20004

VALUE ADDED TAX – partial exemption – special method – fair and reasonable – not in the circumstances – appeal dismissed

LONDON TRIBUNAL CENTRE						   LON/2005/1108

	FARNHAM PHYSIOTHERAPY AND SPORTS CLINIC	Appellant

	- and -

	      THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	ADRIAN SHIPWRIGHT (Chairman)
					SUNIL K DAS

Sitting in public in London on 10 and 11 January 2007 

David Moll, VAT Consultant of VAT Advice and Training Services Limited, for the Appellant

Richard Smith, Counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction
1.	This is an appeal by Farnham Physiotherapy & Sports Clinic, a partnership (“the Partnership”) against the refusal by the Respondents (“HMRC”) to approve the use the Special Partial Exemption Method proposed by the Partnership. This was notified to the Partnership in a letter dated 5 October 2005.  
2.	The Tribunal of its own motion raised:
(1)	the issue of jurisdiction and the precise matter to be decided in the light of the Banbury Visionplus and St Helen’s cases and the Skeleton Arguments;
(2)	the question whether it was common ground that there was an agreed special method  as the Appellant’s skeleton argument seemed to imply but not the statement of agreed facts;
(3)	confirmation as to who had the onus of proof.
3.	A Note on Jurisdiction and the matter at issue was produced by each party.  We are grateful for this assistance in clarifying what we are required and able to do.
4.	It was agreed, after discussion, by the parties that there had been no written acceptance of the offer of a special partial exemption method as the letter of offer required and that accordingly there was no special method in operation.  It was also agreed that the onus was on the Appellant to show the method was fair and reasonable.
The Issue
5.	The first and overriding issue in this case is essentially whether the Special Partial Exemption Method proposed by the Partnership (“the Special Method”) is a fair and reasonable method.  If the Special Method is found to be fair and reasonable the issue arises whether the Special Method is more fair and reasonable than the method in operation (such as the standard method) (see Warren J at paragraph 27 of St Helen’s School).  There is no power for the Tribunal to put forward its own view (ibid) notwithstanding that it has been said that “a full appellate jurisdiction” is conferred on the Tribunal (see Etherton J in Banbury Visionplus at paragraph 52).  However, it is not a jurisdiction allowing the Tribunal to impose its own method.   
6.	As Warren J said in St Helen’s at paragraphs 26 and 27:
“The decision of Customs refusing to approve a proposed partial exemption special method or to apply a standard method override can be appealed to a tribunal under section 83 VATA (see paragraph (e) of that section).  The nature of such an appeal was considered by Etherton J in Banbury Visionplus Ltd v Revenue and Customs Commissioners [2006] STC 1568.  He concluded that an appeal was not “limited” in the sense identified by him (ie an appeal where the tribunal is confined to considering whether Custom's decision was reasonable, in the sense that they did not take into account any irrelevant matters, they took into account all relevant matters and made no error of law and reached a decision which they could properly have reached); instead, the appeal was “full” in the sense that, “even if the disputed decision was a reasonable one, the tribunal should itself decide whether it secured a fair and reasonable attribution of input tax within the meaning of [section 26 VATA]”. In other words, the tribunal can substitute its own view of what is fair and reasonable, in the context of the question before it, for that of Customs notwithstanding that Customs decision was within the range of decisions which a body properly directing itself could reach.  I propose to follow that approach without any further discussion.  
27. This is not to say that the tribunal is able to put forward its own version of a more reasonable special method (if there is one).  It cannot do so, as the Tribunal recognised in paragraph 43 of the Decision.  Accordingly, a tribunal can substitute its own view for that of Customs in deciding whether a proposed special method is fair and reasonable.  If on an appeal by a taxable person from a refusal of Customs to allow a proposed special method the tribunal decides that the method is fair and reasonable and also that it is more fair and reasonable than the method in operation (be it the standard method or some other special method), the appeal should be allowed.  But if the tribunal thinks that both the existing method and the proposed method are unfair or unreasonable, it could not allow the appeal even if it considers that the proposed special method is less unfair and unreasonable than the existing method”.
The Law
7.	The Law in so far as is relevant is found in sections 24-26 VATA and Regulations 101 and 102 VAT Regulations 1995.
The Authorities
8.	We were provided with copies of the following authorities which we have read and considered:
Banbury Visionplus Limited v HMRC Decision No 19266
Banbury Visionplus Limited [2006] EWHC 1024
St Helen’s School Northwood Limited v HMRC [2006] EWHC 
The Evidence
9.	An agreed bundle of documents was produced. No objection was taken to any of them and they were all admitted in evidence.
10.	We heard oral evidence from:
Diane Watkins, one of the partners in the Partnership; and
Amanda Jacques, HMRC Higher Officer, Partial Exemption Officer

A witness statement was provided for each of these witnesses and stood as their evidence in chief.  They were cross examined.
11.	An agreed Statement of Facts was produced. We have treated the content of this Statement of Agreed Facts as common ground when making our findings of facts. It is set out below.
Findings of Fact 
12.	From the evidence we make the following findings of facts:
(1)	In September 2003 and Diane Watkins and Sophie Peachey formed a partnership to purchase the business known as Farnham Physiotherapy and Sports Clinic.
(2)	This business was bought at the end of January 2004 and relocated to temporary premises in Farnham.
(3)	In April 2004 for an offer was made to purchase the freehold premises 21 Firgrove Hill, Farnham.  
(4)	These premises were larger than was required by the sports clinic.  Professional advice was sought on how best to structure the purchase given the future use of the premises “for use by the business and as a property rental business”.
(5)	The building was bought by the partnership.  Completion of the purchase took place on 15 July 2004 the partnership was registered for VAT and waived exemption in respect of the property in July 2004.  
(6)	The ground floor was fitted out as four treatment rooms, a reception area, store room and kitchen. The entrance to the building was on the ground floor.  Stairs lead up to the first floor from the entrance and the ground floor reception was through a doorway to the left of the entrance. The ground floor reception did not serve the first floor.
(7)	The first-floor was leased for a term of five years from the seventh of February 2005 to an unconnected limited company at a rent of £15,000 a year.  The tenant had the obligation to repair and maintain the interior of the demised premises and to deliver them up in the same state as when let.
(8)	In September 2004, as sports masseuse relocated a separate business from premises in Farnborough to Firgrove Hill.  She hired treatment room one for her use, used the receptionist employed by the partnership for booking appointments and stored her equipment in the storeroom.  The hire fee was agreed 40% of her gross takings.
(9)	In a letter dated 14 October 2004 the partnership requested permission to use a partial exemption special method that apportioned residual input tax on the basis of the intended use of the space at the property.  The basis of the calculation was that residual input tax was apportioned in the ratio of intended vatable use (first floor and treatment rooms one and four) and exempt use (first floor and treatment rooms one, two, three and four).
(10)	VAT returns were submitted on this basis. HMRC visited the partnership in November 2004 to review the partial exemptions special method.  No special partial exemption method had been agreed at that stage
(11)	In December 2004 HMRC offered a partial exemption method, and approved a repayment of £34,912 calculated using it, a reduction of £20,984.71 from the revised claim subject to formal approval of the method.
(12)	The letter offering the special method required the duplicate copy of the letter to be signed to indicate acceptance of the conditions and the method.  It was common ground that the duplicate letter had not been signed and returned and that accordingly there was no agreed special method.
(13)	On 25 February 2005 the Appellant’s representative wrote to HMRC rejecting the method offered by HMRC and requesting a modification of the proposed special method as the original proposal allocated too much residual input tax to be exempt use.  The modifications proposed were to exclude the reception area from the denominator used to apportion input tax recovery on the building’s purchase and direct costs and that a new residual input tax category should be introduced for overheads that were attributable to both the property rental and physiotherapy business.  This would have led to recovery of about 72.3% of the building’s costs.  This compares with 4% using the standard method.  
(14)	In a letter dated 5 October 2005 HMRC confirmed that the partnership had not signed the offer of a special method made by HMRC in December 2004.  The letter continued, “Customs policy following case law in the interim requires us to consider the economic use of the building and in the light of this I have to inform you that the offer of the method has now been withdrawn and I invite you to submit alternative methods for consideration”.  
(15)	Notice of appeal against a letter of 5 October 2005 was served on 28 October 2005.
The Submissions of the Parties
The Appellant Submissions in outline
13.	In essence, the Appellant submitted that:
(a)	The standard Method would allow 4% recovery of the residual input VAT in respect of the cost of acquisition of the building. 
(b)	At least 62% of the residual input VAT would be recoverable on a sectorised basis looking at the area of the building related to taxable outputs.
(c)	A special method was needed and that method should recognise that two of the treatment rooms were hired out on a basis including reception and diary services so that not all the residual costs on reception and diary etc related to exempt supplies so those areas should not be wholly excluded in determining the percentage of recoverable residual input tax.
(d)	72% would be a fair and reasonable figure for input tax recovery.
HMRC’s Submissions
14.	In essence, HMRC submitted…
(a)	The Special Method proposed by the Partnership does not produce a fair and reasonable result;
(b)	Even on the Partnership’s suggested original sectorised basis nothing like this percentage recovery would be achieved;
(c)	The sectorised approach is not the one to be used. Warren J in the St Helen’s case said one should look at the economic use in seeking a proxy on which to make the attribution.
(d)	Here, simply looking at floor areas from which the various activities are carried on would not give a fair and reasonable result where the nature of the supplies is very different. The relative income is markedly different here. This makes a floor area basis inappropriate yet alone one which introduces a further layer of direct attribution.
Accordingly, the Special Method did not give a fair and reasonable result and the appeal should be dismissed.
Discussion
Introduction
15.	We have to decide if the Special Method proposed on behalf of the Partnership achieves a fair and reasonable result. If it does the issue of comparison with other methods arises.
16.	We cannot propose a method.  However, we would hope that the parties can agree a sensible approach in the near future without the need for further litigation.
Does the Special Method achieve a fair and reasonable result?
17.	In our view the Special Method does not achieve a fair and reasonable result.  This is for a number of reasons, including the following.  It achieves something over a 70% level of recovery when half the building is used to make exempt supplies. Further, the area used to make exempt supplies produces considerably more income and turnover and seemingly costs than the rest of the building. The tenant was responsible for the interior repairs, maintenance and decoration of the demised premises. There did not appear to be any other significant costs. We were not provided with any evidence of such costs.  The proposed Special Method allowed even more recovery than a sectorised method.  It does not reflect the economic use of the building.  We find this as a fact.
18.	We find that the Special Method proposed by the Partnership did not achieve a fair and reasonable attribution and was not a fair and reasonable method.  Further it did not accord with the economic use approach of Warren J in the St Helen’s case. It was a nice attempt by the Partnership to maximise their input tax recovery.  However, objectively it was not fair and reasonable and we so find. 
Comparison?
19.	We have found that the Special Method is not fair and reasonable. Accordingly the issue of comparison does not arise.
Conclusion
20.	We have found that the Special Method is not fair and reasonable and does not achieve a fair and reasonable attribution of input tax and is not a suitable proxy for attribution of input tax.
21.	Accordingly, the appeal is dismissed.  We make no order as to costs.

	
ADRIAN SHIPWRIGHT

CHAIRMAN
RELEASE DATE: 7  February 2007

LON/2005/1108