In this month’s VAT Update, we look at a recent case on VAT recovery and the question of correct evidence; while we explore another case on financial services VAT exemption; a German case involving VAT on costs of holding companies; and a Supreme Court decision which confirms the position on time limits for HMRC to assess for under-declared VAT.
Under regulation 29 of the VAT Regulations 1995, HM Revenue & Customs (HMRC) have discretion to allow claims for VAT recovery that is not supported by the correct evidence. The case of Majid and Miah Properties (TC/2019/01646) was an instance of the Tribunal taking a practical approach where HMRC had not, allowed the taxpayer to recover VAT without valid VAT invoices.
The appellant was a partnership which purchased and opted to tax a property that was to be let to an associated company to operate as a restaurant. The appellant would therefore ordinarily be entitled to full recovery of VAT incurred where it relates to the letting which would be subject to VAT as a result of the option to tax.
On a routine VAT inspection HMRC identified a number of purchases related to the refurbishment of the property where they felt the partnership had no entitlement to recover the VAT. The reasons being the claims were against pro-forma invoices, invoices not in the name of the appellant and supplies more apposite to the restaurant company. These are standard reasons why a HMRC officer will disallow VAT recovery because it is accepted that to be able to claim input tax, the supplies must be made to the person making the claim, for use in its business and the VAT must be supported by an invoice or some other evidence which supports the claim.
It appears that the appellants made no meaningful differentiation between the two businesses when ordering supplies and supplies were often delivered to premises other than the property.
Some of the disputed invoices were addressed to the builders, but it was claimed that it was clear the supplies related to the redevelopment and fit out of the property and as such were made to the appellant. HMRC however, resisted these claims on the basis that such supplies were stated to have been made to the builders. Where the builders were VAT registered and could reclaim the VAT, the taxpayer lost, but where one of the builders was not registered for VAT, the taxpayer won. The Tribunal pointed out that it would have made sense for the appellant to order building supplies so that the VAT could be recovered. Despite the invoices being issued in the builder’s name, the Tribunal was prepared to accept that the purchases were made through the agency of the builder who would not and could not have claimed input tax, and therefore it was reasonable to allow, on the basis of alternative evidence, recovery of the VAT.
With regard to invoices that were addressed to the restaurant company by the structural engineers who undertook the work on the property, the Tribunal was also prepared to accept given the terms of the lease, and the dates of the supplies, three years before the lease was effective. But it was highly implausible that the supplies were made to the restaurant company. On the balance of probabilities, the Tribunal accepted that the supplies were in respect of the structure/fabric of the building and whilst the invoices were in the name of the restaurant company, they could be accepted as alternative evidence of a supply to the appellant.
Comment: The overall case was a partial win for the taxpayer, but it highlights the rules on alternative evidence. The VAT amounts in the case were quite modest and, as a First-Tier decision, do not set a precedent, but it was good to see the Tribunal taking a common-sense approach and highlighting the fact that even if a business does not possess a VAT invoice in its name the VAT can still, on occasions, be recovered.
Please contact Wendy Andrews, VAT Director, if you would like to discuss this case further.
The First TierTax Tribunal (FTT) held that payment services provided within a corporate group represented financial intermediation and qualified for the financial services exemption.
The appellant is a payment service provider (PSP) based in the UK, specialising in attracting merchants who needed payment services, conducting due diligence on the merchant in question and then introducing it to a card acquirer.
The appeal considered the issue of whether supplies made to the appellant by one of its corporate group members (EMPO) were exempt or taxable. We will only consider this issue here, however the appeal did also consider whether the issuing of HMRC’s assessments was out of time on the basis that they were not issued within one year of evidence of facts (see comments on DCM (Optical Holdings Ltd).
In the marketplace, consumers would pay for goods and services by credit card, a card acquirer would collect the payment from the credit card institution and transmit it to the merchant. Acting as a PSP, the appellant was placed between the merchant and the card acquirer. The role of the appellant was to introduce merchants to card acquirers and other payment methods. The appellant offered various services, including the provision of due diligence on the merchants, payment processing, support, and customer service. The appellant was then remunerated for its service by way of commission.
The appellant lacked the resources to perform the services independently and instead sub-contracted the work to another member of its corporate group; EMPO. EMPO was a Bulgarian company with approximately 50 employees. There was no agreement setting out the precise scope of services that EMPO would provide to the appellant. It was the nature and liability of these services that had become subject to a dispute with HMRC.
Whilst HMRC argued that the EMPO’s services were taxable, the appellant relied on Item 1 of Group 5, Schedule 9 of the VAT Act 1994, claiming that EMPO’s services were exempt supplies of financial intermediation.
The FTT ultimately sided with the appellant, stating that the services represented a single composite supply and, when viewed as a whole, the core elements were those which were essential in bringing merchant acquirers together with merchants, with a view to the former providing financial services to the latter. As a result, they were exempt.
Comment: This decision was a good win and payment service providers operating in similar circumstances should consider it. Whilst it cannot be concluded with any degree of certainty, the absence of clear contractual arrangements between the members of the corporate group in this case may have increased HMRC’s appetite to challenge the VAT position. It is therefore a reminder that such arrangements should be carefully considered and implemented to mitigate VAT risk.
Please contact Wendy Andrews, VAT Director, if you would like to discuss this case further.
In this German case, which was heard by the Court of Justice of the European Union (CJEU), a holding company supplied various management services to its subsidiaries and charged VAT. The subsidiaries were engaged in property development activities which are exempt for VAT in Germany.
In addition to the costs of providing the taxable management services, the holding company also incurred various construction related costs which were provided to its subsidiaries in exchange for the issue of shares. It was argued that VAT was recoverable on these costs as they were overhead costs of the holding company, whose only supplies for VAT were the taxable supplies to the subsidiaries, and could therefore be reclaimed in full.
However, the CJEU ruled that the nature of the costs incurred meant that they were directly related to the investment in the subsidiaries, which was outside the scope of VAT, and could not therefore be treated as overhead costs of the holding company for VAT recovery purposes. The Court did not consider whether a barter transaction might have taken place.
Comment: This case demonstrates the importance of careful consideration of VAT recovery in respect of costs incurred by holding companies.
Please contact Wendy Andrews, VAT Director, if you would like to discuss this case further.
This case provides the Supreme Court’s view on when HMRC is in full possession of the facts to enable it to make an assessment for VAT purposes. It also acts as a useful reminder that the “4 year” time limit is a backstop position and there are other time limits that should be considered before accepting an HMRC assessment.
Any assessment must be within 4 years of the end of the prescribed accounting period. However, s73(6) VAT Act 1994 states that any assessment in relation to HMRC exercising a “best estimate” of a taxpayer’s VAT liability or in relation to an error in a return must be raised before the later of:
- 2 years after the end of the accounting period; or
- 1 year after evidence of fact, sufficient in the opinion of the Commissioners (HMRC) to justify making the assessment, comes to their knowledge.
DCM argued that HMRC were in possession of the facts (in January 2004) when HMRC was made aware and accepted that “something was wrong” with a VAT accounting method. Therefore, by the time that HMRC raised an assessment in October 2005 they were out of time to do so as it was more than 2 years since the end of the accounting period concerned and they had, in DCM’s view, had evidence of fact to make an assessment from more than 1 year.
The Supreme Court dismissed DCM’s appeal on the basis that the final piece of evidence (details from DCM’s VAT accounting records) was not provided to HMRC until the end of August/beginning of September 2005. The test, the Supreme Court confirmed is when did HMRC have the final piece of evidence relevant to making the assessments not whether HMRC could have asked and received evidence at an earlier date.
Comment: This decision confirms HMRC’s guidance on the matter. However, given the length of time it currently takes for HMRC to process any disclosure or enquiry it is well worth remembering that the “4-year cap” is only the backstop provision and the other two-time limits should also be considered.
Please contact Sean McGinness, VAT Partner, if you would like to discuss this case further.
