Ridgeons Bulk Ltd v Commissioners of Customs and Excise
| Jurisdiction | England & Wales |
| Judgment Date | 23 March 1994 |
| Date | 23 March 1994 |
| Court | Queen's Bench Division |
Queen's Bench Division (Crown Office List).
Popplewell J.
Joe Smouha (instructed by HH Mainprice) for the taxpayer.
Kenneth Parker QC (instructed by the Solicitor for Customs and Excise) for the Crown.
The following cases were referred to in the judgment:
C & E Commrs v Battersea Leisure Ltd VAT[1992] BVC 23
C & E Commrs v Sooner Foods Ltd VAT(1983) 1 BVC 535
Football Association VAT(1985) VATTR 106; (1985) 2 BVC 205,246
Gleneagles Hotel plc VAT(1986) VATTR 196; (1986) 2 BVC 208,108
International Institute for Strategic Studies VAT(1992) VATTR 245; [1992] BVC 555
International Language Centres Ltd v C & E Commrs VAT(1983) 1 BVC 545
IR Commrs v Church Commrs for England ELR[1977] AC 329
Jeudwine (1977) VATTR 115
Silvermere Golf Club and Equestrian Centre Ltd VAT(1981) VATTR 106; (1981) 1 BVC 1158
Sneller VAT(LON/87/124) No. 2556; (1987) 3 BVC 662
Value added tax - Assessment - Amendment of assessment by withdrawal of amount demanded for overclaimed input tax replaced by amount of undeclared output tax - Fresh assessment for output tax would have been out of time - Whether amendment valid - schedule 7 subsec-or-para 4Value Added Tax Act 1983, Sch. 7, para. 4(5).Supply - Supply of services for consideration - Lease contained covenant requiring tenant to carry out repairs and allowed an initial three-year rent-free period - Whether tenant made supply of building services to landlord for consideration of rent-free period of occupation - section 2Value Added Tax Act 1983, s. 2.
This was an appeal against two decisions of the VAT tribunal (see[1992] BVC 578 and [1992] BVC 907). By the first decision it was held that Customs were entitled to amend an assessment by replacing an amount of input tax alleged to have been overclaimed with a different amount of output tax which could not be assessed because such an assessment would have been out of time. By the second decision it was held that repairs required to be carried out under the terms of a lease, which gave the tenant a rent-free period of occupation, were taxable services supplied by the tenant to the landlord in consideration for the rent-free period of occupation.
In 1987 Ridgeons (Saffron Walden) Ltd ("Ridgeons") acquired a sawmill which required renovation. A new company, Ridgeons Bulk Ltd ("the taxpayer"), was formed to operate the sawmill. Ridgeons agreed to grant a lease to the taxpayer in consideration of the taxpayer covenanting to renovate the building and to pay rent after a three-year rent-free period which would reflect the cost of the renovation work. The taxpayer carried out the work at a cost of £372,725 and recovered £51,598 input tax. Customs then decided the input tax was not allowable and, on 5 July 1989, an assessment for that amount was issued.
Customs subsequently accepted that the taxpayer was entitled to deduct the input tax claimed but alleged that the lease contained a contract for the supply of building services by the taxpayer to Ridgeons on which output tax was due. The alleged output tax exceeded the input tax assessment by £3,183 and Customs raised an additional assessment for that amount. It was later accepted by Customs that the additional assessment was out of time and it was withdrawn. However, Customs claimed to be entitled to maintain the output tax assessment up to the amount of the original assessment for overclaimed input tax by way of amendment.
The taxpayer applied to the VAT tribunal to strike out Customs' statement of case on the ground that it was not open to them to withdraw an assessment for input tax and substitute for it an assessment for output tax which it was admitted would have been out of time. The tribunal refused the application holding that the amended assessment was not out of time pursuant to the schedule 5 subsec-or-para 4Value Added Tax Act 1983, Sch. 5, para. 4(5). It was not a new assessment but merely an amendment of an earlier assessment which had been made in time.
When the taxpayer's substantive appeal came before the tribunal the issue was whether the taxpayer made a taxable supply of services to Ridgeons within section 2s. 2 of the 1983 Act, as defined by section 3 subsec-or-para (2)s. 3(2)(a),which provided that a supply "included all forms of supply but not anything done otherwise than for a consideration". It was not disputed by the taxpayer that there was a supply of services. The question was whether there was any consideration.
The taxpayer contended that the only supply was the supply of an interest in land granted to the taxpayer by Ridgeons, consideration for which was that the taxpayer would pay rent and comply with the covenants in the lease. One of the covenants was that the taxpayer would pay for the building works. Instead of assessing tax on the agreement as a whole, Customs assessed tax on what they believed the parties had subjectively agreed having regard to correspondence between Ridgeons and their solicitors leading to the lease. The taxpayer submitted that it was not legitimate to look at such extrinsic evidence which went behind the terms of the formal contract: nor was it open to Customs to have regard to the motives which led the parties to enter into the lease.
The taxpayer appealed to the High Court against both decisions, contending in relation to the first decision that if Customs and the tribunal were right, the taxpayer would be precluded from taking the point that the assessment for output tax was out of time. Under the schedule 7 subsec-or-para 4Value Added Tax Act 1983, Sch. 7, para. 4(5) an out of time assessment could be made only under schedule 7 subsec-or-para 4para. 4(5), where further evidence had come to Customs' knowledge after a valid assessment had been made in time. If an assessment were made under schedule 7 subsec-or-para 4para. 4(5) it would have been open to the taxpayer to challenge it on a time b asis by requiring Customs to show when the necessary knowledge came to their attention. Customs could not amend assessments out of time depriving the taxpayer of the right to rely on the time limitation.
In relation to the second decision the taxpayer argued that, looking at the transaction as a whole, the lease was granted for a bundle of covenants including covenants to pay rent and to carry out the repairs. The building works were part of the consideration for the lease, not services performed for some other consideration. It was wrong to construe the correspondence as if there were a separate agreement and extrinsic evidence to suggest that the legal basis was different from what appeared in the lease was inadmissible.
Held, allowing the taxpayer's appeal against the first decision and quashing the assessment:
1. It was not open to Customs to treat the assessment for overclaimed input tax as an assessment for undeclared output tax which would have been out of time, thereby depriving the taxpayer of the opportunity of taking the limitation point.
2. Dismissing the second appeal: the repairs were done pursuant to an agreement that the taxpayer would undertake them in return for three years' rent-free occupation. The execution of the lease was simply a formal document incorporating in legal terms what had been previously agreed. It was not a case where extrinsic evidence as such was involved. If, however, it was necessary to rely on the correspondence, and if the correspondence was extrinsic evidence, it would be admissible as it was adduced only for the purpose of explaining the true nature of the transaction. IR Commrs v Church Commrs for England ELR[1977] AC 329 per Lord Wilberforce at p. 344 applied.
The taxpayers appealed against two decisions of the London VAT tribunal released on 26 November 1991 (chairman Mr Neil Elles) and 3 June 1992 (chairman His Honour Judge Medd QC). The grounds of the appeals were:
1. The tribunal giving the first decision erred in holding that the purported assessment to output tax was not out of time pursuant to the schedule 7 subsec-or-para 4Value Added Tax Act1983, Sch. 7, para. 4(5) by reason of the fact that it was not a new assessment but merely an amendment of an earlier assessment.
2. The tribunal giving the second decision erred in holding that it was permissible to receive extrinsic evidence of negotiations leading to a contract as justifying the conclusion that the taxpayer made a taxable supply to the landlord of building services for identifiable consideration.
Popplewell J: In this case there are two appeals from decisions of VAT tribunals. The first is a decision of a VAT tribunal dated 26 November 1991 (chairman Mr Neil Elles), "the Elles decision"; the second is a decision of VAT tribunal dated 3 June 1992 (chairman His Honour Judge Medd QC), "the Medd decision".
Although the appeals relate to the same assessment by the Commissioners of Customs and Excise they raise unrelated points of principle.
These are not in dispute. I take them from the Medd decision:
Ridgeons Bulk Ltd ["the taxpayer"] was brought into existence in 1987 as a company associated with an already existing company, Ridgeons (Saffron Walden) Ltd ["Ridgeons"]. The purpose for which it was formed was to operate a sawmill at Herringswell that had been acquired by Ridgeons. The sawmill had been bought from the liquidator of an unconnected company and needed substantial works of renovation to be carried out before the taxpayer could use it. Some of the necessary works were carried out at the taxpayer's expense and the cost of those works included £51,598.65 VAT, charged on the goods and services it supplied in connection with the work which was done.
This sum was claimed by the taxpayer as input tax in its VAT returns from 22 February 1988 to 31 July 1988 and credit for that amount was given by the respondents. Later after a visit by one of their officers to the company the respondents learnt what had happened and thinking that...
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