[2012] UKFTT 687 (TC)
TC02358
Appeal number:
TC/2010/08094
VAT – INPUT TAX – Fleming claim for unclaimed input
tax incurred on investment management fees between 1973 and 1990 – whether
evidence that appellant paid investment management fees throughout period of
claim sufficient? – held yes – appeal allowed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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GUIDE DOGS FOR
THE BLIND ASSOCIATION
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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REVENUE &
CUSTOMS
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Respondents
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TRIBUNAL:
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JUDGE GREG SINFIELD
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HARVEY ADAMS
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Sitting in public in London on 28 August 2012
Mr Thomas Mobee, of Saffery
Champness, for the Appellant
Mr Colin Strudwick, officer of
HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2012
DECISION
Introduction
1.
The Guide Dogs for the Blind Association ("GDBA") claims an
amount of £4,879.19 VAT from Respondents ("HMRC"). GDBA claims that
it had incurred that amount of VAT on investment management services during the
period 1 April 1973 to 31 March 1990. It was not disputed that, if GDBA had
incurred such an amount of VAT then it was entitled to recover a proportion,
also agreed, of the VAT but had not done so at the time. The only question in
this appeal is: did GDBA pay investment management fees throughout the period
1973 to 1990?
Background
2.
GDBA is a charity. GBDA instructs third party investment managers to
provide services in relation to the management of its investments. Until some
time in 2005, GBDA treated the input VAT incurred on investment managers’ fees
as irrecoverable.
3.
Following the High Court’s decision in The Church of England Children’s Society v HMRC [2005] EWHC 1692 (Ch), [2005] STC 1644, HMRC issued
Business Brief 19/05 on 7 October 2005. The Business Brief confirmed that VAT
incurred by a charity on raising funds to support both the charitable and the
business activities of the charity should be treated as overhead costs of the
charity as a whole and recoverable to the extent they are attributable to
taxable supplies.
4.
In January 2008, the House of Lords in HMRC v Michael Fleming
(t/a Bodycraft [2008] UKHL 2, [2008] STC 324 held that the three-year cap
on claims for repayment of under-claimed input tax must be disapplied until an
adequate transitional period had been applied. Following the Fleming
case, GDBA made a claim on 25 March 2009 for a proportion of the input VAT
incurred on investment management fees which had been treated as irrecoverable
in the period 1April 1973 to 31 March 1997.
5.
In a letter dated 26 July 2010, HMRC approved GDBA’s claim for the
period 1 April 1990 to 30 March 1997 but rejected the claim for the period
1 April 1973 to 31 March 1990. HMRC refused the claim on the grounds
that GDBA had failed to establish that:
(1)
it had paid investment management fees throughout the period of the
claim;
(2)
it made taxable supplies throughout that period; and
(3)
a proportion of the input tax incurred on investment management fees was
attributable to taxable supplies by GBDA.
6.
GDBA appealed and a hearing took place on 28 August 2012. In paragraph
5 of their skeleton argument for the hearing, HMRC accepted that, in principle,
the investment management fees can be treated retrospectively as taxable
supplies and input tax reclaimed subject to the normal rules. At the hearing, HMRC
(properly in our view) made certain admissions in the light of the evidence of
Mrs Samantha Aarvold of GDBA. Those admissions suggested to us that agreement
might be reached between HMRC and GDBA or, at least, the scope of the dispute
could be narrowed by further discussion between the parties. Accordingly, we
adjourned the hearing of the appeal.
7.
On the day after the hearing, we issued Directions that GDBA should
serve further submissions, together with any supporting evidence, on HMRC. The
further material concerned the basis of calculation of the amounts of VAT
incurred on the investment managers’ services and GDBA’s rate of recovery of
VAT relating to overheads during the period 1 April 1973 to 31 March 1990. We
also directed that HMRC should provide their comments, together with any
supporting evidence, in reply to GBDA. Finally, we directed both parties to
notify the Tribunal if they had reached agreement and whether they required a
further hearing of the appeal.
8.
In a letter dated 12 September 2012, GDBA’s advisers set out the details
of the calculation of the claim. The calculation was split into two parts.
The first part showed the “base period” on which all the ratios used to
calculate the pre-1997 claim were based. The base period data was taken from
actual figures, either extracted from GDBA’s Financial Statements for 1 April
2004 to 30 June 2007 or from figures used to claim VAT on investment managers’
fees for the same period which had since been agreed and paid by HMRC. The
second part of the calculation showed how the ratios had been applied to the
period 1973 to 1990 and the final amount of the claim. Applying the
methodology in the letter of 12 September produced a claim for £4,879.19.
9.
In a letter dated 26 September 2012, HMRC stated that they accepted the
methodology used by GDBA which was the same methodology as had been used in
claims for later periods that HMRC had previously accepted and paid. HMRC
stated that they also accepted Mrs Aarvold’s evidence that taxable supplies
were made by GDBA during the period 1973 to 1990. That evidence was
corroborated by further evidence which HMRC only became aware of when
considering their response to the Tribunal’s directions. The letter also
stated that, subject to a minor point, HMRC considered the calculation of the
proportion of recoverable VAT to be a fair and reasonable method of
calculation. The letter stated that HMRC did not consider that there was
sufficient evidence that taxable investment management fees were paid by GDBA throughout
the period of the claim. HMRC asked the Tribunal to make findings of fact on
the remaining issue which would decide the appeal. Both HMRC and,
subsequently, GDBA confirmed that they did not consider that a further hearing
of the appeal would be necessary to enable the Tribunal to determine the
appeal.
Did GDBA pay taxable
investment management fees during 1973 to 1990?
10.
At paragraph 15 of their skeleton argument, HMRC submitted that, among
other things now conceded, GDBA needed to establish that it had paid investment
management fees throughout the period 1973 to 1990. HMRC contend that GDBA has
not produced sufficient evidence to establish that taxable investment
management fees were paid by GDBA throughout the period of the claim. HMRC did
not adduce any evidence that GDBA had not paid investment management fees
during the relevant period but simply put GBDA to proof on this issue. It was
common ground that the burden of proof was on GDBA and that the standard of
proof required is the balance of probabilities.
11.
GDBA could not produce any direct documentary evidence to show that it
had paid investment management fees during the relevant period. GDBA explained
that it did not retain any of the books and records for the relevant period
because there was no requirement for it to keep such records beyond a period of
six years and also it was not practical to retain detailed records going back
thirty years. GDBA, relying on Morrison Bowmore Distiller’s Ltd v Revenue
& Customs [2010] UK FTT 394 (TC), submitted that the absence of
historic evidence, such as invoices, was not fatal to its claim in a case where
there was such a long period of time between the date of the claim and the
events in issue. In the Morrison Bowmore case, the taxpayer made a
claim for repayment of input tax incurred between 1994 and 1997, for which no
records were available, based on an extrapolation from the figures for one
year, 2007, for which records were available. The Tribunal in Morrison
Bowmore reviewed all the evidence, including the “tax history” of the
taxpayer, and accepted that, on the balance of probabilities, the calculation
by extrapolation showed that the taxpayer had incurred the amount of input tax
claimed. The Tribunal did not decide that the passage of time reduced the
burden on the appellant of proving its case. The appeal in Morrison Bowmore
was decided on its own particular facts. We agree with the approach adopted by
the Tribunal in Morrison Bowmore but that does not indicate that we
should make any particular finding in this case. We consider that we must
review such evidence as there is in this case and decide, on the balance of
probabilities, whether GDBA paid investment management fees throughout the
period 1973 to 1990.
12.
HMRC previously accepted that GDBA had incurred investment management
fees for the period 1 April 1990 to 30 March 1997 on the evidence of the base
period data. In the course of correspondence relating to the claim, GDBA
provided HMRC with the Financial Statements of GDBA for each year from 1974 to
1990. HMRC submitted to the Tribunal that the Financial Statements did not
show that GDBA had paid any amount by way of investment management fees. HMRC
acknowledged, in the letter dated 26 September 2012 following the hearing, that
Mrs Aarvold’s evidence to the Tribunal supported, to an extent, the proposition
that investment management fees had been incurred by GDBA but HMRC did not
consider that the evidence was sufficiently strong for them to concede the
point.
13.
We were provided with the Financial Statements for the years 1974 to
1990. During that period the format of the Financial Statements changed
slightly but nothing turns on that. Relevant to the issue in this appeal is
the fact that the Financial Statements for the years ending 1974 – 1977
contained a note to the accounts headed “Loans and Deposits” which stated:
“Deposit with Lazard Bros.
& Co Ltd, for investment on behalf of the Association”.
Between 1978 and 1980, the note simply stated “Deposits
with Lazard Bros. & Co Ltd”. From 1981 onwards, the same note does not
mention Lazard Bros but simply has the heading “Loans and Deposits”. From
1987, however, the Financial Statements list the investment advisors to the
GDBA as Lazard Investors, in 1987, and Lazard Investors and Mercury Asset
Management for 1988 to 1990.
14.
Mrs Samantha Aarvold is a Senior Financial Accountant in GDBA. She has
worked in the Finance Department of GDBA since 2001. She provided a witness
statement and gave evidence at the hearing of the appeal. Mrs Aarvold
explained that there was no one still working for GDBA who could give evidence
about the provision of investment management services to GDBA in the 1970s and
1980s. Mrs Aarvold’s evidence was that GDBA had incurred investment and portfolio
management fees in the period 1973 to 1990 and any VAT incurred on those fees
had been treated as irrecoverable at that time. Mrs Aarvold accepted that her
evidence was based on information for the base period used to calculate the
claim and her knowledge of how GDBA had treated investment management fees
during the time that she had worked for the GDBA until the change of treatment
following the issue of Business Brief 19/05.
15.
We found Mrs Aarvold a truthful and honest witness but her evidence was
of limited help. As Mrs Aarvold acknowledged, her evidence amounted to no more
than saying that GBDA incurred investment management fees during her period
with the organisation, no one had ever said anything to her to suggest that
there had been a time when GDBA did not pay investment management fees and so
she assumed that GDBA had always incurred investment management fees.
16.
In Jonas v Bamford 1973 51 TC 1, 1973 STC 519 Walton J observed,
at page 25, that once an inspector comes to the conclusion that, on the facts
which he has discovered, the taxpayer has additional income beyond that which
he has so far declared, then the usual presumption of continuity will apply.
The situation will be presumed to go on until there is some change in the
situation, the onus of proof of which is clearly on the taxpayer. Such a
presumption is not the exclusive preserve of HMRC but is also available to
taxpayers. It is, however, only a presumption and may be rebutted. We agree
with the observations of the Tribunal in Dr I Syed v HMRC [2011] UKFTT 315 (TC) on this point at paragraph 38 that:
"In our view this
quotation [from Jonas v Bamford] expresses no legal principle. It seems
to us that it would be quite wrong as a matter of law to say that because X
happened in Year A, it must be assumed that it happened in the prior year. An
officer is not bound by law and in the absence of some change to make or to be
treated as making a discovery in relation to last year merely because he makes
one for this year. This tribunal is not bound to conclude that what happened
this year will happen next year. It seems to us that Walton J is instead
expressing a common sense view of what the evidence will show. In practice it
will generally be reasonable and sensible to conclude that if there was a
pattern of behaviour this year then the same behaviour will have been followed
last year. Sometimes however that will not be a proper inference: there will
be occasions when the behaviour related to a one off situation, perhaps a
particular disposal, or particular expenses; in those circumstances continuity
is unlikely to be present."
17.
In the case of GDBA, we consider that if GDBA paid investment managers
to provide investment management services in the years since Mrs Aarvold joined
the organisation then there is a strong likelihood that GDBA paid such fees in
earlier years. The investments in respect of which GDBA incurred investment
management fees were not one-off events but carried on, no doubt with changes,
from year to year. Further evidence of some relationship with an investment
manager or managers is contained in the Financial Statements which, from 1974
to 1980 and in 1987, refer to Lazards and, from 1988 to 1990, refer to Lazards
and Mercury. We consider that those references strongly suggest a professional
relationship. In the later period of 1987 to 1990, it is clear that the
companies were investment advisors to GDBA and we conclude, on the balance of
probabilities, that Lazards had a similar relationship with GDBA in the earlier
years. Based on our knowledge of the commercial dealings between investment
managers and their clients in general, we infer that such a professional
relationship involved GDBA paying fees for the services of the investment
manager. There is a period between 1981 and 1986 where the Financial
Statements do not make any reference to any investment manager but we consider
that this was no more than a change in the format of the statements. The fact
that the Financial Statements for those years show that GDBA still had
investments and that Lazards are shown as investment advisors in 1987 suggests
that they never stopped providing investment management services and, we infer,
charging fees. In conclusion, we find on the balance of probabilities that
GDBA paid investment management fees throughout the period 1973 to 1990.
Decision
18.
The only issue in this case was whether GDBA incurred investment
management fees in the period 1 April 1973 to 31 March 1990. For the reasons
given above, we have found that GDBA did incur investment management fees
throughout the period. Accordingly, our decision is that the appeal is
allowed.
19.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
GREG SINFIELD
TRIBUNAL JUDGE
RELEASE DATE: 8 November 2012
