V@ update – June 2024

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

News

1. HMRC has published its latest assessment of the tax gap.  It estimates that the tax gap for 2022-23 for VAT is 4.9% of the total theoretical VAT liability, or £8.1bn in absolute terms (a reduction from 5.9% / £8.4bn in 2021-22).
   
   
2. HMRC has updated its guidance in relation to postponed import VAT statements, providing clarification as to when statements are usually available to view.
   
   
3. Finance (No.) Act 2024 has received royal assent.  It contains (at section 23) some minor VAT-related amendments, including in relation to:

• the evidence required to support a refund of VAT in connection with construction;
  
  
• terminal markets; and
  
  
• late payment interest.

Case reports

Time limits – burden of proof lies with the taxpayer when asserting benefit of one-year rule in section 73(6)(b) VATA 1994

On 29 April 2019, HMRC assessed Nottingham Forest Football Club Ltd (NFFC) for VAT of £345,561 for the period 08/15 (the Assessment).

NFFC appealed the Assessment to the First-tier Tribunal (Tax Chamber) (FTT).

The only issue for the FTT to determine was whether the Assessment had been made within the time limit in section 73(6)(b), Value Added Tax Act 1994 (VATA 1994), which provides that an assessment shall not be made later than "one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge".

The relevant facts to determine when the time limit started to run were as follows:

1. On 16 April 2018, HMRC visited NFFC to enquire into its accounting systems. NFFC explained that it used SAGE and then NAVISION for the period in question.
   
   
2. On 20 April 2018, HMRC returned to examine invoices and download data from NFFC's general ledger.
   
   
3. On 9 May 2018, HMRC returned for a final time to collect SAGE accounting records.
   
   
4. On 24 May 2018, HMRC sent an email to NFFC which explained that HMRC considered that an innocent accounting error had arisen when NFFC changed from SAGE to NAVISION, which gave rise to a VAT liability.

NFFC argued that HMRC had knowledge of sufficient evidence to raise an assessment on 20 April 2018 (step 2), when it obtained the general ledger data. One year from that date would be 20 April 2019, and therefore the Assessment was out of time.

HMRC argued that it had the requisite knowledge on 9 May 2018 (step 3) at the earliest.

In accordance with the test in Pegasus Birds Ltd v C & E Commissioners [1999] STC 95, the FTT was required to determine the following two questions:

1. what facts justified the making of the assessment in the opinion of the HMRC Officer who raised the Assessment and was that opinion reasonable; and
   
   
2. when was the last piece of evidence of sufficient weight to justify making the Assessment communicated to HMRC?

The FTT was unable to provide a decisive answer to either of these questions due to insufficient evidence being before it. NFFC did not provide any witness evidence and the HMRC Officer who raised the Assessment had retired from HMRC and  did not provided oral evidence.

NFFC argued that the SAGE accounting records, which were received by HMRC on 9 May 2018, were not necessary for HMRC to reach its decision and would not have formed the basis of its calculations. However, the FTT concluded that, as the burden of proof was on NFFC (following Pegasus Birds), and it had not provided any witness evidence to support its assertion, the appeal must fail.

NFFC appealed to the Upper Tribunal (UT).

Before the UT, NFFC relied upon the following three grounds of appeal:

1. the FTT failed to apply the correct tests as set out in the relevant case law;
   
   
2. the FTT erred in its treatment of the burden of proof; and
   
   
3. the FTT’s conclusion that 9 May 2018 was the best date on which HMRC had evidence of the facts sufficient, in its opinion, to justify the making of the Assessment, was perverse because there was no evidence to support such a finding.

On the first ground, the UT held that the FTT had applied the correct test (the Pegasus Birds test) and simply had insufficient evidence to determine answers to either of its two limbs.

With regard to the second ground, NFFC argued that Pegasus Birds was not a binding authority on the point that the taxpayer bore the burden of proof in relation to section 73(6)(b), VATA 1994, because the High Court had not heard argument on the point. The UT agreed that a proposition assumed without argument is not authority, but held nonetheless that the taxpayer does bear the burden of proof in respect of this provision.

Finally, the UT rejected the third ground of appeal. In its view, the FTT's conclusion that 9 May 2018 was the date on which the time limit started to run, was not perverse, it was simply the result of NFFC failing to discharge the burden of proof which lay with it.

Why it matters: This is an important decision.  The question of where the burden of proof lies in relation to the one-year time limit for raising VAT assessments has not previously been the subject of judicial consideration. In order to successfully appeal a VAT assessment on this ground, the taxpayer must be able to provide evidence that HMRC had sufficient actual knowledge to raise an assessment more than a year before the assessment was raised.

The decision can be viewed here.

Single/multiple supplies – supply of prescription drugs and non-prescription contraceptives form part of single supply of healthcare to prisoners

Spectrum Community Health CIC (Spectrum) is a healthcare provider which provides or arranges medical supplies, including prescription drugs and non-prescription contraceptives, to prisoners in England. Medical supplies to prisoners are VAT exempt (as they fall within Group 7, Schedule 9, VATA 1994), whereas prescription drugs and non-prescription contraceptives are, respectively, zero-rated (under Group 12, Schedule 8, VATA 1994) and reduced-rated (under Group 8, Schedule 7A, VATA 1994).

Spectrum appealed to the FTT against HMRC's decision to refuse its attempt to register for VAT. Spectrum argued that its supplies of prescription drugs and non-prescription contraceptives were separate supplies to its general, VAT-exempt supply of healthcare to prisoners. If Spectrum was VAT registered it would be able to recover input tax attributable to these non-exempt supplies. HMRC disagreed with Spectrum's interpretation and determined that Spectrum made a single exempt composite supply of "primary healthcare or health and social care", and that the supply of the prescription drugs and non-prescription contraceptives was merely a component of this single supply. The answer to the question of whether Spectrum made a single supply or multiple supplies  hinged on the interpretation of the relevant medical exemptions in Article 132(1), Principal VAT Directive (PVD) and their treatment in subsequent case law, principally European Commission v UK (Case 353/85) (EC v UK) and Finanzamt Dortmund-West v Klinikum Dortmund gGmbH (Case C-366/12) (Klinikum).   

A key component of the single or multiple supply question before the FTT, was who the relevant consumer was and thus, from whose perspective the supplies should be assessed. The FTT found that the supply contract was between Spectrum and NHS England (NHSE). In the view of the FTT, it was clear from both the contractual position and the economic and commercial reality, that it was NHSE which was responsible for overseeing and commissioning the overall healthcare in English prisons. NHSE (and not, as Spectrum contended, the prisoners) was the relevant typical consumer. From NHSE's perspective, it received from Spectrum a single composite supply of “primary healthcare or health and social care in the specified prison or prisons”. The FTT said that “it would be artificial to split that supply into separate supplies of the individual elements that comprise the integrated healthcare or health and social care service”. Having decided that it was a single supply, the FTT concluded that no part of the single composite supply should be taxed differently and so the whole was VAT exempt.  It therefore dismissed Spectrum's appeal.

Spectrum appealed to the UT. 

Before the UT, Spectrum's appeal focussed on the FTT's interpretation of EC v UK and Klinikum, the FTT's decision that NHSE (rather than the prisoners) was the relevant consumer, and that the FTT made an alleged error of law in failing to reach the conclusion that Spectrum did not make a single supply of medical care within the exemption under Art. 132(1)(c), PVD, when that was the only conclusion possible on the agreed facts.

The UT rejected all of Spectrum's grounds of appeal. In the UT's view, EC v UK and Klinikum did not, as Spectrum argued, suggest that it was impossible for elements of a single supply which would not be exempt, if viewed as a separate supply, to be exempt when forming part of a single complex supply. In the view of the UT, the FTT was correct to look at the contractual position of the supply and find that NHSE was the relevant typical consumer. The nine factual points which Spectrum claimed led inexorably to the conclusion that Spectrum did not make a single supply of medical care, did not lead to the only possible conclusion that there were multiple supplies. Many of the points relied on the argument that it was the prisoners, rather than NHSE, who were the typical consumer.

The UT therefore dismissed the appeal, agreeing with the FTT that Spectrum made a single VAT-exempt supply of medical services.

Why it matters: This decision provides a clear overview of the principles applicable to potentially-divisible services, albeit focussing on a relatively niche market; those in the healthcare sector will no doubt be disappointed by the limits this decision places on their ability to recover input tax.

The decision can be viewed here.

Single/multiple supplies – 'dip pots' supplied as part of takeaway meal are part of a single standard-rated supply of hot food

The FTT has confirmed that 'dip pots' supplied as part of a takeaway meal deal are part of a single standard-rated supply of hot food, as opposed to a separate zero-rated supply for VAT purposes.

Queenscourt Ltd (Queenscourt) had, until 2019, accounted for VAT on the basis that the dip pots (containing sauces like tomato ketchup or mayonnaise) supplied as part of KFC takeaway meal deals formed part of a single standard-rated supply for VAT purposes. However, Queenscourt subsequently changed its view and submitted an error correction notice to HMRC to reclaim the VAT it considered it had wrongly accounted for between October 2015 and September 2018. After some debate, HMRC agreed to repay the VAT to Queenscourt. Queenscourt then submitted a further error correction notice to reclaim VAT which it had accounted for on dip pots comprised in takeaway meal deals between October 2018 and September 2019. This claim was reviewed by a different HMRC officer and was refused on the basis that the dip pots formed part of a single standard-rated supply for VAT purposes. The officer also considered the previous repayment made by HMRC to have been incorrect, and issued assessments under section 80(4A), VATA 1994, in order to recover the amount which had been repaid to Queenscourt. Queenscourt appealed both decisions to the FTT, primarily on the basis that the supply of the dip pots was a separate zero-rated supply for VAT purposes.

The question for the FTT to determine was whether there was a principal element (i.e. the supply of the hot food) with an ancillary supply (of the dip pots), that is, the ancillary element was not an end in itself, but was a means of better enjoying the principal element. In the FTT's view, the key question was whether, objectively, a typical customer purchasing a meal deal which included a dip pot was doing so in order to obtain the dip pot as a separate item, or whether such a customer would consider the dip pot simply as a means of better enjoying the hot food included in the meal deal. The FTT noted that this question was "highly fact sensitive" and that it was therefore necessary to consider all relevant circumstances in coming to a decision.

Whilst the FTT accepted that KFC's dips were popular and that some customers purchased the dips on their own to consume with other food, they noted that the scale of this was relatively limited. The FTT considered it to be fanciful to suggest that the typical purchaser of a meal deal would purchase a meal deal in order to get the dip to use for something else - a customer who wanted to do that would simply purchase the dip separately. The overwhelming likelihood must therefore be that the typical consumer of a meal deal which includes a dip pot considers the dip pot simply as an accompaniment to the hot food and therefore as a means of better enjoying the hot food. Further, there was no evidence that a dip is typically eaten on its own unlike, for example, coleslaw or a cookie. It was therefore difficult to see how the dip pot could be characterised as an aim in itself, when purchased as part of a meal deal. 

In light of all of the above, the FTT concluded that the supply of a dip pot as part of a meal deal is not, for the typical consumer, an aim in itself but is a means of better enjoying the hot food which is included as part of the meal deal. The FTT commented that it might be thought that this conclusion is further supported by the use of the term 'dip pot'; the typical consumer would conclude that the intention is for the hot food to be dipped into the dip pot to make it more enjoyable. The FTT therefore dismissed Queenscourt's appeal and confirmed that dip pots supplied as part of a takeaway meal deal are part of a single standard-rated supply of hot food as opposed to a separate zero rated supply for VAT purposes.

Why it matters: As this appeal was designated as a lead appeal under Rule 18 of the Tribunal Rules, it will also impact the other 17 related cases which were stayed pending its determination. The total amount at stake in all of the appeals is just under £3m although the outcome of Queenscourt’s appeal will also have a significant impact on future VAT liabilities for all of the appellants and, no doubt, for other taxpayers who find themselves in a similar position.

The decision can be viewed here.