Commissioners of Customs and Excise v Southern Primary Housing Association Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Jacob |
| Judgment Date | 18 November 2003 |
| Neutral Citation | [2003] EWCA Civ 1662 |
| Docket Number | Case No: C3/2003/0507 |
| Court | Court of Appeal (Civil Division) |
| Date | 18 November 2003 |
[2003] EWCA Civ 1662.
Court of Appeal (Civil Division).
Lord Phillips MR, Mantell and Jacob L JJ.
Melanie Hall QC and Philippa Whipple (instructed by Solicitor for Customs & Excise) for Customs.
Richard L Barlow (instructed by Rowel Genn) for the Crown.
The following cases were referred to in the judgment:
Abbey National plc v C & E Commrs VAT(Case C-408/98) [2001] BVC 581; [2001] ECR I-1361
BLP Group plc v C & E Commrs VAT(Case C-4/94) [1995] BVC 159; [1995] ECR I-983
Card Protection Plan Ltd v C & E Commrs VAT(Case C-349/96) [1999] BVC 155; [1999] ECR I-973
C & E Commrs v Midland Bank plc VAT(Case C-98/98) [2000] BVC 229; [2000] ECR I-4177
C & E Commrs v Wiggett Construction Ltd VAT[2002] BVC 3
Value added tax - Land - Supply - Input tax - Right to deduct - Building works - Taxpayer bought and resold land to housing associations together with building services - VAT charged to taxpayer on purchase of land because vendor had opted to tax - Purchase of land followed by exempt supply of land together with zero-rated building services to housing association - Whether input tax on taxpayer's purchase of land attributable partly to building services - Whether direct and immediate link between land purchase and development contract and whether former cost component of latter - Council Directive 77/388, art. 17(2).
Customs appealed against a decision of the High Court ([2003] BVC 579) upholding a decision of the VAT Tribunal (No. 17,770; [2003] BVC 4025) that input tax incurred on the taxpayer's acquisition of land acquired for the purpose of building development work and re-sale was attributable to its subsequent supply of building work.
The taxpayer's business was to find and acquire land suitable for building houses for housing associations, agree the specification and costing of the building, obtain planning permission and sell the land to the housing association and simultaneously enter into a building agreement to carry out the works. In this case the taxpayer purchased land, subject to VAT and sold it to a housing association as an exempt supply. The taxpayer simultaneously entered into a building contract, agreeing to develop the property for the housing association. The building works were zero-rated for VAT purposes. Customs determined that the taxpayer's input tax on the property was not recoverable because it related only to the exempt supply of land.
The taxpayer appealed to the VAT tribunal against a VAT assessment in the sum of £76,125 raised on the basis that input tax was not recoverable. The taxpayer argued that the input tax was partially recoverable because it was attributable to both the exempt supply of land and the zero-rated supply of building works. The tribunal decided that as there was a direct and immediate link between the acquisition of the land and the building contract, there was a mixed supply of exempt and zero-rated services. Therefore the taxpayer was entitled to reclaim the input tax that was attributable to the zero-rated supply of building services (No. 17,770; [2003] BVC 4025).
Customs appealed against that decision to the High Court arguing that the only link with the purchase of the land was with the supply consisting of the sale of the land, and that the purchase of the land was not a cost component of the building contract since the land was purchased and sold at a profit with the result that the whole of its costs was reflected in the sale. The High Court dismissed the appeal ([2003] BVC 579). Customs appealed to the Court of Appeal.
Held, allowing Customs' appeal:
1. Under art. 17(2) of the sixth directive, implemented by s. 24(1) of the Value Added Tax Act 1994 and reg. 101(1) and (2) of the Value Added Tax Regulations 1995, the test was whether the input was used exclusively for making exempt supplies (or transactions) or for making both taxable and exempt supplies (or transactions). In order for input tax to be attributable to an output there had to be a "direct and immediate link" between the two. The issue in this case was whether there was a direct and immediate link between the input of the acquisition of the land and the building contract, according to the objective nature of the transaction, and whether the former was a cost component of the latter. (BLP Group plc v C & E Commrs (Case C-4/94) [1995] BVC 159; [1995] ECR I-983 applied.)
2. The tribunal and the judge had applied a test of attribution for which there was no authority, namely, whether the input enabled the taxpayer to make a taxable supply. The land purchase transaction was commercially necessary to make its performance commercially possible, but it was not a cost component of the contract itself in the same way as the costs of materials used. There was a link with the contract but the link was not direct and immediate. The development contract would not have been made but for the associated land purchase and sale. However, "but for" was not the test and did not equate to the "direct and immediate link" and "cost component" test.
3. There was nothing about the development contract as such which made the land purchase and sale essential. If the housing association had already owned the land or had bought it from some third party, the inputs of the development contract would have been just the costs of carrying it out. The fact that there were commercially linked land transactions did not mean that those transactions were directly linked to the costs of the development contract. The cost of buying the land could not be said to be a cost of the development contract itself.
4. Applying the fundamental principle that VAT applied to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components, the land purchase price was not a cost component of the development contract. The test was whether the expenditure on the land purchase was part of the costs of the development contract which used the land acquired. It was not. The carrying out of the development was on the land acquired, but did not utilise the land, whose ownership was irrelevant. The price of a land purchase was not "generally" part of the costs of a development contract and therefore did not have any direct and immediate link with it. (C & E Commrs v Midland Bank plc [2000] BVC 229; [2000] ECR I-4177 applied.)
5. Transactions had to be considered individually. Only if one transaction was merely ancillary to a main transaction could one disregard the distinct nature of each transaction. Otherwise, the principle of neutrality would be violated. Moreover there would be intractable problems as to which input was being attributed to which part of the "overall transaction". (Card Protection Plan v C & E Commrs (Case C-349/96) [1999] BVC 155; [1999] ECR I-973 considered.)
Jacobs LJ:
[1] This appeal by the Commissioners of Customs and Excise ("CCE"), with the permission of Carnwath LJ, is from a decision of Sir Donald Rattee of 13 February 2003 ([2003] BVC 579). He dismissed CCE's appeal from the decision of the VAT Tribunal of 7 August 2002 (No. 17,770; [2003] BVC 4025).
[2] The primary facts are not in dispute and are clearly set out in para. 2 and 3 of the tribunal's decision. I summarise. There were three transactions:
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(i) A purchase by the taxpayer of some land. VAT was paid on the price. (This was because the vendor had opted to tax the property under para. 2 of Sch. 10 of the Value Added Tax Act 1994.)
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(ii) A sale by the taxpayer of the land to a housing association ("HA"). VAT was not paid on this sale because it was an exempt transaction.
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(iii) A development contract between the taxpayer and the HA under which the taxpayer was to build housing for the HA on the land. In the course of carrying out the work the taxpayer of course had to buy materials and contract for building services.
[3] The taxpayer, in the normal way, paid VAT on the goods and services it used to carry out the building contract. That VAT is undoubtedly input tax which is deductible against the output tax consisting of the VAT charged on the price of the development contract. But what about the VAT paid on the purchase of the land? Is that recoverable against the...
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