Country-specific updates: UK

New guidance on compensation payments and termination fees

The UK tax authority has issued new guidance on compensation payments and termination fees. The guidance replaces guidance issued in September 2020 which has provoked widespread industry comment both for aspects of its approach and for its retrospective effect.

The tax authority has now reviewed its policy in the light of industry representations and notes that its revised policy, which will take effect from 1 April 2022, will result in fewer payments being regarded as within the scope of VAT than the policy published in 2020.

The new guidance reflects more closely the CJEU judgments in Meo (C-295/17) and Vodafone Portugal (C-43/19) which held that where customers pay fees to withdraw from agreements early, the amount charged will often be additional consideration for the supply of goods or services under the contract, and therefore are subject to VAT even if they are described as compensation or damages.

The guidance also confirms that dilapidation payments will not generally be regarded by the tax authority as further consideration for the supply of a lease. Such payments have long been widely considered to be damages payments outside the scope of VAT but there was some concern that HMRC had changed its policy on this and sees these payments as further consideration under the lease.

DLA Piper comment:

In the recent Scottish case, Ventgrove ([2021] CSOH 129), it was held that, the break fee was outside the scope of VAT where the fee was considerably less than the rent which would have been paid had the lease continued. The MEO and Vodafone cases were considered not to be directly in point. Until the position is clarified, a tenant may benefit from seeking a ruling from the UK tax authority if it cannot recover all its VAT.

However, the recent CJEU case, Apcoa (C‑90/20), suggests that the UK tax authority’s new policy may not go far enough. In this case it was held that private car parking penalties were subject to VAT because they were effectively consideration for the supply of parking, despite the fees being set at a punitive level. This is contrary to the UK tax authority’s new guidance which says that such fees are outside the scope of VAT where the amounts are “substantial and punitive” and designed to deter a breach of the terms and conditions. Accordingly, care should be taken with substantial penalties as well as smaller ones.

See our bulletin on this new guidance and here for a summary of the Apcoa case.

Beyond Brexit—HM Treasury launches consultation on new customs regime

Following an announcement in its Autumn Budget, the UK government has launched a consultation on improvements to the new customs regime following the UK’s departure from the European Union. The call for evidence invites views on three specific areas:

• The customs intermediary sector – the government seeks to understand how the sector is performing following a period of significant change and wishes to ensure that all traders, including SMEs, are able to access a customs intermediary at an affordable cost and that the service they receive is of high quality.
• The Simplified Customs Declarations Process (SCDP) and how its benefits can be increased to encourage further take-up.
• The Transit facilitation which went live on 1 January 2021. In particular, the government is seeking to understand the how the costs of using Transit (such as obtaining a financial guarantee, purchasing or accessing IT software and seeking expert advice) affect businesses’ decisions to use it and what the government may do to reduce them, as well as looking to introduce a more customer focussed information and guidance strategy.

The government says it is also interested in hearing other ideas about how the UK customs system could be reformed to make it simpler, easier to navigate and more responsive to stakeholders’ needs. The call for evidence follows the government’s 2025 UK Border Strategy published in December 2020 which set out the government’s vision for the UK border to be the most effective in the world.

Upper Tribunal finds that eligibility for VAT grouping depends on being established in the UK based on the place of supply rules

In HSBC Electronic Data Processing (Guangdong) Ltd and others v HMRC [2022] UKUT 41 (TCC), the Upper Tribunal has decided some preliminary issues before the case proceeds to a full hearing. HSBC Bank plc and five non-UK companies (or GSCs) were part of a UK VAT group. The GSCs were incorporated as part of a programme of relocating the provision of various functions and processes from the UK to offshore, lower cost jurisdictions. The GSCs (which had registered branches in the UK for company law purposes), provided services to and for the benefit of entities within the taxpayer group. In December 2017, the UK tax authority issued notices removing the companies from the VAT group with effect from October 2013 on the basis that they were not established or did not have a fixed establishment, in the UK. As an alternative argument, the tax authority argued that it made the decision to remove the entities from the VAT group with effect from January 2018 in exercise of its powers for the ‘protection of the revenue’.

While the decision released this month does not address the underlying issues of whether the bank’s entities were ‘established’ in the UK or had a ‘fixed establishment’ in the UK or whether the tax authority was entitled to remove the entities from the VAT group on grounds of protection of the revenue, it makes the following findings in relation to preliminary legal issues:

How is the concept of a ‘fixed establishment’ to be interpreted in the context of the grouping rules? Although the taxpayer tried to argue that the VAT grouping requirement was met if the close links between members of the group were forged in the UK, the tribunal agreed with the tax authority that each member of the group had to be established or have a fixed establishment in the UK. The tribunal also found that the concepts of ‘establishment’ and ‘fixed establishment’ in the place of supply rules and associated case-law inform the meaning of those terms in the VAT grouping rules.

Is the question of whether the UK discharged its obligation to consult the VAT Committee in implementing its VAT grouping rules relevant? The VAT Committee is an advisory committee consisting of representatives from Member States and the Commission. The VAT Directive permits Member States to implement VAT grouping ‘after consulting’ with the VAT Committee. The taxpayer argued that the tax authority had failed to consult the VAT Committee on several occasions when the grouping rules were changed in contravention of Article 11 PVD. The tribunal said that whether or not the UK had consulted adequately with the VAT committee could not be relevant, in principle, to the lawfulness of the tax authorities’ decision to terminate group membership of the taxpayer’s various offshore service companies. The cases relied upon by the taxpayer in which Member States had not consulted the VAT Committee had all been ones where national law had derogated from directly effective rights. As the VAT grouping rules in the VAT Directive do not have direct effect, the obligation to consult was not relevant.

Are the measures that a Member State (having adopted grouping rules) may adopt to prevent evasion or avoidance limited to abusive practice under Halifax principles? The tribunal said that the measures that a Member State may adopt can apply to tax avoidance as well as to tax evasion and abusive practices under Halifax (C-255/02) principles. Whereas an abusive practice can only arise where the ‘essential aim of the transactions concerned is to obtain a tax advantage’ tax avoidance as formulated in Direct Cosmetics (C-5/84) does not require an intention on the part of the taxpayer to avoid tax.

Appropriate date for terminating membership: The tribunal examined a technical issue around the factors to take into account when determining from which date a tax authority could reasonably terminate group membership including the relevance of the change of the tax authority’s policy in 2014 as to the criteria for group membership.

DLA Piper Comment:

This is a very important case, of relevance to a number of financial institutions which have adopted grouping arrangements including branches of overseas companies. None of these preliminary decisions are a surprise and all seem sensible and predictable. The analysis of whether the activities of the UK branches amounted to a UK fixed establishment and the meaning of "protection of the revenue" law is awaited.