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Steve Allen of VAT Advisers Ltd highlights a selection of recent VAT cases. 

High Court says Tribunal should Not Ignore Contracts when Deciding if Taxpayer is acting as Agent or Principal

This dispute involved the supply of loft conversions, and whether the Appellant, a limited company, was supplying conversions as principal, or acting as agent on behalf of three other companies.

The Appellant argued VAT was only due on its project management services, not the full consideration paid by customers. The design and inspection services were supplied by a company owned by the same individual as the Appellant, with the other two companies being run by his daughter and his ex-wife.

Previously, following evidence given by one of the Appellant’s customers, the VAT Tribunal had found that customers were completely unaware of the involvement of the other companies, and that if things went wrong, they sought redress from the Appellant. The Chairman highlighted a number of clauses in the contract between the Appellant and its customers which were inconsistent with agency treatment, and dismissed the appeal.

The Appellant appealed to the High Court on the basis that the Tribunal had not made any actual finding that the contractual documents were a sham, or that parties departed from the contractual arrangements. On that basis, it argued that the VAT position should follow the contractual documentation. The High Court held that the Tribunal had adopted an unstructured approach, and that instead of starting by looking at case law, it should have used the facts established by the contracts to consider whether they were a sham or were superseded by a different contract. The Court added that whilst the Tribunal mentioned a number of features which suggested the contract did not represent the real situation, none of these was referred to when making the decision. The Court said the Tribunal’s decision could not stand, and remitted the case back to the Tribunal for reconsideration.

A1 Lofts Limited, High Court Chancery Division, 30 October 2009

Tribunal says Intended Yacht Charters gave Entitlement to Register as Intending Trader

This was an appeal against HMRC’s refusal to register the Appellant for VAT. The Appellant, a limited company, purchased a yacht in August 2006 which it said was for chartering through an agent to its Directors and a variety of related companies and individuals.

The Appellant requested registration in July 2006, but was refused. According to HMRC, there was uncertainty around the financing of the purchase of the yacht, and the arrangement with the agent constituted a single charter for the yacht. The initial exchanges in the case reflected badly on the Appellant due to the amount of time spent examining records on how the yacht was purchased, together with its failure to provide a witness familiar with the business’s records.

HMRC argued that the Tribunal should follow the approach taken in Peachtree Enterprises Ltd, where the Tribunal limited itself to the facts available at the time. The Tribunal Judge dismissed this approach, and stated it would have reached the same conclusion anyway.

However, the Tribunal found that the activities undertaken did actually constitute an economic activity for the purposes of Article 9 of the EC VAT Directive, and that they were carrying on a business in the course of which supplies were being made for a consideration. The appeal was thus allowed. However, given the Appellant’s lack of explanation for its accounting records, the Tribunal directed HMRC to only pay 40% of its costs.

Heath House Charter Limited (TC00249)

Tribunal says Exempt Supply of Land was the Principal Element of Children's Parties

This case looked at whether the Appellant’s provision of children’s parties was a single taxable supply, or a multiple supply of exempt land and taxable refreshments.

During the week, the property known as ‘The Barn’ is used primarily as a nursery for young children. At weekends, however, it is hired out for children’s parties. Parents book the parties for an inclusive price per head, which consists of the use of the hall for 75 minutes, followed by a ‘rudimentary’ buffet.  A member of staff greets the party at the beginning of the session, and then tidies up and makes sure the hall is ready for the next party. However, it is up to the parents to supervise the children. At the end of the 75-minute session, the party would move to a separate area to enjoy their refreshments.

The Appellant said there were three elements to its supply, which were the licence to occupy the hall, the use of the play equipment, and the provision of catering. It argued under Card Protection Plan that the principal supply was the licence to occupy, with the other supplies being ancillary to it. On that basis, there was a single exempt supply. HMRC argued that there was a single standard-rated supply of a children’s party.

The Tribunal used the established approach of establishing if there was ‘a single supply as a matter of economic reality, which should not be artificially split’. It found that the use of the hall and provision of refreshments were the main elements of the supply. Other supplies, such as the use of play equipment and tables and chairs, were ancillary to the use of the hall and refreshments respectively. As such, the Tribunal rejected the Appellant’s argument that the other services were ancillary to the use of the hall.

The Tribunal went on to consider whether the two principal services supplied for a single price were a single supply of a children’s party or two separate supplies. It held that there were two separate supplies, finding support in the Levob case, which found a single supply due to the relevant goods and services being so closely linked that they formed a whole transaction which would be artificial to split, and that one without the other had no purpose. In applying the reverse of this, the Tribunal said the supply of the hall and refreshments were not closely linked, and that one could be enjoyed without the other. The Judge said the separated 75-minute use of the hall followed by the refreshments supported this conclusion.

Having concluded there were two separate supplies, the Tribunal went on to consider whether the licence to occupy the hall was exempt under VATA 1994 Sch 9. It said that even after taking into account the ancillary supplies, the grant of the use of the hall was an exempt supply of land.

Diana Bryce t/a ‘The Barn’ (TC00298)