Tag: VAT

VAT for Schools – Fees in Advance Schemes

Posted on by Alicia Sprott

But before sticking my head above the parapet, I will return to the first of these (to date) articles when I ventured into political punditry for the first time to speculate on how long schools might have to prepare for VAT on school fees and own up to losing the 50p bet I had on there being an Autumn General Election in October.

Rishi Sunak caught me completely off guard (along with, by all accounts, many of his own Party), as- at the time of writing this we are now five days after the election. October may still be significant, though now in the context of when the first Budget for the new Government is held.

But to return to Fees in Advance, schemes allowing for the payment of school fees in advance have been around since before VAT was invented. The advantage for parents was, in most cases, a small discount on school fees. For the school, it provided access to a pool of money which was cheaper than bank borrowing.

Other motivations included using bonuses to pay for school fees where a person had exceeded the limit for pension or ISA contributions, grandparents wishing to help out their children, or parents taking advantage of a windfall, such as an inheritance.

Since the possibility of VAT being introduced on school fees became more likely, the question of whether paying in advance could beat a VAT charge also became part of the equation.

The technical answer

Technically the answer is yes. The VAT legislation contains provisions which determine when a supply is made. There are good reasons for these, not least so a taxpayer knows when they have to declare VAT, i.e. the return when the supply was made.

The starting point for services is that a service is deemed to be made when it is performed. But the legislation goes on to say that if before that time, a VAT invoice is issued or payment is received, then the legislation says that the supply is deemed to be made at the earliest of these three dates:

  • Date of performance of service.
  • Date of issue of the VAT invoice.
  • Date of receipt of payment.

With a service like education, which is performed over a period of time, the use of the date of performance to set the time of supply becomes even more problematic. The VAT regulations deal with “continuous supplies of services” in Regulation 90, which again refers to the date of issue of a VAT invoice, or the date of receipt of payment, as crystallising a time of supply to the extent covered by the invoice or payment.

But that’s the wrong answer!

From the point of view of an incoming Labour administration, that is unlikely to be welcome so the question of what, if anything, can be done about it remains.

It seems to me there are three possible lines of attack, retrospective legislation, a novel interpretation of existing legislation, or an attack on VAT avoidance grounds. If we look at these in turn my thoughts are as follows.

Retrospective legislation

This obviously cannot be ruled out, but shortly before the Election, the then Shadow Chancellor, Rachel Reeves, indicated that she had no intention of introducing retrospective legislation. If this commitment is adhered, then it deserves credit for being both morally right and also pragmatic.

From the moral point of view, to retrospectively penalise somebody for doing something which is entirely legal at the time they do it just doesn’t seem right.

But from the pragmatic point of view, realistically how much VAT will not be paid if parents do choose to pay in advance? I suspect the answer is not very much since it will only be the very wealthiest people who can choose to make payments in advance for many years. Some might be able to dip into savings, or remortgage to pay a year or so. But far more will simply not be able to afford to pay in advance as they struggle to afford the fees anyway.

Secondly, retrospective legislation is unlikely to be easy to achieve. There are two aspects to this. Firstly, human rights legislation guarantees an individual the right to the peaceful enjoyment of their possessions. There is a carve out which allows governments to take away your possessions in the form of taking money through taxation. But it is far from clear that the European Court of Human Rights (ECHR) would allow this to extend to giving a government the right to retrospectively impose a tax, and Labour, unlike the Conservatives, are unlikely to leave the ECHR.

The other UK Courts might also have something to say about this, as VAT remains largely governed by EU VAT legislation and this extends to what is now referred to as assimilated EU case law. The case which seems likely to be relevant here is that of Marks & Spencer [Case C-62/00]. The current time limit for correcting errors is four years, but prior to 1995, it was six years. HMCE (now HMRC) was concerned about the possible impact of a case going through the European Court of Justice (ECJ) and shortened the time limit from six years to three years with no notice.

The case they were concerned about came to nothing, but it did impact Marks & Spencer, who were in the process of making a claim for VAT they had overpaid on teacakes (not Jaffa Cakes!). The ECJ ruled that the Government had been wrong to shorten the time limit without an effective transitional period, as it retroactively deprived taxpayers of their right to make a claim.

Whilst the facts are different, the Court’s opposition to retrospective legislation does highlight the potential difficulties an attempt to implement it would face and it may well be that the Chancellor had concluded that for the amount of money at stake, it simply wasn’t worth trying it.

Retroactive legislation

However, whilst retrospective legislation seems to have been ruled out, retroactive legislation is highly likely in the shape of anti-forestalling provisions. This is nothing new and one only has to think back to old Budgets when we were told “fags and booze go up by a penny at midnight” for an  example of an anti-forestalling provision in that  the Provisional Collection of Taxes Act 1968allows for this tax to be collected, even though the Finance Bill still had to go through two readings in the Lords and Commons, and would not become a Finance Act until it had received Royal Assent, circa three months later.

For schools, what is likely to happen is that the Chancellor will make a statement announcing the date that the change in VAT legislation is to take effect from (now likely to be September 2025), and that payments made after the date of the statement, but relating to education supplied after the date of the change in legislation, will be subject to VAT.

The difference between retrospective and retroactive legislation is that in the latter you are being told in advance that something will be taxed from a future date, but with retroactive effect, as opposed to being told after the event that something you did will now be taxed.

A new interpretation of existing legislation

If payment in advance cannot be stopped by retrospective legislation, the next question is could it be stopped by a novel interpretation of existing legislation?

It seems to me that there are two possible arguments. The first of these would be to seek to argue that the time of supply rules should be set aside and that any payment received in advance should be deemed to relate to the period for which it is paid, e.g. £5,000 paid now for education in the spring term of 2026 should be brought to account in spring 2026 and is therefore subject to VAT.

A difficulty with this argument is that it is contrary to what HMRC has recently successfully argued before the Court of Appeal. The case involved was the Prudential case (Prudential Assurance Company Ltd v Commissioners for Her Majesty’s Revenue and Customs) which concerned fund management services supplied by one company in the s VAT group to another. Supplies between members of the same VAT group are disregarded, so at the time the work was done, no VAT was chargeable.

The company which had supplied the investment management services subsequently left the VAT group following a management buy out and about seven years later, became liable to receive some additional fees based on the performance of the investments it had managed. As it was now outside the VAT group, it issued VAT invoices charging VAT on the amounts it was due. The Prudential challenged this, saying that no VAT was due because the work was done at the time it was in the VAT group and HMRC supported the company that was due the performance related fees by saying VAT was due because the issue of the VAT invoice and receipt of the performance related fee created a new time of supply.

The Prudential won at both First and Upper Tribunal, but HMRC succeeded by a 2:1 majority decision at the Court of Appeal which held that the deemed time of supply created by the bonus overrode the time the actual work was done because there was no supply in respect of it at that earlier time.

It would therefore be difficult for HMRC to now argue that you can ignore what the law says unless, of course, the case is appealed to the Supreme Court and the Prudential win.

The other possible novel interpretation of the time of supply rules dates back to a case which started in the late nineties, where in anticipation of the removal of the zero-rate from certain drugs and prostheses, a company in one of BUPA’s VAT groups entered into a pre-payment scheme with an associated company. The ECJ held that for the pre-payment scheme to be effective, the specific goods or services must be specifically identified at the time the payment is made.

The question then is whether this could prevent a pre-payment from crystallising a time of supply. The difference of course is quite significant in that in the BUPA case, the pre-payment would be called off against undetermined drugs or different types of prostheses to be decided upon at a later date.

Here the payment is specifically for a supply of education, so the services have been identified at the time the payment is made.

VAT avoidance

That leaves the question of whether a Fees In Advance scheme could be attacked as VAT avoidance. The lead case here is the principle advanced in the Halifax case by the ECJ [Case 255/02] of “abuse of rights”. This allows a tax authority to recategorise a transaction which has been entered into to obtain a tax advantage which it should not be able to obtain.

In the case of the Halifax, they were seeking to reclaim VAT on costs, even though those costs were overwhelmingly used in making exempt supplies. The Court held that, where this principle applied, a tax authority could remake or recategorise the transaction to what it should have been. In the case of fees in advance, HMRC could use it to allocate pre-payments to the relevant terms after a change in legislation.

However, the key point in the Halifax case is that recategorisation only applies where a transaction is entered into solely to avoid VAT, and in the case of fees in advance, as set out above, such schemes have been around for many years and other reasons.

Clearly, some parents fortunate enough to be able to make an advance payment will do so in the hope of paying no or less VAT. But, that is not the motivation of the school for operating the scheme, or for the parents who have been availing themselves of Fees in Advance schemes before.

It seems to me that Fees in Advance schemes could only be attacked on Halifax avoidance grounds if it had been set up just for parents to avoid paying VAT and the school had been publicising it as such, but even then, the school derives no VAT advantage from it.

Conclusion

Whilst we cannot rule out an attack on payments made in advance of a change in legislation, it does seem unlikely that such an attack would be successful, and it does not look as though the new Government intends to, though they will almost certainly seek to curtail it through anti-forestalling legislation.

The real downside to this is that it does reinforce the stereotype that Independent Schools are for the very privileged who can afford to stump up tens of thousands of pounds in advance, which is far from being true for very many parents who struggle to put their children through independent schools.

Perhaps the answer to that would be for Labour to have been more honest by increasing Income Tax for the very wealthiest who will be able to afford to pay VAT on school fees, with perhaps a levy on overseas pupils who would not otherwise pay UK Income Tax.

For further advice, contact Phil Salmon directly or a member of the VAT team.

VAT for Financial Services: position of financial intermediaries

Posted on by Alicia Sprott

 

In this video, Dougie explores:

  • What defines an intermediary?
  • The conditions for VAT exemption.
  • The complexities of VAT liabilities in corporate finance transactions

You can view earlier videos in the series below:

For further advice, please contact Dougie directly.

VAT for Financial Services: position of UK fund managers

Posted on by Alicia Sprott

 

Within this video, Dougie clarifies:

  • The definition of ‘management’ for VAT purposes.
  • The specific conditions under which fund management services can be VAT exempt.
  • The types of funds eligible for these exemptions.

You can view the additional videos in this four-part series below:

For further advice and assistance with your VAT obligations, contact Dougie Todd.

VAT position for UK fund managers

Posted on by Alicia Sprott

VAT exemption on fund management

Fund management services in the UK are generally exempt from VAT. This exemption aligns with the broader treatment of financial services under VAT regulations. However, the exemption is dependent on satisfying specific conditions, highlighting the intricacies of VAT legislation in the financial sector. If the conditions for exemption are not met, then the supplies are subject to UK VAT.

What is meant by ‘fund management’?

For VAT purposes, fund management is the management fee charged by fund managers, which can be deducted from the fund’s assets or charged directly to investors. Importantly, the scope of what constitutes management can also extend beyond asset management. It also includes general administrative services and delegated third-party services, provided these services collectively embody the characteristics of fund management.

Conditions for VAT exemption

The nature of the fund under management is a key criterion in applying the VAT exemption. The exemption applies to nine different types of funds. In essence, fund management services are exempt if you:

  • Manage funds or collective investment schemes which are being marketed to retail investors in the UK;
  • Manage UK pension funds; or
  • Manage funds which are close-ended collective investment undertakings admitted to trading on a regulated market situated or operating in the UK.

It is therefore important that fund managers fully understand the nature of funds under management and how those funds are defined within UK VAT law, to determine whether its supplies are VAT exempt.

Fund management services are excluded from the list of specified supplies, which means managers making VAT exempt supplies to non-UK funds are not entitled to any VAT recovery on costs which are attributable to those supplies.

Regulatory developments

In 2023, HMRC launched a consultation aimed at simplifying the definition of qualifying funds for VAT exemption purposes. In December 2023, HMRC published its response to the consultation. The response failed to address a number of points that respondents to the consultation had raised, and which could have significantly clarified the VAT legislation as it applies to UK fund managers.  Instead, the only change to the position of fund managers is that from 1 January 2024, UK fund managers will no longer be able to rely on the EU VAT law applying to their services.  This is significant as the EU law has traditionally been drawn more widely that the UK legislation and may limit the ability of UK fund managers to rely on VAT exemption for their services.

Seeking professional VAT advice

Given the complexities involved in identifying eligible exemptions, fund managers are encouraged to seek professional VAT advice. As the sector anticipates regulatory, strategic VAT compliance and planning is becoming increasingly vital. Fund managers are advised to stay informed about legislative developments and seek expert guidance to ensure compliance and optimise their VAT position.

For further advice on any of the above, contact Dougie Todd, Partner and Co-Head of VAT.

 

VAT: Making and receiving overseas supplies

Posted on by Alicia Sprott

 

Watch the video to understand:

  • VAT treatment in international supplies
  • The specified supplies rule
  • The reverse charge mechanism

You can view the additional videos in this four-part series below:

You can also read further detail here. For further advice and assistance with your VAT obligations, contact Dougie Todd.

VAT on international supplies in financial services

Posted on by Alicia Sprott

This article aims to explain the principles and practices surrounding VAT on international supplies within the financial services sector, providing valuable insights for businesses aiming to navigate these waters effectively.

VAT treatment in international supplies

The VAT implications of international transactions hinge on the place of supply rules. These rules determine whether a supply is made in the UK or outside of it and, consequently, whether UK VAT is chargeable. Generally, the place of supply for financial services to non-UK customers is where the recipient belongs, making most of these services outside the scope of UK VAT. This can have significant implications for VAT recovery on costs.

Financial services businesses are largely exempt from VAT (our previous article here talks more about VAT exemptions).  If the businesses’ customers are outside of the UK, generally, the supply of services continues to be VAT exempt. The absence of VAT can make UK-based FS firms more attractive to foreign customers.

However, the VAT exemption for services provided to non-UK customers also means that related input VAT on costs incurred in providing these services may not be recoverable. This aspect underscores the importance of understanding the specific rules that apply to the financial services sector and how they impact VAT recovery strategies.

Exporting services to non-UK customers: Specified supplies

As per UK VAT legislation, specified supplies (referring to a defined set of services and intangible goods) exported to non-UK customers are still considered VAT exempt and any input tax incurred which is directly attributable to those supplies can be recovered in full.

In essence, specified supplies are subject to special VAT treatment when supplied between businesses across borders. This special treatment is designed to simplify VAT accounting for businesses operating internationally and to ensure that UK suppliers of financial services are not disadvantaged from a VAT perspective.

VAT on services received from non-UK suppliers: Reverse charge

In most cases, when UK businesses receive services from non-UK suppliers, the supplier will not charge UK VAT. However, in order to account for VAT, the reverse charge mechanism is applied. This shifts the responsibility for VAT reporting from the supplier to the recipient of the service.

Under the reverse charge, the supplier does not charge VAT on their invoice for the service supplied. Instead, the recipient of the service in the UK must account for VAT as if they had made the supply themselves, by paying 20% of the value of that cost to HMRC. This involves reporting the VAT on their VAT return, both as output tax (as if they had supplied the service) and as input tax (reflecting the VAT on the purchase), subject to the normal rules of VAT recovery.

The business must then consider whether any or all that VAT is recoverable as input tax using the normal partial exemption rules. As UK financial services businesses often suffer an irrecoverable VAT cost, this reverse charge mechanism can mean that these businesses cannot recover all or some of the VAT paid to HMRC

This mechanism prevents the need for suppliers to register for VAT in every EU member state where they have customers, simplifying international trade within the VAT area. It also ensures that VAT is accounted for in the Member State where the recipient is based, aligning with the principle that VAT should be charged in the location where services are consumed.

The final, important point is that the value of these ‘reverse charge’ services needs to be included in the VAT registration threshold calculation for the UK recipient. So, if a financial services business, which isn’t otherwise required to be registered (as it makes VAT exempt supplies which are not included in the turnover calculation), receives non-UK services, the value of which is over the registration threshold, the business is required to register for UK VAT and pay VAT to HMRC.

Impact on UK businesses

The key things to takeaway are:

  • For UK based financial services businesses supplying services: When supplying specified services to a business customer in another country, the UK supplier does not charge VAT. There is a possibility of recovering some or all of the VAT on costs if the services are specified supplies, but the business must still ensure that its VAT reporting practices are compliant.
  • For UK based financial services businesses receiving supplies from non-UK suppliers: When receiving supplies from abroad, the business must apply the reverse charge on its VAT return. This means they must account for both the output VAT (as if they had made the supply themselves) and reclaim the input VAT (as per the normal rules), provided they are entitled to recover VAT on their purchases.
  • Understand place of supply rules: Businesses should thoroughly understand the place of supply rules to determine the correct VAT treatment for international services.
  • Optimise VAT recovery: By structuring transactions and operations efficiently, FS firms can maximise their VAT recovery on both domestic and international costs.
  • Compliance and reporting: Compliance with the rules surrounding specified supplies and the reverse charge mechanism requires careful attention to the nature of the supplies, the status of the customer, and the country involved.

Given the complexity and potential impact of specified supplies on VAT liabilities and cash flow, businesses engaged in international trade of services should seek professional advice to navigate these rules effectively. Proper management and compliance can help avoid costly mistakes and penalties while ensuring smooth international transactions.

Contact Dougie Todd, Partner and Co-Head of VAT, for further advice.

The basics of VAT in the Financial Services sector

Posted on by Alicia Sprott

The impact of VAT and exemptions

VAT presents unique challenges for the sector. Given the intangible nature of many financial products, determining the applicability of VAT can be complex. The impact of VAT on FS businesses is multifaceted, affecting pricing strategies, service delivery models, and overall tax compliance.

Many financial services are exempt from VAT in the UK. This exemption covers a wide range of services, including insurance, granting of credit, certain transactions in securities, and others. In HMRC’s guidance, debt collection services or certain portfolio management services are VATable. When a supply is classed as VAT exempt however, no VAT is charged on the sale of that service to the customer. Banking services and certain types of investment activities often fall into this category and other VAT regimes globally.

VAT recovery in financial services businesses

While VAT exemption can make services more competitively priced (as there is no VAT to pass on to the customer), it also means the provider cannot recover VAT on purchases related directly to these exempt supplies, leading to a potential increase in overhead costs. Therefore, the extent to which FS businesses can recover VAT is limited by the nature of their exempt supplies. Effective VAT recovery strategies are essential for FS businesses to manage their tax liabilities and enhance profitability.

Partial exemption, direct attribution, and residual costs

For FS businesses that make both taxable and exempt supplies, navigating VAT implications requires a nuanced approach. Partial exemption rules allow businesses to recover VAT on purchases to the extent that they are used to make taxable supplies. This involves a two-step process:

  1. Direct attribution: Costs are first analysed to determine whether they can be directly attributed to taxable or exempt supplies.
  2. Residual costs: Costs that cannot be directly attributed (residual costs) are then apportioned between taxable and exempt activities, using a fair and reasonable method.

Determining the correct amount of VAT that can be recovered under partial exemption rules requires careful calculation and can impact the business’ overall VAT liability.

The turnover method

The standard method for calculating recoverable VAT on residual costs is based on the turnover of the business. This method apportions residual input VAT in line with the proportion of the business’ taxable supplies to its total supplies. While this method is commonly applied, it may not always reflect the actual use of goods and services. Businesses can apply for a special method if they believe an alternative approach better reflects their use of inputs.

Understanding your VAT obligations

Understanding the complexities of VAT within the sector is crucial for compliance and optimisation of your business’ tax position. By effectively managing VAT recovery, understanding the implications of exemptions, and accurately applying partial exemption calculations, FS businesses can position themselves for success in the competitive UK market. It is advisable for FS businesses to seek expert advice to navigate the intricacies of VAT legislation and ensure compliance with all regulatory requirements.

Contact Dougie Todd, Partner and Co-Head of VAT, for further advice.

VAT for financial services: The basics

Posted on by Alicia Sprott

 

Watch the video to understand:

  • The impact of VAT on the sector
  • VAT recovery
  • Partial exemptions, direct attribution and residual costs

You can view the additional videos in this four-part series below:

For further advice and assistance with your VAT obligations, contact Dougie Todd.

The clock is ticking – VAT on school fees

Posted on by Alicia Sprott

Until such time as legislation is published, any comments I do make are speculation, though after spending most of my working life as a VAT specialist, they are, I hope, informed speculation.

How long will schools have to prepare?

Let’s start with my first venture into political punditry as to how long schools might have to prepare. If we roll back the clock to the end of last year, there was some speculation that the Prime Minister might call an early  election in perhaps March 2024 following a tax cutting Budget in the Spring. The possibility of that seemed to recede due to the state of the economy and comments from the Chancellor that he would not have as much
headroom as hoped for a giveaway Budget.

That said, there is still pressure from the far-right wing of the Conservative party to slash taxes and in recent weeks the possibility of a May election has been mooted, despite comments from the Prime Minister that he was not
contemplating an early election. For what it’s worth, my 50 pence was on an Autumn election in either October or November, and probably the former. In recent weeks there has been talk that the Government is moving away from the idea of a November election towards one in October so that the news cycle is not dominated by events in the US should Donald Trump be elected for a second term.

In the event this does happen, I will not be able to pat myself on the back too much since my own reasons for thinking October was a possibility were based on very different reasons, largely to do with the British weather.

It is, after all, no secret that the demographics of the Conservative Party tends to be made up of older people (I hope that as a grandfather and someone who became entitled to collect a pension last year, I can say this without offending anyone). My view was that an election in October, and possibly before the clocks went back, stood a better chance of maximising the Conservative vote than one in November when it was dark and rainy, let alone one  in December or January in the run up to Christmas, with even darker, wetter weather with ice and snow perhaps preventing people getting out at all.

So where does my straying into (for me) new territory take us? Quite simply that a year is not a great deal of time to prepare for what, if it happens, will be a fundamental change for independent schools, and we may well not even have a year.

It is said that the first two stages of grief are denial and anger and much of the last couple of years have been taken up with that, but the final stage is acceptance. I think schools now need to accept it is highly likely (if not  inevitable) that VAT on school fees will happen.

With a limited amount of time, what action should schools be taking?

Firstly, I think this is too big a change to simply leave it to Bursars. They will need help, so I think that if they have not already done so, schools should be setting up a working party with Governors and the Head involved, as well as finance staff.

Secondly, and bearing in mind that absent sight of draft legislation, schools cannot predict exactly what will change, therefore the working party should be drawing up an action plan of what steps they can take to mitigate the  impact of VAT being introduced.

The plan should attempt to set out the order in which action should be taken, prioritising those that have the largest financial impact and the greatest likelihood of working at the top, so that even if a school cannot work through all of the areas, it can work through some of the most important at least.

Mitigating the impact

Over the last couple of years, various commentators have set out their thoughts of ways in which the amount of VAT that will need to be charged can be reduced. As a VAT specialist, I will set out my views on some of these areas over the next few months.

But mitigation of the impact of such a change is not solely confined to ways in which the VAT bill can be reduced. It will encompass various things, such as how much fees will need to be increased by, and how much a school might bear itself at least over the first few years after a change. This might impact on reserves policies and how much support schools can afford to give by way of bursaries and scholarships. However, such things are outside my specialism, so I leave them to others better qualified to opine.

For now, here is a list of some of the VAT aspects which schools should consider and which I will look at in more detail over the next few months:

  • Accounting packages
  • Assisting state schools
  • Being VAT registered
  • Boarding
  • Bursaries
  •  Bussing
  • Capital Goods Scheme
  • Expenditure
  • Extras
  • Fees in advance
  • Nurseries

For further advice, contact Phil Salmon directly or a member of the VAT team.

VAT recovery on sale of shares in subsidiary companies

Posted on by Alicia Sprott

The UTT dismissed HMRC’s appeal against the decision of the First Tier Tribunal (FTT), which found that in certain circumstances, businesses which sold shares in subsidiary companies to fund their downstream, taxable activities, should be entitled to recover VAT incurred on the costs of the share sale. This decision allows businesses involved in the sale of subsidiary companies, like HLT, to recover VAT, which may have been previously blocked, by now making claims to HMRC.

The facts

HLT is a holding company and owned the entire share capital of Hotel La Tour Birmingham (HLTB). HLTB owned and operated a luxury hotel in Birmingham and HLT provided it with management services, which included the provision of key personnel, such as the general manager. In 2015, HLT decided to build a new hotel in Milton Keynes, which was anticipated to cost approximately £34.5 million.

To finance this development, HTL decided to sell HLTB and to borrow the shortfall from a bank. It was considered that HLTB’s business had reached the stage where it could grow no further. HLT engaged various advisors to provide professional services to assist in the sale of HLTB, including market research, buyer shortlisting, financial modelling, and tax compliance. This was with a view to obtaining the highest sales price available, which would provide for the largest sum possible to fund the new development.

HLT sought to recover the input VAT incurred on the professional services, but HMRC denied recovery on the basis that the input VAT was attributable to the VAT exempt sale of the shares. Despite HMRC’s position being based on well-established case law that businesses can only recover input tax based on the supply to which the VAT is immediately attributable (i.e. the European Court of Justice decision in the case of BLP Group plc v Commissioners of Customs & Excise), HLT appealed to the FTT against HMRC’s ruling.

The FTT’s decision

The FTT considered that previous case law made clear that VAT on professional services for a fundraising transaction, which was either outside the scope of VAT or exempt from VAT, was not blocked if:

  • The purpose in fundraising was to fund a business’ economic activity;
  • The funds are later used for taxable supplies; and
  • The costs of the services are cost components of downstream activities, which are taxable.

The FTT concluded that the whole of the consideration, received by HTL for the sale of shares, had been used towards the development of the Milton Keynes hotel. HMRC initially argued that HLT was not carrying out an economic activity because the management services were provided by employees who were directors of both HLT and HLTB, rather than being provided by HLT. However, in a subsequent letter, HMRC accepted that sufficient management services were provided by HLT to constitute an economic activity. HMRC instead maintained that the professional services, which gave rise to the fees on which VAT was charged, were used in making an exempt supply (sale of the shares in HLTB), rather than in making taxable supplies.

The FTT found that there was a direct and immediate link between the professional services and HLT’s downstream taxable economic activities, and that the VAT should not be attributed to the sale of the shares in HLTB. In the FTT’s view, the relevant purpose for HLTB’s sale was for fundraising and the relevant use was to fund the development of the Milton Keynes hotel. It was clear from previous case law that the use of professional services for the initial fundraising transaction did not break the link between the input VAT and the downstream supplies. The link would only be broken where the cost of the inputs was a cost component of the price of the shares in the initial transaction.

Applying these principles to the facts of the appeal, the FTT found that the purpose of the share sale was to fund HLT’s taxable activities and that the VAT incurred should be recovered as if the costs were business overheads. That is to say, if HLT was fully taxable, the VAT incurred should be fully recoverable, or otherwise recoverable in line with the general residual VAT recovery under a partial exemption calculation.

The FTT dismissed other arguments presented by HLT, regarding the implications of VAT grouping and the possible application of the transfer of going concern.  However, based on the FTT’s decision regarding the attribution of input VAT to HLT’s taxable, downstream activities rather than to the exempt share sale, HMRC requested, and were granted, the right to appeal the FTT decision to the UTT.

The UTT decision

The UTT dismissed HMRC’s appeal against the FTT’s decision. In its findings, the UTT stated that the FTT was correct when it applied a “modified approach” in interpreting attribution of VAT on “deal fee” costs. This modified approach recognises that the VAT costs incurred on services for a fundraising transaction are not automatically restricted, provided the three key conditions identified by the FTT and listed above are met.

Next steps

It is not currently clear if HMRC intend to further appeal to the Supreme Court or if it will issue a Revenue and Customs Brief addressing the decision. However, the UTT decision creates a legally binding precedent, and all businesses which have restricted VAT recovery on share sales in the last four years, in facts similar to this case, should consider whether they are in a position to support and submit VAT repayment claims.

If you think you may be affected by the UTT decision or if you want to discuss VAT and financing issues more generally, please contact Dougie Todd, VAT Partner, or your usual haysmacintyre contact.

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