Commissioners of Customs and Excise v Svenska International Plc
| Jurisdiction | England & Wales |
| Judge | LORD SLYNN OF HADLEY,LORD LLOYD OF BERWICK,LORD HOPE OF CRAIGHEAD,LORD CLYDE,LORD HUTTON |
| Judgment Date | 25 March 1999 |
| Judgment citation (vLex) | [1999] UKHL J0325-6 |
| Date | 25 March 1999 |
| Court | House of Lords |
[1999] UKHL J0325-6
HOUSE OF LORDS
Lord Slynn of Hadley
Lord Lloyd of Berwick
Lord Hope of Craighead
Lord Clyde
Lord Hutton
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Hutton. If the facts are recited without a detailed reference to the legislation, the result arrived at by the Industrial Tribunal and by the Court of Appeal may seem decidedly odd. However, on an analysis of the relevant provisions of the Value Added Tax (General) Regulations 1985 and the Value Added Tax Act 1983, and having regard to the principle of fiscal neutrality upon which Mr. Pleming, Q.C. for the Commissioners of Customs and Excise laid much emphasis in his submissions, I have no doubt that the result arrived at by my noble and learned friend, and contended for by the Commissioners, is the correct one. I, too, would accordingly dismiss the appeal.
My Lords,
Svenska International Plc. ("Svenska") is a U.K. subsidiary of a Swedish bank. It has been registered for VAT since October 1983. In those days a Swedish bank was not allowed by Swedish law to set up branches abroad. But the Swedish law changed on 1 January 1987. Accordingly on 29 December 1987 the Swedish bank set up a branch in London ("London Branch") to carry on business alongside its subsidiary, Svenska.
Svenska had already established relationships with suppliers in the United Kingdom for the supply of services such as telephone, electricity and accountancy. London Branch had no staff of its own, and no premises. So it was agreed that Svenska would provide all management services to London Branch, for which it would make a charge in due course. London Branch did not purchase any goods or services from third parties. The arrangement was eventually reduced to writing in a letter dated 1 February 1991, in which it was agreed that all expenses incurred by Svenska on behalf of London Branch would be shared in proportion to the value of the banking business undertaken by each party during the period of the arrangement. London Branch was not registered for VAT It follows that London Branch and Svenska were separate entities for VAT purposes.
During 1988 and 1989 London Branch made a number of applications to join the same VAT group as Svenska. These applications were unsuccessful, for the reason that a United Kingdom branch of a foreign company was not then permitted to join a VAT group unless the foreign company was itself registered in the United Kingdom. But a change was announced in the 1991 budget; and from 8 July of that year London Branch became eligible to join the same VAT group as Svenska. By a letter dated 2 October 1991 the Commissioners confirmed that London Branch would be included in the VAT group with Svenska with effect from 1 August 1991, and Svenska was to be the representative member of the group. It followed that any supply of goods or services by Svenska to London Branch thereafter fell to be disregarded by virtue of section 29(1)(a) of the Value Added Tax Act 1983. The issue in the present case relates to the period from 1 June 1987 to 31 July 1991.
Under section 4(3) of the Act a supply of services is treated as taking place at the time when the services are performed. But by section 5(9) of the Act it was open to the Commissioners to make special provision by regulation for services supplied on a continuous basis. By regulation 23 of the Value Added Tax (General) Regulations 1985 ( S.I. 1985 No. 886) it is provided that the supply of services in such a case is to be treated as taking place, not when the services are performed, but when they are paid for, or when a tax invoice is issued in respect of the services, which- ever be the earlier. It was common ground that regulation 23 applied in the present case, so that services supplied by Svenska to London Branch between 1987 and 1991 would in the ordinary way have been treated as being supplied on 26 June 1992, when Svenska issued an invoice in respect of those services, and not before. But since by 26 June 1992 Svenska and London Branch were both members of the same VAT group, that supply fell to be disregarded for tax purposes under section 29(1)(a) of the Act. Accordingly the invoice did not include any charge for tax. It is not suggested that this was incorrect.
Under sections 14 and 15 of the Act Svenska was entitled to credit for input tax paid on inward supplies of services against any output tax due on taxable supplies made by Svenska in the course or furtherance of its business. Detailed provisions are contained in regulation 30, which specifies the method for determining the amount of input tax to be attributed to taxable supplies in any accounting period. Under regulation 30(5) it was open to the Commissioners to agree a special method other than the method specified in regulation 30. That is what happened in the present case. The details do not matter. They are set out clearly in the decision of the tribunal. It is sufficient to say that the input tax provisionally attributed to taxable supplies made by Svenska during the period 1 June 1987 to 31 May 1990 came to £621,252. The equivalent figure for the period 1 April 1990 to 31 July 1991 came to £523,724. The Commissioners now say that they are entitled to reclaim part of the input tax credited to Svenska during the period in question on the ground that it was not all attributable to taxable supplies, but was in part attributable to exempt supplies. They can only succeed if they can bring the case within regulation 34 which provides:
"(1) This regulation applies where (a) a taxable person has been credited with an amount of input tax in respect of any importation or supply which has been attributed to an intended taxable supply; and (b) during a period of six years commencing on the first day of the prescribed accounting period in which the attribution was determined, he uses or appropriates for use any such importation or supply in making an exempt supply or in carrying on an activity other than the making of taxable supplies before the intended taxable supply is made. "(2) Save as the Commissioners otherwise allow, where this regulation applies the taxable person shall on the return next following the date on which the use or appropriation for use occurs account for such proportion of the input tax credited as is attributable to the exempt supply or other activity in accordance with the method which he was required to use when the input tax was credited, and he shall repay the said proportion of input tax to the Commissioners."
There can be no doubt that the conditions set out in regulation 34(1)(a) were satisfied. The input tax was attributed to an intended taxable supply, namely, the intended supply of services by Svenska to London Branch. If Svenska had invoiced London Branch before London Branch became a member of the same VAT group, the taxable supply would have been treated as having taken place at that date. As it was, Svenska did not invoice London Branch until after they had become members of the same group. But this does not mean that the input tax was not properly attributed to an intended taxable supply.
Then what about regulation 34(1)(b)? This requires that Svenska should have "used" the inward supply in making an exempt supply before the intended taxable supply. The example which is often given of the operation of regulation 34(1)(b) is that of a builder who constructs a building with the view to selling the freehold. The sale of a newly constructed commercial building is taxed at the standard rate. So the builder would be credited with input tax under regulation 30 during the period of construction. But then suppose that the builder changes his mind, and grants a lease of the building instead of selling the freehold. The grant of a lease is normally exempt. The Commissioners would be entitled to claw back the input tax since the builder would have used the inward supply in making an exempt supply before making the intended taxable supply (the sale of the freehold). The claw back procedure would have been triggered by the changed use (or appropriation for use) from intended taxable supply to actual exempt supply: see Customs & Excise Commissioners v. Briararch Ltd. [1992] S.T.C. 732 and Cooper and Chapman (Builders) Ltd. v. Customs and Excise Commissioners [1993] S.T.C. 1.
Has there then in this case been a use or an appropriation for use of the inward supplies for the making of supplies (including exempt supplies) other than the intended taxable supply? The tribunal found this a difficult question. They said:
"Mr. Lasok's submission [for the Commissioners] does not involve regarding the entry of London Branch into the VAT group as itself being the use or appropriation for use. That plainly would not be correct. It is rather that once that event has occurred it must be taken, since use for making wholly taxable supplies was no longer possible and henceforth there could only be the making of mixed supplies, that there has been an appropriation to the latter use."
Carnwath J. [1996] S.T.C. 1000 did not accept the tribunal's reasoning. He drew attention to what he regarded as a non-sequitur in the third sentence quoted above. He was also of the view that the sentence begged the question. The core of his decision is to be found in the following paragraphs, at pp. 1005-1006:
"The regulation applies where the taxable person 'uses or appropriates for use' a supply. It is necessary, therefore, to identify something done by the taxable person in relation to the supplies–some action or decision–which can be characterised, in the ordinary sense of the words, as a 'use or...
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