20969

VAT – INPUT TAX – Appellant incurred legal expenses in respect of a dispute with his former partners – Appellant claimed VAT repayment on those supplies – were the supplies made to him in his capacity as a partner for the purposes of the partnership business – no – supplies made to him in a personal capacity – Appeal dismissed

LONDON TRIBUNAL CENTRE

	GRAHAM LANGRAN	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      SUNIL DAS (Member)	  

Sitting in public in London on 6 January 2009 part heard 29 April 2008

The Appellant appeared in person

Alexander Ruck Keene counsel instructed by the Solicitor of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION
The Appeal
1.	On 29 April 2008 we heard the Appellant’s appeal against the Respondents’ decision refusing his claim to recover VAT in the sum of, £41,176.49 on legal and professional fees totalling £277, 227.32, incurred by  him in connection with a dispute with his  former partners. 
2.	In our decision released 2 July 2008 we concluded that we had insufficient information to make a decision on the dispute. We, therefore, adjourned the hearing part-heard and issued the following directions:
(1)	The Appellant supply the Respondents and the Tribunal with the following information in writing by no later than 4pm on 1 August 2008: 
a.	the breakdown from his solicitor of the legal and professional fees between the property and business disputes.
b.	 whether the legal and professional fees incurred by the partners including the Appellant in  their dispute about the identity and value of the assets owned by the Archer partnership and its post dissolution profits formed part of the partnership assets in the winding up settlement. 
(2)	The Respondents supply the Appellant and the Tribunal by no later than 4pm on 15 August 2008 their response to the additional information supplied by the Appellant including representations on the relevance of section 38 of the Partnership Act 1890 and the decision in Abbey National PLC v CEC (Case C-408/98) [2001] STC 297 on the facts of this case.
(3)	The Appellant shall have a right of reply to be served on the Respondents and the Tribunal by no later than 4pm on 29 August 208.
(4)	The Tribunal shall advise the parties by no later than 4pm on 12 September 2008 whether it would decide the Appeal on the basis of the written representations received or whether a further hearing is required.  
3.	Through no fault of the parties there was slippage in meeting the directions. After receiving the additional information the Tribunal acceded to the Appellant’s request to hold a further hearing which was arranged for 6 January 2009.
The Dispute
4.	The Appellant contended that he was entitled to recover the VAT because the legal and professional services were supplied to him in his capacity as partner in connection with the winding up of the partnership. The Respondents, on the other hand, countered that the supplies were made to him personally and had no link with the business of the partnership. 
The Background
5.	The background and the parties’ arguments were set out in some detail in the decision released 2 July 2008 and are incorporated in this decision. 
6.	Essentially the Appellant was in partnership with a Mr Halliwell and a Mr Millis and they formed the Archer Partnership. On the 15 October 2002 Messrs Halliwell and Millis dissolved the partnership which triggered a dispute with the Appellant about the assets of the partnership, their value and post dissolution profits. The dispute also involved the value of two properties, Winters Farm and Winters Farm Courtyard, and in particular the split of the share of Winters Farm Courtyard. In 2005 Mrs Halliwell and the Appellant’s wife were made parties to the properties’ dispute. 
7.	On 29 November 2005 the High Court made a consent order declaring that the Archer Partnership owned the two companies, Archer Specialist Treatments Limited and Archer Stone Restoration Limited, and that the Appellant and his wife jointly owned a one third share in Winters Farm properties. The High Court recorded that the Archer partnership was a partnership at will, the terms of which were governed by the Partnership Act 1890. Further the Archer partnership was dissolved on 15 October 2002, whilst the Winters Farm partnership was dissolved on 4 November 2004. The Appellant, however, was unable to reach agreement with his former partners about the value of the partnership assets, the extent of post dissolution profits and the value of the Winters Farm properties. The dispute was eventually resolved by a consent order made by the High Court on the 25 May 2007. The order recorded the parties’ agreement that the Archer Partnership and the Winters Farm Partnership be wound up, and that no order for costs would be made. 
8.	 The invoices for the professional services were either addressed to the Appellant or to the Appellant and his wife, except Mansor Hunot’s invoice dated 8 November 2002 which was addressed to the three partners in respect of professional fees for the draft accounts of the Archer Partnership and the two companies. In the decision released 2 July 2008 we found that some of the fees incurred by the Appellant related to his wife’s claim in respect of Winters Farm properties and to a dispute concerning the Winters Farm partnership which was separate from the Archer partnership dispute. In those circumstances we were satisfied that the Appellant had no entitlement to recover the VAT on the fees incurred in the property dispute. We also found that the Appellant could not recover the VAT on the legal and professional fees in his own right, because the expenses have no connection with his current VAT registered business as a sole trader. Thus the Appellant would have to look to the assets of the partnership for the reimbursement of the sums expended on legal services, if he succeeded with the Appeal.
9.	The purpose of the additional submissions and the hearing on 6 January 2009 was to determine whether the Appellant incurred that part of the professional fees attributed to the Archer partnership dispute in his capacity as partner and for the purpose of any business carried on by the Archer partnership. In this respect we requested additional information from the Appellant about the disaggregation of the fees and whether that part of the fees formed part of the partnership assets at dissolution. We also required Respondents’ counsel to provide submissions on the relevance of section 38 of the Partnership Act 1890 and the European Court decision in Abbey National PLC v CEC (Case C -408/98) to the facts of this Appeal.
The Further Information and Submissions
10.	The Appellant supplied letters from Rohan & Co and KSB Law LLP which estimated that the proportion of their fees attributed to the Archer partnership dispute amounted to 65 to 75 per cent, and 60 to 70 per cent respectively. The Appellant was unable to provide a more detailed breakdown unless he incurred additional costs. The Appellant undertook to obtain a detailed analysis of the costs if he was successful with the Appeal.
11.	The Appellant confirmed that the legal fees of the partners did not form part of the winding up settlement because the asset position at dissolution was negative. The Appellant referred again to the charging of the legal and professional fees of Messrs Halliwell and Millis in the accounts of Archer Specialist Treatments Limited and Archer Stone Restoration Limited, which in his view indicated that his former partners considered them to be partnership expenses.
12.	The Appellant asserted that it was necessary to have the assistance of the court to wind up the Archer partnership.
13.	Respondents’ counsel submitted that the provisions of section 38 of the Partnership Act 1890 did not assist the Appellant. According to counsel, section 38 should be read in conjunction with section 5 of the 1890 Act. Thus the authority granted by section 38 only extended to acts carried out by one or more of the partners which usually formed part of the process of winding up the partnership and properly be said to be necessary to wind up the affairs of the partnership. Counsel accepted in principle that those acts could include retaining the services of lawyers and other appropriate professionals to obtain the assistance of the Court to determine questions about the winding up of a partnership. 
14.	Counsel, however, did not accept that section 38 authorised a partner to act in the name of the partnership to bring proceedings founded upon misconduct on the part of one or more of his partners but even if such a wide interpretation could be applied to section 38 that would not assist the Appellant because:
(1)	The proceedings before the High Court concerned not just the Archer partnership but a second partnership, the Winters Farm partnership.
(2)	The proceedings involved the assets of both partnerships.
(3)	The proceedings were initiated against a person who was never a partner in the Archer partnership. 
In those circumstances the legal costs incurred in the proceedings could not be apportioned between the Archer partnership and Winters Farm disputes because they were inextricably linked with each other. Thus the Appellant’s decision to engage lawyers and other professionals to bring proceedings was not a usual part of or necessary for the winding up of the Archer partnership.
15.	Counsel considered that the Abbey National decision was of no relevance to the Appellant’s case having regard to the Respondents’ primary case that the disputed supplies were made to the Appellant in his personal capacity. If, however, the Tribunal concluded that the supplies were made to the Appellant in his capacity as partner in the Archer partnership, the Abbey National decision would only come into play if the professional fees for those supplies were incurred in order to wind up the Archer partnership. Counsel considered that the wide ranging litigation launched by the Appellant was not necessary to wind up the affairs of the Archer partnership.
Reasons
16.	The onus was on the Appellant to demonstrate on the balance of probabilities that the legal and professional supplies were made to him in his capacity as a partner of the Archer partnership. The Appellant adduced no direct evidence that he was authorised by the partnership to incur the expenditure on the disputed legal and professional supplies. 
17.	The principal evidence relied upon by the Appellant to prove his case was the charging of the legal and professional fees of Messrs Halliwell and Millis in the accounts of Archer Specialist Treatments Limited and Archer Stone Restoration Limited.  According to the Appellant, these account entries indicated that his former partners considered the legal expenditure to be partnership expenses. We placed no weight on the account entries because there was no evidence that the legal fees were incurred by the companies for the same purposes as incurred by the Appellant. Further the fact that the companies’ claims for VAT recovery on the legal fees had been processed by the Respondents did not preclude the Respondents from investigating whether those claims were validly made. 
18.	We find that the following facts supported the conclusion that the disputed supplies were made to the Appellant in his personal capacity:
(1)	 The invoices for the disputed supplies except the Mansor Hunot  invoice dated 8 November 2002 were addressed either to the Appellant or to the Appellant and his wife.
(2)	The wide ranging nature of the proceedings launched by the Appellant which included parties and assets not part of the Archer partnership.
(3)	The legal and professional fees incurred by the partners were not included in the final accounts of the Archer partnership on dissolution. We consider the Appellant’s explanation that the partnership had no assets was not a sufficient reason for excluding them from the accounts if they were expenses properly incurred on behalf of the partnership.
19.	We are persuaded by the Respondents’ legal analysis of sections 5 and 38 of the Partnership Act 1890 and their application to the facts of this Appeal. Essentially counsel for the Respondents contended that the Appellant could only bind the partnership if his acts would usually form part of the process of winding up and necessary to wind up the affairs of the partnership. We find that the litigation launched by the Appellant and his wife could not be characterised as a usual part of the winding up process and necessary to wind up the Archer partnership. The litigation was hostile in nature and wide ranging which involved assets and litigants not part of the Archer partnership. We accept counsel’s submission that it was not possible to split the litigation costs between the respective claims relating to the Archer and Winters Farm partnerships because the claims were inextricably linked and in effect formed one claim. We are satisfied that the Appellant did not have actual or ostensible authority to bind the Archer partnership to the expenditure incurred on the litigation. Further the litigation did not form part of the usual business of the Archer partnership.
Decision
20.	We decide for the reasons given above that the expenditure on the legal and professional services except the Mansor Hunot  invoice dated 8 November 2002 was incurred by the Appellant in his personal capacity and not for the purposes of the business of the Archer partnership. We, therefore, dismiss the Appeal and make no order for costs. We uphold the assessment subject to an adjustment in respect of the the Mansor Hunot  invoice. 

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 5 March 2009

LON/