HMRC have issued a new Revenue & Customs Brief here http://www.hmrc.gov.uk/briefs/vat/brief5708.htmb which sets out their revised position on the treatment of excess car parking charges for off-street car parking. In the past, HMRC took the view that excess charges were liable to VAT, but following a recent VAT Tribunal case, have now changed their view about excess charges levied because of breach of contract.
This is an interesting subject as the principles involved should apply not only to car parking charges, but also other situations where payments are due because of breach of contract. Businesses who have overpaid VAT as a result may be able to make a claim for the amount overpaid, subject to the “unjust enrichment” rules (see below). This will be of particular interest to exempt, partly exempt and non-business customers who cannot recover the VAT charged on such payments.
Historically, the VAT position about penalties and other non-contractual payments has always been a bit confusing. Most of us are familiar with the basic concept that VAT is due on consideration paid for a supply of goods or services. HMRC have normally taken the view that payments such as compensation or payments made under out of court settlements are not consideration so are not liable to VAT. But they believed that excess parking charges were additional consideration for the use of parking facilities and were liable to VAT.
Excess parking charges levied by local authorities
The issue has been reconsidered following a VAT Tribunal case (Bristol City Council LON/99/261) about excess charges levied by local authorities. Local authorities are entitled to levy excess charges for off-street parking by regulation and the Tribunal considered the VAT liability of the excess charges levied under this regulatory framework. The Tribunal concluded that the excess charges were not additional payment for the provision of parking facilities. Therefore the excess charges are not consideration for VAT purposes and therefore not liable to VAT.
Excess charges levied by commercial operators
Commercial operators are not subject to the same regulatory provisions as local authorities and their operations are governed by normal commercial law. HMRC had always taken the position that excess charges levied by commercial operators were levied within the context of the contractual relationship between driver and operator. Their view was that the excess charges were additional consideration for the use of the extended parking facilities and were therefore liable to VAT.
HMRC have now reconsidered the position in respect of commercial operators. They have decided that where the excess is charged because the driver is in breach of contract, it is not consideration for a supply and is not liable to VAT.
In the Brief, they make a distinction between two separate situations:
• Where a driver is entitled under the terms of the parking contract to use the parking facilities for a longer period in return for additional payment.
• Situations where the contract does not allow for an extension of car parking facilities, or other breach of contract situations such as parking without displaying a ticket.
The Brief confirms that any payments levied for a breach of contract are outside the scope of VAT. However where the payment is additional consideration for the use of extended car parking facilities, this is consideration and therefore liable to VAT.
Breach of contract payments not consideration for a supply
This is an interesting development because it confirms what most of us already understood to be the correct application of VAT law, ie that payments which are made as a result of a breach of contract are not consideration for a supply and thus not liable to VAT. In the Brief, HMRC mention another VAT Tribunal case which considered the VAT liability of payments charged for video rental which were returned late. In that case, because the payments were additional charges for extended video hire within the business’ terms and conditions of business, they were liable to VAT.
This area of VAT has always caused confusion for businesses and VAT officers alike. HMRC’s internal guidance and their VAT Guide, Notice 700, both confirm that payments that are for breach of contract are not consideration for a supply. But confusion often arises in practice because individual businesses and VAT officers may not appreciate the distinction between contractual and non-contractual payments. VAT officers tend to assume that payments are consideration for a supply unless the business provides evidence to the contrary.
So this Brief is a helpful reminder of the correct application of the law and it will be helpful in dealing with such disputes in the future.
Planning Opportunities
It also provides a couple of opportunities for reducing VAT costs as follows:
• First, if the business is drawing up terms for any type of business contract which include levying additional payment when the original terms are broken, such as extended hire, consider whether the payment is for a breach of the original contract and therefore can be outside the scope of VAT. This is an issue that should be discussed with a solicitor and the business should ensure that the documentation reflects that the payment is for a breach of contract. It may be possible to amend existing terms and conditions to confirm that such payments are for breach of contract to avoid uncertainty in the future.
• The second opportunity concerns past payments where the customer has not been able to recover the VAT. This would include circumstances where the customer is a private individual, a charity or a partly exempt business. In these circumstances, it may be possible to recover the VAT from HMRC and refund it to the customer.
Unjust enrichment rule
Now the position about refunds to customers is a difficult area, because if your customers are private individuals, you may not be in a position to make refunds. In this case HMRC may take the view that the “unjust enrichment” rules apply and not refund the overpaid VAT to the business on the basis that the business would be unjustly enriched by retaining the overpaid VAT.
The VAT legislation entitles HMRC to withhold overpayments in such circumstances, but the position concerning “unjust enrichment” is no longer as black and white as it used to be since the now infamous Marks & Spencers’ case about teacakes. In principle, you would have to be able to show that the business bore the additional VAT charge so would not be unjustly enriched if it didn’t refund the VAT to its customers. In the M & S case, economists for both M & S and HMRC were engaged to prove opposing viewpoints and HMRC were largely successful as the Court only allowed M & S to retain a small proportion of the VAT involved.
So proving that the unjust enrichment rules is difficult and you would probably only want to pursue a claim for VAT in such cases if there was a significant amount of money involved.