We report on a selection of cases from the Tribunals this month, in addition to the indirect tax headlines from the Chancellor’s Spring Budget.
Northumbria Healthcare successfully convinced the Court of Appeal that hospital parking charges should not be subject to VAT. Meanwhile, Morrisons supermarket failed to argue at the First Tier Tribunal that healthy snack bars could benefit from the zero rate.
Two other First Tier Tribunal decisions, Colchester Institute and Monmore Properties, do not appear to have immediate consequences for other taxpayers, but each highlight potential future issues to monitor, in the education and welfare sectors respectively.
Finally, at the Court of Justice in the European Union, the Advocate General has provided an opinion which may have potential to widen the scope of VAT exemption for investment management services in relation to certain types of DB pension scheme.
Aside from a headline increase in the VAT registration threshold, there were no significant VAT surprises in the Budget. A number of ongoing consultations were referred to in niche areas (such as retail export scheme; private hire vehicles, carbon credits and DIY housebuilders). Taxpayers for whom these issues are relevant should look out for further updates as the year progresses. There was also a minor change to rules allowing HMRC to offset VAT errors in the same VAT period for the purposes of calculating entitlement to repayment interest.
Regarding customs duty and excise, there were announcements on freezing of fuel duty and alcohol duty rates, uprating of air passenger duty rates, and an upcoming change to the alcohol duty stamps scheme. There are also new duty rates for vaping products and a rise in tobacco duty. Finally, there was confirmation of a prior announcement on a UK carbon border adjustment mechanism (“CBAM”) from 1 January 2027 which will apply to relevant goods imported in the aluminium, cement, ceramics, fertiliser, glass, hydrogen and iron & steel sectors.
This case concerned hospital car parking charges at healthcare sites operated by NHS foundation trusts, in situations where the trust operates car parks itself (ie there is no outsourcing to a third-party operator). The Court found that this income was generated in the course of an activity engaged in by the trusts “as public authorities” – in particular because the provision of parking by the trusts was subject to specific legal conditions in the form of “Parking Principles” issued by the Department of Health. Consequently, this income was found not to be subject to VAT. Furthermore, HMRC had failed to evidence that this VAT treatment would lead to significant distortions of competition in the market for parking.
Comment: while the quantum of this dispute is quite small, there are circa 50 cases standing behind it, with around £70million at stake. NHS Foundation Trusts with a similar factual position will therefore seek significant VAT repayments in due course.
The decision concerns “Nakd” and “Organix” snack bars, which were marketed as healthy, and do not contain ingredients associated with traditional confectionery, namely cane sugar, butter or flour. This case had previously been considered at the First Tier and Upper Tribunals, before being remitted back to the First Tier Tribunal, specifically to consider the relevance of the healthy marketing and non-traditional ingredients. These products included fruit and nut bars; bars that emulate desserts, biscuits or cakes; crunch bars; and bars that emulate sweets or chocolate products.
While “cakes” are zero rated for UK VAT purposes, “confectionery” is standard rated. This case considered the appropriate definitions of these two categories, noting “confectionery” means food items that:
The Tribunal considered that importance of the look, feel and taste of the Products outweighs any other factors that might suggest that they are not confectionery, and furthermore decided that the taste, texture, mouthfeel and appearance of the products are wholly different from what it considered to be the nearest “cake comparator” (a dark fruit cake).
Consequently, the products under appeal were found to be standard rated.
Comment: the boundaries of the zero rate for food remain one of the most complex and contentious areas of UK VAT law. This decision highlights the significant potential for uncertainty, and may call into question historical application of the zero rate to a variety of other similar products. Retailers and manufacturers should carefully review product portfolios to identify whether any additional VAT liability is likely to arise; and should monitor whether this decision is appealed further in due course.
This case related to an output VAT assessment raised by HMRC under the “Lennartz” VAT accounting rules for “non-business” use of input VAT, in relation to costs of a building development used to provide education and/or vocational training free of charge to students but funded by grants from government agencies. This came further to a previous Upper Tribunal decision for the same taxpayer, which had already found that the College made only “business” income for VAT purposes (which was VAT-exempt), rather than “non-business” income.
The First Tier Tribunal was bound by the previous Upper Tribunal decision, and therefore unsurprisingly found that the college was only making “business” supplies, such that the output tax assessment was not due.
Comment: to date, HMRC has seemingly not applied the outcome of the previous Upper Tribunal decision to other taxpayers, many of whom consider similar income to be “non-business” for VAT purposes. It remains to be seen whether this latest decision will be appealed. There is potential that this case may prompt a future change in HMRC policy, which could have adverse implications for taxpayers currently relying on “non-business” status to access other VAT reliefs.
This was an appeal by a care home group that includes both a “state-regulated” entity and a non-regulated entity. The group provides welfare services both to Local Authority funded residents and to privately funded residents and was subject to VAT assessment by HMRC. The FTT decided some of the assessments were made out of time. Meanwhile the Tribunal noted that there is a wider dispute in these proceedings as to which of the group companies supplied the welfare services, and when, but that is a matter for the substantive appeal which is yet to be heard.
Comment: while this latest decision only relates to time limits which are specific to this one taxpayer, the outstanding questions to be heard at subsequent appeal may be of interest to a wide variety of welfare businesses, especially those which have implemented, or are considering implementing VAT efficient structures with the use of non-state regulated entities.
This structure typically involves the creation of a separate non-regulated company in a VAT group with the state-regulated care companies. The new company will contract directly with Local Authorities / Clinical Commissioning Groups and NHS bodies for the provision of welfare services. These services would be standard rated for VAT purposes, thus enabling a proportion of input VAT recovery, whilst the delivery of the underlying welfare services continues to be performed by the existing regulated care company under subcontract within the VAT group.
The results of the substantive appeal and the question as to whether or not services were supplied by a state-regulated entity, or by an unregulated entity, is fundamental to the VAT treatment of the group’s income (either as taxable or exempt for VAT purposes); and consequently has the potential to have a significant impact on input VAT recovery entitlement.
These cases concern the VAT liability of the services of managing various occupational pension funds in the Netherlands. The funds in question appear to be consistent with what would be called a “defined benefit” scheme in the UK, which is to say, the level of the pension entitlements and benefits depends primarily on the level of employment income and years of service.
Previous VAT law has established that the VAT exemption for management of “special investment funds” applies only where (amongst other conditions) the pension customers bear an investment risk. In the UK this has therefore limited the VAT exemption to management of defined contribution schemes, and not to defined benefit schemes. This case considers whether the existence of mechanisms to reduce or increase pension entitlements in response to investment performance of a defined benefit scheme constitutes a comparable investment risk, sufficient to allow these pension funds to be treated as special investment funds.
The Advocate General has indicated that the Court of Justice should answer this question by considering whether the pension commitment provides primarily for guaranteed benefits, or otherwise for benefits dependent on the performance of the invested capital. The taxpayer has also put forward an alternative argument based on “fiscal neutrality” by comparison to certain other pensions in the Netherlands which already benefit from “special investment fund” status.
Comment: this is the latest on the long line of cases defining the limits of exemption for management of special investment funds. Currently, UK Defined Benefit pension funds typically suffer a degree of irrecoverable VAT on management related costs, and therefore any potential to minimise the incidence of VAT will be of interest to the sector. It remains to be seen whether the Court of Justice will follow the Advocate General’s opinion, and if so, the extent to which this may benefit any particular Defined Benefit pension scheme may be fact sensitive. It remains to be seen what impact this may have on UK law given the implementation of the The Retained EU Law (Revocation and Reform) Act from 1 January 2024. In the meantime, there are various other means by which to mitigate irrecoverable VAT in UK Defined Benefit pension schemes which should be considered regardless of the outcome of this case.
On 1 March 2024, HMRC published a Revenue & Customs Brief (1/2024) on live web streaming of funeral services, clarifying HMRC’s position that live web streaming of funeral, burial or cremation services is VAT exempt under VATA 1994, Sch 9, Grp 8, Item 2.
