20692

VAT – Input tax deduction – Whether relevant supplies made to the Appellant or to a third party on whose behalf the Appellant acted – Held that the documentation and the conduct of the parties after the date of the written agreement indicated that the Appellant acted as agent for the third party to receive the relevant supplies on its behalf – Appeal dismissed

LONDON TRIBUNAL CENTRE

	RENTAL CONCEPTS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	JOHN WALTERS QC (Chairman)
					MISS S WONG CHONG FRICS

Sitting in public in London on 28 January 2008

Robert Maples and Anna Chandley of Begbies Chettle Agar, Chartered Accountants, for the Appellant

Paul Key, Counsel, instructed by the Solicitor of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Rental Concepts Limited (the Appellant) appeals against a decision taken by the Commissioners on review (Review Officer: Mrs. D Champion) to uphold the decisions of  Officer Wootten to disallow the Appellant’s claims for input tax credit in respect of £8,325.22 for period 10/05, and £11,797.82 for period 01/06.  It appears that these figures have been reduced by agreement, because Mr. Key (Counsel for the Commissioners) states in his Skeleton Argument that the sum in dispute is £16,891.34, being £5,467.61 for the period 10/05 and £11,423.73 for the period 01/06.
2.	The Appellant carries on a business described in its application for VAT registration in late 2004 as “furniture rental” and its accountants, Begbies Everett Chettle confirmed this in an Internal VAT Interface Application dated 9 May 2005 (and, later, in a letter dated 26 July 2005 to the Commissioners).  Whereas it is accepted by the Commissioners that furniture rental is part of the Appellant’s business (and VAT paid by the Appellant on the purchase of furniture for rental has been accepted by the Commissioners to be the Appellant’s input tax), the Appellant contends that it also carries out other business activities of the general nature of project management.  It is these activities which are in issue in this appeal.
3.	Bundles of documents were put in by both the Appellant and the Commissioners, and these documents form the totality of the evidence before us, as no witness evidence was called by either side.
4.	In a letter dated 5 September 2006 to the Commissioners, Begbies Chettle Agar, acting for the Appellant, stated that Sophie Holdings Limited (“Sophie Holdings”) was the only current client of the Appellant, and that appears to have been the situation in the periods 10/05 and 01/06 (and to have been the situation at the time of the hearing).
5.	Sophie Holdings is, we understand, a company registered in the Turks & Caicos Islands.  It was not at the material times (and was not at the time of the hearing) registered for VAT.  It is owned by a trust under which a Mr. Glen Breaden, a resident of Monaco, has some undefined beneficial right or interest.  In their letter dated 5 September 2006 to the Commissioners, Begbies Chettle Agar stated that the Appellant is funded by way of loans from Sophie Holdings and that both the Appellant and Sophie Holdings are under common beneficial ownership.  Mr. Maples told us that Mr. Breaden is the owner and director of the Appellant.  This may not be consistent with a situation of common beneficial ownership of the two companies, but the point is not important.  In practical terms Mr. Breaden is interested in both companies in point of ownership and, possibly, also control.
6.	The invoices showing VAT for which the Appellant claims input tax credit are, for the period 10/05 four invoices from PKS Partnership, and, for the period 01/06, 11 invoices, three of which are from PKS Partnership, three from Moulton Taggart, two from Premiere B&D Limited, two from Croft and one from EAS.  We have been able to identify only two of these invoices (from PKS Partnership) and have only a general idea as to what supplies the rest of the invoices relate, in that the supplies come under the general heading of “project management”.  
7.	The project management in which the Appellant was apparently engaged, and to which the invoices presumably relate, was a project relating to a property at 48 Acacia Road, London NW8.  
8.	There is in the papers a letter of appointment dated 20 May 2005 from Sophie Holdings to the Appellant in the following terms:
“LETTER OF APPOINTMENT
We hereby appoint Rental Concepts Limited of Trafalgar House, Grenville Place, London to carry out the following project management duties on our behalf relating to the property at 48 Acacia Road, London NW8
1.	Appoint and coordinate a team of professional consultants to carry out the following services
•	Full design schemes for consultation with Westminster Planning and Listed Buildings
•	Submit detailed designs and full planning applications for redevelopment consent
•	Submit detailed designs for Building regulation approvals
•	Submit detailed design for Listed Building and Conservation Area approvals
•	Produce full working specifications and design schemes
•	Produce detailed specification and designs for construction
•	Produce tender documentation and cost analyse [sic] documents
•	Procure samples of interior finishes through out [sic] development
2.	Interview and appoint main contractor and specialist sub-contracts [sic] to carry out the building works in full accordance with the approved scheme.  Contracts are to be administered under the JCT Intermediate Works Contract with Rental Concepts appointed as contract administrators.
3.	Purchase and free issue to nominated contractors specialist finishes and equipment which will include kitchens, bathrooms, marbles, specialist lighting and audio visual equipment.
In consideration for your services we agree to pay you a fee of 10% plus administration expenses.
Signed for and on behalf [sic]
SOPHIE HOLDINGS LIMITED
………………
Director”
9.	There is a planning permission with our papers dated 15 December 2005 relating to a development of 48 Acacia Road, London NW8.  The permission is addressed to Mr. Glen Breaden c/o PKS Architects.  It appears from the letter granting permission that the application for permission was made by Mr. Breaden.
10.	It appears from the correspondence that Sophie Holdings was at all material times the beneficial owner of 48 Acacia Road, London NW8.  We were told by Mr. Maples that Mr. Breaden had bought the property and settled it on Sophie Holdings.  Mr. Breaden remained the registered owner of the title to the property.
11.	Mr. Maples submitted that what had happened was that the Appellant had been appointed project manager by Sophie Holdings.  It supplied services to Sophie Holdings in consideration of its 10% fee which were zero-rated because they were supplied in the course of an approved alteration of a listed building (cf. item 2, Group 6, Sch. 8 VAT Act 1994 (“VATA”)). Because of the close relationship between the Appellant and Sophie Holdings, the arrangements between them were fairly informal.
12.	He submitted that the supplies represented by the invoices in dispute were therefore made to the Appellant and not, as the Commissioners contended, to Sophie Holdings.  Because the supplies were made to the Appellant for the purposes of its business, the Appellant was entitled to input tax credit in respect of them.
13.	The arrangement between Sophie Holdings and the Appellant was, submitted Mr. Maples, carried out in order to separate the risk associated with the construction (which the Appellant assumed) from the ownership of the property (which remained with Sophie Holdings).  In particular it was planned to insulate the value comprised in the property itself from funds available to meet claims which might be made by builders.  They would look to the Appellant, and not to Sophie Holdings, for any payment to which they might be entitled.
14.	 For this reason, he argued, the arrangement was not entered into for the purpose of achieving a VAT advantage. 
15.	He referred us to paragraph 22.2 of Notice 700 (the VAT Guide) in which the Commissioners state inter alia that “to act as an agent, you must have agreed with your principal to act on their behalf in relation to the particular transaction concerned”.  He stated that there was no such agreement between Sophie Holdings and the Appellant.  He stated (although not giving evidence) that the intention of Mr. Breaden and Sophie Holdings was that the Appellant would deal with Sophie Holdings as principal, and not as agent for Sophie Holdings.
16.	Mr. Maples’s case was that the Appellant was trading on its own account and Sophie Holdings was its customer.  He submitted that the documentation (principally the Letter of Appointment) was consistent with this and inconsistent with an analysis showing that the Appellant received the services represented by the disputed invoices as agent for Sophie Holdings.
17.	Mr. Maples accepted that the work done by the Appellant was actually done by Mr. Breaden, presumably in his capacity as director of the Appellant.
18.	He submitted that the words “on our behalf” in the Letter of Appointment did not signify the creation of an agency, but were indicative of the fact that the work to be done by the Appellant would benefit Sophie Holdings.
19.	He cited Customs and Excise Commissioners v Johnson [1980] STC 624 where Woolf J (as he then was) had approved the definition of agency given in Bowstead on Agency as follows:
“Agency is the relationship which exists between two persons, one of whom expressly or impliedly consents that the other should represent him or act on his behalf, and the other of whom similarly consents to represent the former or so to act.”
20.	He stated that the relationship between the Appellant and Sophie Holdings was not accurately described in these terms, and was not a relationship of agent and principal.
21.	 He drew our attention to the reasoning of the Review Officer in her letter that the fact that the beneficial ownership in the property was in Sophie Holdings suggests that the Appellant was acting as agent as “if they were not an agent, they would have no legal right in engaging services in respect of this property”.
22.	We comment on this point immediately.  It is not clear that Sophie Holdings had beneficial ownership of the property although it is clear that the Appellant did not.  However the position of the Appellant in not having beneficial ownership of the property is no indication at all that it was acting as agent for Sophie Holdings.  Their entitlement (or “right”) to engage services in respect of the property derived from the appointment evidenced by the letter of appointment. If the Appellant was not the agent of Sophie Holdings it was an independent project manager engaged by Sophie Holdings, and obviously, if it had that capacity, it had the authority of Sophie Holdings to contract with third parties to provide the services contemplated by the letter of appointment.
23.	Mr. Key’s general submission was that the reality of the position, as it can be discerned from the evidence, shows that any ostensible relationship whereby Sophie Holdings appointed the Appellant as an independent third party project manager is an inaccurate representation of the true position.  
24.	He accepted that the documentation supported the Appellant’s case, as far as it goes.  But his case was that the documentation did not tell the whole story, and when one considered all the evidence it was clear that the Appellant received the supplies evidenced by the disputed invoices on behalf of Sophie Holdings, and not as principal.
25.	His first point was based on Begbies Chettle Agar’s statement, in their letter to the Commissioners dated 16 November 2006, that the Appellant did not open a company bank account until January 2006, and the first transaction did not go through the account until 22 June 2006, which was over a year after the Letter of Appointment was written and after both of the VAT periods in issue in the appeal.
26.	There was no evidence therefore that the Appellant paid the third parties who submitted the disputed invoices.  Nor was there any evidence who did pay those parties, though it may have been Mr. Breaden in some capacity.
27.	Secondly, Mr. Key pointed out that the Appellant was funded entirely by way of loans from its only customer, Sophie Holdings, a company under the same indirect ownership as the Appellant.
28.	It was not known what were the terms and conditions of the loan finance provided to the Appellant by Sophie Holdings, but Mr. Key pointed out that the profit and loss account of the Appellant for the year ended 31 December 2005 (at which date the loan finance outstanding was £121,068, disclosed no interest paid to Sophie Holdings.  The Appellant’s tangible assets consisted of rental furniture of relatively low value (£59,474, per the accounts).  Mr. Key suggested that the Appellant had no assets suitable to secure the loan finance provided by Sophie Holdings.
29.	 He pointed out that the Letter of Appointment was apparently unsigned, and so it might not represent the final agreement.  The contract entered into by the Appellant with the architects, PKS dated 10 May 2005 made no reference to the Appellant being “main contractor”.  The Appellant was described as the Client.  The positions of “Project Manager” and “Lead Consultant” in the agreement were described as “not applicable”  see: Schedule 4 to the agreement.
30.	He submitted that the correspondence exhibited was all signed by or addressed to Mr. Breaden on behalf of the Appellant, and it was evident that Mr. Breaden, who had relevant property experience, could be his own main contractor, project manager and lead consultant.
31.	He commented that the Letter of Appointment did not, as one might have expected it would, describe how the cash flow in the project would work.  Who, for instance, would pay the architects? The Letter of Appointment was not therefore a complete and free-standing contract.  Other terms had to be read in to give it commercial effect.
32.	Another example of this concerned the Appellant’s right to “10% plus administration expenses”. There was no mechanism for ascertaining these amounts.  There were no apparent constraints put on the Appellant regarding the contract value to be agreed (which presumably would give rise to its remuneration of 10%).  This was odd and uncommercial.
33.	Mr. Key pointed out that the burden of proof was on the Appellant, who had chosen not to produce any witnesses of fact. Insofar as any factual matters were unclear on the documentary evidence, no assumptions should be made in favour of the Appellant.
34.	He submitted that the Tribunal should adopt prima facie the view that services supplied in the performance of the development were supplied to the owner of the property, that is, to Sophie Holdings. This view should only be departed from if there was persuasive evidence that the services were in fact supplied to an independent third party, the Appellant, who had been interposed as a principal.
35.	He cited Spearmint Rhino Ventures (UK) Ltd. V HMRC [2007] STC 1252 for the proposition that control by one party of another is indicative of a relationship of agent and principal.  It was the credit of Mr. Breaden that was important to the architects and other contractors who contracted with the Appellant through Mr. Breaden. 
36.	He drew the Tribunal’s attention to an invoice dated 22 June 2005 from Aston Chase, Residential Sales and Lettings, addressed to “Glen Breaden, Rental Concepts Limited” charging an agreed fee of £10,000 plus VAT for introducing the property and “acting on your behalf in respect of the purchase of the same in the sum of £2,500,000”.  He made the point that it would be consistent with the evidence to conclude that the Letter of Appointment (dated 20 May 2005) was suspended by 22 June 2005 and substituted by an arrangement whereby the Appellant acted for Mr. Breaden directly.
37.	In respect of that and another invoice from Aston Chase, the input tax was disallowed by the Commissioners and that decision was accepted by the Appellant on the basis that the invoices did not relate to the listed building alteration and would therefore be recharged to Sophie Holdings subject to a standard rated VAT charge (Begbies Everett Chettles’ letter to the Commissioners dated 15 March 2006).  In a later letter (dated 5 September 2006) Begbies Chettle Agar state with regard to these invoices: “As the claim for input tax on these invoices was disallowed by Mr. Wootten there has been no need to recharge them to Sophie Holdings at the current time”.
38.	Mr. Key submits that this gives some indication of the real motivation behind the appeal.  He says that the effect of the stance of the Appellant and its advisors is that the Appellant does not seek to recover the associated tax on supplies made to it in respect of the property if (and only if) it is not in a position to make onward zero-rated supplies of the services to Sophie Holdings.  He points out that this is in commercial terms irrational, because it places the VAT burden on the Appellant rather than Sophie Holdings when, on the Appellant’s case, the Appellant is acting as independent project manager for Sophie Holdings on a cost plus 10% basis.  The VAT burden on these invoices would be an “administration expense” which ought to have been recharged to Sophie Holdings.
39.	 Our analysis is that the tax on the disputed invoices is only deductible by the Appellant if it relates to supplies of services made to the Appellant, and not to some other party (Sophie Holdings).  This is the effect of s.24(1)(a) VATA and is accepted by both parties to be the underlying position in VAT law.
40.	We must decide whether the services were supplied to the Appellant, or to Sophie Holdings.  
41.	The Appellant’s case that the services were supplied to it is based on the evidence that the invoices were addressed to the Appellant, or to Mr. Breaden, care of the Appellant and, chiefly, on the terms of the Letter of Appointment dated 20 May 2005.
42.	The Commissioners’ case is that these documents are not determinative of the issue in the Appellant’s favour or at all, and can be regarded as consistent with the Commissioners’ case.  Mr. Key cites a passage from Customs and Excise Commissioners v Music and Video Exchange Ltd. [1992] STC 220, where McCullough J said:
“What then did A and B agree?  One looks first in any case of contract to see what the parties said to one another.  First, what did they put into writing?  If they did not record their entire agreement in writing, was what was written supplemented orally?  If this does not provide the answer, one looks next to see what implications, if any, should be drawn from statute, custom, usage, their previous dealings, etc. and how they conducted their relations with one another after their contract had been made.”
43.	Mr. Key says that the Letter of Appointment clearly did not record the entire agreement between the Appellant and Sophie Holdings, and without the help of Mr. Breaden or any other witness of fact which the Appellant might have brought to give evidence, the Tribunal is thrown back on an examination of how the Appellant and Sophie Holdings conducted their relations with each other after the date of the Letter of Appointment (20 May 2005).  He also points out that the Letter of Appointment was not signed and so may not have expressed the parties’ final agreement in any case.
44.	We agree with Mr. Key’s submissions.
45.	First, the (unsigned) Letter of Appointment does not create a relationship whereby the Appellant acts as third-party project manager, dealing as principal with Sophie Holdings.  The language of the agreement refers to the Appellant carrying out project management duties “on our behalf” (ie. on Sophie Holdings’ behalf) in consideration of a fee of 10% plus administration expenses.  We agree with Mr. Key that the more natural interpretation of this language is that it creates an agency whereby the Appellant carries out the itemised duties as agent for Sophie Holdings.
46.	Secondly, the fact that the Appellant had no bank account of its own until January 2006, and did not operate its account until 22 June 2006 (well after the periods in issue in this appeal) and was completely funded by Sophie Holdings in the interim, undermines the case that there was a principal to principal relationship with any commercial bona fides and, instead, suggests that in substance and reality the Appellant was interposed to make contracts with third party suppliers as agent for Sophie Holdings.  As Mr. Key submitted (and we accept) there is no evidence that the Appellant, as opposed to Mr. Breaden or Sophie Holdings actually paid the disputed invoices.
47.	Thirdly, we are persuaded by Mr. Key’s argument based on the Aston Chase invoices.  The fact that the Appellant was content voluntarily to accept the cost of the VAT on these invoices rather than appeal or charge them on to Sophie Holdings indicates that there is no commercial reality to the distinction between the Appellant’s business interests and Sophie Holdings’ business interests.
48.	For these reasons, and the other reasons advanced by Mr. Key, which we also accept, we hold that the supplies were received by Sophie Holdings through the agency of the Appellant and we dismiss the appeal.

JOHN WALTERS QC
CHAIRMAN
RELEASE DATE: 28 May 2008

LON/2006/1562