Royal and Sun Alliance Insurance Group Plc v Commissioners of Customs and Excise
| Jurisdiction | UK Non-devolved |
| Judge | LORD HOFFMANN,LORD WALKER OF GESTINGTHORPE,LORD STEYN,LORD CLYDE,LORD WOOLF |
| Judgment Date | 22 May 2003 |
| Neutral Citation | [2003] UKHL 29 |
| Court | House of Lords |
| Date | 22 May 2003 |
[2003] UKHL 29
HOUSE OF LORDS
The Appellate Committee comprised:
Lord Steyn
Lord Woolf
Lord Hoffmann
Lord Clyde
Lord Walker of Gestingthorpe
My Lords,
I have had the advantage of reading the opinions of Lord Hoffmann and Lord Walker of Gestingthorpe. For the reasons they have given I would also allow the appeal and restore the decision of the Tribunal.
My Lords,
In this case I have had the considerable advantage of being able to read the speeches of Lord Hoffmann and Lord Walker of Gestingthorpe in draft. With the majority of the reasoning in those speeches I am able to agree. Unfortunately, however, I find that I am unable to accept their conclusion that this appeal should be allowed.
Notwithstanding the careful reasoning contained in their speeches, I have come to the conclusion that they attach less significance than they should to the special position of a supply of an interest in land, such as the grant of a lease. Subject to exceptions which need not concern us, such a supply can be an exempt supply or, if a taxable person elects to waive the exemption under Group 1 of Schedule 9 to the Value Added Tax Act 1994 ("the 1994 Act") it can be a taxable supply if regulation 109 of the Value Added Tax Regulations 1995 (SI 1995/2518) ("the Regulations") is complied with.
The language of regulation 109 is central to the outcome of this appeal as the Commissioners in their case contend. Regulation 109 is in the following terms:
(1) This regulation applies where a taxable person has incurred an amount of input tax which has not been attributed to taxable supplies because he intended to use the goods or services in making either–
(a) exempt supplies, or
(b) both taxable and exempt supplies,
and during a period of six years commencing on the first day of the prescribed accounting period in which the attribution was determined and before that intention is fulfilled, he uses or forms an intention to use the goods or services concerned in making taxable supplies or, in the case of an attribution within sub-paragraph (a) above, in making both taxable and exempt supplies.
(2) Subject to regulation 110 and where this regulation applies, the Commissioners shall, on receipt of an application made by the taxable person in such form and manner and containing such particulars as they may direct, pay to him an amount equal to the input tax which has become attributable to taxable supplies in accordance with the method which he was required to use when the input tax was first attributed.
(3) For the purposes of this regulation any question as to the nature of any supply shall be determined in accordance with the provisions of the Act and any Regulations or Orders made thereunder in force at the time when the input tax was first attributed."(Emphasis added)
Regulation 109 is the converse of regulation 108 but it is not necessary to cite the terms of that regulation, although its presence should not be ignored since it is obviously intended that the choice to which I will refer operates in both directions. The important feature of regulation 109 is that it gives the taxable person six years in which to elect to use or form an intention to use the goods or services concerned in making taxable supplies. Examining the language of regulation 109, which is all important to the outcome of this appeal, more closely it appears that there are contained in the regulation the following relevant requirements:
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(i) The taxable person must have incurred an amount of input tax (on supplies to him) which has not been attributed to taxable supplies (by him).
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(ii) This must be because he had intended for a period of time to use the goods and services (and the leasing of land is a supply of goods) in making exempt supplies.
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(iii) Before he had fulfilled his intention to use the goods and services in making exempt supplies (ie "before that intention is fulfilled") he must use or form the intention to use the goods or services in making taxable supplies.
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(iv) That the change of intention happened during a period of six years commencing on the first day of the prescribed accounting period.
Having referred to regulation 109, it is necessary to apply that regulation to the facts of the present appeal. As they have been referred to by my Lords and in the reported decisions of the court and the tribunal below, it is sufficient for my purposes merely to refer to the fact that the Royal and Sun Alliance Insurance Group Plc ("RSA") had leased accommodation from landlords who had exercised their option to treat the supply as taxable with the result that RSA had to pay input tax in relation to the letting and other services with which they were supplied. Between November 1991 and April 1993 RSA had five properties which became surplus to the requirements of their insurance business. However, having decided to let the properties they had difficulty in obtaining tenants and the accommodation remained vacant for a substantial period of time (with exceptions which can be ignored) until November 1995. On 21 November 1995 RSA made an election to waive the exemption and, accordingly, the supplies constituted by their lettings were a taxable supply in relation to which RSA charged output tax. The election was duly notified to the Commissioners on 21 December 1995.
During the intervening vacant period RSA continued to pay input tax on the rent and other services which RSA paid in order to retain their interest in the premises. They also incurred expenses which would have been taxable in their attempts to let the premises.
It is not in dispute that if RSA had at the outset elected (that is, prior to the relevant dates between November 1991 and April 1993) to treat the lettings as taxable supplies, RSA would have been entitled to credit for the input tax which is now in dispute. RSA would have been entitled to this notwithstanding that the lettings did not take place in fact until after November 1995. However, not having elected RSA did not seek credit for the input tax that was paid from time to time until they made their elections. So the input tax paid did not appear in their periodic VAT returns prior to their making the relevant elections.
Until a landlord has identified the tenant to whom he is going to let premises, frequently it will not make sense to decide whether the letting should or should not be exempt. What the decision should be will depend on the circumstances of the tenant in relation to VAT. If the tenant cannot obtain credit for any input tax payable it will be to the tenant's disadvantage if the lease is a taxable supply. Accordingly he may be prepared only to pay a lower rent then he would be prepared to pay if the letting was exempt. For this reason, it can be sensible for a landlord (here RSA) to defer an election since once he elects he cannot revoke that election. However, until he elects he is not entitled to credit for the input tax which he has paid.
If RSA's submissions are correct, one of the purposes of regulation 109 is to take into account the difficulty of the landlord in this regard. However, if a landlord is to have the benefit of regulation 109 he must comply with its requirements. Here there is no dispute that the election was made during the period specified by the regulation. Nor until RSA elected had the input tax, which they had paid, been attributed to taxable supplies. The input tax could not be attributed because there had been no subletting of the premises and in any event, until RSA did elect, for VAT purposes, the only supplies that RSA could make were exempt. While, if RSA had let the premises before electing they would have made an exempt supply, as the letting followed the election there was no exempt supply to which the input tax could be related.
Once RSA had decided to let the premises as a taxable supply, the position changed. RSA, applying the language of regulation 109 literally, were fulfilling the remaining requirement of that regulation. RSA was a taxable person that had incurred an amount of tax on the lettings of the properties to them. The amount of input tax had not been attributed to taxable supplies by them. This was because they are deemed, not having elected, to have intended to make exempt supplies. However, before they had fulfilled their intention to make the exempt supplies, that is by subletting the premises, RSA had elected to make taxable supplies instead by subletting the premises. Throughout the economic activity remained the same but its taxable nature changed. Finally that change of intention had occurred within the six year period. That being so, I ask rhetorically why should RSA not be entitled to the benefit of regulation 109? This is not a case, as has been suggested, of RSA rewriting history other than the rewriting that the regulation expressly contemplated. If the regulation could not be applied in these circumstances it could not have any meaningful application to the subletting of property. The Commissioners contend that inputs can be consumed by an unsuccessful attempt to make supplies and that the input tax incurred was so used here during the vacant period. But this argument which has no statutory foundation is inconsistent with the express terms of regulation 109, which presupposes that there will be a six year period in which to make an election and after that election there can be a claim for repayment of the tax paid. This is because that tax (in the language of regulation 109 (2)) "has become attributable to taxable supplies". Such attribution accords with article 20(1) of the Sixth Directive.
The Commissioners give...
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