In Languard New Homes Ltd v HMRC [2016] TC04917 the First Tier Tribunal (FTT) allowed the sale of a converted mixed-use property to be zero rated, contrary to HMRC’s longstanding interpretation of the legislation. Stop press: HMRC is appealing this decision.
VAT Cases & News
Summaries of interesting VAT cases for the SME owner.
In HMRC v Frank A Smart & Son Ltd (Respondent) (Scotland) [2019] UKSC 39, the Supreme Court upheld the decisions of all earlier courts and dismissed HMRC's continued appeal: a company was entitled to a repayment of VAT paid when acquiring Single Farm Payment (SFPE) units as a fund raising exercise.
The long running saga of Associated Newspapers and its VAT treatment of retail vouchers given away to customers has finally come to an end in the Upper Tribunal after two earlier visits to the First Tier Tribunal.
Associated Newspapers ran two business promotions:
- In the first, customers who bought the Newspaper for a certain period of time would receive a free high-street voucher worth between £10 and £100. Associated Newspapers would buy these vouchers directly from the retailer.
- In the second, customers accumulated loyalty points which they could later exchange for high-street vouchers. Associated Newspapers acquired these vouchers from an intermediary who managed the scheme.
The tribunal decided that:
- When the vouchers were given away by the Newspaper this constituted the use of goods for a business purpose and was not a supply. As a result, no output VAT was due.
- When the vouchers were acquired by the Newspaper directly from the retailer, the Newspaper did not incur any input VAT and therefore no input VAT could be reclaimed.
- When the vouchers were acquired by the Newspaper from an intermediary, input VAT was incurred. This cost was a directly attributable cost of its taxable supplies of newspapers. This input VAT could therefore be reclaimed in full.
Comment
The question of business promotions, giveaways and vouchers can be a complex one and it is gratifying that the Upper Tribunal have provided a straightforward answer in this case.
HMRC’s guidance on this topic is contained mainly in VAT notice 700/7: business promotions and is consistent with the Upper Tribunal view as far as it relates to the input VAT on the retail vouchers.
However, at the time of writing, the VAT notice had the following to say with regard to the VAT treatment of the vouchers that are given away at paragraph 8.13:
“Where face value vouchers are purchased by businesses to give away for no consideration, for example as part of a promotions scheme, the VAT incurred may be recovered as input tax subject to the normal rules. However, VAT also has to be accounted for on vouchers given away for no consideration to the extent of the input tax claimed.”
Although is to be hoped that HMRC will be updating and clarifying their guidance in light of this decision shortly, both parties have been given leave to appeal to the Court of Appeal and so this matter might not yet be settled.
Links
For case decisions see the following links:
Upper Tribunal decision HMRC v Associated Newspapers Limited [2015] UKUT 0641 (TCC)
First Tier Tribunal decisions Associated Newspapers Ltd v HMRC [2014] UKFTT TC03256 and Associated Newspapers Ltd v HMRC [2015] UKFTT TC04586
For HMRC guidance see VAT notice 700/7: business promotions.
In Farmyard Funworld Ltd v HMRC [2015] TC04741 the First Tier Tribunal (FTT) agreed that a lack of funds caused by an unexpected heatwave could constitute a reasonable excuse for a late VAT payment.
In John David Pryor t/a Purfleet Post Office v HMRC [2015] TC04702 the First Tier Tribunal (FTT) agreed that HMRC had not been unreasonable to deny retrospective relief from a VAT Flat Rate scheme despite the hardship caused.
Background
Mr Pryor ran a Post Office and shop from October 2006 and applied the flat rate scheme (FRS) percentage of 2%, correctly describing his business as 'retailing food, confectionary, tobacco, newspapers, or children's clothing'.
He failed to apply the increased FRS percentage of 4% for this type of business when it was introduced in January 2011.
In March 2014, HMRC notified Mr Pryor of the increase in the FRS percentage and issued an assessment to collect underdeclared VAT of £13,869.
Mr Pryor wrote to HMRC to withdraw from the FRS in March 2014 however his request for retrospective withdrawal was denied by HMRC as there were no exceptional circumstances which would allow a departure from the standard policy of refusing such requests.
Mr Pryor appealed this decision on the grounds that:
- HMRC had not notified him of the percentage change when it occurred in January 2011.
- HMRC could reasonably have checked the Returns earlier which would have resulted in a lower underpayment.
- The hardship caused by the payment of the assessment amounted to exceptional circumstances and should have enabled HMRC to agree to his request.
Decision
In making its decision to dismiss the appeal, the FTT
- Agreed that it would be helpful if HMRC could notify traders of a change in percentage, but noted that there was no statutory obligation for them to do so.
- Confirmed that the onus was on the taxpayer to pay any underdeclared VAT as a result of using the wrong percentage.
- Accepted that the business was in a worse position as a result of refusing the application to withdraw but that this did not amount to exceptional circumstances, and nor did any hardship that followed.
The jurisdiction of the FTT was limited to considering whether HMRC's decision was reasonable, and in this case the tribunal agreed that it was.
Case reference John David Pryor t/a Purfleet Post Office v HMRC [2015] UKFTT TC04702
In New Deer Community Association v HMRC [2015] UKUT 604, the Upper Tribunal (UT) agreed that a building consisting mainly of changing rooms and showers was not used as a ‘village hall or similarly’.
In David Love Marketing Ltd v HMRC [2015] TC04644 the first tier tribunal (FTT) allowed the taxpayer’s appeal against HMRC's cancellation of its VAT registration on the grounds that whilst there had been no taxable sales, commercial activities did continue.
HMRC may cancel a VAT registration with effect from the day on which it ceased to be registerable (VATA 1994, Schedule 1, Paragraph 13).
The last evidence that HMRC had of any taxable supplies made by David Love Marketing Ltd (DLM) was a receipt on 22 June 2010. In December 2013 HMRC cancelled the VAT registration with effect from 23 June 2010, issuing an assessment for input VAT reclaimed on subsequent VAT returns submitted for periods up to 30 April 2013.
Although the scale of the business had reduced from 2007, DLM contended that it continued to carry on its business after that by entering into agreements with yacht brokers, making one sale and narrowly missing out on at least one other. DLM had also written to the editor of Yachting Monthly on 6 October 2011, trying to convince him to run an editorial on its yachts.
DLM also argued that the potential for making sales of new boats still existed but the nature of a trade involving high-value items was that sales can be infrequent and the trade was affected by the recession.
The FTT agreed that there had been evidence of business activity after 23 June 2010, although there was none since 6 October 2011, and also noted that it ‘was perfectly possible for a person to be carrying on an activity with reasonable or recognisable continuity and with the intention of making taxable supplies for a substantial consideration but not be successful in achieving any sales’.
A person is entitled to be registered for VAT if they make taxable supplies or are carrying on a business and intend to make taxable supplies in the course of that business (VATA 1994 Schedule 1, Paragraph 9).
The FTT concluded that HMRC had not been entitled to cancel DLM’s registration from 23 June 2010, as there had been evidence of activity until October 2011.
Comment
This case is noteworthy because the FTT agreed that a commercial business could exist for a considerable period of time despite the absence of any sales. It also re-confirms the importance of keeping evidence of activity even where that activity is not directly linked to any specific cost or receipt.
Case reference: David Love Marketing Ltd v HMRC [2015] UKFTT TC04664