VAT Tribunal Reports

JOHN T NEWTH FCA, FTII, FIIT, ATT summarises some recent tribunal decisions.

Caught by the regulations

A golf club operated as a limited company and had been extended at a cost of £1.7 million during the year ended 31 March 1999.

No election had been made to waive exemption to tax for VAT purposes on the golf club, health club and conference centre, all of which were rented to companies incorporated to deal with those aspects. A contracted company had carried out the building works and those works qualified for treatment under the capital goods scheme.

The appellant rendered monthly VAT returns and at 31 March 1999 had paid just over £1.9 million to the contractor. However, one invoice was submitted in April 1999 for a sum of £600,000, the VAT on which was £105,000. The invoice was dated 30 April 1999.

Because of the complicated provisions of the capital goods scheme, the first interval under the capital goods scheme was deemed to be for the period 4 March 1999 to 31 March 1999. This meant that input tax incurred by the appellant company on the capital item in the second interval did not form part of the capital goods scheme adjustment in interval two, but would be adjusted from the third interval onwards.

The consequence of this submission was that an assessment was issued in the sum of £49,661, against which the golf club appealed.

Articles 10, 17 and 20 of the European Community Sixth Council Directive were relevant, as were Regulations 99 to 116 in Part XIV and Part XV of the Value Added Tax Regulations 1995. The principal case relevant was H Lennartz v Finanzamt Munchen III [1991] 1 ECR 3795.

The appellant contended that the tax shown on the invoice of 30 April 1999 ought not to be subject to a partial exemption calculation outside of the capital goods scheme. The invoice related to the cost of the capital project completed in March 1999, and so should fall to be recovered in respect of the first interval, which was for the period 4 March 1999 to 31 March 1999.

The tribunal, under the chairmanship of Miss J C Gort, considered the complicated Customs and Excise internal guidance notes regarding the capital goods scheme. Sections 25 and 26, VAT Act 1994 laid down the basic position in relation to the recovery of input tax in accordance with partial exemption rules to be determined by regulations. In the present case, at the end of the prescribed accounting period there was no entitlement to deduct, because there had been no supply until 30 April 1999.

The summary of the judgment in Lennartz states 'Article 20(2) of the Sixth Directive, which concerns adjustments to the deductions of the VAT Act initially made in respect of capital goods, does no more than establish a procedure for calculating the adjustments to the initial deduction. It cannot therefore give rise to any right to deduct or convert the tax paid by a taxable person in respect of his non-taxable transactions into tax that is deductible within the meaning of Article 17 of the Sixth Directive'.

The tribunal adopted the conclusions of the court in that case and observed that although the legislation is complicated, the tribunal members did not find that the legislation itself was either incoherent or uncertain. The appeal by the golf club was dismissed.

(Witney Golf Club (17706).)

Partial attribution

A building and development company appealed against a VAT assessment of £76,125.

The business of the appellant company was to find and acquire land suitable for building houses for housing associations, agree the specification and costing of the building, obtain planning permission, and sell the land to the housing association and simultaneously enter into a building agreement to carry out the works.

In the current case, the appellant company acquired the land subject to VAT and sold it on as an exempt supply. The building works contracted were zero rated.

The issue was whether the input tax on the acquisition of the land was to be attributed solely to the exempt disposal of the land, with the result that none of the input tax was creditable, as contended by Customs and Excise, or whether the input tax on the land should be attributed to both the exempt supply of the land and the zero-rated supply of the building work, with the result that part of the input tax was creditable, as the appellant company contended.

The VAT tribunal, under the chairmanship of Dr John F Avery-Jones, considered the facts of the case and also Article 17 of the European Community Sixth Directive and Regulation 101 of the Value Added Tax Regulations 1995. A relevant case was BLP Group Plc v Commissioners of Customs and Excise [1995] STC 424.

The objective character, to use the words of paragraph 24 of the judgment in BLP Group, of the output transaction was one of making two connected supplies. The appellant company did not make, and would not have made a single supply of land; it only made the two supplies together.

Accordingly, the tribunal considered that the land acquired was used for transactions in respect of which tax was both deductible and non-deductible (in the words of the Sixth Directive) or used in making both taxable and exempt supplies (in the words of Regulation 101). It was considered that the facts in the case were almost identical to Wiggett Construction Limited v Commissioners of Customs and Excise [2001] STC 933.

Accordingly, the appeal was allowed in principle to the extent that the input tax on the purchase of the land was attributable to the zero-rated supply of building services. How the attribution should be made had not been argued before the tribunal.

(Southern Primary Housing Limited (17770).)

The basic elements of living

The owner of a substantial property in Hampshire decided to construct a studio room as a single storey self-contained building some 40 feet from the main house. He wanted the building to be used initially for his wife to indulge in her hobby of painting. However, the building was designed quite intentionally to be large enough and to contain facilities for it to be occupied as a granny or teenager's studio or for a variety of living-in purposes.

Customs and Excise considered that the construction of the new building was standard rated and not, as the appellant company contended, zero rated.

It was contended on behalf of the appellant company that the studio room had been designed as a building and satisfied the four criteria laid down in Note (2) of Group 5 of Schedule 8 to the VAT Act 1994 in order to qualify for zero rating.

The VAT tribunal, which was chaired by Mr Rodney P Huggins, considered that the basic elements of living could be carried out in the studio because of the following features:

• It was a separate building fronting a road, which is a public highway, to which it had direct access.
• It had a water closet and hand basin in a separate room.
• It had a kitchen sink unit, worktop and sufficient electrical points for cooking appliances.
• It had its own central heating system and hot water system.
• It had its own separately monitored electricity supply.
• It was connected to main drainage and sewerage through a combined system.
• It was a self-contained unit built with double cavity walls, triple-glazed window units and roof lights.

The tribunal observed that although the building did not have a shower unit or bath installed it was still capable of being used as a studio flat providing living accommodation.

It was accepted by Customs and Excise that the building was completely separate from the main house and its stables and garage block. In addition, the tribunal was informed that it was accepted that the separate use or disposal of the studio was not prohibited by any covenant relating to the freehold title of the premises. Statutory planning permission had been granted in respect of the building and it had been carried out in accordance with that consent.

Taking into account these factors, the appeal by the development company was allowed.

(Old Rings Development Kingsclere Limited (17769).)

Hot food

A catering business was assessed to VAT of £39,295 exclusive of interest for the period 1 April 1995 to 31 October 1999. Customs and Excise contended that the appellant was making supplies in the course of catering, whereas the appellant submitted that the supplies should be zero rated.

The business supplied principally school lunches, subject to very stringent regulations, including the fact that all hot food had to be delivered at a temperature above 63 degrees, whereas all cold food had to be kept below 8 degrees centigrade.

The appellant relied on Note 3(b) of Group 1 of Schedule 8 to the Value Added Tax Act 1994 which states 'Any supply of hot food for the consumption off those premises; and for the purposes of paragraph (b) above 'hot food' means food which, or any part of which: (i) has been heated for the purposes of enabling it to be consumed at a temperature above the ambient air temperature; and (ii) is at the time of the supply above that temperature'.

The tribunal was referred to a number of cases including Commissioners of Customs and Excise v Cope [1981] STC 532 and John Pimblett and Sons Limited v Commissioners of Customs and Excise [1998] STC 358.

The tribunal, under the chairmanship of Miss J C Gort, found that it was at all times the purpose of the business to provide hygienic, freshly cooked food which was fit for consumption by children. The tribunal also found that it was not the purpose of the business in delivering the food at the time that it was delivered to the schools that it should be consumed hot within the meaning of Note 3(b). In all the circumstances the appeal was allowed.

(Mr A Leach t/a Carlton Catering (17767).)

Exemption denied

The appellant company was set up as the corporate vehicle to provide an army of sales agents as a national network to sell health insurance products for a well-known company.

The point at issue was whether the services so provided under the agreement were exempt for VAT purposes as insurance related services falling within Item 4 of Group 2 (Insurance), in Schedule 9 to the VAT Act 1994.

The agreement, which ran from October 1994, was terminated in 1998 but run-off commission continued to be paid.

Customs and Excise contended that the appellant company was not performing exempt insurance related services but was making a standard-rated composite supply of recruitment, training and sales force management to the health insurance company.

The company had been set up by Mr David Abingdon, who had substantial experience in selling insurance products. He introduced a pyramid structure including divisional managers and himself as national sales manager. At the lowest level were salesmen and saleswomen termed sales advisers. When the agreement ended, the number of sales agents at all levels had reached a figure of over 900.

The company had also organised a telesales canvassing unit regarding which the health insurance company reimbursed the cost and paid a small fee.

All these activities were represented in the agreement between the health insurance company and the appellant company, and a significant part of the company's work included recruitment and training and setting up the appropriate computer systems.

The domestic legislation regarding insurance services is set out in section 31, VAT Act 1994 and Item 4 of Group 2 of Schedule 9 to the that Act. European legislation is included in Article 13B(a) of the European Community Sixth Council Directive. That directive requires two conditions for services to be regarded as exempt. The first is that the services must be 'related to' insurance transactions. The second requirement is that the services are 'performed by insurance brokers or insurance agents'.

The United Kingdom domestic legislation draws upon the Insurance Intermediaries Directive European Community Council Directive 77/92, and Article 2(1) was relevant to the current case.

The problem that the VAT tribunal, under the chairmanship of Mr R K Miller, had was that in its judgment and looking at the question from the point of view of the United Kingdom domestic legislation, was that what the appellant company contracted to do, save in one respect, could not be brought within any of the four paragraphs of Note 1 (to Group 2) describing what are 'services of an insurance intermediary' for the purposes of Item 4. The company was setting up, training and maintaining a force of people who themselves provided the services of insurance intermediaries under their individual contracts with the healthcare company.

The exception was where the appellant company, acting by Mr Abingdon, was directly responsible for selling policies. It was therefore held that in respect of the services provided by the appellant company to the healthcare company, except to that very limited extent, the company had not shown that they fell within the exemption described.

In addition, in the judgment of the tribunal, Article 13B(a) of the Sixth Directive did not avail the appellant company of an exemption that is denied by the VAT Act 1994. The appeal by the appellant company was therefore dismissed.

(Agentevent Limited (17764).)

The meaning of dwelling

The appellant was the representative member of a group comprising two relevant housing associations. The appeal concerned a decision letter that certain building works converting two properties were not zero rated. The issue in the case was whether the two buildings before conversion consisting of bed-sits were non-residential within Item 3 of Group 5 of Schedule 8 to the Value Added Tax Act 1994. The facts in the case were effectively the same as those in Look Ahead Housing Association (decision number 16816). In that case it was decided that bed-sits with shared kitchen and bathroom facilities in the pre-conversion building were not dwellings and therefore the use of the building was non-residential so that the conversion to flats was zero rated.

Accordingly, the current appeal was an attempt by Customs and Excise to persuade the tribunal that Look Ahead was wrongly decided in the light of the House of Lords' decision in Uratemp Ventures Limited v Collins [2001] 3 WLR 806.

The tribunal, under the chairmanship of Dr John Avery-Jones, considered the ordinary meaning of dwelling, as decided in University of Bath (14235). The tribunal decided that, in its view, the bed-sits before conversion were where the occupants lived, treating it as home, and were therefore dwellings. The pre-conversion buildings were accordingly designed for use as dwellings. Although it was clearly desirable that tribunals should follow each others' decisions, in this case the tribunal did not consider that the Look Ahead case required the tribunal to depart from the conclusion reached purely on the construction of the legislation and the ordinary meaning of 'dwelling'. Accordingly, the appeal was dismissed.

(Amicus Group Limited) (17693).

Excess parking charge

A city council claimed that it had overpaid VAT of £98,643 in respect of excess charges imposed for parking in breach of an Order. In its view that charge was a penalty and not a payment of consideration for a supply of parking. In addition it contended that provision of off-street parking is a non-business activity of the council.

The VAT tribunal, which was chaired by Angus Nicol, considered the matter at length in a 27-page determination. The tribunal was drawn to the conclusion that the excess charges, whatever may be their precise nature, as damages for trespass or as a penalty for infringement, were not consideration for a supply of parking. The appeal was therefore determined in favour of the appellant.

(Bristol City Council (17665).)

Partnership not intended

Two hairdressing stylists arranged to work at the same premises, although the intention was that they would not form a partnership. Expenses were shared but net income was apportioned and both parties submitted sole trader accounts for direct tax purposes, with different year ends.

The two stylists worked on different days of the week and had separate bank accounts. Their former accountant had not advised them in any way on the VAT implications of trading in this way.

The local Customs and Excise VAT office at the time became aware of the business and subsequently issued two VAT assessments totalling £36,688 (plus interest) and a civil penalty of £5,322 (plus interest).

The assessment and penalty were appealed at the VAT tribunal and the facts and method of working were considered in detail. Reference was made to Article 4 of the Sixth Directive of the European Community and various sections of the Partnership Act 1890.

Customs submitted that the absence of a formal partnership agreement could not be definitive of the existence or non-existence of a partnership (see Burrell [1997] STC 1413).

Customs also submitted that in determining the nature of the relationship the tribunal should look to substance not form, as considered in Commissioners of Customs and Excise v Jane Montgomery Hairstylists [1994] STC 256.

The tribunal, under the chairmanship of Mr Peter H Lawson, conceded that the two appellants were honest, respectable and hardworking citizens and accordingly mitigated the penalty by 75 per cent. However, on the basis of the evidence and the law, the two assessments were confirmed.

(Tracy Jane Sumner (trading as Extravaganza Hair Workshop) and Paula Sinead Kiddle (17784).)

Issue: 3892 / Categories: