Commissioners of Customs and Excise v Southern Primary Housing Association Ltd
| Jurisdiction | England & Wales |
| Judge | SIR DONALD RATTEE |
| Judgment Date | 13 February 2003 |
| Neutral Citation | [2003] EWHC 304 (Ch) |
| Docket Number | CH/2002/APP/0769 |
| Court | Chancery Division |
| Date | 13 February 2003 |
[2003] EWHC 304 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
The Strand
London WCA 2LL
Sir Donald Rattee
CH/2002/APP/0769
MISS P. WHIPPLE appeared on behalf of the Appellant.
MR. R. BARLOW appeared on behalf of the Respondent.
This is an appeal by the Commissioners of Customs and Excise against a decision by the VAT and Duties Tribunal, under the Chairmanship of Mr. John Avery-Jones, which was released on 7 th August 2002.
The basic facts of the case are clearly set out in paragraphs 2 and 3 of the Tribunal's decision. For the purposes of this judgment, they are briefly summarised as follows. As the Tribunal found:
"The Appellant's…
(The Respondent in this court, to whom I will refer as "the taxpayer").
"…business is 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."
Pursuant to that business, on 27 th June 2000, the taxpayer completed the purchase of a freehold property known as 30–44 Freehold Terrace, Brighton. The price paid by the taxpayer for the property was £435,000 plus £76,125 VAT. The purchase was made from a company called Peckham Developments. VAT was charged on the sale because, as I understand it, the vendor had previously opted to tax the property under paragraph 2 of Schedule 10 of the VAT Act 1994. Apart from that election, of course, the sale of the property would not have attracted a charge of VAT.
On the same day as it completed the purchase of the property, the taxpayer sold it on to the Samuel Lewis Housing Trust Limited for £481,000. No VAT was charged on that sale, because the taxpayer had not itself opted to tax the property under paragraph 2 of Schedule 10 of the VAT Act.
The taxpayer also entered into a design and building contract with Samuel Lewis Housing Trust Limited, whereunder the taxpayer was to build certain residential units on the property at a price of £1.87 million. That building contract was not in fact apparently signed until 14 th July 2000, but it is common ground, as the Tribunal found, that there was a binding contract in place by 14 th April of that year. The building works to be done under the building contract were, for VAT purposes, zero-rated, having regard to the provisions of item 3(a) of Group 5 of Schedule 8 to the VAT Act 1994.
The issue which was before the Tribunal was whether the £76,125 VAT, representing input tax which was incurred by the taxpayer on the acquisition of the land, was to be attributed solely to the exempt disposal of the land by the sale on by the taxpayer, in which case none of the input tax would be recoverable by the taxpayer, or whether the input tax incurred on the acquisition by the taxpayer of the land was instead to be attributed both to the exempt supply consisting of the sale on of the land and to the zero-rated supply of the building work. If the latter was the true position, then the result is that part of the input tax would be recoverable by the taxpayer under the legislative provisions to which I shall refer in a moment.
The Commissioners of course contended for the former result, the taxpayer for the latter. The Tribunal decided that the taxpayer's argument was correct and that there falls to be made (because it has not yet been made) an apportionment of the input tax between the exempt supply of the land and the zero-rated supply of the building services.
I should refer now to various legislative provisions which are relevant for present purposes, and which have been, if I may say so, very helpfully set out in the skeleton argument which was produced for the purposes of the hearing of this appeal by Miss Whipple, counsel on behalf of the Commissioners. Article 2 of the First European Council VAT Directive 227 of 67 provided, so far as material:
"On each transaction value added tax calculated on the price of the goods or services at the rate applicable to such goods or services shall be chargeable after deduction of the amount of value added tax born directly by the various cost components."
That directive, as I understand it, was partially repealed by the next piece of legislation to which I will refer, although the provision which I have just read still remains in force.
The Sixth VAT directive, number 388 of 77, contained further provisions relating to the right of deduction of input tax, and Article 17.2 of that directive provides, so far as material:
"Insofar as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay (a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person…."
The reference to "taxable transactions" in that extract has to be considered in the context of Article 5 of the Sixth Directive and that Article makes clear that a taxable transaction includes a supply of goods, and it appears to be common ground that for this purpose "goods" includes immovable property, with the result that the sale of the land in this case was a supply of goods.
Article 17.2, from which I have just quoted, was brought into domestic legislation in the United Kingdom by sections 24 to 26 of the Value Added Tax Act 1994. Section 25(2) of that Act provides:
"Subject to the provisions of this section, he [a taxable person] is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26 and then to deduct that amount from any output tax that is due from him."
Section 26 provides:
"(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, i.e. 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."
Subsection (2) includes in paragraph (a) taxable supplies. Subsection (3) provides:
"The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above."
I need not quote the remainder of that section.
Regulations made pursuant to that power are contained in Part 14 of the VAT Regulations of 1995. Regulation 101(2) provides, so far as material for present purposes, as follows:
"(2) In respect of each prescribed accounting period (a) goods or services supplied to the taxable person in the period in question shall be identified; (b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies; (c) no part of the input tax on such of those goods or services which are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies; (d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services which are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period."
Those provisions, in particular the provisions of regulation 101(2)(d), give rise to the question whether, in the context of the facts of the present case in order to determine whether part of the input tax sought to be deducted by the taxpayer can properly be deducted in respect of the building supplies contract, the land which was the subject of the transaction giving rise to the input tax was used by the taxpayer in making both the taxable, i.e. the building supplies contract supply, and the exempt, i.e. the sale on of the land supply, both of which it is clear that the taxpayer made. On the face of it one would have thought there was little room for argument that the land concerned was used by the taxpayer in supplying the building services under the building contract. As a matter of common sense, it seems to me impossible to conclude that the taxpayer did not use the land for the purposes of providing the building services, when it was the very land on which the building was to take place.
However, that apparently is too simplistic an approach, because the provisions of the relevant legislation, to which I have referred, in particular the European legislation, have been considered and explained (if that is the right word) in various decisions of the European Court. I should refer to two of those cases in particular. The first is BLP v. The Commissioners of Customs and Excise [1995] STC 424. At paragraph 18 and following of the judgment of the European Court one finds this:
"18. Paragraph 2 of Article 17 of the Sixth Directive must be interpreted in the light of paragraph 5 of that article.
19. Paragraph 5 lays down the rules applicable to the right to deduct VAT where the VAT relates to goods or services used by the taxable person 'both for transactions covered by paragraphs 2 and 3 in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible.' The use in that provision of the words 'for transactions' shows that to give the right to...
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