VAT Cases & News

Summaries of interesting VAT cases for the SME owner.

In Intrinsys Ltd v HMRC [2015] TC04611 the first tier tribunal (FTT) has allowed an appeal against a default surcharge, holding that the appellant had a reasonable excuse for missing the bank cut-off time for same day transactions.

Background

  • Intrinsys is VAT registered. It has one employee who handles VAT matters, and he is the only one with the expertise to do so.  
  • He became ill during the week the return in question was due, meaning that the return was prepared later than was usual.
  • As a direct consequence, the amount to be paid was not known until 6 March (a Friday) which was the last working day a payment could be made on time.
  • The appellant’s bank had a 3.30pm cut off time for same day transactions involving a different bank.  
  • The Finance Director had a genuine belief that the cut off was 4.30pm, which was the cut off time for same day transactions involving the same bank.
  • The high value nature of the transaction meant it required electronic countersigning, and this was eventually done at 4.28pm as the person required was away in a meeting.
  • As this was after the 3.30pm deadline the payment was not received by HMRC until the next working day, Monday 9th March.
  • HMRC issued a surcharge penalty of £8,043 and the company appealed on the grounds that the circumstances meant that it had a reasonable excuse, and the penalty was disproportionate.

Decision

  • The FTT held that the illness of the member of staff responsible for preparing the VAT return directly contributed to the late payment as there was no one else who could have prepared it.
  • The tribunal also found that there was nothing on the banking platform that differentiated between the 3.30pm and 4.30pm deadlines, and so it was not unreasonable for the Finance Director to have believed he could make a same day transaction by 4.30pm as he had done so before.  
  • The company therefore had a reasonable excuse and the appeal was accepted.
  • The FTT also commented that it did not find the penalty to be disproportionate, though this was irrelevant as the reasonable excuse matter had already been decided.

Comment

It is important to note that had the Finance Director merely been incorrect in his belief that the cut off time for all same day payments was 4.30pm this would not have constitued a reasonable excuse.  

In fact, he was able to clearly demonstrate why he thought this, and the tribunal was therefore satisfied that it was not unreasonable for him to hold this belief.

Useful link

Intrinsys Ltd v HMRC [2015] UKFTT TC04611

 

In HMRC v Caithness Rugby Football Club [2016] UKUT 354 the Upper Tribunal (UT) agreed with the First Tier Tribunal (FTT), that the construction of a clubhouse did qualify for zero-rating as it was intended for use as a village hall or similar.

In the Trustees of the Institute for Orthodox Christian Studies v HMRC [2015] TC04622 the First Tier Tribunal (FTT) confirmed that HMRC was entitled to raise an assessment for output tax on the sale of a property to the appellant as it was not subsequently used solely for a relevant charitable purpose.

The Appellant is a registered charity whose aim is to further religious education and knowledge of the doctrines, history and culture of the Orthodox Church.

Background summary

  • The appellant purchased a property and declared that it intended to use it for relevant charitable purposes
  • The vendor therefore did not charge VAT on the sale even though it had opted to tax the property
  • In its fund raising brochure the Charity set out the purposes for which the building would be used, including a library, lecture and seminar rooms, areas for study, and in due course some accommodation for residential students and visiting scholars
  • The Charity charges fees for attendance at lectures and seminars although the costs of providing these are heavily subsidised by donations and grants
  • The appellant let out rooms in the property to tenants before undertaking major conversion and refurbishment.  Approximately two-thirds of the rooms were let
  • HMRC contended that this was constituted a business use and raised an assessment for £133,333 output tax on the sale

Relevant Legislation

The legislation allowing the vendor not to charge VAT on the property is containe in the Value Added Tax Act (VATA) 1994, Schedule 10, paragraph 7:

(1) An option to tax has no effect in relation to any grant made to a person in relation to a building or part of a building intended by the person for use-

(a) solely for a relevant charitable purpose, but

(b) not as an office.

"relevant charitable purpose" is later defined as use by a charity "otherwise than in the course of furtherance of a business"

Appellant's argument

When the building was identified by the charity for possible purchase a number of rooms were occupied by business tenants.  The charity requested vacant possession, and a three-month notice was given to tenants.

The Charity later noted that it would not immediately have sufficient funds to begin converting the property for its intended use and after attempting to raise funds by bank overdrafts or mortgage facilities offered short term tenancies to the tenants to raise monies to offset overheads before conversion work could begin.

The Charity contacted HMRC to confirm that letting out temporarily unused space would not be regarded as a business supply.  HMRC advised that it would not, as long as all income was directed to furthering the purposes of the Charity.

The Charity argued that as the rooms were only let for a temporary period to cover overheads this could not reasonably be considered a business activity.  Further, the trustees were attempting to comply with their obligations to minimise costs and preserve the Charity's resources.

HMRC's argument

HMRC contended that as two thirds of the property was rented out it did not matter whether this was temporary or not; this constituted business use.

Tribunal decision

The FTT noted the following:

  • there is a presumption that the supply of goods or services in return for consideration amounts to a business activity
  • the onus is on the Appellant to show that the nature of its activities is such that it is not carrying on a business activity even though it is supplying services for consideration (lecture fees) and renting out accommodation
  • absence of a profit motive does not necessarily mean that there is no business activity
  • it is possible for charitable activities to also be business activities

In particular reference to this case, they accepted that:

  • the greater part of the Charities activities are charitable
  • it charges fees to meet operational expenses and not so as to give rise to profits which points away from economic activity
  • the property acquisition was partly funded by donations which would not be the case for a commerial organisation

However, the FTT concluded that:

  • the fees received were consideration for the teaching provided despite the lack of profitability and charitable motives; the provision of religious education in return for payment is a business activity
  • the temporary lettings were not to anyone connected to the Charity's activities and 'could not be anything other than a business activity' even though there may have been no intention for the arrangements to be continuous or permanent
  • that the intention to eventually let rooms to students would also be regarded as a business activity

Comment:

This case is interesting for a number of reasons, not least because the Charity can be considered a little unlucky to be facing this unexpected liability which it has indicated could result in its collapse.

  • Firstly, the trustees had taken professional advice and contacted HMRC on two occasions to confirm that the VAT exemption would apply.  Unfortunately it would seem that some relevant information was not passed on by the trustees, and that to some extent they had been asking the wrong questions.

This reinforces how important it is when obtaining advice to make sure that all information is provided that could possibly be relevant.  If there is more than one intended use for the property, then each one should be considered.

It also reinforces how important it is for advisers to make sure they ask sufficient questions of their clients to be sure of giving correct advice.

  • Secondly, the FTT have made their decision by taking into account grounds for argument that were not raised by HMRC at tribunal, such as the fact that the charging of fees for lectures would have been sufficient to count as an activity 'in the furtherance of a business' even without the lettings to third parties.  However had those lettings not taken place would HMRC have challenged the transaction?
  • Finally, the FTT decided that the Charity were conducting business activities despite conceding that they had no profit motive, were not managed on a commercial basis, and that the primary purpose of all of its activities was charitable.  The FTT also referred to the six business tests taken from the Lord Fisher case, accepting that at least three of these were not met.  It is becoming ever more difficult to argue that an activity is not a business activity where any consideration at all is charged, even if it is just a token amount which is far less than would be charged by a commercial entity.  

 

Useful links:

Trustees of the Institute for Orthodox Christian Studies v HMRC [2015] UKFTT TC04622

 

 

 

 

 

 

 

In Craft Carnival v HMRC [2015] TC04428, the First Tier Tribunal (FTT) agreed with the taxpayer that the supply of pitches to stallholders at craft fairs is an exempt supply of a licence to occupy land.

This decision has since been overturned by the Upper Tribunal: see Stallholder pitches are subject to VAT: Upper Tribunal

In Morrisroe UK Ltd v HMRC [2015] TC04577 the First Tier Tribunal (FTT) concluded that reliance upon a third party could be a reasonable excuse for failure to make a payment of VAT on time.

VAT penalty set aside

In C J Palau & R C Loughran v CRC (2014) TC 04251, the FTT allowed a taxpayer’s appeal against a penalty under Schedule 24 FA 2007 for an error in a document. The taxpayer had used the wrong form and there was no loss of tax.

In HMRC v Trinity Mirror PLC The Upper Tax Tribunal (UTT) has overturned the previous decision of the First Tier Tribunal (FTT) to set aside a late filing surcharge of £70,900 on the grounds of proportionality, concluding that whilst it might be considered harsh, it cannot be regarded as plainly unfair.

The facts of the case

These were not in dispute and were as follows:

  • The company paid its balancing payment for the 06/07 VAT period one day late, and as a result was issued with a surcharge notice indicating that a further default prior to 1 July 2008 would result in a penalty.

  • The company paid its balancing payment for the 12/07 VAT period one day late, and as a result HMRC levied a surcharge penalty in the amount of £70,906.44, being 2% of the amount due and not paid by the due date.

  • The 2% surcharge for a first default within a surcharge period is in accordance with s59A VATA 1994.

The initial case was brought by the company on the grounds that whilst EU Directives empower member states to apply penalties as appropriate, that power must be exercised in accordance with the "principle of proportionality".

This means that:

  1. penalties must not go beyond what is strictly necessary for the objectives pursued and
  2. a penalty must not be so disproportionate to the gravity of the infringement that it becomes an obstacle to the underlying aims of the objective.

FTT decision

In reaching its decision to set aside the surcharge, the FTT considered a number of precedents including Enersys Holdings UK Ltd v. Revenue and Customs Commissioners in which a 5% surcharge of £131,881 was determined to be disproportionate.

FTT took a mathematical approach to compare the surcharge in Enersys with the Trinity surcharge; if £131,881 was disproportionate for a 5% charge, then anything in excess of £52,752 must be disproportionate for a 2% charge.

 Judgment of the UTT

In upholding the surcharge, the UTT considered the following:

  1. That the FTT had erred in law by attempting to set any maximum penalty as this was effectively seeking to legislate, and that the tribunal had placed too much emphasis on the Enersys decision in seeking an arithmetical comparison; each case should be considered for proportionality based upon its own facts and what is disproportionate in one circumstance may not be disproportionate in another.
  2. That the objective of the surcharge scheme is to impose a penalty for late payment and it does not penalise any further for subsequent delays in payment.  The UTT concluded that the penalty was based upon a modest percentage of the VAT unpaid by the due date and that it could not be considered to go beyond the objectives of the scheme.
  3. That the objective of the EU directive is one of 'fiscal neutrality'.  This recognises that the burden of VAT falls not upon the company itself but upon the final consumer, and that the company is merely collecting and then paying over the tax.  The system requires companies to comply with its obligations, including paying over the tax it has collected on a prompt and timely basis.  The UTT concluded that a penalty of 2% could not be considered so disproportionate to the gravity of the infringement as to constitute an obstacle to the underlying aims of the objective.

Cases referred to

HMRC v Total Technology (Engineering) Ltd [2012] UKUT 418 (TCC)

Enersys Holdings UK Ltd v. Revenue and Customs Commissioners [2010] UKFTT 20 (TC).

Trinity Mirror PLC v Revenue & Customs [2014] UKFTT 355 (TC)

HMRC v Trinity Mirror PLC [2015] UKUT 0421 (TCC)