In the latest food related case the Upper Tribunal has confirmed that Poppadoms are not always poppadoms for VAT purposes. The First Tier Tribunal has provided no less than four liability rulings this month, with two decisions in favour of the taxpayer (dental aligners, and medical intravenous drips) and two going HMRC’s way (extra-curricular maths, and the bedroom wing of a specialist hospital).
The latest case from the Court of Justice indicates that Bulgaria continues to have an “interesting” interpretation of the EU VAT rules.
The Upper Tribunal has confirmed that Walkers Sensations Poppadoms are not poppadoms for VAT purposes - but are instead taxed like crisps. Despite their name and ingredients, the Judges ruled that their potato content and snack-like presentation make them subject to the standard 20% VAT rate.
Grant Thornton’s Daniel Rice, who advised Walkers in this dispute, considers how the lack of clarity in law and court decisions makes it so difficult for businesses to be sure of the correct VAT treatment of a food product at the time of launch.
Background: The taxpayer argued that it was providing exempt examination services to pupils who were receiving education. The FTT considered there was a complex supply related to mathematics, including a range of ‘diagnostic tests’, a small portion of tutoring videos and worksheets to be completed offline and uploaded. The offering could be used at any time, online, and did not lead to any particular qualification.
Based on feedback from pupils and teachers which referred to the supply being teaching related, and the way the offering was marketed not referring expressly to examinations or assessments, the FTT put itself in the shoes of a typical consumer and concluded the supply to be a teaching product or revision aid and too wide to be within examination services.
Comment: The correct test appears to have been applied on the basis that this was a complex supply, and therefore the view of a typical consumer should be considered.
Background: This dispute was in relation to aligners (transparent devices worn most of the time and used to re-align the teeth in a similar way to dental braces or splints), Align sold the aligners (made for individual patients’ requirements), to dentists and orthodontists, who in turn provided them to the patient as part of their exempt services.
The test applied by the FTT in this case was to determine whether the aligners fall within the definition of ‘dental prosthesis’, by considering the usual meaning of dental prosthesis in everyday language, because there is no statutory definition. As well as looking at the context and purpose of the exemption.
The standard dictionary definitions referred mostly to ‘artificial substitutes’ (i.e. bridges and crowns) however the medical dictionary definitions also included examples such as fixed and removable dental appliances.
The FTT found on that specialist dictionary definitions had widened over time sufficiently to conclude the aligners were dental prostheses. It went on to consider the purpose of the exemption, which is for health related products to be affordable and accessible.
Although patients typically use aligners for aesthetic purposes, an ‘imperfect smile’ can be a sign that an individual's bite is not functioning properly, and therefore aligners were found to restore the function of the teeth even where patients are not aware of any functional problem. The FTT therefore found that to exclude the aligners from the exemption would be to deprive the exemption of its intended effect.
Comment: In contrast to the approach taken in the Generic Maths case above, this was an interesting approach by the tribunal as it did not consider the main purpose of the patient in using the aligners, which was mainly for aesthetic purposes, but rather the associated health benefits, when determining how the supply related to the purpose of the exemption. Although this is more likely to reinforce the VAT treatment applied by dental suppliers, it may possibly open the door for other non-permanent dental supplies to be exempt (these might include made to measure teeth whitening trays, teeth protectors etc).
The contrasting approach in Generic Maths appears to be because in that case there was a complex (single) supply, so it was necessary to look for the predominant element and then characterise the supply by reference to the informed view of a typical consumer (first set out by the CJEU in MestoZamberk and confirmed by the Upper Tribunal in Metropolitan International Schools).
Background: GaD started business in 2017, employing registered nurses and doctors, and provided intravenous drips and injections for people experiencing various medical symptoms. It originally applied for VAT registration on the basis of making zero rated supplies. HMRC queried its returns, which resulted in an initial exempt ruling (perhaps due to confusing responses from GaD), which was later replaced with a standard rated ruling.
GaD appealed on the basis that the drips and injections were always prescribed by a registered nurse or under the supervision of a doctor and then administered in accordance with medical guidelines.
GaD’s expert witness was able to provide oral evidence that each of the sample transactions identified a medical need and the proposed treatment was reasonable and in each case and this led the FTT to the supplies constituted exempt medical care exempt.
Comment: This is the latest in a line of cases where HMRC have challenged the exemption for medical related services provide by private clinics. This time the taxpayer has the exemption (but not the zero rating) it sought.
Background: The NHS Trust had a new building constructed in the grounds of Ayrshire Central Hospital, which was to be used as a National Secure Adolescent Inpatient Service (NSAIS) unit, to accommodate young people aged between 12-18 who are detained under mental health legislation after committing a violent criminal offence. The building consists of three wings - one for education and clinical care, one for patients’ bedrooms and one for administration.
The Trust asked HMRC to treat the construction work on the bedroom wing of the unit as a zero-rated supply because it was a separate and distinct part of the building designed and intended to be used solely for a relevant residential purpose and the law allows part of a building to be zero rated.
However, the FTT was convinced by HMRC arguments that the whole building was a hospital (even though not legally defined) and therefore there was no scope to carve out the dormitory wing for zero rate relief.
Comment: This case will be of primary interest to those who advise NHS Trusts and/or their contractors on infrastructure projects and makes two main points, which may be of wider interest to the healthcare sector.
It shows that differentiating between a hospital and a care home for VAT purposes is far from straightforward – for example, we are aware the FTT has reached different conclusions for two different types of NHS mental health facility.
The judgement also provides guidance on the extent to which RRP status can be applied to part of a building where the remainder is used as a hospital – NHS Ayrshire appears to have lost its appeal because the bedroom wing was not fully self-sufficient as a residential unit and the medical treatment offered in other parts of the building continued to some extent in the bedroom wing.
Background: Brose is an international group of companies that produces components and assemblies for the car industry. The German Brose company (registered in Germany and Bulgaria) purchased specialist tooling from a subcontractor IME in Bulgaria. The tooling was later sold to the Slovakian Brose company (the tooling remaining in Bulgaria at IME’s factory, local Bulgarian VAT was charged, and Brose Slovakia applied for a refund using the non-established refund procedure (often referred to as an 8th Directive claim).
The Bulgarian tax authority refused the claim on the basis there was an intra-community supply, and this was upheld at the first level court. However, Brose Slovakia has taken the case further with a referral to the CJEU, where AG seemed to be quite surprised by the stance taken by the Romanian tax authority, and indeed the Romanian Courts, that both seemed to see some mischief that was not apparent. Her analysis found the tooling (goods) changed ownership, thus leading to a supply of goods. The goods did not move out of Bulgaria, so there could not be an intra-community supply. The transactions appeared entirely commercial, and the supplier charged BG VAT and paid it to the tax authority, so there was nothing artificial going on. The conclusion is a taxable supply in Bulgaria, with a right of deduction for the taxable customer, (it manufactures door closers, window regulators, door systems and power liftgates for vehicles).
Comment: This is another in a line of cases from Bulgaria where their authorities seem to have an “interesting” interpretation of EU VAT rules. We expect the Court will follow the AG’s recommendations.
In the UK we have always had a rule that zero rates the supply of jigs, patterns, templates, dies, punches and similar machine tools used in the UK solely for making goods for export. When the UK was in the EU this rule did not apply to manufacture of goods destined for the EU (so zero rating does not apply to tooling supplied in Northern Ireland used for manufacture of goods for the EU, unless the cost is wrapped up in the price of the components produced for export).
We commented on HMRC’s change of attitude to VAT Grouping arrangements in the Care Industry last month, and HMRC have provided further comment in Spotlight 70 which is the latest in HMRC's Tax avoidance schemes currently in the spotlight.
