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FIRST DIVISION, INNER HOUSE, COURT OF SESSION
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Lord President
Lord Nimmo Smith
Lord Brodie
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[2007] CSIH 58
XA93/06
OPINION OF THE COURT
delivered by THE LORD PRESIDENT
in
APPEAL
under section 11(7) of the
Tribunals and Inquiries Act 1992
by
DCM (OPTICAL HOLDINGS)
LIMITED
Appellant;
against
COMMISSIONERS OF HER
MAJESTY'S REVENUE AND CUSTOMS
Respondents:
_______
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Act: Tyre, Q.C., Small; Harper Macleod (Appellant)
Alt: Artis; Shepherd & Wedderburn
(Respondents)
6 July 2007
Introduction
[1] The appellant
company is a retail optician. In the
course of its business it makes certain supplies which, for the purposes of the
Value Added Tax Act 1994, are taxable supplies (primarily, the sale of lenses and
frames or, as appropriate, contact lenses) and others which are exempt supplies
(professional services in eye testing and prescribing and dispensing lenses).
The statutory
provisions
[2] By virtue of
sections 25-26 of the Act the appellant is entitled to credit for input tax
attributable to taxable supplies made in the course or furtherance of its
business. Section 26(3) provides that
the Commissioners [now the Commissioners for Her Majesty's Revenue and Customs]
"shall make regulations for securing a fair and reasonable attribution of input
tax to supplies ... ".
The Value Added Tax Regulations 1995 provide by regulation 101:
"(1) Subject
to regulation 102 ... , 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 -
(a)
...
(b) there shall be attributed to taxable supplies the whole of
the input tax
on such of those goods or services as
are used or to be used by him exclusively in making taxable supplies,
(c) no part of the input tax on such of those goods or services
as are used
or to be used by him exclusively in
making exempt supplies, or in carrying on any activity other than the making of
taxable supplies, shall be attributed to taxable supplies, and
(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."
The attribution prescribed by regulation 101(2)(d) is commonly described as "the standard method".
[3] Regulation
102 provides:
"(1)
... the Commissioners may approve or direct the use by a taxable person of a
method other than that specified in regulation 101 ... ".
Any method so approved or directed is commonly referred to as
a "special method".
The correspondence
[4] The
appellant, through its professional advisers, applied to the respondents for
approval of a special method. The method
proposed was based on an analysis of the use made of floor space in the appellant's
premises, a zoning technique being employed.
By letter dated 6 December 2001 the advisers, having referred to
previous correspondence and concerns earlier expressed by the respondents,
said:
" ... We have therefore specifically
addressed those areas of concern and have commented in more detail on these
issues in Appendix A.
Appendix A sets out in detail the
methodology we will employ in analysing floor space in the retail outlets,
including the proposed split between taxable, exempt, and non-attributable
areas. Further we have also set out in
summary, how the overall split will be calculated.
By way of illustration, we have
enclosed an example of a typical store floor plan at Appendix B. We have attached with the plan at Appendix C
a sample calculation to support the floor plan.
We trust this will help illustrate the principles of the method.
We trust the enclosed appendices will
meet with the approval of VAT policy.
This is a method which we understand has been approved by VAT policy as
fair and reasonable for other similar businesses.
Once we have your approval in
principle for the method, we will conclude our work on the detailed plans and
overall calculation of the method."
In Appendix A the writer inter
alia set out in tabulated form particular floor areas to which were
ascribed the descriptions "Taxable", "Exempt" or "Non-attributable" as thought
appropriate, together with a footnote describing the use made of the front part
of the typical store and how it was proposed that areas within that part to
which descriptions had not already been ascribed would be treated for the
purposes of the method. A formula was
then set out for calculating the proportion of the non-attributable areas which
should be treated as used for taxable supplies and a further calculation of the
fraction of general overhead expenditure (head office expenses etc.) which
would qualify for recovery of input tax.
Appendix B comprised a floor plan and Appendix C contained a worked
example with figures. This example
brought out a recovery rate of 50%. (We
were advised that the use of the standard method in respect of the appellant's
business produces a recovery rate of 25-26%).
[5] Further
correspondence appears to have passed.
Ultimately, a decision on the application was made on behalf of the
Commissioners by letter dated 11 November 2002.
It was in the following terms:
" ...
I am aware that your client's request
to use a Special Partial Exemption method, as set out in your letter of 6
December 2001,
was referred to our VAT Policy Division for their consideration. I regret the amount of time it has taken for
you to receive a response to this submission, but I am now able to confirm that
they do not find the proposed method acceptable and that permission to use it
is therefore refused.
This is because they consider that
the floor space has not been categorised accurately, in that zone A and most of
zone B have been classed as taxable when in fact they should be both taxable
and exempt. The
customers to whom mixed supplies are made walk through these areas to get to
other areas of the premises such as exempt consulting rooms. In the retail premises there are also mirrors
placed by the frame bars that can be used by members of staff to offer some
assistance in fitting spectacle frames.
Overall, any agreed method should be
seen to be fair and reasonable and our VAT policy division consider that this
method does not meet the criteria. The
method does not cater for any changes in use of the floor area and it also
places an unreasonable burden on the Commissioners of Customs and Excise in
verifying it.
At stage 2 of your calculations it is
not clear what the distinction is between 'directly attributable taxable input
tax' and 'taxable input tax from the shop'.
In any event in my colleagues' view, this fraction does not reflect the
use of general overheads in making taxable supplies and would appear to inflate
it. For example staff use heat and light
and their costs are principally cost components of exempt supplies. This would also apply to other inputs.
Finally my colleagues consider that
the Standard Method gets it right, as it assumes proportionality between inputs
and outputs.
... "
The initial appeal
[6] The appellant
appealed under section 83 of the Act against that decision to the VAT and
Duties Tribunal. That section provides
that -
" ... an appeal shall lie to a tribunal
with respect to any of the following matters -
...
(e) the proportion of input tax allowable under section 26."
By its decision dated 18 April 2006 the Tribunal refused the appeal.
[7] A principal
issue before the Tribunal was the nature of that body's jurisdiction. Counsel for the respondents had submitted,
under reference to John Dee Ltd v Customs & Excise Commissioners
[1995] STC 941 and the tribunal decision Banbury
Visionplus Limited (LON - 19266) and related cases, that the Tribunal's
jurisdiction was limited to a power to quash the respondents' decision if it
was unreasonable. Counsel for the
appellant had submitted that the Tribunal's jurisdiction was neither limited
nor restricted; it
could, it was argued, substitute its own decision as appropriate "and in any
event set out guidelines". The Tribunal
preferred the respondents' contention.
It said:
"We consider that [our jurisdiction]
is limited in the sense that we should consider whether the Respondents'
refusal proceeds upon a reasonable assessment and is not undermined by any
error of fact or law. However, we cannot
substitute our own discretion and we cannot prescribe an acceptable alternative
special method or set out guidelines. We
prefer the arguments of [counsel for the respondents] to those of [counsel for
the appellants] on this aspect of the Appeal.
As we read the statutory provisions the criterion of a 'fair and
reasonable attribution of input tax' is prescribed in section 26(3) VATA. The Regulations relative thereto (nos 101 and
102) set out a formula to that end and, further, permit the Commissioners to
approve or direct another (ie special) method. There is no reference there or elsewhere to
the Tribunal having a comparable or parallel discretion. Section 83(e) introduces the Tribunal into
the process by granting a taxpayer, aggrieved by the proportion of input tax
allowable under Section 26, a right of appeal to it. That in our view enables us to review the Respondents'
refusal in a Wednesbury context (Associated Provincial Picture Houses Ltd v
Wednesbury Corporation [1948] 1 KB 223) as being justified or not, but no further.
On the basis of the authorities cited
it seems that we cannot take into account the 'fairness' or otherwise of the
standard method in reaching our decision.
In any event the evidence before us does not provide a comparison of the
full financial consequences of applying the standard and proposed methods. As [counsel for the respondents] reminded us,
we heard no such evidence from the Appellant's accountants or financial
director on this aspect.
Accordingly we accept and follow the
reasoning in Banbury Visionplus Ltd
and related cases at paras. 94-100 and we note also the observations of Neill
LJ in relation to a somewhat comparable provision in John Dee Ltd v C & E [1995] STC 941 at p. 952. These indicate that
if, say, the proper assessment of material omitted from the decision-making
process inevitably would not have altered the decision, we could still
uphold the decision as justified."
[8] The Tribunal
continued - "We now have to consider the basis for the Respondents'
refusal." Having referred to the
relative correspondence it said - "In our view the Respondents' refusal was
reasonable and, therefore, we refuse this Appeal." It then addressed the grounds of refusal,
making some observations of its own on the proposed method, and concluded:
" ... notwithstanding our reservations
about certain aspects of the Respondents' refusal for the reasons indicated
earlier we consider that we cannot overrule it."
[9] At the time
when the Tribunal made its decision different views had been expressed by
different tribunals as to the scope of their jurisdiction in appeals of this
kind - some holding that the jurisdiction was "full" and others that it was
"limited". The decisions on either side
of that issue were noted by Etherton J. in Banbury
Visionplus Ltd v Revenue and Customs
Commissioners [2006] STC 1568 at para. [39]. In that case (which was an appeal to
the High Court from the Banbury Visionplus
Ltd tribunal decision relied on by the Tribunal) Etherton J., while
dismissing the appeals, held that the Tribunal's jurisdiction was "full". That view was followed by Warren J. in St. Helen's School v Revenue and Customs Commissioners [2007] STC 633 (see para. [26]). Before us it
was accepted by both parties that the Tribunal's jurisdiction was indeed "full"
and that it had been in error in adopting the "limited" approach.
Submissions for the
appellant
[10] Mr. Tyre for
the appellant submitted that the appeal should be allowed, the decision of the
Tribunal quashed and the case remitted to it with certain directions, including
a direction to reconsider the appeal to it on the basis that the Tribunal's
jurisdiction was full in the sense described in Banbury Visionplus Ltd and St.
Helen's School. In terms of the
Sixth Directive (77/388/EEC) the focus of the right to deduct was on the use
made for the purposes of transactions (Article 17.2 and .5). In Article 19 turnover was taken as a proxy
for use; Article
17.5(c) envisaged a use-based
alternative to turnover. In
implement of that Directive the 1994 Act provided for the deduction of input
tax, a fair and reasonable attribution of that tax to supplies being required
to be secured by regulations (section 25 and section 26, especially section
26(3)). Regulations had been made (Value
Added Tax Regulations 1995). Regulation
101 provided for the "standard method" but was subject to regulation 102, which
empowered the Commissioners to approve or direct a "special method". Though the power to approve or direct a
special method was vested in the Commissioners, it was for the Tribunal itself
to determine whether in the factual circumstances found by it that power had
been validly exercised by Commissioners' insistence on the standard method
being used in this case. The Tribunal
had failed to address that issue. It was
impossible to tell what conclusion the Tribunal would have reached if it had
addressed it. It had considered the
respondents' refusal to approve the proposed special method "reasonable and
justifiable" on a single ground, namely, shortcomings in the suggested
categorisation of space, but had made no comment on the specific detailed bases
upon which the respondents in their letter of refusal had rejected that
categorisation. The Tribunal had
rejected all the other grounds on which refusal in that
letter was based. It would have
been open to the Tribunal to find that a floor-based basis of attribution would
be fair and reasonable, yet to find that certain of the detailed features of
the appellant's proposed categorisation were factually inaccurate; and to allow the
appeal in the event of adjustments to meet these criticisms being made. Six possible criticisms of the appellant's
categorisation had been canvassed. The
first two (the "walk through" point and the "mirror" point) had not been dealt
with by the Tribunal. The Tribunal had
erred in law in failing to deal with them.
Moreover, the first of these was unsound in law, there being no relevant
activity by the appellant involved in its customers walking through the retail
areas to obtain exempt services in the inner parts of the premises. The second of these criticisms was
inconsistent with the Tribunal's findings in fact. The Tribunal had made four further
criticisms, none of which had featured in the respondents' letter of
refusal. The first of these was
technically correct;
there had in the table been an erroneous description ("Non-attributable")
in respect of the dispensing areas but that error had not been carried through
to the calculation in Appendix C. The
second criticism, in relation to the categorisation of retail areas, was
inconsistent with the Tribunal's findings in fact. The third criticism (the categorisation of
the shop windows) was probably correct but could have been met by an
appropriate adjustment. The last criticism
was again inconsistent with the Tribunal's findings in fact. In addition to directing the Tribunal on the
remit to reconsider the appeal upon a correct understanding of its
jurisdiction, the court should give to it a direction -
"to decide
whether the method proposed by the appellants and refused by the respondents,
subject to any adjustments to the detail of floor space allocation which the
Tribunal may consider appropriate on facts found by it, secures a fair and
reasonable attribution of input tax."
It should also give directions to it in respect of the other
more detailed errors in law which, it was submitted, it had committed.
Submissions for the
respondents
[11] Mr. Artis for
the respondents submitted that the Tribunal had no jurisdiction to approve a
special method "in principle". Its
function, which admittedly included a "full" jurisdiction, was to address the
special method proposed by the taxpayer in all its particulars and to reach a
determination on that special method and on no other. Regulation 101 enjoined the attribution to be
used, subject only to approval or direction of a special method under regulation
102. The standard method was the
fair and reasonable attribution unless a special method was approved or
directed. The predominant use of the
premises was a "mixed" use (for taxable supplies and for exempt supplies). In these circumstances the Commissioners had
justifiably come to the view that the standard method (which proceeded on an
attribution based on turnover) was appropriate.
The circumstance that other opticians may have had special methods based
on floor areas approved did not mean that such a method was appropriate here; it depended on the
actual use made by the particular trader.
If a special method based on floor area was to be approved, it required
to be proposed in sufficient detail. An ambiguous
method could not be one that was fair and reasonable. Reference was made to Kwikfit (GB) Limited v Commissioners
of Customs and Excise 1998 SC 139.
Although the Tribunal had misconceived its jurisdiction, the appeal
should nonetheless be refused since the result would inevitably have been the
same. The Tribunal's findings of fact
were to the effect that the predominance of floor use was in making "mixed"
supplies. The Tribunal, although
addressing the wrong test, had in substance answered in the negative the true
question, namely, whether the appellant's proposed method would result in a
fair and reasonable attribution. It had
expressed its own independent view as to the miscategorisation in the
appellant's proposed method. The
overriding test was whether the expenditure in respect of which the right to
deduct input tax was claimed was part of the costs of the taxable output
transactions which utilised the goods and services acquired (Midland Bank plc v Customs and Excise Commissioners [2000] STC 501, especially at
para. 30). As to the Tribunal's detailed
criticisms of the appellant's proposed method, it had, in relation to the
matter of frame stands, been entitled, by way of shorthand, to explain its
decision by a cross-reference to the parallel situation in the tribunal case of
Banbury Visionplus. Looking at the substance of what the Tribunal
had done, the answer to the true question was on its findings inevitable. Reference was made to Dollar Land v Customs
and Excise Commissioners [1995] STC 414, per Judge J. at page 423. In the event of the appeal being allowed and
the case remitted, no direction should be given to the Tribunal to decide on
the appellant's proposed method subject to adjustments. The care and management of Value Added Tax
was vested solely in the Commissioners (Value Added Tax Act 1994, Schedule 11
para. 1(1)). For the Tribunal to adjust
a proposed method would be to impinge on the responsibilities of the
Commissioners. A solution should not be
imposed on either party by the Tribunal.
Nor should any of the other particular directions invited by the
appellant be given.
Discussion
[12] As Etherton J.
noted in Banbury Visionplus Ltd v Revenue and Customs Commissioners at
para. [44] the right of appeal from the Commissioners'
decision conferred by section 83(e) of the 1994 Act is, according to the terms
of the statute, without limitation. A
perfectly general appellate jurisdiction is conferred. The objective of section 26(3) of the 1994
Act is to secure a fair and reasonable attribution of input tax to taxable
supplies. Whether the decision of the
Commissioners in fact secures that objective is accordingly an issue for the
Tribunal itself to determine on the basis of the evidence led before it and its
evaluation of that evidence. Due regard
will be had to the decision of the Commissioners and to their reasons for that
decision but the scope of the appeal is not restricted to review on Wednesbury principles. For the reasons given by
Etherton J. at paras. [46] - [48], the case of John Dee Ltd v Customs and
Excise Commissioners (upon which tribunal decisions to an opposite effect
appear to have been based) is distinguishable.
In these circumstances we are satisfied that the concession made by the
respondents in this appeal is well-founded and we shall give effect to it.
[13] Mr. Artis
urged us to hold that, notwithstanding the error in law made by the Tribunal in
its approach to its jurisdiction, its decision should nonetheless stand. He did so on the
basis that, had the Tribunal approached its jurisdiction on the correct basis,
its decision would "inevitably have been the same". In examining this submission it is necessary
to consider how the Tribunal approached the task before it. Having expressed the view that the respondents'
refusal was reasonable and stated that it refused the appeal, the Tribunal
continued:
"We consider that the refusal was
reasonable and justifiable on the basis of their criticisms of the Appellant's
categorisation of floor space as 'taxable' or 'exempt' or 'non-attributable' in
Appendix 'A' to Document 23 [the appellant's letter of 6 December 2001]. On the other hand we do not consider that the
other reasons set out in the refusal [the respondents' letter of 11
November 2002]
have substance. However, given the
significance of the shortcomings of the suggested categorisation of floor
space, that in itself in our view justifies the Respondents' rejection of the
proposed partial exemption special method.
Whatever merit there may be in an approach based on the zoning of floor
area, the form proposed in [the appellant's letter] is in our view undermined
in that its categorisations are incorrect.
The dispensing areas should be described as 'exempt', not as
'non-attributable'. The retail area has
been classified as 'taxable' (by implication of the footnote no 1 at page
47), while it should be 'mixed'. The
retail sale of both goods and services takes place there. Not only are spectacles provided but
professional advice is given there too.
The shop windows are not fully 'taxable': the 'exempt' services provided are promoted
there too. Finally, the frame-stands are
not wholly 'taxable': on the basis of Banbury Visionplus these are 'mixed'."
The Tribunal then addressed the various further criticisms of
the proposed method made by the respondents in their refusal letter and held
that each of them was unjustified. It
concluded its decision, as earlier narrated, with the words:
"However, notwithstanding our
reservations about certain aspects of the Respondents' refusal for the reasons
indicated earlier we consider that we cannot overrule it."
[14] It is clear
that the Tribunal began and ended its discussion of the issue before it upon
the basis that it was concerned to explain why, in its view, the respondents'
refusal was "reasonable and justifiable" and thus why it could not "overrule
it" - that is, the discussion was on its face directed to a Wednesbury test. On the other hand, the Tribunal was
sympathetic, as subsequently appears from its discussion of the issue of costs,
with the appellant's stance in seeking a "floor-based" apportionment of
inputs. Curiously, the Tribunal, while
accepting that the respondents' refusal to approve the appellant's proposed
method was reasonable and justifiable on the basis of "their criticisms" of the
appellant's categorisation of floor space, does not refer to the only two
particular criticisms of that categorisation, namely, the "walk through" point
and the "mirrors" point, identified in the respondents' letter of refusal. It then goes on to identify and discuss four points
of criticism of the appellant's proposed method which had found no place in the
respondents' refusal letter. These, or
at least some of them, appear from the recorded submissions of the respondents'
counsel to have been raised before the Tribunal . After that excursion into
matters not raised in the respondents' refusal letter the Tribunal returns to
that letter and rejects the balance of the criticisms advanced there.
[15] While the
excursion, if viewed in isolation, might be capable of being construed as the
Tribunal's own evaluation of whether the proposed method secured a fair and
reasonable attribution of input tax to taxable supplies, it is impossible to be
confident that that is so. The passage
occurs in the midst of a discussion of whether the refusal letter was capable
of being set aside on Wednesbury grounds; it does not proceed
as a distinct alternative ground for refusing the appeal. In any event, it cannot be said that the
criticisms which the Tribunal itself made of the proposed method would
inevitably have resulted in that method being rejected. The first of the four criticisms, while
formally justified, fails to recognise that in the substance of the illustrated
calculation the correct attribution was in fact made. It is at least doubtful whether the second
and fourth criticisms are supported by the Tribunal's findings in fact. The third criticism was conceded by Mr. Tyre
to be probably justified;
but it is doubtful whether that criticism would have itself
justified the rejection, rather than acceptance subject to qualification, of
the appellant's proposed method. In
these circumstances we cannot be satisfied that the Tribunal itself addressed
the question whether the proposed method secured a fair and reasonable
attribution or, if it did so address it, whether its conclusion (that the
shortcomings of the suggested categorisation of floor space were so significant
as to justify total rejection of the proposed method) was sound in law.
[16] In the course
of the discussion questions were raised as to procedure before a tribunal on
appeal. Mr. Artis submitted that it was
not open to a tribunal to make a decision "in principle"; its jurisdiction was to assess the
method as proposed and (subject to de
minimis qualifications) no other method.
Mr. Tyre submitted that it was open to a tribunal, if satisfied that the
proposed method was sound in principle, to approve it subject to adjustments as
to matters of fact (for example, the correction of specific area
attributions). Both counsel recognised
that it was not open to a tribunal to put forward its own special method (St. Helen's School, per Warren J. at
para. [27]), that is, it had no power itself to devise a special method
and impose it on the parties. That,
however, does not mean that the only alternatives open to a tribunal are to
accept a proposed method in all its particulars or to reject it outright
(subject only to de minimis
matters). A method might be proposed
with factual particulars (for example, attributions of particular
classifications to particular areas) which might, without departure from the
proposed method as such, be acceptable to the tribunal only subject to
modification, for example, by reclassification of certain areas. These required modifications might become
evident in the course of the hearing and parties be heard on them; alternatively, the tribunal after
deliberation might return with an
indication to parties that it was minded to approve the method but only subject
to identified modifications. Provided that the appellant was prepared, even
subject to reservation of any right of further appeal, to accept these
modifications, a tribunal would be entitled to approve the method so
modified. We prefer this indication of
the tribunal's powers to the direction as to procedure which Mr. Tyre invited
us to give.
[17] Mr. Tyre also
invited us to give a direction on the "walk through" point, contending that the
Tribunal had erred in law by considering what use, by way of passage, customers
coming for exempt services made of the retail areas. Mr. Artis submitted that what was
critical was that the trader allowed or encouraged such customers to make use
of such access. We do not intend to give
a ruling on this point, which was not addressed by the Tribunal. While prima
facie there is an attraction to Mr. Artis's submission, much may turn on
the extent to which such subsidiary use is made of that area. Mr. Tyre also invited us to rule in the
appellant's favour on the first, second and fourth points made by the Tribunal
in its excursion. However, as the case
is to be returned to the Tribunal with the opportunity for parties to address
it further (and possibly lead further evidence) on these matters, it is
undesirable that we give a ruling at this stage.
Disposal
[18] In all the
circumstances we shall allow the appeal and remit the case to the Tribunal (as
originally constituted) with a direction to reconsider the appeal on the basis
that its jurisdiction is full in the sense described in Banbury Visionplus (in the High Court) and St. Helen's School and to proceed as accords, due regard being had
to the terms of this Opinion.
