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VAT and car parking - Good news for Local Authorities and NHS Trusts?

What’s it all about?

Should Local Authorities and other public bodies including NHS Trusts, have been charging VAT on car parking facilities?  If not, can they claim back from HM Revenue & Customs the VAT paid?  This point is currently being looked at by the European Court of Justice (“ECJ”) and depending on the result of that judgement, we could see public bodies making significant claims for a refund for historically overcharged VAT.

 

The background

In recent years the public sector and HM Revenue & Customs have been unable to agree whether public bodies should have to charge VAT on the provision of off-street parking facilities. HM Revenue & Customs argued that such parking was liable to VAT and accordingly insisted that VAT was paid. The sum in issue in the current case before the ECJ, involving 127 public bodies, is put at £129m.

 

The law

The law is set out in an EU VAT Directive which (among many other things) says that public bodies are not obliged to charge VAT on business supplies of goods or services, if that business activity is carried out under a statutory regime that is unique to the public sector, unless to treat them in this way would significantly distort competition with private sector bodies carrying on the same activities.

 

The commonly called “Isle of Wight” test case was brought in the UK on the back of a flood of Local Authorities seeking to reclaim VAT on parking (HMRC v Isle of Wight Council (No 2) (and related appeals), Ch D [2007] EWHC 219(Ch) [2007] All ER(D) 208 (Feb)). The UK courts concluded that the key question is essentially this; when considering whether or not there would be “significant distortions of competition” should the assessment be made:

1. Of the particular geographical market in which the Local Authority concerned operates (as the Local Authorities themselves assert) or
2. On a nationwide basis in order to identify the cumulative impact on the private sector as a whole (as the Revenue’s Commissioners assert)

 

The question has been remitted to the ECJ for consideration, and a judgment is currently awaited (Case C-288/07).

 

What could the impact be?

If the European Court favours the Revenue’s view then car parking will continue to attract VAT regardless of whether it is operated in the private or public sector. Further there will obviously be no right to reclaim overcharged VAT from the Revenue.

 

If, however, the Local Authorities’ view is preferred, the VAT exemption could be more widely available.  In that case, the Revenue will have to prove the extent of the anti-competitive effect on the relevant local market, which could be more difficult to show, and of course would have to be examined for each locality. This might mean, for example, that VAT would be due on off street parking charges imposed by the city council in say Nottingham, but not in Birmingham.  Potentially, therefore, such a ruling could lead to numerous public bodies being exempt from charging VAT on parking going forward, as well as being able to recover from HM Revenue & Customs historically overcharged VAT on parking.

 

Subject to the decision in another case presently being considered by the House of Lords (Marks & Spencer v HMRC) again in conjunction with the ECJ, the public authorities might be entitled to keep any such refund rather than having to refund it to the customers who paid the VAT on their parking fees in the first place.

 

When will we know the outcome?

The ECJ began hearing the appeal on 1 April. The EU Judges will hear argument from both parties and will then decide whether the public authorities are obliged to charge VAT and if so in what circumstances. This judgment should clarify the meaning of the EU Directive on this point. The judgment is likely to be available sometime over the next couple of months.

 

What about the NHS?

Whilst UK VAT law is not clear on the subject, it may well be that if the ECJ ruling helps Local Authorities reclaim overcharged VAT from the Revenue, NHS bodies could also lodge claims on the same basis.

 

We will provide a further update following publication of the ECJ judgement.

 

For more information or advise, please contact Carole Ayre, Ian Long or Paul Giles.

 

The content of this bulletin is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.