Cloud Electronics Holdings Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 November 2012 |
| Neutral Citation | [2012] UKFTT 699 (TC) |
| Date | 14 November 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 699 (TC)
Judge WDF Coverdale, Mr R Presho
Mr S Charles, Accountant, of Hawsons appeared for the Appellant
Mr R Chapman, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
VAT - input tax - professional fees incurred by holding company - whether there has been a supply of services - whether services used for business purpose
The First-tier Tribunal decided that a taxpayer company satisfied the two questions - the "to whom" question and the "purpose" question - under the Value Added Tax Act 1994 ("VATA 1994"), Value Added Tax Act 1994 section 24 subsec-or-para 1s. 24(1) in order to claim input tax on supplies of services rendered by professional advisers prior to the taxpayer's incorporation. The taxpayer received the supplies since the professional advisers were aware that they were to be acting for the taxpayer who would be their client and with whom they would deal. The relevant supplies were used for the taxpayer's business since most of the professional advisers' work was done, and services supplied, by the time the taxpayer was carrying out the very activity for which it was formed.
The taxpayer company appealed against HMRC's notice of assessments under VATA 1994, Value Added Tax Act 1994 section 73s. 73, representing disallowance of input tax claimed in the period December 2008. It also appealed against HMRC's decision rejecting a voluntary disclosure claiming input tax incurred in the relevant period.
In February 2008, the taxpayer was incorporated as the vehicle for a management buyout of a company ("CEL"), and was registered for VAT with effect from 1 March 2008. The taxpayer then acquired CEL's entire share capital with the involvement of CEL's former officers ("management buyout team").
The taxpayer claimed input tax related to professional fees for services of due diligence and other services rendered by professional advisers prior to its incorporation. Letters of engagement had been disclosed together with relevant invoices in respect of the supplies subject of the input tax claimed.
HMRC refused the taxpayer's claim on the grounds that the supplies in question were not made to the taxpayer. Furthermore, the supplies were consumed within the acquisition process of CEL, rather than for the taxpayer's ongoing business.
The taxpayer submitted that it received the benefit of the services and it was the one who paid for them. Thus, it should be able to recover the input VAT.
Whether the taxpayer could claim input tax for the relevant supplies under VATA 1994, Value Added Tax Act 1994 section 24 subsec-or-para 1s. 24(1).
Held, allowing the taxpayer's appeal:
Under VATA 1994, Value Added Tax Act 1994 section 24 subsec-or-para 1s. 24(1), for VAT to be a person's input tax, there are two questions to be satisfied. The first is the "to whom" question - who received the supply? If the supply is indeed to the person concerned, then the second question is the "purpose" question - whether that supply is used by that person for a business purpose.
Here, in respect of the "to whom" question, the due diligence exercise was being carried out, certainly as far as the management buyout team were concerned, as a mechanism to enable them to confirm a decision to acquire CEL. One member of the management buyout team had begun working for CEL in 2007 with the intention of managing a management buyout. He was following professional advice in using the taxpayer as a vehicle for the acquisition. The use of that vehicle was therefore planned and all the professional advisers were aware of its use when sending their initial letters of engagement.
The advice from which the management buyout team benefitted was not advice whether to invest in the taxpayer, but rather advice on whether the taxpayer should invest in CEL, i.e. the advice being addressed to the taxpayer. The professional advisers were therefore aware that they were to be acting for the taxpayer who would be their client and with whom they would deal.
In respect of the "purpose question", there was a direct and immediate link between the taxpayer's input tax and its ongoing output tax. The relevant services were indeed supplied to the taxpayer which was carrying out economic activity at the material times. Most of the professional advisers' work was done, and services supplied, after the dates of the letters of engagement in January 2008 and after the dates of incorporation and registration for VAT. By that time, the taxpayer was carrying out the very activity for which it was formed, i.e. to facilitate the acquisition and conduct of the business of CEL.
Therefore, the two tests in VATA 1994, Value Added Tax Act 1994 section 24 subsec-or-para 1s. 24(1) were satisfied at the time the professional advisers sent out their engagement letters reflecting the intentions of the parties at the time they entered into legal relations.
1.Cloud Electronics Holdings Limited (Holdings) appeals two HMRC decisions:
(2) A decision to assess Holdings pursuant to Value Added Tax Act 1994 section 73s. 73 of the Value Added Tax Act 1994 in the sum of £8,487 (plus interest) representing input tax claimed in the period 12/08 but disallowed by HMRC. This decision was notified to Holdings by Notice of Assessments dated 21.12.2009. In fact £1,312.50 is not in dispute so the figure appealed is £7,135.36.
(3) A decision to reject a Voluntary Disclosure, submitted by Holdings' representative on 25.09.2009, claiming input tax incurred in the period 12/08 in the sum of £10,807. This decision was notified to the representative by letter dated 20.10.2009.
2.Holdings trades from premises in Sheffield. It was incorporated on 28.02.08 as the vehicle for a management buy-out of Cloud Electronics Limited (Cloud) and was registered for VAT with effect from 01.03.2008. Holdings acquired the entire share capital of Cloud for £5.4 million. None of the former shareholders of Cloud are shareholders of Holdings and they have no further investment in the company. The former officers of Cloud involved in the acquisition of Holdings are Simon Curtis and Clare Powell (referred to as "the management buy-out team").
3.The input tax in issue related to professional fees for services of due diligence and other services rendered prior to the incorporation of Holdings. Professional advisers included:
•DLA Piper UK LLP |
Solicitors providing legal advice |
•Ford Campbell Freedman |
Corporate finance advisers |
•Hawsons |
Accountants undertaking the due diligence exercise |
•Walker Morris |
Solicitors advising Royal Bank of Scotland |
4.Letters of Engagement have been disclosed together with relevant invoices; the supplies in respect of which input tax was claimed were as follows:
INPUT TAX |
PERIOD 12/08 RETURN |
VOLUNTARY DISCLOSURE |
DLA Piper |
£168 + £1,312.50 Allowed |
£6,256.52 Refused |
Ford Campbell Freeman |
£4,550.00 Refused |
|
Hawsons |
£2,800.00 Disallowed |
|
Walker Morris |
£4,375.36 Disallowed |
|
Brown McLeod |
£1,312.50 - Disallowed but not now in dispute |
5.The engagement letters are considered in turn.
There were separate engagement letters for (i) drawing up consultancy agreements and (ii) legal advice in respect of the management buy-out. A very large amount of work was to be done by DLA Piper with extensive documentation covering every aspect of important elements of financing and contractual agreements relating to the business of Cloud in the context of the formation of Holdings. The letter referring to "Consultancy Agreements - Terms of Engagement" was dated 07.04.2008 and related to supplies recognised by HMRC as made to Holdings. The other letter, dated 16.01.2008, was addressed to Mr Curtis and Ms Powell; Holdings had not yet been incorporated and was known as "Newco"; it was an Engagement Letter headed "Proposed Buy-out of Cloud Electronics Limited" and purported to confirm that DLA Piper would be acting "On behalf of management" and "On behalf of Newco". Signed agreement and acceptance was required of both Mr Curtis and Ms Powell as authorised signatories of Newco.
7.The input tax claimed in Holdings' 12/08 return was allowed because it related to advice on employment and post-competition matters, both of which were commissioned by Holdings and were used by it for its business purposes.
8.HMRC took the view that the input tax claimed in the Voluntary Disclosure related to advice commissioned by Mr Curtis and Ms Powell; DLA Piper were undertaking to "act on behalf of the management buy-out team in relation to the proposed buy-out by a new company to be incorporated for the purpose of Cloud Electronics Limited." It was considered that:
(a) the supply had not been made to Holdings and
(b) the services had been consumed within the acquisition process rather than for the ongoing business of Holdings.
Accordingly input tax was refused.
This firm rendered Corporate Finance advice to the management buy-out team and to Holdings. There was an incidental benefit to Royal Bank of Scotland (which was providing loan finance). The engagement letter dated 11.01.2007 (incorrectly typed as 2008) was addressed to Simon Curtis but stated explicitly that "When Newco has been formed, we shall issue an engagement letter addressed to it seeking its formal endorsement of the terms of our engagement". HMRC concluded from all the circumstances that the supply in question was not made to Holdings and was in any event consumed within the acquisition process. Accordingly this element of the voluntary disclosure was refused.
The engagement letter was for due diligence work in connection with the proposed acquisition of Cloud Electronics Limited by a new company ("Newco") and was addressed to Simon Curtis and Royal Bank of Scotland. The management buy-out team invested substantial sums in the buy-out and were rightly anxious...
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