This month the heavy weight case law concerns the extent of exemption for financial services (Target Group), taxation of intra-group transactions in the banking sector (JPMorgan) and an attempt to backdate changes to a group registration. All being victories for HMRC.
On a lighter note, we have two chocolate related disputes: in Poland and in the UK.
However, for those with an interest in legal process various forms of Estoppel are discussed in the Vistry and Linden FTT decision. This is light reading compared with HMRC’s latest post on the UK’s interpretation of EU law from 1 January 2024.
News from the UK Courts
 UKSC 35 Target Group Limited
Supreme Court provides definitive ruling that outsourced loan administration services provided to a bank are standard rated.
This judgment marks the end of the line for Target Group ("Target"), which lost appeals in the First Tier Tribunal, Upper Tribunal, Court of Appeal and now the Supreme Court.
Target Group administers loans made by Shawbrook Bank. Target's services include operating individual loan accounts and instigating and processing payments due from borrowers. The appeal concerns whether the outsourced loan administration services provided by Target fall within the VAT exemption for financial services.
Target contended that its services fall under the financial services exemption for two reasons:
The Payments/ Transfers issue, that by giving instructions which automatically and inevitably resulted in payment from the borrower’s bank accounts to Shawbrook’s bank accounts via the Bankers’ Automated Clearing System, the services were exempt; and
The Loan Issue, that the inputting of entries into the borrower’s loan accounts with Shawbrook were exempt.
Despite the UK's departure from the EU, the Court drew upon the case law of the Court of Justice of the European Union (CJEU) in resolving the resolution of the Payments/Transfers issue.
In Sparekassernes Datacenter (‘SDC’) (Case C-2/95)  ECR I-3017, it was held that “viewed broadly” and as “a distinct whole", to be exempt, the services must:
(i) have the effect of transferring funds and,
(ii) change the legal and financial situation of the relevant parties.
This left open the question of whether the services must in themselves have that effect and make that change (“the narrow interpretation”) or whether it was sufficient for them to have that causal effect ("the wider interpretation").
In the Court of Appeal decision of FDR Limited ('FDR') STC 672 the wider interpretation was considered appropriate. However, the Supreme Court has now considered the CJEU case law since SDC in detail and concluded that it makes it clear that the narrow interpretation is the correct one.
This is established in particular by the cases of Bookit Ltd ('Bookit II') (Case C-607/14); National Exhibition Centre Ltd (Case C-130/15)  (“NEC”), and DPAS Ltd (Case C-5/17).
The narrow interpretation accords with the rationale of the exemption to apply to situations where there are difficulties determining the consideration of financial services and therefore the tax base for VAT liability. It seeks to exempt services that themselves effect the transfer of funds and change the legal and financial situations of the relevant parties. The exemption must also be interpreted strictly .
It follows that the giving of instructions is not enough even if that inevitably results in a payment or transfer and the services necessitate being involved in the carrying out or execution of the transfer or payment – its "function and performance".
Given this conclusion, the Court said it is apparent that domestic law (the Court of Appeal) took a wrong turn in FDR and the conclusions from that case are now overturned.
The loan accounts issue
Target submitted the making of accounting entries is the standard modern means of effecting movements of value and that unilateral accounting entries may be sufficient to effect a transfer of payment.
Target characterises its role as debiting and crediting the borrower loan accounts with Shawbrook and thereby making changes to the financial and legal situation of the parties so as to fall within the exemption.
This position however was undermined by the FTT’s factual findings that the entries in the ledgers were of “expected payments” which were “assumed to be made”. This meant such an entry cannot effect a payment or transfer or result in a change of the legal position of the parties. The loan account was no more than a ledger, recording the effect of payments made by customers to Shawbrook but not effecting such payments.
Comment: The long-awaited judgment will be disappointing for banks and outsourcers and may lead to related changes to HMRC guidance, as part of HMRC challenges to VAT exemptions applied by businesses within the financial services sector. In light of this, practical recommendations include:
Both suppliers and recipients of services should undertake upfront reviews of transaction flows to help ensure VAT exemptions are appropriately accessed (e.g., in relation to the "Payments/Transfers" and "Loan accounts" issues, and for intermediary services in respect of the granting of credit).
Suppliers of services should review the VAT treatments applied, including documenting positions taken or updating VAT accounting where appropriate.
Similarly, financial institutions receiving such services should do likewise (e.g., when reviewing the VAT treatments self-applied to "reverse charge" services received from overseas and the potential cost base impact).
On a more general note, the final comment about the FTT's finding of (unhelpful) facts is very telling for anyone interested in the appeal process. The Upper Tribunal and the Courts have no powers to hear new factual evidence, so it is vital to provide all the documentary and witness evidence of facts in the FTT hearing. It remains to be seen if outsourcers can learn from the Court's comment, to demonstrate that the services do effect the payments or transfers, rather than just record them.
Court of Appeal (CoA)
 EWCA Civ 1073 Mercy Global Consult Limited (In Liquidation)
This is a step in litigation between the liquidators of Mercy Global Consult ('MGC') and its shareholder, his relatives and various companies.
MGC sourced health professionals then seconded them to another agency which in turn sub-seconded them to NHS Trusts. Readers may be reminded of the similarity with the business model of Mainpay which lost in the Court of Appeal.
At the time services were provided, VAT was charged on MGC services, but it appears that the output tax of about £21M was not paid over to HMRC. Due to the size of HMRC's assessment MGC was put into liquidation. It is alleged that the defendants in this case (the shareholder, his relatives and various companies) allowed the company to charge VAT then misappropriated the funds.
The reason for this case is that the defendants applied to introduce a new defence against the claims that the supplies made by MGC were actually exempt. The High Court had rejected that application, so the defendants appealed to the CoA.
The Court, having provided a comprehensive commentary on the limits of exemption in this sector, concluded that the Judgement in the same Court in Mainpay provides adequate justification for MGC's services being standard rated. The High Court had been correct to dismiss the introduction of this defence.
Comment: This is an unusual case in that the Court was not looking directly at whether the HMRC assessments against the company were valid, but the validity of the assessments had a direct impact on the claims and defences of the parties.
News from the UK Tribunals
Upper Tribunal (UT)
 UKUT 00256 Dollar Financial UK Ltd – backdating group registration
This was an appeal against the FTT decision to strike out Dollar Financial's appeal. Dollar had added the branch of its American affiliate to its VAT group in June 2013, and HMRC accepted that application.
It later transpired that the American affiliate had a UK establishment from 1 July 2012 and had been making supplies to Dollar, those supplies would be standard rated if made from outside the VAT group and would have led to irrecoverable input tax as Dollar was partly exempt.
Dollar applied to have the affiliate's admission to the VAT group backdated by nearly a year, as if it had known there was a UK establishment earlier it would have been able to join the VAT group. However, the FTT ruled that this was not an appealable matter, and the Upper Tribunal has now agreed.
Comment: adding members to a VAT group and timing thereof can be tricky, and while HMRC do have discretion to backdate beyond the usual 30 days or the first day of the current VAT period, they will only exercise that discretion in exceptional circumstances. Clearly HMRC did not recognise the belated realisation by the taxpayer that it could have applied earlier as exceptional circumstances.
First-tier Tax Tribunal (FTT)
TC08941 United Biscuits (UK) Limited - whether McVities Blissfuls are zero rated
The taxpayer argued that their product is a zero rated chocolate filled biscuit, similar to a chocolate bourbon, or a chocolate chip cookie, which HMRC accepts are zero rated.
The difficulty for United Biscuits is that the biscuit base in the shape of a small tart is filled with chocolate cream, and then topped with another biscuit. The second biscuit is smaller than the base, has holes and so does not entirely cover the chocolate.
The law excludes zero rating for biscuits wholly or partly covered in chocolate and the Tribunal was persuaded that as the second biscuit only partly covered the chocolate, it followed that in the gaps the chocolate partly covered the biscuit.
Comment: This case is a reminder that beyond the everyday world, lies the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted so said Lord Justice Sedley in Royal and Sun Alliance Insurance back in 2001
TC08957 JPMorgan Chase Bank, NA - whether VAT group rules disregarded
This is a case about section 43(2A) of the VAT Act and whether the normal rules on intra-group supplies to make them outside the scope of VAT still applies. JPMorgan is a bank with headquarters in USA. It has a branch established in the UK with many employees and is the representative member of a VAT group. The American HQ buys in services from third parties in the USA, and then provides services to its subsidiaries or branches around the world. In the UK there is a charge by JPMorgan its operating subsidiary JPMorgan Securities plc ("Securities”), which is in the same VAT group, and which provides mainly exempt supplies to third parties.
HMRC asserted that services provided by JPMorgan to Securities over a period of several years were an exception to the normal disregard of intra-group supplies because of section 43(2A) of the VAT Act “resupply within a VAT group of services bought in from overseas”.
The diagram shows a representation of the supplies.
JPMorgan admitted that section 43(2A) would apply to services supplied to Securities within the VAT group, but only to the extent they would not be exempt.
It argued there were two supplies made to Securities, one of standard rated Support Services and one of exempt Business Delivery services. Alternatively, that there is a single supply, properly characterised as exempt Business Delivery services.
HMRC argued there is a single standard rated supply of Support Services.
The Tribunal went into a great deal of detail of the facts and evidence, which is not surprising for such a large and complex business, especially as with the sums at stake the losing party is very likely to appeal further.
The FTT took pains to look into the identification of the supplies, partly because the supply contracts being intra-group were not drafted with VAT in mind, and this had led in practice to any analysis by the bank to value the output tax due having to be done on a “semi-manual basis”.
Having looked at the single v multiple supply question with the benefit of recent cases (Frenetikexito (Case C-581/19) Spectrum Community Health CIC v HMRC  UKFTT 856 and Gloucestershire Hospitals NHS  UKUT 28 (TCC) the FTT ultimately concluded there was a single supply. The reasoning was detailed and complex but we think it can be boiled down to “different elements of the supply are indivisible and indispensable in order to achieve the aim of the supply”.
The FTT then turned to JPMorgan’s second argument that the single supply could be charactered as exempt. It was unable to find a predominant element, so was faced with looking at the supply as a whole, which it could not reasonably conclude was exempt.
Comment: The VAT grouping disregard under section 43(2A) does not appear to have been subject to appeal in the UK before now. The FTT has provided a very long and detailed judgement in anticipation of a further appeal.
The judgement was finalised on 29 September 2023, before the Supreme Court Decision in Target Group. The question of whether some of the services provided by JPMorgan were exempt was not given so much attention by the FTT, but it seems to your authors that the conclusions of the Tribunal would have been supported by the Target judgement.
It seems likely that HMRC will be encouraged by this decision and may well investigate other partly exempt VAT groups on the hunt for similar assessments.
TC08956 Key Retirement Solutions Finance Ltd - partial exemption attribution and apportionment method
Key Retirement Solutions Limited's (‘KRS’) main business activity involves offering advice and related services including equity release mortgages (exempt supply) and estate planning (standard rated supply) services. It was partly exempt and not able to recover as much input tax as it would have liked.
KRS argued the VAT incurred on its marketing spend should be treated as overhead VAT. HMRC countered the marketing material, viewed objectively, was designed to attract those customers who are looking for equity release services. On this issue the FTT sided with HMRC as the advertising made no mention of the standard rated income sources and concentrated solely on the exempt equity release activity.
KRS also asserted that the standard method of partial exemption did not work in its favour, so proposed a partial exemption special method based on sectors and transaction counts. It seems that HMRC were not convinced that it would produce a fair and reasonable result, so rejected the proposal. The taxpayer modified its proposal, but HMRC remained unconvinced which led to the appeal.
The Tribunal was not convinced by KRS’ proposals as it used disparate transactions grouped in the same sector, showed no evidence transactions within the same sector used similar amounts of input tax, and there was a lack of economic credibility,
Comment: The authors' reading of the judgement provides insight into how not to approach a PESM proposal. It seems neither proposal was considered by HMRC to provide a “fair and reasonable” result, and the tribunal agreed with HMRC.
TC08966 Piramal Healthcare UK Limited - import VAT recovery by non-owner
This appeal is interesting for two reasons. Firstly, as it analyses the change in HMRC policy to bring its practice in line with EU Law to allow only owners of imported goods to recover import VAT as input tax. Secondly the FTT used the EU principle of equal treatment to allow input tax recovery for a transitional period equal to the general business population.
Piramal Healthcare UK Ltd (‘Piramal’) imported active pharmaceutical ingredients (APIs) into the UK so that it could process the APIs into tablets and pills. It historically paid the import VAT on the value of those goods. Processing of others’ goods into new products (toll manufacturing) is common in the pharmaceutical industry as the supplier, with appropriate product licences, remains the owner of the goods.
The dispute involves a change in HMRC policy that followed the European Commission and VAT Committee’s reports that import VAT should not be refunded to non-owners of goods.
HMRC visited Piramal a few months before it published the change of policy in Revenue and Customs Brief 02/19. This allowed non-owners to claim credit for import VAT until 14 July 2019, a transitional period of just over three months from the date the Brief was issued. It had however already decided that its policy was not strictly in line with the law, so it denied input tax credit on the imports, and Piramal appealed on the basis of unequal treatment.
The FTT partly agreed with the taxpayer that HMRC’s decision to deny the repayment claim for a VAT period in 2018 offended against the EU principle of equal treatment. Piramal’s should have been allowed the same three-month grace period allowed to other businesses.
Comment: It could be slightly surprising the FTT provided a judgement based on the European principle of equal treatment, but as this is a legal principle rather than a concession it appears to have the authority to rule on this basis. We shall see in due course if HMRC appeal. We will have considerable uncertainty over litigating using European principles from 1 January 2024 as the Retained EU Law (Revocation and Reform) Act 2023 (REUL Act) comes into effect.
TC 08972 Derby Quad Limited - cultural exemption and equal treatment
Derby Quad Ltd (‘DQ’) is a charity (managed on a voluntary basis) that runs an arts centre in Derby, providing ‘a visual arts and media centre, art exhibition and workshops, cinema, café bar, corporate room hire and training’.
DQ made a voluntary disclosure for overpaid VAT for the periods 06/12 to 12/15 claiming the cultural exemption and HMRC paid out on the voluntary disclosure (about £130K) on a "without prejudice’ basis because the First-tier Tribunal and Upper Tribunal, in the British Film Institute (BFI), had ruled that they were entitled to apply the exemption.
However, in February 2017, the CJEU (Case C-592/15 BFI) ruled that it was up to the Member States to decide what supplies were culturally exempt, thus overturning the FTT and UT decisions. Accordingly, the UK was entitled to treat these cinematic performance supplies as taxable. So HMRC assessed to recover the tax.
DQ made a further claim in relation to Live Events, which were screenings of live performances from other venues, but HMRC rejected the claim.
The Tribunal was not persuaded that a Live met the natural and ordinary meaning of the words of a ‘theatrical performance of a cultural nature'. In particular it could not accept that, despite the similarities in the form of audience experience, the production and the ‘buzz’ as stated by the appellant, Live Events were the same as being at an actual theatrical performance because the actors cannot hear the Live Event audience and moreover, they provided no audience and performer interaction.
DQ also argued on the basis of the “always speaking” doctrine that readers may recall from the Newscorp appeal. DQ argued that when the cultural exemption was introduced in 1996, there was no concept of Live Events, which had now become popular. The FTT gave due consideration to the arguments but felt bound to follow the Supreme Court’s view in Newscorp that the always speaking doctrine must be applied narrowly given the constraints of EU law.
Ultimately the Tribunal concluded that a Live Event is, not capable of being a ‘theatrical performance’ in terms of the cultural exemption.
Comment: this is another example of trying to stretch the terms of a relief, using the doctrine of “always speaking” where the type of supply was not envisaged when the law was drafted. Since Newscorp, the Tribunal was bound to follow the Supreme Court's narrow interpretation of this doctrine.
TC 08974 Vistry Homes Limited and Linden Wates (Westbury) Limited - golden brick development agreements, impact of withdrawing appeal on similar issue
This is a preliminary decision on HMRC's strike out application.
Vistry and Linden are house builders and develop their own sites for private sale as well as building houses for Housing associations. Where they build for housing associations they would usually build to a certain stage (the golden brick) and then sell as a zero rated supply. HMRC accept (see Notice 708 paragraph 4.7.4) the transfer of property is zero rated as long as "the building is clearly under construction".
However sometimes Vistry and Linden would sell before the construction had reached that stage, and a ruling had been sought relating to the development agreement with one housing association (Merlin). HMRC had ruled there was a separate supply of (exempt) land and taxable construction services. Linden appealed to the FTT but later withdrew its appeal.
During those appeal proceedings Linden asked HMRC to confirm whether they would treat the Merlin contract as applying more widely. HMRC declined to do so. After the original appeal had been withdrawn, Vistry, now being the representative member, wrote to HMRC saying it had recovered input tax on 9 Housing Association contracts on the basis of making single zero rated supplies of new dwellings. HMRC re-asserted its view of there being two supplies and assessed for over claimed input tax.
Vistry appealed, and HMRC asked for the case to be struck out on the basis that when an appeal is withdrawn, the parties are deemed to have “come to an agreement…that the decision under appeal should be upheld without variation”, and a tribunal is then deemed to have “determined the appeal in accordance with the terms of the agreement. HMRC said this meant all contracts similar to the merlin contract were covered by the earlier appeal and so Vistry could not take the appeal forward.
The FTT found both as a fact and as a matter of law that the deemed decision which arose as a result of the withdrawal of the Linden appeal was that supplies made under the Merlin agreement comprised two supplies, one of exempt housing and one of zero rated construction services.
The FTT then went on to consider HMRC's strike out application in more detail:
CAUSE OF ACTION ESTOPPEL
The concept arises where the cause of action in the latter proceedings is identical to that in the earlier proceedings, the latter having been between the same parties or their privies and having involved the same subject matter. Basically, this means that you cannot have two bites of the same cherry.
Overall, the FTT decided that HMRC's earlier response that the Merlin dispute could not be considered more widely, meant that other contracts undertaken by Vistry or Linden, would not be covered by the earlier appeal.
Issue estoppel may arise where a particular issue forming a necessary ingredient in a cause of action has been litigated and decided and in subsequent proceedings between the same parties involving a different cause of action to which the same issue is relevant one of the parties seeks to reopen that issue”.
Again, the FTT examined the application of this principle to the present circumstances. Overall, it decided that the facts of the earlier appeal had not been examined in detail by the Tribunal (because the appeal was withdrawn before the hearing), so it would not be reasonable to conclude the present dispute would cover exactly the same issues.
ABUSE OF PROCESS
Abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter.
The FTT concluded: HMRC are not being vexed with the same matter twice. They have yet to be vexed by the new matters which will arise in the 2022 appeals. They are not being harassed. To my mind it would be 12 inequitable to prevent the appellants bringing their 2022 appeals before a trial judge who can consider the contractual arrangements, and commercial and economic realities surrounding those arrangements in detail and can come to a conclusion regarding the nature of the supplies made under those arrangements.
Comment: many of the Tribunal case reports we see (both in the First Tier and Upper Tribunals) deal with procedural issues. It is clear that HMRC have moved away from the original idea of the VAT Tribunal being a relatively informal route for taxpayers’ access to justice. They will now use all the procedural tactics they have at hand to win the dispute, thus pre-empting the necessity to examine the actual facts and apply the law.
News from the CJEU
Case C-146/22 Dyrektor Krajowej Informacji Skarbowej (VAT on hot milky drinks) Poland
The dispute concerns the different reduced VAT rates applicable in Poland for classic hot chocolate. The Court ruled on 5 October 2023 that Poland is allowed to tax it at two different rates. Where it was supplied by a coffee shop for consumption in the shop or as a takeaway drink the VAT rate was 8%. But if it was supplied pre-mixed in a retail shop, presumably to be heated at home, the VAT rate was 5%.
Comment: the dispute is very much like the disputes we have seen in the UK between cold takeaway food and that provided by way of catering. It's interesting to see Member States like Poland facing similar issues even though the rate differential is on 3% compared with the 20% difference in the UK.
Case C-355/22 Osteopathie Van Hauwermeiren - Belgium
On 5 October 2023 the Court Ruled
A national court may not make use of a national provision empowering it to maintain certain effects of a provision of national law which it has found incompatible with the PVD on the common system of value added tax, on the basis of an alleged impossibility of passing on value added tax (VAT) wrongly levied on customers of services supplied by a taxable person, in particular because of the large number of persons concerned or when these persons do not have an accounting system enabling them to identify these benefits and their value.
Comment: Osteopathy services had historically been treated by Belgium as standard rated, but this was challenged and found to be invalid. However, the Belgian tax authority and the Belgian Court held that refunds could not be made to VAT registered providers of these services because of the difficulties of passing the overpaid tax back to the customers. The Court has emphatically said the position taken by Belgium is nonsense, particularly as the CJEU has ruled on the same or similar in another Belgian case with similar circumstances see 27 June 2019, Belgisch Syndicaat van Chiropraxie and Others (C-597/17).
Case C-505/22 Deco Proteste – Editores, Lda. - Portugal
On 5 October 2023 the Court ruled:
Article 2(1)(a) and the first paragraph of Article 16 of the PVD must be interpreted as meaning that the provision of a subscription gift in return for taking out a subscription to periodicals constitutes a supply that is ancillary to the principal service of supplying periodicals, which falls within the concept of ‘supply of goods for consideration’, within the meaning of those provisions, and must not be regarded as a disposal of goods free of charge within the meaning of the first paragraph of Article 16.
Deco Proteste offered new subscribers to its magazines a “Gift” of a smartphone or tablet (with a cost price of less than €50), provided the subscriber paid at least one month's instalments.
The Portuguese tax authority ruled there was a separate supply of goods taxable at the standard 23% rate rather than included in the magazine subscription taxed at the reduced rate of 6%.
Comment: in the latest of the long line of single v multiple supply disputes the Court has taken the principal supply to be the magazine subscription, to which the “subscription gift” is ancillary so is taxed within the consideration for the main supply.
Case C‑249/22 Gebühren Info Service GmbH (GIS) v Beemer
On 26 October the Court followed opinion of the AG, reported in ITU 5/ 2023, that the TV and Radio licence fee in Austria is subject to VAT.
Comment: (Unchanged from ITU 5/2023) This is an example of a derogation (a specific exception granted to individual member states to deal with a particular problem or historic policy decision). Since the derogation granted to Austria was lawful, this is an exception to the general rule that broadcasting licence fees are not subject to VAT. In the UK, public broadcasters (BBC and S4C) can recover their VAT under section 33 of the VAT Act. Austria has used a different mechanism - i.e. making the licence fee subject to VAT, so the broadcaster can recover its VAT as input tax.
HMRC updated VAT Notice 700/64 (Motoring expenses) on 20 October 2023 to include new information re VAT rules when a business sells a second-hand vehicle in Northern Ireland that was purchased in Great Britain (England, Scotland and Wales, not including Northern Ireland).
It states that “If you purchase a second-hand motor vehicle in Great Britain (England, Scotland and Wales) and move it to Northern Ireland, you cannot use the second-hand margin scheme when you resell it. You should issue a normal tax invoice with VAT charged on the full selling price. You may, however, be able to claim a VAT-related payment under the second-hand motor vehicle payment scheme”.
Registering for VAT
HMRC have confirmed that postal applications can only be made by exception, so it is likely that this link will disappear shortly.
Interpretation of VAT and excise legislation
On 20 October 2023, HMRC published a policy paper on the Interpretation of VAT and excise legislation.
This measure clarifies how VAT and excise law should be interpreted in light of changes made by the Retained EU Law (Revocation and Reform) Act 2023 (REUL Act).
The implication of this is that in respect of VAT and excise law, it will no longer be possible for any part of any UK Act of Parliament or domestic subordinate legislation to be quashed or disapplied on the basis that it was incompatible with EU law following the changes made in the Retained EU Law (Revocation and Reform) Act 2023.
It also ensures that UK VAT and excise legislation continues to be interpreted as Parliament intended, drawing on rights and principles that currently apply in interpreting UK law. This ensures the stability of the VAT and excise regimes and provides legal certainty.
The government has published draft legislation for technical consultation ahead of its inclusion in an upcoming Finance Bill. The consultation will run for 4 weeks and will close on 17 November 2023.
Comment: The proposed changes could mean that disputes covering the period pre-Brexit (up to 31 December 2020), post Brexit (up to 31 December 2023) and under the new regime (from 1 January 2024) that involve or rely on EU law, may need to be considered by the Tribunal or Courts under three sets of rules. We will provide further commentary if and when the fog clears.