V@ update – May 2024

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

News

1. HMRC have published further guidelines for compliance in relation to dual representation contracts for football players. They focus on the employer duties and VAT aspects of agents' fees and dual contract representation. 
2. HMRC have published Revenue & Customs Brief 7 of 2024 explaining the VAT treatment of voluntary carbon credits from 1 September 2024.
3. HMRC have updated their VAT Assessments and Error Correction manual to incorporate changes based on the Making Tax Digital project.

Case reports

HMRC v Hotel La Tour Ltd [2024] EWCA Civ 564 – VAT on professional fees incurred in connection with share sale not deductible.

The Court of Appeal (CA) has overturned the decision of the Upper Tribunal (UT) in relation to the deductibility of VAT on professional fees incurred in connection with share sales.

Hotel La Tour Ltd (HLT) was a holding company which owned the entire share capital of Hotel La Tour Birmingham Ltd (HLTB). HLTB owned and operated a luxury hotel in Birmingham and HLT provided management services and key personnel. Both companies were members of the same VAT group of which HLT was the representative member.

In 2015, HLT decided to construct a new hotel in Milton Keynes which was anticipated to cost £34.5 million. To finance this development, HLT decided to sell HLTB and borrow the balance from the bank. HLT received a net amount of £16 million from the sale of the shares in HLTB.

HLT engaged various advisers to provide professional services to assist in the sale of HLTB, including market research, buyer shortlisting, financial modelling and tax compliance. HLT incurred £382,899.51, plus VAT of £76,822.95, in professional fees.

The entirety of the £16 million from the sale of shares was used towards the development of the Milton Keynes hotel.

On 2 November 2017, HLT filed its VAT return and sought recovery of the input VAT incurred on the professional fees. By a decision letter dated 26 June 2018, HMRC disallowed the input tax in respect of the professional services. Although initially on different grounds, HMRC ultimately disallowed the input tax on the basis that the fees were incurred pursuant to making an exempt supply (sale of the shares in HLTB), rather than in making taxable supplies, and therefore input tax could not be recovered.

HLT appealed to the First-tier Tribunal (FTT), which allowed its appeal on the basis that there was a direct and immediate link between the professional services and HLT's downstream taxable general economic activities. Accordingly, 'the chain' had not been broken by the sale of the shares in HLTB and input tax could be recovered.

Further, the FTT considered that the relevant consideration in fund-raising cases was whether the cost of the services was incorporated into the price of the share transaction, or the downstream transactions. In this case, the cost was paid for out of the proceeds of the sale and therefore reduced the amount available for the taxable transactions and so was a cost of those transactions.

HMRC appealed to the UT, which dismissed the appeal and reaffirmed that input tax was recoverable in these circumstances. In particular, the UT considered Kretztechnik C-465/03, in which the CJEU confirmed that it was possible to recover input tax as a general overhead in circumstances where that input tax had been incurred in relation to a transaction which was outside the scope of VAT. The CJEU applied the principle of fiscal neutrality to conclude that if a taxpayer was able to deduct input tax in relation to transactions which are outside the scope of VAT (such as share issues) they should also be able to deduct input tax in relation to exempt supplies (such as share sales).

HMRC appealed to the CA.  The CA considered that CJEU case law confirmed that inputs could, in theory at least, be attributed to overheads if  there was no direct and immediate link established by way of direct attribution to a share sale.  It further held that there should be no assumption that inputs incurred in the context of a share sale were necessarily directly attributable to it (so as to be irrecoverable); it was possible that they may bear a direct and immediate link with a taxpayer's economic activity as a whole, so as to be treated as overheads and therefore recovered in proportion to taxable outputs.  The CA also considered that the right of deduction did not depend on where costs were incorporated in the price of outputs.  In light of this, the CA considered that the UT had failed to apply the 'direct and immediate link' test and had erred in disregarding the existence of an exempt share sale in coming to its conclusion.  The CA was also of the view that the UT had been wrong to be 'distracted' into an analysis of where costs were incorporated in coming to its decision.

Why it matters: This decision will provide an element of certainty for businesses who incur VAT on costs pursuant to the sale of shares in similar circumstances, albeit not in the direction that businesses who have incurred such VAT may have hoped.   

The judgment can be viewed here.

V-COM (Worldwide) Ltd v HMRC [2024] UKFTT 368 – Application to strike out appeal dismissed

The FTT has dismissed an application by HMRC to strike out an appeal.

The predecessor company to the Appellant (together with the Appellant, V-Com) wished to start trading in mobile phones in 2010, as at that time Apple had launched the iPhone 4, which was in high demand.  V-Com made purchases of the phones (initially in small quantities) from Apple stores via its employees, who paid in cash (from a petrol station business also carried on by V-Com) or by Apple gift cards.  In December 2010, V-Com spent £374,250 in purchasing iPhones in this indirect manner using cash, and a further £3,030,926 using Apple gift cards.

V-Com claimed input VAT in the sum of £3,428,430, which was said to have been incurred by it in purchasing the iPhones.  HMRC refused the bulk of the claim on the basis that there was no evidence that the iPhones in question had been purchased by V-Com or its employees. The Appellant had failed to provide valid VAT invoices or sufficient alternative evidence.  It emerged that many of the iPhones had been purchased by family or friends of V-Com's directors.  V-Com appealed against the denial of the bulk of the input tax.  HMRC applied to the FTT to have the appeal struck out on the basis that it stood no reasonable prospect of success.

The FTT dismissed HMRC's strike out application.  In its view, the strike out application did not concern a short point of law and the question whether sufficient evidence had been provided to evidence the supplies required the determination of substantial issues and evidence.  There was clear evidence differentiating V-Com's position from that in Scandico Ltd v HMRC [2017] UKUT 0467 (TCC) where there was no audit trail confirming how the goods in question had been purchased.  In addition, the Appellant was not required to show a strong case at this stage in the proceedings, and HMRC had not established that the Appellant stood no reasonable prospect of success.

Why it matters: This decision provides an interesting discussion of the criteria which will be considered by the FTT when determining a strike out application by HMRC.    

The decision can be viewed here.

Qubic Advisory Services Ltd v HMRC [2024] UKUT 106 (TCC) – Appeal against penalties imposed for breach of invoicing and record-keeping requirements allowed.

The UT has allowed an appeal against penalties imposed by HMRC for breaching invoicing and record-keeping requirements.

Qubic Advisory Services Ltd (QASL) had been assessed for penalties amounting to £14,821,830, under section 69A, Value Added Tax Act 1994 (VATA), in respect of what HMRC considered to be a breach of regulation 31A(1), Value Added Tax Regulations 1995 (VAT Regulations), which requires taxable persons making specified supplies of investment gold to issue invoices and keep records containing certain details specified in Notice 701/21 'Gold Imports and Exports' (Notice 701/21). 

QASL appealed against the penalties to the FTT.  The FTT directed that the question whether the record-keeping requirements, set out in paragraphs 6.4 and 7.1 of Notice 701/21, applied to QASL in respect of the transactions for which HMRC had issued penalties, be heard as a preliminary issue.  QASL submitted that the requirements did not apply, since the relevant investment gold was never 'delivered or otherwise made available' to its customer, or 'delivered or available to be taken away' by its customers, as required by paragraphs 6.1 and 7.1 of Notice 701/21, respectively.  HMRC contended that a right of possession (whether as a matter of fact or as a matter of law) was sufficient for these conditions to be met.  The FTT dismissed QASL's appeal against penalties, and QASL appealed to the UT. 

The UT noted that QASL operated an account with BullionVault, a member of the London Bullion Market Association.  Under the terms of that account, ownership of bullion did not relate to a specific bar or bars but to a specified quantity of bullion in a specific vault.  The UT considered that QASL's customer had no right to seek or take possession of the gold.  Since none of the gold had ever been delivered to any of QASL's customers, the result was that the relevant criteria set out in Notice 701/21 were not met and accordingly QASL had not been required to meet the invoicing and record-keeping requirements set out in regulation 31A(1), VAT Regulations.  The UT therefore held that there were no grounds for the imposition of penalties and accordingly allowed the appeal.

Why it matters: This decision provides useful commentary on the limits of the record-keeping and invoicing requirements set out in the VAT Regulations.

The decision can be viewed here.