Country-specific updates: UK

HMRC clarifies VAT Treatment of Energy Bill Relief

HMRC has published additional guidance on the VAT treatment of the various measures that provide both domestic and non-domestic customers of energy suppliers with a level of relief from the rapidly rising costs of energy. The guidance clarifies VAT treatment for all three measures providing relief:

• the Energy Bill Relief Scheme;
• the Energy Price Guarantee; and
• the Energy Bills Support Scheme.

The first scheme is for non-domestic customers and the latter two are for domestic customers.

Under the first scheme, that is relevant for business, suppliers will be compensated for the reduced prices they are charging. It is provided in the guidance that the payments received in compensation are to be treated as grants and are outside the scope of VAT. Input tax incurred in the operation of the schemes will relate to the taxable supply of energy and shall be fully recoverable.

The schemes run from 1 October 2022 to 31 March 2023 and the full guidance can be found in section 2.9 of VAT Notice 701/19 - Fuel and Power.

Updates to VAT Construction Manual following Balhousie case

HMRC’s VAT Construction manual has been updated at sections VCONST21400 and VCONST21500. For context, for the purposes of zero-rating qualifying buildings, VAT legislation requires that the person receiving the supplies of construction services must be intending to use the building themselves solely for a qualifying purpose. However, once the building has been zero-rated, if it is used for a non-qualifying purpose or the building is disposed of, a ‘change in use’ charge will arise.

• VCONST21400 states that a ‘change of use’ charge is triggered where the ‘entire interest’ in a building is disposed of, irrespective of whether the purchaser uses it for a qualifying purpose
• VCONST21500 has updated guidance on what constitutes the disposal of the ‘entire interest’ in a building in the context of sale and leaseback transactions following the Supreme Court decision in Balhousie Holdings Ltd [2021] UKSC 11. According to the guidance, a sale and leaseback transaction will not constitute the disposal of the ‘entire interest’ in a building for these purposes where all of the following apply:

1. the property is sold, with an immediate leaseback in place, which is a seamless transaction with no time lapse
2. the lease must be for the remaining ten-year term from the original acquisition date or longer
3. the property must be continually used / operated for a qualifying purpose, meaning the business suffers no break in trade during the sale and leaseback.

UK First-tier tribunal decision in Ashtons Legal (partnership) [2022] UKFTT 422 (TC) – firm leasing premises through a company held to be recipient of supply

Ashtons Legal (partnership) (“the Firm”) wanted to enter into a new commercial lease. At the time, only four partners in a partnership could enter into a lease because of the Law of Property Act 1925 and so a company was formed to acquire the lease, acting as nominee for the firm. This was done in the full knowledge of the landlord. The company remained dormant, and no charges were made between the company and the partnership.

The Firm was in sole occupation of the premises for the purpose of its business, and the rent invoices although addressed to the company were sent to the Firm, which processed and paid them, and reclaimed the VAT incurred.

HMRC raised an assessment on the basis that there were two supplies: from the landlord to the company and from the company to the partnership. As no option to tax was made by the company, the latter supply was exempt, and no input tax recovery was available to the Firm.

After reviewing the case-law on economic substance, the tribunal found in favour of the Firm holding that the Firm could be regarded as receiving the taxable supplies by the Landlord  which were used for the purposes of carrying on its business, and the VAT charged on the rent was therefore recoverable as input tax by the firm. The economic and commercial reality was that the firm paid the rent in return for which it secured the premises from which it carried out its business, with the Company a “mere cipher”, inserted into the leases to deal with matters of land law.

Comment: The FTT has placed importance on the economic and commercial reality of the supplies and “substance over form” to hold that the VAT charged on the rent was recoverable as input tax by the Firm, notwithstanding that the invoices were addressed to the company . This is a sensible decision to show that contracts need to be construed consistently with economic and commercial reality to determine  the true nature of the supplies , but it may have avoided difficulties if the nominee company had treated itself as an agent acting in its own name and as making its own supplies to the Firm and issued its own invoices.