Value Added Tax

Value Added Tax

Commercial Know-how

JOHN PRICE FCA explains how a company recovered the costs of trying to obtain money from finance houses.

'MY OH MY', I said. 'This company has recovered the input tax on the costs of being checked out by the financial sector. It was after money from the Bank of Scotland and 3i.'

'Were the reports not addressed to the financiers?', enquired the Busy Practitioner. 'Surely, if the advice was to them, they will have based their decision to invest on it and will have demanded that the responsibility be to them so that they could sue if it proved to be wrong?'

'Yes, that is the norm. However, this case, Mono Global Ltd 18559, appears to show how the commercial reality can overcome the legal theory! The evidence of the finance director impressed the tribunal and seems to have been a key factor.

'He and his business associate wanted to establish a company big enough to negotiate profitable sales to telecoms businesses. The idea was to take over their existing company and another one, whose shareholders would then invest in Mono. They themselves put in £300,000, obtained loan finance from the bank and issued bonds and equity to 3i. Deloitte was accepted by Customs as providing services jointly both to Mono and 3i when it advised the two entrepreneurs, prepared a three-year business plan, negotiated reduced purchase prices for the assets to be acquired and negotiated better bank loan terms.'

'Well, all that sounds like primarily advice to the company, not the bank or 3i.' 'Yes, though the Deloitte letters of engagement were addressed to 3i as well. So was that from Dickson Minto WS, which provided the shell company renamed as Mono. Addressing it to 3i sounds a bit odd since Dickson's role was to advise the entrepreneurs.

'Then KPMG was instructed to prepare financial and commercial diligences, the engagement letter again being addressed to both parties. KPMG reviewed the prospects for new venture and prepared an exit strategy, which was of interest to all concerned.

'Finally, Aon Ltd, an insurance consultancy, reviewed risk management and insurance needs, as a result of which, changes to current and future insurances were made.'

'Those services sound as if they were made at least as much to Mono as to 3i.'

'Yes. Mind you, this is an Edinburgh case. The Scottish chairmen tend to keep their judgments concise and that sometimes makes it difficult to appreciate all the nuances.'

'But why were Customs denying recovery of the input tax?'

'Presumably, the officer, when reviewing what was probably an initial repayment claim, found £119,000 of it to be related to the setting up of the project, knew the usual requirement for the advice to be to the financing companies rather than the borrower and then found the engagement letters addressed to them. Customs argued in the tribunal that the supply was indeed primarily to 3i regardless of payment by Mono, but their views, as quoted, do not appear to have had any strength in the light of the facts.

'The finance director's evidence was found to be key by the tribunal because he was able to explain the terms of engagement and put the work done into its commercial context. The advice had benefits for the management in the running of the new business over several years; it was not restricted to the decision whether or not to proceed.'

'Presumably, Mono quoted Commissioners of Customs and Excise v Redrow Group [1999] STC 161, the one where the House of Lords held that the housebuilder could recover VAT on the fees charged by estate agents for selling houses when the seller then bought a Redrow one.'

'Yes, the tribunal found that apt. However, it then said that Mono was the prime beneficiary, any benefits to 3i being incidental. It further said that the decisions in Commissioners of Customs and Excise v Reed Personnel Services Ltd [1995] STC 588 and Eastbourne Town Radio Cars Association v Commissioners of Customs and Excise [2001] STC 606) held that the contractual relationship of the professional advisers did not necessarily determine to whom the supply was made.'

'But a key point in Redrow was that it had contracted to pay those fees in the first place. Had Mono not done the same?'

'Yes, Mono had. The tribunal recorded that it had paid all of them and was liable, or at least liable primarily, to do so.'

'So what had the other two cases to do with it?'

'That is a good question. Moreover, the decision does not explore the extent to which Bank of Scotland and 3i even attempted to have the contractual responsibility to them. It seems curious if there was no such liability, as opposed to that for payment. Be that as it may, the case highlights both the possible value of Redrow to businesses trying to fund their establishment or expansion and the importance of getting the key facts in a case. Since few professional advisers have ever worked in industry and even fewer people from Customs, they all too easily fail to appreciate the full commercial story. Of course, the tribunal needs to hear that too.'

A St J Price FCA is a VAT consultant in Gloucestershire and author of Value Added Tax in the Tolley's Tax Essentials series, now in its fifth edition. He may be contacted on tel: 01285 851888, fax: 01285 851889, e-mail: asjohnprice@btopenworld.com.

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