Estate agents – Advertisements – Input tax – Appellant’s estate agency subsidiaries making taxable supplies of selling houses and VAT exempt supplies of mortgage services – Appellant agreeing special method of calculating recoverable VAT — Appellant seeking to recover in full VAT on cost of newspaper advertising – Respondents taking view that VAT partially attributable to exempt supplies to be treated as residual input tax – Whether direct link between relevant input tax and taxable transactions – Appeal allowed in part
The appellant was the parent company of a number of subsidiaries and the representative member of a VAT group of which its subsidiaries were also members. The group members made both taxable and exempt supplies and it was therefore a partially exempt trader. The group had agreed with the respondent commissioners a special method for calculating the proportion of its input tax that was recoverable under regulation 102 of the Value Added Tax Regulations 1995. One of the activities carried on by the subsidiaries was residential estate agency.
The appellant’s principal estate agency subsidiary was Connells Group, which also had subsidiaries, carrying on various property-related businesses. The group and its subsidiaries had approximately 500 estate agency branches throughout the UK. Different trading names were used throughout the country, most of which had been acquired on the purchase of local businesses, but the manner in which the business was conducted was broadly uniform. Connells Group had an annual turnover of around £250m, of which 60% was derived from estate agency, 25% from lettings, conveyancing, surveys and valuations and 15% from mortgage and insurance services and building society agency; only the last three were exempt for VAT purposes; all the others were standard-rated.
The group’s estate agency business was carried on through branches sited in the shopping areas of cities and towns, in which photographs and details of the properties available for sale were displayed, arrangements for visits made and negotiations undertaken. Properties were also promoted by newspaper and internet advertising.
An issue arose as to whether the VAT incurred by the appellant’s estate agency subsidiaries on the cost of local newspapers advertisements was wholly attributable to the sales of the properties advertised and therefore recoverable in full, as the appellant contended; or was partially attributable to the exempt services that the group supplied, so that it would be treated as residual input tax for the purposes of the special method. The appellant appealed against: (i) the respondents’ decision that it could not claim credit for the entire input tax; and (ii) their direction to treat the tax as residual.
Held: The appeal was allowed in part.
In order to be deductible, input tax had to have a direct and immediate link with the taxable transactions and the ultimate aim pursued by the taxable entity was irrelevant.
In the instant case, it was impossible to argue that an advertisement that mentioned that the advertiser offered mortgage services was not advertising those services. The fact that the primary purpose of the advertisement was to sell houses and that, in some cases, the reference to mortgage services consisted of a single word did not alter that conclusion. The mortgage service that Connells Group supplied was a distinct service, capable of being supplied independently of the sale of a house. If the advertiser chose to mention a service that it supplied, that had to be regarded as an intention to promote that supply. Although the ultimate aim was not the test, in the case of advertising what the advertiser intended to promote was likely to be the best available guide to what it was in fact promoting. In cases where the strap line, even if briefly, mentioned mortgage services, the input tax incurred had to be regarded as a cost component of both taxable and exempt supplies and was therefore residual. The same conclusion applied to advertisements that promoted the “Headstart” facility or in some other way indicated that the branch provided mortgage services.
However, as regards those advertisements that did not overtly mention mortgage services, the opportunity to supply the services was not, objectively considered, the aim of the advertisement but a consequence of its success. That was so whether the prospective purchaser called into the branch or viewed the website; the advertisement might have created an opportunity that would not otherwise have arisen, but there was nevertheless no direct and immediate link between the advertisement and the supply of that other service. The same applied to advertisements that referred to an award received by the agency, or to a customer testimonial that did not expressly promote mortgage services. In those cases, there was no more than an indirect link with the supplies of mortgage services and that was not sufficient.
Valentina Sloane (instructed by KPMG LLP, of Manchester) appeared for the appellant; Peter Mantle (instructed by the legal department of HM Revenue & Customs) appeared for the respondents.
Eileen O’Grady, barrister
