Neutral Citation Number: [2007] EWHC 755 (Ch)
Case No: CH/2006/APP/0812
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 3rd April 2007

Before :

THE CHANCELLOR OF THE HIGH COURT
- - - - - - - - - - - - - - - - - - - - -
Between :

	HER MAJESTY’S COMMISSIONERS FOR REVENUE & CUSTOMS	Appellants	
	- and -		
	GRACECHURCH MANAGEMENT SERVICES LIMITED	Respondent	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Mr K. P. E. Lasok QC and Mr Jeremy Hyam (instructed by HM Revenue & Customs) for the Appellants
Mr Jonathan Peacock QC (instructed by Denton Wilde Sapte) for the Respondent

Hearing date: 21st March 2007
- - - - - - - - - - - - - - - - - - - - -
Judgment
The Chancellor : 

Introduction

1.	At the beginning of November 1994 both Patriges Gracechurch SA (“Patriges”) and Gracechurch Management Services Ltd (“GMS”) were members of the Societé Generale Group of Companies both for the purposes of VAT and more generally.  Patriges was entitled to the benefit of an agreement for a long lease of 60 Gracechurch Street, London, EC3 and wished to redevelop the same.    On 25th November 2004 Patriges and GMS entered into a detailed agreement (“the Development Agreement”) whereunder such development would be undertaken by GMS on the terms thereof.   The nature of the development was clearly defined and the price was to be 105% of the Development Expenditure defined as the costs, expenses and payments made, incurred or discharged by GMS in connection with the carrying out of the development and the proper discharge of its duties under the Development Agreement.    Under clause 11(1) the price was to be paid as to £20m on the date of the Development Agreement “as an advance payment”, such other advance payments as might be agreed and the balance within seven days of completion.   The advance payment of £20m was duly paid on 25th November 1994.  
2.	On 29th November 1994 GMS left the Societé Generale Group and was separately registered for the purposes of VAT.  Thereafter it entered into the subcontracts necessary for the proper discharge of its duties under the Development Agreement.   From time to time GMS paid the sums due under the various sub-contracts plus VAT and accounted for the VAT as input tax for deduction from output tax or for repayment.   The aggregate of the input tax paid and so accounted for by GMS was £4,944,814.   The development was completed in December 1997.   GMS invoiced Patriges for the balance of the price, there having been no further advance payments, in the sum of £10,506,970 plus VAT of £1,751,162.   
3.	On this appeal of Her Majesty’s Revenue and Customs (“HMRC”) from the decision of the VAT and Duties Tribunal (Adrian Shipwright Esq and Cyril Shaw Esq) released on 26th September 2006 I am concerned with the VAT consequences of the events I have described.  It is not in dispute that by virtue of the advance payment of £20m made by GMS on 25th November 1994, at a time when GMS and Patriges were members of the same VAT group, the services to which it related would have been treated as supplied by GMS to Patriges on that date by virtue of s.6(4) VAT Act 1994 but for the terms of s.43(1)(a) VAT Act 1994 which required the supply of services by one group company to another to be “disregarded”.   The only output tax paid by GMS in the relevant accounting periods was the sum of £1,751,162 paid on completion of the development in respect of the balance of the contract price.   But GMS had already deducted from other output tax or been repaid the whole of the input tax it had paid its contractors, namely £4,944,814.   HMRC did not accept that GMS had been entitled to do so.    By an assessment dated 14th April 1998 it sought to recover the difference, namely £3,193,652, on the basis that, to that extent, the input tax did not relate to any taxable supply and  was not recoverable by deduction from output tax or otherwise.    GMS appealed successfully to the VAT Tribunal and the assessment was set aside.  HMRC now appeal to the court.  They claim that the assessment should be restored.

The relevant legislation and case law

4.	Before considering the reasoning and conclusions of the Tribunal it is necessary to have in mind the relevant legislation and case law of both the European Union and the United Kingdom.   As is well-known VAT is imposed on the supply of goods and services in the United Kingdom in the performance of the obligations of the United Kingdom imposed by a series of Directives of the Council of the European Union.   At the material times the relevant directives were the First and Sixth (both having been superseded by Council Directive 2006/112/EC with effect from 1st January 2007).   
5.	Article 2 of the First Directive was in the following terms:
“The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.
On each transaction value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.
The common system of value added tax shall be applied up to and including the retail trade stage.”

6.	Though most of the First Directive was replaced by provisions of the Sixth Directive Article 2 remained but subject to the obligation on Member States to modify their value added tax systems in accordance with the provisions of the Sixth Directive imposed by Article 1 of the latter.   Articles 5, 6 and 7 defined the phrases ‘supply of goods’, ‘supply of services’ and ‘imports’.  Articles 10 and 11 dealt with chargeability and amount.  Article 17, entitled “Origin and scope of the right to deduct”, provided for deduction of input tax.  Article 17.2, so far as relevant provided:
“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: [input tax]”

Reference was also made to Article 17.6.  This enabled the Council within a period of four years from the entry into force of the Sixth Directive to determine what expenditure should not be eligible for deduction of value added tax.  It provided:
“Value added tax shall in no circumstances be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.”

7.	Article 18 authorised rules governing the exercise of the right to deduct including (Article 18.4) provisions for refunding input tax paid in excess of any available output tax or for carrying the excess forward.  Article 19 provided for the calculation of the deductible proportion where some only of the inputs were deductible under Article 17.2 or 17.3.
8.	The obligations of the United Kingdom at the material time were implemented by the VAT Act 1994.  I have already referred to ss.6 and 43 dealing respectively with the time of supply and group companies.  S.24, so far as material, provides:
“(1) Subject to the following provisions of this section, ‘input tax’, in relation to a taxable person, means the following tax, that is to say—
(a) VAT on the supply to him of any goods or services; 
[(b),(c)]
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.
(2) Subject to the following provisions of this section, ‘output tax’, in relation to a taxable person, means VAT on supplies which he makes....
[(3), (4)]
(5) Where goods or services supplied to a taxable person,....are used or to be used partly for the purposes of a business carried on or to be carried on by him and partly for other purposes, VAT on supplies,...shall be apportioned so that only so much as is referable to his business purposes is counted as his input tax.”
9.	S.25 requires taxable persons to account for output tax by reference to prescribed accounting periods.   Under s.25(2) and subject to the provisions of that section:
“...he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.”
10.	S.26, so far as material, provides:
“(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies...in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below. 
(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business—

(a) taxable supplies; 
(b) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom; 
(c) such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection. 
(3) The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above,...”

11.	The relevant regulation, authorised by s.26, is Regulation 101 of Value Added Tax Regulations 1995 SI 1995 No.2518.  It is entitled “Attribution of input tax to taxable supplies”.   So far as relevant it provides:
“(1) Subject to regulation 102 and 103B, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.
(2) In respect of each prescribed accounting period-
(a)...goods or services supplied to, the taxable person in the period shall be identified, 
(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,
 (c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and 
(d) there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.”
Regulation 101(3)(a) excludes from that proportion any sum received by the taxable person in respect of capital goods.
12.	I should also refer, at this stage briefly, to the decided cases which have been cited to me.  They are, in chronological order, Lennartz v Finanzamt München III [1995] STC 514, BLP Group plc v Commissioners for Customs and Excise [1995] STC 424, Seeling v Finanzamt Starnberg [2003] STC 805, BUPA Purchasing Ltd v Commissioners for Customs and Excise [2003] STC 1203 and Charles and another v Staatssecretaris van Financiën [2006] STC 1429. 
13.	In Lennartz the European Court of Justice was concerned with the extent to which a taxable person was entitled to deduct input tax referable to a car he had bought but only used for the purposes of his business to a limited (8%) extent.  The Court concluded (paragraph 35) that:
“It must therefore be stated in reply to the national court that a taxable person who uses goods for the purposes of an economic activity has a right on the acquisition of those goods to deduct input tax in accordance with the rules laid down in Article 17, however small the proportion of business use. A rule or administrative practice imposing a general restriction on the right of deduction in cases where there is limited, but none the less genuine, business use constitutes a derogation from Article 17 of the Sixth Directive and is valid only if the requirements of Article 27(1) or Article 27(5) of the directive are met.”
 
14.	In BLP the taxpayer had sold shares in a subsidiary in order to pay off debts arising in the course of its business.  In connection with such sale it incurred liability for the professional fees of merchant bankers, solicitors and accountants.  It sought to deduct VAT in respect of those fees as input tax.  Its claim was refused on the grounds that the sale of shares in the subsidiary was an exempt transaction.   BLP contended that as the sale had been made for the purpose of paying off its debts which had arisen directly from its taxable transactions the professional services should be treated as having been used “for the purposes of [its] taxable transactions” within the meaning of Article 17.2 of the Sixth Directive.  ECJ rejected this contention.   In paragraphs 18 and 19 of the judgment the Court concluded that:
“18 Paragraph 2 of Article 17 of the Sixth Directive must be interpreted in the light of paragraph 5 of that article. 
19 Paragraph 5 lays down the rules applicable to the right to deduct VAT where the VAT relates to goods or services used by the taxable person "both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible". The use in that provision of the words "for transactions" shows that to give the right to deduct under paragraph 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by the taxable person is irrelevant in this respect.”
The Court then considered Article 2 of the First Directive and Article 17(3)(c) of the Sixth Directive.   It acknowledged (paragraph 25) that if the professional services had been supplied in connection with a bank loan with which to pay the debts the VAT on the professional services would have been deductible as input tax because:
“that is a consequence of the fact that those services, whose costs form part of the undertaking' s overheads and hence of the cost components of the products, are used by the taxable person for taxable transactions.”
It concluded in paragraph 28:
“The answer to Question 1 must therefore be that Article 2 of the First Directive and Article 17 of the Sixth Directive are to be interpreted as meaning that, except in the cases expressly provided for by those directives, where a taxable person supplies services to another taxable person who uses them for an exempt transaction, the latter person is not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction is the carrying out of a taxable transaction.”

15.	In Seeling the taxpayer built a house which he used partly for the purposes of his horticultural business and partly for private residential purposes.   Under the national law use of immovable property for private use was exempt.  The ECJ considered that the national law was inconsistent with other Community Law in cases where the taxpayer had treated the whole of the building as a business asset.  It held (paragraph 43) that:
“..where a taxable person chooses to treat an entire building as forming part of the assets of his business and subsequently uses part of that building for private purposes, on the one hand, he is entitled to deduct the input VAT paid on all construction costs relating to that building and, on the other, he is subject to the corresponding obligation to pay VAT on the amount of expenditure incurred to effect such use.”
In arriving at that conclusion the ECJ relied on and applied certain passages in Lennartz.
16.	In BUPA Park J was concerned with a series of transactions similar to those in this case.  BUPA and its wholly owned subsidiaries comprised a group of companies to which the provisions of s.43 VAT Act 1994 applied.  The supplies of goods and services by the group were largely but not exclusively exempt so that a proportion of its input tax was irrecoverable.   In order to increase the taxable supplies and therefore the proportion of input tax recoverable the subsidiaries contracted to provide services to BUPA for which BUPA made substantial payments in advance.  The subsidiary was then removed from the VAT group and registered as a taxable person for VAT purposes.  As and when BUPA required services of a particular description they were provided by the subsidiary, through a sub-contractor, at the price charged by the sub-contractor plus a mark-up of which 98% was deemed to have been satisfied by the original payment in advance.   The subsidiary invoiced BUPA for the balance of 2% plus VAT and claimed to deduct from that output tax the VAT on the whole of the price it had paid to the sub-contractor as input tax.   HMRC claimed that the subsidiary was not entitled to do so.
17.	After setting out the relevant facts and legislation, the arguments of counsel and the decision of the Tribunal in some detail Park J proceeded in paragraphs 32ff to explain why he agreed with the Tribunal, which had dismissed the appeal of the subsidiary, that the subsidiary was not so entitled.   His reasons, to which I shall refer in greater detail later, may be summarised as follows:
(a) Deduction of input tax is permitted under Article 17.2 only “in so far as” the services supplied were used by the taxable person “for the purposes of his taxable transactions”.  Such condition could only be satisfied as to 2% of the services supplied by the subsidiary to BUPA (para 32(i).
(b) The word “business” in the context of s.24(1) does not include activities which do not involve the making of taxable supplies.  Consequently 98% of the services supplied by the subsidiary, through its subcontractor, to BUPA could not be deductible as input tax (para 32(ii)).
(c) The provisions of s.24(5) require the apportionment of VAT on supplies to a taxable person so as to restrict the deduction of input tax to that part which is referable to the business purposes of the taxable person.  98% of the services supplied by the subsidiary, through its subcontractor, to BUPA is not so referable (para 32(iii)).
(d) If Regulation 101 is applicable, because 98% has not already been excluded by s.24(1) and (5), then the deduction would to that extent be precluded by Regulation 101(2)(b) or (c) on the grounds that the relevant goods or services were not used or to be used exclusively in making taxable supplies (para 32(iv)).

18.	In succeeding paragraphs of his judgment Park J tested his conclusion by reference to the provisions for apportionment (paragraphs 34 to 40), the concept of neutrality (paragraphs 41 to 43), the requirement for a direct and immediate link (paragraphs 44 to 46), cost components (paragraphs 47 to 51) and various other arguments advanced by counsel for BUPA (paragraphs 52 to 58).   It was in the section dealing with apportionment (paragraph 37) that Park J considered the decision of ECJ in Lennartz.  He concluded that it did not support the proposition for which counsel had cited it, namely that there could only be an apportionment where the relevant asset can be physically divided, but, in any event it related to the supply of goods and not services.
19.	Finally I should refer to Charles.   In that case the taxpayers acquired a holiday bungalow for the purpose of both letting and private use.  In the relevant period it was let for 87.5% of the time and used for private purposes for the balance of 12.5%.  The taxpayers sought to deduct 100% of the VAT paid by them in relation to the bungalow on the basis that they had chosen to allocate the bungalow to their business.   The inspector of taxes allowed such deduction only in respect of 87.5%.   The ECJ considered that the taxpayers were entitled to deduct the whole but on the basis that their private use was itself a taxable supply of services.   They explained the reasoning in paragraphs 23 to 25 in the following terms:
“23 It is settled case-law that, where capital goods are used both for business and for private purposes the taxpayer has the choice, for the purposes of VAT, of (i) allocating those goods wholly to the assets of his business, (ii) retaining them wholly within his private assets, thereby excluding them entirely from the system of VAT, or (iii) integrating them into his business only to the extent to which they are actually used for business purposes (see, to that effect, in particular, Armbrecht, paragraph 20; Bakcsi, paragraphs 25 and 26; Seeling, paragraph 40; and Case C-25/03 HE [2005] ECR I-0000, paragraph 46).
24 Should the taxable person choose to treat capital goods used for both business and private purposes as business goods, the input VAT due on the acquisition of those goods is, in principle, immediately deductible in full (see, in particular, Case C-'97/90 Lennartz [1991] ECR I-3795, paragraph 26, Bakcsi, paragraph 25, and Seeling, paragraph 41).
25 It follows from Article 6(2)(a) of the Sixth Directive that when the input VAT paid on goods forming part of the assets of a business is wholly or partly deductible, their use for the private purposes of the taxable person or of his staff or for purposes other than those of his business is treated as a supply of services for consideration. That use, which is therefore a taxable transaction within the meaning of Article 17(2) of that directive is, under Article 11A(1)(c) thereof, taxed on the basis of the cost of providing the services (see, to that effect, Lennartz, paragraph 26, Bakcsi, paragraph 30, and Seeling, paragraph 42).”

The Decision of the Tribunal

20.	After setting out the relevant legislation and the evidence the Tribunal recorded their findings of fact.  In paragraph 8 they stated:
“It also became clear during the hearing that it was common ground that the outputs by GMS were agreed to be all business outputs for the purposes of Article 17 of the Sixth Directive. There was no non-business use. It was all business use and not partial business and partial non-business use.  This was accepted by both parties.  In other words they were all used for the purposes of GMS’s taxable outputs.”
This point was repeated in paragraph 10(n) (and again in paragraphs 18 and 27), in these terms:
“All of the inputs to GMS were used to make taxable outputs by GMS.  It was common ground that there was no non-business use.  We found that they were all used for the purposes of GMS’s taxable transactions.”

21.	After referring to the submissions of the parties, the Tribunal turned to the issue of deductibility in paragraphs 18ff.   In paragraphs 18 and 19 they wrote:
“18. Article 17 allows deduction of input tax where “goods and services are used for the purposes of taxable transactions”.  This is the starting point in considering deductibility.  It is common ground that GMS’s outputs were all business outputs for the purpose of Article 17.  This case is only concerned with input tax recovery.  Here the inputs were used for the purposes of the taxable transactions treated as taking place in December 1997 when the VAT invoices were issued.  We find this as a fact.
In our opinion one should start by looking at Article 17, rather than Article 6.  This allows the deduction of input tax from the tax a taxpayer is liable to pay on his outputs which are accepted as all business outputs.  
19. Accordingly, at first blush, (on the common ground and findings of fact) GMS is entitled to deduct the whole of its input tax from the output tax on the taxable transactions in December 1997.  This flows from the Sixth Directive and does not have to be further demonstrated by GMS.  This raises the question as to whether there are any restrictions on this deductibility.”

22.	The Tribunal then turned to consider whether there are restrictions to be applied.  They found that s.43 VAT Act 1994 did not supply one.  They concluded that the decision of Park J in BUPA did not do so on two grounds.   The first was that the decision in BUPA is distinguishable on its facts in that in BUPA only 2% of the outputs were taxable transactions.   The second was that even if BUPA is not so distinguishable the comments of Park J in that case had been superseded by the Seeling and Charles cases and their impact on Lennartz.   

Submissions for the parties and my conclusion

23.	Counsel for HMRC points out that as a judge sitting at first instance I should follow the decision of Park J in BUPA unless I am convinced that it is wrong.   He submits, further, that I should not be so convinced because the judgment of Park J in BUPA is right and the grounds on which the Tribunal distinguished it are inadequate and wrong in law.   Counsel for GMS did not dissent from the proposition that I should follow the decision of Park J unless I am convinced that it is wrong.   He did not seek to support the Tribunal’s conclusion that the decision of Park J in BUPA was distinguishable on its facts but he did support the proposition that it had been shown to be wrong by the two decisions to which the Tribunal referred, namely Seeling and Charles, neither of which had been cited to him.
24.	Before returning to the decision of Park J in BUPA I should note the submission of counsel for HMRC to the effect that the Tribunal wrongly assimilated business use or purpose with taxable supplies.  Thus in paragraph 10(n), quoted in paragraph 20 above, the Tribunal appeared, so he submitted, to think that if the relevant inputs were used exclusively for business purposes they were, by definition, used for the purposes of taxable transactions.   There are similar passages in paragraph 18 (quoted in paragraph 21 above).   He submitted that such an assumption is wrong because a supply may well be for business purposes but not constitute a taxable supply because it is exempt.
25.	Counsel for GMS submitted that the passages on which HMRC relied should not be so read.  He contended that the Tribunal would be well aware that a business transaction would not necessarily be taxable.  Rather the Tribunal was recognising the existence of two stages or screens.   First if there is non-business use of the incoming goods or services then, as s.24(1) and (5) VAT Act 1994 recognise, the tax thereon cannot, to that extent, qualify as input tax at all.  But, second, if it does then it will only be deductible from output tax in accordance with s.25 to the extent that it is attributable to taxable supplies.   Thus, he submitted, in paragraph 10(n) the sentences were in the wrong order.  The correct analysis is that described by the Tribunal in paragraph 27 of the Decision where they wrote:
“They [the incoming goods or services] were all for business use as is common ground.  There was no 98:2 split here as there was in BUPA.  The outputs which were subject to VAT here were all taxable supplies. Accordingly, no question of apportionment arises in this case.”

26.	On this issue I accept the argument of counsel for GMS.   I do not think that a specialist tribunal such as this would misunderstand the effect of the Sixth Directive and the VAT Act to such an extent as to assume that a business use or purpose for the incoming goods or services necessarily gives rise to a right to deduct the input tax;  they must also be attributable to taxable [output] transactions.   But the debate did reveal an important issue between the parties.   If all the outputs are taxable are all the business inputs necessarily deductible?  Counsel for GMS submits that the answer is in the affirmative and that such a conclusion follows from the decisions of ECJ in Lennartz, Seeling and Charles.
27.	I have referred to those decisions in paragraph 13, 15 and 19 above.  Each related to a property, be it a car, house or bungalow, used partly for business purposes and partly for private purposes.   In each case the ECJ concluded that the taxpayer was entitled to deduct all the input tax.   The basis, as Seeling and Charles make clear, is that the taxpayer has allocated the asset to his business.  But the consequence, in the case of the house and bungalow, is that the private use is itself a taxable transaction.   The decisions in Seeling and Charles show that the principle applies as much to supplies of services as to supplies of goods so that the distinction towards which Park J inclined in paragraph 37 of his judgment in BUPA is not a valid one.  But none of those cases concerned one in which the inputs were all used for business purposes but some of the corresponding outputs in fact made are to be disregarded.
28.	In paragraph 32 of his judgment in BUPA Park J gave four reasons for concluding that in such a case the input tax must be apportioned and only that part attributable to a taxable transaction deducted from output tax.  I have summarised those reasons in paragraph 17 above.  I must now examine them in more detail.
29.	The first reason arises from the terms of Article 17 of the Sixth Directive.  In paragraph 32(i) Park J stated:
“Article 17.2 of the Directive... is probably the most important single provision in the Directive so far as the present case is concerned.  It begins with the words “In so far as”.  Where a taxable person incurs input tax on some supply made to him, he can only deduct that input tax for his own VAT purposes “in so far as” he uses the supply “for the purposes of his taxable transactions”.   In this case [the subsidiary] used the supplies – the inputs -  which it received from outside suppliers...to perform its obligations under the contracts with BUPA... The performance of those obligations was a taxable transaction to the extent of 2%.  To the extent of 98% it was something that [the subsidiary] did and for which it used the inputs, but it was not a taxable transaction.  So, having in mind the expression ‘in so far as’, I ask myself: how far did [the subsidiary] use the services which it purchased from outside suppliers like advertising agents for the purposes of its taxable transactions?  I answer: to the extent of 2%.”

30.	In paragraphs 34 to 40 Park J concluded that inputs could be apportioned on a percentage basis so that only that proportion attributable to the taxable supplies could be apportioned.  It was in that connection he referred to Lennartz.  At paragraph 37 he said:
“[Counsel’s] argument is that the case shows that an apportionment of input tax can never be made in the case of an asset which cannot be severed into a business part and a non-business part.  I do not think that is shown by the Lennartz case, even taking the case by itself, and certainly not when other decisions of the ECJ are also taken into consideration.  The case is only considering the acquisition of goods, not of services, and even in the context of goods it seems to me to recognise that another acceptable way of dealing with an acquisition made partly for business and partly for private purposes is to deduct and apportioned part of the input tax on the acquisition.  See for example Lennartz [1995] STC 514 para 15 of the judgment.”

31.	Neither Seeling nor Charles suggests that such an apportionment cannot be made.  Rather they affirm the proposition that where the asset has been wholly allocated to the business partial private use does not preclude deduction of all the input tax.  In those circumstances no apportionment is required.   In my view the argument for GMS does not meet the point made by Park J that the use of the introductory phrase in Article 17.2 of the Sixth Directive “In so far as” shows that deduction of input tax is only allowed if and to the extent that the incoming goods or services are used for the purposes of taxable  [output] transactions.   Park J concluded that the condition was not satisfied in the case of outgoing supplies in fact made but required by s.43 to be disregarded.   I agree with him.
32.	In paragraph 32(ii) Park J reached the same conclusion in the light of the definition of input tax contained in s.24(1) VAT Act.  In doing so he relied on the House of Lords decision in Commissioners for Customs & Excise v Apple and Pear Development Council [1986] STC 192.   In that case the Development Council had been established by order to promote the marketing of apples and pears.  It was funded by government grant and a levy on producers.  It was registered for the purposes of VAT.   The issue was whether it was entitled to deduct all its input tax when, as found, only part of its activities were to be classed as business activities.   The House of Lords concluded that it was not.  Lord Brightman, with whom the other members of the Appellate Committee agreed said:
“The scheme of the legislation is plain.  If the business activities of the taxpayer are such that all the supplies that he makes are subject to output tax (whether positive rated or zero rated) he recovers all the tax that he pays on the inputs of that business: see ss. 3(3) and 4(1)(a).  If all the supplies he makes are exempt supplies, he can recover none and the probability is that he will not even be registered.  If the supplies which he makes are partly taxable supplies and partly exempt supplies there is to be an apportionment of the tax and that which is attributable to the exempt supplies is not recoverable.  I ask myself how, against that background, one could rationally come to the conclusion that if the business activities of the taxpayer are such that some services are taxable supplies and some are not supplies at all, the whole of the input tax is recoverable?  The reductio ad absurdum of the taxpayer’s argument is this: suppose that the taxpayer’s business is such that some of this supplies (outputs) are taxable supplies, some are exempt supplies and some are not supplies at all within the statutory definition:  in this situation the only allowable input tax under s.4(1)(b) is that attributable to the taxable supplies made by the taxpayer:  suppose that the taxpayer then ceases to make exempt supplies but continues to make his taxable supplies and his ‘non-supplies’; on the Council’s argument the taxpayer now recovers the whole of the input tax attributable to his ‘non-supplies’, which in the first example was not recoverable by him.
Lord Brightman then quoted Article 11.2 of the Second Directive and Article 17.2 of the Sixth Directive and observed:
“The sense of both directives is the same.  Input tax is not deductible except so far as the goods or services on which the tax has been levied are for the purposes of the taxpayers taxable transactions.”

33.	It appears to me that that decision of the House of Lords is clear authority as to the proper application of Article 17.2 of the Sixth Directive and supports the case for HMRC.   If the supplies in fact made are to be disregarded pursuant to s.43 then, in the words of Lord Brightman, they are non-supplies.  But in that event Article 17.2 applies to disallow the deduction of input tax to that extent.  I see nothing in the decisions of the ECJ in Lennartz, Seeling or Charles to undermine that conclusion.
34.	Park J reached the same conclusion in sub-paragraphs 32(ii) and (iii) of his judgment.   In those sub-paragraphs he considered, respectively, the provisions of s.24(1) and (5) of the VAT Act 1994.   In relation to the former he considered that the House of Lords had concluded that 
“activities that do not involve the making of taxable supplies, even if they would be business in the normal sense, do not count as business for VAT.”
In relation to the latter he stated:
“It is true that the reason why some of [the subsidiary’s] activities (98% of them) were not taxable supplies is not the same as the reason why some of the Apple and Pear Development Council’s activities were not taxable supplies, but that does not, in my view, make any difference.  If the activities were not the making of taxable supplies, any VAT borne on the price of them is not ‘input tax’ to which s.24 can apply.”
Whilst I have reservations in respect of the first of those conclusions, I agree entirely with the second.
35.	The fourth reason given by Park J in paragraph 32(iv) of his judgment in BUPA arises from the wording of Regulation 101(2)(b) and (c) which I have quoted in paragraph 11 above.  Assuming that the obstacles arising from the terms of s.24(1) and (5) have been overcome deduction of input tax still depends on compliance with s.26(1) and the regulations made thereunder.   Regulation 101(1)(b) requires that the input tax should be attributable to “such of those goods or services as are used or to be used by him exclusively in making taxable supplies”.  Plainly this requirement echoes that of Article 17.2.  As Park J said:
“When [the subsidiary] used its inputs only to the extent of 2% in making taxable supplies, I do not see how it can be said that it used the inputs (ie 100% of them) ‘exclusively’ in making taxable supplies.”

36.	Park J made the same point and arrived at the same conclusion in relation to the part of Regulation 101(2)(c) which requires that no part of the input tax on goods or services which are used or to be used “in carrying on any activity other than the making of taxable supplies shall be attributed to taxable supplies”.  As Park J observed “To the extent of 98% the performance by [the subsidiary] of its contracts with BUPA..is an activity other than the making of taxable supplies”.  I agree with his conclusions and his reasoning.
37.	As I have already observed Park J justified his conclusion by reference to the provisions for apportionment, the concept of neutrality, the requirement for a direct and immediate link, cost components and various other arguments advanced by counsel for BUPA.  It is not necessary for me to follow him down all those avenues.   I did not understand it to be disputed that those principles could justify the conclusion of Park J.  Rather it was submitted that they could also justify the conclusion of the Tribunal.
38.	It is also necessary to have regard to the terms of s.43 VAT Act 1994.  This deals with groups of companies.  Subsection (1) provides that:
“Where...any bodies corporate 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, and –
(a) any supply of goods or services by a member of the group to another member of the group shall be disregarded; and
[(b) and (c)].

39.	Such statutory disregard must be applied to achieve the purpose of the section.  But it does not require the court to ignore the fact of the supplies for all purposes.  Nor does it require the court to treat such supply as a taxable supply.   Accordingly, given the interpretation of Article 17.2,  s.24(1) and (5) of VAT Act 1994 and Regulation 101(2)(b) and (c) of VAT Regulations 1995 SI 1995 No:2518 to which I have referred, s.43 is of no avail to GMS.
40.	In summary, for all these reasons, I conclude that the Tribunal was wrong and the assessment dated 14th April 1998 was correct in point of law.  Accordingly I allow the appeal and confirm the assessment.