Tripartite Agreements – Take Care!
The case of U-Drive (UDL) v HMRC was recently heard at the Upper Tier Tax Tribunal (‘UTT’). The case was an appeal to a decision of the First-Tier Tax Tribunal (‘FTT’) in relation to the recovery of VAT on costs incurred in tripartite arrangements. The case looked at the age-old questions – ‘to whom is a supply made and who is entitled to reclaim the VAT charged?’
UDL is in the business of self-drive hire cars and vans so fully taxable for VAT purposes and ordinarily entitled to reclaim VAT costs incurred subject to the normal rules. To help manage the process of any accidents its hirers may have without the need for the making of an insurance claim, UDL asked its customers to hand over “bump cards” when accidents occurred and on some occasions as an alternative to an insurance claim, UDL would pay for the third party’s car to be repaired. UDL would contract with garages to repair the third party’s car, and thereby control the speed and cost of repairs and UDL received a VAT invoice from the garage. The key question was whether U-Drive was entitled to recover VAT on the garage’s charges?
The FTT had decided, in agreement with HMRC, that where UDL incurred VAT on the cost of repairing damage caused by its vehicles to third party property the VAT was not recoverable. The UTT recognised that there was a legal relationship between the garages and U-Drive, and that the contracts, viewed in isolation, supported input tax recovery. However, the UTT decided that the economic reality was that U-Drive simply agreed to pay for the repairs and the fact that it contracted to directly pay the garages was not sufficient to justify VAT recovery
We would always recommend that you seek expert VAT advice if you are involved in any tripartite agreement to ensure that you do not recover VAT incorrectly which may later be the subject of an assessment and penalties.
For those interested in reading the UTT decision please see HERE