CHILLI CLUB RESTAURANT Ltdappellant(S)

20043

VAT Input Tax; fitting out a shop – whether supplies made by contractors of services or of goods – if services irrecoverable standing date of registration whether date of registration could be amended – discretion of Commissioners – whether exercised – held services - appeal remitted to Commissioners to consider an exercise of their discretion in the light of the findings of the Tribunal – VAT Regulations 1995 111(2).

EDINBURGH TRIBUNAL CENTRE

CHILLI CLUB RESTAURANT LTDAppellant(s)

- and -

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE & CUSTOMS Respondents

Tribunal: (Chairman): T Gordon Coutts, QC

(Member): Miss Karen Bruce Lockhart, WS

Sitting in Edinburgh on Monday 29 January 2007

for the Appellant(s)Mr Charles Rumbles, RCB Partnership

for the RespondentsMr Andrew Scott, Shepherd & Wedderburn, WS

DECISION

Introductory

The Appellants, a company incorporated 29January 2003, have opened an exceedingly attractive Thai Restaurant in premises formerly occupied by shops. They appeal against the disallowance of the input tax claim in connection with the fitting out of those premises. Those were taken over from the landlord as a vacant shell, the clearance having been effected by the landlord.

The Tribunal heard evidence from Carole Tong the Director of the Appellant company who is responsible for their VAT returns and from the Appellants’ accountancy advisor Nelson Yiu of Messrs Whitelaw Wells, C.A. Mr Russell Harrison an officer of the Respondents also gave evidence.

The dispute concerns supplies made to the Appellant in connection with the fitting out. The supplies were in some instances obviously of services; eg professional fees of architects, solicitors, surveyors and the like; some were obviously goods in that they were items purchased by the Appellants such as certain furnishings, but the major dispute was in connection with the works by a firm, Brick and Steel Company Ltd, whose contract is referred to below.

Background Facts

After incorporation works were done to the premises and completed to the extent that trading could begin on 29 March 2004 as declared on the VAT 1 form completed by and on behalf of the Appellant. On that form it was stated that the Appellants would require to be registered and that they exceeded the limit on and after 5November 2004. VAT 1 was dated 23/12/04. In the reply to box 20 on the form, the question whether the Appellant wished to be registered at an earlier date than that on which they were obliged to be registered, the box was ticked “no”. The Appellant was accordingly registered on 1 January 2005, a date which rules on the matters hereinafter considered unless it can be altered.

In their first return, dated 30/3/05 a refund of input tax, including a substantial sum in relation to pre-registration tax incurred was claimed in the sum of £97,021.03. Officer McBride visited the Appellants and having studied the books and records reduced the input tax claimed from that sum to £30,311.10. In that reduction various items were undisputedly services such as the fees of the various professional persons and these it was agreed were out of time. The main issue which remained, however, that of the Brick and Steel contract, represented the substantial balance between the two above figures. Initially Officer McBride thought that it might be possible either to apportion the items in the Brick & Steel account, or that consideration could be given to backdating the date of registration. He found himself unable to make an apportionment and his policy unit told him that backdating was not allowed.

The significance of the division between goods and services is that by reason of Regulation 111 the Commissioners may authorise a taxable person to treat as input tax, tax on the supply of goods and services made by him before the date for which he is registered but no tax may be treated as input tax in respect of services, as distinct from goods, which have been supplied more than six months before registration. The rationale of the above noted distinction is elusive and we understand is being considered for amendment but as matters stand the distinction between goods and services is critical. If the Brick and Steel contract were to be considered a supply of goods then the whole input tax reclaimed would be allowable.

The Brick and Steel Company Ltd Contract

The Tribunal were presented with a copy of that contract which specified essential elements. It consisted of a standard form works contract with a tender, specification of quantities, provisional sums, also specification of architects, services engineers, structural engineer and quantity surveyor. It comprised works in connection with the creation, supplying and fitting of various items including the construction of a mezzanine floor. Plainly some goods were supplied but, we find, supplied in connection with their fitting by the contractor. The architect issued interim certificates in the normal form for the various works and, in short, this contract was indistinguishable from an ordinary building contract.

Argument on Classification of Supply

It was maintained throughout by Mr Yiu and by Mr Rumbles before us that this contract was properly to be regarded as a supply of goods. As illustrative authority the decision in Messrs G and J B Miller, No 18630, was cited. In that decision the Tribunal found it possible to categorise a refit of premises as a supply of goods but that case was very different on the facts from the present. Shortly in Miller Messrs Miller engaged persons to install things which they had either obtained or designed and it was apparent that the cost of the items far outweighed the cost of the labour. Thus the Tribunal was able to hold that the supply to the Millers was a supply of goods specific items being able to be specified.

Mr Yiu in his evidence strenuously stressed the operation of the standards of accounting principles and practices laid down by ICAS. Works were not expenses of the business but capital costs which were fixed assets which required different accounting and direct taxation treatment. The effect of this view is later considered. The argument for the Commissioners was that this was obviously on the facts and authority the provision of a service.

The Tribunal are bound to follow the guidance in the speech of Lord Hope of Craighead in CEC v British Telecommunications Plc [1999] STC 758 at p768 as follows:

“As Millett LJ recognised in [Customs and Excise Commissioners v] Wellington Private Hospital Ltd (Case 353/85) [1988] STC 251 was not laying down a general rule of classification for use in all cases where the question is raised as to whether a particular supply is or is not incidental or ancillary to another supply can be regarded as a separate and distinct supply it must, at least to some degree, be physically and economically dissociable from the other supply. But it would not be right to take this factor as the sole criterion as to whether the supply was separate and distinct from the other supply or was merely incidental or ancillary to it. If that were so, it would mean that in every case where it was possible to dissociate the two economically and physically (for example, because one supply was of goods and the other supply was of services and the price for each supply could be separately identified) the two supplies would have to be treated as separate supplies for VAT purposes. That would not be consistent with the guidance which the Court of Justice [of the European Communities] gave in Card Protection Plan Ltd v Customs and Excise Comrs (Case C-349/96) [1999] STC 270 at 293 para 29 that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system. According to this guidance, the question is one of fact and degree, taking account of all the circumstances”.

Additionally there is an observation of Owen J in Rayner & Keeler Ltd v CEC [1994] STC 724 said at page 730 in relation to the matter “in the final analysis I can only agree with each Counsel that necessarily the answer is, to a great extent, a matter of impression”. On a matter of impression as was observed by Malcolm LJ in Card Protection Plan Ltd v Customs and Excise Commissioners [1994] STC 199 that on such a matter different minds may reach different conclusions (page 207).

Having regard to the above matters, the correspondence, the terms of the contract and the guidance above quoted our impression is that this is one indivisible contract for a supply which from any practical or economic point of view is indivisible and, plainly, the supply of a service.

It follows that the input tax claimed was correctly refused standing the date of registration of the Appellants. Must that date stand?

Circumstances surrounding the Appellants choice of date of registration

It should be said at the outset that the Tribunal were wholly satisfied of the bona fides of the actions undertaken by both Ms Tong and Mr Yiu, both credible witnesses. The explanation of the “no” response from VAT 1 was that Ms Tong was unsure about how VAT 1 should be completed, although she knew all about goods and services and the distinction between them and all along intended to reclaim pre-registration tax. She sought advice from Mr Yiu about the completion of the form. He actually completed the form which Ms Tong then signed. He said that he had considered the matter of an earlier date of registration but that since the Brick and Steel contract was, in his view, plainly a supply of goods the appropriate date of registration was when supplies exceeded the limit. Had he considered that the Brick and Steel contract was a supply of services he would have inserted the date of incorporation of the company. Since however for purposes of direct taxation and accountancy practice the supply was, he thought, of goods his choice of date was an error in fact and law and mistaken. The fact that Ms Tong claimed the tax she did at the time she did, knowing about the distinction between goods and services strongly points to the conclusion that the choice of date was the result of error and not a deliberate manipulation of the tax regime for advantage. Indeed Mr Yiu thought that he had dealt with other clients VAT on the same basis and that no questions had been raised about that.

Can the date of registration be changed and if so should it be?

Mr Harrison in his evidence and in a witness statement dated 16/11/06 which was produced to us and referred to said:

“There are circumstances whereby a change of the registration date can be made, however this requires that there is a genuine error in either requesting the date or in the completion of the application form, and not simply an error of judgement as to the most advantageous registration date.

In the submissions made in this case I have concluded that an error of judgement has been made and I thus maintained that the date should be maintained. This is in accordance with VAT Act 1994, Schedule 1, paragraphs 5 & 6 and paragraphs 9 & 10”.

In his evidence to the Tribunal Mr Harrison indicated that there was nothing in the legislation to permit a backdating of a registration, but conceded that this could be done at the instance of Customs if it appeared to them that there should have been an earlier date. He further said that he would have changed the date if an application to do so had come before the taxpayers first VAT return.

The Respondents have set out their considerations in writing in their manual of instructions to officers in particular V1-28. By paragraph 8.4 it is noted that a trader and the Commissioners may agree an earlier effective date of registration than that required for obligatory registrations. Officers instructed to allow the requests provided that the inputs relate to the business concerned and would be properly deductible if the trader was registered. There is no question in the present case but that an earlier date would have been appropriate if asked for.

The manual goes on to deal with changes of the EDR. It deals at 8.7 with change to a later date where basically such requests are directed to be refused. An example of an appeal on such a matter is Sandra Jayne Whithead (No 202), which in this Tribunals view erroneously supports the contention that the Commissioners had no discretion in the matters of the date once it had been allocated but, in any event, a general proposition that the date could not go forward was reinforced in Louise Howard (19838).

However by paragraph 8.8 the handbook says –

“You may receive requests from registered traders to amend their EDR to an earlier date than that already allocated. Commonly this is where they belatedly find that input tax incurred prior to the EDR can’t be claimed as it is ‘out of time’.

In limited circumstances we may permit a retrospective change to the EDR if there has been a genuine error in completing the VAT 1 by the person registering. Section 33 details the circumstances and procedures to follow.

Otherwise refuse requests of this nature. VAT Act 1994, Schedule 1, paragraphs 5 & 6 and paragraph 9 & 10 of the do not allow an EDR to be varied after a trader is registered. When the trader applied for registration he had the opportunity to negotiate his EDR then and the legislation does not allow this date to be changed retrospectively.”

It is apparent from Mr Harrisons evidence, no doubt subject to guidance, that he did not consider the circumstance above narrated to constitute a “genuine error”.

Now it may be that the Respondents were not in possession of as full an account of the events as the Tribunal has had. Further the Tribunal does not understand the significance of the word genuine in the front of error. If it means bona fide or reasonably understandable then the Commissioners ought to have considered that whether this mistake made by the Appellants on the advice of Mr Yiu was such an error that they could allow to be corrected. It does not appear to the Tribunal that this is an instance of an Appellant changing his mind in order to obtain a tax advantage this is a situation in which in a confused misunderstanding of the state of law and in fact the option to apply for earlier registration was not taken up.

To the comment in the above quoted passages about legislation not permitting changes the Commissioners themselves have outlined some circumstances in which changes are or perhaps even must be allowed. So, the fact that the legislation does not mention correction is in the view of this Tribunal neither here nor there.

No doubt finality is desirable in relation to tax returns of whatever nature but it would be unfortunate if a genuine and understandable mistake should stand in the way of and provide a bar to a correction of the form submitted.

Decision

The Tribunal considered that their jurisdiction in this matter was solely one of quashing the decision not to allow retrospective alteration. This they do. They have no jurisdiction to supply a new date since that requires to be agreed.

Accordingly the Tribunal adjourn the case for the sole purpose of the Respondents considering in the light of the above whether in the circumstances of this case correction of the error in the Appellants VAT 1 was appropriate.

When that decision is made parties may return to the Tribunal for any necessary order if the whole matter cannot be resolved between them.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE: 13 MARCH 2007.

EDN/06/65