Customers made payments for the Media Services to Virgin Media Payments Ltd (VMPL), a wholly owned subsidiary of VML and a member of the VML UK VAT group (the VAT group). Any customers that paid for the Media Services other than by direct debit paid an additional £5 payment handling charge to VMPL. Virgin Media argued that this charge was consideration for a separate exempt supply of payment handling services by VMPL. Virgin Media relied on the exemptions from VAT in article 153(1)(d) of the Principal VAT Directive and/or items (1) and/or (5) of VATA 1994 Sch 9 Group 5.

The fact pattern was similar to that considered by the CJEU in Everything Everywhere Ltd (EE). EE made supplies of mobile telephone services to customers. Where customers paid for the mobile telephone services other than by direct debit or BACS payment, EE charged an additional ‘separate payment handling charge’. The CJEU found that there was no distinct and independent supply of a payment handling service by EE. Virgin Media submitted that, on the basis of the Court of Appeal decision in Telewest, EE should be distinguished because the Media Services and payment handling services were supplied by two separate companies.

The FTT rejected this analysis. VMPL was a member of the VAT group, and any supply of goods or services by VMPL to a recipient that was not also a member of the VAT group was to be treated as a supply made by the representative member, VML. As VML was treated for VAT purposes as supplying both the Media Services and the payment handling services to the customers, it followed that there was no basis for distinguishing EE. As such, the FTT concluded that VML could not be treated as making a distinct and independent supply of the payment handling services.

In any event, the FTT went on to conclude that even if the payment handling services had amounted to a separate supply, that supply would not in any case fall within the exemption for payments. It was clear from the CJEU decisions in Bookit [2006] EWCA Civ 550, NEC (Case C-130/15) and DPAS (Case C-5/17) that, since VMPL did no more than instruct the relevant financial institutions to take steps to effect the payments, its supplies did not amount to an exempt activity.

Why it mattersThe FTT’s analysis appears attractive given the VAT grouping between VML and VMPL. However, even had VMPL been subject to a separate VAT registration, the decision suggests that it would not have benefited from VAT exemption for its supplies. It is now clear that the exemption for payments and transfers is a narrow one.

In contrast, however, the FTT did accept that there was nothing artificial in the arrangements that would have warranted applying the abuse principle. This was despite the fact that the decision to introduce VMPL into the structure had clearly been influenced by tax considerations.

Input VAT recovery by GP of an investment fundIn Melford Capital General Partners v HMRC [2020] UKFTT 6, the FTT held that the general partner of an investment fund was entitled to full recovery for input VAT incurred on both the set-up costs of the fund and also on the ongoing management costs. The tribunal rejected the argument that the costs should, at least in part, be attributed to the non-economic investment activities of the fund.

The appellant, MCGP, was the general partner of an investment fund (the fund) set up as an English limited partnership. The fund, acting through MCGP held shares

VAT grouping precludes separate supply analysis

In Virgin Media Payments Ltd v HMRC [2020] UKFTT 30, the FTT held that a payment handling fee charged

by a VAT grouped subsidiary of the Virgin Media group could not be separated from the main supply of media services by the group. In those circumstances, it was not possible to rely on the principle in Telewest [2005] STC 481 that supplies by different suppliers could not be treated as a single supply. Instead, the services were treated as made by the representative member of the group and, following the CJEU decision in Everything Everywhere Ltd (Case C-276/09), the payment handling service and media services formed a single indivisible economic supply that it would be artificial to split.

The decision, which was many years in the making, is long and complex and considers a wide range of VAT issues, including the exemption for payment services, the principle of abuse and the single supply rules. However, ultimately, the principal issue on which the decision stands appears to be relatively straightforward.

Virgin Media Ltd (VML) provided TV, broadband and telephone services (the Media Services) to residential customers in the UK under the Virgin Media brand.

Gary BarnettSimmons & SimmonsGary Barnett is a senior professional support lawyer in the corporate tax group at Simmons

& Simmons LLP. Before becoming a professional support lawyer, he advised on a wide range of corporate tax and VAT matters. Email: gary.barnett@simmons-simmons.com; tel: 020 7825 3313.

Heather RowlandsSimmons & SimmonsHeather Rowlands is a managing associate in the corporate tax group at Simmons &

Simmons LLP. She specialises in litigation concerning both direct and indirect taxes, and has experience litigating clients’ disputes at all levels of the courts and tribunal system. As well as being a qualified solicitor, Heather is a member of the CIOT. Email: heather.rowlands@simmons-simmons.com; tel: 020 7825 3106.

This month’s review covers two recent decisions of the FTT influenced by the existence of VAT grouping arrangements. The Virgin Media case involved a range of difficult issues, but the FTT was able to conclude that there could be no separate supply by a payment handling entity VAT grouped with the main provider of services. In Melford Capital, the VAT group was treated as a holding company, allowing certain investment activities of the group to be ignored as not amounting to a separate investment activity. Elsewhere, the Court of Appeal held that an officer of HMRC does not have to intend to make an assessment for one to exist, and HMRC confirmed that it has been given leave to appeal the digital newspapers decision to the Court of Appeal.

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in an Isle of Man company which in turn held shares in a number of SPVs, which each held underlying investments, such as commercial property. MCGP was owned by MCG LLP, an investment manager which provided advisory, property management and administrative services to both the Fund and to each of the SPVs.

MCGP and the LLP formed a VAT group of which MCGP was the representative member. Separately, the Isle of Man company and SPVs formed another VAT group. The supplies of services by the LLP to the SPVs, etc. were standard rated, but its supplies of services to the fund (through MCGP as general partner) were disregarded for VAT purposes.

MCGP sought to recover input VAT that it incurred on the set-up costs for the fund and also on ongoing running costs, such as audit, accounting, bookkeeping, etc. costs. It argued that since the only activities of the single entity consisting of the VAT group (MCGP and the LLP) were the taxable supplies of services to the SPVs, all of its input VAT was correctly attributable to its taxable supplies.

HMRC rejected that analysis. HMRC argued that whilst the VAT group provided some taxable supplies, it also carried on non-economic activities and that it was necessary to attribute the input VAT between the two. In particular, the Fund (and thus the VAT group) provided funds to the SPVs (in the form of capital and interest free loans) and the provision of such finance (in return for investment returns) was a non-economic activity.

The tribunal accepted that the VAT group (of MCGP and the LLP) should be treated in the same way as a holding company which carried on the taxable economic activity of providing management services to its subsidiaries. In a very short judgment, the tribunal rejected HMRC’s argument that MCGP carried on a separate non-economic investment business, distinct from its activities as an active holding company. Its activities (taking account of the activities of the LLP and those of the fund on behalf of which it acted) were acting as a holding company and it provided management services for consideration to its subsidiaries.

The set-up costs were incurred for the purposes of subscribing for shares in or providing loans to its subsidiaries with the intention of providing management services to them. As such, there was a direct and immediate link between the set-up costs and the taxable economic activity and MCGP was entitled to full recovery for the associated input VAT. HMRC had accepted that there was sufficient link between the ongoing costs and the taxable supplies of management and since the tribunal found that there was no separate non-economic activity, again the input VAT on those costs was fully recoverable.

Why it mattersThe case raises difficult issues on input VAT recovery. The nature of the supplies, given the existence of a VAT group, and the question whether any investment activities could be ignored, in particular, were challenging questions. The decision of the tribunal is short on analysis, but it takes the nature of the VAT group at face value, resulting in treating the VAT group as akin to a holding company making supplies of management services to its subsidiaries. It also takes the pragmatic approach of ignoring the existence of the (inevitable) investment element of the holding company relationship with its subsidiaries where there are taxable management activities. As such, it will be interesting to see if HMRC chooses to appeal the decision, particularly given that the VAT group arrangement in this case is not uncommon in the private funds sector.

Accidental assessmentsIn Aria Technology Ltd v HMRC [2018] UKUT 363, the Court of Appeal held that the question whether or not HMRC has made an assessment does not depend on the subjective mindset of the individual HMRC officer concerned.

The case concerned ‘missing trader’ or ‘MTIC’ fraud. The appellants had claimed a net repayment from HMRC of some £450,000, which HMRC rejected. Correspondence from HMRC indicated the correction that should be made to the input VAT claim in the appellant’s VAT return and, separately, indicated that the box in the return showing the net tax due to HMRC should be some £313,000. HMRC did not send out their normal standard assessment letter.

The appellants denied that these letters amounted to an assessment by HMRC and, under cross-examination, the HMRC inspector concerned admitted that he did not think he had made an assessment. Accordingly, the appellants argued that, whilst they might be denied the VAT repayment they claimed, HMRC could not enforce payment of the £313,000 against them. Nevertheless, the FTT concluded that the letters together amounted to an assessment and this conclusion has been upheld by the Court of Appeal. There is no set formula by which an assessment must be made and its notification can take any form so long as the terms are clear. Applying those principles to this case, it was clear that HMRC’s letters communicated an ‘assessment’ and the subjective state of mind of the HMRC officer concerned did not negate that fact.

Why it mattersIt may appear somewhat odd that HMRC might make an assessment without the officer concerned actually intending to make that assessment, but ultimately it is better for all that the nature of administrative acts by HMRC should not be based on the subjective intent of an individual officer, but rather the objective nature of the communications which take place. However, businesses should be aware that it is not necessary for HMRC to use its standard form notice of assessment in order to make a valid assessment.

Zero-rating digital newspapersThe recent Upper Tribunal decision in News Corp UK & Ireland v HMRC [2019] UKUT 404 held that that digital newspapers are entitled to benefit from the same zero-rating provisions as physical newspapers. However, HMRC has been given leave to appeal the decision to the Court of Appeal, and it has announced in Revenue & Customs Brief 1/2020 that it does not intend to change its practice (treating digital newspapers as standard rated supplies) in the meantime.

Why it mattersAny businesses which have made supplies of digital publications similar to newspapers should consider whether they should make claims for repayment of overpaid VAT. Such claims would be stood behind the appeal in this case. n

For related reading visit www.taxjournal.comXX Holding companies, VAT groups and funds (E Wong, 18.2.20)XX Cases: Aria Technology v HMRC (27.2.20)XX News Corp: VAT treatment of digital newspapers (K Killington, 22.1.20)

20 6 March 2020 |

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