Imprimatur Capital Holdings Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 January 2021 |
| Neutral Citation | [2021] UKFTT 19 (TC) |
| Date | 27 January 2021 |
| Court | First-tier Tribunal (Tax Chamber) |
[2021] UKFTT 19 (TC)
Judge Aleksander, Rebecca Newns
George Perez QC, instructed by VAT Advice Line Limited, appeared for the appellant
Mark Fell and Edward Hellier, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Right to deduct input tax on supplies – Principal VAT Directive, art. 168.
Value added tax – Input tax – Right to deduct input tax on supplies – Whether taxable supplies – Whether consideration.
The First-tier Tribunal (FTT) partially allowed an appeal against input tax deductions disallowed as not being used for the purposes of taxable, or intended taxable, supplies.
ICH was the representative member of a VAT group, and member of a corporate group that invested in projects originating in universities and research institutions. Companies would be incorporated to commercially exploit intellectual property spun out of the institution. The group would then invest in this “portfolio company” and provide services to it with the objective of building it up until a return could be obtained from selling its shares. The appellant claimed investment agreements were concluded providing for the payment of fees for a variety of services including consulting, management services and the placement of directors or executives. It was acknowledged the level of fees charged was not always the same and might be less than the normal rate to reflect the ability of the portfolio company to pay. The FTT found fees were often deferred, sometimes indefinitely. There were also various projects where the appellant claimed the group had intended to make supplies but for some reason the projects did not come to fruition. The group also supplied services to unrelated third parties.
To be able to claim a deduction for input VAT on supplies made to it, ICH had to show they were using those supplies for making taxable transactions, or for taxable transactions it intended to make. The transactions had to satisfy two basic conditions,
- they must be made by ICH for consideration, and
- the supply must constitute an economic activity carried on by ICH. It must be made for the purpose of obtaining income on a continuing basis.
HMRC submitted there was no consideration if the payment for supply was dependent on generating sufficient revenues to be able to afford to make the payment. This contingency broke the link between the supply and the payment because it was the contingency that gave rise to the payment, not the original supply.
Further, to determine whether the services were being supplied for the purpose of obtaining income on a continuing basis there must be a wide ranging enquiry of all the objective circumstances including whether the services were the principal activity, the amounts earned, the extent to which they covered the costs of providing the supply and how the price was established.
The appellant contended supplies to portfolio companies met the requirements for the “automatic satisfaction condition”. The requirement for a supplier to be undertaking an economic activity did not need to be considered where a holding company was supplying services to a subsidiary for consideration.
ICH entered into contracts under which it provided services in exchange for remuneration. The amounts were not determined by ability to pay although it did agree to defer payment in line with its strategy. The fees were not waived, and the liability to pay fees was never removed.
The FTT found the appellants activities could be divided into several broad categories.
Investing in portfolio companies with a view to realising a profit on disposal of the company.
Providing services to portfolio companies
Holding shares in group companies
Providing services to group companies (ICFM)
Providing services to third party clients
Its activities in relation to portfolio companies were not for consideration. Although it was a commercial business, in many cases it did not charge fees and even when it did the fee was set by reference to the ability of the company to pay and then often deferred or waived breaking the direct link between the provision of the services and the payment received. Adopting the language in Norseman Gold plc v R & C Commrs [2016] BVC 504 the FTT suggested there was only ever a vague intention on the part of ICH to levy an unspecified charge. It was ICH's practice to cancel fees or defer them indefinitely and there was no evidence payment was ever enforced. There was little or no evidence of agreements for the provision of services for a fee.
The activities also did not amount to an economic activity. ICH's principal purpose was to invest. The fees paid by portfolio companies were limited and ICH were unable to show the charges covered the costs of supplying its services.
Finally, the supplies to portfolio companies did not meet the requirements for the automatic satisfaction condition because ICH was not a holding company in relation to its interest in portfolio companies.
In relation to group companies, the FTT found ICH did aim to generate a continuing flow of income. However, the provision of services was not for consideration because the fee charged was unrelated to the value or cost of the services provided. It was fixed by reference to what ICFM could afford. This contingency broke the link necessary for there to be consideration.
Services provided to third party clients were undertaken for consideration and did amount to an economic activity.
Accordingly, input tax incurred on supplies used for the provision of services to portfolio or group companies was not deductible but input tax incurred on supplies used for the provision of services to third party clients was deductible.
The parties were left to seek agreement on how this should be apportioned.
Although the appellant provided some documentation it was piecemeal, not always relevant or consistent with the evidence presented orally, and therefore was not as helpful as it might have been to their case.
[1] This is an appeal by Imprimatur Capital Holdings Limited (“ICH”) against:
- a review by HMRC dated 20 December 2016 upholding their decision issued 9 June 2016 to disallow input tax deducted by ICH totalling £102,205 for the periods 06/12 to 06/15; and
- a review by HMRC dated 5 October 2017 upholding their decisions dated 31 October 2016 and 1 September 2017 to disallow input tax deducted by ICH totalling £82,609 for the periods 12/15 to 03/17.
[2] The dispute relates to input tax on supplies made to ICH which were used for the purposes of supplies made (or to be made) to companies in which ICH (or its subsidiary, Letzone Limited) owned shares, and to other unrelated entities. HMRC assert that the inputs were not used for the purposes of taxed transactions or intended taxed transactions.
[3] Ian Watson (founder and director of ICH) and Benjamin Ferrari (chief strategic officer of Imprimatur Capital Limited) provided witness statements (in the case of Mr Watson, he provided two witness statements) and both gave oral evidence under oath and were cross-examined. Three bundles of documentary evidence were submitted in evidence.
[4] In addition, a letter from Grunberg & Co was produced. Grunberg & Co undertake bookkeeping and the preparation of VAT returns for ICH. Attached to the letter were printouts from Grunberg & Co's computer records of ICH's daybook and sales invoice ledgers, confirming that these had been reconciled to ICH's bank statements. The ledgers had been marked-up in manuscript to show where the entries in these ledgers had been agreed with the spreadsheet produced by Mr Watson as an exhibit to his witness statement. However, the letter concludes that the information is provided “without any responsibility on the part of the writer, Grunberg & Co, or the employees thereof”. The signatory of the letter did not appear as a witness.
[5] ICH was represented at the hearing by Mr Perez. HMRC were represented by Mr Fell and Mr Hellier.
[6] We find the background facts to be as follows:
[7] ICH (whose name was changed from “Imprimatur Capital Limited” in 2015) is a member of a corporate group (“the Group”) which includes Letzone Limited (“Letzone”); Imprimatur Capital Corporate Finance Limited (“ICCF”); Imprimatur Fund Management Limited (“IFM”) and Imprimatur Capital Limited (“IC”– not to be confused with ICH). ICH was registered for VAT on its own from 1 September 2004. This registration was cancelled on 1 October 2015, when ICH joined (as representative member) a group registration with IC. Letzone is a subsidiary of IC. ICCF was regulated by the (then) FSA and IFM is regulated by the FCA. None of Letzone, ICCF, nor IFM were ever part of the VAT group. IFM was incorporated after 2009. ICCF was dissolved in 2015.
[8] As IC and ICH were members of a VAT group from 1 October 2015, in this decision, for convenience, reference to supplies being made by or to ICH, include circumstance where the supply would have been treated (but for the VAT group) as being made to (or by) IC.
[9] The Group invests in projects which were originated in universities and research institutions. Companies would be incorporated to exploit intellectual property commercially and “spun out” of the institution, and the Group would invest in the spin-out company (referred to in this decision as a “portfolio company”). The evidence is that the shareholdings in portfolio companies were registered in the name of Letzone, which was also the beneficial owner of the shares.
[10] In addition, the Group provides services to its portfolio companies, such as the provision of “management services” (such as introductions to potential executives and other advisors, advice on how best to exploit the intellectual property commercially, provision of office accommodation and contact points)....
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