As it’s the beginning of the new year, I thought it would be interesting to pick out 10 of the most significant VAT cases from last year. I should say, I have cheated a little with number 10, but I couldn’t leave it out.

The world of VAT is fast paced and every week the VAT team discuss recently released tribunal decisions and how they may affect our clients. My chosen 10 are broad examples that represent either particularly interesting scenarios or recurring themes we’ve observed throughout the year.

1. Hotels

R & C Commrs v Hotel La Tour Ltd

This case is interesting, in that the Court of Appeal overturned previous similar cases and ruled that VAT incurred in relation to a sale of shares could not be recovered, even though the proceeds were used to make taxable supplies – i.e. a person couldn’t look through the transaction. This may well go to the Supreme Court and clearly gives mixed messages as to when Input Tax can be claimed.

2. Taxi firms

Bolt Services UK Ltd

This is one of the most significant cases of the year. For over 40 years there has been a debate about whether taxi firms act as agents or principals when they use self-employed taxi drivers. This case has turned that on its head, in that the tribunal ruled that the taxi firm was the principal but was in the Tour Operators Margin Scheme (TOMS), which effectively means they only need to account for VAT on the profit margin. It was a novel argument and one that was immediately appealed.

3. Mega Marshmallows

Case report: Mega Marshmallows not confectionery and therefore zero rated

No list would be complete without this case. As we mentioned late last year in The VAT Bulletin, size really does matter, at least when it applies to marshmallows! Small marshmallows are used as cooking ingredients and have always been zero-rated. Similarly middle size versions are designed to be eaten with the fingers and are thus confectionery. This case rules that large marshmallows were designed to be cooked before eating so were considered to be food. If you want to know if VAT is chargeable when buying a marshmallow, bring a ruler!

4. Short term accommodation

Sonder Europe Ltd

This case also involved TOMS but is related to unfurnished accommodation being bought in and supplied as hotel accommodation. Again, this could have far-reaching ramifications for this industry if the taxpayer wins.

5. Construction

Fount Construction Ltd

Fount is an example of a number of cases HMRC are taking to tribunal concerning the level of detail required on a tax invoice. They disallowed VAT on invoices on the basis that the description did not adequately describe the service being provided. The service in question could, for example, have been zero-rated new build services as the description did not make it clear that the work was in respect of a commercial premises and therefore standard rated. The tribunal sided with the taxpayer. This is one example of HMRC subtly changing the goalposts for what is established practice. We understand they are pursuing a similar case to be heard next year.

6. Hot food

Queenscourt Ltd

In this case, the taxpayer tried to argue that a dip provided with a hot meal was zero-rated. Most people would assume it was part of a larger supply of hot food, but the interesting point in this case was that a previous officer had allowed zero-rating of the dips. However, a subsequent officer had overturned that decision. The tribunal did rule that the dips, when supplied with a meal, were ancillary to the main supply of hot food. The business had other arguments, although the key point was that they had relied on the original officer and had been paid the tax. It would be unfair for HMRC to clawback the tax repaid at a later date. This point had merit, although there are a number of tests that need to be met for this argument to be successful. For example, that the taxpayer gave HMRC all of the information they needed and that the decision was clear and unequivocal. The tribunal considered that those tests were met. However, the third test was that the (incorrect) decision by HMRC was so detrimental that it was conspicuously unfair for HMRC not to recognise the mistake and not recover VAT previously repaid. The tribunal decided that this had not been met. This is a very good example of how taxpayers should not always rely on what HMRC state, and the importance of getting the support of a VAT expert and adviser, even if it is a decision made with all of the facts.

7. Fraud

Elphysic Ltd & Ors 

There appears to be a fraud case every week, and HMRC seem to be winning them all! Fraud is clearly an area where HMRC are targeting resources, both on the ground, with officers, but also through the courts. The issue of ‘fraud’ and the consequences are not limited to the actual fraudsters, and anyone involved in long supply chains should take a great deal of care to check the identity of their customer or supplier. In addition, if a deal is too good to be true, it could be that fraud is involved and HMRC may pursue other parties in the supply chain for lost VAT.

8. Alternative Dispute Resolution

Andrew Quay Hull LLP

This case involves Alternative Dispute Resolution (ADR). This is a procedure that falls outside of reviews and tribunals where the taxpayer and HMRC can agree on a particular tax treatment on a more informal basis. However, as this tribunal has found, any signed exit agreement is still binding on both parties. If you are in ADR, consider and be careful what you agree to and discuss with an expert if needed.

9. Aesthetic procedures

Aesthetic-Doctor.Com Ltd

This case both continues a theme in this article and in the particular area in dispute. The theme in this article is around HMRC targeting certain areas (fraud, tax invoices etc.) and pursuing multiple cases in tribunals. Again, this case is one example of an area where HMRC have consistently won. The tribunal considered whether certain cosmetic treatments could be exempt as healthcare. Healthcare can be exempt where it involves diagnosing, treating and curing medical conditions, whether that is physical or mental.

The majority of the cases involved Botox, fillers, fat reduction and breast augmentation. The taxpayer attempted to argue that even if these treatments did not cure physical conditions they were treating the mental anguish caused by those conditions. The tribunal, along with a large number of similar cases, disagreed.

10. Kebabs

‘Tax fugitive’ caught out by an £18 kebab | Business & Accountancy Daily

This is not a tribunal case but shows that sometimes HMRC are persistent in their pursuit of fraudsters. The ‘tax fugitive’ had fraudulently reclaimed large amounts of VAT and then went missing. The person purchased a kebab for £18, presumably using a bank card which enabled HMRC to track him down. Clearly the fugitive was doubly unlucky – £18 is a steep price for a kebab. Worse was to follow as he was imprisoned for two and a half years. Buying that kebab was not in hindsight one of his better decisions!

The Gerald Edelman VAT team

Every client the Gerald Edelman VAT team works with is different. From different locations, company size, and sectors, our team works with a wide variety of clients supporting them through complex VAT queries. With ex-HMRC officers and over 30 years of experience working within the private sector, our team are well placed to support you in your VAT case.

To discuss a VAT query or case, email myself or the VAT team at vat@geraldedelman.com.