Employment taxes

January 2024

Third-party payments were taxable employment benefits

The First-tier Tribunal (FTT) found that gifts made to employees from the chairman’s own pocket were taxable as employment income. They were made by reason of employment.

On sale of a company, the majority shareholder – who was also the chairman – made payments to the employees from his personal resources, although paid through the company. PAYE and national insurance contributions were initially deducted, then the company tried to reclaim this on the grounds that these were non-taxable gifts.

The FTT found for HMRC that these payments were taxable. They were not direct earnings, but should be taxed as employment benefits. Although freely made gifts, the reason the employees got them was by reason of their employment, they had no independent relationship with the chairman. The payments were also calculated by length of service.

OOCL UK Branch v HMRC [2023] UKFTT 996 (TC)

From Tax Update December 2023, published by Evelyn Partners LLP

Inducement to accept changes to pension scheme found to be earnings

The Court of Appeal (CA) has overturned an Upper Tribunal (UT) decision, finding that payments made to employees to compensate for future reduced pension payments were taxable as earnings. The payments were made to induce the employees to work willingly in the future, not just to put them in the same position as before.

A large company decided to change its pension scheme arrangements and made payments to employees to facilitate the change. HMRC held that for 1,100 of the employees the payments derived from the employments and should be subject to income tax and national insurance contributions as earnings. The First-tier Tribunal (FTT) agreed with HMRC, finding that the change to pension arrangements was part of a wider renegotiation of working conditions and could not be separated from the integrated package. Although the employees lost a right to purchase additional pension benefits, only 7% of scheme members used that right.

The UT overturned that decision, finding for the employer that the payments were compensation for the expected lower pension payments and reduction in future employer contributions, so were non-taxable as they simply put the employees in the same position as before the change.

The CA overturned the UT decision and reverted to the FTT view. It found that the rule the UT had applied, which originated in an earnings from work case, did not have to apply to pension rights. The payments were an inseparable part of an overall package offered to compensate for a loss in another area. The payments were earnings.

HMRC v E.ON UK Plc [2023] EWCA Civ 1383

From Tax Update December 2023, published by Evelyn Partners LLP

VAT

January 2024

VAT exemption for contact lens dispensing services

High-street opticians frequently allocate part of the price of contact lenses to VAT-exempt dispensing services, even for existing customers who do not need a new eye test. Vision Direct, an online contact lens supplier, similarly split its sales between Vision Direct BV (lenses + VAT, 82%) and Vision Dispensing Ltd (VDL) (exempt dispensing services, 18%). 

The First-tier Tribunal (FTT) has ruled that VDL’s services were not exempt from VAT. VDL provided advice and recommendations to customers via helplines, live chats and instructional videos on the Vision Direct website. The FTT accepted that generic clinical advice delivered by a website could be exempt healthcare, but found that the website belonged to Vision Direct BV, not to VDL. In any event, the website was a resource that was freely available to anyone, and the FTT did not accept that VDL was charging Vision Direct customers for access. VDL’s description of its services as a prescription validation service was “unrealistic”. 

VDL answered customer enquiries, sent out reminders and operated the Vision Direct warehouse in York. The only element that might qualify as care and therefore VAT exempt was directing clinical enquiries to the website, but that happened with only about 2% of customers. 

The FTT also found that VDL’s staff were not supervised by a registered optician. Although they had access to professional opticians if they needed clinical advice, the “authoritative, intrusive (if not constant) element of checking, knowing for yourself what is going on”, which the FTT considered to be an essential feature of supervision, was absent. VDL was not providing exempt healthcare and its appeal was dismissed. 

From the Weekly VAT News dated 11 December 2023, published by Deloitte

Historical VAT bad debt relief

Deficiencies in the rules for VAT bad debt relief (BDR) prevented BT plc from claiming VAT relief of £65m between 1978 and 1989 under the BDR scheme in effect at that time (the ‘Old BDR Scheme’). Since 2009, BT has been pursuing a historical BDR claim by two routes, both of which the Court of Appeal has now rejected. 

In September 2023, the Court of Appeal refused permission for BT to pursue an appeal, which had originally been made to the First-tier Tribunal (seeking to justify a claim through s80, Value Added Tax Act 1994 and a ‘conforming interpretation’ that corrected the Old BDR Scheme). 

The Court of Appeal has now also struck out BT’s High Court claim for restitution. In the Court of Appeal’s judgement, Parliament must have intended the Old BDR Scheme to exclude common law remedies such as restitution. Otherwise, BT would have been able to avoid detailed regulations about the form and timing of BDR claims by pursuing a High Court claim, rather than applying the Old BDR Scheme. Even if restitution had been available alongside the Old BDR Scheme, the Court of Appeal concluded that HMRC had not been unjustly enriched. The purpose of the law of unjust enrichment is to correct ‘normatively defective’ transfers of value. But BT had always accounted for VAT at the correct time and was only out of pocket because it had failed to make a BDR claim within the requisite period. On that basis, any unjust enrichment action could not succeed, and the Court of Appeal confirmed the High Court’s decision to strike out BT’s claim.

From the weekly Business Tax Briefing dated 8 December 2023, published by Deloitte

VAT on interactive video chats 

The delivery of interactive video chats generally involves a business acting as an intermediary between performer and customer. In Geelen, the CJEU previously identified one such intermediary as providing an entertainment service, as he brought together the performer and customer, and arranged the necessary IT infrastructure. Under the EU Principal VAT Directive (PVD) at the time (2006-09), this was subject to VAT where Mr Geelen performed his service (in the Netherlands). 

In Westside Unicat, however, the role of the intermediary was split, and had to be assessed in light of changes made to the PVD in 2009-10. Westside Unicat (based in Romania) made a recording studio available to performers and acted as their agent in dealings with StreamRay USA Inc in the US; but it was StreamRay that contracted with customers for the delivery of the video chats. 

By the time of these services (2019-20), the PVD stated that admission to entertainment events (rather than simply entertainment services) should be subject to VAT where those events actually took place. According to the Court of Justice of the European Union, this rule referred to marketing the right of admission to an event to the public (such as selling tickets to an event). Services provided by a recording studio (Westside Unicat) to the operator of an internet streaming platform (StreamRay) were not concerned with granting customers the right to access content. Westside Unicat was not therefore obliged to charge Romanian VAT on its services to StreamRay.

From the Weekly VAT News dated 4 December 2023, published by Deloitte

Single or multiple supplies of plant hire

GAP Group Ltd hired dumpers, diggers, excavators and a wide range of other plant to construction companies, generally for around six weeks at a time. Like many car hire companies, GAP Group dropped off any diesel-powered plant with a full tank of fuel, and the customer could either return it after topping up the tank, or pay GAP Group for the fuel that it used. 

The First-tier Tribunal has ruled, applying the tests in Middle Temple, that GAP Group’s supplies of fuel when the plant was returned were separate from the hire. GAP Group charged a premium rate for fuel, which prompted most customers to return the plant with a full tank. Charges for fuel therefore made up only 3.4% of GAP Group’s total turnover. 

These charges were calculated at the end of the hire period, indicating that they should not be treated as part of the plant hire whose rate was agreed at the outset. Consequently (until April 2022, when the use of red diesel in construction equipment was prohibited), GAP Group’s supplies of diesel qualified for the reduced rate of VAT, as it was providing less than 2,300 litres of fuel which meant that the fuel was deemed to be provided for ‘domestic use’ (under Note 5 to Group 1, Sch 7A, Value Added Tax Act 1994).

From the Weekly VAT News dated 27 November 2023, published by Deloitte

VAT treatment of ‘refer a friend’ scheme

New customers who signed up with Bulb for gas and electricity were not only given a £50 reward, but were also emailed a unique link that they could share with their friends. For every friend (‘recruit’) that signed up with Bulb through this link, the customer (‘referrer’) received a further £50 reward. 

This ‘refer a friend’ scheme was one of Bulb’s most successful methods of attracting new customers, accounting for between 20% to 33% of sign-ups in 2018-2022. In HMRC’s view, the VAT treatment of the two rewards was different. The initial £50 received by the customer for signing up was a discount against Bulb’s energy charges. However, the further £50 deducted from their bill each time the referrer successfully recruited a friend for Bulb represented consideration for a supply they made to Bulb and could not be treated as a discount. 

The First-tier Tribunal agreed. There had to be a direct link between the reward and something that the referrer did for Bulb (rather than something that the recruit might later do). However, the threshold for what the referrer had to do for their reward was low. Simply forwarding an email to some friends required little effort, but it was dissociable from the referrer’s status as a Bulb customer. Consequently, the refer a friend reward should not be treated as a £50 discount from the price of gas and electricity supplied by Bulb. Bulb’s appeal was dismissed.

From the weekly Business Tax Briefing dated 24 November 2023, published by Deloitte