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Gemini Cars (Egham) Ltd v Revenue & Customs  UKVAT V20035 (07 March 2007)
VAT – Supply of Services – Taxi Service – Agent or Principal – Whether supply by taxi service or by drivers
LONDON TRIBUNAL CENTRE
GEMINI CARS (EGHAM) LIMITED Appellant
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: JULIAN GHOSH QC (Chairman)
Sitting in public in London on 9 & 10 October 2006
Richard Barlow instructed by VAT Consultancy (Steve McIntyre) for the Appellant
Andrew O'Connor instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2007
This is an appeal by Gemini Cars (Egham) Limited ('the Appellant') against a decision by Her Majesty's Commissioners of Customs and Excise (now the Commissioner for Her Majesty's Revenue and Customs, to whom we shall refer as 'the Respondents') to refuse to accept a claim made by the Appellant under section 80 of the Value Added Tax Act 1994 ('the VAT Act') for overpaid output tax in the sum of £219,573.65 in the periods from March 2001 to December 2003. The Appellant, which is a taxi-hire company, contends that the overpayment was the result of its incorrectly accounting to the Respondents for VAT in relation to so-called 'account customers', that is to say, for customers who have account facilities with the Appellant and who do not pay for their bookings in cash or by credit card.
A taxable person is required to account for VAT on taxable supplies of services made by it in the course of its business. It is not in dispute that the Appellant is a taxable person. The question is merely whether the Appellant makes supplies of agency services to the self-employed drivers of the taxis (in which case the tax is due on the amounts paid to it by the drivers in consideration of the supply of those services) or whether it makes supplies of services to the paying account customers (in which case the tax is due on the whole amount of the price paid by the customers for those services). Therefore, the single issue of principle before me is the identity of the maker of supplies of taxi services to the account customers: are the supplies made (as the Appellant contends) by the self-employed taxi drivers, for whom the Appellant acts merely as agent; or are they made (as the Respondents contend) by the Appellant, in the course of its business, by means of services supplied by those drivers acting as the Appellant's agents?
We were told that (save, perhaps, for one particular account customer) the calculation of the overpayment is not in dispute and that once we have made my decision on the issue of principle – namely, whether the Appellant acts as agent or principal – the parties ought to be able to agree the consequences of that decision.
THE CLAIM AND THE DECISION TO REFUSE IT
The Appellant's claim was made by way of voluntary disclosure in a letter dated 4 February 2004. Following a clarification of the Appellant's business practices by an officer of Her Majesty's Customs and Excise on 2 March 2004, the Respondents' decision to refuse the claim was notified to the Appellant by a letter dated 29 March 2004. On 27 April 2004, the Appellant wrote to the Respondents with further information that it felt answered the points raised in the decision and requested that it be reconsidered.
The matter was reconsidered by a review officer of HM Customs and Excise, who sought further clarification of the Appellant's business practice by letters dated 11 May 2004 and 10 June 2004, both of which received responses on behalf of the Appellant. Following the reconsideration, notification that the decision had been confirmed was given to the Appellant in a letter dated 29 November 2004.
By a notice of appeal dated 22 December 2004, the Appellant appeals to this tribunal under section 83(t) of the VAT Act on the grounds (as set out in that notice) that the Appellant:
…is acting in an agency capacity when administering account customer jobs on behalf of the self employed taxi drivers who use the booking facility at Gemini.
By contrast, as set out in the statement of case dated 24 March 2005, the Respondents contend that, on the basis of a proper characterisation of the relationship between the relevant parties, the Appellant was not acting in relation to 'the account customer jobs' as an agent but rather that it was acting as the principal using the services of the drivers.
THE SUBMISSIONS OF THE PARTIES
We have had the benefit of a written skeleton argument from Counsel for the Appellant and written opening and closing skeleton submissions from Counsel for the Respondents.
The Appellant's Submissions
In his skeleton argument, Counsel for the Appellant submitted that the transactions in question are the arrangements made between the Appellant, members of the public or corporate bodies, and the owner-drivers of the taxis. The nature of these transactions consists in the provision of taxi services by the drivers to those members of the public or corporate bodies who have credit accounts operated by the Appellant. He contended that the role of the Appellant in these transactions was to act as the agent of the drivers in making bookings for the account holders, collecting fares periodically from the account holders and distributing (after retention of a commission for this service) those fares to the drivers who drove the account holders on specific journeys.
The Appellant notes that it is also involved in transactions with cash-paying passengers or with passengers who pay by credit card. In relation to such transactions, the Appellant again makes bookings for the same drivers. In respect of credit-card transactions, the Respondents have accepted that the Appellant acts as the agent of the drivers. In respect of both cash and credit-card transactions, the drivers do not pay a commission to the Appellant but rather pay flat-rate amounts based, in part, on the number of shifts in which they operate.
The Appellant notes that the VAT Act does not define 'agent' for these purposes and, accordingly, submits that the general law of agency should be applied to determine the issue. In that regard, I was invited to adopt the definition of agency contained in Bowstead and Reynolds on Agency, 18th edn (London, 2006) at paragraph 1-001:
Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect his relations with third parties and the other of whom similarly manifests assent so as to act or so acts pursuant to the manifestation. The one on whose behalf the act or acts are to be done is called the principal. The one who is to act is called the agent. Any person other than the principal and the agent may be referred to as a third party.
The Appellant accepts the proposition that the reality of the relationship, rather than the terminology used, is the basis for determining whether or not that relationship is one of agent and principal but submits that the reality includes the terms upon which the parties have acted, submitting that such terms are not the same thing as the 'terminology' used by the parties. The terms upon which the parties in this case have acted indicate, so the Appellant submits, that the Appellant acted as the agent of the drivers and that the passengers were the customers of those drivers.
We were invited to consider Hill and another (trading as JK Hill & Co) v Customs and Excise Commissioners  STC 424 as an example of how a tribunal should approach the question of whether or not a relationship of agency exists but was also urged to remember, as indicated by the passage from the judgment of Simon Brown J at page 426h, that cases such as that which is before me turn on their own individual facts.
As indicated in the passage from Bowstead and Reynolds cited to me, a relationship of agent and principal can arise both expressly or by implication. In this particular case, the Appellant submits that such a relationship arose by virtue of an express, contractual agreement for the agency between it and the drivers.
The Respondents' Submissions
In the statement of case, the Respondents accept that the VAT Act does not define 'agent' for these purposes but submit that it is possible to discern general principles from the case law in this area. In particular, they submit that the correct approach is to establish the reality of the relationship between the relevant parties: see Customs and Excise Commissioners v Johnson  STC 624. For this reason, the Respondents submit that the issue is a highly factual one.
The Respondents contrast the non-account work, in which the Appellant simply receives and passes on the request for a taxi from the customer to the driver and keeps no (or no detailed) records of the transaction and in which the driver keeps the entire fare, paying only a flat fee to the Appellant, with account work, in which (they contend) the Appellant plays a wholly different, and far more substantial, part. In their submission, the key difference is that the Appellant has a pre-existing relationship with the customer that is separate from any driving work involving the drivers.
In his (opening) skeleton submissions, Counsel for the Respondents refers to a concession made by the Appellant in its letter requesting a reconsideration dated 27 April 2004. In that letter, the Appellant stated:
With one exception there are no formal contracts with any of the businesses for whom drivers are supplied. The exception is a contract that is between [the Appellant] and is serviced by a firm subcontracted for the purpose. The contract was entered into in anticipation of being acceptable to the drivers we act for but none have been prepared to undertake the work
In only the above case is it the responsibility of [the Appellant] to fulfil a contract. It is accepted that, in this single case, [the Appellant] acts as principle [sic].
Not only do the Respondents submit that this concession was properly made but also they submit that it should apply to all account work, in relation to which the Appellant should properly be viewed as principal.
THE REASONS FOR THE RESPONDENTS' DECISION
In the letter dated 29 March 2004, the officer of Her Majesty's Customs and Excise set out the basis of the Respondents' decision to refuse the claim. The decision was based on the following factors in relation to the account work:
- The contract is between [the Appellant] and the customer;
- It is [the Appellant's] responsibility to fulfil the contract and this could mean sub-contracting the work out to other taxi operators;
- Although Drivers undertake Contract work, as this is a regular income, they are under no obligation to carry out the work – hence they are not contracted by the customer;
- The sales invoice is raised by [the Appellant] and they keep detailed records of all Account customers;
- Payment is made to [the Appellant], cheques are made out to them and they bear the cost if a customer does not pay;
- Fares within the Runnymede area are set by the council, but [the Appellant] set their own prices for long distance trips;
During the process of reconsidering the decision, the Respondents requested, by letters dated 11 May 2004 and 10 June 2004, further information regarding the nature of the Appellant's business, to which the Appellant responded by letters dated 13 May 2004 and 15 May 2004 (although, from the context, the latter letter appears to be incorrectly dated and, presumably, ought to have been dated 15 June 2004). From this correspondence, it emerged that the individual, self-employed drivers own their own cars and are responsible for maintenance, tax, insurance and purchasing fuel. The administration fee, of £125 per week or £30 per shift, is intended to cover the costs of the radio, computer system and control room incurred by the Appellant in providing services to the drivers. The drivers are under no obligation to display any name, logo or number upon their vehicles, although many use the Appellant's magnetic sign the better to enable their customers to identify them. There is no written contract between the Appellant and the drivers save that the latter are required to sign what is described as an agreement confirming their self-employed status. In the words of the letter dated 13 May 2004, 'There are no terms to enforce, drivers come and go as they please'. Save for the contract to which I have already referred and in relation to which the Appellant concedes that it acts as principal, there are no written contracts with the account-holding customers. The arrangement is described by the Appellant as follows:
- The Drivers pay an agreed percentage of their takings back to [the Appellant].
The Directors agree an account. There are no specific terms. An account customer is billed collectively for the cost of journeys they have ordered during a given period
Advertising, which is carried out mainly by word of mouth, is in the Appellant's name rather than in the names of the drivers. Bookings are made by way of the customer's ringing, faxing or e-mailing the Appellant's call centre, where those bookings are allocated to the appropriate drivers. In response to a question as to what credit-worthiness checks are made, and by whom, the Appellant responded: 'References are taken but not followed up'. Rates for journeys within the Runnymede area are set by the local council; rates to locations outside that area are agreed between the call centre and the customer. In this regard, the Appellant stated:
Drivers could offer discounts etc for such jobs [i.e. discounts on the rate agreed by the Appellant's call centre] but it would be unlikely that a self-employed driver would voluntarily reduce his income. Similarly a customer is unlikely to accept a higher fare than that previously agreed
In response to the question of for whom does the Appellant regard itself as acting as agent (the driver, the customer or the passenger), the Appellant replied that it:
As regards the detail of the operation of the Appellant's business, it appears from the correspondence that each booking is allocated by the Appellant's call centre to the nearest available driver who is willing to accept it. There are no obligations upon any driver to accept a booking and each is entitled to turn down any job offered by the call centre. There is no general obligation to carry out account work and the standard administration charge paid by a driver to the Appellant is not adjusted to reflect the relative amounts of cash or account work that he does (although account work attracts an additional charge 'for the additional work undertaken by [the Appellant]'). The Appellant was asked what happens if there is no driver available to fulfil a particular account job; its reply was:
…is primarily acting from the driver but we regard ourselves as acting for all 3. When someone calls us we will supply him or her with a driver for whom we act but will ensure a licensed driver picks them up if a Gemini driver is not available. We see this as valuable so people know they can rely on us
This has never happened but we would rather phone another taxi firm ourselves than leave a potentially vulnerable customer without a taxi. It is important to us that people know that they will get a taxi when they call us
The Appellant cannot influence the journey taken by a particular driver (although, unsurprisingly, the drivers will take the most direct route in order to minimise fuel costs) and, although the Appellant notifies the driver of his pick-up time, it cannot influence whether or not that driver arrives upon time.
In relation to bad debts, the Appellant stated that there have not been any but that, if there were, it would be the driver who would be responsible for them. In the words of the Appellant's letter dated 15 May 2004, 'If an account were not to be paid the respective drivers who carried out that work would, also, not be paid.' The Appellant invoices the customers for account work but states that this is done 'on behalf of the drivers who provided rides that month'. Similarly, the Appellant issues credit notes on behalf of the driver and recovers the money from that driver. All accounts are paid to the Appellant and cheques drawn by the customers are in the name of the Appellant. The drivers are paid monthly by cheque for all amounts settled by (in the words of the Appellant) 'their customers'. None of the drivers is registered for VAT. In relation to complaints, the Appellant would seek to mediate but stated that it is Runnymede Council to whom a customer should complain (because the drivers each have a license issued by that council).
In carrying out her reconsideration, the Respondents' review officer adopted a method used by the tribunal in the case of Gibbs Travel (a Firm) v Commissioners of Customs and Excise (LON/03/343). In that case, the tribunal considered an aide-mémoire listing nine relevant factors (ownership of vehicles, drivers' access to vehicles, costs and expenses, payment by drivers to cab firm, risk of bad debts, advertising on cars, control exercised by cab firm, record keeping, and prices for customers) and found that five of those indicia pointed to a supply directly by the drivers and that three pointed to a supply by the appellant cab firm, with one indicium not being applicable. Although this list was only advisory, the tribunal used it to support its finding that the supplies were made by the drivers and not by the firm.
Similarly, in this case, the review officer produced an aide-mémoire (a copy of which was appended to the statement of case) outlining the thirty-one questions relating to the nature of the Appellant's business asked in the correspondence to which I have already made reference. The review officer indicated whether the response to each of these questions indicated to her that the Appellant was acting as agent, principal or either. In her view, six answers indicated that it acted as agent and ten answers indicated that it acted as principal, with fifteen answers not indicating one way or the other. Adopting the numbering used by the review office, the six answers indicating that the Appellant acted as agent related to: (2) the identity of the person responsible for maintenance etc. of the cars; (8) the absence of enforceable terms of operation against the drivers; (17) the absence of any conditions relating to a driver's availability for account work; (21) the responsibility for bad debt; (25) the issue of credit notes; and (31) the fact that if an account were not paid then the driver would not be paid. (I should note at this point that I struggle to see any substantive difference between the fourth (21) and sixth (31) factors.) The ten factors indicating that the Appellant acted as principal related to: (9) the existence of an express contract with one particular customer; (10) the fact that the Appellant determines whether or not a customer may have an account and determines the terms of that account; (11) advertising in the name of the Appellant; (13) credit references taken by the Appellant but not followed up; (14) the method for setting the fares; (19) the fact that the Appellant would always ensure that a customer received a taxi; (23) invoices issued by the Appellant; (24) the fact that VAT is charged on the total amount invoiced to the customers; (29) customers settle their accounts with the Appellant; and (30) cheques are made payable to the Appellant. (I should note that the ninth (24) factor appears to me to be the very issue that I have to decide and, accordingly, is of little assistance in making that decision one way or the other.)
In the light of this analysis, the review officer was satisfied that the original decision to refuse the claim had been correct.
In addition to relevant correspondence, the documents provided to us for the purposes of the hearing contained a statement by Karen Michelle Boltwood, an officer of Her Majesty's Revenue and Customs detailing her visit to the Appellant's premises on 2 March 2004 and outlining the information gathered during that visit regarding the nature of the Appellant's business which had led her to conclude that the Appellant was acting as principal in relation to account work. This information reflects the factors listed in the letter dated 29 March 2004 informing the Appellant of the decision (see paragraph 16 above).
Statements were also provided by two drivers who receive bookings from the Appellant. The statement of Stephen William Turner confirmed that he is a self-employed driver who owns, and is responsible for the running costs of, his own vehicle. It also confirmed that his working hours vary according to his own personal requirements and that the Appellant supplies him with bookings for cash, credit-card or account fares, in return for which he is charged a fixed, weekly rate. The statement concluded that included within this fee are the extra administration costs incurred by the Appellant for ensuring that account monies are invoiced and collected. The statement of Mr M Brown explained that cash or credit card bookings are 'on agreement of a fixed circuit fee paid weekly by me' whereas account work is 'charged by Gemini to the customer to include all admin expenses involved in collecting monies owed to me.'
We also had the benefit of hearing the oral testimony of Mr Turner, who confirmed that, contrary to what is suggested in his written statement, the percentage fee in relation to account work (and, indeed, a percentage fee in relation to credit-card work) is paid by the driver to the Appellant in addition to the fixed, weekly amount. He also confirmed that, although the situation had never arisen, he would repay the Appellant if the Appellant were not itself paid by a customer.
The documents included a witness statement by Anthony Stevens, who described himself as the Appellant's 'main daytime controller', responsible for overseeing the booking and dispatching of work, and whose oral evidence we also had the benefit of hearing. Mr Stevens' statement confirmed that:
In the case of drivers getting "no-calls" or customers not turning up on time and the driver doesn't get a job, the drivers are aware that they do not get paid on these occasions. I will endeavour to "make this up to them", but sometimes this is not possible and they lose out.
The statement also confirmed that the drivers, who are self-employed, are at liberty to turn down jobs offered to them by the call centre but observed that this 'doesn't happen often, but does occur at times.'
In his oral evidence, Mr Stevens explained the process whereby bookings are made and dispatched to drivers. In particular, he confirmed that a driver is not obliged to take a particular call and that if a customer cancels a booking then the designated driver does not receive any payment for that booking (although the controller will try to find another).
We were further provided with a statement by Michael Wells, who is the Appellant's managing director, in which he said:
It is both the companies [sic] (Gemini Cars) and the driver's responsibilities to fulfil all the fares that are done on an account, as well as those that are paid on the completion of the fare, be it cash or credit card.
All the drivers agree to pay a fixed percentage of their gross earnings on account work to be paid to Gemini Cars (16%).
His statement also confirmed that invoices are sent 'on behalf of the drivers' showing all work done for that customer during the invoice period, stating that it would be 'totally impractical' to provide invoices for just one driver's work for each account customer. However, it also stated that:
Payments by the Account Customers are made to Gemini Cars in accordance with the credit terms agreed.
In principle, payments to the drivers are made once payment has been received from the account customer. In practice it is assumed that all account customers will have paid within their credit terms and a driver will actually be paid on the 1st of the second month after the work has been done (e.g. work done in January will be paid on the 1st of March).
Should an Account Customer fail to pay for all or part of an invoice then Gemini Cars will claw back the monies paid to a driver for that work.
Mr Wells too provided oral evidence, which confirmed these statements.
All of the witnesses who gave evidence were cross-examined.
We were also provided with several example documents. These included several examples of the 'Declaration of Self Employment' signed by the drivers, which also contained the statement:
Gemini Cars (Egham) Ltd acts solely as an agent to collect monies on my behalf.
We have also seen a blank form on the Appellant's headed paper entitled 'Application for Account Facilities'. This two-page form contains the following passage:
Gemini Taxis Terms and Conditions
1. All invoices are subject to a 3% service charge for administration of the account.
2. All invoices should be paid within 30 days of the invoice date.
3. Gemini Cars (Egham) Ltd have the right to terminate any account contract at anytime.
Finally, I was provided with sample of invoices sent to an account customer. Although these were headed with the Appellant's name, they also clearly stated 'INVOICED ON BEHALF OF SELF-EMPLOYED DRIVERS'.
It is not in dispute that the VAT Act does not provide a specific definition of 'agent' for these purposes and, accordingly, we accept that the nature of the relationship between the parties must be determined by an application of the general law of agency. For these purposes, we are happy to adopt the definition set out in Bowstead and Reynolds. However, we agree that it is a question of fact as to what relationship pertains in any particular case. We also agree that the terminology used by the parties is not determinative of the matter and, accordingly, that we are not bound either by the written declarations made by each driver or by the statement endorsed at the head of each invoice sent out to the account customers.
In our judgment, although the aide-mémoire approach can be of assistance, the result that it produces cannot be determinative of the matter, particularly where almost half of the answers indicated, in the opinion of the review officer, that the Appellant could be either principal or agent. Furthermore, we have already noted how there appears to be some overlap between the questions and how at least one of the question anticipates the ultimate question that we are asked to determine. For these reasons, whilst we take assistance from the aide-mémoire, we do not consider myself bound by its apparent result or methodology.
We agree with the Respondents' submission that, in respect of account customers, there is a pre-existing business relationship between the Appellant and those customers that does not exist in relation to either cash or credit-card customers. Although the matter is rather finely balanced, we find that the Appellant acts as principal in relation to this contract with the account customers, rather than merely as agent for the drivers. In this respect, we are mindful of the fact that the terms of the customers' accounts are determined by the Appellant and that the account facility is agreed in the Appellant's name. We are also satisfied that the Appellant considers itself to be bound to provide a taxi to its account customers who make a booking and that, although the situation has apparently never arisen, the Appellant would endeavour to ensure that a licensed driver (albeit not one who is part of the Appellant's operation) pick up an account customer's passenger if none of the Appellant's drivers were available. In this respect, we are not satisfied that the absence of enforceable terms against the drivers, nor the ability of those drivers to turn down any job offered by the Appellant's call centre, necessarily indicates that the Appellant acts merely as agent for the drivers. On the contrary, in our judgment this serves to indicate that it is the Appellant that incurs an obligation on its own account vis-à-vis the account customers (within the context of the pre-existing contractual arrangement negotiated and agreed between those customers and the Appellant) and on specific terms as to the fare agreed by the Appellant (where not imposed by the local council) that it then seeks to fulfil by means of one of the drivers who are on its books. The fact that the Appellant is unable to ensure that a sufficient number of drivers is available at any given time does not, necessarily detract from this conclusion: there was nothing in the evidence to suggest that the Appellant undertook merely to ascertain whether a driver was available for a particular account-customer's booking but rather it undertook to fulfil that booking. The service, in that regard, is provided by the Appellant through the offices of its regular drivers (with whom it has agreements regulating the terms on which such drivers are to be remunerated for any account work undertaken on behalf of the Appellant).
We take account of the fact that the invoices sent to account customers are said to be 'on behalf of self-employed drivers'. However, the fact that the drivers are self-employed is not, in my judgment, directly relevant. Moreover, as we have noted, we accept the Respondents' proposition that the nature of the relationship must be deduced from the reality of that relationship and not from the terminology. In this case, we find that the Appellant has not proved that the reality of that relationship reflects the terminology used in the documentation.
One of the significant countervailing factors is the incidence of the burden of bad debt. We are satisfied that if an account customer were to fail to pay, or if its cheque were dishonoured, then the ultimate burden would fall upon the driver and not upon the Appellant. However, in our judgment, that is merely a facet of the agreement reached between the Appellant and the several drivers in relation to the latter's remuneration for work undertaken on behalf of the former, i.e. that the Appellant would be able to claw back from the drivers any payments made on account of work carried out by that driver on behalf of the Appellant in circumstances where the Appellant is not in fact paid. In our judgment, the agreement between the Appellant and the drivers, properly construed, was not that the drivers would pay a fee of 15% of their account-customer earnings to the Appellant in consideration of the services provided to them by the Appellant in that regard, but rather that the Appellant would pay to a driver 85% of any fee agreed between the Appellant and one of its account customers (provided that the fee was, in fact, paid) in consideration of the driver's fulfilling the Appellant's obligation to provide taxi services to that particular customer, i.e. that the 85% figure is the driver's remuneration for acting as the agent of the Appellant in relation to the Appellant's supply of taxi services to its (that is, the Appellant's) customers.
For the reasons given above, and after considering carefully all of the written and oral evidence, we find that the Appellant makes supplies of taxi services to its account customers as principal. In the circumstances, therefore, we dismiss the appeal.
JULIAN GHOSH QC
RELEASED: 7 March 2007
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