This appeal concerned whether Multimedia Computing Limited (MCL) and Deed Poll Services Limited (DPSL) had made vatable supplies within the UK. The main issue for the First Tier Tribunal (FTT) to consider was whether MCL should be treated as DPSL's fixed establishment for the purposes of determining where the parties’ supplies had taken place.
MCL was a UK company that offered deed poll services to the public from its offices in Witham, Essex. Mr Barratt was the founder and director of MCL and supervised the company’s 12 employees. MCL was registered for VAT and had originally accounted to HMRC for VAT on the deed poll services it provided to its customers.
In 2010, however, MCL was sold to a Liechtenstein based trust (the ‘Trust’). Under the SPA, the acquisition of MCL by the Trust was structured in order to minimise the parties' VAT liability. All of MCL’s intellectual property was transferred to DPSL, a Jersey incorporated SPV also owned by the Trust. MCL then entered into an outsourcing agreement whereby it exclusively supported DPSL by continuing to operate in substantially the same manner as it had done before the sale. Mr Barratt, as the manager of the business, continued to act as director of MCL but was also hired as the sole employee of DPSL.
The purpose of this arrangement was that customers would contract with DPSL, however, the contracts would be substantially fulfilled by MCL. This resulted in a favourable VAT treatment for both companies. MCL would benefit from the VAT treatment of the B2B rules, which treated the supply as being made in the location of the business consumer, namely DPSL. DPSL would similarly not be liable for VAT under the B2C rules, which treat the place of supply as the location of the supplier rather than the customer. Consequently neither company paid any VAT to HMRC.
HMRC assessed the appellants to tax on the basis that DPSL had made supplies to its customers using MCL as a fixed establishment in the UK. This resulted in both companies being accountable for VAT. The appellants appealed against the assessment and it fell to the FTT to determine whether MCL should be considered a fixed establishment.
Finding in favour of HMRC, the FTT found that MCL was a fixed establishment of DPSL. The FTT, drawing extensively on the opinion of the Advocate General’s opinion in RAL (Channel Islands) Ltd, gave the following reasons for reaching this decision. First, MCL had continued to operate in substantially the same fashion as it had done before the sale (where it had accounted for VAT). The only practical difference was that Mr Barratt's supervisory function was now, for the most part, performed by him from Jersey, in his capacity as an employee of DPSL. DPSL itself did not have the resources alone to provide its deed polling services to customers, but was entirely dependent on MCL's substantial support, with 90% of all customer applications being processed by MCL with next to no involvement from Mr Barratt (and therefore DPSL).
Second, MCL was in effect, an ‘auxiliary organ’ of DPSL. The parties were not independent operators, but were in fact very closely connected. They shared the same parent and the activities of both companies were in practice controlled by Mr Barratt. MCL was prevented from providing its services to any other company under the outsourcing agreement and DPSL did not outsource its operations to any other company. As a result, the FTT found HMRC’s assessment to be correct and that the appeal should be dismissed. Both parties were liable for over £500,000 each in unpaid VAT.
This is a helpful decision on determining the place of supply for VAT, particularly in the context of fixed establishments. In its decision, the FTT stressed that VAT is a tax on consumption and consequently the importance of looking towards where the consumption takes place. It demonstrates the commitment of the courts to look at the practical reality of where services are provided, rather than relying on the location of the supplier.
In this case, all parties were agreed that DPSL provided the services to its customers. The dispute concerned whether it had done so through a fixed establishment in the UK. To determine that Jersey was the place of supply, the FTT held, when 90% of the business' operations occurred at MCL’s UK office, would not lead to a rational result for tax purposes. The lesson here is not to assume that services are made from the country in which a company is based or incorporated, but to always consider where in practice the majority of that company's operations occur.