03 0034 ASR CONSULTANTS LTD Mrs E Gilliland  Birmingham 16 February Mr A R M Rowland for the Appellant Miss Sara Williams of counsel instructed by the Solicitors Office of H M Customs and Excise for the Commissioners 
	Vat - payment of two outstanding debts (Vat inclusive) of another company by Appellant – claimed the Vat as input tax – no transfer of intellectual property or other rights from the debtor company – not within s.24 VATA – no invoices under Reg.29 Vat Regulations 1995 – Appeal dismissed. 

MANCHESTER TRIBUNAL CENTRE

 
 	
	ASR CONSULTANTS LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Mrs E Gilliland (Chairman)

Sitting in public in Birmingham on 16 February 2004

Mr A R M Rowland for the Appellant

Miss Sara Williams of counsel instructed by the Solicitors Office of H M Customs and Excise for the Commissioners

	© CROWN COPYRIGHT 2004

DECISION

1.	This is an appeal against an assessment brought by ASR Consultants Limited (the Appellant). The sum assessed under section 73 of the Value Added Tax Act 1994 (the Act) was £1705.00 (plus interest) being the Vat element on two payments the first a payment of £8000.00 a payment inclusive of Vat made by the Appellant to Netspin on 15 September 2000 and the second a payment of £3456.45 made on 5 September 2000 by the Appellant to U-Net also Vat inclusive. The Vat on the respective payments was £1191.49 and £514.79 making a total of £1706.28.  There is no dispute as to the actual payments made by the Appellant.  The question is whether the Appellant is entitled to deduct the Vat included in these payments as input tax. 

2.	Input tax is defined in section 24 (1) (a) of the Act as meaning Vat on the supply to a taxable person of any goods or services “ being…goods or services used or to be used for the purposes of any business carried on or to be carried on by [a taxable person]”. The payees Netspin and U-Net have failed and/or refused to issue to the Appellant a Vat invoice in respect of each of the payments made. But there is power under Regulation 29 Vat Regulations 1995 for the Commissioners to require in lieu of an invoice “…such documentary evidence of the charge to Vat as the Commissioners may direct”.  The Appellant’s case as stated in its Notice of Appeal is that the payments were made by way of a purchase of liens from Netspin and U-Net which those companies had claimed in respect of moneys owed to them by a company which had ceased to trade and that company was Interactive World Webs Limited (IWW). It has been submitted on the Appellant’s behalf that a lien is an enforcement of a charge or similar over an asset until fully paid.  The evidence is that IWW ceased trading on 15 August 2000.  In the Appellant’s written submission dated 27 August 2002 seeking reconsideration of the assessment by the Commissioners, it was stated that a final and concluding Board meeting of IWW was held on 1 September 2000 to wind up the company (IWW) but I note that the company search which is in the bundle of documents before the tribunal does not disclose any members or creditors voluntary winding-up. The search does disclose that a winding-up petition was presented on 22 March 2001 and a compulsory liquidation order made on 14 May 2001.  It is however accepted between the parties and I accept also that IWW was at all material times insolvent after 15 August 2000.

3.	IWW carried on business as an internet job advertising company. U-Net was its internet service provider (ISP) and Netspin provided its software. The computer equipment and the domain names from the evidence given to me belonged to third parties and the Appellant acted in the interests of the third parties.

4.	There is no dispute that IWW defaulted in its payments to U-Net in respect of the hosting services and in respect of payments due to Netspin.  As I understand the position, U-Net as the host had physical possession of the hardware used by IWW and the software had been installed in the computer. When IWW ceased trading on 15 August 2000 the Appellant wished to restart the business previously carried on by IWW.  It was unable to transfer the domain names to another service provider without making arrangements with U-Net and not able to make use of the software without making arrangements with Netspin.  Accordingly negotiations were entered into by Mr. Frank David Hutton (Mr.Hutton) who has given evidence to the tribunal today and who was the sole director of IWW after 15 August 2000 and who, according to Mr. A.R.M. Rowland (Mr.Rowland) who has represented the Appellant at today’s hearing, was also then the sole director of the Appellant.  Mr. Hutton has said in evidence that he had little involvement in the U-Net negotiations which were handled by Mr. Rowland. His involvement was with Netspin.  At the time the payments were made by the Appellant U-Net was claiming to retain the hardware and software and to prevent the release of the domain names until a satisfactory arrangement was made for payment of moneys which were owed to it by IWW. This is what I understand has been referred to as the “lien”.  Likewise Netspin; although it had apparently been agreed to sell the software to IWW, there was a retention of title or similar provision preventing the transfer of intellectual property rights in the software to IWW until payment was made of the moneys it claimed were owing to it by IWW.  Again this was described or referred to by the Appellant as a “lien”. 

5.	Although there would seem to have been a contract between IWW and Netspin in relation to the software no copies of that agreement have been produced to the tribunal and I have not heard any evidence as to its terms. That the contract was with IWW does clearly appear from Mr. Hutton’s email of 15 September 2000 to Mr. Richard Cope-Lewis at Netspin.  Although that email and an earlier email from Mr Cope-Lewis to Mr. Hutton on 15 September 2000 referred to the subject matter of the emails as” Draft document” no copy of any draft has been produced to the tribunal.  The evidence relied on by the Appellant in respect of the arrangement with Netspin is that of the two emails and the oral evidence of Mr. Hutton.

 6.	The first email from Mr. Cope-Lewis is timed at 16.45 on 15 September 2000 and reads as follows:- “ Hi Frank, I enclose a form of words that should be acceptable to both parties. I have looked into the issue of vat and it appears that the sum outstanding, as discussed was inclusive of vat.  To confirm our desire for an agreement that is fair to both parties I have amended the offer to read £8000 inc vat…”  A response from Mr. Hutton timed 17.55 is as follows:-  “ Richard- this is brilliant, thank you.  I made one small amendment which you won’t have a problem with. Except for where you refer to the original contract with IWW, I have changed any reference to IWW to ASR (a company of which I am a director).  Can I just clarify in point two where you say that you’ll supply telephone support on the software, will this include us making sure the thing is handed over to our new guys who will be looking after the system, maintaining it etc.  Obviously, you’ll want to restrict their access until we’ve paid the full amount, but we need them to be reasonably au fait with things before you bow out.  Thanks for taking the time on this. I am sure we’ll all benefit!  If you can ring me to say this is O.K., then I will drop a cheque in at the weekend (01275 331233)”.                                                                                                                    
7.	The clear interpretation of Mr. Cope-Lewis’s email is that the sum outstanding referred to is the sum owed by IWW to Netspin and that appears to have been just under £12000.  Again no documentation has been produced to the tribunal to verify the figure but Mr. Hutton said that they “met in the middle”. Since that amount will have been for services provided by Netspin to IWW it will in principle have included Vat. The proposal which was accepted was that  £8000 inclusive of Vat should be paid.  Although Mr. Hutton in his email referred to making “ one small amendment”, changing the reference to the original contract with IWW to a reference to the Appellant “(a company of which I am a director)” there is no documentary evidence that Netspin agreed the amendment. Mr. Hutton in his evidence did however say that Netspin did agree the amendment.  But even if that is correct it seems to me that cannot amount to the transfer of the right to use the software to the Appellant. Any rights in relation to the software were vested in IWW and subject to the settlement of Netspin’s claim the full title to the software would in law vest in IWW.  IWW was however insolvent and no longer trading on 15 September 2000.  The software would have been a valuable asset but an asset to which IWW was entitled and any transfer of the asset could in principle only be a transfer from IWW to the Appellant.  However I am satisfied that there never was any such transfer and no intention to make any such transfer and no payment was made to IWW.  As IWW was insolvent it would be quite improper for Mr. Hutton as a director of IWW to authorise or approve the transfer of a valuable asset belonging to IWW to the Appellant for no consideration. I do not think that he did so.                                                                                               
8.	I have noted that Mr. Hutton has said in re-examination by Mr. Rowland that the benefit to the Appellant in paying Netspin was to obtain control and ownership of the sites and support for the transfer to a new ISP, but I am satisfied that the payment of £8000 was in reality a payment made by the Appellant in order to obtain the release or discharge of IWW’s liability to Netspin and it was not in any sense a payment made to acquire for the benefit of the Appellant the rights to the software.  It is significant in my view that the view taken by Netspin as appears from the letter dated 8 May 2003 from Christine Bennett was that all rights to the software were transferred to IWW.  The Commissioner’s witness, Janet Russell, was examined also on an interview she had with Christine Bennett who had not been willing to give a written witness statement.
  
9.	Mr. Hutton’s email of 15 September 2000 refers in the second paragraph to Netspin providing telephone support on the software until arrangements were made for a new supplier to maintain it.  That appears to be a reference to a provision in the draft document which has not been produced. It has not been suggested on behalf of the Appellant that the arrangement for the provision of telephone support was a separate independent contract and the truth is that it was part and parcel of a single overall arrangement.  It also appears to be Mr. Rowland’s submission that the support element could not be separated from the remainder of the arrangement and it has not been suggested that there should be any apportionment of the figure of £8000 to the extent to which the arrangement involved the release of any lien or rights of retention in respect of this software. Until an appropriate payment was made the release of the lien in law enured for the benefit of IWW.  There is no evidence that any lien was ever transferred to the Appellant.  The substitution of the Appellant’s name for that of IWW in the reference to the original contract between IWW and Netspin cannot in law operate a transfer of IWW’s rights to the Appellant or as a novation of the original contract.  There is no suggestion that IWW was a party to a tripartite arrangement and in any event Mr. Hutton could not properly have given up IWW’s right in favour of the Appellant without an appropriate payment being made to IWW. There was a further payment of £100 plus Vat made subsequently but this in essence was to remove reference to IWW’s copyright and was separate and invoiceable to the Appellant.
                                          
10.	So far as the arrangement with U-Net is concerned there is before the tribunal a letter dated 26 April 2002 from VIA the successor to U-Net.  This letter records that in September the hosted server service provided by U-Net was cancelled due to non-payment of invoices and the customer’s equipment was retained. The letter states that Mr. Rowland of the Appellant said that the Appellant would pay the outstanding balance if U-Net would rejoin the service and release the equipment on request to the Appellant.  It is stated that “…this arrangement was confirmed by correspondence from IWW.” No copy of that correspondence has been produced.  The letter then refers to payment of £3456.46 on 6 September 2000 followed by 3 monthly subscriptions of  £293.75.  There is no explanation in the letter however why no vat invoice was provided to the Appellant in respect of the payment of £3456.46.                                                                                                                                  
11.	So far as the payment of £3456.46 related to the release of the equipment I have not seen any documentary evidence to establish the ownership of the equipment or the terms on which it was made available to IWW.  Neither has any documentation been produced establishing the termination of any rights IWW may have had to make use of the equipment.  Although Mr. Rowland has submitted that the equipment belonged to third parties and that IWW’s rights to use the equipment were determined, there is no evidence before me to establish that this was the case.  To the extent that it was thought necessary for IWW to consent or approve the arrangement with U-Net it seems to me that this consent or approval must have been given after 15 August 2000 at a time when IWW was not trading and was insolvent. It is not apparent who purported to give such consent on behalf of IWW.  In principle it would not have been right for Mr. Hutton to have given up any rights or claims that IWW may have had in the equipment without a proper consideration being received by IWW. It is clear that no payment was made to IWW. I do not consider that it was permissible for the equipment to be released to the Appellant in effect without the proper authorisation from IWW. No such authorisation has been produced or explanation given as to how the arrangement was for the benefit of IWW. It is not open in effect for the Appellant simply to take over and seek to carry on the business formerly carried on by IWW.                                                                                                                        
12.	The correct analysis in my view of the arrangement with U-Net evidenced in the letter dated 26 April 2002 is that the Appellant agreed to pay the outstanding balance of moneys owed by IWW i.e. £3456.46 including vat of £524.79 and the payment was made to discharge IWW’s indebtedness.  The effect of that payment in law was to determine any lien or right of retention which U-Net may have had. The release of that lien would enure for the benefit of whoever was entitled to the assets in question and would be those persons who would be able to authorise the Appellant to make use of those assets in future.  It is unclear what part if any the owners of the equipment played in the arrangements with U-Net.  The only person apart from the Appellant and U-Net involved was on the face of the letter IWW and it was IWW who consented to the arrangement.  In principle any supply was a supply by IWW to the Appellant and not by U-Net as they had no title or interest in the equipment except at the most a possessory lien which they gave up and released. That release however was a release to IWW in return for a discharge of its indebtedness by the Appellant.  In my view the Vat paid to U-Net was not Vat on the supply to the Appellant of any goods or services used or to be used for the purposes of a business carried on by the Appellant. The payment was merely payment of Vat already owed by IWW to U-Net in respect of services it had provided to IWW.   
                                                                  
13.	Accordingly the appeal is dismissed.                                                                                                       
14.	The Commissioners have not sought costs and I make no direction as to costs.                                    

                                                   

MRS E GILLILAND
CHAIRMAN
MAN/03/0034