20924

VAT – novation of HP agreements – identity of supplier – HP co or former hirer? – HP co – input tax recovery – appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

SCOTTS GROUP LIMITED
		Appellant

-and-

             HER MAJESTY’S COMMISSIONERS OF
             REVENUE AND CUSTOMS
			Respondents

Tribunal: Richard Barlow (Chairman)
      Howard Middleton FCA (Member)						

Sitting in public in Manchester on 29 and 30 September.

Mr Nigel Gibbon of Omnis for the Appellant

Mr Jonathan Cannan counsel, instructed by the Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2009

DECISION

1.	The appellant is the representative member of a VAT Group and appeals against the respondents’ decision to disallow recovery of £283,403.16 claimed as input tax in the period ending April 2005.

2.	The appellant now contends that part of that sum is properly claimable as input tax in respect of a transaction by which the appellant acquired certain assets from Scotts Plant Hire Limited (which we shall refer to as Plant Hire).  Plant Hire was not a member of the VAT Group registration though it and the appellant were under the same or substantially the same management and had the same or substantially the same shareholders.  The appellant contends that the assets it acquired consisted of such interest as Plant Hire held in plant that was subject to hire purchase agreements with several hire purchase companies.  Following the transfer of assets, the appellant hired the equipment back to Plant Hire until that company ceased to trade on 31 October 2004.

3.	Plant Hire was placed in creditors’ voluntary liquidation by a resolution of its shareholders and a creditors’ meeting was held on 24 February 2005.        

4.	The appellant claimed that the assets had been transferred in May 2003 though paperwork from the hire purchase companies was delayed.  According to the company history prepared, in March 2005 by the insolvency practitioners dealing with the liquidation, Plant Hire had been trading successfully in early 2003 and problems had only emerged later in 2003.  Despite that, Plant Hire had not then (and still has not) accounted for any output tax due on the sale of the assets.   

5.	Although the appellant now contends that the sale of the assets took place in May 2003, the invoice for the sale was not issued until 4 August 2004 at the earliest.  It is dated 4 August 2004 and the transaction details are “to sale of plant and machinery as per attached schedule - £1,619,446.61”.  That sum is exclusive of VAT and VAT of £283,403.16 is shown on the invoice.  Mr Gibbon accepted that the schedule was not accurate and that approximately £418,725 worth of goods and £73,276.88 input VAT should be deducted from it and from the invoice and that the appellant’s claim should be reduced by whatever the VAT on the accurate amount approximating to £418,725 turns out to be (which would be subject to further consideration by the tribunal if not agreed).        

6.	We find that the schedule to the invoice is inaccurate but not necessarily only by the amount conceded by Mr Gibbon. The appellant’s witnesses were unable to explain the schedule and a number of discrepancies were demonstrated by Mr Cannan when he cross examined them.  In light of our holdings below it is not necessary for us to arrive at a precise figure for reasons we will explain.

7.	 However, the respondents now agree that part of the £283,403.16 related to transactions in which supplies were made to the appellant by third parties (hire purchase companies that dealt with the appellant not with Plant Hire).  That is of course yet further evidence that the invoice of 4 August 2004 and the appellant’s evidence is unreliable but it leads to a concession by the respondents that £73,276.88 of the input tax claimed is recoverable. 

8.	The respondents do not allege that no transfer of assets occurred.  Their case is that the assets were not transferred by the appellant but rather by the hire purchase companies under novation agreements.  There are two exceptions to that in that the respondents agree that two of Plant Hire’s hire purchase agreements were assigned and were not subject to novation so that the input tax was recoverable in principle.  The exact amount of input tax in respect of those two agreements is not agreed between the parties but it is approximately £16,044 (and the parties agree we should decide the issue in principle and allow them to attend a resumed hearing to establish the exact amount if necessary).  

9.	However, the respondents contend, in the alternative to their argument that input tax is not recoverable on any novation agreements, that such transfers as did occur were a transfer of a going concern and so no tax was due, or therefore recoverable as input tax, in respect of the transactions; even if they are wrong to argue that the novations did not give rise to supplies by Plant Hire.  That argument applies to the whole sum still in dispute.  

10.	To summarise, the position is therefore that the appellant has reduced its input tax claim from £283,403.16 by approximately £73,276.88 to approximately £210,126.28, though the respondents agree that the £73,276.88 or thereabouts is payable for the other reason stated above.  The respondents argue that the approximate sum of £210,126.28 is potentially to be disallowed, as to all of it, by reason of the transfer of a going concern argument and as to approximately that sum less approximately £16,044 (i.e. approximately £194,082.28) by the additional reason of the novation argument.

11.	 It is relevant to the appellant’s case in respect of the novation issue to decide whether the appellant paid Plant Hire the amount shown on the invoice dated 4 August 2004.  The appellant produced a schedule headed “payment of Fixed Assets Invoice” which purported to prove that, of the £1,902,849.16 invoiced as the tax inclusive price, £1,356,418.83 had been paid.  The schedule states that there was “need to show this was paid in full by 4th February 2005”.  That was admitted by the appellant to be because section 26A of the VAT Act 1994 would have disallowed input tax recovery if the sum invoiced had not been paid by six months after the date on which the consideration became payable.

12.	The appellant apparently admits that it had not paid £546,430.94 (including VAT of £81,383.33) within six months of the invoice but claims that the novation agreements account for the difference because the appellant’s agreement to be bound by the novation agreements is equivalent to at least that amount of consideration because they relieved Plant Hire of the obligation to pay the hire purchase companies the sums due under the original hire purchase agreements.

13.	We are not satisfied that the appellant has made out any of its claims that it has paid the sums shown on the schedule.

14.	The burden of proof is upon the appellant and the necessary documents to prove those payments were not produced.  Mr Gibbon asked us to make such findings as we could but to re-convene the tribunal for him to produce such documents if we are not satisfied on such evidence as was produced but we made it clear that we were not prepared to do that.  Mr Cannan had pointed out that the respondents had been asking to see the evidence for a number of months before the hearing but none had been produced.  No court or tribunal can be expected to agree to give a party a second chance to prove its case after the decision is given and depending upon how far it has failed to do so at the first attempt.  Mr Gibbon did not seek an adjournment and invited us to make our finding on the oral evidence of the appellant’s director and accountant who gave evidence.  Evidence of that type is capable of proving such facts so Mr Gibbon’s approach was acceptable.

15.	However, we are not satisfied that the amounts allegedly paid to Plant Hire were in fact paid.  The schedule of payments is made up of a number of items.  Three items were described simply as payments made with dates of payment but the company’s accountant Mr Michael Taylor said that £100,000 said to have been paid on 31 March 2004 was related to financing assets on hire purchase that the appellant took out, which we took to mean that the appellant had acquired goods on hire purchase and allowed Plant Hire to use them but that would not amount to payment made to Plant Hire.  It also pre-dated the invoice of 4 August 2004 but the invoice does not recognise any part payment.  He said a sum of £50,000, said to have been paid on 25 June 2004, was made by bank transfer and £21,859.16, said to have been paid on 31 July 2004, were part payments for the assets but it appeared to us from his evidence that these sums were paid to help to keep Plant Hire afloat and were not referable to the sale of assets contended for by the appellant.  These alleged payments also pre-date the invoice but, again, it does not acknowledge them.

16.	£237,017 is alleged to have been paid on 20 May 2003 by the appellant electing to take over Plant Hire’s deferred tax liability.  That was said to have occurred on 20 May 2003 which was the date of a directors meeting of Plant Hire of which a minute was produced.  At that meeting the directors agreed to sell plant and machinery to the appellant for “approx £1.6m” but there is no mention of the appellant taking on any deferred tax liability. 

17.	The remainder of the sum allegedly paid was made up of hire charges for the plant after the transfer, during which period Plant Hire used the plant without actually paying for its use.  Mr Cannan was able to show in cross examination of Mr Smithson, the director of the appellant, that it was far from clear what machinery had been used or at what rates.

18.	Mr Taylor admitted that the deferred tax liability was shown as a part of an unsecured non-preferential claim by the appellant in Plant Hire’s statement of affairs which, even if it had otherwise been possible to categorise that as a payment by the appellant, would negate the suggestion that it was in fact a payment at all.

19.	We find that the appellant has failed to prove on a balance of probabilities that the payment was made as contended for by the appellant.

20.	Novation of a contract arises in circumstances where both parties to a contract agree that one of them will be replaced by a third party and a new contract replaces the old one.  In this case Plant Hire and the several hire purchase companies agreed that the hire contracts would terminate and a new contract was entered into between the hire purchase companies and the appellant.  We hold that the correct analysis of the supply to the appellant, so far as the assets are concerned, is that the hire purchase companies made a supply to the appellant consisting of the letting on their usual hire terms with a right to purchase at the end of the period of hire.

21.	There is no question of a supply of the assets by Plant Hire to the appellant.

22.	In some but not all cases Plant Hire paid a nominal consideration (£1 on two occasions) to the appellant for its agreement to take over Plant Hire’s obligations to the hire purchase company but that is a supply of a service to Plant Hire not to the appellant and so there is no question of a claim to input tax.  As we have held that so such substantial payment was made by the appellant to Plant Hire as was contended for by the appellant, there is no question of the appellant having received any service from Plant Hire as would have entitled it to claim input tax.

23.	We agree with and adopt the Tribunal’s reasoning in Swan Plant Limited –v- HMRC (Decision 20759).  We reject Mr Gibbon’s submission that Phillip Drakard Ltd –v- Customs and Excise Commissioners [1992] STC 568 is applicable because that case did not deal with a novation at all.  In that case the original hirer transferred the goods to a third party, apparently without the hire purchase company’s prior agreement but on terms that the transferee would settle the hire purchase agreement and so bring it to an end.  That is a quite different transaction to the one in issue in this case.

24.	The question of a transfer of a going concern does not therefore arise because there was no transfer of the assets by Plant Hire to the appellant except for the two items which were dealt with by assignment which the respondents have accepted do give rise to a claim to deduct input tax.  However, those two items are not sufficient on any view to constitute a transfer of the business of Plant Hire or part of it that would be capable of separate operation so as to constitute a transfer of a going concern as opposed to a transfer of that plant.

25.	Our decision is therefore that, of the sum claimed, only the approximate sum of £16,044 is payable to the appellant as input tax in respect of a supply from Plant Hire and £73,276.88 is payable on supplies from hire purchase companies as conceded by the respondents.  The sum of £73,276.88 is, we understand, a precise figure but we give leave to the parties, or either of them, to apply to the tribunal for further consideration of the amounts now payable in light of our decision if they are not agreed.  Such application is to be made within three months of the release of this decision.

26.	The appellant applied for costs if successful but as the appellant has been largely unsuccessful we will not award it costs at this stage.  However, we give leave to the appellant to make an application for costs within three months of the release of this decision if so advised, any such application to be made in writing stating the basis for the claim and the amount claimed.  Our giving leave in these terms should not be taken as any indication that we will in fact award costs.  The respondents indicated they would not seek an award of costs in any event.         

Richard Barlow
CHAIRMAN

Release date: 16 January 2009

MAN/06/0179