V@ update - February 2023

Welcome to the February 2023 edition of RPC's V@, an update which provides analysis and news from the VAT world relevant to your business.

News

• HM Treasury has published the response to its consultation relating to online sales tax. The balance of responses supported the view that an online sales tax would be 'complex, distortive, and would not raise sufficient revenue to fund the scale of business rate relief stakeholders have called for'.
  
  
• The Financial Secretary to the Treasury has confirmed, in relation to the Deposit Return Scheme set to be established in Scotland in August 2023, that VAT will not be applied to the deposit amount but VAT will be due on deposits that have not been redeemed, with the liability falling on the producer who originally issued the deposit.
  
  
• HMRC has published a policy paper relating to legislation (the 2022 Value Added Tax (Margin Schemes and Removal or Export of Goods: VAT Related Payments) Order) designed to remedy an outstanding VAT issue for businesses trading in second-hand vehicles in Northern Ireland sourced from mainland Britain and the Isle of Man. The legislation aims to put them in a similar financial position as if they were still able to access the second-hand margin schemes.

Case reports

Greenspace (UK) Ltd v HMRC [2023] EWCA Civ 106

The Court of Appeal (CA) has dismissed an appeal by a supplier of roofing panels designed to insulate conservatory roofs.

The panels were made to measure, according to measurements taken by the appellant on a site visit to its customers.  The fitting process involved removing the existing glass or polycarbonate panels from the roof, and the panels being slotted into their place using the existing struts and/or glazing bars that supported the former glass or polycarbonate panels. 

Items 1 and 2, Group 2, Schedule 7A, Value Added Tax 1994 (VATA 1994) apply a reduced rate, respectively, to '[s]upplies of services of installing energy-saving materials in residential accommodation' and '[s]upplies of energy-saving materials by a person who installs those materials in residential accommodation'.  Note 1(a) to that Group defines 'energy-saving materials' as including 'insulation for … roofs'. 

The First-tier Tribunal (FTT) considered that the roof panels constituted 'the supply of a roof rather than something for a roof' and, taking the view that this was outside the scope of Note 1(a), dismissed the appeal.  On appeal, the Upper Tribunal (UT) maintained this approach and dismissed the appeal.

The appellant appealed to the CA, on the grounds that  the UT (and FTT before it) had failed to give effect to the purpose of the legislation and/or had misapplied the relevant case law, had erred in rejecting a test based on the nature and extent of the supply, that the UT should have characterised the FTT's approach to evaluating the evidence as a material error of law, and that the lower tribunals were wrong to hold that because the supplies consisted in part of a roof covering they constituted a roof rather than insulation for roofs.

The CA dismissed the appeal. 

In the view of the CA, when determining whether the supplies were 'insulation for roofs', those words had to be considered 'in their ordinary sense, applied strictly but not restrictively', and that if the supply was of 'something more than or different from insulation for roofs', then it fell outside the scope of Note 1(a).  Viewing the test – as the FTT and UT had done, in accordance with precedent by which they were bound – as 'whether the supply is of insulation for roofs or a roof' was the wrong approach. The legislation did not mandate a binary test.  However, on the facts, the supply was of something more than insulation for a roof and the appeal therefore failed with the consequence that standard rating was to be applied to the panels.

Why it matters:

This decision provides clarity on the scope of the reduced rate treatment afforded to home insulation in an environment where energy-efficiency is an important consideration for both environmental and economic reasons.

The decision can be viewed here.

Wm Morrison Supermarkets Plc v HMRC [2023] UKUT 20 (TCC)

The UT has allowed an appeal by a supermarket regarding the scope of the exemption from zero-rating in relation to confectionery.

The appellant appealed to the FTT against HMRC's decisions that certain Organix and Nakd bars bore standard rate VAT. The FTT dismissed the appeal. In its view, the relevant products were 'confectionery' within the meaning of Item 2 in the list of exemptions set out in Group 1, Schedule 8, VAT 1994. Therefore, those products could not attract a zero-rating for VAT as 'food of a kind used for human consumption' under Group 1, Schedule 8, VATA 1994.

The appellant was dissatisfied with the FTT's decision and appealed to the UT on the grounds that the FTT wrongly treated certain factors as irrelevant, such as the actual or perceived healthiness of the products (and the products' marketing as such) and the absence of cane sugar, butter and flour (being ingredients associated with traditional confectionery).

The UT allowed the appeal, concluding that the FTT erred in failing to take account of the healthiness and/or the nature of the ingredients of the products under consideration in comparison to traditional confectionery. The UT remitted the case back to the FTT for another hearing before a differently constituted panel.

Why it matters:

Since the matter has been remitted to the FTT, the VAT position of the relevant products remains unclear. However, the UT's decision demonstrates that the healthiness of food may be relevant when determining its VAT treatment. The UT's decision also includes a helpful analysis of Note 5 of Item 2, so manufacturers and suppliers of similar products, particularly those with no added sweetness, will be especially interested in the final outcome of this case.

The decision can be viewed here.

The King (on the application of Gloucestershire Hospitals NHS Foundation Trust) v HMRC [2023] UKUT 28 (TCC)

The UT has determined that input tax incurred in relation to the supply of ‘consumables’ to an NHS trust could be recovered as it formed part of a single supply.

Gloucestershire Hospitals NHS Foundation Trust (the Trust) had a large surgical estate of operating theatres and wished to improve its overall efficiency. It contracted with Genmed, a specialist company offering a complete theatre management service, and claimed the benefit of Contracted-Out Services Direction (COS) relief on the VAT it incurred in paying Genmed’s service charges.

HMRC denied the Trust recovery of the VAT arguing that the supplies fell outside the scope of the COS relief because they were separate supplies of goods. The effect of HMRC’s decision was that they fell outside the scope and purpose of the relief which was to encourage public authorities to contract out the provision of services without suffering irrecoverable VAT charged by external contractors via a direct refund mechanism, which is provided for in section 41(3), VATA 1994. As there is no appeal to the FTT, cases on COS have to be challenged by way of judicial review. In this case, the Administrative Court, with the agreement of the parties, transferred the case to the UT.

The central issue considered by the UT was whether the Trust was receiving a single supply of healthcare facilities (which would allow for VAT to be recovered under the COS), or whether the trust was receiving multiple and separate supplies of consumable goods and healthcare facility services.

The UT, applying the Levob test (Levob Verzekeringen and OV Bank C-41/04) and with reference to other established case law in this area, agreed with the Trust that the supply of a wide range of consumables alongside a large number of services all of which provided the Trust with ready to go operating theatres was one service. From a VAT point of view the goods and services were indispensable and not capable of being separated without artificially splitting the transaction. The UT was also of the view that even if not part of the same supply, the consumables were closely related to the services and therefore qualified for that reason too. As the goods were viewed as part of the overall supply of services, the Trust was entitled to recover VAT on the consumable goods. The VAT refund in this case amounted to approximately £3.3 million per year and therefore represents a very significant and ongoing financial benefit for the Trust.

Why it matters:

This UT decision will no doubt be welcomed by any NHS trust which finds itself in a similar situation to the Trust. To date, there has been little case law in this area and this decision provides an important precedent which may enable other NHS trusts in a similar position to the Trust to secure a VAT refund. The decision also discusses well-established principles regarding the determination of a single versus multiple supply, which will be relevant in other contexts.

The decision can be viewed here.