Neil Warren explains how the VAT accounting became confused when four closely linked but separate legal entities, which all traded from the same building, swapped goods and made purchases on behalf of each other.
VAT risks associated with family trading
A challenge for tax advisers when there are a number of family-linked businesses trading closely together is to look at the potential VAT risks associated with such arrangements. This usually involves checking that the following two objectives are met:
- input tax is claimed by the correct business, ie on expenses that are directly related to the taxable supplies made by that business; and
- output tax is correctly charged on any goods or services that are supplied from one business to another. In the Storer case (TC06183), a key issue was the purchasing arrangements for alcoholic drinks.
The Storer structure
Imagine the picturesque seaside resort of Swanage on the south coast, and a single building on the seafront with the following businesses, all trading independently but with close links:
- Gee White Kiosk ( a VAT-registered partnership between MG and ND Storer) – selling take away seafood and fried fish.
- Quay Hole Restaurant (also VAT registered – a sole trade of Mr Storer’s partner Ms Thomas) – selling fish and chips and also drinks including alcohol.
- Quay Desserts (not VAT registered – a sole trader of Mr Storer’s son) – trading as an ice cream parlour.
- Freehold of building – owned by Mr Storer – and not VAT registered ie there is no option to tax election in place.
Input tax challenges
The case primarily concerned the partnership: MG and ND Storer who operated the Gee White Kiosk. HMRC disallowed input tax claimed by Gee White Kiosk for the period between 2012 and 2015 on two categories of expenditure:
- Alcoholic drinks: £20,904 – the officer said these goods were relevant to Quay Hole Restaurant, ie another business.
- Building costs: £12,966 – which HMRC claimed was a capital cost relevant to Mr Storer as the freeholder/landlord of the building.
The alcohol issue
The taxpayer’s representative produced photographic evidence that Gee White Kiosk also sold alcohol as well as seafood, so at least some of the input tax claimed related to its own business. HMRC was strangely unaware of this fact until the tribunal hearing.
The taxpayers argued that the rest of the input tax was claimable because it related to onward supplies made to Quay Hole Restaurant, which were paid for by supplies of fish and chips made by the restaurant to the kiosk. The tribunal agreed with the taxpayers that the input tax was, therefore, claimable by the kiosk and separate output tax assessments were therefore needed on these ‘barter’ supplies, which would both become input tax claims of the other business.
The building costs
The tribunal decided that the costs assessed by HMRC were ‘occupant costs’ rather than ‘landlord capital costs’ and that one-third of these costs was relevant to each trading business. An assessment should have been raised to disallow two-thirds of the input tax claimed by the kiosk, and not the full amount as HMRC had done.
It seems that the HMRC officer did not get it clear in his mind about the overall trading operation here. The officer couldn’t see the wood for the trees, so to speak. A “revenue risk” approach should have focused on making sure that neither of the two VAT registered businesses were claiming input tax on costs relevant to the two unregistered businesses.
As stage two of this approach, the challenge is to check if any output tax has not been accounted for on onward supplies to the unregistered entities. However, the officer got bogged down worrying about the supplies of alcohol between the two businesses that are VAT registered, ie the kiosk and restaurant.
The tribunal noted that VAT should not be a cost to either of these entities: “Deduction of input tax should relieve the taxable person entirely of the burden of VAT paid or payable in the course of making supplies which are themselves subject to VAT.”
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.