The High Court held that the VAT and Duties Tribunal ([2006] BVC 2,246) had had full jurisdiction to consider whether the termination of the taxpayers’ partial exemption special method with regard to input tax was reasonable and had been entitled to hold that the disputed decision secured a fair and reasonable attribution of input tax within VATA 1994, s. 26(3).

Facts

The taxpayers were all companies in the SOG group and it was agreed that their combined appeal would stand as a lead case in relation to more than 450 separate appeals lodged by the group companies. The main trading activity of the taxpayers was the sale and dispensing of prescription spectacles and contact lenses. It was common ground that the provision of spectacles and lenses was a dual supply for VAT purposes: standard-rated goods and exempt dispensing services. Where a single price was charged, it was necessary to apportion residual input tax between the taxable and exempt supplies using a partial exemption method under reg. 101 or 102 of the Value Added Tax Regulations 1995 (SI 1995/2518). Since about 1992, the group companies had used special methods agreed with the Revenue and Customs Commissioners based on floor area.

In 2002, the commissioners reviewed the agreed special methods and raised concerns about various aspects including the floor-area calculation. In July the commissioners informed the group that, in their view, the agreed special method did not result in a fair and reasonable recovery of input tax and they invited proposals for an alternative method. The group objected, stating that there was no reason to propose an alternative partial exemption method as the current method was fair and reasonable. Following further correspondence, the commissioners wrote to the group in December 2003 stating that the special methods would be terminated with the result that the standard partial exemption method would apply. In January the commissioners directed the termination of the special methods from 1 April 2004. The effect of the change from a special method to a standard method was that the amount of irrecoverable residual input tax was increased substantially.

The tribunal dismissed the taxpayers’ appeals deciding that the jurisdiction of the tribunal was limited to deciding whether the disputed decision was reasonable. The decision of the commissioners to terminate the taxpayers’ partial exemption special method was a reasonable decision. Even if the tribunal was wrong in holding that its jurisdiction was limited, the disputed decision secured a fair and reasonable attribution of input tax within s. 26(3) of VATA 1994 ([2006] BVC 2,246; Decision No. 19,266).

The taxpayers appealed to the High Court contending that the commissioners were both unreasonable and wrong in law to conclude that, in respect of the taxpayers, the standard method in reg. 101(2)(d) secured a fair and reasonable attribution of input tax to supplies or even that the standard basis secured a fairer and more reasonable attribution than the special method. The taxpayers claimed that, in either case, the commissioners ought not to have terminated the special method without giving, and ought now to give, notice applying the override provisions in reg. 102A and 102B. The taxpayers further claimed that the tribunal was wrong in law to conclude that its jurisdiction, on the appeals by the taxpayers, was limited to consideration of whether the commissioners had acted reasonably in deciding that the standard method should be substituted for the partial exemption special method and terminating the former partial exemption special method for that reason.

Issues

Whether the jurisdiction of the tribunal was full or limited; if the jurisdiction was limited, whether the decision to terminate the appellants’ partial exemption special method was reasonable; and, if the jurisdiction of the tribunal was full, whether the termination of the special method secured a fair and reasonable attribution of input tax within VATA 1994, s. 26(3).

Decision

Etherton J (dismissing the appeals) said that the jurisdiction of the tribunal on the appeals by the taxpayers was not a limited jurisdiction. What was in issue before the tribunal in the present case was the decision of the commissioners that the special method should be replaced by the standard method. It was common ground that reg. 102(3) conferred on the commissioners a discretion to terminate the use of a special method. Also the discretion had to be exercised so as to achieve the statutory objective in VATA 1994, s. 26(3), i.e. to secure a fair and reasonable attribution of input tax to taxable supplies. The issue whether a decision of the commissioners achieved the s. 26(3) objective was, on the face of it, perfectly susceptible to a full appellate review.

The discretion conferred by reg. 102(3) had to be exercised, and only exercised, to achieve the statutory purpose in s. 26(3). There was nothing in the regulations or in s. 26 or in any other part of the relevant legislative framework that conferred on the commissioners alone the right to decide whether a particular method would in fact achieve the s. 26(3) objective, to the exclusion of the tribunal on an appeal.

That conclusion on the jurisdiction of the tribunal was not undermined by the fact that there might be a number of different ways in which the s. 26(3) objective might be achieved, and that in every case the task of the commissioners was to decide, when exercising their discretion under reg. 102(1) and (3), whether the new method better secured a fair and reasonable attribution, for the purposes of s. 26(3), than the existing method.

There was no practical or jurisprudential difficulty in conferring on the tribunal a full appellate jurisdiction to determine, on the basis of all the facts and matters found by it at the time of its decision, whether a decision of the commissioners under reg. 102 substituted, in place of an existing method, a method which secured, or at least better secured, a fair and reasonable attribution of input tax to taxable supplies for the purposes of s. 26(3). That would be consistent with the unqualified wording of the appeal provisions in VATA 1994, s. 83(e). It imposed an objective test which was consistent with the provisions of art. 17 and 19 of the sixth directive, and which the tribunal, as a body with the requisite specialist expertise, was well qualified to conduct.

A decision by the commissioners under reg. 102 to place a taxpayer on a special method or to terminate a special method had to be exercised so as to give effect to the statutory purpose in s. 26(3). It would not be in accordance with the statutory objective to move the taxpayer to a method which was less capable of achieving that objective than the existing method. It was necessary, therefore, to consider whether the tribunal made an error of law in concluding that the standard method did achieve the statutory purpose in s. 26(3). If the tribunal made no error of law, the appeals had to be dismissed.

In all the circumstances, the court was satisfied that the tribunal made no error of law in concluding, on the evidence before it, that, in the case of the taxpayers, the standard method achieved a fair and reasonable attribution of input tax for the purposes of VATA 1994, s. 26(3). The commissioners had considerable evidence (oral and written) of the actual use of SOG's stores, and made a site visit to one. The tribunal was therefore in a position to form a view about the way in which those stores were actually used. It was entitled to conclude that the taxpayers’ shops, and associated overheads of the business, were used by employees predominantly to make exempt supplies. The tribunal was entitled to conclude that such evidence supported what would, in any event, have been a reasonable starting hypothesis that overheads would be likely to be applied in the provision of exempt and taxable outputs in broadly the same proportions as the direct costs. Accordingly, the tribunal's decision was not flawed in law in determining that the standard method achieved the statutory purpose in s. 26(3).

In the circumstances, it was not necessary to consider the taxpayers’ various alternative arguments. However, the court rejected the argument that, if the tribunal erred in law in holding that the standard method did secure a fair and reasonable attribution of input tax, the appeals should be allowed even if the standard method better secured the statutory objective in s. 26(3) than the special method. That argument was not consistent with the statutory objective. It plainly followed from the tribunal's analysis and decision that the standard method better secured the statutory objective than the special method since it suffered none of the flaws which made the special method inappropriate.

Chancery Division. Judgment delivered 9 May 2006.