18688

VAT – Partial Exemption – Apportionment – Appeal dismissed
LONDON TRIBUNAL CENTRE

	LEESIDE LEISURE LIMITED	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	DR K KHAN   (Chairman)
						LYNNETH SALISBURY

Sitting in public in London on 12 December 2003 

Mr M A Chandler, VAT Consultant for the Appellant 

Mr Mackay for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	Background

1.1	Leeside Leisure (“Appellants”) carry on business as the operator of a greyhound racing stadium.  Racing is held three times per week on Wednesday, Friday and Saturday, for a total of approximately 12 races (called “meetings”) per month.  Attendance at these meeting tends to be higher at the weekend, with mid-week attendance at approximately 200 people per night, 400 people on Friday and 800 people on Saturday.

1.2	The admission charge is £5 per person per night.
1.3	The Appellants carry on all activities relating to the meetings which includes the running of a bar, provision of food and betting (the “Tote”).

1.4	Admission charges, sale of drinks and food, sale of confectionaries and use of telephones by customers are all vatable supplies.

1.5	The Tote betting, including the independent bookmakers’ contribution to prize money for the winner of races (called ‘tober’ money) are not vatable supplies.

1.6	The business carried on by the Appellants is therefore a partially exempt business.

1.7	The Tote makes up 35 to 40 percent of the Appellant’s income.  The largest expense is prize money since all owners of dogs finishing races receive a cash prize.

1.8	With the demise of dog racing stadiums throughout London (there are only two remaining stadiums in operation), the Appellants wished to diversify their business by creating another source of income.

1.9	The Appellants embarked on the construction of an extension to the Grandstand of the existing dog racing stadium, which was called the Harlequin Suite (the “Extension”).

1.10	By way of background, the existing site of the stadium was purchased in 1991, developed into a dog racing stadium between 1993 and 1995 with the actual stadium opened to the public in 1995.  The Appellants always operated as a partially exempt business in this period.  They made quarterly payments of VAT for seven years from 1995 – 2002.

1.11	The Extension, which was built in 2002, was intended to operate as a separate business from the dog racing business.  It was meant to provide facilities for meetings, conferences, parties, weddings and other social events.  Events of this nature were to take place when the facilities were not being used for racing.  The Appellants stated that the Extension was kept separate (by partitions) from the racing area.  It was, occasionally to be used to provide overflow capacity for racing customers and this was intended to be for ‘four or five days’ per year.

1.12	The Appellants sought to recover all of their input tax incurred on the construction of the Extension on the basis that it was not used for the betting business, which is partially exempt.

2.	VAT Issues
2.1	The Commissioners made a VAT inspection visit to the Appellant’s premises on the 21 August 2002 and discovered that the Appellants had constructed the Extension to the stadium.

2.2	On the basis of this visit, the Commissioners made an assessment dated 31 October 2002 for recovery of input tax in the sum of £10,976 over recovered in the periods 01/01/01 to 31/03/02 and 01/04/02 to 30/06/02.

2.3	The Commissioners argued that the Appellant’s input tax recovery was restricted by the partial exemption status of Appellants for the periods ending 03/02 and 06/02.  Since the Appellants had accounted for tax on tober money (an exempt supply) for the periods to 03/02 and 06/02, due to a clerical error, the assessment dated 31 October 2002, was adjusted to take account of the over declaration of tax.  The actual input tax sought to be recovered was £18,163, which was reduced by over declaration of tax on tober money of £7,161.  The Appellant had therefore a net liability of £10,976 after adjustment.

3.	The Appellant’s Grounds of Appeal
3.1	The Appellants state that the business relating to the Extension was a separate wholly taxable business.  It is not part of the greyhound racing business which is partially exempt.  They said that the main use of the Extension was to offer facilities to local business interest and individuals for, inter alia, conferences, seminars and social functions.  They explained that steel shutters were in place to restrict access from the main Grandstand to the new Extension.  The shutters could be opened for busy greyhound racing meetings but there were no betting terminals or facilities in the new Extension for the carrying on of the greyhound racing business.

3.2	They further argued that the Extension would only be opened for greyhound racing customers as an overflow facility on perhaps four or five days per year.

3.3	On the basis of this argument, it was felt that all full input tax incurred on the construction of the Extension should be recoverable.

4.	The Commissioners’ Argument
4.1	The Commissioners argue that the only method for the recovery of input tax by a partial exempt business is pursuant to Regulation 101 of the Value Added Tax Regulations 1995 (SI1995/2518) (the “1995 Regulations”).  This is known as the standard method.  In the absence of the standard method, they argue that there can be a special recovery method but since the Appellants had not agreed a special method with the Commissioners, this cannot be used.  The standard method does not require prior agreement with Customs & Excise.

4.2	They state that pursuant to Regulation 101(2)(d), the recovery of input tax where a business made both taxable and exempt supplies is determined by apportionment, which is done by reference to the ratio of the value of taxable supplies made to the aggregate value of all supplies made by the business.  This is the only basis for recovery.

4.3	Further, the Commissioners argue (based on a visit to the site) that there were television screens fitted inside the Extension which allowed the Appellant’s customers to view racing.  The Commissioners also found a connecting door between the Extension and the Grandstand was open during the time of the visit, which would allow customers using the Extension to go into the Grandstand where bets could be made.  The Commissioners argue that the Extension to the Grandstand merely increases the size of the facilities already available to greyhound racing customers.  In this sense, the premises would be used in the making of exempt (betting) as well as taxable supplies (food, bar etc) and the VAT incurred on the construction costs of the Extension should be treated as input tax the reclaiming of which should be restricted by the partial exemption method.

5.	The Law
“Input tax” is defined in VATA 1994, S.24, which states, inter alia:-
“Subject to the following provisions of this section, “input tax”, in relating to a taxable person, means the following tax, that is to say:

(a)	VAT on the supply to him of any goods and services;

(b)	VAT on the acquisition by him from another member State of any goods; and

(c)	VAT paid or payable by him on the importation of any goods from a place outside the member States,

being (in each case) goods and services used or to be used for the purpose of any business carried on or to be carried on by him.”

5.1	The basic rule is that a taxable person is entitled at the end of each accounting period  to credit for so much of their input tax as is allowable by or under regulations as being attributable to taxable supply made or to be made by the taxable person in the course or furtherance of his business.

5.2	According to VATA 1994, S.26, the amount of input tax which a taxable person is entitled to credit is so much of the input tax for the relevant period as is allowable by or under regulations as being “attributable to” taxable supplies and S.26(3) empowers the Commissioners to make regulations to secure a fair and reasonable attribution.  

S.26 states:-
	(1)	“The amount of input tax for which a taxable person is entitled to 		credited at the end of any period shall be so much of the input tax 		for the period (that is input tax on supplies, acquisitions and 			importations 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 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 and any such regulations may provide for:

		(a)	determining a proportion by reference to which input tax 			for any prescribed accounting period is to be provisionally 			attributed to those supplies;

		(b)	adjusting, in accordance with a proportion determined in 			like manner for any longer period comprising two or more 			prescribed accounting periods or parts thereof, the 				provisional attribution for any of those periods;

		(c)	the making of payments in respect of input tax, by the 				Commissioners to a taxable person (or a person who has 			been a taxable person) to the Commissioners, in cases 				where an attribution was made; and

		(d)	preventing input tax on a supply which under or by virtue 			of any provision of this Act, a person makes to himself from 			being allowable as attributable to that supply.

	(4)	Regulations under subsection (3) above may make different 			provision for different circumstance and, in particular (but 			without prejudice to the generality of that subsection) for different 		descriptions of goods or services; and may contain such incidental 		and supplementary provisions as appear to the Commissioners 		necessary or expedient.”

5.3	Under S.26 the Commissioners are required to make regulations for securing a fair and reasonable attribution of input tax to supplies.  These regulations are contained in the 1995 Regulations.

5.4	The standard method of apportionment is set out in Regulation 101 of the 1995 Regulations which states the method for attributing input tax which a taxable person is entitled to deduct.  (The standard method is subject to Regulation 102, which gives the Commissioners power to approve or direct the use by a taxable person of another method).

5.5	The basic rule of attribution is that input tax on goods and services exclusively used in making taxable supplies are attributable to taxable supplies, and no part of input tax on goods and services used in making exempt supplies can be attributable to taxable supply.

5.6	Regulation 101 provides:
	(1)	Subject to regulation 102, 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 imported or accounted by and goods and 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 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 attributable to taxable supplies such 				proportion of the input tax on such of those goods or 				services as are used 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.

5.7	Under Regulation 101(2)(d), where input tax has been incurred in the provision of goods and services which are used in making both taxable and exempt supplies, there has to be an apportionment by reference to the ratio of the value of taxable supplies made to the aggregate value of all supplies made.

5.8	If any business is not fully taxable, subject to the de minimus limit (£625 per month with effect from 18 April 2002 and not applicable in this case) then that business cannot recover all its input tax.  In determining the amount of input tax  reclaimable, one has to separate the goods and services supplied to the business in the relevant period which are used exclusively for the making of taxable supplies and from those which are used exclusively for the making of exempt supplies.  In other words, one must directly attribute the input tax to either exempt or taxable supplies (see Article 17(5) of the Sixth Directive).  Where input tax is used exclusively in making taxable supplies, then such input tax is recoverable.  It will not be possible to recover input tax which relates to goods and services which are used in making exempt supplies.

5.9	In a partially exempt businesses, as in this case, there may also be some input tax which can be attributable to neither taxable or exempt supplies exclusively and may relate to goods and services used or intended to be used for making both taxable and exempt supplies or to general overheads of the business such as telephone bills, accountancy and legal services.  There are to be apportioned on a fair and reasonable basis where a business makes both standard and exempt supplies.  Under Regulation 101(2)(d), the standard method of apportionment is used to calculate how much of the input tax can be reclaimed or if this is not possible, then to use a special method agreed with Customs & Excise providing in all cases that the method used is fair and reasonable circumstances.  The standard method, is simply a way of calculating how input tax can be attributable to taxable supplies and deducted.  It provides a method of apportionment which is fair and reasonable.  In this method, the numerator is the value of the taxable person’s taxable supplies and the denominator is the value of its supplies, both taxable and exempt.  The calculation is normally done on a quarterly basis.

One last issue needs to be addressed in this Appeal.
5.10	The Appellants raised the issue of whether the Capital Goods Scheme (“the Scheme”) applied to their case and whether any capital goods scheme adjustments were necessary in the recovery of input tax.  The Scheme does not apply to the input tax recovery incurred in building the Extension.  While the definition of a “capital item” includes the alteration or construction of an extension, the value of all taxable supplies in connection with such alternation or construction must be £250,000 or more (exclusive of VAT) for the Scheme to apply (SI 1995/2518, Reg 112(2) and 113(h)).  In this case, the value of the total taxable supplies, excluding VAT is £235,543.76.  No adjustment are therefore necessary under the Scheme and the Scheme does not apply in this case.

6.	Conclusion
6.2	The Appellant operate a partially exempt business and recovering of input tax should be on the basis of the standard method of apportionment.

6.3	The Extension, while constructed with a view to being used to create another source of income for the Appellants, was also used for the purposes of their core partially exempt business, and the recovery of input tax incurred in its construction should accordingly be apportioned.

6.4	The Appeal should be dismissed.  No order for costs has been made.

DR K KHAN
CHAIRMAN

RELEASED:09/07/2004

LON/2003/165