VAT — Construction costs — Partial exemption from VAT — Sports complex to be built by school for exempt educational supplies plus taxable supplies outside school hours — Whether appropriate to apply special method for calculating partial exemption by reference to hours and capacity of use for taxable supplies — Whether standard method providing fair and reasonable attribution — Appeal dismissed
The appellant ran a private school. It proposed a scheme to construct a sports complex, which was to be used by pupils during school hours. A subsidiary company was to be granted a licence to occupy the complex, out of school hours, for various activities involving pupils, parents and “friends” of the school under a club regime, with a view to generating revenue to fund the costs of running the complex. Planning permission for the complex restricted its use to purposes ancillary to school use. The appellant applied to the respondents for a partial exemption from VAT on the costs of construction, on the basis that the complex would be mixed use for both VAT-exempt educational supplies and taxable use relating to the licence. It sought approval for the application of a special method of partial exemption pursuant to regulation 102 of the Value Added Tax Regulations 1995, on the ground that the application of the standard method under regulation 101, calculating input tax by reference to the proportion of the value of the total supplies that was attributable to supplies of a taxable kind, did not fairly and reasonably represent the extent to which goods or services were used by it in making taxable supplies. The appellant suggested a method of calculating VAT on the construction costs by reference to the projected actual use of the complex by the subsidiary, in terms of hours and percentage of capacity, as a proportion of the total hours of use. The respondents refused both that request and a subsequent request by the appellant to apply a standard method override pursuant to regulation 107.
The VAT and Duties Tribunal upheld that decision on appeal. It held, inter alia, that the legislation focused on the use of goods and services by the taxable person itself for the purposes of its own taxable transactions, so that a method that brought into account the uses made by a third party went beyond what was authorised. It held that the costs of construction were directly and immediately linked to the grant of the licence by the school, but that the use made of the complex by the subsidiary party were not. The appellant appealed, contending that the use by the subsidiary was simply a proxy for use by the appellant.
Held: The appeal was dismissed.
The approach of UK legislation, consistently with the Sixth Directive 77/388/EC, envisaged that input tax on goods and services should be attributed in a manner that reflected the extent of the use of those goods and services in making taxable supplies. The standard method was a proxy for an apportionment according to the relative uses in making exempt and taxable supplies. There had to be a direct and immediate link between the goods in question and the taxable outputs of the taxable person, and the cost of acquiring those assets had to be calculated as a cost component of the output transaction; those two tests were separate but were reflective of each other and came to the same thing: BLP Group plc v Commissioners of Customs & Excise [1996] 1 WLR 174 and Midland Bank plc v Commissioners of Customs & Excise [2000] STC 501 applied.
Although an attribution method of the kind proposed by the appellant could not be ruled out in appropriate cases, in the instant case that method did not provide a fair and reasonable proxy for the use of the complex by the appellant in making exempt and taxable supplies. The use referred to in regulation 101 was not physical use but “economic use” relevant for VAT purposes. In that regard, the availability of the sports complex was part of the package of benefits for which parents were paying school fees, and the appellant’s use of the complex in providing that package was a single supply. In VAT terms, the principal use of the complex was the provision of an exempt supply of educational services, while the taxable supply of the licence to the subsidiary was a secondary use. In those circumstances, the standard method produced a fair and reasonable attribution that reflected the economic use made by the appellant of the complex, and was more fair and reasonable than the method proposed by the appellant: Banbury Visionplus Ltd v Commissioners of Revenue & Customs [2006] EWHC 1024l; [2006] STC 1568 applied.
Roger Thomas (instructed by Gregory Rowcliffe Milners) appeared for the appellant; Jessica Simor (instructed by the legal department of Revenue and Customs) appeared for the respondents.
Sally Dobson, barrister
