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Cite as: [2007] ScotCS CSIH_15, [2007] CSIH 15

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SECOND DIVISION, INNER HOUSE, COURT OF SESSION

Lord Justice Clerk

Lord Osborne

Lady Cosgrove

[2007] CSIH 15

X30/00

OPINION OF THE COURT

delivered by THE LORD JUSTICE CLERK

in the appeal by

ROYAL BANK OF SCOTLAND GROUP plc

Appellant;

against

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS

Respondents:

______

For appellant: Tyre QC; MacRoberts

For respondents: Currie QC; Shepherd & Wedderburn WS

21 February 2007

Introduction

[1] The appellant has appealed to the VAT and Duties Tribunal on a question as to the appropriate recovery method on input tax on its general overheads and costs in the various sectors of its business. This is an appeal against a decision of the Tribunal dated 20 January 2006 on a preliminary issue that has arisen in those proceedings. It relates to a special method of calculation of recoverable input tax.

[2 ] This appeal raises two questions; namely (1) whether, in such a method, the appellant is entitled to round up the deductible proportions of VAT calculated for each of the sectors of its business "to a figure not exceeding the next unit"; and (2) whether, in rounding up to a figure not exceeding the next unit, the appellant is entitled to round up to the next whole number.

[3 ] The Tribunal found against the appellant on the first question and, by way of obiter dictum, favoured the appellant's argument on the second.

[4 ] The questions turn on the construction of articles 17 and 19 of the EC Sixth VAT Directive, which has been implemented in domestic law in Part XIV of the Value Added Tax Regulations 1995 (SI No 2518, as amended) (the Regulations).

The Sixth VAT Directive

[5 ] Title XI of the Directive sets out the rules governing the right of a taxable person to deduct from the tax that he is liable to pay the tax due or paid by him in respect of goods or services supplied to or to be supplied to him by another taxable person.

[6 ] Article 17 provides inter alia as follows:

"1 The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2 In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in

respect of goods of services supplied or to be supplied to him by another taxable person;

(b) value added tax due or paid in respect of imported goods within the

territory of the country;

(d) value added tax due pursuant to Article 28a(1)(a).

3 Member States shall also grant every taxable person the right to the deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods and services are used for the purposes of

(a) transactions relating to the economic activities referred to in Article

4(2), carried out in another country, which would be deductible if they had been performed within the territory of the country;

(b) transactions which are exempt pursuant to Article 14(1)(g) and (i), 15,

16(1)(B), (C), (D) or (E) or (2) or 28c(A) and (C);

to (5), when the customer is established outside the Community or when those transactions are directly linked with goods to be exported to a country outside the Community ...

5 As regards goods and services to be used by a 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, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This 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;

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 sub-paragraph, in respect of all goods and services used for all transactions referred to therein;

(e) provide that where the value added tax which is not deductible by the

taxable person is insignificant it shall be treated as nil."

[7 ] Article 19 governs the calculation of the deductible proportion. It provides inter alia as follows:

"1 The proportion deductible under the first sub-paragraph of Article 17(5) shall be made up of a fraction having:

―as numerator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3)

―as denominator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible. The Member States may also include in the denominator the amount of subsidies, other than those specified in Article 11A(1)(a).

The proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit.

2 By way of derogation from the provisions of paragraph 1, there shall be excluded from the calculation of the deductible proportion, amounts of turnover attributable to the supplies of capital goods used by the taxable person for the purposes of his business. Amounts of turnover attributable to transactions specified in Article 13B(d), in so far as these are incidental transactions, and to incidental real estate and financial transactions shall also be excluded. Where Member States exercise the option provided under Article 20(5) not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the deductible proportion."

[8 ] Article 17(2) entitles the taxable person to deduct input tax in so far as the goods and services supplied to him are "used" for the purposes of his taxable transactions. The proportion of the VAT that is deductible under the first sub-paragraph of article 17(5) is calculated under article 19(1) as a fraction of which both the numerator and denominator relate to turnover. The calculation is therefore value-based, reflecting, it seems, the theory that value is a reasonable proxy for use (cf National Provident Institution v CCE, Tribunal Decision No. 18944, 18 February 2005, at paras 87-88). The method of calculation prescribed in article 19(1) is the method that normally applies. In the United Kingdom it is known as the standard method.

[9 ] The other methods referred to in the third sub-paragraph of article 17(5) are described as special methods.

The Regulations

[10 ] Regulation 101, so far as relevant to this appeal, provides as follows.

"101-(1) Subject to regulation 102 and 103B, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.

(2) In respect of each prescribed accounting period- ...

(d) 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 period ...

(4) The ratio calculated for the purpose of paragraph (2)(d) above shall be expressed as a percentage and, if that percentage is not a whole number, it shall be rounded up as specified in paragraph (5) below.

(5) The percentage shall be rounded up-

(a) where in any prescribed accounting period or longer period which is applied the amount of input tax which is available for attribution under paragraph 2(d) above prior to any such attribution being made does not amount to more than £400,000 per month on average, to the next whole number, and

(b) in any other case, to two decimal places."

These provisions relate to the standard method. In its original form, regulation 101(4) provided for rounding up to the next whole number in all cases. The VAT (Amendment) Regulations 2005 (SI No 762) amended that provision and added the present regulation 101(5). Counsel for the appellant submits that the provision for rounding up to two decimal places is contrary to the standard method of calculation prescribed by the Directive.

[11 ] Regulation 102 deals with special methods of calculation. We need not quote it. It is agreed that it echoes all of the requirements in the Directive relating to such methods, but that it does not provide for rounding up.

The Framework Agreement

[12 ] The respondents and the Scottish Banks entered into a Framework Agreement dated 21 May 2002 which provides that the Banks shall use a special method under which the various sectors of their businesses may have their own procedures for the calculation of recoverable input tax (cf art 17(5), third sub-para (a) and (b)). The Agreement does not specify the details of the special method that has been agreed. It provides, in general, for a value-based calculation of input tax in certain circumstances, but also for any other method of calculation that may be agreed on, including attribution based on head counts, units of time and floor area (Framework Agreement, pp 6-7). It also provides that where any part of the method requires a recovery of input tax based on a calculated percentage, that percentage will be rounded up to two decimal places; and that, unless the parties shall otherwise specify, regulation 101(4) - which at the time of the Agreement provided for rounding up to the next whole number - shall not apply (p 8). The appellant challenges that provision on the view that rounding up to two decimal places is contrary to the Directive.

The decision of the Tribunal

[13 ] The essence of the Tribunal's decision on the first question is as follows:

" .. It appears to [the Tribunal] that article 19(1) specifically deals with a 'standard' method of making the calculation and it is as a result of that standard method being adopted that the rounding provisions were deemed to be appropriate, no doubt as a somewhat rough and ready method of achieving justice in a situation in which precision is difficult to achieve (p 10) ...

... However the sub-paragraphs of article 17 allow member states to implement special methods. No restriction is placed on the special methods, no mention is made of rounding and, since by definition a special method derogates from the prescribed standard method there would appear to be no objection to an agreement allowing for a different form of rounding than that to the next whole unit in respect of the various sectors. If rounding to the nearest whole unit is thought to be advantageous then the standard method requires to be used.

In addition the use of the indefinite article 'a' in paragraphs A and B points to a different proportion from the standard. If 'a' proportion can be determined there is no compulsitor to adopt the appellant's construction that 'the proportion' is the same concept throughout article 17" (p 11).

The Tribunal thought it significant that, in the case of special methods, regulation 102 does not mention rounding up (p 5).

[14 ] On the second question the Tribunal expressed the view obiter that

"It would be difficult to conceive of rounding up to be to a number lower than that with which the calculation started and the Tribunal would have no hesitation in concluding, were it relevant, that the 'unit' referred to must be a whole number since numbers after a decimal point are not a unit in the ordinary use of language. The use of the words 'not exceeding' in some versions, including English, might seem to allow any figure provided it did not surpass the next whole number" (p 6).

The submissions for the parties

The first question

[15 ] Counsel for the appellant submitted that rounding up is not confined to the standard method. The reference in article 17(5)(a) and (b) to the determination of "a proportion" is a reference back to the deductible proportion referred to in the first sub-paragraph of article 17(5). Under the special method of calculation referred to in article 17(5)(a) and (b), there will be a separate deductible proportion for each sector of the business. Each such proportion should be determined under article 19(1) (cf art 17(5), second sub-para) and rounded up as article 19(1) provides. There is no logical reason why that form of rounding up should not apply generally to all calculations of deductible proportions. The Opinion of the Advocate General in BLP Group v CEC ([1995] STC 424, at paras 58-61) to the effect that special methods are outwith the scope of article 19 is too broadly stated. Much of article 19 applies to special methods, some of which are value-based. Special methods are not necessarily more accurate than the standard method.

[16] The revised wording of the new Council VAT Directive of 2006, which supersedes the Sixth Directive with effect from 1 January 2007, supports the appellant's position. Article 173 of this Directive, which replaces the second sub-paragraph of article 17(5) of the Sixth Directive, uses the expression "deductible proportion" and provides that it shall be determined in accordance with articles 174 and 175. Article 174 provides for the calculation of the "deductible proportion" generally, and not, as in the former article 19(1), "the proportion deductible under the first sub-paragraph of article 17(5)." The expression "deductible proportion" is carried into article 175, which includes the provisions of the former article 19(1).

[17 ] Counsel for the respondents contended that because the words relating to rounding up appear only in article 19(1), rounding up is confined to calculations by the standard method that it prescribes. It is significant that article 19(1) provides that the standard method is to be used in the calculation of the proportion deductible "under the first subparagraph of article 17(5)," which does not apply to special methods under the third sub-paragraph. If the appellant's contention were sound, these words would be otiose. Likewise, it would be unnecessary for article 17(5) to provide that, in the special method to which article 17(5)(d) refers, the deduction should be made "in accordance with the rule laid down in the first sub-paragraph." The allowance of the use of special methods recognises that the standard method is rough and ready and that in more complex cases a special method can produce a more accurate result (Terra and Kajus, A Guide to the European VAT Directives, pp 57-58 and the Explanatory Memorandum there referred to). When the parties agreed to use a special method, it was open to them to agree on a more accurate rounding provision. This view is supported by the Opinion of the Advocate General in BLC Group v CEC (supra) that special methods are outwith the scope of article 19 altogether. The revised wording in the 2006 Directive does not assist the argument for the appellant. The "deductible proportion" to which articles 173-175 refer is the value-based fraction that is found in article 19(1). Article 174 in effect defines it to mean the proportion calculated by the standard method.

The second question

[18 ] Counsel for the appellant submitted that the logical interpretation of article 19(1) is that rounding up to a figure not exceeding the next unit means rounding up to the next whole number. Most of the nineteen other language versions of the provision that have been produced are to that effect (cf The Queen v CCE, ex p EMU Tabac (1998) ECR I-1605, at pp I-1644-1645, paras 33-36). The Oxford English Dictionary defines "unit" as a whole number.

[19] Counsel for the respondents submitted that if article 19(1) should be held to apply in this case, there was no obvious reason why a rounding up provision should be interpreted so generously to the taxpayer.

Disposal

[20 ] Counsel for the appellant submitted that the appellant's case on both points was clearly correct. The court should find for the appellant on both points, allow the appeal and remit the case to the Tribunal to proceed as accords. On the other hand, if the court was in any substantial doubt as to the soundness of the appellant's case, it should refer both points to the European Court of Justice (R v International Stock Exchange, ex p Else (1982) Ltd, [1993] QB 534).

[21 ] Counsel for the respondents submitted that the court could confidently conclude that the respondents' case was well founded. The court should refuse the appeal; failing which, it should refer both points.

Conclusions

[22 ] The point raised by counsel for the appellant relating to regulation 101(4) and (5) of the Regulations is a side issue. This is a case about the special method which the parties have agreed to apply. The questions in this appeal depend on the interpretation of the Sixth Directive.

[23 ] In our opinion, this case should be referred to the European Court of Justice. In R v International Stock Exchange, ex p Else (1982) Ltd (supra, at p 545D-F), Sir Thomas Bingham MR, as he then was, described the approach that a national court should take to a question of this kind. In his view, if the facts have been found and the Community law issue is critical to the court's final decision, the appropriate course is ordinarily to refer the issue to the Court of Justice unless the national court can with complete confidence resolve the issue itself. Among the factors that he considered to be relevant to the court's decision on that point, the Master of the Rolls mentioned the need for uniform interpretation throughout the Community and the agreed advantages enjoyed by the Court of Justice in construing Community instruments. He concluded that if the national court has any real doubt, it should ordinarily refer. We agree with that approach.

[24 ] We incline to the view that the respondents' position on the first issue is sound. It is our impression that a value-based calculation made under article 19(1) applies only to the standard method to which the first and second paragraphs of article 17(5) refer. Both sides accept that the value-based standard method is at best a reasonable proxy for what is a use-based entitlement to deduct input tax (cf art 17(1)). The primary reason for having a special method is, we infer, that in certain cases such a method may be capable of achieving a greater degree of accuracy. The details of a special method in a case such as this are a matter for agreement. In our view, if such a method should involve the calculation at any stage of a fraction of the kind prescribed by article 19(1), the resulting proportion may be rounded up in any way that the parties may choose.

[25 ] However, we acknowledge that the solution to the first issue depends critically on the construction of the Directive and is by no means cut and dried. We cannot say that we can resolve it ourselves with the complete confidence to which the Master of the Rolls referred in R v International Stock Exchange, ex p Else (1982) Ltd (supra). It is pre-eminently a Community law issue; and it is an important issue on which, in our view, it is desirable that the Court of Justice should rule.

[26 ] The second question, in our view, is more straightforward. We agree with the submission for the appellant. But the second issue is ancillary to the first and it involves the interpretation of a provision in the Directive on which the other language versions seem not to be uniform. We understood counsel to agree that if there were to be a reference, it should comprehend both questions. We are of the same view.

Disposal

[27 ] We shall pronounce an interlocutor in terms of Rule of Court 65.3(1) directing the parties to draft and adjust a reference to the European Court of Justice in accordance with Form 65.3, and to lodge it with the court within 28 days from the date of our interlocutor. At the conclusion of the hearing counsel agreed on a formulation of the questions that should be asked if we were to refer the case. We are content with that formulation. Subject to any adjustments that we may require to be made under Rule 65.3(2), we shall thereafter make and sign the reference and pronounce the relative interlocutor.