Non standard partial exemption method
Dynamic People Ltd
The taxpayer’s principal activity is the provision of exempt domiciliary care to patients in their own home. As well as training its own staff, it also provides training to third parties. These training supplies were, at the time of the appeal, taxable. As a standalone registration, the taxpayer sought a Partial Exemption Special Method in 2011. In 2012 a special method was agreed. This essentially recovered general/overhead costs by reference to turnover but applied a floor based method in relation to the property costs. On the basis that parts of Unit 1 and Unit 3 of the property were used for training, this resulted in 58.4% of property costs being recovered, compared to 1.59% of general costs.
In 2014 the taxpayer sought to register as a VAT group with two non-trading companies. HMRC’s position was that as it was a new taxable person it needed to agree the PESM afresh. HMRC did not accept the proposal and refused to agree the method.
The FTT noted its role is not to identify a method of attribution but instead solely to adjudicate between the methods proffered by the parties. In the current case this was between the taxpayer’s proposed floor based method and the standard method.
HMRC argued that the method proposed by the taxpayer could not be used because it could not be monitored or audited to ascertain the actual use of the individual rooms in Unit 3. However, the FTT considered that the proposed method is materially identical in terms of operation and audit to that proposed in 2012 when HMRC accepted that method was fair and reasonable. HMRC confirmed they did not think the decision to agree to the method in 2012 was wrong. The FTT noted that the taxpayer VAT grouped with 2 non-trading entities, which have no impact on how the properties are used. For the formation of the group to change HMRC’s conclusion that the method was fair and reasonable would be perverse. There may well be weaknesses in the operation and auditability of the method, but they are precisely the same weaknesses as were present in 2012 and HMRC accepted it as a fair and reasonable method then.
The FTT proceeded to compare this to the standard method. The FTT concluded that the standard method cannot reflect the use of a building which largely lay empty. The building was opted and any disposal or letting to an unrelated party would have been taxable. The FTT added that a method that gave just over 1% recovery of property costs as compared to one that gave circa 20% does not seem to be more fair and reasonable in the attribution of the property costs which in 2013 represented a small sum of input tax. The taxpayer’s appeal was allowed
This case highlights the need to think about special methods and reapplying, where there are changes to a business. HMRC’s decision to confirm to the FTT that it did not think the earlier 2012 decision was wrong, was always going to make this case a difficult one for it to win. It also highlights the FTT’s role in only adjudicating between the methods in front of them. HMRC only offered the default standard method. With a lot of the taxpayer’s business activity being carried out away from the property (i.e. in people’s homes) this would again weaken the argument for the standard method being a more fair and reasonable way to calculate the deductible amount of property VAT. [Note also that an earlier Dynamic People FTT in April 2016 reached the conclusion that a previously agreed PESM is not automatically revoked when the person using it joins a VAT group and continues until the termination of its use is approved or directed by HMRC].