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

Andrew Needham

High Court finds partly for HMRC on supply of printed matter for slimming clubs

A classic single v multiple supply case, concerning weekly meetings for slimmers, including weigh-ins, and literature provided on initial registration and at those meetings.

HMRC had previously allowed output tax to be declared on a proportion of income, but then issued a revised ruling stating that there was a single standard-rated supply of a weight loss programme.

At the Tribunal, the Chairman, through an analysis of case-law, took the view that for cases involving a mix of goods and services, the Levob ECJ case (C-41/04) was the leading precedent, it having built on the earlier principles established in the Card Protection Plan case (C-349/96). He took particular note of the comment in Levob:

'where two or more elements or acts supplied by the taxable person to the customer, being a typical customer, are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split'. 

The Chairman concluded that there was no single indivisible supply at the first or subsequent meetings, and that there was nothing artificial about splitting the printed matter and attendance at the meetings. A contributory factor to this conclusion seemed to be the fact that there were a certain number of slimmers, described as 'at home members', who received the printed matter without attending any meetings. The appeal was thus allowed by the Tribunal with a comment that the zero-rated split on initial registration, where a 170-page handbook was supplied, would be higher than that on subsequent meetings where only leaflets were supplied.

In the High Court, Counsel for HMRC put forward four challenges to the reasoning applied by the Tribunal in reaching its conclusion. The judge concluded that HMRC had not succeeded in demonstrating that any one of them represented an error of approach by the Tribunal. However, whilst the correct tests had been distilled (i.e. to the extent that the tests were a matter of law rather than fact), the judge considered that he had the right to reconsider the correct legal characterisation of the transactions, albeit that interfering with the Tribunal decision could only be done with circumspection.

Applying the 'ancillary' test as per the College of Estate Management case, the judge concluded that, as far as the subsequent regular meetings were concerned, the printed material was ancillary, and a differentiation between the printed material and the services provided would be artificial. The judge thus concluded that the subsequent meetings should be properly classified as a single supply of weight loss services.  The judge then asked himself if any practical difficulties arose out of a conclusion that the charges for the initial meeting should be apportioned, but the charges for subsequent meetings should not. He decided not, noting that the Tribunal decision had already recognised different apportionments for the two types of meeting.

The appeal was partly-allowed to the extent of the treatment of subsequent meetings.

Weight Watchers (UK) Ltd, High Court Chancery Division, 21 January 2008

Tribunal says taxpayer did not know about the fraud elsewhere in its supply chain

Livewire, a wholesale exporter of mobile phones, appealed against HMRC's refusal to repay input tax incurred on 14 deals in 2006. The issue in the case is whether the Appellant knew or ought to have known that there was Missing Trader Intra-Community (MTIC) fraud elsewhere in the chain. Contrary to the decision in Calltell, it was held that HMRC were not entitled to restrict Livewire’s claim to input tax.

HMRC provided details of their case that the transactions entered into by Livewire formed part of an overall scheme to defraud the Revenue. HMRC accepted VAT was accounted for properly in respect of the 14 deals, and there were no UK tax losses in Livewire's direct supply chain. However, the fraudulent evasions of VAT were said to have taken place in other supply chains of which Livewire was not a part, but which were connected to Livewire's direct supply chain. Livewire carried out all the checks suggested in Notice 726 to protect the integrity of the supply chain.

The counsel for Livewire considered that HMRC may have been influenced by their knowledge of the existence of other alleged frauds and the subsequent dealings in the same phones detected by Nemesis, their system that tracks the movements of mobile phones by their unique EMEI number. This information was not passed on to Livewire, so they could not have possibly known about the phones' history at the time of the deals. The Tribunal ruled that other evidence given by HMRC (that the phones were from Central Europe, Livewire rarely had stock, the phones were exported to a warehouse in the Netherlands where none of the purchasers was located) despite being odd, did not amount to knowledge of fraud.

Therefore the Tribunal decided that the fraud was carried out by the missing traders only and that Livewire neither knew nor ought to have known about the fraud, and allowed the appeal.

Livewire Telecom Ltd (VTD 20,533)

Tribunal holds that charges for homeless pets by animal charity were zero-rated sales

Gablesfarm is a charity providing rescue and shelter for abandoned/unwanted cats and dogs. When animals were re-homed a charge was made to the new owner which was treated as zero-rated under Schedule 8 group 15 item 1 as sale of donated goods by a charity. HMRC considered that the zero-rating should only apply to the sale of unwanted animals donated by their original owners, not those received from the local authority, police or general public as strays. They argued that only the original owner could transfer the ownership of the goods and make a donation, and the first argument before the Tribunal centred on whether ownership was a prerequisite of donation.

Gablesfarm was under contract with the local authority to kennel dogs brought by them for seven days, enabling the local authority to discharge their obligations under the Environmental Protection Act. The local authority paid for administration, kennelling and vets' fees for seven days, after which their obligations ceased and the dogs became the property of Gablesfarm under the Environmental Protection Act. HMRC's secondary argument was that the sale of dogs received from the local authority was excluded from zero-rating for not meeting the conditions set out in note 1 of Schedule 8 group 15, specifically that the sale took place as a result of a prior arrangement in place before the goods were made available for sale. The Tribunal dismissed this view. The terms of the contract did not regulate what happened to the dogs after the expiry of the seven days, and the Tribunal was satisfied that the sales took place as a result of Gablesfarm's charitable objectives, not as a result of its contract with the city council. They considered note 1 to be an anti-avoidance measure, and the contract bore no hallmarks of avoidance and was not an arrangement within the meaning of note 1.

On the issue of donation, the Tribunal considered that ownership was not an absolute concept in English Law. The local authority warden has statutory power to give stray dogs to such a centre, which effects ownership by Gablesfarm, and members of the public acquire the right of possession of a stray unless the original owner demands its return, so can also transfer ownership. Furthermore Gablesfarm made no payment to people who brought in lost or abandoned animals, and HMRC guidance focuses on the point that goods given freely to a charity can be sold at the zero rate, rather than making any mention of the ownership of the goods. The social reason for the UK's zero-rating legislation in this area is to help charities raise funds for their charitable objectives. The Tribunal concluded HMRC's approach of distinguishing between the sales of animals directly given by their owners and those abandoned produced an irrational result when set against the specific purpose of animal protection. The Tribunal concluded that the sales may be zero-rated and the appeal was allowed in full.

Gablesfarm Dogs & Cats Home (VTD 20,519)