UK: VAT Focus - November 2012

Last Updated: 28 November 2012
Article by Smith & Williamson

Life after the First Tier Tribunal decision in Reed Employment Limited

In March 2011, the First Tier Tribunal ruled that Reed Employment Limited's supplies were that of introducing temporary staff (temps) to its clients; therefore VAT was due only on their commission for introduction. Subsequently, HMRC issued a business brief to confirm that it would not appeal, but the decision of the Tribunal would only be binding on the parties involved. This was an interesting tactical move by HMRC, meaning that Reed has been permitted to charge VAT only on its commission to its clients. Other temp businesses, however, have been forced in the majority of cases to continue to charge VAT not only on commission, but on the employment costs of the temps (salary, PAYE, etc.). This move by HMRC has therefore led to considerable distortion of competition and confusion in a market where margins are tight, and slight price differentials mean the loss of clients to competitors.

What next?

Following the decision of Reed, a number of employment businesses, under pressure from clients, lodged claims with HMRC for VAT that had been overcharged. The majority of these claims remain under scrutiny by HMRC, and are likely to be litigated at some point. The four-year cap following the removal of the staff hire/agency concessions will come to an end on 1 April 2013, and therefore further claims are being compiled and lodged with HMRC to prevent money being lost as the four-year clock ticks past April 2013.

As was inevitable, we understand that an appeal against HMRC's refusal to make a repayment has been lodged by another agency and a further case (or possibly cases) will be heading to the Tribunal in 2013 to re-consider the arguments put forward in Reed. Employment businesses need to consider lodging appeals to stand over behind this case so they can benefit from any positive result from the Tribunal. The concern is that HMRC will attempt, again, to limit the findings of any positive Tribunal result to the parties concerned with the appeal.

Rare victory for the taxpayer in the field of MTIC fraud

The recent case of JDI Trading Limited v HMRC regarding alleged missing trader intra-community (MTIC) fraud stands out as one of just a handful of victories for the taxpayer in the field of MTIC fraud.

In this case, it was found that JDI did not, and could not, have known that fraud was being carried out by others in its supply chain. The Tribunal therefore ruled that JDI had a valid claim to repayment of VAT of £688,421 incurred on its supplies. The case concerned nine transactions in consignments of mobile phones which were purchased in the UK and subsequently exported to Europe.

Martin O'Neill, a partner and customs investigations specialist at Smith & Williamson, took the case to Tribunal and disputed HMRC's entire approach to cases of this type as well as the evidence it served. He successfully challenged the evidence, such that the Tribunal exerted a higher degree of evidential rigour on HMRC. It was sought at all stages to prevent the making of unpleaded, unproven and damaging allegations in court. The judge was also persuaded to exclude the evidence of an expert whose testimony had previously been accepted on similar cases.

Litigating cases of this type is highly specialised, requiring solid expertise and persistence - you cannot take shortcuts while preparing such a case. This is a landmark decision in a notoriously complex area of VAT law. In our experience, HMRC will attempt to fight the case on its own terms and on issues with which the Tribunals regularly find in their favour. Companies facing similar cases need to plan to take HMRC's case on at a fundamental level and at the outset should talk to an expert in this field.

What next?

HMRC will maintain its approach to MTIC fraud by denying VAT repayments on suspected cases for the foreseeable future.

MTIC fraud is complex, highly technical and is no longer confined to mobile phone and computer component industries; businesses can unwittingly get caught out. However, if they carefully check new suppliers, document their approach and are prepared to pursue their case if appropriate they should not lose out.

The VAT treatment of hot take-away sandwiches in the Subway decision

The Upper Tribunal decision in Sub One Limited t/a Subway was released in October 2012. The decision dismissed the appeal against the First Tier Tribunal's decision and concluded that toasted subway sandwiches and meatball marinara products are subject to VAT at the standard rate. Subway argued that it was merely complying with health regulations, but the Tribunal concluded that the food was being heated so it could be consumed at a temperature above the ambient air temperature. As a result, the toasted subs and meatball marinara supplied by Subway should be subject to VAT at 20% (and not zero-rated) as hot food.

The Tribunal's decision has questioned a previous judgment of the Court of Appeal in the case of John Pimblett & Sons Limited. That case, delivered 25 years ago, ruled that keeping pies warm after being cooked did not constitute a supply of hot food as it was not the intention of the supplier to sell the pies hot (i.e. a subjective assessment of intention of the trader, rather than an objective assessment of whether the food was sold hot). The Upper Tribunal decision in the Subway case was that the preferred assessment method from an EU VAT perspective was objective assessment of the supply, which in the case of Subway was heavily influenced by the sale of hot food. Essentially, if the Upper Tribunal in the case of Subway is correct, then VAT must be due on all food that is simply kept warm.

What next?

It remains to be seen whether Subway will appeal this decision, or whether another business may pick up the reins and continue the fight over the VAT liability of hot/take-away food.

Single versus multiple supply

The 'single versus multiple supply' question was further considered in the decision of Goals Soccer Centres plc (Goals).

HMRC, following its own guidance (Revenue & Customs Brief 04/11), contended that Goals was making a single supply of the right to participate in a football league that was subject to VAT at the standard rate.

Goals argued that it made two separate supplies, one of pitch hire which was exempt from VAT when supplied in a series of ten or more bookings, and one of league management services which was standard-rated.

The Tribunal concluded in these particular circumstances it would be artificial to combine the separate contracts for the pitch hire and the league management services, there being two separate supplies, one taxable and one exempt, each with separate prices and each capable of being changed without affecting the other. Moreover, the Tribunal went on to say that if they were wrong and there was a single, composite supply, the principal supply is of pitch hire (exempt) with the league management services being ancillary.

What next?

Although we do not know if HMRC will appeal, this decision does bring into question the guidance printed in Revenue & Customs Brief 04/11. This case again demonstrates the difficulties in determining whether a package of services should be taxed as a single supply or is in reality made up of separately taxed services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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