BUPA Purchasing Ltd; Essex Street Investments Ltd;Bemerton Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 September 2002 |
| Date | 26 September 2002 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
The following cases were referred to in the decision:
Associated Provincial Picture Houses Ltd v Wednesbury CorpELR[1948] 1 KB 223
BLP Group plc v C & E Commrs VAT(Case C-4/94) [1995] BVC 159C & E Commrs v Faith Construction Ltd VAT(1989) 4 BVC 111
C & E Commrs v Midland Bank plc VAT(Case C-98/98) [2000] BVC 229
C & E Commrs v Robert Gordon's CollegeVAT[1996] BVC 27
C & E Commrs v Sooner Foods Ltd VAT(1983) 1 BVC 535
C & E Commrs v Thorn Materials Supply Ltd VAT[1998] BVC 270
EC Commission v France VAT(Case 50/87) (1990) 5 BVC 205
Harnas & Helm v Staatssecretaris van Financiën VAT(Case C-80/95) [1997] BVC 358
Intercommunaale voor Zeewaterontzilting (INZO) v Belgian StateVAT(Case C-110/94) [1996] BVC 326
JP Morgan Trading and Finance VATNo. 15,373; [1998] BVC 2147
Lennartz v Finanzamt München III VAT(Case C-97/90) [1993] BVC 202
Rahman (t/a Khayam Restaurant) v C & E CommrsVAT[1998] BVC 323
Rompelman v Minister van Financiën VAT(Case 268/83) (1985) 2 BVC 200,157
Van Boeckel v C & E Commrs VAT(1980) 1 BVC 378
Westmoreland Investments Ltd v MacNiven TAX[2001] BTC 44
Input tax - Group-exit scheme - Prepayments within VAT group for services to be supplied - Departure from group - Minimal payments made for services as supplied - Substantial input tax incurred - Whether principle of neutrality between right to deduct VAT and liability to VAT - Whether principle violated if input tax claims allowed in full - Assessments - Whether original assessments made to best judgment - Whether power to amend assessments from overdeclarations of input tax to assessments for underdeclarations of output tax - Whether amended assessments to be increased - Directive 77/388, the sixth VAT directive, art. 2, 4(1), 4(4), 10, 17 and 19; Value Added Tax Act 1983, s. 1, 4, 5, 14, 15 and 29; Value Added Tax Act 1994, s. 24(5), 29, 73(1), (2), (9) and 84(5); Value Added Tax (General) Regulations 1985 (SI 1985/886), reg. 30.
The principal issue was whether each of the three appellants were entitled to recover input tax arising under group-exit schemes. This turns on the proper treatment of a group-exit scheme that relates to continuous supplies. Other issues in relation to the appeal by BUPA Purchasing Ltd (BPL) included: whether assessments were validly amended in time to reflect, in part, underdeclarations of output tax rather than overdeclarations of input tax; whether the tribunal had power to increase the assessments; and whether the assessments had been issued to best judgment.
British United Provident Association Ltd (BUPA) is a company limited by guarantee. Its principal activities, and those of its subsidiaries, are the provision of private medical insurance, the operation of private hospitals and care homes and the provision of primary care services. The appellants were subsidiaries of BUPA and, while members of that company's VAT group, received substantial prepayments under the terms of various agreements. After leaving the BUPA VAT group, the appellants each incurred substantial input tax on supplies made to them for the performance of their respective obligations under the agreements.
BPL entered in to two agreements, one with BUPA and one with BUPA Hospitals Ltd (BHL). The agreements were for the supply of goods and services by BPL and for the prepayment of £30m to BPL by each company. The primary purpose of the arrangements, in the opinion of the tribunal, was for BPL to receive the prepayments and then leave the VAT group with a view to gaining the VAT benefit of full input tax deduction in respect of future expenditure where, because of the exempt nature of the VAT group's principal supplies, input tax deduction would not otherwise be available. Essex Street Investments Ltd (Essex) was selected as the vehicle through which new office space would be acquired for BUPA in the Manchester area. A principal reason for choosing Essex was that it was planned that it would be able to reclaim VAT paid on fitting out the new office. Once again, in the view of the tribunal, the primary purpose of the structure put into place, with Essex receiving a substantial prepayment of rent and subsequently leaving the BUPA VAT group, was to achieve deduction of input tax that would be unavailable without a balancing output tax charge. The third appellant, Bemerton Ltd, entered into four separate agreements with other members of the BUPA VAT group for the provision to those companies of various supplies of goods and services. Once again, prepayments were made followed by the departure of Bemerton Ltd from the BUPA VAT group and again, in the tribunal's opinion, the main purpose of the arrangements was to gain the benefit of full input tax deduction where no such entitlement otherwise existed.
The appellant submitted that a company leaving a partially exempt VAT group and thereafter making only taxable supplies qualified for full input tax deduction. It had a different fiscal identity before and after leaving the group. All three of the appellants in this case made taxable supplies after leaving the BUPA VAT group and were, according to the appellants, entitled to reclaim the VAT incurred. By blocking input tax claims by reference to what happened when the appellants were group members, the commissioners were effectively requiring a newly registered company to consider the tax affairs of another legal entity and determine its entitlement to deduct input tax on that basis. In the appellants' view, if the commissioners were entitled to issue assessments, then the anti-avoidance legislation introduced after the events and now in Sch. 9A of the Value Added Tax Act 1994, would have been unnecessary.
The commissioners argued that the schemes operated by the appellants were typical group-exit schemes. They submitted that such schemes defeat a basic purpose of the VAT system which is to separate exempt supplies from taxable supplies. Group-exit schemes distort competition and have no basis in Community or domestic law. Article 17(2) of the sixth directive provides an entitlement to deduction of VAT paid in respect of goods and services in so far as those goods and services are used for the purposes of taxable transactions. Here, according to the commissioners, there was a claim for full deduction of input tax where only a small percentage of the value of outputs was taxed. In the view of the commissioners, the goods and services acquired by the appellants were not acquired for the purposes of their businesses in the sense of being used for taxable transactions. Instead, the goods and services were used for the purpose of non-supplies and were not, therefore, used for the purpose of any business.
Held, dismissing the companies' appeals:
1. Applying the reasoning of Lord Nolan in C & E Commrs v Thorn Materials Supply Ltd [1998] BVC 270, the most recent House of Lords judgment relating to a group-exit scheme, it was clear that the prepayment made to the appellants must be disregarded for VAT purposes. Therefore, no taxable supply was generated at the time of prepayment.
2. Article 17(2) purposively permitted a restriction of input tax credit allowed in a group-exit scheme to a portion that reflects that small fraction of the full, acknowledged value of the services supplied that is subject to output tax. Without such restriction, the principle of neutrality would be significantly violated.
3. There was no merit in the appellants' suggestion that if the tribunal found for the commissioners, the anti-avoidance legislation introduced by the Finance Act 1996 must have been unnecessary. The tax appeal system was not designed to reach a speedy conclusion. It was very understandable that the commissioners considered they had a need to find a faster conclusion through amending or clarifying legislation.
4. The assessments were made to the best judgment of the commissioners. Treatment of VAT assessed by the commissioners as overdeclarations of input tax on services rather than underdeclarations of output tax on goods was an error on the part of the commissioners, but did not make the assessments "wholly unreasonable" or "unreasonable" in the manner established in the cases of Rahman and Wednesbury.
5. The monthly assessments were inaccurate in failing to recognise that some of the supplies made out of group consisted of the delivery of goods. The judgment in Thorn was clear authority that in the case of a group-exit scheme the delivery of supplies of goods out of group gives rise to an assessment based on an output charge on the value of the goods. The subsequent amendment of the assessments in respect of ten of the periods raised the question of whether the commissioners were able to change the basis of the assessments in this radical way. In the opinion of the tribunal, they were.
6. Both parties accept that the amounts assessed for six monthly periods should have been calculated on the basis laid down in Thorn for supplies made out of a group. For the purposes of s. 84(5) of the Value Added Tax Act 1994, the amounts that should have been assessed for the periods in question were higher than the amounts actually assessed. The tribunal had the power under s. 84(5) to increase the assessments and directions were made to this effect. The assessed tax would be increased by a total of £48,536.
[The tribunal set out the facts summarised above and continued as follows.]
1. These are three appeals by three subsidiaries of British United Provident Association Ltd ("BUPA") which, while members of the BUPA VAT group, received substantial prepayments of consideration due under the terms of various agreements. Subsequently, after leaving the BUPA VAT group but while remaining subsidiaries of BUPA, they each paid substantial input VAT on supplies made to them for the performance of their respective obligations under those various agreements. These three appellants are BUPA...
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