VAT — Exempt supplies — Repayment of input tax — Respondent taxpayer paying input tax on rent and service charges under leases — Taxpayer later electing to sublet as taxable supply — Whether input tax recoverable — Appeal allowed
The respondent held five leasehold properties, in respect of which the landlords had elected, under Group 1 of Schedule 9 to the Value Added Tax Act 1994, to waive the exemption from VAT. Accordingly, both the leases and the services provided to the respondent as tenant were taxable supplies for VAT purposes, and the landlords added VAT to their rent and service charge invoices.
From 1993, the respondent attempted to sublet the properties, and, in order to keep its options open, made no election as to VAT for the period during which they remained empty. As a result, it had to bear the input tax for that period without deduction. It eventually elected for taxation from November 1995. It then applied for repayment of the input tax that it had paid for the period before its election, pursuant to regulation 109 of the Value Added Tax Regulations 1995. Regulation 109 provided for repayment of input tax that had not been attributed to the making of taxable supplies in circumstances where the taxpayer had intended to use the goods or services in making either exempt supplies or both taxable and exempt supplies, but where, within a six-year period, the taxpayer had decided to use those goods or services in making taxable supplies.
The appellant commissioners rejected the respondent’s application in a decision that was upheld by the Value Added Tax and Duties Tribunal, but was overturned in the courts below. The commissioners appealed.
Held: The appeal was allowed (Lord Woolf and Lord Clyde dissenting).
1. For the purposes of regulation 109, the taxpayer had to: (i) have an intention to use goods or services for supplying exempt services, or a mixture of exempt and taxable services; and (ii) use the goods or services, or form an intention to use them, for the different purpose of supplying taxable services. The appellant had had no intention of making a mixed supply, as each lease was intended to be used in supplying either an exempt or a taxable sublease, but not both. Nor had it ever been committed to make exempt supplies; it simply wanted to find tenants, and was willing to fall in with whatever VAT arrangements suited them best. Such ambiguities were not consistent with a claim under regulation 109, which was predicated upon a definite intention to make exempt supplies followed by a change of plan.
2. Furthermore, the change of plan had to have been in relation to particular goods or services supplied to the taxpayer; regulation 109 did not apply where the goods and services originally intended for use in making exempt supplies were not the same ones as those later used, or intended to be used, in making taxable supplies. In the case of a leasehold interest in land, the superior owner was to be regarded as granting rights of occupation in successive units of months, quarters or whatever was the stipulated interval for payment of rent, and each such grant was a new supply. That being so, the goods and services supplied to the respondent during the unelected period were different from those supplied afterwards, and regulation 109 did not apply: Abbey National plc v Commissioners of Customs & Excise (C408/98) [2001] STC 297, Finanzamt Goslar v Breitsohl (C400/98) [2001] STC 355 and Svenska International plc v Commissioners of Customs & Excise [1999] 1 WLR 769 distinguished. That view was consistent with the legislative framework, in particular section 6(14) of the 1994 Act and regulations 85 and 90 of the 1995 Regulations.
Kenneth Parker QC and Peter Mantle (instructed by the solicitor to Customs & Excise) appeared for the appellants; Malcolm Gammie QC and Camilla Bingham (instructed by Linklaters) appeared for the respondent.
Sally Dobson, barrister
