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

Andrew Needham

Tribunal says architect's fees for installation of a new lift can be zero-rated

The Appellant was a charity providing a permanent residence for the elderly, and had appealed against an HMRC decision that the architect's services relating to the installation of a new lift in a care home did not qualify for zero-rating.

HMRC argued that the words ‘in the installation of a lift' in item 17 of Group 12 of Schedule 8 of VATA 1994 referred only to the physical act of installing the lift. However, the Tribunal was in agreement with the Appellant’s interpretation of the words in the legislation, that the installation of the lift is the end result and, hence, the zero-rating includes all the services necessarily performed in achieving that end result. The Tribunal Chairman stated:

 “…this includes the architect's services, which are clearly necessary to the installation because without them the building that holds the lift could not have been designed or built.”

The decision of the VAT Tribunal in this case could potentially lead to refunds of VAT for charitable institutions, which have received zero-rated installations of lifts. This case should also apply to Registered Social Landlords and other Care Home providers, where the contractor has not charged VAT on the installation of a lift due to the issuing of a 'certificate' by the recipient of the services.

The potential refund relates to professional services received in connection with the installation of the lift. The VAT legislation (VATA 1994, Sch. 8, Grp 6 Item 2) specifically excludes such professional fees from zero-rating when a building is constructed, but Item 17, Group 12 (which grants zero-rating on the installation of a lift) does not explicitly exclude such fees. It uses the phrase ‘the services necessarily performed in the installation of a lift’, and the Tribunal found the architect's services in the Appellant’s case were ‘necessarily performed’, and could, therefore, benefit from zero-rating.

Item 2 of Group 6 excludes the services of an ‘architect, surveyor or any person acting as a consultant or in a supervisory capacity’, so the decision would appear to open up these services as candidates for zero-rating too, when supplied for the installation of a zero-rated lift.

Friends of The Elderly (VTD 20,597)

Comment: there are a couple of options open to HMRC on this case. They could appeal the case to a higher court and hope to win, or they may treat the case as a 'rogue' decision, and decline to apply it more generally on the basis that VAT Tribunal decisions do not set precedents which may be relied upon. Anyone who has incurred VAT on such fees in connection with the zero-rated installation of lifts within the last three years should consider making a claim.

High Court says scheme to indemnify school fees against absence is an exempt supply

The High Court has recently given its decision in a case which is stated to be a test case on behalf of a range of private schools.  The background is a scheme which parents can enter at their own choice, whereby, in return for an additional payment, the school fees will be refunded in specified circumstances to the extent that the pupil is unable to attend classes, (e.g. illness or accidents). The dispute concerns the VAT liability of the additional payment.

HMRC had previously accepted the payment as being part of the consideration for an exempt supply of education, but decided in December 2005 that it was actually consideration for a separate standard-rated supply. HMRC duly assessed for tax in the prior three years.

At the VAT Tribunal hearing of 3 April 2007 (VTD 20,122), the Chairman had found in favour of HMRC, commenting:

“Despite the persuasive nature of the primary case for the School advanced by Mr Cordara, I am unable to accept his submission that there is in reality a single supply of education of which the provision of the Scheme simply forms part: there is a difference for VAT purposes between the nature of the supply made to parents who avail themselves of the Scheme, and those who do not. Certainly, each group receives an education for their children but those who do join it also receive the separate supply referred to in the last preceding paragraph, which has no effect on that education. I further disagree with Mr Cordara’s contention that any terms concerning fees are an integral part of, and cannot be divorced from, the contract for education: the fees for the Scheme are identified on the School’s invoices and are charged separately from those for education. Whilst the Scheme necessarily relates to the supply of education made by the School, it cannot itself be described as a supply of education. I hold that there are two separate supplies: a supply of education, and a supply of the entitlement to the refund of school fees in prescribed circumstances”

The High Court judge was especially critical of the Tribunal, in particular, savaging the above paragraph, and making reference to over-zealous dissection of transactions. The judge concluded that “the Tribunal was clearly wrong to reject the School's primary case, and that when a parent participates in the Scheme there is still a single supply to him of educational services by the School.” The appeal was thus allowed.

Birkdale School Sheffield, High Court Chancery Division, 5 March 2008

Tribunal says assessment to apportion subscription fees needs to be recalculated 

The Institute was an exempt professional body which charged a subscription fee that included the provision of two publications. They used Extra-Statutory Concession (ESC) 3.35, which stated that subscription charges for a non-profit organisation could be apportioned according to the liability of the supplies.  As there was no separate charge for the publications, the issue was what value should be put on them compared to the total subscription cost (and the amount of input tax thus recoverable). Whilst both parties agreed the ‘cost’ to the institute of the production of the publications should be used, the dispute was over how the cost should be defined as there was no cash expense incurred by the Institute in providing the publications to members.

The Institute appealed against HMRC’s assessment which disallowed some residual VAT as a result of the dispute over the value of taxable supplies made and whether HMRC had acted reasonably in applying its own apportionment method.

The Institute argued that the cost was the advertising revenue foregone when they agreed to let another company, ‘Step’, handle the production of the publications. Step paid 20% of its net profit to the Institute to compensate for the Institute’s loss of profit on the publications, and retained 80%. The Institute argued that the cost to the Institute was Step’s gross advertising revenue less Step’s retained profit, and that accordingly 83.35% of the subscription charge related to the publications.

The Commissioners rejected the Institute’s method in favour of their own, which used the net loss of revenue to the Institute (i.e. broadly the 80 percent net profit retained by Step) as the Institute's cost of producing the publication. This method allowed 37.25% of the subscription charge to be attributable to the publications.

The Tribunal ruled that HMRC had acted reasonably, as no particular method seemed any better or worse than the other, and no substantial evidence was put forward by the Institute that confirmed HMRC’s method did not properly reflect the publication element of the subscription. The Tribunal therefore dismissed the appeal in relation to whether HMRC acted reasonably but allowed the appeal in part for the assessment, stating that a new calculation needed to be made based on the methodology as decided in the Tribunal. This would use the Commissioners’ method to determine the proportion of the subscription that related to publications but would also include 100 percent of Step’s net profit as the value of the Institute’s taxable supply to Step, (part of which was deemed to be paid by non monetary consideration) thus giving a revised residual recovery rate.

Institute of Biomedical Science (VTD 20,609)