United Kingdom VAT & Duties Tribunals Decisions

 


Ross & Liddell Ltd v Revenue & Customs [2006] UKVAT V19559 (27 April 2006)

19559

Assessment: Appellant providing taxable and exempt supplies – recovery of input tax: assessment made on whole business without direct attribution – whether to best judgement – appeal allowed. VATA 1994 s.73, Value Added Tax Regulations 1995 101(2).

EDINBURGH TRIBUNAL CENTRE

ROSS & LIDDELL LIMITED Appellant

- and - THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents Tribunal: (Chairman): T Gordon Coutts, QC (Members): I R Welch, CA., JP Mrs Helen M Dunn, LL.B.
Sitting in Edinburgh on Wednesday 22 and Thursday 23 March 2006

for the Appellant Heriot Currie, QC

for the Respondents Jane Paterson, Advocate

© CROWN COPYRIGHT 2006.

DECISION

Introductory

The Appellant appeals against two assessments notified on 7 November 2003 and 12 May 2005 in the sums of £31,597 plus interest and £2,835 plus interest. The first assessment, which was persisted in, was said to have been made "in order to protect the revenue" and "on a best judgment basis" in a letter of 30 October 2003.

The Tribunal was provided with a substantial file of correspondence between the Appellant and the Respondents officers which might not unreasonably be described as a dialogue of the deaf. Mr Harris the Managing Director and Mr Cassidy, the Chief Accountant of the Appellant gave detailed evidence. Mrs Vardy and Mr Stewart the officers of the Respondent responsible for the initial enquiries and subsequent assessment by Mr Stewart gave evidence to attempt to explain their thought processes in adopting the attitude they did.

The Grounds of Appeal

So far as insisted upon the grounds of appeal were:

1. The assessment has not been raised on a best judgement basis as required by s.73(1) VATA 1994 as it does not recognise the existence of certain fully taxable business activities where input tax incurred by the Appellant can be subject to full input tax credit.

2. The assessment has not been raised on a best judgement basis as required by s.73(1) VATA 1994 as the assessing officer has failed to obtain a satisfactory understanding of how the Appellant's business operates and costs are allocated.

3. The assessment has been raised without a satisfactory understanding of Regulation 101(2)(b) and the process of direct attribution and fails to recognise the decisions reached in BLP Group v CCE Case C-4/94 [1995] STC 424, Midland Bank v CCE C-98/98 [2000] STC, Abbey National v CCE Case C 408/98 [2001] STC 297 and The Commissioners of Customs and Excise v Southern Primary Housing Ltd [2003] EWCA Civ 1662.

The Appellants Business

We find from the evidence and productions spoken to by Messrs Harris and Cassidy that the following facts are established. The Appellants are a Company providing a comprehensive range of residential and commercial property services. They employ about 80 people in 3 offices in Glasgow, Paisley and Edinburgh. They undertake property management, residential letting, building surveying, estate agency and valuation surveying, all standard rated activities for VAT purposes and they also have a department specialising in the provision of insurances for residential and commercial properties in multiple ownership.

The Glasgow office has in a specific department an operation as insurance intermediary. For that activity, it and the individuals in it, require to be recognised and regulated by the Financial Services Authority. No other employees of the Appellant can provide such services. One director and two other persons in that department deal with that business. The insurance department does not deal with insurance claims.

The Paisley office has based within it the residential letting and building surveying departments. The Edinburgh office deals with other activities but principally property management as do the other offices. No insurance business is initiated in Edinburgh or Paisley although on occasion the furnished let department may ask the insurance department in Glasgow to provide a quote for a particular furnished let. The only activity otherwise having a connection with insurance consists of the odd occasion when someone will come in to the Appellants office in Paisley or Edinburgh to pay in cash or by cheque, instead of by direct debit the balance of an account for charges which may include a payment of insurance premiums. Neither Edinburgh nor Paisley are set up to receive such insurance monies but occasionally may do so. That activity comprises a miniscule part of the activities of those offices, although it was not argued that it was de minimis when considering whether the concept of "used exclusively" must mean that the smallest use otherwise would affect the categorisation of use.

The Appellant's income derived from insurance commission is substantial. The cost of obtaining that income is a small proportion of the overall costs of the business. That factor appears to have bedevilled the discussion of a special method of attributing input tax fairly and reasonably. Despite invitation by the Respondents to operate a special method they refused to authorise any method suggested by the Appellant.

The Accounting for VAT by the Appellant

This is entirely the responsibility of Mr Cassidy and he explained fully how he set about it in production 54. He scrutinises all the items of expenditure due by the company, puts all the VAT input details for the quarter onto a spreadsheet and classifies each item under headings of either exempt, residual or taxable. He analyses every single entry line by line and classifies it accordingly. He outlined his whole approach which, in general terms, was to treat as residual any matters he could not treat as 100% wholly taxable.

As illustrations of items that were treated as taxable costs he instanced:

Actual Computer/Equipment Purchases as they are all marked specifically who they are for.

Cars for the Property Managers etc.

Specific Costs for Paisley and Edinburgh like Oil for the Paisley Office.

Gordon Rae's Costs. (Of which more below)

Specific staff advertising for vacant posts other than insurance.

Specific Costs for the Building Surveyors Department like Ordinance Survey costs, etc.

It should be said at this stage that the Tribunal was impressed by Mr Cassidy's evidence, found no reason to doubt his bona fides or that his attributions were done to his best judgement.

The Statutory Framework

The statutory power which applies to the attribution of input tax is found in Section 101(2) VATA Regulations 1995 which provides:

(2) In respect of each prescribed accounting period-

(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,

(c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and

(d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.

The Applicable Case Law

The case law relating to the matters in issue is in the view of the Tribunal equally plain. There requires to be identified any clearly defined part of the taxpayers economic activities and it has to be determined whether there is a direct and immediate link between the input tax incurred by the user and that clearly defined part of the business.

Midland Bank Plc v Customs & Excise Commissioners [2000] STC 501 it was stated that goods or services acquired had to have a direct and immediate link with the output transactions giving rise to the right to deduct and that the question of what was a direct and immediate link was one of fact for the Court.

In Abbey National Plc v Customs & Excise Commissioners [2001] STC 297 the ECJ held that if services had a direct and immediate link with a clearly defined part of the taxable person's economic activities so that the costs of the services form part of the overheads in that part of the business and all the transactions relating to that part of the business was subject to VAT all the VAT incurred on the costs of acquiring those services was deductible. It was for the national Court to determine whether those criteria were satisfied in any particular case.

In Customs & Excise Commissioners v Southern Primary Housing Association Ltd [2004] STC 209 the Court of Appeal held that the direct and immediate link test was not one purely of fact and was thus subject to appeal. The Tribunal had to determine the primary facts but whether or not those facts amounted to a use within the meaning of Article 17/2 was a question of law arising on those primary facts. In that case it was said that a contract would not have been made but for an associated purchase and sale. The decision continued by emphasising that "but for" was not the test and did not equate to the direct and immediate link and cost component test. The Court of Appeal considered that the Tribunal had conflated two sides of a business – see paragraph 25. The Court in para 32 said:

"The land purchase transaction was commercially necessary to make its performance commercially possible, but it was not a cost component of the contract itself in the same way as the costs of materials used. There is a link with the contract but the link was not direct and immediate. The development contract would not have been made but for the associated land purchase and sale. But 'but for' is not the test and does not equate to the 'direct and immediate link' and 'cost component' test."

In Dial-a-Phone Ltd v Customs and Excise Commissioners 2004 STC 987 which was cited, perhaps because of a certain similarity in the factual matrix, it was held that it did not matter that insurance intermediary services might be viewed as being in a commercial sense secondary to the making of a taxable supply or even that they might be provided only after a taxable supply had been made provided that a sufficient direct and immediate link existed between them and the marketing advertising costs. On the facts of that case however there was not held to be a direct and immediate link.

Question for the Tribunal

The basic question for this Tribunal was whether the assessments noted above should be sustained or quashed. In that situation that is not necessary to do other than examine the assessment and the reasoning for it. The attribution by the Commissioners, which would appear to be to regard all the matters dealt with in the Paisley and Edinburgh offices as being "tainted" with the exempt supply of insurance had to be scrutinised.

Respondents Consideration of Facts

Matters were first raised by the Respondents' Mrs Vardy on a visit in June 2002 at which she spoke to Mr Harris and Mr Cassidy. On the whole matter she expressed her view in a letter of 9 October 2002 as follows:

"As stated in my letter of 24 June 2002, since a significant part of the company's income relates to exempt supplies of insurance commission, you must review the partial exemption position on a quarterly basis to confirm that the exempt input tax is below the de minimus (sic) limits.

Based on the standard method for partial exemption, as detailed in the VAT leaflet Partial Exemption (already sent), it would appear that the company exceeds the de-minimus limits. As discussed, a special method for partial exemption may be more appropriate for your company".

There is no recorded reasoning for that view but it did give rise to much discussion about the utilisation of a special method by the Appellant which, had it been agreed, might have resolved various problems. However no special method was agreed as providing a fair and reasonable result, and although it is not for the Tribunal to express a view on that matter on the evidence presently before the Tribunal it is not understood why there was any difficulty in relating costs to the numbers of staff involved in exempt activities. Accordingly there being no agreement the standard method was used and continued to be used.

The Appellant continued throughout to insist that direct attribution of expenses was possible within the business and the respondent continued to maintain a position that was encapsulated in a letter by Mr Stewart of 17 August 2004 as follows:

"I explained that the aims of direct attribution were to identify the VAT on expenditure that relates wholly and exclusively to the making of taxable supplies and as a consequence becomes fully recoverable by the business.

I discussed with you how the business generated income and I made reference to the marketing material published on the company website which clearly illustrated that property insurance was an integral part of the comprehensive service provided by Ross & Liddell Ltd for their clients.

You outlined to me the rational you had applied in identifying VAT on costs that were regarded as fully recoverable.

After some discussion I was unable to accept that the VAT identified as fully recoverable actually related wholly and exclusively to the making of taxable supplies".

It is to be noted that the word "wholly" does not appear in the statute.

A further view expressed by Mrs Vardy on 5/2/03 in the VAT audit report produced was "the insurance commission is a spin-off of the mba of property management. Property management costs can therefore be seen as a cost component of the insurance intermediary services".

Mr Stewart issued the first of the assessments in issue and the Appellant requested an internal review. That review was conducted by Mrs Parkes and Mr Harrison who, in the Tribunal's view correctly, expressed the view in a letter dated erroneously 20/2/03 instead of 20/2/04 that it was possible "to directly attribute". He referred the matter back to Mr Stewart for reconsideration. Mr Stewart purported to do so but the only amendment he made was to items relating to the costs incurred by a Gordon Rae. Mr Rae provided consultative services on valuation supplies. The insistence up until that point about the inclusion of even that item as a cost component of insurance and intermediary services served merely to indicate a failure properly to consider matters before Mr Harrison's review. However on his revisiting the matter Mr Stewart thought he could make a further additional assessment by disallowing still further items as being part of the "comprehensive service". It can be seen accordingly that underlying the whole approach by the Respondents was a refusal to do other than adopt the blanket approach above noted.

Evidence before the Tribunal

At the Tribunal no detailed evidence of their consideration of the Appellants accounts was given by the Respondents. A detailed calculation and exposition of his attributions was produced to the Tribunal by Mr Cassidy who gave explanations of various items therein such as, for example, the costs of surveyors cars and fuel therefore. None of the detail of these matters was challenged by cross-examination.

Findings on the Evidence

For the avoidance of doubt we can find on the evidence we have as a matter of fact that the surveyor did not utilise costs for the provision of anything but taxable services. In relation also to valuation in estate agency work it is plain to the Tribunal that no question of an insurance intermediary supply arose or was involved. The Tribunal holds that what was involved in the Appellants activities was not one comprehensive business service but discrete parts and several economic activities. We find it to be incorrect as a matter of generality to regard property management costs as a cost component of insurance intermediary services and incorrect to describe the insurance commission as a "spin off". We accept the analysis of the Appellant as to the cost component of various items claimed by them as relating to taxable supplies. This follows as a result of the Respondents failure to examine, identify and attribute cost components in any other way. There might even be no reasonably attributable cost component of the insurance intermediary services supplied at either Paisley or Edinburgh.

Decision

No attempt having been made to identify and deal with the various separate economic activities carried out by the Respondents it follows that the assessment made cannot stand. It was not made to best judgement since we hold that no officer properly seized of the facts of the Appellants business and the cost components thereof could have taken the view that there was tax due, a pre-requisite of an opportunity to assess. This is not a case in which it is the function of the Tribunal to assess what tax is due as in, for example, a case in which there is suppression of takings. The preliminary matter which requires to be satisfied before an assessment is made to best judgement is that there is tax due and on that matter the Tribunal were not satisfied.

In the light of our findings we allow the appeal and set aside the assessments in issue.

T GORDON COUTTS, QC CHAIRMAN
RELEASE: 27 APRIL 2006.

EDN/03/124