VAT Update – September 2022

15 Sep 2022

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This month’s VAT Update looks at the problems being experienced by users trying to use the new online VAT registration service which went live in August. There is a report of an interesting case looking at VAT and the sporting facilities provided by local authorities (with some interesting variations in the UK’s various jurisdictions). We also look at a recent Tribunal decision (a victory for the taxpayer) on safety testing and whether a business or non-business activity.

HM Revenue & Customs (HMRC) has introduced a new online VAT registration process. It replaces the previous system and must be used for all new VAT registration applications from 1 August 2022.

There are a number of problems with the system, which may lead to delays in applying for new VAT registrations:

  • For UK corporates, an application cannot be processed until a Unique Taxpayer Reference (UTR) has been issued by HMRC. This can take place several weeks after incorporation and therefore means that a company cannot apply for registration immediately after incorporation, even if it has a compulsory liability to register.
  • For non-UK entities there is confusion around the information required for entities such as offshore partnerships and VAT business establishments that may not require a UK UTR.
  • HMRC initially required businesses to have an intention to trade within three months before they could register. This is not correct in law and we understand the system is due to be updated to remove this question.
  • There are practical details in saving an application for review or approval, and applications can be lost and require complete re-entry.
  • It appears that the form does not allow certain words, such as “Limited”, “Ltd” or “plc”, to be included anywhere in the business’ trading name. For example, a sole trader trading as “Limited Clothing” would have issue registering this trading name.
  • We understand it is no longer possible for non-UK entities to apply for an EORI number at the same time as the VAT registration and a separate application would need to be made.

Comment: Professional bodies are in discussion with HMRC about improving this process, but until then it may be very difficult to obtain a VAT registration at short notice. In addition, we understand HMRC’s current turnaround time for processing new standalone VAT registrations is eight weeks. We would encourage any businesses that are considering VAT registration to plan ahead where possible so the application can be submitted promptly. We also recommend businesses get in touch to discuss the approach to VAT accounting whilst waiting for a VAT number to be issued.

The Upper Tribunal has found that the First Tier Tribunal (FTT) erred in law when deciding that the provision of sports and leisure facilities by local authorities was to be regarded as outside the scope of VAT.

There is interesting history to this case. Many local authorities submitted claims to HMRC for output VAT overpaid in relation to the provision of sports and leisure facilities to the general public, on the basis that the supplies were made by the local authorities in their statutory capacity and so outside the scope of VAT. HMRC disagreed and three lead cases were heard at the FTT for each of the jurisdictions within the UK: Mid Ulster District Council for Northern Ireland, Chelmsford City Council for England & Wales, and Midlothian Council for Scotland. In all three cases, the FTT found (for slightly different reasons) that the local authorities were to be treated as public authorities and therefore their supplies of sports and leisure facilities fell outside the scope of VAT.

In Scotland, HMRC did not appeal the finding to the Upper Tribunal, as the councils operate under a statutory duty as a result of the powers granted by the Scottish Government (a very fine legal distinction to the other jurisdictions). So, Scottish local authorities should treat the supply of sports and leisure facilities as outside the scope of VAT.

In England & Wales, HMRC appealed the decision that the councils were operating under a special legal regime and so were to be treated as a public authority (the EU term used in the Principle VAT Directive). The Upper Tribunal upheld the decision of the FTT in this case and found that the councils did indeed operate under a special legal regime and were to be treated as a public authority. So, English and Welsh local authorities should also treat the supply of sports and leisure facilities as outside the scope of VAT.

In Northern Ireland, HMRC did not dispute that the councils were operating under a special legal regime. Instead, it argued that by treating the supply as outside the scope of VAT, it created distortion of competition with the private sector. This argument was put forward as a result of specific laws in place in Northern Ireland to accommodate equality across the religious/political spectrum and which often result in a duplication of facilities within local areas. The Upper Tribunal found that the FTT had wrongly defined the activities of the council, and whether there is distortion of competition required further analysis. Insufficient facts were available for the Upper Tribunal to remake the decision and so it has been remitted to the FTT to look at the provision of facilities across the whole of Northern Ireland. Northern Irish local authorities should continue treating supplies of sports and leisure facilities as they have done until the courts have reached the final decision.

Comment: This case highlights the impact of having three different legal jurisdictions within the UK. Whilst the same VAT legislation applies in all three jurisdictions, the differing powers granted to local authorities by the UK and devolved governments/executives, has resulted in three different outcomes. It will be interesting to see how HMRC proceeds with two conflicting decisions from the Upper Tribunal and whether any attempts will be made to ‘equalise’ the position across the UK.

Please contact Sean McGinness, Head of VAT, if you would like to discuss this case further.

The First Tier Tribunal (FTT) has found in favour of the taxpayer in The Towards Zero Foundation (formerly Global New Car Assessment Programme) v Revenue and Customs Commissioners [2022] UKFTT 226 (TC), and found that the carrying out of certain safety tests was a business activity and assessments raised by HMRC for overclaimed input tax should be set aside.

The Towards Zero Foundation (TZF) is a registered charity whose primary object is to achieve zero road traffic fatalities through its New Car Assessment Program (NCAP). Under the program, TZF purchases (as a secret shopper) and crash tests individual models of cars manufactured for the UK market. In the event a particular model of car performs poorly in the initial tests, a manufacturer would then seek to engage TZF to undertake further testing, for which a fee is a paid.

HMRC was satisfied the further testing, as requested by the manufacturer, is a business activity, however it considered the initial test to be a non-business activity and consequently raised an assessment for over-claimed VAT on the purchase of the cars (VAT incurred with respect to a non-business activity is not input tax).

TZF’s argument against HMRC’s stance, was that the initial tests and the published results which followed, prompted the manufacturers to engage for further research to be undertaken, so that the safety performance of the vehicles they sell in the UK is maximised. Because of the direct link between the initial tests and the follow-on research, TZF maintained the costs associated with the initial tests do have a connection to economic activities being undertaken and the FTT agreed that the initial test was not independent from the further testing and analysis which the manufacturers paid for.

Comment: HMRC continually challenges instances of activities being undertaken for which no income is being received, and the point features regularly in VAT tribunal cases. Whilst this particular case involved a charity, it is interesting that HMRC is seeking to apply similar arguments with respect to fully taxable companies and not just charities and not-for-profits. It would seem anything done for which no income is received is subject to potential HMRC challenge, and taxpayers in all sectors should be mindful of this. The risk here is one of VAT recovery. Should HMRC conclude costs are incurred with respect to something they consider is not an economic or business activity, they will seek to disallow the VAT reclaimed on those costs. Businesses should be prepared to justify how all of their operations are undertaken for the purposes of receiving income. This is not always necessarily the case though.

Rural estates, as an example, should be mindful when VAT is being reclaimed on costs relating to issues such as biodiversity when income may not be directly received as a result of the activity.  . The link between such costs and the income generating elements of the estate is not always an obvious one, so care should be taken when reclaiming VAT on a cost which itself is not part of an income generating activity.

The Towards Zero Foundation (formerly Global New Car Assessment Programme) v Revenue and Customs Commissioners [2022] UKFTT 226 (TC)

Please speak with Nick Hart, VAT Director, or Sean McGinness, Head of VAT, if you would like to discuss further.

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