Evidence

“Recording the Reid & Co commission invoices in the books and records

10. The VAT assessment issued on 8 December 2008 concerns four invoices from Reid & Co in respect of intermediary services provided during the 12 months to 31 March 2005. These invoices were dated 31 March 2005 but were issued in January 2006 and were reflected in the audited accounts of the recipient companies for the year to 31 March 2005. These accounts were signed by me as Company Secretary on 20 January 2006. I exhibit copies of the financial accounts of the four relevant companies for the year to 31 March 2005 at Exhibit D.

11. When the Reid & Co invoices were received, apart from that relating to GW223 Ltd discussed below in paragraph 12, they were entered into the books and records of the three companies (other than GW223 Ltd) by posting the invoiced amounts to the Creditors Control Account in each company, with an equal and opposite debit entry to the Commissions Payable account, reflected in the relevant company's Profit and Loss Account. Book entries for the invoices were then made which debited the Creditors Control Account for that company and credited the inter-company account for GW223 Ltd. A corresponding entry in the books and records of GW223 Ltd was made debiting the inter-company account with each of the three companies (Hercules Products Ltd, Wares Hercules Ltd and JMNI Ltd) and crediting the Mark Reid Directors Loan Account in GW223 Ltd for the same amount. Thus the commission due to Reid & Co was correctly reflected in the Profit and Loss Account of each company. The bookkeeping was carried out in this way for administrative convenience.

12. The Reid & Co commission invoice to GW223 Ltd was credited to the Mark Reid Directors Loan Account in GW223 Ltd and debited to the Commissions Payable account reflected in the Profit and Loss Account.

The Mark Reid Directors Loan Account

13 . The Mark Reid Directors Loan Account in GW223 Ltd is a ledger account recording amounts due to me including Reid & Co and how these have been dealt with. This is the only Directors Loan Account that exists; I do not have a Directors Loan Account when [sic] any of the other three companies concerned. At no time have I owed any monies to GW223 Ltd and the Directors Loan Account has always been in credit. Exhibit E details the postings in the Mark Reid Directors Loan Account for GW223 Ltd for the period 1 April 2004 to 31 March 2006.

Payments from GW 223 Ltd

14. Exhibit E shows the four commission invoices which are the subject of the V AT assessment, credited to the account with the date 31 March 2005 (even though the posting to the account took place in January 2006). No payments have been made in respect of these four invoices. The ledger shows four payments to me between 1 October 2005 and 31 March 2006 all of which relate to loan withdrawals and were not related to the commission invoices.

15. Three payments were made to me in early 2005, within the period of six months after 30 September 2004: £160,000 on 14 February 2005; £203,150 on 25 February 2005; and £100,000 on 4 March 2005. None of these payments was specifically allocated to any commission amounts due to me. The payments were made before the commissions represented by the V AT assessment were credited to the Directors Loan Account in January 2006, with the date 31 March 2005.”

(1)        The accounting adopted was for administrative ease. 

(2)        It was effected by a lady in the firm’s accounts department who he believed would have given no consideration to the legal niceties or legal effect of the various bookkeeping entries. 

(3)        The accounts of the companies had been finalised by the auditors. 

(4)        Mr Reid had signed some of those accounts as company secretary of the relevant company.

“RELATED PARTY DISCLOSURES

Both Mr Simon Emblin and Mr Mark Reid are directors and shareholders of the company. During the year the company has traded with both JMNI Associates and Reid and Co of which Mr Simon Emblin and Mark Reid is sole proprietor and partner respectively

During the year the company has traded with both businesses and been charged commission of £2,512,004 (2004: £591,586) by JMNI Associates and £2,512,004 (2004: £591,587) by Reid & Co Solicitors in respect of these transactions. Reid & Co Solicitors have recharged expenses of £48,338 to GW223 Limited

At 31st March 2005 no amounts are owed to or from Reid & Co Solicitors and JMNI Associates.

Exemption has been claimed under Financial Reporting Standard number 8 regarding the disclosure of group transactions and transactions with associated companies on the basis that consolidated accounts are publicly available.”

(1)        JMHI Associates was the business style of Mr Emblin. 

(2)        The reference to Reid & Co was really to Mr Reid himself – he was the only equity partner in the firm and so the firm was his alter ego.  The Commissions were invoiced by Reid & Co. 

(3)        In stating that no amounts were owed to Reid & Co the note to the accounts was referring to legal fees; the firm was not owed any legal fees by the company.  The note should not be read as stating that nothing was due to Mr Reid; he certainly had not treated the commissions as satisfied. 

(4)        Mr Reid accepted that the 2005 and 2006 accounts of GW223 were audited accounts and had been signed by himself as company secretary on behalf of the board.

“RELATED PARTY DISCLOSURES

Mr Simon Emblin, Mr Mark Reid and Mr Stuart Drury are directors of the company. During the year the company has traded with Reid and Co Solicitors a firm in which Mark Reid is partner. The company has also traded with Redbox Associates, a business in which all directors of GW223 Limited are partners.

During the year Reid & Co solicitors have recharged expenses of £194,602 (2005:£48,338) to GW223 Limited. At the end of the year the company owes £1,922,339 to Mark Reid.

During the year Redbox Associates has charged introductory commission to GW223 Limited of £747,000 (2005 - £ni1). At 31st March 2006 £1,768,819 is outstanding to Redbox Associates (2005: £Nil).

Exemption has been claimed under Financial Reporting Standard number 8 regarding the disclosure of group transactions and transactions with associated companies on the basis that consolidated accounts are publicly available.”

“The schedule below is re the directors loan account at 31^st March 2006 from our files. The entry for £4,365,729.27 is to clear the balance to nil. In this year you reassigned many of the balances from DLA to related party balances. As far as your SAGE is concerned a one line entry would be made rather than each individual entry being made.”

Legislation

“(4) The Commissioners shall not be liable on a claim under this section—

   (a)     to credit an amount to a person under subsection (1) or (1A) above, or

   (b)     to repay an amount to a person under subsection (1B) above, if the claim is made more than 3 years after the relevant date.”

“Where this regulation applies… services shall, to the extent that they have not already been treated as supplied …, and to the extent that they have been provided, be treated as separately and successively supplied … at the end of the period of twelve months after [1st October 2003] … and thereafter at the end of each subsequent period of twelve months.”

“… where services … are supplied for a period for a consideration the whole or part of which is determined or payable periodically or from time to time, they shall be treated as separately and successively supplied at the earlier of the following times—

(a)     each time that a payment in respect of the supplies is received by the supplier, or

(b)     each time that the supplier issues a VAT invoice relating to the supplies.”

“… a supply is treated as taking place each time that a payment (however expressed) is received or an invoice is issued, the supply is to be treated as taking place only to the extent covered by the payment or invoice.”

Appellant’s case

“Whilst “payment” can mean something other than the simple transfer of cash, its meaning will depend upon the context. [HMRC’s officer witness] indicated that it was HMRC’s view that the payment was made when the accounts were signed. We note that in Customs & Excise Commissioners v Svenska International[1999] STC 406, when an invoice was issued representing 5 years accrued supplies there seems to have been no argument that any accrual of the amounts receivable and payable constituted payment. We also note that the purpose of Regulation 94B appears to be to deal with the issue of the provision of services between group companies which are not VAT grouped where neither regular payment nor invoicing occurs, and the recipient company could not reclaim all its tax. That at the least suggests that “payment” in Regulation 90 may not encompass the accrual of rights and liabilities in the accounts of the companies concerned.”

That approach must be correct.  Otherwise, other provisions of the VAT legislation – for example, bad debt relief – would become inoperable in practice.

Respondents’ case

“We agree with the passage in De Voil at A5.42 where the learned author says 'payment may be made by offsetting a debt owed against a debt due e. g. by journal transfer between purchase and sales ledger accounts, or by making a credit entry in an inter-company current account having a debit balance. The time of payment in these circumstances seems to be the date on which the appropriate entry is made in the accounting records.' It was pointed out by Lord Evershed MR in White v Elmdean Estates Limited [1959] 2 All ER 605 at page 610 (affirmed by the House of Lords at [1960] 1 All ER 306)) 'the word 'payment' in itself is one which and in the appropriate context may cover ways of discharging obligations, it may even … include a discharge, not by money payment at all, but by what is called 'payment in kind". In our view the tax point in this case was the date of the respective debits and credits and that the Value Added Tax returns were incorrect in that they did not use these dates as tax points.”

“Given that the payments, although made under arrangements which fettered the recipient's use of the money received, discharged the liability of the customer under the building contract and left the recipient with no right to sue for payment thereunder, I can see no alternative but to conclude that in each case payment was made before 1 June and accordingly that the Crown's contention that payment was not received until, in the cases of Faith and West Yorkshire, there was partial repayment of the loan and, in the cases of Dormers and Nevisbrook, the money was released from the deposit account, is unsustainable.”

1.     The right to payment is Mr Reid’s (trading as Reid & Co) rather than GW223’s.

2.     Note 14 to GW223’s 2005 accounts state that at 31 March 2005 no amount was owed to Reid & Co – thus the four companies’ obligations to pay the commissions to Mr Reid had been treated as having been discharged.

3.     There had been a two-stage accounting process whereby first the commissions were treated by the Three Sister Companies as owed to GW223, and then secondly GW223 credited the accrued rights to Mr Reid’s loan account.  That second stage constituted “payment” – Mr Reid obtained a benefit from GW223 that he could not have received from the Three Sister Companies because he had no director’s loan account with those companies.

4.     The credit by GW223 to Mr Reid’s loan account also constituted payment because it replaces the obligation to pay the commissions with a credit to the loan account.  As a result Mr Reid could not sue GW223 for payment of the commissions, albeit he could sue for any non-payment of his loan account.

5.     The final entry on Mr Reid’s loan account ledger was the withdrawal of the entire balance on 31 March 2006 – thus Mr Reid received the benefit of the whole of the loan account (including the commissions) on the last day of the relevant six month period.

Consideration

(1)        Can the 2005 accounts of GW223 be construed as evidencing “payment” of the liabilities?

(2)        Did the intercompany accounting between GW223 and the Three Sister Companies constitute “payment” of the liabilities?

(3)        Were the liabilities otherwise “paid” no later than 31 March 2006?

Can the 2005 accounts of GW223 be construed as evidencing “payment” of the liabilities?

1.     The Reid & Co invoices were booked by the four companies as liabilities.  The four companies then undertook intercompany accounting to show the Three Sister Companies as owing money to GW223 (rather than Reid & Co) and GW223 owing the aggregate amount of the invoices.  That liability of GW223 was booked by GW223 to the ledger account “MMR DIRECTORS LOAN ACCOUNT”.  That was done even though the invoices were issued by Reid & Co.  It was done by a member of the accounts staff without any deep consideration of possible implications; it was merely administratively convenient.  The accounts staff, and perhaps also the auditors, appear to have taken Mr Reid and Reid & Co to be interchangeable.

2.     At 31 March 2005 the balance on the ledger account “MMR DIRECTORS LOAN ACCOUNT” was £4,093,978.18.  That amount is included in the aggregate directors’ current accounts of £8,895,080 included as a current (ie falling due within one year) creditor in GW223’s statutory 2005 accounts, as shown in Note 9 to those accounts.  Thus the commissions were still outstanding and owed as at 31 March 2005.

3.     The company and its auditors then sow some confusion in drafting the related party disclosures note (Note 14) to GW223’s 2005 statutory accounts.  Having treated the commissions as amounts due to Mr Reid personally (ie as a director), they now describe the company as trading with Reid & Co and disclose the amount of commissions charged in the year.  I make no finding as to whether that was correct as a matter of company law and/or GAAP, just that it is how and why it was reported as it was.  Note 14 then discloses the balance due to Reid & Co at 31 March 2005 as nil – from the company’s ledgers that is correct because the commissions have been credited to the account of Mr Reid not that of Reid & Co. 

Did the intercompany accounting between GW223 and the Three Sister Companies constitute “payment” of the liabilities?

Were the liabilities otherwise “paid” no later than 31 March 2006?

Conclusions

Decision

Apportionment of the Assessment

Appeal Rights

PETER KEMPSTER

TRIBUNAL JUDGE

RELEASE DATE:  18 April 2013

ANNEX

Wording of reg 94B VAT General Regulations 1995 (SI 1995/2518) as in force at the date relevant to these proceedings

94B―

(1) This regulation applies in relation to the following supplies where they are provided in the circumstances referred to in paragraph (2) below—

·      (a)     supplies falling within regulation 85 above (leases treated as supplies of goods) other than any supply which is exempt by virtue of Group 1 of Schedule 9 to the Act or would be exempt but for the operation of paragraph 2(1) of Schedule 10 to the Act;

·      (b)     supplies falling within regulation 86(1) to (4) above (supplies of water, gas or any form of power, heat, refrigeration or ventilation);

·      (c)     supplies falling within regulation 90 above (continuous supplies of services) other than any supply which is exempt by virtue of Group 1 of Schedule 9 to the Act or would be exempt but for the operation of paragraph 2(1) of Schedule 10 to the Act.

(2) The circumstances referred to in paragraph (1) above are—

·      (a)     that the person making the supply and the person to whom it is made are connected with each other, or

·      (b)     one of those persons is an undertaking in relation to which the other is a group undertaking (except where both undertakings are treated under sections 43A to 43C of the Act as members of the same group), and

·      (c)     the supply is subject to the rates of VAT prescribed in section 2 or section 29A of the Act.

(3) But this regulation does not apply where a person can show that a person to whom he has made a supply of a description falling within paragraph (1) above is entitled under sections 25 and 26 of the Act to credit for all of the VAT on that supply.