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

Tribunal says HMRC's Failure to Revoke Special Method Means it has been effectively 'Allowed' and 'Approved'

This case concerns the partial exemption implications of a retailer, who, in addition to a taxable main activity of selling furniture, also generates regular exempt commission income from selling related insurance (i.e., anti-stain insurance for sofas, and personal protection insurance for customers using credit terms).

The issues were:

• whether the receipt of the VAT exempt income necessitates a partial exemption restriction on general running costs
• if so, on which costs in which areas of the operations
• and, what calculation should be used to give a fair and reasonable restriction of input tax deduction

The case focused on the VAT on advertising costs, with the conclusion being that although the recoverability of VAT on advertising costs will depend on the content and intention of the advertising concerned, in the case of store costs, head office costs, and potentially even factory costs, all related input VAT should be included in a standard partial exemption method calculation whenever exempt income is generated by store activities (unless there is a special method in place allowing a different apportionment to be carried out).

The second part of the case dealt with the question of whether the Appellant had and was able to rely on an agreed or allowed partial exemption method enabling it to make minimal restriction, and shows the importance of having a properly agreed and up-to-date special method in place to cover sources of exempt income. Fortunately for the Appellant, the Tribunal found that HMRC had effectively ‘allowed’ and ‘approved’ the special method by failing to ever actively revoke it. 

This case will no doubt encourage HMRC to look very critically at the partial exemption positions of all retailers who generate exempt income in their stores, however incidental it is.

DFS Furniture Company Ltd (TC00157) 7 August 2009

Tribunal says Referral Fee to Debt Negotiation Company is an Exempt Service

The Appellant is a loan broker which passes details of unsuccessful applicants to a sister company offering exempt debt management and negotiation services. These services comprise working out affordable payments, negotiating a payment plan with creditors and passing the monthly payments collected on to the creditors. The Appellant was paid fees for referring the unsuccessful applicants to the sister company. The disputed issue was the liability of those fees. HMRC argued it was a standard-rated referral fee, and the financial intermediary exemption could not apply as the Appellant was providing services to another intermediary. The Appellant said it was acting as a financial intermediary, making the referral fee exempt.

The Tribunal noted that the Appellant identified potential customers for the other company through a screening process, and provided the company with a completed electronic application form that contained the necessary information on income and debts that were the basis of any debt management services subsequently provided to the customer. The Appellant was intent on ensuring the customer obtained a financial product, and it recommended the sister company’s services. There was a high take up of those services by the referred customers, and so was more than just selling on leads in a detached manner. It brought persons together with a view to the making of financial contracts, with those persons being the principal supplier and customer in any potential exempt debt management contract. That contract also included payment handling services. The Appellant was therefore negotiating financial transactions and acting as an intermediary in relation to payment handling services.  The referral fee was thus exempt, and the appeal allowed.

Friendly Loans Ltd (TC00196) 25 September 2009