[2013] UKFTT 215 (TC)
TC02629
Appeal number: TC/2012/01812
& TC/2012/02460
VAT – input tax – “Fleming”
claims –lack of evidence to support claims – evidence that companies making
claims at times part of a group of which they were from time to time the
representative member and at other times a group member and at yet other times
registered in own right – true entitlement to any input tax recovery due
unclear outside periods when within group registration - appeal dismissed for
periods when companies not part of group registration – also complete absence
of evidence in support of rejected claims for remaining periods that same
accounting system in place as in periods for which claims accepted – claims
dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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WMG ACQUISITION
CO UK LTD
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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 DAVID DEMACK
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Sitting in public at Bedford Square London on 19 March 2013
Mr Julien Brugere, VAT
director of WMG Acquisition Co UK Ltd for the Appellant
Mrs Erika Carroll of HMRC’s Appeals and Review Unit for
the Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
On 27 March 2009 Warner Music International Services Ltd (“WMIS”) and
Warner Music UK Ltd (“WMUK”), companies within the Warner Music Group, each
submitted a “Fleming” claim to the Commissioners to recover input tax allegedly
incurred by its employees on travel and subsistence and not reclaimed. (Stated
shortly, “Fleming” claims are input tax repayment claims which, as a result of
the decision in Fleming t/a Bodycraft v Revenue and Customs Commissioners
[2008] STC 324, may be made outside the 4 (formerly 3) year statutory period
for such claims. The Fleming decision permitted such claims as Parliament had
failed to provide a transitional period for them prior to the introduction of
the capping period).
2.
Each claim was in the form of a voluntary disclosure. In WMIS’s case,
the claim was for £186,919 plus statutory interest and covered the period from 1
May 1988 to 30 April 1997. In WMUK’s case it was for £172,823 plus statutory
interest, and covered the period from 1 April 1973 to 30 April 1997.
3.
On the claims being submitted, the Commissioners required each taxpayer
to supply further information. Having considered that subsequently submitted
together with that they themselves possessed, and in the light of their own
advice in dealing with Fleming claims, on 11 November 2011 the Commissioners
rejected both claims.
4.
On 12 December 2011 WMIS and WMUK appealed the rejections claiming:
(a)
that they disagreed with the Commissioners’ assessment of the level of
evidence required to support the claims;
(b)
that the Commissioners had agreed that input tax on staff expenses had
not been recovered at least as far back as 1999, and that input tax had only
been recovered following the appointment of Meridian VAT Processing
(International)(“Meridian”) in 2002;
(c)
that the Commissioners had queried whether there were any previous
system issues preventing input tax recovery on staff expenses between 1973 and
1996;
(d)
that from 1973 to 2002 WMIS and WMUK did not have in place a system
capability that enabled VAT to be separately identified; and
(e)
therefore, the expenses in question were treated as VAT inclusive, and
neither appellant had in place a process to analyse separate components.
5.
I should explain that Meridian is an international firm specialising in,
inter alia, VAT input tax recovery.
6.
Before me, Mr Julien Brugere, the Warner Music Group’s VAT director,
appeared initially for WMIS and WMUK but, as mentioned below, later for Warner Acquisition
Co UK Ltd (“WMG”), and Mrs Erika Carroll of HMRC’s Appeals and Review Unit
represented the Commissioners. I was provided with four bundles of copy
documents by Mrs Carroll, and a single bundle by Mr Brugere.
7.
Mr Brugere called two witnesses to give oral evidence. They were Mrs
Breda Argyrou, the senior director of accounting at WMIS, and Mr Michael
Maloney, an accountant and chartered tax adviser, who is also a director of Meridian. Mrs Carroll called Mr Daniel Edwards, a specialist officer of the Commissioners
who is responsible for the VAT affairs of the Warner group of companies.
8.
It is from the whole of that evidence that I make my findings of fact.
9.
However, before doing so I should first deal with the question of
whether WMIS and WMUK are entitled to make the claims. Although those
companies made the appeals, both are part of group registration 424 1810 84,
the representative member of which is WMG. I allowed Mr Brugere to make application
for the appellant in each appeal to be changed to WMG and, despite opposition
to the application by Mrs Farrell, I granted it.
10.
At this point I should mention that, on 28 March 2012 the tribunal
directed that the two appeals should proceed and be heard together.
11.
As in the case in a great many “Fleming” appeals, problems arose at the
outset in that neither WMIS nor WMUK had records going back to the beginning of
its respective claim period. Nor for that matter had the Commissioners. But
whereas in most cases it is possible for an appellant to provide evidence
sufficient to satisfy the Commissioners (or, on appeal, the tribunal) that an
entity was registered from a particular date and that it was registered in its
own right or as part of a group registration, in the instant case that proved
impossible. Mr Brugere acknowledged that for the period from 1 May 1988 to 30
November 1990 WMIS could prove neither that it was registered in its own right
nor as a member of a group; and, if it were the latter, of which group it
formed part. Similarly, in relation to WMUK, for the period prior to 1 June
1985, it could not show that it was either registered in its own right or as a
member of a group.
12.
Mrs Gaskell submitted that in relation to the periods referred to in
the last preceding paragraph, I should dismiss the claims for, if an appellant
was registered in its own right, any claim must be made under that
registration. Alternatively, if the appellant was part of a group, since that
group might still exist, the representative member must make the claim.
13.
In response, Mr Brugere contended that it was unreasonable of the
Commissioners to contend that if a taxpayer were registered in its own right
any Fleming claim must be made as suggested by Mrs Gaskell. He maintained that
“the exceptional circumstances of [WMIS’s and WMUK’s] claims call[ed] for an
exceptional application of the rules and policies so as to achieve a fair and
logical conclusion.” The tribunal should not penalise WMIS or WMUK provided
that, on balance, it could be reasonably established that each entity would
probably have been registered for VAT.
14.
The evidence adduced as to registration of WMIS and WMUK was provided
solely by the Commissioners. Mr Edwards established that, during the period covered
by its repayment claim, WMIS had been registered for VAT under various
registration numbers. It joined the VAT group registered under number 424 1810
84 in 1990. It left the group in 1991 becoming registered in its own right
under number 440 4525 78. It then rejoined group 424 1810 84 in 1993, and
remained so registered throughout the remainder of the period of its claim.
During the periods WMIS was part of the group registration, it was variously a
subsidiary member of the group or the representative member. (WMIS’s Fleming
claim was made under VAT group registration number 730 8809 27, the
representative member of which is Time Warner Ltd).
15.
Mr Edwards also established that, during the period covered by WMUK’s
claim, the company had undergone a number of name changes, and had been
registered for VAT under various registration numbers. The company joined VAT
group 424 1810 84 in 1985 and continued to be a member thereof until the end of
its claim period, 30 April 1997. (The Commissioners’ evidence showed
conclusively that registration number 424 1810 84 did not exist before 1985).
WMUK was either a subsidiary member or the representative member of group
number 424 1810 84 from 1 June 1985.
16.
The least I would have expected from WMIS and WMUK was that they could
have produced if not their original VAT registration certificates then
something to indicate their first registration. In the event, they produced
nothing. It is thus impossible to say who, if anyone, is entitled to make
claims on their behalf when they were outside the group registration 424 1810
84. I entirely agree with the submission of Mrs Gaskell that I should dismiss
the two companies’ claims in so far as they fall outside that group
registration, and do so.
17.
I found both Mrs Argyrou and Mr Maloney to be honest witnesses, but as
neither was involved with the Warner Group until after the claim periods
concerned, their evidence was of limited value. (Mrs Argyrou joined the group
in 2001, and Meridian was instructed in 2002).
18.
Mrs Argyrou explained the system in place on taking up her employment to
enable employees to recover expenses for which the Group was liable in the
following way. Each employee entitled to claim was issued with an American
Express credit card in his or her individual name. If the employee incurred
expense on behalf of the Group he or she had to obtain a receipt in the name of
the Group with the VAT registration number of the supplier on it. When the
employee received the monthly statement from American Express, that person
submitted it to the Group with the VAT receipt(s) in question. And, in order
to ensure that the employee was not called upon to pay American Express out of
his or her own funds, the company would process the claims as quickly as the
one person dealing with VAT matters within the Group could do so. Mrs Argyrou
estimated that some 70-75 claims per month were dealt with in that way.
19.
Mr Brugere claimed that the Warner group had traditionally not recovered
input tax on travel and subsistence expenses of employees in the years before
2002 for a variety of reasons:
(a)
being part of a US group, the internal computer software used by both
WIMS and WMUK did not allow it separately to account for input VAT on travel
and subsistence expenses. Consequently, all amounts of expenses claims were
marked “VAT inclusive”;
(b)
there was a lack of internal procedure for recovering input VAT incurred
on such expenses;
(c)
travel and subsistence expenditure consisted of numerous small value
transactions, which would have required intensive work to process; and
(d)
travel and subsistence was viewed as a VAT technical issue requiring
careful analysis, and the group did not have adequate resources to deal with
the matter.
20.
Following its instructing Meridian in 2002, the Group lodged initial
claims for input tax recovery on travel and subsistence expenses. It did so
despite it claiming it to be difficult to calculate the tax concerned because
at the time its computer systems could not separately identify claims for VAT
on such expenses. However, the input tax claims for 1999 through to 2002 were
subsequently met by the Commissioners. The claims were calculated by Meridian on the basis of the actual records.
21.
Following the Fleming decision, the Group made claims going back to
1997, again based on records held. They too were met by the Commissioners.
22.
For the period prior to 1 May 1997, in the absence of any records
whatsoever from WMIS and WMUK, Mr Maloney explained that Meridian had
calculated the amounts claimed by “extrapolation”, explained as “by comparing
‘known claims’, i.e. those based on actual records, with total operational
costs extracted from available financial statements of WMIS and WMUK”. And,
where financial reports were not available, i.e. no information about the total
operational cost was accessible, Meridian used available indexation figures to
estimate the input tax reclaimed. The indexation was based on UK published annual inflation rates.
23.
Mr Brugere submitted that the way in which the Group dealt with input
tax recovery on expenses claims from 1999 onwards was indicative of the
practices it would have had in place throughout the claim periods concerned; on
balance, it was more likely than not that VAT incurred on travel and
subsistence expenses in the periods would not have been reclaimed as input VAT.
24.
The Commissioners undertook a computer based audit of the purchase
system of VAT group 424 1810 84 in 1995, and the reports they held produced by
the audit team contained no indication that the group was not recovering input
tax on staff expenses at the time. Mr Edwards told me, and I accept, that had
the group been entitled to recover input tax which it was not claiming he would
have expected the reports to indicate that fact.
25.
Mrs Carroll countered Mr Brugere’s arguments by observing that the Group
had provided no evidence whatsoever to demonstrate that the same accounting
system as described for the period 1999 to 2002 was in operation from 1 May
1988 to 30 April 1997 in the case of WMIS and from 1 April 1973 to 30 April
1997 for WMUK. She submitted that it was unlikely that the same accounting
system was in use throughout the claim periods concerned, they covering a
period of immense change in the development of computerised accounting systems.
Further, if the same accounting system was not in operation throughout the
claim periods and from 1999 to 2002, the Group had not provided any evidence to
demonstrate that the software issue that was said to prevent the recovery of
input tax on employees’ expenses between 1999 and 2002 was also an issue that
prevented the recovery of input tax on those expenses in the claim periods.
26.
Mrs Carroll further observed that input tax on other types of UK expenses incurred by the Group, such as non-employee expenses and business gifts, was
recovered during the claim periods.
27.
Records held by the Commissioners of visits to the Warner Group by their
officers showed that nominal ledgers and their different codes had been
examined, and that input tax on business gifts had been claimed for and allowed.
The records also showed that a report on audit action on companies within the
Warner VAT Group in the year ending 31 March 1997 indicated that input tax in
respect of business entertainment, business gifts and costs incurred by the USA parent company was checked. The records further showed that the Group had recovered
foreign VAT in the claim periods; they contained many requests for
‘certificates of status of taxable person’ – a necessary part of the process
for making such claims. Mrs Carroll observed that the amounts involved in
foreign VAT claims must have been distinguishable in order for the claims to
other EU tax authorities to be dealt with.
28.
She therefore submitted that WMG had not shown that it was more likely
than not that the input tax on the Group’s travel and subsistence expenditure
had been incurred and not recovered; the information and documentation produced
did not support its assertions.
29.
The burden of proving that the two companies have not recovered the
input tax on employee’s travel and subsistence expenses falls on the taxpayer
in appeals such as the present one. And whilst only the civil standard proof
is involved, the tribunal cannot be expected to make decisions simply on the
basis that a claim covers a period long ago for which a taxpayer cannot be
expected to hold any records, so that its claims should be accepted without
question and without evidence. It is simply not good enough for the two
companies to say to the Commissioners, “You accepted our claims for input tax
recovery for the period 1999 on 2002 on the basis of our records for that
period. We say that we made no input tax recovery for earlier periods for
which we hold no records whatsoever, but for which we say we operated in
exactly the same way and made no input tax recovery claims. You must accept
our claims and repay the input tax concerned.”
30.
The two companies have not satisfied me on the balance of probability
that they failed to make claims for the period concerned, and I therefore
reject the claims. It follows that I dismiss the appeals.
31.
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.
DAVID
DEMACK
TRIBUNAL JUDGE
RELEASE DATE: 5 April 2013
