VAT Tribunal Cases

RICHARD CURTIS reviews some recent decisions.

Customs shot down

The appellants operated a shooting school and had charged VAT at the standard rate on their fees. However, they had subsequently agreed with Customs that their services, to the extent that they applied to the tuition of individuals, should be exempt from VAT under Item 2 of Group 6 of Schedule 9 to the VAT Act 1994 as 'the supply of private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer'.

This meant that VAT had been overpaid, but the claim to repayment was refused by Customs under section 80(3), VAT Act 1994 on the grounds that this would 'unjustly enrich' the appellants. The tribunal was asked to decide whether the unjust enrichment defence was applicable in this case as a preliminary issue as, if this failed, the exact amount of the repayment would then need to be determined. This would in turn depend upon the effect of the three-year cap and the recent decision of the European Court of Justice in Marks and Spencer plc v Commissioners of Customs and Excise [2002] STC 1036. The issue of the amount of the repayment was also slightly complicated by two further points.

(1) Whether, in the case of partnerships such as this one, the exemption applied if only one of the partners (Mr King in this case) provided the tuition, rather than both. The case of C Clarke and Others (15201) had decided that this was not required, but this had been misinterpreted by Customs in its Business Brief of January 1998.

(2) Did the VAT exemption for recreational and sporting subjects only commence from 1 August 1994 as a result of a change in the legislation in the VAT Act 1994?

The tribunal noted that the question of unjust enrichment had been reviewed by Mr Justice Moses in the Marks and Spencer case. He had noted that, when considering the subject, one must ask not only whether the tax has been passed on to the customer, but whether the taxpayer had suffered damage, for example by 'losing profits which it would otherwise have received had the overcharged tax not been imposed'.

With regard to this particular case, the tribunal found that Mr King provided a very high level of professional service and personal tuition. Trainees are charged £60 per hour and this was stated to be VAT inclusive. Research showed that similar establishments charged between £58.75 and £63 (including VAT), but some non-VAT registered schools charged less, typically £33 to £40 per hour.

Customs argued that if the appellants had known that some of their services should have been exempt they would have charged less and to make a repayment now would be a 'windfall' profit.

The appellants argued that their prices were set at a level that the market would bear. Having to pay the VAT therefore represented profit foregone and was a genuine loss. The tribunal found Mr King to be a straightforward and honest witness on this subject. He said that there were cheaper schools, but mentioned that one customer who had moved from his, to another school, had later returned because although he was paying more, he was getting better tuition. Mr King mentioned that he had made no secret from his customers that there had been a change in the VAT treatment, but none had suggested that prices should be reduced as a result, this seemed to indicate that his prices were set at 'the going rate'. The fact that prices were not changed when the standard rate increased from 15 to 17.5 per cent also supported this contention.

The tribunal considered that all claimants would be 'enriched' by a repayment, the question was whether they would be better off than if they had not had to make the payment in the first place. Only if the answer to that question was 'yes', was it necessary to consider whether it was 'unjust'.

The tribunal found that because the appellants would have charged the same overall price even if they had known the correct VAT treatment, the repayment would not make them better off than they would have been if they had applied the correct VAT treatment in the first place. The appeal was therefore allowed. The exact amount of the repayment was to be determined by agreement, with reference back to the tribunal if this was not possible.

( Mr & Mrs J King t/a The Banbury Shooting School (17822) .)

The tribunal regrets …

The availability of zero rating under Group 12 of Schedule 8 to the VAT Act 1994, entitled 'Drugs, medicines, aids for the disabled, etc. ' was the subject of an appeal hearing in September last year.

The appellant was a registered charity and operated a centre for disabled people, which consisted of twelve units available to be let to the disabled. The charity appealed against Customs' refusal to confirm that certain work at the centre was eligible for zero rating under Items 4 and 6 of Group 12 of Schedule 8 to the VAT Act 1994. The tribunal commented on the expenditure as follows.

• The front gates were adapted for ease of use by the handicapped. These were not eligible because zero-rated Item 9 of Group 12, 'the supply to a charity of a service described in Item 8 for the purpose of facilitating a handicapped person's entry to or movement within any building' had to meet the requirement of Item 8 that required the expense to be related to 'constructing ramps or widening doorways …'.
• Specially adapted and colour-coded rails for use by the blind and partially-sighted: Customs argued that this did not qualify within Item 2(g) 'equipment and appliances not included in paragraphs ( a ) to ( f ) above [beds, chairs, lifts, motor vehicles, etc. ] designed solely for use by a handicapped person' as they were not available for the personal use of a disabled person. The tribunal disagreed, 'since the singular includes the plural' and allowed zero-rating on the cost of this item.
• Columns that had colour-coded cobble surrounds and paving that was coloured - to assist the blind and partially-sighted - were not zero-rated, as they did not fall within the definition of goods in Item 4.
• The tribunal could not see that colour-coded carpeting - 'very important to make it safe for the blind to move around the building' - qualified for zero rating as it did not fall within any part of Item 2; nor did colour-coded beading to the edge of a stage.
• Radiators were specially designed for the disabled with low surface temperatures, etc. , but the tribunal agreed that zero rating would only apply where these were installed in a 'washroom or lavatory' (Item 12).
• The food preparation area had specially adapted taps, height-adjustable sinks, etc. Zero rating did not apply as they were not 'made available for the personal use of a disabled person' as required by Item 2; they 'are not designed solely for use by a handicapped person'.
• Similarly, electric 'paddle' switches positioned 800-900 millimetres above floor level for ease of use by wheelchair users and glass vision panels in doors did not qualify for zero rating as they could also be used by people who are not disabled.
• Colour-contrasted and Braille signs were installed around the centre and its car park. The tribunal confirmed that only signs on toilet and washroom doors would qualify for zero rating under Item 12 of Group 12.

In the case of Arthritis Care (13974), the tribunal held that a fire escape in a hotel used by arthritis sufferers was not 'made available to a handicapped person for domestic or personal use' and, even if it were, it was not designed solely for use by the handicapped; the tribunal found this to be pertinent.

In this case, the tribunal echoed the view of the late Paul de Voil in Arthritis Care , that it had no pleasure in finding that the appeal, in most respects, failed. The Vassall Centre was an unique building, a model for the facilities that can be provided for the disabled, and the tribunal was of the view that Group 12 needed to be kept more up to date.

Commentary: The problem seems to be in the restrictive wording of Category 4 of Annex H (list of supplies of goods and services which may be subject to reduced rates of VAT) of the Sixth Directive which includes 'aids and other appliances normally intended to alleviate or treat disability, for the exclusive personal use of the disabled'.

In fact, in a similar recent case ( Shalden Millennium Committee (17897) ), the tribunal also expressed regret that the widening of the gates to the 300-yard driveway to a church, to allow access for vehicles of disabled persons, was not eligible for zero rating. Various reasons were cited:

• The work on the gates was not 'work on any building' as required by paragraph 27(b) of Notice 701/7/94.
• Facilitating the access of the disabled may have been 'a' purpose, but it was not 'the' ( i.e. the sole) purpose of the work. While it was stated that the gates would only be used for access by the disabled, it was presumed that wedding cars and hearses would also use the access.

( Vassall Centre Trust (17891) .)

MOT and VAT

Customs issued an assessment to VAT on the appellant who repaired cars and arranged MOT tests at another garage. Customs considered that the test fees had not been properly accounted for as they were 'part and parcel' of his services. The standard charge for the test was £34, but the appellant received a trade discount and paid £26. His customers were not aware of this and, although they may have been able to obtain a reduced fee elsewhere, they preferred the client to carry out a pre-test check and arrange the test for them. The appellant originally charged customers £34 with no VAT, on the basis that the test was exempt. He subsequently changed this to a total charge of £34, comprising £26 for the test, £6.81 as his administrative fee and VAT of £1.19 being 17.5 per cent of that fee.

Customs said that its Business Brief 21/96 stated that MOT tests were only outside of the scope of VAT if the exact amount was charged separately or was shown as a separate item on an invoice. In other cases VAT would have to be charged on the full amount. As this had not been complied with, and as the other conditions of paragraph 10.8 of its VAT Guide had not been met, an assessment to VAT on the full amount was raised.

The appellant agreed that VAT should be charged on his administrative fee, but not on the £26 relating to the test. Furthermore, the amount being charged in proportion to his normal VAT charge exceeded the level raised for penalties, etc.

This was another case in which the tribunal had much sympathy for the case of the taxpayer. And in the cases quoted by Customs in support of their case, M A Ward t/a Acorn Garage (15875) and Chandlers Garage Holdings (16610) , the tribunal had also expressed concern that the law had not been adequately explained, particularly as it affected smaller garages which were not approved to carry out MOT tests and which, with probably smaller turnovers, etc. , were less well placed to be in a position to afford detailed advice. Nevertheless, the position was that unless the true amount of the test fee was being clearly shown as a disbursement, on the basis that the trader was operating as an agent, then VAT must be applied to the whole fee charged, as an agent could not make a secret profit on the transaction.

( A L Davis & Co (17802) .)

Issue: 3898 / Categories: