Welcome to the November update of our VAT Insights. The past few weeks have been eventful, marked by significant political developments. We invite you to listen to our podcast, which offers insights into the UK Budget 2024 tax and spending announcements, market responses, and immediate reactions following the US elections. To access the podcast, please click here.
The question whether the FTT has jurisdiction to consider taxpayer appeals based on public law arguments, such as legitimate expectation, has a long and difficult history. Following the 2021 Upper Tribunal decision in Henrik Zeman, it now seems (relatively) clear (at least until the matter is reconsidered at a higher level) that, provided the relevant statutory appeal scheme does not expressly or by implication exclude the ability to raise such arguments, the FTT may consider such matters. Even so, there are still considerable hurdles for the taxpayer to overcome in order to show that it had a legitimate expectation that HMRC would not collect the correct amount of tax due, even if the FTT is entitled to consider such arguments. That was, however, the position in the recent Treasures of Brazil case, where the taxpayer relied on HMRC’s advice in not charging output VAT on its supplies until it received confirmation from HMRC that its application for VAT registration had been approved. What is especially notable in this case is that the (incorrect) advice appears to have been set out in the form of a standard letter to taxpayers applying for VAT registration. It is rare for such cases to succeed, but this is a notable example of a situation where HMRC’s insistence on applying the strict legal position would have had a significant and wholly unfair impact on the taxpayer and it seems quite right that the FTT has held HMRC to their incorrect advice.
In this edition, as well as looking at the Treasures of Brazil case, we also cover the following recent VAT and indirect tax developments:
- A somewhat unsatisfactory decision of the FTT concerning recovery of VAT on litigation costs by one of three litigants.
Another decision of the CJEU on the VAT treatment of supplies from EV charging stations, this time focussing on the question of whether supplies of the facility of using a card/app is separate from supplies of the electricity.
An FTT decision confirming a taxpayer’s right to recover overpaid output VAT where it can demonstrate a more accurate and advantageous method of apportionment of the consideration than the one it historically used.
The new Labour government’s Corporation Tax Roadmap and what it says for tax administration going forwards generally.
A round-up of the limited VAT elements from the Autumn Budget.
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 on the page.
Legitimate expectation and VAT registration
The facts of the Treasures of Brazil Ltd v HMRC [2024] UKFTT 929 case are somewhat shocking. A trader, which was approaching the compulsory threshold for VAT registration, decided to register voluntarily and put in an application. HMRC replied immediately by email stating that: “You should wait until your VAT registration is confirmed before you: get any software; charge customers for VAT”. As a result of that instruction, the trader deferred adding VAT to its prices. For some unexplained reason, it took HMRC three months to approve the VAT registration. It eventually did so from the originally requested date of 1 October, but in a letter only sent in late December (despite being misleadingly dated mid October!). HMRC then sought output VAT from the trader for its supplies made from 1 October.
Having held that it had jurisdiction to consider the trader’s argument that it had a legitimate expectation that HMRC would not seek output VAT (which it was accepted was technically due), the FTT upheld the trader’s arguments. It was clear that it relied on HMRC’s guidance and that it had done so to its detriment. Indeed, VAT is a tax where the trader essentially collects VAT from customers on behalf of HMRC. It had not done so due to HMRC’s guidance and if it were now required to pay that VAT, it would have to come out of its own resources. Indeed, the FTT went further. HMRC argued that if the trader was able to rely on the guidance so as not to pay output VAT, it should not be allowed to recover input VAT for the period. Although recovery of input VAT in the circumstances represented a windfall for the trader, the FTT refused to take this into account. The trader was technically entitled to recover the input VAT and the FTT had no jurisdiction to set this off against the output VAT saving resulting from the legitimate expectation.
Read our Insights article here
VAT and litigation fees
The decision of the FTT in Visual Investments International Ltd v HMRC [2024] UKFTT 843 is a prime example of why clear documentation is so important for the recovery of input VAT. Visual Investments International Ltd (VIIL) was denied a deduction for input VAT paid by it, in part on the basis that invoices were issued to a third party only c/o VIIL. This led HMRC to reject the claim based on the premise that the payments were actually third party consideration and did not give rise to input VAT for VIIL. Ultimately, after receiving proof that VIIL was one of the litigants in the relevant dispute, HMRC accepted that the input VAT was, in principle, in part its input VAT. However, the FTT agreed with HMRC that the share of the input VAT was not, in any event, attributable to any taxable supplies made by VIIL. Rather, the dispute in question related to ownership of an interest in a target company as an investment, such that input VAT was not deductible in any event.
In many ways, this is an unsatisfactory case. Whilst it seems clear that the argument that the input VAT was directly attributable to a management business was too remote, what is somewhat less clear is whether VIIL might have argued that the input VAT was therefore residual and should be recovered based on it being a general business overhead. It is also interesting that the FTT was happy to assume that because VIIL was one of three litigants, then one third of the input VAT would have been attributable to it. That seems a far too simplistic approach and there seems no reason in principle why, if VIIL could have shown that it
instructed the solicitors and paid the fees, that it would not have been able to argue that all of the VAT was on supplies made to it (even if others also benefitted).
Read the decision in full here
VAT and EV charging stations
The CJEU has returned to the topic of VAT on supplies involving EV charging stations in Skatteverket v Digital Charging Solutions GmbH (Case C-60/23). The case is principally about the application of the single supply rules – the Swedish tax authorities taking the view that supplies made by the German provider of a card/app that allowed users to charge their vehicles at third party EV charging stations in Sweden amounted to a single supply of electricity. DCS appealed arguing that the monthly charge it made users for access to the card/app was a separate supply of services and the CJEU has now endorsed that argument. In particular, the CJEU noted that the monthly charge was levied irrespective of whether or not the customer actually used the card/app to purchase electricity. In those circumstances, it would not be said that the payment for the card/app was merely a better means of enjoying supplies of from EV charging stations. In those circumstances, to regard those services as either ancillary to supplies of electricity or inseparable from such supplies would be to disregard the economic reality of the situation. The fee was charged irrespective of supplies of electricity, invoiced separately and was not dependent on the amount of electricity consumed.
Read our Insights article here
Method of calculating output VAT
When is an error not an error? When it is merely a more accurate method for apportioning consideration according to HMRC. Fortunately, the FTT had disagreed and upheld the taxpayer’s appeal in Abbeyford Caravan Company (Scotland) Ltd v HMRC [2024] UKFTT 928.
Abbeyford historically apportioned consideration it received on caravan sales between the caravan (zero or reduced rate) and the removable contents (standard rated) based on the manufacturer’s costs on the basis of an 80/20 split. Following a review, it realised that this apportioned too much to the contents, since it assumed that any increase in value was equally attributable to the caravan and contents. A detailed sampling exercise revealed that a more accurate range was 5 to 9% of the total. HMRC agreed to the use of this percentage going forwards, but rejected Abbeyford’s application to recover overpaid output VAT for earlier periods. HMRC took the view that there had been no “error” in those earlier periods, as just because one method produces a different result doesn’t mean it is wrong. The taxpayer pointed to HMRC’s own guidance indicating that retrospection should be allowed where the new method produces a substantially more accurate attribution (even in the absence of “error”). However, HMRC contended that the difference (amounting to £150,000) was not “substantial”.
The FTT has rejected both of HMRC’s arguments. It was clear from the Supreme Court decision in The Advocate General v K E Entertainments Ltd that the principle of equal treatment in general requires the court to determine that one method is the correct method. In any event, the FTT was clear that the difference in treatment was “by any measure substantial”.
Read the decision in full here
The Corporate Tax Roadmap
The Labour Party election manifesto included a pledge to publish a roadmap for business taxation within six months of taking power, with the aim of allowing businesses to plan investments with confidence for the lifetime of the next parliament. That roadmap was published by HM Treasury alongside the Budget on 30 October 2024. The aim is clear and set out in the first paragraph of the document - "to provide the stability needed for businesses to make investments that are critical to boosting growth in the UK". Indeed, the government is to develop and consult on a new process to give investors in major projects increased advance certainty about tax treatment.
Whilst there is nothing VAT specific in this document, it is an important one from the perspective of all businesses’ relations with HMRC and the tax system. As well as committing the government to the minimum necessary tax changes in order to foster tax certainty and a continuation of the Customer Compliance Manager model for managing the tax compliance of the largest businesses, there is also the promise of a focus on modernisation of tax administration. In addition to an extra 500 HMRC staff, this will involve much greater use of technology. One aspect the government will be looking at is the use of electronic invoicing, with a consultation to be launched in spring 2025.
Read our Insights article here
VAT and the Budget
There was little new or surprising from a VAT perspective in the Budget held on 30 October 2024. The government recommitted to introducing VAT on school fees from 1 January 2025, notwithstanding the need for schools to now reconsider the charges they have already published for the 2024/2025 school year, but calculated on an incorrect basis. The government also reconfirmed that it will respond in due course to the feedback it has received to the recent consultation on the VAT treatment of private hire vehicle (PHV) services following recent decisions on the necessary contractual and licensing arrangements for PHVs, including Uber Britannia Limited v Sefton Borough Council and Uber London Limited v Transport for London.
The Autumn Budget also confirmed that a consultation will be published in early 2025 to establish standards and increase the adoption of electronic invoicing.
Other issues we have recently covered
Black holes and goalposts but no rocket boosters
Our fiscal perspective on the Autumn Budget 2024 from client insights lead, Andy Hartwill, discusses the macro-economic aspects of the Budget and its market reception.
EU list of non-cooperative jurisdictions for tax purposes updated
On 8 October 2024, the EU Commission announced further changes to the EU list of non-cooperative jurisdictions for tax purposes, moving Antigua and Barbuda to the "grey list". The black list now contains eleven jurisdictions. A number of jurisdictions, which have committed to agreeing necessary changes to their tax systems with the EU, remain on a second "grey list" (or state of play document). The grey list currently contains nine jurisdictions.
Navigating the FASTER Directive for Streamlined Withholding Tax Relief
On June 19, 2023, the European Commission (EC) proposed the "Faster and Safer Relief of Excess Withholding Taxes" (FASTER) Directive. This Directive aims to streamline and secure the process for claiming withholding tax (WHT) relief, enhancing efficiency, reducing fraud risks, protecting revenues, and minimizing administrative burdens for investors holding securities in European Union (EU) member states. This article explores the FASTER Directive, starting with its background and current status, followed by an analysis of its core articles and its impact on existing WHT relief systems, with a special focus on the Netherlands.
Dutch unallowable purpose rules not contrary to EU law
The CJEU has held that Dutch anti-avoidance rules denying interest deductions for certain payments of interest to related entities are compatible with the freedom of establishment.
Tax point for payment of interim dividends
The Upper Tribunal has held that, where the payment of an interim dividend is made to one shareholder without payment to other shareholders of the same class, that creates a debt from the company to those other shareholders: HMRC v Gould [2024] UKUT 285. However, whilst this would normally fix the date by reference to which the interim dividend was taxable, the UT also held that in this case, where there was a deliberate delay in the date of payment for tax purposes, there was either an agreement to amend the Articles or an agreement to waive the right to payment at the earlier date and these were effective to prevent the interim dividend becoming taxable in the earlier tax period when the shareholder was UK tax resident.
Tax podcasts
Our tax podcasts can be found here.
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