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Quintiles (Scotland) Ltd v Customs and Excise [2004] UKVAT V18790 (08 October 2004)

18790

BUSINESS ENTERTAINMENT – refreshments provided to GPs by Appellant whose business is to promote products for pharmaceutical companies – cost reimbursed by the pharmaceutical companies – not business entertainment by the Appellant – appeal allowed

LONDON TRIBUNAL CENTRE

QUINTILES (SCOTLAND) LIMITED Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

DIANA M WILSON

Sitting in public in London on 21 and 22 September 2004

Hilary Thompson, solicitor, KPMG for the Appellant

Jeremy Hyam, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

This is an appeal by Quintiles (Scotland) Limited against the Commissioners' refusal to accept a voluntary disclosure that refreshments provided between April 1999 and September 2001 in the circumstances of this appeal are not business entertainment. That company is the representative member of the group including Innovex (UK) Limited, the company concerned in the supplies in this appeal, which for convenience will be described as the Appellant. The Appellant was represented by Mrs Hilary Thompson, and the Commissioners by Mr Jeremy Hyam.

We heard evidence from three employees of the Appellant, Mr N A Spruce, Operations Director for Merck Sharp & Dhome Inc projects for the Appellant, Mr M Scrutton, Director of Syndicated Sales for the Appellant, and Mr I P Gore, Head of Financial Accounts for the Appellant. We also saw a number of documents. We find the following facts.

(1) The Appellant's business is to act for pharmaceutical companies in marketing and promoting their products.

(2) The Appellant employs sales representatives who work in teams for particular drugs for particular pharmaceutical companies in three types of situation: "Innovex Managed Services," in which the Appellant manages the sales representatives, "Innovex Support Services," in which the pharmaceutical company manages the sales representatives provided by the Appellant, and "Syndicated Services," in which representatives are engaged on the business of more than one pharmaceutical company at the same time, although at a particular audio-visual meeting (see below) they will be promoting drugs on behalf on only one company. Pharmaceutical companies also directly employ their own representatives.

(3) Drugs are promoted to general practitioners (GPs) in two ways: face to face individual meetings often taking place between patients (no refreshments are provided at these meetings), and audio-visual meetings at which the representative will make a presentation to the GPs of a particular surgery usually at lunchtime, at which the Appellant will provide refreshments such as sandwiches and coffee. The term audio-visual meetings also includes cases at which a speaker gives a presentation either at a small seminar (advocate meetings) or a larger meeting (speaker meetings), after which refreshments in the form of a meal are provided. We saw an example of an invitation for a speaker meeting arranged by the Appellant where the invitation was issued in the pharmaceutical company's name for a meeting in a private room at a Chinese restaurant.

(4) Pharmaceutical companies will agree with the Appellant to visit target numbers of GPs from a list provided by the pharmaceutical company comprising GPs who are likely to be interested in the type of drug concerned. The number of meetings will be set out. For example, one contract that we saw provided that the pharmaceutical company and the Appellant will work together to limit the frequency of calls on any GP to a maximum of 14 calls in the year, with the Appellant being entitled to make a maximum of 9 calls on any GP. The combined target coverage was 80 per cent of the GP population (of 41,295 GPs). In another case a list of 12,000 selected GPs was given to the Appellant out of which to arrange visits. The Appellant arranged who to visit and when out of the GPs on the target list.

(5) We saw examples of contracts with pharmaceutical companies which, although relating to periods after the events in question, we accept represents the type of contracts in use at the relevant times. One contract provided a bonus for the Appellant meeting key performance indicators based on what the GPs recalled of the information given at the meetings. This contract also provided for penalties for the Appellant not meeting targets of the coverage of calling on GPs with a sliding scale of penalties for shortfalls of 2 per cent to 8 per cent. Another contract did not contain any bonus or penalty provisions but no doubt such matters would be taken into account in renegotiating any subsequent contract.

(6) The contracts required the representatives to comply with the ABPI [Association of the British Pharmaceutical Industry] code of practice for the pharmaceutical industry. This code includes that a requirement that the representative must at the outset in an interview and when making an appointment not mislead the doctor as to his identity or that of the company he represents. It also requires that "…any hospitality provided is secondary to the purposes of a meeting, is not out of proportion to the occasion and does not extend beyond members of the health professions or appropriate administrative staff." It states that "Representatives organising meetings are permitted to provide appropriate hospitality and/or to meet any reasonable, actual costs which may have been incurred. For example, if the refreshments have been organised and paid for by a medical practice the cost may be reimbursed as long as it is reasonable in relation to what was provided and the refreshments themselves were appropriate to the occasion." One of the witnesses said, and we accept, that before the guidelines much more hospitality was provided by pharmaceutical companies to GPs.

(7) In accordance with the ABPI guidelines the representative employed by the Appellant will introduce himself at the start of an audio-visual meeting as representing a particular pharmaceutical company. The company's name and logo will be prominently displayed on material used at the meeting.

(8) Individual representatives employed by the Appellant are paid a fixed salary and bonus agreed with the pharmaceutical company based on sales which can be attributed to the individual's activity. The ABPI guidelines state that representative must be paid a fixed basic salary and any addition proportional to sales of medicines must not constitute an undue proportion of their remuneration.

(9) It is accepted practice that at audio-visual meetings at GPs' surgeries refreshments such as sandwiches, soft drinks and coffee will be provided, and at larger meetings a meal will be provided after the lecture. A letter from one of the pharmaceutical companies stated, and we accept this as a statement of the general practice "The meetings themselves are generally held over a lunch time period due to the time constraints placed upon GPs and hospital doctors. As such, refreshments will often be provided to the attendees. Where such refreshments are provided, Innovex will recharge the related expenses to [Merck Sharp & Dhome Inc] who will pay them on a pass through basis as part of the supply made under the contract." When booking a visit to a surgery the Appellant's representative will be told to provide sandwiches for a stated number of people.

(10) None of the contracts with pharmaceutical companies that we saw made any express reference to the provision of refreshments. One provided for the reimbursement of "all promotional materials, audio-visual equipment and meetings budgets" and another for "audio-visual meetings budgets (if applicable)." An addendum to the latter contract relating to syndicated detailing did, however, state: "If required on a territory Innovex representatives are encouraged to achieve GP customer access using Innovex funded low cost catering with small GP groups (max 5) for 1:1 detailing." The contractual provisions are interpreted by both parties to include refreshments, which are included in agreed budgets. Such additional charges are invoiced monthly to the pharmaceutical company with detailed schedules that will show the amount of each item of expenditure, including refreshments. Accordingly we find that when the contracts refer to reimbursing the cost of audio-visual meetings this is understood to include refreshments.

Pursuant to section 25(7) of the Value Added Tax Act 1994 the Treasury may provide that credit is not available for input tax on specified supplies. By article 5 of the VAT (Input Tax) Order 1992:

"(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 services in question are used or to be used by the taxable person for the purpose of business entertainment.

…

(3) For the purposes of this article, 'business entertainment' means entertainment (including hospitality of any kind) provided by a taxable person in connection with a business carried on by him…."

It is common ground that the refreshments in this case are business entertainment. The issue is who has provided the business entertainment. There are two relevant Tribunal decisions which illustrate the way in which different parties provided the business entertainment depending on the facts. In Webster Communications International Limited v Customs and Excise Commissioners (1997) VAT Decision 14753 a conference organiser arranged a conference on the basis that a sponsor paid a fee fixed in advance which entitled the sponsor to provide a speaker at the conference, to be consulted about the agenda for the conference, and to nominate up to 120 persons to attend the conference free. Refreshments were supplied during the conference to those attending. The Tribunal found that as the sponsorship fee covered the cost of the conference (including the refreshments) together with a profit for the organiser, the refreshments had been supplied by the sponsor not by the organiser. On the other side of the line is Evensis Limited v Customs and Excise Commissioners (2001) VAT Decision 17218, in which an exhibition organiser charged exhibitors for the space they occupied at the exhibition. Those attending the exhibition who registered in advance were entitled to a complementary lunch. The Tribunal found that the lunch was provided by the organiser and not by the exhibitors. It was the organiser who advertised the exhibition and invited people to attend, and there was no connection between the guest and any particular exhibitor.

Mrs Thompson contends that this case is on the Webster side of the line. It is the pharmaceutical companies who are providing business entertainment. Although the contracts do not refer specifically to refreshments it is the understanding of both parties that these will be provided. Budgets are agreed which include refreshments, and the pharmaceutical companies reimburse the cost. The Appellant does not provide refreshments at audio-visual meetings in order to promote itself but because, if it did not, it would not be able to gain access to GPs for the purpose of fulfilling its contracts with pharmaceutical companies. It is the companies who set the target names of GPs to be visited.

Mr Hyam contends that it is the Appellant who is providing business entertainment. He draws attention to the fact that the Appellant is in business on its own account and has in some cases a financial interest in successfully promoting the pharmaceutical company's products. As part of its own business, and not under the contract with the pharmaceutical company, it provides refreshments. He points out that the representative is seen as the representative of the Appellant because he may at different times be promoting products of more than one pharmaceutical company. The Appellant is providing the refreshments as part of building up its connection with the GPs.

Both parties are agreed that the relevant question is who is providing the business entertainment in the form of for example sandwiches at audio-visual meetings.

In spite of Mr Hyam's persuasive arguments we find that the Appellant is not providing the refreshments. The contracts do provide for the reimbursement of refreshments even though refreshments are not specifically mentioned as part of the cost of audio-visual meetings. While we agree with him that the Appellant is in business on its own account and in some circumstances will benefit financially from good performance on behalf of the pharmaceutical company, it remains the case that its performance is always on behalf of the pharmaceutical company even though they are not in law agents of the company.

In accordance with the ABPI guidelines, the representative of the Appellant will introduce himself at the audiovisual meeting as representing a particular pharmaceutical company and its name and logo will be on material displayed at the meeting. It is normal practice for refreshments to be provided at audio-visual meetings. We infer that GPs know that it is the pharmaceutical company that is paying for them. The ABPI guidelines will be understood by all parties as restricting what can be provided in the way of refreshments, and GPs will expect that such restricted amount to be provided if a meeting takes place at lunchtime. A budget for audio-visual meetings, including the cost of refreshments, is agreed with the pharmaceutical company. The cost of the meeting is reimbursed to the Appellant by the pharmaceutical company who receive an itemised list including the refreshments. In these circumstances the Appellant arranges the refreshments that the pharmaceutical company expects it to provide at the cost of the pharmaceutical company. In doing so the Appellant is not providing any business entertainment; it is being reimbursed by the pharmaceutical company for the refreshments as part of the contract with the pharmaceutical company. The provider of the refreshments must (if anyone) be the pharmaceutical company, although whether or not the pharmaceutical company is providing refreshments is not in issue in this appeal.

Accordingly we allow the appeal in principle. The figures are not agreed and we adjourn to enable the Appellant to provide evidence of the figures to the Tribunal if not agreed with the Commissioners. Either party is at liberty to request the Tribunal to arrange a further hearing for this purpose.

Mrs Thompson asked for costs. Mr Hyam said that in the event of the Appellant succeeding he wished to reserve the possibility of arguing that the Appellant's costs should be reduced to the extent that the decision was based on evidence that came out at the hearing that could have been given to the Commissioners in advance. Accordingly we direct that the Commissioners provide a written submission within 30 days of the date of release of this decision why the Appellant should not be awarded costs, to which the Appellant may reply within a further 14 days. The costs will be determined by the Chairman in the light of such submissions.

J F AVERY JONES

CHAIRMAN

Release Date: 8 October 2004

LON/02/762