[2012] UKFTT 423 (TC)
TC02105
Appeal number:
TC/2010/8417
VAT – disallowance of
input tax claim – question of fact whether expenditure used or to be used for
purpose of business – appeal allowed in part
FIRST-TIER TRIBUNAL
TAX CHAMBER
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DARRAGH HOUSE
LIMITED
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE BARBARA MOSEDALE
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Sitting in public at Bedford Square London on 17 May 2012
Mr S Reeves, director, for the
Appellant
Miss L Ratnett, HMRC officer, for the
Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
Darragh House appealed against assessments dated 12 January 2010 for
repayment of input tax which HMRC considered was incorrectly reclaimed by the
Company in its VAT returns for the periods 07/06 to 10/09. The review decision
dated 14 July 2010 resulted in a reduced assessment.
2.
The original assessments were for £8981.00 and £1371.00 (total
£10,352). The review decision 14 July 2010 modified the assessments to a total
of £9823. After the appeal was lodged the amounts HMRC considered due for 04/07
to 10/09 were further reduced on the basis of information provided by the
appellant although this was never formalised in reduced assessments. By the
time of the hearing HMRC considered that that what was in issue was some £3,076
for 04/07 to 10/09 (and an appropriate percentage of the input tax reclaimed in
07/06 to 01/07).
3.
The appeal was lodged out of time but HMRC raised no objection to this
and I admitted the appeal as it had been clear to HMRC that the appellant was
disputing the assessments.
The facts
4.
Evidence was given by Mr S Reeves, the director and shareholder of the
appellant. Evidence on behalf of HMRC was given by Ms Joanne Shuttleworth who
was the VAT officer who carried out the inspection and Ms Sarah Bates, who
carried out the review.
5.
From this evidence I find the following facts:
6.
Mr Reeves is a surveyor. He chooses to operate his business via limited
companies. Each “project”, being the development of land, is owned by a
different company. In jargon, it is referred to as a special purpose vehicle
or SPV.
7.
One company which was a constant was Darragh House Limited. All the
work is done by this company and re-charged to the relevant SPV by way of
management charges.
8.
Mr Reeves evidence, which I accept and which was not challenged by HMRC,
is that business is cyclical and sometimes very profitable with a lucrative
project running. At other times, like now, there are no lucrative projects and
the business is surviving on the profits made in earlier periods.
9.
As a result of this cyclical nature, for some time the company submitted
VAT input tax claims while declaring virtually no output tax. A visit by HMRC
officer Joanne Shuttleworth took place in November 2009. At that point the
business had been showing virtually nil output tax for 4 years. The situation
had not changed at the date of the hearing.
10.
At the visit Mr Reeves produced the original receipts for the input tax
claims for periods 07/08, 10/08, 1/09, 4/09, 7/09 and 10/09. Later he produced
them for earlier periods. He was unable to produce and has never produced the
receipts for 01/07, 10/06 and 07/06 as these were in store.
11.
And the assessments the subject of this appeal were the result of that
visit.
12.
In the event, explanations provided by Mr Reeves has led HMRC to revise
the assessments as mentioned above. In particular, HMRC accepted that Darragh
House was genuinely incurring input tax on supplies to be made to an SPV which
under the contract with the SPV were not to be charged to the SPV until the
property owned by the SPV was sold. The property currently is let. HMRC have
allowed the Company to recover the input tax attributable to the services
supplied to this SPV which are yet to be charged to them
13.
After the information provided by Mr Reeves the assessments were reduced
as noted above. As at the date of the appeal the remaining input tax in
dispute was of 6 main types, as follows:
·
Invoices not addressed to Darragh House
·
Maintenance of “Redcar” telephone associated with alarm system;
·
Car park charges
·
Subsistence expenses;
·
Business entertainment;
·
Miscellaneous.
Invoices not addressed to Darragh House Limited
14.
It was not in dispute that the appellant had reclaimed VAT on invoices
which were addressed to other companies, principally Saga Property Services
Ltd. The amount in dispute was some £2,367.14 so this was by far the largest
element remaining in dispute.
15.
As a matter of law, s 24(1) Value Added Tax Act 1994 provides:
“… ‘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….
being …goods or services used or to be used for the
purpose of any business carried on or to be carried on by him.”
16.
Mr Reeves was aggrieved because the invoices were addressed to one of
his SPVs, in this case Saga Property Services Ltd, and Saga was VAT
registered. We accept his evidence that it was a mistake that Darragh House
had reclaimed the VAT: Saga should have done but had not. As far as Mr Reeves
was concerned it was merely a book entry error and HMRC had lost nothing as
Saga (he said) was fully taxable and entitled to reclaim its input tax. At the
outset, he said, he had asked for HMRC’s advice on how to put the matter right
but had not receive any help in putting matters right.
17.
But that does not affect the position with regards Darragh House: the
input tax was Saga’s and therefore Darragh House should not have reclaimed it.
It was not input tax used by the appellant for the purpose of any business
carried on by it; nor did it hold the correct documentary evidence (an invoice
addressed to Darragh House) in order to be able to reclaim it.
18.
I dismiss the appeal on this point.
19.
I sympathise with Mr Reeves’ position: the appellant must repay the tax
Saga may now be out of time to lodge its reclaim. Saga is not the appellant
here and I can make no ruling on this nor were any arguments addressed to me on
it. I merely draw to the attention of both parties that the provisions of
Regulation 29 VAT Regulations 1995/2518 are that the time limits start to run
from when the taxpayer “holds” the invoice. There may be a question here
whether Saga could be said to “hold” the VAT invoices in question at a time
when the appellant had included them in its records for the purpose of its own
VAT reclaim.
20.
But whatever is the answer to this question, so far as the appellant is
concerned its appeal in respect of VAT on invoices addressed to other persons
is dismissed.
Redcar alarm system
21.
It was Mr Reeves’ evidence which I accept that because his contents
insurance at Darragh House had to include business cover for the office, it was
a requirement of his insurers that he install and maintain a “Redcar” system.
I was informed that this system involved a telephone call being made
automatically if the burglar alarm at the house was tripped. The call was to a
manned centre, whose response to the automatic phone call would be to ring the
nominated key holder on the policy. The key holder (Mr Reeves’ neighbour)
would be asked if there were visible signs of entry: if there were the manned
centre would place an emergency call to the police. The Redcar was expensive as
not only did the phone have to be installed but there was an annual maintenance
charge. It was the VAT on this annual maintainance charge that the appellant
sought to reclaim and HMRC disallowed.
22.
It was not clear to me or to Mr Reeves why this gave him better
protection than simply having an ordinary burglar alarm: it was his evidence,
which was not challenged by HMRC and which I accept, that he only installed it
because it was a condition of the insurance policy and that that condition was
only imposed because Mr Reeves’ home was also the company’s business premises.
It was therefore his case that the costs of maintaining the Redcar phone line
was exclusively a business expense and should be allowed in full.
23.
HMRC, on the other hand, said they were prepared to allow him 50% on the
basis of mixed business and private use under s24(5) VATA. They pointed out
that Mr Reeves had not produced any documentary evidence that the Redcar system was fitted as a requirement of having business premises insurance.
24.
Mr Reeves accepted, and I find, that if the burglar alarm was tripped
in the domestic part of the house, it would benefit from the Redcar system as
the automatic phone call to Redcar would be made whether the alarm was tripped
in the domestic or business part of the property.
The law
25.
Section 24(5) VATA provides:
“Where goods or services supplied to a taxable
person … are used or to be used partly for the purposes of a business carried
on or to be carried on by him and partly for other purposes, VAT on supplies…
shall be apportioned so that only so much as is referable to his business
purposes is counted as his input tax.”
Conclusion
26.
I accept the oral evidence of the appellant. The input tax incurred by
the appellant in respect of the Redcar system, was I find, incurred because
otherwise the appellant could not insure its business premises. I am satisfied
that Mr Reeves would not have installed the Redcar system were it not a
condition of the appellant’s insurance policy.
27.
Therefore, the installation of the Redcar system was used for the
purpose of the appellant’s business and not used for any other purpose and in
particular not for a private purpose of Mr Reeve’s. While there was incidental
benefit to Mr Reeves, in that his domestic accommodation as well as the
appellant’s business premises, had the benefit of the Redcar system, this was
not the purpose for which it was used. Its purpose was to obtain insurance for
the business premises.
28.
I agree with and follow the decision of the VAT & Duties Tribunal
where a similar issue arose (on very different facts) in the case of Thorpe
Architecture Ltd (1992) VTD 6955. I agree with the statement of the
chairman:
“Expenditure incurred wholly for business purposes
may produce an incidental benefit of a personal or non-business kind but it
does not thereby lose the character of business expenditure…”
29.
I allow the appeal in relation to the expenditure on the maintenance of
the Redcar system.
Car park charges at airports
30.
Mr Reeves’ evidence was that these charges were incurred when he parked
at the airport car park to use the mainline railway line to travel into London for business meetings, or when he picked someone up for a business meeting from the
airport or airport station. He pointed out that all charges were short-stay
incurred Monday-Friday in the day time and it was not a case of him parking his
car while he was on holiday for two weeks.
31.
It was his evidence that he frequently travelled to London on business
and would not have travelled to London Monday-Friday other than for business.
He said he attended meetings connected with existing or potential future
projects. This evidence was not challenged and I accept it.
32.
I was not shown the actual receipts.
33.
He complained that HMRC were inconsistent in that they had allowed the
Company’s other parking expenses but just disallowed it where the car park used
was at an airport, even though both airports used were also mainline stations.
34.
HMRC did not challenge Mr Reeves’ evidence on this but maintained that
the VAT should be disallowed on the basis Mr Reeves had not shown sufficient
detail for them to be satisfied that it was money spent exclusively on business
purposes.
35.
I accept the appellant’s evidence that the car parking expenses were
incurred for business purposes (business meetings) and therefore the appeal is
allowed in relation to the VAT on the car parking charges.
Subsistence
36.
Mr Reeves’ case was that these receipts fell into two categories.
Sandwiches at motorway service stations and meals at Little Chefs when he was
travelling on business and meals on a Friday night in a local restaurant when
Mr Reeves and his company secretary (his wife) ate out and, he said, discussed
the business.
37.
Mr Reeves accepted that the latter receipts were not business expenses
but says at the time, and before Ms Shuttleworth explained it to him, he had
not understood this. He accepted that it was right that the input tax on the
local subsistence should be disallowed but considered he was still entitled to
reclaim the VAT in so far as he was buying sandwiches while travelling on
business.
38.
Taxpayers can only recover expenses “used or to be used for the purpose
of any business” (S 24 VATA 94 as cited above). Lunch expenses for employees
and directors of a taxpayer are ordinarily not for the purpose of the business
as it is simply necessary for people to eat.
39.
As accepted by all parties, the Company is not allowed local subsistence
costs, even if business was discussed: a business meeting could have easily
been held at the office and the fact it was not means that the purpose of the
meal out was more than to discuss the business.
40.
It is only where an employee or director is forced by the needs of
business to purchase food it would not otherwise have done, such as when
travelling for business, that the expense may be said to be for the purpose of
the business.
41.
Mr Reeves did not bring the receipts with him. From HMRC’s schedule I
can see that some of these expenses are labelled “local subsistence” and some
“subsistence”. the appellant agrees it is not entitled to the VAT labelled
“local subsistence”. On those labelled “subsistence”, the VAT involved is
small sums (between £0.58 and up to £18). Mr Reeves suggests they were largely
receipts from motorway service stations: Ms Shuttleworth’s recollection is
that the receipts were largely from restaurants and pubs.
42.
Bearing in mind the diversity in the sums involved I can discern that
they cannot largely be just sandwiches from motorway service stations and
therefore on this I find Mr Reeves’ recollection is faulty. Therefore, I
conclude that the appellant has not made out its case that these expenses were
business expenses rather than Mr Reeves just choosing to have a meal out.
43.
I dismiss the appeal on this point.
Business entertainment
44.
The appellant recovered 35% of the VAT on invoices which related to
business entertainment. He said he recovered 35% because he had been advised
this was the right thing to do by HMRC as he was entitled to recover the
subsistence element of entertainment.
45.
I am not concerned (having no judicial review powers) with what HMRC
said to Mr Reeves. It is certainly not the law that a taxpayer is entitled to
recover VAT on all subsistence expenses for its employees. Outside the context
of business entertainment, it can recover VAT incurred on feeding its employees
only where the expenditure was incurred for a business purpose. Within the
context of business entertainment the input tax is blocked, unless it is staff
rather than business entertainment (Ernst & Young VTD 15100) as the
Value Added Tax (Input Tax) Order 1992 provides:
“5(1) Tax charged on any goods or services supplied
to a taxable person, …is to be excluded from any credit under section 25 of the
Act, where the goods or service in question are used or to be used by the
taxable person for the purposes of business entertainment.”
46.
I was given no evidence on the nature of these supplies other than the
appellant accepted that they were for business entertainment. The VAT incurred
in respect of them is therefore blocked from recovery and the appeal dismissed
in so far as it relates to business entertainment.
Miscellaneous
47.
HMRC’s schedule showed that other sums of input tax had been disallowed.
I note for instance that some £6.17 was disallowed on the basis it was
Portugese VAT. If correct (and Mr Reeves did not suggest otherwise) this
disallowance was plainly correct.
48.
It was for the appellant to show me that HMRC was wrong to disallow this
input tax. I accept his evidence that the expenses in relation to the fridge,
torch, engineer and lazer level were for the purpose of the appellant’s
business as provider of management services. From what little information I
was given, I was not satisfied that the other expenses were business
expenses.
49.
In respect of the various miscellaneous items I allow the appeal to the
extent stated above. but not otherwise.
Quantum
50.
As Mr Reeves produced no records for the earliest three quarters, the assessments
for the periods 07/06 to 01/07 were estimates based on the percentage of
overclaimed input tax in the other periods of the assessment. As HMRC accepted
at the hearing, the percentage used to calculate these assessments must be
revised to take account of the reductions in the assessments for the later
periods where records are available: the percentage must be reduced to reflect
the reductions allowed by HMRC before the commencement of the hearing and the
reductions allowed by me in this decision notice.
51.
This decision is therefore, in respect of periods 07/06 to 01/07 one of
principle only. If the parties are unable to agree the quantum of the
assessment for these three quarters, either is at liberty to revert to the
Tribunal for a ruling.
52.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
BARBARA
MOSEDALE
TRIBUNAL JUDGE
RELEASE DATE: 27 June 2012
