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

Tribunals Says Taxi Firm acts as Principal for Cash Work

This case is interesting in that it concerns the age-old problem of trying to decide whether a business is acting as an agent or a principal. 

The Appellant company supplies taxi services to account customers, whom it invoices regularly, and from whom it receives payment directly. It also provides cash work, which includes taxis picking up at taxi ranks and/or in the street and telephone bookings. The Appellant argued that it acts as a principal in respect of account work, and as an agent in respect of cash work. It said it was an agent for cash customers because the taxi drivers suffered the loss if a cash customer didn’t pay.  This differed from account work, where it suffered the loss if the account customer did not pay. HMRC argued that it acts as principal for both types of work, which is a key issue, because if it is acting as principal for both types of work, VAT is then due on all of the fares rather than just account customers.

The case turned on a document entitled the ‘Self Employed Drivers’ Agreement’, which was given to all drivers. It was not signed, but stated that, “by driving you are accepting these terms and conditions”, and covered a number of areas including holiday leave, payments to be made, forms to be filled in, and dress code. The Tribunal found that the use of the ‘Self Employed Drivers’ Agreement’ was significant in that it allowed the Appellant to exercise control over the way the business was run. Although the drivers were said to set fares and be able to refuse work as they thought fit, the practical reality was that the Appellant had implicit control over fare levels and the availability of drivers, and explicit control over advertising, record keeping and most costs and expenses.

The Tribunal noted that the Agreement did not differentiate between account and cash work.  Additionally, fuel costs were deducted from all fares and the Appellant was responsible for insurance, further blurring the lines between account work and cash work. Whilst the Appellant claimed that losses were suffered by the drivers for unpaid cash work, it would not in those cases receive its 50% share of the proceeds (after deduction of fuel costs), and so it was also subject to a cost. As such, the appeal was dismissed.

Albion Taxis Limited (TC00671)

Tribunal says there was No Supply of Staff under Joint Contracts of Employment

The Appellant is a multinational supplier of IT services. It entered into an arrangement with an insurance business to oversee its in-house IT department, which it felt had become a distraction to its business. Under the arrangement, the in-house IT employees of the insurance business became jointly employed by the Appellant. The case concerns whether VAT is due on the proportion of the payment for overseeing the IT department which relates to the recharge of employee costs where the employees are jointly employed. HMRC considered that it was due, and assessed the Appellant for output tax. 

In its analysis, the Tribunal considered the following two key issues:

• Whether there was, in fact, a situation of joint employment 
• Whether there was a single supply of IT services, or a supply of IT services plus a recharge of salary costs for the jointly employed staff

The Tribunal found that the employees were jointly employed, because although the Appellant had primary control over them, if, in breach of the agreement with Appellant, the insurance business exercised control over an employee, the employee could not deny its right to do so.

In considering the VAT treatment, the Tribunal decided to start with the contractual position and then test whether this really reflects the “precise way in which performance satisfies the interests of the parties” (as suggested in the AGO in Mirror Group). The Tribunal looked behind the contractual position to consider the economic purpose and found that the Appellant was providing services entirely as a principal, rather than acting as an agent when paying the employees. As such, VAT was chargeable on the whole consideration, and the appeal had to be dismissed. This case is of note in that it suggests a joint contract of employment will not avoid a VAT charge if, in fact, there is no supply of staff from one employer to the other.

CGI Group (Europe) Limited (TC00678)

Tribunal says Supplies by Not-for-Profit Membership Body were Outside Exemption

The Appellant is a not-for-profit company limited by guarantee, and was established with the aim of promoting ethical trade and improving trading practices accordingly. It offers services to its corporate members in return for membership subscription fees.

The case concerns the liability of the services to members, which the Appellant considered to be taxable.  HMRC, however, ruled that its supplies were exempt under VATA 1994 Sch 9 Group 9 Item 1(e) as follows:

“1.  The supply to its members of such services, and, in connection with those services, of such goods as are both referable only to its aims and available without payment other than membership subscription by any of the following non-profit-making organisations:

(e) a body which has objects which are in the public domain and are of a political, religious, patriotic, philosophical, philanthropic or civic nature.”

This case is unusual in that it is normally the taxpayer arguing for exemption, and HMRC arguing for taxable treatment. Assuming the corporate members would be able to recover any VAT charged by the Appellant, HMRC presumably thought exemption was the better argument to pursue, as it would prevent the Appellant from recovering its input tax.

In its submission, HMRC identified three points in dispute as follows:

• Whether the Appellant’s objects are ‘in the public domain’
• Whether the Appellant’s services are ‘referable only to its aims’
• Whether the Appellant is an organisation within VATA 1994 s 94(2)(a)

The Appellant argued that its services were not only referable to its aims, but also to the tangible commercial benefits which derive from the membership for the corporate members. This gave the result that it is more of a commercial nature and not a public initiative. HMRC pointed out that whilst the motivation of members to join might be different to the Appellant’s stated aims (e.g., “improve the incomes, working conditions and respect for the rights of millions of poor workers who are employed by companies that supply members”), the Appellant’s aim itself was clearly in the public domain. HMRC added that, from the Appellant’s perspective, the fact that the members may effectively be advertising their membership for commercial purposes was irrelevant.

Having established that the Appellant’s aims are ‘in the public domain’, the Judge went on to conclude that the services supplied by the Appellant are ‘referable only to its aims’. On the issue of whether it was an organisation, the Court decided that the exemptions set out in VATA 1994 Sch 9 were freestanding exemptions, so there was no reason to refer to VATA 1994 s 94(2)(a). As it was irrelevant whether or not the Appellant was an organisation within the meaning of VATA 1994 s 94(2)(a), it was not necessary to consider this point. The Tribunal concluded that the services were within the scope of VATA 1994 Sch 9 Group 9 Item 1(e) and dismissed the taxpayer’s appeal.

Ethical Trading Initiative (TC00690)