Gateshead Talmudical College v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 April 2011 |
| Neutral Citation | [2011] UKUT 131 (TCC) |
| Date | 15 April 2011 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2011] UKUT 131 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Sir Stephen Oliver QC.
David Jamieson (instructed by Berwin Leighton Paisner LLP) for the taxpayer.
Phillip Moser (instructed by the solicitor for HMRC) for the Crown.
The following case was referred to in the decision:
Sinclair Collis Ltd v R & C Commrs ECASVAT(Case C-275/01) [2003] BVC 374; [2003] ECR I-5965
Value added tax - Input tax - Capital goods scheme - Adjustment - Decrease in use of capital item in making taxable supplies - College making educational supplies - College incurred capital expenditure on building extension to premises - College leased premises to tenant company - College took lease back from tenant company - Parties opted to tax premises or elected to waive exemption - No rent paid after initial period - Tenant company struck off register and lease became bona vacantia - Whether adjustment to relief for input tax required by change of use - Taxpayer's appeal dismissed - Value Added Tax Act 1994, Value Added Tax Act 1994 section 24 subsec-or-para 1s. 24(1) - Value Added Tax Regulations 1995, reg. 115(2).
This was an appeal by the taxpayer against a decision of the First-tier Tribunal ([2010] UKFTT 244 (TC); [2010] TC 00541) that an adjustment under the capital goods scheme (CGS) was required pursuant to reg. 115(2) of the Value Added Tax Regulations 1995 because of a decrease in the making of taxable supplies in respect of a leaseback transaction.
The taxpayer's main activity was the provision of education and, as such, its supplies were exempt from VAT. In 1996 it granted a lease of a newly constructed extension of its premises to an unconnected company (S) which granted a sub-lease back to the taxpayer. On the basis that both the taxpayer and S had elected to waive exemption (or opted to tax), the taxpayer claimed input tax credit on the construction and associated costs. Up to the prescribed accounting period ending August 1998, the taxpayer accounted for output tax in respect of rent received under the lease and S accounted for output tax in respect of rent received under the sub-lease. After that date, if not before, the taxpayer and S ceased to pay each other rent under the lease and sub-lease. S was dissolved and struck off the companies register in July 1999. S remained dissolved (and thus did not in fact exist) for the entire remainder of the ten-year CGS period. The taxpayer took no action to forfeit the lease, the benefit of which became vested intheCrown, following the striking off of S, as bona vacantia. The arrangements between thetaxpayer and S had been put in place to secure repayment of input tax incurred onthebuilding of the premises. For the initial period until the striking off of S, actual rent had been paid between the taxpayer and S under the lease. There thus existed not only an initial input tax sum properly reclaimed in relation to the construction of the premises but also subsequent output tax relating to that input tax within the CGS period. After the initial period the lease was no longer of any relevance and so the taxpayer simply ignored it for practical purposes, although it did wish to take advantage of its continued existence in law so as to avoid having to make CGS adjustments.
The premises were a capital item for the purposes of the CGS and HMRC issued assessments in respect of years ending November 1999 to 2006 to give effect to CGS adjustments which they claimed were necessary in the circumstances. HMRC relied on reg. 115(2) of the Value Added Tax Regulations 1995 which provided for an adjustment to VAT where the extent to which a capital item was used in making taxable supplies decreased. HMRC's case was that the making of taxable supplies reduced to nil when S was dissolved. In their view, once dissolved, S could not be the recipient of any supplies from the taxpayer. The taxpayer argued that, since the lease continued to exist as a matter of law, taxable supplies continued to be made.
The First-tier Tribunal upheld the assessments on the basis that reg. 115(2) was engaged because of the decrease in the making of taxable supplies by the taxpayer and that where the decrease was to nil then the full adjustments were called for ([2010] UKFTT 244 (TC); [2010] TC 00541).
The taxpayer appealed contending that in the circumstances there had been no change in use and therefore no adjustment arose under the CGS. The taxpayer argued that only if the premises had been used in the making of exempt supplies would there have been a change of use: the question of the amount of taxable supplies was therefore irrelevant. The only use of the premises had been in connection with the lease and any supply made under the lease would have been taxable because the taxpayer had elected to waive the exemption.
Held, dismissing the appeal:
1.In law the lease continued to exist as an item of bona vacantia such that it was held by the Crown for the remainder of the ten-year CGS period. But that did not alter the facts as found by the FTT that no further rent had been paid or claimed between the taxpayer and the Crown (as successor to S) and no further output tax was accounted for by either the taxpayer or the Crown in relation to the premises. Moreover, as a matter of fact, the taxpayer never intended that there should be any further regard to the lease or any of the lease obligations after the initial period. The fundamental characteristic of a letting of immoveable property for the purposes of Community law lay in conferring on the person concerned, for an agreed period and for payment, the right to occupy property as if that person were the owner and to exclude any other person from enjoyment. In this case payment was made once and then never again. Thus the annual rent obligation was effectively overlooked. Thus the FTT was correct in deciding that, after the end of the initial period, no supplies had been made by the taxpayer to S, and consequently no supplies had been made under the sub-lease to the taxpayer. (Sinclair Collis Ltd v C & E Commrs (Case C-275/01) [2003] BVC 374; [2003] ECR I-5965 applied.)
2.Regulation 115(2) had to be read and interpreted as part of the overall scheme for determining what input tax could be attributed to taxable supplies. The object of the scheme was to afford relief by reference to the use to which the capital item in question had been put in making taxable supplies. Regulation 115(1) set out how deductions were to be calculated where there was an increase in use in making taxable supplies in subsequent years; reg. 115(2) provided for the converse case, i.e. where there was a decrease in use in making taxable supplies in subsequent years. The latter was the case here. The calculation in reg. 115(2) referred back to the same method used in reg. 115(1), which formula included the adjustment percentage. That, in turn, was defined in reg. 115(5). Where the decrease was total, that difference would be 100 per cent, as the tribunal had found. The taxpayer asserted, on the strength of reg. 116(1) and 101 that the total input tax would be attributed to taxable supplies, but the circumstances of the case and the facts found by the FTT did not support theconclusion that the input tax was used in making taxable supplies after the termination of the initial period. There were...
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