19867

VAT – input tax – development agreement between the property owner and a development company – whether input tax on services relating to a planning appeal properly claimed by the property owner – whether services contracted for the owner by the development company acting as its agent – yes – appeal allowed

LONDON TRIBUNAL CENTRE

	HAMSTEAD HOLDINGS LIMITED	
		Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE AND CUSTOMS	
			Respondents

				Tribunal:	Malcolm Gammie CBE QC (Chairman)
						Kamal Hossain FCA FCIB

Sitting in public in London on 11th August 2006

Mr M Hezel, Accountant, for the Appellant

Robert Keller of Counsel, instructed by the Acting Solicitor of HM Revenue and Customs, for the Commissioners

© CROWN COPYRIGHT 2006

DECISION

Introduction

1. This is an appeal by Hamstead Holdings Limited (“the Appellant”) following a decision contained in a letter of 5th January 2006 from Mrs L V McLoughlin of HM Revenue and Customs (“the Respondents”) confirming on review the assessment notified to the Appellant on 24th August 2005 in the sum of £4,462.  The assessment was raised to give effect to the disallowance of input tax claimed by the Appellant in respect of two invoices from David Cooper & Co for that firm’s services in relation to a planning appeal.

2. The invoices were addressed to BNB Developments (“BNB”) (as the client) but were stated to be payable by the Appellant.  The Respondents contended that the services of David Cooper & Co had been supplied to BNB and not to the Appellant and that the input tax could therefore be claimed by BNB and not by the Appellant.  The Appellant contended that BNB was acting as its agent in procuring the services in question and that the input tax was therefore correctly claimed.

3. We had before us a bundle of documents relating to the matter in dispute.  Mr Hezel did not produce any witness evidence even though the evidence of those principally concerned in the development in question would surely have been the quickest and most reliable manner of resolving the dispute in his favour.  As it is we have had to reach our conclusion solely by reference to the relevant documents and the submissions of Mr Hezel for the Appellant and Mr Keller for the Respondents.

The facts

4. The Appellant’s main business activity is as a property developer.  On 8th February 2005, BNB and Timothy Gwyn-Jones (“TGJ”) entered into an agreement (“the JV Agreement”) relating to the acquisition and development of a property at Timbermill Way, Clapham (“the Property”).  TGJ owns the appellant company and the JV Agreement records that the Appellant has acquired (or will on or around 8th February 2005 acquire) the Property.  

5. The Appellant’s purchase was financed by a loan from TGJ and the JV Agreement recites that—

	“(B) TGJ  will advance such further amounts to [the Appellant] to (i) enable it to pay any deferred consideration payable under the agreement for the purchase of the Property; (ii) discharge agreed professional costs incurred in connection with an appeal against the planning permission applied for and refused by the local planning authority in respect of the Property (the “Planning Consent”); and (iii) pay other amounts required in connection with the management of the Property or [the Appellant] (such sums together referred to as the “Loan”);”

6. The operative provisions of the JV Agreement deal with the Planning Consent and how, following grant of the Planning Consent, the property is to be refinanced and the development managed.  Under Clause 1.1 BNB agrees to use all reasonable endeavours to obtain the Planning Consent.  Once that has been achieved the Appellant or the Property is to be sold to a new company (presumably jointly owned by TGJ and BNB) with the benefit of third party finance.  The sale proceeds are to be allocated first in repaying the Loan, then in paying TGJ an agreed ‘profit’, thirdly in paying BNB an agreed fee (plus VAT) for finding, structuring and negotiating the transaction and obtaining planning permission and, finally, any surplus is to be shared equally by TGJ and BNB.

7. The JV Agreement goes on to provide for the development of the Property thereafter and how any profit shall be shared.  In this respect BNB is to act as project manager and be paid a fee to be set out in a project appraisal agreed between TGJ and BNB.  TGJ agrees to procure that the Appellant shall not dispose of the Property and that no material decision affecting the Property shall be made without BNB’s consent.  BNB is to prepare a project financial appraisal which (once agreed) BNB is authorised to implement without reference to TGJ and TGJ agrees to advance whatever sums are required as a result.

8. Apart from the JV Agreement, the only other material that we had before us were the correspondence between the parties, the disputed invoices and a letter of 10th January 2006 from Mr Arthur, a director of BNB, written at the Appellant’s behest.  He states that—

	“As you [Mr Hezel] and Mr Gwyn Jones are aware, our function is to identify development opportunities, act as your Project Manager through each stage of the development, which includes certifying accounts for your dispersal, and selling the end investment.  The agreement is intended to demonstrate our profit share for successful projects, and should not be construed as a joint venture or partnership.

	Clearly we understand that all funds expended on this project emanate from [the Appellant], and we are therefore acting purely as your agent.  We have not, and indeed would have no right to reclaim the VAT, but if HM Revenue and Customs insist on their current line, presuming we are able, we would reclaim the VAT on our next quarter, and return that which is rightly yours.

	We would have no objection to this letter being presented to HM Customs, or indeed speaking with them on the telephone to clarify our position as your Project Manager and Agent.”

9. As the letter indicates, the Respondents accepted that BNB, as itself a VAT registered person, was entitled to claim the input tax on the David Cooper & Co invoices and then ‘re-invoice’ that amount to the Appellant as part of the costs of its services in obtaining the Planning Permission.  David Cooper & Co were, however, engaged to provide specialist services in relation to the planning appeal and, as appears from the JV Agreement, BNB would only receive something for its part in obtaining the Planning Consent if the outcome of the appeal were successful.  All the expenses of the planning appeal were to be borne directly by the Appellant on a separately agreed basis (see Recital B, paragraph 5 above).

The relevant legislation

10. Section 24(1) of the Value Added Tax Act 1994 (“VATA”) provides that—

	“Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say—

(a)	VAT on the supply to him of any goods or services
(b)	VAT on the acquisition by him from another member State of any goods; and
(c)	VAT paid or payable by him on the importation of any goods from a place outside the member States,

	being (in each case) goods or services used or to be used for the purposes of any business carried on or to be carried on by him.”

The Parties’ contentions

11. Mr Hezel’s contentions were straightforward.  He said that the Property had come to the Appellant’s attention through BNB when planning permission was refused.  Essentially, TGJ provided the initial finance, purchased through the Appellant and the Appellant had appointed BNB as its project manager while the planning appeal went forward.  BNB acting as the Appellant’s agent had engaged David Cooper & Co to provide specialist services in making representations for and attending the planning appeal, the Appellant had paid its invoices and had correctly reclaimed the input tax.  

12. Mr Hezel said that it was the Appellant’s Property and its planning appeal and that the services were accordingly rendered to the Appellant.  BNB had never owned the property and was to be separately remunerated for its services under the JV Agreement.  While one element of those services included using its best endeavours to obtain the Planning Consent, that did not extend to engaging the specialist services of a third party planning consultant at the Appellant’s expense.  That could only be done with the Appellant’s prior agreement.

13. Mr Keller for the Respondents submitted that the issue was whether on a proper understanding of the facts the Appellant was the recipient of the relevant services or whether the recipient was BNB.  He said that the key document was the JV Agreement.  This contained no reference to the appointment of BNB as the Appellant’s agent.  The manner of BNB’s remuneration was different from that conventionally used for an agent.  It was essentially a profit sharing agreement under which each party acted in concert but in its own interests.  He submitted that BNB had engaged David Cooper & Co to fulfil its part of the commercial bargain, namely to ensure the success of the planning appeal and thereby secure the Planning Consent on which everything else under the JV Agreement hinged.  In support of this Mr Keller noted that the invoices identified BNB as the client even though they were stated to be payable by the Appellant and gave the Appellant’s address.  He also criticised Mr Arthur’s letter as ‘self-serving’ and written after the event with the appeal in mind.  In any event Mr Arthur’s view of the legal relations created by the JV Agreement was not determinative.

14. We should note that Mr Hezel sought to rely on various paragraphs of the Respondent’s VAT Guide (VAT Notice 700) dealing with agency relationships and Mr Keller replied to Mr Hezel’s submissions.  As that Notice has no binding force and we have found it of no particular assistance in reaching our decision in this case we have not troubled to record the submissions here.

The reasons for our decision

14. The JV Agreement does not appear to have been prepared with the benefit of legal advice.  It appears to be an attempt by the lay parties to record their understanding of how the Property was to be managed and developed and the hoped-for profits divided.  As such it is not entirely clear how several elements of the transaction will actually work.  For example, the eventual sale of the Appellant or the Property to a new company following Planning Consent is likely to raise issues of how the profit on that sale (if it materialises) will actually find its way into the hands of TGJ and BNB.  In this respect, it seems to us to be an agreement that is better interpreted according to its evident spirit and purpose rather than its literal words and its terms may need to be supplemented in various ways (by implication or supplemental agreement) as the transaction proceeds.

15. We agree with Mr Keller that the JV Agreement does not in so many words appoint BNB as the Appellant’s agent and that, furthermore, there are elements of the JV Agreement that suggest that BNB is acting in a greater capacity than just as the Appellant’s agent.  Neither of those points, however, answer the question of whether David Cooper & Co were engaged to render services to the Appellant through BNB acting in that regard as the Appellant’s agent.

16. Under Clause 1.1 of the JV Agreement BNB agreed to use all reasonable endeavours to obtain Planning Consent.  Its fee and share in any profit depended upon Planning Consent and no doubt, acting in its own interests, it could have engaged the specialist services of David Cooper & Co as the best way of securing the outcome it desired.  In that case, of course, BNB would have had to bear the costs of David Cooper & Co itself and would, quite correctly, have reclaimed the input tax on the cost it had borne.  

17. David Cooper & Co, however, was engaged at the Appellant’s expense and as Recital B of the JV Agreement indicates, this could only be done with the Appellant’s agreement, as a separate matter.  The fact, therefore, that BNB’s status under the JV Agreement itself is ambivalent provides no answer as to the basis upon which David Cooper & Co’s services were engaged.  In this respect, it seems to us that the most likely scenario is that BNB sought the Appellant’s agreement that the services of David Cooper & Co should be engaged as offering the best chance of securing the Planning Consent.  No doubt in making that suggestion BNB was acting in its own interests and the Appellant in accepting the suggestion and agreeing to pay was doing likewise.  

18. How in fact David Cooper & Co came to be engaged could have been answered quite shortly had Mr Hezel produced either the documents or (assuming as we must do that there were no relevant documents) the witnesses to give us the answer.  As matters stand we can only reach our decision by reference to the JV Agreement and what we know of the arrangements.  The Respondents have based their case on the JV Agreement as indicating that there was no agency.  As we have explained, however, this does not answer the question that we have to decide.  

19. What we know is that the Appellant paid for the services and that David Cooper & Co were obviously informed that this was how the arrangement was to work.  David Cooper & Co must also have known that they were advising on the Appellant’s planning appeal in respect of the Appellant’s Property and in that respect that the benefit of their services would enure directly to the Appellant.  (We do not know whether David Cooper & Co knew of BNB’s interest in the matter.)  Mr Hezel told us that David Cooper & Co had declined to issue the invoices addressed solely to the Appellant as they had been requested to do.  They preferred to reflect the situation in which they had rendered their services: taking their instructions from BNB but acknowledging that the Appellant would pay.  That, however, is quite consistent with a situation in which BNB was acting as the Appellant’s agent and, overall, we think that this the better explanation of the various parties’ relationships in respect of this aspect of the Property’s development.

20. We therefore allow this appeal.  We direct that the Respondents shall pay the Appellant’s costs of and incidental to and consequent upon its appeal.

MALCOLM GAMMIE QC
CHAIRMAN
RELEASED: 6 November 2006

LON/06/0132