Tower Resources Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 July 2019 |
| Date | 08 July 2019 |
| Court | First-tier Tribunal (Tax Chamber) |
[2019] UKFTT 442 (TC)
Judge John Brooks
Michael Firth, Counsel, appeared for (and instructed by) the appellant
Hui Ling McCarthy QC and Edward Hellier, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Oil exploration and production in sub-Saharan Africa – Activities undertaken through local subsidiaries – Provision of technical services by plc – Financed through additions to intercompany loans – Whether supply for consideration – Whether supply made in the course of economic activity – Appeal allowed.
The FTT allowed an appeal by a UK plc which recovered input tax incurred on costs of providing technical support to overseas subsidiaries undertaking oil exploration in Africa. HMRC argued that the holding company was not making supplies for consideration or engaged in economic activity. However, the FTT found that, although the subsidiaries made payment through increases in their intercompany loan, the holding company was making supplies for consideration and was entitled to input tax recovery.
Tower is a UK company which owns subsidiaries which undertake oil exploration in Africa. Tower provides its subsidiaries with considerable technical support. The subsidiaries all had at least one director in common with Tower and the CEO of Tower was on the board of all subsidiaries.
The subsidiaries “paid” for the support provided by Tower via an increase in the inter-company loan account. Oil exploration is a long-term enterprise which may not generate revenue until many years have passed from the discovery of a reserve.
HMRC relied upon the decision in Norseman Gold plc v R & C Commrs [2016] BVC 504 (where a UK holding company was deemed not to be supplying services to its Australian subsidiary) to argue that Tower was not making supplies for consideration. However, the FTT distinguished this case from Norseman. In Norseman the holding company had a “vague intention to levy an unspecified charge” (para. 61). In contrast the FTT was satisfied that “there were agreements between Tower and its subsidiaries under which the loans were payable on demand and not conditional” (para. 74).
Tower did not have written agreements with its subsidiaries for much of the period under consideration but the FTT was persuaded by the evidence of a Tower director and the company's auditor that there was an agreement to provide services in return for consideration, i.e although the payment was made via an intercompany loan account Tower was not making loans to its subsidiaries (para. 74).
Having found that there was an agreement to provide services for consideration, the FTT was led “inexorably to the conclusion that [Tower] is also carrying on an economic activity” (para. 96).
The question of whether a holding company is making supplies to its subsidiaries and is engaged in economic activity recurs frequently in practice and, as the accumulating case law on the issue demonstrates, is not necessarily easily answered. This is an interesting case because the FTT provides a helpful overview of some of the key cases in this area and, also, because the FTT looked through the lack of paperwork to establish the true nature of the relationship between the holding company and the subsidiaries.
[1] Tower Resources Plc (“Tower”) appeals against a decision of HM Revenue and Customs (“HMRC”), dated 25 April 2016 and upheld on 24 October 2016 following a review, to deny it credit for input tax in the sum of £613,169.96 claimed for its VAT accounting periods 12/14 to 12/15 (inclusive) and to issue an assessment in the sum of £842,850 for VAT periods 06/12 to 09/14 (inclusive) on the grounds that Tower did not make taxable supplies for consideration.
[2] In April 2019 HMRC amended their statement of case to include an additional argument, that if Tower was making taxable supplies it was not doing so in the course of an economic activity. There are, therefore, two issues before the Tribunal:
- Whether Tower made supplies for consideration; and
- If so, whether such supplies were made in the course of an economic activity.
[3] Mr Michael Firth appeared for Tower. HMRC were represented by Ms Hui Ling McCarthy QC and Mr Edward Hellier. Their full and extensive submissions were most appreciated. However, in reaching my conclusions it has not been necessary to refer every argument advanced or of all the authorities cited at the hearing.
[4] In addition to some 12 bundles of documentary evidence ,which included correspondence between the parties, HMRC visit reports, audit working papers and post-2015 loan and service agreements, I heard from the following witnesses on behalf of Tower (no witnesses were called by HMRC):
- Mr Jeremy Asher, the Chairman of Tower. He has been a director of Tower since 2007 having been a director of numerous other companies in the oil and gas industry. He was elected chairman of Tower's Board of Directors in late 2011 and assumed the responsibilities of Chief Executive Officer in Autumn 2016 whilst continuing his role as Chairman. Mr Asher also chairs Tower's Audit Committee.
- Mr Colin Wright, a partner at UHY Hacker Young LLP, Chartered Accountants (UHY). UHY have been auditors to Tower since 2006 and Mr Wright was the audit partner between 2010 and 2014.
- Mr Brian Brittney, a manager of TM Services Limited who was contracted to Tower to oversee its financial accounts and VAT returns between 2006 and 2015. His work for Tower included basic bookkeeping, payroll and invoice payments. Mr Brittney was assisted at Tower by Mr David Doyle who helped with the preparation of financial statements including monthly management accounts, interim and annual accounts. Like Mr Brittney, Mr Doyle was also an independent contractor. It was Mr Brittney who completed Tower's application for VAT registration
- Mr Andrew Smith, the Group Financial Controller of Tower from 1 December 2014. He was employed by Tower to consolidate the recently acquired structures of Rift Petroleum Holdings Limited and its subsidiaries in Zambia and South Africa and to bring their accounting into line with Tower's and also to support the expansion of Tower into West Africa, particularly Cameroon where had a number of years prior experience. On joining Tower Mr Smith consolidated the roles of management/joint venture accountant (Mr Doyle) and financial accountant (Mr Brittney).
[5] In Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm) Leggatt J (as he then was) observed, at [15]:
[15] An obvious difficulty which affects allegations and oral evidence based on recollection of events which occurred several years ago is the unreliability of human memory.
Having noted that the legal system has not sufficiently absorbed the lessons of a century of psychological research into the nature of memory and the unreliability of eyewitness testimony and that the process of civil litigation subjects the memories of witnesses to powerful biases and subtle influences such as a desire to assist, or at least not to prejudice, the party who has called the witness or that party's lawyers, as well as a natural desire to give a good impression in a public forum, can be significant motivating forces, Leggatt J continued, at [22]:
In the light of these considerations, the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses' recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.
[6] Although mindful of the fallibility of the human memory as outlined by Leggatt J, I found all of the witnesses to be credible and truthful and accept their evidence in full.
[7] Tower, which was incorporated on 6 December 2004, is a UK holding company listed on the Alternative Investment Market (“AIM”). It was registered for VAT with effect from 6 December 2004.
[8] Its business model is to acquire licences to explore for and produce oil in sub-Saharan Africa. This involves preparation for drilling of the wells which both discover and produce the oil, a process which involves obtaining a production licence, undertaking the geological and geophysical work, seismic data acquisition, processing and interpretation, exploratory drilling, appraisal drilling and production. Such an operation generally takes up to ten years between the first step and “first oil”.
[9] Although, as Mr Asher explained, at the time that a licence is obtained there is a hope, expectation and a belief that it will succeed – he said he would not be a “competitive businessman” if he thought otherwise – it was accepted that this was not always the case with an average rate of success for genuine exploration wells (as opposed to appraisal or development wells) of approximately 20%.
[10] The exploration and production activities in the various countries are not undertaken by Tower but conducted through local subsidiaries with development and production taking place over a decade or several decades.
[11] Although the use of a local subsidiary to conduct such activities, which is...
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Imprimatur Capital Holdings Ltd
...to a subsidiary for consideration. This condition was considered by the First tier Tribunal in W Resources and in Tower Resources plc [2019] TC 07256. It is convenient to set out the provisions of the decision of the Tribunal in W Resources, the conclusions of which were adopted by the Trib......
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Alternative Investment Strategies Ltd
...supplied and the charges levied or to be levied. [59] This was applied in the context of holding companies in Tower Resources plc [2019] TC 07256. We recognise that this is a First-tier Tribunal decision and so not binding upon us but it remains a helpful summary of the law in this matter. ......