United Kingdom VAT & Duties Tribunals Decisions

 


19740

INPUT TAX – whether VAT paid for a sub Post Office counter and security screen was deductible in respect of general stores business carried on at the same address . No – appeal against assessment to recover tax dismissed - VATA 1994, ss 24 and 26 – EC Council Directive 77/388 Art 17(2).

LONDON TRIBUNAL CENTRE

ROBERT TAYLOR AND MARY ELIZABETH TAYLOR T/A CHEW MAGNA POST OFFICE	Appellants
and
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS	Respondents

Tribunal: Rodney P Huggins (Chairman)

Claire E Howell

Sitting in public in Bristol on 14 July 2006

Alan Rushleigh, VAT Consultant, for the Appellant

Paul Key of Counsel instructed by the Acting Solicitor for Revenue and Customs for the Respondents.

... CROWN COPYRIGHT 2006

DECISION

The appeal

1. Mr Robert Taylor and Mrs Mary Elizabeth Taylor trading as Chew Magna Post Office ("the Appellants") appeal against an assessment made by the Commissioners on 20 January 2005 in the total sum of £1,755.99, the material component of the assessment being in the sum of £1,301 plus interest of £239.70 for the period 01/02.
2. The assessment was issued because Revenue and Customs were of the view that the Appellants were not entitled to claim input tax in respect of a Post Office counter and security screen purchased by them.

The legislation

Input tax

3. The relevant European provision relating to this appeal is contained in the Sixth Council Directive (77/388/EEC) ("the Sixth Directive").

Article 17(2) of the Sixth Directive provides as follows :

"In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay :

(a) value added tax due or paid within the territory of the country in respect of goods or services, supplied or to be supplied to him by another taxable person;

4. The legislation relating to input tax is contained in sections 24 and 26 of the Value Added Tax Act 1994 (the 1994 Act). The relevant parts of those sections which (in particular) implement Article 17(2) in the UK provide :

"24(1) Subject to the provisions of this section, "input tax" in relation to a taxable person, means the following tax, that is to say –

(a) VAT on the supply to him of any goods or services …being … goods or services used or to be used for the purpose of any business carried on or to be carried on by him …"

(5) Where goods or services supplied to a taxable person … are used or to be used partly for the purposes of a business carried on or to be carried on by him and partly for other purposes, VAT on supplies … shall be apportioned so that only so much as is referable to his business purposes is counted as his input tax."

26(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period … as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business-

(a) taxable supplies …"

Postal services

5. Schedule 9, group 3, items 1 and 2 of the 1994 Act provides that the following supplies are exempt.

"1. The conveyance of postal packets by the Post office company.

2. The supply by the Post Office company of any services in connection with the conveyance of postal packets."

The issue

6. The Appellants are in business in partnership running a village general store which included a sub post office. It was accepted by both parties that Mrs Taylor, one of the Appellants, was employed by Royal Mail under a contract of service to manage the sub post office. The Appellants argued that their general business and the sub post office were so inextricably linked that their general business was entitled to claim input tax in credit in respect of the VAT on the purchase of a new counter and security screen as it was used in the course of the ordinary taxable business as well as a post office.
7. Revenue and Customs argued that the activity of a sub post office was outside the scope of VAT and the counter and screen installed by the Appellants were not goods acquired for the purposes of a business carried on by the Appellants within the scope of section 24(1) of the 1994 Act.
8. Accordingly, we have identified the issue for determination in the appeal to be whether the counter and screen were supplied to the Appellants so that the tax incurred was their input tax as defined in section 24(1).

The evidence

9. The parties produced a bundle of 80 documents. Oral evidence was given on behalf of the Appellants by Mrs Taylor and Mr Fred Cowgill a VAT Consultant and also a customer at the Appellants' shop.

Assurance Officer Miss Kirsty Jolliffe ("Miss Jolliffe") gave evidence for the Respondents.

10. From the evidence before us we find the following facts.

The Appellants and their business activities

10. Mrs Taylor acquired the general store business in South Parade, Chew Magna near Bristol in January 1998 as a going concern and became the sub post office manager at almost the same time.
11. She became registered for value added tax as a sole proprietor from 8 January 1998. She ran the business with the sub post office until May 2004 when her husband took early retirement. They entered into a partnership and have conducted the general store together since May 2004. Mrs Taylor continued her relationship with Royal Mail as far as the sub post office was concerned. Mr and Mrs Taylor were registered for VAT with effect from 6 May 2004. The business was transferred into their joint names as a going concern.
12. From 1998, Mrs Taylor has been employed as the sub-postmaster and was employed in that role by Royal Mail Group plc which trades under the name of Royal Mail. She received a salary from Royal Mail for her sub post office duties which is paid monthly. In addition she also receives monthly a sum called "staff costs" to cover part-time staff and a much smaller amount called "non staff costs" which is a contribution towards the expenses (other than staff wages) incurred in running a sub post office. Royal Mail does not rent any premises from the Appellants and this allocation is to cover a proportion of the costs incurred at the property such as rates, heating and lighting and other similar outgoings.
13. The Appellants include Mrs Taylor's post office salary and the staff costs and non-staff costs in their annual accounts. However tax and national insurance contributions are deducted at source from her salary.

15. They employ in the general business two part-time employees and another person who works on Saturdays; lunch hours are covered by Mrs Taylor and post office staff. The opening hours for both the general store and the sub post office are 09.30 to 17.30 on weekdays and 9.00 to 13.00 on Saturdays.

14. The shop premises consist of one large room with a smaller area off selling cards. The post office is located within the same room as the general store and upon entering the shop takes up the left hand endentirely. It is well contained with a modern counter and security screen entirely closing the area from the top of the counter to the ceiling. This is to prevent unauthorised access to the post office working area. There is a door in the wall behind the post office area leading to residential accommodation.
15. The general store has a retail counter and till area to the right of the entrance door which is completely separate from the post office counter on the opposite side of the room.
16. The business sells amongst other things cards, stationery, confectionary, small gift items, wrapping paper, some books and small office items. It also acts as an agent for film processing and dry cleaning. It does not sell food, tobacco or newspapers/magazines.
17. In addition, the business supplies photocopying and fax facilities which are always conducted through the post office screen because the machinery for these items is placed in the post office working area.
18. The post office has its own special till which only deals with takings for post office services.

21. However, from time to time, customers use the post office counter in order to pay for items which are sold or provided by the general store. Normally this occurs at lunchtime when the only person on duty is behind the post office counter and also if a customer is purchasing a card which requires a postage stamp on the envelope. The sales for photocopying and fax facilities are also paid for over the post office counter.

19. All the cash for the items mentioned above were paid over the post office counter and placed in a smallish box. When convenient, the cash was transferred to the main till by the general store counter. No individual record was kept for the various items and the amounts of money dealt with in this way are therefore not identifiable.
20. Towards the end of the year 2000, Mrs Taylor decided that as government regulations were about to be brought into force to ensure shop premises would be more user friendly for disabled wheelchair customers, she should replace the existing post office counter and screen with a unit which would, for instance, provide a writing table. Also the general store area had been renovated before.
21. Upon recommendation from Royal Mail she approached E A Smart Security Limited of Dewsbury, Yorkshire who manufactured and sold post office security screens and counters. They provided and installed a "Post Office SP50 2000 series counter and screen" in January 2001 for a total price of £8738.48 with a VAT content of £1301.48.
22. Mrs Taylor who at the time was the sole proprietor of the general store subsequently claimed the VAT component as input tax in the 01/02 return for the business.

Customs investigation

23. A routine VAT inspection took place on 14 January 2005 at the shop premises. Prior to the visit, the officers who conducted the inspection (Miss Jolliffe and Officer Tom Alvey) had identified the invoice for the supply of the post office counter and screen from the VAT records as being subject to scrutiny.
24. Miss Jolliffe and Mr Avey conducted a thorough investigation of the business records which revealed particularly what appeared to be items which were non-deductible input tax. These related partially to road fuel payments and that for the counter and screen. They discussed these with Mrs Taylor and said that an assessment would be raised to take account of the VAT that had been reclaimed.
25. Upon her return to the office, Miss Jolliffe raised the assessment on 25 January 2005 confirming the matters which had arisen from the inspection. She had previously written to Mr and Mrs Taylor on 17 January 2005 pointing out what in the opinion of Customs was not allowable for input tax claimed.
26. On 31 January 2005 Mr David Rice the Appellant's Accountant indicated in a letter to Revenue and Customs that his clients were not recommended by him to pay the assessment in so far as it related to the counter and screen. The Appellants then appealed on 31 March 2005 and the late appeal was admitted.
27. As a result of the appeal, Customs Officer Mrs Sally Blackford of the Bristol VAT Appeals Office indicated to Mr Rashleigh on 10 May 2005 that she wished to carry out an independent review of the assessment raised by Miss Jolliffe. Mr Rashleigh responded on 18 May supplying information about what the monthly payment from the Post office included and setting out his assertion that the input tax did not have to be repaid. Mrs Blackford replied on 15 June asking (inter alia) for "copies of the records kept or the accounting procedures used in order to separate the takings relating to shop sales which are taken over the post office counter". She commented further "how are these sales included into the shop sales 'point of sale' retail scheme ?"
28. Mr Rashleigh replied on 23 June stating "My understanding is that any money that is taken over the post office counter in respect of "shop sales" is kept separate and run into the shop till periodically (at least each day) for inclusion in the daily gross takings and the retails scheme calculations etc."
29. On 20 July 2005 Mrs Blackford informed Mr Rashleigh of her review. She stated that the Commissioners position remained that the VAT on the purchase of the post office counter in January 2002 related to non-business activities and could not be treated as input tax. This was again confirmed by another Customs Officer Brendon Christian on 12 April 2006.

The submissions of the Appellants

30. On behalf of the Appellants, Mr Rashleigh repeated the grounds as set out in the Notice of appeal. He said that the Commissioners had assumed that the monies received from the post office related solely to the salary of Mrs Taylor for operating the sub post office. However, the payment received was in two parts (1) salary and (2) non staff costs which related to

a contribution to rent and rates for use of the premises.

31. He asserted that the salary was outside the scope of VAT and the non staff costs exempt from VAT. He said the assessment related to the purchase of the new counter which was used in the course of the ordinary taxable business as well as a sub post office. The Commissioners had not taken cognizance of this. Under the partial exemption regulations the whole of the amount assessed could be treated under the de-minimus rules as being fully recoverable.
32. He also pointed out that the post office counter and screen were used for the whole of the Appellants' business not merely the post office. The evidence pointed to many items being purchased at the post office counter in addition to post office business.

The submissions of the Resondents

33. For the Commissioners, Mr Key submitted that the goods supplied, namely the counter with screen were not goods or services used or to be used for a purpose of a business carried on or to be carried on by the Appellants within the meaning of section 24(1) of the 1994 Act.
34. He put forward two propositions. The first was that "purpose" in section 24(1) was a subjective purpose, but any alleged subjective purpose, he said, must also be tested by reference to objective criteria. To support this assertion, he relied upon the High Court judgment of Stuart-Smith J in Ian Flockton Developments Limited v Commissioners of Customs and Excise [1987] STC 394 ("Flockton"). It was held in that case that the fact-finding tribunal had to consider what was in the taxpayer's mind at the relevant time in order to discover their object.
35. His second proposition was that input tax only exists if there is a clear nexus between the matter in relation to which the expenditure has been incurred and the business itself. He referred to another High Court case of Customs and Excise Commissioners v Rosner [1994] STC 228 ("Rosner") where it was made clear that supplies can only be "used for the purpose of the business carried on" by a taxpayer (and, therefore, can only give rise to income tax) if there is a clear nexus between the matter in relation to which the expenditure has been incurred and the business itself.
36. In support of the second proposition Mr Key also made reference to the Judgment of the European Court of Justice in BLP Group plc v Customs and Excise Commissioners [1995] STC 424 at 437 (para 19) which established that (i) the right to deduct under Article 17(2) of the Sixth Directive arises only in respect of goods and services which have a "direct and immediate link" with taxable transactions and (ii) the "ultimate aim or purpose" pursued by the taxable person is irrelevant.

Reasons for decision

37. First, we will consider the relationship between Royal Mail and Mrs Taylor Unfortunately, we did not receive documentation dealing with her running the sub post office except a pay slip for the month of March 2005 and a copy of a letter dated 22 June 2005 from Royal Mail confirming that non-staff costs paid to sub postmasters are a contribution towards the expenses, other than staff wages, incurred in running a sub post office. The letter also stated that a sub postmaster is obliged to provide premises from which he/she operates but Post Office Limited did not rent any premises from any sub postmaster.
38. Therefore, we conclude that Mrs Taylor was an employee of Royal Mail and there must have been contractual documentation governing their relationship. She received in addition to her own salary, staff wages and non-staff costs. Her duty was to run the sub post office and this was in no way connected with the general store business. As provided in Schedule 9, Group 3, Items 1 and 2 of the 1994 Act, postal services generally are exempt from value added tax. Thus, it was not possible for Mrs Taylor to claim a refund of input tax in relation to the sub post office alone because (1) she was an employee of Royal Mail and (2) postal services are exempt.
39. We now turn to the claim by the Appellants that the counter and screen supplied to Mrs Taylor in her capacity as a sole proprietor of the general store business in January 2001 (and in respect of which VAT was paid) were used or to be used for the purpose of her business.
40. In his submission, Mr Key put forward two propositions which he argued were tests this tribunal should consider.
41. For the first proposition, he referred to the judgment of Stuard-Smith J in Flockton. He stated at p.400 c-f as follows :

"In a case such as this, where there is no obvious and clear association between the taxpayer company's business and the expenditure concerned, the tribunal should approach any assertion that it is for the taxpayer company's business with circumspection and care, and must bear in mind that it is for the taxpayer company to establish its case and the tribunal should not simply accept the word of the witness, however respectable. It is both permissible and essential to test such evidence against the standards and thinking of the ordinary business man in the position of the applicant.

…

The tribunal must look at all the circumstances of the case and draw such inferences as they think fit. In the end it is a question of fact for them whether they are satisfied on the balance of probability that the object in the taxpayer company's mind at the time the expenditure was incurred was that the goods and services in question were to be used for the purposes of the business"

42. The second proposition was founded on the judgment of Latham J in Rosner who said at p.230 c-g :

"I have been referred to a number of decisions of tribunals in which the question has arisen as to whether or not in any given case it can be properly said that expenditure has been for the purposes of a business. As is accepted by the commissioners, it is a deceptively simple phrase. But the thread, it is said which allows one to keep control of a phrase which could otherwise be used to cover a wide variety of circumstances is that there must be a clear nexus between the matter in relation to which the expenditure has been incurred and the business itself. That nexus cannot merely be the fact that the business will benefit from the expenditure. That seems to me to be abundantly clear … Benefit therefore, cannot be the test. There must be a real connection, a nexus, between the expenditure and the business. It seems to me that the nexus, if it is not to be benefit, must be directly referable to the purpose of the business. By the purpose of the business in this context I mean by reference to an analysis of what the business is in fact doing. It is only by identifying what the nature of the business is in that way that one can determine the extent to which any given expenditure can be said to be for the purposes of that business."

43. We adopt both these principles out of which the propositions evolve in deciding this appeal.
44. In our view the facts as found by us indicate that two separate activities were carried on at the shop. The first was the general store business carried on until May 2004 by Mrs Taylor and after that date in partnership with her husband. The second activity was the sub post office in which Mrs Taylor was employed by Royal Mail and in respect of which she was not registered for value added tax under a contract of service. This conclusion is consistent with the following facts.
45. First, the income from the sub post office and the income from the general store business came from different sources. For the sub post office activity Mrs Taylor received remuneration from Royal Mail in respect of which she was liable for Class I national insurance contributions. For the general store business the Appellants made profits on goods they sold.
46. Secondly, the exterior of the shop would have indicated the presence of a sub post office which is consistent with the fact that two separate activities were carried on at the same premises.
47. Thirdly, monies received from Royal Mail, especially non-staff costs, were outside the scope of value added tax. Royal Mail did not pay rent but contributed financially to offset part of the costs of statutory services to the premises and rates (inter alia).
48. Fifthly, there is a separate retail counter on the opposite side of the shop with its own till. No calculation or evidence has been forthcoming from the Appellants as to the amount of ordinary retails sales which are made occasionally from behind the post office counter. Indeed, any sums collected are kept in a box and rung up on the till on the other side of the shop once or twice a day without identification. No monies are retained in the sub post office area.
49. Finally, the Appellants' accounts did not include post office turnover because it belonged to Royal Mail. Although the Appellants did include in their annual accounts the remuneration received by Mrs Taylor from Royal Mail that cannot change the nature of the remuneration which is not a supply to the general store business.
50. Taking all these factors into account, we therefore find that there is no real connection or nexus between the Appellants' business and the counter and screen purchased for the post office. There is no nexus directly referable to the purpose of the Appellants' business, and the fact that the Appellants may derive some benefit from the purchase and installation of the counter and screen does not alter our conclusion.

Conclusion

51. The value added tax incurred originally in January 2001 by Mrs Taylor is not input tax within the meaning of section 24(1) of the 1994 Act. In particular, the counter and screen purchased by her were not "goods acquired for the purposes of her general store business." The value added tax incurred by her on the expenditure cannot be recovered by the Appellants. The assessment stands and the appeal is dismissed.
52. There is no order as to costs.

Rodney P Huggins

Chairman

Release date: 26 July 2006

LON/2005/0366