The Commissioners for HMRC v Tower Resources PLC

For VAT purposes, whether services are supplied for consideration is determined by the parties’ agreement as construed in its economic and commercial reality. A supplier’s subsequent practice of not demanding a debt does not alter an agreement which creates an unconditional obligation to pay on demand.

A holding company which supplies management or technical services to subsidiaries for consideration carries on an economic activity within Article 9(1) of the EU Directive 2006/112/EC. The fact that the company also provides loan funding to the subsidiaries is incidental and does not alter that conclusion.

HMRC appealed from the First-tier Tribunal’s decision of 8 July 2019 allowing Tower Resources PLC’s appeal against the denial and assessment of input VAT.

Tower was a holding company which funded subsidiaries and supplied them with management, logistical and technical services. The relevant costs were added to intercompany loan accounts, which were stated to be repayable on demand. Although Tower had not generally demanded repayment, the First-tier Tribunal found that there was no agreement that repayment depended on the subsidiaries’ ability to pay.

The issues were whether Tower made supplies for consideration under Article 2(1) and whether it carried on an economic activity under Article 9(1) of the EU Directive 2006/112/EC.

1. Appeal dismissed. The First-tier Tribunal was entitled to find that the intercompany loans were repayable on demand and that this reflected the economic and commercial reality of the parties’ relationship. The Upper Tribunal could not revisit that factual finding by resolving disputes concerning unrecorded oral evidence or conducting its own evaluation of all the evidence.

2. The contractual terms are the starting point for VAT analysis, but must reflect the transaction’s economic and commercial reality. The evidence that Tower chose not to demand payment while its subsidiaries needed funds did not establish a further agreement making repayment contingent. Nor could a supplier’s variable practice alone define the legal relationship for Article 2(1). The taxable character of a transaction must be assessed objectively at the chargeable event.

3. The subsidiaries’ unconditional obligation to pay Tower on demand provided the necessary reciprocal performance and direct link between the services and consideration. Actual payment was not required. Authorities concerning fees which were payable only on uncertain or contingent events did not assist HMRC because the First-tier Tribunal had rejected the alleged contingency. The Tribunal therefore did not decide whether an accounting entry adding the debt to an intercompany loan account itself amounted to payment.

4. Direct or indirect involvement by a holding company in managing subsidiaries is an economic activity where it entails taxable supplies, including management and technical services supplied for consideration. Having upheld the finding that Tower supplied such services for consideration, the First-tier Tribunal correctly concluded that Article 9(1) was satisfied.

5. Factors relevant in other economic-activity contexts, including comparison with commercial providers or whether receipts cover costs, did not displace that settled rule for holding-company management services. Tower’s concurrent provision of loan facilities was incidental to the characterisation of its services.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal was dismissed in [2021] UKUT 123 (TCC).
• First-tier Tribunal (Tax Chamber): Tower’s appeal was allowed by a decision released on 8 July 2019. The First-tier Tribunal held that Tower made supplies for consideration and carried on an economic activity.