United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20729

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Graham Langran v Revenue & Customs [2008] UKVAT V20729 (02 July 2008)

20729

VAT – INPUT TAX – Appellant claimed VAT on legal and professional services connected with a dispute with his former partners following dissolution of the partnership – whether the supplies made to him in a personal capacity or as a partner on behalf of the partnership – Appeal adjourned part heard – directions made seeking clarification of the evidence and further representations on the law.

LONDON TRIBUNAL CENTRE

GRAHAM LANGRAN Appellant

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

SUNIL DAS (Member)

Sitting in public in London on 29 April 2008

The Appellant appeared in person

Alexander Ruck Keene counsel instructed by the Solicitor of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Appeal

The Appellant was appealing against the Respondents' decision in a letter dated 28 June 2007 which:

(1) Refused the Appellant's claim to recover VAT in the sum of £27,163 on fees for legal services for the periods 10/02 – 06/06.

(2) Upheld an assessment dated 19 February 2007 in the sum of £4,353 plus interest to recover VAT repaid to the Appellant on fees for legal services for the period 09/06.

The issue in dispute was whether the Appellant can recover input tax in respect of legal and professional services supplied in connection with a dispute arising out of the dissolution of a partnership in which the Appellant was a partner.

The Evidence

The Appellant gave evidence on his own behalf. The parties submitted bundles of documents which were received in evidence.

The Facts

In 1986 the Appellant together with Messrs Barrett, Wadey and Archer set up a building contracting business known as the Archer Group. Also in 1986 the Appellant and Mr Barratt purchased a property known as Winters Farm. The Appellant and his family lived in the main house at Winters Farm with Mr Barrett and his family residing in the annexe.

Over the years the personnel involved with the Archer Group changed with the exception of the Appellant who became managing director of the Group. Also the housing market recession in the late 1980s resulted in a reorganisation of the Archer Group.

In May 1995 the Group comprised the Archer partnership which managed two companies: Archer Specialist Treatments Limited which specialised in timber treatment and damp proofing, and Archer Stone Restoration Limited which carried out stone repairs on buildings including the Palace of Westminster. At this time the partners in the Archer partnership were the Appellant, Mr Halliwell and Mr Millis. The office for the Archer partnership was relocated to Winters Farm in 1995.

In 1996 the partners reached an agreement with Mrs Barrett to buy out her share of Winters Farm following which the Farm was owned by the partners in equal shares. In August 2001 the Appellant obtained planning permission on appeal to build a new house on land which was part of Winters Farm. The partners agreed that Winters Farm House would be sold, with the Appellant and his family moving into the new house. There was a delay with the building of the new house which resulted in the Appellant moving into rented accommodation following the sale of Winters Farm House in October 2002. The Appellant understood that the title to the new house would transfer to him and his wife. On 14 October 2002 the Appellant instructed his solicitor to transfer the sale proceeds of Winters Farm House to the Archer business account in the belief that the title to the new house would be transferred the following day. Instead the Appellant received a hand written note from the other two partners, Mr Halliwell and Mr Millis, dissolving the partnership. The two companies, Archer Specialist Treatments Limited, and Archer Stone Restoration Limited, however, continued to trade from Winters Farm House. The partnership was deregistered for VAT purposes with effect from 15 October 2002.

A legal dispute then ensued between the Appellant and his former partners about the ownership of the two companies, Winters Farm and Winters Farm Courtyard, the value of the Archer Partnership assets and post dissolution profits. Mrs Halliwell and the Appellant's wife also became parties to the dispute in 2005.

On 29 November 2005 the High Court made a consent order declaring that the Archer Partnership owned the two companies, and that the Appellant and his wife jointly owned a one third share in Winters Farm properties. The High Court recorded that the Archer partnership was a partnership at will, the terms of which were governed by the Partnership Act 1890. Further the Archer partnership was dissolved on 15 October 2002, whilst the Winters Farm partnership was dissolved on 4 November 2004. At this stage the Appellant's solicitor was confident that the Appellant's legal costs would be recoverable from the other partners.

The Appellant, however, was unable to reach agreement with his former partners about the value of the partnership assets, the extent of post dissolution profits and the value of the Winters Farm properties. The dispute was eventually resolved by a consent order made by the High Court on the 25 May 2007. The order recorded the parties' agreement that the Archer Partnership and the Winters Farm Partnership be wound up, and that no order for costs would be made.

The Appellant incurred legal and other professional fees in relation to the dispute with his partners, which totalled £277, 227.32, of which, £41,176.49 represented the VAT element. The table below analysed the breakdown of the fees.

The Supplier	The Fee (£) (VAT inclusive)	Comment
Rohan & Co	23,458.59	Legal fees in relation to Archers' Dissolution of Partnership dispute. Invoices addressed to the Appellant
Reynolds Porter Chamberlain	10,450.74	Legal fees partnership dispute. Invoice addressed to the Appellant and his wife
KSB Law	234,202.91	Legal fees partnership dispute. Invoices addressed to the Appellant and his wife
Mansor Hunot	6,612.80	Accountancy advice re the deconstruction of the accounts of the two Archer companies. Invoice 8 November 2002 addressed to the 3 partners in respect of professional fees for preparing the draft accounts of the Archer Partnership, and the two companies. Invoice 25 April 2006 addressed to the Appellant.
Shahram Moallemi & Co	1,762.50	Professional charges relating to the dispute. Invoices addressed to the Appellant
Begbies Traynor	739.78	Corporate rescue and recovery professional fees. Invoice addressed to the Appellant

The Appellant sought to recover the VAT charged on the professional fees incurred on the dispute with his former partners. His claim was supported by valid VAT invoices. The invoices were either addressed to the Appellant or to the Appellant and his wife, except Mansor Hunot's invoice dated 8 November 2002 which was addressed to the three partners in respect of professional fees for the draft accounts of the Archer Partnership and the two companies. Some of the invoices for the professional fees were dated after the end period covered by the Appeal which accounted for the discrepancy between the amount of input tax under Appeal, and the £41,176.49 representing the total VAT charged on the professional fees.

The Appellant produced extracts of the accounts journals for the two Archer companies which indicated that the other partners had charged the fees for their professional advice in connection with the partnership dispute to the companies' accounts. The Appellant also considered that the companies had recovered the VAT on the professional fees. The Notes to the Financial Statements for Archer Stone Restoration Limited for the year ended 30 April 2005 recorded that transactions took place with Archers, a partnership in which Mr Millis was a partner, the amount owed by Archers was £94,967. The Appellant interpreted that Note to the effect that the company had invoiced the Archer Partnership for the professional fees of Mr Millis in connection with his dispute with the Appellant.

The Appellant was now a sole trader registered for VAT with effect from 1 October 2003. His business was described as ceramic tiling, although in his Notice of Appeal he stated that he worked as an accountant/delivery driver. The disputed input tax claim of £4,353 for the period 09/06 was made on the VAT return of his current business.

Respondents' counsel undertook to review the decision in respect of the invoice of Mansor Hunot dated 8 November 2002 which was addressed to the partners

The Parties' Representations

The Appellant contended that the professional fees incurred by him were a bona-fide expense of the partnership. The expenses were incurred prior to the winding up of the partnership to resolve the disputed issues between the partners arising from the dissolution. The Appellant submitted that a partner could commit the partnership to costs without reference to the other partners. In those circumstances it did not matter that the disputed invoices were addressed to him. The provisions of section 94 VAT Act 1994 which deemed that anything done in connection with the termination of a business was treated as being done in the course of a business supported the eligibility of his claim for a VAT repayment.

The Respondents' argued that the supplies of the legal and professional services were made to the Appellant and his wife personally, not in the Appellant's capacity as a partner of the Archer partnership. Further the supplies received by the Appellant were not used for the purpose of any business carried on either by him or the partnership.

According to the Respondents the Appellant adduced no evidence that the partners agreed that the costs of the legal supplies to each of them in connection with the dissolution constituted a partnership expense. In the Respondents' view it was inconceivable given the nature of the dispute that the Appellant had either actual or ostensible authority to use funds belonging to the partnership to bring legal proceedings against his fellow partners. Finally the Archer partnership received nothing from the supply of legal services to the Appellant, and, therefore, there was an insufficient nexus between the expenditure on legal fees and the purposes of the business carried out by the partnership.

The Respondents considered the Appellant's evidence regarding the other partners recovering the VAT on their legal expenditure in connection with the dispute irrelevant. Essentially the Tribunal was not in a position to establish the truth of the evidence, and could not be satisfied that the Appellant was in fact in the same position as the other two partners.

The Respondents contended that having regard to all the facts the Appellant was not eligible to recover the VAT charged on the legal and professional fees incurred in relation to his dispute with his former partners.

Reasons

Under sections and 24 and 25 of the VAT Act 1994 a taxable person is entitled at the end of each accounting period to credit for input tax paid on taxable supplies of goods or services made to him in the furtherance of his business. Section 24(6) (a) of the 1994 Act enables the making of Regulations which specify the requirements for successful input tax claims. Regulation 111(5) of the VAT Regulations 1995 enables a person to claim input tax on supplies of services made after the date upon which that person ceased to be registered for VAT subject to certain conditions.

The following requirements must be met for input tax credit to be available:

(1) a supply must have taken place;

(2) the input tax credit must be claimed by the taxable person to whom the supply is made:

(3) the supply must be chargeable to tax at the rate claimed;

(4) the claimant must hold satisfactory evidence of his entitlement to input tax credit;

(5) the supply of services must be used or to be used for the purpose of any business carried on or to be carried on by him.

The dispute in this Appeal centred upon requirements 2 and 5, or as Mr Justice Lindsay in The Commissioners for Her Majesty's Revenue and Customs v Jeancharm Limited [2005] EWHC 83 categorised the requirements as the To whom question and the Purpose question.

The Respondents' principal contention was that the supplies of legal and professional services were supplied to the Appellant and his wife in their personal capacities and not for purposes of any business at all. We consider that the factual matrix for the Appeal was not complete and presented a more complex picture than that portrayed by the Respondents.

The invoices and copies of the High Court orders provided by the Appellant clearly demonstrated that some of the fees incurred by the Appellant related to his wife's claim in respect of Winters Farm properties and to a dispute concerning the Winters Farm partnership which was separate from the Archer partnership dispute. We consider that the fees attributed to the Appellant's wife's claim and the Winters Farm partnership have no connection with the Appellant in his capacity as partner of the Archer partnership or with business of that partnership. In those circumstances we are satisfied that the Appellant has no entitlement to recover the VAT on those fees which need to be disaggregated from the Appellant's claim. We understand from the Appellant's e-mail to Ms Cooper of the Respondents dated 13 June 2007 that his solicitors would be able to provide a breakdown of the fees between the property and business disputes.

The remaining fees related to the legal and professional services supplied to the Appellant in connection with his dispute with his former partners about the identity and value of the assets owned by the Archer partnership and its post dissolution profits. The only way that the Appellant could maintain a repayment VAT claim on these supplies was on the footing that he incurred them as a partner of the Archer partnership for the purposes of its business. The testing of the validity of this proposition underpinned the contest between the parties in this Appeal. The problem for the Appellant was that even if he was correct, the VAT would be payable to the partnership not to himself. Thus the Appellant would have to look to the assets of the partnership for the reimbursement of the sums expended on legal services, if he succeeded with the Appeal. The Appellant could not recover the VAT on the legal and professional fees in his own right, because the expenses have no connection with his current VAT registered business as a sole trader.

The Respondents accepted that the provisions of the Partnership Act 1890 were relevant to the dispute. The Archer partnership was a partnership at will since the partners had not executed a written agreement setting out the terms on which the partnership was run. The Respondents did not consider that the Partnership Act 1890 assisted the Appellant's case. In their view his former partners followed the correct procedure under section 32 of the Act to dissolve the partnership. Further the Appellant could not rely on section 5 to give him either actual or ostensible authority to commit the partnership to his expenditure on legal and professional services. In their view, taking legal proceedings against his former partners did not fall within the parameters carrying on in the usual way the business of the partnership.

The Respondents, however, overlooked the provisions of section 38 of the Act which appeared to give authority to the Appellant to bind the partnership and preserve his rights as a partner after dissolution provided the acts done were necessary to wind up the partnership. The High Court decision in Stocking v Montila [2007] EWHC 56 (CH) confirmed the general principle decided in Hamer v Giles (1879) 27 WR 834 that

"in case where the court's assistance is required for winding up a partnership's affairs, the costs were ordinarily borne by the partnership's assets before the final division of them between the partners, although this is not an invariable authority".

The Appellant's evidence of the financial accounts of the two Archer companies indicated that the other partners had charged their fees incurred in the dispute to the partnership. The position regarding the recovery of the VAT on those fees was unclear, on the face of it the companies had recovered the VAT on the fees.

The combined effect of section 38 of the 1890 Act and the evidence of the financial accounts of the two Archer companies gave potential support for the Appellant's principal submission that the supplies of legal services were made to him in his capacity of partner for the Archer partnership.

The second question about whether the supplies of legal services were used for the purposes of the partnership business may be covered by the principle established in Abbey National PLC v CEC (Case C-408/98) [2001] STC 297 that VAT on costs incurred in relation to closing down the business must remain deductible even though no further taxable outputs were made. Such costs form part of the general overheads of the complete business from inception to termination and thus have a direct and immediate link with the output transactions of the business.

Respondents' counsel gave considerable assistance to the Appellant and the Tribunal by identifying the various arguments and legal principles applicable to the disputed issue. We conclude, however, that we are not in a position yet to make a decision on the question: whether the supplies of the legal and professional services were made to the Appellant in his capacity as a partner and if so whether they had a direct and immediate link with the business of the partnership. We are satisfied that the Appellant was not entitled to recover the VAT under his current VAT registration as a sole trader.

We require further information on the facts of the Appeal, and consider that it would be unfair to the parties to make decision on aspects of the law upon which we have not heard argument. We, therefore, make the following directions:

(1) We adjourn the Appeal part heard.

(2) The Appellant supply the Respondents and the Tribunal with the following information in writing by no later than 4pm on 1 August 2008:

a. the breakdown from his solicitor of the legal and professional fees between the property and business disputes.

b. whether the legal and professional fees incurred by the partners including the Appellant in their dispute about the identity and value of the assets owned by the Archer partnership and its post dissolution profits formed part of the partnership assets in the winding up settlement.

(3) The Respondents supply the Appellant and the Tribunal by no later than 4pm on 15 August 2008 their response to the additional information supplied by the Appellant including representations on the relevance of section 38 of the 1890 Act and the decision in Abbey National PLC v CEC (Case C-408/98) [2001] STC 297 on the facts of this case.

(4) The Appellant shall have a right of reply to be served on the Respondents and the Tribunal by no later than 4pm on 29 August 208.

(5) The Tribunal shall advise the parties by no later than 4pm on 12 September 2008 whether it would decide the Appeal on the basis of the written representations received or whether a further hearing is required.

MICHAEL TILDESLEY OBE

CHAIRMAN

RELEASE DATE: 2 July 2008

LON/07/1240