Regulation 109 of VAT Regulations 1995 – Election to waive VAT exemption – Landlords opting to tax – Tenant ceasing to occupy – Tenant paying rent plus VAT while seeking suitable sublessee – Tenant deferring decision whether to opt to tax – No subletting concluded – Tenant eventually opting to tax – VAT Tribunal rejecting tenant’s claim to recover tax paid prior to making election – Tribunal decision reversed – Commissioners’ appeal dismissed
Five companies belonging to the appellant group (Royal) each held their respective office buildings under leases for terms between 15 and 25 years. The landlord in each case elected to waive the VAT exemption that was otherwise applicable. Pursuant to a series of decisions made at group level in the early 1990s, each company ceased to occupy its building for the purpose of its (exempt) insurance business, and sought to attract a suitable sublessee. The VAT status of any such subletting was left in abeyance in the expectation that opting to tax would suit some sublessees (those in the business of making taxable supplies), but not others.
These marketing attempts were unsuccessful. With effect from November 1995, Royal (irrevocably) exercised the right of election in relation to all the buildings, with the result that all future sublettings would necessarily be taxable supplies. Thereafter, a number of such sublettings were concluded.
Royal sought to recover an amount in excess of £400,000 from the respondent commissioners, that sum being the input tax paid to the various landlords for the period (the vacant unelected period) beginning with the cesser of business occupation and ending with the November 1995 election. Basing its claim upon regulation 109 of the VAT Regulations 1995, Royal contended that its entitlement arose because: (i) as required by the regulation, it had not attributed the tax to taxable supplies, having intended to use the inputs from its landlords in the making of exempt supplies; and (ii) by making the November 1995 election, it had formed an intention to use those inputs in making taxable supplies. The second contention was disputed by the commissioners, whose arguments were accepted by the VAT tribunal.
Royal appealed successfully to the High Court (see [2000] EGCS 106), where it was held, inter alia, that the 1995 election had brought about the necessary attribution because: (i) the rents paid to the various landlords during the vacant unelected period were “cost components” in the sense employed in the first VAT Directive, No 67/227, since, by paying them, Royal had put itself in a position to grant subleases; (ii) the fact that the subleases were to be granted out of the leases, for which such rents had been paid, created the necessary “direct and immediate link” between the input and the intended output, as required by the European Court in BLP Group plc v Customs & Excise Commissioners C4/94 [1995] STC 424; (iii) there was no basis for contending that the inputs had been exhausted during the vacant unelected period in the appellant’s unsuccessful efforts to make exempt sublettings. The appellant had tried to consume the inputs, but had failed; and (iv) the asset acquired in each case was the fixed term — regulations 85 and 90 did not require the rental payments to be treated as a series of short-lived inputs. The commissioners appealed.
Held: The appeal was dismissed.
The crucial question was not whether Royal had “used” the inputs, but whether the inputs that had been incurred during the vacant unelected period had, for the purpose of regulation 109, been used, or had been intended to be used, “in making a taxable supply…or both taxable and exempt supplies”. The judge was right to consider the relevant supply as the grant of the lease, which remained as such despite the requirement under regulation 85 that VAT had to be charged and paid periodically. The necessary direct and immediate link was present: see BLP Group plc and Midland Bank plc v Customs & Excise Commissioners C98/98 [2000] STC 501.
Per Arden LJ dissenting: The deeming of the time of supply under regulation 85 had to effect the nature of the supply; it was accordingly wrong to see the lease as a single supply.
Malcolm Gammie (instructed by Linklaters & Alliance) appeared for the appellant; Kenneth Parker QC and Peter Mantle (instructed by the solicitor to the Commissioners of Customs & Excise) appeared for the respondent.
Alan Cooklin, barrister
