Revenue and Customs Commissioners v Simpson & Marwick

JurisdictionScotland
Judgment Date12 April 2013
Neutral Citation[2013] CSIH 29
Date12 April 2013
CourtCourt of Session (Inner House)

[2013] CSIH 29.

Lord Eassie.

Revenue and Customs Commissioners
and
Simpson & Marwick

K. Campbell QC; Office of the Solicitor to the Advocate General

Wolff QC; Delibegovic-Broome; Simpson & Marwick

Value added tax - Bad debt relief - VAT-only invoices - Taxpayer solicitors acting for insurance companies - Insurers paying fees excluding VAT - VAT-only invoices issued to VAT-registered insureds - VAT-only invoices unpaid by insureds - Whether bad debt relief limited to VAT proportion of invoices - Whether restriction disproportionate interference with right to enjoyment of possessions - Directive 77/388, art. 11(C)(1) - Value Added Tax Act 1994, Value Added Tax Act 1994 section 36s. 36 - European Convention on Human Rights, Protocol 1, art. 1 - Human Rights Act 1998, s. 3.

The Court of Session allowed HMRC's appeal from the Upper Tribunal ([2012] BVC 1533; [2011] UKUT 498 (TCC)) holding that, where a VAT-only invoice was unpaid, the taxpayer was not due bad debt relief in respect of the whole amount of that invoice.

Summary

The taxpayer solicitors acted for insurance companies. As directed by HMRC, if the insured was VAT-registered, they sent (1) a fee note to the insurer for the VAT-exclusive fees and (2) an invoice to the insured seeking payment of only the VAT on the fees. If the insured failed to pay the VAT, the taxpayer claimed a bad debt refund for the whole amount.

HMRC assessed the preceding three years on the basis that the taxpayer's entitlement to bad debt relief was restricted to the VAT fraction of the unpaid VAT-only invoices.

The First-tier Tribunal upheld the assessment ([2011] TC 00662). The taxpayer appealed to the Upper Tribunal.

The Upper Tribunal held that the amount written off was all VAT. The purpose of Value Added Tax Act 1994 section 36s. 36 was that the whole of the VAT that had not been recovered from the customer should be refunded. HMRC appealed to the Court of Session.

The taxpayer unsuccessfully cross appealed to the Court of Session contending that the Upper Tribunal, although it accepted the firm's argument based on domestic law, erred in rejecting an argument based on alleged breach of art. 1 of protocol 1 to the European Convention on Human Rights to the effect that the making of the assessment contravened their Convention rights under the Human Rights Act 1998; and hence also EU law.

The Court held that the judgment of the Upper Tribunal appears to proceed on the basis that the normal construction and effect of Value Added Tax Act 1994 section 36s. 36 was displaced by the "direction" that solicitors were to issue VAT-only invoices to the policyholder client. In fact, the invoicing failed wholly to accord with that direction. So, in so far as the Upper Tribunal judgment proceeds on the basis that VAT-only invoicing accords with the "direction", it was flawed (para. 22 and 24 of the Opinion).

If a solicitor followed the "direction", the solicitor was not relieved from his duty to issue a proper VAT invoice to the policyholder client. The covering note or request for payment by the policyholder of "an amount equal to the VAT" with a statement that "the balance of the account will be settled by the insurance company" recognises that, although the policyholder is the client, the insurance policy allows for his being indemnified in respect of the solicitor's bill. In the case of a VAT-registered client and a claim related to the client's business, that indemnification is reduced by the fact that the client may reclaim the VAT on the solicitor's bill (para. 23 of the Opinion).

The Court held that, although the part of the consideration outstanding equals the VAT on the services, the supplier and customer merely attributed the partial payment to the VAT-exclusive sum (para. 25 of the Opinion).

The Court held that the words "outstanding amount" are defined in Value Added Tax Act 1994 section 36 subsec-or-para 3s. 36(3) by reference to the amount of the "consideration" or the extent to which the "consideration" has been written off. However, Value Added Tax Act 1994 section 19s. 19 makes plain that the "consideration" is a VAT-inclusive amount. There is nothing in the text which permits an exercise of seeking to identify the extent to which the amount is "demonstrably all VAT" (para. 26 of the Opinion).

Comment

Many advisers were surprised by the decision of the Upper Tribunal. The Court of Session has restored the VAT treatment of bad debts to what had generally been understood to be the position.

For commentary on refunds for bad debts, see the CCH Value Added Tax Reporter18-900.

OPINION OF THE COURT
Introductory

[1]This is an appeal under Tribunals, Courts and Enforcement Act 2007 section 13section 13 of the Tribunals, Courts and Enforcement Act 2007 by the Commissioners for Her Majesty's Revenue and Customs - "HMRC" - from a decision of the Upper Tribunal (Tax and Chancery Chamber). It relates to an assessment to value added tax - "VAT" - made by HMRC on a firm of solicitors, Simpson & Marwick - "S&M". The assessment in question was the subject of an appeal by S&M to the First-tier Tribunal, which rejected the firm's appeal. The amount at issue, were the making of the assessment to be well founded, was however agreed before the First-tier Tribunal. The decision of the First-tier Tribunal was appealed by S&M to the Upper Tribunal, which allowed the firm's appeal and set aside the assessment. HMRC now seek to have the assessment, in the agreed amount, restored. S&M have a cross appeal contending that the Upper Tribunal, while it accepted the firm's argument based on domestic law, erred in rejecting an argument advanced to that tribunal based on alleged breach of article 1 of protocol 1 to the European Convention on Human Rights to the effect that the making of the assessment was contrary to their Convention rights under the Human Rights Act 1998; and hence also contrary to EU law.

[2]The appeals are concerned with bad debt relief claimed by S&M in their VAT returns between 1 May 2004 and 30 April 2007 in respect of VAT which they had paid on certain supplies of legal services. The particular feature of those supplies relevant to the issues in the case is that they were supplies of legal services in cases in which S&M had been instructed by an insurance company which had provided indemnity insurance, or property risk insurance, to the policyholder in question. Typically, in the former case the policyholder would be the defending party in a claim by a third party; in the latter the policyholder would be the nominal pursuing party, the claim having been subrogated to the insurer.

[3]As is recorded by the Upper Tribunal judge (Lord Drummond Young), and was not in dispute, while in such cases the initial and continuing instruction of the solicitor comes from the insurer, the solicitor nonetheless has a professional responsibility towards the policyholder. If matters proceed to litigation, the solicitor's client is seen in those court proceedings as being the insured. This is not without practical reality, since often the insured may not be wholly indemnified by his policy; and the insured may have, in regard to the outcome of the litigation, wider concerns for the conduct of his enterprise or his professional standing to which the solicitor must have regard and upon which he must take the view of the insured.

[4]At some point in time relatively shortly before February 1985 discussions took place between the British Insurance Association and other insurance bodies on the one hand and HM Commissioners for Customs and Excise on the other respecting practices which might be followed in regard to VAT on legal services provided in regard to claims covered by insurance. This resulted in an agreement between the Commissioners and the British Insurance Association (and the other insurance bodies). A copy of the document containing that agreement was not produced to either of the tribunals below nor to this court, and it may well be that the agreement or understanding was not recorded in formal written terms. The best account of the terms of the agreement available to the tribunals below and this court is a letter from the British Insurance Association to the Law Society of Scotland published in the Journal of the Law Society of Scotland in March 1985. The letter, which the Upper Tribunal judge sets out in paragraph [5] of his judgment, reads:

HM Customs and Exercise have reviewed the application of VAT to legal services in relation to insurance claims. Following discussions with the BIA, Customs have extended their view that such services are normally supplied to the policyholder to encompass claims in which the insurance company exercises its right of subrogation. Furthermore, and for lawyers' invoices issued on or after 1st January 1985, Customs have agreed that if the claim relates to the policyholder's business then legal services supplied to the policyholder are for the purposes of that business and, if registered, the policyholder can recover the VAT incurred - subject of course to the normal rules for input tax deduction.

The insurance company will therefore indemnify the policyholder in respect of an amount net of VAT. Where such a policyholder is partially exempt, for example a bank, the policyholder will not be able to recover all the VAT as input tax. The insurance company will therefore have to indemnify the policyholder in respect of an amount which will include some VAT. This VAT will not be recoverable from Customs by the insurance company. If, however, the insurance does not relate to the policyholder's business and/or the policyholder is not registered for VAT, the insurance company will indemnify the policyholder in respect of an amount which will include VAT. This VAT will not be recoverable from Customs by the insurance company.

The procedure for UK solicitors' services will depend on whether or not the policyholder is registered...

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