V@ update - June 2022

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

News

• Regulations 23A to 23D of the VAT Regulations, which require VAT-registered businesses to submit sales statements for mobile phones and computer chips to HMRC, are to be revoked with effect from 1 July 2022. HMRC has determined that it no longer needs the data from sales lists due to a reduction in the levels of fraud involving these goods and alternative sources of intelligence. HMRC has updated VAT Notice 735 to reflect this change.
• HMRC has published Revenue & Customs Brief 8 (2022), which sets out HMRC's position on making a claim under the DIY Housebuilders Scheme, following the decision of the First-tier Tribunal in Ellis and Bromley v HMRC [2021] UKFTT 343 (TC). HMRC will only allow a single claim under the scheme which must be made within three months of completion of the build. Where it is agreed that a claim has been repaid in error, HMRC will accept a subsequent claim with evidence that the claim has been made within three months of completion.
• HMRC has published Revenue & Customs Brief 10 (2022), which sets out details of how HMRC now approaches determining whether an activity is a business activity for VAT purposes. HMRC will adopt the approach articulated by the Court of Appeal in Wakefield College v HMRC [2018] EWCA Civ 952, which requires that in order for an activity to be a business activity it must: (a) result in a supply for consideration (and not, as in that case, a charitable donation) and (b) be supplied in order to obtain remuneration. The purpose of an individual activity is assessed separately from the overarching purpose of the supplier.
• HMRC has updated its guidance on goods that are purchased for exempt supplies but then moved from Great Britain to Northern Ireland. Businesses that have a limited ability to recover input VAT (due to the exempt nature of the supplies / partial exemption calculations) should treat the movement of the goods to Northern Ireland as a fully-taxable supply, enabling them to recover the originally restricted input tax as being fully attributable to that supply. This can be done as part of a business's annual adjustment.

Case reports

Zipvit – no input tax deductions as VAT not "due or paid"

In Zipvit Ltd v HMRC (No 2) [2022] UKSC 12, the Supreme Court (SC) dismissed the taxpayer's appeal against HMRC's decisions refusing Zipvit's claims to deduct input tax.

Zipvit supplied vitamins and minerals to customers and used the services of Royal Mail, who supplied business postal services under individually negotiated contracts. Zipvit, Royal Mail and HMRC mistakenly considered that postal charges by Royal Mail were exempt from VAT. Therefore Zipvit was not charged, and did not pay, VAT on postal services provided by Royal Mail, and did not account to HMRC for any sum representing VAT in respect of those services.

However, several years later, the judgment of the Court of Justice of the European Union (CJEU) in R (TNT Post UK Ltd) v HMRC (Case C-357/07), was released. The CJEU held that the postal services exemption applied only to supplies made by the public postal services acting as such, and did not apply to supplies of services for which the terms had been individually negotiated.

Zipvit made claims against HMRC for the deduction of input tax in respect of the services. HMRC rejected those claims on the basis that whilst Zipvit had been contractually obliged to pay VAT, it had not in fact been charged VAT and had not paid VAT. Zipvit unsuccessfully appealed to the First-tier Tribunal (FTT), Upper Tribunal and Court of Appeal. Following a hearing in the SC, a reference was made to the CJEU to determine the 'due or paid' issue and the 'invoice' issue.

In dismissing Zipvit's appeal, the SC applied the judgment of the CJEU, which had ruled that VAT should not be regarded as included in the price paid by Zipvit and that VAT cannot be regarded as having been 'due or paid', for the purposes of the Principal VAT Directive (2006/112/EC). The SC also concluded that if HMRC had considered exercising its discretion under Regulation 29(2) of the VAT Regulations 1995, it would have been bound to conclude that no payment should be made to Zipvit.

The CJEU did not consider it necessary to determine the 'invoice' issue which concerned the question of whether the condition that Zipvit holds a VAT invoice to evidence and support its claim to have paid input VAT was satisfied. The SC also declined to determine this point.

Why it matters: The SC's decision brings to an end not only Zipvit's claims but an estimated £500m - £1 billion worth of claims by other taxpayers against HMRC. Had Zipvit been successful, this would have amounted to a windfall to the claimants.

The decision leaves unanswered important questions relating to the 'invoice' issue which may arise again in other litigation.

The decision can be viewed here.

Haymarket Media Group – sale of land and property was not a transfer of a going concern for VAT purposes

In Haymarket Media Group Ltd v HMRC [2022] UKFTT 00168 (TC), the FTT considered whether the sale of land and property in Teddington by Haymarket Group Properties Ltd (HGPL) to Pinenorth Properties Ltd (Pinenorth) was a supply of an asset and not a supply of a business as a transfer of a going concern (TOGC) for VAT purposes. The appeal was brought by Haymarket Media Group Ltd (HMGL) as the representative member of the VAT group of which HGPL was a member.

HMGL was a subsidiary of the Haymarket Group, which was a publisher of magazines. From the late 1970s until 2015, the Haymarket Group was also a property owner, utilising those properties for its offices, as investments and as rental opportunities. In the period prior to the sale, the Teddington site was occupied by the Haymarket Group as its business premises, concurrently with tenants to whom leases had been granted or assigned by HGPL as the owner of the site.

In 2013, HGPL decided to apply for planning permission to develop the Teddington site with a view to selling it with the benefit of planning consent. Consent was granted in December 2014 for the construction of 213 flats and six houses. The site was subsequently marketed by Savills, and Pinenorth submitted a successful bid of £85m.

The sale of the Teddington site was completed in November 2015. In its VAT return for 01/16 HMGL treated the sale of the Teddington site by HGPL as a TOGC, within Article 5 of the Value Added Tax (Special Provisions) Order 1995/126 (SPO), and therefore involving neither a supply of goods nor a supply of services for VAT purposes. HMRC took a different view, concluding that the sale was a supply of an asset, and accordingly issued a notice of assessment to VAT in the sum of £17m.

In challenging HMRC's assessment, HMGL contended that HGPL carried out two activities at the Teddington site that, together or separately, amounted to a business for VAT purposes: property development and property lettings. In dismissing the appeal, the FTT concluded that for there to be a TOGC within Article 5 of the SPO the "same kind of business" had to be carried on by the transferor as that of the transferee in relation to the transferred assets. Further, while the form of the contract entered into by the parties was structured as a TOGC, that was not conclusive in determining the issue. Rather, it was necessary to have regard to the intentions of the parties, the substance of the transaction, and all relevant surrounding circumstances.

With regard to property development, the FTT found that it was not HGPL's intention to carry on a property development business, nor did the parties intend that there was to be a transfer of a property development business. In particular, HGPL had never intended to develop the Teddington site prior to sale, but had merely intended to sell the site with the benefit of planning permission for the best offer. What HGPL had done was to obtain planning consent, which was a step that may have enabled development to take place, but that was not active development in itself.

The FTT rejected HMGL's contention that there was a TOGC of a property letting business. The Teddington site was required to be transferred to Pinenorth with vacant possession, and the parties were clear from the outset that the subject matter for sale was the freehold title with vacant possession. The putative tenants at the date of completion were connected to Pinenorth, which the FTT considered reflected the economic and commercial reality that Pinenorth could not afford the risk of taking over any genuine tenants from HGPL, which would possibly obstruct its title with vacant possession of the whole Teddington site as the developer.

Accordingly, the FTT concluded that the sale of the Teddington site did not fall within Article 5 of the SPO and confirmed HMRC's assessment.

Why it matters: This case is an interesting example of the FTT having to carry out a detailed analysis to determine whether the form of a transaction properly reflected its substance, for the purposes of Article 5 of the SPO.

The decision can be viewed here.

Hodge and Deery - the installation of flexible vault burial chambers exempt from VAT

In Hodge and Deery Ltd v HMRC [2022] UKFTT 00157 (TC), the FTT ruled that the installation of flexible vault burial chambers fell within the definition of the VAT exemption for ‘the making of arrangements for or in connection with the disposal of the remains of the dead’ (the exemption).

Due to ground contamination caused by decomposing bodies in adjacent graves, the taxpayer installed ready-to-use, flexible vault burial chambers in cemeteries on behalf of a third-party and treated these services as exempt from VAT, under the exemption. HMRC challenged the VAT treatment on five separate grounds, including that the exemption only extended to supplies directly involved with the disposal of the remains of a particular dead person and that the exemption can only be applied to funeral directors with care and custody of the deceased, not sub-contractors. HMRC also referred to its own public notice on the matter (VAT Notice 701/32), which made clear that the exemption can only apply to the party with responsibility for the deceased.

The FTT agreed with the taxpayer. The FTT took, as a starting point, the legislation and whether the services fell within Schedule 9, Group 8, items (1) and (2). To be exempt, the services had ‘to lead directly to the disposal of the remains of the dead’. The FTT concluded that the services undertaken by the taxpayer resulted in the provision of many graves for the disposal of the remains of the dead and therefore satisfied the object of the exemption. It did not matter that the services were provided in advance or were in connection with a specific funeral. Noting that HMRC’s notice does not have the force of law, the FTT did not accept HMRC’s assertion that, to be exempt, the digging of a grave had to be provided by an undertaker. Overall, the installation of the prefabricated flexible vaults served the same purpose as a brick constructed product, namely, to provide the graves needed to safely dispose of the remains of the dead.

Why it matters: This case is another example of HMRC's guidance being wrong and not reflecting the correct legal position. In this case, it reflected too narrow an interpretation of the exemption, and was simply out of date as a result of new technological advancements. Paragraph 5.1 of Notice 701/32 states that the graves must be “brick, block or concrete” and constructed to deal with unstable soil. However, pre-formed flexible vaults achieve the same objective. The FTT was of the view that the legislation should to be construed in a manner that recognised new technology that achieved the same result, thereby giving effect to the purpose of the exemption.

The decision can be viewed here.