[2010] UKFTT 382 (TC)

TC00664

Appeal number: MAN/2008/1023

VAT – Appellant paying reverse premium on assignment of lease - whether locus standi to challenge taxable status of reverse premium and/or recover VAT paid on it; whether reverse premium attributable to assignment of lease and, if not, to what; whether HMRC’s decision to refuse permission to opt leased property wrong in law

FIRST-TIER TRIBUNAL

TAX 

	BRITISH EVENTING LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	Barbara Mosedale (TRIBUNAL JUDGE)							Sonia Gable		

Sitting in public at 45 Bedford Square, London WC1 on 29 March 2010.  On directions from the Tribunal further submissions were made in June and July 2010.

Mr D Southern, Counsel,  instructed by Saffery Champness for the Appellant

Ms R Haynes, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

The issues in the appeal
1.	The disputed decision at issue in this appeal was contained in HMRC’s letter of 17 July 2008.   This was a refusal by HMRC to give permission to the Appellant to opt to tax land and buildings at Tweseldown Racecourse in Hampshire (“Tweseldown Racecourse”).  As HMRC pointed out in this letter, there was no direct right of appeal against a refusal to give permission to opt but the Appellant had a right of appeal against the decision as it amounted to a refusal to repay input tax.   
2.	The Appellant’s appeal was therefore against HMRC’s refusal of its claim to deduct input tax consequent upon making an election to waive exemption over Tweseldown and, in so far as relevant, against HMRC’s prior decision to refuse permission for the Appellant to make such an election.
3.	Both parties proceeded on the assumption at the hearing that the input tax at issue was entirely attributable to a supply by the Appellant of Tweseldown Racecourse.   Therefore, HMRC’s decision to refuse permission to opt to tax that land with the result that a supply of it by the Appellant was exempt was critical to the Appellant’s right to recover the input tax.
4.	At the hearing, we questioned the correctness of the parties’ belief that the input tax at stake was entirely attributable to a supply of Tweseldown Racecourse.  Neither party appeared prepared to fully address this at the hearing, and as the point is critical to the decision, we asked for further written submissions.  We received these, together with an application by HMRC to strike out the Appellant’s appeal.  This led to a further round of written submissions:  either party was given the chance to opt for a further oral hearing but neither chose to do so.  We have therefore dealt with these further submissions on the papers and will refer to them where appropriate in our Decision Notice.
5.	At the hearing, the Appellant also argued in the alternative that the input tax was recoverable by them because the supply to them in respect of the Racecourse was exempt and the “input tax” should not have been charged.  This was not part of their original grounds of appeal and they applied to amend their Notice of Appeal to incorporate this as an additional ground.
The facts
6.	The facts were not in issue.  The parties agreed a Statement of Facts which was augmented by evidence given by Ms Alexandra Fox in a witness statement and orally at the hearing.  This evidence was not disputed by HMRC.  Ms Fox was (and still is) a Director and the Chairman of the Appellant and has held these positions since 2004.  The Tribunal finds the facts to be as follows:
7.	The owner of Tweseldown Racecourse is the Ministry of Defence.  The British Horse Society had been in occupation of the racecourse at Tweseldown for at least 40 years under an unwritten lease.  In 1997 the part of the British Horse Society which dealt with eventing (dressage, show-jumping and cross-country events) was hived out into a separate, new company limited by guarantee called British Eventing Limited – the Appellant in this case. The Appellant is the governing body for the sport of horse eventing and the purpose of the Appellant was to be responsible for all horse eventing activities and competitions throughout the UK which are affiliated to it.  Its main source of income is membership and affiliation fees and its main expenses are staff costs and securing the safety of events affiliated to it.
8.	 The Appellant took over the occupation of the Tweseldown Racecourse from the British Horse Society and in the beginning hired a manager to run the site.  This did not work out and a new manager was recruited.  The new manager formed a company, Tweseldown Equisport Limited, to carry out the management.
9.	The arrangements changed and at some time Tweseldown Equisport Limited (“TEL”) ceased to be a manager on behalf of the Appellant but became instead a tenant at will of the Appellant’s, managing the racecourse on its own behalf.  The rent charged by the Appellant to TEL was equivalent to the rent paid by the Appellant to the MOD.  The MOD did not charge VAT on the rent and nor did the Appellant.
10.	The Appellant accepted a formal written lease of the premises from the Secretary of State for Defence on 10 June 2003.  The rent was £9,000 per annum.  It was a full repairing lease and in addition the Appellant agreed to carry out certain specified works within 3 years.  Shortly after the lease was granted, the buildings at the site were given Grade II listing.
11.	At some point the hospitality building was fire damaged and under the insurance which it held the Appellant received compensation of £140,000.  It did not use this money in reinstating the hospitality building as it was required to do so by the terms of the lease.
12.	The Appellant had the buildings surveyed and believed that it needed to spend in the region of £350,000 - £500,000 to fulfil its obligations under the head lease from MOD to reinstate the buildings to their proper state of repair.  It commenced negotiations with TEL to assign the lease to it.  The issue between the Appellant and TEL was the necessary repair works to the property.  It was agreed that the assignment would be for a nominal amount and that that the Appellant would pay a sum of money to TEL to meet the costs of the necessary works, which would be carried out by TEL.  That sum of money would include the £140,000 which the Appellant had received from the insurers in respect of the fire damaged building.
13.	 It was common ground between the Appellant and HMRC that the Appellant had made prior exempt supplies of Tweseldown (the lease to TEL) and therefore needed HMRC’s permission to opt to tax.  It was also common ground that the Appellant did not meet the conditions for obtaining automatic permission to opt to tax.  On 26 October 2007, the Appellant wrote to HMRC requesting permission to make an option to tax.  The letter from the Appellant’s advisers explained that the assignment would be for £10 and that they would pay the assignee a premium of £200,000 plus VAT “in recognition of the assumption by TEL of [the Appellant’s] obligations under the lease.”  
14.	HMRC replied on 7 November 2007 refusing permission.  Their letter stated:  “In this case it is clear that there will be no further taxable supplies by [the Appellant]  after they assign the lease to TEL.  The attribution input tax that [the Appellant] is seeking to recover is therefore not attributable to any anticipated taxable supplies from the property.  Under these circumstances the Commissioners will not grant permission to opt to tax as there is no intended taxable use of the property once the lease is assigned.”
15.	The Appellant’s letter of 26 October did not mention the additional payment to TEL of £140,000:  it was not suggested at the hearing that this made any difference to HMRC’s decision.  Indeed, logically, it would only have reinforced their decision to refuse permission.
16.	The Appellant replied on the same day as receiving HMRC’s refusal asking for reconsideration of this decision.
17.	On 9 November 2007, TEL wrote to HMRC querying the VAT liability on the payment to them of the £140,000 insurance monies by the Appellant.   HMRC’s reply on 20 November 2007 was that the money was consideration for a taxable supply being “the supply of your agreement to take over the responsibility of restoring the building”.
18.	On the same day (20 November 2007) the Appellant agreed in a side letter to the assignment (which took place a few days later) to pay to TEL the £140,000 plus VAT which the Appellant had received in respect of its claim on insurance following fire damage to the premises.  
19.	A licence to assign was entered into on 22 November 2007.  This was signed by the MOD as landlord, the Appellant as tenant, TEL as assignee and a guarantor for TEL.  Under this licence, the MOD agreed to the assignment of the tenancy, the Appellant agreed to assign the lease, and TEL agreed to carry out the programme of works to the property as set out in the Schedule to the lease within 3 months of the assignment.
20.	The lease was assigned by Deed on 23 November 2007.  The Assignment was for the sum of £10.  The Appellant agreed to pay TEL £200,000 in consideration for TEL assuming the Appellant’s repairing obligations under the head lease.  All sums payable were stated to be exclusive of VAT.
21.	The Appellant paid £340,000 to TEL as agreed plus VAT amounting to £59,000.  The £340,000 was made up of the £200,000 due under the assignment and £140,000 under the side letter.
22.	A Dilapidations Fund Deed was entered into between the Appellant, TEL and TEL’s owner.  Under this TEL covenanted to put aside a sum of money each year to meet any repairing obligations at the end of the lease.  At the end of the lease any monies not used in repairs would revert to TEL.  The purpose of this deed was no doubt to provide a measure of protection to the Appellant as original tenant:  it was not suggested that it had any relevance to the VAT issue in the Tribunal and we do not find that it does.
23.	The Appellant notified HMRC on 19 December 2007 of an election made on 23 November 2007 over the racecourse.  As they recognised, HMRC had of course not given permission for this election to be made.
24.	There was further correspondence between the Appellant and HMRC following the Appellant’s request for reconsideration on 7 November 2007.  This culminated on 17 July 2008 in a confirmation by HMRC of their original decision not to give permission to elect.  They said “The £10 grant creates a supply which, if permission to opt were granted, would generate a one off VAT charge of £1.75 against which at least £35,000 input tax can be recovered.  Breaking the reverse assignment up in this way produces an unfair recovery of input tax” and therefore HMRC would not give permission to opt to tax.
25.	The Appellant lodged an appeal on 4 August 2008.
26.	It applied to amend its grounds of appeal on 14 September 2009.  There was some dispute about this at the hearing.  Counsel for HMRC was unaware of the application until 1 March 2010 but it is clear from the Tribunal’s file that HMRC was made aware of the application shortly after 14 September 2009 although it seems HMRC did not communicate this to their counsel until much later.
Jurisdiction
27.	A number of issues on the Tribunal’s jurisdiction arose:
(1)	Whether the Tribunal has jurisdiction over a decision by HMRC to refuse permission to opt to tax;
(2)	Whether the Tribunal has jurisdiction over the Appellant’s claim to recover the input tax at stake on the grounds that there was no taxable supply by TEL.
Jurisdiction over decisions refusing permission
28.	The Appellant’s Notice of Appeal was stated to be “against a decision of the Commissioners of Revenue & Customs to refuse a claim by the Appellant to deduct input tax consequent upon the making of an election under VAT Act 1984, Sch 10, para 2 in relation to land and buildings at Tweseldown Racecourse, Crondall, Hampshire and, in so far as it may be relevant, the prior decision of the Commissioners to refuse the Appellant permission to make such an election.”
29.	The jurisdiction of the Tribunal to hear the appeal in respect of HMRC’s refusal to give permission to opt to tax was not in dispute.  HMRC’s view was expressed in their letter to the Appellant of 17 July 2008.  HMRC considered that as the original decision refusing permission was given on 7 November 2007 and the affected supply took place on 22 November 2007, the right to appeal under s83(wb) VATA 1994 inserted by the VAT (Buildings & Land) Order 2008/1146 did not apply as it only applies to supplies made after 1 June 2008.  Nevertheless, HMRC considered that this Tribunal has jurisdiction as HMRC’s decision was also a refusal to allow recovery of the attributable input tax and this is appealable under s83(c) VATA 1994.
30.	  The parties also considered that we have jurisdiction to consider the refusal to give permission for an option because of the provisions of s84(10) which provides:
“(10) Where an appeal is against a decision of the Commissioners which depended upon a prior decision taken by them in relation to the appellant, the fact that the prior decision is not within section 83 shall not prevent the tribunal from allowing the appeal on the ground that it would have allowed an appeal against the prior decision.”
In other words, we understand the parties to accept that if we consider HMRC wrong to have refused permission to elect, even though we have no jurisdiction as such to consider the refusal, we can allow the appeal against their refusal to allow recovery of the input tax attributable to the supply which would have been taxable had HMRC given permission.
31.	We agree with the parties that we have jurisdiction on this basis but with the proviso that we can only consider HMRC’s exercise of their discretion to refuse permission in so far as the refusal to repay the input tax at stake was properly dependent on that decision.  In other words, it is only if the input tax at stake is  attributable to a supply of Tweseldown Racecourse that we can have jurisdiction to consider HMRC’s refusal of permission to opt to tax the Racecourse.  We will return to this point.
The amount of input tax at stake
32.	One small point that we note is that for s83(c) or s84(10) to apply in this case  HMRC have to have made a decision refusing recovery of input tax.  The notice of Appeal states that approximately £60,000 is at issue. However, the original request in the letter of 26 October 2007 only mentioned £35,000 (ie the VAT on the £200,000 rather than the actual total of £340,000).  It seems that the issue of the £140,000 was first drawn to HMRC’s attention by the Appellant’s advisers on 1 July 2008, before the final review letter was written.  The review letter of 17 July 2008 from HMRC referred to “at least” £35,000”.  So it is not clear to the Tribunal that HMRC ever gave a written decision in relation to the full amount in issue of £59,000.  However, no point was taken on this at the hearing and it is clear that HMRC did consider that the VAT on neither the £140,000 nor the £200,000 was recoverable by the Appellant so we find that they had decided that none of the VAT claimed by the Appellant was recoverable and we have jurisdiction to hear the appeal in respect of both sums.
33.	There is a separate question of what would happen if we agreed with the Appellant that HMRC should not have refused permission. Although the Appellant purported to make an election on 23 November, at the time they had no permission to do so in circumstances where permission was required for the election to be effective.   The Appellant’s advisers wrote to HMRC on 18 June 2009 asking for confirmation that if the Tribunal agreed with the Appellant that HMRC should not have refused them permission to opt then HMRC would refund the input tax in issue, and would not seek to raise as an issue the question of whether an election could be treated as made retrospectively. HMRC replied on 7 July 2009 agreeing to limit the focus of the arguments in the Tribunal to the reasonableness of the Commissioners’ ruling.  No point was raised on this at the hearing.  The assumption of the parties seems to have been that if the Tribunal were to decide in favour of the Appellant then HMRC would be liable to refund it the input tax.
34.	We would agree that there is much to be said for the view that a finding for the Appellant that HMRC were wrong to refuse permission would result in liability by HMRC to repay the attributable VAT:  otherwise the Appellant’s right of appeal would be worthless.  However, we were not asked to decide this issue and do not do so:  it is, as will be seen from below, unnecessary to our decision.
Jurisdiction on supply by TEL
35.	There was yet another concern on jurisdiction.  The Appellant applied on 14 September 2009 to amend its Notice of Appeal. The application was to add:
“That the payments on which VAT has been charged arose from the assignment of an exempt lease, and accordingly the payments (if and so far as they were or could be consideration for a supply) only ever were and could only have been exempt from VAT.  The Appellant accordingly has a claim to recover overpaid output tax under Value Added Tax Act 1994 s80(1)”
36.	Mr Southern suggested at the hearing that the Appellant did not need the consent of the Tribunal to amend the Notice of Appeal.  We disagree.  We must have power to refuse amendments to Notices of Appeal in the same way that this Tribunal can refuse to entertain a Notice of Appeal where, for instance, we do not consider that we have jurisdiction.  Further in the interests of fairness and justice parties should be allowed to properly prepare for the hearings and not be taken by surprise.  So even where the amendment sought is one over which the Tribunal has jurisdiction, we would still not necessarily permit a Notice of Appeal to be amended.  And as with all applications, it is right that the other party be given the opportunity to object to it.  And HMRC did object to this application.  
37.	Further to its objection to the application at the hearing, on 21 June 2010, after receiving the Appellant’s further submissions in accordance with our Direction of 17 May 2010, HMRC applied to have the appeal struck out on the basis that the Appellant had abandoned its original grounds of appeal and its only remaining grounds were those in its application to amend its Notice of Appeal.  HMRC objected to this on the same grounds as at the hearing:  the Tribunal had not given leave to amend the Grounds of Appeal and the Tribunal should not give such leave as HMRC had made no Decision in respect of the amended grounds of appeal.
38.	It is convenient to deal with the Appellant’s disputed application to amend its Notice of Appeal together with HMRC’s application to strike out the appeal as they cover the same ground.
39.	The Tribunal finds that the amendment sought by the Appellant raises two points.   The first is whether the Appellant could challenge the taxable status of supplies to it made by another taxpayer who is not a party to the appeal.  The second is whether the Appellant has a claim under s80 to recover output tax overpaid by another taxpayer.  A taxpayer may well be able to challenge the taxable status of a supply made to it:  but it by no means follows that they have the right to be repaid by HMRC any tax that the Tribunal finds was overpaid.
40.	There are a number of reasons put forward by HMRC and the Tribunal why we might refuse permission for the amendment:
(1)	It was not in the original Notice of Appeal and the application to amend the Notice of Appeal may be made too late;
(2)	The Appellant cannot make a claim under s80 as they are not the person who paid the tax;
(3)	HMRC claimed they had made no appealable decision;
(4)	The supply in question was not made by the Appellant;
(5)	The person who paid the tax (TEL) was not a party to these proceedings.
(1)	Too late to amend?
41.	We deal first with the short point of whether HMRC were taken by surprise by the application.  HMRC (but not Ms Haynes) had known of the application for six months (see paragraph 26 above).  We consider this ample time to have prepared either or both their objections to the application or their answer to the case.  It was unfortunate that HMRC had not passed on the application to their counsel until recently but “surprise” is not a reason for refusing an application made six months ago. 
(2) 	No claim under s80?
42.	Mr Southern maintained that the Appellant could make a claim under s80.  He said that the Appellant could bring a claim under s80(1) because recovery of overpaid output tax was a directly effective community right.  This Tribunal is unaware of any right in the Directive which allows the customer of the taxable person to recover VAT overpaid to the state by the taxable person.  Nor was Mr Southern able to give us any authority on this.
43.	There is no actual provision in the Principal VAT Directive 2006/112/EC which provides for persons to recover overpaid VAT.  Nevertheless, the ECJ has held that that there is an implied right to do so.  For instance in Marks & Spencer plc  C-62/00 at paragraph 30 the court said:
“According to well-established case-law, the right to obtain a refund of charges levied in a Member State in breach of rules of Community law is the consequence and the complement of the rights conferred on individuals by Community provisions as interpreted by the Court (see, inter alia, Case 309/85 Barra [1988] ECR 355, paragraph 17; BP Supergas, paragraph 40; Case C-343/96 Dilexport [1999] ECR I-579, paragraph 23; and Joined Cases C-397/98 and C-410/98 Metallgesellschaft and Others [2001] ECR I-1727, paragraph 84).”
44.	But as can be seen from the above quote, the right is to obtain a “refund”.  It presupposes that the person making the claim to recover overpaid tax is the person who overpaid it.
45.	VATA s80 is the provision in UK law which allows recovery of overpaid output tax.  S80(1) – (2) provides:
“(1) Where a person – 
(a)	has accounted to the Commissioners for VAT for a prescribed accounting period (whenever ended), and
(b)	in doing so, has brought into account as output tax an amount that was not output tax due, 
the Commissioners shall be liable to credit the person with that amount.	
(1A)	  Where the Commissioners – 
(a)	have assessed a person to VAT for a prescribed accounting period (whenever ended), and
(b)	in doing so, has brought into account as output tax an amount that was not output tax due, 
they shall be liable to credit the person with that amount.
(1B)	Where a person has for a prescribed accounting period (whenever ended) paid to the Commissioners an amount by way of VAT that was not due to them, otherwise than as a result of –
(a)	an amount that was not output tax due being brought into account as output tax, or
(b)	an amount of input tax allowable under section 26 not being brought into account,
the Commissioners shall be liable to repay to that person the amount so paid.
(2) 	The Commissioners shall only be liable to credit or repay an amount under this section on a claim being made for the purpose.

46.	Section 80(1) gives HMRC a liability to repay certain money to a person who has “accounted to the Commissioners”,   S80(1A) gives HMRC a liability to repay monies to persons they have (wrongly) assessed and S80(1B)  gives HMRC liability to repay certain monies to a person who has “paid to the Commissioners an amount”.  The scheme of these three sub-sections is very clear:  the liability is for HMRC to repay overpaid VAT to those persons who paid it to HMRC.  There is no liability on HMRC to repay it to anyone else.  This is entirely consistent with the ECJ’s ruling that there is a right to a “refund” of overpaid tax.
47.	The Appellant paid an amount by way of VAT to TEL.  The assumption in the Tribunal was that TEL then accounted for an equivalent amount of VAT to HMRC.   If TEL overpaid HMRC because, as the Appellant argues the supply by TEL was exempt, then in our view any right to repayment under s80 arises in favour of TEL, not the Appellant.
48.	We find that we have no jurisdiction to make an award to the Appellant under s80 even if we were to find that TEL was not liable to account for VAT on the reverse premium.  We do not give leave for the Notice of Appeal to be amended to include “The Appellant accordingly has a claim to recover overpaid output tax under VATA 1994 s80(1)”.  
49.	We mention that Ms Haynes for HMRC said she considered University of Sussex [2003] EWCA Civ 1448 delivered a knockout blow to the claim under s80.  What we understand her to mean is that University of Sussex decided that a claim to recover under-recovered input tax had to be made under Regulation 29 of the VAT Regulations 1995/2518 and could not be made under s80 VATA even where the claimant was a payment trader.  We agree but this is not relevant:  Mr Southern was making a claim on behalf of the appellant under s80 for output tax paid by TEL.  But we entirely agree with counsel for HMRC that it cannot make such a claim.
(3) 	No Decision by HMRC? 
50.	HMRC objected to the application on the grounds that they had made no decision on the matter which could be appealed.  We do not need to consider this in respect of the application to add a claim under s80 as we have already found we have no jurisdiction to entertain such a claim (as above) although we note that we do agree with HMRC that they have issued no decision on a claim under s80. 
51.	 We proceeded to consider whether the Appellant should be allowed to amend its appeal by inclusion of the first sentence of its amended grounds of appeal (paragraph 35 above) that the supply to it by TEL was exempt.  Had HMRC made a decision in respect of this?
52.	As mentioned above, on 20 November 2007 HMRC wrote to TEL in response to TEL’s query, informing them that they considered the payment of £140,000 by the Appellant to TEL on the assignment of the lease was consideration for a taxable supply of TEL’s agreement to take over the lease and was subject to VAT.
53.	On 1 July 2008 the Appellant’s advisers wrote to HMRC questioning the ruling given to TEL in respect of the £140,000.  HMRC replied on 11 August 2008 refusing to enter into correspondence with the Appellant on the issue as they considered they had given the ruling to TEL, the taxpayer, and they could not reconsider this at the customer’s request. 
54.	We were not shown any decision by HMRC in respect of the payment of £200,000 plus VAT by the Appellant to TEL. Mr Southern suggested that HMRC had impliedly given such a decision in their Statement of Case in paragraph 4.3 which says “the refusal of the Appellant’s input tax claim is a direct and inevitable consequence of the refusal to give the Appellant permission to waive exemption, since the assignment of the Appellant’s leasehold interest remained exempt”.  We cannot agree.  There is nothing in this that suggests that HMRC were considering that the supply by TEL  might not have been taxable:  Mr Southern seems to be saying that because HMRC considered the assignment by the Appellant to be exempt then it follows that they ought to have considered that the reverse premium paid by the Appellant on the assignment was properly exempt.  We reject this.  It is clear to us that neither the original Notice of Appeal not the Statement of Case contemplated the possibility that the supply by TEL might have been exempt.
55.	We find that HMRC have issued a decision to TEL that their supply to the Appellant was taxable:  although this was only in respect of £140,000, it follows that the entire consideration was in HMRC’s opinion subject to tax.  
(4) 	Does the Appellant have locus standi to appeal the TEL decision?
56.	The decision which HMRC have made was addressed to TEL was that £140,000 of the reverse premium was taxable.  Is this appealable by the Appellant?
57.	Mr Southern says that it is because he considers s84(10) allows the Appellant to appeal a decision on which a later decision depended.  We understand his reasoning to be that the decision to deny the Appellant recovery of the input tax was dependent upon an earlier decision that TEL must charge the output tax.  But s84(10) only applies where the prior decision was “in relation to the appellant” and if there was a decision on the supply by TEL that was not a decision in relation to the appellant but in relation to TEL. So we reject Mr Southern’s point on s84(10).
58.	HMRC put the view that the Tribunal cannot be used to obtain an advisory opinion.  By this we understand them to mean that HMRC must have issued a decision against which the Appellant is appealing.  We agree.  But we don’t agree that that decision necessarily has to be addressed to the Appellant.
59.	It seems to the Tribunal that the Appellant (as the customer of the taxable person, in this case TEL) would have locus standi to bring a case to the Tribunal to challenge a decision issued to TEL (or indeed to themselves) that the supply by TEL to the Appellant was taxable.  This would be an appeal under s83(b) about “the VAT chargeable on the supply of any goods or services”. They would have locus standi because they have a financial interest in the outcome:  they are the customer and if the supply was exempt they may well have a claim against TEL for restitution of monies paid under mistake of law because the contract with TEL was exclusive of VAT.   If the Appellant were to win the case, though, this would not result in a VAT repayment to them:  the overpaid ‘output tax’ could only be repayable to TEL  and then only if TEL made a successful s80 claim in time.
(5) 	TEL is not a party to this appeal
60.	This is not the end of the matter.  We were concerned that it would be improper to allow the Notice of Appeal to be amended without notice to TEL where the issue that the amendment would bring in was the status of a supply by TEL, a person who is not a party to the proceedings.
61.	Mr Southern said we should not be concerned as our decision would have no impact on TEL’s VAT position.  His main point seemed to be that he considered that TEL made no supply at all when receiving the £340,000 plus VAT, but that if they did it was exempt.  He also said that TEL was well aware of the appeal and wholly supported the Appellant’s position.
62.	We mentioned our concern that a decision the supply was exempt might impact on TEL’s partial exemption position, and certainly on their ability to recover directly attributable input tax.  We concluded we did not know whether our decision would impact on TEL’s VAT position and that we should not reach a decision on a supply by TEL unless TEL had been given a chance to make representations to us.  
63.	We indicated that we were not prepared to make any decision about the liability to tax of a person (TEL) who had not been given the opportunity to participate in the hearing and we Directed at the hearing that the Appellant be given an opportunity to demonstrate this no  later than 12 April to the Tribunal failing which we would not give permission for the Notice of Appeal to be amended.
64.	As part of the first round of submissions, the Appellant sent to us a letter from TEL dated 14 June 2010 in which they said: “We have no legal or commercial objection to a finding by the Tribunal that, in fact the amounts paid to us by British Eventing should not have been subject to VAT”.  This was not received within the time limit which we Directed but HMRC have not sought to take a point on this and we do not.  We find therefore that TEL have been given the opportunity to participate in the hearing and have declined:  that TEL is not a party to the appeal is therefore not a ground to refuse to allow the Appellant to amend its grounds of appeal.
Relevance
65.	The appellant sought to amend its grounds of appeal to include the claim that the supply by TEL was exempt because it wished to reclaim the VAT paid by TEL under s80.  We have ruled we have no jurisdiction to entertain its claim under s80.  We have nevertheless found no reason why it cannot amend its grounds of appeal merely to include the claim that the supply to it by TEL was exempt:  we have found HMRC has sufficient warning of the application, that at least in respect of £140,000 of the premium HMRC has issued a decision, the Appellant (although not the taxpayer) is an interested party and has locus standi as the customer, and that, lastly, that the taxpayer (TEL) has been given the opportunity to participate in the hearing.
66.	We are aware that this “half-way house” was not sought by the Appellant.  A finding by us that the supply by TEL to the Appellant was exempt would mean that the “VAT” on the reverse premium of approximately £60,000 which they seek to recover in these proceedings is not VAT at all.  It is therefore not input tax under s24 VATA and not recoverable whether or not an election should have been allowed by HMRC and whatever the correct attribution of it would have been had it been input tax.  
67.	Nevertheless, the point is of great relevance to our decision because if the “VAT” on the reverse premium is not VAT, it is not input tax and HMRC were clearly right to refuse to repay it.  Further, it has implications for the private law position between the Appellant and TEL, and for TEL’s right to recover from HMRC (were they in time to make a claim).  So we allow the amendment to the Notice to Appeal “That the payments on which VAT has been charged arose from the assignment of an exempt lease and accordingly the payments (if and so far as they were or could be consideration for a supply) only ever were and could only have been exempt from VAT” and proceed to consider this issue.
68.	As we have (in part) allowed an amendment to the Notice of Appeal, HMRC’s application for a strike out falls away even if they were correct to assert that the Appellant had wholly abandoned its original grounds of appeal.  We find, however, that although the VAT status of the reverse charge may have become its primary ground at the hearing, the Appellant still did advance its original grounds of appeal.  We do not strike out the appeal.
Was the reverse charge subject to VAT?
69.	On the day of the hearing we heard full argument on the question of whether the supply by TEL was taxable, although the decision whether to allow the amendment to the Notice of Appeal was deferred as set out above.  The Appellant put forward a number of grounds on which it considered that the supply by TEL was not subject to VAT:
(1)	It was outside the scope of VAT because it was:
•	Compensation;
•	Dilapidations;
•	There was a trust; and/or
•	Mirror applied
(2)	It was exempt:
•	under Lubbock Fine; and/or 
•	as part of an overall single exempt supply.
The grounds argued are in fact wider than the amendment sought by the Appellant which was to put the case that TEL’s supply was exempt.  At the hearing they also argued that it was outside the scope of VAT.  HMRC did not take a point on this and from the papers it was clear that HMRC had been given warning of these arguments:  so we considered them.
Compensation
70.	An argument put forward by the Appellant was that at least the £140,000 was not payment for a supply because it was compensation for the assignee assuming an onerous lease and was earmarked to be used to restore the fire damaged building.  A related argument was that because TEL was compensated for this “can he in fact be said to have assumed any obligation at all … the one cancels the other out.”  Mr Southern said “If an incoming tenant assumed a liability to rebuild a damaged building he would assume an onerous lease to that extent.  However, if as part of a single contractual arrangement he assumes that obligation but is also given financial compensation equivalent to the cost then he does not assume any obligation at all save to use the money given for that purpose.”  
71.	The Tribunal does not agree.  The VAT system charges tax where one party does something or agrees to do something in return for payment.  Compensation, on the other hand, is something which the law requires to be paid retrospectively for unlawful actions which have taken place.  Compensation is outside the system of VAT:  payments made to induce another person to assume a burden, even if they are described as “compensation”, are within the VAT system.  A reverse premium paid to induce an assignee to take on an onerous lease is within the VAT system:  the question is merely whether the supply is exempt or taxable and if so at what rate.
Dilapidations
72.	A similar argument put forward by Mr Southern was that the payments to TEL were for dilapidations.  He said if the £340,000 had been paid to the MOD it would not have been consideration for a supply.
73.	We agree that payments made by a former tenant for dilapidations to its former landlord at the termination of a lease are compensation and outside the scope of VAT.  Dilapidations are compensation for failing to return the property in the state required by the lease.  The payment made to TEL was not in respect of dilapidations.  TEL was not the Appellant’s landlord.  The Appellant owed no obligation to TEL to put the property into a particular state of repair.  The payment to TEL was not dilapidations:  it was an inducement payment to take on the lease.  We refer to it as a “reverse premium” to indicate that, the lease being onerous, the payment moved the same direction as the property, in contrast to the normal position where the payment moves in the opposite direction to the property.
74.	The evidence from the Appellant suggests that it was assumed that if no works were carried out and the Appellant kept the lease to the end of its term, it would have a liability to MOD in dilapidations.  But rather than do that it entered into the arrangement with TEL under which TEL agreed to do the work so that (no doubt) the Appellant hoped to avoid the expected liability for dilapidations.  Its position would be comparable with a tenant hiring a contractor to put the leased property in repair to avoid liability to dilapidations:  the  supply by the contractor would be taxable.
Trust
75.	Another argument Mr Southern put was that there was no more consideration in this case than when he as a junior counsel was given money to buy cigarettes for everyone attending a conference.  In other words he seems to be saying that the Appellant merely gave the money in trust to TEL to discharge the Appellant’s obligation to MOD.  There is no evidence for this:  indeed the agreed statement of facts so far from referring to the money remaining the Appellant’s actually refers to TEL wishing to be indemnified against taking on the liability for dilapidations.  The documents also are clear that it was a contractual arrangement between the Appellant and TEL.  TEL was paid the money in return for agreeing to become tenant and carry out the works within 3 months.  If it failed to do this no doubt it would have been liable to the Appellant for breach of contract.  On the other hand, if it carried out the repairs in full and managed to spend less then £340,000 on doing so, the agreement did not provide for the balance to be repaid to the Appellant.  Therefore, we find that there was no explicit trust on the money and every reason for the Tribunal to refuse to imply one where the parties chose to put their relationship on a contractual basis.
Mirror Group Plc
76.	Mr Southern also put the view that the payments were not consideration because of the decision of the ECJ in Mirror Group Plc C-409/98.  The ECJ in Mirror Group Plc at paragraph 26  said:
“… it must be noted that a taxable person who only pays the consideration in cash due in respect of a supply of services, or who undertakes to do so, does not himself make a supply of services for the purposes of art 2(1) of the Sixth Directive.  It follows that a tenant who undertakes, even in return for payment from the landlord, solely to become a tenant and to pay rent does not, so far as that action is concerned, make a supply of services to the landlord.”
77.	The Appellant retained its repairing liability under the lease as the original tenant:  TEL by accepting an assignment of the lease inevitably also took on the repairing liability.  Mr Southern thought that the payment of £340,000 was not consideration for TEL doing something but merely to enable TEL to discharge the obligation which fell on both of them.
78.	In his submissions of 15 June, he formulated this slightly differently.  He suggested TEL did not provide consideration on the assignment because they were already liable to pay the identical rent under the sub-lease.  
We do not agree with either formulation.  The consideration TEL provided to the Appellant was taking on the Appellant’s repairing obligations under the head lease.  TEL clearly provided consideration for the £340,000. 
79.	We do not think the ratio in Mirror applies.  Our understanding of what the ECJ said is that taking on an asset which involves assuming an obligation (such as to pay rent) is by itself not a supply by the person who is taking on the asset.  A lease is perhaps comparable to buying something on deferred consideration.  No supply is made by the purchaser.  Even if there is an inducement paid to the purchaser (as in Mirror), without more, this is merely an upfront adjustment to the instalments or rent due.  It is only where the purchaser does more than merely agree to purchase that the inducement may in fact be consideration for a supply.
80.	In Mirror the inducement was paid on the grant of a new lease.  In the case before us, the inducement was paid on the assignment of a pre-existing lease.  We think this is a fundamental difference.  The taxpayer in Mirror was agreeing to take a lease from the landlord and pay rent to the landlord: and the landlord paid an inducement to Mirror to do so.  In our case, it was the assignment of an existing lease by the original tenant to a new tenant.  By taking the assignment the tenant became liable to a third party, the landlord, to pay the rent and carry out the repairs.  The inducement paid by the Appellant was not an upfront adjustment to the rent which would become payable to MOD.  It is fundamentally different to the position in Mirror.
81.	Our conclusion on Mirror is buttressed by the simultaneous ECJ decision in Cantor Fitzgerald International C-108/99 [2001] STC 1453.  In that case, as in this case, a lease was assigned.   In order to get the incoming tenant to agree to the assignment the outgoing tenant paid it £1.5million.  The ECJ held that this was subject to VAT.  The ECJ found that the incoming tenant was making a supply of agreeing to accept the lease (paragraph 20).  This supports our conclusion that the ECJ only intended the ratio in Mirror to apply in bi-partite situations, where the inducement to take on the property is paid by the person to whom the rent due on the property is owed.  
82.	Even if we are wrong on this, the ECJ made it clear in Mirror that the payment of the inducement was a non-event in VAT terms only where the tenant agreed to do no more than become the tenant and pay the rent.  In Mirror,  if the inducement was paid in return for the agreement to be an anchor tenant the ECJ would have found it to be a supply by the tenant.  In this case, TEL agreed to take on the Appellant’s accrued repairing obligations to the landlord in return for the inducement.  So even if Mirror applied, which we don’t think it does, this case would be within the exception the ECJ recognised where a supply is made by the person accepting the inducement.
83.	Therefore, we do not agree with Mr Southern that the monies paid by the Appellant to TEL were not in consideration of a supply.  We find that they were in consideration of TEL agreeing to take on the onerous lease of Tweseldown and in particular to discharge the repairing obligation within 3 months.
Was the supply by TEL exempt under Lubbock Fine?
84.	In case we decided against him on the question of whether the inducement was consideration for a supply, Mr Southern went on to say that following Lubbock Fine & Co C-63/92  because the assignment of the lease was exempt then the payments made by the assignor to the assignee were also exempt.  The ECJ in that case at paragraph 9 said:
“Where a given transaction, such as the letting of immoveable property, which would be taxed on the basis of rents paid, falls within the scope of the exemption provided for by the Sixth Directive, a change in the contractual relationship, such as the termination of the lease for consideration, must also be regarded as falling within the scope of the exemption.”
85.	Mr Southern is therefore giving a wide interpretation to what the ECJ said in that case:  the change in contractual relationships referred to in the above paragraph was a surrender of the lease by the tenant to the landlord.  He considers that the ECJ would have come to the same conclusion where the change in contractual relationship was an assignment of the head lease by the tenant to a pre-existing sub-tenant with the consent of the landlord, as in this case.
86.	He sees it as being within the ratio of Lubbock Fine because the assignment was a change in the contractual relationship between the Appellant and TEL.  Prior to the assignment, the relationship was one of landlord and tenant.  The assignment brought that relationship to an end.  The pre-existing landlord and tenant relationship was exempt from VAT as the Appellant had not elected to waive exemption over Tweseldown.  Therefore, we understand Mr Southern to argue, the assignment to TEL must also be exempt as it was merely a change in the contractual relationship.
87.	The Tribunal’s view is that the meaning of the ECJ’s judgment in Lubbock Fine must be taken from its context.  In that case the tenant surrendered a lease for consideration.  Was this an exempt supply?  The ECJ ruled it was.  The tenant owned an interest in the land over which it had made no election.  It supplied this to its landlord:  in land law terms this is a surrender.  In VAT terms, it was an exempt supply of land for consideration.
88.	It is true that the ECJ talked of an alteration in the contractual relationship:  but this was in the context of a surrender of a lease.  They were not saying that any alteration in contractual relations would necessarily be exempt where the previous relationship was exempt:  merely that a surrender of a lease was in effect a supply of land and would come under the property exemption contained in Article 13B of the Sixth VAT Directive  77/388/EEC (now Article 135(1)(l) of the Principal Directive 2006/112/EC).
89.	In the joined decision in Mirror Group and Cantor Fitzgerald, the ECJ caution against giving too wide an interpretation of their decision in Lubbock Fine:  at paragraph 34 of Mirror and paragraph 28 of Cantor the ECJ said:
“However, the court must make clear that that judgment [ie Lubbock Fine] was given in respect of a tenant who returned the immovable property leased to the landlord and who, consequently, for the purposes of taxation, assigned his right to occupy the property back to the landlord by surrendering it.  That is why the court ruled that the tenant’s surrender of the supply of services made by the landlord, which involved a change in the contractual relationship, has to be exempt where the supply itself is exempt.”
90.	In other words, a surrender of an interest in property which was by its nature a supply of an interest in property (ie the tenant gave the landlord back the right to occupy the property) is exempt from VAT.  But to be exempt, the supply must be intrinsically of a right that is exempt, such as a right to occupy property.  Merely altering contractual relationships without transferring such a right for consideration is not an exempt supply.
91.	If we needed authority for such an interpretation of Lubbock Fine, we find it in the ECJ’s decision in Cantor Fitzgerald.  The ECJ was quite clear that the exemption for property in article 13B(b) did not include the transaction entered into by Cantor Fitzgerald as it did not involve the supply of an interest in land but the acceptance of an onerous lease.  As the ECJ said at paragraph 17, the court must decide who provided the consideration and who provided the goods or services.  And as the ECJ said at paragraph 23, the outgoing tenant, by paying a reverse premium, is paying consideration for the supply by the incoming tenant of agreeing to take on the lease and its obligations.
92.	Mr Southern, however, thought that Lubbock Fine should be given his wide interpretation and the conflict that this would create with the decision in Cantor Fitzgerald resolved by interpreting the distinction between the two as depending on whether the incoming tenant had a pre-existing interest in the land.  He takes this from paragraph 34 of the ECJ’s judgment in Cantor:
“art 13B(b) of the Sixth Directive does not exempt a supply of services which is made by a person who does not have any interest in the immovable property and which consists in the acceptance, for consideration, of the assignment of a lease of property from the lessee”
93.	In Cantor, the incoming tenant had no pre-existing interest in the property.  The ECJ found the supply to be taxable.  He also says that this follows from the ECJ’s judgment in Mirror Group.  He says that there the transaction was taxable if Mirror was being paid to be an anchor tenant because the transaction was concerned with the creation of the landlord-tenant relationship and not the alteration of rights within an existing relationship.  Similarly, he sees his interpretation as consistent with Lubbock Fine as the ECJ found the supply to be exempt where the supply was to the landlord who had a pre-existing interest in the land.
94.	In this appeal TEL, the assignee, unlike the assignee in Cantor, had a pre-existing interest in the land as it was a sub-tenant.  Mr Southern thinks this means under Lubbock, Mirror and Cantor that the supply by it of accepting an onerous lease is exempt because the existing landlord-tenant relationship was exempt.
95.	The Tribunal does not agree that this is the correct interpretation of the three ECJ decisions.  In particular, we do not consider that the determination of whether a supply is taxable depends on whether the supplier held a pre-existing interest in the land.  The question is rather whether he supplies an interest in land.  We would also point out that Mr Southern’s interpretation does not even hold good in Mirror Group where the ECJ’s decision was that whether the new tenant was making a supply depended on whether it was doing something extra (such as becoming an anchor tenant).  It is clear to the Tribunal that the ECJ’s reference to an interest in immoveable property in the above quote (paragraph 92 above) from Cantor Fitzgerald was in the context of that interest being supplied:  they were making the point that the assignee could not have supplied an interest in land because it did not possess one.  This does not mean (contrary to what Mr Southern suggests) that because TEL was the sub-tenant any supply by it in agreeing to take an assignment of a lease over the same property was therefore exempt:  the question remains whether by agreeing to take on an onerous lease it supplied an interest in property.  Clearly it didn’t.
96.	We do not think the ECJ’s decisions in Mirror and Lubbock Fine & Co given their natural meaning could be taken as suggesting a different conclusion.  We agree with Ms Haynes that this case is on all fours with the ECJ decision in Cantor Fitzgerald.  TEL agreed to take on an onerous lease and was paid £340,000 to do so.  That supply by it was not a supply of an interest in land.  There is no other potentially applicable exemption or zero rating so the supply was subject to standard rated VAT.  The mere fact that TEL had a pre-existing interest in the land is irrelevant as it did not supply it.
Single Supply?
97.	Mr Southern’s next line of attack was that the supply by the Appellant of the assignment of the lease for £10 was a single economic transaction with the supply by TEL of its acceptance of the assignment for the combined total of £340,000. His argument was that because HMRC did not give permission for the option to tax, the assignment of the lease for £10 was exempt.  As this was (in his view) a single economic transaction with the acceptance of the assignment for £340,000 this means (in his view) that the £340,000 was also exempt.
98.	Mr Southern cited Henriksen C-173/88 where the developer sold a house for one price and then separately a garage to the same purchaser.  The ECJ decided that there was a single economic transaction and (presumably) that the supply of the house was the predominant element so that the whole supply including that of the garage was exempt from VAT.  He also cited Aktiebolaget C-111/05 and Dr Beynon and Partners (House of Lords) [2005] STC 55, Levob Verzekeringen BV C-41/04, Birkdale School [2008] STC 2002 and the recent ECJ decision in Don Bosco Onroeren BV C-461/08.
99.	In none of these cases was the ECJ (or House of Lords) looking at a situation where the supplies in question were made by different persons.  We do not think that had they been, the answer would have been the same.  It seems obvious that there cannot be a single indivisible supply where the suppliers are different persons.  
100.	Of course, in seeing the assignment of the lease by the Appellant with the acceptance of the lease by TEL as a single economic transaction Mr Southern is right:  it was two sides of a single coin.  But that does not mean that each supply must have the same VAT treatment.  Take a hypothetical barter situation where a box of oranges is exchanged for a box of chocolates:  the supply of the oranges is zero rated but the supply of the box of chocolates is standard rated.  Even assuming that the Appellant did supply the assignment to TEL and that assignment was exempt, this has no impact on the taxable status of TEL’s acceptance of an onerous lease from the Appellant.
101.	In any event, as can be seen from paragraph 120 below, we find that the Appellant did not supply the assignment to TEL.  The only VAT supply in the contract between the Appellant and TEL was by TEL in agreeing to take on the onerous lease in consideration for £340,000.  So for this reason as well, we reject the Appellant’s case that the supply by TEL was exempt.
Attribution
102.	We have therefore rejected the Appellant’s argument that the supply to it by TEL was not subject to VAT at the standard rate.  It was.  So the VAT paid by the Appellant was input tax.
103.	As we raised at the hearing, we saw the question of the attribution of this input tax as critical to the appeal.  Although seen by the parties as an appeal against HMRC’s refusal to allow an option to tax, this is an appeal under s83(c) against a refusal by HMRC to repay that input tax as we have set out in paragraph 31 above.   The Tribunal therefore has to determine the attribution of the input tax to decide whether or not it is recoverable.  In any event, to the extent that this is an appeal against HMRC’s refusal to give permission to opt to tax, that appeal can only be made if a subsequent decision (such as the refusal to repay input tax) was dependent on it.    Yet if the input tax that is the subject of this appeal is not attributable to the assignment of the lease, HMRC’s refusal to repay the input tax cannot in law be dependent on their decision to refuse permission to opt the assignment.
104.	Either way, we could not determine this appeal without deciding whether the VAT paid by the Appellant on the reverse premium was attributable to the assignment by it of the lease (and in respect of which they asked for HMRC’s permission to opt to tax).
105.	At the hearing both sides advanced the view that the input tax on the reverse premium (the payment of £340,000 plus VAT) was wholly attributable to the  assignment of the lease.  We stated in the hearing that this premise was not obvious to us, bearing in mind the assignment was for the nominal amount of £10.  As stated in paragraph 4 above, as both parties had made the same assumption neither was prepared at the hearing to make submissions on the point to us.  We therefore directed written submissions and the following discussion has taken into account the written submissions made to us by both parties after the hearing.
Is the Tribunal entitled to consider the point?
106.	HMRC put the view that at no point prior to the hearing did the Appellant put forward an alternative attribution and that they should not therefore be able to advance this argument to support their case.  Our answer to this is that the point was raised by the Tribunal and not the Appellant.  At and before the hearing both parties proceeded on the assumption that the input tax was attributable to the assignment, but the Tribunal is not obliged to accept the parties’ assumptions about the law.  The object of the Tribunal is to reach a correct decision, having heard in so far as possible full argument from both sides.  For this reason, we asked for written submissions subsequent to the hearing.  In the event there were two rounds of submissions as HMRC made its strike out application (dealt with above) on reading the Appellant’s original submissions.  Neither side can say that they have not had the opportunity to deal fully with the attribution point:  as indicated in our Directions either party could have called for a further oral hearing but in the event were content for this point to be decided on the papers.  We conclude we do have jurisdiction to consider attribution.
The law on attribution
107.	Article 173 of the Principal Directive provides:
“in the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible”
108.	 Articles 168-170 provide that VAT is deductible in respect of taxable transactions and certain intra-community supplies with which this case is not concerned.
109.	UK law is identical in effect if not in wording.  S26(1) VATA 94 provides:
“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 … as is allowable by or under regulations as being attributable to supplies within subsection (2) below”
110.	Supplies within subsection (2) are taxable supplies and certain intra-community  supplies with which this case is not concerned.  In other words, for the purposes of this case, to be deductible the input tax must be attributed to taxable supplies.
111.	So the first question is whether the assignment in this appeal was a supply at all.  The second is whether the input tax was attributable to it?  Only if the answer to both these are positive do we get to the third question, which is whether that supply was (or ought to have been) taxable because (it is argued) HMRC wrongly refused permission to the Appellant to make an option to tax over Tweseldown Racecourse.
Was the assignment a supply?
112.	Was the sale of the lease by the Appellant a supply at all?  As a general rule there is no supply where there is no consideration.  This follows from Article 2 of the Principal VAT Directive which at paragraph 1 refers to the various forms of supply “for consideration” and VATA 1994 s5(2) which provides in conformity with the Directive: “‘supply’ in this Act includes all forms of supply, but not anything done otherwise than for a consideration”.
113.	There are exceptions. Article 16 of the Principal Directive deems certain disposals by businesses to be a supply for consideration:
“The application by a taxable person of goods forming part of his business assets for his private use … or their disposal free of charge or more generally their application for purposes other than those of his business, shall be treated as a supply of goods for consideration, where the VAT on those goods or the component parts thereof was wholly or partly deductible.”
114.	This is reflected in UK law in Schedule 4 paragraph 5 which deems there to be a supply of goods where goods “forming part of the assets of a business are transferred or disposed of … so as no longer to form part of those assets, whether or not for a consideration”.  (Technically, the head lease in this case being for only 20 years is not a “major interest in land” and a supply of it is therefore not a supply of goods (Schedule 4(4)) but the effect of Schedule 4(9) is that paragraph 5(1) of Schedule 4 applies to assignments of leases whether or not they are a major interest in land).
115.	 The deeming effect of both Article 16 and Schedule 4(5) is limited to a disposal of assets on which input tax was incurred and which was recoverable.  We do not have sufficient facts to ascertain whether the assigned lease falls into this category.  There may well have been taxable expenses incurred in respect of the property (the rent from the MOD we know was exempt).  And although for some years the property had been sub-let to TEL exempt, it appears the use of the property prior to this may have been taxable.  
116.	However, more fundamentally both Article 16 and Schedule 4(5) only apply to “business assets”. This is no surprise:  their purpose is to prevent recovery of input tax on items that are then put to private use without a VAT charge.  It is an anti-avoidance measure.  It was not intended to be used to allow disposals of onerous obligations to be treated artificially as taxable transactions in order to recover VAT.
117.	 In this case the lease was not an asset.  It had a negative value to the Appellant.  They paid £340,000 to be rid of it.  We conclude therefore that the deeming provisions of Article 16 and Schedule 4(5) do not apply.  There was no disposal of a business asset.  Nevertheless, there was a disposal and this will be a supply under the normal rules if it was for consideration.
Was there consideration?
118.	In this case, there was nominal consideration of £10 for the assignment. We do not find that this was consideration:  it was paid to the Appellant in a bi-partite transaction where it was vastly outweighed by the reverse premium of £340,000 paid by the Appellant.  The transaction should properly be viewed as an assignment with a reverse premium of £339,990.  TEL did nothing in return for the £10:  it is clear that the lease had no value to them as they had to be paid £339,990 to take it on.  So viewed properly the £10 was a (nominal) reduction in the price of TEL’s acceptance of the onerous lease and not consideration for a supply made by the Appellant.  The Appellant didn’t make a supply to TEL.  
119.	  This finding should be no surprise to the Appellant who was clearly aware that so far from being valuable, the lease from the MOD was onerous to them, and they were prepared to pay £340,000 to be rid of it.  
Was the reverse premium attributable to the assignment?
120.	Our view is therefore that the assignment was not a supply for VAT purposes as it was neither (a) for consideration nor (b) a deemed supply for no consideration as the lease was not an asset. It is therefore impossible for the input tax on the reverse premium to be attributable to it. Nevertheless, we went on to consider, in case we were wrong on this and the assignment was a supply, whether the input tax on the reverse premium would have been attributable to that assignment.  
121.	Neither the Directive nor UK law gives any definition of “attributable”.  The meaning has been considered by the ECJ.  In BLP Group plc C-4/94 [1995] STC 424  the ECJ said at paragraph 19:
“… to give the right to deduct … 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.”
122.	This has been considered in later ECJ cases, most recently in the case of SKF AB C-29/08 where the ECJ said at paragraphs 57-58:
“According to settled case law, the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions given rise to entitlement to deduct, is, in principle, necessary before the taxable person is entitled to deduct VAT …. The right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring them was a component of the cost of the output transactions that gave rise to the right to deduct ….
It is, however, also accepted that a taxable person has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, where the costs of the services in question are part of his general costs and are, as such, components of the price of the goods or services which he supplies.  Such costs to have a direct and immediate link with the taxable person’s economic activity as a whole …”
123.	The reason the ECJ takes this view is no doubt because of the provisions of the Principal VAT Directive which says at Article 1: 
“The principle of the common system of VAT entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, however many transactions take place in the production and distribution process before the stage at which the tax is charged.
On each transaction, VAT, 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 VAT borne directly by the various cost components.
The common system of VAT shall be applied up to and including the retail trade stage.”
124.	The Principal Directive came into force on 1 January 2007.  It replaced not only the Sixth VAT Directive but also the First Directive (67/227/EEC):  Article 1 above of the Principal VAT Directive is virtually identical with Article 2 of the First VAT Directive.  It has therefore always been the case that attribution of an expense depends on it being a cost component of a supply.
What is a cost component?
125.	In the recent case of SKF AB C-29/08 the ECJ said at paragraph 60:
“… whether there is a direct and immediate link will depend on whether the cost of the input services is incorporated either in the cost of particular output transactions or in the cost of goods or services supplied by the taxable person as part of his economic activities” (our emphasis)
126.	  Similar but not identical rulings have been given by the ECJ in earlier cases, such as Midland Bank plc C-98/98 at paragraph 30:
“… the goods or services acquired must have a direct and immediate link with the taxable transactions, that the right to deduct the VAT charged on such goods or services presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions.”  (our emphasis)
127.	In paragraph 28 of Abbey National plc C-408/98) the ECJ said:
(paragraph 28) “It follows … that, in order to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with the taxable transactions, that the right to deduct the VAT borne by those goods or services presupposes that the expenditure incurred in acquiring them was part of the cost components of the taxable transactions.  That expenditure must therefore form part of the costs of the output transactions which use the goods and services, acquired.  Consequently, those cost components must generally have arisen before the taxable person carried out the taxable transactions to which they relate (see Midland Bank, paragraph 30)” (our emphasis)
128.	The wording used by the ECJ in these three rulings is not identical.  But as in SKF, the latest case, the ECJ cites its earlier decisions, it is clear that it does not intend to diverge from them.  Starting with Article 2 of the First VAT Directive, “cost component” is clearly used in the sense of it being one of the expenses incurred to bring about the supply.   This is also apparent from the above quote from Abbey as it requires a cost component to be one of the “costs of the output transactions”.  So where in SKF the ECJ refer to a cost which is “incorporated … in the cost of particular output transactions” they must be asking the same question:  is the alleged cost component actually a cost of the output transaction in issue?
129.	The difficulty is that these 3 rulings seem to be saying that an expense is a cost component of a transaction if it is a cost component of it.  It is tautologous. 
130.	There is some guidance to what the cost component actually means in the facts of the cases.  In the case of Midland the ECJ had to consider an expense which arose after the supply took place.  In this case, the bank incurred VAT on legal advice in dealing with a claim against it arising out of services they had supplied to a customer.  The ECJ said at paragraphs 31-32 that such legal advice, which was a consequence of the earlier supply, would not be attributable to that supply to the customer unless it could be shown on the facts that it was a cost component:
 “Such services [referring to the legal expenses at issue in that case] do not therefore have any direct and immediate link with the output transaction.  On the other hand, the costs of those services are part of the taxable person’s general costs and are, as such, components of the price of an undertaking’s products.  Such services therefore do have a direct and immediate link with the taxable person’s business as a whole …”
 “… It could only be otherwise if the taxable person were able to prove that, exceptionally, the costs relating to the goods or services which he has utilised as a consequence of making a deductible transaction are part of the cost components of that transaction.”
131.	Our interpretation is that the ECJ’s meaning of cost component is that it was an expense which was taken into account when making the supply.  
132.	The ECJ also has made it clear that the cost component test is objective and not about motive.  In both BLP Group plc (C-4/94) and Abbey National they said that the ultimate aim pursued by the taxpayer was not relevant.  The purpose of the taxpayer in BLP was to raise capital for its general taxable business by selling off shares.  The sale of the shares was exempt.  The VAT on the expenses of the share sale was found to be directly linked to the sale of the shares.  It was a cost component of that sale.
133.	Ms Haynes considers that there is an exception to the “cost component” rule when a business (or part of it) closes down.  The ECJ permitted VAT recovery on costs arising after a business was closed down in I/S Fini H C-32/03.  In Fini H the company ran a restaurant in leased premises.  The restaurant closed down and the company ceased trading but remained liable on the lease for some years.  The landlord refused to take a surrender and no assignee could be found.   The ECJ found that there was a direct and immediate link between the expenses incurred on the leased property and the company’s previous taxable business as a restaurant.  The company was allowed to recover the VAT on the rent as attributable to its now closed taxable business.  In its decision, the ECJ  did not refer to the necessity for the expense to be a “cost component” but did find that there was a direct and immediate link to the previous taxable supplies.   
134.	In Abbey National, the company sold a let property for a very substantial sum.  The transfer was not a supply for VAT purposes because it was a transfer of a business as a going concern.  The ECJ held that there was no direct and immediate link with any particular supply made by Abbey, but that the expenses of the transfer formed part of Abbey’s overheads and were cost components of the business as a whole.  They said at paragraph 34 & 35: 
“It follows that the various services acquired by the transferor in order to effect the transfer of a totality of assets or part thereof do not have a direct and immediate link with one or more output transactions giving rise to the right to deduct. 
However, the costs of those services form part of the taxable person’s overheads, and as such are cost components of the products of a business.  Even in the case of a transfer of a totality of assets, where the taxable person no longer effects transactions after using those services, their costs must be regarded as part of the economic activity of the business as a whole before the transfer.”
135.	So it seems that on the closure (or sale) of the whole or part of a business, expenses of that closure are cost components – or at least directly linked – to the business as a whole (even if it has now ceased).  The ECJ may, however, have been implying a distinction in that the costs of a transfer which did not bring the business activities of the taxpayer to an end are current overheads whereas the costs of a termination of a business are overheads of the pre-existing business.
Was the input tax attributable to the assignment?
136.	Applying the law to the facts of this case, what is the result? Ms Haynes takes the view in her submissions after the hearing that the reverse premium cannot be attributed to the assignment as, she says, it is clearly not a cost component of it.  £340,000 clearly cannot be a component of £10.
137.	Mr Southern put the case that there is a direct and immediate link where the expense (the reverse premium) would not have been incurred other than in order to bring about the supply (ie the assignment).  There was no dispute between the parties that TEL was only prepared to take the assignment if they were paid £340,000 in consideration for doing so.  Effecting the assignment was the purpose of the payment of the reverse premium.  Case law shows, however, motive is not relevant.  If Mr Southern’s test is the right one, the ECJ would no doubt have referred to it in its decided cases.  In BLP for instance, the fact that the only reason that the shares were sold (and the expenses incurred) was to raise capital for the general taxable business of the Appellant did not create a direct and immediate link between the expenses and the general taxable business.
138.	We have already found that the assignment was not a supply and therefore the reverse premium could not have been attributable to it irrespective to the question of what the reverse premium was a cost component.  However, if we were wrong to decide the assignment was not a supply, we would agree with Ms Haynes and find that the reverse premium of £340,000 was not a cost component of the assignment for £10.  It was not an expense of the assignment as it was not incorporated into the costs of the assignment:  a sale for £10 could not absorb an expense of £340,000.
139.	The ECJ has said motive is irrelevant and the test is objective, so it seems that the test is objectively whether the expense actually was a cost of the supply.  Objectively, whatever £340,000 was an expense of, it was not an expense of a “supply” incurred merely to generate consideration of £10.
To what was the reverse premium attributable?
140.	 The main question before the Tribunal is whether HMRC were correct to deny the Appellant the input tax on the reverse premium.  To decide that question, having found that the reverse premium was not attributable to the assignment, we have to decide to what it was attributable.   As recognised by the parties, the other options are that (in whole or part) it is attributable to the prior exempt letting of the property to TEL or simply attributable to the Appellant’s general business at the time of the assignment.
141.	In this case, as reported earlier, the Appellant took on the lease for its own occupation.  The lease contained a schedule of works.  The Appellant has neither put nor kept the property in the state of repair required by the head lease.  Although it seems the Appellant must have known from the start about its accrued and accruing liabilities under the head lease, nevertheless this did not influence the rent charged to TEL which was £9,000 per annum and the equivalent to the rent paid out by the Appellant under the head lease.  The letting activity was brought to an end by the assignment of the head lease.
142.	Ms Haynes considers that the reverse premium was attributable to the Appellant’s prior exempt letting of the leased property to TEL.  She considers that when the Appellant assigned the lease they brought to a close their letting activity over Tweseldown Racecourse.  She considers that it follows from Abbey National that the reverse premium was an expense in relation to this exempt letting activity and that it is therefore directly and immediately linked to it.  
143.	The Appellant disputes this.  They say that retrospective attribution cannot be right.  They consider that input tax incurred cannot be attributed to previous exempt supplies but only to supplies subsequent in time. Mr Southern puts the view that the input tax was attributable to general overheads as the transaction in question was “the direct, permanent and necessary extension of the taxable activity” of the Appellant as per SKF paragraph 31 which seems another way of saying that he considers the reverse premium was part of the overheads of the Appellant’s business.
144.	 As mentioned above, following Midland, while it is true that costs consequential to a supply are not normally cost components of that supply, it seems they can be where they were anticipated in advance.  Further, “retrospective” attribution can happen as in the case of Fini H.   
145.	We find that the assignment did bring to an end the Appellant’s letting activity.   Fini H might suggest that the costs of that assignment should be attributed to the prior letting activity but that was a case where the taxpayer had ceased trading.  Abbey National, which was like this one a case of a termination of only part of a business, suggests that where the expense is not a cost component of any particular supply, the direct and immediate link is with current overheads or (as per paragraph 40) with a “clearly defined part of his economic activities”.  Which again brings us back to the question of whether the reverse premium was a cost component of the Appellant’s business as a whole or solely of its letting activity?
146.	 Our conclusion is that the reverse premium was an overhead expense of the Appellant’s business as a whole.  We bear in mind that it follows from the ECJ’s ruling in Midland that costs arising after the supply (in this case the reverse premium arising after the letting activity) would not normally be a cost component of that supply, but exceptionally they might be.  We consider that the repairing liabilities of the Appellant under the lease from the MOD  must have been anticipated by it and therefore the reverse premium which they paid to be rid of them, could not be seen as an expense arising entirely after the letting activity. Nevertheless, the expense was not wholly in relation to the letting business as the Appellant’s occupation of the property under a lease from the MOD dated back to its inception in 1997 and pre-dated the letting activity.  Further, we have found on the facts that the accruing repairing obligations were not in fact treated as an overhead of the letting to TEL (as they were not taken into account in setting the rental level).  We therefore consider the reverse premium to be an expense of the business as a whole as it is not solely a cost component of the letting activity.
147.	Therefore we find that the reverse premium was a general business expense for the Appellant, and as according to Ms Fox the Appellant is partially exempt, it will be entitled to recover the VAT on the reverse premium in accordance with its partial exemption method applicable to the period in which the expense was incurred. 
Option to tax
The law
148.	From the foregoing, this Tribunal’s decision in respect of HMRC’s option to tax is unnecessary:  indeed it follows we have no jurisdiction to consider it because the refusal to repay the VAT paid by the Appellant on the reverse premium should not have depended on HMRC’s prior refusal of permission to opt to tax (see paragraph 31 above).  Nevertheless, as the point was fully argued, we here record our decision on it.
149.	At the time the law on options to tax was set out in the old version of Schedule 10 to VATA 94.  Paragraph 3(9) of Schedule 10 provided as follows:
“Where a person who wishes to make an election in relation to any land (the relevant land) to have effect on or after 1st January 1992, has made, makes or intends to make, an exempt grant in relation to the relevant land at any time between 1st August 1989 and before the beginning of the day from which he wishes an election in relation to the relevant land to have effect, he shall not make an election in relation to the relevant land unless the conditions for automatic permission specified in a notice published by the Commissioners are met or he obtains the prior written permission of the Commissioners, who shall only give such permission if they are satisfied having regards to all the circumstances of the case and in particular to – 
(a)	the total value of exempt grants in relation to the relevant land made or to be made before the day from which the person wishes his election to have effect;
(b)	the expected total value of grants relating to the relevant land that would be taxable if the election were to have effect; and
(c)	the total amount of input tax which has been incurred on or after 1st August 1989 or is likely to be incurred in relation to the relevant land,
that there would be secured a fair and reasonable attribution of the input tax mentioned in paragraph (c) above to grants in relation to the relevant land which, if the election were to have effect, would be taxable.
150.	“Grant” is defined in VATA 1994 Schedule 9 Group 1 Note (1) (which applies to Schedule 10 by virtue of……) as:
“(1) ‘Grant’ includes an assignment …”

151.	Both parties were agreed that the Appellant required HMRC’s permission in order to opt to tax the property.  The Tribunal concurs.  TEL had been in occupation of the property for a number of years as a tenant at will paying rent to the Appellant.  The Appellant had not opted the property and the rent was paid without VAT.  Thus the Appellant had made exempt supplies of the property and under Paragraph 3(9) permission from HMRC had to be obtained before an option could be made.
152.	Both parties were agreed that the conditions for automatic permission to opt to tax were not met.
Supervisory jurisdiction
153.	The Appellant referred us to John Dee Ltd [1995] STC 941 which was a judgment of the Court of Appeal in which a decision of HMRC that a company should provide security as a condition of being registered for VAT was challenged.  The Court of Appeal ruled that the jurisdiction of the Tribunal in considering HMRC’s exercise of their discretion in making the decision to require security was limited to deciding whether HMRC had acted in a way which was unreasonable or had taken into account something which was irrelevant or disregarded something which was relevant or had erred on point of law:  but the Tribunal could not substitute its own discretion.
154.	In the later case of R & R Pension Fund Trustees [1996] STC 889 Buxton J agreed that the same mode of approach to the exercise of HMRC’s discretion in security cases applied to cases on permission to opt to tax.  All parties in this case agreed that this was the correct test to apply but were at odds as to the conclusion we should reach.
155.	The parties’ submissions made at the hearing were made on the basis that the VAT incurred on the reverse premium was entirely attributable to the assignment of the lease.  We have found that assumption wholly unfounded, but we record the submissions made and what our conclusions would have been had we considered the underlying assumption to be correct.
HMRC’s submissions
156.	HMRC’s case was that HMRC only had power to grant permission to opt to tax where HMRC considered that a fair and reasonable attribution of input tax would result.  On the facts of this case, HMRC did not consider that generating an output tax charge of a mere £1.75 to which input tax of at least £35,000 would be attributed was fair and reasonable.  They do not consider that they had any choice but to refuse the request to opt to tax.
Appellant’s submissions
157.	Input tax exceeds output tax:  Mr Southern put forward the view that HMRC have taken irrelevant things into account by refusing permission merely because the input tax to be recovered exceeds the output tax that would be collected.  
158.	We disagree.  We think that the whole tenor of paragraph 3(9) is to compare the output tax payable with the input tax chargeable.  By sub-paragraphs (a) to (c) HMRC is required to consider the value of exempt grants, the value of taxable grants, and the amount of the input tax incurred in order to secure a fair and reasonable attribution.  That the input tax to be recovered greatly exceeds the output tax to be charged would seem a very relevant consideration and we find HMRC were right to take it into account in making their decision.
159.	Mr Southern suggested that in a case where the input tax is wholly attributable to a taxable supply then paragraphs 3(9) (a) & (c) become irrelevant  to the question of “fair and reasonable”.  He said this was because under the VAT system input tax wholly attributable to a taxable supply ought to be recoverable.  But in our view this is begging the question:  paragraph 3(9) provides that because input tax attributable to a taxable supply is recoverable, HMRC are not to give permission for the supply to be opted unless they consider that the result is fair and reasonable.  We consider that HMRC were right (and indeed obliged) to consider the historic value of exempt grants (paragraph 3(9)(a)) and the amount of input tax which had been incurred and was likely to be incurred (paragraph 3(9)(c)).
160.	Mr Southern then put forward the view that applying para 3(9) of Schedule 10 he considers that the figures for (a) and (b) are both nil and that therefore there was no comparison for HMRC to carry out under paragraph 3(9).   We do not agree.  The only taxable supply (if permission were granted) would be the assignment of the lease for the nominal amount of £10 and the value of (b) would, we agree, effectively be nil.  However, we do not understand why Mr Southern considers the value of (a) would be nil.  This includes in the total value of exempt grants in relation to the land grants already “made”.  The evidence on behalf of the Appellant is that TEL has been paying rent of about £9,000 per annum.  Compared to the input tax under (c) this figure is not high but it is more than nominal. More importantly we do not understand why Mr Southern suggests that because the figure for (b) (future taxable grants) is effectively nil, that there is therefore nothing to which HMRC can compare the large input tax figure under (c).  They compared (c), a figure in excess of £35,000, to (b), the nominal figure of £10.  This is what they were required to do by the legislation.
161.	Fair and reasonable attribution: Mr Southern also said that Paragraph 3(9) required HMRC to secure a “fair and reasonable attribution”.  Since in Mr Southern’s view the VAT on the reverse premium was wholly attributable to the assignment and could not be attributable to anything else, attributing it to the assignment was therefore a “fair and reasonable” attribution and the option to tax should have been permitted.
162.	Paragraph 3(9) does require HMRC to be satisfied “having regards to all the circumstances … that there would be secured a fair and reasonable attribution of the input tax …” if the option were to have effect.  As attribution is a matter of law, HMRC cannot decide whether something is or is not attributable to a particular supply.  It is a question of law. So on one level the reference to securing a “fair and reasonable attribution” in paragraph 3(9) is meaningless:  HMRC can have no impact on whether the input tax is as a matter of law attributable to a particular supply.
163.	However, we think  the intention of paragraph 3(9) is clearly for HMRC to look at the attribution which results from the law and decide if it is “fair and reasonable” for the supply to which the input tax is attributable to be taxable.  So the question for HMRC is not whether the attribution is fair and reasonable, but whether it is fair and reasonable to convert the exempt supply into a taxable one.
164.	That this interpretation is the correct one seems to follow from the High Court decision in R & R Pension Fund Trustees.  In that case the Appellant sought an attribution of input tax that did not follow from the law and Mr Justice Buxton ruled that it was not open to HMRC to agree this.  HMRC cannot agree an attribution different to that provided for by law.  It follows in our view that the reference to “fair and reasonable attribution” is a reference to whether it is fair and reasonable for the input tax which is attributable to supplies which would be taxable if permission to opt were granted to be recovered.  If it is not, HMRC are to refuse permission.  This is what they did in this case, and as we have said above, by comparing the reverse premium of £35,000 to the output of £10 they took into account relevant factors.
165.	Fiscal Neutrality:  Although Mr Southern said he was not pursuing a case that UK rules which give HMRC a discretion whether to permit an option to tax were unlawful under the Directive, nevertheless he did argue that paragraph 3(9) needed to be interpreted in such a way that it was consistent with fiscal neutrality and proportionality.  Of course we do not disagree with this as a general principle but we were unable to agree with Mr Southern on its application to this case.
166.	Mr Southern’s view was that the option to tax mechanism which was authorised by the Principal VAT Directive was intended to achieve fiscal neutrality.  It was not a mechanism intended to raise revenue but had as its “sole” purpose to place in the hands of the taxpayer a tool to achieve fiscal neutrality.
167.	As a general principle we do not agree with this.  The Principal VAT Directive at Article 137(2) provides:
“Member States shall lay down the detailed rules governing exercise of the option under paragraph 1.  Member States may restrict the scope of that right of option.”  
168.	Although it must be true that such restrictions must be consistent with fiscal neutrality and the other principles of EU law, it does not follow that achieving fiscal neutrality was its purpose.  On the contrary since all national VAT laws must be consistent with fiscal neutrality, and the option to tax is itself optional to the Member State (see Article 137(1)), it must follow that both having the option available and not having it available ought to be consistent with fiscal neutrality.
169.	But are the restrictions imposed by national law in paragraph 3(9) consistent with fiscal neutrality?  Mr Southern saw fiscal neutrality as a principle which ensures that VAT charged on final consumption does not contain hidden unrecovered VAT higher in the chain.  In other words, he saw fiscal neutrality as a concept which required the Tribunal to look at entire supply chain and ensure that one party was not being charged hidden, irrecoverable VAT which was incurred by someone higher up in the supply chain.  
170.	Mr Southern therefore considers that either we must interpret Paragraph 9(3) to be consistent with fiscal neutrality as he sees it or we must find that Paragraph 9(3), in only allowing HMRC to consider the grants made by the “opter”, is inconsistent with fiscal neutrality.  If it is inconsistent, he says, we must therefore adopt a conforming interpretation as set out in IDT Card Services Ireland Ltd [2006] STC 1252 at para 75 and come to the same conclusion that we should take into account the whole supply chain.
171.	In his view, the practical implication of such an interpretation of Paragraph 9(3) is that HMRC should have taken into account TEL’s taxable use of the assigned lease and allowed the Appellant to opt to ensure that the VAT on the reverse premium was not sticking tax.
172.	On the facts by themselves we must disagree with Mr Southern.  We had no evidence that TEL’s use of the property was taxable:  such evidence was certainly not presented to HMRC in the Appellant’s application to opt.  In any event, looking at the supply chain as a whole (continuing to suspend in our minds our finding that the VAT on the reverse premium was not attributable to the assignment) allowing the Appellant to opt a £10 supply could have no real impact on TEL as they were not paying the sticking tax on the £340,000 reverse premium rolled up in the mere £10 charge for the assignment.
173.	Putting the facts to one side, we also disagree with Mr Southern on the law.  We agree that fiscal neutrality is a principle to which we are required to have regard.  Although it is sometimes used in the sense that similar supplies must not be treated differently for VAT purposes, it also has the meaning taken from the First VAT Directive (paragraph quoted above) that as VAT is a tax on consumption the intention is to relieve traders of VAT whilst taxing final consumption.  
174.	An expression of this principle is contained in the case of Abbey National (above) where at paragraph 24 the ECJ said 
“It should be noted, to begin with, that the deduction system is meant to relieve the trader entirely of the burden of VAT payable or paid in the course of all his economic activities.  The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT….”

175.	Our understanding is that fiscal neutrality does require in general terms for there to be no sticking tax before final consumption:  a taxable person should be able to recover VAT on supplies made by other traders to itself because it charges VAT on supplies it makes.  VAT is, of course, more complicated because some supplies are exempt, putting a taxable person in the same position as a consumer:  unable to recover input tax on purchases. Exemption for certain supplies is enshrined in the VAT Directive: exemption cannot therefore be incompatible with the principle of fiscal neutrality.  
176.	It follows that it has to be accepted that in the EU VAT system sticking tax can arise in the hands of a fully taxable trader when it buys in exempt supplies and that this is not incompatible with fiscal neutrality.  In conclusion, we see fiscal neutrality as meaning that when a trader makes a taxable supply he should be wholly relieved of the burden of VAT charged on his inputs related to that supply.
177.	Fiscal neutrality does not require account to be taken of taxable supplies made by the trader’s customer or of irrecoverable VAT in the hands of his suppliers.  The ECJ in Abbey National has expressly ruled against taking into account the taxable activities of a transferee when looking at the VAT recovery of a transferor.  In that case the Appellant argued (see paragraph 31) that the taxable activities of its transferee should be taken into account, but the ECJ said:
“(paragraph 32) That argument cannot be accepted … in any event, the amount of VAT paid by the transferor on the costs incurred for the services acquired in order to carry out a transfer of a totality of assets or part therefore does not directly burden the various cost components of the transferee’s taxable transactions, as required by Article 2 of the First Directive ….”
178.	It follows that fiscal neutrality does not require that HMRC give permission to convert an exempt supply into a taxable one because making exempt supplies is not inconsistent with fiscal neutrality.  We also find that UK law is not in breach of fiscal neutrality.
Conclusions on option
179.	We consider that properly interpreted paragraph 3(9) only requires HMRC to take into account the putative opter’s grants and not the grants made by anyone else.  In particular, (b) only applies to grants that would be taxable if the election were made.  Since an election can only affect grants made by the person making the election it follows that it is only grants made by the person seeking to make an election which count for the purposes of paragraph 3(9).  And HMRC is required to consider the “attribution” of the tax in (c).  As under the Directive and VAT Act, VAT is only attributable to supplies made by the person incurring the input tax, it follows that it is implied in paragraph 3(9) that HMRC are only to consider input tax belonging to and supplies made by the person who wishes to make the election.  As a matter of law, TEL’s position is irrelevant.
180.	In conclusion, we find that HMRC, in taking account of the disproportionate amount of input tax (VAT on £340,000) to be recovered as compared to the output tax to be generated (VAT on £10) were the requested option to tax to take effect, took into account what they were required to do by UK law and came to a reasonable conclusion.  Indeed, we would go so far as to say on these facts, as the Court did in R&R Pension Fund Trustees, that it is beyond serious argument that HMRC reached a reasonable conclusion.
181.	However, all the above is on the assumption that our finding that the reverse premium was not attributable to the assignment was incorrect.  We have found, on the contrary, that the reverse premium was not attributable to the assignment.  As we have noted this means that we do not have jurisdiction to review the decision on the option to tax as the recovery of the input tax on the reverse premium does not depend on it.  In any event, it would serve no purpose for the Appellant if we were to review it as nothing hangs on it for them.
182.	Nevertheless, we would comment that HMRC in not considering the correct attribution of input tax when exercising their discretion under paragraph 3(9) did err on a point of law.  Counsel for HMRC at the hearing suggested that they need only consider the attribution made by the Appellant.  We do not agree.  R & R Pension Fund Trustees makes it clear that HMRC’s exercise of discretion when deciding whether to give permission to opt to tax must be based on the attribution according to the law.  HMRC has no power to agree an attribution other than in accordance with the law.
183.	Under the John Dee test, however, the Tribunal would not quash the decision if it was inevitable, had the error not been made, that the same result would have been reached by HMRC.  In this case, bearing in mind that we have found that the assignment, which brought to an end the Appellant’s interest in the property, was itself not a supply for VAT purposes, it seems inevitable that had HMRC considered this, they would have refused permission on the basis that no taxable supplies would be made at all of the opted land.  In any event, quashing the decision would be futile as nothing turns on it:  the assignment was not a supply and no input VAT could be attributable to it.  An option by the Appellant would have had no impact whatsoever on its VAT position.
184.	To repeat what we said above at paragraph 148 we are recording our views on the option to tax because it was argued and the case might be appealed:  but our finding that the assignment was not a supply (and, if we were wrong on that, that no input tax was attributable to it) means that we have no jurisdiction to consider HMRC’s refusal of permission on the option to tax because the recovery of the input tax did not in law depend on it.
185.	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.

TRIBUNAL JUDGE
RELEASE DATE: 17 August 2010