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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> HM Revenue & Customs v Gracechurch Management Services Ltd [2007] EWHC 755 (Ch) (03 April 2007) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2007/755.html Cite as: [2007] EWHC 755 (Ch) |
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
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HER MAJESTY'S COMMISSIONERS FOR REVENUE & CUSTOMS |
Appellants |
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- and - |
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GRACECHURCH MANAGEMENT SERVICES LIMITED |
Respondent |
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Mr Jonathan Peacock QC (instructed by Denton Wilde Sapte) for the Respondent
Hearing date: 21st March 2007
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Crown Copyright ©
The Chancellor :
"The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.
On each transaction value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.
The common system of value added tax shall be applied up to and including the retail trade stage."
"In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay: [input tax]"
Reference was also made to Article 17.6. This enabled the Council within a period of four years from the entry into force of the Sixth Directive to determine what expenditure should not be eligible for deduction of value added tax. It provided:
"Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment."
"(1) Subject to the following provisions of this section, 'input tax', in relation to a taxable person, means the following tax, that is to say—
(a) VAT on the supply to him of any goods or services;[(b),(c)]being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.
(2) Subject to the following provisions of this section, 'output tax', in relation to a taxable person, means VAT on supplies which he makes....
[(3), (4)]
(5) Where goods or services supplied to a taxable person,....are used or to be used partly for the purposes of a business carried on or to be carried on by him and partly for other purposes, VAT on supplies,...shall be apportioned so that only so much as is referable to his business purposes is counted as his input tax."
"...he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him."
"(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies...in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.
(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business—
(a) taxable supplies;(b) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;(c) such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection.
(3) The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above,..."
"(1) Subject to regulation 102 and 103B, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.
(2) In respect of each prescribed accounting period-
(a)...goods or services supplied to, the taxable person in the period shall be identified,(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,(c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and(d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period."
Regulation 101(3)(a) excludes from that proportion any sum received by the taxable person in respect of capital goods.
"It must therefore be stated in reply to the national court that a taxable person who uses goods for the purposes of an economic activity has a right on the acquisition of those goods to deduct input tax in accordance with the rules laid down in Article 17, however small the proportion of business use. A rule or administrative practice imposing a general restriction on the right of deduction in cases where there is limited, but none the less genuine, business use constitutes a derogation from Article 17 of the Sixth Directive and is valid only if the requirements of Article 27(1) or Article 27(5) of the directive are met."
"18 Paragraph 2 of Article 17 of the Sixth Directive must be interpreted in the light of paragraph 5 of that article.
19 Paragraph 5 lays down the rules applicable to the right to deduct VAT where the VAT relates to goods or services used by the taxable person "both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible". The use in that provision of the words "for transactions" shows that to give the right to deduct under paragraph 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by the taxable person is irrelevant in this respect."
The Court then considered Article 2 of the First Directive and Article 17(3)(c) of the Sixth Directive. It acknowledged (paragraph 25) that if the professional services had been supplied in connection with a bank loan with which to pay the debts the VAT on the professional services would have been deductible as input tax because:
"that is a consequence of the fact that those services, whose costs form part of the undertaking' s overheads and hence of the cost components of the products, are used by the taxable person for taxable transactions."
It concluded in paragraph 28:
"The answer to Question 1 must therefore be that Article 2 of the First Directive and Article 17 of the Sixth Directive are to be interpreted as meaning that, except in the cases expressly provided for by those directives, where a taxable person supplies services to another taxable person who uses them for an exempt transaction, the latter person is not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction is the carrying out of a taxable transaction."
"..where a taxable person chooses to treat an entire building as forming part of the assets of his business and subsequently uses part of that building for private purposes, on the one hand, he is entitled to deduct the input VAT paid on all construction costs relating to that building and, on the other, he is subject to the corresponding obligation to pay VAT on the amount of expenditure incurred to effect such use."
In arriving at that conclusion the ECJ relied on and applied certain passages in Lennartz.
(a) Deduction of input tax is permitted under Article 17.2 only "in so far as" the services supplied were used by the taxable person "for the purposes of his taxable transactions". Such condition could only be satisfied as to 2% of the services supplied by the subsidiary to BUPA (para 32(i).(b) The word "business" in the context of s.24(1) does not include activities which do not involve the making of taxable supplies. Consequently 98% of the services supplied by the subsidiary, through its subcontractor, to BUPA could not be deductible as input tax (para 32(ii)).
(c) The provisions of s.24(5) require the apportionment of VAT on supplies to a taxable person so as to restrict the deduction of input tax to that part which is referable to the business purposes of the taxable person. 98% of the services supplied by the subsidiary, through its subcontractor, to BUPA is not so referable (para 32(iii)).
(d) If Regulation 101 is applicable, because 98% has not already been excluded by s.24(1) and (5), then the deduction would to that extent be precluded by Regulation 101(2)(b) or (c) on the grounds that the relevant goods or services were not used or to be used exclusively in making taxable supplies (para 32(iv)).
"23 It is settled case-law that, where capital goods are used both for business and for private purposes the taxpayer has the choice, for the purposes of VAT, of (i) allocating those goods wholly to the assets of his business, (ii) retaining them wholly within his private assets, thereby excluding them entirely from the system of VAT, or (iii) integrating them into his business only to the extent to which they are actually used for business purposes (see, to that effect, in particular, Armbrecht, paragraph 20; Bakcsi, paragraphs 25 and 26; Seeling, paragraph 40; and Case C-25/03 HE [2005] ECR I-0000, paragraph 46).
24 Should the taxable person choose to treat capital goods used for both business and private purposes as business goods, the input VAT due on the acquisition of those goods is, in principle, immediately deductible in full (see, in particular, Case C-'97/90 Lennartz [1991] ECR I-3795, paragraph 26, Bakcsi, paragraph 25, and Seeling, paragraph 41).
25 It follows from Article 6(2)(a) of the Sixth Directive that when the input VAT paid on goods forming part of the assets of a business is wholly or partly deductible, their use for the private purposes of the taxable person or of his staff or for purposes other than those of his business is treated as a supply of services for consideration. That use, which is therefore a taxable transaction within the meaning of Article 17(2) of that directive is, under Article 11A(1)(c) thereof, taxed on the basis of the cost of providing the services (see, to that effect, Lennartz, paragraph 26, Bakcsi, paragraph 30, and Seeling, paragraph 42)."
"It also became clear during the hearing that it was common ground that the outputs by GMS were agreed to be all business outputs for the purposes of Article 17 of the Sixth Directive. There was no non-business use. It was all business use and not partial business and partial non-business use. This was accepted by both parties. In other words they were all used for the purposes of GMS's taxable outputs."
This point was repeated in paragraph 10(n) (and again in paragraphs 18 and 27), in these terms:
"All of the inputs to GMS were used to make taxable outputs by GMS. It was common ground that there was no non-business use. We found that they were all used for the purposes of GMS's taxable transactions."
"18. Article 17 allows deduction of input tax where "goods and services are used for the purposes of taxable transactions". This is the starting point in considering deductibility. It is common ground that GMS's outputs were all business outputs for the purpose of Article 17. This case is only concerned with input tax recovery. Here the inputs were used for the purposes of the taxable transactions treated as taking place in December 1997 when the VAT invoices were issued. We find this as a fact.
In our opinion one should start by looking at Article 17, rather than Article 6. This allows the deduction of input tax from the tax a taxpayer is liable to pay on his outputs which are accepted as all business outputs.
19. Accordingly, at first blush, (on the common ground and findings of fact) GMS is entitled to deduct the whole of its input tax from the output tax on the taxable transactions in December 1997. This flows from the Sixth Directive and does not have to be further demonstrated by GMS. This raises the question as to whether there are any restrictions on this deductibility."
"They [the incoming goods or services] were all for business use as is common ground. There was no 98:2 split here as there was in BUPA. The outputs which were subject to VAT here were all taxable supplies. Accordingly, no question of apportionment arises in this case."
"Article 17.2 of the Directive... is probably the most important single provision in the Directive so far as the present case is concerned. It begins with the words "In so far as". Where a taxable person incurs input tax on some supply made to him, he can only deduct that input tax for his own VAT purposes "in so far as" he uses the supply "for the purposes of his taxable transactions". In this case [the subsidiary] used the supplies – the inputs - which it received from outside suppliers...to perform its obligations under the contracts with BUPA... The performance of those obligations was a taxable transaction to the extent of 2%. To the extent of 98% it was something that [the subsidiary] did and for which it used the inputs, but it was not a taxable transaction. So, having in mind the expression 'in so far as', I ask myself: how far did [the subsidiary] use the services which it purchased from outside suppliers like advertising agents for the purposes of its taxable transactions? I answer: to the extent of 2%."
"[Counsel's] argument is that the case shows that an apportionment of input tax can never be made in the case of an asset which cannot be severed into a business part and a non-business part. I do not think that is shown by the Lennartz case, even taking the case by itself, and certainly not when other decisions of the ECJ are also taken into consideration. The case is only considering the acquisition of goods, not of services, and even in the context of goods it seems to me to recognise that another acceptable way of dealing with an acquisition made partly for business and partly for private purposes is to deduct and apportioned part of the input tax on the acquisition. See for example Lennartz [1995] STC 514 para 15 of the judgment."
"The scheme of the legislation is plain. If the business activities of the taxpayer are such that all the supplies that he makes are subject to output tax (whether positive rated or zero rated) he recovers all the tax that he pays on the inputs of that business: see ss. 3(3) and 4(1)(a). If all the supplies he makes are exempt supplies, he can recover none and the probability is that he will not even be registered. If the supplies which he makes are partly taxable supplies and partly exempt supplies there is to be an apportionment of the tax and that which is attributable to the exempt supplies is not recoverable. I ask myself how, against that background, one could rationally come to the conclusion that if the business activities of the taxpayer are such that some services are taxable supplies and some are not supplies at all, the whole of the input tax is recoverable? The reductio ad absurdum of the taxpayer's argument is this: suppose that the taxpayer's business is such that some of this supplies (outputs) are taxable supplies, some are exempt supplies and some are not supplies at all within the statutory definition: in this situation the only allowable input tax under s.4(1)(b) is that attributable to the taxable supplies made by the taxpayer: suppose that the taxpayer then ceases to make exempt supplies but continues to make his taxable supplies and his 'non-supplies'; on the Council's argument the taxpayer now recovers the whole of the input tax attributable to his 'non-supplies', which in the first example was not recoverable by him.
Lord Brightman then quoted Article 11.2 of the Second Directive and Article 17.2 of the Sixth Directive and observed:
"The sense of both directives is the same. Input tax is not deductible except so far as the goods or services on which the tax has been levied are for the purposes of the taxpayers taxable transactions."
"activities that do not involve the making of taxable supplies, even if they would be business in the normal sense, do not count as business for VAT."
In relation to the latter he stated:
"It is true that the reason why some of [the subsidiary's] activities (98% of them) were not taxable supplies is not the same as the reason why some of the Apple and Pear Development Council's activities were not taxable supplies, but that does not, in my view, make any difference. If the activities were not the making of taxable supplies, any VAT borne on the price of them is not 'input tax' to which s.24 can apply."
Whilst I have reservations in respect of the first of those conclusions, I agree entirely with the second.
"When [the subsidiary] used its inputs only to the extent of 2% in making taxable supplies, I do not see how it can be said that it used the inputs (ie 100% of them) 'exclusively' in making taxable supplies."
"Where...any bodies corporate are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member, and –
(a) any supply of goods or services by a member of the group to another member of the group shall be disregarded; and
[(b) and (c)].