United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18826

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Care v Customs and Excise [2004] UKVAT V18826 (29 October 2004)

18826

Partial Exemption – Allowable Input Tax – Input tax on certain residual expenditure at care homes and hospices – whether agreed special method or standard method of apportionment applied to this residual expenditure – meaning of agreed special method - VATA 1994 s26(1)(2) and (3) - VAT Regs. 1995 S.I. 1995 No. 2518 regs. 101(1) and 102(1) and (3) - appeal dismissed

LONDON TRIBUNAL CENTRE

SUE RYDER CARE Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MALCOLM J F PALMER (Chairman)

BERNARD J COODE

Sitting in public in London on 7 and 8 September 2004

David Jordan, VAT Consultant, for the Appellant

Mrs Zoe Taylor, Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The Appeal

This is an appeal by Sue Ryder Care against the decision of Mrs Lucy Henry, a Senior Officer of Customs and Excise Essex Business Centre, in a letter dated 15 October 2003 rejecting a claim by Sue Ryder Care that certain residual input tax be entitled to credit calculated in accordance with the standard method.

The principal issue is whether this residual input tax should be entitled to a credit under the standard method or by reference to the special method set out in paragraph E(2) of a letter dated 10 April 2001 from Colchester VAT Local Office.

At the beginning of the hearing we were given a folder of 167 pages of agreed documents. During the course of the hearing following an adjournment requested by Mrs Taylor, to which Mr Jordan had consented, we were also handed up as an agreed document a letter dated 10 January 2001 from Mr P A Taylor of Colchester VAT Local Office and a print out of an Officer's Assessment Details dated 7 September 2004. Evidence was given at the hearing for Sue Ryder Care by Mr Roger Cunningham, who is the current acting Director of Finance of Sue Ryder Care. Evidence was given for Customs and Excise (generally referred to in this decision as "the Commissioners") by Mrs Lucy Henry who is an officer of the Commissioners Colchester Local VAT Office.

The Facts

Sue Ryder Care is a charity that provides health care for the seriously sick at a number of care homes and hospices (the "Homes"). Much of its funds are raised by sales at a around 450 retail charity shops (the "Shops"). It has a number of sources of income. The Shops generate taxable income from the sales of goods consisting of both standard rated income from the sale of new goods and zero rated income from the sale of donated goods. The Homes generate exempt income from payments for services for care from the residents in its homes and hospices. The Homes also generate taxable income in relatively small amounts from such business income as income from the sale of meals to staff and visitors, payphones, tuck shop takings, plant sales and sales of goods donated for resale. Sue Ryder Care also has non business income from such receipts as legacies and donations.

Sue Ryder Care has some expenditure at the Homes, such as payphone costs, that are directly attributable to its taxable income at the Homes. (Expenditure is described as directly attributable either to taxable income or to exempt income, if it is identified as expenditure on goods or services that are used exclusively to make taxable supplies or exempt supplies, as the case may be.) Other expenditure at the Homes is partly attributable both to its exempt income and partly to its taxable income at the Homes. The exempt and taxable income generated by this other expenditure is the residual income that is the subject matter of this appeal. We understand that the amount and nature of the residual income is not in dispute, nor that it is entitled to partial recovery. To recap, the issue for us is whether the input tax on that residual income is to be treated as partly creditable under the standard method, as Sue Ryder Care claims, or under a special method as the Commissioners claim.

The Commissioners and Sue Ryder Care have agreed two special methods in recent years. The first is in a letter dated 13 June 1996 (the "1996 Letter") and the second in a letter dated 10 April 2001 (the "2001 letter"). It is the 2001 Letter that we have to understand in this appeal. The operative parts read as follows:

"I refer to the correspondence concerning non-business VAT and the partial exemption special method.

The following method is proposed for the calculation of your deductible input tax.

A. The tax year to begin on 1 April and end on 31 March.

B. Identify all supplies you receive which are to be used wholly in the making of taxable supplies: the input tax thereon is deductible.

C. Identify all supplies you receive which are to be used wholly in making non business supplies: the VAT is not input tax and not deductible.

D. Identify all supplies you receive which are to be used wholly in making exempt supplies: the VAT thereon is exempt input tax, subject to restriction according to the partial exemption rules.

E. Any residual VAT is to be directly attributed to either (1) "Headquarters" VAT or (2) "Homes repairs" input tax.

(1) Headquarters VAT. To be apportioned between business and non-business supplies by apportioning in the ratio 91.31 : 8.69 (Jordans VAT Consultancy letter 6/4/01 refers).

a. Headquarters business input tax - to be reclaimed in the proportion that the value of your taxable supplies bears to the value of your taxable and exempt supplies. The exempt portion is exempt input tax and subject to restriction according to the partial exemption rules.

b. Headquarters non-business VAT is not input tax and not deductible.

(2) Homes repairs input tax - to be reclaimed in the proportion that your taxable homes income bears to the value of the total homes income. "

The partial exemption method set out in the 1996 Letter and its wording differed from that in the 2001 Letter in a few ways. The principal differences are:

a. The 2001 Letter specifically refers to non business supplies;

b. The paragraph in the 1996 Letter covering taxable supplies equivalent to paragraph B in the 2001 Letter included, as an example, the words "(eg shop expenses)"; and

c. The paragraph in the 1996 Letter equivalent to paragraph D in the 2001 Letter included instead of the words "the VAT thereon is exempt input tax, subject to restriction according to the partial exemption rules" the words "the input [tax] thereon is not deductible. (In practice this means the general expenses of running the homes)."

The need for an apportionment of the headquarters VAT between business and non business activities was suggested by Mr P A Taylor, an assurance officer of Colchester Local VAT Office, in a letter dated 26 May 2000 to Mr Roy Smith of Sue Ryder Care. It is clear from that letter and a subsequent letter from Mr Taylor dated 10 January 2001 that at some time in 2000 Mr Taylor had made a number of visits to Sue Ryder Care. We infer that the idea of a revised special method agreement stems from those visits. However, none of the correspondence prior to the 2001 Letter that we have seen gives any reason for any change in the terms of the special method other than the need for the specific inclusion of wording to cover non business income.

On 6 April 2001, and therefore only four days before the issue of the 2001 Letter, Mr Jordan wrote to Mr P A Taylor on the terms of a revised special method in response to his letter of 26 May 2000. Mr Jordan had by then been instructed to advise and act for Sue Ryder Care. But Mr Jordan's letter of 6 April makes no reference to any proposed change other than in respect of non business income: he was proposing an apportionment by reference to time spent by staff. His analysis of the business income of Sue Ryder Care for this purpose does not include any amount of business income generated at the Homes.

Mr Cunningham was aware of the proposal to have a new special method letter agreed, but he was not directly involved with the Commissioners in its drafting or the reasons for its preparation. This was handled by Mr Roy Smith for Sue Ryder Care. Nor was Mrs Henry involved in its preparation.

Mr Cunningham was told by his predecessor that the reference to the "general expenses of running the homes" in the 1996 Letter meant that the input tax on expenditure at the Homes was to be treated as exempt. We accept that he believed that this meant that the 2001 Letter had the same effect.

We also accept that the Commissioners believed that the reason why Sue Ryder Care made no claim for any residual income tax of the Homes was because either Sue Ryder care thought that any claim would be de minimis or that it chose not to make any claim for reasons of its own.

It is accepted that the 2001 Letter sets out an agreed special method.

On 28 June 2003 Mr Jordan submitted a voluntary disclosure on behalf of Sue Ryder Care claiming £16,022.88 in respect of the quarter ended 30 June 2003. This claim was calculated on the basis that there was residual input tax in respect of the Homes for which the recovery percentage should be 62.59 per cent. That percentage was calculated by reference to total taxable income of Sue Ryder Care as a percentage of total business income. This claim was made on the grounds that there was a gap in the terms of the 2001 Letter because, so it was claimed, it did not cover the treatment of residual input tax attributable in part to business income generated at the Homes. That gap, it was claimed, should be dealt with under the standard method.

That claim gave rise to the decision of Mrs Henry in her letter of 15 October 2003 that the special method in the 2001 Letter applies to all residual input tax of Sue Ryder Care, including any that relates to business income generated by the Homes. It is against that decision that this appeal has been made.

The Legislative background cited to us

The principal provisions of national law cited to us included the following (the parties accepted that European Union law, whether in the Sixth Directive or elsewhere need not be considered for the purposes of this appeal):

Sub-sections 26(1), (2) and (3) of the Value Added Tax Act 1994 provide in so far as relevant

"(1) The amount of input tax for which a taxable person is entitled to a credit at the end of any period shall be so much of the input tax for the period … as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following made or to be made by the taxable person in the course or furtherance of his business–

taxable supplies …

(3) The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above …"

The relevant regulations for the attribution input tax to taxable supplies for the purposes of this appeal are regulations 101, which sets out the standard method, and 102 of the Value Added Tax Regulations 1995. In so far as relevant these provide as follows:

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

102–(1) … the Commissioners may approve or direct the use by a taxable person of a method other than that specified in regulation 101 …

(3) A taxable person using a method as approved or directed to be used by the Commissioners under paragraph (1) above shall continue to use that method unless the Commissioners approve or direct the termination of its use."

The principal submissions of the parties

Mr Jordan, for Sue Ryder Care, submits that the 2001 letter does not cover expenditure at the Homes that is attributable both to exempt income of the Homes and to business income of the Homes: there is a gap that should be filled by the standard method under Regulation 101 of the Value Added Tax Regulations 1995. This expenditure should therefore be recoverable in the proportion that taxable income of Sue Ryder Care bears to total taxable and exempt income of Sue Ryder Care.

The following are in summary the principal points made by Mr Jordan in support of his basic submission:

a. Mr Cunningham's evidence was, as we have accepted, that he believed that this expenditure was treated as exempt under the 1996 Letter and that the position remained the same under the 2001 letter;

b. The use of the expression "Homes repairs" input tax is not apt to cover such items as sale of food or telephone calls: this expression is easily understood by Sue Ryder Care to cover the expenditure accounted for by central headquarters for centrally administered major project expenditure on the Homes;

c. The Commissioners offered to amend the terms of the 2001 Letter: this must imply that they thought the letter deficient.

d. The 1996 Letter, with its example that general expenses of running the Homes should be treated as exempt, did not permit any apportionment of input VAT on this expenditure.

e. The only purpose of the second letter was to deal with the treatment of non business expenditure and income (i.e. donations, legacies etc): such little evidence as there is prior to the signing of the 2001 Letter refers only to this topic and none refers to the reasons why the examples in paragraphs (b) and (c) of the 1996 Letter are not repeated in the 2001 letter. These deletions are, therefore, to be assumed not to intend any change from the 1996 letter.

Mrs Taylor accepts that a proportion of the relevant input tax is recoverable. But she submits that the 2001 Letter covers "any residual" input tax: for this purpose any means all.

The 2001 Letter, she submits provides that all residual income tax is to be allocated under one of the two categories of "Headquarters input tax" and "Homes repairs input tax". These two expressions are not intended to be exhaustive descriptions of the expenditure they cover. They are convenient shorthand descriptions.

She also submitted that treating the residual Homes input tax as "Homes repair" residual input tax results in a fair attribution. This treatment attributes the input tax in the proportion that the taxable income generated by the expenditure bears to the total income of the Homes. This total income is the total income to which this residual input tax relates.

Our Conclusions and the Reasons for them

We are not convinced by Mr Jordan's submissions. He has not persuaded us that there is any relevant gap in the terms of the 2001 Letter. In our view the attribution of the residual expenditure at the Homes as Homes repair residual input tax gives a result that is in accordance with the terms of the 2001 Letter.

In coming to this conclusion we take into account the points made by Mr Jordan and the following points:

a. The examples that were in the 1996 Letter are deleted from the 2001 Letter. Whatever the purpose of those examples in the 1996 Letter, we now have the April 2001 Letter as the operative document setting out the special method. This can and should stand on its own. Particularly is this the case when we have no direct evidence from either party from the people who must be assumed to have decided what should go into the 2001 Letter and, therefore, as to what they intended by the deletion of the examples;

b. We would normally expect an agreed standard method as intended to cover all residual input tax with, where appropriate, express provisions to cover any relevant categories to be treated differently;

c. While we have accepted Mr Cunningham's evidence that he believed that the relevant expenditure at the Homes was exempt, we are not satisfied that he was involved to any significant extent in the negotiation of the terms of the 2001 Letter. His views as to what it was intended to effect are, therefore, only of marginal relevance;

d. While the expression "Homes repairs" is not apt, or at any rate not the best that could be used, to cover all the relevant residual expenditure, it is in our view clearly intended as some sort of shorthand. It is reasonable to apportion this expenditure incurred at the Homes in the way that that category is to be apportioned under the 2001 Letter: that apportionment is in proportion to the categories of income in furtherance of which this residual expenditure was incurred;

e. The 2001 Letter expressly states that it covers "any" residual input tax. We construe "any" to mean all;

f. We are not impressed by the argument that the Commissioners have offered to amend the terms of the 2001 Letter and that, therefore it must be deficient. It must have become clear to the Commissioners that the wording had caused confusion. It makes a lot of sense to amend it to remove any possibility of this confusion continuing. But that leaves open what is the proper construction of the letter as it stands; and

g. Apportioning the relevant input tax on the relevant expenditure as "Home repairs" means that it is apportioned by reference to the income of the Homes where it is spent. Apportionment in accordance with the method proposed by Mr Jordan would take into account the large amounts of taxable income generated by the Shops. Apportionment by the first of these two alternatives seems entirely reasonable.

For these reasons we dismiss this appeal by Sue Ryder Care. We understand that the parties do not wish us to consider any question of the amount of input tax that is recoverable.

MALCOLM J F PALMER

CHAIRMAN

RELEASED: 29 October 2004

LON/03/1035