20872
VAT – Input tax – Disallowance of input tax – Whether supplies used for making any taxable supplies – Held no
LONDON TRIBUNAL CENTRE
DOUGLAS O SHACKSON Appellant
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: CHARLES HELLIER (Chairman)
MR S K DAS
Sitting in public in London on 3 October 2008
The Appellant was neither present nor represented
Jonathan Holl for the Respondents
© CROWN COPYRIGHT 2008
DECISION
- Mr Shackson appeals against an assessment dated 9 July 2007, the effect of which was to disallow the input tax claimed by Mr Shackson in respect of the periods from that ending on 31 August 2004 to that ending 31 May 2007.
- Mr Shackson is in poor health. His spine has deteriorated and it would have been very difficult for him to attend a hearing. Following a pre-trial review (which Mr Shackson did not attend), by a direction release on 4 September 2008, the Tribunal directed that Mr Shackson should indicate whether or not he wished to attend or be represented at the hearing. Mr Shackson wrote to the Tribunal indicating that he did not intend to appear in person or to be represented at the hearing but provided written representations.
- In the circumstances we decided to proceed with the hearing in the absence of Mr Shackson, and to consider the representations he had made.
- Section 25(2) VAT Act 1994 entitles a taxable person to credit "for so much of his input tax as is allowable under section 26". Section 26 specifies that input tax as that "as is allowable by or under regulations as being attributable to supplies within" section 26(2). Section 26(2) specifies taxable supplies, certain supplies outside the UK and certain exempt supplies, in each case where made by the taxable person in the course or furtherance of his business. Thus it can be seen that input tax is creditable only if it is "attributable to" taxable and certain other supplies irrelevant to this appeal. Regulation 101 of the VAT Regulations 1995/2518 provides that this attribution is to be done on the basis of the "use" made of the supply giving rise to the input VAT. Thus for example Reg 101(2)(a) provides that "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 [the taxpayer] in making taxable supplies." A taxable supply is a supply made by a taxable person in the course of his business other than an exempt supply.
- These provisions reflect the provisions of the EC Directive: Article 17(2) of the Sixth Directive provides that:-
"Insofar as the goods and services are used for the purposes of his taxable transactions the taxable person shall be entitled to deduct input tax paid."
- It is against these provisions that we must determine whether or not any of the input tax claimed by Mr Shackson is deductible.
- This Tribunal is created by statute (section 82 VAT Act 1994). It is given its powers and duties by that statute. One of the matters in relation to which it may hear appeals is given by section 83(a): "the amount of any input tax which may be credited to any person". The Tribunal's determination of that matter must be in accordance with the statute and therefore by reference to the provisions noted above. Those words confer on us a duty to hear and determine an appeal as to the amount of input tax, not as to whether HMRC acted fairly or reasonably in deciding upon the issue. We have power to consider whether or not HMRC acted reasonably or fairly in making an assessment only where the Act is framed in such a way as to make the way it acted a necessary ingredient of the assessment. One case where some limited enquiry into HMRC's conduct is permitted is section 73(p). In relation to an assessment to VAT section 73(p) permits an appeal against
"an assessment –
(i) under section 73(1) or (2) …
or the amount of such assessment."
That language contemplates the possibility that the Tribunal may consider whether the making of the assessment was proper, as well as considering and determining its amount. In relation to section 73(1) the power of HMRC to assess is dependent upon the assessment being made to the "best of their judgment". In the case of an appeal against a section 73(1) assessment therefore the tribunal may consider whether or not the assessment has been so made : that may include considering issues which approach the question of whether it was fair to make the assessment. But the enquiry the tribunal may conduct is narrowly defined and it is not permitted, even under section 83(p), to consider generally whether HMRC's actions were fair : all it may consider is whether the assessment was made to the best of their judgment. Section 73(1) concerns an assessment where it appears to HMRC that returns are incomplete or incorrect; section 73(2) contains a separate power:
"In any case where … there has been paid or credited to any person –
(b) as being due to him as a VAT credit, an amount which ought not have been so paid or credited … the Commissioners may assess that amount … and notify him accordingly."
This separate power is not subject to any requirement that the assessment be to the best of HMRC's judgment. Thus in any appeal against such an assessment, the investigative power and duty of this Tribunal in relation to a section 73(2) assessment is limited to the determination of whether or not there had been such payment or credit, whether or not the sum was due as a VAT credit, and whether the assessment was notified and made within the relevant time limits. There is no power to take into account issues of fairness in the making of the assessment.
- We make these points because there are a number of points in the documents before us which relate to the conduct of the parties: to conversations with the VAT advisory service, to difficulties over changes of address, to the preservation of records, and to past compliance record and such like. These issues, however important they might be in another forum, are not relevant to the determination we have to make. We have to decide whether the input tax claimed by Mr Shackson and assessed as being not creditable by HMRC is or is not creditable. The answer to that question depends on the use to which the supplies which gave rise to the input tax were put.
- In VAT appeals such as this one the onus of proof is on the taxpayer. That is a well established principle. The principle is such because the taxpayer will have the information about his business. He is best placed to lay that information out before the tribunal and to use it to show what the assessment ought to have been. HMRC make the assessment – they will indicate in their statement of case why they have made it. Then the taxpayer, if he is to succeed in his appeal, must shown that it is wrong and show what it ought to be. The burden is on him to produce evidence and argument to displace the assessment. The tribunal's job is to weigh the evidence brought before it, to hear what HMRC may say in reply, and to come to a conclusion on the balance of probabilities as to what the facts are, and to decide how the law applies to those facts. The tribunal in determining the facts can look only at what is brought before it; it may question and probe but it is limited to what it is put before it.
- In the Tribunal's direction released on 4 September 2008 Mr Shackson was alerted to the possibility that he might argue that the input VAT disallowed by HMRC was in truth deductible in the following terms:
"The Tribunal notes that input tax may be creditable (or repayable) if it relates to supplies made to the taxpayer which:
(i) were or are used for the purposes of making taxable supplies, including tax relating to supplies in the Hotel business (even if paid for after the disposal of that business) and also input tax relating to any other business of the Appellant which makes taxable supplies; or
(ii) were to be used for any later taxable supplies.
The Tribunal notes that the Appellant's grounds of appeal did not deal with either of these issues …
It is therefore DIRECTED as follows:-
…
(4) The Appellant may pursue his appeal on the grounds that the input tax at issue is in fact creditable in whole or part (and may do so either in writing or at the hearing) but he may do so only if within 21 days of the release of these directions he notifies the Tribunal by letter that he intends to do so and sets out the taxable purposes for which the relevant input supplies were used or to be used, and accompanies such letter with any documentary evidence he may wish to produce to support such a contention. (The Tribunal reminds the Appellant that if he does not attend and is not represented at the hearing this letter and those documents will be all that will be available to the Tribunal in addressing the issue).
In response Mr Shackson included the following paragraphs in his letter to the Tribunal:-
"The input tax was claimed mainly in the renovation of properties which formed part of the Hotel strategy and "paid for after the disposal of that business."
"Properties adjacent to the hotel had been acquired as part of the development strategy of the hotel. They were not sold at the same time as the Hotel. They had been used for staff housing, and also let out. They were not in a suitable condition to be sold to advantage, but, when the optimum time came to sell, the amount of the proceeds of sale of the houses would provide an amount in excess of the threshold for VAT registration and part of my case for not de-registering. Renovation was essential. It was all part of my retirement programme. I was not involved in buying and selling of houses."
We took this as an indication that Mr Shackson did wish to argue that the input VAT was allowable. We therefore proceeded to consider what the goods and services to which that input tax related had been used for.
- From the documentary evidence available to us we found the following facts:-
(i) Before 5 December 2003 Mr Shackson carried on a business which included running the Pantycelyn Hotel at 370 Oystermouth Road Swansea.
(ii) Mr Shackson sold the Pantycelyn Hotel on 5 December 2003.
(iii) Mr Shackson also owned a number of properties close to the Hotel which he continued to own after 5 December 2003.
- Those are the only relevant fact which were clear to us. We also make, on balance, the following findings:-
(i) the properties close to the hotel appear to have included 3, 19, 23 and 25 Rodney Street and 14 Kimberly Road. These appear to have been dwellings or divided into separate dwellings, flats or bed sitting rooms;
(ii) 368 Oystermouth Road may have been another property owned by Mr Shackson; or it may have been part of the Pantycelyn Hotel;
(iii) from time to time both before and after 5 December 2003 these properties were let out and also (prior to the sale of the hotel) used for the accommodation of staff who worked at the hotel;
(iv) these properties were not sold on 5 December 2003 but at least some were sold later;
(v) before these properties were sold, and after 5 December 2003 some of the properties were renovated.
Discussion
- The input VAT borne by Mr Shackson in respect of supplies made to him in the periods to which the appeal relates may be deductible (creditable) depending on whether or not the goods and services giving rise to that input VAT were used for VATable supplies made by him. A supply which is exempt is not a VATable supply. One which is zero or standard rated will be. It is therefore necessary to consider what taxable (VATable) supplies were made by Mr Shackson in the course of his business.
- The supply of hotel accommodation is a taxable supply, Mr Shackson ceased to supply such accommodation in December 2003. If the supplies made to him after that date were used in the taxable supplies of the hotel business made before that date the input tax on them will be deductible. The judgment of the European Court of Justice in I/S Fini H v Skatteminsteriet [2005] STC 903 is high authority for the proposition that an expense incurred many years after the making of taxable supplies ceased may be capable of being in respect of a supply received for the use of those taxable supplies. A payment made, for example, in 2006 in pursuance of an obligation incurred in relation to taxable (hotel) supplies made in 2003 may thus give rise to creditable input tax.
- That raised the question, for this Tribunal, as to whether any of the inputs – the payments – made between 2004 and 2007 were made for the purpose of the taxable hotel business conducted before 2003. It was clearly possible that they could have been : for example an expense could have been invoiced in instalments, or invoiced late. If an expense had been so used then, however late it was invoiced, or however delayed the payment, it could have been deductible.
- There was however no evidence before us that indicated – or even suggested – that any of the input tax claimed between August 2004 and May 2007 related to supplies which had been used in the hotel business (i.e. the business of providing VATable hotel accommodation and related supplies). In the absence of such evidence we conclude that none of it was.
- The next question we addressed was whether there was any evidence that any supplies made by Mr Shackson in the course of any other activity of his business before or after 5 December 2003 were taxable supplies for which supplies to him giving rise to the input tax claimed were used.
- On the evidence before us the only business activities of Mr Shackson, other than his hotel supplies, were:
(i) the letting of the properties described in paragraph 12(i) above; and
(ii) the sale of the properties described in paragraphs 12(i) and (ii) above.
- We therefore need to consider whether any of those activities involved the making of taxable supplies. If they did not then Mr Shackson's inputs cannot have been used in making taxable supplies and therefore cannot be creditable. If the activities involved only the making of exempt supplies then they would not involve the making of taxable supplies.
- Group 1 of Schedule 9 VAT Act 1994 describes those supplies related to land which are exempt. It provides that the grant of any interest in or right over land or of any licence to occupy land is exempt unless the grant falls into one of 14 categories. Unless Mr Shackson's supplies fall into one of those categories they will therefore be exempt and not taxable. The only categories which appear to us to be potentially relevant to Mr Shackson's business are:-
"(d) the provision in an hotel inn boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering;
(e) the grant of any interest in, right over or licence to occupy holiday accommodation;"
- On the evidence before us none of the supplies described in paragraph 17 above fell within either of these categories. There was no evidence that the letting of the houses or of rooms in them carried with it any supply of service (other than the passive supply of a right of occupancy) which would enable one to conclude that the supply was of accommodation in an hotel inn, boarding house, or similar establishment or of holiday accommodation. We therefore conclude that none of the exceptions in Group 1 take Mr Shackson's supplies outside exemption. All the supplies made in the course of the business activities described in paragraph 12 above were therefore exempt and not taxable supplies by virtue of any of those headings.
- Schedule 10 VAT Act 1994 provides for an election which may be made in relation to a building. If the election is made then the exemption of a supply in relation to the building otherwise created by Group 1 of Schedule 9 does not apply. However paragraph 2(2) Schedule 10 provides that an election of this type is not possible if the grant is made in relation to a building "intended for use as a dwelling or a number of dwellings or solely for a relevant residential purpose." There was no evidence before us that would have enabled us to conclude that the buildings which were let did not fall into this category; but more particularly no evidence that any election had been made. We therefore conclude that Mr Shackson's supplies were not made taxable supplies by virtue of Schedule 10.
- We therefore conclude that none of Mr Shackson's other supplies were taxable supplies. Accordingly no input tax incurred in relation to them can be deductible.
- We therefore conclude that none of the goods or services which gave rise to the input tax claimed were used for making taxable supplies. Therefore none of the input tax is deductible.
- As a result we dismiss the appeal. Our decision was unanimous.
CHARLES HELLIER
CHAIRMAN
RELEASED: 19 November 2008
LON 2007/1486
