Merlin Scientific LLP
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 June 2015 |
| Date | 04 June 2015 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Timothy Herrington, Michael Bell ACA CTA
Kieron Beal QC and William Frain-Bell, Counsel, instructed by ARIG LLP, appeared for the Appellant
Martin Priest, Presenting Officer, appeared for the Respondents
Value added tax – Input tax – Whether part in respect of supply of corporate meeting services disallowable on basis of an apportionment to business entertainment – Value Added Tax Act 1994 (“VATA 1994”), s. 24 to 26 – Value Added Tax (Input Tax) Order 1992 (SI 1992/3222), art. 5.
Income tax – Whether costs described as being for corporate meeting services disallowable as business entertaining – Income Tax (Trading and other Income) Act 2005 (“ITTOIA 2005”), s. 34 and 45.
The First-tier Tribunal (FTT) allowed the taxpayer LLP's appeals against (a) a VAT assessment and a direction to amend a VAT return and (b) amendments made to its self-assessment return. The FTT found that expenses which HMRC contended were for the provision of business entertainment were in fact corporate meeting costs and therefore the input tax incurred on those costs was allowable and the expenses could be deducted in the computation of profits for income tax purposes.
This decision relates to the treatment of corporate meeting costs and whether they were in fact the provision of business entertainment. Although Merlin Scientific LLP (“MSL”) made two appeals involving two different taxes with different legislation, HMRC decided that its treatment of the deductibility of the corporate meeting costs should follow the VAT treatment, therefore the parties agreed that the findings of the VAT appeal would be determinative of the income tax appeal. Therefore the FTT looked solely at the VAT appeal, which in turn led to the same decision on the income tax appeal.
Merlin Biosciences Ltd (“MBL”) was an international fund management and corporate finance business specialising in the medical services sector. To be successful MBL needed to attract substantial investors and to have a good track record in identifying and choosing companies to invest in. Investee companies would also seek to market themselves to MBL in the hope that the funds would make an investment. Negotiations between significant investors and potential investee companies could be long and protracted and needed to be carried out in the right atmosphere. The success of MBL was also dependant on the involvement of Sir Christopher Evans (“Sir Chris”), a biotechnology entrepreneur, who as the non-executive chairman had an ambassadorial role as well as leading MBL's Board, but who was not involved in the day-to-day business of MBL or its investment decisions. In another quite distinct role, Sir Chris' services were made available to MBL as its principal outside consultant through the terms of a Consultancy Agreement between MBL and MSL, whose main business was the provision of Sir Chris' consultancy services. The Consultancy Agreement provided for MSL to charge as disbursements certain expenses incurred in providing the consultancy services, such as travelling, accommodation and entertaining expenses, but in practice it did not charge disbursements separately. Sir Chris used his family home “Glebe House” in the Cotswolds, which had first class meeting facilities, to host meetings in his role as consultant to MBL. The facilities at Glebe House were operated by Glebe Corporate LLP (Glebe Corporate), which was controlled by Sir Chris' wife. Whilst Glebe House had extensive leisure facilities, the FTT accepted that when he used these to entertain business contacts this was treated as a personal rather than a business expense. The invoices issued by Glebe Corporate to MSL included identical narrative in respect of the services provided, being:
For meetings, teas, coffees, lunches, breakfasts, dinners, food and wine, overnight accommodation, use of facilities, vehicles, rifles and shotguns, cartridges, fishing rods, gear, mountain bikes, horses and tack, clothing, laundry, petrol, use of gym, snooker room and bar, meeting rooms, estate office for emails, faxing, copying typing, arranging appointments, general secretarial support, cleaning to support client.
Each invoice then listed under the heading “Clients” the name of each attendee at the meetings in respect of which the facilities were made available.
HMRC contended that the sums paid by MSL to Glebe Corporate were predominantly related to the provision by MSL of business entertainment free of charge to MSL's clients and their contacts and therefore the relevant proportion (which they estimated should be two thirds) should be excluded from credit for input tax in accordance with SI 1992/3222, art. 5. MSL argued that HMRC had misunderstood the contractual arrangements and that there should be no disallowance of input tax. Alternatively MSL argued that if there was a supply of business entertainment by MSL it was minimal and therefore HMRC's two thirds disallowance could not be sustained.
The FTT noted that from the invoices issued by Glebe Corporate to MSL, taken together with MSL's invoices to MBL, it appeared at first sight that the arrangements were such that MSL made the facilities available to the attendees in the course of providing its consultancy services to MBL and did not charge MBL or anyone else for them separately, the costs being absorbed by MSL as a cost component of its consultancy services. The FTT noted that the alternative was that MBL made a composite supply to MBL which MBL paid for, namely a supply of consultancy services with an ancillary supply of corporate meeting facilities. On this analysis Sir Chris provided his consultancy services to MBL in surroundings that were conducive to the success of the meetings concerned, whether the outcome sought be to procure new investors or suitable new investments for MBL's funds.
Based on the evidence provided, the FTT found that the services supplied by MSL to MBL was a composite supply of services consisting principally of the supply of consultancy services and an ancillary supply of corporate meeting services, which facilitated the supply of the consultancy services. No separate charge for the ancillary services was required to be specified on MSL's invoices as there was a composite supply for a single price, MSL having chosen to treat the onward supply of corporate meeting services as ancillary to the principal supply of consultancy services. It was open to MSL to provide its services in this way and it was not obliged to treat the ancillary services as a disbursement. Therefore if any of the supplies did constitute the supply of business entertainment they were not provided free of charge, finding the position akin to that in Webster Communications International Ltd VAT[1997] BVC 2,263.
The FTT also found that the use of the leisure facilities and the provision of meals etc. was minimal in the context of the overall supply of services (which was primarily the provision of meeting facilities for business purposes), even though this is not how it came across from the invoices. On that basis the FTT suggested that if a disallowable proportion was needed, which it was not given its earlier findings, it should not have exceeded 5%.
The FTT concluded that MSL should be given full credit for the input tax on the Glebe Corporate invoices and these expenses are allowable in full as they have been wholly and exclusively incurred for the purposes of MSL's trade. Both appeals were therefore allowed.
The FTT understood why, on the basis of the invoices (which it was accepted by the appellant did not adequately reflect the situation) and a less than comprehensive explanation from the appellant's accountants, the HMRC Officer had thought the expenses were for business entertainment provided free of charge and that therefore there should be a block on recovering the input tax. However the Officer then appeared to close her mind to what the appellant was saying and therefore failed to understand the business context in which the facilities were made available.
[1] The Appellant (“MSL”) has two separate appeals against the following decisions of the Respondents (“HMRC”) :
1) A VAT assessment raised by HMRC on 22 March 2010 in the sum of £128,317 in respect of periods between 1 March 2006 and 30 September 2008 and HMRC's direction to MSL to amend its VAT return for the period 12/08. The basis for this decision was HMRC's finding that certain expenses in relation to corporate meeting costs were incurred in the provision by MSL of business entertainment and a proportion of the input tax referable to those costs was accordingly irrecoverable; and
2) The decision taken on 28 June 2012 to close the enquiry into MSL's partnership self-assessment for the year 2006/2007 by making amendments to the return so as to disallow those same expenses as deductions in the computation of profits for income tax purposes.
[2] Although HMRC's decisions are entirely separate, involving different taxes with slightly differently worded applicable legislation, HMRC in its income tax decision determined that its treatment of the deductibility of the corporate meeting costs in question should follow the VAT treatment determined by its indirect tax colleagues. Accordingly the parties agreed that the findings in the VAT appeal would also be determinative of the income tax appeal. Therefore this decision deals in substance solely with the VAT appeal, the decision on which also, as shown at the end of this decision, leads to the same decision on the income tax appeal.
[3] The dispute which is the subject of these appeals can be summarised as follows:
1) HMRC contends that sums payable by MSL to Glebe Corporate LLP (“Glebe Corporate”) in respect of charges made by Glebe Corporate to MSL for the provision of meeting facilities at a property situated in the Cotswolds called Glebe House in fact...
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