Y4 Express Limited v The Commissioners for HMRC

Until 2013, the appellant company (“Y4”) was able to obtain preferential rates on postage from the Royal Mail (“RM”). When RM refused to allow Y4 to continue to use that service, Y4 sought to circumvent the problem by using RM accounts set up in the names of Mr Pat Ning Man (“Mr Man”) and Colemead Limited (“Colemead”). The issue raised in these proceedings is the extent to which Y4 is entitled to credit for input VAT in connection with payments that it made to Mr Man and Colemead.

In a decision released on 10 July 2020 (the “Decision”), the First-tier Tribunal (the “FTT”) held that Y4 was not entitled to input tax credit. The FTT also held that Y4 was not entitled to credit for input tax in respect of goods and services supplied to it by the courier company Yodel and that Y4 was liable to a penalty in respect of inaccuracies in its VAT returns. With the permission of the FTT, Y4 appeals against some, but not all, of the FTT’s determinations.

In this section, references to numbers in square brackets are to paragraphs of the Decision unless we say otherwise.

Y4 was incorporated on 27 May 2010. Its business at material times included arranging for the importation of goods from companies based in China and Hong Kong. That business involved it collecting the goods from the airport, storing them if required and arranging delivery to the final customer ([7]).

The FTT made no express finding that Y4 was registered for VAT at material times but it was common ground that Y4 was so registered.

Y4’s business required it to use the services of delivery companies including RM. Until 2013, Y4 used RM’s Printed Postage Impressions (“PPI”) service. The PPI scheme provided Y4 with access to preferential rates and required it to make daily declarations by means of an online business account (“OBA”) of the items it was sending. In June 2013, RM became concerned that Y4’s declarations were not accurate and eventually suspended Y4’s access to the PPI scheme. Y4 agreed to pay RM £600,000 ([13]). The FTT did not explain precisely what that payment was for, but it can be inferred that it was to compromise some claim that RM had against Y4 for alleged under-declarations of postage due to RM.

Mr Samuel Yeung was, at material times, the company secretary of Y4. He had a personal friendship with both Mr Man ([14]) and Mr Fung, the sole director and shareholder of Colemead ([93]). Mr Samuel Yeung devised a plan to use his friendship with both men to get around the problems Y4 was having with RM.

The outcome of Mr Samuel Yeung’s plan, so far as involving Mr Man, was as follows:

Mr Samuel Yeung asked Mr Man to open an OBA with RM in Mr Man’s name, but on the understanding that Mr Man would permit Y4 to use this account. Mr Samuel Yeung said that the reason for the request was so that Y4’s customers would not know that Y4 was itself obtaining goods from another supplier which could have become apparent from statements that Y4 would obtain from RM if Y4 operated an account in its own name. Mr Samuel Yeung did not mention the difficulties that Y4 was having with its own PPI account with RM ([14] and [113]).

Mr Man agreed to the request which he regarded as a “favour to a friend rather than as a business venture” ([113]). He opened the OBA with RM in 2012 although this did not become active until July 2013 ([15]). He provided Mr Samuel Yeung with details of his OBA that enabled Y4 to access the account and use RM for deliveries ([16]).

In practice, Y4 made payments to Mr Man at least equal to sums that RM charged Mr Man in respect of postage charged to his OBA ([21]).

The FTT appears to have found that Y4 made some other payments to Mr Man that were additional to the sums referred to in (3) above ([121] and [122]). Parts of these passages of the Decision read as recitations of evidence. However, the FTT’s statement at [122] that the “documentation provided, however, points to Mr Man having received a payment from Y4 on more than one or two occasions” reads as a finding of fact.

Y4 prepared invoices, addressed to itself, recording sums payable to Mr Man ([24]). The FTT recorded Mr Man’s evidence that he could not remember seeing these invoices at the time and that he was not asked to approve them but did not say expressly whether it accepted that evidence or not ([114]).

Mr Man played no part in dealing with RM and arranging for Y4’s goods to be delivered using RM’s network. Y4 did all of that, using the access to Mr Man’s PPI account that he had provided.

In paragraph [8] above, we have set out the FTT’s findings as to what actually happened, including some payments that were in practice made by Y4 to Mr Man. The FTT did not set out all in one place findings as to the precise character of any arrangement under which these payments were made. There is a finding, at [14], that Mr Man regarded the arrangement as involving a “favour to a friend”. There is a finding at [23] that there was no written contract in place between Y4 and Mr Man and instead there was a “verbal agreement”. Read in isolation, that might suggest that the FTT regarded the arrangement as contractual, albeit not in writing. However, the FTT could not have been concluding that there was any contract in place given its finding at [120]:

If this is a finding that there was no arrangement at all for Y4 to pay Mr Man anything, it might be thought puzzling since the FTT referred to payments being made in practice. The FTT referred, at [116] of the Decision, to invoices that Mr Man had sent for material sums of “postage fees”. It recorded Mr Man’s evidence, quoted at [117] of the Decision, that he did not make any profit on the arrangement because “…purchase invoices I received from the Royal Mail were matched in value by the sales invoices raised by Y4”. At [21] of the Decision, the FTT made a finding that Y4 transferred sums to Mr Man’s account, first by way of single transfers, and later by direct debit.

However, the finding becomes less puzzling once it is appreciated that in putting its case to the FTT, Y4 was not inviting the FTT to attach any significance to the presence or otherwise of any arrangement for Mr Man to receive what we will term “make whole” payments sufficient to enable Mr Man to meet RM’s postage costs. Instead Y4 made its case on the basis that payments (described as “income” or “commission”) that Y4 made in addition to those “make whole” payments constituted consideration for taxable supplies and demonstrated that Mr Man was carrying out an economic activity. Accordingly, we read the quote that we have set out in paragraph [9] above as a rejection of Y4’s case that there was an arrangement for it to pay “income” or “commission” to Mr Man, but as making no finding as to whether there was a more limited arrangement for Y4 to pay Mr Man “make whole” amounts and, if so, the nature of that arrangement, because it had not been suggested to the FTT that there was any significance to the presence or absence of such an arrangement.

The FTT made no finding as to whether Mr Man was, or was not, registered for VAT at material times. There was some evidence, set out in Mr Man’s witness statement, and a witness statement from Officer Burns, that Mr Man successfully applied to be registered for VAT from July 2013. However, on 28 May 2015, Mr Man applied to be deregistered and for that deregistration to be backdated to July 2013. The FTT did find, however, that Mr Man never submitted any VAT returns ([26]).

The FTT referred, at [116] and [121], to invoices that Y4 prepared and delivered to itself, ostensibly on Mr Man’s behalf. It made no finding as to whether these documents satisfied the formal requirements necessary to be valid VAT invoices.

Colemead was the personal company of Mr Fung, who was, as we have noted, a personal friend of Mr Samuel Yeung. It was incorporated for the purpose of giving effect to the arrangement described below.

The outcome of Mr Samuel Yeung’s plan, so far as involving Colemead, was very similar to that of the plan involving Mr Man’s OBA. In particular:

Colemead was established with Mr Fung as director. Colemead opened an OBA with RM which was active from April 2014 until December 2016. Mr Fung provided Y4 with access to Colemead’s account so that Y4 could use that account as its own ([29] to [32]).

Y4 paid Colemead by direct debit sums equal to those that RM charged Colemead in relation to the OBA ([33]).

Y4 prepared invoices that were ostensibly then issued by Colemead to Y4. Mr Fung did not approve these invoices on behalf of Colemead ([37]).

Colemead played no active part in the arrangement and was, as the FTT put it at [95], “totally hands off”. All that Mr Fung (and by extension Colemead) did was to open the OBA and provide the log-in details to Y4.

Y4 arranged for Man & Co accountants to deal with Colemead’s VAT returns. Such VAT returns were prepared and Mr Fung signed them on behalf of Colemead without checking their accuracy.

The FTT did not set out in one place its findings as to the precise nature of any arrangement between Y4 and Colemead, echoing the narrative approach it followed when making findings as to the arrangement with Mr Man. At [38], the FTT described the arrangement between Colemead and Y4 as “verbal, informal and hands-off with no specific terms attached to it”. That suggests, although the FTT did not make the suggestion explicit, that it did not consider that there was any contract at all. The FTT also appears to have found that there was no arrangement or understanding, and by extension no contract, entitling Colemead to receive payments of “commission” or “income” from Y4 at [103] and [105] of the Decision saying:

As we have noted in paragraph [11] above, Y4 was not inviting the FTT to conclude that there was any significance to the presence or absence of an arrangement to make “make whole” payments. Rather, it relied entirely on the averred arrangement to pay “commission” or “income” as constituting the consideration that Y4 paid for Colemead’s taxable supplies Therefore, as with Mr Man, the FTT appears to have rejected Y4’s case that there was an arrangement to pay income or commission without making any finding as to whether there was an arrangement to pay “make whole” amounts, because it had not been suggested to the FTT that any such arrangement would be significant.

The FTT made no findings as to whether Colemead was registered for VAT at material times although its finding that Colemead submitted VAT returns suggested that it was proceeding on the basis that Colemead was VAT registered. Evidence that Officer Burns gave to the FTT indicated that Colemead had two VAT registration numbers with one of those being cancelled with retrospective effect.

The FTT made no findings as to the nature of invoices that Y4 delivered to itself, ostensibly on Colemead’s behalf, and so did not say whether it considered those invoices to satisfy the formal requirements necessary to be VAT invoices.

At [49], the FTT recorded the issues before it. The parties agree that it correctly described the issues for determination as:

At [51] to [65], the FTT set out extracts from provisions of the Principal VAT Directive (“PVD”) and UK primary and secondary legislation.

At [66] to [72], the FTT summarised HMRC’s submissions and both parties agree that the FTT’s summary was accurate. HMRC were arguing that neither Mr Man nor Colemead had made any taxable supplies to Y4 because: (1) there was no direct link between the consideration that they received from Y4 and the services they provided; and (2) neither Mr Man nor Colemead was carrying on an economic activity as demonstrated by the absence of “an intention to obtain income on a continuing basis” ([72]).

At [73], the FTT correctly summarised Y4’s “primary” case as being that both Mr Man and Colemead had, contrary to HMRC’s analysis, made taxable supplies to it.

The FTT’s reference to Y4’s “primary” case suggests that Y4 also had a “secondary” case. Such a case was set out in Y4’s skeleton argument: it was argued that, if Colemead and Mr Man had not made taxable supplies to Y4, considerations of “economic reality” meant that RM had made taxable supplies directly to Y4. Y4 relied on the judgment of the Supreme Court in HMRC v Airtours Holiday Transport Limited [2016] STC 1509. In view of Y4’s argument that the FTT failed adequately to address its secondary argument, we set out in full how the FTT described the argument based on Airtours:

It will be seen that paragraph [75] of the Decision set out in the extract above summarises the facts of Airtours but does not state the conclusion Y4 sought to derive, namely that applying the principle stated in Airtours, RM could be regarded as supplying services directly to Y4. The extract set out in paragraph [76] could not be referring to Y4’s argument based on Airtours since Y4 was not arguing that there was any “verbal agreement” between itself and RM. Indeed the very reason for Y4 involving Mr Man and Colemead was that RM was no longer prepared to enter into any agreement with Y4.

The FTT then considered various authorities of the Court of Justice of the European Union (“CJEU”, which expression we will use to embrace the predecessor European Court of Justice) and the UK courts on the meanings of an “economic activity” (for the purposes of Article 9 of the PVD) and the concept of a supply of services for a consideration within the meaning of Article 2(1)(c) of the PVD.

The FTT did not state expressly what it considered to be the questions it needed to determine in order to decide whether Y4 was entitled to input tax credit, but the structure of its later reasoning demonstrates that it considered the relevant questions to be (i) whether Mr Man and Colemead were supplying their services for a consideration and (ii) whether Mr Man and Colemead were carrying on an economic activity. The parties were agreed that these were the two relevant questions.

On the question of “consideration”, the FTT quoted passages from the judgment of the CJEU in Gemeente Borsele (Case C-520/14) which indicated that the question was whether there was a legal relationship between the provider of the service pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied by the recipient. At [89], the FTT included a quote, also from Borsele, to the effect that it is not relevant, when determining whether there is a transaction effected for consideration, to consider whether the supplier charges more than cost price. Rather, the question is whether there is a “direct link between the … provision of services and the consideration actually received by the taxable person.”

At [91], the FTT considered the judgment of the Court of Appeal in Wakefield College v HMRC [2018] STC 1170 and quoted extracts from that judgment that gave guidance on the meaning of the terms “consideration” and “economic activity” for VAT purposes. It was common ground that the extracts that the FTT quoted were correct statements of the law.

At [108], the FTT stated its conclusion that Colemead was not supplying any services for a consideration. That conclusion was evidently based on the FTT’s determinations in [106] and [107] as to the absence of a connection between the payments that Colemead received and its provision of the account with RM. In this regard, the FTT said at [107] and [108]:

At [109], the FTT concluded that Colemead was not carrying out any “economic activity” as follows:

Therefore, in essence the FTT concluded that Y4 was not entitled to credit for input tax on services supplied by Colemead because: (1) Colemead was not supplying services for a consideration; and (2) Colemead was not carrying out any “economic activity”. At [123] to [125], the FTT expressed similar conclusions in relation to Mr Man.

After setting out its conclusions relating to Mr Man, the FTT said this, in a passage that we will quote in its entirety because of its central relevance to Y4’s second ground of appeal:

Y4 applied to the FTT for permission to appeal on the grounds that the FTT erred when it:

found that neither Mr Man nor Colemead made taxable supplies on which Y4 could claim input tax (“Ground 1”); and

did not consider Y4’s alternative argument that it had received the supplies directly from RM (“Ground 2”).

In a short decision issued on 3 December 2020, the FTT granted permission to appeal on both grounds.

Little difficulty arises as regards the scope of Ground 2, which is clear from Y4’s application. However, the summary of Ground 1 alone which we have set out in paragraph [34] above does not itself explain the full scope of that ground. While it is stated that the FTT erred in reaching a particular conclusion, the summary does not itself say precisely how it erred. Conceptually, the FTT could have erred by, for example, (i) basing its conclusions on flawed findings of facts or (ii) applying the law wrongly to the facts that it had (appropriately) found.

Y4’s application to the FTT for permission read as a whole, however, made it clear that Y4 is not seeking to challenge the FTT’s purely factual findings and rather it was challenging the legal conclusion that the FTT drew from the factual findings that it made. That was demonstrated by paragraph 7 of Y4’s application to the FTT for permission to appeal which focused on four factual matters that the FTT had accepted and asserted that, having made those factual findings, the FTT should have found that Mr Man and Colemead had made taxable supplies to Y4 on which Y4 was entitled to recover input tax.

Moreover, Y4’s application to the FTT on Ground 1 contained none of the ingredients that would be expected if it was challenging the FTT’s factual findings. There was no reference to the underlying evidence, no assertion, as regards Ground 1 that irrelevant considerations had been taken into account or relevant considerations ignored, no criticism of the reasoning underpinning the FTT’s factual findings and no assertion that any particular factual finding was against the weight of the evidence. The matter was made abundantly clear when, in answer to questions from the Tribunal, Mr Brown confirmed on behalf of Y4 that Ground 1 involved a challenge to the way the FTT applied the law to the facts.

Before addressing the detail of Y4’s appeal, we consider it is helpful to set out in one place the requirements that Y4 needed to meet in order to establish an entitlement to input tax credit in relation to services that it received. The parties made their submissions on the law by reference to the PVD and we will therefore similarly focus on the PVD rather than provisions of domestic UK law.

The starting point is Article 168 of the PVD which provides, so far as relevant:

Therefore, Y4 is entitled to credit by operation of Article 168 if it can establish that:

Y4 is a taxable person.

Mr Man and Colemead were taxable persons.

Mr Man and Colemead made supplies to Y4 on which VAT was due or paid.

Y4 used the supplies that Mr Man and Colemead made for the purposes of its taxed transactions.

No difficulty arises in this case in relation to requirements (1) and (4) as it was common ground that they were met. Therefore, the key issues before the FTT were (i) whether Mr Man and Colemead were taxable persons and (ii) whether they were making taxable supplies to Y4, that is to say supplies on which VAT was due or paid.

Article 9 of the PVD defines a taxable person as follows:

Therefore, Article 9 makes relevant the question whether Mr Man or Colemead were carrying on an “economic activity” since, if they were not, they would not be “taxable persons”. We pause briefly to note that domestic UK law provides for a different definition of taxable person which provides, by s3 of the Value Added Tax Act 1994 (“VATA”), for a person to be a taxable person while registered or required to be registered. However, neither party invited the FTT to proceed on the basis that the status of Mr Man or Colemead as “taxable persons” was determined by the fact of their VAT registration, and indeed the FTT made no findings as to their VAT registration or the effect of what was described as “retrospective” cancellation of that registration. Both parties proceeded before the FTT on the basis that it was necessary to determine whether Mr Man or Colemead were carrying on an “economic activity” as defined in Article 9 of the PVD. They re-iterated that common understanding in the hearing before us. We will, therefore, determine this appeal on the basis of the parties’ agreed approach.

That leaves the question whether Mr Man or Colemead were making taxable supplies. The answer to that is to be found by applying Article 2 of the PVD which provides, so far as material, as follows:

Therefore, given the agreed approach of the parties, to determine the issues in dispute, the FTT needed to decide (1) whether Mr Man or Colemead were making supplies of services for a consideration and (2) whether they were carrying on an economic activity.

In Case C-16/93Tolsma [1994] STC 509, the CJEU held, in paragraph 14, that a supply is for consideration only if:

That statement, therefore, envisages that the requisite reciprocal performance must take place “pursuant to” a “legal relationship” between provider and recipient. The CJEU gave guidance on the type of “legal relationship” required in Case C-498/99Town and County Factors Ltd [2002] STC 1263. That judgment was given in the context of a weekly “Spot the Ball” competition published in a newspaper under which competitors had to pay a weekly fee but the rules of the competition provided that the competition organiser had no obligation to provide a prize beyond an obligation “binding in honour only”. At [37] to [39] the CJEU said:

At [40] and [41] of its judgment, the CJEU contrasted the situation before it with that considered in Tolsma (involving the question whether donations received by a street musician from passers-by were “consideration” for a taxable supply) saying:

Therefore, we consider that the correct approach to the question of whether Mr Man or Colemead received consideration for a taxable supply involves asking:

whether there was reciprocal performance with the sums paid to Mr Man and Colemead constituting the “value actually given” in return for their provision of services to Y4; and

whether that reciprocal performance took place under some agreement, or framework of agreements, even if not contractually binding, that establishes the requisite link between supply and consideration.

The parties were agreed that the FTT had stated the law on the nature of an “economic activity” correctly in the extracts from the Court of Appeal’s judgment in Wakefield College set out at [91] of the Decision. We will therefore apply the principles as set out in those extracts which can be summarised as follows:

The supply of goods or services for a consideration is a necessary condition for the carrying out of an economic activity, but is not sufficient. An economic activity involves something more than effecting supplies for a consideration, namely the purpose (determined objectively) of obtaining income from those supplies on a continuing basis.

The presence or absence of an economic activity will involve a wide-ranging enquiry. That enquiry is objective. Subjective considerations, such as whether the supplier has an intention to make a profit, are irrelevant.

The existence of an economic activity does not depend on whether there is a “sufficiently direct link” between services provided and consideration received. It is relevant to consider the link or otherwise between services and consideration as part of the wide-ranging enquiry to be undertaken, but there is no separate test in that respect.