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Tribunal: Brewery's VAT position no small beer

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26th Jun 2018
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Neil Warren considers the case of Redwood Birkhill Ltd (UKUT0189) and the challenge faced by the court of deciding which business was the customer and which was the supplier. This is obviously crucial in working out the VAT position.

Many transactions involving three parties can have difficult VAT issues. In this case, the upper tribunal has decided that a hotel and pub business was supplying a VATable service to independent publicans.

The case

It is normally very easy to identify the supplier and the customer in a business deal. If I visit my hairdresser for a haircut, then I am clearly the customer and the hairdresser is the supplier. And this is confirmed by the fact that money passes from me to the hairdresser, and not the other way around.

The Redwood case considered the VAT treatment of a tricky arrangement involving the company, independent publicans and two breweries. An example might help to clear the muddy waters.

Example

Beer Brewery would normally give Mr Publican a discount of 10% if it purchased 200 or more barrels of beer in a year. However, Redwood Birkhill already owns and manages a chain of hotels and pubs, so gets a better discount than 10% for its own supplies. So Mr Publican agrees that Redwood Birkhill will receive and negotiate its discounts with Beer Breweries instead, and then Redwood will give it a quarterly payment once it (Redwood) has received a payment from Beer Breweries. Redwood will retain a share of the discount for its own efforts, which is a figure unknown to Mr Publican.

Supplier or customer

In the above example, HMRC claimed that the amount retained by Redwood represented its fee to Mr Publican for “negotiating and administering an arrangement with the brewers ... achieving greater discounts from the brewers than the publicans would otherwise have obtained.” However, Redwood’s advisers claimed that it (Redwood) was actually the customer of Mr Publican, with Redwood paying Mr Publican for the right to claim a discount from the brewery on its beer purchases.

Ignore the money

You might be thinking that Redwood’s argument is correct because the end result of the deal is that Redwood is making a payment to Mr Publican and not the other way around. This is the same outcome as me paying my hairdresser a three-figure fee for my haircut (£4.99). But this is one of the major differences between VAT and the direct tax world. The challenge is to sometimes forget the money flow and focus on the key question: who made what supply to whom?

Consideration

But hang on, I hear you say. If Redwood is making a payment to Mr Publican, it has not received any ‘consideration’ for the supply of services it has supposedly made. And no consideration means no output tax. This is the second Agatha Christie twist to this tale, namely that HMRC ruled (and the upper tribunal agreed, confirming an earlier decision in the first tier tribunal) that the consideration for the services supplied by Redwood was the discount it retained on the deal - ie the discount received from the brewery was less than discount it gave to Mr Publican.

Why is there an issue?

You might also be wondering why VAT should be a problem for Redwood when probably all of the independent publicans are VAT registered and able to fully claim input tax. There is no partial exemption issue in the equation. Why could Redwood not just issue a VAT invoice to Mr Publican in my example and he would pay the VAT and claim input tax?

The answer is because the publicans do not know how much discount was received by Redwood from the brewery. Redwood has a lot of purchasing power because of the supplies relevant to its other hotels and pubs and does not want to reveal the figures. An invoice to Mr Publican for £x + VAT would give the game away so to speak, and possibly encourage the publicans to ask for a bigger share of the pie.

Learning points

Many transactions involving three parties can have difficult VAT issues. Think of the challenges involving beauty salons, taxi firms and events where there is a separate host and organiser. I always remember a concert where both the venue and the production company putting on the show thought the other party was accounting for output tax on the ticket sales from the punters!

The challenge is to look at both the commercial reality of a transaction as well as the contractual position, and hopefully in most cases this will lead to a straightforward conclusion on its VAT treatment. But not always!

Replies (3)

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By geoffmw1
27th Jun 2018 12:04

What your article doesn't say is why the discount is received by Redwood quarterly. I assume because it's on a sliding scale. Otherwise the discount would work on each invoice. Is there a similar situation between Redwood and Mr Publican?
We need more info here.

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PJ
By paulgrca.net
27th Jun 2018 12:49

''If I visit my hairdresser for a haircut, then I am clearly the customer and the hairdresser is the supplier. ''
Poor choice as an example supplier could of course be the hairdresser or the salon!

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By geoffmw1
28th Jun 2018 15:38

On reflection Redwood should self bill VAT on the discount it pays to Redwood and Redwood should to the same on its payment to Mr Publican.

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