Royal and Sun Alliance Insurance Group Plc v Her Majesty's Commissioners of Customs and Excise

The House considered whether a landlord's input VAT paid during vacant periods could be reclaimed by a tenant under regulation 109 of the Value Added Tax Regulations 1995 after the tenant later elected to waive exemption and make taxable supplies. The majority held that time-of-supply rules made by virtue of section 6(14) of the Value Added Tax Act 1994 (in particular regulation 85 of the 1995 Regulations) treat leases as "separately and successively supplied" so that the discrete supplies made during the vacant periods were different goods or services from those later supplied; accordingly there was no direct and immediate link allowing re-attribution under regulation 109.

The majority distinguished authorities relied on by the tenant (including Svenska) or held them inapplicable to RSA's facts and emphasised the distinction between economic activities which are taxable and those which are exempt. The minority would have given effect to regulation 109 on a literal reading and allowed re-attribution because the tenant throughout intended the single economic activity of letting the same properties and the regulation was designed to deal with such changes of intention.

Background and procedural history:

• Royal & Sun Alliance (RSA) held leases on properties the landlords had opted to tax, so RSA paid input VAT on rent and services.
• Between 1991 and 1993 some properties became vacant; RSA attempted to sub-let but remained largely unsuccessful until after November 1995.
• On 21 November 1995 RSA elected to waive exemption and thereafter claimed repayment of VAT paid during the prior vacant periods under regulation 109 of the Value Added Tax Regulations 1995.
• The VAT and Duties Tribunal rejected the claim ([1999] V & DR 336). Park J allowed RSA at first instance ([2000] STC 933). The Court of Appeal (majority) upheld Park J ([2001] STC 1476). The Commissioners appealed to the House of Lords.

Nature of the claim / relief sought: RSA sought repayment (re-attribution) of input tax paid during the "vacant unelected period" by application of regulation 109.

Issues framed:

• Whether regulation 109 can operate to reattribute input tax paid in earlier accounting periods where the supply in question (a lease) is, by operation of regulation 85 and section 6(14), treated as separately and successively supplied;
• Whether the "goods or services concerned" in regulation 109 were the same goods or services supplied during the vacant periods and those supplied after election, i.e. whether there was a "direct and immediate link" between the earlier inputs and later taxable outputs;
• How the Sixth Directive and European Court of Justice authorities bearing on deduction and adjustment (including the concept of a direct and immediate link) inform the interpretation of regulations 85 and 109.

Court's reasoning and outcome:

• The majority (Lords Hoffmann, Walker of Gestingthorpe and Steyn) concluded that under section 6(14) and regulation 85 grants of leases for periodic consideration are to be treated as separately and successively supplied at the times of receipt of consideration or invoicing; consequently the supplies during the vacant period were different discrete supplies from those later supplied after election. Because regulation 109 requires that the same "goods or services concerned" be subsequently used or intended to be used for taxable supplies, the discrete past supplies could not be reattributed and regulation 109 did not assist RSA. The majority also held that established ECJ jurisprudence (direct and immediate link, fiscal neutrality) did not justify re-writing history in favour of RSA and distinguished Svenska on its special facts.
• The minority (Lords Woolf and Clyde) would have held that regulation 109 could apply: they favoured a literal reading of regulation 109 and emphasised that RSA throughout pursued the single economic activity of letting the same properties and that there had been no use of the goods or services during the vacant periods; for them regulation 109 addressed precisely that factual pattern.

The House allowed the Commissioners' appeal by a majority and restored the decision of the Tribunal that RSA's claim under regulation 109 failed.

Appeal allowed. The majority held that section 6(14) and regulation 85 treat grants of leases with periodic consideration as separately and successively supplied at successive accounting points, so the discrete supplies during the vacant periods were not the same "goods or services concerned" as those later supplied after election and there was no direct and immediate link permitting re-attribution under regulation 109. The majority therefore restored the Tribunal's rejection of RSA's claim. The minority would have dismissed the appeal and applied regulation 109 to allow repayment.

Value Added Tax and Duties Tribunal decision [1999] V & DR 336 (claim rejected); High Court (Park J) [2000] STC 933 (allowed RSA); Court of Appeal [2001] STC 1476 (majority upheld Park J; Arden LJ dissenting); House of Lords [2003] UKHL 29 (appeal allowed, Tribunal decision restored).