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

Tribunal says Jersey VAT Structure was Not 'Abusive' and Halifax should Not Apply

The Appellant was a well known UK debt finance business which had incorporated a wholly-owned subsidiary in Jersey to mitigate the effect of irrecoverable input tax incurred on advertising relating to exempt loans to UK customers.

HMRC challenged the structure, arguing that the Appellant was providing the loan broking services, and that the advertising was actually supplied to the Appellant and that it should have accounted for VAT under the reverse charge. HMRC’s secondary argument was that the structure was abusive. The Appellant said the subsidiary provided the loan broking services to the UK customer and received the advertising from a Jersey supplier.

On looking at the nature of the supplies, the Tribunal found that the subsidiary supplied the loan broking services to lenders and also received the advertising services. Though not determinative, it noted that the construction of contracts is one of the factors that should be taken into consideration. The Judge saw that the subsidiary received and paid for the advertising services itself for the purposes of its business, under a genuine contract. The Tribunal also noted that even though the Appellant had provided its subsidiary with an initial loan, this was repaid by the material time. The Judge said that even though the arrangements were not at arm’s length, it did not mean that the Appellant was responsible for payment.

The Tribunal then considered the principle of ‘abuse’ as defined in the Halifax case. On whether the scheme achieves a result contrary to the VAT Directive, HMRC argued that a principle of the tax is that someone making exempt supplies should suffer the tax incurred in making those supplies. HMRC added that the ‘insertion’ of the subsidiary meant the purpose of Community Law could not be achieved. The Tribunal disagreed that the subsidiary had been simply inserted. There had in fact been a wholesale reorganisation and not just a simple offshore loop as in the WHA case. The Judge added that HMRC were incorrect to compare the results achieved by this structure to a situation where exempt supplies were made in the UK. The transactions should seen by reference to the actual facts and circumstances. In this case, there was no UK exempt supply, and it was inappropriate to compare what was done with what could have been done.

After finding for the Appellant on the first condition, the Judge went on to look at whether the essential aim of the Jersey structure was to obtain a tax advantage. The Tribunal found that the essential aim was to obtain a tax advantage, but as it did not result in an outcome contrary to the Directive, abuse did not apply. However, on the issue of the redefinition, the Tribunal said that if it had found abuse it would be required to neutralise the tax advantage by redefining the supplies, and agreed with the recent Atrium Club decision that any such redefinition could create a hypothesis outside the real world that was not bound by real world constraints.

Paul Newey t/a ‘Ocean Finance’ (TC00487)

Tribunal says Reposessed Goods are being Sold in Same State, so No Output VAT is Due

The Appellant sells repossessed goods such as televisions, washing machines and fridges. The dispute concerns the ‘same condition’ test specified in the VAT (Special Provisions) Order 1995 for selling repossessed goods free of VAT.

HMRC argued that adding things like a new remote control or new water hose meant the goods were not in the ‘same condition’ when sold on, and so VAT was due on the full sale price. The Tribunal disagreed with HMRC, but said that there was a separate supply of a new remote control etc. on which VAT was due, so the sale price had to be apportioned. As such, the Card Protection Plan principles were not applied, even though the remote control and other items were all for the better enjoyment of the main item. There was no composite standard-rated supply of an item in a different state from when repossessed, but two supplies; one of second-hand ‘same state’ goods, and one of new goods, with a different VAT treatment applying to each one. The new items were clearly distinct and separate from the second hand goods, and could be bought separately. The Tribunal added that if had it been minded to treat the supply as composite, it would have exempted the whole supply from VAT as the second-hand goods would have comprised the dominant item.

HMRC tried to argue that doing things like replacing batteries in a repossessed remote control, or putting a dust bag in a repossessed vacuum cleaner, meant the item was not sold on in the ‘same state’. However, the Tribunal found this inappropriate, as they were just consumables. The test should only apply where the item had been repaired or reconditioned before resale, such that its condition had changed from broken to working, or unusable to usable. Examples of this would be replacing a faulty TV tube or broken fridge drawer, such that the ‘same condition’ was not met and VAT would then be due on the full second-hand sale price.

Buy As You View Limited (TC00486)

Tribunal says Taxi Account Work Retentions Not Taxable

This case concerned the treatment of monies retained by the Appellant relating to services supplied to account customers where it acted as principal. The Appellant invoices and collects money from the account customers, retaining either 20% or 26% as ‘Account Work Discount’ and passing the balance to the drivers. HMRC saw this discount as taxable consideration for a supply of services to the drivers, and raised a £167K assessment.

The Tribunal found there was no supply by Appellant to the drivers other than of XDA equipment, for which a separate charge was made, and VAT declared upon. The Tribunal cited A2B Radio Cars and Camberwell Cars in support of its view that a flat rate deduction is not consideration for a supply of services. The Judge distinguished RJ & CA Blanks and Argyle Park Taxis on the basis that no separate charges were made for equipment.

Parker Car Services (TC00528)