The People's Dispensary for Sick Animals ("PDSA") v Revenue & Customs [2012] UKFTT 362 (TC) (31 May 2012)
DECISION
The Appeal
1.
The Appellant appeals against HMRC’s decision to refuse the following
voluntary disclosures:
(1)
A voluntary disclosure in the sum of £2,201,250.00 for the VAT periods
11 April 2004 to June 2007;
(2)
A ‘Fleming claim’ dated 26 March 2009 in the sum of £1,917,323.00 for
the periods March 1993 to December 1997 inclusive.
(3)
A voluntary disclosure dated 29 March 2010, in the sum of £3,854,999 for
the VAT periods 1 November 2007 to 31 August 2011.
2.
The Appeals in respect of the first two disclosures had been
consolidated under Appeal number TC2010/3798. After hearing representations the
Tribunal decided to consolidate the third Appeal with the other Appeal under
Appeal number TC2012/1247.
3.
The Appellant is a “not for profit” incorporated Society providing
welfare and charitable services for sick and injured animals. The Appellant was
established in 1917 and now constituted under People’s Dispensary for Sick
Animals Acts 1949 and 1956.
4.
The Appellant’s charitable objects are to provide free medical or
surgical treatment to animals belonging to persons who appear to the Appellant
to be unable to afford the service of a veterinary surgeon and to do all such
other things as are incidental or the Society may deem conducive to the
attainment of those objects.
5.
The Appellant delivers its veterinary services to those in financial hardship
through a national network of 43 Pet Aid hospitals and five Pet Aid branches. In
geographical areas too small for a Pet Aid hospital, the Appellant arranges for
local veterinary practices (“Pet Aid practices”) to provide treatment to sick
and injured pets free of charge to registered owners under the Pet Aid scheme. Currently
there are 375 Pet Aid practices.
6.
The dispute in this Appeal is whether the Appellant was entitled to
recover the VAT on the fees charged by the veterinary practices under the Pet
Aid scheme. The Appellant argued that Pet Aid practices supplied it with
services for consideration with the result that the VAT incurred on those
supplies was attributable to the Appellant’s taxable supplies made to registered
pet owners. The Appellant, therefore, had the right to deduct the VAT on the
supplies of the Pet Aid practices.
7.
HMRC disagreed with the Appellant’s contention relying on three separate
arguments which were
(1)
The Pet Aid scheme was not an economic activity (Non-Economic issue).
(2)
The supplies of services by Pet Aid practices were made to the
registered pet owners not to the Appellant (To Whom issue).
(3)
The Appellant was making exempt supplies of insurance services
(Insurance issue).
8.
The Tribunal heard evidence from Dr Stuart Duff, Principal Veterinary
Surgeon, and Mr Russell Eaton, Head of Accounting and Financial Control, for
the Appellant. The witness statement of Ms Lesley Gilding, HMRC’s review
officer, and an agreed bundle of documents were admitted in evidence.
Background
9.
The Appellant is a large national charity, registered in England and Scotland. In 2010 its total incoming resources were ₤93 million. The Appellant was
ranked 42nd nationally on the Charity 100 Index in terms of the size
of its overall income.
10.
The Appellant’s income was sourced from a mixture of fundraised income and
commercial income in a ratio of approximately 3:1. The range of income streams
was diverse but about 40 per cent of the total income came from gifts in wills.
11.
In 2010 the Appellant expended ₤60 million on its charitable
activities, of which ₤48 million was spent on the Pet Aid hospitals. Mr
Eaton stated that the annual cost of the Pet Aid scheme was ₤6 million
VAT inclusive which was sourced from charitable income (₤5.6 million) and
fees from registered pet owners (₤0.4 million).
12.
In 2010 the Appellant treated 407,000 sick and injured animals and
administered 383,718 preventative treatments. The Pet Aid hospitals and the Pet
Aid scheme covered 78.3 per cent of all eligible households in the United Kingdom.
Pet Aid Scheme
13.
The Appellant introduced the scheme in 1993, and its format has remained
largely unchanged since that date. The structure of the scheme allowed the
Appellant to exert a more effective control on its costs. The predecessor to
the scheme which involved veterinary practices screening pet owners for
eligibility, treating the animals and then inviting the Appellant to pay the
costs in full proved unaffordable. Under the former scheme the veterinary
practices had no incentive to treat animals within defined budgets. A key
feature of the Pet Aid scheme was to provide Pet Aid practices with a regular
defined pool of money which enabled registered pets that fell sick or were
injured to be treated free of charge.
14.
The scheme was open to pet owners who did not have the financial
resources to pay for veterinary services. A pet owner was eligible for the
scheme if he lived within the postcode boundary of a Pet Aid practice, in
receipt of housing or council tax benefit and registers in advance with the
Appellant. The application for registration must be supported by a payment of
£5
by way of a postal order and documents evidencing receipt of Housing or Council
Tax Benefit.
15.
The payment of ₤5 was described as an administration charge
(hereinafter known as the registration fee)
in the application form. The registration fee was initially ₤2 when the
scheme was introduced and has been increased incrementally since 1993. Dr Duff
explained that a fee was imposed so that pet owners understood the value of the
services offered by the Appellant. The level of the fee was a balancing act to
ensure that principal donors were not discouraged from making donations and
that animals did not suffer.
16.
The Appellant on receipt of a completed application form issued a
certificate to the pet owner valid for a fixed period of six months.
The owner must produce the certificate each time he visited a Pet Aid practice.
A pet owner who was not registered or did not hold a valid certificate would
not be entitled to receive veterinary services free of charge.
17.
The Pet Aid scheme was restricted to one companion animal per household.
The application form made explicit that registration operated as a passport to
the Appellant’s funded free treatment. Previous application forms emphasised
that the Appellant provided charitable veterinary assistance. The current
application form stated that the Pet Aid services were funded entirely by
public support.
18.
The information to Applicants on the scope and limitations of Pet Aid
emphasised that throughout the duration of eligibility under Pet Aid the pet
owner remained a client of the nominated practice. If a registered owner chose
to consult another practice the Appellant would not accept responsibility for
any fees incurred. The practice declaration on the application for registration
stated that it agreed to accept the pet owner as a client of the practice.
19.
Dr Duff accepted that the statements on the various documentation
regarding pet owners being clients of the nominated practice were correct. Dr
Duff, however, said there was a divergence between the official statements and
the perceptions of the participants to the scheme. He considered that the Pet
Aid practices regarded the pet owners as the Appellant’s clients. The pet
owners were split between perceiving themselves as the Appellant’s clients or
clients of the Pet Aid practices.
20.
Veterinary practices were required to enter into formal signed contracts
with the Appellant to offer Pet Aid services. The contracts incorporated a set
of rules and guidance notes which dictated the delivery of the charitable
veterinary service from the Pet Aid practices.
21.
The guidance notes re-affirmed the principle that registered pet owners were
entitled to receive free of charge veterinary attention within the scope of the
service. The Appellant paid the Pet Aid practice a monthly capitation charge
for each registered client irrespective of whether or not treatment was
provided. The capitation payments continued until cessation of the period of
registration even where the pet had died during the registration. A certificate
of registration was valid for a period of six months or twelve months in the
case of those in receipt of state pensions. Pet owners were required to
re-apply for registration if they wished to remain eligible for support under
the Pet Aid scheme.
22.
The Appellant also made additional payments for registered pets which
suffered from chronic conditions. The additional payments fell into two categories.
Class A which covered serious conditions such as, diabetes and Cushings
Syndrome, and Class B for less expensive continuous medication or expensive
treatments not given continuously. Class A payments ceased at the end of the
month in which the pet died.
23.
The Pet Aid scheme also provided a facility of special payments which
was designed for emergency situations and to assist eligible pet owners who
have never been previously registered to achieve initial registration.
Applications for special payments were submitted jointly by the veterinary
practices and the pet owner. Only one application was permitted on behalf of a
pet owner. Also the practice must secure whatever payment the pet owner could
afford against the treatment costs before submitting the application.
Notification of the approval was made to the practice and the pet owner.
Successful applications would also result in the registration of the pet owner
as a Pet Aid client of the practice for a period of six months. Dr Duff also
asserted that the pet owners were required to pay the registration fee. The
guidance emphasised that although the pet owners were expected to contribute
towards the initial treatment costs, they could not be required to pay for any
treatment provided after registration.
24.
The Pet Aid practice was required to complete a treatment receipt on
each attendance of a registered pet owner. The practice was required to give
brief clinical details and the category of treatment given on the receipt. Also
the practice had to include details of the charge that would have to be made
for the treatment if the pet owner had been a fee paying client. The purpose of
this information was to raise the pet owner’s awareness of the value of the
Appellant’s charitable gift. Finally the practice was obliged to encourage the
pet owner to make donations to the Appellant which if made were recorded on the
treatment receipt.
25.
The monthly per capita allocations as at September 2008 stood at
₤9.60 for each of the first 100 registered clients, ₤7.20 for the
second 100 registered clients and ₤6 for subsequent registered clients.
The payments for chronic case allocations were ₤30 for class A conditions
and ₤20 per animal for class B. These payments were exclusive of VAT.
26.
At the beginning of each month the Appellant supplied each Pet Aid
practice with a list of their current registered Pet Aid clients. The list signified
those animals which had been awarded additional payments for chronic
conditions. The practice was required to return the list for the preceding
month by the 10th day of each month with dates of first attendance
of clients entered with all relevant treatment receipts attached. On receipt of
the list the Appellant guaranteed to make monthly payments to the Pet Aid
practice. The monthly payment comprised:
(1)
Number of first 100 registrants x allocation;
(2)
Number of second 100 registrants x allocation;
(3)
Number of subsequent registrants x allocation;
(4)
Number of Class A chronic cases x allocation;
(5)
Class B chronic cases x allocation;
(6)
Special payments;
(7)
VAT on (1-6) above;
(8)
A deduction for donations received.
27.
The purpose of the monthly payment was to provide a pool of money out of
which those registered pets that fell sick or were injured must be treated free
of charge. The Appellant’s guidance notes emphasised that
“These monthly payments should be regarded as a fund
awarded to the practice for the provision of the Pet Aid practice service, to
an ethically acceptable standard free of charge to all registered pets
requiring veterinary attention”.
28.
Dr Duff was of the view that the funding arrangements for the Pet Aid
scheme were commercially attractive to practices, pointing out that the scheme
had a number of Corporate practices which were renown for their commercial
approach to veterinary services.
29.
The Pet Aid practice was responsible to the pet owner for the diagnosis
and treatment of the registered animal. The practice was obliged to administer
the treatment required without consultation and or approval from the Appellant.
Dr Duff explained that where more costly treatment was required the practice
took the risk as to whether an additional payment would be made by the
Appellant. Dr Duff pointed out that a veterinary surgeon was in breach of
professional ethics if he refused treatment. Also a surgeon who delayed
treatment awaiting the Appellant’ authorisation for the additional payment
would not be welcome on the Pet Aid scheme. Dr Duff considered that the
financial risk to the practices was, however, mitigated by the Appellant’s
guidance on the making of additional payments.
30.
The rules and guidance notes specified which services were not covered
by the Pet Aid scheme. The non-eligible services included amongst others: house
calls and out of call charges, prophylactic treatments, health checks and
pregnancy diagnosis and laboratory procedures not essential for diagnosis. The
rules and guidance emphasised that practices must provide the Pet Aid service to
an ethically acceptable standard without charge to all clients who hold a
certificate of eligibility whose registered pets required veterinary attention. It was not permissible for practice
staff to offer a higher level of treatment, or more expensive medications, to a
registered pet with the expectation that the client contributed towards or pays
for that treatment.
31.
Dr Duff accepted that the Appellant principally provided administrative
support to Pet Aid practices in connection with the scheme. The Appellant would
on occasions provide clinical advice to the practice which would normally be
restricted to supplying treatment protocols and advice on ethical standards
within a charitable context. Dr Duff, however, pointed out that each of the
Appellant’s hospitals had its own treatment protocols. In those circumstances
the Appellant did not circulate the protocols widely to the Pet Aid practices. Dr
Duff acknowledged that the Appellant’s principal role was to provide the Pet
Aid practices with funding to carry out treatments of injured and sick animals
belonging to owners unable to afford private veterinary fees.
32.
Dr Duff explained that if a pet owner lived within the catchment area of
Pet Aid hospital he would have to register in the same way as the Pet Aid scheme
to receive free veterinary treatment for his sick or injured animals. The
owner, however, would not have to pay a registration fee. The Appellant’s
veterinary staff administered the treatment from the hospitals direct to the
pet owners. The Appellant acknowledged that Pet Aid practices acted in their
own right. They were not the Appellant’s agents when administering the
treatment.
The Parties to the Pet Aid Scheme
33.
Before dealing with the disputed issues the Tribunal considers it
helpful to identify the relationships that make up the Pet Aid scheme which
are:
(1)
The Appellant and registered pet owners, whereby the owners pay a charge
to the Appellant and are issued with a certificate of eligibility which
entitles the owners to free veterinary services from Pet Aid practices for
their nominated pets during the currency of the certificate.
(2)
The Appellant and Pet Aid practices, whereby the Appellant supplies the
practices with a pool of money to fund the treatment of sick and injured
animals whose owners are unable to afford private veterinary fees.
(3)
The Pet Aid practices and registered pet owners, whereby the Pet Aid
practices provide diagnosis and treatment of the sick and injured animals
belonging to registered pet owners.
34.
The parties differ in their analysis of the relationships for VAT
purposes. The Appellant viewed the relationships as a tri-partite arrangement
whereby the pet owner paid consideration to the Appellant for veterinary
services, which was provided by the Pet Aid practices. In this analysis the
Appellant was making taxable supplies to the pet owner for consideration (the
₤5 registration fee) and the Pet Aid practices were making taxable supplies
to the Appellant. The VAT incurred on the supplies of the Pet Aid practices was
attributable to the Appellant’s taxable supplies to the owners, which allowed
the Appellant to treat the VAT as input tax. The Appellant considers that its
analysis holds good if the Tribunal finds that the Pet Aid practices made
supplies to both the pet owners and the Appellant.
35.
HMRC’s interpretation of the relationships was that they constituted
three separate transactions. The transaction between the Appellant and the
pet owners was not a taxable supply for consideration. The predominant purpose
of the Appellant’s dealing with the pet owners was to further its charitable
objects of providing free veterinary services to those who cannot afford them.
The Pet Aid practices supplied their veterinary services to the pet owners not
to the Appellant. The fact that the Appellant provided the Pet Aid practices
with a pool of money to fund the veterinary services did not change the nature
of the supply made by the practices to the owners. The Appellant by providing
the money pool was simply fulfilling its charitable objects. In HMRC’s analysis
the pet owners were the recipients of the supplies of veterinary services in
which case the VAT charged on those supplies by the Pet Aid practices was
irrecoverable. The pet owners were the final consumers. The pool of money
provided by the Appellant to the Pet Aid practices constituted third party
consideration for the supplies by the practices to the pet owners.
Non-economic Issue
The Parties’ Representations
36.
The Appellant argued that underlying HMRC’s contentions was the unspoken
assumption that if a charity was acting as a charity, it could not be acting as
a business. In the Appellant’s view, this assumption had no bearing upon the
correct application of the VAT directive which was concerned with whether the
Appellant was carrying on an economic activity. The fact that the activity was
charitable was co-incidental. The Appellant referred to a range of decisions (CCE
v RSPCA VAT decision 618; HMRC v Three Counties Dog Rescue [2011] TC
01653 and CCE v Church Schools Foundation [2001] EWCA Civ 1745) where
charitable organisations were found to be undertaking economic activities.
37.
Whether the Pet Aid scheme was an economic activity was a mixed question
of law and fact. The Appellant considered that the following features of the
scheme when looked at in the round supported the conclusion that the Appellant
was engaged in economic activity.
(1)
The financial scale of the operation with ₤6 million spent
annually on the scheme.
(2)
The degree of administrative resource and professional expertise
involved.
(3)
The continuous operation of the scheme since 1993.
(4)
The scheme was part of the Appellant’s primary business and not some
peripheral activity.
(5)
The payment of fees by pet owners to gain eligibility to the scheme.
(6)
The scheme was designed to provide a workable and cost conscious
solution and replaced previously unaffordable arrangements.
38.
HMRC contended that the Appellant’s activities insofar as they related
to the operation of the Pet Aid scheme was not an economic activity for the
purposes of Articles 2(1)(c) and 9(1) of the Council Directive 2006/112/EC.
Further the provision of Pet Aid to those eligible was not a taxable supply
made by the Appellant in the course or furtherance of any business carried on
by the Appellant. According to HMRC the true nature of the Appellant’s activity
was to provide charitable support to ensure that veterinary treatment was
available to sick and injured animals for pet owners who appeared to the
Appellant to be unable to afford private veterinary fees. The Appellant was not
concerned with the supply of services to the pet owners for consideration.
39.
HMRC submitted that the registration fee paid by pet owners wishing to
register with the Pet Aid scheme was outside the scope of VAT. The fee was paid
to cover the Appellant’s administration costs and was a flat fee entirely
unrelated to the cost of the services provided by the Pet Aid practices. There
was no direct link between the payment made by the pet owners and the supply of
services from Pet Aid practices. Thus the Appellant was not making a taxable
supply to the pet owners in the course or furtherance of any business carried
on by it.
The Parties’ Correspondence
40.
By a letter dated 24 March 1993, the Appellant informed HMRC
that it would be introducing a Pet Aid scheme with effect from 1 July 1993 and
sought confirmation of its view that the registration fee would be outside the
scope of VAT. The grounds put forward were that the fee was not a prepayment
for treatment services but intended to recover part of the Appellant’s
administration costs, and that the Pet Aid scheme was a non business activity.
HMRC responded on 5 May 1993 confirming that the registration fee could be
treated as non business activity.
41.
By letter dated 3 January 1997 the Appellant informed HMRC that it was
considering a subsidised service rather than a free one, and sought
confirmation as to whether the charge under such an arrangement would constitute
a taxable business activity and so enable the recovery of related input VAT.
HMRC indicated on 10 January 1997 that a subsidised service would be a taxable
supply which would enable the recovery of input tax on those supplies.
42.
On 1 March 2004 the Appellant wrote to HMRC requesting confirmation of
its ruling in 1997 on the taxable character of the proposed subsidised
services. HMRC confirmed its 1997 ruling on 17 March 2004.
43.
On 14 November 2007 the Appellant following the RSPCA decision
made a voluntary disclosure requesting the repayment of input tax on the basis
that the registration fee paid by pet owners was consideration for the taxable
supply of treatment. HMRC rejected the voluntary disclosure and that rejection
formed the basis of this appeal. HMRC, however, at that time expressed the view
that the Pet Aid registration fee was consideration for a taxable supply. On
review dated 29 March 2010 HMRC overturned its decision regarding the status of
the registration fee, stating that it was outside the scope of VAT. The
Appellant has not introduced a subsidised service.
Reasons
44.
For the purposes of Directive 2006/112/EC, VAT is concerned with any
person who independently carries out ... any economic activity ... whatever
the purpose or results of that activity. The economic activities referred
to comprise all activities of producers, traders and persons supplying
services ... and activities of the professions. The exploitation of tangible or
intangible property for the purpose of obtaining income therefrom on a
continuing basis shall in particular be regarded as an economic activity.
The Court of Justice of the European Union has stressed that the concept of
economic activity must be given a wide scope, and is objective in character, in
the sense that the activity is considered per se and without regard to its
purpose or results.
45.
Although EU legislation uses the term economic activity rather
than the term business, the provisions of UK legislation relating VAT to
business activities are derived from Directive 2006/112/EC article 9. Thus
under section 4 of the VAT Act 1994 VAT is levied on supplies of goods and
services in the course or furtherance of a
business. Section 24(1) provides that input tax is VAT charged on the
supply to taxable person, of goods or services used or to be used for the
purposes of a business carried on by him. Finally a person is liable or entitled to be registered for VAT only if he makes, or
intends to make, taxable supplies in the course or furtherance of a business.
It follows from above that a supply which is not made in the course or
furtherance of a business is not subject to VAT. The expression business is,
therefore, fundamental to the operation of VAT.
46.
It is common ground between the parties the wide definition of economic
activity enables charities to make taxable supplies and recover input tax
attributable to those taxable supplies. The fact that an activity may be
performed in the furtherance of charitable aims and objectives does not by
definition prevent it from being deemed a business activity for VAT purposes.
In VAT terms charities are generally regarded as making a mixture of business
and non-business supplies.
47.
HMRC accepted that the Appellant was a taxable person, having been
registered for VAT with effect from 6 July 1981 and that it did make taxable
supplies. The dispute concerned whether a particular aspect of the Appellant’s
activities, the Pet Aid scheme, was an economic/business activity.
48.
The word "business" is not exhaustively or precisely defined
in the VAT legislation. The High Court in C & E Comrs v Lord Fisher
[1981] STC 238 at 246 set out six indicators to ascertain whether the activity
is properly to be regarded as a business:
(1)
Whether the activity is a serious undertaking earnestly pursued or a
serious occupation not necessarily confined to commercial or profit-making
undertakings.
(2)
Whether the activity is an occupation or function actively pursued with
reasonable or recognisable continuity.
(3)
Whether the activity has a certain measure of substance as measured by
quarterly or annual value of taxable supplies made.
(4)
Whether the activity is conducted in a regular manner on sound and
recognised business principles.
(5)
Whether the activity is predominantly concerned with the making of
taxable supplies to consumers for a consideration.
(6)
Whether the taxable supplies are of a kind which, subject to differences
of detail, are commonly made by those who seek to profit by them.
49.
The Tribunal makes the following findings of fact in relation to the Pet
Aid scheme:
(1)
The Appellant has operated the Pet Aid scheme on a continuous basis
since 1993, which has been earnestly carried out in pursuit of its charitable
objective of providing free veterinary treatment to sick and injured animals of
pet owners who could not afford the fees of veterinary surgeons.
(2)
The Pet Aid scheme was well organised and efficiently run. The
relationships between the parties to the scheme were documented clearly setting
out their respective obligations. The Appellant exercised control over the
costs of the scheme, which ensured its affordability. The scheme had been set
up to overcome the financial weaknesses of the previous scheme.
(3)
The Appellant incurred significant annual expenditure of about ₤6 million
on the Pet Aid scheme.
(4)
The expenditure of the Pet Aid scheme was funded 93.34 per cent
(₤5.6 million) from public donations, the majority of which comprised
legacies, and 6.66 per cent (₤0.4 million) from the registration fees.
(5)
The registration fees had increased incrementally since the inception of
the scheme: ₤2 (1993), ₤3 (1995), ₤5 (2008), and ₤7.50
(November 2011).
(6)
The contribution of the registration fees to the annual cost of running
the scheme was minimal.
(7)
When fixing the level of the registration fee the Appellant ensured that
it did not represent a significant departure from its charitable object of free
veterinary services which would have deterred the giving of donations.
(8)
The payment of the registration fee entitled pet owners to free
veterinary services from Pet Aid practices for their nominated pets during the
currency of the certificate.
(9)
A pet owner would not receive free veterinary services unless he had
been registered under the scheme and had paid the registration fee.
(10)
The registration fee was payable whether or not the eligible pet owner
received treatment for his nominated animal during the currency of the
certificate.
(11)
The registration fee was a fixed flat fee which had no relationship to
the actual costs of the veterinary treatment if administered to the registered
animal during the currency of the certificate.
(12)
A registered pet owner was not required to contribute to the treatment
costs of the Pet Aid practice in respect of his sick or injured animal,
although donations were encouraged.
(13)
The Appellant described the registration fee in the application form as
an administration fee.
(14)
The Appellant provided Pet Aid practices with a regular pool of money to
fund free veterinary services to sick and injured animals of eligible pet
owners.
(15)
The per capita payments to the Pet Aid practices were made regardless of
whether the pet owners have attended the practice.
(16)
The Appellant did not provide the veterinary services direct to the pet
owners.
50.
Each of the indicators of business activity identified in the Lord
Fisher case are merely that, and may point in differing directions. The
Tribunal’s task is to assess the various indicators and come to decision on
whether the activity in question is business or non-business.
51.
The Appellant was a large national charity with total incoming resources
of ₤93 million and ranked 42nd nationally on the Charity 100
Index. Given that context the Tribunal considers its findings on the organised,
efficient and continuous nature of the Pet Aid scheme as against the other
indicators was not persuasive in determining whether the Pet Aid scheme
constituted a business/non business activity. The Tribunal is of the view
given the size and the established nature of the Appellant that the themes of
organisation and efficiency were constant throughout the whole range of its
activities encompassing both the economic and non-economic aspects.
52.
The Tribunal considers that its findings on the character of the actual
supplies that make up the Pet Aid scheme carried weight in determining whether
the Appellant was engaged in a business activity. The critical supply is the
one between the Appellant and the pet owner. The Appellant maintained that this
was a taxable supply of services. The European Court of Justice in,
Staatssecretaris van Financien v Cooperatieve Aardappelenbewaarplaats (Case
154/80) [1981] ECR 445 and Tolsma Inspecteur der Omzetbelasting Leeuwarden
[1994] STC 509 has emphasised that a provision of services is taxable only if
there is a direct link between the service provided and the consideration
received.
53.
The Tribunal concludes from its findings there was no direct link
between the registration fee paid by the pet owners to the Appellant and the
veterinary services supplied by the Pet Aid practices. The registration fee was
paid regardless of whether the animal of the registered Pet Owner received
treatment during the currency of the eligibility certificate. The amount of
the registration fee was flat and had no relationship to the costs of the
veterinary services provided under the Pet Aid scheme. The pet owner paid no
consideration to the Pet Aid practice which was required to provide the
veterinary services free of charge. The Appellant did not provide the
veterinary treatment direct to the pet owners.
54.
In this respect it is helpful to compare the facts of this Appeal with that
for the Tribunal decision in RSPCA. Here the RSPA provided veterinary
services direct to per owners who were unable to pay for private veterinary
fees. At the end of the treatment the RSPCA gave a bill, which was based on the
owner’s ability to pay, for its services. RSPCA expected the owners to meet the
bill, although not all owners paid up. RSPCA excused no cases from payment. The
Tribunal at page 17 of the decision said:
“I also hold that where payments were made for
treatment there was a direct link and on that point I accept the submission of
Mr Thornhill who posed the question why was the payment made? to which
the answer followed because the treatment had been carried out, nor do
I consider that the policy of RSPCA not to enforce such payments makes any
difference”.
55.
The direct link found between the treatment and the fee paid by the pet
owner in RSPCA was not present in this Appeal. In the RSPCA case
the pet owners were given a bill for the cost of the treatment and expected to
pay for it or at least make a contribution, the amount of which was related to
the cost of providing the supply. The registration fee paid to the Appellant by
the pet owners had no relationship to the treatment costs given by Pet Aid
practices. There was no element of sufficient reciprocity between the payment
of the fee and the treatment received.
56.
The question, therefore, what was the precise character of the
registration fee. The Appellant in its documentation described it as an
administration charge or to assist with administration costs of the Pet Aid
scheme. The benefit given by payment of the fee subject to meeting the other
eligibility requirements was receipt of a Pet Aid certificate which entitled
the holder to free treatment of his sick or injured pet from a Pet Aid
practice.
57.
The Tribunal finds that
(1)
The size of the registration fee was not related to the potential
benefits afforded to the pet owner from the Pet Aid scheme. The fee was a flat
fee which was the same for all pet owners. The amount was nominal which has
only seen a small increase since the inception of the scheme in 1993. Under the
scheme pet owners received different degrees of benefit from no to expensive
treatment for the same payment. The Tribunal is satisfied that the necessary
reciprocity or direct link has not been established between the payment of the
registration fee and the benefits under the Pet Aid scheme (see Apple &
Pear Development Council v CCE (Case 102/86) [1988] STC 221 at 235).
(2)
The purpose of the payment was to give the Pet Owner access to free
veterinary services, which has been funded overwhelmingly (93.34 per cent) by
charitable donations. The provision of free veterinary services to sick and injured
animals of owners unable to pay for private veterinary fees was the Appellant’s
charitable object not incidental to the object.
58.
In view of its findings the Tribunal agrees with HMRC’s
characterisation of the registration fee which was that it was outside the
scope of VAT. The fee was a contribution to cover the administration costs of
the Appellant, and not a taxable supply by the Appellant in the course or
furtherance of any business carried on by it.
59.
The Tribunal holds that the Appellant’s activities in so far as they
related to the operation of the Pet Aid scheme did not constitute economic
activities. The Pet Aid scheme did not involve the Appellant in the making of
taxable supplies. The Pet Aid scheme in reality was the manifestation of its
charitable object the provision of free veterinary services to owners unable to
afford private veterinary fees. The Pet Aid scheme was funded by charitable
donations. The Pet Aid scheme was not concerned with the making of taxable
supplies to consumers for a consideration. Further the activities of the Pet
Aid Scheme were not of a kind which, subject to differences of detail, commonly
made by those who seek to profit by them.
To Whom Issue
60.
This issue is only relevant if the Tribunal is wrong on its finding that
the Appellant did not engage in economic activities in relation to the
operation of the Pet Aid scheme. The to whom issue presupposes that the
Appellant was making a taxable supply to the pet owners in consideration of the
registration fee. The dispute between the parties was whether the veterinary
services of the Pet Aid practices were supplied to the Appellant alone or to
both the Appellant and the pet owner or to the pet owner alone. If the Tribunal
finds that either one of the first two situations applied, the Appellant was
entitled to recover the VAT charged on the veterinary services in furtherance
of its taxable supplies to the pet owner. If the Tribunal finds that the supplies
of the Pet Aid practices were to the pet owners alone, the Appellant was not
entitled to recover the VAT charged on the veterinary services.
The Parties’ Representations
61.
The Appellant submitted that ultimately the to whom issue was a
question of fact. The proper inference to be drawn from the facts was the
supply of veterinary services by the Pet Aid practices was made to the
Appellant or to the Appellant and the registered pet owners.
62.
The Appellant played the key role at all stages in the Pet Aid scheme by
first arranging payment of the registration fees which enabled access for
registered pet owners to the veterinary services of the Pet Aid practices, and
then actively providing those veterinary services by means of its contracts
with Pet Aid practices. According to the Appellant there was close
collaboration between the Appellant and the Pet Aid practices. The fact that
the pet owners were described as the clients of the Pet Aid practices was not
determinative of the issue. The VAT invoices issued by the Pet Aid practices
named the Appellant as the payer of the services.
63.
The Appellant contended as a matter of law that where a person arranges
a supply and receives a benefit from that supply for which he pays that supply
is made to him. It is irrelevant that the same transaction may also constitute
a supply to someone else (C&E Comrs v Redrow Group Plc [1999] STC 161. The Appellant received benefits from paying for the veterinary services,
namely, enabling the fulfilment of its charitable object and simultaneously
discharging its obligations to the pet owners. In the Appellant’s view the
payment to the Pet Aid practices did not constitute third party consideration.
The decision of The Court of Justice in Loyalty Management v R & C
Comrs. (Case C-53/09 and C-56/09) [2010] STC 2651 was concerned with
business promotion schemes and had no relevance to the disputed issues in this
Appeal. Essentially the Appellant was involved in one overall transaction not
two separate transactions.
64.
The Appellant saw no merit in HMRC’s argument that a finding in its
favour compromised the fundamental principle that VAT was a tax on consumption.
According to the Appellant the reason why the pet owners only paid VAT on the
registration fees and not on the veterinary fees was that they indirectly
received the benefit of large charitable donations which was VAT free. The
Appellant stated that its situation was analogous to zero-rated supplies which
were subsidised by every taxable and exempt supplies, in that the input tax was
recoverable even though no output tax was paid.
65.
HMRC disagreed with the Appellant’s submissions contending that VAT was
charged at each stage of the supply chain and that where there was a supply for
consideration by a taxable person the final burden fell on the consumer. The
Court of Justice in Loyalty Management emphasised that consideration of
economic realities was a fundamental criterion for the application of the
common system of VAT. Such consideration involved identifying the nature of the
transactions involved.
66.
According to HMRC the facts of this Appeal showed that the veterinary
services were supplied solely to the pet owners. The Pet Aid practices and the
Appellant regarded the pet owners as clients of the practices. When treatment
was required the registered pet owner would take his sick or injured animal to
the Pet Aid practice. The diagnosis and the treatment were made by the Pet Aid
practice in consultation with the owner. The practice was obliged to provide
that treatment without consultation with and or approval from the Appellant.
Under this arrangement the pet owner was liable to pay for the treatment. The
only reason that he did not was because of his financial circumstances. The
Appellant in pursuit of its charitable object provided Pet Aid practices with a
pool of money to pay for the treatment of animals belonging to registered pet
owners. This pool of money constituted third party consideration for the
supplies to pet owners which meant that the VAT incurred was irrecoverable as
the supplies were to the final consumer, the pet owner.
Reasons
67.
The Tribunal identifies the following legal principles which are
relevant to the determination of the to whom issue:
(1)
The principle of the common system of VAT involves the application to
goods and services up to and including the retail trade stage, of a general tax
on consumption exactly proportional to the price of the goods and services
whatever the number of transactions which take place in the production and
distribution process before the stage at which tax is charged (Banca
popolare di Cremona Soc Coop arl v Agenzia Entrate Ufficio Cremona (Case
C-475/03) [2006] ECR I – 973).
(2)
The consideration of economic realities is a fundamental criterion for
the application of the common system of VAT, and secondly as regards the
identification of the person to whom goods/services are supplied (Auto Lease Holland BV v Bundesamt fur Finanzen (Case C-185/01) [2005] STC
598).
(3)
Only an economic definition of the supply of goods/services (Tribunal’s
italics) is compatible with the objectives of the VAT directive. This view is
in accordance with the purpose of the VAT directive, which is designed inter
alia to base the common system of VAT on a uniform definition of taxable
transactions. This objective might be jeopardised if the pre-conditions for a
supply of goods/services varied from one member state to another (Auto
Lease).
(4)
Identification of the nature of the transactions is necessary to provide
an answer to the to whom question (Loyalty Management).
(5)
It is not a requirement of the VAT directive that for a supply of goods
or services to be effected for consideration, the consideration for that supply
must be obtained directly from the person to whom the goods or services are
supplied. The directive provides that the consideration may be obtained from a
third party (Loyalty Management).
(6)
The six characteristics of a supply of services are (1) it must have
constituted a transaction, (2) something must have been done by the person said
to have made the supply, (3) that which was done must not fall within the
definition of a supply of goods, (4) that which was done must have been
capable of being used by and for the benefit of an identified recipient (5) the
benefit given to an identified recipient must be capable of being regarded as a
cost component of the activity of another person in the commercial chain, (6)
that which was done must have been done for a consideration: (a) there must be
a legal relationship between the provider of the service and the service; (b)
pursuant to the relationship there must have been reciprocal performance; (c)
to amount to consideration the remuneration received by the provider of the
service must constitute the value actually given in return for the service
supplied (Mirror Group Newspapers Ltd v C & E Commrs [2000] STC 156).
(7)
The fact that someone else had also received a service as part of the
same transaction, did not deprive the taxable person who had instructed the
service and who had to pay for it, of the benefit of the deduction (Redrow
Group plc). The Tribunal did not accept HMRC’s submission that the decision
in Loyalty Management had questioned the correctness of the decision in Redrow
Group plc.
(8)
But to ask who benefited from a service is not necessarily to find the
answer to the question of to whom the service was supplied (R&C
Commrs. v Jeancharm Ltd [2005] STC 918).
68.
Turning to the facts of the Appeal, the Tribunal agrees with HMRC’s
analysis that the economic reality of the Pet Aid scheme was that it consisted
of three separate transactions, namely:
(1)
The Appellant and registered pet owners, whereby the owners pay a charge
to the Appellant and are issued with a certificate of eligibility which
entitles the owners to free veterinary services from Pet Aid practices for
their nominated pets during the currency of the certificate.
(2)
The Appellant and Pet Aid practices, whereby the Appellant supplies the
practices with a pool of money to fund the treatment of sick and injured
animals whose owners are unable to afford private veterinary fees.
(3)
The Pet Aid practices and registered pet owners, whereby the Pet Aid
practices provide diagnosis and treatment of the sick and injured animals
belonging to registered pet owners.
69.
The two key transactions for the analysis of the to whom question
were the Pet Aid practices and registered pet owners, and the Appellant and Pet
Aid practices. The nature of the transaction between Pet Aid practices and
registered pet owners comprised taxable supplies of veterinary services. The
Tribunal finds that it was the registered pet owners who initiated the treatment
from the Pet Aid practices by taking their sick or injured animals to the
practice. The diagnosis of the illness and the treatment of the animal were
carried out by the veterinary surgeon in consultation with the pet owners. The
veterinary surgeon was required by his professional code of ethics to administer
the necessary treatment. The Pet Aid documentation emphasised that the
registered pet owners were the clients of Pet Aid practices. On these facts the
registered pet owners were the recipients of the taxable supplies. They used
the service and received a benefit from it. The Appellant, however, pointed out
that it provided the consideration for the supplies not the registered pet
owners. In those circumstances the pet owners could not be the recipients of
the supplies. The validity of the Appellant’s submission depended upon whether
the Appellant’s payment to the Pet Aid practices constituted third party
consideration.
70.
Before considering the question of third party consideration the
Tribunal examines the nature of the transaction between the Appellant and the
Pet Aid practice. The transaction was governed by the terms of a written
agreement which incorporated the rules and guidance notes for the operation of
the Pet Aid scheme. The objective of the agreement was to extend the availability
of a charitable veterinary service to geographical areas where there was no Pet
Aid hospital. The objective was achieved by helping registered pet owners by
paying the cost of the treatment carried out by Pet Aid practices. The Tribunal
is satisfied that the terms of the agreement supported the finding that the
Appellant stepped in for the pet owner and paid his bill for veterinary
services from the Pet Aid practice.
71.
The Tribunal considers that the evidence on the actual arrangements
between the Appellant and the Pet Aid practices reinforced the view that the
Appellant’s role was essentially a funding one. Dr Duff confirmed that the
Appellant’s relationship with the Pet Aid practices was directed at providing
the necessary finance to carry out the treatment of injured and sick animals
belonging to owners unable to afford private veterinary fees and giving the
required administrative support in connection with the Pet Aid scheme. Further
the Tribunal is satisfied on the evidence that the Pet Aid practices were
obliged to administer the treatment required without consultation and or
approval from the Appellant. There was no persuasive evidence that the Pet Aid
practices and the Appellant collaborated with the provision of clinical
services. The Tribunal formed the view that when the Appellant gave clinical
advice it was infrequent and restricted to high level guidance on treatment
within a charitable context. The Appellant did not instruct Pet Aid practices
on the treatment given to sick or injured animals brought in by the registered
pet owners.
72.
The Appellant asserted that it benefited from the supplies of veterinary
services of Pet Aid practices by discharging its essential charitable role and
giving assurance to its donors that their gifts were being deployed to helping
sick and injured animals. The fact that the Appellant derived a benefit from
the supplies was not conclusive that it received a service. The Tribunal holds
that the benefits identified by the Appellant were incidental and indirect to
the services supplied by Pet Aid practices. The veterinary services were
directed at treating the particular animal brought into the practice by the pet
owner.
73.
Equally the Tribunal considers the fact that the invoice for veterinary
services was in the name of the Appellant did not determine the identity of the
recipient of the services. The invoice took the form of a self billing invoice
prepared by the Appellant. This arrangement was a reflection of the
administrative strictures imposed by the Appellant to ensure financial control
of the Pet Aid scheme. The Tribunal is of the view that the details of the self
billing invoice were outweighed by the compelling evidence supplied by the
written terms and the actual arrangements for the transaction between the
Appellant and the Pet Aid practices.
74.
The Appellant argued that the facts of this Appeal were very different
from those in Loyalty Management. The capitation fees paid to Pet Aid
practices were not related to the number of treatments provided by the
practices. Further the Appellant was simply outsourcing the supply of
treatments which it would have made in its own veterinary hospitals. The
practices did not own anything and the pet owners made no payment for the
treatment other than the registration fees.
75.
The significance of the Loyalty Management decision for this
Appeal was not its specific facts which the Tribunal accepts were directed at
business promotion schemes but the restatement of general principles that
effect the application of the common system of VAT. The key principles
identified in Loyalty Management which were relevant to this Appeal
related to the economic reality, the nature of the transactions, and the
existence of third party consideration. The Tribunal has already dealt with its
findings on the nature of the transaction between the Appellant and Pet Aid
practices, concluding that essentially it was one of funding the veterinary
bills on behalf of the registered pet owners.
76.
The Appellant contended that its funding of the Pet Aid practices did not
constitute third party consideration because the capitation fees were not
related to the number of treatments provided by the Pet Aid practices. The
Tribunal notes that this argument could also be deployed against the
Appellant’s assertion that it was the recipient of the veterinary services
supplied by the Pet Aid practices.
77. The Court of Justice
in a series of cases
sets out the criteria for determining whether a supply of goods/services was
effected for consideration which apply equally to the question of third party
consideration and can be summarised as follows:
(1)
There must be a direct link between goods supplied or services provided
and the consideration received.
(2)
There must be a legal relationship between the supplier and recipient
pursuant to which there is reciprocal performance, the remuneration received by
the supplier constituting the value actually given in return for the supply.
(3)
The consideration must be capable of being expressed in money.
(4)
The consideration is a subjective value.
78. The Appellant’s
argument regarding capitation fees and the number of treatments is dealt with
by the subjective value criterion. Lord Walker of Gestingthorpe in Lex
Services plc [2003] UKHL 67 at 79 explained subjective value:
“…. that such consideration is a subjective value
since the basis of assessment for the provision of services is the
consideration actually received and not a value assessed according to objective
criteria”.
79. Lord Walker
referred to Lord Justice Hobhouse’s formulation of subjective value in Rossgill
Group Limited v Customs and Excise Commissioners [1997] STC 811:
“The second question involved the value of the
barter element in the supply of the blouse. The value is that which the parties
put on it, attributed to it, in the actual transaction between them. It is not
a valuation exercise but simply the giving of an answer to a factual question,
which is normally a simple exercise. In the present case the answer is provided
by the parties own documentation”.
80.
The Pet Aid contract documentation specified that the capitation fees
together with additional sums for chronic conditions provided a pool of money
out of which those registered pets that fell sick or injured must be treated
free of charge. In the Tribunal’s view it was clear from the documentation that
the Appellant’s monthly payments constituted consideration for the individual
treatments given by the Pet Aid practices, and in that respect represented
third party consideration. Dr Duff confirmed that the Pet Aid practices viewed
the funding arrangements as commercially viable which demonstrated that the
consideration received was related to the actual value of the treatments
administered to the animals of the registered pet owners.
81.
The Tribunal’s conclusion that the pet owners were the recipients of the
supplies of the Pet Aid practices, and that the Appellant’s role was restricted
to providing the pet owners with the necessary funds to pay for the services
was highlighted by the special payment element of the Pet Aid scheme. Here the
Appellant would cover any shortfall of up to ₤200 in the veterinary fees
that a pet owner was liable to pay provided the owner met the eligibility
requirements for the Pet Aid scheme. Where a special payment was made the owner
was required to discharge any outstanding fees for the initial course of treatment
to his sick or injured animal. The special payment regime displayed in sharp
contrast the precise nature of the respective transactions. The pet owner was the
consumer of the veterinary supplies with the Appellant stepping in and meeting
the shortfall so that the pet owner could fulfil his obligation to pay the bill
for those services.
82.
The Tribunal summarises its findings as follows:
(1)
The pet owners instructed the Pet Aid practices to treat their sick and
injured pets, and received the benefit of those supplies of veterinary services
in the form of diagnosis and treatment of their animals.
(2)
The pet owners had an agreement with the Appellant that it would pay for
the veterinary services on their behalf.
(3)
The Appellant did not instruct the Pet Aid practices on the treatment of
the sick and injured animals belonging to registered owners.
(4)
The Pet Aid practices administered the treatment to the sick or injured
animals without consultation with or the approval of the Appellant.
(5)
The benefits identified by the Appellant of essentially furthering its
charitable objects were incidental and indirect to the services supplied by Pet
Aid practices.
(6)
The fact that the self billing invoice named the Appellant for the
purposes of paying the veterinary services was not determinative of the
identity of the recipient of the veterinary services.
(7)
The nature of the Appellant’s relationship with the Pet Aid practices
was that it stepped in for the pet owner and paid his bill for the veterinary
services.
(8)
The capitation and additional payments for chronic conditions funding
arrangements was the agreed method for paying for the individual treatments.
83.
The Tribunal concludes from the above findings that the registered pet
owners were the recipients and the consumers of the veterinary services from
the Pet Aid practices. The Appellant was not a recipient of those services
either on its own or in conjunction with the pet owners. The Appellant’s
payment to the Pet Aid practices constituted third party consideration. The
Appellant was, therefore, not entitled to recover the VAT incurred on the fees
of the Pet Aid practices.
84.
The above analysis is consistent with the principles underpinning the
common system of VAT. The Appellant asserted that the supplies of the Pet Aid
practices were used for the purpose of its taxable supplies to the registered
owners in the sense that there was a direct and immediate link between the two
supplies with the veterinary services being a cost component of the taxable
supplies. In this respect the Tribunal agrees with HMRC’s submission that the
concept of direct and immediate link incorporates an economic relationship
between the cost of the incoming supply and the price of the outgoing supply.
In this Appeal the Tribunals finds that there was no direct and immediate link
between the two supplies because the cost of the veterinary treatments as
compared with the price charged for registration was so disproportionate with
costs exceeding price by 1,500 per cent.
85.
The Tribunal’s decision that the pet owner is the recipient and the
consumer of the veterinary supplies results in a position which conforms to the
common system of VAT. The pet owner as final consumer is not entitled to
recover the VAT incurred on the supplies and the economic relationship between
cost and price in the transaction chain is upheld.
Insurance Issue
86.
This only comes into play if the Tribunal is wrong on either the
non-economic or the to whom issue. The issue presupposes that the
supplies of the Pet Aid practices were made to the Appellant. Given that
position the Appellant states that it was entitled to recover the VAT on the
supplies of the veterinary services because they were a cost component of the
taxable supplies to the registered pet owners. HMRC disagrees contending that
the supplies to the taxable owners were exempt supplies of insurance services.
The Parties’ Representations
87.
The Appellant contended that the registration fee paid by the pet owners
was not an insurance premium because there was no risk allocation by it.
Insurance contracts provided for a sum of money to be payable on a contingency,
for example, fire in a building or getting ill on holiday. According to the
Appellant, there was no contingency element in the transaction between the
Appellant and the pet owner. Once the pet owner was registered, the Appellant
was liable to pay the capitation fees to the Pet Aid practices without the need
for a further event to occur. In the Appellant’s view there was simply a
commercial bargain between the Appellant and the Practices.
88.
HMRC argued that the transaction between the Appellant and the pet
owners had all the essential hallmarks of an insurance transaction. The
situation here was that in return for prior payment of the registration fee,
the Appellant indemnified the pet owner against the cost of veterinary
treatment for his sick or injured animal provided the treatment fell within the
scope of the Pet Aid scheme. The registration fee was akin to a premium, and
the risk covered by the Appellant was illness or injury to the animal belonging
to the pet owner.
Reasons
89.
Group 2 of schedule 9 of the VAT Act 1994 exempts from VAT insurance
transactions and reinsurance transactions. Prior to 1 January 2005 the
exemption was restricted to a supply of insurance made by a permitted insurer.
The legislation was changed as a result of the decision of the Court of
Justice in Card Protection Plan Ltd v C & E Commrs (Case C-349/96)
[1999] STC 270 which ruled that any person supplying insurance qualified for
the exemption, as did supplies of insurance transactions effected by block
policyholders.
90.
There is no legal definition of insurance. The Court of Justice in Card
Protection Plan stated [1999] STC 270 at 291:
“16. The Sixth Directive does not define the
expressions 'insurance transactions' and 'insurance agents' used in art 13B(a).
17. With respect, first, to the interpretation of
the expression 'insurance transactions', it must be observed that EC Council
Directive 73/329 does not define the concept of insurance either. However, as
the Advocate General states in para 34 of his opinion, the essentials of an
insurance transaction are, as generally understood, that the insurer
undertakes, in return for prior payment of a premium, to provide the insured,
in the event of materialisation of the risk covered, with the service agreed
when the contract was concluded.
18. It is not essential that the service the insurer
has undertaken to provide in the event of loss consists in the payment of a sum
of money, as that service may also take the form of the provision of assistance
in cash or in kind of the types listed in the annex to EC Council Directive
73/239 as amended by EC Council Directive 84/641. There is no reason for the
interpretation of the term 'insurance' to differ according to whether it appears
in the directive on insurance or in the Sixth Directive.
19. Moreover, it is common ground that the
expression 'insurance transactions' in art 13B(a) covers in any event cases
where the transaction is carried out by the actual insurer who has undertaken
to cover the risk insured against. As the United Kingdom government has
correctly pointed out, it is for the national court to determine whether CPP
itself has accepted insurance obligations”.
91.
In Medical Defence Union v Department of Trade [1979] 2
All ER 421 the judge held there must be three specific elements present in any
contract of insurance:
(1)
the contract must provide that the insured will become entitled to
something on the occurrence of some event;
(2)
the event must be one which involves some element of uncertainty and
(3)
the insured must have an insurable
interest in the subject matter of the contract.
92.
VAT Notice 701/36 which sets out HMRC’s policy on
insurance regarded generally something as insurance for VAT purposes if it was
an activity that required the provider to be authorised as an insurer under the
provisions of the Financial Services and Markets Act 2000 (FSMA). The
provisions of FSMA make it illegal for UK businesses to effect contracts of
insurance without being authorised to do so (with the exception of certain
bodies specifically granted exemption from the need for authorisation). The VAT
notice acknowledged the decision in Card Protection Plan and that
insurance supplied by unauthorised insurers was exempt from VAT. The VAT
Notice, however, warned that HMRC might refer unauthorised insurers to the
Financial Services Authority in case it wished to prosecute.
93.
At the hearing the Tribunal expressed concerns about the
presentation of this issue particularly by HMRC. Until raised by the Tribunal
there was no reference to the legal position prior to 1 January 2005 which
affected part of the period covered by the voluntary disclosures. The evidence
did not deal with the question of whether the Appellant was an authorised
insurer. The Tribunal acknowledges that the burden of proof is on the
Appellant. The Tribunal, however, considers that HMRC has some responsibility
to establish what it asserts on the issue of insurance.
94.
In some respects the analysis of the insurance issue is
strained by the fact that it is the third alternative scenario presented by
HMRC for denying the Appellant’s voluntary disclosures. This means that the
Tribunal has to assume that the Appellant was engaged in economic activities in
respect of the Pet Aid scheme and that the supplies of the Pet Aid practices
were made to the Appellant. Those assumptions are contrary to the Tribunal’s
findings on the first two issues which are in the alternative. In the
Tribunal’s view it may have been better for HMRC to focus its case on a narrower
range of issues.
95.
The Tribunal is required to make decisions on the evidence
and the arguments presented to it. It is not the Tribunal’s job to make good
the deficiencies in the parties’ presentations.
96.
The Tribunal finds that the economic reality of the
transaction between the Appellant and the pet owners was not one of insurance.
The registration fee did not have the characteristics of a premium. It was a
flat fee and had no relationship to the potential costs of the purported risks
of injury or illness to the pet. Payment of the registration fee gave the pet
owner access to free veterinary services during the currency of the
registration certificate without the necessity of making a claim when his
animal fell ill or was injured. There was no evidence that the Appellant had
accepted insurance obligations in respect of the Pet Aid scheme. The Tribunal
holds that the transaction between the Appellant and the pet owners was not an
exempt supply of insurance.
Decision
97.
The Tribunal decides that
(1)
The Appellant’s activities in so far as they related to the operation of
the Pet Aid scheme did not constitute economic activities.
(2)
The registered pet owners were the recipients and the consumers of the
veterinary services from the Pet Aid practices. The Appellant was not a
recipient of those services either on its own or in conjunction with the pet
owners.
(3)
The transaction between the Appellant and the pet owners
was not an exempt supply of insurance.
98.
In view of the Tribunal’s decision on the economic issue and in the
alternative on the to whom issue, the Appellant is not entitled to
recover the VAT incurred on the veterinary fees of the Pet Aid practices. The
Tribunal, therefore, dismisses the Appeal.
99.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
TRIBUNAL JUDGE
RELEASE DATE: 30 May 2012
