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United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Abbeyview Bowling Club v Revenue & Customs [2008] UKVAT V20661 (28 April 2008)
URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20661.html
Cite as: [2008] UKVAT V20661
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- that income generated from the consumption of drinks and snacks in the indoor rink area should have been included in the calculation of "use";
- indoor rink members' subscriptions income should have been excluded from the calculations because separate consideration was payable by members who wished to use the indoor bowling facility; (not accepted see above)
- an allowance was due for the portion of the roof and the wall that rendered part of the lounge area wind and water tight after the new construction;
- that a proportion of the costs of the rink analogous to the extent of the borders should be allowed.
20661
Input Tax Partial Exemption – Standard Method Over-ride – whether appropriate to non avoidance transactions – Bowling Club – new rink providing exempt and standard rated supplies. No over-ride applicable on facts – 1995 VAT Regulations 101 & 107. HMRC guidance.
EDINBURGH TRIBUNAL CENTRE
ABBEYVIEW BOWLING CLUB Appellant(s)
- and -
THE COMMISSIONERS FOR
HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: (Chairman): T Gordon Coutts, QC
(Member): Ian M P Condie, CA
for the Appellant(s) Mr Charles K Rumbles
for the Respondents Miss Julie Strachan, Shepherd and Wedderburn, LLP
and on 3 March 2008 instructing Ian Artis, Advocate
© CROWN COPYRIGHT 2008.
Introductory
This appeal was against an assessment by the Respondents purporting by use of the application of a "standard method override" to place liability on the Appellant for a substantial sum in disallowed input tax. There were several difficulties and complexities in the matter one result of which was recognised by the Respondents not seeking to impose a mis-declaration penalty. A further reason for that action by the Respondents might be found in the introductory material they promulgated when the regulations were amended to bring in this concept of "override". It is plain from the note they produced at the time that the reason for the introduction of the override was the targeting of aggressive tax avoidance. It was conceded that this description did not apply to the Apellant's activities. They were a bowling club attempting to provide social and leisure facilities in a somewhat deprived area of Dunfermline and were run on a substantially voluntary basis by dedicated office bearers in a wholly commendable enterprise, viewed overall. They were, viewed reasonably, unintended victims of the change by HMRC.
Factors involving the Hearing
In the presentation of this appeal the Appellant's and indeed Respondents' case was hampered. In the first place the Appellant's representative with his customary enthusiasm and industry had to attempt to present arguments and calculations which were not those originally discussed with HMRC and to some extent not fully considered until the actual Hearing. In the second place the Hearing itself, when it began was conducted by Miss Strachan, an able solicitor within the firm of Shepherd and Wedderburn. At the conclusion of the 2 days set down for the Hearing various questions were floated by the Tribunal for the consideration of parties. When the case called again for Hearing about 4 months after the evidence was concluded the Respondents' case was then presented by Counsel. The Tribunal accordingly heard submissions from a Counsel who had not conducted the Hearing, had not heard the evidence and who concentrated his attention it seemed on the questions posed by the Tribunal. The Tribunal is grateful to Mr Artis for his eloquent summary of evidence he had not heard and also his helpful researches into and submissions upon the law and the questions posed after the Hearing by the Tribunal. They are also grateful to him for a 23 page "outline submission" presented before his summing up began.
An additional factor which caused difficulty was that none of the participants had had any experience of the standard method override or its operation, and the Tribunal itself was able to hear the matter with an entirely open mind.
In that state of affairs the various utterances in the correspondence produced and also the need for the Appellant to have had second thoughts about matters that HMRC said that they thought had been agreed and conceded caused, it seemed, a certain gap in the argument presented for the Respondents. Contrary to the submission made by the Respondents the Tribunal do not consider that they were involved in this instance in a matter of supervisory jurisdiction. They took the view that they were entitled to hear and decide upon evidence relating to the compilation of the figures upon which HMRC had based their calculations considering that their proper function in a case involving any assessment is to ascertain what tax, if any, is due. They do not consider that the Appellant, who had not for various reasons, unsound but understandable, made an attempt to deal with the implications of issues of fact the standard method override or made a statutory calculation at the time of the assessment, was in issue. That does not the Tribunal hold preclude it from listening to assertions about what the proper factual basis for any assessment should have been. In that they follow Murat v CCE [1998] STC at 925 & 926 and the Court of Appeal in CCE v Pegasus Birds [2004] STC 1509.
The Evidence
The Tribunal heard evidence from the Appellant's Honorary Secretary Mr Stewart Roxburgh a substantial witness of credit, from Mr Andrew Croxford, the Appellant's accountant, who had been consulted at an early stage by the Appellant and had formed a view as to the applicability of the standard method override which bedevilled subsequent discussions. They also heard evidence from Mr John Wilson whose involvement was with the design and who assisted with the funding of the project hereafter described and who ultimately became project manager working with Tannson Design Build. The final witness for the Appellant was Mr Dugald Carstairs a VAT Consultant. For the Respondents Miss Strachan led evidence from Mr McMeechan the officer involved in the initial discussions, inspection and assessment and from Mrs Fiona Marshall who conducted the statutory review of the matter. All these persons had provided and were referred to a body of correspondence, tables and calculations, with the exception of Mr Roxburgh who gave the Tribunal very clear evidence about the aims and objects of the Appellant and how their affairs were conducted in the past, in the present and at the premises. He described their daily use.
Facts
From the evidence the Tribunal hold the following matters to have been established as fact.
The Appellants were originally engaged in operating an outdoor bowling green which they took over from Dunfermline Council and formed themselves as a club to do so in 1967.
Originally the premises occupied by the Appellant consisted of a clubhouse attached to the outdoor green. It had operated as a bowling green, obviously only in the summer months, but did trade with its members in the supply of refreshments and catering throughout the year.
The Committee of the Appellant wished to expand their activities and conceived the ambitious plan of adding an 8 lane indoor bowling rink onto and in places into the existing clubhouse and adjoining land.
In order to do so the Tribunal heard, very extensive negotiations, discussions and seeking of finance were necessary. The Tribunal find as a fact that had the Appellant not been able to offer to the commercial lenders in the licensed trade the prospect of substantial turnover, funding would not have been forthcoming and the rink would not have been built. It appeared therefore that the Appellant had 2 aims. The first primarily was the provision of the exempt supply of recreational facilities, as they had done in the past, and then also as a trader seeking to maximise its turnover and profit in order to exist with substantial loan finance over its premises.
In the trading aspect of their activities the Appellant were successful and substantially increased their turnover of excisable liquor and catering facilities, all taxable supplies. Neither this aim, nor the aim of providing indoor bowling facilities to its members could have been achieved or have operated without the other.
The new building annexed to the old partially encroached on the airspace of the old building and provided it with a new roof extension. The clubhouse, after modification, provided one wall of the rink and part of the roof of the new rink rendered part of the extended clubhouse wind and water tight.
From the photographs and plan produced it is clear that the rink itself was at a lower level than the remainder of the club premises. As a consequence it was surrounded by a border referred to, not wholly accurately as a "walkway" and that part of the border adjacent to the clubhouse and bar was 2 metres wide and 41 metres long. That part contained chairs and tables which in the normal course of events supported drink and drinkers. The borders running at right angles were 1.5 metres wide and the border at the opposite end of the rink was 1.6 metres wide. Along the whole length of most of the walls bordering the "walkway" were benches, chairs and tables for the occupation of spectators viewing the activities on the rink, and presumably also by bowlers either waiting their turn to bowl or relaxing between games. The 8 lanes of the rink ran at right angles between the 2 wider parts of border. The widest border was separated from a new lounge, new bar and another area in part by a glazed partition into which there were 2 major openings connecting the rink with the remaining premises. There was a serving hatch which opened onto the wider border. Photographs 36, 37 and 38 in the productions demonstrate the layout and the lack of a continuous partition not only between the bar and lounge and the border at one end of that border but also between floor and ceiling, so providing a shelf or counter.
From that evidence together with the evidence of the Appellant's witnesses the Tribunal find as a fact that the "walkways" and in particular that adjacent to the old building were an integral part of the premises used for the supply of taxable material. The larger "walkway" could be, and was utilised as an extension of the bar for the purposes of the consumption of excisable liquor even when there was no or very little bowling taking place.
It would seem that the Appellants enterprises have been successful. Membership of the club, which is divided into indoor and outdoor members had increased and trading revenue had increased markedly within months of the new premises being opened and the financial consequences are discussed below.
The Membership
There are 200 outdoor members who pay a subscription of £50 a year and pay nothing as a rink fee; at present there are 800 indoor members who pay £30 as a subscription and £1.90 per play. There is capacity for 1500 indoor members. Both types of member have full club rights but the outdoor membership capacity is full. Visitors pay a fee to use the rinks. It would be reasonable to assume that the outdoor membership being, as it always was, full has made no difference to bar sales within the new premises and that all increases in bar sales and catering activity can reasonably be attributed to the existence of the new rink. Visitors fees are taxable; membership and members' playing fees are exempt. An argument was put forward by the Appellant that the membership subscription for the new rink was of a different taxable status to the green fees members paid. While that might provide the basis for an argument, such an argument cannot be utilised in the present appeal. No division has ever been made between subscription and green fees in the accounting arrangements for the club and no output tax has ever been charged on the membership subscription. If that situation was to change then different considerations might arise, but for the purposes of the present appeal, we do not consider it open to the Appellant to argue for the removal of membership indoor rink subscriptions from the general calculation; consequently we reject that argument.
Tax Implications of the works
The works were begun in May 2003 and completed by late September 2003. The Appellant, having taken advice, thought there was no problem in recovering a proportion of the input tax paid on the construction using the standard method in a partially exempt situation. HMRC thought differently and their Mr McMeechan, realising that the Appellants had residual input tax of a sum in excess of £50,000, turned his mind to the provisions of the "standard method override". That device was incorporated by way of amendment on 17 April 2002 to Regulation 107 of the Value Added Tax Regulations 1995 (as amended). As a result of his thoughts Mr McMeechan undertook an examination of records and paid visits to the officials and representatives of the Appellant and also to the premises. It transpired that his visit to the premises was wholly useless for the purposes of informing himself of any use or proxy for use of the new rink construction as he went early on a midweek summer morning when any bowling would be outside and drinking had barely commenced.
The Regulations
The statutory regime begins with Regulation 101 of the 1995 Regulations the relevant portions of which read:
(1) Subject to regulation 102 [and 103B], 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 prescribed accounting period –
(a) goods imported or acquired by and … goods or services supplied to, the taxable person in the period shall be identified,
(b) there shall be attributed 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 making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed 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 taxable supplies made by him bears to the value of all supplies made by him in the period.
(3) In calculating the proportion under paragraph (2)(d) above, there shall be excluded –
(a) any sum receivable by the taxable person in respect of any supply of capital goods used by him for the purposes of his business,
(b) any sum receivable by the taxable person in respect of any of the following descriptions of supplies made by him, where such supplies are incidental to one or more of his business activities.
(i) any supply which falls within item 1 of Group 5, or item 1 of Group 6, of Schedule 8 to the Act,
(ii) any grant which falls within item 1 of Group 1 of Schedule 9 to the Act,
(iii) any grant which falls within paragraph (a) of item 1 of Group 1 of Schedule 9 to the Act,
(iv) any grant which would fall within item 1 of Group 1 of Schedule 9 to the Act but for an election having effect under paragraph 2 of Schedule 10 to the Act, and
(v) any supply which falls within Group 5 of Schedule 9 to the Act,
(c) that part of the value of any supply of goods on which output tax is not chargeable by virtue of any order made by the Treasury under section 25(7) of the Act unless the taxable person has imported, acquired or been supplied with the goods for the purpose of selling them, and
(d) the value of any supply which, under or by virtue of any provision of the Act, the taxable person makes to himself.
(4) The ratio calculated for the purpose of paragraph (2)(d) above shall be expressed as a percentage and, if that percentage is not a whole number, it shall be rounded up [as specified in paragraph (5) below].
The relevant Regulations for present purposes thereafter are 107B, 107C and 107E these read:
[107B]
(1) This regulation applies where a taxable person has made an attribution under regulation 107(1)(a) according to the method specified in regulation 101 and that attribution differs substantially from one which represents the extent to which the goods or services are used by him or are to be used by him, or a successor of his, in making taxable supplies.
(2) Where this regulation applies the taxable person shall-
(a) calculate the difference, and
(b) in addition to any amount required to be included under regulation 107(1)(c), account for the amount so calculated on the return for the first prescribed accounting period next following the longer period, except where the Commissioners allow another return to be used for this purpose.
(3) But where a registered person has his registration cancelled at or before the end of a longer period, he shall account for any adjustment under this regulation on his final return.
[107C]
For the purposes of regulations 107A and 107B, a difference is substantial if it exceeds-
(a) £50,000, or
(b) 50% of the amount of input tax falling to be apportioned under regulation 101(2)(d) within the prescribed accounting period referred to in regulation 107A(1), or longer period, as the case may be, but is not less than £25,000.
[107E]
(1) Regulations 107A and 107B shall not apply where the amount of input tax falling to be apportioned under regulation 101(2)(d) within the prescribed accounting period referred to in regulation 107A(1), or longer period, as the case may be, does not exceed-
(a) in the case of a person who is a group undertaking in relation to one or more other undertakings (other than undertakings which are treated under sections 43A to 43C of the Act as members of the same group as the person), £25,000 per annum, adjusted in proportion for a period that is not 12 months; or
(b) in the case of any other person, £50,000 per annum, adjusted in proportion for a period that is not 12 months.
(2) For the purposes of paragraph (1) above, "undertaking" and "group undertaking" have the same meaning as in section 259 of the Companies Act 1985.
Various calculations were produced to the Tribunal before and during the Hearing and the calculation produced by Mr McMeechan at number 29 of the productions is reproduced as appendices 1-4. There was no dispute about the calculation of the Standard Method Annual Adjustment in Appendix 1.
The override calculation was in dispute over the matter of the extent of use of the indoor rink area in making taxable supplies
The challenge by the Appellant was in relation to several issues –
The Tribunal felt that there was some merit in each of the Appellant's contentions 1,3 & 4. Least compelling of these were the wind and water tight calculations, the Tribunal being un-persuaded that such works would not have been required anyway since the clubhouse premises would have required to have been wind and water tight whatever works had been done at the adjacent area and, if an extension was to take place for an indoor rink, then the works attributable to that would require to make good the wind and water tight arrangements of the old clubhouse.
The Appellants argued that the increase in bar/catering sales of £72,836 following the opening of the indoor rink was income derived from use of the indoor rink area. This view is attractive and gains support from the layout of the premises; the bar dispensing directly into the area, the seating area and the extended seating area around the bowling rink itself. However the increase in bar sales while a function of additional throughput of customers could not be said to be entirely the result of the construction of the new rink. Given that the outdoor membership of the Appellant was, and remains full, and all of the growth in membership of the Appellant has derived from the indoor rink membership, it is reasonable to assume that a substantial proportion of this increase in bar sales represented sales of taxable supplies into the indoor rink area. In the absence of any alternative detailed information, the Tribunal reasonably infers that at least ? and possibly 50% of the £72,836 increase in bar/catering income following the opening of the indoor rink can be fairly attributed to the indoor rink area. In coming to that view the Tribunal considered the "but for" warning in Southern Primary Housing [2004] STC 209, but were able to distinguish the present case on its facts.
The effect of that view of the facts means that the "Taxable percentage of residual input tax related to the indoor rink" (Appendix 2(6)) is increased from 5% to:
This in turn increases the "Input tax attributable to taxable outputs" (Appendix 2(7)) from £4,749.80 to £28,498.80 and reduces the difference in the level of input tax recoverable using the standard method as compared to the standard method override from £59,187.02 to £35,438.02. In the event therefore because the difference amounts to less than £50,000 the appeal succeeds and the Appellant is entitled to the refund of the sum paid with simple interest thereon from the date of expenditure until payment.
Expenses
The Appellant sought expenses in the event of success. It has succeeded and is entitled to expenses which failing agreement will be taxed by the Auditor of the Court of Session in terms of Rule 29(3).
EDN/07/69
Footnote:
The view we have come to on the facts does not require us to consider the matter of whether the "override" regulations are incompatible with European Law rights. We reserve that matter for further argument in an appropriate case as well as on the argument that HMRC had and failed to exercise any discretion in this case.
Abbeyview Bowling Club Appendix 1
VAT registration number 380 0756 59
Summary of the Standard Method Annual Adjustment Y/E 31 March 2004 as per representative's schedule
£
1 Total input tax incurred for the year 162,473.40
2 Input tax related wholly to taxable supplies 22,076.91
3 Input tax related wholly to exempt supplies 534.85
4 Residual input tax 139,861.64
5 Value of all taxable supplies 263,341.29
6 Value of all exempt supplies 82,748.08
7 Value of all supplies (5 + 6) 346,089.37
8 Recoverable percentage of residual input tax 77%
263,341.29 x 100 (rounded up to nearest whole number)
346,089.37
9 Recoverable residual input tax attributed to taxable supplies £139,861.64 x 77% 107,693.46
10 Residual input tax related to exempt supplies £139,861.64 - £107,693.46 32,168.18
11 Taxable input tax recovered for the year £22,076.91 + £107,693.46 129,770.37
12 Exempt input tax for the year £534.85 + £32,168.18 32,703.03
Residual input tax exceeded the threshold limit of £50,000, over-ride calculation should have been considered
Abbeyview Bowling Club Appendix 2
VAT registration number 380 0756 59
Standard method over-ride calculation
Based on the proposal agreed with the trader's representative, cost analysis details have been submitted for the club house extension and alterations. Residual input tax relating to the extension and alterations to the club house must be apportioned according to use. The total taxable costs were £771,661.41 and the related input tax x17.5% £135,040.74. I have allowed all the costs for that part of the extension of the club house and alterations to the club house as they were related to the improvements for the bars and catering facilities (see item 1 below) whose supplies are all taxable.
£
1 Analysis of taxable costs related to the extension and alterations
of the bar and catering facilities, all wholly deductible £228,826[1] x 17.5% 40,044.55
2 Analysis of taxable costs related to the extension involving the
construction of an indoor rink £542,835.41[2] x 17.5% 94,996.19
3 Taxable outputs (visitor indoor rink fees) 3,016.10
4 Exempt outputs (membership indoor rink subscriptions and
indoor rink playing fees) 64,919.95
5 Total income for the indoor rink 67,936.05
6 Taxable percentage of residual input tax related to the indoor rink.
3,016.10 x 100 (rounded up to nearest whole number) 5%
67,936.05
7 Input tax attributable to taxable outputs £94,996.1 x5% 4,749.80
8 Input tax attributable to exempt outputs £94,996.1 - £4,749.80 90,246.39
Abbeyview Bowling Club Appendix 3
VAT registration number 380 0756 59
Calculation of recoverable input tax incorporating the Standard Method over-ride calculation
£
1 Total input tax incurred for the year 162,473.40
2 Input tax related wholly to taxable supplies 22,076.91
3 Input tax related wholly to exempt supplies 534.85
4 Residual input tax 139,861.64
5 Value of all taxable supplies 263,341.29
6 Value of all exempt supplies 82,748.08
7 Value of all supplies (5 + 6) 346,089.37
7 sic Residual input tax that can be calculated using the standard method
£139,861.64 - £135,040.74[3] 4,820.90
8 Recoverable residual input tax attributable to taxable supplies using
the standard method £4,820.90 x 77% (see Item 8 to Appendix 1) 3,712.09
9 Residual input tax attributable to exempt supplies using the standard method
£4,820.90 - £3,712.09 1,108.81
8 sic Recoverable residual input tax attributed to taxable supplies applying the
standard method over-ride calculation (see Item 7 to Appendix 2)
£40,044.55 + £4,749.80 44,794.35
9 sic Residual input tax related to exempt supplies applying the standard method
over-ride calculation (see Item 8 to Appendix 2) 90,246.39
10 sic Taxable input tax recoverable for the year incorporating the standard method
over-ride calculation £22,076.91 + £3,712.09 + £44,794.35 70,583.35
11 sic Exempt input tax for the year incorporating the standard method over-ride
calculation £534.85 + £1,108.81 + £90,246.39 91,890.05
Abbeyview Bowling Club Appendix 4
VAT registration number 380 0756 59
Summary of the calculation in Appendix 1 to 3 to determine whether an over-ride adjustment should be made
£
1 Total input tax recovered year ended 31 March 2004 using the standard method
(see Item 11 to Appendix 1) 129,770.37
2 Total input tax recoverable incorporating the standard method over-ride
(see Item 10 to Appendix 3) 70,583.35
3 Difference in the sum claimed 59,187.02
Over-ride should have been applied as the difference exceeds £50,000
Note 1 otes Taken from page 2 of Wilson Marketing Services’ letter of 29 May 2006 to Thomson Cooper [Back] Note 2 Total cost £771,661.41 - £228,826 costs attributed to taxable supplies [Back]