V@ update - February 2022

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

News

• HMRC has published Revenue and Customs Brief 2 (2022): VAT early termination fees and compensation payments. This Brief replaces Revenue and Customs Brief 12 (2020) and introduces a revised policy on early termination payments and compensation payments, following representations from the industry. The revised policy, which will take effect from 1 April 2022, will result in fewer payments being regarded as within the scope of VAT by HMRC than the policy set out in 2020. The main impact of the new policy is that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. HMRC has also updated its guidance manuals on charges described as compensation or early termination fees (VATSC05910, VATSC05920 and VATSC05930), to make it clear when HMRC considers they are payments for a supply and potentially liable for VAT.
• In Finance Act 2021, the government legislated to reform penalties for late submission and late payment of tax (initially from 1 April 2022) and to align interest charges for VAT with other major taxes. In a written ministerial statement, the Financial Secretary to the Treasury has announced that these changes will now be introduced 9 months later, on 1 January 2023. The reason given for this postponement is that the extra time will allow HMRC sufficient time to implement the necessary IT changes required for the new penalties and interest charges, ensuring a high standard of service to taxpayers.
• HMRC has issued a press release which reminds businesses to take steps to prepare for Making Tax Digital for VAT before it becomes mandatory for all VAT-registered businesses from 1 April 2022. The reminder relates to VAT-registered businesses with a taxable turnover below £85,000, given that, since April 2019, businesses with a taxable turnover above £85,000 have already been required to follow Making Tax Digital requirements. 

Case reports

Flying Spur – FTT refuses permission to bring a late appeal

In Flying Spur Ltd v HMRC [2022] UKFTT 00007 (TC), the First-tier Tribunal (FTT) refused the application of Flying Spur Ltd (FSL) for permission to bring a late appeal.

FSL ran an OFSTED-registered children’s home in Norfolk. It was registered under the Value Added Tax Act 1994 (VATA) from November 2013 to September 2015, when HMRC cancelled its VAT registration on the grounds that its supplies were exempt.  FSL submitted a late appeal to the FTT against HMRC's decision to cancel its VAT registration.

The reason given in the notice of appeal for the delay in appealing was that FSL did not wish to litigate in relation to HMRC’s decision to cancel its VAT registration, but rather wished to pursue a complaint with the Adjudicator and Ombudsman. FSL submitted that its failure to file a timely appeal was countered by the continued steps it took to bring matters to an efficient and effective conclusion. It argued that Mr Rapley, as sole director, had been in continued contact with HMRC, his MP and the Ombudsman concerning HMRC’s decision to cancel FSL's registration. FSL said it would be inequitable to refuse permission for the late appeal, as Mr Rapley acted in good faith prior to FSL notifying the appeal to the FTT, and permitting the late appeal would not prejudice, and was not objected to, by HMRC.

The FTT refused permission to bring the late appeal, commenting that "The balance is in our view swayed by the particular importance of respecting statutory time limits together with the absence of good reasons for the very long delay in this case".

Although this disposed of the appeal, the FTT went on to explain that, even if it had given permission for the late appeal, it would have dismissed the appeal, as there was nothing to impugn HMRC's decision to use its powers to cancel FSL's VAT registration. The FTT found that FSL (i) was originally registrable in November 2013, because it put on form VAT1 that it intended to make taxable supplies in the course of its business, but (ii) in fact FSL's supplies of services were OFSTED-regulated and directly connected with the care or protection of children and were therefore exempt supplies by reason of item 9, Group 7, Schedule 9, VATA.

Why it matters: Interestingly, the FTT refused permission to bring the late appeal, notwithstanding a lack of objection from HMRC. Although the delay was  significant in this case (around three and a half years), the case illustrates the importance of appealing a decision of HMRC within the relevant statutory deadlines.

The decision can be viewed here.

Zipvit – CJEU decides that VAT was not due or paid

In Zipvit Ltd v HMRC (Case C-156/20), the Court of Justice of the European Union (CJEU) has delivered its judgment regarding the correct interpretation of Article 168 of Council Directive 2006/112/EC, in connection with the question of whether a recipient of postal services may deduct input VAT in relation to those supplies, where both parties and HMRC have mistakenly treated the supplies as exempt from VAT. We reported on the related opinion of Advocate General Kokott in the August 2021 edition of V@ and on the judgment of the Supreme Court, which referred the relevant questions to the CJEU, in the April 2020 edition of V@.

The CJEU decided that Article 168(a) must be interpreted as meaning that VAT cannot be regarded as being due or paid, within the meaning of that provision, and is therefore not deductible by the taxable person, in the case where, (i) that person and its supplier have mistakenly assumed, on the basis of an incorrect interpretation of EU law by the national authorities, that the supplies at issue were exempt from VAT and that, consequently, the invoices issued did not refer to it, in a situation where the contract between those two persons provides that, if that tax were due, the recipient of the supply should bear the cost of it, and, (ii) no step to recover the VAT was taken in good time, with the result that any action by the supplier and the tax and customs administration to recover the unpaid VAT is time-barred.

The CJEU departed from the opinion of the Advocate General, that recovery of VAT on the relevant postal charges would only be practically possible where the customer was in possession of a VAT invoice. However, the CJEU's decision has the same practical effect, which is that the relevant VAT is not deductible.

Why it matters: If the Supreme Court applies the CJEU's decision, it will mean that the taxpayer (and many other taxpayers in similar circumstances) will be unable to deduct input VAT in respect of services they received from the Royal Mail which were incorrectly treated as exempt. The total value of these claims is estimated to be between £500 million and £1 billion.

The judgment can be viewed here.

City YMCA London – FTT decides that supply of hostel accommodation to homeless person is the supply of sleeping accommodation in a "similar establishment" to a hotel

In City YMCA London v HMRC [2021] UKFTT 477 (TC), the FTT decided that the supply of accommodation made by a hostel, City YMCA London (CYL), to young homeless people (the Supply) was similar to the supply of hotel accommodation, for VAT purposes.

Under Item 1, Group 1, Schedule 9, VATA (Item 1), the grant of any interest in or right over land or any licence to occupy land is an exempt supply. This exemption is subject to an exclusion in Item 1(d) for "the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation…" (the Item 1(d) exclusion). The Notes to Item 1 define a "similar establishment" to a hotel, inn or boarding house as including "premises in which there is provided furnished sleeping accommodation, whether with or without the provision of board or facilities for the preparation of food, which are used by or held out as being suitable for use by visitors or travellers".

HMRC argued that the Supply was subject to VAT at the standard rate, as a supply of facilities. This was on the basis that the recipient of the Supply did not gain "exclusive possession of the property" and therefore the Supply was not a "licence to occupy land" for the purpose of Item 1. CYL argued that the Supply was a "licence to occupy land" and that CYL was a "similar establishment" to a hotel for the purposes of the Item 1(d) exclusion. This would mean that, under paragraph 9, Schedule 6, VATA, where guests had signed up to stay for over 28 days, CYL could claim the full amount of its input VAT in respect of the Supply, while accounting for its output VAT on one-fifth of the value of the Supply.

After careful consideration of the facts, the FTT decided that the Supply amounted to a licence to occupy a specified room and therefore represented a "licence to occupy land" for the purposes of Item 1. In the view of the FTT, the Supply was a supply by a "similar establishment of sleeping accommodation", and therefore fell within the Item 1(d) exclusion, by virtue of its intended purpose of providing temporary accommodation to homeless young people. The FTT found that it was the temporary nature of the accommodation provision at CYL which set it apart from long-term lettings of residential accommodation and which made the Supply similar to the provision in the hotel sector.

The FTT therefore allowed CYL's appeal.

Why it matters: This decision will be of interest to suppliers of similar hostel accommodation. Given the complexity of the issues considered by the FTT, it seems likely that HMRC will seek to appeal the decision to the Upper Tribunal.

The decision can be viewed here.