GAP wins VAT appeal

UK rental company GAP Group has won an appeal against the UK’s taxation authority - HMRC -regarding VAT (Value Added Tax) charged on red diesel supplied in its equipment.

The First Tier Tribunal effectively dismissed the HMRC demand for £844,909 in undercharged VAT for the period of March 2017 to March 2020.

The case revolved around whether the equipment rental charge and a refuelling charge were separate transactions or just one. For those that do not know, VAT on red diesel is 5%, while VAT on the rental element of plant is 20%.

The HMRC was looking to claim the 15% difference between the two rates, stating that the provision of a full tank of diesel was part of the rental price and could not be calculated separately for the sake of VAT. It had initially issued a demand for £1.44 million, which it reduced to £1.03 million following an independent review. Eventually it reduced that figure to £844,909 after removing invoices to Thames Water from its calculation.

GAP disputed HMRC’s claim and took the case to the appeal tribunal. The arguments over the issue seem to have become quite petty at times. HMRC argued that the sales were linked because the equipment had to be supplied with fuel so that they could be unloaded and moved by the customers, stating that, “a customer cannot operate a plant item at the outset of a hire without this fuel.” GAP called witnesses that said that if the equipment was not fuelled on delivery, it could always be unloaded with a crane or forklift.

GAP added that a key reason for providing fuel in the tank was practicality, as being able to drive equipment off the truck made it more straightforward for the customer. And that its competitors did business this way. It also argued that it was in line with standard industry practice and customer expectations, and that failure to do so, or to charge 20% on the diesel would result in loss of business.

In its findings, the tribunal stated: “We were not persuaded by HMRC’s argument that it had not been established that the vast majority of the appellant’s customers would not have known that they could reduce the fuel cost by refuelling the plant prior to return. Apart from the fact that we have accepted that it was industry custom and practice, the Best Practice and Trading Agreements for the Major Account Customers and the Regional Customers make that absolutely explicit and that comprises almost all of the appellant’s customer base.”

“We find that the appellant’s supplies of plant and supplies of red diesel constitute multiple supplies for VAT purposes.”
The HMRC said: "We are disappointed with the outcome and note the decision of the First Tier Tribunal.”

This is a simplified overview of the arguments. For those which wish to delve into the ‘nitty gritty’ of the case, simply click on the following link: https://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j12899/TC%2008991.pdf