International taxes

Treaty advantage found not to be the main purpose in withholding tax case

The Upper Tribunal (UT) has upheld the First-tier Tribunal (FTT) decision, ruling against HMRC in a case regarding withholding tax deducted at source. The arrangement was not designed to take advantage of the UK/Ireland double tax treaty (DTT), so anti-avoidance rules did not apply.

The Irish resident company had bought, from a Cayman Islands resident company, a debt claim in the administration of Lehman Brothers. When the interest was discharged, UK income tax was withheld at source from the payment, HMRC refused to refund the withholding tax on all of the interest payments. It considered that the DTT did not apply to exempt some of the payments from UK tax as at least one of the companies had had a main purpose of taking advantage of the relevant interest article by means of the assignment of debt.

The FTT found that the interest payment did qualify for the exemption from UK withholding tax in the DTT. On consideration of the overall arrangement, and the motives of the parties, tax avoidance was not a main purpose of the arrangement.

The UT agreed with the approach taken by the FTT in considering the overall arrangement, and concluded that having consideration of a tax treaty and its inherent reliefs did not on its own amount to a tax avoidance main purpose.

Burlington Loan Management DAC v HM Revenue & Customs [2024] UKUT 152 (TCC)

From Tax Update July 2024, published by Evelyn Partners LLP

VAT

VAT liability of dip pots

In 2019, HMRC repaid Queenscourt Ltd VAT of £75,502, on the basis that dip pots sold as part of takeaway meal deals at its KFC outlets should be treated as separate zero-rated supplies. When Queenscourt submitted a top-up claim in 2020, a different HMRC officer determined that the dip pots were part of a single standard-rated supply and issued an assessment to recoup the VAT previously repaid. The First-tier Tribunal (FTT) has ruled that the dip pots formed part of a standard-rated supply. 

The FTT also considered whether it was fair of HMRC to revisit the original claim. As a general rule, the FTT does not have any general supervisory jurisdiction over HMRC’s actions (judicial review applications are a matter for the High Court). However, the Court of Appeal has previously ruled (in the case of Beadle) that public law arguments can be deployed as defences to HMRC enforcement action even at the FTT, unless expressly excluded by statute. The FTT considered that this principle (as applied by the Upper Tribunal in the case of Zeman) could be reconciled with more general observations from the courts about the limited scope of the FTT’s jurisdiction. 

Based on this, there is some further support for arguments about legitimate expectation to be heard by the FTT in appeals against HMRC assessments. However, appellants should bear in mind the associated standard of proof. For there to be any remedy, HMRC’s actions must be ‘conspicuously’ or ‘outrageously’ unfair (formally, this is not the same as having to show detrimental reliance, but it amounted to much the same thing in this case). Although Queenscourt described various initiatives that had to be put on hold when it was required to repay the £75,502, the FTT considered that its evidence was insufficient to supplant HMRC’s obligation to collect the right amount of VAT. Queenscourt’s appeal was dismissed. 

Queenscourt Limited v HMRC [2024] UKFTT 460 (TC)

From the Weekly VAT News dated 17 June 2024, published by Deloitte

CIC: outsourcing primary healthcare in prisons

NHS England engaged Spectrum Community Health CIC to deliver primary healthcare at prisons across the North of England (including nurses, GPs, pharmacies, mental and sexual health services, optometry, dentistry and physiotherapy). Spectrum viewed its various services as separate, which meant that (although its services were mostly exempt healthcare) supplies of drugs should be zero-rated and sexual health products should be reduced-rated, meaning that Spectrum should be entitled to some input tax recovery. HMRC disagreed, and in 2022 the First-tier Tribunal dismissed Spectrum’s appeal. 

At the Upper Tribunal, Spectrum pleaded that the Court of Justice of the European Union’s (CJEU) 1988 judgement in the case of EC v UK (C-353/85) (as considered in the case of Klinikum Dortmund) meant that goods should always be treated as physically and economically dissociable from medical services. In EC v UK, the CJEU ruled that the UK should not exempt supplies of goods such as spectacles that were provided alongside medical care (and the same approach would have justified Spectrum’s claim that its various services were separate). 

However, the difficulty with relying on such ancient authority is that it pre-dates cases such as CPP, Levob, Město Žamberk, and Frenetikexito, which have established core principles in this area. The Upper Tribunal considered that EC v UK did not provide any grounds for departing from these more recent authorities in relation to medical services. Spectrum was making a single supply of healthcare services (as judged from the perspective of NHS England, which received the services), and was not entitled to recover input tax. Spectrum’s appeal was dismissed. 

Spectrum Community Health CIC v HMRC [2024] UKUT 162 (TCC)

From the Weekly VAT News dated 10 June 2024, published by Deloitte

Burden of proof for VAT assessment time limits 

When issuing a VAT assessment, in addition to the four-year cap, HMRC must issue the assessment either within two years of the end of the relevant VAT period or within a year of having the facts they need to raise an assessment. HMRC received data downloads from Nottingham Forest Football Club Ltd’s new accounting system (Navision) on 20 April 2018, and from its old system (Sage) on 9 May 2018. HMRC considered that the change in accounting systems had led to an underpayment of £345,561 on the 08/15 VAT return, and issued an assessment on 29 April 2019. The club challenged the assessment on the basis that HMRC had all the information they needed on 20 April 2018 (the Sage data having been disregarded), meaning that it was out of time. 

The First-tier Tribunal (FTT) dismissed the club’s appeal, as it had failed to show, on the balance of probabilities, that HMRC did not think that it needed the Sage data. The Upper Tribunal (UT) has now ruled that the burden of proof was on the club to show when HMRC had the evidence to raise an assessment. This proposition has not been explicitly argued before the courts previously, but it was accepted without comment by the Court of Appeal in the case of Lithuanian Beer and this is tantamount to binding authority. 

The UT also decided that the FTT had not followed the tests about the one-year rule set out in the case of Pegasus Birds because it had not been provided with sufficient evidence, and rejected the club’s argument that the FTT had failed to apply the Pegasus Birds tests correctly. Finally, the UT rejected a challenge that the FTT had made its decision based on a view of the facts that could not reasonably be entertained. The club’s appeal was dismissed. 

Nottingham Forest Football Club Limited v HMRC [2024] UKUT 145 (TCC)

From the Weekly VAT News dated 3 June 2024, published by Deloitte

VAT on recharges of merchant acquirer costs

SilverDoor Ltd acts as an intermediary between serviced apartment operators and businesses looking for short-term accommodation for employees on temporary assignments. SilverDoor charges a commission to the property owner for its services. It does not normally charge the business unless the business pays using a corporate card, when SilverDoor passes on the 2.95% fee that it is charged by the merchant acquirer. It did not add VAT to those recharges and was assessed by HMRC for VAT £109,305. 

The courts have generally rejected attempts by taxpayers to treat credit card charges as separate from services that they deliver to customers, even when the charges are made by separate, but related, entities (such as in the case of Bookit). In this case, the credit card charge was only imposed on the businesses that paid by credit card, whereas SilverDoor generated most of its turnover from commissions charged to the property owners. The credit card charge was therefore isolated to a greater extent than in previous cases. Nevertheless, endorsing the First-tier Tribunal’s decision, the Upper Tribunal (UT) considered that SilverDoor was providing a reservation service to businesses, albeit a service which businesses not paying by credit card received free of charge. 

The 2.95% charged to businesses paying by corporate credit card could not be provided separately from the reservation service and represented consideration for that service. Even if the charge should be characterised differently, the UT ruled that there was no contract for the provision of a financial service by merchant acquirers to the businesses and that SilverDoor was not involved in negotiating any such service. Consequently, SilverDoor’s services could not qualify for the financial intermediary VAT exemption. Its appeal was dismissed. 

SilverDoor Ltd v HMRC [2024] UKUT 147 (TCC)

From the Weekly VAT News dated 3 June 2024, published by Deloitte

VAT recovery on fundraising share sale 

To fund the development of a new hotel in Milton Keynes, Hotel La Tour Ltd (HLT) decided to sell its existing hotel in Birmingham by way of the sale of shares in a subsidiary which owned the hotel. HLT sought to recover the VAT incurred on the marketing and legal costs associated with the sale on the basis that the relevant services were directly and immediately linked to its downstream taxable activities, namely developing and operating the new hotel in Milton Keynes. HMRC denied VAT recovery on the basis that the costs related to the exempt share sale. Both the First-tier Tribunal and the Upper Tribunal found in favour of the taxpayer. 

However, on appeal, the Court of Appeal has unanimously (3:0) found in favour of HMRC. On revisiting the Court of Justice of the European Union’s decision in the case of AB SKF, LJ Whipple held that this judgement preserved the existing rules on direct attribution, but acknowledged that input tax connected with a share sale may have a direct and immediate link either with the share sale or with the taxpayer’s business as a whole, that being a matter for the domestic court to determine. 

Distinguishing the case of Frank A Smart (which related to a non-business activity), and rejecting the contentions that it was necessary to look at the purpose of the share sale (ie, fundraising) and that the existence of a VAT group meant that HLT was not engaged in an economic activity, HMRC’s appeal was allowed. The VAT on the costs were used in, were cost components of, and were directly and immediately linked with the share sale which was conducted as part of HLT’s economic activity and exempt for VAT purposes. 

HMRC v Hotel La Tour Ltd [2024] EWCA Civ 564

From the Weekly VAT News dated 28 May 2024, published by Deloitte