VAT recovery on share sale costs

This is an important case that reflects the change in the ‘VAT views’ of judicial bodies over the years.

To fund the development of a new hotel the taxpayer decided to sell its existing hotel, by way of the sale of shares in a subsidiary which owned the existing hotel.

The taxpayer reclaimed the VAT incurred on the marketing and legal costs associated with the sale, as these were seen as costs relating to the taxable activity of constructing a new hotel.

HMRC denied input tax recovery on the basis that the costs related to the exempt share sale. The First-tier Tribunal agreed with the taxpayer, so HMRC appealed.

Now the Upper Tribunal has agreed with the taxpayer also. In doing so this ruling has created a precedent.

HMRC relied on a 1995 case, BLP Group Plc, where transaction costs had been attributed to an exempt share sale, rather than the subsequent application of the sale proceeds to BLP’s wider taxable activities.

The Upper Tier took the view that that that Court of Justice of the European Union had evolved considerably since 1995; in particular where there is a clearly identifiable ultimate economic purpose of a transaction. Equally, The Supreme Court in the UK had, in the case of Frank A Smart & Sons Limited, attributed the input tax incurred on acquiring non taxable assets (milk quotas) to the taxable farming of the activity of the business.

The outcome of this case could have far reaching effects, not just for transactions going forward but also for those in the last four years where the costs of a share sale has not been claimed but the circumstances reflect those of the case here. If the latter is a situation for your business, please get in touch.

VAT law: medical or cosmetic?

Initially my view was that this case highlights some of the grey areas in what qualifies for VAT exemption as medical services and what does not. However, the case really highlights that if you can’t substantiate what you say you do you can’t expect HMRC to accept what you say.

The business promoted themselves as providing the treatment of skin conditions, removal of lesions and treatment of varicose veins. They also advertised Botox treatments, tattoo removal, facelifts and described themselves as one of the foremost authorities of medico beauty in the UK.

In VAT law the exemption for health is framed so that it is not just what is being provided (medical care) but also the status of the person providing it – essentially, they need to be a relevant health professional, which usually requires them to be on a register for their specified profession (doctor, nurse, dentist, etc.).

The taxpayer was compulsory registered for VAT by HMRC in 2010, because the taxpayer had not provided HMRC with the evidence they required to demonstrate that the supplies being made were exempt as medical care provided by (or directly supervised by) a health professional. A request to review the decision to register the business was upheld.

To then compound the issue the taxpayer submitted several nil VAT returns on the basis that the services supplied were exempt. HMRC issued assessments for VAT on the basis that the supplies being made were taxable. It was these assessments that triggered the current appeal.

The taxpayer was not registered with the Care Quality Commission as the CQC said that the services they provided were not seen as regulated services. Whilst not the sole deciding factor, this did count against the taxpayer.

Whilst the director of the taxpayer said that services were undertaken by, or supervised by, a relevant health professional, no details of specific practitioners or their qualifications were given to the Tribunal.

The fact that a service has been supplied by a health professional does not automatically qualify it for exemption (the key case in this area was a doctor giving evidence at legal hearings) but again this was a factor that counted against the taxpayer.

A common complexity is whether a procedure is for the mental rather than physical health of the patient. This is often used to argue that what appears to be a cosmetic procedure is exempt because it addresses the mental health issues for the individual. Here this was dealt with rather abruptly by the Tribunal judge, “Although [the taxpayer] was of the view that the majority of patients attended the clinic because their condition was affecting their mental health, I do not consider that this means that the clinic must be considered to be providing entirely exempt services.”

In conclusion, it was the lack of evidence requested by HMRC, both for the issue of the VAT registration and the VAT treatment of the supplies, that was the main point that resulted in the taxpayer losing the case.

Import duties: a lesson from Wales

Whilst we don’t often cover import duty cases this one highlights the perils of not getting the paperwork correct.

In November 2016, an aircraft was flown from Bulgaria to Wales, where the taxpayer carried out maintenance work, then to Ireland, and ultimately to the US. The taxpayer had previously imported aircraft for maintenance under an end use authorisation (EUA). This special procedure relieves the imposition of duty on the import, but the taxpayer had allowed its authorisation to lapse.

In view of this HMRC issued a post-clearance demand which included customs duty of £275,547. The taxpayer appealed, saying that IPR, inward processing relief, (another special procedure) could be used with the same duty relief outcome as the EUA.

The Upper Tribunal agreed with the First Teir ruling; for IPR to apply the export from Bulgaria had to be indirect, and that as the export was classified as direct IPR could not apply. The taxpayer’s arguments of the illogical classification were not enough to overturn the First Tribunal’s findings. Despite other points being raised by the taxpayer, including legitimate expectation, the taxpayer was now facing a bill in excess of £300,000 (the post clearance demand included other charges) for repair works of £1,500.

It seems the Tribunal took a dim view of what they saw as the taxpayer’s negligence for letting the EUA lapse and this was a factor in the Tribunal finding for HMRC.

Trade Operating Model – further delays

We reported that HMRC had announced the imposition of tighter import checks on goods arriving from the EU to be effective from October 2023. These checks were initially planned to be in place in 2021 but have been delayed for various reasons (system requirements, COVID, infrastructure, England’s men’s team losing the Euros, etc.).

Given that there is likely to be an inspection charge of £43 per consignment (and these rules relate mainly to food and other organic products) the concern was the impact that these checks would have on food inflation. Therefore, the introduction of these checks has been pushed back into 2024.

For UK exporters the situation remains unchanged and their goods (food, animal products, timber, leather, etc.) are subject to such checks when arriving in the EU and require a health or veterinary certificates prior to export.

Get in touch

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

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