Telent Plc v Revenue & Customs [2006] UKVAT V19967 (19 December 2006)

19967

Value added tax – supplies of services – single or multiple supplies – whether solicitors supplying services both to their clients and to other beneficiaries of their services

LONDON TRIBUNAL CENTRE

TELENT PLC	           Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

CLIFFORD CHANCE LLP                         Third Party

Tribunal:	DR DAVID WILLIAMS (Chairman)
M K HOSSAIN FCA FCIB

Sitting in public in London on 25-28 September 2006

Mr Roger Thomas of counsel, instructed by Ernst & Young, for the Appellant 

Mr Owain Thomas of counsel, instructed by the Acting Solicitor for Her Majesty’s Revenue and Customs, for the Respondents

Mr Jordan, partner, for the Third Party

© CROWN COPYRIGHT 2006

DECISION

1	This case is about the refusal of the respondents to refund to the appellant input tax paid by the appellant to the third party.  It arises out of services supplied by the third party to others in connection with a corporate restructuring exercise in circumstances such that the appellant argues that services were supplied by the third party to it as well as those others. The unusual nature of the contention is that the third party is a firm of solicitors, and the contention of the appellant is that the solicitors were supplying services to them as well as to the solicitors’ own clients.
The parties to the appeal 

2	The appellant is the representative company for value added tax purposes of the Telent group of companies. The group was previously known as the Marconi group (comprising in particular Marconi plc and Marconi Corporation plc and their subsidiaries). Before that the appellant was known as GEC Plc or the General Electric Company group. For the purposes of this decision the group and representative company (and the other companies in the group) are referred to throughout as “Marconi” without distinguishing between the corporate members of the group save where relevant and without reference to those name changes. 

3	The respondents are referred to as “HMRC”. That includes their predecessors in title, the Commissioners of Customs and Excise.  	

4	The third party, the London based limited liability partnership of lawyers, is referred to as Clifford Chance. Clifford Chance applied to be joined as a party to the appeal. This was because it was informed (accurately) that Marconi’s grounds of appeal expressly challenged the legality of the actions of Clifford Chance in issuing value added tax (“VAT”) invoices in the way it did for amounts paid in full to it by Marconi. Clifford Chance submitted that for it to have acted otherwise than it did in issuing the VAT invoices would have been a breach of the professional code of conduct it was obliged to follow as a firm of solicitors. The tribunal admitted it as a third party for those reasons. 

5	The Value Added Tax Tribunal Rules 1986 (“the Tribunal Rules”) are not, it is common ground, designed for three party proceedings. The tribunal directed that Clifford Chance be treated for all purposes of proceedings as an equal party under the Tribunal Rules once joined, save as directed otherwise. But Clifford Chance confined its part in the proceedings, with agreement of the tribunal, to those issues of fact and law that directly affected its own interests. It did not directly support the arguments of either of the other parties on all the issues in the appeal. 

Witnesses

6	Once Clifford Chance was joined to the proceedings, Marconi sought disclosure of evidence from it. After directions hearings, the tribunal accepted applications from Marconi and issued witness summonses against two partners of Clifford Chance. One of the partners, Nicholas Frome, accepted the summons and made a long voluntary witness statement. He was a partner of Clifford Chance with direct responsibility for handling the work undertaken and advice given by Clifford Chance relevant to this appeal. The appellant, having obtained the second summons, did not serve it. The tribunal discharged that summons at the start of the main hearing. It became clear at that stage that Marconi also did not wish to call Mr Frome as a witness. It sought to exclude his witness statement from the proceedings. The tribunal noted that the summons still stood good and that Mr Frome had agreed to attend – indeed, he accepted that he was required to attend. After discussion with the parties, the tribunal agreed that Mr Frome attend as the witness of Clifford Chance. The tribunal accepted his witness statement in evidence, save that the representations of law in the statement were adopted by Mr Jordan as part of the argument put to the tribunal for Clifford Chance rather than as evidence.  

7	The tribunal also received oral evidence under oath or affirmation from  Christopher Holden, interim chief financial officer of Marconi during part of the period relevant to the appeal, and from three officers of Revenue and Customs: Andrea Coppins, Frederick John Howe, and Stephen John Murrell.  

8	The tribunal found the evidence of Mr Frome detailed and helpful. He provided the tribunal not only with details of the relations between Clifford Chance, Marconi, and the other persons involved in the events in question but also with an expert view on the practical interactions taking place. By contrast, the tribunal found the evidence of the other witnesses to be of limited value. Mr Holden was only able to give direct evidence of events during part of the relevant time. He also appeared to the tribunal to be less than sharp in his recollection of some relevant details. None of the officers could contribute much by way of direct evidence of those events. Their evidence was confined to confirmation of details of the investigations by HMRC and of the provenance of some documentation. While this was useful, it had clearly been collated before Clifford Chance was made a party to the proceedings. It included secondary evidence of relevant documents and events of which the tribunal at the hearing was offered primary evidence. Where, therefore, there was any conflict between evidence of the witnesses, the tribunal accepted the evidence of Mr Frome in preference to other evidence.  

Documentary evidence

9	Marconi sought wideranging disclosure of documents from Clifford Chance under rule 20 of the Tribunal Rules in preliminary applications. These were contested by Clifford Chance. HMRC took a neutral view of these applications. 

10	The tribunal took the view that, as it had directed that Clifford Chance be treated as an equal party to the proceedings, that approach should apply to its rights and duties to disclose. Marconi was subject to a duty under rule 20(1) to serve by the stated time a list of the documents that it proposed to produce at the hearing. Marconi, by contrast, applied for the tribunal to direct that Clifford Chance produce documents under the additional powers of rule 20(3). Clifford Chance objected to this on several grounds. These included the lateness of the application, the question why Marconi was seeking to impose a heavier duty on Clifford Chance than, in the view of Mr Jordan, it had accepted for itself in compliance with rule 20(1), and also by reference to the applications for evidence from witnesses. The tribunal accepted the substance of the objections by Clifford Chance and, in particular, the arguments that it should not be made subject to a heavier duty than that accepted by Marconi. It therefore refused to make the direction sought by Marconi. But it indicated that it would be more sympathetic to the late admission of documents by parties than would otherwise have been the case. Marconi made an application for late admission of documentation at the beginning of the full hearing, and rightly reminded the tribunal of that indication. The tribunal admitted the late documents while reserving the position of the other parties as to costs incurred by the late admission.

11	Both HMRC and Clifford Chance commented in the preliminary hearings and at the full hearing about what they viewed as a conflict in the Marconi position of seeking further documentation from the other parties while producing only limited documentation itself. The tribunal noted during the full hearing the absence of documents that it would expect to have seen in evidence on a full disclosure under rule 20(1) by all parties. It also indicated towards the end of the hearing that it would comment on this in its decision. It does so below. The tribunal became satisfied on the evidence before it that some key documents that had been assumed to exist at earlier stages in the appeal never came fully into existence and remained drafts. Others were never created. But others again either were not regarded as relevant or could not now be located. The tribunal finds that as a result some transactions were in substance oral contracts. There were no formal documents to produce on those matters. The nature of those relationships is therefore a matter of fact and not of the interpretation of contractual documents.  

The professional code of conduct for solicitors

12	Another issue rehearsed in the directions hearings was whether Clifford Chance was in breach of professional requirements upon it as a firm of solicitors. These are set out in the Guide to the Professional Conduct of Solicitors issued by the Law Society of England and Wales. Clifford Chance drew the attention of the tribunal to the following guidance in Cordery on Solicitors, Vol I L 902:

“In no circumstances may a solicitor render a bill to someone who is not his client. Misunderstandings about this arise frequently when a third party who is paying the client’s costs wishes to have an involve on which he can recover the VAT.” 

13	The tribunal has, of course, no jurisdiction over these issues. It emphasises that it has seen nothing that would suggest – as the appellant did suggest might be the case in a directions hearing – that Clifford Chance were acting in breach of professional obligations. But, at the same time, the tribunal accepts the submissions of the parties that the determination of issues in dispute in this appeal as argued by the appellant could lead to the consequence that firms such as Clifford Chance could be forced to break professional obligations to their clients in order to comply with the requirements of value added tax law. The tribunal takes the view that this is not relevant to its decision, and it heard no detailed argument on the point. If the result of its decision is that there is inconsistency between the requirements of value added tax law and the requirements of the professional conduct code applying to solicitors then that is for the Law Society, or the courts, but not for the tax tribunals, to resolve. But the tribunal recognises that this possibility could arise because of the nature of the central issue put before it for decision by Marconi.   

The central issue in the appeal 

14	As put for Marconi by Mr Roger Thomas in a thorough and attractive argument, this case involves a fundamental aspect of the design of value added tax (“VAT”). The problem is this. What happens when A makes a single undivided taxable supply of services to both B and C where A has a contract with B to provide those services, but C pays A for them in full, including paying the full VAT. Should the VAT invoice be issued to B, or to C, or in duplicate to both, or should it be divided in some way between them? 

15	Given the nature of the central issue in the argument, the tribunal sets out the key aspects of Marconi’s argument in summary form before turning to the facts and evidence, and also to the full arguments of the three parties. It does so in order to indicate the issues to be decided both in fact and in law for the appellant’s full  argument to be made good. For Marconi, Mr Roger Thomas contended that:

(a) services may be supplied (in the VAT sense of the term) by a taxable person to two other persons at the same time, and therefore A may supply services both B and C at the same time; 
(b) if only one of those suppliers (C) provides the consideration, the other (B) may rely for VAT purposes on third party consideration to A for the supply to B;
(c) both the persons supplied (B and C) may receive those supplies as taxable persons, that is, in the course or furtherance of their respective registered businesses for VAT purposes;
(d) while it is necessary to have a legal relationship between the supplier and each person supplied for VAT purposes, the legal relationship does not have to be a contractual relationship, and so A may have the legal relationship necessary between a supplier and a person supplied for VAT purposes with both B and C without having contracts with both B and C;  
(e) in such a case the party providing the consideration (C) may claim input tax paid by it to A if the appropriate VAT invoice is issued to it by A;
(f) there is a potential duty on the supplier (A) to issue a VAT invoice to all persons supplied (here B and C) for VAT purposes, if the necessary conditions are met in respect of each party supplied; and
(g) in the case of a supply to both B and C and where the conditions are met by both B and C, the VAT invoice should be issued by A to C as payer so that C can reclaim the input tax;
(h) the invoice should not therefore be issued to B as the other contractual party. 

Mr Roger Thomas argued that his client Marconi was in the position of C. Marconi should have been issued with the relevant invoices by Clifford Chance, who were in the position of A, regardless of whom was in the position of B. 

16	The tribunal accepts, and finds, that this is not a case involving any form of  planned avoidance of VAT on the facts. Nor does it involve structures designed to sidestep or take advantage of the internal distortions in either European VAT law or the United Kingdom variant of VAT. On the contrary: the evidence as a whole clearly showed that events dictated the courses of action of most of the parties to those events and that the payment of VAT followed those events. If any thought was given by anyone to the VAT consequences of the transactions that gave rise to this appeal, then those thoughts also followed the events and at no time shaped them. This is therefore a case of applying the ordinary rules about reclaiming input tax to complex facts.

Project Telescope 

17	The events that give rise to this appeal involve what Mr Frome described as “a hugely complex project”. It took place between 2001 and 2003 under the working title of Project Telescope. It is a matter of public record that Marconi considered in the autumn of 2001 that it needed to refinance its operations. What started as a refinancing operation that was expected to involve a number of its bankers became a complete worldwide restructuring of the Marconi corporate group. This involved not only all its bankers but also all its bondholders and all its shareholders. It culminated in both the Marconi main companies entering into schemes of arrangement approved by the High Court on 19 May 2003. Given that until not long before these events, Marconi was one of the largest corporations listed in the United Kingdom, these were major matters involving multi-billion financing arrangements. It is not surprising, therefore, to find that the arrangements involved some of the largest banks, firms of solicitors, and accountants operating in the London market. 

The parties involved in Project Telescope

18	Those involved in the project were:

(a)	Marconi, that is, the two main public limited companies in the appellant group of companies, other companies in the group and their subsidiaries,
(b)	Allen and Overy as solicitors to Marconi,
(c)	Barclays Bank and HSBC (and, later, JP Morgan Chase), “the joint co-ordinating banks” on behalf of the creditor banks to Marconi,
(d)	the Co-ordinating Committee appointed from among the creditor banks,
(e)	each of the 31 “creditor banks” (including the joint co-ordinating banks in their individual capacities as creditor banks) who were creditors under syndicated credit agreements made in 1998 and 2001
(f)	the bondholders under issues of both Euro and Dollar bonds by Marconi
(g)	HSBC as facility agent to those bondholders
(h)	Bingham Dana (later Bingham McCutchen) as solicitors to the ad hoc committee of those bondholders, and
(i)	Clifford Chance.

19	The key question is the capacity in which Clifford Chance took part in the events. The tribunal emphasises that its primary concern is with the capacity in which Clifford Chance took part for VAT purposes. That must, at least in the factual sense, take into account of the firm’s professional involvement. But, ass Mr Roger Thomas argued, there are a number of possibilities. Was the firm (a) acting as the solicitors to, and supplying services for VAT purposes to, the joint co-ordinating banks, as both it and HMRC contended, (b) regardless of the identity of its clients and any supplies to them, also supplying services for VAT purposes to Marconi, as contended in Marconi’s main argument, or (c) was it acting for, and supplying services to each of the 31 creditor banks, as contended in Marconi’s alternative argument? Those contentions are not exhaustive or exclusive of the possibilities. But they require analysis of the position of Clifford Chance both as solicitors advising clients and as suppliers of professional services subject to VAT. In order to give full weight to the arguments of Mr Roger Thomas, the tribunal does not assume that those are identical positions.

The key documents about the appointment of Clifford Chance

20	On 12 October 2001 Marconi formally requested both Barclays and HSBC in writing to act jointly as provisional co-ordinating banks for the bank creditors of the Marconi Group until 22 October 2001. The letter, countersigned for both the joint co-ordinating banks, is a carefully drafted document including terms of reference, indemnities and other relevant provisions. These include that (paragraph 4):

“the Provisional Coordinators will be authorised to instruct a single firm of lawyers in each relevant jurisdiction to advise them in relation to issues or matters which in the reasonable view of the provisional coordinators are or might become relevant or have a bearing on their position or the position of all or any of the bank creditors. The costs of such lawyers relating to such advice shall be for the account of [Marconi] only to the extent provided for in paragraphs 11 and 12.”

Paragraph 11 is, subject to paragraph 12, an undertaking to reimburse all reasonable legal fees up to and including 22 October 2001. Paragraph 12 refers to an initial estimate of fees provided by Clifford Chance. Clifford Chance is not otherwise mentioned expressly in the letter. Mr Frome confirmed in evidence that Clifford Chance drafted the letter. There followed a general meeting of the creditor banks on 19 October 2001 in which Clifford Chance was also involved. This meeting formally appointed Barclays and HSBC as the joint co-ordinating banks for all the creditor banks. The tribunal also accepts the evidence that the appointment of Clifford Chance as solicitors to the joint co-ordinating banks was confirmed as a result of the meeting. 

21	The formal appointment of Clifford Chance to act for the provisional coordinators, later the joint co-ordinating banks, is clearly evidenced in several documents. But there is no single letter setting out the formal terms of appointment between the joint co-ordinating banks and Clifford Chance. There is an important document issued on Clifford Chance paper that states as follows:

“Draft 29/10/01

PROJECT TELESCOPE

THE ROLE AND RESPONSIBILITY OF CLIFFORD CHANCE

Clifford Chance has been instructed by the Joint Coordinators of Project Telescope

(i)	to advise the joint Co-ordinators and the Co-ordination Committee in relation to their respective appointments and responsibilities and in their capacities as such in relation to Project Telescope;

(ii)	in accordance with instructions of the Joint Co-ordinators to provide advice and analysis to the Banks collectively in relation to Project Telescope; and

(iii)	to advice the Co-ordinators and the Banks collectively as regards documentation relating to Project Telescope.

While the written advice which Clifford Chance provides to the Banks collectively may be relied upon by each Banks (and any successors in title with the consent of Clifford Chance but not otherwise), Clifford Chance is not acting for individual Banks in relation to Project Telescope or as regards their individual relationships with or liabilities do to them from members of the Telescope group.

Generally speaking Clifford Chance will consider issues and matters relating to Project Telescope only from the collective perspective of the Banks as a group and without knowledge of individual positions or expectations of Banks either in relation to the Telescope Groups or relative to other Banks. 

If individual Banks wish to receive advice in relation to their respective positions on matters relating to Project Telescope they should communicate this request to the Joint Co-ordinators. If the Joint Co-ordinators instruct Clifford Chance to provide such advice directly to a Bank that Bank will be able to rely upon the advice Clifford Chance provides but should expect such advice to be made available to the other Banks.

Clifford Chance will have no duty of care or responsibility to any persons other than the Banks to whom their written advice is addressed or otherwise communicated with their express written consent. If any Bank wishes any successor in title or other person to be able to rely on advice provided by Clifford chance in relation to Project Telescope it should communicate this request to Clifford chance who shall be entitled to grant or refuse their consent in this regard at their absolute discretion.

Each Bank will be expected to and must reach its own conclusions and make its own assessment as to the meaning and significance for their organisation of advice provided by Clifford Chance in relation to Project Telescope.” 

22	That document was drafted by Mr Frome. He told the tribunal that although it was headed “Draft”, it was a finalised document and was circulated by the joint co-ordinating banks to all the creditor banks. It was seen by Clifford Chance and those banks as a unilateral statement by Clifford Chance to those who were not clients of the extent to which Clifford Chance would accept responsibility. None of the creditor banks objected to the document. 

23	The joint co-ordinating banks instructed Clifford Chance to draft a formal letter of their appointment (“the Appointment Letter”). This was needed, Mr Frome confirmed, to deal with indemnities and the likely costs of professional assistance. The draft which was before the tribunal was dated 9 November 2001. It was signed for the joint co-ordinating banks and for Marconi but was never signed by the other members of the coordinating committee.  Mr Frome explained why some of the creditor banks were unhappy with aspects of the Appointment Letter and so withheld agreement to the full text. As a result, the draft was not signed by all intended signatories and remained a draft.

24	The draft set out the duties of the joint co-ordinating banks and related issues. The following paragraphs relate to the position of Clifford Chance:

“7	Appointment of Legal Counsel

7.1 The co-ordinators are authorised to instruct Clifford Chance LLP (in England and Wales) and a single firm of lawyers in each other relevant jurisdiction to advise them in relation to issues or matter which in the reasonable view of the co-ordinators are or might become relevant to or have a bearing upon their position or role or the position of all or any of the bank creditors. The costs of such lawyers relating to such advice shall be for the account of [Marconi] only to the extent provided for in paragraph 14.

[there is no clause 7.2]

14	Costs and expenses

…

14.3	[Marconi] will reimburse the co-ordinators for the reasonable fees and expenses of Clifford Chance LLP for the period up to and including 31 October 2001 (including without limitation the fees previously approved or the subject of estimates supplied to [Marconi]. Clifford Chance LLP has provided (and [Marconi] has approved) in a letter dated on or about the date of this letter an initial estimate of its anticipated fees for the period 1 November 2001 to 31 January 2002 covering:

14.3.1 legal due diligence and analysis of the existing financing arrangements between the Marconi Group and its financial creditors; and

14.3.2 work in relation to [Marconi’s] future bank financing (as contemplated by paragraph 5.1); and

14.3.3 other analysis, advice and work requested from time to time by the co-ordinators in accordance with paragraph 7.

[14.4 deals with the current and future estimates]

14.5	The most recent estimates approved from time to time by [Marconi] under paragraphs 14.2 and 14.3 and, if applicable, pursuant to paragraph 8, shall represent the maximum amount of [Marconi’s] liability under paragraph 14.2.

15	Co-ordinators fees

15.1	[Marconi] will pay to the co-ordinators the fees specified in the fee letter of even date hereof from the co-ordinators to [Marconi] at the times and in the amounts specified in such letter.” 

[there is no clause 15.2]

The tribunal notes that this letter was signed by both the joint co-ordinating banks and by Clifford Chance. Although it remained as a draft as regards the creditor banks, it was confirmed as between those parties.

25	Another formal letter, entitled “Terms of Appointment of the Co-ordinators and the Co-ordination Committee of Project Telescope”, was also drafted at that time. The tribunal saw an early November third draft, the first draft having been made on 25 October. The letter was to be addressed to each of the creditor banks from the joint co-ordinating banks. The purpose of the letter was to authorise the co-ordinating committee and choose its members. It also dealt with liabilities and indemnities. This draft rehearses some of the preceding events, sets out the terms of reference of the joint co-ordinating banks (in terms identical to those in the preceding draft) and deals with obligations, indemnities, responsibilities and exclusions.

26	The attention of the tribunal was drawn to paragraph 7 (Own responsibility) of that document. Under that provision each creditor bank was to confirm that it understood and accepted that “it has itself been, and will continue to be, solely responsible for making its own independent appraisal of and investigation into all risks arising under or in connection with Project Telescope…”. This included (at 7.1.5): “the adequacy, accuracy, and/or completeness of any advice obtained by the co-ordinators in connection with Project Telescope”. 

27	Paragraph 11, Costs and Expenses, provided:

“To the extent not reimbursed by Marconi in accordance with paragraph 14 of the Appointment Letter, each bank will reimburse the co-ordinators and/or the co-ordination committee rateably on demand in the proportion which the outstandings of each bank under the existing facilities bear to the aggregate of total outstandings of all the banks under the existing facilities at the time of such demand, for all fees (excluding for the avoidance of doubt, fees payable by Marconi to the co-ordinators pursuant to paragraph 15 of the Appointment Letter), costs and expenses which they may incur as a result of carrying out their duties as co-ordinators and/or co-ordinating committee member including as a result of instructing solicitors and reporting accountants.” 

28	The Appointment Letter described above was to be scheduled to this letter.

29	Clifford Chance sent these documents, on the instructions of the joint co-ordinating banks, to the creditor banks in two series of letter dated 13 November 2001. Mr Frome told the tribunal of the reservations expressed by some recipients about some aspects of the terms of the indemnities in these letters. The result was again that the formal letters were not signed. 

30	Notwithstanding the failure to reach full agreement on these terms and to settle the documents in final form, events forced progress to be made by all involved along the lines, but not the precise terms, set out in those drafts. 
The oral evidence 

31	The tribunal also considered the oral and other evidence received about these events. Mr Frome, as already noted, presented a long voluntary statement and gave full oral evidence. He was the main individual author of the INSOL International Statement of Principles for a Global Approach to Multi-Creditor Workouts adopted in 2000. That document forms an important background source evidencing the approaches adopted or that might be adopted in arrangements such as Project Telescope. The tribunal approaches its findings of fact about the relevant aspects of Project Telescope against the background of the principles set out in that document. 

32	Mr Frome joined Clifford Chance in September 2001, a little after Clifford Chance had had the first telephone calls and meeting about what became Project Telescope but in time to be involved centrally in it. The tribunal accepts Mr Frome’s evidence as given by someone with considerable expertise in and experience of the kinds of transactions involved in Project Telescope, and as someone centrally involved in both the planning and execution of Project Telescope from shortly after the first suggestions to the banks of the need for refunding at Marconi through to the completion of the full restructuring. The tribunal found his evidence thorough, coherent, consistent with the key documents discussed above, and convincing in its detail. 

33	The tribunal accepted his account of how Clifford Chance had been appointed provisionally by the joint co-ordinating banks, both of whom had been regular clients of Clifford Chance from the initial appointment letter of 12 October 2001. He gave evidence of talks for some weeks before that letter in which Clifford Chance, and he personally, had been in discussion with the banks as a result of their discussions with Marconi. Instructions to Clifford Chance to act evolved as those discussions became more formal. The joint co-ordinating banks actively took up their roles, assisted by the co-ordinating committee. Clifford Chance continued to take an active role in advising about Project Telescope through to the completion of the project and the restructuring of Marconi. Mr Frome confirmed that, as a result of matters moving forward in this way, no other specific letter of appointment or of instructions was exchanged between Clifford Chance on the one side and the joint co-ordinating banks (or any other persons) on the other with respect to this. Clifford Chance remained of the view that the position had been stated in the note about Project Telescope set out in full above. No other potential party objected to this. Its own concerns, about the risks to it about its costs not being met, were met in an alternative way by a system of substantial payments on account by Marconi directly to Clifford Chance.

34	In reply to questions about the relationship with Marconi, Mr Frome confirmed that Marconi had taken steps both to identify and to limit its liability to Clifford Chance for their fees. Clifford Chance sought to keep them informed of the extent of liability by reference to the tasks Clifford Chance was given. This started at a reasonably specific level but became more and more generalised as Project Telescope developed. He confirmed that although much of the work was to the benefit of Marconi some aspects of the advice given were adverse or even hostile to Marconi. It was necessary to consider contingency planning and the position in various jurisdictions in the event of insolvency. Clifford Chance was also looking at the position of the banks as against the noteholders and at the consequences of default or material adverse changes in Marconi’s position. Much of that advice was not seen by Marconi. Nor was there any agreement, written or otherwise, with Marconi about advice. He denied that Clifford Chance was in any way contractually bound to Marconi to complete its work on Project Telescope. The fee estimates were based on spreadsheets sent to Marconi from time to time on an ongoing basis. (The tribunal observes that it saw no documentation of this kind).   

35	If Marconi did not pay the fees, Mr Frome would have looked with Clifford Chance to the joint co-ordinating banks for payment. They were the clients following provisional appointment by those banks and then formal appointment following the meeting with the creditor banks. The draft letters seen by the tribunal should have confirmed the position but were not agreed by everyone. He also confirmed “most definitely” that despite the terms in the drafts the joint co-ordinating banks had no recourse to the other banks for Clifford Chance’s fees, and those banks knew that. 

36	Actual payment by Marconi was always made, so none of the underlying liabilities or arguments about recourse were tested. Marconi paid sums to the Clifford Chance client account. Funds were released from there to the relevant office account against invoices addressed to the joint co-ordinating banks and copied to Marconi. The client account funds were held to the order of the joint co-ordinating banks, not Marconi. The arrangement was worked by Clifford Chance on instructions from the joint co-ordinating banks.

37	Mr Frome’s evidence was consistently that the joint co-ordinating banks, and only the joint co-ordinating banks were the clients of Clifford Chance, and that Clifford Chance’s only involvement in Project Telescope in the role for which Marconi were paying the fees was in that capacity. If and in so far as its advice was given to others or made available to others, it was on the instructions or with the express assent of the joint co-ordinating banks. No advice was given on a solicitor-client basis to Marconi or any third party. Marconi was advised throughout by its own solicitors. In his view, those solicitors undertook more work on the project than Clifford Chance. They had conducted and had attended meetings and were also involved in drafting key documents. 

38	Christopher Holden gave evidence for Marconi. He was acting finance director for Marconi from August 2002. He confirmed that Marconi had paid all the fees invoiced by Clifford Chance for Project Telescope including all the VAT on the invoices. It was paid largely by money up front. Sums were paid directly across from  Marconi to Clifford Chance by credit transfer, and money was then drawn down from those up-front payments as specific invoices were rendered. The invoices were almost of a secondary nature to the funding relationship with Clifford Chance. His understanding was that if Marconi did not pay, then Clifford Chance had made it clear that it would not provide its services. That mattered to Marconi because if the arrangements on which they were all working did not come together, Marconi would not survive. He had to make the judgment call about directly providing Clifford Chance with funding against that background. 

39	Mr Holden also confirmed that he was not at Marconi before August 2002, and that he became the interim chief financial officer in November 2002. He could not speak to events before then as he was elsewhere. He was not therefore involved in the strategic planning of Project Telescope. He agreed that Marconi had retained another major firm of London solicitors as its solicitors and that they acted for Marconi throughout. When pressed in cross-examination about his evidence that Clifford Chance had applied considerable pressure to Marconi to have its bills paid, he confirmed that no direct pressure had been applied to him, and that he had received no written demand. Rather, it was an impression formed by those in his team which he had seen no reason to clarify. Nor was he able to confirm whether any statements made by Clifford Chance about payment had been made formally on Clifford Chance’s own initiative or on the instructions of the joint co-ordinating banks. And he agreed that he could produce no documentary evidence about this aspect of his evidence. When pressed about whether, in his view, Clifford Chance were acting for the creditor banks generally as well as, or in addition to, the joint co-ordinating banks, he accepted that little importance had been given to that at the time of the events and that he did not recall discussing it as an issue. 

40	HMRC tendered three witnesses to give oral evidence to support their witness statements. Those statements described the investigations conducted by the officers, the documents they had identified and conversations they had had, and the conclusions they had reached. All three gave formal evidence confirming their statements. Although the tribunal accepts that each had conscientiously discharged her or his duty, they had no personal direct knowledge to add to the evidence before the tribunal about the events in question and the key relationships and documents. The tribunal accepts also that it was given full disclosure by HMRC of the papers reflecting its own investigations into the claim by Marconi that it should receive the input tax on the sums paid by it to Clifford Chance. The tribunal did not identify any matters in the evidence from HMRC that added any new point to the overall evidence before it.  
The VAT invoices and other evidence 

41	The tribunal was shown only one invoice issued by Clifford Chance in respect of its services. It was dated 23 April 2003. But it was accepted on all sides to be representative of the invoices issued by Clifford Chance that led to the payments of VAT now in dispute. The invoice is a numbered and dated invoice issued by Clifford Chance. It states that it is not a tax invoice, and it does not set out the relevant VAT number of Clifford Chance or any other person. It is addressed to one of the joint co-ordinating banks for the attention of a named person. And it bears on it the statement “Payable by [Marconi]”. The text of the invoice, after stating a period of time reads:

“Advice to Provisional Coordinators

Professional charges for London and New York in relation to the above matter.”

It then sets out the fees and disbursements, properly identifying and totalling the VAT rate and the amount of VAT payable on the items invoiced. At the end of the invoice are details about payment methods. The copy is marked “paid” and it is common ground that all such invoices were paid in full, including the VAT shown, by Marconi direct to Clifford Chance. The tribunal was not told of any other invoices being issued by Clifford Chance in respect of its fees concerned with its work on Project Telescope or the VAT on those fees. It assumes therefore that no formal tax invoices were issued. It was aware from the oral evidence of other contemporary documents about fees sent between Clifford Chance, Marconi and others, but none were produced in evidence.  

42	The tribunal was taken to a number of other documents, and to correspondence between the various parties involved. These showed events moving forward to the conclusion of restructuring agreements. But the tribunal did not consider that these clarified the matters outlined above. The tribunal accepts that some of the documents, letters and minutes used phrases that, taken in isolation, might suggest that Clifford Chance was regarded, at least by some involved, as acting for all the creditor banks, but it saw nothing of sufficient evidential weight to throw serious doubt on the evidence of Mr Frome. While the disclosed documents were broadly consistent with the courses of action outlined by the drafts, none removed the doubts about which Marconi was arguing one way or the other. 

Conclusions on the evidence

43	The tribunal concludes that neither Marconi’s witness nor those from HMRC added significantly to the history of the key events from their direct knowledge. Nor were they able to produce any additional documents directly relevant to events at this time.  

44	The position found by the tribunal is that there is no document other than the unilateral statement set out in full above setting out the relationship between Clifford Chance and the other persons involved in the restructuring, including of course Marconi. There is no single document signed by all those involved. Nor is there any single contractual document devoted solely to setting out the terms under which Clifford Chance was instructed formally to act by identified clients. To the extent that Marconi asked for production of such a document, the tribunal accepts the evidence that there was no such document. And Marconi could not now produce any other documents from its own records at the time about these matters. The tribunal is satisfied that it has seen all the documents that could be produced that were of relevance – save for any documents that Marconi might have or have had that it had not produced for the appeal. 

45	The tribunal takes the view that on all this evidence it is clear that Clifford Chance was acting, and acting only, for the joint co-ordinating banks, and not for the creditor banks, Marconi, or any third party. It takes that view as a matter of the law of contract of England and Wales. It takes no account of any requirement or other aspect of professional conduct, as it received no evidence and no argument on that aspect of the relationship between Clifford Chance and any other person beyond the statement for Clifford Chance of whom it considered to be its clients. Clifford Chance was acting for the banks that were the joint co-ordinating banks from time to time in their capacities as the joint co-ordinating banks. This is of course what Clifford Chance said it was doing consistently from the statement set out above to the evidence given to the tribunal. And it is the view taken by HMRC after its own analysis of events. Further, the tribunal find that if and in so far as Clifford Chance directly or indirectly supplied services to any other person – any of the creditor banks or Marconi – it did so as a consequence of its relationship with its clients and not as a result of any separate solicitor-client or contractual relationship.		

46	The tribunal also finds that it was the responsibility of the joint co-ordinating banks to meet Clifford Chance’s fees for acting in Project Telescope. This did not result in those banks paying Clifford Chance. All payments were in fact made direct by Marconi to Clifford Chance. Further, there was an agreed pattern of advance payments by Marconi to Clifford Chance held by Clifford Chance on client account against its future fees. From the standpoint of Clifford Chance, the tribunal accepts the evidence that this provided comfort against risk of non-payment of its fees for involvement in Project Telescope. In the view of Clifford Chance, this was payment by a third party for its services to its clients, the joint co-ordinating banks.  

47	The tribunal also accepts the evidence that the joint co-ordinating banks were themselves being paid by Marconi in respect of their own services as co-ordinators of the creditor banks as a result of a direct arrangement between Marconi and those banks. It was as part of that arrangement that Marconi accepted that it should also pay Clifford Chance. From that standpoint, the payment to Clifford Chance may be regarded as payment made to a third party by Marconi as part of the contract or arrangement between it and the joint co-ordinating banks.

48	The tribunal therefore rejects as not consistent with the facts the alternative argument for Marconi that Clifford Chance were acting for the creditor banks either as a whole or on an individual basis. Although the burden of proof under which the tribunal operates is that of the balance of probabilities, the tribunal records that it is satisfied on this matter on a higher standard that that. It has no doubt that this is the case.

49	The tribunal finds that Marconi paid considerable amounts of value added tax together with the fees it paid to Clifford Chance. Marconi has been unable to set any of that value added tax off as input tax against its output tax for the relevant periods. The tribunal also finds that Marconi gained a business advantage from much, but not all, of that advice. Marconi has to date been unable to offset or recover the value added tax paid despite the fact that all the value added tax paid to Clifford Chance was incurred by it in a business context. It is not in dispute that there was no private or non-economic aspects to the payments of value added tax, nor, as noted, that this was any kind of value added tax avoidance planning. The tribunal’s above findings set the scene, but do not deal with the main argument raised by Marconi as justifying a claim for refund of that input tax. Nor do they meet the argument of Marconi about the economic neutrality of value added tax.

The relationship between Marconi and Clifford Chance

50	The main argument by Marconi is that, for the purposes of VAT, the actions of Clifford Chance amounted also to supplies to Marconi for the purposes of Marconi’s business. In order to see if the evidence recorded above supports this view, the tribunal must now examine the argument put for Marconi in more detail.

51	Mr Roger Thomas buttressed this aspect of his argument by reference to the leading cases of Customs and Excise Commissioners v Redrow Group plc [1999] 1 WLR 408, [1999] STC 161, and Customs and Excise Commissioners v Plantiflor Ltd [2002]  UKHL 33, [2002] STC 1132. He drew from both these cases the proposition that as a matter of law Clifford Chance could in this case be regarded as making supplies both to its clients (whether those clients were the joint co-ordinating banks or the creditor banks) and to its paymaster, Marconi. This could be the case whether or not Marconi was a client of Clifford Chance in the professional sense.

52	In Plantifor, Lord Slynn summarised the point thus:

“[32]	It is clear from Customs and Excise Commissioners v Redrow Group plc that one set of acts can constitute two different supplies of services. There it was to be found in the work of the estate agent in connection with the marketing of the existing home of the potential purchaser of a new Redrow home as well as selling the Redrow home. The House held that what was done was a supply of services to Redrow as well as to the owner.”

He then set out a passage from the opinion of Lord Millett in Redrow.

53	Lord Millett also gave an opinion in Plantiflor. His opening paragraph sums up the common ground between that case and this:

“[49] My Lords, value added tax (VAT) is charged on the value of the of the supply of goods and services made in the United Kingdom for a consideration and is a liability of the person making the supply. In the ordinary case the supply and the liability to pay the consideration for the supply are reciprocal, that it so say the supply is made to the person who is liable to pay the consideration and the consideration is payable to the supplier by the person who receives the supply. But this is not always the case. Tripartite agreements which result from two or three separate but related bilateral contracts call for close analysis to determine their taxable consequences.”

He then summarised Redrow as a case where there were three separate bilateral contracts between the three parties “but only one of them was liable to pay the consideration and accordingly there was only one taxable supply.” He briefly summarised the facts of that case and concluded that “Thus a single course of conduct by one party may constitute two or more supplies to different persons” (paragraph [50]). He then analysed the contracts in issue in Plantiflor, and the supplies made under those contracts. He also analysed the supplies made. He identified two contracts and three supplies. The contracts were those between Plantiflor and the customer and between Plantiflor and Parcelforce. The supplies were by Parcelforce to Plantiflor, by Parcelforce to the customer and by Plantiflor to the customer. He noted, however, that the supply by Parcelforce to the customer was not a supply for consideration. He therefore reached the conclusion that the pattern of taxable supplies was the same as the pattern of bilateral contracts. Lord Hobhouse and Lord Scott agreed with that opinion and also the opinion of Lord Slynn. 	

54	Both those decisions rested on an underlying network of contracts. The difficulty in applying that approach to this case to reach the conclusion for which Marconi contends is that the contract giving rise to the supplies was that between Clifford Chance and its clients, the joint co-ordinating banks. The payment was made to Clifford Chance by Marconi by reason of its arrangement with those banks, but it cannot be said that there was a contract between Marconi and Clifford Chance. To follow through the actions in this case in a framework of the kind set out by Lord Millett, the tribunal finds that the contracts are those between Marconi and the joint co-ordinating banks, and between the joint co-ordinating banks and Clifford Chance. There was a supply of services by the joint co-ordinating banks to Marconi for which Marconi paid. This tribunal was not concerned with that contract, or the consideration for it, in any further detail. There was also a solicitor-client contract between the joint co-ordinating banks and Clifford Chance. The joint co-ordinating banks were liable to pay Clifford Chance for their professional services, although, as a result of the other contract, Marconi did so.  

55	That leaves unanswered the critical final elements for the argument of Mr Roger Thomas. Were there, for VAT purposes, services supplied to Marconi? If so, were those services supplied for consideration? 

56	The tribunal need not consider at any length the further requirement that Marconi received any such services in the course or furtherance of its business. Mr Roger Thomas maintained that this was so, and the tribunal has no difficulty in accepting that. However, that does not assist the conclusion that there was a relationship between Marconi and Clifford Chance such that it could be said that for VAT purposes there was consideration for any supply made by Clifford Chance. 

57	As a reservation by Mr Jordan in argument noted, “supply of services” is an extremely wide term, covering anything supplied that is not a supply of goods. 
If anything was supplied in this case, then it was a supply of services. Mr Roger Thomas sought to argue from that breadth of meaning to a conclusion that the link between Marconi and Clifford Chance was present because Marconi benefitted in the course of its business from the activities of Clifford Chance. Further, there was in his submission a relationship between Clifford Chance and Marconi underlying that benefit. This was sufficient to establish that the supply made by Clifford Chance to Marconi was “for” the consideration paid by Marconi to Clifford Chance. He conceded, as he must, that this was not a contractual relationship. But it did not have to be a contractual relationship for that relationship to be sufficient in law to make the nexus required for value added tax law purposes.

58	For HMRC, Mr Owain Thomas answered this by the simple submission that Clifford Chance had not supplied services to Marconi. In other words, there had been no supply of anything by Clifford Chance to Marconi. Any benefit to Marconi was indirect and incidental to the services supplied by Clifford Chance to its clients. Marconi did not engage Clifford Chance to perform any services, nor did it in any other way contract with Clifford Chance for services. It did not instruct Clifford Chance about any of the services, and it did not in fact obtain any services from Clifford Chance. In confirmation of that, Clifford Chance did not invoice Marconi for any services supplied. The invoices were to the joint co-ordinating banks. The position was confirmed by the retention by Marconi of its own solicitors.

59	For Clifford Chance, Mr Jordan was strongly critical of the arguments for Marconi. He pointed out that Marconi’s primary argument before the tribunal was  that there had been supplies of services by Clifford Chance were to Marconi. Marconi’s alternative argument was that Clifford chance had supplied the creditor banks. In his view, not only were those arguments both wrong, but they were presented the wrong way round. This he suggested was for solely for the advantage of Marconi rather than as a clear view of the facts. The two alternative arguments put by Marconi were inconsistent on the facts in a way that weakened both of them. And the answer to the submission that Clifford Chance supplied Marconi as a matter of fact is that it was simply wrong. Mr Jordan reserved his position were it to be established by the tribunal that there was in law a supply of services to Marconi for the purposes of VAT law which was not a supply of services by Clifford Chance to its clients.

60	The tribunal agrees with the positions adopted by both Mr Owain Thomas and Mr Jordan on the evidence. It is not obvious on what basis it can be argued that Clifford Chance did supply anything to Marconi as a matter of fact. Marconi had its own legal advisers who were, not surprisingly, another major firm of London solicitors. Any legal advice that Marconi accepted came, it must be assumed on professional grounds, from them. As a matter of fact, in the common sense of the terms, Clifford Chance did not supply Marconi with anything. It supplied services to the joint co-ordinating banks from which – or, more accurately, from some of which - Marconi undoubtedly benefited in the sense that it was able to undertake a financial restructuring that kept it in business. In the ordinary meaning of the words, the tribunal therefore finds that Clifford Chance did not make any supply to Marconi. 
Nonetheless, it went on to consider the next stage of Mr Roger Thomas’s argument that there were for VAT purposes relevant supplies, and that these supplies were for the sums paid by Marconi to Clifford Chance.  

61	Mr Roger Thomas sought to address the issue in this way. He first identified the supply of services made to Marconi by Clifford Chance. That supply was two-fold. There was a supply by Clifford Chance to Marconi in its agreement to provide services to the joint co-ordinating banks. There were further supplies to Marconi in that in so doing it facilitated the refinancing and restructuring and specifically the survival of Marconi by its advice to those banks.  He then argued that these supplies were “for” the sums paid by Marconi.

62	The tribunal accepts as clear law the proposition that the link between supply and consideration that establishes that one is “for” the other in European Union VAT law cannot be limited only to those relationships accepted as valid within the domestic contract laws of the individual member states or their constituent legal systems – in this case the contract law of England and Wales. The link is autonomous. This was accepted in the British courts in Customs and Excise Commissioner v Reed Personnel Services [1995] STC 88 and has been affirmed in the higher courts since. Similarly, it accepts that there may be a supply for consideration not based on obligations enforceable as a contract under national law as for example in Town & County Factors Ltd v Customs and Excise Commissioners [2002] STC 1263. What is necessary is a direct link such that it can be said that the supply was “for consideration” within the meaning of the Sixth VAT Directive, article 2(1). Mr Thomas cited Customs and Excise Commissioners v Church Schools Foundation Ltd [201] STC 1661 to support that argument. Nonetheless, while the tribunal accepts that the principles of the European model of value added tax are autonomous and operate to identify a wider group of transactions than those defined purely by contract law of individual jurisdictions, it cannot see how Mr Thomas’ argument, for all its cogency, gets round the fact that Clifford Chance acted for, and supplied, the joint co-ordinating banks and not Marconi. 

63	The tribunal was prepared to assume Mr Thomas’s description of the services supplied to Marconi to test his argument. Mr Thomas buttressed his approach by a close analysis of the decision of the court of Appeal in WHA Ltd and another v Customs and Excise Commissioners [2004] EWCA Civ 559, [2004] STC 1081, applying the decision in Redrow. The tribunal finds that this case is significantly different in fact from the basis on which that case was argued, and that the analogy with that case unpersuasive. While it clearly endorses the argument that two people can be supplied at once by one composite supply of services, the only analogy between that case and the position of Marconi lies in the argument that Marconi benefited from the supply to the third party. As Mr Owain Thomas pointed out, there is no question of authorisation by Marconi here. Nor was there any VAT invoice from Clifford Chance to Marconi, even if it can be said that Marconi paid Clifford Chance. In WHA there were in addition important contracts between the insurance company and the garage. It was realistic in that case to call the insurance company a paymaster of the garage. That term, which Mr Roger Thomas used in connection with Marconi, is not appropriate here. 

64	The tribunal tested its view in another way. The force of Marconi’s argument rests on the fact that it paid Clifford Chance directly. But the fact that it paid Clifford Chance directly rather than indirectly does not of itself alter the relationship between Clifford Chance and Marconi. This is because there is no contract or directly equivalent relationship in place that could be altered by the fact whether or not Marconi paid Clifford Chance directly rather than through the joint co-ordinating banks. What difference would it have made to the supplies made by Clifford Chance in this case if Marconi had paid the joint co-ordinating banks, and the banks had then paid Clifford Chance? The tribunal can see none. The essential link between the fact of payment and any counterconsideration is missing. Further, while the tribunal did not accept the argument on the facts, this position would not be assisted by the argument put forward that Clifford Chance would have stopped work if Marconi did not pay. That argument, even if accepted, was predicated on the assumption that Marconi would then have stopped paying both the joint co-ordinating banks and Clifford Chance, and not simply that there might be a threat of work stopping if Marconi did not pay Clifford Chance direct. To use the term again, Marconi was not a paymaster of Clifford Chance. 
 
65	Having taken that view, the tribunal returns to the contention that services were supplied by Clifford Chance to Marconi. It does not accept that element of the argument either. In particular, it does not agree that Clifford Chance can, as solicitors, be said to be supplying services to another party in a transaction in which it agrees to advise its own clients. That can be tested by another example. Was Mr Roger Thomas supplying services to HMRC as respondents in agreeing to argue the case for Marconi as appellant in this appeal (in addition to supplying services to his own clients) notwithstanding that Mr Owain Thomas was acting as counsel for HMRC?  Using the analogy of Marconi’s arguments in this appeal, it could be said perhaps that some of his arguments might assist HMRC, as may some of the evidence he produced, although other arguments clearly do not. To take the first of the two alleged supplies by Clifford Chance to Marconi, did Mr Roger Thomas provide services to HMRC by agreeing to argue the case for Marconi?  It is in the view of the tribunal unarguably the case that he was not supplying any services to HMRC. But that is the same argument as made in his first submission that Clifford Chance was supplying services to Marconi. The tribunal rejects it. 

66	The other element of the services said to be supplied by Clifford Chance to Marconi is also not accepted. The evidence shows that Project Telescope was successful. Undoubtedly Clifford Chance played an important role in that success. And undoubtedly Marconi benefitted from that success. It might otherwise simply have ceased trading. But to argue from the presence of the advantageous nature to third parties of advice given to clients to protect the interests of those clients to the contention that that advantageous nature was itself a parallel supply to a third party simply because the third party receives an advantage from the supply to the client is in the tribunal’s view a step too far in this case. Take again the example of the services of counsel to the parties in an appeal. Could it be said that counsel to one party in an appeal provided services, for the purposes of VAT, to the other party if as a result of her or his submissions to the court or tribunal the other side won? No. 

67	In summary, the tribunal’s conclusion is first that that there was no contractual or other legal basis on which Clifford Chance made, or was obliged to make, supplies of any nature to Marconi as part of Project Telescope. Second, on the facts, Clifford Chance did not for the purposes of value added tax supply any services to Marconi as part of Project Telescope. Notwithstanding that Marconi derived benefits from the supplies made by Clifford Chance to its clients, those benefits were not supplied to it by Clifford Chance. Third, there was therefore nothing supplied by reference to which the payments by Marconi to Clifford Chance could be regarded for VAT purposes as consideration. 

68	The tribunal therefore accepts the views of HMRC, and so far as stated of Clifford Chance, that the arguments of Mr Roger Thomas founder in this case for want of any evidential basis for them. This is regardless of whether those arguments were or were not valid in other fact situations. 

69	Although the tribunal set out a summary of Mr Roger Thomas’s full argument at the start of this decision, the tribunal sees no factual basis on which to continue a detailed examination of his analysis. It therefore sees nothing to be gained in this decision in following through his close argument and the authorities on which he based it. In particular, it cannot identify any factual basis on which it need decide to whom a VAT invoice should be supplied in the case of joint supplies of services subject to value added tax to two or more persons at the same time where one person supplied has a contractual right to those services and the other person supplied pays for all the services.  

Conclusion 

70	The appellant therefore fails in both arguments, and the appeal is dismissed. As this is the position that the third party was seeking to establish, the tribunal confirms that it accepts the third party’s case, so far as made, in addition to that of the respondents.

71	The tribunal indicated at the end of the hearing that it would reserve the position on costs. It must consider the position of the third party in the appeal, and also the costs position with regard to the various applications as well as the costs of the appellant and respondents in the main appeal. It therefore makes no specific order for costs in this decision but invites the parties to make any application they wish to make as to costs in the light of this decision.

DAVID WILLIAMS
CHAIRMAN

RELEASED: 19 December 2006

LON/05/335