Burden of proof

A case that moved from First Tier (FT) to Upper Tier (UT) and back again. The taxpayer sold alcohol. Several transactions were made with no UK VAT declared on the basis that the goods were located outside the UK in the EU. HMRC contended that the goods were in fact in the UK at the time, and that the director of the company had full knowledge of this. Therefore, the director received a personal liability notice for 100% of the assessment.

At the first FT hearing the Tribunal said that it was for HMRC to prove that the goods were removed to the UK under the direction of the company. On this point the FT said that the case was not proven. HMRC appealed. The UT said that that FT had erred in law and that it was for the taxpayer to prove their innocence and so referred the matter back to the (same) FT.

The FT on second consideration decided that the evidence of the location of the goods was not proven and the assessment (and with it the liability notice) was dismissed. Again.

VAT in the education sector

The VAT treatment of supplies in the education sector are not only determined by what is being supplied but also the status of the supplier. To be exempt the supplier needs to be an ‘eligible body’.

The definition of an eligible body is set out in UK legislation. This includes universities, colleges of universities and further educational colleges. The appellants said that they were so similar to these entities that to deny exempt for the supplies they made was a breach fiscal neutrality (if ever there’s a phrase to get a VAT advisor interested in a case it’s ‘fiscal neutrality’).

The appellants were referred to as Alternative Providers (APs) in the education sector, and, unlike universities, colleges of universities and further educational colleges, they were not bodies governed by public law.

The Tribunal also found that the regulatory regimes for the courses provided by the eligible bodies were stronger than for those provided by the APs. This enabled the Tribunal to see a distinction between the two types of provider and thus the differing treatments were not a breach of fiscal neutrality.

A second argument (and another unique aspect of the education exemption) that the exemption applied was that the students were under 19 when the courses began, and the course fees were ultimately a charge to funds provided by the Secretary of State. Although the student loans used to finance the courses would be a burden to the State if unpaid (due to the student being unemployed or in a job with an income below the repayment threshold) this was insufficient to meet the requirements of the law.

One final throw of the dice was that one of the APs taught English as a foreign language (TEFL). The teaching of TEFL is specifically exempted (irrespective of the provider’s status). The appellant argued that as TEFL was exempt so were all the other courses they provided. The law specifically restricts the exemption to TEFL so this was unsuccessful too.

The case highlights the complexities and risks regarding VAT in the education sector.

How many supplies?

A European case that reflects a long-established principle, but worthy of highlighting. The taxpayer let turkey rearing sheds. Within these sheds were specialist machinery adapted for the building and its use for the rearing of poultry. Under the primary EU VAT Directive, the default for the letting of immoveable property is exempt (as it is in UK law with some exceptions and, for non-residential land/property, the option to tax). The letting of moveable property is taxable.

The European court confirmed that there was a single economic supply where several elements are so closely linked they formed, objectively, a single supply. The letting of the machinery was not an end in itself and was seen as ancillary to the letting of the sheds, so there was one supply (the sheds) and one VAT treatment (exempt).

It seems somewhat odd that such a principle required re-confirming at the European court level, but also illustrates the issues with potential single/mixed supply issues.

Fundraising events

This First-Tier case saw the taxpayer stating clearly that they did not fulfil HMRC’s requirement that the primary purpose of the event run was to raise fund. Yet they went to Tribunal and won. How so?

The taxpayer was the Yorkshire Agricultural Society (YAS). The biggest annual event that they held was the Great Yorkshire Show (as a Lancastrian forgive my doubts regarding the word “Great”).

The taxpayer argued that the UK legislation was ultra vires as it diverged from the European Primary VAT Directive in a key area; the Directive exempts the supply of services and goods, “in connection with fundraising events organised exclusively for the benefit of a charity if exemption is not likely to cause distortion of competition”.

There was no reference to purpose or to how the event was promoted. It essentially came down to the position of whether the fundraising element was the purpose or a purpose of the event(s).

The Tribunal decided that the fundraising being a purpose for the event was sufficient. HMRC’s internal guidance was seen as too restrictive in setting out that the exemption only applies where fundraising is the “main and overriding purpose” of the event.

Since the shows and the appealable decisions occurred so has Brexit. Whilst it is no longer a legal requirement to ensure that UK law is a correct interpretation of the primary European Directives, it would seem that until the UK legislation is purposefully changed to diverge from the European root that taxpayers could use the argument of legal certainty to challenge such issues.

Of course, the downside to getting an event to be treated as exempt is that it means that there are likely to be significant adjustments to the amounts of input tax reclaimable under partial exemption regulations.

The Tribunal also commented, unfavourably, on several aspects of HMRC’s approach to the hearing; from failing to produce witness evidence to late amendments on the statement of case and HMRC’s difficulty in competently articulating their arguments as the Tribunal saw some of them being “rationally unsustainable."

Bad debt: the end of the line

This was a case involving British Telecom and claims for historic bad debt relief (BDR). The hearing said that the appeal itself and the history of the availability of BDR in the UK is “long and complicated”. Due to a window that was open in 2008/9, businesses were not inhibited by the time cap in revisiting VAT claims for overpayments, BDR, etc. In this case BT went back to a period from 1978 to 1989.

Despite losing their appeals all the way to the Court of Appeal, BT appealed the decision of res judicata  (a matter that has been adjudicated by a competent court and therefore may not be pursued further by the same parties) and argued that the First Tier Tribunal had erred in law in striking out their appeal on the basis it had almost no chance of success.

It was decided that the First Tier had not erred and that the strike out of BT’s appeal was valid.

Building materials and VAT

In most cases the installation of building materials during the course of construction, etc. follows the VAT rate of the build. So, for example, floor tiles are building materials and the charge to the customer for the supply and installation, in a newly constructed dwelling would be zero-rated. Carpets are not building materials so their supply in the same property would be standard rated.

The list of what is and isn’t seen as building materials are listed in public notice 708.  HMRC has recently issued and updated version of this Notice. It seems the purpose of this update is to “clarify that electrical blinds are not ordinarily incorporated in dwellings” so are not seen by HMRC as building materials.

Dealing with HMRC

It is now unfortunately becoming rather common place to hear of (or experience) significant delays in dealings with HMRC.

The decision for the Department not to respond to Option to Tax notifications in February has now been followed up by the registration helpline being closed with effectively two working days’ notice.

Registrations can take months, rather than weeks, and HMRC usually issues requests for further information but then fails to monitor any responses so then shuts down the registration.

We have one deregistration that was submitted in December but as of the end of May has yet to be processed.

Any questions?

If you would like to discuss any of these VAT updates in more detail, please contact Ian Marrow via ian.marrow@rickardluckin.co.uk

To receive future copies of our VAT newsletter, or any of our other newsletters, directly to your inbox, please register your interest via our preference centre.