VAT Insights – August 2023

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A VAT summary document for busy accountants in general practice

In this August 2023 edition, the three VAT cases are:

  • Hotel La Tour Ltd                                                       – “Deal Fees” – Extension of VAT recovery?
  • Sonder Europe Ltd                                                    – Serviced Apartment operators
  • Illuminate Skins Ltd                                                 – VAT liability of medical care

The first two deal with some very important VAT concepts, with the third shining some light on VAT and the medical profession. Should you have any clients that these are relevant to, it may be worth raising the next time you speak with them.

Hotel La Tour Ltd (“Hotel”)

This is a very significant decision of the Upper Tribunal (“UT”) which was handed down last week. This follows the decision of the First Tier Tribunal (“FTT”) in January of this year. The UT, in upholding the earlier decision, found that the application of the law to the facts in this case as “unimpeachable”.

You should investigate whether any of your clients may benefit from this decision and make protective claims relating to fundraising transactions in the last four years ASAP. This is due to potential claims being restricted to a period of four years.

In summary, Hotel needed to pay for the development of a new £30m hotel in Milton Keynes. To fund this, it decided to sell shares in its underperforming hotel. It incurred various professional fees.

HMRC disallowed VAT recovery on the basis that the professional fees were “directly and immediately linked” to a VAT exempt supply i.e., the sale of shares in its subsidiary company.

The decision of the UT challenges HMRC’S traditional view of input tax, in that it must always be attributed to the first supply made in a chain. As Hotel’s activities will ultimately generate VATable income i.e., hotel accommodation, VAT recovery on professional fees incurred was allowed. It was considered to be a “cost component” of the VATable activities, rather than the VAT exempt sale of shares.

This decision opens up the ability to recover VAT, where hitherto HMRC may have said no! Accordingly, where VAT on costs support downstream VATable activities, a VAT claim may now be available.

Should you wish to discuss this in relation to any of your client scenarios, please don’t hesitate in giving me a call.

Sonder Europe Limited (“Sonder”)

Suffice to say, this decision of the FTT has come at the right time, for Serviced Apartment operators, in the middle of the holiday season. However, it is not the end of the road…

Briefly, Sonder rented residential accommodation from third party landlords. Some were furnished and others, unfurnished. It in-turn made onward supplies to guests without marketing itself as a tour operator or travel agent.

Sonder maintained that it was acting in the capacity of a tour operator. Its supplies should therefore be subject to the Tour Operators Margin Scheme (“TOMS”).

The TOMS rules apply where a business buys-in and re-sells travel, accommodation and certain other services in its own name. Where it applies, VAT on direct costs incurred is irrecoverable and VAT is only payable on the margin made.

The main advantage to be gained for small operators, is that VAT registration may be delayed. The margin, rather than the total turnover figure, is the relevant figure for VAT registration purposes.

One important area which this case dealt with, was the idea of a “material alteration” being made. HMRC had consistently relied on this having occurred. Therefore, VAT fell due on the full selling price, as opposed to the margin made. Accordingly, VAT registration was necessary.

As you may have imagined, HMRC didn’t agree with Sonder. It wanted VAT on the full price charged.

The FTT has found in Sonder’s favour.

This is a very welcome judgement. However, it should be taken cautiously as it’s:

  1. Only a FTT decision. As such it is not binding on any other courts to follow;
  2. Likely that HMRC will appeal this decision, so the final decision may be many years off; and
  3. Come at a time when the FTT was bound by EU legislation… which is not the case anymore.

In the event of you wanting to have a chat to discuss the ramifications of this case for any of your Serviced Apartment operators, please feel free to give me a call.

Illuminate Skins Ltd (“Illuminate”)

Illuminate operated a private clinic offering a range of treatments including fat freezing, thread lifts, chemical peels, fillers etc. It registered for VAT in August 2014 and deregistered in 2017.

HMRC raised an assessment for underpaid VAT, claiming that the supplies made were VATable. Illuminate considered that the supplies were VAT exempt, in line with the VAT exemption as being the provision of medical care.

The main issue was whether these supplies fell to be considered “medical care” and therefore VAT exempt.

The FTT, relying on earlier decisions made, ruled that the supplies were not “medical care”. The fact that people went to the clinic feeling unhappy with some aspect of their appearance and may have been happier following a procedure being performed, did not mean that the treatment was medical, or had a therapeutic aim.

As mentioned in the earlier decision above, as this is an FTT decision, it is not binding on any other courts to follow. In the event of you having a client which is currently grappling with this issue, please give me a call.

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