VAT Chatter Newsletter – May 2017 Edition
By Graham Elliott CTA (Fellow) MBA
Thus far, one cannot single 2017 out for an award on the VAT front. Nothing earth shattering appears to have happened to the application of the tax to any specific situations. We have not had any fundamental beliefs crushed by ‘meddling’ judges. The Chancellor has not even attempted a manifesto-busting increase in the VAT rate, nor anything radical on VAT registration thresholds. And not much has progressed on ‘Brexit’. So, I have been biding my time before following up on my Christmas 2016 edition. However, there is only so long one can hang on, so here are my observations on what actually has happened, with the usual caveat that I have chosen those which happen to interest me, and I hope will interest you.
Education, Education, Education
As I reported in the December 2015 edition of VAT Chatter. I was amazed when the English Court of Appeal referred the case of Brockenhurst to the Court of Justice, because two tribunals had upheld the tax payer’s case, and I could see no reason to assume that a British court was incapable of deciding the point.
But no harm was done, because the Court simply agreed with both our First and Upper Tribunals. I now feel almost guilty about referring to its decision as being likely to be opaque and unhelpful (see my previous article). It shows that the Court of Justice is capable of plain speaking, so I wish it would speak as plainly more often.
What was it about, and why the doubt?
Brockenhurst is a further education college providing, amongst other courses, training in the catering industry. The college took the view that its students would benefit from staging test catering sessions with real diners in real restaurants being served real food. To make it as realistic as possible, these diners actually paid for their dinners. They were not dragged off the street (as they all knew the college in some way, or were connected with students). Nor did they pay a going rate (around 80% of cost). And they were required to write a report for the benefit of the students. The issue was whether this was ‘closely related’ to the education provided to students, and thus could be exempt despite the fact that the charge was not made to students (but made to diners).
Our First Tribunal noted that there was no express provision in EU law that a closely related (and therefore exempt) supply had to be made to the student. The Upper Tribunal concurred. So far, these opinions meant that the supply should be exempt. We had a wobble when the Advocate General opined that this was wrong as the supply was not to the student so the diners benefitted too much. But one of the quaint aspects of the Court of Justice procedure is that the Advocate General publishes her opinion (which is not a decision), for all to peruse, and we then wait to see whether the Court agrees. So, she does not get to make a decision at all, but can nonetheless be ‘overturned’.
And that is what happened in this case. The Court preferred our two tribunals’ reasoning to that of the Advocate General, whose opinion was rejected.
I have to say that I thought the Court of Justice made a very straight forward and powerful decision, which is more than I can say about the next decision I will come to. And, nevertheless, I still cannot see why our Court of Appeal really thought that we could not decide such a point without the Court of Justice’s input.
Culture, Culture, Culture
What is ‘culture’? Does the definition of ‘culture’ depend on the national traditions of the country in which it takes place, or is the definition universal? That is a question that the Court of Justice posed when deciding against British Film Institute in its long-running case to have cinema accepted as a branch of culture.
I will come to the Court’s answer to that question in a moment, but, first, some context. Supplies of admission to a cultural service are only exempt if provided by an eligible body. One condition of eligibility is to be a non-profit body. Most cinemas are commercially run, so the issue of whether they supply culture is irrelevant and their supplies are taxable. But the BFI is a charity, so its cinema events would be exempt if they were culture.
The UK legislation lists activity it holds to be ‘culture’, but cinema is not included. Zoos are included, by the way, but botanical gardens are not included. Theatrical performances are included, and I was once told that HMRC had therefore accepted that stand-up comedy shows are included when supplied by an eligible body, as they are ‘theatrical performances’.
And this brings me neatly back to the Court’s burning question, because when you think about it, stand-up comedy is a quintessentially British thing (think of Arthur Askey, for instance). So, is culture defined by where you are, and therefore can each member state of the EU determine what is, and what is not, ‘culture’? The Court’s answer is ‘yes’. The reasoning is that the VAT Directive refers to ‘certain’ supplies of a cultural nature. The Court thought that the word ‘certain’ could not be mere window-dressing verbiage, but had to imply a choice that the member state could apply. What could such a choice logically be? It could only be that what is ‘culture’ in France, say, is not culture in England, so the member state chooses how to define it.
On that basis one can imagine cinema being culture in France (film noir?), but not in the UK. Perhaps stand-up comedy is not culture in France (but perhaps it is, you may know better). Perhaps beer festivals are ‘culture’ in Belgium, the Czech Republic, and Germany, but sadly not here. As I write this I am shortly to visit the Chelsea Flower Show, but it does not rank as ‘culture’ here, though my visit last summer to Colchester Zoo was a great cultural experience.
What this means is that the UK government can pick and choose what is and what is not ‘culture’. That is a surprising outcome. I can only respond by suggesting that the list that the Court of Justice has said the UK has the right to select should now be widened to include (at least) botanical gardens and cinema. If it can stretch to beer festivals, or sausage tasting events, so very much the better.
New Housing Development
We are all aware of the shortage of housing in England, but we also know that the VAT system works in favour of new development, and to a lesser extent to conversion and renovation, so the problem of housing development cannot be relieved by VAT reductions; or can it?
Taylor Wimpey has been on a campaign to wrestle even greater VAT efficiency from the system by challenging the ‘blocking order’. This is a rule that ensures that VAT is charged to the developer on all fitments that are not deemed typical of a house (not ‘normally incorporated’), and additional common items such as white goods, fitted furniture, and carpets, and which also ‘blocks’ the developer from claiming that VAT. The policy rationale is clear, namely that these are not socially necessary additions to the basic housing need and therefore should not be relieved of tax.
Taylor Wimpey were not really interested in arguing over the policy points, as they noted what they thought were weaknesses in the language of the blocking order and possible challenges against the way it was introduced and whether it sat comfortably with the VAT Directive, with which it had to comply. These were therefore what we often refer to as ‘technical challenges’, where the game is to point to a procedural weakness of the opponent and to rely solely on that.
Several years ago, the First Tribunal refused the appeal. Now (after a very long interval) the Upper Tribunal has also refused it, and thus has backed the UK law and the right of the UK to block VAT recovery on such items. It is difficult to see Taylor Wimpey winning this one, though they might try to. The benefit is very much for the past. The UK could change the law to create a similar effect, and plainly has no issues over how it legislates in this area post-Brexit.
I reported in detail about the impact of VAT on temp workers sourced via employment bureaux in my piece on the outcome of the Adecco appeal way back in 2015, and you can read about that here.
So, this section gives an update, without repeating the same background.
I am afraid the news is not good. The Upper Tribunal has upheld the First Tribunal’s rejection of Adecco’s case for VAT not to be levied on the wage element of the self-employed temp’s services. The decision is not easy to criticise in legal terms. It simply followed the contractual position and did not accept that there was a persuasive enough ‘alternative reality’ which displaced the contractual terms.
The general point concerning interpretation of supplies is that, if there is a contract, its terms tend to explain the nature of the supply unless they do not contain enough information to settle the issue in point, or the real operation of the business is incompatible with the terms agreed in the contract (which can sometimes happen, but which is not going to be common in well-regulated situations). Neither was true in this case. The contracts did not paint a VAT-efficient portrait. The detail was against the appellant.
If an appeal is made it can only be won if the Court of Appeal takes the view that both tribunals are too hidebound by contractual detail, and that one should ‘stand back from the canvass’ to get a better view of what is going on. But if that happens, HMRC is bound to appeal, and the record of the Supreme Court is that it tends to gaze rather more at the brushstrokes of the portrait than the Court of Appeal has done in the past. So, a reversal at the Supreme Court would probably be more likely than not (unless the point can be referred to the Court of Justice for a European perspective…).
Input tax and the problem of omission
JDI International Leasing is a puzzling case which leaves one with the feeling that something is definitely missing. But it is as key as a First Tribunal decision gets (given that the First Tribunal is the lowest court) in respect of its interplay with the seminal Court of Justice decision in Sveda.
I need, first, to set the scene on Sveda. This was a commercial company that received a huge government grant to build a ‘Baltic Theme Path’ on its land, which led the walker to its shop. You can walk on the path and never enter the shop. If you enter the shop, you need not buy anything. But, that is the way to the shop, and you get the benefit of a Baltic cultural experience on the way there. The Court decided that all of the VAT on the cost was recoverable by reference to the supplies of the shop. The grant funding and free access to walkers made no difference.
JDI International relied heavily on Sveda to support its case. Unfortunately, the Sveda ‘principle’ was not equal to the pressure and gave way. Here is what JDI did.
A company was set up to acquire some hefty machine tools which it then leased to associated companies that used the tools to generate taxable supplies. Oddly (and nobody explained why, to the tribunal’s bemusement) no charges were levied by JDI on its fellow corporates for these tools. JDI also sold spare parts for the tools, and thankfully charged for those. The issue was whether the VAT incurred on the tools transferred to JDI for free-leasing to its corporate colleagues could be recovered. The reference to Sveda was intended to show that a charge for access to the immediate facility in point was not a necessary pre-condition for VAT recovery, if it was in the context of a fully taxable business. That, the argument went, was what JDI was doing.
The tribunal disagreed, and I am sorry to say that I do as well. The key point in Sveda was that the path led to the shop, not that the shop happened to be operated by the same company that owned a decorative path. JDI seemed to suggest that there was a consequential link between acquiring machine tools for lease and selling spare parts for tools of that kind (including for those very tools, presumably). The tribunal thought that the two were serendipitous, not synchronistic, so the appeal failed. I think the decision could well be appealed, or perhaps the company should simply make leasing charges. If it is appealed I shall be very interested to see whether the Upper Tribunal is more sympathetic.
HMRC lacks sympathy
Talking of sympathy, or the lack thereof, I wish to draw your attention to a true hard luck case where HMRC decided to take what Lady Luck handed out and leave a business empty handed.
J & B Hopkins is a construction company. It was acting as a subcontractor on the job of building a charity building. There was no dispute that the building qualified for the zero rate. The problem, for Hopkins, is that the zero rate can only apply by law to the main contractor’s supply to the charity, not to the subcontractor’s supply to the main contractor. Note, in passing, how that differs from zero rating applying down the entire supply chain where dwellings are being constructed. Note the trap for the unwary that is inherent in that distinction. And Hopkins fell into the trap.
Had Hopkins charged VAT, the main contractor would have claimed it. As the main contractor was charged no VAT, it claimed no VAT. So, HMRC was not out of pocket by a penny. But it carried out an inspection in which it noted Hopkins’ error, and raised an assessment. The problem was that, by that time, the main contractor had gone bust. Hopkins could not get the VAT back from the main contractor, so it asked HMRC to waive the tax (although I should point out for the legal eagles who might be reading this that the argument was considerably more sophisticated than that, and dealt with possible arguments under which a valid claim could be brought against HMRC, with the intention of creating the same effect as waiving the tax…). HMRC said that the tax was owed, and that was that.
The tribunal had to consider many cases, including the concept of HMRC being unjustly enriched, and the net position from all of this was that the tribunal found in HMRC’s favour. Now, I think that might be the ‘correct’ answer, even if it is not the ‘right’ answer. I think it may be incorrect, but only an appeal will settle that. What cannot be accepted is that HMRC was right to pursue this business and get a windfall of tax.
Much is said about tax payers not trying to squeeze out of the system that which should be paid by reference to the intentions of parliament. Too little is said about HMRC squeezing tax out of the system in excess of what was intended by parliament. If there is a watchword for our times it is that, where parliament’s intentions are clear, the tax outcome should reflect those intentions.