Taylor Pearson (Construction) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 November 2019 |
| Neutral Citation | [2019] UKFTT 691 (TC) |
| Date | 13 November 2019 |
| Court | First-tier Tribunal (Tax Chamber) |
[2019] UKFTT 691 (TC)
Judge Philip Gillett
Ben Elliott, counsel, instructed by Grey Eclipse (formerly Blackstar Defence Ltd), appeared for the appellant
Natalie Mason, officer of HMRC, appeared for the respondents
Value added tax – Input tax – VAT on fees for design of tax avoidance scheme for paying directors' bonuses – Whether for the purposes of the business – VATA 1994, s. 24 – Yes – Whether for the purpose of issuing share capital – No – Appeal allowed.
The First-tier Tribunal (FTT) allowed an appeal against an assessment denying input tax deductions on services provided by tax advisers as to how the company might reduce its tax and NIC liabilities in rewarding its directors, and reduce the income tax liabilities of the directors. Services in relation to the employee rewards were for the purposes of the business.
The company carries on a business of making supplies of construction goods and services. All its normal supplies in the course of business are fully taxable.
In March 2012, following a profitable trading year, the company decided to reward its 3 directors and engaged Blackstar (Europe) Ltd to act as adviser in relation to the provision of employment rewards. Blackstar would provide taxation advice and draft relevant documentation in connection with the transaction.
Blackstar issued a VAT invoice to the company for professional services. In October 2012, 150 000 E shares were created and, in consideration for a director offering to subscribe for the E shares, the company would pay £500 and credit the directors’ loan account in the sum of £49 500.
In November 2012, the company considered conferring further similar rewards on 2 directors and the transaction proceeded under the terms of the existing letter of engagement. Again Blackstar issued a VAT invoice.
In November 2013 “Evolve” were engaged on similar terms to Blackstar and provided advice in relation to P shares subsequently created.
HMRC contended the only purpose of these transactions was to benefit the shareholders and directors of the company. It had no link with the economic activity of the business and should not be classed as an overhead.
A previous argument that the services were provided in relation to an exempt transaction was withdrawn at the hearing but the FTT considered it anyway and concluded, following the propositions set out by the Supreme Court in R & C Commrs v Frank A Smart & Son Ltd [2019] BVC 37, it was clear the FTT was required to consider the true purpose of the arrangements and to look through any initial transaction to ascertain objectively the overall purpose of the arrangements. They were not therefore provided in relation to an exempt transaction.
The FTT considered the ultimate purpose of the services provided by Blackstar and then Evolve was to incentivise the company’s employees in a tax efficient manner. The question was whether that objective was for the purposes of the business.
Distinguishing C & E Commrs v Rosner [1994] BVC 841 and the ECJ decision in Finanzamt Köln-Nord v Becker (Case C-104/12) ECR 0000 since the directors in this case were beneficiaries of the arrangements only in their capacity as directors and employees, and not in any personal capacity, the FTT found the economic and commercial reality was that the services provided were tax advice in relation to the provision of employment rewards. The FTT commented the reward and incentivisation of employees was one of the more obvious overheads of the business that was treated as a cost component of the company's overall economic activities. It was in principle identical to expenditure on normal payroll services.
The FTT also noted this case was materially identical to Doran Bros (London) Ltd [2017] TC 05554 which had not been appealed by HMRC and which, although not binding, was highly persuasive unless it was clearly wrong. The FTT did not consider it was clearly wrong. The similarities were obvious and the conclusion was the same. The incentivisation of employees, even though in this case they were directors and shareholders of the company, has a direct and immediate link to the purposes of the business.
Appeal allowed
The direct tax consequences of these arrangements are also being challenged by HMRC but this appeal was only concerned with the VAT aspects of the arrangements.
[1] This was an appeal against a VAT assessment issued under s73 Value Added Tax Act 1994 (“VATA 1994”) in relation to the appellant's VAT periods ended 31 December 2012 and 31 March 2014. The assessment was in the sum of £12,682.00 but only £9,970.00 is disputed.
[2] The overall issue in this appeal was whether the company was entitled to deduct input VAT in relation to services provided by tax advisers as to how the company might reduce its tax and NIC liabilities in rewarding its directors, and reduce the income tax liabilities of the directors. There are two specific issues:
- Whether the services supplied were used for the purpose of the company's business within the meaning of s24 VATA 1994.
- Whether the services supplied do not have a direct and immediate link with taxable output supplies because they have a direct and immediate link with exempt supplies, being the issue of share capital in the company.
[3] The tribunal decided that:
- the services were used for the purposes of the company's business, and
- they did not have a direct and immediate connection with the issue of share capital.
[4] The appeal was therefore ALLOWED.
[5] The direct tax consequences of these arrangements are also being challenged by HMRC but that is the subject of a separate appeal. This appeal was only concerned with the VAT aspects of the arrangements.
[6] The basic facts were not in dispute between the parties. I received a witness statement and oral evidence from Mark Perkins, Commercial Director of the company and was referred to a bundle of documents. I make the following findings of fact.
[7] The company carries on a business of making supplies of construction goods and services, which are all taxable supplies for VAT purposes. It was accepted by HMRC that the company was a taxable person for VAT purposes and that all its normal supplies in the course of its business are fully taxable.
[8] The ordinary shares in the company are held by Taylor Pearson Holding Limited. At all material times, the shares of Taylor Pearson Holding Limited were held by Mr Alex Coupland, Mr Mark Perkins, Mr Mark Robertson, Mrs Joanne Coupland and Mrs Karen Perkins (250 shares each, except for Mr Robertson who held 500 shares).
[9] In March 2012, following a profitable trading year, the company decided to reward its three directors, Mr Alex Coupland, Mr Mark Perkins and Mr Mark Robertson with bonuses of £50,000 each.
[10] The company had just emerged from the recession and at that time the directors were receiving annual salaries of approximately £35,000 each, which Mr Perkins considered to be fairly low for a company of this size at that time.
[11] Under the terms of an engagement letter between the company and Blackstar (Europe) Limited (“Blackstar”) dated 12 October 2012:
- Blackstar were engaged to act as adviser to Taylor Pearson (Construction) Limited in relation to the provision of employment rewards.
- Blackstar's role and responsibilities were stated to be:The provision of taxation advice in connection with the Transaction, andThe drafting of relevant documentation in connection with the Transaction
[12] Under the terms and conditions, the services provided were described as follows:
The Advisor will (on the basis of the information provided to it by the Company) provide taxation advice to the Company in connection with the provision of employment rewards and will assist (after legal advice from Solicitors and Counsel) in providing the necessary documentation.
[13] The fee for the services was 11.5% of the amount paid by the company under the scheme. Under the terms and conditions, it was noted that VAT would be chargeable on any sums due to Blackstar under the engagement.
[14] On 15 October 2012, Blackstar issued a VAT invoice to the company for professional services provided “In respect of the provision of tax advice in relation to the grant of employment rewards”. The fee was £17,250 plus VAT of £3,450.
[15] At a board meeting on 22 October 2012 it was decided to recognise the contributions of Alex Coupland, Mark Perkins and Mark Robertson to the company and it was resolved that 150,000 class E shares be created and amended articles of association be filed at Companies House. The main characteristics of the E shares were as follows:
- The shares did not carry any voting rights or rights to attend shareholder meetings;
- On a winding up of the company, each E share entitled the shareholder to a payment of 1p,
- Dividends could be paid on E shares but such shares did not entitle the holder to a dividend where a dividend was paid on any other class of share,
- If the turnover and pre-tax profits for the Company's accounting period ended 22 October 2015 were 500% of the turnover and pre-tax profits for the accounting period ended 30 September 2012, then the shareholders of the E shares would be entitled to 10% of the consideration payable on a subsequent disposal of the entire share capital of the Company,
- Where a shareholder of an E share did not hold any other shares then their consent was not required to permit a variation of the rights attached to the other classes of shares,
- E shares could only be transferred with the unanimous consent of the directors of the company,
- The shares would be issued 1p paid, 99p uncalled. The company could by notice make a call for the full amount previously uncalled (payment being due within 90 days). A shareholder who failed to pay could be required to forfeit the E share.
[16] Also on 22 October 2012,...
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