19129

Value Added Tax – pre-registration expenditure on fitting-out restaurant premises – invoices in respect of “services” pre-dating registration by more than 6 months – whether recoverable as “input tax” following on registration – Regulation 111(2) (d) of VAT Regulations (SI 1995/2518) and Article 17 of the Sixth Directive – Appeal refused.

EDINBURGH TRIBUNAL CENTRE

	ORIENTAL DELICACY LIMITED	Appellant

	- and -

	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  Mr Kenneth Mure, QC
					 (Members)	  Mrs Charlotte Barbour, CA., ATII
							  James D Crerar, WS., NP

Sitting in Edinburgh on Wednesday 18 May 2005

for the Appellant		Mr Charles Rumbles

for the Respondents	Mr Julian Ghosh, Advocate

© CROWN COPYRIGHT 2005.

DECISION

Introduction
In this appeal the Appellant was represented by Mr Charles Rumbles, VAT Consultant, The RCB Partnership.  Mr Julian Ghosh, Advocate, appeared for the Respondents.

The Appellant trades as a restaurant.  It was registered for VAT on 1 February 2004.  It rents its premises.  These were a “shell” which the Appellant had to fit out.  It did so incurring expenditure which was the subject of invoices pre-dating the registration date by over 6 months.  

Regulation 111(2) (d) of the Value Added Tax Regulations (1995/2518) provides that VAT on services incurred within 6 months of registration for VAT purposes may be recovered.  The dispute in the present case relates to VAT totalling £3,320.31 in respect of 3 invoices by Belmont Contracts Limited for fitting-out work.  However, their dates all precede the date of registration by over 6 months.  The issue is whether VAT on expenditure on services preceding registration by over 6 months should be deductible as input tax having regard to Article 17 of the Sixth Directive.  The Respondents have refused to allow its deduction under reference to Regulation 111(2) (d) and the Appellant appeals against this refusal.  (See Document 9).

The Law
Article 17 of the Sixth Directive provides:-

“1.	The right to deduct shall arise at the time when the deductible tax becomes chargeable.
2.	In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
(a)	value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person; …”

Article 18 makes further provision in respect of the right of deduction in paragraphs 1 and 2 thereof and further provides – 

“3.	Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.”

Deduction of input tax generally by taxable persons is allowed in the UK by Sections 24-26 VATA 1994.  In the case of pre-registration expenditure Regulation 111 of the VAT Regulations (1985/2518) further provides:

“(1)	subject to paragraphs (2) and (4) below, on a claim made in accordance with paragraph (3) below, the Commissioners may authorise a taxable person to treat as if it were input tax – 

(a)	VAT on the supply of goods or services to the taxable person before the date with effect from which he was, or was required to be, registered … for the purpose of a business which either was carried on or was to be carried on by him at the time of such supply or payment, …

(2)	no VAT may be treated as if it were input tax under paragraph (1) above – 

(a)	in respect of –

(i)	goods or services which had been supplied, or 
(ii)	save as the Commissioners may otherwise allow, goods which had been consumed, 
by the relevant person before the date with effect from which the taxable person was, or was required to be, registered;

(b)	subject to paragraph (2A) below, in respect of goods which had been supplied to, or imported or acquired by, the relevant person more than 3 years before the date with effect from which the taxable person was, or was required to be, registered; 
(c)	in respect of services performed upon goods to which sub-paragraph (a) or (b) above applies; or 
(d)	in respect of services which had been supplied to the relevant person more than 6 months before the date with effect from which the taxable person was, or was required to be registered.”

We were referred also to extensive case-law in relation to the issue, viz:

Rompelman – Case 268/83
Direct Cosmetics Ltd v CCE – Case 5/84 [1985] STC 479, - Cases 138/86 and 139/86 [1988] STC 540
Lennartz – Case C97/90 [1995] STC 514
Armbrecht – Case C219/92 [1995] STC 997
INZO – Case C110/94 [1996] STC 569
Ghent Coal Terminal NV – Case C37/95
Enkler – Case C230/94 [1996] STC 1316
Gregg – Case 216/97 [1999] STC 934
Schemepanel Trading Ltd v C&E [1996] STC 871
Trustees of Park Avenue Methodist Church (LON/99/812)
Local Authorities Mutual Investment Trust v C&E [2004] STC 246
Messrs G, J & B Miller (MAN/03/559)
Denise Jerzynek (MAN/03/0452)

The Facts
Mr Rumbles and Mr Ghosh indicated at the outset that the factual background to this dispute was not controversial.  They agreed as admitted the circumstances set out in paragraphs 1-6 of the Appellant’s Grounds of Appeal and in paragraphs 2-6 of the Respondents’ Statement of Case.

In summary the Appellant trades from a unit in East Kilbride town centre leased from British Land Company plc which it required to fit out before trading.  The Appellant was incorporated on 7 February 2003 and its first taxable supply was made on 24 August 2003.  It was registered for VAT with effect from 1 February 2004, its first return being for the period ending 30 April 2004.  Included in input tax which it sought to deduct was VAT in respect of fitting-out works.  Three invoices remain the subject of dispute.  These are from Belmont Contracts Limited for a total of £3,320.31, and are dated respectively 26 June 2003, 10 July 2003 and 18 July 2003.  (These are included in Document 3 and referred to in Document 10).  Accordingly they pre-date the Appellant’s registration for VAT by more than 6 months.

For the purposes of the appeal the 3 invoices were regarded as being in respect of services (but see further our observations infra on the Appellant’s submissions).

Submissions for Appellant
Mr Rumbles submitted that VAT on the 3 disputed invoices should be recoverable and the 6 month time-bar in Regulation 111(2) (d) should be disregarded.  That provision, he argued, infringed the Appellant’s rights in terms of Article 17 of the Sixth Directive.  The expenditure which was the subject of the invoices was necessary to enable the Appellant to start trading.  Thus it could be related as expenditure to the trading receipts of the business to date and continuing.  Article 17 did not contain any time-limit and accordingly the 6 month time-limit in respect of services provided for in Regulation 111(2) (d) should be regarded as void.

Mr Rumbles argued further that the 6 month provision affecting “services” was discriminatory.  There was an obvious contrast with the 3 year provision in respect of “goods” contained in the Regulation.  He suggested various illogical results produced by this provision.  Reference may be made to the Appellant’s Further and Better Particulars (Document 3).

Although Mr Rumbles produced copies of case-law for our reference, he did not address us on these initially.  However he did note certain of these briefly in his reply in turn to Mr Ghosh’s submissions.  He sought to distinguish the decisions in Trustees of Park Avenue Methodist Church and Denise Jerzynek.  He stressed that the wording of Section 24 (1) VATA seemed to allow the deduction of input tax on future expenditure, and that crucially the 3 particular invoices continued to be cost components of the Appellant’s current taxable supplies.  He referred to paragraph 3.7 and Appendix A of Document 12 (the Respondents’ Consultation Document of April 2003) as noting that an extension from 6 months to 3 years for pre-registration services would “… reflect the principle of Article 17 (2) of the Sixth Directive”.  

When we invited Mr Rumbles to reply to any new matter raised in Mr Ghosh’s submissions he sought to amend his Grounds of Appeal by adding as a reserve argument that the subjects of the 3 invoices were “goods” rather than “services” with the effect that a 3 year period preceding registration could be considered in allowing pre-registration expenditure.  This was opposed vigorously by Mr Ghosh.  There was no forewarning of such a radical motion to amend the Grounds.  The appeal process has been lengthy and considered with Further and Better Particulars having been required of the Appellant.  We recognised that the whole conduct of the appeal would have to be reconsidered radically (with a possible need to lead evidence) if such a motion were allowed, the resultant difficulties being particularly acute at the conclusion of a Hearing.

In these circumstances we refused to allow Mr Rumbles to make this radical amendment to his Grounds of Appeal.

Submissions for Respondents
Mr Ghosh invited us to refuse the Appeal.  

He lodged a summary of his submissions which is included in the papers and to which we refer.  

Essentially, he argued that Regulation 111(2) (d) was not in breach of the terms of Article 17.  That provides for allowing deduction of input tax by taxable persons, having that status when the relative expenditure was incurred and when they seek to deduct the tax.  The Appellant was not a taxable person when the expenditure was incurred.  It was exempt and it did not have to register for VAT then.  It could have registered on a voluntary basis although its turnover was below the registration requirement.  It chose not to do so.

By Article 18(3) member countries may extend relief for input tax.  The UK legislature has chosen to do so in Regulation 111 to non-taxable persons.  It was not bound to do so and this should be viewed as a concessionary relief beyond the requirements of Article 17.  In short Regulation 111 was wholly in favour of the taxpayer as it gave relief for input tax albeit in certain prescribed circumstances, but which went beyond the requirements of Article 17.

Mr Ghosh distinguished the cases of Rompelman, Lennartz, INZO and Ghent Coal.  There the taxpayers were taxable persons whereas the Appellant here was “exempt” when the expenditure was incurred.

Mr Ghosh referred us to the decision (and Tribunal findings) in Schemepanel Trading Ltd v C&E [1996] STC 871 especially at p877-879.  There, he indicated, it is stressed that input tax to be deductible should be related to taxable outputs.  Input tax to be deductible should have been incurred when the recipient of the supply was a taxable person.  The provision of the primary VAT legislation was to restrict the deduction of input tax to tax on “… supplies made to a taxable person who was also a taxable person when he used these supplies”.  (See Section 24 VATA 1994).

He noted also the Tribunal decision in the Trustees of Park Avenue Methodist Church particularly paragraphs 26-27 and 38-46.  This decision, he submitted, was “in point” (although not “binding”) and undermined the Appellant’s criticism of Regulation 111(2) (d).  It emphasised that the remedy for a taxpayer in the Appellant’s circumstances was to register for VAT.

Finally, Mr Ghosh addressed the criticism of “discrimination” made by the Appellant.  In the context of Community Law this refers to the distortion of competition which was not present here.  A differing tax treatment between “goods” and “services” did not amount to discrimination.  Here, the Appellant was treated no differently from other taxpayers in the application of Regulation 111.  (cf Gregg and Another).

Time limits, Mr Ghosh submitted, had been approved as providing certainty in a tax context and were acceptable where they were reasonable and, for instance, did not render late claims nugatory (see Local Authority Mutual Investment Trust v C&E at paragraphs 55, 61 and 63-68).

In conclusion Mr Ghosh noted the Respondents’ Consultation Document (Document 12).  While at paragraph 3.7 it proposed an extension of the 6 months limit to 3 years in respect of “services” supplied pre-registration, this was neutral to the question of whether Regulation 111 infringed Article 17.

Decision
We consider that Mr Ghosh’s arguments are well-founded and, accordingly, we refuse the appeal.

It is of the essence of the VAT system that input tax is deductible against tax charged on the corresponding taxable outputs.  This results in the burden of the tax being borne by the ultimate consumer, with a tax “neutrality” affecting any intermediate stage.  Tax status is crucial to the system.  A “taxable person” is one registered or liable to be registered for VAT (see Sections 3-4 VATA), and any input tax borne by taxable persons may be set against output tax on their taxable supplies.  As at the date of the 3 invoices the Appellant was exempt and not a taxable person (whether for standard or zero-rating).  It had the option of seeking voluntary registration, which would have conferred taxable status, but it did not exercise this.

Article 17 provides for deduction of input tax by “taxable persons” and the terms of VATA 1994 at Sections 24-26 reflect the requirement of such status.

The case-law to which we were referred confirms this approach.  Taxable status is required at both the date of issue of the invoice and the date of deduction of the input tax.  We note especially Potts J’s approval of the Tribunal’s decision in Schemepanel (at p879), viz – 

“… Section 24 does restrict the definition of input tax to tax on supplies made to a taxable person who was also a taxable person when he used those supplies”.

The argument of the Tribunal in Park Avenue Methodist Church at para 41 is of further assistance in considering the effect of Regulation 111 in the context of Article 18(3).

Following this approach we agree with Mr Ghosh’s submission that Regulation 111 is an extension of the principles of Article 17 allowing relief for input tax.  It bears to be competent within the tolerance allowed by Article 18(3).  It is in our view a legitimate deeming provision extending the benefits of taxable status and the entitlement to deduct input tax to non-registered or exempt persons.  On that basis the 6 month limit affecting pre-registration services is not a restriction or deprivation of any right which an exempt taxpayer has.  The remedy of voluntary registration, which was available, would have secured that right.

Moreover, we do not consider that Regulation 111 is discriminatory in the context of Community Law.  It affects all taxpayers.  The distinction between the time limits affecting goods and affecting services does not in our view introduce an element of discrimination.  We refer again to the decisions in Gregg and Local Authority Mutual Investment Trust.

Finally, while we appreciate the terms of para 3.7 of the Respondents’ Consultation Document (Document 12) it is simply a matter of interest and not in any way authoritative.

Expenses
Mr Ghosh sought expenses on behalf of the Respondents in the event of the appeal being refused.  While the amount of tax involved is no doubt of importance to the Appellant, it is not in relative terms substantial.  Further, we have to note the terms of the Consultation Document (Document 12) at Appendix A which seem to suggest that equalisation of time-limits at 3 years for both goods and services would better reflect the principle of Article 17(2).  Also, we do not view the appeal and its conduct as being in any sense vexatious.  In these circumstances we make no award of expenses.

Finally, we would thank both Mr Rumbles and Mr Ghosh for their detailed presentation of their respective arguments and their agreeing all relevant factual aspects.

MR KENNETH MURE, QC

CHAIRMAN

RELEASE:  20 June 2005

EDN/04/147