Case: VAT dispute required no case management hearing

First-tier Tribunal.

Judge Greg Sinfield.

Decision released on 25 January 2019.

Value added tax – Application by HMRC for issue of whether “open market value” in Directive 2006/112 (the Principal VAT Directive), art. 72 and Value Added Tax Act 1994 (VATA 1994), s. 19 is synonymous with “arm’s length price” for transfer pricing purposes to be determined as preliminary issue –Wrottesley v R & C Commrs [2015] BTC 537 considered – HMRC’s application refused.

Jupiter Asset Management Group Ltd [2019] TC 06942

Summary

HMRC argued that “open market value”, in art. 72 and s. 19, is synonymous with “arm’s length price” for transfer pricing purposes. If so, the OECD Transfer Pricing Guidelines could perhaps be used to determine “open market value” for VAT purposes. HMRC argued that this should be determined to resolve the substantive dispute. Thus, HMRC applied to have this determined as a preliminary matter, as this would be fair, just and convenient.The Appellant (JAMG), as representative member of the JAMG VAT Group, accounted for output tax on the supplies of management services by members of the group. The management services were priced at an arm’s-length value, in accordance with transfer pricing principles.

HMRC decided that the JAMG VAT Group was not entitled to recover as input tax the VAT incurred by it in relation to the management services. HMRC assessed JAMG for the input tax. In the alternative, HMRC argued that JAMG had under-valued the management services supplied to the JIMG VAT Group. Thus, on 23 May 2014, HMRC issued a Notice of Direction of Open Market Value (OMV Direction) under VATA 1994, Sch. 6, para. 1 to JAMG. The effect of the OMV Direction was that, for VAT purposes, the value of supplies of management services by the JAMG VAT Group was the open market value of those supplies. Following the issue of the OMV Direction, HMRC issued assessments for under-declared output tax.

JAMG appealed against both the input tax assessments and the output tax assessments.After the assessments were issued, HMRC changed their view and the output tax assessments became HMRC’s “preferred” assessments. The input tax assessments became the “alternative” assessments.

The dispute concerned the following:

(1)What is the open market value of the supplies of management services by the JAMG VAT Group on which JAMG is liable, as representative member, to account for VAT?

(2)To what extent is JAMG entitled to recover, as input tax, the VAT incurred by it?

Wrottesley concerned deciding whether to order a hearing of a preliminary issue. The reason for this omission became apparent at the hearing where HMRC stated that they were not seeking a preliminary issue hearing, but a case management hearing. This surprised JAMG’s representative, who stated that this was not the application that had been made.

At the hearing, HMRC correctly accepted that the application for a preliminary issue hearing must fail, because it did not meet the Wrottesley criteria. For example, a decision on the “open market value” issue would not be decisive, because HMRC could still contest the appeal even if JAMG’s view were upheld and whatever the FTT decided.

HMRC’s application could have been better worded to make clear that it was not an application for a preliminary hearing, but it was an application for a case management hearing.

Effectively, HMRC applied for a preliminary hearing, because they hoped to exclude the evidence from JAMG relating to the OECD guidelines from the substantive appeal. The purpose of the application and any preliminary hearing was to determine the evidence that would be needed for the hearing of the substantive appeal. HMRC’s application was based on their understanding that JAMG sought to argue that the concept of “open market value” equated with the OECD/transfer pricing concept of an “arm’s length price”.

JAMG argued that the OECD Transfer Pricing Guidelines are useful evidence in determining an open market value.The FTT held that a preliminary hearing to determine the issue raised by HMRC would not cut the overall time required to dispose of this appeal. It might result in a shorter subsequent hearing of the remaining issues, but that is not the same thing.

The FTT could see the benefit of having case management directions that provide for the parties to agree (if possible) and set out the issues in the appeal. That is often done in the more complicated appeals, but usually at a later stage. In this appeal, the FTT decided that there would be a real advantage to both parties in having the issues agreed at an early stage, so that they both know the case that they had to meet and consider what evidence may be required to support it in advance of the hearing of the appeal. Thus, the FTT asked the parties to agree directions for the provision of a list of agreed issues.Thus, HMRC’s application for directions providing for the hearing of a preliminary issue was refused.

Comment

HMRC rarely accept at a hearing that their application must fail and could have been better worded. The FTT tries to meet the overriding objective of dealing with cases justly and fairly, but it failed to see the need to exclude the evidence provided by JAMG.

For commentary on the FTT’s case management powers, see In-Depth at ¶61-490.

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