V@ update - April 2023
Welcome to the April 2023 edition of RPC's V@, an update which provides analysis and news from the VAT world relevant to your business.
- The government has published a draft of its Border Target Operating Model, setting out a new approach to imports into Great Britain scheduled to be applied gradually from the end of October 2023, and is seeking feedback.
- Finance (No. 2) Bill 2023 is working its way through the House of Commons. It contains provisions relating to the VAT effect of deposit return schemes and amends the late payment interest and penalty provisions for VAT.
- Draft regulations have been published in relation to the VAT treatment of deposit return schemes. A consultation in relation to them closes on 17 May 2023.
The Supreme Court (SC) has dismissed a taxpayer's appeal in relation to the disapplication of an option to tax land.
The appellant, M, had acquired a building in 2001. He paid VAT on the purchase price, as the seller had opted to tax in respect of the building. M himself also opted to tax the building and reclaimed the VAT on the purchase price. Shortly after purchasing the building, M granted a lease over it to an optician connected with him for the purposes of schedule 10, VATA 1994. He charged VAT on the rent. In 2007, HMRC carried out a VAT inspection and M was informed that the lease to the optician was an exempt supply and therefore not subject to VAT. In 2014, M sold the building to a non-VAT-registered SPV purchaser (unconnected with M for the purposes of schedule 10), subject to the lease in favour of the optician.
M charged no VAT on the sale price, as he had been advised that the option to tax was disapplied by paragraph 12, schedule 10, VATA 1994. This provides that a supply is not taxable if: (a) the grant giving rise to the supply was made by a person who was a "developer" of the land (which would be the case if he intended or expected the land to be a relevant capital item in relation to the SPV and if the sale to the SPV were made at an eligible time) and the "exempt land test" was met. It was not in issue that the exempt land test was met.
M argued that because he had exercised the option to tax in relation to the land, he intended that the purchaser would pay VAT on the purchase price. Accordingly, he had the requisite intention for the anti-avoidance provision to be engaged, such that the option to tax was disapplied and the transaction was not subject to VAT.
HMRC considered that the transaction should have been subject to VAT and assessed M accordingly. M appealed to the First-tier Tribunal (FTT), Upper Tribunal (UT), and the Inner House of the Court of Session (all of which dismissed his appeals) and then to the Supreme Court (SC).
The SC noted the ambiguity in the relevant provisions of schedule 10, VATA 1994. The consequence of these provisions appeared to it to be that if M intended, or expected, to add VAT to the price of the land, then VAT was not chargeable, but if he did not intend or expect that the purchaser would pay VAT, then the transaction was subject to VAT.
The SC, unlike the court and tribunals below, did not consider that evidence (or lack thereof) regarding how M thought the statutory provisions would apply was the key to deciding the case. In the SC's view, such an approach could lead to capricious results.
The court's task was to construe the legislation in its context so as to give effect to its purpose. HMRC submitted, and the SC agreed, that the purpose of this particular part of schedule 10 was to ensure that exempt businesses could not recover input tax.
The SC therefore declined to adopt the construction favoured by M, preferring the narrower construction relied on by HMRC. The relevant intention / expectation that had to be held by M for the option to tax to be disapplied was about VAT being incurred on some other cost, and not simply on the purchase price of the building. It therefore dismissed the appeal and held that the transaction should have been subject to VAT.
Why it matters: This is an important decision on the construction of confusing legislation, and the principles to be applied when construing statutory provisions. The SC adopted a purposive approach to the interpretation of anti-avoidance legislation.
The judgment can be viewed here.
The UT has held that continuous services provided by one member of a VAT group to another should be subject to VAT because payments relating to those services were invoiced after the supplier had left the VAT group.
Prudential Assurance Company Ltd (Prudential) was the representative member of a VAT group. Silverfleet Capital Ltd (Silverfleet) was a member of this VAT group between 2002 and 2007. In this period, Silverfleet provided investment management services to Prudential in return for management fees. These management fees were disregarded for VAT purposes because both parties were members of the same VAT group (section 43, VATA 1994). In November 2007, Silverfleet left the VAT group due to a management buy-out and ceased providing services at this time. All management fees were therefore invoiced while both parties were still part of the same VAT group.
The agreement between Silverfleet and Prudential provided that Silverfleet was entitled to performance fees if the investment funds met certain hurdle rates of return. During 2014 and 2015 these hurdle rates were passed and Silverfleet became entitled to performance fees, amounting to over £9.3 million. Silverfleet invoiced Prudential for the performance fees, and the invoices included VAT. This was problematic for Prudential because it provided insurance services which were exempt from VAT and it could not therefore recover the VAT as input tax.
Prudential challenged HMRC on the VAT liability arguing that those payments were outside the scope of the charge to VAT because the services had been provided while both parties were members of a VAT group. Prudential successfully appealed to the FTT and HMRC appealed to the UT.
The UT considered whether the VAT grouping rules which provide that intra-VAT group supplies should be disregarded for VAT purposes should take precedence over the time of supply of continuous services rules, which provide that continuous services are deemed to be supplied, and therefore become liable to VAT, at the earlier of payment or invoicing (regulation 90, Value Added Tax Regulations). The UT held that the time of supply rules should be applied before VAT grouping rules and should determine both when a supply was made for VAT purposes and whether a supply was between group members. Applying the time of supply rules to the transaction meant that the supply was deemed to be made in 2014 and was therefore not an intra-VAT group supply.
The FTT had relied on the Court of Appeal's decision in B J Rice & Associates v Customs and Excise Commissioners  STC 581, which considered a situation where a taxpayer performed services before they were liable to be registered for VAT but were invoiced after registration. The UT considered that this case should be distinguished on the basis that the facts in that case were unusual and there was no need to consider conflicting provisions because VAT rules did not apply. Instead, the UT placed more weight on the House of Lords' decision in Customs and Excise Commissioners v Thorn Materials Supply Ltd and Thorn Resources Ltd  UKHL 23, in which it was held that the time of supply rules should be used to determine whether a supply falls within VAT grouping rules. In the view of the UT, the FTT had erred in law and it therefore remade the FTT's decision.
Why it matters: This case is important for two reasons. First, it provides clarity for partially-exempt VAT group members in relation to the treatment of supplies made by former members. If an intra-group agreement provides for deferred payment, the parties will need to consider the possible VAT implications. If the party receiving the deferred payment leaves the VAT group before payment is made, the payment may be subject to VAT. Second, the UT has confirmed that, in most cases, the time of supply rules should take priority over other provisions, such as the VAT grouping rules.
The decision can be viewed here.
The FTT has dismissed an appeal against various HMRC decisions denying the right to recover input tax (the Kittel denials) and refusing zero-rating for certain acquisitions and supplies made by the taxpayer (the Mecsek denials).
The parties agreed that the relevant test, for HMRC to prove on the balance of probabilities, was:
- there was a VAT loss;
- occasioned by fraud;
- the appellant’s transactions were connected with such a fraudulent tax loss;
- the appellant knew, or should have known, of such a connection; and
- in respect of the Mecsek denials, the appellant did not take every reasonable step within its power to prevent its own participation in that fraud.
The FTT found that the above test was met. It described the appellant's due diligence as "woefully inadequate" and having considered the evidence as a whole, inferred actual knowledge on the part of the appellant. The FTT concluded that even if the taxpayer did not know that the transactions in question were connected to the fraudulent evasion of VAT, it should have known that they were so connected.
Why it matters: This case serves as a reminder to businesses that sufficient due diligence should be treated as an essential commercial practice as this should limit the risk of HMRC or the tribunals considering there to be actual knowledge of, or wilful ignorance of, fraudulent activity in the supply chain.
The decision can be viewed here.