From giant marshmallows to mega casinos: Top ten big VAT cases in 2024

1. Hippodrome Casino

“Casino’s big gamble on partial exemption doesn’t pay off”

Hippodrome had a casino venue which made a mixture of exempt supplies from gaming, and taxable supplies from hospitality and a theatre. It was therefore partly exempt for VAT purposes.

Hippodrome argued that the turnover-based standard method of input tax apportionment didn’t reflect its actual use of overheads and that a floor space apportionment method produced a more precise result. Consequently, it invoked the “standard method override”. Broadly, this standard method override requires a VAT adjustment to be made where the standard method produces a substantially different VAT recovery result than a deduction based on how costs are used.

The Upper Tribunal overturned the previous decision of the First-tier Tribunal and held that the use of a floor space method was “critically flawed” because it did not take into account the “dual use” of the hospitality and entertainment areas and their role in attracting customers to the premises, encouraging them to stay and thereby strengthening the (exempt) gaming proposition.

Consequently, the proposed override did not produce a more precise VAT recovery result than the standard method.

Given the complexity of partial exemption, cases on methodologies reach the tribunals and courts surprisingly infrequently. The Upper Tribunal took an interesting approach to the issue of “dual use” of costs. This could reopen arguments in other areas. In some instances, the logic could work against HMRC. It may be worth revisiting overrides and special methods in light of this decision.

The full decision is available here.

2. Aesthetic-Doctor.com

“Vanity or Vitality: Do cosmetic procedures (large or small) qualify as medical care?”

Supplies of services consisting of the provision of medical care by certain registered medical practitioners are exempt from VAT, provided the “purpose of the service is to diagnose, treat, and insofar as possible, cure diseases or health disorders including the protection, maintenance or restoration of health.”

Unfortunately, Aesthetic-Doctor.Com (“ADCL”), could not convince the First-tier Tribunal that treatments which maintain hairlines or restore a younger appearance fell within the definition of medical care.

ADCL lacked evidence to support its claims that the purpose of the cosmetic treatment was to treat health disorders, such as anxiety or depression. The lack of reference to diagnosis and treatment of any psychological conditions in patient file notes or in any follow-up action taken by the practitioners, meant the taxpayer failed to produce adequate evidence to solidify his testimony.

Simply put, patients wished to improve their appearance and whilst this could result in greater self-esteem and less anxiety it could not amount to medical care.

A key takeaway is that VAT liability often depends on the economic reality of the supply, and where the burden of proof is on the taxpayer, evidence which reflects this economic reality is critical.

The full decision is available here.

3. Prudential Assurance Company

“Big warning: beware of leaving the VAT group”

The tax point for a continuous supply of services falls on the date of the earlier of the issue of a valid VAT invoice or the receipt of a payment.

In the case of The Prudential Assurance Company Limited, Silverfleet Capital Limited (“Silverfleet”) ceased to be a member of a UK VAT group, of which Prudential was the representative member. Several years later, Silverfleet paid a management fee to Prudential under a management services agreement entered into whilst Silverfleet was a member of the VAT group. HMRC assessed for output tax on the payment of the management fee on the basis that a tax point had been created.

Prudential argued the management services were not subject to VAT because they were provided whilst the companies were members of the same VAT group.

However, the Court of Appeal ruled in favour of HMRC, finding that if a tax point falls after a company has been a member of a VAT group, the VAT grouping rules cease to be relevant, and the actual supplier is treated as making the supply. Consequently, VAT was due on the management services.

The case shows the need for vigilance when changing the composition of a VAT group as unforeseen and costly implications can arise. This will be of particular importance in the context of business reorganisations and especially where partly exempt businesses are involved. Permission to appeal to the Supreme Court has been granted so this is not yet the final say on the issue.

The full judgment is available here.

4. Hotel la Tour

“Big Deal or No Deal… Fees”

Hotel la Tour (“HLT”) sought to recover VAT incurred in respect of the sale of shares of its subsidiary, Hotel La Tour Birmingham Ltd, which was treated as exempt from VAT. The funds from the sale were intended to finance a new hotel development, a taxable business activity which HLT argued would entitle it to VAT recovery.

Initially, both the First-tier Tribunal and the Upper Tribunal ruled in favour of HLT, allowing the VAT recovery. However, the Court of Appeal overturned these decisions earlier this year, stating that the costs were directly linked to the exempt share sale, making the VAT on these costs irrecoverable.

HLT has now been granted permission to appeal to the Supreme Court.

This ruling emphasises the application of VAT rules regarding exempt transactions and highlights the challenges businesses face in recovering VAT on costs associated with share sales. The case will be of wide interest to many corporate groups who have been involved in share sales. With permission having been granted to the Supreme Court, we can expect some resolution in the not-too-distant future.

The full judgment is available here.

5. Silverdoor

“Shut the front door – no separate supply here (big or small)”

The provision of intermediary services relating to “the issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money” falls under the financial services exemption.

SilverDoor provided an intermediary service relating to the booking of short-term rental of properties such as hotels and serviced apartments. It charged a commission to property owners for its services.

Where a booking was made with a corporate credit card, SilverDoor charged an additional fee to cover its costs on card processing. It argued that this additional fee represented a separate supply of a financial intermediary service. The Upper Tribunal held that the additional fee was ancillary to a supply made by SilverDoor to the corporate customer (even though no other charge was made to this customer) and could not be regarded as an independent supply to customers. Therefore, the VAT treatment of the processing fee was held to be subject to VAT.

This decision follows that of recent EU case law and upholds a strict interpretation of the financial services exemptions.

The full decision is available here.

6. Queenscourt

Big disappointment: “Queenscourt's saucy VAT refund goes sour”

Queenscourt operated various KFC franchises across the UK, and up until 2019, it had accounted for VAT on the basis that dip pots supplied with a takeaway meal formed part of a single, standard-rated supply of hot food.

However, the taxpayer later changed its view, arguing that the dip pots should be considered a separate, zero-rated supply. Subsequently, it submitted an error correction to HMRC to recover the overpaid VAT. HMRC accepted the initial submission and repaid the VAT, but rejected the second submission that followed a year later, on the basis the dip pots formed part of a single, standard-rated supply. It also raised a recovery assessment in respect of the VAT previously repaid relating to dip pots.

The First-tier Tribunal found that the supply of the dip pot was a means for better enjoyment of the hot food, and it was an accompaniment to the meal, as opposed to an item that is consumed in its own right, and the appeal was dismissed. The earlier repayment of VAT was described by the First-tier Tribunal as a ‘mistake’ by the previous HMRC officer and this had no impact on the validity of the assessment raised by HMRC. The First-tier Tribunal also held that the taxpayer did not have a “legitimate expectation” which prevented HMRC from being able to raise the recovery assessment.

This case is a reminder that there are frequently difficult decisions to be made on whether a package of elements constitutes a single supply subject to one rate of VAT or multiple supplies which are potentially subject to different rates of VAT. It also shows that just because HMRC appears to have accepted a point, this doesn’t mean it won’t be able to come back later and challenge the approach taken.

The full decision is available here.

7. SC Adient

“Establishment ruling takes a big toll”

The establishment of a business helps to determine the relevant place of supply for VAT purposes. There are two types of establishments: business; or fixed.

In SC Adient, the CJEU had to decide if SC Adient Ltd & Co. KG (‘’Adient Germany’’) had created a Romanian fixed establishment by virtue of its Romanian subsidiary. SC Adient Automotive Romania SRL (“Adient Romania’’) was a Romanian toll manufacturer and a subsidiary of Adient Germany. It only provided services to its German principal.  If a fixed establishment was created, then the services supplied would be subject to Romanian VAT.

The CJEU ruled that the mere fact the manufacturer was part of the same corporate group as the German principal did not create a local fixed establishment for Adient Germany in relation to the services supplied. To create a fixed establishment, Adient Germany would have to have the necessary human and technical resources to operate its business and create or receive taxable supplies. The fact that the staff from the subsidiary could access a shared accounting system and make entries was not enough to create an establishment, and neither was the availability of a storage facility for usage by Adient Germany.

The decision is in line with similar recent case law and provides further clarity of fixed establishment principles, especially concerning groups of companies. Businesses that have been challenged in similar circumstances should take note.

The full judgment is available here.

8. Barclays Service Corporation

 “UK branches of overseas businesses in the crosshairs”, especially when they are not big enough.

Overseas companies can join UK VAT Groups where certain eligibility conditions are met. One of the conditions is that they must have a fixed establishment in the UK for VAT purposes.

Where a VAT Group is partly exempt this can give rise to a significant VAT benefit; the overseas entity provides services to members of the UK VAT group, but these services are disregarded instead of being subject to reverse charge VAT. An anti-avoidance reverse charge can apply but it is effectively limited to bought-in services.

In Barclays Service Corporation, the benefit of including an overseas company within the VAT Group was in the millions each year. On the facts of the case, the First-tier Tribunal held that HMRC was entitled to reject the taxpayer’s VAT grouping application because the overseas company did not have a UK fixed establishment at the time the application was made. This was because the branch was still in the process of being set up and so the overseas company did not have the necessary control of human and technical resources in the UK.

VAT grouping arrangements that involve UK branches of overseas companies are an area of focus for HMRC. This year we have seen HMRC continue to target and scrutinise such arrangements, particularly in the financial services and insurance sectors. We understand that Barclays has been granted permission to appeal the FTT decision, so this is certainly one to watch over the next year.

The full decision is available here.

9. Go City

Big news: “protective assessments may not offer much protection”

Go City is an interesting First-tier Tribunal decision about the VAT status of an attraction pass that allowed consumers to access a variety of sights and activities across London. The attraction pass was structured as a credit package, with credits being used up each time an attraction was accessed, subject to a maximum limit.

The taxpayer treated the initial sale of the passes as outside the scope of VAT and never accounted for VAT on the unused credits when the passes expired. HMRC raised assessments for underdeclared VAT, including two assessments to “protect HMRC’s position”.

There are several important issues discussed in this case. Notable elements included:

·       HMRC’s protective assessments were not valid because they were only raised to be within statutory time limits and before a fully considered decision had been made;

·       The passes were “multi-purpose vouchers” for VAT purposes;

·       The initial supply of the passes was also a “preliminary transaction” which was outside the scope of VAT;

·       VAT did not need to be accounted for on the portion of income that was attributable to unused credits.

There is much to take away from this case, including the limits on HMRC’s powers to issue protective assessments, the interpretation of the current VAT voucher rules and the VAT complexity that can arise when dealing with credits packages and similar arrangements.

The full decision is available here.

10. Innovative bites

“Sweet decision for mega marshmallow seller”

The distinction between zero-rated food and standard-rated confectionary for VAT purposes has been a long-standing contentious area of VAT law. Generally, food for human consumption is zero-rated, including most basic food items e.g. produce and ingredients. However, several food items are specifically excepted from the zero-rating, one of which being ‘confectionary’, meaning items such as sweets, chocolates and some biscuits (but not cakes) are standard-rated for VAT purposes.

In Innovative Bites Limited the taxpayer was a wholesaler of ‘Mega Marshmallows’, treating the large marshmallows as falling within the zero-rating for food. HMRC however, disagreed and classified the goods as confectionery issuing assessments for the unpaid VAT.

The taxpayer previously successfully appealed to the FTT, which held the product was not confectionery on the basis it waspredominantly used for roasting and was marketed and packaged in a way that clearly differentiated the marshmallows from standard-rated confectionary. This year HMRC unsuccessfully appealed to the Upper Tribunal which rejected HMRC’s wide interpretation of the VAT legislation on “confectionery”.

The VAT rules on food can be ambiguous and incorrect classification can be costly. Businesses need to be prepared to provide detailed evidence demonstrating the intended use and consumer perception of the product to support VAT classification.

The full decision is available here.