VAT Insights - April 2024

This month, we particularly enjoyed the musings of the Upper Tribunal in WTGIL v HMRC where they noted that “VAT is rarely straightforward. Sedley LJ memorably referred to “the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted”, although that perhaps suggests a level of enjoyment not always inherent in navigating the process”. A sentiment that many VAT practitioners would echo, we heavily suspect.

Whether or not you enjoy navigating the rollercoasters in the “fiscal theme park” of VAT, there is no doubt that the regime includes more than its fair share of provisions which treat transactions for VAT purposes in a very specific manner which is often at odds with the real world, such as the grouping rules, the TOGC rules, the time of supply rules etc etc. And when those deeming provisions come into conflict…. well, you end up with cases such as Prudential v HMRC, a textbook, Alton Towers-esque example of Sedley LJ’s world of VAT, requiring the Court to disentangle and prioritise deeming provisions dealing with the time of supply and the VAT grouping rules. This essentially involved an almost impossible “chicken and egg” exercise, which the Court essentially resolved by relying on earlier decisions (albeit on the basis of a two to one majority). 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 Court of Appeal decision in Prudential, in this edition we also cover the following recent VAT and indirect tax developments:

• The Court of Appeal decision in Northumbria Healthcare NHS Foundation Trust concerning the determination of which supplies are made by a public authority “acting as such”
• The Advocate General’s opinion in a group of further Dutch pension fund appeals concerning the scope of the VAT exemption for the management of investment funds
• An interesting FTT decision concerning how to bring Reemtsma claims and whether they might survive Brexit
• The WTGIL case which provides something of a defence to excessive barter-style consideration arguments
• And last (and probably least) what the March 2024 Budget had in the way of VAT content.

We also have updates from across our European network, including from the Netherlands.

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 links to our more detailed reports.

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. Our contact details are at the bottom.

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 was essentially the problem facing the Court of Appeal in The Prudential Insurance Company Ltd v HMRC [2024] EWCA 300 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.

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 no longer members of the same VAT group. Which approach took priority?

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 Court of Appeal has, however, held (by a majority of two to one) that it was not bound to follow the BJ Rice approach in a VAT grouping scenario. The later 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 the VAT grouping rules are in point. Accordingly, the Court of Appeal agreed with the UT the time of supply of the services remunerated by the deferred performance fee were after SCL had left the VAT group, and the supplies were consequently subject to VAT.

Read our Insights article here

NHS car parking and VAT

Car parking charges at hospitals are already an extremely emotive subject, but that hasn’t stopped HMRC seeking to make itself even more unpopular by insisting on VAT being levied on those charges. In Northumbria Healthcare NHS Foundation Trust v HMRC [2024] EWCA Civ 177, HMRC is arguing that the Trust was not acting as a public authority in providing car parking and, even if it were, not charging VAT would lead to significant distortions of competition so as to take the situation outside s.41A.

The Trust lost its case on both grounds before the FTT and UT, but the Court of Appeal has now upheld that appeal. On the question of whether the car parking was provided by a public authority acting as such, the sole test is whether the activities are engaged in under a special legal regime, or under the same legal conditions as private operators. In this case, there were extensive Parking Principles issued by the Department of Health under the statutory framework of the NHS Act. These Parking Principles started from a quite different point to those of a private operator, requiring NHS Trusts to ensure users can access sites, rather than focussing on revenue maximisation. As such, the legal conditions under which the Trust offered car parking differed in material respects from that applicable to private operators. The decision is an important one on the scope of s.41A to supplies made by public authorities.

Read the full decision here

More on VAT and pension funds

The question whether, and if so to what extent, pension funds might benefit from VAT exempt management has been a long-running question. And despite decisions in Wheels and other cases indicating that defined benefit schemes would not meet the test of being a special investment fund (SIF) that has not, yet, ended the flow of cases. The latest cases involve a number of Dutch defined benefit pension funds which argue that they meet the “investment risk” test of comparability with UCITS by virtue of various indirect links between pension benefits and the investment performance of the funds: X and other v Inspecteur van de Balastingdienst Maastricht (Joined Cases C-639/22 to C-644/22).

Unsurprisingly, the AG has opined that an indirect link is insufficient to render such funds comparable with a typical UCITS. Although the case mainly focusses on the “investment risk” element of the comparability test, the AG also considered the “raising capital from the public” element, concluding that the funds in question would have failed this test as they were only open to members of particular sectors or entities.

According to the AG, funds should be “open to an unlimited number of investors” to meet the comparability requirement. However, it is not entirely clear how to interpret this suggestion by the AG, when clearly many current SIFs have some form of restriction on the investors to which they are open.

Read our Insights article here

Reemtsma claims

The interesting feature of the FTT decision in Metatron v HMRC [2024] UKFTT 115 concerns the application of the Reemtsma principle. The FTT struck out claims for the repayment of VAT under the old Eighth Directive procedure on the basis that the supplies should have been zero-rated and so the claimant should have reclaimed the VAT incorrectly charged from its suppliers.

HMRC, however, offered to consider the refund claims made prior to 31 December 2020 on "Reemtsma" grounds, which allows for direct recovery from tax authorities where it is virtually impossible or excessively difficult to obtain recovery direct from suppliers. However, HMRC refused to consider a Reemtsma claim in respect of claims made after 31 December 2020, on the basis that, post-Brexit, there was no basis for such a claim. A Reemtsma claim was one based on general principles of EU law and post-2020 such a claim was precluded by the EU (Withdrawal) Act 2018 Schedule 1 para 3, even where it related to supplies made pre-Brexit.

The FTT struck out the claim based on Reemtsma on the basis that the appropriate forum for enforcing a taxpayer’s EU law rights under a Reemtsma claim was in the Country Court and, as such, the FTT had no jurisdiction to hear the Reemtsma claim. In doing so, the FTT noted that whether a right to bring a Reemtsma claim in the County Court still remains would be a complex issue. Whilst HMRC contended that no such claim could be brought post 31 December 2020, the FTT noted that many practitioners would disagree and would consider that the principles of effectiveness and neutrality had been acknowledged by the UK courts prior to Brexit such that an entitlement remains. Sadly, ableit inevitably, that would be a matter for the County Court and not the FTT to determine, however.

Read our review in full

Barter and VAT

In a VAT context, there can be a tendency to see barter arrangements hiding behind every contractual provision - and once you’ve seen them, they are very difficult to unsee! In WTGIL v HMRC [2024] UKUT 77, the taxpayer argued that the act of entering into an insurance contract was non-monetary consideration for its supply of fitting a black box monitor into the policyholders vehicle, thus entitling it to input VAT recovery. The UT decided that, looking at the position in the round and based on the contractual arrangements, that was not the case.

The decision may, hopefully, provide something of a break on the worst excesses of supply arguments which depend on barter. Both the FTT and UT have applied admirably robust rejections to the "beguiling" barter argument. There was simply no evidence of the necessary reciprocity (or direct link) in the arrangements. Policyholders in reality simply accepted the devices as part of the terms of the insurance contract and there was no suggestion that they were agreeing to enter into that insurance contract as consideration for the installation of devices by the taxpayer. (Though it is worth noting that the contractual arrangements could very easily have changed that position.)

Read our Insights article here

March 2024 Budget

The Budget contained no great surprises on the VAT front, though there were several noteworthy announcements. The announcement that the registration threshold will be raised to £90,000, after several years of being frozen, perhaps signals an admission that the thorny issue of how to address the distortions created by the high registration threshold in the UK is just too difficult to address. In addition, the Budget noted that the government will be looking at the issue of tax free shopping for tourists again following the publication of more OBR findings on the fiscal consequences of its repeal. In the meantime, the government welcomes further representations on whether or not to re-introduce a VAT retail export scheme. We do not have long to wait for the government’s consultation on the VAT treatment of private hire vehicles following a number of important decisions both on VAT and the classification of workers in this sector. The Budget announced this will be published in April. Finally, the government confirmed it will update the underpinning legislation for the VAT Terminal Markets Order (TMO). This will allow for further reform, including bringing trades in carbon credits within the scope of the TMO in due course.

Read our full Budget coverage here

Dutch CGS for real estate services

The Dutch government has consulted on extending the capital goods scheme (CGS) to services related to real estate. Under the proposal, the CGS would apply to all services related to real estate with a value of €30,000 or more. The proposal is motivated by government’s desire to combat VAT avoidance by means of the so-called short stay scheme. Under this scheme, a taxable person arranges for taxable short stay use of real estate in the (book) year in which substantial alterations have been made and claims 100% deduction of input VAT on the alterations on the basis of this taxable use. Thereafter, the real estate will cease to be used for taxable supplies. However, without CGS operating in relation to the VAT incurred, there can be no adjustment to the initial deduction.

The consultation closed on 2 April 2024 and, should the proposal proceed, then the Dutch government plans to introduce the new rules with effect for services supplied from 1 January 2026.

Italy: draft consolidated VAT code

On 4 March 2024, the Italian Revenue Agency published nine draft consolidated tax codes, one of which is entirely dedicated to VAT. The draft consolidated VAT code, although a consolidation, has the merit of bringing order to the Italian VAT legislation, of identifying and withdrawing repealed rules, and of proposing the repeal of those still in force that can be considered outdated. It is worth noting that the rules on assessment and collection and on the applicable administrative and criminal penalties are included in the draft consolidated tax codes and are common to different taxes. The draft of the consolidated VAT code has been released for consultation until 13 May 2024.

Ireland: new VAT and financial services manual

On 4 March 2024, Irish Revenue issued a new tax and duty manual covering the VAT treatment of negotiation services in respect of financial services. The manual includes guidance on the VAT treatment of negotiation and agency services provided in respect of securities, payments, debts and credit. The publication of the manual is a welcome development and should help provide additional certainty as to the Irish Revenue’s approach to these supplies of services.

Other issues we have recently covered

Labour’s tax plans
Following the Labour party conference last year, we summarised what we knew about Labour's tax plans. At least one of their intended measures has been pre-empted and there has been little further information in the meantime. However, Shadow Chancellor Rachel Reeves has now provided some further information as part of her Mais Lecture on Labour's approach to corporate taxes. This confirms that CT will not be raised from 25%, there will be an early roadmap for business taxation (echoing the one published in 2016 following the 2015 election) and there will be a commitment to a single autumn Budget each year.

UK CBAM consultation
The UK government has published its proposal to introduce a UK CBAM with effect from 2027. The consultation, “Introduction of a UK carbon border adjustment mechanism from January 2027” sets out details of the proposal, including its scope, method of calculation and administration features. In particular, the UK has chosen not to follow the example of the EU CBAM in using tradeable CBAM certificates, but will simply apply a domestic CBAM charge on importers of goods within the scope of the charge.

Construction industry scheme changes
Regulations have been introduced to remove uncertainty and complexity on what payments made by commercial landlords to tenants are within scope of the Construction Industry Scheme (CIS) and which result in the majority of such payment falling outside the scope of the CIS. The measure is designed to reduce compliance and administrative burdens of the CIS by preventing tenants from falling with the scheme who would otherwise have fallen outside its scope.

FATCA under attack
The recent decision by the High Court in Webster v HMRC [2024] EWHC 530 contains not only a fascinating insight into the process for challenging administrative legislation in the form of automatic exchange of information, but also appears to reveal a wide-ranging international attempt to undermine the far-reaching development of information exchange agreements between jurisdictions over recent years.

Carried interest regimes
Global asset managers continue to look to incentivise key executives through the award of carried interest. Those executives are increasingly based across Europe (as well as in the US and UK “head office” locations). Different jurisdictions have different regimes which apply to carried interest and the precise rules as to their scope can be complex. Our updated European tax overview identifies the regimes that do exist in a number of European jurisdictions in which we see the most interest for such incentives and sets out a brief overview of the operation of each of those regimes.

Ramsay applied to dividend scheme
The Court of Appeal has held that a scheme to transfer distributable profits from a company to its shareholders via trust arrangements in respect of a separately incorporated subsidiary gave rise to taxable distributions by virtue of applying the Ramsay principle: Clipperton and Lloyd v HMRC [2024] EWCA 180. The Court described this as a “paradigm case for the application of the Ramsay principle”.

The new reserved investor fund: unreserved good news?
In April last year, HM Treasury and HMRC published a joint consultation on the possible introduction of a new Reserved Investor Fund (RIF) regime. The March Budget announced that the government has decided to proceed with the introduction of a restricted RIF and further details on the tax rules that will apply to such funds were released.

Termination triggering discrimination claims
The Upper Tribunal has confirmed that the test as to whether a payment is taxable on the basis it is received directly or indirectly in consequence of, or otherwise in connection with, the termination of employment is a wide one and not restricted to situations where there the payment is as a result of the termination: Mathur v HMRC [2024] UKUT 38. In this case, a global settlement sum reached after negotiation and in return for withdrawing Employment Tribunal appeals based on the termination and other discriminatory treatment was clearly made both indirectly in consequence of and in connection with the termination.

Common law mistake as to tax consequences
The decision of the FTT in Mahmood v HMRC [2024] UKFTT 114 is a useful reminder that it is not possible simply to rescind arrangements on the basis that they had an unexpected tax effect. A mistake as to the tax consequences of a transaction is not sufficient to entitle the parties to treat the transaction as never having had effect.

Anonymity in tax cases
The Upper Tribunal has stressed that applications for private hearings and taxpayer anonymity should be dealt with promptly by the FTT and not deferred: HMRC v A Taxpayer [2024] UKUT 12. Moreover, such applications should be made well in advance of any hearings.

Dividends of a capital nature
The Upper Tribunal has held that distributions made out of share premium account by a Jersey company to a UK shareholder were not "dividends of a capital nature": Beard v HMRC [2024] UKUT 73. Under Jersey law, the share premium was freely distributable such that the distribution out of share premium account amounted to an income distribution in the same way as other payments out of distributable profits.

Entrepreneurs’ relief and trusts
The FTT has held that the sale of the sole share in a trading company held in trust for the director as life tenant in possession did not qualify for entrepreneurs’ relief: Trustees of the Peter Buckley Settlement v HMRC [2024] UKFTT 29. The provisions of the legislation clearly required the beneficiary to hold shares in the company in a personal capacity in order for the sale by the trustees to qualify and that was not the case here. The decision is a useful, albeit harsh, reminder that the exact conditions for qualifying for relief must be met in any individual case. The mere fact that the taxpayer concerned effectively wholly controlled the company and was entitled to all the income from the sole share was not sufficient.

Trading activities and planning permission
The FTT has held that a company with a property was not a trading company despite appropriating the property it owned to trading stock: Stolkin v HMRC [2024] UKFTT 160. The FTT held that the mere act of appropriating the property to trading stock did not mean the taxpayer was trading in land, just as a person cannot start to trade by doing no more than articulating a desire to do. The appropriation of property to trading stock cannot have any tax significance if the taxpayer was not actually carrying on a trade.

Salaried member rules: capital contributions
Recent updates to HMRC’s manuals indicate that HMRC will seek to apply salaried member anti-avoidance rules where partners make capital contributions with a view to ensuring that they do not fall within the scope of those rules. In these circumstances, HMRC indicate that they will not have regard to any additional capital contributions when determining whether the salaried member rules apply. The change in guidance appears to represent a significant and controversial shift in policy by HMRC.