V@ update - June 2023
Welcome to the June 2023 edition of RPC's V@, a monthly update which provides insightful analysis and news from the VAT world relevant to your business.
- HMRC has published Revenue & Customs Brief 6 (2023), relating to the VAT liability of digital publications following the Supreme Court decision in News Corp UK and Ireland Ltd v HMRC. The Brief explains that HMRC will be writing to organisations that have submitted claims for overpaid VAT based on the Upper Tribunal's decision in that case, enquiring whether they intend to proceed with their appeals.
- HMRC, HM Treasury and the Department for Business and Trade, have launched a consultation in relation to compliance in the umbrella company market. HMRC consider that the employment allowance and flat-rate VAT scheme are both targeted by fraudulent umbrella companies. The consultation closes on 29 August 2023.
- An amended version of Finance Bill 2022-23 has been published following amendments in Committee stage. It provides (at draft clause 314 and onwards) details in relation to the VAT treatment of deposit return schemes.
No reasonable prospect of success for claims for VAT relief on bad debts
Before October 1978, the UK's VAT legislation did not provide for relief from VAT on bad debts (though such a relief had been provided for in the Sixth VAT Directive from 1 January 1978). In October 1978, such a relief was introduced, but until 31 March 1989 the non-paying customer had to be insolvent in order for it to be granted. In view of the limited size of most customers' telephone bills, it was impracticable for insolvency procedures to be instigated for many of the bad debtors owing debts to British Telecommunications plc (BT).
Section 24, Finance Act 1989, made provision for recovery of overpaid VAT from HMRC, subject to a six-year time limit on claims. For payments made by mistake, the limitation period was extended to six years from the date on which the claimant discovered (or could with reasonable diligence have discovered) the mistake. Section 24 was repealed and replaced by section 80, VATA 1994, later amended by Finance Act 1997, to introduce a three-year limitation period for claims, with retrospective effect from 4 December 1994. Section 80 also provided that there was no other means of making a claim for repayment of VAT. Following the decision of the Court of Justice of the European Union (CJEU) in Marks and Spencer and the decision of the House of Lords in Fleming t/a Bodycraft, section 121, Finance Act 2008, disapplied this three-year limitation period to claims made before 1 April 2009.
On 30 March 2009, BT wrote to HMRC invoking its directly effective rights under the Sixth VAT Directive and claimed repayment of VAT in respect of bad debts from 1 January 1978 to 31 March 1989.
In HMRC v British Telecommunications plc  EWCA Civ 433, the Court of Appeal (CA) had found that BT could have claimed VAT relief on bad debts from October 1978 to 1989 where the insolvency condition had been satisfied, and in any event since the insolvency condition was incompatible with EU law, even where the insolvency condition was not satisfied. The CA also held that BT could have claimed VAT relief in respect of its bad debts prior to 1978, on the basis of a directly-enforceable EU law right. However, the CA was of the view that BT's letter of 30 March 2009 did not constitute a claim, made under section 80, VATA 1994, for repayment of overpaid output tax.
Following the CA's decision, BT claimed that residual factual issues fell to be determined by the First-tier Tribunal (FTT) and provided a statement of those issues to the FTT. HMRC applied to the FTT for BT's appeal to be struck out on the grounds that the statement disclosed no reasonable prospect of success. The FTT agreed with HMRC and struck the appeal out. BT appealed to the Upper Tribunal (UT).
The UT dismissed BT's appeal against the strike-out order. It held that EU law principles required the taxpayer's directly effective EU law rights to be exercised under the domestic regime (suitably moulded to give effect to those rights). The pre-section 80 regime, appropriately applied, was the appropriate mechanism for the exercise of these rights, and not section 80(1) (this had already been determined by the CA in the related GMAC appeal) Neither section 80(1), nor section 80(1B), had been engaged. Section 80(1B) applied to payments 'by way of VAT which was not VAT due to [HMRC]', which was not the case here (as VAT had been due at the time of the supply – it was a retrospective relief in respect of a bad debt that was being claimed).
The UT also considered that the issues had been determined by the CA in favour of HMRC and that the matter was therefore res judicata and BT was estopped from pursuing the issue.
Accordingly, BT's claims for repayment were time and/or statute-barred, and its appeals had no prospect of success.
Why it matters: This decision illustrates the importance of procedure and time-limits, particularly when making claims for repayment. It also serves as a reminder that a 'technical' victory is of little use to a taxpayer if it is in practice unable to recover the sums sought.
The decision can be viewed here.
Penalties due as the taxpayer's conduct was deliberate
In April 2017, Coonley Trading Ltd (CTL), which was a franchise owned by Adekunle Omisakin-Adeyela, the second appellant, who was also the sole director of CTL, registered for VAT. It stated its business activities as being plumbing and drainage, heating and plumbing contracting. In August 2019, CTL's claim for a repayment of £1,169 for the VAT period ending 07/19, was questioned by HMRC. In September 2019, HMRC wrote to CTL to arrange a visit to check its VAT records. HMRC also requested that the records for the periods from 1 August 2017 to 31 July 2019, were made available when it visited. The list of records included annual accounts, business bank statements, the VAT account and related working papers, accounting books, sales and purchase invoices, documents such as contracts and details of vehicles. When HMRC visited CTL, the records were said to be held in storage and were not available. Following HMRC's visit, several requests for information and/or documents were made between September 2019 and February 2020, including a formal information notice request made under paragraph 1, Schedule 36, Finance Act 2008, in October 2019. The requested information was not forthcoming.
In March 2020, HMRC issued a Notice of VAT assessment under section 73, VATA 1994, for the periods ending 10/17 to 04/19, inclusive, in the amended sum of £11,400.
In December 2020, HMRC issued a decision, dated 24 December 2020, to charge penalties under Schedule 24, Finance Act 2007, in the amended sum of £7,281, due to inaccuracies within CTL's VAT returns for the periods 10/17 to 04/19. A personal liability notice (PLN) was subsequently issued by HMRC to Mr Omisakin-Adeyela, in relation to 100% of the penalties.
CTL and Mr Omisakin-Adeyela appealed to the FTT. In essence, CTL's grounds of appeal were that: (i) it ceased trading in June 2019; (ii) it had provided various information to HMRC but this had not been taken into account; and (iii) HMRC's assumptions had been inaccurate.
The FTT dismissed the appeals.
The FTT concluded that the amended VAT assessments in the sum of £11,400 were in accordance with section 73, VATA 1994, and were timeously raised. The FTT did not find Mr Omisakin-Adeyela's evidence credible. It was of the view that the VAT assessments in relation to the disallowed input tax were correct, because the relevant documentary evidence had not been provided by CTL.
The FTT also agreed with HMRC that CTL did not have the funds required to make the significant number of purchases which it claimed to have made and because it had not produced the necessary invoices or any alternative evidence to demonstrate the alleged purchases, it concluded that such invoices did not exist. Therefore, in completing the VAT returns, the actions of Mr Omisakin-Adeyela were deliberate.
The amended penalties were therefore validly raised and issued in accordance with Schedule 24, Finance Act 2007, and were upheld by the FTT.
As the FTT found that the deliberate inaccuracy was attributable to the actions of Mr Omisakin-Adeyela, the PLN was also upheld.
Why it matters: This decision is a reminder of the requirement for taxpayers to keep VAT records for six years (paragraph 6(3), Schedule 11, VATA 1994). It also provides a useful guide to the likely approach taken by the FTT when deciding if there has been deliberate behaviour by a taxpayer when determining penalties and deciding whether a PLN has been validly issued.
The decision can be viewed here.
VAT deduction cannot be denied solely as a result of a transaction being considered fictitious under national law
The right to deduct VAT arises automatically under EU law when certain criteria are met and can only be denied if the right is relied on for fraudulent or abusive ends.
The taxpayer (M) purchased an assignment of trademarks which was subject to VAT. M attempted to recover the VAT paid on this assignment, but the recovery was refused by the Polish tax authorities. Under the relevant Polish legislative provision, input tax cannot be refunded if the underlying invoice identifies a transaction to which the provisions of Articles 58 and 83 of the Civil Code apply. The director of the tax authority argued that the right to deduct VAT did not arise because the assignment was invalid under Article 83 of the Civil Code, on the basis that it was a 'fictitious transaction'.
M appealed this decision to the Regional Administrative Court in Poland and it was annulled on the basis that the tax authority had not adduced evidence that the transaction was fictitious. The director of the tax authority appealed to the Supreme Administrative Court (SAC).
The SAC referred the following question to the CJEU: does the EU Directive 2006/112 (the Principal VAT Directive) preclude national legislation from depriving a taxpayer of the right to deduct VAT when the transaction does not comply with national civil law?
The CJEU confirmed the SAC's premise, that input tax reduction is a fundamental right of a taxpayer and cannot be limited if the material and formal requirements of the right under EU law are met. The substantive requirements for the right to arise are listed in Article 168, Principal VAT Directive: the taxpayer must be a 'taxable person' within the meaning of the directive and the goods or services relied on must: (1) be supplied by another taxable person; and (2) be used for the purposes of taxed output transactions. Article 167, Principal VAT Directive, provides that the right of deduction arises when the deductible tax becomes chargeable; pursuant to Article 63, this is the time when the goods are delivered or the service is performed. This introduces a further requirement, that the provision of goods and services is actually carried out.
In light of these requirements, the CJEU concluded that M had to prove that the supply of goods or services was actually carried out in order for the right of deduction to arise. If the right did arise, a deduction could only be refused if it was established that the right was being relied on for fraudulent or abusive ends.
In this case, the CJEU said that the factors, as a result of which a transaction may be considered fictitious under Polish law, are different to factors that would be considered under EU law to determine whether the supply of goods and services was actually carried out. Further, a transaction being treated as fictitious under national law does not, in and of itself, constitute evidence of fraudulent or abusive practice. The Principal VAT Directive should therefore be interpreted as precluding national legislation under which a taxable person is deprived of the right to deduct input VAT solely because the transaction was considered fictitious under national law.
Why it matters: This decision provides clarity for taxpayers in Member States regarding their right to deduct input VAT. If the requirements in the Principal VAT Directive are met, the right to deduct input VAT can only be denied if the transaction is fraudulent or abusive. In relation to fraud, the tax authority must establish that the taxpayer committed VAT fraud or ought to have known that the transaction was connected with a fraud. In relation to abuse, the taxpayer must accrue a tax advantage which would be contrary to the purpose of the provisions, and the essential aim of the transaction must solely be to obtain that tax advantage.
The decision can be viewed here.