England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		12/03/2009

Mr Justice Sales:

1. By a letter dated 27 July 2006 to the Defendants ("HMRC"), the Claimant ("CHA") made a claim for recovery of £458,428.15 of Value Added Tax ("VAT") paid by it in respect of various services provided to it in relation to certain housing construction projects originally carried on by it, but later transferred to a wholly owned subsidiary development company, CHA Ventures Ltd ("Ventures"), for completion. HMRC did not accept the validity of that claim, so CHA appealed to the VAT & Duties Tribunal ("the Tribunal"). This is an appeal from the decision of the Tribunal dated 10 June 2008, in which the Tribunal dismissed CHA's appeal.
2. CHA is a registered social landlord engaged in the provision of accommodation to needy persons, i.e. social housing. As part of this activity, CHA acquires new sites and builds residential units. Prior to 2006, CHA carried out these construction projects itself. It engaged surveyors, architects, planning consultants and so on to obtain planning permission for and to design and construct such projects. CHA paid VAT in respect of the fees of such persons providing services to it. CHA also engaged building contractors to build the residential units comprising such projects, but paid no VAT in respect of their services, because they were zero-rated. CHA would use the completed units as part of its rental stock. Provision by CHA of social housing for rent involves CHA making exempt supplies of services, with the result that the input VAT paid by CHA in relation to the professionals' fees for such projects are not recoverable by CHA.
3. In early 2006, CHA decided that a more effective and tax efficient structure should be used to provide it with new housing from development projects. Accordingly, it set up Ventures to undertake all future development activity on CHA's sites. Ventures was to contract with CHA as a property developer, to take over and carry on existing construction projects and undertake new projects on land owned by CHA. The tax advantage of this arrangement in terms of VAT is that Ventures provides zero-rated supplies of design and build services to CHA and it (unlike CHA) is able to recover all input VAT paid by it on services used to provide such supplies to CHA.
4. CHA also "transferred" to Ventures all construction projects which it had in hand, but which were unfinished, as at 1 February 2006. The nature of this transaction requires examination, as set out below. CHA charged Ventures a sum in respect of the transfer of the unfinished construction projects equal in each case to what it had paid in respect of professionals' fees on that project. This was referred to as CHA "re-invoicing" Ventures in respect of those fees.
5. CHA claims that its change of purpose from incurring fees to carry out the construction projects itself to transferring the unfinished projects to Ventures for completion by Ventures, with the benefit of work already done by the professionals for CHA, involved a change of intention, so that its intention became to use the professionals' services to make taxable supplies to Ventures (i.e. by way of the "transfer" of the projects to Ventures), rather than to use them to make exempt supplies itself as before. On this basis, CHA claims that it is entitled to the benefit of Regulation 109 of the Value Added Tax Regulations 1995, so as to be able to recover the input tax in respect of the professionals' services. HMRC denies that CHA is entitled to rely on Regulation 109 to reclaim the input tax.
6. Regulation 109(1) and (2) provides as follows:

"(1) This regulation applies where a taxable person has incurred an amount of input tax which has not been attributed to taxable supplies because he intended to use the goods or services in making either –

(a) exempt supplies, or

(b) both taxable and exempt supplies,

and during a period of 6 years commencing on the first day of the prescribed accounting period in which the attribution was determined and before that intention is fulfilled, he uses or forms an intention to use the goods or services concerned in making taxable supplies or, in the case of an attribution within sub-paragraph (a) above, in making both taxable and exempt supplies.

(2) … the Commissioners shall, on receipt of an application made by the taxable person in such form and manner and containing such particulars as they may direct, pay to him an amount equal to the input tax which has become attributable to taxable supplies in accordance with the method which he was required to use when the input tax was first attributed. …"

7. Under the Sixth Directive (77/388/EEC), as applicable at the relevant time, a "supply of services" was defined very widely to mean "any transaction which does not constitute a supply of goods …". Domestic law provides a similarly wide definition. Section 5(2)(a) of the Value Added Tax Act 1994 ("the VAT Act") provides that "supply" "includes all forms of supply, but not anything done otherwise that for consideration". Section 5(2)(b) provides that:

"anything which is not a supply of goods but is done for a consideration (including the granting, assignment or surrender of any right) is a supply of services."

8. A taxable supply is any supply of goods or services made in the United Kingdom which is not an exempt supply: s. 4(2) of the VAT Act.

The Facts

9. CHA's letter to HMRC of 27 July 2006 stated that Ventures had been established as a specialist development contractor with whom CHA had placed a contract for the construction of new dwellings; Ventures now appointed all sub-contractors and CHA paid Ventures rather than the sub-contractors; as part of the exercise, CHA transferred all schemes currently underway to Ventures "and as such, all contracts previously in the name of CHA have now been assigned from CHA to [Ventures]"; and CHA "has re-invoiced the value of all work up until the point of transfer to [Ventures]". CHA said that without the input of services supplied up to the date of the transfer, Ventures "could not complete any of the developments". Under the heading, "Resupply of professional services to [Ventures]", the letter continued,

"The supply of professional services from CHA to [Ventures] is a standard rated supply for VAT purposes. Because of this change of intention by CHA and the fact that all inputs now go towards making a taxable supply to [Ventures], CHA now wishes to recover any input VAT …"

10. The relevant invoices from CHA to Ventures in respect of the charges made by CHA in relation to the transfer of the projects to Ventures bore descriptions of the form, for example, "Building Services in period 17/05/04 to 13/01/2006". The amounts CHA charged Ventures in relation to each project were equivalent to what CHA had previously paid the building contractors and professionals for their services in respect of that project. CHA treated the transaction as a taxable supply by it, and charged Ventures for VAT in the invoices. In August 2006, Ventures filed its VAT return identifying such VAT as input tax. HMRC has accepted Venture's right to treat the VAT it paid as recoverable input tax.
11. The Tribunal had to deal with a number of points raised before it by CHA (which was not at that stage represented by Mr Rivett, who appeared for them before me). Some of those points (in particular, submissions made by CHA about the significance of certain collateral warranties in respect of the development projects) were of only marginal if any relevance to the true issue, and had a tendency to distract attention from that issue. So far as concerns this appeal, the Tribunal made the following relevant findings in its decision, at [12]-[14]:

"12. … CHA decided to set up a new development company, [Ventures], which was a wholly-owned subsidiary of CHA. [Ventures] thenceforth undertook all future development activity. It acted as a property developer, and provided a zero-rated supply of design and build services to CHA, which enabled full associated input VAT recovery by [Ventures]. This scheme is accepted by HMRC.

13. Those projects which were under way as at 1 February 2006 but not yet completed, were transferred to [Ventures]. These projects, which CHA had originally commissioned, were assigned in their entirety to [Ventures]. This enabled CHA to concentrate on its core business of providing high quality social housing.

14. At about the same time as CHA was considering implementing a new structure, European Union procurement rules meant that it was obliged to open all its large scale procurement to competitive tender and to choose a panel of preferred bidders for all future work. It was therefore decided to give [Ventures] the sole right to appoint construction contractors for EU procurement purposes, and henceforth CHA would have no legal right to enter into construction contracts in its own name. This change was effective from the beginning of February 2006, and all suppliers were notified that all existing contracts were to be assigned and future work would be provided to [Ventures]. Having transferred its development function to [Ventures], CHA no longer had the capability to proceed with the development. All future invoices were addressed to [Ventures], but additionally it was considered that [Ventures] could only take over development already under way if it was given the benefit of the services such as those of architects and surveyors. In January 2006 therefore CHA had advised its contractors that such works would be re-invoiced to [Ventures]."

The Tribunal's decision and reasons

12. The Tribunal dismissed CHA's claim for recovery of the VAT it had paid, as input tax recoverable under Regulation 109. It gave the following reasons for its decision at [33]-[34]:

"33. Regulation 109 requires that a person seeking to benefit from it change a previous intention to make either exempt supplies, or to make both taxable and exempt supplies, to an intention to use the relevant goods and services in the making of taxable supplies, or, where previously he has been making only exempt supplies, to make both taxable and exempt supplies. CHA appear to have misunderstood this wording, and thought that by transferring the obligation to pay for the supplies to CHA Ventures, they had changed the nature of the supplies themselves. This is not the case. The supply was still one of architectural and professional services in respect of either exempt supplies or, as the evidence shows in some cases, the supply of both taxable and exempt supplies. We accept the Commissioners' arguments and find that there was no change of intention with regard to the supplies.

34. It is completely irrelevant that CHA felt the need to transfer the collateral warranties. Even if CHA had by so doing achieved what it was put to the Tribunal that it was attempting to do, it would still be irrelevant. The input tax relates to the supply by various professionals to CHA in respect of exempt or, possibly, partially exempt transactions, but at no stage was the nature of those supplies changed by CHA's actions. As was submitted by Mr Singh [for HMRC], it would still fall to CHA to enforce the collateral warranty, it being made between CHA and the respective contracting party. Any benefit of such enforcement would then be passed to [Ventures]."

Analysis

13. The description, "Resupply of professional services", in CHA's letter of 27 July 2006 was somewhat misleading. So was the description ("Building services in period [prior to February 2006]") in the invoices sent by CHA to Ventures. CHA did not itself supply to Ventures the very professional services which had been supplied by various professionals to it; nor did it supply the very building services which had been provided to it prior to February 2006. Rather, in early February 2006 the benefit of various contractual arrangements CHA had with building contractors and professionals in respect of each development project was assigned by CHA to Ventures (in fact, on the facts found by the Tribunal, it appears that the relevant contracts were novated so as to release CHA from further performance obligations under them, and substitute Ventures as obligee in respect of such obligations). Thereafter, Ventures was entitled to call for any further performance required from building contractors or professionals under those contracts: e.g. if architects had promised to produce plans for a development, Ventures would be entitled to require them to do so for its benefit, to allow it to construct the development which it had contracted to provide to CHA. In addition, Ventures was entitled, as against the professionals in question, to make use of the work product of the services of those professionals previously supplied to CHA: e.g. if architects had already produced plans for a development and provided them to CHA, the architects would be obliged to allow Ventures to make use of those same plans in constructing the development which it had contracted to provide to CHA. Ventures paid consideration to CHA for the benefit of the assignment/novation of these contracts, in sums equivalent to what CHA had previously paid the building contractors and professionals for their services.
14. HMRC do not contend that CHA is estopped by the terms of its letter of 27 July 2006, its invoices or any other documents produced in connection with its claim from arguing that there was a supply of services by it to Ventures, in a form other than the re-supply of professional services as described in its letter or building services as described in its invoices. Accordingly, I have to look at the commercial substance in order to consider the application of Regulation 109. On that approach, it is clear that, in view of the width of the definitions of "supply" and "supply of services" in s. 5(2) of the VAT Act, the assignment by CHA to Ventures (whether by way of novation or otherwise) of the benefit of CHA's contracts with building contractors and with professionals in respect of the various construction projects was a supply of services for the purposes of the Act. Since not exempt, it was a taxable supply.
15. I accept CHA's submission that the Tribunal fell into error in that it did not distinctly and properly identify the assignment as a taxable supply, and hence did not apply Regulation 109 correctly by reference to the change of intention of CHA in making that supply. It is therefore appropriate for this court to analyse the position afresh. (I should record that I have considerable sympathy for the Tribunal, since it is apparent that CHA's case before the Tribunal was not presented with the same clarity or focus upon relevant issues as it was before me).
16. CHA originally obtained the taxable supplies from the professionals in question intending to use the services provided in making exempt supplies of social housing. The question, then, under Regulation 109, is whether CHA in early February 2006 changed its intention so as to use those services in making taxable supplies to Ventures in the form of the assignments in relation to the various contracts (both contracts with building contractors and with professionals) regarding ongoing development projects.
17. HMRC submit that the input tax paid by CHA in respect of the services supplied by professionals is not now recoverable under Regulation 109, for two reasons. First, HMRC submit that, on proper analysis, the relevant intention of CHA as to use of the services supplied by the professionals did not change in early February 2006. Before that time, CHA intended to use the services to build residential units to be used in making exempt supplies in the form of providing social housing; and after that time, although Ventures had been interposed to carry out the design and building of the residential units, when completed they were to be made available for CHA to make the same exempt supplies by providing social housing. Therefore, it was said, there had been no real change of intention by CHA as to the use to which the professionals' services would be put, so Regulation 109 had no application.
18. I do not accept this submission. It involves taking a general, overarching approach to the analysis of CHA's intention as to use of the professionals' services which is in my judgment incompatible with binding authority as to the proper analysis of transactions for the purposes of the law governing imposition of VAT.
19. In Case C-4/94 BLP Group Plc v Commissioners of Customs & Excise [1995] STC 424 it was held that the right to deduct input tax arises only in respect of goods and services which have a direct and immediate link with taxable transactions; the ultimate aim pursued by the taxable person is irrelevant: see [31]-[35] in the Opinion of Advocate General Lenz and [18]-[24] in the judgment (observing, at [24], that an obligation on the tax authorities to carry out inquiries to determine the ultimate intention of the taxable person "would be contrary to the VAT system's objectives of ensuring legal certainty and facilitating application of the tax by having regard, save in exceptional cases, to the objective character of the transaction in question"). In that case, the taxable person had paid VAT in respect of professional services directly used by it for an exempt supply, albeit that the ultimate purpose it had in mind was to raise funds to pay off debts which had arisen from taxable transactions. The ECJ's ruling meant that the taxable person was not entitled to treat the VAT as recoverable input tax. In the present case, by contrast, it is in order to deny CHA's right to treat the VAT paid as recoverable input tax that HMRC point to CHA's ultimate purpose to make exempt supplies using (at one point in the chain of transactions leading to the making of such supplies) the services of the professionals in question. But, in light of the assignment in early February 2006, the transaction with which those services had a direct and immediate link was the supply (in the form of the assignment) by CHA to Ventures. Therefore, on the reasoning in BLP Group Plc, it is the use of the professional services to make that supply which is relevant, which in this case links those services with a taxable supply rather than an ultimate exempt supply. This analysis is also supported by Case C-98/98 Midland Bank plc v Customs & Excise Commissioners [2000] STC 501, esp. at [29] in the Opinion of Advocate General Saggio and [20]-[24] in the judgment.
20. In Customs & Excise Commissioners v Southern Primary Housing Ltd [2004] STC 209 (CA), the taxpayer purchased land (paying VAT on the price) then sold that land to a housing association (an exempt supply of goods for VAT purposes) and entered into a contract with the association to build housing for the association on that land (a taxable supply of services). The transactions were commercially connected. The taxpayer claimed to recover the VAT on the price it paid to acquire the land as input tax in respect of the taxable transaction consisting in the development contract. The Court of Appeal held that there was no direct and immediate link between the cost of the land and the development contract, such as to allow recovery of the VAT, even though the overall purpose when the land was acquired was that a development contract in relation to it would be entered into: see [32]-[37] (Jacob LJ, giving the lead judgment). Jacob LJ analysed the decisions in BLP Group Plc and Midland Bank, emphasised that the ECJ focused "on the objective, transaction-by-transaction nature of VAT law" ([36]) and at [37] criticised the tribunal's conclusion in that case that there was a direct and immediate link between the land purchase and the development contract, because:

"VAT law does not work in such a generalised way. You have to look at transactions individually, component transaction by component transaction. They may be linked in the sense that one would not have happened without the other, but they remain distinct transactions nonetheless. Only if one transaction is merely ancillary to a main transaction can one disregard the distinct nature of each transaction … If that were not so, the principle of neutrality would be violated. Moreover, there would be intractable problems as to which input was being attributed to which part of the 'overall transaction'. You may find, as here, taxable and exempt transactions all mixed up in the same 'overall' transaction – which is illegitimate".

In my judgment, these observations apply with equal force in the present context. They mean that the proper focus of analysis in the present case is the immediate supply by CHA to Ventures, rather than the ultimate supply of social housing by CHA to tenants.

21. The second submission by HMRC is that, notwithstanding the focus on the supply by CHA to Ventures, the payments made by CHA to professionals in respect of the development projects before the assignments in early February 2006 were not directly and immediately linked with the supply by CHA to Ventures in the sense required by these authorities, and could not be regarded as a cost component of the supply by CHA to Ventures as required by these authorities: see in particular Midland Bank at [29]-[30] of the judgment. I do not accept this submission either.
22. Under the transactions between CHA and Ventures, Ventures undertook to design and build residential units on CHA's land, so as to provide CHA with completed projects at the end of the process. By the assignments under those transactions, Ventures acquired from CHA contractual rights (a) as against building contractors, to require them to complete each project; (b) as against various professionals, to require them to carry out any further work required from them to complete each project; and (c) as against those professionals, to require them to allow Ventures to use the product of any services which they had previously provided to CHA. In my view, the services supplied by professionals to CHA prior to February 2006 (in respect of which CHA paid fees and VAT on those fees), in relation to preparing for, designing and supervising the projects to get them to the stage at which they were transferred to Ventures for completion, were services used by CHA in making its taxable supply to Ventures in the form of the assignment of rights in relation to the various projects. This conclusion is supported by the following reasoning.
23. What Ventures received under the taxable supply by CHA in the form of the assignment of rights varied in value to Ventures depending on how much work had been done in relation to any particular project, and the overall price which CHA would pay Ventures for completing the project (after allowing for payments from Ventures in return for the assignment) would be directly linked to the extent of work already carried out on behalf of CHA. Where (say) only a small amount of preparatory work had been done for CHA, CHA charged Ventures the (small) sum it had paid and Ventures had to cover the (large) cost of completing the project from its own resources. On the other hand, where a project was (say) nearing completion at the time of the assignment, CHA charged Ventures the (large) sum it had paid and Ventures had only to cover the small remaining cost of completing the project out of its own resources. In each case (assuming projects of similar size and value), when the project was completed Ventures would charge CHA the same amount in return for providing the completed development. Thus the value of the taxable supply made by CHA to Ventures in each case (and the price payable by Ventures to CHA for the supply) varied according to the amount of the services CHA used in making that supply (in the sense that CHA now allocated the product of such services, in terms of advancing the project, to transferring the project to Ventures rather than continuing to use it to complete the project itself to make exempt supplies of social housing). Accordingly, in my view, the professional services for which CHA paid prior to February 2006 clearly constituted cost components of CHA's taxable supply to Ventures. The cost incurred by CHA allowed it to make a more valuable supply to Ventures, and charge Ventures a higher price for that supply.

Conclusion

24. For the reasons given above, CHA's appeal is allowed.
25. The evidence adduced by CHA before the Tribunal regarding the precise nature of the professional fees it had paid and the precise nature of the assignments to Ventures was very much less than complete. Accordingly, it is difficult to be sure that each and every payment of professionals' fees by CHA would be covered by the reasoning set out above. For that reason, I did at one stage consider whether the proper course might be to remit the case to the Tribunal for further consideration in the light of this judgment. However, both parties agreed that I should finally resolve the claim for repayment now, doing the best I could on the information available to me, and should not remit the case for further consideration. No doubt that is a sensible course, in light of the desirability of maintaining a proportionate relationship between any likely difference on a more detailed examination of the facts and the likely costs of undertaking such an exercise. Therefore, I simply give judgment for CHA on its claim to recover the VAT referred to in its letter of 27 July 2006.