Treasury Management in local government is regulated by the 1996

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Treasury Management in local government is regulated by the 1996




    8 AUGUST 2006




1.0 Introduction

1.1 It was the previously established principle that car parking income is

    received inclusive of Value Added Tax (VAT). However, in February

    2004 a VAT Tribunal heard the Isle of Wight Council‟s submission on

    whether car-parking income received by a Local Authority, specifically

    the Isle of Wight Council, should not be liable to VAT.

1.2 The Tribunal ruled in favour of the Council on two preliminary points: -

    (i) that the Council was operating its car parks under a special legal

    regime (the Road Traffic Regulations Act 1984) governing the

    Council‟s provision of off-street parking such that the Council was

    acting as a public body governed by public law when operating car


    (ii) that HM Revenue and Customs could not deny the Council

    treatment as a non-taxable person on the ground that it would

    create a significant distortion of competition, as that EU law

    provision had not been adequately transposed into UK legislation.

1.3 This means that the Council operated its car parks under special

    legislation afforded it and that the issue of competition had not been

    properly accepted into UK law.

1.4 An earlier European Court case established that where a public body

    acts under public law, such activities must be regarded as not being

    engaged in furtherance of business, provided that this does not result in

    a distortion of competition with private sector providers.

1.5 HM Revenue and Customs appealed the February 2004 ruling. At that

    appeal the Judge stated that while the Council did in fact operate car

    parks under a special legal regime, the issue of competition would need

    to be reviewed once again. The High Court, therefore, referred the case

    back to another VAT Tribunal to consider further the issue of distortion of

    competition with private sector providers.


1.6 In January 2006 the Tribunal published its findings on a further two


    (i) whether the disapplication of VAT on Local Authority parking

    activities would lead to significant distortions of competition on the

    demand for car parking;

    (ii) whether the disapplication of VAT on Local Authority parking

    activities would result in significant distortions of competition on

    the supply of car parking (i.e. encourage Local Authorities to

    provide more car parks, in order to generate income).

1.7 The Tribunal decided that, considering all the facts presented to it, car

    parks provided by the Local Authorities did not lead to a distortion of

    competition with private car park providers. VAT would not need to be

    paid to HM Revenue and Customs. Therefore, the Local Authorities can

    retain all the income they receive through car parking and are not

    required to pay over the 17.5% to HM Revenue and Customs.

1.8 HM Revenue and Customs are once again appealing this decision.

2.0 How does this effect Bridgend County Borough Council

2.1 The key points in both Tribunals also relate to Bridgend County Borough


    (i) Bridgend provides car parking under the same special legal

    regime as the four Local Authorities making the claim (i.e. the

    Road Traffic Regulations Act 1984);

    (ii) The private car park providers (the competition) in this area are

    very similar, in number and location, to the parking facilities

    offered in the four Local Authorities making the claim.

2.2 A number of Local Authorities have stopped paying over the VAT

    element of these receipts. A larger number are also considering the

    proposal to retain the receipts.

2.3 Bridgend County Borough Council should now consider its own position

    with regards to VAT on car parking income i.e. either :-

    (i) Discontinue paying over the VAT on car parking income to HM

    Revenue and Customs;

    (ii) Continue to pay over the VAT on car parking income to HM

    Revenue and Customs.


3.0 What are the implications if Bridgend County Borough Council

    discontinues paying over VAT on Car Parking Income?

    3.1 If HM Revenue and Customs win their appeal, then Bridgend County

    Borough Council will have to pay over the amount that HM Revenue and

    Customs state is owed to them in lost revenue, plus interest (currently

    6.5%). It should be noted that this interest rate of 6.5% would be offset

    by the 4.5% that the Authority will receive for retaining the receipts, as

    part of its investments. This net liability of interest would be less than

    ?5,000 per annum.

    3.2 If HM Revenue and Customs lose their appeal, then Bridgend County

    Borough Council will not have to pay over the amount that HM Revenue

    and Customs believe is owed to them in lost revenue.

4.0 What are the implications if Bridgend County Borough Council

    continues paying over VAT on Car Parking Income?

4.1 This is where the real issue lies.

4.2 Bridgend County Borough Council has up until now lodged „protective

    claims’ to HM Revenue and Customs on this matter. These „protective

    claims‟ are official forms submitted to HM Revenue and Customs which

    state that the Authority is owed an amount (currently ?1.5m), as it has

    paid over VAT that it need not have done. These protective claims cover stthe Authority to the period ended 31 March 2006.

4.3 However, an argument that HM Revenue and Customs use against

    suppliers who wish to reclaim VAT from them, is that the Supplier (the

    Council) should repay the VAT back to its customers. Where the supplier

    is unable to do this (e.g. because in this case the Authority cannot

    identify its customers), the Supplier will be seen to be „unjustly enriched‟.

    This basically means that where a supplier has charged and accounted

    for VAT incorrectly, HM Revenue and Customs would be prepared to

    repay the money to the supplier if the supplier, in turn, repays the

    customer the amount of money that was incorrectly charged to them.

    This is clearly impossible when it comes to car parking.

    4.4 Where, in their opinion, „unjust enrichment’ has occurred, HM Revenue

    and Customs have recently refused to repay the amount of money back

    to the supplier.

4.5 The argument that the Local Authority can use in this scenario is that the

    Authority is not unjustly enriched, as the „additional money‟ that the

    Authority will have returned to it will be repaid to the users of the car park

    in the form of other services, e.g. schools, or indeed car parking facilities.

    In effect, the taxpayer still receives the benefit and the Local Authority


    does not benefit from what a private sector provider would enjoy i.e.

    „windfall additional profits‟.

5.0 HM Revenue and Customs View of the position and potential

    sanctions imposed

5.1 HM Revenue and Customs currently maintain that VAT remains

    accountable from Local Authorities.

5.2 HM Revenue and Customs are fully aware that a number of Local

    Authorities are of the opinion that it will be safer to retain these funds and

    risk legal / financial proceedings being taken against them.

5.3 HM Revenue and Customs official policy is that they do not impose any

    legal or financial proceedings against the Local Authorities that take this

    course of action. They will, however, impose the statutory interest rate of


6.0 The Effect on balances on Later Years, if the case was to continue

    for a number of years.

6.1 Discussions have taken place with other Authorities and independent

    advisors on this matter. It is realised that any money that is retained in

    the form of reserves cannot be retained as balances indefinitely. A

    decision will need to be made some time in the future.

6.2 HM Revenue and Customs have also made attempts to recover the

    unpaid VAT from those Local Authorities who have decided to withhold

    accounting for VAT on car parking receipts. They have, therefore,

    assessed some Local Authorities and charged interest on, either, a

    monthly or quarterly basis.

6.3 These Local Authorities can then either pay over the monies, plus

    interest, or apply to a VAT Tribunal to postpone charging any interest

    penalties, pending a final out-come of the situation. This may ultimately

    be resolved by the European Courts.

6.4 The process of withholding VAT and then paying over the amount plus

    interest will in itself reduce the amount of interest that an Authority would

    be charged all at once, should the case be resolved in favour of HM

    Revenue and Customs.

6.5 The advantage of withholding the VAT and then paying over the amount,

    should the Authority be assessed by the VAT Inspector, is mainly one of

    legal technicality. The Authority will continue to maintain throughout that

    this sum is not VAT and, in our view, merely an incorrect assessment

    following the Tribunal ruling. Therefore, if the assessment is not for VAT

    then the Authority should be repaid the money, if the ultimate legal ruling

    is settled in favour of the Local Authorities.


6.6 Our VAT consultants have advised that a Local Authority in possession

    of an assessment which has been appealed to a VAT Tribunal will be

    protected against the “unjust enrichment” rule, used by HM Revenue and


7.0 Conclusion

7.1 Bridgend County Borough Council has the option of either:-

    a) maintaining the status quo by paying over to HM Revenue and

    Customs the VAT element of car parking income, in which case

    there is a possibility that HM Revenue and Customs may refuse to

    repay the receipts under their “rich unjustment” rule.


    b) retaining the full income from car parking receipts and awaiting a

    VAT assessment from HM Revenue and Customs and then

    paying the amount over and any potential interest charged.

7.2 It can only remain an educated guess as to what the final outcome of

    these Tribunals will be and it will remain a risk either way. Cabinet has to

    weigh the risk of losing the interest payment of less than ?5,000 per

    annum against a potential loss of approximately ?250,000 per annum,

    through remaining „on the fence‟.

    8.0 Recommendations

8.1 Cabinet is requested to approve :-

    ? withholding payment of these receipts until such a time that HM Revenue

    and Customs raise an assessment against the Authority;

    ? to appeal HM Revenue and Customs assessment to a VAT Tribunal

    pending the outcome of the Isle of Wight VAT Tribunal case.

Allan Phillips, CPFA


    27 July 2006

Report Author : J Hughes

Background Papers:

    Isle of Wight Council Tribunal (v/18557) (06.04.2004)

    Isle of Wight Council, Mid-Suffolk District Council, South

    Tyneside Metropolitan Borough Council, West Berkshire

    Council Tribunal (v/19427) (23.01.2006)


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