First-tier Tribunal (Tax)

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URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00059.html
Cite as: [2009] UKFTT 91 (TC), [2009] SFTD 200, [2009] STI 2606

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Loughborough University v Revenue & Customs [2009] UKFTT 91 (TC) (06 May 2009)
VAT - EXEMPTION - PARTIAL
Vat exemption partial

[2009] UKFTT 91 (TC)

TC00059

Appeal number MAN/06/0881

VAT – input tax – effect of taxpayer's reasons for a special exemption method override notice – preliminary ruling.

FIRST-TIER TRIBUNAL

TAX

LOUGHBOROUGH UNIVERSITY Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS (VAT) Respondents

TRIBUNAL: Richard Barlow

Sitting in public in Manchester on 11 and 12 February 2009.

Roderick Cordara QC and Emily Wood of counsel instructed by Ellis and Chapman and Associates for the Appellant

James Puzey of counsel instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

The appellant has appealed against an assessment to value added tax and a letter amending a return. Both those decisions affect the input tax recovery claimed by the appellant and the total amount in dispute is approximately £1,000,000.

This decision is a decision about a point of law which the parties have asked the Tribunal to deal with as a preliminary issue.

By way of background the appellant, as a University, makes exempt supplies for VAT but it also makes taxable supplies many of which are supplies relating to the University's acknowledged leading specialism in sports science and the facilities it provides to third parties in connection with that. It is therefore a partially exempt trader in the terminology adopted in connection with accounting for VAT.

In December 1994 the commissioners approved, in writing, a special method for calculation of the recoverable input tax to take account of the fact that some of the inputs are not referable only to taxable or to exempt supplies and so have to be apportioned. Somewhat worryingly, I was told that the special method has become a de facto method over the intervening years because of amendments made informally to the 1994 method. Whether the precise terms of the existing special method are agreed is not yet clear and I note that it has only been from 1 April 2005 that there has been a formal requirement that a special method must be in writing (regs. 102(1A) and (5) of the Value Added Tax Regulations 1995 as amended – 'the Regulations').

On 25 August 2004 the appellant sent a letter to the respondents headed "This is a Special Method Override Notice" in which it referred specifically to rule 102C of the Regulations and in which it requested the commissioners to approve the notice by the due date for rendering a return for the prescribed accounting period beginning 1 November 2004. The notice stated the appellant's reasons for seeking to override the special method and it is clear from the notice that the appellant was proposing that the existing special method would continue to apply in some respects whilst being overridden in others.

The commissioners replied on 21 September 2004 by a letter which included the following:

"As requested, the notice takes effect from the start of the next VAT period commencing 1 November 2004. The Notice remains in force until the current special method is replaced.

The notice requires that for each VAT period covered, Loughborough University:

determines the amount of deductible VAT using its current special method;

determines the amount of deductible VAT in accordance with the use or intended use of purchases; and

accounts for any difference between these amounts as a Notice correction.

Full details of the Notice and of its application can be found in legislation (VAT Act 1994, SI 1995/2518, regulations 102A, 102B and 102C) and in Business Brief 27/2003 …".

In accepting the Notice the Commissioners neither approve nor reject the calculations that Loughborough University outlines, … . The Commissioners will accept any calculation, providing the result fairly and reasonably reflects the use or intended use of purchases in making taxable supplies … ".

There followed a lengthy correspondence, the issue of the decisions under appeal and the appeal itself. Much of the correspondence was about a possible new special method though none has yet been agreed.

On 16 December 2008 the appellant applied to the VAT and Duties Tribunal for a direction that a preliminary issue should be tried which it formulated as follows:

"A preliminary issue be tried herein … as to the true construction of VAT General regulation 102C, namely whether the effect of a special method override notice, given by a taxpayer to the Commissioners pursuant to VAT General Regulation 102C, and approved by them, is to oblige or entitle the taxpayer to recalculate its input tax (a) only in connection with the matters mentioned in the notice, including the reasons required to be contained therein, or alternatively (b) generally, ie in respect of any aspect of the special method (irrespective of the content of the notice, including in particular the reasons contained therein) which could have been (but was not in fact) the subject of a SMON under regulation 102A and/or a direction under Regulation 102".

A SMON is a special method override notice.

The Commissioners agreed on 16 January that a preliminary issue should be determined but stated that they did not entirely agree with the wording of the issue and proposed the following:

"The parties agree a preliminary issue be tried herein at the forthcoming hearing of this matter as to the true construction of Regulation 102C of the VAT Regulations ('Regulation 102C'), namely whether the effect of a special method override notice ('SMON'), given by the taxpayer to the Commissioners pursuant to Regulation 102C, and approved by them, had effect in relation to the whole of a taxpayer's partial exemption special method or only has effect in relation to the matters mentioned in the SMON including the reasons set out therein".

I regard the two different forms of words as being materially the same but for the avoidance of doubt it is the appellant's form of words I will rule upon as that was what was applied for and agreed to by the respondents who only suggested a different form rather than specifically applying for a direction of the Tribunal in respect of it.

The respondents accept that the appellant's notice of 25 August 2004 complies with the formal requirements of an override notice as set out in reg. 102C of the Regulations and that they approved it but they do not agree about the consequences of that approval and in particular they do not agree that a taxpayer can limit the scope of the effect of such a notice, whether when giving the reasons required by reg. 102C or otherwise.

Reg. 102C reads:

"(1) Subject to regulation 102A, where a taxable person-

(a) is for the time being using a method approved or directed under regulation 102, and

(b) that method does not fairly and reasonably represent the extent to which goods or services are used by him or are to be used by him in making taxable supplies

the taxable person may serve on the Commissioners a notice to that effect, setting out his reasons in support of that notification.

(2) Where the Commissioners approve a notice served under this regulation, the effect is that regulation 102B shall apply to the person serving the notice in relation to-

[specified VAT periods]".

Regulation 102B reads:

"(1) Where this regulation applies, a taxable person shall calculate the difference between-

(a) the attribution made by him in any prescribed accounting period or longer period, and

(b) an attribution which represents the extent to which the goods or services are used by him or are to be used by him in making taxable supplies.

and account for the difference on the return for that prescribed accounting period or on the return on which that longer period adjustment is required to be made, except where the Commissioners allow another return to be used for that purpose.

(2) This regulation shall apply from the date prescribed under regulation 102A(2) or 102C(2), unless or until the method referred to in regulation 102(A)(1)(a) or 102(C)(1)(a) is terminated under regulation 102(3)".

The respondents through Mr Puzey, whose analysis was presented with admirable clarity, contend that the effect of reg. 102C is that, where an override notice is served and approved (by the taxpayer and the commissioners respectively) then reg. 102B applies to the input tax partial exemption calculation. They contend that the reasons that are required when the application is made are required for the purpose of deciding whether the notice should be approved but that the effect of the notice, if it is approved, is simply to apply reg. 102B and that applies without its being affected by the reasons.

The respondents contend that the reasons mentioned in reg. 102C(1) are required to be in support of "that notification" and the only notification mentioned in that regulation is the notice that the special method does not fairly and reasonably represent the extent to which the goods and services are used in making taxable supplies. The reasons are therefore those which show the existing special method needs to be overridden.

The commissioners argue that when those reasons are given there is no requirement that they should explain what the taxpayer suggests should be done in terms of making a new calculation, what should be done is set out quite clearly in reg. 102B. If the reasons happen to express the taxpayer's opinion about what the new calculation might entail that goes beyond what is required and the commissioners argue that their approval should not be seen as an approval of any such proposal.

They argue that there are two reasons why that is the case.

Firstly, to take the reasons in the taxpayer's override notice as having effect is to ignore and to fail to give effect to reg. 102B, the terms of which are plain. The regulations require the taxpayer to make the calculation in reg. 102B and that is a piece of self contained legislation which provides a complete rule for the consequences of a notice under reg. 102C, once it is approved, and as such the effect of that legislation cannot be modified by the taxpayer.

Secondly, the commissioners have the power to issue a new special method under reg. 102 by approving or directing the termination of the existing method under reg. 102(3) and approving or directing a new one under reg. 102(1). If the reasons for an override notice, in effect, proposed a new method about which the commissioners were satisfied, they have the power to direct a new special method rather than to put the taxpayer to the trouble of making the more difficult calculation under reg. 102B, which they say is the consequence of the taxpayer's override notice. If the reasons do not satisfy the commissioners in that way, then they should not be taken to have approved them in the positive sense of agreeing that they form a proper basis for calculation and their approval is only and should only be taken to mean that they are satisfied that the existing method should be overridden but not exactly how the new calculation would work. Therefore the scheme of the regulations itself indicates that the reasons will not determine the scope of the new calculation that has to be made after an override notice has been accepted because, in cases where the reasons do propose a satisfactory new method of calculation, whilst accepting the override notice as such the Commissioners may well quickly direct or approve a new special method and it is open to the taxpayer to request them to direct a new method if the commissioners do not take the initiative by directing one.

The commissioners rely upon the comments of Mr Bishopp, sitting as chairman, in the case of Vision Express(UK) Ltd (VAT Case 20870) in which the commissioners had issued an override notice under reg. 102A. He said the following (at [62]):

"We also find nothing in the argument that the Commissioners should have told [the appellant] what method would be acceptable to them as such. Such an indication would have amounted, in substance if not in form, to a direction to use a special method, a course which the Commissioners considered (as we have indicated, in our view correctly) was not open to them. The greater difficulty with the argument is that regulation 102A prescribes that a trader in receipt of an override notice must comply with regulation 102B. That regulation tells the trader what he is to do (namely to comply with the general law by claiming credit for the correct amount of input tax), and not how he is to do it. We do not understand how it can be said that the Commissioners are required to fill the gap by themselves instructing the trader how to comply with the law".

The commissioners argue that that passage makes it clear that Mr Bishopp decided that the effect of an override notice is that a new legal regime applies, namely that the calculations under regulation 102B must be made rather than that something newly directed by the commissioners should apply. The commissioners in this case rely upon that decision to support their argument that, equally, when the taxpayer issues an override notice the same consequence follows, namely that regulation 102B applies in its own terms regardless of what the taxpayer might have proposed, for example in his reasons in support of the override notice.

At [59] in Vision Plus Mr Bishopp also made it plain that he read reg. 102B as obliging the taxpayer to continue to make the existing special method calculation ("the attribution" referred to in paragraph 102B(1)(a)) and then to compare it with some other calculation, the nature of which is not specified, ("an attribution" in reg. 102B(1)(b)) but which represents a correct calculation of the partial exemption attribution.

Mr Cordara relied upon a number of arguments based on European Law concepts for the proposition that the regulations should be read as meaning that the reasons should be taken as approved as a method or part of a method for the necessary revised calculation in a suitable case and that this was a suitable case with the consequence that the reasons should determine or circumscribe, at least in part, how the new calculations should be made after the override notice had been approved. What a suitable case would consist of would depend upon the form of the reasons but the reasons were sufficiently clear in this case for them to have that effect.

He also relied upon one textual point within the regulations. Reg. 102A(1) which deals with an override notice served by the commissioners requires them to set out their reasons and to state the effect of "the notice". In reg. 102A(2) the effect of "a notice" served under that provision is that reg. 102B applies. Mr Cordara argued that the effect of "the notice" must necessarily refer back to the reasons so that where the commissioners issue a notice the reasons do become part of the reg. 102B calculation. By analogy therefore, he argued, the same should apply to a taxpayer's notice. I do not agree. The effect of a commissioners' notice is that reg. 102B applies as is stated in reg. 102A(2) and the requirement that they should state that is the consequence is imposed so that the taxpayer shall know that is the case. Where a taxpayer issues a notice it is reasonable to assume he will know the consequence (in fact the same consequence - ie that reg. 102B applies) and it is certainly unnecessary for the taxpayer to tell the commissioners what the consequence is.

Mr Cordara relies upon the principles of effectiveness, legal certainty, legitimate expectation and proportionality as arguments in favour of the proposition that I should read reg. 102C as meaning that the reasons given by the taxpayer in issuing an approved override notice should be taken to set enforceable parameters that are applicable to the calculation under reg. 102B.

Before dealing with his submissions specifically I should note that the provisions of the Sixth VAT Directive (articles 17-20) and the VAT Common System Directive (arts 167-192) as well as the UK legislation (Ss 24 to 26 of VAT Act 1994 and the regulations) all aim for the same result, which is that the deduction of input tax should be made in respect of, and only in respect of, goods and services used or to be used for the taxpayer's taxable transactions (with a few specific exceptions). In order to achieve that, the detailed rules allow for proportional attribution where goods or services are used partly as cost components of taxable supplies and partly for exempt or non-supplies and for adjustments of provisional attributions. So much is not controversial and I would add that the object of the special methods allowed or directed by the commissioners is better to achieve those results rather than to make life as easy as possible for taxpayers. In principle, a taxpayer can expect to be required to make difficult calculations if that is what is necessary to achieve a fair and reasonable attribution. It is also reasonable to assume that the taxpayer, who has control of his transactions, should be in a position to be able to achieve that result without too much difficulty.

Mr Cordara submitted that the commissioners' interpretation of the regulations leads to uncertainty contrary to the requirement for legal certainty. He contended that the rules for attribution must be known to a taxpayer in advance so that he is not unexpectedly met with an assessment after carrying out what he reasonably thought to be a correct calculation of his input tax entitlement. I agree in principle that that is a reasonable expectation of a taxpayer. However, it is the law that should be certain and an uncertainty in the taxpayer's mind caused by his misunderstanding of the law is not a lack of legal certainty. In this case the appellant may well have thought it would be entitled to limit the nature of the recalculation by giving suitable reasons in its override notice but, if that is not the effect of the law, no lack of legal certainty arises. Mr Cordara argued that the commissioners' approach (that the reasons do not limit the nature of the revised calculation) leaves the taxpayer guessing and that the legislation should be read so as to avoid that outcome which can be achieved by interpreting the legislation as meaning that the reasons do limit the nature of the recalculation. I agree with the commissioners' contention that the taxpayer was not left guessing at all. It was told that reg. 102B applied and the effect of that regulation was briefly described. The taxpayer might have been disappointed to find that was the case but no uncertainty arises within the legal provisions just because the taxpayer had misunderstood their effect.

Essentially the same arguments apply as far as the principle of effectiveness is concerned. Mr Cordara argued that the appellant's right of deduction of input tax has not been made effective. He argued that for five years the right of deduction has been uncertain. It is unfortunate that the parties have not been able to agree a new method of calculation over such a long period. The commissioners' contrary argument is that regulation 102B has always provided the appellant with a means of calculating the correct amount of input tax and so it has always had an effective right to recover input tax even if it would have preferred to have been allowed to calculate on a different and legally incorrect basis and I agree with that contention.

Similar arguments apply so far as proportionality and legitimate expectation are concerned. The taxpayer can expect the commissioners' powers to be proportionate and has a legitimate expectation that the rules will in fact allow him to recover the correct amount of input tax. The commissioners contend that his misunderstanding about the rules is not a reason to interpret them in his favour and, again, I agree.

My conclusion is that the reasons given in support of a taxpayer's override notice do not limit the scope or nature of the necessary calculation of input tax deductible after the existing special method has been overridden. That is because regulation 102B is, on the face of it, specific and can only be interpreted as meaning that the taxpayer is required to make a calculation under the special method ("the attribution" referred to in reg 102B(1)(a)) and then to make a calculation ("an attribution" referred to in reg 102B(1)(b)) and then to account for the difference between the two.

In my opinion the status of the reasons for the override notice are also plain on the face of reg 102C. They are only required and only have effect to satisfy or fail to satisfy the commissioners that the existing method should be overridden on the ground that the existing method does not produce a fair and reasonable result. Once the commissioners are so satisfied reg 102B takes over as far as the calculation is concerned. If the commissioners refuse to agree the override the taxpayer has a right of appeal under section 83(c) of the VAT Act or, as here, pursuant to an assessment being issued. It is also open to the taxpayer to seek approval of a new special method incorporating the reasons.

I am not persuaded by Mr Cordara's arguments that the regulations should be interpreted differently than the way in which, on their plain wording, they appear to be intended to be interpreted. The arguments about legal certainty and legitimate expectation do not in my opinion support the argument that the regulations should be interpreted as meaning that the reasons for the override should apply to the new calculation. Adequate reasons to support a contention that the existing special method does not achieve a fair and reasonable result may say nothing about what it is proposed would be a better method. Reg 102C does not impose any such requirement and it would be extraordinary if a taxpayer, who states reasons in more detail than is required for the purpose of the override, could thereby determine that a different regime applied to him than would be the case for a taxpayer who stated adequate but less detailed reasons. In addition, reg 102B does provide a certain method of calculation after the override which is entirely in accordance with the scheme of the input tax regime and provides both legal certainty and satisfies the reasonable expectations of the taxpayer, which are that a correct attribution should be arrived at. The taxpayer cannot expect to be entitled to pick and choose between the parts of the existing special method he likes to retain and those parts he wishes to improve upon. If he were to be entitled to limit the scope or nature of the new calculation by his reasons in support of the override that would be at least a possible consequence.

So far as proportionality is concerned, again the effect of the regulations is proportionate in that they seek to achieve the correct result, whereas the interpretation contended for by Mr Cordara would at least risk the achievement of an incorrect result.

For the above reasons I hold that the true construction of reg 102C is that reasons stated in support of an application for approval of an override notice do not entitle the taxpayer, when making a calculation under reg 102B following the approval, to make it only in accordance with the matters mentioned in the notice or its reasons.

I would add that it by no means follows that every aspect of the taxpayer's input tax recovery will necessary be affected. As a matter of fact some aspects of the existing special method may well not be changed when the two sets of reg 102B calculations are compared to arrive at the difference referred to in that regulation but that will be if, as a matter of fact, the attribution is unaffected not because, as a matter of law, it must remain unaffected where the reasons would have so dictated had they had the effect contended for by the appellant.

RICHARD BARLOW

TRIBUNAL JUDGE

RELEASE DATE: 6 May 2009