Input Tax – attribution – services for admission to A.I.M and contemporaneous issue of shares – whether wholly related to exempt supply – no – partial exemption.  Appeal allowed.

EDINBURGH TRIBUNAL CENTRE

	HALLADALE GROUP PLC	Appellants

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	       Respondents

			Tribunal:	 (Chairman)   T Gordon Coutts, QC
					 (Member)	 R L H Crawford, BA., CA., ATII

Sitting in Edinburgh on Monday 23 June 2003

for the Appellants		Colin Tyre, QC

for the Respondents	Andrew Young, Advocate

© CROWN COPYRIGHT 2003.

DECISION

Introductory
This is an appeal by Halladale Group PLC against an assessment issued to reclaim tax credits for input tax in relation to professional services rendered to the Appellant by various professional firms.  The issue was joined, but negotiations were refused by the Respondents, on whether the services rendered to the Appellant by the professionals were only linked to an issue of shares, an exempt supply.  The attitude of the Commissioners expressed and persisted in, until just prior to the Hearing, was that none of the invoices fell within the general business overheads of the Appellant but instead were regarded thus “there is a direct and immediate link between the professional services and the issue of shares”.  It does not appear that the Commissioners prior to the Hearing considered whether there was a direct and immediate link with another taxable supply.  That was always the expressed contention of the Appellant.

The issue related to services rendered to the Appellant by Deloitte & Touche, Accountants; McGrigor Donald, Solicitors; DTZ Debenham Tie Leung, Property Valuers; Tayburn Ltd, Printers and Bell Pottinger, Public Relations Consultants.

The Legislation
3.	Section 25 of the VAT Act provides that a taxable person is entitled to credit for so much of his input tax as is allowable under section 26.  Section 26(1) provides that the amount of any input tax to which a taxable person is entitled to credit is so much of the input tax allowable by regulations made for this purpose as is attributable to taxable (and not exempt) supplies.  Section 26(3) provides that the Commissioners shall make regulations for securing a fair and reasonable attribution of input tax as between taxable and exempt supplies.
4.	The Value Added Tax Regulations 1995 are the relevant regulations made under section 26(3).  Regulations 101 provides as follows:

“(1)	Subject to regulation 102, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.

(2)	In respect of each prescribed accounting period

(a)	… goods or services supplied to the taxable person in the period shall be identified,
(b)	   there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,
(c)	   no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and
(d)	   there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.

(3)	In calculating the proportion under paragraph (2)(d) above, there shall be excluded

…

(b)

 	…

(v)	any supply which falls within Group 5 of Schedule 9 to the Act …

(4)	The ratio calculated for the purpose of paragraph (2)(d) above shall be expressed as a percentage and, if that percentage is not a whole number, it shall be rounded up to the next whole number.”

5.	Section 31(1) of the Value Added Tax Act 1994 provides that a supply is an exempt supply if it is of a description specified in Schedule 9.  Group 5 of Schedule 9 is headed “Finance”.  Item 6 specifies as exempt supplies (inter alia):

“The issue, transfer or receipt of, or any dealing with, any security or secondary security being

(a)	shares, stocks, bonds, notes (other than promissory notes), debentures, debenture stock or shares in an oil royalty;….”

The Evidence
The Tribunal heard evidence from Mr Mark Harkin the Finance Director of the Appellant and were provided with bundles of documents.  There was no objection taken to the admissibility of any of the documents nor was the oral evidence given by Mr Harkin the subject of any challenge as to its accuracy or veracity and the Tribunal were satisfied that they could properly rely upon it entirely.

The Facts
The Appellant is a Property Trading and Development Company founded in 1991 by its Chief Executive and major shareholder.  Its operations now extend throughout the UK and its portfolio at the time in question in the present appeal was valued at about £67.7m, approximately one quarter of which was in Scotland and three quarters in England and Wales.  The above figure of £67.7m was book value, not realisable value.

The Appellants core activities were the acquisition, asset management or development and subsequent disposal of commercial properties.  It so operated both as owner and through joint ventures.  The Tribunal was advised that all the Appellants commercial properties were “opted to tax” properties

In the year 2000 the Appellant had in mind to raise capital and also to secure a quotation for its shares on the Alternative Investment Market of the London Stock Exchange (AIM).  Having so determined a variety of matters required to be undertaken.  For the purpose of the AIM listing the Appellant required to have a nominated advisor, reporting accountants, auditors, a broker, a portfolio valuer and the services of solicitors as well as registrars and receiving bankers.  For the purpose of raising capital they required a separate solicitor, they also required a portfolio valuation from their accountants and auditors and the involvement of the company’s solicitors.

It can be seen from the prospectus which was produced that the professional advisers for the listing and the placing were not exactly the same.  It cost the Appellant dearly to raise capital in this way in that they expected to obtain only £1.875m out of the total placing to raise £2.5m.

The prospectus produced was for both the placing and the admission to trading on the AIM.  More shares were to be admitted than those placed, in that the whole pre-existing share capital was also involved.

The purpose of the admission to trading, as explained by Mr Harkin, was that this would be of continuing benefit to the Appellant.  It would enable the Appellant to have credibility in the property market field in which they were engaged.  It would enable them readily to raise funds.  After the placing it would provide their shareholders with an obvious means of exit and thus encourage participation and allow an exchange of equity for preference shares to benefit the company’s capital position.  

From Mr Harkin’s evidence it was clear that there were two distinct objects in the mind of the Appellant, one to raise capital and the second to establish their position as a quoted company and so acquire and retain benefits for the future.  He explained that if a quoted company were seeking to enter into a property transaction they would be regarded much more seriously than an unquoted concern particularly if they wished to pay for an acquisition by way of shares.

Coincidentally various matters were also given attention.  The Directors Contracts, Share Option Schemes and Director and Employee Service Contracts were also negotiated.

For the purposes of the AIM listing it was necessary to have English and Scottish property certificates and title aligned.  Messrs McGrigor Donald produced 2 invoices in those regards,  In relation to the first, dated 25 April 2001, it was narrated that their professional services included advice in relation to the placing of new ordinary shares, admission to trading on the AIM, drafting and revising documentation and the negotiation of the above contracts.

It was accepted by the Respondents, just prior to the Hearing, that that invoice demonstrated a single supply which did not relate exclusively to an exempt transaction.

The services supplied by Messrs Deloitte & Touche were described in 2 separate invoices as “reporting accountant services” in terms of their terms of engagement dated 13 February 2001.  Those terms of engagement related entirely to the admission to the AIM and those services were essential for that purpose.  The services of reporting accountants were not required for a placing of shares.

In relation to the services of DTZ Debenham Tie Leung their invoice identified their report and valuation as being in connection with the Alternative Investments Market.  It is addressed to the nominated adviser, the nominated broker and the Appellants.  It was not directed to nor provided for the purposes of the solicitors acting in the placing.

Mr Harkin explained that a property valuation was essential every year for the purposes of the Appellant’s annual report.  A valuation report would have been required at or about the same time as the report in connection with the AIM listing.  The AIM listing valuation and report was more extensive than would otherwise have been required but was nonetheless, in part, necessary for the general purposes of the Appellant.  At all events it was so utilised.  It would have been absurd had it not been in the circumstances.

Services were provided by Tayburn Ltd who sent 2 invoices, one was explained in evidence as relating to the production of the prospectus document the other, larger, was for general photographic work for inter alia the purposes of annual report, eg pictures of the Directors and the like.  It was accepted by Mr Young for the Commissioners that the latter invoice was also one which detailed general services to the Appellant not exclusively concerned, if it was at all, with the issue of shares.  It accordingly was properly conceded as falling within the Appellants general partial exemption arrangements.

The final disputed invoice was that of Messrs Bell Pottinger, Public Relations Consultants.  It was not immediately obvious to the Tribunal what utility public relations consultants could have had in relation to the issue of shares but in any event from Mr Harkin’s evidence it was apparent that the services provided by these consultants were utilised mainly after the admission and placing and were concerned with raising the general profile of the Appellant.  On that evidence Mr Young also accepted that their invoice fell within the Appellants general partial exemption arrangements.

Mr Harkin confirmed that it was not essential for the purposes of AIM listing for the Appellant to issue new shares.  The shareholder base could have been equally efficiently widened by the Chief Executive and principal shareholder selling part of his shareholding.  He also stated that finance could have been raised, probably more economically, by other methods.  An issue of shares did not require an AIM listing.

In summary we hold that the disputed invoices were for the undernoted services by the supplier:

Deloitte & Touche, Accountants - Admission & Placing;
McGrigor Donald – Admission, Placing and other Legal Advice;
DTZ – Admission, Placing and Annual Accounts Valuation;
Tayburn Ltd – Admission, Placing and work related to Production of Annual Accounts;
Bell Pottinger – Admission, Placing and Corporate Identity Matters.

From the evidence the Tribunal concluded and find as fact that the AIM listing was in part for the general business purposes of the Appellants and was not an essential element of the issue of shares.

Contentions for the Respondents
Subject to the concessions made prior to and at the Hearing the services rendered to the Appellants were directly and immediately linked to the issue of shares.

Actinic PLC, Decision 18404, 24/10/02 was said to confirm that professional work related to the placing and admission of shares on a stock exchange will normally be regarded as relating exclusively to the exempt supply of issuing shares, no distinction was drawn it was submitted correctly between the admission and the placing.  In Tribunal decision, Southampton Leisure Holdings PLC, Decision 17716, 2/5/02 it was held that due diligence work carried out by valuers, solicitors and accountants on a target company in an acquisition situation was not exclusively related to the issuing of shares, nor was general advisory work by financial advisers in that regard.  The invoices rendered by the printers of the author document and the public relations consultants were considered to be connected exclusively to the subsequent issuing of shares.  In RAP Group PLC [2000] STC 980 which was again an acquisition situation and it was largely the work carried out in investigating the target company which was not exclusively related to the issuing of shares.

None of the work outlined in the letters of engagement in this case support any suggestion that this was general advisory of preparatory work.  It was specifically related to the mechanics of achieving placing and admission.  The Appellant was not admitted to the AIM, it is a class of their share capital which is so admitted for trading.  The Appellant sought admission of their shares to raise funds through the issue.  Insofar as Deloitte’s work is concerned it was all connected with the placing and an admission.  In relation to McGrigor Donald the second invoice relating to preparation of title and summary reports was connected with the placing proceeding.  The DTZ invoice expressly related to AIM and the present situation is distinguishable from Southampton Leisure in that in Southampton Leisure the valuation of properties owned by the target company was the matter at issue not those of the company issuing the shares.

Tayburn invoices are exclusively related to the exempt supply relating as they do to the prospectus for the placing.

Contentions for the Appellant
The law is not in dispute as between the parties.  The work has to be identified as being attributable both to an exempt supply and taxable supplies made in the course of the business if it is to fall into the residual ‘pot’.  The matter is entirely one of fact as was emphasised in Abbey National PLC v The Commissioners of Customs and Excise [2001] STC 297.  The approach is to ask the question whether there is a link between Halladale’s activities as a whole with the transactions in question.  Actinic PLC does not determine the matter.  It was not argued in that case that the quotation could have a purpose beyond and additional to the share issue.  It was the clear evidence of Mr Harkin that the share issue was not the sole purpose for issuing the prospectus and incurring the expenditure.  The evidence disclosed the advantages to the Appellant of the quotation and these are significant and independent of any placing of shares.  The expenditure as a whole is sufficiently direct and connected with the general purposes of the company in addition to such matters as are related to the issue of shares.  Accordingly all the supplies by all the companies concerned serve a dual purpose one in relation to the general business activities of the Appellant the other in relation to the issue of shares by way of a placing to raise capital.

Decision
The question has to be “were the input supplies used exclusively for the purposes of the exempt transaction or partly for an exempt transaction and partly for the general purpose of the business?”

In this case the issue is simply whether it was solely in connection with the placing of shares that expenditure was necessarily incurred in achieving an AIM quotation which itself necessarily involved the engagement of various professionals for various purposes.

Although in the previous cited decisions various detailed analyses of the works were indulged in it does not appear to this Tribunal that there was there an argument for or evidence available to establish a general business purpose for AIM listing albeit combined with an issue of shares.

We were entirely satisfied from the evidence of Mr Harkin and the correspondence that there was such a dual purpose and that by completing the two matters, no doubt encouraged by the terms of the prospectus upon which was produced the Respondents have dealt with everything as though “placing and admission” were necessarily indivisible.

The Tribunal had no evidence from which it could conclude that unless the AIM quotation was obtained the Appellants could not raise capital and they also had satisfactory evidence that for the general business purposes of the Appellants the desirability of an AIM quotation was reflected in making their shares tradable, providing business credibility, raising their business profile and enabling future acquisition of assets in exchange for shares as well as and in addition to facilitating the raising of capital.

It is on the basis of those facts that the Tribunal discharges the assessments made in relation to all the invoices produced in connection with this matter.  This does not mean that the Tribunal expresses any view as to the attribution of any specific parts of the professional services rendered.  The invoices can be dealt with in the agreed way by which the Appellant recovers input tax in the general course of its business.

The Tribunal would wish to record their appreciation of the excellent presentation to them of the issues and the mechanics of detailing the documentation.  They were greatly assisted by both Counsel.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  14 JULY 2003 

EDN/02/55