In Wheels Common Investment Fund Trustees Ltd v HMRC [2017] UKFTT 830 (TC) (reported in Tax Journal, 20 January 2017), the First-tier Tribunal (FTT) held that Wheels is entitled to amend its grounds of appeal to include reliance on alternative arguments being raised in other litigation.
Wheels originally argued that investment management services supplied to defined benefit pension funds were exempt from VAT because they were ‘special investment funds’ within the meaning of article 135(1)(g) of the VAT Directive (2006/112/EC). In 2013, the CJEU held that this was not the case.
When Wheels’ appeal returned to the FTT, it was stayed pending decision of the High Court in United Biscuits (Pension Trustees) Ltd v HMRC (HC14A01221) where VAT exemption was claimed based on a different argument. United Biscuits relied on article 135(1)(a) of the VAT Directive and argued that, since similar fund management services are exempt when supplied by an insurer, fiscal neutrality demanded that they should also be exempt when supplied by a non-insurer. Wheels applied for permission to amend its pleadings in order to incorporate this new argument.
The FTT has a discretion to allow a party to amend its pleadings, and it was common ground that the exercise of this discretion turned on whether the proposed changes were an amendment to the original claim or a new claim (which would have been out of time). Wheels argued that the only amendment was using a different comparator to apply the principle of fiscal neutrality (i.e. that their argument changed from neutrality between similar recipients to neutrality between the suppliers of similar investment management services). HMRC contended that the fundamental character of Wheels’ claim had changed and that the new claim arose out of completely different facts and circumstances.
The FTT agreed with Wheels and found that the key elements of the original claim (the method of calculating the output tax claimed and the reason why the amount was due) remained unchanged. Further, despite some prejudice to HMRC, dismissing the appeal without considering the new argument would have been inconsistent with the overriding objective of dealing with matters fairly and justly.
Why it matters
Wheels’ appeal continues to be stayed pending the United Biscuits hearing this autumn. This is good news for businesses claiming exemption on pension fund management services that have their own claims stood behind Wheels. However, they should consider amending their grounds of appeal to refer to the argument raised in United Biscuits.
In Gala 1 Ltd v HMRC [2016] UKUT 564 (TCC) (reported in Tax Journal, 13 January 2017), the Upper Tribunal (UT) considered certain claims made by Gala Leisure Limited (GLL), a supplier of bingo facilities, for repayment of incorrectly charged output VAT for the period 1973 to 1996. The supplies in question had been made whilst GLL was a member of a VAT group. HMRC had rejected the relevant claims on the basis that the only body entitled to repayment in each case was the representative member of the relevant VAT group, and not the company which had made the relevant supply. GLL appealed HMRC’s rejection to the FTT, which dismissed the appeal, and subsequently appealed to the UT.
The UT also dismissed GLL’s claim, holding that, following the UT’s judgment in MG Rover; Standard Chartered v HMRC [2016] UKUT 434 (TCC), any claim for overpaid VAT may only be made by the representative member of a VAT group, save in certain exceptional circumstances where it is ‘virtually impossible’ for the wrongly paid tax to be recovered through the representative member (for example, where a VAT group has been disbanded and the representative member has been irrevocably dissolved). This remains true even where, as in this case, some of the companies that had made the supplies in question had subsequently left the group. The UT held that GLL had not provided sufficient evidence to show that there were ‘exceptional circumstances’ in its case.
The UT also rejected GLL’s alternative argument that it had made the relevant claims on behalf of the relevant representative member, on the basis that this was not supported by a purposive reading of the documentation. The UT distinguished the case of Taylor Clark [2016] CSIH 54, where this argument was successful in light of factors such as references to the VAT number and identity of the representative member in the letters of claim.
Why it matters
The application of the UT’s judgment in MG Rover suggests that, after a period of uncertainty, this is now a more settled area of law. Care should be taken, therefore, that claims under VATA 1994 s 80 are made solely by or expressly on behalf of the representative member unless exceptional circumstances apply. Where exceptional circumstances apply which make this impossible, these circumstances should be clearly documented by way of evidence.
The European Commission has launched three consultations following last year’s Action plan on VAT, which remain open until 20 March 2017.
Definitive VAT system for B2B transactions in goods within EU
The Commission believes the current cross-border rules are complex, expensive, and vulnerable to missing-trader fraud. As such, it aims to adopt a simpler system involving a single supply. Currently, goods are exempt in the member state of departure and the customer has to pay VAT in the member state of arrival.
Under the proposal, two options are being considered:
Reference is made to the existing mini one stop shop for electronically-supplied services, suggesting that the Commission would like to use a similar approach under the new regime. This would mean that the supplier would account for VAT based on the rate in the customer’s member state but to the supplier’s tax authority, who would pass it on to the customer’s tax authority.
VAT rates reform
The VAT system was originally based on the origin principle, so that VAT rates would be set based on the seller’s location. This system required similar rates to avoid unfair competition, and so the VAT Directives contained very prescriptive rules on what supplies could be reduced and zero-rated. However, in 2011 the origin principle was abandoned in favour of a destination-based system (with the VAT rate being determined by where the customer belongs).
The Commission is now considering giving more discretion to member states on VAT rates, either by:
The Commission does not expect significant change in rates once limitations are removed, but it acknowledges that over time there may be a wide differentiation. To prevent unfair competition, it may prevent easily transportable high-value items from being reduced rated.
Small enterprises
The Commission finds the current SME VAT system costly, outdated, and unfair. It highlights that SME suppliers from other member states do not benefit from the VAT registration threshold for domestic suppliers, even if their turnover is limited. It aims to adopt a simplification package for SMEs in 2017 to make the current SME scheme less complex and expensive. It is considering measures to reduce the ‘threshold effect’, where a small increase in turnover results in an enterprise going from exemption to taxation.
Why it matters
The proposed changes to the rules for intra-EU transactions in goods are likely to cause disruption for businesses. While the UK is likely to have left the EU by the time these changes come into effect, they have the potential to present barriers to trade with the EU if UK businesses are unable to benefit from the proposed one-stop shop. Following Brexit, the UK should already be in a position to determine its own VAT rates.
In G B Housley Ltd v HMRC [2016] EWCA Civ 1299 (reported in Tax Journal, 13 January 2017), the Court of Appeal (CA) considered HMRC’s failure to properly exercise its discretion. Housley (GBH) had relied upon self-billing invoices when reclaiming input tax, even though no valid self-billing agreement was in place (as required under the VAT Regulations, SI 1995/2518, reg 13(3A)). HMRC had discretion to accept suitable alternative evidence of input tax (under reg 29(2)), but chose not to exercise this discretion, stating that it would be inappropriate for it to do so.
The FTT had allowed GBH’s appeal and discharged the assessment, on the basis that HMRC had been unreasonable in making no attempt to consider its discretion; and its decision would not inevitably have been the same if it had exercised its discretion properly. The UT affirmed the FTT’s decision on these points, but went on to hold that the FTT should not have discharged the assessment as HMRC’s failure was only a ‘process’ defect. Instead, the FTT should have given HMRC another opportunity to exercise, or re-exercise, its discretion, considering information now available to it. GBH appealed.
The CA held that, although there was no express statutory articulation of the powers which a tribunal can exercise, it was clear that a tribunal could not substitute its own views in place of HMRC’s, as its jurisdiction was ‘appellate’ only. A taxpayer’s appeal against a wrongly made decision of HMRC could be dismissed by the tribunal if the decision would ‘inevitably’ have been the same if the discretion had been properly exercised. The CA held that, if HMRC had properly considered or re-considered the exercise of its discretion, it would not ‘inevitably’ have come to the same conclusion.
The CA went on to reject the process/merits distinction drawn by the UT as unhelpful. GBH had appealed against the assessment itself – the necessary outcome of the case was, therefore, that the assessment should be discharged with HMRC free to issue a new assessment on a proper basis.
Why it matters
This case demonstrates that a taxpayer does not have the burden of proving the outcome of proper discretion for an assessment to be invalid. Of particular interest is that the CA recognised that HMRC would be subject to statutory time constraints in making a new assessment. It criticised the UT’s decision which had effectively ‘given HMRC a further opportunity retrospectively to have justified their assessment’ regardless of these limits.
In Wheels Common Investment Fund Trustees Ltd v HMRC [2017] UKFTT 830 (TC) (reported in Tax Journal, 20 January 2017), the First-tier Tribunal (FTT) held that Wheels is entitled to amend its grounds of appeal to include reliance on alternative arguments being raised in other litigation.
Wheels originally argued that investment management services supplied to defined benefit pension funds were exempt from VAT because they were ‘special investment funds’ within the meaning of article 135(1)(g) of the VAT Directive (2006/112/EC). In 2013, the CJEU held that this was not the case.
When Wheels’ appeal returned to the FTT, it was stayed pending decision of the High Court in United Biscuits (Pension Trustees) Ltd v HMRC (HC14A01221) where VAT exemption was claimed based on a different argument. United Biscuits relied on article 135(1)(a) of the VAT Directive and argued that, since similar fund management services are exempt when supplied by an insurer, fiscal neutrality demanded that they should also be exempt when supplied by a non-insurer. Wheels applied for permission to amend its pleadings in order to incorporate this new argument.
The FTT has a discretion to allow a party to amend its pleadings, and it was common ground that the exercise of this discretion turned on whether the proposed changes were an amendment to the original claim or a new claim (which would have been out of time). Wheels argued that the only amendment was using a different comparator to apply the principle of fiscal neutrality (i.e. that their argument changed from neutrality between similar recipients to neutrality between the suppliers of similar investment management services). HMRC contended that the fundamental character of Wheels’ claim had changed and that the new claim arose out of completely different facts and circumstances.
The FTT agreed with Wheels and found that the key elements of the original claim (the method of calculating the output tax claimed and the reason why the amount was due) remained unchanged. Further, despite some prejudice to HMRC, dismissing the appeal without considering the new argument would have been inconsistent with the overriding objective of dealing with matters fairly and justly.
Why it matters
Wheels’ appeal continues to be stayed pending the United Biscuits hearing this autumn. This is good news for businesses claiming exemption on pension fund management services that have their own claims stood behind Wheels. However, they should consider amending their grounds of appeal to refer to the argument raised in United Biscuits.
In Gala 1 Ltd v HMRC [2016] UKUT 564 (TCC) (reported in Tax Journal, 13 January 2017), the Upper Tribunal (UT) considered certain claims made by Gala Leisure Limited (GLL), a supplier of bingo facilities, for repayment of incorrectly charged output VAT for the period 1973 to 1996. The supplies in question had been made whilst GLL was a member of a VAT group. HMRC had rejected the relevant claims on the basis that the only body entitled to repayment in each case was the representative member of the relevant VAT group, and not the company which had made the relevant supply. GLL appealed HMRC’s rejection to the FTT, which dismissed the appeal, and subsequently appealed to the UT.
The UT also dismissed GLL’s claim, holding that, following the UT’s judgment in MG Rover; Standard Chartered v HMRC [2016] UKUT 434 (TCC), any claim for overpaid VAT may only be made by the representative member of a VAT group, save in certain exceptional circumstances where it is ‘virtually impossible’ for the wrongly paid tax to be recovered through the representative member (for example, where a VAT group has been disbanded and the representative member has been irrevocably dissolved). This remains true even where, as in this case, some of the companies that had made the supplies in question had subsequently left the group. The UT held that GLL had not provided sufficient evidence to show that there were ‘exceptional circumstances’ in its case.
The UT also rejected GLL’s alternative argument that it had made the relevant claims on behalf of the relevant representative member, on the basis that this was not supported by a purposive reading of the documentation. The UT distinguished the case of Taylor Clark [2016] CSIH 54, where this argument was successful in light of factors such as references to the VAT number and identity of the representative member in the letters of claim.
Why it matters
The application of the UT’s judgment in MG Rover suggests that, after a period of uncertainty, this is now a more settled area of law. Care should be taken, therefore, that claims under VATA 1994 s 80 are made solely by or expressly on behalf of the representative member unless exceptional circumstances apply. Where exceptional circumstances apply which make this impossible, these circumstances should be clearly documented by way of evidence.
The European Commission has launched three consultations following last year’s Action plan on VAT, which remain open until 20 March 2017.
Definitive VAT system for B2B transactions in goods within EU
The Commission believes the current cross-border rules are complex, expensive, and vulnerable to missing-trader fraud. As such, it aims to adopt a simpler system involving a single supply. Currently, goods are exempt in the member state of departure and the customer has to pay VAT in the member state of arrival.
Under the proposal, two options are being considered:
Reference is made to the existing mini one stop shop for electronically-supplied services, suggesting that the Commission would like to use a similar approach under the new regime. This would mean that the supplier would account for VAT based on the rate in the customer’s member state but to the supplier’s tax authority, who would pass it on to the customer’s tax authority.
VAT rates reform
The VAT system was originally based on the origin principle, so that VAT rates would be set based on the seller’s location. This system required similar rates to avoid unfair competition, and so the VAT Directives contained very prescriptive rules on what supplies could be reduced and zero-rated. However, in 2011 the origin principle was abandoned in favour of a destination-based system (with the VAT rate being determined by where the customer belongs).
The Commission is now considering giving more discretion to member states on VAT rates, either by:
The Commission does not expect significant change in rates once limitations are removed, but it acknowledges that over time there may be a wide differentiation. To prevent unfair competition, it may prevent easily transportable high-value items from being reduced rated.
Small enterprises
The Commission finds the current SME VAT system costly, outdated, and unfair. It highlights that SME suppliers from other member states do not benefit from the VAT registration threshold for domestic suppliers, even if their turnover is limited. It aims to adopt a simplification package for SMEs in 2017 to make the current SME scheme less complex and expensive. It is considering measures to reduce the ‘threshold effect’, where a small increase in turnover results in an enterprise going from exemption to taxation.
Why it matters
The proposed changes to the rules for intra-EU transactions in goods are likely to cause disruption for businesses. While the UK is likely to have left the EU by the time these changes come into effect, they have the potential to present barriers to trade with the EU if UK businesses are unable to benefit from the proposed one-stop shop. Following Brexit, the UK should already be in a position to determine its own VAT rates.
In G B Housley Ltd v HMRC [2016] EWCA Civ 1299 (reported in Tax Journal, 13 January 2017), the Court of Appeal (CA) considered HMRC’s failure to properly exercise its discretion. Housley (GBH) had relied upon self-billing invoices when reclaiming input tax, even though no valid self-billing agreement was in place (as required under the VAT Regulations, SI 1995/2518, reg 13(3A)). HMRC had discretion to accept suitable alternative evidence of input tax (under reg 29(2)), but chose not to exercise this discretion, stating that it would be inappropriate for it to do so.
The FTT had allowed GBH’s appeal and discharged the assessment, on the basis that HMRC had been unreasonable in making no attempt to consider its discretion; and its decision would not inevitably have been the same if it had exercised its discretion properly. The UT affirmed the FTT’s decision on these points, but went on to hold that the FTT should not have discharged the assessment as HMRC’s failure was only a ‘process’ defect. Instead, the FTT should have given HMRC another opportunity to exercise, or re-exercise, its discretion, considering information now available to it. GBH appealed.
The CA held that, although there was no express statutory articulation of the powers which a tribunal can exercise, it was clear that a tribunal could not substitute its own views in place of HMRC’s, as its jurisdiction was ‘appellate’ only. A taxpayer’s appeal against a wrongly made decision of HMRC could be dismissed by the tribunal if the decision would ‘inevitably’ have been the same if the discretion had been properly exercised. The CA held that, if HMRC had properly considered or re-considered the exercise of its discretion, it would not ‘inevitably’ have come to the same conclusion.
The CA went on to reject the process/merits distinction drawn by the UT as unhelpful. GBH had appealed against the assessment itself – the necessary outcome of the case was, therefore, that the assessment should be discharged with HMRC free to issue a new assessment on a proper basis.
Why it matters
This case demonstrates that a taxpayer does not have the burden of proving the outcome of proper discretion for an assessment to be invalid. Of particular interest is that the CA recognised that HMRC would be subject to statutory time constraints in making a new assessment. It criticised the UT’s decision which had effectively ‘given HMRC a further opportunity retrospectively to have justified their assessment’ regardless of these limits.
