[2010] UKFTT 520 (TC)

TC00775

Appeal number: LON/2009/0368

VAT – cancellation of registration -  VATA, Sch 1, para 13(3) – claims for recovery of input tax – whether appellant carrying on a business

FIRST-TIER TRIBUNAL

TAX 

	PRITI LEE	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: JUDGE BAL DHALIWAL (Chair)
				JUDGE ROGER BERNER									

Sitting in public at 45 Bedford Square, London WC1 on 26 July 2010

The Appellant appeared in person

Rory Dunlop, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Mrs Lee made a number of appeals to the former VAT and Duties Tribunal in relation to the various matters we shall describe in this decision.  On 7 January 2010 Judge Berner heard applications by both Mrs Lee and HMRC to strike out all or part of the other party’s case.  As a consequence the judge directed that the only four issues falling for determination in this appeal (following consolidation of all outstanding appeals) are as follows:
(1)	The cancellation by HMRC of Mrs Lee’s VAT registration by letter dated 14 December 2008.
(2)	   Assessments to VAT issued by HMRC on 18 June 2007 in respect of the recovery of input tax claimed by the Appellant for the VAT periods 12/05 and 03/06.
(3)	   Rejection by HMRC on 14 June 2007 of Mrs Lee’s claims for input tax credit upon goods and services purchased between 1 March 2001 and 30 September 2005 submitted by way of voluntary disclosure on 27 April 2006.
(4)	   A claim for interest in respect of the above matters.
2.	As we shall describe, determination of each of these issues depends, in the first instance, primarily on the question whether, at the relevant time or times, Mrs Lee was carrying on a business.
3.	Mrs Lee appeared in person, assisted by her husband, Mr Mark Lee.  HMRC were represented by Rory Dunlop.
The facts
4.	We set out first the background to, and history of, the various disputes that have arisen between Mrs Lee and HMRC, and which have culminated in this appeal.  We shall then make further findings of fact in relation to the crucial question of the nature of the activities undertaken by Mrs Lee at the relevant times.
Background and history
5.	Mrs Lee purchased a leasehold flat in Kingsley Court, in Salford in or around December 1990. The freeholder of the building, Manchester Property Limited (“MPL”) had allowed the building to become dilapidated to the extent that it was demolished by Salford City Council (“the Council”) in mid-2001 under the provisions of the Housing Act 1985 on the grounds that it was unsafe.  The Council incurred costs of £110,000 in demolishing this building, clearing the grounds and put a charge on the land in respect of these costs.
6.	Mrs Lee and two others sued the joint liquidators of MPL (which, in the meantime, had become insolvent). The result of these proceedings was an Order made on 24 March 2003 by the High Court.  By the Order the title in the bare land on which Kingsley Court had stood was vested in Mrs Lee, subject only to the local land charge in favour of the Council.  By the terms of the Order, Mrs Lee was required to make reasonable endeavours to procure the sale of Kingsley Court, the proceeds being applied according to the provisions of the Order.
7.	Mrs Lee applied to be registered for the purposes of VAT with effect from 1 March 2001.   The application for VAT registration was signed by Mrs Lee on 25 March 2004.  The business was described as “Property Development”.  The application stated that no taxable supplies had yet been made, but Mrs Lee notified HMRC that she had opted to tax Kingsley Court with effect from 1 March 2004.
8.	By letter dated 24 March 2004, Mrs Lee’s then advisers, Smith & Williamson, stated to HMRC:
“The property was demolished without our client’s knowledge and compensation sought. The land was purchased by our client with the intention to develop the land and grant either a long lease or freehold.”
The letter also states:
“As you will see we are requesting retrospective registration to the date at which the intention to purchase the land arose and fees were incurred in relation to the acquisition.”
9.	Mrs Lee was registered for VAT with effect from 1 March 2004.
10.	Mrs Lee then sold the land on which Kingsley Court had stood to the Council on 31 March 2004 for £455,000 plus VAT of £79,625. The relevant clause in the agreement for sale is special clause 15, which is to the effect that:
“the [Council] shall retain the sum of £79,625 (which represents the VAT payable in this transaction) on completion such monies to be paid to the Seller as soon as the Buyer has received a copy from the Seller a VAT invoice showing a VAT registration number together with a copy of the Buyer’s option to tax in respect of the property.”
11.	On 5 April 2004, HMRC requested further information by issuing a form VAT 5. They sought information which included the proof of ownership of the land and copies of any planning permission.  It was following this request that Mrs Lee telephoned the VAT Registration Unit and advised them that she owned the land, that there was no planning permission in place and that the bare land was sold on 31 March 2004.
12.	In a letter dated 19 May 2004 to HMRC, Smith & Williamson advised that the land had been sold to the Council for a price plus VAT, and that there was no planning permission as the site previously held a block of flats.  A copy of the land registry entry provided showed Mrs Lee as the title holder with effect from 28 April 2003. Also enclosed was a letter from Edwards Symmons & Partners to Mrs Lee dated 8 April 2004, which confirmed that Mrs Lee had discussed various options for the site, including (1) developing the site for residential purposes herself; (2) developing the site for residential purposes as a joint venture; and (3) selling the site.  The final decision made by Mrs Lee was to sell the site.  Edwards Symmons & Partners advertised the land and a sale was agreed with the Council.
13.	A handwritten note on a letter dated 7 May 2004 from Mrs Lee to Smith & Williamson reads:
“All you needed was this letter as proof of evidence of my land sale as part of an ongoing business activity, which indeed it is, by me.”
This note from Mrs Lee was addressed to HMRC, as was a faxed copy of the sale agreement for Kingsley Court sent by Mrs Lee to HMRC on 20 May 2004.
14.	By letter dated 28 May 2004 HMRC acknowledged the Option to Tax as effective from 1 March 2004.
15.	There followed a series of exchanges between HMRC and Mrs Lee regarding the revocation of the Option to Tax.  This culminated in an email from Mrs Lee to HMRC on 21 June 2004 confirming her wish not to revoke the Option to Tax.
16.	Mrs Lee then issued a “VAT” invoice to the Council on 21 June 2004.  We find that the Council treated the document as a VAT invoice as it paid the amount due together with VAT of £79,625 on 24 June 2004 and subsequently claimed the full amount from HMRC.
17.	On 24 September 2004 Mrs Lee telephoned HMRC’s National Advice Service querying whether the classification codes affected what input tax could be claimed as she felt that the code that had been allocated to her was too narrow for her line of work.  She was advised that as long as the input tax was incurred in making taxable supplies, then she would able to claim back the VAT.  Mrs Lee enquired what was meant by “taxable supplies”, to which she was given the reply that these were any supplies that were not exempt.  She also enquired whether she should have an option to tax every piece of land if she wished to charge VAT upon its sale and was advised that land and property were exempt unless an option to tax was placed upon the land. Further clarification was provided that in respect of all supplies related to the business input tax could be reclaimed and that such supplies included things such as office materials, mobile phones and similar items for business use as long as supporting evidence was available.
18.	None of Mrs Lee’s VAT returns for any of the periods relevant to this appeal, including for the period of the sale of Kingsley Court, declared any VAT due on any sales or other outputs.
19.	Mrs Lee, in a letter to HMRC dated 27 October 2004, raised for the first time that the sale of Kingsley Court might in fact be outside the scope of VAT.  This letter also included a copy of the High Court Order under which the land had been sold, which had not previously been submitted to HMRC, and stated:
“… it cannot be said, that the sale of Kingsley Court was in the course of business, rather, and quite simply, it is effectively realising damages awarded by the Court, under Order”.
In referring to Mrs Lee’s advisers and accountants the letter continued:
“I cannot understand why they did not pick up the fundamental issues stated above, and therefore allowed their clients, wrongly it seems, to pursue a Vat registration in respect of my sale of the land at Kingsley Court …”.  
	and
“Assuming the above analysis to be correct, it would appear that the Vat registration is inappropriate, in which case I enclose and return the vat return form duly marked as inapplicable”.
20.	In a subsequent letter dated 17 November 2004, Mrs Lee stated, in effect, that the High Court had vested the land in her in order to provide compensation for her and two other independent parties, in her case in order that she might recoup the losses she had incurred from her involvement in property litigation over a three-year period.  She stated that she had at all times a bona fide intention to run a property business with the compensation from the land and had discussed her business ideas with her land agent.  However, she reiterated that it could not be said that the sale of the land at Kingsley Court was in the course of business but quite simply realising damages awarded under a Court Order.  She made the point that it would thus appear that the Option to Tax was simply wrong, but suggested that the VAT registration could remain in force.
21.	By letter dated 23 March 2005, HMRC confirmed that there would be no VAT chargeable on the sale of Kingsley Court.  HMRC agreed with Mrs Lee that the sale was a non-business transaction and not a consideration for VAT as the supply was for compensation.  They referred to guidance stating that compensation payments for loss are outside the scope of VAT as they are not consideration for a supply.  Mrs Lee was advised that any “VAT” charged on the sale of the property would need to be returned to the purchaser and that no input tax incurred in the sale would be recoverable.
22.	On 21 February 2006 Mrs Lee submitted a letter claiming £28,435.07 purportedly in respect of claims for recovery of input tax for the period from the date of her VAT registration.
23.	On 3 March 2006 this claim was refused by HMRC on the basis that Mrs Lee was not making taxable supplies and that for that reason the VAT was not input tax.  
24.	Mrs Lee asked for this decision to be reconsidered in a letter dated 6 March 2006 in which she stated, effectively, that, although the land sale was not a taxable supply, she was in business generally.
25.	On 27 April 2006 a Voluntary Disclosure claiming £33,307.77 was submitted by Mrs Lee in respect of goods and services received by her from 1 March 2001 to 30 September 2006.  
26.	In a further letter to HMRC dated 8 June 2006, Mrs Lee contended:
“I am in business… As I am in business for myself, the intolerable delay in you making payment to me is hurting my business, I need to make new land investments”
Similar statements were made in further letters of 28 June 2006 and 4 September 2006.
27.	Following unsuccessful attempts by HMRC to visit Mrs Lee to review her records, on 1 November 2006 HMRC issued an assessment against Mrs Lee for £79,625 for the tax period 09/04, the period which related to the VAT on the sale of Kingsley Court.  However, as a result of a review, HMRC notified Mrs Lee by letter dated 8 February 2007 that the assessment was inappropriate and should be cancelled. This took effect on 15 February 2007.  HMRC also confirmed that the sale of Kingsley Court was not a supply for VAT purposes.  A demand was therefore raised under para 5, Sch 11, Value Added Tax Act 1994 (“VATA”) on the basis that Mrs Lee had raised a VAT invoice against the Council in respect of the sale of the land at Kingsley Court in circumstances where she was not entitled to do so.  Mrs Lee appealed that demand, but her appeal in that respect was struck out by the VAT tribunal on the basis that there was no appealable matter within that tribunal’s jurisdiction.
28.	On 29 March 2007 and further on 23 May 2007, HMRC wrote to Mrs Lee in respect of her Voluntary Disclosure and in respect of repayments sought by way of VAT returns.  HMRC indicated that, in the absence of any further information, they would refuse to pay Mrs Lee’s Voluntary Disclosure claim and would also disallow her claim made by the VAT returns for the periods 12/05 and 03/06 by way of raising a “best judgment” assessment under s 73 VATA for tax for the same net sum together with interest.
29.	On 14 June 2007, in the absence of any further information from Mrs Lee, HMRC disallowed the claim made by way of Voluntary Disclosure on the basis that they were not satisfied that she was entitled to make a claim for repayment of input tax. This was confirmed by letter dated 22 August 2007.  At the same time the claims in respect of the period prior to 1 March 2004 were in any event said to be invalid.  On 18 June 2007, an assessment was issued to recover the input tax claimed of £2,134.32 for VAT period 12/05 and £965.57 for VAT period 03/06, again on the basis the claims had not been substantiated.  Interest was applied of £239 and a further misdeclaration assessment in the sum of £320.
30.	On 2 August 2007, Mrs Lee delivered to HMRC by hand a bundle of documents, including expenses invoices for the period of 2001 to 2007 and a letter dated 7 July 2007 claiming a total of £434,496.62 including £53,332.20 by way of input tax.
31.	On 17 June 2008, HMRC wrote to Mrs Lee asking her to provide evidence that she had made taxable supplies or that she intended to make such supplies by way of business.  In addition, she was advised that if she did not provide such evidence within three weeks, her VAT registration would be cancelled.
32.	On 5 July 2008, Mrs Lee responded to HMRC, stating that she intended acting as a property consultant for overseas businesses and that at that time she was engaged in discussions with overseas property developers to negotiate contracts for such property consultancy.  Mrs Lee further stated that the invoices that she would raise would also include an amount for charge to VAT.  At the same time, she submitted a schedule of claims, up to that time totalling £610,784.30.
33.	On 28 July 2008 HMRC wrote to Mrs Lee asking for confirmation of any past or current business activities. Mrs Lee responded on 27 August 2008 stating that her intention to trade was “lodged with” the option to tax team and an “intention statement”, on the basis that she wished to run a business from her share of the proceeds of sale of the Kingsley Court land, had been made by her under advice at that time.
34.	On 31 August 2008, HMRC received a letter from Mrs Lee setting out what she contended to be her business activities and advising that she intended to form a limited company.   Mrs Lee also stated:
“I work in property, I deal with all matters. I have a good faith intention to apply vat charge in accordance with the provisions of the vat act.
The consultancy part of my work can attract 17.5% vat charge in a similar way to how solicitors charge vat ie on services and expenses but not on disbursements. I will of course double-check with my tax expert.
As aides to promoting business, I am a member of the Association of the international property professionals, recently formed out of London, a business to business group, where members meet to do business with each other.  I am making myself known as a would be agent to assist overseas professionals in uk.
I have recently signed a lease for property in London, where I can be, to be readily available to my clients and very close to Olympia and Earls Court, venues for property exhibitions, so that I am available to front exhibitions for any clients who are overseas but require representation.
I am a member of the institute of directors worldwide, based out of London (pall mall), thus I have instant access to meeting rooms and all other facilities to promote and sustain business at senior level, in addition to my own facilities.
I attend seminars talks and take part in social events. You will appreciate a lot of leads for work may be gathered by meeting like minded professionals. I also attend training courses, to remain up to date with skills and knowledge.  By training, I have a law degree and professional legal qualifications, generally with firsts, and some distinctions, both here and at the new york bar. Thus I have useful commercial experience, including from being the legal officer for Ericsson.
The said sale of land was successful result of my 3 year litigation against Manchester Properties Limited, which set a new precedent in property matters and law. The court order which you have a copy of, is the evidence of that event, Thus I have a credible base of knowledge which which [sic] to run a business.”
35.	On 29 September 2008, HMRC wrote to Mrs Lee and advised her that it was their view that she had not established an intention to make taxable supplies.  This was followed on 14 December 2008 by a letter from HMRC to Mrs Lee confirming their intention to cancel her VAT registration with effect from the original registration date of 1 March 2004.  Subsequently, on 8 January 2009, HMRC wrote to Mrs Lee notifying her that her VAT registration had been cancelled with effect from 31 December 2007.
36.	In the meantime, on 20 December 2008, Mrs Lee lodged appeals with the VAT and Duties Tribunal (amongst others) against the decision to cancel her VAT registration, and seeking repayment of input tax claims and repayment of interest.
37.	Subsequently, HMRC realised that the letter of 8 January 2009 had erroneously stated that Mrs Lee’s VAT registration had been cancelled with effect from 31 December 2007.  They therefore wrote to Mrs Lee on 20 July 2009 to inform her that the registration had been cancelled in accordance with para 13(3), Sch 1 VATA with effect from the day on which she was registered, namely 1 March 2004.
38.	As regards VAT returns rendered by Mrs Lee, we find, firstly, that no sales or output tax have been declared by Mrs Lee at any stage.  For quarterly VAT periods from 09/04 to 12/07 Mrs Lee has made claims for input tax recovery totalling £65,585.79. Two of those claims, namely £2134.32 for period 12/05 and £965.57 for period 03/06 were repaid by HMRC to Mrs Lee on 12 May 2006.
39.	Prior to the decision being undertaken to de-register Mrs Lee, she had submitted income tax returns which declared her only income as being from employment and directorships from 1 March 1997 to 1 February 2001.  For years 2002 and 2003, in the tax returns Mrs Lee described her activities as “working on litigation at home, funded from savings, not an employee”.  Further income tax returns were submitted up to 2007/08.  All of the returns describe the income as being from self employment, with the description of the business being given as property.
Mrs Lee’s activities
40.	That deals with the background and history to Mrs Lee’s appeals.  We must now turn to some more detailed findings of fact in relation to her activities at the material times.
41.	We heard oral evidence from Mrs Lee, who was cross-examined by Mr Dunlop.  Mrs Lee also produced at the hearing three large bundles of documents.  We have considered all of these together with the three equally substantial document bundles produced by HMRC, in reaching our conclusions.  We should add also that following the hearing the Tribunal received further correspondence from Mrs Lee which she asked should be drawn to our attention.  It would not be proper, or in the interests of justice, for us to consider such material after a full hearing, and we have not done so.
42.	We make the following findings of fact in relation to the activities undertaken by Mrs Lee in the relevant period and the transactions carried out by her.
43.	Mrs Lee purchased, at a price of £32,500, funded with the assistance of a mortgage from National Westminster Bank, a flat at Kingsley Court for the sole purpose of renting it out to tenants.  This she did up to the time of the demolition of the block in which the flat was located in 2002.  As a result of this demolition Mrs Lee was left with a loss of rental income of approximately £300 per month, and her liabilities under the bank mortgage.
44.	The Order made on 23 April 2003 in the High Court was the culmination of a period in which Mrs Lee was engaged in substantial litigation against the liquidators of MPL.  At that time her losses consequential upon the demolition and MPL’s insolvency had been estimated at more than £330,000, covering the purchase price of the flat, loss of rental income, loss of belongings and personal effects, the liability to the bank, liability under legal charges (including a charge for demolition costs) and legal costs (themselves amounting to more than £76,000, including VAT).
45.	In 2002 Mrs Lee set up a company, Picham Limited.  Her intention at that time, which we accept, was to undertake work in her own property business, through the company.  This would, it was thought, include everything related to property matters, from agency, consultancy, buying and selling property, property management and dealing with rentals, to associated legal and commercial matters.
46.	Under the terms of the court order Mrs Lee was given the conduct of the sale of Kingsley Court and was obliged to use reasonable endeavours to procure such a sale.  That the order was directed at a sale is clear from its underlying purpose to compensate the relevant parties out of the proceeds of sale.  A sale was the only form of realisation of the property envisaged, and Mrs Lee’s obligations were, subject to further order of the court, to use reasonable endeavours to achieve that end.
47.	The letter from Edward Symmons & Partners of 8 April 2004 to HMRC needs to be read in this context.  Whilst it was perfectly possible for Mrs Lee to arrange for there to be a sale of the land following a development, whether by Mrs Lee alone or by her in a joint venture, and we accept that she had received advice in relation to these options, there is no evidence that any steps were taken by Mrs Lee to pursue the development alternatives.  We find that the only option that was pursued was the sale of the bare land.
48.	We accept that the sale of the bare land entailed advertisement and a marketing campaign.  We also accept that initial interest was expressed by a number of developers before the ultimate sale was agreed with the Council.  In the course of this Mrs Lee was engaged in seeking for herself the best possible price and the best possible net outcome, including taking into account the advice she was receiving regarding the VAT considerations.  This included the insertion into the eventual contract with the Council of what is termed an “overage clause” which provided for additional consideration to be paid to Mrs Lee if there were to have been an on-sale of the property by the Council for use other than Class 3 residential use.  We also accept, in this connection, that Mrs Lee was at the relevant time engaged, with her lawyers, in clearing off encumbrances on the title in order to make the property marketable.
49.	The original suggestion that Mrs Lee might be able to benefit from recovery of VAT in relation to expenses incurred in connection with the sale of the land emanated from the Council, which was itself able to recover any VAT that would be charged on the sale.  Mrs Lee took advice from Smith & Williamson, who advised her on the requirement that the sale of the property had to be in the course of a business, and that this aspect might be questioned by HMRC.  Nevertheless, in discussions with Smith & Williamson, Mrs Lee informed them of her intention to continue a property business.
50.	The Smith & Williamson advice was given to Mrs Lee on 9 March 2004.  At an earlier stage, in August 2003, the question of VAT had been raised as a contractual matter, and Mrs Lee’s response in a series of emails to Merricks LLP had been that she was not selling the land in the course of a business.  As she herself put it, “… I am a private person making a ‘one-off’ sale.”  This is consistent with other email correspondence in which Mrs Lee makes it clear that the purpose of the sale is to recoup her losses.
51.	Mrs Lee’s evidence, which we accept, was that her intention, through her property company Picham Limited, was to establish a property business of the nature we have already described, using the proceeds of sale of Kingsley Court that were due to her.  We turn therefore to consider what evidence there is of the establishment of such a business by Mrs Lee herself.
52.	Mrs Lee gave evidence of a number of activities which she argued constituted a property business.  The first was the letting out of rooms at her private residential address.  We accept that such lettings took place, but Mrs Lee provided us with no evidence at the hearing of when those rooms were let, to whom, and, for the relevant period, at what rent.  Such lettings as there were would have been exempt from VAT.
53.	The second activity of which we heard evidence from Mrs Lee was in respect of the letting of holiday accommodation in Spain.  Mrs Lee said that this activity had commenced in April 2003 (so at around the same time as the sale of Kingsley Court to the Council).  One property is owned, in Marbella, and Mrs Lee’s evidence was that this was occupied for holiday lets on Spain’s leading website.  She had a local agent with a team whom she paid for cleaning and gardening and other services.  Mrs Lee said that income of £8,000 to £9,000 was received in respect of these lettings, but we were shown no accounts, and we were unable from the evidence produced to find that any material activity of this nature had taken place in the periods relevant to this appeal.  In cross-examination it was put to Mrs Lee that in fact the vast majority, indeed probably all, of this income was rental income from Mrs Lee’s own residential property in the UK.  Mrs Lee was unable to provide any evidence to the contrary.  We find that most, if not all, of the income referred to by Mrs Lee in this context derived from the letting of rooms in her own UK residence.
54.	We were shown a pro forma contract, in the name of Picham Limited, in connection with the Spanish property.  Mrs Lee’s evidence was that this contract had been changed in this year (2010) from an earlier contract that had been in her name.  However, we saw no such contract, and in no previous correspondence that we saw had it at any time been suggested that Mrs Lee was herself carrying on a holiday lettings business.
55.	In relation to the third activity said by Mrs Lee to constitute a business, Mrs Lee told us that she had made bona fide efforts to undertake a buy-to-let business in the UK.  She had received a price list in December 2003 from a firm called Wilson Connolly and had reserved two apartments with the intention of buying one of them.  She had obtained a mortgage offer, in part to fund expenses on Kingsley Court and partly to finance the buy-to-let.  However, the deadline to exchange was very tight and could not be achieved.  The proposed purchases were therefore aborted.  Mrs Lee said that there were other buy-to-let property proposals, one in Farnham, Surrey and one in London.  A contract had been signed in respect of the Farnham property, but again, this time because of an issue with a sitting tenant, the purchase had not proceeded.  We find that all the proposals were for the purchase and letting of residential property (in respect of which all supplies would have been exempt from VAT), and that no transactions or lettings were in fact undertaken.
56.	Fourthly, Mrs Lee gave evidence of what she described as her property consultancy activities.  She said that these comprised property services, such as undertaking exhibitions and representing developers in the UK, drafting rental contracts and assisting with tenders, and other commercial activities.  However, in evidence she confirmed that she had only once successfully been engaged as a consultant, in 2008.  We saw a copy of an email from Kanika Developments Ltd in Cyprus referring to a visit undertaken by Mrs Lee to Cyprus to view certain projects there.  An agency agreement was entered into so that Mrs Lee could be appointed as a “Kanika Developments Associate”.  In her application for VAT registration there had been no mention of a consultancy business.  At March 2004 Mrs Lee’s ideas around the establishment of a property consultancy were ill-defined at best.  Despite Mrs Lee’s evidence that there was a business plan at this time, we saw no evidence of that, and the absence of any reference to it in any of the documentation and correspondence we have seen leads us to find that there was no such plan; the most there could have been was an idea and aspiration in Mrs Lee’s own mind.  Mrs Lee did not at any time make any return of VAT outputs referable to a property consultancy business carried on by her.
57.	Mrs Lee made much of her membership of the Institute of Directors and (although this was disputed by HMRC) of the Association of International Property Professionals.  As to the latter, the only evidence produced was an e-mail addressed to Mrs Lee from the AIPP informing her that tickets to the AIPP Awards 2008 were available to non-AIPP members.  We find that Mrs Lee has failed to show that she was a member of AIPP.  In relation to the IoD, the documents show arrangements for a visit to the Institute’s advisory service for members in October 2008, and a room booking for a half day in July 2008.  This latter booking was, however, in the name of Picham Limited, and not for Mrs Lee in her individual capacity.  We were not shown an invoice, but the information on costs showed that no VAT was chargeable on the room hire in any event, although the hire of a screen incurred a cost of £30 plus VAT.
58.	A considerable number of invoices were produced in evidence.  These formed the basis of Mrs Lee’s claim for recovery of input tax.  They included invoices for various professional services, but in the main consisted of invoices for ordinary domestic expenditure, none of which contained any indication that it was for business purposes.  This included expenditure on furniture (which Mrs Lee told us was for her office at home), repairs for defective wiring at Mrs Lee’s home, utility bills for that address and a locksmith’s charge for the same property.  In addition we saw invoices for other personal expenditure such as vet’s bill’s and hospital bills.  We find that Mrs Lee has failed to demonstrate that any of these invoices related in any way to the carrying on of any possible business activity by her.  Some of the invoices related to the sale of Kingsley Court, comprising lawyers’ and accountants’ fees and land agents’ charges.  A claim was also made in respect of the demolition charges paid by the Council, but which were recouped (through the land charge) out of the proceeds of sale of the property.  There was no invoice to Mrs Lee in that respect. 
The parties’ contentions
59.	Mrs Lee contends that:
(1)	HMRC erred in cancelling the VAT registration as she was at the material time (namely 1 March 2004) (a) making taxable supplies, or alternatively (b) carrying on a business and intending to make taxable supplies in the course or furtherance of that business;
(2)	HMRC erred in raising assessments so as to recover input tax claimed by Mrs Lee for the VAT periods 12/05 and 03/06;
(3)	HMRC erred in rejecting on 14 June 2007 Mrs Lee’s claims for input tax credit upon goods and services purchased between 1 March 2001 and 30 September 2005; and
(4)	As a result of the official errors of HMRC, Mrs Lee is entitled to recover interest on the sums that she would have recovered by way of input tax credit.
60.	HMRC contend:
(1)	At the material time Mrs Lee was neither making taxable supplies nor carrying on a business and intending to make taxable supplies in the course or furtherance of that business.  HMRC acted properly in cancelling her registration on the basis that she was not registrable on 1 March 2004;
(2)	On the basis that Mrs Lee should not have been registered, she was not entitled to be repaid any sums by way of credit for input tax.  Further, even if Mrs Lee was registrable, she has not discharged the onus of proving that the invoices for the periods covered by the assessment related to taxable supplies;
(3)	Mrs Lee’s appeal against rejection of her claims for input tax recovery made by way of voluntary disclosure must fail for the same reasons as in (b); and
(4)	On the basis of HMRC’s contentions, the question of a claim for interests does not arise.
Discussion
61.	The key to determination of Mrs Lee’s appeals is the question whether, at the relevant time or times, she was carrying on a business for the purpose of VAT.  This depends on an examination of all the circumstances and in particular the characteristics of the activities carried on by Mrs Lee at the material times, having regard to the tests established by case law.  Those tests are best expounded in the judgment of Gibson J in Customs and Excise Commissioners v Lord Fisher [1981] STC 238.
62.	We turn first to consider whether, at the date of registration of Mrs Lee, or at any other time material for this appeal, she was carrying on a business.  Whilst the test in Lord Fisher should not be regarded as a checklist, we first of all examine the activities of Mrs Lee by reference to those tests.
Was the activity, at the material time, a serious undertaking earnestly pursued?
63.	 Mr Justice Gibson described this phrase as apt to “describe the sort of activity normally carried on by way of business or daily work”.  Whilst we have accepted that Mrs Lee did earnestly pursue her claim against MPL through the courts, that claim was not in our view related to any normal business activity.  It arose as a consequence of losses incurred by Mrs Lee as the owner of a residential property that was let.  That ownership and letting activity was not of itself a business activity.
64.	We have also accepted that Mrs Lee was actively engaged, after the property was vested in her by court order, in the process of the sale of the Kingsley Court land, both as regards establishment of a marketable title and the process of negotiation of an acceptable price.  Mrs Lee argued that whilst part of the purpose of the sale of Kingsley Court was compensatory, part was commercial.  The price, she submitted, was a commercially-negotiated amount.  There were, she argued, many commercial terms inserted into the sale and purchase contract; we have, by way of example, referred to the overage clause.
65.	We do not accept that the mere fact of a commercially-negotiated bargain for the sale of Kingsley Court is indicative of a business activity.  It is equally indicative of the natural desire on the part of any owner of property to maximise its sale value potential.  Considerably more would be required to show that a mere sale of property was in the course of a business.
66.	We accept Mr Dunlop’s submission that there is no evidence of any other economic activity at the time of Mrs Lee’s registration for VAT.  In that application Mrs Lee gave her intended business as “property development”, but there is none of the evidence which would normally be expected when a person is registering on the basis that they have a business that intends to trade.  There are no details of business arrangements made, no contracts, no evidence of efforts to enter into contracts, no details of any actual or proposed advertising or marketing plans and no business plans.  The letter from Edward Symmons & Partners describing the fact that Mrs Lee had chosen to sell Kingsley Court following discussion of certain development options in our view indicates a decision on the part of Mrs Lee at the material time not to undertake property development as a business.
67.	We accept that Mrs Lee intended to use her share of the proceeds of sale of Kingsley Court, at least in part, to finance future business projects that she had in mind.  She had established Picham Limited for that purpose.  We accept also that those ideas included the letting of rooms in her own home, and the purchase of residential properties in the UK for buy-to-let, and abroad for holiday lets.  But at no time relevant for the purpose of this appeal do we find that any of these activities were being carried on on a scale or in the nature of what could be described in any sense as the carrying on of business or daily work.  The letting of rooms in Mrs Lee’s home amounted to no more than personal exploitation of her property wholly lacking in any business characteristics.  The buy-to-let proposals came to nothing, and there is no evidence that those were conducted in a business-like way so as to distinguish them from a typical private investment.  In any event, none of these activities could have given rise to any taxable supplies.  We saw no evidence of any activity on the part of Mrs Lee as an individual in relation to the holiday let, and visits to Spain were once more indistinguishable from what might have been done by any private investor not carrying on a business.  Finally, there was in our view insufficient evidence of any property consultancy activity for us to conclude that this was a business carried on by Mrs Lee.  One contract in 2008 could not suffice, particularly in the absence of any return by Mrs Lee of any taxable supply.  Nor could the sale of Kingsley Court itself be treated as a business activity merely on account of it being intended to provide finance for future projects of the nature described by Mrs Lee.
68.	None of the invoices or other material produced by Mrs Lee, voluminous though it was, come anywhere near to establishing that she was operating a business at any time in the period under review.  The majority of the invoices fall into three broad categories, namely those relating to the pursuit of compensation regarding Kingsley Court, general expenses that could relate, in relevant circumstances, equally to private or business activities (for example, home gas, electricity and telephone bills), but in respect of which no apportionment had been made by Mrs Lee, and matters that are clearly private and unrelated to any possible business activity alleged by Mrs Lee, such as vet’s bills.
Was the activity an occupation or function which was earnestly pursued with reasonable or recognisable continuity?
69.	We do not consider that any of the activities that Mrs Lee put forward as business activities were, either at the date of her VAT registration, or at any other material time, pursued with any reasonable or recognisable continuity.  The sale of Kingsley Court was an isolated activity, occasioned not by any pattern of business activity of Mrs Lee, but by the circumstance of the method by which Mrs Lee was to be compensated under the court order.  We had no evidence of the actual lettings by Mrs Lee of rooms in her house, but even if a series of such lettings had taken place that of itself could not have resulted in that activity being regarded as a business.  There was no evidence of any continuity in respect of the holiday lettings.  The buy-to-let proposals came to nothing.  There was evidence of only one consultancy contract, and no return was made of any supply in that respect.
70.	 We do not consider that the evidence of Mrs Lee’s membership of the Institute of Directors can have any impact on the nature of Mrs Lee’s activities.  A meeting to obtain advice and one booking of a room for Picham Limited is not evidence of her business activity.
Did the activity have a certain measure of substance in terms of annual or quarterly value of taxable supplies made?
71.	On the facts we have found on the basis of the evidence before us, we find that at all material times there was no substance, in terms of taxable supplies, to any of the activities argued by Mrs Lee to be in the nature of a business.  Mrs Lee has made no return of any taxable supplies, and her activities around the letting of residential property could only have resulted in exempt supplies to the extent that any such supplies were made.
72.	We ought however at this point to say something about the sale of Kingsley Court.  Mrs Lee elected to waive exemption in respect of that property, such that a supply, if it was one made in the course of a business, would have been a taxable supply.  This was the basis upon which Mrs Lee rendered a VAT invoice to the Council on the sale of the land.  It was subsequently agreed between Mrs Lee and HMRC that, as the sale had been under a court order and all monies received from the sale would be distributed by way of compensation, this sale was outside the scope of VAT.  In her letter to HMRC dated 27 October 2004, Mrs Lee herself acknowledged that, although she hoped to run a property business with her share of the compensation from the land sale, that sale was not itself in the course of a business but was effectively realising damages awarded by the court.
73.	We consider that Mrs Lee was right in her conclusion that the sale of Kingsley Court was not in the course of a business.  This, in our view, is the reason that the sale of the land could not be a taxable supply.  We doubt whether in these circumstances, where a property is vested in a party for sale in order to compensate parties to an action, the case can properly be regarded as falling within the category of cases where compensation itself is not regarded as consideration for any supply.  However, in view of the fact that we consider that the sale was not in the course or furtherance of any business, and so could not have been a taxable supply in any event, and as we did not have the benefit of full argument on the point, we make no finding in that respect.
Was the activity conducted in a regular manner and on sound and recognisable business principles?
74.	Save for Mrs Lee’s evidently diligent pursuit of her claim against MPL and the sale of Kingsley Court, which we accept was conducted with due regard to commercial and financial factors associated with such a sale, we saw no evidence that any activity of hers was conducted on any recognisable business principle.  There was no evidence of any business plan.  In relation to the sale of Kingsley Court, as we have found, the mere fact that Mrs Lee conducted herself so as to maximise the financial outcome for herself does not make the sale, in the circumstances in which it arose, a business activity.
Was the activity predominantly concerned with making taxable supplies for a consideration?
75.	The context of this test, derived from Customs and Excise Commissioners v Morrison’s Academy Boarding Houses Association [1978] STC 1 (at para 6), was originally to look at the main activity in question – there the provision of boarding house accommodation for consideration – rather than a subsidiary activity such as, in that case, providing accommodation for students of the academy.  In Lord Fisher it was used in the sense that the contributions made towards the cost of the shoot were not the predominant concern of the taxpayer in organising it (see at p 252).  In our view the predominant concern of Mrs Lee at the time of her registration was to effect a sale of the land at Kingsley Court pursuant to the court order in order to recoup her losses.  She had considered and rejected proposals to develop the land.  Her activities in this respect were not accordingly predominantly concerned with the making of taxable supplies, notwithstanding that she had elected to waive exemption in respect of the land.
Were the (intended) taxable supplies of a kind commonly made by those who seek to profit from them?
76.	This question is of relevance to the sale of Kingsley Court, on the assumption (which we have found was not the case) that it was a taxable supply.  Even in that instance, in our view that sale, in the circumstances in which it was carried out, was not of a kind commonly made by those who seek profit.  Although sales of property are of course commonly made by those engaged in a property development or land dealing business, it is necessary to examine, not only the fact of the sale itself and the subject matter, but also the particular characteristics of the sale.  Here the sale was pursuant to a court order.  It had nothing in common with a sale in the course of a property business, notwithstanding that – as with any sale – the seller sought to negotiate the best possible deal.
Summary
77.	Taking all these matters into consideration, and stepping back to view the activities of Mrs Lee in the relevant periods as a whole, we are entirely satisfied that both at the date of her registration for VAT, and for all relevant periods thereafter, Mrs Lee was not carrying on a business for VAT purposes.
78.	Mrs Lee had, and appears to continue to have, aspirations and intentions to establish a property business.  Those aspirations appear primarily to be directed to carrying on that business in a corporate vehicle, whether Picham Limited or another company, but may also include carrying on business on her own account.  But merely aspiring to a business is not the same as carrying on a business.  The evidence in this case clearly shows, in our view, that Mrs Lee’s aspirations have not yet crystallised into anything that can approach being considered to be a business within the meaning of VATA.
Cancellation of registration
79.	In that context we now address the issues before us for determination.  The first is the cancellation of Mrs Lee’s VAT registration.  Cancellation was effected by HMRC under para 13(3), Sch 1 VATA, which provides as follows:
“Where the Commissioners are satisfied that on the day on which a registered person was registered he was not registrable, they may cancel his registration with effect from that day.”
80.	HMRC say that Mrs Lee was not registrable on 1 March 2004 because she did not satisfy either the compulsory registration requirements in para 1(1), Sch 1 or the voluntary registration requirements in para 9.  Those provisions were at the material time as follows:
“1- (1) Subject to sub-paragraphs (3) to (7) below, a person who makes taxable supplies but is not registered under this Act becomes liable to be registered under this Schedule—
(a)     at the end of any month, if the value of his taxable supplies in the period of one year then ending has exceeded [£58,000]2; or
(b)     at any time, if there are reasonable grounds for believing that the value of his taxable supplies in the period of 30 days then beginning will exceed £58,000.”
…
“9- Where a person who is not liable to be registered under this Act and is not already so registered satisfies the Commissioners that he—
(a)     makes taxable supplies; or
 (b)     is carrying on a business and intends to make such supplies in the course or furtherance of that business,
they shall, if he so requests, register him with effect from the day on which the request is made or from such earlier date as may be agreed between them and him.”
81.	On the basis of our finding that, at 1 March 2004 (the date of Mrs Lee’s registration), Mrs Lee was not carrying on any business, we can conclude that:
(a)	Mrs Lee was not making, and would not within 30 days of 1 March 2004, be making any taxable supplies.  In the absence of a business, a supply cannot be a taxable supply.  This is clear from Lord Fisher, where Gibson J said, in the context of a supply of services (at p 241): “It is … clear that a supply of services, made for a consideration … is not a taxable supply unless it is supplied by a taxable person ‘in the course of a business carried on by him’.”  Even if the sale of Kingsley Court was a supply, it could not have been a taxable supply as it was not in the course of a business.  Although Mrs Lee had elected to waive the exemption, such a waiver did not have the effect of deeming the supply – absent a business – to be a taxable supply; it merely operated to prevent the sale from falling within the exemption that would otherwise have applied (see para 2, Sch 10 VATA).  Accordingly Mrs Lee was not liable to be registered for VAT under para 1(1), Sch 1.
(b)	For the reasons given in (a) above, Mrs Lee was not making taxable supplies and accordingly was not entitled to be registered under para 9(a), Sch 1.
(c)	Mrs Lee was not carrying on a business and intending to make taxable supplies in the course or furtherance of that business.  Accordingly, Mrs Lee was not entitled to be registered under para 9(b), Sch 1.
82.	We conclude therefore that HMRC were right to be satisfied for the purpose of para 13(3), Sch1 that Mrs Lee was not registrable on 1 March 2004, and that they were entitled to cancel Mrs Lee’s VAT registration from that date, which they have done as notified to Mrs Lee on 20 July 2009.  Mrs Lee’s appeal in this regard is dismissed.
Input tax recovery
83.	We can take together Mrs Lee’s appeals against the assessments to recover amounts that were repaid by HMRC in respect of Mrs Lee’s claims for input tax recovery for periods 12/05 and 03/06 and HMRC’s refusal on 14 June 2007 to allow claims for input tax recovery in the period 1 March 2001 to 30 September 2005.
84.	It is a fundamental principle of VAT that a taxable person has the right to deduct VAT on goods and services that are used for the purposes of the taxed transactions of the taxable person (see now article 168 of the Principal VAT Directive 2006/112/EC).  That right is enacted as a matter of UK law by s 25(2) VATA which provides, in essence, that a taxable person is entitled to credit for allowable input tax according to s 26, and s 25(3) goes on to say that if the credit for input tax exceeds the output tax payable by the taxable person for a period, the excess will be paid to the taxable person.
85.	Section 26, so far as material to this appeal, provides:
“26 Input tax allowable under section 25
(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.
(2)     The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business—
(a)     taxable supplies;
(b)     supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;
(c)     such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection.”
86.	It can therefore be seen that a number of conditions have to be satisfied before VAT on supplies of goods and services to a person can be recovered.  The first is that the person must be a “taxable person”.  That expression is defined by s 3(1) VATA: “A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act.”  We have found, for the reasons we have given, that Mrs Lee’s registration was validly cancelled with effect from 1 March 2004.  She was not therefore registered for VAT at the material times (both before and after 1 March 2004), nor on the evidence before us was she liable so to be registered.  On that basis, at all relevant times, Mrs Lee was not a taxable person.  No input tax can accordingly be recovered by her.
87.	Secondly, the only VAT recoverable is input tax.  That expression is defined by s 24(1) VATA as follows:
“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.”
88.	The relevant VAT must therefore relate to goods or services used or to be used for the purpose of the taxable person’s business.  As we have found that Mrs Lee did not carry on any business at the material times, none of the VAT claimed by her in the relevant periods qualified as input tax, and consequently none of it was allowable as a credit.
89.	Thirdly, as we have described, s 26 allows a credit only in respect of input tax that is attributable to taxable supplies made by the taxable person in the course or furtherance of that person’s business.  There were no such supplies in this case.
90.	For these reasons we conclude that Mrs Lee had no entitlement to credit for any of the VAT claimed by her in respect of any of the relevant periods.  We therefore dismiss Mrs Lee’s appeal against both the assessment in this respect and the decision to reject her input tax claims.
Interest
91.	In view of our conclusion that no repayments of VAT are due to Mrs Lee, the question of interest does not arise.  Accordingly, Mrs Lee’s claim for interest is dismissed.
Decision
92.	For the reasons we have given:
(1)	We dismiss Mrs Lee’s appeal against cancellation of her VAT registration.
(2)	We dismiss Mrs Lee’s appeals against the assessment issued by HMRC on 18 June 2007 in respect of the recovery of input tax claimed by Mrs Lee for the VAT periods 12/05 and 03/06, and against the rejection by HMRC on 14 June 2007 of Mrs Lee’s claims for input tax credit for VAT incurred on goods and services purchased between 1 March 2001 and 30 September 2005.
(3)	We dismiss Mrs Lee’s claim for interest.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

BAL DHALIWAL
ROGER BERNER

TRIBUNAL JUDGES
RELEASE DATE: 28 October 2010