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Andrew Needham of VAT Specialists Ltd highlights a selection of recent VAT case decisions

Tribunal says supply of sales leads for insurance and loan products is taxable

The Appellant was involved in the provision of an open market where sales leads involving loans and insurance products could be bought from and sold to brokers who were willing to purchase them via an internet-based bidding system. The issue to hand was whether these activities were exempt, as argued by the Appellant, or taxable, as ruled by HMRC.

The Tribunal considered whether the services constituted a supply involving the negotiation of credit, the arrangement of credit, or the arrangement of insurance as an intermediary. It concluded that the supply was simply the collection and sale of data, which was taxable. The decision includes a detailed analysis of the scope and meaning of the finance and insurance exemptions, especially the meaning of insurance broker/agent (a question which has arisen several times in recent cases). The Tribunal held that the Appellant’s activities were not carried out with the intention of securing a loan contract or insurance contract, so there was insufficient nexus with its activities and loans and insurance services, for exemption to apply. The process was driven by what a broker would pay for a lead, not the needs of the consumer. The activities of the Appellant were not essential for a loan or insurance contract to happen, and the Appellant was paid for each lead transaction it brokered, whether or not a contract was concluded from that lead. The fact that the Appellant had no relationship with insurer or insured was also a key factor in denying the insurance exemption.

This decision looks correct when you look at what the appellant actually did for its money, given that exemptions should be construed strictly, but the case does highlight once again the complexity of these areas.

Leadx Ltd (VTD 20,904)

High Court finds partly for HMRC on correct application of the 'MTIC knowledge test'

This jointly-heard case concerns MTIC fraud and the application of the ‘knowledge test.’ Both Appellants were the ultimate exporters, and HMRC had refused to repay input tax on the exported goods on the basis that the taxpayers ‘knew’, or ‘should have known’, about fraud elsewhere in the supply chain. At the VAT Tribunal, where both cases were heard by the same Chairman, the taxpayers’ appeals were allowed, prompting HMRC to appeal to the High Court. The High Court found that the Tribunal had applied too high a legal test when considering whether the taxpayers ‘knew’ or ‘should have known/ought to have known’ about the fraud, by requiring HMRC to show that the taxable person must know or ought to have known of both the missing trader’s fraud and the contra trader’s involvement in that fraud. The court added that the mis-statement had no impact on the case.

With regard to the ‘should have known’ test, the Court reached a different conclusion in each case. In Livewire, the court concluded that HMRC had concentrated too narrowly on the missing traders in the fraudulent chain, and that HMRC were unable to suggest any other due diligence precautions that Livewire could have taken. Even perfect due diligence would not have indicated the fraud by the missing traders in the fraudulent chain. As a consequence of this, HMRC’s appeal in respect of Livewire was dismissed.

In Olympia, however, the court concluded that the Tribunal adopted a test requiring fewer precautions and a lower level of understanding than would have been required of a director of ordinary competence. Consequently, HMRC’s appeal in Olympia was allowed in respect of the straight MTIC chains, and the case has now been remitted to the Tribunal to determine what Olympia should have known, applying the correct legal test.

Livewire Telecom Ltd and Olympia Ltd – High Court Chancery Division, 19 January 2009

Tribunal holds that passes for London attractions are VAT-free face value vouchers

The Appellant sells the ‘London Pass’, which is a pass enabling holders to get entry to a number of attractions in London without further payment. It charges customers for the pass, and then pays the owner of the relevant attractions at an agreed rate if a pass holder uses the pass to gain entry. Some of the attractions included in the pass were exempt cultural bodies.

At Tribunal, HMRC argued that the pass was not a voucher, and that VAT was due on the sale of the pass. Leisure Pass Group Limited (LPG) argued that the pass was a face value credit voucher, with the result being that no VAT should be charged on its issue. Instead, VAT was due on the redemption of the pass by the attractions (assuming the attraction is not exempt). The case turned on whether the pass represented a right to receive goods or services to the value of an amount stated on it or recorded in it, as per VATA 1994 Sch 10A para 1.

This argument was first run unsuccessfully in Tribunal in 2007 (appealed unsuccessfully to High Court 2008) with a version of the pass which had no stated value of monetary limit. The Appellant had argued that it had recorded in it the value of all the attractions put together, as this was the maximum value available to the holder. This argument was dismissed on the basis that this was a meaningless value and that, effectively, there was no monetary limit to the pass, as the only limit was a temporal one, namely the duration of the validity of the pass (anything from one to six days depending on the price paid). The terms of the pass were then amended so that it had a monetary limit of £70 per day. A chip in the pass calculates the value of the holder's daily entries and blocks entry once this limit is reached. The new Tribunal agreed that following this change, the pass fell within the definition of a face value voucher.

HMRC argued that it would be contrary to the basic principles of VAT if the Appellant’s profits were not taxed, but the Tribunal dismissed this argument. It said it is a commercial reality that issuers and intermediaries buying and selling credit vouchers will almost invariably do so at a profit having agreed discounts on the face value of the vouchers. Without this, there would be no point in them making the supplies. As the legislation provides for certain vouchers to be bought and sold by intermediaries without attracting VAT, the legislators must have envisaged that the intermediaries’ profits in this case should not bear any VAT.

Leisure Pass Group Ltd (VTD 20,910)