Baa Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mummery,Lord Justice Patten,Mr Justice Kenneth Parker |
| Judgment Date | 21 February 2013 |
| Neutral Citation | [2013] EWCA Civ 112 |
| Docket Number | Case No: A3/2011/2237 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 February 2013 |
[2013] EWCA Civ 112
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
THE HON MRS JUSTICE PROUDMAN and MR JULIAN GHOSH QC
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lord Justice Patten
Mr Justice Kenneth Parker
Case No: A3/2011/2237
MR RODERICK CORDARA QC, MR DAVID SOUTHERN and MS REBECCA MURRAY (instructed by Herbert Smith LLP) for the Appellant
MR OWAIN THOMAS and MR EDWARD BROWN (instructed by HM Revenue & Customs Solicitor's Office) for the Respondents
Hearing dates: 17 th, 18 th & 19 th July 2012
Brief introduction to appeal
In this three day VAT appeal the case against the Commissioners for Her Majesty's Revenue and Customs (HMRC) is that they should have allowed an input tax reclaim for VAT charged on supplies of professional and advisory services received by a company then known as Airport Development and Investments Limited (referred to as ADIL in the judgments below and in this judgment). The supplies were in connection with a take-over bid by ADIL. At the time when it incurred liability to pay VAT on the fees for those supplies ADIL was not registered for VAT. It was not a taxable person.
ADIL is a UK holding and management company incorporated on 27 March 2006. It was used as a special purpose vehicle for a take-over completed on 26 June 2006. It is responsible for the airports business of an investment consortium. A Spanish company, Ferrovial SA, is the majority shareholder in the consortium. Bankers and legal advisers made taxable supplies of services to ADIL in the course of a successful bid to acquire the entire issued share capital of the UK airport operator, BAA plc. In August 2006 BAA plc became BAA Airports Limited (BAA). Further name changes have occurred since. They are irrelevant to this appeal.
On 22 September 2006 ADIL joined the BAA VAT Group, which makes taxable supplies. ADIL thus became a taxable person with a VAT registration. BAA, as the representative member of the group, then claimed recovery, as input tax, of the VAT incurred and paid by ADIL on the supplies to it prior to the acquisition of the target company and prior to joining the BAA VAT Group.
The basis of the input tax reclaim is that the supplies were made to ADIL in the course of an "economic activity" carried on by it at the relevant time; that ADIL's economic activity was preparatory to the acquisition of the target company; that the BAA VAT Group's subsequent tax outputs should be attributed to ADIL's prior tax inputs; that the VAT incurred by ADIL was part of the "general overheads" of the BAA VAT Group; and that there was a "direct and immediate" link between the taxable supplies made to ADIL in connection with the take-over of BAA and the taxable supplies made by the BAA VAT Group.
The two main questions are:-
(1) Economic activity
Was ADIL carrying on an "economic activity" at the relevant time? i.e. when it incurred liability to pay the input tax to its professional advisers on the supplies connected with the take-over bid. If it was not, that is the end of the matter: there would be no right to recover input tax. If, however, it was carrying on an economic activity, there is a second question.
(2) Direct and immediate link
Was there a "direct and immediate" link between (a) the supplies of services to ADIL, on which ADIL incurred input tax at the relevant time, and (b) the outward taxable supplies (outputs as distinct from inputs) of the BAA VAT Group, of which ADIL had subsequently become a member, and which outputs might be attributed to ADIL?
The tribunals below reached different conclusions on the correctness of the decision by HMRC when, in issuing on 21 February 2007 their VAT assessment of BAA to £6.7m VAT, they disallowed, as part of the BAA Group's general overheads, the claim to recovery of the input tax incurred by ADIL on the take-over of BAA.
A second appeal
It is very tempting to de-clutter VAT "second appeals" in this court by making a bee-line for the legal issues and not spending very much time on the judgments below. In my opinion, that is not a good idea here. The careful judgments leading to different outcomes in the specialist tribunals need to be considered in some detail in order to understand the legal submissions, which, in large part, address the findings of fact and the legal reasoning in applying the law to those facts.
On 28 January 2010 the First-tier Tribunal (Tax Chamber) (the FtT) allowed BAA's appeal from HMRC's assessment on two grounds: first, ADIL was carrying on an economic activity at the relevant time, and, secondly, BAA was entitled to claim the input VAT incurred by ADIL as part of BAA's general overheads, there being a "direct and immediate" link between the supplies on which ADIL incurred input tax and the supplies on which BAA charged output tax.
On 22 June 2011 the Upper Tribunal (Tax and Chancery Chamber) (the UT) agreed with the FtT that ADIL was carrying on an economic activity at the relevant time, but allowed the appeal by HMRC on the ground that, at the relevant date, there was no direct and immediate link between the supplies of professional services on which ADIL incurred liability to VAT and the taxable output supplies on which BAA charged VAT. The FtT had found as a fact that ADIL had no intention, prior to the relevant time, of making taxable supplies or of joining BAA's VAT Group and that between 26 June 2006 and 22 September 2006 it made no charges for actual taxable outward supplies in its own right.
The UT dismissed a cross appeal by ADIL on the point that the FtT had erred in finding that there was no evidence that, prior to completion of the take over, ADIL intended to join BAA's VAT Group. The UT refused permission to appeal on that point, for which permission was granted by Patten LJ on 30 October 2011.
The UT granted permission to appeal against its decision on the question of "direct and immediate" link.
In this court ADIL argued that, on the facts found, there was no error of law in the FtT's decision. The UT was therefore wrong to allow the appeal by HMRC.
HMRC argued that the FtT erred in law in concluding (a) that there was a direct and immediate link between the inward supplies to ADIL and the outward supplies by the BAA VAT Group and (b) that, at the relevant time, ADIL was carrying on an economic activity for VAT purposes. The decision of the UT was right on (a), but wrong on (b). HMRC's challenge to the decisions below on the economic activity point is raised in the respondents' notice served by HMRC. They emphasise the importance of the FtT's finding that, prior to the relevant time, ADIL had neither made, nor had it any intention of making, any taxable supplies which could count as an economic activity by it. ADIL had simply achieved its target, which was to acquire all the shares in BAA.
Some key facts
The relevant services supplied to ADIL were mainly professional and advisory services by Macquarie Bank Limited, as financial advisers, and by Freshfields Bruckhaus Deringer, as legal advisers, in the course of the take-over of BAA. ADIL incurred liability to pay and in fact paid the fees plus VAT.
The consequential benefits produced by the take-over continued beyond completion on 26 June 2006. The completion of the takeover put ADIL in charge of the strategic and financial direction of the BAA's group business of running airports in the UK and overseas. The acquisition formed part of a continuum of onward investment.
The acquisition involved management. However, in the period between acquiring the shares in BAA and becoming a member of the BAA VAT Group, ADIL did not levy any intra-group charges on BAA's subsidiaries as fees for the supply of services in the form of management of the airport business or corporate governance.
ADIL said that it had been preparing for, or was otherwise engaged in, activities which were fully taxable for VAT purposes and that the services on which VAT was charged were in connection with the take-over and subsequent direction and management of the airport business. It argued that, in principle, it ought to be able to recover all that input tax once registered in its own right, or as a member of the BAA VAT Group. As for ADIL's real and relevant intentions, however, there was no evidence that there was any intention on its part, prior to the take-over, to charge for its intra-group services. Although ADIL did have such an intention as from completion of the take-over, no charges were ever made by it. Further, as already mentioned, there was no evidence of ADIL having an intention, prior to the completion of the takeover, to join the BAA VAT Group. The finding of absence of such an intention was the subject of an unsuccessful cross appeal by BAA to the UT.
Some basic legal principles
This appeal is about the correct application of the EU and UK legislation and the interpretive case law to the particular facts found by the FtT. There is no major dispute of interpretation nor is there any point in repeating for a third time all of the detailed legislative provisions, which are conveniently set out in the FtT and UT judgments.
All that is needed at this stage, in order to follow the rival arguments on the two questions of "economic activity" and "direct and immediate link", is a summary of the legal basis of the judgments below, the rival submissions and the conclusions in this judgment. The UT judgment contains at [29] a...
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