United Kingdom VAT & Duties Tribunals Decisions

Pemberton & Anor (t/a The Sandwich Box Plus) v Revenue and Customs [2005] UKVAT V19307 (27 October 2005)

19307

REGISTRATION – Artificial separation of two businesses – one Appellant carrying on business of a takeaway sandwich bar – Appellant and wife carrying on an outside catering business from the same premises – whether businesses artificially separated and liable to be registered for VAT as a single business – characteristics of separate businesses – VATA 1994 Schedule 1 paras 1A, 2 – EC Sixth Dir. Art 4.4 - Appeal allowed.

LONDON TRIBUNAL CENTRE

(1) KENRICK LOGAN PEMBERTON

Appellants

trading as THE SANDWICH BOX PLUS

(2) KENRICK LOGAN PEMBERTON

and ELIZABETH MARY PEMBERTON

trading as DESMOND'S

and

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Respondents

Tribunal : Rodney P Huggins (Chairman)

Claire E Howell

Sitting in Plymouth on 30 September 2005

The Appellants in person

Vicki Bowles, Solicitor of the Solicitor's Office for Customs and Excise of HM Revenue and Customs for the Respondents.

... CROWN COPYRIGHT 2005

DECISION

The appeal

1. This is an appeal by Kenrick Logan Pemberton (Mr Pemberton) and his wife Elizabeth Mary Pemberton (Mrs Pemberton) against a decision by the Commissioners (Customs) to issue a direction on 12 February 2004 that the business trading as The Sandwich Box Plus and the other business trading as Desmond's be treated as a single taxable person for the purposes of VAT pursuant to paragraph 2 of Schedule 1 of the Value Added Tax Act 1994 (the 1994 Act).
2. The Sandwich Box Plus and Desmond's are two businesses which operated from a leasehold property at 320 Union Street, Plymouth. Mr Pemberton was the sole proprietor of The Sandwich Box Plus and Desmond's is owned by himself and his wife acting in partnership.

The issue

3. Customs considered that taking into account all known facts, both business activities should be considered to be a single business.
4. The Appellants argued that each business was started separately and they had never been joined together although, for mutual convenience, certain items of expenditure were paid by one or the other.

The evidence

5. Ms Bowles put in a bundle of documents of 58 pages. She was unable to call the investigating Customs Officer, Anne Denise Thompson (Mrs Thompson) due to serious illness and relied upon her notes taken as a result of two visits to 320 Union Street, Plymouth.
6. Mr and Mrs Pemberton gave oral evidence and also produced a Monthly Cashflow Statement for The Sandwich Box Plus and a Receipts and Payments Summary for Desmond's for the periods April 2002 to March 2003 for the former and for the year ending 31 March 2004 for the latter.

The facts

7. On the evidence before us, we find the following facts.

The Sandwich Box Plus

8. Mr Pemberton is a chef and served in the RAF in that capacity for a number of years. On his return to civilian life, he decided in the autumn of 1997, to open a takeaway sandwich bar in the centre of Plymouth at 320 Union Street. His landlord was Plymouth City Council.
9. He was single at the time and employed up to four part-time employees who were usually students. He never advertised for trade and relied upon reputation and word of mouth to build up his trade.
10. Sandwich Box Plus sold takeaway sandwiches and salads, snacks, soft drinks and a little hot food such as potatoes, bacon rolls and chips. He had an oven, microwave and hot plates for the preparation of food. However, hot food was only a small part of his business.
11. He kept monthly cashflow figures on a computer spreadsheet of all his sales and expenditure. His main suppliers were Bookers (wholesale cash and carry), fish wholesalers, a baker and a butcher.
12. A secondhand Vauxhall Combo van was purchased for the business when it opened and had the logo "Sandwich Box Pus" on the side. He used the van to obtain supplies.
13. His sandwich business grew steadily from a gross turnover for the period to 31 March 2000 (his trading year end) of £49,000; £50,485 in 2000/2001; £51,392 in 2001/2002; £54,264 in 2002/2003; and £49,274 in 2003/2004.
14. The business hours were 8.00 a.m. to 4.00 p.m. and the shop was closed on Sundays. It was entirely takeaway as there was not room for any seating except for people waiting for their takeaways.

Desmond's

15. Mrs Pemberton has throughout been employed full-time as a civil servant in the Department of Work and Pensions. She married Mr Pemberton in February 1998 and the only time she would help Mr Pemberton in the sandwich business was on a Saturday afternoon after the shop had closed at 4.00 p.m. in cleaning the premises and the equipment.
16. In or about June 1998 Mr and Mrs Pemberton decided that as the shop premises at 320 Union Street were under utilized in the evenings. They decided to enter into partnership to open an ethnic takeaway at the same premises operating from 7.00 p.m. to 10.00 p.m. The takeaway food was always hot and West-Indian

in nature hence the name Desmond's. Consent to the additional use was obtained from the City Council. A separate bank account was set up and there was also an independent accounting system. Mrs Pemberton attended the premises in the evenings to participate in the running of the business.

17. After some six months, it became apparent that the business was not very successful as there was not a demand for takeaway Caribbean hot food in Plymouth. Since a few outside functions had proved viable, it was decided by the partners to change the catering business. Contracts to supply the local Freemasons' Lodge with weekly dinners and also regular meals for members of a shore establishment of the Auxiliary Navy were obtained There were also casual bookings for catering such as weddings. The ethnic catering side was dropped after twelve months.
18. Mr Pemberton prepared and cooked the food for the outside functions. He used facilities for cooking at the establishments where these were available. Ninety per cent of the cooking took place in this way. He did prepare some uncooked food at 320 Union Street. He used his van to obtain supplies and take the food to outside venues.
19. Mrs Pemberton supervised and assisted the part-time waitresses. She laid the tables and assisted her husband with cleaning up after the functions were over and washing the crockery and utensils.
20. There was no formal partnership agreement between Mr and Mrs Pemberton. She was entitled to a five per cent share on the advice of their accountant. She participated in discussing with her husband the affairs of the business and joint decisions were taken when necessary. In the first year's trading to 31 March 2000 the turnover was £13,000; £13,106 in 2000/2001; £11,989 in 2001/2002; £13,573 in 2002/2003; and £8,601 in 2003/2004.
21. The essential outgoings for running both Sandwich Box Plus and Desmond's were shared with the former paying the lion's share. It was not practical in view of the small turnover of Desmond's for these outgoings to be split formally. Details were as follows :

(1) Rent - All paid by Sandwich Box Plus. In the year

2002/2003 the rent amounted to £3,250.

(2) General Rates - All paid by Desmond's – In the year 2003/2004

this amounted to £1,157.

(3) Electricity and Gas - Sandwich Box Plus paid 75% and Desmond's 25%

(4) Motor expenses - Sandwich Box Plus paid 2/3rds and Desmond's 1/3^rd

22. Invoices for outside catering by Desmond's were made out on Sandwich Box Plus notepaper with the word Desmond's added. Effectively, Sandwich Box Plus

did not raise invoices as all its customers were cash paying. All payments from customers were made out to Desmond's.

23. Desmond's acquired and utilizes in its outside catering activities, some 100 place settings of crockery and cutlery, appropriate linen and kitchen utensils and hostess trolleys.
24. Mr Pemberton was the sole signatory on the separate bank account.

Customs investigations

25 On 14 August 2003, Mrs Thompson visited 320 Union Street with a Mr Peter

Bonney from the Department of Work and Pensions. This was as a result of a suspicion that the two businesses were being operated from the same premises but were separated to avoid registration for VAT

25. Only Mr Pemberton was present at the meeting and he answered all the questions put to him and Officer Thompson made the following notes :

* The Sandwich Box was opened six years previously and Mr Pemberton visited the VAT office ad established that he did not need to register for Vat at that time. 6 – 9 months later the catering business called Desmond's was started.

* His accountant advised that he could not operate two separate businesses as a sole prop so he formed the partnership with his wife.

* Mr Pemberton dealt with the day to day affairs of both businesses and described his wife as a "sleeping partner" who sometimes helps out at catering functions and had no involvement in the Sandwich Box (she was employed fulltime by DWP).

* There was no advertising for Desmond's and the customer base came from Sandwich Box customers.

* Only one set of premises were used which were rented from the City Council.

* The businesses had separate bank accounts but only Mr Pemberton was signatory to the accounts.

* Separate records were kept for both businesses which were maintained by Mr Pemberton.

* Individual utility bills were not divided but Sandwich Box paid most of them with Desmond's contributing according to funds.

* Casual staff was used in Desmond's and there were 2 part-time staff employed by Mr Pemberton at the Sandwich Box.

* Invoices were issued for the catering which were headed Desmond's but also said the Sandwich Box Plus.

Mrs Thompson issued Mr Pemberton with a copy of Customs Notice 700/1 and referred him to the relevant part relating to artificial separation. He told her from the outset that the businesses were not artificially separated.

26. Mrs Thompson returned to the premises by appointment on 9 September 2003 when she interviewed both Mr and Mrs Pemberton although the latter turned up after the meeting had started. They answered her questions and described the activities of both businesses. She was told that the accounts of Sandwich Box were kept on an Excel spreadsheet. With reference to Desmond's, invoices were issued for the catering functions and payments received by cheque. The invoices stated "Cheques to be made payable to Desmond's" and were not numbered. The takings and bills were recorded using the DOSH system.
27. Following Mrs Thompson's visit Mr Pemberton wrote to her on 15 September 2003 giving more information about how the two businesses were run separately. He also supplied certain documentation requested by Mrs Thompson in November 2003. However, she did not seek copies of annual accounts for the two businesses. Mrs Thompson then sent an internal memorandum to a specialist technical team of Customs at Wolverhampton for consideration.
28. On 5 January 2004, official letters were issued by Miss R M Jones, a Customs Officer of the Deregistration Unit at Deansgate VAT Office, Wolverhampton to Mr and Mrs Pemberton directing them to be treated as a single taxation person under the statutory provisions with effect from 5 February 2004. Mr Pemberton replied on 8 January 2004 expressing his confusion at what had occurred and then asked for a reconsideration of the decision to issue a direction by letter dated 26 January 2004.
29. His request was passed to the "Appeals and Reconsiderations Section" at the Customs Wolverhampton Office and eventually on 12 February 2004 Customs Officer Sharon Howard responded as follows :

"... After careful consideration of all the available information, much of which was given by you at a meeting with Officer Thompson on 14 August 2003, I concur with the decision that although two legal entities do exist the business has been artificially separated and should be registered as a single entity for VAT purposes. I've based my decision on the fallowing facts:

(a) You have controlling influence over both The Sandwich Box Plus and Desmonds and are the sole signatory for the bank accounts for both parties. Although Desmonds is a 'partnership' between you and Mrs Pemberton she has admitted to only limited involvement (occasional help given at functions).

(b) Both parts of the business operate from the same premises, using the same equipment and sharing use of the van registered to you at the business address.

(c) Stationery carries the names of both The Sandwich Box Plus and Desmonds and the impression given to the public is that of a single business.

d) Desmonds does not advertise and its customer base comes from Sandwich Box Plus customers. Therefore the activities of The Sandwich Box Plus clearly benefits Desmonds and the same circle of customers is supplied.

(e) There is common financial interest in the proceeds of the two parts of the business,

The above points confirm the close financial, economic and organisational links between the separated parts of the business

However it has come to my attention that the Notices of Direction issues on 5 January 204 are incorrect as the Notice issued to Elizabeth Pemberton trading as Desmonds should have been addressed to both Elizabeth Pemberton and yourself as a partnership. I have arranged for correct Notices to be issued and confirm that, as a Notice of Direction can only have effect from a current date, the date from which you will be registered will be amended to 12 March 2004. Please now complete and return the VAT 1 already issued to you. You will be compulsorily registered with effect from 12 March 2004 and should account for VAT on any standard rated taxable supplies made from that date."

30. On the same day fresh Directions to register for VAT purposes were issued to Mr and Mrs Pemberton.
31. On 29 February 2004, Mr Pemberton wrote to Officer Howard and stated in the final paragraph :

" ... we still refuse to submit to registration for VAT. I am not an individual who has ever felt threatened by government departments, and I also do not feel that in all cases they are necessary right. We will instead close all activities that Desmond's was involved in. Until at least the results of the independent appeal is known. This will mean that The Sandwich Box Plus can retain its non VAT status. You see we really are not in business solely concerned about making money. I am a highly qualified person and feel the need to express my talents in my terms. In the unlikely event that we lose the appeal Plymouth will have lost a business that prided itself in producing high quality corporate catering."

The law

32. Paragraphs 1A and 2 of Schedule 1 to the 1994 Act provides:

"1A-(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 the activities are closely bound to one another by financial, economic and organizational links.

-(1) Without prejudice to paragraph 1 above, if the Commissioners made 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 register under this Schedule with effect from the date of the direction or, if the direction so provides, from such 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 of 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 under this paragraph shall be served on each of the persons named in it.

(7) [Sets out the consequences of the making of a direction]

The threshold for liability to be registered for VAT for the year 2003/2004 was £56,000

The provisions of paragraph 1A effectively carries into United Kingdom statute law the provisions of Article 4.4 of the EC Sixth Directive, which provides, so far as is relevant :

"Article 4

'Taxable person' shall mean any person who independently carries out in any place an economic activity specified in paragraph 2, whatever the purpose or results of that activity.

...

...

Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links."

33. The legislation which applies to appeals and to the Tribunal's jurisdiction appears in sections 83 and 84 of the 1994 Act.

"83 Subject to section 84, an appeal shall lie to a tribunal with respect to any of the following matters :

...

(u) any direction or supplementary direction made under paragraph 2 of Schedule 1;

34. Where there is an appeal against a decision to make such a direction as is mentioned in section 83(u), the tribunal shall not allow the appeal unless it considers that the Commissioners could not reasonably have been satisfied that there were grounds for making the direction."

Arguments of the Respondents

35. Ms Bowles, for Customs, referred to paragraph 1A(1) of Schedule 1 to the 1994 Act and pointed out that it covered the situation in the appeal where another business of outside catering was set up which was in reality part of the original sandwich box business.
36. She submitted that the information before the Respondents at the time of the issue of the directions was sufficient to justify the making of them and therefore the decision was one which a reasonable Officer of Customs could make and the appeal should be dismissed.
37. Customs identified financial, economic and organisational links between the two businesses which were contained in her skeleton argument and referred to by her.
38. These were :

Financial

(1) Mr Pemberton has a financial interest in the proceeds of both businesses as does Mrs Pemberton as a partner in Desmond's, and the wife of Mr Pemberton.

(2) Desmonds would appear to be financially dependent upon The Sandwich Box Plus, as shown by the fact that the Sandwich Box Plus pays rent of £3250 per

year, whereas Desmonds only contributes £1576 in rates. The Sandwich Box Plus also pays the electricity bills, and when a meter was used, paid the majority of money due.

(3) Mr Pemberton is the sole signatory for both businesses and maintains day to day and overall control of both businesses.

Economic

(4) Both businesses use the same circle of customers – the idea for Desmonds initially came from the customers of The Sandwich Box Plus and Desmonds does not advertise, therefore is dependent on The Sandwich Box Plus customers and word of mouth for its continued existence.

(5) The van used in the catering business does not have the name "Desmonds" on it, but does bear the logo of the Sandwich Box Plus, thus providing advertising for the other company.

(6) Both businesses are involved with the preparation and sale of food.

(7) Both businesses utilise the catering skills of Mr Pemberton to prosper.

Organisational

(8) Mr Pemberton is the manager and controlling mind of both businesses.

(9) Both businesses use common premises and equipment – including the kitchens and van.

39. She identified the task of the tribunal in determining the appeal as set out in paragraph 46 of a tribunal decision in the similar case of Mike Kiernan's Beer Tent Co Limited t/a Fish and Duck v Commissioners of Customs and Excise (2001) [Decision 17794]. This had reinforced the judgment of McCowan J in the case of Chamberlain v Commissioners of Customs and Excise [1989] STC 505.

Arguments for the Appellants

40. Mr Pemberton told the tribunal that from the outset, Desmond's had to be run for a profit independently of the Sandwich Box. He was sorry that Mrs Thompson could not be present because of illness as Customs had based the case on her evidence.
41. For his wife and himself, he admitted Desmond's had not been run perfectly but at no stage had there been an intention to defraud the Inland Revenue and Customs. An income tax review had been carried out some years previously and when Mrs Thompson had approached him, she had been given all information voluntarily. He considered the evidence against his wife and himself was flawed. Mrs Thompson had misunderstood the information supplied.
42. They ran two separate businesses. The accounts supplied were factual and each business bore its own expenses.

Reasons

43. As the tribunal. We have to exercise a supervisory jurisdiction in this appeal. It is for the Appellants to show that Customs could not reasonably have been satisfied of the conditions set out in paragraph 2(2) of Schedule 1. It was for us to consider whether the Commissioners failed to take into consideration any relevant matters which they should have considered, or whether they did take into consideration any irrelevant matters (see Associated provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223.
44. In South West Launderettes v Customs and Excise Commissioners [1987] (Decision 3449), the tribunal set out those matters which, in their opinion, should be taken into account when considering an appeal involving similar circumstances to this appeal. The tribunal stated as follows :

"Our examination of this aspect of the Appellant's appeal are governed by the provisions of section 40(3A).* We cannot allow the appeal unless we consider that the Commissioners could not reasonably have been satisfied as to these matters. In our opinion this implies that we should consider the matter objectively. As the Appellants representative accepted, the onus is on the Appellant to establish that the Commissioners can only be satisfied after a proper and full examination of all relevant facts and matters. Have the Commissioners taken into account matters which they ought not to have taken into account ? Have they omitted to take into account matters which they ought to have taken into account ? In general principle we accept and adopt this approach, but with this qualification, that even if the Commissioners have failed to some extent with regard to either question, it does not necessarily follow in our view that, standing back, the Commissioners could not reasonably have been satisfied as to the matter in (in this case) paragraphs (b) and (d). Objectively, they could still have been satisfied even if they failed to take into account this of that fact or if they took into account something that they ought not to have done. Overall they might be right to have been satisfied. On the other hand, some fact may emerge which throws a very different light on the facts as they knew then when they made the direction."

*[section 40(3A) of the VAT act 1983 is re-enacted in section 84(7) of the 1994 Act]

45. We take the view that this passage is a realistic approach to the question which we have to answer and, accordingly, adopt it.
46. Customs rely upon certain criteria which are stated in the letter from Customs Officer Sharon Howard dated 12 February 2004 and also repeated with additions in Ms Bowles skeleton argument. We will deal with each in turn taking into account the only oral evidence before us that of Mr and Mrs Pemberton whom we found to be entirely credible.
47. First, we refer to the alleged "facts" as set out in paragraph 29 above.

(a) As he is the only chef involved there is no doubt Mr Pemberton has a considerable influence over the choice, preparation and cooking of food for Desmond's outside catering business. Because his wife works fulltime as a civil servant he is the signatory for the bank accounts for Desmond's as well as The Sandwich Box Plus.

Ms Howard admits in her letter relying upon the case notes of Officer Thompson and comments that" Mrs Pemberton ... has admitted to only limited involvement/occasional help given at functions." At the hearing, Mrs Pemberton denied she gave this information to Officer Thompson.. She told us she was always involved in the running of Desmond's and was fully involved at the functions. We accept that evidence.

(b) The implication of Ms Howard is that both businesses operated fully from the same premises, using the same equipment. In accepting what the Pembertons told us, that is not the case.

After the first few months of its existence, Desmond's became exclusively an outside catering business. All of its income came from these functions and some ninety per cent of the cooking was done from those premises where the functions took place. Very little of the cooking therefore took place at 320 Union Street. As for equipment, we accept that most of the cooking utensils could only be used by Desmond's and it acquired and utilised all its own crockery, cutlery and linen (some 100 place items). The Sandwich Box Plus had no use for such items by nature of its business.

It was admitted by Mr Pemberton that his van was utilised for transporting food and equipment to the outside functions. In view of the annual turnover of Desmond's, it was not practical for it to hire or purchase another vehicle. It made economic sense to use the same vehicle. Desmond's therefore contributed one third of the motor expenses for this facility.

(c) Mr Pemberton admitted openly that he utilized Sandwich Box Plus stationery for Desmond's business. However, he denied that it gave to the public an impression of a single business. He rarely used the notepaper in his Sandwich Box as it was a cash orientated business.

(d) There was no evidence produced by Customs that the customer base of Desmond's came from Sandwich Box Plus customers. The nature of its clientele was completely different. The local lodges of Freemasons and a naval establishment have nothing in common with a sandwich takeaway business in a central thoroughfare in Plymouth.

(e) Again, there was no evidence provided by the Respondents that there was a common financial interest in the proceeds of the "two parts of the business". Indeed, it was only after enquiry by the tribunal at the hearing that copies of

separate annual accounts for both businesses were produced by Mr and Mrs Pemberton who had supplied copies to the tribunal centre previously.

Ms Bowles appeared not to be aware of their existence and we find that on the balance of probabilities neither Officers Thompson or Howard were aware of their existence or contents. These accounts were evidence of two separate businesses. There was no indication in the accounts that the business depended on each other in any respect.

48. Turning to the points raised by Ms Bowles in her skeleton argument and referred to in paragraph 37 above we would comments as follows :

(1) This is a factual statement and not in dispute.

(2) It is true that the rent and rates were split between the two businesses for convenience sake. It was not economically viable for a business such as Desmond's with an annual turnover of between £12,000 and £13,000 to rent appropriate premises and its seemed a practical way for these outgoings to be split between the two businesses in the manner in which they were.

(3) (4) and (5) These points have already been dealt with in paragraph 47 above.

(6) This is factual. However, the type of food provided in each business was very different.

(7) Agreed.

(8) From the evidence before us, it was apparent that Mr Pemberton did manage both businesses but was not the controlling mind of Desmond's. His wife definitely had an input.

(9) We have already dealt with this in the previous paragraphs.

49. As already mentioned. We considered both Mr and Mrs Pemberton to be witnesses of truth and Mrs Thompson must have been mistaken when she inferred that Mrs Pemberton had told her that she had no involvement in the running of Desmond's and "had become a partner somewhat reluctantly". Mrs Pemberton had no participation in the running of Sandwich Box Plus and this is what may have been said by Mrs Pemberton at the time. She undoubtedly had a considerable part in the running of Desmond's as she looked after the front of house at the functions.
50. The facts and matters which the Commissioners considered to be necessary financial, economic and organisational links were set out in both the letter from Mrs Howard dated 12 February 2004 and Ms Bowles' skeleton argument. Looking at them in the light of the evidence before us, there were errors which could have been elucidated and additional information obtained. Particularly, investigations of the annual accounts of both businesses and the crockery, cutlery and linen belonging to Desmond's would have revealed a different picture.
51. It is accepted that there is some overlap between the two businesses, but when one business has only a turnover of one-quarter of the other then it makes economic sense for there to be a sharing of essential expenses such as rent, rates, electricity and motor. There was some indication of a single business, such as the heading to the invoices and the lettering on the van, but these were not, in our view, major matters to affect our decision.
52. Bearing in mind the last paragraph we have come to the conclusion that, on the balance of probabilities, the matters which the Commissioners took into account included a number of important things which were not accurate including the intentions of both Mr and Mrs Pemberton. The result, in our opinion, is that the decision to serve the notice of direction was not reasonable in the Wednesbury sense.
53. The appeal is therefore allowed.

RODNEY P HUGGINS

Chairman

Release Date: 27 October 2005

LON/04/0783