[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Capital Cranfield Trustees Ltd v Revenue & Customs [2008] UKVAT V20532 (09 January 2008) URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20532.html Cite as: [2008] STI 1073, [2008] UKVAT V20532, [2008] V & DR 123, [2008] BVC 2201

[New search] [Printable RTF version] [Help]

20532

VAT – input tax - services received by professional pension fund trustee – attributable to taxable supply? – yes – refund properly claimed – appeal allowed.

LONDON TRIBUNAL CENTRE

CAPITAL CRANFIELD TRUSTEES LIMITED

Appellant

and –

HER MAJESTY'S COMMISSIONERS OF

REVENUE AND CUSTOMS

Respondents

Tribunal: Richard Barlow (Chairman)

Ms Sandi O'Neill

Sitting in public in London on 18 October 2007

Mr Rupert Baldry of counsel instructed by Sacker & Partners LLP for the Appellant

Dr Ian Hutton of counsel instructed by the general counsel and solicitor to the Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION
1. This appeal is against the respondents' refusal to agree to repay to the appellant £76,783.95 which the appellant had claimed was overpaid by reason of its not having deducted that sum by way of input tax, to which it claims to be entitled, when making returns of VAT between May 2003 and September 2004.
2. The appellant is the representative member of a VAT Group registration. The appeal was originally submitted in error by another member of the Group and the appellant was substituted as the appellant at the hearing without objection from the respondents.
3. The appellant as well as being the representative member of the Group was the company whose activities have given rise to the claim.
4. The appellant acts as a professional trustee for reward in the pensions sector of the economy and for the purposes of this appeal it is necessary to have regard to the fact that it does so in two different capacities. It provides professional advice to pension fund trustees and also acts as a pension fund trustee itself. In both capacities it incurs input tax when it obtains advice from other professionals such as solicitors and actuaries.
5. It is not in dispute that when the appellant obtains advice from other professionals, in order itself to give advice to other pension fund trustees, that gives rise to the correct deduction by it of input tax to be set against the fees it charges to those trustees.
6. What is in issue is whether the appellant is entitled to claim input tax when it obtains advice from other professionals where that advice is needed to enable itself properly to act as the trustee of a pension fund.
7. The pension fund in question is the Kendrick and Jefferson Group Pension Fund ("the Fund").
8. Some provisions of the Pensions Act 1995 are particularly relevant to this appeal and to the capacity in which the appellant acts as the trustee of the Fund. Section 22(1) of the Act provides that where a person begins to act as an insolvency practitioner in relation to a company which is the employer in relation to a pension scheme then that section applies to the trust scheme. Section 23 of the Act then provides that as long as section 22 applies the insolvency practitioner must satisfy himself that at least one of the trustees of the scheme is an independent person and, if not, under section 23(1)(b), to secure the appointment of an independent person as a trustee. The appellant was already an independent trustee when the insolvency practitioner was appointed.
9. While section 22 applies, section 25(2) of the Act provides that any power vested in the trustees of the scheme and exercisable at their discretion may be exercised only by the independent trustee. In practice the other trustees finding themselves in the position of having responsibility without power (the prerogative of the naively optimistic) usually resign. As we understand it the appellant thus became the sole trustee of the Fund.
10. Section 25(6) is important in this appeal and reads:

"(6) A trustee appointed under section 23(1)(b) is entitled to be paid out of the scheme's resources his reasonable fees for acting in that capacity and any expenses reasonably incurred by him in doing so, and to be so paid in priority to all other claims falling to be met out of the scheme's resources".

11. We note also that section 27 of the Act precludes a trustee of a trust scheme governed by the Act from acting as the auditor or actuary of the scheme. It follows from that that, even if the appellant is qualified to act as auditor or actuary, it would have been necessary for it to buy-in those services from a third party.
12. The Fund is not a legal person. It is a collection of investments which were vested in the trustees (now the appellant as sole trustee) but it is governed by a combination of the trust deed that set it up in 1997, the law of trusts, and the statutory provisions including those already referred to.
13. The trust deed defines who is entitled to benefit from the property vested in the trustees and the nature of the benefits to be conferred upon those persons. The law of trusts imposes a fiduciary duty on a trustee and that applies in this case but it is modified by the trust deed and the statute because, although the normal rule is that a trustee cannot benefit from or make a profit from his position as a trustee and although that rule is strictly applied, where the trust instrument allows it, a trustee can be paid by way of exception to the normal rule. Such "exceptions" are no doubt more common than their absence would be in trusts of the sort with which this case is concerned. Clause D2 of the trust deed provides for the remuneration of the trustee "for services as a trustee" and the trustee is entitled to be paid for those services out of the Fund. That clause allowed for the level of remuneration to be set at a rate agreed with the principal employer but it has been superseded by the statutory provisions already quoted because section 25(6) of the Pensions Act 1995 substitutes a reasonable rate for the agreed rate.
14. Mr Baldry submitted on behalf of the appellant that the case is a simple one and that the ordinary principles of VAT law would allow the appellant to claim the input tax now claimed. He submitted that the professional services in question were supplied to the appellant in the course of its business as a professional trustee and that it was therefore entitled to deduct the input tax as cost components of those professional services. He pointed out that as a matter of fact the appellant commissioned those services and that they were performed in accordance with its instructions and invoiced to it by the professionals involved. He argued that the fact that the appellant was entitled to reimbursement from the Fund did not alter that analysis and relied on the contention that only the appellant was entitled to appoint those advisers, as is clear from the trust deed and the Pensions Act 1995. The appellant's evidence, given by Mr Charles Goddard (a director of the appellant), was that it regards itself as bound to pay the third party professionals' fees once they have been earned whether or not the Fund has sufficient resources to reimburse the appellant. We find that to be the case.
15. He further contended that the supplies of services by the professionals are attributable to the appellant's taxable supplies which are the supplies it makes and for which it charges fees when it acts as trustee of the Fund under its appointment as statutory independent trustee.
16. The appellant has, at all material times, been registered for VAT and has accounted for output tax on the charges it makes to the Fund when acting as independent trustee. The appellant is and would have been registered for VAT as an adviser to pensions trustees whether or not it had acted as the independent trustee of the Fund (or other funds) and no doubt incurs similar input tax in respect of that advice when it needs to buy-in expert advice from third parties. But Mr Baldry made it clear that his case is that the appellant makes supplies on which output tax is properly chargeable and input tax properly deductible in both capacities.
17. Dr Ian Hutton on behalf of the commissioners made two alternative submissions. The first was that the registered business of the appellant cannot be equated with its trustee function for VAT purposes with the result that, in its role as trustee as opposed to adviser to trusts, the appellant cannot deduct input tax at all in respect of expenses incurred in the fulfilment of that role unless they can be directly linked to supplies made by the trustees on behalf of the specific pension fund. He gave as an example the case where a pension fund may own and exploit commercially a property in respect of which an option to tax is in place so that the expenses of running that property would give rise to deductible input tax if the trustees were registered for VAT. Alternatively the commissioners argued that, if the appellant's activities as trustee and as adviser to trusts cannot be separated, then some of its supplies (i.e. those consisting of the operation of the funds) would be exempt because the operation of the trusts and distribution of their income to the beneficiaries is not a taxable supply but rather only the passive exploitation of the funds' investments. It appears to us that if this alternative argument is correct it might more accurately be described as a case where the appellant could be said to have activities outside the scope of the tax rather than one where it makes exempt supplies but that in itself would not affect the alternative argument.
18. In support of the commissioners' first argument Dr Hutton pointed out that the appellant, as fiduciary, is precluded from making a profit from the trust except in so far as authorised by statute or the trust deed and that that shows that its function as a trustee is separate from and of a different nature from its function as an adviser to trusts. He pointed to several passages in the witness statement (confirmed in oral evidence) of Mr Charles Goddard which confirm that the two functions are separate. Indeed it is clear that as a matter of law the two functions must be kept separate and we accept entirely that is the case. We find that the two functions are separate both in law and in fact and that the appellant operates in that way.
19. Dr Hutton drew our attention to the case of Customs and Excise Commissioners –v- British Railways Board [1976] STC 359 in which the commissioners had argued that when the Board acted as trustee of its staff pension fund it did so in a fiduciary capacity (which was clearly the case) and that consequently supplies to it in that capacity were not for the purpose of a business carried on by it and input tax on them was not deductible. The Court of Appeal held that the management of the staff pension fund was so much part of its functions as an employer, and therefore of its business, that the input tax was deductible as having been received for the purpose of the business.
20. Dr Hutton relied in particular on a passage in the judgment of Lord Widgery CJ in the Divisional Court in the same case ([1975] STC 498 at page 501b-d). He said:

"I would not like to close the door finally on the possibility that there would be cases coming forward later in which some recognition of the fiduciary capacity is necessary. Counsel for the commissioners has referred to the trust corporations, corporations which are trustees of manifold trusts, and he has lifted the corner of the curtain to show us the trouble which may occur in trust corporations if the corporation being a single person has to operate as a single person for all purposes under this tax. I can see that, and I recognise that there might be cases where part of the activities of a single person are so separate and distinct from the other activities, and in particular are carried on on behalf of other persons, that some kind of acceptance of the fiduciary capacity argument may have to be recognised, but I am absolutely confident that this is not to be recognised in this case".

21. Neither party was able to cite to us a case which, in the intervening 32 years, has come forward in which the fiduciary capacity issue has arisen. Mr Baldry did refer us to a case called Linotype and Machinery Ltd –v- Commissioners of Customs and Excise (decision number 594) in which the tribunal held that supplies like those under consideration in this case were made to the trustees not to the employer. That was a case where the employer and the trustees were separate persons in law and the trustees were not registered for VAT. The Tribunal, having held that the supplies were to the trustees, dismissed the appeal by the employer who was seeking deduction of input tax; without further consideration of the fiduciary question.
22. We begin discussion of the submissions with some non-controversial observations. The supplies made by the professional advisers were correctly and indeed inevitably treated as subject to a charge of output tax. The appellant was entitled both by the trust deed and the statutory provisions to draw from the Fund the cost of those services provided they were reasonably incurred, which is not in doubt in this case. The appellant is registered for the purposes of value added tax. The appellant is entitled to payment for acting as trustee of the Fund as well as being entitled to charge fees when it acts as adviser to funds.
23. The following are matters of controversy between the parties. First, when the appellant is acting as trustee, as opposed to adviser, is it making taxable supplies on which it correctly charges VAT? If so, do the third party professional fees in question give rise to a deduction of input tax? Or will the appellant only make taxable supplies if it does so for the benefit of the Fund by way of exploitation of the Fund's assets? If the appellant is making taxable supplies when acting as trustee are the expenses incurred directly attributable to the supplies so as to give rise to deduction of input tax?
24. The appellant clearly acts in two different capacities and we understood Mr Baldry to have accepted that in his submissions to us. The appellant is in business and the nature of the activities it undertakes when advising trusts is a professional service taxable at the standard rate. When the appellant acts as trustee, as such, it is equally clear in our view that it does so by way of a business activity. It is paid for doing so and although the rate at which it charges its fees must be reasonable, because of section 25(6) of the Pensions Act 1995, it does so with a view to making a profit by exploiting its professional skills.
25. The trustee activities have so far always been treated as taxable supplies by both parties. The appellant is registered for VAT and, although that would have been necessary anyway because of its advisory role, it has accounted for tax at the standard rate on all its income including payments for its trustee role. The respondents have accepted that is the correct status of that income and apparently still do.
26. Although the respondents have rejected the overpayment claim on the basis that the input tax now claimed is not deductible they have not allowed part of the overpayment claim on the basis of an overpayment of output tax. If the input tax is not deductible and if that is because the trustee function does not involve making taxable supplies, then it would follow that there has been an overpayment of output tax even on the respondents' case. Section 80(1B) of the VAT Act 1994 provides for a repayment to be made where either output tax has been overpaid or input tax has been under claimed and so, if there was no supply by the appellant in its trustee capacity, it should receive a repayment of at least part of what it has claimed.
27. Of course it may be that the respondents have simply not thought it necessary to adjust the claim while it is under appeal and that they would readily accept that it is a consequence of their case, if upheld, that some overpayment of output tax has occurred.
28. We hold that the appellant did correctly account for output tax on the services it provided when acting in its capacity as trustee as well as when acting as advisor. It supplied a service for consideration by way of business and was paid for that supply. We regard it as unrealistic to say, as the commissioners have urged us to in this case, that there cannot be a supply because of the fiduciary nature of the trustee function and the prohibition on the fiduciary making a profit from his position. Provision for payment is clearly made and so the activity is done for a consideration and indeed with a view to profit.
29. The appellant's activities as adviser and as trustee are not "separate and distinct" (to use the phrase adopted by Widgery J in the British Rail case). The appellant provides a composite service from which it profits by charging reasonable fees under the Pensions Act 1995 and it is an integral element of that service for it to buy-in the services of third party professionals, where necessary or where required by statute, and to charge the cost of those services to the Fund.
30. We also regard it as unrealistic to say, as the commissioners have urged us to, that because the Fund is not a legal person the appellant must have supplied the service to itself, making it therefore a non-supply because a supply must necessarily be to another party. Whilst we agree that a supply must be to a party other than the supplier we note that in section 4(1) of the VAT Act 1994 and article 24 of the Common System Directive ((2006/112/EC) the emphasis is upon the nature of the supply rather than the identity of the recipient. It is a principle of VAT law that the word supply should be given a wide meaning. It is inherent in the respondents' case that they contend that commercial activities having all the characteristics of a supply (the appellant's acting as a professional trustee) are not in fact a supply.
31. In the well known case of Apple and Pear Development Council –v- Customs and Excise Commissioners [1988] STC 221 the Court of Justice of the European Communities held that there must be a direct link between a service and a consideration received before the activity in question can be categorised as a supply of services and in that case the fact that apple and pear growers were obliged to pay the Council's fees whether or not they received any benefit meant there was not a sufficient link. However, it was not held that the consideration had to come from the recipient of the service as such and it is well established that the consideration for a supply may come form a third party. In this case all the beneficiaries of the Fund obtain the benefit of the management of the Fund. They will not all receive equal benefits but they all receive some benefit. This case is in our opinion more like that of The Institute of Leisure and Amenity Management –v- Customs and Excise Commissioners [1988] STC 602 in which the services available to the members were directly linked to the subscriptions because they were provided for all the members.
32. Thus we hold that the appellant makes supplies to the beneficiaries of the Fund by managing the Fund for their benefit and that it does so for a consideration and that it is not fatal to that analysis that the payment of that consideration comes from the Fund. It follows that the supplies are taxable supplies. The fact that the Fund itself does not trade in the commercial sense is irrelevant because the appellant is in business and trades as a professional trustee as well as an adviser to trusts and is therefore correctly registered.
33. We also hold that the supplies of the professionals are made to the appellant in its capacity as a taxable person. Section 25(6) of the Pensions Act 1995 makes that clear. Section 25(6) is the provision that allows the appellant to charge its fees and it does so, in effect, to the exclusion of the provisions of the trust deed as we have explained in paragraphs 10 to 13 above. Section 25(6) refers to expenses reasonably incurred "by him" and thereby makes it clear that it is the trustee who incurs the expenses. The facts of the case as we have held them to be in paragraph 14 are also consistent only with the supplies having been made to the appellant.
34. We therefore hold that the appellant was entitled to deduct, as input tax, the tax charged on the fees paid to professional persons in its capacity as trustee.
35. We also hold that the appellant did make supplies taxable at the standard rate and that therefore the respondents' alternative argument is rejected.
36. The consequence of those holdings is that we allow the appeal in principle and hold that the appellant is entitled to claim a refund of tax. It appears that the parties have agreed the amount of the repayment due to the appellant if that were to be our holding but in case that is not so we give liberty to the parties (or either of them) to apply to the tribunal within six months of the release of this Decision for a further hearing for the determination of the amount of the repayment, failing which the appeal will then be allowed in full without further hearing.
37. We direct that the respondents should pay the appellant's costs to be determined by a costs judge of the High Court if not agreed by the parties.

RICHARD BARLOW

CHAIRMAN RELEASED: 9 January 2008

LON/06/0337