St Helen's School Northwood Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE WARREN,Mr Justice Warren |
| Judgment Date | 20 December 2006 |
| Neutral Citation | [2006] EWHC 3306 (Ch) |
| Docket Number | Case No: CH/2006/PTA/024 |
| Court | Chancery Division |
| Date | 20 December 2006 |
[2006] EWHC 3306 (Ch)
Mr Justice Warren
Case No: CH/2006/PTA/024
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE VAT & DUTIES TRIBUNAL
Mr Roger Thomas (instructed by Messrs Gregory Rowcliffe Milners) for the Appellant
Ms Jessica Simor (instructed by The Solicitor for HM Revenue & Customs) the Respondent
Hearing dates: 2nd and 3rd November 2006
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is an appeal from the decision dated 7 February 2006 ("the Decision") of the VAT & Duties Tribunal (Stephen Oliver QC and Catherine Farquharson ACA) ("the Tribunal"). The case concerns a claim by St Helen's School Northwood Ltd ("the School") to deduct 54% of the VAT payable on the cost of construction of a sports complex, the construction cost of which was £2,635,013 including a VAT element of £454,92The School applied to use a "partial exemption special method" which produced that result; that application was rejected by HMRC (" Customs") in a letter dated 3 February 2005. Following a voluntary disclosure, to which a separate decision referred to below was given, the VAT was reduced by a small amount. The School then applied to use a "standard method override". By a separate decision letter dated 22 November 2005, that application was rejected by Customs.
The Facts
The Tribunal's summary of the facts is set out in paragraphs 4 to 22 of the Decision. For completeness, I set out that summary in the Appendix to this Judgment. I would make these additional observations:
a. As long ago as 29 January 2002, the School's architect wrote to the local planning authority (London Borough of Hillingdon) saying this:
"The school have close links with the existing community as demonstrated in the attached paper. They wish to make the new facilities available under a strict club regime to friends of the school."
b. Draft 2 (dated 29 November 2002) of the outline business plan contained the following among other matters:
• A suggestion that the following overall aim could be adopted "To provide a fully flexible and accessible Sports Centre which will, primarily, accommodate a wide range of activities as part of the School's curriculum and extra-curriculum programme but would also provide opportunities for appropriate out-of-school use by pupils, parents and "friends" of the School, all at the lowest appropriate capital and revenue cost".
• A number of short-term objectives were identified (see paragraph 4.7 of the draft) which in summary were: ensuring the design would met present and foreseeable School needs; providing a programme of activities to meet the needs of the target market (ie non-School use); developing management arrangements to enable utilisation of the facilities within and outside School time and setting up an operating regime to ensure out-of-school use contributed positively to the overall running costs.
• A number of longer term objectives were also identified (see paragraph 4.8 of the draft), including ensuring "primacy of use for the School and its pupils whilst acknowledging the value of out-of-school use to the School".
• Under the heading "Financial Objectives", a fundamental choice was identified as needing to be made regarding the extent to which the School was seeking to obtain income from out-of-school use. A number of options were identified, the business plan itself saying that it had been determined that "the most appropriate level at which to pitch the financial aspirations is to ensure that costs of out-of-school use are covered, to seek to cover all the School's own costs and, if possible, generate sufficient income to fund future developments of the complex". In other words, as a minimum, the costs of running the sports centre for school and out-of-school use would be covered so that, as the plan puts it, the School has "use of the new facilities for free in revenue terms".
• Paragraph 5.2c. of the draft business plan states "school boarders would be able to use the sports facilities at all times they are open to members (at no charge….)".
• The financial projections showed an operating surplus in relation to provision, for a money consideration, of facilities to members and others of £18,000 in year 1 to over £95,000 in year 5.
c. Mary Morris, the deputy head of the School, gave evidence. The Notes of her evidence taken by the Chairman, Mr Oliver, include a reference to boarding pupils at the School. In relation to out-of-school use, Ms Morris stated that these boarders had to be members of the club with annual renewal.
The legislation
The UK legislation to which I come in a moment implements the provisions of the First Council Directive (67/227/EC) of 11 April 1967 and the Sixth Council Directive (77/388/EC) of 17 May 1977 and must be construed in the light of those Directives.
As the First Directive, Article 2 includes the following:
"On each transaction, value added tax……shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components."
As to the Sixth Directive, Article 2, so far as relevant, subjects to value added tax "the supply of goods or services effected for a consideration….by a taxable person acting as such." Under Article 4(1), a taxable person is a person who independently carries out any economic activity within Article 4(2) whatever the purpose or results of that activity. The economic activities referred to comprise, under Article 4, all activities of producers, traders and service providers.
Deduction is dealt with under Article 17: Article 17(2) allows deduction in respect of inputs "used for the purpose of his taxable transactions"; and under Article 17(5), there is to be an apportionment in the case of mixed use both for transactions in respect of which VAT is deductible (ie taxable transactions) and transactions in respect of which VAT is not deductible. It then provides that "such proportion….shall be deductible as is attributable to the [taxable] transactions".
The default method of attribution is found in Article 19(1). It is in effect the fraction A/B where
a. A is the total amount exclusive of VAT of turnover per year attributable to transactions in respect of which VAT is deductible under Article 17(2) and (3) (although (3) is not relevant for present purposes) and
b. B is the total amount exclusive of VAT of turnover per year attributable to transactions included in A and to transactions in respect of which VAT is not deductible (ie exempt transactions).
However, Article 17(5) also provides that Member States may make certain other specified provisions as set out in paragraphs (a) to (e): paragraph (c) provides that a Member State may authorise or compel a taxable person to make the deduction on the basis of the use (a term which is not defined) of all or part of the goods or services.
The relevant domestic legislation is found principally in sections 24, 25 and 26 Value Added Tax Act 1994 (" VATA") and in Regulations 101 and 102 of the Value Added Tax Regulations 1995 (SI 1995 No 2518) ("the Regulations"). Reference will also need to be made to section 83 VATA and to some of the later Regulations.
Section 24 VATA defines input tax as tax on the supply to a taxable person of goods or services used for the purposes of a business carried on or to be carried on by him. Thus, tax on supplies to a taxable person of goods or services which are not used for the purposes of a business is not input tax as defined. Section 24(5) provides for apportionment in cases of mixed use for business and non-business purposes; only so much as is referable to business purposes counts as input tax. The section uses the concept of business whereas the provisions of the Sixth Directive which I have referred to focus on economic activities but they come to the same thing.
Section 25 provides that a taxable person is entitled, at the end of each accounting period, to credit for so much of his input tax as is allowable under section 26. Section 26 contains the provisions which describe the input tax allowable under section 25 and, so far as relevant to this appeal, makes it clear that the only input tax allowable is that which is attributable to taxable supplies made by the trader in the furtherance of his business and not to exempt supplies. Section 26(3) provides in effect that, where a taxable person makes both taxable and exempt supplies, the Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to taxable supplies. They have done so in the form of the Regulations.
Regulation 101 provides that the amount of input tax which a taxable person is entitled to deduct is the amount attributable to taxable supplies. This is calculated by attributing to taxable supplies by the trader the whole of the input tax on supplies to the trader used or to be used exclusively in making taxable supplies; by providing that no part of the input tax on supplies used or to be used by the trader exclusively in making exempt supplies by him is attributable to taxable supplies by him; and by providing that, where supplies to the trader are used or to be used by the trader in making both taxable and exempt supplies by him, the amount of the input tax attributable to taxable supplies by him is the proportion of the input tax on supplies to him used to make both taxable and exempt supplies which the value of the taxable supplies bears to the total value of taxable and exempt supplies. Input tax on supplies to the...
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