03 0452 DENISE JERZYNEK Mr R Barlow Mrs R Dean Manchester 12 July Mr N Gibbon, solicitor of Gibbon & Co appeared for the appelant Miss H Redmond of counsel instructed by the solicitor of HM Customs and Exise for the respondents. 

	CATCHWORDS  — VALUE ADDED TAX — pre-registration input tax — rent on premises — appeal allowed

MANCHESTER TRIBUNAL CENTRE

 
 	
	DENISE JERZYNEK	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Mr R Barlow (Chairman)
						 Mrs R Dean (Member)	

Sitting in public in Manchester on 12 July 2004

Mr N Gibbon, solicitor of Gibbon & Co appeared for the appelant

Miss H Redmond of counsel instructed by the solicitor of HM Customs and Exise for the respondents.

	© CROWN COPYRIGHT 2004

DECISION

1. 	The appellant appeals against part of an assessment issued to recover £1,288 which she had claimed as input tax in the return for the VAT period ending March 2002, which was her first VAT period after registering with effect from 1 December 2001.  The balance of the assessment, relating to motor scale charges, is not in dispute.

2.	The relevant facts are not in dispute and I find them to be as follows.  The findings are based on the oral evidence of Mr K Aldred, the appellant’s accountant, on the documents and on the agreements of fact stated by the parties as the case progressed.  

3.	The appellant became the proprietor of a furniture retail business when it was transferred to her by her husband on 1 August 2001.  He had not been registered for VAT purposes and it has not been suggested that he should have registered.  During the period 1 August 2001 to 30 November 2001, the appellant traded in the furniture business buying stock costing about £10,000 (ex VAT) each month.  By 30 November 2001 she was holding stock to the value of just over £20,000 (ex VAT).  During the same period the appellant paid £1,288, as VAT, on rent for the business premises.

4.	It is not in dispute that if the appellant had been registered for VAT from 1 August 2001 she could have claimed the £1,288 as input tax because all her supplies were taxable at the standard rate and the rent would represent tax on a supply to her which would be directly linked to those taxable outputs as a cost component.

5.	However, when she did register, she claimed that amount as input tax under regulation 111(1)(a) of the VAT Regulations 1995 (S.I. 1995/2518) which reads (so far as is relevant):

“(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 purposes of a business which was either carried on or was to be carried on by him at the time of such supply …”

Regulation 111(2) reads (so far as is relevant)

“(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.

(b) By the relevant person before the date with effect from which the taxable person was, or was required to be, registered;

(c) In respect of services performed on 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.”

6.	That regulation was made under section 24(6)(b) of the VAT Act 1994 which reads (so far as is relevant):

“(6) Regulations may provide:

(b) For a taxable person to count as his input tax, in such circumstances, to such extent and subject to such conditions as may be prescribed, VAT on the supply to him of goods or services … notwithstanding that he was not a taxable person at the time of the supply ...”.

7.	“Taxable person” is defined by section 96 of the Act, by way of a cross reference to section 3, as follows: “A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act”.  The normal rule for input tax provided by sections 24 to 26 is that only a taxable person can claim credit for input tax and section 24(6)(b) maintains that rule.  The appellant had to be a taxable person before she could claim input tax under regulation 111(1)(a) but the special rule made by regulation 111, as quoted above, undoubtedly provides for some claims to be made by persons who have become taxable persons, relating to the time before they became taxable persons.

8.	In this case the appellant claims that she is entitled to the disallowed input tax but Customs and Excise dispute that.  They argue that the input supplies in respect of which a pre-registration claim is made must still be attributable to taxable supplies and must be cost components of those supplies but that in this case the rent was in respect of the period before taxable supplies were made and was therefore not attributable to taxable supplies.  They argue that the rent in question was specific to the period for which it was paid and that in that period no taxable supplies were made so the tax paid to the landlord was not capable of being treated as input tax under regulation 111(1)(a).

9.	Mr Gibbon, who presented the appellant’s case with admirable clarity and conciseness, pointed out that it is not necessary for a person to be a taxable person in order to make taxable supplies.  In that respect, he relied upon section 4(2) of the Act which defines a taxable supply as a supply other than an exempt supply.  He also pointed out that, logically, if only a taxable person can make a taxable supply, the requirements for registration in Schedule 1 of the Act would become hopelessly circular because they rely on a person (i.e. someone who is not yet liable to be registered) becoming so liable on the basis of taxable supplies he has already made before the liability to register arises, therefore implying that a person who has not yet become a taxable person can indeed make taxable supplies.    

10.	Miss Redmond sought to counter this argument and to support the Commissioners argument that the special rule for deduction provided by regulation 111 can only apply where the input tax claimed relates to supplies on which tax is actually payable, by relying on the case of Schemepanel Trading Ltd –v- Customs and Excise Commissioners [1996] STC 871.  In that case the issue was stated, by Potts J, as follows:

“The essential issue for determination before the tribunal and before this court, was whether the company was entitled to claim input tax in respect of supplies made to it after it was registered which supplies had been used by the company in making supplies before it was registered.” [Page 873d].

The factual situation was unusual in that, because of special rules applicable to the construction industry, the supplies made to the company were deemed to have been made at a date later than the date on which they were physically carried out, by which time the company had registered.  It appears that the company had not made a claim under regulation 111(1)(a) and that regulation certainly did not feature in the appeal.  

11.	Miss Redmond pointed out that the Commissioners’ argument in the Schemepanel case was that there was no entitlement to deduct input tax because the outputs were not subject to tax (having been made before the company registered) and that that argument was accepted by Potts J and formed the basis of his judgment.  Her argument then proceeded that the appellant was not entitled to deduct input tax in respect of the rent in the pre-registration period in this case because, at the time in which it was paid, the appellant had not made taxable supplies because no tax was actually chargeable on the supplies the appellant had made because she was not then a taxable person.  She pointed out that Potts J had said, at page 878e:

“I accept the commissioners’ submission that [section 26(2) of the VAT Act] is likewise to be construed as referring to taxable supplies made or to be made by the taxable person at a time when he is a taxable person (and when, therefore the taxable supplies made by him will be subject to tax).  The input tax for which he is entitled to credit is the input tax attributable to such supplies.”

The words in brackets cannot be taken to mean that Potts J had concluded that taxable supplies can only be made by a taxable person.  Those words correctly state that supplies made by a taxable person are subject to tax and therefore give rise to a right to deduct input tax under the normal rules but it does not follow that only a taxable person can make taxable supplies.

The Commissioners’ Statement of Case (paragraph 5) also cites a passage at page 877(j) in which Potts J said that a “taxable transaction” in the Sixth Directive is one that is subject to tax and, relying on that, the Statement of Case contended that the pre-registration supplies were not subject to tax and therefore that the inputs were not cost components of a taxable transaction.  That passage in the judgment of Potts J summarises the position applicable in normal circumstances but says nothing relevant to the special case provided for in regulation 111(1)(a). 

12.	That case is not authority for the proposition that a claim under regulation 111(1)(a) can only be made where output tax is payable on the supplies to which the input tax claimed relates.     

13.	The regulation itself certainly ensures that, at least in some cases, input tax will not be allowed to be claimed where it relates to supplies on which tax has not been paid.  That is the effect of regulation 111(2)(a) which disallows a claim where the input tax is “in respect of” supplies of goods or services that have been supplied before registration and paragraph (2)(c) which disallows a claim where input services have been performed on goods which have been supplied before registration.  In effect, these provisions achieve most if not all of the effect of the Commissioners’ Schemepanel argument.  If tax in respect of goods and services supplied before registration and goods consumed before that date are excluded from being treated as if it were input tax the effect is that the tax to be treated as input tax in those cases will in fact be only that which is attributable to taxable supplies made after registration (on which tax will actually be payable).

14.	Mr Gibbon relied upon the contention that, as regulation 111(2) specifically excludes certain categories of input supplies, others that are not excluded remain within regulation 111(1)(a).  In particular, the tax on the rent during the period before registration was tax on a supply of services to the appellant and it was either not in respect of goods or services that had been supplied before the effective date of registration or at most was only partly in respect of such supplies (in the latter case he contended for an apportionment).  As the exclusions in regulation 111(1)(a) relate only to inputs as cost components of supplies made before registration, he argued, there was no basis to exclude recovery where, or in so far as, the rent was not specifically a cost component of such supplies because the appellant’s business was that of making fully taxable supplies once she registered and the rent paid before registration was in respect of (to use the phrase used in regulation 111(2)) the business to be carried on after registration as well as before.   

15.	Miss Redmond relied upon the contention that, whether or not Schemepanel is in point, inputs incurred before registration can only be recovered if the supplies to which they relate are taxable supplies made after registration.  In this respect she relied upon the general nature of input tax and its treatment in the Act, in particular the contention that input tax can only be claimed if it is a cost component of a taxable supply by a taxable person.  

16.	The Commissioners developed their argument by then contending that as the rent in question, and therefore the tax charged on it, was applicable to the pre-registration period it could not be a cost component of the supplies made after registration.  Miss Redmond argued that the rent was analogous to goods that had been consumed before registration, inputs in respect of which are excluded, subject to a discretion of the Commissioners, by regulation 111(2)(a)(ii).  As against that, Mr Gibbon argued that if it had been intended to exclude services consumed before registration the regulation should have said so and that the specific reference to goods consumed before registration is to be contrasted with the silence about services.  He argued that that silence implies that services are not excluded as such.         

17.	I have already pointed out that the effect of the specific exclusions for treating pre-registration inputs as claimable under regulation 111 largely achieve the result that inputs are only claimable if they relate to taxable supplies made after registration by a person who has by then become a taxable person but the question remains how the specific inputs in question in this case should be treated.

18.	Regulation 111(1)(a) allows recovery as if it were input tax for all VAT on the supply to the taxable person (i.e. it allows recovery after registration) in respect of the supplies of goods and services supplied to the taxable person for the purpose of a business which was carried on or was to be carried on by him at the time he received those supplies.  I hold that regulation 111(2) then excludes only certain input supplies and any that are for the purpose of the business carried on or to be carried are recoverable as if they were input tax unless they are excluded.  This is the plain wording of the regulation.

19.	The question then becomes whether the tax charged on the rent was incurred for the purpose of the business carried on or to be carried on and this is a question of fact.  I find that the tax charged on the rent was in respect of the business because it constituted both a general overhead of the business and a specific overhead relating to the holding and sale of stock.  Some of the purposes for which the premises were used before registration were for the making of sales before that date and at first sight the rent incurred in that period was, at least to some extent, in respect of supplies of goods by the appellant before the date of registration and therefore apparently excluded by regulation 111(2)(a)(i).  On the other hand, some of the purposes for which the premises were used before registration were the holding of stock for sale after registration and generally developing and promoting the business both before and after the date of registration.  At first sight, an apportionment might be expected but the regulation makes no provision for it.

20.	I hold that the reason why the regulation does not address that question of apportionment is that the exclusions in regulation 111(2)(a) to (d) are alternatives to each other, as is clear from the word “or” between the last two.  Regulation 111(2)(a) might exclude some services supplied to the trader before registration where those services are exclusively in respect of supplies made before registration but where the services supplied to the trader are in respect of the business as a whole, including the intended business to be carried on after registration, they more aptly fall within regulation 111(2)(d) and the limitation on recovery is the arbitrary six months there provided for, without reference to how far the supplies were used up before registration.  As I have held paragraphs (a) to (d) to be alternatives, it is appropriate to apply the one most directly applicable to the situation in question. 

21.	That interpretation is entirely consistent with the Commissioners’ own statement in their internal guidance notes, at V1-13 section 7.4a, to which both parties drew my attention and in which it is stated that, during the six month period, it is deemed for simplification purposes that “services obtained will relate to business activity carried on at the time of registration”.  I interpret that as meaning that the Commissioners accept that services received within six months before registration can, on a rough and ready basis, be accepted as attributable to supplies made after registration.  Clearly, those internal notes do not have the force of law but they do explain why the legislation adopts a specific approach to services relating to the business generally. 

22.	On the above basis, I hold that the appellant was entitled to claim the sum in dispute.

23.	However, one further point was raised by the commissioners, which I should deal with.

24.	Miss Redmond, relying upon the fact that regulation 111 says that the commissioners “may” authorise a taxable person to treat VAT on the supplies to him before registration as if it were input tax, argued that the commissioners had a discretion and were entitled to refuse the claim, so that the tribunal could only allow the appeal if it were satisfied that the commissioners had acted unreasonably.

25.	The word ‘may’ could simply be used to empower the commissioners to allow such claims but, as Miss Redmond pointed out, the word ‘shall’ sometimes appears in the legislation.  Certainly, ‘shall’ would have made it clear that the commissioners are obliged to allow a claim if it falls within the rules laid down in regulation 111.  However, ‘may’ can sometimes mean ‘shall’ (as to which see Bennion Statutory Interpretation (2002 Butterworths) at page 36 and Pargan Singh –v – Secretary of State for the Home Department [1992] 4 All ER 673 at 676f to 677b.     

26.	The vires for regulation 111 in section 24(6)(b) allows the regulations to legislate for the circumstances and extent to which tax may be treated as input tax and to prescribe conditions.  It is difficult to see how a discretion, unfettered save as to reasonableness, could amount to prescribing conditions or determining circumstances or extent.  The vires appears to suppose that the regulations will set specific parameters.  On that basis it appears more likely that the word ‘may’ was intended to empower the commissioners to allow claims falling within the terms of the regulations rather than to give them a discretion to refuse claims, even where they do fall within those terms.

27.	However, I do not find it necessary to determine the question whether the correct interpretation of the regulation is that it gives the commissioners a discretion to refuse; still less whether it would be ultra vires if it did so.  That is because it is clear that in the circumstances of this case it would be unreasonable for the commissioners to refuse the claim even if they do have a discretion to do so.  The claim falls within the terms of the regulations and it also falls within the plain wording of section 7.4(a) of the published guidance.  The relevant parts of the guidance are:

“Where goods or services are purchased in respect of taxable business activities by a person prior to registration for VAT, relief from the VAT incurred is permitted provided the following criteria are met:
…
In the case of services, the supply was made not more than 6 months prior to the date of registration.  The 6 months represents the period when it is deemed, for simplification purposes that services obtained will relate to business activity carried on at the time of registration.
…
The amount of tax that can be recovered is the amount that would have been recovered had the trader been registered at the time the tax was incurred – i.e. partial exemption and non-business aspects need to be considered.”  [Emphasis added].

The reference to taxable business activities cannot, by definition, refer to supplies on which output tax is actually charged because there will be none before registration.  The emphasised words make it very clear that the recovery does not depend on the inputs (of services) being cost components of taxable supplies made after registration.  Had the appellant been registered at the time the tax was incurred she would have recovered the input tax in question in full, as it would have related to a fully taxable business.

28.	The commissioners could not reasonably refuse a claim that falls squarely within their own published guidance, at least in the absence of some exceptional circumstances, which it is not suggested apply to this case.

29.	Accordingly, the appeal is allowed.  Mr Gibbon sought an award of costs for the appellant and I award the costs of and occasioned by the appeal to be determined by a chairman of the tribunal if not agreed between the parties.

MR R BARLOW
CHAIRMAN
       Release Date
MAN/03/0452