Author: SB
Last saved by: joe.ury
Company: Smith Bernal

CO-103-96
BAILII Citation Number: [1996] EWHC Ch 385
IN THE HIGH COURT OF JUSTICE   
QUEEN'S BENCH DIVISION

Royal Courts of Justice
Strand
London WC2

Tuesday, 7th May 1996

B e f o r e:

MR. JUSTICE BUXTON

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THE COMMISSIONERS OF CUSTOMS AND EXCISE
Appellants

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TRUSTEES FOR R & R PENSION FUND
Respondents

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(Computer Aided Transcript of the Palantype Notes of
Smith Bernal Reporting Limited, 180 Fleet Street,
London EC4A 2HD
Tel: 0171 831 3183
Official Shorthand Writers to the Court)

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MISS PHILLIPA WHIPPLE (Instructed by HM Customs & Excise, New Kings Beam House, 22 Upper Ground, London, SE1 9PJ) appeared on behalf of the Appellants
The Respondents did not appear and were not represented
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J U D G M E N T

MR. JUSTICE BUXTON:  This is an appeal by the Commissioners of Customs and Excise from a decision of the VAT Tribunal, sitting at Cambridge, released on 21 November 1995, in an appeal brought under section 83 of the VAT Act 1994 whereby the Tribunal allowed an appeal by the respondents, who are the Trustees for the R & R Pension Fund, against a decision of the Commissioners contained in two letters of 31 May and 14 July 1995, the decisions being that the provisions of the Capital Goods Scheme, set out in Regulation 37 of the VAT (General) Regulations 1985, as well as the provisions at paragraph 3(9) of Schedule 10 to the VAT Act 1994, both apply to the respondents' input tax apportionment.  

The significance of those decisions arose principally under paragraph 3(9) of Schedule 10 concerning an application on the part of the Pension Fund Trustees ("the Trustees", as I will call them) to opt to pay capital gains tax in respect of certain property, the Commissioners having indicated that were they to give such permission the Capital Goods Scheme would apply thereafter to the Trustees' affairs.  

I shall set out more fully the facts upon which this matter turns.  They are to be found, and are not disputed, at page 2 of the Tribunal's decision.  But before I do so, I should say that on this appeal the Trustees have not appeared, having informed the court that while they in no way concede the matters in issue, in view of the amount of value added tax at stake should the Commissioners' appeal succeed, they have decided not to incur the expense of engaging counsel to appear before me.  That means that I have only heard submissions and argument from Miss Whipple on behalf of the Commissioners, but I am satisfied that she has fully put before me, both in a very full skeleton argument and also in argument today, the issues in the case and all matters that might have been urged on the part of the Trustees had they appeared.  I should say that the Trustees were represented before the Tribunal and it is apparent from the Tribunal's decision that they made full and detailed submissions, the substance of which appears clearly from the Tribunal's decision.  
	
With those observations by way of introduction, I turn to the background facts.  The Trustees, who are registered for value added tax, over a period of time developed land that they own by constructing there a commercial building called Morelands Manor.  During the course of those operations they recovered input tax.  On 1 August 1993, the commercial building being completed, they granted a 15 year lease of it without, at that stage, opting or electing to charge tax.  This matter came to the attention of the Commissioners who pointed out that on the grant of that lease there arose a self-supply charge under what is now paragraph 6(1) of Schedule 10 to the VAT Act 1994, and they accordingly assessed the Trustees to tax in a certain figure.  That having been done, the Trustees, as they were entitled to do, applied to exercise the option potentially available to them under the VAT provisions to be taxed.  They did that by an undated letter, received by the Commissioners on 12 December 1994.  

This election or option to tax, as it is sometimes called, is available to the taxpayer under paragraphs 2 and 3 of Schedule 10 to the VAT Act 1994.  The grant of an interest in land is prima facie an exempt supply, but the landlord or landowner may seek to waive that exemption in circumstances where it appears to his best judgement to be beneficial to him to do so (i) as it appears to the Trustees to have been in this case, since if the grant of the lease was exempt from tax the self-supply provisions in respect of the development would be triggered.  There is, of course, no criticism at all of the Trustees for seeking to take that course.  It perhaps should be noted that before the VAT (Buildings and Land) Order 1991 there could be no recovery of any input tax incurred before such an election.  That position was changed, at least potentially in favour of the taxpayer, by paragraph 3(9) of Schedule 10 to the VAT Act 1994, as it now is, which was introduced by the VAT (Building and Land) Order 1991.  That paragraph, which is important in this appeal, reads as follows: 

	"Where a person who wishes to make an election in relation to any land (the relevant land) to have effect on or after 1st January 1992, has made, makes or intends to make, an exempt grant in relation to the relevant land at any time between 1st August 1989 and before the beginning of the day from which he wishes an election in relation to the relevant land to have effect, he shall not make an election in relation to the relevant land unless he obtains the prior written permission of the Commissioners, who shall only give such permission if they are satisfied having regard to all the circumstances of the case and in particular- 

	(a) the total value of exempt grants in relation to the relevant land made or to be made before the day from which the person wishes his election to have effect; 
	(b) the expected total value of grants relating to the relevant land that would be taxable if the election were to have effect; and 
	(c) the total amount of input tax which has been incurred on or after 1st August 1989 or is likely to be incurred in relation to the relevant land, 

	that there would be secured a fair and reasonable attribution of the input tax mentioned in paragraph (c) above to grants in relation to the relevant land which, if the election were to have effect, would be taxable." 
The terms on which the taxpayer, the Trustees, sought to make their election and what they conceived would be the result thereof, can be taken from their application to the Commissioners. 

	"The land/buildings referred to above were newly constructed and completed in August 1993.  

	On completion, the tenant ... took possession.  

	The lease is for 15 years and commenced on 1 August 1993... 

	The lease provides for review dates on 1 August 1988, 1 August 2003 and 31 July 2008.  

	... the trustees wish to make the following proposal regarding the extent to which Vat on the self-supply will be recoverable as input Vat on exercising the option to tax:- 

	1.  Option to tax to be effective from 1 December 1994.  
	2.  Estimated `life span' of building 150 years (1800 months)..."  
A letter from their advisor on building matters was attached verifying that point.  

	"3.  Period of exempt occupation by tenant as at 1 December 1994- 16 months.  

	4.  Proposed recovery of self-supply Vat on exercising option to tax- 99.1% ..." 
That is the fraction of 1784 over 1800; 1784, it will be observed, being 1800 minus the 16 months of exempt occupation.  

It is well to remind ourselves of the requirement of paragraph 3(9) of Schedule 10: the Commissioners shall only give permission for an election if they are satisfied having regard to various matters that there would be a fair and reasonable attribution of the input tax which had been incurred in relation to the relevant land.  Perhaps not altogether surprisingly, in this case the Commissioners were not so satisfied, at least in the terms of the attribution suggested by the Trustees.  

However, consideration moved on so that that issue was not the issue before the Tribunal and is not the issue in this appeal.  Rather, as the Tribunal explains at page 3 of its judgment, the Commissioners put their case as follows: 

	"... the Commissioners [contend] that they cannot allow any revised initial attribution of input tax as proposed by the Appellant because the land is, as both parties agree, within the capital goods scheme, contained in regulations 37A to E of the VAT (General) Regulations 1985, which applies from 1 April 1990.  Under this scheme, each year the difference in the proportion of taxable use is measured and any increase in that proportion results in that increased proportion of 10 per cent of the original input tax being recovered (or in the case of a decrease, being paid back).  This case concerns the interaction of paragraph 3(9) with the capital goods scheme.  If the land had not been within the scheme the Commissioners would have agreed some revised initial attribution of input tax, although not necessarily on the basis suggested by the Appellant.  As I have already mentioned, I need not be concerned with the method of attribution, but only with whether the Appellant is right in contending for some revised initial attribution of input tax following the making of an election, or the Commissioners are right in contending for none.  

		Mr. Harrison for the Appellant [Trustees] contends that, for the Commissioners merely to allow the capital goods scheme to apply, does not lead to a fair and reasonable result in this case, as required by paragraph 3(9).  The effect of the capital goods scheme is that, in the first year there is no recovery of input tax.  In the second year, the land was used for an exempt use for 4 months and for a taxable use for 8 months, so that two‑thirds of 10 per cent of the input tax is recovered.  In the third year, 10 per cent ... is recovered, and so on, until, by the end of 10 years, about 86 per cent has been recovered."  
I add that, as we have seen, the input tax, or a large part of it, is by that method recovered over 10 years, as opposed to the immediate recovery of some 99% of input tax for which the Trustees contended.  
It will be seen therefore that the Commissioners' case before the Tribunal and before me is simple.  It is agreed by both parties that the building or property is in terms of the Capital Goods Scheme capital goods, and therefore if the taxpayer opts, as he seeks to do, to pay value added tax in respect of that property the Capital Goods Scheme must apply to it: because, say the Commissioners, that is the provision, the method, laid down by regulations which they cannot challenge, for applying the Vat system in the case of capital goods.  In the present case they are willing that the taxpayer should opt, but say that if he does opt to pay tax he will be bound, like any other taxpayer, by the Capital Goods Scheme: and that is the end of the matter.  
	
The Tribunal did not agree with that approach.  It expressed itself in the following way at page 6 of its decision: 

	"... in all cases where there has been an exempt grant the Commissioners have to give permission for the election to be made, and they may give permission only if they are satisfied that the result is a fair and reasonable attribution of input tax.  Therefore, where the election would not otherwise achieve this result under the capital goods scheme, because the attribution is less than fair and reasonable to the taxpayer, the Commissioners are bound by the paragraph to do something to achieve this result, just as they should do when the result would otherwise be too favourable to the taxpayer.  
		I can therefore see no reason [the Tribunal continues] why the Commissioners should not agree a revised initial attribution of input tax in lieu of the capital goods scheme applying, so long as the taxable lease continues, as a condition of allowing a taxpayer to elect in a case where application of the capital goods scheme gives a result too favourable to the taxpayer.  In a case such as the present one, where application of the capital goods scheme gives a result too favourable to the Commissioners, they are still required by paragraph 3(9) to be satisfied that the attribution is fair and reasonable having regard to the provisions of that paragraph, which they can only do if they agree a revised initial attribution of input tax on the basis that this will not change under the capital goods scheme so long as the taxable lease continues.  Regulation 37E(2) of the VAT (General) Regulations 1985 seems to be designed for this purpose."  
I am driven to say that in adopting that approach the Tribunal fell into error.  First, in my judgement, the Tribunal's analysis of paragraph 3(9) places the wrong emphasis on the Commissioners' powers.  The Tribunal, in an earlier passage, spoke of making an election as being something that the taxpayer was free to do.  That is the case, but only in the sense that he is free to make an application to elect, which the Commissioners can moreover only grant subject to the limits on their powers imposed by paragraph 3(9).  It is therefore unlikely to be the case, and in my judgement on the wording of paragraph 3(9) it is not the case, that the Commissioners are under an obligation to a person seeking to elect necessarily to produce a result that is fair and reasonable to him.  Rather, the emphasis is that they are specifically forbidden to give permission to elect if the outcome would produce a result which was not (in general terms) fair and reasonable.  The Capital Goods Scheme, being imposed by a Statutory Instrument, is, after an election, binding on the (elective) taxpayer as a taxpayer.  For that reason, it would not in any event, be open to the Commissioners to accept or approve arrangements that overrode that scheme.  Certainly, the Commissioners are under no obligation under the terms of paragraph 3(9) to accept, or to agree to be fair and reasonable an attribution different from that which the law provides or from that which would normally be the case, because they are obliged to put themselves (as the Tribunal's decision seems to assume) in a position to give permission to elect.  On the contrary, paragraph 3(9) positively forbids them from giving that permission unless they are satisfied that on an election a fair and reasonable attribution would be achieved.  

In the present case the Commissioners have said, and only said, that the taxpayer may elect, but if he elects he will be governed by the provisions of the Capital Goods Scheme.  That, in my judgment, is exactly within the terms of their duty under paragraph 3(9).  
	
I therefore find that the view that the Commissioners adopted is impelled by the wording of the statutory provisions, and I cannot agree with the view taken by the Tribunal.  Quite apart from the position so far as the wording of the statutory provisions is concerned, it seems to me that there is nothing odd or unfair about the position that those provisions achieve.  This question, as I have said, only arises if the taxpayer decides to seek to elect.  He is to be taken to have made that decision on an informed basis, including, in this case, the existence of the Capital Goods Scheme.  If he finds the implication of that scheme, as applied to the taxation of the rental payments on the property, unsatisfactory he can, of course, abandon his desire to elect and continue to treat the property as exempt.  That in the present case non‑election exposes the lessor to a substantial charge to Vat is, the product of the existing Vat rules about self-supply and not the result of any oddity of paragraph 3(9), nor of any unreasonable behaviour of the Commissioners in applying paragraph 3(9).  For that short reason, therefore, in my judgement this appeal must be allowed, in any event.  	
There are two further points that have been argued.  First of all, it will be recalled that the Tribunal considered that the Commissioners had power under section 37E(2) of the Vat (General) Regulations 1985 to agree the revised initial attribution of input tax.  However, even if the Commissioners were otherwise obliged or free so to act in this case, Regulation 37E(2) would give them power to do so under the Capital Goods Scheme only to a very limited extent.  That regulation reads: 

	"In any particular case the Commissioners may allow another method by which, or may direct the manner in which, the extent to which a capital item is used in making taxable supplies in any subsequent interval applicable to it, is to be ascertained."  
What that is referring to is the way under the Capital Goods Scheme that the attribution of use is decided, not in the first period to which that scheme refers but in subsequent periods.  In the present case, under the Capital Goods Scheme, most of the period that is in dispute, that is to say the period during which the building was leased and before the Trustees opted to tax, falls into the initial period under the Capital Goods Scheme and therefore is not touched by Regulation 37E(2), in any event.  Some part of the period in dispute in this case does fall within what is described in Regulation 37E(2) as a subsequent interval, that is to say that part of a subsequent tax year running from the start of the tax year up to the date at which the option to elect is exercised.  That limited application of Regulation 37E(2) is, I say with respect, plainly not what the Tribunal had in mind.  But even in respect of that limited prima facie relevance of the regulations to the latter part of the disputed period in our case I cannot, in fact, see that in any sensible way Regulation 37E(2) could bite upon it.  Regulation 37E(2) appears to be directed at a case where there is a change in the relevant proportion of the capital goods (in the case of land, most obviously the proportion of surface area) devoted to exempt and to non‑exempt uses.  That, of course, is plainly not this case because the whole of the property has been devoted throughout to the same use.  The only reason why it changes from exempt to non‑exempt at a particular point is because of the option exercised by the Trustees or sought to be exercised by them.  I therefore consider that the Commissioners are right in what is a subsidiary point in this appeal in saying that even if otherwise they were free or obliged to make some adjustment in respect of the impact of the Capital Goods Scheme Regulation 37E(2) does not enable them to do so.  
	
The second and subsidiary point that the Commissioners raise is this.  On the basis of its conclusion as to the Commissioners' obligations under paragraph 3(9) the Tribunal ruled as follows (at page 6 of the ruling): 

	"Accordingly I find in favour of the Appellant [Trustees] in principle and leave the parties to negotiate a fair and reasonable attribution.  The parties have liberty to apply if they cannot agree an attribution.  The Appellant [Trustees] should, it seems to me, so far as possible be put in the same position as if his election had taken effect when it was applied for."  
As I have already found, it was not open to the Tribunal to require the parties, and more particularly the Commissioners, so to negotiate.  But assuming that that conclusion was not correct and that it was, contrary to my ruling, open to the Tribunal to scrutinise the Commissioners' conclusion in this case, the Commissioners say that, in any event, it was not right for the Tribunal to approach the matter in the way that it did.  They draw my attention to two recent authorities, Kohanzad v Customs and Excise Commissioners [1994] STC, 967 and John Dee Ltd v Customs and Excise Commissioners [1995] STC, 941, which they say establish that in considering whether the Commissioners have acted properly when exercising a statutory discretion the test that a Tribunal should apply is whether the Commissioners have acted in the way in which no reasonable panel of Commissioners could have acted or whether they had taken into account some irrelevant matter or have disregarded something to which they should have given weight.  That is the formulation of the Court of Appeal in the John H. Dee case, in the judgment of Neill LJ at page 952 of the report in which he drew on the judgment of Lane LJ in the House of Lords in the case of Customs and Excise Commissioners v J H Corbitt [1980] STC, 231 at p. 239.  Both of those cases were concerned with factual matters, substantially different from those before me in this case; and certainly the ratio of Corbitt was not directed at the exercise of a statutory discretion, though John H. Dee was.  For my part, however, although I am conscious that I have not heard adversary argument on the point, I do not at the moment see that any sensible distinction is to be drawn between the mode of approach laid down by the Court of Appeal to the statutory discretion in Dee case and the proper mode of approach to what is undoubtedly the exercise of a discretion conferred on the Commissioners under paragraph 3(9) of Schedule 10.  It therefore does seem to me that the Commissioners are right in saying that even on the assumption that I have rejected, that the Tribunal was at liberty to scrutinise the Commissioners' decision, it should thereafter have asked itself whether the decision could be criticised in the terms adopted in the John H. Dee case.  
	
I also venture to add a further reflection arising out of that point, though I particularly give a warning that Miss Whipple did not press this consideration on me, and when it was put to her did not necessarily adopt it.  If the matter were to go back to the Commissioners and, irrespective of what had been said by the Tribunal, they maintained their view that permission to elect would only be given on the assumption that the Capital Goods Scheme would be applied, I find it difficult to see how it could then be said that no reasonable Commissioners could reach that conclusion, which is in effect the conclusion reached by the statutory Capital Goods Scheme as to the recovery of input tax.  So if the Commissioners were minded to adhere to the present position on the matter returning to the Tribunal, as the Tribunal envisaged, there would, it would seem to me, to put it at its very lowest, be an unfortunate difficulty in deciding how to proceed thereafter.  None of this arises on my findings on the law, but I do venture to think that this point perhaps illustrates further the unlikelihood of it being a correct interpretation of paragraph 3(9) that it prevents the Commissioners, in effect, from adopting an attribution that is based not only, in my judgment, in reason but also in the provisions of United Kingdom and, indeed, European value added tax law.  

For those reasons, therefore, this appeal succeeds.  Are there any consequential matters to be dealt with?  

MISS WHIPPLE:  I ask that there be no order as to costs.  

MR. JUSTICE BUXTON:  Yes, the appeal succeeds with the Commissioners' costs.  What happens now?  The position is as it was before they went to the Tribunal presumably.  They can elect, if they wish, and that is the consequence.  

MISS WHIPPLE:  My Lord, yes.  Might I just take brief instructions? I am told that they can elect on terms of the Capital Goods Scheme and arrangements can be made that the effect of that be backdated.

MR. JUSTICE BUXTON:  That is a matter for you.  I just wanted to make certain, which I thought would be the case, that there is nothing else that this court has to do.  

MISS WHIPPLE:  My Lord, no.  

MR. JUSTICE BUXTON:  Thank you very much for your submissions.  They were extremely helpful. 
	
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