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Andrew Needham, Director of VAT Specialists Ltd, highlights a further selection of recent VAT case decisions.

Tribunal Allows Zero-Rate for Alteration of a Listed Building

This was an appeal against HMRC’s decision not to accept the zero-rating of building works supplied under VATA 1994 Sch 8 Group 6 Item 2 (i.e., works to listed buildings). Interestingly, the appeal was not made by the supplier of the services, but by the recipient, who incurred and suffered the VAT cost on those supplies.

Item 2 states that zero-rating applies to

“The supply, in the course of an approved alteration of a protected building, of any services other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity.” 

The new building in question was physically separate to, but within the curtilage of, an existing Grade II Manor House. The issue was whether its separate use or disposal was prohibited by the statutory planning consent. There are a number of definitions and conditions contained within the Notes to Group 6. Note 2 has a number of conditions which must be satisfied and includes,

“(c) the separate use, or disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision.”

HMRC contended the terms of the planning did amount to a prohibition of use and/or disposal. The Appellant argued that restriction did not mean prohibition, citing the Nicholson Tribunal case in which the Chairman criticised HMRC’s incorrect legal interpretation. HMRC cited a number of cases, including Thompson (VTD 15,834) to support the fact Nicholson was wrongly decided. Given the lack of binding case law on item 2(c), the Tribunal sought to identify the intention of Parliament for note 2. The Chairman dismissed HMRC’s contention that Note 2 was intended to “give relief to new housing stock supplied to the open market, and that the line was specifically drawn to deny relief to added accommodation within existing housing stock, including annexes that might be physically separate from existing units but which have to be used in connection with existing units”. The Tribunal held that separate use was not prohibited by the terms of planning, and that Note 2(c) was met. HMRC agreed that their argument on separate disposal was ‘more difficult to make,’ and the Tribunal again found that the disposal condition in Note 2(c) was also met. The appeal was thus allowed.

The Tribunal went on to discuss costs in great detail. The Appellant had sought costs on an indemnity basis, but these were granted on a standard basis. An interesting point to note was the Appellant’s complaint that HMRC refused to confirm whether they received advice as to their chances of success being more or less than 50%, citing legal privilege. HMRC’s published litigation strategy says litigating where their chances of success are below 50% will only be justified where there are significant amounts at stake, or there is a fundamental point of principle. The Chairman noted this was not within the jurisdiction of the Tribunal, but may be an issue for judicial review or investigation by the Parliamentary Commissioner for Administration.

Steven Lunn (VTD 20,981)

High Court says 'misdirection' cannot be applied to alleged misadvice by HMRC's helpline

This case was an application for a Judicial Review to quash an assessment issued by HMRC. The Appellant, which was a wholesale supplier of beverages, had experience of supplying goods to other EU countries.

In 2005, a new customer approached the Appellant to buy soft drinks, but wanted them delivered to a VAT registered end customer in Poland. The new customer was based in Belize with a European office in Poland, but was not registered for VAT. Not wanting to deal direct with this customer, the Appellant was concerned about the VAT treatment, and contacted the National Advice Service (NAS). The Appellant claimed the telephone advice it was given suggested the new customer could be invoiced without VAT by using the address and registration of the Polish end customer.

The call record made by the NAS officer differed from that, saying the supply could only be zero-rated where all the conditions of section 3 of Notice 725 were met. As the Belize business was the Appellant’s customer, and was not VAT registered, all the conditions could not be met. Consequently, HMRC raised an output tax assessment of £315,504.

In dismissing the Appellant’s claim, the High Court found that the best evidence was the call note made by the NAS which indicated that the taxpayer was directed to the appropriate conditions for zero-rating.

The Court went on to address a number of the other points raised by the parties, the first of which related to Extra Statutory Concession 3.5 (also known as the ‘Sheldon Statement’). The concession says that,

“where an officer, with the full facts before him, has given a clear and unequivocal ruling on VAT in writing, or knowing the full facts has misled a registered person to his detriment, any assessment of VAT due will be based on the correct ruling from the date the error was brought to the registered person's attention”.

HMRC argued that due to the uncertainty of the telephone conversation, it could not be said that HMRC acted irrationally in refusing to apply the ESC on misdirection (Sheldon Statement) and assessing for VAT. The Court found no legal basis for this, stating the issue of whether there has been an abuse of power or unfair conduct is a matter for the courts, and not a public authority. However, the Court went on to say that even if it accepted the Appellant’s version of the telephone conversation, the claim would still have been dismissed on the basis that the law required there to be VAT on the supply. It said the Appellant had not made a full disclosure of the facts, and that, perhaps more crucially, the NAS is only a source of general advice rather than binding rulings – something that the people who use it need to appreciate.

Comment: We have said to clients on many occasions that great caution needs to be taken when acting upon any advice they have received from the NAS!

Corkteck v HMRC [2009] EWHC 785  [ See also Pinches of Salt and Ha'p'oths of Tar - Ed. ]