TC00146

Appeal number MAN/07/0635

VALUE ADDED TAX — partial exemption — estate agents — costs of newspaper advertising — whether wholly attributable to taxable supplies of selling houses or partially to exempt mortgage services — appeal allowed in principle

FIRST-TIER TRIBUNAL
TAX 

SKIPTON BUILDING SOCIETY
	Appellant
- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS 
Respondents

Tribunal: 	Judge Colin Bishopp
							
Sitting in public in Manchester on 5 & 6 May 2009

Valentina Sloane, counsel, instructed by KPMG LLP for the Appellant
Peter Mantle, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	The appellant, Skipton Building Society (“Skipton”), is the parent of a number of subsidiary companies and is the representative member of a VAT group of which the subsidiaries are also members. The members of the VAT group make both taxable and exempt supplies and the VAT group is, correspondingly, a partially exempt trader, which has agreed with the Commissioners upon a special method for calculating the proportion of its input tax which is recoverable, in accordance with reg 102 of the Value Added Tax Regulations 1995. One of the activities carried on by the subsidiaries is residential estate agency. The issue in this appeal is whether the VAT incurred by Skipton’s estate agency subsidiaries on the cost of advertisements placed in local newspapers is wholly attributable to the sales of the properties advertised and therefore recoverable in full, as Skipton argues; or, as the Commissioners maintain, is partially attributable also to the exempt services which the group supplies so that it must be treated as residual input tax for the purposes of the special method. I am asked to determine only the principle. Formally, the appeal is against a decision set out in the Commissioners’ letter to Skipton of 17 May 2007, confirmed on later review, to the effect that it could not claim credit for the whole of the input tax so incurred, and directing it to treat that input tax as residual.
2.	Before me, Skipton was represented by Valentina Sloane and the Commissioners by Peter Mantle, both of counsel. I heard the oral evidence of David Livesey, now the chief executive of Skipton’s principal estate agency subsidiary, and I had the formal and unchallenged statement of the officer who made the disputed decision, James Barr. I was provided with several examples of the advertisements in issue, and with copies of other relevant documents. The following description of the material facts is taken from Mr Livesey’s evidence and the documents. Most of it was uncontroversial, but the parties invited me to draw very different conclusions.
3.	Skipton’s principal estate agency subsidiary is Connells Limited, generally known as Connells Group, which itself has a number of subsidiaries, carrying on various property-related businesses. Mr Livesey has been the chief executive of Connells Group since 2008; formerly he was the chief executive of one of its own major subsidiaries, Sequence (UK) Ltd. Altogether the group and its subsidiaries have about 500 estate agency branches throughout the UK. Different trading names are used in different parts of the country, most of them acquired on the purchase of local businesses, but the manner in which the business is conducted is broadly uniform throughout the country. Connells Group has an annual turnover of about £250 million, of which about 60% is derived from estate agency, about 25% from lettings, conveyancing, survey and valuation and the remaining 15% from mortgage and insurance services and building society agency. Only those last three of the group’s activities are exempt for the purposes of VAT; all the others are standard-rated.
4.	The group’s estate agency business is carried on in the conventional way, that is through branches sited in the shopping areas of cities and towns, in which photographs and details of the properties that branch has available for sale are displayed, arrangements for visits made, and negotiations undertaken. Properties are also promoted by newspaper and internet advertising. A typical branch has a manager, three negotiators and an administrator. One of the manager’s tasks is to visit the properties of prospective vendors, to value them and to persuade the house owners to instruct the agency. The agencies have brochures which the manager hands to the prospective vendor when visiting the house. The brochure describes the agency’s services, including the facilities it has for arranging mortgages for prospective purchasers. Mr Livesey regarded the brochure, and the fact that the agencies have a comprehensive mortgage service, as useful marketing tools.
5.	The negotiators are employed to sell the houses and other properties the branch has on its books. They are paid a salary and commission geared to the number and value of the properties they sell. Each branch is a separate “profit centre”, earning its own commission and carrying its own costs including particularly, for present purposes, the cost of advertising the properties it has for sale. 
6.	Each branch also accommodates a shared mortgage consultant—shared, that is, with (usually) one other branch. Although the mortgage consultant is available in the branch in order to assess the financial position of, and provide mortgage advice to, prospective purchasers of properties marketed by that branch (who are often but not invariably referred to the mortgage adviser by the sales staff) he or she does not report to the branch manager but to a separate manager within a different division of Connells Group. The salary and other expenses of the mortgage consultant do not come within the profit centre calculations for the branch, but within a separate mortgage costs centre.
7.	Among the branch manager’s responsibilities is the advertising of the properties the branch has for sale. In recent years the internet has become increasingly important but, Mr Livesey said, the details displayed in branches, “for sale” boards placed outside properties, word of mouth and, most of all, local newspaper advertising are still thought to be of considerable value. Newspaper advertising is extensively used since the market is predominantly local, both sellers and buyers being attracted to agents within their own area. Each branch manager is expected to maintain a relationship with the local newspapers, to negotiate advantageous terms for the placing of regular advertisements, and to make the most effective use of the available space. Connells Group provides templates (updated from time to time) which the branches are required to use. They prescribe the manner in which the advertisements are laid out, leaving the branch manager to populate the available spaces with details of properties the branch has for sale and, when appropriate, with other material.
8.	The examples of the advertisements with which I was provided show that they are, as one might expect, in a form familiar to anyone who has ever examined advertisements of this kind. Occasionally a half-page is taken, but more usually the advertisement occupies a full page. The greater part of the available space, in every case, is taken up by small individual advertisements for residential properties, almost always consisting of a photograph, brief details of the accommodation and the asking price. At the top of a typical page, in a shallow box occupying the whole width of the page, appear the name of the estate agency placing the advertisement, its address and telephone number (in some cases the address and telephone number of more than one branch office are given). At the foot of the page appear website addresses where details of further properties may be viewed. Some of the websites identified are national sites used by many estate agents, but one is a site maintained by Connells Group and on which it not only advertises the properties it has for sale but provides links to other services offered by the group. In some cases the name and address and other particulars of the agency appear at the foot rather than the head of the page, but the differences in the layout of the details I have described are of no present importance. 
9.	However, most, but not all, of the advertisements contain some other material. One example consists of a “strap line” beneath the name of the agent bearing the text “buying – selling – letting – renting – overseas – property auctions – land & new homes – mortgages – conveyancing”; in other similar examples the words used, or their position, are slightly different but their substance is the same. Mr Livesey told me that the “strap line” appeared in advertisements placed between November 2005 and November 2006, when it was removed from the template as it was thought to have no real value. The “strap lines” merely mentioned the other services, and said nothing more about them. Some of the advertisements additionally devote part of the page to an inset advertisement promoting the agency’s mortgage service, or another service such as the provision of Home Information Packs (“HIPs”). Connells Group offers a service known as “Headstart”, by which a prospective purchaser may secure approval in principle of a mortgage before finding a property to buy, and some of the advertisements feature that service. Others have an inset promotion of the branch, with, usually, a picture of the staff employed at that branch followed by a client’s testimonial. In one of the examples I saw the testimonial related only to the efficiency with which the client’s property had been sold; in the other it related to the whole service provided by the branch, including financial advice. Some of the advertisements also include a fairly prominent reference to Connells Group’s having won an award as estate agency of the year.
10.	Mr Livesey’s evidence was that Connells Group set out to exploit the opportunity its successful estate agency business gave it of promoting other services. These include surveys, conveyancing, the procuring of mortgages for purchasers (not necessarily from Skipton—the mortgage advisers are at liberty to place mortgages with any of a panel of 15 lenders) and the placing of insurance. He said, however, that the group did not sell houses in order to promote its mortgage services, nor did it provide mortgage services in order that it could sell houses. The two are, he considered, distinct and independent services. The objective of the newspaper advertisements is to sell houses, and not to promote the agencies’ other services. About 700 newspaper advertisements are placed each week by the group; Mr Livesey’s understanding (which was based on information he had obtained from the group’s marketing department) was that about 5% of the advertisements contained an inset, and that less than a fifth of those made any mention of mortgages. The inserts were used, he said, sometimes simply to fill up the available space when the branch had insufficient houses on its books, and on other occasions as a means of making the advertisement appear more attractive.
11.	Mr Mantle was at pains to emphasise the fact that the group makes both kinds of supply and that, as I accept is the case, the mortgage service is much more than a mere incidental to the selling of houses. Mr Livesey’s evidence made it clear that the group earns significant income from its mortgage service, that it is pursued for its own sake and that the group exploits the fact that it provides a mortgage service to prospective purchasers, including those of its vendor clients who are buying a new property, in order to promote its estate agency business. Those facts do not, however, dictate the answer to the question whether the relevant input tax is residual or directly attributable to the sales of houses alone.
12.	It is common ground that the conditions which must be satisfied if input tax is to be deductible are to be found in arts 167 to 192a of the Principal VAT Directive (2006/112/EC), the most important being that prescribed by art 168, namely that the input tax must be “used for the purposes of the taxed transactions of a taxable person”. That provision is implemented in the UK’s domestic legislation by s 26 of the Value Added Tax Act 1994 and reg 101 of the Value Added Tax Regulations 1995, which provides that a taxable person shall be entitled to deduct so much of his input tax as “is attributable to taxable supplies”.
13.	The meaning of “used”, in the corresponding provision of the Sixth VAT Directive (77/388/EEC), which was replaced by art 168, was considered by the Court of Justice in BLP Group plc v Customs and Excise Commissioners (Case C4/94) [1995] STC 424, still regarded as the leading authority on the subject. The Court said, at para 19 of its judgment, that in order to be deductible the input tax “must have a direct and immediate link with the taxable transactions and that the ultimate aim pursued by the taxable person is irrelevant”. 
14.	In Revenue and Customs Commissioners v Mayflower Theatre Trust Ltd [2007] STC 880 Carnwath LJ referred to a number of other judgments of the Court of Justice, as well as two decisions of the Court of Appeal, Customs and Excise Commissioners v Southern Primary Housing Association Ltd [2004] STC 209 and Dial-a-Phone Ltd v Customs and Excise Commissioners [2004] STC 987, and summarised the effect of those authorities, at [9]: 
“(i) input tax is directly attributable to a given output if it has a ‘direct and immediate link’ with that output (referred to as ‘the BLP test’); (ii) that test has been formulated in different ways over the years, for example: whether the input is a ‘cost component’ of the output; or whether the input is ‘essential’ to the particular output. Such formulations are the same in substance as the ‘direct and immediate link’ test; (iii) the application of the BLP test is a matter of objective analysis as to how particular inputs are used and is not dependent upon establishing what is the ultimate aim pursued by the taxable person. It requires more than mere commercial links between transactions, or a ‘but for’ approach; (iv) the test is not one of identifying what is the transaction with which the input has the most direct and immediate link, but whether there is a sufficiently direct and immediate link with a taxable economic activity; and (v) the test is one of mixed fact and law, and is therefore amenable to review in the higher courts, albeit the test is fact sensitive.”
15.	The basis of the Commissioners’ disputed decision was put in the letter of 17 May 2007 in these terms:
“The advertising costs, although relating to the sale of property by vendors, also promote the business as a whole. This is directly evidenced by reference to mortgage services in adverts. From discussions with staff on our visit to Connells it was found that enquiries relating to property sales and resulting purchases were seen as an opportunity to promote other services including mortgage products that resulted in exempt outputs. The advertising is seen as an integral part of the process to attract customers resulting in benefits to the business as a whole.”
16.	The later letter, written following the review, went into the matter in more detail and included observations on a number of the authorities to which I was referred, and which had been mentioned by Carnwath LJ in Mayflower Theatre Trust. The letter included this passage:
“The Commissioners’ view is that there is a direct and immediate link between the advertising and the exempt supplies. It does not matter what the principal supply is. If there is sufficient direct and immediate link with the principal supply and another supply then the costs are used for both supplies.”
17.	Skipton’s case is, in essence, that there is no sufficient link between the advertisements and the exempt supplies. Miss Sloane argued that there could be no possible room for doubt that the advertisements had a direct and immediate link with the taxable estate agency business (a proposition with which Mr Mantle did not disagree). She did not argue that there was no link of any kind between the advertisements and the mortgage services the group offered; but it was not the direct and immediate link which, as the Court of Justice had explained in BLP, was the essential criterion. A general commercial link, which was the most which could be said to exist here, was not enough. The assertion in the letter of 17 May 2007 that the advertising was “an integral part of the process to attract customers resulting in benefits to the business as a whole” was not only contrary to the evidence, but also misrepresented the relevant test. 
18.	This appeal, Miss Sloane said, was on all fours with Royal Agricultural College v Customs and Excise Commissioners (2001, VAT Decision 17508), a decision cited with approval by the Court of Appeal in Dial-a-Phone and in Mayflower Theatre Trust. There, the tribunal rejected the taxpayer’s argument that advertising of the college designed primarily to attract students had a sufficient link with taxable supplies, essentially those made by the college in its bar and shop to the students who enrolled in response to the advertising. The tribunal saw “no direct link between the advertising which is plainly directed at recruiting students for the college, and the subsequent, and indirect, link with eventual taxable supplies”. The position was the same here: the advertising was directed at the sale of houses, and any connection with the mortgage services which were supplied was subsequent and indirect. The most that could be said was that there was a commercial link in as much as a purchaser of a house could then be offered related services, but that opportunity was indistinguishable from the opportunity of selling goods to the students whom the advertisements had attracted to the college. Similarly, in Mayflower Theatre Trust, there was no sufficient link between the costs of a theatre production and the opportunity of selling catering and merchandise to those who attended the theatre.
19.	Most of the present-day advertisements did not refer to mortgage services at all, and those that did made only a passing reference to them. They were designed to attract prospective purchasers of the properties the estate agency businesses had for sale, and any benefit which accrued to the remainder of Connell Group’s business was no more than incidental. The Commissioners’ argument amounted to an assertion of a generalised link which was neither direct nor immediate, and their contention that the advertisements were of benefit to the business as a whole showed that they were applying the wrong test, since benefit was not to be equated with use. It may be that “but for” the advertisements prospective purchasers would not enter the branches, and become prospective clients of the mortgage service, but as the Court of Appeal had made clear in Southern Primary Housing Association, “but for” was not the test; the link had to be much closer.
20.	For the Commissioners, Mr Mantle relied principally on Dial-a-Phone, a decision which, he said, contained a most careful analysis of the correct approach, and one which was not supplanted by the later decision in Mayflower Theatre Trust. The question in Dial-a-Phone was whether advertising costs incurred by a company whose principal business consisted of retail sales of mobile phones with associated airtime contracts, but which also sold insurance of the phones, was (as the company contended) wholly attributable to its taxable supplies of phones and airtime contracts, or partly to those supplies and partly to the supplies of insurance, as the Commissioners maintained. The advertisements offered three months’ free insurance, but Dial-a-Phone’s sales staff endeavoured to persuade customers taking up the offer to purchase insurance to cover the phone after expiry of the three-month period. It earned commission on the premiums such customers paid, but did not receive any payment in respect of the initial three-month period.  At [74] Jonathan Parker LJ said
“ … it is important to bear in mind that (as the Advocate General observed in Abbey National [plc v Customs & Excise Commissioners (Case C-408/98) [2001] STC 297] a ‘direct and immediate link’ may exist between the marketing and advertising costs and the insurance intermediary services despite the fact that there may be an even closer link between those costs and Dial-a-Phone’s taxable supplies.  In other words, the quest is not for the closest link, but for a sufficient link.”
21.	The position was, Mr Mantle said, very similar here. While the main focus of the advertisements was the sale of the featured properties, one could not disregard the other material which appeared in them. There was, in some, an express reference to mortgage services, including the “Headstart” facility, and all of the advertisements invited readers to call into the branch to obtain more information, which afforded the staff the opportunity of offering them mortgage and insurance services. The websites which readers were directed to carried links to those services. This was not, as Miss Sloane had suggested, a “but for” test; the advertisements had as one of their objectives the encouragement of prospective purchasers to enter the branches in order that the staff could attempt to sell not only a house but other services as well. It was quite impossible to say there was no direct link between an advertisement which encouraged prospective purchasers to enter the branch and what happened when they did so. 
22.	References to the agency’s having won awards and the customer testimonials were designed not to sell houses but to promote the agency. Reputational advertising, that is the promotion of the advertiser’s image without publicising any particular service, had been recognised by the VAT and Duties Tribunal in Britannia Building Society v Customs and Excise Commissioners (1997, Decision 14886). Though there was no exact parallel with that case here, those parts of Connells Group’s advertisements could not be said to be connected to the sale of any property, or the advertised properties generally; they were intended to promote the agency.
23.	As Dial-a-Phone showed, one looked for a sufficient link, rather than only the closest. Jonathan Parker LJ went on to say, at [75],
“It follows that it matters not that the insurance intermediary services may be viewed as being in a commercial sense secondary to the making of the taxable supplies, or even that they may be provided only after a taxable supply has been made, provided that a sufficient ‘direct and immediate link’ exists between them and the marketing and advertising costs.”
24.	Here, it was quite clear that the promotion of the other services provided by the agencies was more than merely incidental, or a consequence of the success of the advertising, as in Royal Agricultural College; the advertisements set out to promote the other services, in the same way as the advertisements in Dial-a-Phone had set out to promote sales of insurance. Royal Agricultural College was no more than an example of a case in which no direct link could be established. The fact that the promotion of the overall business was, as he conceded, a subordinate purpose of the advertisements was immaterial; the advertising was designed to do, and did, more than merely sell houses and a proportion of the cost was used for those other purposes. The Commissioners’ approach to the analysis was entirely consistent with what Carnwath LJ had said at point (iii) in the extract from his judgment in Mayflower Theatre Trust which I have set out above: objective analysis of the use of the inputs is necessary. 
25.	Although Connells Group no longer uses advertisements with a “strap line” I was asked to give my view about those advertisements as well as those now in use, and I shall deal with those advertisements first.
26.	It is in my view impossible to argue that an advertisement which mentions the fact that the advertiser offers mortgage services is not advertising those services. One has only to pose the question “why were mortgages mentioned?” to see that the answer is obvious. The fact that the primary purpose of the advertisement is, plainly, to sell houses and that, as in some cases, the reference to mortgage services consists of a single word does not seem to me to alter that conclusion. The mortgage service Connells Group supplies is a distinct service, capable of being supplied independently of the sale of a house. If the advertiser chooses to mention something he supplies he must in my judgment be taken to intend to promote that supply. Though ultimate aim is not the test, it seems to me that in the case of advertising what the advertiser intends to promote is likely to be the best available guide to what he is in fact promoting. I agree with Mr Mantle that in these cases there is no equivalence with Royal Agricultural College; there is a closer, though still not exact, parallel with Dial-a-Phone, where the insurance was specifically mentioned in the advertisements. I have concluded that in those cases in which the “strap line”, even if briefly, mentioned mortgage services the input tax incurred must be regarded as a cost component of both taxable and exempt supplies, and was therefore residual. The same conclusion must apply to any advertisements now used which promote the “Headstart” facility, or in some other way indicate that the branch provides mortgage services.
27.	I have come to the opposite conclusion in respect of those advertisements which do not overtly mention mortgage services. Here, I do think there is a parallel with Royal Agricultural College, since the opportunity to supply mortgage services is not, objectively considered, the aim of the advertisement but a consequence of its success, as the opportunity to sell taxable goods to its students was a consequence of the college’s success, by means of its advertisements, in attracting them. That is so, in my judgment, whether the prospective purchaser calls into the branch or views the website; the advertisement may have created an opportunity which would not otherwise have arisen, but there is nevertheless no direct and immediate link between the advertisement and the supply of that other service. I reach the same conclusion with respect to those advertisements which refer to the agency’s having won an award, or which carry a customer testimonial which does not expressly promote mortgage services. In these cases, in my judgment, there is no more than an indirect link with the supplies of mortgage services and, as the authorities show, that is not enough.
28.	I therefore allow the appeal save to the extent that advertisements, following the direction of 17 May 2007, have mentioned the availability of mortgage services. If the parties are unable to agree on the application of that conclusion to the costs which Skipton has incurred I give permission for either of them to apply to have the hearing continued. 
29.	This was, of course, an appeal initially brought to the VAT and Duties Tribunal and, in accordance with the usual practice before that tribunal, Miss Sloane asked for a direction in respect of costs should Skipton succeed, a direction which I am able to make by applying the provisions of para 7 of Sch 3 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009. It seems to me that, Skipton having substantially succeeded, it should have its costs and I so direct. If they cannot be agreed they are to be the subject of detailed assessment on the standard basis by a costs judge of the High Court.

COLIN BISHOPP
TRIBUNAL JUDGE
RELEASE DATE:31 July 2009