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 – Tenant’s appeal allowed
Five companies belonging to the appellant group each held their respective office buildings under leases for terms between 15 and 25 years, the landlord in each case having elected to waive the VAT exemption 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 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, the appellant (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.
The appellant sought to recover an amount in excess of £400,000 from the respondent commissioners, being the input tax paid to the various landlords for the periods (the disputed periods) 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, the appellant 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. The appellant appealed to the High Court.
Held: The appeal was allowed.
1. As recently affirmed by the European Court in Midland Bank plc v Customs & Excise Commissioners [2000] STC 501, the deduction system relied upon by the appellant was fundamental to the operation of VAT, in that it was intended to relieve the trader of the burden of tax payable, or paid, in the course of all his economic activities, provided that such activities were themselves subject to VAT in principle. Regulation 109 covered the case of a delayed attribution of an input to an actual or intended taxable supply.
2. In holding that the election had failed to bring about the necessary attribution, the tribunal had fallen into error because: (i) the rents paid to the various landlords during the dispute period were “cost components” in the sense employed in the First VAT Directive, No 67/227, since, by paying them, the appellant complied with its obligations to the landlords, and thus (by preserving the leases against the risk of forfeiture) 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 [1995] STC 424; and (iii) there was no basis for contending that the inputs had been exhausted during the dispute period in the appellant’s unsuccessful efforts to make exempt sublettings, the true position being that the appellant had tried to consume the inputs, but failed.
3. It was likewise wrong to see each rental payment as creating a series of short-lived inputs. The asset acquired in each case was the fixed term, and it was immaterial that it was paid for on a periodic basis. Nor was a contrary conclusion compelled by regulations 85 and 90, which did no more than stagger the timing of the single supply so that the burden or credit should be spread over the full period of the lease. Those regulations, when construed in the light of the parent provisions in section 6 of the Value Added Tax Act 1994, were not concerned with the nature of the supply: see BJ Rice & Associates v Customs & Excise Commissioners [1996] STC 581.
4. The parties had correctly agreed that no distinction should be drawn between the payment of rents and the payment of service charges, as the latter had been expressly reserved as rents.
Malcolm Gammie (instructed by Linklaters) appeared for the appellant; Peter Mantle (instructed by the Treasury Solicitor) appeared for the respondent commissioners.
Alan Cooklin, barrister