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 Merlin Scientific LLP wins VAT appeal over business meeting costs


In an interesting case on business meeting costs, HMRC has lost an appeal over a claim about input tax on meetings costs. HMRC argued that the costs were business entertainment expenses, but the Court said that the costs were incurred for legitimate business meetings. The circumstances of the case were a little unusual but the principles may have wider application.


In the case,Merlin Scientific LLP [2015] TC 04441 UKFTT 0247 (TC), the First Tier Tribunal (FTT) allowed the limited liability partnership’s (LLP) appeals against a VAT assessment and a direction to amend a VAT return, as well as amendments to a self assessment return.


The tribunal ruled that the expenses were corporate meeting costs and the input tax incurred on those costs was allowable. Therefore the expenses could be deducted in the computation of profits for income tax purposes.


This decision relates to the treatment of corporate meeting costs and whether they were in fact the provision of business entertainment.


Although Merlin Scientific LLP (MSL) made two appeals involving two taxes with different legislation, HMRC decided that its treatment of the deductibility of the corporate meeting costs should follow the VAT treatment.


The parties agreed that the findings of the VAT appeal would determine the outcome of the income tax appeal.


MSL provided consultancy services to Merlin Biosciences Ltd (MBL), now called Excalibur Fund Managers Ltd, an international fund management and corporate finance business specialising in the medical services sector. MBL frequently held meetings with potential investors in high class venues as part of the business process.


Much of the case centred on meetings attended by Christopher Evans, a biotechnology entrepreneur and non-executive chairman of MBL. He was not involved in the day-to-day business of MBL or its investment decisions, but had a consultancy role through MSL.


The consultancy agreement between MSL and MBL allowed MSL to charge as disbursements certain expenses incurred in providing the consultancy services, such as travelling, accommodation and entertaining expenses. In practice MSL did not charge disbursements separately.


Evans used his family home, Glebe House in the Cotswolds, which had meeting facilities, to host meetings in his role as consultant. Set in extensive parkland, meeting facilities at Glebe House range from the traditional board room set-up to an isolated summer house. All technological and presentation equipment are available, including state-of-the art TV screens.


The facilities at Glebe House were operated by Glebe Corporate LLP, run by Evans’ wife. While Glebe House had extensive leisure facilities, the FTT accepted that when Evans used these to entertain business contacts this was treated as a personal rather than a business expense. The invoices issued by Glebe Corporate to MSL always included round sums, the figures ranging from £23,500 to £42,000 per invoice, plus VAT at the standard rate, each with an identical narrative for the services provided, including: ‘For meetings, teas, coffees, lunches, breakfasts, dinners, food and wine, overnight accommodation, use of facilities, vehicles, rifles and shotguns, cartridges, fishing rods, gear, mountain bikes, horses and tack, clothing, laundry, petrol, use of gym, snooker room and bar, meeting rooms, estate office for emails, faxing, copying typing, arranging appointments, general secretOpen Sans support, cleaning to support client.’


Each invoice then listed under the heading ‘Clients’ the name of each attendee at the meetings.


HMRC contended that the sums paid by MSL to Glebe Corporate were predominantly related to the provision by MSL of business entertainment free of charge to MSL’s clients and their contacts and therefore the relevant proportion (which they estimated should be two thirds) should be excluded from credit for input tax in accordance with SI 1992/3222, art 5.


MSL argued that HMRC had misunderstood the contractual arrangements and that there should be no disallowance of input tax and if there was a supply of business entertainment by MSL it was minimal and therefore HMRC’s two thirds disallowance could not be sustained.


HMRC officer Michelle Hawes disagreed and wrote to MSL’s accountants, Calder & Co on 25 February 2009 questioning the invoices, asking for further information so that she could carry out an apportionment of the sums on the invoices referable to business entertainment.


In response, Calder & Co did not explain the underlying contractual arrangements or emphasise that the services were paid for by MBL and consequently not provided by MSL free of charge. It also suggested an apportionment on the basis that 2.5% of the overall costs should be disallowed, on the basis that any entertainment provided was small in the overall context. In response, the HMRC officer called for a 33% apportionment as reflective of the services provided.


In the ruling, the judges commented: ‘We found Officer Hawes [Michelle Hawes] at times to be confused in her evidence, particularly as to the basis on which she had made the apportionment between business entertainment and other charges, and inflexible in her approach when challenged.


‘She failed to demonstrate an open mind which led her to maintain her position in the face of what we have found to be clear evidence which undermines her decisions.’


Based on the evidence provided, the FTT found that the services supplied by MSL to MBL was a composite supply of services consisting principally of the supply of consultancy services and an ancillary supply of corporate meeting services.


No separate charge for the ancillary services was required to be specified on MSL’s invoices as there was a composite supply for a single price, MSL having chosen to treat the onward supply of corporate meeting services as ancillary to the principal supply of consultancy services.


If any of the supplies did constitute the supply of business entertainment they were not provided free of charge, finding the position akin to that in Webster Communications International Ltd [1997] BVC 2263.


The FTT also found that the use of the leisure facilities and the provision of meals was minimal in the context of the overall supply of services (which was primarily the provision of meeting facilities for business purposes), even though this is not how it appeared on the invoices.


On that basis the FTT suggested that if a disallowable proportion was needed, which it was not given its earlier findings, it should not have exceeded 5%.


The FTT concluded that MSL should be given full credit for the input tax on the Glebe Corporate invoices and these expenses were allowable in full as they had been wholly and exclusively incurred for the purposes of MSL’s trade. Both appeals were therefore allowed.


The fact that Merlin won the appeal was primarily down to the HMRC officer’s subsequent failure to recognise or accept any explanations or justification for the expenses which was considered unacceptable by the tribunal judges, Timothy Herrington and Michael Bell ACA CTA.


The decision was released on 4 June 2015.


The judgment in Merlin Scientific LLP [2015] TC 04441 UKFTT 0247 (TC) is available here

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