A belated Happy New Year from VAT Insights. We have plenty to look forward to in the rest of 2022 and, indeed, plenty to cover in this the first edition of the year. In particular, HMRC may have concluded that major simplification for the VAT land exemption is off the cards for now following responses to its Call for Evidence, but that does not stop the flow of cases illustrating why, in an ideal world, simplification of the rules would take place. This edition references two such cases, one involving the fundamental question whether a supply was one of land at all and another looking at the VAT treatment of break fees in a lease.
As well as the cases concerning the application of VAT to land transactions, in this edition we also cover the following recent VAT developments:
- whether an exempt sale of shares to raise funds for a taxable activity has a "chain breaking" effect;
- when VAT is "due" or "paid"; and
- when statutory operating requirements may affect the correct VAT analysis.
We produce more detailed reports on the most significant tax developments so if you scroll to the bottom, there's a list of the most important issues we have covered, with a link to our more detailed report.
If you are interested in finding out more about the below or have a specific indirect tax query, please don't hesitate to get in touch. In particular, we would like to draw your attention to our next webinar, Transfer Pricing Adjustments and VAT: the price of everything and the value of nothing? which is on 8 February at 9.30am, where we'll be looking at the interaction between the arm's length principle which determines the transfer "price" and the open market "value" (OMV) for VAT purposes. What happens when you know all the "prices" of your costs but not the "value" of your supply? Use this registration link to sign up.
VAT and land transactions: taking a functional approach
It was only last November that the government announced that they had decided not to take forward their more radical suggestions for simplifying the VAT land exemption (see our article). One of the issues covered in their Call for Evidence was the fundamental difficulty of distinguishing between a supply of land and a taxable supply of services, an issue that is exemplified in the recent City YMCA London case. The case concerned the correct VAT treatment of supplies of accommodation at the YMCA with HMRC arguing that they fell outside the VAT exemption on a number of grounds, including the argument that it was a mixed supply of services. However, perhaps the most interesting argument was that a provision in the agreement expressly providing that residents did not obtain exclusive possession prevented the supply from being one of land as a right to exclusive possession is a necessary precondition for a supply to have the character of a lease or letting of property.
The FTT's approach to these arguments is worth studying. The FTT emphasised that it was wrong to directly equate the domestic law concept of a right to "exclusive possession" with the broader Community concept of a right to use property to the exclusion of others. Furthermore, the FTT stressed the need to approach the question looking at the economic and commercial reality of the situation with an eye on the function of the VAT exemption and the exceptions to it. Applying these twin approaches, the FTT concluded that the supply was one of land albeit one that fell within the exception for hotel accommodation.
There is no doubt that such a nuanced approach helps to reach a result in line with the purpose of the VAT rules. But, equally, such an approach does not always lend itself to a simple and straightforward application of those rules!
VAT and lease break fees
A real area of difficulty at the moment is the correct VAT treatment of compensation payments - in particular, whether payments amount to consideration for a supply or are purely compensatory and outside the scope of VAT. The previously accepted position was undoubtedly changed by the recent CJEU cases of Vodafone (C-43/19) and MEO (Case C-295/17), which recognised certain termination payments provided for in contractual arrangements as additional consideration for the supplies made under those contracts rather than merely compensation for early termination of those contracts. However, the position was arguably made even less certain by HMRC's controversial guidance in Revenue & Customs Brief 12/20, which they were subsequently forced to withdraw in January 2021 after adverse feedback. It was to be replaced by further updated guidance "shortly". Of course, that guidance is still awaited over a year later.
The issue and withdrawal of that guidance forms the backdrop to a recent Scottish case on the correct VAT treatment of break fees: Ventgrove Ltd v Kuehne + Nagel Ltd [2021] CSOH 129. It is not a tax case, but involved a landlord arguing that a tenant had failed to correctly exercise a break clause in a lease since it had failed to pay VAT as required. In determining that question, the Scottish Court of Session was required to consider whether VAT was due on the payment and it held that it was not. The decision is partly based on the fact that HMRC's revised guidance (which indicated such payments should be subject to VAT) was withdrawn at the time of the payment (February 2021). However, of potential greater interest is that the Court also considered whether the CJEU decisions in Vodafone and MEO affected the correct VAT analysis. The Court concluded that those cases could be distinguished from the exercise of a break clause in a lease. The court categorised the CJEU cases as essentially cases involving compensation for failure to complete the minimum contractual term. That was not the same situation as a contractual entitlement to bring a contract to an end after a specified period upon payment of a fee.
We will have to wait and see whether the Court's analysis of the MEO and Vodafone decisions in this case influences the final outcome of the revised guidance.
Attributing input VAT incurred on fundraising transactions
The attribution of input VAT following the 1995 decision of the ECJ in BLP seemed simple (if unhelpful). It did not matter if a taxpayer had a wider purpose in selling shares (an exempt supply), any input VAT must be attributed to that exempt supply and so could not be recovered. The VAT analysis has come a long way since BLP, however, with CJEU cases (such as C&D Foods Acquisitions ApS v Skatteministeriet) now indicating that the wider purpose of the transaction may well be relevant and the exempt supply will not always have a "chain breaking" effect.
The recent FTT decision in Hotel La Tour Ltd v HMRC is a very useful addition to the case law in this context. The case contains a careful and lengthy analysis of the case law and concludes that it is possible to ignore the chain-breaking effect of the exempt supply of shares in a "fundraising" scenario (in this case the share sale was to raise funds for a hotel development). The one exception would be where the relevant costs were incorporated in (and thus a cost component of) the exempt sale of shares. However, the decision indicates that where (as in most cases) the seller simply obtains the best price possible in the market for the shares, those costs will not be a cost component of the sale. Rather they are a cost component of the intended taxable activity since those costs reduce the funds available for that activity.
VAT due and paid
It has taken a long time for the Zipvit case to reach the end of the road - and sadly for the taxpayer the final CJEU judgment is something of a disappointment. Zipvit's individual case always appeared a bit of a long shot, but it did at least hold out the prospect of helpful guidance from the CJEU on more general issues, such as the requirement for a VAT invoice. Unfortunately, the CJEU judgment is a disappointment also for practitioners on that score.
The Zipvit case arose out of the decision in TNT Post UK (Case C 357/07) that the postal service exemption from VAT did not apply to public postal services for which the terms have been individually negotiated. Zipvit had not been charged VAT by Royal Mail as everyone had assumed that the supplies were exempt and even after the TNT Post UK decision neither Royal Mail nor HMRC sought to recover VAT on historical supplies (largely on the basis that they were either out of time or there would be a defence of legitimate expectation). Nevertheless, Zipvit argued that it was entitled to input VAT recovery on the basis that the consideration it paid must have included VAT. It had two major obstacles - firstly, the contract price was expressed to be exclusive of VAT and secondly it didn't hold a VAT invoice.
The decision of the CJEU focussed on that first hurdle and unsurprisingly held that, in the circumstances, VAT had not been "paid" nor was it "due" for the purpose of Article 168(a) of the Principal VAT Directive, so there was no entitlement to input VAT. As a result, Zipvit lost and as a further result, the Court did not go on to comment on the significance of the lack of a VAT invoice. That is unfortunate as it is far less clear what the position would have been had the price been inclusive of VAT but the trader did not hold a VAT invoice.
VAT and agency arrangements
The correct application of VAT to agency arrangements can be a minefield. There is a long and distinguished list of cases going back to the House of Lords decision in Redrow on the correct approach to analysing tripartite arrangements from a VAT perspective. These cases indicate that the starting point for the VAT analysis is the contractual arrangements but regard must be had to the commercial and economic reality also. Stating the correct approach is one thing, of course – applying it to the particular facts can be something altogether more difficult. And the correct analysis can affect a number of different and equally important features of any arrangements – who is making the supply, what are they supplying, what is the consideration, who is receiving the supply, for example.
In addition to these factors, we now have to add the question whether there are any particular non-VAT statutory rules which impact on the analysis. An example of this is the recent case of R (on the application of Untied Trade Action Group Ltd) involving Uber. The High Court has held that a licensed operator which accepts a booking from a passenger is required to enter into a contractual obligation as principal with the passenger to provide the journey which is the subject of the booking in order to operate lawfully under the Private Hire Vehicles (London) Act 1998. Although not a VAT decision, this is likely to prove significant in the context of the question whether Uber and similar operators are required to account for VAT on the full consideration paid by customers.
Other issues we have recently covered
Revised draft guidance on the uncertain tax treatment rules
Taxpayers and advisers have only until 1 February to respond to the latest updated guidance published by HMRC on the uncertain tax treatment rules. And there is a lot to digest, including some significant changes to the examples on the application of the rules to VAT transactions and in particular the way in which it will not be possible to set off resultant VAT credits against the threshold limits.
ESG: a critical part of the tax agenda
The latest edition of our Global Insights webinars sees members of our international tax team discussing the growing importance of ESG and its relevance to the tax function within a business.
Implementing Pillar Two in the UK: consultation
The UK government has published a consultation document on implementation of the OECD Pillar Two rules. As well as a high level consultation on how best to implement the internationally agreed rules in the UK, the government has indicated that it intends to introduce a minimum UK tax rate of 15% to ensure that the UK Exchequer benefits from any additional taxes levied on UK companies that might otherwise fall foul of the rules.
Review of tax administration for large businesses
Following a review of large businesses' experiences of UK tax administration, the government has published a summary of feedback and proposed a number of steps to take to improve engagement with taxpayers, focussing on improved guidance, improved processes for long-running enquiries and continuing to improve the CCM model.
Our tax disputes team picks its list of top tax cases from 2021, including a festive sprinkling of VAT cases.
Tax disputes in the UK: Outlook for 2022
Last but not least, we have also peered into the looking glass and set out our insights into the key tax dispute trends we expect to see in 2022.
The latest edition of our Tax Controversy Podcast series covers the question what other options remain to taxpayers to deal with cross-border tax disputes if the mutual assistance procedure (MAP) fails.
Podcast series: tax controversy
If you haven't already signed up to our podcast series there is still time to do so! There's a huge focus on tax collection and controversy as governments seek to raise revenues to support economies. And we know transfer pricing is one of the most promising ways for tax authorities to collect revenue. You can register for our future podcasts and also listen to earlier ones on a wide range of topics from this page on our website.
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