England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		06/05/2005

Mr Justice Lindsay :

Introduction

1. In outline the case before me is this: a young employee of Jeancharm Ltd ("the Company") drove the Company car provided to him in such a way as to kill two persons. He was charged with and pleaded guilty to charges of causing death by dangerous driving. The Company's motor insurance covered legal defence costs and some £95,000 was paid by the Insurers in respect of the young man's defence. The Solicitors concerned sent a bill for the VAT on that £95,000, namely £16,625, to the Company, which paid it. The Company sought to reclaim that payment as input tax to be offset against its own liability for VAT. The Commissioners of Customs and Excise, now the Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") resisted that but the VAT and Duties Tribunal sitting at Manchester held in the Company's favour. The Commissioners appeal.
2. The Commissioners were represented before me by Mr Macnab, who did not appear below; the Company by Mr Barlow, who did. I gave the Commissioners leave, unopposed by Mr Barlow, to introduce into the evidence some uncontroversial documents which had not been put before the Tribunal.

In more detail ….

3. In more detail, in October 1997 the Company agreed a Contract of Employment with Damian Collins ("Damian"), then a very young man. He was to be a Sales Consultant/Designer. He was to be required to visit clients and would be provided with a Company car for the purpose. It was a term of his contract that all insurance and repairs would be payable by the Company. No term of the Contract specified how extensive that insurance would be or that it would include any indemnity as to the provision of legal services to him. The Contract of Employment was not put before the Tribunal; it is amongst the newly-added evidence.
4. With effect from 23^rd May 2001 the Company effected a Business Carshield motor policy ("the Policy") with Royal & Sun Alliance ("the Insurer"). The policyholder was the Company, which paid the premium by monthly instalments. The Policy covered the risks and provided the benefits described in sections 1-6 of the Insurer's Booklet. It does not appear but can be assumed (as was the case on a later renewal) that the car to which I shall later refer was a car covered by the terms of the Policy and that Damian was a permitted driver so long as he was driving with the Company's permission. The Policy covered both social, domestic and pleasure purposes as well as use in connection with the Company's business. Section 2 subsection 2 (a) of the Booklet provided that the Insurer would indemnify:-

"…any person permitted to drive the Motor Car under the terms of the certificate of motor insurance…"

in respect (inter alia) of the costs of defence against a charge of causing death by dangerous driving, described in Section 2, subsection 1 (iii). Although there are, of course, provisions in the Policy whereby an indemnity is given to the Company itself as policyholder (as opposed to an employee or driver of a company car) there is, as I read the Policy, no indemnity given to the Company in respect of the cost of any individual's defence against a charge of causing death by dangerous driving; the indemnity in such a case is, in point of the language used, direct from the insurer to the permitted driver in such an event. It was not the Company that was charged with causing death by dangerous driving but Damian and it was not the Company but Damian that needed defending. The liability of the Insurer was thus not under Section 2 subsection 1 of the Policy but Section 2 subsection 2, referring back to Section 2 subsection 1 (iii). The Policy was not put before the Tribunal but is in the newly-added evidence.

5. On the evening of 6^th February 2002, by which time Damian was aged 21, he went with a friend for a drink after work. They then travelled home in the car which had been provided by the Company to him for the purposes of his employment. Damian was driving. He was not on Company business at the time. The car collided with another car; the driver of that other 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 4 years imprisonment. But there is no suggestion that he had not been permitted to drive the motor car by the Company or that he was not nominated as a permitted driver under the terms of the Certificate of Insurance.
6. Solicitors, Freeman & Co of Princess Street, Manchester were instructed in relation to Damian's defence and, in turn, they instructed Leading Counsel. Neither their invoice to whoever they understood to have instructed them nor Leading Counsel's fee note to those Solicitors was put before the Tribunal. What was put before the Tribunal was a pro forma invoice stating "This is not a VAT invoice" from Freeman & Co addressed to the Company; it says as follows:-

"Re D Collins

In relation to the VAT element of costs re: insurance case

grand total received with thanks £16,625."

I do not understand it to be disputed but that it was the Company that paid Freeman & Co that £16,625. When the Company claimed that its payment of the VAT element on the lawyers' fees paid in respect of Damian's defence was deductible input tax they found that claim to be denied by the Commissioners. On 13^th November 2003 the Commissioners indicated to the Company that the £16,625 was disallowed on the ground that the fees related to the provision of legal services to Damian in a private and not a business capacity. On 8^th December 2003 the Commissioners reiterated that they considered that the legal fees related to the provision of legal services to Damian in a private not a business capacity. The Company appealed against the Commissioner's view and a hearing before the Manchester Tribunal Centre was arranged.

7. On 16^th September 2004 Mr Barlow, then, as now, appearing for the Company, put in a Skeleton Argument for the hearing before the Tribunal, paragraph 2 of which began:-

"It is assumed that it is not in dispute that the relevant supplies were made to the Appellant in the same way that the estate agent's supplies were made to the taxpayer in Redrow…"

that being a reference to Customs & Excise Commissioners –v- Redrow Group [1999] STC 161 HL.

8. The Commissioners were represented at the Manchester Tribunal by Mr M J Brueck of their office and at paragraph 5 of his Skeleton he said:-

"The Commissioners do not accept the Appellant's contention that the supply of legal services in this case was made to it upon a similar basis to that on which supplies of estate agent's services were made in Redrow."

The argument that immediately followed sought to distinguish Redrow but did not address, as if a separate question, whether the legal services in question had been supplied to the Company.

9. Amongst the small bundle of papers that was put before the Tribunal was a Note as to a suggested practice agreed between the Commissioners and the British Insurance Association with the concurrence, it would seem, of the Law Society. In full it reads as follows:-

"VALUE ADDED TAX ON SOLICITORS COSTS IN INSURANCE CASES

The correct VAT treatment of solicitors' bills in cases where the bill is being paid by Insurers has been subject of some diversity of practice, with bills – and thus VAT invoices – being addressed in some instances to Insurers, and in other instances to policy holders. The British Insurance Association and Customs & Excise have been concerned to try to work out what the correct procedure should be and the Law Society has participated in the discussions which have taken place for this purpose.

Customs & Excise accept that the direction of a supply i.e. whether it is made to the Insurers or to one or more policy holders, will depend on the facts of each case, but as a matter of routine they will expect solicitors' VAT invoices delivered after the 1^st January 1985 to be addressed to the policy holder rather than to the Insurer, even in subrogation cases. If the Insurance relates to the policyholder's business, the solicitors' services will be treated as having being supplied for the purpose of that business and (if VAT registered) the policyholder will be able to pay the VAT element of the bill and, at the same time, take a full input tax credit for it. Insurers have indicated that they will therefore normally require that when matters can be dealt with in this way they should be, and they will in principle expect to be responsible only for the VAT exclusive amount of the solicitors' bill."

I shall comment on this Note later but Mr Macnab argues that I must in the first instance decide the appeal by reference to the applicable legislation and decided cases and not by reference to an extra-statutory note. I do not understand Mr Barlow to dissent from that.

10. I shall have to come back in more detail to the Tribunal's reasoning but the conclusion that the Tribunal came to was as follows:-

"I am satisfied that the [Company] 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."

The Commissioners were directed to pay the Company's costs.

11. The Tribunal's decision was released on 3^rd November 2004 and in December 2004 (the date is not given) the Commissioners appealed against the Tribunal's decision.

The Legislation

12. This is not a case which requires extensive citation from the legislation. I respectfully agree with the learned Chairman that the only provision that required to be cited was section 24(1) of the Value Added Tax Act 1994, which provides as follows:-

"Subject to the following provisions in 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;

(b) …..

(c) …..

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him."

13. The Chairman continued - and there is no dispute between the parties as to any of this - that it was not suggested that section 24 in that respect failed correctly to implement Article 17 of the 6^th VAT Directive, nor that "the following provisions" referred to had any application. It was accepted that input tax falling within the subsection can be offset by a taxable person, as was the Company, against the output tax for which it was liable save to the extent, not material in this case, that it was used for the purpose of making exempt supplies.
14. It follows that on the facts of this particular case two principal questions arose: firstly, was the relevant supply a supply to the Company and, secondly, if it was, was the service thus supplied used for the purpose of any business carried on by the Company? It is convenient to call the former question the "To whom?" question and the latter the "Purpose" question.
15. The relevant supply, given the events which happened and the pro forma invoice I have described, can only be the Solicitors' and Counsel's provision of legal services in the course of Damian's defence. But before I turn to the two questions I have just described I must deal with one which the Tribunal took to be the correct one to raise.

The Question Which the Tribunal Answered

16. The Tribunal took the view (para 28) that the parties had not been correct in focusing upon Damian's representation. It was not correct (its para 12) to focus on whether Damian's representation could properly be regarded as having been supplied to the Company for the purpose of its business. The correct question (para 29) was whether the purchase of the Policy had been for that purpose.
17. Mr Macnab argues that that was not the relevant question and that no party had suggested that it was. The sum sought to be recovered by the Company as input tax was the VAT paid not on the Policy (insurance services are exempt supplies so no VAT had been paid by the Company on the Policy) but on the lawyers' services. Mr Barlow accepts that, if the Tribunal had posed itself the question which it described as the correct one, then it would have been in error but he seeks to avoid that consequence by saying that the posing of that incorrect question was but a first step in a more complex argument. However, I have failed to see how, if, as was accepted, that first step was false, the error was somehow later undone and corrected. I accept Mr Macnab's argument; one cannot, in my judgment, arrive at an answer to the recoverability of the VAT on the lawyers' fees by asking only for what purpose the Policy had been bought. The Chairman was, with respect, in error in seeing that to be the correct question. That error, one of law, was material as it coloured his reaction to other issues in the case. In particular, as I will explain, it may have been that which led him to treat the "To whom?" question as a subject which he need not address.

To Whom?

18. There are difficulties with the Tribunal's treatment of this question, which I will first consider without the benefit of the authorities cited to me. In his paragraph 11 the Chairman stated that the sole issue for his determination was the "Purpose" question. Section 24(1 supra) shows, of course, that the "To whom?" question also required an answer. That the "To whom?" question had been previously raised in correspondence and was even, albeit ambiguously, touched on in the skeleton arguments before the Tribunal appears from the references I have cited in paragraphs 6 and 8 above. At its paragraph 12 the Tribunal records the focus of the debate at the hearing being on whether the representation of Damian could properly be regarded as having been supplied to the Company for the purposes of its business, a debate which could plainly include both the "To whom?" and the "Purpose" question as two separable questions. The Chairman, though, indicated, as I have mentioned, that that did not seem to him to be the "right question" [singular] "to ask", which shows that he was taking the two separable questions to be but one compound question. Consistently with that view that there was but one question the Chairman at his paragraph 27 said:-

"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."

19. It is, however, far from clear that the Commissioners' argument on the day proceeded or, at any rate, consistently proceeded from the assumption which the Tribunal asserts; at its paragraph 23 the decision records the Commissioners' argument as including that:-

"…the only recipient of the lawyers' services was Damian Collins."

It is not unlikely that the Chairman's rather dismissive treatment of the "To whom?" question was coloured by the fact that in his view the question was not part of any correct question that required to be answered.

20. In my judgment the Tribunal erred in law in its treatment of the "To whom?" question. Firstly, it was inescapably a question that required an answer. A taxpayer, to succeed, has to succeed on both parts of section 24(1). If he fails on "To whom?", the "Purpose" question does not arise. Secondly, although there must very often be situations in which it is entirely acceptable for a Tribunal not itself to look into a question of law but rather to rely upon the answer to it being that which is assumed between the parties before it, I would see it as an error of law for a Tribunal on such an understanding to fail at least to look further into the question of law where the answer to it is both central to a proper determination of the case and where the Tribunal itself is not persuaded that the parties' assumption is correct. In such a case the Tribunal, as it seems to me, is duty bound further to enquire in order to establish whether the parties' assumption of law can, indeed, be accepted or should be rejected. It is an error of law not to do so. Of course a failure to enquire further will in other situations often be immaterial; there may be some other route on the facts or in law to the Tribunal's conclusion that leaves the assumption as no part of the necessary steps to the conclusion. But here the legislation made the "To whom?" question inescapably central to the determination. Accordingly, as I have indicated, I see the Tribunal's treatment of it as being an error of law. Although the Commissioners' argument on the day cannot have been as clear as it should have been, the fact that the Tribunal was of the view that it had heard no argument on the subject and yet in terms records such an argument only underlines the vulnerability of the Tribunal's conclusion on the issue, which I can only think was arrived at because of an erroneous view that it need not tarry to answer the "To whom?" question because it was not, in the Tribunal's view, a correct question which the Tribunal had to pose.
21. If, therefore, the Tribunal, in error of law, was required, but failed, to arrive at its own decision on the "To whom?" question, what is to be done?
22. Mr Macnab argued that once the "To whom?" question is raised it is susceptible of only one answer; the lawyers' services were not provided to the Company. He went on to say (although this was no necessary part of his case) that they were provided to Damian or to the Insurer.
23. The relevant findings in this case as described by the Tribunal are that it is usual in such cases that the insurer takes control, instructing solicitors and other professionals, and that this is what happened here (para 8). The Insurer needed instructions from Damian; it was the Insurer who appointed the Solicitors and assumed responsibility for their fees (para 8). Damian was the principal beneficiary of the services (para 20). The Company did not instruct the Solicitors and had no right to influence their conduct in Damian's defence, nor had any means of doing so (para 26). The only link between the Company and the Solicitors was that the Company paid the VAT on the Solicitors' bill (para 26). It is to be remembered that the Solicitors' and Counsel's invoices or fee notes were not before the Tribunal and still have not been seen. All this, says Mr Macnab, points to the lawyers' services being supplied other than to the Company, but he adds to his argument the effect of section 148(7) of the Road Traffic Act 1988.
24. That subsection provides as follows:-

"(7) Notwithstanding anything in any enactment, a person issuing a policy of insurance under section 145 of this Act shall be liable to indemnify the persons or classes of persons specified in the policy in respect of any liability which the policy purports to cover in the case of those persons or classes of persons."

It is not disputed but that the Insurer issued the Policy under section 145 of the Act. In consequence, Damian was entitled to call directly on the Insurer to indemnify him in respect of liability he incurred by way of the cost of his defence on the charges of causing death by dangerous driving. He had no need to ask the Company to ask the Insurers on his behalf and, indeed, as the Company itself had no indemnity in respect of such outgoings, it would not have availed him or the Company so to do. In effect, section 148(7) undid the usual restrictions of the doctrine of privity of contract and put Damian in a position to call directly on the Insurers for indemnification in all respects as if he himself had a contractual right to receive it.

25. Unhappily, section 148(7) was not drawn to the Tribunal's attention; if it had been, it could, in my judgment, have only weakened the Company's position when it came to be considered whether it was to the Company that the lawyers' services had been provided. Moreover, Damian's right to indemnity did not depend in any way upon his being an employee of the Company at the time the lawyers' services were provided, nor did they depend on the terms of his Contract of Employment; even if he had been dismissed in the interval between the accident and the rendering of services by the lawyers the case would have remained the same. Even if he had had no contractual right as against the Company for it to pay for his motor insurance, so long as the Policy was effected as it was Damian would have obtained the direct indemnity which section 148(7) conferred on him. There was no evidence, said Mr Macnab, that the Company had paid the lawyers or had been under any liability to do so. On the contrary, the Tribunal held that it was the Insurer that paid for Damian's representation (its para 7). Assuming that the Insurers had paid the Solicitors, they had done so under their obligation to indemnify Damian.
26. Against that, Mr Barlow asserts that the lawyers' fee note was addressed to the Company. That is not shown to be the case. The fee note has not been seen. It is not known to whom it was addressed. All that the Tribunal saw was the pro forma invoice to which I have referred. That, as Mr Macnab pointed out, was no more than an after-the-event paper that does not indicate who did what for whom. I fail to see how a pro forma invoice describing not any services rendered but merely VAT and firmly marked "This is not a VAT invoice" can be taken to prove to whom the services were rendered.
27. Mr Barlow says that it was the Company that paid for the lawyers' services. There is no evidence of that whatsoever and, as I have said, the Tribunal held otherwise. The Company, doubtless, paid for the Policy but it does not follow from that that it was the Company that paid for the lawyers' services. In any event, to ask who paid for the services does not necessarily indicate to whom the services were rendered. Nor can I accept Mr Barlow's assertion that it was the Company that obtained the legal services; there was no finding to that effect and the Tribunal was not persuaded that that was the case (its para 27).
28. Mr Barlow argues that the provision of representation to Damian enabled the Company to supply a perquisite to its employee, Damian, from which not only Damian but the Company itself benefited. Adequate representation of Damian at the hearing of the very serious charges against him could conduce to his being imprisoned for a shorter period than might otherwise have been the case and hence he might become able earlier to return to his service with the Company. But to ask who benefited from a service is not necessarily to find the answer to the question of to whom the service was supplied.
29. Mr Barlow argued that Mr Collins Senior, Damian's father and Managing Director of the Company, had given evidence that the Company had played a part, along with the Company's insurance broker and the Company's own lawyers, in selecting Freeman & Co to represent Damian. There are difficulties with that. The Tribunal nowhere describes itself as having received such evidence and it hardly squares with the Tribunal's view in its paragraph 8 that the Insurer took control and instructed the Solicitors and other professionals in this case.
30. Mr Barlow sought to draw an analogy with a case involving insurance and a supply of goods. Suppose an insured householder loses a washing machine in a fire. The householder buys a replacement machine and pays VAT on that purchase. The fact that the insurer may then reimburse the householder has no effect on the supply of goods; it is a taxable supply to the householder. That hypothesis does not in any event give rise to the question before me, as to the repayment of input tax, but the analogy, as it seems to me, is false. There the householder selects the retailer to go to for the replacement machine, selects which machine he or she wishes, pays for the machine and then seeks indemnity from the insurer. By contrast, here the Company did not instruct or appoint the Solicitors (Tribunal para 8) but it was the Insurers that took control; it was Damian's not the Company's instructions that the Solicitors took and it was not the Company but the Insurer (Tribunal para 7), which paid for Damian's representation. In the supposed analogy it would have been the householder-policyholder, presumably, who claimed indemnity from the Insurer for the cost of the new machine and VAT. There is no evidence the Company claimed an indemnity against the fees payable in respect of Damian's defence and it would have been quite idle for it to do so as Damian was himself entitled to such an indemnity and the Company was not. It is true that there is no evidence that Damian claimed under the Policy (or that the Solicitors did on his behalf) but I cannot think the case can be affected by whether the Insurer, bound to pay, did so without, or only after, prompting.
31. Mr Barlow argued that the primary facts would lead to a conclusion that the supply was to the Company. I cannot agree. The factors against that, as I have described them, point otherwise. The most simple and natural view, as I would see it, would be that the lawyers' services were provided to Damian, but, if that were wrong, it would be to the Insurer that one might think that they were supplied. But what I am quite unable to see as likely is that these services were provided to the Company. In my view (but still without the benefit of authorities) the Tribunal was quite right to be not persuaded that there had been a supply to the Company.
32. Turning to the authorities, the Tribunal was shown four cases which, in the chronological order in which they were decided, were Flockton Developments Ltd – v- Customs & Excise Commissioners [1987] STC 394; P. & O. European Ferries (Dover) Ltd –v- Commissioners of Customs & Excise (1992) Decisions 7846, Customs & Excise Commissioners – v- Rosner [1994] STC 228 and Redrow supra decided in1999. I was taken to all except P. & O.
33. Looking to see, firstly, whether any of such authorities reflects on the "To whom?" question, in Flockton (upkeep of a racehorse as a part of the promotion of the taxpayer company) the sole question for the Tribunal had been whether the horse had been acquired and raced for the purpose of any business carried on by the taxpayer company – p698f. The case threw no light on the question of to whom goods or services had been supplied as there was no conceivable candidate other than the taxpayer company. In Rosner (legal expenses which the taxpayer had incurred in defending himself against criminal charges involving his illegal making of false representations as to the genuineness of students of the kind who might attend his private educational establishment) again there was no candidate but the taxpayer. In Redrow, however, there was another possible candidate than the taxpayer and the case thus merits closer attention.
34. Redrow, a well-known builder of new houses for sale in the private sector, devised a scheme under which it would assist buyers of its houses with their estate agency expenses in selling their existing houses. In the House of Lords the scheme was described by Lord Hope of Craighead at page 163 as follows:-

"This appeal relates to a sales incentive scheme which Redrow operates in order to expedite sales of its homes to prospective purchasers, most of whom have to sell their existing homes before they can proceed to purchase a new home. It is also intended to provide the prospective purchasers with a financial incentive to purchase their homes from Redrow.

The scheme assumes that the services of an estate agent will be needed if a buyer for the existing home is to be found. In order to expedite the sale Redrow selects the estate agent, instructs the agent to value the existing home and handle the sale and monitors progress in the marketing of the property to maintain pressure on the agent to achieve a sale. As an incentive to the prospective purchaser, Redrow enters into an agreement with both the agent and the prospective purchaser that it will pay the estate agent's fee plus VAT if the prospective purchaser completes on the purchase of a home from Redrow. The instructions to the agent cannot be changed without Redrow's agreement. But the agreement provides that Redrow is not liable to pay the agent's fee if the prospective purchaser does not proceed with the purchase of a home from Redrow. The agent is advised by Redrow on being recruited into the scheme to enter into a separate agreement in the normal terms with the prospective purchaser, to provide cover in the event that Redrow is not liable to pay the fee because the prospective purchaser has decided to go elsewhere to buy a new home." - Redrow supra page 163.

At page 164 Lord Hope continued:-

"The critical question is whether the expenditure was incurred in the supply by the estate agents of services to Redrow."

There was no doubt but that the work done by the estate agents was the supply of services on which they were obliged to charge VAT but:-

"Were they supplying services to Redrow, for which Redrow was entitled to deduct the tax which it paid as input tax? Or were they, as the Commissioners contend, supplying services only to the prospective purchasers?"

35. The Tribunal in Redrow had held that the services were supplied both to Redrow and to the prospective purchasers – Redrow at page 165. On appeal, Potts J held that that was a view which the Tribunal had been entitled to reach. The Court of Appeal, persuaded by a judgment in another case that raised a point which the House of Lords took to be entirely different, concluded that the supply was to the prospective purchasers and not to Redrow. At page 166 Lord Hope continued:-

"The estate agents received their instructions from Redrow and, so long as the prospective purchasers completed with Redrow, it was Redrow who paid for the services which were supplied. I do not see how the transactions between Redrow and the estate agents can be described other than as the supply of services for a consideration to Redrow. The agents were doing what Redrow instructed them to do, for which they charged a fee which was paid by Redrow."

Later, on the same page, Lord Hope added:-

"Questions such as 'Who benefits from the service?' or 'Who is the consumer of it?' are not helpful. The answers are likely to differ according to the interests which various people may have in the transaction. 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 done for him for which, in the course or 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."

36. There are marked differences between Redrow and the case before me. In Redrow the estate agents received their instruction from Redrow; in the case before me there is no evidence that the Solicitors received instructions from the Company. In Redrow it was Redrow that paid for the services which were supplied. In the case before me the Company did not pay for the services supplied. In Redrow the agents were doing what Redrow instructed them to do for which they charged a fee which was paid by Redrow; by contrast, in the case before me the Solicitors were doing what Damian or, perhaps, the Insurers had instructed them to do, for which they charged a fee which was not paid by the Company. If the question is "Has the taxpayer had to pay a consideration which has attracted VAT?" the answer in the case before me is that there is no evidence that the Company had to pay, still less that it did pay, the Solicitors.
37. At the end of his speech Lord Hope indicated that he adopted also the reasons of Lord Millett. In his speech Lord Millett has a heading "Identifying the Recipient of the Services". He pointed out that the nature of the services and the identity of the person to whom they were supplied could not be determined independently of each other because each defined the other. If one described the services supplied as being the ordinary services of an estate agent instructed to market and sell his client's house and then asked to whom the services were supplied, the answer would inevitably be: to the householder. By contrast, if one took the services to be the services which Redrow had instructed the agents to perform, it would be Redrow who was the obvious recipient of the services. At page 171 he said:-

"In fact, of course, there can be no question of deducting input tax unless Redrow has incurred a liability to pay it as part of the consideration payable by [it] for a supply of goods or services."

Pausing there, there is not a shred of evidence that the Company incurred any liability to pay input tax as part of the consideration payable by it for the supply of the lawyers' services as there is no evidence, either, that the Company incurred any liability at all for the services which the lawyers provided. Lord Millett continued:-

"In my opinion these two factors [the need for consideration and that unless services are rendered for a consideration, they cannot constitute the subject matter of a taxable supply] compel the conclusion that 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."

Pausing there, in the case before me the lawyers were to be paid for by someone other than the Company, namely by the Insurer; it was the Insurer (Tribunal para 8) which assumed responsibility for the payment of the fees and disbursements. On that footing the Company would have had no claim to deduction. Continuing with citation from Lord Millett's speech:-

"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 purpose 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."

Here, of course, the taxpayer Company failed to identify a payment of which the tax to be deducted formed a part; the Company was neither liable to pay the Solicitors of Counsel nor is there any evidence that it did. It was the Insurer which paid.

38. Turning to the facts of Redrow Lord Millett continued at page 171:-

"In the present case, Redrow did not merely derive a benefit from the services which the agents supplied to the householders a for which it paid. It chose the agents and instructed them. In return for the payment of their fees it obtained a contractual right to have the householders' homes valued and marketed, to monitor the agent's performance and maintain pressure for a quick sale, and to override any alteration in the agent's instructions which the householders might be minded to give. Everything which the agents did was done at Redrow's request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to Redrow."

39. In the case before me it cannot be denied that the Company may have derived a benefit from the services which the lawyers supplied. It may well be that the Company will be denied Damian's services for a shorter period than would have been the case had Solicitors and Counsel not been instructed in his defence. But thereafter the difference between the Company's position and Redrow's is quite marked. The Company did not choose the lawyers. The Tribunal held (its para 26) that it was the Insurance Company that took control and instructed the Solicitors and other professionals. The Company received nothing in return for its payment of the lawyers' fees because it did not pay the lawyers; it obtained no contractual right in relation to Damian's defence. The Tribunal held (its para 26) that it had no right to influence the Solicitors' conduct of the defence nor any means of doing so. The Company had no ability to override the indemnity conferred, by the combination of the Policy and section 148(7), upon Damian. Had the Company told either the Solicitors no longer to defend Damian or the Insurers no longer to pay for his defence, it would, or, at any rate should, have had no effect whatsoever on the activity of either the Solicitors or the Insurer. Nor could it be said that everything which the lawyers did was done at the Company's request; there is no indication in the Tribunal's findings of any request having been made by the Company in relation to Damian's defence and it was Damian's plea, in response to the charges against him, about which the Solicitors had to take instructions (Tribunal, para 8).
40. On page 172 Lord Millett continued, under the heading "Conclusion":-

"It is sufficient that Redrow obtained something of value in return for the payment of the agent's fees in those cases where it became liable to pay them, and that what it obtained was obtained for the purposes of Redrow's business. Both those conditions are satisfied in the present case. It is not necessary that there should be 'a direct and immediate link' between the services supplied by the agent and the sale of a particular Redrow home, although if it were necessary then this condition too would be satisfied on the facts of the present case."

Again, that emphasises the crucial differences between Redrow's case and the case before me; the Company could not receive something of value in return for its payment of the lawyers' fees as it did not pay the lawyers' fees and there is no evidence that it was under any liability to pay them.

41. I would confess to seeing the difficulties as to how the observations in Redrow fit an insurance context but, if they do fit, then, as I have indicated, they do not assist the Company. If they do not fit, then, as they would then be irrelevant, again they would not assist it.
42. Consideration of the authorities drawn to my attention does nothing to cause me to reconsider the conclusion on the "To whom?" question to which I had arrived without consideration of the authorities.
43. Mr Barlow's Skeleton Argument asks that, if the Court were to be against the Company, then it would be right for the matter to be remitted to the Tribunal for it to make further findings. He did not abandon that in argument but nor did he press it. In my judgment, for the reasons I have given, the supply was not to the Company and the Tribunal was right not to have been persuaded that it was. Further, as I see that matter now, with the benefit also, which the Tribunal did not have, of section 148(7) having been drawn to attention, there can be no conclusion on the "To whom?" question other than that the lawyers' services were not provided to the Company. If that is right then it seems pointless to remit merely for the Tribunal to be moved, as I would take to be inevitable, from its being, as it said, unpersuaded that the supply was to the Company to its being certain that the supply was not to the Company.
44. I add only this on the "To whom?" question. I recognise that a service can at one and the same time be supplied to more than one person. Sometimes it will be plain that a bundle of supplies is comprised of some services to A and some to B and some, perhaps, to both. Here there is no means of severing the services so that one might think that some of them were to one person, others to another and yet others to both. The Solicitors' invoice and Counsel's fee notes, as I have said, have not been disclosed. It seems to me I have no option but to regard the supply as being a unity and, regarding the supply as such, I have been unable to see it as being to the Company.
45. If that is right, then that is an end of the appeal. The Tribunal was in error of law, as I have identified, and the errors, capable of rectification without remission, are such that the Commissioners must succeed on the appeal. However, a good deal of argument was addressed to me on the "Purpose" limb of the case. It is to that to which I shall now turn.

The Purpose Question

46. The business purpose of the Company identified below as part of the Company's case was that the supply of the lawyers' services was in order to keep a key employee, Damian, out of prison or at least to ensure that his sentence would as short as possible (Tribunal's decision para 15). After citation to it of the authorities I have mentioned above and after consideration of the arguments it received on the issue, the Tribunal was left concerned with two points. The first (para 25) was this:-

"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 (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."

47. The second point (para 26) was a comparison with the Redrow case. There, the Tribunal concluded, the estate agency fees scheme had had a direct effect on the taxpayer's business – each successful disposal of a prospective purchaser's existing house led to the sale of a new house by Redrow to that purchaser. The Tribunal continued:-

"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 solicitors fees."

For those reasons (its para 27) the Tribunal concluded that it was not satisfied that the Solicitor's services were supplied for the purposes of the Company's business, with the Tribunal adding, "…if one examines the facts of the case by considering only the representation of Damian Collins". One might think that as the Tribunal was not satisfied that the lawyers' services were supplied for the purposes of the Company's business that the Company would necessarily have failed below. However, by reference to the question, described above, as to whether the Policy had been purchased for a business purpose of the Company, the Tribunal took the view that, as it had been, the Company succeeded.

48. I have already given reasons for my seeing the question of the purpose behind the purchase of the Policy as being a question which is not required to be asked, or, at any rate, as one the answer to which does not assist with the principal questions – para 14 above - that do need to be answered. But in any event the Tribunal's treatment of the question was, in my view, flawed. In this part of the case (its para 29) the Tribunal proceeded as follows:-

"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 [company] is entitled to credit for the input tax it has been required to pay pursuant to the agreement between the Customs, the Association of British Insurers and the Law Society to which I have already referred."

49. It is, at lowest, unclear that the Company did claim the indemnity under the Policy for which it had already paid. The Policy confers no indemnity upon the Company in respect of Damian's defence expenses and the Tribunal described no claim by the Company against the Insurer. Moreover, for the reasons emerging out of section 148(7) supra, the Insurer was committed under the indemnity whether the Company "claimed" under it or not. Further, there is no evidence that the Company, if it did claim under an indemnity, did so in order to make good the perquisite which it had supplied to its employee. It had no need to do so; the employee was entitled to the indemnity regardless of what the Company did. A decision by the Company not to avail itself of the provision in the Policy would have been completely without effect, given the benefit conferred on Damian by the combined effect of the Policy and section 148(7). For the Company to refuse to meet the costs itself would have been no breach of any contract of employment with Damian because his Contract of Employment did not confer on him any right to legal expenses insurance. The Contract of Employment, moreover, was, as I have mentioned, not even seen by the Tribunal. Thus, even if it had been relevant to look into whether the purchase of the Policy was for the Company's business purposes, the subsequent reasoning I have cited was, in my judgment, unsustainable.
50. On that footing the Tribunal should have been left only with its view (its para 27) that it was not satisfied that the Solicitors' services were supplied for the purposes of the Company's business.
51. However, Mr Barlow argues that, leaving entirely aside the argument as to the purposes lying behind the purchase of the Policy, the Solicitors' services, properly regarded, were supplied for the purpose of the Company's business. Recognising that whilst Flockton assists him, Rosner is against him, he argued that the law on the subject now has to be reviewed in the light of Redrow. He argues that Rosner must now be seen to have been wrong.
52. Rosner requires there to be a nexus between the expenditure (for the goods or services the input tax in respect of which the taxpayer seeks to reclaim) and the taxpayer's business and that the former must be "directly referable to the purpose of the business" – page 230f-g - namely to "what the business is doing". The word "directly" is repeated at page 230j and page 231a. It is easy to espy arguments against that word. Firstly, it could be said that the word "directly" is a gloss, not a word found in the legislation, which merely requires that the goods or services are used or to be used "for the purpose of any business carried on" by the taxpayer, an expression which does not obviously exclude those which are used "indirectly" for such a purpose. Secondly, it may be argued that the expression "directly referable" leaves the line between what is direct and what is indirect too hard to discern. Moreover, there may be a conflict between Rosner and Redrow in that at page 172 in Redrow, as cited above, Lord Millett said it was not necessary that there should be a direct and immediate link between the services supplied and what was, on the facts of that case, a business purpose of the taxpayer, namely the sale of its houses.
53. There is a further complication in that whilst Lord Millett in Redrow points out that it is of the essence of a taxable supply that it is supplied for a consideration, he goes on, in effect, to require, that where, as was the case in Redrow, the taxpayer is seeking to reclaim input tax, the taxpayer must have been liable to pay or undertake the consideration for the service in question. That that was so would seem to follow from the first two passages cited in paragraph 37 above from the speech of Lord Millett in that case. Whether it is right to jump from the need for consideration – see the Value Added Tax Act 1994 s5(2)(a) – to a requirement that the reclaiming taxpayer shall itself have been liable to pay or satisfy it may require further debate, especially in the context of insurance with which Redrow was not concerned.
54. Because, as I have indicated, the Company has to succeed on both the "To whom?" question and the "Purpose" question and because it has, in my judgment, failed on the "To whom?" question, I have no need to explore the difficult questions that arise on the "Purpose" part of the case and I think it wiser, especially as any decision might have repercussions quite outside the area before me, to leave them for decision in a case where a decision upon them is required. Thus whilst I think it fair to say that I might have been inclined to find more force in Mr Barlow's arguments on this subject than had the Tribunal, (its para 27) I come to no decision on the "Purpose" question.

The BIA Note

55. I indicated earlier that I would revert to the Note made by the Commissioners and the British Insurance Association, with some participation by the Law Society, as to the practice in insurance cases, the Note which I cited at para 9 above. The Note indicates that the "To whom?" question, which it calls "the direction of a supply" will depend on the facts of each case. If there had been a conflict between the effect of the applicable legislation and of the Note, I would have had to prefer that of the legislation but I do not see there to be such a conflict as the Note does not appear to say (although it is hardly pellucid on the point) that the practice it indicates is to be followed even when it is not the taxpayer-policyholder to whom the service is supplied. It may in any event be that the Note requires some refinement in cases where section 148(7) of the Road Traffic Act applies and dicta in Redrow may also now need to be reflected. However, amendment to the Note is not a subject that is for the Court and I need, accordingly, say no more on the subject.

Conclusion

56. For the reasons I have given, I allow the Commissioners' appeal and set aside the Tribunal's decision of 3^rd November 2004 without need for any remission to it. I will discuss with Counsel the form of Order I need to make.