V@ update - April 2022

Welcome to the April 2022 edition of RPC's V@, an update which provides analysis and news from the VAT world relevant to your business.

News

• HMRC have published Revenue and Customs Brief 6 (2022): Lennartz mechanism and VAT accounting. This brief clarifies HMRC’s understanding of paragraph 4, Schedule 8, Finance (No 3) Act 2010. The law provides that, in relevant circumstances, businesses which chose to retain the VAT recovered under the rules of the Lennartz mechanism before 22 January 2010, must continue to account for output tax on the non-business use of the asset. The guidance confirms that, if the output tax paid equals the input tax originally claimed (the ‘fiscal balance point’) before the end of the economic life of the asset, businesses are not required to continue to account for output tax on the non-business use of the asset.
  
  
• HMRC have published Revenue and Customs Brief 7 (2022): claiming a repayment of overpaid import VAT on the importation of dental prostheses into the UK. This brief, which is aimed at importers and suppliers of dental prostheses, including registered dentists and other registered dental care professionals, explains how businesses can claim a repayment of overpaid import VAT on dental prostheses imported from 1 January 2021 to 27 October 2021, if they used postponed VAT accounting to account for import VAT on their VAT return.
  
  
• HMRC has updated its guidance on Energy-saving materials and heating equipment (VAT Notice 708/6), which explains when the installation of energy-saving materials and heating equipment is reduced-rated in Northern Ireland and zero-rated in Great Britain (England, Scotland and Wales). The guidance has been updated and contains information relating to legislative changes from 1 April 2022.

Case reports

Glanbia Milk Ltd – FTT decides that flapjacks are not "cakes" for VAT purposes

In Glanbia Milk Ltd v HMRC [2022] UKFTT 00108 (TC), Glanbia Milk Ltd (GML) appealed to the First-tier Tribunal (FTT) against a decision of HMRC to issue a VAT assessment, as a result of HMRC having concluded that supplies of certain goods by a company in the VAT group of which GML was the representative member (the VAT Group) had incorrectly been zero rated, rather than standard rated.

The relevant goods were 36 varieties of food products described as “flapjacks” (the Relevant Products), the principal ingredients of which were oats, syrup and protein. It was not in dispute that all were “confectionery” within the meaning of excepted item 2 in Group 1 of Schedule 8, Value Added Tax Act 1994 (VATA 1994) (Excepted Item 2).

The VAT Group included Glanbia Performance Nutrition (UK) Ltd (GNUK). The Relevant Products were manufactured by GNUK, then sold by GNUK to Glanbia Nutritionals (Ireland) Ltd (GNIL), a member of the same corporate group that was outside the VAT Group. GNIL then supplied some of the products back to GNUK, which GNUK then supplied third party customers. The assessment under appeal included output tax on the last supplies by GNUK to third party customers.

GML contended that the Relevant Products were correctly zero rated because they were “cakes” within the meaning of Excepted Item 2.

GML contended in the alternative that, if the supplies by GNUK should have been standard rated, then GNIL should also have standard rated its earlier supplies of those same goods to GNUK, and that GNUK was therefore entitled to a credit for the input tax that GNUK was deemed to have paid by virtue of the principle in Tulică and Plavoşin (C-249/12 and C-250/12).

Applying the approach adopted in Corte Diletto Ltd v HMRC [2020] UKFTT 75 (TC), the FTT confirmed that the words in Excepted Item 2 must be given the ordinary meaning that would be attached to them by the ordinary reasonable person in the street who is informed to the same extent as the FTT. The FTT, having considered the evidence presented by the parties in relation to factors including ingredients and manufacturing technique, texture and appearance, function and typical circumstances of consumption, marketing and markets, and packaging and name, concluded that none of the Relevant Products were "cakes" within the meaning of Excepted Item 2, as they did not have sufficient characteristics of a cake to fall within the definition of a cake for the purposes of that provision. The Relevant Products therefore fell to be standard rated as “confectionery”.

The FTT rejected GML's alternative argument. Even if it were assumed that GNIL had no contractual or other means of recovering from GNUK the unpaid VAT on those supplies, GML could not recover the input tax deemed to have been paid by virtue of Tulică principles in the absence of a fully compliant VAT invoice issued by GNIL showing the correct amount of VAT paid in relation to those supplies (applying Zipvit Ltd v HMRC [2018] EWCA Civ 1515). There was no suggestion that GML had such invoices.

The FTT dismissed GML's appeal.

Why it matters: This decision will be of interest to businesses which supply flapjacks of the kind in issue in the case.

The decision can be viewed here.

The Mayor's Office for Policing and Crime – FTT decides that HMRC can rely on unjust enrichment defence to a section 80 claim made by a public body

In The Mayor's Office for Policing and Crime v HMRC [2022] UKFTT 00095 (TC), the FTT considered whether HMRC could rely on the unjust enrichment defence in section 80(3), VATA 1994, in relation to a claim (in respect of an overpayment of VAT) made by The Mayor’s Office for Policing and Crime (MOPAC). MOPAC, a public body, contended that it would not be enriched because any amount repaid would remain for the benefit of the public.

MOPAC appealed under section 83(1)(t), VATA 1994, against HMRC's decision to deny four claims it had made under section 80, VATA 1994. MOPAC claimed that it had paid HMRC approximately £1.7m on a mistaken understanding that the payment represented VAT due to HMRC. The four claims related to the sale of privately owned vehicles seized by MOPAC under various statutory powers and disposed of for breaking or scrap. HMRC accepted that when MOPAC sold the seized vehicles no VAT was chargeable on the sales. However, HMRC refused the four claims on the basis that crediting MOPAC under section 80(1) would unjustly enrich it and HMRC had a defence to the claims under section 80(3). It was MOPAC’s case that repayment would not enrich or unjustly enrich it and therefore the section 80(3) defence was not available to HMRC.

MOPAC argued that both it and HMRC are proxies for the same entity, the general public as a body (the body public). Therefore, the payment of the claims by HMRC to MOPAC represented both an equal expense and an enrichment to the body public without any marginal or net effect or change in the position of the body public.

The FTT accepted HMRC's submission that the body public is not a concept recognised in the Principal Vat Directive, or VATA 1994. The FTT agreed with HMRC that MOPAC and HMRC and the other identified bodies governed by public law are, for the purposes of VATA 1994, treated as separate and distinct bodies and not as indistinct or undifferentiated "emanations of the State". Similarly, section 80 does not distinguish between bodies governed by public law and other persons.

MOPAC argued that section 80 is a national law measure closely analogous to the common law remedy of restitution. It argued that, for VAT purposes, section 80 is a substitute for the common law remedy and effectively a codification of the common law remedy. However, the FTT agreed with HMRC that section 80 is a bespoke statutory remedy and, unlike the established causes of action for restitution, it does not depend on establishing a mistake of fact or law. For a claim to be made under section 80(1), all that is required is that the statutory conditions in section 80(1)(a) and (b) are met. It is distinct and different from common law claims for restitution, as section 80(7) expressly excludes common law claims for restitution of amounts of overpaid VAT against HMRC.

Applying section 80 to MOPAC's claim, the FTT decided that MOPAC would be unjustly enriched because it passed on the VAT which it wrongly charged to the relevant scrap companies, and that VAT was recovered by those companies from HMRC. The FTT therefore dismissed MOPAC's appeal.

Why it matters: Although the FTT is not a tribunal of binding authority, this decision is an important one and is of wider significance to other public bodies, as it confirms that HMRC can rely on the unjust enrichment defence to a section 80 claim made by a public body.

The decision can be viewed here.
 
Tasca Tankers Ltd – UT allows HMRC's appeal against FTT's decision to refuse HMRC's strike out application

In HMRC v Tasca Tankers Ltd [2022] UKUT 88 (TCC), the Upper Tribunal (UT) heard an appeal against the refusal of the FTT to strike out an appeal of Tasca Tankers Ltd (TTL) against a decision of HMRC to deny input tax, on the basis that TTL knew, or should have known, that the relevant transactions were connected with the fraudulent evasion of VAT in accordance with the Kittel principle (Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL C-439/04 and C-440/04 [2008] STC 1537).

HMRC applied to the FTT to strike out the relevant appeal (the Strike Out Application), pursuant to Rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the FTT Rules), which permits the FTT to strike out the whole or part of proceedings if the FTT considers that there is no reasonable prospect of the appellant’s case, or part of it, succeeding. The FTT dismissed the Strike Out Application and HMRC appealed to the UT on the following grounds:

1. the FTT reached a decision which was perverse;
2. in reaching its decision the FTT misapplied the law; and
3. the FTT failed to provide sufficient reasons for its decision.

The UT noted that the first ground of appeal essentially boiled down to the submission that the judge had failed to engage with HMRC's case in the Strike Out Application. The UT accepted this submission and that there was a critical gap in the reasoning of the FTT, but did not regard the FTT's decision to dismiss the Strike Out Application to be perverse.

With regard to the second ground, the UT noted that the essential complaint was that the FTT had failed to properly apply the tests that had to be applied on an application under Rule 8(3)(c), to the evidence before it. The UT accepted that the FTT had misapplied the law.

Applying the guidance given by the Court of Appeal in Flannery v Halifax Estate Agencies Ltd [2000] 1 W.L.R. 377, the UT concluded that the FTT had failed to give adequate reasons for its decision to dismiss the Strike Out Application.

The UT allowed HMRC's appeal, set aside the FTT's decision and remitted the case to the FTT to be reconsidered by a different judge.

Why it matters: HMRC is increasingly making applications to the FTT to strike out taxpayers' appeals. This case elucidates the principles which must be applied by the FTT when considering a strike out application under Rule 8(3)(c) of the FTT Rules.

The decision can be viewed here.