V@ update - February 2024

Welcome to the February 2024 edition of RPC's V@, a monthly update which provides insightful analysis and news from the VAT world relevant to your business.

News

1. Regulations come into force on 1 March implementing changes to the Import One-Stop Shop (IOSS) agreed under the Windsor Framework.  The regulations make the penalty regime for the IOSS and VAT One-Stop Shop consistent with VAT penalties more generally, and provide for businesses using the IOSS to account for VAT via their regular UK VAT returns.
   
   
2. The EU VAT Committee has updated the list of guidelines that it has agreed in relation to the interpretation of EU VAT provisions.  While these do not constitute official guidance (as they are merely the views of an advisory committee), they can be influential even given their lack of official standing.
   
   
3. HMRC has announced that it will automatically sign up all new VAT registered businesses that are neither exempt nor have applied for an exemption to Making Tax Digital for VAT.

Case reports

Zero-rating – zero-rating denied as taxpayer could not evidence export

Background

The taxpayer, H Ripley & Co Ltd (HR), claimed for zero-rated output tax totalling £1,176,161.00 for 72 separate supplies, comprising 91 loads, of scrap metal made between 15 February 2016, and 1 September 2016. HMRC rejected the claim on the basis that HR had failed to provide evidence meeting the requirements outlined in VAT Public Notice 725 (VN 725), which required that valid commercial evidence of the removal of the goods from the UK be obtained and kept within three months of the date of export.  HR appealed to the First-tier Tribunal (FTT).

Decision

The appeal was dismissed.

The key issue before the FTT was whether HR had obtained and kept sufficient valid commercial evidence within three months of supply to satisfy the requirements of VN 725.  HMRC did not allege bad faith or fraud on HR's part.

The evidence of export produced by HR and considered by the FTT included sales invoices, weighbridge tickets, the CMRs (road transport consignment notes), ferry boarding cards, sales ledger information, bank transactions showing payment by the customer, emails and WhatsApp messages.

The FTT concluded that none of the documents provided by HR, either individually or collectively, sufficiently demonstrated the export of the loads of scrap metal as required by VN 725. Therefore, the appeal was dismissed, and the assessments made by HMRC were upheld.

In coming to its conclusion, the FTT noted that the burden of proof was on HR to show that the goods were removed from the UK and that the onus was on HR to gather sufficient evidence of removal within three months of the date of supply. If it did not do so (and the FTT held that HR did not), it was not entitled to zero-rate the supplies.

Why it matters:

This case demonstrates how important it is not only to retain documents that are relevant to a taxpayer's VAT claims, but to critically review the systems in place to ensure that the right documentation is regularly obtained and kept in case HMRC should require it.

The decision can be viewed here.

Recovery of input tax – UT overturns FTT decision as standard method override not appropriately applied

Background

Hippodrome Casino Ltd (HCL) operated a casino business which made supplies comprising of gaming, hospitality, and entertainment. It therefore made both taxable supplies (through the sale of food and drink and theatre tickets), and non-taxable supplies (through its gaming business).

The standard method for calculating the deductibility of VAT in a partial exemption situation is to do so according to proportions of turnover attributable to taxable and non-taxable supplies under Regulation 101, VAT Regulations 1995. However, Regulation 107B provides for an alternative method known as the standard method override (SMO). HCL contended that it was required to use the SMO instead of the standard method on the basis that the actual economic use of its overhead expenditure in making taxable and non-taxable supplies, based on a floor space apportionment, differed substantially from the attribution based on turnover, if calculated under the standard method.

HMRC rejected HCL's claims to deduct input VAT on this basis and it appealed to the FTT, which  found in favour of HCL.  HMRC appealed to the Upper Tribunal (UT).

Decision

The appeal was allowed.

The main argument put forward by HMRC in the appeal was that the floor space SMO method was flawed because this method operated on the basis that the areas allocated to HCL's hospitality offering were used only for the purposes of taxable supplies. HMRC argued that the areas in question had a dual use: the areas were used economically both for taxable supplies such as food and drink as well as HCL's non-taxable gaming business. 

The UT examined the offerings of HCL and noted that there was overlap between HCL's offerings in that some customers might visit HCL's premises for the sole purpose of having a drink at one of the bars or visiting the theatre. However, the UT noted that this did not mean that each strand of the business operated independently and so the physical space that each strand of the business occupied could not be attributed exclusively to taxable or non-taxable supplies. The UT concluded that the hospitality and entertainment areas were "significantly used economically for the gaming business". In effect, this meant that these areas were used to make both taxable and non-taxable supplies and accordingly the UT found that HMRC's case on dual use was made out.

The UT disagreed with the FTT's view that the floor space SMO was a more precise measure than the standard turnover method for the recovery of residual input tax. The burden of proof was on HCL to show that the standard method was less precise than the SMO method. In the UT's view, HCL had failed to discharge this burden. Instead, the UT explained that the premise of the floor space SMO was that the gaming business was entirely separate from HCL's taxable supplies. However, given the dual use of the areas in HCL's premises this was not the case. Therefore, the UT concluded that the floor space SMO method used by the FTT was fundamentally flawed. 

Why it matters:

This case provides useful guidance for businesses making both taxable and non-taxable supplies. Businesses should be mindful of the 'dual use' argument considered by the UT and the UT's findings that the taxable and non-taxable strands of the business did not, in this case, operate separately.

The decision can be viewed here.

Zero-rating – flapjacks and cake bars for sports nutrition not zero-rated

Background

DuelFuel Nutrition Ltd (DNL) manufactured and sold sports nutrition products (a flapjack and a cake bar/brownie, packaged and sold together (the Products)), and sought clearance from HMRC that the Products should be zero-rated. HMRC issued a decision to the effect that the Products were standard rated confectionery. This was upheld on review by HMRC and DNL appealed to the FTT. 

Decision

The appeal was dismissed.

In reaching its decision, the FTT examined:

1. whether the Products were to be zero rated as 'cakes' (under Excepted Item 2, Group 1, Schedule 8, VATA) (Excepted Item 2) even if they would otherwise be 'confectionery' (the First Issue). It was common ground that if the Products were found to be 'cakes' then DNL would succeed in its appeal without the need to consider arguments in relation to confectionery products; and

    

2. if the Products were not cakes, whether they were standard rated as confectionery because they were either deemed to be confectionery (under Excepted Item 2 by virtue of Note 5 to Group 1 (Note 5)) or confectionery on general principles (the Second Issue).

The FTT concluded that the Products were not cakes under Excepted Item 2, but deemed to be confectionery under Excepted Item 2 by virtue of Note 5. The FTT was also of the view that the Products were not confectionery on general principles. In reaching its decision, the FTT considered that the following principles applied (based on previous cases involving classifications for VAT purposes):

• Words should be given their ordinary meaning.
• There needs to be a multifactorial assessment of a range of factors that the FTT considers relevant which can include not only the objective characteristics of the goods in question such as their ingredients, texture and so on, but also factors such as how they are marketed, how they are perceived by the public and how they are eaten.
• The test is the ordinary person's view as to the nature of the product and whether the product is one which falls within the relevant category.
• The precise factors to be considered and their relative importance may vary depending on the circumstances.
• The question does not lend itself to extensive legal analysis but is a short practical question.
• There may be features on both sides of the argument and the FTT should allocate the goods to the category which is most appropriate.

On the First Issue, the FTT applied the multifactorial test and assessed the name and description, ingredients, manufacturing process, size and appearance, taste and texture, packaging, marketing, and circumstances of consumption. The FTT observed that the high protein levels (around 20g of protein in each 40g cake slice or brownie) would not be associated with a cake by an ordinary person and that the Products were not marketed in the same way as normal cakes. The Products were aimed at people going to the gym and doing other strenuous exercise and the FTT did not see any marketing efforts aimed at conventional retail outlets, such as supermarkets. An ordinary person would consider the marketing of the Products to be strongly indicative of them not being cakes. Further, the Products were designed for eating immediately before and after vigorous exercise and, by their ingredients and marketing, not as a cake which might be eaten by consumers of all generations. Therefore, applying the multifactorial test, the FTT concluded that the Products were not cakes.

On the Second Issue, the FTT relied on the UT's summary of Note 5 in Martland v HMRC [2018] UKUT 0178 (TCC). In short, Note 5 deems products with certain attributes to fall within the confectionery exception under Excepted Item 2 (see WM Morrison Supermarkets Plc v HMRC [2023] UKUT 20 (TCC)). The parties agreed that the Products were "sweetened prepared food which is normally eaten with the fingers", meeting the constituent elements in the phrasing of Note 5. In the FTT's view, having considered the history and [previous] interpretation of Note 5, the definition of confectionery could best be described as an inclusive definition, expanding the meaning beyond its normal meaning so as to include those items specifically included in the definition. The FTT concluded that the Products fell within Note 5 and were therefore deemed to be confectionery.

The FTT also considered whether the Products were confectionery on general principles in case it was wrong on the First and Second Issues, and concluded that the Products were not. The FTT applied the multifactorial test and concluded that the Products did not have the characteristics of confectionery. For example, the high levels of protein, the baking process, the appearance, and the marketing of the Products were not characteristics of confectionery.

Why it matters:

This case illustrates the challenges taxpayers can face when applying the VAT classification rules to new food related products.  It helpfully illustrates the FTT's approach to the multifactorial test and interpretation of Note 5.

The decision can be viewed here.