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Andrew Needham, Director of VAT Solutions (UK) Ltd, summarises a selection of recent VAT decisions.

Andrew Needham

Tribunal says works done on housing plots was part of a single exempt supply of land

The Appellants were farmers in the Scottish Borders who had diversified their activities to include the sale of parts of their land to DIY housebuilders as serviced plots of land.

The activity involved employing contractors to undertake preparatory earthworks, and to construct a spine road and associated drainage and lighting (it was accepted that this is a zero-rated supply by the contractors to the Appellant). The Appellant also arranged for the utilities to lay water and electricity connections up to the boundaries of the individual plots (enabling the DIY housebuilder to arrange their own individual connections). The DIY housebuilders were obliged to construct the properties to meet general criteria within the overall planning permission obtained by the Appellant, who made a single charge for each serviced plot. The dispute comes down to a single v multiple supply argument deriving from the provision of the pre-sale engineering works and services.

HMRC issued a ruling after a visit in 2006 that the engineering works were not a means of better enjoying the principal supply of the land, but were an aim in themselves to the purchaser.  Furthermore, HMRC ruled that the engineering works were not supplied in the course of construction as a building, and were thus standard-rated, thereby necessitating an apportionment of the plot sale price. HMRC tried to argue that this analysis might give a better overall VAT position for the DIY housebuilder than the arguments of the Appellant. The Appellant's main argument was that, under CPP principles, there was a single exempt supply of land. The alternative argument was that, if there were multiple supplies, they were a mix of exempt land and zero-rated engineering works and services supplied in the course of construction of dwellings.

The Tribunal Chairman concluded that the engineering works and services are not an aim in themselves, and that it would be entirely artificial to make the split suggested by HMRC. As such, there was a single supply, correctly regarded as an exempt supply of land. Although that conclusion decided the case, the Chairman considered the alternative argument and concluded that, if there was a multiple supply, it was a mix of exempt supply of land and zero-rated engineering works and services supplied in the course of construction of dwellings. The Chairman observed that both these conclusions avoid any VAT cost, express or hidden, falling upon the DIY housebuilder (unlike the HMRC analysis). The appeal was accordingly allowed.

Douglas and Sonia Virtue t/a Lammermuir Game Services VTD (20,259)

Tribunal says driving school gave standard-rated tuition and also acted as principal

This was a ‘double whammy’ appeal in that it involved a dispute on the VAT liability of the tuition fees as well as an ‘agent v principal’ argument on the business structure in place.

On the first issue, the Appellant argued that the driving tuition fees were exempt as ‘private tuition’ under Sch 9, Group 6(2) VAT Act 1994.  On the second issue, the Appellant argued that the individual driving instructors were acting as ‘principals’ for VAT purposes.

The Appellant operated a school of motoring and had several instructors employed by him. The cars were generally supplied to the instructors and insured by the School. The School provided booking facilities, advertising for the services, and also provided the bulk of the students. For this, the instructors paid a fixed fee to the School. The instructors would sometimes be paid by cash/cheque, and other times, a cheque might be sent directly to the School, in which case, the amount would be deducted from the fixed fee.

Addressing the issue of VAT liability first, the Tribunal found that, although the School had provided some simple driving lessons and road safety to 15 year-olds after school, they were not lessons which were ‘ordinarily taught in a school or university’. Therefore, the conditions of the exemption were not satisfied, and the supplies were taxable.

On the second issue of who was actually making the supplies of driving tuition, the School contended that it provided administrative services only, and that the driving tuition was provided by the instructors as principal.  However, after reviewing the evidence, the Tribunal concluded that there was a ‘strong element of direction and control’ provided by the School to its drivers, and that the drivers were not free to run a business as they wished. Consequently, the Tribunal held that the drivers were supplying the services on the School’s behalf, and dismissed the appeal.

John Mitchell Cameron Smith (t/a ‘Qualified School of Motoring’) (VTD 20,275)

Tribunal agrees input tax should not be repaid because taxpayer was unaware of fraud

This was an appeal by two associated companies against HMRC’s refusal to repay two substantial input tax claims (totalling more than £18 million) on the grounds that the Appellants were aware that VAT fraud was taking place elsewhere in the supply chain.

Following the ECJ cases of Bond House and Optigen, HMRC were forced to repay large quantities of input tax where it had previously refused repayments to innocent taxpayers because of a fraudulent link elsewhere in the supply chain.

The ECJ concluded that the right of a taxable person to deduct input tax cannot be affected by the existence of a prior or subsequent fraudulent transaction in the chain of supply, without that taxable person knowing or having any means of knowing that to be the case.

In order to establish both the existence of fraud and the taxpayer’s knowledge of it, the Tribunal considered various transactions undertaken by the Appellant in great detail. The detailed reasoning is specific to this case, so there is no need for a summary of the Tribunal’s detailed conclusions here.

In this particular case, HMRC were ultimately successful in arguing that the Appellants knew the goods were involved in fraud elsewhere in the supply chain. Therefore, the Tribunal supported HMRC’s decision to withhold the business’s repayment claims.

This case is significant in that it is the first time that the UK courts have accepted HMRC had proven that a taxpayer (who was not a direct participant in the fraud) had knowledge that fraud was occurring elsewhere in the supply chain. Although the case is fact-specific, the decision gives some useful hints as to what factors persuaded the Tribunal that the case for ‘knowledge’ had been proven.

Calltell Telecom Limited and Opto Telelinks (Europe) Limited(VTD 20,266)