University of Southampton v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR JUSTICE WARREN,Mr Justice Warren |
| Judgment Date | 17 March 2006 |
| Docket Number | Case No: CH/2005/APP/0286 |
| Court | Chancery Division |
| Date | 17 March 2006 |
[2006] EWHC 528 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL
The Honourable Mr Justice Warren
Case No: CH/2005/APP/0286
David Milne QC & Mr Andrew Hitchmough (instructed by Messrs Ellis Chapman) for the Appellant
Paul Lasok QC & Mr Paul Harris (instructed by HM Revenue And Customs) for the Respondent
Hearing dates: 30th November & 1st December 2005
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 8 March 2005 ("the Decision") of the VAT & Duties Tribunal (Dr AN Brice and Professor RG Spector) sitting in the London Tribunal Centre dismissing an appeal from a decision of Customs and Excise contained in a letter dated 21 October 2003 and an assessment for tax of £1,598,366 in respect of six consecutive accounting periods from that ending in October 2001 to that ending in January 2003. As the Tribunal state, the disputed decision and the assessment were made because Customs and Excise were of the view that Publicly Funded research (" PFR") undertaken by the Appellant University of Southampton (" the University") was not a "business" activity and so the University was not entitled to input tax credit in respect of tax on the supply of goods or services to the University which were used for the purposes of PFR. By PFR is meant research funded in whole or in part by way of a grant provided by one or more "public sponsors" for which the University has applied for the purposes of carrying out a particular research project; these include the Research Councils, charities and the UK government.
The University argued that its PFR is an integral part of its overall business, which includes (as was accepted by the Tribunal at paragraph 58 of its decision) the supply of education, undertaking research for commercial sponsors, the exploitation of intellectual property, an active conference trade, publishing and consultancy. The Tribunal rejected that argument. They held that PFR is "completely distinct" from the University's other activities. That conclusion is challenged by the University; and it is argued that, if that conclusion is wrong as the University argues, then the University is entitled to input tax credit in respect of supplies used for the purposes of PFR just as it is entitled to input tax credit for any other supplies used for the purposes of its business, for instance VAT charged on advertising commercial conference facilities.
In making that challenge, the University is saying that the Tribunal were wrong in their conclusion of fact that PFR is a completely distinct activity of the University. Since an appeal from the Tribunal lies only on a point of law, the University has to show that the case falls within the principles expounded in Edwards v Bairstow [1956] AC 14 to which I will come in due course. In essence, the University submits that the conclusion which is challenged is inconsistent with the findings of primary fact which the Tribunal made and that they therefore erred in reaching the conclusion which they did.
The legislation
The UK legislation to which I come in a moment implements the provisions of the Sixth Council Directive (77/388/EC) of 17 May 1977 and must be construed in the light of that 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 paragraph 1 of Article 4, a taxable person is a person who independently carries out any economic activity within paragraph 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. The exploitation of intangible property (such as IP) for the purposes of obtaining income on a continuing basis is considered an economic activity. Articles 5.6 and 6.2 concern self-supply of goods and services respectively. Deduction is dealt with under Article 17: it allows, by paragraph 2, deduction in respect of inputs "used for the purpose of his taxable transactions"; and under paragraph 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 ("such proportion….shall be deductible as is attributable to the [taxable] transactions").
The Tribunal identified the relevant UK legislation in paragraphs 3 to 7 of the Decision and which, for completeness, I repeat here:
a. Section 24 Value Added Tax ACT 1994 (" VATA 1994") 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. Although the section uses the concept of business whereas the provisions of the Sixth Directive which I have referred to focus on economic activities, there is no relevant distinction to be drawn. Thus a person who uses a supply exclusively for a non-business purpose cannot deduct any VAT, and in this context, to decide whether an activity forms part of a taxable person's business or is separate from it, one looks to see whether that activity is part of his "economic activities"
b. 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.
c. Those regulations are the Value Added Tax Regulations 1995 ("the Regulations") ( SI 1995 No 2518), in particular regulation 101.
d. 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 trader used to make both taxable and exempt supplies by him is called residual input tax.
I also mention section 5(2), reflecting Article 2, which provides that "supply" does not include anything done otherwise than for a consideration. This is important in the case of PFR. PFR does not give rise to any supplies (it is common ground, there is no supply to the funder in return for the funding which it provides). Viewed in isolation, PFR is not an economic activity or a business for VAT purposes. The position is therefore different from that of commercial research. In that case, a supply is made to the commercial sponsor for a consideration: the University carries out, for a fee or sponsorship, research, the fruits of which it delivers to the commercial sponsor. This generates outputs and a corresponding right to deduct input tax. It is worth noting, however, that both types of research produce the same product, namely the research results and papers; but in one case that result is an output, in the other it is not.
It can be seen from the summary of VATA 1994 above that there is a two-stage approach to the identification and quantification of the VAT charged on inputs which are recoverable by a taxable person.
a. First, the VAT in question must fall within the definition of "input tax" in section 24(1) VATA 1994. The statutory definition, it should be noted, relates to tax on supplies used for the purpose of a business. A person who happens to be a trader who is registered for VAT may acquire goods or services (carrying a VAT charge) which are not acquired for use in his business at all. The VAT incurred in respect of those supplies is not within the statutory definition.
b. Secondly, the VAT in question which is thus identified as input tax, in order to be allowable as a credit at the end of the relevant accounting period, must be attributable to the trader's taxable supplies within section 26(2) by virtue of sections 25(2) and 26(1).
The only definition of "business" is to be found in section 94 which provides in subsection (1) that "business" includes any...
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