VAT Cases & News

In M Hodges v HMRC [2015] a taxpayer successfully reduced VAT penalties of £394,694 to £7,807. He was found guilty of dishonesty however HMRC had failed to exercise “best judgement” in assessing the VAT penalties as required by the law.

In Dazmonda Ltd t/a Sugar & Spice v HMRC TC 03473, the FTT held that, when an adult entertainment club allowed dancers to use booths at its premises, there was a standard rated single composite supply of services rather than an exempt supply of land.

In HMRC v Secret Hotels2 Limited [2014] UKSC 16, the Supreme Court held that a holiday company (SH2) was an agent for a disclosed principal (or “intermediary”), rather than a principal; and was not liable for the £7.1 million of VAT that HMRC had claimed.

• Secret Hotels2 (SH2) marketed and arranged holiday accommodation through an online website.
• 94% of its sales of hotel rooms were made to travel agents, with the rest made directly to holiday makers.
• Hoteliers, who wished their hotels to be marketed by SH2, entered into a written agreement ("the accommodation agreement”) with SH2 containing a number of provisions. The hotels were then advertised on the website.
• The accommodation agreement was very much in favour of SH2, but this reflected the powerful negotiating position of the large company (backed up, for instance, by Lastminute.com).
• Bookings were made using the website and customers paid in full (the” gross sum”) before the holiday. SH2 then paid a lesser sum (the “net sum”) to the hotelier, which was invoiced by the hotelier at the end of the holiday.

HMRC argued that SH2 was a “travel agent” and liable to account for VAT; whereas SH2 claimed that it was solely an “intermediary”, with the difference between the gross sum and net sum being its “commission”. If SH2 were correct, under the “reverse charge mechanism”  it would be foreign hotelier who would account for VAT, rather than SH2.

The court held that it needed to identify the nature of the relationship of SH2, the hotelier and the customer by first considering the effect of the contractual documentation and only then consider whether its conclusion was changed by the commercial facts. It decided that the accommodation agreement (and the surrounding facts) both showed that SH2 was an agent for a disclosed principal.

Links:

Supreme Court judgment 

Court of Appeal judgment  in which the tribunal found in favour of HMRC.

UT judgment in which the tribunal found (correctly) in favour of Secret Hotels2.

FTT judgment in which the tribunal found in favour of HMRC.

Following Goals Soccer Centres plc v HMRC (TC 02253), the charge made by suppliers of indoor and outdoor pitches for league and cup competitions (including managing and administering these) now constitutes two separate charges for VAT purposes.

In HMRC v Esporta [2013] UKUT 0173, it was held that late paid gym fees are subject to VAT.

Three VAT registered businesses who have difficulty using online services have won their appeal against HMRC’s requirement that they file their VAT returns online.

The business owners were supported in their appeal by the Low Incomes Tax Reform Group (LITRG):

• All three ran their own businesses. Two have disabilities which made it excessively difficult or impossible for them to use a computer, and a third lived in a remote area of the country where broadband access was absent or unreliable.
• All three were of an age which made learning how to use a computer particularly difficult and they would have had to incur the cost of instructing an agent.
• They had all filed their VAT returns promptly and accurately on paper for many years.

In a ground-breaking decision, the judge held that the regulations which required online filing of VAT returns without providing exemptions for older people, those with disabilities or who lived in parts of the country which were too remote for broadband access, were in breach of the appellants’ human rights and were unlawful under the EU law.

The appeals were heard in the First-tier Tribunal, Tax Chamber, with Judge Barbara Mosedale presiding. The appellants themselves were represented by Miss Anne Redston of Counsel instructed by Mr Nigel Eastaway, then of BDO and now of MacIntyre Hudson.

Anthony Thomas, Chairman of the LITRG, said:

“This case shows that HMRC must consider the needs of taxpayers when making regulations about complying with VAT and other tax requirements. They cannot just act in isolation without regard for the human rights of taxpayers and to other provisions of the general law of the land. When making policy and promulgating regulations HMRC, like all other public authorities, must obey the rule of law. We now know that digital mandation is a policy that contravenes the rule of law when it fails to make provision for the needs of older or disabled people or those who cannot access broadband easily because of where they live.

“LITRG are pleased to have played our part in establishing this principle, and we and the appellants place on record our appreciation of the very significant work of BDO, Nigel Eastaway and Anne Redston, and the very careful and thorough examination of all the legal issues by the judge.”

There are many other implications of the decision which the LITRG together with appellants’ legal advisers must take time to consider.

Anthony Thomas added:

“Any assistance HMRC offer to taxpayers in complying with their obligations must be responsive to the diverse needs of the people it is supposed to help. We remain willing to work with HMRC to ensure that those who cannot use online channels for reasons of disability, age and so forth are treated appropriately and in accordance with the law. This must involve giving them alternative means of complying with their tax obligations – including paper filing – that are workable and meet their particular needs.”