Commissioners of Customs and Excise v Redrow Group Plc

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLORD STEYN,LORD GOFF OF CHIEVELEY,LORD HOPE OF CRAIGHEAD,LORD HUTTON,LORD MILLETT
Judgment Date11 Feb 1999
Judgment citation (vLex)[1999] UKHL J0211-1

[1999] UKHL J0211-1

HOUSE OF LORDS

Lord Steyn

Lord Goff of Chieveley

Lord Hope of Craighead

Lord Hutton

Lord Millett

Commissioners of Customs and Excise
(Respondents)
and
Redrow Group Plc.
(Appellants)
LORD STEYN

My Lords,

1

For the reasons contained in the speeches of my noble and learned friends, Lord Hope of Craighead and Lord Millett, which I have had the privilege of reading in draft, I would allow the appeal.

LORD GOFF OF CHIEVELEY

My Lords,

2

I have had the advantage of reading in draft the speeches prepared by my noble and learned friends, Lord Hope of Craighead and Lord Millett. For the reasons they give I too would allow the appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

3

Redrow Group Plc. ("Redrow") is a member of a group of companies almost all of which are involved in constructing new houses for sale in the private sector. The group has the benefit of group registration for the purposes of value added tax, and Redrow is the representative member of the group. This appeal relates to a sales incentive scheme which Redrow operates in order to expedite sales of its homes to prospective purchasers, most of whom have to sell their existing homes before they can proceed to purchase a new home. It is also intended to provide the prospective purchasers with a financial incentive to purchase their homes from Redrow.

4

The scheme assumes that the services of an estate agent will be needed if a buyer for the existing home is to be found. In order to expedite the sale Redrow selects the estate agent, instructs the agent to value the existing home and handle the sale and monitors progress in the marketing of the property to maintain pressure on the agent to achieve a sale. As an incentive to the prospective purchaser, Redrow enters into an agreement with both the agent and the prospective purchaser that it will pay the estate agent's fee plus Value Added Tax if the prospective purchaser completes on the purchase of a home from Redrow. The instructions to the agent cannot be changed without Redrow's agreement. But the agreement provides that Redrow is not liable to pay the agent's fee if the prospective purchaser does not proceed with the purchase of a home from Redrow. The agent is advised by Redrow on being recruited into the scheme to enter into a separate agreement in the normal terms with the prospective purchaser, to provide cover in the event that Redrow is not liable to pay the fee because the prospective purchaser has decided to go elsewhere to buy a new home.

5

The question is whether Redrow is entitled to credit as a deduction from the output tax due from it for the amount of the value added tax which the estate agent is obliged to charge on the supply of its services. Section 14(2) of the Value Added Tax Act 1983 sets out the rule which enables a taxable person to obtain credit for so much of his input tax as is allowable under section 15 of the Act and then to deduct that amount from any output tax that is due from him. The issue in this case is whether the tax which Redrow pays to the estate agent falls within the definition of "input tax" in section 14(3).

6

That subsection provides, so far as relevant to the facts of this case, that "input tax," in relation to a taxable person, means the tax "on the supply to him" of any goods or services "used or to be used for the purpose of any business carried on or to be carried on by him." In Belgium v. Ghent Coal Terminal N.V. ( Case C-37/95) [1998] S.T.C. 260, 268, para. 54 the Advocate General said that the condition which determines whether the right to deduct value added tax arises is that the goods acquired and the services received are acquired and received in connection with the business activity of the taxable person, that is to say for the purpose of being incorporated in its economic activity. Redrow has the benefit of a finding of fact by the value added tax tribunal which is in its favour on this point. The tribunal held that the fees paid to the estate agents were part of Redrow's cost components in the sale of its homes. On the facts it is beyond dispute that this expenditure was in connection with Redrow's business activities. The critical question is whether the expenditure was incurred in the supply by the estate agents of services to Redrow.

7

Section 3(2)(b) of the Act provides that "anything which is not a supply of goods but is done for a consideration" is a supply of services. Article 6(1) of the E.C. Sixth Council Directive (Directive 77/388) contains a definition in terms which are no less wide. It states that "supply of services" shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5. There is no doubt that the work done by the estate agents was the supply of services on which they were obliged by section 2(1) of the Act to charge value added tax. But were they supplying services to Redrow, for which Redrow were entitled to deduct the tax which it paid as input tax? Or were they, as the Commissioners contend, supplying services only to the prospective purchasers?

8

Dr. Lasok Q.C. for the Commissioners said that it was not enough to entitle Redrow to deduct the tax as input tax that it had had to pay for the services. Nor was it enough that it had benefited from them. He maintained that the rights and obligations which were created by the contractual relationship did not determine the relationship between the parties for the purposes of Value Added Tax. That relationship had to be determined by looking at the objective character of the transaction. The question was, where did the goods or services actually go? In this case the services went to the prospective purchasers. It was their houses which were being marketed and sold by the estate agents. It was they, and not Redrow, who had consumed these services. The scheme of the tax was that the burden of it fell on the final consumer of the goods or services. The tax which the final consumer had to pay was the product of links in the chain as each transaction was drawn into the economic activity which resulted in the ultimate supply. On the facts of this case it was unrealistic to say that the services of the estate agents were being passed through Redrow as a step in the chain of transactions which led to the prospective purchasers as the final consumer of their services. This was because those same services were being supplied to the prospective purchasers at the same time as they were, on Redrow's argument, being supplied to Redrow. The direct and immediate link was between the estate agents and the prospective purchasers. The aim of Redrow, which was to facilitate the sale of their homes by instructing and paying for the services of the estate agents, was irrelevant.

9

The decision of the European Court of Justice in B.L.P. Group Plc. v. Customs and Excise Commissioners ( Case C-4/94) [1996] 1 W.L.R. 174 was said to support this argument. In that case, in para. 19 of the judgment at pp. 198-199, the court held that "the goods or services in question must have a direct and immediate link with the taxable transactions, and … the ultimate aim pursued by the taxable person is irrelevant in this respect." The Court of Appeal were persuaded by that judgment, against their initial impression on reading the facts in this case, that the services which the estate agents were supplying were the services which an estate agent ordinarily supplies when a house is to be sold and that they were being supplied to the prospective purchasers and not to Redrow. As Peter Gibson L.J. [1997] S.T.C. 1053, 1060 put it, objectively these services could be seen to be directly attributable to the sale by the prospective purchaser of his own house and not the sale of a new house by Redrow, even though the estate agent's supply benefited Redrow by facilitating Redrow's sale.

10

But the B.L.P. case was concerned with a point which seems to me to be entirely different from that which arises here. In that case services had been supplied to B.L.P in connection with the sale of shares, which was an exempt supply. The argument that they had been used for the purposes of B.L.P.'s taxable transactions had to look beyond the direct and immediate link with the exempt supply to the ultimate aim of the sale, which was to raise funds to pay off debts. In the present case there is no problem of allocation of that kind. It is agreed that all the supplies which Redrow makes in the course or furtherance of its business are taxable supplies. So it is not necessary to examine each of the transactions on which it claims to be entitled to deduct input tax in order to determine whether there is a direct and immediate link with a supply which is taxable. That exercise only becomes necessary where the evidence shows that the taxable person makes supplies some of which are exempt supplies or is carrying on an activity other than the making of taxable supplies: see regulation 30(2)(c) of the Value Added Tax (General) Regulations 1985. The question then is whether there is a direct and immediate link with an exempt supply or with a supply which is not taxable. Where–as in this case–all the supplies which the taxable person makes in the course or furtherance of its business are taxable supplies, the only question which has to be addressed is whether the supplies on which it seeks to deduct input tax have been used or are to be used for the purposes of the business. The relevant test is that laid down in the Ghent Coal Terminal case. Was the supply received in connection with the business activities of the taxable person, for the purpose of being incorporated within its economic activities?

11

The tribunal held that the services which were supplied by the estate agents were supplied both to Redrow and to the prospective purchasers. Potts J. [1996] S.T.C. 365,...

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