Revenue and Customs Commissioners v Tower Resources Plc
| Jurisdiction | UK Non-devolved |
| Neutral Citation | [2021] UKUT 123 (TCC) |
| Year | 2021 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 123 (TCC)
Mrs Justice Bacon, Judge Jonathan Cannan
Upper Tribunal (Tax and Chancery Chamber)
Value added tax – Holding company – Provision of management services to subsidiaries – Whether FTT failed to make complete findings of fact – Whether supplies made for consideration – Cost of services added to intercompany loan accounts – Whether supplies made in the course of an economic activity – Directive 2006/112/EC, art. 9(1) – VATA 1994, s. 4(1) and s. 5(2)(a) – Yes – Appeal dismissed.
The Upper Tribunal upheld the decision of the FTT that additions to an intercompany loan account represented consideration for supplies of services by a holding company to its subsidiaries, in the course of an economic activity.
The Upper Tribunal (UT) upheld the decision of the First-tier Tribunal (FTT) in Tower Resources plc [2019] TC 07256 that Tower was making supplies of services to its subsidiaries for consideration, in the course of an economic activity.
Tower was a UK holding company listed on AIM. It acquired licences to explore for and produce oil and gas in sub-Saharan Africa. Its activities were conducted through local subsidiaries. Tower funded the local costs of the subsidiaries and provided what were described as management services to its subsidiaries but also included technical services. The costs were charged through additions to the intercompany loan account. The loans were treated as assets in the financial statements of Tower and were treated for accounting purposes as repayable on demand, although Tower had not demanded repayment of any of the them by the time of the FTT hearing.
The supplies were all made outside the UK and therefore no output tax was due by Tower, but they had claimed input tax in relation to the services provided. Following an investigation in 2015, HMRC denied there was any entitlement to input tax leading to the present appeal.
HMRC advanced three arguments:
- The FTT had erred in its understanding of HMRC's case and failed to make complete findings of facts.
- There was a common understanding between Tower and its subsidiaries, that they would not demand payment unless the subsidiaries had the funds to pay or Tower needed the money, which broke the requisite link between the supply and consideration.
- Tower was not a taxable person because it was not carrying out an economic activity.
The UT was satisfied the FTT had not erred in its finding of facts. On the second point, the UT found the FTT had previously rejected HMRC's submission that Tower would demand repayment only in the event of certain contingent events. On the findings of facts, by the FTT, the economic and commercial reality was that payment by the subsidiaries was due on demand. That was sufficient to demonstrate Tower's services were supplied for consideration.
Finally, the FTT had not erred in concluding Tower involved itself in the management of its subsidiaries by providing management and technical services to them for consideration. It therefore followed, from settled case law of the ECJ, those services constituted an economic activity for the purposes of Directive 2006/112/EC, art. 9(1).
The UT found the supplies of services by Tower to its subsidiaries were made on a continuing basis, for consideration, and there was a direct link between the services supplied and the consideration received. The fact that Tower also provided a loan facility to their subsidiaries did not affect the characterisation of those services as an economic activity.
Appeal dismissed.
Citing African Consolidated Resources plc [2014] TC 03705 and W Resources plc [2019] TC 06879, HMRC had attempted to argue the understanding between Tower and its subsidiaries, they would not request payment until the subsidiary had sufficient funds or Tower needed the funds, amounted to a contingency that broke the direct link between the services supplied and consideration received. This had already been rejected by the FTT, however, in their finding of fact that the loans were neither contingent nor uncertain.
As the UT noted, in para. 79 of their decision, what HMRC really objected to was the fact the subsidiaries paid for the services provided through the intercompany loan accounts, but the provision of funding by a parent company to its subsidiaries through loan finance is standard commercial practice.
Ms Hui Ling McCarthy QC and Mr Edward Hellier, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Mr Michael Firth appeared for the respondent
[1] This is an appeal by HMRC against a decision (the “Decision”) of the First-tier Tribunal (Tax Chamber) (the “FTT”) released on 8 July 2019. The central issue in the appeal is the question of whether a parent company that charges its subsidiaries for management, logistical and technical services is making a taxable supply for consideration, in the course of an economic activity, where the cost of the services is added to intercompany loan accounts, and where although the loans are repayable on demand the parent company has in practice not demanded repayment.
[2] In a decision dated 25 April 2016, and upheld on 24 October 2016 following a review, HMRC considered that the appellant (“Tower”) was not making taxable supplies for consideration to its subsidiaries. HMRC therefore denied Tower credit for input tax in the amount of £613,169.96 for VAT periods 12/14 to 12/15, and issued an assessment for input tax previously claimed in the amount of £842,850 for VAT periods 06/12 to 09/14.
[3] On appeal by Tower to the FTT, HMRC maintained that Tower was not making taxable supplies for consideration. In the alternative, HMRC argued that if Tower was making such supplies then it was not doing so in the course of an economic activity. The FTT rejected both arguments and held that Tower was both making taxable supplies for consideration and doing so in the course of an economic activity. Tower's appeal was therefore allowed.
[4] HMRC now appeals to the Upper Tribunal with the permission of the FTT (for two of its grounds of appeal) and the Upper Tribunal (for the remaining ground of appeal).
[5] There was no dispute as to the applicable legislative provisions and all submissions were made by reference to the Principal VAT Directive, EU Directive 2006/112/EC (“PVD”). Article 2(1) provides that:
The following transactions shall be subject to VAT: […] (c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such
[6] Article 9(1) PVD provides:
“Taxable person” shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity or producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.
[7] Article 168 PVD provides for the deduction of input VAT, as follows:
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:
- 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;
[8] Article 169(a) PVD extends that right of deduction to goods and services that are used for transactions relating to the activities described in the second subparagraph of article 9(1), but carried out outside the Member State in which the input VAT is sought to be deducted.
[9] Those provisions have been transposed into domestic law by the Value Added Tax Act 1994 (“VATA”). Section 4(1) VATA provides:
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.
[10] Section 5(2)(a) and (b) VATA define “supply” as follows:
- supply in this Act includes all forms of supply, but not anything done otherwise than for a consideration;
- 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.
[11] Sections 24–26 of the VATA contain detailed provisions on input tax, transposing articles 168 and 169 PVD. It is not necessary to set these out for the purposes of this decision.
[12] The FTT had before it 12 bundles of documentary evidence, and heard from four witnesses on behalf of Tower. On the basis of that evidence the Decision set out a full description of the background facts. For present purposes the following summary suffices, with references to the paragraph numbers of the Decision.
[13] Tower is a UK holding company incorporated in December 2004 and listed on the Alternative Investment Market (“AIM”). Its business is to acquire licences to explore for and produce oil and gas in sub-Saharan Africa. Those operations generally take up to 10 years before the first production of oil (paragraphs 7–8).
[14] When a licence is obtained, there is an expectation and belief that oil production will succeed. In relation to genuine exploration wells, however (as opposed to appraisal or development wells) the average success rate of a particular well is 20% (paragraph 9).
[15] Tower's exploration and production activities are conducted through local subsidiaries. Tower funds the local costs of those subsidiaries and provides what are described as management services to its...
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The Commissioners for HM Revenue and Customs v Tower Resources PLC [2021] UKUT 0123 (TCC)
...[2021]UKUT 0123 (TCC) Appeal number: UT/2019/0134 VALUE ADDED TAX – holding company providing services to subsidiaries – whether FTT failed to make complete findings of fact – whether supplies were made for consideration – whether supplies amounted to an economic activity UPPER TRIBUNAL TAX......