Dcm (optical Holdings) Limited V. Commissioners Of Her Majesty's Revenue And Customs
| Jurisdiction | Scotland |
| Judge | Lord Nimmo Smith,Lord President,Lord Brodie |
| Judgment Date | 06 July 2007 |
| Neutral Citation | [2007] CSIH 58 |
| Court | Court of Session |
| Published date | 06 July 2007 |
| Docket Number | XA93/06 |
| Date | 06 July 2007 |
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION | |
| Lord President Lord Nimmo Smith Lord Brodie | [2007] CSIH 58 XA93/06 OPINION OF THE COURT delivered by THE LORD PRESIDENT in APPEAL under section 11(7) of the Tribunals and Inquiries Act 1992 by DCM (OPTICAL HOLDINGS) LIMITED Appellant; against COMMISSIONERS OF HER MAJESTY'S REVENUE AND CUSTOMS Respondents: _______ |
Act: Tyre, Q.C., Small; Harper Macleod (Appellant)
Alt: Artis; Shepherd & Wedderburn (Respondents)
6 July 2007
Introduction
[1] The appellant company is a retail optician. In the course of its business it makes certain supplies which, for the purposes of the Value Added Tax Act 1994, are taxable supplies (primarily, the sale of lenses and frames or, as appropriate, contact lenses) and others which are exempt supplies (professional services in eye testing and prescribing and dispensing lenses).
The statutory provisions
[2] By virtue of sections 25-26 of the Act the appellant is entitled to credit for input tax attributable to taxable supplies made in the course or furtherance of its business. Section 26(3) provides that the Commissioners [now the Commissioners for Her Majesty's Revenue and Customs] "shall make regulations for securing a fair and reasonable attribution of input tax to supplies ... ". The Value Added Tax Regulations 1995 provide by regulation 101:
"(1) Subject to regulation 102 ... , the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.
(2) In respect of each prescribed accounting period -
(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, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and
(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 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."
The attribution prescribed by regulation 101(2)(d) is commonly described as "the standard method".
[3] Regulation 102 provides:
"(1) ... the Commissioners may approve or direct the use by a taxable person of a method other than that specified in regulation 101 ... ".
Any method so approved or directed is commonly referred to as a "special method".
The correspondence
[4] The appellant, through its professional advisers, applied to the respondents for approval of a special method. The method proposed was based on an analysis of the use made of floor space in the appellant's premises, a zoning technique being employed. By letter dated 6 December 2001 the advisers, having referred to previous correspondence and concerns earlier expressed by the respondents, said:
" ... We have therefore specifically addressed those areas of concern and have commented in more detail on these issues in Appendix A.
Appendix A sets out in detail the methodology we will employ in analysing floor space in the retail outlets, including the proposed split between taxable, exempt, and non-attributable areas. Further we have also set out in summary, how the overall split will be calculated.
By way of illustration, we have enclosed an example of a typical store floor plan at Appendix B. We have attached with the plan at Appendix C a sample calculation to support the floor plan. We trust this will help illustrate the principles of the method.
We trust the enclosed appendices will meet with the approval of VAT policy. This is a method which we understand has been approved by VAT policy as fair and reasonable for other similar businesses.
Once we have your approval in principle for the method, we will conclude our work on the detailed plans and overall calculation of the method."
In Appendix A the writer inter alia set out in tabulated form particular floor areas to which were ascribed the descriptions "Taxable", "Exempt" or "Non-attributable" as thought appropriate, together with a footnote describing the use made of the front part of the typical store and how it was proposed that areas within that part to which descriptions had not already been ascribed would be treated for the purposes of the method. A formula was then set out for calculating the proportion of the non-attributable areas which should be treated as used for taxable supplies and a further calculation of the fraction of general overhead expenditure (head office expenses etc.) which would qualify for recovery of input tax. Appendix B comprised a floor plan and Appendix C contained a worked example with figures. This example brought out a recovery rate of 50%. (We were advised that the use of the standard method in respect of the appellant's business produces a recovery rate of 25-26%).
[5] Further correspondence appears to have passed. Ultimately, a decision on the application was made on behalf of the Commissioners by letter dated 11 November 2002. It was in the following terms:
" ...
I am aware that your client's request to use a Special Partial Exemption method, as set out in your letter of 6 December 2001, was referred to our VAT Policy Division for their consideration. I regret the amount of time it has taken for you to receive a response to this submission, but I am now able to confirm that they do not find the proposed method acceptable and that permission to use it is therefore refused.
This is because they consider that the floor space has not been categorised accurately, in that zone A and most of zone B have been classed as taxable when in fact they should be both taxable and exempt. The customers to whom mixed supplies are made walk through these areas to get to other areas of the premises such as exempt consulting rooms. In the retail premises there are also mirrors placed by the frame bars that can be used by members of staff to offer some assistance in fitting spectacle frames.
Overall, any agreed method should be seen to be fair and reasonable and our VAT policy division consider that this method does not meet the criteria. The method does not cater for any changes in use of the floor area and it also places an unreasonable burden on the Commissioners of Customs and Excise in verifying it.
At stage 2 of your calculations it is not clear what the distinction is between 'directly attributable taxable input tax' and 'taxable input tax from the shop'. In any event in my colleagues' view, this fraction does not reflect the use of general overheads in making taxable supplies and would appear to inflate it. For example staff use heat and light and their costs are principally cost components of exempt supplies. This would also apply to other inputs.
Finally my colleagues consider that the Standard Method gets it right, as it assumes proportionality between inputs and outputs.
... "
The initial appeal
[6] The appellant appealed under section 83 of the Act against that decision to the VAT and Duties Tribunal. That section provides that -
" ... an appeal shall lie to a tribunal with respect to any of the following matters -
...
(e) the proportion of input tax allowable under section 26."
By its decision dated 18 April 2006 the Tribunal refused the appeal.
[7] A principal issue before the Tribunal was the nature of that body's jurisdiction. Counsel for the respondents had submitted, under reference to John Dee Ltd v Customs & Excise Commissioners [1995] STC 941 and the tribunal decision Banbury Visionplus Limited (LON - 19266) and related cases, that the Tribunal's jurisdiction was limited to a power to quash the respondents' decision if it was unreasonable. Counsel for the appellant had submitted that the Tribunal's jurisdiction was neither limited nor restricted; it could, it was argued, substitute its own decision as appropriate "and in any event set out guidelines". The Tribunal preferred the respondents' contention. It said:
"We consider that [our jurisdiction] is limited in the sense that we should consider whether the Respondents' refusal proceeds upon a reasonable assessment and is not undermined by any error of fact or law. However, we cannot substitute our own discretion and we cannot prescribe an acceptable alternative special method or set out guidelines. We prefer the arguments of [counsel for the respondents] to those of [counsel for the appellants] on this aspect of the Appeal. As we read the statutory provisions the criterion of a 'fair and reasonable attribution of input tax' is prescribed in section 26(3) VATA. The Regulations relative thereto (nos 101 and 102) set out a formula to that end and, further, permit the Commissioners to approve or direct another (ie special) method. There is no reference there or elsewhere to the Tribunal having a comparable or parallel discretion. Section 83(e) introduces the Tribunal into the process by granting a taxpayer, aggrieved by the proportion of input tax allowable under Section 26, a right of appeal to it. That in our view enables us to review the Respondents' refusal in a Wednesbury context (Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223) as being justified or not, but no further.
On the basis of the authorities cited it seems that we cannot take into account the 'fairness' or otherwise of the standard method in reaching our decision. In any event the evidence before us does not provide a comparison of the full financial consequences of applying the standard and proposed methods. As [counsel for the respondents] reminded us, we heard no such evidence from the...
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