V@ update - August 2022

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

News

• HMRC has launched an online VAT error correction service. It is now possible for businesses to sign-in using government gateway details or an email address and submit an error correction directly to HMRC.

• HMRC has updated paragraph VATDREG07000 of its internal manual to make it clear that it should allow a VAT registration to continue if the underlying business is clearly of a short duration or where the nature of the business is such that there may be a considerable interval between taxable supplies.

• The call for evidence in relation to the EU Commission's proposal for a directive on VAT in the Digital Age has closed, and adoption of the resulting amendments to directives is planned for Q3 2022. However, the impact assessment that is to be the product of the call for evidence has yet to be published. The proposed options include digital reporting requirements, including e-invoicing, clarification of VAT rules to deal with the 'platform' economy and potentially an extension of the One-Stop Shop, both in terms of the types of supplies covered and the thresholds for use of the Import One-Stop Shop.

• HMRC note that there was a technical issue relating to import VAT figures for VAT account statements produced in June 2022. Businesses that downloaded June 2022 statements before 13 July 2022 should not use those statements to complete their VAT returns, but instead should download updated versions from their VAT account dashboard. The revised statements should have a publication date of 18 or 19 July.
  
   

Case reports

Tower Bridge GP Ltd v Commissioners for HMRC [2022] EWCA Civ 998

Court of Appeal finds no right to deduct input VAT without valid VAT invoice

Tower Bridge GP Ltd (TB) was representative member of a VAT group that undertook, amongst other things, brokerage in equities, derivatives and FX, and brokerage information and consulting relating to environmental markets including the sale of OTC carbon credits. In March 2009, CFE, a member of the VAT group, began trading in carbon credit transactions that, it turned out, were connected to VAT fraud.

TB claimed a deduction for input tax of more than £5.5m for purchases of carbon credits from a third party (that was a taxable person) by CFE prior to 15 June 2009. However, the third party had not registered for VAT and the purported VAT invoices that it provided were not valid as they did not show a valid VAT number, or name the group member as the customer.

HMRC denied the deduction on the ground that the VAT invoices were invalid and refused to exercise its discretion to allow TB to present evidence other than a VAT invoice to support the deduction since CFE's supplier was not VAT-registered, the transactions were linked to fraud, and CFE had failed to carry out reasonable due diligence in relation to the transactions. TB appealed unsuccessfully to the First-tier Tribunal (FTT) (which found that CFE neither knew, nor should have known, that transactions prior to 15 June 2009 were connected to VAT fraud, but that from 15 June 2009 it should have had such knowledge) and Upper Tribunal (UT)

TB appealed the UT's decision to the Court of Appeal (CA), arguing that it could make the deduction as of right, or alternatively that HMRC should have exercised its discretion to allow the deduction.

The CA dismissed the appeal holding that, although the right to deduct under Article 168(a), Principal VAT Directive, had direct effect (provided that the person claiming the right was a taxable person and the goods/services supplied to it were for the purposes of its own taxable transactions and supplied to it by another taxable person), this depended on a valid VAT invoice being produced (either at the time or subsequently due to a correction).

It further held that HMRC's refusal to exercise its direction was reasonable. The supplier was not VAT-registered, the transactions were linked to a fraud, and CFE had failed to carry out reasonable due diligence. It was also "perfectly legitimate" for HMRC to take into account the loss to the public purse if the deduction were allowed.

Why it matters: This judgment provides a helpful summary of the evidence required for a deduction to be made and reinforces the importance of carrying out due diligence into the VAT status of suppliers. The judgment is also notable in that it contains an early instance of the CA having regard to, but not following, a judgment of the CJEU given after 31 December 2020 (Kemwater ProChemie sro v Odvolací finanční ředitelství C-154/20), which it considered diverged from the CJEU's previous jurisprudence.

The judgment can be viewed here.

 
Spectrum Community Health CIC v HMRC

FTT finds healthcare supplies in prisons formed single composite supply

Spectrum Community Health CIC (Spectrum) supplied healthcare services and related goods to prisoners in thirteen prisons. Spectrum provided the services to NHS England (NHSE) under standard contracts; some it delivered directly itself and others it sub-contracted.

It was common ground that Spectrum made some exempt supplies of medical care. Spectrum contended that it also made separate, taxable supplies (zero-rated supplies of the dispensing of prescription drugs within Item 1, Group 12, Schedule 8, VATA 1994 and reduced-rate supplies of non-prescribed sexual health products (Item 1, Group 8, Schedule 7A, VATA 1994). HMRC contended that Spectrum made a single, composite, exempt supply and accordingly denied Spectrum's application to be registered for VAT. Spectrum appealed to the FTT.

In dismissing the appeal, the FTT noted that there were two types of single composite supply, namely: (1) where one or more supplies constitute a principal supply and the other supply/supplies were ancillary supplies which were not for customers as an end in themselves but as a means of better enjoying the principal service (as in Card Protection Plan v C&E Commrs C-349/96) and (2) where two or more elements were so closely linked that they formed, objectively, a single indivisible economic supply which it would be artificial to split (as in Levob Verzekeringen BV v Staatssecretaris van Financiën C-41/04).

The FTT concluded that the sole customer was NHSE (rather than individual prisoners, although they benefited from the supplies). What NHSE wanted, and what Spectrum was obliged to deliver, was an integrated primary healthcare/health and social care service in the relevant prison equivalent to that provided by the NHS in the community. The individual elements specified in the contracts shared the same aim of enabling this healthcare service to be delivered. The supplies were made under separate contracts for each prison or group of prisons in a 'package' and it was not possible for NHSE to alter this package without amending the whole contract. The consideration for the supply was a single amount for each year of the contract, paid in monthly instalments without adjustment for what elements were actually supplied. All these factors pointed to the supply being a single composite supply that it would be artificial to split.

The FTT then went on to consider whether the single supply was exempt under Article 132(1)(b), Principal VAT Directive (Item 4, Group 7, Schedule 9, VATA 1994) or Article 132(1)(c), Principal VAT Directive (Item 1, Group 7, Schedule 9 VATA 1994). This was important because supplies of drugs and contraceptives could be excluded from a single composite supply of medical care under Item 1, but not from a supply of care or medical treatment under Item 4. Item 4 exempted "[t]he provision of care or medical or surgical treatment and, in connection with it, the supply of any goods, in any hospital or state-regulated institution". Item 1 exempted "[t]he supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following…".

The FTT considered it clear that "state-regulated institution", in light of European case law, meant an establishment comparable to a hospital, and that Spectrum was the establishment that fell to be assessed. It was not enough for the establishment to be regulated by the Care & Quality Commission (CQC). The CQC regulated activities, and not establishments. The FTT therefore held that Spectrum's supplies did not fall within Item 4, but rather within Item 1, with the result that none of the drugs or contraceptives supplied fell outside the exemption.

Why it matters: This decision contains a useful summary of the law as it stands relating to single/multiple supplies, which is relevant outside the relatively narrow medical context of this case.

The decision can be viewed here.

The Towards Zero Foundation v HMRC

FTT finds self-funded crash tests did not constitute non-business activity

The Towards Zero Foundation (the Foundation), a charity, carried out crash safety tests on vehicles (in the form of the New Car Assessment Programme, or NCAP/Euro NCAP). It would buy and test vehicles at its own expense and publicise the results with a view to influencing consumer behaviour, thereby driving manufacturers to improve the safety standards of their cars. Typically, having improved a car's safety features, manufacturers would then seek (and pay for) further testing.

HMRC considered that the initial testing, funded by the Foundation, represented a non-business activity to which residual input tax should, in part, be attributed. It raised assessments on the basis that there should be a 40% restriction on general overhead input tax recovery. The Foundation appealed to the FTT.

The Foundation argued that the 'free' testing needed to be undertaken to create a market for manufacturer-funded testing. It established the baseline for safety improvements and established a consumer impetus for manufacturers to improve vehicle safety. That a charitable/philanthropic goal motivated the business did not prevent the activities undertaken being for a business purpose. The Foundation argued that there was a direct link between the self-funded and manufacturer-funded tests so as to constitute a single business activity. HMRC argued that since the self-funded tests were provided for free, they could not represent a supply for consideration and were not therefore capable of representing a business activity. Further, the supplies were for a charitable or philanthropic objective and not a business objective.

In allowing the appeal, the FTT held that it was clear from the unchallenged evidence of the Foundation that without an unfavourable baseline assessment manufacturers would not proactively seek to have vehicles tested. The Foundation, through purchasing and testing new vehicles in each market jurisdiction, could establish a baseline safety standard for vehicle production in that market; this was a necessary precursor to making taxable supplies. As such, the Foundation was not engaged in any non-business activity.

Why it matters: This decision, although perhaps initially counter-intuitive, will provide comfort to any business that also has charitable/philanthropic goals in terms of input VAT recoverability.

The decision can be viewed here.