Commissioners of Customs and Excise v Liverpool Institute for Performing Arts

The House of Lords considered the correct method of attributing residual input tax where a taxable person makes supplies both in the United Kingdom and supplies the place of supply of which is outside the United Kingdom. The court held that regulation 32 of the Value Added Tax (General) Regulations 1985 provides a separate, use-based code for attributing input tax to out-of-country supplies and is not inconsistent with article 17(5) (and article 19) of the Sixth Council Directive (77/388/EEC). Regulation 30(2)(d) prescribes a value-based apportionment for supplies in the United Kingdom and the expression "taxable supplies" in regulation 30 is to be read as supplies in the United Kingdom (per section 2 of the Value Added Tax Act 1983). The appeal was dismissed.

The appellant (Liverpool Institute for Performing Arts) supplied exempt educational services in the United Kingdom but made advertising supplies to a German company which, by virtue of the place of supply rules, were treated as supplied in Germany. The dispute concerned the method by which residual input tax (tax on goods and services used indiscriminately for taxable and exempt activities) should be apportioned between in-country taxable supplies, out-of-country supplies that would have been taxable if made in the United Kingdom, and exempt supplies.

The appellant challenged the commissioners' application of regulation 32 of the Value Added Tax (General) Regulations 1985 and contended that the Sixth Council Directive required a value-based apportionment under article 19 and article 17(5), such that out-of-country supplies must be treated within the value-based regime of regulation 30. The factual background included decisions at tribunal and in the High Court (Carnwath J) in favour of the appellant's approach, but the Court of Appeal took the opposite view.

The issues framed by the House of Lords were whether regulation 32 was compatible with article 17(5) of the Sixth Directive and whether regulation 32 should be read as establishing a separate regime for out-of-country supplies or whether out-of-country supplies remained "taxable supplies" for the purposes of regulation 30. The House examined the Directive and domestic statutory provisions (notably section 15 and section 2 of the Value Added Tax Act 1983) and concluded that article 17(5) permits member states to adopt a use-based apportionment for all or part of the goods and services (article 17(5)(c)). Regulation 32 therefore validly prescribes a use-based attribution for out-of-country supplies, and that attribution establishes the amount of input tax to which section 15(2)(b) refers. The court also concluded that, in regulation 30, the term "taxable supplies" means supplies in the United Kingdom and that "all supplies" does not include out-of-country supplies dealt with under regulation 32.

The House therefore dismissed the appeal, holding regulation 32 to be valid and compatible with the Directive and confirming that regulation 32 creates a separate regime for out-of-country supplies while regulation 30 governs in-United Kingdom taxable and exempt supplies.

Appeal dismissed. The House held that regulation 32 of the Value Added Tax (General) Regulations 1985 validly prescribes a use-based method for attributing input tax to supplies outside the United Kingdom and is not inconsistent with article 17(5) (and article 19) of the Sixth Council Directive. "Taxable supplies" in regulation 30 means supplies in the United Kingdom and out-of-country supplies are dealt with under the separate regime in regulation 32.

Tribunal decision in favour of the taxpayer (reflected in the tribunal and reported at [1998] STC 274); judgment of Carnwath J at first instance / High Court in favour of the taxpayer ([1998] STC 274); Court of Appeal reversed ([1999] STC 424). The House of Lords dismissed the appeal ([2001] UKHL 28).