Cloud Electronics Holdings Ltd v Revenue & Customs [2012] UKFTT 699 (TC) (14 November 2012)
DECISION
1.
Cloud Electronics Holdings Limited (Holdings) appeals two HMRC
decisions:
1.) A decision to assess
Holdings pursuant to S73 of the Value Added Tax Act 1994 in the sum of £8,487
(plus interest) representing input tax claimed in the period 12/08 but
disallowed by HMRC. This decision was notified to Holdings by Notice of
Assessments dated 21.12.2009. In fact £1,312.50 is not in dispute so the figure
appealed is £7,135.36.
2.) A decision to reject a
Voluntary Disclosure, submitted by Holdings’ representative on 25.09.2009,
claiming input tax incurred in the period 12/08 in the sum of £10,807. This
decision was notified to the representative by letter dated 20.10.2009.
2.
Holdings trades from premises in Sheffield. It was incorporated on
28.02.08 as the vehicle for a management buy-out of Cloud Electronics Limited
(Cloud) and was registered for VAT with effect from 01.03.2008. Holdings
acquired the entire share capital of Cloud for £5.4 million. None of the former
shareholders of Cloud are shareholders of Holdings and they have no further
investment in the company. The former officers of Cloud involved in the
acquisition of Holdings are Simon Curtis and Clare Powell (referred to as “the
management buy-out team”).
3.
The input tax in issue related to professional fees for services of due
diligence and other services rendered prior to the incorporation of Holdings.
Professional advisers included:
·
DLA Piper UK LLP Solicitors providing legal advice
·
Ford Campbell Freedman Corporate finance advisers
·
Hawsons Accountants undertaking the
due diligence exercise
·
Walker Morris Solicitors advising Royal Bank
of Scotland
4.
Letters of Engagement have been disclosed together with relevant
invoices; the supplies in respect of which input tax was claimed were as
follows:
INPUT TAX PERIOD 12/08 RETURN
VOLUNTARY DISCLOSURE
DLA
Piper £168 + £1,312.50 Allowed £6,256.52 Refused
Ford Campbell £4,550.00 Refused
Freeman
Hawsons £2,800.00 Disallowed
Walker Morris £4,375.36 Disallowed
Brown
McLeod £1,312.50 – Disallowed
but not now in dispute
5.
The engagement letters are considered in turn.
6.
DLA Piper
There
were separate engagement letters for (i) drawing up consultancy agreements and
(ii) legal advice in respect of the management buy-out. A very large amount of
work was to be done by DLA Piper with extensive documentation covering every
aspect of important elements of financing and contractual agreements relating
to the business of Cloud in the context of the formation of Holdings. The
letter referring to “Consultancy Agreements – Terms of Engagement” was dated
07.04.2008 and related to supplies recognised by HMRC as made to Holdings. The
other letter, dated 16.01.2008, was addressed to Mr Curtis and Ms Powell;
Holdings had not yet been incorporated and was known as ‘Newco’; it was an
Engagement Letter headed “Proposed Buy-out of Cloud Electronics Limited” and
purported to confirm that DLA Piper would be acting “On behalf of management”
and “On behalf of Newco”. Signed agreement and acceptance was required of both
Mr Curtis and Ms Powell as authorised signatories of Newco.
7.
The input tax claimed in Holdings’ 12/08 return was allowed because it
related to advice on employment and post-competition matters, both of which
were commissioned by Holdings and were used by it for its business purposes.
8.
HMRC took the view that the input tax claimed in the Voluntary
Disclosure related to advice commissioned by Mr Curtis and Ms Powell; DLA Piper
were undertaking to “act on behalf of the management buy-out team in relation
to the proposed buy-out by a new company to be incorporated for the purpose of
Cloud Electronics Limited.” It was considered that:
(a)
the supply had not been made to Holdings and
(b)
the services had been consumed within the acquisition process rather
than for the ongoing business of Holdings.
Accordingly input tax was refused.
9.
Ford Campbell Freeman
This firm rendered Corporate Finance advice to the
management buy-out team and to Holdings. There was an incidental benefit to
Royal Bank of Scotland (which was providing loan finance). The engagement
letter dated 11.01.2007 (incorrectly typed as 2008) was addressed to Simon
Curtis but stated explicitly that “When Newco has been formed, we shall issue
an engagement letter addressed to it seeking its formal endorsement of the
terms of our engagement”. HMRC concluded from all the circumstances that the
supply in question was not made to Holdings and was in any event consumed
within the acquisition process. Accordingly this element of the voluntary
disclosure was refused.
10.
Hawsons
The engagement letter was for due diligence work in
connection with the proposed acquisition of Cloud Electronics Limited by a new
company (‘Newco’) and was addressed to Simon Curtis and Royal Bank of Scotland. The management buy-out team invested substantial sums in the buy-out and were
rightly anxious to have the benefit of professional advice as to the suitability
of their investment. Assurances as to the viability of the business were
essential for the management buy-out team and Holdings. If the due diligence
exercise had been negative then the buy-out would not have proceeded and
Holdings would not have carried out any active steps.
11.
HMRC considered that it was clear that the service was commissioned by
Mr Curtis or Royal Bank of Scotland to inform their decision whether to invest;
the service was not commissioned by Holdings which had not been incorporated at
the commissioning stage and was not supplied to it. It was further considered
that, as the service was used to inform the investment decision of Mr Curtis
and Royal Bank of Scotland, rather than in carrying out the ongoing business of
Holdings, the input tax could not be recovered by Holdings.
12.
Walker Morris
These solicitors primarily represented the interests of
Royal Bank of Scotland but their services were also of benefit to the
management buy-out team and Holdings. Holdings was unable to produce a copy of
the engagement letter but contended that, as it was ultimately the beneficiary
of the service supplied, it was liable for the costs which it paid in full.
Input tax was claimed on the 12/08 return on the apparent basis that it was
sufficient that it had obtained something of value for the purposes of its
business in return for the payment of the fees. HMRC considered that the
service was commissioned by and supplied to Royal Bank of Scotland and as Holdings was not the commissioning body and the services were not used for
its ongoing business purposes the input tax would be disallowed.
13.
Brown McLeod
An engagement letter was not disclosed. Brown McLeod had
acted as accountants for Cloud for many years. In the absence of evidence that
the supply was made to Holdings for the purposes of its ongoing business the
input tax was disallowed. This is evidently no longer in dispute.
14.
In his evidence to the Tribunal Mr Curtis says that he does not believe
that the letters of engagement were ever ratified by Holdings.
15.
Holding’s case, in summary and as outlined in the Notice of Appeal dated
15.01.2010, is that the benefit of the services was received by Holdings who
paid for them and therefore should be able to recover the input VAT on the
basis that it received the services. Reference was made to a number of cases
namely:
Mono
Global (18559)
Redrow
Group PLC
Airtours
Holiday Transport Limited (TC00201)
16.
The Notice of appeal went on to say that “The fact that the company was
not incorporated is not relevant as pre-incorporation expenses can be claimed
under SI 1995/2518”. It was confirmed that £1,312 in the Brown McLeod invoice
was now accepted but with the Voluntary Disclosure of £10,807 being refused
there remained a total of £17,982 VAT in issue.
17.
The relevant legislation is S24(1) of the Value Added Tax Act 1994:
“Subject
to the following provisions of 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 ...
being (in each case) goods or services used or to be used
for the purposes of any business carried on by him.
18.
HMRC’s position, therefore, is that no element of the input tax which
was disallowed or refused was supplied to Holdings for the purposes of its
ongoing business; in each instance the supplies were made to another entity for
the benefit of that entity or were consumed within the acquisition process or
both; Holdings cannot then establish any entitlement to deduction of the
disputed input tax.
19.
The Tribunal accepts that in order for an input tax claim to be valid,
the claim must be made by the person to whom the supply was made. This
fundamental principle overrides the question of who may have paid for the
supply in question or who may have possession of the relevant invoice or other
evidence. In certain circumstances it is common practice for a third party to
pay for goods or services which are, in fact, supplied to someone else; in such
cases the person making the payment does not have the right to deduct input tax;
this applies whether the payment was made due to a legal requirement or is
simply a normal commercial practice; only the recipient of the supplies is
entitled to recover input tax
20.
HMRC has, therefore, correctly observed in correspondence that for VAT
to be a person’s input tax there are two questions to be satisfied: the first
is the “to whom” question – who received the supply? If the supply is indeed to
the person concerned then the second question is whether that supply is used by
that person for a business purpose – the “purpose” question.
21.
A taxpayer has to succeed on both parts of S24(1). If he falls on the
first part (“to whom”) the second part (“purpose”) does not arise. It is these
factors which need to be considered when making a claim for recovery of input
tax.
22.
It is not in dispute that Holdings paid for the services rendered by the
various suppliers. The Tribunal has to consider whether they received anything
for their payments.
23.
The Tribunal has noted the case of Customs and Excise Commissioners v
Redrow [1999] STC 161 in which it is stated that in these circumstances
exact contractual relationships are not of primary importance. In The
Commissioners for Her Majesty’s Revenue and Customs v Airtours Holidays
Transport Limited NCN [2010] UKUT 404 (TCC) the Upper Tribunal, agreeing
with Lord Hope in Redrow, stated at Paragraph 16 of its decision that:
“The
principle is that where the person contracted for a service primarily for the
benefit of a third party and paid for it, the question to be asked was “Was
something being 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?” (Lord Hope); or “did he obtain anything – anything at all –
used or to be used for the purposes of his business in return for that
payment?” (Lord Millett), which is also expressed as “something of value” in
his conclusion. These questions are aimed at deciding whether the payer
received something to be used for the purpose of its own business even though
the main service was supplied for the benefit of a third party”.
24.
The engagement letters refer, of course, to the management buy-out team
as well as Newco. HMRC take the view that the parties securing benefit from the
services being rendered were the management buy-out team but not Newco
(Holdings).
25.
It is clear that Holdings had not yet been incorporated at the dates of
the Engagement letters: those letters were sent by the professional advisers in
January 2008; the date of incorporation was 29.02.2008. The Tribunal is invited
to consider whether services can be obtained by an entity that does not yet
exist.
26.
The services of the professional advisers were rendered over a period of
time which certainly ran into the period after the incorporation of Holdings.
In fact, if the acquisition of Cloud by Holdings had not proceeded there would
still have been a liability for those professional fees but at a much reduced
level. It must be right to say that most of the work will have been done after
the incorporation date 29.02.2008. Furthermore, and importantly, the tax points
of the professional advisers’ accounts were all in March and April 2008 i.e.
after the date of Holdings’ incorporation. Therefore the services were largely
obtained by an entity that did indeed exist.
27.
The exercise being carried out by some of the professional advisers was
a Due Diligence exercise. This was carried out not only on the initial
instructions of the management buy-out team but also at the request of Royal
Bank of Scotland which was providing funding to Holdings to assist with the
acquisition. The principal purpose of the Due Diligence report for that Bank
was “to assist the Interested Parties to make a decision as to whether or not
to provide the funding for the acquisition of [Cloud]” (undated instruction
letter from Royal Bank of Scotland received by Hawsons on 21.01.2008).
28.
It is important to note that the Due Diligence exercise was being
carried out, certainly as far as the management buy-out team were concerned, as
a mechanism to enable them to confirm a decision to acquire Cloud – a decision
that had been made during the previous year. Mr Curtis, who has given oral
evidence to the Tribunal, had begun working for Cloud in 2007 with the
intention of managing a management buy-out. He was following professional
advice in using Holdings as a vehicle for the acquisition. The use of this
vehicle was therefore planned and all the professional advisers were aware of
its use when sending their initial letters of engagement.
29.
Furthermore the Tribunal determines that the advice, from which the
management buy-out team benefitted, was not advice whether to invest in
Holdings – a decision that had been made some six months previously – but
rather advice on whether Holdings should invest in Cloud i.e. the advice being
addressed to Holdings.
30.
The professional advisers were therefore aware (and stated explicitly in
their engagement letters) that they were to be acting for Holdings who would be
their client and with whom they would deal. It is noted that DLA Piper’s first
Engagement Letter was addressed to “Simon Curtis and Clare Powell” but after
the incorporation of Holdings they sent a further letter on 07.04.08 concerning
“Consultancy Agreements – Terms of Engagement”, to “Mr S Curtis, Cloud
Electronics Holdings Limited” and in that letter they confirmed that “our
client in this matter will be “Cloud Electronics Holdings Limited”. Therefore
by that time Mr Curtis had the authority of his directorship of Holdings to
instruct these professional advisers who were to do work and supply services
for Holdings thereafter.
31.
It was always the intention of the management buy-out team to create a
Holding Company for the purpose of acquiring and managing Cloud. All of the
professional advisers knew that. By the time the letters of engagement were
sent out the way forward was clear and was acknowledged by the professional
advisers. In so far as Walker Morris was reporting direct to the Royal Bank of Scotland it was nevertheless acknowledged that Holdings was to be responsible for their
fees so, again, the true intentions of all parties was known and reflected in
the subsequent progress of the transaction of acquisition.
32.
Mr Chapman draws the attention of the Tribunal to BAA Limited v The
Commissioners for her Majesty’s Revenue and Customs [2010] UKFTT 43(TC) and
the observations of the First-tier Tribunal in that case concerning the
requirement to be carrying out economic activity as core to the concept of an
ability to recover input tax. The matter was considered in Wellcome Trust Ltd
v Customs and Excise Commissioners [1996] STC 945, another First-tier
Tribunal case, at paragraph 101: a passage was recited from Polysar
Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen [1993] STC 222, paragraph 239 of which reads:
“The
mere acquisition of financial holdings in other undertakings does not amount to
the exploitation of property for the purposes of obtaining income therefrom on
a continuing basis because any dividend yielded by that holding is merely the
result of ownership of the property. It is otherwise where the holding is
accompanied by direct or indirect involvement in the management of the
companies in which the holding has been acquired, without prejudice to the
rights held by the holding company as shareholder.
...
art 4 of the Sixth Directive [EC Council Directive 77/388] is to be interpreted
as meaning that a holding company whose sole purpose is to acquire holdings in
other undertakings, without involving itself directly or indirectly in the
management of those undertakings, without prejudice to its rights as a
shareholder, does not have the status of a taxable person for the purpose of
VAT and therefore has no right to deduct tax under Art 17 of the Sixth
Directive.”
33.
Mr Chapman submits that the only management services carried out by
Holdings related to the management of the debt that arose on acquisition of the
shares in Cloud and that Cloud has simply carried on trading as before
irrespective of the change of ownership.
34.
The management services carried by Holdings went further than managing
debt. It is noted from the Witness Statement of Mr Curtis that Holdings
submitted a VAT return on 08.01.2009 for the long period 01.03.2008 to
31.12.2008 and this showed output VAT due on management services to Cloud
Electronics of £91,400 (and input VAT relating to advisers’ fees of £9,968.36).
VAT was due and paid in the sum of £81,431.64. Management charges had therefore
been in excess of £450,000 which is a substantial sum and it is therefore
concluded that Holdings was supplying substantial management services to Cloud
and this was genuine economic activity. The management charges were not based
upon the salaries of the directors (the two companies sharing the same
directors); Cloud itself paid the directors’ salaries.
35.
The Tribunal therefore accepts that the management charges reflected the
costs incurred by Holdings in managing the group and that this was genuine
economic activity.
36.
Addressing a further point taken by Mr Chapman, the Tribunal has
considered whether there is a direct and immediate link between Holdings’ input
tax and its ongoing output tax. Since it has been carrying out an economic
activity, as stated above, it is not difficult to conclude that there is such a
link. Mr Chapman speculates whether Holdings has, in reality, paid for the
various services and whether there may possibly have been some recharge to
Holdings, with Holdings in fact acting as agent for Cloud. It will suffice to
say that there is no evidence to support such an assertion.
37.
The Tribunal concludes, therefore, that services were indeed supplied to
Holdings which was carrying out economic activity at the material times and was
certainly incorporated by 29.02.2008 and registered for VAT with effect from
01.03.2008. As stated above much, and indeed most, of the professional
advisers’ work was done, and services supplied, after the dates of the letters
of engagement in January 2008 and after the dates of incorporation and
registration for VAT. By that time Holdings was carrying out the very activity
for which it was formed, namely to facilitate the acquisition and conduct of
the business of Cloud.
38.
The two tests in S24(1) were therefore satisfied at the time the
professional advisers sent out their engagement letters, those letters
reflecting the intentions of the parties at the time they entered into legal
relations.
39.
Accordingly this appeal is allowed in respect of each of the relevant
invoices issued by DLA Piper, Ford Campbell Freeman, Hawsons and Walker Morris.
40.
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.
W D F COVERDALE
TRIBUNAL JUDGE
RELEASE DATE: 14 November 2012
