Royal Bank of Scotland Group Plc v R & C Commissioners
| Jurisdiction | Scotland |
| Judgment Date | 21 August 2008 |
| Date | 21 August 2008 |
| Court | Court of Session (Inner House - First Division) |
[2008] CSIH 49.
Court of Session (Inner House, First Division).
Lord President Hamilton, Lord Kingarth, Lord Penrose.
Currie QC (instructed by Shepherd & Wedderburn WS) for the Crown.
Colin Tyre QC for the taxpayer.
The following cases were referred to in the judgment:
Midland Bank plc v C & E CommrsECASVAT (Case C-98/98) [2000] BVC 229; [2000] ECR I-4177
St Helen's School Northwood Ltd v R & C CommrsVAT [2007] BVC 58
Sovereign Finance plcVAT No. 16,237; [2000] BVC 4,023
Value added tax - Partial exemption - Special method - Hire-purchase contracts - Exempt provision of credit - Fair and reasonable attribution of residual input tax - Proposed revision of agreed special method - Revenue refused to approve special method put forward by taxpayer - Whether tribunal right to allow appeal against refusal to approve special method for allocation of input tax on overhead expenditure incurred by companies within finance group as between taxable and VAT exempt instalment credit businesses - Tribunal finding that special method proposed achieved fair and reasonable result - Whether tribunal decision unsupported by relevant findings of fact and in substance unexplained - Value Added Tax Act 1994, Value Added Tax Act 1994 section 26 subsec-or-para 3s. 26(3), Sch. 9, Value Added Tax Act 1994 schedule 9 group 5Grp. 5 - Value Added Tax Regulations 1995 (SI 1995/2518), SI 1995/2518 regulation 101 regulation 102regs. 101, 102 - Council Directive 77/388, art. 17(2), 17(5), 19(1).
This was an appeal by Revenue and Customs against a decision of a VAT and Duties Tribunal (No. 19,983; [2007] BVC 2,295) approving a special method for the allocation of input tax on overhead expenditure incurred by companies within the Lombard Finance Group as between their taxable and VAT exempt instalment credit businesses.
Lombard, which was part of the taxpayer's VAT group, was in the business of providing asset finance, a form of hire-purchase finance available for the acquisition of business plant and machinery and motor vehicles. Typically, Lombard entered into a contract for the purchase of a specified item of plant, identified by its customer, often after discussion with the company's technical staff, and hired the item to the customer on instalment terms that provided an option to purchase at the end of the contract hire period. It was agreed between the parties that, for the purposes of VAT, each transaction at the outset involved the purchase and hire of corporeal moveable property, and the provision of instalment credit finance. In due course the asset might be purchased by the customer, or traded in for another asset or otherwise disposed of by Lombard as its property. The purchase and hire of the asset and other transactions relating to its disposal were standard-rated for VAT purposes. The provision of instalment credit finance was exempt from VAT in terms of VATA 1994, Sch. 9, Grp. 5, item 3.
In so far as Lombard's expenditure related to mixed transactions, involving standard-rated business and exempt business in combination, VAT input tax charged on the supply of the services to Lombard had to be apportioned, since VAT input tax might be recovered only in respect of outputs subject to VAT. A dispute arose as to the proportion of input tax paid by Lombard on general overheads allocated to instalment credit business and to the method proposed by the taxpayer for calculating the amount of deductible input tax.
The partial exemption special method previously used by Lombard produced an agreed recovery rate of 15 per cent of general business overheads attributable to instalment credit business. The basis of that agreement was called into question in an appeal by Sovereign Finance plc [2000] BVC 4,023 (Decision No. 16,237), following which the Revenue suggested the entire activity of a hire-purchase company related to the provision of exempt credit. Lombard maintained the 15 per cent recovery rate until its present disputed proposal. The method proposed by Lombard, to have effect from 1 January 2005, was that the unattributed input tax on instalment credit business should be allocated as to 50 per cent to the business of dealing in plant and machinery and motor vehicles and as to 50 per cent to the provision of instalment credit finance, on the basis that there were two main transactions involved in an HP agreement, one taxable and one exempt. Irrespective of the number of transactions the percentage would always be 50 per cent.
The Revenue did not dispute the taxpayer's proposition that instalment credit business might comprise a taxable supply of goods and an exempt supply of credit. However, they decided on an overall recovery rate of 13.63 per cent.
The VAT tribunal allowed the taxpayer's appeal on the basis that it was entitled to substitute its own view of what was fair and reasonable, rather than merely considering whether the Revenue's decision was reasonable. As a matter of fact, the recoverable rate of 15 per cent did not reflect a fair and reasonable attribution of input tax. The proposed special method based on a transaction count was fair and reasonable and would be approved, since no other method was suggested to replace the previously used method (Decision No. 19,983; [2007] BVC 2,295). The Revenue appealed.
Held, allowing the appeal by Revenue and Customs:
1. It was of the nature of the overheads in question that they could not be attributed principally or solely to a particular activity, but it did not follow that there could not be a basis for the fair and reasonable attribution of overheads to different activities. The fair and reasonable allocation of overhead expenditure across the several activities of any commercial company appeared to be an essential element of financial control. The evidence demonstrated that there was overhead expenditure that was closely, if not directly, referable to the transactions relating to the asset. Similarly there was expenditure that was closely, if not directly, referable to the transactions relating to the provision of credit. In the nature of things there was likely to have been expenditure that was not so related to either aspect of the transaction. Without appropriate findings it was not possible to say how the tribunal approached those issues.
2. There was nothing unreal or artificial in posing the question whether particular input tax arose in respect of an activity that had a connection with the administration of the asset hired or with the administration of credit. If such an approach was to be rejected it had to be for reasons particular to the case that required to be explained so that they could be tested. As an alternative, value might have been considered as a possible basis for a result approximating to that sought by Lombard. This was not a case in which one was driven to a wholly artificial result on the simple premise that the exercise was founded on a wholly artificial construct required for VAT purposes. The scheme of the statute required one to make an allocation. The fairness and reasonableness of the method adopted depended on facts found on the basis of the evidence. (St Helen's School Northwood Ltd v R & C Commrs [2007] BVC 58 considered).
3. In the circumstances the tribunal's decision could not stand and had to be quashed. There were no relevant findings in fact sufficient to support the decision of the tribunal and its decision was, in substance, unexplained. There was no basis on which the case could be sent back other than for re-hearing. It was open to either party to give notice to the other in terms of reg. 102A or 102C of the Value Added Tax Regulations 1995 contending that the current special method did not fairly and reasonably represent the extent of use of goods and services used in making taxable supplies. That was the approach that Lombard would have to take to re-open the issue.
[1] The appellants are the Commissioners for Her Majesty's Revenue & Customs ("HMRC"). HMRC appeal against a decision of the Edinburgh VAT and Duties Tribunal dated 19 January 2007 ([2007] BVC 2,295) in which the Tribunal allowed an appeal by the Royal Bank of Scotland plc ("RBS") against the refusal of HMRC to approve a special method for the allocation of input tax on overhead expenditure incurred by companies within the Lombard Finance Group ("Lombard") as between their taxable and VAT exempt instalment credit businesses. Lombard is part of the RBS VAT Group.
[2] So far as is material for present purposes, the relevant part of Lombard's business is the provision of asset finance, a form of hire-purchase finance available for the acquisition of business plant and machinery and motor vehicles. Typically, Lombard enters into a contract for the purchase of a specified item of plant, identified by Lombard's customer, often after discussion with the company's technical staff, and hires the item to the customer on instalment terms that provide an option to purchase at the end of the contract hire period. It is agreed between the parties that, for the purposes of VAT, each transaction at the outset involves the purchase and hire of corporeal moveable property, and the provision of instalment credit finance. In due course the asset may be purchased by the customer, or traded in for another asset or otherwise disposed of by Lombard as its property. The purchase and hire of the asset and other transactions relating to its disposal are standard rated for VAT purposes. The provision of instalment credit finance is exempt from VAT in terms of Value Added Tax Act 1994 schedule 9 group 5Group 5, item 3, of Schedule 9 to the Value Added Tax Act 1994 ("the VATA").
[3] In the conduct of its business Lombard incurs expenditure in the purchase of goods and services. Across the range of its activities particular services may relate exclusively to one class of...
To continue reading
Request your trial