Revenue and Customs Commissioners v Temple Finance Ltd; Temple Retail Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 August 2017 |
| Neutral Citation | [2017] UKUT 315 (TCC) |
| Date | 04 August 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 0315 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Judge Greg Sinfield, Judge Sarah Falk
Sarabjit Singh, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Nicola Shaw QC and Michael Firth, instructed by Grant Thornton UK LLP appeared for the respondents
Value added tax – Whether VATA 1994, Sch. 6, para. 1 (supplies of services between connected parties at below open market value) applied – Whether standard method of recovery of input tax on overheads appropriately reflected use of inputs – Whether correct approach affected by principle of fiscal neutrality – Whether activities carried on by two separately registered companies amounted to a single business.
The Upper Tribunal (UT) upheld decisions of the First-tier Tribunal (FTT) concerning the valuation of supplies between connected persons and the method of apportioning input tax between taxable and exempt supplies.
This was an appeal by HMRC against decisions of the FTT that:
- charges for occupation and use of shops (store services) by Temple Retail Ltd (TRL) to Temple Finance Ltd (TFL) were not made at below open market value (OMV) as contended by HMRC;
- the OMV of advertising services supplied by TRL to TFL should be determined by reference to their respective operating profits rather than in the manner proposed either by HMRC or by the companies; and
- TFL's recoverable input tax on overheads should be determined using the partial exemption standard method as submitted by TRL and TFL with no standard method override being required.
TRL and TFL were two wholly-owned subsidiaries of PerfectHome Holdings Ltd and supplied household goods from showrooms in the UK. The companies' activities were aimed principally at credit-constrained customers, with 98% of sales being made on hire purchase. Insurance cover was compulsory and approximately 88% of customers bought theft and damage insurance alongside the product. Approximately 90% also bought an extended warranty. TRL was the tenant under the showroom leases and it was responsible for acquiring goods to be sold and for stocking showrooms. In the 2% of cases where no hire purchase was required TRL made the sale direct to the customer but, otherwise, it sold the goods to TFL at a price equal to 97% of the advertised price and TFL entered into the hire purchase agreement with the customer. TFL then sold the goods at full price and made an exempt supply of theft and damage insurance and a standard-rated supply of Coverplus warranty. The arrangements between the companies were governed by an Intra-Group Services Agreement.
TRL made only taxable supplies and recovered input tax in full, whereas TFL was partially exempt and its input tax recovery was restricted. In simple terms, the dispute concerned the overall level of VAT cost that the group should suffer. HMRC's concern was that TRL and TFL had an opportunity to enhance their aggregate input tax recovery by charging fees for store services and advertising services at below OMV. HMRC approached the matter in two ways. Firstly, they issued a direction to TRL, under VATA 1994, Sch. 6, para. 1, that the value of supplies by TRL to TFL in respect of store services and shop advertising services was below OMV and should be treated as made at OMV. HMRC subsequently made their own determination of the value of these supplies and assessed TRL to additional output tax on that basis. The effect of this approach was to increase the quantum of irrecoverable input tax incurred by TFL. Secondly, HMRC issued assessments to TFL on the basis that it should apply the partial exemption standard method override in determining the proportion of input tax recoverable on its overheads, rather than the standard method that TFL had applied, and, consequently, that the proportion of TFL's recoverable input tax should be reduced.
Having considered the parties' submissions the FTT had reached a number of conclusions. On the valuation issue, it found that in the absence of abuse of rights under Halifax principles (Halifax plc v C & E Commrs (Case C-255/02) [2006] BVC 377) there was no scope for HMRC to re-characterise the supplies, so the issue to determine was the OMV of the actual supplies made. The FTT decided that value of store services should be determined by using the analogy of a “shop within a shop” arrangement and concluded that TFL was not paying less than the OMV for store services. For advertising services, the FTT decided that the correct approach was to calculate the OMV of advertising services by apportioning their cost in accordance with TRL's and TFL's operating profits and adding a 10% mark up to TFL's share. On the partial exemption issue, the FTT rejected HMRC's decision that taxable supplies of goods should be excluded from the turnover calculation for the reason, HMRC had argued, that TFL's overhead costs were used not for the purposes of supplying goods but for the supply of credit, together with insurance and Coverplus warranty. The FTT had concluded that HMRC's approach was not correct, in particular because TFL incurred residual input tax in order to collect weekly payments that related at least in part to the sale price of the goods.
The UT observed that although HMRC had preferred eight separate grounds of appeal, there was a significant recurring theme in their approach. The grounds of appeal recognised that an error of law was required before the UT was able to intervene. HMRC's contentions centred on the FTT having made irrational or erroneous findings, having misdirected itself and having erred in its decisions. HMRC also contended that the FTT had failed to apply the EU principle of fiscal neutrality, since its decision led to similar supplies of goods and services being treated differently for VAT purposes. Examining each of HMRC's contentions in turn, the UT concluded that the findings of the FTT were findings it was entitled to reach on the evidence. HMRC had failed to show that the FTT had erred in law or made decisions that were not open to be made. The appeal was duly dismissed.
The complex subject matter of this appeal highlights the rarely used power of HMRC to direct open market value in situations where supplies between connected persons are considered to be undervalued and the recipient is unable to recover all of the VAT on the supply. In the present case, the UT upheld the FTT's finding that inter-company charges for the occupation and use of shop premises had not been undervalued. It is advisable that connected businesses making inter-company supplies in similar situations correctly value those supplies where the recipient is exempt or partially exempt and establish a method of input tax apportionment that is both fair and reasonable.
[1] This is an appeal by the Appellants (“HMRC”) against a decision in principle by the First-tier Tribunal (“FTT”) released on 25 January 2016 with neutral citation [2016] TC 04840 (“the Decision”). Save as otherwise indicated, paragraph references in square brackets in this decision are to the paragraphs in the Decision.
[2] The Respondents, Temple Retail Limited (“TRL”) and Temple Finance Limited (“TFL”), are two wholly-owned subsidiaries of PerfectHome Holdings Limited. TRL and TFL together carry on the activities of “PerfectHome”, which operates showrooms in various parts of the UK supplying household goods. TRL and TFL are not members of a group for VAT purposes.
[3] In summary, the FTT decided that:
- supplies of store services by TRL to TFL were not made at below open market value (OMV) as had been contended by HMRC;
- the OMV of advertising services supplied by TRL to TFL should be determined by reference to their respective operating profits rather than in the manner proposed either by HMRC or by the Respondents; and
- TFL's recoverable input tax on overheads should be determined using the standard method as submitted by TRL and TFL, no standard method override (SMO) being required.
The Decision also addressed a number of procedural and evidential matters that are not relevant to this appeal and to which we will not make further reference.
[4] HMRC appeals on eight grounds. These are as follows:
- Ground 1: the FTT failed to apply the principle of fiscal neutrality.
- Ground 2: there was inadequate reasoning to support the FTT's erroneous finding that TRL and TFL carry on separate businesses.
- Ground 3: the FTT made an irrational or erroneous finding that there is a shop within a shop arrangement between TRL and TFL, with TFL acting as a concessionaire.
- Ground 4: alternatively, the FTT took an irrational approach to the assessment of the appropriate concession fee.
- Ground 5: the FTT's approach to determining the OMV of advertising services was flawed.
- Ground 6: the FTT misdirected itself in the approach to be taken to determining TFL's recoverable input tax on its overheads (the partial exemption issue).
- Ground 7: the FTT erred in deciding that the standard method for determining the proportion of input tax recoverable on TFL's overheads was fair and reasonable.
- Ground 8: the FTT erred in its decision in respect of quality refurbished or QR goods, the value of which should have been excluded in TFL's partial exemption calculation.
[5] PerfectHome's activities are aimed principally at credit-constrained customers. Only around 2% of sales are made for cash. The remaining 98% are made on hire-purchase (HP) terms, involving weekly payments typically over a three-year period. Insurance cover is required and approximately 88% of customers buy theft and damage insurance (“TAD”) alongside the product. Around 90% also buy an extended warranty product which at the time was called Coverplus, typically paid for by an additional loan.
[6] Up to around half of customers terminate their HP arrangements early, not only on default but also under Coverplus...
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