Praesto Consulting UK Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Hamblen,Lord Justice Haddon-Cave |
| Judgment Date | 11 March 2019 |
| Neutral Citation | [2019] EWCA Civ 353 |
| Docket Number | Case No: A3/2017/3450 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 March 2019 |
[2019] EWCA Civ 353
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
JUDGE TIMOTHY HERRINGTON &
JUDGE ASHLEY GREENBANK
Royal Courts of Justice
Strand, London, WC2A 2LL
THE MASTER OF THE ROLLS
Lord Justice Hamblen
and
Lord Justice Haddon-Cave
Case No: A3/2017/3450
Oliver Conolly (instructed by RG Legal Limited) for the Appellant
Eleni Mitrophanous (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondent
Hearing date: 14 February 2019
Approved Judgment
Introduction
This appeal concerns whether, on the facts as found, a company which pays the legal fees relating to the defence of civil proceedings brought against its sole director is entitled to credit for VAT input tax charged in relation to those fees.
The background facts
The following facts are taken from the decision of the First Tier Tribunal (“FTT”, Judge Cannan and Mr Atkinson) dated 13 July 2016, with bracketed references to the relevant paragraphs of the decision.
Mr Ranson, was formerly an employee of the claimant in the civil proceedings, Customer Systems plc (“CSP”), which was an information technology consultancy. In 2009 Mr Ranson resigned to set up the company of which he was sole director, the appellant (“Praesto”), which thereafter carried on a consultancy business competing with CSP. Three other employees of CSP left to become employees of Praesto [6].
Letters before action were written by CSP's solicitors to both Mr Ranson and Praesto [7], [8]. Mr Ranson and Praesto instructed solicitors, Sintons. Solicitors' correspondence, without prejudice meetings and negotiations followed in which it was acknowledged that Mr Ranson was acting on behalf of Praesto [9]. In early 2010 there was an unsuccessful mediation. CSP then issued proceedings against Mr Ranson and the other three employees, but not against Praesto. It was alleged that Mr Ranson had breached “his terms of employment and/or fiduciary duties in setting up Praesto and competing with CSP through Praesto. Further claims were made alleging misuse of a contact list. CSP claimed damages by reference to the value of the business lost by CSP. This was estimated by reference to work done by Praesto. In the alternative CSP sought an account of profits earned by Mr Ranson in breach of his fiduciary duties” [10].
The claim went to a trial on liability before Sir Raymond Jack sitting as a High Court judge over nine days in November 2011 [12]. At the outset of the trial, there was a discussion between CSP's counsel and the judge about the claim for an account of profits in the light of the fact that Praesto was not a party. CSP's counsel stated that in the event that it was found that Mr Ranson owed a fiduciary duty and was in breach of that duty then CSP was likely to seek to join Praesto in relation to the account claim. In the end, the position of Praesto was left to be decided in any trial on quantum or remedy [15], [16].
The claim against Mr Ranson succeeded at trial but his appeal to the Court of Appeal was allowed. No further trial or hearing was therefore necessary [16].
Sintons issued nine invoices for their fees in connection with the litigation [20]. The first invoice was addressed to Praesto and HMRC has not challenged Praesto's claim for input tax credit on that invoice. It covered all costs up to and including the date when CSP commenced proceedings [21].
The other eight invoices were addressed to Mr Ranson alone and related to the conduct of the litigation from the commencement of proceedings up to and including the Court of Appeal. There is no mention of Praesto in the description of the work done to support the invoices [22]. These are the invoices which are subject to challenge.
Mr Ranson had a discussion with Sintons sometime before January 2011 about whether the invoices should be addressed to Praesto as well and was told that the invoices should match the title of the proceedings [23]. The invoices were paid by Praesto [24].
The appeal proceedings
HMRC issued a notice of assessment to recover the input tax credit of £79,932 claimed by Praesto in relation to the VAT paid on the eight invoices in issue. That assessment was appealed to the FTT [2].
The FTT considered that the appeal raised two issues [51]:
(1) Do the invoices relate to services supplied by Sintons to Praesto?
(2) If so, did the services have a direct and immediate link to Praesto's taxable activities?
It answered both questions in the affirmative.
In relation to issue (1), the FTT found, in particular, that all the work done by Sintons was on behalf of Mr Ranson and Praesto, that CSP would have sought to join Praesto as a party if it had been successful on liability and that the services were supplied to Praesto just as much as if it had been a party [53].
In relation to issue (2), the FTT found, in particular, that Praesto had a direct interest in CSP's claim being dismissed, that otherwise there was a real risk it would have to account for the profits it had made in competition with CSP and that it may be viewed as a party in the proceedings in all but name [59].
HMRC appealed to the Upper Tribunal (“UT”, Judge Herrington and Judge Greenbank). In its decision of 10 October 2017 the appeal was allowed.
On issue (1), the UT held that the FTT had failed to make a finding as to whether Praesto was contractually entitled to the legal services provided by Sintons, and that this failure was an “error of approach” which amounted to an error of law. It would have remitted the case the FTT for reconsideration, had it not granted HMRC's appeal on issue (2) [42]–[44].
On issue (2), it held that if, contrary to the above, services were supplied to Praesto, they were not used by it for the purposes of its business [73].
Permission to appeal from the UT decision was given by Patten LJ on 29 June 2018.
The legal framework
The most relevant provisions of EU law are set out in the Principal VAT Directive (“PVD”), Council Directive 2006/112/EC of 28 November 2006 on the Common System of Value Added Tax, as follows:
“Article 2
1. The following transactions shall be subject to VAT:
( a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;
….
( c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such.
….
Article 14
‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.
….
Article 24
‘Supply of services’ shall mean any transaction which does not constitute a supply of goods.
….
Article 73
In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.
….
Article 168
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;”
Article 178 of PVD provides that to exercise the right to deduct the customer must hold an invoice. Article 226 requires that the invoice show the name of the customer. These are formal rather than substantive conditions – see Senatex GmbH v Finanzamt Hannover-Nord (C-518/14) [2017] STC 205 at [38].
The most relevant provisions of UK law are set out in the Value Added Tax Act 1994 (“ VATA”) as follows:
“Section 4
(1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.
(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.
Section 5
(1) Schedule 4 shall apply for determining what is, or is to be treated as, a supply of goods or a supply of services.
(2) Subject to any provision made by that Schedule and to Treasury orders under subsections (3) to (6) below—
(a) “supply” in this Act includes all forms of supply, but not anything done otherwise than for a consideration;
(b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.
….
Section 24
(1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say—
(a) VAT on the supply to him of any goods or services….
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him. (emphasis added)
(2) Subject to the following provisions of this section, “output tax”, in relation to a taxable person, means VAT on supplies which he makes or on the acquisition by him from another member State of goods (including VAT which is also to be counted as input tax by virtue of subsection (1)(b) above).
….
Section 26
(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within...
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