Supplies of hearing aids

THE APPELLANT, MR Rowe, was a self-employed hearing aid dispenser who operated from a retail outlet, supplying hospital patients with hearing aids and also working in a similar capacity in doctors' surgeries.

The dispute arose out of an assessment by Customs that was based upon an under-declaration of output tax relating to his supplies of standard-rated hearing aids. Customs' enquiries started some four years prior to the assessment being raised and the tribunal was appraised of lengthy correspondence between the appellant, his accountant and Customs regarding the method of apportioning his income between the standard-rated supplies of hearing aids and the VAT-exempt supplies of dispensing services. In challenging Customs' assessment, it was claimed that it was not made using best judgment and should be ruled out on that basis.

Initially, the appellant's claim was that he was providing a single VAT-exempt supply of services, the supply of the hearing aid being incidental to the patient's need for better hearing. He claimed that the hearing aids were supplied at or below cost and the balance of the fee charged to the patient represented his dispensing services. The motive for that approach was to undercut his competitors and offer a better, more comprehensive service which sometimes extended to months and even longer than a year in some cases in order to ensure his patient received the best possible solution to the hearing loss. When Customs' enquiries started, he changed his method of invoicing, showing the cost price of the hearing aid (plus VAT) separate from his dispensing services (without VAT) but still challenged the amount of the assessment.

The appellant claimed that his supplies to hospital patients should be regarded as fully VAT exempt since these supplies were made in hospitals and was covered by Note 4 of Group 7 of Schedule 9 to the VAT Act 1994. It was shown that a contract existed between Mr Rowe and the hospitals which described the terms and conditions under which the patients should be treated and also specified the charges that would be made. Evidence was produced to show that in many cases the overall price charged in the hospital cases represented a below-cost charge for the hearing aid which, together with a dispensing fee, met the cost limit imposed by the hospital.

In other cases, supplies from his retail outlet were similarly discounted in order to undercut his competitors. However, upon being questioned about his pricing structure, the appellant was unable to demonstrate a hard and fast rule that he applied to the valuation of his own dispensing charge, preferring to operate on a method of gauging what the patient would consider to be good value.

The tribunal concluded that the United Kingdom legislation was imprecise in its description of supplies in hospitals when compared with the EC VAT Directive. This led the tribunal to the conclusion that an individual practitioner's supplies of hearing aids in such cases could not be VAT exempt on two grounds. Firstly it was clear from the contract that the supplies were made to the patient and not the hospital, and secondly the practitioner would be making a profit which is one of the specific exclusions from VAT exemption. The view that was reached on this point was that two separate supplies were made and only the dispensing service was VAT exempt.

At the outset, Customs did not accept that a fair apportionment of output tax could be calculated by using a base line of cost for the hearing aid, preferring to use some sort of mark-up to calculate the value of standard-rated outputs. Another factor that was taken into account was the proportion of the overall charge that was represented by the cost of the hearing aid. In arriving at a view on this, Customs could only rely upon the evidence of hospital sales and applied a similar formula to the rest of the appellant's supplies.

The tribunal's overall view was that two separate supplies were made by the appellant both in hospitals and from his own retail outlet. Following this conclusion, a similar view was taken of supplies in general practitioners' surgeries.

There remained the issue of whether the assessment was flawed in law by not being made on best judgment. The tribunal's view was that the assessment was based upon the best information available, and therefore it was not bad in law. Since the tribunal was not asked for its view on an alternative calculation to be applied to the assessment, it was confirmed, and the whole of the appeal was dismissed.

Comment: One might have some sympathy for the appellant in this case. He had a genuine desire to give good value for money and, in pursuing that objective, cut or eliminated the profit margin on the hearing aid. Perhaps if he had been able to persuade the tribunal that he had a consistent approach to valuing his own work on the basis of time and hourly rates, he might have had more success. But one main failing was in the grounds of the appeal by not requesting the tribunal, had it found some doubt, to replace Customs' assessment with one which reflected more accurately the practice that Mr Rowe had adopted towards his overall pricing of his services.

(Bruce Rowe, trading as Cheshire Hearing Centre (17600).)