V@ update - September 2023

Welcome to the September 2023 edition of RPC's V@, an update which provides analysis and news from the VAT world relevant to your business.

Announcing our new weekly update – Tax Take +

Please note that from next month, our VAT update will be replaced by RPC's brand new weekly update, Tax Take +, containing all the latest developments in the tax and regulatory world including key upcoming dates, news, blogs, guidance notes and our latest podcasts and webinars, all designed to keep you up to date with fast moving developments in the tax and regulatory world. We hope you enjoy the new format. Please do reach out to the RPC Tax Team if you have any queries.

News

• HMRC has published a new section in its VAT Partial Exemption manual relating to private equity and venture capital.  It confirms HMRC's view of the VAT treatment of supplies including receipt of a priority profit share by a general partner (not consideration for a supply for VAT purposes) and management services provided by private equity houses (business activities subject to VAT).
• The final version of the Border Target Operating Model, relevant for all who import food, animals, animal products, plants or plant products into the UK, has been produced.  It sets out a new approach to importing goods, to be introduced progressively from January 2024.
• HMRC has published a policy paper announcing that VAT zero rating for drugs, medicines and aids for disabled people is to be extended (temporarily) from 9 October 2023 until 31 March 2027, to include the supply of certain drugs and medicines to an individual for personal use.

Case reports

Impact Contracting Solutions Ltd v HMRC [2023] UKUT 215 (TCC)

Deregistration – VAT registration of party who facilitated fraud can be cancelled

The appellant (ICSL) operated in the labour provision market.  It made supplies to temporary work agencies, and its suppliers were around 3,000 mini-umbrella companies which supplied labour.  In September 2019, HMRC decided to cancel ICSL's VAT registration with immediate effect, on the basis that ICSL was registered for VAT principally, or solely, to facilitate VAT fraud.  It also denied ICSL various input tax credits.

ICSL appealed against the decision to cancel its VAT registration (and, separately, against the denial of input VAT credits).  The First-tier Tribunal (FTT) held that the facilitation of fraud (rather than actual involvement in its commission) was sufficient for HMRC to cancel the registration. However, the FTT considered that simple facilitation on its own did not suffice – it had to be shown that the facilitating party knew, or should have known, that it was facilitating another party's fraud. 

ICSL appealed to the Upper Tribunal (UT), arguing that: (1) the FTT had erred in law in finding that parties who had not themselves fraudulently evaded VAT could be deregistered under the Ablessio principle; (2) the FTT had erred in relying on pre-permission judicial review decisions (in  R (Thames Wines Ltd) v HMRC [2017] EWHC 452 (Admin) and R (Ingenious Construction Ltd) v HMRC [2020] EWHC 2255 (Admin)); (3) the FTT had erred in finding it proportionate for tax authorities to deregister a taxpayer on the basis that it knew, or should have known, that it was facilitating a fraud where the taxpayer had made and continued to make taxable supplies; and (4) reading an implicit power of deregistration in case of misuse was a contra legem interpretation of the domestic legislative scheme.  Grounds (3) and (4) had not been considered by the FTT.

The UT dismissed the appeal. It held that the EU abuse principle was a free-standing principle and did not require domestic legislation (or, therefore, a conforming interpretation of UK VAT legislation).  The contra legem principle was not therefore relevant.  The application of the Ablessio principle to an existing VAT-registered trader which also made 'untainted' supplies did not breach the EU principle of legal certainty. A taxpayer who knew, or should have known, that their transactions were connected with fraudulent VAT evasion could be certain that they would not be entitled to deduct input VAT, and the UT could see 'no principled reason' why the same should not be true in relation to the entitlement to registration.  In relation to grounds (1) and (2), the UT considered that there was nothing which suggested that the CJEU considered that registration could not, or should not, be refused to a facilitator of VAT fraud and indeed considered that the language used was suggestive of the broader construction proposed by HMRC and supported by the FTT.   

Why it matters: This decision provides some clarity in relation to the extent to which a party must be involved with, or aware of, a fraud in order to be de-registered for VAT.

The decision can be viewed here.

GB-Gadgets Ltd v HMRC [2023] UKFTT 726 (TC)

Penalties – director's personal circumstances did not constitute 'special circumstances' sufficient for the penalty to be relieved

HMRC imposed a failure to notify penalty on GB-Gadgets Ltd (GBG) under Schedule 41, Finance Act 2008, relating to VAT unpaid from the period 1 September 2013 to 31 March 2018.

GBG appealed to the FTT. Its sole ground of appeal was that the penalty should be reduced due to 'special circumstances'.

There was no dispute that GBG had failed to notify its liability to be registered for VAT, nor as to the amount of unpaid VAT.  GBG sought to adduce an additional ground of appeal at the hearing – that the VAT threshold had only been crossed in 2018 – but its application to do so was denied by the FTT, as there was no reason why it could not have been made at an earlier stage and there was no apparent evidence to support it.

The special circumstances relied upon by GBG were that it had opened its first bank account in September 2016, and that before this period the account was used by another individual and his company.  The company's ownership had changed at the end of 2017, and much of the period to which the penalty related was before the present director, Mr Hussain, had been involved with GBG.

GBG also noted that Mr Hussain had children who had been born in 2016 and 2021, and his wife had mental health problems diagnosed in 2021, as a result of which he had had to take on extra caring responsibilities.  GBG had also struggled during the Covid-19 pandemic.

The FTT accepted that the facts set out by GBG were true, but noted that since the penalty was imposed on the company (rather than on Mr Hussain as an individual) they had no bearing on it having failed to notify its liability to be registered for VAT, and none of the factors relied upon  by GBG constituted special circumstances that should have been taken into account by HMRC to reduce the penalty.  HMRC had considered whether there were any special circumstances that should operate to reduce the penalty and the FTT saw no reason to displace its determination.

Why it matters: This decision provides a reminder that 'special circumstances' can be narrowly construed for the purposes of penalty determinations. 

The decision can be viewed here.

All Answers Ltd v HMRC [2023] UKFTT 737 (TC)

Consideration for supply – substance over form doctrine followed

The appellant, All Answers Ltd (All Answers) operated a largely internet-based business.  In return for a payment to All Answers, customers could order academic work (such as essays or dissertations) which were then written by third-party writers who were not employed by All Answers.  All Answers and the third-party writers shared the fee paid by customers.  The UT had previously held that All Answers made a single standard-rated supply of the academic work to its customers, and should account for VAT to HMRC in respect of the full amount paid by the customer, on the basis that the core obligation (to the customer) to deliver the academic work was binding on All Answers only (and not the writer), although an obligation to pay the customer £5,000 in the event that plagiarism was detected in the work provided was binding on the writer.  It considered that All Answers acted as principal, rather than agent. 

Following the decision of the UT, All Answers provided HMRC with revised contracts pursuant to which it intended to make further supplies, and which it considered made it clear that it was acting as agent for the writers (and so should charge VAT only on the proportion of the consideration that it retained). HMRC did not accept that these amendments were effective, and assessed All Answers for VAT in respect of the whole amount of the consideration for the academic work. All Answers appealed to the FTT.

The FTT dismissed the appeals.  It considered that although the contractual framework had been amended, the substance of the update was to provide for the copyright in the academic work to remain with the writer.  This, in the view of the FTT, did not alter the fact that the 'core' obligation to the customers to deliver the product, in the specified timescale, and to the requisite standard, remained with All Answers (and not the writer).  The commercial and economic reality was therefore that All Answers made the supply and received the consideration and VAT was therefore due on the entirety of the consideration.

Why it matters: This decision illustrates the importance of the 'substance over form' approach often adopted by the tax tribunals and courts in tax matters in general and in particular in relation to VAT.

The decision can be viewed here.