A Direct and Immediate Link

The Court considers whether value added tax on professional fees can be claimed in RAP Group plc v Commissioners of Customs and Excise.

A parent company of a group acquired another company. Professional fees in connection with this work were paid to accountants, solicitors and stockbrokers, and the holding company claimed these for VAT purposes. This claim was refused by Customs and Excise on the basis that in order for the claim to succeed, the amounts paid had to be attributed to taxable services rather than exempt supplies. It was the view of the department that the amounts paid related to the exempt supplies and this was also the view of the VAT tribunal. In the High Court it was determined that, as regards the fees paid to the accountants and stockbrokers, the decision of the tribunal should stand but that the company could claim the VAT on the fees paid to the solicitors.

The background and facts

The appellant company was the holding company of a group and provided management and other services to its subsidiaries, which were all separately registered for VAT.

The company offered for and acquired the issued share capital of W plc. The acquisition involved the issue of new RAP shares for W plc shares and the issue of placing the shares to RAP's existing shareholders.

The company claimed the deduction of input tax on the supplies of services by its accountants, solicitors and stockbrokers in relation to its acquisition of W plc. Customs and Excise treated the services as falling within Regulation 101(2)(c) of the Value Added Tax Regulations 1995 which provided that input tax on goods or services used exclusively on making exempt supplies was not to be attributed to taxable supplies. Accordingly, the deduction was disallowed and a VAT assessment was issued.

Evidence before the VAT tribunal consisted of three invoices. The relevant part of the invoice from the accountants, KMPG, referred only to 'placing an open offer' and 'offer for W plc'. The invoice from the stockbrokers, Williams de Broe, was in similar terms.

However, the invoice from the solicitors, Travis Smith Braithwaite, included details such as advising on the financing of the transaction, preparing service contracts for executive directors, preparing a due diligence report on W plc and investigating title to the properties of W plc, as well as preparing papers for its annual general meeting following the acquisition.

The company contended that, as a matter of law, part of the cost of the advisers' services was a cost component of its taxable transactions in the form of management services supplied to W plc once it was part of the RAP group and that there was a direct and immediate link between the advisory services received and the management services supplied. However, the VAT tribunal (see decision 16601) dismissed the appeal and a company appeal to the High Court.

(Rupert Anderson for RAP; Peter Mantle for Customs and Excise.)

The Chancery Division judgment

The matter came before Mr Justice Patten who detailed the facts. These included the fact that the total professional fees incurred, including VAT, amounted to about £160,000.

The relevant legislation was found in paragraphs 2 and 5 of Article 17 to the European Community Sixth Council Directive 77/388 and, as far as domestic legislation was concerned, in sections 25 and 26, VAT Act 1994. The ability of the company to obtain credit by deduction in respect of the input tax in any relevant period depended upon it establishing that the input tax was treated under the regulations as attributable to taxable supplies made in the course or furtherance of its business.

Conversely, section 31 of, and Schedule 9 to, the VAT Act 1994 dealt with the issue of exempt supplies and it was common ground before the appeal that the judgment in Mirror Group Newspapers Limited v Commissioners of Customs and Excise [2000] STC 156 determined that an issue of shares constitutes an exempt supply for VAT purposes.

In considering the facts of the current case, a number of well-known and fairly recent cases were referred to and these included Midland Bank Plc v Commissioners of Customs and Excise [2000] STC 501, BLP Group Plc v Commissioners of Customs and Excise [1995] STC 424 and Commissioners of Customs and Excise v UBAF Bank Limited [1996] STC 372.

None of the facts of these various cases fitted exactly the facts of the current case. The Midland Bank case concerned legal fees paid by the bank to its solicitors in connection with a corporate takeover by one of the bank's clients. In that instance it was held that the fees were incurred in respect of the business of the bank generally.

The BLP case concerned fees paid to professional advisers in connection with the sale of shares in a subsidiary company. Following reference to the European Court of Justice, that Court confirmed that the purpose of the transaction was exempt and therefore VAT on the fees could not be claimed.

The other well-known case of UBAF Bank Limited concerned the deduction of input tax charged on professional fees which had been incurred in connection with the acquisition of three leasing companies. The bank had contended that the tax was attributable to taxable outputs in the form of the bank's leasing business. In that case there was a finding of fact by the tribunal that there was a direct link between the acquisitions and the making of taxable supplies.

In the current case Mr Justice Patten had to bear in mind the findings of fact by the tribunal and the principle flowing from Edwards v Bairstow 36 TC 207. A crucial fact was the amount of detail shown in the fee notes from the three professional firms, or the lack of it. It was quite clear that in the case of Travis Smith Braithwaite more information was available on its fee note. The judge therefore held that the tribunal was wrong to ignore this fact and to treat all of the work of solicitors as limited to the issue of shares.

The decision

The appeal was allowed insofar as it related to the input tax on the invoice of Travis Smith Braithwaite. In the case of the invoices from the accountants and stockbrokers, the appeal was dismissed.

(Reported at [2000] STC 980.)

Commentary by John T Newth FCA, FTII, FIIT, ATT

Readers will have mixed views on whether professional fee notes should be concise and merely reflect the purposes of the work done or should be detailed and indicate every item of work undertaken on behalf of the client.

Some of us may have been irritated in the past by solicitors' fee notes which referred to every letter written and received and every telephone conversation made. However, in this instance the detail shown on the invoice of Travis Smith Braithwaite was the deciding factor in the partial allowance of the appeal and meant that the company was able to claim VAT of £14,000.

It will be difficult to conjecture whether, if KPMG and Williams de Broe had submitted similar detailed fee notes, all or part of their fees would have been allowable for VAT purposes. No one will ever know, but this case certainly gives food for thought and a possible headache for those who have to draft fee notes for companies and businesses where there is a mix of taxable supplies and exempt supplies.

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