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.	Training Consultant appeals against an assessment to tax of £6,814.12 for 2001-02, and amendments to the Appellant’s self-assessments for 2002-03 and 2003-04, all made on 21 September 2005.  The Appellant appeared in person, and the Revenue were represented by Mr Akash Nawbatt.
2.	The issue in this appeal is whether the Appellant is entitled to double taxation relief for Slovak tax charged on what I describe below as the Slovak operation.
3.	The Appellant gave evidence.  I find the following facts:
(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.”
4.	During the hearing the parties narrowed the issue to the determination of the legal nature of the Slovak operation as one of two possibilities: (1) something akin to an English partnership, under which both the Appellant and X were both carrying on business jointly, as contended for by the Appellant, or (2) something akin to a silent partnership (as in Memec v IRC [1998] STC 754, particularly the description of a German silent partnership at 759f), under which X carried on the whole business but contractually paid the Appellant 50% of the adjusted profits, as contended for by the Revenue.  I have deliberately used the expressions “akin” to an English partnership, or a silent partnership, because I am deliberately not categorising a relationship probably governed by Slovak law, about which I have no evidence.  (I should mention the existence of a third possible category, that of each of the Appellant and X carrying on separate businesses, which raises difficult points on the tax treaty with which I need not deal as the Appellant disclaims reliance on this possibility.)  It is sufficient for me to determine the nature of the operation without actually giving the categorisation a name since it is common ground that if (1) applies the Appellant is entitled to credit relief for the Slovakian tax even though charged on “X International Limited oz,” and if (2) applies the Appellant is not entitled to credit relief for the Slovakian tax.
5.	The Appellant contends that his arrangement amounted to a joint venture.  It was not a payment for services because X obviously would not have agreed a profit share regardless of his input.  Key decisions were always made jointly.  For example, the focus on ACCA courses was his view; the premium pricing above what X would normally have charged was his idea; he met the landlord when the lease was being negotiated; and he was involved in the engagement of the third tutor.  He was also consulted about the giving of discounts.
6.	Mr Nawbatt, for the Revenue, contends that the Slovak operation appeared to third parties to be X’s business: it was in X’s name, used X’s materials, the staff were employed by X, the lease of the premises was taken by X, the Appellant could not operate the bank account, the letter heading was X’s, and by the end of the period clients would not have been aware of the Appellant.  It would be unusual for a plc to have something akin to a partnership without a written agreement.  The most significant factor was that it was registered as a branch of X with the Slovak tax authority and in the commercial register.  The Appellant had not made any investment in the operation.  Following the transfer of the Appellant’s business to Accountancy Limited if there were something akin to a partnership it would, in any case, be carried on by Accountancy Limited, which received the profit on charging out the tutors, and not the Appellant.  He points out that the Appellant in his Statement of Case stated that he did not contend that the operation amounted to a partnership under the Partnership Act 1890.  
7.	Since the Appellant makes up his self-employment accounts to 31 August I am potentially concerned with the Slovak operation as it was in the years to 31 August 2001, 2002, 2003 and the period to 31 December 2003.  I am not concerned with the initial operation before the branch was registered.  In favour of the Appellant’s contention that the Slovak operation is akin to an English partnership are the following factors: (1) many of the decisions were taken jointly, (2) once the strategic decisions had been taken there was less need for his individual decision taking, (3) the Appellant was kept in the picture and consulted throughout.  In favour of the Revenue’s contention that the Slovak operation is akin to a silent partnership are the following factors: (1) from the point of view of third parties the operation is carried on in as a branch of X under the name “X International Limited oz,” which is registered in the commercial register and with the Slovak tax authorities as a branch of X, (2) the staff are employed and paid by X, and the premises are paid for by X, (3) the Appellant takes no part in the financial transactions and is not a signatory to the bank account, (4) X provided all the capital for the operation, (5) it would be unusual for a subsidiary of a plc to have an oral agreement for something akin to a partnership, (6) in the later years the Appellant’s involvement in the operation was small.
8.	In considering up these factors I have felt hampered by the lack of evidence from anyone on X’s side who was involved in the Slovak operation since their view may have assisted the Appellant (or, on the other hand, may have been different from the Appellant’s).  Even though they are abroad (and the Appellant told me that AB is now in India) it would have been easy enough to obtain a witness statement from them, or for them to give evidence by video conference.
9.	Weighing up the factors for the period starting 1 September 2000 my view is that the Revenue’s contention is right (the position might have been different before the establishment of the branch but that does not fall to be decided).  The Slovak operation is conducted as a branch of X and the Appellant has a difficult evidential problem to show that his oral arrangement is something different.  There are many pointers to the X branch being the reality with the Appellant having a contractual profit share.  X financed the operation and took the commercial risk in employing staff and taking a lease.  Since the people involved in the operation are all accountants I consider the form of the management accounts to be important.  These provide for the “Calculation [Appellant’s] profit share,” by making some notional adjustments to the total result to reflect X’s financing of the capital assets and charging out tutors in a different way from the Appellant (and in one case the Appellant not charging out tutors in his normal way), but they do not show a split of profit including X’s profit share, which I consider to reflect the reality of the situation with X carrying on the whole business and paying a profit share to the Appellant.  There was from the beginning a commercial reason for X to pay the Appellant a profit share as he held a significant share of the market and had better access to tutors.  It is natural for those conducting the local operations to consult the Appellant as he started by having more knowledge of the local market than X had and throughout he was affected by the result because of his profit share.  In my view the Appellant’s input was that of being consulted rather than having an equal say in how the operation was run, although in practice X seems to have followed his advice.  I find that the operation was akin to a silent partnership.
10.	Accordingly I dismiss the appeal in principle.  The Revenue produced a schedule during the hearing showing what they considered to be the result if they won.  The Appellant was unable to agree this at the hearing and I adjourn to give the parties the opportunity to agree figures.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 15 January 2007

SC 3060/06