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  • VAT and Parking: A Brief History

    13 July 2021

    Keith Miller

  • VAT
  • In the first of a series of articles looking at how VAT affects the parking sector, Keith Miller takes a look at how VAT litigation (or the threat of litigation) has changed how VAT applies to the parking sector

    Parking companies will know that applying VAT to their business activities is not always straightforward. HMRC has certainly never found it easy and in my experience most HMRC VAT officers still struggle to understand how parking businesses work.

    Before 2007 – apart from charges for on-street parking and penalty charge notices (PCNs) issued by local authorities – revenue generated from parking-related activities was generally subject to VAT.

    This changed when HMRC accepted that the VAT relief should be extended to PCNs issued on private land (although not penalties, essentially the same as PCNs issued by Local Authorities).  However, HMRC limited this ruling to landowners only, insisting that third-party operators who retained some or all PCN revenue had to pay VAT on this, arguing that retained PCN revenue was effectively payment for services provided to the landowner.

    Changes to HMRC’s VAT policy on PCNs

    HMRC’s policy was challenged by VCS, an operator who kept 100 per cent of PCN revenues at sites managed under the authority of landowners, and in 2013 the Court of Appeal judged that VCS could treat its PCN revenue as VAT free.

    This should have enabled all other operators to follow suit, but HMRC restricted the Court of Appeal’s decision to those operators whose contractual arrangements were similar to those of VCS, arguing that operators with more complex and nuanced arrangements were acting as agent for the landowner and could not treat PCN revenue as VAT free.

    In early 2020, HMRC conceded in principle and amended its published guidance to include all operators who were acting as principal, whether or not they had a legal interest in the land, thus formally acknowledging that the 2013 VCS decision could be applied more widely. The 2015 Supreme Court decision in Beavis vs Parking Eye had proved helpful during the lobbying process by validating arguments put to HMRC and removing obstacles that had been preventing progress. 

    In reality, there is evidence that many HMRC officers are still pursuing the old policy, not aware of changes that have arisen. This creates unnecessary difficulties when dealing with HMRC.

    HMRC’s challenge to operators’ VAT recovery

    Because the scope for VAT-free PCNs has widened, HMRC has sought to mitigate this by seeking a restriction to the level of VAT that operators can recover on costs.  This challenge arose directly from the VCS case, with HMRC arguing that because 92 per cent of VCS’ income was PCN income and therefore not subject to VAT, it was only fair that 92 per cent of the VAT on VCS’ overhead costs should be irrecoverable. The VAT Tribunal agreed with HMRC, so this policy is now being pursued on a wider level.

    Initially, operators were only challenged on VAT recovery when they sought a refund of VAT overpaid on PCN revenue, but HMRC is now challenging operators who have already treated PCNs as VAT free but have not restricted VAT recovery. 

    There are a number of arguments to counter HMRC’s policy on restricting VAT recovery and this is an area that will be the subject of further litigation.

    Other VAT cases

    Although the VAT treatment of PCNs and related costs has been the single biggest VAT issue for operators in recent years, there are other areas in which uncertainty has resulted in appeals being heard in the VAT Tribunal or higher.

    HMRC has typically seen no distinction between off-street car parks operated by local authorities and those operated by commercial operators (applying VAT to both). A group of local authorities challenged HMRC, arguing that local authority off-street parking should be VAT free because it was provided within a special statutory framework.

    Their appeal went as far as the European Court of Justice but ended with HMRC winning the day, essentially on the basis that local authority car parks were in competition with commercial facilities so special VAT treatment could not be applied.

    A similar verdict was reached more recently in the VAT Tribunal when Northumbria Healthcare NHS Foundation Trust argued that charges at its hospital car parks should be VAT-free.  Although the arguments used were subtly different to the arguments used by local authorities, the outcome was the same. 

    Equal treatment between public bodies and private operators was also an interesting aspect of another recent case in the VAT Tribunal, this time on the treatment of ‘overpayments’ made by customers at pay and display machines.  The King’s Lynn and West NorfolkBorough Council successfully argued that such overpayments should be outside the scope of VAT because they were essentially voluntary, not a payment for services.

    Because HMRC had sought to restrict this ruling to local authorities only, National Car Parks (‘NCP’) appealed to the VAT Tribunal, seeking equal treatment with local authorities.  The VAT Tribunal refused NCP’s claim and also suggested that the Kings Lynn appeal should never have been allowed.

    This culminated in HMRC appealing to the VAT Tribunal again, arguing that the original King’s Lynn ruling should be reversed, which it was in February this year, so local authorities once again have to account for VAT on pay and display overpayments.

    If you have any questions in relation this article or any other VAT-related questions, contact Keith Miller.

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