Commissioners of Customs and Excise v Trustees for R & R Pension Fund
| Jurisdiction | UK Non-devolved |
| Judgment Date | 07 May 1996 |
| Date | 07 May 1996 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
Option to tax - Previous exempt supply - Whether additional attribution of input tax permissible when land is within the capital goods scheme - Value Added Tax Act Value Added Tax Act 1994 schedule 10 subsec-or-para 101994, Sch. 10, para. 3(9);Value Added Tax (General) Regulations 1985 (SI 1985/886), reg. 37A-37E (Value Added Tax Regulations 1995 SI 1995/2518 rule hgreen(SI 1995/2518), reg. 112-116) - Directive 77/388, the sixth directive, eu-directive 77/388 article 13(C) article 20(4)art. 13(C) and 20(4).
The issue was whether the appellants were entitled to a revised initial input tax credit on the development of property where the option to tax was exercised after the grant of a lease.
The appellants developed land by constructing a commercial building, during the course of which they recovered input tax. They then granted a 15-year lease from 1 August 1993 without opting to charge tax. Subsequently the commissioners pointed out that on the grant of the lease there was a self-supply charge and accordingly assessed the appellants to tax in the figure of £74,417. The appellants then applied to exercise their option to tax ("the election") by letter received by the commissioners on 12 December 1994. The appellants suggested that 99.1 per cent of the input tax on the self-supply should be allowed based on the assumption that the period of the exempt lease was then 16 months compared to an expected life of the building of 150 years. The commissioners refused to allow the election on the ground that it did not give a fair and reasonable attribution of input tax.
The commissioners contended that they could not allow any revised initial attribution of input tax as proposed by the appellants because the land was within the capital goods scheme contained in reg. 37A-37E of the Value Added Tax (General) Regulations 1985 (SI 1985/886). Under this scheme each year the difference in the proportion of taxable use was measured and any increase in that proportion resulted a proportion of the original input tax being recovered (or in the case of a decrease being paid back). If the land had not been within this scheme the commissioners would have agreed some revised initial attribution of input tax.
The appellants contended that, for the commissioners merely to allow the capital goods scheme to apply, did not lead to a fair and reasonable result as required by Value Added Tax Act 1994 schedule 10 subsec-or-para 3para. 3(9) of Sch. 10 to the Value Added Tax Act 1994. Under the capital goods scheme only 86 per cent of the input tax would be recovered over a ten-year period whereas the appellant claimed 99.1 per cent.
Held, allowing the appeal:
1. It was difficult to see how the commissioners could applyValue Added Tax Act 1994 schedule 10 subsec-or-para 3para. 3(9) of Sch. 10 to the Value Added Tax Act 1994 to restrict the recovery of input tax given that Parliament had enacted that the amount recovered should be fair and reasonable. The tribunal had to imply words into para. 3(9) such as … that there would be so far as the law allows secured a fair and reasonable distribution.
2. In all cases where there has been an exempt grant the commissioners have to give permission for an election to be made but they may give permission only if they are satisfied that the result was a fair and reasonable attribution of the tax. If the election would not otherwise achieve this result under the capital goods scheme, because the attribution was less than fair and reasonable to the taxpayer, the commissioners were bound by the paragraph to do something to achieve a fair result just as they should do when the result would otherwise be too favourable for the taxpayer.
3. There was no reason why the commissioners should not agree a revised initial attribution of input tax in lieu of the capital goods scheme. They would do so to prevent a taxpayer from gaining an unfair advantage, and they should also do this to prevent a taxpayer from being unfairly disadvantaged.
[The tribunal set out the facts summarised above and continued as follows.]
The facts are not in dispute. The appellants, who are registered for VAT, developed land by constructing a commercial building, Morelands Manor, during the course of which they recovered input tax. They then granted a 15-year lease from 1 August 1993 at a rent of £46,500 with five-yearly rent reviews without opting to charge tax. The commissioners later pointed out that on grant of the lease there was a self-supply charge under what is now Value Added Tax Act 1994 schedule 10 subsec-or-para 6para. 6(1) of Sch. 10 to theValue Added Tax Act 1994 and accordingly they assessed the appellants to tax in a figure which was subsequently reduced to £74,417. The appellants then applied to exercise the option for taxation, to which I shall refer as the election, by letter which is undated but was received by the commissioners on 12 December 1994. They suggested that 99.1 per cent of the input tax on the self-supply should be allowed based on the assumption that the period of the exempt lease was then 16 months compared to an expected life of the building of 150 years (based on the builder's estimate of the life of the building). The commissioners refused to allow the election on the ground that it did not give a fair and reasonable attribution of the input tax. This is a reference to Value Added Tax Act 1994 schedule 10 subsec-or-para 3para. 3(9) of Sch. 10 to the Value Added Tax Act 1994, introduced by the Value Added Tax (Buildings and Land) Order 1991 (SI 1991/2569), which provides as follows:
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3(9) Where a person who wishes to make an election in relation to any land (the relevant land) to have effect on or after 1 January 1992, has made, makes or intends to make, an exempt grant in relation to the relevant land at any time between 1 August 1989 and before the beginning of the day from which he wishes an election in relation to the relevant land to have effect, he shall not make an election in relation to the relevant land unless he obtains the prior written permission of the Commissioners, who shall only give such permission if they are satisfied having regard to all the circumstances of the case and in particular to-
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(a) the total value of exempt grants in relation to the relevant land made or to be made before the day from which the person wishes his election to have effect;
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(b) the expected total value of grants relating to the relevant land that would be taxable if the election were to have effect; and
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(c) the total amount of input tax which has been incurred on or after 1st August 1989 or is likely to be incurred in relation to the relevant land,
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that there would be secured a fair and reasonable attribution of the input tax mentioned in paragraph (c) above to grants in relation to the relevant land which, if the election were to have effect, would be taxable.
The background to this provision is that previously no pre-election input tax could be recovered if there had been an exempt supply. From 1 January 1992, and as a result of the capital goods scheme according to the commissioners' press release of 15 November 1991, the law was relaxed so that pre-election input tax could be recovered with effect from 1 August 1989, but, if there had been an exempt supply, the making of the election was subject to the conditions in para. 3(9) [of Sch. 10 to the Value Added Tax Act 1994].
Miss Whipple for the commissioners contends that they cannot allow any revised initial attribution of input tax as proposed by the appellant because the land is, as both parties agree, within the capital goods scheme, contained in reg. 37A to 37E of the Value Added Tax (General) Regulations 1985 (SI 1985/886), which applies from 1 April 1990. Under this scheme, each year the difference in the proportion of taxable use is measured and any increase in that proportion results in that increased proportion of ten per cent of the original input tax being recovered (or in the case of a decrease, being paid back). This case concerns the interaction of Value Added Tax Act 1994 schedule 10 subsec-or-para 3para. 3(9) [of Sch. 10 to theValue Added Tax Act 1994] with the capital goods scheme. If the land had not been within the scheme the commissioners would have agreed some revised initial attribution of input tax, although not necessarily on the basis suggested by the appellant. As I have already mentioned, I need not be concerned with the method of attribution, but only with whether the appellant is right in contending for some revised initial attribution of input tax following the making of an election, or the commissioners are right in contending for none.
Mr Harrison for the appellant contends that, for the commissioners merely to allow the capital goods scheme to apply, does not lead to a fair and reasonable result in this case, as required by para. 3(9) [of Sch. 10 to the Value Added Tax Act 1994]. The effect of the capital goods scheme is that, in the first year there is no recovery of input tax. In the second year, the land was used for an exempt use for four months and for a taxable use for eight months, so that two-thirds of ten per cent of the input tax is recovered. In the third year, ten per cent of the input tax is recovered, and so on, until, by the end of ten years, about 86 per cent has been recovered. Mr Harrison contends for a revised initial attribution of input tax, resulting in an immediate recovery of a proportion of input tax (such as the 99.1 per cent which he has claimed), which will not be adjusted under the capital goods scheme unless for some reason the property changes from being fully taxable during the ten years. This is unlikely to arise because the term of the now-taxable lease exceeds the ten years.
Miss Whipple contends that the capital goods scheme is the law and will apply in any event. What the appellant is...
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