VAT & Economic Reality

The world of VAT can be a minefield, especially when business arrangements don’t fit neatly into standard boxes. The recent First-tier Tribunal decision in D Nuttall UK Ltd (DNUK) is a perfect example of how the economic reality of a business can trump the strict wording of contracts when it comes to VAT input tax recovery.

DNUK runs an international haulage business. While DNUK owned the trailers and managed the logistics, the trucks themselves were owned by a separate Romanian company, ROBO. DNUK didn’t just hire the trucks; it also paid for all the fuel, repairs, and maintenance, even though the trucks weren’t in its name. HMRC challenged DNUK’s right to reclaim VAT on these costs, arguing that the supplies were made to ROBO, not DNUK.

At the heart of the case was a simple but crucial question: Who was the true recipient of the fuel and maintenance supplies? HMRC said ROBO, as the truck owner, was the recipient, and DNUK was just footing the bill. DNUK argued that, in reality, it was using the trucks as if they were its own, controlling every aspect of their operation and bearing all the associated costs.

The Tribunal took a two-step approach. First, it looked at the contracts. On paper, ROBO was providing “transport services” to DNUK, and DNUK was paying a fixed fee per kilometre plus all running costs. But the Tribunal didn’t stop there. It then examined the economic and commercial reality, considering who actually controlled the trucks, who made the decisions, and who bore the risks and rewards.

The Tribunal found that, despite the contract wording, the real-world arrangement was that ROBO simply made its trucks available to DNUK for a fixed fee. DNUK used the trucks in its own business, managed the drivers, and paid for all the running costs. In effect, DNUK was using the trucks as if they were its own. Therefore, the supplies of fuel and maintenance were made to DNUK, not ROBO, and DNUK was entitled to reclaim the input VAT.

This case is a reminder that, for VAT, substance can matter more than form. Businesses should look beyond contract labels and consider who really receives and uses the goods or services. The Tribunal’s focus on economic reality over contractual wording could have wide implications for similar arrangements in the logistics and other sectors.