VAT Update – April 2024

The Court of Appeal has dismissed the appeal in The Prudential Assurance Company Limited [2023] UKUT 00054 (TCC), finding in favour of HMRC in a matter that relates to the relationship between the VAT grouping rules and those which apply to a continuous supply of services, from a time of supply perspective.

The time of supply, which is when VAT needs to be brought to account on a supply with respect to a continuous supply of services provided over a period of time on a recurring basis, is the earlier of invoice date or payment date. In Prudential a company, Silverfleet Capital Limited, had supplied it with investment management services while registered together in a VAT group. The milestone which triggered the entitlement of Silverfleet to invoice for the investment management services did not arise until a time when it was no-longer a member of that VAT group, following a management buy-out. Silverfleet treated the supply as one made on an intra-VAT group basis ie disregarded for VAT purposes. HMRC disagreed with this approach and assessed a significant amount of VAT, on the basis the time of supply occurred after the two were no longer part of the same VAT group and therefore VAT was accountable.

The Court of Appeal on a split decision has dismissed the appeal following the Upper Tribunal decision, which also came down in HMRC’s favour.

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The case highlights two important points, especially the importance of getting the time of supply right, so that VAT is accounted for at the correct time when it’s due. Secondly, the implications to changes in a VAT group are considered in full at the time the changes are known to be taking place in the near future. In this case, the change to the VAT group was compulsory because of the buy-out, which meant that Silverfleet was no longer eligible to remain in the VAT group. In such circumstances it may be possible to amend contractual terms to ensure a time of supply occurs before any changes to the VAT group structure become required.

There are specific time of supply rules which apply in certain circumstances, including with respect to continuous supplies of services, and it’s important to know which set of rules applies to the supply being made. The conclusion in Prudential was that time of supply rules were not superseded by the VAT grouping provisions and if a supply is deemed to take place at a time when the two parties to the transaction are not registered in the same VAT group, the VAT group disregard does not apply, and VAT will be due.

Please get in touch with Nick Hart, VAT Director, if you’re planning anything which will result in changes becoming necessary to the make-up of an existing VAT group.

HMRC has recently updated VAT Notice 742A (‘the Notice’) Opting to tax land and buildings to reflect changes to the option to tax (OTT) acknowledgement process that came into effect in 2023, and to update the list of authorised signatories.

Changes to the OTT acknowledgement process

We previously reported on changes to the OTT acknowledgement process in our January 2023 VAT Update and in our FAQ article, Changes to option to tax for land and property owners. To recap, since 1 February 2023, HMRC has stopped issuing formal acknowledgement or receipt letters (other than autoreplies where a notification is submitted via email) for OTT notifications. The VAT notice has now been updated to show that HMRC no longer sends an acknowledgement letter when an option to tax is notified.

List of authorised signatories

Section 7 of the Notice provides a list of signatories, who in HMRC’s view are authorised and have the legal capacity to make an OTT election. For an option to tax election to be effective, the notification to HMRC must be signed and dated by an authorised signatory, or someone who has had authority granted to them by means of an authorisation letter signed and dated by an authorised person.

The list has been extended to clarify who the authorised signatories are for the following types of entities/organisations:

• Housing associations and other providers of social housing,
• Schools or colleges,
• Universities,
• Property Authorised Investment Funds (PAIF),
• Authorised Contractual Schemes (ACS),
• Self-invested personal pension (SIPPs),
• Pension funds, and
• Other organisations incorporated by specific Act of Parliament or Royal Charter.

The updated guidance from HMRC also reflects that for VAT groups, the member which holds the interest in the land or property being opted, may not always be a corporate body and the authorised person may be a sole proprietor or a partner in a partnership, if that is the relevant party within the VAT group which is making the election.

Finally, where the authorised signatory listed is not a natural person, the VAT notice has been updated to clarify that the OTT should be made by an authorised signatory for the relevant entity. For example, the partners in a partnership might be limited companies and in these cases a company director or company secretary of one of the partner companies should sign the OTT notification for it to be effective.

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It’s crucial for businesses to conduct appropriate checks to ensure that OTTs are validly made and notified to HMRC. This includes ensuring that it’s effective from the correct date, covering the correct piece of land or property, signed by an authorised signatory that is accepted by HMRC and correctly notified within the time limits.

If an appropriate person has not signed the OTT, the OTT is not valid. The issue may only come to light at a later date during a compliance check or as part of a due diligence exercise or when the property is being disposed. While the issue is potentially resolvable, it will likely require additional steps to correct the position and may delay transactions. Businesses must therefore take great care to ensure that the signatory was either someone who HMRC accepts as authorised or accompanied by an appropriate authority letter (which must still be signed by an authorised person). We recommend keeping documentation to show that the signatory on the notification is an appropriate authorised signatory at the time the OTT is made, and keeping the evidence with other records for the OTT notification.

Please get in touch with Nick Hart or John Butterfield, VAT Directors, for further details.

With HMRC updating the VAT Notice on record keeping (VAT Notice 700/21), it’s important to understand what details and information must be included for a valid VAT invoice.

Recent changes made by HMRC explain that it’s no longer necessary to provide the reasons why a supply of goods or services is zero-rated or VAT exempt. Previously, HMRC would have expected a statement to be included as to why the services where being treated in this way. However, this was never part of the law regarding what constitutes a VAT invoice and HMRC has therefore changed its view. Such statements can of course be included on an invoice should the issuer want to.

VAT invoices (on which standard or reduced rate VAT is being charged) are mandatory documents and must be issued in accordance with specific regulations which form part of VAT legislation. These regulations specify the minimum details which VAT invoices need to contain in order to be valid. Incorrectly issued or invalid VAT invoices can have a significant impact on both the supplier with respect to their VAT reporting, and also the recipient from a VAT recovery perspective.

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Issuing valid VAT invoices is a routine but significant task for VAT registered businesses, which should be mindful of not becoming complacent over. While many businesses adopt a standard invoice template, issues still arise, including:

• VAT invoices not correctly addressed to the party receiving the supply which leads to VAT recovery issues for the recipient and may ultimately result in a delay in payment until corrections are made,
• Lack of accurate description of goods or services being supplied,
• Separate VAT rates not being shown correctly, and
• Invoices issued in foreign currency with no conversion to GBP shown for the VAT amount being charged.

A lack of care when issuing VAT invoices can lead to delays in being paid, a loss of commercial reputation, and additional costs of making corrections.

Please get in touch with your usual Saffery contact for further information should you have a concern regarding the VAT invoices you are issuing or receiving.

The First Tier Tax Tribunal (FTT) case of Colchester Institute Corporation (No. 2) v HMRC [2024] UKFTT 191 (TC) (4 March 2024) was a follow on to previous litigation where the technical point of relevance centred around the VAT treatment of grants received by Further Education Colleges (FECs) in exchange for the provision of education and vocational training to students. The key question at hand was whether these grants constituted consideration for VAT purposes. The case delved into the nature of the transaction between the funding agencies and the FECs, exploring whether it amounted to economic activity. Additionally, it examined the definition and scope of consideration within the context of educational institutions.

The earlier litigation was a result of HMRC denying a claim for overdeclared output tax with respect to a capital expenditure project when Lennartz VAT accounting had been adopted to account for non-business use of the property asset. Following that litigation the appellant advised HMRC it would no longer be accounting for output tax under the Lennartz principle, and HMRC assessed for underdeclared output tax which prompted this particular appeal to the FTT.

In the previous decision of the Upper Tribunal (UT), in the case of Colchester Institute Corporation v HMRC [2020] UKUT 368 (TCC), it was determined that grants received by FECs constituted consideration for the supplies of education and vocational training provided to students. The FTT judge confirmed that he was bound by this UT decision. The sole use of the property asset was for an economic activity and therefore Lennartz VAT accounting did not apply and the output tax assessment by HMRC was therefore not valid.

Some of the key points, which reaffirm general principles of VAT, include:

1. In the present case the grants received by FECs were given in exchange for the provision of education and vocational training to students. This suggests a reciprocal relationship akin to a contractual agreement, where the funding agencies provide financial support in exchange for the educational services provided by the FECs.
2. The provision of education and vocational training by the FECs constitutes economic/business activity within the scope of VAT.
3. Consideration can be paid by a third party who is not a recipient of a supply. In the present case, it was the funding agencies making payments on behalf of the students receiving supplies of education.

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Determining whether a grant received is consideration for a supply requires a careful examination of the underlying transactions and relevant case law. The matter can be a complex one and taking advice is recommended, as incorrectly treating a payment as outside the scope when it’s actually consideration for a supply, can lead to under-declared VAT and the risk of interest and penalties when the position is corrected.

If you receive grants and would like to understand how this judgement impacts you, please get in touch with Callum Richards, VAT Director, or Aalia Ahmed, Senior Manager.

Chasing up debtors is all part of ensuring your business is in good order. However, paying creditors in a timely manner isn’t always top of the to-do list. While it’s important for businesses to pay its creditors for a number of reasons, one of these can often get overlooked, and that is VAT.

Where your business is not cash accounting and recovers VAT based on receipt of a supplier invoice, it should be aware that this is also partly provisional upon paying those suppliers. This is because VAT reclaimed must be repaid to HMRC on any purchase invoice which is more than six months overdue. It’s therefore important that businesses regularly review their aged creditors reports before filing each VAT return to identify invoices that are more than six months overdue, and where that is the case, they must make an adjustment to the VAT previously recovered. The VAT can be reclaimed again once the invoice has been paid.

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In our experience HMRC will regularly request aged creditor reports to check for unpaid purchase invoices older than six months past the payment due date, as part of their assurance activities. The review of aged creditors as part of the VAT reporting process is recommended to identify any costs which a VAT adjustment needs to be applied to. Failing to make the adjustment at the correct time is an error for VAT purposes and one which HMRC would assess for.

Please get in touch with your usual Saffery contact to discuss any of the points raised or for further details.