MAYBECK LLP v Revenue & Customs [2006] UKVAT V19898 (20 November 2006) 

19898

VALUE ADDED TAX — input tax — professional fees incurred in the acquisition of a minority shareholding in a company providing services to the taxpayer — whether direct and immediate link with the taxpayer’s own activities or merely an investment — Cibo Participations and Kretztechnik applied — appeal allowed in principle

MANCHESTER TRIBUNAL CENTRE

MAYBECK LLP
Appellant
- and -
THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS
Respondents

Tribunal:	Colin Bishopp (Chairman)
Roland Presho FCMA
Sitting in public in Birmingham on 26 September 2006

James Fletcher, group financial controller, for the Appellant 
Nigel Poole, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents 

© CROWN COPYRIGHT 2006

DECISION
1.	The Appellant, Maybeck LLP, is a limited liability partnership and a member of a group of traders carrying on the business of managing residential property. Maybeck provides what its application for VAT registration describes as “ancillary property management services”, which include the arranging of insurance on the properties within the group’s management portfolio. As we understand the position, it makes onward supplies of its services to other group members, which in turn supply services to the residents of the properties. 
2.	In or about 2004 Maybeck acquired a 40 per cent shareholding in an insurance broker, Residentsline. In the course of the acquisition Maybeck incurred legal fees on which VAT was charged and it now seeks to recover that VAT as input tax. The Respondents contend that the VAT is not recoverable since there is no direct and immediate link between the legal services and Maybeck’s onward taxable supplies. There is, we understand, a separate disagreement between the parties about the extent to which those onward supplies are taxable, rather than exempt for VAT purposes, but that disagreement is not before us and we proceed upon the basis that we are required to determine only whether the VAT is, in principle, recoverable input tax.
3.	Before us, Maybeck was represented by its group financial controller, James Fletcher, and the Respondents by Nigel Poole of counsel. We heard no formal evidence (the basic facts set out above were not in dispute). We were provided with a small number of relevant documents and some authorities. 
4.	Maybeck’s case is that it acquired the shares in the broker not merely as an investment but in order that it could obtain some measure of control over the broker’s activities (even though it did not appoint any directors to Residentsline’s board its representatives attended board meetings) and particularly its services to Maybeck and its group. Although Maybeck acquired only a minority holding it was nevertheless able to share training facilities, to take advantage of the broker’s authorisation by the Financial Services Authority, and thereby avoid having to obtain such authorisation itself (which would otherwise be necessary as it places insurance for consumers), to monitor and exercise some control over the level of premiums charged—which enabled it to price its own onward supplies more competitively—and to obtain a 40 per cent share of the commissions earned by the broker from the various insurers with which business was placed. The services which Maybeck supplies are a component of the group’s contractual obligations to its clients; if it did not provide those services the group would be in breach of its contracts. The acquisition was made, therefore, for the purposes of Maybeck’s business. The benefits of investment, that is the receipt of dividends and the opportunity of capital growth, were not the motive for the acquisition. 
5.	For the Commissioners, Mr Poole did not challenge what Mr Fletcher had said about the motives behind the acquisition (although at the same time not conceding it) but, he said, the motives were immaterial: what mattered was whether the acquisition could properly be regarded as a cost component of Maybeck’s own supplies. Maybeck had acquired only 40 per cent of Residentsline and did not control it. The sharing of training facilities could have been accomplished whether or not a shareholding was acquired and similarly Maybeck and Residentsline could have agreed upon their relationship as client and broker regardless of the acquisition. The fact that Maybeck was entitled to 40 per cent of the commissions earned was no more than a consequence of its having acquired 40 per cent of the shares. Thus the only thing which Maybeck gained by its acquisition of the shares, rather than by negotiation, was the investment benefit.
6.	The right to deduct input tax is conferred by article 17(2) of the Sixth VAT Directive (77/388/EEC) which provides that 
“in so far as the goods and services are used for the purposes of taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay: 
(a)	value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person …”
7.	Domestic law adds nothing of present significance to that statement of principle. Thus if Maybeck can show that the legal services supplied to it in connection with its acquisition of the shares were “used for the purposes of [its own] taxable transactions” (assuming for present purposes that Maybeck’s onward supplies are taxable) it is entitled to deduct the input tax. The essential question is whether the legal services were “used for” that purpose. In the most proximate sense the legal services were used for the acquisition, but one is not restricted to that very narrow view and the parties are correct to identify as the true question whether the acquisition was used for—or formed a cost component of—Maybeck’s onward supplies. One other condition which must be satisfied is that the person seeking to deduct the tax must be a taxable person, a concept defined by article 4 of the Sixth Directive in this way:
 “1	‘Taxable person’ shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.
2 	The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.”
8.	The jurisprudence on the subject is almost entirely that of the European Court of Justice. A summary of the earlier case-law is to be found in the Court’s judgment in Cibo Participations SA v Directeur régional des impôts du Nord-Pas-de-Calais (Case C-16/00) [2002] STC 460, as follows: 
“18.	The court has consistently held that art 4 of the Sixth Directive must be interpreted as meaning that a holding company whose sole purpose is to acquire holdings in other undertakings and which does not involve itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have the status of taxable person and has no right to deduct tax under art 17 of the Sixth Directive (see Polysar Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen, Arnhem (Case C-60/90) [1993] STC 222, para 17, and Floridienne SA v Belgium (Case C-142/99) [2002] STC 1044, para 17).
19.	It is clear from case law that that conclusion is based, amongst other things, on the finding that the mere acquisition and holding of shares in a company is not to be regarded as an economic activity, within the meaning of the Sixth Directive, conferring on the holder the status of a taxable person. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property (see the judgments in Sofitam SA (formerly Satam SA) v Ministre chargé du Budget (Case C-333/91) [1997] STC 226, para 12, and Harnas & Helm CV v Staatssecretaris van Financiën (Case C-80/95) [1997] STC 364, para 15). 
20.	However, the court has held that it is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder (see Polysar [1993] STC 222, para 14, and Floridienne [2000] STC 1044, para 18).”
9.	The point in issue in the Cibo Participations case was whether Cibo could recover as input tax the VAT as it had been charged by various third parties for their services in Cibo’s acquisition of shares in three subsidiaries to which, after acquisition, it provided various management services. As the extract from its judgment which we have set out indicates, the court held that while the acquisition and holding of shares were not to be regarded as an economic activity and there was no direct and immediate link between the acquisition of the shares and Cibo’s own taxable activities, the costs of acquisition were part of Cibo’s general costs and for that reason had a direct and immediate link with Cibo’s business activities as a whole. Thus the input tax which had been incurred could be recovered to the extent that those business activities were taxable—that is, where the taxable person carried on both taxable and non-taxable activities, only a proportion of the input tax so incurred was recoverable. The court reiterated that dividends were not the consideration for any taxable supply, and that remains the case whether or not the shareholder receiving the dividends also provides management services. We mention in passing that the report of the case states that Cibo acquired “significant” shareholdings in the subsidiaries, but does not disclose the percentage of the issued shares which it acquired.
10.	The court had occasion to consider similar questions again in Kretztechnik AG v Finanzamt Linz I (Case C-465/03) [2005] STC 1118. Kretztechnik arranged for its listing as a public company on the Frankfurt Stock Exchange, and at the same time issued shares with a view to increasing its capital. It incurred various professional and similar fees in connection with the listing and the issue of the shares, and sought to deduct as input tax the VAT which had been added to the charges. The court put its conclusions in this way:
“34.	The deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities whatever their purpose or results, provided that they are themselves subject in principle to VAT (see, to that effect, Rompelman v Minister van Financiën (Case 268/83) [1985] ECR 655, para 19, Belgium v Ghent Coal Terminal NV (Case C 37/95) [1998] STC 260, para 15, Gabalfrisa SL v Agencia Estatal de Administración Tributaria (Joined Cases C-110/98 to C-147/98) [2002] STC 535, para 44; Midland Bank plc v Customs and Excise Commissioners (Case C-98/98) [2002] STC 501, para 19, and Abbey National plc v Customs and Excise Commissioners (Case C-408/98) [2001] STC 297, para 24).
35.	It is clear from the last-mentioned condition that, for VAT to be deductible, the input transactions must have a direct and immediate link with the output transactions giving rise to a right of deduction. Thus, the right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring them was a component of the cost of the output transactions that gave rise to the right to deduct (see Midland Bank, para 30, and Abbey National, para 28 and also Cibo Participations).
36.	In this case, in view of the fact that, first, a share issue is an operation not falling within the scope of the Sixth Directive and, second, that operation was carried out by Kretztechnik in order to increase its capital for the benefit of its economic activity in general, it must be considered that the costs of the supplies acquired by that company in connection with the operation concerned form part of its overheads and are therefore, as such, component parts of the price of its products. Those supplies have a direct and immediate link with the whole economic activity of the taxable person (see BLP Group plc v Customs and Excise Commissioners (Case C-4/94) [1995] STC 424, para 25; Midland Bank, para 31; Abbey National, para 35 and 36, and Cibo Participations, para 33).
37.	It follows that, under article 17 (1) and (2) of the Sixth Directive, Kretztechnik is entitled to deduct all the VAT charged on the expenses incurred by that company for the various supplies which it acquired in the context of the share issue carried out by it, provided, however, that all the transactions carried out by that company in the context of its economic activity constitute taxed transactions. A taxable person who effects both transactions in respect of which VAT is deductible and transactions in respect of which it is not may, under the first sub-para of article 17(5) of the Sixth Directive, deduct only that proportion of the VAT which is attributable to the former transactions (Abbey National, para 37, and Cibo Participations, para 34). 
38.	The answer to the third question must therefore be that article 17(1) and (2) of the Sixth Directive confer the right to deduct in its entirety the VAT charged on the expenses incurred by a taxable person for the various supplies acquired by him in connection with a share issue, provided that all the transactions undertaken by the taxable person in the context of his economic activity constitute taxed transactions.”
11.	We mention for completeness, since Mr Fletcher relied on it, Customs and Excise Commissioners v UBAF Bank Ltd [1996] STC 372, a decision of the Court of Appeal. The facts of that case are rather different from those which pertain here, and we derive little assistance from the case; moreover, it pre-dates most of the relevant European jurisprudence.
12.	Although Mr Poole urged us to the view that Maybeck’s acquisition of its shareholding in Residentsline was a mere investment, and that in consequence none of the VAT incurred on the professional fees was deductible, we have come to the conclusion that the argument must be rejected. We are satisfied that this is a case of an acquisition which was intended to, and did, enable Maybeck the better to perform its own business activities, and that the benefits which Maybeck obtained by reason of the acquisition are benefits of substance, and are not limited to the receipt of dividends. It is true that Maybeck did not acquire a controlling interest in Residentsline, but that does not seem to be the test: certainly it was sufficient, in Cibo Participations, that a “significant” holding was acquired. In our view 40 per cent is a significant holding. We have concluded that the circumstances of this case are more closely akin to those of Cibo Participations and Kretztechnik than to the position described in Polysar, where the taxpayer was no more than a holding company. It follows therefore that the professional fees incurred by Maybeck in the acquisition form part of the its overheads and a proper proportion of the VAT added to those fees, that is to say the proportion attributable to its onward taxable supplies, is recoverable. 
13.	In principle, and subject to the resolution of the disagreement about the nature of Maybeck’s own supplies, the appeal must be allowed. 

COLIN BISHOPP 
CHAIRMAN
Release Date: 20 November 2006
MAN/05/778