V@ update - July 2023

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

News

• HMRC has updated its systems so that it is possible to view and amend One-Stop Shop (OSS) Union scheme registration details from within an HMRC business tax account. This is relevant for any business using the OSS to report and pay VAT due on distance sales of goods from Northern Ireland to EU consumers.
  
  
• 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 7.5% p.a. and the statutory interest rate (for money owed by HMRC) is 4% p.a.. Both rates apply with effect from 11 July 2023.
  
  
• The Supreme Court has heard the appeal in Target Group v HMRC, in which the taxpayer appealed against the decision of the Court of Appeal. The issue in the appeal is whether outsourced loan administration services are standard-rated for VAT purposes (i.e. outwith the scope of the financial services exemption set out in Article 135(1)(d), Principal VAT Directive / Group 5, Schedule 9, Value Added Tax Act 1994 (VATA 1994)). The Supreme Court's decision, which could have a significant impact on the financial services industry, is awaited at the time of publication.

Case reports

R (on the application of Glint Pay Services Ltd) v HMRC [2023] EWHC 1621 (Admin)

The Administrative Court has dismissed a taxpayer's application for judicial review of a decision by HMRC that its supplies were to be treated as exempt, rather than zero-rated.

The taxpayer, Glint Pay Services Ltd (Glint) operated an app and payment card interface enabling its clients (members of the public) to buy gold from it and sell gold to it – in effect, using the gold as money via the app and debit card. Clients could hold funds in an e-money account (with funds held at Lloyds Bank) and use the available funds either to pay for spending transactions using the debit card, or to buy gold from Glint to be held in its gold account. Gold held could be sold to settle debit card transactions. Glint, in turn, bought gold from and sold it to StoneX, a member of the London Bullion Market Association (LBMA). The gold bought from and sold to Glint's clients was held in a segregated section of a vault operated by a third party, also a member of the LBMA, in Switzerland. Glint was not a member of the LBMA.

Group 15, Schedule 9, VATA 1994, provides for an exemption from VAT for investment gold (the Investment Gold Exemption). Note 4 to Group 15 provides that it does not include supplies between members of the LBMA or by members of the LBMA to taxable non-members of the LBMA (or vice versa). Article 4, Value Added Tax (Terminal Markets) Order 1973, provides that supplies excluded from the Investment Gold Exemption by Note 4 are zero-rated.

In March 2019, HMRC determined that Glint's supplies were to be treated as exempt (rather than zero-rated). Glint sought a statutory review, which upheld the decision (albeit on different grounds to those originally stated by HMRC). Glint then appealed to the First-tier tribunal (FTT), but subsequently withdrew its appeal in October 2021. The result of this was that HMRC's decision was treated as upheld.

However, Glint maintained that it had a legitimate expectation based on the content of a memorandum of understanding between the LBMA and another precious metals market and HMRC (the MOU) that its supplies should be zero-rated. It also contended that in light of that alleged legitimate expectation HMRC's decision was irrational.

The Court was of the view that the intention behind the MOU was for zero-rating to apply to dealings on the London wholesale markets, and not to retail sales, such as those carried out by Glint. It would not be unfair or an abuse of power to frustrate any expectation of zero-rating in respect of the transactions that Glint might have carried out as neither Glint nor its advisers had ever approached HMRC to seek clarification that the MOU applied to Glint's business model, and the MOU did not state in terms that were clear, unambiguous and devoid of any relevant qualification, that Glint's supplies would benefit from any treatment beyond that provided for by statute.

Why it matters: This decision serves as a reminder of the limited circumstances in which taxpayers will acquire, and the courts will uphold, a legitimate expectation of a particular tax treatment being afforded them.

The judgment can be viewed here.

Illuminate Skin Clinics Ltd v HMRC [2023] UKFTT 547 (TC)

The FTT has decided that certain skincare and wellness treatments do not fall within the scope of the relevant exemptions for medical care and should therefore be standard-rated.

Illuminate Skin Clinics Ltd (ISC) ran a private clinic which offered treatments including botox, dermal fillers, chemical peels, microdermabrasion, Thermavein (for facial thread veins and removal of skin tags) and platelet-rich plasma treatment. Until 2017, all treatments were carried out by Dr Shotter, a qualified doctor registered with the GMC. After this date, Dr Shotter continued to supervise the clinic.

Item 1 of Group 7, Schedule 9, VATA 1994 (Item 1) provides that '[t]he supply of services consisting in the provision of medical care by a person registered or enrolled in … [t]he register of medical practitioners' is exempt, and Item 4 of Group 6, Schedule 9, VATA 1994 (Item 4) exempts the provision of 'care or medical or surgical treatment and, in connection with it, the supply of any goods, in any hospital or state-regulated institution'.

The FTT focussed its discussion on Item 1. It noted that the catalyst for patients' use of ISC's services was not their being referred to it by a general practitioner having received some diagnosis, but rather their wish to avail themselves of the treatment it offered. ISC argued that Dr Shotter was trained and experienced in terms of psychology, and sought to characterise the services offered by her or under her direction as being of a psychological nature. However, in the view of the FTT, the appropriate tax treatment of the services being offered did not ultimately depend on the identity of the person performing them or whether they had psychological training or experience. While Dr Shotter would sometimes refer a client to another professional in a different field, the FTT considered that this made no difference to the VAT status. The services provided were cosmetic treatments being provided for cosmetic (i.e. non-medical purposes). The FTT dismissed the appeal as the supplies were not those of 'medical care' within the meaning and effect of the legislation and were therefore standard-rated.

The FTT went on to comment that if it had focussed on Item 4, it would also have dismissed the appeal. In its view, what was being provided was neither medical nor surgical treatment and this exemption was therefore unavailable to ISC.

Why it matters: This decision illustrates the narrow interpretation frequently given to exemptions from VAT, and in particular to those that apply in the medical context. The FTT was clearly reluctant to extend the exemption to what it considered to be non-essential procedures.

The decision can be viewed here.

3D Crowd CIC v HMRC [2023] UKFTT 00495 (TC)

The FTT has partially allowed a taxpayer's appeal relating to input VAT recovery on donated PPE produced during the COVID-19 pandemic.

The appellant, 3D Crowd CIC (3D), was incorporated as a community interest company on 26 March 2020, three days after the announcement by the government of the first COVID-19 lockdown. It mobilised volunteers with access to 3D printers to produce personal protection equipment (PPE) for use by individuals in high-risk settings, such as hospitals and care homes, to mitigate against the risks associated with COVID-19 in those settings.

3D incurred VAT on supplies made to it in the course of seeking CE/BSI certification, on its general overheads, and on materials bought to produce PPE. Certification was required initially in order to sell the PPE directly to NHS trusts (although sales via central government would have circumvented this problem - 3D stated that it was unaware of the 'VIP lane' under which government contracts were granted on an expedited basis). From late May 2020, certification was also required for PPE donated to NHS trusts. Pending the receipt of certification, 3D relied on donations from the public to facilitate the urgent provision of PPE, and during the tax period 08/20, it supplied 200,000 face-shields to NHS trusts and health care authorities at no cost. It intended to gain a government contract for the supply of PPE. However, by the time it received the necessary certification, towards the end of September 2020, the government had found alternative sources of supply. 3D had registered for VAT and sought a deduction. HMRC denied the deduction sought on the basis that as 3D gave away all the PPE it produced, the VAT incurred was not linked to taxable supplies in the period in which it was incurred.

With effect from 1 May 2020, the supply of PPE was temporarily zero-rated (until 31 October 2020, under Group 20, Schedule 8, VATA 1994). Prior to this point, the supply of PPE had been standard-rated.

HMRC and 3D agreed that 3D was a taxable person, and that the core issue was whether its activities met the test for it being in business. 3D contended that the entirety of its activities should be looked at as a whole in order to determine whether VAT recovery was justified, and so the costs involved in preparation for making taxable supplies (including achieving the necessary accreditations) should be allowed. HMRC contended that 3D's activities were outside the scope of VAT as they were not business activities and therefore the VAT incurred was not recoverable as the costs were not linked to any taxable supplies.

The FTT noted that 3D's claim to recover VAT incurred as input tax could only succeed to the extent that 3D was carrying on a business and incurred the VAT for a business purpose. Applying the test in Gemeente Borsele v Staatssecretaris van Financiën (Case C-520/14) and Commission v Finland (Case C-246/08), the FTT held that for there to be business/economic activity, there must be supplies made for a consideration. The FTT concluded that 3D was seeking to enter into contracts to supply PPE for payment and sought to cover its costs through those charges (supplemented by donations where possible). On that basis, it was intending to make taxable supplies of PPE. Looking at 3D's activities in the round, the requirements for a business, other than charging for supplies, were already present.

Further, VAT incurred by 3D on the direct costs of accreditation through the notified body (i.e. obtaining the CE certification) counted as input tax. Those costs were incurred to enable 3D to sell PPE in the future and for no other purpose; it did not matter that they were not linked to a particular supply. Nor did it matter that 3D did not, in fact, make taxable supplies of PPE as it was clear from UK domestic law that an intending trader could recover input tax (see paragraph 10, Schedule 1, VATA 1994).

However, at the time 3D incurred some of the VAT it sought to recover – that relating to its general running costs – it had concluded that it would be unable to sell PPE in current production. The FTT considered that 3D knew that it would have to donate this PPE. It therefore considered that although there was a business purpose in 3D's incurring these costs, it was not the only (or even the predominant) purpose. On that basis, the FTT decided that VAT incurred on the production of PPE would need to be apportioned between 3D's business and altruistic purposes.

Why it matters: The impact of the COVID-19 pandemic on businesses was, and continues to be, extensive. It is reasonable to suggest that, with the benefit of hindsight, the policy changes made to VAT on PPE might have enabled a taxpayer that was only unable to sell the PPE it produced due to delays in certification (and therefore donated it) to recover all the input VAT associated with the production of that PPE. Nonetheless, this pragmatic decision does at least allow 3D to recover some of the input VAT it incurred.

The decision can be viewed here.