V@ update – April 2024
Welcome to the April 2024 edition of RPC's V@, a monthly update which provides insightful analysis and news from the VAT world relevant to your business.
News
- HMRC have updated Notice 700/1 to provide additional guidance on when non-established taxable persons should register for VAT in the UK.
- HMRC have issued Revenue & Customs Brief 4 (2024), explaining how VAT and excise legislation should be interpreted in light of the Retained EU Law (Revocation and Reform) Act 2023 and the VAT and excise changes contained in Finance Act 2024. In short, UK VAT and excise legislation should continue to be interpreted in the same way as it was on 31 December 2023.
- HMRC have notified stakeholders that if a business de-registers for VAT, any Economic Operators Registration and Identification (EORI) numbers it holds will be removed at the same time.
Case reports
VAT groups – services invoiced after departure from VAT group are subject to VAT
The Court of Appeal (CA) has, by a majority, upheld the decision of the Upper Tribunal (UT) that fees relating to services provided while both the supplier and recipient were members of the same VAT group, but not invoiced or paid until after the supplier had left the group, were subject to VAT.
Prudential Assurance Company Ltd (Prudential) was the representative member of a VAT group. Silverfleet Capital Ltd (Silverfleet) was a member of that VAT group between 2002 and 2007. During 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, Value Added Tax Act 1994 (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 caused an issue 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's view regarding VAT liability, arguing that the performance fee payments were outside the scope of the charge to VAT because the services had been provided while both parties were members of the same VAT group.
Prudential's appeal to the First-tier Tribunal (FTT) was successful and HMRC appealed the FTT's decision 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 (Regulation 90)).
In allowing the appeal, 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.
Prudential appealed to the CA. The CA considered that the correct approach was to ask whether Silverfleet was still a member of the Prudential VAT group at the time at which the services provided were treated as having been supplied by operation of the relevant rules. Since in this case Regulation 90 provided for the relevant supplies to be treated as having been made at a time when the parties were no longer in the same VAT group, it followed that (from the point of view of the majority of the CA) the supply was subject to VAT.
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 decision confirms that, in most cases, the time of supply rules should take priority over other provisions, such as the VAT grouping rules.
The judgment can be viewed here.
Zero rating – whether giant marshmallows are 'confectionery' and therefore standard-rated
Innovative Bites Ltd (IBL), a wholesaler of American sweets and treats, manufactured and sold 'Mega Marshmallows' (the product). IBL treated the product as zero-rated for VAT purposes under Group 1, Schedule 8, VATA 1994.
While there is no set definition of 'confectionery', the legal framework from Note 5, Group 1, provides the following explanation: "'confectionery' includes chocolates, sweets and biscuits; drained, glacé or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers".
In HMRC's view, the product should have been classified as 'confectionery' by IBL and should therefore have been standard rated rather than zero-rated. HMRC issued assessments to IBL for £472,928, relating to periods between June 2015 and June 2019.
IBL appealed the assessments to the FTT, which allowed its appeals, holding that the product was not 'confectionery' for the purposes of Excepted Item 2, Group 1, Schedule 8, VATA 1994. In its view, the term 'confectionery' would not be expected to include products that were intended to be subjected to another cooking process before being eaten. In arriving at its decision, the FTT also considered the packaging and design of the product and its marketing and placement in supermarkets. The FTT concluded that the product was sold and purchased as a product specifically for roasting and could not therefore be classified as 'confectionery'.
HMRC appealed to the UT, which dismissed its appeal. It concluded that, contrary to HMRC's argument, Note 5 was not a deeming provision, and that a multi-factorial assessment could still be undertaken to establish whether the product constituted confectionery. In light of this, the UT considered that the FTT had not erred materially in carrying out its analysis.
Why it matters: This decision provides useful commentary on the nature of deeming provisions in VAT legislation and the consequences that follow from a provision being (or not being) such a provision.
The decision can be viewed here.
Provision of telematics devices by insurance intermediary not a supply for VAT purposes
WTGIL Ltd, formerly known as Ingenie Ltd (Ingenie), was the representative member of the Ingenie VAT group, which also contained WTGISL Ltd, formerly known as Ingenie Services Ltd (ISL). The appeal concerned the VAT treatment of supplies made by ISL but deemed to have been made by Ingenie, by operation of section 43(1) VATA 1994.
ISL was an insurance intermediary which developed, marketed and sold telematics car insurance (also known as black box insurance). Ingenie and ISL were not insurers and the policies were underwritten by insurers from a panel appointed by ISL. As a condition of the insurance, a telematics device (the device) had to be fitted to the policyholder’s car within ten days of the commencement of the policy. ISL agreed to provide the device and to fit it, or arrange for it to be fitted.
Ingenie made a claim to HMRC for a refund of input tax incurred in relation to the provision and fitting of the devices. The claim was based on the view that the provision and fitting of the device was a taxable supply made by ISL to the policyholders, whether or not for consideration, and the input tax was attributable to such supplies.
HMRC rejected Ingenie's claim, on the basis that there was no contract under which ISL supplied the device to the policyholders for consideration. HMRC took the view that the only consideration for ISL’s supplies of providing and fitting the devices and any subsequent data analysis was the commission paid to ISL by the insurer, which was consideration for an exempt supply of insurance intermediary services. Accordingly, any input tax relating to the device was directly linked to an exempt supply by ISL and not deductible. HMRC also considered that charges in relation to the fitting of a new device when a policyholder changed their car was either additional premium charged by the insurer, or consideration for an exempt supply by ISL.
Ingenie appealed to the FTT, on the ground that the VAT incurred on the cost of purchasing and fitting the devices was recoverable in full because it was directly attributable to taxable supplies made by ISL. Ingenie’s primary case was that there was a legal relationship between ISL and the policyholder, under which ISL supplied and fitted the device which collected data which ISL provided to the policyholder and the insurer in return for non-monetary consideration provided by the policyholder, namely, entering into the contract of insurance with the insurer. HMRC's position was that ISL made a single, indivisible supply of insurance intermediary services to the insurer in return for the commission, or to the policyholder, or to both.
The FTT dismissed Ingenie's appeal. It was of the view that there was a legal relationship between ISL and the policyholders but concluded that there was no supply of the devices, or any services relating to the devices, by ISL to the policyholder for VAT purposes. In the absence of clear wording, the FTT did not consider that entering into the insurance policy and complying with its terms and conditions was consideration for a separate supply by ISL. The FTT found that the policyholders simply entered into the insurance contract on particular terms which included having a working device installed by ISL. There was no need for the policyholders to provide any further consideration other than paying the premiums under the policy, and they did not do so. The FTT also concluded that, in the absence of consideration, there was no deemed supply of the devices, because they were acquired and provided to the policyholders by ISL for the purposes of its own business.
The FTT therefore concluded that ISL did not make any supplies of the devices or related services in the relevant VAT periods and dismissed the appeal.
Ingenie appealed to the UT. The UT determined that Ingenie had not supplied the goods. The UT did, however, consider that services were supplied to policyholders (in the form of the installation services), and that these services would, if made for consideration, be a taxable supply (ie not an exempt insurance supply). However, it concluded that Ingenie received neither monetary nor non-monetary consideration from the policyholders for these supplies. Further, the UT agreed that there was no deemed supply, for the purposes of Article 16 and paragraph 15, Schedule 4, VATA 1994, as there had been no input deduction in respect of any deemed supply. Accordingly, the UT dismissed the appeal.
Why it matters: The contractual analysis underpinning both the FTT and UT decisions in this case is complex, and the exercise carried out by both tribunals in order to arrive at their conclusions will be of interest to anyone dealing with the VAT analysis of complex interlinked commercial arrangements.
The decision can be viewed here.