V@ update - November 2022

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

News

• The Chancellor of the Exchequer has confirmed that the VAT registration and deregistration thresholds will remain unchanged for a further two years (i.e. until at least 31 March 2026), a decision that is projected to increase the UK's tax take by £420m p.a. by 2027/28.
• Penalties are now in force (as of 1 November 2022) for businesses failing to use Making Tax Digital compatible software to submit quarterly or monthly VAT returns. Businesses filing annual returns may still use the old online VAT account system until May of next year. For more information, please see here.
• HMRC has launched a new form for taxpayers claiming VAT repayments to provide details and documents in support of their repayment claim. A significant array of information is required.
• Following the increase in the Bank of England's base rate, HMRC has increased its payment and repayment interest rates. The rate for late payment of VAT has increased to 5.5% from 22 November 2022, and the rate of interest paid by HMRC on overpayments has increased to 2% from the same date.

Case reports

Northumbria Healthcare NHS Foundation Trust v HMRC [2022] UKUT 267

Whether person taxable – public authority required to charge VAT on car parking

The Upper Tribunal (UT) has held that an NHS trust that provided car parking services (the Trust) was acting as a taxable person and was therefore required to charge VAT on those car parking services.

The Trust's principal purpose was to provide goods and services for the purposes of the health service in England. It was a public authority for the purposes of section 41A, Value Added Tax Act 1994 (VATA). The Trust was also permitted under its constitution to carry on activities for the purpose of generating additional income in order to better carry on its principal purpose.

Section 41A, VATA, applies to supplies made "in the course of activities or transactions in which … [a public authority] is engaged as a public authority". It sets out a list of supplies by public authorities that are automatically subject to VAT (none of which was in issue), and also provides that if a supply made by a public authority "is not in respect of … an activity [set out in the list], it is to be treated for the purposes of this Act as a supply in the course or furtherance of a business if (and only if) not charging VAT on the supply would lead to a significant distortion of competition".

The Trust had appealed to the First-tier Tribunal (FTT) on the following three grounds:

(1) that it should not be regarded as a taxable person pursuant to section 41A ,VATA (and article 13(1) Principal VAT Directive (PVD)), in relation to the supply of parking services;

(2) that if it was a taxable person, then its supply of car parking was closely related to the supply of hospital and medical care and therefore exempt under Article 132(1)(b), PVD and Item 4, Group 7, Schedule 9, VATA; and

(3) that its supply of car parking services did not constitute an economic activity and therefore was outside the scope of VAT.

The FTT dismissed the Trust's appeal on all grounds and only the first ground was pursued on appeal to the UT.

The UT noted that in order to determine whether the Trust was supplying car parking services in its capacity "as a public authority", it was necessary to determine whether the activity was carried out under a "special legal regime". In the view of the UT, it was necessary to ask whether the pursuit of the activity involved the use of public powers, or whether it was "closely linked to the exercise of rights and powers of public authority". It was not enough for a body governed by public law simply to be acting in accordance with powers given to it by statute.

The UT held that the Trust was not acting in accordance with a special legal regime. The UT further held that even though, on the evidence, car parking prices would not necessarily reduce if VAT were not charged, there would still be a distortion of competition sufficient to engage section 41A(3), VATA (i.e. for the supplies to be treated as supplies in the course of a business). In the view of the UT, the question to be asked was "whether the different treatment of the activity for VAT purposes would lead to a significant distortion of competition, including a distortion of potential competition provided that there is a real and not hypothetical possibility of market entry by a private operator" and where two similar supplies meeting the same needs were treated differently for the purposes of VAT there would generally be a distortion of competition.

The UT therefore agreed with the FTT and dismissed the appeal.
Why it matters:

This decision provides useful commentary on the question of whether there has been a distortion of competition which is key to achieving the fiscal neutrality that is a hallmark of the VAT system.

The decision can be viewed here.

HUMDA Magyar Autó-Motorsport Fejlesztési Ügynökség Zrt. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (C-397/21)

Refund of VAT paid in error – tax authorities required to refund VAT paid in error where impossible to recover from issuer of invoice

The Court of Justice of the European Union (CJEU) has held that national tax authorities are obliged to refund VAT paid in error to either the recipient or issuer of a relevant invoice, and that invoice recipients can claim back VAT from national authorities in cases where it is impossible, or excessively difficult, to recover the amount from the issuer of the invoice.

The Hungarian Motorsport and Green Mobility Development Agency (HUMDA) had appealed against a decision to deny recovery of overpaid VAT.

In 2015, HUMDA's predecessor company was involved in the construction of Hungary's national pavilion at that year's World Expo, hosted in Milan. In constructing the pavilion, HUMDA recruited the assistance of Bíró Hűtéstechnikai és Acélszerkezetgyártó Ipari Kft (BHA). BHA issued nine invoices to HUMDA's predecessor, all of which were paid by HUMDA's predecessor. BHA then paid VAT on those invoices to the Hungarian tax authorities.

Following an investigation, it was determined that as the construction of the pavilion had taken place in Italy and not in Hungary, VAT was not payable on the invoices. HUMDA therefore brought an action before the Hungarian courts to recover the amount of VAT paid together with interest, which was around €‎320,000. While the standard practice would have been to recover the VAT directly from the supplier itself, in this case BHA was the subject of liquidation proceedings and BHA's liquidator argued that the claim was irrecoverable.

The Hungarian court referred three specific questions on the VAT directive to the CJEU. These questions concerned whether:

(1) national authorities were obliged under the PVD to refund VAT erroneously paid to either the issuer or the recipient of a relevant invoice;

(2) invoice recipients could claim back erroneously paid VAT directly from national tax authorities only if it was impossible, or excessively difficult, to do so another way under civil law; and

(3) national authorities in such cases were obliged to pay interest on the relevant VAT refund.

The CJEU found in favour of HUMDA on the first and second questions, concluding that a refund of unduly paid tax could be claimed back from the national tax authorities in cases where it is impossible, or excessively difficult, to recover the amount from the issuer of the invoice. The CJEU also concluded that interest would be payable on the amount in such cases.

Why It matters:

The CJEU's judgment was consistent with that in Reemtsma Cigarettenfabriken (C-35/05) in holding that member states should provide a mechanism for adjusting any tax that has been incorrectly invoiced in circumstances where the person who issued the invoice acted in good faith. The Reemtsma principles have been followed in a number of UK tax tribunal decisions and so this provides helpful guidance on those principles (even if the decision is no longer binding on UK courts following the European Union (Withdrawal Agreement) Act 2020).

The decision can be viewed here.

HMRC v NHS Lothian Health Board [2022] UKSC 28

Input tax recovery – scope of evidence required

The Supreme Court has allowed HMRC's appeal disallowing a taxpayer's claim for input tax as the taxpayer had not provided sufficient evidence to support the amount of VAT claimed.

The Supreme Court has allowed HMRC's appeal against a decision by the First Division of the Inner House of the Court of Session (CSIH) in favour of NHS Lothian Health Board (NHS Lothian) and its claims for input tax, following decisions by the FTT and UT in favour of HMRC, as NHS Lothian had not provided sufficient evidence to support the amount of VAT claimed.

NHS Lothian is one of a number of Scottish NHS Boards which, in March 2009, pursuant to section 121, Finance Act 2008, submitted late claims to HMRC seeking to recover input VAT that they paid many years previously when purchasing goods and services. The late claims related to the periods from 1 April 1974 to 30 April 1997 and totalled over £7 million.

HMRC rejected NHS Lothian's claim for various reasons, including that the claim used a percentage to calculate the recoverable input tax but that the method used to apportion general expenditure between business and non-business expenditure had not been explained. In addition, NHS Lothian had not shown that the input tax claimed had not already been recovered by it previously and had not explained why the annual input tax claimed for some of the earlier years was more than four times higher than the input tax being claimed in the then current year.

Following rejection of NHS Lothian's claim by HMRC, it appealed to the FTT. The FTT dismissed the appeal, holding that HMRC was entitled to conclude that NHS Lothian had failed to establish how much input tax it was entitled to recover. That decision was upheld by the UT. On further appeal, the CSIH overturned the decisions of the FTT and the UT and remitted the case to be heard by a differently-constituted FTT. HMRC then appealed to the Supreme Court.

The Supreme Court allowed HMRC's appeal, stating that there was no error of law in the FTT's decision, as upheld by the UT. The Supreme Court commented that the FTT was entitled "… to conclude that it is not enough for a taxpayer to show that it has engaged in business activity and has bought supplies for which it was charged VAT. The taxpayer must present either the specified documents showing the amount of input tax incurred or devise a credible alternative method by which that amount can be estimated by HMRC with reasonable certainty that the amount now being claimed was at least close to the amount that had in fact been incurred". The Supreme Court also considered the EU principle of effectiveness and concluded that "there was nothing in the approach of HMRC or the reasoning of the FTT that made NHS Lothian’s claim for historic input tax virtually impossible or excessively difficult, and so nothing that infringed the principle of effectiveness".

Why it matters:

This decision will have a direct impact on the many similar existing claims by other NHS Health Boards and NHS Trusts that are currently pending before the FTT, with a combined value of over £38 million. Although the 31 March 2009 deadline for submitting these claims for input tax has passed, the decision helpfully highlights the evidence that is required to support input tax claims more generally as well as demonstrating the importance of having an appropriate document retention policy.

The decision can be viewed here.