VAT Update – April 2022

20 Apr 2022

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In our April VAT update, we comment on VAT recovery for a partially exempt business and the use of the standard method override; a case that considered whether a flapjack was a cake or confectionary; and we remind businesses that the reduced rate of VAT in the hospitality sector has now ended.

During the pandemic, the government announced a temporary reduction to the VAT rate for the hospitality, hotel, and holiday accommodation sectors, as well as admission to certain attractions. The reduced rate was originally 5%, increasing to 12.5% for the period from 1 October 2021to 31 March 2022.

From 1 April 2022 the rate applicable to these sectors returned to 20%, the current standard rate of VAT.

Comment: Businesses should now check their systems to ensure that the VAT rate applied to services that were able to take advantage of the temporary reduced rates have been updated to account for VAT at the correct rate.

Saffery Champness can advise on how to treat payments and also stays/supplies that straddle the rate change date.

The First Tier Tribunal (FTT) has decided in the case of Hippodrome Casino Limited (TC/2021/01140) that the Hippodrome was entitled to use a floor-based method to recover VAT where the amount of recoverable VAT under the standard method of partial exemption was substantially different to the recovery based on the use of costs.

Between 2012 and 2018 the difference between the VAT recoverable under the standard method and under the SMO was £3.2 million.

The Hippodrome business makes taxable supplies of hospitality and entertainment and exempt supplies of gaming supplies from its premises in Leicester Square. Over five floors, the premises include gaming machines, electronic gaming, poker as well as eight bars, restaurants, conference and events areas, plus a theatre.

The Hippodrome began a £50 million refurbishment of the premises in 2009. The VAT on this would fall into the overhead category under the standard method, as the Hippodrome did not have a special method. Therefore, VAT recovery on overheads such as premises costs were based on the proportion of taxable income compared to taxable plus exempt income. The Hippodrome generated far more income from its exempt gaming activities, proportionately, than its taxable activities. However, the taxable activities took up a much larger part of the premises. Using the standard method compared to a floor area method significantly affected its VAT recovery.

VAT legislation allows for a different method of recovery via the SMO and the FTT had to determine whether the SMO rather than the standard method should apply, and whether the method put forward by the Hippodrome was appropriate.

HM Revenue & Customs (HMRC) contended that the Hippodrome’s principal activity was the operation of a casino, whereas the Hippodrome argued that because the hospitality and entertainment was operated from discrete areas, albeit with some crossover, that these should be seen as standalone attractions.

The FTT found that, on the facts of this case, the floor space apportionment proposed did provide a more fair, reasonable, and precise proxy of the Hippodrome’s economic use of its overhead expenditure than the standard method, based on turnover.

Comment: This case is an important reminder of an often-overlooked part of the VAT legislation that is there to ensure that where the standard method does not provide for a fair and reasonable basis of VAT recovery, and the difference is substantial, that a taxpayer has the right (and in fact a requirement) to apply another proxy even if it does not have an agreed “special method” of recovery with HMRC.

That proxy must be fair and reasonable and reflect the use to which costs are put in making both taxable and exempt supplies, but it can be an important way for businesses to ensure a fair recovery of VAT on costs where the method in place doesn’t achieve this.

For further information regarding the implications of the Court of Appeal in this case, please contact Sean McGinness, VAT Partner.

HIPPODROME CASINO LIMITED v Revenue & Customs (VAT – Partial exemption – Recovery of residual input tax) [2022] UKFTT 110 (TC) (22 March 2022) (bailii.org)

In the case of Glanbia Milk Ltd (UKFTT 108) the FTT was asked to consider if 36 varieties of food product described as “flapjack” were actually “confectionary” for VAT purposes.

The FTT offered to sample all 36 products, but it was agreed in the end that four would be sufficient.

The company was a manufacturer of nutritional sports and performance protein bars, shakes and powders. This case concerned protein bars that were individually wrapped rectangular bars made from oats, syrup, and protein, and many of them were described as flapjack on their packaging.

Flapjacks are widely accepted as cakes and zero-rated for VAT purposes. However, the description on packaging does not necessarily determine the VAT treatment of a product. HMRC’s policy is that, for the zero-rate to apply a traditional flapjack should consist solely of oats.

In each of the 36 products in this case, the ingredients were oats (ranging between 20% and 50% of the product by weight), syrup (ranging between 21% and 39%) and protein (ranging between 8% and 28%).

The FTT agreed with HMRC, deciding that the flapjack bars were not cakes for VAT purposes, so could not be zero-rated. This was based on the products not being an archetypal flapjack recipe; nor having the texture and appearance of a flapjack. The FTT stated that an ordinary person would not consider the product to be a flapjack based on this criteria; circumstances of consumption; and marketing where it was more clearly aimed at the sports nutrition market.

Comment: This case again illustrates the complexities of the UK’s rules on VAT and food that presents VAT risks for food producers and retailers trying to determine what VAT is due and which baffles consumers.

Hopefully now the UK has left the EU and the UK has greater scope to change VAT rates the government will, in due course, simplify the UK’s VAT rules on food.

For further guidance please contact Nick Hart or John Butterfield, VAT Directors.

GLANBIA MILK LIMITED v Revenue & Customs (VALUE ADDED TAX – zero rating – General item no. 1 of Group 1 Schedule 8 VATA – food – Excepted item no. 2 – confectionery – cakes – flapjacks) [2022] UKFTT 108 (TC) (24 March 2022) (bailii.org)

Apart from the nursing agencies’ concession, most supplies of health professional staff are subject to VAT.

On 22 March, HMRC updated its guidance in section 6 of VAT Notice 701/57 – Health professionals and pharmaceutical products. This followed the Court of Appeal ruling in First Alternative Staffing Limited and another [2022] EWCA Civ 249, where it was made clear that the concession is only available prospectively.

The taxpayer in this case was an employment agency providing nurses and other medical staff on a temporary basis to hospitals and care homes. It had originally treated itself as agent and only accounted for VAT on its commission. It then tried to retrospectively apply the nursing agencies’ concession, which applies where nursing staff are supplied as principal to a third party. If successful, VAT would not have been due on the past commissions. The Court of Appeal confirmed that to apply the concession requires a positive action by the taxpayer, who must make a decision in relation to each supply by the time of the supply at the latest.

Comment: This case emphasises the need for businesses to consider their VAT position in advance of transactions and highlights HMRC’s scrutiny of businesses applying concessions, particularly in areas where there have been prior concerns about the way concessions have been applied by businesses.

For further guidance please contact Nurena Tarafder or John Butterfield, VAT Directors.

Health professionals and pharmaceutical products (VAT Notice 701/57) – GOV.UK (www.gov.uk)

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