20741
ZERO RATING VAT Act 1994, schedule 8, group 5, note 20 supply of scaffolding to contractors whether there is a "transfer of possession" of the scaffolding to the contractors
MANCHESTER TRIBUNAL CENTRE
PHARAOH SCAFFOLDING Appellants
- and -
THE COMMISSIONERS FOR
HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: LADY MITTING (Chairman)
ALBAN HOLDEN (Member)
Sitting in public in Manchester on 4 June 2008
Glyn Edwards, VAT consultant, for the Appellant
James Puzey, counsel, instructed by the Solicitor for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2008
DECISION
- The Appellant ("Pharaoh") appeals against an amended assessment in the sum of £14,601 plus interest dated 4 May 2007.
- We heard oral evidence from Mr. Simon Critchley, Pharaoh's contracts manager and a director of the company which is owned by his parents. An unchallenged witness statement from Officer Andrew Barton was also put into evidence.
Legislation
- VATA 1994, Section 30(2) provides for the zero-rating of activities falling within Schedule 8. Group 5 thereof, Item 2(a) applies zero-rating to the construction of dwelling houses.
However, Note 20 excludes from zero-rating "
the supply of services described in paragraph 1(1)
of Schedule 4." Paragraph 1(1) thereof provides:
"(1) any transfer of the whole property in goods is a supply of goods; but subject to sub-paragraph (2) below, the transfer
(a) of any undivided share of the property, or
(b) of the possession of goods,
is a supply of services"
Section 19(4) VATA provides:
"Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it."
- The Commissioners set out their interpretation of the legislation in public notice 708, paragraph 3.4.2, which provides as follows:
"Goods hired on their own are always standard-rated. Examples include the hire of:
scaffolding, formwork or false work (although the service of erecting or dismantling can be zero-rated where all the other conditions in sub-paragraph 3.1.2 are met);"
- We were referred by the parties to the following three tribunal cases:
- Peter J Guntert, The Abingdon Scaffolding Co. 10604
- R&M Scaffolding Ltd 18955
The facts
- Pharaoh provides professional scaffolding services to the building industry. The case before the tribunal was concerned exclusively with new builds. The issue was whether Pharaoh made one single zero-rated supply of its services as contended by Mr. Edwards or whether possession of the scaffolding passed to the customer, thus creating one zero-rated supply of erection and dismantling and a separate standard-rated supply of the hire of the equipment as contended by Mr. Puzey.
- Mr. Critchley and his employees are all qualified scaffolders. It is Mr. Critchley's job to visit the customer and to discuss and ascertain with him his requirements for the site. He agrees with the customer the amount of scaffolding required and the contract period which he then costs according to an established formula. A detailed description of the work and an equally detailed quotation is submitted in writing to the customer, on the reverse side of which there is set out various terms and conditions to which we refer in greater detail below.
- The process involved in the scaffolding of a new property was described to us as an eight-stage process; from initial erection to final dismantling and including all alterations, amendments and movement in between. At the conclusion of each stage, Pharaoh supplies the customer with a "handing over certificate". This document certifies that the work specified on the certificate has been completed to the statutory health and safety standards and stipulates that the scaffold must be inspected once a week by the customer and the inspection recorded in the scaffold register. Pharaoh could be working on several blocks on the same site at the same time, all at different stages of erection so Pharaoh could well be on site for a large part of the contract period. We were referred to one job where they were on site for 19 of the 25 days of the contract.
- During the contract period, Mr. Critchley maintains a health and safety role, attending on site at least once a week to ensure the safety of the equipment and the safety of his own workforce. If he finds any fault he will report it to the customer's site manager and will himself put up a sign prohibiting use of that section until rectified. Mr. Critchley described it as the site manager's job to ensure the notice was complied with. Pharaoh maintain employer's liability and public liability insurance cover as it is statutorily obliged to do. Equally the customer also carried similar insurance and Mr. Critchley accepted that both Pharaoh and the customer had a statutory liability to ensure the safety of the equipment and the site. This joint responsibility was reflected in an insurance claim which had been brought against Pharaoh after an employee had fallen from the scaffolding. Liability was split equally between Pharaoh as they were responsible for the fall in the first place and the contractor because the injuries were worsened by the contractor's failure to clear up the site.
- Pharaoh does not add VAT to the contract price. However, if a job overruns and further charges have to be made, VAT is charged on that invoice. The further bill is calculated at the same contract rate but is stated to be for "material hires" for a stated period. Mr. Critchley accepted that there was in fact nothing different in the overrun period but it was, he felt, rather more palatable to the customer if the customer thought he was paying merely for the use of the equipment for an extended period rather than labour as well. In reality, the extended period could just be for the use of the scaffolding which might be lying idle or just as equally Pharaoh's staff could be working on it.
- Pharaoh's "conditions of contract" ran to 19 clauses. Many were uncontentious and we need not refer to them but we will summarise those to which the parties referred us. Clause 3 stipulates that the customer is not allowed to undertake or carry out any alteration, adaptation, variation or addition to the structure or to interfere with it in any way. All such additions or alterations etc. have to be carried out by Pharaoh on receipt of written instructions from the customer but at the customer's expense. Clause 7 reflects Pharaoh's continued ownership of its own plant and states that in the event of default in payment from the customer, the customer would assist Pharaoh in resuming possession of its property. Clause 8 provids that the customer is responsible for any loss or damage to the scaffolding equipment whilst on site, save to the extent caused by the negligence of Pharaoh. Clause 18 stipulates that Pharaoh would not undertake statutory inspection of the scaffolding or sign the register as this is the responsibility of the customer as employer of the labour using the scaffolding. Clause 19 stipulates the chargeable contract period would run from commencement of erection until final dismantling and that the contract price remained the effective price regardless of earlier completion.
Submissions
- On behalf of the Appellant, it was Mr. Edwards' basic submission that the facts of this case were on all fours with GT. In GT the tribunal had held that "possession" of the scaffolding did not pass to the customer. The chairman, Dr. Williams, described the "full service" provided by GT which Mr. Edwards described as being identical to that provided by Pharaoh. The regulatory, contractual and insurance requirements were similar as was the continuing nature of the scaffolding service provided. Mr. Edwards asked us to adopt Dr. Williams' analysis of "possession", the key concept of which Mr. Edwards saw as the control of the goods and the transfer of exclusive possession. He submitted that the correct analysis of note 20 was, as set out in the Commissioners' Notice 708, that scaffolding hired on its own would be zero-rated. In such a case there would be delivery and no more. However the service provided by Pharaoh of erection, dismantling, alteration and maintenance brought the supply squarely within the category of "supplies in the course of construction" within the meaning of item 2 of group 5. Mr. Edwards referred us to clause 3 of the Terms & Conditions prohibiting the customer from altering or adapting the scaffolding. This he saw as inconsistent with a transfer of possession. He stressed the continuing presence on site of the Pharaoh workforce. The fact that the invoices for runover periods referred to the hire of materials was not, in his submission, indicative because the mere labelling of a supply in an invoice could not determine the nature of that supply. In respect of R&M Scaffolding, Mr. Edwards submitted that the tribunal had placed too much reliance on the idea that there was no physical impediment to customers altering the scaffolding, and in any case in the case of Pharaoh there was a clear and unmistakeable contractual impediment which precluded the transfer of exclusive control.
- Mr. Puzey contended that the "full service" described in paragraph 11 of GT was not of itself inconsistent with a transfer of possession and that the concept of "exclusive use" by a customer would not preclude Pharaoh from having access to the scaffolding for specified tasks. The tribunal in GT, Mr. Puzey submitted, had read too much into the supplier's rights to go back on site and its continuing health and safety responsibilities. Mr. Puzey stressed the co-existing statutory responsibility on both supplier and customer to ensure the safety of the equipment. He also pointed out that in GT, the tribunal had expressly not considered the meaning of the word "hire" as not being of relevance in that case. Here, the contractual documentation referred to a "hire" and that concept therefore had to be considered. Mr. Puzey submitted that "hire" can and usually does denote a transfer of possession. Mr. Puzey took us through the Appellant's standard terms and conditions, referring us specifically to clauses 7, 8, 18 and 19 all of which have been set out above.
Conclusions
- It was common ground that zero-rating was to be narrowly, or as Mr. Edwards described it "strictly" construed and conversely that exceptions to zero-rating should be broadly construed.
- We deal first with whether the present case is, in fact, on all fours with GT and conclude it is not. First, as pointed out by Mr. Puzey, we are expressly dealing with the "hire" of equipment but secondly there is in our view one very important distinction and that is to be found in clause 8 of Pharaoh's Terms & Conditions. Dr. Williams in GT stressed the fact that GT throughout retained responsibility for the risks arising from the structures (including the risks of loss and damage and of liability to third parties). In his oral evidence, Mr. Critchley told us that Pharaoh would make good any loss or damage to the scaffolding once on site but clause 8 makes it abundantly clear that in fact Pharaoh's contractual responsibility so to do extends only to loss caused by the negligence or default of Pharaoh. Otherwise the risk has passed to the customer. It is the customer who is responsible for making good any loss or damage to the structure.
- As both tribunals in GT and R&M point out, there is no statutory definition of "possession" and both chairmen analysed the concept with great care. Drawing on both, we believe that for possession to pass to the customer, the customer must have acquired an exclusivity of use and at least de facto control. It is our view that once the scaffolding is erected, Pharaoh's customers acquire just that. Once erected, Pharaoh hands over the handing over certificate and leaves the site, reserving an entitlement to return for only two reasons. First, in accordance with its contractual obligations to continue, as and when required, the erection, dismantling, alteration and adaptation of the scaffolding. Secondly, in furtherance of its contractual, insurance and statutory liabilities to carry out health and safety checks. Neither of these, do we think, disturb the customer's use, possession and control of the scaffolding. Once erected, it is the customer who decides on its use, how it should be used and who by. Pharaoh has no control over that. The fact that Pharaoh employees are on site carrying out adaptations does not give Pharaoh any control over the use to which the customer puts the scaffolding. Unless Pharaoh has a specific task to do it will not be represented on site. It does not watch over or supervise the use to which the scaffolding is put. Responsibility for loss and damage had passed to the customer (clause 8). In reality de facto control and an exclusivity of use has passed to the customer.
- We note the strict prohibition in clause 3 of the Terms & Conditions of the customer's tampering in any way with the structure. Scaffolding is a complicated and highly specialist piece of equipment and one would not expect the position to be otherwise. However the point is that we do not see this prohibition as being in any way inconsistent with a transfer of possession. First, as Mr. Critchley accepted, the customer's staff can and do make their own alterations. Pharaoh cannot physically prevent them from doing so despite the contractual bar. Secondly, such a clause is essential given Pharaoh's continuing contractual and statutory responsibility to ensure the safety of the structure. It does not however imply or impose any continuing control over its use.
- Mr. Puzey referred us to the fact that the charges for any runover period were treated by Pharaoh as standard-rated despite the goods and service provided being identical to those covered within the terms of the contract. Whilst accepting that this is totally illogical, it does not in our view go towards determining what the true legal status of these supplies are.
- In summary therefore we hold that on the facts of this case and the nature of its dealings with its customers, Pharaoh does transfer possession of the scaffolding. We note that Pharaoh is allowed back on site for the two stated reasons but do not believe that this disturbs the exclusivity of use and de facto control which has passed to the customer. There are therefore two distinct supplies. There is the zero-rated supply of erection and dismantling and a standard-rated supply of the equipment. Accordingly there should be apportionment of the price between the two items. We understand that the Commissioners' attempt at apportionment is the basis of the calculation of the assessment, the quantum of which is not challenged. We therefore dismiss the appeal. The Commissioners made no application for costs and no order is made.
MAN/2007/0423
Lady Mitting
CHAIRMAN
Release Date: 14 July 2008
