United Kingdom VAT & Duties Tribunals Decisions

A1 Lofts Ltd & A1 Loft Conversions Ltd v Revenue & Customs [2008] UKVAT V20888 (3 December 2008)

20888

VALUE ADDED TAX – Supply of services – Loft conversions – Taxpayer agreed with contractors they would be paid by clients out of clients' accounts – Whether taxpayer project manager on clients' behalf – Whether taxpayer making supply of loft conversions or only of project management – Appeal dismissed

LONDON TRIBUNAL CENTRE

A1 LOFTS LTD & A1 LOFT CONVERSIONS LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: MISS J C GORT (Chairman) MRS R WATTS DAVIES MHCIMA, FCIPD

Sitting in public in London on 7, 8 and 9 October 2008

Mr G Tritton of counsel, instructed by Halliwells LLP, for the Appellant

Mr R Smith of counsel, instructed by the solicitor's office, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION

1. This is an appeal against a decision contained in a letter dated 24 November 2005 in which the Commissioners ("HMRC") decided that A1 Lofts Ltd and A1 Loft Conversions Ltd make single supplies of loft conversion services to their customers, there being no separate supplies from self-employed contractors directly to customers.
2. That decision was upheld by HMRC in a letter dated 24 May 2006.
3. In respect of A1 Lofts Ltd the assessment made as a result of the decision is in the sum of £489,498 plus default interest, and the assessment made against A1 Loft Conversions Ltd is in the sum of £739,243 plus interest.
4. The grounds of appeal in respect of A1 Loft Conversions Ltd and A1 Lofts Ltd (collectively "A1 Lofts") are the same, namely: "HMRC have assessed A1 Lofts on the grounds that A1 is supplying a single composite supply of finished loft conversions. It is in fact only supplying services of project management services. It does not act as a principal in the supply of loft installation, plumbing, electrical and other ancillary building services. The assessments issued are therefore incorrect and excessive."
5. The issue for the Tribunal therefore is whether A1 Lofts are supplying loft conversions or whether they are merely acting as agents in the supply of loft conversions to the customers. By consent it was agreed that the issue of the quantum of the assessment will not be determined until the outcome of the substantive appeal, and therefore that matter is adjourned to a later date. The assessments are for the periods ended 31 July 2002 to 30 November 2004.

The Background

6. A1 Loft Conversions Ltd was incorporated on 16 November 1999 and, although it is now dormant, it remains registered for VAT. Its business was continued by A1 Lofts Ltd which was incorporated on 4 June 2003 and registered for VAT on 1 April 2004. The way the business operated changed from about August 2005, but that is after the period with which this decision is concerned.

The facts

7. The Tribunal heard evidence from the following witnesses on behalf of the Appellant: Michael Foley, Mark Ashley-Hacker, Stephen Mills, Kevin Branagan, Michael Jones and Margaret Mills. Uncontested witness statements were provided by 6 other witnesses. The witness statement of Linda Sherwood was contested, but she was unavailable to attend due to illness. The only witness called on behalf of HMRC was Andrew Brookman. Agreed bundles of documents were provided.
8. In addition to A1 Lofts, there is also a company A1 Designs Ltd which carried out design services for A1 Lofts and which was principally the vehicle for Mr Mills' own services, and two further companies, M M Administration Ltd ("MMA") and M M Logistics Ltd ("MML"), neither of these latter two companies are VAT registered. They are run respectively by Mr Mills' daughter and his ex-wife, Margaret.
9. A1 Lofts advertises in the Yellow Pages and also on its own website. Upon being contacted by a customer, Mr Mills arranges a visit to get details of the work/project required. This visit is almost invariably carried out by Mr Mills himself, on behalf of A1 Designs, and includes inspection of the proposed conversion, preparation of an indicative design and preparation of a quote to the customer for the total price of the job, including labour and materials. That quote is presented to the customer on A1 Lofts' headed notepaper. It is calculated by Mr Mills on the basis of his experience, and the customer is given no breakdown of the details of how that quote is made up and is unaware of the existence of A1 Designs. There is no negotiation with the customer over the price of the job. For each job there is an order form detailing all the works necessary, a payment schedule and a client agreement ("the A1 Agreement"). Prior to the signing of an agreement with the customer A1 Lofts provides a document which sets out what A1 says it does. In particular at Clause 1.2 which is headed 'What does a full A1 Loft Conversion include?' It sets out the various matters, such as the technical survey, the design, the submission to authorities or approve inspectors, scaffolding and skip hire and then the work which is required to effect a loft conversion. Under Clause 1.3 headed 'About us and what we do' it states as follows:

"A1 Lofts are the loft conversion specialist in your area. We are specialist and therefore have a wealth of knowledge on all related issues such as design, planning, building regulations and of course the construction. …

"We concentrate on specific areas within London and the Home Counties where we know we have access to a reliable and experienced workforce …

"Building a loft conversion is complex and requires careful planning. A1 are unique in that we will manage the whole project for you by using tried and trusted professionals and experienced personnel, from plans through to completion.

…

"We will not just build your loft conversion we will manage the whole project on your behalf by appointing specialised teams to look after every single stage of the process. You will have access to a pre-survey design team, pre-build client services, drawing build client services, heaters, electricians and plumbers."

This document also contains a reference to the guarantee and says that structural work is guaranteed for a period of ten years, and that upon completion of the works A1 Lofts will issue a written guarantee. The A1 agreement states that:

"The Client … hereby appoints A1 Lofts Ltd as Project Management and Agent for the Client in respect of the construction and installation of:

………….

…………

("the Works")

at the property

………….

("the Property")

for the price of ……….

Subject to the Terms of Business (receipt of which the Client acknowledges) and any special conditions detailed overleaf.

The customer and Mr Mills or a representative of A1 Lofts sign the A1 Agreement. Two copies are made of the order form, the payment schedule and the agreement - one for the customer and one for A1 Lofts.

10. The pre-billed work is handled by MMA. The agreement between A1 Lofts and MMA is contained in a document headed "Service Provider's Notice of Appointment" which states inter alia: "The Agent hereby appoints the Service Provider for: Pre Build Administration Services to the Owner in respect of the Works at the Property pursuant to the terms of the Principal Agreement." It is then signed on behalf of A1 Lofts and in the notes it provides that the Service Provider's obligations are to complete the aspects of the Works for which it is responsible to the standard required by the Principal Agreement, all invoices are to be addressed to the Owner care of the Agent and must include the Property details, and all questions arising which cannot be satisfactorily answered in discussions with the Owner must be referred to the Agent. The Agent is described as A1 Lofts Ltd. It handles all issues such as arranging for party wall agreements, scaffolding, skips, architects etc. MMA issues an invoice addressed to the client for work done, but the customer does not see this as it is sent to A1 Lofts for payment and is unaware of MMA's connection with A1 Lofts. The client does not know the value of the supply, which is paid from a bank account in the name of "A1 Loft Client Account". A payment schedule is given to the customer which sets out the stage payments which are to be made by the customer into the Client Account.
11. The next stage of the work is handled by MML which orders the materials required and the teams of labourers and contractors who are appointed from A1 Lofts approved lists. In some cases a client would want to use his own contractor, and this would be allowed in circumstances where that contractor had satisfactory references and these would invariably be checked by Mr Mills before such a contractor was employed. In circumstances where a client was not asking for his own contractor, the client would not know who the contractors or the labourers were until the work started. The material which have been ordered by MML are paid for out of the Client Account from the stage payments. Where VAT has been incurred it is not itemised to the client, but is paid by the client without there being a separate VAT invoice. This applies equally to materials as to the labour.
12. The contractors will have agreed previously with A1 Lofts a total fee for the job. A1 Lofts does not enter any negotiation with the contractors as to the price per job, the contractor is able to accept the price or reject it. The amount each contractor makes depends on how efficiently he has done the job, he does not get paid any extra if he overruns the budgets. However he is able to negotiate directly with the client if the client requires any items over and above those agreed in the initial contract. In those circumstances there is a separate contract between the contractor and the client with which A1 Lofts is not associated, and from which it takes no cut. All the contractors are self-employed, a matter which does not affect the issue for determination by the Tribunal. The client is at no stage aware of the actual amounts paid to individual contractors, but it is permitted to see the entries on its own Client Account.
13. Upon completion of the works a customer must sign a completion notice stating that the works "have been completed by A1 Loft Conversions". This document is contained within a Client Information Pack. The work is then signed off by NAW Inspections Ltd, a company which is run by a former building inspector. The cost of this inspection is built in to the total price of the job and is similarly paid out of the Client Account. Upon completion of the job, the customer pays the final balance. He is given copies of any planning permission and building regulations approval required for the job and a ten year guarantee for the work carried out. All final contractors' invoices are paid by A1 Lofts, barring any retentions. The arrangement with the contractors that they should bill the client and not A1 Lofts was not always adhered to. We saw several invoices addressed to A1 Lofts and not to the relevant client. There were no written contracts between the clients and the contractors, A1 Lofts relied entirely on their oral representations and the Terms of Business attached to the A1 Agreement (see paragraph 16 below) where the contractors are said to be independent.
14. A1 Lofts does not immediately takes all the money out of the Client Account once the job is finished: it leaves a significant amount of money there in the event of any claim under a ten year guarantee which it offers to the clients. It was agreed by both parties that this guarantee is very limited and is in effect no more than a guarantee against the failure of materials and a re-statement of any relevant manufacturer's warranties which the customer would be entitled to in any event from the manufacturer, such as the ten year guarantee which applies in respect of Velux Windows. There is no guarantee against defective workmanship in the agreement itself, which we will turn to below, the individual contractors themselves in their agreement with A1 Lofts undertaking that obligation.
15. The turnover shown on the annual accounts for A1 Lofts is the amount transferred from the Client Account to the business bank account, less output tax paid. Output VAT is declared on the VAT return based on the VAT fraction being applied to monies transferred out of the Client Account.
16. Attached to the A1 Agreement are A1 Lofts' Terms of Business. Under the definition section the agreement itself is said to be a contract between the client and the project manager in respect of works to be carried out. The "Contractors" are defined as: "the Architect, Service Providers, tradesmen and other persons engaged by the Project Manager on behalf of and as independent contractors to the Client to fulfil in whole or in part the obligations herein." Under "the Project Manager" it is stated that it shall be A1 Lofts Ltd "which shall throughout the existence of the agreement act as the agent of the Client".
17. Under clause 2, which is headed "the Project manager", it states that the project manager, as agent for the client, shall:

"(a) Prepare and agree with the Client an initial scheme of design for the construction of the Works and generally oversee and co-ordinate the conduct of the Works at the Property until completion;

(b) Upon receiving the deposit (which shall be non-returnable) and stage payments from the Client pursuant to the terms herein utilise the same for the purposes of making payments to the suppliers, the Service Providers, Contractors and all other persons properly entitled to the same, including the Project Manager either for his own account or on behalf of the Contractors;

(c) Upon satisfactory completion of the Works, and the Client having fully complied with the proficiency of the agreement and made payment of all moneys due, issued to the Client the Guarantee."

18. Clause 5 is headed "The Contractors" and states:

"The Contractors, as independent contractors to the Client, shall:

(a) Complete the Works in accordance with good building practice and within a reasonable time. In respect of the commencement, carrying out and completion of the Works time shall not be of the essence.

(b) In the event that the Contractors shall unreasonably delay the completion of the Works the Client, having complied fully with the provisions of Clause 5, shall have the right to give the Project Manager formal notice in writing requiring the Project Manager to remedy such default as may be specified in the notice with a reasonable time being not less than 30 days from the date of delivery of such notice by registered or recorded delivery post".

19. Clauses 7 and 8 deal with financial matters and circumstances where there is default in payment or other breach of contract. Clause 9 is the guarantee which states simply that a guarantee will be delivered to the Client by the Project Manager. Clause 10 is headed "Interpretation etc" and states inter alia: "it is hereby acknowledged that the provisions herein constitute the entire agreement and that no reliance is placed on any prior oral or written representations."
20. Clause 11 is headed "Status" and provides: "During the currency of this agreement the Project Manager, the Architect and the Contractors shall be deemed independent contractors working independently of each other and contracting severally with the Client as detailed herein."
21. A further document is appended which is a proforma list of the work to be done on the property. The payment schedule sets out the precise amounts to be paid at the different stages of completion of the work and gives a total price.
22. The next relevant contract is headed "Contractor's Agreement". In that document under the definition section the Principal Agreement is expressed to be "an agreement between the Owner of a Property and the Agent to undertake building works therein". Clause 1 provides:

"(1) The Contractor hereby agrees for the Agent to undertake such Works for Owners as the Agent may from time to time allocate to the Contractor at a Price to be agreed in each case.

(2) The Works shall be carried out in accordance with the provisions of the Principal Agreement between the respective Owner and the Agent, a copy of which including any Special Conditions, shall be made available to the Contractor upon request.

…

(4) Breaches by the Contractor or those for whose supervision the Contractor is responsible shall entitle the Agent to terminate the appointment forthwith and to recover from the Contractor or such other Contractors for whose supervision he may be responsible such costs and expenses as the Owner and/or the Agent may incur arising out of or incidental to those breaches. Recovery may be made from any moneys due to the Contractor or the Contractors for whose supervision he is responsible whether or not those monies are due in respect of the particular Works or Property in respect of which the breaches occurred."

23. Each Contractor is given a letter signed by Mr Mills on behalf of A1 Lofts which states inter alia:

"From time to time, we will be acting as the Agent for Clients who may wish to instruct you to undertake work at their premises. Please note that when we ask you to undertake such work we will be acting as Agents for the Clients. Accordingly, your invoices should be addressed to them, but delivered to us for payment.

"For the avoidance of doubt, we wish to make it clear that at no time we will be acting in the capacity as a contracting party ourselves. On all such occasions, we will be merely acting as agents for the clients."

24. The actual guarantee provided by A1 Lofts states in large print that, as well as the ten years' manufacturer's warranty on the Velux window system, there is a ten year guarantee on all other materials "provided by A1 Lofts Ltd" but excluding any plumbing or electrical components, any decorating materials, and any damage caused by drying out of timbers or plaster work. Then in small print underneath it says inter alia "This guarantee is limited in value to a maximum of one-eighth the contract price and is fully transferable to the current owner of the property." And then as a separate paragraph appears: "The Company shall not be liable for defects arising from damage caused to the installation or to the property where such damage arises from natural causes, act of God, exceptional weather conditions, accidents, negligence or the failure to maintain the work in accordance with good practice or the act of any third party howsoever caused."
25. Mark Ashley-Hacker is head of programme management at Inmarsat plc. He is a former client of A1 Lofts, but also knew Stephen Mills independently, as did his wife prior to employing the company. In 2006-2007 he had entered into negotiations with A1 Lofts to have a loft conversion built. Mr Ashley-Hacker had previously acted as his own project manager in respect of earlier building work and had experienced severe problems, he was therefore pleased to appoint A1 Lofts as Projects Manager in respect of the loft conversion. He had heard good reports about Stephen Mills and talked to him at length before receiving the proposal from A1 Lofts. It was Mr Ashley-Hacker's understanding that A1 Lofts would act as his agent in finding the various contractors needed to get the conversion done. He found the document which he received from A1 Lofts not inconsistent with what he had been told at the initial meeting. Mr Ashley-Hacker had confidence in Mr Mills, and considered that this was more important than the nature of the documentation. In his witness statement he said he clearly understood that the people doing the work were separate contractors who were working directly for him.
26. Mr Ashley-Hacker regarded the advantage of using A1 Lofts as being that they would have the necessary leverage to get the work done should the people on site fail. Although Mr Ashley-Hacker is an experienced businessman he did not appear to have properly understood the nature of the guarantee provided by A1 Lofts. Similarly it was apparent that he did not fully understand the implication of the contractual document, as opposed to what he had been told by Mr Mills. He had not understood that the guarantee was limited in value to only one-eighth of the price, nor that it was limited in the way that it was. There had been various matters which he referred to as "snagging items" which had been fixed by the builder on site with whom he was dealing. In his evidence he told us he had not thought about what would happen in the event that the foreman on site did not do the work and A1 Lofts had been unable to persuade him to do it. He did not know what his rights were, but in those circumstances he would as a last resort have gone to a solicitor. Contrary to the claim in his witness statement, he considered it would be overstating matters to say that he had a separate contract with the electrician and with the plumber, he had contracted with A1 Lofts for a certain number of electrical points and for various plumbing matters, and had signed a global contract with them and had no extra contracts. In re-examination he was adamant that the only contract he had signed was with A1 Lofts, he had no other contracts, and by saying he had no other contracts, he included verbal as well as written contracts. The only VAT paid directly by Mr Ashley-Hacker was that in respect of subsidiary work that he had arranged independently, he had not paid VAT on the overall price for the conversion.
27. The Tribunal heard evidence from three of the contractors who do work for A1 Lofts: Michael Foley, Kevin Branagan and Michael Jones. Only Michael Jones was VAT registered. Neither Michael Foley nor Kevin Branagan appear to do work for people other than A1 Lofts or for customers of A1 Lofts when they require extra work to be done. Mr Foley described himself as a self-employed fitter of loft conversions, and a director of a company called Masterdec Ltd. He, and subsequently his company, were appointed by A1 to act as a fitter on loft conversions. Prior to starting this work he had signed a contractor's agreement with A1, which made it clear that A1 was only the agent for the client and he therefore considered himself to be directly responsible to the client for his work. All three of the contractors had their own public liability insurance. Both Mr Foley and Mr Branagan acted as head contractors on the various jobs, Mr Jones was an electrician who provided electrical services under the supervision of the main contractor. Mr Foley and Mr Branagan were aware of the total job price before the job started, and their arrangement was that 75% of the total price would be allocated to building work, including materials, tradesmen etc and including all the costs of the contractor. Being aware of this, it was open to them to decide whether they want to do the work at that price. Both regarded themselves as working direct to the client, and would agree the precise starting date of the works with the client once the job had been inspected. On occasions when as a result of that first visit costs had to be adjusted, and where there is a major change required, then the contractor would go back to A1 and ask for the original contract to be amended. Where it is simply a variation because of the client's specific requirements, then that would be arranged between the contractor and the client. The contractor will be responsible for paying any sub-contractors he may require for doing menial jobs. Any required materials will be ordered by the contractor, but A1 Lofts will pay for those materials. Mr Foley believed that other tradesmen such as plumbers and electricians were similarly working under contract with the clients in respect of each job.
28. Kevin Branagan had previously worked for another loft conversion company which he described as being on the same basis, and yet it emerged that in fact previously he had been working under a sub-contract. Mr Branagan believed that if he were not paid, he would have to sue the client for non-payment and not A1 Lofts. This had never occurred and he believed it would be unlikely to in practice. He would collect the payments from the client and forward the cheque to A1 Lofts to the client account. The work of the electricians and plumbers had to be paid out of the 75% of the total cost of the job which he obtained.
29. Michael Jones was an independent electrician who traded as Michael Jones Electrical Services. He would issue his invoices, including VAT in the name of the client and send them to A1 Lofts for payment. In his witness statement he stated that if his invoices were not paid, he would have to speak directly to the client, but this had never happened. In cross-examination in the Tribunal he told us that his payment came from A1 Lofts and if he were not paid he would speak to someone at A1 Lofts not the client. This point of contradiction was not examined further in the course of the hearing.
30. Stephen Mills was a straightforward and reliable witness. We accept his evidence that he arranged his affairs on the advice of lawyers and tax specialists in order to minimise his, and in particular his client's, liability to VAT. He was well aware where his own skills lay, namely in dealing with the clients themselves and he arranged for his daughter and his ex-wife to deal with those aspects where he was not so competent, namely the administration. He arranged the individual client's finances in such a way that they were ring-fenced, so that in the event that he became bankrupt the client's money would be safe. It was his understanding that he did not use sub-contracted labour. The money in the Client Account was put on short term deposit which earned interest, that interest was used to pay for meetings with clients. After completion, any money left over in the Client Account would be put on deposit and remain there until the expiry of the guarantee. Since the dates we are concerned with the companies MMA, MML and A1 Lofts had all been brought under the one umbrella on the advice of his accountant. Mr Mills was adamant that all the clients of A1 Lofts knew precisely what the situation was: namely that the individual contractors would be working directly for them and would be paid out of the Client Account. They would have been aware of the existence of MMA, MML and A1 Designs, whose existence was explained to them by him at the initial visit. Whilst we have no doubt that Mr Mills firmly believes that all the clients understood the situation precisely as he does, we are not so satisfied. The documentation does not make the situation clear.
31. The only occasion Mr Mills had in the past been asked by a client about reclaiming tax was where solar panels were installed, where the value added tax was only 5%, not 17½%. Separate invoices would come from the plumbing and heating engineers where value added tax was involved, but A1 Lofts had never been asked by a client for a value added tax invoice. All documents were drafted by a lawyer, A1 Lofts had not been responsible for any of the drafting. A1 Lofts took 4½% net profit on each job. This was known by the clients.
32. Margaret Mills dealt with the invoices from the contractors and was responsible for approving them. The invoices would then be sent to the bookkeeper. She was responsible for managing the contractors and authorising payment to them. If the clients were unhappy with any of the contractors she would deal with that matter.

The Appellant's case

33. It was submitted by Mr Tritton that the only issue between the parties for the present hearing was the question of who supplied the services, but we consider that precisely what the services are is also an issue that will have to be determined.
34. It was suggested by Mr Tritton that the critical question was what was the relationship between the contractors and A1 Lofts. The Tribunal was referred to the cases of Kieran Mullin Ltd v Customs and Excise Commissioners [2003] STC 274, Customs and Excise Commissioners v MacHenrys (Hairdressers)Ltd [1993] STC 170 and Customs and Excise Commissioners v Music and Video Exchange Ltd [1992] STC 220. The first of those two cases concerned hairdressing salons, and both MacHenrys and the Music and Video Exchange cases were referred to in the judgment of Park J in the case of Kieran Mullin. The brief facts in Kieran Mullin are that Kieran Mullin Ltd (KML) owned and operated a hairdressing salon. All the stylists were employed KML and others were self-employed. All the self-employed stylists operated under identical written contracts under which KML agreed to provide a chair in a salon to the stylists to rent and the stylists agreed to rent the chair. The contracts gave KML a significant measure of control over how the self-employed stylists were to carry on their business in order to ensure that its salons were properly staffed at all times by competent and well equipped stylists who would provide to customers the standards of service which KML required. Receipts from customers were first paid into the tills in the salons but at frequent intervals the receipts attributable to the self-employed stylists and the amounts payable by them to KML by way of chair rentals and service charges were calculated. The balance of the receipts belonged to the stylists and they were paid to them. The issue in the appeal was whether KML supplied the hairdressing service to the customers or it was provided by the self-employed stylists. Park J upheld KML's appeal and found that the self-employed stylists supplied their services to the customer.
35. Park J considered that the issues in the appeal were not merely matters of fact but there were issues of law to be considered. He held that there was a critical distinction to be drawn between the situation where a stylist was an employee of KML and where the stylist was self-employed. The stylist supplied the hairdressing service to the customer, and the salon provided facilities to the stylist to enable him or her to dress the customer's hair. The price which the customer paid for the treatment of her hair belonged to the stylist, and it would be expected that the stylist would pay a fee to the salon for the use of the salon's facilities. Mr Tritton relied particularly on paragraphs 32 and 34 of the judgment. In paragraph 32 Park J said in part:

"32. I first remind myself of what the precise question is. It is this. Assume that a customer goes into a KML salon and has her hair cut or styled by a self-employed stylist. Who, for the purposes of section 1 of the 1994 Act, makes through the customer the supply of the service of hairdressing? Is it KML, acting by the stylist as its agent? Or is it the stylist, acting as principal? In my opinion the answer depends on the relationship between KML and the stylist. Further, the answer does not depend on what the customer knows about that relationship. Usually the customer will not know about it. …

33. That was also the view of Potts J in the MacHenrys case. He said …:

'The answer to the question, to whom were the services being supplied depended largely on the relationship between the stylist and the company … how the public or a customer perceived the situation was and is not a crucial or determinative factor in the resolution of that issue given the provision of section 2 of the 1983 Act [now section 1 of the 1994 Act]. I accept [Counsel's] submission on behalf of the company in this regard.'

34. "So the critical question is: What was the relationship between the self-employed stylists and KML? In my view the starting point, and sometimes the finishing point as well, in answering a question of that nature is to analyse the contractual terms which operate between the parties. In Customs and Excise Commissioners v Music and Video Exchange Ltd [1992] STC 220 (not a case about hairdressing, but nevertheless a case about analysing for VAT purposes the relationship between two parties), McCullough J put it as follows [1992] STC 220 at 222-223:

'What then did A&B agreed? One looks first in any case of contract to see what the parties said to one another. First, what did they put into writing? If they did not record their entire agreement in writing, was what was written supplemented orally? If this does not provide the answer one looks next to see what implications, if any, should be drawn from statute, custom, usage, their previous dealings, etc. and how they conducted their relations with one another after the contract had been made.' "

36. Mr Tritton's position was that one could consider the operation of the business only if it could be shown that the parties departed from the contractual position or that the contract was sham. A degree of control exercised by A1 Lofts over the contractors was likely to be of only marginal relevance, the Tribunal was referred to the case of Spearmint Rhino [2007] STC 1252 for this proposition. Spearmint Rhino is a case of a lap-dancing club and the question was whether the dancers in a lap-dancing club were acting as agents of the club. In that case Kieran Mullin was followed. The degree of control exercised by A1 Lofts over the contractors was likely to be of only marginal relevance, including whether it fixed the prices charged by the contractors to the customers. For this last proposition the Tribunal was referred to the case of Ringside Refreshments v Customs and Excise Commissioners [2004] STC 46. This was another case in which Kieran Mullin was followed.
37. It was submitted by Mr Tritton that the fact that A1 Lofts acted as the agent of the customer has two important consequences arising out of the fundamental principles of agency law:

(i) as agent, A1 Lofts has the capacity to contract with third parties on behalf of his principal (if acting within his authority);

(ii) knowledge of the agent is imputed to the customer. (The Tribunal was referred to Art. 51 of Bowstad on Agency for this principle).

It followed from this that it was irrelevant that the individual contractor was not identified or known to the client at the time that the A1 Agreement was entered into. The client delegated to A1 Lofts the task, of contracting on its behalf with the contractors in accordance with the terms of the A1 Agreement. Whilst the contractor was free to accept or reject a job, once he accepted it, he became directly responsible to the client via the A1 Agreement and the contractor's agreement. Mr Tritton concluded that once a contractor was selected, which necessarily happened prior to the job starting, there was a clear contractual relationship between the client, A1 Lofts and the contractors as set out in the A1 Agreement. The fact that the client will not know the price breakdown was irrelevant because his agent, A1 Lofts, knows the breakdown. The A1 Agreement made a clear distinction between A1 Lofts as project manager and the contractors acting as such. They had different contractual obligations consistent with their respective roles.

38. The Tribunal was referred to VAT Notice 708 (February 2008) in which a distinction between "design and build" and "project management" is recognised as follows:

"Project Management here the building client engages a project manager (usually a construction company) to plan, manage and co-ordinate the whole project including establishing competitive bids for all elements of the work, with the successful contractors being employed directly by the building client. Management fees paid by the building client to the project manager are standard-rated."

39. This notice is relied on for showing that project managers select contractors who are not known at the time the project management agreement is entered into.
40. It was A1 Lofts' case that the terms of the A1 Agreement were clear. It did not permit a client to sue A1 Lofts for defective workmanship or for not doing the work at all. The terms and conditions would inevitably mean that. As A1 Lofts did not contract to carry out the work, let alone to a satisfactory standard, it was not liable for providing the service and could not be said to be responsible for providing the service, and was therefore not liable to pay VAT for those works. What the Tribunal had to look at was what the parties in fact agreed that relationship would be.
41. In respect of the contractor's agreement it was submitted inter alia that the fact that extra work outside the contract was agreed between the contractor and the client, which technically created another contract, showed that A1 Lofts was in fact an agent and not itself contracting with the client because it was not normal for head contractors to allow the customer to cut them out by dealing directly with sub-contractors. In particular Mr Tritton relied on the following: the position being made clear to the client pre-contract; the evidence of the fitters that they were in a direct contractual relationship with the customer; the fact that the customers dealt directly with the fitters on site; the limited contact between A1 Lofts and the client during the building phase; the payment mechanism in which money is held on account for the client until the work is finished; the invoices are required to be addressed to the client; the customer is told that the price includes "VAT where applicable" and, finally, if the client requires, he is able to see those invoices where VAT has been charged. In addition where there is a major problem it is the contractors' insurance companies that are notified. A1 Lofts itself is neither sued nor claimed against. If the individual contractors were sub-contractors, the client would have no right of recourse against them because he would have no contractual relationship with them.
42. It was also submitted that the architects used on the project would receive their monies via the A1 Lofts' client account. An architect would not usually be considered as a sub-contractor to a building head contractor which would be a consequence of HMRC's approach. The A1 Agreement refers to the architect as agent of the client in the same way that A1 Lofts is referred to as the agent of the client. Given the disparity of treatment in the A1 Agreement, it would be odd if they were not both treated as agent of the client.
43. Finally, and this submission was made at the conclusion of Mr Tritton's final submissions and was not addressed by the Commissioners, Mr Tritton proposed, in the event that he did not succeed in his main argument, an intermediate position, namely that A1 Lofts was project manager in relation to the building side, but in relation to the architects, the surveyors and the building inspectors he was not. Alternatively, that A1 Lofts could succeed other than in relation to MMA and MML. This last was on the basis that the client had a more direct relationship with the contractor than it had with either MMA or MML.

The Respondents' case

44. Whilst it was accepted by Mr Smith that it was necessary to look at the contractual provisions, he submitted that the contractual position did not reflect the true nature of the VAT supply being made by A1 Lofts. The concept of 'supply' for VAT purposes is not identical with that of a contractual obligation, for this proposition the Tribunal was referred to the judgment of Laws J (as he then was) in Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588, where at page 591 he said:

"I certainly accept that where any issue turns wholly upon the construction of a document having legal consequences, the exercise of construction is one of law for the Judge. That for the proper resolution of a case of this kind, there are I think two qualifications. The first is that the concept of making a supply for the purposes of VAT is not identical with the performance of an obligation for the purposes of the law of contract, even where the obligation consists in a provision of goods or services. The second is that, in consequence, the true construction of a contractual document may not always answer the question – what was the nature of the VAT supply in the case? Insofar as the answer to that question is not concluded by the legal process of construing the documents, there remains a question of fact; and for the purposes of an appeal of this kind, as I have made clear, the Wednesbury rule must therefore guide the course of approach in relation to it.

Page 595 "…it is perfectly possible that although the parties in any given situation may conclude their contractual arrangements in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made by A to B for the purposes of A's assessment of VAT. In many situations of course the contract will on the facts conclude any VAT issue, as well there is a simple agreement for the supply of goods or services with no third parties involved. In cases of that kind there is no space between the issue of supply for VAT purposes and the nature of the private law contractual obligation but that is a circumstance, not a rule. There may be cases, generally (perhaps always) where three or more parties are concerned, in which the contracts definition (however exhaustive) of the parties private law obligations nevertheless neither caters for nor concludes the statutory question, what supplies are made by whom to whom. Nor should this be a matter for surprise: in principle, the incidence of VAT is obviously not by definition regulated by private agreement. Whether and to what extent tax falls to be extracted depends, as with every tax, on the application of the taxing statute to the particular facts. Within those facts, the terms of contracts entered into by the taxpayer may or may not determine the right tax results. They do not necessarily do so. They will not do so where the contract, though it tells all the parties everything that they must or must not do, does not categorise any individual parties' obligations in a way which inevitably leads to the conclusion that he makes certain defined supplies to another. In principle, the nature of a VAT supply is to be ascertained from the whole facts of the case. It may be a consequence, but it is not a function, of the contracts entered into by the relevant parties.

"It is I think no coincidence that many of the cases which have caused difficulty in the VAT field, requiring resolution by the higher courts, have concerned the situations involving three parties. Customs and Excise Commissioners v Music and Video Exchange and Customs and Excise Commissioners v MacHenrys (Hairdressers) Ltd, both of which were cited to me, are examples … in my view the reason why they have caused difficulty is that in such cases the correct VAT result does not flow inevitably from the true construction of the contract or contracts in play in the case."

45. Mr Smith distinguished the cases relied on by Mr Tritton, namely Kieran Mullin Ltd, MacHenrys Hairdressers Ltd, Music and Video Exchange Ltd, Spearmint Rhino Ventures (UK) Ltd v Revenue and Customs Commissioners and Ringside Refreshments [2004] STC 426 on the basis that the facts were different from the instant case in one important respect, namely that in none of those cases was there any question of the appellant acting as agent for the customer. This was a crucial distinction in considering the position of the client in the present case and knowing what the client is being supplied with, given that the client is being supplied with major building works to his house. In the cases relied on by A1 Lofts the question was whether the trader was the agent of the person physically supplying the services or goods, or whether the latter was subcontracted to make provision on their behalf. In such cases it was immaterial to the customer who was the contracting party. Where the trader purports to be the agent of the customer is quite a different matter and it is of far greater importance to the customer to know who to look to in the event that something goes wrong.
46. The Commissioners relied on A1 Lofts' website where it characterises itself as making supplies of loft conversions AND where it says:

"Q. Are A1 Lofts Ltd experienced specialist in loft conversions?

A. Yes. We have many years experience in designing and building loft conversions and we use only skilled professional tradesmen."

This was relevant in establishing what supply the customer is lead to believe he/she will receive in advance of contacting A1 Lofts.

47. This same statement is repeated in the proposal documentation supplied at the time the customer is given the quotation, and is a clear indication that A1 Lofts supplies a full service. It is at no point set out in any pre-contractual document that A1 Lofts will only act as an agent obtaining services for the client from third parties, rather than providing those services themselves, albeit with the assistance of sub-contractors. The customer is given a global quote for the full provision of the supply of the loft conversion, and this is done prior to the obtaining of any quotes from the contractors, or even identifying a particular contractor it is proposed to engage. This is not consistent with an agency relationship, but is consistent with the supply being fully made by A1 Lofts.
48. At the time the customer accepts the quote, no contractor has been identified to do the work requested. This remains the case at the time the contract is concluded. It therefore cannot be suggested that the contract between A1 Lofts and the client is a tripartite agreement, as submitted by Mr Tritton. A contractor cannot be bound by the terms of that contract until he has been approached and agreed to it.
49. The "Contractors Agreement" which the approved contractors are asked to sign are entered into when no particular job is contemplated, they do no more than evidence the fact that the contractor is approved by A1 Lofts. The contractor is not obliged to take any work that A1 Lofts offers and A1 Lofts are not obliged to offer the contractor any work at all. It cannot therefore be said that these agreements confer on A1 Lofts the authority to bind the contractors to contract with customers without more. The reality is that A1 Lofts conclude the contract with the client and then seek to appoint a contractor taken from its approved list. If the contractor is not willing to do the work required with the price that A1 Lofts offer then he is not bound to do so by the contract between A1 Lofts and the client. The contractor is appointed without reference to the client. The client has no knowledge of the identity of the contractor until after he has been appointed and the client has no knowledge of or ability to influence the contract price agreed with the contractor. No separate written contract exists with the agreement between A1 Lofts and the contractor for the performance of the particular job, whether purporting to bind the customer as principal or not. Mr Smith also points to the fact that at the material time A1 Lofts appointed MMA and MML to do work under the contract and yet the customer was never told of their existence or role.
50. No contract, written or oral, is ever concluded between the client and the contractor and by the time the contractor arrives he has already been contracted by A1 Lofts to do the work and the client is obliged to allow him to do so by the terms of Clause 6(c) of the terms of business. This arrangement is inconsistent with there being a separate contract between the contractor and the client.
51. The payment schedule provides for percentages of the overall price to be paid at certain points in the progress of the work. These are not related to any amount which the contractor might be entitled to at any particular time, insofar as the client can ascertain.
52. The consequences of the client failing to keep to the payment schedule is that A1 Lofts has the right to suspend all work and withdraw the contractors from the premises, add £100 per day to the agreed price, add interest of 4% above base rate to the price if the client wishes the work to restart, the agreement is rendered voidable at the election of A1 Lofts if the work was suspended for 14 days, and A1 Lofts is entitled to seek a charge over the customer's house until all outstanding money is paid. These provisions are entirely consistent with A1 Lofts acting as the customer's agent. If the client fails to make payments in line with the Schedule, the loss to A1 Lofts will be minimal and certainly not such as to justify the steps contemplated in Clause 8. There is no evidence that the contractors have any similar contractual right to make additional claims for money from the client in such circumstances, and no suggestion that A1 Lofts will be holding any such money recovered on trust for the contractors. Clause 8 is consistent with A1 Lofts being the main contractor and making an entire supply of a loft conversion to the client. The Completion Notice, which is signed by the customer at the completion of the work, states:

"I confirm that all the works have been completed by A1 Lofts Conversion and I have paid, although immediately paid, the balance of moneys due, by cheque to your fitter or company representative."

This again fosters the perception of the client that his supply is being made entirely by A1 Lofts.

53. Mr Ashley-Hacker was clear that he had no contract with anyone other than A1 Lofts. He did not understand that he was said to have contracts with all the people who were doing work at his house other than the labourers. Nor did he know how much he was paying his 'agent'. Separate contracts were not negotiated on behalf of the individual client. Mr Ashley-Hacker had also thought that the guarantee covered everything. In fact it is a very limited guarantee, and given the silence of the contract as to the nature of the guarantee it is unlikely that A1 Lofts would be able to rely on the limitations which subsequently appear in the light of the pre-contract representations. It is unlikely that A1 Lofts could defend a claim on the basis of the guarantee. The Tribunal was referred to Chitty on contracts at paragraph 12-083 where the well-known rule that a contract is to be construed more strongly against the grantor in cases of ambiguity and where other rules of construction fail. At 12-085 it says:

"So, in the case of a guarantee, if the party who drafts it uses ambiguous language, such ambiguity will be taken more strongly against himself."

It was submitted that the agreement in clause 9 of the contract that a guarantee will be provided is a misrepresentation because it says a guarantee will be given for "structural work" for a period of ten years and no other limitation is mentioned. The eventual guarantee which is offered does attempt to limit it.

54. The reality of the situation was that A1 Lofts would look to any contractor who was at fault to remedy any defective workmanship. This does not indicate that the client had a direct contractual relationship with the contractor. Under Clause 5(b) it is A1 Lofts, rather than the contractors, who are expressly liable to remedy any default caused by unreasonable delay on the part of the contractors, which is inconsistent with A1 Lofts being an agent. The evidence shows that not all the invoices were addressed directly to the client, as was supposed to be the case, but nonetheless these invoices were still approved by A1 Lofts. The contract was not consistent with agency because:

(i) There was no express provision for A1 Lofts to agree a separate contract on the client's behalf;

(ii) A1 Lofts would be liable for all work;

(iii) A1 Lofts would be liable for delay;

(iv) Clause 8 is inconsistent with agency.

55. Finally it was submitted that by attempting to avoid value added tax on its turnover, A1 Lofts was gaining an unfair competitive advantage and distorting the market.

Reasons for decision

56. We accept Mr Smith's distinction between this case, where the client specifically engages an agent, and those cases referred to by Mr Tritton where the person paying for the service would not for one moment consider engaging an agent for such purposes as a hairdressing appointment or buying a hotdog. It is perhaps of some small relevance that it is normal to refer to 'customers' in the hairdressers or at a hotdog stand, whereas those people engaging Mr Mills' services would more commonly be referred to as 'clients'. We have set out in extenso above the passages relied on by Mr Smith from the case of Reed, and we adopt that reasoning here. We do not find that the contracts/agreements entered into by A1 Lofts create the type of agency relationship argued for. Whilst from the contractor's point of view it may appear that his obligation is only to the client, and Mr Mills' intention was undoubtedly that A1 Lofts should have no obligation to the client above and beyond that of finding the appropriate contractors and those matters which are covered in the extremely limited guarantee, that was not how the relationship was viewed by Mr Ashley-Hacker. His evidence was clear: namely that he had no other contract than that with A1 Lofts, and he would ultimately look to A1 Lofts if the head contractor did not provide a satisfactory service. He had no notion that A1 Lofts considered that he had a contractual relationship with any of the other contractors who worked on his loft conversion.
57. The clients were at no stage aware of the separate existence of A1 Designs, MML or MMA. These companies were also said to have separate contracts with the client. We do not accept that the client's perception in this matter is irrelevant. Were things to go wrong, and we accept Mr Mills' evidence that this has very rarely happened, and were the contractor in question's insurance inadequate to remedy the particular defects, we have no doubt that the client would look to A1 Lofts for a remedy, as indeed Mr Ashley-Hacker said he would. The fact that A1 Lofts might succeed (although in our view it would not), in such a situation, nonetheless, as was said by Laws J (as he then was) whilst the parties' contractual arrangements may be exhaustive for the purposes of their private law obligations, they need not define and conclude issues arising as to supplies under the 1994 VAT Act. In our view this is such a case. As was also said by Laws J, the concept of VAT supply is not coterminous with the concept of a contractual duty. At no stage does the contract between the client and A1 Lofts say that A1 Lofts will negotiate separate contracts on behalf of the particular client, which would be expected were the limit of A1 Lofts' obligations to be that of finding the contractors who would then form a separate contract with the clients. Clause 8 of the A1 Agreement with the client gives the Project Manager the right to suspend the work and withdraw all the contractors from the property in the event of non-payment by the client. This in our judgment indicates very clearly that there is no contractual relationship between the client and the contractors. If A1 Lofts were merely an agent in the manner claimed, and the contractors were independently providing their services, then any failure by the client to pay would be a matter for the contractors to sue the client, not A1 Lofts.
58. Clause 10 of the A1 Agreement, the Interpretation section, is not consistent with agency in that the agreement is said to constitute the entire agreement between the parties, and no reliance is to be placed upon any prior oral or written representations. It was part of Mr Mills' case that the clients were fully informed of the situation at the meetings which took place prior to the concluding of the agreement and the representations made orally were part of the whole agreement.
59. It is not necessary for us to deal separately with the position of A1 Designs, MMA and MML, because we find that their position is no different from that of the contractors, to the extent that their services are also provided by A1 Lofts and are part of the complete package of services of providing a loft conversion. For the above reasons this appeal is dismissed. The matter of the quantum of the assessment is to be referred back to this Tribunal in the absence of agreement between the parties. No order for costs.

MISS J C GORT

CHAIRMAN

RELEASED: 3 December 2008

LON 2006/0649

LON 2006/0650