Indirect tax news from the past week
Balhousie: sale and leaseback does not trigger VAT self-supply charge – SC
Balhousie Holdings Ltd had a new care home constructed, and financed its development through a sale and leaseback with a Real Estate Investment Trust. The construction qualified for zero-rating, but in 2019 the Court of Session ruled that Balhousie had disposed of its entire interest in the property through the sale (which immediately preceded the leaseback), and this triggered a self-supply charge that clawed back the zero-rating relief. The Supreme Court has now overturned that decision. The purpose of the self-supply charge was to encourage businesses like Balhousie to commit to building and operating care homes for at least ten years. In the Supreme Court’s judgment, the sale and leaseback occurred simultaneously and were indissolubly bound together, and in that context there was no point when Balhousie did not have an interest in the property. As Balhousie had not disposed of its entire interest, the self-supply charge did not arise. The majority of the Court found it unnecessary to apply the CJEU’s reasoning in Mydibel, which suggests that sale and leaseback transactions should in some situations be regarded as a means of finance rather than as two separate transactions for VAT purposes. (Contact: Ben Tennant).
Saint-Gobain: historical bad debt relief claim rejected – UT
A time limit for VAT bad debt relief (BDR) claims was introduced in 1997 with prospective effect only, and to this day it therefore remains possible to submit BDR claims for 1989-97. The Upper Tribunal’s decision in Saint-Gobain Building Distribution Ltd, however, has shown how difficult this can be in practice. Many such claims are based on an acceptance that legal title to goods did not transfer to customers because of retention of title clauses which, combined with a deficiency in the BDR scheme at the time, would have prevented businesses from making claims. However, retention of title clauses are not always effective – where builders’ merchants such as Jewsons (owned by Saint-Gobain) sold timber, bricks, or copper pipe, legal title probably transferred to customers when they incorporated the goods into buildings regardless of any retention of title clauses. Consequently, the UT saw nothing wrong with the FTT's conclusion that Saint-Gobain had been able to claim BDR in the 1990s, and had failed to prove on the balance of probabilities that it had not. Its appeal was dismissed. (Contact: Aaron Bissett).
Prudential Assurance: VAT groups and continuous supplies of services – FTT
In November 2007, Silverfleet Capital Ltd completed a management buy-out and left the Prudential VAT group. Since 2000 it had been providing fund management services to one of Prudential’s with-profits funds, and was entitled to a performance-related fee in the event that the fund exceeded certain benchmarks. Those benchmarks were eventually met in 2014 and 2015, triggering performance payments of £9.3m. Given that the services were delivered before Silverfleet left the VAT group, but payment was received several years afterwards, should the performance payments be subject to VAT? Silverfleet’s management qualified as a continuous supply of services, and HMRC considered that VAT therefore had to be charged on the performance fee when it was invoiced and paid. The FTT agreed that the supply of services took place when they were invoiced (i.e. after Silverfleet had left the VAT group). However, Silverfleet had only ever supplied investment management services while it was in the VAT group. The time of supply rules could not lift Silverfleet’s services out of the world of VAT groups and simultaneously attribute them to Silverfleet (which had made no supplies outside the VAT group) rather than the representative member. Prudential’s appeal was allowed. (Contact: David O’Kane).
CB: concealed payments exclusive of VAT - AGO
CB owned the Lito Group, which provided orchestras to take part in religious and village festivals in Galicia. Most of the payments to Lito Group were made in cash, and CB took 10% of this as a personal agency fee which he did not declare for VAT or income tax. The CJEU has previously ruled that, where suppliers should have charged VAT but failed to do so, the amount actually paid should be treated as VAT-inclusive. In the Opinion of AG Gerard Hogan, this principle only applies in cases of relatively innocent mistakes. By contrast, CB and the Lito Group had agreed to conceal the agency fees to avoid an income tax charge, and in such circumstances the Spanish tax authorities were entitled to treat the gross amount as the taxable consideration, unless CB could provide evidence to the contrary. This would result in additional VAT of approximately €40k being due. (Contact: Adam Routledge).