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Steve Allen, Director of VAT Solutions (UK) Ltd, reports a selection of recent VAT cases.

Steve ALlen

Tribunal says legal services supplied to the shareholders rather than the company

A useful case on the often asked question of whether VAT can be claimed on legal costs.

The Appellant is one of three associated companies engaged in the wholesaling and retailing of alcoholic drinks. In February 2000, a minority shareholder commenced legal action to wind-up the companies on the grounds that the three majority shareholders were running the companies in a manner prejudicial to his interests as a minority shareholder. The action also contained other allegations of impropriety against the management of the companies.

After High Court and Court of Appeal hearings, the dispute was eventually settled between the parties. However, the three majority shareholders had each appointed legal representatives in the court actions, and legal costs of nearly £2 million were incurred. These costs were met by the company, which sought to deduct the VAT thereon as input tax. However, HMRC disallowed the input tax.

The Appellant argued that the costs were a necessary business expenditure of the company in defending itself against the legal action, as a failure to have done so would have put the continued trading existence of the company into doubt. HMRC argued that one should not look at questions of purpose and benefit behind the expenditure, but should focus on the question 'to whom were the services supplied?' HMRC argued that the services were supplied to the shareholders rather than to the company, and that there were no parallels between the facts of this case and those in the ‘Redrow’ case.

The Chairman agreed with the arguments made by HMRC, and dismissed the appeal.

City of Belfast Warehousing Ltd (VTD 20,196)

Tribunal says legal services related to land, and so were supplied where land situated

A case concerning the place of supply rules for legal services relating to a UK property.

 The Appellant is a Jersey resident who became involved in litigation to establish his ownership under a trust deed of a flat in Bristol (following the death of its occupant). The Appellant used the services of a UK lawyer, and argued that he should not be subject to UK VAT on two grounds.

The first argument was that VAT Notice 741 expressly states that the legal administration of a deceased person's estate, which happens to include property, is not a land-related service, and that legal services in the general administration or winding-up of the estate of a deceased person are not in relation to land even where the estate includes land.  For the second argument, the Appellant made reference to comments of AG Sharpston in the ‘Rudi Heger’ case (C-166/-05), which concerned the place of supply of the transfer of fishing permits.

In his deliberations, the Tribunal Chairman differentiated matters from the scenarios in Notice 741, stating that this was a case of proceedings against an estate specifically in relation to a property.  He then rejected the relevance of the AG's comments in the Rudi Heger case.

The appeal was subsequently dismissed, although the Chairman did question why Article 5 of the Place of Supply of Services Order 1992 (i.e. the law for ‘land-related services’) does not expressly mention the services of lawyers.

Kenneth Richard Daunter (VTD 20,120)

Tribunal decides that debt collection services to bank were not exempt supplies of credit negotiation

The appeal concerns the VAT liability of the services supplied to the bank by debt collection agents.

Despite European law specifically excluding debt collection from exemption, the bank advanced an argument that in almost all cases (i.e. those where the defaulting customer does not immediately pay up in full), the agent's services involve exercising a discretion given to it to negotiate new terms of payment, such that the true nature of the supply is one of the negotiation of credit as per the definition applied by the ECJ in the CSC Financial Services case. HMRC countered that the services do not involve any intermediation and that the essential aim of the service is to secure collection of the debt.

The Tribunal gave the parties an opportunity to put alternative arguments that a mixed supply might be involved, but both declined.

The Chairman commented as follows:

It is the clear view of the Tribunal that (borrowing the words from CPP)  the dominant purpose of the entire economic arrangement was the recovery of money due to the Appellants. The Tribunal are of this view despite the wording of the revised agreement, and despite arguments for the Appellants that they perceive the service they receive as one of debt negotiation. That said, they have no doubt whatsoever that negotiations and skilled negotiations at that, required to be undertaken and were undertaken, and that a substantial discretion was given to the trained staff of the agents in how they achieved their purpose. The Tribunal were unable to find that the negotiation involved in the recovery of money for the Appellant was an aim in itself, although it might be a desirable feature for various reasons. They find that it was truly ancillary to the dominant purpose of debt recovery. Further, it does not fall to be regarded as “intermediary services” in terms of the domestic legislation, since we do not find that the agents act in an intermediary capacity in relation to both debtor and creditor. In short, the service supplied to the Appellant was a single supply of debt recovery.

Not surprisingly, the Chairman found for HMRC and dismissed the appeal.

HBOS Plc (VTD 20,118)