HMRC has lost a case at the First Tier Tribunal against a plant hire company over the rate of VAT charged on red diesel provided in equipment for hire
The case centred around an initial claim for £1.4m to GAP Group Limited which was subsequently reduced to £844,909 by HMRC.
GAP Group is a plant hire company that has been operating for over 50 years with 175 depots around the UK.
Up until 2016 GAP was a registered dealer in controlled oils but the company de-registered as they supplied less than 2,300 litres of red diesel a day.
HMRC notified GAP Group in March 2021 that the company owed undeclared VAT at the rate of 20%, originally totalling £1,440,141 then reduced to £1,028,672 after an independent review.
This was reduced for a second time to £844,909 after HMRC confirmed that GAP Group’s dealings with Thames Water to be regarded as two separate VAT sums.
HMRC had two issues with the appellant, one was whether the supply of plant machinery and the supply of red diesel should be taxed individually, or as multiple supplies for VAT purposes. HMRC argued these sales should be taxed together at 20%.
GAP Group had always considered these two separate transactions where VAT was concerned, paying 5% on the diesel in their hire vehicles.
The second issue was whether the two supplies should be taxed separately, with the red diesel taxed at the reduced VAT rate or the standard rate of 20%.
Philip Simpson was the representative of GAP Group Limited, instructed by KPMG LLP.
HMRC questioned whether the red diesel constituted separate supplies from those of plant hired tools and vehicles from the 2017 to 2020. The fuel supplied with the hire machinery and the fuel in transportation vehicles had always been on different rates of VAT.
Andrew Telfer, finance director for GAP Group told the tribunal: ‘Our equipment hire revenue for financial year April 2021 to March 2022 was £185m and we only charged fuel to a value of £2.69m which is 1.5% of the total revenue.
‘The total fuel revenue was 1.3% in the prior year and between 1.2% and 1.6% in financial years March 2017 to March 2020 (which is the period of the assessment).
‘The percentages calculated are derived by taking the revenue charged to customers for red diesel and dividing it by the amount of hire revenue generated. When you compare the total fuel costs to the total hire costs the fuel costs amount to a very small percentage of GAP’s total revenue.’
HMRC responded with details of the fuel sales amounting to £2.69m, making the percentage of the total revenue 3.4%. Telfer agreed to this figure as previously GAP did not separate revenue made through rental of machinery that did need fuel against machinery that did not.
HMRC argued that the sales were linked, stating: ‘The appellant’s plant items are required to be fuelled in advance for hire so that they can be moved to be made available to customers. More significantly, a customer cannot operate a plant item at the outset of a hire without this fuel.’ Witnesses for GAP all said that if the machinery was not fuelled, they could be lifted off the lorries. HMRC did not accept this.
The reasons for providing fuel with the hired machinery came down to practicality. To be able to ‘take the plant off the lorry with its own power’ made it more straightforward for the customer. Additionally, all of GAP’s main competitors offered this service, therefore, to stay competitive this service had to be offered.
Gap argued: ‘This is in line with standard industry practice and customer expectations and GAP would otherwise lose customers if GAP sought to recover additional VAT after the date of the supply.’
The tribunal stated: ‘We were not persuaded by HMRC’s argument that it had not been established that the vast majority of the Appellant’s customers would not have known that they could reduce the fuel cost by refuelling the plant prior to return. Quite apart from the fact that we have accepted that it was industry custom and practice, the BPTAs for the Major Account Customers and the Regional Customers make that absolutely explicit and that comprises almost all of the Appellant’s customer base.
‘We find that the appellant’s supplies of plant and supplies of red diesel constitute multiple supplies for VAT purposes.’
The FTT allowed GAP’s appeal.
An HMRC spokesperson said: 'We’re disappointed with the outcome and note the decision of the First Tier Tribunal.'