[2009] UKFTT 308 (TC)

TC00252		TC

		Appeal number: EDN/09/0089

Input tax – claim for deduction of VAT in respect of goods and services supplied for premises used as office and domestic accommodation and partially used by directors – VAT Act 1994 Section 24(3) – Appeal allowed.
Input tax – claim for deduction of VAT in respect of relocation costs – whether goods and services supplied were for the purposes of the business – VAT Act 1994 Section 24(1) – Appeal allowed.
Whether indirect taxes such as VAT and direct taxes such as Income Tax should apply the same rules and tests in relation to reliefs and claims to deduction of tax – Appeal dismissed.

FIRST-TIER TRIBUNAL
	
RODERICK GUNKEL & ASSOCIATES LIMITED		     Appellant

		-and-

		THE COMMISSIONERS FOR HER MAJESTY’S
		REVENUE AND CUSTOMS (VAT) 		 Respondents 

					
				TRIBUNAL JUDGE: 	W Ruthven Gemmell, WS 
				MEMBER:		Peter R. Sheppard, F.C.I.S., F.C.I.B., ATII

Sitting in public in Edinburgh on Monday 12 October 2009

Mr Roderick Gunkel for the Appellant

Mr Kevin Clancy – Shepherd and Wedderburn, LLP for the Respondents

© CROWN COPYRIGHT 2009

DECISION
The Appeal

1.	This is an Appeal by Roderick Gunkel & Associates Limited (“the Appellant”) against an assessment of VAT and interest totalling £1,321.35 issued by the Commissioners of H M Revenue and Customs (“the Respondents”) on 3 December 2008.  The assessment was in respect of goods supplied and works carried out at (a) 17 Palmerston Place, Edinburgh (“Edinburgh property”) and (b) property bought by an employee Ms Lesley Hamill known as Ballindalloch in Balfron (“Balfron property”).  The VAT on those goods and services was reclaimed as input tax by the Appellant.
Legislation

2.	[European law]
Article 1 of the EU Council Directive of 28 November 2006-
Article 1
1.	This directive establishes the common system of value added tax (VAT).	
2.	The principle of the common system of VAT entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged.
On each transaction, VAT, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of VAT borne directly by the various cost components.
The common system of VAT shall be applied up to and including the retail trade stage.
3.	[Domestic Law]
In relation to input tax, the EU Directive is implemented in the UK generally by section 24(1) of the Value Added Tax Act 1994 (VATA 1994) which provides-
(1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say— 
(a) VAT on the supply to him of any goods or services; 
(b) VAT on the acquisition by him from another member State of any goods; and 
(c) VAT paid or payable by him on the importation of any goods from a place outside the member States, 
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.
Section 24(3) of VATA 1994 provides-

(3) For the purposes of subsections (1) and (2) above, where goods or services are supplied to a company, goods are acquired by a company from another member State or goods are imported by a company from a place outside the member States and the goods or services which are so supplied, acquired or imported are used or to be used in connection with the provision of accommodation by the company, they shall not be treated as used or to be used for the purposes of any business carried on by the company to the extent that the accommodation is used or to be used for domestic purposes by— 
(a) a director of the company, or 
(b) a person connected with a director of the company. 

Section 24(5) of VATA 1994 provides-

(5) Where goods or services supplied to a taxable person, goods acquired by a taxable person from another member State or goods imported by a taxable person from a place outside the member States are used or to be used partly for the purposes of a business carried on or to be carried on by him and partly for other purposes, VAT on supplies, acquisitions and importations shall be apportioned so that only so much as is referable to his business purposes is counted as his input tax. 
The Tribunal heard evidence from Mr.Roderick Gunkel, a director of the Appellant; and Mrs. Christabel M. Henderson-Symons an officer for the Respondents both of whom were credible witnesses.

Findings-in-Fact

4.	The Appellant Roderick Gunkel & Associates Limited provide taxable accountancy services and operates from its principal place of business at Orchardlea, Callander, Perthshire.  This is the domestic premises and residence of two directors of the Company.
5.	The Appellant also leases a flat at 17 Palmerston Place in Edinburgh for use by directors and employees whilst attending to clients and on business in Edinburgh.  Knowledge of the lease was unknown to the Respondents at the time of a visit to the Appellant during the period when the assessment was raised and when it was reviewed.
6.	The Appellant recruited Ms Lesley Hamill, who previously lived in Glasgow, to work full time for the Company and this required her to relocate from Glasgow to Balfron.  At the time of the relocation, Ms Hamill was an employee but she subsequently became a director.  The fact that Ms Hamill was an employee at the time of the relocation and only subsequently became a director was also not known to the Respondents at the time of the visit during the period when the assessment was raised and when it was reviewed.
7.	The flat in Edinburgh had been bought by Mr and Mrs Gunkel, who later became directors of the Appellant, in the late 1990s because their business in that area was heavy and travelling times from Callander became too onerous.  It was later rented by them to the Appellant for directors’ and workers’ accommodation and comprised a kitchen, bedroom, bathroom and sitting room which was used for meetings.  It had no television and for some time had no fixed telephone link.  Any use that Mr and Mrs Gunkel had made personally for the property had been invoiced to them and paid to the Appellant.  The Appellant had charged VAT on such supplies and paid it over to HMRC.  The flat was used not only by Mr Gunkel but also by colleagues from as far away as Aberdeen.
8.	Mrs Henderson-Symons for the Respondents visited the Appellant in Callander on 2 April 2008 and carried out a review of items where the input tax seemed higher than usual.  This was not a full audit and the aim of the visit was not to review all VAT matters.  The visit took place at the Callander premises and the VAT on a number of items of expenditure in relation to the Callander premises was apportioned by the Respondents and agreed by the Appellant as regards domestic use and business use.  Higher than average input tax was identified and was detected in the periods ending 30 September 2005, 31 March 2006, 30 June 2006, 31 March 2007, 30 June 2007, 30 September 2007 and 31 December 2007.
9.	A number of items were identified and these were contained in the assessment dated 3 November 2008 for an amount of £1,242 plus interest of £79.35 making a total of £1,321.35.
10.	In relation to the Edinburgh property, the amounts of disputed input tax related to five payments of £6 in relation to a monthly maintenance charge for the Edinburgh property and covered items such as stair cleaning, communal roof maintenance, car parking, lighting and grass cutting.  In addition, an amount of £6 was claimed in relation to a blanket to be used as bedding.
11.	Also identified during this visit were amounts of input tax on work carried out to the property at Balfron which belonged to Ms Hamill.  It had been agreed by the Appellant and Ms Hamill that in return for her becoming a full-time employee she would relocate to Balfron, an area nearer to Callander, and that a number of costs involved in this relocation would be met by the Appellant.  The input tax in relation to these included in the assessment was £141 worth of removal expenses.  It was agreed by the parties that this amount was overstated by an amount of £6.23 which represented insurance premium tax so that the true amount was £134.77.  The following other amounts of input tax were for electrical work in an office in the Balfron property, £108.64; and for an alarm, outside lights, a new kitchen and boiler £957.78.
12.	At the visit in April, Mrs Henderson-Symons disallowed the relocation and refurbishment items along with the amounts in relation to the Edinburgh property.  As noted, Mrs Henderson-Symons was not aware of the rental agreement in place in relation to the Edinburgh property and at no time before or after the visit and up until the review period was the rental agreement produced or this fact known to the Respondent.
13.	Mrs Henderson-Symons’ opinion was that the business had good records and that as the Appellant provided accounting services to clients who received advice on VAT matters she assumed a good knowledge of VAT.
14.	Mrs Henderson-Symons did not feel that expenditure, other than that which had been agreed, should be apportioned because it was used by directors of the Company and in relation to the Balfron property it was not for business purposes.  Again, the fact that Ms Hamill was not a director at the time was unknown to Mrs Henderson-Symons and was not pointed out to her from the date of the visit until after the review period.
15.	Mrs Henderson-Symons sought guidance from her colleague.  By letter of 29th October 2008, Mrs Henderson-Symons wrote to the Appellant advising that the input tax reclaimed for the Edinburgh property had been refused because “the provision of domestic accommodation is regarded as personal rather than a business responsibility.  Goods or services acquired in connection with this are not treated as used or to be used for the Company’s business, therefore, any input tax is not recoverable (as per the VAT Act 1994 Section 24 (3)”.  
16.	The Appellant replied that the accommodation at the Edinburgh property was not used for domestic purposes by anyone connected with the Company or otherwise; that it was expenditure incurred by and for the business and not for private purposes.
17.	As regards the Balfron property, the Respondents’ letter of 29 October 2008 stated that “the costs have not been incurred for the purpose of your business, therefore, the input tax is non-deductible as per the VAT Act 1994 Section 24(1)”.  The Appellant claimed that the costs would be allowed for income tax purposes as they were “business expenses”.  This led to the ground of the Appeal that the Respondents should apply the same criteria when considering Valued Added Tax (“indirect taxation”) on the one hand and income and other business taxes (“direct taxation”) on the other.
18.	The matter was then passed to Alison Beckest, Senior Officer for the Respondents, who by letter dated 17 November 2008, stated that “in relation to the Edinburgh property Section 24(3) clearly stated that the goods and services used in connection with the provision of accommodation by a Company shall not be treated as used for the purposes of any business carried on by the Company to the extent that the accommodation is used for domestic purposes by a director of the Company”.  In relation to the Balfron property costs, Ms Beckest confirmed that these were disallowed on the basis of Section 24(1) of the VAT Act 1994 as the input tax of the costs had not been used for the purpose of the business.  A general comment was made that Ms Beckest could not comment on how colleagues of the former Inland Revenue interpreted legislation.
19.	The matter was then referred to the VAT Appeals team to carry out an independent review of the assessment and this was carried out by Mrs McIntyre of the Respondents.  By her letter dated 18 March 2009, the Edinburgh property claim was rejected because “the flat is utilised by Mr Gunkel, director of the Company, for both business meetings and overnight stays.  Where a property is utilised for such activities, the use for domestic accommodation means that the VAT incurred on the property is subject to the restrictions determined in Section 24(3) of the Value Added Tax Act 1994”.  In relation to the Balfron property, the letter stated “this property is also utilised by a director of the Company, Ms Hamill, as domestic accommodation and, therefore, was also subject to the restriction detailed in Section 24(3) of the Value Added Tax Act 1994”. The claims were rejected.
20.	This letter, based on an inaccurate assessment of the facts, added little to the process and, accordingly, an Appeal was made to the Tribunal.  
Authorities

Ian Flockton Developments Ltd v Commissioners of Customs and Excise, [1987] STC394

Customs and Excise Commissioners v Rosner, [1994] STC288

Decision 17813, Durnell Marketing Limited

Decision 6421, G I Hadfield & Son Ltd.

Decision 14660, Christopher James Aplin & Others

Decision 2478, SSL Ltd.

Reasons for the Decision

21.	The arguments of the parties raise the following questions which the Tribunal considered separately.  
22.	The questions are-
a)	Should the rules relating to indirect taxation and direct taxation be the same given that the former Customs and Excise and former Inland Revenue have been amalgamated to form H M Revenue and Customs?
b)	Was the supply to the Appellant of the expenses for the Edinburgh flat used or to be used for the purpose of any business carried on or to be carried on and if so whether this would be disallowed because they are used in connection with the provision of accommodation by the Company because of use by a Director of the Company?
c)	Were the goods and services in relation to the Balfron property used or to be used for the purposes of the business?

(a) Should the rules relating to indirect and direct tax be the same?
23.	The Appellant Mr Gunkel submitted that the rules should be the same and, in particular, that any subjective element should be considered in the same way.
24.	The Respondents directed the Tribunal to Article 1 of the European Directive of 28 November 2006 and, consequently, to the fact that this is EU legislation which must be implemented by member States of which the UK is one.  They pointed out the rules and regulations that govern the administration and collection of direct taxes and indirect taxes are different and separate rules apply.  
25.	The Tribunal accepted this argument and saw no reason why, even if the Respondents’ Department is now one, that the same rules should apply to all taxes in the same way.  The Tribunal agreed that the legislation and rules that apply for each tax should be applied in relation to which ever tax and legislation is relevant and at issue.  

26.	This ground of Appeal is dismissed.
(b) Was the supply of goods and services to the Edinburgh flat used or to be used for the purposes of the business and, if so, would it be disallowed because this would be domestic accommodation used or to be used for domestic purposes by a director of the Company?
27.	This related to an interpretation of Section 24(3) of the VAT Act 1994.  The Respondents were unaware of a lease between the Appellants and the owners, being Mr and Mrs Gunkel, but no submission was made as to whether this would change the position in relation to the claim for input tax and the use by the directors of the domestic accommodation.
28.	It became clear during the evidence that the expenditure was for the property as a whole which was being used as an office and where appropriate for overnight accommodation albeit on a somewhat utilitarian basis.  It was also clear that the property was used by directors principally Mr Gunkel and subsequently by Ms Hamill, when she became a director, not only for domestic accommodation but also business purposes and that it was also used by other employees many of whom were self employed but working for the Company and who came from places as far away as Aberdeen where it would have been difficult, if not impossible, to have worked a full day and return home.
29.	The Respondents argued that the factoring fees and the costs of a blanket were not used in the course of the business and were personal use.
30.	It was clear during the evidence that the Edinburgh property was used as an office as well as for occasional overnight accommodation and that the use was not only by directors.  The Appellant gave evidence that previous claims for input tax had been met in relation to the costs associated with the Edinburgh property.  Based on the evidence before it, the Tribunal found that the items of expenditure in relation to the maintenance costs were not all in relation to the domestic accommodation nor were they, in total, in relation to domestic accommodation used solely by directors.
31.	Similarly, whereas the cost of a blanket did relate to domestic accommodation, this was not solely for the use of directors.  Although it was not mentioned at the Hearing and has no force in law the Tribunal is aware the Respondents published a public document entitled The VAT Guide (Notice 700) (April 2002).  Section 12 of this Notice covers input tax:subsistence, staff entertainment and domestic accommodation expenses. 

Section 12.2 covers Domestic accommodation and states: 
“12.2.1. Employees.  If your business provides domestic accommodation for employees you can treat any VAT incurred as input tax. 
12.2.2. Sole proprietors, partners and directors.  If you are a sole proprietor, partner or director then you cannot recover the VAT on expenses such as repair and maintenance connected with your domestic accommodation even if the business owns the accommodation and bears the cost.  But if the accommodation is used partly for business purposes (for example if you use a room for meetings or as your office) then you can reclaim as input tax part of the VAT charged.  Section 33 explains how much VAT you can reclaim.”
Section 33 of this Notice is a lengthy section which covers various alternative methods of apportioning tax between business and non-business activities.
32.	The Tribunal, therefore, allows this ground of Appeal in relation to the Edinburgh property on the basis that the total amount claimed should not be disallowed but a proportion should be.  The Tribunal heard no evidence from either party as to an appropriate apportionment.  The matter is therefore remitted to the Respondents and the Appellant to agree an appropriate apportionment.
(c) Whether the supply of goods and services at the property at Balfron were used or should be used for the purposes of the business?
33.	Some confusion arose during the cross examination of Ms Henderson-Symons and, indeed, in the internal review which refused the claim for input tax on the grounds that Ms Hamill was a director and, therefore, this claim would be disallowed under Section 24(3) of the VAT Act 1994.  As became clear in the evidence at the time of the supply of goods and services, or at the time they were contracted, Ms Hamill was not a director of the Company.  This had not been made clear to the Respondents at the time of the visit and not until after the internal review had taken place.  The Balfron property was owned by Ms Hamill.
34.	The matter at issue was whether, as the Respondents argued, the expenditure was for the benefit of the business but not for the purpose of the business.  It was clear from the evidence that Ms Hamill had to relocate and that this would be a benefit to the business as she would be (a) full-time and (b) nearer to the catchment area of clients of the business.
35.	The Respondents made reference to Ian Flockton Developments Ltd v Commissioners of Customs and Excise [1987] STC394 setting out the tests the Tribunal should look at in order to be satisfied “on the balance of probability that the object in the taxpayer’s company mind at the time the expenditure was incurred was that the goods and services in question would be used for the purposes of the business”.  
36.	The test is whether the goods and services supplied to the taxpayer were used or to be used for the purpose of any business carried on by him?  The test is a subjective one: that is to say, the fact finding Tribunal must look into the tax payer’s mind as it was at the relevant time to discover his object.
37.	Reference was also made to Customs and Excise Commissioners v Rosner [1994] STC 228 which stated that “there must be a clear nexus between the matter in relation to which the expenditure has been incurred and the business itself.  That nexus cannot merely be the fact that the business will benefit from the expenditure”.
38.	“Benefit, therefore, cannot be the test, there must be a real connection, a nexus between the expenditure and the business.  It seems to me that the nexus, if it is not to be benefit, must be directly referable to the purpose of the business”.
39.	The Tribunal found on the facts that the Appellant’s business had benefited from the relocation of Ms Hamill but that this did not mean that the expenditure incurred was not for business purposes.  Reference was made to the HMRC VAT internal guidance on input tax V-13- 
 “5.24.2 Relocation expenses -
Many employers will provide assistance to employees or future employees in relocating nearer their new job.  Assistance may take many forms, including the payment of estate agent fees, payment for a removal firm when moving house, the provision of maintenance/gardening for an employees former property awaiting sale, short term accommodation in a hotel.  Providing such expenditure is linked to the actual relocation it can be treated as being the employers input tax.  The supply of services order should not be applied.
If however the expenditure is not linked specifically to the relocation but forms part of the ongoing living expenses at the new property then it is not input tax.  Thus the provision of new bespoke curtains or carpets for a new house is acceptable as it is a normal expense of moving house.  Yet the provision of a new stereo system would not be acceptable as it is an expenditure unrelated to the relocation.”
40.	It was clear at the time that Ms Hamill was not a director so that the provisions of Section 24 (3) do not apply.
41.	Whilst accepting that the HMRC internal guidance has no force of law the Tribunal felt that it is clear from this, in the interpretation of Section 24(1), that the Respondents treat relocation expenses as input tax provided “such expenditure is linked to the actual relocation”.  The guidance drew a distinction, however, between expenditure which is not linked specifically to the relocation but forms part of the ongoing living expenses at the new property.  The latter was not treated as input tax and examples are given such as new bespoke curtains or carpets which would be acceptable and would be treated as a normal expense of moving house unlike a new stereo system.
42.	The Tribunal therefore allows the appeal on this ground in relation to the removal expenses input tax of £134.77.  In relation to the other sums claimed, as the internal review procedure had been based on a misunderstanding as to Ms Hamill’s status at the time; and as some of the amounts involved in relocation expenditure are as a matter of practice allowed, the Tribunal allows the appeal but directs that the matter be remitted to the Respondents to agree an appropriate apportionment in the light of the Tribunal’s findings and comments.
43.	There is no order as to expenses and costs.

W RUTHVEN GEMMELL W.S.
TRIBUNAL JUDGE

RELEASE DATE:  16 NOVEMBER 2009