University College London v Her Majesty's Revenue & Customs, V 20664
| Jurisdiction | UK Non-devolved |
| Judge | John CLARK |
| Judgment Date | 01 May 2008 |
| Respondent | Her Majesty's Revenue & Customs |
| Appellant | University College London |
| Reference | V 20664 |
| Court | First-tier Tribunal (Tax Chamber) |
20664
VAT – partial exemption special method – previous appeal determined by section 85 agreement – whether issue estoppel established – alternative contention of abuse of process – construction of section 85 agreement – direction that question precluded by issue estoppel
UNIVERSITY COLLEGE LONDON Appellant
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Tribunal: JOHN CLARK (Chairman)
JOHN N BROWN CBE, FCA, CTA
Sitting in public in London on 11 March 2008
Andrew Hitchmough of Counsel, instructed by Deloitte, for the Appellant
Richard Smith of Counsel, instructed by the Solicitor for Her Majesty’s Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2008
DECISION: REASONS FOR DIRECTIONS
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On 28 September 2007, the Appellant (“UCL”) applied to have the validity of a particular decision made by the Respondents (“HMRC”) dealt with at a preliminary hearing. The application was allowed by the President on 13 November 2007. The preliminary hearing took place before us on 11 March 2008. Following that hearing, we have issued Directions. The parties agreed that our decision on the matter should be published, and accordingly we have treated the hearing as having taken place in public.
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Rule 19(3) of the Value Added Tax Tribunals Rules 1986 (SI 1986/590), to which we refer as “the Tribunals Rules”, provides:
“(3) Without prejudice to the preceding provisions of this rule a tribunal may of its own motion or on the application of a party to an appeal or application or other person interested give or make any direction as to the conduct of or as to any matter or thing in connection with the appeal or application which it may think necessary or expedient to ensure the speedy and just determination of the appeal . . . .”
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The corresponding legislation applying for direct tax purposes is regulation 9(3) of the Special Commissioners (Jurisdiction and Procedure) Rules 1994 (SI 1994/1811), which we refer to as “the Special Commissioners Rules”:
“(3) On a preliminary hearing the Special Commissioner—
(a) shall give all such directions as appear necessary or desirable so as to enable the proceedings to be disposed of expeditiously, effectively and fairly;
(b) may, if the parties so agree, determine the proceedings without any further hearing.”
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Section 85(1) of the Value Added Tax Act 1994 (“VATA 1994”) provides:
“85 Settling appeals by agreement
(1) Subject to the provisions of this section, where a person gives notice of appeal under section 83 and, before the appeal is determined by a tribunal, the Commissioners and the appellant come to an agreement (whether in writing or otherwise) under the terms of which the decision under appeal is to be treated—
(a) as upheld without variation, or
(b) as varied in a particular manner, or
(c) as discharged or cancelled,
the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, a tribunal had determined the appeal in accordance with the terms of the agreement (including any terms as to costs).”
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Section 54 of the Taxes Management Act 1970 (“TMA 1970”) contains similar provisions for direct tax purposes:
“54 Settling of appeals by agreement
(1) Subject to the provisions of this section, where a person gives notice of appeal and, before the appeal is determined by the Commissioners, the inspector or other proper officer of the Crown and the appellant come to an agreement, whether in writing or otherwise, that the assessment or decision under appeal should be treated as upheld without variation, or as varied in a particular manner or as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the Commissioners had determined the appeal and had upheld the assessment or decision without variation, had varied it in that manner or had discharged or cancelled it, as the case may be.”
The facts-
UCL, through its Mullard Space Science Laboratory (“MSSL”) makes zero-rated supplies of scientific equipment, for example, telescopes, spectrometers and x-ray equipment. This equipment is used for research into space (for example, the Beagle II mission to Mars project). Much of the equipment produced by MSSL is launched into space from sites outside the Member States. Under section 30(5) VATA 1994, MSSL is treated as making zero-rated supplies in the course or furtherance of a business carried on by it when it exports equipment to these launch sites.
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In addition, MSSL donates equipment to other UK charities such as the Open University for export by them outside the Member States in order to be launched into space; these donations are treated as zero-rated under item 2(b) of Group 15 of Schedule 8 VATA 1994.
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As the supplies made by UCL are zero-rated, it is common ground between the parties that UCL is entitled to recover input tax that is directly attributable to these supplies.
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The issue arises whether UCL is also entitled to recover input tax on its overhead costs (“residual input tax”), to the extent that these overheads support the zero-rated supplies of scientific equipment that UCL makes.
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The question was first raised by UCL in a letter to HMRC dated 23 February 2005. UCL indicated that as section 30(5) VATA 1994 requires a charity to treat the export of goods as a supply made in the course or furtherance of a business that it carries on, UCL was also required to include a value for these exports within its partial exemption calculations. UCL was therefore writing to agree with HMRC the value which should be attributed to such exports. On the basis of the adjusted figures resulting from the inclusion of the export values in the numerator of the partial exemption calculations, UCL stated that it was entitled to a repayment for the partial exemption years 2001-02 and 2002-03.
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On 3 March 2005, HMRC responded. UCL’s conclusion concerning the effect of the transactions on its input tax recovery through the partial exemption special method could not be agreed. There was no consideration received for a donation; the donation therefore had no value for partial exemption purposes. UCL’s current partial exemption special method determined the numerator of the calculation based on outputs values. To determine the numerator in a different manner would constitute a change in partial exemption special method.
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On 23 March 2005, UCL appealed against HMRC’s decision in that letter. The appeal was assigned the reference number LON/2005/0238. (We refer to that appeal as “the First Appeal”.) In their Amended Statement of Case dated 8 March 2006, they set out a summary of their argument:
“The numerator is calculated by grossing up the output tax declared and thereafter adding certain other specified values. The PESM [partial exemption special method] as originally agreed contained no provision for including any zero rated supplies in the numerator. . . . As such, the Commissioners cannot accept that there has been an error in excluding these zero rated exports from the calculation.”
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The First Appeal was listed for hearing in early April 2006. However, shortly before the hearing, the parties settled the appeal by agreement. That agreement, which was dated 3 May 2006, included the following provisions:
“TAKE NOTICE that the Appellant and the Respondents HEREBY AGREE that the Commissioners’ decision of 03 March 2005 shall be treated as discharged or cancelled pursuant to section 85(1)(c) of the Value Added Tax Act 1994 and the appeal determined on the following terms -:
1. The numerator and denominator of the fraction in the Appellant’s partial exemption special method calculation shall include the value of the specific supplies of the goods to the extent that it is established that those supplies were properly zero-rated.
2 The Appellant shall provide evidence within 56 days to establish that the supplies of the goods were properly zero-rated. If the...
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