V@ update - August 2023
Welcome to the August 2023 edition of RPC's V@, an update which provides analysis and news from the VAT world relevant to your business.
News
- Homes England has updated its guidance in relation to claims for irrecoverable VAT in the context of remedial works under the Cladding Safety Scheme, insofar as such claims relate to snagging.
- Following the increase in the Bank of England base rate, HMRC has again updated its default and statutory interest rates. The default interest rate (applicable to late payments) is now 7.75% p.a. and the statutory interest rate (for money owed by HMRC) is 4.25% p.a.. Both rates apply with effect from 22 August 2023.
- HMRC's annual report and accounts reveal that £166.9bn of net revenue was attributable to VAT in the year 2022/23, an increase from £148.8bn in the year 2021/22.
Case reports
Sonder Europe Ltd v HMRC [2023] UKFTT 00610 (TC)
Sonder Europe Ltd – Tribunal allows taxpayer's appeal confirming that it was a tour operator within the scope of the Tour Operator’s Margin Scheme (TOMS)
In Sonder Europe Ltd v HMRC [2023] UKFTT 00610 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal confirming that it was a tour operator as defined in section 53(3), VAT Act 1994 (VATA), and that its supplies were designated travel services within Article 3(1), Value Added Tax (Tour Operators) Order 1987.
Sonder Europe Ltd (Sonder) provided self-contained apartments in the UK (which it had leased from third party landlords) to corporate and leisure travellers. Sonder sublet the apartments to travellers for different periods from a night to a month or longer. During the relevant period, the average stay at one of the apartments in the UK was five nights. Sonder made cosmetic changes to the apartments before they were let out to travellers. No structural changes were made.
In VAT accounting periods ended October 2017 through to April 2018, Sonder accounted for VAT on the basis that its supplies fell within the scope of the TOMS. In 2019, HMRC decided that the TOMS did not apply to the supplies made by Sonder with the result that those supplies were chargeable to VAT at the standard rate in the sum of £252,229.29. Sonder requested an independent review of HMRC's decision which was upheld and Sonder then appealed to the FTT.
The only issue for the FTT to consider was whether Sonder's supplies of accommodation were a ‘designated travel service’ and therefore within the scope of TOMS. If so, this would mean that VAT would only be due on Sonder's margin which would effectively halve its overall VAT liability.
The first question for the FTT was whether Sonder was a tour operator for the purposes of the TOMS. The terms ‘travel agent’ and ‘tour operator’ were to be interpreted broadly. The apartments were used by Sonder as serviced apartments for the residential occupation of travellers. There was no suggestion that the apartments were used as permanent or long-term accommodation and the average length of stay was only five nights. Sonder used the apartments to provide temporary accommodation for people. The FTT concluded that such people were travellers and the apartments were, therefore, travel facilities and for the benefit of travellers (as required by section 53(3), VATA). The FTT was also of the view that the provision of accommodation in self-contained apartments was the type of service that was commonly provided by tour operators or travel agents. The FTT therefore concluded that Sonder was a tour operator, for the purposes of the TOMS, during the relevant period.
The second question for the FTT was whether Sonder acquired the apartments for the purposes of its business. It was common ground that Sonder was established in the UK and carrying on a business of providing accommodation in serviced apartments. It was clear (and was not disputed by HMRC) that Sonder entered into the tenancy agreements with the landlords for the purposes of its business, that was, to let the apartments to the travellers. The FTT therefore concluded that Sonder acquired services (i.e. leased apartments) provided by the landlords for the purposes of its business.
The final question for the FTT was whether Sonder provided the apartments for the benefit of travellers 'without material alteration or further processing'. The FTT concluded that this must refer to more than minor changes or processes which do not affect the fundamental character of the particular goods or services and commented that "[i]t would be absurd as well as impracticable if any minor change or processing excluded a bought-in supply from the TOMS" (paragraph 76). The FTT considered that the alteration and processing must change the goods or services supplied so that what was supplied by the tour operator could not be described in the same terms as the items acquired. The FTT commented that it did not matter whether the apartments were furnished or unfurnished when they were acquired by Sonder. In both cases, Sonder supplied the apartments to the travellers without changing their structure. Any changes that Sonder made to the apartments were cosmetic or decorative. The nature of those changes was such that they could be reversed simply by removing the items of furniture or re-painting a wall. In the FTT's view, such changes could not be described as material and did not amount to processing of the apartments. The FTT therefore concluded that Sonder provided the apartments for the benefit of travellers without material alteration or further processing.
Why it matters: This decision provides a useful insight into the FTT's likely approach to the application of the TOMS, which suggests a potentially wider application than perhaps previously thought. This decision will be of particular interest to the rent-to-rent sector. It will be interesting to see whether permission to appeal to the Upper Tribunal is sought by HMRC.
The decision can be viewed here.
Massala Exotic Ltd and Khosru Miah v HMRC [2023] UKFTT 00621
Massala Exotic Ltd – Taxpayer with limited resources qualified for hardship; director's right to appeal personal liability notice (PLN) had not crystallised as no review conclusions letter had been received
The first appellant (Massala) applied for permission to pursue its appeal without having to pay the VAT to which it related (in excess of £280,000) to HMRC under section 84, VATA, its hardship application having been refused by HMRC. The second appellant (Mr Miah) had been issued with a PLN, alleging that he was personally liable to pay a penalty of nearly £177,000 in respect of a deliberate inaccuracy in Massala's VAT returns. Mr Miah appealed against the PLN.
In relation to Massala's hardship application, the FTT referred to the comprehensive review of legislation and case law relating to hardship applications set out in the Upper Tribunal's (UT) decision in NT ADA Ltd v HMRC [2019] UKFTT 0333. The FTT noted, in particular, that the purpose of the provisions relating to hardship was to strike a balance between abuse of the appeals mechanism by deploying it to delay paying disputed tax and the stricture of having to pay the disputed sum as a price of entering the appeal process. The FTT commented that the relief afforded by the 'hardship' provisions should not be applied so as to "operate as a fetter on the right of appeal". The FTT noted that it should not concern itself with the merits of the appeal when determining the hardship application.
On the facts, Massala had ceased trading in January 2020, after a period of struggling financially. It no longer had a bank account. It had received no income since ceasing to trade. Mr Miah had tried to liquidate Massala but had not yet succeeded in doing so. Massala's most recent available bank statement showed a credit balance of £164.87. The burden of proof to demonstrate hardship lay on Massala and the FTT noted that it was clear from the evidence that Massala had no resources from which to pay the VAT at stake and therefore allowed the hardship application.
In relation to Mr Miah's application, the FTT noted that although Mr Miah's representative had requested an independent review of the decision to impose the PLN, no review conclusions letter had in fact been issued. Neither of the letters received from HMRC contained sufficiently clear evidence of the conclusions of a review. The FTT therefore concluded that no appeal right had crystallised and directed that HMRC issue a review conclusions letter within 30 days of the date of the FTT's decision, which Mr Miah could then appeal if he so wished.
Why it matters: The 'pay to play' requirement for VAT litigation risks operating as a deterrent to those seeking to appeal VAT assessments or penalties. This decision reinforces the proposition that those who would genuinely struggle to pay amounts under dispute must not be prevented from exercising their right to an appeal.
The decision can be viewed here.
HMRC v Hotel La Tour Ltd [2023] UKUT 00178
Hotel La Tour – UT confirms input tax recoverable on fiscal neutrality grounds
Hotel La Tour Ltd (HLT) was a holding company which owned the entire share capital of Hotel La Tour Birmingham Ltd (HLTB). HLTB owned and operated a luxury hotel in Birmingham and HLT provided management services and key personnel. Both companies were members of the same VAT group of which HLT was the representative member.
In 2015, HLT decided to construct a new hotel in Milton Keynes which was anticipated to cost £34.5 million. To finance this development, HLT decided to sell HLTB and borrow the balance from the bank. HLT received a net amount of £16 million from the sale of the shares in HLTB.
HLT engaged various advisers to provide professional services to assist in the sale of HLTB, including market research, buyer shortlisting, financial modelling and tax compliance. In total, HLT incurred £382,899.51 plus VAT of £76,822.95, in professional fees.
The entirety of the £16 million from the sale of shares was used towards the development of the Milton Keynes hotel.
On 2 November 2017, HLT filed its VAT return and sought recovery of the input VAT incurred on the professional fees. By a decision letter dated 26 June 2018, HMRC disallowed the input tax in respect of the professional services. Although initially on different grounds, HMRC ultimately disallowed the input tax on the basis that the fees were incurred pursuant to making an exempt supply (sale of the shares in HLTB) rather than in making taxable supplies and therefore input tax could not be recovered.
HLT appealed to the FTT.
The question for the FTT to determine was essentially whether the relevant objective purpose of the professional services was for the initial fund-raising transaction (the sale of shares) or the purchase of the hotel in Milton Keynes.
HMRC argued that the professional services were used for the sale of shares which was an exempt supply and therefore input tax could not be recovered. The FTT disagreed and found that there was a direct and immediate link between the professional services and HLT's downstream taxable general economic activities. Accordingly, 'the chain' had not been broken by the sale of the shares in HLTB and input tax could be recovered.
Furthermore, the FTT was of the view that the relevant consideration in fund-raising cases was whether the cost of the services was incorporated into the price of the share transaction, or the downstream transactions. In this case, the cost was paid for out of the proceeds of the sale and therefore reduced the amount available for the taxable transactions and so was a cost of those transactions.
HMRC appealed to the UT.
The UT dismissed the appeal and reaffirmed that input tax is recoverable in these circumstances. In particular, the UT considered Kretztechnik C-465/03, in which the CJEU confirmed that it was possible to recover input tax as a general overhead in circumstances where that input tax had been incurred in relation to a transaction which was outside the scope of VAT. The CJEU applied the principle of fiscal neutrality to conclude that if a taxpayer is able to deduct input tax in relation to transactions which are outside the scope of VAT (such as share issues) they should also be able to deduct input tax in relation to exempt supplies (such as share sales).
Why it matters: This decision will provide an element of certainty for businesses who incur VAT on costs pursuant to the sale of shares in similar circumstances. Businesses should consider whether they have incurred irrecoverable VAT on such costs in the last four years as they may now be able to make a repayment claim.
The decision can be viewed here.