Newmafruit Farms Ltd v Revenue & Customs (VAT—Input tax—Professional fees incurred in pursuing litigation) [2019] UKFTT 440 (TC)
FTT-Tax
Newmafruit Farms Ltd v Revenue & Customs (VAT—Input tax—Professional fees incurred in pursuing litigation)
[2019] UKFTT 440 (TC) · 2019-06-18
[36]It is well established that a supply will be treated as being “ used for the purposes of the taxed transactions of a taxable person” within the meaning of Article 168 of the Directive if either:(1) there is “a direct and immediate link” between the supply and one or more taxed output transactions; or(2) there is “a direct and immediate link” between the supply and the taxable person’s economic activity as a whole. (See, for instance, Praesto Consulting UK Ltd v HM Revenue and Customs [2019] EWCA Civ 353 (“ Praesto ”) at [28]; Finanzamt Koln-Nord v Wolfram Becker , C-104/12, EU:C:2013:99 (“ Becker ”) ). 37. However, where a supply is used by a taxable person for the purposes of an exempt transaction, the taxable person is not entitled to deduct the input tax paid on that supply (see BLP Group plc v Customs and Excise Commissioners , C-4/94, EU:C:1995:107, [1996] 1 WLR 174 ) . 38. The Appellant therefore appropriately makes the concessions referred to in paragraph 24 above. 39. The making of a loan is an exempt supply by virtue of s 31(1) VATA and Item 2 in Group 5 of Schedule 9 VATA . Application of legal principles to the facts 40. The Appellant’s first submission is that there has been no supply of loans. 41. At the hearing Mr Brown, when asked by the Tribunal, accepted that the Appellant’s case in the High Court proceedings was that the loan agreements were valid and legally enforceable. Indeed, Mr Brown accepted that the Appellant was in the High Court proceedings in fact suing on the loan agreements. It is therefore difficult to see how the Appellant can now argue before this Tribunal that there were no loan agreements. 42. In any event, in the present appeal proceedings, the Appellant’s own case is that there were formal written loan agreements, and that the Appellant performed its obligations under those loan agreements by advancing sums to the borrowers. On ordinary principles, a contract comes into existence upon the acceptance of an offer, rather than upon performance of the terms of the contract by the parties. At the point in time when a loan agreement has been entered into and the funds have been advanced by the lender to the borrower, there is “an agreement between the parties for reciprocal performance”, providing for payment by one for a supply received by the other (see Airtours Holidays Transport Ltd v Revenue and Customs [2016] UKSC 21 at [48], [55] and [57]). By that point there has been a supply of a loan . The fact that a borrower subsequently defaults on a loan agreement would not retrospectively undo the existence of the loan agreement or the fact of the supply. 43. Whatever may have been decided in the High Court proceedings, had they been pursued to finality, this Tribunal is satisfied for purposes of the present appeal, based on the evidence before it, that the Appellant made an exempt supply of loans. The Appellant’s first submission is therefore rejected. 44. The Appellant’s second submission is that even if there has been an exempt supply of loans, there is no direct and immediate link between the professional fees incurred in the litigation and that supply. 45. In considering this question, the Tribunal must determine whether the professional fees were objectively a component of the price of the supply of the loans, having regard to all the circumstances surrounding the transactions at issue, and having regard to economic and commercial realities (see Praesto at [30], [57(2)] and [60], quoting Becker at [19]-[23]). 46. The Tribunal takes into account that the Appellant is not generally in the business of providing loans, and that its business is fruit farming and packaging. However, the Tribunal sees no reason in principle why the question whether there is a direct and immediate link between an input and an exempt supply should depend on whether the taxable person regularly makes such exempt supplies, or only exceptionally. 47. The Appellant argues that in this case, the legal fees were incurred years after the loans had been made, such that there is a temporal disconnect between the two. However, legal proceedings by a lender against a borrower who defaults on a loan will by definition occur only some time after the supply of the loan has been made, and depending on the term of the loan, may be many years after the loan has been made. Furthermore, if there is otherwise a direct and immediate link between the supply of a loan and legal proceedings, the Tribunal does not see how this will be affected by the passage of time alone. 48. The Appellant then relies on the statement in Becker at [31] that a causal link cannot be considered to constitute a direct and immediate link, and that it is necessary for there to be a legal link. In this respect, the Tribunal considers as follows. 49. When a lender supplies a loan, the lender will need to administer the loan until the borrower’s obligations are finally discharged. The administration of a loan will involve, for instance, checking that repayments have been made on time and in the correct amounts, chasing the lender in the event that repayments are in arrears, and ultimately, bringing legal proceedings in the event that a default is not remedied. All of this administration is a cost component of the supply of the loan itself, and the expected costs thereof are typically factored into the supplier’s determination of the interest rate at which the supplier is prepared to make the loan, which is in practice the price for which the loan is supplied. 50. Therefore, a lender’s costs of bringing legal proceedings against a borrower for breach of a loan agreement is a cost component of the supply of the loan itself, and there is a direct and immediate link between such costs and that supply. 51. However, the Appellant contends that in the this case, some of the defendants in the High Court proceedings were not parties to the loan agreements, and the claims made in the High Court proceedings were not all based on the loan agreements, but encompassed also other claims including deceit, breach of fiduciary duty, dishonest assistance, negligence and conspiracy . 52. The Tribunal does not consider that the existence of a direct and immediate link between the costs of legal proceedings and the supply of a loan is confined to circumstances where the litigation is against a party to the loan agreement, and where the claim in the litigation is founded directly on the loan agreement itself. As a matter of economic and commercial reality, in the event of a default on a loan, a lender might seek to recover the principal and interest due under the loan agreement by means of litigation against persons who were not parties to the loan agreements, but who are said to have been involved in some way in the circumstances leading to the lender’s loss, and against whom the lender claims to have a cause of action for compensation for that loss. An example, to give just one, would be a claim in professional negligence against a financial adviser who is said to have negligently advised the lender that the borrower was credit worthy. The Tribunal considers that it is part of the administration of a loan generally, as described in paragraph 49 above, for the lender, in the event of a default, to bring whatever legal claims it can against whichever parties it can, in respect of the losses flowing therefrom. Irrespective of the defendant against which a claim is brought, or the legal basis for the claim, if the claim is seeking, one way or another, compensation for losses said to have been sustained through entering into a loan agreement upon which the borrower subsequently defaulted, then the costs of the litigation have a link with that loan that is for present purposes legal, and not merely causal. 53. The Appellant then contends that some of the claims in the High Court proceedings were completely unconnected to the loan agreements. At the hearing, Mr Brown contended that even if some of the professional fees incurred in the High Court proceedings were directly and immediately linked to the supply of the loans, then part of the fees should be apportioned to the Appellant’s taxable supplies on the basis that they were unconnected with loans and therefore a general overhead of the Appellant’s business. 54. However, Mr Brown did not take the Tribunal through all of the detailed particulars of claim in the High Court proceedings, in order to itemise which ones were said to be unrelated to the loans. 55. Having considered the 27 March 2018 “Re-Re-Amended Particulars of Claim” , it appears to the Tribunal that, with one exception referred to below, all of the claims in the High Court proceedings against all of the defendants related in one way or another to loans made by the Appellant, and that each of the claims was, one way or another, seeking to recover losses claimed to have been suffered as a result of failure to repay the loans and interest. 56. The one exception appears to be a claim that the Appellant was overcharged for the services of Mr Peter and Green & Peter. However, the Tribunal notes as follows. The 25 July 2016 witness statement of Mr Newman claims at paragraphs 107-108 that Mr Newman became aware of the overcharging in about May 2014. Despite this, the High Court proceedings were originally brought some 18 months later in November 2015 against Mr Pither only. An application for Mr Peter to be added as a defendant was made only on 22 July 2016, some 8 months after that, and the first reference to Green & Peter as a defendant in the documents before the Tribunal is found only in the 27 March 2018 “Re-Re-Amended Particulars of Claim”. Furthermore, the claims of overcharging for the services of Mr Peter and Green & Peter were not necessarily added at the same time that Mr Peter and Green & Peter were added as defendants. It is not at all clear exactly when this claim was added. Paragraphs 107-108 of Mr Newman’s witness statement seem to be describing a chronology of events rather than claims being made in the proceedings, and paragraph 6 of that witness statement which sets out a summary of the main points does not mention this claim at all. Indeed, paragraph 6.5 of that witness statement describes the Appellant’s losses as “the sums still outstanding on its lending”. 57. The Tribunal is not satisfied on the evidence before it that the claim for overcharging was unconnected with the claims relating to the loans. Furthermore, even if the claim for overcharging was unconnected with the claims relating to the loans, the Tribunal is not satisfied on the evidence that the proportion of the professional fees spent on the overcharging claim was more than de minimis . The Tribunal does not consider that there needs to be any apportionment of the professional fees as suggested by Mr Brown. 58. The Tribunal therefore finds that the professional fees were directly and immediately linked to the making of exempt supplies of loans. 59. It is therefore unnecessary to consider the Appellant’s third submission, to the effect that there was a direct and immediate link between the professional fees and the Appellant’s business activities as a whole. Conclusion 60. The appeal is dismissed. Right to apply for permission to appeal 61. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. DR CHRISTOPHER STAKER TRIBUNAL JUDGE RELEASE DATE: 08 JULY 2019