Doran Bros (London) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 December 2016 |
| Neutral Citation | [2017] UKFTT 829 (TC) |
| Date | 23 December 2016 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Jane Bailey, Mr Charles Baker FCA
Mr Martin Kaney, tax consultant, appeared for the appellant
Mr Anharul Qureshi, presenting officer, appeared for the respondents
Value added tax – Input tax – Whether expenditure for the purposes of the business – Yes – Value Added Tax Act 1994 (VATA 1994), s. 24(1) – Company's appeal allowed.
The First-tier Tribunal (FTT) allowed the appeal against HMRC's decision that there was insufficient evidence to show that an invoice for tax advice related to a business expense. The FTT held that advice given to an employer on how to cut the tax and NICs liabilities in rewarding staff is supplied for the purpose of the business.
Following advice from a tax consultant (Qubic Tax), the Appellant company implemented certain measures, including buying some investment gold to put into an employee trust for the benefit of the Appellant's sole director and employee. Qubic Tax invoiced the Appellant for £50,000 (plus £10,000 VAT) for the advice.
HMRC refused the Appellant's claim for that £10,000 as input tax. HMRC argued that the Appellant had failed to demonstrate a sufficient link between the expenditure and the taxable supplies it made. HMRC claimed that the expenditure was incurred on advice to mitigate tax and NICs on extracting money from the Appellant. Thus, it was for the personal benefit of the Appellant's sole director (para. 6 and 24 of the decision).
The Appellant claimed that:
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1) the VAT was incurred on expenditure that related to advice taken to enable it to reward the sole employee and director. The expenditure was not attributable to the Appellant's purchase of gold. Providing rewards for employees and directors was a residual cost of running a business. Companies normally remunerated their employees and directors, so the expense was referable to the Appellant's taxable supplies; and
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2) the taxpayer's state of mind largely determined the purpose for which a fee was incurred. HMRC had looked too far ahead in linking the advice given to the Appellant with its subsequent purchase of gold.
The FTT considered:
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1) to whom were Qubic Tax's services supplied, having regard to both the contract and the economic reality; and
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2) whether there was a link between the expenditure incurred by the Appellant and the taxable supplies made by the Appellant?
The FTT rejected the claim that the Appellant's state of mind determines the purpose for which expenditure is incurred. Following R & C Commrs v Newey (t/a Ocean Finance) ECASVAT(Case C-653/11) [2013] BVC 259, the analysis is not of why a particular taxable person chose to enter into a transaction, but what transaction a taxable person has entered into and whether there is a link between the expenditure and that taxable person's supplies (para. 18 of the decision).
The FTT held that, as the Qubic Tax engagement letter was addressed to, and signed on behalf of, the Appellant, Qubic Tax was required to supply services to the Appellant. The contract was between the Appellant and Qubic Tax. The sole director had no rights under the contract (para. 19 of the decision).
The FTT agreed that implementing the advice may result in considerable benefit to the director, as well as benefitting the Appellant. However, the benefits obtained by the Appellant and the director from the resulting transactions did not mean that the contractual arrangement was artificial or that it did not reflect economic reality. Thus, as a matter of contract and of economic reality, Qubic Tax's services were supplied to the Appellant (para. 20 and 21 of the decision).
The FTT held that the expenditure was incurred by the Appellant on advice on how to reward its sole employee with the least possible liability to tax and NICs (para. 32 of the decision).
The FTT held that advice, which is supplied to a taxable person on how it can cut its tax and NICs liabilities in rewarding its employee, is provided for the purpose of the business. The advice directly related to the Appellant's own tax and NICs liabilities, and reducing these liabilities increased the Appellant's profits. The additional benefit which the sole director may derive personally, even if it is considerable, did not enable the FTT to distinguish between (1) this type of advice and (2) advice given to the Appellant in respect of operating its payroll, or mitigating any other business expense (para. 37 of the decision).
Thus, the company's appeal was allowed.
The onus of proving that expenditure is for business purposes is on the taxpayer. The civil standard of the balance of probabilities applies. For the input tax to be deductible, there must be a direct and immediate link between the expenditure in question and the taxable supplies made by the business. It is not sufficient for the expenditure to provide a general benefit to the business, the expenditure must be for the purpose of the business.
[1] The Appellant appeals against the Respondents' refusal, expressed in a review letter dated 2 March 2016, to allow a claim for input tax in the sum of £10,000 for the period ended 09/15, and also against the Respondents' subsequent assessment to give effect to their decision. The Respondents refused the Appellant's claim on the basis that the invoice supplied was a pro forma invoice, and that there was insufficient evidence to show that this invoice related to a business expense of the Appellant.
[2] The background to this appeal is set out in more detail in our findings of fact, below. In brief, the Appellant entered into an engagement with a firm of tax consultants, Qubic Tax. After taking the advice offered by Qubic Tax, the Appellant implemented certain measures, including buying a large quantity of investment gold to put into an employee benefit trust for the benefit of the Appellant's sole director and employee. Qubic Tax invoiced the Appellant in the sum of £50,000 plus £10,000 VAT. The Appellant paid Qubic Tax's invoice.
[3] The Appellant sought to deduct the input tax of £10,000 in its VAT return for the period ended 09/15. After enquiring into this return, the Respondents refused the Appellant's claim to be entitled to deduct the £10,000 as input tax. This refusal was upheld on review. The Appellant appealed.
[4] On behalf of the Appellant, Mr Kaney submitted that the Appellant was entitled to deduct the £10,000 in dispute as this was VAT incurred on expenditure related to advice taken by the Appellant to enable it to provide employee rewards, and it was not attributable to the Appellant's subsequent purchase of gold. Mr Kaney argued that the provision of rewards for employees was a residual cost of running a business, and it was normal for companies to remunerate their directors, and so the expense was referable to the Appellant's taxable supplies. It followed that the VAT incurred in paying for the advice was deductible by the Appellant.
[5] Mr Kaney also submitted that it was the taxpayer's state of mind which largely determined the purpose for which a fee is incurred, and that the Respondents were looking too far ahead in linking the advice given to the Appellant with its subsequent purchase of gold. Mr Kaney submitted that the advice could have related to other matters, such as tax in respect of residential lettings, and that at the time the advice was given it was not known what consequences might follow. Mr Kaney submitted that if the advice had related to payroll matters then the VAT would have been allowed and that this was an analogous expense.
[6] The Respondents' case was put on a different basis in the original decision and in the review decision. Before us the Respondents accepted there was no longer a dispute about whether the invoice was a proforma invoice; instead Mr Qureshi argued that the Appellant had failed to demonstrate a sufficient link between the expenditure and the taxable supplies it made. The Respondents' view was that expenditure was in respect of advice given to achieve the tax efficient extraction of funds from the Appellant and so it was for the personal benefit of the Appellant's sole director. It followed that it was not deductible. This description – advice on a tax efficient extraction method – was that used by the Appellant's accountants to explain what the expenditure was for.
[7] In an appeal to the Tribunal against an assessment to input tax under section 73(1) of the Value Added Tax Act 1994 (‘VATA 1994’), the onus of proof is upon the Appellant to displace the assessment raised. The burden of proof is the civil standard of the balance of probabilities.
[8] We heard oral evidence from Mr Thomas Doran and were shown the documents in the bundle consisting of correspondence between the parties, an engagement letter and various invoices. On the basis of the documents in the bundles before us and the oral evidence of Mr Doran, we find the following facts:
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a) Mr Doran is a builder. He began in the building trade in the UK with his uncle in the early 1990s and then worked alone albeit with the involvement of members of his family. Mr Doran set up the Appellant as the vehicle through which he could conduct his trade, and (at all relevant times) he was the Appellant's sole employee and sole director. Through Mr Doran's efforts over time, the Appellant built up a good reputation for the high standard of work it delivered and for delivering that work on time. This reputation ensured a steady stream of work for the Appellant.
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b) In late 2014, the Appellant sold a large property, formerly a church, which it had converted into residential properties. As a result of this sale the Appellant had a considerable amount of...
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