Commissioners of Customs and Excise v. Redrow Group Plc

The House of Lords held that Redrow was entitled to deduct as input tax the Value Added Tax charged on estate agents' fees which Redrow paid under its sales incentive scheme. The court emphasised that the primary requirement for a deduction is that the taxable person has incurred expenditure on goods or services "on the supply to him" which are used for the purposes of his business (see Value Added Tax Act 1983, sections 14(2) and 14(3)). Where Redrow chose and instructed estate agents and agreed to pay their fees in specified circumstances, it obtained a contractual right to have the purchasers' houses valued and marketed in accordance with its instructions; that right amounted to a supply of services to Redrow for consideration and therefore to input tax deductible against output tax. The House of Lords rejected the Court of Appeal's application of the "direct and immediate link" language from the B.L.P. case as determinative of who was the recipient; that language properly relates to attribution between taxable and exempt transactions under Article 17(5) of the Sixth Directive and regulation 30(2)(c) of the Value Added Tax (General) Regulations 1985.

Background and parties. Redrow Group Plc, a housebuilder and representative member of a VAT group, operated a sales incentive scheme under which it selected and instructed estate agents to market prospective purchasers' existing homes and agreed to pay agents' commission plus VAT if the buyer completed the purchase of a Redrow house. The Commissioners of Customs and Excise disallowed Redrow's deduction of the VAT paid to estate agents.

Procedural history. The Value Added Tax Tribunal allowed Redrow, finding the agents' services were supplied to both Redrow and the purchasers. That decision was affirmed by Potts J. The Court of Appeal reversed, holding the services were supplied to the purchasers alone. Redrow appealed to the House of Lords.

Nature of the claim and issues. Redrow sought credit for input tax on estate agents' fees. The central issues were (i) whether the agents' services were "supplies to" Redrow within the meaning of section 14(3) of the Value Added Tax Act 1983 and Article 17 of the Sixth Directive, and (ii) the correct legal significance of the Court of Justice's phrase requiring a "direct and immediate link" between goods or services and taxable transactions (as stated in B.L.P.).

Court's reasoning. The majority (Lord Hope, Lord Millett and others) held that the decisive question is whether the taxable person has acquired goods or services "on the supply to him" for a consideration and for the purposes of his business. Where Redrow instructed and selected the agents, monitored performance and agreed contractual terms (including refusal to pay if the purchaser did not complete), Redrow obtained a contractual right to have the services performed in accordance with its instructions. That constituted a supply of services to Redrow when Redrow became liable to pay. The House of Lords distinguished the B.L.P. decision as concerned with attribution between taxable and exempt supplies, not with identifying the recipient of a supply; the "direct and immediate link" test is therefore relevant to attribution, not to the separate question whether the services were supplied to the claimant. Because Redrow's outputs were taxable (zero-rated) and the services were used for its business, the VAT paid when Redrow became liable was deductible as input tax.

Subsidiary findings: the court accepted the tribunal's factual finding that the fees were part of Redrow's cost components and that the scheme was intended to and did facilitate sales; it approved the tribunal's approach that deduction could only arise where Redrow actually became liable to pay the agent's fees.

Appeal allowed. The House of Lords held that Redrow obtained something of value (a contractual right to have purchasers' houses valued and marketed in accordance with Redrow's instructions) in return for the payments it agreed to make; that right was a supply of services "to" Redrow for the purposes of section 14(3) of the Value Added Tax Act 1983. Consequently, where Redrow became liable to pay the estate agent's fees the VAT borne by those fees was input tax creditable against output tax. The court also held that the "direct and immediate link" test in B.L.P. relates to attribution between taxable and exempt supplies and does not determine the identity of the recipient where the claimant has acquired and paid for a supply.

Value Added Tax Tribunal: allowed Redrow's claim; Potts J (High Court): affirmed the Tribunal [1996] S.T.C. 365; Court of Appeal: reversed Potts J, holding the services were supplied to the purchasers alone [1997] S.T.C. 1053; House of Lords: appeal allowed [1999] UKHL 4.