Grant Thornton - VAT Casebook January 2013

VAT Casebook - A summary of recent VAT cases
Ines Zimmermann
Whether different VAT rules can be Comment – The principle of fiscal neutrality raises
applied to the supply of the same its head again. In many situations, tax authorities
service – fiscal neutrality impose conditions and the consequences are such
that one taxpayer will meet the condition whereas
another will not. The imposition of a condition
The Court of Justice has released its judgment in the above
may mean that the same or similar supplies are
case on 15 November 2012. The case once again centres
treated differently and, if that is the case, the
around the EU principle of fiscal neutrality.
principle of fiscal neutrality may be offended. The
arguments will undoubtedly go on for some time
The issue in this case was whether the welfare services yet.
provided by Ms Zimmermann – care services provided to
individual patients on a freelance basis – were exempt from
VAT under the general Welfare provisions of the Directive, or European Commission v Ireland
whether, as contended for by the German tax authorities, the
Whether the VAT Group rules only
services were subject to VAT. Under Article 13A(1)(g) of the
apply to ‘Taxable persons’
6th VAT Directive Member States were required to exempt
from VAT the supply of services and goods closely linked to
welfare and social security work by organisations (other than The Advocate General (Jaaskinen) issued his opinion in the
Public Bodies) recognised as charitable by the Member State. above case which concerns whether Ireland‟s VAT law - which
Under the German law implementing this provision, the test allows non-taxable persons to be a member of a VAT Group -
of whether a body was charitable (and thus able to exempt its is ultra vires. The case is important as the Commission has
supplies) was determined by whether the income from its commenced similar infraction proceedings against the UK and
supplies of welfare services exceeded a threshold imposed several other Member States. The Court has asked for a single
under the German VAT law. In essence, to qualify as a opinion as the subject matter in all of the cases is the same.
charitable organisation, the medical and pharmaceutical costs
had to be borne in at least two thirds of cases wholly or mainly Essentially, the Commission brought the proceedings on the
by the statutory social security or social welfare authorities. basis that, even though the word „taxable‟ does not appear in
Article 11 of the VAT Directive in between the words „any
Ms Zimmermann argued that the two thirds condition did persons‟, it is implicit in Article 11 of the VAT Directive that
not apply to other similar bodies which, although governed by this provision encompasses only „taxable persons‟ as defined in
private law, were nonetheless allowed to exempt their supplies. Article 9 of the VAT Directive. Otherwise, a VAT group could
As such, Ms Zimmermann argued that the different treatment consist solely of non-taxable persons. For the Commission, the
offends the principle of fiscal neutrality. concept of „grouping‟ implies that all of the persons in the
Article 11 group must belong to the same category for VAT
In its judgment, the Court has confirmed that the purposes. Further, given that Article 11 derogates from the
establishment and use of the two thirds test is acceptable as it general rule that each taxable person is to be treated as a
meets the need to identify which bodies are recognised by the separate unit, Article 11 is to be interpreted narrowly.
Member State as „charitable‟. However, the Court has held
that, in order to comply with the principle of fiscal neutrality, Ireland, on the other hand, took the position that Article 11
the test must apply to all organisations (other than Public of the VAT Directive must be interpreted literally, and the use
Bodies) so that they are placed on an equal footing in relation of the term „persons‟ by the legislator without the attribute
to whether or not the State recognises their „charitable‟ status. „taxable‟ was deliberate. If the legislature had intended to refer
to taxable persons in Article 11, it would have inserted this
The Directive provides an option whereby exemption can word into the recast VAT Directive.
be denied by the State if an organisation – such as Ms
Zimmermann‟s – systematically aims to make a profit. The Advocate General states in his opinion that “I find it
However, in this case, Germany has not availed itself of that difficult to accept the arguments of the Commission. As has
option and, as a consequence, the principle of fiscal neutrality been pointed out by Ireland, elsewhere in the VAT Directive,
means that national legislation may not lay down materially the term „taxable person‟ has been used, and not „person‟ when
different conditions for profit making entities on the one hand an entity is engaged in economic activities for the purposes of
and non-profit making entities on the other. the VAT Directive. While the legislative history is not decisive,
it may imply that the legislator wanted to broaden the scope of
those who may engage in VAT grouping. Further, I note that
supplies between non taxable persons fall outside the scope of

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the VAT Directive, irrespective of whether they form a VAT Consequently, the Court confirmed in each of the cases
group or not. This means that the Commission‟s hypothetical that a taxable person established in one Member State and
concern that a VAT group could consist merely of non taxable carrying out in another Member State only technical testing
persons is not pertinent. Therefore, Article 11 of the VAT (as in Daimler‟s case) or research work (as in Widex‟s case)
Directive allow Member States to regard as „a single taxable which does not include making any taxable transactions,
person‟ any legally independent persons established in the cannot be regarded as having in that other Member State a
territory of that Member State, provided that they are closely „fixed establishment from which business transactions are
bound to one another by financial, economic and effected‟ within the meaning of Article 1 of the Eighth
organisational links. This conclusion is in conformity with the Directive.
principle of legal certainty, which is particularly important in
taxation matters, where not only taxable persons and tax
authorities but also the Member States need to rely on the clear A secondary issue in the Daimler case was whether the
and precise wording of the relevant European Union law. I existence of a wholly owned subsidiary in the Member
therefore propose that the Commission‟s action should be State of refund made any difference to the question of
dismissed.” whether the parent company had a fixed establishment in
that country. Once again, the Court ruled that it was not
the case. Although the CJEU had ruled differently in the
Comment – Although the full court has yet to DFDS case (Case C-260/95), it confirmed that the facts in
deliver final judgment, this opinion is excellent DFDS were also very different and did not therefore bind
news for VAT Groups in the UK. The removal of the court in the current case.
non-taxable companies from UK VAT groups
would be a costly exercise so the Advocate
General’s views as expressed in his opinion will be Comment – Although, again, in what is a worrying
welcome news. trend, this case has proceeded to judgment without
the benefit of an Advocate General’s opinion, it
must be regarded as a common sense judgment. It
Daimler AG demonstrates the lengths to which a Member State
Whether taxpayer was entitled to make will go in order not to pay a VAT refund.
th
an 8 Directive claim – meaning of
fixed establishment
Deutsche Bank
The CJEU has issued its judgment in the above joined Whether discretionary fund
cases which concerned the issue of what should be management services are exempt
regarded for VAT purposes as a „fixed establishment‟. from VAT – whether a single or
In both cases, the Swedish Authorities claimed that the multiple supply
taxpayers had „fixed establishments‟ in Sweden which
precluded refunds of VAT paid in Sweden under the The Advocate General (AG) has issued his opinion in the
provisions of the 8th VAT Directive. above case. In essence the AG has confirmed that the
discretionary fund management service provided by Deutsche
Bank AG to individual customers in return for a fee is a single
Daimler AG is a German company which manufactures supply for VAT purposes. Whilst the various elements of the
motor cars. It has a Swedish subsidiary which owns and service are separately identifiable and are capable of being
operates a test track in northern Sweden. Daimler AG supplied separately. the AG is of the view that, when viewed
does not carry out any taxable transactions in Sweden but, objectively, the customer's interest lies in benefitting from a
each winter, it transfers equipment and personnel to the single supply rather than a multitude of component services.
test track site in order to carry out the testing of cars. The Consequently, his view is that there is a single supply of
company incurred input VAT on costs associated with this portfolio management.
testing and claimed a refund under the 8th Directive. The
Swedish Authority considered that the test track amounted The AG acknowledged and recognised that there are two
to a fixed establishment of Daimler AG in Sweden. main elements of the single supply of portfolio management;
(a) the instigation of transactions which actually create, alter or
Widex A/S is a Danish company with a research extinguish parties' rights and obligations in respect of securities
division based in Stockholm. It incurred VAT on costs (which if supplied separately may qualify for VAT exemption)
associated with the research activity but it had no taxable and (b) the deployment of relevant financial expertise for
activities in Sweden. Again, the Swedish Authority which there is no VAT exemption. He concludes that a
considered that the research division constituted a fixed customer who chooses a particular investment strategy is
establishment and refused to make a refund of the VAT interested in seeing that strategy applied. Whether securities are
incurred. actually bought or sold is less important to him than the
assurance that his investment is, at any given moment,
structured in accordance with that strategy. He wishes to be
In both cases, the CJEU has confirmed that the actual sure that any transactions which take place are carried out at
carrying out of taxable transactions in the Member State of the right moment, but also that there will be no buying or
refund is the common requirement for there to be selling when it is preferable to sit tight.
exclusion of a right to refund, whether or not the applicant
taxable person has a fixed establishment in that State.
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As a consequence, the AG's view is that the preponderant HMRC take the view that, just as in a non-fraudulent case,
role of the 'expertise' element over the 'transactions' element the goods are physically handed over to the customer who is
means that, the exemption provided for by Article 135(1)(f) then free to dispose of those goods. This therefore must be
cannot apply to the service in question. As a result, such regarded as a supply of goods within the meaning of Article
services are taxable. 14.1. The state of mind, motive or dishonest conduct of a
customer is not relevant as to whether there is a supply of
On a final point, the AG confirmed that the service in goods. As far as payment is concerned, HMRC contend that
question qualifies as a 'financial' service. Consequently, the payments received from the card issuer are directly linked to
place of supply of the service fell to be treated in accordance the supply of goods and should therefore be included in the
with what was Article 56(1)(e) [which has since been repealed]. calculation of the taxable amount
Following the 2010 changes to the place of supply rules, the
consequences of this view is that the place of supply of such
Comment – on the face of it, the taxpayer has a
services to Business customers (B2B) is where the customer
very strong case here. The immediate question is
belongs (under Article 44), but the place of supply to
whether or not the arguments apply equally to
Consumers (non-taxable persons), will depend on whether or
supplies of services that have been obtained by
not the customer is within or outside the EU. The place of
fraudulent use of credit or debit cards. It is likely
supply to non-EU customers will be where the customer
to be 18 months or so before the CJEU gives
belongs (under Article 59) whereas, the place of supply for
judgment on the questions referred.
services provided to consumers within the EU will be the place
where the supplier belongs under Article 45.

Dixons Retail plc Hope in the Community Ltd
Whether retailer entitled to reclaim Whether income is a grant and outside
VAT paid on supplies of goods paid the scope of VAT or consideration for
for by fraudulent use of credit cards a supply

The First Tier Tax Tribunal (FTT) has announced that it has The First Tier Tax Tribunal has delivered its decision in the
decided to refer the issues in this case to the Court of Justice Hope in the Community Ltd VAT case. The case
of the European Union (CJEU) for a preliminary ruling demonstrates once again that those in the „not for profit‟
concerning the interpretation of Articles 14.1 and 73 of the sector must take great care when determining the VAT liability
VAT Directive. of income. Following closely on the heels of a similar case
(Aberdeen Sports Village v HMRC), the Tribunal has ruled
that income which the taxpayer had treated as outside the
The taxpayer considers that VAT should not have been scope of VAT was, in fact, consideration for supplies of
accounted where purchasers have fraudulently used credit or services and was, thus, clearly within the scope of VAT.
debit cards to obtain goods. A claim for repayment of £1.9
million of VAT has been rejected by H M Revenue & Customs
(HMRC) and the taxpayer appealed to the FTT. Hope in the Community Ltd was established as a charitable
company established with a view to providing support to faith
and voluntary sector groups seeking to regenerate the
The questions that have been referred centre around two communities which they serve. The company entered into
main issues. Firstly what is the correct meaning of the phrase various contracts with other bodies - who were themselves in
“transfer of the right to dispose of tangible property as owner” receipt of funding from EU and UK funding agencies – to
contained within Article 14.1 of the Directive? Secondly, in provide feasibility reports in relation to a number of projects
circumstances where, under the terms of various agreements and the administration of various grants. HMRC had provided
with the card issuers, the retailer receives a payment from the a number of rulings to the company that the income in relation
card issuer, whether such a payment should be included in the to these projects was, in their view, subject to VAT and,
taxable amount under Article 73. In other words, in initially, the company had accounted for VAT. However, the
circumstances when a fraudster uses a card which he is not company then submitted two voluntary disclosures to HMRC
authorised to use to obtain goods from the retailer, has a alleging that the income should have been classified as outside
„supply‟ of those goods occurred for VAT purposes? Dixons the scope.
argue that the presence of a legal relationship requiring
reciprocal performance is a fundamental criterion to the
identification of whether or not a „supply‟ of goods has taken In many cases of this kind, it is often a very fine line
place and that in cases where goods are obtained fraudulently, whether a payment received is truly funding provided in the
no such reciprocity exists. As such, Dixons claim that if there form of a grant which is outside the scope of VAT or whether
is no supply, then no VAT can be due. Similarly, as far as the payment constitutes consideration for the supply of goods
computing the taxable amount is concerned, Dixons argue or services. The company in this case tried to argue that the
that, in the circumstances of a fraudulent card transaction, money it received was not consideration and, as a result, it
there is no reciprocal assumption of any obligation by the could not therefore be within the scope of VAT. The Tribunal
fraudster in connection with the payment for the goods and decided that the matter turned on a close examination of the
thus there is no direct link between any sum received by the agreements and arrangements between the parties. It went on
retailer and the release of the goods. As a consequence, to confirm that both Article 2 of the VAT Directive and
Dixons argue that payments received from the card issuers section 5(2) of the UK VAT Act require that for VAT to be
should not be included in the taxable amount. due there has to be a supply for a consideration. However, on
the basis of the available documentation, the Tribunal stated
that there was insufficient evidence to establish that the
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payments made to the company were not in consideration of a confirmed, in light of the evidence, that the treatment of
supply of services. The company was not able to show that the Local Authorities as non-taxable persons in relation to such
relationship between it and the funder was one of informal provision would not lead to negligible levels of distortion of
optional cooperation not giving rise to any transaction capable competition but would, as a matter of fact, lead to significant
of recognition as a supply. Indeed, many of the agreements, distortion of competition. As such, the Tribunal had no
letters and other documents provided by the company actually alternative but to dismiss the Local Authorities appeal.
supported HMRC‟s case that there was a direct link between
the supply and payment of the “grant” monies. In light of this,
the Tribunal dismissed the company‟s appeal. Comment – It has taken the best part of a decade
for this matter to be resolved. However, given the
long and tortuous history of the litigation in this
This is not an uncommon problem. Businesses and
case, it would come as no great surprise to anyone
organisations in the not for profit and charity sectors need to
if the matter is appealed further. Given that there
fully understand the VAT implications and consequences of
are a substantial number of cases stood behind this
their projects. Generally, in cases where, under an agreement,
test case, it is difficult to believe that this is the end
an obligation to provide goods or services exists and money is
of the line!
paid to the supplier, it is often extremely difficult not to
conclude that the payment is anything other than
consideration. As the Tribunal stated in this case, the burden
of proof in such matters rests entirely with the supplier. Borough Council of King’s Lynn &
Bodies in receipt of such funding should continually review West Norfolk
their VAT position if errors are to be avoided. Whether voluntary overpayments for
car parking by customers are subject
Isle of Wight Council (and others) to VAT
Whether the provision of off street
car parking by a local authority The First Tier Tax Tribunal has issued its decision in this case
should be subject to VAT which concerned whether voluntary overpayments by
customers paying to park in the Council‟s car parks should be
The First Tier Tribunal has issued its decision in this long subject to VAT.
running case relating to whether off street car parking
provided by a Local Authority should be subject to VAT. The Borough Council of Kings Lynn & West Norfolk (the
The case has a very long history starting, as it did, at the VAT Council) operates pay and display car parks where customers
& Duties Tribunal in 2004. pay for the parking using machines which give no change.
Whilst there is a published tariff which sets out a scale of
charges based on the length of time a vehicle is parked in the
In simple terms, the issue in question is whether the
car park, on occasion, the customer will not have the correct
provision of off street car parking by a Local Authority should
change and will, as a result, elect to overpay (eg if the tariff for
be subject to VAT or whether, as claimed by the appellants in
a two hour stay is £2.50, but the customer inserts £3.00). In
this case, such provision should be treated as a „non-business‟
such cases, the Council took the view that the voluntary
activity given the Public Body status of the Local Authority.
overpayment was not consideration for the supply of the car
Article 4 of the 6th Directive stipulated that where such
parking space and submitted a claim to HMRC to recover the
bodies supply goods or services in their capacity as public
VAT overpaid. HMRC refused to pay the claim contending
authorities, they are not to be regarded as taxable persons
unless such treatment is likely to cause significant distortion of that the overpayment was consideration for a taxable supply.
competition with commercial providers of the same goods or
services. It was the interpretation of this „significant Having considered the facts and evidence, the Tribunal has
distortion of competition‟ issue which was referred to the concluded that, as the charges for parking are fixed by a
Court of Justice which confirmed in its 2008 judgment that, to statutory „Order‟, the consideration payable in respect of a
evaluate whether or not such distortion might exist, it is supply of parking cannot be unilaterally changed by either the
necessary to look at the activity as a whole rather than by customer or the Local Authority. The sliding scale published
reference to the competition in any single local area. In tariffs which are shown on the machine reflects the scale
addition, the ECJ confirmed that the word „significant‟ is, for charges in the Order. The Appellant is not able to change
the purposes of the second subparagraph of Article 4(5) to be those scale charges without changing the Order itself. The
understood as meaning that the actual or potential distortions paying member of the public is also not able to unilaterally
of competition must be more than negligible change the consideration by paying more or less than the scale
charges which are stated on the machines. The agreement
between the parties is that the payer must pay the scale
With the ECJ‟s judgment in mind, the High Court referred
charges in order to obtain a ticket for parking. The customer
the case back to the Tribunal for the matter to be reheard and
understands, from the instructions on the meter, that where
for the Tribunal to come to a decision on the distortion of
there has been an overpayment, over and above the scale
competition issue. Having taken account of a substantial
charges, no change would be given. An overpayment by a
body of evidence in relation to the operation of off street car
customer is not accidental but may arise where the customer
parking in the UK and the actual and potential competition
does not have the precise change for the machine but requires
between commercial and Local Authority provision, the
a ticket in order to park. A decision is then made by the
Tribunal has now confirmed that there is no doubt that Local
customer to pay more than the sum required to obtain the
Authorities are in competition with commercial providers of
ticket. In doing so the payer is making an ex gratia payment
off street parking. More importantly, however, it has also
of the amount which exceeds the scale charges. The customer
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understands that they are not receiving anything extra for the
overpayment which has been made. The parking service Comment – It is clear from this case that HMRC’s
given by the ticket is being provided regardless of the new approach to the application of this concession
overpayment. The overpaid sums goes into the general fund constitutes an unpublished change of policy in
of the Council for general spending, they do not expect to relation to the recovery of input tax on partners’ tax
have to return those sums to the customer. return fees incurred by the partnership. This is
likely to affect almost all professional partnerships
going forward as clearly, HMRC do not consider
In light of the above, the Tribunal held that the income
that £170 VAT per partner is de-minimis. (There is
received by the Council from the voluntary overpayments was
no indication in HMRC’s manual as to what value
not therefore consideration for a taxable supply and was, thus,
is to be regarded as de-minimis).
outside the scope of VAT.

It also seems that the Tribunal has confused the
Comment – An interesting decision. Whilst each EU principle of legitimate expectation with the
case is, of course, decided on its own merits, it English law concept of equitable estoppel. Both are
seems fairly clear that the ruling will apply equally similar but are not the same. In relying on the
in other cases where customers voluntarily overpay principles of estoppel, it is possible that the
in order to secure the underlying supply. Tribunal has erred in law and presented an
opportunity for the matter to be appealed further
on a point of law.
Mundays LLP
Whether VAT incurred by a firm of
Solicitors on the preparation of
partner’s own tax returns is Our Communications Ltd
claimable by the firm Whether Repayment Supplement is
payable in relation to voluntary
This is a First-tier Tribunal decision relating to the recovery of disclosures
input tax by a firm of Solicitors on fees relating to the
preparation of the firm‟s partnership tax return and those of The only issue under appeal in this case was whether
the individual partners. Repayment Supplement, payable under section 79 of the VAT
Act 1994, applies to claims for the payment of VAT credits
Despite published guidance in its own manuals which not made on a VAT return but on an additional claim made
confirms that “in order to avoid disputes over small amounts under the provisions of Regulation 29 of the VAT
of tax our policy is that VAT on a partnership‟s accountancy Regulations 1995.
fees should usually be claimed in full”, HMRC took the view
in this case that the input tax was not reclaimable and issued Our Communications Ltd (the company) submitted its
an assessment in the sum of £18,647 for the VAT periods VAT return for the month of January 2006 in the normal way
between January 2007 and October 2010. and claimed a repayment of £1.71 million. The return was
received by HMRC on 6 February 2006. However, by a letter
In the Tribunal‟s view, the published guidance is simply dated 3 March 2006 to HMRC, the company claimed an
concessionary treatment by HMRC and not (and was not additional repayment of £1.48 million in relation to the same
intended to be) a correct statement of the law. In this case, VAT period. The company also submitted similar returns for
HMRC argued that the amounts in question were not for the months of February 2006 and March 2006. Each of these
small amounts and refused the claims. The appellant on the returns were subjected to extended verification by HMRC
other hand argued that the concession should be looked at on who refused to repay the amounts of input tax claimed.
a per partner basis. The fees per partner were £900 per year
and the VAT on these was thus „de-minimis‟. In July 2006 and September 2007, HMRC informed the
company that the input tax claimed would not be repaid and
The Tribunal agreed with HMRC holding that the the company appealed to the First Tier Tribunal . The
concession clearly related to the annual accountancy fee as a Tribunal allowed the appeal in December 2008 the total
whole. Each bill was for (roughly) £20,000 (in other words, amount of VAT credits claimed in the three periods was
23 multiplied by £900) with VAT varying between 15% and
20% during the period. As such, the Tribunal considers that £9.77 million. In February 2009, the company claimed
the concession was not intended to cover invoices of this size repayment supplement and HMRC conceded that Repayment
and the appellant cannot rely on it. The Tribunal also Supplement was due in relation to the credits claimed on the
confirmed that the appellant had not relied on a legitimate VAT returns but not in relation to the credit claimed in the
expectation to its detriment as, clearly, all the appellant did letter of 3 March 2006. The company appealed to the
was claim VAT which it was not strictly, as a matter of law Tribunal against HMRC‟s refusal to pay Repayment
entitled to claim. As such it had not altered its position to its Supplement.
detriment.

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The Tribunal held that the company was entitled to the VAT was payable. Finally, having acquired the rights to the
payment of Repayment Supplement on the full amount of vehicles, this company only accounted for VAT on any
£1.48 million. The language of section 79 means that margin it made because, when it sold the car to a customer,
Repayment Supplement is payable in respect of any VAT it did so under the second hand margin scheme.
credits whether they are claimed in a VAT return or otherwise
after the return has been submitted.
Under the Halifax abuse of law principle, if transactions
are entered into which result in the accrual of a tax
Comment – Repayment Supplement (at 5% or £250 advantage the grant of which would be contrary to the
whichever is greater) is payable in situations where purpose of the VAT Directive and, it is clear from
the following conditions are met: objective factors that the essential aim of the transactions
• a person is entitled to a VAT credit and has in question is to obtain a tax advantage, the transactions
submitted a return or claim by the due date must be redefined. In this case, the First Tier Tribunal
• HMRC fails to make the repayment within 30 found that the essential aim of the transactions in question
days (allowing for it to make reasonable enquiries) was not to seek to gain a tax advantage but to generate
• the amount claimed has not been adjusted by finance for the group. As a result, Halifax abuse was not „in
more than 5% or £250 (whichever is greater). point‟ and the First Tier Tribunal allowed Pendragon‟s
appeal.
This is a new and major development – businesses
that have submitted voluntary disclosure claims in The Upper Tribunal has, however, concluded that, "the
the past should examine whether the conditions evidence in this case does not come anywhere near
above were met and, if so, where appropriate, displacing the overwhelming case for saying that the
further claims for Repayment supplement should essential aim of the transactions in this case was to obtain a
be made. Consider all of the Fleming claims that tax advantage". The First Tier Tribunal‟s decision must
were made up to 31 March 2009. therefore be reversed and the transactions re-defined.

Pendragon PLC Comment – An interesting case which discusses
Whether the essential aim of the ‘Halifax’ abuse of rights principle in some
arrangements put in place was to detail. It should be borne in mind that the Tribunal
gain a tax advantage – whether has found that the ‘essential aim’ of the
arrangements abusive under ‘Halifax’ principle transactions in question was to obtain a tax
advantage. This does not mean that planning per
se is dead as transactions which are entered into for
The judgment of the Upper Tribunal in the Pendragon other commercial reasons should not fail the
PLC case [2012] UKUT 90 TCC has been released and is a ‘essential aim’ test. However, the case does
resounding defeat for the taxpayer. Allowing HMRC‟s highlight that great care is always needed when
appeal from the First Tier Tax Tribunal‟s decision, the such arrangements are being considered.
Upper Tribunal has held that the arrangements put in place
by the taxpayer involved an abuse of law and, as a
consequence, following the judgment of the European
Court of Justice (as it then was) in the case of Halifax and Robinson Family Ltd
others [2006] STC 919, the Court has had to redefine the Whether transfer of a business as a
transactions in question so as to achieve an appropriate going concern (TOGC) where
outcome for VAT purposes. transferor retained a reversionary
interest in the property transferred
Pendragon PLC entered into arrangements in relation to
the sale of cars. These arrangements included a number of This case concerns the VAT provisions relating to the
steps and relied on the operation of the second hand car transfer of a going concern (TOGC). In essence, the
scheme as well as the rules relating to the transfer of going question to be resolved was whether the disposal of a
concerns which de-supply certain transactions. In essence, property by a developer to a third party purchaser by way
cars were sold by Pendragon PLC to a number of captive of the granting of a new sub-lease constituted the transfer
leasing companies. These supplies were taxable and of an asset which could be treated as part of the TOGC
Pendragon PLC accounted for VAT in the normal way. and thus outside the scope of VAT.
The captive leasing companies reclaimed the input tax on
these transactions and then hired the cars to dealerships Robinson Family Ltd is a company which carries on a
under the terms of hire purchase agreements. The leasing property development business. The company purchased a
companies then assigned the benefit of the hire agreements leasehold site for a term of 125 years. The company then
to a Jersey based bank and treated this assignment as a constructed a number of commercial units. Due to various
transfer of a business as a going concern. As a restrictions in this head lease, the company could not
consequence, no VAT was due on this transaction. In turn, dispose of their interest in the completed units except by
the Jersey bank assigned the benefit of the agreements to a way of the grant of sub-leases. Accordingly, as far as Unit
further captive company within the Pendragon group. This 3 was concerned, the unit was sold by way of the grant of a
was also treated as a transfer of a going concern and no sub-lease for the duration of the head lease less 3 days. At
6

the time of the grant of the sub-lease, the company stated should not have taken into account the „behaviour of the
in the sale contract that the transfer of the unit was subject taxpayer‟ but should have focused solely on the contractual
to a proposed further letting to another sub-tenant and, as arrangements. Had it done so, the First-tier would not
a consequence, treated the transfer as the transfer of a have come to that decision.
property letting business for VAT purposes.
HMRC appealed to the Court of Appeal which has held
However, that further sub-lease did not materialise and that the Upper Tribunal was incorrect in its view that the
HMRC therefore took the view that the TOGC conditions First-tier Tribunal was wrong to hold that the correct
were not satisfied and raised an assessment on the approach, when determining the nature of a supply for
company. Essentially, HMRC concluded that there was VAT purposes, was to look not only at the all the various
insufficient evidence of intended economic activity to contractual documents but also at „the behaviour of
justify the argument that there was a property letting Medhotels‟. The Court considered that two questions
business either in place (or indeed proposed) at the time of needed to be answered. Firstly, whether the First-tier erred
the grant of the original sub-lease to treat them as the in law in its approach and secondly, whether, if that
transfer of a going concern. Following a review, HMRC approach was correct, whether it was entitled to reach the
then focused on the question of whether the grant of the conclusions that it did.
sub-lease could ever qualify as a TOGC because, as stated
in notice 700/9, it is HMRC‟s stated policy that the grant Citing the dicta of Justice Laws in Reed Personnel
of the sub-lease was, in fact, the creation of a new asset and Services, the Court held that the Tribunal was entitled to
not the transfer of the existing asset [the head lease]. examine all relevant factors including the behaviour of the
taxpayer. Consequently the answer to the first question
The company argued, and the Tribunal accepted that the was that the First-tier had not erred in law. Secondly,
condition in the head lease which stipulated that lessee‟s based upon the evidence before it, the First-tier was also
could only grant sub-leases rather than make assignments entitled to reach the conclusion that Medhotels acted as a
meant that, if HMRC‟s view was correct, adherence to the principal and its supply of designated travel services were
condition in the head lease would be sufficient to deny the thus within the scope of TOMS and taxable in the UK.
company the availability of the TOGC provisions. On the
facts of the case, the Tribunal confirmed that there was a Looking at the „whole package‟ and not just the
letting business in existence at the time of the grant of the contractual obligations the Court found that Medhotels
sub-lease. Crucially, the Tribunal also confirmed that a dealt with holidaymakers in its own name in respect of the
property letting business existed after the grant of the sub- use of its website and in cases where a hotel operator was
lease. The Tribunal held that in light of those facts, unable to provide accommodation as booked. Similarly,
ownership and possession of the unit was transferred to Medhotels dealt with complaints and provided
the sub-tenant and should be treated for VAT purposes as compensation in its own name. Further, Medhotels did
a TOGC. not invoice the hotel providers for commission nor did it
pass on deposits received from holidaymakers for
This is a welcome decision albeit it is decided on the bookings. All in all, the First-tier Tribunal‟s decision that
facts and is binding only on the parties to the appeal. Medhotels did not act as an intermediary but actually
However, this case goes some way to dispel the myth that supplied the holidays to the holidaymakers was the correct
it is only the assignment of the existing asset (the head decision.
lease in this case) that can qualify as a
TOGC
Comment – Given the values involved, one can only
assume that this judgment is not necessarily the
Secret Hotels2 Ltd (formerly Med end of the litigation. If the judgment stands, it
Hotels Ltd) seems clear that the nature of a supply for VAT
Whether taxpayer acting as agent or purposes must be determined by an examination of
principal – whether Tour Operators’ the whole package and not, as the Upper Tribunal
Margin Scheme applied concluded by simply looking at the contractual
obligations.
In a unanimous judgment released on 3 December 2012,
the Court of Appeal has allowed HMRC‟s appeal in this
long running case relating to VAT and the Tour Operators‟ Volkswagen Financial Services (UK)
Margin Scheme (TOMS). In 2010, the First-tier Tribunal Ltd
had originally dismissed the taxpayer‟s appeal on the Whether Partial Exemption Special
grounds that, looking at the whole of the facts of the case Method was fair and reasonable
and not just at the contractual obligations of the respective
parties, the taxpayer acted as a principal when it supplied The Upper Tribunal has issued its judgment in the above
travel services to holidaymakers. case and has allowed H M Revenue & Customs‟ (HMRC)
appeal against the First Tier Tribunal‟s (FTT) decision.
The Upper Tribunal allowed the taxpayer‟s appeal ruling The FTT had ruled that a partial exemption special method
that the First-tier Tribunal had erred in law. The First-tier adopted by Volkswagen Financial Services (UK) Ltd

7

(VWFS) which apportioned residual input tax based on the We understand that all organisations want the peace of
ratio of taxable transactions to total transactions (which in mind that comes with knowing that they are dealing with
this case was 50%) was fair and reasonable. This was on their indirect tax affairs efficiently. We minimise the
the basis that for each vehicle sale there were two impact of indirect taxes for all types of organisations;
transactions. Firstly, the taxable sale of the vehicle at cost from global companies and large plc's, AIM listed
and secondly the exempt supply of credit. The FTT found companies, owner managed businesses and inbound
that although the residual overheads incurred by VWFS investors in start-up situations, through to not for profit
were not cost components of its taxable supplies, and government bodies. We advise on VAT, Customs
nevertheless, to ignore the taxable transactions would be Duty, cross border activities, VAT compliance
inherently unfair and unreasonable. requirements, landfill tax and other indirect taxes.

HMRC appealed to the Upper Tribunal. HMRC‟s
principal contention was that the FTT had found as a fact For further information in
that VWFS‟s residual input costs had been built into the relation to any of the issues
price of its exempt supplies of finance and that there was highlighted in this
no authority (statutory or otherwise) for the proposition Casebook please contact:
that there could be any recovery of input tax that has been
incorporated into the price of an exempt output supply. Scotland/Northern/England/
Not surprisingly, VWFS, on the other hand, contended Northern Ireland
Stuart Brodie
that the FTT had been correct for the reasons it gave at the stuart.brodie@uk.gt.com
time. The Upper Tribunal trawled through a long list of
existing case law authority (including Rompleman, BLP
London/South East
Group, Midland Bank, Abbey National, Kretztechnik, St Karen Robb
Helen‟s School Northwood, Investrand, and London Clubs karen.robb@uk.gt.com
Management) all of which are concerned with the
deductibility of input tax and whether an input is „used‟ for Thames Valley/Southwest
the purposes of a taxable output or is a cost component of James Hurst
the output. However, what really mattered to the Upper james.hurst@uk.gt.com
Tribunal was the economic reality of what VWFS were
supplying. The FTT formed a very clear view of the nature Midlands/East Anglia
of the economic reality. VWFS did not simply supply Mike Sheppard
credit but supplied vehicles on credit and as such the mike.sheppard@uk.gt.com
economic reality was that the overheads were consumed
for the business as a whole. Unfortunately, the Upper
Tribunal disagreed with that view and held that „the
observable terms and features of VWFS‟s business start
with the fact that it is the finance arm of Volkswagen AG.
It exists in order to provide finance to those purchasing
Volkswagen brands of vehicle and will only be involved in
any transaction when the purchaser requires such finance‟.

In essence therefore, the Upper Tribunal concluded that, Join our fast growing VAT
although VWFS‟s transactions will always involve a taxable Club group on LinkedIn to
transaction and an exempt transaction, the economic reality hear about Case alerts,
of the situation was that VWFS was a finance company Indirect Tax updates, Court
rulings and other updates
making exempt supplies of finance and that the residual
as and when they happen.
overheads are used for its financing business which is
exempt from VAT. Consequently a partial exemption
method which apportions 50% to taxable activities would LinkedIn
not be a fair and reasonable apportionment. HMRC‟s VAT Club
appeal was allowed. group

Comment – A blow to Finance Companies but, one
suspects, this is not the last we will hear on this
matter.

© 2013 Grant Thornton UK LLP. All rights reserved.
'Grant Thornton' means Grant Thornton UK LLP, a limited partnership. Grant Thornton is a member firm of Grant Thornton International Ltd (Grant
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www.grant-thornton.co.uk 8

Grant Thornton - VAT Casebook January 2013

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