VAT Update – March 2023

16 Mar 2023

VAT Update

In this month’s VAT Update, we update readers on key news and cases, including:

  • A reminder of the difference between recharge and disbursement expenses for VAT accounting.
  • A case appeal regarding standard rate and zero-rated VAT.
  • Another appeal in a case exploring the VAT treatment of consultancy services.
  • What we know so far about The Windsor Framework and trading with Northern Ireland.

The treatment of recharged expenses is a common cause of error within VAT accounting. The differences between a recharge and a disbursement are often misunderstood and it is very common for businesses to confuse the two.

In short, a recharge expense is an expense that is incurred in the process of performing one’s own services but is paid for by the client. As an example, if an accountant travels to see a client and then charges the travel costs onto the client, this is a recharge. This type of expense is a cost that the business has incurred itself for a service that has been received by the business itself.

A disbursement is slightly different as it is an expense that one has paid on behalf of the client. In the case of a disbursement, one acts on behalf of its client in arranging and paying for the goods or services, but the underlying supply remains between the supplier and the client (end customer).

Whilst the practical differences between a recharge and a disbursement may not be immediately obvious, from a VAT point of view the difference is significant as recharges are subject to VAT, while disbursements are outside the scope of VAT. Getting the treatment wrong could lead to incorrect input tax recovery, under declarations of output tax, and for a business operating close to the VAT registration threshold incorrectly treated expenses could lead to an undesirable VAT registration obligation.

HM Revenue & Customs’ (HMRC’s) guidance on this topic is available, and the guidance outlines that to treat an expense as a disbursement, all of the following must apply:

  • You paid the supplier on your client’s behalf and acted as the agent of your client.
  • Your client received, used or had the benefit of the goods or services you paid for on their behalf.
  • It was your client’s responsibility to pay for the goods or services, not yours.
  • You had permission from your client to make the payment.
  • Your client knew that the goods or services were from another supplier, not from you.
  • You show the costs separately on your invoice.
  • You pass on the exact amount of each cost to your client when you invoice them.
  • Goods and services you paid for are in addition to the cost of your own services.

Should all the above points apply, then the cost can be treated as a disbursement and VAT is not chargeable when the expense is charged to the customer. In addition, VAT is not recoverable on the incurrence of the expense as the supply has only been received by the client and not the party passing the cost on as a disbursement.

While HMRC do not make this point clear within its guidance, when issuing a VAT registered client with a disbursement charge, it is recommended that steps are taken to ensure all supplier invoices are addressed to the end client. This is to ensure that the client holds the evidence necessary to recover the VAT incurred on the supply.

If you have any concerns or queries regarding the VAT treatment of expenses that you incur and feel a review of those expenses would be beneficial, please get in touch with Wendy Andrews.

This case was an appeal to the First-tier tribunal (FTT) against the decision that the construction of new areas of Paradise Wildlife Park Limited (PWP) should be standard-rated as they are not intended for use solely for non-business purposes.

The argument was centred around two key questions:

  • Whether the construction of the new attractions was solely for the relevant charitable purpose; and
  • Whether one of the new constructions constitutes as a building.

HMRC argued that members of the public must pay an admission fee to see these new attractions and therefore the construction was not intended solely for non-business purposes. PWP argued that the construction of these new areas was for wildlife conservation and education purposes, and the public would not have direct access to areas such as the lion enclosure, but rather a viewing platform.

It was accepted that the lions’ enclosure provides an improved and modern home for the lions, which has a positive effect in relation to the conservation work, and the ‘World of Dinosaurs’ area does indeed have an educational function, but both constructions make the park a more attractive place to visit and perform a role in business activities. It was therefore decided that the construction was not intended solely for non-business purposes.

The second argument was that the ’World of Dinosaurs’ construction could not be constituted as a building, and therefore could not be zero-rated under construction rules.

Previous cases were used as precedent such as Upper Don Walk Trust v HMRC, (2006) and Wheeled Sports 4 Hereford Ltd v HMRC, (2011), to argue that a building must be a structure with walls and although not invariably, a roof, which this construction does not have. It was therefore decided quickly that the ‘World of Dinosaurs’ construction is not a building.

The FTT therefore concluded that the appeal is dismissed as it agreed with previous rulings on the two key questions.


This case demonstrates the importance of charities carefully considering the circumstances where a new charitable building may be eligible for zero-rating.

If you have any questions regarding this case, please contact Wendy Andrews.

This case was an appeal by HMRC to the Court of Appeal against the Upper Tribunal’s (UT’s) decision to classify Gray & Farrar’s (G&F’s) services as consultancy. This decision was made as part of an appeal by G&F against the decision of the FTT which agreed that the services provided by G&F did not qualify as consultancy, and hence were within the scope of VAT even when supplied to clients outside the UK. The FTT had agreed with HMRC that the services provided by G&F went beyond those typically provided by consultants, and hence VAT should have been charged to non-UK clients.

In making the original decision, the UT held that the FTT had erred in its initial decision by failing to apply the ‘predominant element test’ to the supplies made by G&F.

G&F supplied a multi-tiered subscription matchmaking service where clients are introduced to prospective partners. There are three levels, costing £15,000, £25,000, and £140,000 for a year, and each one providing a more in-depth service. The services in question involved:

  • Interview and vetting of clients – mostly carried out by the managing partner.
  • Preparation of the brief – drafted by managing partner.
  • A matching process – done by managing partner.
  • Post introduction liaison with clients – support team.

HMRC posited that if the predominant element test were to be applied, the UT had failed to correctly characterise the supply as an introductory service.

The scope of the appeal was limited to these main issues:

  • Whether the UT was correct in setting aside the FTT decision based on the failure to apply the predominant element test as it is not a mandatory test;
  • If, under the predominant element test, the UT was mistaken in characterising G&F’s supply as ‘services of consultants’ and, in doing so failed to correctly characterise G&F’s supply for VAT purposes as an introductory service and not within the art 59(c) of the Principal VAT Directive; and
  • If the UT had erred in its reading of ‘data processing and the provision of information’ as distinct services and allowed G&F to benefit from stating it only provided information but did not provide data processing.

HMRC argued that the ‘predominant element’ test was not mandatory to apply, and that domestic authorities point towards an ‘overarching supply’ test. They put forward that it was valid to assess supply through either test. Hence, the original decision made by the FTT was essentially one done through the latter test and was permissible.

G&F point to the EU case law for determining the character of this supply – the predominant element test, pointing out that while it has no express approval from the Court of Appeal or above, there is a precedent for its application by the UT in several cases, and so they were correct in setting aside the FTT decision based on it.

After deliberation, it was concluded that the predominant element test should be the primary test applied wherever possible, and the UT was correct in doing so, hence the first ground of the appeal failed.

HMRC further argued that if the ‘predominant element’ test must be used, the UT application of it was flawed: The UT had failed to identify a predominant element, there was no predominant element to identify, and they had artificially divided the single service provided. In addition to this, they argued that the UT had not applied a sufficient level of scrutiny in considering whether the supply could be considered consultancy by not properly regarding the typical characteristics of the supplier, namely qualifications and strict regulation. They also point to the incorrect reading of ‘data processing and the provision of information’ in art 59(c), pointing out the wider consequences of this misinterpretation.

G&F put forward that their supply was one composite supply, consisting of consultancy services, the provision of information, and the provision of the customer liaison support team. They further argued that while the supply may be an introduction service, it involved the provision of information and expert advice, and the label does not prevent the activities constituting the supply falling within art 59(c). They also argue that the wording of the law does imply that ‘data processing and the provision of information’ are separate categories, and in either case, G&F process client data.

In considering whether the UT was correct in characterising the predominant element, HMRC pointed out that the UT had identified two elements as the predominant element, without specifying which predominated. They instead should have classified the single supply (an introduction service) as the predominant element, or if all elements were equally important, then it is the overarching supply.

It was decided that in characterisation of the supply, the first step should be an interpretation of contractual obligations. Upon examination of the contract, it was determined that G&F’s only obligation was the supply of introductions, and the UT had failed to consider this in its identification of the services.

The court concluded that both the FTT and UT had artificially dissected the introduction service supplied by G&F. Each component – the verification, identification of potential matches and post introduction liaison were not mentioned in the contract, but form part of the process of providing introductions to prospective partners, expertly selected by the managing partner.

The appeal was allowed on the grounds that the services provided by G&F were not ones that would typically be supplied by a consultant, nor was it the processing of data or the supply of information.


This case demonstrates the importance of looking in detail at the nature of services being supplied to clients or customers outside the UK to ensure that VAT is charged where necessary.

If you have any questions regarding this case, please contact Nick Hart or Sean McGinness.

At the end of February, the UK and EU reached an agreement in principle, The Windsor Framework, on changes to the Northern Ireland Protocol (NIP). The changes, once implemented, will have implications for VAT.

It is worth recapping that under the NIP, Northern Ireland is effectively part of the EU VAT system with respect to trade in goods.

The headlines from a VAT perspective include:

  • The zero rate of VAT for the installation of energy-saving materials will apply in Northern Ireland once appropriate legislative changes have been made. Currently the zero-rate only applies in Great Britain.
  • The right for the UK to implement an unrestricted number of instances where the reduced or zero-rate of VAT could be introduced. Currently this number is limited for Northern Ireland.
  • There will be greater flexibility with respect to VAT rates which can apply in Northern Ireland where that is the place of consumption.
  • A new scheme for the sale of second-hand cars in Northern Ireland will be introduced in May 2023.
  • Removes the need for businesses in Northern Ireland to have to comply with certain EU measures such as having a VAT registration threshold which is lower than that in Great Britain.
  • A new mechanism which will enable to UK and EU to consider future EU VAT changes and how they impact Northern Ireland in case they create any inconsistencies within the UK VAT system.


Whilst The Windsor Framework does not mean immediate change, it is seeking to address matters which create a position of inconsistency within the UK VAT system. The temporary zero-rate which applies to the installation of energy-saving materials, was only introduced in Great Britain in 2022, because of Northern Ireland’s position within the EU VAT system. Its continued EU status in this respect prevented the zero-rate being applied, and we welcome changes which will address this imbalance. It remains to be seen whether this will now encourage the government to propose further VAT rate changes given the increased flexibility provided by The Windsor Framework with respect to the number of categories of supply to which the zero-rate or reduced rate of VAT can be applied.

We also welcome the steps designed to remove certain administrative obligations for businesses in Norther Ireland, and in particular the exemption from new EU VAT registration thresholds being introduced in 2025. The measures will also mean the movement of goods from Great Britain to Northern Ireland, with respect to low value items, is not within the scope of the Import One Stop Shop (IOSS).

We will share further details with respect to the changes which The Windsor Framework outlines, as and when they are fully implemented.

Please contact Nick Hart VAT Director if you would like to learn more.

Contact Us

Sean McGinness
Partner, Edinburgh

Key experience

Sean is Head of the Edinburgh office.