Issues to consider: identifying disbursements in particular areas and trades: MOT tests
The fee charged by an approved test centre for carrying out an MOT test has always been seen as outside the scope of VAT. However, a garage which is not approved as a test centre may arrange for a vehicle to be tested elsewhere as part of its service to the vehicle’s owner and the treatment of the MOT test fee in such circumstances has sometimes caused difficulties. Following a review of policy in this area a simplified treatment, based on normal disbursement principles was introduced with effect from 1 November 1996. From this date:
- the charge for an MOT test provided direct by a test centre to its customers is outside the scope of VAT, provided it does not exceed the statutory maximum;
- any discount given by a test centre to an unapproved garage should be treated as a normal trade discount and not as consideration for a taxable supply by the unapproved garage to the test centre;
- provided the unapproved garage charges on the exact amount it has been charged by the test centre and shows this separately on the invoice to its customer, it may treat this element as a disbursement and also outside the scope of VAT (assuming, of course, that all the other conditions set out in VTAXPER39000 are met);
- any amount charged by an unapproved garage to its customer over and above the amount charged by the test centre is consideration for its own service of arranging the test as agent of the customer and is taxable at the standard rate;
- if the unapproved garage chooses not to treat the exact amount charged by the test centre as a disbursement, or otherwise does not satisfy all the conditions set out in VTAXPER39000, it must account for VAT on the full invoiced amount.
This policy was publicised by Business Brief 21/96 (dated 17 October 1996) and is supported by both the Society of Motor Manufacturers and Traders and the Retail Motor Industry Federation. Details were communicated to local VAT staff by a ‘Dear Colleague Letter’: DCL VAT 40/96.
In January 1999, it was upheld by the VAT tribunal in the case of M A Ward trading as Acorn Garage (MAN/98/507Y). However, in the latter, the law was not argued in any detail.
Subsequently, the tribunal upheld our policy on both the application of the disbursement rules and MOT test charges in Chandlers Garage Holdings Ltd (LON/99/271). Here the Chairman held that a payment cannot be treated as a disbursement unless it has been incurred in the capacity of agent, and here it was. Moreover, that an agent must not make a secret profit, and here he did. He took the view that the exclusivity agreement struck between the appellant and the approved test centre did not alter the situation. In dismissing the appeal, he held that the appellant was seeking to make a profit out of what was an agency transaction, and was not disclosing the amount of that profit to the customers.
Before 1 November 1996, there had been a number of not very well co-ordinated (and some inexplicably unpublicised) changes to our policy. At one time, we allowed unapproved garages to treat the MOT test charge as a disbursement but, depending on the contractual situation, we saw any discount obtained from the test centre as consideration for a supply to the test centre of introducing a customer. This policy was based on the assumption that test centres would normally charge the statutory MOT fee and charge a lower amount only where the unapproved garage delivered a customer’s vehicle for testing. However, commercial practices have now changed and many test centres offer discounts to all customers. The reduction offered to unapproved garages may therefore be little more than a normal trade discount and in the interests of simplification we have abandoned the concept of seeing a supply back to the test centre.
Other policy changes in 1991 departed from the normal disbursement procedures and allowed any onward charge raised by the unapproved garage for the MOT test to be treated as outside the scope of VAT provided it did not exceed the statutory fee. Further changes when this guidance was issued provided that unapproved garages should only treat their charge as outside the scope if it passed on the exact statutory amount to the customer.
None of these changes were publicised and no information on the treatment of MOT test fees generally was widely available to businesses until this guidance on the subject was copied to the trade representative bodies in 1995. As a result, garages adopted different procedures and our own confused and conflicting policy led to assessments being raised on an inconsistent basis. Control staff visiting garages involved with MOT test fees need not look into how tax was accounted for before 1 November 1996 and should confine their action to ensuring that the trader is aware of and has been correctly applying the new policy from that date.
For operational reasons, an approved MOT test centre may need to subcontract the test to another approved MOT test centre. Reasons my include staff shortage, equipment failure etc. Where this happens, the supply of the MOT to the customer will remain outside the scope of VAT , provided it does not exceed the statutory maximum, regardless of any discount that may be given by the subcontracted test centre. This is because the first test centre is still making a supply of an MOT test (the charge for which is outside the scope of VAT) whether from its in-house resources or not.