HM Revenue & Customs v Jeancharm Ltd (t/a Beaver International)

Input tax is recoverable under Value Added Tax Act 1994, section 24(1), only where the relevant goods or services were supplied to the taxable person and were used, or intended to be used, for the purposes of its business. These are separate questions. A tribunal errs in law if it treats them as one question, or fails to investigate the recipient issue when it is central and the tribunal is not satisfied that the parties’ assumption is correct. The person who benefits from a service is not necessarily its recipient. In an insurance-funded criminal defence, the identity of the recipient depends on the arrangements for instruction, responsibility and payment. The court left the wider meaning of business purpose undecided because the supply was not made to the taxpayer.

Jeancharm claimed input tax on VAT included in legal costs incurred in defending its employee, Damian Collins, against charges of causing death by dangerous driving. The employee had driven a company car, and the insurer’s policy indemnified permitted drivers for defence costs. The VAT and Duties Tribunal held that Jeancharm could recover the input tax, principally because the insurance policy had been obtained for business purposes.

HM Revenue and Customs appealed on the basis that the Tribunal had asked the wrong question and had failed to determine whether the legal services were supplied to Jeancharm. The central issues were therefore the identity of the recipient of the legal services and, if Jeancharm was the recipient, whether the services were used for the purposes of its business.

1. The appeal was allowed. The Tribunal’s decision of 3 November 2004 was set aside without remission.
2. Section 24(1) of the Value Added Tax Act 1994 required two distinct questions: whether the relevant legal services were supplied to Jeancharm, and whether those services were used or intended to be used for the purposes of its business. Jeancharm had to succeed on both questions.
3. The Tribunal erred in law by treating the purpose for which the insurance policy was purchased as the decisive question. It also erred by failing to determine the “To whom?” question, despite that question being central and despite its own uncertainty about the parties’ assumption.
4. The legal services were not supplied to Jeancharm. The insurer had taken control, instructed the solicitors and assumed responsibility for payment. The employee supplied the instructions relevant to his defence, and the company had no right to control or influence the conduct of that defence. Any benefit to the company from the employee’s possible earlier return to work did not establish that the company was the recipient.
5. Customs & Excise Commissioners v Redrow Group [1999] STC 161 (HL) was materially different. There, the taxpayer instructed the agents and paid for the services. Those features were absent here. The court did not need to decide the difficult questions concerning the scope of business purpose, including the relationship between Customs & Excise Commissioners v Rosner and Redrow.
6. Section 148(7) of the Road Traffic Act 1988 gave the employee a direct right to indemnity from the insurer. That provision reinforced the conclusion that the services were not supplied to the company. The court also observed that the extra-statutory insurance note could not prevail over the legislation.

• High Court (Chancery Division): allowed the Commissioners’ appeal and set aside the VAT and Duties Tribunal’s decision of 3 November 2004 without remission.
• VAT and Duties Tribunal, Manchester: allowed Jeancharm’s claim for input-tax credit and directed the Commissioners to pay its costs.