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Andrew Needham, Director of VAT Solutions (UK) Ltd, reports on recent VAT decisions.

High Court says taxpayer made single standard-rated supply of membership

The High Court has found for HMRC in a recent case involving the tricky issue of composite/multiple supplies.  HMRC had appealed the decision of the VAT Tribunal, which had found partially for the Appellant.

The Appellant is a franchisor of activity programmes for pre-school children. The franchisee is authorised to charge parents between £4 and £8.50 per session but, as a precondition of attendance, the child must be enrolled in the Appellant’s ‘Club’ for a fee of £19, payable to the Appellant. On enrolment, the Appellant provides a number of benefits, including a special T-shirt and six issues of a magazine. The dispute was a typical composite v multiple supply question; i.e. whether (as argued by HMRC) the £19 is consideration for a single standard-rated supply of membership, or (as argued by the Appellant) it is consideration for a mixed supply of standard-rated and zero-rated elements requiring an apportionment of the consideration, or alternatively, requiring the consideration to be treated as wholly zero-rated on the grounds that the zero-rated elements are predominant.

The Chairman focused on what the typical customer looks to receive from the payment of the £19, and concluded that the Appellant makes a mixed supply, but only split into two principal elements - the standard-rated 'husk of membership' (into which things like the magazines, DVDs and CDs, handbook and membership card are subsumed, rather than being the specific object of a parent paying the fee) and the zero-rated T-shirt, which acts as a form of admission card. The Chairman suggested that only a small proportion of the total consideration is attributable to the T-shirt, and invited the parties to return to the Tribunal if an apportionment could not be agreed.

There were cross-appeals before the High Court, both parties effectively looking to maintain their arguments before the Tribunal; i.e. the Appellant arguing for a full breakdown of standard-rated, zero-rated, and exempt elements, and HMRC arguing for a single standard-rated supply.

In the High Court, Mr Justice Briggs dismissed the Appellant’s arguments, but accepted the arguments of HMRC. The judge said the Tribunal's decision that the T-shirt, not being ancillary to the programme, was a separate supply, was wrong, and that there was a single supply.   HMRC’s appeal was thus allowed.

Tumble Tots (UK) Ltd v HMRC, High Court Chancery Division, 30 January 2007

Court of Appeal says HMRC delay in issuing VAT number caused 'transfer of going concern' (TOGC) buyer to breach contract warranty

Although issued a few months ago, we recently came across a Court of Appeal (CoA) decision that may well have some VAT significance, and is likely to be of particular interest to solicitors.

On 12 October 2006, the CoA issued its judgment in a case about a business sale that included an interesting message on VAT warranties, particularly in these days of delays in getting VAT registration numbers from HMRC.

Within a sale agreement, the purchaser gave a warranty that, in order to confirm VAT-free TOGC treatment, it would confirm its status as a VAT-registered business at the date of completion. In the event, there was a delay in the purchaser obtaining a VAT registration number, which in turn delayed completion of the sale by eleven days. Although the contract did not state that such a delay would be a breach of contract, the seller's action against the purchaser for damages was successful.

Davey v Lombard Asset Management, Court of Appeal, 12 October 2006

Tribunal finds for HMRC re input VAT recovery on legal services made to third party

The general scenario behind this case is that of a bank, which, in providing a financial service to its client, incurs legal costs, which, under the terms of the transaction, the client is responsible for paying. As the bank is unlikely to be in a position to deduct any input VAT on the legal services, the usual expectation is that the client pays the full VAT-inclusive cost of the legal services. The frustration for the client is that it knows it is paying a sum including VAT, and, particularly if it is fully taxable, would normally have an expectation of an input tax deduction. However, the technical position is that the client cannot make an input tax deduction as the supply of the legal services is to the bank, albeit that he pays the invoice. The further practical issue is that the solicitors will consider they must address the VAT invoice to the bank as their client, albeit that the invoice may be annotated to the effect that it is payable by the bank's client. Any request for the solicitors to address their VAT invoice to the bank's client is likely to be refused.

The facts in this particular case are broadly as described, involving a major corporate restructuring, with the relevant parties being a firm of solicitors, two coordinating banks acting on behalf of the creditor banks, and the Appellant.

Counsel for the Appellant sought to construct an argument that, looking at the wider events, the Appellant was either a joint recipient of the legal services (albeit not directly contractually so), or at least received a sufficient interest in the legal services to justify its right in principle to take an input tax deduction by reference to case law, in particular, Redrow plc.

Alas, the Chairman refused to accept the argument, finding that, in VAT supply terms, the supply of legal services was made wholly and exclusively to the coordinating banks. The status quo on this matter was thus preserved.

Telent Plc (VTD 19,967)

Tribunal says that flat rate kiosk sales were not supplies of catering

One for Flat Rate Scheme fans (whoever you are!), and yet another take on the meaning of ‘catering’, an issue which has featured in countless cases on VAT liability.

The Appellant sells ice cream and milk shakes from a kiosk in Christchurch, with limited seating accommodation nearby. The Appellant adopted the Flat Rate Scheme under the classification 'retailing food, confectionery, tobacco, newspapers or children's clothing,' which attracts a flat rate of 2%. HMRC reclassified the Appellant under the classification 'catering services including restaurants and takeaways,' which, surprise, surprise, attracts a flat rate of 12%.

The Appellant appealed to the Tribunal on the basis that it was merely making simple retail supplies liable to the 2% rate applied.

In his written summing up of the case, the Tribunal Chairman came to the following conclusions:

‘We have found that on the evidence before us:

(1) there is no catering and no supply of ‘catering services’ here;
(2) there is no restaurant here;
(3) there is no takeaway here;
(4) retailing is an appropriate categorisation, and catering is not.

Accordingly, as catering is not the right categorisation, and retailing is, the appeal is allowed with costs.’

The only thing that needs to be said about this particular case is; “Nice try HMRC.”

The Chilly Wizard Ice Cream Co Ltd (VTD 19,977)