Welcome to the November 2023 edition of RPC's V@, a monthly update which provides insightful analysis and news from the VAT world relevant to your business.

Case reports

MJL Contracts Ltd v HMRC [2023] UKUT 254

VAT default surcharge – Upper Tribunal confirms operation of default surcharges and HMRC's use of automated processes

MJL Contracts Ltd (MJL) appealed against the decision of the First-tier Tribunal (FTT) that MJL was liable for a default surcharge under section 59, Value Added Tax Act 1994 (VATA).

The Upper Tribunal (UT) had to determine the following two issues:

  • Did HMRC follow the correct process for imposing a default surcharge on MJL?
  • Was HMRC able to rely on automated processes to make decisions about default surcharges?

Process for imposing default surcharges

The process governing default surcharges is contained in section 59, VATA.

MJL argued that a default surcharge can only be imposed when a taxpayer fails to submit their VAT return or if HMRC issues a VAT assessment under section 73(1), VATA.

The UT dismissed this argument. The UT set out the position under section 59 VATA, as follows:

  • A person is in default in respect of an accounting period if they either:
    • do not file a VAT return by the last day on which they are required to for that period; or
    • have not paid the VAT shown on a filed return by the due date.
  • When a person is in default, HMRC serves a surcharge liability notice (SLN) on them which specifies a "surcharge period" beginning on the date of the SLN and ending on the one-year anniversary of the end of the relevant accounting period.
  • If a person who has been served with an SLN defaults again within the surcharge period, a default surcharge becomes payable.

In this case, MJL had filed its VAT return but had failed to pay part of the VAT due by the due date and was therefore served with an SLN. It defaulted again within the surcharge period and was therefore liable for a default surcharge of 2% of the outstanding VAT.

HMRC's use of automatic processes

MJL observed that HMRC could only impose a default surcharge under section 76(1), VATA, which provides that HMRC "may assess" the amount due. MJL argued that the use of the word "may" implies that an HMRC officer must apply their mind to the decision and exercise their discretion. It therefore followed that HMRC's use of an automated process was contrary to the legislation.

The UT referred to the Court of Appeal's decision in Donaldson v HMRC [2016] EWCA Civ 761, which dealt with a similar issue in respect of penalties imposed under Schedule 55, Finance Act 2007, which includes the language "HMRC decide…". The UT followed the Court of Appeal's reasoning in Donaldson and held that Parliament could not have intended that HMRC should be required to determine, on a taxpayer-by-taxpayer basis, whether and how to assess.

The UT dismissed MJL's appeal.

Why it matters: This decision is a helpful explanation of default surcharges, but more importantly acts as a reminder that the UT tends to favour a practical approach to statutory interpretation and will be slow to subvert HMRC's processes.

The decision can be viewed here.

JPMorgan Chase Bank NA v HMRC [2023] UKFTT 856 (TC)

Supply of Services – FTT confirms that the supply of intra-group services constitutes a single supply and is not eligible for VAT exemption

JPMorgan Chase Bank NA (CBNA) made supplies to JPMorgan Securities plc (SPLC). These supplies comprised generic business services such as human resources, real estate and legal services (Support Services) and services which SPLC considered necessary to carry out transactions with clients (Business Delivery Services).

Although CBNA and SPLC were members of the same VAT group (and therefore intra-group supplies would ordinarily be disregarded under section 43(1)(a), VATA), CBNA bought in services from overseas in order to enable it to make the intra-group supplies in issue. HMRC contended that the intra-group supplies were taxable pursuant to section 43(2A) and (2B), VATA, anti-avoidance provisions which disapply the statutory disregard in section 43(1) in certain circumstances. HMRC issued assessments on this basis. CBNA and SPLC appealed the assessments to the FTT.

The FTT was required to determine the following two key issues:

  • whether the supply of the services CBNA provided to SPLC constituted a single supply or multiple supplies to SPLC (the Supply Issue); and
  • whether the supply of Business Delivery Services to SPLC constituted an exempt supply falling within articles 135(1)(d) and/or (f) of Council Directive 2006/112/EC (the Principal VAT Directive) (the Exemption Issue).

The Supply Issue

The FTT examined the contractual arrangements between CBNA and SPLC. It noted that, from the contractual documents as a whole it was clear that CBNA makes a single supply to SPLC providing everything that it needs to enable it to achieve its aim of regulatory compliant trading in globalised markets. The FTT concluded that the Business Delivery Services and Support Services were linked and that SPLC required both services in order to trade. The FTT stated that it would be "artificial" to split these services into separate supplies and so concluded that CBNA made a single supply to SPLC.

The FTT then went on to consider whether the single supply was standard rated as HMRC argued, or exempt, as CBNA argued. The FTT held that it was not possible to identify a principal element to the services provided to SPLC. Both the Support Services and Business Delivery Services were services on which SPLC relied and could not trade without. Therefore, the FTT concluded that the single supply of services must be taken into account as a whole for VAT purposes and so was a taxable supply which could not fall within the scope of the exemption.

The Exemption Issue

Given that the supply in question was held to be a single taxable supply, which was not eligible for an exemption, the FTT was not required to make a finding in relation to the Exemption Issue. However, the FTT decided to consider the Exemption Issue in case of a subsequent appeal.

The FTT considered this issue only in relation to the Business Delivery Services, given that CBNA accepted that the supply of Support Services could not be an exempt service. CBNA argued that the securities exemption (set out in article 135(1)(f), Principal VAT Directive) and payment exemption (set out in article 135(1)(d), Principal VAT Directive) were the two applicable exemptions.

CBNA argued that SPLC had outsourced key functional aspects of transactions to CBNA. These functional aspects were specific and essential to a transaction in securities and/or CBNA's role was intrinsically connected with those functions. The applicability of the exemption hinged on whether the transactions in question were administrative or technical in nature, or if they were financial in nature and therefore fell within the exemption.

The FTT concluded that the relevant transactions were technical or administrative in nature given that the nature of the services included services such as data/information gathering, processing, monitoring, verification and storage management. Accordingly, the Business Delivery Services provided by CBNA did not fall under the exemption and the transactions were therefore subject to VAT.

Why it matters: This case provides useful guidance for businesses when considering whether services constitute single or multiple supplies. It also provides a reminder that VAT grouping does not necessarily mean that all transactions will be disregarded for VAT purposes.

The decision can be viewed here.

Dollar Financial UK Ltd v HMRC [2023] UKUT 256 (TCC)

Dollar Financial UK Ltd UT confirms that there was no right to retrospectively amend the date a company joined a VAT group to recover overpaid VAT

The taxpayer, Dollar Financial UK Ltd (DFUK), was the representative member of a UK VAT group. Its US parent, Dollar Financial Group Inc (DFGI) initially joined the UK VAT group from June 2013. However, in September 2016, DFUK applied to amend, retrospectively, the date DFGI joined the VAT group to July 2022, on the basis that this is when it acquired a UK Permanent establishment and, therefore, the date that it should have registered for VAT. DFUK did not seek to separately register the US company for UK VAT. If DFUK's request to backdate the date DFGI joined the VAT group was allowed, the result would have been that DFUK should not have accounted for VAT of £2.2 million under the reverse charge on management services provided by DFGI. DFUK made a repayment claim to HMRC for this amount. However, HMRC rejected DFGI's request for the date that DFGI joined the VAT group to be backdated. DFUK appealed HMRC's decision to the FTT.

The FTT struck out the appeal, concluding that the request by DFUK was not a valid VAT registration application. No form VAT 1 had been filed by DFUK and DFUK could not apply for registration on its behalf. The comprehensive VAT grouping legislation at section 43B, VATA, provides for four types of application and none of these related to backdating admission to a VAT group. An application could only be made in respect of a company that was outside the VAT group at the date of the application which did not apply here as DFGI was already a member of the VAT group. The 2016 request by DFUK was therefore not a valid grouping application under section 43B, VATA. HMRC had not issued any decision letter on either point. As a result, there was no appealable decision for the FTT to determine, it had no jurisdiction and DFUK's appeal was therefore struck out.

DFUK appealed to the UT.

The UT found that the FTT had been correct to conclude that no valid application to backdate VAT grouping was, or could validly have been, made under section 43B, VATA. Had there been a valid application, as HMRC did not refuse it within 90 days, the legislation would have deemed such an application to have been granted with effect from HMRC’s receipt of it in September 2016. As DFGI was already a member of the VAT group in September 2016, a valid application would have had no legal effect. The decision given by HMRC related only to VAT grouping and was not a decision about the VAT registration of DFGI. The FTT was therefore correct to find that it had no jurisdiction. There was no right of appeal under section 83, VATA. The UT therefore dismissed DFUK's appeal.

Why it matters: This case provides useful confirmation that there is no right within the VAT legislation for a taxpayer to effectively amend its group registration date at a later date. As the UT noted, it is open to a taxpayer to invite a decision from HMRC in the exercise of its discretionary care and management responsibilities. Although such a decision would not give rise to a right of appeal to the FTT, it could, in principle, be challenged by way of judicial review proceedings.

The decision can be viewed here.