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	First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> University of Essex v Revenue & Customs [2010] UKFTT 162 (TC) (13 April 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00467.html Cite as: [2010] SFTD 893, [2010] STI 2547, [2010] UKFTT 162 (TC)

DECISION

1. These are appeals by the University of Essex (“the University”) against decisions of HMRC requiring an adjustment of £248,001.93 in respect of input tax deducted on the construction of new student accommodation (“the Development”) and refusing to repay that sum to the University, and against the refusal of HMRC to backdate the removal of an associated company, Universal Accommodation Group Limited (“UAG”) from the University’s VAT group.

2. The case essentially revolves around input tax incurred on the construction of the student accommodation that was deducted by UAG on the making of a zero-rated supply to the University. UAG subsequently became a member of the University’s VAT group, and HMRC claim that its entry into the group, and the exempt supplies made by the University in respect of the student accommodation, have the result that there must be adjustments of the input tax recovery under the capital goods scheme, and consequent payment of VAT to HMRC. That is what we describe below as the first issue. The second issue arises out of an attempt by the University to rectify the situation by applying to remove UAG from its VAT group with effect from the date on which UAG had joined the group. That backdating was refused by HMRC.

3. The University was represented by Michael Conlon QC and Rebecca Murray. Rupert Baldry appeared for HMRC.

4. The essential facts were not in dispute. We had the benefit of a statement of agreed facts, which we set out in full below. We also had a witness statement of Mr Charles Rumbles, a director of CKR VAT Consultancy Limited, the content of which was not challenged by HMRC. A bundle of documents was produced.

The facts

5. The statement of agreed facts is as follows (reference numbers are to the documents bundle):

Introduction

1. University of Essex (“the University”) and Universal Accommodation Group Limited (“UAG”) are in dispute with the Commissioners of Her Majesty’s Revenue and Customs (“the Commissioners”) about adjustments to the attribution of input tax incurred on the construction of student accommodation at Hythe Quays (“the Development”).

2. In Appeal Reference LON/08/1441 (“the First Appeal”) the University appeals against the Commissioners’ decisions requiring an input tax adjustment of £248,001.93 and refusing to backdate, to 1 August 2004, the removal of UAG from the University’s VAT group.

3. In Appeal Reference LON/08/1446 (“the Second Appeal”) UAG appeals against the Commissioners’ refusal to pay a claim under section 80 of the Value Added Tax Act 1994 (“VATA”) for £248,001.93 paid to the Commissioners by UAG by way of VAT which was not VAT due to them.

4. In Appeal Reference LON/08/1839 (“the Third Appeal”) UAG appeals against the Commissioners refusal to backdate, to 1 August 2004, the removal of UAG from the University’s VAT group.

The Parties

5. The University is a higher education establishment which carries on its activities at Wivenhoe Park, Colchester, Essex, CO4 3SQ. The University is registered for VAT as part of a VAT group registration under VAT No. 594 7948 65. Returns are submitted quarterly for prescribed accounting periods ending on the last days of January, April, July and October.

6. At all material times the University has been partly exempt and its tax year for VAT purposes begins on 1 August.

7. UAG was incorporated on 27 March 2000 and is, and was at all material times, a property development company originally carrying on business at Sundridge House, Main Road, Sundridge, Kent TN14 6EQ.

8. UAG was registered for VAT with effect from 22 May 2001 to 31 July 2004 under VAT No. 779 3375 74 and required to submit monthly VAT returns.

9. Between 1 August 2004 and 3 May 2005 UAG was a member of the University’s VAT Group (VAT No. 594 7948 65).

10. UAG was re-registered for VAT as a stand alone registration with effect from 4 May 2005 under VAT No. 872 7976 68.

11. The RCB Partnership of Fairburn House, Fairburn Place, Livingston, West Lothian, EH54 6TN (“RCB”) is a tax consultancy firm which acted as VAT adviser to the University between 1993 and July 2005.

12. Deloitte & Touche LLP of Four Brindley Place, Birmingham, B1 2HZ (“Deloitte”) is an accountancy firm which has advised the University on VAT since July 2005.

13. The MBA VAT Consultancy of Somerhayes, Fountain Lane, Hockley, Essex SS5 4ST (“MBA”) is a tax consultancy firm which has corresponded with the Commissioners in relation to VAT issues which are the subject of these appeals since May 2006.

The Development

14. In 2001 the University wished to acquire new student accommodation and in 2002 it contracted with UAG to construct the Development on land owned by UAG.

15. With effect from 22 May 2001 UAG elected to waive exemption over the Development under paragraph 2 of Schedule 10, VATA [B4/1].

16. On 13 September 2002 the University issued to UAG a certificate pursuant to Note (12), Group 5, Schedule 8, VATA certifying that the intended use of the Development was as to 96.22% for a relevant residential purpose and as to 3.78% for other non-qualifying purposes (“a Zero-Rating Certificate”) [B19/1].

17. On 14 October 2002 the University issued a revised Zero-Rating Certificate to UAG certifying that 97.45% of the Development was intended for use for a relevant residential purpose and 2.55% for other non-qualifying purposes [B20/1]. This revision to the Zero-Rating Certificate was made due to a small reduction in the proposed commercial areas within the Development.

18. Between November 2002 and September 2003 UAG constructed the Development and incurred input tax totalling £3,751,618.53 on the Development.

19. On 26 September 2003 UAG entered into a lease of the Development for a term of 25 years commencing on 1 August 2003 (“the Lease”) in consideration of an annual rent of £1,550,000. [B29/1]

20. The Development was first brought into use by the University on 26 September 2003. [B29/1]

21. In October 2003 the University issued to UAG a revised Zero-Rating Certificate certifying that 98.73% of the Development was intended for use for a relevant residential purpose and 1.27% for other non-qualifying purposes [B31/1]. The change in the certified percentages followed from a change in design of the Development which reduced the area for non-residential use by removing a bar and changing the space to student accommodation use.

22. On 18 June 2004 the University acquired the entire share capital of UAG for £24,699,146 [B37/1]

23. The University has paid to UAG the premiums due under the Lease and all payments of rent as they fall due.

24. At all material times the Development has been used by the University in accordance with the Zero-Rating Certificates issued by it from time to time.

The Grouping and De-Grouping of UAG

25. On 28 July 2004 UAG applied to the Commissioners to be treated as a member of the University’s VAT group registration [B42/2] (“the Grouping Application”).

26. On 12 August 2004 [B43/1] the Commissioners informed the University that, with effect from close of business on 1 August 2004, they had cancelled UAG’s VAT registration under VAT No. 779 3375 74 and with effect from 2 August 2004 registered UAG as a member of the University’s VAT group.

27. On 27 April 2005 RCB, on behalf of the University, applied to the Commissioners to remove UAG from the University’s VAT group [B59/1] (“the De-Grouping Application”).

28. On 4 May 2005, on behalf of the University, RCB requested the Commissioners to backdate the effective date of the De-Grouping Application to 1 August 2004 [B60/1].

29. On 7 June 2005 the Commissioners informed RCB by letter that the De-Grouping Application could not take effect from 1 August 2004 [B61/1]. The Commissioners subsequently removed UAG from the University’s VAT Group with effect from 4 May 2005.

Rulings given by the Commissioners

30. By letter dated 14 June 2002 [B16/1] RCB, on behalf of the University, requested clearance from the Commissioners that if UAG were to sell the freehold in the Development to the University, this would not trigger a capital item adjustment under Part XV of the Value Added Tax Regulations 1995 (“the Regulations”) in respect of that part of the Development used other than for a relevant residential purpose.

31. The Commissioners responded to RCB by letters dated 16 October 2002 [B21/1] and 8 October 2003 [B30/1].

32. By letter dated 28 July 2004 to the University [B42/1] the Commissioners set out their understanding of the supplies made by UAG under the Lease and the VAT consequences as regards capital item adjustments under the Regulations.

33. By a follow-up letter dated 8 September 2004 sent to the University [B46/1], the Commissioners stated that the University had become responsible for capital item adjustments in respect of the Development and would be liable for VAT adjustments. [B46/1].

34. Following an exchange of correspondence with RCB, on 15 November 2004 the Commissioners wrote to RCB [B50/1] confirming that the University was responsible for making capital item adjustments and requesting a summary of input tax reclaimed. In a letter dated 9 December 2004 to RCB [B52/1], the Commissioners stated that, as a result of UAG joining the University’s VAT group, the payments of rent made by the University thereupon became disregarded for VAT purposes.

35. In a letter dated 14 April 2005 sent to RCB [B57/1], the Commissioners stated that an application by UAG to leave the University’s VAT group would be likely to be considered favourably. By letter dated 20 April 2005 sent to RCB [B58/1], the Commissioners stated that, if UAG had been left outside the University’s VAT group and use of the Development had remained as before, no capital item adjustment would have been necessary. Following receipt of this letter the University instructed RCB to make the De-Grouping Application [B59/1].

36. Following negotiations between Deloitte and the Commissioners regarding an appropriate capital item adjustment, UAG included on its VAT return for the period ended 30 November 2006 an amount of £248,001.93 as due to the Commissioners in respect of the Development (“the CGS Adjustment”), which has been paid by UAG.

The Dispute

37. By a letter dated 23 August 2007 [B78/1] MBA on behalf of the University requested the Commissioners to agree that the CGS Adjustment was not payable to the Commissioners. By their decision dated 6June 2008 [B79/1] the Commissioners declined to so agree. On 3 July 2008 the University served the First Appeal on the Tribunal.

38. By letter dated 20 June 2008 [B80/1] MBA on behalf of UAG sought repayment of the CGS Adjustment. By their decision dated 4 July 2008 [B82/1] the Commissioners refused repayment. On 21 July 2008 UAG served the Second Appeal on the Tribunal.

39. By letter dated 23 August 2007 [B78/1] MBA on behalf of UAG requested the Commissioners to approve the De-Grouping Application backdated to 1 August 2004. By letter dated 6 June 2008 [B79/1] the Commissioners refused. On 3 July 2008 UAG served the Third Appeal on the Tribunal.

The first issue

6. The first issue we have to determine is whether the University, for the period of time when UAG was a member of the University’s VAT group, was using the Development to make exempt supplies which could not be ignored under the Capital Goods Scheme (“CGS”), such that an adjustment under the CGS was required.

The law

7. It was common ground that UAG was entitled to deduct the input tax it had incurred on the construction of the Development on the basis that it intended to make (and ultimately did make) a zero-rated supply within Item 1 of Group 5 of Schedule 8 VATA, namely the first grant of a major interest in the Development. It was also common ground that the Development was a capital item within the CGS.

8. The CGS is contained in Part XV of the Value Added Tax Regulations 1995. Regulation 112(2) explains how “capital item” is to be construed:

“Any reference in this Part to a capital item shall be construed as a reference to a capital item to which this Part applies by virtue of regulation 113, being an item which a person (hereinafter referred to as “the owner”) uses in the course or furtherance of a business carried on by him, and for the purpose of that business, otherwise than solely for the purpose of selling the item.”

The Development fell within reg 113(b).

9. Regulation 114 provides that the proportion (if any) of the total input tax on a capital item which may be deducted is subject to adjustments under the CGS. Where the taxable use of the capital item decreases, this adjustment is dealt with by reg 115(2):

“Where in a subsequent interval applicable to a capital item, the extent to which it is used in making taxable supplies decreases from the extent to which it was so used or to be used at the time that the original entitlement to deduction of the input tax was determined, the owner shall pay to the Commissioners for that subsequent interval an amount calculated in the manner described in paragraph (1) above [i.e. in accordance with the adjustment formula.]”

We are not concerned in this case with the way the adjustment formula works. Put shortly, in a case where the adjustment period is 10 years (as for the Development), in the interval in which the taxable use decreases (for example by exempt supplies being made) a payment must be made to HMRC equal to one-tenth of the percentage decrease applied to the total input tax on the capital item.

10. In order therefore to adjust the input tax recovery in respect of a capital item, the taxable use of that item must be determined at the relevant time. In this regard reg 116(1) provides:

“Subject to … paragraph[s] … (3) below, for the purposes of this Part, an attribution of the total input tax on the capital item shall be determined for each subsequent interval applicable to it in accordance with the method used under Part XIV for that interval and the proportion of the input tax thereby determined to be attributable to taxable supplies shall be treated as being the extent to which the capital item is used in making taxable supplies in that subsequent interval.”

However, in ascertaining taxable use certain exempt supplies are disregarded by reg 116(3):

“Where the owner of a building which is a capital item of his grants or assigns a tenancy or lease in the whole or any part of that building and that grant or assignment is a zero-rated supply to the extent only as provided by—

(a) note (14) to Group 5 of Schedule 8 to the Act, …

any subsequent exempt supply of his arising directly from that grant or assignment shall be disregarded in determining the extent to which the capital item is used in making taxable supplies in any interval applicable to it.”

The disregarded exempt supplies accordingly included any exempt supplies made by UAG arising from the grant of the lease to the University. Prior to UAG joining the University’s VAT group, there was therefore no question of any adjustment arising under the CGS.

11. Section 43 VATA makes provision for the effect of companies being treated as members of a group. Section 43(1) provides:

“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) any supply which is a supply to which paragraph (a) above does not apply and is a supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member; and

…

and all members of the group shall be liable jointly and severally for any VAT due from the representative member.”

12. Section 43(1AA) deals with the situation where the description (other than simply as a taxable person) of the person by whom or to whom a supply is made is material. It provides:

“Where—

(a) it is material, for the purposes of any provision made by or under this Act ('the relevant provision'), whether the person by or to whom a supply is made, or the person by whom goods are acquired or imported, is a person of a particular description,

(b) paragraph (b) or (c) of subsection (1) above applies to any supply, acquisition or importation, and

(c) there is a difference that would be material for the purposes of the relevant provision between—

(i) the description applicable to the representative member, and

(ii) the description applicable to the body which (apart from this section) would be regarded for the purposes of this Act as making the supply, acquisition or importation or, as the case may be, as being the person to whom the supply is made.

the relevant provision shall have effect in relation to that supply, acquisition or importation as if the only description applicable to the representative member were the description in fact applicable to that body.”

The first issue: discussion

13. In his skeleton argument Mr Conlon put forward the submission that reg 115(2) did not apply in this case because all the input tax incurred by UAG was attributable to its first, zero-rated, supply, and was thus fully “crystallised”. On this basis it was said that there was no decrease in the extent to which the Development had been used for the first taxable rental. At the hearing before us Mr Conlon did not pursue this line of argument. We consider he was right not to do so. It is clear from reg 116(3) that only certain exempt supplies by an owner of a building who has made a zero-rated supply as the first grant under a lease, may be disregarded. If there are exempt supplies that fall outside the disregarded category, reg 115(2) may then apply to adjust the input tax recovery.

14. The issue therefore is the effect, for CGS adjustment purposes, of UAG becoming a member of the University VAT group on 2 August 2004. Mr Conlon argued that group registration changed nothing. The lease between UAG and the University remained in place and the Development continued to be used by the University for a relevant residential purpose (“RRP”). UAG continued to enjoy the status of a “person constructing” a building used for RRP who has received a zero-rated first rental. Notwithstanding grouping, it was submitted, the status of the persons and the transactions is preserved. In those circumstances no adjustment fell to be made under reg 115(2).

15. Mr Baldry argued that something had changed when UAG became a member of the group. Entering the group had inevitable fiscal consequences. He submitted that on joining the group UAG had ceased to carry on business for VAT purposes. Thereafter the only business in which the Development was capable of being used was the single business deemed to be carried on by the University under the grouping provisions in s 43 VATA. The Development was, he argued, undeniably used in that business in making exempt supplies to the students. The extent to which the Development was used in making taxable supplies thereby decreased and an adjustment was required by reg 115(2).

16. The effect of group registration was considered and explained in Customs and Excise Commissioners v Kingfisher plc [1994] STC 63. In that case Kingfisher plc was the holding company of a group consisting mainly of retail companies, but also including a finance company, Time Retail Finance Limited (“Time”). Time provided a consumer credit service in the form of credit cards for use in the retail outlets of the group. The question was whether the credit cards payments should be treated as cash paid by the customer on making the purchase, or whether Kingfisher, as representative member of the VAT group, was entitled to be treated as carrying on both the Time credit business and the retail businesses so that the credit sales should be treated as self-financed to be accounted for as and when payments were received from the customer.

17. In the High Court, Mr Justice Popplewell reviewed the scheme of the UK legislation and article 4(4) of EC Council Directive 67/228 (“the Sixth Directive”) which at the relevant time provided the authority for member states to “treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links”, and in the result found himself in entire agreement with the views expressed by the Chairman of the VAT Tribunal (D. C. Potter QC) whose decision (reported at [1991] VATTR 47) was the subject of the appeal. Before the tribunal it was argued by the Commissioners (at that time of Customs and Excise) that the function of what is now section 43 VATA was to provide a simplified accounting method and no more. Mr Potter rejected this submission and said (at p 52):

“Had Parliament intended that section 29(1) [of the Value Added Tax Act 1983] did no more that provide simplified accounting, nothing would have been easier than to have stated that in the section itself. In my view section 29(1) clearly affects the substantive liabilities of members of the group for VAT purposes. It is far reaching. It nullifies inter-group supplies of goods and services; it deems all supplies to or from a member of the group from or to an outsider to be treated as supplied by or to the representative member notwithstanding that the representative member may in reality neither make not receive any supply whatever; it makes all members liable jointly and severally for any tax due from the representative member. It seems to be reasonably clear that the purpose of section 29 is to enable a group to be treated as if it were a single body corporate, the different companies being no more than different departments. Although the phrase ‘a single taxable person’ introduced into Schedule 1 by Finance Act 1986 is absent, I nevertheless consider that the group is, albeit without prejudice to third parties, treated as a single taxable person. Furthermore, on any reckoning group treatment does change the substantive liabilities of members of the group.”

Having referred to consideration of the effect of deeming provisions by Lord Asquith in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109, and by Nourse J in IRC v Metrolands Ltd [1981] STC 193, Mr Potter continued (at pp 52-53):

“There would in my view exist anomaly, if not injustice, if section 29 did not cause a group to be treated as a single taxable entity, through its representative member, not materially distinguishable from a single body corporate having separate trading departments. That is the object of its deeming provisions.”

18. The holding by Popplewell J in Kingfisher that the purpose of what is now section 43 was to enable a group to be treated as if it were a single taxable entity was approved by a majority of the House of Lords in Customs and Excise Commissioners v Thorn Materials Supply Ltd and another [1998] STC 725. That case concerned the effect of an agreement under which one VAT group company (“Materials”) agreed to sell goods to another (“Home”) on terms which provided for 90% of the price to be payable immediately, and 10% on delivery. Materials then ceased to be a member of the VAT group and became separately registered. Subsequently Materials purchased the goods and delivered them to Home. Home paid the remaining 10% of the price. The appellants argued that the advance payment gave rise to a deemed supply which therefore, as to 90%, had to be disregarded, leaving only 10% of the supply to be taxed.

19. The leading opinion in the House of Lords was given by Lord Nolan, with whom Lords Browne-Wilkinson and Lloyd agreed. Lord Clyde delivered a concurring opinion, but on grounds which did not entirely accord with the reasoning of Lord Nolan, and Lord Hoffman delivered a dissenting opinion. In considering the question whether the supply of the goods, to the extent of 90%, was permanently excluded from the charge to VAT, Lord Nolan said (at p733):

“My Lords, I can find no warrant in the 1983 Act for any such consequence. I accept Mr Pleming's submission that art 4(4) and s 29(1) are not designed to confer exemption or relief from tax. They are designed to simplify and facilitate the collection of tax by treating the representative member as if it were carrying on all the businesses of the other members as well as its own, and dealing on behalf of them all with non-members. It is entirely consistent with this approach that the 90% supplies effected by Materials and Resources to Home should be disregarded for the purposes of the 1983 Act, because Materials and Home were not to be treated as carrying on their own businesses at that time. Popplewell J was in my judgment correct in holding, in the Kingfisher case, that the purpose of s 29(1) was to enable a group to be treated as if it were a single taxable entity, even though it is not expressed in those terms. The section may have the effect of deferring the charge to tax upon the added value of goods until they are the subject of a supply outside the group, but it does not prevent that charge.”

20. The representative member of the group must be treated as if it were carrying on the businesses of all group members, and dealing on behalf of those group members with non-members. But that does not mean that the group members are themselves ignored or that transactions between group members are to be treated as not having taken place. As Lord Nolan said (at p732):

“That leaves open the question of what is meant by the requirement in s 29(1) that a supply by one member of a group to another must be disregarded. I accept Mr Prosser’s [counsel for the appellants] submission that it does not mean that the separate existence of the appellants and Home is to be denied or that the sale agreement and the prepayment are to be treated as not having taken place.”

On this basis it was held that, although the intra-group supply between Materials and Home had to be disregarded as a supply for VAT purposes, the 90% of the consideration that was paid in advance was not ignored and had to be taken into account as part of the consideration for the later supply outside the group.

21. Mr Conlon referred us to the dissenting opinion of Lord Hoffman. He argued that in his discussion of the effect of the VAT grouping Lord Hoffman was not differing from the majority, but that he departed from the majority view only as regards the effect of the disregard of the supply between Materials and Home. Lord Hoffman took the view, agreeing in this respect with the decision of the VAT Tribunal (Mr P. M. Horsfield QC) (see (1994) VAT decision 12914), that the supply should be disregarded to the extent covered by the advance payment, and there should be no charge to tax on the amount of that advance payment. We can see the basis on which Mr Conlon sought to rely on what Lord Hoffman had to say about the effect of the VAT grouping provisions, but we consider that this should only be followed to the extent that it reflected the opinion of the majority, as set out by Lord Nolan. We therefore do not consider that we should have separate regard to Lord Hoffman’s opinion in this respect.

22. On this basis we turn to consider Lord Nolan’s opinion. It is clear from this that the purpose of section 43 is to enable a group to be treated as if it were a single taxable entity, and that the representative member is to be treated as carrying on the businesses of the other members as well as its own and dealing on behalf of those members with non-members. Consistently with this, group members (other than the representative member) are not treated as carrying on business on their own account. However, group members are nevertheless treated as continuing to have a separate existence, and transactions between group members (as opposed to the VAT supplies those transactions give rise to) are not to be ignored.

23. Given these principles, the issue is what effect UAG joining the University VAT group had on the application of the CGS to the Development. Mr Baldry argued that, since the University is treated as a separate taxable person that is carrying on the business of UAG, the University must be regarded as the owner of the Development and that the exempt supplies made by the University represented a decrease in the extent to which the Development was used in making taxable supplies. We do not agree. There is in our view nothing in section 43 that goes so far as to treat the University as owning the Development. The separate existence of UAG and its lease to the University must, according to Thorn, continue to be respected; this could not be the case if the Development were to be treated as no longer owned by UAG, but owned by the University. Kingfisher, in particular the tribunal’s description of the single taxable entity in terms of a single company with separate divisions, must be read in the light of Thorn.

24. Our conclusion on the effect of the group provisions does not turn on section 43(1AA), but we should refer here to the argument of Mr Conlon that the effect of section 43(1AA) is that the separate identity of persons and transactions is preserved, effectively a codification of the principles we have found in Thorn. We do not share this view of section 43(1AA). In our view, in the circumstances of this case, section 43(1AA) does not apply. Section 43(1AA) operates only in relation to supplies of group members that are treated as made to or by a representative member (s 43(1)(b)), or acquisitions or importations of goods treated as made by the representative member (s43(1)(c)). Here no supplies of UAG were treated as made by the University; the exempt supplies at issue were the actual supplies made by the University. As the relevant supplies were the University’s own supplies, no comparison can be made as required by s 43(1AA)(c). Section 43(1AA) does not therefore apply.

25. We consider now the effect of our conclusion as to the group provisions on the operation of the CGS in the circumstances of this case. As we have described, the effect of section 43 is that, once UAG became a member of the University VAT group, it was no longer regarded as carrying on a business for VAT purposes, but instead the University was treated as carrying on that business as well as any business of its own. The business of UAG that was treated as being carried on by the University was the business of leasing the Development to the University itself. The University had an interest in the Development, but only by virtue of the lease from UAG. It exploited that interest in the Development by letting student accommodation. Both of these businesses are treated by section 43 as being carried on by the University.

26. Regulation 113(b), which describes the possible classes of capital items, includes land where the value of the interest supplied to the owner, by taxable supply which is not a zero-rated supply, exceeds a certain threshold. The other categories of capital item likewise depend on factors concerning the owner. The expression “owner” for these purposes is defined by reg 112(2) as the person who uses the item in the course or furtherance of a business carried on by him, and for the purposes of that business, otherwise for the purpose of sale.

27. Under section 43, it is only the University that can be regarded as the owner for this purpose, as it is only the University that is treated as carrying on the business of the group members, including UAG. But in order that the Development can represent a capital item for the University, there must have been a supply of it to the University. In this case the relevant supply of the Development was to UAG at a time when UAG was not a member of the group, and section 43 accordingly had no effect with regard to that supply. Although, once UAG was a member of the group, section 43 had the effect that supplies to (and by) UAG were regarded as made to (or by) the University, that effect is not retrospective. The representative member does not stand in the shoes of group members for all purposes, particularly as regards past events.

28. On this basis, the item for which input tax was recovered by UAG did not, as a consequence of the group registration whereby UAG became a member, become a capital item of the University, nor was it treated as such. The University did not use that capital item (namely the Development) in order to make its own exempt supplies in respect of the student accommodation. It used the lease it had itself obtained from UAG. Although the supplies under that lease by UAG to the University fell to be disregarded by section 43 whilst UAG was a group member, the lease itself was not treated as if it did not exist. Accordingly, the extent to which the Development was used in making taxable supplies did not decrease. Prior to UAG joining the group its exempt supplies were disregarded under reg 116(3); after it joined the group they were disregarded by section 43. The only relevant supply in respect of the Development was the zero-rated supply, and consequently no adjustment falls to be made to the recovery of input tax attributable to that supply.

29. Mr Baldry referred us to the decision of the Court of Justice in Kretztechnik AG v Finanzamt Linz (Case C-465/03) [2005] STC 1118, a case concerning whether input tax incurred on a share issue and listing on the Frankfurt stock exchange was deductible. It was held that in view of the fact that the share issue was an operation falling outside the scope of VAT, the costs of the supplies in question formed part of the company’s overheads. The supplies had a direct and immediate link with the whole economic activity of the company, and input tax was deductible accordingly. Mr Baldry cited in particular the following passage from the opinion of the Advocate General (Jacobs) (at paras 71 – 74):

“71. Determination of the right to deduct governed by art 17 of the Sixth Directive is based on an attribution of input costs to output transactions.

72. Any link which those costs may have with other events, such as other inputs, transactions purely internal to the taxable person's business, or events, other than supplies, entirely outside the scope of VAT, is simply irrelevant in that regard.

73. For example, if a trader uses the services of a broker or valuator when acquiring a commodity, the cost of those services may be said to be directly, immediately and exclusively linked to the acquisition. That does not however determine whether the VAT on the services is deductible. The right to deduct must be determined by the output transactions for the purposes of which the services are used. The transactions in question will usually be the onward supply of the commodity or of the goods or services for which it is used or in which it is incorporated. The right to deduct will depend on whether that supply is taxed or not.

74. Thus, if the transaction with which the input is most closely linked is one which falls entirely outside the scope of VAT because it is in any event not a supply of goods or services, it is irrelevant for the purpose of determining deductibility. What matters is the link, if any, with such output supplies, and whether they are taxed or exempt (see also my opinion in Abbey National plc v Customs and Excise Comrs [2001] STC 297, [2001] 1 WLR 769, [2001] ECR I-1361, in particular at points 35 and 46).”

30. Relying on this, Mr Baldry argued that it was a fundamental principle that transactions that were not supplies for VAT (such as supplies disregarded under section 43) should be looked through. We do not consider that this assists Mr Baldry. This is not a case where input tax cannot be attributed to a transaction because there is no supply. In this case, to the contrary, there was a supply, namely the zero-rated supply made by UAG to the University, to which all the input tax was attributed. Kretztechnik is not in our view authority for the way in which an adjustment might subsequently be made to that input tax according to the CGS, and is not relevant to the effect of the group provisions on that question.

31. For these reasons, in relation to the first issue, we decide, in favour of the University, that the University was not, in the period when UAG was a member of the University’s VAT group, using the Development to make exempt supplies, and that no adjustment under the CGS was required.

The second issue

32. Our decision in respect of the first issue decides the substantive question in favour of the University, and we do not therefore have to consider the second issue. However, in case we are found to be wrong on the first issue we now set out our conclusions on the second issue.

33. Put briefly, the second issue concerns the refusal by HMRC to allow UAG to cease to be a member of the University’s VAT group from a date earlier than the date of the application to de-group UAG. The University’s submission is that the refusal was based on an error of law and should be set aside.

34. The background to this dispute is set out in the statement of agreed facts. The letter of 4 May 2005 from RCB on behalf of the University requested HMRC to remove UAG from the group with effect from 2 August 2004. (The letter itself says 1 August 2004, but the accompanying application has the correct date of 2 August 2004, namely the date of the original entry of UAG into the group.) Essentially, having regard to the position that HMRC had adopted with regard to the CGS adjustments whilst UAG was in the group, the University was attempting to put the position back to what it would have been if UAG had never become a group member. The letter from RCB makes clear that the University did not wish to remove UAG from the VAT group, and was making that application only as a result of the position taken by HMRC regarding the CGS.

35. HMRC had been aware of the project to construct the student hall of residence at an early stage. On 14 June 2002 Mr Rumbles wrote to HMRC outlining the proposals, and asking for assistance in resolving an issue around the exercise by the University of its option to acquire UAG and the transfer of the Development from UAG to the University. Mr Rumbles put forward the view that reg 116(3) of the 1995 Regulations would preclude a CGS adjustment in UAG. Clearance was sought in respect of the application of a special method under reg 116(2). Ms Janice Lambert, the HMRC officer dealing with the University, replied on 16 October 2002, having consulted HMRC’s Policy team. This letter appears rather confused, in that it refers only to the non-qualifying percentage of the Development as potentially being a capital item, and does not deal with the question raised. It does, however, refer to the possibility of UAG becoming a member of the University’s VAT group. This was followed by a further letter from Ms Lambert on 8 October 2003 stating that HMRC did not agree with Mr Rumbles’ view of reg 116(3) and stating that the transfer of the Development would give rise to a CGS adjustment.

36. Ms Lambert visited the University on 17 June 2004, and following an enquiry by her by letter of 8 July 2004 regarding the inclusion of UAG in the VAT group, Mr C. J. Walters, the University’s Assistant Director of Finance (Financial Accounting) replied on 13 July 2004 to confirm that an application for UAG to be included in the group would shortly be forwarded. In his e-mail, Mr Walters refers to the CGS as follows:

“Though we are aware of the continuation of the Capital Goods Scheme re University Quays [the Development], we do not anticipate at present any adjustment will be necessary. This position will be reviewed annually as part of our PE [partial exemption] claim.”

Ms Lambert then asked, on 14 July 2004, if Mr Walters was saying that UAG would continue to provide the student accommodation, querying presumably at zero-rate, which Mr Walters confirmed on the same day, subject only to noting the small standard-rated element according to the zero-rating certificate.

37. The application for UAG to be included in the VAT group registration was made under cover of a letter from Mr Walters dated 29 July 2004. In that letter Mr Walters again refers to the CGS, saying: “The capital goods scheme will apply to the University Quays building. However, none of this is used for VAT-exempt activities, nor is this envisaged to change within the next 10 years.”

38. It appears that Mr Walters’ letter of 29 July 2004 enclosing the application for group registration crossed in the post with a letter from Ms Lambert to Mr Walters dated 28 July 2004 which is date-stamped as received by the University’s Finance Section on 2 August 2004. Ms Lambert refers to recent correspondence with Mr Walters and says she has taken advice on the application of the CGS in relation to the Development. She goes on to confirm that the Development is a capital item in its entirety, and makes the surprising assertion (in the light of reg 116(3)) that UAG should have been making adjustments for the exempt use. In relation to the proposal to bring UAG into the group, Ms Lambert says that the University would become responsible for any CGS adjustments. Although this letter refers to possible adjustments within the group, it does not indicate that these would be triggered by UAG becoming a group member. The adjustments referred to here by Ms Lambert are those adjustments that at this stage she (wrongly) believed were attributable to exempt supplies made by UAG. It is not surprising therefore that Mr Walters did not immediately reply, or that when he did on 7 September 2004, he merely acknowledged what Ms Lambert had said and confirmed that no change was envisaged to the original use of the Development, and that consequently no future VAT liability was anticipated.

39. Ms Lambert’s response of 8 September 2004 repeats, in greater detail, the erroneous view that UAG’s exempt supplies under the lease to the University had given rise to a CGS adjustment. Ms Lambert refers to UAG becoming a member of the VAT group, and says that UAG should have completed the first interval of the CGS on the day it became a member of the group. This is a reference to the effect of reg 116(5A) of the 1995 Regulations, which deals with the ending of the then applicable interval in assessing the adjustment to be made for that period, which relates to a time before UAG joined the group. Ms Lambert then goes on to say that the University has become liable for any CGS adjustments.

40. This letter raised concerns at the University. Mr Rumbles wrote to Ms Lambert on 7 October 2004, and refers in that letter to an earlier telephone conversation with Ms Lambert. In that conversation it appears that Mr Rumbles had understood HMRC’s position to be that the University would be liable to account for CGS adjustments notwithstanding the issue of the zero rate certificate and the University’s continued compliance with its terms. The letter concludes with a request for early confirmation of the interaction between the CGS and the zero rating certificate.

41. A meeting was held at the University on 23 February 2005 at which Andrew Connolly, the University’s Director of Finance, presented a paper on the background to the Development. This was followed by a letter from Mr Rumbles to Mrs Susan Harrington at HMRC setting out the respective positions. By this time it had become apparent that the position adopted by HMRC was the one we have considered as the first issue of these appeals. This letter also raise the possibility of removing UAG from the group registration, even though, having regard to restrictive housing regulations, the University would wish to avoid this if at all possible.

42. Mrs Harrington sent a substantive reply on 14 April 2005. In relation to the possibility that UAG might cease to be a member of the VAT group, Mrs Harrington said:

“UAG can apply to leave the VAT [group] and return to being an independent VAT registration. Although it cannot be guaranteed at this stage that such a request would be granted, it is likely to be considered favourably. However, I understand there are reasons, un-connected with these issues, why the University would not wish to pursue this.”

The 14 April 2005 letter also raised the possibility of HMRC allowing a special method to determine the CGS adjustments under reg 116(2). This was followed shortly by a letter of 20 April 2005 saying that this would not be permitted. In that letter Mrs Harrington gives the following reason why HMRC would not permit a special method:

“The University took the commercial decision to bring UAG into the VAT group with any benefits or otherwise that may bring. If UAG had been left outside of the group and the use had remained as before for the duration of the CGS then no adjustments would have been due. It is not possible to use the legislation to effectively treat supplies, and therefore use, which are correctly exempt in law as taxable.”

43. Mr Rumbles wrote to Mrs Harrington on 4 May 2005. This is the letter we have referred to above enclosing the application to remove UAG from the group registration with effect from 2 August 2004.

44. The reply from HMRC to Mr Rumbles was dated 7 June 2005. It refused the retrospective de-grouping of UAG. Mrs Harrington wrote:

“Under the provisions of section 43C of the VAT Act 2004 [sic], where a body is treated as a member of a group and that body is not or is no longer eligible to be a member of a VAT group, the Commissioners may approve retrospective corrective action.

UAG Ltd met the criteria laid down in section 43A when they entered the group and there is no evidence to suggest that the circumstances changed to such a degree that they were no longer eligible to remain in the group; on that, or any other, date.

The Commissioners have no power to allow retrospective changes in the group structure other than in the above circumstances.”

45. This letter was followed by a letter dated 2 August 2005 from Deloitte & Touche LLP on behalf of the University to the Appeals and Reconsiderations Section of HMRC, firstly requesting reconsideration of the CGS issue, but also saying that the University would like to proceed with the removal of UAG from the VAT group with effect from 4 May 2005. UAG was subsequently removed from the group with effect from that date.

46. Correspondence then ensued between HMRC and Deloitte & Touche and HMRC and Mike Arnold of the MBA VAT Consultancy with regard to the CGS adjustment, in the course of which Mr Arnold wrote two letters to HMRC, on 9 May 2006 and 23 April 2007, setting out the history of the matter and asking HMRC to consider a waiver of tax on the grounds of the nature and correspondence leading up to the inclusion of UAG in the VAT group and essentially that the University were led into applying for UAG to be included in the group by Ms Lambert’s ruling of 28 July 2004 (and her letter of 8 September 2004). HMRC investigated these concerns, and in extensive letters dated 17 January 2007 and 14 May 2007 concluded that the University had not been led to include UAG in its VAT group by the incorrect advice of Ms Lambert.

47. On 23 August 2007 Mr Arnold wrote to HMRC asking for a formal review of the decision not to allow retrospective de-grouping on the ground that section 43B(4)(b) “plainly allows backdating”, and that section 43C was irrelevant as it relates to the termination of a group membership by HMRC. In addition, Mr Arnold referred to the view of leading counsel that the circumstances in which the grouping was mistakenly requested and Ms Lambert’s actions provided reasonable grounds on which HMRC could agree to a backdating.

48. HMRC replied to Mr Arnold’s letter on 6 June 2008 as follows:

“Decisions about VAT grouping are voluntary ones for a business and there is no basis for HMRC to revisit the decision that was made in relation to the de-grouping of UAG, on the grounds that the original application for including UAG in the group was an error by the University. You refer to the grouping being a mistake, but RCB’s letter of 4 May 2005 requesting de-grouping said that ‘The University does not wish to remove UAG from the VAT group …’

HMRC fail to see how an exercise of the Commissioners discretion, as allowed under s 43(4)(b) of the VAT Act 1994, can be classed as an “error of law”. The law has been exercised exactly as it is written.”

In the circumstances the ruling dated 7 June 2005 stands.”

It was from this decision of HMRC as regards the refusal to allow UAG to be treated as ceasing to be a member of the group on 2 August 2004 that the University has appealed.

The law

49. Section 43B VATA, so far as is material, provides:

“(1) This section applies where an application is made to the Commissioners for two or more bodies corporate, which are eligible by virtue of section 43A, to be treated as members of a group.

(2) This section also applies where two or more bodies corporate are treated as members of a group and an application is made to the Commissioners—

…

(b) for a body corporate to cease to be treated as a member of the group,

…

(4) Where this section applies in relation to an application it shall, subject to subsection (6) below, be taken to be granted with effect from—

(a) the day on which the application is received by the Commissioners, or

(b) such earlier or later time as the Commissioners may allow.

(5) The Commissioners may refuse an application, within the period of 90 days starting with the day on which it was received by them, if it appears to them—

…

(6) If the Commissioners refuse an application it shall be taken never to have been granted.”

The second issue: discussion

50. Mr Baldry argued firstly that the Tribunal had no jurisdiction in respect of the appeal on the second issue. He referred us to section 83(k) VATA under which an appeal lies to the Tribunal with respect to “the refusal of an application such as is mentioned in section 43B(1) or (2)”. He drew our attention to section 43B(5), which contains a distinct provision for refusal of an application. He argued that, subject to sub-section (5), if HMRC did not exercise its discretion to grant the application for de-grouping from an earlier or later date, the de-grouping would take effect in any event from the date on which the application was received by HMRC. The refusal referred to in section 83(k) is confined to a refusal under section 43B(5), and there was no such refusal in this case.

51. We do not agree that section 83(k) should be construed in this restrictive way. If it had been intended to confine the right of appeal to the Tribunal to refusals of applications falling only within section 43B(5), section 83 could have said so. We regard the application by the University to de-group UAG as an application to de-group on 2 August 2004. By refusing to agree to the back-dating HMRC was refusing the application that had been made. That refusal is a refusal falling within section 83(k). It follows that the Tribunal has jurisdiction in respect of the second issue. Mr Baldry also referred us to section 84(4A), which relates to refusals of applications under section 43(1) and (2), but concerns only refusals on the grounds stated in section 43B(5)(c). We do not consider that this assists Mr Baldry. If anything it confirms our own view, as it demonstrates that specific language is required when only specific circumstances are intended to be covered.

52. Mr Baldry sought in addition to rely on Customs and Excise Commissioners v J H Corbitt (Numismatists) Ltd [1980] 2 WLR 653 in the House of Lords where, by a majority, it was held that on a true construction of the powers of the commissioners to specify by notice what accounts and records were required to be kept and section 40(1)(b) of the Finance Act 1972 (the right of appeal in respect of an assessment or the amount of an assessment) the tribunal’s jurisdiction was confined to the question whether as a matter of law the trader had kept the specified records and accounts, and that the tribunal had no supervisory jurisdiction. Lord Simon made it clear (at p 656) that this was a well-established rule of law that could be abrogated only by clear words. Corbitt also confirms, however, that the powers of the tribunal are a question of construction of the statutory provisions. In this case, as we have described above, we consider that section 83(k), properly construed, does afford this Tribunal jurisdiction in an appeal against a refusal of an application to de-register retrospectively. We do not consider that Corbitt is authority to the contrary.

53. If, as we have found, the Tribunal does have jurisdiction, there was no dispute but that it is an appellate and not a supervisory one. Mr Baldry referred us to Customs and Excise Commissioners v Save and Prosper Group Ltd [1979] STC 205, where, in the context of a decision by the commissioners that they had no power to permit retrospective group treatment (which was held to be wrong), since these matters were in the discretion of the commissioners, the tribunal in that case had been wrong to decide themselves that the relevant company should be allowed to be treated as part of the group. The matter should instead have been sent back to the commissioners for their consideration.

54. The jurisdiction of the Tribunal in relation to matters that require HMRC to exercise a discretion was set out by the Court of Appeal in John Dee Ltd v Customs and Excise Commissioners [1995] STC 941. In that case, which concerned the power of HMRC to require a trader to provide security where it appears to them requisite for the protection of the revenue, it was held that the tribunal had to consider whether the commissioners had acted in a way in which no reasonable panel of commissioners could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight. The tribunal might also have to consider whether the commissioners had erred on a point of law. However, the tribunal could not exercise a fresh discretion. Nevertheless, even in a case where it was shown that the commissioners’ decision was erroneous because of their failure to take relevant material into account, a tribunal could nevertheless dismiss an appeal if the decision would inevitably have been the same had account been taken of the additional material.

55. Mr Baldry argued that where a simple discretion is being exercised John Dee can have no application. In John Dee there was a specific statutory condition that had to be considered by HMRC, namely the protection of the revenue. In a case of a pure discretion, with no such statutory condition, the proper remedy in respect of a complaint that the discretion was exercised in wholly improper way was by way of judicial review. This essentially comes back to the jurisdiction argument. On the basis, as we have decided, that this Tribunal does have jurisdiction in respect of refusals of retrospective de-grouping applications, we conclude that the nature of our jurisdiction is that described in John Dee.

56. We turn therefore to consider whether HMRC in this case have acted in a way no reasonable panel of commissioners could have acted, whether they have taken into account some irrelevant matter or have disregarded something to which they should have given weight, or whether they have made an error of law. On this basis it is clear to us that the refusal on 7 June 2005 was based on an error of law. It is not disputed that the reference to section 43C in that letter was wrong, and it certainly was an irrelevant consideration. However, that decision itself was not appealed, and instead Deloitte & Touche wrote to HMRC on 2 August 2005 asking for the de-grouping to proceed from 4 May 2005. It was only on 23 August 2007 that Mr Arnold wrote to HMRC to ask for a review of the 7 June 2005 decision. At that stage the question of the circumstances in which grouping was “mistakenly” required and Ms Lambert’s actions were raised as grounds on which HMRC could exercise their discretion in favour of backdating.

57. HMRC’s reply dated 6 June 2008 does not place reliance on section 43C; it refers instead, correctly, to the exercise of HMRC’s discretion under s 43B(4)(b). HMRC’s decision in this respect cannot be impugned as an error of law. The 6 June 2008 letter considers the question whether the original grouping decision was in error, but itself discloses no consideration of the actions of Ms Lambert. However, that does not mean that those matters had been disregarded. The actions of Ms Lambert had been considered in detail by HMRC in response to equally detailed representations made by Mr Arnold in his letters of 9 May 2006 and 23 April 2007. HMRC’s letter of 14 May 2007 states that all the case papers had been reviewed and contains a comprehensive review of the history of the matter, leading to the conclusion that Ms Lambert had not misled the University into making its application for UAG to become a member of the VAT group. This conclusion was, in our view, reflected in the 6 June 2008 letter in the reference there to the decision to bring UAG into the group being a voluntary one on the part of the University. We do not consider that, on the facts of this case, this conclusion was one that no reasonable body of Commissioners could have reached.

58. For these reasons we conclude that, although an error of law was made by Ms Lambert in making the original decision not to permit retrospective de-grouping, that error was rectified in the decision of 6 June 2008 and in making that decision HMRC had at that stage taken into account all matters that ought to have been given weight and had not disregarded any relevant matter. There are no grounds therefore in our view for the matter to be remitted to HMRC.

59. We should finally refer to written submissions we helpfully received from both parties following the hearing on the observations made by Sales J in Oxfam v Revenue and Customs Commissioners [2009] EWHC 3078 (Ch). This was in response to our request during the hearing for such submissions in view of the arguments we had heard on Corbitt, which had been discussed by Sales J in Oxfam. Having considered the submissions, we do not consider that it is necessary for us to comment on the jurisdictional questions raised in Oxfam. It is no part of the University’s case in these appeals that the conduct of HMRC gave rise to any legitimate expectation on the part of the University. We have decided, independently of Oxfam, that the Tribunal has, by virtue of section 83(k), jurisdiction on an appeal in respect of the exercise of HMRC’s discretion with regard to backdating a de-grouping application, and accordingly we need give no further consideration to Oxfam.

Decision

60. For the reasons we have given:

(1) The University’s First Appeal, against the decision of HMRC not to agree that the CGS adjustment was not payable to HMRC, is allowed.

(2) The University’s Second Appeal, against the refusal of HMRC to repay the CGS adjustment, is allowed.

(3) The University’s Third Appeal, against the refusal of HMRC to approve the application to backdate the de-grouping of UAG from the University’s VAT group with effect from 2 August 2004, is dismissed.

Costs

61. At the commencement of the hearing, and with the agreement of the parties, the Tribunal directed, pursuant to para 7(3), Sch 3, Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, that Rule 29, Value Added Tribunals Rules 1986 should apply to these appeals, and that Rule 10, Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 should be disapplied.

62. Although we have dismissed the University’s Third Appeal, the University has in substance succeeded in these proceedings. Accordingly we direct that HMRC pay the University’s costs of these appeals, such costs to be assessed if not agreed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents

The facts

The first issue

The law

The first issue: discussion

The second issue

The law

The second issue: discussion

Decision

Costs

ROGER BERNER

TRIBUNAL JUDGE

RELEASE DATE: 13 April 2010