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HMRC internal manual

VAT Valuation Manual

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HM Revenue & Customs
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Apportionment of monetary consideration: should "uplifted costs" include an element in respect of profits?

The difficulty in establishing an appropriate uplift to be applied to the costs in those cases where these are only identifiable for one supply is likely to be the main issue in any disputes with traders in this area. In particular, you may encounter traders who contend that they are merely supplying the standard-rated items on at cost and deriving all their profits from the exempt or zero-rated supplies. You should reject this argument completely and insist upon the application of an appropriate uplift. This argument is one that has resurfaced periodically since the commencement of VAT and there are several long-standing decisions that you can rely upon to support your rejection of the trader’s claims.

In Waterhouse Coaches Ltd (LON/82/378), which pre-dates the Tour Operators Margin Scheme, the Appellant sold tours for a single price but these comprised zero-rated transport and standard-rated meals and hotel accommodation. The Appellant claimed that it was charging its customers for the meals and accommodation at cost, and making all its profit on the transport supplies. The Tribunal agreed with Customs’ contentions that:

“… in arriving at the proportion of a single price which reflects the zero-rated element and the standard-rated elements making up the whole, it is not proper for the Appellant Company to affect to charge a profit cost on the zero-rated supply of transport and to pass on at cost the standard-rated supplies.”

Subsequent Tribunal decisions followed the above approach but, most importantly, we have the decision of Mr Justice Forbes in the High Court case of Tynewydd Labour Working Men’s Club and Institute Ltd [(1979) STC 570].

Tynewydd was a workingmen’s club that held regular sessions of bingo for its members. On some nights, entertainment was also provided. On these occasions the members had to pay a specified charge. No one could play the bingo games on those nights unless they had paid the charge. Tynewydd claimed that the payments were exempt charges for playing bingo. Customs argued that part of the payment was for a standard-rated supply of entertainment and/or admission. When referring the matter back to a Tribunal to decide upon the nature of the supply, the judge commented as follows on the question of apportionment:

“If there has to be an apportionment, I should add, this should take account of the profit element by ensuring that the part of the payment attributable to the facilities for bingo included a due proportion of the profit for the club from this part of the enterprise.”

In Tynewydd, the judge was therefore saying that where there was more than one supply, any profit element in the charge had to be allocated to all of the supplies involved.

In the decided cases, it had been possible to attribute the costs directly to all of the supplies involved. However, there is no reason not to apply the same principle when an apportionment is being performed in a situation where only one supply’s costs can be identified.

Past cases have involved mixed supplies of transport/hotel accommodation and bingo/entertainment. The exact nature of the supplies in any particular case has no effect upon the valuation principles involved.