UK Tax Tribunal finds VAT not payable on retained overpayments

In Borough Council of King’s Lynn and West Norfolk v Revenue & Customs [2012] UKFTT 671 the UK First Tier Tax Tribunal found that the Council was not liable to pay VAT on overpayments made by members of the public in respect of car parking.  The Council operated ticket vending machines which displayed sliding scale hourly parking charges and indicated that overpayments were accepted but no change was given.  The overpayments occurred where members of the public voluntarily paid more for a parking ticket than they were required to pay (for example if they did not have the correct change), which ranged between 2.25% to 3.46% of total payments per year.

The Revenue submitted that there was a supply of services by the Council and VAT was payable on “the whole consideration paid or payable”.  Further, the parking ticket confirmed the full payment as being made for the supply.

The Council submitted that the payment was ex gratia and the member of the public gets nothing in return for the payment.  There was no link between what is supplied and what is received – in the absence of the nexus, the overpayment cannot be treated as consideration for the the purposes of VAT.

In considering the issue, the Tribunal made the following statement of principle:

There must be a direct link between the supply made and the consideration given.  The supplier would normally expect something in return for a supply and will not fulfil their contractual obligation unless payment is received or forthcoming.  If there is no direct link between the supply which is made and the payment received or if a party was not obliged to pay then it cannot be said that there was consideration for the supply.  There must be some form of reciprocity between the parties.

In finding for the Council, the Tribunal observed that the fact that a party receives a sum of money does not mean that that sum represents consideration.  What was missing in this case was a direct link between what is supplied and what is paid for.

In the Australian context, the “nexus” is broader (being “in connection with” rather than a direct nexus between supply and consideration).  The question would be whether the overpayment was received “in connection with” the supply of car parking – or to use the approach adopted by the Commissioner – whether there was “a substantial relation, in a practical business sense”, between the overpayment and the supply.  The application of the nexus was recently considered by the Tribunal in AP Group Limited and Commissioner of Taxation [2012] AATA 409 dealing with the GST implications of various motor vehicle incentive payments.  The pending appeal of that decision to the Federal Court may well provide some guidance as to how the issue considered in the UK Tribunal should be dealt with in the Australian context.

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