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Andrew Needham of VAT Solutions (UK) Ltd provides the first part of an update on recent VAT decisions.

Court of Appeal says theatre production costs are 'residual' for partial exemption purposes

The Court of Appeal (CoA) has released its judgment in what is likely to be an important future case when attributing input tax.

The issue was whether the VAT on production costs was wholly irrecoverable as relating exclusively to the exempt sales of tickets (as argued by HM Revenue & Customs (HMRC), and as found by the Tribunal) or was 'residual' as relating to the totality of income including taxable supplies such as sponsorship and merchandising (as argued by the Appellant, and as found by the High Court).

In an interesting twist, the CoA has confirmed that the VAT on the production costs is correctly treated as residual, but on a different reasoning to that of the High Court. The Court rejected the view that the taxable supply to which the production costs have a direct and immediate link is the sponsorship package including the rights to tickets, in favour of a view that the taxable supply to which the production costs have a direct and immediate link is the supply of programmes. One of the judges, LJ Chadwick, actually expressed some surprise that VAT Regulation 101(2)(d) should operate in this manner.

Mayflower Theatre Trust Ltd, Court of Appeal, 22 February 2007 

High Court Says Taxpayer Was Acting As Agent In Providing Dancers To Customers

This was an appeal against the VAT Tribunal’s earlier decision that the Appellant had supplied the services of the dancers to the customers.  The Tribunal decision goes into great detail on the arrangements behind the provision of entertainment at the six gentlemen's clubs operated in the UK by the Appellant.

The dancers were, by agreement of the parties, self-employed individuals, so the fundamental issue was one often litigated in businesses such as hairdressers and driving schools; i.e. whether, in the context of the clubs:

• the supply of entertainment services is made by the dancer to the customer in accordance with an individual contract negotiated by the dancer (as argued by the Appellant); as such, the dancer makes the supply of entertainment services and the Appellant simply licenses the dancer to perform in its premises and provides specified services to the dancer, or 
  
• (as argued by HMRC) the Appellant provides entertainment to the customer through the dancers, whom the Appellant has engaged.

The Tribunal had earlier reviewed the Dance Performance Licence (‘DPL’) between the Appellant and the dancer, the local authority licensing conditions, and the manner in which dancers were recruited, retained and remunerated.  The Tribunal Chairman had concluded that, whilst it was true that the dancer entered into a contract with the customer in relation to her services, that did not detract from the fact that there was an overall contractual framework within which the Appellant provided the relevant services to the customer through the dancers as agents. The Tribunal accordingly dismissed the Appellant’s appeal.

Before the High Court, the Counsel for the Appellant argued that he had no major disagreement with the Tribunal's analysis of the facts and the contractual relationships, but believed that the analysis could only point to a conclusion that the dancers contracted as principals to provide services to the customers in the Appellant’s clubs, and that there was no substantive evidence of the agency arrangement adduced by the Tribunal. Mr Justice Mann agreed with this, commenting as follows:

“35. It seems to me to be a very forced construction of events, if it is possible at all, to say that the dancers are contracting as agents for the club. The documents themselves have no particular badges of agency. The DPL is, in its terms, a licence permitting entry to the premises so that the dancer can apparently ply her trade. Background (2) expresses the desire of the club to give her a licence, and Background (3) expresses her desire to licence the premises for that purpose. It is not suggested that those expressions of desire are in any way a sham or are to be disregarded. The rest of the terms of the document (which, so far as relevant, are set out above) pursue that notion. Nothing in that document suggests that the dancer is vested with any authority to do anything on behalf of the club.”

The judge subsequently allowed the Appellant’s appeal.

Spearmint Rhino Ventures Limited, High Court, 23 March 2007

High Court finds for taxpayer and sends case concerning VAT on  players' agent fees back to tribunal

This was an appeal against the VAT Tribunal’s earlier decision that found, with limited exceptions, the club was not entitled to deduct input tax on players' agent fees for player transfers and player contract renegotiations.  The Tribunal said that, even though the club paid the fees, the supply of the agents services was made exclusively to the player, and hence the VAT thereon was not input tax of the club. The Tribunal also rejected a more detailed argument that, even if the supply was made primarily to the player, the club received sufficient benefit to give it a right of input tax deduction under the ‘Redrow’ principle.

This was the test case on the HMRC challenge to football clubs on such deductions (some may recall that the original test case involving Glasgow Rangers got virtually to the steps of the Edinburgh VAT Tribunal only to be pulled at the eleventh hour by HMRC - the view of the Edinburgh Tribunal was clearly that HMRC decided at the last minute that they were likely to get a more favourable ruling in a Tribunal South of the Border).

Mr Justice Mann allowed the club’s appeal, remitting the case to the Tribunal for a rehearing, with a strong steer on how the second Tribunal should approach the issues raised.  The judgment was fairly damning of the approach of Mr Demack in the Tribunal, broadly saying that the Tribunal formed a view at the start based on a number of misconceptions, in particular, the 'exclusivity' aspect of the players' agents operations, and then, in analysing the individual scenarios, fitted the facts around those misconceptions. The judge also took the view that the Tribunal was too easily influenced by what the documents stated, rather than what took place in reality.  As such, the Tribunal‘s decision was flawed. The judge went on to list the misconceptions as follows:

“29. It is clear to me that the expressed rationale of the Decision cannot stand. In reaching its Decision the Tribunal was relying on several propositions or bases that are not correct:
a. First, it made a fundamental mistake about exclusivity. It misunderstood the express exclusivity provisions that it saw and assumed that there was a contractual obligation that the agent would not act for another. It got the exclusivity the wrong way round. The exclusivity operated (where it operated at all) so as to prevent the player from engaging another agent. As I have indicated, HMRC accept that the Tribunal did that.

b. It found that there was an implied exclusivity obligation of the kind that it relied on even where there was not an express one. That is a misplaced assumption, as I have already observed.

c. It seems to have considered that that sort of exclusivity obligation automatically prevented any contract existing between the Club and the agent. That is not correct. Even if such an obligation existed it would not necessarily prevent a contract arising. It would merely mean that the second contract was a breach of the first.

d. It may also have assumed that the conflict of interest that would arise if the agent acted for both Club and player would prevent there being a contract between Club and agent. If so that is wrong. It seems to me to be highly likely that a conflict would arise. As Mr Milne (Counsel for Newcastle United) observed, it might well expose the agent to claims from the player, because it is apparent from the Tribunal's findings that there was no disclosure of the terms on which the agent was acting for the Club. Its existence might even mean that on the facts it would not be right to find that a conflicting contract had come into existence. However, it does not automatically mean that the Club/agent contract did not or cannot exist. As is observed in Bowstead & Reynolds on Agency, 18th Edn at para 2-013:

"Agent acting for both parties to a transaction. The agent of one party is not incompetent to act as agent of the other. Thus solicitors frequently act for both the buyer and the seller of a house, though there are many traditional warnings as to the dangers of this practice. It is perhaps more likely that an agent can unacceptably acquire the second capacity after the conclusion of the contract negotiated. Where there is no conflict of interest, the matter is straightforward. But an agent who does act in this way runs great risks of finding himself in a position in which his duty to one party is [in]consistent with his duty to the other, for example as regards information coming into his possession. In such a case he will be in breach of his duty to his first principal, and is liable accordingly, unless that principal has given his informed consent to the transaction with the other principal …"

 e. The Tribunal also apparently found that a Club/agent contract could not exist because it would breach FA and FIFA Regulations.

Again, that is wrong. The Regulations do not regulate the technical capacity of the agent to enter into contracts. The Regulations are no more than a form of contract themselves, and they impose obligations, but an apparent breach of them does not necessarily mean that the breaching act did not in law happen (though the fact that a club/agent contract would be a breach might be a relevant factor in determining where in fact there was such a contract). So entering into a contract with the Club might be a breach of the Regulations, but it is a contract nonetheless.

Counsel for HMRC sought to argue that, notwithstanding the above misconceptions, there was still an absence of a necessary contractual arrangement between the agent and the club to substantiate a right to input tax deduction by the club. The judge rejected this, finding that the supply scenario was clearly similar to that addressed in the Redrow and WHA cases.

The judge then considered if he could make a final decision of his own or whether he should remit the case back to the Tribunal and decided on the latter.

Newcastle United PLC, High Court, 23 March 2007