VAT Tribunals

VAT Tribunals

RICHARD CURTIS reviews some recent VAT tribunal decisions.

A pressing matter

Mr Hussein and Mr Azim traded as Pressing Dry Cleaners until October 1998, when Mr Azim left the partnership which the two parties then treated as having been dissolved. There was no written notification of this, but there had also not been a written partnership agreement at the outset. There was a partnership tax return showing that the partnership had been dissolved on 30 September 1998. The next return of Mr Hussein showed accounts for Harlequin Dry Cleaners for 1 June 1999 to 31 May 2000 and a turnover of £48,369 (accounts for the following year showed a turnover of £47,677). There was no evidence as to if or how the business had been carried on between October 1998 and May 1999, although there was mention that Mr Hussein had been involved in a car crash.

Due to the level of turnover, no VAT returns were submitted in respect of Harlequin Dry Cleaners, but the registration of Pressing Dry Cleaners had remained, with nil returns being submitted.

At a VAT investigation in October 1999, Mr Hussein advised Customs that 'Pressing' had ceased, but as the partnership used a cash accounting basis and was still owed money, nil returns had been submitted to keep the position open in case payments should be received in the future. A change of particulars form, VAT 484, was left for completion, but this was not returned. Following a subsequent visit in 2002, Customs took the view that, although accounts showed a turnover below the registration threshold, the partnership was still in existence. This was because:

• no notice of change of business had been received;

• the partnership had not been properly terminated; and

• the business bank account was still in the names of Pressing Dry Cleaners and Mr Hussein and Mr Azim.

Customs accepted that deregistration may be appropriate, but only from the present time, taking the view that the accounting figures shown for Harlequin actually relocated to Pressing Dry Cleaners. An assessment for under-declared VAT of almost £22,000 was issued.

The taxpayer appealed contending that the sales since 1999 related to Mr Hussein rather than the partnership.

The tribunal accepted the taxpayer's arguments because:

• Customs received oral notification of the cessation of the partnership during their visit in October 1999.

• A partnership agreement and/or dissolution need not be in writing and it was found that the partnership was dissolved in October 1998.

• Although the bank account was still in the name of Pressing Dry Cleaners, Mr Azim was not a signatory.

However, the position regarding any VAT liability then had to be determined. Was Mr Hussein still a 'taxable person' under section 3 of, and Schedule 1 to, the VAT Act 1994 ? As form VAT 484 had not been submitted, it was not disputed that Pressing Dry Cleaners was still registered for VAT. Section 45(2) states that a person shall continue to be treated as a partner in a business until Customs are notified of his cessation. The tribunal thus held that Mr Hussein was a member of Pressing and trading as such until Customs were notified otherwise. As there was no evidence that the business of Pressing had been transferred to Harlequin, Pressing could be treated as continuing until Customs were verbally advised of the change in October 1999. The assessment was reduced from £21,491 to £870.

( T A Z Hussein and M Azim t/a Pressing Dry Cleaners (18341).)

Good intentions are not enough

In addition to changing the face of newspaper publishing and proving that everyone has a book to write, Mr S J (Eddy) Shah is also the controlling shareholder of the Messenger Group of companies, one of whose subsidiaries was Messenger Leisure Limited, which carried on the business of providing golf and country club facilities in East Anglia. In 1998, Leisure informed Customs that the operation of the sports facilities at its clubs were to be transferred to its subsidiary non-profit making company, Messenger Leisure Developments Limited. In addition to owning the land, hotels, and golf and sporting facilities, the parent company, Leisure Limited, would operate the social and non-sporting functions at its premises.

Article 13A(2) (m) of the Sixth Directive allows Member States to exempt the supply of 'certain services closely linked to sport or physical education supplied by non-profit-making organisations to persons taking part in sport or physical education'. This European legislation is enacted into United Kingdom law by Group 10 of Schedule 9 to the VAT Act 1994 , but there are seventeen Notes relating to the exemption aimed at restricting its scope and Note 2A states that the provider 'is precluded from distributing any profit it makes, or is allowed to distribute any such profit by means only of distributions to a non-profit making body'.

The company was open in admitting that the reason for this restructuring was to enable sporting facilities to be supplied to individuals without VAT being charged. It contended that it was a non-profit making body. Furthermore, although it accepted the principle that exemptions from VAT should be interpreted strictly, they should not be interpreted restrictively, citing European Commission v Spain [1998] STC 1237 in support. In that case, the Spanish government sought to limit the effect of the exemption for sports bodies on condition that entry fees did not exceed specified amounts. The European Court of Justice held that this was not authorised by the exemption and could mean that non-profit making bodies did not benefit from the exemption. The Spanish government had therefore not fulfilled its obligations under the Sixth Directive.

Customs argued that the company was not non-profit making because it aimed to make a profit or financial advantage for its parent company; and its controller, Mr Shah, had the final say in what happened to any profit that the company made. A members' club was funded by members' subscriptions; in this case the company was supplying services to third parties (the members) with the intention of creating a financial advantage. Customs argued that this was evidenced by an interest-free inter-company loan from Messenger Leisure Developments Limited to Messenger Leisure Limited, comprising its subscriptions, which were collected by Leisure and held in an inter-company loan account. This loan was not evidenced in writing. Furthermore, Developments had acquired half of Leisure's business for no consideration, accounting records were intermingled and the companies' operations were 'symbiotic' and characterised by informality and artificiality.

The tribunal found Mr Shah to be a convincing witness and accepted his explanation that he wanted to create a new type of club with improved facilities and accepted that it was not his primary intention to extract profits. However, and although seeking the financial advantage that exemption would bring was not a valid reason why the company should not benefit from it, it had to be recognised that Leisure and its parent would benefit from Developments if VAT exemption were agreed.

The very fact that Developments subsequently charged Leisure interest on its loan, indicated that the company accepted Customs' view that there had been a distribution to the company as interest had not been charged. Furthermore, being able to apply such a charge retrospectively indicated the commercial unreality of the situation. Also, Developments had argued that it was spending money on improving the golf course, etc. ; however, the land was still owned by Leisure Limited, who would ultimately be able to benefit from those capital improvements.

For these reasons, the tribunal found that Developments was not a non-profit making body and its appeal failed.

( Messenger Leisure Developments Limited (18300) .)

Down at the lab

The tribunal was asked to consider the nature of medical goods eligible for zero rating.

Supplier Limited, is a specialist supplier of equipment to pharmaceutical and medical institutions for research activities, which includes experimentation on animals and considered that VAT was not chargeable on its products by reason of Item 5 of Group 15 (Charities) of Schedule 8 of the VAT Act 1994 . This zero rates 'The supply of any relevant goods to an eligible body which pays for them with funds provided by a charity or from voluntary contributions or to an eligible body which is a charitable institution providing care or medical or surgical treatment for handicapped persons'. It was accepted that the supplies were to such organisations, but were they 'relevant goods'? These are defined in the relevant parts of Note 3 of Group 15 as:

'( a ) medical, scientific, computer, video, sterilising, laboratory or refrigeration equipment for use in medical or veterinary research, training, diagnosis or treatment; ...

( c ) parts or accessories for use in or with goods described in paragraph ( a ) or ( b ) above ...'

Apparently there were over 800 items requiring determination, and the tribunal considered products under the following headings for detailed review.

Cages, bedding, liners and litter

The tribunal was assisted by the decision in Commissioners of Customs and Excise v David Lewis Centre [1995] STC 485, where observation windows in a centre for the treatment of epilepsy were held not to be medical goods. It was not sufficient to say that because the function of the goods was medical, the goods themselves were medical. 'Medical' had a separate meaning from 'for use in medical diagnosis'; the goods had to have some specialised feature identifying and limiting their use to the specified field, so that they were not capable of being used for other purposes.

The animal cages were completely free from chemicals and were an integral part of the experiments and were described as such in journal articles. They were designed to be housed in racks and were not available at retail outlets. The tribunal concluded that they were laboratory equipment. Similarly, the bedding, nesting materials, and cage liners also had to be free of chemicals, etc. that could otherwise affect the outcome of experiments. They improved the operation of the cages and were therefore 'parts or accessories' for use in or with laboratory equipment.

Protective clothing

The appellant supplied protective gloves, footwear, face masks, suits and helmets. However, the tribunal found that most of these would be suitable for use outside of a laboratory; e.g. in food processing work, etc., and thus did not fall to be zero rated. The exception was a respirator helmet, which the manual described as being 'ideal for a research environment, especially veterinary surgeons and animal technicians, to give protection from the environmental hazards of working with animals'.

Decontaminating agents and disinfectants

The tribunal accepted that anti-bacterial products and the like would not be suitable for domestic use, but concluded that they did not have any specialised feature limiting their use to laboratories, nor could they be described as parts or accessories for use in or with sterilising equipment, which would have brought them within the meaning of relevant goods. In reaching this decision, the tribunal followed the decision in Norwich Camera Centre Limited (11629), where it was decided that chemicals and photographic paper used in x-ray work were neither part of the equipment nor accessories.

Dispensers and other items

Also considered were plastic boxes for keeping gloves, masks, etc. clean. Again, the tribunal considered that they had no specialised features limiting their use and were thus not laboratory equipment. Conversely, items such as anaesthetic and autopsy equipment, surgical scissors and surgery operating lamps were, because of their specialised features, laboratory equipment; however, non-surgical scissors, without such features, were not.

The appeal was therefore allowed in part.

( Supplier Limited (18247). )

Issue: 3966 / Categories: