VAT-Chatter Newsletter: Christmas 2015 edition

Round up of the recent news on VAT
By Graham Elliott CTA (Fellow) MBA

At this Christmas time, instead of sending a card, I send you these thoughts from the world of VAT. But fear not! I bring no tidings of zero rated food to choose for a tax-efficient Christmas (though mince pies would be a candidate….). The theme of this Yuletide edition is: don’t assume that a court decision which supports your viewpoint means you are home and dry. Not for the first time we have found that previous decisions have been overturned, (and the decision that did the overturning can very easily be overturned in its own turn).

The Temps they are a-changing….
In the tale of staff supplies past, we recall that Old Marley was able to hire temp staff through a bureau and pay VAT solely on the ‘mark-up’, and not on the element paid to the staff. VAT was added to the temp wage element in 2009 ostensibly as a late reaction to changes in regulations affecting employment businesses which themselves occurred as far back as 2003. This created a significant hurdle to employing temps since the tax differential with ‘proper’ employees made temps all but unaffordable except for fully taxable businesses. This hit to ‘neutrality’ was evidence of poor policy thinking on the part of government, but they did not seem to care about that.

In 2013 we saw a light at the end of the tunnel when a tribunal held that Reed Employment did not supply staff in this case but acted as a mere agent, irrespective of the regulatory position (but only as long as the contracts were written in a manner which supported that). We all expected HMRC to appeal this adverse decision, but they decided not to (not to be confused with cases where they simply miss the deadline to appeal…).

Did this mean that they accepted the decision? No; it probably meant that they wanted to keep their powder dry for another case where the facts were more propitious for them. This reveals a significant ‘fault line’ in our legal system. Courts of first instance do not set binding precedent, but any court of appeal (Upper Tribunal upwards) does set binding precedent. So HMRC can avoid setting binding precedent simply by not appealing. They concede the immediate case (and the tax in question) but live to fight another day. And that’s what happened here.

Another case, Adecco, came forward recently on similar facts, and the argument started again. HMRC said that the previous Reed case had been wrongly decided and should be overturned (in effect). The tribunal pointed out that it was very regrettable that HMRC had not chosen to appeal a decision with which they clearly disagreed. But that is all the tribunal could say, since that is HMRC’s right under the rules. And this aspect could not influence the tribunal’s conclusion in itself, which had to be reached on the merits of the legal argument alone. Unfortunately for all of us, this second tribunal flatly disagreed with the earlier one. The facts were not identical (in my view), and the tribunal could have said that the different outcome arose mainly from any small differences there were. But it decided not to be as gentlemanly as that, and simply declared the earlier tribunal to be wrong. It took ‘comfort’ from the fact that the tax payer was highly likely to appeal its decision (ignoring the fact that HMRC had decided not to appeal in the case of the earlier decision), so a more capable judge would be able to arbitrate between the two views.

Unless an appeal goes ahead, we seem to be stuck with a VAT imposition on the whole of a temp’s costs when incurred via a bureau that pays its wages. We can only hope for an appeal. That said, the outcome of the appeal, on the facts of the later case, is far from predictable.

Parking for Christmas?
What can be worse than the dash for the parking space at Christmas shopping? There are never enough, and the sole remaining space is in an inaccessible area hedged in by obese vehicles of the kind that appear to have eaten too much stilton and cake. So you will be pleased to hear that the car park operators are not going to have as Merry a Christmas as they might have had, owing to the tribunal decision in the case of National Car Parks Limited, released in the middle of December.

This deals with that other unpopular feature of many car parks, namely that you not only have to predict the amount of time you need, but also have to insert the exact amount, or else make a deliberate overpayment, since no change is ever given. What happens (in VAT terms) to the element that exceeds the minimum amount needed for the time you have selected? Is it outside the scope of VAT, or part of the price, and thus subject to VAT? Well, we surely have known the answer to that since the Kings Lynn car park decision of a few years back, haven’t we? This was that the extra payment is outside the scope of VAT and entirely a windfall to the provider. On the strength of this, NCP made a claim of half a million pounds for a four year period (meaning, dear reader, that we have in effect made overpayments in that period of £3m… or more, because the period in question had elements in the days of a lower VAT rate, but let’s not get hung up on details).

What could possibly go wrong? Well, the problem was that the Kings Lynn decision was only ‘first tier’ so, as with the temps case mentioned above, it was not binding on a later tribunal. And, yes, HMRC had decided to take a new case having not appealed the earlier one. And the result? You guessed it, the new tribunal said that the overpayments were subject to VAT after all.

Now, in this case the judge did indeed adopt a more gentlemanly approach, because she did not say she disagreed with the earlier decision, but that there was a relevant factual difference, to which I will come in a moment. That said, she was clearly unconvinced about the impact of that difference on the decision of the earlier tribunal, and I infer that she would have reached a different conclusion in the Kjngs Lynn example had she been deciding it. But she was content to say that the difference was sufficient to justify her different conclusion, and to give NCP a nasty surprise.

What was the difference? Merely that the Kings Lynn car park was run by a local authority which was technically restricted as to the prices it was allowed to charge, whereas NCP had no such restriction. Quite how this impacts on the obvious fact that the local authority had demanded exact coins or that any overpayment would be accepted and no change given, is completely beyond me. If there was a rule limiting the price they could charge, then they were breaking that rule. If there was no breach of the rule, then the overcharging was just the same as with NCP’s car parks. There is no logical reason why NCP should be treated differently. They can definitely feel that the Grinch has stolen their Christmas!

On the other hand, I find it hard to resist the logic of the latest decision. The customer was offered parking at a minimum sum of coin values which, if unable to pay that exact sum, could be purchased at a higher sum of coin values. So everything they paid was consideration, and none was a ‘gift’, nor a tax or levy, so it must therefore be consideration.

Straight down the Middle….?
Your New Year Day round of golf will be enhanced by good festive news for members clubs (note: not proprietary clubs) concerning the VAT they can claim from HMRC on the past over-taxing of what are generally called ‘green fees’.

The main issue on green fees, namely that a non-profit club can exempt them, was decided a while back. But the most recent case involving a number of clubs focussed on whether ‘unjust enrichment’ prevented such clubs receiving their claims for incorrectly paid VAT from the days when HMRC asserted that the supplies were taxable. HMRC can use this as a defence against paying out the VAT if they can show that the economic burden of the VAT charge fell on the customer rather than the club (unless the club suffered lost sales from the necessary higher prices).

Now, a moment’s thought on this suffices to take the general view that the club must surely have been the ‘loser’ from accounting for VAT as the price clearly would not have been reduced had they been able to exempt the supply from VAT all along. But the boffins have more sophisticated ways of appraising the position than this ‘fag packet’ thought process would suggest, and HMRC decided to spend small fortunes arguing that casual green fee golfers had borne the economic burden of the VAT charge.

They squared up to some members golf clubs in a tribunal hearing (such as the Berkshire). What was the outcome? It was that 90% of the burden had indeed fallen on the clubs (and pardon me if I do not try to explain why 10% did not, since I do not have a PHD in economics). So, common sense prevails again….

Enjoy your New Year day round of golf (but remember, as a player, you were never disadvantaged by the incorrect tax impost anyway, so cannot be getting a benefit from the supply being exempt).

And while you are playing, spare a thought for the owners of proprietary clubs, whose supplies are all taxable, because they make and distribute profit, whereas a members club retains all surpluses in the club, and is therefore exempt. What Christmas cheer do these owners have? The answer is: none. They attempted to give themselves a Christmas present in the form of a result in the case of Abbotsley Golf Club et al heard by the first tier tribunal and decided a fortnight prior to Christmas (just days after the above case was decided in favour of the members clubs).

This intriguing case proceeded by the somewhat circuitous route of challenging the exemption applicable to affiliation fees that had to be paid to the county association and thence (in part) to England Golf (the national governing body). Oddly, these bodies, the VAT treatment of whose fees was under discussion, were not even involved in the proceedings. What could be the point of it? Well, it seems it was a ‘warm up act’ (to quote the judge verbatim) for an attempt to challenge the entire basis of the sports exemption for non-profit making bodies, via a requested reference to the Court of Justice of the EU, on the basis of unfair discrimination against proprietary operations. But there is nothing more to report of this potential ‘tale of Christmas future’ because, a bit like Old Marley, it was dead (to begin with), since the tribunal refused all arguments and did not make a reference to the CJEU.

Michelin Star replaces Master Chef
Non-profit colleges make exempt supplies of education to students. This includes education supplied to catering college students. But what about supplies made to parents of students for tasting or experiencing the result of their education? For example a school concert ticket, or a ‘test meal’ at a catering college?

HMRC has long held that, when a parent buys a ticket to the school play, the supply is taxable (subject to possible qualification for the exemption for cultural services) because the supply ‘competes’ with a general theatre experience. You do not need to be an Evening Standard theatre critic to understand how ridiculous that notion is. However, they take the view that a supply to someone other than he who is being trained/educated cannot either be one of education or one that is ancillary to education.

The point may seem faintly ridiculous when referring to parents paying for the school concert, but it becomes more difficult for charges to those tasting the meals of student chefs, or having their hair cut by hairdressing students. Somehow, the implications appear less easy to grasp. Did they buy a meal for its own sake, or are they in reality contributing towards the students’ education? Can that supply be ancillary to the students’ education, and thus exempt?

Well, the first tier tribunal thought that the supply was exempt as being ancillary to education (in the case of Brockenhurst College). The Upper Tribunal said there was nothing wrong in the first tier tribunal’s reasoning and refused HMRC’s appeal. So we were on a roll (whether Swiss, pancake, or bread). But then something strange happened:

HMRC appealed these two defeats to the Court of Appeal, where yours truly decided to attend to hear what would happen next. I found out that both parties had agreed that the issue was unclear and should be referred to the Court of Justice of the EU. I do not know why Brockenhurst College chose that route when it was already winning 2:0. But there is nothing to stop HMRC offering to waive their tax liability in return for them giving red carpet treatment to their own potential defeat. Beyond such a surmise (with no evidence) I cannot think of a reason.

To my mind, the Court of Appeal was less than happy with this. Why substitute Roux for Wallace and Torode? But it is not easy for them to refuse when both parties are asking for it. Perhaps this culture of dependency on the European Court is one that should be reviewed. It is difficult to see what causes the difficulty with this issue. The question, whilst intriguing, has been fully explored by our own expert courts which have been unanimous. The Court of Appeal judges gave me the impression of being on top of their brief, and it would have been refreshing had they simply declined to take the matter out of the hands of our domestic judicial system.

This means we now tread water while the case rumbles onwards through the CJEU system, and, by next Christmas (if we are lucky) we will have the unenviable task of trying to interpret the CJEU’s customarily opaque and unhelpful decision. The children affected by this are bound to wonder what naughty thing they did to cause Santa to deny them the present of a simple resolution from the English Court of Appeal.

Feel free to contact Graham Elliott:

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