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VAT and parking Revenue, recovery and rulings In the first of a series of articles looking at how VAT affects parking, Keith Miller, from ETC Tax, outlines how litigation or the threat of litigation has changed how VAT applies to the sector arking companies will know that applying VAT to their business activities is not always straightforward. HM Revenue and Customs (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 subject to VAT. This changed when HMRC accepted that the VAT relief should be extended to parking charge notices (also PCNs!) issued on private land. However, it limited this ruling to landowners only, insisting that third-party operators who retained some or all PCN revenue had to pay VAT on this. HMRC argued that retained PCN revenue was, effectively, payment for services provided to the landowner. P in Beavis v ParkingEye had proved helpful during the lobbying process by validating arguments put to HMRC and removing a number of obstacles that had been preventing progress. In reality, there is evidence that many HMRC officers are still pursuing the old policy, unaware of the changes that have arisen. This creates unnecessary difficulties when dealing with HMRC. HMRCs challenge to operators VAT recovery Changes to HMRCs VAT policy on PCNs HMRCs policy was challenged by VCS, an operator who kept 100 per cent of PCN revenues at sites managed under the authority of landowners. 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 Appeals decision to those operators whose contractual arrangements were similar to those of VCS. It argued that operators with more complex and nuanced arrangements were acting as an 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, thereby formally acknowledging that the 2013 VCS decision could be applied more widely. The 2015 Supreme Court decision 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 VCSs income was from PCNs and, therefore, not subject to VAT it was only fair that 92 per cent of the VAT on VCSs 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 seeking to counter HMRCs policy on restricting VAT recovery, so this is an area that will be the subject of further litigation. 36 britishparking.co.uk PN June 2021 pp36-37 VAT.indd 36 21/05/2021 11:43