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	England and Wales High Court (Administrative Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> Svenska International Plc v Customs and Excise [1996] EWHC Admin 899 (24 May 1996) URL: http://www.bailii.org/ew/cases/EWHC/Admin/1996/899.html Cite as: [1996] STC 1000, [1996] EWHC Admin 899

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
CROWN OFFICE LIST

		Royal Courts of Justice Strand London WC2
		Friday 24 May 1996

Friday 24 May 1996

MR. JUSTICE CARNWATH:

Summary

The Appellant ("Svenska") is a UK subsidiary of a Swedish bank. In late 1987, the Swedish bank itself established a branch in London ("London branch"), separate from Svenska. It was agreed that Svenska would provide all management services to London branch and would make a charge for them. The services provided included staff, use of shared premises, office services, legal and accounting services, and incidental goods. Svenska in turn contracted with outside suppliers for all goods and services. This arrangement was formalised on 1st February 1991 in a written agreement, under which the amount to be paid by London Branch was to be calculated on the basis that the total costs incurred by Svenska would be shared between the parties in proportion to the value of banking and related business undertaken by each. Although amounts in respect of these services were accrued in the accounts of both bodies, no actual charge was made by Svenska, until an invoice was issued on 26th June 1992 in respect of services up to December 1991 (amounting to some £45m).

Svenska was registered for VAT purposes in the UK. London branch was not. There were attempts from 1988 to procure the registration of both parties as a single VAT group, thus making them a single entity for VAT purposes. However, this was not possible until August 1991 (following a change in the law affecting branches of foreign companies). Thus, between 1987 and 1991, Svenska and London branch were treated as separate entities. Services by Svenska to London Branch were subject to VAT, although (under the regulations relating to "continuous supplies") tax was not payable until an invoice was issued. Under arrangements agreed with the Customs (the detail of which is not material), Svenska was able to claim full credit for input tax on inward supplies attributable to these services, on the basis that tax would be payable in due course by London branch when an invoice was issued.

From 1st August 1991 London branch became a member of the Svenska group for VAT purposes (as confirmed by Customs in their letter of 2nd October 1991). This mean that for VAT purposes transactions between them were disregarded. Accordingly, the invoice issued by Svenska to London branch in June 1992, in respect of its services from 1987 onwards, did not include VAT. Outward supplies by London (now to be treated as supplies by the Group) were in the main exempt. Thus the recoverable tax did not correspond to the credits previously given, which had been based on attribution to supplies which would be fully taxable.

The Commissioners, in October 1991, raised an assessment seeking to reclaim the input tax credited between 1987 and 1991. Following certain revisions, two assessments remain, one dated 23rd November 1992 in the sum of £20,392 and the other, dated 27th July 1993, in the sum of £791,202. Both are in respect of the period from 1st July 1991 to 30th September 1991, that being the period during which London branch ceased to be a separate VAT entity. No distinction need be drawn between the two assessments for present purposes. They were both subject to appeal to the VAT Tribunal, which upheld them by its decision dated 23rd May 1995. Svenska now appeals to this Court on the grounds that that decision was erroneous in law.

The appeal raises two principal issues:-

(i) whether the powers relied on by the Customs entitled them to raise an assessment to recover the input tax in question?

(iii) if so, whether they raised the assessment for the right period?

The statutory provision, under which the Customs claims to be entitled to recover the input tax previously claimed by Svenska, is regulation 34 of the Value Added Tax (General) Regulations 1985, as amended in 1987. Regulation 34 provides as follows:

"(1) This regulation applies where -

(a) a taxable person has been credited with an amount of input tax in respect of any importation or supply which has been attributed to an intended taxable supply; and

(b) during a period of six years commencing on the first day of the prescribed accounting period in which the attribution was determined, he uses or appropriates for use any such importation or supply in making an exempt supply or in carrying on an activity other than the making of taxable supplies before the intended taxable supply is made.

(2) Save as the Commissioners otherwise allow, where this regulation applies the taxable person shall on the return next following the date on which the use or appropriation for use occurs, account for such proportion of the input tax credited as is attributable to the exempt supply or other activity in accordance with the method which he was required to use when the input tax was credited, and he shall repay the said proportion of input tax to the Commissioners."

That provision can be seen as the counterpart to regulation 30, under which input tax on supplies which are "used or to be used" wholly or partly for making taxable supplies may be "provisionally attributed", so as to enable credits to be obtained in advance of actual use. Regulation 34 is designed to enable credits to be reclaimed if the use or appropriation changes. The effect of those regulations, and their relationship with the corresponding provisions of the EC Council Directive (77/388) ("The Sixth Directive"), was examined in Cooper & Chapman v Commissioners of Customs and Excise [1993] STC 1.

In the present case, regulation 34 has to be applied in the somewhat artificial context created by the provisions relating to "continuous supplies". Under section 4 of the Value Added Tax Act 1983 (which applied at the relevant time), a supply of services is treated as taking place at the time when the services are performed (s.4(3)). By section 5(9) provision may be made by regulations with respect to the time at which a supply is to be "treated as taking place", where it is a supply -

"of goods or services for a consideration the whole or part of which is determined or payable periodically, or from time to time, or at the end of any period."

By regulation 23 of the General Regulations, it is provided -

"... where services are supplied for a period for a consideration the whole or part of which is determined or payable periodically or from time to time, they shall be treated as separately and successively supplied at the earlier of the following times -

(a) whenever a payment in respect of the supply is received; or

(b) whenever the supplier issues a tax invoice relating to the supplies."

Putting these provisions together, the Commissioners argue that Svenska was, between 1987 and 1991, credited with amounts of input tax in respect of goods and services supplied to it which were attributable to the supply of management services to London branch. Since, by regulation 23, such management services were not to be treated as supplied until invoiced or paid for, they were "intended taxable supplies" at the time the input tax was credited. This brings the case within regulation 34(1)(a). Thus far, the argument is uncontentious.

The next stage of the argument depends on the provisions of section 29, relating to groups of companies. That provides -

"(1) Where under the following provisions of this section any bodies corporate are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member, and -

(a) any supply of goods or services by a member of the group to another member of the group shall be disregarded; and

(b) any other supply of goods or services by or to a member of the group shall be treated as a supply by or to the representative member...

and all members of the group shall be liable jointly and separately for any tax due from the representative member."

Thus, after August 1991, the supplies of services by Svenska to London branch were to be disregarded for VAT purposes. Accordingly, inward supplies to Svenska, which had formerly been attributed to taxable supplies by them to London branch, must now be attributed to supplies outside the Group, including those by London branch itself. Deductions cannot be made for that proportion which is properly attributable to exempt supplies by London branch. Again, there is no dispute on this point so far as affects inward supplies after August 1991. The issue concerns the treatment of the input tax in earlier periods, for which Svenska received credits on the basis that it was attributable to taxable supplies to be made to London branch.

The Commissioners analyse the position as follows. Although the management services had in the real world been supplied by Svenska to London branch between 1987 and 1991, they were not, for VAT purposes, treated as having been supplied unless and until an invoice was issued or payment made. Since that had not happened before August 1991, and since section 29 precluded regard being had to transactions between them after August 1991, those intended supplies must be treated as never having taken place.

These circumstances, it is said, bring the case within regulation 34(1)(b). The earlier supplies attributed to Svenska on the basis of intended taxable supplies to London branch are now to be treated as "used or appropriated" for use for outward supplies by London branch. Insofar as those supplies are exempt, the amounts attributable to the exempt supplies must now be accounted for (reg 34(2)).

This submission was accepted by the Tribunal. They concluded:

"(The Commissioners') submission does not involve regarding the entry of London branch into the VAT group as itself being the use or appropriation for use. That plainly would not be correct. It is rather that once that event has occurred it must be taken since the use for making wholly taxable supplies was no longer possible and henceforth there could only be the making of mixed supplies, that there has been an appropriation to the latter use. In the ordinary way in order to decide whether supplies have been appropriated for use for a particular purpose one would have to look at all the circumstances and the trader's action in relation to those supplies, and determine from those factors whether the requisite attribution, allocation or, in other words, appropriation has taken place. This process necessarily will require rationalisation afterwards in the light of events which have occurred. Thus, it seems to us, the Commissioners' approach is justified. We accept their submission upon this point." (p.13-14, emphasis added).

In submissions to me, Mr Pleming, for the Commissioners, re-formulated the argument in this way:

"The inward supplies 'accumulated' (in VAT terms) prior to 1st August 1991 could thereafter only be used for (and therefore were appropriated for the use of) making supplies of banking services, only part of which were taxable. Whether or not there was a subjective change of intention on 1st August 1991 is not the point, there was, by operation of section 29, a necessary change of use of the accumulated inward supplies which could not now be used for the making of taxable supplies for management to London branch." (emphasis added)

The principal question, as I see it, is whether either of these formulations can be fitted into the statutory language. The regulation applies where the taxable person "uses or appropriates for use" a supply. It is necessary therefore, to identify something done by the taxable person in relation to the supplies - some action or decision - which can be characterised, in the ordinary sense of the words, as a "use or appropriation for use".

The Tribunal, in my view, rightly took the view that the entry of London branch into the VAT group in itself did not satisfy the paragraph. That event did not involve London branch or Svenska doing anything in relation to the supplies. However, the next sentence in their decision (underlined above) seems to me, with respect, a non sequitur. It is true that once that event had occurred, the making of wholly taxable supplies between Svenska and London branch was no longer possible, and that the only supplies would be supplies outside the group. But that was simply by operation of law, following the incorporation of London branch in the group. It did not in itself involve Svenska doing anything in relation to the supplies.

Mr Pleming's formulation faces similar difficulties. He has to start from the proposition that it is permissible, in the artificial world created by the Act, to treat the supplies as notionally "accumulated", so that there is still something left to use or appropriate in 1991. That in itself creates difficulties. The inward supplies to Svenska were (as the Tribunal accepted - p.10) consumed or used at once in making the onward supplies to London branch. Regulation 23 required the outward supplies to be treated as intended, rather than actual, supplies, until an invoice was issued. But there appears to be nothing in regulation 23, or anywhere else in the statutory scheme, which required the inward supplies to be notionally "accumulated" until the outward supplies had become taxable. They were simply "provisionally attributed".

However, even accepting that first step, Mr Pleming fails to point to anything done by Svenska which could be regarded as a use or appropriation. To assert that they "could only" be used for banking services begs the question whether they needed to be used at all. In the real world they had been fully used already, and Svenska had no need to re-use them. Even if Svenska was to be regarded as notionally "accumulating" them for tax purposes, it does not follow that it was to be notionally treated as using them at any particular time or at all. That argument would have to be supported by the effect of some additional "deeming" provision - express or implied - to be found in the legislation. No such provision has been identified.

In my view, therefore, the Commissioners' claim cannot be brought within the language of the statute, and the appeal should succeed.

Although this is sufficient to dispose of the matter, I should comment briefly on some of the other points that have been made in argument:-

(1) The first issue, as identified by Mr Milne in opening, was: "Did the provision of the services to London branch constitute 'taxable supplies'?" The Tribunal had accepted the Commissioners' submission that they did not:

"The supplies to which the Appellant points as having been made have not been made for tax purposes because, due to the operation of the timing provisions, those supplies have not for tax purposes taken place" (decision p 11)

They referred, by analogy, to the decision of Macpherson J in B J Rice v Commissioners [1994] STC 565. That decision has since been overruled by the Court of Appeal ([1996] STC 581), and Mr Milne relies on the majority judgments in that case to challenge the Tribunal's conclusion. In view of my conclusion on regulation 34, it is unnecessary to pursue that issue. In any event, I doubt its relevance. The services to London branch fell properly within the scope of regulation 30 at the time they were performed, and they were properly attributed on that basis, albeit "provisionally", to intended taxable supplies. Whether that provisional attribution can now be revised depends simply on the true construction of regulation 34(1)(b), not on a retrospective redefinition of the services.

(2) I have been referred to a recent decision of the European Court - Intercommunale voor Zeewaterontzilting v Belgian State ("the Seawater case") [1996] STC 569. That case concerned a project set up by a company with the intention of developing processes for turning sea water into drinking water. It was registered as a taxable person and recovered input tax on the costs of the initial studies. In the event, it was decided not to proceed with the project and the company was put into liquidation. The tax authority claimed repayment of VAT on the basis that, viewed retrospectively, the company had not been engaged in an economic activity, and therefore it should not have been registered as a taxable person. The Court of Justice rejected that claim, disagreeing with the Advocate-General's opinion. As they said (para. 21):

"... it is contrary to the principle of legal certainty for the rights and obligations for taxable persons to depend on facts, circumstances or events which occurred after the tax authority made a finding in respect of those rights and obligations. It follows that, as from the time when the tax authority accepted, on the basis of information provided by a business, that it should be accorded the status of a taxable person, that status cannot, in principle subsequently be withdrawn retroactively on account of the fact that certain events have or have not occurred".

Thus, the reasoning was based on the fact that there had been an irrevocable determination of the company's status as a taxable person. The result was that the company was able to obtain credits for input tax, even though in retrospect the assumptions upon which those claims had been based were falsified. This was justified in the interests of the principle of "legal certainty". The present case is not concerned with Svenska's status as a taxable person; nor has there been anything other than a "provisional" determination. Thus the Seawater case is not directly applicable. It does, however, provide a possible answer to Mr Pleming's submission that to allow the appeal would -

"undermine the basic neutrality of VAT and the principle that input tax can be deducted only to the extent that relevant goods and services are used in the making of taxable supplies".

Such principles, while important, are not overriding. As I said in a recent case (Commissioners v University of Wales College, Cardiff [1995] STC611, 621) such general objectives do not detract from the need, in the interests of legal certainty, to construe the relevant statutory provisions in accordance with their terms.

(3) Mr Milne submitted that, even if the assessment was in principle justified, it related to the wrong period; the attribution of the inward supplies was not finally determined until the invoice was issued in June 1992. Although the raising of an invoice by Svenska might be regarded as a "use or appropriation", it is doubtful whether it could have any effect for VAT purposes, having regard to section 29. It is unnecessary to decide that point since an assessment would be out of time.

(4) Finally, I should note that there is provision in the legislation to prevent abuse of the rules relating to groups of companies. Thus, section 29(4) enables the Commissioners to refuse an application for treatment as a group if -

"it appears to them necessary to do so for the protection of the revenue".

That was the stance taken by the Commissioners initially in the present case. In their letter of 9th August 1991 in response to Svenska's application to include London branch in the group, they drew attention to the sum of output tax outstanding on supplies by Svenska to London branch. They asked Svenska, before proceeding with this application, to explain how they proposed to account for the outstanding tax. In reply, Svenska argued that, since no tax had yet become due on the management services (by virtue of reg. 23), there could be no issue of "protection of the revenue". This argument appears to have been accepted by the Customs since, without further comment, they accepted the registration with effect from 1st August 1991. Before me, neither Counsel sought to support the rather narrow view taken of the legislation. In my view, protection of the revenue is a broader term which would entitle the Customs to take account of future tax as well as accrued tax. However, there is no suggestion that the argument was put forward other than in good faith. If this produces an unexpected benefit to Svenska, that is the effect of the regulations, and it is not open to me re-write them.

Accordingly, this appeal succeeds, and the assessments will be set aside.

Appeal allowed with costs. Leave to appeal allowed