VAT: No credit on prepaid courses

Driving instructor
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Neil Warren considers whether a driving school could reduce its output tax if students didn’t complete the course, but had already paid a non-refundable fee.


Have you ever booked a discounted deal in advance at a hotel where you pay the entire fee at the time of making the booking, but you don’t get a refund if you cancel the booking or don’t turn up?

A similar situation was considered in the case of RDS Driving Services Ltd (TC06087), which centred on whether the company could reduce its output tax if a trainee driving instructor paid a non-refundable fee for all three parts of his course, but dropped out of the course before he had started either Parts two and three or Part three. In other words, was output tax only due on the value of completed or partly completed stages?

Outside the scope?

The taxpayer argued that if a customer did not complete part of the course, there should be no VAT payable for the advanced fee that related to the uncompleted parts. In such cases, argued the taxpayer, there was no supply of goods or services to the customer and the money retained by RDS should be outside the scope of VAT rather than standard rated.

HMRC’s argument

HMRC argued that there was a single tax point created when the customer paid his fee, and that fee was standard rated for VAT because it gave the driver the right to attend and carry out all three parts of the course. The fact that he might not complete some of the parts was irrelevant.

Court decision

The tribunal agreed with HMRC that there was no opportunity to split the supply and make some of the payment standard rated and some outside the scope of VAT in the event of an uncompleted course.

The judge said: “The trainee is supplied with the right to embark on all three parts of the course. It is a single supply. I find that as each part of the course is integral to the course as a whole, and the trainee has prepaid for the whole course, it would be artificial to split the supply”.

Tax points

A basic tax point is created when either goods have been supplied to a customer, or a service has been completed. VAT is due on this date unless an actual tax point is created within 14 days thereafter. This is created by either an invoice being raised by the seller or payment being made by the customer.

The actual tax point then overrides the basic tax point. However, if payment is received or an invoice is raised before goods or services are supplied, this creates a tax point instead, which was the rule applied in the RDS case.

Sporting example

I am a member of Lancashire County Cricket Club and my season ticket (paid at the beginning of the season) gives me the right to attend 35 days of cricket. VAT is payable at the time I make payment. Unfortunately there is no scope for a VAT rebate for the club if I don’t attend any days because of either bad weather, games finishing early or me being unable to attend.

To put some numbers to this example: if I pay £700 for my season ticket but only attend 10 days of play, then the reality is that I have paid £70 including VAT for each day I have attended, rather than £20 including VAT that would have been the case if I had watched cricket at the Club on all 35 days. C’est la vie.

The “right” is a supply

Don’t forget that the ‘right’ to do something is a supply in most cases, and usually standard rated. For example, a VAT registered farmer I advised recently received £50,000 from a building developer, giving the developer the right to buy his land at market value at any time he chooses in the next three years. Because the farmer had opted to tax the land in question, this meant he was required to treat the £50,000 as being inclusive of 20% VAT, i.e. it was a standard rated fee.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.


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