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Monthly VAT update: January 2023


A new year with resolutions and goals but surely we can rely on the ever constant that is VAT?

Subway franchises: the ratios between standard and zero-rated supplies

Another VAT case about best judgement by the assessing Officer; but this is yet another one for a Subway franchise. It seems that HMRC have put together information to give them what they believe to be the ‘correct’ picture regarding the ratios between standard and zero-rated supplies.

Given that the cases highlighted have been won by HMRC, they will no doubt look to target more Subway franchises (larger than McDonalds in the UK), and then extend to similar retailers where the lunch order begins with a bewildering array of bread choices.

Late but not great: identifying the steps taken by HMRC

Several years ago there were a number of VAT cases where significant number of businesses ‘stood behind’ a lead VAT case, usually taken by a big business affected by the relevant ruling.

One such instance was the VAT treatment of prize machine takings. These were referred to as Rank claims as The Rank Group was the taxpayer in the lead case.

The usual scenario was for a claim to be made to HMRC, have it rejected and then appeal awaiting the outcome of the lead case.

Despite these being many years ago the effects are still impacting businesses. In a recent case the process was that HMRC initially paid out the claim but then issued a protective assessment. The taxpayers then paid HMRC the money back but when HMRC finally threw in the towel in 2020, the taxpayers were told by HMRC that by failing to appeal against the protective assessments the claim was no longer live. This case shows how important it is to ensure that any steps taken by HMRC are identified and if an appealable event the relevant processes are followed in a timely manner.


Another lead case has been heard where a car dealer has claimed for additional payments from HMRC due to Departmental Error. Our recent article, Incorrect VAT treatment of transactions and interest , covers this in detail but the origins of this case goes back to 1996. The heading of Fleming is due to the original claims being referred to as Fleming claims due to an appeal bought by a relative of Ian Fleming who was, naturally, an Aston Martin dealer.

The court dismissed the three points that the taxpayer made, and their claim of £200,000 failed. But as a lead case it is thought that the true value of the claims was in the millions.

Framework control and staff

A business supplied qualified doctors to A&E departments of various NHS Trusts. The Taxpayer took the view that the supplies being made were those of a medical professional so were exempt. The court ruled that the supply being made was one of staff under the control and direction of the NHS Trust.

The relevant health professionals had levels of seniority and autonomy for clinical decision-making; so the control here referred to the “framework of control”, with regards to factors such as the place and hours of work and the requirement to comply with local policies.

This has been a contentious area of VAT for a very long time, and referrals back to other court decisions didn’t help the taxpayer as they were not “on all fours” with their situation.

Cold turkey

In European Court cases it is usual for there to be an opinion given by an Advocate General (AG) first which the Court may or may not follow in giving their ruling. More often than not the Court agrees with the AG but it is not a given. A taxpayer in Germany rented turkey (“Das Truthahn”) rearing sheds which came with inbuilt fittings for heating, watering and feeding the birds. The supply of the sheds was not subject to VAT (indicating that Germany operates a similar option to tax system to here). The German authorities assessed for VAT underdeclared on the leasing of the fixtures. The European Court has ruled that where the main supply (the sheds) is not taxable the VAT treatment of the ancillary supply (the fixtures) follows that of the main supply. This may seem a sensible approach and follows a key UK case of this type namely Card Protection Plan (CPP) where the VAT treatment of the main supply (which in itself can be difficult to identify) applies to ancillary supplies too. However, the primary EU directive whilst exempting the letting of immoveable property has a specific exception to that exemption for ‘letting of permanently installed equipment and machinery’. The AG has ruled that this exception does not apply in this instance as the sheds and fittings formed, objectively, a single indivisible supply.

It will be interesting to see if the Court agrees with the AG and if they do whether HMRC would see this as applicable in the UK.

Catch 708: what constitutes a village hall?

HMRC have updated the public notice 708 “Buildings and Construction” with the aim of clarifying their views as to what constitute a village hall. This is important as a village hall can benefit from zero-rating for its construction.

Regular readers will be aware of the constantly shifting sands of HMRC’s views as to what is a relevant charitable purpose (RCP) building and/or a village hall. It has been said that the legislation was drafted in such an historically rose-tinted way that anything built after 1945 would be in trouble.

Equally, Tribunal definitions of a local amenity for local people has reached League of Gentlemen proportions.

The clarification seems to be contradictory in saying that it can be run as a business but not operated as a business; and seems to suffer from trying to take into account HMRC’s relatively new definition of what constitutes a business activity; but the result is a picture really no clearer than before.

Just enrichment?

It is a long established principle that where a supplier has overcharged VAT it cannot get a refund of that VAT overpayment unless it puts in place a methodology to refund the customers who paid too much VAT. Otherwise the supplier business would be “unjustly enriched”. In another EU case (except this is a judgement by the Court) a taxpayer provided soft play services to members of the public. It was decided that the rate of VAT charged to the public was incorrect (too high), but the relevant authorities refused to refund the difference citing unjust enrichment.

On the basis that none of the recipient of the service were able to reclaim the VAT (privately incurred rather than a business expense), the Court ruled that the repayment was not subject to unjust enrichment restrictions.

This is an EU Case that HMRC may not agree with but should a UK business be in a similar position it would be interesting to see they would deal with such a claim. Equally if a business has had a similar claim rejected on unjust enrichment grounds this should be reviewed to see if this could be challenged.

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

This article is from the latest issue of our VAT newsletter. To receive future copies of any of our newsletters directly to your inbox, please register your interest  via our preference centre.

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