19428
Input tax – proportion deductible where no specific attribution possible – standard and special methods – rounding up – whether applicable to special method – “next unit” – EC 6th Directive Articles 17 and 19 VAT Regulation 1995 paras 101 and 102.

EDINBURGH TRIBUNAL CENTRE

	THE ROYAL BANK OF SCOTLAND GROUP PLC	Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC
					 (Member):	  Mr K W Pritchard, OBE., BL., WS

Sitting in Edinburgh on Monday 9 January 2006

for the Appellant		Colin J Tyre, QC

for the Respondents	Heriot W Currie, QC

© CROWN COPYRIGHT 2006.

DECISION

Introductory
In these three appeals a direction was given by the Tribunal that as a preliminary issue it be determined whether the Appellant was entitled, when calculating the proportion of residual input tax deductible in respect in each sector of its business in terms of its Special Method, to round the proportion up to the next whole number.

The Tribunal heard excellent arguments from senior counsel on 9 January 2006.  They led no evidence but certain facts which were not an issue appeared to the Tribunal to be relevant.

Relevant Facts
On 21st May 2002 a framework agreement, referred to as a “template” was agreed between the Appellant and other Scottish banks on the one hand and the Respondents on the other.  That provided for the use of a special method of calculating residual input tax.  It also provided, specifically, for rounding up of the proportion, hereafter specified in more detail, to 2 decimal places.  That Agreement has been implemented and operated since that date on a provisional basis, although no adjustments have taken place to the figures produced.  At that date the matter of rounding up was detailed only in article 19/1 of the Sixth EC Directive and Regulation 101 of the Value Added Tax Regulations 1995.  Regulation 101 provided for the rounding up to the next whole number of a percentage.  Article 19/1 also did so in certain of its language versions.

In November 2004 in the course of negotiations between the parties the Appellant contended that the rounding in respect of each sector should conform to the nearest whole number provision in Article 19 and that the provisions of Article 19 had direct effect.

The Applicable Legislation
Article 17(5)
As regards goods and services to be used by a 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, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

However, Member States may:
(a)	authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;
(b)	compel the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;
(c)	authorise or compel the taxable person to make the deduction on the basis of the use of all or part of the goods and services;
(d)	authorise or compel the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph, in respect of all goods and services used for all transactions referred to therein;
(e)	provide that where the value added tax which is not deductible by the taxable person is insignificant it shall be treated as nil.

Article 19 – Calculation of the deductible proportion
(1)	The proportion deductible under the first subparagraph of Article 17(5) shall be made up of a fraction having:

-	as numerator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3),
-	as denominator, the total amount, exclusive of value added tax, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which value added tax is not deductible.  The Member States may also include in the denominator the amount of subsidies, other than those specified in Article 11(A)(1)(a).

The proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit.

(2)	By way of derogation from the provisions of paragraph 1, there shall be excluded from the calculation of the deductible proportion, amounts of turnover attributable to the supplies of capital goods used by the taxable person for the purposes of his business.  Amounts of turnover attributable to transactions specified in Article 13(B)(d), in so far as these are incidental transactions, and to incidental real estate and financial transactions shall also be excluded.  Where member states exercise the option provided under Article 20(5) not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the deductible proportion.

(3)	The provisional proportion for a year shall be that calculated on the basis of the preceding year’s transactions.  In the absence of any such transactions to refer to, or where they were insignificant in amount, the deductible proportion shall be estimated provisionally, under supervisions of the tax authorities, by the taxable person from his own forecasts.  However, Member States may retain their current rules.  

Deductions made on the basis of such provisional proportion shall be adjusted when the final proportion is fixed during the next year.

In the United Kingdom Regulation 101(4) originally provides that: “the ratio calculated for the purpose of paragraph 2(d) above shall be expressed as a percentage and, if that percentage is not a whole number, it shall be rounded up to the next whole number”.

It requires to be noted that on 16 March 2005 the Commissioners of Customs and Excise purported to amend by the Value Added Tax (Amendment) Regulations 2005 (SI 2005/762) the said Regulation 101(4) by adding,

“101(5)  the percentage shall be rounded up-
(a)	where in any prescribed accounting period or longer period which is applied the amount of input tax which is available for attribution under paragraph 2(d) above prior to any such attribution being made does not amount to more than £400,000 per month on average, to the next whole number, and 
(b)	in any other case, to two decimal places”.

While it does not arise in the present case it must be open to serious doubt whether that amendment competently alters Directive Article 19 either because it is directly contradictory or because it is discriminatory.  That matter however may well be for another day.

Regulation 102 provides for the use of other methods.  It is silent on the matter of rounding.

An argument was floated about the construction of “next unit” in the English version of Article 19.  It was suggested that this might be open to interpretation and accommodate decimal places of a unit.  There was produced to us various language versions of the Article, not all of which were within the competence of the Tribunal.  However in the English and French versions the requirement appeared to be rounding up to “not exceeding the next unit” but in the German, Italian, Portuguese, Spanish and Swedish versions the language appears to require rounding up to the “next whole number”.  It would be difficult to conceive of rounding up to be to a number lower than that with which the calculation started and the Tribunal would have no hesitation in concluding were it relevant, that the “unit” referred to must be a whole number since numbers after a decimal point are not a unit in the ordinary use of language.  The use of the words “not exceeding” in some versions, including English, might seem to allow any figure provided it did not surpass the next whole number.

Argument for the Appellant
The Directive prescribed a single method of achieving the outcome required by the first sub-paragraph of Article 17(5) but continued by permitting member states to authorise or compel certain alternative methods of calculation as means of achieving the required outcome.  Sub-paragraphs A and B relate to sectorisation of the business and neither deals with the determination of “the proportion” which would continue to be determined in accordance with the first and second sub-paragraphs of Article 17(5) and Article 19(1) unless there is authorisation or compulsion to the contrary under sub-paragraph C.  In relation to a business in which sectorisation is authorised or compelled references in Article 19 to the proportion and to the proportion deductible must be read as referring to the proportion determined for each sector of the business and must be rounded up to the next whole number.

Article 19(1) contains 2 separate requirements that the proportion be determined on an annual basis and that it be rounded up.  Where a business is sectorised the first requirement must as a practical matter be complied with by each sector individually.  However a person who has been authorised or compelled in terms of sub-paragraph C to deduct input tax on the basis of the use of goods and services the position is still the same.  The expression “makes a deduction” includes determining a deductible proportion achieving the outcome required by 17(5) in respect of the whole business and determining a deductible proportion achieving that outcome and respect of a sector of the business in each case a deductible proportion requires to be determined albeit now on the basis of use instead of by applying the fraction in the first sub-paragraph of Article 19.

The partial exemption template, if it indicates other than rounding to the next whole number (which it does) is in contravention of the express requirement of Article 19(1) and is and has been of no effect.

In response to the Commissioners contrary argument it was contended that every reference to a proportion in the directive is to the proportion in the first sub-paragraph of Article 17(5) and there is no other note of a proportion in any of the sub-paragraph of 17(5) to which the reference in 19(1) could be in-applicable.  

Argued for the Respondents
The UK VAT Regulations 1995 properly and fully implement the provisions of Articles 17-20 of the Sixth Directive.  The first sub-paragraph of Article 17(5) provides for a standard method of calculating the appropriate percentage deduction whereas the third sub-paragraph allows member states to derogate from the standard method in the manner specified in paragraphs A-E of that third paragraph.  What has been done in the present case is such a derogation.

Article 19 provides that the proportion deductible under the first sub-paragraph of Article 17(5) shall be rounded up to a figure not exceeding the next unit.  Here however goods and services are not calculated in terms of the first sub-paragraph but in terms of the remaining sub-paragraphs.  The Commissioners were empowered to enter into such an agreement under EC and UK Legislation, they were at liberty and the parties have agreed to round the percentage used and calculating recovery of residual input tax to 2 decimal points.

In any event the Appellant having entered into the Template agreement cannot now assert that it is not binding - see the Tribunal decision in C H Beazer (Holdings) Plc (1987) VATTR 164 where Lord Grantchester at page 11 said:

“Further, I am of opinion that, where a ‘special method’ is agreed, neither party can during the subsistence of that agreement unilaterally revert in whole or in part to the ‘standard method’ laid down in Regulation 24(1), or be heard to contend that either the ‘special method’ or the ‘standard method’ or both fail to correspond with the provisions of the Sixth Directive.  In such a case it might be possible for the Commission to take the United Kingdom to task for not implementing the provisions of the Sixth Directive, but I consider that the taxpayer concerned would be estopped from so doing by his own agreement

However it is conceded that should the legislation be ultra vires then no question of estoppel or personal bar could arise, Becker v Finanzamt Munster-innenstadt 1982 ECR 53.  Accordingly the Appellant cannot change its mind at this stage unless it can demonstrate that the agreement to round to two decimal places was ultra vires.  

Decision
The Tribunal prefers the construction of the above quoted legislation favoured by the Commissioners.  It appears to them that Article 19(1) specifically deals with a “standard” method of making the calculation and it is as a result of that standard method being adopted that the rounding provisions were deemed to be appropriate, no doubt as a somewhat rough and ready method of achieving justice in a situation in which precision is difficult to achieve.  It follows that if that standard method, as originally implemented in the UK by Regulation 101, is adopted rounding requires to be to the next unit.  In the opinion of this Tribunal had they been dealing with a standard method in the instant case they would have found that the purported substitution by 101(5) of a calculation to two decimal places instead of one to the nearest unit contravened the Directive and they would have held that that Directive had direct effect.  That view which is obiter involves taking a particular view of the interpretation of the Directive and a view of the linguistics.

However the sub-paragraphs of Article 17 allow member states to implement special methods.  No restriction is placed on the special methods, no mention is made of rounding and, since by definition a special method derogates from the prescribed standard method there would appear to be no objection to an agreement allowing for a different form of rounding than that to the next whole unit in respect of the various sectors.  If rounding to the nearest whole unit is thought to be advantageous then the standard method requires to be used.

In addition the use of the indefinite article “a” in paragraphs A and B points to a different proportion from the standard.  If “a” proportion can be determined there is no compulsitor to adopt the Appellant’s construction that “the proportion” is the same concept throughout Article 17.

It might be thought that the Commissioners could always compel the use of a special method and so avoid a rounding provision.  No doubt some future Tribunal would be asked to put matters right if that was attempted contrary to the wishes of the tax payer to the tax payers disadvantage.

There can in the Tribunal’s view be seen nothing to indicate that the implementation of special methods in paragraph 102 of the Regulations does other than implement properly the Directive.  It follows that rounding to two decimal places is not in that context ultra vires it having been agreed by the parties.

On the preliminary point therefore the Tribunal find that rounding in relation to a special method does not require to be to the nearest whole number.

Expenses
Counsel were agreed that expenses should follow success in this preliminary matter.

Accordingly the Respondent is entitled to its expenses which failing agreement will be taxed in terms of the Rules by the Auditor of the Court of Session.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  20 JANUARY 2006

EDN/05/21
EDN/05/80
EDN/05/87
££Royal Bank of Scotland Group PLC v Her Majesty's Revenue and Customs [2005] UKVAT V19429 (20 January 2006)