Ellon Car Clinic Ltd v Revenue and Customs (VAT - CARS : Other)

Factual and Procedural Background

The appeal arises from a decision by the Respondents dated 4 February 2016, issuing VAT assessments for the periods from April 2014 to July 2015, totaling £3,847. The assessments concern the VAT treatment of charges for MOT tests by the Appellant, a motor vehicle repair and service business. During the relevant period, the Appellant was not an authorised MOT testing station and arranged MOT tests through approved third-party garages, yet invoiced customers as if it were authorised. The MOT charge was not separately identified on invoices.

The Appellant had taken over the business on 1 January 2014; the prior business had been an authorised MOT testing station until March 2014. The Appellant regained authorised status from 23 December 2015. Customers were informed that MOTs would be conducted elsewhere and that immediate or walk-in MOT bookings were not possible. The Appellant advertised competitive MOT prices and absorbed losses on some MOTs to retain customers. The invoicing combined MOT and other service charges without itemising the MOT fee separately.

The appeal also includes a penalty of £577.05 related to the VAT treatment of MOT charges, which the Appellant had signed a Notice of Penalty Suspension for.

Legal Issues Presented

1. Whether VAT should be charged on the full invoiced amount for MOT tests provided by the Appellant when it was not an authorised MOT testing station.
2. Whether the MOT charge should be treated as a disbursement (outside the scope of VAT) or as part of the taxable supply by the Appellant.
3. The correct VAT treatment of the element of the MOT charge exceeding the amount paid to the authorised garages.
4. The applicability and validity of the penalty imposed related to the VAT treatment of MOT charges.

Arguments of the Parties

Appellant's Arguments

• At the time the Appellant lost its authorised MOT testing station status, relevant VAT guidance (VAT Notice 700) did not clearly address the VAT treatment of MOTs, and the Appellant's Director did not find such information during a review in March 2014.
• The Appellant accepts VAT should be charged on the element of the MOT charge exceeding the actual cost paid to authorised garages (approximately £9.95), but disputes VAT on the full MOT fee of £49.95.
• The Appellant acted as an agent for customers in arranging MOT tests with authorised garages, not as principal.

Respondents' Arguments

• The Respondents contend that because the Appellant’s invoices did not separately identify the MOT charge as a disbursement, the entire amount invoiced is subject to VAT under Section 1 of the Value Added Tax Act 1994.
• The Respondents rely on VAT Notice 700 and internal guidance to support their position that the VAT was underdeclared on the supply of arranging MOTs.
• They did not explicitly argue whether the Appellant acted as principal or agent, having relied primarily on their VAT guidance rather than legal authority.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal examined the factual circumstances and legal principles concerning whether the Appellant acted as principal or agent in relation to the MOT tests. It found that all customers were aware the Appellant was not authorised to perform MOT tests and that tests were conducted by third-party authorised garages arranged by the Appellant. The Appellant transported vehicles to and from these garages and invoiced customers without separately showing the MOT fee as a disbursement.

The Tribunal referred to VAT Notice 700, which sets out HMRC's view that if a fee is treated as a discrete disbursement (agent role), it falls outside VAT scope; otherwise, VAT applies on the full charge. The Tribunal also reviewed relevant case law, including four Tribunal decisions favoring taxpayers in similar circumstances, all focusing on the agency/principal distinction.

The Tribunal agreed with the precedents and found the Appellant acted as agent for the customer in arranging the MOT tests. Consequently, only the margin element above the actual MOT cost paid to the authorised garages was taxable. The Tribunal noted HMRC's concession that, given this finding, the penalty should be withdrawn.

The Tribunal criticized HMRC’s guidance and internal manuals as unclear and insufficiently authoritative, endorsing calls for clearer guidance to avoid confusion for businesses like the Appellant.

Holding and Implications

The Tribunal ALLOWED THE APPEAL in part, holding that VAT should not be charged on the full MOT test fee invoiced by the Appellant but only on the element exceeding the amount paid to the authorised garages.

The penalty imposed on the Appellant related to the VAT treatment was also set aside following HMRC's concession.

This decision directly affects the parties by correcting the VAT liability and penalty assessment but does not establish new precedent, instead applying existing case law to the facts. The Tribunal emphasized the need for improved clarity in HMRC guidance to assist businesses in similar positions.