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Tax Tribunals - JOHN T NEWTH, FCA, FTII, FIIT, ATT summarises some recent VAT tribunal decisions.

04 July 2001 / John T Newth
Issue: 3814 / Categories:

A separate business

An appeal came before the VAT tribunal where Customs and Excise were submitting that two businesses should be combined for VAT purposes. In this instance an assessment of £12,674 together with interest of £1,543.60 was at stake.

The appeal was made by the freehold owner and sole licensee of the King's Head public house at East Hoathly, near Lewes, East Sussex. The accompanying agreed bundle of documents and correspondence ran to over 200 pages.

A separate business

An appeal came before the VAT tribunal where Customs and Excise were submitting that two businesses should be combined for VAT purposes. In this instance an assessment of £12,674 together with interest of £1,543.60 was at stake.

The appeal was made by the freehold owner and sole licensee of the King's Head public house at East Hoathly, near Lewes, East Sussex. The accompanying agreed bundle of documents and correspondence ran to over 200 pages.

The grounds of the appeal were that a separate catering business run at the public house should not be regarded as one business with the public house. The underlying intentions of the parties, the nature of the agreement between them and the circumstances and facts of the business arrangement meant that valid separate businesses existed. In making the assessment, Customs and Excise had given insufficient consideration to these factors and consequently the appellant considered that the assessment was incorrect.

The separate business was carried on by another individual, namely Mrs Tracie Greenland, trading as Tracie's Parlour. Mrs Greenland wished to retain her independence and, for the first three years after she started living with the appellant at the King's Head, retained her own house in Brighton. She gave up her previous job in school catering to take on the catering at the King's Head.

The tribunal heard detailed evidence of how the two businesses were operated and in particular the fact that there was a computerised nominal ledger for Tracie's Parlour which ensured that all transactions effected by one business on behalf of the other were correctly reflected by inter-company accounts.

Counsel for Customs and Excise referred to the case of Burrell [1997] STC 1413 and the conclusions that there were only separate taxable entities if (1) the so-called separate business entities were sufficiently at arm's length from each other; and (2) the businesses had normal commercial relationships with each other. Customs contended that the businesses were not sufficiently at arm's length from each other and they did not have normal commercial relationships with each other.

The tribunal referred to the case of Mr B R Parker and Mrs J G Parker trading as Sea Breeze Café (16350) where Mr and Mrs Parker ran a café in partnership and Mr Parker ran a fish and chip business as a sole trader, and the tribunal decided that they were separate businesses.

The facts of the case indicated that when Tracie's Parlour commenced business both the appellant and Mrs Greenland intended and wished that they should be separate businesses. Mrs Greenland wanted her own business and her own independence. She could have left at any time.

The tribunal, of which the chairman was Mr Peter H Lawson, did not consider public perception to be important. The public visiting a shop or public house cannot possibly tell what legal relationships exist in relation to the businesses carried on there. In almost every department store there are separate businesses issuing bills in the name of the store.

It seemed to the tribunal that the recharging through the respective ledgers was as valid a method of adjusting outgoings between the parties as any other method of payment or contributions. The conclusion was that there was a commercial relationship, though it was not normal because of the unusual facts. Although the appellant and Mrs Greenland were not married, their relationship was analogous.

The tribunal was not prepared to say that the attempt to set up a separate business was a failure. It was a real business where proper tax returns were made to the Inland Revenue. The appeal was therefore allowed.


(Robert Wallace trading as Inn House (17109).).


Unusual facts

This case concerned disputed assessments totalling £27,244 and was heard by a tribunal chaired by Mr Stuart Lightman. A previous appeal had been heard at the London VAT Tribunal Centre, chaired by Mr Malcolm Palmer (see LON/94/904P).

The substance of the appeal concerned very substantial gifts received by Mr Clarke from an elderly lady who was 40 years younger than him. Mr Clarke ran a racing stables and had previously been a jockey and had a business relationship with the lady, Mrs Ludlow.

Over a period of four-and-a-half years it was submitted on his behalf that fifty-eight payments totalling nearly £300,000 and including three payments in June and July 1994 totalling £250,000 had been made to him as gifts. These payments were made against the background of monthly charges made by Mr Clarke to Mrs Ludlow which varied between £2,400 and £3,600 during a two-year period.

There were a number of other relevant factors. Mr Clarke had suffered violent experiences which were said to have led to post traumatic stress disorder and selective losses of memory. He had received threats of violence and his house had been set on fire twice and destroyed completely in 1993.

Another factor was that Mrs Ludlow had failing mental health during the early part of 1996, and eventually her affairs came under the control of the Court of Protection. Previously Mr Clarke had held enduring power of attorney.

The tribunal was not concerned with the moral or ethical elements of the gifts received by Mr Clarke. Mr Lightman strongly believed that the evidence pointed towards the manipulation by Mr Clarke of Mrs Ludlow. However, this does not by itself imply manipulation of Customs and Excise. The more likely that unexplained payments were received from Mrs Ludlow, the less likely it was that they were in payment of bills in consideration of the supply of goods and services. Accordingly, Mr Lightman was forced to the conclusion that on the balance of probabilities VAT was not payable on any of the fifty eight payments, except one which related to a known invoice submitted. Accordingly, the appeal was substantially allowed.

Unusually, the tribunal was not unanimous and the other member, Mr A McLoughlin considered that Mr Clarke could be considered a taxable 'general factotum'.


(Peter Cedric Clarke (17154).)


Beyond reasonable doubt

A partnership of husband and wife solicitors appealed against a total of twenty-one defaults concerning surcharge liability periods between May 1994 and May 1999.

The basis of the appeal was on the grounds of reasonable excuse and the catalogue of disasters which had hit the legal practice was almost unbelievable. There had been two burglaries and two attempted burglaries. A computer breakdown had occurred and an unjustified complaint had been made to the Law Society. Following that occurrence, the practice bank had taken fright and had dishonoured cheques in error. A third partner had retired because of stress, costing the practice £15,000.

Because of financial difficulties, the partners had surrendered life policies, and a whole catalogue of difficulties with Customs and Excise had ensued. These included the issue of a walking possession agreement and the involvement of the Debt Management Unit. At one time bailiffs had been appointed by Customs and Excise and items had been wrongly seized. The department had made computer errors.

Due to vandalism, damage and loss had cost the practice £9,000. Legal aid documents had gone missing which also cost £9,000.

Having heard this catalogue of extreme difficulties, the tribunal, under the chairmanship of Mr A W Simpson, stated the following:

'Clearly it will be wrong for trivial disputes on the state of a VAT account to be manufactured and used as a pretext for the lateness of payments of VAT. In my judgment this is not such a case; it is a case of insufficiency of funds, ultimately attributable to the burglaries in 1993 and in no way attributable to the normal hazards of trade, which continued until after this appeal was brought, coupled with a genuine difficulty on either side in ascertaining the state of the account, the last details of which were not resolved until after the appeal was brought. They will now have to be revised yet again, since, taking all the circumstances of the case into consideration, I hold that there is a reasonable excuse for each of the defaults still in issue, and consequently that each of the extant surcharge assessments before me must be discharged.'

The appeal was therefore allowed and the writer will comment that the facts of this case demonstrates how the Revenue authorities still seek to cash in on misfortune where a business is concerned. Fortunately, the right result was achieved at the tribunal, but those who consider that justice is not always tempered with mercy could do worse than read this particular tribunal report, the misfortunes suffered by the business and how Customs and Excise related to them.


(Andrew Stevenson and Janet Elizabeth Stevenson t/a Prime & Co (17166).)


Issue: 3814 / Categories:
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