Tax Cases

What consideration?

Hartwell plc was a motor car dealer, supplying new and used cars to customers. Methods of payment varied, for instance, the purchaser's existing car was sometimes taken in part exchange, or part of the payment was provided through a finance company. When a car was sold, the appellant issued two types of vouchers: a purchase discount plus note and MOT vouchers. The note referred to the car purchased, the address of the customer, and the amount of the purchase and the amount of discount to which the purchaser was entitled. Where no finance was involved, the discount entitlement under the note was credited against the purchase price together with the agreed price of the car which was taken in part exchange. When a used car was purchased, the customer was given three vouchers entitling him to three free MOT tests, and they could only be used for that purpose.

Customs said that the purchase price allowance formed part of the consideration. With regard to the MOT vouchers, Customs said that these and the supply of the vehicle constituted a single supply, the supply of the vouchers being ancillary to that of the car. Therefore, paragraph 5 of Schedule 6 to the VAT Act 1994 did not apply (consideration for vouchers for future services to be disregarded up to the face value of the vouchers).

The VAT tribunal agreed with Customs, so the appellant appealed to the High Court, which allowed the appeal. Customs therefore appealed.

Lord Justices Chadwick and Arden said that in order to determine what constituted consideration, it had to be decided what was obtained for the supply made. The judge was correct to conclude that the purchase discount plus voucher formed part of the consideration for the supply of the vehicle, and then to ask what monetary value should be attached to the voucher. This value was not the amount attributed by the parties to the voucher, but the consideration obtained by the supplier of the voucher for it. In this case, the consideration was the agreement of the customer to the sale. However, that agreement had not been shown to have any value, so the judge was correct to treat the value of the consideration obtained by the supplier for the supply of the voucher as nil.

Lord Justice Ward disagreed, saying that the supply of MOT vouchers should be deemed as part of the principal supply and subject to VAT. The appeal was allowed to that extent.

Thus the High Court decision was partly reversed, and the appeal partly allowed.

(Hartwell plc v Commissioners of Customs and Excise, Court of Appeal, 12 February 2003.)

Direct link exists

The Southern Primary Housing Association developed property for housing associations. In June 2000, it purchased the freehold interest in a property in Brighton from another company for £435,000 plus £76,125 VAT. VAT was charged because the vendor company had opted to tax. On the same day, the taxpayer company sold the property to a housing trust for £481,000, with no VAT chargeable since the taxpayer company had not opted to tax the property. It was therefore an exempt supply of land within Group 1 of item 1 to Schedule 9 to the VAT Act 1994.

The taxpayer also entered into a design and build contract with the housing trust for £1.87 million. The construction works were zero rated.

Customs claimed that the taxpayer could not recover any of its input tax, so the taxpayer appealed. The issue before the tribunal was whether a direct link existed between the input of the acquisition of the land and the building contract, according to the objective nature of the transaction, and whether the acquisition was a cost component of the building contract. The tribunal decided in favour of the taxpayer company, so Customs appealed.

In the High Court, Sir Donald Rattee said that the existence of the direct link depended on the facts of the case. The tribunal had applied the direct link test established in a previous case, and was entitled to make the decision it did.

Customs' appeal was dismissed.

(Commissioners of Customs and Excise v Southern Primary Housing Association, Chancery Division, 13 February 2003.)

Issue: 3896 / Categories: