Value-added tax (VAT) on retention of fines

The facts of the matter were briefly as follows: The appellant provided parking control services to landowners. The appellant would put up warning signs on the land and keep an eye on the parking areas for unauthorised use. Where there is unauthorised parking (ie parking in contravention of the rules), the appellant would charge the infringing motorist a penalty fee for such unauthorised parking (ie fine the motorist), or clamp or tow the vehicle subject to a release charge. The appellant could retain all such charges derived from enforcing the rules.

The landowner would pay the appellant for these parking control services in the form of an upfront fee together with an annual fee for putting up signs. The appellant would also supply the landowner with permits (displayable discs), at a cost, which the landowner could issue to authorised users.

The warning signs display the various parking rules and warn of the applicable charges relating to unauthorised parking. The signs also contain the wording: "You are entering into a contractual agreement. Do not park in this area unless you fully understand and agree to the above contractual terms."

Unauthorised parking

Generally, the appellant would issue the permits to authorised users on instructions from the landowner. These permits are attached to a letter from the appellant referring the motorist to certain terms and conditions, which include the parking rules. The letter also states that any breach of the terms and conditions will result in a penalty fee being charged, or clamping or towing of the vehicle.

The appellant could also alter the penalty fees. In practice, where there is unauthorised parking, the appellant would place a notice on the windscreen of the offending vehicle indicating that the motorist has been charged a penalty fee. The appellant would then collect and retain such penalty fee. It should be noted that only permit holders were subject to penalty fee charges in respect of unauthorised parking, as opposed to persons who were not allowed on the premises at all.

The appellant was assessed by Her Majesty's Revenue and Customs (HMRC) for output VAT on the penalty fees charged on the basis that such charges constituted consideration received in respect of taxable supplies.

The appellant lost in the First Tier Tribunal as well as in the Upper Tribunal (Tax and Chancery Chamber) and appealed to the Court of Appeal (Civil Division).

The appellant's argument was that, apart from the agreement between the appellant and the landowner, there was an agreement between the appellant and each motorist and that the penalty fee charged was a form of damages paid by the motorist for breaching the terms and conditions of that agreement. The appellant thus argued that the penalty fee was not consideration for any supply made to either the motorist or the landowner. Alternatively, the appellant argued that, if the payments were not in respect of breach of contract, they should be seen as compensation for trespassing.

HMRC argued that there was no contract between the appellant and each motorist, but only between the appellant and the landowner, and that the penalty fees charged could only be seen as consideration for the supply of services to the landowner.

The appellant could in any event not contract with each motorist in respect of land of which it was neither the owner nor the lawful occupier.

Contract with each motorist

The court held that, even though the appellant did not have any rights in respect of the land, it could nevertheless contract with each motorist on the same basis that it would be lawful for a seller to sell property to a purchaser, even though the seller was not the owner of the property.

On the facts, the court found that a contract had been established between the appellant and each motorist holding a permit. The penalty fee charges that the appellant collected did not directly flow from the agreement with the land owner, but constituted damages in respect of breaching the contract between the appellant and the relevant motorist.

On the issue of trespassing, HMRC argued that the appellant did not have such rights in respect of the land so as to give it any action in respect of trespassing. However, the court held that the contract between the appellant and the landowner gave the appellant the right to eject trespassers by towing their vehicles and that the contract between the appellant and each motorist also gave the appellant that same right. The appellant could therefore sue in trespass, and if it imposes a penalty fee instead, such fee would constitute damages for trespass.

The court accordingly allowed the appeal on both grounds, and ruled that the penalty fees charged did not relate to any supply of goods or services, but constituted damages, which did not attract VAT.