First-tier Tribunal (Tax)

See Also: [2010 UKFTT 393 (TC)

[2010] UKFTT 393 (TC)

TC00675a

Appeal number:  EDN/02/182

Value Added Tax – residual input tax – partial exemption special method (floor based) – continued hearing on feature of zoning in calculating rental – zoning rejected.

FIRST-TIER TRIBUNAL

TAX

                                DCM (OPTICAL HOLDINGS) LTD               Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

            TRIBUNAL JUDGE:            Mr Kenneth Mure, QC                                                         Members:                               Mr I R Welch, CA, JP

                                                            Mr K Pritchard, OBE., BL., WS

Sitting in public at 126 George Street, Edinburgh on Monday 28 June 2010

Roderick Cordara, QC SC and Edmund King, Barrister for the Appellant

Julian Ghosh, QC and Jern Fei Ng, Barrister, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Proposed PESM

1.       This is a continued hearing from the full consideration of the merits of the Appellant’s proposed Partial Exemption Special Method (“PESM”) which took place from 15 to 19 June 2009 following on the Direction of the First Division of the Inner House of the Court of Session.  (At an earlier hearing in 2006 we considered that we were unable to do this).  We approved the proposed PESM in principle but subject to one modification, viz the removal of zoning in relation to the valuation of floor space.  Zoning is discussed in the Tribunal’s earlier decision.  Essentially, it is a means whereby a surveyor in estimating rent for retail premises places greater value on the front floor area, so enabling the size of the façade of shop premises to be taken into account.  In the Tribunal’s view the proposed PESM, were the factor of zoning removed, was fair and reasonable as a means of apportioning residual input tax between the taxable and exempt supplies of the Appellant’s business.

2.       As we had not been addressed on this modification to the proposed PESM we considered it appropriate to invite oral and/or written representations from Parties.  In the event both Parties submitted written submissions which they then adopted in addressing the Tribunal.

3.       The Appellant also lodged a revised PESM in which zoning was retained in respect of VAT on rental but removed in respect of all other residual expenditure.  Both parties did not dispute that the feature of zoning could be removed, with the PESM remaining otherwise intact.  The point of controversy was whether zoning should be retained in respect of rental alone.  Also we were addressed on expenses.  Helpfully, we were referred to the recent decision of McCombe J in Vision Express (UK) Ltd v Revenue & Customs Commissioners [2009] EWHC 3245 (Ch).

4.       For the Appellant Mr Cordara submitted that in respect of rent (only) the Tribunal should look behind the unitary bill.  It should, he argued, view the rent’s constituent parts.  Such an approach reflected the economic reality that the front area of retail premises was ordinarily more valuable than the back.  As he noted in para 10 of his written submission the critical question is “not just...    how the floor space is used but also…    the value of the floor space used”.  Also, at para 8 he prayed in aid a section of the evidence of HMRC’s technical witness, Mr Mattacks, at the first hearing in 2006.  He submitted that the Tribunal decisions in Optika Ltd, Vision Express, and Banbury Vision Plus noted in our earlier Decision and the Judgment of McCombe in Vision Express (UK) Ltd, which all had disapproved of the use of zoning, had erred in law.

5.       For the Respondents Mr Ghosh argued that zoning fell to be excluded in apportioning residual input tax on rent.  Crucially, in respect of each of the Appellant’s premises there was one lease, there was one rental (albeit a “blended” figure), and that was for the entirety of each of the premises.  The rental cost could not be segmented:  it was in respect of one entirety.  This was the ratio of the Tribunal decisions in Optika Ltd, Vision Express and Banbury Vision Plus and as confirmed by McCombe J’s Judgment in Vision Express.

6.       Having heard Counsel we remain of the view which we expressed in our decision of 28 September 2009, viz that zoning should be excluded from the PESM and that even for VAT on rental.  As explained there, especially paras 22, 23 and 33, we view the rent as an entirety.  This is consistent with the decisions by the other Tribunals noted.  We note also McCombe J’s emphatic support of this reasoning at para 42 of his Judgment.  Zoning is simply a tool in the process of valuation and the negotiation of rental terms between landlord and tenant.  It is a constant formula in the valuation process while the pattern of use of any particular premises will depend on the nature of the business conducted there. 

Expenses

7.       In view of the Appellant’s successful appeal to the Court of Session the matter of expenses in respect of the first hearing in 2006 is re-opened, and we considered each of the 3 hearings in turn in determining the appropriate award.

8.       The result of these 3 hearings has been that from the outset we considered that the standard method did not produce a result which was fair and reasonable.  At the first hearing we did not consider that we could competently review the proposed PESM in detail.  However, we were directed by the First Division to do so with the result that at the conclusion of the second hearing we gave tentative approval to the PESM subject to the removal of the feature of zoning.  Thus far the Appellant was successful. 

9.       However following on the last hearing we have rejected the feature of zoning as appropriate.

10.    Accordingly we find the Respondents liable in expenses to the Appellant in respect of the 2 hearings on 13-16 February 2006 and on 15-19 June 2009.  On the other hand we find the Appellant liable in expenses to the Respondents in respect of the third hearing on 28 June 2010.

11.    We have no hesitation in agreeing that the Appeal was appropriate for the instruction of both Senior and Junior Counsel, and we certify both Professor Steven P Taylor an Optometrist, and Mr Struth, a Chartered Surveyor, as expert witnesses.  Finally we tend to agree that an additional fee is appropriate given the length and volume of documents involved in the Appeal but this aspect more appropriately might be pursued, if necessary, with the Auditor of Court.  Failing agreement on any aspect of the matter of expenses these would fall to be taxed in terms of Rule 29(3) as a Court of Session action.

This document contains full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

MR KENNETH MURE, QC

TRIBUNAL JUDGE

RELEASE DATE: 20 AUGUST 2010.