Weekly VAT News

Thomas Holdings Limited & Ors: HMRC’s application of extra-statutory concessions: CA

The Court of Appeal has allowed an appeal by Thomas Holdings Limited and other taxpayers (the claimants) against HMRC’s decision to refuse to apply certain extra-statutory concessions to liabilities for under-declared amusement machine licence duty (AMLD). The assessments concerned certain slot machines in bingo halls and amusement arcades, relating to periods in 2004 to 2006. The claimants relied on two concessions: misunderstanding and misdirection. The misunderstanding concession would apply if the AMLD was under-declared on account of a bona fide misunderstanding, provided certain conditions were met. Disagreeing with the High Court, the Court of Appeal concluded that the bases on which HMRC rejected the application of the misunderstanding concession were flawed. In particular, the claimants’ reliance on their understanding of HMRC’s guidance without further checking was not evidence of negligence. Accordingly, the appeal was allowed in relation to the misunderstanding concession, meaning that HMRC must reconsider the refusal to apply the concession. Given this finding, there was no need to reach a conclusion with respect to the misdirection concession. (Contact: Rob Holland)

Bottled Science Ltd: Whether collagen product was food – UT

Bottled Science Ltd sold Skinade, a liquid collagen product, marketed as “a uniquely formulated drink using advanced technology and high-quality ingredients for your skin”. The First-tier Tribunal found that Skinade was not food for VAT purposes, and therefore zero-rating did not apply. The Upper Tribunal has allowed Bottled Science’s appeal, and the issue will be remitted to the FTT for reconsideration on the issue of whether Skinade was drink of a kind used for human consumption. The FTT had stated that “it does not follow from Skinade being a drink that it is automatically a food”. Note 1 of Group 1, Schedule 8, VAT Act 1994 states that ‘“Food” includes drink’. Applying the Court of Appeal’s judgment in Innovative Bites, which was delivered after the FTT’s decision, the UT held that an inclusive definition is conclusive: if a product falls within drink, it is conclusively food, absent absurdity, and subject to any exceptions. The FTT had therefore erred in its approach, although the UT noted that this was no fault of the FTT, as the argument was not advanced by Bottled Science at the time. The error was material, as the FTT had not conducted a multi-factorial assessment or reached a conclusion on whether Skinade was drink. Accordingly, the FTT decision was set aside and the case remitted to a differently constituted FTT to determine whether Skinade was drink of a kind used for human consumption, based on fresh evidence and the legal arguments of the parties. If Skinade is found to be a drink, the FTT may also need to consider whether it falls within any of the exceptions to zero-rating, including the exception for beverages. (Contact: Donna Baker)

Frasers Group Financial Services Limited: Input tax attribution – FTT

Frasers Group Financial Services Limited (previously Studio Retail Limited) sold a wide range of goods through catalogues and online. Studio’s business model was to provide integrated supplies of goods and credit, with most customers paying for goods on credit, the majority incurring interest. Credit interest during the relevant period amounted to approximately 20%-24% of total revenues. The case considered whether VAT incurred on the costs of producing photographs of the goods which appear in the catalogues/online was attributable only to Studio’s taxable supplies of goods (therefore recoverable in full), or, as HMRC contended, partly to the exempt supplies of credit (therefore residual), and if residual, the appropriate apportionment methodology. The First-tier Tribunal has held that Studio’s photography and modelling costs were residual marketing costs attributable to both taxable goods and exempt credit supplies. Considering the photographs’ objective use, the FTT found that although the photographs primarily described products, their context mattered – references to the credit offering featured prominently on some catalogue/website images, and it was artificial to treat only the accompanying text as promoting credit. The FTT distinguished Littlewoods Limited, where credit information appeared discreetly. (The FTT rejected HMRC’s alternative contention that Studio’s integrated, symbiotic retail/credit business meant that there was a link between the costs and the supplies of credit.) Having reached this determination, the FTT focused on the appropriate apportionment methodology. The FTT found that, whilst not perfect, the standard turnover-based partial exemption method produced a more precise apportionment, without significant distortion, than Studio’s proposed alternative partial exemption special methods (PESMs), which sought to estimate lifetime interest from current purchases for actual receipts, or exclude interest from defaulting customers. The FTT also rejected Studio’s appeal against HMRC’s rejection of a previous PESM and its contention that two of HMRC’s assessments were made out of time. Studio’s appeal was dismissed. (Contact: Andrew Clarke)

Dbriefs webcast

On Wednesday, 11 November at 12.00, the UK Tax Update – November webcast will cover the latest UK tax developments, with updates on news in corporate, employment, international, and indirect taxes.