Jones v Revenue & Customs [2006] UKVAT V19570 (09 May 2006)
                                                                                                           19570

INPUT TAX – Whether Appellant entitled to recover value added tax on opponents’ costs paid to their solicitor pursuant to an agreed order in the High Court – Turner (trading as Turner Agricultural) followed – Appeal dismissed

LONDON TRIBUNAL CENTRE

	DAVID JOHN JONES	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	MISS J C GORT (Chairman)
						MRS A WEST FCA

Sitting in public in Cardiff on 20 January 2006

The Appellant appeared on his own behalf

Mr Richard Smith of counsel for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	The appeal is against a decision of the Commissioners to refuse to allow a claim for input tax in relation to a sum of money Mr Jones had paid to his opponent’s solicitor following the settlement of an action which Mr Jones had brought in the High Court.  The sum in dispute is £2,978.72 and the Commissioners’ initial decision was made by a letter dated 17 January 2002.

2.	Mr Jones is a sole trader who designs and manufactures tools for the building trade under the trading name of “Advanced Pro Tools”.  He was registered for value added tax with effect from 1 August 1999.  

3.	Some years previously Mr Jones had set up a company called Excalibur Hand Tools Ltd.  He had invented a specialised tool and had consulted a solicitor Mr Hugh James, who was instructed to draw up an agreement to license and patent the product.  It was not clear precisely what the nature of that agreement was. Subsequently the company was bought out by its directors, but later became insolvent.  The exact circumstances of this were not made clear to us. The Welsh Development Agency invested in the company, and various products were re-licensed to it.  It was Mr Jones’ understanding that there was an agreement that in the event of the company going bankrupt again the licenses and patents would revert to him.  It was unclear to us the precise factual background, which is irrelevant to the decision we have to make.  In any event it appears that when the company became insolvent for a second time, Mr Jones was unable to recover what he considered to be his rightful property in the form of the patents and licenses.

4.	The Official Receiver who had been called in at some stage sold the assets to two people: Gary Lewis, a former director of Excalibur Hand Tools Ltd, and a man named Max Halliday.  A new company was set up called Excalibur Hand Tools 2. At that time Mr James was still acting for Mr Jones, but it was Mr Jones’ understanding that he had also been doing some work for Ernst & Young, who were acting in the bankruptcy proceedings for the Official Solicitor.  

5.	In 1999 Mr Jones appointed a new solicitor, and took proceedings against Max Halliday (trading as “Excalibur Hand Tools”) as the first defendant and Excalibur Hand Tools Ltd (now known as ProofIncome Ltd) as the second defendant.  This action was initiated in the Patents County Court but was later transferred to the Patents Court in the Chancery Division of the High Court. From the minutes of order of the proceedings in the High Court it appears that there were also two other defendants, a Mr Jack Lewis and a Mr Cedric M Clapp, it was not explained who these people are.  

6.	It was Mr Jones’ view that he had a case against his former solicitor, Hugh James, and also against a barrister who had previously been acting for him; it was not clear again at what point the barrister became involved, or ceased to be involved, but again it is not relevant for the purpose of these proceedings.

7.	It appears that Mr Halliday had in 1992 sold all the tools and materials which had previously been the property of Excalibur Hand Tools Ltd to another company of his called Paramo Tools. Mr Jones believed that Mr James ought to have prevented this sale.  

8.	Early on in the High Court proceedings it became apparent that Mr Jones cause of action lay against Paramo Tools, and not against the actual defendants in the action.  Mr Jones was advised by his barrister to settle the case, Mr Jones initially refused to do this.  In the course of the evening following the first day in court, when he was in conference with his barrister and with Mr Rees, Mr Jones received a phone call from counsel representing Mr Halliday asking him if he would offer a settlement.  Counsel also asked if he was registered for value added tax, Mr Jones confirmed that this was the case.  He was then informed by counsel that he could claim back any VAT involved in a settlement, if he were to reach one.  Mr Jones was informed that Mr Halliday would accept £25,000.  Mr Jones offered £16,000 because he had been advised by his solicitor and barrister that he should withdraw from the action.  

9.	The next morning Mr Halliday himself again said he would settle for £25,000, which Mr Jones refused, but said that he would pay Mr Halliday £20,000.  This sum was eventually accepted by Mr Halliday and an agreement was reached on the basis of various undertakings by both Mr Jones and the first and second defendants, that Mr Jones’ claim would be dismissed.  The order subsequently drawn up by the Court states: 

“The Claimant shall pay to the First and Second Defendants the sum of £20,000 as contribution to the First and Second Defendants’ costs within 21 days, payment to be made by way of bankers draft in favour of the First and Second Defendants’ solicitors or in such other manner as may hereafter be agreed in writing.”

10.	It was Mr Jones’ case before us that he had only agreed to the settlement in the sum of £20,000 on the basis that he could recover the value added tax element of it.  He argued that this was not a payment of compensation but was a payment in respect of costs, and as such he should be entitled to recover his value added tax.  Furthermore he argued that he was paying the solicitor instructed by Halliday for the services that solicitor was rendering to Mr Jones, namely the service of paying over to the First and Second Defendants, in whatever proportion the solicitor deemed appropriate, the sum of £20,000, minus the value added tax element, which was to be retained by the solicitor.

11.	Mr Jones told us that he had initially not been willing to pay over the £20,000 until he received a value added tax invoice from the solicitor in question.  However, his own solicitor had advised him that he must pay the money, even without the invoice, because it was a term of the settlement, and if he did not do so he would face serious consequences .  

12.	Mr Jones did pay the money the solicitor, and also received a receipt, but he never obtained an invoice. He distinguished his case from that of Turner (trading as Turner Agricultural) v Customs and Excise Commissioners [1992] STC 621, which was relied on by the Commissioners, on the grounds that that case concerned compensation, and not a contribution to costs.  His appeal is against the Commissioners’ refusal to allow him to reclaim the proportion of that sum which represented value added tax.

13.	The Commissioners’ case was that there was no supply of services to Mr Jones by the solicitors instructed by his opponents in the action.  As there was no such supply, Mr Jones was not entitled to recover input tax on the moneys paid.  

14.	Mr Smith submitted that, properly construed, in any litigation where one party is ordered to pay the costs of another, he is paying on the basis of an indemnity to cover the costs properly payable to the receiving party’s lawyers.  This is so whether the payment is made to the receiving party, or directly to the lawyers, as here.  He submitted that the decision in the case of Turner was determinative of the issues in the present case. 

15.	In Turner the taxpayer had brought two actions in the High Court as the purported assignee of the rights of the company of which he had been a director.  The Court held that the assignment was invalid and ordered him to pay the defendants’ costs.  The taxpayer claimed to deduct as input tax the value added tax charged in respect of those costs.  

16.	It was held that under section 14(3)(a) of the Value Added Tax Act 1983 (which is in identical terms to section 24(1) of the Value Added Tax Act 1994 which is now the relevant Act) was clear and unambiguous, input tax in relation to a taxable supply was the tax on a supply of goods or services made to that person.  The tax on the costs incurred by the defendants in the two actions brought by the taxpayer, however, was a tax on a supply of services made to the defendants, and not to the taxpayer, or the company, and accordingly, it was not input tax within the meaning of that section.

17.	Mr Smith submitted that, if it were not the case that, even where a case was settled, the solicitors provided a service only to the party by whom they were instructed, and not to the other party, there would be a conflict of interest, which the rules of the profession would not allow.

18.	Finally it was submitted by Mr Smith that the fact that Mr Jones paid only a contribution, and not the whole of the defendants’ costs was irrelevant, and the solicitors had incurred costs doing work for the defendants, and not for Mr Jones.  

19.	It is unfortunate that Mr Jones has incurred a considerable amount of expense at the hands of lawyers for various reasons which it is not for this Tribunal to enquire into.  We accept that it was his clear understanding that he was settling on the basis that he would be able to recover the sum of £3,000 as value added tax.  However, he had been wrongly informed that this was the case by counsel for the defendants in the High Court action, and, presumably, this advice was not corrected by those acting for him.  Turner is a case in the High Court, and is binding on this Tribunal.  The fact that in the case of Turner the sum paid was the total of the defendants’ costs, whereas in the present case Mr Jones was only paying a contribution to those costs does not sufficiently distinguish the two cases.

20.	For the above reasons this appeal is dismissed.  There is no order for costs.

MISS J C GORT
CHAIRMAN

RELEASED: 9 May 2006

LON/02/775