19122
PARTIAL EXEMPTION – Special method – Approval – Appellant applied for group registration conditional upon proposal for special method being accepted – Commissioners granted group registration without considering special method proposal – Appellant continued for 18 months on standard method – Whether approval to use special method granted – No – Appeal dismissed – VAT General Reg’s r. 102 

LONDON TRIBUNAL CENTRE

CLAIM 13 PLC                                         Appellant

-	and –

	HER MAJESTY’S  REVENUE AND CUSTOMS 	Respondents

				Tribunal:	STEPHEN OLIVER QC (Chairman)
				                        SHEILA EDMONDSON FCA		 

Sitting in public in London on  16 May 2005

Simon Newark, of Hacker Young, Chartered Accountants, for the Appellant 

Ben Collins, counsel, instructed by the acting Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Claim 13 Plc (in administration) (“C13”) appeals against a decision of the Commissioners that C13’s use of a partial exemption “special method” was not approved.  The decision is contained in a letter of 12 July 2004 which confirms an initial decision in a letter 15 January 2003.  

2.	 At all material times C13 was a partially exempt taxpayer and a member of a group of companies.  Rule 102 (1) of the VAT General Regulations empowers the Commissioners to approve the use of a special method.  The question at issue is whether, as C13 contend and as the Commissioners dispute, the Commissioners approved the use of a special method.  C13 rely on  letter of 2 May 2001 (“the May 2001 letter”) and the consequent registration of C13’s group of companies as a VAT group with C13 as the representative member.  

Facts

3.	Prior to May 2001 the group of companies of which C13 was a member consisted of some companies which were registered and of some that were wholly exempt and not registered.  None of the companies in the group was “partial exempt”.  Costs of the group as a whole had been incurred centrally.  Had these been charged out as management charges, they would have born VAT and the exempt companies would have been unable to reclaim the amounts charged to them.

4.	The May 2001 letter is headed “Application for VAT Group Registration and Partial Exemption Special Method”.  It was sent to the Commissioners at the Newry VAT Registration Unit.  Enclosed with their letter was a  Form VAT 1”Application for Registration”.  The May 2001 letter explained that the application was for group registration of five companies of which Accident Advice (Group) Plc, now C13, was to be the representative member.  The text of the letter went on as follows:

“The application for group registration is conditional on our proposal for a partial exemption special method being accepted by the Commissioners. The standard method for partial exemption is inappropriate for our clients since it would not fairly apportion VAT incurred on expenditure according to the relative consumption between taxable and exempted activities.

Since the costs incurred are labour intensive and the fact that many of the employees of the companies are involved in undertaking a mixture of activities we suggest that the most equitable method is one based on time spent on taxable and exempt activities respectively.  This would involve the preparation of schedules of time spent”.

The application forms describe the businesses of the various companies as insurance brokers, investigation services, helpline phone services and claims handling.  The VAT 50 form asks the applicant to “give the date you would like this application to take effect if you don’t want it to take effect from the date on which it is received by Customs”:  the box for answering that question was left blank by the applicant (C13).

5.	On 15 May 2001 the Newry VAT Registration Unit wrote back stating that in accordance with Section 43B(4) of the VAT Act 1994 C13’s application “will be given effect from the date 3 May 2001”.  The letter makes no reference to any special method or the acceptance of one.

6.	A letter from Hacker Young Chartered Accountants (“HYCA”) acting for C13 of  18 December 2002 to the Voluntary Disclosure Section of the Commissioners states:

“It has become apparent to us that our client has not been carrying out partial exemption calculations as is required due to the group incurring input tax.  We have therefore carried out the relevant calculations to account for this oversight on out client’s part, please see attached schedule.

You will notice that we have used a special method that has been approved by yourself (as our application for group registration was conditional upon our proposed special method being approved).”

The total amount due for the five periods to 8/02 was said in the letter to be £19,502.

7.	A month later on 15 January 2003 the Commissioners responded as follows:

“Please be advised that HM Customs and Excise has not approved the use of a partial exemption special method for the above registration.
To consider an application for a special method further information is required ……  Reasons are also required as to why the standard method is inappropriate.

Please submit details of the taxable and exempt supplies undertaken by the registration. …..

On receipt of the above information further consideration can be given to the application for a special method and the Voluntary Disclosure submitted.”

8.	C13 (through HYCA) appealed on 20 February 2003 and their grounds of appeal were:

“The decision in Customs and Excise letter contends that our client does not have any partial exemptions special method approved by Customs and Excise.  Our client was already registered for VAT but applied to form a VAT Group with other existing VAT – registered companies upon condition that the proposed special method was approved.”

9.	Correspondence between HYCA and the Commissioners then ensued giving further schedules of the group’s “times spent” for 2002 and 2003 and attempting to get an acceptable agreement of the matters in dispute.  We will refer to some of these letters at a later stage when drawing conclusions from the facts.  On 12 July 2004 the Commissioners wrote saying that they had examined the request for a special method and had decided to reject the application.  The letter went on to say that they had taken into account the terms of the May 2001 letter but had never considered the special method to be a condition of the registration and they pointed out that there had never been any express or implied acceptance of C13’s proposal.

Contentions

10.	Simon Newark for C13 accepted that C13 had not since May 2001 correctly operated the alleged special method.  The special method had however been approved by the Commissioner’s action of granting the group registration.  The Commissioners had, he argued, been duty bound to clarify C13’s request for a special method rather than to process the group application paperwork.  The Commissioners must nonetheless have been taken to have agreed the framework of the proposed special method.  De facto approval of an application, which C13 say happened here, is a well established European Law principle.  Mr Newark referred to Article 27 of the Sixth Directive.  This deals with derogation requested by Member States; it states that the Council’s decision authorising a derogation shall be deemed to have been adopted if, within a particular period, neither the Commissioner nor any Member state has required the matter to be raised by the Council.  Mr Newark further argued that if the Tribunal was against C13 on its claim that the special method have been approved, the Tribunal should direct the parties to settle the matter on the basis that the group registration is disregarded.

11.	The Commissioners accept that Regulation 101 contemplates that the de facto approval of a special method is legally possible.  But they argue that no such approval was given here.

Conclusions

12.	It is clear to us that no express approval was given to any application by C13 for the use of  a special method in any form.  At the same time we accept that approval under Regulation 102 may be given by conduct.  For the record, Regulation 102, so far as is relevant, reads as follows:

“ (1)	Subject to paragraph (2) below …, the Commissioners may approve or direct the use by a taxable person of a method other than that specified in Regulation 101…”

The essential ingredients for implied approval were stated by the Tribunal in Wellington Private Hospital, [1993] VATTR 86 (VAT Dec. 10627) to be as follows:

“In the present context where the question is whether Customs and Excise have allowed the adoption of a special method two features have, I think, to be present.  Firstly, the taxpayer must have knowingly adopted or sought to adopt the special method.  Secondly, Customs and Excise must have been aware of what the taxpayer was doing or seeking to do.”

13.	Did C13 knowingly adopt or seek to adopt the special method on which they rely?  Here the evidence shows that they did not, at least until they submitted the Voluntary Disclosure letter in December 2002.  In the first place, the May 2001 letter upon which C13 relies as the claim for approval  does there more than suggest as “the most equitable method” one that was “based on time spent (by the employees of the group companies) on taxable and exempted activities respectively.”  The letter enclosed no schedules of time spent which, the writer indicated would have to be prepared;  it provided no other evidence and it gives no reasons why such a special method would provide a fairer and more reasonable method than the standard method.  The absence of any such details coupled with the fact that C13 had neither adopted nor sought to adopt any method that could realistically be described as a special method (at least until December 2002) concludes the first question against C13.

14.	Were the Commissioners aware that C13 was adopting or seeking to adopt the special method?  In this connection we refer to the witness statement of Richard Taylor, the review officer from Commissioners.  Following the HYCA letter of 18 December 2002 to the “Voluntary Disclosure Section”, Mr Taylor had telephoned the person at HYCA responsible for C13’s VAT affairs.  In the course of the phone call Mr Taylor had been told that the term “schedules of time spent” was vague and was not necessarily based on individual’s records of working days and could be “number of things”.  This recollection (which is backed up by a rudimentary note of the telephone call) shows that C13 did not have any clear knowledge of the workings of the alleged special method.  On 16 April 2002 C13 had written to HYCA setting out the number of staff in the group and proposing a way of identifying their time spent on particular functions but that letter, as we read it, merely proposes one way of making an analysis of time spent;  it contains estimates but does not provide schedules of the sort referred to in May 2001 letter.  Moreover, even after the appeal was lodged, C13 continued to be engaged in a debate with Commissioners about  how the staff-time apportionment  should be determined and on what basis.  Ultimately on 9 December 2003, an officer of the Commissioners (Tony Rowe) paid a visit to C13’s premises and an attempt was made, by listening to a specimen phone call from one of its staff, to work out how much time was attributable to the exempt activity of dealing with insurance policies;  the attempt to apportion time on this basis and with the assistance of telephone transcripts was found by him to be unreliable.  What these later events show is that C13’s proposal of a special method in their May 2001 letter was so vague and unstructured that the Commissioners could not possible have construed C13’s action, or rather inaction, as the adoption of an approved special method.

15.	Mr Newark referred to the Tribunal’s decision  in University of Exeter (2003) VAT Dec 18117.  There the Tribunal said that the Commissioners may not withdraw approval of a special method if the result is to force the taxpayer to adopt a less satisfactory method.  Here, we accept, C13 disadvantaged itself by applying for group registration (and raising no point when the Commissioner duly granted it on 13 May 2001) without obtaining approval of any special method.  But the University of Exeter case, as we read it, was on the quite different point of whether the Commissioners could properly withdraw a special method already in place.  Hammersmith and West London College (2002) VAT Dec 17540 was relied upon by Mr Newark.  The question there was whether an election to waive exemption was made with actual authority and so bound the College; the Tribunal held that it was made with due authorization.  We cannot see how this advances C13’s case; the correspondence we have seen simply does not indicate any notification on C13’s part of an acceptable special method.  Reference was also made to Pearl Assurance Plc (1999) VAT Dec 15960.  There the taxpayer had been sent a letter indicating that the Commissioners would approve a particular “values based” special method.  The taxpayer had not acknowledged the letter of approval but had used that method nonetheless.  The letter proposing the approved special method was held to be binding on the taxpayer.  We cannot see any useful parallel between that case and the present where C13 and the Commissioners never came near proposing, let alone agreeing, any special method.

16.	For all those reasons we dismiss the appeal.  That is as far as we can take it.  We have no authority to make any direction as to what, if anything, should be done to resolve the dispute.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 16 June 2005

LON/2003/191