VAT Update – September 2024

In Go City Limited, the First Tier Tax Tribunal (FTT) has considered the VAT position of sightseeing passes sold by the appellant.

The appellant, Go City Limited (Go City) sells two types of passes, the London Pass and the London Explorer Pass, both of which entitled the purchaser to enter various attractions and use certain forms of transport in London without further payment. The passes were sold at a price lower than the usual admittance price at the attractions and usually expired after a year from purchase. Go City treated the passes as multi-purpose vouchers with VAT due when the pass was used to gain access or entry to an attraction or transport. HMRC considered the passes to be tickets, which essentially means single-purpose vouchers with VAT due when the passes were sold by Go City. HMRC raised assessments for under-declared VAT. It did so on a protective basis to ensure certain VAT accounting periods did not fall out of time in terms of the statutory limits for correcting VAT accounting errors.

HMRC originally accepted that the supplies were of face value vouchers, but later changed its view. It raised assessments for the deemed under declarations. These were issued as protective assessments, essentially on a precautionary basis as the statutory time limit of assessments was approaching.

The FTT found in favour of Go City in that the passes were multi-purpose vouchers and not single purpose vouchers (tickets).

Further, the FTT also concluded the assessments issued by HMRC were invalid because, at the time they were raised, HMRC had not formed the view that the VAT returns were incorrect and did not have a reasonable basis for raising the assessments.

Comments

Go City Limited is an interesting case both from a vouchers and assessment powers perspective.

The VAT treatment of vouchers can be complex even though there are just the two for VAT purposes – the single purpose and the multi-purpose voucher. The distinction is important to make as VAT is due each time a single purpose voucher is sold whereas VAT is only due when a multi-purpose voucher is redeemed.

HMRC will often raise protective assessments to prevent VAT accounting periods in which they consider errors have been made, but perhaps are not fully quantified at that point, falling outside of the statutory time limits for assessments to be raised. HMRC’s powers of assessment are important, and it should not be assumed that protective assessments have been raised in accordance with those powers. In Go City Limited the protective assessments were found to be invalid because HMRC could not demonstrate that they had formed the reasonable view that there were errors in the periods assessed.

Please contact Sean McGinness, VAT Partner and National Tax Partner, if you deal with vouchers or if you are subject to a current HMRC enquiry and HMRC is suggesting it will issue a protective assessment.

The case of Kenthouse Properties Ltd (TC09250) (KPL) illustrates the importance of demonstrating intentions and taking VAT advice. Mr Ghafar purchased a commercial property in 2014, opted to tax and registered for VAT; his intention was to convert it into residential apartments. If structured appropriately, VAT would not have been a cost to the taxpayer.

In 2016 Mr Ghafar transferred the property to a company he set up, KPL, and the transfer was treated as a VAT-free transfer of a going concern (TOGC), but the TOGC conditions were not met and VAT of £183,000 was due. KPL then tried to recover the VAT from HMRC, but HMRC rejected the claim on the basis that KPL, who had completed the conversion works, had already made short-term exempt lets of the property and held no evidence that it intended to make zero rated sales of the new apartments. There was therefore no basis for VAT recovery.

The taxpayer tried to argue before the First Tier Tax Tribunal that the original purchase was a TOGC, but the tribunal said that the appeal had been brought against HMRC’s decision to reject the claim for input tax, not the TOGC position. Therefore, the TOGC point was not considered, but as KPL was not VAT registered or required to be registered at the date of the transfer, and only opted to tax at a later date, it would appear to have had little or no chance of success on this point.

Comments

With a bit of structuring, KPL should not have ended up with a VAT cost and not ended up in tribunal. This case clearly demonstrates that businesses should always consider the VAT consequences and take appropriate advice before moving or disposing of any property because the amounts are usually significant. Taking action in advance can often ensure that VAT isn’t a cost or can at least be budgeted for. 

If you are planning property transactions including transferring property from one vehicle to another, or planning a residential conversion project, please get in touch with John Butterfield, VAT Director, for assistance.

In CCLA Investment Management Ltd [2024] UKFTT 636 (TC), the First Tier Tax Tribunal (FTT) concluded that investment management services supplied by CCLA to a number of investment funds is exempt from VAT.

The funds in this case comprise charity and local authority investors. Whilst CCLA had been treating certain investment management services as exempt, it had been applying VAT to others. CCLA argued that these services should also be within the scope of the VAT exemption for special investment funds. It submitted a claim to HMRC, which was rejected.

The relevant periods for the claim all pre-dated Brexit and CCLA sought to apply direct effect of the relevant provisions within the EU VAT Directive covering the exemption for managing special investment funds. Also relevant to the argument was the EU Alternative Investment Fund Managers Directive.

At the heart of the case was whether the funds being managed were the same in nature and characteristic to an undertaking for collective investment in transferable securities, or similar to the degree that the two were in competition, and both would attract the same group of investors.

The FTT considered each type of fund and applied certain rules to reach its decision that exemption did apply but only to specific funds. The principal rules of state supervision and a group of investors investing collectively were key.

Comments

VAT exemption applies to special investment funds, but there is no definition coded into VAT legislation. The government resisted the calls to do this following a VAT consultation on investment management services. Typically, the rules which must apply for VAT exemption to be available include state supervision and collective investment.

As a result of this approach, there is still some uncertainty within the sector as to what qualifies as a special investment fund. It is worth noting that in CCLA the FTT remarked that state supervision did not have to be direct for that condition to be met. A fund manager supervising the fund under Financial Conduct Authority controls and regulations would be sufficient. This may help to support the argument for exemption for type of funds.

The exemption for fund management remains a complex area and specialist advice is recommended. Please contact Nick Hart, VAT Director or Callum Richards, VAT Director.

Under VAT grouping rules, companies or partnerships seeking to be registered in a VAT group together must be established in the UK (or in the case of sole proprietors they must be resident in the UK for income tax purposes). The concept of establishment in this context is not specifically defined although through case law, there is a broadly accepted view of what constitutes a fixed establishment for place of supply rules. A fixed establishment is created when there is an establishment from which, some of, the activities of the organisation are carried out and which has the permanent presence of both the human and technical resources necessary for making or receiving the supplies of services in question.

In Barclays Service Corporation & Barclays Execution Services Limited [2024] UKFTT 785 (TC), the First Tier Tribunal (FTT) concluded that a UK branch of a US company was not established in the UK and did not have a fixed establishment at the time of application, preventing them from forming a VAT group together. When the VAT group application was submitted, the US company, Barclays Service Corporation, did not have sufficient human and technical resources in the UK capable of undertaking activities on a commercial basis, even though it had a UK branch. At the time, the UK branch of Barclay Service Corporation had a single employee who was working on other matters related to her previous role, rather than anything tangible for the US company.

Had a fixed establishment existed when the application was submitted, the FTT commented that HMRC would have been incorrect to reject the application on the grounds of protection of the revenue. VAT efficiencies arising from VAT grouping in this case would, in the FTT’s view, have been in line with the normal consequences of VAT grouping.

Comments

Another significant case on VAT grouping and UK establishment following the Upper Tribunal decision in HSBC Electronic Data Processing (Guangdong) Ltd [2022] UKUT 0004.

The FTT remarked that just because a UK branch of an overseas company had been registered with Companies House, it did not automatically mean there was establishment in the UK or that a fixed establishment had been created for VAT purposes. Following HSBC, the FTT was able to apply the fixed establishment concepts which have been derived from place of supply related case law, and concluded that such concepts were still relevant in the present case despite no services being supplied. A key point was that whatever presence the non-UK company had at the time of application, it was not sufficient to be making a commercial contribution to the overall operations of the non-UK company.

If you are considering VAT grouping a non-UK company, taking advice is recommended. Please contact Nick Hart, VAT Director to discuss further.

This case, Lycamobile UK Ltd v HMRC [2024] UKFTT 638 (TC), is one which will hold significance for telecommunications companies. The treatment of plan bundles from a VAT perspective and the point at which VAT becomes chargeable on supply (whether at the time the bundle is paid for or when the elements of the plan came into use) were considered in this tribunal.

Lycamobile sold plan bundles to customers in the UK, comprising of rights to future telecommunication services (eg calls, texts and data allowances), and rights to access other types of services (eg calls in non-EU countries), for a specified amount of time. Customers could also purchase SIM cards with credits, which could be used to access telecommunications services (Pay as You Go) or acquire plan bundles. Lycamobile’s view was that the various services comprising the bundle were only supplied as and when each service was used, and only to the extent that they were used.

HMRC viewed the bundles as being supplied when they were sold and were subject to VAT on the entirety of the bundle value, regardless of whether the services included were ever used.

Lycamobile’s appeal against HMRC assessments was based on the following grounds:

1. The plan bundles were multi-purpose face-value vouchers.
2. VAT was not chargeable at the time of activation because it was not possible at that time to identify the nature and extent of the services to be supplied.
3. There was no functional difference between the plan bundle and the top-up credit which could be used to receive telecommunication services. Such credits were face-value vouchers for VAT purposes, and general EU principles require that plan bundles be treated the same way.

Lycamobile’s appeal was unsuccessful. The First Tier Tribunal (FTT) concluded that there is principle within the VAT legislation (supported by case law) to suggest that a tax point for a supply of services cannot arise until the relevant information in relation to the relevant supply is known. Identifying any uncertainties existing at the time of sale is not necessary, and only the real supply which is being made needs to be identified. They concluded that the payment for the bundles was chargeable to VAT at the point of acquisition regardless of the extent to which they were used.

Similarly, bundles which allowed for access to additional services were to be treated as composite supplies, where the principal element was the allowances. Where an element of the bundle related to non-EU allowances, an adjustment should be made for use and enjoyment outside the EU. The FTT dismissed the notion that the bundles were face-value vouchers of any sort, either before or after changes to VAT law concerning vouchers which pre-dated Brexit.

Comments

This is a significant case not just for the amount of VAT involved (£50 million approximately) but because of the FTT’s conclusions regarding when VAT was accountable on the sale of a bundle.

Of particular importance for the FTT in reaching its decision was Hutchison 3G UK Limited V HMRC (HG3) [2018] UKFTT 0289 (TC)*. The FTT noted that there was no reason to suggest that uncertainty in the place of supply should prevent the time of supply from occurring, and that a tax point could arise before the place of supply was known. They also held that in HG3, the customer had paid for the rights to allowances which could be used, and the fact that they may not be used did not delay the charge to VAT.

If you are a business relying on the provisions related to multi-purpose vouchers or you are providing a bundle of services which the customer may not ever fully use and are delaying bringing VAT to account as a result, we would recommend speaking with one of our VAT experts for further guidance in light of the Lycamobile decision. Please contact Nick Hart, VAT Director, for further details.

*At the time of writing, a link to the Hutchison 3G UK Limited case was not available from the tax tribunal website. If you are interested in understanding this case in more detail, please contact us to discuss further.