Summary
December and early January have been relatively quiet in the world of indirect tax; however, one of Grant Thornton’s clients, Global by Nature, which produces drink powders, has recorded a significant success in the First Tier Tribunal, which found that its plant-based powders are zero rated. The decisions from the European Court of Justice will have little impact in the UK, and the other rulings from the Tribunals are steps on the way to further litigation.
News from the UK Courts and Tribunals
Upper Tribunal
[2024] UKUT 397 (TCC) Colchester Institute Corporation
Comment: this is a continuation of the Colchester Institute Corporation saga where the taxpayer argued successfully that as a Further Education College it was making business supplies of education in return for consideration, rather than non-business activities funded by grants. It seems that HMRC are trying to engineer a hearing in the Court of Appeal, as the Upper Tribunal was unlikely to have found in their favour since there is another Upper Tribunal that found the opposite of HMRC's current position. It is one to watch for those involved in the Further Education sector, as it could affect their right to issue certificates for zero rating of charitable buildings.
First Tier Tribunal
Global by Nature TC/2023/07672 – zero rating of protein rich drink powders
Background: Global by Nature produces a number of products, including the Sunwarrior plant based powders, which it had originally treated as standard rated. With the help of Grant Thornton, it persuaded HMRC that some of its other products were zero rated but HMRC refuted the claim in relation to Sunwarrior powders, so the taxpayer appealed to the FTT.
Judgement: The Tribunal provided two possible interpretations, but the overall conclusion is that the products in this appeal should be zero rated and should not be considered standard rated sports drinks under the Item 4A provision introduced in the pastygate budget of 2012.
Under the first interpretation, all three disputed Sunwarrior Products are not sports drinks and therefore should be zero rated. This is because the Tribunal applied a two-stage test:
“In summary, we have decided that Item 4A sets out a two stage test, so that a product only falls within the exception if it is both a sports drink and either (a) advertised or marketed in the way prescribed by the provision, or (b) similar to other sports drinks which are so advertised or marketed."
The Tribunal went on to find the meaning of a sports drink in Item 4A is a drink which contains significant amount of carbohydrate (usually sugar) and may contain salts (such as sodium and potassium). As the Sunwarrior products had only a small proportion of sugars, it found they were not sports drinks.
In its second interpretation the Tribunal said that if its first interpretation was wrong, i.e. Item 4A applied to any drink as per HMRC’s understanding, then the two out of three of the products should still be zero rated.
Comment: This is a significant victory since there is no statutory definition of a sports drink and the Tribunal has made a finding of fact in providing a definition. It seems likely that HMRC will regroup and appeal this point, but they would have to show that no reasonable Tribunal would have made the same finding of fact. The second interpretation of the Tribunal provides significant (but not complete) reinforcement to zero rating of the products.
Daniel Rice, VAT Director, Head of Food & Beverage said, “this decision is a huge potential opportunity for all in the protein/powdered supplements sector”.
TC09374 Align Technology Switzerland GmbH & Anor (Align)
Comment: This is an unusual case where Align had historically treated its supplies of orthodontic aligners as exempt supplies on the basis they are dental prostheses (one of the few supplies of goods that are exempt) in line with HMRC’s published guidance. It seems HMRC took a different view in mid 2023 and assessed for large amounts of output tax, which then led to a claim for Judicial review. HMRC then backed down on the assessments but maintained their view the supplies are standard rated. This led to the unusual dispute with some urgency as to whether the appeal stood or should be struck out. Judge Greg Sinfield seems to have provided an appropriate answer that, although the assessments have been withdrawn, the fundamental liability dispute can proceed into a hearing scheduled for January 2025.
Court of Justice of the European Union decisions
There have been a number of VAT related Judgements from the CJEU in December, but they will have little or no impact in the UK.
In a dispute originating in Belgium, the court held the Belgian decision in 1978 to tax the radio and TV licence fee (in order that the public broadcaster could recover the VAT incurred on its costs) is allowed. In the UK, the BBC and S4C are able to recover their VAT even though the licence fee is not within the scope of VAT. Case C-573/22 A, B, Foreningen C - Denmark.
In recent years Romanian tax authority and their national Court have referred several disputes to the CJEU on issues that we would not find contentious. The latest case confirms that VAT incurred on administration costs by a VAT group that makes taxable supplies is recoverable. Case C527/23 Weatherford Atlas Gip SA - Romania.
HMRC
RCB 3/2024 and Guidelines for Compliance 11 GfC11 VAT on cladding remediation work
On 17 December 2024, HMRC clarified its policy on the deduction of VAT incurred on cladding remediation works which are carried out on existing residential buildings.
Neither the GfC nor the RCB appear to herald any change in policy. The GfC provides three broad examples of how to apply the rules on VAT treatment of remedial works:
- works needed due to changes in building safety regulations. In this example HMRC see these works as a new supply of services so cannot be zero rated.
- works needed due to incomplete work in the original construction . In this example HMRC say the works are not part of the original construction so cannot be zero rated.
- works needed due to faults in the original construction. In this example HMRC would expect the developer to have engaged the original contractor. Where the developer engages a third party, we would usually expect there to be a new standard rated supply.
Comment: As might be expected, HMRC are leaning towards allowing zero rating by asserting that there is in most cases a “new” supply. Our initial reaction is that HMRC's views in the first example have merit, they are too restrictive in the second and the third example is too simplistic when compared to the guidance in VATConst02600 which says as long as the remedial works are carried out as soon “as practicable” they can be zero rated.
This is a complex and contentious area, and it seems HMRC may feel they were too lenient in the period soon after the post Grenfell cladding issue first arose.
Q1 2025 CPD Tax Webinar
George Williams, VAT director will be presenting in the Grant Thornton Tax CPD webinar on 28 January on challenges that businesses will likely face in relation to VAT in 2025, covering topics such as e-invoicing, ViDA, and live events changes in the EU. Please use this for further information and register your place.
