Indirect Tax Update for week ending 22 July 2016

1. © 2016 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
The highlight of this week's ITU
is the First-tier Tax Tribunal's
judgment in the case of
Associated British Ports (ABP).
A warning for all operators of
public customs warehouses! The
Tribunal decided that VAT paid
by ABP arising from a lack of
compliance with its warehouse
approval could not be reclaimed
as input VAT.
The Upper Tribunal's judgment
in the case of General
Healthcare Group (GHG) has
been released. GHG tried to
argue that it made separate
supplies of prostheses from its
hospital and medical care
services.
Finally, the FTT has issued an
interesting decision relating to
the recovery of input VAT by a
company. The sole director of
the company had been invoiced
for legal services in defending an
action against him by his
previous employer. HMRC
considered that the company was
not entitled to the claim.
27 July 2016
Associated British Ports
The First-tier Tax Tribunal has dealt Associated British Ports (ABP) an expensive blow
in a recent tribunal ruling. ABP is authorised by HMRC to operate a public customs
warehouse. One of its customers stored goods in such a warehouse in Swansea but
went into administration. Subsequently, it transpired that some of the goods deposited
into the customs warehouse had been removed without the payment of customs duty
and import VAT. Under the terms of the warehouse authorisation, both the depositor
and ABP were jointly and severally liable for any customs debts arising and with the
depositor in administration, HMRC called on ABP to pay duty of £400,000 and import
VAT of £1,200,000.
The question for the First-tier Tax Tribunal was whether ABP was entitled to reclaim
the import VAT. ABP contended that the VAT had been paid in connection with its
own taxable activities of operating the customs warehouse. HMRC on the other hand
argued that the VAT was not input tax of ABP and that, as a result, it could not be
reclaimed.
The FTT agreed with HMRC and ruled that the customs debt (including the import
VAT) was incurred through non-compliance with the terms and conditions of the
authorisation. As the debt was not incurred through the normal taxable activities of
ABP, it ruled that ABP did not have the right to recover the input tax. The fact that
ABP took a 'lien' over the goods did not mean that its business activity was the taxable
disposal of the goods. In any case, the debt arose prior to the period in which the lien
was taken over the goods and so was not of material consideration.
Comment – This case illustrates that businesses operating public warehouses
can be at risk if their customers remove goods from the warehouse without
payment of duty or VAT. Operators should be aware that HMRC will, where
necessary, enforce the joint and several liability clause of the authorisation and
hold the warehouse operator liable for the customs debts of its customer. To
make matters worse, the case highlights that any VAT paid by the operator
cannot be reclaimed and so represents a real cost (in ABP's case a very hefty
cost). Warehouse operators need to ensure that they have appropriate due
diligence procedures in place.
Issue24/2016
Ouch! – Customs Warehousekeepers
beware!
Indirect Tax Update

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GRT100456
General Healthcare Group Ltd (GHG)
Upper Tribunal
As long ago as 1997, the Court of Appeal issued a judgment in the case of Wellington Private
Hospital Ltd which decided that the provision of prostheses to in-patients in private hospitals were
zero-rated supplies for VAT purposes rather than a component element of a single exempt supply of
hospital and medical care services. Following that decision, GHG (and many other private hospitals)
submitted a claim to recover VAT incurred on the purchase of such prostheses but HMRC refused
the claim on the basis that subsequent case law of the Court of Justice meant that Wellington was
wrongly decided. GHG and the other private hospitals appealed and a lead case was identified. GHG
agreed to fall in behind the lead case (Nuffield). Unfortunately, Nuffield lost its appeal at the First-tier
Tax Tribunal (FTT) and did not appeal further.
GHG applied to the Tribunal to be 'unbound' from the Nuffield decision but this application was
refused on the basis that the facts of its case were virtually identical to those in the Nuffield case.
GHG appealed to the Upper Tribunal arguing that the FTT was wrong in fact and in law. However,
on the evidence, the Upper Tribunal concluded that, from the point of view of the typical patient
who requires a prosthesis, GHG makes a single supply of hospital and medical care which includes
providing the prosthesis to be fitted by the consultant. Accordingly that single supply of hospital and
medical care is an exempt supply and the VAT incurred on the purchase of the prostheses could not
be reclaimed by GHG – appeal dismissed.
Comment
Yet another case
concerning whether
there is a single supply
or separate supplies.
Had the Tribunal ruled
that GHG had made
separate supplies of
medical care services
and of the prostheses it
would have been
entitled to a VAT
refund in excess of
£3 million. With that
amount at stake it is
conceivable that GHG
will apply for leave to
appeal the matter to the
Court of Appeal.Praesto Consulting Ltd
Comment
It would not be a
surprise if HMRC
decided to appeal this
decision to the Upper
Tribunal. There have
been many previous
cases with similar fact
patterns where the
tribunals and courts
have found 'the other
way'.
Whilst each case is
decided on its own
facts and merits, the
general rule is that a
company is not entitled
to recover VAT
incurred on any private
expenditure of its
directors.
First-tier Tax Tribunal
Praesto Consulting Ltd had been established by its sole director Mr Ranson. Prior to the
incorporation of the company, Mr Ranson was an employee of a company. He left that employment
and set up Praesto Consulting in direct competition. His former employer sued him for breach of his
contract of employment and Mr Ranson engaged lawyers to assist him in defending that action.
The issue in the case was whether the company (Praseto) was entitled to reclaim VAT charged by Mr
Ranson's lawyers that had been invoiced directly to Mr Ranson. HMRC considered that the VAT
had not been incurred by the company for the purpose of its business but had been incurred by Mr
Ranson in his private capacity. HMRC relied on a Court of Justice judgment (the Becker judgment)
which found that, in similar circumstances, there was an insufficient link between the legal costs and
the taxable activities of the company. As such, the CJEU found that the VAT could not be reclaimed
by the company.
In this case, however, the Tribunal was satisfied that such a link existed. The company had a vested
interest in the outcome of the proceedings against its sole director and, on the evidence, despite the
invoices being made out to Mr Ranson, it was clear that the legal services had been supplied to the
company. In the circumstances there was a link between the legal costs and the company's taxable
activities and the VAT could therefore be reclaimed in full.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556