Commissioners of HM Revenue & Customs v Mayflower Theatre Trust Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Carnwath,Lord Justice Chadwick,Lord Justice Auld |
| Judgment Date | 22 February 2007 |
| Neutral Citation | [2007] EWCA Civ 116 |
| Date | 22 February 2007 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: C3/2006/1018 |
[2007] EWCA Civ 116
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT, QBD
MR JUSTICE HART
CH/2005/APP/0729
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Auld
Lord Justice Chadwick and
Lord Justice Carnwath
Case No: C3/2006/1018
Melanie Hall QC & Eleni Mitrophanous (instructed by HMRC Tax & Excise Litigation) for the Appellant
D. Milne QC & Philippa Whipple (instructed by Forbes Hall) for the Respondent
Hearing dates: 22 – 24 January, 2007
Introduction
The Mayflower Theatre in Southampton was built in 1928. The theatre is the fourth largest in the country with a seating capacity in excess of 2,200. Between 1942 and 1982 it was run as a cinema. In 1982 there were proposals to turn it into a bingo hall, but after a public outcry the City Council intervened and bought the theatre. It granted a 125 year lease to the Mayflower Theatre Trust (“the Trust”), an independent charitable trust established for the purpose. Its objects include the maintenance of the theatre, and the support of drama, dance, opera and the arts generally. The Trust is a company registered for VAT, as part of a group registration with its wholly owned subsidiary trading company, Mayflower Enterprises Ltd.
The theatre draws its audience from the entire southern region of the United Kingdom. Its programme of productions includes ballet, opera, drama, musicals, comedy, pantomime and rock and pop performances. It sells tickets for the productions either through its own box office or through a ticketing agency. The Trust does not produce its own performances, but buys in performances from production companies under separate production contracts. The contracts regulate the respective responsibilities of the Trust and the production companies. A production contract dated 23 rd September 2003 with Cameron Mackintosh Ltd (described as “touring manager”) for “Miss Saigon” was accepted by the tribunal as typical, although falling outside the relevant periods. The tribunal summarised the normal financial arrangements under such contracts (para 13):
“The (Trust) would pay a consideration to the production company for putting on the performance with the company bearing the costs of the production including a proportion of the marketing expenses. The size of the consideration paid by the (Trust) would depend upon the relative strength of the negotiating positions of the parties, the costs of the production and the projected ticket sales for the performance.”
This appeal concerns the calculation of value added tax for the VAT periods ended March 1999 to December 2002. At stake is £679,694 of input tax, which the Trust claims it should have been entitled to deduct for those periods. This follows the decision of the European Court of Justice in Customs and Excise Commissioners v The Zoological Society of London [2002] STC 521, relating to the cultural exemption from VAT under the relevant directive. In the light of that decision, HMRC accepted that the Trust was within the terms of the cultural exemption, and that accordingly the supply of tickets for performances should have been treated as exempt from VAT. VAT charged on these supplies has been repaid. The Trust claimed that it was entitled to a further repayment, representing a proportion of the input tax it could have deducted in respect of the consideration paid to production companies. This was based on the contention that, under the “partial exemption” rules (see below), the input tax was not attributable exclusively to the exempt supplies of theatre tickets, but also in part to taxable supplies of various types.
VAT principles
The basic principles of VAT law are well-known and do not need elaboration in this judgment. The starting point is Article 2 of the First Directive (67/227/EEC), which established the general features of the tax:
“The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.
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 borne directly by the various cost components.”
Rules for deduction of input tax are found in articles 17 and 19 of the Sixth Directive (77/388/EEC). Article 17(2) gives a taxable person the right to deduct input tax “in so far as the goods and services are used for the purposes of his taxable transactions”. Where the inputs are used for both taxable and exempt supplies, Article 17(5) allows the deduction of “only such proportion of the value added… as is attributable to” the taxable supplies. Article 19 provides a method for calculating the proportion to be deducted, by applying a fraction of taxable turnover over all turnover. Article 17(5) permits other methods to be applied by domestic law in particular circumstances.
These articles are given effect in this country by the VAT Regulations 1995 ( SI 1995/2518) (made under section 26 of the VAT Act 1994). Regulation 101(2) provides that
a) …
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 as are used or to be used by him exclusively in making exempt 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 as are used or to be used by him in making both taxable and exempt supplies as bear the same ratio to the total of such input tax as the value of the taxable supplies made by him bears to the value of all supplies made by him in the period. (emphasis added)
The rules governing cases falling under paragraph (d) are known as the “partial exemption rules”. (It is not suggested that, for the purposes of this appeal, there is any material difference between the Directive and the Regulations.)
The method prescribed by paragraph (d) mirrors Article 19, and is normally referred to as “the standard method”. It applies except where a different “special” method is agreed, or directed by HMRC. For the periods in question in this case (before the law had been clarified by the Zoological Society case) no alternative method had been directed. Although there is now some provision for retrospective adjustment, that does not apply to periods before April 2002 (reg 107A-E).
We have been referred to numerous cases on the application of these rules. At the European level the most significant are BLP Group plc v CCE [1995] STC 424; Card Protection Plan Ltd v CCE [1999] 2 AC 601; Midland Bank plc v CCE [2000] STC 501; Abbey National plc v CCE [2001] STC 297; and Kretztechnik AG v Finanzamt Linz [2005] 1 WLR 3755. We have been much helped by the fact that these cases have been authoritatively reviewed in two recent cases in this court: CCE v Southern Primary Housing Association Ltd [2003] EWCA Civ 1662, [2004] STC 209; and Dial-a-Phone Ltd v. CCE [2004] EWCA Civ 603, [2004] STC 987. Two recent decisions in the House of Lords are also relevant: Beynon v CCE [2004] UKHL 53; and College of Estate Management v CCE [2005] UKHL 62.
The main principles derived from these cases are not controversial. They were helpfully summarised in Miss Whipple's first skeleton for the Trust dated 1 st August 2006 (subsequently adopted by Mr David Milne QC). I will refer to this as “the Trust's skeleton”.) I extract (with minor adaptations) the following points:
i) Input tax is directly attributable to a given output if it has a “direct and immediate link” with that output (referred to as “the BLP test”).
ii) That test has been formulated in different ways over the years, for example: whether the input is a “cost component” of the output; or whether the input is “essential” to the particular output. Such formulations are the same in substance as the “direct and immediate link” test.
iii) The application of the BLP test is a matter of objective analysis as to how particular inputs are used and is not dependent upon establishing what is the ultimate aim pursued by the taxable person. It requires more than mere commercial links between transactions, or a “but for” approach.
iv) The test is not one of identifying what is the transaction with which the input has the most direct and immediate link, but whether there is a sufficiently direct and immediate link with a taxable economic activity.
v) The test is one of mixed fact and law, and is therefore amenable to review in the higher courts, albeit the test is fact sensitive.
Point (v) needs to be read in the light of what was said by the House of Lords in Beynon (per Lord Hoffmann):
“The courts have not treated VAT classification in the same way as some questions of classification (for example, whether a contract is of service or for services) which, notwithstanding that there are no facts in dispute, are deemed to be questions of fact so as to exclude on appeal on a question of law: see the discussion in Moyna v Secretary of State for Works and Pensions [2003] UKHL 44; [2003] 1 WLR 1929, 1935, paras 22–25. On the other hand, as Lord Hope of...
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