by Peter Jones
7 minute read
Should local authorities have to charge VAT on their commercial waste services? Not according to Mr Justice Warren of the Upper Tribunal (Tax and Chancery Chamber), who this month declined to overturn HMRC’s 2011 decision that such services were VAT exempt.
HMRC’s logic was that, because their duty to collect commercial waste if requested to do so creates a “special legal regime”, which takes this work outside the scope of VAT. The case has been big news in the waste sector, with both sides claiming that the decision has important implications.
The Local Government Association (LGA) hailed the result as a victory for councils that would mean “savings of many millions”. Meanwhile the plaintiff, The Durham Company Limited (‘TDC’, which trades as Max Recycle), is considering an appeal, or perhaps a fresh challenge targeting an individual council. From my reading of the situation, while the judgement is fascinating, I really can’t understand why anyone thought the VAT issue was worth spending money on litigating.
VAT chance
TDC brought the case because of their concerns about local authorities as competitors. In a witness statement, the company’s MD Scott Hawthorne explained that in his view “Customers see trade waste collection as essentially a ‘generic’ service… [and] just want the cheapest supplier.” All else being equal, if this were correct the VAT exemption might give councils a 20% price advantage and represent a significant selling point.
However, the purported competitive advantage is illusory. As the judge notes:
“The extent to which the customer will have to bear the burden of tax will, of course, depend on the nature of the customer’s own activities in particular whether or not it is registered for VAT and, if it is, on its mix of taxable and exempt supplies.” (Paragraph 8)
He goes on to say that, for some businesses, the true cost of waste services will include some or all of the VAT. However, he does not speculate as to how many businesses this might apply to. The latest business population data indicates that there are now 5.4m businesses in the UK, of which only around 2.3m are registered for VAT.
That might suggest there is a huge population of businesses where councils enjoy a big advantage. However, only 1.3m businesses employ anyone aside from the owner. Very few businesses with no employees will have premises – and (generally) if you don’t have commercial premises, you don’t produce commercial waste.
It’s hard to imagine that many businesses big enough to need premises have a turnover of less than the £83,000 VAT registration threshold. And when it comes to “exempt supplies”, the list is pretty limited. Greengrocers and charity shops aside, most businesses will be charging VAT on a decent share of their sales, and so can offset the VAT they pay out against the VAT they collect.
Most business-to-business services are quoted exclusive of VAT, precisely because VAT matters little to most companies. For the massive majority of trade waste customers, the only benefit of VAT exempt service is a small, short-term cash flow benefit, which is unlikely to carry much weight when choosing between suppliers.
Loss adjustment
I’d also question the claim that the commercial waste market is highly price sensitive. Whenever I’ve researched prices, I have been surprised at just how wide a range there is in any given area. Councils’ prices are rarely at the bottom end, and often more than 20% more expensive than the lowest on the market – yet they retain customers. That suggests that some businesses choose their supplier for reasons other than price – I suggested some possible factors here.
It therefore seems unlikely that TDC would have benefitted much if the case had gone their way; but equally, it needn’t have had much impact on councils’ services.
The LGA said that the case could have cost councils up to £77m a year, but that assumes they wouldn’t have simply been able to pass the VAT charge on to their customers. For most, it would make no difference to the real cost of the service, so councils would have been under little pressure to absorb it – except perhaps for a few sensitive cases such as charity shops and village halls.
Despite TDC’s protests, council trade waste collections remain VAT-free. Photo: Nate (CC BY-NC 2.0), via Flickr.
The most sensible comment on the case came from LARAC, who said “the VAT exemption for Councils does little if anything to distort the market”. Perhaps TDC and the courts will heed this before contemplating any further litigation.
Warren piece
Two other points in the judgement seem particularly worthy of highlighting. TDC’s case attempted to characterise local authorities as collectors “of last resort”, a phrase the LGA also uses in its press release on the case. But that’s not how the judge saw it.
Section 45(1)(b) of the Environmental Protection Act (EPA) 1990 certainly does give councils a duty to pick up commercial waste if requested, which might sometimes make them collectors of last resort. However, Warren J puts to bed the idea that this role is the limit of their powers:
“A LA is not, it seems to me, a provider of last resort in the sense that it is obliged to provide a service only if no-one else will. Rather, it is under a statutory obligation to arrange for collection if requested. Far from being a last resort, the LA may, for some occupiers, be the first port of call.” (Paragraph 75)
Admirably clear and to the point!
There seems to be some misunderstanding of another quote from the judgement. The judge refers in paragraph 104 to local authorities operating commercial waste collections “only following a request and for a reasonable cost reflecting cost recovery and no surplus”. However, it is very clear in the context that Warren J is characterising a service that would have no impact on TDC’s business, and give no conceivable grounds for complaint. He doesn’t appear to be suggesting that these are criteria that a council’s service must meet, whether to escape VAT, or to be a legitimate exercise of its powers.
Surplus to requirements
Indeed, at Paragraph 63 he says:
“The fact that a service is provided for a charge, even if that charge is set so as to make a surplus or profit, does not demonstrate that the purpose of providing the service is commercial…. It is not immediately obvious to me that, if the LA is empowered and chooses to provide those services in a way which is designed to make a profit, the purpose of the provision then becomes a commercial purpose.”
The legal arguments in the case are, however, a salutary reminder that the charges a council makes for commercial waste collections under Section 45(4) of the EPA must be “reasonable”. Rather too often, when I’ve looked at council commercial waste services, their collection charges aren’t clearly related to the costs of providing the service, and there can be uncertainty about what surplus, if any, is really being made. For example:
- Some councils set their prices simply by adding a percentage to the previous year’s costs, rather than regularly looking at the real costs of providing the service.
- Some councils consider only their direct operational costs, and don’t factor in costs such as support services or the rental value of the depot and office space they occupy.
- Some councils charge all customers the same price per lift for a particular bin size, when it might be more reasonable to differentiate.
That’s not to say that any of these practices is inherently unreasonable – but with TDC considering litigation against individual authorities, it could be a good time to review trade waste prices and to make sure they are based on a clear rationale.
While the recent judgement appeared to leave the commercial waste landscape untouched, Mr Justice Warren covers much more interesting ground in the 50-page judgement than the ultimately inconsequential issue of VAT. There are some murky issues regarding councils’ powers in this area, and we may not yet have seen the final repercussions of the case. It’s well worth councils investing a little time in getting to grips with its conclusions.
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