Rio Tinto London Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 November 2014 |
| Neutral Citation | [2014] UKFTT 1059 (TC) |
| Date | 27 November 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 1059 (TC)
Judge Guy Brannan, Ms Rebecca Newns
Amanda Brown, KPMG LLP, appeared for the Appellant
George Peretz, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax - Repayments - Appellant supplying investment management and administration services to a group pension fund - VAT charged on all services - No over-charge in respect of net of VAT costs themselves - Appellant "refunds" part of payment made by pension fund - Whether a decrease in consideration for the supply within Value Added Tax Regulations 1995 (SI 1995/2518), reg. 38 - Appeal dismissed.
The First-tier Tribunal (FTT) dismissed an appeal by the Appellant Rio Tinto London Ltd (RTL), against HMRC's refusal to allow a VAT credit in respect of a "price adjustment" relating to earlier payments made by a pension fund which according to RTL constituted a "decrease in consideration" and so could adjust the VAT account in its favour.
Rio Tinto London Limited (RTL) appealed against an HMRC assessment under the Value Added Tax Act 1994 (VATA 1994), Value Added Tax Act 1994 section 83 subsec-or-para 1s. 83(1)(p).
The issue in this appeal was whether a "price adjustment" which RTL said was made in relation to services which it supplied to a group pension fund was a "decrease in consideration" for the purposes of the Value Added Tax Regulations 1995 (SI 1995/2518), reg. 38.
The assessment under appeal was for £1,064,893 and was issued on the basis of HMRC's view that RTL was not entitled to a VAT credit in respect of the price adjustment. RTL claimed that for the purposes of SI 1995/2518, reg. 38(1)(b) and (3) there had been a "decrease in consideration for a supply" resulting from the price adjustment so that it was entitled to make a negative entry in the VAT portion of its VAT account.
RTL supplied services to the Trustees of Rio Tinto pension funds established for the benefit of Rio Tinto employees. The various UK Rio Tinto pension funds were reorganised in 1996 and consolidated into one fund (the Fund).
The services supplied by RTL to the Fund comprised investment management services and administration and general management of the Fund. In the correspondence and discussions between the parties there was some confusion in relation to these terms. The FTT used them as follows:
•"investment management" to describe advice given to the Fund in relation to its Investments;
•"administration and general management" services comprised the production of pension news updates for employees, legal services, tracing missing beneficiaries, fund administration, etc.
The FTT examined the supplies made by RTL to the Fund and these are summarised as follows:
•Pension Department Costs - not subject to VAT on the recharge to the Fund, but gave rise to input tax recovery rights;
•Salary and Dependent Charges - not subject to VAT (as there is no VAT on salaries) on the recharge to the Fund;
•Pension Investment Costs - subject to standard-rated VAT on recharge to the Fund.
The VAT treatment of these first two categories of costs was not in dispute between the parties.
The real dispute in this appeal relates to the third category of expenses - the Pension Investment Costs. These costs were, until 2007 (when the internal fund manager retired), incurred by the Appellant in the form of salary and related charges.
After 2007, the Appellant outsourced its investment management function to third-party suppliers. However, RTL contended that Pension Investment Costs included an element (which the Appellant estimated to be 30%) of administration costs. The Appellant contended that these administration costs should not carry VAT when recharged to the Fund.
However, for the whole of the period from 1973 to 2010, RTL had, in its view mistakenly, charged VAT to the Fund in respect of these expenses. Furthermore, it was in relation to these administration expenses that the alleged price adjustment, which lies at the heart of this appeal, was made.
The FTT spent some time examining the background to the price adjustment that was made in 2011.
The FTT noted that RTL supplied the investment management and administration services to the Fund from 1973 to 2010 - the period covered by the price adjustment and it was in respect of these services that RTL sought to make the price adjustment.
The deadline for filing historic VAT claims after the ruling in the Fleming case (Fleming (t/a Bodycraft) v R & C CommrsVAT[2008] BVC 221) was 31 March 2009.
RTL instructed KPMG to assist it in identifying appropriate claims. In the course of preparing these claims, KPMG were said to have advised the Appellant that, on the basis of HMRC guidance in notice 700/17Notice 700/17, 30% of the fund management charges (by which we understood this to mean the Pension Investment Costs) were properly costs of the employer rather than costs which should be charged to the Fund.
In the skeleton arguments there was a debate about whether notice 700/17Notice 700/17, provided support for the view reportedly taken by KPMG (and which was advanced by RTL).
The FTT reviewed the relevant provisions of notice 700/17Notice 700/17, but concluded that the guidance simply related to the correct attribution of input tax, in respect of outsourced services, between administration services and investment management services, in circumstances where the service provider did not differentiate between the two types of services in its invoice.
In summary, administration services gave rise to a right to deduct input tax against taxable supplies made by the employer. The supply of investment management services, however, gives no right to input deduction for the employer because there was no sufficiently direct and immediate link between such services and the employer's taxable supplies.
In this context, where the supplier's invoices did not differentiate between administration services and investment management services, RTL claimed that notice 700/17 section 2 para 2.7para. 2.7 of Notice 700/17 suggested a 30% (administration services) and 70% (investment management services) apportionment.
However, the FTT could not find in notice 700/17Notice 700/17 any support for the proposition. The Notice was completely silent on this point and in cross-examination, RTL abandoned this position.
RTL accepted that the net of VAT amounts charged by the Appellant to the Fund in respect of Pension Investment Costs were correct and that the only element of overcharge related to the VAT on 30% of those costs.
RTL took the view that in order to reclaim the overcharged VAT a provisional claim should be filed under VATA 1994, Value Added Tax Act 1994 section 80s. 80 (which provides for such claims). Accordingly, a claim for the allegedly over-charged VAT was made by the Appellant in March 2009.
In March 2010, however, RTL wrote to HMRC informing the Commissioners that, although the Value Added Tax Act 1994 section 80s. 80 claim was not being withdrawn, RTL intended to make a price adjustment in respect of the services supplied by RTL to the Fund during the period 1973 to January 2007.
The FTT expressed no view on the merits of the Value Added Tax Act 1994 section 80s. 80 claim in this decision.
RTL wrote to HMRC in February 2011 explaining that it intended to make a price adjustment of £7.15m and explaining the basis of calculation. The proposed price adjustment was discussed with HMRC at a meeting in March 2011. HMRC indicated that no approval was required from HMRC.
RTL issued a credit note to the Fund in August 2011 in respect of the price adjustment. The credit note described the credit as "Investment mgt fees as agreed with Trustees". The VAT exclusive amount was £6,085,106.38 and the VAT element was £1,064,893.62 resulting in a VAT inclusive gross amount of £7,150,000.
The consequent repayment by RTL to the Fund was processed around the same time.
RTL was cross-examined on a letter that was sent with the appeal. The letter stated:
As a result of the global financial crisis in 2009, the Fund was in deficit as were most UK pension funds. [The Appellant] as principal employer had an obligation to increase funding requirements and as such, together with the Fund, considered a number of options to deal with the deficit and consequently agreed for a period of time to reduce the level of IM charges previously charged to the Fund. As part of this process, [RTL] and the Fund requested that the Rio Tinto Tax Department review the tax treatment (including VAT) of the proposed arrangement.
In cross-examination Counsel for HMRC put it to RTL that this paragraph of the letter revealed the real reason behind the price adjustment, i.e. that it was intended to help deal with the Fund's deficit.
RTL replied that the price adjustment indicated that the Appellant wanted to help deal with the Fund's deficit but that this was the background to a decision to review the tax aspects of the Fund at the same time as considering potential Fleming claims to see whether the tax treatment of the Fund was as tax efficient as it could be.
Counsel for RTL reviewed the general principles which she argued, ought to be applied by the Tribunal. She submitted that it was necessary to look at the economic and commercial reality of the price adjustment (referring to the judgment of the ECJ in R & C Commrs v Newey (t/a Ocean Finance)ECAS (Case C-653/11) [2013] BVC 259 at [42]-[45] ("Newey")).
Counsel submitted that, unless there was a reason to consider that the contractual and legal relationships between the parties were artificial, those relationships had to form the basis for determining the commercial and economic substance of the relevant transactions.
Counsel further submitted that in order to determine the nature of a...
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