Responsibility is power
The taxpayer carried on a car hire business. Controllers manned the telephones at the business premises, receiving taxi requests and directing drivers to the customers. The cars were owned by the drivers, who hired short-wave car radios from the business. Charges were based on a tariff, and in addition there was a fixed charge of 40 pence for each journey, described as 'job money'. The drivers kept the fare, so the only money received by the business was the radio hire money. On this basis, the business was below the VAT registration threshold.
Responsibility is power
The taxpayer carried on a car hire business. Controllers manned the telephones at the business premises, receiving taxi requests and directing drivers to the customers. The cars were owned by the drivers, who hired short-wave car radios from the business. Charges were based on a tariff, and in addition there was a fixed charge of 40 pence for each journey, described as 'job money'. The drivers kept the fare, so the only money received by the business was the radio hire money. On this basis, the business was below the VAT registration threshold.
The dispute arose over the 'job money' which was not retained by the drivers but was instead paid by them to the controllers. Thus the question was whether or not it was an output of the business. If it was, then the business would be over the VAT threshold.
The tribunal concluded that the 40 pence payments were in law the income of the taxpayer who set the level of them, and whose system it was that decreed the payments should be given to the controllers. Organising the activity of the controllers and drivers was essential to the success of the business; by dint of being responsible for this organisation, the business had the power to decide how much the job money should be, and who should receive it.
It was irrelevant to say that it had been left to the drivers and controllers to sort out the payments. It was convenient for the controllers to receive the money direct from the drivers.
Dismissing the appeal, the tribunal ruled that the appellant should be registered for VAT with effect from 1 September 1997.
(Samantha Wren (Blue & White Car Service) (17024).)
Heady exemption
The slightly bizarre item being disputed by Customs and Medical and Dental Staff Training Ltd was an artificial head used in dentists' training. Customs said that these artificial heads were not supplies of medical equipment for the purposes of Note 3(a) to Group 15 of Schedule 8 to the VAT Act 1994, although they accepted that the heads were used for dental training. Customs' reason was that the heads were training equipment, rather than medical equipment used in training, and that the latter could be used to treat injury or illness, which the heads could not.
However, for the appellant it was said that the heads were used for training both students and qualified dentists (as part of their continuing professional education). When qualified dentists brought heads in for training, the heads were often casts of their patients, so that they could use the training time as planning and practising treatment for genuine cases.
Customs argued that equipment designed for training and for trying out techniques could not be equipment designed for the practice of medicine. The primary use of the heads was for training, and any secondary use should not qualify them for exemption.
The tribunal said that it was not possible to draw a distinction between training and treatment when aspects of the treatment were performed during training. The heads were supplied for continuing education, which had become patient orientated. The goods were clearly medical equipment supplied for use in medical training, and were within the terms of the exemption.
The appeal was allowed.
(Medical and Dental Staff Training Ltd (17031).)
Invalid agreement
North East Worcestershire College appealed against eight assessments for the periods from 1 August 1995 to 31 July 1997 and a notice of interest. The assessments were raised on the basis that the college took credit for more than it was due in respect of input tax.
The college made both taxable and exempt supplies, so a formula approach to input tax recovery was necessary. From the start, non-business activities and non-business VAT were not excluded from the partial exemption calculations. Customs approved the initial plan as a temporary measure. However, subsequently, Customs tried to change the arrangement. They said that the non-business activity, i.e., non-business supplies of education, carried out by the college should be restricting the amount of input tax claimed, since VAT was not recoverable on non-business activities.
The college refused, on the grounds that the initial arrangement had already been approved by Customs.
The tribunal said that Customs were right, and that otherwise the college was trying to establish that something not within the definition of input tax in section 24(1), VAT Act 1994 should be treated as input tax for the purposes of the partial exemption. Customs indeed could not agree this. The initial agreement did not deal with non-business VAT, it was not open to the college to rely upon it as doing so, and regardless of inaction by others, in treating non-business VAT as its input tax an assessment should be expected in order to correct the error.
The appeal was dismissed.
(North East Worcestershire College (16665).)
Capital cars
The appellant, Harbig Leasing Two Ltd carried on in business in Dublin, Eire where it was registered for VAT. It was owned by Harbig Leasing Ltd, also incorporated in Eire. Both companies had the same directors and operated from the same address. The day-to-day activities of both companies were conducted by Paul Higgins, a United Kingdom resident, although his father, K Higgins, owned the majority of the shares in the parent. Mr K Higgins also owned most of the shares in Auto Travel Ltd, a short term self-drive car hire business based in Chester. Up until 1998, Auto Travel organised the purchase of its own cars, but it was then decided to make new arrangements for the purpose of saving VAT. These arrangements were as follows.
Harbig Leasing purchased motor cars from United Kingdom car dealers obtaining various discounts using hire purchase to pay. After six months, the cars were sold back to the dealers under pre-arranged agreements, known as buy-back agreements. Meanwhile, the cars were leased to Auto Travel for the six-month period. The parent company claimed back the input tax credit in respect of the VAT paid on the cars. No VAT was charged by the parent in Eire on the leasing supply, because an Eire registered trader is relieved from accounting for VAT where the recipient of the supply can claim a refund under the Eighth Directive.
At some stage during the period of the leases, the parent company transferred all the cars to the appellant. The prices paid by the appellant for the transfers was less than the amount paid by the dealers at the buy-back price. Customs agreed that the transfer of business was that of a going concern.
The effect of the scheme was that the parent company recovered all input tax on the purchase of the cars, neither parent nor the appellant paid any output tax on the sale of the cars to the dealers, with only the dealers having finally to account for output tax on the margin. The appellant admitted that the aim of the scheme was to save VAT, but said that this fact was irrelevant under Article 4.1 of the Sixth Directive, which required consideration of the activity carried on by the taxpayer, rather than of the motive or result. It was also claimed that the cars were capital assets of the business, and so should not be accounted for when calculating turnover for the purposes of registration.
It was further argued that the cars were not the trading stock of the appellant because the appellant was exploiting tangible assets, i.e., car leasing, and not dealing in cars. Finally the appellant argued that when it acquired the leases from the parent, this was a capital acquisition, so the eventual sale of the cars was a capital transaction, and not a revenue one.
Customs argued that the appellant only ever held the cars for a short period, and never intended that they be held for a long time. The cars could not therefore be described as durable assets. The parent company's profit on the sale of fixed assets was 289 per cent of turnover, and this indicated that the principal activity was dealing in cars.
The tribunal said that it had to define the economic activities carried out by the appellant, while it would not be influenced by the fact that the arrangements had been set up in order to avoid tax, it did have to consider what the appellant actually did, i.e., purchased cars from the parent, retained them for a few months and then sold them back to the dealer. Looking at whether the cars were capital assets or not, the tribunal considered the decision in Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen (Case 51/76) [1977] 1 CMLR 561, where the European Court of Justice said that capital assets were distinguished by their durable nature and that their acquisition costs were normally written off over several years, rather than treated as current expenditure. Clearly the cars were not intended to be kept for several years, rather they were sold after a period of only a few months. It was clear that the purpose of the appellant was to buy and sell cars with leasing being a subsidiary purpose, the frequency and value of the sales supported this conclusion. It was irrelevant that the appellant made no profit on the sale, as for VAT purposes turnover was relevant.
The cars were not capital assets of the appellant's business, and the appeal was dismissed.
(Harbig Leasing Two Ltd (16843).)
Outsourcing by unit trusts
Prudential Assurance appealed against Customs' decision that certain supplies of services were not exempt. In brief, the facts were that Scottish Amicable Unit Trust Managers, a member of the VAT group of which Prudential Assurance was the representative member, was the manager of a number of unit trusts. It delegated the management investment and the administration functions, initially all to Scottish Amicable Investment Management. However, it later gave some of the investment management to Nikko Capital Management (UK).
Customs said that for the purposes of Item 9 of Group 5 of Schedule 9 to the VAT Act 1994, the supplies made by Nikko were not supplies of management. The management of the unit trusts could not be delegated or subcontracted, as the management was always in the hands of the operator. The operator could delegate certain tasks, but the responsibility for the management remained solely with Scottish Amicable, so Nikko was not a substitute. Nikko was not authorised to operate unit trusts, but undertook the investment management function. Article 13B(d)(6) of the Sixth Directive specified management of funds, but did not necessarily imply delegation and did not include management for the operator of the funds.
The appellant argued that Nikko carried out management functions in accordance with the agreement between it and Scottish Amicable. The only relevant question in terms of the Sixth Directive, was whether or not Nikko's services supplied in terms of its agreement were management of an authorised unit trust.
The tribunal agreed with the appellant. It said that paragraph 6 contrasted with the other paragraphs in Article 13B(d) in that it was not limited in any way as to function or its provider, and in particular was not limited to the person operating the special investment fund. It was not legitimate to restrict the exemption to one particular person carrying out a management function.
The functions carried out by Nikko could only be described as management, and should be exempt under Article 13B of the Sixth Directive.
The appeal was allowed.
The case is considered to have wide significance in the fund management industry and substantial VAT repayment claims will be possible for many unit trust groups.
(Prudential Assurance Co Ltd (17030).)
