United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20627

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Carl John William Denton (t/a Denton Auto Repairs v Revenue & Customs [2008] UKVAT V20627 (18 March 2008)

20627

OUTPUT TAX – garage arranging for MOT tests from an authorised testing centre – whether acting as a principal or an agent – agent – whether art 79 of the Recast VAT Directive requires the price paid to the authorised test centre to be disclosed to the customer – no – appeal allowed

LONDON TRIBUNAL CENTRE

CARL JOHN WILLIAM DENTON

T/A DENTON AUTO REPAIRS Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

ELIZABETH MACLEOD CIPM

Sitting in public in London on 13 March 2008

The Appellant appeared in person with his wife Mrs H Denton

Alexander Ruck Keene, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Mr Carl Denton trading as Denton Auto Repairs appeals against an assessment made on 18 May 2007 and subsequently reduced to £3,711 plus interest. The Appellant appeared with his wife Mrs H Denton; the Respondents ("Customs") were represented by Mr Alexander Ruck Keene.

The issue in this appeal is whether the Appellant acts as a principal (as Customs contend) or an agent (as he contends) when he obtains an MOT test certificate from an authorised garage for his customer.

We find the following facts:

(1) The Appellant has carried on business since 1988 servicing and repairing cars at unit 4, New Town Road, Luton.

(2) The Appellant is not authorised to carry out MOT tests. He has an arrangement with Eaton Green Motors ("Eaton Green") to carry out MOT tests. They are separated from the Appellant's workshop by two other workshop buildings in which other traders carry out work on tyres and exhausts, and bodywork respectively (and if Eaton Green are not able to carry out a particular test he has another arrangement with a garage 15 minutes walk away; to save repetition anything said about Eaton Green is also applicable to the other garage unless otherwise stated). From the photograph that we saw, anyone standing outside the Appellant's workshop would be able to see that Eaton Green were an official MOT test centre from the sign with three triangles outside its building, three workshops away. At the time with which we are concerned, Eaton Green charged the Appellant £38 for a MOT test. This discount is not available to the public. The maximum charge for MOT tests was at the time £44.50 which is what the Appellant charged its customers, and this is also the amount that Eaton Green charged to the public.

(3) The Appellant normally combines the MOT test with a service. He opens at 8 am and will check points like lights and the horn before taking the vehicle to Eaton Green for the MOT test at say 9 am. If the vehicle fails the test the Appellant will correct the fault and have the vehicle retested by Eaton Green during the day, for which they will not charge a second fee. If the customer went directly to Eaton Green and the vehicle failed the test, the customer would have to book the vehicle into the Appellant for the fault to be rectified, and then arrange another appointment with Eaton Green for which it would be charged the test fee again. Arranging for the MOT test through the Appellant is therefore an advantage to the customer which costs the customer nothing extra.

(4) Cars are booked for MOT tests with Eaton Green by the Appellant in the name of "Carl D." They issue a monthly invoice to the Appellant listing the registration numbers of the cars tested. (If the other authorised testing centre is used the Appellant pays in cash at the time of the test.)

(5) The Appellant's customers, who are almost entirely regular customers, are aware that the Appellant does not carry out the test itself from the absence of an official test centre sign outside the Appellant's workshop and the presence of such a sign outside Eaton Green, and that the test will be carried out elsewhere, usually at Eaton Green.

(6) There is no notice displayed by the Appellant for customers about the arrangement between himself and Eaton Green. The price paid by the Appellant to Eaton Green for the MOT test is not disclosed to the customer.

(7) The Appellant issues handwritten invoices for MOT tests which merely state the £44.50 charge without any reference to VAT. Where the test is carried out at the same time as a service, the charge for the service (separating out labour and spares) is set out separately with VAT added to it and the test fee is shown separately at the end. In his books the Appellant shows the breakdown between of the charge paid to Eaton Green, his own charge and the VAT element included in his own charge.

(8) An MOT test certificate refers to the vehicle's registration number and particulars but does not name the owner. The certificate runs with the vehicle (to use an analogy of covenants running with land) whoever owns it.

We infer from these facts:

(1) It is obvious to Eaton Green that the vehicles which they test belong to the Appellant's customers but their concern is with the vehicle not the owner.

(2) Eaton Green look to the Appellant and not to the vehicle owner for payment.

A number of previous Tribunal decisions have considered the same issue each based on different facts. Mr Ruck Keene agreed with the distinction made in Jamieson v HMRC (2007) VAT Decision 20269 that the Tribunal had to choose between the following possible alternatives:

(1) The Appellant contracted with his customer to procure an MOT test for that customer and he then had a sub-contract relationship with Eaton Green, to which he (and not the customer) was alone the contracting party. In such case the Appellant's service would be to procure an MOT test for the customer and the whole £44.50 is liable to (and includes) VAT. We shall refer to this alternative as the Appellant being a principal.

(2) The Appellant acted as agent for the customer, booking an MOT test on behalf of the customer, so that that there was implicitly a contract between the customer and Eaton Green for the performance of the test. In such case the Appellant's service was confined to the agency service and only £6.50 would be liable to (and includes) VAT. We shall refer to this alternative as the Appellant being an agent.

The Appellant contends that he was an agent.

Mr Ruck Keene, for Customs contends the Appellant was a principal, on the basis that:

(1) Eaton Green would not charge the discounted fee of £38 to the public. The Appellant did not pass on this discount to the customer.

(2) The charge is not broken down on the invoice.

(3) The customer is not told that the Appellant makes a profit. If the Appellant were an agent this would be a secret profit.

(4) If the Appellant were an agent he would be obliged to keep the fee charged by Eaton Green separate from his own money. He also had a duty to produce to the customer accounts of his dealings and transactions in the course of his agency, and to produce to the customer all books and documents in his hands relating to their MOT test. Since he did none of these things the evidence is more consistent with his not being an agent.

(5) There are no other factors pointing towards agency, such as the notice to customers that existed in Jamieson.

(6) The case was analogous to that in Customs and Excise Commissioners v Plantifor [2002] 1 WLR 2287 in which Plantifor contracted to arrange delivery on its customer's behalf via Royal Mail Parcelforce, and it agreed to advance all postage charges to Royal Mail on the customer's behalf. As Lord Millet said at [67]:

"What the customer received for his money was the benefit of the arrangements which Plantifor had made with Parcelforce to deliver its customer's goods to his order without charging him in the normal way. Since Plantifor made this supply for a consideration, it was a taxable supply."

(7) The Appellant did not comply with Notice 700 para 25.1.1 for treatment of the payment to Eaton Green as a disbursement. For example, the Appellant acted in his own name when booking the MOT test with Eaton Green; the customer was not responsible for paying Eaton Green; the customer did not authorise the Appellant to pay them on his behalf; the amount paid was not separately invoiced; and the Appellant did not recover the exact amount paid to the third party.

(8) If, contrary to his main submission we did find the Appellant to have been an agent, art 79 of the Recast VAT Directive is not satisfied. We deal with this contention separately below.

None of the parties to the various contracts—the customer with the Appellant and the Appellant and Eaton Green—have specified the nature of the legal relationship they intended to create. We therefore start by looking at what a reasonable man would conclude from the facts we have found. Since the customer is aware that the Appellant is not authorised to perform MOT tests and Eaton Green is, and an MOT certificate runs with the vehicle, it seems to us that the reasonable man would conclude that the Appellant would, on behalf of the customer, obtain the MOT test for the benefit of the vehicle (and hence its owner at the time) from someone authorised to provide it. Similarly, the reasonable man would say that Eaton Green were performing the MOT test for the benefit of the vehicle (and hence the owner who was required to have a certificate), rather than the Appellant. It is the customer who wants an MOT test carried out on his vehicle; the Appellant has no interest in whether the customer has one. Suppose a certificate were refused for a vehicle that should have been given one, it would be the owner of the vehicle who would want to complain. These factors point towards an agency analysis.

Against the agency analysis is the important case of Plantifor which concerned the somewhat similar circumstances of Plantifor contracting with Parcelforce for something that it could not itself provide, namely delivery. However factually the situation was rather different. Parcelforce had contracted with Plantifor for bulk delivery with a minimum annual delivery requirement that affected the price per item so that the price could not be attributed to any particular customer. There, nobody suggested that the future customers of Plantifor were an undisclosed principal to that contract. Here the customer needs the MOT certificate, which runs with the customer's vehicle, that Eaton Green (and not the Appellant) can supply. The relationship between the Appellant's customer and Eaton Green is much closer and there is no difficulty in concluding that the customer is an undisclosed principal, or perhaps since it is the vehicle that is important, that the vehicle is disclosed and the name of its owner is irrelevant to the transaction. The second objection to the agency analysis is that Eaton Green looks to the Appellant for payment. This seems a neutral factor to us because if the Appellant is an agent, the customer is an undisclosed principal to whom Eaton Green could look for payment if the Appellant did not pay (which has never occurred). Next, if the Appellant is an agent it means that he was making a secret profit of £6.50. Realistically, the customer is not likely to care about that because he knew (or could easily find out) that even if he took his vehicle to Eaton Green, which was only a few doors away, he would still have to pay £44.50. Presumably therefore he values the service that the Appellant is providing and is willing for the Appellant to make a profit, whatever it is. Lastly, if the Appellant is an agent he should put the £38 when received from the customer into a separate account so that when asked by Eaton Green to pay it at the end of the month he had the money available. We also suspect that if the customer had been told that he was at risk of paying again if the Appellant failed to pay, we consider that the customer, as a long-standing customer of the Appellant, would say that this was not a serious risk.

Should we therefore regard the Appellant as an agent who has done something to which the customer could (but is most unlikely to) object, or does this tip the balance away from agency towards the Appellant being a principal? We consider it is the former. We regard the main factor as being that only Eaton Green are authorised to issue test certificates which run with the vehicle and therefore it is the customer who wants it. It seems unlikely that the customer would contract with the Appellant to procure what he knows the Appellant cannot do without the services of Eaton Green, rather than the customer contracting with the Appellant to assist him in obtaining on the customer's behalf the test certificate from Eaton Green.

Accordingly we consider that the Appellant acted as an agent and we so find.

Mr Ruck Keene's second contention, on the basis that we find that the Appellant is an agent, is the novel one that Article 79 of the Recast VAT Directive (formerly art 11A(3)(c) of the Sixth Directive the wording of which is virtually identical) requires the Appellant to specify to his customer the actual amount of the expenditure incurred on behalf of the customer in order for the disbursement to be excluded from the taxable amount. Article 79 provides:

Article 79

The taxable amount shall not include the following factors:

…

(c) amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer, and entered in his books in a suspense account.

The taxable person must furnish proof of the actual amount of the expenditure referred to in point (c) of the first paragraph and may not deduct any VAT which may have been charged.

He contends that it is implied that the taxable person must furnish proof to the customer so that, for example, the taxable person cannot make a secret profit out of the transaction. Very properly he drew our attention to the only other reference in the Directive to furnishing of proof, that of proof of export in art 147(2) second paragraph, which in the context must mean furnishing it to the tax authority.

Having found that the Appellant is an agent, we consider that art 79 is in point, reading the reference to the civil law concept of contracting in the name of the principal, in terms of which the Directive is drafted, as meaning that legal relations are created between the principal and the third party, as opposed to the agent contracting in his own name (as in art 28, and art 14(1)(c) except in the English version which is a mistranslation) where the legal relations in civil law are solely between the agent and the third party. In English law even where the principal is undisclosed there are legal relations between the principal and the third party. The context of art 79 is that arts 73 to 77 specify the taxable amount in various circumstances. Article 78 provides that the taxable amount shall include various items, and art 79 that it does not include certain items. The taxable amount is a matter in which the taxable person and the tax authority are primarily interested. The last part of the paragraph that follows para (c) deals with the prohibition of deduction of VAT by the taxable person, which is also consistent with this being a provision dealing with the relationship between the taxable person and the tax authority. Accordingly we consider that the reference to furnishing proof relates to furnishing proof to the tax authority and not to the customer. In other words, art 79 provides that the taxable person does not pay output tax (and is not entitled to input tax credit) for amounts paid on behalf of its customer which are entered in a suspense account, that is do not go through his books normally, so long as the taxable person proves the amount of the payment to the tax authority. Accordingly on the basis of this interpretation, art 79 does not assist Mr Ruck Keene.

A more fundamental objection, which we did not think of until after the hearing and were therefore unable to put to Mr Ruck Keene, is that he cannot point to any domestic tax law requirement that corresponds to art 79(c) except for Notice No 700 para 25.1.1, which is advice not law. Accordingly, even if we had agreed with Mr Ruck Keene's interpretation of art 79, he would not have been able to rely on it since it has not been given effect in domestic law. While he is no doubt correct in saying that this requirement is inherent in the law of agency, it is a requirement as between the agent and his principal. If a tax result is made to turn on compliance with it, that requires tax legislation. Accordingly, we find in favour of the Appellant in relation to art 79 of the Directive.

The result is that we find that the Appellant was an agent in obtaining MOT tests for his customers and we allow the appeal. Strictly, the Appellant should re-invoice his customers to show the charge by Eaton Green separately but very sensibly Customs agreed at the hearing to waive the requirement in this case, which would be of no benefit to the customer. We direct Customs to repay the amount of the assessment paid by the Appellant with interest at base rate plus 2 per cent. We also direct Customs to pay the Appellant's travelling costs attending the appeal and any other out-of-pocket expenses to which a litigant in person is entitled to claim.

If we may add a postscript agreeing with the Tribunals in Jamieson and Lower and Lower v HMRC (2008) VAT Decision 20567 that Customs guidance is completely unhelpful to people like the Appellant who was doing his best to comply with the law while running a vehicle repair business. We are grateful to Mr Ruck Keene for his detailed analysis of the law of agency, most of which the Appellant not surprisingly said went over his head, but garages are not interested in understanding fine points of law, and nor should they be required to do so. There is a need for Customs to issue some revised guidance in this area setting out clearly to the public and their officers how garages should avoid the trap of being treated as a principal. The guidance currently given to officers (V1-37 Control Notes para 3.1.2) saying that "If the business is an unapproved garage, they will normally have to 'sub-contract' MOTs to an approved test centre" the disbursement route is available on satisfaction of various conditions depends on the quotation marks round sub-contract to give it the exact opposite meaning.

JOHN F. AVERY JONES

CHAIRMAN

RELEASE DATE: 18 March 2008

LON/07/1708