On 15 and 16 September, the First Tier Tribunal heard the long-running Portsmouth City Council VAT appeal. The case, which has been running for around 15 years, concerned the VAT treatment of the fees councils charge for administering DFG grant applications and the subsequent works. Local authorities say these fees are for VAT-exempt welfare services, but HMRC contend they are for general administration or project management services, which are liable to VAT at the standard rate. The hearing lasted around seven hours over the two scheduled days.
HMRC’s Position on DFG Administration Fees
HMRC put forward several technical arguments, supported by EU VAT legislation (which still applies in these circumstances), purporting to show that the council’s services cannot be welfare services or connected to welfare services.
Portsmouth City Council’s Welfare Services Argument
On the other hand, the council’s tax barrister argued that the council’s services must be welfare services and should properly be treated as VAT-exempt.
Tribunal Outcome Expected Within Three Months
We were encouraged by how the Tribunal Judge and the Lay Member engaged in the arguments and asked pertinent questions. As expected, no judgement was handed down at the end of the hearing, and we expect it in around three months.
Top-slicing update
We recently provided an update on HMRC’s apparent U-turn on how DFG top-sliced amounts should be treated for VAT.
HMRC officers have withdrawn several local authority top-slicing assessments, including one that was the subject of an appeal and was on its way to the First Tier Tribunal (FTT).
Since our last update, we have seen HMRC change its position in other top-slicing disputes, and it has now withdrawn the assessments under appeal. I think we can be confident that the shift is a policy change rather than a few isolated fact-based cases.
Why HMRC Has Changed Its Position on Top-Slicing
As we explained in the last update, the basis for HMRC’s shift is its acceptance of the arguments PSTAX and local authorities have submitted to HMRC since the dispute arose. We submitted to HMRC that basic VAT principles mean top-sliced funds cannot be consideration for a supply because the fundamental tests are not met, as there is no reciprocal, legal relationship with anyone where the council does something in exchange for payment.
Lessons for Local Authorities Facing VAT Challenges
This episode provides another illustration of the point that public bodies should not automatically accept HMRC decisions that deny VAT recovery or create VAT liabilities. This can be done in a non-confrontational way, and does not inevitably mean a legal challenge, although sometimes that might be necessary. Sometimes, merely submitting an appeal is enough. Top-slicing did not reach a Tribunal hearing, but no doubt the appeals submitted by local authorities helped force HMRC to reconsider its position.
Seeking Advice on VAT Disputes with HMRC
If your organisation is challenged by HMRC about VAT, please contact us via the helpline to seek our views. As we have seen with top-slicing, HMRC can often be wrong!
