Tag Archives: tribunal

VAT: Input tax claims – alternative evidence

By   7 March 2019
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What can be used to make a claim?

It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can HMRC accept any other evidence to support a claim? Well, the answer is yes… sometimes.

HMRC has discretion provided by EC law. The right to deduct is given by Article 167 of the Principal VAT Directive (via VAT Regulations 1995/2518 Reg 29(2) in the UK). Specifically, the wording most relevant here is “…such other documentary evidence of the charge to VAT as the Commissioners may direct.” Broadly, a business must hold the correct evidence before being able to exercise the right to deduct.

Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff are required to consider whether there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff should not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. However, this obligation is balanced against a duty to protect the public revenue.

Full details of tax invoices here.

 What HMRC consider

HMRC staff are required to work through the following checklist:

  • Does the business have alternative documentary evidence other than an invoice (for example a supplier statement)?
  • Does the business have evidence of receipt of a taxable supply on which VAT has been charged?
  • Does the business have evidence of payment?
  • Does the business have evidence of how the goods/services have been consumed or evidence regarding their onward supply?
  • How did the business know the supplier existed?
  • How was the business relationship with the supplier established? For example: How was contact made?
  • Does the business know where the supplier operates from (have staff visited?)
  • How did the business contact them?
  • How does the business know the supplier can supply the goods or services?
  • If goods, how does the business know they are not stolen?
  • How does the business return faulty supplies?

Outcome

If the responses to the above tests are credible, HMRC staff should exercise their discretion to allow the taxpayer to deduct the input tax. Overall, HMRC are required to be satisfied that sufficient evidence is held by the business which demonstrates that VAT has been paid on a taxable supply of goods or services received by that business and which were used by that business for its taxable activities

Challenge HMRC’s decision

A business may only challenge HMRC’s decision not to allow a claim (did not exercise its discretion) if it acted in an unfair or unreasonable way. In these cases, the onus is on the taxpayer to demonstrate that HMRC have been unreasonable in not using the available discretion. This is quite often a difficult thing to do.

Case law

Not surprisingly, there is significant case law on this subject. The most relevant and recent being the Upper Tribunal (UT) cases of James Boyce and Scandico Ltd.

Tips

If possible, always obtain a proper tax invoice from a supplier, and don’t lose it! The level of evidence required when no invoice is held usually depends on the value of the claim. There would be a difference between persuading an inspector that £20 input tax on stationery is recoverable and the claiming of £200,000 VAT on a property purchase is permissible. As always in VAT, if you get it wrong and claim VAT without the appropriate evidence there is likely to be a penalty to pay.

If you, or your clients are in dispute with HMRC on input tax claims, please contact us.

VAT: More on the Mercedes Benz Financial Services case – PCP

By   1 March 2019
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Further to my article on the Mercedes Benz Financial Services (MBFS) case on Personal Contract Purchase (PCP), HMRC has published a Briefing Note – Changes to the VAT treatment of PCPs

HMRC has fully implemented the findings in the MBFS CJEU case. In summary, HMRC state that:

“The correct treatment of PCP and similar contracts depends on the level at which the final optional payment is set:

  • if, at the start of the contract, it is set at or above the anticipated market value of the goods at the time the option is to be exercised, the VAT treatment of the contract will follow the MBFS It is a supply of leasing services from the outset and VAT must be accounted for on the full value of each instalment, there is no advance, or credit, so there is no finance
  • if, at the start of the contract, it is set below the anticipated market value, such that a rational customer would buy the asset when they exercise the option, it is a supply of goods, with a separate supply of finance. VAT is due on the supply of goods in full at the outset of the contract, the finance is exempt from VAT”

This treatment must be used by 1 June 2019. Past declarations which have been in error must be adjusted per PN 700/45. Businesses affected by the changes may also need to consider adjustments to input tax claimed, or forgone in respect of partial exemption. A guide to partial exemption here.

VAT: Yet more cases on food

By   11 February 2019
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Latest from the courts

Like London buses, few cases on the VAT liability of food, then a veritable deluge (although I am unsure whether there can be a deluge of buses…).

Following Eat Ltd and my summary, two further food cases have been heard at First Tier Tribunal (FTT). These are on the subjects of juicing and brownies.

Juice

In The Core (Swindon) the issue was whether fruit and vegetable juices sold as meal replacements were beverages and therefore standard rated or whether they were not beverages and therefore zero-rated as food.

Background

The appellant provides “juice cleanse programmes” (JCPs) which consist of fresh drinkable products made from juicing raw fruits and vegetables and are intended to replace normal meals. The relevant test was how the product was objectively “held out for sale” by the supplier.

What needed to be considered was:

  1. How is the product marketed?
  2. Why it is consumed by the customer?
  3. What is the use to which it is put?

Case law

 Similar products were considered in Fluff, Ltd. Roger Skinner and Bioconcepts where the above tests were set out.

Decision

Judging the JCPs by reference to the above tests the Tribunal found that the purchasers of the JCPs purchase them as meal replacements. Customers do not purchase them as beverages (they drink water in addition to consuming the products). They do not therefore purchase them in order to increase their bodily fluid, or to slake their thirst, or to fortify themselves or to give pleasure. The products are deliberately made palatable, in order not to deter consumers from drinking them, and they are not unpleasant to drink, but they are not consumed for pleasure. Customers purchase and consume them as a meal replacement, not as a beverage. As a consequence, they were zero rated food.

Brownies

In Pulsin’ Ltd the issue was whether a raw choc brownies was a cake (zero rated) or a biscuit (standard rated). So, shades of the infamous Jaffa Cake case.

Background

The products in question were individually wrapped bars produced by cold compression of predominantly: dates, cashews, cacao, various syrups, concentrated grape juice and brown rice bran. All ingredients used are intended to be as natural, unprocessed, hypoallergenic and as nutritionally beneficial as possible.

Case law

The cases set out above were also referred to in this case, along with Kinnerton which I considered here although the judge dismissed HMRC’s contention that the decision in that case was helpful in this.

Decision

The judge formed the view that the products do show enough characteristics of cakes to be so categorised. Therefore, all variants of the raw choc brownies were properly classified as cakes and are therefore eligible to be zero rated.

Commentary

What was interesting here was the judge’s comments on the current position regarding food and VAT.

“It is the Tribunal’s view that the current state of the law on the taxation of food items is not fit for purpose and will necessarily present apparently anomalous results as tastes and attitudes to eating change. The Tribunal fundamentally disagrees with HMRC’s guidance that the borderline between cake and confectionary presents few problems. The lines set and perceived by HMRC in the application of this out of date provision (as recognised by them in their anguished consideration of flapjacks and cereal bars) drives anomalous outcomes….”

And so say all of us…

The zero rating of food is complicated as the provision under VAT Act 1994, Schedule 8, Group 1 provide for a wide general description (qualifying for zero rating) subject to excepted items (which must therefore be standard rated) with exclusions and overriding items to those exceptions (which then requalify to be zero rated).

VAT: Zero rated food – a summary

By   8 February 2019
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Food – What’s hot and what’s not?

Further to my article on the recent Eat case I have had a number of queries on what “hot” food can be zero rated. So, as a brief overview of the current position a quick look at types of food:

Pasties, sausage rolls, pies or other pastries

  • If they are hot and straight from the oven: Although the pasty is hot, it is not being kept warm, so therefore there is no VAT
  • Left to cool to room temperature: The pasty is not being kept warm, so no VAT is chargeable.
  • Kept hot in a cabinet, on a hot plate or under a heat lamp: The pasty is being kept warm so VAT is due

Sandwiches

  • Cold food is zero-rated for tax purposes so no VAT.
  • Heated for a customer – standard rated per the Eat case.

Bread

  • Freshly baked, cooling or cold – the bread is not kept warm, even though it may be straight from the oven, so would be VAT free.

Rotisserie chicken

  • If hot from the spit; VAT on takeaway food intended to be served hot is VATable.
  • Kept hot in a cabinet, on a hot plate or under a heat lamp – As the food is kept hot and served hot, VAT is applicable.
  • Left to cool to room temperature – If the chicken is cooked then left to cool, such as in bags in a supermarket, it will be VAT free.

Takeaways

  • such as fish and chips: VAT remains on all takeaway food served hot.

Catering

  • All supplies of catering is subject to VAT regardless of what food and drink is being provided. This includes all restaurants and cafés.

This is a general guide and, as case law shows, there will always be products on the “borderline”.

VAT: What’s hot and what’s not?

By   4 February 2019
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Latest from the courts

In the seemingly never-ending series of cases on hot/cold food comes the latest instalment in the Eat Limited (Eat) First Tier Tribunal (FTT) case.

Issue

Via VAT Act 1994 Schedule 8, Group 1, the sale of certain food is zero rated. However, there is an exception for supplies in the course of catering. Anything coming within the definition of catering reverts to the general rule and is taxable at the standard rate.

The definition of catering includes “any supply of hot food for consumption off those premises…” Note 3 (b).

So, the issue here was whether grilled ciabatta rolls and breakfast muffins which were heated by Eat were hot… or not. HMRC decided that the relevant sales were the standard rated sale of hot food and disallowed a retrospective claim by Eat that they should have been correctly zero rated.

The issue here was whether the products had been heated for the purpose of enabling them to be consumed at a temperature above ambient air temperature. In considering the purpose of the heating, the Tribunal needed to ascertain the common intention of Eat and the customer.

Background

Eat sells a range of hot and cold food and drink products through its outlets in the UK. The food and drink can either be consumed at the outlet or be taken away for consumption elsewhere.

The breakfast muffins are filled bread rolls. The rolls are supplied to the appellant by a bakery in a condition that enables Eat to finish baking the rolls at their outlets. The specification requires the rolls to be “pale and 90% baked”. The muffin is assembled at a central kitchen from various ingredients, bagged, and then distributed to Eat’s retail outlets. The ciabatta rolls are also supplied to Eat part-baked and a similar process applied. If a customer purchases a breakfast muffin or a ciabatta roll, the product is “finished-off” in the outlet’s grill.

For zero rating to apply, Eat had to prove that its intention and that of its customers, was that the breakfast muffins and grilled ciabatta rolls were not supplied to customers in order to be eaten “hot”.

The products are treated as “hot” if:

  • They have been heated for the purposes of enabling them to be consumed at a temperature above the ambient air temperature; and
  • They are above that temperature at the time they are provided to the customer.

It was not disputed that the products were above ambient air temperature at the time they were provided to customers,

Case law

There has been considerable litigation on the meaning of hot food. The decision of the Court of Appeal in Sub One Limited (t/a Subway) (in liquidation) v 30 HMRC [2014] EWCA Civ 773 reviews the meaning of the legislation, and in particular whether the “purpose” test in the legislation should be construed objectively or purposively.

Submissions

Eat contended that the common intention of the parties was that the supply of the products was to be finished as being “fresh” rather than partially complete. Any residual heat in the products was merely incidental to that common intention.

HMRC submitted that it was part of the deal between Eat and its customers that the products should be sold hot (and obviously so).  Further, that no customer seeks to enter into a bargain in a takeaway restaurant containing a term that the food he or she is to purchase is “to be finished as fresh rather than partially complete”. The customer either wants hot food or does not. Either the supplier proposes to supply hot food, or it does not. It was also noted that in Eat’s advertising (at the point of sale and on its website) that the products were described as “hot”

Decision

The judge decided that this was a “hopeless appeal” and that it was the common intention of Eat and its customers that the products were heated for the purpose of enabling them to be consumed at a temperature above ambient air temperature. Further, that they were wrapped in foil-backed sheets that keep them warm. This showed an intention on the part of Eat that the products should be consumed whilst they were hot. So, they were hot and standard rated.

Commentary

Only in the world of VAT can something too hot to touch be treated as cold (as certain foods are). However, in this case common sense prevailed and not unsurprisingly, food which was sold hot was treated as hot food! There is a lesson here however. In such cases, the outcome depends on the precise facts of the relevant transactions and that it is unhelpful to make assumptions.

Now, about that proposed pasty tax…

VAT: Latest on holding companies and input tax recovery

By   21 January 2019
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Latest from the courts

In the First Tier Tribunal (FTT) case of W Resources plc (WRP) the enduring matter of input tax recovery by a holding company was considered. This follows similar considerations in the cases of Norseman and BAA and HMRC’s updated guidance on the matter. This case considered whether a holding company could recover input tax incurred on certain costs.  This is turn depended on whether the holding company intended to make taxable supplies. Specifically; the intention to recharge professional expenses incurred to two non VAT-grouped subsidiary companies contingent on those companies receiving income at a future time.

Background

WRP acquired two subsidiary companies. The subsidiary company’s business the exploration and exploitation of tungsten in the EU. WRP contended that it incurred the relevant input tax

  • to enable the subsidiaries to raise funds to carry out their exploration activities
  • to exercise financial control over the subsidiaries
  • to obtain geological expertise, project management and supervision and day to day management and supervision for the subsidiaries so that they could carry on their exploration and exploitation activities

HMRC denied the claim of input tax on the basis that the WRP was not carrying on an economic activity or making supplies for a consideration (such that it should not be VAT registered).

It was common ground that, if it was decided that all of the supplies which were made by the WRP to the subsidiary companies (following their acquisition by the appellant) were supplies made for a consideration and in the course of carrying on an “economic activity”, then the input tax which was incurred during the preparatory phase should be recoverable.

So, the issue was – were the intended recharges so uncertain such that there could be no direct link to an economic activity?

Decision 

The appeal was dismissed.

Although the judge distinguished Norseman (above) where there was only a vague intention to make charges to subsidiary companies and here the position was different because there was a fixed intention that WRP would be able to invoice in due course for its supplies of services at an amount quantified by reference to the value of the services received but only if the relevant subsidiary began to generate revenues, the fact that it was uncertain whether the subsidiaries would generate income was to sufficient to break the link between supply and consideration. The fact that the intended charges were contingent was fatal to the appeal.

Commentary

The judge appears to have come to the decision reluctantly and entertained the thought that “the contrary is certainly arguable”. This case demonstrates, yet again, the difficulties in determining future intentions of a business. Such intentions dictate whether a business may VAT register and/or recover input tax. It is often difficult to evidence intentions and HMRC seem intent to challenge input tax recovery in such circumstances and will be buoyed by this result.

This case again emphasises the importance of holding companies having appropriate processes and ensuring that proper documentation is in place to evidence, not only the intention to make taxable supplies of management charges, but that those charges were actually made to subsidiaries.

Often significant costs can be incurred by a holding company in cases such as acquisitions and restructuring.  It is important that these costs are incurred by, and invoiced to, the appropriate entity in order for the VAT on them to be recovered.  Consideration should be given to how the input tax is recovered before it is incurred, and the appropriate structure put in place if possible.

Further information and advice on inter-company charges may be found here

VAT: More on agent or principal – The All Answers Limited case

By   9 December 2018
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Latest from the courts

In the All Answers Limited (AAL) First Tier Tribunal (FTT) case the issue was whether AAL acted as an agent as it contended, or was a principal as HMRC argued. It also considered the position of contracts in certain situations. There have been a huge number of cases on this point, many of which I have commented on. Some of them here here and here

Background

AAL runs an online business which provides essays, coursework and dissertations to students. The FTT found many euphemisms used for this service, but the service which the student paid for effectively passed off other peoples’ work as the students own in order to obtain a certain grade which was decided by the student. Or in other words; cheating. AAL arranged for one of its circa 400 writers, which were usually other students, teachers or lecturers etc (who should have known better) to provide the required work.

Technical

AAL contended that it was acting as the students’ agent in respect of making arrangements to provide the written work. Consequently, it would only account for output tax on the “commission” retained, rather than on the full value of the amount paid by the student – a significant difference. The contracts produced as evidence fully supported the agency analysis. The Terms and Conditions between AAL and the writer provided that the appellant acts as the writer’s agent to sell his/her services and to enter into “relationships” with clients on the writer’s behalf and to collect payment on the writer’s behalf.

HMRC’s view was that there were no agency services supplied and that the economic reality should be examined rather than relying solely on the relevant contracts. The respondent argued that the notion of agency, so carefully woven into the AAL’s Terms and Conditions, lacked both factual and economic reality because the only service provider was the appellant who choose to use a sub-contractor to provide it with the work which AAL ultimately supplied to the client as principal.

The Decision

Unsurprisingly, the judge concluded that the appellant was acting as principal, not agent and so AAL’s appeal was dismissed. In the ruling, certain comments were made which illustrate how the decision was arrived at and are useful to consider when looking at agency/principal positions.

In respect of the T&Cs, the judge observed “…an agreement which is not a sham may nonetheless be artificial and intended to deflect attention from the true positions taken by both the client and the writer, to whom the appellant profitably lends a willing hand, with no concern for ethics or morality”. 

And in respect of the business model: “It could not be stressed more strongly during the appeal before us, and in the documents emanating from the appellant, that its business model is based upon the identity of the client and the identity of the person who is to write the requested piece of academic work, not being made known to one another…” In such circumstances it is difficult to conclude that any agency services are being carried out.

 Commentary

As in nearly all agent/principal cases, the VAT position is determined according to the facts of each individual case. Slight variations may produce different VAT outcomes, so it is crucial to look at the detail of each business activity. Contracts are a useful starting point, but as this case shows, if a contract is deliberately drafted to produce a VAT outcome that is not supported by the actual facts of a transaction then it must be disregarded in favour of an analysis of the economic reality. It seems that in this case, AAL desired agency treatment in order to significantly reduce its output tax (which was sticking tax as the recipient was unable to recover it as input tax). Its advisers drafted the relevant contract with this in mind. The FTT saw through that and, came to this sensible decision.

VAT: Time of supply (tax point). Baumgarten Sports case

By   4 December 2018
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Latest from the courts

In the Baumgarten Sports EJEU case, the matter was the time of supply of a German football agent’s services.

Background

As is common in the football world, clubs make payments to agents in order to obtain the services of footballers. When the agent places a player with a football club, it receives commission from that club, provided that the player subsequently signs an employment contract and holds a licence issued by the Deutsche Fußball Liga GmbH (German Football League). The commission is paid to the company in instalments every six months for as long as the player remains under a contract with that club.

The arguments

The German tax authorities took the view that a tax point was created when Baumgarten Sports services were complete – when the contract was signed, and that output tax was due in full at that time The appellant contended that the rules for “successive payments” applied and that VAT was due on each six monthly payment.

Legislation

The issue is covered by Articles 63 and 90 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’).

Decision

The supply of services gave rise to successive payments, the chargeable event for VAT occurs and VAT becomes chargeable on expiry of the periods to which those payments relate (re; Asparuhovo Lake Investment Company, C‑463/14).

The chargeable event (tax point) and chargeability of a tax on the supply of the agent’s services must be regarded as occurring, not when the player is placed, but on expiry of the periods to which the payments made by the club relate.

Commentary

It is useful to look at the UK tax point rules for services, which I have summarised here:

VAT must normally be accounted for in the VAT period in which the tax point occurs and at the rate of VAT in force at that time. Small businesses may, however, account for VAT on the basis of cash paid and received.

Although the principal purpose of the time of supply rules is to fix the time for accounting for, and claiming VAT, the rules have other uses including

  • calculating turnover for VAT registration purposes
  • establishing the period to which supplies (including exempt supplies) are to be allocated for partial exemption purposes, and
  • establishing when and if input tax may be deducted

The tax point for a transaction is the date the transaction takes place for VAT purposes. This is important because it crystallises the date when output tax should be declared and when input tax may be reclaimed. Unsurprisingly, get it wrong and there could be penalties and interest, or VAT is declared too early or input tax claimed late – both situations are to be avoided, especially in large value and/or complex situations.

The basic tax point for a supply of services is the date the services are performed.

Actual tax point

Where a VAT invoice is raised or payment is made before the basic tax point, there is an earlier actual tax point created at the time the invoice is issued or payment received, whichever occurs first.

14 Day Rule

There is also an actual tax point where a VAT invoice is issued within 14 days after the basic tax point. This overrides the basic tax point.

Continuous supply of services 

If services are supplied on a continuous basis and payments are received regularly or from time to time, there is a tax point every time:

  • A VAT invoice is issued
  • a payment is received, whichever happens first

Deposits

Care should be taken when accounting for deposits. The VAT rules vary depending on the nature of the deposit. In some circumstances deposits may catch out the unwary, these could be, inter alia; auctions, stakeholder/escrow/solicitor accounts in property transactions, and refundable/non-refundable deposits. There are also other special provisions for particular supplies of goods and services, for eg; TOMS.

Summary

The tax point may be summarised (in most circumstances) as the earliest of:

  • The date an invoice is issued
  • The date payment is received
  • The date title to goods is passed, or services are completed.

Planning

Tax point planning can be very important to a business. the aims in summary are:

  • Deferring a supplier’s tax point where possible
  • Timing of a tax point to benefit both parties to a transaction wherever possible
  • Applying the cash accounting scheme (or withdrawal from it)
  • Using specific documentation to avoid creating tax points for certain supplies
  • Correctly identifying the nature of a supply to benefit from certain tax point rules
  • Generating positive cashflow between “related” entities where permitted
  • Broadly; generate output tax as early as possible in a VAT period, and incur input tax as late as possible
  • Planning for VAT rate changes
  • Ensure that a business does not incur penalties for errors by applying the tax point rules correctly.

As always, please contact us if you have any queries.

VAT: Are sales from Student Union shops exempt?

By   5 November 2018
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Latest from the courts

In the Upper Tribunal (UT) case of Loughborough Students’ Union (LSU) the issue was whether sales of certain goods from Student Union shops were exempt as being closely related to education. This case is a practical issue considering the exemption I set out recently here

The two issues before the UT were:

  • were the shops eligible bodies, and
  • were the sales closely related to education supplies?

 Background

The appeal by LSU was against a decision of the First-Tier Tribunal (FTT) dismissing its appeal against HMRC’s decision to deny its claim for repayment of output tax in respect of sales of; stationery, art materials and other items from the shops which LSU operates on campus.

Legislation

The legislation (where relevant to this case) is:

VAT Act 1994, Group 6, Item No 1, item 4

1 The provision by an eligible body of (a) education; …

4 The supply of any goods or services (other than examination services) which are closely related to a supply of a description falling within item 1 (the principal supply) by or to the eligible body making the principal supply…

Decision

Not surprisingly, the appeal was dismissed. because even if LSU was an eligible body (which the judge was doubtful about) the exemption only applied to an eligible body which itself provided education, which clearly LSU did not. Consequently, the supplies for which exemption was sought were not closely related to any principal supply. Further, the judge was not persuaded that even if the supplies were closely connected to education, that they were essential (as required) to education. Food, newspapers and household goods for eg, are “ends in themselves” and not ancillary to education; the education provided by the University would be just as good if the students did not buy these items from the LSU shops.

Commentary

The appeal seems to have been a long-shot and predictably, it failed. Care must always be taken with the VAT treatment of goods and services closely connected to education. This is an area I am often asked for an opinion on by schools, academies, colleges and universities and there is not one single one-size fits all answer.

Our offering to education bodies here

VAT: Valuation – interest free credit

By   15 October 2018
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Latest from the courts. The Dixon Carphone plc (Dixon) First Tier Tribunal (FTT) case.

It considered the value of a retail sale where interest free credit was offered. Was it the amount paid by the consumer, or the amount actually received by Dixon after the deductions made by the credit supplier?

Background

The transactions which were the subject of this case are as follows:

  • a consumer purchases goods in a Dixon store and pays a deposit to Dixon
  • the balance of the cost of the purchase is funded by a loan, provided by a third-party loan company
  • the customer gives authority to the loan company to pay the money borrowed to Dixon
  • the customer loan is on favourable terms to the consumer as it is an interest free: “Buy Now, Pay Later” arrangement
  • the amount paid by the loan company to Dixon is a lower amount than that authorised by the consumer, following deduction of an amount described as a “Subsidy”.
  • the customer pays no interest on the amount borrowed if the full amount of credit is repaid by the customer within the “Pay Later” offer period.

Contentions

The appellant argued that the general rule, derived from the VAT Directive Article 73, is that the taxable amount is everything received by the supplier as consideration. In more complex cases, with more than one paying party, the consideration should be everything moving from each paying party and received by the supplier. Consequently, in these transactions there is a reduction in what was received by Dixon consequently, the taxable amount on which VAT should be calculated should be the amount received by Dixon from the loan company.

HMRC contended that output tax was due on the full selling price and that the other transactions did not impact the value of the supply.

Decision

As in a similar case which was decided at the CJEU: Primback Ltd C-34/99 ([2001] STC 803, The FTT decided that the loan company was providing the finance to the consumer who used the money to pay Dixon the full retail price of the goods. The loan company’s “Subsidy” did reduce the amount paid by the loan company directly to Dixon on behalf of the consumer, but this transaction did not affect the amount owed by the consumer for the goods.

The appeal was therefore dismissed.

Practical application

HMRC provide an example of the VAT treatment of interest free credit along the lines as follows:

Goods are sold for £600 on six months interest free credit terms.  As far as the customer is concerned, (s)he merely pays six instalments of £100 to the loan company.

Under separate arrangements between a loan company and the retailer, the loan company makes a deduction from the amount forwarded to the retailer, which accordingly, received only £560, not the full amount of £600. HMRC regard this deduction as third-party consideration, paid by the retailer for the loan made to the customer, and that output tax on £600 is due. Because there is no consideration, in the form of interest, paid by the customer on an interest-free loan, there is no supply for VAT purposes.

Commentary

The value of retail sales has often been an issue in the VAT world, whether it be interest free credit, credit card charges, BOGOF, or “bumping” in the motor industry. Care should be taken when deciding the value of consideration to be used for output tax declarations and advice should be sought if there is any doubt. It appears that the issue of interest free credit has now been killed off, but with ingenious marketing ideas always being created, VAT must be considered at an early stage.