Vehicle Control Services (VCS) operates car parks for clients (taxable activity) but it is also allowed to keep the penalty charge notice income (PCN) paid by customers who do not obey the parking regulations. In an earlier separate case the Court of Appeal has confirmed that the taxpayer’s PCN income was outside the scope damages for trespass. HMRC then challenged the company’s right to full input tax recovery, because VAT is only deductible to the extent it has a link to taxable supplies. As around 92 percent of the company’s income is generated from the penalty charges, HMRC sought to disallow 92 percent of VCS’s input tax. The First-Tier Tribunal (FTT) has dismissed the taxpayer’s appeal. This is a 2015 FTT but has only recently been published. We know that the taxpayer appealed and the case was heard at the Upper Tribunal on 16 and 17 June.
VCS initially argued that it should get full VAT recovery before accepting that any VAT that only related to the PCN income should be disallowed. This was around 31 percent of total VAT. However, it argued that it made no exempt supplies (its other income all being from taxable parking services). The PCN income, though VAT free, was part of its business activity and as far as its general overheads were concerned it would incur these costs whether it generated any PCN income or none. If all customers obeyed the regulations it would have no PCN income but the core taxable parking business would remain. In its view the VAT was all input tax used for business purposes so section 24(5) VATA 1994 did not apply (apportionment of costs used partly for business and partly for other purposes) and there was no basis elsewhere in law to apportion it. So it should get full recovery of the remaining 69 percent of VAT.
The FTT however agreed with HMRC that as many of the general overheads (staff, rent etc.) were used in the generation of the PCN income that VAT had to be apportioned as it did not just have a link to taxable supplies. The FTT agreed there is no right to any input tax attributable to an activity that is not within the scope of VAT, and this included a proportion of overhead VAT. A disallowance based on income was easy to calculate and not unreasonable.
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