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When selling products with mixed VAT rates, calculating VAT accurately is essential. A recent tribunal case (Abbeyford Caravan Company (Scotland) Ltd v HMRC [2024] TC09324) highlights the importance of fair and regularly reviewed methods for mixed supply apportionment. The dispute centred around a caravan company that changed its VAT calculation method to reflect market values more accurately.
The Old Method
The taxpayer sold caravans with removable contents, such as dishwashers, which are standard-rated items. The company used a “cost ratio method,” basing VAT calculations on supplier invoices. For instance, if a £10,000 caravan included £2,000 for removable contents, 20% of the sale price would be standard-rated.
However, this method inflated the value of removable contents, sometimes declaring them at three times their actual market value. For example, a dishwasher worth £250 was declared as £750. This led to overpayment of VAT on standard-rated items.
The New Method
After hiring a VAT expert, the taxpayer established a fairer range of 5-9% to reflect the actual market value of removable contents. HMRC accepted this improved method for future calculations starting April 2022 but refused the company’s £150,458 error correction claim for prior periods (June 2018 to March 2022). HMRC argued that no error occurred because the original calculations followed a valid method.
Tribunal Decision
The First-tier Tribunal disagreed with HMRC, noting that the tax reduction from £296,907 to £150,458 was substantial. The tribunal cited the Supreme Court case CRC v KE Entertainments Ltd [2020], which emphasized that VAT methods must achieve “fairness and equality.” The tribunal ruled in favour of the taxpayer, allowing the appeal and confirming that the new method was the only one achieving fairness.
Lessons Learned
VAT methods for mixed supplies must be regularly reviewed to ensure they remain fair and accurate. The case revealed issues with supplier invoices, where manufacturers incorrectly charged 20% VAT on all contents, further distorting the company’s calculations.
Frequently asked questions (FAQs)
1. What is a mixed supply for VAT purposes?
A mixed supply occurs when a sale includes items subject to different VAT rates. For example, caravans might have a zero-rated main unit but include removable contents like standard-rated appliances. Businesses must accurately apportion the VAT on such supplies to comply with HMRC regulations.
2. Why did HMRC reject the error correction claim?
HMRC argued that the company’s original calculations were correct because they used a valid method at that time. The revised method, while fairer, was viewed as a change in approach, not a correction of an error. This shows that businesses need to regularly review their methods to avoid overpaying VAT.
3. How did the tribunal justify allowing the appeal?
The tribunal stated that VAT methods need to be fair and equal, referring to a Supreme Court decision. It decided that the new method, which greatly lowered the tax owed, was the only fair option. The tribunal also pointed out that the big difference in tax results showed that the old method was not accurate.
4. What should businesses learn from this case?
This case highlights the importance of reviewing VAT methods regularly to ensure fairness. Businesses should work with experts to identify and address discrepancies in their VAT calculations. Accurate methods not only ensure compliance but also prevent unnecessary tax overpayment.
If you need help with VAT compliance call our office to talk to one of our Tax Specialists.