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You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Gracechurch Management Services Ltd v Revenue & Customs [2006] UKVAT V19785 (26 September 2006) URL: http://www.bailii.org/uk/cases/UKVAT/2006/V19785.html Cite as: [2006] UKVAT V19785

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19785

VALUE ADDED TAX – Input Tax recovery – Prepayment before leaving group – whether input recovery restricted – held not restricted on then law – appeal allowed

LONDON TRIBUNAL CENTRE LON/1998/0633

GRACECHURCH MANAGEMENT SERVICES LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: ADRIAN SHIPWRIGHT (Chairman)

CYRIL SHAW

Sitting in public in London on 22 and 23 May 2006

Jonathan Peacock QC, Counsel, for the Appellant

Dr Paul Lasok QC and Jeremy Hyams, Counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006


 


DECISION

Introduction

1. This is an appeal by Gracechurch Management Services Limited("GMS") against an assessment ("the Assessment") made by the Respondent") for £3,193,652 dated 14 April 1998. The Assessment seeks to recover input tax said to be over deducted by GMS for the periods 6/1995 to 12/1997 (inclusive). The Assessment is "global" in form (i.e. not in respect of each of the periods within the Assessment).

The Issues

2. There are two issues in this case. These are:

a. Whether GMS was entitled to deduct and recover all the input tax in the relevant periods and so whether the Assessment is properly made? ("Issue I")

b. Whether the Assessment (if properly made) was made in time? ("Issue 2")

There was no issue raised as to Abuse or Abuse of Rights.

The Law

Legislation

3. The UK statutory material so far as is relevant includes section 43 VATA headed "Groups of companies." It reads (in so far as is relevant):

"(1) Where under the following provisions of this section any bodies corporate are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member, and—

(a) any supply of goods or services by a member of the group to another member of the group shall be disregarded; and
(b) any supply which is a supply to which paragraph (a) above does not apply and is a supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member; and
(c) any VAT paid or payable by a member of the group on the acquisition of goods from another member State or on the importation of goods from a place outside the member States shall be treated as paid or payable by the representative member and the goods shall be treated—

(i) in the case of goods acquired from another member State, for the purposes of section 73(7); and
(ii) in the case of goods imported from a place outside the member States, for those purposes and the purposes of section 38,

as acquired or, as the case may be, imported by the representative member; and all members of the group shall be liable jointly and severally for any VAT due from the representative member."

4. The relevant European provisions include the following provisions of the Sixth Directives. Article 17 is headed "Origin and scope of the right to deduct." It reads:

" 1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;
(b) value added tax due or paid in respect of imported goods;
(c) value added tax due under Articles 5 (7)(a) and 6 (3)…

As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

However, Member States may (a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;
(b) compel the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;
(c) authorise or compel the taxable person to make the deduction on the basis of the use of all or part of the goods and services;
(d) authorise or compel the taxable person to make the deduction in accordance with the rule laid down in the first sub-paragraph, in respect of all goods and services used for all transactions referred to therein;
(e) provide that where the value added tax which is not deductible by the taxable person is insignificant it shall be treated as nil…"

"

Article 6 headed Supply of services. It reads:

"Supply of services" shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.

Such transactions may include inter alia:

—assignments of intangible property whether or not it is the subject of a document establishing title,
—obligations to refrain from an act or to tolerate an act or situation,
—the performances of services in pursuance of an order made by or in the name of a public authority or in pursuance of the law

The following shall be treated as supplies of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible;
(b) supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than those of his business.

Member States may derogate from the provisions of this paragraph provided that such derogation does not lead to distortion of competition.

In order to prevent distortion of competition and subject to the consultations provided for in Article 29, Member States may treat as a supply of services for consideration the supply by a taxable person of a service for the purposes of his undertaking where the value added tax on such a service, had it been supplied by another taxable person, would not be wholly deductible.

Where a taxable person acting in his own name but on behalf of another takes part in a supply of services, he shall be considered to have received and supplied those services himself.

Article 5 (8) shall apply in like manner to the supply of services."

The Authorities

5. A bundle of authorities was produced which included the following:

Associated Provincial Picture Houses Limited v Wednesbury Corporation [1948] 1K.B. 223

S J Grange Ltd v Customs & Excise Commissioners [1979] STC 183

Heyfordian Travel Ltd v The Commissioners [1979] VATTR 139

International Language Centres Ltd v Customs and Excise Commissioners [1983] STC 394

Customs & Excise Commissioners v Biararch Ltd & Customs and Excise Commissioners v Curtis Henderson Ltd [1992] STC 732

Customs & Excise Commissioners v Post Office [1995] STC 749

Classicmoor Ltd v Customs & Excise Commissioners VTD 13336 (1995)

Lennartz v Finanzamt Munchen III Case C-97/90 [1995] STC 514

Elida Gibbs Ltd v Customs & excise Commissioners [1996] STC 1387

Belgium v Ghent Coal Terminal NV Case C-317/94 [1998] STC 260

Pegasus Birds Ltd v Customs & Excise Commissioners (HC) [1999] STC 95

Pegasus Birds Ltd v Customs & Excise Commissioners (CA) [2000] STC 91

Seeling v Finanzamt Starnberg Case C-269/00 [2003] STC 805

BUPA Purchasing Ltd and others v Customs & Excise Commissioners [2003] STC 1203

P Charles and TS Charles-Tijmens Case C-434/03 (2005)

RSPCA & RSPCA Properties Limited VTD19440 (2006)

The Evidence

6. A bundle of documents was produced. No objection was taken to any of the documents and they were all admitted in evidence.
7. An Agreed Statement of Facts was produced and admitted in evidence.
8. It also became clear during the hearing that it was common ground that the outputs by GMS were agreed to be all business outputs for the purposes of Article 17 of the Sixth Directive. There was no non-business use. It was all business use and not partial business and partial non-business use. This was accepted by both parties. In other words they were all used for the purposes of GMS's taxable outputs.
9. Oral evidence was given by Mr Thomas Detain who was an anti-avoidance Customers Officer at the time who had been involved in this case. A witness statement was produced for Mr Detain which was admitted as evidence in chief. He was cross-examined.

Findings of Fact

10. From the documents, the Agreed Statement of Facts and the evidence, we make the following findings of fact:

a. GMS is a company within the Societe Generale Group of companies.

b. Until 28 November 1994 (inclusive) GMS was a member of the Societe Generale VAT group.

c. Partriges Gracechurch SA ("Patriges") had the benefit of an agreement for lease of 60 Gracechurch Street, London. It was proposed to redevelop this property.

d. Patriges was a member of the same VAT group as GMS at the time of the prepayment described below but subsequently left the group.

e. Patriges entered into a contract ("the Contract") with GMS dated 25 November 1994, in effect, for GMS to provide a clearly defined development service. This included demolition, construction and related services.

f. Broadly, the terms of the Contract provided that GMS would construct the development in accordance with the agreed plans. It was clear, in principle, from the start what was intended to be built. As with any development it was subject to subsequent modification. However, the specific requirements, duties obligations and benefits were clear from the start.

g. Clause 3.1 of the Contract provided that "The Developer shall carry out and complete the Development on the terms of this Agreement."

h. Clause 1.1 provided (inter alia) "Development means the proposed development of the Property involving the demolition of existing buildings the carrying out of archaeological investigations if required, and the erection of new buildings and other facilities to be more particularly shown and described in the Approved Plans and briefly described in the Second Schedule and references to Development shall where the context so admits include references to any part or parts thereof."

i. The Second Schedule read as follows. "The Development comprises the obtaining of planning permissions (and any other Requisite Consents) for the construction of new buildings and ancillary facilities for high class office and ground floor retail use, the demolition of existing buildings and structures and site clearance, and the construction of new Buildings in accordance with the planning permission obtained by the Developer and all appropriate ancillary works.

The Development is described in the following documents (which form the Approved Plans as at the date of this Agreement):

Planning application to the City of London Corporation dated 18 July 1994

The Halpern Partnership drawing numbers:

LP(O) 01B Basement

LP(O) 02 Basement high level

LP(O) 03A Level minus 1

LP(O) 04B Level 1

LP(O) 05A Level 2

LP(O) 06A Level 3

LP(O) 07A Level 4

LP(O) 08A Level 5

LP(O) 09A Level 6

LP(O) 10A Level 7

LP(O) 11A Level 8

LP(O) 12A Level 9

LP(O) 13A Level 10 (roof)

LP(O) 14A Level 11 (roof high level)

D(E) 01C Gracechurch elevation

D(E) 02C Fenchurch elevation

D(E) 03C South-east elevation

D(E) 04C South-west elevation

D(S) 01B Section B-B

D(S) 03C Section C-C"

j. It was thus a clearly defined and identifiable project. We find this as a matter of primary fact.

k. Clause 11 of the Contract provided:

"11.1 In consideration of the Developer carrying out and completing the Development in accordance with the terms of this Agreement the Investor [Patriges] shall pay the Developer [GMS] the following amounts:

(a) on the date hereof [25 November 1994] Twenty Million pounds (£20,000,000) as an advance payment on account of any sums to become payable under this clause 11 Provided that payment of all or part of such sum may be deferred at the specific request of the Developer

(b) on such dates as may from time to time be agreed such further on account amounts in advance as may be agreed as being mutually commercially advantageous [sic]

(c) on such dates as may from time to time be agreed such sums as shall equal 105% of the Development Expenditure incurred for the time being (after deducting the whole or such part of any payments previously made under paragraphs (a) and/or (b) above as the parties may agree and the aggregate of any payments previously made under this paragraph (c)) such payments (taken in conjunction with any payments made under paragraphs (a) and/or (b) above) to be made at such times and to be at least of such amounts as shall be required to ensure in particular that the Developer shall at all times have at least sufficient funds to maintain a positive cash flow in discharging any amounts forming part of the Development Expenditure properly incurred by the Developer for the time being

(d) within seven days after the Completion Date of the Development such sum as equals 105% of the Development Expenditure less the aggregate of the amounts paid under paragraphs (a) (b) and (c) above

2 Amounts paid to the Developer under paragraphs (a) (b) or (c) of Clause 11.1 shall belong to the Developer absolutely and shall not (subject to Clause 11.5(d)) be repayable (regardless of the final actual amount of the Development Expenditure) and in the event of the calculation pursuant to paragraph (d) of Clause 11.1 producing a negative figure nothing shall be payable thereunder by either party to the other

3 The Developer shall in a good and efficient manner and in such form and manner as shall be agreed with the Investor:

(a) prepare and maintain up-to-date accounts of all Development Expenditure and the dates on which the Developer discharges the same;

(b) keep full and proper records of and receipts and vouchers for such expenditure and provide copies thereof and make the same available for inspection on behalf of the Investor if so required;

(c) provide the Investor with all relevant financial information, cost reports and budget estimates in respect of such expenditure whenever the Investor reasonably requests the Developer to do so.

4 There shall be deducted from the amount of Development Expenditure for the time being:

(a) any Value Added Tax on expenditure within the definition of Development Expenditure which is actually recovered by the Developer with effect from the date of such recovery;

(b) an amount equal to the interest which would have accrued on the amount whereby the aggregate of any amounts for the time being paid to the Developer pursuant to Clauses 11.1(a) and (b) and any amounts treated as a deduction from Development Expenditure pursuant to Clause 11.4(a) (calculated on a day to day basis) exceeds the amount of Development Expenditure for the time being actually discharged by the Developer had interest accrued to such excess at the London Inter Bank Bid Rte calculated on a daily basis (whether or not such interest is actually earned by the Developer).

5 For the purposes of Clause 11.4 and the avoidance of doubt:

(a) Value Added Tax on expenditure within the definition of Development Expenditure shall itself form part of the Development Expenditure;

(b) Nothing shall import any obligation on the Developer to invest any amounts or excess as referred to in Clause 11.4(b) in any particular way or at all it being acknowledged by the Investor that any such excess as therin referred which may from time to time exist shall belong to the Developer absolutely

(c) The calculation required for the purposes of Clause 11.4(b) shall cease on the Completion Date of the Development.

(d) If any Value Added Tax on expenditure within the definition of Development Expenditure is actually recovered by the Developer after the making of the payment referred to in Clause 11.1(d) the Developer shall forthwith account for the same to the Investor to the extent that the aggregate of the amounts paid by the Investor pursuant to Clauses 11.1(a) (b) and (c) exceeds the amount payable under Clause 11.1(d).

(e) The Developer shall use all reasonable endeavours to recover any Value Added Tax on expenditure within the definition of Development Expenditure which it able to recover as soon as it is reasonably possible to do so.

6 The Development Expenditure shall not include:

(a) any payment for project management services provided to the Developer by Gesnov SA

(b) any internal costs of the Developer

7 The Developer shall give the Investor as much prior notice of the Completion Date of the Development as is reasonably practicable.

8 The Investor and the Developer shall use their best endeavours to agree as soon as possible the amounts and where necessary the payment dates in respect of any sums which may become payable to the Developer under this Clause 11."

g. Payment under clause 11 represented some 80% of the project's contract value. This payment was made on 25 November 1994.

h. At the time that this payment was made i.e. 25 November 1994 GMS and Partriges were both members of the Societe Generale UK VAT Group.

i. GMS left the the Societe Generale UK VAT Group on 29 November 1994. GMS became separately registered for VAT purposes at the same time.

j. GMS contracted with third-party builders and others to provide it (ie GMS) with the goods and services which GMS subsequently supplied to Partriges in accordance with its obligations under the Contract.

k. Construction work began in 1995 (i.e. after GMS left the group) and continued until its completion in December 1997.

l. GMS issued two VAT invoices to Partriges in December 1997. These related to construction costs together with additional charges for further works requested by Partriges and totalled some £10.5 million plus VAT of some £1.8 million.

m. During the period of construction various visits have taken place. Officers of HMRC visited GMS. Mr Detain was an officer who made such visits. Another was Mr Torrington who accompanied by Mr Camoon visited GMS for about 2 ½ hours on 2 November 1995. Their reports record "GMS is entitled to full recovery of input tax on construction costs, etc."

n. All of the inputs to GMS were used to make taxable outputs by GMS. It was common ground that there was no non-business use. We found that they were all used for the purposes of GMS's taxable transactions.

Submissions of the Parties in outline

The Appellant's Submissions in outline

Issue 1

11. In essence, the Appellant's argument was very simple, all its attributable input tax was deductible at the time the liability to output tax arises. GMS bought in supplies and services after it had left the group which were referable to the outputs made in 1997 and accordingly the input tax on them was deductible in full. This accords with EU law and gives effect to the principle of fiscal neutrality.
12. In more detail it was as follows:

(a) This case is concerned only with the deductibility of inputs, not the taxability or otherwise of outputs.

(b) Article 17 of the Sixth Directive gives a right to deduct at the time that the deductible tax becomes chargeable.

(c) Article 17.2 provides that tax on inputs used for the purpose of his taxable transactions give the taxable person an entitlement to deduct the tax on such input from the tax he is liable to pay on his outputs.

(d) All the taxpayer is doing is to deduct the input tax from the taxable outputs to which it may be said to be attributable.

(e) The £20 million prepayment has no impact on the inputs. It could only give rise to output tax. By Section 43 VATA it was to be disregarded.

(f) HMRC argue in effect that the BUPA case means that only about one third of the Input Tax is recoverable (£10.5 : £30m). This approach is wrong certainly in the light of the later ECJ cases. In light of the decisions of the ECJ in Seeling and Charles it is submitted that the decision of Park J in BUPA (given without the benefit of either authority) must now be regarded, at least in this respect, as wrongly decided. A taxpayer who incurs input tax on the purchase of goods or services where the goods/services are to be used, in part for business and non-business purposes, is entitled to deduct the input tax in full subject to an obligation to account for output tax. This conclusion is reflected, expressly, in the approach of Customs as set out in the Business Briefs.

(g) By section 43 VATA a supply is to be disregarded when made between members of the same group. It is to be disregarded for all purposes as the section is not limited in its application. It does not apply to limit input deductibility on its wording which says the transactions between group members are to be disregarded.

(h) Hence the need for section 43(1A) to be introduced which came into effect after the transactions in question. It is the lack of symmetry with output tax that HMRC is objecting to.

(i) The BUPA case is distinguishable and so not determinative.

Issue 2

13. Mr Detain recognised in cross-examination that the only fair way to proceed was to allow deductibility up to a ceiling in making assessments. Accordingly, GMS had shown that the way HMRC had proceeded was not reasonable. Thus the Assessment was not made in time.

HMRC's Submissions in outline

Issue 1

14. In essence, HMRC's argument was that the Appellant should only recover part of the VAT on the inputs as only part of the inputs is referable to outputs made after GMS left the Societe Generale VAT Group.
15. In more detail, it was contended as follows.

(1) Section 43 only applies to disregard the intragroup supply for output tax in these circumstances. It does not apply for the purposes of attribution of input tax so that the input tax recovery here is to be limited.

(2) Lennartz is not relevant as it is all business use here. However BUPA is relevant. It decides that where a prepayment is made by one member of a VAT group to another who subsequently leaves the VAT group any input tax claim for all the input tax will fail because the inputs are referable in part to the output marked prepayment. Section 43 only requires the output to be disregarded as between the members of the VAT group. It is to be regarded for attribution purposes.

(3) Article 17(2) reinforces this when it refers to "taxable transactions".

(4) BUPA is not distinguishable.

(5) GMS has to assert that inputs must proceed outputs if it is to succeed. It is not the case. It is not to be found so stated in the Directive.

(6) This is not a case of force majeure like Ghent Coal. That case has no application here.

(7) Here there was a tax scheme. If one seeks to scheme whilst making certain assumptions, one may get burnt if one plays with fire. That is what the taxpayer has done here.

(8) In interpreting section 43 VATA for these purposes one must ignore 43(1A) which was inserted later effectively out of abundant caution. BUPA is authority for this.

(9) Input Tax is only deductible from the taxable transaction to which it relates. This excludes that referable to the prepayment.

Issue 2

16. The relevant law is found in Pegasus Birds. This requires GMS to show that no reasonable officer of HMRC would have waited till February or March 1998 to make the assessment. Faced with a prepayment where the position was not clear till the end of the construction period the best course for the officer to take was to wait and see. This is what the officer did. Accordingly, what the officer did was reasonable in all the circumstances. The assessment was thus made in time.

Discussion

Introduction

17. There are two issues to consider, namely:

Issue 1 Input tax recovery

Issue 2 Was the Assessment in time?

We will consider each issue in turn.

Issue 1 – Input Tax recovery

Authority for Deduction

18. Article 17 allows deduction of input tax where "goods and services are used for the purposes of taxable transactions". This is the starting point in considering deductibility. It is common ground that GMS's outputs were all business outputs for the purpose of Article 17. This case is only concerned with input tax recovery. Here the inputs were used for the purposes of the taxable transactions treated as taking place in December 1997 when the VAT invoices were issued. We find this as a fact.
19. In our opinion one should start by looking at Article 17, rather than Article 6. This allows the deduction of input tax from the tax a taxpayer is liable to pay on his outputs which are accepted as all business outputs. Accordingly, at first blush, (on the common ground and findings of fact) GMS is entitled to deduct the whole of its input tax from the output tax on the taxable transactions in December 1997. This flows from the Sixth Directive and does not have to be further demonstrated by GMS. This raises the question as to whether there are any restrictions on this deductibility.

Restrictions

General

20. Having decided that prima facie the input tax is deductible this requires the question to be considered "Whether there are any restrictions to be applied?"
21. In our view, in these circumstances where all the outputs are business outputs, there are no restrictions to be applied here. The obvious restriction would be a large output tax liability. However, that is not the case here. If section 43(1A) had applied it would be the case by making the prepayment liable to output tax. However, that subsection is not applicable to these circumstances. It does deal with the position after the subsection came into force so as to restrict input tax recovery.
22. There could also be an explicit restriction in the Directive or the UK legislation. We do not consider that there is an applicable one. We have not been shown one nor have our own researches revealed one.
23. We turn to consider these matters and the impact of section 43 in turn in more detail.

Large Output and section 43

24. Section 43 VATA is set out above at paragraph 3. It requires the supply of goods or services between members of a group to be disregarded (subsection (1)(a)). There is no restriction on the purposes for which it is to be disregarded in its wording. It would seem that such a supply is to be disregarded for all the purposes of VAT unless there is any reason to restrict it. It does not appear to us on its wording that there is. If it did apply only to outputs then it would seem to apply to restrict input tax even where the recipient is still a member of the group. This would be an odd result. This interpretation is supported by the assumption Parliament must have made in enacting section 43(1A). We only note this as a form of loose corroboration (cf BUPA paragraph 8 and passim). This is subject to one consideration namely the BUPA case which we consider next. However, it was considered that only two per cent of the outputs were taxable transactions in the BUPA case (paragraph 32 quoted below). This is not the position here so that BUPA is distinguishable on the facts, even if not superseded.

BUPA Case

25. The essence of Park J's decision in the BUPA case is set out at paragraphs 32-50 of his careful judgement based on the authorities cited to him which did not include Charles.
26. He made some helpful comments in considering the present case at paragraph 32. He said:

"I start with some observations on specific words in the relevant statutory provisions, …

i) Article 17(2) of the Directive. This is probably the most important single provision in the Directive so far as the present case is concerned. It begins with the words 'In so far as'. Where a taxable person incurs input tax on some supply made to him, he can only deduct that input tax for his own VAT purposes 'in so far as' he uses the supply 'for the purposes of his taxable transactions'. In this case BPL used the supplies—the inputs—which it received from outside suppliers like advertising agencies to perform its obligations under the contracts with BUPA and BHL which it had made at the first stage of the scheme. The performance of those obligations was a taxable transaction to the extent of 2%. To the extent of 98% it was something which BPL did and for which it used the inputs, but it was not a taxable transaction. So, having in mind the expression 'in so far as', I ask myself: how far did BPL use the services which it purchased from outside suppliers like advertising agents for the purposes of its taxable transactions? I answer: to the extent of 2%. I do not answer: to the extent of 100%, but that is the answer which BPL puts forward in this case. It is implicit in my answer that it may be appropriate and necessary to apportion a service on a percentage basis. In my opinion that is plainly correct, but there is an issue about it, and I shall discuss it under a later sub-heading (see [34]–[40], below). [Emphasis supplied]

ii) Section 24(1) of the Act. This defines 'input tax' as tax on the supply to a taxable person of goods and services used or to be used for the purposes of any business carried on by him. If the person who receives a supply of goods or services is a taxable person, but nevertheless he does not use the supply for the purpose of his 'business', the VAT which he pays on the supply is not 'input tax'. 'Business' has a restricted meaning in this connection, and activities which do not involve the making of taxable supplies, even if they would be business in the normal sense, do not count as business for VAT. This aspect of s 24(1) (at the time s 3(3) of the Finance Act 1972, as amended by the Finance Act 1977 to anticipate the introduction of the Sixth Directive) was the subject matter of the House of Lords' decision in Customs and Excise Comrs v Apple and Pear Development Council [1986] STC 192. In my opinion their Lordships decided that a particular activity of a taxable person which, together with other activities, formed part of what might normally have been regarded as the taxable person's business, but which did not itself involve the making of taxable supplies, did not rank as 'business' for VAT purposes. (See further the citations from the Apple and Pear case which I give in the next sub-paragraph.) The application of the principle to this case is as follows. To the extent of 98% BPL's activity of performing its contract by providing services to BUPA and BHL did not involve the making of taxable supplies, and accordingly that activity to that extent (to the extent of 98%) did not count as 'business' for VAT. Therefore, as it appears to me, 98% of the VAT charged to BPL by its suppliers (advertising agents and the like) was not within the definition of input tax. in s 24(1). If it was not 'input tax' it could not be recovered from the commissioners.

iii) Section 24(5) of the Act. If there is any doubt about the point which I have just made in relation to s 24(1), the conclusion is more explicitly spelt out in s 24(5), a sub-section to which the Tribunal referred and on which it correctly placed reliance. The subsection effectively provides that a taxable person, notwithstanding that he is a taxable person, cannot count as part of his input tax the VAT on the apportioned part of goods and services supplied to him which he uses for purposes other than those of a business carried on by him. This subsection, like s 24(1), was part of the law considered by the House of Lords in the Apple and Pear case (having at the time been s 3(4) of the Finance Act 1972). With reference to what I said about that case in the previous sub-paragraph I add two points from Lord Brightman's speech. First, he agreed ([1986] STC 192 at 197–198) with Fox LJ in the Court of Appeal (see [1985] STC 383), who had said:

'If an activity neither makes nor is intended to make taxable supplies, I do not think that the draftsman of the 1972 Act can have contemplated that it was a "business" for the purposes of s 4.'

Second, after summarising the scheme of the legislation, His Lordship said ([1986] STC 192 at 198):

'I ask myself how, against that background, one could rationally come to the conclusion that, if the business activities of the taxpayer are such that some services are taxable supplies and some are not supplies at all, the whole of the input tax is recoverable?'

That seems nevertheless to be what BPL wishes me to conclude here. It is true that the reason why some of BPL's activities (98% of them) were not taxable supplies is not the same as the reason why some of the Apple and Pear Development Council's activities were not taxable supplies, but that does not in my view make any difference. If the activities were not the making of taxable supplies, any VAT borne on the price of them is not 'input tax' to which s 24 can apply. A footnote which I can conveniently add here is that another English decision to a similar effect as the in decision the Apple and Pear case is the decision of Potts J in Schemepanel Trading Ltd v Customs and Excise Comrs [1996] STC 871. The case was about input tax which a company had borne at a time when it was not yet registered (because its turnover was too low) and so was not a taxable person.

iv) Regulation 101(2)(b) and (c). Mr Pleming submits, and I agree, that this case does not reach the stage of reg 101 having to be considered at all: the VAT borne by BPL which the case is about (98% of the VAT on supplies to BPL from outside suppliers) has already been excluded from any possibility of being recoverable input tax by either s 24(1) or s 24(5) or both. However, if that is wrong, by reg 101 a taxable person can only deduct input tax attributable to taxable supplies. Sub-paragraph (2)(b) of the regulation attributes to taxable supplies the input tax on such of the goods and services received by the taxable person as are used or to be used by him exclusively in making taxable supplies. When BPL used its inputs only to the extent of 2% in making taxable supplies, I do not see how it can be said that it used the inputs (ie 100% of them) 'exclusively' in making taxable supplies. The other relevant sub-paragraph is sub-para (2)(c) of reg 101. It provides that no part of the input tax on such of the inputs as are used or to be used in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, is to be attributed to taxable supplies. It is true that, as Mr Cordara stresses, BPL does not use any of its inputs in making exempt supplies, but what about the reference to 'any activity other than the making of taxable supplies'? To the extent of 98% the performance by BPL of its contracts with BUPA and BHL is an activity other than the making of taxable supplies. So 98% of the inputs is to be attributed otherwise than to taxable supplies, and cannot be recovered from the commissioners by BPL.

v) For the foregoing reasons I consider that BPL's claim to credit for 100% of the input tax which it bore on supplies to it by advertising agents and the like cannot be brought within the statutory provisions, and for that reason alone must fail. I refer also (as being relevant to this sub-heading as well as to a later one) to observations which I make in [49]–[51] below about art 19 of the Sixth Directive, and in particular about the concept of 'turnover' used in that article."

27. We have already found that all the inputs were used by GMS to make taxable outputs. Applying what his Lordship said to the current case we need to ask "How far did GMS use the inputs which it purchased from outside suppliers for the purposes of its taxable transactions?" We answer that it applied such inputs as to 100% to make taxable transactions, and we have found this as a fact. They were all for business use as is common ground. There was no 98:2 split here as there was in BUPA. The outputs which were subject to VAT here were all taxable supplies. Accordingly, no question of apportionment arises in this case.
28. The matters which we are asked to consider here relate to the prepayment, ie output, not input. The effect of section 43 VATA is that the prepayment is to be disregarded for all VAT purposes. Accordingly, we have disregarded it. On that basis all the outputs are taxable transactions and we so find. There is therefore no need for apportionment.
29. Park J. went on the consider apportionment in detail. He concluded that apportionment on a percentage basis was permissible where it is appropriate in the circumstances, a conclusion with which we respectfully concur. It is not appropriate where it is accepted all (ie one hundred per cent) of the outputs are for business purposes.
30. The question arises whether BUPA requires us to hold that the prepayment is not to be disregarded altogether but is to be regarded for some purposes such as input tax recovery.
31. Park J. in BUPA did not have the benefit of the Charles case being cited to him. Paragraph 32 of his judgment says it may be necessary and appropriate to apportion a service on a percentage basis but this is subject to the discussion at paragraph 34 – 37 (see last words of (i)). Park J said of Lennartz (at paragraph 37):

"…The case [ie Lennartz] is only considering acquisition of goods, not of services…".

Accordingly, the Lennartz approach could not apply to goods.

32. It is now clear from Charles that Lennartz applies to both goods and services. This goes to the basis of what his Lordship said in paragraph 32 and what is said on neutrality. We remind ourselves (as Park J. did) that the deduction regime is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. (See e.g. MKG [2003] STC 951 at paragraph 55).
33. Mr Peacock said in his Skeleton Argument that:

(1) Park J. rejected an argument for the taxpayer based on Lennartz in BUPA on the basis that Lennartz was concerned with goods and not services and that it was permissible, in any event, for the UK to insist on restricting input tax recovery rather than seeking a later output charge (paragraphs 37, 38).

(2) Lennartz decides that the right to deduct arises at the time that the deductible tax becomes chargeable (purchase of car in Lennartz) if the person is acting as a taxable person at that time.

(3) In Seeling the taxpayer paid for a building to be erected which he used partly for his business and partly for non-business purposes; he claimed to recover in full the input tax incurred and accounted for output tax in relation to his private use of the property. In proceedings relating to the taxpayer's entitlement to recover the input tax the ECJ ruled that the Sixth Directive prevented national legislation from treating such private use of a business asset as exempt so as to restrict the input tax recoverable. The Court made clear that where a taxpayer acquires goods or services and treats the goods/services as a business asset the input tax concerned is immediately deductible in full, subject to the corresponding obligation to account for output tax on the non-business use of the goods/services: paragraphs 41 – 44. Such a result constitutes a "deliberate choice on the part of the community legislature" (paragraph 54).

(4) The matter was addressed again in P Charles, TS Charles-Tijmens Case C-434/03 (14 July 2005, Grand Chamber of the ECJ) when the ECJ ruled that Member States were not permitted to rely on a derogation under Article 6(2) of the Sixth Directive to deny taxpayers the right to treat all input tax incurred when they purchase goods for mixed business and non-business use and allocate the goods to their business. Instead, and as Lennartz and Seeling established, input tax recovery in full must be permitted with a consequent charge to output tax in relation to non-business use: see paras 23 – 30 (acquisition of holiday home in part for private and in part for business use).

(5) As a result of the ECJ's decision in Charles it became clear that the limit on the operation of the Lennartz mechanism introduced in the UK in 2003 was itself unlawful. In consequence it is now accepted by Customs that where a trader incurs input tax on construction services or on purchasing land, buildings or civil engineering works for mixed business and non-business use, all of the input tax is deductible and output tax must be accounted for over the economic life of the asset concerned: Business Brief 15/05, published on 9 August 2005. The Brief also recognised that the Lennartz mechanism remains available for all other types of goods and of services where the services are incorporated into goods used in the business.

34. We accept and adopt these propositions as part of our decision. We also note that it was agreed by both parties that all GMS's outputs were business outputs.
35. In the light of the Charles case and its impact on Lennartz we consider that the comments in BUPA have been superseded. Accordingly we have to decide whether the inputs are entirely attributable to taxable transactions. We find in the circumstances that they were and it is not appropriate or necessary to do other than what section 43 requires and to disregard the prepayment for all the purposes of VAT. This is loosely corroborated by section 43(1A). We therefore find that the input tax is wholly recoverable. The consequence of this is that the Assessment is bad.

The Lennartz Principal and Apportionment

36. It was agreed by both parties that GMS's outputs were all business outputs and that there were no non-business outputs. Although there was much discussion of this point in the Skeleton Arguments given the agreed lack of non-business use it cannot be applicable here.
37. Accordingly, we do not need to consider this point other than to the extent we have already done so when considering the BUPA case which we find does not restrict input tax recovery.

Issue " – Was the Assessment in time?

38. Given the conclusion we have reached on Issue 1, Issue 2 does not arise. However, for completeness we record that we consider the Pegasus Birds requires GMS to show that no reasonable offices would have waited till early 1998 to make the Assessment. Given the difficulty of knowing the position till after the construction was complete we do not consider that GMS has shown this. On that basis if it became necessary we would be minded to find that the Assessment was made in time.

Overview

39. In our view:

(a) As it is agreed that there was no non-business use (ie all business outputs), the general Lennartz principal is not applicable here.

(b) The starting point therefore in any argument has to be Article 17 which allows the tax payer a deduction of VAT on inputs used for the purposes of his taxable transactions from his liability for VAT on outputs.

(c) This covers the present case where it is common ground all the outputs were for business purposes and would allow input tax deduction unless there is a specific restriction.

(d) On the applicable wording of section 43 VATA (before it was amended) there is not and we consider that BUPA is distinguishable for the reasons given above. No other specific restriction was argued to be applicable nor are we aware of any other.

(e) Accordingly, the input tax is wholly deductible.

(f) This makes the assessment bad so that Issue 2 does not arise.

However, we record that in our view, the Appellant had not shown enough to make the assessment one made out of time.

Conclusion

40. Accordingly the appeal is allowed with costs.

ADRIAN SHIPWRIGHT

CHAIRMAN

RELEASE DATE:26 September 2006

LON/1998/0633