20170
VALUE ADDED TAX — fixed odds betting terminals — change of tax treatment — exempt supply re-classified as standard-rated — Appellant required to register for VAT — whether VAT incurred prior to registration recoverable as input tax following registration — exercise of discretion by Respondents — VAT Regs 1995, reg 111 — whether Respondents' conceding part of the input tax forced them to concede the whole — no — appeal dismissed
MANCHESTER TRIBUNAL CENTRE
WILF GILBERT (STAFFS) LIMITED Appellant
- and -
HER MAJESTY'S COMMISSIONERS OF REVENUE AND CUSTOMS
Respondents
Tribunal: Colin Bishopp (Chairman)
Sitting in public in Birmingham on 28 March 2007
Thomas Gilbert, director, for the Appellant
James Puzey, counsel, instructed by their solicitor's office, for the Respondents
© CROWN COPYRIGHT 2007
DECISION
- The Appellant, Wilf Gilbert (Staffs) Limited, trades as a bookmaker from a number of shops in the West Midlands area. Until 6 December 2005 all of its supplies were exempt from VAT, as they fell within item 1 of Group 4 of Schedule 9 to the Value Added Tax Act 1994 as it was originally enacted. The Notes to the Group were amended, with effect from 6 December 2005, by the VAT (Betting, Gaming and Lotteries) Order 2005 (SI 2005/3328) and from that date (as is common ground) the Appellant's supplies to its customers of the use of fixed odds betting terminals became standard-rated. The Appellant registered for VAT in consequence of the change in VAT treatment of those supplies. Its other supplies, I understood, remain exempt.
- Before the change of treatment the Appellant had already purchased a number of terminals, had paid for their installation and servicing, and had paid for the necessary broadband connections. It was unable to recover as input tax any of the VAT it had incurred since, at the time, it made exclusively exempt supplies and was not registered for VAT: thus the conditions for recovery imposed by section 26(2) of the 1994 Act were not satisfied. In principle, the later change in the tax treatment does not retrospectively entitle a trader to recover VAT he incurred before the change. Whether a trader has the right to deduct must be determined at the time the liability to pay the VAT is incurred: see article 17(1) of the Sixth VAT Directive (77/388/EC) (the directive in force at the material time—the corresponding, but slightly different, provision is now to be found in article 167 of Council Directive 2006/112/EC) and Lennartz v Finanzamt München III (Case C-97/90) [1995] STC 514.
- However, there is an obvious injustice in precluding recovery altogether when a trader has incurred VAT in the acquisition of an asset which will be used initially for making exempt supplies and, after a change in the law or his own circumstances (for example by his turnover exceeding the registration threshold), for making taxable supplies. That injustice is addressed by regulation 111 of the Value Added Tax Regulations 1995 (SI 1995/2518), which, so far as material to this decision, is in these terms:
"(1) Subject to paragraphs (2) and (4) below, on a claim made in accordance with paragraph (3) below, the Commissioners may authorise a taxable person to treat as if it were input tax—
(a) VAT on the supply of goods or services to the taxable person before the date with effect from which he was, or was required to be, registered, or paid by him on the importation or acquisition of goods before that date, for the purpose of a business which either was carried on or was to be carried on by him at the time of such supply or payment …
(2) No VAT may be treated as if it were input tax under paragraph (1) above—
(a) in respect of—
(i) goods or services which had been supplied, or
(ii) save as the Commissioners may otherwise allow, goods which had been consumed,
by the relevant person before the date with effect from which the taxable person was, or was required to be, registered;
(b) … in respect of goods which had been supplied to, or imported or acquired by, the relevant person more than 3 years before the date with effect from which the taxable person was, or was required to be, registered;
(c) in respect of services performed upon goods to which sub-paragraph (a) or (b) above applies; or
(d) in respect of services which had been supplied to the relevant person more than 6 months before the date with effect from which the taxable person was, or was required to be, registered."
- Paragraphs (3) and (4), which deal with the manner in which a claim is to be made, are of no present relevance. It is clear from the use in those parts of the regulation which I have set out of the word "may" that the Commissioners have a discretion to allow a trader to recover as input tax VAT which, strictly, does not rank as recoverable input tax.
- In February 2006 the Appellant submitted its first VAT return. It claimed a repayment of £20,603.97, which included all the VAT it had incurred in the acquisition and servicing of the terminals and the broadband connections. The Commissioners were not willing to allow the recovery of all the VAT, but did accept that some should be deductible as input tax. On 1 June 2006 an officer wrote to the Appellant, offering to make partial payment, and inviting it to submit a calculation of the VAT incurred in the cost of the terminals, apportioning it on a fair and reasonable basis between use before and use after the change in the tax treatment of the Appellant's supplies to its customers. The letter indicated that the offer did not relate to the cost of services consumed before the Appellant became registered.
- The Appellant responded promptly, advancing substantially the same argument as that advanced before me by Thomas Gilbert, one of its directors. It is that regulation 111 confers on the Commissioners only a limited discretion: they may allow or refuse recovery, but, having agreed to accept a claim, must allow it in full—they are not permitted to allow only partial recovery. The regulation, Mr Gilbert contended, refers only to "VAT on the supply of goods or services"; it does not, expressly or by implication, provide for partial recovery, for the reason suggested in the Commissioners' letter of 1 June 2006 or otherwise. The only condition imposed by the regulation of relevance to this case is that the VAT must have been incurred for the purpose of the taxpayer's business, and that condition was clearly satisfied in this case. Satisfaction of the condition carries with it the consequence that all the VAT so incurred is recoverable; the regulation does not lend itself to any other interpretation.
- The argument depends for its force on the decision of this tribunal in Jerzynek v Customs and Excise Commissioners (2004, Decision 18767). The question in that appeal was whether the appellant, a furniture dealer, could recover the VAT which her landlord had charged on the rent of her trading premises which she had paid before she was required to register (apparently because her turnover rose to a level above the registration threshold, though the decision does not make that clear). The point was made in argument for the appellant that the premises had been used in the pre-registration period for the storage of furniture forming part of her stock, which she would sell after registration; the Commissioners argued that the rent was paid for a supply, the right to use the premises, which had been consumed before registration. At paragraph 19 of the decision, after reciting those arguments, the tribunal said:
"At first sight, an apportionment might be expected but the regulation makes no provision for it.
20 I hold that the reason why the regulation does not address that question of apportionment is that the exclusions in regulation 111(2)(a) to (d) are alternatives to each other, as is clear from the word "or" between the last two. Regulation 111(2)(a) might exclude some services supplied to the trader before registration where those services are exclusively in respect of supplies made before registration but where the services supplied to the trader are in respect of the business as a whole, including the intended business to be carried on after registration, they more aptly fall within regulation 111(2)(d) and the limitation on recovery is the arbitrary six months there provided for, without reference to how far the supplies were used up before registration."
- I agree with James Puzey, who represented the Commissioners at the hearing of this appeal, that there is an important difference between Jerzynek and this case, and that the two are to be distinguished. There, the supplies which the trader made were at all times taxable even though the trader was not registered and was not required to register. Here, when the VAT was incurred, prior to 6 December 2005, the Appellant's supplies were exempt. Thus in Jerzynek the rent was attributable to taxable supplies throughout, albeit because of her own circumstances the trader was not obliged to charge tax to her customers, while here part of the tax is attributable to exempt supplies. It is a fundamental principle that input tax is recoverable only to the extent that it is attributable to taxable supplies: see article 17 of the Sixth Directive and section 26 of the 1994 Act (and the extensive further provisions of both which deal with attribution and the apportionment of input tax which is attributable in part to taxable transactions and in part to other purposes).
- It is true, as Mr Gilbert argued and as the tribunal said in Jerzynek, that regulation 111 contains no provision of its own for apportionment. On the other hand, it does not provide that, in exercising their discretion, the Commissioners are required to allow a trader to deduct all of the input tax he has incurred prior to his registration. There are time limits—of six months and three years for services and goods respectively—which, albeit on an arbitrary basis, do apportion pre-registration input tax. Sub-paragraph 2(c)—which is of relevance to the Appellant's own circumstances—restricts altogether the right to recover some pre-registration VAT. It is worth, too, considering the provision of the 1994 Act which contains the authority for regulation 111. It is section 24(6), which is in these terms:
"Regulations may provide—…
(b) for a taxable person to count as his input tax, in such circumstances, to such extent and subject to such conditions as may be prescribed, VAT on the supply to him of goods or services … notwithstanding that he was not a taxable person at the time of the supply …" [emphasis added]
- It does not seem to me that the enabling provision and the regulation, taken together, can bear the meaning the Appellant claims. It must be assumed that, in granting a discretion to the Commissioners, Parliament intended that they should exercise it in a manner consistent with the objectives of the Sixth Directive and the 1994 Act. Those objectives include the fundamental principle I have mentioned, that input tax may be recovered to the extent that it is attributable to the making of taxable supplies, and no further. (I leave out of account the anomalous "out-of-scope with recovery" supplies envisaged by section 26(2)(c).) Moreover, it seems to me that paragraph (2)(a)(ii) can properly be read to mean that where goods have been partially consumed—that is, used for the purpose of making supplies—before registration, even if they are still available for that purpose after registration, the input tax incurred in their acquisition may not be deducted "save as the Commissioners may otherwise allow"—"otherwise" being apt to permit recovery of a proportion of the tax.
- I am satisfied that the Commissioners' proposed apportionment of the input tax, in order that the Appellant recovers a fair amount but no more, is consistent with the provisions of regulation 111, but the Appellant's contentions are not. The appeal must therefore be dismissed.
COLIN BISHOPP
CHAIRMAN
Release date: 22 May 2007
MAN/06/0540
