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Steve Allen, Director of VAT Solutions (UK) Ltd, highlights a further selection of recent VAT decisions.

{mosimage}Tribunal says construction work done for a community football club qualified for chartitable zero-rating

This was a dispute about whether construction work carried out by a small, community-based football club qualified as a ‘charitable pursuit’ and, as such, was eligible for zero-rating.

The Appellant received a meagre income (allowing it barely to break-even) from its basic catering facilities, the rental of its grounds to other charities, and gate fees (which were used to pay the referee and lines men). Reference was made to the ‘Pemsel’ income tax case, which established the four principal divisions of charity as: "trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community...". It was found that the Appellant fell within the last division. Reference was then made to s94 VATA 1994 to establish whether the Appellant fell within the definition of a ‘business’, and to Sch 8 VATA 1994 to establish whether the construction was a zero-rated building "for use solely for a relevant charitable purpose".

After relatively short proceedings, the Tribunal held that the Appellant "operates for purposes beneficial to the community" without the "predominant business purpose of making supplies for a consideration". In allowing the appeal, the Chairman took a large swipe at HMRC by commenting that their reasons for denying zero-rating were ‘trivial’, and concluded with "noting our surprise that this matter should ever have got so far as it has".

Jeanfield Swifts Football Club (VTD 20,689)

Comment: This case, in the wake of several recent others won by charities (e.g. Quarriers, and Gablefarm Cats and Dogs Home among them [ see a previous article by Andrew Needham, also of VAT Solutions (UK) Ltd., here http://articles.taxationweb.co.uk/index.php?id=595 ], raises concerns of a potential mismatch between HMRC's litigation policy (as set out in Business Brief 44/07) and what is happening at visit level.

Tribunal says attribution of costs to profitable activities is not a basis for applying a standard method override

This was one of two recent cases (the other being Abbeyview Bowling Club (VTD 20,661)) which were the first to examine the ‘Standard Method Override’ (SMO) introduced by HMRC a few years ago.

The Appellant had a mixture of taxable vehicle sales and exempt finance commission. Under the standard method, its exempt turnover of less than 1% and overhead VAT of less than £400,000 a month meant that it was within the ‘de minimis limits’, so it enjoyed full input tax recovery. HMRC considered the standard method was not fair and reasonable. They were concerned that the method resulted in no VAT being allocated to what appeared to be the only part of the business generating any profit. (HMRC had allocated all salary costs to taxable sales).

The Tribunal first concluded that the SMO should not apply to a trader who is 'de minimis' after the annual adjustment. It then went on to consider the substantive part of the appeal, and found the sale of the cars was the economic driver of the business. As such, it was wrong to focus on profit when attributing input tax and calculating recovery. The Tribunal also rejected HMRC’s approach of allocating nearly all salary costs to the taxable side of the business to support a calculation that the exempt side made all the profit and the car sales were loss making. This was not factually correct, as the sale of finance involved higher-paid employees. As salaries bear no VAT, they have little or no bearing on a use-based VAT recovery calculation.

In finding that the standard method did achieve a fair and reasonable result, the Chairman noted the far greater infrastructure and cost required to sell and service a car, and agreed with the Appellant’s argument that if it stopped selling finance, the impact on its overheads would be minimal.  He dismissed HMRC's emphasis on profit, confirming profitability is not a requirement for input tax deduction, and European legislation attributes inputs in accordance with how they are used. Any reliance on the relevant profitability of a sector to determine input tax recovery is contrary to the basic principles of VAT.

Camden Motors Holdings Ltd (VTD 20,674)

Comment: This is a significant decision in that it’s one of the first to address the override, and the Tribunal analysed the legislation carefully in reaching its conclusion. It has received wide publicity in the VAT world, and should help to rein in any over-zealous Officers on VAT visits going forward.

Tribunal says UK treatment of mechanised bingo breaches EC principle of 'fiscal neutrality'

The dispute covered supplies of mechanised cash bingo (MCB) from 1 January 2003 to 31 December 2005, covered by s14 and s21 of the Gaming Act. MCB is played on either portable Bingo boards or boards built into the players’ tables. Games are played during main Bingo events, and following the announcement of a game, players have around 30 seconds to put their cash into their machine. The three main types of MCB are as follows:

• ‘Prize for Cash’ (stake = 50p, prize =£25)
• ‘Prizeline’ (stake = 50p, non-monetary prize =£500)
• ‘Cashline’ (stake >50p, and prize >£25)

‘Prize for Cash’ and ‘Prizeline’ fell under section 21 of the Gaming Act. However, the similar Cashline’ fell under section 14 of the Gaming Act. Under Group 4 of Schedule 9 VATA 1994, the provision of any facilities for the placing of bets or the playing of games of chance was exempt from VAT. However, Note 1(b) to the exemptions specifically excludes any games under section 14. This means that ‘Prize for Cash’ and ‘Prizeline’ were both exempt from VAT, but the higher stake or prize game ‘Cashline’ was standard-rated.

The Tribunal said Linneweber (C-453/02) had established that Member States must comply with the principle of ‘fiscal neutrality’, which precludes differing treatment of similar supplies.

Counsel for HMRC admitted that the games were identical from the point of view of the consumer. However, HMRC argued that the principle of fiscal neutrality only arises where there are competing traders, which was not the case here. The Tribunal dismissed this, finding that if goods or services are similar, it follows that they are in competition. It added that HMRC’s approach would mean having to address distortion of competition on a case-by-case basis. The Tribunal concluded “either the provisions of Note 1(b) did infringe the principle of fiscal neutrality, or they did not. It cannot depend on the circumstances of the individual Appellant”.  It would be daft if a taxpayer making only s14 supplies could cite distortion of competition when compared to a taxpayer making only s 21 supplies, but could not cite distortion if he made both types of supplies himself. Such an approach did not give certainty.  Appeal allowed.

The Rank Group plc (VTD 20,688)

COA says literature issued at slimming clubs is part of a single standard-rated supply of slimming services

The Court of Appeal has issued its decision in the latest chapter of a classic ‘composite v multiple supply’ case, on slimming club fees.

The Tribunal had held that the initial £9 registration fee and £4.95 weekly meetings fees should be apportioned to reflect a multiple supply of standard-rated slimming services and zero-rated printed matter. The High Court agreed with the Tribunal on the registration fee, but said the weekly meetings fees were payment for a single standard-rated supply of slimming services.

The CoA has agreed with HMRC's original ruling that the Appellant makes a composite standard-rated supply of meetings and literature. The complexity of this area of the tax has been borne out by the fact that the Tribunal, High Court, and CoA each reached wildly different conclusions on the same facts! (see also http://articles.taxationweb.co.uk/index.php?id=595 ).

Weight Watchers (UK) Ltd, CoA, 25 June 2008