Imperial College of Science, Technology & Medicine
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 January 2015 |
| Date | 22 January 2015 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Anne Redston, Ms Rebecca Newns
Adam Rycroft of KPMG LLP, appeared for the Appellant
Christian Zwart of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax – Partial exemption – CVCP agreement between universities and HMRC – Whether HMRC approved a new non-CVCP retrospective partial exemption special method (“PESM”) from 1973 to 1994 – Whether a combined business/non-business method was ultra vires – Whether a PESM is valid if it is not fair and reasonable – Whether non-inclusion of grant income in PESM means it was not fair and reasonable – Further 1997 claim for residual VAT on overheads of academic departments – 1997 claim based on PESM but subject to three year cap – Fleming claim to recover further residual VAT for period from 1973 to 1994 – Whether HMRC able to reopen earlier claims so as to include grant income – Evidential issues – Earlier years of Fleming claim dismissed for lack of evidence – Adjournment of later years – Directions given.
The issue here concerns the special partial exemption arrangements existing over 20 years ago between universities and HM Customs & Excise. However, the principles as set out in the decision are still relevant to any agreement with HMRC. The FTT found that the taxpayer was entitled to reclaim VAT on a “Fleming” claim as HMCE had previously agreed a special partial exemption method. HMRC therefore could not revisit earlier claims it had paid because it believed they had been wrongly paid.
Imperial College of Science, Technology and Medicine (the College) is a university based in London and the issue here concerns a claim made in March 2009 for residual input tax incurred between 1 April 1973 and 31 July 1994 following the “Fleming” case. To remind readers, residual input tax is VAT on expenditure that cannot be directly attributed to the making of taxable or exempt supplies. Fleming claims are those made on the back of the three-year cap case Fleming (t/a Bodycraft) v R & C Commrs VAT[2008] BVC 221. The claims related to expenditure on commercial research along with compound interest and were refused by HMRC in a decision made on 9 February 2012. The First-tier Tribunal (FTT) decided that the compound interest question should be stayed behind the case of Littlewoods Retail Ltd v R & C Commrs VAT[2014] BVC 23.
Since the introduction of VAT in 1973 and until it was withdrawn in 2007 universities have followed guidance in various guidelines with HMRC known as the Committee of Vice-Chancellors and Principals of the United Kingdom (CVCP) agreement. The CVCP was intended to provide a basis for universities to interpret the VAT law and in particular allowed for a methodology known as “tunnelling”. Tunnelling allowed universities to recover VAT that under the normal partial exemption rules would be lost due to the high level of exempt outputs.
In this instance neither party had a copy of the original 1973 agreement and had to rely on case law for historical details of the CVCP agreements (and attached grids that allowed for calculations to be made). The tunnelling method basically allowed each taxable activity and its related input tax to be calculated and recovered and the guidelines said that such arrangements would have to be agreed locally with HMRC. In addition the CVCP guidance allowed for distinctive activities where taxable supplies were made, such as external catering, conferences and bars to be included under a “formulaic tunnel”. A general agreement was made that universities could recover 20% of the output tax payable for external catering and conferences and 5% for bars as representing the input tax incurred without the need to keep detailed input tax records.
Following the case University of Edinburgh VAT[1992] BVC 524 (“Edinburgh University”) the College submitted a claim for a proportion of VAT on central administrative expenditure. Edinburgh University had successfully argued that there was no oral agreement with HM Customs & Excise to exclude residual or overhead input tax. The fact that it had not until then sought to claim such input tax was not suggestive of such an oral agreement.
Following Edinburgh University the College made claims in 1993, 1994 and 1995 known as “the earlier claims” and covered periods prior to the introduction of VAT in 1973. A later claim known as the “1997 claim” was made, however, the introduction of the capping regime restricted this claim to three years from 1 August 1994 to 31 July 1997.
After the Fleming three-year cap case in 2008 a window of opportunity was opened allowing taxpayers to make claims as far back as 1973. Simply put the College maintained that its claim in 2009 was an extension of its successful claim for residual input tax in 1997. HMRC said that no partial exemption special method had been agreed following payment of the “earlier” claims and therefore the College had no right to make such a claim. In turn if a special method existed then the earlier payments to the College would have to be re-visited by HMRC which might leave the College owing money.
The FTT spent much time in considering the history between the College, its advisors and HMCE. Evidence from the College was accepted that as far back as 1992, when the first claim was made HMCE was delaying matters because of its concern over the treatment of grants and donations in the proposed special method. In 1993 the College via its advisor wrote to HMCE requesting approval of a special method that excluded grants and donations from the calculation and that such approval had already been given to other establishments. The College provided evidence that HMCE had accepted this proposal in a meeting in May 1993 and that a letter had gone to HMCE formally seeking approval. This special method involved a standard turnover calculation. The FTT accepted that HMCE made payments to the College in respect of the first two of its earlier claims some time before February 1994 (para. 39). These claims were based on calculations as submitted under what the College and its then advisor had agreed as part of a special method in correspondence with HMRC.
By the time the third claim was processed HMCE had started to review university claims in general because of concerns over grant income being excluded from calculations leading to an unfair outcome for HMCE (para. 52). In particular this involved what was known as the T-grant from the Higher Education Funding Council. As the College had used the CVCP guidelines since its inception to claim a portion of input tax from bars and halls of residence this was deemed a special method. However, as HMCE had paid the first two claims it paid the third claim as well, accepting that the College had, on several occasions written for approval of its special method and had received no response in writing. However, moving forward HMCE refused to allow the special method from 1994 onwards and required the College to carry out two calculations, firstly splitting residual input tax between business/non-business and then apportioning the business element using the agreed special method. A new method was therefore required for 1995–96, in fact this was later moved forward to commence from 1996–97. In fact the College did not change its special method until 1 August 1999 as accepted by the tribunal (para. 79). A formal approval with HMRC was not agreed until October 2007 for the College to use a special method under the HE Framework.
The FTT went about its task in a methodical way posing six questions (para. 92) First, “was there a retrospective non-CVCP partial exemption method from 1973–1994 and if so was it a special method or the standard method?” The tribunal found that correspondence consistently referred to a “method” (see para. 99) and that a non-CVCP special method was in place (para. 114). The second question led on, “was this special method approved by HMRC?” The answer was yes (see para. 142) and at the time there was no legal requirement anyway for approval in writing (para. 139). The third question led on, “if it was approved was this ultra vires because it used a combined method and/or because the T-grant was not included?” The FTT considered the case of Labour Party VAT[2001] BVC 4,091 in which the powers of HMCE were considered in relation to a special method and which had cited C & E Commrs v GUS Merchandise Corporation Ltd (No 2) VAT[1995] BVC 103 and R v C & E Commrs, ex parte Kay & Co Ltd VAT[1997] BVC 128. The FTT found that the powers HMCE had under its general care and management and the VAT Regulations allowed it to approve a combined method (see para. 154). Furthermore because the requirement to have a prior business/non-business apportionment derives from UK law it cannot be ultra vires under EU law (see para. 163). Did the non-inclusion of the T-grant in the denominator of the fraction for the special method make it ultra vires? The FTT considered the background of policy changes, complex case law in respect of grants and subsidies. At para. 174 it refers to the fact that historically it was treated as outside the scope of VAT and not included as an exempt supply of education. Quoting McCombe J in Vision Express (UK) Ltd v R & C Commrs VAT[2010] BVC 208, the FTT said that the attribution of residual input tax “in a more or less rough and ready proxy fashion” is intrinsic to the nature of the task (see para. 178 and 179).
Question four, if the answer to Q1 was “no”“did the retrospective change to the College's operation of the CVCP guidelines mean there was a CVCP based upon a special method?” As Q1 was answered “no” then this fell away. Question five asked “if the 1997 claim was paid under a special method is HMRC bound by its terms to repay the claim, subject to the evidential burden being satisfied”? The FTT...
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