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Cite as: [2005] UKVAT V19345

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Shell International Petroleum Co Ltd v Revenue and Customs [2005] UKVAT V19345 (21 November 2005)

19345

Deduction of input tax – Company paying the investor relations expenses of two listed companies that held 40% and 60% respectively of its share capital – Whether services received were services rendered to the company and were services to be used by the company for the purposes of its business – Whether services only satisfied those tests in part

LONDON TRIBUNAL CENTRE

SHELL INTERNATIONAL PETROLEUM CO LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: HOWARD M NOWLAN (Chairman)

SANDI C O'NEILL

Sitting in public in London on 6 and 13 October 2005

Andrew Hitchmough for the Appellant

Paul Key for the Respondents

DECISION

INTRODUCTION

This was an appeal by Shell International Petroleum Company Limited ("Shell International") in relation to whether VAT borne by it in respect of expenses that it incurred, in operating an Investor Relations division, were eligible input tax in relation to its business. The investors in question were (at the time material to this appeal) the public shareholders in Shell Transport and Trading Company plc ("Shell T&T") a UK listed company, and Royal Dutch Petroleum Company ("Royal Dutch"), a listed Dutch company. Shell T&T owned only 40% of the share capital of a UK company which we shall refer to as Shell Petroleum Company (which in turn owned 100% of the share capital of the appellant company, Shell International) and Shell T & T also owned 40% of the share capital of a non listed major Dutch company which we will refer to as Shell Petroleum N.V. Royal Dutch owned the remaining 60% of the share capital of Shell Petroleum Company and Shell Petroleum N.V.

Briefly, the functions of Shell International, in its Investor Relations division, extended to playing a lead role in the communication of the Group's financial and strategic information; conducting results presentations quarterly, running road shows relating to Shell's activities; providing assistance to the analyst community in understanding the activities and results of the Group; shareholder and competitor analysis; and ensuring that internal management of the business entities was fully informed of the financial market's perception of the Group.

Whilst it was not material to the points of principle in dispute, the appeal arose it two different ways.

Initially Shell International had treated the VAT borne in relation to its investor relations expenditure as non allowable. It then made a voluntary disclosure, contending that this treatment had been wrong, and contending that the expenditure should have been treated as general overhead expenditure, recoverable in accordance with the group's partial exemption special method. It accordingly made a repayment claim for VAT allegedly overpaid.

Shell International then consistently prepared its VAT returns for later periods on the basis that it contended was correct.

The Commissioners of H.M. Revenue & Customs (HMRC) disputed Shell International's revised treatment and accordingly refused the repayment claim, and assessed additional VAT for the later periods on the basis that no input tax referable to the investor relations services should have been treated as eligible input tax.

Shell International's appeal was thus an appeal against the non repayment of the claim resulting from its voluntary disclosure, and against the subsequent assessments of additional VAT.

THE SHELL STRUCTURE AT THE TIME IN QUESTION

At all times relevant to the appeal, the structure of the Shell companies was as follows.

Public shareholders in Shell were able to acquire shares either in the UK listed company, Shell T&T, or Royal Dutch. The former was listed on the UK Stock Exchange and the latter the New York and various European Stock Exchanges.

As indicated above, Shell T&T owned 40% of the share capital of Shell Petroleum Company and 40% of the share capital of the Dutch holding company, Shell Petroleum N.V. Royal Dutch correspondingly owned 60% of the share capital of those two companies. In turn Shell Petroleum Company and Shell Petroleum N.V. each owned directly and indirectly numerous subsidiaries. Presumably most UK subsidiaries were owned directly or indirectly by Shell Petroleum Company though there appeared to be no structural reason why Shell Petroleum Company could not own non UK subsidiaries, and it may well have done. Shell Petroleum N.V. owned not only Dutch operating companies but operating companies in many parts of the world. As already indicated, one of the UK subsidiaries owned by Shell Petroleum Company was Shell International.

It followed from the above structure that while the traded value of the listed shares of Shell T&T and Royal Dutch would not necessarily move precisely in line, nevertheless the ultimate investors in both top listed companies had shares that derived their value from exactly the same operating companies. In both cases the percentage ownership by Royal Dutch was of course greater (at 60%) than that by Shell T&T but each listed company held the same percentage interest (i.e. 40% in the case of Shell T&T) in Shell Petroleum Company as it held in Shell Petroleum N.V. Thus if the results of one of the operating subsidiaries of, say, Shell Petroleum Company were particularly good, this would logically have a similar impact (market forces apart) on the traded values of the shares of both Shell T&T and Royal Dutch. It naturally followed from this that all investors in both listed companies had the same interest in the results, and prospects, of the unified group.

So far as UK VAT was concerned, we were informed that Shell International was the representative member of the UK group for VAT purposes, and that the majority of the operating companies owned directly and indirectly by Shell Petroleum Company (including that company) were members of that VAT group.

We were also informed first that Shell T&T and secondly approximately 15 non dormant companies directly or indirectly owned by Shell Petroleum Company were not included in the group registration. Shell T&T was incapable of being included in the group registration because it owned only 40% of the share capital of Shell Petroleum Company. Why various subsidiaries were excluded from the group registration we were not told. Nor were we told whether the number of 15 was precisely correct, or indeed whether the companies were of any great significance.

In a similar manner to that in which UK investor relations activities were conducted by Shell International, we were informed that there was an equivalent service company in the Netherlands owned by Shell Petroleum N.V. that performed similar investor relations activities. Since however Royal Dutch owned more than 50% of the share capital of Shell Petroleum N.V., Royal Dutch was entitled to be a member of the relevant group registration in the Netherlands, and was such a member, with the result that the issue underlying the UK dispute was not relevant in the Netherlands.

THE FUNDAMENTAL ISSUE

There was no dispute between the parties that in order to sustain its claim for a deduction for the VAT suffered in relation to services rendered to Shell International in connection with its investor relations activities, it had, within the meaning of section 24(1) VATA 1994, to establish that the services had been supplied "to Shell International", and that "the services (were) used … for the purpose of any business carried on by Shell International". Since Shell International conceded that the services were not directly attributable to any of its taxable activities it conceded that it would not be able to deduct the whole of the relevant VAT as if the relevant expenses were a cost component of its taxable activities. Instead it claimed to be entitled to deduct the costs as general costs of its business, recoverable in accordance with the group's partial exemption special method.

THE OUTLINE CONTENTIONS OF SHELL INTERNATIONAL

The basis of Shell International's case was that one of its functions was to maintain "Shell's" reputation in the market place, which it did through its Investor Relations Division. It contended that these costs were general overheads of its business. To HMRC's contention that the costs were incurred in supporting the share price of a distinct entity (Shell T&T) not included in the group registration, and in communicating with the investors in that distinct company, so that they were not costs "used in its business", Shell International contended that the perception of Shell in the market place, and its reputation with investors, influenced far more than the price of shares in Shell T&T. It also affected (directly) the ability of the individual group operating companies (of which the majority were members of the VAT group) to carry on business in an effective manner, bearing on issues ranging from customer confidence to the ability of those companies to develop new business opportunities.

THE INITIAL CONTENTIONS OF HMRC

HMRC initially contended simply that the costs could not qualify at all as input tax in Shell International's returns. It was thus contended that:-

(i) the investor relations expenditure was directed at maintaining relations with investors in two companies outside the Shell VAT Group; namely Shell T&T and Royal Dutch;

(ii) there was no real connection or nexus between the Shell VAT Group's business/trading activities and the investor relations expenditure;

(iii) the investor relations expenditure did not form a cost component of the Shell VAT Group's taxable transactions; and

(iv) the investor relations expenditure was not "for the purpose of" the Shell VAT Group's business.

THE FURTHER CONTENTION OF HMRC

The outline submissions made on behalf of HMRC at the hearing referred to the feature that if we found, contrary to the main contentions on behalf of HMRC, that the investor relations expenditure was incurred for a business purpose of the Shell VAT Group, a further question might arise as to whether the expenditure was partly incurred also for other purposes, such that a question of apportionment might be required under section 24(5) VATA 1994. During the course of the hearing we were formally asked to give consent to the modification of HMRC's case such that they could argue in the alternative that the was partly incurred for other purposes. We consented to this variation on terms geared to costs that we will refer to at the end of this decision. It was further requested by HMRC that if we decided that the case was one where the costs were incurred partly for business purposes of the VAT Group and partly for other purposes, we should not ourselves indicate the relevant percentage split of the expenditure, but should leave it to the parties to negotiate "in the ordinary way" on an appropriate apportionment. We were however asked to indicate the principles that we thought might be relevant to the parties in that negotiation.

Whilst we gave leave for HMRC's case to be amended as just indicated, we should mention at this stage that it was self evident that we would not and could not indicate any relevant percentage split between services incurred for business purposes, and those incurred for other purposes if this issue were to become relevant, because there had been and there was to be in the hearing no argument and no evidence in relation to such matters. For instance if it was to be asserted that some apportionment was required because Shell Petroleum Company owned directly or indirectly 15 non dormant companies that were outside the VAT group, and that the services were also used for the purposes of those companies' businesses, then we had no evidence as to the activities or significance of those companies.

We did accept however that if we decided on the main issue, that the expenses were incurred in part for the business purposes of the Shell VAT Group and in part for other purposes, then we would seek to give some guidance on the principles that we thought should govern the further negotiation between the parties.

THE LAW AND THE AUTHORITIES

According to s.24 (1) VATA 1994 Shell International must demonstrate two different points before it sustains its case for a deduction of the input tax related to services received in connection with investor relations expenditure. It must show first, on what has been referred to as the "to whom" question, that the services were supplied to it. Secondly it must demonstrate that the services were used or to be used for the purposes of its business.

The whole of the argument before us focused on the second of those questions, and it appeared to be accepted that the services were rendered to Shell International, so satisfying the first of the two tests just mentioned. This was perhaps slightly surprising as counsel for HMRC drew our attention (in a slightly different context) to the fact that one of the contracts for the supply of third party investor relations services had been entered into by Shell International "on behalf of Royal Dutch Petroleum Company and the Shell Trading and Transport Company plc" (sic).

On the authority of HMRC v. Jeancharm Ltd (trading as Beaver International) [2005] EWHC 839 (Ch), we must review the first, "to whom", question, regardless of the fact that the parties have implicitly assumed that this test was satisfied, and have focused all their argument on the second "used in the business test".

If we conclude that the first test is satisfied, we must then consider the issue of whether the services were used or to be used for the purposes of any business carried on by Shell International.

Several issues arise here.

The first is whether we should operate this test in a subjective or objective manner. On this issue both counsel confirmed that they did not seek to rely on the case of Ian Flockton Developments Limited [1987] 394 that had decided that the test was a subjective one, to be applied however with circumspection. In the light of the views adopted by counsel, particularly counsel for Shell International, and in the light of the general spirit of later decisions, we will apply this second test on the basis of asking whether the objective person would be regarded as having incurred the expenditure and received the services for the purposes of its business. This approach will be particularly consistent with the evidence given by Mr. Gerard Paulides because his evidence had principally focused on an objective summary of the sort of activities undertaken, and to an extent the general approach of the Shell group to the investor relations function. To a considerable degree it was left to us to decide whether we considered that the relevant services could appropriately be said to be used for the purposes of the business.

Much more consideration was given, in argument, to the other issues relevant to how we should approach the "used in the business" test, and to the numerous authorities that impact on that question, even when applying the test objectively.

The leading case of BLP Group plc v. Customs and Excise Commissioners (Case c-4/94) ruled that there had to be a direct and immediate link between the services and the taxpayer's taxable transactions for the input tax to be deductible. In that case, the services were the services of accountants and lawyers in relation to the sale of shares which sale was an exempt transaction, such that ordinarily the related VAT would have been non deductible as being specifically attributable to the exempt transaction. The company had argued however that as it was selling the shares in the first place to re finance its main business and reduce debt, the input tax was suffered for that broader business purpose and should have been apportioned between the company's taxable and exempt supplies, and moreover the sale of the shares, as an incidental financial transaction, left out of account in doing the apportionment. It was held that what counted was the direct and immediate purpose for which the services were secured, and as that purpose was the sale of the shares, an exempt transaction, the VAT was entirely non deductible.

The test of "direct and immediate link" seems to us to be particularly appropriate where there is no issue of the services benefiting two different parties, the taxpayer and another, but rather the situation where the taxpayer incurs the services directly for one purpose, but has an ultimate aim, or broader purpose in mind. That of course was precisely the situation in the BLP case.

The "direct and immediate link" test is also applied helpfully in situations where the question is whether the services are solely attributable to taxable transactions or whether they are used more generally for unallocated business purposes such that they should be apportioned.

We feel that whilst we could adopt the terminology of "direct and immediate link" in coming to the decision that we have reached, we nevertheless find the test slightly less helpful than the test adopted by Latham J in C&E Commissioners v. Rosner [1994] STC 228. In that case the taxpayer had borne the costs of a fraud case against him (where he pleaded guilty) and the Tribunal had found that the outcome of the case directly affected, and was bound up with, the purpose of his business. They also found that the costs incurred had been incurred both for the taxpayer's personal benefit and for the purposes of the business so that at least in part the taxpayer should be entitled to treat the VAT element of the legal fees as deductible input tax. Latham J over-turned that decision on the basis that to be deductible there had to be "a clear nexus between the matter in relation to which the expenditure had been incurred and the business itself. That nexus cannot merely be the fact that the business benefited from the expenditure".

Counsel for HMRC in the present case referred to this test as involving both a positive and a negative element. The positive was to establish the "clear nexus" between the expenditure and the business; the negative was that it was not enough that the business merely benefited.

Another way to express this test, but it is really only offering slightly different wording, is to draw a contrast between the "occasioning cause" as to why expenditure is incurred, and "peripheral benefit". However important the peripheral or spin off benefit derived from some expenditure may be, and however much that benefit might benefit the business, the question that must still be asked is "Was the expenditure incurred for the business?" That seems to us to be the required nexus in Rosner, and to be the test that we should apply here.

An excellent example of a case where this test was satisfied (albeit that the point was so obvious that it had been conceded and it did not have to be debated) was C & E Commissioners v. Redrow Group plc, [1997] STC 161. In that case Redrow, a well known house builder had initiated a scheme under which, in order to promote the sale of its new homes, it instructed estate agents in the sale of their old homes, by people who purchased Redrow houses, and if they purchased a Redrow house, it paid those estate agency expenses. The case was formally only on the first issue that we have referred to above of whether the services were rendered "to Redrow". It had been conceded that the services were used for Redrow's business and that the case was not one where the real nexus was between the individual purchaser who was selling his old house and the estate agent, with the benefit to Redrow (of promoting a sale of its new homes) being purely a peripheral benefit.

In the Redrow situation the whole scheme had been introduced for the purposes of Redrow's business, namely to promote the sale of new houses. There was no question of Redrow altruistically meeting the estate agents costs of third parties, and deriving a spin off benefit. The occasioning cause of the scheme and the contractual feature that Redrow instructed, and paid, the relevant estate agents was all dictated by the fundamental trade motive that Redrow wanted to promote the sale of its new houses.

Drawing these various threads together, we conclude that in applying the law to the facts of this case we must address the following questions.

(i) Were the third party services received in connection with the investor relations services rendered to Shell International (the "to whom" test)?

(ii) Were the services (or at least some of the services) rendered so as to establish the required nexus with the businesses of the companies in the Shell International VAT group and for use in those businesses? Putting it another way, were the services (or some of the services) actually occasioned by business and trade considerations of the businesses of those companies?

(iii) Did the relevant nexus go beyond the feature of the Shell International VAT group companies merely deriving spin off or peripheral benefits from services primarily incurred for other persons (Shell T&T and Royal Dutch)?

(iv) Assuming that the above tests are satisfied, were the services wholly used for business purposes of companies in the Shell International VAT group, or were they partly used for other purposes? What different factors might lead to possible apportionment? This is, of course, aside from the issue that the services were always admitted to be general overhead services, such that the input tax would have, in any event, to be apportioned by reference to the group's partial exemption special method.

THE FACTS AND THE EVIDENCE

The facts presented to us at the hearing were provided principally by the production of a copy of a letter from Shell Finance Services to HM Customs & Excise dated 29 March 2004 and in the Witness Statement provided by Mr. Gerard Paulides, head of UK Group Investor Relations, and in the oral evidence given by Mr. Paulides, the only witness.

We understood two areas relatively clearly in the light of the above, but there were two other areas where we were left in some doubt by the evidence that had been provided.

The first area that we feel we understood clearly was the general summary of the function of the Investor Relations division. Rather than describe this in our own words we will quote those sections of the letter of 29 March that summarised the background, leaving out the VAT related arguments. The relevant passages of the letter were as follows.

"The Royal Dutch/Shell Group of Companies (Shell) aims to be the world leader in energy and petrochemicals and to deliver superior shareholder returns. The Investor Relations function has the lead role in the communication of Shell's financial and strategic information with the key purpose to ensure the share price fully reflects the intrinsic value of the Group.

"Investor Relations is the area within SPCo that operates to provide an interface between stakeholders and Shell, conveying information to investors (private and institutional), potential investors, analysts and the financial media, complying with regulatory requirements and maintaining or improving the group's reputation within the market to ensure share price stability.

"Its main activities are as follows:

• Playing a lead role in the communication of the Group's financial and strategic information;

• Conducts results presentations each quarter, including dividend announcements;

• Runs road shows relating to Shell activities;

• Provides assistance to the analyst community, ie to provide them with information to assist them in understanding the activities and results of the Group and enable them to produce reports and advise the market;

• Assists in the production of annual reports;

• Full production and distribution of quarterly reports;

• Full production of a Financial and Operational Information booklet, a supplement to the annual report;

• Shareholder and Competitor analysis;

• Ensuring that internal management is fully informed of financial market perception of the Group;

• Make decisions on disclosures to be made to the market and execute in a timely manner;

• Disclosure to the market of other news items; and

• Maintenance of the website (http://www.shell.com/investors).

"A good recent example of Investor Relations' activities has been providing information to stakeholders in respect of the reserve recategorisation issue. As you as no doubt aware, this has been a significant issue for Shell and Investor Relations has been working to minimise the damage to Shell's reputation, the financial market's confidence in the way Shell does business and the share price".

We will not quote further passages of the letter that were more geared to emphasising the business significance to Shell of the above activities, because we have quoted the extracts above simply to repeat a fairly objective summary of the sort of activities undertaken.

In his Witness Statement and more particularly in his oral evidence we feel that we got a clearer idea of Shell's approach to the investor relations activity from Mr. Paulides, than emerged from the fairly bald summary quoted in para 15 above.

First Mr Paulides described how structurally there was an equivalent service company, Shell International B.V. that operated a similar investor relations function in relation to the Dutch and other international operating companies held in the group headed by Shell Petroleum N.V.

He then described the approach to staffing the Investor Relations function internally which we thought was very important. He himself had been in the Investor Relations division since 2003 but had previously been running the international gas business. He said that virtually all the people employed in the Investor Relations function had business backgrounds. They were not in other words from a professional regulatory background, but were representatives of the group's various business interests. He and others had had 10 to 15 years experience in business and the likelihood was that after a 3 or 4 year stint in Investor Relations, they would be re assigned to one of the business units.

One of the main functions of the Investor Relations function was to give guidance to the internal leaders of the business functions, and to provide crucial feedback from analysts and the professional investment community of what is expected of the various businesses, and of new business opportunities. He personally would regularly be communicating with the chairman of the UK side of the business, and the leaders of the various business units.

In cross examination, Mr. Paulides first confirmed that there were more than 20 people engaged internally in the Investor Relations function.

In response to the important question of whether the primary aim of Investor Relations was to liaise with investors, he answered that that aspect was important but not crucial. At a later stage in cross examination, he expanded on this answer by saying that the group was very focused on "value creation". He observed that the group created no value if the approach was simply to liaise with investors. To create value, a great deal of time was spent talking to business leaders, endeavouring to create and exploit new opportunities. Furthermore if the business case was not put adequately to the investor community, this could result in adverse criticism and possible pressure to change the business model. It was in the interests of the businesses to take up good ideas from outside, but also to see that the businesses were not disrupted or damaged by criticism from uninformed investors.

It was a further part of the function of the Investor Relations function to gather information about competitor strengths and weaknesses, and to feed this back to the business units.

Several questions were put to Mr. Paulides in cross examination that he was unable to answer. He knew that the costs directly incurred by Shell International in its Investor Relations function were cross charged against Shell Petroleum Company but did not know whether in its turn that company cross charged Shell T&T and Royal Dutch for any of the services. He appeared to think that it was unlikely but could not confirm that unequivocally.

Since his own background was business based and that was the slant of the Investor Relations function he was unable to answer any questions in relation to the particular companies (said to be 15 by HMRC on their understanding) that were non dormant and excluded from the group registration.

Mr. Paulides was asked about a particular contract, to which we have already referred, that was executed "on behalf of Royal Dutch Petroleum Company and the Shell Trading and Transport Company plc". He said that this contract, with Georgeson Shareholder Communications Limited, was a "one off", and that it arose out of the particular need to respond to shareholder questions at the time of the reserve recategorisation issue. The contract did appear to envisage responding to shareholder phone enquiries and other such matters.

Finally in response to a question from the Tribunal, as to whether some or all of the expenses would have still been incurred if the group had not been publicly traded, he said that many would have been. He cited the example of companies funded by private equity, and the degree to which investors had a say in their businesses, and thus the business need to liaise with such investors. He also made the point (perhaps more significant in the context of a private group where there was no need to formalise any contacts with investors at all) that the same functions, as were undertaken by Shell in its Investor Relations function, could be handled by a "public affairs regime". He suggested that not everyone had the same model but that essentially the same functions could be undertaken under a slightly different label.

We will defer commenting on the facts and evidence disclosed, summarised in paragraph 15 above and this paragraph 16, and will now turn to the two areas that we have indicated were not particularly clear to us.

Although there was considerable focus on the activities performed internally in the Investor Relations function, the VAT for which a partial input deduction was being claimed of course arose in the provision of third party services to that internal Division. There was very little treatment of what these costs were, although several third party contracts were included, without comment, in the bundle of documents. Admittedly the final paragraph of Mr. Paulides' Witness Statement did refer shortly to this point. It read:

"External costs incurred by Investor Relations when communicating with the equity investor community are event related costs such as venue hire, staging, sound, lighting, webcasting and teleconferences. Other costs are primarily regulatory news feeds, video production and consultancy fees."

We regard this omission as most unsatisfactory though less so in the light of the decision that we have actually reached. But we were otherwise left to assume or infer that the outside services (particularly those just referred to as consultancy) were expert services designed to support all the functions already undertaken internally by the Investor Relations division and summarised above. Whether the functions referred to in the passage that we have just quoted were events such as the A.G.M of Shell T&T, or whether they were less formal presentations to analysts and the investor community was not made clear to us.

The other area where no argument was advanced and no evidence produced was the whole issue of whether and to what extent a business has a real business interest in performing an Investor Relations function well and efficiently, even if it were to be conceded that one of the main aims of that function was to promote better shareholder understanding, and perhaps more price stability in the company's share price. It may be that this topic was rightly left to us since we have already summarised that it is not the company's subjective intentions, but rather an objective test, that governs whether the second of the two critical tests set out in para 9 above has been satisfied.

We approach this issue by stating first, and this is part of our decision, that the whole activity undertaken by the Investor Relations function, and implicitly many of the costs incurred from outside parties, seemed to us to go beyond the requirements or merely securing compliance by the two listed companies, Shell T&T and Royal Dutch with their statutory, accounting, legal and Stock Exchange obligations.

A separate division has been set up in the UK, and another in the Netherlands, to which people with valuable and extensive business experience have been transferred for 3 to 4 year periods of duty. In the UK at least 20 people are employed in the division and the division also engages the expertise of outside consultants. It is clear to us that the functions and purposes of this division go beyond merely ensuring compliance by the listed companies with their obligations, and we therefore ask ourselves why such importance is attached to the function. Is it simply prompted by the desire to benefit shareholders by perhaps enhancing the share price? Naturally we accept that the purpose of the relevant organisation is not as such to raise the share price but simply to provide better information, and to put the group's case on all issues in a balanced, but nevertheless, good light. But however the function is described, is it performed with the altruistic motive of benefiting the shareholders? Or is it performed simply so that the investor community considers that Shell, like most equivalent companies, performs this function efficiently? Or is it performed because the whole function is seen to be of vital importance to the trades and businesses of the group companies? Ignoring at this point, detailed structural questions, and almost approaching the question as if the listed company was itself the trader, we think that it was established on the evidence, and that objectively speaking the conclusion is realistic, that major companies see significant trade and business reasons for operating an effective Investor Relations function of the sort involved here.

In the present case, much of the evidence as to business motivations, referred to liaison with internal division and business units, seeking new business opportunities, and keeping the business units well informed of the expectations of the investor community.

No attention was paid to the point that seemed to be self evident to us, namely that if a group or company allowed its share price and shareholder relations to languish through inattention to investor relations, this could have adverse implications for the trade and business of the group for a number of reasons. The price at which new share capital could be issued, the pricing of a rights issue, and in the final analysis the very ability to call on the market for further equity would all be influenced by poor equity performance. It is not suggested that the Investor Relations function improves performance directly, but in as much as the objective is to improve presentation and put matters in their best light, we consider that these functions (even if judged initially, and unrealistically, on the basis that they only result in supporting the share price) appear to us to have a clear business motivation.

The same point applies in relation to new acquisitions and take over defences. Good investor relations can assist the company in making new acquisitions, both as a matter of pricing share issues and general investor reaction.

A healthy share price obviously also benefits employees participating in share option and incentive plans, and in their general pride in the organisation. It is also central to the pricing of any convertible debt issues.

Turning to raising debt, brief mention was made of the importance attached by the group to sustaining its AAA rating, but more generally we think it self evident that investor relations can play a role in enhancing the profile of a company in the debt markets and of therefore cheapening the cost of debt to the group.

Whilst we repeat the point that little attention was given in argument to any of the points mentioned in this para 18, we think that the objective businessman would support the point that there were many trade and business reasons, both those mentioned in evidence and those that we think are fairly self evident, for operating an efficient investor relations function. In so far as the division operates solely to secure compliance with legal and Stock Exchange requirements, we accept that those activities are not primarily business focused. But for what may be a considerable part of the investor relations activity, going beyond mere compliance, we consider that the readiness of most groups to undertake these further functions is largely business driven, even if the business motivations are secured by nurturing the share price, with perhaps spin off benefits to the shareholders.

OUR DECISION

Our decision is a somewhat complex one, in which we conclude that although in part Shell International satisfies the two tests for sustaining deductibility of input tax in accordance with its special method, there are four factors that mean that the tests are only satisfied in part. We will accordingly explain why we consider that HMRC fail in their overall argument that Shell International fails the second test across the board; and we will then explain the four aspects of the case that require or might require some apportionment. Some of our observations on these points will be tentative because of the lack of argument and evidence on the points.

On the general point, we consider first that with the exception of two categories of service, the relevant services were rendered to Shell International. It was not asserted that any of the services were rendered otherwise than to Shell International. Aside from the two exceptions we think that this approach was correct. Contractually the services were rendered to Shell International, and we see no reason to say that consultancy services, supporting the wider compass of the investor relations function that we consider to have been established were provided otherwise than to Shell International.

There are however two exceptions. First the contract that we have referred to with Georgeson Shareholder Communications Limited appears to have been entered into on behalf of the two listed companies. It also appears to have related very specifically to shareholder enquiries around the time of a shareholder Meeting of Shell T & T, considered to be vital, and because the services were thus directly intervening in dialogue between shareholders and Shell T&T, we consider it strongly arguable that those services were provided to Shell T&T, even if they were paid for (if they were) by Shell International. Since we conclude that these services also fail the "used in the business" test (see below), we consider that no VAT deduction should be available in respect of these costs.

We are not clear as to the nature of the "outside events" and "functions" that Mr. Paulides mentioned at the end of his Witness Statement, and that we referred to towards the end of para 17. We accept that if outside events were contractually performed for Shell International, and they were secured in the performance of the investor relations function in its wider sense, then there is no reason to question the assumption that the relevant support services were provided to Shell International. If however these events included support services at the formal A.G.M. of Shell T&T (for instance the provision of rooms in which Shell T&T would hold its A.G.M.), then we think that these services should be seen as being rendered to Shell T&T, and only paid for by Shell International. The A.G.M is after all Shell T&T's meeting, and its function, and it seems realistic to treat the securing of accommodation in which to hold its meeting as a service rendered to that company.

These two exceptions apart, however, we consider that the first test was satisfied. Apart from services in the identified two categories, we consider that the services were provided to Shell International.

Subject to the three important areas where we consider that the services must or may be said in part not to have been used for the purposes of the businesses of the VAT group companies (see 22, 23 and 24 below) we consider that Shell International generally satisfies the second "business use" test. We think that the occasioning cause of why a group such as Shell undertakes the wider aspects (beyond pure compliance with its statutory, accounting and Stock Exchange requirements)) of an investor relations function is for one or another benefit of its businesses. The functions are not performed (other again than those related to pure compliance) principally for the shareholders or for the investor community generally, or principally so as to benefit the two listed companies, or to discharge the obligations of those two companies. They are performed because Shell International has all the business reasons that we have referred to for performing this activity. In the light of this, it does not matter that the investor relations are strictly relations between the shareholders of the two listed companies and those two companies. It is not a case of an activity being performed, and services being received, first and foremost for the two listed companies, with just spin off benefits flowing through to Shell International and its businesses. It is a case of the wider function of investor relations being conducted fundamentally for the purpose of the businesses, with outside services being received in that character. The fact that the two listed companies benefit from the activities of the relevant division does not break the nexus between the services and the business motivations for the performance of the whole activity and the securing of the services.

The facts were of course very different in the Redrow case from those in the present case, and the business use point did not strictly arise at all for debate in that case, but we nevertheless consider that the nature of the facts in this case are fairly similar to those in Redrow. In that case the occasioning cause of the scheme that was evolved was to support and benefit the trade of Redrow and to sell its houses. In this case, the occasioning cause of the performance of the wider investor relations function (and the securing of outside services in the course of that activity) is business benefit, and the fact that the shares and shareholders are shares and shareholders in two other companies does not change this fact.

The first ground on which we consider that the cost of the services must be apportioned, and part be said to fail the business use test, is where the nature of the services is principally directed simply to securing compliance by the two listed companies with their obligations. We believe that we are not lapsing into the error of addressing a service of one nature and observing that there are competing links with enabling the listed companies to comply with their obligations, and securing business benefits. We consider that an activity such as arranging the A.G.M. of Shell T&T, and securing services in relation to that, are principally if not totally directed to ensuring that that company complies with its obligations. And if there are spin off benefits to the trading companies in the VAT group, and even that is not particularly evident, then those benefits are precisely the feature that fails to satisfy the "business use" test. In answering the question, "Why have those particular functions been performed?", the answer is to secure compliance with the listed company's statutory obligations.

As we have already indicated no argument or evidence was given in relation to this possible demand for an apportionment, and we have also observed that in all the factual information and evidence that was produced to us, most of the attention was directed to the nature of the investor relations function, rather than to the particular third party services rendered to Shell International in connection with it. We can obviously therefore not suggest any proportion of total services that might fail the second test on this ground, and we were specifically asked not to do so.

The next point is by contrast, extremely simple. Although evidence was not given as to how many companies owned by Shell International were excluded from the group registration, and as to how significant the operations of the alleged 15 excluded companies might be, we cannot see how it can be argued that no apportionment is required in the light of the fact that the investor relations services secured by Shell International benefit not only the companies within the group registration, but also those outside it. It is clearly the case that services "used for the purposes of the businesses of the companies in the group registration" cannot include companies outside the registration merely on the ground that the extraneous companies are owned by Shell Petroleum Company directly or indirectly, so as to be included within Shell Petroleum Company's business in a general and non VAT sense. In this context it is use for the purposes of the businesses of companies in a VAT sense that counts and we conclude that to the extent that services benefit and support both VAT group companies, and non VAT group companies, again an apportionment must be made. It is only the proportion of the cost of services and related input tax attributed to use for the purposes of the VAT group companies that can qualify in the VAT group to be included in the special method allocation.

The third occasion for a possible apportionment is much the most difficult.

Since there are service companies in both the U.K. Shell Petroleum Company group and in the Dutch group headed by Shell Petroleum N.V., it might follow that most of the focus of the investor relations functions performed in the UK would relate to investor relations with the UK shareholder base, and thus the shareholders of Shell T&T. If then it were right to suppose that Shell International dealt with the investor relations of the Shell T&T shareholder base, but Shell International still argued that it essentially did this (as we have decided in 21 above) for business reasons, one would have to observe that Shell T&T owns not only 40% of the share capital of Shell Petroleum Company, but also 40% of the share capital of Shell Petroleum N.V. Without any information on this point, it seems at least distinctly possible that that second 40% share-holding might be worth more than the share-holding in Shell Petroleum Company, the U.K. company.

On the reasoning then that ultimate investors can only be interested in what one might describe as "combined group information" and the world wide picture, it would follow that if the prime focus of the investor relations activity of Shell International was to deal with shareholder relations with the UK shareholder base, then it would be difficult to say that that activity was entirely directed to the business benefit of Shell Petroleum Company and its U.K. VAT group subsidiaries, since arguably half (or maybe more) of Shell T&T's investment might consist of its share-holding in Shell Petroleum N.V. And performing an investor relations function for Shell T&T would have to be said to be one directed to securing the business interests of not only the VAT group and the non VAT group companies owned by Shell Petroleum Company, but the companies owned by Shell Petroleum N.V. as well.

A quite different picture might emerge however if the way the functions are divided between Shell International and the Dutch service company were different. The constant feature of course would remain that the investor community in both listed companies would only be interested in the world wide picture, so that the information imparted to all investors must obviously reflect the activities, profitability and prospects etc of the world wide group. If however the right conclusion is that the focus of Shell International's Investor Relations function is to represent and input all information from the Shell International sub group for dissemination amongst both groups of shareholders that have an interest in the Shell Petroleum Company sub group, and it is the Dutch service company that inputs the information etc from the Shell Petroleum N.V. companies, for dissemination again amongst both groups of shareholders, then this approach would appear to eliminate the need for this third possible apportionment.

The resultant picture would of course emerge as follows. Shell International would be rendering functions essentially for the business motivations of its subsidiaries, and seeing that the UK derived information was appropriately disseminated amongst the shareholder base of both Shell T&T and Royal Dutch. The occasioning cause of all of Shell International's activity would be to support the business interests of the companies in the Shell Petroleum Company sub-group. There could well remain a need for apportionment because of the factors referred to in paras 22 and 23 above, but the point in this para 24 would largely drop away.

Indeed the overall conclusion that we have reached and summarised in para 20 above would rather be reinforced. The picture would emerge that all of Shell International's functions were related to the benefit of its companies, and it would be entirely secondary that the function was partially performed by disseminating the information amongst the shareholder base of the two listed companies. There would be less temptation to say that the functions were primarily performed in relation to another company, and amongst the shareholder base of just Shell T&T, as HMRC originally framed their case. Shell International would be securing its own business benefits, and it would be indifferent to the feature that the information was blended with information amassed by the Dutch service company, and then imparted to the investor community in general, amongst the shareholders in both listed companies. And it would be consistent with this view that the investor relations function in the UK would report almost exclusively to the companies and business heads that it was seeking to represent, in other words those within its own predominantly UK sub group.

It is of course essential for the parties to consider which is the correct approach and absent argument and evidence we cannot purport to do so.

COSTS

We have referred earlier to an agreement about costs. When HMRC requested leave to amend its case and to advance the apportionment argument in the alternative as a formal part of its argument, Shell International requested and HMRC agreed that if HMRC failed to sustain its case for total disallowance in this hearing then the costs of this hearing would be awarded to Shell International. We accordingly make that award. Whilst the following is naturally subject to review by a later Tribunal that may have to hear a further appeal if the parties are unable to negotiate a satisfactory apportionment between themselves, HMRC agreed that reasonable costs of a further appeal would be awarded to Shell International, since that appeal could never have arisen or been heard, but for the leave granted to HMRC to amend their case in this appeal.

HOWARD M NOWLAN

CHAIRMAN

RELEASED: 21 November 2005

LON/04/1578