V@ update - March 2022

Published on 31 March 2022

Welcome to the March 2022 edition of RPC's V@, an update which provides analysis and news from the VAT world relevant to your business.


Case reports

First Alternative Medical Staffing Ltd – Court of Appeal decides that extra-statutory concession did not apply retrospectively

In First Alternative Medical Staffing Ltd and Delta Nursing Agency Ltd v HMRC [2022] EWCA CIV 249, the Court of Appeal considered whether the appellants could apply an extra-statutory concession issued by HMRC, referred to as the ‘Nursing Agencies Concession’ (the NAC), retrospectively, so as to exempt past supplies from VAT. The NAC, which was first set out in HMRC Brief 12/10 on 18 March 2010, provided that, by concession, nursing agencies may exempt the supply of nursing staff and nursing auxiliaries supplied as a principal to a third party.

The appellants operated as employment agents and provided nurses and other medical staff (the nurses) on a temporary basis to hospitals and care homes. When a nurse was placed with a client by the appellants, the client paid the appellants an hourly amount which included both a wage element and a commission element by way of agency fee. The appellants paid the wage element to the nurses.

At all material times, the appellants charged and accounted for VAT on the basis that they were acting as agent. The appellants therefore charged and accounted for VAT on the commission element only of the amounts paid to them by the client. HMRC issued assessments to the appellants for additional VAT, on the basis that the appellants were at all material times acting as principal. It was common ground that the appellants were in fact acting as principal. Absent any concession by HMRC, and subject to any applicable statutory exemption, an employment bureau acting as principal is liable to account for VAT on the whole of the amount paid to it by its client.

Delta Nursing Agency Ltd (Delta), one of the appellants, had received a letter from HMRC dated 14 January 2004 (the 2004 Letter) which confirmed that it was correct to charge and account for VAT on the commission element, primarily because it was acting as agent for the employment of temporary staff rather than as principal. The appellants sought judicial review of HMRC’s decisions to assess them to additional VAT, contending among other things, that they had a legitimate expectation that they would be treated as agents, not principals. The court held that, while the 2004 Letter was capable of giving rise to such a legitimate expectation, by 2013, as a result of subsequent HMRC public statements, the appellants could no longer rely on that legitimate expectation. The court also concluded that the appellants could not now rely on the NAC, because it could not be invoked retrospectively. The appellants appealed against that aspect of the court's decision to the Court of Appeal.

The appellants contended that the court made the following three errors of law: (1) concluding that the NAC could not be relied on retrospectively as a matter of domestic law; (2) failing to consider whether the NAC could be relied on retrospectively as a matter of EU law under the principle of legitimate expectation and in light of the principle of legal certainty, or, alternatively, deciding that the NAC could not be relied on retrospectively as a matter of EU law; and (3) applying the wrong test and reaching the wrong conclusion as to whether the appellants had sufficiently exercised any choice required to be made under the NAC.

The appeal was dismissed. The Court of Appeal: (1) decided that the High Court's interpretation of the NAC (that the appellants could not rely on the NAC retrospectively as a matter of domestic law) was consistent with how it would be understood by an ordinarily sophisticated taxpayer; (2) dismissed the EU law arguments advanced by the appellants; and (3) decided that, with regard to the question of whether the appellants had sufficiently exercised any choice required to be made under the NAC, the most that could be said was that, because they did not appreciate they were supplying nurses as principal, they gave no thought to the NAC as they thought it did not apply to them. 

Why it matters: This case provides helpful guidance regarding the scope of HMRC extra-statutory concessions. In light of this judgment, it is particularly important for taxpayers to consider the potential application of any concessionary treatment before a relevant transaction takes place, as it is unlikely taxpayers will be able to rely on such treatment retrospectively.

The judgment can be viewed here.

Gray & Farrar International LLP – Upper Tribunal decides that matchmaking services were subject to special place of supply rule for B2C consultancy services

In Gray & Farrar International LLP v HMRC [2021] UKUT 293 (TCC), the Upper Tribunal (UT) found that matchmaking services supplied to clients outside the EU fell within Article 59(c) of Council Directive 2006/112/EC (the Principal Directive) and were therefore outside the scope of VAT.

Gray & Farrar International LLP (G&F) provided exclusive matchmaking services to clients in several jurisdictions. HMRC decided that G&F's services to its clients, who were outside the EU, did not constitute "services of consultants … and other similar services … and the provision of information …”, within Article 59(c) of the Principal Directive (which is enacted in UK domestic law as paragraph 16(2)(d), Schedule 4A, Value Added Tax Act 1994 (VATA)), and so did not fall to be treated as supplied outside the EU and therefore outside the scope of VAT. HMRC issued related VAT assessments to G&F, which G&F appealed to the First-tier Tribunal (FTT).

The FTT panel members diverged in their views. The presiding panel member, Judge Hellier, concluded that the post-introduction liaison services provided by G&F's support team were a material element of the relevant supply, which could not be regarded as assisting the provision of information concerning a potential partner or the expert advice provided by Claire Sweetingham (the managing partner of G&F). Accordingly, the services provided by the support team could not be regarded as ancillary to the other elements of the supply. The effect of the inclusion of the support team’s services in the service provided by G&F was that the service went beyond the provision of information and expert advice and so could not fall within Article 59(c). On that basis and on the casting vote of Judge Hellier, the FTT dismissed the appeal.

G&F appealed to the UT, which allowed the appeal.

The UT decided that the listed activities in Article 59(c) are not confined to services provided by members of the liberal professions, and that the phrase “data processing and the provision of information” in Article 59(c) and paragraph 16(2)(d), Schedule 4A, VATA, specifies two activities: (i) the processing of data; and (ii) the provision of information.

The UT decided that the FTT erred in law by failing properly to characterise the supply made by G&F and, in particular, by failing to consider the application of the predominant element test as set out by the Court of Justice of the European Union in Levob Verzekeringen BV and OV Bank NV v Staatssecretaris van Financien (Case C-41/04) [2006] STC 766 and Mesto Zamberk v Financni reditelvsti (Case C-18/12) [2014] STC 1703 (which permits of the possibility that there may be a material element of the supply which is not ancillary to a principal element but which does not govern the characterisation of the supply because another element predominates).

The UT decided that, given the findings of the FTT, the predominant element of the supply (from the point of view of the typical consumer) was the advice which was provided as part of the matchmaking service, combined with the information relating to a potential match. In the view of the UT, the addition of the post-introduction liaison services was not sufficient to disturb this conclusion.

The UT therefore concluded that the services provided by G&F were “consultancy services … or similar services … and the provision of information” falling within Article 59(c) of the Principal Directive and paragraph 16(2)(d), Schedule 4A, VATA. The UT remade the FTT's decision to that effect.

Why it matters: Since the end of the Brexit transitional period, paragraph 16(1), Schedule 4A, VATA, provides that B2C supplies of the services set out in paragraph 16(2) to recipients which belong in a country other than the UK, or Isle of Man, are to be treated as made in the country in which the recipient belongs and are therefore outside the scope of VAT. This means that paragraph 16(2)(d), which was in issue in this case, now has a broader application than in the period to which this decision relates (in which paragraph 16(2)(d) applied to recipients outside the EU). The decision elucidates the scope of this specific provision. It also provides a useful contribution to the general case law on the characterisation of complex supplies.

The decision can be viewed here.

Y4 Express Ltd – Upper Tribunal decides that input VAT on postage payments was not recoverable

The Y4 Express Ltd v HMRC [2022] UKUT 40 (TC), the UT found that a company could not recover VAT on delivery charges as its suppliers were not in business.

Y4 Express Ltd (Y4) was able to obtain preferential rates on postage from the Royal Mail (RM) until 2013. When RM refused to allow Y4 to continue to use that service, Y4 sought to circumvent the problem by using RM accounts set up in the names of Mr Pat Ning Man (Mr Man) and Colemead Ltd (Colemead). The issue before the UT was the extent to which Y4 was entitled to credit for input VAT in connection with payments that it made to Mr Man and Colemead.

The FTT held that Y4 was not entitled to input tax credit. The FTT concluded that Y4 was not entitled to credit for input tax on services supplied by Colemead because Colemead was not supplying services for a consideration, and Colemead was not carrying out any “economic activity” for VAT purposes. The FTT expressed similar conclusions in relation to Mr Man.

Y4 appealed to the UT on the grounds that the FTT erred when it: (1) found that neither Mr Man nor Colemead made taxable supplies on which Y4 could claim input tax; and (2) did not consider Y4’s alternative argument that it had received the supplies directly from RM.

With regard to the first ground of appeal, the UT was of the view that the FTT's conclusion that Mr Man and Colemead were not, as a matter of fact, supplying services for a consideration, led inexorably to the conclusion that they were not carrying out any “economic activity”. The UT also rejected the second ground of Y4's appeal, agreeing with the FTT’s conclusion that considerations of economic reality pointed firmly to the conclusion that RM was supplying its services to Mr Man and Colemead, and not to Y4.

Why it matters: This decision is a useful reminder of the importance of considering economic reality when analysing the VAT implications of any arrangements.

The decision can be viewed here.

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