In Norseman Gold Plc v Revenue and Customs [2016] UKUT 69 the Upper Tax Tribunal agreed with the finding of the First Tier Tribunal that a UK management company providing management services to overseas subsidiaries was not entitled to input tax credits because it did not make taxable supplies to those subsidiaries. The management company was found to have made supplies to its subsidiaries, but those supplies were not made “for consideration”

The decision illustrates two differences between the UK VAT regime and the GST in Australia. First, the threshold requirement for claiming input tax credits is different. Second, the requisite nexus between “supply” and “consideration” is narrower in the UK.

In the UK, an entitlement to input tax credits arises if acquisitions are made in the course of conducting “economic activity”, meaning the making of taxable supplies (supplies for consideration) or intending to make at some time in the future taxable supplies. The First Tier Tribunal found that the taxpayer had supplied management services to its subsidiaries and that what it supplied was “capable” of amounting to a taxable supply – however, what it had supplied was not in fact supplied for consideration and was therefore not a taxable supply. Any understanding (referred to by the First Tier Tribunal as a “vague intention”) between the taxpayer and its subsidiaries about payment being made for services when the subsidiaries could afford to pay was insufficient to establish that supplied would be made “for consideration”.

On appeal, the Upper Tribunal agreed with the First Tier Tribunal and found that the supplies were not made for consideration, they were made gratuitously. The Upper Tribunal noted (at [126]) that the taxpayer did intend to make supplies to its subsidiaries, but the question was whether the taxpayer intended to make supplies “for consideration”. The answer to this question was no because:

…the direct and immediate link between the supplies and intended supplies on the one hand and any payment in respect of those supplies on the other hand was absent at the time when the input tax was incurred.

The conclusion of the Upper Tribunal was helpfully summarised as follows (at [137]:

Putting the matter in the very briefest of ways, this is a case where one party (Norseman) has supplied services to closely related parties (its subsidiaries) with, at best from Norseman’s point of view, an intention on its part to charge at some unspecified time in the future for its services, but with no agreement with the subsidiaries to that effect (even to the effect that the subsidiaries would pay if an when they had the funds available to do so) and no understanding of the amount or timing of such payment. The charge/payment, if and when introduced, might or might not match or exceed recovery of the costs incurred in providing the services and might or might not include a profit element. It might even be nominal…This is an insufficient basis on which to be able to say, at any time prior or during the relevant period, that the eventual charge and payment would have the immediate and direct link with the services provided which EU law requires. If it is not possible to find the necessary link in relation to future supplies and the intended payments for those supplies, still less is it possible to find a link where there has, as yet, been no payment at all, in particular in relation to services provided during the relevant period.

Comment

The decision illustrates two differences between the UK VAT regime and the GST Act.

Entitlement to claim input tax credit

In the UK the entitlement to claim input tax credits arises where there is a direct connection between the acquisition and the making of taxable supplies (i.e., the making of supplies for consideration). In Australia, the test is one of “creditable purpose” and requires that the entity make the acquisition “in carrying on its enterprise”: s 11-15(1) (subject to the “blocking provision” in s 11-15(2) where the acquisitions relate to making supplies that would be input taxed or where the acquisitions are of a private or domestic nature).

These tests can operate quite differently. In the UK an entity must show that it is, or will be, making taxable supplies (i.e., supplies for consideration). In contrast, in Australia an entity need only show that it is making the acquisitions “in carrying on its enterprise”.  To constitute an enterprise, an entity must carry out an activity, or series of activities, done, inter alia, in the form of a business or in the form of an adventure or concern in the nature of trade: s 9-20(1). Given that the carve-out for activities undertaken without a reasonable expectation of profit or gain is limited to individuals (whether on their own or in partnership), it does not appear necessary that a corporate entity carry out these activities for profit or gain or that it actually make taxable supplies. This raises the question of whether this case would be decided differently in Australia.

Meaning of “for consideration”

The meaning of the words “supply for consideration” is narrower in the UK.The Upper Tribunal observed that the authorities established that a supply is “for consideration” where there is a direct link between the service supplied and the consideration received, although there need not be a legally binding agreement between the parties. The nexus between “supply” and “consideration” is a direct one.

In contrast, the words “supply for consideration” in s 9-5(a) of the GST Act need to be seen in light of the expansive definition of “consideration” in s 9-15. In AP Group Limited v Commissioner of Taxation [2013] FCAFC 105  (Edmonds and Jagot JJ) observed that if the definitions in s 9-15 were inserted in substitution for the defined terms where they appear in s 9-5, the result was as follows:

you make a supply for [any consideration, within the meaning given by sections 9-15 and 9-17 in connection with the supply or acquisition].

In Australia, the nexus between “supply” and “consideration” is broader than the UK.  There will be a “supply for consideration” where the supply is made “in connection with” consideration. This nexus may therefore be direct or indirect, although it would appear that a “trivial” or “remote” connection will not suffice.