Stirling Investments v Revenue & Customs [2010] UKFTT 61 (TC) (09 February 2010)

DECISION

1. This is an appeal by Stirling Investments against a VAT assessment in the sum of £91,875 made on 3.9.2007 arising from a single transaction in the appellant partnership’s prescribed accounting period ending 31.12.2006.

2. Stirling Investments (“the Partnership”) is a partnership consisting of Mr David Newett and his wife Jane Elizabeth Newett. They are also shareholders and directors of a company named Stirling Investments Limited (“the Company”) (and they are also shareholders and proprietors of other linked businesses although there is no formal group for VAT or other legal purposes). The Stirling Group in general and the Appellants and Stirling Investments Ltd in particular are involved in the exploitation of real property with a view to profit.

3. The Partnership is registered for VAT under number VRN 808 8790 84 and has been since 5.2.2003. The Company is also registered for VAT under number VRN 829 6352 01.

4. The Partnership is used to hold working capital for the group and this is explained in some detail in paragraph 5 of the witness statement of Paul Brian Foster, the Finance Director of the Partnership and paragraph 3 of the witness statement of David Ian Newett.

5. On 31.1.2006 the Company sold two properties known as London House and Bushbury House (the Properties) which it had purchased in October 2004 and there was a profit on sale of some £550,000.

6. Pursuant to a wish to transfer funds to the Partnership the sum of £616,875 was invoiced by the Partnership to the Company on 30.6.2006, the invoice in question being reproduced at page 132 in the bundle of documents and purporting to relate to £525,000 “professional fees in connection with the management and disposal of London House and Bushbury House premises” together with £91,875 VAT.

7. Initially the Company reclaimed input tax in the sum of £91,875 in respect of the charge to the Partnership for “management services” together with £8,750 in respect of Sutcliffe Barker for services as selling agents.

8. The Partnership included the invoice for the charges in its VAT return for the period 06/06 and accounted for output tax.

9. Following a visit from an Officer of the Commissioners, a Mr Keith Allison, to the Company in October 2006 it was noted that the properties had been let as exempt supplies prior to 13.12.2005. However on 13.12.2005 Mr Foster had written to the Commissioners seeking leave to waive the exemptions, stating on the application form that the Company had not charged any exempt rents on the property.

10. By letter dated 17.11.2006 Mr Allison wrote to the Company and advised that the Commissioners treated the waiver as invalid for failure to state that exempt supplies had already been made and that the Company would therefore be liable to repay the input tax claimed.

11. Further correspondence passed between the Commissioners and the Company in which the Company sought to argue that the characterisation of the charges was erroneous and that they in fact represented dividends.

12. On 1.12.2005 the Company, having at that time opted to tax the two properties, deducted £91,875 as input tax when making its VAT return for the period ended June 2006.

13. The Appellants argue that the transaction was dealt with by way of VAT invoice for management services in error; the error was thereafter corrected by treating the payment as a dividend paid by the Company to the shareholders and indeed the transaction was treated in that way so far as the liabilities of the parties (i.e. the Company, the Partnership and Mr and Mrs Newett) were concerned.

14. The Partnership issued the Company with a VAT credit note in respect of the charges and reconciliations were made in the Company’s accounts. The Partnership adjusted its 12/06 return to show this credit.

15. By a notice of assessment dated 13.9.2007 (the Assessment) the Partnership was assessed in the sum of £91,875 plus interest, effectively seeking to reverse the credit shown by the Partnership in its 12.06 return. The appeal before the Tribunal today relates to this assessment.

16. As stated above, in November 2006 Mr Allison of the Respondents visited the Company and on 17.11.06 he wrote to the Company intimating that the input tax on the management fees would be disallowed.

17. The Respondent’s position at that time was that the Company had not correctly notified the option to tax because the Company had made exempt supplies before the option in respect of the properties in question so that the option required the Commissioners’ prior permission. This is not, in fact, accepted by the Appellant because automatic condition 3 of the conditions set out in paragraph 5 of Public Notice 742A (see Paragraph (3) of Schedule 10 to the VAT Act 1994) appears to have been met, even on the Respondent’s view of the facts. On behalf of the Appellant it is also contended that paragraph 30 of that Schedule empowers the Commissioners to give retrospective approval and it appears that they have not considered whether to do so.

18. By notice of appeal dated 23^rd April 2007 the Company appealed against the corresponding assessment dated 4^th December 2006 (the assessment being for repayment of the input tax claim) on the ground that a supply had been made but only to a value of £40,000; it was said that the remainder of the payment made relates to a dividend which is outside the scope of VAT and the assessment is therefore excessive.

19. By a notice of application dated 14.9.2007 the Company withdrew the 2007 appeal upon the basis that the Company then accepted the Commissioner’s assessment of tax subject to the appeal.

20. By a notice of appeal dated 20.5.2008 the Company appealed against the same decision as the 2007 appeal upon precisely the same grounds. The 2008 appeal was subsequently withdrawn.

21. The Company is not the Appellant in this appeal and the Company’s position with regard to deduction of input tax (if the relevant payment had been for a supply of management charges) is not relevant for present purposes.

22. The Appellant’s case is that the transaction in question was not a taxable supply for VAT purposes (whether as a supply of management services or otherwise) so that for that reason no input tax was deductable by the Company but equally no output tax was payable by the Appellants and therefore the Appellants are not liable to be assessed for it.

23. It is accordingly common ground in this case that the issue is whether or not a taxable supply was made by the Partnership.

24. The combined effects of Sections 1 and 4 of the VAT Act 1994 is that VAT is chargeable only on taxable supplies. It is observed on behalf of the Appellants that VAT is not chargeable on transactions erroneously described as or treated as taxable supplies but which are not taxable supplies. The case of Sandell (9665) refers.

25. It is acknowledged by the Appellants in this case that the burden of proof lies upon them to satisfy the Tribunal that the transaction was as they contend. The case of G Kaur (15366) is authority for the submission by the Appellants that the Respondents cannot, under Paragraph 5 of Schedule 11 of the Act, assess a person who has issued an invoice showing VAT due where none is due just because such an invoice has been issued. Of course, issuing an invoice showing tax due is some evidence that a taxable supply has taken place but the issue to be determined, and the issue before the Tribunal, is to ascertain the true nature of the transaction and to look at the substance and reality of the transaction and to determine what, if anything, is supplied in consideration for the payment made. The Tribunal must look at the entire transaction as revealed by the terms of the contract (De Voil, paragraph V3.102; Eastbourne Town Radio Cars v Customs and Excise Commissioners [2001] STC 6060).

26. Extrinsic evidence is admissible if it tends to show the true character of a transaction, although not for the purpose of treating a transaction of one legal character as if it were a transaction of another legal character (Inland Revenue Commissioners v Church Commissioners for England [1976] STC 339, HL per Lord Wilberforce at page 346). Again, in these cases, emphasis is laid upon ascertaining the nature of the supplies made, by whom and to whom. It is stated that the terms of contract entered into by the taxpayer may or may not determine the right tax result. They do not necessarily do so.

27. Where transactions, invoices and returns are based on fictitious supplies they are all either fiscal nullities or ineffective to form the basis of an assessment (Sandell (9665)); The University of Huddersfield Higher Education Corporation (17854).

28. It is necessary to examine the commercial reality of the transaction in this case, as indicated in HJ Glawe Spiel-und Unterhaltungsgerate Aufstellungsgesellschaft mbH & Co KG Barmbek-Uhlenorst (Case C-38/93) [1994] STC 543, 547, paragraph 18 and Commissioners of Customs and Excise v Sinclair Collis Ltd [1999] STC 701, 708, paragraph 7. Uncommerciality or artificiality is not itself sufficient to disturb the transaction: Revenue & Customs Commissioners v Noel Dempster (trading as Boulevard) [2008] EWHC 63 (Ch).

29. The Appellants purported to rectify the position that arose with the VAT invoice by issuing a credit note. The Respondents take the point that the credit note should have reversed the whole transaction whereas it only reversed the VAT element. The Appellant acknowledged that their accounting procedures were not altogether in order in this case and it is arguable that they should indeed have reversed the whole transaction but the Tribunal notes that the intention was that the transaction should be VAT neutral and the issue of a credit note limited to VAT did achieve this. The Company was still remitting £525,000 to the Partnership after the completion of the sales of the Properties and the invoice was at least some form of documentation to back up the payment for record-keeping purposes.

30. The Tribunal has had the benefit of seeing witness statements in this case including those by Mr Newett and Mr Foster. Those gentlemen have also given evidence to the Tribunal and been subjected to cross examination. Likewise Keith Thomas Allison, a Higher Officer of HMRC has given evidence to the Tribunal.

31. The Respondent’s case is that the payment of £525,000 by the company to the partnership was indeed a payment in respect of management fees, as described in the invoice. The Appellants have observed that such a figure would have been completely disproportionate; the £525,000 was, in effect, profit on the sale of the properties. The Partnership had carried out management services for the company on the sale of other properties and a figure of £40,000 changed hands in this respect. The £40,000.00 was properly described as management charges and invoiced (with VAT) as such. A “management charge” of £525,000.00 on the sale of these two properties would have been completely out of line with the precedent set by a £40,000.00 charge made in similar circumstances. The Tribunal accepts the Appellant’s argument in this respect.

32. Mr Foster, the Finance Director of the Appellants, admits that the issue of a VAT invoice in respect of the £525,000 was a misconceived exercise and the Tribunal is asked to accept that admission as an answer to the Respondent’s case. It has to be said that Mr Foster has given his evidence in an honest and straightforward manner and the Tribunal accepts his contention that, with the benefit of hindsight, he approached the transaction of the transfer of funds from the Company to the Partnership in an incorrect manner on paper.

33. Mr Newett has given evidence to the Tribunal, also in an honest and straightforward manner. He, in fact, had much less knowledge of these matters than Mr Foster who had day to day responsibility for accounting matters.

34. The Tribunal concludes that what has occurred in this case, within the procedures operated by the Appellants, is a true error as opposed to a situation where a party has always intended to characterise a transaction as a supply but is now of the view that it was not the most beneficial interpretation.

35. The invoice itself is not conclusive; the original VAT Returns of both the Company and the Partnership initially perpetuated the error which had been made by issuing a VAT invoice; the original accounts of the company likewise perpetuated the error which had been made.

36. The withdrawal of the 2007 and 2008 appeals by the Company is not a matter which requires any conclusions to be drawn by this Tribunal.

37. It is acknowledged by both the Appellant and Respondents that the invoice giving rise to the charges was not a sham; there has been no dishonesty or intent to deceive in this case.

38. It is submitted by the Respondents that it is not clear that it is open to the Company to pay dividends to the Partnership in any event because the parties entitled to the dividends were Mr & Mrs Newett in their personal capacities rather than as partners in the Partnership. It is further submitted that the whole structure of using the Partnership to release profits must therefore be based upon payment for supplies as the payment of dividends would not require the involvement of the Partnership at all. It is the Appellants’ case, accepted by the Tribunal, that the Partnership was indeed simply a vehicle for accommodating surplus funds following the sale of properties and the partners (Mr & Mrs Newett) were entitled to dictate that dividends, to which they were entitled from the Company, should be directed to the Partnership bank account. The evidence given to the Tribunal is that the Partnership (and the Company) were anxious to present a particularly solvent picture to their Bank and that is why funds were accumulated in the partnership bank account in this way. That appears to be a completely valid and understandable position.

39. The Tribunal has concentrated its attention upon the commercial reality of the transaction in question and in particular upon the nature of legal relations into which the parties were purporting to enter at that time. There had been no significant supply of management services, certainly not to the extent of £525,000. Any supply of services would have been more in line with the payment of £40,000.00 made in the previous accounting period and indeed the Tribunal is informed that another figure of £129,000.00 was charged for management services in connection with other group activities and when added to the £40,000.00 this made a total of £169,000.00 for management services. This total sum is, again, very substantially less than £525,000.00.

40. Clearly it was the intention of all relevant parties i.e. Mr & Mrs Newett, Mr Foster, the Company and the Partnership that the £525,000 should be released to the Partnership as a dividend and by way of distribution of profits made on the sale of the Properties. No substantial management services had been delivered by the Partnership to the Company and accordingly the Tribunal’s conclusion is that no taxable supply occurred and this appeal is therefore allowed.

41. With regard to costs there is an application for costs by the Appellants and this is opposed by the Respondents. This appeal was commenced in the VAT and Duties Tribunal and the Tribunal directs under Rule 6 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 that Rule 29 of the Value Added Tax Tribunal Rules 1996 as amended shall continue to apply to these proceedings.

42. This is not a Complex case. The Tribunal does have the power to award costs and there is an expectation on the part of the Appellants to have the costs of this appeal awarded to them. However the Tribunal has determined to make no order for costs for two reasons.

43. Firstly the Respondents have not acted unreasonably in the conduct of this appeal and, more importantly, they did not act unreasonably in raising the assessment of £91,875 VAT in respect of the Partnership. The Respondents relied upon documentation initially issued by the appellants which indeed gave rise to a clear liability for VAT. They were entitled to continue to rely upon the Appellants’ original documentation and to await the decision of the Tribunal as to the interpretation of that documentation.

44. Secondly this whole situation has arisen because of an accounting error on the part of the Appellants and their Finance Director. They made a mistake. If they had not made a mistake there is no reason to believe that the Respondents would have issued the Notice of Assessment dated the 13^th September 2007 which is the subject of this appeal.

45. Accordingly the Tribunal makes no order for costs.

46. The Appellant and the Respondent have a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents

TRIBUNAL JUDGE

RELEASE DATE: 9 February 2010

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Stirling Investments v Revenue & Customs [2010] UKFTT 61 (TC) (09 February 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00374.html Cite as: [2010] UKFTT 61 (TC)