Equal to the sum of its parts? Is a ‘kit’ the same as the completed model? Graham Elliott (City & Cambridge Consultancy) considers the recent tribunal VAT decision in Scandinavian Log Cabins Direct.
A seeming reminder that we have been in the ‘silly season’, the tribunal case of Scandinavian Log Cabins Direct [2016] UKFTT 563 (TC) caused some head-scratching on my part.
This relates to the zero rate for a caravan under VATA 1994 Sch 8 Group 9. The product in question is a flat-packed kit for construction of the same (which, it was not disputed by HMRC, would become a caravan as defined, despite being called a ‘log cabin’). But the kit consisted of much more than a selection of logs and screws. The entire pack was machined to fine tolerances and had all that was required to build the basic unit. Buyers need to do some off-cutting and minor adaptation as is inevitable given the different sites on which the assembled unit would sit. Some parts were left to the buyer to procure as they were ‘standard’, but the unit would recognisably be the finished article even before these were fitted.
The appellant had two arguments. First, the kit was ‘a caravan’, notwithstanding the lack of assembly, because a caravan was not necessarily to be defined by being the assembled article, as long as all of it was ‘present and correct’. Second, a kit is as good as the real thing so there was no point making a distinction.
The first of these failed. References to other legislation concerning caravans showed how difficult it was to make sense of those laws if one included the concept of a complete set of parts for a caravan rather than limiting it to the usual habitable structure. I was not surprised by this.
The second, however, did succeed. I was quite surprised by that. How could the tribunal be persuaded that a kit was equivalent to the final product of its assembly?
What persuaded it was an ancient purchase tax case: Betterways Panels Ltd [1964] 1 All ER 948 in which a judge opined (to ensure that purchase tax was duly paid) that a full kit of parts for something was materially different to merely buying some of the constituent parts, and thus was equivalent to the final product. Our appellant used this in reverse, so to speak, to make out a case that the kit for a zero rated product should also be taxed as though it were the product. HMRC said that it should be taxed the same as building materials are taxed even when later used on a zero rated building project. The tribunal rejected that parallel because building materials are not supplied as a fully measured out ‘kit’ to create exactly one house, so are not comparable to the log cabin kit, which held everything that was needed. Nobody was trying to argue that felled pine trees should be sold zero rated because they might be used to build a caravan. This kit was completely finished save for the effort of assembly.
And the tribunal was fortified in its view by reference to HMRC’s policy that fabrics marked out for completion into children’s clothes (hence, a kit) are zero rated as though they were children’s clothes (see Notice 714, para 7). I can see that being withdrawn pretty sharply in the light of this case.
But can it be right?
I struggle with the logic. Were it not for a case of more than 50 years’ age, the point would not appear to have had much chance. That related to a different tax, and was involved in bringing a supply within the tax, not providing a relief from tax. Reliefs ought to be applied strictly where VAT is concerned, so why is the question of the scope of purchase tax really all that relevant? And what if parliament intended the zero rate to reflect not merely the social aspect of providing housing but also the social aspect of the use of manual labour in constructing the housing? That would be reduced in the case of a kit.
HMRC may be discouraged from appealing on the basis that there is a small market for the product, but if it does, one cannot help predicting a successful appeal.
Equal to the sum of its parts? Is a ‘kit’ the same as the completed model? Graham Elliott (City & Cambridge Consultancy) considers the recent tribunal VAT decision in Scandinavian Log Cabins Direct.
A seeming reminder that we have been in the ‘silly season’, the tribunal case of Scandinavian Log Cabins Direct [2016] UKFTT 563 (TC) caused some head-scratching on my part.
This relates to the zero rate for a caravan under VATA 1994 Sch 8 Group 9. The product in question is a flat-packed kit for construction of the same (which, it was not disputed by HMRC, would become a caravan as defined, despite being called a ‘log cabin’). But the kit consisted of much more than a selection of logs and screws. The entire pack was machined to fine tolerances and had all that was required to build the basic unit. Buyers need to do some off-cutting and minor adaptation as is inevitable given the different sites on which the assembled unit would sit. Some parts were left to the buyer to procure as they were ‘standard’, but the unit would recognisably be the finished article even before these were fitted.
The appellant had two arguments. First, the kit was ‘a caravan’, notwithstanding the lack of assembly, because a caravan was not necessarily to be defined by being the assembled article, as long as all of it was ‘present and correct’. Second, a kit is as good as the real thing so there was no point making a distinction.
The first of these failed. References to other legislation concerning caravans showed how difficult it was to make sense of those laws if one included the concept of a complete set of parts for a caravan rather than limiting it to the usual habitable structure. I was not surprised by this.
The second, however, did succeed. I was quite surprised by that. How could the tribunal be persuaded that a kit was equivalent to the final product of its assembly?
What persuaded it was an ancient purchase tax case: Betterways Panels Ltd [1964] 1 All ER 948 in which a judge opined (to ensure that purchase tax was duly paid) that a full kit of parts for something was materially different to merely buying some of the constituent parts, and thus was equivalent to the final product. Our appellant used this in reverse, so to speak, to make out a case that the kit for a zero rated product should also be taxed as though it were the product. HMRC said that it should be taxed the same as building materials are taxed even when later used on a zero rated building project. The tribunal rejected that parallel because building materials are not supplied as a fully measured out ‘kit’ to create exactly one house, so are not comparable to the log cabin kit, which held everything that was needed. Nobody was trying to argue that felled pine trees should be sold zero rated because they might be used to build a caravan. This kit was completely finished save for the effort of assembly.
And the tribunal was fortified in its view by reference to HMRC’s policy that fabrics marked out for completion into children’s clothes (hence, a kit) are zero rated as though they were children’s clothes (see Notice 714, para 7). I can see that being withdrawn pretty sharply in the light of this case.
But can it be right?
I struggle with the logic. Were it not for a case of more than 50 years’ age, the point would not appear to have had much chance. That related to a different tax, and was involved in bringing a supply within the tax, not providing a relief from tax. Reliefs ought to be applied strictly where VAT is concerned, so why is the question of the scope of purchase tax really all that relevant? And what if parliament intended the zero rate to reflect not merely the social aspect of providing housing but also the social aspect of the use of manual labour in constructing the housing? That would be reduced in the case of a kit.
HMRC may be discouraged from appealing on the basis that there is a small market for the product, but if it does, one cannot help predicting a successful appeal.
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