tolley's tax digest - lexisweb

An overview of recent changes and cases affecting:

• VATregistration;

• onlineVAT;

• landandbuildings;

• TOGC;

• financialservices;

• inputtaxandcompanyacquisitions;

• partialexemption;

• andmuchmore.

Value Added Tax - An Update

Issue 131 | September 2013

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Hugh Mitchell ACA CTAHigh Path VAT Consultancy

Tolley’s Tax Digest

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

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AuthorContentsHugh Mitchell ACA CTA

Hugh qualified as a chartered accountant in 1990 with one of the “big four” accountancy firms. He then worked for national and regional accountancy practices while specialising in VAT. In 2001 he qualified as a chartered tax adviser on the VAT route. In 2011 he set up his own VAT consultancy mainly advising small and mediumsized accountancy practices in the West Country but also advising charities and businesses in the construction sector.

He was involved in the pilot of the HM Customs & Excise Working Together initiative in the South West prior to the creation of HM Revenue & Customs and he is currently a member of the VAT Technical Committee of the Association of Taxation Technicians (ATT).

Throughout his career Hugh has been advising SMEs and with a general accountancy background he is used to understanding VAT issues in the context of the accounting and direct tax requirements that these businesses face.

Hugh lives in the West Country with his wife and two sons, spending his spare time gardening, engaged in property maintenance and supporting Yeovil Town.

Introduction 1

VAT registration 2

Online VAT 3

2013 Budget 4

Land and buildings 5

Transfer of Going Concern 6

Financial services – the tectonic plates are shifting 7

The education exemption – private tuition 8

Single supply or multiple supplies – clarity or confusion 9

Recovery of input tax on costs of company 10 acquisition – the Court of Appeal grounds BAA’s claim

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?

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

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1 IntroductionIt was 40 years ago that VAT was introduced in the UK. There was a standard rate of 10% and we were promised that it would be a ‘simple tax’. How things change.

In the last year there have been no headline-grabbing changes announced in the Autumn Statement or in the Budget, and by contrast the tax profession has been almost overwhelmed by consultation documents in advance of proposed changes. However, despite being around for 40 years, the basic principles of VAT still continue to evolve and sometimes it is unclear whether the decisions of the courts clarify our understanding or just muddy the waters further.

Tribunal cases have dealt with perennially difficult areas and I have looked at some of these in detail covering what is, or is not, a ‘building designed as a dwelling’ and deciding whether a transaction is a Transfer of a Going Concern. There have also been several cases regarding whether a supply comprising several elements is one supply for VAT purposes or a multiple supply with each supply having its own VAT liability. There is now also the possibility that a single supply may have elements that are liable to different VAT liabilities. You might have thought that this issue was largely decided with the Card Protection Plan case in 1999 but it is something that continues to evolve, as seen in Colaingrove and other cases.

Another area where the long-established boundaries are changing is the exemption for finance. The Retail Distribution Review has already forced financial advisers to look hard at the VAT liability of the services they provide and more changes are on the way that may extend standard rating to more financial services.

The difference between acceptable tax planning and unacceptable tax avoidance remains at the forefront of public debate and VAT is no different from the other taxes in this regard. The European Court decision in the Ocean Finance case has confirmed that in certain circumstances the strict contractual position can be disregarded if this does not reflect the ‘economic and commercial reality’ of the transactions, but we are not yet sure what those circumstances might be.

Advisers providing general tax and accountancy services should also look at the Mundays case for an instance of where VAT on fees for accountancy and tax services was disallowed.

Whatever changes have taken place in the world of VAT over the past 40 years one thing has remained the same: it is a challenging place for the adviser juggling with the pressures of client expectations, complex legislation, and the demands of HMRC.

2 VAT registration2.1 2013 Budget changes

Continuing the trend of the past few years, the registration and deregistration thresholds were each raised by £2,000. With effect from 1 April 2013 the registration threshold is £79,000 (previously £77,000) and the deregistration threshold is £77,000 (previously £75,000).

2.2 Other aspects of registration

Remember that recharged expenses such as travel, accommodation and subsistence are included in turnover when working out whether the threshold has been crossed.

A liability to be registered can also arise because the value of goods acquired (imported) from other EU countries exceeds the threshold or, even more unexpectedly, because the level of deemed supplies accounted for under the reverse charge exceeds the threshold. The latter can be particularly difficult to spot and for businesses to understand.

Example 1

A firm of financial advisers, which provides exempt financial advice, receives consultancy services from an American company valued at £100,000 on 30 September 2012. The American company is based solely in America and so does not charge VAT on its fees. However, the services follow the general rule on business services and are deemed to be supplied in the UK and the recipient is liable to account for output tax on the value of the services using the reverse charge mechanism. As the value of the fees has exceeded the current VAT threshold the firm of financial advisers is liable to register for VAT and pay output tax of £20,000 on fees that it has incurred!

This can be a serious issue because the recipient may claim input tax on these services only insofar as the services are used for making taxable supplies, so a business can unwittingly create a VAT liability. In the example, the firm of financial advisers makes only exempt supplies so it cannot claim any of the £20,000 VAT it has paid to HMRC. A business that considers itself fully exempt, and so is probably not aware of the existence of the VAT reverse charge procedure, has become liable to be registered and what is more has landed itself with a £20,000 VAT liability that it was not expecting.

Note that a business making wholly taxable supplies can claim all the VAT it accounts for under reverse charge as input tax subject to the normal rules.

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

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

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VAT can still make a claim. The timing of expenditure around the time of registration is crucial because the input tax incurred before the date of registration may be eligible for a claim for pre-registration input tax, but it will not be recoverable if incurred after the date of registration unless it is for a single purchase of capital assets that cost £2,000 or more, including VAT.

Example 2

A business is approaching the VAT threshold and wants to use the Flat Rate Scheme. The business will be registered for VAT and for the Flat Rate Scheme with effect from 1 December 2013. The business knows it will be purchasing equipment costing £1,800 including VAT in the next two months. If the expenditure is incurred before 1 December the input tax of £300 can be claimed on the first return after registration as part of a claim for pre-registration VAT. However, if it is not purchased until after 1 December 2013 no input tax can be claimed as generally input tax cannot be claimed under the flat rate scheme.

Therefore capital expenditure should be brought forward to before the date of registration. However, if a single purchase of capital expenditure is £2,000 or more the related input VAT can still be claimed under the scheme.

2.5 Businesses temporarily exceeding the registration threshold

Advisers are aware that if a business temporarily exceeds the registration threshold, usually due to a large one-off sale, it can apply to the VAT Commissioners for exception from registration. The business must provide evidence that its turnover over the next twelve months will not exceed the deregistration threshold in effect at the time it became liable to be registered.

The case of Mark Mills-Henning [2012] UKFTT 444 (TC) offers a cautionary tale of a business that temporarily exceeded the VAT threshold. In the summer of 2007 Mr Mills-Henning was very busy and his turnover exceeded the threshold, although at the time he was not aware of this. Later when his accountant was preparing the annual accounts he noted that the business had exceeded the threshold but that its turnover had subsequently fallen so that it was below the deregistration threshold. The accountant did not advise his client that he should have registered for VAT and neither did he notify HMRC.

Unfortunately the exception from registration is not automatic; it can only be granted by HMRC and so they must be notified when the registration threshold is crossed. In the Mark Mills-Henning case HMRC saw from his self-assessment tax return that he should have been registered

for VAT on selling prices can be a serious disadvantage. In the current economic climate in particular the business will find it difficult, if not impossible, to increase prices by 20%. This makes it more important than ever for a business whose turnover is approaching the registration threshold to monitor its monthly sales.

2.4 Measures to mitigate the effect of registering for VAT

• Make use of the month’s interval between exceeding the threshold and the effective date of registration.

Note that this does not apply where turnover in the next 30 days alone will exceed the threshold.

• Consider using the Flat Rate Scheme for small businesses if annual turnover is expected to be below the thresholds for entry into the scheme.

The scheme allows a simplified way of calculating the VAT payable to HMRC and avoids the need for detailed VAT records (although adequate records must be kept for other tax purposes). In essence, a business in the scheme simply applies a fixed percentage to its business income (including VAT where applicable) to work out the VAT it pays to HMRC. The percentage varies according to the type of business. There is also a useful 1% reduction in the flat rate for businesses in their first year of VAT registration. It is not suitable for all businesses and so the calculations must be done first to ensure that the business is better off using the scheme. Businesses with exempt or zero-rated sales should not use the scheme, nor should businesses involved in EU acquisitions.

• Maximise the claim for pre-registration input tax.

When a business registers for VAT it can claim the input VAT on certain expenditure it incurred before it was registered. This is a one-off claim and so the business must ensure that it is as complete as possible.

VAT can be claimed on assets (including stock) on hand at the date of registration that are to be used in the business for making taxable supplies. The assets must have been purchased in the four years before registration and the business must hold VAT invoices as evidence of the purchase.

The input tax on services received for business purposes in the six months before registration can also be claimed as long as they have not been used in making goods that have been supplied before the date of registration.

There are special provisions to deal with expenditure incurred before a company is formed.

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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from December 2007. Mr Mills-Henning duly registered and tried to recover the output tax he should have accounted for by raising VAT-only invoices on his main customer. To make matters worse this customer went into liquidation and did not pay the invoices so he had to bear most of the VAT as he could claim bad debt relief only on the VAT fraction of the outstanding invoices.

Planning points

Businesses making taxable supplies must monitor their monthly turnover to ensure that a liability to register for VAT is recognised at the right time.

If claiming exception from registration the business should not inadvertently apply for registration by completing form VAT 1, the circumstances should be set out in writing to HMRC.

2.6 Backdating the effective date of registration

A point that is sometimes missed when considering registration is that it can either be from the date a business becomes liable to be registered or from an agreed earlier date. This is useful where there is a long lead time between starting to set up a business and making the first supply. A potential business may incur considerable costs in, for example, planning applications, product development, or training well over six months before it has to register for VAT. In order to claim the VAT on these costs the business should register from the date it can show a clear intention to trade. HMRC will need to be sent adequate evidence of the intention to trade, for example, a copy of the business plan, an agreement to lease business premises, applications for finance, etc. Note that the date of registration cannot be backdated by more than four years.

An important point to note is that HMRC take a ‘one bite of the cherry’ approach when agreeing an effective date of registration. Once a business has registered for VAT HMRC will generally refuse a later request to backdate the date of registration. Backdating is sometimes allowed where HMRC have made an error in processing the application or if the applicant has made a genuine error in a few restricted circumstances.

But in the case of Cambrian Hydro Power Limited v Revenue and Customs Comrs [2012] UKFTT 764 (TC) TC02423 (‘Cambrian Hydro’) the Tribunal decided that HMRC should allow a late request for backdating in circumstances in which HMRC would normally refuse it.

Cambrian Hydro is a company that was formed to pursue a hydro-electric power project and from 2009 has been incurring costs on reports required for various planning purposes. At the end of 2011 a director of the company applied online for a voluntary VAT registration and requested a registration date

of 1 January 2012, believing that he would be able to claim the VAT on all pre-registration expenditure incurred in the previous four years. HMRC accepted the application and allocated a registration date of 1 January 2012. The director soon became aware that most of the input tax had been incurred on services received more than six months before the date of registration and that this VAT was irrecoverable. On 1 February 2012 he asked HMRC if they would backdate the date of registration to 1 April 2009. Unsurprisingly, HMRC refused, explaining that they would backdate the registration only if there had been a ‘departmental error’ in dealing with the application, or if Cambrian Hydro had been liable to be registered from an earlier date.

Cambrian Hydro appealed on the basis that if, during the online registration process, they had been made aware of the six month limit on claims for pre-registration VAT on services, they would clearly have requested an earlier registration date. They also claimed that the difference between goods and services for VAT purposes had not been explained during the registration process.

The tribunal clearly felt that Cambrian Hydro’s position was ‘unfair and unjust’ after having made a genuine error and looked for any other basis on which HMRC should allow backdating. They found it in HMRC’s Manual V1-28, Volume 1: Registration, where section 33.1.2 allows additional criteria to be taken into account when deciding to permit a late request for backdating if there are thought to be ‘mitigating circumstances’. The tribunal considered that in this case there were mitigating circumstances in that if the significance of the director’s action in choosing 1 January 2012 had been made clear to him at the time of making the online application he would have chosen a different date. The online registration process does not allow for explanations or comments to be added to the form and so there had been no opportunity for HMRC to see that a mistake had been made. Nevertheless the tribunal decided that in the interests of fairness and justice the decision not to allow the late backdating should be revised in the light of the information now available.

This decision seems to put HMRC’s officers in the unenviable position of having to read the minds of applicants and dealing with information submitted on the basis of what the applicant meant to submit rather than what they actually did submit!

Planning points

When advising on VAT registrations consider whether there is any benefit in backdating the effective date of registration.

Consider if it is worth looking at any cases where a request for backdating has been rejected. As this is a 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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2.7 Non-resident businesses making supplies in the UK

From 1 December 2012 the registration threshold is not available to any business that is based outside the UK but which makes supplies in the UK. See 14.5 below.

2.8 Online VAT registration

Most types of VAT registration can now be completed online. This should speed up the registration process. However, there are some cases where a paper submission should be made, principally where the applicant is claiming exception from registration. Applications involving distance selling in the UK, acquisition of goods from other EU countries and other unusual circumstances should also be made on paper. Check the HMRC website for the current position.

Applications to join the Flat Rate Scheme for small businesses can also be made online at the same time. If you are completing an application to join the Flat Rate Scheme you must be careful in how you describe your business activities in the business classification section. HMRC will automatically assign a business to a particular flat-rate sector based on the description of the business and it may be difficult to change this later.

Online registration can also include an application to join the Annual Accounting Scheme, and the additional forms for creating a group registration, as well as notification of an option to tax.

If the business involves making supplies of property an additional VAT Form 5L may have to be completed.

3 Online VATAll VAT returns due for periods starting on or after 1 April 2012 must be filed electronically and payments of VAT to HMRC must be made by one of the electronic methods. Very few exceptions will be allowed to the requirement to file and pay electronically, the most common exemption being because of the taxpayer’s religious beliefs.

EC Sales Lists (ESLs) and Intrastat returns must also be filed electronically.

Businesses no longer receive paper returns and so if they have not signed up to online filing they will not be receiving a prompt to make a return. Consequently they may be racking up penalties for late filing.

If traders cannot file online they can appoint an agent to file on their behalf. The agent can arrange this without the trader having to register for the online service. Note that the agent can only use this procedure when he or she is going to file VAT returns on behalf of the trader. In order to

submit EC Sales Lists online the trader must register for the online service, although they can then appoint an agent to submit the returns on their behalf.

3.1 Payment by electronic means

The easiest method is to set up a direct debit and this also extends the payment date by three days. However, payment can be made by:

• CHAPS;

• BACS;

• Internet or telephone banking, including Faster Payments;

• credit card or debit card using Billpay; and

• bank giro.

Note that payment deadlines refer to the date that HMRC is in cleared funds. So if payment is due by a Monday the business must allow for clearance time so that HMRC has the cleared funds in their account on the Monday. Payments due on a Saturday or Sunday must be cleared by the preceding Friday. Depending on the clearance times operated by the business’s bank the payment may have to be initiated a few days earlier and must allow for the Saturday and Sunday. If the Monday is a bank holiday the payment should be brought forward so that HMRC is in cleared funds by the preceding Friday.

3.2 Other online VAT services

In October 2012 the online service was expanded so that in addition to registration the following tasks can now be done online:

• change registration details; for example, change the principal place of business address;

• download a copy of the certificate of registration;

• apply to deregister.

Note that some services are not available to agents.

The new scheme for notifying HMRC of vehicles brought into the UK (Notification of Vehicle Arrivals, or NOVA) was introduced in April 2013 and this is also mainly an online system (see 14.11 below).

One area that remains paper-based is the disclosure of misdeclarations of VAT. This makes it all the more important to check online returns carefully before submission. It can take several weeks for a correction to be processed. HMRC say that they do not expect ‘careless’ errors to be formally disclosed (unless they are too big to be corrected on the next return), but if a careless error is not disclosed to them as soon as it is discovered, and HMRC subsequently discover the error, there is the possibility that a penalty will be imposed.


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4 2013 Budget Perhaps because the VAT changes announced in last year’s Budget were somewhat less than universally welcomed there was very little in the 2013 Budget regarding VAT. Most of the announcements related to current or forthcoming consultations and changes that have previously been announced.

A summary of the Budget VAT announcements:

• Registration and deregistration thresholds increased (see 2.1 above).

• Slight changes were introduced to the operation of road fuel scale charges to take effect from the date of Royal Assent.

• As previously announced, from 1 April 2013 the reduced rate of VAT (currently 5%) applies to passenger transport provided by small cable-based systems. On transport systems where each car or gondola can carry ten passengers or more the transport was already zero-rated.

• Withdrawal of the reduced rate for the supply and installation of energy-saving materials in buildings used for relevant charitable purposes. Supplies made on or after 1 August 2013 will be standard rated. The reduced rate will continue to apply to the supply and installation of energy-saving materials in residential accommodation. The long-term future of the application of the reduced rate to energy-saving materials is in doubt because the EU Commission believes that this is beyond the scope of the supplies which can be reduced-rated, as laid down in EU legislation. The Commission has begun infraction proceedings against the UK, but it may take a year or so before it actually gets to court. In the meantime the UK Government has stated that it does not agree with the Commission’s view and the reduced rate will continue to apply.

• Withdrawal of the exemption for business research supplied by one eligible body to another. This was the subject of a consultation and subject to the responses to the consultation the government will proceed with this change with effect from 1 August 2013 (see 14.13 below).

• Consultation on the proposed changes to the place of supply of broadcasting, telephone and electronic services (see 15.3 below).

• Consultation on changes to the zero-rating of exports. The government is proposing to extend zero-rating to supplies of goods to businesses that are registered for VAT in the UK but which do not have a business establishment in the UK and which arrange for the export of those goods outside the EU. This would 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.

• Review of the Retail Export Scheme. This is the scheme that allows visitors from non-EU countries to reclaim VAT on goods that they buy in the UK and which they take home in their luggage. HMRC want to redesign the scheme to make it easier to understand and use, so reducing errors and opportunities for fraud. They have been undertaking a consultation on how this can be done during the summer of 2013.

• Consultation on treatment of refunds made by manufacturers. The Government intends to introduce changes that will allow manufacturers to take into account refunds that they make direct to customers in respect of faulty goods, etc when calculating their VAT liabilities. However, no change is expected until the 2014 Budget.

• In 2014 the Government intend to add Health Education England and the Health Research Authority to the bodies that can use the VAT Refund Scheme under the VAT Act 1994 s 41.

5 Land and buildings This is a very complicated area of VAT and an area where a mistake is likely to be very expensive. HMRC’s guidance regarding land (VAT Notice 741) and buildings and construction (VAT Notice 708) grows ever longer as changes to the legislation and the testing of the boundaries in the courts refine and alter the interpretation of the law.

5.1 Definition of ‘dwelling’

The meaning of ‘dwelling’ for VAT purposes is important because buildings designed as dwellings, together with buildings used for a ‘relevant residential purpose’ or a ‘relevant charitable purpose’, receive a favourable VAT treatment.

5.1.1 Background

Construction services are generally standard rated but there are some important exceptions.

Construction services supplied in the course of constructing a building ‘designed as a dwelling or number of dwellings’ or constructing a building used for a relevant residential purpose may be zero-rated. If the construction services are supplied in the course of a ‘qualifying conversion’ they are reduced rated. If the construction services are supplied in the course of constructing a building used for a relevant charitable purpose they may also be zero-rated. I am not covering the zero-rating of work comprising approved alterations to listed buildings as this has been withdrawn – see above for transitional arrangements.

A claim under the Do-it-yourself Housebuilders Scheme can be made only in respect of a building designed as a dwelling or buildings to be used for relevant residential or relevant charitable purposes.


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Note that ‘construction services’, ‘qualifying conversion’, ‘relevant residential purpose’ and ‘relevant charitable purpose’ have specific meanings for VAT purposes. Before advising on the VAT status of construction services you must make sure that the services are construction services and that you understand the status of the building that is being constructed or converted. VAT Notice 708 Buildings and construction is a good starting point.

In the case of the construction of buildings to be used for relevant residential or relevant charitable purposes the customer must issue a certificate to the main contractor confirming the status of the building. The contractor must hold a certificate in these circumstances in order to zero-rate his or her supplies. No certificate is required where buildings designed as dwellings are being constructed or created by conversion. A consequence of this is that only the main contractor can zero-rate the supplies where a certificate is required; certificates cannot be issued to sub-contractors and so they charge VAT at the standard rate to the main contractor. As no certificates are required in the case of buildings designed as dwellings any supplier of construction services relating to a new dwelling may be able to zero-rate their supplies.

In addition, the first grant of a major interest (the sale of the freehold or the grant of a long lease) in a building designed as a dwelling or dwellings or in a building used for a relevant residential or relevant charitable purpose by the ‘person constructing’ is zero-rated.

5.1.2 Dwellings

There is no legal definition of ‘dwelling’. For VAT purposes a building ‘designed as a dwelling or number of dwellings’ is a building where each dwelling in it:

• consists of self-contained accommodation;

• has no provision for direct internal access to any other dwelling or part of a dwelling;

• is not subject to any covenant, statutory planning consent or similar provision that prohibits its separate use or disposal; and

• has been granted statutory planning consent and it has been constructed or created by conversion in accordance with that consent.

All these conditions must be met for the accommodation to be a dwelling. Despite these conditions having been applied for many years there are frequent disagreements with HMRC as to their meaning and application. The third condition regarding ‘separate use or disposal’ in particular is the cause of many disputes that often arise on the meaning and interpretation of the restrictive clauses that planning authorities use in planning consents. There have been some recent cases concerning ‘live-work’ units that show just how difficult it can be to decide whether a building is a dwelling. HMRC’s guidance on the subject is not altogether clear, adding to the confusion.

Note that a planning restriction on who can occupy a dwelling generally does not constitute a restriction on separate use. However, if a condition links the occupant of the dwelling very closely to associated business premises it may be regarded as such so that the building does not meet the definition of ‘designed as a dwelling’.

5.2 Live-work units – a nasty VAT trap

As local authorities try to encourage the re-use of older buildings while at the same time encouraging businesses, there have been more cases involving properties that combine residential and business use. Many of these are designated ‘live-work’ units by the terms of the planning consent and there are usually conditions in the consent that are designed to prevent the business part of the property from being used for other purposes or by someone different from the occupier of the residential area. Commonly it is forbidden to sell one part separately from the other. This leads to a VAT problem for the developer or, frequently, the self-build claimant because HMRC do not regard the typical live-work unit as a dwelling for VAT purposes. This means that VAT at the standard rate is due on the construction or conversion costs and also possibly on the onward sale, and it is not eligible for a claim under the Do It Yourself Housebuilder Scheme. Unfortunately HMRC’s guidance in Notice 708 Building and Construction on the construction of live-work units is not altogether clear and this was brought to a head in the case of Adrian and Jane Holden v Revenue and Customs Comrs [2012] UKFTT 357, (TC) TC02043.

Mr and Mrs Holden owned premises that comprised a photographer’s studio and workshop, an office and a garage. They demolished the office and garage and replaced it with a flat, so creating a live-work unit. One of the conditions imposed by the planning permission for the construction of the flat stated:

‘The flat hereby permitted shall be occupied only in conjunction with the operation of the photographic studio from 240a Highbridge Road.’

Mr and Mrs Holden submitted a housebuilder’s claim in respect of the VAT incurred on the materials used in the construction of the flat. As mentioned above, a claim can be made only in respect of the construction of a dwelling as defined for VAT purposes, or in respect of the conversion of a non-residential building into a dwelling. HMRC denied the claim on the basis that the flat failed the separate use or disposal condition and so was not a dwelling for these purposes.

Mr Holden referred to the published guidance on live-work units in Notice 708, paragraph 15.4. This paragraph describes a live-work unit and then states that: ‘Zero rating or reduced rating is only available to the extent that the unit comprises the dwelling, provided that the dwelling meets the normal conditions…’. Mr Holden’s argument was that a live-work unit could never qualify for the zero rate or the reduced rate as by definition the residential part could not be separated from the non-residential. The legislation


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should be interpreted so as to apply the zero rate to the creation of the new residential property.

Although the tribunal was sympathetic to Mr Holden’s argument it could only ‘construe and apply the legislation as it stands’. Therefore the Holdens’ appeal was dismissed.

HMRC’s view of VAT and live-work units is given in their VAT Construction Manual at VCONST14210. HMRC state that the residential part of a live-work unit will qualify for zero-rating only if that part meets all the conditions as a dwelling. The manual notes that, as planning consent often prevents separate use or disposal of the residential part from the commercial part, live-work units often do not qualify for zero-rating. The residential part will qualify if it there are no restrictions on separate use or disposal, or if there is no separate designated area that has to be used for business purposes.

5.3 Separate use – what does the planning permission actually say? The Barkas case

However, the conditions in planning permissions have to be read carefully and the right wording may mean that there is no restriction on the separate use or disposal of the residential part of the building.

The actual wording of the planning permission was the issue in the case of Barkas v Revenue and Customs Comrs [2013] UKFTT 186, (TC) TC02601. Mr Barkas owned two adjacent barn-like buildings which had both been used for commercial purposes. There was no internal access from one building to the other. He applied for permission to convert one building into a dwelling and proposed that the other building remain in commercial use. In order to comply with the planning authority’s development policies it was proposed that the dwelling and commercial building should be used as a live-work facility.

Planning permission was granted for the conversion and among the conditions was the following:

‘6. The workshop/office within the application site shall only be used/operated by the occupiers of the dwelling hereby granted permission.’

On completion of the conversion Mr Barkas made a claim for the VAT incurred on materials used in the conversion under the Do It Yourself Housebuilders Scheme. The claim was rejected on the basis that the effect of condition 6 was that it was ‘not possible to use the dwelling separately from the working space’ and therefore the residential building did not qualify as a dwelling.

HMRC admitted that there was no condition prohibiting separate sale of the residential building. However, it contended that there was a restriction on separate use of the residential area even though the planning condition referred only to separate use of the commercial area. HMRC also wrote to the planning authority to obtain their

view on the restriction. The planning authority replied that in their view there was one live-work unit and that separate disposal of the residential part would not be permitted.

The tribunal was having none of it and looked at the actual wording of the condition 6. It dismissed HMRC’s interpretation of the condition and also ignored the planning authority’s comments as having no legal effect.

In practical terms, the restriction prevented the separate disposal and use of the commercial building because if the residential building was sold separately, the commercial building could not be used. However, there was nothing in the planning permission to prevent Mr Barkas from doing just that. He could choose to sell the house and keep the commercial building, leaving it unused. Therefore condition 6 did not prevent the separate use or disposal of the residential building and so it was eligible for a claim under the DIY Housebuilders Scheme.

HMRC are clearly unhappy with this decision and intend to appeal to the Upper Tribunal

Planning points

When intending to build residential accommodation or convert non-residential buildings into residential accommodation it is essential to check the planning consent and in particular any conditions to the consent for any restrictions on use or disposal.

If restrictions are to be imposed on use, they should be imposed on the commercial part of the business rather than the residential part.

5.4 Residential conversions – a setback for HMRC in the case of Alexandra Countryside Investments

The cases involving property conversions continue to surprise. The decision in the case of Alexandra Countryside Investments Limited v Revenue and Customs Comrs [2013] UKFTT 348, (TC) TC02751 contradicts HMRC’s longstanding policy regarding the conversion of non-residential property that already contains a residential part. The policy was a result of the Calam Vale case in 2001, when it was decided that where a mixed-use building was converted into dwellings the first grant of a major interest in those dwellings by the person converting was zero-rated only if the additional dwelling or dwellings created were created from the non-residential parts. If the additional dwelling or dwellings created included an area that had been part of the residential part of the original building then any onward supply would be exempt. Therefore a developer who divided a mixed-use building in the wrong way in the course of converting it to dwellings could find that none of the VAT on the conversion costs was recoverable.


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holiday lettings and the management of the hotel and grounds were carried out by a management company appointed by the developer. The management company acted as undisclosed agent in letting the apartments, so that as a far as the guests were concerned they were not renting the apartment from Mr and Mrs Roden.

Under the terms of their lease from the developers of the St Moritz Hotel the Rodens could not reside in the apartment themselves for more than eight weeks a year.

VAT at the standard rate had been charged on the lease from the developers to the Rodens. HMRC and the Rodens did not contest this.

The Rodens had then registered for VAT on the basis that they would be making supplies of ‘sleeping accommodation in a hotel’, which are standard rated under Item 1(d) of Group 1, Schedule 9 of VAT Act 1994. On this basis they claimed input VAT of £70,000 on the lease premium. HMRC ruled that the supply of the accommodation was exempt and therefore disallowed the claim for the input VAT. HMRC contended that the supply was not standard-rated because their supply was to the management company. The supply of the accommodation by the management company to the guests was standard-rated but the Rodens’ supply was exempt because the management company did not actually use the accommodation itself. The Rodens appealed.

The main argument of their appeal was that the VAT status of the supply could not be altered because it was made via an undisclosed agent (the management company). UK VAT law allows HMRC to treat a supply made via an undisclosed agent to be treated as made to and by that agent. They asserted that the VAT status of the supply to and by the undisclosed agent must be the same.

Their secondary argument was that Item 1(d) made no mention of the recipient of the supply and that HMRC were incorrect in inferring that the supply of accommodation had to be made to the actual user in order to be standard-rated.

The main argument rested on the decision in the Court of Justice of the European Union (‘CJEU’) case of Belgium v Henfling (acting as administrators in the insolvency of Tiercé Franco-Belge SA): C-464/10, [2011] STC 1851. (CJEU is the new name for The European Court of Justice (‘ECJ’). Both terms are used in this update.) The general principles of the treatment of agents and principles under EU law and UK law were discussed at length. The tribunal noted the difficulty in applying EU law to the situation where the agent is undisclosed, or ‘acting in his own name’ in EU terms. In contrast to UK law, in EU law the undisclosed agent is regarded as the principal when he makes the supply to the customer; there is a deemed supply from the supplier to the agent but there is no deemed supply from the agent of his own services to the supplier.

The first chink in HMRC’s armour was opened in Revenue and Customs Comrs v Jacobs [2005] EWCA Civ 930, [2005] STC 1518 where a developer claiming input VAT under s 35 (the Do-It-Yourself Housebuilders Scheme) was successful in establishing that the meaning of the restrictions in Note 9 to Group 5 Schedule 8 of VAT Act 1994 was that if a building already contained a residential part, the conversion must merely result in an additional dwelling, or additional dwellings, being created in the building to qualify for zero-rating. There was no requirement that the additional dwelling or dwellings should be created from just the non-residential parts. HMRC realised the seriousness of this case by fighting it all the way to the Court of Appeal. However, they lost and in a damage-limitation exercise issued a business brief stating that the revised treatment applied only to claims under s 35 and not to zero-rating under s 30.

I suppose it was only a matter of time before someone challenged the different treatment of conversions carried out by a self-builder from conversions carried out by a developer. The Alexandra case involved the conversion of a former public house into two dwellings. The public house had contained a flat and each new dwelling was created partly out of the flat and partly out of the commercial areas. According to HMRC’s policy the first grant of a major interest in neither new dwelling would qualify for zero-rating; the grants would be exempt and hence none of the VAT incurred on the conversion costs would be recoverable. This was because each new dwelling incorporated a part of the building that had previously been residential.

Applying the principle used in the Jacobs case the tribunal noted that before the conversion there was one dwelling in the building and after the conversion there were two dwellings. Therefore the condition in Note 9 was met and the first grant of a major interest in the new dwellings was zero-rated.

So far there has been no response from HMRC. As a First Tier Tribunal decision it is only binding on the parties involved and so it may take a further case to establish the new principle or for HMRC to appeal to the Upper Tribunal. However, in view of their defeat in the Court of Appeal in the Jacobs case HMRC may not wish to take it further.

5.5 Supply of sleeping accommodation in an inn, hotel or similar

Roden v Revenue and Customs Comrs [2012] UKFTT 586, (TC) TC02263 covered the scope of the standard rate with regard to the supply of accommodation as well as highlighting the differences in the legal status of supplies via undisclosed agents in EU law and UK law.

Mr and Mrs Roden bought a holiday apartment in a hotel development. The St Moritz Hotel, which, despite the name, is in Cornwall, sold apartments on long leases to private investors who could then let them to holiday-makers. The


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6.1 Transfer of Going Concern – general

The fundamental principle is that if assets comprising a taxable business or part of a taxable business are transferred to a person who is VAT registered, or becomes liable to be registered as a result of the transfer, and who then operates that business with no significant break, then no VAT is due on the sale of those assets. The supply of the assets is treated as outside the scope of VAT. The detailed conditions that must be met for TOGC treatment are set out at 6.2 below.

Although the law governing TOGCs is relatively short and seemingly simple, the interpretation of what constitutes a TOGC is often far from straightforward and is the subject of detailed guidance from HMRC in Notice 700/9 Transfer of business as a going concern. This includes a number of decisions in tribunal and court cases.

It is crucial to establish whether a transfer of assets constitutes a TOGC for VAT purposes because VAT must not be charged on assets in a TOGC, but there is a major exception for land subject to an option to tax, as explained below.

If a transaction is wrongly construed as a TOGC, the transferor is liable for the output VAT that has not been charged. This may not be recoverable from the transferee.

On the other hand if a transaction is not treated as a TOGC but should have been, the transferee has been charged VAT incorrectly and so is not entitled to recover it as input tax. There have been many cases where VAT on assets purchased has been disallowed by HMRC because they viewed the transaction as a TOGC but the parties to it did not. The transferee’s first course of redress is to try to recover the VAT from the transferor, who by then has often moved on and sometimes cannot be traced. However, HMRC may allow the transferee to treat it as input tax if the transferor has declared and paid the output tax to HMRC.

This makes it extremely important that written sale and purchase of business agreements are used and that they cover the liability for omitted or disallowed VAT and consequent interest and penalties.

Note that in certain circumstances TOGC can take place without any assets being transferred. This is important as the transferee may be required to be registered from the date of the transfer, but may fail to do this because he is unaware that a TOGC has taken place if there has been no direct transfer of assets to him (see 6.4 below).

6.2 Conditions for TOGC treatment of a supply of assets

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

Be that as it may, the tribunal decided that the decision in Henfling did not preclude the deemed supply to the agent from being of a different VAT status from the supply by the agent.

However, the tribunal did agree with the Rodens’ secondary argument. The judge could find nothing in Item 1(d) or in Article 135(2) of Directive 2006/112, to which it corresponds, that supported HMRC’s contention that the accommodation had to be supplied to the actual user. Therefore the supply of the apartment from the Rodens to the management company was standard-rated.

The sting in the tail

As has already been stated, both parties agreed that the lease from the developer to the Rodens was standard-rated. However, the judge questioned why this should be. The lease was not zero-rated as it was in relation to a ‘building designed as a dwelling’ but which could not be used for permanent residence. Should it then have been exempt? The judge thought this to be the case unless the developer had exercised an option to tax over it – and there was no evidence of this. If the lease was exempt then the VAT had been charged incorrectly and the Rodens were not entitled to claim it as input tax.

What was not mentioned was whether the hotel was a ‘new’ building at the time of the grant of the lease. If it was under three years old when the grant was made it would be standard-rated under Item 1(e) of Group1 Schedule 9 of the VAT Act 1994. If it was over three years old then the lease should have been exempt unless an option to tax had been exercised.

Planning point

All this goes to show that advice should always be taken in relation to transactions involving land and buildings, especially if they involve dwellings that cannot be used for permanent residence.

6 Transfer of Going Concern This is a perennial source of confusion and potential loss of VAT. However, following Robinson Family Limited [2012] UKFTT 360, (TC) TC02046 last year there has been a welcome slight relaxation in the definition of a Transfer of Going Concern (TOGC) of a property-letting business.

Note: ‘Transfer of Going Concern’ or ‘TOGC’ refers to the special meaning these terms have for VAT purposes and are not used in their general sense.


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from being a TOGC. If a business normally closes as part of a seasonal pattern of trade this is not considered a break in trade.

Other features such as the transfer of goodwill, premises, staff, and stocks strongly indicate that a TOGC has taken place, but the absence of one or more of these features does not mean that a TOGC has not taken place (see 6.4 below for an example).

It is sometimes possible to obtain a ruling from HMRC as to whether a transaction is a TOGC, but often the timetable for a transaction is not long enough to allow for this. Moreover, in the recent case of the Royal College of Paediatricians and Child Health v Revenue and Customs Comrs [2013] UKFTT 202, (TC) TC02617 HMRC helpfully confirmed that they did not give TOGC clearances in transfers involving a property business nor post-transaction rulings.

6.4 TOGC – there does not have to be a transfer of assets

This is, perhaps, a surprising aspect of TOGC, but it was brought into focus by the case of Mark Young t/a The St Helens v Revenue and Customs Comrs [2012] UKFTT 702, (TC) TC02371. I think it is worth looking at this case in detail because it shows how difficult it can sometimes be to identify a TOGC.

6.4.1 Background

The St Helens restaurant had been operated by Mr Young’s company, Bonne Bouchee Caterers Limited (‘Bonne Bouchee’). Bonne Bouchee had leased the premises, furniture and equipment and so owned no assets of its own except the stock and possibly goodwill. Mr Young was the chef at the restaurant. Bonne Bouchee became insolvent and ceased to trade at the end of January 2009. On 4 February 2009 the company wrote to its suppliers informing them it had ceased trading and was insolvent. As a result the landlord foreclosed on the lease and repossessed the premises. Unpaid suppliers repossessed the other assets.

Mr Young negotiated a new lease from the landlord in his own name and reopened the restaurant on 14 February 2009 trading on his own account. He did not purchase any assets from Bonne Bouchee. He obtained advice from the HMRC VAT helpline on whether he was required to be registered and believed that he would not have to register for VAT until his turnover exceeded the registration threshold. He duly registered with effect from 1 September 2009.

However, HMRC decided that a TOGC had taken place and therefore in determining whether he should have registered for VAT on 14 February Mr Young should have taken Bonne Bouchee’s turnover into account, as required by VAT Act 1994 s 49. On that basis HMRC decided he should have registered with effect from 14 February. Mr Young appealed against that decision.

must be capable of separate operation. The meaning of ‘going concern’ is covered in more detail below.

• The purchaser intends to use the assets in the same kind of business. This can cause problems because of the interpretation of ‘same kind of business’. For instance, a restaurant may be sold to someone who wants to convert it into a bar; this is not the same type of business (and so TOGC does not apply to the sale), but an Italian restaurant that is sold to someone who runs it as a Greek restaurant is a TOGC. Before the transfer the purchaser does not need to have been running the same type of business as the vendor.

Another consequence of this is that consecutive transfers do not constitute a TOGC. For example, if Andrew sells his business to Barry, who immediately sells it on to Colin, there can be no TOGC treatment of the assets because Barry does not actually use the assets in his business.

• If the vendor is a taxable person the purchaser must be a taxable person or must become one as a result of the transfer. Remember that a ‘taxable person’ is a person that is registered or is liable to be registered for VAT. This means that, in a TOGC, if the vendor is registered, or should have been registered, because his turnover is above the registration threshold the purchaser is automatically liable to be registered from the date of the transfer. If the vendor is voluntarily registered for VAT the purchaser does not have to register from the date of the transfer, although in that case there is no TOGC and VAT is charged on the assets transferred in the normal way.

6.3 What is a ‘going concern’?

A going concern for VAT purposes may not be a going concern as it is commonly understood. There is no firm definition of a TOGC; it is a matter of fact, although over the years decisions in various cases have given us pointers as to whether a transaction is a TOGC or not. Importantly, the substance of the transaction is more important than its form. This means that a transaction cannot be made a TOGC merely because the contract or agreement says that it is.

In addition to fulfilling the conditions set down by statute, as described above, the following are essential features of a TOGC:

• The business transferred must be capable of operation and so must still be operating at the time of the transfer. It need not be profitable and may even be insolvent but it must still be active.

• There must not be a significant break in trade on the transfer. A short closure for redecoration or refitting can be ignored. However, the definition of a ‘short’ closure depends on the circumstances and breaks of two or three weeks need not prevent a transaction


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The tribunal did not consider whether Mr Young could rely on the apparently incorrect advice obtained from the VAT helpline to prevent HMRC from backdating his effective date of registration.

This cautionary tale also illustrates that a TOGC can take place even if it is unintended, or even not desired, by the parties as well as reiterating the point that an insolvent business may still be a going concern for VAT purposes.

6.5 TOGC including land subject to an option to tax

The exception to the principle of not charging VAT on assets transferred in a TOGC is where the assets transferred include land (‘land’ includes buildings) that is subject to an option to tax, or that is otherwise standard-rated, such as a new commercial building. VAT must be charged on the land regardless of the TOGC rules, unless it has been disapplied under the anti-avoidance provisions, or unless the following steps are taken.

To avoid a VAT charge the transferee must notify the transferor before the date of the transfer that he (the transferee) has notified HMRC of his own option to tax in respect of the land. This means that an unregistered transferee must apply for VAT registration and notify HMRC of the option to tax before the transfer. Time to do this must be built into any transfer of business arrangements.

The transferee must also confirm in writing to the transferor that the option to tax will not be disapplied by the effect of the anti-avoidance provisions contained in VAT Act 1994 Sch 10 para 12. This condition is sometimes overlooked.

6.6 TOGC and a property-letting business

In certain circumstances the sale of let property can be treated as the sale of a letting business and so the TOGC provisions apply. This can be of advantage to the purchaser as a property that otherwise may be subject to VAT can be bought without VAT, obtaining a cash-flow advantage and also reducing the SDLT payable on the purchase. HMRC’s guidance on the transfer of a property-letting business distinguishes between the transfer of an interest in a property and the creation of a new interest in a property: the former can be a TOGC, but the latter cannot.

However, following the case of Robinson Family Limited [2012] UKFTT 360, (TC) TC02046 HMRC have amended their guidance.

In Revenue & Customs Brief 30/12 HMRC set out the circumstances in which the grant of a lease or sub-lease, which is the creation of a new interest, will nevertheless qualify for TOGC treatment. HMRC’s view is that if the value of the reversionary interest retained by the grantor is not more than 1% of the value of the property immediately before the transfer then the transfer may still be treated as a TOGC if the other conditions are met.

The tribunal considered there were three issues to be resolved:

• Did the transfer of the premises, fixtures and fittings from Bonne Bouchee to the landlord (on repossession) and then to Mr Young preclude a transfer of the business as a going concern from Bonne Bouchee to Mr Young?

• Was there a sufficient break between Bonne Bouchee’s cessation of trade and Mr Young’s commencement to prevent the transfer being a TOGC?

• Was the effect of the taking possession of the premises to put Mr Young in a position to carry on Bonne Bouchee’s business?

The tribunal dealt with these three issues as follows:

6.4.2 Successivetransferofassets

The provisions relating to the treatment of assets transferred in a TOGC are in Article 5 of the VAT (Special Provisions) Order 1995. The effect of those provisions is that assets that are transferred in quick succession are unlikely to be considered part of a TOGC where the intermediate owner does not use them to carry on the business. However, the tribunal emphasised that Article 5 applies only to a supply 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 a going concern. Therefore the tribunal concluded that it was irrelevant that there was no supply for VAT purposes from Bonne Bouchee to Mr Young in determining whether a TOGC had taken place.

6.4.3 Breakintrade

The tribunal considered the two- to three-week break in trade to be a factor in considering whether there had been a TOGC, but not the deciding factor.

6.4.4 Carryingonthesamebusinessasbefore

Mr Young obtained via the landlord the premises and equipment that enabled him to recommence the business carried on by Bonne Bouchee. He did not need to acquire stocks from Bonne Bouchee as in the nature of the trade the stocks were mainly bought fresh. He acquired any goodwill that attached to the premises or reputation of the restaurant as it was run in much the same way and with a similar name as before and Mr Young continued to be the chef.

6.4.5 Conclusion

The tribunal decided that in essence Mr Young was carrying on the same business as Bonne Bouchee and he had largely obtained the wherewithal to carry on that business, therefore it was a transfer of a going concern. The break in trade was not a deciding factor because it was clear that Mr 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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C-424/11, [2013] All ER (D) 117 (Mar) (‘Wheels’) case that was waiting for a hearing at the CJEU. The Wheels fund provides defined benefits pensions for certain employees of the Ford Motor Company. In the UK pension funds are not regarded as SIFs and so are charged VAT on the investment fund management services they receive. The pension fund, supported by the pensions industry, brought the case because it believed that it should be treated as an SIF and should enjoy the same exemption that SIFs enjoy. The First Tier Tribunal submitted a set of questions to the CJEU regarding the eligibility of the assets in retirement pension schemes and of the pooled investment funds, in which they are included, to be regarded as SIFs.

The CJEU has now replied and considers that ‘special investment funds’ are ‘funds which constitute undertakings for collective investment in transferable securities [“UCITS”] within the meaning of the UCITS Directive’. In this Directive UCITS are defined as having ‘as their sole object … the collective investment in transferable securities of capital raised from the public.’

Wheels could not be an SIF on this definition because the funds were not raised ‘from the public’. Only employees of Ford companies could join the scheme and so it was not open to the public.

The CJEU also considered that Wheels was not sufficiently similar to an SIF to be treated in the same way for VAT purposes. The main reason for this was that the members of the pension scheme do not bear the risk of investment. In a defined benefit scheme (or final salary scheme) the level of pension is predetermined and the employer must make up any shortfall in the fund to cover pension payments, but equally can benefit from any surplus. In addition, the employer was not in the position of a usual investor as the employer was paying into the scheme to fulfil his obligations to the employees rather than making investments on his own account.

Therefore in the case of defined benefit schemes it is correct for investment managers to charge VAT on their fees. However, this decision does not relate to defined contribution schemes or possibly Additional Voluntary Contributions to defined benefit schemes. In these arrangements it is the individual member who bears the risk and has some discretion over how the funds are invested.

7.3 Can employers recover the VAT charged by fund managers in respect of defined benefit pension schemes?

In a Dutch case, Fiscale eenheid PPG Holdings BV cs te Hoogezand v Inspecteur van de Belastingdienst/Noord/kantoor Groningen: C-26/12, [2013] All ER (D) 258 (Jul), the court referred this question to the CJEU and asked whether the scheme was a special investment scheme. The Advocate General gave her opinion, stating that following the decision in the Wheels case the pension scheme was not

7 Financial services – the tectonic plates are shifting

The financial services industry has undergone a major change with the implementation of the Retail Distribution Review (‘RDR’) on 1 January 2013. For the first time many financial advisers have to decide whether they must charge VAT on their fees. At the same time there has been a series of decisions from the CJEU that clarifies the scope of the VAT exemption of financial services.

7.1 Financial services – intermediaries

Financial advisers need to distinguish between providing advice (standard-rated) and acting as intermediaries between the client and the financial services provider (exempt). Guidance is available in Notice 701/49 Finance and in HMRC’s VAT manuals.

However, HMRC issued specific guidance in relation to advising on group pension schemes in Revenue & Customs Brief 09/13 issued in April 2013. Although the Brief relates only to group personal pension arrangements it serves as a good example of the issues now facing financial advisers. In the past, advisers often did not charge for their consultancy services in setting up or assisting in the administration of group personal pension schemes by employers for their employees. The advisers received income by way of commissions from the pension provider. Under RDR they may not be able to be paid commissions and so have to charge the employer or the employees for the advice.

The consultancy or general advice provided to the employers and the employees is standard-rated; however, where they act as intermediary, for example in advising and arranging for an employee to join a pension scheme, their services are exempt.

As the requirements of auto-enrolment affect more employers this is likely to be an increasingly common issue.

The Brief also points out that VAT charged on advice provided to the employer may be claimed depending on the employer’s VAT status. The employer cannot claim the VAT on fees in respect of services provided to their employees even if he or she pays the fees.

7.2 Investment management fees charged to pension schemes

EU law provides that certain Special Investment Funds (‘SIFs’) may enjoy an exemption from VAT on the investment fund management costs that they incur. Which funds are specified as SIFs is left to the member states, although recent CJEU cases have indicated that this discretion is not absolute and member states must afford similar VAT treatments to similar funds.

In last year’s update I mentioned the Wheels Common Investment Fund Trustees Ltd v Revenue and Customs Comrs:


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the fact that the German regulations do not permit fund managers to be given ultimate discretion in buying and selling investments. In these circumstances it seems fair to extend the exemption to fund management services are as close to complete management of the fund as local regulations allow.

On the other hand, it may open the door to other services closely related to fund management to be exempt. So far HMRC has not made any comment on the implications of the decision for UK businesses.

8 The education exemption – private tuition

The Upper Tribunal case of Marcus Webb Golf Professional v Revenue and Customs Comrs [2012] UKUT 378 (TCC) brought out some important issues in considering whether a person is acting ‘independently of an employer’ when providing tuition, which consequently is exempt from VAT.

In brief, Marcus Webb Golf Professional was a partnership (‘the Partnership’) that, among other things, provided golfing tuition to members of the general public. Sometimes the tuition was provided by Mr West, who was an employee of the partnership but who also provided golfing tuition in his own name. When Mr West was providing the tuition on behalf of the Partnership he was also considered to be acting in his own name and not as an employee, although this was not completely clear from the arrangements between them. At the First Tier Tribunal he was considered to be an employee of the Partnership. This was because when bookings for tuition with Mr West were made through the Partnership’s shop, they were made in the Partnership’s diary and invoiced on Partnership invoices.

Perhaps surprisingly, it was agreed that the services of golfing tuition could be exempt as education, if the other conditions were met. However, the lessons provided by Mr West were considered by HMRC to be standard-rated because it appeared that it was the Partnership that entered into the contract to provide the tuition to the customer; Mr West provided his services to the Partnership so that it could meet its obligations under that contract. The tuition provided by Mr West could not be exempt because he was not engaged directly by the customer. He was not a partner of the Partnership and therefore the Partnership was not entitled to treat his services as being provided directly by a teacher acting independently. Evidently the Partnership was not an eligible body for the purposes of providing exempt education.

The Partnership considered that Mr West was acting in his own name in the provision of the tuition and so the fees should be exempt. The Partnership also argued that refusing exemption for these fees breached the principle of fiscal neutrality.

an SIF. The CJEU did not give a decision on this aspect of the case.

With regard to the recovery of input tax it should be noted that PPG Holdings contracted with the advisers and fund managers to provide services to the scheme and so invoices were made out to PPG Holdings. The CJEU did not give a definitive answer as to whether the input tax could be recovered but provided guidance to the Dutch court to be used when considering how much of the input VAT could be recovered. The CJEU said that PPG could recover the input tax on expenditure incurred in relation to the pension scheme, including fund management charges, to the extent that there was a ‘direct and immediate’ link to PPG’s taxable activities.

This seems to be rather wider than HMRC’s current approach in the UK and so there may be scope for claiming more input tax than has previously been allowed.

Planning point

Previously disallowed input tax on pension management costs should be reviewed for a possible claim.

7.4 Fund management services and defined contribution schemes

ATP PensionService A/S v Skatteministeriet (C-464/12) asks the much same questions as in the Wheels case, but this time in respect of defined contribution schemes. However, at the time of writing no decision is expected until 2014.

7.5 The GfBk case, an extension to the exemption – or a peculiar German practice?

There has been another CJEU decision (GfBk Gesellschaft fur Borsenkommunikation mbH v Finanzamt Bayreuth: C-275/11, [2013] All ER (D) 118 (Mar)) that may or may not affect the scope of the exemption in the UK. GfBk concerned the VAT liability of fund management services provided to a special investment fund. Strictly, GfBk provided a non-discretionary service in that it provided a continuous supply of purchase and sale recommendations to its client. The client retained the right to buy or sell the investments, but in practice it always followed GfBk’s recommendations almost immediately. The court decided that the recommendations to buy or sell investments were ‘intrinsically connected to the activity characteristic’ of an investment management company if it amounted to managing an SIF.

In the UK fund managers must have discretion to buy or sell investments if their management services are to be exempt from VAT, however, this discretion is a normal part of the service provided. Therefore the implications of the decision may be limited. The decision may just reflect


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position where a supply comprises two or more elements that are so closely linked that they in effect comprise one composite supply and it would be artificial to split them for VAT purposes, (Levob Verzekeringen BV and Another v Staatssecretaris van Financiën: C-41/04, [2006] STC 766). The Levob principles have been further developed in the Deutsche Bank case – see also 15.1 below.

The decision as to whether one supply or several supplies are made is important because the VAT rates that apply to supplies may be different if they are regarded as separate supplies from the rate that would apply if they were regarded as merely elements of one composite supply. Over the years we have become used to the tests to establish whether a supply that is made up of several elements is a single supply or a multiple supply for VAT purposes.

The decision in Colaingrove Ltd v Revenue and Customs Comrs [2013] UKFTT 116, (TC) TC02534 now gives us another possibility – that a single supply may be subject to more than one rate of VAT.

9.1 One supply – multiple rates of VAT? The strange case of Colaingrove

This is not entirely without precedent – the sale of a caravan and its contents is a single supply but, as was established in Talacre Beach Caravan Sales Ltd v Customs & Excise Commissioners: C-251/05, [2006] STC 1671, the caravan is reduced-rated (or zero-rated at the time of the Talacre case) and the contents are standard-rated and so an apportionment must be made. However, it was believed that the circumstances in that case were unique.

9.1.1 Background

Colaingrove Limited is the representative member of the Bourne Leisure Group Limited VAT group of companies. The group owns and runs holiday parks including the Haven and Butlins holiday parks. The holiday parks offer accommodation in, amongst other choices, static caravans and chalets, and there are also pitches for customers’ own touring or static caravans. Each caravan, chalet and pitch has its own metered supply of gas and electricity. Reference to ‘Colaingrove’ includes any company in the Bourne Leisure Group Limited VAT group.

For many years Colaingrove has had a contract with News International Limited by which News International offers holidays at Colaingrove’s holiday parks at heavily discounted prices to readers of The Sun newspaper. The price covers solely the accommodation in a static caravan or in a chalet; other services such as electricity must be paid for separately in advance by the customer. The charge for electricity is a fixed charge per night and is not related to the actual amount used. It is too expensive and time-consuming for Colaingrove to take meter readings at the start and end of every letting and calculate the actual amounts used.

The basis of the exemption for private tuition is Article 132(1)(j) of the Principal VAT Directive 2006. This refers to ‘tuition given privately by teachers’.

The tribunal considered the meaning of ‘privately’ in this context by referring to two ECJ cases: Haderer v Finanzamt Wilmersdorf: C-445/05, [2007] All ER (D) 141 (Jun) and Ingenieurburo Eulitz GbR Thomas und Marion Eulitz v Finanzamt Dresden I: C-473/08, [2010] All ER (D) 79 (Feb). These cases have shown that ‘privately’ means ‘on their own account and at their own risk’. They have also reaffirmed the principle that exemptions must be interpreted narrowly. The Eulitz case in particular examined the situation where a freelance tutor was providing education on behalf of an educational institute. In that case the self-employed status of the tutor was not enough to establish that he was acting ‘privately’. The courses were clearly provided by the institute and, therefore, the tutor was providing his services to the institute and not to the students.

On these grounds the tribunal decided that the tuition provided via Mr West was not exempt. It did not matter whether Mr West was providing the tuition on a self-employed basis or as an employee. It was clear that it was the Partnership that was supplying the tuition to the customers and that Mr West was supplying his services to the Partnership.

The fiscal neutrality argument was dismissed because it is an established principle that the clear interpretation of an exemption cannot be overruled by an argument that it violates fiscal neutrality.

Planning point

Any arrangement where it is claimed that exempt education is being provided by private tutors via some other organisation should be checked carefully to ensure that it is not the organisation that is in fact providing the education.

Where exempt education is being provided it is essential to confirm that the conditions for exemption are strictly adhered to. This means considering who is providing the education, what subjects are being taught, and, in the case of vocational training, how it is funded.

9 Single supply or multiple supplies – clarity or confusion?

At first we thought that the principles laid down in the ECJ decision in Card Protection Plan Ltd v Customs and Excise Comrs: C-349/96, [1999] STC 270 (‘CPP’), were the final word on this subject. However, later cases have provided guidance in situations where there is no clear ‘principal supply’, the Levob case in particular looked at the VAT


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Colaingrove’s second argument was that there were two separate supplies, largely based on the decision in RLRE Tellmer Property sro v Financni reditelstvi v Usti nad Labem: C-572/07, [2009] All ER (D) 120 (Sep). Each supply would then be subject to its own VAT liability.

9.1.3 Decision

The tribunal accepted Colaingrove’s first argument. It agreed that there was sufficient evidence of the clear intention that the reduced rate should apply to qualifying supplies of electricity where it met the ‘concrete and specific’ conditions.

The tribunal also went on to say that it would have rejected Colaingrove’s second argument and that it considered that there had been one supply of holiday accommodation, although subject to two rates of VAT.

Planning point

There are many cases where standard-rated rents are inclusive of charges for electricity and gas, which have also been standard-rated if they have been supplied unmetered. Holiday-park owners and landlords may wish to consider making protective claims for repayment of over-declared VAT if they should have charged VAT at the reduced rate.

Unsurprisingly, HMRC have applied for leave to appeal against this decision and therefore claims are likely to be rejected at this stage – particularly because the same argument was rejected by the Upper Tribunal in the Morrison case described below.

9.2 Burnt fingers – the Morrison barbecue case

Morrison, along with other retailers, sells disposable barbecues comprising a foil tray, filled with charcoal and lighting paper, and an aluminium mesh lid. HMRC regards the supply of the disposable barbecue as a single standard-rated supply. Morrison, supported by other retailers, argued that the charcoal element of the supply should be reduced-rated as a qualifying supply of domestic fuel. Morrison lost at the First Tier Tribunal and appealed. Morrison’s argument relied, among other decisions, on the decision in the French Undertakers case as described in the Colaingrove case above.

At the Upper Tribunal (W M Morrison Supermarkets PLC v Revenue and Customs Commissioners [2013] UKUT 0247 (TCC)) the tribunal rejected this argument, saying that there was no evidence that Parliament intended the reduced-rate to apply specifically to this type of supply, and it was not a case in which Parliament had restricted the application of the reduced rate to a specific aspect of supplies allowed to be reduced-rated under Annex III of the Principal VAT

The supply of electricity for ‘domestic use’ is a reduced-rate supply as set out in VAT Act 1994 Sch 7A. ‘Domestic use’ includes, amongst other things, use in self-catering holiday accommodation or a caravan.

Where electricity was supplied as an additional service to touring caravans HMRC had accepted that this was a separate supply of electricity at the reduced rate. However, when Colaingrove extended the same treatment to the electricity supplied to customers who had taken up the offer in The Sun and made a claim for repayment of overdeclared VAT, HMRC rejected it. Where electricity was supplied to customers staying in Colaingrove’s own static caravans and chalets HMRC viewed the supply of electricity as part of a single supply of standard-rated holiday accommodation.

9.1.2 CalltheFrenchUndertakers

Colaingrove submitted two arguments to support the reduced rating of the electricity. The first argument relied on the fact that the ECJ, as it was then known, has stated that the principles set out in Card Protection Plan Ltd with regard to identifying multiple and single supplies are not the be all and end all of this difficult issue. Indeed, the Talacre case already showed that it was possible for a single supply to have elements subject to different VAT rates but this was taken further in another ECJ case – European Commission v France: C-94/09 – concerning the services supplied by undertakers, also known as the ‘French Undertakers’ case.

The Principal VAT Directive allows member states to apply a reduced rate of VAT to a number of types of supply (specified in Annex III) including the services of undertakers. In France the reduced rate was restricted to the transport services provided by undertakers and it was clear in the French regulations that the reduced rate was to apply to this element of the undertakers’ services even though they were part of an overall service that was subject to a different rate. The Commission contended that this selective approach to which supplies could be reduced-rated and the subsequent mixed-rate supply was incompatible with EU legislation. The ECJ decided that there was nothing in the legislation to prevent the application of the reduced rate to ‘concrete and specific aspects’ of one of the types of supply that can be reduced-rated as long as there is no conflict with the principle of fiscal neutrality.

Following this principle Colaingrove argued that the UK Government had shown clearly in the legislation that it intended the reduced rate to be applied to qualifying supplies of electricity such as those to a holiday caravan. The electricity supplied was a ‘concrete and specific’ element of the supply of holiday accommodation and therefore the reduced rate should continue to apply to the electricity even though it had become part of an overall standard-rated supply. The application of the CPP principles could not negate the clear intention of the Government in applying the reduced rate to certain supplies.


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• ‘Every supply must normally be regarded as distinct and independent, although a supply which comprises a single transaction from an economic point of view should not be artificially split.

• ‘The essential features or characteristic elements of the transaction must be examined in order to determine whether, from the point of view of a typical consumer, the supplies constitute several distinct principal supplies or a single economic supply.

• ‘There is no absolute rule and all the circumstances must be considered in every transaction.

• ‘Formally distinct services, which could be supplied separately, must be considered to be a single transaction if they are not independent.

• ‘There is a single supply where two or more elements are so closely linked that they form a single, indivisible economic supply which it would be artificial to split.

• ‘In order for different elements to form a single economic supply which it would be artificial to split, they must, form the point of view of a typical consumer, be equally inseparable and indispensable.

• ‘The fact that, in other circumstances, the different elements can be or are supplied separately by a third party is irrelevant.

• ‘There is a single supply where one or more elements are to be regarded as constituting the principal services, while one or more elements are to be regarded as ancillary services which share the tax treatment of the principal element.

• ‘A service must be regarded as ancillary if it does not constitute for the customer an aim in itself, but is a means of better enjoying the principal service supplied.

• ‘The ability of the customer to choose whether or not to be supplied with an element is an important factor in determining whether there is a single supply or several independent supplies, although it is not decisive, and there must be a genuine freedom to choose which reflects the economic reality of the arrangements between the parties.

• ‘Separate invoicing and pricing, if it reflects the interests of the parties, support the view that the elements are independent supplies, without being decisive.

• ‘A single supply consisting of several elements is not 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

Directive (as the French authorities had done in the case of undertakers services).

In making this decision the Upper Tribunal has all but said that the Colaingrove case was decided wrongly.

9.3 One supply or two? The Middle Temple case at the Upper Tribunal

Honourable Society of the Middle Temple v Revenue and Customs Comrs [2013] UKUT 250 (TCC) is useful because the tribunal listed all the factors that have to be taken into account when deciding whether a supply made up of more than one element is a single supply or made up of separate supplies.

9.3.1 Background

The Middle Temple is one of the ancient Inns of Court in London where barristers have their chambers and where pupils train to become barristers. Most of its premises are let to barristers chambers. The Middle Temple has exercised an option to tax over its buildings and so the grant of leases of its buildings at the Temple is standard-rated.

The Middle Temple also owns the network of pipes supplying the buildings at the Temple with cold water. It is charged by Thames Water for the water used on the whole site and it makes a separate charge to the lessees for the water they use based on the floor area of the premises that they occupy.

The Middle Temple, relying on the decision in Tellmer (also cited in the Colaingrove case in 9.1 above), believed that they were making two separate supplies: a standard-rated supply of the leased premises, and a zero-rated supply of the cold water. HMRC believed that they were making a single supply of the leased premises.

In 2011 the First Tier Tribunal agreed with them and decided that there were two separate supplies, although part of their reasoning was based on the belief that it would theoretically be possible for the let premises to be separately metered and invoiced by the water company. This belief was later found to be incorrect.

HMRC appealed. However, the hearing had to wait for the ECJ’s decisions in two other UK cases (Purple Parking Ltd v Revenue and Customs Comrs: C-117/11 and Field Fisher Waterhouse LLP v Revenue and Customs Comrs: C-392/11), which also dealt with whether a supply was a single supply or multiple supplies.

In March 2013 the Upper Tribunal heard the appeal. The tribunal used this as an opportunity to review all the relevant ECJ cases to date and summarise what it regarded as the principles that had been evinced from the judgments on whether a supply was a single supply or multiple supplies. It is worth reproducing these in full:


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2013. BAA Ltd v Revenue and Customs Comrs [2013] EWCA Civ 112 (‘BAA’) concerned a claim for input tax incurred by the company that acquired BAA at a time when the acquiring company was not making taxable supplies and was not part of BAA’s VAT group. The case is important because it clarifies some of the conditions that need to be fulfilled before input tax can be claimed and it also shows the limits of making a claim for VAT in a VAT group.

10.1 Background

In 2006 BAA was the subject of a successful takeover bid. A new company, Airport Development and Investments Limited (‘ADIL’) was incorporated as a special purpose vehicle specifically to acquire the issued share capital of BAA. ADIL appointed the usual range of professional advisers to deal with the planning, financing, and legal aspects of the acquisition. ADIL also negotiated debt facilities with a syndicate of banks.

ADIL’s offer for BAA was successful and ADIL applied to become a member of the BAA VAT group. This was eventually allowed by HMRC with effect from a date three months after the date of the takeover. ADIL had incurred VAT of about £6.7m on fees in connection with the offer and acquisition and this was claimed by the BAA VAT group.

HMRC disagreed that BAA was entitled to make this claim and assessed BAA for the £6.7m. BAA appealed and in 2010 was successful at the First Tier Tribunal.

The tribunal decided that ADIL carried out an economic activity and that the input tax had a direct and immediate link to BAA’s subsequent taxable supplies. Perhaps this was surprising because at the time the input tax was incurred ADIL did not make any taxable supplies, nor was there any evidence that it intended to do so. However, the tribunal decided that, although ADIL made no taxable supplies itself, it did provide strategic direction to BAA’s management and operations and negotiated debt facilities for the BAA group. These activities constituted an economic activity. The tribunal also decided that there was a sufficient link between the input tax ADIL incurred and the taxable supplies made by the BAA VAT group, relying on the principle in the ECJ case Finanzamt Offenbach am Main-Land v Faxworld Vorgründungsgesellschaft: C-137/02.

HMRC appealed the decision to the Upper Tribunal. In 2011 the tribunal overturned the decision of the First Tier Tribunal. The tribunal accepted that ADIL carried out an economic activity. However, it decided that there was no direct and immediate link between the input tax incurred by ADIL and BAA’s taxable supplies for the following reasons:

• ADIL’s expenditure was largely incurred in connection with the acquisition of BAA; this expenditure was not used by ADIL to provide its own services to the BAA VAT group.

might be a case of two supplies that it would be artificial to split. Following the principles stated above, the supply of water should not be regarded as separate just because it would be zero-rated if it was a separate supply but would be standard-rated if part of a composite supply of the buildings. The tribunal noted that the Middle Temple’s tenants were unable to make alternative arrangements for the supply of water and, since it was impossible to use the premises without a water supply, the supplies were inseparable. The tribunal concluded that there was one supply of a lease of land and this was standard-rated.

Planning point

If a business splits up a supply into separate elements, usually to isolate zero-rated, reduced-rated or exempt elements, the principles set out above should be applied to ensure that the split is not artificial and so ineffective for VAT purposes.

The principles should also be applied ‘in reverse’ if a business is trying to absorb what would normally be regarded as separate supplies into a single zero-rated, reduced-rated or exempt supply.

9.4 One supply or two? Colaingrove at the tribunal again

Not content with their claim for the reduced rate to be applied to electricity supplied as part of a supply of holiday accommodation, Colaingrove has been at tribunal again claiming that verandahs supplied with zero-rated caravans should be also be zero-rated. This time they were not quite so successful (Colaingrove Ltd (Verandahs) [2013] UKFTT 343, (TC) TC02746).

Colaingrove sells static caravans at its caravan sites and holiday parks. These can be sold with a verandah, which is a freestanding structure attached to the caravan. The verandahs provide an easy, level access to the caravans and also provide an outside area similar to a patio or terrace.

Colaingrove’s argument was that the verandah was an integral part of the supply of the caravan to the extent that there was one supply. The case is interesting in that the tribunal took the view that it could consider cases decided before the Card Protection Plan ECJ decision because it involved the application of the zero rate, which is a derogation from the VAT Directive, and so largely a matter of domestic law. This is a rather contentious approach and Colaingrove has appealed.

10 Recovery of input tax on costs of company acquisition – the Court of Appeal grounds BAA’s claim

This long-running case finally came to a conclusion when the Court of Appeal issued its decision on 21 February


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taxable supplies at the time that the expenditure is incurred. The timing of fees could therefore be very important.

Of course, the entity must have evidence that it is making taxable supplies, or that it intends to make taxable supplies. The Court of Appeal made it very clear that there was no hope of claiming the input tax without evidence of the taxable supplies that were going to be made. The entity must consider what supplies it is making or will make and be able to provide evidence of these supplies.

Finally, this decision shows that merely putting an entity into a VAT group does not assure the recovery of VAT on expenditure incurred before entry into the VAT group.

11 Partial exemption – Volkswagen Financial Services (UK) Ltd

Recovery of input tax is always an issue when a business makes exempt and taxable supplies. Although many businesses can take advantage of the de minimis thresholds and recover all their business input tax they may still need to carry out calculations to prove that they are de minimis.

For businesses making significant exempt supplies calculating recoverable input VAT can be a quite a headache. The case of HMRC v Volkswagen Financial Services (UK) Limited [2012] UKUT 394 (TCC) reached the Upper Tribunal this year and it is interesting because it deals with the fundamental issue of apportioning the residual input tax. Any method of apportionment used must be ‘fair and reasonable’ and HMRC did not believe that VWFS’s method was.

11.1 Background

By agreement with HMRC VWFS operates a special method for apportioning its residual input tax. Its operations are divided into a number of sectors; retail, wholesale, insurance services, etc, and a separate partial exemption calculation is applied to each. The appeal arose in respect of VWFS’s retail sector calculation which includes sales on hire purchase (‘HP sales’).

As is usual in HP sales, VWFS buys cars from the motor dealers and sells them to the customers on hire purchase contracts; the cars are sold on at cost. The sales of the cars are standard-rated and VWFS recovers all the input incurred on purchasing them. VWFS also supplies the finance and the interest and acceptance fees charged are exempt from VAT (the option to purchase fee is standard-rated).

VWFS needs to apportion the input VAT on overheads (residual input tax) incurred in making HP sales between taxable supplies (the sale of the car) and the exempt

• The link between the ADIL’s expenditure and the benefits that ADIL provided to the BAA VAT group was too nebulous to be a direct link.

• There was no evidence that ADIL intended to make taxable supplies and so there were no supplies that the input tax could be attributed to.

• At the time the input tax was incurred ADIL was not a member of the BAA VAT group.

• The principle in the Faxworld case did not apply as the supplies made to ADIL were not used by BAA to make taxable supplies.

• BAA appealed the Upper Tribunal’s decision to the Court of Appeal.

10.2 The final destination?

In 2013 The Court of Appeal considered the same two issues:

• Did ADIL carry on an economic activity?

• Was there a direct and immediate link between the input tax incurred by ADIL and the taxable supplies made by the BAA VAT group?

The Court of Appeal came to a different conclusion from the tribunals regarding the first question. The court laid great importance on ADIL’s activities, or intended activities, at the time the input tax was incurred. In the court’s view, at that time there was no evidence that ADIL was making or intended to make taxable supplies; ADIL clearly intended to acquire the shares in BAA, but this in itself was not an economic activity. As there were no taxable supplies to which ADIL could attribute the input tax it was unable to claim it. Although the claim was denied for this reason alone, the vourt also considered the ‘direct and immediate link’ question.

The court could see that there was a link between ADIL’s inputs and the supplies subsequently made by the BAA VAT group, but that it was impossible to characterise this link as either ‘direct’ or ‘immediate’. The court agreed with the Upper Tribunal’s reasoning on this question. The court also stated that the principle in the Faxworld case could not apply because Faxworld concerned a transfer of a going concern and the BAA case did not.

There would seem to be no grounds for a further appeal and so the claim is permanently grounded.

Planning points

Substantial fees are usually incurred in corporate acquisitions, takeovers and reconstructions and 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 the apportionment on a simple ‘number of transactions’ basis, taking each HP sale as made up of two transactions: the taxable sale of the car; and the exempt charges for finance. As half the transactions are taxable, VWFS claims 50% of the residual input tax. In practice this resulted in the retail operation claiming more input VAT than it declared and so HMRC were bound to be unhappy with it.

HMRC contended that VWFS’s method was not fair and reasonable and instead proposed that the input on the overheads should be apportioned on the basis of taxable finance income (purchase option fees and some other minor charges) as a percentage of total finance income, ignoring the value of the sale of the car. This would result in a much reduced level of input tax. As set out in Revenue and Customs Brief 31/07, HMRC do not consider that any overhead can be attributed to the sale of goods under HP because these are generally sold on at cost and so the cost of the overheads must be covered by the charges for finance. In their view the overhead costs cannot be considered a ‘cost component’ of the sale of the goods and so must be attributed to the exempt supplies of finance.

In 2011 the First Tier Tribunal rejected HMRC’s arguments and allowed VWFS’s appeal. The First Tier Tribunal found that the overheads by their nature should be regarded as a cost component of VWFS’s HP sales as a whole and not attributed to just one element of those supplies.

11.2 At the Upper Tribunal

In October 2012 the case was heard by the Upper Tribunal. The tribunal disagreed with the First Tier Tribunal’s analysis of the nature of VWFS’s business. In the Upper Tribunal’s view VWFS was quite clearly a finance business; it made no profit on the sale of the cars and this was never the intention, it did not even have any say on the price of the car. The economic reality was that all the overheads were incurred in operating the exempt finance business and therefore apportioning 50% of the input on overheads to the taxable sale of the cars was not fair and reasonable.

However, VWFS has not given up and a further appeal has been listed for hearing by the Court of Appeal later this year.

Planning points

If a business is partially exempt any method for apportioning residual input tax must be ‘fair and reasonable’. Special methods of calculating the apportionment must be agreed in writing beforehand with HMRC.

Before apportioning residual input tax make sure that overheads and other residual expenditure can be justified as “cost components” of the taxable supplies of the business on economic grounds.

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

The national and international debate continues as to what constitutes legitimately arranging your business affairs so as to minimise or avoid tax liabilities and what is unacceptable tax avoidance. In VAT this is particularly important because it has always been regarded as a transactional tax and the contractual position of the parties is seen as a significant factor in determining who is supplying what to whom. The Halifax case a few years ago introduced the concept of ‘abuse of rights’ into English law so that a wholly artificial chain of transactions that appeared to have been created solely to avoid a tax liability was disregarded. The tax position was instead based on the commercial substance of the effect of the transactions. But how far can this ‘substance over form’ approach override the provisions of legally valid contracts?

The Ocean Finance case may ultimately provide an answer.

The case was originally heard by the First Tier Tribunal in 2010 (Newey (t/a Ocean Finance) v Revenue and Customs Comrs [2010] UKFTT 183, (TC) TC00487) and allowed Mr Newey’s appeal. HMRC appealed to the Upper Tribunal, which referred a number of questions to the CJEU. The CJEU’s judgment was released on 20 June 2013 (Case C-653/11) and it is now back with the Upper Tribunal.

12.1 Background

Mr Newey was trading as a loan broker in the UK, dealing direct with lenders and borrowers, and as such his loan-broking services were exempt from VAT. His business relied heavily on advertising to attract business and this significant cost was increased by the burden of the irrecoverable VAT. In order to reduce this cost Mr Newey decided to take the business offshore, the intention was that it would then be able to incur the advertising costs without incurring the VAT.

A new company, Alabaster (CI) Limited (‘Alabaster’), was incorporated in Jersey and a board of directors, resident in Jersey, was appointed. The company was wholly owned by Mr Newey. Alabaster held a consumer credit licence enabling it to provide a loan brokerage service in the UK. It also leased office premises in Jersey. Apart from the directors, who charged Alabaster according to the time spent on its affairs, there was one full-time employee in Jersey. Most of the directors were also partners of the Jersey office of Mr Newey’s accountants. Mr Newey was never a director of Alabaster.

Alabaster entered into a service agreement with Mr Newey covering, among other matters, the processing services that Mr Newey would carry out in the UK for Alabaster in return for a fee and the grant of use of the name ‘Ocean Finance’ to Alabaster for the purposes of commissioning advertising.


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Alabaster entered into agreements with various lenders to act as an intermediary in arranging loans from them to applicants from the general public. All lending proposals had to be approved by the management in Jersey, but apart from that the businesses operations were carried out in the UK under the terms of the service agreement.

Alabaster also engaged a Jersey-based company to provide the advertising for Ocean Finance. The advertising was aimed at potential customers in the UK and Mr Newey liaised with the advertising agent with regards to the nature and effectiveness of the advertising. This was the essential advantage to Mr Newey of basing his business in Jersey because there was no VAT charged on the advertising supplied by one Jersey company to another.

HMRC assessed VAT on Mr Newey with regards to the advertising services, arguing that either these services had actually been supplied to him and not to Alabaster and so he was liable to a reverse charge on them as he effectively carried out loan-broking activities in the UK, or that the arrangements with Alabaster constituted an abuse of law and so HMRC were entitled to recharacterise the transactions so that the proper VAT due could be charged.

From the outset the First Tier Tribunal accepted that the formation of Alabaster and the transfer of the management of the business to Jersey were undertaken purely for tax purposes. However, the Tribunal did not believe that this necessarily undermined the validity of the subsequent transactions entered into by Alabaster and Mr Newey.

Despite the fact that almost all the operations were carried out in the UK by Mr Newey’s business under the terms of the service agreement, the tribunal considered that there was enough activity in Alabaster to constitute a commercial business and so there was some substance to its operation in Jersey. The tribunal also considered that Mr Newey’s involvement in negotiating commission rates with the lenders and in liaising with the advertising agency were consistent with his services to Alabaster under the service agreement and that these activities did not constitute a direct business relationship between him and those parties. There was no direct link between the consideration paid by Alabaster for the advertising services and the commissions it received via Mr Newey and so it could not be said that, in effect, Mr Newey paid for the advertising. Therefore the tribunal decided that the supplies of advertising had been made to Alabaster for the purposes of its loan-broking activities carried out in Jersey.

As regards the ‘abuse of law’ argument the First Tier Tribunal observed that the VAT legislation specifically made provision for transactions with entities based outside the EU. It also made the point that in other abuse of law cases, principally Halifax, the purpose of the scheme was to allow effective recovery of input VAT in relation to exempt supplies made in the UK, which was contrary to the purpose of the Sixth Directive. This was not the case

with Ocean Finance and Alabaster. The transactions were outside the scope of VAT because they were made outside the EU and therefore could not be said to be contrary to the purpose of the Sixth Directive.

HMRC appealed to the Upper Tribunal. The Upper Tribunal referred a number of questions to the CJEU for a preliminary ruling. The Upper Tribunal sought guidance as to whether, in this type of arrangement, the contractual position was decisive in determining who was making and receiving the supply, and if the contractual position was not decisive, how far could the court depart from the contract. The tribunal also asked for guidance on the extent to which non-contractual aspects were relevant. These were:

(a) ‘Whether the person who makes the supply as a matter of contract is under the control of another person.

(b) ‘Whether the business knowledge, commercial relationships and experience rests with a person other than that which enters into the contract.

(c) ‘Whether all or most of the decisive elements in the supply are performed by a person other than that which enters into the contract.

(d) ‘Whether the commercial risk of financial and reputational loss arising from the supply rests with someone other than that which enters into the contract.

(e) ‘Whether the person making the supply, as a matter of contract, sub-contracts decisive elements necessary for such a supply to a person controlling that first person, and such subcontracting arrangements lack certain commercial features.’

The tribunal also asked directly whether the national court should depart from the contractual position in a case such as this. If it should not, then did the arrangements in this case amount to an abuse as defined in the Halifax case? If the arrangements did constitute an abuse, how should the transactions be recharacterised?

The CJEU’s response to these detailed questions was singularly unhelpful. The CJEU decided that the Upper Tribunal’s questions boiled down to whether the contractual position was the deciding factor in identifying the supplier and the recipient of a supply of services. Following EU settled law the court confirmed that the contractual position was not the deciding factor, although it was a factor. In particular the court said that the contractual position could be disregarded if it was ‘wholly artificial’ and it did not reflect the ‘economic and commercial reality’ of the supplies, and was set up with the ‘sole aim of obtaining a tax advantage'. However, it was up to the national court to decide whether, in taking into account all the circumstances, the contractual position could be disregarded.

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 use and enjoyment of the services at issue in the main proceedings took place in the United Kingdom and that Mr Newey profited therefrom.’ However, it was up to the referring court to decide whether the contracts should be disregarded such that Mr Newey should be regarded as having supplied the loan-broking services in the UK and received the supplies of advertising in the course of making those loan-broking services.

The issue of whether the contractual arrangements produced a result that was ‘contrary to the purpose’ of the Sixth Directive was not addressed. It is unclear whether this should also be taken into account when considering whether arrangements are abusive.

So it is back to the Upper Tribunal and a very interesting decision.

Planning point

If business structures are formed or reorganised in order to minimise or avoid VAT liabilities, they must still reflect the actual economic or commercial relationships between supplier and customer. No matter how well an arrangement is supported by a written contract if it is found to be ‘purely artificial’ and does not reflect the economic reality the contract can be set aside by the courts and the VAT treatment will be determined as if the contract did not exist.

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

HMRC has long accepted that, in many circumstances, sole traders and partnerships can reclaim the VAT incurred on accountancy fees in connection with preparing business accounts and tax returns and receiving business advice. The guidance is in HMRC’s Manuals at VIT 13700 where it says:

‘It is arguable that income tax is the responsibility of the sole trader or partner as an individual and is not strictly a business matter.

‘In order to avoid disputes over small amounts of tax our policy is that VAT on a sole trader’s or a partnership’s accountancy fees should usually be claimed subject to the normal rules.

‘The only exception to this is where the accountant’s fees clearly relate to taxation matters that do not relate to the VAT registered business […] Usually, however, a sole trader’s or a partner’s tax advice can be treated as entirely business related …’

Unfortunately, there is no guidance as what constitutes a ‘small amount’ of tax as one taxpayer found to their cost.

13.1 Background

Mundays is a firm of solicitors constituted as an LLP (‘the Firm’). Mundays’ accountants carried out various tasks for the Firm including calculations of the estimated tax liabilities of the partners so that these amounts could be withheld by the Firm to meet its working capital requirements and to meet the tax liabilities of the partners when they fell due, maintaining the accounting on the tax reserve account, preparation of the partnership tax return, as well as preparing the personal tax returns of most of the partners. For all this tax work the accountants raised a single invoice headed ‘Partners’ personal tax returns’

The Firm duly claimed the input tax on the whole of the invoice. HMRC assessed for the whole of this amount stating that it had been overclaimed. HMRC said that the concession stated above applied only to small amounts and that the input claimed on the invoice was not a small amount and therefore ineligible. The Firm appealed to the tribunal: Mundays LLP v Revenue and Customs Comrs [2012] UKFTT 707, (TC) TC02374.

13.2 The tribunal hearing

At the tribunal the accountants produced an analysis of the fees charged in respect of the ‘partners’ personal tax returns’. This showed the relative costs of preparing the tax estimates, maintaining the tax reserve account and the work on the personal tax returns among other items. According to the analysis, of the £955 cost per partner £170 was in respect of preparing the personal tax returns. The Firm’s accountants believed that £170 was de minimis in the circumstances and so all the input VAT was recoverable.

HMRC argued that the whole amount of the invoice, which amounted to around £20,000 annually, was in respect of the partners’ own tax affairs and so was not input tax of the business. HMRC also argued that the £170 per partner was not de minimis and for good measure asserted that the tribunal had no jurisdiction over HMRC guidance in any case.

13.3 The decision

The tribunal had no difficulty in identifying that preparing estimates of amounts to be withheld from drawings, maintenance of the tax reserve account and the preparation of the partnership tax return were business expenses and so the Firm was entitled to the proportion of the input tax relating to these elements. However, it considered that the 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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to its facilities to members who were in arrears with subscription payments and therefore fees due after the date of barring were outside the scope of VAT.

HMRC appealed to the Upper Tribunal and in April 2013 the tribunal released its decision. On a close examination of the contract that Esporta had with its members it was clear that the monthly payments related to the membership period as a whole and were not related to specific months. Therefore all payments due under the contract were consideration for the supply of membership and so were taxable.

14.3 Principal or agent? The Court of Appeal overturns the decision of the Upper Tribunal in the Secret Hotels case

In December 2012 the Court of Appeal released its decision in the latest chapter in the Secret Hotels saga. There was over £7m of VAT at stake and many other travel companies have an interest in the result.

To recap the story so far:

In 2010 the First Tier Tribunal decided that Secret Hotels 2 Limited (formerly Med Hotels Limited) was acting as principal when it arranged accommodation at various, mainly overseas, hotels. Med Hotels (as it was then) contended that it acted as agent and that its only income was the commission it earned from the sales of accommodation; the hotels themselves were selling the accommodation to the holidaymakers. This is an important distinction because if Med Hotels was acting as principal the supplies of accommodation that it arranged would be treated as its own income and would fall within the Tour Operators Margin Scheme (TOMS) and be subject to UK VAT. On the other hand, if Med Hotels was acting as agent its main income was the commission paid by the hotels and, as most of the hotels were outside the UK, most of the commissions would be outside the scope of UK VAT.

The First Tier Tribunal decided that Med Hotels was acting as principal despite the fact that it was expressly described as an agent in the contractual arrangements with the holidaymakers and with the hotels. On the facts it decided that the actual operation of the arrangements and the behaviour of Med Hotels were not consistent with the written contracts and were more in the nature of Med Hotels being a principal. Med Hotels appealed and the case reached the Upper Tribunal in July 2012 (Secret Hotels2 Limited v Revenue and Customs Commissioners [2011] UKUT 308 (TCC)).

The Upper Tribunal overturned the decision of the lower tribunal and ruled that Med Hotels was acting as agent. The tribunal laid much greater stress on the importance of the written contracts and took the view that, as the contracts were clearly not shams and the actions of Med Hotels were not incompatible with those contracts, the VAT treatment should follow from the written contractual position.

concession, but it said that if it did have jurisdiction it would have decided that the concession was not intended to cover ‘invoices of this size’, that is to say the invoice for approximately £20,000 issued to cover the ‘partners’ personal tax returns’.

The conclusion was that the Firm was entitled to a proportion of the input tax on the invoice in relation to business expenses and left it to the parties to agree the apportionment.

Planning points

All accountants should be aware of the implications of this case. Unfortunately it leaves it unclear as to what HMRC will accept is a ‘small amount’ of input tax in relation to billing a sole trader or partnership for personal tax advice. However, accountants should think carefully about how their services are described on invoices and about whether separate invoices should be raised for personal tax services. Raising separate invoices is more likely to result in ‘small amounts’ of tax that may be considered de minimis and so recoverable.

Another important aspect of this case is that HMRC had accepted that 82% of the fee was deductible as a business expense for direct tax purposes. The tribunal dismissed this as irrelevant because of the different legal bases of direct tax and VAT. Many businesses assume that the same percentage can be used to apportion certain types of expenditure between private and business use for income tax and VAT purposes. This decision shows that that can be a dangerous assumption.

14 Other cases and recent changes14.1 Bad debt relief – Simpson & Marwick

(FTC/85/2010) decision overturned

When in late 2011 the Upper Tribunal decided that it was possible to obtain full bad debt relief with respect to an unpaid VAT-only invoice, it seemed that the door would be open to some large claims against HMRC. However, HMRC unsurprisingly appealed, and the Court of Session has now decided that HMRC’s original policy was correct (CS [2013] CSIH 29). Bad debt relief is calculated by applying the relevant VAT fraction to the outstanding amount even if that amount comprises only VAT.

14.2 Membership subscriptions – Esporta loses at the Upper Tribunal

Also in 2011 the Esporta case (Esporta Ltd v Revenue and Customs Comrs [2011] UKFTT 633, (TC) TC01475) caused some interest as the First Tier Tribunal found that Esporta, a sports club, made no supplies where it had barred access


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14.4.1 Background

Subway sells toasted rolls and also a hot meatball marinara filling; both toasted subs and the filling are sold at above ‘ambient air temperature’. HMRC naturally views these as sales of hot food and so standard-rated in accordance with Note 3(b)(i) of VAT Act 1994 Sch 8 Group 1, which states that hot food is: ‘food which, or any part of which, has been heated for the purposes of enabling it to be consumed at a temperature above the ambient air temperature; and (ii) is above that temperature at the time it is provided to the customer.’

At the First Tier Tribunal ([2010] UKFTT 487 (TC)) Subway claimed that the purpose of the toasting process was to enhance the flavour of the bread and fillings and not so that the customers could eat the rolls hot. In the case of the meatball marinara it was claimed that the meatballs continued to marinade in the bain-marie part of the food counter and so the marinara was sold as freshly cooked rather than as hot food. The tribunal applied the subjective test as set out in the leading case on this subject, John Pimblett and Sons Ltd v Customs and Excise Commissioners [1988] STC 358, and decided that it was Subway’s intention that the toasted rolls and the meatball marinara were sold above the ambient air temperature to enable them to be consumed hot. Subway’s argument regarding the meatballs was rather undermined when the franchisee admitted that the meatball marinade was unpalatable cold.

Subway’s appeal largely rested on the inconsistency of the approach to VAT on hot takeaway food that has allowed rival businesses selling similar products to sell them zero-rated while Subway has had to sell them standard-rated. In the meantime the decision in Manfred Bog had been released and so Subway additionally argued that its supplies were zero-rated goods rather than standard-rated supplies of catering as it provides no service other than preparing the food for sale.

The Upper Tribunal recognised that the principles laid down in the lead case of Pimblett in 1988 may not have been entirely consistent with EU law and accepted that the subsequent decisions of the tribunal had sometimes been contradictory. In Pimblett it was established that a subjective test of the supplier’s intention could be applied to establish why the food was sold hot. However, EU law requires that an objective test is applied. The tribunal stated that the inconsistent decisions of the tribunals were not HMRC’s fault and HMRC had been under no obligation to appeal decisions that may not have been decided in accordance with principles of EU law. The tribunal asserted that the relevant legislation and the decision in Pimblett had always been capable of being be interpreted consistently with EU law and in particular in accordance with the principle of 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

HMRC appealed.

14.3.1 TheCourtofAppealdecision

The Court of Appeal held that it had been correct for the First Tier Tribunal to take all the facts of the arrangements between Med Hotels, the hotel operators and the customers into account when determining the nature of the supplies made by Med Hotels.

The Court of Appeal went on to hold that on the basis of those facts the First Tier Tribunal was correct to find that Med Hotels was acting as principal when selling holidays to its customers. One of the key factors in this decision was that Med Hotels was invoiced by the hotel operators for the accommodation and this was invoiced to the customers for a higher amount. The operators did not know what the customers paid for the accommodation and the customers did not know how much Med Hotels had paid for it. This arrangement was not consistent with a true agency arrangement where the principal knows the commission being taken by the agent.

Planning points

If any business appears to resell accommodation to travellers, or sells accommodation together with another service as a package the arrangements should be checked to see whether VAT should be accounted for through TOMS. TOMS does not just cover the classic resale of hotel rooms or foreign hotel plus transport, it can apply to businesses that arrange accommodation as part of a conference, or to a UK hotel that arranges travel or excursions as part of an all-in deal.

As a general point, if a business appears to be acting as an agent the contractual arrangements should be checked to ensure that VAT is being accounted for correctly. It is strongly recommended that any agency arrangement is put in writing to reduce the risk of a challenge by HMRC. However, a written contract will be disregarded by HMRC if it is ignored by both parties or if the actions of the parties are inconsistent with the terms of the contract.

14.4 VAT on hot takeaway food – the Meatball Song goes on …

Following Manfred Bog: C-497/09 in 2011 any business selling hot takeaway food has had an interest in the decisions in the cases involving Sub One Limited T/A Subway. After defeat at the First Tier Tribunal Subway took the case to the Upper Tribunal in late 2012 (Sub One Limited t/a Subway v Revenue and Customs Commissioners [2012] UKUT 34 (TCC)).


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a fixed establishment in the UK’, and therefore the owner is entitled to the threshold. However, many owners choose to manage the properties themselves, taking bookings via the Internet, and so have become liable to be registered.

Many of these businesses may require an agent or representative to look after their UK VAT affairs, although it remains to be seen whether some will choose not to make UK supplies or how many will simply ignore the new requirement. Alternatively, they can register direct with HMRC’s Non-Established Persons Unit (‘NETPU’) and this can be done online.

14.6 VAT invoices

On 1 January 2013 the UK implemented the EU regulations on the issue of VAT invoices. However, the changes are fairly minor because the UK had already implemented most of these regulations. The main changes are:

• Electronic invoices

There is no longer a requirement that electronic invoices are issued with an electronic signature or via Electronic Data Interchange (‘EDI’) or other HMRC-approved electronic medium. The only condition is that the customer must agree to electronic invoicing. However, suppliers must take steps to ensure the validity and the integrity of the contents of electronic invoices. HMRC are not imposing any particular method of controlling the issue of electronic invoices but there must be reasonable controls. Electronic invoices must contain the same information as is required for paper VAT invoices.

• No VAT invoice required for exempt supplies

This was already the case in respect of supplies made in the UK; however, a VAT invoice was required where exempt supplies of insurance and finance were made to a customer in another EU country. This condition has now been removed.

• Simplified VAT invoices

Retailers are already allowed to issue a simplified VAT invoice where the total value of the supply does not exceed £250. This option is now available to all VAT registered businesses.

• Time limit for issuing a VAT invoice for an EU cross-border supply

The VAT invoice must now be issued by the 15th day of the month following the month in which the goods are removed from the UK or the services are performed. This will reduce the time limit from the normal 30-day period where the supplies are made 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

should affect the VAT status. It accepted that as a supply of goods the sale of hot food fell within the definition set out in Note 3(b).

However, Subway is taking the case to the Court of Appeal and so there may yet be another verse to this meatball song.

14.5 Compulsory registration of all persons belonging outside the UK but making supplies in the UK

From 1 December 2012 the registration threshold no longer applies to businesses that are based outside the UK but make supplies in the UK. This mostly affects businesses that supply certain services to non-business customers. Just to recap, under the general place of supply rules for services the place of supply of services to a business customer is where the customer is based. This means that businesses based in other EU countries do not charge VAT to UK business customers who have to account for the VAT under the reverse charge mechanism. If the supply is to a non-business customer who is in the UK the place of supply is where the supplier is based and the supplier charges the local VAT as applicable.

But in the case of some services the place of supply rules are different. The situations most commonly encountered are services relating to land (these are always supplied where the land is) and certain supplies of artistic, cultural, educational and sporting services, which are supplied where performed if supplied to a non-business customer.

In the case of services related to land situated in the UK where the customer is a UK business the reverse charge is used.

Many small businesses based outside the UK make occasional supplies to non-business UK customers (a common example is a builder based in the Irish Republic who also undertakes work in Northern Ireland). Although these supplies are deemed to be made in the UK until 1 December 2012 a business based outside the UK was not required to register in the UK unless the value of its UK supplies exceeded the VAT registration threshold. From 1 December 2012 they have had to register as soon as they are aware that they will be making UK supplies.

One area that may cause a problem is UK-situated holiday houses whose owners are resident overseas. Many owners let these properties as holiday accommodation in the periods that they are not using them themselves. As the supply of holiday accommodation is standard-rated some owners may have inadvertently become liable to be registered for VAT in the UK. The registration threshold is available to them only if they have an ‘establishment’ in the UK. The property by itself is not an ‘establishment’, but HMRC say in Notice 741A Place of supply of services at paragraph 3.4.1, second example, that if the owner ‘appoints a UK agency to carry on its business by managing the property, this creates


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However, if a business receives a significant level of income from gaming machines – for instance, an entertainments venue may have an amusement machine area – the business may now be partially exempt and have to restrict the amount of VAT it can claim.

14.9 Sales of caravans – an intention to simplify leads to more complication

The controversial decision, announced in the 2012 Budget, to extend VAT to the sale of some types of caravan took effect on 6 April 2013. After strenuous lobbying by the caravan manufacturing and retailing industries VAT is applicable at the reduced rate rather than the standard rate. We now have the situation where the sale of a caravan can be zero-rated, reduced-rated or standard- rated – hardly the addressing of an anomaly, as it was called in the initial proposal!

In March 2013 HMRC issued VAT Information Sheet 04/13 VAT: Taxing holiday caravans, setting out the conditions in which the various rates will apply and also explaining the effect on the sale of second-hand caravans.

Caravans fall into three types for VAT purposes.

1. Caravans that do not exceed a length of 7m and a width of 2.55m (mostly touring caravans) remain standard-rated.

2. Caravans that exceed a length of 7m and a width of 2.55m and do not meet BS 3632:2005 approved by the British Standards Institute as being suitable for residential use. These caravans are reduced-rated from 6 April 2013.

3. Caravans that exceed a length of 7m and a width of 2.55m and meet BS 3632:2005. These caravans remain zero-rated.

The sale or lease of ‘removable contents’ with the caravan is always standard-rated and therefore if contents are sold with a caravan of types 2 or 3 above an apportionment of the selling price is needed between the value of the caravan and the value of the contents.

The sale of second-hand caravans follows the same principles. To qualify for zero-rating there must be evidence that caravans meeting the size criteria were occupied before 6 April 2013. For older large static caravans there may not be evidence that they comply with BS 3632:2005 or its previous versions. In these circumstances HMRC will accept evidence that they were occupied before 6 April 2013 as indicating that they qualify for zero-rating, in addition to meeting the size criteria.

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.

believes that a tax agent has been involved in ‘dishonest conduct’. The new measures took effect from 1 April 2013.

If HMRC determine that a tax agent is involved in ‘dishonest conduct’ they may issue a conduct notice giving their reasons for issuing it. There is an opportunity for the agent to appeal at this stage. Note that the tax agent is an individual rather than a firm or corporate body.

If there is no appeal or an unsuccessful appeal HMRC may then, with the approval of the tribunal, issue a ‘file access notice’. This notice requires the document-holder to whom it is addressed to provide working papers and any other documents created or used in relation to clients’ tax affairs. A document-holder may be a corporate body.

The concealment or destruction of documents after receiving a conduct notice or file access notice is an offence punishable by a fine of up to £5,000, or imprisonment for up to two years.

‘Dishonest conduct’ is doing something dishonest, or dishonestly omitting to do something, while acting as tax agent, to achieve a loss of tax revenue, regardless of whether the loss actually arises. Dishonest conduct includes advising or assisting a client to do something dishonest.

Penalties for dishonest conduct range between £5,000 and £50,000.

There is a right of appeal against the imposition of penalties for a failure to comply and against the amount of penalty imposed for dishonest conduct.

There is no automatic right for appeals to be held in private, although the Tribunals Service may allow this.

14.8 Replacement of Amusement Machines Licence Duty – the VAT implications are not amusing for some

On 1 February 2013 Machine Games Duty (MGD) replaced Amusement Machines Licence Duty. Although these are not VAT measures the change has had an effect on the VAT treatment of income from gaming machines.

MGD is due on income from gaming machines where a cash prize can be won that is greater than the minimum cost of one play. VAT is not due on this income; however, it is exempt from VAT. Businesses that receive only this type of income are therefore exempt from VAT and unable to register. Other businesses that receive this type of income are now partially exempt. For many businesses this income is not significant, for instance a café or takeaway may have only one machine, and so the change should have no effect on their ability to recover VAT as they can take advantage of the de minimis limits.


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have to register with the Government Gateway before being able to use NOVA. VAT-registered businesses will need to be registered for online VAT. In some instances NOVA can be used by an agent; more details are in VAT Information Sheet 06/13.

However, there are a few instances where a paper return is required, notably on a change of intention where a temporarily imported vehicle is to stay permanently in the UK or where a vehicle is leased from another EU country and there is an option to buy the vehicle at the end of the lease.

Since July 2013 late or inaccurate declarations have been subject to penalties.

Anyone bringing a vehicle into the UK should be made aware of NOVA and should read VAT Information Sheet 06/13.

14.11 The European Union expands

On 1 July 2013 Croatia joined the EU. Accounting and reporting systems should have been changed so that goods arriving from Croatia are now EU acquisitions rather than imports and goods despatched to Croatia are EU despatches rather than exports. Sales to Croatian VAT-registered customers should be included on EC sales lists. The country code for Croatia is HR. Some supplies of services to non-business customers in Croatia are now subject to UK VAT rather than being outside the scope of VAT.

14.12 VAT on loss-adjusting services for marine and aviation claims

On 3 July 2013 HMRC issued Revenue & Customs Brief 13/2013 confirming that loss-adjusting services supplied in the UK are, and have always been, standard-rated. Some businesses providing physical inspections of qualifying ships and aircraft for loss-adjusting purposes were treating these supplies as zero-rated believing them to fall under ‘surveys’ rather than a service provided by loss-adjusters. From 1 September 2013 HMRC expects all businesses providing these services to treat them as standard-rated. They have accepted that the guidance regarding physical inspections was misleading and so businesses wrongly supplying these as zero-rated do not need to correct previous returns. However, businesses that zero-rated services that did not include a physical inspection will need to correct previous returns unless they can show that they were given misleading advice from HMRC.

14.13 Withdrawal of the exemption from business research supplied between eligible bodies

Before 1 August 2013 a supply of research from one ‘eligible body’ to another in the course of business was 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

For example, Happivans Park buys a static caravan, including the removable contents, from Fred and Doris for £8,000. It later sells the caravan and contents for £12,000. The caravan meets the size criteria but does not meet BS 3632:2005 and therefore the sale of the caravan is reduced-rated. The value of removable contents is estimated to be 10% of the total value.

The VAT on the margin is calculated as:

Sale of caravan: £12,000 – £8,000 = £4,000 × 90% = £3,600 × 1/21 = £171.43

Sale of contents: £12,000 – £8,000 = £4,000 × 10% = £400 × 1/6 = £66.67

Total output tax = £238.10

VAT Information Sheet 04/13 VAT: Taxing holiday caravans contains examples of calculations involving the different types of caravan.

14.10 NOVA – a new way of declaring VAT on vehicles brought into the UK

On 15 April 2013 HMRC introduced a new system to be used, in certain circumstances, to notify them when a land vehicle is brought permanently into the UK. HMRC have to be notified before the vehicle can be registered with the DVLA and therefore the DVLA can withhold registration if there is a risk that the VAT will not be paid. This should reduce the risk of VAT evasion on imported vehicles.

The Notification of Vehicle Arrivals (NOVA) system is likely to be used mainly by non-registered entities and private individuals bringing vehicles into the UK from another EU country. It should also be used by VAT-registered businesses that are bringing in vehicles for non-business use and by importers bringing vehicles in from outside the EU who do not use one of the existing registration systems operated by the DVLA.

The notification must be made within 14 days of the date the vehicle was brought into the UK.

VAT-registered businesses that purchase vehicles from other VAT-registered businesses in the EU for business use do not need to use NOVA as the vehicles can be treated as EU acquisitions on their VAT returns.

Non-registered entities and private individuals who import vehicles from outside the EU will not usually need to use NOVA because import VAT will be charged automatically.

NOVA is designed to be an online system. Individuals and non-registered entities who use other online government services, for instance if they file tax returns electronically, will already have access to NOVA. Otherwise they will


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store his or her own goods may now be standard-rated. The standard-rating is independent of any option to tax exercised. A key feature is how the tenant actually uses the facility. For instance, if a commercial unit, not subject to an option to tax, was let to a business that used it as a workshop then the rents would be exempt, but if the tenant started using the unit mainly for storing his or her own goods the rents would become standard-rated. HMRC expect landlords to take steps to ensure that tenants inform them if they intend to use, or start using, premises for storage.

Some lettings of storage facilities remain exempt, principally lettings of property that is used to keep animals and lettings of property for use for a relevant charitable purpose.

Planning points

Businesses that let or sub-let property that could be used for storing goods should check on the tenants’ current use of the property. VAT should be accounted for on letting income in respect of the period since 1 October 2012.

New tenancies may need to include a clause obliging the tenant to inform the landlord if they start, or cease, using the property for storage purposes.

15 Looking into the futureThere are a number of changes on the way, some directly affecting the operation of the VAT, while others are the result of developments outside the tax system that may have VAT effects. The 2013 Budget changes have been covered above.

15.1 Discretionary investment management service

Investment managers frequently offer clients a service by which the client authorises the manager to invest the client’s funds on their behalf and to actively manage the portfolio without having to obtain the client’s authorisation for each transaction. The charges for this service are standard-rated. Currently the investment managers separate out specific fees for buying and selling the investments and treat these as exempt charges because they are regarded as financial transactions that investment managers carry out as intermediary on their client’s behalf.

Last year I mentioned the ECJ decision in Finanzamt Frankfurt am Main V-Hochst v Deutsche Bank AG: C-44/11, which confirmed that in these circumstances the investment managers make a single supply of discretionary investment management and that the buying and selling activities form part of this supply. Therefore all fees charged for this service are wholly standard-rated.

organisations – see Notice 701/30 Education and vocational training for more on the definition of ‘eligible body’.

From 1 August 2013 if the supply is made in the course of business it is standard-rated. Supplies of research made under contracts signed before 1 August will remain exempt as far as they remain within the scope of the original contract. Supplies made under contracts signed after that date and supplies arising from variations to pre-1 August contracts will be standard-rated. Eligible bodies carrying out research must be careful when charging for work that is additional to the scope of the original contract in that if the work is mixed with work under the original contract all the work becomes standard-rated.

Supplies of ‘non-business’ research are and remain outside the scope of VAT. Non-business research is usually publicly or charity-funded research carried out for the public benefit. If non-business research is being carried out in a collaborative arrangement evidence must be kept to show that this is the case, otherwise payments from one body to another that are actually distributions of grant funding may be viewed as consideration for services provided.

Anyone involved with eligible bodies that supply research should make sure they know when VAT should be charged. There is more information in VAT Information Sheet 11/13 VAT: Supplies of research between eligible bodies.

14.14 Accommodation and catering supplied by hotels and similar to their employees

In June 2013 Notice 709/3 Hotels and holiday accommodation was updated to reflect HMRC’s policy on accommodation and catering supplied to employees. If employees pay for accommodation or food and drink provided by their employer they are regarded as VAT inclusive, and VAT needs to be accounted for on those payments as relevant. From 1 January 2012 accommodation and catering paid for under salary sacrifice arrangements have also been subject to VAT in the same way.

This serves as a useful reminder that many salary sacrifice arrangements may now result in unforeseen VAT costs.

14.15 VAT on storage – unexpected VAT liabilities for landlords?

On 9 August 2013 HMRC issued VAT Information Sheet 10/13 VAT: Provision of Storage Facilities. The VAT liability on providing storage facilities generally became standard-rated with effect from 1 October 2012; however, there has been confusion regarding the scope of the changes. In particular, the 2012 Budget announcements where this measure was first described referred to ‘self-storage’ and some people have assumed that the change affected only specialist self-storage providers.

The Information Sheet makes it clear that the provision of facilities in any structure where the tenant is able to


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Anyone advising businesses in the telecommunications and broadcasting sectors and any businesses making supplies of electronic services should look at the Question and Answer paper on the HMRC website and look out for future developments.

16 And finally…whatever happened to ‘Spot the Ball’ competitions?

In the decades leading up to 1994 Spot the Ball competitions were very popular and were run mainly by the same organisations that ran the football pools. The introduction of the National Lottery in 1994, and the many other forms of legal gambling since then, has greatly reduced the number of people playing Spot the Ball (and the pools) although it is still seen.

You would have thought that the VAT status of these competitions would have been decided many years ago and, indeed, in 1979, HMCE, as it was then, decided that they were not games, or if they were, that they were games of skill rather than games of chance and so entry fees were standard-rated.

However, various entities that ran the Spot the Ball competitions in the years 1979 to 2006 have made claims for repayment of VAT wrongly declared on their income. They claim that the competitions should have been classified as games of chance as defined by the legislation in force during that time and so exempt from VAT. The legislation governing gambling included within the definition of ‘games of chance’ games where skill and chance were combined, and this is what the Spot the Ball organisers claim their games are.

There is over £72 million of VAT at stake.

The First Tier Tribunal was asked to decide solely on this issue. The matters of whether repayment claims could still be made and by whom were left to later hearings.

But why should a Spot the Ball competition be a game of chance? The typical game comprised a coupon with a photograph of a football match from which the ball and much of the background had been removed to leave a lot of white space. A participant had to mark with a cross, or crosses, depending on the competition, where he or she thought the ball should be, judging from the position and attitude of the players. The coupon and entry fee were sent in to the organiser and the participant whose cross was closest to the centre of the ball won a prize. This would appear to be a game of skill, as HMRC thought.

However, the position of the ball was not decided by simply reinstating it from the original photograph, as you would think. It was decided by a panel of judges drawn from professional football who did not see the original

I also stated that HMRC’s guidance following this decision ‘should be issued soon’. ‘Soon’ turned out to be June 2013 when HMRC issued the snappily titled Revenue & Customs Brief 11/13 VAT: Modified Treatment for Certain Portfolio Management Fees Following a European Court Ruling. In future, periodic flat fees for carrying out purchases and sales of securities will be standard-rated. However, if fees are calculated and charged based on the number of transactions performed then they may still be exempt if this basis is contracted for in the provision of portfolio management services and the fees are shown separately on the VAT invoice.

The revised VAT treatment will be introduced with effect from 1 December 2013.

15.2 Intrastat thresholds

On 1 January 2014 the Intrastat arrivals threshold will be increased from £600,000 to £1,200,000. This will be a welcome relaxation for small businesses that import goods from other EU countries. The despatches threshold is currently £250,000. Any change to this for 2014 will be announced in autumn 2013. Note that these thresholds apply to calendar years.

15.3 Change to place of supply of telecommunications, broadcasting, and electronic services – the introduction of the Mini One-Stop Shop (‘MOSS’)

As announced in the 2013 Budget, the Government will be consulting on the changes that will take effect across the EU on 1 January 2015. It is intended that the place of supply of certain services will change so that they are supplied where the customer is. Where sales are made to private individuals or non-business entities this may require a supplier based in another country to register for VAT in the country where their customers ‘belong’.

The Government intends to introduce an online system that will allow UK-based traders to submit a return that will account for their VAT liabilities in other EU countries. This will avoid the need to register in the other EU countries where their customers are located.

The place of supply of electronic services is already a difficult area of VAT and as more businesses provide services online it is an area that is becoming increasingly important.

It is important to distinguish businesses that use the Internet merely as a means of supplying something that is not an ‘electronically supplied service’ from those that provide a service that depends entirely on the Internet for its existence. The place of supply rules may be different depending on the nature of the services provided. Further guidance is available in VAT Notice 741A Place of supply of services.


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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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TTD Issue 111 – Research and Development Tax Relief (January 2012)TTD Issue 112 – Pension Schemes: Auto-enrolment rules (February 2012)TTD Issue 113 – High Net Worth Individuals (March 2012)TTD Issue 114 – Disguised Remuneration (April 2012) TTD Issue 115 – Employee Share Schemes (May 2012)TTD Issue 116 – Seed Enterprise Investment Scheme (June 2012)TTD Issue 117 – The Substantial Shareholding Exemption (July 2012) TTD Issue 118 – A Practitioner's Guide to the Finance Act 2012 (August 2012)TTD Issue 119 – Value Added Tax – An Update (September 2012)TTD Issue 120 – Recent Developments on Residence and Domicile Matters (October 2012)TTD Issue 121 – The New Controlled Foreign Companies Regime (November 2012)TTD Issue 122 – Topical Tax Planning Issues for Owner-managed Businesses (December 2012) TTD Issue 123 – Employer-provided Benefits (January 2013) TTD Issue 124 – Income Tax: Transactions in Securities (February 2013)TTD Issue 125 – Topical Corporation Tax Issues for Large Companies (March 2013)TTD Issue 126 – Employee Expenses (April 2013)TTD Issue 127 – The Patent Box Rules (May 2013)TTD Issue 128 – A Practical Guide to the Statutory Residence Test (June 2013) TTD Issue 129 – Stamp Duty Land Tax and Annual Tax on Enveloped Dwellings (July 2013)TTD Issue 130 – A Practical Guide to the Finance Act 2013 (August 2013) TTD Issue 131 – Value Added Tax – An Update (September 2013)

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