Summary
We have one Judgement from the CJEU on the valuation of management charges levied by a Swedish holding company on its partly exempt subsidiaries, where it seems the Court is saying a single charge for various services can be split into its components to find an appropriate value.
The most interesting case from the First Tier Tribunal looks at an arrangement designed to avoid VAT being due on commercial pilot training, however the FTT was not persuaded of its effectiveness, apart from the training that took place outside the UK.
HMRC has now published Finance Bill 2025-26 and other documents from its Legislation Day information release, but there are no announcements directly relating to VAT.
News from the UK Courts and Tribunals
Upper Tribunal
This is an “evidence of export” case, where a scrap metal dealer sold scrap to Belgium and used its own lorries to undertake the transport. It did not have sophisticated systems to keep the appropriate evidence required by Notice 725 and tried to rely on boarding cards provided by the ferry company at Dover. Unfortunately for Ripley the boarding cards proved inconclusive, and the Tribunal did not accept them as appropriate evidence, so the appeal was dismissed at the FTT. The Upper Tribunal did not find fault with the FTT’s reasoning.
Comment: The FTT has denied zero rating in a similar appeal by Fisher Hirst Ltd (TC09526) where that company bought plastic sheeting in Northern Ireland and used its own trucks to transport the goods to the Republic of Ireland, but failed to keep adequate records to support zero rating.
The rules of evidence for zero rating removals or exports are strictly enforced by HMRC, and where a significant proportion turnover is assessed for output tax this can be devastating for the business.
First Tier Tribunal
TC09595 Airline Placement Limited
Airline Placement (APL) has lost its appeal in the FTT that the money it received to provide pilot training was consideration for a supply to airlines rather than to cadet pilots. This is the second time we have seen this taxpayer’ dispute, as APL had a failed application for judicial review of HMRC’s decision in 2023, on legitimate expectation grounds. The High Court rejected the application, in particular questioning whether the taxpayer had made a "full and frank" disclosure when making a non-statutory clearance request.
Airline Placement (APL) is part of an international corporate group providing aerospace and defence technology. It ran a training programme for cadet pilots under which cadets trained to be commercial airline pilots – essentially the outsourcing of pilot training from well-known airlines.
The cadets were provided with a loan from a bank to cover the cost of their flying training, which would be eventually paid back in instalments by their employer once they had completed a minimum term of employment, with the now qualified pilot funding the repayments by a salary sacrifice arrangement. The borrowed money, passed to the airline that employed the cadet. Once they had completed the training programme it was used to pay the “placement fee” APL charged the airline (the same value as the training fee) at the time the cadet took up employment and accounted for VAT at that point.
A dispute arose with HMRC over the VAT position of the contracts with all three airlines, which appears to focus on who the training services were provided to: the cadet pilots or the airlines. The FTT has found in each case that the supply of training was made from APL to the cadets, not to the airlines. It is not explicitly stated in the judgement, but presumably HMRC were concerned because the cadets would not be able to recover the VAT charged, whereas the airlines would.
In case the bond was found not to be consideration for the supply of training, the FTT went on to hypothetically find that the arrangement would have given rise to an abusive result under the Halifax principles. It decided that the structure of the training programme was artificial and contrived to avoid VAT on training. VAT that would normally be irrecoverable to a consumer (the cadet) was avoided by routing the payment through a structure that made it appear as if the airline was the customer. The arrangement also artificially deferred the tax point of the training from the date the training took place to the date when the cadet took up employment with the airline.
However, the tribunal accepted that around 27% of the training took place in New Zealand so that proportion of the supply and the payment was outside the scope of UK VAT.
Comment: This litigation looks at several important VAT concepts, but the main lessons appear to be as follows:
- The judicial review stage of this litigation has highlighted the importance of disclosing full facts to HMRC when seeking non-statutory clearance.
- The FTT decision is another example of how the courts establish, in a potential tripartite situation, whether a payment is consideration for a supply and to whom. It also considers whether the attribution of a cost to an employer rather than an employee is tax avoidance under Halifax.
- The decision perhaps also highlights a risk that HMRC might regard staff training in general as giving rise to a deemed supply to the employee if it is ultimately funded by a salary sacrifice (or putting business assets – the outsourced training - to a personal use so input tax cannot be recovered by the employer).
Finally, it is possible the New Zealand tax authority may be interested.
TC09596 United Carpets (Franchisor) Ltd
United Carpets has won its appeal that the separate charge it makes on behalf of independent carpet fitters is consideration for the fitters’ supply of services.
United Carpets sells flooring (including carpets, underlay, vinyl and wood flooring) to private customers through its network of stores. A customer who purchases flooring from the company is given the option to have it fitted in their home by an independent, self-employed, fitter. The fitter is then paid by the customer for that work, with the money being received and retained, in full, by the fitter. Around 75% of customers take up the option to be introduced to one of the fitters, from the pool of fitters that each store refers work to.
United Carpets accounted for VAT on the price charged for the flooring materials, but not the fitting fee which it considered to be consideration for a separate supply between the fitter and the customer. However, HMRC took the view that United Carpets supplied fitting services using the fitters as its subcontractors and that this formed part of a single supply of fitted flooring.
The tribunal has found in favour of United Carpets, deciding that there were two separate supplies:
- a supply of goods (carpets and other flooring) by the United Carpets to the customer, and
- a supply of services (fitting) by the fitter to the customer.
Having carefully examined the facts, and the written terms and conditions, the FTT found that there is a ‘legal relationship’ between the fitter and the customer, which involves the fitter providing fitting services to the customer, for which the fitter is solely liable. In return, the customer is liable to and actually does pay the fitter directly. United Carpets is not privy to that agreement. Those mutual obligations represent ‘reciprocal performance’ and the sum received by the fitter represents ‘consideration’ for a supply of fitting services made to the customer. United Carpets does not receive the consideration for the fitting, therefore this cannot form part of the taxable amount of its supply.
This was enough to decide the appeal in favour of United Carpets, but the tribunal has gone onto hypothetically consider whether United Carpets had a legitimate expectation from previous correspondence with HMRC that it would not apply its single supply interpretation retrospectively.
The tribunal first found that it had jurisdiction to hear the legitimate expectation argument, adopting the reasoning in the Upper Tribunal’s decision in KSM Henryk Zeman, which held that the FTT has limited jurisdiction to consider a legitimate expectation argument in appeals under section VATA94 s83(1)(p), which provides a right of appeal against assessments made under s73(1). However, it found that no legitimate expectation had in fact arisen on the facts of the case.
Comment: The decision does not mention whether the flooring fitters are VAT registered in their own right – it can perhaps be assumed that most had turnovers below the VAT registration threshold and were not liable to register and charge VAT to the customers, which may be what incentivised HMRC to try to argue that United Carpets was liable to account for VAT on the value of the fitting as part of a single supply of flooring and fitting.
Nevertheless, the case is a useful summary of the case law that establishes who has made a supply in a potential tripartite situation, and helpfully supports previous findings that the FTT has limited jurisdiction to hear legitimate expectation arguments in relation to appeals against HMRC VAT assessments issued under VATA s73(1).
Court of Justice of the European Union – Judgement
The holding company of the corporate group made supplies of management services to its partly exempt trading subsidiaries, consisting of IT, HR, accounting, real estate management services and general management of the company. The subsidiaries made both taxable and exempt supplies of property so were subject to partial exemption. Although closely connected, the companies were not in a VAT group registration.
The holding company’s expenditure on which it had recovered input tax greatly exceeded the income received from the subsidiaries as management charges (by a factor of about 10:1). This and the low valuation of the management charge that would minimise the irrecoverable input tax incurred by the partly exempt subsidiaries, led to the disagreement with the Swedish tax authority.
The tax authority argued that the active management of subsidiaries by a parent company (i.e. the combination of the services recharged) is a single supply for VAT purposes, whose equivalent does not exist between independent parties on the open market, so the correct valuation is based on the cost of providing the services, and in this case the full costs incurred by the holding company.
The Swedish Court asked the CJEU to rule on the application of the valuation rules in Arts 72 & 80 of the PVD, asking:
- whether it is always correct to say that management charges between connected entities cannot be valued on the open market (meaning they can only be valued at cost), and
- whether a holding company that has recovered input tax on all of its costs must include the total expenditure of the holding company in the cost-based valuation of its management charges to its subsidiaries.
CJEU judgment was very brief.
The court has firstly decided that the services making up Hogkullen’s management charge are not so closely linked that they form a single inseparable supply. Even if provided jointly, each of these services appears to have its own and identifiable character.
Also, the fact that an overall price is paid by the subsidiaries to the holding company does not in itself confirm the existence of a single supply for intra-group supplies as that would allow the taxpayer to create or preclude a single supply on the basis of their payment conditions agreed between the group companies.
As this would appear to confirm that the management service can be valued on the open market (and therefore does not default to the cost based valuation method), the CJEU has declined to answer the second question on how much of the holding company’s costs should be included in the value of the management charge.
Comment: The CJEU’s final judgment is unusually short and does not address all of the questions posed by the Swedish court. However, the CJEU has broadly supported the AG’s opinion, which suggests that we should also take note of the AG’s hypothetical comments on how much of the holding company’s total costs should be included in the value of the management charge.
The circumstances behind this referral are very similar to those in as the UK FTT’s 2021 decision in Jupiter Asset Management, where it was held in principle that intercompany management charges should be valued according to cost because (as bespoke charges made between connected companies) they cannot be compared to transactions between unconnected parties. No clear rationale emerged from the FTT over exactly how various holding company costs should be attributed to that management charge, and that decision was not appealed further by the taxpayer.
The CJEU appears to have reached more nuanced conclusions in Hogkullen. Where possible, the AG believes the management charge should be broken down into its constituent elements, which may be available on the open market, meaning it would be possible to establish a comparison price. Also, a tax authority cannot simply assess for output tax on the holding company’s total costs for the year - it can only apply an open market valuation to the maximum extent the holding company incurred input tax on its costs. For capital costs, the holding company is also entitled to recharge these to its subsidiaries over a longer period.
While the judgment in Hogkullen will not be binding in the UK, the question of how to value management charges can be an important issue for partly exempt businesses (especially in the financial services sector). In the absence of any binding precedent in UK case law, the UK courts may find any firm findings on this issue by the CJEU highly persuasive.
The other intriguing aspect is the Court’s assertion that a single supply can be split into its component parts, which seems to run in the face of the long line of single v multiple supply cases we have seen starting with Card Protection Plan in 1999. In those cases, the issue was usually different liability of supply, rather than valuation principles.
Court of Justice of the European Union - Advocate General’s Opinion
Joined Cases Agrupació de Neteja Sanitària, AIE (C379/24), Educat Serveis Auxiliars SCCL (C380/24) - Spain
Comment: This case is about a group of hospitals (exempt or non-business) that grouped together to employ cleaning staff. They applied the cost sharing group exemption, but the Spanish Tax Authority objected. The opinion is interesting, if only for the AG's comments that previous CJEU Judgements on this exemption have been rather vague and unhelpful. Her conclusion is effectively saying she sees nothing wrong with the arrangements and exemption should apply.
HMRC News
VAT, customs, international trade and excise
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Other news
The Supreme Court heard the appeal of Hotel La Tour (VAT recovery on vendor deal costs) in the first half of June, and the Court of Appeal heard the appeal in Hippodrome Casino in the last week of June. We have checked the judicial calendar, and found that neither judgement will be forthcoming before the Court’s summer holiday is over.
