Customs and Excise Comrs v Liverpool Institute for Performing Arts

Article 17(5)(c) of the Sixth Council Directive (77/388/EEC) permits a member state to use different methods to apportion residual input tax. A use-based method may apply to input tax connected with out-of-country supplies while a value-based method applies elsewhere.

Under the Value Added Tax (General) Regulations 1985, regulation 32 establishes a separate use-based regime for out-of-country supplies. Such supplies are therefore excluded from both “taxable supplies” and “all supplies” in regulation 30(2)(d). Input tax attributed to them under regulation 32 remains deductible under the governing Act without their being treated as taxable supplies under regulation 30.

The Liverpool Institute for Performing Arts supplied exempt educational services and advertising services to a German company. The advertising services were treated as supplied in Germany. They were therefore out-of-country supplies which would have been taxable if made in the United Kingdom.

The VAT tribunal and Carnwath J, [1998] STC 274, treated regulation 32 of the Value Added Tax (General) Regulations 1985 as ancillary to regulation 30. The Court of Appeal, [1999] STC 424, held that regulation 32 created a separate regime and that “taxable supplies” in regulation 30 excluded out-of-country supplies.

The Institute appealed. The questions were whether the Court of Appeal had correctly construed regulations 30 and 32, and whether that construction was compatible with articles 17(5) and 19 of the Sixth Council Directive (77/388/EEC).

1. Appeal dismissed unanimously. Lord Scott of Foscote delivered the leading speech. Lord Slynn of Hadley, Lord Cooke of Thorndon, Lord Hope of Craighead and Lord Millett agreed that the appeal should be dismissed.

2. Per Lord Scott, article 17(5), read with article 19 of the Sixth Council Directive (77/388/EEC), contemplates a value-based method for apportioning residual input tax but does not make that method compulsory. Article 17(5)(c) permits deduction according to the use of all or part of the relevant input goods and services. It therefore permits a use-based method for input tax associated with out-of-country supplies and a value-based method for the remainder. Regulation 32 was consistent with that scheme. Lord Hope independently reached the same conclusion.

3. Per Lord Scott, regulation 32 of the Value Added Tax (General) Regulations 1985 provides a separate regime for attributing input tax to out-of-country supplies. It is not merely ancillary to regulation 30. Input tax determined under regulation 32 is attributable to supplies within section 15(2)(b) of the Value Added Tax Act 1983 and is creditable under section 14(2). The supplies need not be treated as “taxable supplies” under regulation 30. Lord Slynn and Lord Hope expressly agreed that regulation 32 constituted a distinct code or regime.

4. Per Lord Scott, “taxable supplies” throughout regulation 30, including regulation 30(2)(d), bears the statutory meaning derived from section 2 of the 1983 Act. It means taxable supplies made in the United Kingdom and excludes out-of-country supplies. “All supplies” in regulation 30(2)(d) likewise excludes out-of-country supplies which would have been taxable if made domestically, because those supplies are dealt with under regulation 32. Out-of-country supplies which would have been exempt if made domestically are included as exempt supplies by regulation 29(1)(a)(ii).

5. Lord Scott left unresolved the precise operation of regulation 30(2)(d) where input goods or services were also used for non-business supplies. That issue did not arise because the Institute made only taxable, exempt and out-of-country supplies.

1. House of Lords: The Institute’s appeal was dismissed unanimously. The Court of Appeal’s construction of regulations 30 and 32 was affirmed: [2001] UKHL 28.

2. Court of Appeal: The court allowed the Commissioners’ appeal and held that regulation 32 established a separate regime for out-of-country supplies. “Taxable supplies” in regulation 30 retained its statutory domestic meaning: [1999] STC 424.

3. High Court: Carnwath J agreed with the VAT tribunal that regulation 32 was ancillary to regulation 30 and that out-of-country supplies should effectively be treated as taxable supplies: [1998] STC 274.

4. VAT tribunal: The tribunal treated regulation 32 as determining the residual input tax attributable to out-of-country supplies, after which those supplies were to be treated as taxable supplies for regulation 30 purposes.