The Upper Tribunal (UT) has upheld the First-tier Tribunal’s (FTT) decision in this VAT recovery case and dismissed Vehicle Control Services’ (VCS) appeal. This UT decision was released a mere matter of weeks after the late publication of the FTT decision. The UT has confirmed that 92 percent of VCS’ overhead VAT should be disallowed because 92 percent of its (regular and ongoing) income is parking penalty charge notice income (PCN) which is outside the scope of VAT. The VAT on the direct costs of generating this income is also disallowed.
It is accepted that VAT is only deductible to the extent that it has a link to a taxpayer’s taxed economic activities but as many recent cases (some still under appeal) have demonstrated, calculating the extent of that link when the taxable person is fully taxable but has “non-economic” activity is not straightforward. There are many examples where the non-economic activity does not break the chain of deduction and can be looked through, so one cannot simply say that non-economic activity/transactions and exempt supplies should be treated exactly the same when it comes to VAT recovery. The issue is further complicated by the fact that non-economic activity may not always involve the generation of income, and may or may not be carried out to support a wider business purpose.
In VCS’ case however, the FTT and UT have decided that the overhead VAT is used to generate both parking income that is subject to VAT and PCN revenue that is outside the scope of VAT, and as a result the VAT must be apportioned as not all of it has a link to the taxable supplies. The basis of the apportionment was the percentage of the outside the scope income. To do this has required the UT to interpret the words in VATA 1994 s24(5) “for the purposes of a business carried on by him” as meaning “for the purpose of making supplies within the scope of VAT”. This then justified the apportionment of the overhead VAT. To access the decision click here.
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