In Norseman Gold plc v HMRC the First-tier Tribunal (Judge Colin Bishopp) ("FTT") dismissed an appeal by Norseman Gold plc ("Norseman") against assessments made pursuant to section 73 VATA 1994 to recover input tax which had been claimed by it, on the basis that as Norseman had not imposed a charge for its services to its subsidiary companies, there was no taxable supply, for which the company could recover the VAT incurred.
Norseman is a UK registered company which at the relevant time was listed on the Alternative Investment Market (AIM). It is a holding company and has operating subsidiaries which carried on gold mining activities in Australia, one of which was the parent of Central Norseman Gold Corporation Ltd ("CNGC"), the company in the group which undertook most of the operating activity.
The evidence accepted by the FTT was that while it was CNGC which undertook the mining operations, it was Norseman as the ultimate holding company which directed what was done, provided working capital (by way of interest free loans), ensured that capital was used properly and took care of the shareholders' interests. Norseman had been registered for VAT on 2 October 2007, but with effect from 27 October 2006. In its application for registration it stated that its business was gold mining, but it was accepted that this was an error, as it was the group's core activity that had been provided to HMRC rather than Norseman's activity. Before Norseman was registered, HMRC made some enquiries as a result of which Norseman's description of its intended business activities was amended to "management charges to be made by the company to the operating subsidiary in Australia". Claims for input tax which had been incurred by Norseman were made. No output tax was declared because although it had been intended that Norseman would charge management fees to the subsidiaries, that did not happen during the relevant VAT periods. HMRC made an assessment in August 2010 which related to the periods from October 2007 to January 2009.
The disputed input tax was incurred on the supply to Norseman of the services of a UK resident director (engaged via a service company), on accountancy and audit fees, on fees incurred in raising finance, on fees for a Mr Bottomley who acted as company secretary (inter alia) for Norseman, on registrar's fees and Stock Exchange fees and on fees for public relations services and website design.
The FTT's decision
The FTT found (see paragraph 20 of the decision) that nothing was done in relation to the relevant periods by way of an agreement between Norseman and the subsidiaries on the amount to be charged, the frequency of invoicing and ascertaining of the relevant subsidiary to receive the invoices, nor to specify the detail of the services to be provided in exchange for the charge.
The taxpayers did satisfy the FTT that the directors of Norseman could and did spend material amounts of time on the activities of the subsidiaries and that there was "direct or indirect" involvement in the subsidiaries' activities which could amount to a taxable supply (See BAA Ltd v HMRC). However, the FTT said, at paragraph 48, that:
"the difficulty for Norseman lies in the absence of any agreement about payment for what was provided……As I have indicated, Mr Bottomley did raise the point in an email, to which there was a rather desultory response. There was no evidence that the matter was addressed until further after [the HMRC] enquiry began…".
Although Norseman subsequently issued invoices and the subsidiaries recorded the debts in their books, this only happened once it had realised that it would be unable to recover VAT incurred unless it charged for its services. The failure to agree that charge before supplies were made was critical. The FTT held (see paragraph 53) that what Norseman provided to its Australian subsidiaries during the period covered by the disputed assessments did not amount to taxable supplies.
The outcome in this case can be contrasted with another recent VAT decision concerning supplies of management services, see African Consolidated Resources plc v HMRC . In that case, the FTT accepted that there was consideration for the management services, but concluded that an economic link between the consideration and the management services provided was lacking, which meant there was no taxable supply. In particular the fixed management fees were based on the recipients' ability to pay rather than the value of the services provided. They were invoiced as "consultancy fees" with little transparency in relation to what the services entailed.
Whilst neither decision is binding they both underline the importance of the existence of an agreement for the services supplied, i.e. a legal link between the management service and the consideration payable, being established at the outset. African Consolidated Resources plc also shows that there may also be a focus on the economic link between the consideration and provision of services even when there is a legal obligation in place. Care therefore needs to be taken when similar arrangements with subsidiaries are established in order to ensure that there is a documented agreement to pay for such management services which reflects the appropriate value of the services being provided to the subsidiary companies.