Svenska International plc v Customs and Excise Comrs

For VAT purposes, continuous services within regulation 23 of the Value Added Tax (General) Regulations 1985 are not treated as supplied until payment is received or a tax invoice is issued. If the supplier and recipient meanwhile enter the same VAT group, the statutory group-accounting rules must be applied even though they depart from the transactions’ real-world chronology.

Where the representative member is consequently treated as using the relevant inward supplies to make partly exempt supplies, regulation 34 permits recovery of the corresponding input tax. A separate physical act or decision changing the use is unnecessary: the deemed use may result from the combined operation of the time-of-supply, group-registration and input-tax adjustment provisions.

Svenska supplied continuous management services to the London branch of its Swedish parent and recovered input tax attributable to an intended taxable supply. Before any payment or tax invoice, the branch joined the same VAT group as Svenska. Supplies between them were thereafter disregarded, while the branch’s external supplies were treated as supplies by Svenska as representative member.

The VAT Tribunal upheld assessments recovering input tax attributable to exempt supplies. Carnwath J allowed Svenska’s appeal in [1996] STC 1000, holding that regulation 34 required an identifiable act or decision by the taxable person. The Court of Appeal reversed that decision in [1997] S.T.C. 958.

The central issue was whether the combined statutory deeming provisions meant that Svenska had “used or appropriated for use” its inward supplies in making partly exempt supplies, despite their earlier physical consumption.

By a majority of four to one, the appeal was dismissed.

1. Per Lord Hutton, in the leading speech, regulation 23(1) of the Value Added Tax (General) Regulations 1985 governed the continuous management services. No supply was to be treated as made for VAT purposes until payment was received or a tax invoice issued. The services physically supplied before group registration could not therefore be treated as earlier taxable supplies. Lord Slynn, Lord Hope and Lord Clyde agreed that the appeal should be dismissed.

2. Regulations 23(1) and 34(1) had to be read with section 29(1) of the Value Added Tax Act 1983. Upon group registration, the business and external supplies of the London branch were treated as those of Svenska, the representative member. The inward supplies previously credited to Svenska were consequently treated as used or appropriated for use in making the branch’s external supplies, some of which were exempt. Regulation 34(2) therefore required repayment of the corresponding proportion of input tax.

3. The statutory scheme deliberately employed artificial concepts. It was unnecessary to identify an additional physical act or decision by Svenska changing the use of the supplies. Carnwath J’s concentration upon real-world use failed to give effect to the combined time-of-supply and group-accounting provisions. The Court of Appeal’s construction was correct.

4. Customs and Excise Commissioners v Thorn Materials Supplies Ltd [1998] STC 725 was distinguished. There, after the intra-group deemed supply was disregarded, the legislation permitted the later delivery to constitute a supply. Here regulation 23(1) prevented the earlier physical provision of services from being treated as a supply before payment or invoicing.

5. Belgium v Ghent Coal Terminal N.V. [1998] S.T.C. 260 was also distinguished. Its protection of an acquired deduction concerned failure to make the intended taxable use because of circumstances beyond the taxable person’s control. The branch entered the VAT group with Svenska’s concurrence.

Lord Hope additionally regarded the outcome as consistent with fiscal neutrality. Lord Lloyd dissented. He considered that regulation 34 required an actual use or appropriation, that the services had already been consumed, and that group registration alone supplied no statutory basis for treating them as used again. He would have allowed the appeal and restored Carnwath J’s order.

1. House of Lords: By a majority of four to one, dismissed Svenska’s appeal and affirmed the Court of Appeal.
2. Court of Appeal: In [1997] S.T.C. 958, allowed the Commissioners’ appeal and restored the Tribunal’s decision upholding the assessments.
3. High Court: Carnwath J, in [1996] STC 1000, allowed Svenska’s appeal from the Tribunal.
4. Value Added Tax Tribunal: Dismissed Svenska’s appeal against the assessments.