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Steve Allen of VAT Advisers Ltd highlights a selection of recent VAT cases.

Upper Tribunal Rejects Use of 'Redrow' Principle on Recovery of Input VAT on Corporate Restructuring Fees

This case concerns the right of a business to recover VAT charged by an adviser undertaking a strategic review of its business. It examines the key question of ‘to whom’ did the adviser provide its services, and as such, who can recover the VAT charged.

The Appellant wanted to restructure itself, and had presented detailed proposals to the banks that would be involved if implemented. The banks required a strategic review of the Appellant to be taken by a third party adviser so that a report could be produced to help them decide whether to continue to provide finance. Both the banks and the Appellant received a copy of the report, which was issued under an engagement letter addressed only to the banks.

The First-Tier Tribunal had previously held that the Appellant was a party to the engagement letter (via frequent references to ‘you’ which were held to contractually include the Appellant) and had a role in deciding which adviser to appoint. Since the Appellant paid the adviser’s fees, the First-Tier Tribunal also held (applying the Redrow decision) that it had received a service from the adviser (and therefore incurred the VAT charged), irrespective of the fact that the banks had also received a service from the adviser.

In contrast, the Upper Tribunal held that, ‘in substance’, the adviser was providing its service to the banks to enable them “to decide whether to continue to support” the Appellant. Whilst the Appellant was a party to the engagement letter, it did “not obtain any service for use in its business, but contracted to pay the adviser for supplying its reports to the banks”. The banks had initiated the need for the report and the benefit to the Appellant was that the “report might lead to continued finance from the bank which it was willing or was forced to pay for”.

In short, the Upper Tribunal did not consider that ‘Redrow’ applied in this case. Other factors taken into account were that the banks first approached the adviser, contracted for the work and authorised it; the drafting of the engagement letter was not always clear (e.g., whether the references to ‘you’ always did include the Appellant); the Appellant had received a copy of the report more as a courtesy than as a supply of services to the Appellant from the adviser. Crucially, the Upper Tribunal had chosen to apply a ‘substance over form’ interpretation of the relationships between the parties, referring to its own ‘more natural reading’ of the ‘flavour’ of the engagement letter terms, in preference to a ‘legalistic’ approach.

The decision of the Upper Tribunal to focus on the substance of the relationships was the key factor in coming to the conclusion that Redrow did not apply in this case. The banks wanted the report, but the Appellant had to pay, and was not even entitled to see all parts of the final report. The benefit received by the Appellant was the possibility of continued finance rather than any ‘business use’ of the report (which may limit application of this decision to other cases). Where there are multiple parties to a contract this case is a new barrier to VAT recovery, and means a resolution of the corporate finance sector’s wider ongoing dispute with HMRC over recovery of VAT on deal fees is now even further away. Litigation on the point of ‘to whom’ services are provided can be expected to continue, with the next round being HMRC's appeal in the BAA case due to be heard early in 2011. In the meantime, this case should act as a spur to ensure engagement structures always reflect the underlying relationships between the parties, and that engagement letters are always clearly drafted to minimise the possibility of any alternative interpretation by HMRC or the courts.

Airtours Holiday Transport Ltd, Upper Tribunal (NCN [2010] UKUT 404 (TCC)

Tribunal says Fruit Smoothie is a Standard-Rated Beverage rather than Zero-Rated Food

This case concerns the correct VAT liability of a well-known brand of fruit smoothie.

The Appellant submitted a voluntary disclosure for overpaid VAT in 2007, having decided that its smoothies were actually zero-rated. HMRC refused to make the repayment on the basis that the product was a beverage, and so excepted from zero-rating under VATA 1994 sch 8 Group 1 Item 4.

The Appellant stated that its product was treated by the Government as being equivalent to 2 out of the 5 recommended daily portions of fruit and vegetables, and that the main purpose of a beverage was not to provide nutrition, but increase bodily liquid levels and slake thirst or give pleasure. The taxpayer further argued that its smoothies were the same as fruit salad, and should therefore have the same treatment. In seeking to establish the meaning of ‘beverage’ the Judge began by looking at existing case law. The Tribunal concluded that social policy offered no help in determining the meaning of ‘beverage,’ and so turned to the ordinary meaning.

Applying the tests applied in the Bioconcepts case, the Tribunal noted that the smoothies were not mainly consumed to rehydrate or quench thirst, and whilst they were drunk for pleasure, this was not the principle reason for consumption. Concluding the Bioconcepts test was not exhaustive, the Tribunal went on to consider the smoothies in a social context, and concluded they are drunk in coffee bars and are pleasant and easy to drink. Whilst accepting they would not generally be offered to guests, they could be offered as alternatives to tea, fruit juice or alcohol.

In reaching a decision in favour of HMRC, the Judge stated:

“We considered comparators such as fruit juice, alcohol, coffee, soft drinks, other smoothies and milk. We find beverages can be small (an espresso) or large (a litre bottle of soft drink). They can be alcoholic or non-alcoholic. They can be thirst-quenching or not. They can be a stimulant or not. They can also be healthy or not so healthy. Many will contain little or no nutrition, and most will not require digestion. Our conclusion is that there is a great deal of variation in beverages. As drinks go, fruit smoothies are unusual in that they are quite thick, and do require digestion: however, we do not think this is sufficient to mean that they are not a beverage if they are drunk as other beverages would be drunk.”

Accordingly, the appeal was dismissed.

Innocent Ltd (TC 00771)