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TMI Blog1999 (3) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration. 25 March 1999. Lord Slynn of Hadley. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Hutton. If the facts are recited without a detailed reference to the legislation, the result arrived at by the Industrial Tribunal and by the Court of Appeal [1997] STC 958 may seem decidedly odd. However, on an analysis of the relevant provisions of the Value Added Tax (General) Regulations 1985 and the Value Added Tax Act 1983, and having regard to the principle of fiscal neutrality upon which Mr. Pleming, for the Commissioners of Customs and Excise laid much emphasis in his submissions, I have no doubt that the result arrived at by my noble and learned friend, and contended for by the commissioners, is the correct one. I, too, would accordingly dismiss the appeal. Lord Lloyd of Berwick. My Lords, Svenska International Plc. ("Svenska") is a U.K. subsidiary of a Swedish bank. It has been registered for VAT since October 1983. In those days a Swedish bank was not allowed by Swedish law to set up branches abroad. But the Swedish law changed on 1 January 1987. Accordingly on 29 December 1987 the Swedish bank s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erformed, but when they are paid for, or when a tax invoice is issued in respect of the services, whichever be the earlier. It was common ground that regulation 23 applied in the present case, so that services supplied by Svenska to the London Branch between 1987 and 1991 would in the ordinary way have been treated as being supplied on 26 June 1992, when Svenska issued an invoice in respect of those services, and not before. But since by 26 June 1992 Svenska and the London Branch were both members of the same VAT group, that supply fell to be disregarded for tax purposes under section 29(1)(a) of the Act. Accordingly the invoice did not include any charge for tax. It is not suggested that this was incorrect. Under sections 14 and 15 of the Act Svenska was entitled to credit for input tax paid on inward supplies of services against any output tax due on taxable supplies made by Svenska in the course or furtherance of its business. Detailed provisions are contained in regulation 30, which specifies the method for determining the amount of input tax to be attributed to taxable supplies in any accounting period. Under regulation 30(5) it was open to the commissioners to agree a specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... properly attributed to an intended taxable supply. Then what about regulation 34(1)(b)? This requires that Svenska should have "used" the inward supply in making an exempt supply before the intended taxable supply. The example which is often given of the operation of regulation 34(1)(b) is that of a builder who constructs a building with the view to selling the freehold. The sale of a newly constructed commercial building is taxed at the standard rate. So the builder would be credited with input tax under regulation 30 during the period of construction. But then suppose that the builder changes his mind, and grants a lease of the building instead of selling the freehold. The grant of a lease is normally exempt. The commissioners would be entitled to claw back the input tax since the builder would have used the inward supply in making an exempt supply before making the intended taxable supply (the sale of the freehold). The claw-back procedure would have been triggered by the changed use (or appropriation for use) from intended taxable supply to actual exempt supply: see Customs and Excise Commissioners v. Briararch Ltd. [1992] S.T.C. 732 and Cooper and Chapman (Builders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted,' 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) . . . consumed or used at once in making the onward supplies to the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s supplied by Svenska were used at once, when a member of the staff supplied by Svenska for the purpose of carrying on the London branch's business picked up the telephone or turned on the light. It is only if one assumes a need to use (or reuse) the services after London Branch joined the VAT that any question of change of use arises. But I see no reason to make that assumption, and there is certainly nothing in regulation 34(1)(b) which requires one to make that assumption. I accept, of course, that the time of supply rule in relation to the supply of continuous services requires one to depart from the real world and enter the make-believe world of VAT. But I am only willing to depart from the real world to the extent that I am compelled by the terms of regulation 23(1)(b) and regulation 34(1)(b). This brings me back to the language of regulation 34. It requires the Commissioners to show that Svenska used the services in making an exempt or partially exempt supply. If all that they can show is that Svenska should be treated as having used the services in making an exempt or partially exempt supply because of the changed group status, then the commissioners fail, since it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those goods or services for the purpose of carrying out taxable transactions. A supply of investment goods during the adjustment period, where such occurs, may give rise to an adjustment of the deduction under the conditions set out in article 20(3) of the Sixth Directive." It is significant that the adjustment mentioned in the last sentence is an adjustment under article 20(3) (which is irrelevant in the present case), and not an adjustment under article 20(1). The facts are, of course, a long way from the facts of the present case. But the decision serves to undermine Mr. Pleming's argument that the inward supplies could not simply disappear into limbo. This is exactly what happened in the Ghent case. The right to deduct remained. There was no compelling need to find some other taxable outward supply. It also supports Carnwath J.'s view that the change of use must be brought about by some conduct on the part of the taxpayer, and that a change in the law whereby Svenska and the London branch became members of the same group is not enough. Another recent case which might be thought to support the appellant is the recent decision of the House in Customs and Excise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regulation 23 which required the inward supplies which Svenska made to the London branch to be notionally accumulated until the outward supplies became taxable and that, as in the real world they had been fully used already before the London branch was included in the VAT group, the commissioners' claim could not be brought within the language of the statute. But I was in the end persuaded by Mr. Pleming Q.C. for the commissioners that this approach is unsound, that the statutory scheme as a whole requires one to depart from the real world when applying it to the facts of this case and that the Court of Appeal were right to restore the order which the tribunal made upholding the assessments. In order to apply the statutory scheme to the facts of this case it is necessary to read regulation 34(1)(a) together with regulation 23 which lays down the rules which must be applied in the tax treatment of continuous supplies of services, and it is necessary to read both regulation 34(1)(a) and regulation 34(1)(b) together with section 29 of the Value Added Tax Act 1983 which deals with the approach which must be taken where bodies corporate are treated as members of a group. If this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the date when the input tax was credited, to attract value added tax. The second point is that the effect of the group registration was that, as from 1 August 1991, the words "taxable person" in regulation 34(1)(a) and "he" in regulation 34(1)(b) must be read as meaning Svenska as the representative member of the group and not Svenska carrying on business on its own as a separate company. This is because section 29(1) of the Act states that, where any bodies 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. Svenska brought with it into the group registration the amounts which had been credited to it as input tax which had been attributed to supplies which were not yet treated as taxable, and the London branch brought into the group the value of the continuous supply of services for which it had not yet paid and not yet been issued with a tax invoice. The question raised by regulation 34(1)(b) as to whether, after the group registration, these supplies were used or appropriated for use in making an exempt supply must be answered by applying the rule which section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs for all goods and services. The services provided included staff, use of shared premises, office services, telecommunications, electricity, legal and accounting services. The agreement made between Svenska and the London branch in or about December 1987 was later recorded in a letter between the parties dated 1 February 1991, under the terms of which the amount to be paid by the London branch for the services provided by Svenska 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 the banking and related business undertaken by each party. Svenska was registered for VAT at all material times. The London branch was not registered for VAT when it was established. In 1988 and 1989 the London branch, with the support of Svenska, applied to become part of the same VAT group as Svenska, so that it and Svenska would become a single entity for VAT purposes. However until 1991 it was not possible as a matter of law for a branch of a foreign company to join a VAT group unless it was resident in the United Kingdom. Therefore between 1987 and 1991 Svenska and the London branch remained separate entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable supplies it intended to make to the London branch. In October 1991 the Commissioners issued two notices of assessment to claim back all the input tax which Svenska had claimed up to 30 June 1991. Following certain revisions, two assessments remained, one dated 5 January 1993 in the sum of £20,392 and the other, dated 27 July 1993, in the sum of £791,202. Svenska appealed against the two assessments to the value added tax tribunal ("the Tribunal") which dismissed its appeal. Svenska appealed to the High Court and Carnwath J. allowed the appeal. The Commissioners then appealed to the Court of Appeal which allowed their appeal. The issue debated in the successive appeals was whether Svenska was obliged to repay to the Commissioners a proportion of the input tax which had been credited to it and, in particular, whether after 1 August 1991, Svenska had "used or appropriated for use" the supplies received by it in making an exempt supplies. Regulation 34 of the Regulations of 1985, as substituted, provides: "(1) This regulation applies where--(a) a taxable person has been credited with an amount of input tax in respect of any importation or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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'." He then said that counsel for the commissioners: "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 reuse 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 the Court of Appeal [1997] S.T.C. 958 Aldous L.J., with whose judgment Auld L.J. and Butler-Sloss L.J. agreed, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t during the period between 1987 and 1 August 1991 Svenska did in fact instantly use the goods and services supplied to it for the intended purpose of providing the onward services to the London branch. Therefore when the London branch joined the VAT group on 1 August 1991 there were no "accumulated services ", to use the term employed by the Commissioners, and regulation 34 could not apply, because Svenska had already made "taxable supplies" to the London branch so that there were no supplies which Svenska could "use or appropriate for use". Mr. Milne submitted that regulation 23(1) did not operate to prevent a court from holding that Svenska had made supplies to the London branch prior to 1 August 1991 notwithstanding that prior to that date no payment had been received and no tax invoice had been issued, and he contended that the effect of regulation 23(1) was to prevent the time for the tax becoming chargeable occurring until receipt of payment or the issuing of a tax invoice, but the regulation did not alter the fact that a supply of services had taken place before such an event. In support of this submission Mr. Milne pointed to the wording of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... took place between the parties was not a "taxable supply" chargeable to tax. My Lords, I am unable to accept those submissions. In my opinion section 5(9) of the Act of 1983 and regulation 23(1) make it clear that where there is a continuous supply of services, no supply shall be treated as having been made until there has been a payment or a tax invoice has been issued. In the Thorn case two companies, at a time when they were members of the same VAT group, entered into an agreement whereby company A agreed to sell motor cars to company B. 90 per cent. of the price was payable immediately as a prepayment and the balance was payable on delivery. B duly made the prepayment and a week later company A ceased to be a member of the VAT group and became separately registered for VAT. On a subsequent date company A delivered the motor cars to company B and company B then paid company A the remaining ten per cent. of the price. The commissioners claimed that VAT was payable upon the whole of the value of the goods, that was upon the whole of the purchase price, whereas the companies contended that VAT was payable only in respect of ten per cent. of the purchase price. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate taxable persons, each carrying on its own business for VAT purposes. The delivery of the goods by them to [the purchasing company] undoubtedly constituted a transfer of the whole property in the goods in the course of business. It constituted a supply of the goods within the meaning of paragraph 1(1) of Schedule 2, taxable under section 10(2) upon the amount of the consideration whether already paid or still payable. The appellants' objection that this approach disregards the fact that, to the extent of 90 per cent., the supply was to be treated as having taken place when the advance payment was made must fail because this disregard is precisely what section 29(1) requires. It follows that, in my judgment, the whole value of the supplies in question falls fairly and squarely within the charging provisions of the Act according to the normal principles of construction which should be applied to a taxing statute." In my opinion Svenska cannot derive assistance from that decision. In the Thorn case section 29(1) required the supply which was to be treated as taking place at the time of the payment of 90 per cent. of the price to be disregarded. Therefore there was a sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her land belonging to the town. The opinion of the Advocate General, at p. 262, para. 5 stated that it was common ground between the parties that: "the invested goods had been in the normal course of events intended for use in taxable transactions, that the exchange had not been foreseen or planned in advance by the respondent, and that it could not have been avoided by the respondent in the normal course of its business and even constituted economic force majeure for it." And in the conclusion of his opinion the Advocate General stated at p. 270, para. 67: "I therefore propose that the Court of Justice should answer the question referred by the Hof van Cassatie as follows: 'Article 17(2) of the Sixth Directive allows an undertaking to deduct the VAT paid in connection with the acquisition of goods and the receipt of services corresponding to investment works originally intended to be used in its business activity but which, for reasons beyond its control, were never in fact put to use by the undertaking. The adjustment of those deductions must be effected as provided for in article 20 of that Directive." The court stated, at p. 273: "22. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in supplying services (some of which were exempt) to the customers of the London branch. But the London branch was then a member of the VAT group of which Svenska was the representative member and accordingly, pursuant to section 29(1), those services to third parties were to be treated as a supply by Svenska. Therefore the services received by Svenska between 1987 and 1 August 1991 were to be treated as used by Svenska after 1 August 1991 in making supplies which were, in part, exempt. In my opinion the commissioners' argument is valid. It is based upon artificial concepts, but the Act of 1983 and the 1985 Regulations require tribunals and courts to apply artificial concepts. The requirement under regulation 23(1) in relation to continuous supplies of services that services which, in the real world of commerce, have actually been supplied to, and already used by, another person are not to be treated as supplied until a payment has been received or a tax invoice has been issued gives support to the view that such supplies can be deemed to be used at a time subsequent to their "actual " use and gives weight to Mr Pleming's submission that such supplies do not sim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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