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This article was first published on LexisPSL Tax on 23 January 2014. Click here for a free 24h trial of LexisPSL.

A lesson on VAT categorisation

23/01/2014 Tax analysis: What are the challenges in determining the category of an activity for the purpose of VAT? Alan Sinyor, head of VAT at Berwin Leighton Paisner, discusses this question in light of a recent tribunal decision concerning the VAT status of belly dancing.

Original news
No VAT relief for belly dancing, LNB News 17/01/2014 72 Daily Telegraph, 17 January 2014: Belly dance teacher, Audrey Cheruvier, has been ordered by a tribunal to pay over 50,000 in tax for her dance classes after a judge ruled they were recreational rather than educational.

How will the tribunal distinguish between recreational and educational for the purpose of VAT?
The question is not really about whether something is recreation or education. The real question is whether something is education or not. Something may be both recreational and educational and in fact there is nothing in the VAT legislation that talks about recreation being VATable, it is just that education is exempt. Having said that, there is a reference in the European Court of Justice's case law which does seem to imply that recreation is an indication that something may not be within the education exemption. In this case the legislation which deals with the VAT exemption for private tuition only covers subjects ordinarily taught in schools or universities and it is not surprising that the tribunal refused to accept that belly dancing is ordinarily taught in these establishments. That was the essential reason why the taxpayer lost and the tribunal decided that the exemption doesn't apply.

Could this decision have wider implications?

The decision was very much based on the facts. It doesn't really take the legal analysis much further.

Are there wider difficulties in categorising activities for the purpose of VAT?
Yes there are very wide and difficult issues when categorising activities for VAT purposes and this stretches across the entire range of VAT exempt activities. The legislation defines an activity but often the legislation is dated and things have moved on. For example we at BLP are taking a case to the tribunal at the moment on the VAT treatment of e-books. Arguably, an e-book is a 'book' and the VAT legislation says that books are zero rated for VAT. It doesn't say that it has to be a physical book it just says books. However HM Revenue & Customs (HMRC) do not accept this and they take the view that only physical books benefit from zero-rating.

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It is true that VAT case law from the 1990s states what a book is--it has a cover and physical pages etc. This is an example of how we have categories set out in legislation which perhaps at the time they were drafted seemed to be quite simple, but as the world develops the old categories don't necessarily fit neatly in today's circumstances.

What should businesses be taking into consideration when categorising their products?
The VAT system works on two separate but related levels. First is the European legislation and the second is the way that this legislation is implemented in the UK. There has been a lot of litigation concerning whether the UK implementation is properly reflective of the European legislation--and if it is not, a business can rely on the European rather than the UK legislation. So businesses have a choice of looking at the European definition or the UK definition of a VAT provision. Taking that one step further you've also got HMRC's interpretation of the UK legislation which doesn't necessarily reflect either the European or the UK law. Very often businesses will just accept what the HMRC policy is as set out in their Public Notices and guidance without realising that they can be challenged in two different ways--for example, is it a proper interpretation of the UK law or a proper interpretation of the European law? If they want to argue for exemption they need to decide which of these options is best for them. The other side to this question is that a business should be categorising their products and activities from an objective point of view. For example in the belly dancing case the teacher may well have thought that what she was doing was a legitimate form of dance but that isn't really the point. The courts will look at it objectively and ask is it taught in schools and universities?

How can lawyers and tax advisers best assist businesses in this regard?
There has in the past been over-optimism from some tax advisers on the chances of success on what really were speculative cases. So they need to inform the business of their chances of success on a realistic basis, as well as how much it is going to cost and how long it will take. Also VAT advisers very often have to think outside the box to see new aspects to things. Very often this type of thinking can lead to new case law which goes against what people have previously assumed. Obviously there is an element of conservatism in the courts and it can be difficult to get them to accept innovative concepts in the VAT world, but it can be done. The advisers need to keep a balance between this realistic assessment on the one hand and an ability to think broadly on the other. Interviewed by Fran Tonks. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.