Roberts & Sons (Curers) Ltd v Revenue & Customs [2006] UKVAT V19617 (09 June 2006)

 19617
	PARTIAL EXEMPTION — deposit paid by Appellant to supplier of goods which were in the event not supplied to the appellant but to associated company — deposit refunded by associated company — was appellant entitled to reclaim input tax on the deposit — no — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

ROBERTS & SONS (CURERS) LIMITED	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Lady Mitting (Chairman)
Peter Whitehead

Sitting in public in Manchester on 8 May 2006

Mr I T Taberner, VAT consultant, for the Appellant 

Jonathan Cannan, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006

DECISION

1.	The matter under appeal arises out of the decision of the Respondents to disallow input tax in the sum of £9,558.94.  The disallowance resulted in the recalculation of a partial exemption adjustment and the clawback of exempt input tax amounted to £6,863, for which amount the Respondents raised an assessment dated 20 September 2005.  The point in issue is whether the Respondents were correct to disallow the input tax.  If they were correct, the Appellant accepts the methodology and calculation of the adjustment and the quantum of the assessment would not then be in dispute.
2.	We heard oral evidence on behalf of the Appellant from Mr William Wyn Roberts, the managing director and sole shareholder in the Appellant company.  The Respondents called no oral evidence.
3.	The material facts were not in dispute and are as follows.
4.	The Appellant is registered for VAT under the trade classification “bacon curing, meat and fish products”.  It also records income from property rentals in respect of which it has opted to tax.  It owns a factory premises from which its associated company, Roberts Port Dinorwic Limited (“Port Dinorwic”) trades.  The Appellant had opted to tax that property and made a commercial letting of the premises to Port Dinorwic.  
5.	On a date which was not ascertained, the Appellant made a verbal acceptance of a contract with a company called Clover (UK) Limited (“Clover”) for the manufacture, supply and installation of a chiller system in the factory at a cost of £218,490 plus VAT.  The system was to be installed in the factory premises occupied by Port Dinorwic and the capital costs of the project would have been recovered by the Appellant by increasing the rental charge to its associated company.  Confirmation of the acceptance of a quotation was written by Mr Wyn Roberts to Clover on 9 March 2004 confirming that the system would be completed and running not later than the week commencing 26 May 2004.  Clover billed the Appellant by invoice dated 8 March 2004 for a 25 per cent deposit in the sum of £54,622.50, with VAT of £9,558.94, the invoice being paid on 9 March 2004 and the input tax being reclaimed in its VAT return in the period 03/04 as input tax attributable to a future taxable supply.  
6.	The system was a major piece of equipment with associated additional pieces of machinery.  It had to be physically installed in the factory and piped through the various rooms.  Clover assembled as much of the plant as they could on their own site and then delivered to install the assembled pack, evaporators and piping. 
7.	Having paid the deposit on its purchase of the system, Mr Roberts discussed the project with the Appellant’s auditors, Grant Thornton.  One of the principal reasons why it had previously been decided that the Appellant should purchase the system and lease it to Port Dinorwic was that there were ongoing discussions as to the buyout of one of Port Dinorwic’s directors and there were consequential concerns about Port Dinorwic’s cash flow.  However, Grant Thornton advised that if the purchase were to be made by Port Dinorwic, Port Dinorwic could obtain a Regional Selective Assistance Grant in respect of the plant, whereas the Appellant company could not and Port Dinorwic would also be able to receive enhanced capital allowances on the plant which again the Appellant could not.  The decision was therefore made that for these perfectly reasonable commercial reasons, the purchase should in fact be made by Port Dinorwic and not by the Appellant.  Mr Roberts could not remember precisely how or when this decision was communicated to Clover.  It is clear from the correspondence that it would have been at some stage between 8 March and 14 April and Mr Roberts told us that it would have been a verbal communication to Clover, probably to one of their representatives on site or over the telephone.
8.	That Clover had been informed of the variation is evidenced by their second invoice which is dated 14 April 2004 and is in the sum of £109,245 plus VAT and is stated to represent “50 per cent due upon delivery of major plant”.  The invoice is made out to Roberts of Port Dinorwic and was paid by Port Dinorwic, apparently on 19 April 2006.  The Appellant invoiced Port Dinorwic to recover the cost of the deposit which the Appellant had paid and brought this sum into account as output tax in its return for the period 06/04.  
9.	A third invoice dated 24 May 2004 was submitted to “Roberts Limited” representing 15 per cent due on completion of the pipe work and a fourth invoice was submitted, again to Roberts Limited, dated 23 June 2004 for the total project cost excluding extras.  Both invoices were paid by Port Dinorwic.  There was no explanation as to why the latter two invoices were addressed to “Roberts Limited”.  No point was made on this by either party and as Port Dinorwic paid them both, nothing hangs on this.
10.	The Appellant’s financial statements for the year ended 30 June 2004 contains the following statement:
“The company has also charged Roberts of Port Dinorwic £75,000 … during the year for rent of land and buildings used by that company in its trading operation.  In addition, the company advanced £54,623 to Roberts of Port Dinorwic for the purchase of plant and machinery, this amount has been repaid in full in the year”.
11.	In his oral evidence, Mr Roberts confirmed and set out the above chronology.  He viewed the payment of the deposit by the Appellant to Clover as a bill paid on behalf of Port Dinorwic for which Port Dinorwic had to and did reimburse the Appellant.  The system appears as a capital item on the balance sheet of Port Dinorwic.  
12.	On 21 January 2005, Mrs Susan Edwards, an officer of the then Customs and Excise, carried out a routine visit to the Appellant’s premises.  She examined the Appellant’s partial exemption calculation and identified the input tax reclaimed on the payment of the deposit to Clover.  On advice from the Unit of Expertise, she concluded that the Appellant had not received a supply for VAT purposes and that the VAT incurred on the deposit was not therefore input tax in the Appellant’s hands and should not have featured in its partial exemption calculation.  Having properly adjusted the Appellant’s input and output tax figures, the input tax attributable to the making of exempt supplies exceeded the de minimis level and the assessment was raised.
Submissions
13.	The Respondents accepted that at the time of payment of the deposit and at the time of reclaiming the input tax on its 03/04 return, the Appellant was intended to be the recipient of the future supply and was in order to reclaim the input tax.  At the time therefore, the return properly reflected the then position.  However, in Mr Cannan’s submission, by the time the annual adjustment was done, it was clear that there had been and there was not to be any supply to the Appellant.  The Appellant never took title to the goods and never took physical possession.  In the absence of a supply to the Appellant, the Appellant was not entitled to recover input tax and could not itself make any supply to Port Dinorwic.  
14.	Mr Taberner expressly conceded that the Appellant never took title to or physical possession of the goods.  It was his contention, however, that there was still a supply because the original order had been placed by the Appellant and the deposit paid for the supply by the Appellant had been subsequently recharged to Port Dinorwic.  Mr Taberner submitted that the placing of the order and the payment of the deposit constituted consideration for a supply.  In invoicing Port Dinorwic to recover its deposit, the Appellant was thereby transferring its future interest in the system to Port Dinorwic.  The Appellant was therefore rightly entitled to reclaim the input tax and the assessment had thus been wrongly raised as the Appellant should have been treated as fully taxable in the partial exemption period 1/04/03 to 31/03/04.  
Conclusions
15.	A taxable person is entitled to recover as input tax the VAT on the supply to him of any goods or services (section 24(1)(a) VAT Act 1994).  It is thus a pre-requisite of an allowable claim for input tax that there should have been a supply.  For the Appellant to be entitled to reclaim the input tax on the payment of the deposit, it must be established that it has, for VAT purposes, received a supply.  Only if there has been a supply will the VAT on the deposit be recoverable by the Appellant as input tax.   To establish the existence or otherwise of a supply there has to be a factual analysis of the events which occurred.
16.	The Appellant entered into a contract with Clover for the manufacture, supply and installation of a refrigeration system. On agreeing terms, it paid a deposit to Clover and quite correctly reclaimed the input tax on the deposit in its 03/04 return.  This was correct because at that time the Appellant was anticipating a future supply to it by Clover.  However, at sometime within the next five weeks and before delivery or installation, the arrangement was changed.  The Appellant was no longer to acquire the system.  It was to be supplied to Port Dinorwic.  Port Dinorwic made all future payments and the system was treated as a capital asset of Port Dinorwic in Port Dinorwic’s books.  Clover supplied the system to Port Dinorwic, not to the Appellant.  Clover made no supply to the Appellant who acquired neither title nor physical possession of the goods, as was readily accepted by Mr Taberner.  What therefore was the status of the deposit paid by the Appellant to Clover?  It was expressed in the Financial Statements of the Appellant to be an advance to Port Dinorwic for the purchase of plant and machinery.  In his evidence, Mr Roberts described it as a bill paid on behalf of Port Dinorwic.  Both refer to the subsequent repayment by Port Dinorwic to the Appellant.  However one looks at it, the repayment cannot be regarded, as contended by Mr Taberner, as consideration for a supply from the Appellant to Port Dinorwic.  The Appellant had nothing to supply because it never acquired title or possession.  In effect, there was a tri-partite agreement whereby Port Dinorwic assumed responsibility for payment to Clover and the goods were supplied by Clover to Port Dinorwic.  The payment from Port Dinorwic to the Appellant amounted to no more than reimbursement of the deposit paid, in the events which happened, to Clover on its behalf by the Appellant.  The goods were not supplied to the Appellant who in turn could not have been able to make an onward supply.
17.	In the events which occurred, there was no supply to the Appellant and the VAT incurred on the deposit cannot thus be treated as input tax by the Appellant and cannot feature in its partial exemption calculation.  The methodology of Mrs Edwards’ partial exemption calculation being accepted by Mr Taberner, it follows that the assessment was correctly raised and the appeal must fail.
18.	The appeal is therefore dismissed.  Mr Cannan made no application for costs and no order is made.

LADY MITTING
CHAIRMAN
Release Date: 9 June 2006
MAN/05/0750