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Steve Allen of VAT Advisers Ltd highlights a selection of recent VAT cases.

Tribunal Allows Partial Recovery of pre-Registration Input Tax incurred on the Construction of New Homes

This case concerns an individual who conducted building operations for two houses behind his own residence, and leased out both after completion (exempt supplies).

During the development, in order to recover VAT on building materials incurred in the course of construction, his accountant advised him to form a company that would act as a building contractor and raise construction charges to him. The company’s services would then be zero-rated, allowing it input tax recovery on related costs.

The individual and his accountant asked HMRC to confirm the VAT position, and thought they had obtained confirmation. The company eventually became VAT registered from 30 April 2006. In October 2006, HMRC disallowed most of the input tax claimed by the company on the first VAT return on the basis that the claims for expenditure before its registration date did not meet the conditions of VAT Regulations 1995 Reg 111 (exceptional claims for VAT relief on pre-registration and pre-incorporation VAT).

The Tribunal dismissed the appeal for much of the VAT on pre-incorporation expenditure because it was incurred before the individual decided that the company would be a property construction business. The expenditure could not be ‘for the business of the company’ as there was no business anticipated at that time. The Tribunal allowed the expenditure incurred by the company after incorporation under Reg 111(1)(a), as this was for the purposes of a taxable business about to be conducted by the company.

HMRC had argued that the VAT on the building materials fell outside Reg 111 because the materials were goods which had been consumed before VAT registration, given that the two houses were complete before the Appellant registered. Thus, the goods were not on hand at registration, and had been used in making supplies before registration that did not meet the conditions of Reg 111. 

HMRC had also argued that any claims made by a company under Reg 111 had to meet the terms of both 111(1)(a) and (b), and that these claims did not.

The Tribunal disagreed with HMRC’s interpretation in two respects:

1. The building materials were not goods that had been consumed pre-registration, as they still existed. Hence, input tax recovery cannot be denied under 111(2)(a)(ii). The Tribunal concluded that the construction services were not supplied until the company was paid, and as this was post registration, it could claim the VAT incurred on materials on and after incorporation;
2.  A company claiming deductions for pre-incorporation expenditure cannot satisfy both Reg 111(1)(a) and (b), as these are mutually exclusive. Reg 111(1)(a) assumes the taxable person exists when the VAT is incurred, but is just not VAT registered, whereas 111(1)(b) assumes the taxable person does not exist at all when the VAT is incurred.

Therefore, HMRC were wrong to argue that a company had to meet both conditions to be able to recover the VAT.  Consequently, the appeal was partly successful.

Oaks Pavilion Ltd (TC 00145) 31 July 2009

Tribunal say Taxpayer acted as Agent on Supplies of Staff to Associated Companies

An unusual and short Tribunal decision concerning an assessment for VAT on supplies of staff.

The Appellant company (‘H’) appealed against an assessment on a sister company (‘W’), which, along with an insurance brokerage company (‘B’), were subsidiaries of a non-trading holding company. Essentially, B carried on the insurance business, whilst H provided assistance and claims management services to the insurance industry. W acted as paymaster.

HMRC argued that as the employment contracts were with W, VAT was due on supplies of staff made by W to other associated companies that were not members of the VAT group that W was in.

Originally, H had argued that there was a joint agreement in place between W and B, but this approach was abandoned. Instead, it was argued that W entered into a written contract with the employees to act as their agent. This had apparently been done in 2000, following a group restructuring. It is not clear at what stage the change in defence occurred.

The Tribunal summary reports a request by HMRC to adjourn the case on the basis of insufficient time to consider the amended defence. This was rejected on the basis there had been sufficient time from the beginning of the week to consider the matter. The Tribunal added the case had been fixed for two days with numerous parties in attendance, with little chance of relisting in the immediate future. The decision then reports that the Tribunal adjourned for lunch, and on its return, HMRC had agreed W was acting as agent. In light of this, the Tribunal allowed the appeal.

Hilltop Assistance Ltd (TC00153) 4 August 2009

Tribunal Agrees Compound Interest is Due on Overpaid VAT, But says Claims should be made to the High Court

The first decision of the new Upper Tribunal has been released in a case that has become known as the ‘Compound Interest Project’ (CIP). The appeal, brought by a group of motor traders, concerned whether the UK was required to pay compound interest on sums of VAT paid in breach of Community Law.

The Upper Tribunal has followed the decision in the VIC GLO case by finding that taxpayers are entitled to be paid compound interest where VAT has been paid in breach of Community Law. However, they did not accept that a claim could be brought under the terms of VAT Act 1994 s 78. Its view was that s 78 only allows for a payment of simple interest, and the correct way to recover compound interest on VAT paid in breach of Community Law is by means of a ‘common law’ claim.

In light of this decision, businesses should consider issuing claims in the High Court to protect their position, and also lodging appeals in the Tax Tribunal within 30 days of a rejection of the payment of simple interest.

John Wilkins (Motor Engineers) Limited & Others [2009] UKUT 175