Temple Finance Ltd; Temple Retail Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 January 2016 |
| Neutral Citation | [2016] UKFTT 41 (TC) |
| Date | 25 January 2016 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Jonathan Richards
Nicola Shaw QC and Michael Firth, instructed by Grant Thornton UK LLP, appeared for the Appellant
Sarabjit Singh, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Supplies between connected parties – Direction under Value Added Tax Act 1994 (“VATA 1994”), Sch. 6 that the value should be taken to be open market value – Appeal against resultant assessments. VAT recovery – Appeal against HMRC assessments applying the Standard Method Override (SMO). Appellant contended that the assessments were wrong and out of time, partly on the basis that the assessments were single global assessments.
The First-tier Tribunal (FTT) held that the majority of the inter-company supplies made were supplied at open market value but set out the method to be adopted to value the remainder. The SMO was not required. The assessments were not global assessments, some elements were out of time, but others were not.
This was a long complicated case involving considerable facts and analysis.
These were joined appeals of 2 connected companies, Temple Finance Ltd (“TFL”) and Temple Retail Ltd (“TRL”). Both companies are wholly owned subsidiaries of PerfectHome Holdings Ltd. TFL is partly exempt and not able to recover all input tax incurred. Both companies operate the “PerfectHome” business from 67 showrooms throughout the UK. The business involves the sale of household goods (e.g. washing machines, refrigerators), furniture and electronic goods (e.g. TVs and games consoles) to consumers. The appeals concerned:
1) A direction issued by HMRC to TRL under VATA 1994, Sch. 6 that the value of certain supplies made to TFL should be taken to be open market value; and a resultant assessment;
2) As assessment issued by HMRC to TFL applying the SMO;
3) A dispute over the time limit for the assessments.
The majority of PerfectHome sales (98%) involve the purchase the goods on hire-purchase (“HP”). Under the terms of the HP agreement the customer only becomes the legal owner of the goods when the final payment is made. If the customer defaults, PerfectHome can repossess the goods and sell them, so has an ongoing interest in the maintenance and condition of the goods after the customer has taken possession. Accordingly, before making a sale to a customer, PerfectHome seeks to ensure that the customer has adequate insurance cover against the risks of theft or accidental damage to the goods. If the customer does not have their own cover, they can purchase an insurance policy (“TAD”) from PerfectHome. Approximately, 88% of PerfectHome's customers purchase TAD from PerfectHome.
PerfectHome also sell a warranty product – “Coverplus” which covers the goods for actual or apparent mechanical breakdown. The premium is payable as a single lump sum on purchase. Approximately 90% of PerfectHome's customers purchase the Coverplus warranty. Most customers cannot pay the lump sum premium so take out a fixed sum loan agreement (“FSLA”) and make the loan payments alongside their HP payments.
PerfectHome has an ongoing role in relation to the 98% of goods sold on HP that continues after the customer has taken possession of the goods:
i) if a product breaks down or becomes faulty, PerfectHome will deal with claims under the Coverplus warranty or other complaints;
ii) PerfectHome needs to ensure that the payments under the HP agreements and FSLA are made when due;
iii) if a customer misses a payment, a PerfectHome manager contacts the customer to agree terms for payment of the arrears;
iv) PerfectHome occasionally takes legal action against defaulting customers but more usually recovers the goods which are then sold as “quality refurbished” (“QR”) goods after the necessary safety checks and repairs have been carried out. The sales process for the QR goods mirrors that for new goods and both Coverplus and TAD are sold with QR goods. QR sales are approximately 30% of all sales made by PerfectHome.
Approximately 40%–50% of PerfectHome's customers terminate their HP agreements early.
As the PerfectHome business is carried on by TFL and TRL together there are a number of transactions between the 2 companies under an Intra-Group Services Agreement (“IGSA”).
TRL:
• is the tenant under leases of the 67 showrooms used by the PerfectHome business;
• enters into contracts with third party suppliers of advertising for the business;
• enters into contracts for the purchase of goods to be sold in the PerfectHome business.
• For cash sales, TRL completes the sale itself with no involvement of TFL.
For the 98% of sales in which goods are sold on HP, the following transactions take place:
• TRL sells the goods to TFL for a price equal to 97% of the advertised price of the goods (a standard-rated supply);
• TFL enters into the HP agreement with the customer and sells the goods for 100% of the advertised price. This involves a standard-rated supply of the goods (when the HP agreement is signed) and an exempt supply of finance (credit under the HP agreement);
• TFL enters into a contract with the customer to provide any TAD purchased – exempt supply of insurance;
• TFL enters into a contact with the customer for the Coverplus cover – standard-rated supply;
• TFL has contractual responsibility to customers for the delivery of bulky items. Under the IGSA TFL pays TRL 5% of the purchase price of the goods to deliver them on its behalf – standard-rated supply by TRL to TFL;
• Since 1 April 2011 TRL and TFL have jointly employed staff of the business, before that date, TFL was the sole employer and staff costs were shared;
• TRL and TFL are not registered as a VAT Group.
PerfectHome makes a 40% margin on sales of goods to customer. Between 2010 and 2014 over 75% of the group's commercial profit came from its business of making taxable supplies. The Tribunal concluded that PerfectHome is a specialist business targeting the sector of credit constrained customers and the business of TFL and TRL are separate, but highly symbiotic. Apart from in 2% of situations (when TRL will sell an item for cash to a customer and make a 40% margin), either both TFL and TRL make a sale or neither of them will.
TRL makes a 37% margin on the sale of goods to TFL, TRL makes most, if not all its profit from the finance element of the HP sale. TFL may also make a 3% margin on the sale of goods to the customer but this margin is completely eroded where the goods are delivered to the customer as TFL has to pay 5% of the selling price to TRL as a delivery charge.
TRL makes only taxable supplies for VAT purposes and is therefore able to reclaim 100% of input tax. TFL is partially exempt. HMRC were concerned that TRL and TFL could have an opportunity to increase their aggregate input tax recovery by charging fees (store fees and advertising fees) at a price below open market value (“OMV”). On 31 May 2012 HMRC issued a direction under VATA 1994, Sch. 6, para. 1 directing TRL that the value of its supply of services to TFL must be at OMV. The services were shop advertising, launch costs and occupation and use of PerfectHome shops. HMRC considered that TRL had not complied with the direction and issued assessments totalling £4.26m for output tax based on its own determination of OMV. The essence of the assessment:
• The OMV of Store services should be determined by allocating costs associated with the retail stores between TRL and TFL in the ratio 25:75 using the methodology adopted by an external consultant engaged by PerfectHome; the OMV of Store services supplied to TFL would be TFL's share of the costs marked up by 10%;
• As 98% of the PerfectHome sales were made by TFL who sold the goods, and provided finance, warranties and insurance, to the customers, 98% of the group's advertising and launch costs benefited TFL and accordingly, the OMV of Advertising Services was 107.8% of the cost that TRL incurred (i.e. TFL's share of those costs, marked up at 10%).
As TFL is partly exempt, the dispute centered on the proportion of VAT incurred on overheads that it could recover. TFL considered it should be on the basis of the partial exemption “standard method”, but HMRC considered that the Standard Method Override (“SMO”) applied thus reducing the input tax recovery of TFL and issued assessments totalling £0.6m.
For the VATA 1994, Sch. 6 direction, the FTT held that the burden of proof was on TRL to show that its calculation of VAT due was correct.
For the partial exemption dispute, the FTT held that the burden of proof was on TFL not merely to show that the reasons underpinning HMRC's calculations of the SMO were flawed but also that its own determination of input tax recovery was correct.
Having firstly considered some procedural and evidential matters, the FTTconsidered the arguments and evidence put forward by both parties and concluded:
• the 2 company structure had not been set up to secure VAT advantages;
• TRL had charged store fees at an amount equal to the OMV;
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• The OMV of advertising services should be calculated by:
1) determining the total cost to TRL of obtaining the advertising services from third parties;
2) expressing TFL's operating profits as a percentage of the combined operating profits of TFL and TRL; and
3) Multiplying the OMV in (1) by the percentage in (2) and further marked up at 10%.
4) TFL's recoverable input tax should be determined by applying the standard partial exemption method and no SMO was required;
5) The TRL and TFL assessments were not global assessment; they were a series of separate assessments taking effect for the VAT periods set out therein;
6) The TRL assessments relating to advertising services were out of time (as the parties agreed) but the assessments relating to...
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