19 March 2019 - Article
Every so often a tribunal case hits one’s desk and one turns the pages wagging head in disbelief at each passing paragraph. Yes, that can happen when the tax payer is on a frolic, but it happens far too often when HMRC loses ‘the plot’. Such a case is Kumon Educational (TC04291).
Kumon acts as a franchisor and receives franchise fees from franchisees. The franchisees use Kumon’s methods, materials, and marketing to teach pupils. Kumon offers a payment (to use a neutral term) to franchisees who meet certain targets. These can be financial targets but are also geared to teaching standards (which, I assume, recognises the importance of the brand’s quality being protected). Up until the start of their dispute with HMRC, Kumon used to make the payments into the franchisee’s bank account. Now they deduct the sums from future franchise payments.
You are now probably guessing the nature of the silly dispute. HMRC said that the payments to the franchisees was for a service the franchisees provided to Kumon. Kumon said it was a straight discount against the franchise fee and thus reduced the VAT chargeable.
My wagging head was asking, as I scanned the material, ‘what service can the franchisees be supplying to the franchisor in such a situation?’. My answer came in paragraph 37, when the tribunal said: ‘it is telling in this regard that HMRC when asked were not able to provide a description of what the separate supply to which they alleged the rewards related actually was’.
And what of their argument that it was not, in any case, a reduction to the franchisor’s charge? They seemed to refer to the fact that the payment had been made separately from the receipt of the franchisor charges. That is a pure form over substance error. I would call it a school boy error but do not wish to denigrate school boys. They pointed to the fact that it was not a percentage geared purely to the volume of commissions generated in a prior period. But, so what if that is the case?
Yet again public money is wasted on HMRC bringing frivolous and vexatious cases to tribunal. I note that the advocate officer of HMRC (note the lack of a barrister) was instructed by the General Counsel and Solicitor to HMRC. I can only suggest that the staffing of that body is urgently reviewed.