Input tax – attribution – professional services provided for a business venture and company acquisition – circumstances and terms of engagement – whether services supplied to company or investors.

EDINBURGH TRIBUNAL CENTRE

	MONO GLOBAL LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	     Respondents

			Tribunal:	(Chairman)   Mr Kenneth Mure, QC
					(Members)    R L H Crawford, BA., CA., ATII
							 Mr K Pritchard, OBE., BL., WS

Sitting in Edinburgh on Wednesday 25 February 2004

for the Appellant		Colin Tyre, QC

for the Respondents	James Campbell, QC

© CROWN COPYRIGHT 2004.

DECISION

Introduction
In this appeal Mr Tyre QC appeared for the Appellant and Mr James Campbell, QC appeared for the Respondents.  A file of correspondence was produced for consideration.  We heard evidence from Mr Brian Donald Dougherty CA, the Financial Director of the Appellant who was led on its behalf.  The Respondents did not lead any evidence.

The issue for our consideration was whether £118,616.58 of Input Tax relating to the services of Accountants, Solicitors, and Insurance Consultants was deductible as having been supplied to the Appellant and used by it in the course and furtherance of its business.

In the course of the Hearing the Respondents conceded that the services provided by Messrs Maclay, Murray & Spens, Solicitors, were supplied to the Appellant (production 23).  They accepted further that the services of Messrs Deloitte & Touche had been supplied jointly to both the Appellant and the investor companies, being 3i Group Plc, and two associated companies (hereinafter referred to as “3i”) involved in the venture.

We found Mr Dougherty an impressive witness, both credible and reliable, who was able to give a detailed account of the business venture to which this Appeal relates, and the involvement of the various professional advisors.

The Legislation
Section 25 of the VAT Act 1994 provides that a taxable person is entitled to credit for so much of his Input Tax as is allowable under Section 26.  Section 26 provides as follows:-

“(1) the amount of Input Tax for which a taxable person is entitled to credit at the end of any period shall be so much of the Input Tax for the period 
…
as is allowable by or under regulations as being attributable to supplies within sub-section (2) below.

(2) the supplies within this sub-section are the following supplies made or to be made by the taxable person in the course or furtherance of his business –

(a)	taxable supplies …

(3)  the Commissioners shall make regulation for securing a fair and reasonable attribution of Input Tax to supplies within sub-section (2) above …”

The Facts
Early in 2002 Mr Dougherty and his business associate, Mr Lewandowski considered that there was a commercial opportunity in establishing a company to provide certain supplies to the Telecommunications Industry.  It was vital that it should be of a relatively substantial size to negotiate successfully and profitably within the Telecoms Industry.  The strategy conceived by Mr Dougherty and Mr Lewandowski was to acquire the share capital of an existing company, James Barr Consultants Limited and also to acquire the Telecommunication business assets of another company, Ingenco Limited, of which they themselves were Directors.

A “shell” company DMWS 540 Limited was acquired to hold these assets.  It was renamed Mono Global Limited.  In addition to about £300,000 provided by Mr Dougherty and Mr Lewandowski the acquisitions were funded by means of loan finance from the Bank of Scotland and the support of 3i which in turn held bonds and equity in the new company.  The shareholders of James Barr Consultants Limited “rolled over” part of their shareholding into the new company.

Before the services of the various professional advisors were obtained Mr Dougherty and Mr Lewandowski had made representations to 3i recommending this venture as a profitable enterprise.  On the initiative of Mr Dougherty and Mr Lewandowski Deloitte & Touche were invited to advise on the venture.  Their letters of engagement are produced (8/2 and 8/15).  Although these are addressed to the 3i companies as well as to the Directors of the “shell” company the role of Deloitte & Touche was to advise Mr Dougherty and Mr Lewandowski at meetings and in correspondence, and to prepare a business plan with budget projections for about 3 years ahead.  They assisted in negotiating favourable purchase prices for the assets to be acquired by the new company and in fact achieved substantial savings.  They assisted in negotiating more favourable bank loan terms for the new company.  Their assistance helped to reduce the outlays of the new business.  3i benefited in as much as these reports supported the projections and representations of Mr Dougherty about the venture.  

The additional work referred to in the second letter of engagement (8/15) related to certain “diligences”, essentially involving tax matters and clearances to facilitate the acquisitions on favourable terms for both the new company and the sellers.  Deloitte & Touche’s invoices (4/4 & 5) were submitted to Mr Dougherty as Finance Director of the Appellant which paid them.

Next, advice was obtained from Messrs Dickson Minto WS.  While the relative letter of engagement (9/2) is addressed to 3i it refers to “Newco”, the “shell” company which was in fact provided by Dickson Minto.  Newco was to be liable for Dickson Minto’s fees and, indeed, settled these (4/6).  While 3i depended on its “in-house” legal advisors, the role of Dickson Minto was to advise Mr Dougherty and Mr Lewandowski in their venture.

A second accountancy firm, KPMG, was instructed to prepare financial and commercial “diligences”.  Mr Dougherty and Mr Lewandowski considered that these should be prepared by an independent second accountancy firm.  Their letter of engagement (9/3) is addressed to both 3i and Newco.  (Probably the principal was signed by Mr Lewandowski on behalf of Newco although the copy produced does not bear any signature).  The financial examination conducted was more detailed than an audit.  It reviewed the “Market Place” opportunities for the new venture.  All of this was of advantage to the new company and its business.  An “exit” strategy was prepared as part of the exercise, which was of interest as part of the “Market Place” scenario to all concerned.  Newco was liable in the first instance for payment – and did in fact make payment (4/9).

Finally, Aon Ltd, an insurance consultancy, was instructed to carry out insurance “diligence”, to review current and future risk management and insurance needs.  Its letter of engagement is addressed to 3i but it refers to the new venture, viz “Project Bounty” and to “Newco”.  Newco was to pay the fee and did so (4/10).  As a result of its advice certain changes to current and proposed future insurances were made, all to the benefit of the new business.  While 3i had the benefit of a third party view on insurance aspects, this was not a matter of primary concern to them.

In short the reports and services of all these professional advisers were produced on the direction of Mr Dougherty and Mr Lewandowski in relation to the business venture to be conducted by the Appellant.  The advisers’ fees were all paid by the Appellant.  Throughout the correspondence the business of the new company/Appellant was noted as being the primary interest.  The purpose of all the reports and services was to assist it in conducting this business successfully and profitably.  The new venture would not have been pursued without these reports.  Any benefit derived by 3i was secondary and incidental.  

The project of establishing the new business and Appellant company would not have proceeded without the initiative and continuing support of Mr Dougherty and Mr Lewandowski.  There was no evidence that 3i would have pursued this venture independently themselves.  

As noted supra it was conceded by the Respondents that the services of Maclay, Murray & Spens were supplied to the Appellant.  (In view of this Mr Dougherty’s evidence on this aspect was not the subject of cross-examination).

It may be observed that the “completion” date intended of 30 August 2002 for the transfer of ownership of the new company and establishing it as conducting the new business could not be achieved until 17 September 2002.  It was registered for VAT in about August 2002.

Submissions for Respondents
Mr Campbell submitted that the essential issue was the identity of the party to whom the services were supplied.  Was it the Appellant company?  He argued that in terms of the correspondence these services bore to have been supplied to 3i even although the Appellant paid for them.  The reports referred to “Project Bounty” and gave advice essentially on whether or not this should proceed.  3i received more than mere incidental benefit.  The new company remained a mere “shell” until a very late stage.

In anticipation of the Appellant’s argument Mr Campbell sought to distinguish the decision in C&E Commissioners v Redrow Group plc [1999] STC 161.  There a house builder company paid the estate agents fees of purchasers of houses from it, who had to sell their existing houses before purchasing.  Redrow paid the estate agency fees and sought to deduct the VAT thereon.  The House of Lords (reversing the Court of Appeal and restoring the decision of the Tribunal) ruled that the taxable supply was to Redrow and accordingly the relative VAT was deductible.

However in the present case, Mr Campbell submitted, the supplies ex facie the letters of engagement were made to 3i and its associates, not to the Appellant.  In any event if the supply were not to 3i alone, it should be viewed as jointly supplied to both parties.

Mr Campbell submitted that the Appellant’s obligation to pay for the advice did not alter his submission that the “supply” for VAT purposes was made to 3i.  In support of this he founded on C&E Commissioners v Reed Personnel Services Ltd [1995] STC 588, particularly at p595a – “… the concept of ‘supply’ for the purposes of VAT is not identical with that of contractual obligation … it is perfectly possible that although the parties in any given situation may conclude their contractual arrangements in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made … for the purposes of … VAT”.

Mr Campbell founded additionally on Eastbourne Town Radio Cars Association v C&E Commissioners [2001] STC 606 at p612-613.

Submissions for Appellant
Mr Tyre submitted that if these professional services were wholly or partly to enable the Appellant to make taxable supplies, then the input VAT was deductible.  He founded on Redrow as being “in point” and noted in particular the Opinion of Lord Millett at p166b-e, which passage concludes – 

“The fact that someone else, in this case, the prospective purchaser, also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction”.

Applying this to the present case Mr Tyre argued that as long as the Appellant received some benefit, the fact that 3i benefited too did not preclude the deduction of Input Tax by the Appellant.  Founding further on Lord Millett’s judgment at p171e-f Mr Tyre argued that what was crucial was whether the Appellant obtained some benefit in return for payment –

“Once the taxpayer has identified the payment the question to be asked is:  did he obtain anything – anything at all – used or to be used for the purposes of his business in return for the payment?  This will normally consist of the supply of goods or services to the taxpayer.  But it may equally well consist of the rights to have goods delivered or services rendered to a third party.  The grant of such a right is itself a supply of services”.

On the basis of Mr Dougherty’s evidence, Mr Tyre argued, the Appellant benefited long-term from the services.  They did not relate to the simple decision of whether to proceed with the venture or not.  Crucially, he argued, the supply of services for VAT purposes was to the Appellant, not to 3i, although 3i did receive some benefit. 

Mr Tyre referred to Regulation 111 (1) of the VAT Regulations 1995 (1995/2518), which in principle can allow the deduction of Input Tax on both pre-registration and pre-incorporation expenses.  (This was not controversial in the circumstances of this case and we do not propose to consider it further).

Decision
The issue for determination is whether the services rendered by the 4 advisers, viz Deloitte & Touche, Dickson Minto, KPMG and Aon, were supplied to the Appellant for the purposes of its business in the context of Section 26 VATA 1994, and what was the significance of any benefit derived by 3i and its associated companies.  (In view of the Respondents’ concession we do not have to consider the work done by Messrs Maclay Murray & Spens).

We found the evidence of Mr Dougherty helpful in explaining the correspondence from the advisers and in particular their terms of engagement, and placing it in its commercial context.  Mr Dougherty and Mr Lewandowski were the “prime movers” in the venture and those promoting the Appellant company.  Without their initiative and continuing involvement the venture would not have reached fruition.  We do not consider that 3i would have taken over the venture, had Mr Dougherty and Mr Lewandowski lost interest.  The Appellant company paid all the fees and was liable, or at least liable primarily, for their settlement.

The nature of the advice was such that its value extended into the medium term.  It was not restricted simply to the decision on whether or not to proceed with the venture.  It was of benefit to the management and running of the new business conducted by the Appellant over several years.

We consider that the decision in Redrow is apt to resolving this appeal.  In the present case we consider that the services were supplied to the Appellant.  It was the prime beneficiary.  Any benefits received by 3i were incidental.  Indeed, it seems that on certain aspects at least 3i had its own “in house” advisers.  Given the decisions in Reed Personnel and Eastbourne Town Radio Cars Association the exact contractual relationship concluded by the professional advisers does not necessarily determine the identity of the party to whom the supply is made.

For these reasons, therefore, we allow this Appeal.

Expenses
Parties were agreed that expenses should follow success.  Accordingly we award expenses to the Appellant, which failing agreement, will require to be taxed in terms of Rule 29(3).

Finally, we wish to record our appreciation of the helpful manner in which both Counsel presented their arguments.

MR KENNETH MURE, QC

CHAIRMAN

RELEASE:  6 APRIL 2004

EDN/03/66