Alternative Investment Strategies Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 January 2020 |
| Neutral Citation | [2020] UKFTT 19 (TC) |
| Date | 10 January 2020 |
| Court | First-tier Tribunal (Tax Chamber) |
[2020] UKFTT 19 (TC)
Judge Richard Chapman QC, Mrs Janet Wilkins
Mr Tushar Patel, Director, appeared for the appellant
Mrs Mary Hendrick, Presenting Officer, of HM Revenue and Customs' Solicitor's Office, appeared for the respondents
Value added tax – Input tax – Whether or not supplies of accommodation were made to the appellant – Yes (jointly with another company) – Whether or not HMRC acted reasonably in refusing to accept alternative evidence of the supplies – Yes – Appeals against the assessments dismissed – Whether or not a penalty was correctly issued – Yes – Appeal against the penalty dismissed – Cancellation of registration – Whether or not the appellant was making supplies of management services to its subsidiary – Yes – Appeal against the cancellation of registration allowed.
The FTT ruled HMRC were reasonable not to accept alternative evidence to support input tax recovery and upheld the resultant penalty for carelessness. This was despite finding that the company was making taxable supplies (and was therefore, technically, entitled to input tax recovery). While HMRC's enquiry into its VAT return was ongoing the company had provided inadequate explanations and its case at the Tribunal was largely based upon newly disclosed documents. The FTT concluded that HMRC had acted reasonably based upon the information it had at the time the decisions were made.
Alternative Investment Strategies Ltd (AIS) is a holding company which recovered input tax incurred on an office which was leased in the joint names of it and its subsidiary. AIS argued that it was making supplies of management service to its subsidiary and was, accordingly, entitled to input tax recovery.
HMRC disallowed the input tax recovery because the invoices were address to AIS's subsidiary and therefore it did not hold evidence to support an input tax claim. HMRC also assessed a penalty for a careless inaccuracy on a VAT return and cancelled AIS's VAT registration on the grounds that it was not making taxable supplies.
The FTT considered the evidence before it and concluded that AIS was making taxable supplies to its subsidiary and it was entitled to be registered for VAT. This part of AIS's appeal was therefore allowed.
AIS's director was also director of the subsidiary and HMRC's argument regarding supplies was that the director was working for the subsidiary as its director, not as an employee of AIS. However, the FTT was satisfied that although he was a director of both companies and owed duties to both, he was, in this regard, working for the subsidiary as a result of his service contract with AIS (para. 12).
In relation to the input tax recovery, AIS did not have invoices from the landlord addressed to it. HMRC has discretion to accept alterative evidence to support input tax recovery, so the question was whether that discretion had been exercised reasonably. The FTT determined that HMRC had not acted unreasonably. It therefore dismissed the appeal against the input tax assessment and, following from this, dismissed the appeal against the penalty.
AIS did have alternative evidence to support input tax recovery, including documentation from the landlord, intercompany agreements and records from the intercompany loan account which had been independently audited. However, this was largely provided to the tribunal in the course of the appeal. AIS provided HMRC with very little information during the course of its enquiry. The FTT concluded that HMRC had acted reasonably given the information which was available to it at the time.
This is a fact dependent decision which will have little wider impact. However, it is a vivid illustration of the consequences of not providing HMRC with full information during the course of their enquiries.
[1] This appeal relates to the proper VAT treatment of purported supplies from a holding company, Alternative Investment Strategies Limited (“AIS”) to its subsidiary, Hedge Funds Investment Management Limited (“HFIM”).
[2] AIS appeals against the following decisions:
- A notice of assessment dated 25 September 2017 which denied AIS' input tax for the periods 09/13 to 09/16, resulting in an assessment in the sum of £21,637.
- A decision dated 26 September 2017 adjusting AIS' 12/16 return to deny all input tax claimed and so reducing the £2,400 repayment to nil.
- A decision dated 8 November 2017 cancelling AIS' VAT registration with effect from 30 June 2017.
- A notice of penalty assessment dated 27 November 2017 charging AIS an inaccuracy penalty in the sum of £4,868.28 pursuant to Schedule 24 of the Finance Act 2007 upon the basis of careless behaviour. An explanation of the penalties was sent with a letter dated 25 October 2017.
[3] At the beginning of the hearing, Mr Patel sought to adduce in evidence various documents which had only recently been disclosed to HMRC. Mrs Hendrick did not object to this providing HMRC were given the opportunity to make written submissions after the hearing. We therefore gave directions for written closing submissions from HMRC and a written response by AIS. These submissions were duly made, and we have considered them in making this decision.
[4] We heard oral evidence from Mr Patel on behalf of AIS and from Officer Carole Esson on behalf of HMRC, both of whom had also submitted written witness statements. We also considered the documents provided by both parties.
[5] We make the following findings of fact. In doing so, we bear in mind that the burden of proof in respect of the appeal against the notice of assessment, denial of input tax and cancellation of registration is upon AIS and the burden of proof to establish that the penalty is properly charged is upon HMRC.
[6] AIS is a company which was incorporated on 24 March 1999. A subscribers' and shareholders' agreement dated 27 June 2006 (“the Shareholders' Agreement”) provided as follows in respect of its business and objects:
“Business” means the acquisition and holding of HFIM to enable HFIM to carry on regulated business, being the provision of specialist investment management and advisory services for the Offshore Fund, managing and advising fund of hedge funds and absolute return investment managers and related services, and such other business as the Board may agree should be carried on by the Company and/or its Subsidiaries and/or Holding Company.
…
2.1. The primary object of the Company is to carry on the Business.
2.2. Unless otherwise agreed in writing by Shareholders representing not less than ninety per cent of the nominal value of the Shares from time to time in issue, the objects of the Company shall be limited to the establishment of HFIM which itself shall provide services to the Offshore Fund in a way as to ensure that HFIM cannot be operated independently from the Company.
[7] Mr Tushar Patel is a director and shareholder of AIS. He is also an employee pursuant to a service agreement dated 1 July 2006 (“the Service Agreement”). The Service Agreement sets out Mr Patel's role as follows (“the Employer” being defined as AIS and “the Executive” being defined as Mr Patel):
2.1. The Employer employs the Executive and the Executive agrees to serve as CO-CHIEF EXECUTIVE OFFICER of the Employer and CO-CHIEF EXECUTIVE OFFICER AND INVESTMENT MANAGER of its subsidiary HEDGE FUNDS INVESTMENT MANAGEMENT LIMITED
[8] HFIM is a wholly owned subsidiary of AIS. Mr Patel is a director of HFIM. Mr Patel's evidence was that AIS provided unregulated marketing and research services and HFIM provided investment advisory, execution and related regulatory services. HMRC did not challenge this aspect of Mr Patel's evidence and so we accept it.
[9] An undated agreement headed “Management and Administrative Services Agreement” (“the Management Agreement”) sets out the services to be provided by AIS (defined as “the Manager”) to HFIM (defined as “the Company”) and the fees and charges payable as follows:
The Manager shall provide the following services to the Company:
- Corporate Governance Services. The Manager shall assist and provide the Company in the provision of general company secretarial services, it will attend all board meeting, monitor the development of the subsidiary, report to the shareholders, and monitor adherence to compliance with the Shareholders agreement business plans and other agreements.
- Treasury Services. The Manager will support managing the treasury function of the Company.
- The Manager shall assist the Company in all matters relevant to the financing of the Company's activities, including the identification of sources of potential financing, negotiation of financing arrangements, and coordination of financing for the benefit of the Company.
- The Manager will arrange, negotiate and provide Director and Officers Insurance.
- The Manager shall provide general advice and assistance to the Company in the procurement of other Insurance as may be necessary or prudent in order to comply with legal or contractual requirements, or otherwise prudently insure the risks of the Company.
- Infrastructure. The Manager will be responsible for, arrange and provision of office space, technology infrastructure, and any other infrastructure mutually agreed to the [sic] of the operating of the Company.
- General Administrative Services. The Manager shall provide services of officers or other employees of the Manager to perform as officers of the Company or provide such general administrative services, technical skills and investment staff including accounting services, access to and consolidation of information and assistance in the general administration and management of the business, with all of the duties of officers of the Company as provided by the Board of Directors of the Company subject to the sole direction of the Board of...
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