New Penalty Regime comes into effect

The new points based penalty system started for VAT returns beginning on or after 1 January 2023. Therefore, monthly returns with a due date of 7 March 2023 will be the first returns subject to the new regime.

Roof insulation or a new roof? Can the reduced rate of VAT apply?

The reduced rate of VAT can apply to the fitting of “energy saving materials” (in this case insulation) into residential properties. The taxpayer supplies roof panels for conservatories (which seem to be an addition freezer or barbeque to the house depending on the time of year). At the First and Upper Tier the Tribunals ruled that the supply was effectively a new roof not insulation. As such the reduced rate did not apply. At the Court of Appeal they have lost again. 

Presumably the taxpayer has reduce rated most if not all of its supplies and the reversal of this treatment is likely to have a significant financial impact.

Don’t forget that until 31 March 2027 the VAT rate for having energy saving materials (ESMs) installed in a dwelling is 0% and there are no “social policy conditions” to restrict who can benefit from this reduction. ESMs can include water or wind turbines, heat pumps and biomass boilers, not just insulation, but does not include double glazing.

Stabling and livery: the consideration paid may be uncertain but it’s still consideration

An EU ruling but one HMRC is likely to want to follow. A business operated a horse stables and training business. The contracts set out that the horse owners were liable to meet the costs of the services provided (stabling, feed, vet fees etc.) and that owners would do so by paying 50% of each horse’s winnings to the stables. The Court has ruled that although the levels of payment are uncertain, they are consideration for a taxable supply and as such taxable themselves.

When it comes to the provision of livery services in the UK the VAT liability is determined by several factors including the levels of service provided and the VAT status of the land on which the livery is sited.

Assignment of bad debts

Another EU ruling that HMRC is likely to approve of. An insurance company had a business insurance policy which enabled policy holders to claim on non-payments from their customers (i.e. bad debt). When a claim was made the policy holder’s contractual rights were re-assigned to the insurer. The insurer then tried to make bad debt relief (BDR) claims on these assigned debts. The EU court has ruled that BDR is not applicable here as the purpose of BDR is to ensure that the VAT declared by the supplier is aligned to the payment received. The insurer was not the supplier and the Court also ruled that to allow this would go against fiscal neutrality as the VAT received by the VAT authorities would not be the same as the VAT due on the original supply.

Director wins appeal against VAT personal liability notice

A director was issued with a personal liability notice (PLN) in excess of £1m, on the grounds that they had been personally involved in fraudulent VAT transactions of the business they were sole director of.

PLNs have usually been the preserve of carousel fraud also known as Multi-Trader Inter-Community (MTIC) frauds involving mobile phones or CPUs. This is one of a number of recent cases involving alcohol wholesaling and the avoidance of VAT. These denials of input tax and resultant fine are all based on the Kittel Principle that the business/individual should have known that the transactions would result in the fraudulent under declaration of VAT.

It was shown that the company in question had failed to undertake proper due diligence before commencing trade with a new customer.

Although the Tribunal ruled that the company (and thus the Director) should have known that the trade would result in the defrauding of VAT, they did not know so that the actions made were not deliberate. As such the PLN against the director was dismissed.

This case highlights that PLNs are no longer the rare beast they once were and are increasingly being used by HMRC to enforce debts which can be avoided by liquidation of the company. Make sure you carry out proper due diligence checks (and keep records of doing so) on new customers. Also the old adage applies; if a deal seems too good to be true... 

Place of Supply of Cupid’s arrow

How apt that news of this case reached us on St Valentine’s Day (patron saint of beekeepers and epilepsy sufferers).

The taxpayer provided “matchmaker” services to clients to help them find a companion or perhaps, for those lucky few, a life partner.

The taxpayer treated the supplies as falling under Article 59 (c) of the VAT directive, the supply of “services of consultants, engineers, consultancy firms, lawyers, accountants, and other similar services, as well as data processing and the provision of information”.

Through a rather lengthy argument the Tribunal agreed with HMRC that the “matchmaker” services supplied did not fall within Article 59 (c) and as such supplies to overseas individuals were subject to UK. If they were within Article 59 (c) the same supply would be outside the scope of VAT.

This is important to note as many see Article 59 (c) as a “catch-all” provision to ensure that the general rule for the place of supply of services (where the recipient belongs) applies. This case clearly shows that the meaning of the examples given has to be strictly defined and applied.

Does illegal mean standard rated?

There is an old saying (in the world of VAT at least) that just because it’s illegal doesn’t mean it’s not taxable. When trying to make this point, HMRC has come unstuck, not for the view but their timing.

The taxpayer supplies cannabinoid products. It had sought a ruling from HMRC that these products were zero-rated as food. HMRC did not agree and issued a substantial assessment (£430K+) for sales that HMRC saw as standard rated. This was appealed to Tribunal and each party submitted their statement of case. Then, sometime later, HMRC sought to amend their statement to add that the supply was subject to VAT at 20% because it was an illegal product.

The taxpayer objected to this late amendment. HMRC said that it had conferred with the Drugs, Licensing and Firearms Unit at the Home Office, and it because they had to await the outcome of this that the amendment was made late. But this approach was made after HMRC’s assessment, and their first statement of case was submitted.

The taxpayer objected to the late amendment; such a late submission effectively created a new case which the taxpayer would have no time to prepare for.

Whilst not common, there has been a steady rise in challenges to HMRC’s processes and approach to Tribunals procedures, no doubt reflecting of the resources available. The Tribunal agreed with the taxpayer and rejected the late amendment.

How much laughter there was, or peanut M&Ms were consumed, is not recorded.

Zero-rating - the intent of law

The extent of zero-rated goods and services has always been far greater in the UK than any other EU countries. The issue at stake here was whether the zero-rating for newspapers applied to their digital versions from when these versions became available or when HMRC ruled that the treatment could be extended to the digital version in 2020.

The Supreme Court has ruled that the zero-rating only applies from 2020, and that the “always speaking” interpretation of the law is narrowly defined. This is not only important for the newspaper publishers (whose claim was apparently worth £35m of VAT) who took the case but in setting limitations on extending current law on VAT treatment to new technologies and products.

Relevant Charitable Purpose buildings – another one bites the dust

As regular readers will know, HMRC has been challenging the RCP treatment of properties (which enables the property to be constructed at the zero-rate) for several years. That HMRC seems to win more than loose, this has narrowed the ability to apply RCP status to what previously was seen as such.

The taxpayer was a charity that ran a zoo. They built a new enclosure for the lions and a “dinosaur” enclosure as an educational exhibit. HMRC’s argument was that although the taxpayer was a charity, to see both projects the public had to pay admission charges to the zoo. Therefore, as the admission charges are a business activity, the buildings could not be RCP.

The Tribunal agreed. It also ruled, due to its design, the dinosaur enclosure was not, in fact, a building either.

Northern Ireland protocol – update

In the news recently are proposed changes to the NI Protocol. After the end of the Transition period, the Protocol saw Northern Ireland treated as part of the EU for goods, part of the UK for services and within the UK for VAT. This dichotomy led to some administrative checks and processes that have been seen as having a negative impact on trade between Great Britain and Northern Ireland in particular.

The proposed changes will see goods from GB to NI entering via a “green channel” or “red channel” the latter is for goods either identified as or “at risk” of moving from NI to the Republic of Ireland or any other EU Member State. These channels already exist (under a different name) but the proposal is for the goods to enter NI via the green channel to have no checks. Currently there are checks albeit meant to be a lighter touch.

Goods from NI to GB will not have to be declared as an export in NI.

There will be a piece on the RL news section giving greater detail and implementation updates when available. It is likely to take several months before the agreement becomes policy.

Most importantly, for regular readers, is the news that chilled GB sausages will be able to enter NI and so the sausage wars appear to be over, thanks to a framework named after a soup.

If you would like to discuss any of these VAT updates in more detail please contact Ian Marrow .

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