19219
INPUT TAX – Partial exemption – Management services – Whether Appellant supplied services of its director to a third party in course of business – No 

LONDON TRIBUNAL CENTRE

GOODSHELTER HOLDINGS LIMITED	Appellant

-	and –

HER MAJESTY’S  REVENUE AND CUSTOMS 	Respondents

			Tribunal:	STEPHEN OLIVER QC (Chairman)
					JOHN BROWN CBE, FCA, ATII 

Sitting in public in London on 1 August 2005

Andrew Young, counsel, instructed by Anthony Hammerman, accountant, for the Appellant 

Robert Kellar, counsel, instructed by the Acting Legal counsel for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Goodshelter Holdings Ltd (“Goodshelter”) appeals against the decision of the Commissioners dated 10 November 2003 to assess for VAT in the sum of £12,872 plus interest of  £1,104.  The assessment relates to input tax which was disallowed as being not directly attributable to taxable supplies. 

2.	The issue in the appeal is whether in the course of its business Goodshelter provided the services of Mr M L Brown to another company called Easycarton Ltd.  The relevance of this is that Goodshelter has claimed relief as input tax for certain expenses and Goodshelter has sought to attribute that “input tax” to the taxable supplies that, as it contends, it has made by providing Mr Brown’s services to Easycarton.  

Background

3.	Essentially the case turns on the application of VAT Act 1994 section 24(1) and the partial exemption regulations. The VAT on the expenses to which Goodshelter’s claim relates will be input tax if and to the extent that it is VAT on the supply to Goodshelter of any goods or services used or to be used for the purposes of a business carried on by Goodshelter.  This requires us to determine whether and to what extent those goods and services were used by Goodshelter in making taxable supplies, i.e. supplies not being exempt supplies and not being things done “otherwise than for a consideration”: see sections 4 and 5(2) VAT Act 1994.

4.	Goodshelter has to satisfy us that it has, throughout the periods to which the assessments relate, been providing the services of Mr Brown to Easycarton in the course of its (Goodshelter’s) business and for a consideration. The proper interpretation of the evidence, say Goodshelter, demonstrates that it has been doing so and consequently has been making supplies to Easycarton continuously.  

The facts : Goodshelter and Easycarton

5.	We heard evidence from Mr Brown.  He and his family own all the shares in Goodshelter and he is a director.  He has a 13% holding in each of Easycarton and Intercarton Ltd (referred to below).  

6.	Goodshelter carries on business from its freehold premises in Tunbridge Wells. During the periods covered by the assessments it occupied the top floor of those premises and the rest were let; Goodshelter had not opted to tax those premises.  Goodshelter owned a residential property producing £2,880 per annum and a factory producing a rent of about £153,000 per annum (for which no option to tax was made).  Goodshelter also owned, until sold as a going concern, commercial premises in Tonbridge producing £36,000 a year. Goodshelter had a 9 per cent shareholding in each of Easycarton and Intercarton. Goodshelter also had a small trading activity selling vacuum cleaners.  

7.	Goodshelter employed Mr Brown at a salary of £132,000 per annum.  He is a director of Easycarton and Intercarton but as yet has received no emoluments from those companies.  

8.	Goodshelter also employed Mrs Janice Penn as a secretary.  She gave evidence.  Mrs Penn works 7½ hours a day.  For a large part of the time she works for three of the directors of Easycarton, one of whom is in Ipswich where she has to attend from time to time; she attends and minutes board meetings of Easycarton.  Each month Goodshelter raises a monthly invoice on Easycarton for her secretarial services; that invoice covers one-half of her salary which is all paid to her by Goodshelter.  The rest of Mrs Penn’s time, between two and five per cent she said, was spent raising quarterly invoices on tenants of Goodshelter, making payments to creditors of Goodshelter and keeping its cash books and accounts for sales of vacuum cleaners.

9.	Easycarton owns the intellectual property rights in a milk carton opening system.  Intercarton is the licensee from Easycarton of the worldwide exploitation rights in relation to the system. Easycarton is incurring £180,000 annual expenditure and Intercarton some £20,000. Both companies are owned in identical proportions by sixteen shareholders (one of whom is a venture capital company owning 42% of the equity in each).  In 1995 Mr Brown had been introduced to the project for developing and exploiting the rights; we refer to this as “the project”. The factory work on the project is done in Ipswich. The administration is done from Goodshelter’s offices in Tunbridge Wells where all the records of the project are kept, where meetings are held and where phone calls are made.

10.	Mr Brown works full-time. Most of his time is spent at Goodshelter’s Tonbridge offices.  It is not in dispute that 75% of that time is spent dealing with affairs relating to the project.  

11.	£15,000 per annum has been accrued in Easycarton’s accounts.  We were not provided with those accounts and cannot therefore make any finding as to how and when that amount has been shown as an accrual; we do know, however, from an explanation given to the Commissioners in a letter from Goodshelter’s accountants to the Commissioners of 15 January 2004 that the £15,000 shown as an accrual was understood to be “Mr Brown’s salary”.  

12.	Goodshelter has not issued invoices to Easycarton for Mr Brown’s services.  There has been no written agreement between Goodshelter and Easycarton covering the provision of Mr Brown’s services; nor have there been correspondence, minutes or other documents that evidence the terms and arrangements covering Mr Brown’s activities in relation to the project. The books and accounts of Goodshelter do not show Easycarton as a debtor in respect of Mr Brown’s activities on the project.   Mr Brown explained that Goodshelter’s accounts did not show any amounts due from Easycarton for those activities as receivables because Goodshelter, i.e. Mr Brown as director, regarded them as “too risky and over optimistic”; consequently there was “too much uncertainty to put them in as debtors”.  

The facts : Communications with the Commissioners

13.	On 14 August 2003 Mr Allan Rhodes, an officer of the Commissioners from Hastings, visited Goodshelter’s Tonbridge premises.  Mr Rhodes gave evidence and provided his visit notes.  He met Mr Brown there and discussed Goodshelter’s business with him.  Mr Rhodes said he made notes in the course of the visit.  He looked at the records of Goodshelter to find out how Goodshelter was accounting for exempt input tax and standard rated supplies. His notes contain entries briefly recording details of Goodshelter’s personnel and business arrangements; they note the standard rated outputs for the “opted” property rental income and the vacuum cleaner sales, exempt outputs and inputs and they contain a short profit and loss account.  They specifically record that Goodshelter was providing secretarial services to Easycarton.  Nothing in the visit notes refers to any provision by Goodshelter of Mr Brown’s management services to Easycarton.

14.	Mr Rhodes accepted that the discussion had covered the affairs of Easycarton.  He recalled no mention about Goodshelter providing Mr Brown’s services to Easycarton.  Mr Brown’s recollection was that he had told Mr Rhodes “exactly what I did for Easycarton”. Mr Brown accepted that nothing in Goodshelter’s cash book related to his services to Easycarton and there was “no paper trail” relating to these.  

15.	On 22 August 2003 Mr Rhodes wrote to Goodshelter setting out his calculations for input tax based upon figures extracted from Goodshelter’s records for the VAT periods 6/00 to 6/03.  Mr Rhodes gave Goodshelter two weeks to consider the matter and offered them the opportunity to bring further information to his attention which they considered to be relevant. Nothing in that letter made any reference to Goodshelter’s provision of Mr Brown's services to Easycarton.  Asked why he had not then drawn the omission to Mr Rhodes’ attention, Mr Brown said “I know nothing about VAT”.  

16.	On 28 October 2003 Mr Rhodes wrote to Goodshelter advising that as he had not received a reply to his letter of 22 August 2003 he had issued an assessment for the period 12/00 to 6/03.

17.	Following the lodging of a notice of appeal, Goodshelter’s accountants wrote to the Commissioners’ review officer on 15 January 2004.  This letter indicated that Goodshelter could and should have applied to use a special partial exemption method under VAT Regulation 1995 Reg. 102(1).  The letter said nothing about Goodshelter making any taxable supply of Mr Brown’s services to Easycarton.  Referring to the Easycarton’s accounts, the letter explained that-

“Mr Brown’s salary is presently accruing in Easycarton’s accounts at the rate of £15,000 …”.

18.	In early 2004 Mr Brown had a meeting with a Mrs A M Jacques, a Customs officer who gave evidence, to consider the application for a partial exemption special method.  The proposed method had been based upon the time that Mr Brown allegedly spent working for Easycarton and Intercarton.  Mrs Jacques noted that records were available to verify the proportion of time that Mr Brown was said to have spent on working for those companies. She further noted that no records were available to verify that the supply of Mr Brown’s time was a supply by Goodshelter.  She therefore concluded that Goodshelter was not making a supply of Mr Brown’s time.   Rather, Mr Brown was working for Easycarton and Intercarton in his capacity as director of those companies.  She therefore wrote to Goodshelter on 5 February 2004.  She advised that the proposal to use a time-based special method was not approved as the time-based method did not allow for a cost-based component in determining the value of taxable use.

Conclusions

19.	The evidence, taken as a whole, does not satisfy us that Goodshelter was providing Mr Brown’s services in the course of its business to Easycarton for a consideration.

20.	We accept that at least 75% of each working day Mr Brown’s time and attention was directed at the project and to matters essential to the project.  We also accept that it would have been possible to have had an arrangement in place whereby Goodshelter, having the right to Mr Brown’s services, agreed with Easycarton to supply Mr Brown’s services to Easycarton in return for an agreed fee.  But the evidence does not support the existence of such an arrangement.  

21.	The only possible evidence of a consideration due from Easycarton to Goodshelter in return for Mr Brown’s services is the mention in Goodshelter’s accountants’ letter of 15 January 2004 where the writer says –

“Mr Brown’s salary is presently accruing in Easycarton’s accounts at the rate of £15,000 …”.

That statement is, we think, more consistent with Easycarton’s accounts recording that unpaid salary is due to Mr Brown personally and will be paid to him when Easycarton is in profit.  It does not convey to the reader that Goodshelter is creditor for unpaid fees for business services.  Other than that there is nothing.  There were no invoices issued by Goodshelter to Easycarton for management services.  Significantly there were invoices relating to Mrs Penn’s secretarial services.  There was nothing that could be construed as a written agreement by which Goodshelter provided Mr Brown’s services to Easycarton – or indeed to Intercarton.  There was no evidence from any of the shareholders and directors of Easycarton and Intercarton as to their understanding of any arrangement between Easycarton and Goodshelter regarding Mr Brown’s services. No internal records of Goodshelter’s business were produced that in any way substantiated its claim that it was providing Mr Brown’s management services to Easycarton in the course of its (Goodshelter’s) business or at all.

22.	Had there been any such arrangement we would have expected its details to have been drawn to the attention of the Commissioners at an early stage.  We accept that at the first visit Mr Rhodes was told that Mr Brown spent most of his time working on the Intercarton and Easycarton projects; but we are not satisfied that Mr Rhodes was told that this was on the basis of an agreement between Goodshelter and Easycarton for which the latter was obliged to provide a consideration.  No reference was made to any Goodshelter-Easycarton management services agreement or arrangement in Goodshelter’s accountants’ letter of 15 January 2004.  We would have expected Goodshelter or its accountants to have filled in the evident gaps in Mr Rhodes’ understanding, had there been any such gaps.  Nor was any explanation of such an arrangement given when Mrs Jacques visited in February 2004.  

23.	For all those reasons we think that the assessments were sound and we dismiss the appeal.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 23 August 2005

LON/03/1182