HMRC v GraceChurch Management Services Ltd
| Jurisdiction | England & Wales |
| Judge | THE CHANCELLOR OF THE HIGH COURT |
| Judgment Date | 03 April 2007 |
| Neutral Citation | [2007] EWHC 755 (Ch) |
| Court | Chancery Division |
| Date | 03 April 2007 |
| Docket Number | Case No: CH/2006/APP/0812 |
[2007] EWHC 755 (Ch).
Chancery Division.
Sir Andrew Morritt C.
KPE Lasok QC and Jeremy Hyam (instructed by HM Revenue & Customs) for the appellants.
Jonathan Peacock QC (instructed by Denton Wilde Sapte) for the respondent.
The following cases were referred to in the judgment:
BLP Group plc v C & E CommrsECASTAX (Case C-4/94) [1995] BTC 5,143; [1995] ECR I-983
BUPA Purchasing Ltd v C & E CommrsTAX [2004] BTC 5,003
Charles v Staatssecretaris van FinanciënECAS (Case C-434/03) [2005] ECR I-7037
C & E Commrs v Apple and Pear Development CouncilTAX [1986] BTC 5,024
Lennartz v Finanzamt München IIIECASTAX (Case C-97/90) [1993] BTC 5,202; [1991] ECR I-3795
Seeling v Finanzamt StarnbergECASTAX (Case C-269/00) [2003] BTC 5,343; [2003] ECR I-4101
Value added tax - Supply of goods or services - Input tax - Supply for purposes of business - Taxpayer leaving group - Whether input tax on supply of services fully deductible - Value Added Tax Act 1994, Value Added Tax Act 1994 section 24 subsec-or-para 1s. 24(1) - Council Directive 77/388, eu-directive 77/388 subsec-or-para 2 article 17art. 17(2).
This was an appeal by Customs against a decision of the VAT tribunal that the taxpayer was entitled to deduct the whole of its input tax in respect of certain construction works.
In November 2004 the taxpayer and another company (P) in the same group entered into a detailed agreement for the taxpayer to undertake the redevelopment of premises of which P held a long lease. The agreement defined the redevelopment and provided that the price was to be 105 per cent of the development expenditure, defined as the costs, expenses and payments made, incurred or discharged by the taxpayer in connection with the carrying out of the development and the proper discharge of its duties under the development agreement. The agreement provided for £20m to be paid on the date of the development agreement as an advance payment, such other advance payments as might be agreed and the balance to be paid within seven days of completion. The advance payment of £20m was duly paid on 25 November 1994.
On 29 November 1994, the taxpayer left the group and was separately registered for the purposes of VAT. Thereafter it entered into the subcontracts necessary for the proper discharge of its duties under the development agreement. From time to time the taxpayer paid the sums due under the various subcontracts plus VAT and accounted for the VAT as input tax for deduction from output tax or for repayment. The aggregate of the input tax paid and accounted for by the taxpayer was £4,944,814. The development was completed in December 1997. The taxpayer then invoiced P for the balance of the price, since there had been no further advance payments, in the sum of £10,506,970 plus VAT of £1,751,162.
It was not in dispute that by virtue of the advance payment of £20m made by the taxpayer on 25 November 1994, at a time when the taxpayer and P were members of the same VAT group, the services to which it related would have been treated as supplied by the taxpayer to P on that date by virtue of VATA 1994, s. 6(4) but for the terms of s. 43(1)(a) which required the supply of services by one group company to another to be disregarded. The only output tax paid by the taxpayer in the relevant accounting periods was the sum of £1,751,162 paid on completion of the development in respect of the balance of the contract price. However, the taxpayer had already deducted from other output tax or been repaid the whole of the input tax it had paid its contractors, namely £4,944,814. Customs did not accept that the taxpayer had been entitled to do so. By an assessment dated 14 April 1998 they sought to recover the difference, namely £3,193,652, on the basis that, to that extent, the input tax did not relate to any taxable supply and was not recoverable by deduction from output tax or otherwise.
The taxpayer appealed successfully to the VAT tribunal and the assessment was set aside (Decision No. 19,785). Customs appealed to the High Court seeking to restore the assessment. They contended that the court was obliged to follow the decision of Park J in BUPA Purchasing Ltd v C & E Commrs [2004] BTC 5,003.
Held, allowing the appeal and confirming the assessment:
1. The use of the introductory phrase in art. 17(2) of the sixth directive, "In so far as", showed that deduction of input tax was only allowed if and to the extent that the incoming goods or services were used for the purposes of taxable (output) transactions. The condition was not satisfied in the case of outgoing supplies in fact made but required by s. 43 to be disregarded. If the supplies in fact made were to be disregarded pursuant to s. 43 then they were non-supplies and art. 17(2) disallowed the deduction of input tax to that extent. If the activities were not the making of taxable supplies, any VAT borne on the price of them was not input tax to which s. 24 of VATA 1994 could apply. (C & E Commrs v Apple and Pear Development Council [1986] BTC 5,024 applied.)
2. There was nothing in the decisions of the European Court of Justice relied on by the taxpayer to undermine that conclusion. Where an asset had been wholly allocated to business purposes, partial private use did not preclude deduction of all the input tax. No apportionment was required but the consequence was that the private use was itself a taxable transaction. That principle applied as much to supplies of services as to supplies of goods. However, none of those cases was one in which the inputs were all used for business purposes but some of the corresponding outputs in fact made were to be disregarded. In such a case the input tax had to be apportioned and only that part attributable to a taxable transaction deducted from output tax. (Lennartz v Finanzamt München III (Case C-97/90) [1993] BTC 5,202; [1991] ECR I-3795, Seeling v Finanzamt Starnberg (Case C-269/00) [2003] BTC 5,343; [2003] ECR I-4101 and Charles v Staatssecretaris van Financiën (Case C-434/03) [2005] ECR I-7037 considered; BUPA Purchasing Ltd v C & E Commrs [2004] BTC 5,003 applied.)
3. Assuming that the obstacles arising from the terms of VATA 1994, s. 24(1) and (5) had been overcome, deduction of input tax still depended on compliance with s. 26(1) and the regulations made thereunder. Regulation 101(1)(b) of the Value Added Tax Regulations 1995 required that the input tax should be attributable to "such of those goods or services as are used or to be used by him exclusively in making taxable supplies". That requirement echoed that of art. 17(2). When the taxpayer used its inputs only to some extent in making taxable supplies, it was difficult to see how it could be said that it used the inputs "exclusively" in making taxable supplies. The same reasoning and conclusion applied to reg. 101(2)(c).
Sir Andrew Morritt C: Introduction
[1] At the beginning of November 1994 both Patriges Gracechurch SA ("Patriges") and Gracechurch Management Services Ltd ("GMS") were members of the Societé Generale Group of Companies both for the purposes of VAT and more generally. Patriges was entitled to the benefit of an agreement for a long lease of 60 Gracechurch Street, London, EC3 and wished to redevelop the same. On 25 November 2004 Patriges and GMS entered into a detailed agreement ("the Development Agreement") whereunder such development would be undertaken by GMS on the terms thereof. The nature of the development was clearly defined and the price was to be 105% of the Development Expenditure defined as the costs, expenses and payments made, incurred or discharged by GMS in connection with the carrying out of the development and the proper discharge of its duties under the Development Agreement. Under clause 11(1) the price was to be paid as to £20m on the date of the Development Agreement "as an advance payment", such other advance payments as might be agreed and the balance within seven days of completion. The advance payment of £20m was duly paid on 25 November 1994.
[2] On 29 November 1994 GMS left the Societé Generale Group and was separately registered for the purposes of VAT. Thereafter it entered into the subcontracts necessary for the proper discharge of its duties under the Development Agreement. From time to time GMS paid the sums due under the various sub-contracts plus VAT and accounted for the VAT as input tax for deduction from output tax or for repayment. The aggregate of the input tax paid and so accounted for by GMS was £4,944,814. The development was completed in December 1997. GMS invoiced Patriges for the balance of the price, there having been no further advance payments, in the sum of £10,506,970 plus VAT of £1,751,162.
[3] On this appeal of Her Majesty's Revenue and Customs ("HMRC") from the decision of the VAT and Duties Tribunal (Adrian Shipwright and Cyril Shaw) released on 26 September 2006, I am concerned with the VAT consequences of the events I have described. It is not in dispute that by virtue of the advance payment of £20m made by GMS on 25 November 1994, at a time when GMS and Patriges were members of the same VAT group, the services to which it related would have been treated as supplied by GMS to Patriges on that date by virtue of Value Added Tax Act 1994 section 6 subsec-or-para 4s. 6(4) of VATA 1994 but for the terms of Value Added Tax Act 1994 section 43 subsec-or-para 1s. 43(1)(a) of VATA 1994 which required the supply of services by one group company to another to be "disregarded". The only output tax paid by GMS in the relevant accounting periods was the sum of £1,751,162 paid on completion of the development in respect of the balance of the contract price. But GMS had already deducted from other output tax or been repaid the whole of the input tax it had paid its contractors, namely £4,944,814. HMRC did not accept that GMS had been entitled to do...
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