Deeks VAT News issue 35

August  2023 – Issue 35 Keeping you up to date on VAT changes In this months newsletter we cover the following: VAT recovery allowed on professional services incurred on share sale. The Hotel La Tour Ltd case Protentional Vat Saving on Serviced Accommodation via TOMS. The Sonder Europe Limited case Is a cosmetic treatment exempt […]

August  2023 – Issue 35

Keeping you up to date on VAT changes

In this months newsletter we cover the following:

VAT recovery allowed on professional services incurred on share sale. The Hotel La Tour Ltd case

Protentional Vat Saving on Serviced Accommodation via TOMS. The Sonder Europe Limited case

Is a cosmetic treatment exempt medical care? The Illuminate Skin Clinics Ltd case

How to characterise a taxable supply – The tests

Apply to receive VAT data from HMRC

New HMRC guidance on error reporting

Business or non-business? The 3D Crowd CIC case

A VAT Did you know?

Popcorn is standard rated, but microwavable popcorn is VAT free.

Latest from the courts

HMRC v Hotel La Tour Ltd [2023] UKUT 178, the Upper Tribunal – HMRC has lost its Appeal to the Upper Tribunal.

VAT recovery allowed on professional services incurred on share sale.

This case is important for businesses that have not recovered VAT on professional fees that relate to the sale of shares when those shares were sold to raise funds for a taxable business venture.

This could result in a claim against HMRC for under recovered VAT.  


Hotel La Tour Ltd is the holding company of a corporate group that operates a chain of luxury hotels, each of which was owned and run by a subsidiary company. In 2015, Hotel La Tour decided to build a new hotel in Milton Keynes, with the project to be financed by selling its existing hotel in Birmingham. The shares in the subsidiary that owned that hotel were eventually sold to an unrelated buyer in 2017.

Hotel La Tour incurred VAT of £76,000 on various professional services related to the sale of those shares, including the fees of its marketing agent, solicitor, and tax advisers. HMRC disallowed VAT recovery on the basis that the professional services were used to make an exempt supply of shares. The sale of shares is exempt from VAT and therefore any related VAT is not recoverable. Hotel la Tour appealed to the First Tier Tribunal on the basis that the fees related to the costs of raising funds to create the new hotel, which would be a taxable business for VAT purposes.

The First-tier Tax Tribunal found in favour of Hotel La Tour. It held that the VAT was recoverable because there was a direct and immediate link between the costs incurred and its taxable business of building, developing and the eventual management of the new hotel in Milton Keynes. The objective purpose of incurring the cost of the services was to raise funds to pay for the development of the Milton Keynes hotel.

HMRC appealed to the Upper Tier Tribunal continuing its argument that you should only look at the immediate supply to which a cost is linked when deciding whether VAT recovery on the costs of raising those funds is possible.  It is not possible to look at the purpose of the fundraising.

The sale of shares is VAT exempt, so according to HMRC, VAT on the fees charged by advisors working on the sale can only be exempt input tax and therefore not recoverable.

The Upper Tier Tribunal disagreed. One factor is that shares usually have a market value. In this case, HLT couldn’t increase the price for the shares to include the costs of paying its professional advisors. These costs therefore reduced the net proceeds of the sale, meaning that less was available to fund the downstream activities. The professional fees were thus “cost components” of the downstream activities, not the sale of the shares.

What does this mean for other businesses?

The impact of this decision is not restricted to the hotel sector and could potentially allow any business to recover VAT on the costs of selling a subsidiary to raise funds to pursue another business activity that is taxable for VAT purposes.

HMRC has yet to comment on the loss of this case and may Appeal further. This could result in long and complex litigation before the position is firmly settled.

Businesses affected by this decision need to bear in mind that potential claims are restricted to four years and should consider whether to submit a protective claim to HMRC to avoid their claim being out of time.

Sonder Europe Limited v HMRC [2023] TC08853 – Protentional Vat Saving on Serviced Accommodation via T0MS.

Are you aware that the Sonder Europe Limited has won its Tour Operators Margin Scheme (“TOMS”) case against HMRC? 

This case is significant for providers of serviced accommodation and could result in a substantial claim of overpaid VAT. 


The First Tier Tribunal held that the onward supply of rented apartments falls within the scope of TOMS.

TOMS is compulsory and where it applies VAT is due only on the profit margin rather than the full selling price of the accommodation.  This can save you a significant amount of VAT. 

Sonder leased apartments and let them to travellers as short-term accommodation. HMRC raised an assessment on the basis that such supplies did not fall within TOMS and VAT was due on the full selling price not just on the profit margin. The FTT allowed Sonder’s appeal, holding that:

  1. Sonder was a “tour operator” for the purposes of TOMS; and
  2. the changes made by Sonder to the apartments (e.g., painting and furnishing empty apartments) did not count as a material alteration under TOMS, which means TOMS applied. 

FTT decisions are not binding on other parties, but where the facts are the same, they should be followed. 

What does this mean for serviced accommodation providers? 

  • If you already use TOMS, continue to use it.
  • If you do not already use TOMS, you can implement it if your supplies fall within TOMS.
  • If you do not already use TOMS, you can put in a claim to correct the past 4 years. 
  • If you buy in accommodation and let it out as serviced accommodation and account for VAT on the full selling price under the normal VAT rules, YOU MAY HAVE PAID TOO MUCH VAT you may be able to submit a claim (going back 4 years) to recover the VAT overpaid to HMRC. 

HMRC have 56 days to appeal the decision to the Upper Tier Tribunal. If they do, we can stand your claim behind this case.

Time is of the essence. It is vital to act promptly, given the 4-year statutory time limit for submitting claims. Due to TOMS’ annual adjustment requirement, you could potentially forfeit a year’s claim, if you do not act now. 

Is a cosmetic treatment exempt medical care? The Illuminate Skin Clinics Ltd case

In the Illuminate Skin Clinics Ltd First-Tier Tribunal (FTT) case the issue was whether cosmetic procedures qualified as exempt medical treatment.


The Appellant runs a private, ie; non-NHS clinic offering a range of aesthetic, skincare and wellness treatments advertised as: fat freezing, thread lifts, chemical peels, fillers, facials, intravenous drips and boosters. The Appellant’s sole director and shareholder, Dr Shotter, complies with Item 1 (below) in terms of qualifications, ie; she is enrolled on the register of medical professionals.

The list of treatments included:

  • Botox
  • Dermal fillers
  • CoolSculpting
  • Microsclerotherapy
  • Prescription skincare
  • Chemical peels
  • Microdermabrasion
  • Thread lifting
  • Thermavein
  • Aqualyx
  • Platelet-rich plasma treatment.

HMRC contended that these supplies were standard rated because there is no medical purpose behind the treatments, and they are carried out for purely cosmetic purposes. An assessment was raised for output tax on this income.

The Appellant argued that what it provided was exempt medical care via The VAT Act 1994, Schedule 9, Group 7, item 1 – “The supply of services consisting in the provision of medical care by a person registered or enrolled in any of the following:

The register of medical practitioners…”

And its contention was that the primary purpose of the treatments was “the protection, maintenance or restoration of the health of the person concerned”

In the Mainpay case it was established that “medical” care means “diagnosing, treating and, in so far as possible, curing diseases or health disorders”


Although there may have been a beneficial psychological impact on undergoing such treatments and this may have been the reason for a patient to proceed (and they may be recommended by qualified medical professionals) this, in itself, was insufficient to persuade the judge that the services were exempt. Consequently, the appeal was rejected, and the assessment was upheld.

The FTT found that there was very little evidence of diagnosis. This was important to the overall analysis because diagnosis is the starting point of medical care. Without diagnosis, “treatment”, in the sense of the exemption, is not something which is being done responsively to a disease or a health disorder.

The fact that people go to the clinic feeling unhappy with some aspect of their appearance, and (at least sometimes) are happier when something is done at the clinic about that aspect of their appearance, does not mean that the treatment is medical, or has a therapeutic aim.

It was telling that the differentiation, in Dr Shotter’s own words, between what the clinic does from what “a GP or other health professional” does is, diagnosis. It also highlighted the general trend or purpose of the clinic’s activity – helping people to feel better about their appearance, in contexts where their appearance is not itself a health condition, or threatening to their health in a way which mandates treatment of their appearance by a GP or another health professional.

Helping someone to achieve goals in relation to their appearance, which is what this clinic did, is not treating someone’s mental health status, but is going to their self-esteem and self-confidence. It is a misuse of language to say that this is healthcare in the sense that it would fall within Item 1 of Group 7.


There has been an ongoing debate as to what constitutes medical care. Over 20 years ago we were advising on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures.

It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.

How to characterise a taxable supply – The tests

In the age-old matter of whether a supply is separate/composite/compound for VAT purposes which and what is the nature of that supply, the Court of Appeal case of Gray & Farrar International LLP has provided helpful guidance. A background to facts of the initial hearing (although this decision was overturned by both the UT and the CoA).

I have previously considered these types of supply. Although not specifically concerning composite/separate supplies, the case sets out a hierarchy of tests to be applied in characterising a single supply for VAT purposes which now sets the standard. These tests are:

  1. The Mesto predominance test should be the primary test to be applied in characterising a supply for VAT purposes.
  2. The principal/ancillary test is an available, though not the primary, test. It is only capable of being applied in cases where it is possible to identify a principal element to which all the other elements are minor or ancillary. In cases where it can apply, it is likely to yield the same result as the predominance test.
  3. The “overarching” test is not clearly established in the ECJ jurisprudence, but as a consideration the point should at least be considered in deciding averments of predominance in relation to individual elements and may well be a useful test in its own right.


The Mesto Test

CJEU Mesto Zamberk Financini (Case C-18/12)

The primary test to be applied when characterising a single supply for VAT purposes is to determine the predominant element from the point of view of the typical consumer with regard to the qualitative and not merely the quantitative importance of the constituent elements.


If a distinct supply represents 50% or more of the overall cost, it cannot be considered ancillary to the principal supply. In such cases an apportionment will usually be required.


A generic description of the supply which is distinct from the individual elements. In many cases the tax treatment of that overarching single supply according to that description will be self-evident.


One must also have regard to the Card Protection Plan Ltd case. This has become a landmark case in determining the VAT treatment for single and multiple supplies. In this case the ECJ ruled that standard rated handling charges were not distinct from the supply of exempt insurance. It was noted that ‘a supply that comprises a single service from an economic point of view should not be artificially split’. Notably many subsequent court decisions have since followed this outcome thereby suggesting a general lean towards viewing cases as single supplies where there are reasonable grounds to do so.

Apply to receive VAT data from HMRC

Credit reference agencies and other qualifying applicants can now apply for VAT registration data for use in making financial assessments.

A UK-based credit reference agency or similar financial organisation can apply for authorisation to get non-financial VAT registration data for the purpose of:

  • credit scoring
  • anti-fraud checking
  • compliance with other financial regulations

It may help small businesses and new start-ups gain access to credit and finance for the first time and give increased access to credit and finance to established VAT-registered businesses.

The data file will cover all VAT-registered businesses, not individual businesses or grouped by trade sector or geographical location.

In addition to the VAT registration number and available contact information, the data for each registered business includes the:

  • effective date of registration
  • overseas trader indicator
  • group or divisional registration indicator
  • organisational name
  • trading name and trading style
  • standard industrial classification code (trade class)
  • legal entity status
  • company number and incorporation date

Where applicable, this will also include the date of:

  • deregistration
  • transfer of a going concern

No financial or payment data is included.

The file shared will be updated weekly to ensure it is accurate.

HMRC will only share non-financial VAT registration data with you if your business has a genuine need to use it for the purposes set out in section 8(1) of the Small Business Enterprise and Employment Act (SBEEA) 2015.

How to apply

An interest may be registered by applying to receive VAT registration data by emailing:, quoting ‘VAT Data Sharing’ in the subject line.

New HMRC guidance on error reporting

HMRC has published new guidance to assist taxpayers on how to deal with errors discovered on submitted VAT returns. The catchy title is:

  1. Check if you need to report errors in your VAT Return
  2. Check if you need to notify HMRC about errors that are over the threshold on your VAT Return and find out how to report them.

The guidance sets out how to report errors of £10,000 or more (net of all errors). This broadly comes down to using the online service by completing a form VAT652 or adjusting a current VAT return.

New portal for VAT payment plans

VAT is normally due on the relevant due date*. However, HMRC has launched a new self-service portal for businesses to set up payment plans.

A business can set up a VAT payment plan online if it:

  • has filed its latest tax return
  • owes £20,000 or less
  • is within 28 days of the payment deadline
  • does not have any other payment plans or debts with HMRC
  • plans to pay off its debt within the next six months

A taxpayer cannot set up a VAT payment plan online if it uses the Cash Accounting Scheme, Annual Accounting Scheme, or makes payments on account.

If a business cannot set up a payment plan online it will need to contact HMRC.

HMRC will ask:

  • if you can pay in full
  • how much you can repay each month
  • if there are other taxes you need to pay
  • how much money you earn
  • how much you usually spend each month
  • what savings or investments you have

If you have savings or assets, HMRC will expect you to use these to reduce your debt as much as possible.

* For businesses that pay their VAT monthly or quarterly, the deadline for both submitting a return and paying the VAT owing is usually one calendar month plus seven days after the VAT period has ended

Business or non-business? The 3D Crowd CIC case

Business or non-business?

In the First-Tier Tribunal (FTT) case of 3D Crowd CIC (3D) the issue was whether a donation of goods, with a subsequent intention to sell similar goods constituted a business activity such that input tax incurred in relation to it was recoverable.


3D was formed at the beginning of the Covid 19 pandemic to produce face protection via the process of 3D printing. Such protection was in high demand, but there was a shortage of suitable products for healthcare workers. The appellant produced 130,000 face shields in the first six weeks of production, which was an admirable feat. However, it was not possible to sell this equipment without the appropriate accreditation. Consequently, to alleviate demand, 3D donated the PPE to the NHS.

By the time accreditation was given the demand for PPE had reduced so it was not possible to sell the 3D printed face coverings as initially intended.


The issue of business versus non-business has been a contentious issue in the VAT world from day one. This classification is important for two reasons. If an activity is a business (an economic activity) it could be subject to VAT and, as in this case, if an activity is non-business there is usually a restriction of input tax.


3D said that input tax could be recovered on costs which involved no direct onward supply of goods or services, but which laid the groundwork for them. That is, the input tax could be attributed to an intended taxable supply, even though that intention was not fulfilled by circumstances outside its control.

HMRC argued that per Longbridge the correct test for determining whether an activity is a business activity is whether there is a direct link between the services or goods supplied and a payment received by the supplier. In this case, there was not so no input tax was reclaimable. HMRC also referred to the decision in Wakefield College, supporting the proposition that an activity is only a business activity if it results in the supply of goods or services for a consideration.


The FTT found that the VAT incurred on supplies made to 3D, constituted elements:

  • in connection with 3D seeking CE certification
  • related to general overheads
  • related to VAT incurred on materials bought to produce the PPE

Input tax incurred on the costs of accreditation is recoverable because these were incurred in order to sell PPE in the future and for no other purpose. The fact that these costs are not linked to a particular supply (and is in the nature of preparing the ground for future supplies) was irrelevant per The VAT Act 1994, Schedule 1, para 10.

The VAT incurred on the general overhead costs and on the costs of producing the PPE was incurred in part for business purposes and party for non-business (donations) and should be apportioned using a method agreed between 3D and HMRC.


Another case highlighting the difficulty in identifying the distinction between business and non-business and the complexity of input tax attribution. The altruistic efforts of the CIC is to be admired, but such charitable (in the broad sense) activities do not always get their just reward in VAT terms.

Recovery of VAT on company cars

Further to our guide to the recovery of input tax on motoring expenses we are often asked about the specifics of a business acquiring a motor car. So, this article sets out the different rules.

Purchase of a car

If a business purchases a car outright, regardless of how this is funded, no input tax is claimable at all. However, If the taxpayer is either a taxi or driving instructor business, VAT falls to be 100% recoverable.

Hire Purchase (HP)

This is treated as a supply of goods as the ownership of the car passes at the end of the agreement. Similarly, to an outright purchase, input tax is blocked for all taxpayers except taxi and driving instructor businesses.

Lease hire

If the car is ‘qualifying car’, and is returned at the end of the agreement it is a supply of services; a lease. There is a specific rule which means that 50% of the VAT is recoverable on the rental payments if it is used for business purpose. The 50% block is to cover the private use of the car. Again, a 100% reclaim is possible if it is to be used for hire with a driver for carrying passengers or providing driving instruction.

The 50% block applies to all the VAT on charges paid for the rental of the car. This includes:

  • optional services — unless they’re supplied and identified separately from the leasing supply on the tax invoice
  • excess mileage charge — if it forms part of a supply of leasing but not if it was incurred on an excess mileage charge that forms part of a separate supply of maintenance

Personal Contract Purchase (PCP)

This is a little more complex because a PCP can either be treated as a supply of goods (the car), or a supply of services (a lease) depending on the terms of the contract. The following treatment is based on the Mercedes Benz Financial Services case.

The difference between services or goods:

This distinction depends on the level of the final payment. This is known as the Guaranteed Minimum Future Value (GMFV).


If the final optional payment (known as a balloon payment) is set at or above the anticipated market value (the GMFV) of the car at the time the option is to be exercised, the contract will be deemed a supply of leasing services with VAT on each instalment. A business can therefore recover 50% of input tax on each monthly payment. A balloon payment is the final “lump sum” which the agreement sets out is to be paid if a customer chooses to own the car at the end of the agreement.


If the final optional payment is set below the anticipated market value, such that any rational customer would choose to buy the car, the contract is a supply of goods with a separate supply of finance. VAT is therefore due on the supply of goods in full at the beginning of the contract and the finance element is exempt. In such cases input tax is 100% blocked.

The distinction

It is often difficult to distinguish between services and goods in relation to PCP cars. We find that the wording of contracts is often arcane and unhelpful (and not particularly drafted with VAT in mind). If the supply is not determinable by reference to the agreement documentation, a simple and practical solution is to consider the invoice. Broadly, if it is a lease the supplier will charge VAT on the monthly payments, but a purchase would mean VAT is charged in full up front at the tax point.

Input tax on repairs 

If a vehicle is used for business purposes, there is a 100% reclaim of the VAT charged on repairs and maintenance as long as the business paid for the work and the vehicle is used for some business purposes. It does not matter if the vehicle is used for some private motoring or if a business has chosen not to reclaim input tax on road fuel.

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