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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Rio Tinto London Ltd v Revenue & Customs [2014] UKFTT 1059 (TC) (27 November 2014) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2014/TC04152.html Cite as: [2014] STI 3559, [2014] UKFTT 1059 (TC), [2015] SFTD 299 |
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[2014] UKFTT 1059 (TC)
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TC04152
Appeal number: TC/2012/10248
VALUE
ADDED TAX– repayments
- Appellant supplying investment management and administration services to a
group pension fund –
VAT
charged on all services – no over-charge in respect
of net of
VAT
costs themselves - Appellant “refunds” part of payment made by
pension fund – whether a decrease in consideration for the supply within
regulation 38
Value
Added Tax Regulations 1995 – appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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RIO TINTO LONDON
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Appellant |
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- and - |
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THE COMMISSIONERS FOR HER MAJESTY’S |
Respondents |
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REVENUE & CUSTOMS |
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TRIBUNAL: |
JUDGE GUY BRANNAN |
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MS REBECCA NEWNS |
Sitting in public at Bloomsbury Place, London WC1 on 14 October 2014
Amanda Brown, KPMG LLP, for the Appellant
George Peretz, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2014
DECISION
1.
Rio Tinto London Limited ("the Appellant") appeals under
section 83 (1) (p) Value
Added Tax Act 1994 ("
VATA")
against an
assessment dated 30 July 2012.
2.
The issue in this appeal is whether a price adjustment which the
Appellant says it made in relation to services which it supplied to a group
pension fund is a "decrease in consideration" the purposes of
regulation 38 Value
Added Tax Regulations 1995 ("the Regulations").
In this decision we shall refer to a "price adjustment" for
convenience, but without prejudging the issue.
3.
The assessment under appeal is in the amount of £1,064,893 and was
issued on the basis of HMRC's view
that the Appellant was not entitled to a
VAT
credit in respect of the above-mentioned price adjustment. The Appellant
claimed that for the purposes of regulation 38 (1) (b) and (3) of the
Regulations there had been a "decrease in consideration for a supply"
resulting from the price adjustment so that it was entitled to make a negative
entry in the
VAT
portion of its
VAT
account.
4.
We heard from two witnesses for the Appellant, both of whom produced
witness statements, gave oral evidence and were cross-examined. First, Ms
Barbara Whent, Global Practice Leader for Employee Benefits for the Appellant
and a trustee of some of the Appellant's other pension funds (but not a
trustee, as we understood it, of the pension fund involved in this appeal),
gave evidence in relation to the operation of the pension fund. Secondly, Mr
Yannis Poulopoulos, the Head of the Global Indirect Taxes group at Rio Tinto
gave evidence on the VAT
background.
5. In addition, a bundle of documents was also placed before us in evidence.
6.
Between 1973 and 2010 the Appellant supplied services to the Trustees of
Rio Tinto pension funds established for the benefit of Rio Tinto employees. The
various
UK Rio Tinto pension funds were reorganised in 1996 and consolidated
into one fund ("the Fund").
7. The services supplied by the Appellant to the Fund comprised investment management services and administration and general management of the Fund. In the correspondence and discussions between the parties there was some confusion in relation to these terms. In this decision, however, we shall use the expression "investment management" to describe advice given to the Fund in relation to its investments "Administration and general management" services comprised the production of pension news updates for employees, legal services, tracing missing beneficiaries, fund administration etc.
8.
We were shown VAT
invoices issued by the Appellant to the Fund during
the period 2005 – 2007. These invoices described the services supplied by the
Appellant to the Fund, the cost (excluding
VAT)
and the relevant
VAT.
A typical
example, which was referred to at the hearing, was the invoice dated 12/05/05
which read as follows: –
|
COST(Excluding ![]() |
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![]() |
Pension Department Costs Salary & Dependant charges Pension Investment costs |
£ 66,671.50
7,149.00 56,282.43
|
S* |
£
9849.40 |
*Indicating a standard-rated supply
9.
It can be seen, therefore, that the Appellant charged the Fund no VAT
in
relation to Pension Department costs and Salary and Dependant charges, but
charged
VAT
at the standard rate on Pension Investment costs."
10. An e-mail from the Appellant to HMRC dated 28 September 2007 explained the categories of services supplied to the Fund detailed on the invoices. The e-mail read as follows:
"Pension Department Costs: … Input VAT
(where charged) is recovered in full on pension department costs on the basis
that these costs related to ongoing management of the scheme and are thus the
input tax of the employer, Rio Tinto London Limited (per Notice 700/17 Funded
pension schemes (2002)….
I performed a review of pension department costs
recharged to the fund during the period January 2006 to March 2007 (inclusive).
The bulk of costs during this period were invoiced by the vendor
is listed
below… [The e-mail and sets out a number of third-party service providers
providing communications, tracing, actuarial, legal, recruitment,
administration, rating agency, consulting, insurance etc. services]
Per my reading of Pensions Notice 700/17, all the above costs are allowable management (as opposed to investment) costs.
As you will see from the procedural guidance issued by the Rio Tinto tax team, investment expenses are recharged separately from management expenses bracket please refer below for full consideration of investment cost recharges).
Salary and Dependent Charges: Selected Rio
Tinto employees perform work in relation to the pension fund. Salary and
dependent recharges are calculated by adding up monthly basic salary, car
allowance, National Insurance charges, accident cover and bonuses payable in
relation to these employees. Depending on the time spent by these employees on
pension fund issues, a portion of the aforementioned salary and dependent
charges costs are disbursed to the fund. No VAT
is recovered in relation to
salary and dependent charges – these charges are not subject to
VAT.
Rio Tinto
employees perform the following types of service: advertising the fund to new
employees and updating existing employees on the fund status, providing
information on the fund for statutory disclosures in Rio Tinto corporate
accounts, general review of fund's performance (production of statistics et al
for employee/Rio Tinto corporate consumption) selection of investment managers,
reviewing and advising on legislative/regulatory/tax changes, ensuring that the
funds can meet their commitments to beneficiaries etc.
Pension Investment Costs: Stephen Burley was
the pension fund investment manager, providing investment services to the fund.
The bulk of investment management costs correspond to salary and other
incidental costs incurred in the provision of these investment management
services. Output VAT
is duly charged by RT London Limited on pension investment
cost recharges. Note that prior to February 2007, Stephen Burley performed all
investment management activity, no external investment managers were engaged by
either RT London
Ltd
all the fund. Stephen Burley had his own cost centre – 227
All investment related costs were posted to this cost centre… At the time of
the monthly recharge the pension fund, investment service costs posted to the
cost centre 227 are captured in full and included in the Pension Investment
Cost line billed to the fund on the monthly recharge invoice.
In February 2007, Stephen Burley left Rio Tinto's
employ and all investment management activity was outsourced to 7 external
investment managers…. Investment costs (including external fund manager costs)
continue to be posted to cost centre 227 for recharge to the fund + VAT."
11.
Thus, to summarise, Pension Department Costs (which appear to comprise
charges levied by third-party suppliers) gave rise to allowable input tax for
the Appellant. Those costs were recharged to the Fund without VAT
being
charged. Salary and Dependent Charges did not give rise to input tax for the
Appellant (because salaries etc. were not themselves liable to
VAT)
and the
relevant proportion of those costs attributable to the Fund were invoiced to
the Fund by the Appellant without
VAT
being charged. The
VAT
treatment of these
two categories of costs was not in dispute between the parties.
12.
The real dispute in this appeal relates to the third category of
expenses, viz
Pension Investment Costs. These costs were, until 2007 (when Mr
Burley retired from the Appellant's employment), incurred by the Appellant in
the form of salary and related charges. After 2007, the Appellant outsourced
its investment management function to third-party suppliers. However, the
Appellant contends that Pension Investment Costs included an element (which the
Appellant estimated to be 30%) of administration costs. The Appellant contended
that these administration costs should not carry
VAT
when recharged to the
Fund. Nonetheless, for the whole of the period from 1973 to 2010 the Appellant
had, in its
view
mistakenly, charged
VAT
to the Fund in respect of these expenses.
Furthermore, it was in relation to these administration expenses that the
alleged price adjustment, which lies at the heart of this appeal, was made.
13. Identifying this category of administration expenses as the expenses in respect of which the price adjustment was made caused some confusion in the exchange of skeleton arguments prior to the hearing. At the hearing, we were asked to assume that the amount of the price adjustment, which we shall explain in more detail below, was not in dispute and that our decision should focus solely upon the question whether the Appellant had made a "decrease in consideration" for the purposes of regulation 38 of the Regulations.
14. We now set out the background to the price adjustment that was made in 2011.
15. The Fund was a defined benefit scheme until 2005, after which the defined benefits scheme was closed to new members and became a defined contribution scheme. For many years the Fund was in surplus; in other words, the assets of the Fund were sufficient to meet current and anticipated liabilities to members. However, in or around March 2008, with the onset of the global financial crisis, the Fund dipped into deficit. This deficit continued to grow and by March 2009 the Fund's assets represented only 77% of its liabilities.
16. The Fund's participating employers were required to make deficit contributions to the Fund from March 2008 in accordance with the terms of a Funding Corridor Framework. To explain the function of this agreement requires a little explanation of the funding and regulation of pension funds.
17. The regulation and funding of UK pension schemes is now largely governed by the Pensions Act 2004. This Act established the Pensions Regulator. The Pensions Regulator's Code of Practice for Trustees contains, in relation to funding obligations, provisions which Trustees should observe. These provisions specify that there should be:
(1) a statement of funding principles specific to the circumstances of each scheme setting out how the statutory funding objective will be met;
(2)
periodic actuarial valuations
and actuarial reports;
(3) a schedule of contributions; and
(4) a recovery plan where the statutory funding objected is not met.
18. The Funding Corridor Framework set out principles agreed between the Trustees and Rio Tinto to secure that the Fund had sufficient assets to meet its statutory funding objectives over the long-term. Ms Whent, in her evidence, referred to the Funding Corridor Framework as a "glide path", established after the Fund first went into deficit in 2007, to take the Fund out of deficit. The Funding Corridor Framework had been agreed between the Trustees and Rio Tinto after negotiation. In accordance with the Funding Corridor Framework, the participating Rio Tinto employers were required to make deficit contributions from March 2008.
19.
Every three years pension fund Trustees must obtain an actuarial
valuation
of the assets and liabilities of a pension fund to show whether a
fund was in surplus or deficit. On the basis of this
valuation
the Trustees of
a fund will then enter into discussions with the employer to agree on the
employer's future contributions to the fund. This agreement is embodied in a
Schedule of Contributions which is a formal document. Each year a pension fund,
including the Fund, is audited and the auditors compare contributions paid to
the fund against the relevant Schedule of Contributions. Any difference between
the contributions agreed to be made under the Schedule of Contributions and the
contributions actually made will be reported to the Trustees and, if
substantial, may lead to the pension fund's accounts being qualified and
possibly reported to the Pensions Regulator.
20.
The Fund entered into a Schedule of Contributions with participating Rio
Tinto employers in December 2009, which was attached to the Fund's annual
accounts (in fact, we were shown the 2009 Schedule of Contributions that was
attached to the Fund's 2012 audited accounts). The Schedule of Contributions
shows the percentage of salaries which the participating employers will make to
the Fund in respect of various
members’ benefits.
21. In addition, in December 2008, Rio Tinto PLC ("PLC") entered into a Deed of Guarantee and Agreement with the Fund under which PLC guaranteed the obligations of other Rio Tinto subsidiary employers.
22. With effect from July 2009, the deficit contributions from participating employers required by the Fund were calculated were calculated at £1,925,000 per month. However, on 30 September 2009 a participating employer made an advance deficit payment of £70 million. The Schedule of Contributions states that, as a consequence of the £70 million advance payment, further deficit contributions amounting to £48.3 million would only become due once the £70 million advance payment had been exhausted. At August 2011, the date of the price adjustment, there was a balance of the advance payment remaining of approximately £19.7 million. The advance deficit payment was finally exhausted in June 2012. During the period from September 2009 to June 2012 participating Rio Tinto employers were only required to make ongoing (rather than deficit contributions) payments to the Fund.
23. As we have explained, the Appellant supplied the investment management and administration services to the Fund from 1973 to 2010 – the period covered by the price adjustment.
24.
The deadline for filing historic VAT
claims after the ruling in the Fleming
case (Customs and Excise Commissioners
v
Michael Fleming (t/a Bodycraft)
[2008] UKHL 2; [2008] STC 324; [2008] BVC 221) was 31 March 2009. The Appellant
instructed KPMG to assist it in identifying appropriate claims. In the course
of preparing these claims, KPMG were said to have advised the Appellant that,
on the basis of HMRC guidance in Notice 700/17, 30% of the fund management
charges (by which we understood this to mean the Pension Investment Costs) were
properly costs of the employer rather than costs which should be charged to the
Fund. We were not shown KPMG’s advice.
25.
In the skeleton arguments there was a debate about whether Notice
700/17, provided support for the view
reportedly taken by KPMG (and which was
advanced by Mr Poulopoulos in his witness statement).
26. As we read the relevant provisions of Notice 700/17, the guidance simply related to the correct attribution of input tax, in respect of outsourced services, between administration services and investment management services, in circumstances where the service provider did not differentiate between the two types of services in its invoice. In summary, administration services gave rise to a right to deduct input tax against taxable supplies made by the employer. The supply of investment management services, however, gives no right to input deduction for the employer because there was no sufficiently direct and immediate link between such services and the employer's taxable supplies. In this context, where the supplier's invoices did not differentiate between administration services and investment management services, paragraph 2.7 of Notice 700/17 suggested a 30% (administration services) and 70% (investment management services) apportionment.
27.
We could not find in Notice 700/17 any support for the proposition,
attributed to KPMG's advice and put forward in Mr Poulopoulos's witness
statement, that this guidance suggested that a 30% attribution in respect of
administration services should not be recharged by an employer to its pension
fund. The Notice was completely silent on this point and, in our view,
on any
conceivable interpretation could not fairly be read as having this meaning.
28.
Be that as it may, in Mr Poulopoulos's witness statement and the
skeleton arguments lodged on behalf of the Appellant, reliance was placed on
Notice 700/17 as providing the basis for reaching the conclusion that the
Appellant had over-charged the Fund by recharging 100% of Pension Investment
Costs, rather than only 70% of those costs. In cross-examination, however, Mr
Poulopoulos rather abruptly abandoned this position. He accepted that the net
of VAT
amounts charged by the Appellant to the Fund in respect of Pension
Investment Costs were correct and that the only element of over-charge related
to the
VAT
on 30% of those costs. He gave no explanation for this change of
view.
29.
In other words, taking the invoices referred to in paragraph 8, the
figures shown in the "COSTS (Excluding VAT)"
were accepted by Mr
Poulopoulos as being correct. In short, Mr Poulopoulos now took the position
that the Appellant should not have charged
VAT
to the Fund in respect of 30% of
the Pension Investment Costs but that this was the only over-charge in
question. The Appellant, therefore, abandoned the argument that Notice 700/17
could be used as a justification for the proposition that there had been an
over-charge of net of
VAT
amounts to the Fund by the Appellant. There had been
no over-charge by the Appellant to the Fund except in respect of
VAT.
30.
Mr Poulopoulos took the view
that in order to reclaim the over-charged
VAT
a provisional claim should be filed under section 80
VATA.
Accordingly, a
claim for the allegedly over-charged
VAT
was made by the Appellant on 31 March
2009.
31. On 21 March 2010, however, Mr Poulopoulos wrote to HMRC informing the Commissioners that, although the section 80 claim was not being withdrawn, the Appellant intended to make a price adjustment in respect of the services supplied by the Appellant to the Fund during the period 1973 to January 2007.
32.
We were informed that the section 80 claim (which does not cover the
full period of the regulation 38 claim) has not been pursued pending resolution
of the current appeal. Furthermore, we were informed that HMRC have not
investigated or formed a view
regarding the
validity
of the section 80 claim
and, therefore, do not yet accept that there was an over-declaration of
VAT
in
connection with the Pension Investment Cost recharges. We express no
view
on
the merits of the section 80 claim in this decision.
33. Ms Whent's evidence was as follows:
"20. I understand that in 2009, as a
consequence of an opportunity to reclaim certain sums of VAT
from HMRC, it was
identified that [the Appellant] had, over a considerable period, been
overcharging the Fund in connection with the costs of investment management. I
understand that in the case of participating employers which had used external
investment managers HMRC accepted that 70% of the cost was proper to the
pension fund and 30% to the employer. [The Appellant] had passed 100% of the
cost to the Fund.
21. Having identified the over-charge, Yiannis Poulopoulos of the tax Department sought to engage with the trustees through [the Appellant]. Yiannis explained the position they had reached concerning HMRC's guidance based on advice they had taken from KPMG. A briefing paper was prepared for the trustees of the Fund so they could understand the issue and it was proposed that it would be discussed at the trustee meeting in September 2010."
34.
Thus, it appears from Ms Whent's evidence that she understood, from the
Rio Tinto tax department, that the Fund had been over-charged in respect of
investment management fees and not just in respect of VAT.
35. Mr Poulopoulos duly submitted a briefing paper to the Fund's Trustees for their meeting in September 2010.
36. The paper stated:
"Please note that the Tax Department recently
undertook a separate review of the recharge of the investment management costs
("IM costs") between [the Appellant] and the [Fund]. The review
established that [the Appellant] has over-charged VAT
to the [Fund].
Specifically, only 70% of the IM costs should have been charged with
VAT.
This
is because 30% of IM costs are deemed to relate to administration and the
associated
VAT
should be borne by the [Appellant] (not the [Fund]).
37.
We note that the only suggestion contained in this paper was that too
much VAT
had been charged by the Appellant to the Fund. There is no suggestion
that the fees themselves charged to the Fund were excessive or in any way
unjustified. If KPMG and/or Mr Poulopoulos were concerned that the Appellant
might have over-charged management fees to the Fund for 37 years one might have
expected this to have been raised with the Trustees on the first occasion where
to topic was to be discussed.
38.
The paper went on to note the distinction between a trader correcting
its VAT
returns by means of a
voluntary
disclosure (which was subject to a
three-year time-limit) and making a "Price Adjustment" (which was not
subject to a three-year time-limit but could go back as far as 1973).
39. At that time it was calculated that 30% of the Pension Investment Costs charged to the Fund by the Appellant in the period 1973 to 2010 would amount to a gross sum of £10,083,796. In fact, as we shall see, a different basis of the calculation of the Pension Investment Costs was used in the final price adjustment, although it is agreed between the parties that the calculation of this amount is not in dispute for the purposes of this appeal.
40. The September 2010 briefing paper set out two options. The first option was to treat the price adjustment as part of the employer's contribution to the Fund. In other words, the price adjustment would offset the obligation to make contributions for a short period of time. The second option involved an immediate price adjustment which did not reduce pension contributions by participating employers but would, in effect, act as an advance pension contribution under the Funding Corridor Framework.
41. Mr Poulopoulos did not attend the Trustees' meeting in September 2010, but the Trustees (who, according to Ms Whent, found the issue complex and decided to defer the issue until the December meeting) requested a simpler note.
42. Mr Poulopoulos consulted informally between September and December 2010 regarding the nature of the price adjustment (although it was not clear whom he consulted). On the basis of those discussions it was decided (but it is not clear who decided) that the price adjustment would not be treated as a contribution by the participating employer. In other words, it was to be treated as neither part of the participating employers’ ongoing contribution liabilities nor was it to be set of against their obligations to make deficit contributions.
43. In December 2010 Mr Poulopoulos submitted a revised paper which was considered at the Trustees' meeting on 9 December.
44.
This revised paper explained that prior to January 2007 the Fund's
investments had been managed in-house and that all expenses incurred were
recharged to the Fund plus VAT.
From January 2007 external investment managers
were employed by the Fund. Their charges were also recharged to the Fund plus
VAT.
The paper continued:
"Rio Tinto Benefits Department on behalf of the
Pension Fund has requested that the Tax Department review the VAT
treatment of
the investment management ("IM") recharges that it suspects may have
been over-charged by [the Appellant]."
45. We observe at this point that, in contrast to the September paper, this appears to be the first mention of the fact that the Fund "may have been" over-charged by the Appellant. No explanation is given as to how or why an over-charge may have arisen nor does the paper indicate that there was definitely an over-charge in respect of the Pension Investment Costs themselves.
46.
The paper explained that UKVAT legislation entitled taxpayers to adjust
VAT
errors within a four year period (instead of the three year period
mentioned in the September paper). In addition, Mr Poulopoulos explained that
UK
VAT
law also allowed taxpayers to make a "Price Adjustment"
outside the four-year limit "going as far back as 1978 [sic]…." The
paper stated that:
"It is estimated that [the appellant] has
over-charged the Fund £1.4 million of VAT
which has been
"over-charged" to the Fund £10,083,796 (Net equals £8,684,225 plus
VAT
equals £1,399,570).
Mechanism by which [the Appellant] would make Price Adjustment [sic] to [the Fund] applying applicable IM costs:
1. Potential Price Adjustment period is 1973 to January 2010.
2. [The Appellant] will issue [the Fund] a credit
note for the over-charged about – £10,083,796 (net amount of £8,684,225 plus
VAT
of £1,399,570).
3. [The Appellant] will adjust its VAT
account to show
a reduction in consideration of £10,083,796 (itemising the net and
VAT
amounts).
4. Price adjustment will result in a credit of the
VAT
to [the Fund] of £1,399,570 from [the Appellant].
5. [The Appellant] will receive the £1,399,570 VAT
credited from HMRC by the adjustment to its monthly
VAT
return.
(Please note that any Price Adjustment made will have the effect of reducing historic charges made by [the Appellant] to [the Fund])."
47.
It will be noted that in the latter part of this extract the emphasis is
upon the "over-charge" being VAT
which has been over-charged to the
Fund. It is possible that paragraph 2. could be taken to suggest that
£8,684,225 had been over-charged but we think that, in context, it reads as the
mechanism by which the over-charged
VAT
can be reclaimed
48. The Trustees approved the proposal, pending agreement with HMRC. The minute of the Trustees meeting of 9 December 2010 reads as follows:
"VAT
on Investment Recharges
Directors NOTED the paper produced by Mr Poulopoulos.
Mr Fox explained that the Tax Department had been
requested to consider the VAT
treatment of a proposed price adjustment to be
made by [the Appellant] for the provision of investment management services to
the Fund during a selective period. A review of the historic management
recharges had revealed that the Fund had been over-charged.
It was AGREED that [the Appellant] should make a
Price Adjustment in accordance with UK VAT
legislation, subject to approval
from the Fund's external auditors, and notification to HMRC of the Price
Adjustment and their acceptance of the
VAT
treatment.
Ms Whent then left the meeting."
49.
This minute refers to the Fund being over-charged and, we think, implies
that this relates to the costs themselves rather than to VAT
charged on those
costs, although the point is not entirely clear. There is, however, no written
evidence that the Trustees enquired about how this over-charging came about or
on what basis the conclusion had been reached that there had been an
over-charge.
50. Mr Poulopoulos said that in the early part of 2011 he had had discussions with KPMG who informed him that HMRC were beginning to pay claims to other pension funds in respect of apportionments for investment management charges. Consequently, Mr Poulopoulos felt under some pressure to ensure that the Fund was not disadvantaged in comparison to other pension funds and he decided to revisit the issue of the price adjustment.
51.
In early 2011 Mr Poulopoulos recalculated the alleged over-charge.
Accurate data only existed for the period 1997 to 2010. Eventually, Mr
Poulopoulos took the period 1997 – 2007 and calculated the over-charge as 100%
i.e. 100% for approximately 30% of the total period (1973 – 2010). This
resulted in a price adjustment of £7,150,000 which, in turn, resulted in an adjustment
to the Appellant's VAT
account of £1,064,893 i.e. 17.5% of the price
adjustment. As already explained, the quantum of the price adjustment is not in
dispute.
52.
As we have seen, in his witness statement Mr Poulopoulos indicated that
the 30% estimate came from KPMG's advice based on Notice 700/17. Having
accepted that Notice 700/17 did not justify the conclusion that the Appellant
had over-charged the Fund, Mr Poulopoulos was asked in cross-examination why he
had calculated the VAT
over-charge as being 30% of the Pension Investment
Costs. Mr Poulopoulos, in our
view,
seemed unable to answer this question. He
gave a
vague
response in which he said that the Appellant had certain
information available, had looked at actual costs and considered 30% a fair and
reasonable figure. He admitted that there was no "science to this
calculation." When asked whether Notice 700/17 had anything to do with the
percentage he replied: "Yes, along with other factors."
53. Mr Poulopoulos wrote to HMRC on 10 February 2011 explaining that the Appellant intended to make a price adjustment of £7.15 million and explaining the basis of calculation. The proposed price adjustment was discussed with HMRC at a meeting on 7 March 2011. HMRC indicated that no approval was required from HMRC.
54.
The Appellant issued a credit note to the Fund on 10 August 2011 in
respect of the price adjustment. The credit note described the credit as
"Investment mgt fees as agreed with Trustees". The VAT
exclusive
amount was £6,085,106.38 and the
VAT
element was £1,064,893.62 resulting in a
VAT
inclusive gross amount of £7,150,000. The consequent repayment by the
Appellant to the Fund was processed around the same time.
The price adjustment was recorded in the audited accounts of the Fund for the year ended 31 March 2012. Note 12 to the accounts was headed "Investment management expenses". In the line "Administration, management and custody" was a negative amount of £3,345,000 (the negative amount was caused by the fact that the annual charge payable by the Appellant to the Fund was exceeded by the amount of the price adjustment). Note 12 stated that:
"Included in the investment management expenses
for the current year is a fee adjustment of £7,150,000 (net amount of £6,085,106
plus associated VAT
of £1,064,894) from [the Appellant]."
55. In short, therefore, the Fund accounted for the price adjustment as a "fee adjustment" and not as a contribution by the Appellant to the Fund.
56. Ms Whent’s evidence was that if the price adjustment had been paid/received as a contribution rather than as a price adjustment this would have required a negotiation between the employer and the Fund. It would have required the Schedule of Contributions to be rewritten and the payment would have been recorded not in Note 12 to the accounts but rather in Note 3 "Contributions". Note 3 referred to the normal employers’ contributions in respect of accruing benefits and to "Augmentations" which related to specific member augmentations and did not relate to the price adjustment. In relation to "Deficit funding" Note 3 contained a negative figure of £313,000 reflecting the effect of the £70 million contribution ready paid in an earlier accounting period as described in paragraph 22 above.
57.
Ms Whent also referred to the briefing papers prepared by Mr Poulopoulos
which we describe in paragraphs 36 – 47 above. Her evidence was that the
Trustees of the Fund did not want to receive the price adjustment as a pension
contribution. The Trustees had already had lengthy negotiations with the
employer about the "glide path" (i.e. the Funding Corridor Framework)
which set in place a framework agreement with the employer to enable the Fund
to move out of deficit. The Trustees did not want to change that plan and, in
any event, the Fund had already received an advance payment of £70 million. Ms
Whent said that if any supplier wanted to give money back to the Fund the
Trustees would be happy to receive it, but not as a contribution. We observe,
however, that according to Ms Whent’s evidence, at no stage did the Trustees
seem to consider whether there were justifiable commercial reasons for the
refund. Instead, they seem simply to have accepted that VAT
had apparently been
over-charged and that there may have been an over-charge in respect of fees.
58. Mr Poulopoulos was cross-examined on his letter to HMRC dated 28 August 2012 which was attached to the Appellant's notice of appeal and which set out the Appellant's grounds of appeal. This letter was originally sent by Mr Poulopoulos to HMRC requesting a of HMRC's decision £1,064,893 dated July 2012. The letter stated:
"Commercial rational [sic] for price adjustment
As a result of the global financial crisis in 2009,
the Fund was in deficit as were most UK pension funds. [The Appellant] as
principal employer had an obligation to increase funding requirements and as
such, together with the Fund, considered a number of options to deal with the
deficit and consequently agreed for a period of time to reduce the level of IM
charges previously charged to the Fund. As part of this process, [the
Appellant] and the Fund requested that the Rio Tinto Tax Department review the
tax treatment (including VAT)
of the proposed arrangement."
59. In cross-examination Mr Peretz put it to Mr Poulopoulos that this paragraph of his letter revealed the real reason behind the price adjustment i.e. that it was intended to help deal with the Fund's deficit. Mr Poulopoulos replied that the price adjustment indicated that the Appellant wanted to help deal with the Fund's deficit but that this was the background to a decision to review the tax aspects of the Fund at the same time as considering potential Fleming claims to see whether the tax treatment of the Fund was as tax efficient as it could be.
60.
Ms Brown reviewed the general principles which she argued ought to be
applied by the Tribunal. She submitted that it was necessary to look at the
economic and commercial reality of the price adjustment (referring to the
judgment of the CJEU in HMRC v
Newey (trading as Ocean Finance) Case C –
653/11 [2013] STC 2432 at [42] – [45] ("Newey")).
61. Ms Brown submitted that, unless there was a reason to consider that the contractual and legal relationships between the parties were artificial, those relationships had to form the basis for determining the commercial and economic substance of the relevant transactions.
62.
Ms Brown further submitted that in order to determine the nature of a
contractual arrangement between different parties it was necessary for regard
to be had to all the circumstances in which the transaction takes place and
that the whole of the relationships between the various
parties needed to be
considered – "labels" used by the parties were not themselves
conclusive (referring to the judgment of the Supreme Court in Secret Hotels2
Ltd
(formerly Med Hotels
Ltd)
v
HMRC [2014] UKSC 16 at [30] – [33] ("Secret
Hotels") and HMRC
v
Aimia Coalition Loyalty UK Limited [2013] UKSC) 15 at [38], [42], [48] and [56]).
63.
From these authorities Ms Brown submitted that the guiding principle
must be that this Tribunal must consider all the relevant facts and
circumstances in reaching a view
on the commercial and economic substance of
the transaction. Those facts and circumstances included the regulatory
environment in which the price adjustment was made as explained in the evidence
of Ms Whent, particularly as regards the Funding Corridor Framework and the
Schedule of Contributions.
64. Looking at the facts, the price adjustment was a decrease in consideration and not a contribution to the Fund. Ms Whent’s evidence was that the Trustees would not accept the payment as a contribution to the Fund.
65.
Turning to the case-law on decreases in consideration, Ms Brown referred
to the decision of the CJEU in Elida Gibbs Limited v
Customs and Excise
Commissioners Case C – 317/94 [1996] STC 1387 [19], [24] [26] – [33]
("Elida Gibbs"). In her submission, the Court accepted that
there could be an ex post facto decrease in consideration. In this case
a manufacturer made a refund to the ultimate consumer and was treated is
entitled to an adjustment under what was then article 11 A of the Sixth
Directive. The question was: what was the cost, in the end, to the final
consumer?
66.
In Almos Agrárkülkereskedelmi
Kft v
Nemzeti Adó- és
Vámhivatal
Közép-magyarországi Regionális Adó
Főigazgatósága Case C-337/13 ("Almos") article 90 of
Council Directive 2006/112/EEC of 28 November 2006 on the common
system
of
value
added tax ("the
VAT
Directive") embodied a fundamental
principle of the
VAT
Directive, according to which a taxable person is taxable
only on the amount of consideration actually received and had a direct effect
([22] and [24] – [26]).
67.
Ms Brown submitted that the CJEU in Freemans plc v
Customs and
Excise Commissioners Case C-86/99 envisaged that ex post facto
adjustments could be used to reduce the purchase consideration.
68.
Ms Brown referred to the decision of the VAT
Tribunal in British
United Shoe Machinery Code Limited
v
Customs and Excise Commissioners
(1977)
VATTR
187. In this case B was a subsidiary of U, both companies being
separately registered for
VAT.
B charged U for intragroup services and charged
VAT
on its invoices. U mistakenly deducted the whole amount of tax on B's
invoices as input tax even though it was partially exempt. The Commissioners
claimed payment from U for the wrongly deducted input tax. B then issued credit
notes to U cancelling or purporting to cancel the service charges in question.
The Commissioners then assessed B for tax in the amount of tax shown on the
credit notes. As regards those supplies made by B to U, the Tribunal found that
the supplies could not be properly cancelled by credit notes. The Tribunal
rejected the Commissioners' contention that the authorisation of a credit note
was a matter exclusively within the discretion of the Commissioners and said
[192]:
"… It seems to us that the issue of a credit
note is a common and usual commercial method of rectifying an over-charge or
giving credit to damaged or returned goods. We can find nothing in the Finance
Act 1972 or elsewhere which empowers the Commissioners to say whether or not a
credit note should be issued at all – so to hold would bring commercial life to
a standstill whilst permissions were being sought. In the judgment of this
tribunal the duty of the Commissioners, and of the tribunal on appeal, is to
satisfy ourselves that a credit note has been issued bone fide in order to
correct a genuine mistake or over-charge, or to give a proper credit. If this
test be not satisfied then the credit note is fraud. As and is void
as being
contrary to public policy, see Alexander
v
Rayson [1936] 1 KB 169 and Napier
v
National Business Agency
Ltd
[1951] 2 All ER 264."
69. Ms Brown submitted that in this case the Appellant had given "a proper credit" to the Fund and that its credit note should be respected.
70.
In Castle Associates v
Commissioners of Customs and Excise (
VATD)
3497 (MAN /87/448) the appellant supplied management services to an associated
company which claimed input credit in respect of the
VAT
charged by the
appellant on its invoice. Over a year later, when the associated company was in
financial difficulty and had been deregistered for
VAT,
the appellant's
auditors queried the invoice. The appellant decided to issue a credit note for
part of the charges on the invoice, maintaining that some of the charges had
duplicated earlier charges. The Tribunal refused to reduce consideration
stating:
"In a case where
services are supplied for an as yet unascertained consideration, and the
parties are at arm's length, the position usually presents little difficulty;
the supplier of the services states his charges, the recipient disputes them if
he wishes, and after discussion the amount is agreed. If an invoice stating the
supplier's original version
of the charges has been issued in the meantime, a
credit note is issued, giving credit for the difference between the charges
originally stated and the agreed charges, and no doubt such a credit note would
be perfectly acceptable for the purposes of
value
added tax. Again, if the
amount has been agreed, and the invoice erroneously states a higher amount, a
credit note is an appropriate method of evidencing the correction of the error.
In each of these cases, the invoice misstates the transaction as it was agreed
between the parties and the credit note evidences the correction of the error. But
once the parties have agreed the amount of the charges for the services, and
the services have been supplied, the
value
of the supply is ascertained. If
thereafter the supplier unilaterally decides, or both parties contract, that
the full amount of the agreed charges is not to be payable, in our judgment the
decision or the new contract does not alter the
value
of the supply for the
purposes of
value
added tax, nor does it make any difference if a credit note
is issued to evidence the decision or the new contract.
In the instant case,
we are not satisfied that there was any error in the calculation of the
Appellant's charges as stated in the Invoice, and in our judgment the credit
note represented, not the correction of one or more errors, but a subsequent
change of mind on the part of the Appellant. In our judgment that is not a
situation in which the issue of a credit note is effective for the purposes of
value
of
value
added tax, and it follows that the appeal must be
dismissed."[emphasis added]
71. Ms Brown argued that the final two sentences of the first paragraph in the above extract from Castle Associates could not be reconciled with Elida Gibbs, which was decided after Castle Associates. In Elida Gibbs the refund to the ultimate customers took place after the supply by the manufacturer. This was no impediment to the application of regulation 38 and article 90.
72.
In Customs and Excise Commissioners v
McMaster
Stores (Scotland) Limited (in receivership) [1995] STC 846 the taxpayer
landlord sought to exercise its option to tax rents payable to its tenants. The
exercise of the option was invalid because it failed to inform the
Commissioners. The taxpayer company went into receivership. The receivers
issued credit notes to the tenants for the tax charged in error and claimed an
adjustment of the company's
VAT
returns under regulation 7 of the
VAT
Regulations (now regulation 38). The Court of Session held that no regulation
38 adjustment could be made in the circumstances. Lord Hope said [at 850]:
“In my opinion reg 7 is concerned only with the
making of adjustments to the VAT
account to reflect an increase or a decrease
in consideration which includes an amount of tax chargeable on the supply. It
does not deal with the problem which has arisen in this case, where the supply
was an exempt supply and no
VAT
was due to be paid on it to the commissioners.
A claim for the recovery of overpaid tax which arises in these circumstances
should be made under s 24 of the 1989 Act. A claim made under that section is
the subject of a separate provision which is to be found in reg 6 of the 1989
regulations, which does not require any adjustment to be made to the
VAT
account
kept and maintained under reg 4 of these regulations. In cases to which reg 7
applies, on the other hand, it is the increase or decrease in the consideration
which requires a corresponding adjustment to be made to the account. The
VAT
forms part of the consideration if the supply was for a consideration in money
and it was a taxable supply. Both the maker of the supply and the recipient of
it are required by reg 7 to make adjustments which are, in these circumstances, the result simply of a process of arithmetic.
The amount of the
VAT
which was chargeable for the supply must be adjusted at
the rate prescribed under s 9 of the 1983 Act to reflect the increase or
decrease in the consideration on which the
VAT
falls to be charged. It is an
adjustment which does not depend upon any decision by the commissioners, and
where there is a decrease in the consideration no question as to whether the
claimant is being unjustly enriched by the adjustment can arise. It is the
consideration as a whole which is being adjusted, and the adjustment to the
amount of the
VAT
payable is the inevitable result of an alteration in the
amount of the
value
of the supply on which the tax falls to be charged."
73.
Ms Brown submitted that the McMaster case could be distinguished
because credit notes were issued only in respect of VAT
and not in respect of
the underlying consideration. In the present appeal, the Appellant issued a
credit note for the gross amount of £7,150,000, which included
VAT.
74.
In Carlton Clubs Plc v
HMRC [2011] SFTD 1209 (Judge Reid QC and Mr Sheppard), Carlton operated bingo clubs. Customers
paid a fixed sum to participate in a session of bingo ('the session fee')
consisting of 15 games. The session fee had two components: the participation
fee (which was subject to
VAT),
which was the consideration received by Carlton
for the supply to the customer of the right to play bingo for cash prizes; and
the stake (which was not subject to
VAT),
which was the contribution made by
the customer towards the cash prizes paid out to the winner of each game in the
session. The tribunal found that in 2007 HMRC had changed its published
practice on the manner in which the calculation of the split in the session fee
between the participation fee and the stake should be calculated. Carlton raised an internal credit note in 2009 to recalculate its output tax liability for
the period 1996 to 2003 in accordance with HMRC's new published practice. Thus,
a greater proportion of fees collected from customers became attributable to
the stake rather than participation fees. HMRC disallowed the adjustment as
being ‘out of time’ under the
VAT
error adjustment rules (i.e. four years since
1 April 2009 but three years until this date). Carlton, however, argued its
claim under regulation 38 (where there was no time bar) and claimed that the
internal credit note was adequate evidence to support the adjustment in its
VAT
account i.e. as a ‘decrease’ in the consideration for the supply because under
the new method of calculation a smaller amount of the session fee was
attributable to the participation fee. The taxpayer argued that no error had
occurred at the time of the original
VAT
returns being submitted because the
output tax declaration was correct at the time. The tribunal agreed and held
that the regulation 38 adjustment was correctly made. A tax adjustment only
became appropriate when HMRC subsequently notified its change in practice when
it issued Business Brief 7/2007 on 1 February 2007 stating that an alternative
calculation basis should be used. The Tribunal stated:
"[69] …It does not seem to us to matter how the change in consideration arises as long as it does arise. Regulation 38, which implements art 11C(1), applies inter alia where there has been a decrease in consideration evidenced by a credit note. Any change in the consideration is bound to be retrospective in nature. The appellant has, in accordance with the administrative directions of HMRC, changed the consideration for the supply of the right to participate in cash bingo sessions over the period between 1996 and 2003. On the face of it, such a change falls within the scope of reg 38. It is not an error. The regulation does not restrict its application by reference to the means by which the consideration changes. Thus, a change might arise by operation of law, agreement of the parties to a transaction e.g. a subsequent reduction in the price due to customer dissatisfaction or coupon schemes under a sales promotion campaign (as in Elida Gibbs), or by reason of administrative direction by HMRC.
…
[72] The fact that the amount paid by the customer
has not changed is irrelevant because we are examining a payment consisting of
two components; one component is the consideration for a supply which falls
within the VAT
regime; the other component is stake money which falls outwith
the scope of the
VAT
regime. The amount of each component has changed. The
stake money becomes greater and the consideration becomes less by equal
amounts. This analysis and the application of reg 38 to the circumstances of
this appeal are consistent with the general principle that a trader should not
pay
VAT
on a sum which is greater than the consideration ultimately received
for the supply in question (Elida Gibbs [1996] STC 1387, [1996] ECR I-5339, paras 19–24 and 29–31)."
75. Ms Brown argued that the Tribunal had given a wide meaning, particularly in [69] to the concept of a decrease in consideration.
76.
Finally, in Cumbria County Council v
HMRC [2011] UKFTT 621 (TC) (Judge Demack and Mr Freeston) the Council provided services to the Department Of Environment,
Food and Rural Affairs (DEFRA) during the 2001 Foot and Mouth Crisis. The
Council invoiced DEFRA the sum of £1.3m plus
VAT.
DEFRA disputed the Council’s
invoice. The Council meanwhile had accounted for
VAT
on the whole of the invoice
to HMRC. The dispute resulted in a
claim being made in the High Court but eventually, the parties
settled on the basis that DEFRA would pay the sum of £200,000. The Council
raised a credit note to write down the original invoice to £200,000 using regulation
38. The Council claimed
VAT
bad debt relief of £222,103 and, in February 2008,
made a
voluntary
disclosure in order to recover this amount. HMRC rejected the claim on the basis that the claim was out of
time under the relevant four year limit.
77.
The Council appealed against HMRC's
decision. This tribunal allowed the appeal, finding that the evidence showed
the Council expected DEFRA to settle the whole amount of the invoice (the
tribunal concluded that the Council had been entitled to recover for its services
on a quantum meruit basis) and had, therefore, overpaid VAT
to HMRC when
it had accounted for
VAT
on the whole invoiced amount. When the Council and
DEFRA settled the High Court claim which reduced the amount due to £200,000
this reduced the consideration for the supply. Regulation 38 was therefore
satisfied and the Council was entitled to recover the overpaid
VAT.
The
tribunal rejected HMRC’s argument that because no fixed consideration had
initially been agreed, no adjustment could be made under regulation 38.
78.
Ms Brown argued that the payment by the Appellant to the Fund of
£7,150,000 (inclusive of VAT)
was made by way of a repayment of consideration.
It was not made as a contribution to the Fund. At the time the payment was made
there was an acceptable plan to reduce the Fund's deficit and the balance of
the £70 million advance payment was still standing to the credit of the Fund.
Ms Whent’s evidence was that the Trustees of the Fund did not want the payment
as a contribution. A price adjustment was a different transaction from a
contribution to the Fund (and, in this context, Ms Brown referred to the
comments of Lord Walker of Guestingthorpe in Lex Service plc
v
HMRC
[2003] UKHL 67 at [29] to the effect that it was to be expected that where
transactions had been structured differently they would have different
VAT
consequences). In Ms Brown's submission the Appellant remedied the over-charge
of
VAT
to the Fund by giving a "proper credit" (to borrow the
language of British Shoe) for the gross sum of £7150, which included
VAT.
The Appellant was, therefore, entitled to a regulation 38 adjustment to
ensure fiscal neutrality.
79.
Mr Peretz agreed that it was necessary to look at the commercial and
economic reality of the transaction to determine its correct VAT
treatment.
80. In his submission, however, the commercial and economic reality of the price adjustment was that it was not a decrease in consideration. The consideration (the Pension Investment Costs) for the supply of investment management services by the Appellant to the Fund had been invoiced and paid without query for over 30 years.
81.
Moreover, on the Appellant's own evidence, it was now accepted that the
charges made by the Appellant to the Fund in respect of Pension Investment
Costs were correct. The only element of over-charge, according to the
Appellant, related to VAT.
In other words, the correct services had been
supplied for the correct consideration but it was now considered that
VAT
should have been accounted for differently. At no stage over the preceding 37
years had the parties considered that the Appellant had over-charged for its
services and the Fund had never queried the charges made by the Appellant for
its services.
82. In Mr Peretz's submission the fact that the price adjustment had accounted for as a reduction in consideration and had not been accounted for as a contribution was not determinative. Labels attached by the parties are transactions did not necessarily reflect the true nature of the underlying transaction Moreover, it was clear from Mr Poulopoulos's letter to HMRC dated 28 August 2012 which was attached to the Appellant's notice of appeal was that the Fund's deficit was the underlying reason for the price adjustment.
83.
Mr Peretz referred to the decision of the House of Lords in Lex
Service plc v
HMRC [2003] UKHL 67, a case involving the quantification of
non-monetary consideration for the purposes of
VAT,
where Lord Walker said
[18]:
"The expression
"subjective value",
to be understood in the sense described above,
has been repeated in many later cases before the ECJ, including
Argos
Distributors Limited
v
Customs & Excise Commissioners [1996] ECR I-5311, para 16, and the other cases cited in that paragraph. Nevertheless the
expression continues to cause some difficulty, partly because it naturally
suggests a
value
which is chosen as a matter of individual discretion, and
might therefore be expected to be more
vague,
labile and difficult to ascertain
than one determined by objective criteria. But any such impression would be
mistaken and would overlook one of the basic strengths of the
VAT
system.
It is
a
system
which is intended to be self-policing in the sense of operating
automatically on the economic activities of registered taxpayers and final
consumers, with the least possible need for
VAT
authorities to undertake
independent investigation of the facts. In a straightforward case the
"subjective
value"
of non-monetary consideration means the
value
overtly agreed and adopted by the parties to the transaction in question, just
as the price overtly agreed and adopted by the parties is (in most cases)
conclusive as to the quantum of monetary consideration. So far from introducing
an element of
vagueness
or obscurity, the concept of subjective
value
(correctly understood) achieves legal certainty and ease of administration of
the
VAT
system
(just as a subjective apportionment of the consideration for a
package of taxable goods and exempt services may achieve those
results: see C R Smith Glaziers (Dunfermline)
Ltd
v
Customs &
Excise Commissioners [2003] STC 419, especially the speech of my noble
and learned friend Lord Hoffmann at p 426, para 21)."
84.
In the present appeal, the parties had agreed on the correct price for
the Appellant's services and that had never been queried – the only question of
debate was whether the VAT
had been correctly charged – and this was the
“subjective
value”
of the services.
85.
Mr Peretz referred to the Castle Associates decision referred to
above and to the extract quoted in paragraph 70 above. In that case the
tribunal was looking for what the parties had actually agreed as the price for
the appellant's services. This was the "subjective value".
86.
In this case, the "subjective value"
was, Mr Peretz submitted,
what appeared under the heading “COST” in the invoices referred to in paragraph
8 above. Mr Poulopoulos accepted that this was the correct statement of the
consideration.
87. Mr Peretz also referred to the decision of the CJEU in Newey (above) at [42] – [45]:
"42 As
regards in particular the importance of contractual terms in categorising a
transaction as a taxable transaction, it is necessary to bear in mind the
case-law of the Court according to which consideration of economic and
commercial realities is a fundamental criterion for the application of the
common system
of
VAT
(see, to that effect, Joined Cases C-53/09 and C-55/09 Loyalty
Management UK and Baxi Group [2010] ECR I-9187,
paragraphs 39 and 40 and the case-law cited).
43 Given that the contractual position normally reflects the economic and commercial reality of the transactions and in order to satisfy the requirements of legal certainty, the relevant contractual terms constitute a factor to be taken into consideration when the supplier and the recipient in a ‘supply of services’ transaction within the meaning of Articles 2(1) and 6(1) of the Sixth Directive have to be identified.
44 It may, however, become apparent that, sometimes, certain contractual terms do not wholly reflect the economic and commercial reality of the transactions.
45 That is the case in particular if it becomes apparent that those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions."
88.
In this appeal Mr Peretz urged us to conclude that the label of
"decrease in consideration" attached to the transaction by the
parties was artificial and did not reflect the economic and commercial reality.
The consideration for the supply of the Appellant's services had never been
challenged and the payment of £7,150,000 had been made solely to obtain a
reduction in VAT.
89. Mr Peretz referred to the decision of the Supreme Court (above) in Secret Hotels and referred to the passage in the judgement of Lord Neuberger at [31]-[32] where, after referring to the passages in Newey quoted above, Lord Neuberger emphasised that:
“31.Where parties have entered into a written agreement which appears on its face to be intended to govern the relationship between them, then, in order to determine the legal and commercial nature of that relationship, it is necessary to interpret the agreement in order to identify the parties' respective rights and obligations, unless it is established that it constitutes a sham.
32. When
interpreting an agreement, the court must have regard to the words used, to the
provisions of the agreement as whole, to the surrounding circumstances in so
far as they were known to both parties, and to commercial common sense. When
deciding on the categorisation of a relationship governed by a written
agreement, the label or labels which the parties have used to describe their
relationship cannot be conclusive, and may often be of little weight. As
Lewison J said in A1 Lofts Ltd
v
Revenue and Customs Comrs [2009] EWHC 2694 (Ch), [2010] STC 214 at [40], in a passage cited by
Morgan J:
'The court is often called upon to decide whether a
written contract falls within a particular legal description. In so doing the
court will identify the rights and obligations of the parties as a matter of
construction of the written agreement; but it will then go on to consider
whether those obligations fall within the relevant legal description. Thus the
question may be whether those rights and obligations are properly characterised
as a licence or tenancy (as in Street v
Mountford [1985] 2 All ER 289, [1985] AC 809); or as a fixed or floating
charge (as in Agnew
v
IRC [2001] UKPC 28, [2001] 2 AC 710), or as a consumer hire agreement (as in TRM Copy Centres (UK)
Ltd
v
Lanwall
Services
Ltd
class=apple-converted-space> [2009] UKHL 35, [2009] 4 All ER 33, [2009] 1 WLR 1375). In all these cases the starting point is to
identify the legal rights and obligations of the parties as a matter of
contract before going on to classify them.
…
34. In the present proceedings, it has never been suggested that the written agreements between Med and hoteliers, namely the Accommodation Agreements, were a sham or liable to rectification. Nor has it been suggested that the terms contained on the website ('the website terms'), which governed the relationship between Med and the customers, namely the Terms of Use and the Booking Conditions, were a sham or liable to rectification. In these circumstances, it appears to me that (i) the right starting point is to characterise the nature of the relationship between Med, the customer, and the hotel, in the light of the Accommodation Agreement and the website terms ('the contractual documentation'), (ii) one must next consider whether that characterisation can be said to represent the economic reality of the relationship in the light of any relevant facts, and (iii) if so, the final issue is the result of this characterisation so far as art 306 is concerned.”
90.
The approach of Lord Neuberger, Mr Peretz argued, was to ignore the use
of labels – structuring the payment is a reduction in consideration could not
be conclusive – and, instead, to look at the commercial and economic reality.
In this case neither the Appellant nor the Fund was really concerned about the
price, because there was no over-charge, but rather their concern was a
perceived overpayment of VAT.
The purpose of the parties in making the payment
was relevant to the question of the commercial and economic reality of the
transaction.
91.
As regards the other main cases relied on by the Appellant, Mr Peretz
argued that Carlton Clubs (above) provided no support for the Appellant.
Mr Peretz explained that, in HMRC's view,
Carlton Clubs had been wrongly
decided. HMRC did not accept that it had changed its practice in 2007. The
tribunal found at [73] that there had been a decrease in the consideration for
the taxable supply. In this case there had been no change in the consideration
and Mr Poulopoulos's evidence was that the only matter which the Appellant
sought was wrong was the amount of
VAT
charged.
92. In relation to Cumbria County Council (above), Mr Peretz submitted that the settlement agreement between the Council and DEFRA amounted to a genuine reduction in price and that the original invoice had incorrectly shown the consideration.
93.
Mr Peretz observed that Mr Poulopoulos had been unable to explain why he
thought 30% represented the correct percentage for the over-charge. This was
simply an attempt to re-write history. The correct consideration had been
agreed and paid for 37 years. The price adjustment should be regarded as a
contribution to the fund. Although it was not accounted for as a contribution,
the accounting treatment of the price adjustment could not determine the true
VAT
treatment.
94. In answer to a question from the Tribunal, Mr Peretz confirmed that HMRC were not advancing any argument based on the doctrine of abuse of rights. HMRC's case was that the price adjustment did not for within the letter of regulation 38 as correctly interpreted.
95.
It is important to be clear on the question before the Tribunal in this
appeal. First, we are not being asked to determine whether the view
formed by
the Appellant that it had over-charged the Fund
VAT
in respect of Pension
Investment Costs was correct. Furthermore, we were not asked to form a
view
on
whether the quantum of the price adjustment was correct. The only issue we have
to decide is whether the price adjustment constituted a "decrease in
consideration for the purposes of regulation 38."
96. The relevant legislative provisions can be briefly stated.
97.
Article 90 of the VAT
Directive provides:
"1. In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.
2. In the case of total or partial non-payment, Member States may derogate from paragraph 1."
98. Under article 73:
"the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply."
99.
"Consideration" for the purposes of VAT
has been held by the
CJEU to be the "subjective
value",
that is to say, the
value
actually
received in each specific case, and not a
value
estimated according to
objective criteria (see e.g. Elida Gibbs at [27] and the cases referred
to therein).
100. The
domestic provisions relating to a reduction in consideration are contained in
regulation 38 (read together with regulation 24) of the Regulations. They
provide, so far as relevant, that where there is a decrease in consideration
for the supply which included an amount of VAT
then the taxpayer must adjust
his
VAT
account by making a negative entry for the relevant amount of
VAT.
A
decrease in consideration, for these purposes, is recognised only if it is
evidenced by a credit note or other document having a similar effect.
101. Although
the article 90 speaks of the "price" being "reduced" and
regulation 38 speaks of a "decrease in consideration" neither party,
correctly in our view,
suggested that there was any practical difference
between the two provisions in this respect.
102. Article 90
and regulation 38 reflect a fundamental principle of VAT,
viz
that
VAT
is
intended to tax only the final consumer. Consequently, as the CJEU said in Elida
Gibbs at [19]:
"… the taxable amount serving as a basis for
the VAT
to be collected by the tax authorities cannot exceed the consideration
actually paid by the final consumer which is the basis for calculating the
VAT
ultimately borne by him."
103. Article 90
ensures fiscal neutrality of the taxable person's position by providing that
where the price is reduced after the supply takes place, the taxable amount is
to be reduced accordingly (see: Elida Gibbs at [30] in relation to
article 11 C (1) of the Sixth Directive – the predecessor to article 90).
Article 90 has direct effect (GMAC UK plc v
HMRC C – 589/12 at [32]).
104. Both parties were agreed that in reaching its decision the Tribunal had to consider the economic and commercial reality of the price adjustment (Newey at [42] and the authorities cited therein). The parties, however, disagreed on the application of this test.
105. In our
view,
Newey is also authority for the proposition the contractual terms
are a relevant factor in ascertaining the economic and commercial reality of
the relevant transaction. The CJEU said:
"42 As
regards in particular the importance of contractual terms in categorising a
transaction as a taxable transaction, it is necessary to bear in mind the
case-law of the Court according to which consideration of economic and
commercial realities is a fundamental criterion for the application of the
common system
of
VAT
(see, to that effect, Joined Cases C-53/09 and C-55/09 Loyalty
Management UK and Baxi Group [2010] ECR I-9187,
paragraphs 39 and 40 and the case-law cited).
43 Given that the contractual position normally reflects the economic and commercial reality of the transactions and in order to satisfy the requirements of legal certainty, the relevant contractual terms constitute a factor to be taken into consideration when the supplier and the recipient in a ‘supply of services’ transaction within the meaning of Articles 2(1) and 6(1) of the Sixth Directive have to be identified.
44 It may, however, become apparent that, sometimes, certain contractual terms do not wholly reflect the economic and commercial reality of the transactions.
45 That is the case in particular if it becomes apparent that those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions."
106. Therefore
to satisfy the requirements of legal certainty, the relevant contractual terms
constitute a factor to be taken into consideration but contractual terms which
are part of an artificial arrangement may not correspond with the economic and
commercial reality of the transaction. Plainly, therefore, the decision that
the VAT
inclusive amount of £7,150,000 should be paid by the Appellant to the
Fund in the form of a repayment of the fees already paid by the Fund is a
relevant, but not the only, consideration in determining the economic and
commercial reality of the transaction.
107. As we have
explained, the Appellant initially put forward an argument that Notice 700/17
justified the price adjustment i.e. justified the payment of £6,085,107 plus
VAT
of £1,064,893. This justification formed part of Mr Poulopoulos's witness
statement and Ms Brown's skeleton argument. In cross-examination, however, Mr
Poulopoulos accepted that the net of
VAT
charges recharged by the Appellant to
the Fund had been correct all along. The seemingly hopeless argument based on
the meaning of Notice 700/17 was abandoned without explanation. It was only the
VAT
amount on those charges which the Appellant now questioned.
108. In these circumstances, therefore, it seems hard to understand why, as a matter of economic and commercial reality, the Appellant considered that it was necessary to refund £6,085,107. There was no dispute about this amount which, as we have said, had been correctly charged. The only conclusion that we could draw was that £6,085,107 had been repaid by the Appellant to the Fund in order to present the price adjustment as a decrease in consideration for the purposes of regulation 38 and, possibly, to confer a gratuitous benefit on the Fund.
109. As a preliminary point, we consider that a decrease in consideration for the purposes of regulation 38 can be made by a subsequent (i.e. after the supply has been made) agreement between the parties. In Elida Gibbs the manufacturer, under both “money off” discount schemes considered by the Court, invoiced its immediate customer (a wholesaler or a retailer) at a price determined irrespective of any present or future promotion scheme. The Court said:
"7. … Thus, the wholesaler or retailer may not know, when purchasing goods from the company, that those goods are or are to be, the subject of a money-off coupon promotion scheme. At that stage it may be that no scheme is in existence or even planned."
110. Nonetheless, in that case the subsequent presentation of a coupon by the ultimate consumer had the effect of decreasing the consideration for the supply made by the manufacturer.
111. Thus, it seems clear to us that regulation 38 can apply to situations where, after the agreement for the supply has been made and performed, the consideration for the supply is subsequently changed.
112. However,
in Castle Associates v
Commissioners of Customs and Excise (
VATD)
3497
(MAN /87/448) the Tribunal stated:
“In each of these
cases, the invoice misstates the transaction as it was agreed between the
parties and the credit note evidences the correction of the error. But once the
parties have agreed the amount of the charges for the services, and the
services have been supplied, the value
of the supply is ascertained. If
thereafter the supplier unilaterally decides, or both parties contract, that
the full amount of the agreed charges is not to be payable, in our judgment the
decision or the new contract does not alter the
value
of the supply for the
purposes of
value
added tax, nor does it make any difference if a credit note
is issued to evidence the decision or the new contract.”
113. In the light of the decision in Elida Gibbs, we agree with Ms Brown's submission, that it is hard to see how this statement by the Tribunal in Castle Associates can now stand without qualification.
114. We also
note that our misgivings about the correctness of the decision in Castle Associates
have been confirmed in the decision of this Tribunal in Barlin Associates v
HMRC [2014] UKFTT 957 (TC) (Judge Mosedale). This case was decided after
the hearing in the present appeal but before our decision was issued and it was
drawn to our attention by Ms Brown. In that case, Barlin performed work for a
company called Autonomy. The price for the work was not agreed at the outset
and when Barlin invoiced Autonomy, Autonomy refuse to pay. Legal proceedings
for the recovery of the invoice amount were eventually settled at a lower
amount. Judge Mosedale held this was a decrease in consideration within
regulation 38. Judge Mosedale cast doubt on the correctness of the decision in Castle
Associates saying:
"23. I do not find that this case supports
HMRC’s position because I do not accept that it was correctly decided.
The chairman gave no authority for the view
which I have recited above.
It is in direct conflict with the clear provisions of the 6VD which was in
force at the time, and which provided, as Art 90 of the PVD now provides, as
recited at §9 above, that
VAT
is reduced “where the price is reduced after the
supply takes place”. Yet the chairman above said that the
VAT
was not
reduced where the parties agreed to a reduction in the price after the
supply. That is clearly wrong.
…
31. The intention is to charge VAT
on the price of
the services; so Art 90 must be read as including a situation where the
supplier unilaterally issues an invoice and then agrees the price in a lower
amount. Reg 38 is the UK’s enactment of that part of Art 90 which refers to
cancellation or subsequent reduction in price and must similarly be read as
including a situation where the supplier unilaterally issues an invoice but
then agrees that the actual price is lower than that shown on the original
invoice. Such a situation is envisaged by Art 90 when it refers to ‘the price
is reduced after the supply takes place’ and this situation is envisaged by
what Reg 38 refers to as a ‘decrease in consideration for a supply’. And that
is effectively the conclusions of the Tribunal decisions in Cobojo
Ltd
and Cumbria CC. I consider they are right. "
115. We
respectfully agree with the comments of Judge Mosedale. Indeed, a decrease in
consideration for the purposes of regulation 38 will often, perhaps usually,
occur after the original supply has been made but where for various
reasons the
parties agree between them that the original price has to be
varied.
We further
note that this conclusion gives effect to the wording of article 90 which refers
to the price being reduced after the supply takes place.
116. Thus, for
example, if an art dealer sells a painting to a regular customer for an agreed
price and charges VAT
(disregarding the application of the margin scheme for
the purposes of this example), but subsequently the customer is unhappy with
the price (having seen similar paintings in other galleries at lower prices)
and asks the dealer for a rebate, the dealer may well repay part of the
original price to the customer in order to preserve the customer’s goodwill.
His agreement to repay part of the price occurs after the original supply has
been made. It seems to us that such an agreement to repay part of the purchase
price constitutes a reduction in consideration for the purposes of regulation 38,
assuming a credit note has been issued.
117. Having thus established that the decision or agreement to reduce consideration can take place after the original supply has been made, we think it also follows from the decision in Elida Gibbs that the reduction in consideration need not necessarily flow from a term or breach of a term in the original supply agreement. In Elida Gibbs, the eventual retail customer was not a party to the agreement between the manufacturer and the wholesalers or retailers. The reduction in price did not, therefore, take place under the terms of the original contract of supply between those parties.
118. A few examples may make this clearer.
119. Taking
the art dealer example above, there may be no legal obligation on the art
dealer to reduce the price – the terms of the original agreement to supply the
painting were enforceable, contained no misrepresentation and the repayment was
purely voluntary
in order to preserve the customer’s goodwill. Nonetheless, we
think it is plain that regulation 38 should apply to decrease the consideration
for
VAT
purposes in this case even where the decrease in consideration results
from something happening after the event outside the terms of the original
supply contract.
120. Another
example would be an agreement between a professional services firm and its
client to provide services at an agreed hourly rate on a particular project. At
the end of the project the firm renders an invoice to its client. There is no
dispute about the number of hours charged or the rate. Nonetheless, the client
is dissatisfied, saying that the final number is "too big". Such an
event is a commonplace of professional life. If the firm then reduces its total
charges by agreement with the client (and issues a credit note), then a regulation
38 decrease in consideration occurs because the original agreement for the
supply of services has been varied
and this is so even though there may be no
legal obligation on the firm to make the reduction.
121. A further
example might be the common occurrence, in recessionary times, of a landlord
offering voluntarily
to reduce the rent charged to a struggling anchor tenant
for a specified period of time, where the landlord had opted to tax the rent.
The landlord does not want the anchor tenant to become insolvent and therefore
offers a reduction in the rent. A regulation 38 adjustment would be justified
even though there was no legal obligation on the landlord to
vary
the terms of
the original lease.
122. We
therefore consider that a valid
regulation 38 decrease in consideration can
occur, inter alia, where the price adjustment:
· takes place after the supply has been made,
· is not provided for in or arises from a breach of the terms of the original agreement for the supply, and
·
is voluntary
or agreed between the parties.
123. But what
all these examples (and the cases in which a regulation 38 adjustment has been
upheld) have in common is that there has been some change in circumstance or
the occurrence of an event (other than a mere change in view
of the correct
VAT
treatment of the supply) after the supply has been made which leads or obliges
the supplier (or the supplier and customer) to consider that the original
invoiced consideration should be altered.
124. In this
case, however, there has been no change in circumstance and there has been no
event which leads the parties to think that the original (net of VAT)
consideration was either wrongly calculated or should be reduced. Whatever may
originally have been in his witness statement, Mr Poulopoulos accepted that the
Pension Investment Costs had been correctly charged by the Appellant to the
Fund. Over a period of approximately 37 years no queries had been raised and no
dissatisfaction with the level of charges was expressed by the Fund. Indeed at
the meetings of the Trustees in September and December 2010 no enquiries seem
to have been made as to whether and how the Fund had been over-charged in
respect of investment management fees. The September paper prepared on behalf
of Mr Poulopoulos seemed to indicate that the only over-charge related to
VAT.
The December paper indicated that the Fund "may have been"
over-charged in relation to the fees themselves (although the remainder of the
paper seems to focus on the over-charge of
VAT)
– a proposition which Mr
Poulopoulos now accepts was incorrect.
125. Instead,
what was wrong, at least in the Appellant's view,
was that
VAT
may have been
over-charged on some of the supplies. The price adjustment was simply an
artificial mechanism used by the Appellant effectively to procure a
VAT
credit
of £1,064,893 and resulted in the Fund receiving a “windfall” benefit of
£6,085,107 for no apparent reason other than to procure this credit (and
possibly to boost the assets of the Fund). Certainly the price adjustment did
not seem to have been made because there was anything wrong with the
consideration paid or the services supplied. Although calculated by reference
to the consideration paid in respect of the Pension Investment Costs over a 37
year period the price adjustment did not really seem genuinely to be related to
the consideration or to the supplies of services it was simply a
vehicle
to
reclaim
VAT.
In our
view,
therefore, that is not a situation which falls within
regulation 38. Accordingly, looking at the economic and commercial reality of
the artificial price adjustment we conclude that it was not a decrease in
consideration for the purposes of regulation 38. In our
view,
the appropriate
mechanism for re-claiming overpaid
VAT
is a claim by the Appellant under
section 80
VATA,
not under regulation 38.
126. We should add four further comments.
127. Whether a
price adjustment constitutes a decrease in consideration within regulation 38
is, in our view,
a matter to be determined on an objective
view
of the facts
but taking account of the economic and commercial reality. In reaching our
decision we have treated the reason for the adjustment as relevant insofar as
it sheds light on those economic and commercial realities. Moreover, whilst the
terms or labels attached to the price adjustment by the Appellant and the Fund
are relevant, they cannot change the true economic and commercial substance of
the arrangement.
128. Secondly,
we have been mindful of the evidence of Ms Whent (which was given before that
of Mr Poulopoulos, in which he adandoned the view
that the Pension Investment
Costs had been incorrectly charged). We accept her evidence that the Trustees
did not want the price adjustment to be paid as a contribution but were happy
for it to be made as a repayment of charges already made. Nonetheless, she did
not indicate that it was not possible for the price adjustment to be a
contribution but rather that it was inconvenient in the sense that it would
result in the need for further discussions with the employer. It did not seem
to us, therefore, that the commercial realities made it imperative that the
price adjustment had to be by way of a reduction in consideration. It was more
convenient but it was not necessary. We therefore did not consider that the
Trustees' preference that the price adjustment should take the form of a
reduction (which in any event seems to have no justifiable basis) in previously
paid charges made by the Appellant changed the reality of the situation that
this was not, in substance, a reduction in consideration.
129. Thirdly,
we do not consider that the accounting treatment of the price adjustment can be
determinative of its correct VAT
treatment. We heard no evidence as to the
basis on which the auditors considered this treatment to be correct. Whether
they would have reached the same conclusion had they appreciated that it was
now accepted that the Pension Investment Costs had throughout been correctly
recharged to the Fund is a matter of speculation.
130. Finally,
whilst our decision relates only to questions of VAT,
we would observe that the
Fund has received a (net of
VAT)
payment from the Appellant which appears to be
gratuitous payment of £6,085,107 since it was not paid under any legal
obligation nor was it paid for any other commercial reason, as far as we are
aware, than to procure a
VAT credit. Whether this amounts de facto to a
contribution for pensions regulation purposes is for others to decide.
131. For these reasons, we dismiss this appeal.
132. 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.
GUY BRANNAN