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Terms & conditions in relation to VAT

5th May 2016
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There is an increasing number of Tribunal and higher Court cases which examine the contractual relationships between supplier and customer and, on occasion, a third party. The VAT outcomes can be significant, especially where the customer cannot recover the VAT charged.

There are two important precedent cases, which are increasingly referred to:

These cases look at any written contracts, but also examine the wider commercial and day-to-day reality of the arrangements. Of course, with any number of details to examine, some of which point in different directions, there may be a fine line between very different VAT outcomes. And the sums involved are often huge.

In the joined cases of Agiliys Contact Services Ltd and Inhealth (London) Ltd the First Tier Tribunal looked at such arrangements. The case was led by the recipient, as it would have been liable to pay an additional £644,000 of VAT had the case gone against the taxpayer.

One of the key players stated that the terms of the Service Agreement involving the two parties did not accurately reflect the commercial and operational reality of the arrangement between the parties. As the arrangement evolved, the formal documents were not amended. The Tribunal accepted that it should not be restricted to considering only the contractual agreement as set out in the Service Agreement, and concluded that the arrangement was a collaborative venture, and staff were joint employees of both companies. This avoided the taxable supply from one to the other, resulting in the significant irrecoverable VAT amount.

Of course, every transaction implies a contract, and many are not reduced to written form. But, for the avoidance of doubt and to help define the nature of supplies made, a good written contract can be very helpful. And, if there is a significant VAT issue, seek input from a VAT specialist.

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