[2011] UKFTT 120 (TC)

TC00996
Appeal reference: TC/2010/00258

VAT – input tax – was there a sufficiently close link between the expenditure and the business? – no – appeal dismissed

FIRST-TIER TRIBUNAL
TAX

				       MR NICHOLAS ADAM JOHN WALLEY	Appellant

- and -

	THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Lady Mitting (Judge)

Sitting in public in Birmingham on 17 January 2011

The Appellant appeared in person

Bernard Haley, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2011
DECISION

1.	The Appellant had lodged an appeal against two assessments raised by the Commissioners, namely:
(1) An assessment calculated on 4 September 2008 in the sum of £23,246 and covering tax periods 07/05 to 11/07 (excluding 12/05); and
(2) An assessment calculated on 30 June 2008 in the sum of £2,847 covering tax periods 09/05, 12/05, 02/06, 10/06 to 03/07 and 08/07 to 03/08.
Both assessments related to disallowed input tax and comprised numerous individual items arising out of discrepancies picked up by officers on a routine visit.  Before and during the hearing various items were either accepted by Mr. Walley or allowed by the Commissioners, leaving the following in dispute and to be adjudicated upon by the Tribunal.
Period	Description	Amount of disallowed tax (£)	
08/05	Legal fees building dispute	56.88	
11/05	Solicitors fees re wills	17.50	
12/05	Architect fees re White Lodge	102.29	
02/06	1. Accountant fees re taxation advice
2. Accountant fees re taxation advice
3. Architect fees re White Lodge
4. Architect fees re White Lodge	78.75
54.24
30.80
130.90	
07/06	1. Solicitors fees re building dispute
2. Solicitors fees re building dispute	948.98
528.83	
09/06	Professional fees re sale of shareholding in Puvis Homes Ltd	5600.00	
10/06	Building works carried out to White Lodge	6702.13	
11/06	1. Legal fees re sale of shareholding in Puvis Homes Ltd	3258.50	
	2. Legal fees re sale of shareholding in Puvis Homes Ltd	292.87	
	3. Legal fees re building dispute	182.26	
	4. Surveyor’s fees re building dispute	140.00	
	Also in this period, IT was claimed on 2 invoices in identical amounts to those in 07/06 but no invoices were available and unless separately and differently dated invoices are produced, I am treating this as a duplicated claim.		
09/07	1. Legal fees on sale of land	306.25	
	2. Estate agents fees on sale of 78 Colley Avenue	297.50	
	3. Legal fees on sale of 78 Colley Avenue and preparation of powers of attorney	108.51	
	Also in dispute for periods 12/05; 02/06 and 10/06 to 03/07 inclusive was the refusal of all IT on the basis that no taxable supplies were being made.  This may not have been quite right, and the Commissioners had asked Mr. Walley to put in a partial exemption calculation which he told me he had, but Mr. Haley and Mrs. Drew had no knowledge of it.  With the agreement of the parties I leave this aspect out of consideration to allow them to liaise and, I hope, agree figures, and to apply to the tribunal if agreement is not reached within 21 days of the release of this decision.		

The Commissioners had also raised a misdeclaration penalty dated 2 October 2008 in the sum of £2,745 and relevant to periods 09/06, 10/06 and 11/06.  Mr. Walley had not expressly appealed against the penalty but I treat it as being under appeal.
2.	Oral evidence was given by Mr. Walley and on behalf of the Commissioners by the assessing officer, Mrs. Pauline Drew. 
3.	The evidence I heard was largely unchallenged and the facts I find to be as follows.  Mr. Walley was from 24 June 1982 to 1 July 2009 registered, as a sole trader, as an agricultural contractor.  Under the registration he, together with his wife, carried on a farming business and he also contracted out agricultural plant hire.  Mr. Walley also had a number of other business interests.  He and his wife were the directors and sole shareholders in a company called Puvis Homes Limited.  This company was set up in 2001 / 02 and operated White Lodge Nursing Home.  All supplies were exempt and the company was not VAT registered.  Mr. Walley was also a director of Caring4U Limited and Green4Go Limited, both registered charities and neither VAT registered.  There were also two companies called Borega and B&W Developments Ltd, neither of which traded and neither of which were ever registered for VAT.  There was therefore, perfectly properly, just the one VAT registration in Mr. Walley’s sole name and relating to his agricultural activities.  In his statement of case, Mr. Walley had described his relationship with the Commissioners over the years as being “faultless” with only ever minor discrepancies and these being readily and easily resolved.  I have no reason to doubt the truth of this statement.
4.	Mr. Walley’s agricultural business traded successfully until 2001.  This was the time of the foot and mouth outbreak, when DEFRA contracted out to a number of companies the task of cleaning up at individual farms to prevent the spread of the disease.  One such company, Farm Assist, sub-contracted to Mr. Walley.  This proved a highly lucrative contract from which Mr. Walley earned in excess of £1 million until, for reasons unknown to me, DEFRA refused payment to Farm Assist who in turn were unable to pay Mr. Walley.  There ensued lengthy litigation between Farm Assist and DEFRA which was abandoned after six years without success.  The financial fallout of all of this was for Mr. Walley catastrophic and set off a chain of events which led to the eventual collapse of his business and a cessation of his trading in the UK.  Farm Assist had owed Mr. Walley some £250,000 which Mr. Walley had hoped to recoup out of the litigation.  Counsel had given an 80% chance of success and on the strength of this, Mr. Walley decided to keep his agricultural business alive if he possibly could.  Mr. Walley borrowed from his bank, HSBC, to an eventual level in 2004 of £750,000.  This was used in part to start up a totally separate venture, Puvis Homes Ltd, which I have referred to in the previous paragraph.  HSBC monitored Mr. Walley’s overdraft through their special debt management unit and as can be appreciated very rigorous repayment conditions were attached to it.  The overdraft was secured on the personal guarantees of Mr. and Mrs. Walley and on all their personally-owned assets, which included their shareholding in Puvis Homes Ltd, some parcels of agricultural land, a house, 78 Colley Avenue, Wolverhampton, which was let out to the DHSS, and on their own home.  In 2003 Mr. and Mrs. Walley moved permanently to Portugal where they now live, leaving a manager to run the agricultural business.  I am led to believe that this business did no more than tick over until it was eventually wound up.  The bank, wishing to recoup full repayment of their debt, was seeking a sale of all Mr. and Mrs. Walley’s assets, and this gradually took place between 2005 and 2008 / 09.  The majority of those items of the assessment which remained in dispute relate to this realisation of assets and I will deal with these individual invoices more fully below in paragraph 7 onwards.
5.	Sometime around 2004 / 05, Mr. and Mrs. Walley had some building work done on White Lodge, which of course was run by Puvis Homes Ltd.  However, Mr. Walley planned to have the invoices addressed to himself personally which he would personally pay with the intention of re-invoicing, with a profit element, to Puvis Homes Ltd.  This however never came to pass as there arose a dispute with the builders, Carters Ltd, who eventually issued court proceedings against Puvis Homes Ltd as first defendant and Mr. Walley personally as second defendant.  The two defendants counter-claimed and the action was eventually settled (by which time Puvis Homes had been dissolved) by Mr. Walley paying £45,000 (being the agreed value of Carters’ work inclusive of VAT) plus costs of £20,000.  The disputed items of input tax relating to this building dispute are (1) the legal fees in 08/05 (£56.88) and in 11/06 (£182.28) and in 07/06 (£948.98 and £528.83); (2) the cost of the building work itself in 10/06 (£6,702.13) and (3) the surveyors’ fees in 11/06 (£140).
6.	There was one miscellaneous item of input tax remaining in dispute, being for the preparation of wills for Mr. and Mrs. Walley in 11/05.  It was Mr. Walley’s submission that this was an allowable item as in making a will he was acting as a reasonable and prudent businessman, providing for the carrying on of his business activities in the event of his death.
7.	Faced with the need to dispose of his assets, Mr. Walley was faced with how best to do this.  This was of particular importance in relation to Puvis Homes Ltd.  The two options were to sell the property and keep the company going, or to dispose of the shareholding.  This necessitated taking expert advice from specialists in the field, namely Franklyn (Developments) Ltd who described themselves as Retirement Developers.  They advised a sale of the shares and they also found the purchaser, Oldfield Residential Care Limited.  The sale price was in excess of £1.5 million on which Franklyn’s fees were commission-based and including VAT were £5,600 (09/06).  Mr. Walley also paid legal fees on the sale in 11/06 (£3,258.50 and £292.87).
8.	Throughout the period of realisation of assets, Mr. Walley took general taxation advice and claimed in period 02/06 input tax on the professional fees of £78.75 and £54.25. 
9.	The sale of the shares in Puvis Homes Ltd was completed by a Share Purchase Agreement between Mr. and Mrs. Walley (1) and Oldfields (2).  The Agreement was dated 31 August 2006 but the sale had been set up a number of months previously and one of the terms which was later incorporated into the Agreement was at paragraph 4 that Oldfields would pay the vendors (Mr. and Mrs. Walley) the additional sum of £75,000 if the vendors were successful in obtaining planning permission for the construction of an additional 15 bedrooms.  Mr. Walley set about trying to obtain planning permission in late 2005 and instructed, to act on his behalf, a firm of architects who submitted a series of bills between 12/05 and 03/07.  Planning permission was eventually refused but Mr. Walley paid the architects’ fees himself and reclaimed all the input tax.  The Commissioners allowed the input tax in all periods post-dating the completion of the sale of the shares on the basis that thereafter Mr. Walley was acting in his own right.  They however refused to allow the input tax on the pre-completion invoices in 12/05 (£102.29) and 02/06 (£30.80 and £130.90) as they saw it as appertaining to the company.
10.	Finally in the realisation of assets were the sales of the agricultural land and 78 Colley Avenue, on which professional fees were incurred and the input tax reclaimed in 09/07.
Submissions
11.	It was the submission of Mr. Haley that the input tax claimed by Mr. Walley related to transactions and activities which were not part of Mr. Walley’s taxable activities as an agricultural contractor.  There was no, or no sufficient, direct connection between the expenditure and the business and as such the input tax was not allowable.  It was Mr. Walley’s contention that there was a sufficient link.  The link which Mr. Walley argued for (as set out in his statement of case) was that shares had to be liquidated to pay off bank loans and overdrafts secured on them, on behalf of the agricultural contracting business.  This link he carried across to all the areas of dispute.  It was in his agricultural business that his financial difficulties arose and the indebtedness accrued.  The realisation of assets to satisfy this indebtedness therefore had a direct link with the agricultural business.  He also contended that throughout he acted as a reasonable businessman making provision for the continuation of his business activities.
Legislation
12.	Section 24 VAT Act 1994 provides that input tax is VAT incurred by the taxable person on the supply to him of any goods or services used or to be used in the course or furtherance of any business carried on to be carried on by him.  Section 26(1) and section 26(2) provide that a taxable person is entitled to credit for so much of his input tax as is attributable to taxable supplies made by him in the course of furtherance of his business.
Conclusions
13.	Two relevant criteria are to be drawn from sections 24 and 26.  First, the taxable supplies have to be made by the taxable person in the course of furtherance of his business.  The taxable person is Mr. Walley and the taxable person’s business is the agricultural business which is the subject of his registration.  All remaining business activities which Mr. Walley may carry out or be involved in are outside the scope of his registration.  Specifically this must include his activities as a shareholder in Puvis Homes Ltd.  The second criterion is that the supplies to Mr. Walley must be used in the course or furtherance of any business carried on by him.  Case law has laid down that there has to be an immediate and direct link between the costs incurred and the business activity to which those costs relate.  There has to be a nexus and that nexus has to be directly referable to the purpose of the business.  The onus of proof is on Mr. Walley and he has to satisfy the tribunal on the balance of probabilities that the goods or services which were supplied to him and upon which he has reclaimed the input tax were to be used for the purpose of his agricultural business – i.e. the business carried on by him as registered person.  A distinction has to be drawn between purpose and benefit, although in the majority of cases they probably coincide.  Here however they do not.  The fact that Mr. Walley’s agricultural business may have benefitted from the services does not necessarily mean that those services were supplied for the purpose of the business.  In those items remaining in dispute, not one of them related to goods or services supplied for the purpose of the agricultural business.  The building works carried out on White Lodge and the professional fees which were incurred in the course of the resulting dispute were all clearly referable only to Puvis Homes Ltd.  The fact that Mr. Walley paid the costs personally with the intention of re-invoicing Puvis Homes is irrelevant.  Those goods or services were not supplied to Mr. Walley for the purpose of his agricultural business.  Likewise the professional fees incurred in Mr. Walley’s application for planning permission prior to the agreement to sell the shares.  Equally, the professional fees incurred in the sale of Mr. and Mrs. Walley’s shareholding have no clear nexus with the registered business.  The professional fees for tax advice and the preparation of the wills were related to Mr. and Mrs. Walley in their personal capacity and again there is no link with the registered business.  The professional fees incurred in connection with the sale of 78 Colley Avenue and the agricultural land were all personal to Mr. and Mrs. Walley and again there was no clear and identifiable link with the registered business.  I find therefore that, looked at individually, none of the disputed items had a link or anything approaching a sufficient link with the registered business.  If one looks at the items not individually but as a whole, Mr. Walley’s argument is that there is a link with the registered business activities in that the indebtedness arose out of the agricultural business and the monies were being raised to repay the indebtedness.  First, as a matter of fact, I believe this is not strictly accurate as at least a part of the indebtedness arose in connection with White Lodge.  However, as a matter of principle this argument cannot succeed.  I accept that Mr. Walley’s financial downfall was triggered by events which occurred, totally outside his control and for which he was in no way to blame, in the course of his agricultural business.  It may also be that the registered business could or would have benefitted from the repayment of the debt, but the crucial point is that the costs were all incurred for the purpose of reducing the capital deficit which Mr. Walley had incurred with the bank.  The bank insisted on repayment.  This necessitated the realisation of assets and the costs were incurred in the main in connection with that realisation.  The costs were not incurred for the purpose of the agricultural business which was the subject of the registration.  The appeal therefore fails and is dismissed in relation to all those items which I have specified individually in the schedule contained in paragraph 1 of this decision.
14.	In relation to the misdeclaration penalty, no mitigation had been allowed by the Commissioners.  At the hearing, Mr. Haley conceded that the Commissioners would allow 50% mitigation.  I heard nothing from Mr. Walley to persuade me that there was a reasonable excuse or that any greater mitigation should be allowed.  The penalty therefore stands but mitigated by 50%.
15.	There remains only those items upon which I was not addressed and which relate to the partial exemption calculation.  As I stated earlier, the parties should try and resolve this aspect between themselves but I give them liberty to re-apply to the tribunal within 21 days of the release of this decision if agreement cannot be reached.  If no such application is made within 21 days then the appeal shall be taken as having been concluded.
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.

LADY MITTING
JUDGE
Release Date: 16 February 2011