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Neutral Citation: [2014] IEHC 685 THE HIGH COURT [2013 No. 672 R] BETWEEN LAST PASSIVE LIMITED (Trading as Aircoach) APPELLANT AND
THE REVENUE COMMISSIONERS RESPONDENT JUDGMENT of Mr. Justice Michael White delivered on the 24th day of October 2014 1. The appellant to these proceedings, Last Passive Ltd. is a private limited liability company which trades as “Aircoach” and operates various bus routes servicing Dublin Airport from different locations within the State and Northern Ireland. 2. The respondent to these proceedings refused to accede to the appellant’s claim for a refund of Value Added Tax (VAT) in the amount of €873, 268.30. The Appeals Commissioner heard the appeal of this decision between November, 2010 and May, 2012. 3. This case stated arises from the determination of the Appeals Commissioner on hearing that appeal and is brought under s. 941 of the Taxes Consolidation Act 1997 as applied to VAT by s. 119(4)(k) of the Value Added Tax Consolidation Act 2010 (as amended) (“the VATCA”). A number of questions of law arise in these circumstances. 4. The Appeal Commissioner found a number of facts admitted or proved. The appellant operates 59 coaches on its bus routes and employs approximately 200 staff. The appellant entered a contract (“the Contract”) with Viacom Ltd. (now CBS Outdoor Limited) in relation to 43 of these coaches. Under the terms of this contract CBS Outdoor Limited obtained the right to sell to its customers the entitlement to place advertising on the exterior of the appellant’s coaches, on the back of seats inside the coaches and in certain places at Aircoach bus stops. This contractual right was extended until April, 2014. 5. During the period of the contract the buses displayed advertisements on their exterior and interior while being driven on their various routes. The income derived from this advertising is considered by the appellant to be an important element of its turnover, however, the overall value of the contract with CBS Outdoor Ltd to the appellant, when compared to the income derived from passenger transport, is small. For example, for the year ended 31st March, 2009, 2% of the appellant’s turnover was derived from advertising but 98% from the transport of passengers. Relevant Legislation 7. Section 12(1)(a) of the VATA 1972 provides:-
(i) the tax charged to him during the period by other taxable persons by means of invoices, prepared in the manner prescribed by regulations, in respect of supplies of goods or services to him…”
‘non-deductible supplies or activities’ means the supply of goods or services or the carrying out of activities other than deductible supplies or activities; ‘total supplies and activities’ means deductible supplies or activities and non-deductible supplies or activities. (c) For the purposes of this subsection and regulations, the proportion of tax deductible by a taxable person for a period shall be calculated on any basis which results in a proportion of tax deductible which correctly reflects the extent to which the dual-use inputs are used for the purposes of that person’s deductible supplies or activities and has due regard to the range of that person’s total supplies and activities. (d) The proportion of tax deductible may be calculated on the basis of the ratio which the amount of a person’s tax-exclusive turnover from deductible supplies or activities for a period bears to the amount of that person’s tax-exclusive turnover from total supplies and activities for that period but only if that basis results in a proportion of tax deductible which is in accordance with paragraph (c).”
The proportion shall be determined, in accordance with Article 19 for all the transactions carried out by the taxable person. However, Member States may:- (a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector; (b) compel the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector; (c) authorise or compel the taxable person to make the deduction on the basis of the use of all or part of the goods and services; (d) authorise or compel the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein; (e) provide that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.”
(i) the proportion which - (I) correctly reflects the extent to which the dual-use inputs are used for the purposes of that person’s deductible supplies or activities, and (II) has due regard to the range of that person’s total supplies and activities, for that taxable period.” 11. This appeal relates to the entitlement of the appellant to deduct VAT incurred in relation to expenditure on its business or “input VAT.” The Appeal Commissioner determined the appeal from the refusal of the Revenue Commissioners by finding that, though the appellant made two supplies of services, a supply of advertising to CBS Outdoor Ltd. under the terms of the Contract and a supply of passenger transport to the public, this did not make inputs for either or both of those purposes “dual-use inputs” pursuant to s. 12(4)(a) of the VATA. It was also determined that the costs incurred by the appellant in operating the coaches were incurred solely and not principally by the company in order to provide the passenger transport service and this service had to be performed irrespective of any advertising services which were also supplied. The Appeal Commissioner also determined that in order to be deductible there must be a link between the inputs and the taxable supply of services in question and therefore costs necessarily incurred through the provision of the transport service could not be seen as constituting a dual-use input in relation to the provision of the advertising space. Any costs in VAT incurred by the appellant through running the transport service, such as maintenance and fuel for buses, were used solely, as opposed to principally, for the appellant’s supplies of transport services to passengers and therefore could not be considered to be dual-use inputs for the purposes of s. 12(4) of the VATA. The VAT incurred by the appellant on running costs directly related to the operation of buses was not therefore deductible. The Appeal Commissioner determined that costs which were related to the business of the appellant as a whole and which did not have a direct and immediate link with its exempt supplies such as audit fees for example were “overheads” and were “dual use inputs” in respect of which the appellant was entitled to recovery. It was determined permissible to have regard to turnover in calculating the deductible proportion in order to achieve a result which has due regard to the range of the appellant’s supplies. The Appeal Commissioner determined that 2% of the VAT on costs claimed by the appellant, which was the relative turnover of the taxable and exempt activity, amounting to €1,897.99 was recoverable for costs not directly and immediately attributable to running the buses. VAT incurred exclusively for the purposes of concluding the advertising contract (such as legal fees) would have been fully recoverable but there were no costs of this nature and therefore this determination is not strictly relevant. 12. Counsel for the appellant issued a notice requiring the Appeal Commissioner to sign a case for determination by this Court on a point of law. The questions raised for the determination of this Court are:-
(ii) Was [the Appeal Commissioner] correct in determining that the foregoing conclusion was not to be called into question by reason of the principles of fiscal neutrality and equal treatment? (iii) Was [the Appeal Commissioner] correct in determining the recoverability of VAT in relation to overheads on the basis of the relative turnover of the advertising and passenger transport businesses.” 13. The VATA transposed the Sixth VAT Directive into Irish law. This directive was repealed from 1st January, 2007, and replaced by Council Directive 2006/112/E.E.C. or the “recast VAT Directive.” However, though the transactions at issue here both pre-date and post-date this change, the provisions of both instruments are identical in all relevant respects and it is the VATA 1972 which is applicable. 14. Section 12(1) VATA provides that where VAT is incurred on costs used exclusively for the purposes of making taxable supplies it is fully recoverable from the Revenue Commissioners but where the costs are used exclusively for the making of supplies which are exempt from the payment of VAT under the terms of the VATA 1972 it is irrecoverable. But under the terms of s. 12(4) of the VATA 1972 where VAT incurred is used both for the making of taxable and for the making of exempt supplies (“dual-use inputs” within the meaning of s. 12(4)(a) VATA 1972) the VAT is recoverable in part according to the ratio set out therein. Therefore the appellant submits that this appeal requires the determination of two key issues:-
(ii) If so, what proportion of such VAT may be recovered by the Appellant? 16. The appellant submits that the main distinction between these two methods of calculation is that the “use” basis of measurement involves looking at the inputs and the goods and services one acquires for one’s business and the use to which they are put whereas turnover involves looking at the amount of money that one makes on the output side from undertaking those activities. So therefore not only are these two options mutually exclusive in the relevant legislation, they are also conceptually very different the one from the other. 17. In relation to the first issue of whether the costs incurred by the appellant in relation to its business are used solely for the making of exempt supplies, or whether they can be characterised as “dual-use inputs” under s. 12(4) VATA, the appellant submits that “use” must be given its ordinary meaning and that the right to deduction can be precluded only if the appellant uses the costs solely in the provision of transport rather than advertising. The appellant submits that the running of its buses is integral to the supply of both services as without the buses neither the transport element nor the advertising element of the company’s income stream would be possible as neither type of supply would be made. Therefore the costs of running the buses in question, such as the maintenance and fuel costs, are dual-use inputs as they are used for the supply of both taxable and exempt services. The appellant submits that this reading of the legislation is supported by first principles of statutory interpretation and that this meaning is also clear from a contextual reading of the text of the VATA 1972. 18. The appellant makes two main submissions. It is submitted that there is (i) a direct link between the taxable supply and the input VAT or in the alternative (ii) there is a direct link between the VAT inputs of the appellant and the general costs of its business rendering 50% of the VAT inputs of the appellant recoverable since part of the services provided by the appellant, though not all of the services provided, are taxable. 19. The appellant relied on a number of authorities in support of his submissions. These are:-
? Dial-a phone Ltd v. Customs and Excise Commissioners [2004] EWCA Civ 603. ? Portugal Telecom v Fazenda Publica Case C-496/11[2013] STC 158. ? Lennartz v Finanzamt Munchen 111 Case C-97/90[1991] ECR 1-3795, [1995] STC 514. ? Finanzamt Friesadt Rohrbach Urfhar v. Unabhangiger Finanzsenat Aussentelle Linz Case C -219/12. ? Mayflower Theatre Trust Ltd v. Revenue and Customs Commissioners [2006] EWCA Civ.116. ? Varzim Sol v. Fazenda Publica Case C-25/11. ? Royal Bank of Scotland v. HMRC Case C-488/07[2008] ECR 1-10409. ? Marks & Spencer plc v. Commissioners of Customs & Excise Case C-62/00 [2002] ECR 1-6325 ? NCC Construction Danmark A/S v. Skatteministereit Case C-174/08[2009] ECR. 1-10567. 21. The respondent argued that the discussion of the jurisprudence in Volkswagen Financial Services (UK) Ltd. v. Revenue and Customs Commissioners [2013] S.T.C. 716, serves as a sound summary of the case law in this area. The respondent submits that it is incorrect to say that the “direct and immediate link” test has been abandoned or modified since it was set down in BLP Group plc v. Commissioners of Customs and Excise Case C-4/94 [1995] ECR I-983 but rather has been repeated ad nauseam in the jurisprudence of the E.C.J since. Counsel submits that the nature of the test was not substantially changed by the decision in Midland Bank plc v. Customs and Excise Commissioners Case C-98/98 [2000] ECR I-4177, [2000] STC 501 where consequential costs of an anterior supply were held to be deductible since they met the cost component test. This case introduced the concept of a direct and immediate link being either directly between the input expenses and an output supply or with the taxable person’s business as a whole. 22. The Respondent submits that the running costs of the buses are not dual-use inputs but that they were incurred solely and not principally to provide the passenger transport service and that it is clear from a plain reading of the Sixth VAT Directive and of s. 12 of the VATA 1972 that the right to VAT deduction on inputs only applies insofar as the input goods and services are used for the making of taxable supplies rather than exempt supplies. Otherwise no right to VAT deduction arises. The respondent submits that a taxable person may provide both deductible and non-deductible supplies without incurring dual-use inputs or substantial dual-use inputs. Should dual use inputs occur, there is only a right of deduction in relation to the amount of tax borne or payable on costs which are actually attributable to the deductible supplies. The respondent submits that the inputs into the appellant’s business were solely related to the provision of its passenger transport service and that the advertising service is in fact “parasitic” upon this other primary supply. There is no “direct and immediate link” between the input running costs and the output advertising service in this instance though such a link does exist between the input and the passenger service output. 23. Counsel for the respondent relies on the decision of the E.C.J. in BLP Group v. Commissioners for Customs & Excise Case C-4/94 [1995] ECR I-983 in which it was held at paras. 19-21 that:-
… 21. Article 2 of the First Directive states that only the amount of tax borne directly by the various cost components of a taxable transaction may be deducted.”
27. The respondent submits that here is no breach of fiscal neutrality here as there is no direct and immediate link between the VAT inputs and the supplies made by the appellant. There is also no factual or economic basis for the 50% recovery claimed. The appellant submits in response that if the interpretation of the Revenue Commissioners is followed by the court there would be a breach of fiscal neutrality as other suppliers of advertising who supply this activity alone and do not supply an exempt service in addition to the taxable service, would benefit from a larger amount of VAT recovery and would therefore receive more favourable treatment than the appellant. 28. The respondent submits that the basis of calculating the proportion of VAT deductible must reflect the extent to which the dual use inputs are used for the purpose of making deductible supplies by a taxable person and must have due regard to the range of that person’s total supplies and activities. The respondent submits that account must be taken of the relative importance of the activities in which the taxpayer is engaged and since the majority of the appellant taxpayer’s income comes from the provision of transport services and since this is the primary aim and purpose of its business, the claim for a 50% refund on tax inputs based on a small proportion of its income coming from an exempt supply is not factually sustainable. The respondent submits that the tax deductible should be calculated on the basis of the ratio which the amount of a taxable person’s tax exclusive turnover from deductible supplies for the period concerned bears to the amount of the person’s tax exclusive turnover from total supplies for the period, provided that this correctly reflects the extent to which dual use inputs are used for the making of deductible as opposed to exempt supplies and has regard to the range of the taxable person’s total supplies. Apportionment on the basis of turnover is the most appropriate method of calculation in this instance as it most closely meets the criteria in s. 12(1)(c) VATA 1972. The third question in the case stated should be answered in the affirmative. 29. The applicant relies on para 4.4 of the respondents own guide Value Added Tax: A Guide to Apportionment of Input Tax, October, 2001, to make the case that it is the utilisation of the inputs for the taxable and exempt transactions which determines the basis of the deduction, regardless of the value of those transactions. The respondent submits that the guide is not relevant to the issue before the court in any way. There has been no evidence adduced of unequal treatment and this document cannot be seen as such evidence. The respondent refers to the decision of Hardiman J. in Campus and Stadium Ireland Development Limited v. Dublin Waterworld Limited [2010] IESC 25 in which the Court held that a similar Revenue document relating to VAT and property transactions did not have binding effect since it was merely a guide. Counsel submits that the same view must be taken of the guidelines adduced in these proceedings, particularly given the disclaimer as to legal effect which is included at the start of the document. In relation to the decision in Metropol Treuhand Wirtschaftstreuhand GmbH v. Finanzlandesdirektion fur Vorarlberg Case C-409/99 [2002] ECR I-81, which the appellant submitted was authority for the proposition that such documents could be seen as evidence of the proper implementation of legislation, the respondent submits that the document in that case was clearly binding on public authorities and therefore, since that is not the case here, this case is wholly distinguishable. Counsel notes that the decision in Commission v. France Case C-404/99 [2001] ECR I-2667 is similarly distinguishable given that the documents in that question were also legally binding. In relation to Marks & Spencer v. Commissioners of Customs & Excise Case C-62/00 [2002] ECR I-6325 it was also submitted that this authority is not applicable to the Irish situation but can be confined to its own particular facts in its own particular jurisdiction. The Approach of the Court When Considering a Case Stated
32. This Court also approves of the passage in the English Court of Appeal decision The Commissioner for Customs & Excise v. Southwern Primary Housing Limited (2003) EWCA CW1662:-
Extract from VW case summarising case law. “CHRONOLOGICAL TREATMENT OF THE AUTHORITIES
[49] Rompelman v Minister van Financien (Case C-268/83) [1985] ECR 655 is still frequently cited. In that case, the CJEU considered the purpose and objective of the VAT system. The CJEU had to decide whether the acquisition of a right to the future transfer of ownership of part of a building, yet to be constructed, with a view to letting such premises, might be regarded as an ‘economic activity’ within the meaning of art 4(1) of the Sixth Directive. The CJEU considered the general characteristics of the VAT system and the rules on deductibility of set-up costs, and said this at para 16:
[51] In BLP Group plc v Customs and Excise Comrs (Case C-4/94 [1995] STC 424, [1995] ECR I-983, BLP sought to deduct input tax on invoices for the professional services it had used in connection with the sale of shares in its subsidiary company (an exempt output). BLP appealed against the Commissioners’ refusal to allow the deduction, contending that the purpose of the share sale was to raise funds to pay off debts which had arisen from its taxable transactions, so that the professional services should be treated as having been ‘used for’ the purposes of its taxable transactions. [52] Advocate General Lenz considered the principles of deductibility in paras 30-37 of his opinion. He said this: ’31. On the question whether the goods or services supplied to taxable persons, on which the input tax has been charged, can be attributed to a transaction by the taxable person in such a way that deduction on input tax is justified, the Community legislature decided on a criterion corresponding to the system: the amount which is to be deducted as input tax must have been “borne directly by the various cost components” (see art 2 of the First Directive) … 33. Those details logically do not change the fact that input tax can be deducted only to the extent that the goods or services on which it has been paid are “cost components” of a taxable transaction … 36. With respect to the present case, the High Court found … that the services in question on which input tax had been paid were “used … for an exempt transaction” by the taxable person … It is thus established that those services form a cost component precisely of the exempt supply (effected by the sale of the shares). 37. That is not affected by the argument put forward by BLP at the hearing that the costs of the services on which input tax has been paid … are ultimately incorporated into the price of the goods and services which it sells by means of its taxable transactions … That circumstance does not make the services in question into costs components of the taxable transactions and cannot therefore alter the attribution stated above”. [53] The CJEU said this in BLP Group, paras 18-25: ’18. Paragraph 2 of art 17 of the Sixth Directive must be interpreted in the light of para 5 of that article. 19. Paragraph 5 lays down the rules applicable to the right to deduct VAT where the VAT relates to goods or services used by the taxable person “both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible”. The use in that provision of the words “for transactions” shows that to give the right to deduct under para 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by the taxable person is irrelevant in this respect. 20. That interpretation is confirmed both by art 2 of the First Directive and by art 17(3) (c) of the Sixth Directive [art 169 of the Principal Directive] … 25. It is true that an undertaking whose activity is subject to VAT is entitled to deduct the tax on the services supplied by accountants or legal advisers for the taxable person’s transactions … However, that is a consequence of the fact that those services, whose costs form part of the undertaking’s overheads and hence of the cost components of the products, are used by the taxable person for taxable transactions.’ (Emphasis added). [54] Thus, in BLP, the CJEU decided that the professional services were used for an exempt output, the sale of the shares. BLP was not able to deduct the input tax even though the ultimate purpose of the transaction was the carrying out of taxable outputs. The direct and immediate link was with the exempt output. [55] In Midland Bank plc v Customs and Excise Comrs (Case C-98/98) [2000] STC 501, [2000] ECR I-4177, Samuel Montagu & Co Ltd (‘Samuel Montagu’) was a merchant bank and part of the Midland Bank Group (‘Midland’). Samuel Montagu provided financial services to Quadrex Holdings Inc (‘Quadrex’). Quadrex then sued Samuel Montagu alleging negligent misrepresentation. Samuel Montagu retained solicitors who invoiced them in respect of work relating (i) to the provision by Samuel Montagu of its services to Quadrex and (ii) the subsequent litigation. Midland sought to deduct all the VAT charged on the solicitors’ fees. The CJEU decided that the solicitors’ fees relating to the litigation were attributable to Samuel Montagu’s business generally and that the business comprised both taxable and non-taxable transactions. The input tax relating to the litigation, therefore, needed to be apportioned in accordance with art 17(5) of the Sixth Directive (art 173 of the Principle Directive). When considering the issue of a ‘direct and immediate link’ the CJEU referred to BLP at para 20, and then continued at para 24 as follows: ‘ 24 … art 2 of the First Directive and art 17 (2), (3) of the Sixth Directive [arts 168,, 169 and 173 of the Principal Directive] must be interpreted as meaning that, in principle, the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to entitlement to deduct is necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement.’ [56] At paras 30-32, the CJEU considered the ‘cost component’ test as follows: ’30. It follows from that principle as well as from the rule enshrined in the judgment in BLP, para 19 according to which, in order to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with the taxable transactions, that the right to deduct the VAT charged on such goods or services presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions,. Such expenditure must therefore be part of the costs of the output transactions which utilise the goods and services acquired. That is why those cost components must generally have arisen before the taxable person carried out the taxable transactions to which they relate.
[58] In Abbey National plc v Customs and Excise Comrs (Case C-408/98) [2001] STC 297, [2001] ECR I-361, Abbey National sought to deduct input tax on professional services it had employed in relation to a transfer of its rights under a lease and sublease. The transfer was not a taxable transaction. Abbey National’s insurance business effected both taxable and non-taxable transactions. It was held that the input professional costs were part of the Abbey National’s overheads and therefore had a direct and immediate link with the whole of its economic activity, so that it could deduct the proportion of VAT attributable to its taxable transactions. [59] Advocate General Jacobs said this about overheads in his opinion: ’42. According to a broader approach, where a taxable person pursues an economic activity in which he makes wholly taxable supplies, all the goods and services supplied to him for the purposes of that activity are cost components of his outputs and all the VAT borne by them should be deductible. The fact that, from a strict bookkeeping point of view, inputs are not attributed to or even apportioned among particular outputs is of no import here. Clearly not all goods and services consumed by a taxable person will be incorporated directly into an identifiable output. Some will be of the nature of general overheads and, to the extent that those overheads are components of taxable supplies, VAT levied on them may be deducted (see [BLP], para 25). Many types of overhead may be absorbed by the business as a whole, simply influencing indirectly the range of profit margins sought. [60] The FTT cited para 35 of the CJEU’s decision, where it held that the professional services used to effect the transfer were overheads that were costs component of the products of a business. In para 36, the CJEU decided that ‘in principle the various services used by the transferor for the purposes of the transfer … have a direct and immediate link with the whole economic activity of that taxable person’. [61] The CJEU continued as follows: ’38. However as the court held in para 26 of the Midland Bank judgment ([2000] STC 501 at 519), a taxable person who effects transactions in respect of which VAT is deductible and transactions in respect of which it is not may nevertheless deduct the VAT charged on the goods or services acquired by him, where those goods or services have a direct and immediate link with the output transactions in respect of which VAT is deductible, without it being necessary to differentiate according to whether art 17(2), (3) or (5) of the Sixth Directive applies. 39. That rule must apply also to the costs of the goods and services which form part of the overheads relating to a part of a taxable person’s economic activities which is clearly defined and in which all the transactions are subject to VAT, since those goods and services thus have a direct and immediate link with that part of his economic activities. 40. So if the various services acquired by the transferor in order to effect the transfer of a totality of assets or part thereof have a direct and immediate link with a clearly defined part of his economic activities, so that the costs of those services form part of the overheads of that part of the business, and all the transactions relating to that part are subject to VAT, he may deduct all the VAT charged on his costs of acquiring those services. 41. It is for the national court to determine whether those criteria are satisfied in the case in point in the main proceedings.’ (Emphasis added). [62] In Dial-a-Phone Ltd v Customs and Excise Comrs [2004] STC 987, the Court of Appeal considered the CJEU decisions that we have already mentioned. [63] Jonathan Parker LJ (with whom Dyson and Waller LJJ agreed expressed the view that there was no material difference between the ‘direct and immediate link’ test and the ‘cost component’ test. He said this at para [28] of his judgment:
’36. In this case, in view of the fact that, first, a share issue is an operation not falling within the scope of the Sixth Directive and, second, that operation was carried out by Kretztechnik in order to increase its capital for the benefit of its economic activity in general, it must be considered that the costs of the supplies acquired by that company in connection with the operation concerned form part of its overheads and are therefore, as such, component parts of the price of its products. Those supplies have a direct and immediate link with the whole economic activity of the taxable person (see BLP Group, para 25; Midland Bank, para 31; Abbey National, paras 35 and 36, and Cibo Participations, para 33). 37. It follows that, under art 17(1) and (2) of the Sixth Directive, Kretztechnik is entitled to deduct all the VAT charged on the expenses incurred by that company for the various supplies which it acquired in the context of the share issue carried out by it, provided, however, that all the transaction carried out by that company in the context of its economic activity constitute taxed transactions. [65] It will be observed that the CJEU decided that the overheads in question were ‘component parts of the price of [KAG’s] products’. [66] In Halifax plc v Customs and Excise Comrs (Case C-255/02) [2006] STC 919, [2006] ECR I-609, Advocate General Poiares Maduro (with whom the CJEU appeared to agree) said this about the entitlement to deduct input tax on supplies received for exempt output transactions: ’93 … VAT is, in effect, an indirect general tax on consumption meant to be borne by the individual consumers. Correspondingly the same principle requires that a taxable person must not be entitled to deduct or recover the input VAT paid on supplies received for its exempted transactions. As long as no VAT is charged on the goods or services provided by taxable persons, the Sixth Directive necessarily seeks to prevent them from recovering the corresponding input VAT …’ [67] In St. Helen’s School Northwood Ltd v Revenue and Customs Comrs [2006] EWHC 3306 (Ch), [2007] STC 633, Warren J had to consider the deductibility of input VAT on the cost of building a school swimming pool and sports hall. The facilities were used by the school pupils (exempt for VAT purposes), but also commercially outside school hours by parents and others (a taxable output). The commercial use of the complex was contemplated in the application for planning permission. The school sought to recover a proportion of the VAT on the building of the complex by reference to a comparison between the hours of use for school and commercial purposes. Warren J decided that the provision of the exempt supply of education was the primary purpose of the complex, and the taxable supplies were a secondary use. Accordingly, the Revenue’s proposed application of the standard method was preferable to the school’s PESM. He said this: ‘[75] I agree with Mr. Thomas (counsel for the school) that the search in the present case is for a fair and reasonable proxy for the “use” of the sports complex in making the exempt and taxable supplies made by the School. However, I also agree with Miss Simor [counsel for HMRC] that the physical use of the complex is not necessarily a fair and reasonable proxy for that use. I consider that her use of the phrase ‘economic use’ is a helpful approach to establishing what the search is for. [76] In that context, it is instructive, I consider, to look at the position had the `School not granted the licence at all and had not allowed any out-of-hours use. In those circumstances, there would have been no taxable supply at all. In consequence, none of the input tax would fall to be attributed to taxable supplies as a result of regs 101(2) (b) and (c), reg 101(2)(d) not applying. However, the sports complex is used for the purposes of the School’s (exempt) business. It is so used not because there is a supply to parents of the physical use (by their daughters) of the sports complex to their children, but because the availability of the complex is part of the package of benefits which is acquired by parents for the fees they pay and which constitutes the exempt supply by the School. The use made by the School, for VAT purposes, of the sports complex is its use in providing that package of services, a single supply. There is, of course, no need to identify a proxy for use when there is only an exempt supply since questions of allocation under reg 101(2)(d) do not then arise. Nonetheless, one can see that the ‘use’ referred in reg 101 (as elsewhere) is not physical use but some special VAT use. It is, I think, the same as what Miss Simor terms ‘economic use’. [77] On the facts of the present case, it seems to me that the overwhelming economic use of the sports complex by the School is in relation to the provision of educational services. In that context, I agree with Miss Simor that the source of funds and the purposes of constructing the sports complex are relevant considerations. To regard those factors as relevant is not, in my judgment, to fall into the error, as Mr. Thomas would say it is, of categorising the nature of a supply by reference to the purpose or motive in making it. There is no doubt that in the present case, the supplies are distinct and readily identifiable, that is to say the taxable supply of the licence to [the company] and the exempt supply of education. Nor, in my judgment, is there any question, in taking those factors into account of treating a taxable supply as an exempt supply or vice versa. The question is what “use” is being made of the inputs in producing the outputs. It seems to me that the purpose of the School, objectively ascertained, in constructing the sports complex is a highly relevant factor in attributing cost components between the relevant outputs and is an entirely different issue from identifying the nature of the output by reference to purpose or motive (which is inadmissible), the issue addressed by Patten J in Customs and Excise Comrs v Yarburgh Children’s Trust [2002] STC 207.’ (Emphasis added). [68] In Invstrand BV v Staatssecretaris van Financien (Case C-435/05) [2008] STC 518, [2007] ECR I-1315, the input tax in question was VAT on the cost of advisory services paid by Investrand in relation to arbitration proceedings to establish the amount of a claim that formed part of its assets, but which arose before Investrand became liable to VAT. The CJEU held that Investrand did not have the right to deduct the input tax saying this: ’23. According to settled case law, the existence of a direct and immediate ink between a particular input transaction and a particular output transaction giving rise to entitlement to deduct is, in principle, necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement (see Midland Bank, para 24, Abbey National, para 26, and I/S Fini H v Skatteministeriet (Case C-32/03) [2005] STC 903, [2005] ECR I-1599, para 26). The right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring them was a component of the cost of the output transactions that gave rise to the right to deduct (see Midland Bank, para 30; Abbey National, para 28; and Cibo Participations SA v Directeur regional des impost du Nord-Pas-de-Calais (Case C-16/00) [2002] STC 460, [2001] ECR I-6663, para 31). 24. It is however also accepted that a taxable person has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, where the costs of the services in question are part of his general costs and are, as such, components of the price of the goods or services which he supplies. Such costs do have a direct and immediate link with the taxable person’s economic activity as a whole (see, inter alia, Midland Bank, paras 23 and 31, and Kretztechnik, para 36).’ [69] This seems to have been a clear reiteration of the principles previously espoused in the cases we have cited above without any significant elaboration. [70] In Mayflower Theatre Trust Ltd v Revenue and Customs Comrs [2007 STC 880, the Court of Appeal looked again at the principles of the CJEU cases. Carnwath LJ (with whom Chadwick and Auld LJJ agreed as to the result) adopted counsel’s summary of the main principles to be derived from the cases at para [9] of his judgment as follows:
`60. It follows that whether there is a right to deduct is determined by the nature of the output transactions to which the input transactions are assigned. Accordingly, there is a right to deduct when the input transaction subject to VAT has a direct and immediate link with one or more output transactions giving rise to the right to deduct. If that is not the case, it is necessary to examine whether the costs incurred to acquire the input goods or services are part of the general costs linked to the taxable person's overall economic activity. In either case, whether there is a direct and immediate link will depend on whether the cost of the input services is incorporated either in the cost of particular output transactions or in the cost of goods or services supplied by the taxable person as part of his economic activities ... 62. ... In order to establish whether there is such a direct and immediate link, it is necessary to ascertain whether the costs incurred are likely to be incorporated in the prices of the shares [in its subsidiary--an exempt supply] which SKF intends to sell or whether they are only among the cost components of SKF’s products [taxable supplies].' (Emphasis added.) [72] In London Clubs Management Ltd v Revenue and Customs Comrs [2012] STC 388, the Court of Appeal had another opportunity to consider the principles applicable where a taxpayer made both taxable and exempt supplies. The taxpayer casino sought to apportion its input tax according to a PESM that was based on the relative use of the floor space for taxable (restaurants and bars, for example) versus exempt (gambling) purposes. The catering services were hugely loss making. HMRC argued that apportionment based on a turnover method was more fair and reasonable. The Court of Appeal ultimately found in favour of the taxpayer, on the basis of a critical finding of fact made by the First-tier Tribunal to the effect that, although the catering business was not currently profitable, it was a business in its own right and not merely ancillary to the gaming business (see para [69] in the judgment of Etherton LJ, with whom Pitchford and Ward LJJ agreed). [73] At para [33], Etherton LJ made clear that the need for a process of attribution only arose when an item is a cost component of both taxable and exempt supplies, so that if the standard method does not result in a fair and reasonable attribution, the search is for a more fair and reasonable method. [74] Etherton LJ continued: `[34] A fair and reasonable attribution to a taxable supply must, for the purposes of art 17(2) and (5) of the Sixth Directive and reg 101(2)(d) of the Regulations, reflect the use of a relevant asset in making that supply. In assessing that use, and its extent, consideration is not limited to physical use. The assessment must be of the real economic use of the asset, that is to say having regard to economic reality, in the light of the observable terms and features of the taxpayer's business.' [75] Etherton LJ then endorsed the passages in Warren J's judgment in St Helen's School Northwood, which we have set out above, and cited the CJEU in Revenue and Customs Comrs v Loyalty Management UK Ltd, Baxi Group Ltd v Revenue and Customs Comrs Qoined cases C-53/09 and C-55/09) [2010] STC 2651, [2010] ECR 1-9187, where it had said that `[i]t must be recalled that consideration of economic realities is a fundamental criterion for the application of the common system of VAT'. He continued as follows: “[41] That case [St Helen's School Northwood] and the reasoning of the tribunal, with which I agree, is illustrative of three points of principle. First, it shows the importance in these cases of close attention to the facts in order to understand the economic or commercial reality underlying the use of the relevant VAT inputs. Secondly, identification of the source or potential source of profit in a business may be an important feature of a business throwing light on whether or not the standard method or a PESM is a more fair, reasonable and accurate method of attribution. It all depends on the facts of each case: cf Banbury Visionplus Ltd v Revenue and Customs Comrs [2006] EWHC 1024 (Ch) at [68], [2006] STC 1568 at [68]. Thirdly, depending again on the precise factual situation under consideration, the approach of the tribunal in Aspinall's Club (see para 49) may well be appropriate in a case where the taxable supplies are not, in themselves, a source of profit:
[77] The FTT’s decision in Aspinall’s Club Ltd v Revenue and Customs Comrs (2002 VAT Decision 17797 arose from similar factual circumstances to London Clubs Management ltd. The taxpayer ran a casino with catering facilities and the dispute concerned a floor space PESM. The tribunal decided that the catering facilities were so heavily funded by the exempt and profitable gaming activities that a PESM based on floor use was not fair and reasonable. The distinguishing factor between the two cases was the finding of fact in London Clubs Management Ltd that the catering business was a business in its own right and was carried on independently of the gaming activities. [78] In TETS haskovo AD v Direktor na Direktsia ‘Obzhalvane I upravlenie na izpalnenieto’ - Varna pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite (Case C-234/11) [2013] STC 243 is the CJEU’s most recent decision on this issue. It reiterated the position as follows: ’32. Moreover, the court has consistently held that for there to be the direct and immediate link required by the court, the costs incurred in acquiring the input transactions must be part of the cost components of the taxable output transactions, that is to say they must be incorporated into their price. The court has also made it clear that this also covers the input transactions attributable to the taxable person’s general overheads. In the case of such input transactions the required link exists not with certain output transactions but rather with the taxable person’s economic activity as a whole, that is to say all of his output transactions.’” End of extract from Volkswagen Financial Services UK Ltd v Revenue & Customs Commissioners [2012] UKUT 394 (TCC) 37. I accept use as the appropriate method of determination in a situation where dual use has to be considered, but I do not accept that in determining use, turnover cannot be considered. Many of these cases are fact specific. It may well be in many cases use can be determined without any reference to turnover, but in a case where dual use arises and the Revenue Commissioners have to apportion same I do not see any reason why turnover should be completely disregarded? I cannot see how turnover is never relevant in determining use or that the Sixth Directive and the Irish legislation, binds the Respondent to such an extent that in considering use it cannot consider turnover. If the Respondent were to consider turnover exclusively to the exclusion of use then that would be impermissible. The Appeal Commissioner in having due regard to turnover in seeking to produce a result which had due regard to the range of the Appellant’s supplies acted correctly. 38. In respect of the guide published by the Respondent, I do not consider the submissions by the appellant on the extracts have any bearing on the judgment of this Court. 39. The Court approves of the dicta in South Primary Housing 2003 AER 2310 at Page 37 when the Court of Appeal stated:-
41. There is no conflict between a wide interpretation of use and the finding by the Appeal Commissioner that the advertising was not a dual use within the meaning of the legislation. 42. I have come to the conclusion that the Appeal Commissioner did not misdirect himself in applying the legislation or the Case Law. He was correct to assert that for deductibility a link must be established between the inputs and taxable supply in question. 43. While certainly from the submission of the Appellant in this Court it was open to the Appeal Commissioner on the facts to establish such a connection he chose not to do so, and held that the inputs for either or both purposes were not dual inputs for the purposes of s. 12(4)(a) of the VTA. 44. The conclusions from the primary facts are not such that no reasonable Commissioner could draw them, so as he did not misdirect himself in law and made conclusions on the facts which were open to him, it is not open to this Court even though the arguments as to an alternative approach were persuasive, to substitute the Appeal Commissioner’s findings from primary facts, for conclusions drawn by this Court. 45. I must therefore answer all three questions in the affirmative. |
