United Kingdom VAT & Duties Tribunals Decisions

Turner & Anor v Revenue and Customs [2005] UKVAT V19076 (12 May 2005)

19076

REGISTRATION – Liability – Single taxable person direction – First Appellant trading as sole proprietor – First and second Appellants trading as partners – Direction to first Appellant names second Appellant alone as the "other person" – Direction to second Appellant names first Appellant as the "other person" – No direction issued to individual partners in regard to the partnership – Whether effective – No – Whether section 16 of Partnership Act saves the direction by treating notice served on one partner as served on the partnership – No – VAT Act 1994 Schedule 1 paragraph 2(1)-(3) – Partnership Act 1890 section 16

LONDON TRIBUNAL CENTRE

KEVIN TURNER First Appellant

ELIZABETH TURNER Second Appellant

- and -

THE COMMISSIONERS OF HM REVENUE & CUSTOMS Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

SHEILA EDMONDSON FCA

Sitting in public in London on 18 April 2005

Glyn Edwards AIIT, VAT Consultant, for the Appellants

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

© CROWN COPYRIGHT 2005

DECISION

1. This decision covers a preliminary point taken by the Appellants against whom the Customs had sought to make a "a single taxable person" direction under VAT Act 1994 Schedule 1 paragraph 2. The preliminary issue is whether the direction was valid.
2. The background, in essence, is this. The first Appellant, Mr Kevin Turner, has since November 1987 been trading as a sole proprietor as Archway Projects ("AP"). We understand that his work in this capacity has consisted in the preparation of drawings for mainly domestic building proposals and works. On 1 January 1998 Mr Kevin Turner and the second Appellant (Elizabeth Turner) commenced business in partnership as Archway Project Management ("APM"). Kevin Turner's work under this entity consisted in the preparation of surveys, preliminary liaison and other project management duties. We understand also that Elizabeth Turner ran the accounting side of APM and her activities included the submission of planning applications for AP and for APM and in the preparation of contracts and in the selection of material samples.

The decision

3. On 13 August 2002 the Customs wrote to Kevin Turner. The decision in this letter reads, so far as is relevant, as follows:

"Under the provisions of paragraph 1A and 2 of Schedule 1 to the Value Added Tax Act 1994 (as amended by the Finance Act 1997) the Commissioners of Customs and Excise hereby direct that you, together with the other person(s) named in this direction, will be treated as a single taxable person carrying on the business activities of preparing drawings for building proposals/works in the name Archway Projects and project management in the name APM Project Management from Meadowbank House … and registered for the purpose of value added tax with effect from 1 September 2002."

The "other person" named was Elizabeth Turner. On the same day Customs wrote to Elizabeth Turner in similar terms naming Kevin Turner as "the other person".

The statutory provisions

4. VAT Act 1994 Schedule 1 paragraph 1A provides as follows:

"(1) Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

(2) In determining for the purposes of subparagraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organizational links."

Paragraph 2 of Schedule 1, as amended in 1997 with the introduction of the words in square brackets, enables the Customs to make directions of this nature in the following terms:

(1) Without prejudice to paragraph 1 above, if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction and that taxable person shall be liable to be registered under this Schedule with effect from the date of the direction or, if the direction so provides, from such later date as may be specified therein.

(2) The Commissioners shall not make a direction under this paragraph naming any person unless they are satisfied –

(a) that he is making or has made taxable supplies; and

(b) that the activities in the course of which he makes or made those taxable supplies form only part of certain activities … the other activities being carried on concurrently or previously (or both) by one or more other persons; and

(c) that, if all the taxable supplies [the business described in the direction] were taken into account, a person carrying on that business would at the time of the direction be liable to be registered by virtue of paragraph 1 above; …

(3) A direction made under this paragraph shall be served on each of the persons named in it."

5. The relevant statutory provision governing notices in the context of partnership relationships is found in section 45(3). This is explicitly stated to be without prejudice to section 16 of the Partnership Act 1890. (Section 45(4) states that any notice addressed to a partnership by the name in which it is registered and served in accordance with the VAT Act is to be treated as served on the partnership. Here APM was not registered and the direction notice made no reference to a partnership or to a partnership name; hence section 45(4) could have no application anyway.) Section 16 of the Partnership Act reads as follows:

"Notice to any partner who habitually acts in the partnership business of any matter relating to partnership affairs operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner."

Contentions

6. The Appellants say that the notices were not valid and in any event were not validly served. They say that the conditions in paragraph 2(2) were not satisfied. Condition (a) was not met in relation to Elizabeth Turner because she has never made taxable supplies. Condition (b) was not made in relation to her for the same reason. Condition (c) was not met in relation to either Elizabeth Turner or Kevin Turner. This last condition, so the argument runs, limits the issue of directions to businesses which would exceed the VAT registration threshold but for their separation. By naming Elizabeth Turner as the other person "named in and subject to" the direction issued to Kevin Turner, the Customs are seeking to combine his business with that of someone whose taxable turnover is nil. As Kevin Turner's business alone is below the threshold, the direction fails this condition. Moreover, they say, Customs failed to comply with paragraph 2(c) because they failed to issue a direction to APM, the partnership.
7. The response for the Commissioners is based on the fact that the "first person" named in the direction sent to Kevin Turner was Kevin Turner and the other person was Elizabeth Turner; and at the material times Kevin Turner and Elizabeth Turner were in partnership in respect of APM. By section 16 of the Partnership Act, it is said, notice to any partner who habitually acts in the partnership business operates as notice to the firm generally (except in cases of fraud relating to that particular partner). Accordingly, notice is served on Elizabeth Turner and on Kevin Turner were valid notices on the partnership, APM, and there was no breach of any provision of Schedule 1 paragraph 2 of the VAT Act.

Conclusions

8. We have to determine whether the direction notices were effective. The stating point in determining that question is to examine the purpose of the notices. This is stated in paragraph 1A of Schedule 1 as "preventing the maintenance … of any artificial separation of business activities carried on by two or more persons resulting in an avoidance of VAT"; and regard shall be had to the extent to which "the different persons carrying on those activities" are bound to one another by financial, economic and organizational links. Those words set the scene and focus on the person or persons carrying on the business activities. If therefore one or more business activities are carried on by a partnership, the partners as proprietors are the persons at whom the provision is directed.
9. Paragraph 2(1) of Schedule 1 sets out the statutory consequences of the anti-avoidance action and paragraph 2(2) and (3) contain the machinery for counteracting the avoidance. Paragraph 2(1) produces a statutory fiction that "the persons named" are to be treated as a single taxable person carrying on the activities described in the direction. It goes on to require that "that taxable person" is liable to be registered. For VAT purposes, therefore, the "different persons" referred to in paragraph 1A are to be disregarded; they are replaced by the notional single taxable person. But this leaves untouched the partnership business and its ingredient activities and the contractual relationships between the persons carrying on that business.
10. Moving on to the machinery for the "begetting" of this notional single taxable person, the words of paragraph 2(2) and (3) impose a set of strict conditions upon the Custom. The opening words of paragraph 2(2) prohibit the making of a direction "naming any person" unless conditions (a) to (c) are all satisfied. Recognizing the acute fiscal consequences of a single taxable person direction on all the individual sand entities embraced by it, the Legislature has insisted that everyone in whatever capacity should be notified, first, that they are objects of the direction and, second, of what the VAT implications of the direction will be to them.
11. The named person must be making or has made taxable supplies (subparagraph (a)). Here Kevin Turner, as AP, has been making supplies of services (i.e. "taxable supplies" within section 4(2)). But Elizabeth Turner has not. The supplies by the APM business are made by the partnership, i.e. the contractual entity which exists by virtue of the relationship between Kevin Turner and Elizabeth Turner who together carry on its business with a view of profit: see section 1, of the Partnership Act. The direction should, but does not, name Kevin Turner and Elizabeth Turner in their partnership capacity.
12. Then paragraph 2(2)(b) prescribes that the activities in the course of which "the named person" makes or made those taxable supplies form only part of "certain activities" which embrace "other activities" being carried on by one or more other persons. Elizabeth Turner is neither the named person making the taxable supplies of APM nor is she is the other person. Kevin Turner is the named person in relation to AP but is not the named person in relation to APM's supplies because APM carries on business as a partnership. The condition is not, for that reason, satisfied here unless, which was not the case the named person is specified as Kevin Turner and Elizabeth Turner trading in partnership as APM.
13. The last condition (paragraph 2(2)(c)) requires that all the taxable supplies comprising the notional business described in the direction shall be brought into account: and it requires that, on that basis, "the persons carrying on that business" would at the time of the direction be liable to be registered. Elizabeth Turner, as the named other person in the direction issued to Kevin Turner, makes no taxable supplies; those are made by the APM partnership. The business of Kevin Turner (AP) has turnover but that alone is below the threshold.
14. Pausing at this stage, we read the conditions of paragraph 2(2), so far as they relate to activities carried on by partnerships, as requiring that the direction naming the persons in question must specify the partnership by which the supplies are made. It is not enough to name one person such as Elizabeth Turner without naming the partnership through which the taxable supplies are made.
15. Paragraph 2(3) requires that the direction be served on each of the persons named in it. For what it was worth that happened here. But the directions themselves were ineffective because they failed to meet the conditions of paragraph 2(2).
16. Does section 16 of the Partnership Act save the present directions? What section 16 does, so far as the present situation is concerned, is to enable the Customs to prove that the partnership (APM) has been given notice of the direction , for what it was worth, by relying on the fact that the notice was given to, for example, Elizabeth Turner as a partner who habitually acts in the partnership business. But section 45 (4) of the VAT Act and Section 16 do not operate to alleviate the requirements in paragraphy 2 (2) governing single taxable person directions. Thus, because the present directions were ineffective section 16 will not and cannot save them. Moreover we do not think that the notices (assuming they were effective) are of "matters relating to partnership affairs". The notices (i.e. the directions) relate to the statutory single person created by operation of the direction. They are part of the mechanism that produces that single person and makes "him" liable to registration. It has fiscal consequences for the future. But partnership affairs as such, eg the business of the partnership and its ingredient activities and the contractual relationships between the partners, are not the subject matter of the directions comprised in the notices.
17. For all those reasons we decide the preliminary issue in favour of the Appellants. We are aware that we have adopted an approach of strict construction of the statutory provisions. We could in theory have taken a broader common sense approach that glossed over the tightly worded conditions for issue of a direction under Schedule 1 paragraph 2. But paragraph 1A states that the paragraph 2 direction procedure is an anti-avoidance measure. The conditions for a direction and the machinery for its implementation are as much to identify the precise scope of the anti-avoidance measure as to protect the taxpayer. Hence the need for a tight adherence to the words used by the legislature.
18. We award the Appellants their costs of an amount to be agreed. If that amount cannot be agreed, the matter should be referred back to this Tribunal for a further direction.
19. Although we have in no way been influenced by this in reaching our conclusions, we are comforted to see that the person who wrote the Customs' own Guidance Manual shares our view. We refer to Reference V 1-28 Chapter 3 table 28. Under the heading "Serving Directions" are found these passages:

"It is very important to remember that you must serve a notice of direction upon each separate business or "person" whom you are directing to register as a single taxable person ("person" here covers both natural persons – such as sole proprietors, partnerships – and legal persons – such as limited companies and other corporations). Failure to comply with the following procedures will render the notice invalid and will lead to it having to be withdrawn and re-issued."

Later in the Guidance Manual there is an "IMPORTANT NOTE" which reads as follows:

"This means that if you are directing, for example, that a sole proprietor (A), a sole proprietor (B), a partnership (C), and a limited company (D) are to register as a single taxable person, you must issue four directions, one to each of the entities or "persons". One addressed to A naming B, C and D. One addressed to B naming A, C and D. One addressed to C naming A, B and D. And finally one addressed to D, naming A, B and C. You should also copy C's direction to the individual partners at their home addresses and copy D's direction to all the directors at their home addresses. This applies even if the sole proprietors are members of the partnership or directors of the company."

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 12 May 2005

LON/02/1094