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HM Revenue & Customs ('HMRC') faces the prospect of refunding over£500m in VAT payments to local authorities follo...
HM Revenue & Customs ('HMRC') faces the prospect of refunding over£500m in VAT payments to local authorities following a decision of the London VAT and Duties Tribunal, chaired by the President of the Tribunals, Stephen Oliver QC.

Such a refund would enable councils to fund capital projects or, if offset against proposed council tax bills, could reduce the forecast increase in council tax bills in England by 50% according to the government's own figures.*

At the end of a long-running legal battle, the Tribunal has ruled in favour of the Isle of Wight Council and other local authorities in their appeal against HMRC's ruling that off-street car parking provided by local authorities is subject to VAT at 17.5%.

Having brought the original test case on behalf of the Isle of Wight and the three other councils whose cases were heard at the same time, tax consultancy Chiltern has submitted claims on behalf of a number of local authorities each of which is worth on average around£1,000,000 in back-claims and approximately£160,000 per annum going forward.

If all local authorities follow suit, the Treasury could be facing a cost of over£500 million in back-claims and a reduction in VAT receipts of about£80 million per annum in the future.

Marc Welby, Director of VAT at Chiltern said:

'Having led the challenge on this, we are delighted with the Tribunal's verdict. There are in excess of 600 councils in the UK, of which approximately 500 are likely to have been paying over VAT on their off-street parking fees. If our figures are indicative of the overall average claims and all of these councils were to successfully claim refunds which were paid out right away, the outflow from central government to local government would be around half a billion pounds which would reduce the overall year on year increase in council tax rises in England for 2005 / 06 by 50%.

'In practice that figure might end up closer to£325m as, based on numbers disclosed to the Tribunal by HMRC, only some 15% of local authorities have so far submitted any claims and the others may find that any claims they submit now will be capped to the last three years. Even at this level though, forecast increases would reduce by a third in England and by 17% in Wales and Scotland.

'Our figures suggest that where claims have been lodged there could be an average refund per local authority of in excess of a million pounds. This could be used to reduce the year on year increase in council tax bills or to fund capital projects, support community initiatives and so on. Furthermore, the refunds may help a number of councils to continue to avoid the prospect of capping by the Office of the Deputy Prime Minister. My message to those councils who have yet to act is that they should get their claims in quickly.

'Whilst this is great news for council tax payers, it should be remembered that the effect on the UK's overall tax take is neutral as central government's loss is local government's gain - we are simply looking at a redistribution of tax payers' money. Given that this is the case and that it has taken nearly five years to reach this point, we would hope that HMRC would accept this latest rejection of their argument. Unfortunately we believe it more likely that they will appeal, leaving the situation more uncertain for longer.'

The case

Historically, local authorities have charged VAT on off-street parking and remitted that VAT to the Treasury. In a landmark test-case, VAT experts at Chiltern challenged this on behalf of the Isle of Wight Council and three other local authorities.

The case (and its subsequent appeals) rests on a small number of key points. The original case was brought to the VAT Tribunal by Chiltern on behalf of the Isle of Wight, amongst other local authorities, arguing that their provision of chargeable off-street car parking was not liable to VAT. Chiltern's argument contained four key issues:

1.The 'special legal regime' - whether a local authority operates within a regime unique to the public sector when operating off-street car parks.

In April 2004, the VAT Tribunal ruled that car parking provided by the Isle of Wight Council came under a special legal regime and that VAT was not therefore chargeable.

2.Non-implementation of an article of EU law - a technical legal point regarding whether or not a particular provision of EU law (second indent of Article 4.5) had been incorporated into UK law.

The April 2004 Tribunal also ruled that HMRC had failed to implement the second indent and, in appeal to the High Court brought by Customs & Excise, the judge ruled that this article had not been incorporated into UK law.

3.Competition - whether treating local authority off-street car parking as non-business for VAT purposes (and thus not subject to VAT) would lead to significant distortions of competition with private operators of off-street car parking.

This issue was addressed in detail by the Tribunal as outlined below.

4.Over-payment - whether, in cases where car parking ticket machines do not give change, VAT is due on any overpayment.

This issue has not been addressed. However, it would only apply if the provision of off-street car parking by local authorities were ruled to be subject to VAT on the basis of an assessment of the competition point. In light of the Tribunal's ruling on competition, over-payment becomes a null point.

The Tribunal's ruling

The Tribunal decision concerned the issue of competition - whether or not the provision of off-street car parking by local authorities not subject to VAT would lead to a significant distortion of competition against private sector car park operators. HMRC's argument centred on the following argument (paraphrased for brevity):

--That distortion of competition was taking place and that if local authorities wished to oppose this, the onus was on them to prove that there was no significant distortion of competition effect.

The Tribunal dismissed this argument as follows:

'Customs have not, in our view, discharged the burden of proof in the case of any of the Four Local Authorities of showing that the disapplication of VAT on the parking activities of those local authorities would result in significant distortions of competition. And even if we were wrong in that, and that the burden of proving that Article 4.5.2 derogation rests with the Four Local Authorities, we think that they have satisfied us that the disapplication of VAT in relation to their off-street car parking activities would not lead to significant distortions of competition within the meaning of that provision.'

In other words, the Tribunal has said that the burden of proof does not fall on the local authorities and, even if it did, the Court believes that the local authorities have demonstrated that distortion of competition is not a factor.

Next steps for local authorities

Any local authority providing off-street car parking would be advised to consider making a claim especially in light of the three year capping.

Linda Leach, Associate Director at Chiltern who is responsible for the provision of VAT services to public sector bodies, commented:

'The Tribunal's verdict points to a case by case approach in determining whether or not there is a significant distortion of competition but the onus will be on HMRC to prove that this is the case. The more private operators there are offering parking services (for example in the larger metropolitan areas), the harder HMRC is likely to argue that there will be significant distortion of competition if councils don't charge VAT in their car parks. However, we believe that even in these cases, the argument is weak. The competitive environment is simply not a factor in determining how a council prices its car parks. More macro and socio-economic factors come into play such as controlling the traffic levels in urban areas. It is far from proven that removing the VAT element in local authority provided car parking prices would lead to significant distortions of competition.'

*based on figures taken from the Office of the Deputy Prime Minister ('ODPM') and historical council tax figures.

According to a Statistical Release issued by the ODPM on 23 March 2005, the council tax requirement for England in 2005 / 06 is forecast to be£21,315 million, an increase of 5% on the previous year's requirement of£20,299 million. A reduction of£500 million to the 2005 / 06 council tax requirement would result in a year on year increase of just 2.54% - half the previous increase. A reduction of£325 million in the 2005 / 06 council tax requirement would result in a year on year increase of 3.4% - a reduction of one third. Although the refunds would apply to the UK as a whole, there are more English local authorities that provide off-street car parking. Scotland and Wales have unitary authorities and are fewer in number.

Data sources:

Statistical Release from the ODPM 23 March 2005:

Historic comparative figures for 2004 / 05:

Historic comparative figures for 2003 / 04:

Historic council tax data for all local authorities in England can be found at::

Historic council tax data for all local authorities in Wales can be found at:

Historic council tax data for all local authorities in Scotland can be found at::

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