In our July VAT Update, we spotlight the limited circumstances when VAT can be reclaimed on the purchase of a car. We also consider the implications of the judgements in several recent cases, including a non-business deliberation involving PPE and one EU case on fixed establishments, as well as considering the concept of legitimate expectation following a high court decision. This month’s update from HM Revenue & Customs (HMRC) comes in the form of a new task force to address correspondence over 12 months old — that’s still without a response.
Many businesses utilise cars and commercial vehicles as part of their trade. The VAT recovery position when purchasing or leasing vehicles is often queried, and in the case of cars in particular, the entitlement for a business to reclaim the VAT paid is very limited. The position is a more favourable for vehicles which are not cars and qualify as commercial vehicles.
HMRC has definitions for both cars and commercial vehicles and identifying the type of vehicle being purchased or leased is the starting point.
For VAT purposes, a car is a vehicle normally used on public roads which has three or more wheels and is either:
- Constructed or adapted mainly for carrying passengers; or
- Possessing passenger seats to the rear of the driver’s seat, where side windows are fitted, or where the vehicle could be adapted for the fitting of side windows.
A commercial vehicle is:
- Primarily designed to carry goods rather than people.
- A vehicle with no windows in the load-bearing part.
- A vehicle which has a total fully-loaded weight of less than 3,500kg.
- A vehicle with a payload of 1 tonne or more.
When purchasing or leasing a commercial vehicle, a business can potentially fully recover the VAT paid, subject to the standard rules for input tax recovery and partial exemption. HMRC permit some incidental private use of the vehicle, however apportionment of the input tax may be required if the private use is more than incidental.
Cars, unlike commercial vehicles, are less straightforward. The input tax recovery when acquiring a car depends on whether it has been leased or purchased outright. As a general rule:
- There is a 100% block on input tax recovery for car purchases and any accessories fitted at the time of purchase, subject to some exceptions; or
- There is a 50% block on input tax recovery for lease payments on leased cars.
The block is necessary to account for private use of the vehicle. There are instances in which input tax recovery is not blocked and the VAT is recoverable, subject to normal rules, and these are if the vehicle:
- Is a stock in trade of a motor manufacturer or dealer.
- Intended to be used primarily as a taxi, driving instruction car, or self-drive hire.
- Will be used exclusively for the purposes of the business and is not available for private use.
In practice, it’s very difficult to successfully demonstrate to HMRC that a car is not available for private use. The test here is not whether it’s used for private purposes, but that it’s available for such (eg there is no reason to prevent it being used for private journeys). If a car is a genuine business pool car, then the opportunity to reclaim the VAT certainly improves, particularly if that car is available to, and used by, more than one employee, by reason of their employment.
Because of the input tax recovery block, many businesses find leasing cars more attractive from a VAT perspective. It’s important to carefully examine the leasing agreement to determine what type of agreement it is, for VAT purposes.
When hiring a car, it will typically be through a lease arrangement or a hire purchase agreement. If the car is leased, then at the end of the contract period, the car is returned to the leasing company. Provided the leasing company issues valid VAT invoices, 50% of the input tax on the leasing charges can potentially be recovered with the other 50%, blocked from recovery to take account of private use of the vehicle. The recoverable 50% is still subject to the taxpayer’s partial exemption position. If a lease is terminated early, any early termination fees will be subject to VAT and have the 50% input tax recovery block applied to them. Most lease companies will offset any termination fees against any rebate due and issue an invoice for the difference. Any VAT on this invoice will also be subject to the 50% block.
With a hire purchase agreement, at the end of the contract period, ownership of the car is transferred to the customer and therefore such agreements are treated the same as outright purchases, and so the 100% input tax block will apply, as described.
If you’re considering acquiring a new vehicle for use within your business, please get in touch with Nick Hart, VAT Director, for further advice.
On 23 March 2020 the Prime Minister announced restrictions on when people could leave their homes to prevent the spread of Covid-19. Three days later the community interest company 3D was incorporated, and by the end of May they had enlisted numerous volunteers and donated 200,000 face shields to the NHS.
3D registered for VAT because the intention had been to sell 3D printed face shields, but this was not possible to begin with without the appropriate BSI approval and CE mark. As 3D lacked this at the time (CE certification was obtained on 21 September) it made the decision to start donating face shields to care homes and the NHS to help with protection against Covid-19. 3D submitted a claim to recover VAT on costs associated with producing the face shields, which was subject to an HMRC assessment, which was appealed to the First Tier Tax Tribunal (FTT).
The FTT made a point of putting on record that: “although HMRC denied 3D’s input tax recovery claim, they were at pains to make it clear that they sympathise with 3D’s position and are aware of the importance of their actions. They say they are bound by the legislation and are unable to act outside it; they have considered the evidence available to them and, in their opinion, have applied the legislation correctly”. The burden of proof was on the taxpayer and not on HMRC to justify its decision.
HMRC applied the principle that, to recover VAT incurred as input tax, it must be incurred for business purposes, and argued that as per Longridge on the Thames v HMRC, [2016] EWCA Civ 930 there must be a direct link between the services or goods supplied and a payment received by the supplier, and following Wakefield College v HMRC [2018] EWCA Civ 952, an activity is only a business activity if it results in the supply of goods or services for a consideration. In HMRC’s view, 3D did not carry out an activity that resulted in a supply of goods (or services) for consideration, because the face shields were made to be given away, and therefore the costs incurred could not be said to have been incurred for any business activity. HMRC accept that it may be possible for VAT incurred on research and development (R&D) to be recovered, where the aim is to make taxable supplies following that R&D phase of work.
3D argued that the VAT should be recoverable as it was incurred on costs that laid the groundwork for future taxable supplies. It also argued that it was clear from correspondence with the NHS, MoD, etc that the intention was to sell face shields, but the timing and certification points initially prevented this.
The FTT found that 3D was seeking to enter into contracts to supply face shields in return for payment and was looking to cover its costs through these charges (supplemented by donations where these could be sourced) so that it had a sustainable basis for a long-term operation. 3D was intending to make taxable supplies at some point in the future and could demonstrate and support this intention. That 3D’s inability to realise its plans did not, in the absence of fraud or abuse (of which there was no suggestion here), impact on its ability to recover input tax as an intending trader.
HMRC’s submission was that the VAT incurred in the period was not related to the cost component of a taxable supply and so was not input tax. That 3D incurred VAT on costs which it knew at the time it incurred them it would not be able to use to make taxable supplies, because it would need a government contract or BSI accreditation.
The Tribunal held that to some extent the costs incurred in producing the face masks had a business purpose, but were not satisfied that was the only purpose of incurring the costs and therefore the VAT should be apportioned. It directed the parties to work together to agree the method and quantum of the apportionment. The FTT did allow VAT on the direct and immediate cost of BSI/CE accreditation, as this was incurred solely for business purposes.
Comments
This case again highlights issues with businesses undertaking non-business activities and the impact on VAT recovery, as well as the need for businesses to always consider the VAT implications of any changes of intentions that can unwittingly impact on the VAT position.
Business should be mindful of any activity that they pursue which results in goods or services being provided in return for no payment. As a starting point, HMRC will generally see such activities as non-business, and seek to restrict input tax recovery as a result. In the case of 3D, the non-business activity of giving face masks away for free occurred before any taxable supplies had been made, and the FTT reached a reasonable conclusion that the VAT on the costs of producing the face masks being reclaimed should be apportioned, as there was still a supportable intention for 3D to sell face masks once it had everything in place to legally do so. Taxpayers are strongly encouraged to document their intentions clearly when incurring costs in advance of a future business endeavour to ensure they can fully support input tax recovery.
If your organisation or business does anything for which it does not charge a fee or collect income, please do get in touch with John Butterfield, VAT Director, to discuss the implications on the VAT position.
Legitimate expectation can arise in a number of different scenarios, but in the case of R (Realreed Ltd) 2023 EWHC 1572 CO/2712/2020, the taxpayer believed they could rely on it where HMRC had undertaken a number of VAT inspections, during which the VAT treatment being applied to the provision of serviced accommodation was not questioned. The company had been applying the VAT exemption to its supplies, until during a later inspection of its records by HMRC, the officer concluded the supply was taxable and subject to VAT, and issued an assessment for under-declared output tax going back four years.
The taxpayer argued they had legitimate expectation and that HMRC should allow it to correct the VAT treatment going forward, but not seek to collect VAT on historic supplies made, given the assessment raised of £4.8 million would cause significant loss to the business. The taxpayer applied for judicial review. The High Court considered the application before the FTT has considered the appeal lodged by the taxpayer, with respect to the liability of the supplies as they still maintain VAT exemption should apply.
The High Court rejected the application for judicial review. In its view there was no evidence to suggest that during the earlier VAT inspections, HMRC had considered the serviced accommodation supplies and been happy they were being correctly treated as exempt. HMRC had not questioned the VAT treatment being applied during those earlier inspections, but this did not create a legitimate expectation and the burden still rested on the taxpayer to ensure it was taking the correct VAT position with respect to all of its activities.
Comments
It will be interesting to learn the outcome of the pending appeal to the FTT in this case with respect to the liability of the supply of serviced accommodation. The High Court’s rejection of the application for judicial review, largely on the legitimate expectation point, once again highlights how difficult it is to successfully argue legitimate expectation, when relying on something HMRC has not done rather than something it has done. Whilst one might have expected previous HMRC inspections of the VAT records to have considered the VAT liability being applied to all supplies being made by the taxpayer (including ones which are significant enough in value to have resulted in a £4.8million assessment) however in this case there was insufficient evidence that HMRC Officers had considered the serviced accommodation position and been happy with it.
This case highlights the risk of relying on HMRC inspections as support that all VAT accounting within the business is correct. HMRC stress that such inspections are not an in-depth audit of all aspects of VAT accounting, and their risk-based approach to obtain assurance through credibility checks will often mean they do not consider a particular position being applied, which may actually be incorrect, and does not come to light until a later inspection or review by HMRC. VAT is a self-assessed tax and taxpayers have an obligation to ensure the correct treatment is applied. Regular in-house reviews of processes and controls are recommended, even when HMRC have inspected the records within the last four years.
Please get in touch with Nick Hart, VAT Director, if you’d like to discuss a VAT health check or if you’re relying on legitimate expectation when applying a certain VAT treatment.
In acknowledgement of some service issues, HMRC has set up, on a trial basis, a taskforce to deal with post received from taxpayers and agents which remains unanswered. HMRC is prioritising anything which is over 12 months old with a view to significantly reducing the backlog over the next couple of months or so.
HMRC is also allowing agents to use the online Agent’s Issue Resolution Service to highlight and escalate correspondence over 12 months old, which HMRC has never responded to. This process will be managed through the Agent Account Manager (AAM) team at HMRC which is designed to assist agents resolve issue.
Comments
The setting up of the task force by HMRC is a positive move and it is hoped it results in outstanding legacy matters being addressed by HMRC now. It’s unclear whether the task force will be assigned to VAT group registration applications or VAT error correction notices over 12 months old, or indeed other VAT matters, but any moves by HMRC to respond to taxpayers’ or their agents’ communications are welcome.
The CJEU recently ruled that a fixed establishment was not automatically created by a Swiss principal through an associated business in Belgium.
Cabot Switzerland GmbH (Cabot-CH), registered in Switzerland, acted as the main operating company for the Cabot Group and had recently concluded work on a contract with its associate in Belgium, Cabot Plastics Belgium SA (Cabot-BE). Both entities are legally distinct from one another despite being part of the same corporate group.
Cabot-BE processed and stored raw materials (owned by Cabot-CH) into products used in plastic manufacturing. The products were then sold by Cabot-CH, from Cabot-BE’s premises in Belgium, to customers in Belgium and the rest of world. The agreement between Cabot-BE and Cabot-CH, effectively constituted all of Cabot-BE’s economic activity.
If Cabot-CH had a fixed establishment in Belgium, then Belgian VAT was due on the toll manufacturing service provided by Cabot-BE. Where Cabot-CH belonged would determine the place of supply.
The CJEU ruled that for a fixed establishment to exist, it’s not necessarily a requirement for a taxable person to own the human or technical resources, it is however necessary for that taxable person to have the right to dispose of those human and technical resources in the same way as if they were its owner. In the case of Cabot-BE, the CJEU determined that Cabot-CH had immediate and permanent access to the resources of Cabot-BE as if they were its own resources, however, ultimately Cabot-BE, the provider of the services, remained responsible for its own resources and provided the toll manufacturing at its own risk. The contract between the two companies, although exclusive, did not mean Cabot-BE’s resources became those of Cabot-CH. Cabot-CH therefore did not have a fixed establishment in Belgium and Belgian VAT was not due on the toll manufacturing service provided.
The CJEU noted that previous case-law (Berlin Chemie C-333/20) has determined that for a company to be considered as having a fixed establishment in a country, it must have a sufficiently permanent presence to enable it to receive such services and use them for its business.
The CJEU disagreed with the Belgian tax authorities and noted that the services were received and used by Cabot-CH in Switzerland. Therefore, the treatment of the services by Cabot-BE as being outside the scope of Belgian VAT, was correct.
Comments
The concept of fixed establishment is that it is a place other than the place of establishment of a business, characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources, sufficient to enable it to receive and use the services provided to it for its own needs (see, Welmory, C‑605/12 & Berlin Chemie, C‑333/20).
The decision by the CJEU in Cabot Plastics Belgium SA is an important one as it supports earlier European case-law in Berlin Chemie and adds further clarification on the European understanding of a fixed establishment for VAT purposes. The concept of fixed establishment is a much debated one and the subject of extensive jurisprudence in a number of different scenarios. Despite this, grey areas can still arise, which are come down to a degree of subjective interpretation.
This judgement has also helped to address some of the confusion caused by the Dong Yan (Case C‑547/18) case where the CJEU ruled that a subsidiary can constitute a fixed establishment of a parent company. We commented on Dong Yan in a previous update.
Whilst HMRC is no longer bound to apply CJEU’s judgements within VAT policy, it is important that UK businesses trading with EU partners continue to stay abreast of VAT developments in the EU, including CJEU judgements on VAT principles which are still part of our own VAT legislation and HMRC guidance.
Please get in touch with John Butterfield, VAT Director, for further insights.
