Vision Express Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR. JUSTICE MCCOMBE,The Honourable Mr. Justice McCombe |
| Judgment Date | 15 December 2009 |
| Neutral Citation | [2009] EWHC 3245 (Ch) |
| Docket Number | Case No: CH/2009/APP/0011 |
| Court | Chancery Division |
| Date | 15 December 2009 |
[2009] EWHC 3245 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand,
London, WC2A 2LL
(Judgment handed down at Teesside Crown Court)
The Honourable Mr. Justice Mccombe
Case No: CH/2009/APP/0011
Mr Roderick CORDARA Q.C. & Mr Edmund KING (instructed by Dorsey & Whitney) for the Appellant
Mr Owain THOMAS (instructed by HM Revenue & Customs) for the Respondents
Hearing dates: 2 – 9 November 2009
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.
The Honourable Mr. Justice McCombe:
This is an appeal by Vision Express (UK) Limited (“VEUK”) from a decision dated 14 November 2008 of the VAT and Duties Tribunal, sitting at Manchester, whereby the Tribunal dismissed appeals by VEUK: first, against a Notice of 22 March 2005 served on VEUK by the Commissioners of Revenue and Customs (“the Commissioners”) under regulation 102A of the Value Added Tax Regulations 1995 (“the Regulations”); and secondly, against an assessment dated 1 February 2007 designed to recover input tax totalling £4,119,103 for which VEUK claimed credit, which the Commissioners say exceeded the amount properly recoverable.
VEUK operates a well-known chain of retail opticians' shops. For purposes of VAT, like many others in this business, it makes two types of “supply”. It supplies to customers goods (in the form of spectacles and contact lenses) and services (in the form of eye-testing, optical advice and the like). Its supplies of goods are “standard rated” for VAT purposes; its supplies, in so far as properly described as “medical care” services, are exempt from VAT. VEUK is, therefore, (what is known in the jargon as) a “partially exempt trader” for VAT purposes. The issue raised by the appeal is as to the proportion of VAT paid by VEUK (known confusingly, but notoriously, as “input tax”) in the course of its business that is deductible by it from the sums for which it must account to the Commissioners for tax paid by customers (known, equally confusingly, as “output tax”).
The typical VEUK customer pays a single total price for the services and goods he or she receives, the end product being usually dispensed spectacles or contact lenses. The customer is, of course, only interested in the total price, not in the niceties of taxable and exempt supplies that he or she receives from VEUK. However, on part of that price the customer is paying VAT, on the other part he/she is not. VEUK pays VAT on goods and services that it purchases from suppliers in the course of its “partially exempt” trade. Some supplies to it are used exclusively for its exempt business, others exclusively for its taxable business and others for both. Its suppliers are, of course, indifferent as to the proportion in which VAT paid to them is deductible from VAT paid to VEUK which would otherwise be payable by VEUK to the Commissioners. However, VEUK is by law only entitled to deduct a part of the amount of VAT that it has paid to suppliers for those goods and services which are acquired in part for its exempt business and in part for its taxable business. The question on these appeals is to find, in principle, how that deductible “part” is to be ascertained. In 2001 VEUK agreed with the Commissioners a method of calculating the apportionment – a “partial exemption special method” or PESM.
The basic statutory scheme for solving the apportionment dilemma is helpfully summarised by the Tribunal in paragraph 2 of its Decision under appeal as follows:
“The general rule, prescribed by regulation 101(2), is that the input tax incurred by a trader in obtaining goods and services is to be attributed, as far as possible, to his taxable and exempt supplies by reference to the use made by him of the goods and services in making those supplies. So much of that input tax as is wholly attributable to the making of taxable supplies is recoverable, while so much as is wholly attributable to the making of exempt supplies is not. What remains, that is the input tax which cannot be fully attributed to taxable or exempt supplies, referred to as “residual input tax”, is attributed to the trader's taxable and exempt supplies in the same proportions as the values of his taxable and exempt supplies bear to the total value of his supplies. In other words, where it is not possible to attribute by reference to use, values are used as a proxy, reflecting the requirements of article 19(1) of the Sixth VAT Directive (77/388/EEC), the European legislation in force at the relevant time-the corresponding provision in the current legislation is to be found at article 174(1) of the Common System Directive (2006/112/EEC). The general rule represents the “standard method”.”
It will be seen that this scheme endeavours, so far as possible, to attribute directly the input tax appropriately between taxable and exempt supplies by reference to the use made of the acquired goods and services in making those different supplies. That which cannot be attributed in this way is called “residual input tax” and is attributed to the taxable and exempt parts of the business in a more or less rough and ready, “proxy” fashion. While precision is impossible in this exercise, the apportionment so achieved must be “fair and reasonable”. As a matter of legislation, at the relevant times in this case, this was all achieved by a combination of Article 2 of the First Council Directive (67/227/EC), Articles 13.1 (c), 17.1, 17.2, 17.5 (especially subparagraph (c)), 18.1, 19.1 and 19.3 of the Sixth Directive (77/388/EEC), the Value Added Tax Act 1994 sections 24(1), 25(1) and (2), 26 (1) and (3) and regulations 101(1) and (2) of the Regulations. It is not necessary to set out those provisions in full.
The Commissioner's notice in this case (an “override notice”) was served under r.102A of the Regulations. This provides as follows:
“…where a taxable person—
(a) is for the time being using a method approved or directed under regulation 102, [i.e. the PESM in this case] and
(b) that method does not fairly and reasonably represent the extent to which goods or services are used by him in making taxable supplies,
the Commissioners may serve on him a notice to that effect, setting out their reasons in support of that notification and stating the effect of the notice.”
As a result, the short question for the Tribunal, on the appeal against the Commissioners' notice, was whether the PESM achieved a fair and reasonable attribution of inputs to taxable supplies. If it did not do so, then the Commissioners' override notice was valid and the appeal would fail; if it did so, the notice was invalid and the appeal would succeed.
The effect of the override notice was not to require another specified method of calculating a proper deduction, but (by reference to regulation 102B) to require VEUK to calculate its recoverable input tax in a manner which “represents the extent to which the goods or services are used by [it] or are to be used by [it] in making taxable supplies…”. In other words, the regulations specify the end to be achieved but not the method by which it is to be achieved.
The way in which the PESM operated in this case is again helpfully summarised in paragraphs 22 to 26 of the Tribunal's decision as follows:
“22. The first step requires the identification of as much input tax as can be directly attributed to taxable and exempt supplies, and the segregation of the remainder, the residual input tax, into five categories of expenditure: rents and service charges, other expenses relating to retail stores; support office expenses and corporate overheads, expenses which cannot be directly related to any of those categories; and management charges. Why the fourth and fifth of those categories appear in that order was not explained.
23. The second step requires the identification of those areas of the stores, by reference to what was agreed between Miss Jutsum and Mr Beresford to be a representative example of six, which are used respectively for taxable, exempt and mixed purposes, and allocating a weighted value to each such area, the weighting being determined by the zoned rental value. We shall deal with the zoning of rental values in more detail shortly. The recoverable proportion of the residual input tax incurred on rents and service charges (the second of the categories identified at step one) is calculated by multiplying it by the zoned weighted area used for taxable purposes and then dividing it by the aggregate of the zoned weighted areas used for taxable and exempt purposes.
24. Step three is applied to the residual input tax incurred on other store expenditure, and is identical to step two save that zoning is left out of account.
25. Step four deals with the remaining three categories of expenditure identified at step one, and uses two calculations, one based on a staff head-count and the other on turnover. It is in this step that the apportionment of VEUK's charges to its customers to which we have referred is taken into account but, as this part of the PESM is not the subject of a specific challenge, we shall not describe the calculations further.
26. Step five draws the results of the preceding steps together in order to determine VEUK's overall percentage of recoverable residual input tax. Save that it uses data whose validity, or appropriateness, is challenged, that step, too, is not controversial.”
The PESM concluded by providing that each year's recoverable residual input tax was to be calculated by reference to the preceding calendar year's figures.
In the annex to the override...
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