“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. Facts 7. Tower, which was incorporated on6 December 2004 , is a UK holding company listed on the Alternative Investment Market (“AIM”). It was registered for VAT with effect from6 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 usual in the oil industry, is often a legal requirement of the country concerned there are advantages in such an arrangement even if this is not the case, eg it can allow for a local manager to act for the company without being a director of the parent company, to insulate assets and liabilities associated with operating a licence in one country from the assets and liabilities in another and to allow financing of the licence at the level of subsidiary. 12. The subsidiaries do not operate completely independently of Tower. Indeed Mr Asher said that a subsidiary, which may have local management and offices in addition to its own board of directors, cannot function independently as it would not have the technical and human resources to operate the licences alone. 13. It is Tower, a signatory and guarantor of a licence, that usually negotiates its terms before a subsidiary is established and which subsequently provides the bulk of technical services (eg the geological and geophysical work, seismic data acquisition etc, referred to above) and funds the local costs. In addition, Tower has at least one director in common with its subsidiary and the chief executive officer of Tower is always a board member of each subsidiary. 14. The provision of technical services and payment of local costs by Tower is charged to the subsidiary, not by the issue of an intercompany invoice to be paid by the subsidiary but through the addition of such sums to the balance of the intercompany loan accounts. Before April 2015 Tower passed on these charges to its subsidiaries at cost but after April 2015, following the appointment of Mr Smith and the introduction of written agreements, added a 5% mark-up and interest. 15. Mr Asher compared the oil business to that of a record label which may release and distribute many records which will not all be hits. Although some will be “total losers” and not recover their costs it does not follow that the company was not trying to make money with all of its releases but, as Mr Asher said, “you can’t have hits without also having some misses.”
“… review all assets to look for any indication that an asset may be impaired (its carrying amount may be in excess of the greater of its net selling price and its value in use).” (IAS 36.9). 22. Indications of impairment, both external and internal sources, are listed in IAS 36.12. These include declines in market value, negative changes in technology, markets economy or laws, increases in market interest rates and company stock value being below book value (external sources) and obsolescence or physical damage, asset being part of a restructuring or held for disposal or worse than expected economic performance (internal). 23. Mr Wright did not recall there being any irregularities or inconsistencies with the inter-company loan accounts and confirmed that if there had been it would be recorded in the Audit Report included as part of the accounts. All of the Audit Reports were unqualified. 24. Mr Asher said that he was unable to find any written loan or service agreements between Tower and its subsidiaries for the period before 2015. Mr Wright confirmed that no such written agreements had been provided as part of the audit process. Mr Brittney, who confirmed he was aware of the legislative requirement to retain records, said that he had not seen any written loan agreements between Tower and its subsidiaries dated earlier than April 2015. Although Mr Smith thought that there had been written loan agreements before 2015 but said that these could not be found. 25. The only conclusion to be drawn in the absence of any such agreements or reference to them in company minutes, correspondence or any other documents that were produced, is that before April 2015 there were no written loan or service agreements. However, it does not necessarily follow that Tower did not have any agreements with its subsidiaries in relation to the loans and the services it provided to them, a subject to which I shall return in due course. 26. As for the terms of the post-2015 agreements, taking the Loan Agreement, dated14 April 2015 , between Tower and its subsidiary Tower Resources (Kenya) Limited (“Kenya”) as an example, it provides that Kenya: “… shall pay interest on the Loan at the rate of LIBOR plus 1 percent per annum” (Clause 5.1 of the Loan Agreement) and that: “The Borrower [Kenya] shall repay the Loan on demand from the Lender [Tower]”. (Clause 6.1 of the Loan Agreement) 27. The Services Agreement between Tower and Kenya, also dated14 April 2015 , provides: “ 1 DEFINITIONS AND INTERPRETATION 1.1 In this Agreement, unless the context otherwise requires, the following expressions shall have the following meanings: “ Annual Fee ” means an annual fee equal to the costs incurred by Tower in connection with the provision of the Services (employee costs being attributed on a time apportioned basis), plus 5% per [calendar] Year, to be agreed in accordance with Clause 4. … “ Services ” means the Tower Services. “ Term ” means the duration of this Agreement. “ Tower Services ” means the services set out in Schedule 1. 2 APPOINTMENT AND THE SERVICES (a) [Kenya] hereby appoints Tower to provide the Tower Services, upon the terms of this Agreement, for the extent of the Term (and to the extent that such services require dealings with third parties, to perform those Services as agent of [Kenya]). Save as provided in Clause 2.3(d) [to act in the interests of the receiving party] Tower is not authorised or entitled to make any assurance or commitment to any third party and shall have no authority to bind [Kenya]. … 4 CHARGES, EXPENSES AND PAYMENT 4.1 In consideration of the Providing Party performing the Services, the Receiving Party shall pay the Annual Fee for each Year on the last Business Day of each Year. The Receiving Party shall make all payments due to the Providing Party without set-off, counterclaim or abatement. 4.2 All out of pocket costs, charges or expenses which the Providing Party incurs in connection with the provision of the Services pursuant to this Agreement shall, save to the extent agreed in writing by the Providing Party otherwise prior to the same being incurred, be for the account of the Receiving Party within 30 days of an invoice being rendered in respect thereof together with reasonable evidence of the relevant costs, charges or expenses. … SCHEDULE 1 THE SERVICES Services shall comprise such strategic, management, logistical, scientific and expert services as are required by [Kenya] and provided using the resources of Tower. The value of the Services shall comprise of the cost of indirect services (“Indirect Recharges”) and related costs charged to the Company by way of time written by management (“Tmewriting”) in addition to the cost of any services directly recharged to the Company and provided by third parties (“Direct Recharges”) together with the agreed percentage addition, together comprising the ‘Annual Fee’. Indirect Recharges shall include the costs of technical and professional personnel, their benefits and al support costs necessary for such technical and professional personnel to perform such services for the benefit of [Kenya]. Neither Indirect or Direct Recharges shall themselves contain any element of profit within their composition, such commercial profit catered for in the terms of the Annual Fee.” 28. Mr Smith explained that interest charges and mark-ups to the cost of services that Tower added to the intercompany loans were to ensure that the loans were “commercial”
“… a London-based oil and gas Exploration Company. The Company has successfully pursued a strategy and had four oil well projects during the year 2008 to 2012 where 3 projects in Uganda from 2008 to 2012 and 1 Namibia during 2008 but none of them were successful. [Tower] now holds licensing positions in South Africa, Zambia, Kenya, SADR (Western Sahara) and maintains a regional office in Uganda”
“The involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity within the meaning of Article 4(2) of the Sixth Directive where it entails carrying out transactions which are subject to VAT by virtue of Article 2 of that directive, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services (see, inter alia, judgments in Cibo Participations , C‑16/00, EU:C:2001:495 , paragraph 22, and Portugal Telecom , C‑496/11, EU:C:2012:557 , paragraph 34).” 46. In MVM Magyar Villamos M űvek Zrt v Nemzeti Ad ó- és V ámhivatal Fellebbviteli Igazgat ós ág (Case C – 28/16)[2017] STC 452 (“ MVM ”) having noted, at [31], that the mere acquisition and holding of shares in a company is not to be regarded as economic activities for Article 9 purposes and that the acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis as any dividend is merely the result of ownership of the property the CJEU continued: “32. The position will be otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company in its capacity as shareholder (judgment of16 July 2015 , Larentia + Minerva and Marenave Schiffahrt , C-108/14 and C-109/14, EU:C:2015:496 , paragraph 20 and the case-law cited). 33 . In that respect, it follows from settled case-law of the Court that the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity within the meaning of Article 9(1) of Directive 2006/112 where it entails carrying out transactions which are subject to VAT by virtue of Article 2 of that directive, such as the supply by a holding company to its subsidiaries of administrative, financial, commercial and technical services (judgment of16 July 2015 , Larentia + Minerva and Marenave Schiffahrt , C-108/14 and C-109/14, EU:C:2015:496 , paragraph 21 and the case-law cited). 34 . Thus, the mere involvement of a holding company in the management of its subsidiaries, without carrying out transactions subject to VAT under Article 2 of Directive 2006/112, cannot be regarded as an ‘economic activity’ within the meaning of Article 9(1) of that directive (see, to that effect, order of12 July 2001 , Welthgrove , C-102/00, EU:C:2001:416, paragraphs 16 and 17). Accordingly, such management does not come within the scope of Directive 2006/112.” 47. The conclusion drawn from these cases by Judge Beare in W Resources Plc v HMRC [2018] UKFTT at [55] (“ W Resources ”), with which I respectfully agree and adopt, was that: “… in the case of a holding company supplying management services to its subsidiaries, a finding that those management services are being supplied for a consideration for the purposes of Article 2 PVD must lead inexorably to the conclusion that the holding company is also carrying on an economic activity for the purposes of Article 9 PVD.” 48. When considering whether there was a supply for consideration within Article 2 PVD or economic activity within Article 9 PVD it is necessary, in addition to the contractual position between the parties, to have regard to commercial and economic reality of the transactions concerned. 49. As the CJEU stated in HMRC v Newey[2013] STC 2432 : “42. As regards in particular the importance of contractual terms in categorising a transaction as a taxable transaction, it is necessary to bear in mind the case-law of the Court according to which consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT (see, to that effect, Joined Cases C-53/09 and C-55/09 Loyalty Management UK and Baxi Group[2010] ECR I-9187 , paragraphs 39 and 40 and the case-law cited). 43 . Given that the contractual position normally reflects the economic and commercial reality of the transactions and in order to satisfy the requirements of legal certainty, the relevant contractual terms constitute a factor to be taken into consideration when the supplier and the recipient in a ‘supply of services’ transaction within the meaning of Articles 2(1) and 6(1) of the Sixth Directive have to be identified. 44 . It may, however, become apparent that, sometimes, certain contractual terms do not wholly reflect the economic and commercial reality of the transactions. 45 . That is the case in particular if it becomes apparent that those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions.”
“94. It is plain that merely holding 'a rather vague intention to levy an unspecified charge, at some undefined time in the future' is not 'enough' as the Judge held at Decision [49]. A mere hope of payment in the future is not a sufficient basis on which to recover input tax as an intending trader. Nor is the stated subjective intention of the company directors sufficient, if unsupported (as here) by objective evidence. Similarly, the Judge was entirely right to hold that there was no reciprocity of obligation because 'what was lacking here was any common understanding of what was payable, when and in what circumstances'. (Decision [52]). 95. These findings are fatal to Norseman’s case that it had (during the relevant period) an intention to make supplies in return for sums capable of amounting to consideration for VAT purposes at some point in the future. 96. Without the relevant intention to make supplies for consideration , Norseman is unable to establish that it intended to make taxable supplies so as to enable it to recover input tax during the relevant period. Accordingly, the Judge was entirely right to conclude that it was not entitled to the input tax it sought to recover.” 60. Ms McCarthy contends that the facts of Norseman are directly analogous to the pre-2015 position in the present case and, as such, provide the answer as to whether during this period Tower made supplies for consideration. 61. However, I agree with Mr Firth who says that the present case can be distinguished from Norseman , as unlike the “rather vague intention to levy an unspecified charge, at some undefined time in the future” in Norseman , Tower not only intended, but did charge its subsidiaries for the services that it provided to them. 62. As such, and as Judge Beare said in W Resources at [35]: “… consideration is provided for a supply when the obligation to provide that consideration is entered into and that that is the case regardless of the extent of any risk of default or any subsequent failure to discharge the relevant obligation. The one caveat to that which I would make is that there might be circumstances where the risk of default is so great and the subsequent failure to discharge the specified obligation is so certain to occur at the time when the agreement is made that the transaction can, in effect, be analysed as if the obligation were illusory. In effect, in those cases, the transaction should be analysed as if there were no obligation to provide the consideration in the first place.” 63. The question is whether that, as HMRC contend, as a matter of commercial and economic reality this case falls within Judge Beare’s caveat. Ms McCarthy submits that Tower did not make supplies for consideration to its subsidiaries, in essence adopting the reasoning of Judge Beare above and at [100] in W Resources that: “… the case law in this area clearly demonstrates that any contingency which has the result that the recipient of a supply will not be required to pay for the supply if it lacks the means to do so is enough to mean that there is no “reciprocal performance” by the parties and therefore breaks the “direct link” which is required in order for the relevant supplies to be “for a consideration”
“… that there may be circumstances where the likelihood of payment by the recipient of a supply may be so remote that the mere fact that the supplier is entitled to render an invoice, and the recipient has an obligation to pay, for a supply would not lead to the conclusion that the relevant supply was for a consideration. But I do not accept the general proposition that, where a legal obligation to make a payment for a supply has arisen, the mere fact that that legal obligation might not be discharged, or is in fact not discharged for some reason, means that there has not been consideration for the relevant supply. I believe that my view on this point is the same as the one adopted by Judge Bishopp at paragraph [51] of the decision at first instance in Norseman .” 65. Given my conclusion that there was, under both the pre and post-2015 agreements, a legal obligation on the subsidiaries to make payment on demand in relation to the intercompany loans, the fact that it is not discharged does not mean that there has not been consideration for the relevant supply. As such I have come to the conclusion that Tower did make supplies to its subsidiaries for consideration. 66. However, for completeness and in deference to the submissions of the parties, I should briefly address the additional arguments advanced. First, whether a right to payment is consideration; secondly if, contrary to my conclusion above, actual payment is required for there to be a supply for consideration, whether this is satisfied by an addition to the intercompany loan; thirdly, whether the loans to the subsidiaries were genuine; and finally, whether the uncertainty of conditionality of payment breaks the direct link between the supply and consideration. 67. Mr Firth contends that the characterisation of a supply cannot depend upon what the counter-party subsequently does and relies on the reasoning of the CJEU in Air France-KLM, formerly Air France (C‑250/14), Hop!-Brit Air SAS, formerly Brit Air (C‑289/14) v Ministère des Finances et des Comptes publics[2016] STC 4571 (“ Air France ”) in support. In Air France it was argued that if a passenger did not turn up for a flight the purchase price should be treated as a non-taxable contractual indemnity. The CJEU observed that: “26. … the services provided in performance of obligations arising from a contract to transport passengers by air are the checking-in and the boarding of passengers, the on-board reception of those passengers at the place of take-off agreed in the transport contract, the departure of the aircraft at the scheduled time, the transport of the passengers and their luggage from the place of departure to the place of arrival, the care of passengers during the flight, and, finally, their disembarkation in conditions of safety at the place of landing and at the time scheduled in that contract (see judgment in Rehder , C‑204/08, EU:C:2009:439 , paragraph 40). 27 . However, it is possible to perform those services only if the passenger of the airline company turns up on the agreed date and at the agreed place of boarding, the customer’s right to performance of those services being given by the company until the time of boarding, according to the conditions set out in the contract to transport passengers concluded when the ticket was purchased. 28 . Therefore, the consideration for the price paid when the ticket was purchased consists of the passenger’s right to benefit from the performance of obligations arising from the transport contract, regardless of whether the passenger exercises that right, since the airline company fulfils the service by enabling the passenger to benefit from those services. 29 . As a consequence, the applicants in the main proceedings cannot claim that the price paid by the ‘no-show’ passenger and retained by the company constitutes a contractual indemnity which, since it seeks to compensate for a harm suffered by the company, is not subject to VAT. 30 . First, such an interpretation would change the nature of the consideration paid by the passenger, which would become a contractual indemnity where that passenger did not use the identifiable service offered by the airline company. 31 . The term ‘supply of services’, within the meaning of the Sixth Directive and the amended Sixth Directive, must, in the light of its objective nature, be interpreted without regard to the purpose or results of the transactions concerned and without its being necessary for the tax authorities to carry out inquiries to determine the intention of the taxable person (see judgment in Newey , C‑653/11, EU:C:2013:409 , paragraph 41 and the case-law cited).” 68. Applying a similar reasoning, Mr Firth submits, that whether a supply is “for consideration” should not vary depending on whether the customer decides, or is able to, pay or not. This must be right. Indeed I did not understand it to be seriously disputed by Ms McCarthy whose argument against the proposition sought to rely, contrary to my conclusion, on lack of an obligation on the subsidiaries to pay breaking the link to the supply of services by Tower. 69. As to an addition to the intercompany loan being payment Ms McCarthy contends as a matter of economic reality that such an addition, which merely replaces a sum due for services with a sum due by way of a loan, cannot amount to payment. 70. In support of her argument that an outstanding debt is not payment she relied on Paton v Inland Revenue Commissioners[1938] AC 341 in support of her argument that is not. The question before the House of Lords in that case, identified by Lord Atkin, at 347, was: “… whether when the charges are added to the existing indebtedness at the end of one half-year, and the whole sum brought down is a debit item at the beginning of the next half-year so that interest is charged on the last half-year's interest, the charges have been paid.”