[2010] UKFTT 33 (TC)

TC00347
Appeal Number: MAN/2007/0219 

FIRST TIER TRIBUNAL TAX
 
VALUE ADDED TAX – PARTIAL EXEMPTION – Input tax recovered on purchase of land and buildings which were used for making of taxable and exempt supplies – did the attribution of input tax under the standard method reflect the use to which the land and buildings were put – No – did the standard method over-ride apply – Yes – did a method of attribution based upon site area provide a fair and  reasonable proxy for use – Yes – Appeal dismissed   

DECISION NOTICE 
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

	HJ BANKS & COMPANY LIMITED	Appellant

	- and -

         THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

Tribunal:	MICHAEL TILDESLEY OBE (Judge) 
		WARREN SNOWDON JP (Member)

Sitting in public at North Shields on 13 November 2009

Mark Hetherington UNW Chartered Accountants for the Appellant  

Andrew Noble counsel instructed by the Solicitor’s office of HM Revenue & Customs, for HMRC

© CROWN COPYRIGHT 2010

DECISION
The Appeal

1.	The Appellant was appealing an amended assessment for VAT dated 4 May 2007 in the sum of £61,674.
2.	 The dispute concerned a transaction completed on 6 January 2004 in which the Appellant purchased land and two commercial buildings for £1.85 million plus £318,500 in VAT. 
3.	The Appellant’s original intention was to make taxable supplies on the purchase by selling on the commercial properties, and building nine luxury flats on the land for onward sale. In those circumstances the Appellant would have been entitled to recover in full the VAT of £318,500 incurred on the purchase because the VAT was attributable to taxable supplies. 
4.	The Appellant’s intention changed in respect of one of the commercial properties, in that it was sold on as an exempt supply. Thus the VAT incurred on the land purchase was no longer directly attributable to taxable supplies, which meant that the Appellant had no automatic entitlement to recover the VAT as input tax. The VAT on the land purchase became what was known as residual input tax. The amount of residual input tax that the Appellant could reclaim was determined by a formula which formed part of the standard method. This method is used by partially exempt  traders to determine the amount of VAT that can be recovered during each VAT quarter. 
5.	The Appellant’s principal business activities consisted almost entirely of taxable supplies with the result that the percentage calculated under the formula was around 99 per cent. The balance outstanding of irrecoverable VAT fell within the de minimus limits.  This meant that the Appellant was entitled to reclaim all the input tax on the land purchase in the accounting quarter that the VAT was incurred.  The Appellant was required to carry out an annual adjustment of the VAT claimed in the year ending 28 March 2004, which involved redoing the standard method using figures for the 12 month period. 
6.	HMRC contended that the standard method for the longer period in respect of the Appellant did not produce a fair and reasonable attribution of input tax to taxable supplies. The input tax claimed under the standard method did not represent the extent to which the land purchase was used for making exempt supplies. In those circumstances HMRC sought to recover that part of the input tax attributable to the onward exempt supply by applying the standard method override which gave rise to the disputed assessment.
7.	The dispute between the parties related to the application of the standard method override. The dispute was in two parts:
(1)	Whether as a matter of statutory construction the provisions dealing with the standard method override applied to the Appellant’s circumstances?
(2)	If the standard method override applied, whether the method used by HMRC to attribute that portion of the input tax to the exempt supply was fair and reasonable?
Evidence
8.	The evidence consisted of two witness statements, one from Brian Hunter, the Appellant’s commercial manager, the other from John Dixon, the officer who carried out the assessment. A bundle of documents was supplied in evidence. 
9.	The parties relied essentially on their submissions, which were set out in their respective skeleton arguments.
The Facts
10.	The Appellant was a family owned company with businesses in surface mining, transportation and property development yielding an annual turnover of about £50 million.
11.	The land which was the subject of the transaction was a prime residential site in an affluent part of Newcastle upon Tyne. The Appellant was only interested in the land at the rear of the site, which it wished to develop by building on it luxury flats for onward sale. The Appellant, however, had to acquire the whole site including two commercial buildings, which the Appellant intended to sell on to third parties.
12.	On 14 October 2003 the Appellant exchanged contracts for the purchase of the land at a price of £1.85 million plus VAT of £318,500 which was completed on 6 January 2004. 
13.	On 19 January 2004 the Appellant submitted to HMRC an election to waive exemption from VAT in respect of the land and commercial buildings to take effect from 6 January 2004. 
14.	On 22 January 2004 the Appellant agreed to sell one of the commercial buildings for £600,000 as an exempt supply. The option to tax was not applied to the sale because the purchaser intended to use the commercial building for residential purposes. The sale was completed on 1 April 2004.
15.	On 9 October 2004 the Appellant sold the other commercial property for £900,000 plus VAT.
16.	 Officer Dixon advised in a letter dated 9 January 2007 that he was not inferring a tax avoidance motive on the part of the Appellant in respect of the onward sales of commercial properties. 
The Legislation
17.	 Section 26 of the VAT Act 1994 sets out the legislative requirements for determining the amount of input tax that may be claimed:
(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;
             	…
(3)	  The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above, and any such regulations may provide –
a)	determining a proportion by reference to which input tax for any prescribed accounting period is to be provisionally attributed to these supplies. 
b)	Adjusting, in accordance with a proportion determined in like manner for any longer period comprising two or more accounting periods  or parts thereof, the provisional attribution for any of these periods
c)	……
  
18.	  Regulation 101 of the VAT Regulations 1995 sets out the standard method for the attribution of input tax to taxable supplies. Regulation 101(2)(d) spells out the formula for apportioning residual input tax between taxable and exempt supplies:
101 (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 of the value of taxable supplies made by him bears to the value of all supplies made by him in the period.
19.	Regulation 107B defines the standard method override. 
(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.
20.	Regulation 107C defines the threshold for substantial difference in regulation 107B, which is if it exceeds £50,000 or 50 per cent of the input tax apportioned under the standard method but not less than £25,000.
21.	Regulations 107(1) and 107(2) deal with adjustments to attributions of input tax under a method following the application of a longer period. Regulation 107(1) covers the situation where all the exempt input tax in the longer period cannot be treated as attributable to taxable supplies:
Where a taxable person to whom a longer period is applicable has provisionally attributed an amount of input tax to taxable supplies in accordance with a method, and where all his exempt input tax in that longer period cannot be treated as attributable to taxable supplies under Regulation 106, and save as the Commissioners may dispense with the following requirement to adjust, he shall – 
(a)	determine for the longer period the amount of input tax which is attributable to taxable supplies according to the method used in the prescribed accounting periods,
(b)	ascertain whether there has been, overall, an over-deduction or an under-deduction of input tax, having regard to the above-mentioned determination and to the sum of the amounts of input tax, if any, which were deducted in the returns for the prescribed accounting periods, and
(c)	include any such amount of over-deduction or under-deduction in a 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.
22.	Regulation 107(2) covers the situation where the input tax in the longer period can be treated as attributable to taxable supplies. In this situation the tax payer is required to calculate the under-deduction of input tax and claim for it in the first prescribed accounting period next following the longer period. 
23.	Regulation 106 enables a tax payer to recover input tax attributable to exempt supplies if it is below specific amounts otherwise known as the de minimus limit. Regulation 106(1) states that:
                      “… where relevant input tax 
(a) in any prescribed accounting period, or 
(b) in the case of a longer period, taken together with the amount of any adjustment in respect of that period under Regulation 107B – 
(i) does not amount to more than £625 per month on average, and
(ii) does not exceed one half of all his input tax for the period 	concerned, 
all such input tax in that period shall be treated as attributable to taxable supplies.”
24.	Regulation 106(3) defines relevant input tax as input tax attributed under the standard method to exempt supplies 
First Dispute: Whether as a matter of statutory construction the provisions dealing with the standard method override applied to the Appellant’s circumstances

Appellant’s Argument

25.	The standard method override in Regulation 107B obliges a tax payer to whom a longer period applies and where certain circumstances are present to carry out an additional review of the attribution of input tax for the longer period and to make a further adjustment outside the standard method.
26.	Regulation 107B applies to a tax payer who has made an attribution under regulation 107(1)(a) which covers the situation where a taxpayer has incurred amounts of VAT attributable to exempt supplies in a longer period at a level above the partial exemption de minimus limit contained in regulation 106. In contrast regulation 107(2) applies to the situation where a taxpayer has incurred amounts of VAT attributable to exempt supplies in a longer period but the amount falls within the partial exemption de minimus limit and is recoverable in full.
27.	The Appellant’s longer period for the purposes of this Appeal ended on 28 March 2004. The Appellant’s level of input tax for the longer period was within the partial exemption de minimus limit. Thus regulation 107 (2) applied to the Appellant not regulation 107(1)(a), in which case the threshold requirement for the standard method override in regulation 107B was not met.
28.	The Appellant pointed out that the very same issue was considered in the VAT and Duties Tribunal decision in Camden Motors Holding Limited (VAT decision 20674). The Appellant’s reasoning was based on the Tribunal’s decision which found in favour of Camden Motors, the Appellant. The Tribunal explained its rationale in paragraphs 70 -72:
“ 70. We accept Mr Hitchmough’s argument that the override in Regulation 107 VATA is only in point where a trader has made an attribution under regulation 107(1)(a), which itself depends upon the trader having incurred input tax which cannot be treated as attributable to taxable supplies under regulation 106.  ‘Relevant input tax’ is defined in regulation 106(3) as input tax attributed under the standard method to exempt supplies.  Since the application of the standard method by Camden results in a nil attribution of input tax to exempt supplies, the de minimis limits prescribed by regulation 106 are satisfied by Camden.  The result is that all of the input tax in the longer period applicable to Camden “shall be treated as attributable to taxable supplies” (regulation 106(1)) and therefore regulation 107(1)(a), and hence the standard method override, is incapable of application.  
71.In our judgment regulation 107B only applies where there is an attribution under regulation 107(1)(a), and regulation 107(1)(a) only applies if regulation 106 does not apply in the first place, which we find to be the case.  There is no requirement for Camden to make an annual adjustment under regulation 107(1)(a).  To answer Mr Manknell’s question as to when regulation 106(1)(b) could ever apply, we again accept Mr Hitchmough’s argument that a trader whose relevant input tax exceeds the de minimis limit in regulation 106 is a trader who is required to make an annual adjustment under regulation 107(1)(a) and in that case the trigger condition for regulation 107B is satisfied.  This ensures that regulation 106 can apply to a trader who only satisfies the de minimis limit because of an annual adjustment.
72.From the above it follows that we do not accept the Commissioners’ argument that it was necessary to decide whether an adjustment had to be made under regulation 107 before deciding whether a taxpayer is over the de minimis limit.  Mr Manknell had accepted that there was an ostensible and unavoidable circularity in that regulation 107 is on its face subject to regulation 106 which sets de minimis limits in relation to input tax ‘taken together with the amount of any adjustment in respect of that period under regulation 107B’.  On this basis Regulation 106 thus requires consideration of whether a regulation 107B adjustment applies.  On the other hand, regulation 107B states that it applies where an attribution has been made under regulation 107(1)(a), whereas regulation 107(1)(a), in turn states that an adjustment shall be made where the exempt input tax cannot be ignored under the de minimis limits in regulation 106.  We do not accept Mr Manknell’s solution which was that one must make the annual calculation under regulation 107 first (without making a conclusive attribution), then see whether the resulting figure is below the regulation 106 de minimis level, which in turn requires prior examination of whether the regulation 107B override needs to apply.  He submitted that ‘attribution’ in regulation 107B should be understood as hypothetical, not actual, and that this required no distortion of the words used and resulted in the only logical reading of the regulations that is possible if they were to have any meaning.  The Commissioners accepted that both Camden’s and its readings were possible, but submitted that its own was to be preferred because Camden’s reading led to absurdity and would prevent the Commissioners from stemming abuse, which was the purpose of the regulations.  We do not accept that this is the case.  We do not consider it consistent with the principle of statutory interpretation to ascribe a hypothetical meaning not an actual one to a word used in a statute as suggested and we consider the whole argument to be unnecessarily complicated; Camden’s simpler solution is to be preferred.  Furthermore the trigger for the application of regulation 107B is regulation 107(1)(a), which deliberately restricts its use.  Regulation 107A specifically refers to a situation where a taxpayer does not have a longer period applying.  Regulation 106 is applicable where a trader is not on the face of it de minimis (and we note that a trader is entitled to arrange his affairs so that he is) which leads to regulation 107(1)(a).  If that applies, then the trigger condition in regulation 107B is satisfied so that the override must be considered.  If a taxpayer is de minimis when the adjustment in regulation 107 is taken into account, then the taxpayer is entitled to benefit.  There is in our judgment a statutory purpose, albeit a restricted one, and we therefore find that the application of the statutory override provided for by regulation 107B is not applicable in this case and for that reason alone this appeal is allowed”.
29.	The Appellant in response to HMRC’s contention that Camden Motors Holding Limited was wrongly decided argued that the legislation should be interpreted in accordance with its literal, ordinary and natural meaning. If the standard method override applied to all traders, the draftsman would have incorporated regulation 107(2) in regulation 107B, as well as regulation 107(1). Further, when the standard method override provisions were introduced HMRC indicated that it was a specific targeted measure, primarily on aggressive VAT avoidance by large businesses and that it would affect a minority of businesses.  The Appellant’s interpretation of the statutory provisions was consistent with HMRC’s intention for the legislation. 
HMRC’s Argument

30.	HMRC contended that the Appellant’s interpretation distorted the correct sequence of adjustments carried out by a trader to his partial exemption calculation as envisaged by the legislation.  The de minimus limit only came into play for a trader subject to a longer period after the effect of the standard method override had been considered as part of the attribution of input tax for the longer period.  HMRC considered its interpretation was consistent with the purpose and the literal meaning of the legislation.
31.	The purpose envisaged for the standard method over-ride as articulated in the explanatory note to The Value Add Tax (Amendment Regulations 2002 SI 2002 No1074  was
 “to counter avoidance schemes based on the partial exemption method specified in regulation 101 of the principal regulations and to deal with situations where the result of the method is clearly unreasonable” 

32.	The literal reading of regulation 106(1)(b) made it perfectly plain that annual conclusions on de minimus limit cannot be drawn until after Regulation 107B has been applied. Further regulation 107B carried its own de minimus limits, (the  substantial difference), which provided a brake on its application. In those circumstances it was nonsensical to emasculate the effect of the standard method override by creating another de minimus threshold. 
33.	HMRC believed that Camden Motors Holding Limited was wrongly decided.  The Tribunal ignored a purposive construction of the legislation. HMRC did not appeal the decision due to the facts of the case. 
Consideration
34.	 The principles governing the right to deduct VAT are set out in Article 17 of the Sixth VAT Directive which was in force at the time of the disputed decision.  Essentially under Article 17(1) and 17(2) the right to deduct only arises in respect of VAT incurred on goods and services used for taxable supplies. Article 17(5) provides that where goods and services are used by a taxable person for both taxable and exempt supplies, only that part of the VAT attributable to the taxable supplies can be deducted.  In the latter circumstances Article 19(1) specifies the method for calculating the proportion of VAT attributable to taxable supplies, which shall be determined on an annual basis. Article 19(3) enables insignificant amounts of irrecoverable VAT arising from the calculation to be treated as VAT attributable to taxable supplies.
35.	The provisions of Articles 17 and 19 of the Sixth VAT directive are enacted in the domestic legislation in section 26 of the VAT Act 1994 which allows a taxable person to claim so much of the VAT that can be attributable to taxable supplies as determined by regulations.   Section 26(3) enables regulations to be made to secure a fair and reasonable attribution of input tax to taxable supplies. The regulations permit the making of a provisional attribution of input tax to taxable supplies for any prescribed accounting period which may then be adjusted for a longer period.
36.	The regulations dealing with input tax and partial exemption are found in regulations 99 to 116 of the VAT Regulations 1995. Regulation 101 states that the amount of  input tax that a tax payer is entitled to deduct provisionally shall be that amount as determined by the regulation which is attributable to taxable supplies. The steps laid down in regulation 101 are known as the standard method. Regulation 101(4) deals with the process for attributing residual input tax to taxable supplies,    which follows the calculation in article 19(1) of the Sixth VAT Directive. Regulation 101 requires the tax payer to perform a provisional attribution of  input tax  to taxable supplies for each prescribed accounting period which effectively is the VAT quarter corresponding with the VAT return. Regulation 106 enables input tax otherwise irrecoverable at the end of the VAT quarter to be treated as attributable to taxable supplies if it is below specified amounts or more commonly known as the de minimus limit. Regulation 106 enacts the concession given by Article 19(3) regarding insignificant amounts. 
37.	Regulation 99(3) to 99(7) spells out the circumstances when a tax payer is required to re-perform the provisional attribution of input tax to taxable supplies  for a longer period. Essentially a longer period is one of 12 months. Regulation 107 provides the mechanism for adjusting the quarterly attribution of input tax to taxable supplies with reference to the longer period. The need for a longer period reflects the requirements of Article 19(1) which envisages a 12 month calculation of deductible input tax. The process undertaken under Regulation 107 starts with the steps laid down in regulation 101 and replicates that carried out for the quarterly period   except that 12 months figures are used. The outcomes from those steps are two figures for the 12 month period: the amount of input tax attributable to taxable supplies, and the amount attributable to exempt supplies. If the amount of input tax attributable to exempt supplies is below that of the de minimus level for the longer period, then that amount is added to the input tax attributable to taxable supplies. Under regulation 107 the figure for deductible input tax under the longer period is then compared with the total of the input tax claims in the previous four quarters with the difference between the two figures resulting in either a payment to HMRC or a repayment to the taxable  person.
38.	Regulation 107 envisages two different outcomes arising from the attributions for a long period. The first is covered by regulation 107(1) under which the tax payer cannot treat irrecoverable VAT as attributable to taxable supplies. In contrast under regulation 107(2) the tax payer is left with no irrecoverable VAT for the longer period. 
39.	Regulation 107B enacts the standard method override which was introduced by HMRC in exercise of its powers under section 26 of the VAT Act 1994 to counter avoidance schemes based on the standard method, and to deal with situations where the result of the method is clearly unreasonable. Under regulation 107B a provisional attribution of input tax to taxable supplies for a long period under regulation 107(1)(a) shall be adjusted if the attribution differs substantially from one which represents the extent to which the goods or services are used in the making of taxable supplies. Regulation 107C defines the threshold of £50,000 or 50 per cent of the input tax for a substantial difference.
40.	 The above analysis of the legislation dealing with the right to deduct demonstrates that its overriding purpose is to ensure that the right to deduction is confined to input tax attributable to taxable supplies. In domestic legislation this purpose is achieved by detailed regulations enacted under section 26(3) of the VAT 1994 which requires the regulations to secure a fair and reasonable attribution of input tax to taxable supplies. The regulations achieve this by identifying a method for attributing input tax to taxable supplies including the apportionment of residual input tax between taxable and exempt supplies and by requiring the tax payer to carry out the attributions every quarter followed by an annual adjustment. The de minimus limits in regulation 106 come into play after the calculation of the deductible input tax in accordance with the standard method has been completed for each period. Regulation 106 applies to relevant input tax. Regulation 106(3) defines relevant input tax as input tax attributed to exempt supplies, which can only be known at the end of the calculation arising from the standard method. 
41.	It, therefore, follows from the above analysis of the purpose of the legislation that potential adjustments to the attribution of input tax must be carried out before the de minimus limit is applied so as to ensure a fair and reasonable attribution of input tax to taxable supplies. The statutory method override affects the attribution of input tax to taxable supplies. Thus adopting a purposive construction, it is the Tribunal’s view that the effect of the statutory method override has to be considered before the tax payer treats input tax attributed to exempt supplies as de minimus. 
42.	The Tribunal considers that the literal, ordinary and natural meaning of the relevant statutory provisions supports the purposive construction.  
(1)	Regulation 107B applies to a taxable person that has made an attribution under regulation 107 (1)(A).
(2)	 A taxable person under regulation 107(1)(A) is a person to whom a longer period is applicable has provisionally attributed an amount of input tax to taxable supplies in accordance with a method, and where all his exempt input tax in that longer period cannot be treated as attributable to taxable supplies under regulation 106.
(3)	Regulation 106(b) specifies that the de minimus limits (£625 per month etc) for a longer period shall apply to that amount of relevant input tax taken together with the amount of any adjustment in respect of that period under regulation 107B. 
(4)	A taxable person who meets the requirements of regulation 107(1) is required to determine for the longer period the amount of input tax which is attributable to taxable supplies according to the method (standard method) used in the prescribed accounting periods (regulation 107(1)(a).
(5)	Under regulation 107(B) the taxable person to whom regulation 107(1) applies is required to calculate the difference between the attribution under regulation 107(1)(a) and an attribution which represents the extent to which the goods or services used by him in making taxable supplies. If the difference exceeds £50,000 or 50 per cent of input tax the taxable person is required to account for it as part of the annual adjustment under regulation 107(1)(c).
43.	The literal construction of the above statutory provisions requires the taxable person subject to a longer period to consider the effect of the standard method override before the de minimus limit is applied. If the exempt input tax arising from the standard method and any adjustment from regulation 107B are above the de-minimus limit, the taxable person is obliged to re-perform the standard method attribution for the longer period and calculate its difference with an attribution representing the extent to which the goods or services are used for the making of taxable supplies. If the difference is significant as defined by regulation 107C then the taxable person must account for that difference in the next VAT return.
44.	The Tribunal in Camden Motors considered the literal construction placed on the statutory provisions by this Tribunal as unnecessarily complicated and inconsistent with the principle of statutory interpretation to ascribe a hypothetical meaning not an actual one to a word used in a statute as suggested. Although the construction may appear complicated, it cannot be described as hypothetical because the actual words of the statutory provisions taken together require the taxable person to consider the effect of the standard method override before a potential attribution under regulation 107(1)(a) is made. 
45.	The Tribunal in Camden Motors was not helped by the concession made by HMRC counsel that the competing constructions of the statutory provisions were equally possible. In this Appeal HMRC counsel made no such concession. The flaw in the Appellant’s reasoning and that of the decision in Camden Motors was a misunderstanding of the various stages in the process which formed the trigger for the application of regulation 107B. The Appellant and Camden Motors when considering the trigger  missed out the step of examining the de minimus limits with reference to regulation 107B and jumped to the attribution under regulation 107(1)(a).  This misunderstanding was demonstrated by the following extract from the Camden Motors decision
“We accept Mr Hitchmough’s argument that the override in Regulation 107 VATA is only in point where a trader has made an attribution under regulation 107(1)(a), which itself depends upon the trader having incurred input tax which cannot be treated as attributable to taxable supplies under regulation 106.  ‘Relevant input tax’ is defined in regulation 106(3) as input tax attributed under the standard method to exempt supplies.  Since the application of the standard method by Camden results in a nil attribution of input tax to exempt supplies, the de minimis limits prescribed by regulation 106 are satisfied by Camden.  The result is that all of the input tax in the longer period applicable to Camden “shall be treated as attributable to taxable supplies” (regulation 106(1)) and therefore regulation 107(1)(a), and hence the standard method override, is incapable of application”.
46.	This Tribunal agrees with the first two sentences of the above extract as being a correct statement of the law. The error was committed in the sentence beginning:  “Since the application of the standard method by Camden results in a nil attribution of input tax to exempt supplies, the de minimis limits prescribed by regulation 106 are satisfied by Camden”. The standard method as laid down by regulation 101 does not as a rule result in a nil attribution. The outcome of the standard method will be an attribution of input tax to taxable supplies, and an attribution to exempt supplies. In order for there to be a nil attribution of input tax to exempt supplies, the provisions of regulation 106 have to be considered. In respect of the longer period the de minimus limits in regulation 106 have to be examined against the exempt input tax produced by the standard method and any adjustment in respect of the period under regulation 107B. The stage of examining the de minimis limits against any potential adjustment under regulation 107B was the one missed out by the Appellant and the Tribunal in Camden Motor in their respective analyses.
47.	Finally the Tribunal in Camden Motors was perplexed about the requirement to consider twice the application of regulation 107B. The consideration of the standard method override at various stages of the process serves different purposes. At the first stage the examination of  regulation 107B is necessary to determine whether the de minimus limits  of  regulation 106 are exceeded, which in turn will decide whether the adjustment for the longer period is carried out under regulation 107(1) or under 107(2). If it is under 107(1), regulation 107B is considered again for the purpose of deciding whether the difference between the two attributions is significant, bringing into play the limits imposed by regulation 107C.
48.	  The Tribunal summarises its construction of the relevant statutory provisions with the following route map:
(1)	The purpose of the legislation dealing with partial exemption is to ensure that the right to deduct is restricted to VAT attributable to taxable supplies.
(2)	This purpose is achieved by the domestic legislation through regulations enacted under section 26(3) of the VAT Act 1994 to secure a fair and reasonable attribution of input tax to taxable supplies.
(3)	Under the regulations the taxable person is obliged to carry out an attribution under regulation 101 for a prescribed accounting period (quarterly), which is then examined against the de minimus limits under regulation 106 followed by the submission of the claim in the VAT return
(4)	If specific circumstances apply, the taxable person is required to perform an adjustment of the attribution to taxable supplies for a longer period (usually one year). The taxable person will carry out the same exercise under regulation 101 except he will use the figures for the longer period.  This will produce provisional attributions of input tax to taxable and exempt supplies. The tax payer is then obliged to examine the provisional attribution to exempt supplies and any potential adjustment under the standard method override (regulation 107B) against the de minimus limits in regulation 106.
(5)	If the taxable person is within the de minimus limits, the longer period adjustment will continue under regulation 107(2). He will submit a claim for VAT equating to the difference between the VAT claimed for the longer period and that for the total of the four preceding quarterly periods.
(6)	If the taxable person is outside the de minimus limits, the provisions of regulation 107(1)(a) apply. Under which the taxable person is required to calculate the difference between the   attribution  of input tax to taxable and exempt supplies under regulation 101 with an attribution that represents the extent to which goods or services are used by him in making taxable supplies.
(7)	If the difference is substantial as defined by regulation 107C, the taxable person is required to account for the difference in the next VAT return. If it is not substantial, the standard method override does not apply in which case the taxable person reverts to his attribution under regulation 101 for the longer period, to which the de minimus limits are applied.
49.	Returning to the facts of this Appeal, the Tribunal makes the following findings:
(1)	During the tax year ending 28 March 2004 the Appellant was a partial exemption trader in that it made exempt supplies, albeit forming a tiny proportion of its total supplies.
(2)	The Appellant was, therefore, required to carry out an attribution of input tax to taxable supplies under the standard method each quarter which was incorporated in its returns after having regard to the de minimus limits in regulation 106. 
(3)	In the year ending 28 March 2004 the Appellant completed the purchase of land and buildings for £1.85 million plus VAT of £318,500. The Appellant knew before the year end that the land and buildings would be used for both taxable and exempt supplies. The VAT incurred on the land purchase was residual input tax which required apportioning between taxable and exempt supplies in accordance with the formula in  regulation 101(2)(d). The application of the formula and de minimus limits enabled the Appellant in the prescribed quarter to recover in full the input tax incurred on the land purchase.   
(4)	The Appellant met the circumstances for a longer period adjustment under regulation 107, and obliged to perform a provisional attribution of input tax to taxable supplies under the standard method for the twelve month period ending 28 March 2004.
(5)	The resulting apportionment under the standard method for the longer period` did not accurately reflect the use to which the land purchase was applied in making taxable supplies. A significant proportion of the VAT incurred on the land purchase related to an exempt supply following on from the purchase.
(6)	The difference between the standard method and the use to which the VAT on the land purchase was put was sufficient to take the Appellant outside the de minimus limits for the longer period.  Thus the Appellant met the criteria for regulation 107(1), and 107 (1)(a).
50.	The Tribunal, therefore, concludes that the standard method override under regulation 107B applied to the Appellant.
Dispute Two: If the standard method override applied, whether the method used by HMRC to attribute that portion of the input tax to the exempt supply was fair and reasonable?

51.	The Appellant contended that if the standard method override applied, which it did not accept, then the most representative proxy for the use to which the land was put in making taxable supplies was the respective sale prices of the various onward transactions.  This proxy produced an apportionment of the input tax on the land transaction of 85.28 per cent to taxable supplies, and 14.72 per cent to exempt supplies. The proposed apportionment resulted in a potential adjustment under the standard method override of £47,656, which incidentally was below the £50,000 limit for a substantial difference under regulation 107C.
52.	HMRC did not consider the proxy of respective sale prices gave a fair and reasonable result. The two commercial properties were sold in the same state as they were purchased. The value of the new build development which constituted the majority of the apportionment at 63.21 per cent included the costs of the construction services. In HMRC’s view the Appellant was not comparing like with like by including the value of a developed site with values of undeveloped sites. HMRC proposed instead an apportionment based on site area which produced attributions of 80.94 per cent of the input tax to taxable supplies, and 19.05 per cent to exempt supplies.  HMRC believed that an apportionment on site area provided a more accurate reflection of the uses to which the land was put.  Under the site area approach the value of the adjustment under the standard method override was £61,674.
53.	The Appellant objected to the site area approach on the ground that it did not represent a fair proxy for use because it treated all the land at par value. Further the approach made no allowance for the premium value which the Appellant considered was applicable to the greenfield aspect of the development site at the rear of the property 
54.	Regulation 107B provides no guidance on how to calculate an attribution of input tax which represents the extent to which the goods or services are used by the taxable person in making taxable supplies. The parties in this Appeal have used the words fair and reasonable or fair and representative to delineate their approach in determining an attribution of input tax according to use.  
55.	 The Tribunal’s approach to the disputed question is to examine the proposals of each party and deciding which best represents the extent to which the land and buildings were used for making taxable supplies.
56.	The Appellant contended that its proposal followed the normal default position  by depicting the apportionment as a proportion of the total value of the onward supplies. This was the process adopted in regulation 101(2)(d) in respect of residual input tax. The Tribunal, however, agrees with HMRC that the Appellant’s proposal contained an in built distortion by including two separate measures of value, namely that of a fully developed site with that of  two undeveloped sites. In the Tribunal’s view the Appellant’s proposal would have carried more weight if it had deducted the construction costs from the value of the new build development. The Appellant argued that it was appropriate to give a higher value to the new build development in the apportionment so as to reflect the premium paid to acquire the land at the rear of the property. The Appellant, however, adduced no evidence to indicate that it gave a higher price for the development land from that given for the commercial buildings. Further the Appellant was able to recoup over 80 per cent of the purchase price for the land by the onward sales of the two commercial properties.
57.	The Tribunal prefers the approach of site area adopted by HMRC. The Tribunal  considers that site area provides an objective and reasonable measure to represent the extent to which the land was used for taxable supplies. The Appellant’s representative in a letter dated 24 January 2007, although preferring its own method, acknowledged that site area gave a reasonable proxy for re-attribution of the input tax incurred by the Appellant on the land transaction. HMRC allowed the Appellant several opportunities to suggest alternative methods of apportionment. This was not a case where HMRC disregarded the Appellant’s views on the matter, for example HMRC reduced the assessment to take account of the Appellant’s representation that the value of the exempt sale should not be included in the long period adjustment.
58.	On balance the Tribunal finds that the site area apportionment gives a representative measure of the extent to which the land was used for taxable supplies. Thus the Tribunal holds that the Appellant was required to account for an adjustment of £61.674 under the standard method override for the year ending 28 March 2004.   
Decision
59.	The Tribunal  decides that
(1)	The standard method override under regulation 107B applied to the Appellant.
(2)	The site area apportionment gave a representative measure of the extent to which the land was used for taxable supplies.
(3)	The Appellant was required to account for an adjustment of £61.674 under the standard method override for the year ending 28 March 2004. 
60.	In views of its findings the Tribunal dismisses the Appeal and upholds the amended assessment for VAT dated 4 May 2007 in the sum of £61,674. The Tribunal makes no order for costs.

                                 	     MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
              RELEASE DATE: 14 January 2010

Notes

1.	The Tribunal directed that the costs regime which operated prior to 1 April 2009 applied to this Appeal. 
2.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.