Economic and commercial reality prevails

The recent FTT decision in D Nuttall UK Ltd v HMRC [2025] UKFTT 1600 provides a stark example of the role of economic and commercial reality in determining VAT disputes. The FTT has essentially entirely ignored the written terms of contractual arrangements entered into by the appellant where it considered that they did not meet the economic and commercial reality of how the arrangements were actually operated. Indeed, in considering that the arrangements were actually, in effect, the hire of vehicles rather than an agreement to receive transport services, the FTT held that the appellant was entitled to input VAT recovery on associated costs incurred by it directly in relation to the use of the vehicles, rather than third party consideration in relation to supplies made to the vehicle owner.

Background

The appellant was a haulage firm which arranged for the delivery of goods in the UK and Europe. At the time of the disputed supplies, it owned its own trailers but did not own its own trucks and so entered into a contractual arrangement with a Romanian company, ROBO. It had previously sold its trucks to ROBO, but under new contractual arrangements it obtained the right to use those trucks to make its deliveries, largely using its own drivers.

The dispute with HMRC arose in relation to costs incurred by the appellant in relation to its activities. In particular, the appellant sought to recover input VAT on supplies of fuel used in its haulage business and supplies of repairs and maintenance on the trucks it used. HMRC argued that in both cases the input VAT was not the appellant’s input VAT as it had simply paid the amounts as third party consideration.

Dispute

HMRC argued that it was clear that under the contractual arrangements made between the appellant and ROBO, ROBO had agreed to provide the appellant with “transport services”. In return, the appellant paid to ROBO agreed amounts by way of consideration, including meeting all of the costs associated with the use of the trucks, such as repairs and maintenance, and the drivers. The appellant had effectively sub-contracted its obligation to transport goods. The appellant contested that analysis arguing that in return for the agreed consideration it was entitled to use the trucks in the course of its own business.

The FTT considered that the correct contractual analysis was that ROBO had agreed to provide transport services to the appellant. The contracts consistently referred to “transport services” as did the invoices and referred to ROBO following the appellant’s instructions in relation to orders for loading, unloading and handling goods. In addition, the purpose of the arrangement appeared to be allow the appellant to continue its haulage business without having a goods vehicle licence (which required more than simply using ROBO’s trucks). However, the FTT went on to consider the economic and commercial reality of the arrangements.

Taking into account all the facts, the FTT considered that the economic and commercial reality was that ROBO made its trucks available to the appellant in return for the consideration and on the basis that the appellant would continue to use the trucks in its business in exactly the same way it had before the arrangement with ROBO arose. It was clear that the appellant made all the decisions in relation to the operation of the trucks and the journeys they made. The appellant made all decisions in repairs, maintenance and fuelling, instructed the drivers and knew the ongoing location of the trucks. In practice, ROBO had very little involvement in the business other than making available its trucks. Moreover, the appellant appeared to be its sole customer and its trucks were not used for any other purpose or customers. ROBO was not in reality providing transport services.

How did that analysis impact recovery of input VAT on the supplies of fuel and maintenance/repairs? The FTT considered that it was plain that the disputed supplies were made to the appellant and not ROBO. It was not a case where the supplies were made to ROBO and the appellant simply met the costs as third party consideration.

As regards the fuel, the FTT considered that in bearing all the risks and rewards which flowed from the supplies, the appellant was in exactly the same position as the card holders in Auto Lease Holland (Case C-185/0) when they made purchases of fuel and thus entitled to input VAT recovery.

In addition, the FTT rejected the argument that the analysis was changed in relation to repairs where parts were installed in vehicles owned by ROBO. “As the CJEU noted in Vega (Case C-235/18) at paragraph [27], “the concept of a ‘supply of goods’ … does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law, but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were its owner”. In this case, the economic and commercial reality was that the suppliers in question empowered the Appellant to dispose of the relevant goods as if the Appellant were the owner and the supplies of goods were accordingly made to the Appellant.”

Accordingly, whilst noting that the appellant might be considered “somewhat fortunate” in having prevailed in this dispute given it had entered into contractual arrangements which bore no relationship to the economic and commercial reality, nevertheless the FTT allowed the input VAT appeals in relation to both fuel and maintenance / repairs.

Comment

The decision reinforces the importance of the economic and commercial reality in analysing supplies for VAT purposes. Whilst the contractual provisions are the starting point for that analysis, the can be overridden where, as here, they do not match the reality of the arrangements.

It is perhaps instructive to contrast the decision with the Supreme Court decision in WHA [2013] UKSC 24 concerning repairs carried out to the vehicles of insured motorists, where the Court held that those repairs were not provided to the insurer paying for the repairs but to the owner of the vehicles.