United Kingdom VAT & Duties Tribunals Decisions

 


Rathbone Community Industry v Custom and Excise [2003] UKVAT V18200 (24 June 2003)

18200

VALUE ADDED TAX — exemption — option to waive exemption in relation to land — whether exercised — burden of proof — letter from chartered accountants notifying election — doubts about wisdom or necessity of election — appellant failing to discharge evidential burden — appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

RATHBONE COMMUNITY INDUSTRY Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Colin Bishopp (Chairman)

Sitting in public in Manchester on 12 June 2003

Nigel Gibbon, solicitor, for the Appellant

Jane Tepper of the Solicitor's office of HM Customs and Excise for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1. The single issue for my determination in this appeal is whether or not the Appellant has made an election to waive the exemption from VAT of property at Hebburn, Tyne-and-Wear. The Appellant sold that property in 1998 for £454,000 without requiring the purchaser to pay VAT in addition. The Respondents, acting on their belief that a valid election had been made, have assessed the Appellant to the VAT fraction of that sum, namely £69,106, and it is, formally, against that assessment that the appeal has been brought.
2. The Appellant was represented by Nigel Gibbon, a solicitor, and the Respondents by Jane Tepper of their Solicitor's office. I heard evidence from the Appellant's current finance director, Frank Billington, and I was provided with an agreed bundle of documents. Unfortunately, the documentation available to the parties is not complete and it is that factor which leads to the rather unusual circumstances of the case, and to the dispute between the parties. Nevertheless, much of the background to the case was not in contention.
3. The Appellant is a charitable organisation, whose main purpose is the provision of training for people with educational or social difficulties. From time to time it has merged with, or taken over, other similar organisations and it is one such merger which has given rise to the present dispute.
4. In 1991 the Appellant agreed with an organisation known as AMARC Foundation, also a registered charity, that it would acquire from AMARC its share capital in a company owned by AMARC which undertook essentially the same activity as the Appellant. A copy of the agreement relating to that transaction was in the agreed bundle. It is silent about any properties which might have been owned by the company whose shares were to be acquired. It identifies Coopers and Lybrand Deloitte as the Appellant's advisors and also as the target company's auditors. There was no documentation available to me to show that the agreement had actually been carried out but Mr Billington assured me that the Appellant had indeed taken over and absorbed the activities of the company, which had since been wound up, and that as far as he was aware, though he was not certain, AMARC itself had since ceased to exist.
5. The next event of significance is that Moores Rowland, a firm of chartered accountants which has since been absorbed into BDO Stoy Hayward, wrote to the Commissioners on 27 March 1992. The letter reads as follows:

"Re: Schedule 6A of Value Added Tax Act 1983

Election to waive exemption

Community Industry Ltd – 554 1642 50

We hereby give notice that our client the above named company has elected to waive exemption in respect of Second Floor Offices, Coniston House, Newmarket Street, Ulverston and premises at Elison Street, Hebburn. The election will be taken up on 27^th March, 1992. The properties are being transferred as part of a going concern which will be completed on 29^th March, 1992 and confirm that the vendor Amarc (Training Education and Safety Ltd, VAT No. 440 6205 71) had previously elected to tax the properties.

We look forward to receiving confirmation that our election has been effected."

6. Community Industry Ltd was, at that time, the Appellant's name. The heading to the letter correctly quoted its VAT number. AMARC (Training Education and Safety) Ltd was the company whose share capital the Appellant had agreed to acquire in 1991. Its VAT number, too, was correctly quoted.
7. If the letter is correct in stating that AMARC (Training Education and Safety) Ltd had waived the exemption, there would be good reasons for the Appellant to do likewise since, without the election, it would have had to charge the Appellant VAT, much of which the Appellant would not have been able to recover, as a partially exempt trader. This was because of the rules about the takeover of going concerns, now to be found in the Value Added Tax (Special Provisions) Order 1995, Article 5, and especially paragraph (2).
8. No other documentation relating to the transfer of the property was made available. Obviously the property was in fact transferred, since otherwise the Appellant would not have been able to dispose of it, and Mr Billington told us that the site in Hebburn had been used for the Appellant's training activities for several years before it was sold. One can only assume that the transfer was effected on or about 29 March 1992, as the letter indicates.
9. Mr Billington was not the Appellant's finance director in 1991 or 1992; he joined only in 1994. He had, however, examined the Appellant's file and he told me he could find no trace at all in it of Moores Rowland ever being instructed by the Appellant. As the 1991 agreement to which I have referred makes clear, the Appellant's accountancy advisors at that time were Coopers and Lybrand Deloitte, who remained the Appellant's advisors until they were replaced by Robson Rhodes in 1993. Mr Billington told me he could find no evidence that any other accountants had been instructed at the relevant time, either generally or in respect of a particular matter. Mrs Tepper suggested that Moores Rowland might have been instructed to advise on this particular transaction, since (as the 1991 agreement indicates) Coopers and Lybrand Deloitte advised both parties and it might have been thought that they would encounter a conflict of interest. That may well be right, although Mr Billington repeated that he could find no indication in the file that it had happened.
10. Nevertheless, it would obviously be quite extraordinary for a reputable firm of chartered accountants to write a letter such as that of 27 March 1992 without instructions. It is conceivable that they might exceed their instructions, but not that they would write without any instructions at all.
11. Enquiries have been made of BDO Stoy Hayward, and in the bundle there was a letter from that firm, written in February 2000, in which appears the sentence "I have checked our archive records and can confirm that all files relating to this client have been destroyed." Mrs Tepper argued that the letter indicated that the Appellant had been a client of the predecessor firm, but no files remained; while I agree that that is the most obvious meaning of the sentence, I accept that it is possible, as Mr Gibbon argued, that the writer had assumed, without enquiry and wrongly, that the Appellant had been a client and had not thought to question the assumption when he was unable to find any files.
12. Mr Billington had also made some enquiries of his predecessor as financial director, Roger Davies. Mr Davies had written a letter to him, of which a copy was also in the bundle. It contains the following two sentences: "I regret that I have no recollection of the issue. I do not recall being advised by Moores Rowland or anyone else regarding any complications regarding election to tax." Mrs Tepper suggested that the letter should be read as meaning that Mr Davies had no recollection of Moores Rowland advising about the election, rather than he had no recollection that Moores Rowland were instructed at all and, there being no plain statement that they had not been instructed, one should infer from this letter that they had been. I am not willing to draw that inference from that letter. It seems to me that Mr Davies is really saying that he had no recollection at all of the matter, and one cannot infer any confirmation that Moores Rowland had been instructed. By the same token, however, the letter cannot be taken as an indication that they had not been instructed.
13. Mr Gibbon also argued that it was most unlikely that Moores Rowland were right in their assertion that AMARC had elected to waive the exemption. It became possible to opt to tax only in 1989 but it appeared that AMARC had owned the land for some years before that – that, at least, was Mr Billington's understanding – and in those circumstances it could not have been forced to opt to tax because its own predecessor had done so. Its use of the land was identical to that of the Appellant, namely for its own occupation for the purpose of training. There had been no subletting and no other taxable supplies had been made from the land. The buildings on the land were old and not in a particularly good state of repair, but the Appellant had made a conscious decision to spend as little as possible on the building; I deduce that the value of the property lay in the land rather than the building. What AMARC's policy might have been was not clear, but I was invited to conclude that there would have been little or no input tax to recover (and, as partially exempt traders, both AMARC and the Appellant could have recovered only a part of the input tax they incurred). Against that background, Mr Gibbon argued, it would have been absurd to elect to tax. Although of only indirect relevance, there was further correspondence in the bundle about the other property mentioned in the letter of 27 March 1992, in Ulverston. That property was held on a short lease, and also occupied by the Appellant for its own use, without subletting. There was, if anything, even greater reason for not opting to tax that property.
14. The Commissioners had inspected their own files, to see if there was any evidence available of AMARC's having opted for tax. Unfortunately no evidence had been found, either supporting or undermining the possibility that it had so elected.
15. For the Commissioners, Mrs Tepper's argument was essentially this: such evidence as there was indicated that Moores Rowland had authority to write as they did, and their letter was clear and unambiguous notification of an election to waive the exemption, from which it must be deduced also that an election had in fact been made. The burden of showing that the letter was written without authority was on the Appellant, which could do no more than say it had no record of having instructed that firm. It was not enough to assert that it was unlikely that AMARC would have elected to waive the exemption; the letter was, again, the best evidence available that, rightly or wrongly, it had done so. The Appellant's case, she argued, depended entirely on conjecture.
16. I have a good deal of sympathy with the Appellant, which is now faced with a large demand for VAT which, I assume, it has little or no prospect of recovering from its purchaser. I accept that it is difficult to imagine any reason why AMARC would waive the exemption but I am driven to accept Mrs Tepper's argument that the only evidence, in the shape of the letter itself, clearly supports the proposition that the election had been made. The only challenge to that evidence is, as Mrs Tepper argued, conjectural. I am unwilling to believe that a reputable firm of chartered accountants would write a letter of that kind without authority; they must have realised the significance of what they were doing. This does not seem to be a case similar to that of Blythe Limited Partnership (1999, Decision 16011) in which evidence was given, and accepted by the tribunal, that a notification had been made by mistake and in excess of authority. The problem facing the Appellant in that there is simply no such evidence here. The letter is the best available evidence that an election was made, by the Appellant, and duly notified.
17. It does not help the Appellant to argue that notification and election are distinct acts since, in this case, the notification is the only evidence that the election was made. In Blythe Limited Partnership it was possible to demonstrate that the election and the notification did not coincide. This case seems to me to resemble more closely Hammersmith and West London College (1991, Decision 17540) in which one of the college's officials, with apparent authority to make and notify an election, did so and the college later sought to argue that the election had not been validly made. The point was made there, and was echoed here, by Mrs Tepper, that if the Commissioners could not rely on communications from those with apparent authority – a senior official of the college there, chartered accountants here – the administration of the tax would grind to a halt. I suspect that the number of cases in which apparent authority is later denied is quite small, and that the danger is exaggerated. Even if the danger were acute, there would, I think, have to be some scope for exceptions in special circumstances. The difficulty for the Appellant in this case, however, is that it cannot discharge the evidential burden which lies on it of showing that an election was not in fact made.
18. With some regret, I must dismiss the appeal. There will be no direction in respect of costs.

COLIN BISHOPP

CHAIRMAN

RELEASE DATE: 24 June 2003