Weekly VAT Update – 28 February 2017
Insurance and Taxi Drivers
This case was an Upper Tribunal one and the judgement suggests that HMRC’s guidance and policy should be amended. The trader, Wheels, runs a taxi business and rents cars, with a radio support service, to drivers who do not have their own vehicles. Wheels also offers drivers the option of arranging insurance for £45 per week, which includes a modest mark up to the cost that Wheels pays the broker. Wheels treated the car hire as standard rated and the insurance as exempt from VAT. In accordance with its guidance, HMRC considered that the insurance was additional consideration for the car hire and also standard rated, on the basis that the driver received a single supply of an insured car. The key issue was whether the customer has the choice to receive the car hire as well as the insurance, or solely the car hire. HMRC argued that Wheels could not supply insurance. However, the Upper Tribunal rejected this point because Wheels could add new drivers to the schedule during the policy year without notifying the insurer, providing certain criteria were met. Like the First Tier Tribunal, the Upper Tribunal found for Wheels and decided that the fact it made a small mark up was not a significant distinction from the leading CJEU case of BGZ leasing, and that the insurance charge was VAT exempt. HMRC has yet to comment but in absence of a successful appeal its guidance on this area appears to be in need of change.
Reasonable Excuse for late payment of VAT
We very rarely cover penalty cases as there are so many, but this one was successful for the Appellant and is worthy of mention. At the hearing, the Appellant suggested that the amount HMRC was claiming was incorrect, and it appears that HMRC agreed and lowered it to c. £8,000. The Appellant was a limited company and the husband and wife who ran it had gone to considerable effort to liaise with HMRC and keep them informed of the difficult financial position they had encountered. This led the Tribunal to state in its judgement: “It is to be hoped that the facts in this case in relation to the taxpayer’s contact with HMRC are relatively unique. Judge Mure was very concerned about the possibility of time to pay arrangements. Indeed, at the original hearing when he granted a recess to Mr Boyle to consider the quantum of reliability, he asked him to consider the efforts made by Mrs Cook to meet with HMRC officers directly. It was very evident from the correspondence produced that both Mr and Mrs Cook had repeatedly contacted HMRC with a singular lack of success.”
The Tribunal observed that the Appellant undoubtedly and repeatedly attempted to make time to pay arrangements. Had that been successful, one or more of the default surcharges would not have arisen. There was no lack of effort on the part of Mr and Mrs Cook to deal with the matter. The cause of the late payment in each of the periods in question was an insufficiency of funds, but the question for the Tribunal was – did the Appellant do enough to try and find alternative funding or take other action to counteract the insufficiency? Mr Cook found full-time employment elsewhere (Mrs Cook was also employed elsewhere), they both obtained personal loans to clear VAT bills, they put the business on the market as a going concern and they also told HMRC that if the sale of the business was not successful then they would put their home up for sale and whichever asset was sold first would clear their VAT liability. They had unsuccessfully attempted to seek a bank overdraft. Thankfully, they were ultimately successful in finding a purchaser for the business. The Tribunal therefore found that the Appellant, in the face of very shoddy service from HMRC, repeatedly went to considerable time, trouble and effort to try and make acceptable proposals for payment to HMRC, and had a reasonable excuse for late payment of VAT liabilities, and the penalties were ordered to be rescinded.
VAT block in respect of new dwellings
In the construction sector there is a concept known as the “builders’ block”. This is intended to prevent the buyer of a new dwelling from having a VAT advantage over the buyer of an old dwelling in respect of items such as fridges and carpets. Therefore, if the owner of an old house buys a fridge or carpet, the cost will include VAT. However, the cost of a new house is zero-rated. So the builders’ block was introduced to prevent the construction company recovering VAT on specified items, and it therefore has to pass the full cost, including the irrecoverable VAT, on to the buyer. In an Upper Tribunal case, Taylor Wimpey challenged the legislation dealing with this principle in a case where £51 million was involved. It was a complex matter, involving law that is slightly different in the UK compared to the EU. While there are other issues still to be dealt with, the Upper Tribunal did not find for Taylor Wimpey on most of the goods in question, one of the exceptions being installed extractor hoods, and on the others such as fridges and carpets the builders block was held to be valid.