Our monthly round-up of the latest VAT news.
From 31 January 2024 the new Border Target Operating Model (BTOM) import controls will apply. This requires most goods entering the UK from the EU of plant or animal origin (including food) to need either an import licence or health certificate alongside a commercial document. There are some reliefs for goods coming from the Republic of Ireland for a six-month period. This may add costs and delays to certain products arriving from the EU.
Importers will need to familiarise themselves with the BTOM import risk categories to establish what types of clearances will be required. This is the first of three steps to introduce the BTOM. In April 2024, there will be inspections on medium-risk goods, with all low and medium-risk goods having to be cleared through a port with a relevant border control post. In October 2024, safety and security (S&S) declarations for imports will be introduced.
Notification of such imports needs to be made at least one day before they happen through IPAFFS. Apparently, discussions are taking place to put certain products on a simplified clearance system due to the low risks associated with them.
The good, the bad, and the UGLE
The United Grand Lodge of England made an application to HMRC for a repayment of what they claimed to be overpaid output tax. This was on the basis that the membership fees for UGLE were exempt as their main aims were of a philosophical, philanthropic, or civic nature.
This claim was dismissed by the First Tier Tribunal, so UGLE appealed to the Upper Tier on the basis that the First Tier had failed to give a proper explanation and had also misdirected itself.
The Upper Tier agreed that the FTT had not given sufficient reason as to why it had made the decision that it did, so this decision was set aside, but the Upper Tier also took the view that despite this, UGLE did not fall within the definitions given to enable the subscriptions to be exempted.
Two associated companies were involved in the sale of the property portfolio of one company to the other. This generated a significant VAT amount as a liability for the seller and a reclaim for the buyer (over £70 million). The company making the reclaim asked for this repayment to be set off against the seller’s VAT liability.
HMRC asked for documentation to support the repayment. When HMRC finally set off the credit to the seller’s debit, more than 30 days had passed since the submission of the reclaim return, so the taxpayer put in a claim for repayment supplement (which would equate to about £3.5 million). The Tribunal ruled that as the buyer had assigned its entitlement to the repayment to the associate company, it had also lost its entitlement to the repayment supplement.
A business made supplies of flats for short-term accommodation; the usual stay was less than 28 days. An associate business made supplies of services for the residents (cleaning, changing bed linen, wifi, etc.). The supplier of the apartments treated these as exempt. HMRC said that although the service element had been carved out, the two were supplied as a package, and therefore the supply was of serviced residential and was similar to the supply of a hotel or guest house and was standard rated. The taxpayer tried a number of ways to argue its case, including highlighting the difference between their offering and that of a hotel and that of “legitimate expectation." The latter was based on the fact that in previous VAT inspections, HMRC had not queried the VAT treatment of the supplies by both companies. Although the latter was dismissed on a technicality, the Tribunal made a useful observation that “Although HMRC did not challenge [the taxpayer’s] position (at least until the inspection that gave rise to this litigation took place), they equally never made a clear statement to [the taxpayer] that they agreed with its position. [The taxpayer] never asked HMRC for a formal ruling (e.g., through the non-statutory clearance mechanism) on its approach to the VAT treatment of its supplies.”
That is, HMRC not raising a question regarding VAT treatment is not the same as HMRC agreeing to that VAT treatment. This is an important point, and one no doubt HMRC is keen to highlight in similar situations.
Equally, regarding the penalty aspect of the appeal (HMRC were seeking a penalty in the “careless” range), the Tribunal said:
“The question in the Penalty Appeal is not how difficult the questions in the Liability Appeal are, but how much (if any) effort [the taxpayer] put into trying to find the answer. It does not matter if, despite trying, it got to the wrong answer to a difficult question, but it does matter if it put no effort into working out whether there was a question to answer or what the answer might be.”
To this point, it was decided that there was no evidence of the taxpayer seeking professional advice or any internal analysis as to the VAT treatment of the supply. Therefore, the penalty appeal was also lost. This case not only gives some valuable insight into how a Tribunal approaches VAT liability and penalty issues, but it is also significant for the taxpayer as the initial assessment was £4.8 million.
Admissible in Tribunal
A UK business was implicated in "off-record" transactions with an Italian business due to records uplifted from a server in Italy. The UK taxpayer argued that the evidence was “hearsay” as there was no ability to cross-examine the author. The Tribunal ruled that the authenticity of the records had been proved beyond reasonable doubt by the criminal case in Italy and was therefore admissible at the Tribunal, even if it may not be in a Court of Law. An attempt by the UK taxpayer to get HMRC for specific disclosures of the Italian records was also dismissed as not being appropriate or proportionate.
Food glorious food
As ever, the world of VAT and food has given us another case to chew over. Walkers manufactures a product called “Sensations Poppadoms." HMRC ruled that the product was an exception to the general zero-rating of food for human consumption. One of these exceptions is for “any of the following when packaged for human consumption without further preparation, namely, potato crisps, potato sticks, potato puffs, and similar products made from the potato, or from potato flour, or from potato starch."
Walkers dropped their initial assertion that the product was designed to be used with dips (further preparation) as there were no instructions on the packaging for this or pictures of dips in the marketing of the product.
Walkers' version contains potato granules, potato starch, and modified potato starch, as well as a gram of flour. There then followed legal arguments of what the term “the potato” meant literally down to cellular level. The word “from” was also subject to scrutiny. You could tell the ruling wasn’t going Walkers' way when the summary said that the Tribunal found their contentions "interesting." Walkers also tried to use “fiscal neutrality” as an argument.
In their summary, the Tribunal revealed a much-concealed sense of humour in stating that “the use of the word "poppadom" is something of a red herring (to badly mix foodstuffs). The title given to a foodstuff is not what determines its VAT rating; what matters, in this particular case, is whether it is similar to a potato crisp and is made from potato.”
The product is similar to potato crisps, is mainly made from potato, and therefore is standard-rated.
Timing your time to pay
A business had found itself getting into arrears with VAT and becoming subject to the default surcharge regime. It realised that it would not be able to pay the VAT shown as due on the 09/21 VAT return, so called HMRC to arrange a time to pay schedule. A schedule was agreed, but the taxpayer still received a default surcharge notification for the 09/21 period.
It transpires that the call to arrange the time to pay was made on the 8 November 2021, one day after the due date for the submission and payment for the 09/21 return. As such, the penalty (the default surcharge) was applicable.
Although dealing with the now gone default surcharge, it is important to note that any approach for time to pay must be done before the relevant due date to prevent the penalties that may be applicable.
Aesthetic-Doctor.com Limited saw itself as providing medical care services by a qualified health professional. As such, the supplies were exempt, and the business was not required to be registered for or account for VAT.
HMRC disagreed and saw the services as not being medical care and therefore standard-rated. Rather, aptly they saw the supplies as cosmetic rather than medical. There have been a number of cases in this area where the supplier has argued that the work may be cosmetic, but the reason for it is for the therapeutic benefit of the patient. Some have qualified for exemption, and some have not. In this case, the main issue for the business was the lack of documented evidence for the relevant procedures. Although the directors of the business presented statements to support the exemption, this was not seen as being capable of determining the VAT nature of the supply.
Therefore, HMRC succeeded, but as the assertion was that the business was making taxable supplies and so should be registered for VAT, the assessment was not restricted to four years but was for the period between when HMRC said that the taxable threshold was exceeded and when HMRC first put forward their argument. In this case, nine years with a VAT value of £1.6 million.
This highlights two issues: the sometimes-grey area of what constitutes exempt medical service or standard-rated procedures; and that when it comes to backdating an entity’s effective date of registration (EDR), it is not time-capped by legislation.
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