Banbury Visionplus Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Etherton |
| Judgment Date | 09 May 2006 |
| Neutral Citation | [2006] EWHC 1024 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/2005/APP/0657 |
| Date | 09 May 2006 |
[2006] EWHC 1024 (Ch)
Mr Justice Etherton
Case No: CH/2005/APP/0657
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Jonathan Peacock Q.C. (instructed by Forbes Hall) for the Appellant
Mr Owain Thomas (instructed by HM Revenue & Customs) for the Respondents
Hearing dates: 5, 6, 10 April 2006
Introduction
These are appeals from the VAT and Duties Tribunal (Dr A N Brice and Mr P D Davda FCA) ("the Tribunal"). The Tribunal dismissed appeals by the Appellant taxpayers from a decision of the Respondents, HM Revenue & Customs, formerly the Commissioners of Customs and Excise ("the Commissioners"), under Regulation 102 of the Value Added Tax Regulations 1995 SI 1995 No. 2518 ("the Regulations") to terminate, in the case of each Appellant, the use of a partial exemption special method ("a special method") which had previously been approved in respect of that Appellant by the Commissioners under Regulation 102(1) (together "the PESM"), and so causing, in place of the PESM, the application of the partial exemption standard method under Regulation 101 ("the standard method"). The Tribunal's Decision ("the Decision") was first released to the parties on 26 July 2005. A subsequent version, in which commercially sensitive material was removed, was released on 26 October 2005.
The Appellant taxpayers, namely Banbury Visionplus Ltd ("Banbury"), Bletchley Specsavers Ltd ("Bletchley"), Eastbourne Visionplus Ltd ("Eastbourne") and Litchfield Visionplus Ltd ("Litchfield") are all companies in the Specsavers Optical Group Ltd group of companies ("the SOG"). The SOG operates a well known chain of high street opticians stores. At the time of the Decision there were some 460 stores in the SOG. There are now approximately 500 stores. Each store is run by a different retail company, which is separately registered for the purposes of Value Added Tax ("VAT"). There is no group registration.
The Commissioners' decision to terminate was notified to each retail company within the SOG group by letters dated 2 January 2004. Each of the companies appealed from that decision. The appeals of the Appellants have been treated as lead cases.
The Background
The SOG
The main trading activity of the SOG is the sale and dispensing of prescription spectacles and contact lenses.
The stores in the SOG are run under either a "dual" corporate structure or a "single" corporate structure.
Most stores have a dual structure. In those cases the store is operated by a retail company, which is a subsidiary of a wholesale company. The wholesale company purchases spectacle frames, contact lenses, solutions and accessories from Specsavers Optical Group Ltd ("Group") and sells them at the retail price to the retail company, which, in turn, sells them to customers with the associated dispensing services. In a dual structure most invoices are submitted for the account of the wholesale company, except for staff and professional costs which are invoiced to the retail company. In particular, the wholesale company pays the shop rent and for shop-refitting, and purchases or leases any equipment that is required.
In the dual structure both the wholesale company and the retail company are separately registered for VAT. The wholesale company is fully taxable for VAT on its supplies, and so does not require a partial exemption method and was not subject to the PESM.
In the case of a single structure the store is operated by the retail company alone. In those cases the retail company purchases optical goods from Group at a price which enables the retail company to make a profit when it sells to customers with the associated dispensing services.
Two of the Appellants, Banbury and Litchfield, are retail companies in a dual structure. The other two Appellants, Bletchley and Eastbourne, operate single structure stores.
Of the total business of the retail companies in the SOG about 75% comprises the supply of dispensed spectacles, 10% comprises the supply of dispensed contact lenses, 10% comprises sight tests, and 5% comprises other supplies (including optical goods).
When an optician supplies dispensed spectacles or contact lenses to a customer two supplies are made for VAT purposes. One is a supply of the optical goods and the other is a supply of the dispensing services. The supply of the optical goods is taxable, and the supply of the dispensing services is exempt under Schedule 9 Group 7 Item 1 Note (2) of the Value Added Tax Act 1994 ("the 1994 Act"). The Association of British Dispensing Opticians has stated that the purpose of the dispensing function is to translate an optical prescription into an order for a pair of spectacles, or other optical appliance, appropriate to the individual patient's needs. It is possible for an optician to make a taxable supply alone (for example, new spectacle frames for existing lenses) or an exempt supply alone (for example, a sight test), but most supplies in the SOG are of dispensed spectacles or contact lenses which consist of both a taxable and an exempt supply.
When both a taxable and an exempt supply are made to a customer for a single price, the price paid by the customer has to be allocated, for the purposes of calculating output VAT, in part to the taxable supply of the goods and in part to the exempt supply of the dispensing services. The SOG has agreed with the Commissioners an apportionment calculation, for this purpose. Under the agreed method, commonly referred to as the "full cost apportionment", 33% of a supply of dispensed spectacles is taxable and 67% is exempt; in the case of contact lenses, 43% is taxable and 57% is exempt.
Similarly, in relation to any input VAT that cannot be directly attributed exclusively to taxable or exempt supplies, it is necessary to establish the proportion of input tax which is recoverable. It is the method for establishing that proportion, the "residual" input tax, which is the subject of these appeals. More precisely, the residual input tax in issue on these appeals is the VAT on the following supplies made to all the Appellants: some rent (some rent is exempt), building repairs, rates, water charges, property management, security, cleaning, insurance, light, heat, telephone, maintenance and repair of equipment, taxable staff expenses, post and stationery, software licence fees, professional fees, and advertising.
The legislative framework
Article 17 of the Sixth Directive (77/388/EEC) contains provisions as to the origin and scope of the right to deduct input tax. Article 17.2 provides that, in so far as goods and services are used for the purposes of his taxable transactions, the taxable person is entitled to deduct, from the tax which he is liable to pay, VAT due or paid in respect of goods or services supplied to him by another taxable person. Article 17.5 provides that, where goods or services are used by a taxable person both for transactions mentioned in Article 17.2 (taxable supplies) and for transactions in respect of which input tax is not deductible (exempt supplies), only such proportion of the tax shall be deductible as is attributable to the taxable supplies. It further provides that the proportion shall be determined in accordance with Article 19.
Article 19.1 provides that the deductible proportion shall be made up of a fraction, having as its numerator the total amount of turnover each year attributable to transactions in respect of which tax is deductible under Article 17.2 and 17.3 (taxable supplies), and having as its denominator the total amount of turnover each year attributable to transactions included in the numerator and to transactions in respect of which tax is not deductible (taxable and exempt supplies). In effect, output values are used as "proxy" for attributing input tax to (respectively) taxable and exempt supplies in the case of transactions comprising both types of supply.
Article 17.5 also provides, however, that "Member States may…(c) authorise or compel the taxable person to make the deduction on the basis of use of all or part of goods or services", that is to say by reference to actual use rather than by reference to the proxy of values of taxable and exempt supplies of the taxpayer.
The national legislation gives effect to those provisions in the following way.
Taxable persons making taxable supplies are required to charge and account for output tax: 1994 Act ss 1–4. When accounting for output tax, taxable persons are permitted, in certain circumstances, to deduct input tax: 1994 Act ss. 24–26. Section 24 defines input tax as tax on the supply to a taxable person of goods or services used for the purpose of a business carried on by him. Section 25(2) provides that a taxable person is entitled at the end of each accounting period to credit for so much of his input tax as is allowable under section 26, and to deduct that amount from any output tax that is due from him.
Section 26 of the 1994 Act provides the statutory framework for determining the deductible input tax. It provides, so far as relevant to these appeals, as follows:
"26. Input tax allowable under section 25
(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.
(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business-
(a) taxable supplies;
….
(3) The Commissioners shall make...
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