18835          
	VALUE ADDED TAX  — input tax — employee driving car provided and insured by appellant at its cost — employee involved in serious accident and prosecuted for causing death by dangerous driving — cost of representation borne by insurer but appellant required to pay VAT on solicitors’ fees — whether input tax incurred for the purpose of the appellant’s business — correct test not whether representation for the purposes of appellant’s business but whether insurance policy obtained for those purposes — yes — appeal allowed

MANCHESTER TRIBUNAL CENTRE

 
 	JEANCHARM LIMITED
	TRADING AS BEAVER INTERNATIONAL	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Colin Bishopp (Chairman)

Sitting in public in Manchester on 24 September 2004

Richard Barlow of counsel instructed by Independent VAT Consultants for the appellant

Michael Brueck of the solicitor’s office of HM Customs and Excise for the respondents 

	© CROWN COPYRIGHT 2004

DECISION

1.	This appeal raises the question whether the appellant is entitled to recover as input tax the VAT charged by solicitors instructed to represent an employee accused of a criminal offence.
2.	The appellant was represented by Richard Barlow of counsel and the respondents by Michael Brueck of their solicitor’s office.  I heard evidence, which was largely uncontroversial, from Paul Collins, who is the appellant’s managing director and from Philip Smith, the officer whose decision it was that the tax recovery was not available, and I was provided with a small bundle of documents.  The parties’ representatives referred me to a number of decided cases.
3.	The appellant is a company engaged in the clothing trade.  Mr Collins is one of the two directors of the company; the other is his brother who, because of his illness, takes only a limited part in the management of the company.  At the material time, Mr Collins’ son Damian was an employee but not a director.  
4.	In 2001 and at the beginning of 2002, a large part of the company’s business consisted of the provision to professional football clubs of “own label” clothing.  The clothing consisted not merely of replica team strips, which might be bought by club fans, but other leisure clothing which had no particular connection with the club by which it was sold save that the labels inside the garments were of that club’s “own label” design.  The packaging, too, was designed so as to be identified with the club by which the goods were sold.
5.	Damian Collins, his father said, had been involved in the company’s business from about the age of 13, obviously in an informal way at that stage, but he had been taken on as an employee as soon as he left school.  He had been particularly active in the sale of goods to football clubs and it was he who had built up the more important contacts with the clubs.  By the end of 2001, the company was selling goods in this way to over 40 football clubs and the sales constituted a large part of its business. 
6.	In the evening of 6 February 2002 (when Damian was aged 21), he went with a friend for a drink after work.  They then travelled home in the car provided by the appellant to Damian, for the purposes of his employment.  Damian was driving.  The car collided with another car; the driver of that car and Damian’s friend were killed.  Damian was later charged with two counts of causing death by dangerous driving, to each of which he pleaded guilty, and he was sentenced to four years’ imprisonment.  
7.	The appellant had previously arranged the insurance of the cars used for the purposes of its business, including the car driven by Damian Collins at the time of the accident.   Although he was not then driving in the course of his employment, the indemnity provided by the policy extended to private motoring and it also extended to the cost of representing an insured driver prosecuted for an offence committed when an insured car was being used within the terms of the policy.  The insurers paid for Damian’s representation.
8.	Strictly speaking, the insurance company is required merely to indemnify the insured against the costs incurred by it in dealing with matters for which cover is provided by the policy.  In practice, however, the insurance company takes control, itself instructing solicitors and other professionals to deal with claims and other matters for which the policy provides cover and as I understand Mr Collins’ evidence, that is what happened on this occasion; while the solicitors naturally needed Damian’s instructions, about such matters as his plea, it was the insurers who appointed the solicitors and who assumed responsibility for the payment of their fees and disbursements.  
9.	In about 1984, Customs and Excise agreed with the Law Society and the Association of British Insurers that, even in subrogation cases, a solicitor instructed by an insurer is to address his VAT invoices to the policy holder, rather than to the insurer, and that if the insurance is related to the policy holder’s business, the solicitor’s services are to be treated as having been supplied for the purposes of that business.  If that condition is satisfied and the policyholder is VAT registered, he is able to recover as input tax the VAT included in the solicitor’s account.  That is so even if (as is the norm in such cases) the insurer pays the solicitor’s charge net of VAT.
10.	In this case, the solicitors respected the substance of that agreement, even if they did not deal correctly with the paperwork, a point on which the respondents take no issue.  They claimed their charges, net of VAT, from the insurer and the VAT amounting to £16,625 from the appellant, which has paid it.  
11.	The sole issue for my determination is whether that VAT was incurred for the purpose of its business and is recoverable as input tax, as the appellant contends, or is not, as the Commissioners argue.  They do not, in terms, seek to identify an alternative purpose but rely upon the decision of the High Court in Customs and Excise Commissioners v Rosner [1994] STC 228, a decision to which I will return in due course.
12.	The focus of the debate at the hearing was whether the representation of Damian Collins could properly be regarded as having been supplied to the appellant for the purpose of its business.  However, as I shall later explain, it does not seem to me that this is the right question to ask.  Nevertheless, it is appropriate that I should deal with the parties’ arguments (and give my conclusion on them); and some of the decided cases to which I was referred do have some bearing on what I perceive to be the correct test.
13.	The starting point is section 24(1) of the Value Added Tax Act 1994, which defines input tax in these terms:
“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; …
being … goods or services used or to be used for the purpose of any business carried on or to be carried on by him.”
14.	It was not suggested by either party that that provision fails to implement correctly article 17 of the Sixth VAT Directive (77/388/EEC) nor that the “following provisions” of the section have any application.  Input tax falling within the subsection can be offset by a taxable person against the output tax for which he is liable save to the extent that it is used for the purpose of making exempt supplies which, I understand, is not a consideration here.
15.	Neither the statute nor the VAT Regulations give any greater explanation of what is meant by the phrase “for the purpose of the business” and correspondingly no assistance in identifying those supplies which are, and those which are not,  to be considered to have been obtained for the purpose of a business.  The appellant’s case is that the business purpose here is the attempt to keep a key employee out of prison or, at the least, to ensure that his sentence should be the shortest possible.  That the employee concerned happened to be the managing director’s son was beside the point.  He was an employee who played a very important role in the promotion of the company’s business, to the extent that as a result of his ceasing to be available to the company, that part of its business for which he had previously been responsible has since very substantially diminished.  
16.	Mr Barlow relied upon what was said by Lord Hope of Craighead in Customs and Excise Commissioners v Redrow Group plc [1999] STC 161 at 165 to 166.  In that case, the taxpayer, a builder of new dwellings, agreed with prospective purchasers of its houses that it would pay the fees of the estate agents instructed to sell the prospective purchasers’ existing homes.  There were conditions – in particular, the fees were paid only if the prospective purchaser actually completed the purchase of a new home from the taxpayer, and the taxpayer was also able to give instructions to the estate agents.  The taxpayer made a payment directly to the estate agents if those conditions were satisfied and the question for determination in the appeal was whether the taxpayer was entitled to claim credit for the input tax included in the estate agents’ fees.  The answer to that question depended entirely upon whether the estate agent’s services were used for the purposes of the taxpayer’s business, as it contended, or were rendered exclusively to the prospective purchasers, as Customs maintained.
17.	Lord Hope said:
“… the only question which has to be addressed is whether the supplies on which it seeks to deduct input tax have been used or are to be used for the purposes of the business.  The relevant test is laid down in Belgium v Ghent Coal Terminal NV (Case C-37/95) [1998] STC 260, [1998] ECR 1-1.  Was the supply received in connection with the business activities of the taxable person, for the purpose of being incorporated within its economic activities? … The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax.  Was something being done for him for which, in the course of furtherance of a business carried on by him, he has had to pay a consideration which has attracted VAT?  The fact that someone else, in this case, the prospective purchaser, also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction.”
18.	Later in the same case, at p 171, Lord Millett said:
“… one should start with the taxpayer’s claim to deduct tax.  He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction.  Once the taxpayer has identified the payment the question to be asked is: did he obtain anything – anything at all – used or to be used for the purposes of his business in return for that payment?  This will normally consist of the supply of goods or services to the taxpayer.  But it may equally well consist of the right to have goods delivered or services rendered to a third party.  The grant of such a right is itself a supply of services.”
19.	That the test was subjective was apparent from Ian Flockton Developments Limited –v- Customs and Excise Commissioners [1987] STC 394, in which the taxpayer sought to recover the input tax incurred by it in the purchase and upkeep of a racehorse, whose participation in races, coupled with the taxpayer’s name as its owner, was thought to be a means of publicising and thus advancing the taxpayer’s business.  At p 400, Stuart-Smith J said:
	“The test is were the goods or services which were supplied to the taxpayer 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 taxpayer’s mind as it was at the relevant time to discover his object.  Where the taxpayer is a company, the relevant mind or minds are those of the persons who control the company or are entitled to and do act for the company.
		“In a case such as this, where there is no obvious and clear association between the taxpayer company’s business and the expenditure concerned, the tribunal should approach any assertion that it is for the taxpayer company’s business with circumspection and care, and must bear in mind that it is for the taxpayer company to establish its case and the tribunal should not simply accept the word of the witness, however respectable.  It is both permissible and essential to test such evidence against the standards and thinking of the ordinary business man in the position of the applicant.  If they consider that no ordinary business man would have incurred such an expenditure for business purposes that may be grounds for rejecting the taxpayer company’s evidence, but they must not substitute that as the test.  It is only a guide or factor to take into account when considering the credibility of the witness, and no doubt there will be many other factors which bear on that question which the tribunal should well understand.”
20.	In both of those cases, the court concluded that the taxpayer was entitled to recover the relevant input tax.  The principle to be applied here, Mr Barlow said, was the same.  Although it was undeniable that the principal beneficiary of the services of the solicitors and barrister representing him was Damian Collins, those services were nevertheless used by the appellant for the benefit of its business.  There was no practical distinction to be drawn between this case and Redrow.  Even if – which he did not concede – the average business man would not expend money on the representation of an employee prosecuted for a driving offence committed outside his working hours, that was not the test; as Ian Flockton made clear, I should scrutinise Mr Collins’ evidence but if, having done so, I accepted his evidence, it was apparent that the expenditure had been incurred for the purposes of the business as Mr Collins perceived them.   Only if I concluded that no reasonable business man would have come to that view could I set Mr Collins’ decision aside; and I could not so conclude.  It followed that credit for the input tax should have been allowed.
21.		For the Commissioners, Mr Brueck relied principally upon Customs and Excise Commissioners v Rosner [1994] STC 228.  There, the taxpayer was the sole proprietor of a private educational establishment.  It catered for overseas students.  The taxpayer was prosecuted for a number of offences under the Immigration Acts.  The taxpayer paid for his own defence and sought to recover as input tax the VAT included in the professional fees he had incurred.  At p 230, Latham J said:
		“Any one-man business depends on the presence of that man in order to run it.  If that man is subject to criminal proceedings which may result in his being sent to prison and therefore no longer able to run the business, it could mean that the business will collapse if he is in fact sent to prison.  It follows that expenditure made for the purposes of defending him in order to avoid that happening could be said to be for the benefit of the business.
	“One only has to state that proposition to appreciate that there can be no question of describing sensibly the legal expenses of a person who has been charged with an offence wholly unrelated to his business as being expenses incurred for the purposes of the business.  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.   By the purpose of the business in this context I mean by reference to an analysis of what the business is in fact doing.  It is only by identifying what the nature of the business is in that way that one can determine the extent to which any given expenditure can be said to be for the purposes of that business.
	“In one case before the tribunals, that is the case of Child v Customs and Excise Commissioners (1991) Decision 6827, one of the ways in which it was put by the chairman in that case was to try to determine how closely connected in a criminal case the offence was to the appellant’s business activities; in other words, one can try to see in a criminal case the extent to which the crime that was committed can properly be said to be a matter which relates directly to the business in respect of which it is said that the expenditure has been incurred.
	“Thus I suppose it could be argued that where the offence with which any company is charged is an offence which relates directly to its trading activities, then the legal costs incurred in defending that company would be so and sufficiently connected as to mean the legal expenditure would be for the purposes of the company.  However, as one moves away from the concept of the offence being an offence committed in relation to the activities of the company, it becomes more and more difficult to argue that the expenditure is being incurred for the purpose of the company.  In particular, it seems to me that one must identify the activity in respect of which it is said that there has been a criminal offence and the extent to which that activity is an activity which relates directly to the carrying on of business and therefore the purposes of the business.
 	“It follows that there can be no question but that the tribunal in directing its attention to the outcome of the criminal proceedings was in error.  It was committing the error of looking at the question of benefit to the business as opposed to determining the true question which is the question of whether the expenditure was for the purpose of the business.
	“In the present case the facts seem to me to make it abundantly clear that the only conclusion must be that the criminal offences in respect of which the legal expenses claimed were incurred were offences which, whilst they had a connection with the business in the sense that it would appear as though the immigration offences related to people who might become students of the business, were not offences which related to the carrying on of the business.  They were sufficiently removed from the purpose of the business to mean that the expenditure was not expenditure incurred for the purpose of the business.”
22.	That case was, of course, decided before Redrow reached the House of Lords.  The report also indicates that while Ian Flockton Developments was cited to the judge, he did not refer to it in coming to his conclusion.
23.	 	Mr Brueck’s argument was that there was no connection between the offence and the appellant’s business.  Damian Collins had been driving the car for his own purposes at the time and the appellant had therefore no responsibility for his activities.  Even if one accepted that Damian Collins’ absence from the business would have an adverse effect, that effect was certainly no greater than that which would have been suffered by Mr Rosner’s business had he been imprisoned.  Furthermore, even if one did accept that there was some benefit to the appellant’s business from its being able to minimise Damian Collins’ sentence, there was no parallel with Redrow since, there, the taxpayer had devised a scheme which, as the House of Lords found, was for its financial benefit.  The estate agent’s services were rendered to both the prospective purchasers and to Redrow.  Here, however, the only recipient of the lawyers’ services was Damian Collins.  Furthermore, while Redrow could quite properly give instructions to the estate agents, the appellant could not properly have given any instructions to those representing Damian Collins; he alone was competent to do so.  Thus the later decision of the House of Lords in Redrow was immaterial to the circumstances of this case, which could not sensibly be distinguished from Rosner.
24.	Mr Barlow sought to distinguish Rosner which, he said, must be treated with considerable caution following Redrow.  It had imposed a rather different test, described by Lord Millett, that is whether the business obtained “anything – anything at all” in exchange for the payment it made.  The benefit to the appellant lay in the efforts made by the lawyers representing Damian Collins to ensure that his sentence was the shortest possible.  In addition, even if one had to look with some degree of scepticism at cases in which a taxpayer was seeking to recover the input tax incurred in his own representation, one would apply a different test in the case of an employee.  So much was apparent from the tribunal’s decision in P&O European Ferries (Dover) Limited v Commissioners of Customs and Excise (1992) Decision 7846.  There, the taxpayer paid for the representation of seven members of its staff who were prosecuted following the Zeebrugge disaster in 1987.  The tribunal concluded that it was entitled to credit for that input tax because there was a clear nexus between the expenditure and the taxpayer’s business.  Mr Brueck’s retort was that the alleged offences (the employees were all acquitted) were committed during the course of their employment and that was not the position here.  
25.	The difficulty which faces the appellant, if one considers only whether or not it was reasonable for it to pay for Damian Collins’ representation, seems to me to lie in two issues.  First, while it is clear from the evidence that Damian Collins’ effective representation was for the benefit of the company, it is far less clear that it was for the purposes of its business.  The prosecution did not arise out of any activity pursued by the company.  I accept that Damian Collins’ imprisonment was likely to (and in fact did) adversely affect the appellant’s business, but I agree with Mr Brueck that there is nothing to distinguish this case from Rosner in that respect.
26.	Second, I am not persuaded that Redrow has materially affected the approach which one must adopt.  There, the taxpayer was actively involved in the scheme by which it paid the estate agents.  It gave them instructions and was able, in some respects, to overrule any conflicting instructions given by the prospective purchasers.  The scheme had a direct effect on the taxpayer’s business – each successful disposal of a prospective purchaser’s house led to the sale of a new house by Redrow to the purchaser.  There was a clear, immediate link between the supply of the estate agent’s services and Redrow’s business.  Here, the only link between the appellant and the solicitors is that the appellant has paid the VAT on the solicitor’s fees.  It did not instruct them, and had no right to influence the solicitors’ conduct of the defence, or any means of doing so.  I do not think there is any analogy with P&O European Ferries; there the taxpayer had a direct interest in the prosecution of its employees, not merely because they were prosecuted for offences alleged to have been committed in the course of their employment but because the success of prosecution of the employees had a direct effect on the prospects that a simultaneous prosecution of the taxpayer itself might succeed.  Again, the taxpayer was able to give instructions to the solicitors representing the employees, albeit the employee’s instructions would prevail in some circumstances.
27.	I am, therefore, not satisfied that the solicitors’ services were supplied for the purposes of the appellant’s business, if one examines the facts of the case by considering only the representation of Damian Collins. Indeed, although the parties’ arguments proceeded from the assumption that the solicitors made a supply to the appellant, I am not persuaded that the assumption is correct.  However, since both parties made the assumption and I heard no argument on the subject, I propose to say no more about it.
28.	As I have already mentioned, I do not think the parties were correct to focus upon Damian Collins’ representation.  As Mr Barlow pointed out, though only as an aside in his closing remarks, the insurance policy was taken out before the accident.  The appellant’s employees were covered by the policy, which included use of the company’s vehicles for private purposes which was allowed to them, as a perquisite of their employment.  The policy cover no doubt included the various compulsory risks for which motor insurance policies are required to provide an indemnity, with the additional, though non-compulsory, benefit that the insurance company would pay (or strictly speaking indemnify the policy holder against) the cost of professional representation of the driver if he was prosecuted for an offence.  The appellant had paid the cost of that insurance – the premiums – in advance of the accident, and when it could not possibly have known whether any accident might occur and what the consequences of any accident which did occur might be.  In other words, the decision was taken in advance to procure a comprehensive level of insurance, in part for the appellant’s own direct benefit (when the vehicles were being driven on company business) and in part for the benefit of its employees (when the vehicles were used for private purposes).  
29.	In my judgment, the correct question is not whether Damian Collins’ representation was undertaken for the purposes of the appellant’s business but whether the purchase of the insurance policy was for those purposes.  It may perhaps be thought by some that the provision of insurance covering private use of a company car is generous but it is by no means unusual (there are provisions of the income tax legislation specifically designed to deal with the supply by employers to their employees of cars which may be used for the employees’ private purposes) and it seems to me impossible to say that the provision of insurance covering the use of a company car for private purposes, as a perquisite of employment, is not a proper business purpose; thus, I am satisfied, the policy was obtained for the purposes of the business.   What happened after the accident was that the appellant claimed the indemnity under the policy for which it had already paid.  It did so in order to make good the perquisite which it had supplied to its employee.  A decision not to avail itself of the provision in the policy by which the insurer indemnified against such costs (and to refuse to meet such costs itself) would have rendered the perquisite illusory and might well have amounted to a breach of the contract of employment.  For this reason, I am satisfied that the appellant is entitled to credit for the input tax it has been required to pay pursuant to the agreement between Customs, the Association of British Insurers and the Law Society to which I have already referred. 
30.	The appeal is, therefore, allowed.  I direct that the respondents pay the appellant’s costs, to be assessed by a tribunal chairman sitting alone if the parties are unable to agree their amount.

COLIN BISHOPP
CHAIRMAN
Release Date: 3 November 2004

MAN/2004/0095
££Jeancharm Ltd (t/a Beaver International) v Customs and Excise [2004] UKVAT V18835 (03 November 2004)