The Scottish Court of Session remitted a case to the VAT tribunal, as originally constituted, to reconsider whether a taxpayer was entitled to use a partial exemption special method in calculating its VAT liability on the basis that the tribunal had full jurisdiction to decide the point.

Facts

The taxpayer was a retail optician making both taxable and exempt supplies. It traded from 182 branches situated in high street locations or purpose-built shopping centres. The layout of the various premises was fairly standard, with spectacle displays in the front retail area through which all customers passed, the dispensing area and reception desk adjoining the retail area and the optometrists' consulting rooms at the rear.

It was common ground that the sale of spectacles and contact lenses was a mixed taxable and exempt supply and that a method was required to calculate the attribution of VAT on costs between the taxable and exempt elements, the former being deductible. In December 2000, the taxpayer applied to Customs for permission to use a special method for calculating deductible input tax based on the usage of floor area in its premises between taxable and exempt activities. That, and a revised application dated December 2001, were refused by Customs, who decided that methods based on floor area ordinarily did not produce a fair and reasonable result, particularly in the absence of large floor areas with exclusive taxable or exempt use.

The tribunal dismissed the taxpayer's appeal, concluding that its jurisdiction was limited in the sense that it was entitled to consider whether Customs' refusal was reasonable and not undermined by error of fact or law, but the tribunal could not substitute its own discretion and could not prescribe an acceptable alternative special method. Customs' criticisms of the categorisation of floor space by the taxpayer were justified and, even though there was no substance to the other reasons for refusal stated by Customs, the significance of that shortcoming by itself justified their rejection of the proposed special method.

Notwithstanding the tribunal's reservations about certain aspects of Customs' refusal of the taxpayer's proposed method, the tribunal concluded that it was not entitled to overrule Customs' decision [2006] BVC 2,708; Decision No. 19,549).

The taxpayer appealed. Before the Court of Session, the parties agreed that, in the light of the judgment of Etherton J in Banbury Visionplus Ltd v R & C Commrs [2006] BTC 5,482, the tribunal's jurisdiction was full and that it had been in error in adopting a limited approach.

Issue

Whether Customs had acted reasonably, under reg. 102 of the Value Added Tax Regulations 1995, in rejecting the taxpayer's application to use a partial exemption special method.

Decision

The Scottish Court of Session (Inner House) (Lord President Hamilton, Lord Nimmo Smith and Lord Brodie) (allowing the appeal) said that the right of appeal from Customs' decision conferred by VATA 1994, s. 83(e) was, according to the terms of the statute, without limitation. A perfectly general appellate jurisdiction was conferred. The object of VATA 1994, s. 26(3) was to secure a fair and reasonable attribution of input tax to taxable supplies.

Whether the decision of Customs in fact secured that objective was accordingly an issue for the tribunal itself to determine on the basis of the evidence led before it and its evaluation of that evidence. Due regard would be had to the decision of Customs and to their reasons for that decision but the scope of the appeal was not restricted to review on Wednesbury principles (Banbury Visionplus v C & E Commrs applied; John Dee Ltd v C & E Commrs [1995] BVC 125 distinguished).

It was clear that the tribunal had begun and ended its discussion of the issue before it upon the basis that it was concerned to explain why Customs' refusal was ‘reasonable and justifiable’ and thus why it could not ‘overrule it’ (‘the Wednesbury test’). On the other hand, the tribunal was sympathetic with the taxpayer's stance in seeking a ‘floor-based’ apportionment of inputs.

Curiously, the tribunal, while accepting that Customs' refusal to approve the taxpayer's proposed method was reasonable and justifiable on the basis of their criticisms of the taxpayer's categorisation of floor space, did not refer to the criticisms of that categorisation identified in the respondents' letter of refusal. It then went on to identify and discuss four points of criticism of the taxpayer's proposed method which had found no place in Customs' refusal letter. After that excursion into matters not raised in Customs' refusal letter the tribunal returned to that letter and rejected the balance of the criticisms advanced there.

While that excursion, if viewed in isolation, might be capable of being construed as the tribunal's own evaluation of whether the proposed method secured a fair and reasonable attribution of input tax to taxable supplies, it was impossible to be confident that that was so. The passage occurred in the midst of a discussion of whether the refusal letter was capable of being set aside on Wednesbury grounds; it did not proceed as a distinct alternative ground for refusing the appeal. In any event, it could not be said that the criticisms which the tribunal itself made of the proposed method would inevitably have resulted in that method being rejected. In those circumstances, the court could not be satisfied that the tribunal itself addressed the question whether the proposed method secured a fair and reasonable attribution or, if it did so address it, whether its conclusion (that the shortcomings of the suggested categorisation of floor space were so significant as to justify total rejection of the proposed method) was sound in law.

Both parties had recognised that the tribunal had no power itself to devise a special method and impose it on the parties. However, that did not mean that the only alternatives open to a tribunal were to accept a proposed method in all its particulars or to reject it outright. A method might be proposed with factual particulars (for example, attributions of particular classifications to particular areas) which might, without departure from the proposed method as such, be acceptable to the tribunal only subject to modification, for example, by reclassification of certain areas. Those required modifications might become evident in the course of the hearing and the parties be heard on them; alternatively, the tribunal after deliberation might return with an indication to parties that it was minded to approve the method but only subject to identified modifications. Provided that the taxpayer was prepared, even subject to reservation of any right of further appeal, to accept those modifications, a tribunal would be entitled to approve the method so modified.

Accordingly, the appeal would be allowed and the matter remitted to the tribunal (as originally constituted) with a direction to reconsider the appeal on the basis that its jurisdiction was full in the sense described in Banbury Visionplus (in the High Court) and St. Helen's School Northwood Ltd v R & C Commrs [2007] BTC 5,059.

Scottish Court of Session (Inner House, First Division).
Judgment delivered 6 July 2007.