Four tribunal cases summarised by editorial staff.
Confusion brings downfall
Multiprime Cuisine Ltd was registered for VAT with effect from 18 April 1997, and stated that its business was a Chinese restaurant. The second appellant, Wing Wah Restaurant, also a Chinese restaurant, registered for VAT from 1 August 1997.
Four tribunal cases summarised by editorial staff.
Confusion brings downfall
Multiprime Cuisine Ltd was registered for VAT with effect from 18 April 1997, and stated that its business was a Chinese restaurant. The second appellant, Wing Wah Restaurant, also a Chinese restaurant, registered for VAT from 1 August 1997.
On its VAT return to 1 July 1997, Multiprime claimed a VAT repayment of over £37,000, which it said arose from refurbishment costs. A VAT officer visited the premises to verify the claim, and noticed that the restaurant was trading. However, Multiprime's next return for the period to 31 October 1997, showed nil outputs. During the resultant visit, Customs was told that the premises were leased to Multiprime by the Wing Yip Group Executive Pension Scheme, and that Multiprime then sublet the premises to Wing Wah. Multiprime appeared to have made retail sales, and it seemed to the Customs officer that it carried on business as a property leasing company, rather than a restaurant. Wing Wah carried on the restaurant business by agreement with Multiprime. There were no rent invoices relating to Wing Wah's occupation issued by Multiprime, but rent invoices from Wing Yip had been sent to both appellant companies, and both had been paid by Wing Wah. Wing Wah claimed input tax in respect of that rent. Multiprime had not elected to waive exemption to tax under paragraphs 2 and 3 of Schedule 10 to the VAT Act 1994.
Customs decided that as Multiprime had not elected to waive exemption, it was not able to claim input tax in respect of the refurbishment, and since it was making not taxable supplies, it was not required to account for output tax. The subletting to Wing Wah was considered an exempt supply. All declared output tax for the periods from July 1997 to January 1999 was credited to Multiprime, and the input tax claim disallowed. This resulted in a VAT assessment of some £52,000.
Furthermore, Wing Yip had made no supplies under the lease to Wing Wah, rather they had been made to Multiprime. Wing Wah was not therefore able to claim input tax on these supplies, and Customs assessed Wing Wah in respect of disallowed input tax in the sum of approximately £20,800.
Both appellants appealed.
The tribunal said that the difficulties which beset the appellants arose out of the confusion of having two companies when only one was needed. Neither the directors nor their advisers seemed to understand what was really going on. The tribunal concluded that Multiprime was not trading as a Chinese restaurant, but simply held the lease of the premises and refurbished them. Multiprime granted Wing Wah a licence to occupy the premises, but no amount of consideration was established. Despite the appellants' claim that an election to waive exemption had been made in July 1997, the tribunal said that there was no evidence of this. Any supplies made by Multiprime of a licence to occupy premises were therefore exempt, and Multiprime could not claim any input tax in their respect.
Wing Wah was obliged to charge VAT on the supplies that it made in the course of its business, but it could not claim input tax in respect of payments made by it to Wing Yip in respect of rent charged by Wing Yip to Multiprime, as Multiprime was not making any taxable supplies.
The appeals were dismissed.
(Multiprime Cuisine Ltd, Wing Wah Restaurant (Birmingham) Ltd (17399).)
Who engaged the fitters?
Two brothers opened up a business (M & S Interiors Ltd) of manufacturing, supplying and fitting quality kitchens, bathrooms and bedrooms. The question was whether the services of the kitchen fitters were caught under sections 1 and 2, VAT Act 1994. The company charged VAT on the furniture, but no charge was made for the fitting services, which they arranged with independent third parties from their own approved list. The appellants contended that they were acting as agents for the fitters who supplied their services direct to the customers and who were paid direct by the customers.
Customs and Excise advised the appellants that, although they accepted that the fitters were self-employed independent contractors, the services of the fitters were supplied by the appellants to their customers as part of the overall costs of putting in a new kitchen. In addition, the work done included all goods and services, which were covered by a 10-year warranty. Work must by implication include fitting and the customers could look to the appellant for remedy. As such, VAT should be accounted for by the company on all fitting charges.
Trafalgar Tours Ltd v Commissioners of Customs and Excise [1990] STC 127 was cited where it was determined that everything the suppliers received by persons for and on behalf of the suppliers had to be treated as received by the suppliers themselves.
It was held that the appellants were acting as principal and not as agent of the fitters. The point of whether or not an agency existed was a question of fact to be decided in accordance with the evidence. It was also essential that both parties should consent to the relationship of principal and agent. The case referred to here was that of Commissioners of Customs and Excise v Music and Video Exchange Ltd [1992] STC 290. In the present case there was no evidence that the appellants were acting as agents of the customer in introducing them to the fitters.
The Chairman concluded that, based on the facts and available evidence, the appellants had supplied and fitted kitchens for which an inclusive price was paid. The appellants' customers had the right to sue the appellants, and not the fitters, for any defect in the fitting services and obtain remedy.
The appeal was therefore dismissed. The case appears to have been decided on limited evidence available, but illustrates the fact that in the realm of VAT it is of little relevance that some work is dealt with by independent subcontractors who are self employed. The question is: who supplies what to whom? It is not: who supplies services as an employee rather than as a subcontractor? For an illustration of how the appellants might have successfully organised the fitting services, see Commissioners of Customs and Excise v Plantiflor [2000] STC 137.
(Wilson and others trading as M & S Interiors (17494).)
Definition of commission
In 1994, the Institute of Directors agreed with the Beneficial Bank to offer its members a VISA card. The card would be administered by the bank, and it would pay commission to the Institute when the card was issued and used. The bank's activities were exempt under Group 5 of Schedule 9 to the VAT Act 1994 but, for four years, the Institute accounted for output tax on the commission.
Following the decision in Civil Service Motoring Association v Commissioners of Customs and Excise [1998] STC 111, the Institute wrote to Customs stating that it would be claiming a VAT refund for some £24,000 which it had paid in error during the previous three years. It recognised that the three-year cap applied. Customs disputed that the repayment was due.
The Institute argued that the services for which it was paid a commission by the bank were the issue and usage of the Visa gold card. These services constituted intermediary services within the meaning of Note (5) of Group 5 of Schedule 9. By a separate agreement, the Institute provided marketing opportunities for the bank, and these were stated to be a separate taxable supply. Customs argued that there had not previously been any discussion of two separate supplies. On the basis of the original information supplied, the commission could not be exempt, as the services undertaken for the bank included the marketing opportunities, and any supply which included such services could not be intermediary services under the VAT Act 1994.
Finding for Customs, the tribunal said that the Institute fell foul of item 5 of Group 5 of Schedule 9 because it sent its members literature and promotional material relating to the bank. The tribunal referred to the appellant's contention that the services of market research, product design and advertising were all performed by the bank, although separate marketing opportunities were provided by the Institute. The appellant did not appear to have applied for any of its supplies to be treated as partially exempt, although this would have been an option.
The tribunal accepted Customs' argument that to come within the exemption for the activities claimed, the appellant would have to be in a position to negotiate the rates or otherwise be involved in the actual transaction binding the other party to the credit card agreement as an agent. This was not the case in the circumstances.
The appeal was dismissed.
(Institute of Directors (17503).)
Unfortunate trader
The appellant had a millinery business in Brighton. When she prepared her 1996 accounts, she found that she had exceeded the VAT threshold in December 1996. In May 1997, she told Customs, but requested that she need not register as her turnover would not exceed the de-registration limit in the next 12 months.
In August 1997, Customs asked for details of her monthly takings in order to calculate her liability to registration. A year later, Customs visited the business, and concluded that the appellant had exceeded the threshold in October 1996 and continued to do so until June 1997. They therefore registered her and assessed her to VAT. Customs also imposed a penalty of £98 for failure to register.
The appellant, whose partner died in summer 1997, said that had she realised she was going over the limit, she would have taken steps not to. She asked for time to pay the assessment, as she was in the process of selling her house.
By February 2001, the appellant had moved back to her mother's house in Herefordshire, closed her business, was unemployed and had suffered a breakdown.
The tribunal said that it had to decide appeals according to the law, and had the appellant realised that her future supplies were likely to be below the threshold, and notified Customs in time, i.e., in December 1996, her appeal might have been successful. However, she did not, and so the assessment must stand.
However, the tribunal did have power to mitigate the penalty to nil, if there were a genuine case of hardship. Although insufficiency of funds to pay the tax or penalty could not be considered, the tribunal said that the appellant had been most unfortunate, had co-operated to the best of her ability, and had not exceeded the figures by much. The task of producing the figures for Customs must have been onerous for a sole trader, making hats by herself, and often away from home, who had been bereaved, sold her home and suffered a breakdown. It was proper therefore to reduce the penalty to nil. The tribunal said furthermore, that it hoped that Customs would give the appellant time to pay the assessment, since there was no purpose in driving her to bankruptcy.
