United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20628

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Sunrise Trading Ltd v Revenue & Customs [2008] UKVAT V20628 (19 March 2008)

20628

Value Added Tax – Supplies of vocational training – Recovery of input tax – Item 5A Group 56 Schedule 9 VATA 1994 – Partial Exemption – Appeal dismissed

LONDON TRIBUNAL CENTRE

SUNRISE TRADING LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: DR KAMEEL KHAN (Chairman)

Sitting in public in London on 18 January 2008

John MacNaught, Director, for the Appellant

Phyllis Ramshaw, Lawyer, HMR&C, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

The disputed decisions of the Commissioners of Her Majesty's Revenue and Customs ("The Commissioners") are:

(i) A decision that the Appellant's supplies of vocational training were exempt from value added tax ("VAT") and in consequence that VAT incurred on supplies made to the Appellant, and previously claimed as input tax in full, was disallowed to the extent that it was not recoverable under the partial exemption standard method.

(ii) An assessment in the amount of £38,348 plus interest for periods 02/03 to 08/04 issued on 21 March 2005.

As a preliminary matter, pages 106-107 of the bundle was taken out as those were not in the public domain. Two officers of HMRC, Mrs Ruth Bostock, and Mr Steven Roberts, Higher Officer, attended the Tribunal but were not called as witnesses.

Background and Chronology

The Appellant is a limited company registered for VAT with effect from 1 April 1995 with VAT registration 655 1216 53. They applied to be deregistered on 28 June 2005 as its entire business was now exempt. Their deregistration took effect on 1 June 2005.

The Appellant's core business activity is training. Until October 2005, there were two business activities namely, the granting of franchises and the supply of vocational training courses provided under the provisions of the government funded "Learn Direct" initiative operated by the Learning and Skills Council.

On 16 August 2004, an officer of the Commissioners visited the Appellant to undertake routine audit visit. The officer discovered that the Appellant had been treating its supplies of training as a zero-rated supply.

The officer formed the view that educational and vocational training were exempt supplies. The Appellant was informed by the Commissioners on 20 August 2004 (Mrs R Bostock) of this position and being partially exempt they would not generally be able to claim back all of their input tax. The Appellant was advised that a partial exemption calculation would need to be applied as from July 2001, the date the Appellant had commenced making exempt supplies. The Appellant was given one month in which to carry out the necessary calculations. On 7 October 2004, the Commissioners reminded the Appellant that they had not received the requested calculations. An extension until the end of October was given.

On 2 November 2004, the Appellant replied to the Commissioners and provided quarterly input tax figures recalculated applying the partial exemption calculation. The Commissioners wrote to the Appellant (13 January 2005) requesting a recalculation of the input tax for the periods 08/02 to 08/04 as the original figures provided had not been correctly calculated.

The Appellant provided a series of schedules containing recalculated figures for the 11/04 period. The Commissioners accepted that the recalculations were correct and requested (17 February 2005) similar calculations for the periods 08/02 to 08/04.

From the sales and purchases schedules for the periods 11/02 to 08/04 provided by the Appellant, the Commissioners calculated the overclaimed input tax after applying the standard partial exemption method. On 21 March 2005, the Appellant was notified that an assessment would be issued in the amount of £38,384 representing overclaimed input tax. The assessment was notified to the Appellant on 16 May 2005.

The assessment was calculated using the figures supplied by the Appellant which identified input tax wholly attributable to taxable supplies and residual input tax. The difference between the input tax previously claimed and the amount which ought to have been claimed was calculated applying the standard method of partial exemption apportionment to the residual tax. An allowance was made for input tax previously assessed. A small amount of tax was also assessed for periods 02/03 to 08/03. The Appellant was advised that the figures for the period 08/02 had not been included and were requested to provide same.

After further discussions between the parties, the Commissioners advised the Appellant (22 August 2005) that they had decided to exercise their discretion and not charge interest on the assessment insofar as it related to the input tax which was disallowed by the Commissioners as a result of the error on the part of the Appellant in recovering input tax in full.

The law

Input tax is defined within section 24(1) of the Value Added Tax Act 1994 ("VATA") which provides:

Subject to the following provisions of this section, "input tax", in relation to a taxable person, means the following tax, that is to say –

(a) VAT on the supply to him of any goods or services;

(b) …

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

Subsection 2 of section 25 VATA provides:

…

(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 28 …

The amount of input tax allowable is set out in section 26:

(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in 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 supplies made or to be made by the taxable person in the course or furtherance of his business –

(a) taxable supplies;

(b) …

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

Regulation 101 of the VAT Regulations 1995 (SI 1995/2518) provides:

(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 accounting period –

(a) … goods or services supplied to, the taxable person shall be identified,

(b) there shall be attributable 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 the making of exempt supplies … shall be attributable 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 the taxable supplies made by him bears to the value of all the supplies made by him in the period.

The Appellant's contentions

In its grounds of appeal the Appellant sets out the following:-

"We are a learn direct training provider who receive funding from the Learning Skills Council. At the time of our initial inspection and assessment, neither we, the inspector, or her supervisor knew that we should have been exempt from being charged VAT by our suppliers for materials or supplies utilised in the training process (Item 5A of Group 6, Schedule 9, Value Added Tax Act 1994).

Upon receipt of the original assessment, we made extensive enquiries and ascertained that this was the case and we notified the inspector accordingly. We were then informed by our inspector that the procedure was as follows:- the assessment stood. We were then responsible for reclaiming the VAT charged in error by our suppliers.

This in effect, would have meant we pay HM Revenue and Customs, we get the monies back from our suppliers and, in turn, the suppliers reclaim this back on their VAT return – no-one loses!

However, this did not work out like that as:- When we contacted our suppliers, they in turn contacted the Helpline at HM Revenue and Customs, who informed them that this was incorrect.

When we contacted UFI Ltd, our Learndirect provider wholly funded by the government and who are our major supplier of learning materials (which accounted for between 25-30% of our funding), we were informed that the whole matter of VAT on such learning materials were under discussion with HM Revenue and Customs at a national level. This, in effect, put us in a position where we were unable to recover the VAT charged in error.

We received demands from the Regional Debt Management Unit of HM Revenue and Customs and responded by informing them of the circumstances and they held off. However, we received another demand from this unit on 6^th November 2006 and when we received a reply to our response, they stated that the inspector considered that the matter was "done and dusted" and that the assessment was due.

They also indicated that we may have grounds for an appeal to a VAT tribunal.

At this time we again contacted UFI Ltd and received a response that it had now been agreed with HM Revenue and Customs at a national level that the VAT charged on material costs was correct and not charged in error.

This means that the assessment is now incorrect, as all the VAT on invoices from UFI Ltd were right and should not have been disqualified at the initial assessment. Our appeal is now based on the fact:-

That the initial assessment was incorrect, due to a retrospective decision between UFI Ltd and HM Revenue and Customs.

That HM Revenue and Customs have blocked every attempt for us to recover the VAT charged in error by our suppliers – even the inspector who made the original assessment and advised us on the situation, contradicted this to one of our suppliers."

The Commissioners' Contentions

The Commissioners submit that the matters set out by the Appellant as their grounds of appeal are not within the jurisdiction of the Tribunal. They further say that the Appellant appears not to dispute the liability as stated in the assessment.

The Commissioners say that the Appellant's contention that they were correctly charged VAT and therefore should be allowed to recover the tax so charged. It appears to the Commissioners that the Appellant is confusing two issues, namely the VAT liability of supplies made to it and the recoverability of such VAT as input tax. The fact that VAT is correctly charged on supplies made to the Appellant does not result in the Appellant being able to recover as input tax such VAT. The liability of the supply made to the Appellant is not determinative of the recoverability of the tax incurred. VAT incurred for a business purpose and therefore properly input tax can only be recovered to the extent that it is used to make taxable as opposed to exempt supplies by the Appellant.

The Commissioners say that the Appellant carry on a partially exempt business and as such incur input tax which is attributable to exempt supplies. The supplies of training are exempt by virtue of Item 5A of Group 6 of Schedule 9. The Commissioners say that the supplies to the Appellant (previously claimed in full) has been disallowed to the extent that it is not recoverable under the partial exemption rules. After allowing the input tax wholly attributable to taxable supplies the remainder according to the figures supplied by the Appellant was residual input tax. The Appellant did not identify any input tax that was wholly attributable to exempt supplies. The Commissioners therefore applied the standard method of apportionment as provided by Regulation 101(d) to the residual tax so that a proportion of residual tax was allowed and the remainder disallowed. The assessment is to recover the difference between input tax previously paid to the Appellant and the amount that the Commissioners calculated ought to have been paid.

This appeal relates to the disallowance of input tax on exempt supplies of educational or vocational training. Group 6 of Schedule 9 of the VATA 1994 deals with exemption from VAT for goods and service in the field of "education". Without going into all the detailed provisions, suffice it to say that an eligible body providing educational or vocational training services makes exempt supplies for VAT. The Appellant is not an eligible body for the purposes of the legislation. The provisions which are more appropriate to the Appellant's position are contained in Item 5A of Group 6 Schedule 9 which states:-

"The provision of education or vocational training and the supply, by the person providing that education or training, of any goods or services essential to that provision, to the extent that the consideration payable is ultimately a charge to funds provided by the Learning and Skills Council for England or the National Assembly for Wales under Part I or Part II of the Learning and Skills Act 2000."

Under this provision, the supplies of educational or vocational training are exempt from VAT where they are provided using funding provided by the Learning and Skills Council for England and provided directly to the person receiving the training. Further, the supply by the Appellant to students of any goods and services essential to the provision of such education or training is also exempt. While some suppliers may satisfy the conditions for making exempt supplies others must charge VAT to the Appellant (e.g. ink cartridges supplies) if not within the exemption. The input tax which has been incurred by the Appellant relates to both taxable and exempt supplies. An assessment has been raised for input tax claimed which relates to exempt supplies (above the de-minimus limits). The assessment of £38,348 was raised on the Appellant for the period 02/03 to 08/04. It should be noted that the Appellant also ran a taxable franchising business which stopped in October 2005 and therefore were partially exempt until late 2005 after which the business was fully taxable.

The Commissioners advised the Appellant that a partial exemption adjustment calculation should have been applied to its input tax which had been claimed in full and that such calculation should be due from July 2001. The Appellant provided the recalculated figures which were accepted by the Commissioners. The figures used in the calculations were supplied by the Appellant. There was a discrepancy between the input tax which had been claimed and the amount which ought to have been claimed by applying the standard method of partial exemption apportionment to the residual tax. It was this discrepancy which formed the basis of the assessment.

I can see no reason to allow this appeal. The Appellant appears not to have fully understood the rules for the recovery of VAT and therefore made an error in their VAT returns in seeking to recover input tax which should not have been recovered if attributable to exempt supplies. The VAT incurred on supplies to the Appellant which have been disallowed have been so treated under the partial exemption rules. The Appellant would have recovered VAT which were wholly attributable to taxable supplies.

In conclusion, the Appellant's ability to recover VAT is a separate and distinct matter from whether they were correctly charged VAT on supplies made to them by their suppliers. The Commissioners have acted correctly in making this assessment.

Finally, there may have been internal correspondence from funding bodies and funded learners designed to assist bodies providing training on the recoverability of VAT which may have confused the Appellant. These correspondences and their implications are not within the remit of the Tribunal.

Appeal dismissed.

DR KAMEEL KHAN

CHAIRMAN

RELEASED: 19 March 2008

LON 2006/1339