England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		Thursday, 25 October 2001

Mr Justice Lawrence Collins

I Introduction

1. JDL Ltd. ("JDL") is a member of a group of companies selling cars in the retail trade. Demonstrators are cars which are materially identical models to the new cars which JDL sells and which JDL is required by its wholesale suppliers to have available to take potential purchasers on trial drives. After such use, and sometimes after further use as a courtesy or an employees' car, ex-demonstrators are sold by JDL to its customers, normally in the usual way in the ordinary course of its business. This appeal from a decision dated January 24, 2001 of the Value Added Tax Tribunal (Mr A.W. Simpson TD) raises the question whether demonstrator cars which a car dealer is required to purchase from the manufacturer whose franchise it holds, and which are subsequently sold when no longer used as demonstrators, are "capital goods" for the purpose of calculating the proportion of input tax which may be deducted by the dealer.
2. The practical issue in this case relates to input tax which cannot be directly attributed to either taxable or exempt supplies, which, I was informed, is sometimes referred to as input tax on overheads or pot tax. The issue in this appeal relates to the correct fraction to be applied to JDL's non-directly attributable input tax to calculate the proportion of that input tax which JDL can deduct and offset against its liability to pay output tax. The normal method of apportionment is based on the ratio between turnover of taxable supplies and turnover of all supplies: VAT Regulations 1995 ("the 1995 Regulations"), Reg. 101(2)(d): cf. Sixth Directive, Art. 19(1).^[1] But "capital goods" are excluded from the calculation of the total turnover: Reg. 101(2)(d); Sixth Directive, Art. 19(2).
3. Whether the exclusion of the value of a particular supply will increase or decrease the amount of non-directly attributable input tax recoverable by the taxable person will depend upon whether that excluded supply is taxable or exempt. If exempt, the proportion of input tax recoverable will increase, favouring the taxable person. If taxable, the proportion will decrease, working against the taxable person. In this case JDL contends for exclusion because the supplies of ex-demonstrators are exempt, and any exclusion from the calculation of turnover in the present case has the effect of increasing the proportion of input tax attributable to taxable supplies.
4. For reasons which will be developed later, VAT was payable on the purchase of the demonstrator cars by the dealer, but VAT should not have been chargeable on the demonstrators when they were sold. This appeal concerns the period from November 1994 to October 1997. During this period, the United Kingdom VAT legislation denied credit for input tax incurred on the purchase of motor cars. This derogation was authorised by virtue of Art. 17(6) of the Sixth Directive.
5. JDL is a partly exempt trader, i.e. it makes both taxable and exempt supplies. JDL is entitled to and does treat certain supplies of used cars which it makes to its customers as exempt supplies. It does so where the input tax incurred directly on the purchase of those cars by JDL is blocked, that is to say it is irrecoverable. In particular supplies of ex-demonstrator cars are exempt.
6. The Commissioners decided that since JDL was a car dealer, when it sold a demonstrator it was selling an item of its normal stock in trade which it would ordinarily sell in the normal course of its business, and the car was not therefore a capital asset. This is an appeal by the Commissioners from the decision of the Tribunal allowing the appeal on the ground that the demonstrators were throughout capital goods because they were of substantial durability and value compared with other articles used in the management and day to day running of the business and were depreciated in the management accounts.
7. This appeal concerns the period from November 1994 to October 1997. During this period, the United Kingdom VAT legislation denied credit for input tax incurred on the purchase of motor cars. This derogation was authorised by virtue of Art. 17(6) of the Sixth Directive. Art. 7(1) of the Value Added Tax (Input Tax) Order 1992 ("the Input Tax Order")^[2] excluded the right to deduct input tax in respect of any VAT charged on the supply to a taxable person of a motor car. But Art. 7(2)(c) provided that the exclusion did not apply where "the motor car is unused and is supplied to…the taxable person for the purposes of being sold."
8. It is common ground that by virtue of Art. 7(2)(c) JDL was entitled to a credit for input tax charged on all new cars purchased by JDL as trading stock. It is also common ground that demonstrators did not fall within Art. 7(2)(c) because they were not acquired "for the purpose of being sold".

II The facts

9. JDL is a member of a group of companies selling cars in the retail trade under the name of The Holdcroft Motor Group. New cars are sold under franchises from manufacturers. The terms of the franchise agreements require the retailer to have available cars of some of the current models, called demonstrators, in which potential purchasers can be taken on trial or test drives. After a period, often between six and twelve months, but sometimes well over 12 months, or after a specified mileage, the cars must no longer be used as demonstrators. After that time, the company uses them as it wishes. They may be used as courtesy cars (cars provided to customers while their own cars are being worked on), or as company cars (cars for the use of directors or employees of the company on its business). When the company has no further use for the cars which were formally demonstrator cars, they are sold for what they would fetch, either as a used car from the premises of the company, or at a car auction.
10. The price obtained will depend on its condition when sold and the sooner it is sold the higher the price that it will fetch, and it may fetch more (in theory), or less than the price which the company paid for it. The evidence of the accountant for the group was that on average it would break even or show a slight loss on the sale of demonstrators. The company will have spent some money in maintaining it as a demonstrator or a courtesy car or company car, or eventually as a car to be sold used.
11. When a batch of new cars arrives at the premises of the company, they are known as consignment stock, meaning vehicles the use of which has not yet been determined. If the franchise agreement requires it, some of the cars are nominated as demonstrators. They are purchased and paid for by the company and a tax invoice is issued. Title to them passes to the company and the demonstrators are then registered and licensed. A demonstrator can remain with the company for several years after its function as a demonstrator has ended. Most franchise agreements stipulate that the company must have a certain number of courtesy cars and that courtesy cars must be held as such for a certain period. The company might keep a courtesy car for up to three years after its time as a demonstrator. Demonstrators and ex-demonstrators would be depreciated monthly in the management accounts, compared with the ordinary new and used cars which were intended for immediate re-sale and formed part of the stock in trade and were therefore not depreciated.

III The legislation

Input tax credits and the VAT position on cars

12. The basic rule is that a taxable person is entitled at the end of each accounting period to credit for so much of his input tax (i.e. VAT on the supply to him of any goods and services) as is allowable by or under regulations as being attributable to taxable supplies made or to be made by the taxable person in the course or furtherance of his business: Value Added Tax Act ("the 1994 Act"), ss. 24-26. Cf. Arts. 17(2), (5), Sixth Directive.
13. By the Input Tax Order, Art. 7(1), tax charged on the supply to a taxable person of a motor car was excluded from any credit under section 25. But the exclusion did not apply where the motor car was unused and was supplied to the taxable person for the purpose of being sold: Art. 7(2)(c). Consequently, JDL was entitled to a credit for input tax charged on all new cars purchased as trading stock, but not for input tax charged on the demonstrators.
14. By Art. 7(4) of the Input Tax Order, where on the supply of a motor car in respect of which tax had been wholly excluded from credit under Art. 7(1), VAT was chargeable as if the supply was for a consideration equal to the excess (if any) of the sale price of the car over the purchase price. Consequently JDL was not entitled to (and did not claim) any credit for the input tax incurred on the purchase of demonstrator cars and JDL accounted for VAT on the sale of the demonstrator cars on the margin, in accordance with the Input Tax Order.
15. The effect of Arts. 13B(c) and 17(6) of the Sixth Directive was that Member States were bound to exempt supplies from VAT where the acquisition did not give rise to a right of deduction: Case C-45/95 Commission v. Italy [1997] ECR I-3605, [1997] STC 1062, 1067, para. 31, per Ruiz-Jarabo Colomer AG. In that case Italian law provided that where a person had been deprived of the right to credit on the supply of goods to him, supplies of those goods by him were to be deemed not to be supplies of goods. The supply by him was removed from the scope of VAT rather than exempted as required by Art. 13B(c) of the Sixth Directive. It was held that exemption was not synonymous with non-liability to tax. The supply of the goods is not excluded from the ambit of the VAT system: the consequence is that in calculating the deductible proportion the taxable person's total turnover includes the exempted supplies, which reduces the deductible proportion: ibid. para. 43, approved by the Court at para. 20.
16. Accordingly, by requiring VAT to be charged on the supply of a car on which the input tax had been excluded (the effect of Art. 7(4) of the Input Tax Order), the United Kingdom had failed to implement the Sixth Directive properly. Consequently the Commissioners in Business Brief 23/97 gave businesses the option of charging VAT on the profit margin or of treating the sale of input tax blocked cars as exempt. JDL is entitled to rely on the direct effect of Art. 13B(c) and is entitled to account for VAT during the period in question on the basis that the supplies of demonstrators were exempt as opposed to taxable on the margin basis: Case 8/81Becker v Finanzamt Munster-Innenstadt [1992] ECR I-249. JDL has therefore overpaid VAT to the Commissioners for the period in question and has claimed repayment of that VAT.

Apportionment

17. Art. 17(2) of the Sixth Directive provides that the taxable person is entitled to deduct input tax "in so far as the goods and services are used for the purposes of his taxable transactions". Where goods and services are used for the purposes of making both taxable and exempt supplies Art. 17(5) provides that only a proportion of input tax may be deducted "as is attributable to" taxable supplies. The normal method of apportionment under the Directive is that set out in Art. 19(1), namely an apportionment based on the ratio between the annual turnover giving rise to the right of deduction (numerator) and total turnover (denominator).
18. By section 26(1) of the 1994 Act the amount of input tax for which a taxable person is entitled to credit is so much of the input tax for the relevant period "as is allowable by or under regulations as being attributable to" the taxable supplies, and section 26(3) empowers the Commissioners to make regulations to secure a fair and reasonable attribution.
19. The standard method is set out in the 1995 Regulations, Reg. 101(2), which sets out the method for attributing input tax which a taxable person is entitled to deduct. The method set out is subject to Reg. 102, which gives the Commissioners power to approve or direct the use by a taxable person of another method.
20. Input tax on goods and services exclusively used in making taxable supplies are attributed to taxable supplies, and no part of input tax on goods or services used in making exempt supplies can be attributed to taxable supplies: Reg. 101(2)(b)(c).
21. Reg. 101(2)(d) provides:

"there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the [prescribed accounting] period."

22. The standard method is a method by which the taxable person recovers a percentage of its pot input tax by applying the prescribed fraction to the total of the VAT incurred on its non-directly attributable inputs. The numerator is the value of its taxable supplies. The denominator is the total value of its supplies, both taxable and exempt. The calculation is done by reference to prescribed accounting periods, i.e. on a quarterly basis.
23. Input tax on goods and services which are used or to be used exclusively in making taxable supplies is to be attributed to those taxable supplies; tax on goods or services which are used or to be used exclusively in making exempt supplies is not to be attributed to taxable supplies; and input tax on goods and services which are used or to be used in making both taxable and exempt supplies (e.g. VAT incurred on heating, lighting and other general overheads), known as "residual" input tax, is to be attributed to taxable supplies in accordance with an apportionment based on the ratio of the total value of taxable supplies to the value of all supplies.

Exclusion of capital goods

24. The practical point in this case arises from the fact that under Art. 19(2) of the Sixth Directive all turnover attributable to supplies of "capital goods used by the taxable person for the purposes of his business" and certain other "incidental transactions" are excluded from the calculation of the deductible proportion. It provides for the exclusion of turnover attributable to transactions in Art. 13B(d) (certain financial transactions), in so far as they are incidental transactions, and to incidental real estate and financial transactions. By Art. 20(4) Member States may define capital goods for the purposes of spreading the deduction.
25. Reg.101(3) of the 1995 Regulations provides:

"In calculating the proportion under paragraph (2)(d) above, there shall be excluded—(a) any sum receivable by the taxable person in respect of any supply of capital goods used by him for the purposes of his business".

26. The original proposal for Art.19(2) provided for the exclusion of (inter alia) amounts attributable to the sale of capital goods used by the taxable person for the purposes of his business, "except where these operations form part of the regular business activity of the taxable person." The proposal by the Commission stated in relation to this version:

"The factors mentioned in this paragraph must be excluded from the calculation of the proportion lest, being unrepresentative of the taxable person's business activity, they should deprive the amount of any real significance. Such is the case with sales of capital items and real estate and financial transactions which are only ancillary operations, that is to say are only of secondary importance in relation to the total turnover of the business. These factors are only excluded if they are not part of the usual business activity of the taxable person."

27. Case C-306/94 Régie Dauphinoise-Cabinet A Forest Sarl v. Ministre du Budget [1996] ECR I-3695, [1996] STC 1176 concerned a question relating to the interpretation of the expression "incidental…financial transaction" in Art. 19(2) of the Sixth Directive (cf. Reg. 101(3)(b) of the 1995 Regulations), and is relevant on the commercial purpose of the apportionment process. The taxable person was in the business of property management, and was entitled to retain interest it received on advance payments from its clients. The investments were exempt from VAT by virtue of Art.13B(d)(1), (3) of the Sixth Directive. The question was whether the interest was to be included in the denominator of the fraction used to calculate the deductible proportion. The taxable person argued that turnover from the investments of the advances were excluded under Art. 19(2) as being transactions specified in Art. 13B(d) but which were "incidental transactions." It was held that the transactions were not merely incidental. The receipt of interest constituted the direct, permanent and necessary extension of the taxable activity of property management.
28. The European Court said (at para. 21) that the purpose of excluding incidental financial transactions from the denominator of the fraction used to calculate the deductible proportion in accordance with Art. 19 of the Sixth Directive was to comply with the objective of complete neutrality guaranteed by the common system of VAT. The Court approved the approach of Lenz AG, who emphasised (at para 37) that the object of the excluding the incidental transactions was to prevent distortion. He said (at para 39):

"If, however, certain transactions (the incidental transactions) are excluded again from the calculation of the deductible proportion, that can only mean that if these transactions were taken into consideration the result would be distorted. That will have to be taken into account … in determining the concept of incidental transactions.

…

Article 17(5) provides for cases in which goods and services are used for the taxable person's economic activity where that activity consists both of transactions which give a right to deduct and transactions for which there is no such right. No right to deduct may be claimed for the latter, because, for instance, they are transactions of negotiation of credit, on which the taxable person himself has not had to pay VAT. There is no apparent reason why in such a case, for example, transaction exempt from VAT under Art 13B(d) should not be included in the denominator of the fraction for calculating the deductible percentage

…

I shall now explain what is to be understood by the concept 'distortion' in this connection: the criterion for the application of Art 17(5) and with it the calculation of the deductible proportion is the use of the taxable person's business asserts for taxed transactions, which thus entail a right to deduct, and of transactions which do not entail such a right. But the turnover attributable to every transaction is included in the calculation of the deductible proportion. That is, as long as the resources utilised are to some extent related to the transactions arising (taxed or untaxed), there are no difficulties. The position is different, however, if the resources applied are slender but the transaction for which they are used is proportionally much greater. Then this relatively substantial transaction has the effect of reducing the deduction. The relevant turnover is included in its entirety in the denominator although only slender resources were used for the transaction. The diminution of the deduction therefore becomes disproportionately high."

The Verbond case

29. Case 51/76 Verbond van Nederlandsee Onderneimingen v. Inspecteur der Invoerrechten en Accijnzen [1977] ECR 113 was a case on the Second Directive, which provided in Art. 17 that Member States could in a transitional period exclude, in whole or in part, capital goods from the deduction system. A trade association deducted the turnover tax which it had been invoiced for a printer and reply cards. The Dutch customs took the view that they were "business assets" and limited the right to deduction under the applicable Dutch legislation. The taxable person contended that they were not capital goods and therefore the Dutch customs had no right to refuse to allow a full deduction. The Hoge Raad (Dutch Supreme Court) referred to the European Court the questions (inter alia) (a) whether the expression "capital goods" was to be understood to refer to goods the acquisition cost of which, according to accounting and management principles, was not treated as current expenditure but was spread over more than one year, and (b) if it was not to be so understood, what the relevant criterion was.
30. The Court answered (at pages 124-126):

"It should be noted, in the first place, that the expression at issue forms part of a provision of Community law which does not refer to the law of the Member States for the determining of its meaning and its scope.

It follows that the interpretation, in general terms, of the expression cannot be left to the discretion of each Member State.

The ordinary meaning of the expression and its function in the context of the provisions of the Second Directive indicate that it covers goods used for the purposes of some business activity and distinguishable by their durable nature and their value and such that the acquisition costs are not normally treated as current expenditure but written off over several years.

…

The Member States …have a certain margin of discretion as regards those requirements, provided that they pay due regard to the existence of an essential difference between capital goods and the other goods used in the management and day to day running of undertakings."

31. This ruling has been applied in a number of Tribunal decisions: Trustees of the Mellerstain Trust v. Customs and Excise Commissioners [1989] VATTR 223: paintings in stately home were capital assets of the business for purposes of what is now 1994 Act, Sched. 1, para. 1(7) exempting persons whose turnover is less than prescribed amount: they were not stock in trade, nor were they consumed, nor did they play any direct part in the provision of the service of opening the house to the public; Harbig Leasing Two Ltd. v. Customs and Excise Commissioners, 2000: another case on the exclusion of capital goods: the appellant purchased cars from its parent company and leased them for a short period to dealers, to which it then sold the cars on a buy-back arrangement. The scheme was designed to avoid VAT by having its purchase treated as of capital goods. It was held, inter alia, that the cars were not intended to be of a durable nature in the business of the appellant. The appellant was dealing in the cars. Its purpose was to acquire and sell the cars, and the leasing was a subsidiary aspect. Scottish Homes v. Customs and Excise Commissioners (2000) Decision No.16644: there was no evidence of the accounting practice applied and the Commissioners had not shown that sale proceeds of occupied houses were receivable in respect of the supply of capital goods for the purposes of Reg. 101(3).

IV The decision of the Tribunal

32. The Tribunal's reasoning was as follows: the expression "capital goods" was not intended to include stock in trade. The Verbond decision did not provide an exhaustive definition of capital goods. There was no evidence as to the existence or otherwise of any normal accountancy rules or practice as to the definition or treatment of capital goods, and it was unlikely that the treatment by the company of the demonstrators by depreciating them would be found to offend against any principle of accountancy in the United Kingdom, and the Verbond case did not lay down that if an article were retained for less than two years, it could not qualify as capital goods, since that would fetter the "certain margin of discretion" which the member states were stated in the judgment to have.
33. The demonstrators were of substantial durability and value compared with other articles used in the management and day to day running of the business and were depreciated in the management accounts, unlike goods intended for immediate resale. Those demonstrators which went on to become courtesy cars were properly classified as capital goods and the same applied to those which were sold when their time as demonstrators had finished, notwithstanding that some of them may have been held for a relatively short period. From the start they were treated on the basis that they were to be held as the property of the company, for a period which might be short, but might just as well be long. The fact that they were intended ultimately to be sold with the rest of the used cars did not affect the position, since "capital goods do not cease to be capital goods when they are sold at the end of their useful life as capital goods, and it makes no difference if one of the activities of the business for the benefit of which the goods were held is the sale of goods of the same kind" since, "if it were otherwise, and capital goods ceased to be capital goods when the decision was taken to dispose of them, then it would be impossible for capital goods….to be supplied, since by the time of the supply they would cease to be capital goods".

V The Commissioners' arguments

34. The Commissioners' argument is this. The approach of the standard method fraction is that the value of all turnover should go into the fraction, unless there is good reason for not including it because a transaction is not part of the usual business activity of the taxable person. The purpose of the exclusions from the fraction (e.g. by Art. 19(2) of the Sixth Directive and Reg. 101(3) of the 1995 Regulations) is to prevent distortion. In particular it is to prevent the value of certain transactions which are unrepresentative of the taxable person's business activity being taken into account. They are excluded because, if they were included, the standard value based method would not function to attribute input tax in a way which reasonably accurately reflected the use of the inputs. This is particularly so where the relative value of the supply to the total supplies made by the taxable person is likely to be out of proportion to the relative use of overheads made in effecting that transaction.
35. Particular examples include: (1) incidental financial transactions, such as the issue of shares, were common experience is that the value of the financial transaction is likely to be relatively high in relation to the value of overheads used in making the supply and (2) supplies of interests in land, for example in factory premises or commercial property, say by a manufacturer or a supplier of advisory services, where the value of the supply of land can be expected to be relatively high in relation to the value of any other particular supply and in relation to the value of overheads used in making the supply of land.
36. To be capital goods, goods must be distinguishable from other goods which are not purchased for resale or incorporation into goods to be sold, but which could not be said to be capital goods. The essential characteristic of a capital good is that it is an asset acquired by a trader not for the purpose of re-sale but for the purpose of being used by the trader as part of the apparatus of his business. The asset in question must have a sufficiently durable nature to qualify as a capital item, therefore consumable items (such as stationery and light bulbs) will not be capital goods. An asset that is a capital good is therefore likely to be of a greater value than a consumable item.
37. A supply of capital goods within the meaning of the regulation does not include a supply which is a supply of goods, the goods at the time of supply being the same as or similar to other goods typically supplied by the taxable person and being in no way unrepresentative of its business activity. On a proper application of the test to be applied in ascertaining capital goods derived from the Verbond case, the ex-demonstrators are not distinct or sufficiently distinguishable from the cars usually sold by JDL. The nature or sphere of the business carried on by JDL (i.e. retail sales of new and used cars) needs to be taken into account in considering whether the ex-demonstrators were supplied as capital goods. There was nothing before the Tribunal to suggest that the ex-demonstrators, which were intended ultimately to be sold with the rest of JDL's used cars at the date of their purchase by JDL, were not treated exactly as stock in trade when their use as a demonstrator (or as a courtesy car or employee's car) had ceased and they were prepared and offered for sale, generally, alongside other trading stock. The ex-demonstrators, as and when sold by JDL, were not capital goods.

VI Conclusions

38. There is no general definition of "capital goods" for the purposes of the Sixth Directive or the United Kingdom VAT legislation. The Verbond ruling was not concerned with the meaning of capital goods in the present context, and the Tribunal, correctly, did not treat the Verbond ruling as laying down an all-embracing test for the meaning of the expression "capital goods" irrespective of the context in which the expression was used. I accept that the purpose of Art. 19(2) of the Sixth Directive, and of Reg. 101(3) of the 1995 Regulation, is to prevent distortion, but that does not mean that the expression "capital goods" is used in a special and unusual sense. In my judgment the Tribunal was right to derive from the Verbond ruling that relevant characteristics of capital goods were their value and purpose relative to other goods used in the management and day to day running of the business, and their accounting treatment.
39. I do not consider that the Commissioners are right to contend that it is evident from the purpose of the legislation that the concept of capital goods excludes any goods which at the time of their supply by a taxable person are "the same as or similar to" other goods sold by that person. I accept the argument for JDL that this amounts to an argument that a car cannot be a capital good for a car dealer (although a car may be a capital good for any other trader), and that there is no justification for reading such a limitation into the meaning of capital goods and that such a limitation finds no support from the underlying purpose of the Directive. It might also mean that the head office of a property dealing company, or the computers of a computer retailer, would not be treated as capital assets. In the present case, the inclusion within the attribution calculations of capital goods which bear a different tax treatment to the activities for which they are used would give rise to the very distortion that Art. 19(2) is designed to remove.
40. There is nothing in principle or in the Verbond ruling which requires the Tribunal to find that capital goods had to be distinguishable by their durable nature and value from all goods forming part of the taxable person's trading stock. Nor do I consider that the Commission proposal for the Sixth Directive or the Régie Dauphinoise decision require a conclusion that the natural test for capital goods requires qualification when the goods which would otherwise be capital goods are similar to the goods sold by the trader and are themselves sold when their useful life as capital goods is over. The Régie Dauphinoise case does not assist because it is clear that an exclusion which is determined by the activity being "incidental" to the trader's other activities may depend on whether that activity is an activity of the trader in its own right. That consideration does not arise in the case of the exclusion for capital goods.
41. Whether or not a particular item is a capital good for a trader is essentially a question for the Tribunal to decide on the facts of the particular case. The essential facts on which the Tribunal relied in coming to its conclusion that the ex-demonstrators were capital goods were these: the demonstrators were not acquired for the purpose of being sold, but for the purpose of being used by JDL for the purpose of carrying on its taxable activities and at the end of their life as demonstrators or courtesy cars were sold off; they were of substantial durability and value compared with other articles used in the management and day to day running of the business, and were depreciated in the management accounts. In my judgment the Tribunal asked itself the right questions and was entitled to come to its conclusion on the evidence before it.
42. It is therefore not necessary to rule on JDL's alternative arguments, neither of which was addressed by the Tribunal. The first was that during the period in question, on the assumption that the supply of a demonstrator was not of a capital good, Reg. 101(3)(c) of the 1995 Regulations had the effect that only the profit margin had to be brought into the partial exemption calculation, and applied so as to exclude from the apportionment calculation the full value of goods on which output tax was not chargeable unless the goods were purchased for the purpose of selling them.

43. Reg. 101(3) (c) provides that in calculating the relevant proportion there shall be excluded: "That part of the value of any supply of goods on which output tax is not chargeable by virtue of any order made by the Treasury under section 25(7) of the Act…" Output tax is not chargeable at all on the entire value of the supply of the demonstrator cars by JDL by virtue of Art. 13(B)(c) of the Sixth Directive. For the reasons mentioned in paragraphs 15-16, JDL has asserted a directly effective EC law right leading to the disapplication, at its option, of the domestic secondary legislation, in particular Art. 7(4) of the Input Tax Order. I see very great force in the Commissioners' argument that, having asserted a directly effective right under the Sixth Directive, JDL cannot now say that during the period in question Art. 7(4) of the Input Tax Order, which was made under section 25(7) of the 1994 Act, had the effect that part of the value of the supply was not chargeable by virtue of any order made under section 25(7).

43. The second alternative ground is that the Commissioners have acted unlawfully or wholly unreasonably in rejecting the alternative "special methods" put forward by JDL. The first special method proposed was the same as the standard method except that it only included the margin realised on the sale of the demonstrator within the partial exemption fraction. This was rejected by the Commissioners on the ground that the standard method provided a more accurate means of attribution.
44. The second special method for which approval was sought was that half of the value of the sale should be included in the residual input tax apportionment calculation as relating to an exempt supply and half as relating to a taxable supply. This was rejected on the ground that it did not represent a fair and reasonable method of apportionment.
45. The Commissioners have a discretion, under Reg. 102 of the 1995 Regulations, to approve the use of a special input tax attribution method, in substitution for the standard method provided by Reg. 101. The Tribunal's jurisdiction was limited to determining whether the Commissioners' discretionary power had been properly exercised, but it made no findings whatever on this issue. This is an appeal under the Tribunals and Inquiries Act 1992, section 11, and the combined effect of CPR 52.1(4), 52.10(1)(2) and Practice Direction 52PD 23.8 is that I would have had the power to deal with the matter myself if the point had such little merit that there would have been been no object in remitting the matter to the Tribunal. If this question had arisen, on the hypothesis that I am wrong on the principal point and on the material presented to me, I would have decided that there was no reasonably arguable case for setting aside the Commissioners' decision.
46. The appeal will therefore be dismissed.

Note 1    The “standard method”, in Reg. 101(2) of the 1995 Regulations, was applicable to JDL at the material time, no special method having been approved or directed by the Commissioners.    [Back]

Note 2    This appeal relates solely to the period before the Order was amended in 1999.     [Back]