V@ update - October 2024

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

News

• The Budget was light on measures affecting VAT.  The highest-profile VAT measure, already much-discussed, was the imposition of VAT on private school fees with effect from January 2025.

• There was also confirmation that the government is considering the responses it has received to the recent consultation on the VAT treatment of private hire vehicle services and the Court of Appeal decision in D.E.L.T.A. Merseyside Limited.

• HMRC has published Guidance to education providers in light of the upcoming implementation of VAT on private school fees.

Case reports

Brian Lawton v HMRC [2024] UKFTT 892 (TC)

Brian Lawton appealed against HMRC’s refusal to refund VAT on his second claim under the VAT Refund Scheme for DIY Housebuilders (the DIY Scheme) for a refund of VAT in respect of projects involving the conversion of a barn into a dwelling and subsequent extensions.

Mr Lawton’s initial planning application had been approved in June 2010 but, due to disruptions caused by the Covid-19 pandemic, he faced significant delays and increased costs. Despite these challenges, he completed part of the project, receiving a completion certificate on 24 March 2021. He claimed a refund of VAT in June 2021, which HMRC granted.

In November 2021, Mr Lawton submitted a second planning application for a larger extension, which was approved and completed by 10 October 2022. He then made a second VAT refund claim under the DIY Scheme in October 2022, which HMRC refused, stating that the claim related to an extension and was therefore ineligible under section 35, Value Added Tax Act 1994 (VATA 1994).  Mr Lawton appealed to the First-tier Tribunal (FTT).

Before the FTT Mr Lawton contended that he was entitled to make two separate claims due to the distinct nature of the projects, arguing that his first claim had been erroneous since the barn conversion was uninhabitable. 

In the view of the FTT, HMRC had acted correctly. It held that only one claim was allowed under the DIY Scheme unless an error in the initial claim had been proven, which was not the case here. The FTT emphasised that completion for VAT purposes must align with original planning permissions and confirmed HMRC's position that extensions to existing dwellings do not qualify for VAT refunds under the DIY Scheme. Accordingly, the appeal was dismissed.

Why it matters: This decision illustrates the practical limitations of the DIY Scheme and the importance of considering the full extent of intended works when preparing an application under it.

The decision can be viewed here.

Microring Ltd v HMRC [2024] UKFTT 874 (TC)

Microring Ltd (Micro) operated a high-street jeweller that had begun dealing in large amounts of silver, despite having no prior experience in this market. The company made ten purchases of silver, reselling it immediately at a 1% margin in back-to-back transactions. These deals were structured such that Micro only paid the supplier after receiving payment from its buyer, and thereby taking no financial risk. Micro performed minimal checks on its trading partners, despite having been warned by HMRC about VAT fraud risks in the scrap metal industry.  Micro claimed input tax of £310,184 in relation to purchases of silver that (it transpired) were part of transactions connected to Missing Trader Intra-Community (MTIC) fraud.  HMRC refused Micro's claims on the basis that it knew, or should have known, that the transactions were connected with the fraudulent evasion of VAT.  Micro appealed to the FTT.

In determining the appeal, the FTT was required to consider the Kittel principle, derived from EU case law, which states that businesses cannot claim VAT input tax if they knew, or should have known, their transactions were connected to VAT fraud. It was for the FTT to determine, on the facts, whether Micro had the requisite knowledge or ought to have suspected the connection to MTIC fraud.

In dismissing the appeal the FTT considered that: 

1. Micro conducted only superficial checks on its suppliers, such as verifying VAT numbers and basic company information. It failed to conduct meaningful due diligence, particularly in an industry known to be vulnerable to fraud. HMRC had previously informed Micro about the risks of VAT fraud in the market, including providing its directors with a copy of Notice 726, which explains joint and several liability for unpaid VAT.
2. Micro’s transactions were not commercially justifiable. The company earned a 1% margin for acting as an intermediary in deals where it did not take possession of the goods, did not arrange transportation, and did not incur any risks. In the view of the FTT this “money for nothing” arrangement strongly indicated a connection to fraudulent activity.
3. Although there was no direct evidence that Micro knew about the fraudulent nature of the transactions, the FTT was of the view that, in the circumstances, given the warnings from HMRC and the uncommercial aspects of the transactions, the company should have realised that the only reasonable explanation for the arrangement was VAT fraud.
4. Micro’s involvement in these transactions was not connected to its usual legitimate business and that it had chosen to overlook obvious red flags.

Why it matters: This decision emphasises the importance of businesses conducting thorough due diligence when engaging in high-value transactions, particularly in sectors which are known for MTIC fraud. The FTT reaffirmed the principle that businesses cannot claim ignorance if they fail to take reasonable steps to ensure their transactions are legitimate.  This decision also highlights how important it is for businesses to protect themselves from being caught up in VAT fraud by performing proper checks on their suppliers and customers.

The decision can be viewed here.

Sandra Krywald v HMRC [2024] UKFTT 895 (TC)

Sandra Krywald was a solicitor who was unable to submit her VAT returns on time due to issues with her bookkeeping service during and after the COVID-19 pandemic. Initially relying on a remote bookkeeper who provided inaccurate figures, she faced further delays when the bookkeeping firm failed to rectify the issues and ultimately resigned. These challenges were compounded by incorrect advice received from HMRC, which led her to believe that opening and closing balances were required to submit VAT returns.

Ms Krywald continued to make monthly VAT payments on account and to communicate with HMRC.  However, she was assessed for late submission and payment penalties under the points-based system, introduced by Finance Act 2021, in respect of the periods ended May 2023, August 2023 and November 2023.  She appealed to the FTT.

The FTT considered that although reliance on another party (the bookkeeper) did not generally constitute a "reasonable excuse" (such as to excuse a taxpayer from penalties) Ms Krywald had taken reasonable care to avoid these failures by actively seeking to correct the mistakes. Additionally, HMRC’s incorrect advice contributed to the delays.  Once she had received accurate advice from a VAT specialist in early 2024, she promptly engaged a new bookkeeping service, which enabled her to submit the required returns by mid-2024.

Whether or not there was a reasonable excuse was an objective test and in the view of the FTT Ms Krywald had a reasonable excuse for the late submissions due to the combined challenges of unreliable bookkeeping and HMRC’s incorrect guidance. This excuse subsisted until she consulted a VAT expert who gave her correct information, whereupon she remedied the situation without unreasonable delay.  As a result, the appeal was allowed and the penalties were reduced to zero, with the FTT also noting that the special circumstances would have justified a reduction of penalties even if there had not been a reasonable excuse.

Why it matters: Although each case will be fact dependant, this decision helpfully clarifies the conditions under which a taxpayer can claim a reasonable excuse for late submissions. It is difficult not to detect a significant note of sympathy from the FTT towards Ms Krywald whose difficulties were largely caused by having been given incorrect information by HMRC. 

The decision can be viewed here.