JP Morgan Trading and Finance
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 February 1998 |
| Date | 25 February 1998 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
The following cases were referred to in the decision:
BLP Group plc v C & E Commrs VAT(Case C-4/94) [1995] BVC 159
C & E Commrs v Apple & Pear Development Council VAT(1986) 2 BVC 200,198
C & E Commrs v Kingfisher plc VAT[1994] BVC 3
Commercial Union Assurance Co plc VAT(LON/95/2756) No. 14,195; [1996] BVC 4315
Furniss v Dawson TAX[1984] BTC 71
IR Commrs v Metrolands (Property Finance) Ltd TAX[1982] BTC 8032
Marshall (HMIT) v Kerr TAX[1993] BTC 194
Naturally Yours Cosmetics Ltd v C & E Commrs VAT(No. 2) (Case 230/87) (1988) 3 BVC 428
Ridgeons Bulk Ltd v C & E Commrs VAT[1994] BVC 77
Schemepanel Trading Ltd v C & E Commrs VAT[1996] BVC 304
Svenska International plc v C & E Commrs VAT[1997] BVC 428
Thorn Materials Supply Ltd & Thorn Resources LtdVAT(LON/94/1996 and 94/1997) No. 12,914; [1996] BVC 2095
Webb v EMO Air Cargo (UK) Ltd UNK[1992] 4 All ER 929
Input tax - VAT avoidance scheme - Lease to the appellant on terms that it would carry out substantial work on the premises - Appellant subleasing premises to another company in the same VAT group for a large premium and low rent on condition that the appellant carried out the works contracted under the original lease - Appellant leaving VAT group and subsequently having contracted works carried out - Whether appellant entitled to input tax credit on the total supply of those works - Value Added Tax Act 1994 section 43 subsec-or-para (1)Value Added Tax Act 1994, s. 43(1)(a); section 30 subsec-or-para (2)Value Added Tax (General) Regulations 1985 (SI 1985/886), reg. 30(2)(b).
The issue was whether a tax avoidance arrangement in relation to a lease and underlease within a group registration, whereby the appellant left the group registration prior to carrying out contracted refurbishment, entitled it to recover the input tax on the refurbishment costs.
The Morgan Guarantee Trust Co of New York Inc ("MGT") was the representative member of a VAT group. A member of that group was the appellant. MGT entered into negotiations to lease four floors of 100 New Bridge Street from One Hundred New Bridge Street Ltd ("100 NBS Ltd"), which was a subsidiary of Broadgate Properties Ltd. Because Broadgate Ltd was in financial difficulties, it was agreed that Trading and Finance Management Ltd ("MANCO"), a subsidiary of MGT, would act as the manager and collect the service charges. On 14 October 1994, the appellant entered into an agreement for an underlease with 100 NBS Ltd for 15 years at a peppercorn rent for two years, £689,034 per annum for the next quarter and £2,045,102 per annum until a review in September 1999. 100 NBS Ltd contracted in the lease to pay to the appellant £1,146,660 plus VAT by way of contribution to the appellant's carrying out some of the ordinary fitting out operations required ("the A alterations"). Under the terms of the lease, the appellant contracted to carry out at its own expense certain major alterations to the premises to make them suitable for its business ("the B alterations"). On 25 October 1994, MGT wrote to the commissioners electing to waive exemption "in respect of our interest in" 100 New Bridge Street with effect from the letter date. The letter stated that no exempt supplies had been made. Also on 25 October, the appellant agreed to grant a subunder-lease to MGT for 15 years in consideration for an annual rent of £36,000 and a premium of £36,500,000. Under the terms of the sub-underlease, the appellant covenanted to carry out the B alterations at its own expense. The premium of £36,500,000 and a quarter's rent was paid on 25 October 1994, but no tax invoices were issued because the payments were supplies within the VAT group. On 26 October the appellant applied to be removed from the VAT group and, on the same day, applied to set up a new VAT group with MANCO. On 27 October the appellant entered into an agreement with the JP Morgan Property Development Co Ltd ("MPDC"), under which MPDC agreed to carry out the B alterations, in accordance with the appellant's obligations, in return for a fee equal to the costs and expenses incurred by MPDC and a fee of £50,000 together with VAT. On 10 November, the commissioners agreed that the appellant ceased to be part of the MGT VAT group with effect from 26 October. On 21 November, the commissioners agreed to the appellant's being the representative member of the new group with MANCO from 26 October. In both cases, the commissioners allowed a shorter period of notice in respect of the applications than the statutory 90 days (Value Added Tax Act 1994, s. 43(7)). On 25 November, MPDC issued an invoice to the appellant for £12m plus £2.1m VAT for "on account payment in relation to fit out 100 New Bridge Street". The appellant paid this sum including VAT to MPDC. In its return to the 31 January 1995, the appellant claimed input tax credit in respect of the £2.1m VAT on the supply by MPDC. The appellant did not invoice MGT for any rent after the initial £9,000 until it issued an invoice on 30 April 1997 for £96,014 plus £16,802 VAT covering the rent from the period 25 October 1994 to 23 June 1997.
Following investigations, the commissioners issued an assessment for £2,069,894 against which the appellant appealed. The grounds for the appeal were that (1) the VAT on the supply from MPDC in respect of the A alterations was recoverable as input tax as being directly attributable to the taxable supply to 100 NBS Ltd for which the payment of £1,146,600 was consideration and further or (2) the input tax was directly attributable to the taxable supply of the right to occupy the premises for which the rent payable by MGT was consideration.
The commissioners contended that the fitting out costs were not used to make a supply of construction services to 100 NBS Ltd, but used to make supplies fitted out office accommodation to MGT under the sub-underlease. MPDC supplied a single package of fitting out works, as opposed to separate supplies in respect of the works paid for by 100 NBS Ltd and those paid for by the appellant. The commissioners contended that the purpose of the payment by 100 NBS Ltd was an inducement or a reverse premium, rather than a payment for a supply of services made by the appellant to 100 NBS Ltd. It was necessary to take account of the payment of the premium and what it was for. The ser vices of fitting out supplied by MPDC were referable to the obligations incurred by the appellant in the sub-underlease undertaken while it was still part of the MGT VAT group. The VAT on services used for non-taxable transactions was irrecoverable. Input tax was only deductible to the extent that it was a "cost component" of a taxable transaction. The fitting-out services were not only referable to taxable transactions after degrouping, but were also a component of the non-taxable element prior to degrouping. The input tax must be referable exclusively to taxable supplies.
The appellant submitted that at the time of the supply of the fitting-out services to the appellant ( section 23Value Added Tax (General) Regulations 1985 (SI 1985/886), reg. 23) it was no longer part of the MGT VAT group. The services were used in discharging the appellant's obligation to MGT under the underlease. Since Value Added Tax Act 1994 section 43 subsec-or-para (1)s. 43(1)(a) required any supply by the appellant to MGT while within the same VAT group to be disregarded, that left the taxable supply after the appellant had left the group. The entire input tax must be attributed to that taxable supply since there was nothing else to which it could be attributed. The appellant accepted that it was a tax avoidance scheme and that its argument would be the same if the rent was only 50p per year. This case stood or fell without regard to motive.
Held, allowing the appeal in part:
1. The payment by 100 NBS Ltd for the A alterations was undoubtedly consideration for a supply of some type by the appellant. The only real question was what consideration should be attributed to the supply of works by the appellant in accordance with its obligations in return for the payment.
2. It was clear from case law that the consideration to be attributed was the subjective value attributed by the parties to the contract. The tribunal had no doubt that the parties prescribed the monetary consideration of £1,146,660 plus VAT to the supply.
3. The supply by MPDC was attributable to the work which the appellant was obliged to do for 100 NBS Ltd under the agreement that the appellant would pay MPDC costs plus £50,000. The £12m payment was on account for all the work carried out by MPDC which included £50,000 (£50,000 represented 0.42 per cent of the £11,950,000). Accordingly the tribunal took the basic cost of the A alterations, which the appellant was obliged to perform for 100 NBS Ltd, to be the same as the £1,146,660 uplifted by 0.42 per cent (the profit element paid to MPDC) which came to £1,151,476 of which VAT was £201,508. Accordingly the appellant was entitled to reclaim that sum.
4. In considering the interaction of Value Added Tax Act 1994 section 43 subsec-or-para (1)s. 43(1)(a) with section 30reg. 30, it was necessary to go back to first principles. eu-directive 67/227 article 2Article 2 of Directive 67/227, the first VAT directive, stated that only the amount of tax borne directly by the various cost components of a taxable transaction might be deducted. It was unreal to say that the entire "amount of VAT"...
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