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Andrew Needham, Director of VAT Solutions (UK) Ltd, highlights a further selection of VAT cases.

Tribunal says that customer ‘cash back’ payments did not reduce the ‘taxable amount’

The Appellant sells mobile phones to the public, and centred its appeal around two main issues at the Tribunal hearing.

The first issue was that the Appellant entered into bilateral arrangements with some customers that are quite distinct from tripartite arrangements involving the service providers which are aimed at ensuring customers remain with the provider (i.e. where the customer receives a ‘cash back’ from the Appellant if he/she remained in the contract sufficiently long for the Appellant to receive the commission payment from the service provider under the tripartite arrangements). The Appellant argued that, on Elida Gibbs principles, the value of its supply to the customer should be reduced by the value of the cash back. HM Revenue & Customs (HMRC) argued that the cash back was not, in reality, a reduction in the price, but was a free-standing inducement to the customer to sign up with the service provider. Furthermore, the contractual arrangements in Elida Gibbs were quite different from those in this case.

The Chairman agreed with HMRC that there were sufficient differences in the facts to say that Elida Gibbs could justify an argument that the Appellant is entitled to reduce the value of its outputs on account of the cash backs. On this analysis (i.e. that the cash back is consideration for a separate supply to the Appellant), the output tax could only be reduced as input tax where the recipient of the cash back is a taxable person, and HMRC had assessed the Appellant on that basis.

The second issue was an argument that the assessment was invalid, firstly, because an incorrect reason code (liability errors) had been used on the assessment forms, and secondly, because, up to their Statement of Case, HMRC had referred to the wrong statutory basis for the assessment (quoting Section 73(2) rather than Section 73(1)).

The Chairman concluded that the Appellant had not been misled, as evidenced by the manner in which it had presented its case, and that there was thus no reason to consider that the assessment had been invalidated by the reason code or statutory references quoted.  As such, the appeal was dismissed.

JAG Communications Ltd (VTD 20,002)

Court of Appeal says theatre production costs are ‘residual’ for partial exemption purposes

The Court of Appeal (COA) released its judgment in a case that is likely to have a significant future bearing on the rules for input tax attribution.

The case looked at whether the VAT on production costs is wholly irrecoverable as relating exclusively to the exempt sales of tickets (as argued by HMRC and agreed by the Tribunal), or is ‘residual' as relating to the totality of income, including taxable supplies such as sponsorship and merchandising (as argued by the Appellant and subsequently agreed by the High Court).

In an interesting twist, the CoA confirmed that the VAT on the production costs is correctly treated as residual, but on a different reasoning to that of the High Court. The CoA rejected the view that the taxable supply to which the production costs have a ‘direct and immediate link’ is the sponsorship package including a right to tickets, in favour of a view that the taxable supply to which the production costs have a direct and immediate link is the supply of programmes. One of the judges, LJ Chadwick, expressed surprise that VAT Regulation 101(2)(d) should operate in this manner.

Mayflower Theatre Trust Ltd, Court of Appeal, 22 February 2007

Tribunal holds that taxpayer provided exempt seasonal pitches to caravan owners

This case concerns the exclusion (f) from Exemption Group 1 of seasonal pitches for caravans, and whether the Appellant fell foul of the 'prevented by any covenant, statutory planning consent, or similar permission from occupying, by living in a caravan at all times throughout the period' definition of a 'seasonal pitch'.

The Appellant had purchased a site in 2004, which consisted of a number of sites within a leisure complex area. Some of the sites accommodated touring caravans, but others consisted of concrete pitches rented long-term to owners of static caravans (which were anchored by metal straps and chains, had their towing bar and wheels removed, and were permanently connected to the electricity mains, gas supply and BT lines). The dispute concerns the latter 'static' pitches. The Appellant had initially charged VAT on the rentals, but then sought to make a voluntary disclosure of £128K for overpaid output tax which HMRC refused. The root of the dispute is that the Appellant 'inherited' a range of planning permissions for the site, one of which was a planning licence issued in the 1980s by the district council for twelve sites, which included in respect of three of the sites the condition 'no caravan on the site shall be occupied between 31 January and 1 March in any year'. The rental agreements between the Appellant and the caravan owners repeated this restriction, although the Appellant later dropped it to reflect the reality that the restriction had never been enforced.

HMRC's main argument was that the term in the rental agreement, and the term in the planning licence condition, precluded exemption. HMRC also advanced various circumstantial evidence that the site was a seasonal holiday park as opposed to a residential park, including the annual duration of the rental agreements, the payment of non-domestic rates, and terminology used in a previous website.

The Appellant argued that it did not operate a seasonal holiday park, and that the references to the February occupation prohibition in the planning licence should be disregarded, as they had never been enforced, and the period of time during which the Council could have taken action for non-compliance was long elapsed, such that, in practice there was a mutually accepted variation of the prohibition. The Appellant also argued that the prohibition only applied to certain sites. The Tribunal Chairman first disregarded HMRC’s circumstantial evidence, stating that her task was to focus only on the application of exclusion (f) to the occupation restrictions. The Chairman then agreed the Appellant's arguments on the planning prohibition, commenting 'The effect of the lapse of the planning condition is that, whilst the words remain on the local authorities' records, it cannot be said that the occupiers of the pitches are prevented by the planning consent or the site licence from occupying their caravans, as would be required by Note 14 for the exception from exemption to be effective'.

The Chairman thus allowed the appeal, and went on to criticise HMRC for maintaining guidance in an extant edition of Notice 701/20 which they stated in evidence at the Tribunal no longer represented their position.

Tallington Lakes Ltd (VTD 19,972)

HMRC withdraws High Court appeal against zero-rating of warm ‘ciabatta melts’

Readers will be interested to hear that, following further legal advice, HMRC withdrew their appeal to the High Court in respect of the Tribunal decision in Ainsleys of Leeds (VTD 19,694), which had found that the sales of ‘ciabatta melts’ were zero-rated even though sold still warm (for optimum freshness and to provide a tasty aroma in the shops).

As the Tribunal decision now stands, affected businesses should consider submitting refund claims to HMRC, subject to the usual 3-year time limits, and unjust enrichment provisions.