This month we see the Court of Appeal dodge the final decision on the VAT liability of giant marshmallows, thus leading to “s’more” arguments in the First Tier Tribunal. We also have an important decision on the validity of legislation affecting offshore looping of insurance arrangements, opening up the possibility of input tax claims for insurers with similar arrangements to those of Hastings Insurance.
The Spring Statement from the Chancellor did not lead to any surprises, but HMRC are consulting on simplifying the penalty regime for underpayment of tax or late notification of liabilities.
Readers will recall that Innovative Bites produces giant marshmallows sold with the intention that they are “roasted” over a barbeque or a fire. The FTT and the UT found they were not confectionery so could be sold as zero-rated food.
However, HMRC were not satisfied with the reasoning, nor the outcome, of the Tribunals’ judgements and appealed to the Court of Appeal, which has ruled against the Tribunals, but without actually deciding the outcome. Instead, it has sent the dispute back to the FTT for it to address the question of whether these giant marshmallows are normally eaten with the fingers (and would be standard rated) or eaten from a stick after being toasted or roasted.
Further insight is provided in our Indirect Tax Case Alert. [ 411 kb ]
Hastings has won the right to reclaim over £16m of input tax in relation to supplies of services to Gibraltar. All of the supplies had been made by Hastings to Advantage Insurance Company Limited (Advantage), a Gibraltar-based company licensed by the Financial Services Commission of Gibraltar.
The position between HMRC and Hastings has been long fought, with the initial round in the First Tier Tribunal in 2018 going in Hastings’ favour. It showed that Advantage, a Gibraltar entity, had made supplies of insurance to UK customers, acting through Hastings (a UK-based company) as its intermediary. The initial case through the Courts examined whether Hastings could recover input tax attributable to supplies of broking, underwriting support, and claims handling services made to Advantage.
Whilst Hastings’ own supplies undoubtedly fell under the VAT exemption for insurance services, which would usually create a sticking VAT cost, where its supplies were made outside the EU (i.e., to Gibraltar), they would be seen as falling under the Specified Supplies Order (“SSO”), creating a right to recovery of VAT on costs.
The initial case, therefore, considered in detail whether Hastings’ and Advantage’s relationship with each other could require that Advantage should properly be seen as having a UK Fixed Establishment. If proven, this would have meant that Hastings made a domestic supply, rather than cross-border, resulting in a block for input tax.
The Courts found that, whilst the two entities had a clear relationship with each other, this was not enough to create an establishment on each other’s behalf. This was particularly because of the provision of services under commercially agreed contractual arrangements where each entity operated a separate business with its own commercial imperatives and financial risk-taking.
Clearly, HMRC and HM Treasury did not gain the decision they wanted, and so the next stage of the chronicle was a change in the law, with amendments to the SSO effective from the beginning of 2019, with the intention to prevent an advantage from offshore ‘looping’ by restricting the application of the SSO to cases where the final consumer is not in the UK.
The SSO is based upon Article 169 of the EU Principal VAT Directive (PVD), which provides an exception to the usual rules, as insurance transactions are exempt. What is important, though, is that the PVD states that input tax recovery is allowed if those exempt services are provided to a customer outside of the EU, whereas the UK changes read that this same recovery is only allowed where the end policyholder is outside the EU.
Hastings considered that the approach by HMT/HMRC was inconsistent with the PVD and therefore made a claim, during 2023, for under-recovered input tax relating to the three years to the end of 2022, and the FTT has agreed. It commented that the “insured” does mean the contractual customer (Advantage), as opposed to the end policyholder.
For the first year of the dispute the PVD had direct effect over national legislation, and for the latter years, the EU Withdrawal Act allows for the continuation of rights found by Courts in the UK in cases decided before 31 December 2020, providing that these rights arise under an EU Directive.
Comment: This finding therefore presents a window of opportunity for input tax claims over the last 4 years, looking back to Q1 2021. There is a degree of urgency required given that any claim to be made in respect of the period 1 January – 31 March 2021 would need to be submitted by the end of April 2025.
It remains to be seen whether HMRC will seek to appeal this decision, and they have until 29 April to do so.
TC09434 Advanced Hair Technology Ltd
This is a dispute about whether treatment for androgenetic alopecia (AGA) by medically qualified doctors is exempt as medical care.
Ultimately, in a complex judgment, the FTT found that AGA is a natural balding process in men with increased incidence compatible with aging. In women it is less common and often associated with the menopause. In the ten cases presented (all male) the Tribunal was not convinced the hair transplants amounted to medical care, nor welfare. However, it did not go so far as ruling that hair transplants to treat AGA could never be medical care.
Comment: This is a case where the taxpayer did not register for VAT as it considered all, or at least the majority, of its supplies were exempt. When HMRC determined its services should have been standard rated this led to a retrospective compulsory registration with a £2.5 million assessment. This is not the first time HMRC have challenged exemption for what they would say are cosmetic procedures, resulting in significant unexpected liabilities, so businesses in this sector should take this case as a salutary warning to critically assess the VAT liability of their services.
Background: Greentech reclaimed input VAT on the costs of equipment purchased from an associated company, but the as a result of a tax audit, the Romanian tax authority reclassified the transaction as a VAT free business transfer assessed to recover the €900,000 of VAT reclaimed. However, the circumstances were complicated as the other side of the transaction had been reviewed by the tax authority which accepted it was subject to VAT.
The result of the dispute dragging on was that it became too late under Romanian rules for the supplier to issue a credit for the VAT incorrectly charged and Greentech was left with no method to recover the VAT it had paid. It therefore appealed on the basis that the tax authority has an obligation to refund incorrectly charged VAT when it is impossible or excessively difficult to recover it from the supplier.
The CJEU found that the right to deduct input VAT forms an integral part of the VAT scheme, intended to remove the burden of the VAT accruing or paid from the taxpayer in respect of their economic activities, and it should not be limited. If output tax is paid incorrectly due to being improperly invoiced by the supplier, it should be claimed from the supplier directly. However, it should be possible to recover the VAT from the tax authority if claiming from the supplier proves difficult (i.e. where the supplier is insolvent).
Comment: The Court is applying the community right that arose from the Reemtsma Case C-35/05, which was referred to in this case by reference to Humda (Case C-397/21, paragraph 22). However, it seems likely that such direct effect can no longer be relied upon in the UK (according to HMRC). It is therefore vital, as a customer in a significant transaction, to ensure that VAT is properly chargeable.
C–808/23 Högkullen AB - Sweden
Background: Högkullen (H) was a holding company of a group whose economic activity is the management of real estate through 19 subsidiaries, some of which were partly exempt.
H provided management services to its subsidiaries, on which output VAT was charged, but made no other supplies. H’s expenditure consisted of costs such as capital items and IPO costs in addition to its bought-in services which it then made onward supplies of to its subsidiaries. H made a full deduction of input tax even though the output tax on its management charges was much lower, and the tax authority challenged the repayment claims on the basis that the management services were undervalued.
The AG concluded there were various services provided that could be valued based on cost or market value (if this was ascertainable), but only those services bought in with VAT needed to be considered when calculating the standard rated output value.
Comment: The UK has valuation rules that allow HMRC to impose market value, for circumstances where the supplier and customer are related, and the customer cannot recover all its input tax, and the leading case on this issue is Jupiter Asset Management Group Ltd [2021] UKFTT 96 (TC).
