Parking Penalty Fines: VAT Taxable Supply or Contractual Damages?

In the recent case of Vehicle Control Services Limited v HM Revenue & Customs [2013] the Court of Appeal considered whether Vehicle Control Services Limited were liable to pay VAT on parking penalty charges. The Court of Appeal overruled the decision of the Upper Tier Tax Tribunal and found that parking penalty fees are not a taxable supply (therefore not subject to VAT) but constituted damages in respect of breach of contract between the appellant and the motorist. This article sets out the facts of the case and the implications of the Court Appeal’s Decision.

Value Added Tax or Damages for Breach of Contract?

In this case the appellant provided parking control services to landowners. The appellant  put up warning signs on the land for unauthorised use. Where there is unauthorised parking, the appellant would charge the infringing motorist a penalty fee. The appellant retained the charges. The warning signs display the various parking rules and warn of applicable charges relating to unauthorised parking.  The signs also contain the wording: “You are entering into a contractual agreement. Do not park in this area unless you fully understand and agree to the above contractual terms.”

The appellant was assessed by Her Majesty’s Revenue and Customs (HMRC) for output VAT on the basis that such charges constituted taxable supplies.  The appellant appealed against the assessment arguing that the penalty charges did not constitutes taxable supplies, but were rather compensation fees for breach of contract.  Alternatively, the appellant argued that, if the payments were not in respect of breach of contract, they should be seen as compensation for trespassing.

The appellant lost in the First Tier Tax Tribunal as well as in the Upper Tier Tax Tribunal. Both tax Tribunals held that the charges were consideration for a supply of services, and hence were subject to VAT. The appellant appealed to the Court of Appeal (Civil Division).

Value Added Tax Act 1994: What is a Taxable Supply?

Value added tax (VAT) is a form of taxation in the United Kingdom. The purpose of VAT is to generate tax revenues similar to the corporate income tax or income tax.

The main charging statute relating to value added tax (VAT) is the Value Added Tax Act 1994 (VATA 1994). VAT is ‘charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him’ (VATA 1994, s 4(1)).

VAT will be charged on the ‘value of the supply’ (VATA 1994, s 2(1)). ‘Business’ includes any trade, profession or vocation (VATA 1994, s 94). A taxable person is a person who makes or intends to make taxable supplies and who is or is required to be registered under the Act (VATA 1994, s 3(1)).

Court of Appeal’s Decision: Taxable Supply or Damages?

The Court of Appeal allowed Vehicle Control Services Limited’s appeal and ruled that the penalty fees charged did not relate to any supply of goods or services, but constituted damages for breach of contract, which did not attract VAT.

On the issue of trespassing, HMRC argued that the appellant did not have such rights in respect of the land so as to give it any action in respect of trespassing. However, the court held that the contract between the appellant and the landowner gave the appellant the right to eject trespassers by towing their vehicles.

The decision by the Court of Appeal finds that such parking penalty charges constitute a taxable supply within the interpretation of section 4(1) of the VATA 1994.  The Court’ of Appeal’s decision was borne from a finding that a contract had been established between the appellant and each motorist holding a permit. The penalty fee charges that the appellant collected therefore did not directly flow from the service agreement with the land owner, but constituted damages between the appellant and each relevant motorist.

This demonstrates that the Courts are to apply a strict interpretation of section 4(1) of VATA 1994, preferring to reinforce contractual remedies instead of imposing VAT charges on parking penalty fines.

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