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You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Training Consultant v Revenue & Customs [2007] UKSPC SPC00584 (15 January 2007) URL: http://www.bailii.org/uk/cases/UKSPC/2007/SPC00584.html Cite as: [2007] UKSPC SPC584, [2007] UKSPC SPC00584 |
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SPC00584
DOUBLE TAXATION RELIEF – whether the operation in Slovakia carried on as a registered branch of X International Limited was akin to a partnership with the Appellant, or whether X International Limited were carrying on business alone but contractually bound to pay the Appellant a share of profits – the latter – no relief available
THE SPECIAL COMMISSIONERS
TRAINING CONSULTANT Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY'S
REVENUE AND CUSTOMS Respondents
Special Commissioner: DR JOHN F. AVERY JONES CBE
Sitting in private in London on 18 December 2006
The Appellant in person
Akash Nawbatt, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2007
ANONYMISED DECISION
(1) In 1992 the Appellant, a chartered accountant, set up an accountancy training consultancy as a sole trader. He operated in Eastern Europe and his clients included the major accountancy firms. He had a team of freelance tutors that he used. He purchased study texts and revisions kits from a major financial training company, X, and also had an arrangement unique to himself to purchase their lecture notes and revision notes.
(2) His method of providing training in Eastern Europe was that the tutors would fly in and out and teach in a local hotel without there being any local administration. He carried out all the administration in the UK with the help of an employee. He made a profit by charging out tutors at a higher rate than he paid them and also made by charging materials and flights at the full price while obtaining a discount on them.
(3) Initially he had no competition in Central and Eastern Europe as two potential competitors were inactive and the third, X, only undertook work at the request of clients. His work in Slovakia was successful providing the ACCA exam training programme to an accountancy firm, by whom he had earlier been employed as a consultant and training manager. The business expanded after their merger to become Big 4 This gave him 35% of the local market.
(4) In 1998 an X plc group company set up a local operation in Slovakia with AB as local manager. AB later became a director of a new company, X International Limited (hereafter references to "X" are to this company). In view of the competition, Big 4 sought and he agreed a discount on his prices. The Appellant was in a strong position to negotiate an arrangement with AB as he had a substantial share of the market and access to tutors. The Appellant and AB made an oral deal having a business plan for the six months to 31 December 1998 under which the Appellant and AB would provide tutors in the ratio of 48:25 charging a higher price than X would normally have charged. Each party would charge out the tutors at a profit and they would share the residual profit. In the event there was a small loss. They described it as a joint venture under the name X Slovakia, to which I shall refer as "the Slovak operation" as a neutral term since its nature is in issue. They made successful proposals to other major accounting firms.
(5) In the budget for 1999 it was agreed that the Appellant and X would each provide 24 tutors.
(6) Early in 1999 AB proposed to set up a local office with classrooms and full-time teaching staff. Two tutors, who were known to the Appellant at Big 4 started work as tutors for the Slovak operation in March 1999 and a third tutor joined in the summer. After this the Appellant provided fewer tutors but still did some teaching himself. The operation took a lease of premises at the same time. The Appellant was involved in selecting the third tutor and in negotiations with the landlord of the new premises. During 1998 he offered to put up capital to finance the operation but AB preferred to finance this entirely from X.
(7) The Appellant's financial statements for the year to 31 August 1999 show as a separate item the net income from the joint venture (£860, being the figure after Slovak tax). The total revenues and expenses of the Slovak operation and the Slovak tax are shown in a note, including a statement that included in the expenses is £67,221 shown as fees receivable in his income statement.
(8) In the first half of the year 2000 the Appellant agreed with a Mr H to merge his business, including his share of the Slovak operation, into a newly formed company, Accountancy Limited. It was agreed orally that the Appellant would have 20 % of the shares (which he never received) and a salary of £Y (although he agreed to a temporarily reduced figure of £Z). The profit on the supply of tutors to the Slovak operation was received by Accountancy Limited. Relations with Mr H became strained and it was agreed that the Appellant would receive personally his share of the profits of the Slovak operation for 2000, and subsequent years would be sorted out when the issue of his shares in Accountancy Limited was resolved. He continued to receive this personally. The Appellant terminated his arrangement with Accountancy Limited in June 2003. It was agreed that on termination of the arrangement the Appellant would keep his share of the Slovak operation.
(9) X informed the Revenue that they had elected to take a deduction instead of credit for the whole of the Slovak tax on the Slovak operation as they had losses.
(10) The Slovak operation continued in 2000. The new Chairman of X, Mr Q, said he was not happy with the arrangement with the Appellant and in May 2001 faxed him purporting to terminate the arrangement. At a meeting the Appellant pointed out that the three employed tutors supported him and he was in a position to set up on competition in Slovakia. As a result Mr Q agreed to continue the arrangement but with payment to X for course notes and central overheads of 3% and 5% of turnover respectively. During the following two years the Appellant's visits to Slovakia were less frequent but he kept in touch. The operation was run by the tutors and the local staff.
(11) The Slovak operation is registered in the commercial register and with the Slovak tax authority and pays tax as a branch of X under the name "X International Limited OZ" (I take OZ to be an abbreviation for branch in Slovak) with a 31 December year end.
(12) On 23 March 2004 the finance director of X offered the Appellant £10,000 to terminate the arrangement from 1 January 2004, which the Appellant accepted.
(13) The management accounts of the Slovak operation show the income and expenses of the operation and then Slovak tax. This is followed by a heading "Calculation [Appellant's] profit share" deducting depreciation on assets financed by X, and deducting the profit that X would have made if they had charged tutors and flights at the same rate as the Appellant as opposed to the cost shown in the accounts. In addition there was an addition to the profit for a tutor provided by the Appellant but charged directly to the operation, thus giving the Appellant the same reward as if he had charged the tutor to the operation with his normal profit. This resulted in an adjusted profit of which half was shown as "[the Appellant's] share."
JOHN F. AVERY JONES
SPECIAL COMMISSIONER
RELEASE DATE: 15 January 2007
SC 3060/06