Alternative Investment Strategies Ltd v Revenue & Customs (VAT - input tax) [2020] UKFTT 0019 (TC)

“‘Business’ means the acquisition and holding of HFIM to enable HFIM to carry on regulated business, being the provision of specialist investment management and advisory services for the Offshore Fund, managing and advising fund of hedge funds and absolute return investment managers and related services, and such other business as the Board may agree should be carried on by the Company and/or its Subsidiaries and/or Holding Company. … 2.1. The primary object of the Company is to carry on the Business. 2.2. Unless otherwise agreed in writing by Shareholders representing not less than ninety per cent of the nominal value of the Shares from time to time in issue, the objects of the Company shall be limited to the establishment of HFIM which itself shall provide services to the Offshore Fund in a way as to ensure that HFIM cannot be operated independently from the Company.”

“The Management and Administrative Services The Manager shall provide the following services to the Company: I. Corporate Governance Services. The Manager shall assist and provide the Company in the provision of general company secretarial services, it will attend all board meeting, monitor the development of the subsidiary, report to the shareholders, and monitor adherence to compliance with the Shareholders agreement business plans and other agreements. II. Treasury Services. The Manager will support managing the treasury function of the Company. III. The Manager shall assist the Company in all matters relevant to the financing of the Company’s activities, including the identification of sources of potential financing, negotiation of financing arrangements, and coordination of financing for the benefit of the Company. IV. The Manager will arrange, negotiate and provide Director and Officers Insurance. V. The Manager shall provide general advice and assistance to the Company in the procurement of other Insurance as may be necessary or prudent in order to comply with legal or contractual requirements, or otherwise prudently insure the risks of the Company. VI. Infrastructure. The Manager will be responsible for, arrange and provision of office space, technology infrastructure, and any other infrastructure mutually agreed to the [sic] of the operating of the Company. VII. General Administrative Services. The Manager shall provide services of officers or other employees of the Manager to perform as officers of the Company or provide such general administrative services, technical skills and investment staff including accounting services, access to and consolidation of information and assistance in the general administration and management of the business, with all of the duties of officers of the Company as provided by the Board of Directors of the Company subject to the sole direction of the Board of Directors. VIII. The Manager will assist in protecting the assets, and goodwill of the Company which is in the interest and benefit for its Group shareholders. IX. The Manager will assist in the preparation of annual financial statements, assist with appointment of auditor and other professional services. X. Other services that may be mutually agreed between the Manager and the Company. The Fees and Charges Payable I. The Company agrees to reimburse the Manager for all costs and expenses reasonably incurred by the Manager in the provision of the Management, Administrative Services and any other support services provided by the Manager to the Company. II. The Company shall pay to the Manager a management fee or charge, that will be agreed between the parties, which will be based on management time involved, the total costs incurred, amount of management time and other consideration together [with] any taxes. III. Other fees for any other works or services agreed between the parties not explicitly set out in the agreement.”

“We write to confirm the following as the licensor of the property occupied by the above companies: 1. The two companies occupy an office within 30 Crown Place, London, EC2A 4EB under a licence agreement with Bourne Financial. 2. We have known the two companies since 2006, who have occupied our offices under a license agreement. 3. The companies are charged currently invoiced 3,000 pounds plus VAT on a monthly basis. 4. The invoice is required to be addressed to both companies. In the past there has been a clerical mistake where invoices were only addressed to HFIM. This has now been ratified [sic] and now addressed correctly that is been invoiced to both companies as per the licence agreement.”

“Were you the recipient of a supply of goods or services? You claimed input tax in relation to charges of office rental by Bourne Financial Ltd. HMRC asked you to provide evidence to support the input tax claim in relation to the supply you were receiving and invoices concerning the transaction were provided. The invoices that have been provided are addressed to HFIM and not to AIS and HMRC’s enquiries indicate that payment of the supplies of rental accommodation have been made by HFIM and not by AIS. You have stated that the underlying agreement is that both companies are part of the Bourne Financial Ltd [sic] and that the invoice has been made out to HFIM in error. However, the fact remains that HFIM have been invoiced for the entirety of the supply, have paid for it, and it is not your input tax to reclaim.”

“(1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say – (a) VAT on the supply to him of any goods or services; (b) VAT on the acquisition by him from another member State of any goods; and (c) VAT paid or payable by him on the importation of any goods from a place outside the member States, being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.”

“(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.”

“(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

“[50] From these domestic and Court of Justice judgments, it appears clear that, where the person who pays the supplier is not entitled under the contractual documentation to receive any services from the supplier, then, unless the documentation does not reflect the economic reality, the payer has no right to reclaim by way of input tax the VAT in respect of the payment to the supplier. [51] On this analysis, it appears to me that, subject to considering a further way in which Airtours’ case is put, it also fails on the second question. The Contract, consisting of the Letter and the Terms, did reflect the economic reality, and was not in any way an artificial arrangement. It is true that Airtours benefited from the Contract, but the benefit which it was getting was not so much the Services from PwC, but the enhanced possibility of funding from the Institutions for its restructuring (a possibility which eventuated into reality thanks, to a substantial extent, to the Report). And it was to improve the prospects of such refinancing that Airtours was prepared to pay for the provision of the Report.”

“[38] In conclusion, we consider that it is clear from Airtours and the cases referred to in that case that determining who is receiving a supply is a two-stage process. The starting point is to consider the contractual position and then consider whether, taking account of all the circumstances, the contractual analysis reflects the economic reality of the transaction. If, as a matter of contract, a party undertakes to provide services to another person in return for consideration from that person or a third party then there is, subject to the question of economic reality, a supply to that person for VAT purposes. It is clear from Lord Neuberger’s comments in [50] of Airtours that where a person who provides the consideration is not entitled under the contractual documentation to receive any services from the supplier then, unless the documentation does not reflect the economic reality, there is no supply to the payer. We consider that, similarly, where a contract shows that one party is obliged to provide services to another person but, on consideration of all the circumstances, it is found that the contractual analysis does not reflect the economic reality of the transactions then there will not be a supply to the other person.”

“[85] We do not accept that the absence of artificiality means that there is no room to consider the economic and commercial reality of the transactions. As the use of the words ‘in particular’ by the Court of Justice in Newey CJEU show, artificiality is not the only test of economic reality. As Henderson LJ noted in HMRC v Newey (t/a Ocean Finance) [2018] EWCA Civ 791 ( 'Newey CA '), when it had returned to the UK and reached the Court of Appeal, at [101] ‘total artificiality is not an invariable requirement, but rather a paradigm example of where the contractual terms do not reflect economic and commercial reality.’ [86] While it appears to be clear that a contract designed to implement a purely artificial arrangement is unlikely to reflect the economic and commercial reality of a transaction, there is very little guidance on the meaning of economic and commercial reality where arrangements are not purely artificial. [87] In Newey CJEU , one of the questions was whether, notwithstanding the fact that under the contractual terms a company, Alabaster, was the recipient of supplies of advertising services provided by Wallace Barnaby, the contractual terms did not genuinely reflect economic reality and it was Mr Newey, and not Alabaster, who was actually the recipient of the supplies of advertising services provided by Wallace Barnaby. In paragraph 48 of the judgment, the Court of Justice indicated that it was ‘conceivable [on the facts stated in the reference] that the effective use and enjoyment of the services at issue in the main proceedings took place in the United Kingdom and that Mr Newey profited therefrom’. Henderson LJ provided more detail about the facts as stated in the reference in Newey CA at [62]: ‘As is apparent from this passage, the CJEU did not rule out the possibility that, in the light of its knowledge of the facts found by the FTT and reflected in the order for reference, the transactions in issue might constitute an abuse in the Halifax sense. The key paragraph for this purpose is paragraph 48, which requires account to be taken of the economic reality of the relevant business relationships between each of Mr Newey, Alabaster, the lenders and Wallace Barnaby, as well as the matters of fact mentioned in the third question referred to the Court. The third question reads as follows: ‘(3) In circumstances such as those in the present case, in particular, to what extent is it relevant: (a) Whether the person who makes the supply as a matter of contract is under the overall control of another person? (b) Whether the business knowledge, commercial relationship and experience rest with a person other than that which enters into the contract? (c) Whether all or most of the decisive elements in the supply are performed by a person other than that which enters onto the contract? (d) Whether the commercial risk of financial or reputational loss arising from the supply rests with someone other than that which enters into the contracts? (e) Whether the person making the supply, as a matter of contract, sub-contracts decisive elements necessary for such a supply to a person controlling that first person and such sub-contracting arrangements lack certain commercial features?’ [88] In paragraph 48 of Newey CJEU , the Court of Justice did not refer to all the matters of fact mentioned in the reference but focussed on two elements, namely where were the services effectively used and enjoyed and who benefited from them. This approach was reflected in U--Drive , where the Upper Tribunal considered, at [44], that whether U-Drive had an interest in the supply for which it was paying was relevant in assessing whether, in economic reality, the company received the supply. [89] Mr Mantle submitted that this stage of the analysis involves considering all the facts relevant to the economic and commercial reality of the transaction to see if any of those facts vitiate the conclusion based on a purely contractual analysis. We agree that we must have regard to all the circumstances, viewed objectively. It appears to us that, in ascertaining the economic and commercial reality of a transaction involving a supply of services, we should have regard to several factors. It is clear that such factors may include where the services are effectively used and enjoyed as well as who benefits from or has an interest in them in an economic or commercial sense. We consider that we should also ask why the consideration for the services is paid to determine the true nature and purpose of the transactions. Not every factor will be relevant in every case and there may be other factors.”

“[14] The obligation on suppliers to provide a VAT invoice was imposed by art 220 PVD and the details of what information must be included in a VAT invoice were set out in art 226, including the full name and address of the customer and the customer’s VAT identification number. It was common ground before us, as it had been before the FTT, that the till receipts given by Apple to the runners did not constitute compliant VAT invoices. [15] So far as the relevant domestic legislation is concerned, input tax in relation to a taxable person is defined by s 24(1) of the Value Added Tax Act 1994 (‘VATA’) as including VAT on the supply to him of any goods or services, being goods or services used or to be used for the purpose of any business carried on or to be carried on by him. Section 24(6)(a) (as amended) provides for the making of regulations: ‘… for VAT on the supply of goods or services to a taxable person … to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents or other information as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases.’ [16] Regulations have been made for this purpose, namely the VAT Regulations 1995, SI 1995/2518: (1) Regulation 13 provides that where a registered person makes a taxable supply in the United Kingdom to a taxable person he shall provide that person with a VAT invoice. (2) Regulation 14 specifies what must be included in a VAT invoice, including the date of issue of the document, the name, address and registration number of the supplier, the name and address of the person to whom the goods or services are supplied, a description sufficient to identify the goods, the rate of VAT and the amount payable excluding VAT and then the total amount of VAT chargeable. (3) There is a relaxation of the rules stipulating the contents of a VAT invoice in a case where the consideration for a supply does not exceed £250 and the supply is a domestic one. In such a case, the VAT invoice that the registered person is required to provide need only contain a more limited amount of information which does not include the name and address of the person to whom the goods are supplied: see reg 16A. (4) Regulation 29(2) deals with claims for input tax. It provides that at the time of claiming deduction of input tax in a VAT return a person shall, if the claim is in respect of a supply from another taxable person, hold a VAT invoice which is required to be provided under reg 13. (5) There is a proviso to reg 29(2) which allows the deduction of input tax to be made without a VAT invoice: ‘provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold or provide such other … evidence of the charge to VAT as the Commissioners may direct.’ [17] Thus, arts 180 and 182 PVD empower the member state to allow a deduction of input tax to be made in accordance with conditions set by that member state and, in the United Kingdom, reg 29(2) of the VAT Regulations 1995 confers on the Commissioners a discretion in a particular case to direct that a deduction can be made in the absence of a VAT invoice if the taxpayer provides such evidence of the charge to VAT as HMRC may direct. [18] The role of the tribunal on an appeal against a refusal to allow a deduction in circumstances where HMRC has rejected alternative evidence supporting a claim that input tax was incurred was discussed in Kohanzad v Customs and Excise Comrs [1994] STC 967 (‘ Kohanzad ’). In that case the Commissioners had conceded before the tribunal that they had a discretion to accept a claim for input tax credit in the absence of VAT invoices. The taxpayer was unable to provide any documentation to support the claim for credit. The taxpayer had produced purchase invoices and contended that in respect of accounting periods before and after those in dispute, the Commissioners had accepted his purchase invoices without question. He submitted that the Commissioners had acted unreasonably in refusing to allow any credit for input tax. An appeal against the decision was dismissed by the VAT Tribunal and the further appeal was also dismissed by Schiemann J sitting in the High Court, Crown Office List. Schiemann J held that the effect of the provision in the VAT (General) Regulations 1985, SI 1985/886 (which was the predecessor to reg 29(2) of the 1995 Regulations) was that prima facie a registered taxable person is not entitled to any credit in respect of input tax unless at the time of claiming such a credit he holds a tax invoice in relation to that supply. The second effect of the provision was that the Commissioners have a discretion to allow credit for input tax, notwithstanding that the registered taxable person does not hold such a tax invoice. They had exercised that discretion against the taxpayer. The jurisdiction under which the tribunal could review that decision was the provision in the VAT Act 1983 drafted in the same terms as s 83(1)(c) VATA. [19] Schiemann J went on to say (at 969): ‘It is established that the tribunal, when it is considering a case where the commissioners have a discretion, exercises a supervisory jurisdiction over the exercise by the commissioners of that discretion. It is not an original discretion of the tribunal, it is one where it sees whether the commissioners have exercised their discretion in a defensible manner. That is the accepted law in this branch of the court’s jurisdiction, and indeed it has recently been decided that the supervisory jurisdiction is to be exercised in relation to materials which were before the commissioners, rather than in relation to later material.’ [20] The judge cited a number of cases in support of that principle including Customs and Excise Comrs v Peachtree Enterprises Ltd [1994] STC 747. [21] More recently the supervisory nature of the tribunal’s jurisdiction in these circumstances was reiterated by the Upper Tribunal in Best Buys Supplies Ltd v Revenue and Customs Comrs [2011] UKUT 497 (TCC) , [2012] STC 885 (‘ Best Buys ’). The Upper Tribunal confirmed the test in Kohanzad, stating that although the jurisdiction of the First-tier Tribunal was appellate since the appeal was made under s 83(1)(c), the tribunal could not substitute its own decision for that of HMRC but could only decide whether the discretion had been exercised reasonably by HMRC: see para [49] of the judgment in Best Buys . … THE CORRECT APPROACH TO APPEALS OF THIS KIND [39] The role of the First-tier Tribunal is to examine a decision that HMRC have taken and decide whether that decision was right or wrong. Sometimes the test that is applied in examining HMRC’s decision is a full merits appeal. Sometimes it is a review as to whether the decision fell within the reasonable bounds of HMRC’s discretion. We have considered carefully the precise content of the decision that the case officer made in this case. Mr Pickup argued that the decision letters showed that she had in fact decided that there had been no taxable supply from Apple to Scandico. We do not agree that that is the correct reading of the letters although we accept that the letters could have been better worded to make this clear. We agree with the conclusion arrived at by the FTT in para [117] of its judgment that in this case HMRC have not taken a decision about whether there was a taxable supply of the phones to Scandico. What the case officer decided is that, in the absence of VAT invoices from Apple to Scandico, there was not enough information provided by Scandico for HMRC to decide whether there has been a taxable supply or not. HMRC has therefore exercised the discretion conferred on it by reg 29(2) of the VAT Regulations 1995 by declining to direct that the alternative evidence that Scandico provided should be treated as sufficient evidence of the supply of the iPhones to Scandico. That is the decision which has been taken by HMRC and hence it is the decision that can be appealed and it is the decision that the tribunal should address. [40] In these circumstances we firmly disapprove of the two-stage approach which the parties in this case encouraged the FTT to adopt and which has, we understand, been adopted in similar cases. We regard the two-stage approach as seriously flawed both in juridical and practical terms.”

“(2) Subject to sub-paragraph (5) below, where the Commissioners are satisfied that a registered person has ceased to be registerable, they may cancel his registration with effect from the day on which he so ceased or from such later date as may be agreed between them and him. … (5) The Commissioners shall not under sub-paragraph (2) above cancel a person’s registration with effect from any time unless they are satisfied that it is not a time when that person would be subject to a requirement, or entitled to be, registered under this Act.”

“[124] Accordingly, Norseman needs to establish that, when it incurred input tax in the relevant period, it had either already made supplies for a consideration (the first question) or that it had the intention of making at some time in the future supplies for a consideration (the second question). If it is right to conclude that Norseman had not already made such supplies and that it had failed to establish such intention, then it is right also to conclude that it was not entitled to recover input tax. It is clear from the decision in Finland that the mere receipt of payment does not, per se , mean that a given activity is economic in nature: thus payment does not per se amount to consideration. What needs to be established is a direct and immediate link between the services supplied and the charges levied or to be levied.”

“[43] In cases, such as the present, concerning a holding company and its subsidiaries, the CJEU has held that where the only activity of a holding company is the holding of shares in in its subsidiaries is not carrying on an economic activity ( Polysar Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen [1993] STC 222 . [44] However, in Cibo Participations SA v Directeur régional des impôts du Nord-Pas-de-Calais [2002] STC 460 (“ Cibo ”), in answer to a request for the criteria establishing whether the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity for Article 9 PVD purposes the CJEU stated: ‘19. It is clear from case-law that that conclusion is based, amongst other things, on the finding that the mere acquisition and holding of shares in a company is not to be regarded as an economic activity, within the meaning of the Sixth Directive, conferring on the holder the status of a taxable person. The mere 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 because any dividend yielded by that holding is merely the result of ownership of the property (see the judgments in Case C-333/91 Sofitam [1993] ECR I-3513 , paragraph 12, and in Case C-80/95 Harnas & Helm [1997] ECR I-745 , paragraph 15). 20. However, the Court has held that it is 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 as shareholder ( Polysar , paragraph 14, and Floridienne and Berginvest , paragraph 18). 21. It is clear from paragraph 19 of the judgment in Floridienne and Berginvest that direct or indirect involvement in the management of subsidiaries must be regarded as 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 such as Cibo of administrative, financial, commercial and technical services to its subsidiaries. 22. The answer to the first question referred for a preliminary ruling must therefore be 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 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.’ [45] The CJEU in Beteiligungsgesellschaft Larentia & Minerva mbH & Co. KG v Finanzamt Nordenham (Case C-108/14) [2015] STC 2101 (“ Larentia ”) stated, at [21] 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 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 vek Zrt v Nemzeti Adó-és Vámhivatal Fellebbviteli Igazgatóság (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 of 16 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 of 16 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 of 12 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.”

“15(1)A person may appeal against a decision of HMRC that a penalty is payable by the person. (2) A person may appeal against a decision of HMRC as to the amount of a penalty payable by the person. … 16(1) An appeal under this Part of this Schedule shall be treated in the same way as an appeal against an assessment to the tax concerned (including by the application of any provision about bringing the appeal by notice to HMRC, about HMRC review of the decision or about determination of the appeal by the First-tier Tribunal or Upper Tribunal). (2) Sub-paragraph (1) does not apply in respect of a matter expressly provided for by this Act. 17(1) On an appeal under paragraph 15(1) the tribunal may affirm or cancel HMRC’s decision. (2) On an appeal under paragraph 15(2) the tribunal may (a) affirm HMRC’s decision, or (b) substitute for HMRC’s decision another decision that HMRC had power to make. (3) If the tribunal substitutes its decision for HMRC’s the tribunal may rely on paragraph 11 (a) to the same extent as HMRC (which may mean applying the same percentage reduction as HMRC to a different starting point), or (b) to a different extent, but only if the tribunal thinks that HMRC’s decision in respect of the application of paragraph 11 was flawed. … (6) In sub-paragraphs (3)(b), (4)(a) and 5(b) “flawed” means flawed when considered in the light of the principles applicable in proceedings for judicial review. …”

“Telling: The inaccuracies were not disclosed at the start of the compliance check, and you did not tell us everything about the extent of the inaccuracies as soon as you could. Helping: Several requests had to be made to obtain all of the relevant information from you, because you did not answer my questions in full at the outset. Giving: Relevant information was only given in response to specific, detailed request. You did not respond to all of my requests for information on time.”