The VAT case law is littered with comparisons between the real world and the world according to VAT. So much so that those of us familiar with the VAT regime would be forgiven for regarding it as existing in a parallel universe of deeming provisions. Whether it is the grouping rules, the TOGC rules, the time of supply rules etc etc, the VAT regime contains a cornucopia of provisions which treat transactions for VAT purposes in a very specific manner which is often at odds with the real world. And when those deeming provisions come into conflict…. well, that way lies the multiverse of VATness!
And that is what occurred in the recent Prudential case, requiring the court to disentangle and prioritise deeming provisions dealing with the time of supply and the VAT grouping rules. In such circumstances, it is hardly surprising that different courts will come to different conclusions in the absence of any express priority for the application of the rules.
As well as looking at the decision on the application of the deeming provisions in the Prudential case, in this edition we also cover the following recent VAT developments:
- An equally perplexing scenario in Moulsdale Properties case where a strict interpretation of the VAT option to tax anti-avoidance rules was infinitely circular!
- The Supreme Court decision in NewsCorp UK & Ireland concerning the question whether e-newspapers qualified as zero-rated newspapers under the UK’s pre-2020 rules;
- New guidance on the apportionment of consideration to various elements included in a bundle of goods or services; and
- VAT aspects of the March 2023 Budget.
We also have a number of updates from across our European network, including updates from the Spain.
In addition, 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.
Intra-group services and the time of supply rules
How do you reconcile the application of two deeming provisions within the VAT legislation when there is no explicit order of priority? That is essentially the problem that faced the Upper Tribunal in The Prudential Insurance Company Ltd v HMRC [2023] UKUT 54 when deciding if a contingent performance-based fee from a taxpayer to the representative member of its VAT group was subject to VAT when the criteria triggering the fee was not fulfilled until a point significantly after it had left the VAT group and considerably after the cessation of services in a real-world context. Transactions within a VAT group are deemed not to give rise to supplies, but on the other hand the time of supply rules deem the supply to take place when payment was made. Which takes priority?
A member of Prudential’s VAT group provided investment management services to it for a consideration which, in part, was deferred and contingent on performance targets. After that entity ceased to be a member of the Prudential’s VAT group, the conditions for payment of the additional performance fee were met and it charged Prudential over £9m. No VAT was charged on these payments as Prudential took the view that the performance fees were consideration for the services rendered to it at a time when they were members of the same VAT group. HMRC, in contrast, pointed to the fact that services represented a continuous supply of services under Regulation 90 of the VAT Regulations such that the relevant tax point was when Prudential was invoiced, at which time they were not members of the same VAT group.
The decision of the Court of Appeal in BJ Rice where the taxpayer made supplies falling within the equivalent time of supply rules before it was registered for VAT, but did not get paid until after it was registered, suggested that the VAT liability of the supplies should be determined before the time of supply rules are applied. The Upper Tribunal, however, has held that the BJ Rice approach should be limited to situations where the taxpayer is not registered and invoices for the services prior to registration. The decisions in Thorn Materials and Svenska made it clear that, in the context of the VAT grouping rules, the time of supply rules should first be applied to determine whether those rules apply.
Circularity of the option to tax anti-avoidance rules
The drafting of the anti-avoidance legislation concerning the option to tax rules in VATA 1994 Schedule 10 is, to say the least, unfortunate. More bluntly, when read with the capital goods scheme provisions, it is entirely circular! This was the problem in Moulsdale Properties v HMRC [2023] UKSC 12, an unusual case where it was the taxpayer seeking to rely on a wide interpretation of anti-avoidance provisions and HMRC arguing for a narrow interpretation.
The anti-avoidance provisions apply where ‘exempt land’ is transferred by a ‘developer’. The question whether a supply is made by a developer depends largely on whether the land is or is expected to become a capital goods scheme (CGS) item. In this case, as the sale price for the property exceeded £250,000 and the sale was subject to VAT because of the existing option to tax, it was a CGS item for the purchaser – unless the anti-avoidance provisions disapplied the option to tax, in which case, the supply would be exempt. However, this would in turn mean that the land being transferred would no longer be a CGS item for the purchaser and the seller’s option would not be disapplied!
To resolve this conundrum, the Supreme Court has adopted a pragmatic approach which ignores the actual sale of the property and treats the reference to the creation of a CGS item as a reference to a capital item other than the one which would arise on the grant or sale of the property.
The uncertainty caused by the circularity of the legislation has been well recognised and it is perhaps surprising in the circumstances that the Court’s comments on this obvious circularity were quite so sanguine – simply acknowledging that “[d]rafting tax legislation is a difficult and complex task so it is not surprising that sometimes the legislation does not quite work” and that particular problems can arise “where, as here, provisions that were drafted in an enactment for one purpose are incorporated by cross-reference into a different enactment dealing with something else”.
Zero-rating and digital newspapers
If someone was frozen in 1945, woke up in 2011, and was handed an e-reader with a newspaper loaded – would they consider they had just been handed a newspaper? And if they did, is that even relevant for the VAT treatment? This was essentially the question which the Supreme Court tackled in News Corp UK and Ireland Ltd v HMRC [2023] UKSC 7. The Court held that on a proper reading of the legislation, when taken together with the principles of EU law, the zero-rating provisions were strictly limited to physical newspapers.
Whilst the decision is largely of historical interest, it does provide important guidance on the correct approach to the interpretation of domestic legislation in the context of technological developments and suggests limits to the scope of the “always speaking” doctrine of statutory interpretation in an EU law context.
In this case, the Court considered that the defining characteristics of a newspaper for the purposes of the zero-rating provisions required that it should be in a physical printed form and there should be no requirement for any other device or service to access the information. These requirements were such that the term newspapers in the zero-rating provisions could not be applied to digital editions.
The UK government introduced zero-rating for digital versions of books and newspapers with effect from 1 May 2020. However, this decision is relevant to the VAT treatment of digital publications going back before this period and, as such, the decision of the Supreme Court will be disappointing to the industry as well as our individual who would have need to have remained frozen until 1 May 2020 if they wanted a zero-rated e-newspaper.
From parallel VAT universes to infinitely circular paradigms to time travel, VAT never disappoints…
VAT and the March 2023 Budget
The March Budget was, on the whole, something of a VAT free zone. Three announcements are, however, worth noting.
- The government published a call for evidence which seeks to build on its commitment to support improvements in energy efficiency. Following on from the introduction of a temporary zero-rate of VAT for the installation of ESMs (energy saving materials) in residential accommodation until 31 March 2027 and an expanded list of ESMs falling within the scope of the relief, the consultation seeks views on two potential areas for further reform of the VAT relief on ESMs, including the ESMs within the scope of the relief. The consultation invites views specifically on whether electrical battery storage should be brought within the scope of the relief, as well as more wide ranging input on other new technologies to be brought within scope, and any technologies currently within scope which should be removed. Importantly, as well as considering the scope of the reliefs, the consultation seeks views on how access to reliefs can be more effective and efficient.
- The government announced that it will continue working with industry to consider possible reforms to simplify the VAT treatment of financial services, reducing inconsistencies and providing businesses with greater clarity and certainty. However, given the significant interest in extending zero rating to certain financial services, in particular fund management, it is somewhat disappointing that there is no further clarity on the proposed direction of travel.
- The government announced that measures will be introduced which will enable HMRC to grant Advance Valuation Rulings (AVRs) to customers importing goods into the UK. AVRs are legally binding written decisions made at the request of the trader in order to provide certainty on the customs value for their goods. It is intended that any AVRs given will bind HMRC and the trader for a three year period. Whilst HMRC currently issues advance rulings on tariff classification and goods origin, there is currently no provision to do so on valuation in the UK.
Read our full review of the March 2023 Budget here
VAT and value shifting: new guidance
In January 2021, HMRC published a consultation document, "VAT and Value Shifting", consulting on the introduction of more prescriptive rules for apportioning consideration for a bundle of separate supplies given concerns that the existing rules allowed manipulation of the values apportioned to the different elements of the bundle to achieve inappropriate VAT savings.
Revenue and Customs Brief 2 (2023) has now announced that no legislative changes will be made. Instead, HMRC has concluded that the most effective way to address valuation concerns is to provide businesses with practical guidance on apportionment methods. This is through Guidelines for Compliance and improvements to other guidance.
The decision not to proceed with the original proposal to introduce new legislation to prevent inappropriate value shifting is not fully explained. However, it is likely that any such rules would have been complex and the decision to deal with the issue through additional guidance is to be welcomed. It was far from clear that a "mechanical" set of rules would have operated more fairly and would not have been equally open to manipulation. Businesses should now pay close attention to the new guidelines and examples in order to lower their tax compliance risk and avoid potentially costly disputes with HMRC.
Spain: VAT treatment of co-living
The General Directorate of Taxes in Spain has released a tax ruling confirming the treatment for VAT purposes of medium or short term leasing activities involving co-living. Apart from a main element consisting of making a room or apartment available, there are often related services included in the price charged for co-living arrangements, such as electricity, water, heating, wi-fi, breakfast etc. In addition to this basic package, other additional optional services are often available such as room cleaning or laundry services at additional cost. To what extent do these arrangements benefit from the VAT exemption for property rentals?
According to the tax ruling, the difference between a (VAT exempt) rental and (taxable) services is that the latter will normally include the provision of the aforementioned related services. In the latter case, the service is treated in the same way as a taxable supply made by a hotel. Consequently, co-living services cannot benefit from the VAT exemption applicable to property rentals where such additional services are provided, instead being subject to a reduced VAT rate of 10%.
Finally, the tax ruling clarifies that additional services, which may be contracted independently, constitute an end in themselves for the client and should therefore be taxed separately for VAT purposes.
Spain: Deductibility of expenses that benefit taxable business activities
The Spanish Supreme Court has recently released a decision concerning the deduction of input VAT incurred in connection with supplies of goods or services that involve an economic benefit for the business activities of the taxpayer as a whole.
The case concerns the deduction of VAT paid by a company on consultancy services received in connection with the “expropriation” by the Madrid City Council of certain plots of land owned by it (a one-off transaction exempt from VAT which was not among its business activities). The purpose of the consultancy services was to achieve a higher price than that initially offered by the Madrid City Council. According to the analysis of the Supreme Court, the nature of the services and their direct relationship with the company's taxable business activities meant that that the consultancy services involved an economic benefit to those business activities and consequently the company was entitled to a VAT deduction.
This decision facilitates the tax neutrality of VATable services and goods as long as these are related to or involve a general benefit for taxable business activities. As such, the decision aligns the Spanish case law with the principle of tax neutrality set out in VAT case law developments at a CJEU level (such as, Kretztechnik (Case C-465/03)).
Other issues we have recently covered
The March 2023 Budget: a Hunt for Growth?
Our analysis of the economic and tax implications of Chancellor’s Hunt’s Spring Budget.
Consulting on a UK CBAM
The UK government has published a consultation on the possible introduction of a carbon border adjustment mechanism in the UK, along with other decarbonisation measures. If introduced, a CBAM is likely to impact a number of sectors including: cement; chemicals; glass; iron and steel; non-ferrous metals; non-metallic minerals; paper & pulp; refining; fertilisers; and power generation.
Responding to the Net Zero recommendations: tax
The government's response to the independent report, Mission Zero: Independent review of Net Zero. The response takes the format of responses to each of the 129 recommendations included in the original independent report and includes a number of tax elements. The response agrees with the review's conclusion that net zero is the growth opportunity of the 21st century and could offer major economic opportunities to the UK - but that decisive action is needed to seize these. Other countries such as the USA with the Inflation Reduction Act are moving quickly, and the UK must do the same.
Deliberate or careless inaccuracy penalties
The Upper Tribunal has held that, for HMRC to apply the penalty provisions applicable to deliberate inaccuracies in a return, the taxpayer must have subjective knowledge that the return is inaccurate or have “blind-eye” knowledge of the inaccuracy: CPR Commercials Ltd v HMRC [2023] UKUT 61. On the facts of this case, the FTT’s findings that the taxpayer could not reasonably have concluded that the return was accurate was insufficient to support a penalty for a deliberate inaccuracy. The decision leaves open the question whether recklessness as to the accuracy of a return (which falls short of blind-eye knowledge) might be sufficient to justify a deliberate inaccuracy penalty as HMRC did not argue the point in this case.
Tax podcasts
Our contentious tax podcast series covering tax controversy and transfer pricing issues can be found here. More general tax podcasts can be found here.
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