Neuvale Ltd and another v Commissioners of Customs & Excise

Development of premises for letting purposes — Input VAT incurred on development services and supplies — Development eventually let on exempt supply — Payment of services — Payments constituted taxable supplies and output VAT accounted for — Whether input VAT recoverable against output VAT — Appeal dismissedSix years ago a Mr Douglas Hampton acquired Public Storage Ltd and this company purchased premises in Battersea, London. The company converted an existing warehouse into storage facilities and sold other parts of the site to two of its subsidiaries, the appellant companies. The appellant companies carried out redevelopment works and incurred expenditure on goods and services which attracted VAT as an input tax for these companies. Following the development, the resulting buildings were let, the lettings constituting exempt supplies for VAT purposes against which input VAT is not recoverable. Meanwhile, under an agreement with the appellant companies, Public Storage Ltd made payments to the appellant companies for the services of Mr Hampton; these payments constituted taxable supplies and the companies had to account for output VAT on the payments received. The appellant companies appealed against the decision of Lord Grantchester CBE QC, the chairman of the VAT tribunal, who had held (November 5 1987) that they could not recover the input tax on the development works against the output tax on Mr Hampton’s services. Held The appeal was dismissed. Sections 14 and 15 of the Value Added Tax Act 1983 provide for the credit of input tax against output tax in relation to a “business”. “Business” for the purposes of section 15(1) means a business activity involving the making of taxable supplies. Tax paid on a supply for the purpose of a business activity which is not one involving the making of taxable supplies is not deductible as input tax. Therefore, where, as in the present case, tax is paid on input supplies for the purpose of a business activity consisting of the letting of buildings, an exempt supply, then the input tax is not deductible. Apple and Pear Development Council v Customs & Excise Commissioners [1986] STC 192 followed. Frederic Reynold QC and Anthony Clover (instructed by HH Mainprice) appeared for the appellants; and Michael Beloff QC and John Laws (instructed by the solicitor for the Commissioners) appeared for the respondents.