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First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Private & Confidential Ltd v Revenue & Customs [2009] UKFTT 59 (TC) (23 April 2009)
URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00038.html
Cite as: [2009] UKFT 00038 (TC), [2009] UKFTT 59 (TC)
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VAT - REGISTRATION
Compulsory
- This appeal raises the question whether the Appellants and another limited company were acting in partnership in relation to certain land transactions in West Lothian and the VAT consequences flowing from payments made to the Appellants, who have been compulsorily registered for the purposes of VAT. It is the decision to compulsorily register which is the subject of this appeal.
- A Hearing took place at Edinburgh on 3rd and 4th December 2008. The Appellants were represented by their director, William Rodgers. He gave evidence and led the evidence of Eric Lumsden, a solicitor involved in the transactions in question, Brian Black, an unqualified accountant, and Brian Neil, a director of Oakmall (Scotland) Limited, one of the companies involved in these transactions. The Respondents ("HMRC") were represented by Julie Strachan, solicitor, Shepherd & Wedderburn, Edinburgh. She led no evidence. A bundle of productions was produced. There was no dispute as to the authenticity and, where appropriate, the transmission and receipt of the documents produced.
- An issue arose a few days before the Hearing about the presence of an HMRC witness, whom Mr Rodgers had indicated he wished to cross-examine. At one stage, Mr Rodgers applied for a postponement. However, he did not pursue that application at the Hearing, which proceeded as arranged.
- Mr Rodgers is sixty three years old. Although he has no professional qualifications, he has wide ranging experience in various industries. By the year 2000, if not before, he had established himself as a self-employed consultant acting as a company doctor. He also sought out and promoted building development opportunities, liaising with landowners, developers and local authority planners with a view to facilitating development of one sort or another. His general approach to his work was informal and he tended to do business on trust, a handshake rather than a formally executed contract.
- At some point in 2002/3 or a little earlier, Mr Rodgers identified a site at Westrigg, Blackridge, West Lothian (the "Site"), as being possibly suitable for residential development. The Site extended to a little over 31 acres. He approached the owners, the Mcnee family, who were interested. He arranged a meeting between the McNee family and Thomas Barr, a developer. However, Mr Barr took the view that it was highly unlikely that planning permission would be obtained as the area was not zoned for development in the West Lothian Local Plan, and declined to take matters further.
- Mr Rodgers, however, persevered. He continued to seek developer interest. The Local Plan was under statutory review and he lobbied planning officials, including the Planning Team Leader at West Lothian Council, Malcolm Inkster, to zone the Site for residential development. He carried out various investigations to satisfy officials in relation to infrastructure such as drainage, the provision of local education and health services. He also raised the question of making provision for the Airdrie/Bathgate rail link to have a stop at Blackridge. He even lodged submissions on the new draft Local Plan.
- Eventually, Mr Rodgers found a developer who was interested. He entered into discussions with Brian Neill a director of Oakmall (Scotland) Ltd ("Oakmall"). Mr Neill was a property developer who carried on business through the medium of Oakmall and several other similarly named companies. Mr Neill's wife was also a director of at least Oakmall. Mr Rodgers and Mr Neill reached a somewhat loose and vague arrangement whereby Mr Rodgers was to receive 34% of the profit. Just how that profit was to be ascertained did not seem to have been discussed at the time and was not explored in evidence.
- A draft Agreement between Brian Neill, his wife Audrey and Mr Rodgers was prepared by Oakmall's solicitor, Eric Lumsden of Sneddon Morrison, solicitors, Whitburn, in about the summer of 2004. The agreement proposed to establish a new company as a vehicle for a joint venture in which the three individuals would be the shareholders. The draft agreement contained provisions regulating the relationship between the three shareholders. The Appellants, who were not then incorporated, were not intended to be a party to the proposed agreement and the Draft was not executed or carried into effect. Mr Lumsden understood that Mr Rodgers was to have 34% of the shareholding and the Neills the balance. Nothing came of that draft. Mrs Neill was against it, writing the words too difficult on the first page of the draft.
- Discussions with Oakmall and the McNee family bore fruit. At that stage Mr Rodgers indicated to Brian Neill that he wanted fair remuneration for his efforts in bringing the parties together and they shook hands. In September 2004, Oakmall entered into four option agreements with Robert and James McNee. The option agreements were prepared on behalf of Oakmall by their solicitor, Eric Lumsden of Sneddon Morrison, solicitors, Whitburn, West Lothian. The Appellants were incorporated in November 2004.
- The Site was subsequently allocated for residential development in the newly adopted Local Plan. Planning permission to develop the Site was obtained. Unfortunately, Mr and Mrs Neill separated. Their relationship seems to have broken down in or about the summer of 2005. A dispute arose as to her continuing to be a director of Oakmall which ended up in court. The details were not explained in evidence. All this resulted in the Site having to be sold and developed by others rather than retaining the options as a long term investment. Mr Rodgers was instrumental in finding a buyer. At one stage he had discussions with a company named Strathclyde Homes Ltd. That company wrote to Oakmall on 29/7/05 marking their letter for the attention of Mr Rodgers. Mr Rodgers, apparently acting on behalf of Oakmall, also had discussions about the Site with Knight Frank, Edinburgh, well known estate agents.
- On or about 5/9/05, Mr Rodgers entered into a contract with Oakmall. The document is on Oakmall headed notepaper and was addressed to Mr Rodgers personally. It was signed by him and by Mr Neill. It bears the heading "CONTRACT BETWEEN MR W RODGERS & OAKMALL SCOTLAND LTD". It also bears a sub-heading Terms of Employment. It contains inter alia the following provisions:-
- "Offer of employment as designated "Land Buyer" for our company on a self-employed basis, with start date being 1st June 2005 and ending on sale of Blackridge site on 31st May 2006, whichever is the earlier, as detailed below.
- An invoice from yourself is required to reach us by the end of each month and a payment of £2,400 (gross), with first payment being made on 1st July 2005, will be made on the first of the following months directly into your bank account named "Private & Confidential" as per details supplied.
- Fuel can be used on our account for company business only and expenses will be paid directly into your bank account "Private & Confidential" on provision of receipts including any other agreed prior additional expenses.
- Blackridge As promised, a percentage of 34% of the net profit will be paid to you on conclusion of the sale of the site from which £1 million will be retained and deposited into the account of the new company "John Charles Estates Ltd" registered number 286054. Brian Neill will also deposit £1 million into the same account to enable the ongoing business to be shared on a 50/50 basis.
- All above terms hinge solely on the sale of the Blackridge site and this sale must be seen through to completion to allow the above proposals to take place.
- New Company This company, as previously stated, will be formed on an equal shareholding basis between you and Brian Neill, that being all new business including Torbothie Farm site and any other developments taken from 1st June 2005 being included.
- These other new sites will be purchased by Oakmall Scotland[1] Ltd meantime and subsequently transferred into the new company "John Charles Estates Ltd" when the cash injection from both yourself (£1 million) and Brian Neill (£1 million less monies paid out prior to that date) has taken place. On that date negotiated salaries and company business will be discussed.
- ..............."
- On 22/11/05 Brian Neill, his wife Audrey and Mr Rodgers entered into an agreement which provided for various payments to be paid into the Appellants' bank account including payments following the receipt of funds from Manorlane Ltd (referred to below). The agreement took the form of a letter from Oakmall to Mr Rodgers but was signed by all three individuals. It included the following:-
- Two further payments will be made to the account of "Private & Confidential" on 1st December 2005 for the amount £2,400 and on 1st January 2006 for the amount £2,400.
- One payment of £170,000 will be made to the same account on our receipt of the first instalment from Manorland[2] Limited on 27th January 2006 of which £50,000 should in turn be paid by you into John Charles Estates Limited, sort code .............
- One payment of £830,000 will be made to the same account on our receipt of the second instalment from Manorland Limited due on 27th January 2007.
- One payment of £120,000 will be made to the same account on receipt of the third payment from Manorland Limited with regard to the Health Centre option.
- Invoices for all above amounts will be required prior to payments being made and all tax implications for these amounts and all prior payments made to you will be your responsibility.
- Fuel can be used for your vehicle on Oakmall Scotland account until the end of January 2006."
- Mrs Neill seemed to be the driver behind these agreements and seemed to be calling the shots in a question between her and Mr Neill. Just how or why this was so was not explained in evidence. She may have had or been thought to have had the majority shareholding in Oakmall and other similarly named companies. On or about 23/11/05, the Site was sold by Oakmall to Manorlane Ltd, a developer, with entry on 27/1/06. This was achieved by a back-to-back arrangement whereby Oakmall exercised the options and at the same time sold on to Manorlane.
- On or about 3/3/06, Mr Rodgers entered into another agreement with Oakmall. It took the form of a letter, on Oakmall notepaper, addressed to Mr Rodgers. The copy produced is signed only by Audrey Neill but Mr Rodgers stated in evidence that he signed the principal letter as did Mr Neill. It provided as follows:-
- Previous agreement/s no longer apply
- One payment of £70,000 will be made to the account of "Private & Confidential" on receipt of the first instalment from Manorland (sic)[3] Limited.
- One payment of £700,000 will be made to the account "Private & Confidential on our receipt of the second instalment from Manorland Limited.
- Invoices for aforementioned amounts will be required prior to any payment being made and all tax implications for these amounts and all prior payments made to you will be your responsibility."
- This followed a meeting in Mr Lumsden's office at which these figures were proposed and eventually accepted by Mr Rodgers. Mrs Neill seemed to be behind the figures ultimately proposed and agreed. At this stage (i.e. when the figures eventually agreed were being discussed) Mr Neill may not even have been a director of Oakmall. This would explain Mrs Neill's seemingly dominant position and her apparent ability to dictate terms.
- The Appellants received in total the sum of £770,000. That sum was paid in instalments. In or about April 2006, the Appellants submitted an invoice dated 11/4/06 to Oakmall for £180,000 under the narrative Consultancy fee re Blackridge. That narrative was entered following discussion between Mr Rodgers and Mr Black, the accountant. This sum, which Mr Rodgers said related to the Manorlane deal, was paid as the first instalment; the second and last instalment being £590,000 was paid in January 2007. Mr Rodgers also received an additional sum of £30,000 from Mr Neill. The Appellants also received payments in respect of Mr Rodgers' expenses and fuel costs were paid to the Appellants. There was no evidence as to the precise amounts and dates of payment.
- In a To whom it may concern letter dated 16/1/08, Brian Neill wrote as follows:-
- Sneddon Morrison did not at any stage act on behalf of the Appellants or Mr Rodgers
- In June 2007 HMRC made enquiries of the Appellants as to whether they should be registered for VAT. Correspondence ensued with KPMG, accountants, on behalf of the Appellants who asserted that the Appellants were acting in partnership with Oakmall and that the income received by the Appellants from Oakmall related to a distribution of partnership funds and was not in return for services provided by the Appellants to Oakmall or another third party. HMRC concluded that the Appellants were liable to registration for the purposes of VAT. It is that decision which is being appealed.
- Although we found the witnesses to be generally reliable and credible, much of what we heard was vague and incomplete. We have found it difficult to put together the various pieces of incomplete evidence and achieve a comprehensive and comprehensible picture. We cannot accept the assertions of Mr Rodgers and Mr Neill that Oakmall and the Appellants acted in partnership. Having entered into various agreements, most of which were ultimately superseded, we do not consider that they can be heard to say that they did not reflect what was in reality agreed because it now suits the Appellants to assert partnership. Oakmall, Mr Rodgers and the Appellants went to the trouble of setting out and agreeing a range of matters. If there had truly been a partnership it would have been very easy to say so expressly. There was nothing to stop them doing so.
- There was no acceptable evidence that the Appellants or even Mr Rodgers had entered into a partnership with Oakmall or the Neills or one of them. Moreover, the evidence we heard does not enable us to infer that any such partnership ever came into existence. In particular there was no evidence as to (i) the name of the partnership, (ii) the nature of its business, (iii) the identity of the partners, (iv) what share of the profits each partner was to receive, (v) the capital contributions of the partners, (vi) the extent of the partnership assets, (vii) the duration of the partnership, or (vii) a partnership bank account. No partnership accounts appear to have been produced. While it may be said that none of these ingredients is actually necessary to infer partnership, or perhaps more accurately here, a joint venture, the absence of each of these ingredients plus the presence of other evidence and documents which unequivocally point to a commercial relationship which is not a partnership make it impossible to conclude that a partnership ever came into existence and traded. There is, moreover, nothing in the evidence to suggest that Oakmall and the Appellants or either of them held themselves out to third parties as being in partnership with each other. Such evidence as there is, is to the opposite effect with various parties writing to Mr Rodgers on the assumption that he acted on behalf of or was part of Oakmall (see paragraph 10 above).
- It seems reasonably plain that Mr Rodgers initially and the Appellants subsequently carried on business as a land or property consultant specialising in facilitating the development of land for which he/they expected to be remunerated in the form of a fee, or commission based on a share of the realised development value plus reimbursement of reasonable expenses incurred to achieve that objective. The arrangements made by Mr Rodgers and the Appellants were somewhat loose but whatever they were they did not include the establishment of a partnership in relation to the Westrigg development. None of the commercial documents produced can be construed as such.
- We were not impressed with the arguments advanced by KPMG in correspondence with HMRC. They were only loosely based on the facts, vague and ambiguous and did not bear close scrutiny.
- Miss Strachan referred us to various provisions of the Partnership Act 1890 including sections 1, 2, and 4. She also referred us to Keydon Estates LON/88/1225X, 10/11/89 Chairman Neil Elles, Britton LON/85/617 15/8/86 Chairman D Shirley, Strathearn Gordon Associates Ltd LON/84/294, 17/4/85, Chairman Neil Elles, J&E Malin LON/91/2224, 8/12/92, Chairman Miss JC Gort, and Fivegrange Ltd LON/89/1631Y, 2/10/90 Chairman Judge Medd.
- These are all English cases and it would have been preferable to have had the benefit of a citation of Scottish cases on the law of partnership. Nevertheless, they are of assistance. In Britton the Tribunal held that an informal arrangement between husband and wife falling short of a contract did not constitute a partnership. In Malin a range of indiciae led the Tribunal to conclude that a de facto partnership existed. The facts were very different but the authorities there cited demonstrate that a statement by one of the parties that there is or is not a partnership is not conclusive and may not even be relevant if the substance and reality of the situation points in the opposite direction.
- In Keydon Estates, the appellants were property consultants and developers; they identified a property ripe for development and introduced it to another developer (L.O.L.); it was agreed that the appellants would share in the profit if L.O.L. bought it which they did; however L.O.L. decided to sell it with planning permission rather than carry out further development themselves. The Appellants and L.O.L. worked closely together on the project. It was held that there was no partnership. There was no separate business carried on. L.O.L. owned the property and took the decisions albeit after consulting the appellants; the appellants did not hold themselves out as a partner. There was a profit sharing agreement but this was the consideration for the services supplied by the appellants. This case bears some resemblance to the facts of the present appeal and we agree with the approach taken by the Tribunal.
- In Strathearn, the issue was whether, in taking part in certain property developments, the appellants were supplying services as a management consultant or were taking a direct part in these developments as a partner. After making and reviewing fairly lengthy and detailed findings of fact, the Tribunal concluded that the essence of the arrangement was the provision of services by the appellants for a consideration; the mere fact that the consideration was measured by reference to a share of the net profit did not convert the agreement into a partnership. We again agree with that approach. A similar issue arose in Fivegrange Ltd in which the approach in Strathearn and Keydon was followed.
- Mr Rodgers invited us to ignore the invoices and attempted to distinguish the cases cited by Miss Strachan. He suggested that in Fivegrange Ltd, one party was unfettered in its ability to deal with the alleged partnership asset. That, however, is a point against the Appellants as here, too, Oakmall were unfettered in their ability to deal with the land. They exercised the options they had over it and sold the land to Manorlane.
- Mr Rodgers also submitted that the sums ultimately received were significantly less than the sum originally agreed. They were compensatory in nature. Assuming for the moment that the sum originally agreed was actually capable of ascertainment, the fact that a lesser sum was received does not ultimately matter because it does not change the character of the juridical relationship. The remuneration was varied by agreement, albeit perhaps reluctantly by Mr Rodgers. It did not convert the remuneration into damages. It still represented the consideration for all the various services provided through Mr Rodger's considerable efforts to enable the Site to be developed.
- We consider that the correct way to describe the juridical nature of the relationship between the Appellants and Oakmall and to classify the nature of the payments received from Oakmall is to say that Mr Rodgers, acting on behalf of the Appellants, provided Oakmall with a wide range of property consultancy services for which the Appellants were reimbursed certain outlays in connection with the provision of those services, and were to be remunerated by reference to a share of the profit ultimately made on the transaction or transactions relating to the Site. In the event, agreement was reached on a precise sum to reward the Appellants for the various services provided. Insofar as the various home-made agreements are classifiable, they have the flavour of remuneration for the provision of services rather than the distribution of sums to persons who have carried on business in common as a separate legal person with a view of profit. For what it is worth, this is entirely consistent with the terms of the Appellants' own invoice rendered to Oakmall.
- We do not consider that, on the evidence we heard, there is any basis whatsoever for classifying the sums received by the Appellants as distribution of the profits, or a share of the profits, of a business carried on by Oakmall and the Appellants in partnership or the distribution of assets of the partnership.
- We would have reached the foregoing views without the benefit of the English case law cited to us. The cases referred to seem to us to be entirely consistent with the conclusions we have reached.
- We dismiss the appeal and uphold HMRC's decision compulsorily to register the Appellants for the purposes of VAT. Miss Strachan indicated that if successful she would not seek expenses. Accordingly, no expenses are found due to or by either party.
TC00038
Appeal number: EDN/08/17
Value Added Tax: compulsory registration, partnership, property consultant entitled to share of profit; whether remuneration or distribution of partnership funds.
TAX
PRIVATE & CONFIDENTIAL LIMITED Appellants
TRIBUNAL: Tribunal Judge: J Gordon Reid, QC., F.C.I.Arb.,
(Members): S A Rae, LLB., WS
Ian M P Condie, CA
Sitting in public in Edinburgh on Wednesday 3 and Thursday 4 December 2008
Mr Bill Rodgers - for the Appellants
Ms Julie Strachan, Shepherd + Wedderburn LLP - instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
Introduction
Facts
"TERMS OF ALLOWANCES/PAYMENTS TO BE MADE TO MR W RODGERS (PRIVATE & CONFIDENTIAL ACCOUNT) BY OAKMALL SCOTLAND LIMITED
RE: SALE OF THE LANDS KNOWN AS WEST RIGG, CRAIGINN TERRACE, BLACKRIDGE
"TERMS OF PAYMENTS TO BE MADE TO MR W RODGERS (PRIVATE & CONFIDENTIAL ACCOUNT) BY OAKMALL (SCOTLAND) LIMITED
RE: SALE OF THE LANDS KNOWN AS WEST RIGG, CRAIGINN TERRACE, BLACKRIDGE
"I confirm that Oakmall (Scotland) Ltd entered into a partnership with Private & Confidential Ltd for the development of the (Site).
I also confirm that Private & Confidential Ltd were not employed at any time as a land buyer, but continually involved at all stages from the initial planning process to the negotiations & sale of the land."
His oral evidence and the documents do not bear out the assertion of partnership.
Discussion
Disposal
Note 1 In the documents produced, the word Scotland sometimes appears in brackets and sometimes it does not. We assume it is the same company; no submission or evidence to the contrary was advanced. [Back] Note 2 It appears from other documents before is that Manorland referred to throughout in this document should be Manorlane
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