Svenska International Plc v. Commissioners of Customs and Excise

The court considered whether input tax previously credited under regulation 30 of the Value Added Tax (General) Regulations 1985 could be clawed back under regulation 34 when a United Kingdom branch of a foreign company subsequently joined the same VAT group as its UK subsidiary. The key statutory provisions were regulation 23 (time of supply for continuous services), regulation 34 (adjustment where attributed input tax is later used for exempt supplies) and section 29(1) of the Value Added Tax Act 1983 (effects of VAT group treatment and representative member). The majority held that, for VAT purposes, continuous supplies which were treated as not yet supplied under regulation 23 were to be regarded as intended taxable supplies; when group registration took effect the representative member must be treated as carrying on the business of the branch under section 29(1), so that supplies by the branch to third parties were to be treated as supplies by the representative member. That reconstruction meant the input tax had been used or appropriated for use in making partly exempt supplies and regulation 34 therefore applied, permitting adjustment and repayment of input tax.

Background and facts.

• Svenska International Plc (a United Kingdom subsidiary of a Swedish bank) provided management and other services to the bank's London branch from 1987. Svenska was VAT-registered; the London branch was not initially registered.
• Regulation 23 of the 1985 Regulations applied: continuous services are treated as supplied at the earlier of payment or issue of a tax invoice. No invoice or payment took place until 26 June 1992.
• Following a change in the law the London branch became eligible to join Svenska's VAT group with effect from 1 August 1991; Svenska was to be the representative member. By that date the inward supplies that had attracted input tax had been provisionally attributed to intended taxable supplies to the branch.

Procedural history. Svenska appealed assessments made by the Commissioners seeking repayment of input tax (assessments upheld by the Value Added Tax Tribunal). Carnwath J. (High Court) allowed Svenska's appeal. The Court of Appeal ([1997] S.T.C. 958) restored the tribunal's decision in favour of the Commissioners. The appeal came to the House of Lords.

Relief sought and issues.

• (i) Relief sought: Svenska sought to resist the Commissioners' assessments reclaiming input tax attributed to intended taxable supplies to the London branch.
• (ii) Principal issues: (a) whether supplies provisionally attributed under regulation 30 and treated under regulation 23 as not yet supplied could nevertheless be said to have been "used or appropriated for use" for exempt supplies within regulation 34(1)(b) after group registration; (b) how section 29(1) (group treatment and representative member) affects the characterisation of use for regulation 34.

Court's reasoning (concise). The majority read regulation 23 together with regulation 34 and section 29(1). Regulation 23 fixes the time at which continuous supplies are to be treated as supplied (invoice or payment) so that before those events the supplies remain "intended taxable supplies" for attribution purposes. Section 29(1) requires that, once a VAT group exists, the representative member is to be treated as carrying on the business of group members and inward and outward supplies by branch and subsidiary be treated accordingly. Applying those provisions together, the representative member (Svenska) must be taken to have used or appropriated for use the attributed inward supplies in making supplies by the branch to third parties (some exempt). That use triggers regulation 34(2) and the requirement to account for and repay the appropriate proportion of input tax. The majority considered related European authority and earlier domestic decisions but held the statutory scheme and principle of fiscal neutrality supported the result.

Subsidiary findings and context. The court rejected the submission that regulation 34 requires a physical act of re‑use in the real world and held that the statutory reconstruction for VAT accounting purposes is decisive. The decision emphasises that the VAT rules on time of supply and group treatment may displace commercial reality for tax-accounting purposes.

Appeal dismissed. The majority held that regulation 23 (time of supply for continuous services), regulation 34 (adjustment where input tax is later used for exempt supplies) and section 29(1) VAT Act 1983 must be read together: supplies provisionally attributed to an intended taxable supply which remained unpaid and uninvoiced at the date of group registration are, for VAT accounting purposes, to be treated as used or appropriated for use by the representative member in making supplies by the branch (including exempt supplies). Consequently regulation 34 applied and the Commissioners were entitled to make the adjustments and assessments.

Value Added Tax Tribunal: assessments upheld; High Court (Carnwath J.) [1996] S.T.C. 1000: allowed Svenska's appeal; Court of Appeal [1997] S.T.C. 958: restored tribunal in favour of the Commissioners; House of Lords [1999] UKHL 23: appeal dismissed (majority).