Revenue and Customs Commissioners v Imperial College of Science, Technology and Medicine
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 June 2016 |
| Neutral Citation | [2016] UKUT 278 (TCC) |
| Date | 24 June 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Birss, Judge Roger Berner
Christiaan Zwart, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the appellants
Adam Rycroft of KPMG LLP appeared for the respondent
Value added tax – Partial exemption – CVCP Agreement between universities and HMRC – Fleming claim to recover residual VAT on overheads of academic departments – Whether HMRC approved a new non-CVCP retrospective partial exemption special method (PESM) from 1973 to 1994 – Whether a combined PESM and business/non-business method was ultra vires – FTT held a new non-CVCP retrospective PESM had been approved and was not ultra vires – HMRC appeal to the Upper Tribunal – Appeal dismissed.
The Upper Tribunal (UT) has dismissed HMRC's appeal against the decision of the First-tier Tribunal (FTT) in Imperial College of Science, Technology & Medicine TAX[2015] TC 04246 and confirmed that a combined method for calculating recoverable input VAT on Imperial College's overhead expenses that was agreed by HMRC for the purpose of earlier (3 year time limited) claims was not ultra vires and was a “partial exemption special method” which HMRC was bound by in respect of the later Fleming claims submitted in respect of the same expenses going back to 1973/74.
This was an appeal against the decision of the FTT in Imperial College of Science, Technology & Medicine TAX[2015] TC 04246.
In 2009 Imperial College of Science, Technology and Medicine (Imperial) made a “Fleming” claim for residual input tax incurred on overheads of its academic departments between 1973 and 1994.
Between 1992 and 1997, following University of Edinburgh VAT[1992] BVC 524 case which had opened up the possibility of a university claiming a portion of input VAT on central administration, Imperial had made a succession of claims to recover VAT for earlier years and relating to the period from 1973/74. However, until July 1997, overheads of academic departments had not been included in the calculations of the claims but in July 1997, Imperial sought to include the overheads and made a claim in respect of overheads going back three years which HMRC agreed and paid.
The 2009 claim in respect of overheads followed the Fleming (t/a Bodycraft) v R & C Commrs VAT[2008] BVC 221 case which disapplied the three year time limitation thus enabling Imprerial to extend its claim to cover the period from 1973/74.
As part of the negotiations in respect of the earlier claims, a partial exemption special method (PESM) had been agreed with HMRC. Imperial argued that the PESM ought to be applied for the purposes of its Fleming claim. HMRC argued that the PESM was a compromise made in respect of claims for the specific periods and that the new claims ought now to be considered afresh. In particular, HMRC were seeking to include a teaching grant as consideration for an exempt supply by Imperial which would result in a much lower recovery rate of input VAT.
The FTT had decided that Imperial were entitled to make the claim based on the PESM and HMRC appealed to the UT on the grounds that the FTT were wrong to find that the PESM was not ultra vires either under UK law or EU law and that HMRC were to be bound by its terms today. The issue on vires was whether HMRC had the power to agree a combined method or not. If HMRC did not, this would mean the claims for the earlier years had been agreed as compromises and in assessing the present claims, HMRC would be entitled to re-negotiate a new method.
The UT noted the relevant legislation governing partial exemption and calculating recoverable input VAT was provided by SI 1995/2518. Reg. 101 defined the standard method for attributing input tax to taxable supplies and operated by attributing to the taxable supplies the whole of the input tax on goods or services used exclusively to make the taxable supplies and none of the input tax used exclusively to make exempt supplies. For mixed cases of input tax on goods or services used for making both taxable and exempt supplies, reg. 101(1)(c) provided for apportionment based on the ratio of the value of taxable supplies. Reg. 102 defined other methods of calculating recoverable input VAT and reg. 102(1) provided that the Commissioners could direct or approve the use of an alternative method to that specified by reg. 101. Such methods were termed “special methods” or “partial exemption special methods” (PESM). Reg. 102(3) stated that once approved or directed, a PESM was to be used until the Commissioners approved or directed termination of its use. Accordingly, if the PESM applied in calculating the earlier claims fell within reg. 102, then HMRC were bound by it in respect of the later claims also. Authority for HMRC to compromise a claim was provided by the Value Added Tax Act 1994 (“VATA 1994”), Sch. 11, para. 1(1).
The UT noted, however, that reg. 101 and 102 were concerned with attribution of input tax between taxable and exempt supplies. By contrast, a combined method of calculating recoverable input VAT was a method which combined attribution as between business and non-business activity together with attribution as between taxable and exempt supplies.
Imperial argued that reg. 102 together with VATA 1994, Sch. 11, para. 1(1) together enabled HMRC to agree that a combined method could operate as a PESM. HMRC argued that a reg. 102 only enables approval of methods concerned exclusively with taxable and exempt supplies and a combined method, therefore, fell outside reg. 102.
The UT concluded that a single agreement could be both one falling with reg. 102 and VATA 1994, Sch. 11, para. 1(1). The formula applied to Imperial expressed taxable income as a percentage of total income (business and non business but excluding the teaching grant) and applied it to “residual input VAT” which was total VAT incurred for certain cost centres. The formula, therefore, combined the distinction between business/non business and taxable/exempt supplies.
The UT concluded that whilst for the purposes of the appeal the formula was not strictly a PESM, HMRC had vires to agree that under the care and management powers. Those powers could be used to agree a single combined method and accordingly, HMRC had the power to do what they did and what they agreed as regards attribution of input tax was a “special method”.
The FTT's decision was, therefore, correct and the appeal was dismissed.
In this case, the Imperial College submitted Fleming claims in respect of overhead expenses going back to 1973/74. HMRC had already agreed a partial exemption special method (PESM) for calculating the recoverable input VAT in respect of an earlier claim for the same expenses. The earlier claim, however, had gone back only three years as it preceded the disapplication of the three year time limit by the case of Fleming (t/a Bodycraft) v R & C Commrs VAT[2008] BVC 221. The FTT had found that HMRC were bound by the earlier PESM agreed but HMRC had appealed on the grounds that the earlier PESM was ultra vires and in fact was a compromise of the earlier claims. HMRC wanted to re-negotiate the claims afresh applying a different calculation method (which would ultimately result in a lower amount of input VAT being recoverable). The UT has confirmed the FTT's decision, the PESM was not ultra vires and HMRC were bound by it.
[1] The Appellants (HMRC) appeal from the decision of the FTT (Judge Anne Redston and Ms Rebecca Newns) released on 22nd January 2015 with the permission of the UT, given by Judge Berner on 5th July 2015. The Respondent (Imperial) is a well known university based in London. The case relates to VAT.
[2] On 31st March 2009 Imperial made a claim for repayment of residual input tax incurred between 1st April 1973 and 31st July 1994. The residual input tax relied on is VAT on overheads of its academic departments. The relevant calculations of the VAT originally paid did not take the recovery of VAT on these overheads into account. The basis of the claim for repayment is that this overhead VAT could and should have been taken into account and, if that is done, then a substantial sum is due to be repaid back to Imperial. For the whole period Imperial's repayment claim was for £626,756.77.
[3] The issues have narrowed very considerably over the course of the claim and these appeals. The key dispute now is about the basis on which the net VAT originally paid for the relevant years was calculated. Imperial's case is that the relevant calculations of recoverable VAT were made pursuant to a method whose terms were agreed with HMRC as a PESM or “partial exemption special method” (see below) as part of an overall agreement with respect to the recovery of VAT incurred by Imperial. HMRC's case is that the relevant calculations were made pursuant to agreed terms which were simply a compromise of claims made by Imperial in respect of specific accounting periods. The significance of the difference is that if Imperial are right, then the correct approach to the repayment claim is to apply the agreed PESM as it was but taking into account the VAT on overheads of academic departments. Subject to disputes about evidence and detail, on that approach the claim is likely to produce a substantial payment to Imperial. However if HMRC are right, then the correct approach is to consider the VAT for the relevant years afresh. That would involve taking into account two factors. One factor is the overhead VAT but there is another, the teaching grant (T-grant) received by Imperial in the relevant years. HMRC's case is that the T-grant should be included as consideration for an exempt supply made by Imperial and that if it is then it is likely to greatly reduce or extinguish any repayment to Imperial. Imperial's primary case is that the T-grant cannot be taken...
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