V@ update - September 2022

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

News

• Speculation about a possible cut to VAT rates as part of the 'mini-budget' held on Friday 23 September has proved to be misplaced. However, the UK government has announced its intention to launch a 'modern, digital, VAT-free shopping scheme' for visitors to the UK, and to launch a consultation to gather views on the approach and design of the scheme which is to be launched 'as soon as possible'.
• The Supreme Court has granted permission to appeal the Court of Appeal's decision in Target Group Ltd v HMRC [2021] ECWA Civ 1043. The Court of Appeal had decided that loan servicing, when outsourced to a third party loan servicer after a loan has been made, is not exempt from VAT.
• HMRC has re-opened its VAT refund scheme for museums and galleries open to the public free of charge for 30 hours or more per week. Participants in the scheme are entitled to a refund of VAT incurred on goods and services purchased in order to provide free admission.
• HMRC has updated its guidance in relation to business activities carried out by not-for-profit entities in the wake of the decision in Towards Zero Foundation v HMRC [2022] UKFTT 226 (TC) (covered in our August 2022 V@ update)

Case reports

Star Services Oxford Ltd v HMRC [2022] UKFTT 291 (TC)

Appeal dismissed as no valid invoice or supply.

Mr Latifi, the sole proprietor of a property rental business, entered into a lease agreement with Oxford City Council (OCC) in 2013, in relation to premises which were used for a bed and breakfast business. The rent charged was subject to VAT at the standard rate. At the time, Mr Latifi was not VAT registered.

Later that year, Mr Latifi incorporated his business and Star Services Oxford Ltd (the Appellant) registered for VAT. The lease was not transferred into the name of the Appellant until 2018.

In 2019, the Appellant sublet rooms to two other businesses charging VAT on the rent to one but not the other as that rent was paid directly to Mr Latifi. The Appellant accounted for and claimed input VAT on the rent paid to OCC.

Following a compliance check, HMRC issued an information notice, pursuant to paragraph 1, Schedule 36, Finance Act 2008, to the Appellant and subsequently issued a decision to the Appellant for £26,250 for a three-year period between 2014 and 2017 for input tax overclaimed on rent for the premises on the basis that the lease, held by OCC, was with Mr Latifi and not the Appellant.

The Appellant requested an internal review of HMRC's decision, which was upheld, and subsequently appealed to the First-tier Tribunal (FTT).

In dismissing the Appellant's appeal, the FTT made the following observations:

• OCC leased the rental premises to Mr Latifi who then sublet the property to the Appellant (free of charge) and the two third-party lessees. The lease to the Appellant was an exempt supply as there was no option to tax in place during the relevant years in dispute.
• The Appellant had not met the requirements of section 24, Value Added Tax Act 1994 (VATA 1994) as it could not evidence that a supply had been made to it for consideration. As the legal relationship was between OCC and Mr Latifi, there could not have been any such supply between OCC and the Appellant.
• VAT cannot be recovered on invoices in the name of third parties and the Appellant did not hold a valid VAT invoice. The OCC invoices were issued to Mr Latifi and not the Appellant.

Why it matters: This decision serves as a reminder that in order for a VAT claim to be accepted by HMRC, the requirements referred to in section 24, VATA 1994, must be satisfied. In particular, taxpayers must be able to evidence that a supply has been made to them for consideration and that they hold a valid VAT invoice.

The decision can be viewed here.

Nottingham Forest Football Club Ltd v HMRC [2022] UKFTT 305 (TC)

Appeal dismissed as assessment raised in time.

Section 73(6), VATA 1994, requires that an assessment for VAT must be made after the later of: (a) two years after the end of the prescribed accounting period, and (b) one year after the evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge (the knowledge of the facts test).

On 16 April 2018, HMRC visited Nottingham Forest Football Club Ltd (the Appellant) to discuss how the business operated and its accounting systems. HMRC made a follow up visit on 20 April 2018, to examine invoices and download general ledger data. On 9 May 2018, HMRC obtained further information from the Appellant.

HMRC argued that it was only after obtaining this further information on 9 May 2018 that the knowledge of the facts test was satisfied. The Appellant argued that the knowledge of the facts test was satisfied following the 20 April 2018 visit.

On 29 April 2019, HMRC issued a VAT assessment to the Appellant. Following an unsuccessful internal review, the Appellant appealed to the FTT on the basis that the assessment was raised out of time as it had been raised over a year after the initial provision of information.

The burden of proof was on the Appellant to demonstrate that the assessment had been raised out of time (see Pegasus Birds v Customs and Excise Commissioners [1999] STC 95) and as the Appellant did not provide evidence to show that the initial information provided on 20 April 2018 was sufficient to satisfy the knowledge of the facts test, the time limit for raising the assessment expired on 9 May 2019. The assessment was therefore in time.

Why it matters: When seeking to show that a VAT assessment has been raised out of time, the burden of proof lies with the taxpayer. In the instant case, the judge commented that it was "conspicuous … that the [taxpayer] did not provide witness evidence to clarify the data that was in the possession of [HMRC]" and that instead the FTT had to rely on documentary evidence which it considered to be insufficient.

The decision can be viewed here.

E-zec Medical Transport Services Ltd v HMRC [2022] UKFTT 302 (TC)

Appeal allowed as non-emergency ambulance services qualify for zero-rating.

E-zec Medical Transport Services Ltd (E-zec) was a provider of non-emergency patient transport services (NEPTS). It transported, on behalf of various NHS trusts, patients to and from medical appointments. It operated a fleet of over 500 vehicles and employed a number of sub-contractors. Patients needing to book NEPTS would undertake an initial telephone assessment with E-zec to determine their eligibility and thereafter, if eligible, could book directly with E-zec. On a typical day, each of E-zec's vehicles would carry at least one wheelchair passenger, and on average approximately 40-50% of all those carried in the vehicle required a wheelchair, a bariatric wheelchair or a stretcher. The vehicles were generally configured with eight seats, and had an aluminium tracking system allowing for easy configuration and re-configuration of the seating to accommodate additional wheelchairs. In addition, they featured a wheelchair ramp and winch.

During the relevant periods, Item 4(a), Schedule 8, Group 8, VATA 1994, provided zero rating for supplies of "[t]ransport of passengers in any vehicle, ship or aircraft designed or adapted to carry not less than 10 passengers". Note 4D, Schedule 8, Group 8, VATA 1994, provided that Item 4(a) "includes the transport of passengers in a vehicle … which is designed, or substantially and permanently adapted, for the safe carriage of a person in a wheelchair or two or more such persons, and … which, if it were not so designed or adapted, would be capable of carrying no less than 10 persons".

The base state vehicle models used by E-zec generally had a maximum capacity of between 12-14 seats before wheelchair adaptations were made, but E-zec ordered the vehicles in an 8+2 configuration (i.e. 8 seats including the driver, plus 2 wheelchairs or a stretcher). However, if the wheelchair modifications in the vehicles were removed, the vehicles were capable of carrying 10 or more passengers. The FTT therefore concluded that the vehicles fell within the zero-rating provision of Note 4D and allowed the appeal.

Why it matters: It is surprising that HMRC adopted the position it did in this case, and the decision contains a certain amount of adverse comment from the FTT. It described HMRC's arguments as "uncommercial and frankly unrealistic", noting that the flexibility and adaptability that E-zec had designed into its vehicles was necessary to provide NEPTS.

The decision can be viewed here.