Vehicle Control Services Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 02 March 2015 |
| Neutral Citation | [2016] UKFTT 443 (TC) |
| Date | 02 March 2015 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Michael S Connell, Member Peter Whitehead
Lord Marks QC appeared for the appellant
Ms Erica Carroll, Officer of HM Revenue and Customs, appeared for the respondents
Value added tax – Input tax – Supplies directly referable to out of scope income which formed part of taxpayer's “business” income – Whether recoverable – No – Income based apportionment necessary – Appeal refused.
This is an appeal by Vehicle Control Services Ltd (“VCS”) against HMRC's decision to deny a VAT credit in respect to the period 1 February 2013 to 30 April 2013 (04/13), on the basis that input VAT incurred must be apportioned between taxable supplies and costs relating to activities which are not within the scope of VAT. The court found that HMRCs methods of apportionment were justifiable and refused the appeal.
VCS carries on business, as a provider of parking, wheel clamping and security services. The Company has been registered for VAT since 1 September 1990. Its clients are the owners of the car parks which VCS supervises and operates.
In practice, most of VCS's income is derived not from parking permits but from parking charge notices (PCNs) which it issues to motorists who are in breach of the rules for parking in the clients' car parks. This includes clamping and tow-away charges, which were charged to motorists prior to such charges being outlawed under the Protection of Freedoms Act 2012. On 13 March 2013, the Court of Appeal decided that the PCN income, was not subject to VAT. This was because the income from PCNs was not earned in respect of supplies of services liable to VAT. Rather, the PCN income represented damages for trespass by the motorists or damages for breach of the contracts between the motorists and VCS and was therefore outside the scope of VAT.
On 6 June 2013, VCS submitted a repayment return for VAT period 04/13 in the sum of £78,077. The return excluded £363,059 of “sales” (PCN income) that in previous quarters would have been declared as taxable sales but were now treated as outside the scope of VAT.
The return included input VAT on monthly management charges from an associated company Excel Parking Services Ltd for a share of head office overheads and directly attributable costs.
HMRC rejected the return advising VCS that the supplies which had been determined by the Court of Appeal to be outside the scope of UK VAT were non-business supplies and that input VAT was only recoverable in so far as it related to taxable supplies. Accordingly there would have to be an apportionment using a fair and reasonable calculation to establish the Appellant's input tax.
VCS disagreed with HMRC's view that there needed to be an apportionment of VAT incurred and argued that all of the VAT incurred related to business and accordingly was fully recoverable as input tax.
In order to progress the 04/13 repayment return HMRC calculated an income based apportionment of the VAT claimed, informing VCS that they would be prepared to revisit the apportionment on receipt of an acceptable alternative method.
HMRC denied the VAT credit in the VAT return and issued an assessment in accordance with VATA 1994, s. 73, in the sum of £630.01, because the VAT return had been amended from a repayment to a payment return. HMRC also requested that VCS provide a non-business apportionment (by VAT periods) for the previous four years.
VCS wrote to HMRC on 16 August 2013 to request a statutory review of the decision to require an apportionment of the VAT incurred by the company. VCS asserted that the income derived from PCNs was a by-product of the main operation of VCS and accordingly, although outside the scope of VAT, should be classed as business.
HMRC upheld their decision of 18 July 2013. The proposed method of apportionment based on income was also upheld, VCS not having submitted any alternative method of apportionment for consideration.
VCS appealed to the Tribunal on 11 December 2013.
Lord Marks on behalf of VCS explained that the company's position is that:
HMRC's assertions that:
i) supplies which are outside the scope of VAT (PCN income) are non-business supplies, and
ii) VAT on the proportion of VCS's overheads which relates to activities which are out of the scope of VAT cannot be recovered as input tax.
are both incorrect, and that:
i) all VCN's income from PCNs is in fact business income as it derives from its economic activities;
ii) all VAT on supplies to VCS of goods and services is input tax;
iii) apportionment under VATA 1994, s. 24(5) does not arise, because all VCS's income, whether from PCNs or taxable supplies, is business income, and
iv) that accordingly all input tax is recoverable, provided only that in respect of such input tax there exists sufficient linkage between the input tax incurred in respect of supplies to VCS and taxable supplies made by VCS to its clients
The parties were initially at polar opposites. The Appellants contended that there was no need for an apportionment of input VAT. It argued that all of the VAT incurred related to business and was fully recoverable as input tax. They argued that all VCS's income, whether from PCNs or taxable supplies, is business income and therefore there is no question of apportionment under VATA 1994, s. 24(5) because that section, which is the section in the statute which gives authority for apportionment between expenses, is only concerned with apportionment between VAT on expenditure referable to the taxable person's business and VAT on non-business VAT.
VCS argues that all input tax which it has paid is deductible where there is a direct link between input tax and the generation of income, which includes income from taxable supplies, even if it also includes incidental PCN income. They say that in respect of such input tax, the test for deductibility is met in full and the whole of the input tax is deductible, even if the inputs are not solely attributable to making taxable supplies.
HMRC reject this, saying that the supplies which had been determined by the Court of Appeal to be outside the scope of VAT, were non-business supplies and that input VAT is only recoverable in so far as it relates to taxable supplies. HMRC say that an apportionment is necessary using a fair and reasonable calculation to establish the Appellant's attributable input tax. For this purpose HMRC used an income based apportionment, which determined that 92% of VCS's input tax related to non-business income and only 8% related to business income. HMRC said they would be prepared to revisit the apportionment on receipt of an acceptable alternative method.
VCS say that HMRC's position is based on the fallacy that the distinction between business and non-business income is relevant in this case. It is self-evident, as recognised by the Court of Appeal, that all VCS's income, whether within the scope of VAT or PCN income, is in fact business income. It all derives from and is generated for the purpose of VCS's economic activities. VCS relies on VATA 1994, s. 24(1) because the goods and services they incur are used “for the purposes of any business carried on” by them and the VAT thereon is input tax.
They contend that the VAT incurred relates to the taxable supplies they make, so all input tax is claimable.
Lord Marks says that the authorities establish that the right to deduct input tax depends upon establishing that the costs of the supplies acquired in connection with the operation concerned, are a component part of the price of the organisation's products. If there is a direct link between the costs of the supplies to the taxable person and the taxable supplies made by the taxable person, then the input tax is deductible. This is because in those circumstances, the input tax is attributable to the making of taxable supplies by the taxable person. The question is however, as Lord Marks acknowledges, whether or not the input tax is incurred in respect of the overall economic activity of the taxable person, provided that such economic activity involves making taxable supplies.
Article 168 of the PVD (2006/112/EC) is quite clear and states that the right to deduct relates only to goods or services used for the purposes of taxed transactions of a taxable person. Article 173 PVD provides that only the proportion of VAT attributable to taxable supplies (and non-relevant supplies covered in art. 169 and 170) are recoverable.
“Business” in the VAT Act means the same as economic activity in the Directive. The UK rules have to be interpreted to be consistent with the Directive as far as possible. In arriving at their decision, HMRC initially made a distinction between business and non-business activity, which is what led to the assertion by VCS that there is no proper basis for equating income that is outside the scope of VAT, because it does not derive from making taxable supplies, with non-business income. But that was not what HMRC were now saying. VATA 1994, s. 24(5) enacted in UK law, art. 4 of the Sixth Directive where the reference is to “economic activity”, and HMRC distinguish between taxable and outside the scope activities, in arriving at their decision that an apportionment of the input tax is necessary.
Case law has clarified how VATA 1994, s. 24(5) and the relevant VAT regulations are to be applied. It is clearly established that, in determining the extent to which input tax is deductible, it is necessary to assess the extent to which the outside the scope activities (and therefore the input tax on those activities) are part of the taxpayers business income. Having identified that, it is then necessary to establish how much of what is left is used in the making of taxable supplies.
That involves or may involve an apportionment in accordance with reg. 101(2)(d) with a view to securing a fair and reasonable attribution of the input tax, so far as apportioned to the taxpayer's...
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Vehicle Control Services Ltd v Revenue and Customs Commissioners
...appeal dismissed. The Upper Tribunal (UT) dismissed the company's appeal against the decision of the First-tier Tribunal (FTT) ([2016] TC 05196) that input tax must be apportioned between taxable supplies and “outside the scope” of VAT SummaryVCS provided parking, wheel clamping and securit......