Royal and Sun Alliance Insurance Group Plc v Commissioners of Customs and Excise
| Jurisdiction | England & Wales |
| Judgment Date | 02 October 2000 |
| Date | 02 October 2000 |
| Court | Chancery Division |
Chancery Division.
Park J.
Malcolm Gammie (instructed by Linklaters) for Royal Sun Alliance plc.
Peter Mantle (instructed by the Solicitor for Customs and Excise) for the Crown.
The following cases were referred to in the judgment:
Belgian State v Ghent Coal Terminal NV VAT(Case C-37/95) [1998] BVC 139
BJ Rice & Associates v C & E Commrs VAT[1996] BVC 211
BLP Group plc v C & E Commrs VAT[1995] BVC 159
C & E Commrs v Midland Bank plc VAT(Case C-98/98) [2000] BVC 229
C & E Commrs v Redrow Group plc VAT[1999] BVC 96
Rompelman v Minister van Financiën VAT(Case 268/83) (1985) 2 BVC 200,157
Svenska International plc v C & E Commrs VAT[1999] BVC 221
Tremerton Ltd v C & E Commrs VAT[1999] BVC 3
Value added tax - Adjustment of attribution - Insurance company - Tax on rents and service charges paid in respect of surplus properties being marketed for sale - Tax initially attributed to exempt supplies - Whether initial attribution to be adjusted on taxpayer opting to tax supplies of properties -SI 1995/2518 section 109Value Added Tax Regulations 1995 (SI 1995/2518), reg. 109.
The appellant was the representative member of a VAT group. It or subsidiaries within the group were tenants of certain properties. All the properties had been occupied for the purposes of the group's insurance business. However, a stage came in the early 1990s when the appellant decided that the properties were no longer required for its occupation and should be sublet to outside tenants. At this stage it did not exercise the option to tax for any sublettings that it made. Finally, with effect from 21 November 1995 the appellant exercised the right of election in relation to all the properties. The dispute concerned the input tax paid by the appellant to its landlord for the periods which began when it ceased to occupy the properties and attempted to find sublessees, and which ended with the exercise of the election to tax on 21 November 1995.
Whether SI 1995/2518 section 109reg. 109 of the Value Added Tax Regulations 1995 (SI 1995/2518) applied so that the appellant could recover the input tax in this "vacant non-elected period".
Held, allowing the company's appeal:
SI 1995/2518 section 109Regulation 109 covers the case where a taxable person has suffered input tax but has not attributed it to taxable supplies, but later uses the input in making taxable supplies, or forms an intention to use it in making taxable supplies. In such circumstances, the taxable person could recover the input tax suffered on the original input. In the present case, the appellant was entitled to the adjustment for which it applied. Within the six year period prescribed by SI 1995/2518 section 109reg. 109 the appellant formed an intention to use the inputs in making taxable supplies, and manifested it by making the election to tax rents from sublettings.
Park J 1. Abbreviations, etc.
[the appellant company, Royal and Sun Alliance Insurance Group plc - RSA
the respondents, the Commissioners of Customs and Excise - Customs
Value Added Tax - VAT
the sixth Council directive (Directive 77/388) - the sixth directive
the Value Added Tax Act 1994 - VATA 1994
the Value Added Tax Regulations 1995 (SI 1995/2518) - the 1995 Regulations
the Court of Justice of the European Communities - ECJ
the VAT and duties tribunal - the tribunal
Vacant unelected period(s) - see para. 28 below
References to articles are to articles of the sixth directive; references to sections or to Schedules are to sections or Schedules of the Value Added Tax Act 1994; references to regulations are to regulations of the Value Added Tax Regulations 1995 (SI 1995/2518).]
2. This is a VAT appeal from the tribunal, the chairman of which in this case was Mr David Demack (No. 16,148; [2000] BVC 2003). RSA was the appellant by reason of being the representative member of its VAT group. It or subsidiaries within the group were tenants of certain properties, and under the leases were obliged to pay rents and service charges. The rents and service charges concerned were subject to VAT, so if the basic rent was 100 the landlord invoiced RSA or its subsidiary for a VAT inclusive rent of 100 plus VAT of 17.5, making a total of 117.5. (I shall use these figures of 100, 17.5 and 117.5 from time to time in this judgment for illustrative purposes.) RSA claimed that, in the particular circumstances which I will describe in more detail below, it was entitled to recover the VAT of 17.5 (the "input tax") from Customs under SI 1995/2518reg. 109.Customs argued that RSA was not entitled to the recovery of the input tax, and RSA appealed to the tribunal. It decided against RSA, and the company now appeals to me.
3. I respectfully disagree with the tribunal. In my judgment, for the reasons which I will explain, RSA met all the conditions ofSI 1995/2518reg. 109 and was entitled to recover the input tax. Therefore I shall allow the appeal.
4. I make two general points at this stage before moving on to describe in more detail how the case arises. The first is that henceforth I shall ignore the difference between RSA itself and other members of the VAT group. This is in accordance with VATA 1994, which, by Value Added Tax Act 1994s. 43, for most purposes (including all purposes which are relevant in this case) treats all members of a group as one for VAT. So when I refer, as I shall from time to time, to RSA paying rent or to RSA seeking to find subtenants, the strict position may have been that it was a subsidiary of RSA which paid the rent or was seeking subtenants. Nothing turns on this, and it is simpler to refer to RSA as if it was the only group company which had been involved in any of the events which gave rise to the case.
5. The second general point is that there are five different properties involved in the case, but, so far as concerns the VAT questions which I have to decide, there is no difference in principle between them. At one stage it seemed possible that there could be a difference between one of the properties (at Birmingham) and the other four, but in the course of the hearing before me it was agreed that there was no such difference. Therefore I can address the question as one of principle, on the basis that my decision upon it will govern the entire case, without the need to differentiate between the circumstances of the five properties.
6. The case is conceptual and difficult. Mr Malcolm Gammie appeared on behalf of RSA, and Mr Peter Mantle appeared on behalf of Customs. I am grateful to both of them for their clear and valuable arguments.
7. The case arises from the combination of two different elements of VAT law: the rules about lettings of property, and the rules about recovery of input tax. A general point which must always be kept in mind is that a VAT case which arises in this country is likely to be governed by a combination of UK law and Community law. Cases decided by the ECJ, frequently arising in a member state other than the UK, are likely to be at least as important as cases decided by our national courts.
8. In this country the treatment of lettings is governed by several different provisions. A letting of property is a "supply" for VAT (Value Added Tax Act 1994s. 5(2)(a)), so if it is made in the course of a business by a person who is registered for VAT, the VAT implications of it have to be considered. The companies which granted leases to RSA granted them in the course of businesses and were registered for VAT. Likewise RSA was registered for VAT, and all its transactions with which this case is concerned were undertaken in the course of a business.
9. A letting more than 21 years is regarded in England and Wales (the position is slightly different in Scotland) as a supply of goods (Value Added Tax Act 1994 schedule 4 subsec-or-para 4Sch. 4, para. 4 and the definition of "major interest" in Value Added Tax Act 1994s. 96(1)). A letting for a shorter term is regarded as a supply of services: Value Added Tax Act 1994s. 5(2)(b). This distinction between supplies of goods and supplies of services may matter in some contexts, but nothing turns on it in this case. There are provisions in the 1995 Regulations (SI 1995/2518regs. 85 and 90), which I will have to examine later (see para. 48 to 51 below) but which I will not go into now, about what happens when the consideration for a supply is payable periodically. These provisions apply in particular to periodical rent payable under a letting of property.
10. The general rule is that the grant of a lease of property is an exempt supply for VAT, not a taxable supply: Value Added Tax Act 1994 schedule 9 subsec-or-para 1s. 31 and Sch. 9, para. 1.If the general rule applies a lessor which makes a supply consisting of a letting does not have to account to Customs for VAT on the rent and other consideration for the supply, notwithstanding that the supply may have been made in the course of a business. But conversely the tenant will not be entitled to recover from Customs any input tax comprised in the rent and other consideration: because the supply was exempt from VAT there is no input tax comprised in the rent and other consideration. The other important effect of the supply being exempt is that, in general, the supplier (the person who grants the exempt letting) cannot recover from Customs any input tax which it (the supplier) may have suffered on supplies received by it and used by it for the purposes of its own exempt supply of the property.
11. However, in this country the general rule that a letting of property is an exempt supply can be excluded by an election made by the lessor. The rules about this are now contained in Value Added Tax Act 1994 schedule 10s. 51 and Sch. 10. The lessor can "elect to waive exemption" or, as it is sometimes more succinctly expressed, can...
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