V@ update - September 2024

Welcome to the September 2024 edition of RPC's V@, a monthly update which provides news and analysis from the VAT world.

News

• HMRC has published new Guidelines for Compliance (GfC8) setting out what it considers to be good practice in relation to VAT accounting and compliance processes.
  
  
• With effect from 30 September 2024, the 'Green Lane' processes under the Windsor Framework apply to movement of goods from Great Britain to Northern Ireland. This requires authorisation under the UK Internal Market Scheme.
  
  
• The Value Added Tax (Caravans) Order 2024 comes into force on 30 September 2024. It amends item 1 of Group 9, Schedule 8, Value Added Tax Act 1994, to bring it in line with the current and future versions of the British Standard for caravan manufacture.

Case reports

Barclays Service Corporation v HMRC [2024] UKFTT 785 (TC)

Barclays Services Corporation (BSC) was an indirect subsidiary, registered in Delaware, of UK-listed Barclays Plc.  BSC carried out services for other Barclays entities under intragroup outsourcing agreements. Its only presence outside the USA was a UK branch, registered at Companies House as a UK establishment of BSC (the UK branch). 

The UK branch was established in 2017 to monitor and update the intragroup outsourcing agreements under which BSC provided services in the USA to other Barclays entities. This was part of a larger Barclays reorganisation made following new Prudential Regulation Authority and Financial Conduct Authority rules and guidance. When establishing the UK branch, Barclays Execution Services Ltd (BESL) applied to HMRC for the UK branch to join the Barclays UK VAT group. This was expected to create a very substantial tax benefit.

HMRC rejected the application on the grounds that:

(1) BSC was not eligible to be treated as a member of the VAT Group because, for the purpose of section 43A(1), Value Added Tax Act 1994 (VATA), it was not established, nor did it have a fixed establishment, in the UK; or

(2) alternatively, if BSC did have a fixed establishment in the UK, it was nevertheless necessary to refuse the application for the protection of the revenue, within the meaning of section 43B(5)(c), VATA.

BESL and BSC appealed HMRC's decision to the First-Tier Tribunal (FTT). The FTT heard evidence about the genesis and formation of the UK branch and on the UK branch's employees, with the principal issue being whether the UK branch of BSC constituted a ‘fixed establishment in the UK’ for the purpose of section 43A, VATA. If it did not, the UK branch could not be added to the Barclays VAT group. It was common ground that BSC itself was not established in the UK.

The FTT held, following guidance provided by the Upper Tribunal in HSBC Electronic Data Processing (Guangdong) Ltd v HMRC [2022] STC 367, that at the date of the application the UK branch had to possess or control sufficient human and technical resources in the UK to make a meaningful commercial contribution to the non-UK company (i.e. BSC). In this case, the application was made on 1 December 2017. However, due to a number of factors, the substantive employment of the relevant staff had not been transferred to the control of the UK branch by this date. At the time of the application, the UK branch's activities were only preparatory to the activities it would eventually carry out.

The FTT therefore rejected the appeal. In obiter comments, the FTT went on to opine that had the UK branch been established in the UK, HMRC would have been wrong to refuse the application for the protection of the revenue, within the meaning of section 43B(5)(c), VATA. The FTT refused to speculate as to the date from which the UK branch might have become established in the UK, such that an application to join the Barclays VAT group could have been successful.     

Why it matters:  This decision provides helpful guidance on the test to be applied when establishing a UK branch of an overseas entity for VAT purposes. In particular, it highlights the crucial importance of the timing of the application. An application made at a later date might well have been successful.

The decision can be viewed here.

TalkTalk Telecom Ltd v HMRC [2024] UKUT 284 (TC)

Talk Talk Telecom Ltd (TalkTalk) supplied fixed and mobile telephone, pay TV and internet access services to retail and commercial customers.  From 1 January to 30 April 2014, TalkTalk offered most of its retail customers a 15% 'speedy payment discount' (SPD) on bills paid within 24 hours of receipt; this was not provided for in the customer terms & conditions.  Only around 3% of customers actually received the discount.  TalkTalk accounted for VAT on the discounted amount in all cases, whether or not the customer had received the SPD.  HMRC issued a decision to the effect that this treatment was incorrect and that the SPD offer only operated to reduce the consideration for VAT purposes where the customer had actually paid (only) the reduced amount. HMRC therefore issued an assessment for £10.6m to recover the VAT that it considered had been underpaid.  TalkTalk appealed to the FTT, which dismissed its appeal. TalKTalk then appealed to the Upper Tribunal (UT).

Legislation

Until 30 April 2014, paragraph 4, Schedule 6, VATA, provided:

“(1) Where goods or services are supplied for a consideration in money and on terms allowing a discount for prompt payment, the consideration shall be taken for the purposes of section 19 as reduced by the discount, whether or not payment is made in accordance with those terms.

(2) This paragraph does not apply where the terms include any provision for payment by instalments.”  

In dismissing the appeal, the UT agreed with the FTT that the customers' contracts did not provide for a "discount for prompt payment", for the purposes of the legislation. Nor did the SPD constitute a unilateral variation to the terms and conditions of the customers' contracts. Rather, it was an offer by TalkTalk to vary the contracts in relation to the charges for services, the timing of the payment, and the payment method used, on a month-by-month basis, which was accepted (or not) by the conduct of the customer concerned.  In respect of services billed in arrears, the proper analysis was that the SPD constituted a rebate of consideration for the supply that was already due.  VAT was due on the full amount and TalkTalk's appeal was dismissed.

Why it matters: The UT has confirmed the helpful commentary on the treatment of discounts for VAT purposes provided by the FTT in its decision.  

The decision can be viewed here.

Go City Ltd v HMRC [2024] UKFTT 745 (TC)

Go City Ltd (Go City) sold two types of pass which entitled the purchaser to enter attractions and use some forms of transport in London without further payment.  Both types of pass were priced at a discount compared to the standard admission prices of the attractions.  Following extensive litigation between Go City and HMRC in relation to previous iterations of the passes, Go City amended its terms and the passes were held by the VAT Tribunal to be vouchers for the purposes of Schedule 10A, VATA, as then worded.

In 2019, the UK implemented the changes to the Principal VAT Directive brought about by the Voucher Directive.  HMRC considered that the Passes would not fall within the new definition as they were "instruments which functioned as a ticket".  Go City further restructured its arrangements, wishing to avoid further litigation.  Under the restructured arrangements, Go City sold a package of credits to a customer.  When the customer used their pass to gain admission to an attraction, the attraction would supply Go City with a right of entry charged at the rate agreed in their contract. Go City then on-supplied the right of entry to its customer, in consideration for a percentage of the sum paid for the pass.  This would use up a set number of credits.    

HMRC assessed Go City for VAT in excess of £8m, in relation to the periods after the restructure.  Go City appealed to the FTT.

The FTT had to determine whether:

(1) the first two assessments which had been issued by HMRC were out of time because, when they were issued, it did not appear to HMRC that Go City's VAT returns were incorrect (and so the condition in section 73(1), VATA was not satisfied);

(2) the supply of passes was outside the scope of VAT as they were multi-purpose vouchers for the purposes of Schedule 10B, VATA (and the Voucher Directive that it implemented) or whether they were instruments functioning as tickets;

(3) the restructured contractual arrangements rendered the supply of the passes outside the scope of VAT; and

(4) where a pass expired without having been used, all the money received from customers by Go City constituted consideration for its supplies.

The FTT allowed the appeal on all grounds.

On the first issue, it held that the first and second assessments had been issued to protect HMRC's position shortly before the expiry of the two-year time limit set out in section 73(6), VATA.  When they were made, neither the assessing officer or any other person within HMRC had a view that Go City's returns were incorrect, as evidenced in correspondence disclosed during the course of the hearing, and accordingly those assessments were out of time and invalid.

On the second issue, the passes were not "instruments functioning as tickets" and constituted "vouchers".  The FTT had regard to the decision of the CJEU in C-637/20 Destination Stockholm AB v Skatteverket, in which passes issued in a materially similar factual situation were held to constitute vouchers.

In relation to the third issue, the FTT agreed with Go City that the supply of passes was a supply of credits, and VAT was not due until those credits were used to enter attractions. 

In relation to the fourth issue, the FTT again agreed with Go City that where not all of the credits were used, part of the payment made for the pass did not constitute consideration for a supply and was not therefore subject to VAT.

Why it matters:  HMRC's practice of issuing "protective" assessments has long been deprecated by practitioners as there is no statutory basis for issuing such assessments. It is to be hoped that this decision is endorsed by superior courts.  Also of note is the pragmatic approach taken by the FTT to CJEU jurisprudence post-Brexit.

The decision can be viewed here.