V@ update - May 2022

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

Thank you for continuing to subscribe to V@. In our last edition, we announced that all your tax-related updates will soon be found on our new website, Tax Take+. The site will host practical guidance to help you navigate everything from the Tax Tribunals system to HMRC 'dawn raids'. You will also find important filing dates and the latest news on all things tax-related.

News

• HMRC has published Revenue and Customs brief 8 (2022): Single DIY Claim — First-tier Tribunal Andrew Ellis and Jane Bromley. This brief clarifies HMRC’s position on making a claim under the DIY Housebuilders Scheme (the Scheme), following the decision of the First-tier Tribunal (FTT) in Andrew Ellis and Jane Bromley v HMRC [2021] UKFTT 0343 (TC). We reported on this case in the November 2021 edition of V@. Under the Scheme, housebuilders can submit a single claim within 3 months of completion. HMRC's position is that only a single claim is allowed under the Scheme. 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 3 months of completion.
• HMRC has added a new page to its VAT Welfare manual: VATWELF3031 - Welfare services: Conditions for Exemption: Charitable Trust Running a Residential Assessment Centre for Assessing Parenting Capabilities. The page sets out HMRC's summary of the decision of the Upper Tribunal in The Lilias Graham Trust v HMRC [2021] UKUT 36 (TCC). We reported on this case in the April 2021 edition of V@.
• HMRC has published guidance on Compliance checks: penalties for transactions connected with VAT fraud — CC/FS42. This guidance informs businesses about the penalties HMRC may charge if the business knew, or should have known, that it participated in one or more transactions connected with a VAT fraud by a defaulting trader (i.e. a business, often known as a “missing trader”, that has fraudulently failed to correctly account for VAT that it has charged on its supplies to customers). The penalties apply to businesses that facilitate missing trader fraud, such as missing trader intra-community fraud.

Case reports

WTGIL – provision of telematics devices by insurance intermediary was not a supply for VAT purposes

In WTGIL Ltd v HMRC [2022] UKFTT 00131 (TC), WTGIL Ltd, formerly called Ingenie Ltd (Ingenie) was the representative member of the Ingenie VAT group, which also contained WTGISL Ltd, formerly called Ingenie Services Ltd (ISL). The appeal concerned the VAT treatment of supplies made by ISL which were deemed, by section 43(1), Value Added Tax Act 1994, to be made by Ingenie.

ISL was an insurance intermediary which developed, marketed and sold telematics car insurance (also known as black box insurance). Ingenie and ISL were not insurers and the policies were underwritten by insurers from a panel appointed by ISL. As a condition of the insurance, a telematics device (the device) had to be fitted to the policyholder’s car within ten days of the commencement of the policy. ISL agreed to provide the device and fit it, or arrange for it to be fitted.

Ingenie made a claim to HMRC for a refund of input tax incurred in relation to the provision and fitting of devices. The claim was based on the view that the provision and fitting of devices were taxable supplies made by ISL to the policyholders, whether or not for consideration, and the input tax was attributable to such supplies.

HMRC rejected Ingenie's claim, on the basis that there was no contract under which ISL supplied the device to the policyholders for consideration. HMRC took the view that the only consideration for ISL’s supplies of providing and fitting the device and any subsequent data analysis was the commission paid to ISL by the insurer, which was consideration for an exempt supply of insurance intermediary services. Accordingly, any input tax relating to the device was directly linked to an exempt supply by ISL and not deductible. HMRC also considered that charges in relation to the fitting of a new device when the policyholders changed their car were either additional premium charged by the insurer, or consideration for an exempt supply by ISL.

Ingenie appealed to the FTT, on the ground that the VAT incurred on the cost of purchasing and fitting the devices was recoverable in full because it was directly attributable to taxable supplies made by ISL. Ingenie’s primary case was that there was a legal relationship between ISL and the policyholder, under which ISL supplied and fitted the devices which collected data which ISL provided to the policyholder and the insurer in return for non-monetary consideration provided by the policyholder, namely, entering into the contract of insurance with the insurer. HMRC's position was that ISL made a single, indivisible supply of insurance intermediary services to the insurer in return for the commission, or to the policyholder, or to both.

The FTT was of the view that there was a legal relationship between ISL and the policyholders but concluded that there was no supply of the devices, or any services relating to the devices, by ISL to the policyholder for VAT purposes. In the absence of clear wording, the FTT did not consider that entering into the insurance policy and complying with its terms and conditions was consideration for a separate supply by ISL. The FTT found that the policyholders simply entered into the insurance contract on particular terms which included having a working device installed by ISL. There was no need for the policyholders to provide any further consideration other than paying the premiums under the policy, and they did not do so. The FTT also concluded that, in the absence of consideration, there was no deemed supply of the devices, because they were acquired and provided to the policyholders by ISL for the purposes of its own business.

The FTT therefore concluded that ISL did not make any supplies of the devices or related services in the relevant VAT periods and dismissed the appeal.

Why it matters: This case is an interesting example of the FTT having to carry out an in depth contractual analysis in order to ascertain the VAT status of supplies in ambiguous circumstances. Given the value of the dispute (the refund claim was for over £2 million), Ingenie may seek to appeal the decision.

The decision can be viewed here.

Hippodrome Casino – standard method override appropriate method for residual input tax recovery

In Hippodrome Casino Ltd v HMRC [2022] UKFTT 00110 (TC), the FTT considered the method for the recovery of residual input tax by Hippodrome Casino Ltd (HCL), which made taxable supplies of hospitality and entertainment and exempt gaming supplies from its premises (the Hippodrome in London’s Leicester Square).

HCL contended that the actual economic use of its overhead expenditure in making taxable and exempt supplies, based on a floor space apportionment, differed substantially from the attribution prescribed by the standard method under Regulation 101 of the Value Added Tax Regulations 1995 (the Regulations), which is based on turnover. As such, HCL submitted, it was required to carry out an a standard method override (SMO) calculation, in accordance with Regulation 107B of the Regulations. HMRC contended that HCL’s proposed floor space SMO calculation did not represent a more fair and reasonable proxy for HCL’s economic use of its overhead expenditure than that calculated under the standard method.

The FTT concluded that, given their extent and nature, the supplies of entertainment and hospitality from discrete and defined areas of the Hippodrome by HCL could not be regarded as merely an adjunct to, or an amenity for, gaming. The FTT also considered that the general space (corridors, lavatories, staircases, lifts, walkways and so on), was used to serve the building as a whole and that it followed that it was appropriate to consider its use in the same way. The FTT took account of the fact that gaming generates higher turnover per square foot than hospitality. The FTT therefore found that the floor space method, as set out in HCL’s SMO calculation, did provide a more fair, reasonable and precise proxy of its economic use of its overhead expenditure than the turnover based standard method, particularly given that most of those overheads were property related. Accordingly, HCL’s appeal succeeded on this issue.

The other issue between the parties related to the Capital Goods Scheme (CGS). The first aspect of this issue concerned whether HCL’s SMO calculation was to be preferred to the standard method in the determination of the capital goods in question. The FTT concluded that it was to be preferred. The second aspect of the CGS issue concerned how the use of the Hippodrome for the purposes of business entertainment (the provision of complimentary food and drink) should be dealt with under the CGS. However, this only applied in relation to the standard method. HMRC accepted that it did not arise if the FTT was to find in favour of HCL, as it did, because the SMO took into account business entertainment and identified the entitlement to deduction in respect of capital goods for subsequent intervals. As such the CGS issue did not arise for determination.

The FTT therefore allowed the appeals.

Why it matters: This decision explains the circumstances in which it may be appropriate to apply a standard method override in accordance with Regulation 107B of the Regulations. The decision will be of particular interest to businesses which make supplies of hospitality, entertainment and gaming from the same premises.

The decision can be viewed here.

Grantham Ceilings & Interiors – no input tax recovery where claims were made dishonestly

In Grantham Ceilings & Interiors Ltd v HMRC [2022] UKFTT 99 (TC), Grantham Ceilings & Interiors Ltd (GC) appealed against HMRC's decision to refuse GC's claim to deduct input tax on supplies received from an associated company, Grantham Holdings Ltd (Holdings).

GC was a company which supplied building and construction services. Holdings had been set up for non-tax reasons to ring fence contracts with employees and subcontractors. Holdings charged GC a management fee for the provision of its services. That supply was taxable for VAT purposes at the standard rate. Holdings never accounted to HMRC for the output tax due from it, but GC claimed the VAT due on those supplies in its returns. After less than a year of operation, Holdings was placed into liquidation.

HMRC's decision to refuse GC's claim for deduction of input tax was made on the basis that either: (1) GC had exercised the right to deduct for fraudulent or abusive ends (S Fini H v Skatteministeriet (C-32/03)); or (2) transactions were connected with the fraudulent evasion of VAT and GC knew or should have known that this was the case (Axel Kittel v Belgian State; Belgian State v Recolta Recycling SPRL (C-439/04 and C-440/04)). HMRC claimed that the common directors of GC and Holdings would have known that Holdings would not account for the output tax due in relation to transactions between the companies. The case therefore concerned whether, and if so at what point, GC’s behaviour in the context of the transactions and/or the claims made in its VAT returns, was dishonest.

GC appealed on the following grounds:

1. Holdings was established in order to manage and implement a new payment bonus scheme. There was no intention to use the company for fraud or abusive ends;
2. where GC had not paid Holdings in full, the bad debt relief provisions of the Regulations were applied and the liquidator of Holdings was pursuing GC for settlement of the outstanding amounts as a debtor;
3. at the time of the supplies made by Holdings to GC it was not known that, due to a serious problem with the contracts being undertaken by GC, substantial cash flow issues would occur. Therefore GC could not know, or have reasonably known, that the commercial issues of one contract would cause the liquidation of Holdings. The facts did not involve fraud but unfortunate commercial pressures; and
4. HMRC had to prove dishonesty to a high degree of probability.

The FTT concluded that (1) submission of the relevant VAT returns of GC was done knowing that Holdings would not pay its VAT liabilities; and (2) GC's claims for input tax made in respect of the relevant periods were made dishonestly. The FTT accepted there was no co-ordinated plan to avoid VAT. However, the FTT found that making the GC reclaims for VAT which had not been paid to Holdings and which GC knew Holdings would be unable to pay to HMRC, given deep-rooted financial problems, was dishonest, applying the approach required by Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 (that what a person knows or believes must be judged by reference to the principles of the ordinary, decent person).

The FTT therefore dismissed the appeal.

Why it matters: This decision provides an interesting discussion of the case law principles in relation to the denial of input tax recovery on the basis of dishonesty.

The decision can be viewed here.