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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Lower & Anor v Revenue & Customs [2008] UKVAT V20567 (11 February 2008) URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20567.html Cite as: [2008] STI 1215, [2008] V & DR 199, [2008] UKVAT V20567

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20567

Value Added Tax – VAT treatment of transactions related to MOT tests – whether fees paid by the Approved Testing Station to a non-approved garage for delivering and collecting cars had to be re-analysed as an effective discount – whether the non-approved garage booked tests as agent for the car-owners – whether the rules in relation to disbursements had been followed – Appeal Allowed

LONDON TRIBUNAL CENTRE

KEVIN JOHN LOWER & MRS SUZANNE JANE LOWER Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: HOWARD M NOWLAN (Chairman)

MRS E M MACLEOD CIPM

Sitting in public in London on 28 January 2008

Suzanne Lower, a partner in the Appellant firm, in person

Alexander Keene, counsel, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION

Introduction

1. This has been a somewhat complex case, partly because it involves two distinct but inter-related points. Moreover this decision will be rendered somewhat longer that is necessary merely to deal with the strict matters under appeal. This is because counsel for HM Revenue and Customs ("HMRC") invited me to try to summarise clearly what I understood the correct legal position to be in relation to the relevant area of law, and to a degree to summarise how I considered that in some respects it should be applied. Whether HMRC accept the decision or appeal against it, and whether they agree with the further comments that I will add will obviously be for them to decide.
2. In this decision I will periodically use the word "we" and sometimes "I". This will always be deliberate. References to our actual decision, on which we are plainly agreed, will be prefaced by "we". Where I am adding commentary, speculating about doubtful legal points and particularly where referring back to the decision in the Tribunal case of Jamieson v. HMRC 30.7.07 (20269) which I wrote, I shall use the word "I".
3. At their simplest the facts of this case were as follows. The Appellants were partners in Stafford Road Garage in Seaford ("Stafford Road Garage"). Stafford Road Garage could not perform MOT tests because some height restriction in its premises meant that it could not meet some requirement. Thus customers' cars, requiring MOT tests, were taken from Seaford to Alfriston Motors, a garage owned by Mr. Kevin Lower's father. This journey involved an 8 mile round trip and required Stafford Road Garage to employ, and insure, a part-time driver, and to own and maintain a car, generally left at Alfriston Motors, for the driver to use on return trips if there would be delays in undertaking the tests.
4. Ignoring periodic changes in the statutory maximum charge for MOT tests, and assuming a constant maximum of £44, most Approved Testing Stations charge that amount to customers bringing their cars directly to the testing station. That amount is not chargeable to VAT. Some Testing Stations may charge somewhat less, either just to attract more business or in the hope perhaps of offering other services and performing necessary repairs. Any such lower discounted charge is similarly free of VAT.
5. Where customers of a garage that is not an Approved Testing Station bring their cars to their familiar garage for an MOT test, there is a common arrangement that enables the non-approved garage to have the car tested, without the garage risking losing the customer by sending the customer directly to the Approved Testing Station. And whilst there is a serious VAT trap if the correct procedure is not followed, the following is the common structure that achieves a sensible result. In the interests of attracting more testing business, the Testing Station offers a discount (say of £8) for tests arranged through the non-approved garage. Provided the non-approved garage acts as agent of the car owner in booking the test, and then passes on the discounted MOT charge of £36 to its customer, and identifies that separately on its invoice, it need not treat its £36 receipt as consideration for any form of service for VAT purposes. If, as is commonly the case, the non-approved garage also charges the car owner an additional £8, inclusive of VAT, for arranging the test and delivering the car to and collecting it from the Testing Station, everyone is reasonably happy. The customer has paid in total the £44. The Testing Station has boosted its trade. The non-approved garage has not risked losing its customer, and while it may make little profit in receiving £8 for diverting a mechanic to driving to and fro or employing someone part-time to do the driving, at least it pays VAT only on (or rather within) the £8.
6. There is a serious trap for the unwary. If the non-approved garage fails to act only as agent, but contracts as principal to get a customer's car tested and then sub-contracts the test to the Approved Station, or indeed if the non-approved garage merely fails to deal correctly with the rules for ensuring that the recovery of disbursements are not to be treated as the receipt of consideration for its services, the non-approved garage ends up being liable for VAT on the £44. Since the resultant VAT is virtually the £8 that the non-approved garage realistically receives and retains itself, the non-approved garage ends up out of pocket even before it has paid the costs of car and driver, which may anyway exceed the £8.
7. The simplistic facts in this case varied in form at least from the above. Using the same numerical example, instead of Alfriston Motors giving Stafford Road Garage an £8 discount, Alfriston Motors charged the full £44 for the MOT tests. Under a separate arrangement, Alfriston Motors then paid £8 (inclusive of VAT) to Stafford Road Garage for the latter's service of delivering and collecting cars. Stafford Road Garage then passed on the undiscounted MOT charge to its customer. Thus the customer paid the same £44 as in the example in paragraph 5 above, the minor difference being that the VAT registered customer would not have expected to claim an input deduction, whereas that VAT registered customer could have claimed an input deduction for the VAT comprised in the £8 handling charge in the example in paragraph 5 above. The key point however is that the end result ensured that the customer paid the same amount as the maximum MOT charge of £44, and saw no great disadvantage in having delivered his car to his normal garage, as against taking it to some Approved Testing Station.
8. HMRC contended that:-

•    the two-way charging of the £44 and the £8 should be collapsed together with Alfriston Motors being treated for VAT purposes as having performed the MOT test for the discounted net figure of £38;

•    as Stafford Road Garage had charged its customer more that the discounted £38 (i.e. the £38 resulting from the re-characterisation just mentioned) , and had not split out its VAT free invoice for £44 into separate elements of £38 and £8, and had failed in other respects to act as an agent,

Stafford Road Garage was liable for VAT on the full £44.

9. The two main points for our decision are whether HMRC are justified in collapsing the two formal and separate steps summarised in paragraph 7 above together; and whether Stafford Road Garage acted as agent for its customers or not. The points are inter-related as the two bullet points in paragraph 8 illustrate because the contention that Stafford Road Garage did not act as agent was initially based entirely on the argument shown in italics in the second bullet point in paragraph 8. When the case came before us the contention against agency was put on broader grounds though the fundamental point remained the one in italics. We might note in passing that were we to decide the issue raised at the first bullet point in paragraph 8 above in favour of the Appellant (i.e. sustaining the distinct nature of the two transactions between Alfriston Motors and Stafford Road Garage), but then to decide the agency point against the Appellant, the Appellant would be in the yet worse position of being analysed to have rendered two taxable supplies, one to Alfriston Motors, and one to the car owners for £44. Since on the facts of this case, we have distorted the example, and the actual charge rendered against Alfriston Motors was £15 and not £8, Stafford Road Garage would end up being liable for VAT on the cumulative £59. As it is the assessment in this case (for £5,169.14 plus interest) gives credit for the VAT already paid within the £15, so that the assessment is only on the balance of approximately £29. This follows naturally from the contention by HMRC that Stafford Road Garage has wrongly accounted for VAT on the £15 fee charged for delivery and collection since that was a disguised discount, so that this has been credited against the VAT now claimed.
10. Our decision on both points is in favour of the Appellants.

The facts in more detail

11. Evidence was given on oath by both Kevin and Suzanne Lower. Since Suzanne Lower was responsible for all accounting matters, she gave the bulk of the evidence. As counsel for HMRC fairly noted, both witnesses were transparently honest. We make the additional comment that Suzanne Lower struck as not only being honest but meticulous. Thus when she relayed some sequence of events, for instance suggestions that an officer of HMRC had looked into certain affairs of Alfriston Motors and that she was given a report of this by her contact at Alfriston Motors, we entirely accept her version of events, notwithstanding that HMRC claims to have no record of the particular discussion.
12. Stafford Road Garage actually had four different arrangements at different times for dealing with MOT tests. This appeal relates only to the second and the third or those arrangements, though we should mention all four.

The first arrangement

13. For some years until 1996 Stafford Road Garage had taken its customers' cars that required MOT tests to Alfriston Motors and had received a discount of roughly the £15 (ignoring the fact that the actual maximum charge for MOT tests would have been much lower in 1996 and that the discount would doubtless have reflected this). Stafford Road Garage then charged its customers the full £44, and we presume that its invoicing did not split out the two elements, but that nevertheless Stafford Road Garage paid VAT only in respect of its own service charge to the car owners for taking their cars to and from Alfriston. The level of discount was on the high side, and this reflected the fact that Alfriston Motors was keen to attract non-local business (Alfriston being a very small village). Stafford Road Garage could easily have taken its customers' cars to any of four garages that were Approved Testing Stations in Seaford and that would have been far more convenient. Admittedly those garages would have been likely to have given a much smaller discount (say the £8 used in the examples above) but that would still have saved Stafford Road Garage the greater costs of going to Alfriston. The reason why Alfriston Motors was used was the family connection, with Alfriston Motors being operated by Kevin Lower's father. No suggestion was made that any customers suffered from the fact that Stafford Road Garage used a garage for MOT testing that involved it in greater costs and presumably a higher handling charge to its customers, because this was funded effectively by the bigger discount that Alfriston Motors had to give and did give. It was realistically assumed that whichever garage had been used, the total of the discounted fee and Stafford Road Garage's handling charge would equal the £44 maximum statutory charge for MOT tests. That of course was the objective of the whole arrangement.

The second arrangement

14. In 1996 certain changes were made either to the law or practice as it affected the procedures between Approved Testing Stations and the garages in the position of Stafford Road Garage. From industry summaries of the announced VAT changes, it became clear to Suzanne Lower that if Stafford Road Garage was to avoid VAT problems in future under the new regime, and if Stafford Road Garage continued to be given a discount by Alfriston Motors, it would have to split out its customer invoices into the £29 and £15 to ensure that only the latter element attracted VAT. Suzanne Lower thought that this would confuse customers, and might lead to a loss of business.
15. Having carefully considered matters, Suzanne Lower required Alfriston Motors to change the form of the arrangement between the two garages, so that under what became "the second arrangement" of the total of four, Alfriston Motors billed Stafford Road Garage £44 for customers' MOT tests, with Stafford Road Garage then charging Alfriston Motors £15. The invoice in respect of this latter charge consistently described the service offered as one of "delivering and collecting cars" and since that service is taxable for VAT purposes, VAT was paid in respect of this service. Stafford Road Garage then billed its own customer £44, matching the undiscounted charge rendered by Alfriston Motors.
16. No notice was displayed in the premises of Stafford Road Garage, indicating whether the garage was acting as an agent for its customers in booking MOT tests. Virtually all customers knew however that the tests were performed by Alfriston Motors, even before they received their certificate which would of course make this plain. Most customers also knew of the close family connection between the two garages; car owners were almost always told that the cars would be driven to Alfriston and back, so that 8 miles would be recorded on the milometer, and customers were often aware that phone calls had to be made to book tests, and to ascertain whether cars were ready for collection or not. Customers were not specifically told that Alfriston Motors was paying Stafford Road Garage for the service of delivering and collecting cars, but most would assume that there would be some such arrangement.
17. We were told that the charges in the two directions between Alfriston Motors and Stafford Road were never netted off. Thus if, as was quite commonly the case particularly in later years, there was a delay on the part of Alfriston Motors in meeting the invoices for the delivery and collection service, this had no effect on the fact that Stafford Road Garage paid the full invoiced amount for MOT tests on the due date.
18. No separate trust or "client" bank accounts were maintained for holding any monies that might be received from customers for MOT tests before the date on which Stafford Road Garage was due to pay Alfriston Motors. We were told however that this was not a point of much significance since customers generally had 30 days' credit themselves, so that Stafford Road Garage had often paid Alfriston Motors before being reimbursed the £44 by the customer.
19. There was some considerable discussion as to whether other factors supported either of the competing analyses of the key issue of whether the charges paid by Alfriston Motors to Stafford Road Garage should be collapsed and treated just as the performance of the MOT tests at a discounted figure of £29 or respected in accordance with their form.
20. Mention was certainly made of the fact that the deal between the two garages was heavily influenced by the family connection and by the fact that it was Alfriston Motors that was keener to strike a deal for performing approximately 46 additional MOT tests a month. Stafford Road Garage was fairly indifferent, in that if could (and later did) get the tests done by one of four other garages in Seaford much more conveniently. But even this factor strikes us as meaning merely that Alfriston Garage would have to reflect the additional costs either by giving a bigger discount (enabling Stafford Road Garage to charge customers the correct realistic amount for the "ferrying") or else it would have to pay a higher fee for the "ferrying service".
21. One factor that is perhaps of more significance is that there were discussions between the two garages under which it was at one time contemplated that Alfriston Motors would attend to the ferrying. This was dropped, but the feature that there was this discussion and that the two eventually agreed that it made more sense for the ferrying to be done by Stafford Road Garage, and that there was an agreement relating to the fact that Stafford Road Garage's car was to be left at Alfriston Motors' premises all support the notion that there was this contract for ferrying the cars between the two garages. Equally the whole two way invoicing procedures, which were always followed rigorously even when Alfriston Motors delayed payment, confirmed the same. None of this would be consistent with Alfriston Motors merely giving a discount so that the contract for the ferrying of the cars would be between Stafford Road Garage and the end customers.

The third arrangement

22. In December 2005, the individual who had been employed part-time to ferry cars to and from Alfriston died, so that it ceased to be viable for Stafford Road Garage to have its customers' cars tested under the second arrangement.
23. Kevin Lower approached one of the Seaford garages, Brooklyn Motors, to see whether they were keen to step into the shoes of Alfriston Motors. From the perspective of Stafford Road Garage this would be simpler because any driver who took the cars to Brooklyn Motors would actually be able just to walk back. We understood that the initial proposal from Brooklyn Motors was that they would offer a discount in the test price, enabling Stafford Road Garage to bill customers in the way already summarised in paragraph 5 above. Doubtless the discount would have been much lower than the fee that Stafford Road Garage had been receiving from Alfriston Motors, but this merely reflected the lower costs that Stafford Road Garage would have to recover on charging its customers a smaller fee which would still leave the aggregate charge at £44.
24. Suzanne Lower requested Brooklyn Motors to change the form of the proposed arrangement, though doubtless not the pricing, so that Brooklyn Motors would charge the full MOT fee, and pay a fee to Stafford Road Garage for collection etc. This was agreed.
25. The third arrangement only lasted for about 3 months. During this period, it remained the case that there was no netting off of the two fees, and indeed we were told that Stafford Road Garage paid its invoices on time and had to wait several months for its own invoices to be met. The factor that occasioned the change from the third to the fourth arrangement was not this delay in payment however but the fact that this VAT dispute had reached such an impasse by the spring of 2005 that Suzanne Lower concluded that to avoid the VAT trap into which seemingly she had fallen, she would have to adopt the fourth arrangement.

The fourth arrangement

26. The fourth arrangement was still with Brooklyn Motors and was a switch of form back to the one that Brooklyn Motors had offered in the first place, mentioned in paragraph 23. It accordingly follows that Stafford Road Garage will now be splitting out their invoices in the recommended way. According to Suzanne Lower this has led to some confusion and even to some loss of business. So far as confusion is concerned, some customers think that they are doing better in that they are gaining a discount; others thing that they are disadvantaged in that they are paying a charge for ferrying the car which is increasing the cost to them. Naturally both are wrong, unless someone can find an Approved Testing Station that gives a simple discount, without strings attached, to the customer who brings his car directly to the Testing Station. Thus customers still pay the £44, and the only marginal difference in monetary terms is that slightly more VAT is collected. This is of course because under the "two-fee" route, Brooklyn Garage secured an input deduction for the "ferrying" fee paid, whereas on the "discount" route, only registered traders with "white vans" would obtain the equivalent input deduction. The private motorist would be indifferent since £44 would remain £44.

Other material facts

27. Whilst we attach little significance to this, we do accept that a VAT officer looked into the affairs of Alfriston Motors at a time when Kevin Lower's father retired, and the business was taken over by his son-in-law and conducted in corporate form. We were told that the particular officer enquired about one of the invoices for delivering and collecting cars from Stafford Road Garage, and was satisfied with the explanation that he was given. As we say we attach little significance to this, but we note that if anything was actually wrong with the second arrangement implemented from 1996 to 2005, and if the two-way fee structure was inevitably to be analysed as a disguised form of discount, then the point at which the VAT challenge might appropriately have been raised was at the Alfriston Motors' end of these payments, where a wrong input deduction would have been generated.
28. In the light of a further contention on the part of the Appellants that the tax claimed should be remitted because the errors in paying the right amount of tax (were that to have been our analysis) would have resulted from an innocent mistake on the part of the taxpayer, the taxpayer doing his or her best to satisfy the statutory requirements, we make the following observations. We accept that we have no strict jurisdiction over the application of an Extra-Statutory Concession, but at this point we certainly note that all the paperwork produced by Stafford Road Garage seemed to us to have been meticulous and exemplary. We also confirm that in our view Suzanne Lower made every effort to comply with the law. We will in due course make some comments on whether in our view we would have thought that the Concession should have been applied in her favour. That is now doubly irrelevant because we consider that she did apply the law correctly, and indeed we would like to record that if HMRC had other people running the accounting affairs of small business who were as honest, competent and conscientious as Suzanne Lower, they would have fewer problems than they do have.

The contentions on behalf of the Appellants

29. The contentions on behalf of the Appellants, summarised in the Statement of Case, were that:-

•    charges to the approved garage were not a discount or commission and only covered the costs of business expenses;

•    the Commissioners guidance and notices were unclear;

•    the Commissioners provided no explanation in respect of business dealings other than the treatment of the MOT fee;

•    customers were charged exactly the same amount as the Approved Testing Station had charged the business; therefore the charges had been treated correctly as disbursements;

•    none of the Tribunal cases were the same as the current case and therefore were of no application;

•    misunderstanding of the procedures regarding the treatment of MOTs was still widespread as evidenced by the Commissioners' need to re-print procedures in VAT Notes no 2 2006;

•    the Commissioners were unfairly trying to penalise the business for what was a genuine misunderstanding and were asking the business to pay additional tax and interest that would not otherwise have been due and could not now be recovered from customers;

•    the Commissioners misled the business when not disputing an invoice presented to an Officer at a visit to the Approved Testing Station which provided MOTs to the business in 2000; and

•    all conditions were fulfilled to satisfy the pre-conditions for the application of the Extra-Statutory Concession 3.4 of Notice 48 (March 2002).

The contentions on behalf of the Respondents

30. The contentions on behalf of the Respondents were that:-

•    there were two matters to be decided here, first whether the admitted form of a charge of the full MOT fee of £44 and a fee in the other direction to Stafford Road Garage should be analysed as the provision of the test at a discount, namely at £29; and secondly the question of whether Stafford Road Garage acted as the car owner's agent in booking MOTs with Alfriston Motors, or whether it entered into one non-agency contract with the car owner "to get the car tested", and then sub-contracted that test itself (the car owner having no relationship with Alfriston Motors at all) to Alfriston Motors;

•    the discount analysis was correct (to quote the Respondents' skeleton argument verbatim) because:-

1. "Alfriston Motors would have been entitled to charge a statutory maximum of £44 to a customer who approached them directly for an MOT;

2. however, for customers directed to them by the Appellants, Alfriston Motors in fact only received £29, a significantly smaller sum;

3. in the circumstances, Alfriston Motors must have agreed to accept being "charged" the sum of £15 by the Appellants. It is legitimate to suggest that it was because the garage was therefore able to carry out more MOTs than it would have done otherwise because the Appellants directed customers to them for testing; and

4. the "service and delivery charge" therefore represented a discount by another means, in an arrangement agreed to by both the Appellants and Alfriston Motors."

•    on a proper analysis, the contractual arrangement was not one of agency but was one of two contracts under the first of which the Appellants provided a service that was liable to VAT of getting a car tested by their sub-contractor. Only the performance of the test by an Approved Testing Station was outside the charge to VAT.

•    the non-agency analysis was confirmed by the facts that:-

1. having only been charged a discounted fee by Alfriston Motors, the Appellants did not pass that discounted fee onto the customer or make the customer aware that there was such a discount in play (indeed as the Respondents understood it, the customer would have been entirely unaware of the "delivery and collection fee" structure);

2. since the Appellants received more from the customer than they ultimately ended up paying to Alfriston Motors, they made a "secret profit", which is a strong indication that they were not in a relationship of principal and agent, but rather in a back-to-back contract and sub-contract relationship; and

3. as the Appellants did not keep payments for MOTs from customers in a separate account, they breached another of the duties of an agent, those duties extending also to "preserving and being constantly ready to produce to the customer correct accounts of all their dealings and transactions in the course of their agency", and "their duty to produce to the customer all books and documents in their hands relating to their MOT", all these factors again suggesting that the relationship with the customers was not one of agency.

Our decision

Our decision on the cross-fees or disguised discount issue

31. We note first that counsel for HMRC accepted (as he manifestly had to do) that "on the face of it, there are two transactions in play as between the Appellants and Alfriston Motors", the provision of an MOT for £44 and the provision of a service in the other direction of a delivery and collection service for £15 that attracted VAT.
32. Before addressing the various arguments as to why it was considered permissible, or indeed even self-evidently right, to reconstruct the two relationships into that of disguised discount, and before looking at the reasons supporting this treatment given in HMRC correspondence, we will just consider this issue in general terms.
33. We can see absolutely no justification for re-analysing what was in form, and accepted in form to be, two separate transactions into something technically different. There was nothing unrealistic in the proposition that Stafford Road Garage performed a genuine service for Alfriston Motors, indeed a service in which it had to acquire and insure a car, and pay a driver and pay for fuel in the "ferry car". Whilst we accept (see below) that this service could equally cogently have been expressed and contracted to be a service for the car owner funded out of a discount, there was nothing unrealistic in it being expressed to be a service to Alfriston Motors. This indeed tallied with the dealings that there had been between the two garages, with the invoicing, with the rigorous adherence to the feature that payments were never netted off, and with the parties' clear and deliberate intentions.
34. Assume for a moment a different example under which Alfriston Motors might have found say an independent taxi firm whose drivers had time on their hands, and that Alfriston Motors had paid that firm £15 or perhaps the more attractive £12 to ferry the cars to and fro. Would it have been suggested that that was unrealistic or that that arrangement (under which Alfriston Motors would still charge the full £44 to Stafford Road Garage's customers for the tests whilst paying the taxi firm £15 or £12) should somehow be re-analysed? The answer to that simply must be that the payment to the taxi firm for a manifest service could not conceivably be challenged, and since (having to bear this cost in order to obtain the MOT custom) Alfriston Motors could obviously not afford to offer a discount as well, this arrangement would be beyond question.
35. Reverting to the facts that it was Stafford Road Garage that performed the service assigned to the taxi firm in the previous paragraph, it nevertheless remains the case that the service rendered by Stafford Road Garage was identical to that, and quite as real as the role assigned to the taxi firm in the previous example. Does some critical difference thus result from the fact that the steps can be collapsed because the two parties to each of the arrangements were the same?
36. The first observation that we make in relation to the question just posed is that if (as we are going to hold the case to be) Stafford Road Garage acted as the customer's agent in booking the MOT tests, then the parties to the two arrangements were not the same anyway. Alfriston Motors was performing an MOT test, arranged through an agent, not for Stafford Road Garage, but for the end customer. Stafford Road Garage itself was providing precisely the service undertaken by the taxi firm in the example above. Thus the steps manifestly cannot be collapsed on the ground that the parties were the same parties because they were not.
37. Quite apart from that point however, we would have rejected the notion that it was permissible to reconstruct the clear form, indeed the form accepted and confirmed by counsel for HMRC, even if the parties had been the same parties. If the form had been a feeble disguise for the reality that was evident to all such a reconstruction might be permissible, but it cannot be permissible to ignore the form, and substitute some different transaction, indeed without any explanation, if the reality conforms to the form as we have suggested that it does in paragraph 33 above.
38. In the course of argument, I gave an example from a completely different context where thought is often given to whether it is right to re-analyse a commission as a discount. Thus, in the situation where a bond issuer, A, issues a bond with a nominal amount repayable of £100 at £90 to the subscriber B, the bond is plainly issued at a discount, and may well be a "deep discount bond" for certain tax purposes. If a bond, repayable at £100, is issued to B at £100 and A pays B a commission of £2, what is then the position? Were the commission paid to distinct placing agents in return for a placing service, the commission would be commission and the bond itself would be issued at par. But if the commission is paid to the subscriber, B, who renders no other service than that of subscribing the bond, then arguably the right analysis might be to collapse the £100 and the £2 and say that the subscriber has realistically subscribed the bond at a £2 discount. This sort of example raises many other issues, and is often occasioned by last minute pricing adjustments geared to interest rates, but the point that I wish to make is that it is not necessarily clear even on this example that the two figures should be collapsed together. There is however a very material difference between this example and that in the present case because in this case, there is no doubt that Stafford Road Garage really did something for its £15, and rendered a clear and distinct service. In my bond issue example, admittedly very simplified, the parties are identical and if one subscriber took up the entire bond and gave £100 and simultaneously received £2 for no distinct service, the temptation to collapse the steps is at last understandable.
39. Having set out in general terms why we consider it not permissible for HMRC to have reconstructed the plain and accepted form of the transactions in this case, we now turn to address why they reached the discount analysis, and how (if at all) they sought to justify this extraordinary leap.
40. We must obviously address first the terms of the VAT Business Brief 21/96 issued on 17 October 1996 because it was entirely as a result of the terms of that that those HMRC Officers who dealt with the initial assessment on the Appellant, and the further review, relied in reaching their discount analysis. Since the officers then based their contentions about the wrong treatment of disbursements entirely on this discount analysis, a great deal seems to us to hinge on whether there is anything in this Business Brief that justifies the view that the Officers took.
41. The relevant paragraph in the Business Brief reads as follows:-

"The discount given by a test centre to an unapproved garage will be treated as a normal trade discount and will no longer be seen as consideration for a taxable supply by the unapproved garage either to the test centre or its customer."

The key point to note about this paragraph is that it does not remotely say that where the Testing Station gives no discount but charges the full MOT fee and then pays a service charge to the introducing garage that the arrangement should be collapsed and analysed as a disguised discount. It simply and solely dealt with the situation spelt out quite clearly in its opening words, namely to deal with the case where the test centre gave a discount. Counsel for HMRC agreed with us that our reading of the relevant sentence was the correct reading, and indeed he agreed that the Business Brief gave no comment anywhere on the facts that had existed in this case. The relevant sentence had, however, definitely been read by HMRC officers in the wrong way, and read as if it required and justified the re-analysis of this case along the lines of a disguised discount.

42. It is just worth illustrating how the HMRC officials based their whole analysis of this case on a wrong application of this paragraph. The key HMRC letter of 8 August 2006 contained the following paragraphs.

"I would like to point out that if there was no commission charge from the garages, that do your MOT's, and that you charged the same amount to your customers, as you are charged, then the disbursement rules would be met. However, as you are paying a lower amount than your customers are being charged, you do not meet the Disbursement rules and this is quite clearly covered in our guidance. Moreover, that this discount, should not be seen as a separate taxable supply to the test Centre.

I am enclosing a copy of our Guidance V 1-5 Section 2.18 for your information, which states:

'Any discount given by a test centre to an unapproved garage should be treated as a normal trade discount and not as consideration for a taxable supply by the unapproved garage to the test centre'".

Without lengthening this decision by quoting other passages from the lengthy correspondence, we would like to record that:-

•    Suzanne Lower repeated pointed out that no actual discount was given in this case, and she asked why it was legitimate to collapse the steps;

•    no-one ever answered her repeated questions on this key point;

•    it was simply asserted that the Business Brief required and justified this analysis which id did not; so that

•    prior to this case being handled by counsel, the second issue of whether the disbursement rules had been correctly applied was entirely based on the false premise that Stafford Road Garage had received a discount from Alfriston Motors.

43. In paragraph 33 above we suggested that there were two ways of structuring the arrangements in this case, and our proposition is that each is equally cogent. The first point to note however is that in both, Stafford Road Garage renders a service to someone, and it is the identification of the recipient of that service that governs the whole question of discount and of how the arrangement must be structured.
44. Dealing first with the more common arrangement, i.e. the one summarised in paragraph 5 above, the deal between Stafford Road Garage and the customer would then be basically as follows. The garage would tell the customer that it could secure a discount from Alfriston Motors of £15 if Alfriston Motors could forget about how the car got to Alfriston and just quote for the MOT test on the basis that the car would appear at their garage, booked through Stafford Road Garage as agent. On this approach, Stafford Road Garage would have to render the service to the car owner of ferrying the car to and fro. So it would pass on the disbursement of £29, and charge £15 for the ferrying service rendered to the customer, the latter attracting VAT or including VAT.
45. Under the second arrangement, Stafford Road Garage would explain to its customer that Alfriston Motors could not and would not give a discount from the £44 standard MOT fee because Alfriston Motors itself had got to be involved with the extra inconvenience of getting a car that was in Seaford to Alfriston and back. Whether it engaged its own staff to do this, or it paid my hypothetical taxi firm, or it paid Stafford Road Garage to ferry the cars, all three account for why it could offer no discount. Thus it would charge the full fee, and assuming that it agreed with Stafford Road Garage that they would ferry the cars, Alfriston Motors would pay Stafford Road Garage for their service. The customer would simply reimburse Stafford Road Garage for the full MOT fee of £44.
46. Our decision thus on the first point, as to whether there is some cogent reason why the separate transactions in this case can be collapsed and treated as a discount, is that:

•    there is absolutely no justification for this re-analysis;

•    the re-analysis has consistently been based on a wrong reading of the relevant Business Brief;

•    the arguments that counsel for HMRC advanced, presumably in an effort to sustain an approach that had been pursued by HMRC at all stages, to justify the collapsing of the discount (quoted at the second bullet point of paragraph 30) add nothing to the argument;

•    the form of the transaction is entirely supported by the dealings between the two garages, by the parties' deliberate intention that the contract should be in this form, by the feature that the payment arrangements always supported this analysis, and by the fact that the invoices rendered by Stafford Road Garage both to Alfriston Motors and to the car owners consistently reflected the form and reality and were correct.

Some general observations on the question of whether the unapproved garage acts as the car owner's agent in booking MOT tests or whether it is to be analysed instead to have simply contracted with the car owner to get the test done, whereupon it contracts in its own capacity for the test to be done.

47. As I mentioned in the introductory remarks, I was somewhat curiously invited to summarise the position on the whole "agency and disbursements" issue as I understood it in general terms. It now seems to me that it will be more convenient to do this before we give our decision on the second main issue in favour of the Appellants in this appeal.
48. The undisputed starting point is that in order to achieve a satisfactory and fair VAT result, the unapproved garage must act as the car owner's agent in booking the tests. This is so whichever of the two arrangements considered at length between paragraphs 32 and 46 above has been followed. There are then really three separate steps in establishing and so to speak "following through" the agency analysis.
49. Those three steps are that:

1. firstly the contractual relationship between the unapproved garage and the customer must be one under which the garage is authorised to book an MOT with another named or unidentified garage on behalf of the customer, either pre-paying the Testing Station on behalf of the customer and subsequently obtaining reimbursement of the exact sum, or applying the customer's advance payment in paying the Testing Centre. It will generally follow on this agency approach that if the Testing Station is unaware of the identity of the car owner, then since the Testing Station will have contracted with an agent on behalf of an unidentified principal, the unapproved garage would be liable for the agreed fee, though if the garage failed, the car owner, the principal, would also be liable for the MOT fee.

2. The second step in supporting the agency analysis is the difficult one of whether the agent must honour all the duties of an agent, in actually supporting and confirming the agency analysis of the arrangements. In this case counsel for HMRC accepted that it was perhaps going too far to say that the agency analysis would be undermined if the agent did not maintain separate client bank accounts for customer pre-payments of MOT fees. It was however asserted that the non-disclosure of "secret profits" (whether indeed profitable or not) and the failure to maintain separate trust or client accounts was a strong factor leading at least to a presumption that the role was not one of agency.

3. The third step should be the easy one which is that if the first two points have been satisfied the invoice issued to the car owner should split out the two elements of the total £44, into the "reimbursement of a £36 VAT free MOT fee", and a VAT inclusive charge of £8 rendered by the unapproved garage for arranging the test and dealing with the ferrying of the car. Alternatively if the arrangement has been along the lines of the one in dispute in this case, the garage would issue an invoice, including VAT, to the Approved Testing Station for its handling service, and recover the whole undiscounted MOT fee as a disbursement from the car owner.

50. There was some discussion in this case of the fact that HMRC officials had somewhat been ignoring the first two issues in paragraph 49 above and just governing matters by reference to whether the VAT invoices said the right thing. It was certainly true in this case that it was only when the case came to be handled by counsel that attention shifted to the first of the two issues mentioned in paragraph 49 above, and to questions such as whether secret profits or pooled monies in one account undermined the status of agency. It is also fair to say that this approach of HMRC officials is somewhat fostered by the very terms of the Business Brief to which reference has been made in that that does not refer at all to the steps required to justify the agency analysis. It deals almost exclusively with the rules for securing reimbursement of disbursements, assuming without comment that the role of agency exists.
51. As an example of the approach periodically followed by HMRC officials, I need only quote an extraordinary fact that emerged in the Jamieson case that I heard in July 2007. In that case I concluded that the Appellant had plainly acted only as agent, but he had failed to split out his invoices as required by the third point in paragraph 49 above. The case involved a great deal of argument about the distinction between the agency approach and the back-to-back contract and sub-contract route, and I thought that it was eventually self-evident to all that the correct VAT treatment hinged on supporting the agency structure and not the sub-contract route. The Appellant's most recent VAT invoices had managed to go half way to the finishing line by splitting out the two elements, but the garage's service charge was still described as "sub-contract". An HMRC official giving evidence confirmed that in her view these most recent invoices were now fine. Having regard to the fact that the legal structure (that HMRC were challenging on fundamental grounds) had not been changed, and that the description given in the invoice was the worst possible description, it seemed odd to me that the officer then said that the most recent position was fine and not liable to challenge. I actually found it perfectly understandable why that officer had made that mistake because the Business Brief glosses over a distinction that has now been fundamental to two, if not to many more, of these MOT cases. If the Business Brief is unclear, it is not that surprising that officers who try to follow it are misled.
52. Counsel for HMRC adopted the expression that some HMRC officials have been somewhat guilty of putting the cart before the horse by giving attention only to the third of the points mentioned in paragraph 49 above, and I believe that it was partly so that I might try to give some guidance on the legal points underlying the first two bullet points in paragraph 49 that I was invited to give some general comments on these issues.
53. The perverse point however is that whilst as a lawyer I am inclined to criticise HMRC officials for proceeding as they have done in some of these MOT cases, in one sense their pragmatic approach achieves a sensible and workable result, and indeed a better one than the result of dwelling too firmly on the application of the strict law of agency to the rather difficult area of a garage booking a few MOT tests. My reasons for this remark are as follows.
54. It is firstly unreal to expect the owners of small garages to appreciate the difference between the agency and the bank-to-back contract routes. They are readily understandable by a lawyer whose concept of agency is based on strict law, and essentially of one party being authorised to enter into contracts or other transactions on behalf of another. But in the context of ringing up and booking an MOT test, the distinctions must be unintelligible to virtually every garage operator.
55. It is also worth noting that the transaction into which the car owner is ostensibly entering through his agent is anyway a difficult one to which to apply the normal agency rules. The MOT test is after all a statutory test undertaken not so much for the benefit of the particular car owner but for all road users. The certificate produced identifies the car, not the owner. I may be wrong on this point, and I know that people can appeal against test failures and indeed test passes (though why against passes seems curious) but I rather doubt whether there are continuing contractual rights enforceable against the test centre once a test has been done. There is certainly a contract that a test be performed and paid for, but there seems to me to be virtually no on-going relevance to the agency question.
56. When therefore the two parties to the discussion at the non-approved garage when a test is being booked are oblivious to the distinctions between an agency arrangement and a chain of contract and sub-contract, the fact that no relevance will attach to who (the garage or the customer) may have subsisting rights against the Testing Station once the test has been performed, does render the legal question rather nebulous. That has been fairly clear in the Jamieson case and in this case because in trying to undermine the agency analysis both counsel have had to resort to what I might describe as fringe points, albeit in other contexts, very relevant points. In neither case has it been possible for counsel for HMRC to point to terms of a contract that was plainly inconsistent with an agency approach. Instead there have been few points either way on the key point, and attention has had to be given to points such as the "secret profits" point and the issue of whether customer pre-payments have been held in separate trust bank accounts. Counsel in this case did at least concede that it was probably going too far to suggest that failure to respect these two points automatically undermined the status as agent. It was in other words possible that one became a "bad agent" first, before the final step of being analysed not to be an agent at all. The fair observation to draw from these various points, however, is that whilst it may be undesirable that the Business Brief and the HMRC officers pay little attention to these key legal distinctions, it is tempting to say that these legal niceties are somewhat alien in the context of simply booking an MOT test for £44.
57. Having regard to the un-real notion of garage owners understanding some of the intricate legal points in this case, it seems to me that the most desirable situation would be for garages to display a notice prominently in their reception area, summarising the way in which MOT tests are dealt with. This would then govern the legal result and be binding between garage and car owner, regardless of whether either or both knew quite what was meant, and both forms of wording that I will suggest would appear (in one case automatically, and in the other overtly) to deal with the secret profits concern. It would thus seem that if garages displayed whichever of the following notices was appropriate, and then rendered consistent VAT invoices, the risk of garages falling into the trap that this case has been about would be minimised.
58. A form of wording that would seem to me to be satisfactory and not too incomprehensible to deal with the more common case where the Testing Centre gives a discount and the unapproved garage charges the car owner for booking the test and ferrying the car is as follows:-

MOT TESTS

THE MAXIMUM (VAT FREE) STATUTORY FEE CHARGEABLE BY APPROVED TESTING STATIONS IS £xx

[MOST LOCAL TESTING STATIONS CHAGE THE FULL AMOUNT TO DIRECT CUSTOMERS]

WE CAN BOOK A TEST ON YOUR BEHALF WITH A SUITABLE TESTING CENTRE IF YOUR CAR IS LEFT WITH US

WE CAN OBTAIN A DISCOUNT FROM THE TESTING CENTRE WHEN TESTS ARE BOOKED THROUGH US, AND OUR SMALL CHARGE (INCLUSIVE OF VAT) FOR BOOKING AND FERRYING YOUR CAR TO AND FROM THE TESTING STATION WILL EQUAL THE DISCOUNT

THUS THE TOTAL CHARGE TO YOU WILL BE THE SAME AS THE STATUTORY MAXIMUM FEE. THE INVOICE WILL IDENTIFY THE TWO ELEMENTS SEPARATELY

59. It is presumably unusual for the structure considered in this case to be employed, and any taxpayer would be well advised to ascertain whether HMRC wishes to appeal this decision before adopting the type of arrangements referred to above as the second and third arrangements. On the assumption that HMRC accept the analysis of the two-way fee charging adopted in this decision, suitable wording that would summarise the position under such an arrangement might be as follows:-

MOT TESTS

THE MAXIMUM (VAT FREE) STATUTORY FEE CHARGEABLE BY APPROVED TESTING STATIONS IS £xx

[MOST LOCAL TESTING STATIONS CHARGE THE FULL AMOUNT TO DIRECT CUSTOMERS]

WE CAN BOOK A TEST ON YOUR BEHALF WITH A SUITABLE TESTING CENTRE IF YOUR CAR IS LEFT WITH US

THE TESTING STATION WILL PAY US A SMALL AMOUNT FOR BOOKING THE TEST AND FOR FERRYING YOUR CAR TO AND FROM THE TESTING STATION

YOU WILL SIMPLY REIMBURSE US FOR THE FULL (VAT FREE) STATUTORY FEE

60. As indicated above wording along those lines would govern the key legal point; simultaneously eliminate the secret profits concern; and indicate the form of invoicing that would be followed and that would be correct. There remains the question of whether it might be fatal in any case to the agency analysis for an unapproved garage not to have maintained separate trust accounts for client monies.
61. I find this question about separate trust accounts difficult. One thing that can be said is that if the notices suggested above were displayed, there would be a better chance of sustaining the agency analysis even if separate accounts were not maintained because at least the notice would confirm the fundamental nature of the transactions. I am reluctant to say that it is "over the top" to require separate accounts to be maintained since if a customer had pre-paid into the general funds of a garage that went into liquidation without paying the Testing Station, on the agency analysis the car owner would almost certainly be liable to pay the Testing Station for the test. Had the funds been in a trust account, they ought to have been available, notwithstanding the garage' insolvency, to pay for the test.
62. Whilst the point made in paragraph 61 must be right, it would doubtless be very complicated to arrange for separate trust accounts to be maintained since customers might pay by credit cards, debit cards, cheque or against invoices with perhaps 30 days' credit. When the Testing Station (or worse still perhaps several different Testing Stations) were paid by the garage, the job of tracing whose bill was being settled and out of which account the monies should be drawn would appear extraordinarily complex. My hope is thus that if the relevant notice had been displayed, the clarity on the basic legal issue should at least make it much more likely that the failure to maintain separate trust accounts would only lead to the conclusion that one of the duties of an agent had been breached, rather than that the status of agent had been undermined with disproportionately serious VAT consequences.

Our decision on the agency/back to back contract question

63. This issue raises a difficult point because there is no specific written agreement or notice to sustain one or other approach, and as counsel for HMRC has argued, the feature that Stafford Road Garage did not reveal the fact that it was paid for ferrying the cars to and from Alfriston Motors and that separate trust accounts were not maintained are not particularly supportive of its case.
64. Our starting point is just to look generally at the arrangement and question whether, if the parties had had their attention focused on the legal distinction, they would have naturally suggested that the arrangement was an agency one or one of the back-to-back contract variety.
65. On this point we consider that the parties, Stafford Road Garage and the car owner, would have assumed that the test was just booked on behalf of the car owner. It is possible that neither would have given much thought to the agency notion but we think that the back-to-back contract would have seemed more unreal.
66. Support for this assertion can be drawn perversely from the quoted passages from Counsel for HMRC's skeleton argument which we have reproduced at paragraph 30, items 2 and 3 of the second bullet point. The natural way in which the reference is made there to introducing customers to Alfriston Motors is consistent with an agency assumption, and would make no sense if Alfriston Motors only ever had one customer in the shape of Stafford Road Garage. The fact that counsel lapsed naturally into expressing matters in this way even when he knew that he was going to be asserting the reverse later in the Skeleton Argument seems to us to be rather significant. There is also some significance to the fact that the Business Brief failed to mention the legal distinction and almost assumed that the relationship would be one of agency and that all that would matter would be the more mechanical feature of dealing correctly with the disbursement. Both by adopting that natural assumption and by failing to draw taxpayer's attention to the serious trap implicit in the arguments now being raised by HMRC, we consider that there is some further support for the agency analysis being the one naturally assumed to exist.
67. We are also very influenced by the fact that the basic case advanced by HMRC officials prior to the case being advanced by counsel was entirely based on the discount notion and on the alleged feature thus that the Appellant had failed to reflect the disbursement rules correctly. This was because it had charged the customers more than the discounted fee that it had had to pay. That argument is simply wrong and it has coloured HMRC's whole approach to this case. Had HMRC's officers not miss-read the Business Brief, and effected the extraordinary slight of hand of collapsing two cogent transactions into something that they were not, the case would never have been brought.
68. We accept that a point against agency consists in the fact that no separate trust accounts were maintained. We are however satisfied that in the vast majority of cases, if not in all, no customer monies were received before Stafford Road Garage had paid the MOT invoices issued by Alfriston Motors, so that there was little or no opportunity for client monies to be wrongly held.
69. We also accept that Stafford Road Garage did not specifically draw to their customer's attention the fact that they were paid for ferrying cars to and from Alfriston. We do however accept the suggestion by the Appellants that most customers would have realised that someone would pay Stafford Road Garage something for its overall role. Since that involved dedicating a car to the role, insuring it, and employing someone specifically to do all the ferrying to and fro, such a realisation seems to us to be fairly obvious. We accept the technical argument that this role should have been revealed and that the fact that the fee might not even have covered the costs does not quite change the legal point. However we agree with counsel for HMRC that some breach of the agency rules might lead to the notion that the agent would be a "bad agent", rather than "no agent at all". We consider that Stafford Road Garage and Suzanne Lower in particular struck us as being the "best bad agent" imaginable.
70. We accordingly decide that Stafford Road Garage did book the MOT tests in an agency capacity. We accordingly allow this appeal on both points.

The Extra Statutory Concession point

71. We should mention one point in relation to the separate argument that the Appellants advanced, to the effect that the Extra Statutory Concession (dealing with the discretion of HMRC officials to remit the tax in cases were taxpayers have made innocent mistakes through misunderstandings etc, and where the tax technically due cannot now be recovered from customers) should have been exercised in their favour.
72. We would naturally have had no jurisdiction over that matter. It is also irrelevant because the Appellants have won this appeal. Furthermore we accept that even if HMRC had accepted that the four pre-conditions to the grant of the concession had all been satisfied, there is still only a discretion to remit the tax, and manifestly a discretion over which we would have had no jurisdiction.
73. It is instructive to note however that counsel for HMRC conceded that three of the four pre-conditions to the possible exercise of the concession had been satisfied and the only one that had not been satisfied was one that denied the availability of the Concession where clear guidance had been given by HMRC in some published material on the point in dispute. It is suggested that clear guidance was given by the Business Brief to which reference has already been made. I endeavoured to criticise the bad and unclear wording of that publication in the Jamieson case and am glad to have a further opportunity to do so now. The somewhat humorous point that now occurs to me is that the whole of the HMRC argument in relation to the disguised discount point, and the knock-on implication that that had on the second point all result from HMRC officers having misunderstood and misapplied a paragraph in the badly written Business Brief. I am pleased that it is now irrelevant, but I say that I think that Suzanne Lower was right in her assertion that the Business Brief was not clear, and since it is the HMRC officers who have misunderstood it in this case, I hope that they might revise their judgment that it gave clear guidance.

One additional point, and an award of costs.

74. It was impossible to read all of the papers in this case before the hearing. Having now read them we want to record a number of points that seem to us to be worthy of considerable respect. Suzanne Lower has presented this case without any professional assistance. Her Statement of Case was immaculate. She had attended an earlier Tribunal case to see how matters were dealt with. She has combed the Internet not only for Tribunal decisions on the relevant topic but also for EC material and Directions. In all correspondence she was courteous, quite apart from almost always being correct. Not surprisingly handling the case led to stress for which she had to seek medical treatment. Counsel for HMRC remarked that she was transparently honest. Beyond this she attends to the book-keeping and accounting for the garage, brings up six children, is a Youth Coordinator for the Catholic church, as well as being responsible for at least three other youth groups.
75. In short both of us wish to record out total respect for her whole preparation and presentation of this case.
76. Since she engaged no professional assistance of which we are aware, we assume that she incurred few third party costs, but we nevertheless think it appropriate to award her her costs, such as travel costs.

HOWARD M NOWLAN

CHAIRMAN

RELEASED: 11 February 2008

LON 2006/1557