VAT – Supplies – Loft-conversion service – Claimant offering loft-conversion service – Terms of contract with customers describing claimant as agent and project manager and providing for engagement of independent contractors to carry out works – Defendant deciding claimant accountable for VAT on supply of all building services involved in loft conversion on basis that relevant supply consisting of full loft-conversion package by claimant – VAT Tribunal finding contractual terms not determinative of issue — Whether tribunal erring in approach – Appeal allowed
The claimant company operated a loft-conversion business, which had various associated companies providing services including design, pre-build work and the ordering of materials. The claimant advertised itself as offering a full service, managing the project from start to finish, and providing customers with a quote for the entire job. However, the terms of its agreement with customers described the claimant’s services only as project management and agency and provided that the claimant would engage independent contractors to carry out the works. The contractors were not identified in the contract and would, unless otherwise specified by the customer, be contractors with which the claimant had a written agreement in a standard form and had previously agreed a fee for carrying out the conversion. All payments for the work were to be made to the claimant’s client account, from which the claimant was authorised, under the terms of its contract with the customer, to make payments to any supplier, the architect and the contractors. The claimant was entitled to suspend the work and withdraw contractors in the event of a customer’s non-payment.
The defendant decided that the taxable supply made by the claimant comprised the complete package of providing a finished loft conversion so that the claimant was accountable for VAT on all the building services involved in that process. Before the VAT Tribunal, the claimant argued that, under the express terms of its contract with customers, it provided only project-management services and that the individual tradesmen who carried out the works made separate supplies to the customer.
The tribunal decided, applying Customs & Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 and distinguishing Kieran Mullin Ltd v Customs & Excise Commissioners [2003] EWHC 4 (Ch); [2003] STC 274, that the contractual position was not determinative of the issues as to supplies under the Value Added Tax Act 1994 and that the claimant’s supply should be characterised as the entire loft conversion service in the light of, inter alia, the customers’ perceptions and certain terms of the contract. The claimant appealed.
Held: The appeal was allowed.
When deciding whether a particular written contract fell within a particular legal description, the court would identify the rights and obligations of the parties as a matter of construction of that contract, and would then to consider whether those obligations fell within the relevant legal description, which would not necessarily be determined by the contract. The approaches taken in Kieran Mullin and Reed Personnel were not at odds with one another: the first was concerned with identifying the parties’ rights and obligations while the second was concerned with classifying them. The tribunal had erred in regarding the two cases as representing inconsistent approaches. The correct approach was as follows:
(a) Where two or more parties were involved in the supply of goods and services to an ultimate consumer, different contractual structures could entail different VAT consequences, regardless of whether the consumer was aware of the contractual arrangements between those parties. The starting point for determining the true relationship between them was an analysis of the contractual arrangements; where those arrangements were in writing, it would be a question of the construction of the agreements. On the other hand, if the contract was partly oral and partly written, on the other hand, the words and conduct of the parties might throw light on their contractual obligations.
(b) It would then be necessary to determine whether the contractual arrangements were a sham or the parties had failed to operate them or the evidence was wholly inconsistent with the apparent contract; if so, the contractual arrangements would not represent the true relationship.
(c) Next, it was necessary to decide how the rights and obligations, as identified, should be classified for the purposes of VAT. The process of classification involved two interlinked questions: to whom was the claimant supplying its services and what services did it supply to the customer? In the absence of any finding of sham or departure from the written arrangements, the construction of the contracts was likely to be the finishing point as well as the starting point on those questions.
In the instant case, the tribunal had taken an unstructured approach, eliding the two different stages, and had neither construed the contract nor squarely addressed the question of whether, as construed, it represented the real bargain between the parties. The tribunal’s reasoning could not stand and the matter would be remitted to it for re-decision in the light of the above principles.
Guy Tritton (instructed by Halliwells LLP, of Manchester) appeared for the claimant; Richard Smith (instructed by the legal department of HM Revenue & Customs) appeared for the defendant.
Sally Dobson, barrister
