Vehicle Control Services Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 July 2016 |
| Neutral Citation | [2016] UKUT 316 (TCC) |
| Date | 13 July 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
The Hon Mr Justice Arnold and Judge John Walters QC
Lord Marks QC, instructed by Freeths, appeared for the appellant
Alan Bates, instructed by the Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Input tax – Supplies purchased for the purposes of both (1) generating revenue from activities “outside the scope” of VAT and (2) making taxable supplies – Entitlement of company to reclaim input tax – Whether HMRC's revenue-based apportionment of input tax justified – Directive 2006/112 (the Principal VAT Directive or PVD), art. 168 – Value Added Tax Regulations 1995 (SI 1995/2518), reg. 100 and 101 – Company's 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 activities.
VCS provided parking, wheel clamping and security services. Its clients owned the car parks, which VCS supervised and operated. Most of VCS's income derived, not from parking permits, but from parking charge notices (PCNs), which it issued to motorists, who had breached the rules for parking in the clients' car parks. The PCN income included clamping and tow-away charges, which were charged to motorists before such charges were outlawed by an Act of Parliament. On 13 March 2013, the Court of Appeal held that the PCN income was not subject to VAT, because such income was not earned in respect of supplies of services liable to VAT (Vehicle Control Services Ltd v R & C Commrs VAT[2013] BVC 99). 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.
The FTT had held that the PCN activity benefited the other economic activities. Thus, costs associated with that activity were overhead costs, so that the input tax on those costs was partly deductible. Thus, the input tax on costs associated with the PCN activity needed to be apportioned. The FTT had held that the apportionment proposed by HMRC, which was based on revenue (turnover), was fair and reasonable. The FTT rejected VCS's proposed method of apportionment, which used time spent by VCS's employees on the sites.
By the time of the hearing before the UT, the scope of the dispute had narrowed. VCS accepted that VAT incurred on supplies purchased exclusively for the purpose of generating PCN revenue, and hence revenue from activities outside the scope of VAT, was not recoverable. HMRC accepted that VAT incurred on supplies purchased exclusively for the purpose of generating revenue from parking permits, and hence revenue from taxable supplies, was recoverable. The dispute was over supplies purchased by VCS for the purposes of making both:
1) transactions outside the scope of VAT; and
2) taxable supplies, i.e. the general overheads of the business.
VCS contended that it could recover 100% of the VAT paid on such supplies. However, HMRC successfully contended that the VAT should be apportioned between the “out of the scope” revenue and the consideration attributable to taxable supplies, with only the VAT apportioned to the latter being recoverable.
Article 168 provides that input VAT may be deducted “in so far as goods or services are used for the taxed transactions of a taxable person”. HMRC contended that “in so far as” should be interpreted as meaning “to the extent that”, and hence requiring an apportionment of input tax incurred on supplies used for both taxed transactions and non-taxed transactions.
Furthermore, HMRC contended that it makes no difference whether the non-taxed transactions are not taxed because:
1) they are exempt, or
2) they are outside the scope of VAT.
The UT held (at para. 22 of the decision) that HMRC's interpretation of art. 168 was correct for the following reasons
1) as a matter of language, HMRC's interpretation of art. 168 is natural. Furthermore, that interpretation is supported by other language versions of the PVD;
2) HMRC's interpretation of art. 168 was supported by the context and purpose of that provision. As art. 2(1) of the PVD states, the general principle of VAT is that it is proportional to the price of the goods and services, however many transactions there are before they are consumed. In order to achieve this, traders can reclaim the VAT paid or payable by them. This is sometimes expressed by saying that VAT is neutral with respect to the taxable person, who is liable to pay the VAT to HMRC. The UT saw no logic in distinguishing between transactions, which are outside the scope of VAT, because the activity in question is not economic activity, and transactions which are outside the scope of VAT because, although the activity in question is economic activity (or at least of a business nature), it does not amount to the making of supplies of goods or services;
3) HMRC's interpretation of art. 168 was supported by the case law at the European Court. The UT considered some of these cases; and
4) the case law of the domestic courts was consistent with the European case law (para. 40 of the decision). The UT also considered some of these domestic cases
Regulation 100 stops a taxable person deducting “the whole or any part of VAT” paid on the supply to him of goods or services where those goods or services “are not used or to be used by him in making supplies in the course or furtherance of a business carried on by him.” Thus, if and to the extent that revenue is generated without making supplies, VAT incurred on supplies used in generating that revenue cannot be deducted. Hence, it was unnecessary to consider the correct interpretation of reg. 101(2) (para. 48 of the decision).
It was agreed that the PVD does not specify how the apportionment should be carried out. It is clear from the case law, however, that the method of apportionment selected by the member state must be in accordance with the aims and broad logic of the PVD. HMRC used a revenue-based apportionment, i.e. they apportioned the input VAT pro rata to the two different types of revenue. There was no challenge to the method of apportionment adopted by HMRC, as opposed to HMRC's entitlement to make an apportionment (para. 49 of the decision).
This case clarifies the need for apportioning input tax between taxable supplies and activities that are “outside the scope” of VAT.
[1] This is an appeal from a decision of the First-Tier Tribunal (Tax) (Tribunal Judge Michael Connell and Peter Whitehead) dated 2 March 2015 [2016] TC 05196 dismissing an appeal by Vehicle Control Services Ltd (“VCS”) against a decision of the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) to require an apportionment of the input VAT incurred by VCS on supplies purchased for the purposes of both generating revenue from activities outside the scope of VAT and making taxable supplies.
[2] VCS is a car park operator, which manages and operates car parking on private land. Its clients are the owners of the car parks, which VCS operates for them under contract. The central features of the contracts are as follows:
i) VCS provides a parking control service.
ii) VCS provides signage at its discretion.
iii) VCS supplies to the client (at a fee) parking permits for the client to issue to those people the client wishes to be allowed to park in its car park. Permit instruction sheets are also supplied by VCS. Permits are, on their face, issued by VCS, so that the distribution by the client is an onward issue by the client of VCS's permits.
iv) The client undertakes to give exclusivity in managing the car park to VCS. The agreement is for a fixed one year initial term, but extends automatically.
v) The warnings as to the enforcement action that VCS will take in the event of contraventions are entirely a matter for VCS. The action actually to be taken is also in VCS's discretion.
[3] In practice, most of VCS's revenue 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 (“PCN revenue”). This formerly included clamping and tow-away charges which were charged to motorists prior to such charges being outlawed by the Protection of Freedoms Act 2012. In the tax year 2012/13 92% of VCS's income came from PCNs, and just 8% from parking permits.
[4] On 13 March 2013 the Court of Appeal decided that the PCN revenue was not subject to VAT [2013] BVC 99). This was because VAT is chargeable only in respect of revenue from the supply of goods or services. The Court of Appeal held that the PCN revenue was not earned in respect of supplies of services liable to VAT. Rather, the PCN revenue represented damages for breach of contracts between VCS and the motorists and/or damages for trespass by the motorists.
[5] Following the decision of the Court of Appeal, and no doubt consequent upon it, on 18 July 2013 HMRC denied VCS a VAT credit for the VAT period 04/13 in respect of input tax reclaimed by VCS which related to the PCN revenue and issued an assessment in which HMRC applied a revenue-based apportionment of the VAT claimed. In short, HMRC decided that, since only 8% of VCS's total revenue was taxable consideration, VCS could only reclaim 8% of the input tax claimed by VCS. On 16 August 2013 VCS requested a statutory review of the decision to require an apportionment of the VAT incurred by the company. That decision was upheld on 11 November 2013, and again by the First-Tier Tribunal.
[6] By the time of the hearing before this Tribunal, the scope of the dispute had narrowed slightly. VCS accepted that VAT incurred on supplies purchased exclusively for the purpose of generating PCN revenue, and...
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