Tribunal supports reduced rate of VAT for the hire of child car seats

Since 2001, sales of child car seats have been eligible for the reduced VAT rate of five per cent. The seats are legally required for children under twelve years old or under 135cm in height.
Europcar recently explored the extent of this relief in a dispute with HMRC over the correct VAT for the hire fees on child car seats.

Having initially charged VAT on the hire of the seats, Europcar reviewed its position and concluded that it had in fact made two separate supplies, one of the hire of the vehicle (subject to standard 20 per cent VAT) and another on the hire of the child car seat, eligible for the reduced VAT rate of five per cent. Europcar submitted a claim to HMRC to recover £631,000 of VAT it believed it had overpaid on its child car seat hire fees over seven years. 

HMRC rejected the claim, arguing that the inclusion of the seat was merely ancillary to, and a means of better enjoying, the main supply of a hire car. Therefore, in HMRC’s view, the fee for the car hire and the child seat hire amounted to a single supply of a hire car by Europcar that was subject to 20 per cent VAT at 20 per cent.

The First-tier Tax Tribunal (FTT) has now found in favour of Europcar, deciding that the hire of the car was separate from the hire of the car seat, so Europcar was entitled to apply the five per cent VAT rate to the seat hire fee.

The FTT found that the two supplies are economically distinct. The car seat enabled the legal and safe transportation of the child, so hiring one was an essential aim for the customer, rather than just a means of better enjoying the principal service of car hire. The customer also went through a booking process that clearly indicated that hiring a car seat is an optional extra for a significant additional fee and, at each stage, the costs of car hire and car seat hire are itemised separately.

The FTT also noted Europcar’s evidence that only around 1 per cent of car hire customers actually hire a child car seat, as most customers with young children would simply use their own. The cost of the seat hire was relatively expensive (the cost of buying a new one was broadly equivalent to three days’ hire fee), so most customers who hired seats did so for convenience because they were travelling to the pickup location by train or by air, making it difficult to bring their own. The FTT found that a customer travelling with young children has a genuine economic choice whether to hire a car seat because they have realistic alternatives, such as bringing their own or buying one locally.  This also supported the conclusion that the car seat was a supply of services in its own right, and not just part of the car hire.

The Europcar case highlights the complexities of VAT for car hire businesses, which typically make a variety of additional supplies and charges to customers when hiring a car, such as breakdown cover, collision damage waiver and fees for collecting fines or congestion charges incurred by the customer.

Not only must hire companies determine the VAT liability of each charge, they must also consider whether the fee is paid for an independent supply or is just part of the car hire. If HMRC were to consult with the industry to broadly agree the VAT position of the most common additional fees, it may avoid costly disputes like this one.

Looking beyond the car hire sector, this appeal is also another example of HMRC challenging the use of VAT reliefs by arguing that a supply that would normally be eligible for a lower VAT rate (or no VAT at all) is part of a larger supply that is subject to VAT at the standard rate of 20 per cent.

As the use of a child’s car seat is required by safety laws - the very reason why the seats are eligible for the reduced rate in the first place – HMRC’s stance is unlikely to be well received by parents. There may be implications for other businesses who hire safety equipment (such as protective helmets) in the course of their activities.

HMRC has yet to comment on whether it will appeal the Europcar decision, but, either way, this will not be the end of the story for these broader VAT issues.