The Scottish Court of Session ruled that within a VAT group, only the representative member is entitled to claim VAT refunds, not the individual members. The Upper Tribunal dismissed an appeal regarding apportionment of input VAT between taxable and non-taxable activities. The Court of Justice ruled that "screenplays" should be classified as video producing apparatus for customs duty purposes based on their objective characteristics.

1. © 2016 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
The highlight of this week's
update is the decision of the
Scottish Court of Session in the
case of Taylor Clark Leisure
PLC. This case concerns VAT
groups and a 'spat' over which
entity within a VAT group is
entitled to any VAT refund. Is it
the member of the group that
actually generated the VAT
overpayment, or is it the
representative member of the
VAT group? The Court has
issued its judgment that, in the
UK, it is only the representative
member that is entitled to make
the claim.
The Upper Tribunal has issued
its judgment in the case of
Vehicle Control Services Ltd. It
has dismissed the taxpayer's
appeal from the First-tier Tax
Tribunal.
Finally this week, the Court of
Justice has issued a judgment in
connection with the classification
of "screenplays" for duty
purposes.
20 July 2016
Court of Session
There have been a number of cases over recent years that have focused on which legal
entity in a VAT group is entitled to the proceeds of a VAT refund. The Court of
Session (the Scottish equivalent to the Court of Appeal) has issued a ruling stating
unequivocally that the only entity entitled to a VAT refund is the representative
member of the VAT Group.
Carlton Clubs Ltd (Carlton) was a member of the Taylor Clark Leisure PLC (Taylor
Clark) VAT Group until 1998 when it was sold to a third party. Some years after
leaving the Taylor Clark VAT group, it submitted a claim for a VAT refund in relation
to trading periods when it was a member of that group. The question to be resolved
was whether it was entitled to the refund claimed or whether, as the representative
member of the VAT group, it was Taylor Clark that was entitled.
Following the 2014 Court of Justice judgment in Skandia America Corp, the Court of
Session considered that a VAT Group must be regarded as a taxable person in its own
right. A VAT group takes on a "quasi-persona". In other words, whilst it has no real
legal form, for VAT purposes, it does have a personality of its own. In the United
Kingdom, the VAT law regarding VAT groups embodies that personality in the form
of a representative member. As such, any supply of goods or services made by a
member of the VAT group is deemed to be made by the representative member.
Similarly, supplies of goods or services by third parties to members of the VAT group
are deemed to be supplies made to the representative member. In light of those
provisions, the only conclusion that the Court of Session could reach was that the
supplies made by Carlton were, in fact and in law, made by Taylor Clark and it was
Taylor Clark as representative member of the VAT group at the time of the supplies in
question that was entitled to the claim.
The fact that it was Carlton that submitted the claim many years after having left the
Taylor Clark VAT group was irrelevant. As the only person entitled to the claim was
Taylor Clark, Carlton's submission of the claim can only have been made as Taylor
Clark's agent even if, as here, Carlton acted as an unwitting agent.
In the circumstances, one can see that this case is likely to be appealed to the
Supreme Court. It is notable that the Court of Session relied heavily on the
Skandia judgment that, whilst a VAT group can contain many entities, it is to
be regarded as a single taxable person for VAT purposes.
Issue23/2016
VAT Groups: Only representative
member entitled to VAT refund
Indirect Tax Update

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GRT100456
Vehicle Control Services Ltd
Upper Tribunal
Vehicle Control Services Ltd operated car parks for private owners. Its income was mainly (92%)
derived from the imposition of fines and penalties imposed on miscreant parkers. Such income is
outside the scope of VAT as the fines and penalties paid by the customers is not consideration for
any supply of goods or services (the payments being regarded as compensation and damages). The
remaining 8% of the company's income was derived from the sale of parking permits. These supplies
were subject to VAT at the standard rate.
The issue in this case was whether the company was entitled to recover all of its input tax incurred on
overheads. The company contended that there was a direct and immediate link between the overhead
costs and the taxable income it generated from the sale of parking permits. HMRC took the view that
the overheads were used both for non-business purposes (the levying of fines and penalties) and for
taxable purposes (permits) such that the VAT incurred on overheads ought to be apportioned. The
ratio for apportionment suggested by HMRC reflected the value of taxable income to total income ie,
HMRC accepted that only 8% of the VAT on overheads could be reclaimed. The First-tier Tax
Tribunal (FTT) agreed with HMRC and the company appealed to the Upper Tribunal.
The Upper Tribunal considered that the FTT had made no error of law and confirmed that HMRC's
method based on income was wholly reasonable.
Comment
Partial exemption
methods can be
complex. In this case
however, HMRC and
both Tribunal's
concluded that a
method of
apportionment based
on levels of income
produced a fair and
reasonable result. To
apportion overheads
wholly towards the
company's taxable
income did not
produce a fair result.
The company's appeal
was, therefore,
dismissed.Case C-97/15 - Sprengen
Comment
In this case the device
had multiple uses
capable of falling into
both Tariff headings.
The CJEU considered
that, in the
circumstances, the
principal function of
the device consists of
video reproduction
and, as such, it should
be classified under
heading 8521. The
judgment demonstrates
that the cost of
incorrect classification
can be very high and
that, where doubt
exists, a ruling should
be obtained in advance.
Court of Justice of the European Union
The classification of goods for customs duty purposes is a fine art which should be left to highly
experienced people. An incorrect classification can result in an underpayment of duty, the imposition
of fines and penalties and, in some cases, even the seizure of the goods in question.
The issue in this case was whether the importation of devices known as 'screenplays' should be under
the classification heading 8471 (hard drives) attracting a zero rate of customs duty or, as contended
by the Dutch tax authority, whether they should be imported under classification heading 8521 (video
producing apparatus) attracting a duty rate of 13.9%.
The CJEU noted that the general rules for the interpretation of the Tariff provide that the
classification of goods is to be determined according to the terms of the headings and any section or
chapter notes but, in addition, the decisive criterion for the classification of goods for customs
purposes is, in general, to be found in their objective characteristics and properties as defined in the
Tariff. Applying those rules, the CJEU concluded that the 'screenplays' bore the characteristics and
properties of video producing apparatus and ruled that for duty purposes, the goods must be
classified under heading 8521. The correct rate of duty was, therefore, 13.9%.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556