VAT Tribunal Cases

RICHARD CURTIS reviews some recent decisions.

Tasty and easy

Doves Farm Foods Limited made two cereal 'cakes', 'Easy' and 'Tasty'. The company advised Customs of its intention to commence production of these and its opinion that these should be considered to be 'crunch cakes' and thus zero rated as they were similar to the Kellogg company's, zero-rated, 'Nutrigrain' bar. Customs disagreed and considered the cakes to be confectionery, which Excepted Item 2, Group 1 of Schedule 8 to the VAT Act 1984 excludes from the zero-rated 'food of a kind used for human consumption' of General Item 1, Group 1 of Schedule 8. The company argued that the products from which the cakes were made, 'rice pops' and cornflakes, were breakfast cereals normally eaten with a spoon and that 'there is a long tradition of pressing rice pops and cornflakes into crunch cakes which are then eaten with the fingers. ''Crunch cake” products are normally zero rated as “being specifically excluded from the definition of “confectionery” for VAT purposes.'

After examining the ingredients of the cakes and tasting samples, Customs maintained their opinion and the company's appeal went to the tribunal for a decision.

The tribunal noted that both the company and Customs accepted that the products were designed to be eaten with the fingers. The question was therefore whether they were also 'sweetened prepared food'. Reference was made to Customs Notice 701/14, which stated that 'cereal, muesli and similar bars consisting of different combinations of cereals, dried foods, etc. compressed into bars with honey or other sweetening matter' are standard rated. The principles identified in the Ferrero decision (at paragraph 8.36) were noted.

Applying these principles in this case, and having 'handled and tasted both bars' and looked at the packaging and marketing material, the tribunal decided that 'Tasty', made mainly with vanilla rice, morning oats and corn syrup and being crunchy rather than chewy did come within Customs' description of a 'crunch cake' and was therefore zero rated. However, 'Easy', which was chewy, described as a cereal bar and heavily sweetened (24 per cent) with corn syrup, was held to be confectionery. There were no flour or eggs in its recipe, which are usual ingredients in cakes.

Commentary: 'Food' seems to be an area of much confusion in the world of VAT. It is noted that the current edition of Customs' Notice 701/14, Food , (at paragraph 3.4) states that 'flapjacks' are zero rated, while immediately opposite this in the 'standard-rated' column is 'cereal, muesli and similar bars with honey or other added sweetening matter'. The Concise Oxford Dictionary defines a flapjack as 'a cake made from oats and golden syrup'. In this case it would seem that the presence of 'vanilla rice' in the 'Tasty' bar brought that product within 'crunch cakes' and the tribunal had referred to various food composition manuals in reaching this decision. This appears to have overidden the 'sweetened prepared food' part of the 'confectionery' definition, as included in the 'Tasty' bar were brown sugar (11 per cent) and corn syrup (31 per cent) against a syrup content of 24 per cent in the 'Easy' bar, which in fact had a higher cornflake/oats content (40 per cent) than the 'Tasty' bar (34 per cent oats and rice). The tribunal also referred to the lack of flour and eggs in the 'Easy' bar's ingredients, 'which are usual components of cakes', but there were in fact none in the 'Tasty' bar either.

(Doves Farm Foods Limited (17805).)

Neither lock nor conversion worked

An appeal was made against Customs' refusal to allow the reduced rate of VAT of 5 per cent to apply to a residential conversion in accordance with what is now Schedule 7A to the VAT Act 1994. Subject to other conditions, the reduced rate applies where 'after conversion the premises being converted contain a number of single household dwellings that is different from the number (if any) that the premises contained before conversion' (paragraph 3(2)(a) of Group 6 of Schedule 7A). A 'single household dwelling' was one that 'consists of self-contained living accommodation' (paragraph 4(3)(a)).

The property in question consisted of an 'L' shaped Victorian manor house, which had stables in the base of the 'L', main accommodation in the 'upright' part of the 'L' and a flat above the stables. Access to the flat was via a staircase in a ground floor room between the stables and main accommodation. The stables and flat had been acquired by the appellant, the main accommodation being in separate ownership, and he had been granted planning permission to convert the stables into a lounge, dining room and kitchen for the flat above.

The appellant argued that before the conversion there was no self-contained accommodation as access to the flat was from the same room that gave access to the ground floor coach house and stables, and the staircase to the flat was only separated by a glazed partition and a door with a lock that did not work.

Customs argued that whether accommodation was self-contained was a matter of reality whether it had minimum requirements, sleeping, cooking and toilet facilities rather than how it was contained. In this case, the lobby was not in common ownership (access to the stables would need the appellant's permission); the fact that there was no lock to the door was irrelevant, and there were no shared facilities. The tribunal found the legislation confusing and had sympathy with the appellant as the relief was available where the number of dwelling units was reduced as well as when it was increased. However, the tribunal had no doubt in dismissing the appeal, finding that, before the conversion, the flat was self-contained. It considered that the reduced rate provisions, like exemptions, should be interpreted strictly.

(Piers Monoprio (17806).)

Employees were not 'supplied'

The appellant, the Central Council of Physical Recreation, was a company limited by guarantee and acted as a consultative body for sport and recreation. It was VAT registered. In 1988, it became a trustee for the newly created British Sports Trust a registered charity operating from the same address as the Council which was also VAT registered. The Trust had no employees of its own and its activities were carried out by some of the 26 personnel employed and paid by the Council, which invoiced the Trust for their time. Until 1 August 2000, the Council charged VAT on those invoices, but thereafter it did not.

Customs wrote to the appellant, referred to paragraph 4 of Notice 700/34/94, Staff, and advised that it was supplying staff and that the payment by the Trust was consideration for VAT purposes.

Clause 5 of the Trust's declaration of trust provided that 'the trustees may employ ... such persons ... to perform such duties as they consider necessary for the proper administration and management of the Charity ...'. This clause and others did, in the opinion of the tribunal, show that the appellant, as trustee, had complete control over the Trust. In addition, the 'British Sports Trust Management Committee Terms of Reference' made the appellant responsible for 'all aspects of the management and staffing of [the trust] including staff conduct and discipline...'.

The Council contended that the staff working for the trust were employed by it as trustee and there was thus no supply by it to the Trust. The case of The Trustees of Nell Gwynn House Maintenance Fund v Commissioners of Customs and Excise [1999] STC 79 was quoted as support. In Durham Aged Mineworkers' Homes Association [1994] STC 553, two charities occupied the same premises and shared expenses. Their appeal against a tribunal decision was upheld in the High Court. The important point was the nature of the relationship between them. The mere fact that one made a payment to the other did not automatically mean that a supply was made. In this case, the Trust could only act through its trustees (the Council) who therefore had to take on the role of employer.

Customs argued that the appellant was a taxable person, all employees were employed by it and a specimen invoice showed a supply by one taxable person to another. This should be the end of the argument and enough to show that a taxable supply was taking place. Customs rejected the argument that the employees were employed by a trustee as their contracts of employment did not refer to this relationship.

The tribunal allowed the appeal. It found that the cases quoted to it were in some way all different from the present one. A trust is 'a state of affairs' and the appellant was in the position of having to hold and administer trust property and consequently was not supplying staff to the Trust, but was using trust funds for the purpose of employing staff for the Trust. The invoice from the appellant to the Trust 'was quite unnecessary' as there was no supply of services.

(The Central Council of Physical Recreation (17803).)

Where is the exit?

BUPA Ltd made prepayments (£76 million for goods, services, supplies and rent) to three subsidiaries. Because the companies were part of the same VAT group, the supply was disregarded (section 43(1), VAT Act 1994). The subsidiaries then left the group and purchased the goods, etc. and reclaimed input VAT. This is commonly known as a group exit scheme see Paragraph V2.190B of DeVoil's Indirect Tax Service and output VAT would only be due on the small balancing payment due when the goods, etc. were supplied.

The subsidiaries appealed against assessments to recover most of the input tax incurred by them on purchases, etc., made to fulfil contracts with BUPA Ltd for which the prepayments had been received. The prepayments being approximately 98 per cent of the value of the supplies with the balancing two per cent being charged to BUPA Ltd on delivery, thus establishing a 'tax point'. Only this element would be subject to VAT as mentioned above.

Customs argued that the use of prepayments and then exiting from group registration (which was done in 1992 and therefore pre-dated the anti-avoidance provisions of Schedule 9A to the VAT Act 1994) would 'defeat the basic purpose of the VAT system which is to separate out exempt supplies from taxable supplies. This is to distort competition'. (BUPA Ltd would not have been able to receive credit for all of the input tax incurred on the supplies that were instead procured by the subsidiaries, because the majority of its supply the provision of private medical insurance, hospitals, care homes and services was exempt from VAT.)

The tribunal started its judgment by reference to Commissioners of Customs and Excise v Thorn Materials Supply and Thorn Resources Ltd [1998] STC 725 - the most recent case dealing with a group exit scheme, particularly quoting Lord Nolan's view that the purpose of section 43(1) (dealing with VAT groups) was 'not designed to confer exemption of relief from tax' but was 'designed to simplify and facilitate the collection of tax'. Applying this reasoning, the tribunal held that the prepayment agreements should be disregarded for tax purposes so that no taxable supply took place at that time. However, this did not mean that they should be disregarded for all purposes, as they did show the true value of the later supplies.

The tribunal also stressed the importance of neutrality or 'harmony' to the VAT system. This would not be achieved if a trader could obtain relief for input tax in full, while only paying tax on a small proportion of the outputs to which the input tax related. To ensure that the principle of neutrality was not violated, the tribunal held that section 24(5), VAT Act 1994 was authority for restricting and apportioning the allowable input tax in cases 'where the trader has deliberately and knowingly set out to use [section 43] to create a significant disharmony'.

The tribunal therefore upheld the assessments and in fact also held that they could be amended and increased to reflect the correct method of calculation in accordance with its powers under section 84(5), VAT Act 1994.

(BUPA Purchasing Limited, Essex Street Investments Limited, Bemerton Limited (17815).)

Issue: 3897 / Categories: