Royal & Sun Alliance Insurance Group plc v Customs and Excise Comrs

For VAT purposes, periodic rent under a lease is treated as consideration for separate and successive supplies for the relevant periods. The corresponding input tax is used when each period expires and cannot later be reattributed, even if the tenant subsequently elects to make taxable lettings. Regulation 109 of the VAT Regulations 1995 permits adjustment only where its statutory conditions are met. A later election does not revive input tax already used in an earlier period. The right to deduct requires a direct and immediate link between the input and the taxable activity.

Royal & Sun Alliance Insurance Group plc occupied leased premises for its exempt insurance business. After vacating them, it marketed the premises for subletting but had not yet elected to waive the exemption for lettings. It later made that election and sought repayment of input VAT paid on rent and service charges during the earlier vacant period.

The Manchester VAT Tribunal rejected the claim. Park J allowed RSA’s appeal, holding that the lease was a single supply, that the inputs were cost components of later taxable lettings, and that regulation 109 of the VAT Regulations 1995 applied. The Commissioners appealed. The central issue was whether the earlier input tax remained available for adjustment after the election.

1. Majority disposition. By a majority, the appeal was dismissed with costs. Aldous LJ gave the principal majority reasoning. Sedley LJ agreed in the result and with the essence of Aldous LJ’s reasoning. Arden LJ dissented and would have allowed the appeal.
2. Regulation 109. Aldous LJ identified five requirements: RSA had incurred input tax; it had not attributed that tax to taxable supplies; the non-attribution resulted from an intention to make exempt, or both taxable and exempt, supplies; that intention was unfulfilled; and RSA later used or intended to use the services in making taxable supplies. RSA satisfied those requirements.
3. Nature and timing of the supply. Regulations 85 and 90 of the VAT Regulations 1995 deem goods or services supplied under a lease for periodic consideration to be separately and successively supplied at the relevant payment or invoicing times. That fiction applies when deciding which input tax relates to a particular period and whether it has been used.
4. Use and direct link. Each periodic supply was fully used when its period expired, because RSA could no longer occupy or sublet the premises for that period. The input tax could therefore not be used against later taxable lettings. There was no direct and immediate link between the earlier periodic supplies and the later taxable supplies.
5. VAT neutrality. RSA had never acquired a right to deduct input tax which it had already used before making its election. The result differed from the position of a trader who had elected at the beginning of the relevant period.
6. Dissent. Arden LJ would have treated the lease as a single supply and held that the earlier inputs remained cost components of the later taxable lettings. Sedley LJ accepted the artificial periodicity created by regulation 85 but considered that regulation 109 applied without the further time-of-supply analysis adopted by Aldous LJ.

• Court of Appeal: The majority dismissed the Commissioners’ appeal from Park J’s judgment dated 20 October 2000 and ordered RSA’s costs. Permission to appeal to the House of Lords was refused.
• Manchester VAT Tribunal: The tribunal held that RSA could not recover the input tax paid during the vacant, unelected period.
• Chancery Division: Park J allowed RSA’s appeal, holding that the inputs were cost components of later taxable lettings and that regulation 109 of the VAT Regulations 1995 permitted adjustment.