20759
VALUE ADDED TAX – claim for input tax on novation of hire purchase agreement – novation new contract – no financial consideration- input tax disallowed- case dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
					SWAN PLANT  LIMITED	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: David Porter (Chairman)

Sitting in public in Manchester on 2 July 2008
	
Richard Chapman of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

No one appearing for the Appellant

© CROWN COPYRIGHT 2008

DECISION

1.	Swan Plant Limited (the Appellant) appeals against a decision in a letter dated 8 November 2007 from the Respondents disallowing input tax of £104,754.34 on the basis that they were entitled to that input on the novation of the hire purchase agreements entered into by Swan Plant Services Limited with John Deere Bank SA (hereafter referred to as the Bank) when taking over the obligations of Swan Plant Services Limited on 6 January 2006. The Respondents say that no consideration arose on the occasion of the novation and no input tax could therefore be claimed.
2.  Richard Chapman of counsel was instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents and provided the Tribunal with a bundle of documents since no one appeared for the Appellant this tribunal determined to proceed under rule 26(20 of the Value Added Tax Tribunal Rules 1986 (as amended)

The Facts
3.	   In the absence of the Appellant the tribunal could only rely on the documentation provided in the bundle produced by Richard Chapman and upon his submissions. The statement of case states that the Appellant carries on business renting ground care equipment to Local Authorities. On 6 January 2006 the Appellant took over the assets and staff of Swan Plant Services Limited, which had gone into administration. That company had a large number of Hire Purchase Agreements which it had entered into with the Bank. On the 26 March 2006 the Appellant entered into a Novation Agreement with the Bank, Swan Plant Services Limited were a party to the agreement, this provided that the Appellant would take over the existing agreements from Swan Plant Services Limited together with the obligations and responsibilities there under. The effect of that deed was to create a new contract. (See Chitty on Contract 29 Edition  page 1201:
“Novation. ….Novation takes place where the two contracting parties  agree that a third, who also agrees, shall stand in the relation of either of them to the other. This is a new contract  and it is therefore essential  that the consent of all the parties shall be obtained, in this necessity for consent lies the most important difference between novation and assignment…..It should, however, be noted that the effect of a novation is not to assign or transfer a right or liability, but rather to extinguish the original contract and replace it with another.”

4.	In their letter of 3 October 2007 Mr Potter, a director of the Appellant stated:
“In purchasing the Business of Swan Plant Services Limited …….The new management of Swan Plant Limited then undertook a rigorous review of the business… After a few weeks the Managing Director was removed and later, due to errors and incompetence the Finance Director was dismissed.
With the removal of the Finance Director it was clear that there were a significant number of clerical and accounting jobs which he had failed to perform, including “the mess” within the VAT control account….
Notwithstanding the delay in processing our input claim we feel the HP contracts at the transferred values have inherently included therein VAT..”
	There is a schedule with the bundle provided to the tribunal of all the contracts for HP which the Appellant believes gives rise to the reclaim of £104,748.34. It appears that the Appellant prepared 10 handwritten invoices of previous HP payments which should have been provided to Swan Plant Services Limited prior to its administration. The Appellant apparently wanted the Bank to issue invoices accordingly The schedule reveals a transfer value (as far as the Appellant is concerned) of £598,544.77 with a consequential VAT payment of £104,748.34. The copies in the bundle at pages 14 to 23 are incomplete. They follow the text of the sample invoice produced by the Bank but are in manuscript whereas the Banks’ invoices are all typed. In their letter of 7 August 2007 to the Respondents the Bank states:-
	“..This example of our ‘system printed’ documents, together with the letter of novation signed by Swan Plant Limited on 28 March 2006 (copy enclosed), are the only documents which John  Deere Bank SA have originated, and it is confirmed that the faxed information received from you today (being the hand written invoices -  chairman’s note ) has not been originated by us.”
As a consequence the invoices manually produced by the Appellant are not invoices.
The Law
4.    Value Added Tax Act 1994 
Regulation  4(1)
VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him
VAT Regulations 1995
Regulation 29(1)
Subject to paragraphs (1A) and (2)  below, and save as the Commissioners may otherwise allow or direct  either generally or specifically, a person claiming deduction of input tax  under section 25 (2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable
Regulation 29 (1A) ..not applicable…
Regulation 29 (2)  At the time of claiming  deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of –
(a)	a supply from another taxable person , hold the document which is required to be provided under regulation 13……
Regulation 13 (1)
Save as otherwise provided in these Regulations, where a registered person –
(a)	makes a supply in the United Kingdom to a taxable person ,or
(b)	makes a supply of goods or services to a person in another member state for the purpose of any business activity carried out by that person, or
(c)	receives a payment on account in respect of a supply he has made or intends to make from a person in another member state 
he shall provide such persons as are mentioned above with a VAT invoice…….
The submission
5.    Richard Chapman submitted that the Deed of Novation did not create a supply for VAT purposes. There was no consideration in relation to the novated agreements other than the obligations taken over by the Appellant. Swan Plant Services Limited would have paid VAT when entering into the agreement and would presumably have reclaimed any VAT it paid on an initial payment and the subsequent instalments thereafter. When the Appellant took over the agreements it would continue to claim the VAT on the instalments and when it eventually sold the equipment at the end of the hire purchase agreement to a third party it would add VAT to the purchase price. In the circumstances there could be no claim for the input tax as required by the Appellant. Further the invoices produced by the Appellant were not invoices with in the terms of the VAT Regulations 1995. The appeal should be dismissed. As the Appellant had not appeared at the hearing they should pay the Respondents’ costs
The Decision
6.	I dismiss this appeal. As I understand it Swan Plant Services Limited entered into various Hire Purchase Agreements. Possibly at the time of the agreements an initial down payment was paid but undoubtedly instalments were paid thereafter. If an initial payment was made then VAT would have been reclaimed at the appropriate time by Swan Plant Services Limited. They would also have reclaimed any VAT paid on the instalments. It appears that the Appellant believes that the VAT may not have been properly claimed. When the agreements were novated the Appellant took over the obligations and liabilities under the Hire Purchase Agreements. Presumably the Appellant has been reclaiming any VAT paid on the instalments as it would be entitled to do. As a result when the Appellant comes to sell the equipment it will have to add VAT to the price. There is no right to claim as input tax the sum of £104,754.34 as there was no consideration against which it could be set when the novation occurred. 
7.	No representatives for  the Appellant have attended the tribunal even though the tribunal office was previously supplied with relevant dates when the Appellant’s representatives could not attend. I therefore award costs of £750 to the Respondents
.
David S Porter
CHAIRMAN
Release Date: 6 August 2008
MAN/07/1399