company wrote to its suppliers informing them
the years decisions in various cases have given us pointers it had ceased trading and was insolvent. As a result the
as to whether a transaction is a TOGC or not. Importantly, landlord foreclosed on the lease and repossessed the
the substance of the transaction is more important than premises. Unpaid suppliers repossessed the other assets.
its form. This means that a transaction cannot be made a
TOGC merely because the contract or agreement says that Mr Young negotiated a new lease from the landlord in his
it is. own name and reopened the restaurant on 14 February 2009
trading on his own account. He did not purchase any assets
In addition to fulfilling the conditions set down by statute, from Bonne Bouchee. He obtained advice from the HMRC
as described above, the following are essential features of VAT helpline on whether he was required to be registered
a TOGC: and believed that he would not have to register for VAT
until his turnover exceeded the registration threshold. He
• The business transferred must be capable of duly registered with effect from 1 September 2009.
operation and so must still be operating at the time
of the transfer. It need not be profitable and may However, HMRC decided that a TOGC had taken place
even be insolvent but it must still be active. and therefore in determining whether he should have
registered for VAT on 14 February Mr Young should have
• There must not be a significant break in trade on the taken Bonne Bouchee’s turnover into account, as required
transfer. A short closure for redecoration or refitting by VAT Act 1994 s 49. On that basis HMRC decided he
can be ignored. However, the definition of a ‘short’ should have registered with effect from 14 February. Mr
closure depends on the circumstances and breaks of Young appealed against that decision.
two or three weeks need not prevent a transaction

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The tribunal considered there were three issues to be The tribunal did not consider whether Mr Young could rely
resolved: on the apparently incorrect advice obtained from the VAT
helpline to prevent HMRC from backdating his effective
• Did the transfer of the premises, fixtures and date of registration.
fittings from Bonne Bouchee to the landlord (on
repossession) and then to Mr Young preclude a This cautionary tale also illustrates that a TOGC can take
transfer of the business as a going concern from place even if it is unintended, or even not desired, by the
Bonne Bouchee to Mr Young? parties as well as reiterating the point that an insolvent
business may still be a going concern for VAT purposes.
• Was there a sufficient break between Bonne Bouchee’s
cessation of trade and Mr Young’s commencement to 6.5 TOGC including land subject to an option to tax
prevent the transfer being a TOGC?
The exception to the principle of not charging VAT on
• Was the effect of the taking possession of the assets transferred in a TOGC is where the assets transferred
premises to put Mr Young in a position to carry on include land (‘land’ includes buildings) that is subject to
Bonne Bouchee’s business? an option to tax, or that is otherwise standard-rated, such
as a new commercial building. VAT must be charged on
The tribunal dealt with these three issues as follows: the land regardless of the TOGC rules, unless it has been
disapplied under the anti-avoidance provisions, or unless
6.4.2 Successive transfer of assets the following steps are taken.

The provisions relating to the treatment of assets transferred To avoid a VAT charge the transferee must notify the
in a TOGC are in Article 5 of the VAT (Special Provisions) transferor before the date of the transfer that he (the transferee)
Order 1995. The effect of those provisions is that assets has notified HMRC of his own option to tax in respect of
that are transferred in quick succession are unlikely to be the land. This means that an unregistered transferee must
considered part of a TOGC where the intermediate owner apply for VAT registration and notify HMRC of the option
does not use them to carry on the business. However, the to tax before the transfer. Time to do this must be built into
tribunal emphasised that Article 5 applies only to a supply any transfer of business arrangements.
of assets in a TOGC whereas VAT Act 1994 s 49 makes no
reference to a supply of assets; it refers only to a transfer of The transferee must also confirm in writing to the transferor
a going concern. Therefore the tribunal concluded that it that the option to tax will not be disapplied by the effect of
was irrelevant that there was no supply for VAT purposes the anti-avoidance provisions contained in VAT Act 1994
from Bonne Bouchee to Mr Young in determining whether Sch 10 para 12. This condition is sometimes overlooked.
a TOGC had taken place.
6.6 TOGC and a property-letting business
6.4.3 Break in trade
In certain circumstances the sale of let property can be
The tribunal considered the two- to three-week break in treated as the sale of a letting business and so the TOGC
trade to be a factor in considering whether there had been a provisions apply. This can be of advantage to the purchaser
TOGC, but not the deciding factor. as a property that otherwise may be subject to VAT can be
bought without VAT, obtaining a cash-flow advantage and
6.4.4 Carrying on the same business as before also reducing the SDLT payable on the purchase. HMRC’s
guidance on the transfer of a property-letting business
Mr Young obtained via the landlord the premises and distinguishes between the transfer of an interest in a
equipment that enabled him to recommence the business property and the creation of a new interest in a property:
carried on by Bonne Bouchee. He did not need to acquire the former can be a TOGC, but the latter cannot.
stocks from Bonne Bouchee as in the nature of the trade the
stocks were mainly bought fresh. He acquired any goodwill However, following the case of Robinson Family Limited
that attached to the premises or reputation of the restaurant [2012] UKFTT 360, (TC) TC02046 HMRC have amended
as it was run in much the same way and with a similar their guidance.
name as before and Mr Young continued to be the chef.
In Revenue & Customs Brief 30/12 HMRC set out the
6.4.5 Conclusion circumstances in which the grant of a lease or sub-lease,
which is the creation of a new interest, will nevertheless
The tribunal decided that in essence Mr Young was carrying qualify for TOGC treatment. HMRC’s view is that if the
on the same business as Bonne Bouchee and he had largely value of the reversionary interest retained by the grantor is
obtained the wherewithal to carry on that business, not more than 1% of the value of the property immediately
therefore it was a transfer of a going concern. The break in before the transfer then the transfer may still be treated as a
trade was not a deciding factor because it was clear that Mr TOGC if the other conditions are met.
Young intended to recommence the business as soon as was
practical. As a consequence of the TOGC Mr Young should
have registered for VAT with effect from 14 February 2009.

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

7 Financial services – the tectonic plates C-424/11, [2013] All ER (D) 117 (Mar) (‘Wheels’) case that
are shifting was waiting for a hearing at the CJEU. The Wheels fund
provides defined benefits pensions for certain employees of
The financial services industry has undergone a major the Ford Motor Company. In the UK pension funds are not
change with the implementation of the Retail Distribution regarded as SIFs and so are charged VAT on the investment
Review (‘RDR’) on 1 January 2013. For the first time many fund management services they receive. The pension
financial advisers have to decide whether they must charge fund, supported by the pensions industry, brought the
VAT on their fees. At the same time there has been a series case because it believed that it should be treated as an SIF
of decisions from the CJEU that clarifies the scope of the and should enjoy the same exemption that SIFs enjoy. The
VAT exemption of financial services. First Tier Tribunal submitted a set of questions to the CJEU
regarding the eligibility of the assets in retirement pension
7.1 Financial services – intermediaries schemes and of the pooled investment funds, in which they
are included, to be regarded as SIFs.
Financial advisers need to distinguish between providing
advice (standard-rated) and acting as intermediaries The CJEU has now replied and considers that ‘special
between the client and the financial services provider investment funds’ are ‘funds which constitute undertakings
(exempt). Guidance is available in Notice 701/49 Finance for collective investment in transferable securities
and in HMRC’s VAT manuals. [“UCITS”] within the meaning of the UCITS Directive’. In
this Directive UCITS are defined as having ‘as their sole
However, HMRC issued specific guidance in relation to object … the collective investment in transferable securities
advising on group pension schemes in Revenue & Customs of capital raised from the public.’
Brief 09/13 issued in April 2013. Although the Brief relates
only to group personal pension arrangements it serves as a Wheels could not be an SIF on this definition because the
good example of the issues now facing financial advisers. In funds were not raised ‘from the public’. Only employees
the past, advisers often did not charge for their consultancy of Ford companies could join the scheme and so it was not
services in setting up or assisting in the administration open to the public.
of group personal pension schemes by employers for
their employees. The advisers received income by way of The CJEU also considered that Wheels was not sufficiently
commissions from the pension provider. Under RDR they similar to an SIF to be treated in the same way for VAT
may not be able to be paid commissions and so have to purposes. The main reason for this was that the members
charge the employer or the employees for the advice. of the pension scheme do not bear the risk of investment.
In a defined benefit scheme (or final salary scheme) the
The consultancy or general advice provided to the level of pension is predetermined and the employer
employers and the employees is standard-rated; however, must make up any shortfall in the fund to cover pension
where they act as intermediary, for example in advising payments, but equally can benefit from any surplus. In
and arranging for an employee to join a pension scheme, addition, the employer was not in the position of a usual
their services are exempt. investor as the employer was paying into the scheme to
fulfil his obligations to the employees rather than making
As the requirements of auto-enrolment affect more investments on his own account.
employers this is likely to be an increasingly common issue.
Therefore in the case of defined benefit schemes it is
The Brief also points out that VAT charged on advice correct for investment managers to charge VAT on their
provided to the employer may be claimed depending on fees. However, this decision does not relate to defined
the employer’s VAT status. The employer cannot claim contribution schemes or possibly Additional Voluntary
the VAT on fees in respect of services provided to their Contributions to defined benefit schemes. In these
employees even if he or she pays the fees. arrangements it is the individual member who bears
the risk and has some discretion over how the funds are
7.2 Investment management fees charged to invested.
pension schemes
7.3 Can employers recover the VAT charged by
EU law provides that certain Special Investment Funds fund managers in respect of defined benefit
(‘SIFs’) may enjoy an exemption from VAT on the investment pension schemes?
fund management costs that they incur. Which funds are
specified as SIFs is left to the member states, although In a Dutch case, Fiscale eenheid PPG Holdings BV cs te
recent CJEU cases have indicated that this discretion is Hoogezand v Inspecteur van de Belastingdienst/Noord/kantoor
not absolute and member states must afford similar VAT Groningen: C-26/12, [2013] All ER (D) 258 (Jul), the court
treatments to similar funds. referred this question to the CJEU and asked whether the
scheme was a special investment scheme. The Advocate
In last year’s update I mentioned the Wheels Common General gave her opinion, stating that following the
Investment Fund Trustees Ltd v Revenue and Customs Comrs: decision in the Wheels case the pension scheme was not

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

an SIF. The CJEU did not give a decision on this aspect of the fact that the German regulations do not permit fund
the case. managers to be given ultimate discretion in buying and
selling investments. In these circumstances it seems fair
With regard to the recovery of input tax it should be noted to extend the exemption to fund management services
that PPG Holdings contracted with the advisers and fund are as close to complete management of the fund as local
managers to provide services to the scheme and so invoices regulations allow.
were made out to PPG Holdings. The CJEU did not give
a definitive answer as to whether the input tax could be On the other hand, it may open the door to other services
recovered but provided guidance to the Dutch court to be closely related to fund management to be exempt. So far
used when considering how much of the input VAT could HMRC has not made any comment on the implications of
be recovered. The CJEU said that PPG could recover the the decision for UK businesses.
input tax on expenditure incurred in relation to the pension
scheme, including fund management charges, to the extent 8 The education exemption – private
that there was a ‘direct and immediate’ link to PPG’s tuition
taxable activities.
The Upper Tribunal case of Marcus Webb Golf Professional v
This seems to be rather wider than HMRC’s current Revenue and Customs Comrs [2012] UKUT 378 (TCC) brought
approach in the UK and so there may be scope for claiming out some important issues in considering whether a person
more input tax than has previously been allowed. is acting ‘independently of an employer’ when providing
tuition, which consequently is exempt from VAT.
Planning point
In brief, Marcus Webb Golf Professional was a partnership
Previously disallowed input tax on pension (‘the Partnership’) that, among other things, provided
management costs should be reviewed for a possible golfing tuition to members of the general public. Sometimes
claim. the tuition was provided by Mr West, who was an employee
of the partnership but who also provided golfing tuition in
7.4 Fund management services and defined his own name. When Mr West was providing the tuition on
contribution schemes behalf of the Partnership he was also considered to be acting
in his own name and not as an employee, although this
ATP PensionService A/S v Skatteministeriet (C-464/12) asks was not completely clear from the arrangements between
the much same questions as in the Wheels case, but this them. At the First Tier Tribunal he was considered to be
time in respect of defined contribution schemes. However, an employee of the Partnership. This was because when
at the time of writing no decision is expected until 2014. bookings for tuition with Mr West were made through the
Partnership’s shop, they were made in the Partnership’s
7.5 The GfBk case, an extension to the exemption diary and invoiced on Partnership invoices.
– or a peculiar German practice?
Perhaps surprisingly, it was agreed that the services of
There has been another CJEU decision (GfBk Gesellschaft golfing tuition could be exempt as education, if the other
fur Borsenkommunikation mbH v Finanzamt Bayreuth: conditions were met. However, the lessons provided by
C-275/11, [2013] All ER (D) 118 (Mar)) that may or may Mr West were considered by HMRC to be standard-rated
not affect the scope of the exemption in the UK. GfBk because it appeared that it was the Partnership that entered
concerned the VAT liability of fund management services into the contract to provide the tuition to the customer;
provided to a special investment fund. Strictly, GfBk Mr West provided his services to the Partnership so that it
provided a non-discretionary service in that it provided a could meet its obligations under that contract. The tuition
continuous supply of purchase and sale recommendations provided by Mr West could not be exempt because he was
to its client. The client retained the right to buy or sell the not engaged directly by the customer. He was not a partner
investments, but in practice it always followed GfBk’s of the Partnership and therefore the Partnership was not
recommendations almost immediately. The court decided entitled to treat his services as being provided directly by
that the recommendations to buy or sell investments were a teacher acting independently. Evidently the Partnership
‘intrinsically connected to the activity characteristic’ of was not an eligible body for the purposes of providing
an investment management company if it amounted to exempt education.
managing an SIF.
The Partnership considered that Mr West was acting in
In the UK fund managers must have discretion to buy or his own name in the provision of the tuition and so the
sell investments if their management services are to be fees should be exempt. The Partnership also argued that
exempt from VAT, however, this discretion is a normal refusing exemption for these fees breached the principle of
part of the service provided. Therefore the implications of fiscal neutrality.
the decision may be limited. The decision may just reflect

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The basis of the exemption for private tuition is Article position where a supply comprises two or more elements
132(1)(j) of the Principal VAT Directive 2006. This refers to that are so closely linked that they in effect comprise one
‘tuition given privately by teachers’. composite supply and it would be artificial to split them
for VAT purposes, (Levob Verzekeringen BV and Another v
The tribunal considered the meaning of ‘privately’ in this Staatssecretaris van Financiën: C-41/04, [2006] STC 766).
context by referring to two ECJ cases: Haderer v Finanzamt The Levob principles have been further developed in the
Wilmersdorf: C-445/05, [2007] All ER (D) 141 (Jun) and Deutsche Bank case – see also 15.1 below.
Ingenieurburo Eulitz GbR Thomas und Marion Eulitz v
Finanzamt Dresden I: C-473/08, [2010] All ER (D) 79 (Feb). The decision as to whether one supply or several supplies
These cases have shown that ‘privately’ means ‘on their own are made is important because the VAT rates that apply to
account and at their own risk’. They have also reaffirmed supplies may be different if they are regarded as separate
the principle that exemptions must be interpreted narrowly. supplies from the rate that would apply if they were
The Eulitz case in particular examined the situation where regarded as merely elements of one composite supply. Over
a freelance tutor was providing education on behalf of an the years we have become used to the tests to establish
educational institute. In that case the self-employed status whether a supply that is made up of several elements is a
of the tutor was not enough to establish that he was acting single supply or a multiple supply for VAT purposes.
‘privately’. The courses were clearly provided by the
institute and, therefore, the tutor was providing his services The decision in Colaingrove Ltd v Revenue and Customs Comrs
to the institute and not to the students. [2013] UKFTT 116, (TC) TC02534 now gives us another
possibility – that a single supply may be subject to more
On these grounds the tribunal decided that the tuition than one rate of VAT.
provided via Mr West was not exempt. It did not matter
whether Mr West was providing the tuition on a self- 9.1 One supply – multiple rates of VAT? The
employed basis or as an employee. It was clear that it strange case of Colaingrove
was the Partnership that was supplying the tuition to the
customers and that Mr West was supplying his services to This is not entirely without precedent – the sale of a
the Partnership. caravan and its contents is a single supply but, as was
established in Talacre Beach Caravan Sales Ltd v Customs
The fiscal neutrality argument was dismissed because it & Excise Commissioners: C-251/05, [2006] STC 1671, the
is an established principle that the clear interpretation of caravan is reduced-rated (or zero-rated at the time of the
an exemption cannot be overruled by an argument that it Talacre case) and the contents are standard-rated and so an
violates fiscal neutrality. apportionment must be made. However, it was believed
that the circumstances in that case were unique.

Planning point 9.1.1 Background

Any arrangement where it is claimed that exempt Colaingrove Limited is the representative member of the
education is being provided by private tutors via Bourne Leisure Group Limited VAT group of companies.
some other organisation should be checked carefully The group owns and runs holiday parks including the
to ensure that it is not the organisation that is in fact Haven and Butlins holiday parks. The holiday parks offer
providing the education. accommodation in, amongst other choices, static caravans
and chalets, and there are also pitches for customers’ own
Where exempt education is being provided it is touring or static caravans. Each caravan, chalet and pitch
essential to confirm that the conditions for exemption has its own metered supply of gas and electricity. Reference
are strictly adhered to. This means considering who to ‘Colaingrove’ includes any company in the Bourne
is providing the education, what subjects are being Leisure Group Limited VAT group.
taught, and, in the case of vocational training, how
it is funded. For many years Colaingrove has had a contract with
News International Limited by which News International
9 Single supply or multiple supplies – offers holidays at Colaingrove’s holiday parks at heavily
clarity or confusion? discounted prices to readers of The Sun newspaper. The
price covers solely the accommodation in a static caravan
At first we thought that the principles laid down in the ECJ or in a chalet; other services such as electricity must be
decision in Card Protection Plan Ltd v Customs and Excise paid for separately in advance by the customer. The charge
Comrs: C-349/96, [1999] STC 270 (‘CPP’), were the final for electricity is a fixed charge per night and is not related
word on this subject. However, later cases have provided to the actual amount used. It is too expensive and time-
guidance in situations where there is no clear ‘principal consuming for Colaingrove to take meter readings at the
supply’, the Levob case in particular looked at the VAT start and end of every letting and calculate the actual
amounts used.

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The supply of electricity for ‘domestic use’ is a reduced-rate Colaingrove’s second argument was that there were two
supply as set out in VAT Act 1994 Sch 7A. ‘Domestic use’ separate supplies, largely based on the decision in RLRE
includes, amongst other things, use in self-catering holiday Tellmer Property sro v Financni reditelstvi v Usti nad Labem:
accommodation or a caravan. C-572/07, [2009] All ER (D) 120 (Sep). Each supply would
then be subject to its own VAT liability.
Where electricity was supplied as an additional service
to touring caravans HMRC had accepted that this was a 9.1.3 Decision
separate supply of electricity at the reduced rate. However,
when Colaingrove extended the same treatment to the The tribunal accepted Colaingrove’s first argument. It
electricity supplied to customers who had taken up the offer agreed that there was sufficient evidence of the clear
in The Sun and made a claim for repayment of overdeclared intention that the reduced rate should apply to qualifying
VAT, HMRC rejected it. Where electricity was supplied to supplies of electricity where it met the ‘concrete and
customers staying in Colaingrove’s own static caravans and specific’ conditions.
chalets HMRC viewed the supply of electricity as part of a
single supply of standard-rated holiday accommodation. The tribunal also went on to say that it would have rejected
Colaingrove’s second argument and that it considered that
9.1.2 Call the French Undertakers there had been one supply of holiday accommodation,
although subject to two rates of VAT.
Colaingrove submitted two arguments to support the
reduced rating of the electricity. The first argument relied on Planning point
the fact that the ECJ, as it was then known, has stated that
the principles set out in Card Protection Plan Ltd with regard There are many cases where standard-rated rents
to identifying multiple and single supplies are not the be are inclusive of charges for electricity and gas, which
all and end all of this difficult issue. Indeed, the Talacre case have also been standard-rated if they have been
already showed that it was possible for a single supply to supplied unmetered. Holiday-park owners and
have elements subject to different VAT rates but this was landlords may wish to consider making protective
taken further in another ECJ case – European Commission claims for repayment of over-declared VAT if they
v France: C-94/09 – concerning the services supplied by should have charged VAT at the reduced rate.
undertakers, also known as the ‘French Undertakers’ case.
Unsurprisingly, HMRC have applied for leave to
The Principal VAT Directive allows member states to appeal against this decision and therefore claims
apply a reduced rate of VAT to a number of types of are likely to be rejected at this stage – particularly
supply (specified in Annex III) including the services of because the same argument was rejected by the
undertakers. In France the reduced rate was restricted to the Upper Tribunal in the Morrison case described
transport services provided by undertakers and it was clear below.
in the French regulations that the reduced rate was to apply
to this element of the undertakers’ services even though 9.2 Burnt fingers – the Morrison barbecue case
they were part of an overall service that was subject to a
different rate. The Commission contended that this selective Morrison, along with other retailers, sells disposable
approach to which supplies could be reduced-rated and the barbecues comprising a foil tray, filled with charcoal
subsequent mixed-rate supply was incompatible with EU and lighting paper, and an aluminium mesh lid. HMRC
legislation. The ECJ decided that there was nothing in the regards the supply of the disposable barbecue as a single
legislation to prevent the application of the reduced rate to standard-rated supply. Morrison, supported by other
‘concrete and specific aspects’ of one of the types of supply retailers, argued that the charcoal element of the supply
that can be reduced-rated as long as there is no conflict with should be reduced-rated as a qualifying supply of domestic
the principle of fiscal neutrality. fuel. Morrison lost at the First Tier Tribunal and appealed.
Morrison’s argument relied, among other decisions, on the
Following this principle Colaingrove argued that the UK decision in the French Undertakers case as described in the
Government had shown clearly in the legislation that Colaingrove case above.
it intended the reduced rate to be applied to qualifying
supplies of electricity such as those to a holiday caravan. The At the Upper Tribunal (W M Morrison Supermarkets PLC
electricity supplied was a ‘concrete and specific’ element v Revenue and Customs Commissioners [2013] UKUT 0247
of the supply of holiday accommodation and therefore the (TCC)) the tribunal rejected this argument, saying that there
reduced rate should continue to apply to the electricity even was no evidence that Parliament intended the reduced-rate
though it had become part of an overall standard-rated to apply specifically to this type of supply, and it was not
supply. The application of the CPP principles could not a case in which Parliament had restricted the application
negate the clear intention of the Government in applying of the reduced rate to a specific aspect of supplies allowed
the reduced rate to certain supplies. to be reduced-rated under Annex III of the Principal VAT

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

Directive (as the French authorities had done in the case of • ‘Every supply must normally be regarded as
undertakers services). distinct and independent, although a supply which
comprises a single transaction from an economic
In making this decision the Upper Tribunal has all but said point of view should not be artificially split.
that the Colaingrove case was decided wrongly.
• ‘The essential features or characteristic elements
9.3 One supply or two? The Middle Temple case at of the transaction must be examined in order to
the Upper Tribunal determine whether, from the point of view of a
typical consumer, the supplies constitute several
Honourable Society of the Middle Temple v Revenue and distinct principal supplies or a single economic
Customs Comrs [2013] UKUT 250 (TCC) is useful because supply.
the tribunal listed all the factors that have to be taken into
account when deciding whether a supply made up of more • ‘There is no absolute rule and all the circumstances
than one element is a single supply or made up of separate must be considered in every transaction.
supplies.
• ‘Formally distinct services, which could be supplied
9.3.1 Background separately, must be considered to be a single
transaction if they are not independent.
The Middle Temple is one of the ancient Inns of Court in
London where barristers have their chambers and where • ‘There is a single supply where two or more
pupils train to become barristers. Most of its premises are elements are so closely linked that they form a
let to barristers chambers. The Middle Temple has exercised single, indivisible economic supply which it would
an option to tax over its buildings and so the grant of leases be artificial to split.
of its buildings at the Temple is standard-rated.
• ‘In order for different elements to form a single
The Middle Temple also owns the network of pipes economic supply which it would be artificial to
supplying the buildings at the Temple with cold water. It is split, they must, form the point of view of a typical
charged by Thames Water for the water used on the whole consumer, be equally inseparable and indispensable.
site and it makes a separate charge to the lessees for the
water they use based on the floor area of the premises that • ‘The fact that, in other circumstances, the different
they occupy. elements can be or are supplied separately by a third
party is irrelevant.
The Middle Temple, relying on the decision in Tellmer (also
cited in the Colaingrove case in 9.1 above), believed that • ‘There is a single supply where one or more elements
they were making two separate supplies: a standard-rated are to be regarded as constituting the principal
supply of the leased premises, and a zero-rated supply of services, while one or more elements are to be
the cold water. HMRC believed that they were making a regarded as ancillary services which share the tax
single supply of the leased premises. treatment of the principal element.

In 2011 the First Tier Tribunal agreed with them and • ‘A service must be regarded as ancillary if it does
decided that there were two separate supplies, although not constitute for the customer an aim in itself, but
part of their reasoning was based on the belief that it would is a means of better enjoying the principal service
theoretically be possible for the let premises to be separately supplied.
metered and invoiced by the water company. This belief
was later found to be incorrect. • ‘The ability of the customer to choose whether or not
to be supplied with an element is an important factor
HMRC appealed. However, the hearing had to wait for in determining whether there is a single supply or
the ECJ’s decisions in two other UK cases (Purple Parking several independent supplies, although it is not
Ltd v Revenue and Customs Comrs: C-117/11 and Field Fisher decisive, and there must be a genuine freedom to
Waterhouse LLP v Revenue and Customs Comrs: C-392/11), choose which reflects the economic reality of the
which also dealt with whether a supply was a single supply arrangements between the parties.
or multiple supplies.
• ‘Separate invoicing and pricing, if it reflects the
In March 2013 the Upper Tribunal heard the appeal. The interests of the parties, support the view that the
tribunal used this as an opportunity to review all the elements are independent supplies, without being
relevant ECJ cases to date and summarise what it regarded decisive.
as the principles that had been evinced from the judgments
on whether a supply was a single supply or multiple • ‘A single supply consisting of several elements is not
supplies. It is worth reproducing these in full: automatically similar to the supply of those elements
separately and so different tax treatment does not
necessarily offend the principle of fiscal neutrality’.

The tribunal accepted the First Tier Tribunal’s finding that
the supply of water was an aim in itself for the tenants
and therefore it was not a question of a principal/ancillary
supply (as in CPP), but the tribunal considered that it

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

might be a case of two supplies that it would be artificial 2013. BAA Ltd v Revenue and Customs Comrs [2013] EWCA
to split. Following the principles stated above, the supply Civ 112 (‘BAA’) concerned a claim for input tax incurred
of water should not be regarded as separate just because by the company that acquired BAA at a time when the
it would be zero-rated if it was a separate supply but acquiring company was not making taxable supplies and
would be standard-rated if part of a composite supply of was not part of BAA’s VAT group. The case is important
the buildings. The tribunal noted that the Middle Temple’s because it clarifies some of the conditions that need to be
tenants were unable to make alternative arrangements for fulfilled before input tax can be claimed and it also shows
the supply of water and, since it was impossible to use the limits of making a claim for VAT in a VAT group.
the premises without a water supply, the supplies were
inseparable. The tribunal concluded that there was one 10.1 Background
supply of a lease of land and this was standard-rated.
In 2006 BAA was the subject of a successful takeover bid.
Planning point A new company, Airport Development and Investments
Limited (‘ADIL’) was incorporated as a special purpose
If a business splits up a supply into separate vehicle specifically to acquire the issued share capital
elements, usually to isolate zero-rated, reduced- of BAA. ADIL appointed the usual range of professional
rated or exempt elements, the principles set out advisers to deal with the planning, financing, and legal
above should be applied to ensure that the split is aspects of the acquisition. ADIL also negotiated debt
not artificial and so ineffective for VAT purposes. facilities with a syndicate of banks.

The principles should also be applied ‘in reverse’ if ADIL’s offer for BAA was successful and ADIL applied
a business is trying to absorb what would normally to become a member of the BAA VAT group. This was
be regarded as separate supplies into a single zero- eventually allowed by HMRC with effect from a date three
rated, reduced-rated or exempt supply. months after the date of the takeover. ADIL had incurred
VAT of about £6.7m on fees in connection with the offer and
9.4 One supply or two? Colaingrove at the tribunal acquisition and this was claimed by the BAA VAT group.
again
HMRC disagreed that BAA was entitled to make this claim
Not content with their claim for the reduced rate to be and assessed BAA for the £6.7m. BAA appealed and in 2010
applied to electricity supplied as part of a supply of holiday was successful at the First Tier Tribunal.
accommodation, Colaingrove has been at tribunal again
claiming that verandahs supplied with zero-rated caravans The tribunal decided that ADIL carried out an economic
should be also be zero-rated. This time they were not quite activity and that the input tax had a direct and immediate
so successful (Colaingrove Ltd (Verandahs) [2013] UKFTT link to BAA’s subsequent taxable supplies. Perhaps this
343, (TC) TC02746). was surprising because at the time the input tax was
incurred ADIL did not make any taxable supplies, nor was
Colaingrove sells static caravans at its caravan sites and there any evidence that it intended to do so. However, the
holiday parks. These can be sold with a verandah, which tribunal decided that, although ADIL made no taxable
is a freestanding structure attached to the caravan. The supplies itself, it did provide strategic direction to BAA’s
verandahs provide an easy, level access to the caravans and management and operations and negotiated debt facilities
also provide an outside area similar to a patio or terrace. for the BAA group. These activities constituted an economic
activity. The tribunal also decided that there was a sufficient
Colaingrove’s argument was that the verandah was an link between the input tax ADIL incurred and the taxable
integral part of the supply of the caravan to the extent that supplies made by the BAA VAT group, relying on the
there was one supply. The case is interesting in that the principle in the ECJ case Finanzamt Offenbach am Main-Land
tribunal took the view that it could consider cases decided v Faxworld Vorgründungsgesellschaft: C-137/02.
before the Card Protection Plan ECJ decision because
it involved the application of the zero rate, which is a HMRC appealed the decision to the Upper Tribunal. In
derogation from the VAT Directive, and so largely a matter 2011 the tribunal overturned the decision of the First Tier
of domestic law. This is a rather contentious approach and Tribunal. The tribunal accepted that ADIL carried out an
Colaingrove has appealed. economic activity. However, it decided that there was no
direct and immediate link between the input tax incurred
10 Recovery of input tax on costs of by ADIL and BAA’s taxable supplies for the following
company acquisition – the Court of reasons:
Appeal grounds BAA’s claim
• ADIL’s expenditure was largely incurred in
This long-running case finally came to a conclusion when connection with the acquisition of BAA; this
the Court of Appeal issued its decision on 21 February expenditure was not used by ADIL to provide its
own services to the BAA VAT group.

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

• The link between the ADIL’s expenditure and the taxable supplies at the time that the expenditure is
benefits that ADIL provided to the BAA VAT group incurred. The timing of fees could therefore be very
was too nebulous to be a direct link. important.

• There was no evidence that ADIL intended to make Of course, the entity must have evidence that it is
taxable supplies and so there were no supplies that making taxable supplies, or that it intends to make
the input tax could be attributed to. taxable supplies. The Court of Appeal made it very
clear that there was no hope of claiming the input
• At the time the input tax was incurred ADIL was not tax without evidence of the taxable supplies that
a member of the BAA VAT group. were going to be made. The entity must consider
what supplies it is making or will make and be able
• The principle in the Faxworld case did not apply as to provide evidence of these supplies.
the supplies made to ADIL were not used by BAA to
make taxable supplies. Finally, this decision shows that merely putting an
entity into a VAT group does not assure the recovery
• BAA appealed the Upper Tribunal’s decision to the of VAT on expenditure incurred before entry into
Court of Appeal. the VAT group.

10.2 The final destination? 11 Partial exemption – Volkswagen
Financial Services (UK) Ltd
In 2013 The Court of Appeal considered the same two
issues: Recovery of input tax is always an issue when a business
makes exempt and taxable supplies. Although many
• Did ADIL carry on an economic activity? businesses can take advantage of the de minimis thresholds
and recover all their business input tax they may still need
• Was there a direct and immediate link between the to carry out calculations to prove that they are de minimis.
input tax incurred by ADIL and the taxable supplies
made by the BAA VAT group? For businesses making significant exempt supplies
calculating recoverable input VAT can be a quite a
The Court of Appeal came to a different conclusion from the headache. The case of HMRC v Volkswagen Financial Services
tribunals regarding the first question. The court laid great (UK) Limited [2012] UKUT 394 (TCC) reached the Upper
importance on ADIL’s activities, or intended activities, at Tribunal this year and it is interesting because it deals with
the time the input tax was incurred. In the court’s view, at the fundamental issue of apportioning the residual input
that time there was no evidence that ADIL was making or tax. Any method of apportionment used must be ‘fair
intended to make taxable supplies; ADIL clearly intended and reasonable’ and HMRC did not believe that VWFS’s
to acquire the shares in BAA, but this in itself was not an method was.
economic activity. As there were no taxable supplies to
which ADIL could attribute the input tax it was unable 11.1 Background
to claim it. Although the claim was denied for this reason
alone, the vourt also considered the ‘direct and immediate By agreement with HMRC VWFS operates a special method
link’ question. for apportioning its residual input tax. Its operations
are divided into a number of sectors; retail, wholesale,
The court could see that there was a link between ADIL’s insurance services, etc, and a separate partial exemption
inputs and the supplies subsequently made by the BAA calculation is applied to each. The appeal arose in respect
VAT group, but that it was impossible to characterise this of VWFS’s retail sector calculation which includes sales on
link as either ‘direct’ or ‘immediate’. The court agreed with hire purchase (‘HP sales’).
the Upper Tribunal’s reasoning on this question. The court
also stated that the principle in the Faxworld case could not As is usual in HP sales, VWFS buys cars from the motor
apply because Faxworld concerned a transfer of a going dealers and sells them to the customers on hire purchase
concern and the BAA case did not. contracts; the cars are sold on at cost. The sales of the cars are
standard-rated and VWFS recovers all the input incurred
There would seem to be no grounds for a further appeal on purchasing them. VWFS also supplies the finance and
and so the claim is permanently grounded. the interest and acceptance fees charged are exempt from
VAT (the option to purchase fee is standard-rated).
Planning points
VWFS needs to apportion the input VAT on overheads
Substantial fees are usually incurred in corporate (residual input tax) incurred in making HP sales between
acquisitions, takeovers and reconstructions and taxable supplies (the sale of the car) and the exempt
therefore VAT recovery should be considered from
the outset. This case shows that the entity incurring
the fees must be making or intending to make

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supplies (interest and other finance charges). It calculates 12 What is acceptable tax planning?
the apportionment on a simple ‘number of transactions’ The Ocean Finance case pushes the
basis, taking each HP sale as made up of two transactions: boundaries
the taxable sale of the car; and the exempt charges for
finance. As half the transactions are taxable, VWFS claims The national and international debate continues as to
50% of the residual input tax. In practice this resulted in the what constitutes legitimately arranging your business
retail operation claiming more input VAT than it declared affairs so as to minimise or avoid tax liabilities and what
and so HMRC were bound to be unhappy with it. is unacceptable tax avoidance. In VAT this is particularly
important because it has always been regarded as a
HMRC contended that VWFS’s method was not fair and transactional tax and the contractual position of the
reasonable and instead proposed that the input on the parties is seen as a significant factor in determining who is
overheads should be apportioned on the basis of taxable supplying what to whom. The Halifax case a few years ago
finance income (purchase option fees and some other introduced the concept of ‘abuse of rights’ into English
minor charges) as a percentage of total finance income, law so that a wholly artificial chain of transactions that
ignoring the value of the sale of the car. This would result appeared to have been created solely to avoid a tax liability
in a much reduced level of input tax. As set out in Revenue was disregarded. The tax position was instead based on
and Customs Brief 31/07, HMRC do not consider that any the commercial substance of the effect of the transactions.
overhead can be attributed to the sale of goods under HP But how far can this ‘substance over form’ approach
because these are generally sold on at cost and so the cost of override the provisions of legally valid contracts?
the overheads must be covered by the charges for finance.
In their view the overhead costs cannot be considered a The Ocean Finance case may ultimately provide an answer.
‘cost component’ of the sale of the goods and so must be
attributed to the exempt supplies of finance. The case was originally heard by the First Tier Tribunal in
2010 (Newey (t/a Ocean Finance) v Revenue and Customs Comrs
In 2011 the First Tier Tribunal rejected HMRC’s arguments [2010] UKFTT 183, (TC) TC00487) and allowed Mr Newey’s
and allowed VWFS’s appeal. The First Tier Tribunal found appeal. HMRC appealed to the Upper Tribunal, which
that the overheads by their nature should be regarded as referred a number of questions to the CJEU. The CJEU’s
a cost component of VWFS’s HP sales as a whole and not judgment was released on 20 June 2013 (Case C-653/11)
attributed to just one element of those supplies. and it is now back with the Upper Tribunal.

11.2 At the Upper Tribunal 12.1 Background

In October 2012 the case was heard by the Upper Tribunal. Mr Newey was trading as a loan broker in the UK, dealing
The tribunal disagreed with the First Tier Tribunal’s direct with lenders and borrowers, and as such his loan-
analysis of the nature of VWFS’s business. In the Upper broking services were exempt from VAT. His business
Tribunal’s view VWFS was quite clearly a finance business; relied heavily on advertising to attract business and
it made no profit on the sale of the cars and this was never this significant cost was increased by the burden of the
the intention, it did not even have any say on the price of irrecoverable VAT. In order to reduce this cost Mr Newey
the car. The economic reality was that all the overheads decided to take the business offshore, the intention was that
were incurred in operating the exempt finance business it would then be able to incur the advertising costs without
and therefore apportioning 50% of the input on overheads incurring the VAT.
to the taxable sale of the cars was not fair and reasonable.
A new company, Alabaster (CI) Limited (‘Alabaster’), was
However, VWFS has not given up and a further appeal has incorporated in Jersey and a board of directors, resident in
been listed for hearing by the Court of Appeal later this Jersey, was appointed. The company was wholly owned
year. by Mr Newey. Alabaster held a consumer credit licence
enabling it to provide a loan brokerage service in the UK.
Planning points It also leased office premises in Jersey. Apart from the
directors, who charged Alabaster according to the time
If a business is partially exempt any method for spent on its affairs, there was one full-time employee in
apportioning residual input tax must be ‘fair Jersey. Most of the directors were also partners of the Jersey
and reasonable’. Special methods of calculating office of Mr Newey’s accountants. Mr Newey was never a
the apportionment must be agreed in writing director of Alabaster.
beforehand with HMRC.
Alabaster entered into a service agreement with Mr Newey
Before apportioning residual input tax make sure covering, among other matters, the processing services
that overheads and other residual expenditure can that Mr Newey would carry out in the UK for Alabaster
be justified as “cost components” of the taxable in return for a fee and the grant of use of the name ‘Ocean
supplies of the business on economic grounds. Finance’ to Alabaster for the purposes of commissioning
advertising.

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

Alabaster entered into agreements with various lenders with Ocean Finance and Alabaster. The transactions were
to act as an intermediary in arranging loans from them to outside the scope of VAT because they were made outside
applicants from the general public. All lending proposals the EU and therefore could not be said to be contrary to the
had to be approved by the management in Jersey, but apart purpose of the Sixth Directive.
from that the businesses operations were carried out in the
UK under the terms of the service agreement. HMRC appealed to the Upper Tribunal. The Upper
Tribunal referred a number of questions to the CJEU for a
Alabaster also engaged a Jersey-based company to provide preliminary ruling. The Upper Tribunal sought guidance
the advertising for Ocean Finance. The advertising was as to whether, in this type of arrangement, the contractual
aimed at potential customers in the UK and Mr Newey position was decisive in determining who was making and
liaised with the advertising agent with regards to the nature receiving the supply, and if the contractual position was not
and effectiveness of the advertising. This was the essential decisive, how far could the court depart from the contract.
advantage to Mr Newey of basing his business in Jersey The tribunal also asked for guidance on the extent to which
because there was no VAT charged on the advertising non-contractual aspects were relevant. These were:
supplied by one Jersey company to another.
(a) ‘Whether the person who makes the supply as a
HMRC assessed VAT on Mr Newey with regards to the matter of contract is under the control of another
advertising services, arguing that either these services person.
had actually been supplied to him and not to Alabaster
and so he was liable to a reverse charge on them as he (b) ‘Whether the business knowledge, commercial
effectively carried out loan-broking activities in the UK, or relationships and experience rests with a person
that the arrangements with Alabaster constituted an abuse other than that which enters into the contract.
of law and so HMRC were entitled to recharacterise the
transactions so that the proper VAT due could be charged. (c) ‘Whether all or most of the decisive elements in the
supply are performed by a person other than that
From the outset the First Tier Tribunal accepted that the which enters into the contract.
formation of Alabaster and the transfer of the management
of the business to Jersey were undertaken purely for tax (d) ‘Whether the commercial risk of financial and
purposes. However, the Tribunal did not believe that this reputational loss arising from the supply rests with
necessarily undermined the validity of the subsequent someone other than that which enters into the contract.
transactions entered into by Alabaster and Mr Newey.
(e) ‘Whether the person making the supply, as a matter of
Despite the fact that almost all the operations were carried contract, sub-contracts decisive elements necessary
out in the UK by Mr Newey’s business under the terms of for such a supply to a person controlling that first
the service agreement, the tribunal considered that there person, and such subcontracting arrangements lack
was enough activity in Alabaster to constitute a commercial certain commercial features.’
business and so there was some substance to its operation
in Jersey. The tribunal also considered that Mr Newey’s The tribunal also asked directly whether the national court
involvement in negotiating commission rates with the should depart from the contractual position in a case such
lenders and in liaising with the advertising agency were as this. If it should not, then did the arrangements in this
consistent with his services to Alabaster under the service case amount to an abuse as defined in the Halifax case? If
agreement and that these activities did not constitute a the arrangements did constitute an abuse, how should the
direct business relationship between him and those parties. transactions be recharacterised?
There was no direct link between the consideration paid by
Alabaster for the advertising services and the commissions The CJEU’s response to these detailed questions was
it received via Mr Newey and so it could not be said that, singularly unhelpful. The CJEU decided that the Upper
in effect, Mr Newey paid for the advertising. Therefore Tribunal’s questions boiled down to whether the contractual
the tribunal decided that the supplies of advertising had position was the deciding factor in identifying the supplier
been made to Alabaster for the purposes of its loan-broking and the recipient of a supply of services. Following EU
activities carried out in Jersey. settled law the court confirmed that the contractual position
was not the deciding factor, although it was a factor. In
As regards the ‘abuse of law’ argument the First Tier particular the court said that the contractual position
Tribunal observed that the VAT legislation specifically could be disregarded if it was ‘wholly artificial’ and it did
made provision for transactions with entities based outside not reflect the ‘economic and commercial reality’ of the
the EU. It also made the point that in other abuse of law supplies, and was set up with the ‘sole aim of obtaining a
cases, principally Halifax, the purpose of the scheme was tax advantage'. However, it was up to the national court to
to allow effective recovery of input VAT in relation to decide whether, in taking into account all the circumstances,
exempt supplies made in the UK, which was contrary to the contractual position could be disregarded.
the purpose of the Sixth Directive. This was not the case
The CJEU made a passing reference to the detailed points
set out in (a) to (e) above in saying that in the light of

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the facts of the case, ‘it is conceivable that the effective Unfortunately, there is no guidance as what constitutes a
use and enjoyment of the services at issue in the main ‘small amount’ of tax as one taxpayer found to their cost.
proceedings took place in the United Kingdom and that
Mr Newey profited therefrom.’ However, it was up to the 13.1 Background
referring court to decide whether the contracts should be
disregarded such that Mr Newey should be regarded as Mundays is a firm of solicitors constituted as an LLP
having supplied the loan-broking services in the UK and (‘the Firm’). Mundays’ accountants carried out various
received the supplies of advertising in the course of making tasks for the Firm including calculations of the estimated
those loan-broking services. tax liabilities of the partners so that these amounts could
be withheld by the Firm to meet its working capital
The issue of whether the contractual arrangements requirements and to meet the tax liabilities of the partners
produced a result that was ‘contrary to the purpose’ of the when they fell due, maintaining the accounting on the tax
Sixth Directive was not addressed. It is unclear whether reserve account, preparation of the partnership tax return,
this should also be taken into account when considering as well as preparing the personal tax returns of most of
whether arrangements are abusive. the partners. For all this tax work the accountants raised a
single invoice headed ‘Partners’ personal tax returns’
So it is back to the Upper Tribunal and a very interesting
decision. The Firm duly claimed the input tax on the whole of the
invoice. HMRC assessed for the whole of this amount
Planning point stating that it had been overclaimed. HMRC said that the
concession stated above applied only to small amounts
If business structures are formed or reorganised and that the input claimed on the invoice was not a small
in order to minimise or avoid VAT liabilities, they amount and therefore ineligible. The Firm appealed to the
must still reflect the actual economic or commercial tribunal: Mundays LLP v Revenue and Customs Comrs [2012]
relationships between supplier and customer. No UKFTT 707, (TC) TC02374.
matter how well an arrangement is supported by a
written contract if it is found to be ‘purely artificial’ 13.2 The tribunal hearing
and does not reflect the economic reality the contract
can be set aside by the courts and the VAT treatment At the tribunal the accountants produced an analysis of
will be determined as if the contract did not exist. the fees charged in respect of the ‘partners’ personal tax
returns’. This showed the relative costs of preparing the
13 Mundays blues – when can you claim tax estimates, maintaining the tax reserve account and
VAT on accountancy fees? the work on the personal tax returns among other items.
According to the analysis, of the £955 cost per partner £170
HMRC has long accepted that, in many circumstances, sole was in respect of preparing the personal tax returns. The
traders and partnerships can reclaim the VAT incurred on Firm’s accountants believed that £170 was de minimis in the
accountancy fees in connection with preparing business circumstances and so all the input VAT was recoverable.
accounts and tax returns and receiving business advice.
The guidance is in HMRC’s Manuals at VIT 13700 where HMRC argued that the whole amount of the invoice, which
it says: amounted to around £20,000 annually, was in respect of
the partners’ own tax affairs and so was not input tax of
‘It is arguable that income tax is the responsibility of the the business. HMRC also argued that the £170 per partner
sole trader or partner as an individual and is not strictly was not de minimis and for good measure asserted that the
a business matter. tribunal had no jurisdiction over HMRC guidance in any
case.
‘In order to avoid disputes over small amounts of tax our
policy is that VAT on a sole trader’s or a partnership’s 13.3 The decision
accountancy fees should usually be claimed subject to the
normal rules. The tribunal had no difficulty in identifying that preparing
estimates of amounts to be withheld from drawings,
‘The only exception to this is where the accountant’s maintenance of the tax reserve account and the preparation
fees clearly relate to taxation matters that do not relate of the partnership tax return were business expenses and
to the VAT registered business […] Usually, however, a so the Firm was entitled to the proportion of the input tax
sole trader’s or a partner’s tax advice can be treated as relating to these elements. However, it considered that the
entirely business related …’ advising of the tax payments to be made on behalf of each
partner from the tax reserve was a private expense rather
than a business expense as the Firm had believed.

The Tribunal did not give a final answer to whether it had
jurisdiction to decide whether the Firm met the de minimis

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

concession, but it said that if it did have jurisdiction it to its facilities to members who were in arrears with
would have decided that the concession was not intended subscription payments and therefore fees due after the date
to cover ‘invoices of this size’, that is to say the invoice of barring were outside the scope of VAT.
for approximately £20,000 issued to cover the ‘partners’
personal tax returns’. HMRC appealed to the Upper Tribunal and in April 2013 the
tribunal released its decision. On a close examination of the
The conclusion was that the Firm was entitled to a contract that Esporta had with its members it was clear that
proportion of the input tax on the invoice in relation to the monthly payments related to the membership period as
business expenses and left it to the parties to agree the a whole and were not related to specific months. Therefore
apportionment. all payments due under the contract were consideration for
the supply of membership and so were taxable.

Planning points 14.3 Principal or agent? The Court of Appeal
overturns the decision of the Upper Tribunal in
All accountants should be aware of the implications the Secret Hotels case
of this case. Unfortunately it leaves it unclear as to
what HMRC will accept is a ‘small amount’ of input In December 2012 the Court of Appeal released its decision
tax in relation to billing a sole trader or partnership in the latest chapter in the Secret Hotels saga. There was
for personal tax advice. However, accountants over £7m of VAT at stake and many other travel companies
should think carefully about how their services are have an interest in the result.
described on invoices and about whether separate
invoices should be raised for personal tax services. To recap the story so far:
Raising separate invoices is more likely to result in
‘small amounts’ of tax that may be considered de In 2010 the First Tier Tribunal decided that Secret Hotels
minimis and so recoverable. 2 Limited (formerly Med Hotels Limited) was acting as
principal when it arranged accommodation at various,
Another important aspect of this case is that HMRC mainly overseas, hotels. Med Hotels (as it was then)
had accepted that 82% of the fee was deductible contended that it acted as agent and that its only income was
as a business expense for direct tax purposes. The the commission it earned from the sales of accommodation;
tribunal dismissed this as irrelevant because of the the hotels themselves were selling the accommodation
different legal bases of direct tax and VAT. Many to the holidaymakers. This is an important distinction
businesses assume that the same percentage can because if Med Hotels was acting as principal the supplies
be used to apportion certain types of expenditure of accommodation that it arranged would be treated as
between private and business use for income tax its own income and would fall within the Tour Operators
and VAT purposes. This decision shows that that Margin Scheme (TOMS) and be subject to UK VAT. On the
can be a dangerous assumption. other hand, if Med Hotels was acting as agent its main
income was the commission paid by the hotels and, as most
14 Other cases and recent changes of the hotels were outside the UK, most of the commissions
would be outside the scope of UK VAT.
14.1 Bad debt relief – Simpson & Marwick
(FTC/85/2010) decision overturned The First Tier Tribunal decided that Med Hotels was
acting as principal despite the fact that it was expressly
When in late 2011 the Upper Tribunal decided that it was described as an agent in the contractual arrangements
possible to obtain full bad debt relief with respect to an with the holidaymakers and with the hotels. On the facts
unpaid VAT-only invoice, it seemed that the door would be it decided that the actual operation of the arrangements
open to some large claims against HMRC. However, HMRC and the behaviour of Med Hotels were not consistent with
unsurprisingly appealed, and the Court of Session has the written contracts and were more in the nature of Med
now decided that HMRC’s original policy was correct (CS Hotels being a principal. Med Hotels appealed and the
[2013] CSIH 29). Bad debt relief is calculated by applying case reached the Upper Tribunal in July 2012 (Secret Hotels2
the relevant VAT fraction to the outstanding amount even Limited v Revenue and Customs Commissioners [2011] UKUT
if that amount comprises only VAT. 308 (TCC)).

14.2 Membership subscriptions – Esporta loses at The Upper Tribunal overturned the decision of the lower
the Upper Tribunal tribunal and ruled that Med Hotels was acting as agent. The
tribunal laid much greater stress on the importance of the
Also in 2011 the Esporta case (Esporta Ltd v Revenue and written contracts and took the view that, as the contracts
Customs Comrs [2011] UKFTT 633, (TC) TC01475) caused were clearly not shams and the actions of Med Hotels were
some interest as the First Tier Tribunal found that Esporta, not incompatible with those contracts, the VAT treatment
a sports club, made no supplies where it had barred access should follow from the written contractual position.

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HMRC appealed. 14.4.1 Background

14.3.1 The Court of Appeal decision Subway sells toasted rolls and also a hot meatball marinara
filling; both toasted subs and the filling are sold at above
The Court of Appeal held that it had been correct for the ‘ambient air temperature’. HMRC naturally views these as
First Tier Tribunal to take all the facts of the arrangements sales of hot food and so standard-rated in accordance with
between Med Hotels, the hotel operators and the customers Note 3(b)(i) of VAT Act 1994 Sch 8 Group 1, which states
into account when determining the nature of the supplies that hot food is: ‘food which, or any part of which, has been
made by Med Hotels. heated for the purposes of enabling it to be consumed at
a temperature above the ambient air temperature; and (ii)
The Court of Appeal went on to hold that on the basis of is above that temperature at the time it is provided to the
those facts the First Tier Tribunal was correct to find that customer.’
Med Hotels was acting as principal when selling holidays
to its customers. One of the key factors in this decision was At the First Tier Tribunal ([2010] UKFTT 487 (TC)) Subway
that Med Hotels was invoiced by the hotel operators for claimed that the purpose of the toasting process was to
the accommodation and this was invoiced to the customers enhance the flavour of the bread and fillings and not so
for a higher amount. The operators did not know what the that the customers could eat the rolls hot. In the case of
customers paid for the accommodation and the customers the meatball marinara it was claimed that the meatballs
did not know how much Med Hotels had paid for it. continued to marinade in the bain-marie part of the food
This arrangement was not consistent with a true agency counter and so the marinara was sold as freshly cooked
arrangement where the principal knows the commission rather than as hot food. The tribunal applied the subjective
being taken by the agent. test as set out in the leading case on this subject, John
Pimblett and Sons Ltd v Customs and Excise Commissioners
Planning points [1988] STC 358, and decided that it was Subway’s intention
that the toasted rolls and the meatball marinara were sold
If any business appears to resell accommodation above the ambient air temperature to enable them to be
to travellers, or sells accommodation together with consumed hot. Subway’s argument regarding the meatballs
another service as a package the arrangements was rather undermined when the franchisee admitted that
should be checked to see whether VAT should be the meatball marinade was unpalatable cold.
accounted for through TOMS. TOMS does not just
cover the classic resale of hotel rooms or foreign Subway’s appeal largely rested on the inconsistency of the
hotel plus transport, it can apply to businesses that approach to VAT on hot takeaway food that has allowed
arrange accommodation as part of a conference, or rival businesses selling similar products to sell them zero-
to a UK hotel that arranges travel or excursions as rated while Subway has had to sell them standard-rated. In
part of an all-in deal. the meantime the decision in Manfred Bog had been released
and so Subway additionally argued that its supplies were
As a general point, if a business appears to be acting zero-rated goods rather than standard-rated supplies of
as an agent the contractual arrangements should catering as it provides no service other than preparing the
be checked to ensure that VAT is being accounted food for sale.
for correctly. It is strongly recommended that any
agency arrangement is put in writing to reduce the The Upper Tribunal recognised that the principles laid
risk of a challenge by HMRC. However, a written down in the lead case of Pimblett in 1988 may not have
contract will be disregarded by HMRC if it is ignored been entirely consistent with EU law and accepted that the
by both parties or if the actions of the parties are subsequent decisions of the tribunal had sometimes been
inconsistent with the terms of the contract. contradictory. In Pimblett it was established that a subjective
test of the supplier’s intention could be applied to establish
14.4 VAT on hot takeaway food – the Meatball Song why the food was sold hot. However, EU law requires that
goes on … an objective test is applied. The tribunal stated that the
inconsistent decisions of the tribunals were not HMRC’s
Following Manfred Bog: C-497/09 in 2011 any business fault and HMRC had been under no obligation to appeal
selling hot takeaway food has had an interest in the decisions that may not have been decided in accordance
decisions in the cases involving Sub One Limited T/A with principles of EU law. The tribunal asserted that the
Subway. After defeat at the First Tier Tribunal Subway relevant legislation and the decision in Pimblett had always
took the case to the Upper Tribunal in late 2012 (Sub One been capable of being be interpreted consistently with EU
Limited t/a Subway v Revenue and Customs Commissioners law and in particular in accordance with the principle of
[2012] UKUT 34 (TCC)). fiscal neutrality.

The tribunal also gave the second argument short shrift.
It noted HMRC’s argument that there was no reason why
the supply being a supply of goods or a supply of services

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should affect the VAT status. It accepted that as a supply of a fixed establishment in the UK’, and therefore the owner is
goods the sale of hot food fell within the definition set out entitled to the threshold. However, many owners choose to
in Note 3(b). manage the properties themselves, taking bookings via the
Internet, and so have become liable to be registered.
However, Subway is taking the case to the Court of Appeal
and so there may yet be another verse to this meatball song. Many of these businesses may require an agent or
representative to look after their UK VAT affairs, although
14.5 Compulsory registration of all persons it remains to be seen whether some will choose not to make
belonging outside the UK but making supplies UK supplies or how many will simply ignore the new
in the UK requirement. Alternatively, they can register direct with
HMRC’s Non-Established Persons Unit (‘NETPU’) and this
From 1 December 2012 the registration threshold no longer can be done online.
applies to businesses that are based outside the UK but
make supplies in the UK. This mostly affects businesses 14.6 VAT invoices
that supply certain services to non-business customers. Just
to recap, under the general place of supply rules for services On 1 January 2013 the UK implemented the EU regulations
the place of supply of services to a business customer is on the issue of VAT invoices. However, the changes are
where the customer is based. This means that businesses fairly minor because the UK had already implemented
based in other EU countries do not charge VAT to UK most of these regulations. The main changes are:
business customers who have to account for the VAT under
the reverse charge mechanism. If the supply is to a non- • Electronic invoices
business customer who is in the UK the place of supply is
where the supplier is based and the supplier charges the There is no longer a requirement that electronic
local VAT as applicable. invoices are issued with an electronic signature or via
Electronic Data Interchange (‘EDI’) or other HMRC-
But in the case of some services the place of supply rules approved electronic medium. The only condition is
are different. The situations most commonly encountered that the customer must agree to electronic invoicing.
are services relating to land (these are always supplied However, suppliers must take steps to ensure the
where the land is) and certain supplies of artistic, cultural, validity and the integrity of the contents of electronic
educational and sporting services, which are supplied invoices. HMRC are not imposing any particular
where performed if supplied to a non-business customer. method of controlling the issue of electronic invoices
but there must be reasonable controls. Electronic
In the case of services related to land situated in the UK invoices must contain the same information as is
where the customer is a UK business the reverse charge is required for paper VAT invoices.
used.
• No VAT invoice required for exempt supplies
Many small businesses based outside the UK make
occasional supplies to non-business UK customers (a This was already the case in respect of supplies made
common example is a builder based in the Irish Republic in the UK; however, a VAT invoice was required
who also undertakes work in Northern Ireland). Although where exempt supplies of insurance and finance
these supplies are deemed to be made in the UK until 1 were made to a customer in another EU country.
December 2012 a business based outside the UK was not This condition has now been removed.
required to register in the UK unless the value of its UK
supplies exceeded the VAT registration threshold. From 1 • Simplified VAT invoices
December 2012 they have had to register as soon as they are
aware that they will be making UK supplies. Retailers are already allowed to issue a simplified
VAT invoice where the total value of the supply does
One area that may cause a problem is UK-situated holiday not exceed £250. This option is now available to all
houses whose owners are resident overseas. Many owners VAT registered businesses.
let these properties as holiday accommodation in the periods
that they are not using them themselves. As the supply of • Time limit for issuing a VAT invoice for an EU cross-
holiday accommodation is standard-rated some owners border supply
may have inadvertently become liable to be registered for
VAT in the UK. The registration threshold is available to The VAT invoice must now be issued by the 15th
them only if they have an ‘establishment’ in the UK. The day of the month following the month in which the
property by itself is not an ‘establishment’, but HMRC say goods are removed from the UK or the services are
in Notice 741A Place of supply of services at paragraph 3.4.1, performed. This will reduce the time limit from the
second example, that if the owner ‘appoints a UK agency to normal 30-day period where the supplies are made
carry on its business by managing the property, this creates after the 15th of the month.

14.7 Dealing with dishonest tax agents

After two years of consultations Finance Act 2012
introduced a set of measures that HMRC can use when it

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believes that a tax agent has been involved in ‘dishonest However, if a business receives a significant level of income
conduct’. The new measures took effect from 1 April 2013. from gaming machines – for instance, an entertainments
venue may have an amusement machine area – the
If HMRC determine that a tax agent is involved in business may now be partially exempt and have to restrict
‘dishonest conduct’ they may issue a conduct notice giving the amount of VAT it can claim.
their reasons for issuing it. There is an opportunity for the
agent to appeal at this stage. Note that the tax agent is an 14.9 Sales of caravans – an intention to simplify
individual rather than a firm or corporate body. leads to more complication

If there is no appeal or an unsuccessful appeal HMRC may The controversial decision, announced in the 2012 Budget,
then, with the approval of the tribunal, issue a ‘file access to extend VAT to the sale of some types of caravan took
notice’. This notice requires the document-holder to whom effect on 6 April 2013. After strenuous lobbying by the
it is addressed to provide working papers and any other caravan manufacturing and retailing industries VAT is
documents created or used in relation to clients’ tax affairs. applicable at the reduced rate rather than the standard rate.
A document-holder may be a corporate body. We now have the situation where the sale of a caravan can
be zero-rated, reduced-rated or standard- rated – hardly
The concealment or destruction of documents after the addressing of an anomaly, as it was called in the initial
receiving a conduct notice or file access notice is an offence proposal!
punishable by a fine of up to £5,000, or imprisonment for
up to two years. In March 2013 HMRC issued VAT Information Sheet 04/13
VAT: Taxing holiday caravans, setting out the conditions in
‘Dishonest conduct’ is doing something dishonest, or which the various rates will apply and also explaining the
dishonestly omitting to do something, while acting as effect on the sale of second-hand caravans.
tax agent, to achieve a loss of tax revenue, regardless of
whether the loss actually arises. Dishonest conduct includes Caravans fall into three types for VAT purposes.
advising or assisting a client to do something dishonest.
1. Caravans that do not exceed a length of 7m and a
Penalties for dishonest conduct range between £5,000 and width of 2.55m (mostly touring caravans) remain
£50,000. standard-rated.

There is a right of appeal against the imposition of penalties 2. Caravans that exceed a length of 7m and a width of
for a failure to comply and against the amount of penalty 2.55m and do not meet BS 3632:2005 approved by
imposed for dishonest conduct. the British Standards Institute as being suitable for
residential use. These caravans are reduced-rated
There is no automatic right for appeals to be held in private, from 6 April 2013.
although the Tribunals Service may allow this.
3. Caravans that exceed a length of 7m and a width of
14.8 Replacement of Amusement Machines Licence 2.55m and meet BS 3632:2005. These caravans remain
Duty – the VAT implications are not amusing zero-rated.
for some
The sale or lease of ‘removable contents’ with the caravan
On 1 February 2013 Machine Games Duty (MGD) replaced is always standard-rated and therefore if contents are sold
Amusement Machines Licence Duty. Although these are with a caravan of types 2 or 3 above an apportionment of
not VAT measures the change has had an effect on the VAT the selling price is needed between the value of the caravan
treatment of income from gaming machines. and the value of the contents.

MGD is due on income from gaming machines where a The sale of second-hand caravans follows the same
cash prize can be won that is greater than the minimum principles. To qualify for zero-rating there must be evidence
cost of one play. VAT is not due on this income; however, it that caravans meeting the size criteria were occupied
is exempt from VAT. Businesses that receive only this type before 6 April 2013. For older large static caravans there
of income are therefore exempt from VAT and unable to may not be evidence that they comply with BS 3632:2005
register. Other businesses that receive this type of income or its previous versions. In these circumstances HMRC will
are now partially exempt. For many businesses this income accept evidence that they were occupied before 6 April 2013
is not significant, for instance a café or takeaway may have as indicating that they qualify for zero-rating, in addition to
only one machine, and so the change should have no effect meeting the size criteria.
on their ability to recover VAT as they can take advantage
of the de minimis limits. Some caravans may be eligible to be included in the margin
scheme for second-hand goods. Note that an apportionment
may be required between the value of the caravan and the
contents.

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

For example, Happivans Park buys a static caravan, have to register with the Government Gateway before being
including the removable contents, from Fred and Doris for able to use NOVA. VAT-registered businesses will need to
£8,000. It later sells the caravan and contents for £12,000. be registered for online VAT. In some instances NOVA can
The caravan meets the size criteria but does not meet BS be used by an agent; more details are in VAT Information
3632:2005 and therefore the sale of the caravan is reduced- Sheet 06/13.
rated. The value of removable contents is estimated to be
10% of the total value. However, there are a few instances where a paper return
is required, notably on a change of intention where a
The VAT on the margin is calculated as: temporarily imported vehicle is to stay permanently in the
UK or where a vehicle is leased from another EU country
Sale of caravan: £12,000 – £8,000 = £4,000 × 90% = £3,600 × and there is an option to buy the vehicle at the end of the
1/21 = £171.43 lease.

Sale of contents: £12,000 – £8,000 = £4,000 × 10% = £400 × Since July 2013 late or inaccurate declarations have been
1/6 = £66.67 subject to penalties.

Total output tax = £238.10 Anyone bringing a vehicle into the UK should be made
aware of NOVA and should read VAT Information Sheet
VAT Information Sheet 04/13 VAT: Taxing holiday caravans 06/13.
contains examples of calculations involving the different
types of caravan. 14.11 The European Union expands

14.10 NOVA – a new way of declaring VAT on vehicles On 1 July 2013 Croatia joined the EU. Accounting and
brought into the UK reporting systems should have been changed so that goods
arriving from Croatia are now EU acquisitions rather than
On 15 April 2013 HMRC introduced a new system to be imports and goods despatched to Croatia are EU despatches
used, in certain circumstances, to notify them when a land rather than exports. Sales to Croatian VAT-registered
vehicle is brought permanently into the UK. HMRC have customers should be included on EC sales lists. The country
to be notified before the vehicle can be registered with the code for Croatia is HR. Some supplies of services to non-
DVLA and therefore the DVLA can withhold registration business customers in Croatia are now subject to UK VAT
if there is a risk that the VAT will not be paid. This should rather than being outside the scope of VAT.
reduce the risk of VAT evasion on imported vehicles.
14.12 VAT on loss-adjusting services for marine and
The Notification of Vehicle Arrivals (NOVA) system is likely aviation claims
to be used mainly by non-registered entities and private
individuals bringing vehicles into the UK from another On 3 July 2013 HMRC issued Revenue & Customs Brief
EU country. It should also be used by VAT-registered 13/2013 confirming that loss-adjusting services supplied in
businesses that are bringing in vehicles for non-business the UK are, and have always been, standard-rated. Some
use and by importers bringing vehicles in from outside the businesses providing physical inspections of qualifying
EU who do not use one of the existing registration systems ships and aircraft for loss-adjusting purposes were treating
operated by the DVLA. these supplies as zero-rated believing them to fall under
‘surveys’ rather than a service provided by loss-adjusters.
The notification must be made within 14 days of the date From 1 September 2013 HMRC expects all businesses
the vehicle was brought into the UK. providing these services to treat them as standard-rated.
They have accepted that the guidance regarding physical
VAT-registered businesses that purchase vehicles from inspections was misleading and so businesses wrongly
other VAT-registered businesses in the EU for business use supplying these as zero-rated do not need to correct
do not need to use NOVA as the vehicles can be treated as previous returns. However, businesses that zero-rated
EU acquisitions on their VAT returns. services that did not include a physical inspection will need
to correct previous returns unless they can show that they
Non-registered entities and private individuals who import were given misleading advice from HMRC.
vehicles from outside the EU will not usually need to use
NOVA because import VAT will be charged automatically. 14.13 Withdrawal of the exemption from business
research supplied between eligible bodies
NOVA is designed to be an online system. Individuals and
non-registered entities who use other online government Before 1 August 2013 a supply of research from one
services, for instance if they file tax returns electronically, ‘eligible body’ to another in the course of business was
will already have access to NOVA. Otherwise they will exempt from VAT. An ‘eligible body’ is one that supplies
exempt education. This includes registered schools and
most colleges and universities as well as many training

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

organisations – see Notice 701/30 Education and vocational store his or her own goods may now be standard-rated.
training for more on the definition of ‘eligible body’. The standard-rating is independent of any option to tax
exercised. A key feature is how the tenant actually uses
From 1 August 2013 if the supply is made in the course of the facility. For instance, if a commercial unit, not subject
business it is standard-rated. Supplies of research made to an option to tax, was let to a business that used it as a
under contracts signed before 1 August will remain exempt workshop then the rents would be exempt, but if the tenant
as far as they remain within the scope of the original started using the unit mainly for storing his or her own
contract. Supplies made under contracts signed after that goods the rents would become standard-rated. HMRC
date and supplies arising from variations to pre-1 August expect landlords to take steps to ensure that tenants inform
contracts will be standard-rated. Eligible bodies carrying them if they intend to use, or start using, premises for
out research must be careful when charging for work that is storage.
additional to the scope of the original contract in that if the
work is mixed with work under the original contract all the Some lettings of storage facilities remain exempt, principally
work becomes standard-rated. lettings of property that is used to keep animals and lettings
of property for use for a relevant charitable purpose.
Supplies of ‘non-business’ research are and remain outside
the scope of VAT. Non-business research is usually publicly Planning points
or charity-funded research carried out for the public
benefit. If non-business research is being carried out in a Businesses that let or sub-let property that could be
collaborative arrangement evidence must be kept to show used for storing goods should check on the tenants’
that this is the case, otherwise payments from one body current use of the property. VAT should be accounted
to another that are actually distributions of grant funding for on letting income in respect of the period since 1
may be viewed as consideration for services provided. October 2012.

Anyone involved with eligible bodies that supply research New tenancies may need to include a clause obliging
should make sure they know when VAT should be charged. the tenant to inform the landlord if they start, or
There is more information in VAT Information Sheet 11/13 cease, using the property for storage purposes.
VAT: Supplies of research between eligible bodies.

14.14 Accommodation and catering supplied by 15 Looking into the future
hotels and similar to their employees
There are a number of changes on the way, some directly
In June 2013 Notice 709/3 Hotels and holiday accommodation affecting the operation of the VAT, while others are the
was updated to reflect HMRC’s policy on accommodation result of developments outside the tax system that may
and catering supplied to employees. If employees pay have VAT effects. The 2013 Budget changes have been
for accommodation or food and drink provided by their covered above.
employer they are regarded as VAT inclusive, and VAT
needs to be accounted for on those payments as relevant. 15.1 Discretionary investment management
From 1 January 2012 accommodation and catering paid for service
under salary sacrifice arrangements have also been subject
to VAT in the same way. Investment managers frequently offer clients a service by
which the client authorises the manager to invest the client’s
This serves as a useful reminder that many salary sacrifice funds on their behalf and to actively manage the portfolio
arrangements may now result in unforeseen VAT costs. without having to obtain the client’s authorisation for
each transaction. The charges for this service are standard-
14.15 VAT on storage – unexpected VAT liabilities for rated. Currently the investment managers separate out
landlords? specific fees for buying and selling the investments and
treat these as exempt charges because they are regarded as
On 9 August 2013 HMRC issued VAT Information Sheet financial transactions that investment managers carry out
10/13 VAT: Provision of Storage Facilities. The VAT liability as intermediary on their client’s behalf.
on providing storage facilities generally became standard-
rated with effect from 1 October 2012; however, there has Last year I mentioned the ECJ decision in Finanzamt
been confusion regarding the scope of the changes. In Frankfurt am Main V-Hochst v Deutsche Bank AG: C-44/11,
particular, the 2012 Budget announcements where this which confirmed that in these circumstances the investment
measure was first described referred to ‘self-storage’ and managers make a single supply of discretionary investment
some people have assumed that the change affected only management and that the buying and selling activities
specialist self-storage providers. form part of this supply. Therefore all fees charged for this
service are wholly standard-rated.
The Information Sheet makes it clear that the provision
of facilities in any structure where the tenant is able to

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

I also stated that HMRC’s guidance following this decision Anyone advising businesses in the telecommunications
‘should be issued soon’. ‘Soon’ turned out to be June and broadcasting sectors and any businesses making
2013 when HMRC issued the snappily titled Revenue & supplies of electronic services should look at the Question
Customs Brief 11/13 VAT: Modified Treatment for Certain and Answer paper on the HMRC website and look out for
Portfolio Management Fees Following a European Court Ruling. future developments.
In future, periodic flat fees for carrying out purchases
and sales of securities will be standard-rated. However, 16 And finally…whatever happened to
if fees are calculated and charged based on the number ‘Spot the Ball’ competitions?
of transactions performed then they may still be exempt
if this basis is contracted for in the provision of portfolio In the decades leading up to 1994 Spot the Ball competitions
management services and the fees are shown separately on were very popular and were run mainly by the same
the VAT invoice. organisations that ran the football pools. The introduction
of the National Lottery in 1994, and the many other forms of
The revised VAT treatment will be introduced with effect legal gambling since then, has greatly reduced the number
from 1 December 2013. of people playing Spot the Ball (and the pools) although it
is still seen.
15.2 Intrastat thresholds
You would have thought that the VAT status of these
On 1 January 2014 the Intrastat arrivals threshold will competitions would have been decided many years ago
be increased from £600,000 to £1,200,000. This will be and, indeed, in 1979, HMCE, as it was then, decided that
a welcome relaxation for small businesses that import they were not games, or if they were, that they were games
goods from other EU countries. The despatches threshold of skill rather than games of chance and so entry fees were
is currently £250,000. Any change to this for 2014 will be standard-rated.
announced in autumn 2013. Note that these thresholds
apply to calendar years. However, various entities that ran the Spot the Ball
competitions in the years 1979 to 2006 have made claims for
15.3 Change to place of supply of repayment of VAT wrongly declared on their income. They
telecommunications, broadcasting, and claim that the competitions should have been classified
electronic services – the introduction of the as games of chance as defined by the legislation in force
Mini One-Stop Shop (‘MOSS’) during that time and so exempt from VAT. The legislation
governing gambling included within the definition of
As announced in the 2013 Budget, the Government will be ‘games of chance’ games where skill and chance were
consulting on the changes that will take effect across the EU combined, and this is what the Spot the Ball organisers
on 1 January 2015. It is intended that the place of supply of claim their games are.
certain services will change so that they are supplied where
the customer is. Where sales are made to private individuals There is over £72 million of VAT at stake.
or non-business entities this may require a supplier based
in another country to register for VAT in the country where The First Tier Tribunal was asked to decide solely on this
their customers ‘belong’. issue. The matters of whether repayment claims could still
be made and by whom were left to later hearings.
The Government intends to introduce an online system that
will allow UK-based traders to submit a return that will But why should a Spot the Ball competition be a game
account for their VAT liabilities in other EU countries. This of chance? The typical game comprised a coupon with a
will avoid the need to register in the other EU countries photograph of a football match from which the ball and
where their customers are located. much of the background had been removed to leave a lot
of white space. A participant had to mark with a cross, or
The place of supply of electronic services is already a crosses, depending on the competition, where he or she
difficult area of VAT and as more businesses provide thought the ball should be, judging from the position and
services online it is an area that is becoming increasingly attitude of the players. The coupon and entry fee were sent
important. in to the organiser and the participant whose cross was
closest to the centre of the ball won a prize. This would
It is important to distinguish businesses that use the appear to be a game of skill, as HMRC thought.
Internet merely as a means of supplying something that
is not an ‘electronically supplied service’ from those that However, the position of the ball was not decided by
provide a service that depends entirely on the Internet for simply reinstating it from the original photograph, as you
its existence. The place of supply rules may be different would think. It was decided by a panel of judges drawn
depending on the nature of the services provided. Further from professional football who did not see the original
guidance is available in VAT Notice 741A Place of supply of
services.

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

photo. This was made clear to participants in the terms and
conditions of the game. The tribunal also heard that the
mechanical systems used to identify winning crosses were
subject to a margin of error so that an element of chance
was inevitably involved in picking winners.

The tribunal decided that a Spot the Ball competition was a
game, and that it was a game combining skill and chance.
Therefore it should have been exempt from VAT. Inevitably,
HMRC have appealed to the Upper Tribunal and so we
shall hear more of Spot the Ball.

So if you are playing what you think is a game of skill or a
game of chance sometimes the tax treatment will tell you
what is really happening.

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

Notes

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Value Added Tax – An Update Tolley’s Tax Digest | Issue 131 | September 2013

Notes

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Tolley’s Tax Digest | Issue 131 | September 2013 Value Added Tax – An Update

Notes

36

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