First-tier Tribunal (Tax)

[2010] UKFTT 244 (TC)

TC00541

Appeal number MAN/09/0049

VAT - input tax – capital goods scheme adjustment – decrease in taxable supplies? –yes - appeal dismissed.

FIRST-TIER TRIBUNAL

TAX

                           GATESHEAD TALMUDICAL COLLEGE          Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

DECISION NOTICE: full findings of fact and reasons for the decision

                                                TRIBUNAL: Judge Richard Barlow

                                                                        Mr Mark Buffery

                                                                        Ms Susan Hewett                                                     

Sitting in public at London on 10 March 2010

Mr Simon Levine AIIT for the Appellant

Mr Philip Moser of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.        The Gateshead Talmudical College (the College) is a yeshiva and as such its main activities are the provision of education which is exempt from VAT.  However, on 1 November 1996 the College granted a lease of part of its premises namely an extension which had been constructed shortly before the grant of the lease.  The lease was granted to a company called Starburst Properties Limited (Starburst) which granted a lease back to the college.

2.        On the basis that the granting of the lease by the College amounted to the commercial exploitation of the property and on the basis that both the College and Starburst had opted to tax the newly built property the College claimed to be entitled to reclaim input tax on the construction costs.  The College registered for VAT with effect from 16 September 1996 having described its business as that of ‘property letting’ in its application to register.  HMRC credited the input tax on the construction costs to the College and that led to a repayment. 

3.        The College accounted for output tax on rents from Starburst only up to and including its return for the three month prescribed accounting period ending August 1998 and Starburst accounted for output tax on rents from the College in respect of the lease back to the College up to the same date.  Certainly after that date, if not before, both parties had ceased to pay each other rent under the lease and lease back.

4.        Starburst was struck off the company register and dissolved on 20 July 1999 but Mr Levine, representing the College, told us that it has been restored to the register with effect from that date, though apparently that only happened a few days before the hearing of this appeal.

5.        We were shown an Advice from Mr Richard Clegg of counsel who also attended the hearing and assisted Mr Levine about the land law aspects of this appeal.  We are satisfied that despite the non-payment of rent by Starburst the lease continued to exist because the College had not taken the necessary formal action to forfeit the lease.  We are also satisfied that the lease continued to exist after Starburst was dissolved because its rights, including the benefit of the lease, then became vested in the Crown as bona vacantia.  Although the respondents had disputed those questions in correspondence they accepted at the hearing that Mr Clegg was correct.

6.        Mr Levine had claimed that there was no connection between the College and Starburst but it seems most unlikely that would have been found to be the case, had the facts been examined, but as that was not a relevant issue we have not considered it.  At the time the lease was agreed and given effect to the Commissioners accepted that what was admittedly a tax avoidance scheme was effective for that purpose, though it is their case that, on the same facts now, the different statutory provisions now applicable would preclude such a scheme from being effective.      

7.        No explanation was given as to why the College had ceased to account for output tax or to claim the rent under the lease before Starburst was dissolved.  It appears that the College thought that once the input tax on the building works had been recovered the existence of the lease was no longer of any relevance and so it simply ignored it for practical purposes, though it did wish to take advantage of its continued existence in law so as to avoid having to make the capital goods scheme adjustments.

8.        On 18 November 2002 the Commissioners issued an assessment covering three twelve month periods ending on 30 November 1999, 2000 and 2001.  Those assessments were made to give effect to capital goods scheme adjustments which the Commissioners claimed were necessary in light of the circumstances described above and in particular because of a change of use.  Although the College was allowed to appeal out of time, an appeal to the VAT and Duties tribunal was dismissed on 26 November 2003 when the appellant failed to attend a hearing at which the Commissioners had applied to dismiss the appeal on the grounds that the College had not paid or deposited the tax and had not shown that it would suffer hardship if required to do so.  On 10 September 2008 the Commissioners agreed to amend that assessment on the ground that the adjustments were only applicable from the date when Starburst was dissolved not from the date when the appellant stopped collecting the rent.

9.        On 2 February 2004 the Commissioners issued assessments to make capital goods scheme adjustments for the twelve month periods ending 30 November 2002 and 2003.  Again the College appealed and following its failure to comply with an unless order made on 11 July 2005 relating to a hardship application the appeal was struck out on 6 August 2005.

10.     Later assessments were made for twelve month adjustment periods ending 30 November 2004, 2005 and 2006.

11.     The present appeal purports to be an appeal in respect of an assessment or decision contained in letters of 10 September 2008 and 9 January 2009.

12.     The letter of 10 September refers to the capital goods scheme adjustments for all years ending 30 November 1999 to 2006.  The letter of 9 January 2009 deals with an issue about whether the building was used for a relevant residential purpose which the College has abandoned.

13.     The years 1999, 2000 and 2001 were the subject of the appeal dismissed on 26 November 2003 and the years 2002 and 2003 were the subject of the appeal struck out on 6 August 2005.  We hold that those appeals are res judicata and cannot now be re-opened.  We would however add that the reduction allowed in the letter of 10 September 2008 for the year ending 1999 is unaffected by our holding that the College cannot re-open those issues in this appeal.  We further add that, had we allowed those matters to be re-opened, it is clear from the decision we are about to give concerning the years 2004 to 2006 that those other appeals would have been dismissed anyway and indeed that the reduction for 1999 was probably too generous to the College. The years to 30 November 2004 and 2005 were assessed in a notice dated 26 January 2006 in the sum of £13,711 and the year to 30 November 2006 was assessed in a notice dated 15 February 2007 in the sum of £124.  This appeal therefore relates to £13,835 as well as the issues of principle.

14.     The calculations of the adjustment and the periods of adjustment were not disputed by Mr Levine on behalf of the appellant.   He did not dispute that the property in question was a capital item within the meaning of Part XV of the Value Added Tax Regulations 1995.

15.      Mr Moser relied in particular on Regulation 115(2) of those regulations which reads:

(2) Where in a subsequent interval applicable to a capital item, the extent to which it is used in making taxable supplies decreases from the extent to which it was so used, the owner shall pay to the Commissioners for that subsequent interval an amount calculated in the manner described in paragraph (1) above.

16.     The Commissioners’ case was that the making of taxable supplies reduced to nil, at the latest, when Starburst was dissolved.  The adjustments made by the Commissioners in their letter dated 10 September 2008 were made on that basis and so they contend that the appeal should be dismissed in its entirety for that reason.

17.     The facts as we find them to be are based on the documents and the agreed stance taken by both parties and they are as follows.  The arrangements between the appellant and Starburst were put in place in order to secure repayment of input tax on the building of the extension.  Rent was paid by and to Starburst under the lease and lease back only up to August 1998 and thereafter the payments were not sought.  Mr Levine admitted that a subsequent voluntary disclosure by which the College purported to declare that it had omitted to account for output tax in periods after 08/01 was not based on “physical money being paid” and indeed we note that Starburst was dissolved by then anyway. 

18.     Mr Moser put the respondents’ case on the basis that once Starburst had been dissolved it could not be the recipient of any supplies and that given that regulation 115(2) refers in terms to a decrease in the extent to which the capital item is used “in making taxable supplies” then a cessation of the making of taxable supplies gives rise to a need to adjust.

19.     Mr Levine’s argument was that as the lease continued to exist as a matter of law taxable supplies continued to be made.  That argument would be difficult to support where both parties to the lease had in fact stopped abiding by its terms and were behaving as if it did not exist but where one of those parties had itself also ceased to exist the argument is completely untenable.

20.     Mr Levine also argued that the College did not start to make exempt supplies of the premises and that it only continued to occupy them as a tenant under the lease back from Starburst.  That is completely irrelevant even if true.  Regulation 115(2) is engaged because of the decrease in the making of taxable supplies by the College and where the decrease is to nil then the full adjustments are called for.

21.     As already noted the appellant abandoned another argument about whether the extension was for a relevant residential purpose and we need not deal with it.

22.     The appeal is therefore dismissed and the sums assessed plus interest are payable.

23.     The College has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

RICHARD BARLOW

TRIBUNAL JUDGE

RELEASE DATE: 1 June 2010