Weekly VAT News

Colchester Institute Corporation (No. 2): further education business activities – UT

Colchester Institute Corporation (the College) reclaimed VAT on its 2008 campus redevelopment, applying the Lennartz mechanism which (at the time) allowed VAT recovery on costs relating to non-business activities, subject to a balancing output tax charge over the following ten years. In 2014, the College decided that the provision of fully-funded further education (FE) was actually an exempt business activity, and submitted a claim for repayment of the balancing charge. In 2020, the Upper Tribunal held that the College’s supplies were exempt, and it should not have applied Lennartz. However, the UT ruled that the College’s claim should be reduced to nil, applying rules on set-off. Nonetheless, the finding in relation to exemption potentially justified the College’s decision (in 2015) to cease paying any more output tax. HMRC disagreed, and assessed the College for underdeclared output tax. The First-tier Tribunal upheld the College’s appeal, which HMRC subsequently appealed, on the basis that the 2020 UT decision was wrongly decided. Unlike the FTT, the UT is not bound by previous decisions of the UT, but would normally follow an earlier UT decision. Accordingly, the Upper Tribunal has rejected HMRC’s subsequent appeal. HMRC recognised that this was a foregone conclusion and did not seek to persuade the UT that the 2020 UT decision was wrong, but rather reserved their right to argue the point in any appeal to the Court of Appeal, which is not bound to follow the UT decision and may, HMRC submit, consider the matter afresh. It now remains to be seen whether HMRC are given leave to appeal to the CA, and what, if anything, the UT decision means in respect of any adverse effects on the FE sector’s ability to access VAT reliefs such as the zero rate on the construction of relevant charitable buildings, and the reduced rate on supplies of fuel and power. (Contact: Kate Connolly)

Beigebell Ltd (No. 2): MTIC fraud – UT

In May 2019, the First-tier Tribunal allowed Beigebell Ltd’s appeal against HMRC assessments made on the basis that Beigebell was involved in deals that were part of a missing trader fraud, and that Beigebell knew, or should have known, of the connection of its transactions with the fraud. In June 2020, the Upper Tribunal ruled that the FTT had failed to consider certain factors that possibly implied actual knowledge, and remitted the appeal to a new FTT judge to consider the case afresh. Following the rehearing, in April 2023 the FTT held that Beigebell knew and, in the alternative, should have known that the transactions were connected with fraud. The UT has now dismissed Beigebell’s appeal against that FTT decision. The FTT had concluded from the evidence that Mr Orton (a director and shareholder of Beigebell), and therefore Beigebell, “had actual knowledge the transactions were connected to fraud”, and if not, he had “blind-eye” knowledge. With respect to the “should have known” test, “the FTT noted the lack of commercial reality” and considered that Mr Orton should have known that the “only reasonable explanation” for the chain of deals was that the transactions were connected with fraud. The UT found that the FTT did not misapply the burden of proof. The UT also rejected Beigebell’s other grounds of appeal, which focused on the circumstances under which Beigebell entered into the transactions in question, on the basis that errors of law raised by Beigebell were not accepted or were immaterial to the outcome. (Contact: Rob Holland)

rhtb: VAT on amounts due for unperformed services – CJEU

In Austria in March 2018, rhtb: project gmbh entered into a contract with Parkring 14-16 Immobilienverwaltung GmbH to undertake a building project for the amount of EUR 5,377,399, including VAT. In June 2018, after works had started, Parkring advised rhtb that it no longer wished to carry out the project, for reasons that were not attributable to rhtb. In accordance with Austrian law, rhtb requested from Parkring payment of the agreed amount, less the costs saved from the termination of the contract. When Parkring did not make the payment, rhtb lodged a civil claim for EUR 1,540,820, including VAT, which Parkring disputed. The Austrian courts found that Parkring was liable to pay the amount due for works not carried out due to termination of the contract, but referred the question of whether VAT would apply to the CJEU. The CJEU has held that an amount due for a supply of services following the termination of a contract by the recipient of the supply, which the supplier had already commenced and was prepared to complete, constituted remuneration for a supply of services for consideration. A supply is made where the supplier places the recipient in a position to benefit from that supply, regardless of whether the recipient avails themselves of that right. Hence there was a supply of services by rhtb. The amount due to rhtb corresponded to the amount payable under the contract for the supply of the services, less the amounts saved on non-completion, and could not be regarded as compensation for loss suffered. Accordingly, there was a direct link between the supply of services and the payment for VAT purposes. (Contact: Andrew Clarke)

This week’s CJEU VAT calendar

On 12 December, the CJEU will deliver its judgments in Dranken Van Eetvelde on penalties for VAT fraud and Weatherford Atlas Gip on the VAT treatment of inter-company support services.