[2012] UKFTT 547 (TC)
TC02224
Appeal number: LON/2008/2433
VAT – INPUT TAX – was professional independent trustee
of pension schemes entitled to deduct VAT on services of third party advisers
relating to schemes? – held yes – are amounts paid by schemes in relation to advisers'
services consideration for supplies of services by trustee? – held yes – do
principles of legitimate expectation, fiscal neutrality and equal treatment
lead to different result? – held no – appeal allowed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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JIB GROUP LIMITED
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE GREG SINFIELD
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JOHN LAPTHORNE
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Sitting in public in London on 6 June 2012
Mr Craig Connal QC, solicitor
advocate, of Pinsent Masons LLP, for the Appellant
Mr Owain Thomas, counsel,
instructed by the General Counsel and Solicitor to HM Revenue and Customs, for
the Respondents
© CROWN COPYRIGHT
2012
DECISION
Introduction
1. Independent
Trustee Services Limited ("ITSL") is a professional trustee company
that acts as an independent trustee of several pension schemes where the
employers have become insolvent. ITSL instructed third party professional
advisers such as actuaries, solicitors, accountants and financial managers
("the Advisers") to provide advice in relation to the Schemes. The
Advisers’ fees were paid directly from the Schemes’ funds. ITSL claimed
repayments of VAT of £2,867,087.80 charged by the Advisers. The Respondents
("HMRC") refused ITSL's claims. The question that arises in this
appeal is whether ITSL is entitled to recover VAT charged by the Advisers
instructed by ITSL in its capacity as an independent trustee of pension
schemes.
2. The appeal
is brought in the name of JIB Group Limited as the representative member of a
VAT group of which ITSL is a member. Section 43(1) VAT Act 1994
("VATA") provides that any business carried on by a member of a VAT
group is treated as carried on by the representative member and any supplies of
goods or services by or to a member of a VAT group are treated as supplied by
or to the representative member. Accordingly, the representative member of a
VAT group is, in the ordinary course of events, the person affected by the
disputed decision of HMRC and the person who has standing to bring the appeal
(see Davis Advertising Service Ltd v Customs and Excise [1973] VATTR 16).
For the sake of clarity, however, we refer to ITSL in this decision.
3. There were
originally two appeals by ITSL but, as they raised the same issues, they have
been consolidated into one. This appeal is a lead case under Rule 18 of the
Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009. The issue
in the lead appeal and all the related cases is whether the VAT incurred on
third party costs can be recovered by statutorily independent trustees. Although
the appeal was made under section 83(c) VATA (now section 83(1)(c)) which
relates to “the amount of any input tax which may be credited to a person” and
the lead case and related cases were stated to concern VAT recovery, at the
hearing, both parties asked the Tribunal to make a decision in principle on
whether, in the event that ITSL is entitled to recover the VAT charged by the
Advisers, ITSL would have any liability to account for an amount of output
tax.
Facts
4. The material
facts in this appeal were agreed. We were provided with a statement of facts
not in dispute, a bundle of correspondence and other documentation and a
witness statement of Mr Richard Boniface, operations director of ITSL. Mr
Boniface gave oral evidence and was asked some questions to clarify points in
his witness statement by Mr Owain Thomas, who appeared for HMRC. On the basis
of the evidence, we find the facts to be as set out below.
5. ITSL is a
professional trustee company. It carries on a business of providing
independent professional trustee services for company pension schemes,
primarily where the company has gone into liquidation. ITSL is usually the
sole corporate trustee of such schemes although sometimes the former trustees
of a pension scheme will continue in that role for a short time after ITSL has
been appointed.
6. ITSL is
currently the independent pension trustee for around forty pension schemes
(“the Schemes”). ITSL may be appointed to act as a pension trustee in a
variety of circumstances. Some of ITSL's appointments as trustee are made by
the Pensions Regulator under section 23 of the Pensions Act 1995. Section 23
provides that, where an insolvency practitioner becomes responsible for an employer in relation to a pension
scheme, the Pensions Regulator may by order appoint an independent trustee. This
appeal relates only to VAT charged by the Advisers instructed by ITSL as an
independent trustee of the Schemes.
7. Once
appointed as an independent trustee, ITSL:
(1)
carries out due diligence to ensure that it understands the history and
development of the Scheme and its rules, and to identify (and put right) any problems;
(2)
takes over the operations of the Scheme (such as dealing with the Advisers
and regulatory authorities, determining appropriate corporate governance
strategies for the Scheme, complying with any regulatory requirements and
reviewing investment strategies); and
(3)
ensures that the Scheme is effectively administered and managed in the
best interest of the members and beneficiaries.
8. ITSL has
independent in-house professionals to manage many of the more common events
that a Scheme may experience. Where appropriate, however, ITSL instructs the Advisers
on behalf of the Scheme. In particular, an independent trustee may not act as
auditor or actuary and so must appoint an external adviser to carry out those
functions. Although not prohibited from doing so, ITSL also instructs the Advisers
to provide legal advice in order to avoid any suggestion of a conflict of
interest. ITSL supervises the duties and conduct of the Advisers to ensure
that the relevant legal and regulatory requirements are fulfilled in relation
to the Scheme.
9.
The Advisers submit invoices for their fees. In most cases, the
invoices are addressed to the relevant Scheme "c/o" (care of) ITSL. The
Advisers' fees are paid either directly from the relevant Scheme's bank account
(where the ITSL controls the bank account) or by Scheme administrator (where ITSL
does not control the bank account). The Advisers charge VAT, where applicable,
which is shown on the invoices.
10.
Section 25(6) of the Pensions Act 1995, as amended, states that the
order under section 23 may provide for any fees and expenses of the independent
trustee to be paid either by the employer or out of the scheme's resources or
by a combination of the two. The orders in the case of ITSL did so provide. VAT
invoices for trustee services supplied by ITSL as trustee to the Schemes were
typically addressed to the relevant Scheme care of ITSL. Section 25(6) of the Pensions
Act 1995, in its original and amended forms, is discussed further below.
Relevant legislation
11.
Section 22 of the Pensions Act 1995 applies where an insolvency
practitioner is appointed in relation to a company which is the employer in
relation to a pension scheme. Where section 22 applies to a scheme, the
Pensions Regulator may appoint an independent trustee in relation to the scheme
under section 23. Section 25(2) provides that any power vested in the trustees
of the scheme and exercisable at their discretion may be exercisable only by
the independent trustee. A trustee of a scheme (and any connected or
associated person) is ineligible to act as an auditor or actuary of the scheme.
12.
Section 25(6) of the Pensions Act 1995 as originally
enacted provided:
"(6) A trustee appointed
under section 23(1)(b) is entitled to be paid out of the scheme's resources his
reasonable fees for acting in that capacity and any expenses reasonably incurred
by him in doing so, and to be so paid in priority to all other claims falling
to be met out of the scheme's resources".
13.
With effect from 6 April 2005, section 25(6) was replaced by section
25(6)-(8) which provide as follows:
"(6) An order under
section 23(1) may provide for any fees and expenses of the trustee appointed
under the order to be paid–
(a) by the employer,
(b) out of the resources of
the scheme, or
(c) partly by the employer
and partly out of those resources.
(7) Such an order may also
provide that an amount equal to the amount (if any) paid out of the resources
of the scheme by virtue of subsection (6)(b) or (c) is to be treated for all
purposes as a debt due from the employer to the trustees of the scheme.
(8) Where, by virtue of subsection
(6)(b) or (c), an order makes provision for any fees or expenses of the trustee
appointed under the order to be paid out of the resources of the scheme, the
trustee is entitled to be so paid in priority to all other claims falling to be
met out of the scheme’s resources."
14.
It was not suggested to us that the amendments to section 25(6) of the Pensions
Act 1995 changed the VAT treatment of supplies of services to or by ITSL. It
seems to us that, from the point of view of the trustee, section 25, in both
its original and amended forms, treats the trustee's fees and expenses in the
same way. Section 25(7) makes clear that the employer may have a liability to
pay the fees and expenses borne by the scheme. In the case of ITSL, payments
were made out of the Schemes’ resources and not by the employers.
15.
With effect from 1 January 2007, Council Directive (EC) 2006/112/EC of
28 November 2006 on the common system of VAT (“the VAT Directive”) replaced the
Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of
Member States relating to turnover taxes - common system of value added tax:
uniform basis of assessment, 77/388/EEC (“the Sixth VAT Directive”). ITSL’s
claim for repayment of VAT relates to supplies under both Directives but, as there
are no material differences in the wording of the relevant provisions of the
two Directives, we refer only to the VAT Directive in this decision.
16.
Article 168 of the VAT Directive describes the scope of the right to
deduct VAT as follows:
“In so far as the goods and
services are used for the purposes of the taxed transactions of a taxable
person, the taxable person shall be entitled, in the Member State in which he
carries out these transactions, to deduct the following from the VAT which he
is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be
carried out by another taxable person.”
17.
The phrase “taxed transactions” is not defined but Article 2(1)(c) of
the VAT Directive defines transactions subject to VAT to include “the supply of
services for consideration within the territory of a Member State by a taxable person acting as such”. There was no dispute that all of ITSL’s supplies
were chargeable to VAT and so no question of any apportionment of VAT incurred
between recoverable and irrecoverable input tax arises.
18.
A “taxable person” is defined by Article 9 of the VAT Directive as “any
person who, independently, carries out in any place any economic activity,
whatever the purpose or results of that activity”. Article 10 provides that the
condition in Article 9 that an economic activity be conducted independently
excludes “employed and other persons from VAT in so far as they are bound to an
employer by a contract of employment or by other legal ties creating the
relationship of employer and employee”.
19.
Article 73 of the VAT Directive provides that, in respect of the supply
of goods or services, “the taxable amount shall include everything which
constitutes consideration obtained or to be obtained by the supplier, in return
for the supply, from the customer or a third party”. Article 79 provides that
the taxable amount shall not include:
“(c) amounts received by a taxable
person from the customer, as repayment of expenditure incurred in the name and
on behalf of the customer, and entered in his books in a suspense account.
The taxable person must furnish
proof of the actual amount of the expenditure referred to in point (c) of the
first paragraph and may not deduct any VAT which may have been charged.”
20.
The provisions of the VAT Directive in relation to deduction of VAT are
implemented in UK legislation by sections 24 – 26 VATA and regulations made
under them. Neither party suggested that the UK legislation departed from the
VAT Directive or placed any specific reliance upon it over the terms of the VAT
Directive and so we do not set it out here.
Summary of submissions
21.
We discuss the parties' submissions more fully below but, in summary,
ITSL's primary submission was that ITSL is entitled to deduct VAT paid on fees
for services supplied by the Advisers because ITSL incurred the fees in the
course of its business. ITSL relied on the decision of the VAT and Duties
Tribunal in Capital Cranfield Trustees Limited v HMRC [2008] UKVAT V20532 ("Capital Cranfield") and invited us to follow it. In
that case, the VAT and Duties Tribunal held that the supplies of professional
advisers were made to the trustee company in its capacity as a taxable person
and it was entitled to deduct, as input tax, the VAT charged on the advisers'
fees. HMRC submitted that the VAT charged on the Advisers’ services is not
input tax of ITSL because the services were supplied to the Schemes. HMRC
submitted that the Tribunal in Capital Cranfield erred in law in
allowing the appeal and this Tribunal should not follow the decision. HMRC
further submitted that, even if the Advisers' services are supplied to ITSL,
the VAT charged on such services is not deductible by ITSL because the services
are not used for the purposes of taxable supplies by ITSL. If the VAT on the
Advisers' fees is input tax of ITSL then HMRC submitted that the principle of
fiscal neutrality requires that ITSL must account for VAT on a supply of those
services to the Schemes.
22.
Further or as an alternative to its primary argument, ITSL submitted
that the refusal of its claim for input tax recovery breaches the principles of
fiscal neutrality, equal treatment and ITSL's legitimate expectation to recover
the VAT. ITSL contended that it should be able to deduct the VAT in the same
way as the employers in relation to the Schemes had been able to do before they
became insolvent. HMRC submitted that the principle of fiscal neutrality would
only be breached if ITSL were able to deduct the VAT on the Advisers' fees
without having a corresponding liability to account for output tax on amounts
that it received in reimbursement of those fees. HMRC did not accept that the
Tribunal has jurisdiction to determine questions of public law such as
legitimate expectation.
Issues to be decided
23.
ITSL's primary submission is that it is entitled to deduct VAT charged
on the services supplied by the Advisers under the provisions of the VAT
Directive. It seems to us that the principles of fiscal neutrality and equal treatment
(which, in this context, amount to the same thing) are not rules of primary law
creating an entitlement to deduct input tax but principles of interpretation
which ITSL may pray in aid (see the comments of the Court of Justice of the
European Union ("CJEU") in Finanzamt Frankfurt am Main V-Hochst v
Deutsche Bank AG (Case C-44/11), 19 July 2012, at [45]). The first issue
to be decided is, therefore, simply: is ITSL entitled to deduct VAT charged on
the services supplied by the Advisers? This raises the subsidiary issue of
whether the Advisers' services are used by ITSL for the purposes of (ie are
cost components of) its taxed transactions.
24.
The identification of the taxed transactions of ITSL, which the
Advisers' services are cost components of, will also be a relevant factor in
considering whether ITSL must charge and account for VAT on the amounts paid by
the Schemes in relation to the Advisers' services. The second issue to be
decided is: are the amounts paid by the Schemes in relation to the Advisers'
services consideration for supplies of services by ITSL or are they repayment
of expenditure incurred in the name and on behalf of the Schemes?
25.
If we conclude ITSL is not entitled, under the VAT Directive, to deduct
the VAT charged by the Advisers, we must consider whether ITSL is nevertheless entitled
to repayment of the amounts equal to the VAT charged on the ground of legitimate
expectation. Before we can consider whether Notice 700/17 or other guidance
issued by HMRC created a legitimate expectation on the part of ITSL, we must
determine whether the Tribunal has jurisdiction to consider issues of
legitimate expectation.
26.
We asked the parties at the hearing whether any of the employers
remained registered for VAT during the insolvency pending winding up. The
parties did not know in relation to the Schemes. We suggested that one
possible analysis was that, despite what was said in paragraph 2.9 of Notice
700/17 (that an employer who ceases trading also ceases to be an employer and
is no longer entitled to deduct input tax on the management of the pension
scheme) the employer remained entitled to recover the VAT relating to the costs
of managing the scheme. We suggested that the decision of the CJEU in I/S
Fini H v Skatteministeriet (Case C-32/03) [2005] STC 903 supported such an
analysis in appropriate cases. In Fini, a restaurant business ceased
trading but was unable to terminate its lease and so continued to incur VAT on
the rent for its former premises for a further five years. The business continued
to claim repayments of the VAT on the rent which the tax authority eventually
refused. The CJEU confirmed that the business was entitled to deduct the VAT
on the amounts thus paid provided that there was a direct and immediate link
between the payments and the former commercial activity. Applying the CJEU's
reasoning in Fini, it seemed to us that the fact that the employer had
ceased trading or ceased to employ the beneficiaries of the scheme did not
necessarily mean that the employer was not entitled to recover input tax which
related to its former business activities. HMRC said that there were practical
problems with repaying the input tax to an insolvent employer and ITSL, for
obvious reasons, did not seek to rely on Fini. In view of the position
taken by the parties, we do not consider the consequences of applying Fini
further and do not base our decision on it.
Is ITSL entitled to
deduct VAT charged on the Advisers' services?
27.
ITSL’s primary submission was that it is entitled to deduct the VAT
charged by the Advisers because it contracts with the Advisers, authorises
their work and is liable to pay their fees. ITSL uses the Advisers’ services
for the purposes of its trustee business and is entitled to deduct the VAT. Lord
Millett in the well known case of HMC&E v Redrow Group plc [1999] STC 161 (HL) (“Redrow”) set out how to identify the recipient of a
supply of services for the purposes of input tax deduction. He held, at page
171, that the correct approach was found in two fundamental features of a
supply of services, stating:
“The first is that anything
done for a consideration which is not a supply of goods constitutes a supply of
services. This makes it unnecessary to define the services in question. The
second is that unless the services are rendered for a consideration they cannot
constitute the subject matter of a supply. In fact, of course, there can be no
question of deducting input tax unless the taxpayer has incurred a liability to
pay it as part of the consideration payable by him for a supply of goods or
services.
In my opinion, these two
factors compel the conclusion that one should start with the taxpayer's claim
to deduct tax. He must identify the payment of which the tax to be deducted
formed part; if the goods or services are to be paid for by someone else he has
no claim to deduction. Once the taxpayer has identified the payment the
question to be asked is: did he obtain anything - anything at all - used or to
be used for the purposes of his business in return for that payment? This will
normally consist of the supply of goods or services to the taxpayer. But it
may equally well consist of the right to have goods delivered or services
rendered to a third party. The grant of such a right is itself a supply of services.”
28.
In the later case of WHA Ltd v CCE [2004] STC 1081 (CA),
Neuberger LJ, having considered Redrow in detail, observed at [53]:
"Although it is plainly
dangerous to generalise, it seems to me that to justify a claim for input tax
in principle, it would normally be sufficient for the person presented with the
relevant invoice to establish that he had authorised and paid for the work the
subject of the invoice, and that he received a genuine benefit in the course of
his business from the carrying out of the work."
29.
We apply Lord Millett's approach to the question in this case. In doing
so, we bear in mind the exhortation of the CJEU in HMRC v Loyalty Management
(UK) Limited and Baxi Group Limited (Cases C-53/09 and C-56/09) [2010] STC 2651 at [39] and [42] to consider the economic realities in identifying the
person to whom goods and services are supplied.
30.
There are two steps in Lord Millett's approach. The first step is to
identify the payment which included the VAT that the taxable person seeks to
deduct. The second step is to determine whether the payment was for goods or
services obtained by the taxable person and used or to be used for the purposes
of his business.
31.
In relation to the first step, there is no difficulty in identifying the
payments in respect of which ITSL seeks to deduct VAT: they are the Advisers'
fees. Lord Millet observed that there can be no question of deducting input
tax unless the taxpayer has incurred a liability to pay it. In our view, who
actually made the payment is not conclusive in determining whether a person has
the right to deduct VAT. The issue is whether ITSL was liable to pay the
Advisers’ fees.
32.
The Advisers' fees were not paid by ITSL from its own resources but directly
from the relevant Schemes' bank accounts (where ITSL controlled the account) or
indirectly via the Scheme administrator (where it did not). The evidence of Mr
Boniface was that ITSL contracts with the Advisers, authorises their work and
is liable to pay their fees. Mr Connal, for ITSL, submitted that, in the event
that a Scheme became insolvent, ITSL would remain liable for any outstanding
fees due to the Adviser. Mr Thomas, for HMRC, did not dispute that ITSL had a
theoretical liability to pay the Advisers’ fees in the event that a Scheme
could not do so but submitted that ITSL would know what assets the Scheme had
and would not instruct Advisers where there was any chance that ITSL would be
left with any liability for the fees.
33.
The Tribunal in Capital Cranfield, at [33], held that "section
25(6) [of the Pensions Act 1995] refers to expenses reasonably incurred 'by him'
and thereby makes it clear that it is the trustee who incurs the expenses."
We agree but it does not seem to us that the words of section 25(6), in its
original or amended forms, conclusively answer the question whether the
Advisers' fees are expenses of the independent trustee in its capacity as a
provider of trustee services to the Schemes or as trustee of the Schemes ie as
the Schemes themselves. What section 25(6) provides is that the independent
trustee, ITSL here, is entitled to be reimbursed expenses that it has incurred
as trustee.
34.
In determining whether ITSL has incurred the Advisers' fees, we consider
that we should look to the contractual position. The evidence before us was
that, in relation to the services in respect of which VAT is claimed, ITSL
instructs the Advisers and undertakes to pay their fees. ITSL does so as
trustee of the particular Scheme. We conclude that, in that capacity, ITSL is
liable to pay the fees, including the VAT which ITSL seeks to deduct. We
accept that ITSL would be unlikely to instruct any Adviser to carry out work if
the relevant Scheme did not have the means to pay the Adviser’s fees. In our
opinion, however, that does not mean that ITSL does not have a liability to pay
the Adviser’s fees. On the basis of the evidence as to the contractual
position, we conclude that ITSL was liable to pay the Adviser’s fees.
35.
The next issue is: was ITSL a taxable person? There was no dispute that
ITSL was and is a taxable person, registered for VAT, in relation to its
business of providing independent professional trustee services. HMRC submitted
that the fact that ITSL is a taxable person and incurred a liability to pay for
the Advisers' services does not resolve the issue because ITSL incurred that
liability in its capacity as trustee of the Schemes. HMRC submitted that ITSL
as a limited company carrying on a professional trustee business and ITSL as
trustee of a Scheme are different taxable persons for VAT purposes. Where a
pension fund makes taxable supplies, HMRC’s practice is to register the fund in
the name of the trustees. This is the only administratively workable
alternative to registering the beneficiaries of the fund. Where the trustee is
registered for VAT and where it is also the trustee of other funds, HMRC
register each separately.
36.
Article 9 of the VAT Directive defines taxable person as any person who,
independently, carries out any economic activity. Article 9 does not provide
that a person is a different taxable person in respect of each economic activity
that the person undertakes but HMRC sought support from the word
"independently", submitting that ITSL as trustee of a Scheme was not
independent of the Scheme. Article 10 of the VAT Directive provides that “independently”
in Article 9 excludes a relationship of employee and employer but the CJEU has
shown that it must interpreted more broadly than that. We were referred to Staatssecretaris
Van Financien v Heerma (Case C-23/98) [2001] STC 1437. That case concerned
whether a person who let a cattle-shed to the partnership of which he was a
member, was to be regarded as a separate taxable person in relation to that
activity. The CJEU held at [17] that Mr Heerma, who was the manager of the
partnership, acted independently in letting immovable property to the
partnership. We consider that the situation of ITSL and the Schemes is
analogous to that of Mr Heerma and the partnership. We conclude that ITSL in
relation to its professional trustee business is a separate taxable person from
ITSL as trustee of a Scheme. We also conclude, on the basis of Heerma,
that, notwithstanding that ITSL is the sole trustee in every case, each Scheme
is a separate taxable person.
37.
We now turn to consider whether ITSL incurred the liability to pay the
Advisers’ fees for the services (which we have held that it did) in its
capacity as a provider of independent professional trustee services or as
trustee of the Schemes. The analysis is complicated by the fact that ITSL has
multiple tax personalities. HMRC accept that ITSL is right to charge VAT to
the Schemes by issuing VAT invoices to itself as trustee of the relevant
Scheme. If the Advisers are regarded as in the same position as ITSL, when it
acts as a professional trustee, then they should invoice ITSL as trustee of the
relevant Scheme. The evidence is that, in most cases, this is what happens.
Invoicing does not, however, determine who is the recipient of a supply. On
the basis of the evidence before us, our view is that it is part of ITSL’s
function as an independent trustee to appoint and supervise the Advisers. ITSL
is not merely a purchasing agent for the Schemes in relation to the Advisers’
services but does so in order to enable it to perform its duties and fulfil its
responsibilities as an independent trustee. The Schemes benefit from the
advice of the Advisers but, as in the case of the house buyer in Redrow,
the fact that a person receives a benefit or even the greater benefit does not
prevent the person who has incurred the VAT being able to deduct it if it has
obtained some benefit and subject to that being consistent with economic
reality. For those reasons, we find that ITSL incurred the liability to pay
the Advisers’ fees in its capacity as a provider of independent professional
trustee services.
38.
In conclusion on this point, we find that ITSL, which is a taxable
person, was liable to pay the Advisers’ fees and that the Advisers’ services
were supplied to ITSL for the purposes of its business of providing independent
professional trustee services. We do not consider that this conclusion is
inconsistent with the economic realities. We decide that ITSL is, therefore,
entitled to deduct the VAT charged by the Advisers, in so far as the Advisers'
services are used by ITSL for the purposes of its taxed transactions (and
subject to the rules in the VAT Directive as implemented by the VATA).
Is ITSL required to
account for VAT on amounts paid by the Schemes in relation to the Advisers’
services?
39.
Although not the subject of the decisions appealed, the parties asked us
to consider whether ITSL must account for VAT on the amounts paid by the
Schemes in relation to the Advisers’ services. We agreed to do so because it was
relevant to the VAT liability position of ITSL and it did not involve
consideration of any further facts.
40.
HMRC submitted that, if ITSL was the recipient of the Advisers’
services, the Advisers’ fees should be characterised as disbursements incurred
by ITSL on behalf of the Schemes rather than cost components of any supply by
ITSL. This submission was made in the context of ITSL’s right to deduct but it
seems to us appropriate to deal with it here as it would also lead to the
conclusion that the amounts were not consideration for any supply by ITSL. The
rules in relation to disbursements in the VAT Directive are quite restrictive
and we consider this is because supply and consideration are to be interpreted
broadly. Article 79 of the Directive provides that, in order to be treated as
a disbursement, expenditure must be incurred in the name and on behalf of the
customer and entered in the taxable person’s books in a suspense account.
There was little evidence before us on this point: the Advisers mostly invoiced
the Scheme c/o ITSL but there was no suspense account (and no need for one as
the amounts were paid by the Schemes). We have found that ITSL was liable to
pay the Advisers fees if the Scheme did not do so. That supports the view that
the fees were not disbursements. Further, section 25(6) of the Pensions Act
1995 provides that the trustee is entitled to be paid expenses reasonably
incurred which suggests, as the Tribunal found in Capital Cranfield,
that the fees were incurred by ITSL itself, which was then reimbursed, rather
than by ITSL as agent of the Scheme. On balance, we conclude that the
Advisers’ fees were not disbursements for VAT purposes.
41.
HMRC submitted that if ITSL was entitled to deduct the VAT on the
services supplied by the Advisers then it should be required to account for VAT
on the free onward supply of services under the VAT (Supply of Services) Order
1993 (SI 1993/1507). Article 6 of the 1993 Order provides that no deemed
supply is made if the services are used, or made available for use, for a
consideration. This is because an actual supply will have been made and VAT
will be chargeable by reference to the consideration for the supply. HMRC also
submitted that, if ITSL was entitled to deduct VAT charged by the Advisers, the
amounts paid by the Schemes to the Advisers could be regarded as consideration
for an onward supply of the Advisers’ services on which ITSL was liable to
account for VAT. In summary, HMRC submitted that, whether or not there is
consideration for the onward supply of the Advisers' services, ITSL is liable
to account for VAT.
42.
ITSL submitted that it contracts for and receives the Advisers’ services
in the same way as the employers. The guidance published by HMRC in Notice
700/17 Funded Pension Schemes (March 2002) and in their online Guidance Manual
at VIT45200 states that VAT incurred by the employer in the day-to-day management
of the scheme is the employer’s input tax and that the employer does not need
to charge output tax if it is reimbursed for costs incurred on management of
the scheme. ITSL submitted that the fact that the fees are paid out of the
Schemes’ resources does not create any obligation on ITSL to account for VAT
for the same reason that the employer, when solvent, was not required to
account for VAT on payments reimbursing such fees. ITSL steps into the shoes
of the employer. ITSL also contended that the Advisers’ services were consumed
by ITSL, as trustee, and not onward-supplied to the Schemes and so there was no
supply by ITSL for which the amounts paid out of the Schemes’ resources could
be regarded as consideration.
43.
We have already cited the passage from Redrow in which Lord
Millett summarised the VAT definition of services as anything done for a
consideration which is not a supply of goods (see now Articles 2(c) and 24 of
the VAT Directive). The issue is whether the amounts paid by the Schemes in
relation to the Advisers’ services were consideration for anything done by
ITSL. That something done could be an onward supply of the advisers’ services
or could be a supply of trustee services but, in either case, VAT would be
chargeable. We have already found that ITSL instructed the Advisers and
incurred the fees as an independent trustee. Such activity constitutes a
supply of services if done for consideration and is a deemed supply if done
otherwise than for consideration by virtue of the VAT (Supply of Services)
Order 1993.
44.
Article 73 of the VAT Directive provides that everything obtained or to
be obtained by a supplier in return for a supply is consideration. In this
case, ITSL’s entitlement to be paid the Advisers’ fees arises under Section 25(6)
of the Pensions Act 1995. We consider that the nature of the payment was
absolutely clear under the section, as originally enacted, which provided that
the trustee is entitled to be paid (emphasis supplied) “his reasonable fees for
acting in that capacity and any expenses reasonably incurred by him in
doing so”. The words “for acting” do not appear in the amended section
25(6) but it was not suggested by either party that the amendments changed the
VAT analysis. In our view, it is clear from the language of the section and
its purpose that the payments of ITSL's fees and expenses by the Schemes are
consideration for ITSL acting in its capacity as a provider of independent
professional trustee services. In conclusion, we decide that ITSL must account
for VAT on the amounts paid by the Schemes in relation to the Advisers’ fees. If
we are wrong and the payments by the Schemes are not consideration for ITSL
supplying trustee services then we consider that ITSL must account for VAT on
the onward supply of the Advisers' services under the VAT (Supply of Services)
Order 1993.
Issues of legitimate expectation, fiscal neutrality
and equal treatment
45.
In view of our decision that ITSL was entitled to deduct the VAT charged
on the Advisers’ services, it is no longer necessary to consider whether ITSL
had a legitimate expectation, on which it was entitled to rely, that it would
be able to deduct the VAT charged by the Advisers as a result of the guidance
published by HMRC in Notice 700/17 and the online Guidance Manual. In case we
are wrong, however, we deal with the point briefly below. There is also the
issue of fiscal neutrality and equal treatment which remains in relation to the
question of whether ITSL is required to account for VAT on the amounts paid by
the Schemes in relation to the Advisers’ fees.
46.
The first issue is whether the Tribunal has jurisdiction to consider
questions of legitimate expectation. ITSL relied on the observations of Sales
J in Oxfam v HMRC [2010] STC 686 at [63] – [76] and the decision of the
Tribunal in Abdul Noor v Revenue & Customs [2011] UKFTT 349 (TC) at
[16] – [21], that this Tribunal has sufficient jurisdiction to deal with the
issue of legitimate expectation. Like this appeal, both cases concerned
whether or not the taxpayer was entitled to deduct input tax. HMRC did not
accept that Oxfam was binding authority as, although the appeal
concerned input tax, the issue was different: it turned on whether the supplies
were business or non-business. HMRC contended that the issue in ITSL’s case
was simply whether VAT was or was not deductible and that did not permit any
exercise of discretion. We do not accept HMRC’s submission on this point. We
did not receive detailed submissions on the jurisdiction point but, for the
purpose of considering the legitimate expectation issue, we accept without
deciding the point that we have jurisdiction to address public law issues relating
to the amount of input tax that is deductible on the basis set out by Sales J
in Oxfam, namely that such jurisdiction is provided by the
language of section 83(c) VATA.
47.
ITSL submitted that that refusal of its claim for input tax recovery
would breach the principles of fiscal neutrality, equal treatment and ITSL's
legitimate expectation to recovery of the VAT. ITSL contended that it should
be able to deduct the VAT in the same way as the employers in relation to the
Schemes had been able to do before they became insolvent. ITSL submitted that
HMRC were seeking to apply a different treatment to VAT incurred in relation to
the administration of a pension scheme by an employer and VAT incurred for the
same purpose by ITSL. Where the employer is solvent, a distinction is drawn
between investment and administration of a pension scheme. The input tax
incurred on administration is treated as incurred for the purposes of the
employer’s business and recovered through the employer’s VAT returns. Even where
the employer obtains a reimbursement from the scheme of the costs of the
services, there is no obligation on the employer to charge or account for
output tax. ITSL relied on HMRC’s published guidance and in particular
paragraph 2.10 of Notice 700/17 which deals with the position where an employer
has ceased business and states that
“If you cease trading, and
therefore cease to be an employer, you no longer have any entitlement to input
tax on management of the pension scheme. Where, however, the trustees are
themselves VAT registered on account of business activities carried out by the
pension scheme they may treat the tax incurred on services connected with the
continuing management of the scheme as their input tax, subject to the normal
rules. This means that where the trustees are required to restrict recovery of
input tax because they make exempt supplies not all the tax on the management
services may be recovered …”
48.
ITSL contended that the guidance clearly states that where the employer
ceases to be in business, the trustees (if VAT registered) may treat the VAT
charged on services connected with the management of the scheme as their input
tax. That input tax is then recoverable to the extent the services are
received by a business of the trustees that makes taxable supplies. ITSL
submitted that this is the only logical conclusion as where the employer
becomes insolvent then the role of the employer is taken on by the independent
trustee. ITSL stated that its analysis results in the VAT on the services
relating to the management of the scheme becoming input tax of the independent
trustee. In other words, the input tax recovery position of the employer
(effectively) passes to the trustees who, if VAT registered, can recover input
VAT charged to them on management services. Any other treatment, submitted
ITSL, produces an unfair distinction between the taxation of solvent and
insolvent pension schemes.
49.
We consider that the reference to the trustee being registered in
paragraph 2.10 of Notice 700/17 refers to the registration of the Scheme
through the trustee and “subject to the normal rules” refers to the need to
take account of a split between exempt and taxable supplies by the scheme. In
our view, the HMRC guidance does not state that that a VAT registered trustee inherits
the employer’s right to deduct VAT in the event that the employer becomes
insolvent or that the trustee has any right to deduct VAT relating to the
management of the scheme beyond the ability of the pension scheme to treat such
VAT as deductible in accordance with the normal rules. We conclude that ITSL
did not have any legitimate expectation that it was entitled to deduct the VAT
charged by the Advisers.
50.
ITSL also contended that if it is required to charge and account for VAT
on the amounts paid out of the Schemes’ resources in respect of the Advisers’
fees then the consequence is that the Schemes where the employer has become
insolvent will be worse off than those with a solvent employer by an amount
equal to the VAT on the fees. ITSL submitted that a contrary conclusion would
infringe the principles of fiscal neutrality and of equal treatment as held by
the CJEC in Marks and Spencer plc v HMRC (Case C-309/06) [2008] STC 1408
which stated at [51]:
"… the general principle of
equal treatment requires that similar situations are not treated differently
unless differentiation is objectively justified".
51.
We do not accept ITSL’s submission that any requirement to account for
VAT on the amounts paid by the Schemes in relation to the Advisers’ fees would
infringe the principles of fiscal neutrality and of equal treatment. It is
correct that this means that the Schemes are therefore in a worse position than
schemes where the employers are solvent and fully taxable. It is also true
that schemes where the employers are solvent but wholly or partially exempt
incur irrecoverable VAT which solvent and fully taxable can recover. The
additional burden arises as a result of the operation of the normal VAT rules
relating to deduction of VAT. In our view, the different treatment arises from
the fact that the solvent employers and the Schemes carry on different
businesses which, unsurprisingly, have different VAT consequences.
Decision
52.
For the reasons given above, our decision is that ITSL is entitled to
deduct the VAT charged by the Advisers and, accordingly, the appeal is
allowed. The result may be something of a Pyrrhic victory for ITSL, however,
as we also find that ITSL must account for VAT on the amounts paid by the
Schemes in relation to the Advisers’ fees.
53.
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.
GREG SINFIELD
TRIBUNAL JUDGE
RELEASE DATE: 29 August 2012
