VAT Update – June 2024

In August 2023, we commented on VAT recovery on costs relating to the disposal of shares following Hotel La Tour (HLT)’s success at the Upper Tribunal (UT), which you can read about in full here. As outlined in our previous article, in this case, both the First Tier Tribunal (FTT) and UT found in favour of HLT that the VAT was indeed recoverable. HMRC then appealed to the Court of Appeal (CA).

In the judgment that was handed down on 21 May 2024, the CA has unanimously found in favour of HMRC and reversed the decisions of the FTT and UT. The CA found that the VAT on the professional services incurred by HLT were cost components of, and therefore directly and immediately linked with, the exempt share sale or not the intended taxable activities.

In arriving at its conclusions, the CA looked at a number of prominent cases, with a focus on Skatteverket v AB SKF (Case C-29/08) and BLP Group plc (Case C-4/94). The CA considered that the UT failed to apply the direct and immediate link test and made an error in law in disregarding the exempt share sale. The CA also stated that the tribunals have overstated the extent to which European caselaw has evolved since BLP Group plc. Also, the CA considered that the UT got wrongly distracted into an analysis of where the costs were incorporated, which was a point the UT placed great emphasis on.

While the CA has upheld HMRC’s appeal, it did indicate that should any costs have a direct and immediate link to the business as a whole and not the actual sale of shares, then there would be an opportunity for VAT recovery subject to partial exemption. Such costs would be residual for partial exemption purposes and partially recoverable on that basis. In HLT’s case the costs, with respect to which the VAT in question had been reclaimed, had a direct and immediate link to the share sale, and not to the overall business.

A secondary argument was also considered with regards to whether the existence of a VAT group between HLT and its subsidiary altered the position. HLT contended that the activity of disposing shares in its subsidiary should be disregarded in the same way supplies between VAT group members are disregarded, therefore input tax would be recoverable as related to the general taxable business as a whole. The CA held that the VAT grouping rules did not allow the fact that HLT was engaging in an economic activity (active management of its subsidiary) to be overlooked, so the share sale remained an exempt economic activity.

Comments

The CA decision is disappointing to many, but on reflection it’s perhaps not a completely unexpected outcome.

The FTT and UT decisions had generated a degree of excitement amongst holding companies that are undertaking similar fundraising activities as HLT, with some making large VAT reclaims and/or protective claims to HMRC to recover VAT associated with share disposals. That excitement is likely to subside in light of the CA’s judgement. However, the findings of the CA do indicate some opportunity for VAT recovery remains if it can be demonstrated that certain costs have a direct and immediate link to the business as a whole, and not a direct and immediate link to the sale of shares itself. It’s therefore important for costs to be analysed separately to see if any do have such a direct and immediate link to the overall business and therefore be considered an overhead. This would enable VAT recovery subject to the partial exemption position.

Given the CA’s decision, businesses should budget appropriately for any irrecoverable VAT on costs associated with sale of shares. Businesses that have made VAT claims for input tax associated with share disposals should take a proactive approach by reviewing those claims and seek advice to determine the appropriate steps to take. While it remains possible that HLT may seek to appeal to the Supreme Court, businesses considering making further protective claims should carefully review the position and seek advice so that an informed decision can be made.

In general, VAT recovery on costs associated with corporate restructuring (whether buying or selling) can be a complex area and one not to overlook when considering a restructure. The VAT team at Saffery is here to provide the specialist advice needed. If you have any queries with regards to VAT recovery on deal costs, please contact Nick Hart or Callum Richards, VAT Directors.

A key VAT principle is that only a recipient of the supply can recover VAT. HMRC does not accept the position that paying for a supply, means you have the right to recover VAT from HMRC. This has led to a number of tribunal cases, such as Redrow Group plc ([1999] STC 161) and Aimia Coalition Loyalty UK Ltd ([2013] UKSC 15), and a growing trend for tripartite or dual contracts to be used, to ensure VAT recovery is possible.

HMRC has recently released guidance (‘the Guidance’) on how this affects football agents, players and professional clubs. The clubs are VAT registered and generally pay the agents’ fees in full when they sign a player or negotiate a new contract, and the clubs naturally want to recover the VAT.  But are they the recipient of the supply on which VAT has been incurred? The Guidance, while not specifically aimed at VAT, highlights some of the VAT aspects of dual contracts and how clubs can justify VAT recovery on their share of the costs.

HMRC accept that an agent can represent both the player and the club where there is a dual representation contract but no longer accept a 50-50 split as the default position. This is a key factor in ensuring that some of the VAT charged by the agent can be recovered by the clubs involved. HMRC’s view is that there needs to be a commercial justification and evidence to prove that the split of agent’s fees between player and club services accurately represents the commercial reality of the transaction. Where this is done, the agent can invoice the club separately for the club services and the club can recover the VAT on this element, subject to normal rules.

Comments

While the Guidance is for a specific sector, it highlights an area that affects many other businesses where they incur costs and pay VAT, but are not necessarily the recipient of the supply or the only recipient. As stated, in order to recover VAT you must be a recipient of the supply on which VAT is charged (along with other conditions needing to be met). HMRC expect the person seeking to recover VAT, and not just football clubs, to be able to evidence that they requested, received and usually paid for said supplies, and the contract is likely to be key. The health warning here – just because you pay the VAT, it doesn’t give you an automatic entitlement to recover the VAT.   

Please get in touch with John Butterfield, VAT Director, for further details.

The recent case of Fount Construction Limited v HMRC [2024] UKFTT 340 (TC) is one which highlights the intricacies of VAT invoicing, and the importance of including the relevant information.

The appellant, Fount Construction Limited, incurred VAT on three contested invoices, totalling £15,218.59. Recovery of this VAT was initially disallowed by HMRC on the grounds that the invoices failed to meet the VAT invoicing requirements. Specifically, HMRC held that the invoices did not contain “a description sufficient to identify the goods or services supplied” and “for each description, the quantity of goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency” was not present.

The invoices in question contained the description: “Building Works at the above”, above which was a box entitled “Job address”, in which the address for the relevant building site was displayed.

Each invoice contained a VAT-exclusive subtotal, the amount of VAT charged, an overall invoice total, and stipulated that VAT was being charged at the standard rate.

HMRC argued that to be valid, a VAT invoice must contain sufficient information for them to confirm that the details were correct, the VAT incurred related to the activities of the business, and that the VAT was charged at the correct rate. They put forth that to this end, the description of the supply present on the invoices was insufficient.

In deliberation, the case of Deadoc Construction Limited v HMRC played an important role. The decision in this case set out the level of detail required by the statute.

The conclusions drawn in Deadoc showed that the level of detail required typically depends on the supplies being invoiced. Furthermore, in industries such as construction, it’s commonplace to provide less specific information on each invoice. While not sufficient to conclude that an invoice is legally compliant, the approval and payment of an invoice without challenge does suggest that it contains adequate identification and quantification of the supplies received.

The threshold for legal compliance was illustrated in Deadoc: where invoices contained short descriptions of services, their compliance with the regulation was determined by whether they contained reference to a specific site or contract to which the supplies related. In the absence of this information, or any other identifying information (such as period covered by the invoice), those invoices were held to be invalid.

The FTT in Fount Construction agreed that the purpose of the description on an invoice is firstly to afford the recipient and supplier a common understanding of which items the invoice relates to, facilitating accurate VAT reporting for both parties. The second purpose is to provide HMRC with a means of understanding the nature of the supply and identifying the supply in correspondence with relevant parties to seek more information as needed.

The FTT did not agree with HMRC’s assertion that an invoice description must contain sufficient evidence for the VAT treatment of the supply to be conclusively determined, noting that they have various powers to seek further information, and deny recovery of input tax if such information is not provided. Rather than serve to answer any questions HMRC may have, the FTT suggested that they serve as a gateway into any further enquiries by HMRC.

The FTT concluded that the invoices were compliant with the VAT regulations and allowed the appeal.

Comments

The outcome of this case is the right one and it does highlight the significance of the invoice and the information it contains. What needs to be included on an invoice, in terms of information and details, is legally prescribed, for the document to be considered a valid VAT invoice, and one which can be used as support for VAT recovery. Suppliers are legally obliged to issue valid VAT invoices, and customers are advised to review the invoices they receive prior to paying them, and to address issues with the supplier on a timely basis. HMRC will always want to examine VAT invoices when undertaking reviews or inspections and will disallow VAT recovery where the supporting document is not a valid VAT invoice.

In the case of Fount Construction, the point was sufficient description of the supply, but other common issues arise, such as lack of purchaser details, no tax point date, no VAT number, or invoices issued in a foreign currency, without the VAT in GBP being include. It pays to have sufficient processes in place to ensure VAT invoices being issued, and received, are valid.

Please contact Nick Hart, VAT Director, for further details.

The VAT liability question before the First Tier Tax Tribunal (FTT) in Gillian Graham t/a Skin Science [2024] UKFTT 00352 was whether the services offered by Skin Science (‘the Appellant’) consisted of the provision of medical care falling within the VAT exemptions which apply to healthcare. The Appellant runs a Harley Street clinic, specialising in skin disorders. While HMRC found the treatments being offered to be overwhelmingly cosmetic, the Appellant maintained they had satisfied the conditions for medical care exemption by diagnosing recognised medical conditions and providing treatment by a fully qualified nursing staff. The Appellant further contended that its treatments were primarily aimed to treat medical conditions while also having a therapeutic purpose, where the outcome of the treatment was a cosmetic improvement in the patients’ appearance.

The FTT concluded that the conditions being diagnosed were simply a result of the normal ageing process. Based on patients’ reviews, the treatments were being sought for cosmetic reasons rather than for medical reasons. The way the services were advertised were indicative of the treatments being intended for cosmetic rather than therapeutic purposes, the focus being on improving appearance. The Appellant was unable to satisfy that there was always a medical need for the treatments. The supplies being made therefore were subject to VAT.

The second issue the FTT considered was an assessment time limit issue, and whether an assessment raised by HMRC in 2021 was within legal time limits.

The relevant time limit here is one year after sufficient evidence of facts, in the opinion of the Commissioners, come to their knowledge to justify the making of the assessment. The 2021 assessment was made with respect to the accounting period starting 1 November 2007 and ending 28 February 2018, and was issued on 18 March 2021. HMRC’s position was that the appellant submitted a nil return on 27 October 2020, which has the effect of cancelling the auto-assessment issued on 7 September 2018, and this justified the making of a new assessment.

The appellant contended that HMRC had sufficient evidence to make the assessment prior to 18 March 2020 and the submission of the nil return did not comprise sufficient evidence for HMRC to raise a new assessment.

The FTT concluded that the nil return submitted by the Appellant in this case did not contain any new information and the fact that it was submitted could not be considered to have automatically cancelled or extinguished the original assessment. On this basis, the 2021 assessment was out of time.

Comments

The two technical elements considered by the FTT in this case, namely the medical VAT exemptions and assessment time limits, feature regularly in the courts. The outcome of Skin Science on each point was not a big surprise. On the time limits point in particular, it’s important to take advice whenever HMRC has issued an assessment to determine whether it has been raised ‘in-time’ with respect to the statutory time limits. The burden of proof here lies with the taxpayer here, to demonstrate from their perspective, when HMRC had sufficient time to make an assessment.

Please contact Callum Richards, VAT Director, if you would like further information on either technical aspect of this case.

HMRC has issued updated guidance to confirm that when a person/company which holds an EORI number deregisters from VAT, the EORI number will be cancelled by HMRC. In these circumstances, should an EORI number still be required to enable the person/company to import/export goods, or to continue to be able to apply customs procedures, a new EORI would need to be applied for.

The EORI (Economic Operators Registration and Identification) number is the means by which parties who are moving goods in and out of the UK are identified and recognised. For VAT registered parties, the EORI should be linked to the VAT number, and the number itself has similarities with that number (the EORI being the VAT number with a suffix then included).

The standard EORI has a GB prefix while EORI numbers for Northern Ireland have an XI prefix. EORI numbers can also be applied for even if the applicant is not VAT registered in the UK. It should be noted that GB EORI numbers are no longer recognised in the EU and so if a holder of a GB EORI wishes to import into the EU for example, it must apply for an EU issued EORI from one of the 27 Member States. EU EORI numbers are recognised and can be used across the EU Single Market (including Northern Ireland).

Comments

Awareness of the importance of the EORI number should not be understated, and changes in circumstances should be acted upon should those changes impact the EORI status of a business. It’s not common for a company which has deregistered from VAT to still require an EORI, but advice should be taken nonetheless to check the implications of HMRC cancelling the EORI, because the VAT registration has also been cancelled, and whether a new EORI would be required.

More commonly, complications do arise where a company joins or leaves a VAT group, and in this event the EORI status must be checked and updated where applicable to ensure no issues arise with importing or exporting goods, or in continuing to apply specific customs procedures, or customs licences issued by HMRC. It’s common for this to be overlooked and advice is recommended when making changes to a VAT group.

For further details about EORI numbers, please contact Nick Hart, VAT Director.