V@ update - January 2023

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

News

• HMRC has confirmed that it will no longer issue letters confirming receipt of a valid option to tax property with effect from 1 February 2023. An automated email receipt will confirm the date on which HMRC was notified of the option to tax, but no further acknowledgment will be given. While the onus has always been on the person making the option to tax to ensure that it is valid, this change in procedure removes the safety-net previously available.
• HMRC has again updated its interest rates. With effect from 6 January 2023, the default interest rate increased to 6%, and the statutory interest rate (applicable in those circumstances where interest is due on a repayment) is 2.5%.
• New penalties now apply for VAT returns submitted, and VAT paid, late (for accounting periods starting on or after 1 January 2023). Late submission penalties are now calculated using a penalty point system. Once a threshold of points has been reached, a penalty applies. Late payment interest and repayment interest have replaced the default surcharge and repayment supplement, respectively, for these periods.

Case reports

HBOS Plc and Lloyds Banking Group Plc v HMRC [2023] UKUT 00013 (TCC)

The Upper Tribunal (UT) has allowed an appeal relating to the circumstances in which HMRC must pay interest on repayment claims.

The appellants made claims for VAT bad debt relief in 2007 and 2009 for periods from 1989 to 1997. The claims related to circumstances where the appellants had made car hire purchase supplies treated as supplies of goods but with title in the vehicles retained where a customer defaulted on the car hire charge. The UK scheme for VAT bad debt relief (set out in section 36, Value Added Tax Act 1994 (VATA 1994)) had required that property in the goods should have passed to the consumer. HMRC therefore rejected the claims. However, in 2016, this condition was held by the Court of Appeal to be contrary to EU law (see GMAC UK v HMRC [2016] EWCA Civ 1015). HMRC therefore paid the bad debt relief claimed by the appellants in February 2019.

Section 78, VATA 1994 (and in particular section 78(1)(d)) provides that HMRC is liable to pay a person interest where, "due to an error on the part of the Commissioners … a person has suffered delay in receiving payment of an amount due to him from them in connection with VAT …". The equivalent predecessor provision, section 38A, VATA 1983, also provided for interest to be paid where a delay was "due to an error on the part of the Commissioners".

HMRC therefore paid the appellants interest (of just over £870k) from the dates of their claims until the date of payment. The appellants however contended that they were also entitled to interest from the dates on which all the conditions for repayments (apart from the invalid property condition) were met, which would have totalled some £10m.

The First-tier Tribunal (FTT) dismissed the appellants' appeals. It was of the view that interest ran from the dates of the appellants' claims as the invalid property condition (being contained in an Act of Parliament) did not constitute an "error on the part of the Commissioners" for the purposes of section 78. The FTT rejected the appellants' argument that failure to pay interest for the full period claimed constituted a breach of the EU principles of effectiveness, equivalence and fiscal neutrality. The appellants appealed to the UT.

The UT held that the phrase "error on the part of the Commissioners" was capable of including the error arising from the (unlawful) property condition even though that condition had been contained in primary legislation. It rejected HMRC's interpretation of section 78(1)(d) and consequently held that interest ran from the earlier dates claimed by the appellants.

HMRC further argued that because there had been a further dispute between hire purchase providers and HMRC after the removal of the property condition, finance providers did not start to make bad debt relief until some years after the removal of this condition. However, this argument had only been raised in closing submissions before the FTT, after the evidence had been heard and the cases pleaded. The UT determined that the balance of justice favoured denying HMRC permission to rely on this argument. It was of the view that the scope of evidence adduced by the appellants would, in all likelihood, have been quite different had they been aware of the argument at an earlier stage in the proceedings, and the facts giving rise to the argument had been apparent to HMRC from witness statements (so it could have been addressed earlier).

The UT therefore remade the decision so as to determine the issue in the appellants' favour and allowed the appeal.

Why it matters:

This decision is of particular relevance to those seeking historic repayments of VAT from HMRC. The UT's comments regarding the pleading point are also of broader interest to those engaged in tax litigation.

The decision can be viewed here.

Mainpay Ltd v HMRC [2022] EWCA Civ 1620

This appeal related to the supply of doctors by Mainpay Ltd (Mainpay) to Accident and Emergency Agency Ltd (A&E). Mainpay argued that its provision of doctors to A&E should be exempt from VAT as the supply constituted a supply of services of medical care. This type of supply falls under an exemption contained in Article 132(1)(c), Principal VAT Directive (2006/112/EC), transposed into domestic law by Group 7, Schedule 9, VATA 1994. Of the doctors supplied by Mainpay, 80% were consultants and the other 20% were "GP specialists".

HMRC disagreed with Mainpay's view and argued that the services should be taxable at the standard rate. HMRC's argument centred on its contention that Mainpay was in fact supplying staff (a supply which is not exempt from VAT) rather than medical care (which is). The FTT considered that the question to be answered was whether the consultants supplied by Mainpay came under the control, direction and supervision of the NHS trusts they were supplied to. If they did, then that would constitute a supply of staff. The FTT found that the consultants had indeed become "part and parcel of the organisations of the NHS Trusts" and therefore concluded that Mainpay's supply was of staff, rather than medical services. The FTT also found that there was no evidence about the GPs engaged by Mainpay and that the appeal should fail insofar as it related to them.

Mainpay appealed to the UT. In the view of the UT, highly skilled doctors were not under the control of anyone when it came to decision-making. On this basis, it found that control over clinical decision-making could not be a key factor in determining how to classify the supplies. The UT also agreed with the FTT's approach on the question of the GPs. Mainpay appealed to the Court of Appeal (CA). The CA dismissed Mainpay's appeal. It agreed with the UT that Mainpay had in fact been supplying staff and not making medical supplies.

In the CA, Mainpay submitted that the UT had:

1. applied the wrong test to determine whether the services fell within the medical exemption;
2. not taken account of the purpose of the exemption;
3. applied the principle of fiscal neutrality incorrectly; and
4. not considered that the FTT's approach to GPs was erroneous.

Mainpay had submitted that the FTT had erred in considering whether Mainpay had been supplying staff or medical services. The CA did not accept this argument. In its view, the FTT had been justified in assessing the nature of Mainpay's services and it had been correct to examine whether there was a "framework of control" between Mainpay and the agencies that it worked with. The CA also agreed with the FTT that "some sufficient framework of control must exist".

The CA reviewed the relevant case law on the exemption for services of medical care. Medical care is defined in the case law as "diagnosing, treating and, in so far as possible, curing diseases or health disorders". In the view of the CA, Mainpay was not providing medical care to A&E; it was supplying staff. The CA therefore dismissed Mainpay's appeal.

Why it matters:

 The tax treatment of labour agencies and other taxpayers involved in the supply of labour appears to be a priority for HMRC at present, with its guidance on umbrella companies recently having been updated. Umbrella companies and agencies should be mindful of the fact that they may be found to be supplying staff rather than the work carried out by the staff supplied, and prepare themselves for the VAT consequences that follow. This is of particular relevance to companies in the medical sector and all those who are engaged in the provision of "medical care". However, as so often in the world of VAT, determining the nature of supplies is a highly fact-sensitive exercise.

The decision can be viewed here.

CJEU C-378/21 (P GmbH)

The Court of Justice of the European Union (CJEU) has considered the case of P GmbH, an Austrian nursery that had stated an incorrect rate of VAT in its invoices to clients. During the 2019 tax year, it applied VAT to its services at 20%, as opposed to the correct rate of 13%. The question arose as to whether (as the nursery argued) the excess VAT should be credited to the nursery, or to the tax authorities and accordingly a preliminary reference was made by the Austrian courts to the CJEU.

The position, as stated in CJEU Case C-712/17 (EN.SA Srl), is that a trader is liable for the rate of VAT stated in an invoice under Article 203 of the Principal VAT Directive, even in the absence of an actual taxable transaction. The CJEU distinguished the present case as there was no risk of a loss of tax revenue, due to the nursery's clients being exclusively final consumers without a right to deduct VAT invoiced to them.

The CJEU ruled in favour of the nursery, and clarified the legal position. It confirmed that VAT incorrectly invoiced remains due to the domestic tax authority where there is a risk of loss of tax revenue under Article 203 of the Principal VAT Directive, but that there is no such risk in instances such as the present case where recipients of the invoice are final consumers without a right to deduct input VAT.

Why it matters:

It is likely that the CJEU's ruling will impact HMRC's defence to repayment claims under section 80, VATA 1994, where the recipients of the relevant supplies are final consumers and there is no risk of loss of tax revenue. The defence of unjust enrichment (that is, that final consumers have borne the tax and repayment of amounts in respect of VAT wrongly paid to HMRC would therefore enrich a taxable person receiving a repayment) may no longer be of much application if the UK domestic courts follow this judgment. However, in light of the legislation governing the UK's departure from the EU (and in particular the draft EU Law (Revocation and Reform) Bill) it remains to be seen whether this judgment will be followed by the UK courts.

The decision can be viewed here.