20701

Value Added Tax – opticians supplying spectacles and contact lenses – apportionment of sales consideration between exempt and taxable elements – assessment of opticians’ and staff time in exempt dispensing and taxable operations – basis of calculation by Respondents for apportionment considered reasonable and to best judgment – VATA 1994 Section 19(4) – Appeal dismissed.

EDINBURGH TRIBUNAL CENTRE

                McBURNEY, CLELLAND & BOYD LTD            Appellant

	- and -

	THE COMMISSIONERS FOR HM REVENUE AND CUSTOMS	  Respondents

			Tribunal:	 (Chairman)   KENNETH MURE, QC
                                                       (Member)     Charlotte Barbour, MA., CA.,CTA

Sitting in Edinburgh on Tuesday 6 May 2008.

for the Appellant			Mr Paul Eyles, CA

for the Respondents		Mr Andrew Scott, Shepherd+Wedderburn, WS

© CROWN COPYRIGHT 2008

DECISION

Introduction

The Appellant is a limited company and is in business as an optician.  In addition to conducting eye tests it supplies spectacles and contact lenses.  To the extent that a dispensing service is involved this is an exempt supply for VAT.  Otherwise the supply is taxable at the standard rate.  Accordingly there requires to be an apportionment of the sales consideration between the exempt dispensing element and the taxable supply of spectacles in terms of Section 19(4) VATA 1994.

The nub of the dispute is the estimate of opticians’ and staff time attributable to the dispensing process.  Should it be 73.08% or 90%?  (See Productions 42 and 47).

The Law
Section 19(4) VATA 1994 provides:-
“(4) where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.“

Passing reference was made to the decision in C&E v Leightons [1995] STC 458.

The Respondents have produced a pamphlet (Production 62) setting out their interpretation of the law and their practice in calculating this apportionment.  So far as we are aware this has not been judicially considered or approved.  Unfortunately there is no statutory or judicial definition of “dispensing”.  The Tribunal found helpful the commentary in Tolley VAT 2007 (2nd ed) pages 643-646 on the nature and calculation of this apportionment.  In particular (as happened in the negotiations in the present case) the apportionment of staff time is noted as being a legitimate approach.

The Facts
Each party led evidence from one witness viz Mr Arthur Clelland, a Director of the Appellant Company, who is a Dispensing Optician, and Mrs Pamela Gibson, until recently a Higher Grade Officer of the Respondents with experience of calculating the liabilities of businesses rendering partially exempt supplies.  In addition to acting as field officer in the present case she has had to consider the VAT liabilities of several other optician’s businesses.

The major dispute noted in evidence was the interpretation of “dispensing”.  Mr Clelland considered its scope to be extensive.  Otherwise, apart from aspects of the negotiations with Mrs Gibson’s predecessor, a Mr Wood (now retired from the Respondents’ service), and not recorded in writing, the evidence to a great extent was not controversial.  In settling our Findings-in-Fact we relied on particularly the terms of the correspondence and the Respondents’ internal records which are produced and which were spoken to.  We allowed (under reservation) an extra document produced at the Hearing setting out further calculations and seeking to justify a percentage of employee time of up to 97% as attributable to the exempt dispensing process.  Ultimately, however, this increased figure was not pursued by the Appellant.

On the basis of that evidence we make the following 

Findings-in-Fact
1.	The Appellant is a limited company in business as an optician.  In addition to conducting eye tests it provides spectacles and contact lenses.  It also makes other minor supplies such as sales of sunglasses.
2.	The Appellant employs Opthalmic Opticians, one being a Director and others on a locum basis.  Only ophthalmic opticians can conduct eye tests.  The Appellant employs also Dispensing Opticians who can provide patients with spectacles on the basis of the prescriptions issued following on the eye tests.
3.	The provision of spectacles involves the skilled professional services of a Dispensing Optician or Opthalmic Optician carrying out the dispensing service and the sale of spectacles.  The initial stage involves considering the optical prescription to enable the instructing of the manufacture of the finished spectacles.  Once the spectacles are ready they require to be checked and adjusted to suit the particular patient.  Subsequent to fitting the patient may require “follow-up” support in relation to the maintenance and repair of the spectacles and frames.  
4.	Over an extended period the Parties negotiated about the apportionment of the supply of spectacles between the exempt dispensing stage and the taxable provision of a pair of spectacles.  In their negotiations the Parties attempted this calculation by reference to the factor of employees’ time as apportioned between the exempt and chargeable stages.  Initially the negotiations were conducted with a Mr Wood of the Respondents and from early 2004 with Mrs Pamela Gibson.  (Her involvement is summarised at Production 60).
5.	Initially Mrs Gibson was not satisfied with the income-based calculations supplied by the Appellant and indicated her preference for an apportionment on a time basis since, as eye test fees had remained low, a fair allocation would not result on an income basis (Production 20).  The Appellant then supplied a time-based apportionment, showing the “average professional time” allocated to the exempt dispensing supply as being 73.08%.  This calculation was for the period of a month, the period and dates having been selected by the Appellant (Production 21).
6.	On 8 November 2004 (Production 59, page 7) Mrs Gibson met Mr Clelland of the Appellant Company and his Accountant, Mr Eyles.  It was agreed that this time calculation would be used in calculating VAT due.  Subsequently another professional advisor was engaged by the Appellant.  However, the negotiation reverted to Mr Eyles who then proposed a revised and increased apportionment of staff time, allocating 90% to dispensing services (See the narrative in Production 55).  No supporting evidence for this increased recalculation has been produced.  
7.	In the absence of such supporting evidence the Respondents relied on the percentage of 73.08 as proposed and set out earlier by the Appellant.  Adopting 73.08% in the cost apportionment calculation produced the taxable percentage of outputs as being 48.65% (See Production 47).  Were the higher apportionment of 90% to be adopted then the taxable percentage of outputs would be reduced to 46.34% (Production 42).
8.	In the other opticians’ businesses considered by Mrs Gibson the taxable percentages in respect of the provision of spectacles were between 50 and 55%.
9.	In relying on 73.08% as representing the average dispensing time for spectacles in making their calculation of output tax due the Respondents were acting to best judgment and reasonably on the basis of information provided and available.  Their stance was intimated in their letters to the Appellant, firstly from Mrs Pamela Gibson, and subsequently by the Reviewing Officer, Mrs Angela Gibson (Productions 52, 55 and 57).

Respondents’ Submissions
The issue, Mr Scott submitted, was what was the correct percentage of direct labour costs to be attributed to the exempt dispensing function.  Was it 73.08% or 90%, as the Appellant now argued.  Section 19(4) VATA requires a just and fair apportionment.  That calculation should be logical, supported by evidence, and produce a fair result.

In the absence of a statutory or judicial definition of “dispensing” Mr Scott suggested that the “….purpose of the dispensing function is to translate an optical prescription into an order for a pair of spectacles or other optical appliance appropriate to the individual patient’s needs.”  Thus the approach of the Field Officer, Mrs Gibson, that the process could not start until a prescription was available, was logical.  The time devoted to management, customer contact, and continuing professional study and development by staff was greater than Mr Clelland cared to admit and did not amount to “dispensing”.   

The time apportionment in Production 21 (produced, of course, by the Appellant) was logically based and gave a fair result, Mr Scott argued.  The complaint about the time apportionment calculation made by Mr Eyles, after the brief involvement of Mr Rashleigh, emerged only after its effect on the calculation of taxable outputs had been ascertained.  However, there was no information produced to vouch for the higher 90% time apportionment now sought.

The stance taken and the assessments made by the Respondents were accordingly to best judgment and fair and reasonable.  Hence, the Appeal should be dismissed, Mr Scott submitted.

Appellant’s Submissions
Mr Eyles confirmed that the issue for the Tribunal was whether the apportionment to the dispensing stage should be 73.08% or 90%.  The crucial problem was the absence of a definition for “dispensing”.  He recommended Mr Clelland’s approach.  He was a Dispensing Optician with over 20 years experience.  Mrs Pamela Gibson, the Field Officer, had only limited experience of this type of business.

The time apportionment at Production 21 represented only a small “window” of observation which could distort figures.  If the Appellant had a lower taxable percentage of outputs than other opticians’ practices, that was irrelevant as each optician’s practice was unique.

He submitted that the calculation of the taxable portion of the ouputs should proceed on the basis of a time apportionment of 90%.

Decision
We consider that the Respondents’ arguments and stance are well-founded.  

We agree that the terms of Section 19(4) VATA requires an apportionment between the exempt and taxable elements of the supply to be done on a fair and reasonable basis.  We agree with the objective as suggested by Mr Scott of achieving a logical and fair result supported by the available evidence.  In our view the approach adopted by the Field Officer of the Respondents, confirmed on review (Production 55), seems to follow and meet these criteria.

In the absence of any statutory or case-law definition of “dispensing” we found Mr Scott’s suggestion helpful.  In our view a significant portion of the professional service rendered in providing a patient with spectacles must be referable to services other than the pure dispensing function.  The time-apportionment now founded on by the Respondents was produced by the Appellant (Production 21) and allows for administrative time and “down time” during which no work actually proceeds.  The Appellant’s revised stance that only 10% of professional time is properly attributable to the non-dispensing function seems implausible to us on the basis of the information presented and the description of the services given to the individual patient.

We consider that the Appellant has not produced any cogent evidence to support this revised figure of 90%.  In that regard we observe that the process of negotiation was conducted over an extended period with professional advice available from two sources.  In these circumstances we find that the disputed assessments made by the Respondents were to best judgment and fair and reasonable.

It is interesting to observe that applying the increased figure of 90% rather than the earlier figure of 73% as representing professional time spent on dispensing results in a decrease in the taxable portion of the supplies by a mere 2% or so i.e. 46.34% instead of 48.65%.  Also, that taxable fraction is less than the 50 to 55% found to be the norm in Mrs Gibson’s experience.

For these reasons we dismiss the appeal.

Costs
Mr Scott indicated that he did not seek costs in the event of success and accordingly we make no award.

Finally, we would thank both Mr Eyles and Mr Scott for their helpful presentations of their respective arguments.

KENNETH MURE, QC
CHAIRMAN

RELEASE DATE:   4 JUNE 2008

EDN/07/83