Monthly VAT news - February 2013

BAA Limited - Court of Appeal disallows input VAT recovery on takeover fees

Following on from our July 2011 edition, the Court of Appeal has released its long-awaited decision in the BAA Limited (“BAA”) case, agreeing with the Upper Tribunal and thereby finding against the taxpayer.  A new company, Airport Development and Investments Limited (“ADIL”), was formed to take over the UK airport operator BAA, and shortly after the takeover, ADIL joined the BAA VAT group.  The representative member then proceeded to recover the input VAT incurred on the associated acquisition costs for the group as being attributable to the general overheads of the group.  The Court of Appeal ruled that the Upper Tribunal was correct to overturn the decision of the First Tier Tribunal as erroneous in law; it held that BAA was not entitled to the recovery of input tax incurred and paid by ADIL, since there was no direct and immediate link between the services supplied to ADIL and the outward supplies made by BAA.  In addition, at the time the costs were incurred, ADIL had no business activity of its own to enable it to recover the VAT; it only existed to acquire shares in BAA.  Furthermore, there was no evidence of ADIL having an intention prior to the takeover, of joining the BAA VAT group or to make taxable supplies in its own right.  This decision means that it is now imperative that the VAT position is carefully considered for all mergers and acquisitions.  It is not known whether BAA will appeal this further.

Rooms provided in hotels or similar establishments with catering – standard rated

Following the review and publication of ‘Notice 709/3 Hotels and holiday accommodation’ in October 2011, HMRC has issued Business Brief 02/13 confirming the VAT treatment of rooms provided in hotels and similar establishments for the purpose of supplies of catering.  The revised wording in the notice relates to a previously unpublicised change in HMRC’s view, and it is hoped this Business Brief will clarify its stance.  In summary, the provision of accommodation in a hotel, inn, boarding house or similar establishment for the purpose of catering, is standard rated, regardless of whether the catering is supplied by the operator of the hotel, etc, or by another person.  No assessments will be raised for businesses that have treated such supplies as exempt in the past, but all supplies must be treated correctly from 22 January 2013, in accordance with this Business Brief.

Effective date of VAT registration – request to backdate application allowed

The First Tier Tribunal has found in favour of the taxpayer in the Cambrian Hydro Power Limited case.  In summary, the taxpayer applied online for VAT registration, selecting his effective date of registration as 1 January 2012.  The taxpayer then realised that he could only recover input VAT on services up to six months prior to the effective date of registration.  Consequently, the taxpayer requested his VAT registration be backdated to 1 April 2009, to enable him to recover the VAT incurred, but HMRC refused this.  The Tribunal, however, has ruled that HMRC’s decision was “unfair and unjust”; there was a genuine error on the taxpayer’s part since he had clearly not understood the implications of his actions, and the HMRC officer should have taken account of this.  The appeal was therefore allowed, with the Tribunal ordering that the matter be referred back to HMRC for a reconsideration of the backdated application.

TNT Post UK Limited – permission granted for Judicial Review

The High Court has granted permission for TNT Post UK Limited (“TNT”) to apply for Judicial Review in respect of the exempt access services supplied by Royal Mail.  Essentially, ‘access services’ or ‘downstream services’ are postal services initiated by a commercial provider, with Royal Mail performing the ‘last mile’ of the delivery from a Royal Mail depot to the recipient’s doorstep.  The matter in question concerned the previous Court of Justice of the European Union (CJEU) judgement in the TNT case, on whether certain access services remain exempt.  TNT argued that the disputed access services (which are subject to price-control regulations), did not fall within the exempt statutory definition of public postal services in Schedule 9 Group 3 of the VAT Act 1994; therefore they should be subject to VAT.  Moreover, TNT contended that these services were not provided in the public interest and that the exemption leads to distortion.  Although the High Court initially refused this application, it has now reversed its decision, noting that the CJEU’s language was ambiguous and could be interpreted in the manner in which TNT has done; TNT’s views on neutrality and competition also need to be considered.  The Judge recommends that  further reference to the CJEU on the specific question of access services might also be desirable.

For further information or advice about any of these issues please contact indirect tax manager Luigi Lungarella on +44 (0)20 7516 2228 or by email