V@ update - March 2023

Welcome to the March 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 manual (at paragraph CH140295) to make it clear that liability to pay interest on late payments now applies automatically and it has no discretion not to charge interest which is legally due.
• HMRC has published Revenue and Customs Brief 2 (2023), detailing its conclusions following a consultation on VAT and Value Shifting. In the Brief, HMRC announce that there are to be no legislative changes, instead, HMRC has concluded that the most effective way to address valuation concerns is to provide practical guidance on apportionment methods.
• HMRC has published Revenue and Customs Brief 3 (2023), confirming that local authorities can now apply non-business treatment to leisure services that they provide to members of the public in the wake of several tax tribunal decisions including HMRC v Chelmsford City Council [2022] UKUT 00149 (TCC).

Case reports

News Corp UK & Ireland v HMRC [2023] UKSC 7 

The Supreme Court has held that VAT zero-rating did not apply to digital newspapers under the legislation that applied at the relevant time.

At the material time, Group 3, Schedule 8, Value Added Tax Act 1994 (VATA), applied a zero-rating to 'newspapers'. Considering that the 'always speaking' principle of statutory interpretation resulted in electronic newspapers being considered as 'newspapers' for the purposes of this provision, the appellant sought to zero-rate its supplies of electronic newspapers. HMRC disagreed, and rejected the appellant's claim for recovery of input VAT. The appellant appealed to the First-tier Tribunal (FTT), which found that digital newspapers were not 'newspapers' for the purposes of the statute and dismissed its appeal. On appeal to the Upper Tribunal (UT), the appellant was successful. HMRC successfully appealed the UT's decision to the Court of Appeal (CA), and the appellant appealed the CA's decision to the Supreme Court (SC).

The SC dismissed the appellant's appeal. 

It noted that it was for the courts to ascertain the meaning of words used in legislation in light of their context and purpose. As a general rule, interpretation of a statute should take into account changes that have occurred since its enactment, even if those changes could not reasonably have been foreseen at the time of enactment; this was the 'always speaking' principle. However, where it was clear that the relevant provision was tied to an historic interpretation, this principle would not be applied.

It was clear that zero-rating provisions were to be interpreted strictly as a matter of EU law as they constituted exemptions from the general principle that supplies by taxable persons in the course of a business should be subject to VAT. While the FTT had found as a fact that the purpose behind the zero-rating for newspapers was the promotion of literacy, democratic accountability and spreading of knowledge, this could equally apply to many things that were not newspapers so the fact that it also applied to digital newspapers was, in the SC's view, of limited assistance. From the point of view of EU law, the zero-rating was a 'grandfathering' of a pre-VAT provision in order to prevent social hardship and so fell to be construed strictly; it could not be said that any social hardship would follow from a failure to extend the zero-rating to digital newspapers.

The 'always speaking' principle therefore had to be applied with regard to the constraints imposed by the fact that Group 3, Schedule 8, VATA, was a standstill provision and the principle that VAT exemptions should be interpreted strictly. There was a conceptual difference between a digital newspaper and a physical newspaper as envisaged in 1975 when the zero-rating provision had come into force.

The principle of fiscal neutrality did not support the appellant's case, as it was not the case that some forms of digital newspaper were to be zero-rated and others not.

Why it matters:

The impact of this decision should be relatively limited, as with effect from May 2020 the legislation governing the VAT treatment of electronic newspapers (and e-books and e-journals) has been amended so that, subject to certain exceptions, they are treated in the same way as their hard-copy equivalents. However, the decision is still notable for its comments in relation to statutory interpretation in general and in particular, the interpretation of EU law (albeit EU law that, the court noted, constituted 'retained EU law' and in relation to a period prior to the coming into force of the legislation implementing the UK's departure from the EU) in a post-Brexit landscape.

The decision can be viewed here.

Universal Flooring (Contractors) Ltd and another v HMRC [2023] UKFTT 282 (TC)

Universal Flooring (Contractors) Ltd (Universal) failed to submit VAT returns between 2010 and 2016. HMRC therefore issued estimated assessments on a quarterly basis. Universal paid these, but they constituted a significant understatement of the VAT actually due. HMRC issued a penalty notice to Universal and a penalty liability notice to the second appellant (its director). The appellants appealed to the FTT.

Section 60, VATA, provides that where a person "does any act or omits to take any action" for the purpose of evading VAT and where his conduct involves dishonesty (whether or not such as to give rise to criminal liability) he is liable to a penalty equal to the amount of VAT evaded or sought to be evaded. The burden of proof is on HMRC.

The parties agreed that the test for dishonesty in this context was that set out in Byers v HMRC [2019] UKFTT 310 and that the test was essentially an objective one, but there was a subjective element that involved examining the party's experience and intelligence and the reasons why they acted as they did.

On the facts, Universal had built a successful business installing and maintaining resin floors in factories. The second appellant had worked extremely hard and by 2015 the business was established. He knew little about tax and had simply paid central assessments issued by HMRC when he 'blitzed' paperwork in short periods in the office. He had known that the business was paying VAT and did not consciously consider the accounts showing an increasing liability to HMRC. He accepted that he was possibly incompetent or clumsy, but considered that a mistake had been made and he was trying to rectify it.

The FTT held that the second appellant was solely responsible for Universal's VAT affairs and was aware of the VAT system. It considered that his approach towards VAT was careless and probably reckless. However, that was not sufficient for HMRC to discharge the burden of proving that Universal acted dishonestly to evade VAT and that that dishonesty was attributable to dishonesty on the part of the second appellant. HMRC had to show that he had sufficient knowledge of the transactions to render his participation "dishonest according to normally acceptable standards of misconduct" and it had failed to do so.

The FTT was of the view that it was plausible that the second appellant had paid little attention to VAT and to the figures in the accounts. It accepted his evidence that he had simply signed the accounts without reviewing them in detail. The FTT accepted his evidence to the effect that he considered that in paying the central VAT assessments he had, in his view, discharged the company's liability to VAT.

Why it matters:

This decision contains a useful discussion of the principles used to determine whether conduct has been dishonest, for the purposes of tax penalties.

The decision can be viewed here.

The Young Driver Training Ltd v HMRC [2023] UKFTT 271 (TC)

The appellant provided driving experiences for drivers aged under 17 at temporary sites off the public highway (typically a fenced-off area of a car park or similar area). For children aged 4-10, specially built 2-seater miniature electric cars restricted to 10mph were used. The children were unaccompanied during the experience but a remote cut-off was available. For older children still aged under 17, the driving experiences used conventional manual-transmission cars with dual controls and the children were accompanied by driving instructors.

In the immediate aftermath of the first Covid-19 lockdown, a reduced rate of VAT was provided for, which related to 'shows and certain other attractions'. Item 1, Group 16, Part II, Schedule 7A, VATA (now repealed) provided that a 5% rate of VAT applied, temporarily, to "[s]upplies of a right of admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas and exhibitions and similar cultural events and facilities but excluding any supplies that are exempt supplies by virtue of Items 1 or 2 in Group 13 of Schedule 9".

In 2020, the appellant's advisors sought confirmation from HMRC as to whether its activities qualified for the temporary reduced rating. HMRC referred the advisors to the general guidance issued by HMRC. In April 2021, the appellant submitted VAT returns on the basis that the reduced rate applied and in May 2021 HMRC confirmed that it did not consider that this treatment was correct. In due course, assessments were issued by HMRC which were appealed to the FTT.

The appellant argued that it was not providing driving lessons but rather a "right of admission" to an attraction falling within Group 16. It also argued that fiscal neutrality required the supplies to be subject to the reduced rating. HMRC contended that the supplies were not of a "right of admission" and that even if they were, the 'attraction' in question did not fall within Group 16.

The FTT dismissed the appeal.

In the view of the FTT, although the supplies included a right of admission to the area in which the driving experience occurred, they in fact included much more – notably the use of a vehicle, driving tuition and supervision, without which there would be no driving experience. Although the children were not generally being taught to drive to a sufficient standard to pass a practical driving test, they were nonetheless being taught how to safely and competently operate the vehicle under supervision. Those booking the 'experience' did not expect merely that the children would be allowed into the area, they also expected them to be taught almost immediately how to drive the vehicles and then to spend the rest of the time driving them.

The FTT further considered it plain that the 'experience' was not an event or venue falling within Group 16. It held that the supplies made by the appellant were not interchangeable with those specified in Group 16 from the point of view of a typical consumer and accordingly fiscal neutrality did not require the reduced rating to be applied to them.

Why it matters:

This decision contains useful discussion of the time-limited reduced rating that was applied in an effort to stimulate the consumer economy in the wake of the Covid-19 pandemic.

The decision can be viewed here.