VAT: Cab driver insurance deal put to the testby
HMRC argued the hire of taxi cabs including insurance was a single composite supply. The taxpayer claimed the insurance was an optional extra and exempt from VAT.
The tribunal appeal of Black Cab Services (BCS) Ltd vs HMRC (TC08141) revolved around the issue of mixed and composite supplies for VAT in its hire agreements with cab drivers.
Black Cab Services (BCS) Ltd hired taxi cabs to self-employed drivers. As part of the price quoted by BCS the customer was provided with insurance for the cab for the hire duration.
BCS originally charged VAT on the whole amount it charged, but later submitted an error correction claim totalling £43,245 on the basis it should not have charged VAT on the insurance element, as this was exempt for VAT purposes under VATA 1994 Schedule 9 Group 2.
HMRC refused the claim, stating that the insurance was to allow the customer to better enjoy the main supply of vehicle hire. It was therefore, in the department’s opinion, a composite supply.
The disagreement was passed to the first tier tribunal (FTT) to rule on whether the arrangement was a mixed supply as BCS claimed, or a composite supply.
Mixed or composite?
Where more than one supply is made at the same time by a trader it is important to determine whether this represents:
- Mix of elements that can be identified separately and where no one element is overwhelmingly predominant; or
- Single composite supply where one element is dominant and the others ancillary. The dominant element of a composite supply is often said to be enhanced by the other elements.
If the supply includes items chargeable to different rates of VAT, each element of the supply under A. would be accounted for separately and the appropriate VAT charged. For composite supplies in B. the whole supply is chargeable at the rate applicable to the dominant element.
The FTT considered several cases which had revolved around the mixed/composite supply issue. This included Wheels Private Hire Ltd  UKUT0051, which had similarities to the BCS case, involving the provision of car hire, radio support and insurance as a package. The supply made by Wheels was found to be a mixed supply by the upper tribunal.
The facts of the case were largely agreed between BCS and HMRC, so the FTT was only required to rule on the mixed/composite issue itself.
BCS confirmed that the option for the customer to use their own insurance was always available. The cab company also confirmed that no customer had taken up this option. This was primarily because, BCS had a block policy that allowed it to charge far less for insurance than a customer could obtain on their own.
HMRC contended that the application forms completed by customers presupposed that the customer would use the insurance offered, going so far as to have ‘N/A’ already entered in the section for the customer’s own insurance details. HMRC therefore argued that the customer thought they were purchasing a single service – that of an “all-in” car hire service.
The FTT noted that the customer was required to enter a tick to opt into BCS’s insurance cover and that the pre-populated section that followed did not affect this decision. The judges presumed that had anyone wished to use their own insurance, a replacement page would have been provided.
In the tribunal’s eyes, the lack of customers opting to use their own insurance wasn’t surprising as BCS’s offer was too good to pass up.
The claim that the customer paid a single amount and so thought they were getting a single service was not borne out; both the application form and the receipt that followed made it clear how much of the amount paid related to hire and how much to insurance. The customer was therefore fully aware of the split.
Finally, HMRC tried to highlight key differences between this case and that of Wheels. The FTT considered the only material difference between the cases was that in Wheels, some customers did not take up the offered insurance.
The FTT therefore dismissed HMRC’s argument and concluded that the supply was mixed and that BCS was entitled to treat the insurance element as exempt from VAT.