Weekly VAT Update – 29 August 2017
Whether a husband and wife partnership could recover VAT paid to a company they owned
This Upper Tier Tribunal case involved Mr and Mrs Kelly who were in a business partnership providing exempt financial advice and were not, therefore, VAT registered. They then bought a manor with an annex that had formerly been used as a stables. They lived in the house while a company, of which they were both controlling shareholders and directors, let the former stables to holidaymakers. Approximately two and a half years after acquiring the property, the company registered for VAT. Several years later, after their children had grown up and left home, it was decided to also let the house to holidaymakers. First, there was an extensive programme of alteration and refurbishment. The company treated the VAT on the refurbishments as recoverable.
Subsequently, Mr and Mrs Kelly were advised by accountants to form a new partnership to undertake the holiday letting of the manor, which was registered for VAT from 1 April 2013. At or around this time, a newly instructed VAT adviser identified that the expenditure and VAT recovery was in the company, whilst the proposed trade that would give rise to the VAT recovery was in the new partnership. He wrote to HMRC and explained that the company would act as the main contractor and invoice the costs to the new partnership. HMRC replied saying that the VAT incurred in earlier years should not be charged to the partnership. However, that is what took place, with a six page invoice having been produced. The company became insolvent and did not account to HMRC for the VAT on the costs invoiced to the new partnership; the new partnership claimed a refund of £108,000 on its June 2013 return, including the £93,300 charged to it by the company. HMRC responded by saying that they considered that there had been a transfer of a business as a going concern (TOGC) from the company to the partnership and that no VAT should be charged or be recoverable, and also assessed penalties of £46,238 for deliberate and careless errors. Shortly afterwards, HMRC changed its mind and said that there was not a TOGC, – instead, the company had consumed the costs and could not therefore sell them on to the partnership.
The First Tier Tribunal decided that the supply of fixtures and fittings could be supplied to the partnership, the VAT on which was £6,600 and recoverable. The appeal to the Upper Tribunal therefore concerned the remaining £87,700 which had been disallowed. The Upper Tribunal found that before March 2013, when the plan changed, there was no reciprocity of obligation between the company and Mr and Mrs Kelly; it was not contemplated that the company would make a supply to them and equally not in contemplation that Mr and Mrs Kelly would pay the company consideration. Additionally, the Upper Tribunal could not see how it could be said that the company has been making supplies of project management services to Mr and Mrs Kelly as the invoice suggests. The appeal was therefore dismissed.
VAT exemption for platform services
This First Tier Tribunal case concerned Blackrock Investment Management who provided investment management services via a platform. The platform was called “Aladdin” and one of the issues was whether the supply of services was exempt from VAT on the basis that it constituted the management of a special investment fund (SIF). The Tribunal ruled that Aladdin was capable of qualifying for VAT exemption as the management of a SIF because it carried out high-level performance and risk analysis, and multi-currency cash flow management and analysis, as well as regulatory services – but that would not apply in this particular case because not all the funds under management were SIFs.
A second issue in the appeal concerned the buying in of platform services from the USA which are subject to the reverse charge. Blackrock tried to argue that the reverse charge should not be applied to the VAT exempt part of the fund management. However, the Tribunal declared that it is not possible to apportion consideration for the purposes of the reverse charge VAT accounting.