Thursday Law Report

Calculation of residual input tax; 22 April 1999 Commissioners of Customs and Excise v Liverpool Institute for Performing Arts Court of Appeal (Lord Justice Nourse, Lord Justice Judge and Lord Justice Tuckey) 17 March 1999

IN CALCULATING the apportionment of residual input tax under regulation 30(2)(d) of the Value Added Tax (General) Regulations 1985, "all supplies" did not include out of country supplies as well as taxable and exempt supplies.

The Court of Appeal allowed the appeal of the Commissioners of Customs and Excise against the decision of the High Court that out of country supplies were to be treated as taxable supplies for the purpose of calculating the deductible proportion of input tax.

Since 1995 the taxpayer had provided educational services in the field of performing arts from premises in Liverpool which were exempt supplies of education. The taxpayer had also, during the periods in question, made taxable and out of country supplies.

The taxpayer's appeal to the VAT Tribunal against the ruling of the commissioners that its out of country supplies were not to be treated as taxable supplies for the purpose of calculating the deductible proportion of input tax was allowed. The commissioners' appeal to the High Court against that decision was dismissed, and they appealed to the Court of Appeal.

The question for decision on the appeal was whether, when calculating the apportionment of residual input tax under regulation 30(2)(d) of the Value Added Tax (General) Regulations 1985, out of country supplies should be included as well as taxable and exempt supplies.

Kenneth Parker QC and Philippa Whipple (Solicitor for Customs and Excise) for the commissioners; Roderick Cordara QC and Perdita Cargill-Thompson (Crokers Oswald Hickson) for the taxpayer.

Lord Justice Nourse said that on the true construction of regulation 30(2)(d) of the 1985 regulations, out of country supplies were altogether excluded from the calculation. The regulation provided that a proportion of the input tax which could not be exclusively attributed in accordance with the preceding subparagraphs, i.e. a proportion of the residual input tax, should be attributable to taxable supplies in accordance with the formula: residual input tax multiplied by the value of taxable supplies divided by the value of all supplies.

The expression "taxable supplies" in regulation 30(2) had to be taken to bear the meaning assigned to it in consequence of sections 2(2) and 15(2)(b) of the Value Added Tax 1983, so that it did not include out-of- country supplies. Regulation 30(2)(c) of the 1985 regulations precluded input tax on goods and services used or to be used exclusively either in making exempt supplies or "in carrying on any activity other than the making of taxable supplies" from being attributed to taxable supplies.

Since making out of country supplies was an "activity other than the making of taxable supplies" it was clear that input tax attributable to out of country supplies was altogether excluded from regulation 30(2). It would thus be anomalous to include the value of such supplies in the denominator of the fraction under regulation 30(2)(d).

Moreover, since the "taxable supplies" in the numerator of the fraction could not include out of country supplies, an absurd result would follow if they were included in the denominator. In summary, on the plain wording of the provision itself, out of country supplies were altogether excluded from regulation 30(2).

The legislation could not have made it plainer that out of country supplies were not taxable supplies. Conversely, since taxable and exempt supplies were the only two categories of supplies which were in terms referred to in regulation 30(2), there was nothing heretical in reading "all supplies" as being confined to those two categories.

The judge had said that it was clearly right to have regard to the Sixth Council Directive 77/3881 (EEC) of 17 May 1977 as an aid to construction, and that it would have been in line with its scheme for out of country supplies to be treated in the same way as taxable supplies. However, since the true effect of the regulation was not in doubt, there was no need to resort to the Directive.