Dial-A-Phone Ltd v Customs & Excise

Input tax is attributable to taxable supplies only where the relevant goods or services have a direct and immediate link with those supplies or are cost components of them. The court must consider all the circumstances and seeks a sufficient link, not necessarily the closest link. A link with an exempt supply may coexist with a closer link to a taxable supply. The exempt supply being commercially secondary, or being made after a taxable supply, does not itself defeat attribution. Where input services relate to both taxable and exempt supplies, the input tax is residual and only the appropriate proportion is deductible under the Value Added Tax Regulations 1995.

Dial-A-Phone Ltd appealed from an order of Blackburne J dismissing its appeal against a decision of the Value Added Tax and Duties Tribunal. The Tribunal had upheld the Commissioners’ ruling that VAT on marketing and advertising services supplied to Dial-A-Phone was attributable to both its taxable mobile-phone and airtime activities and its exempt insurance-intermediary services.

The appeal concerned whether the input tax was attributable exclusively to taxable supplies, whether Dial-A-Phone supplied insurance-intermediary services for consideration, and how the direct and immediate link test applied to the undisputed facts.

1. Appeal dismissed. Lord Justice Parker gave the judgment, with Lord Justice Dyson and Lord Justice Waller agreeing. The Tribunal had not misunderstood the issue, and Blackburne J was right to uphold its decision.
2. Under regulation 101 of the Value Added Tax Regulations 1995, the statutory concepts of attribution and cost components must be interpreted consistently with article 2 of the First Directive and article 17 of the Sixth Directive. The authorities establish the direct and immediate link or cost-component test. The national court or tribunal must apply that test to the facts and consider all circumstances. Its application involves a substantial factual element and a qualitative judgment, so an appeal is unlikely to succeed absent a misdirection or other error of law: BLP Group plc v Customs & Excise Commissioners [1995] STC 424 and Midland Bank plc v Customs Excise Commissioners [2000] STC 501.
3. The test requires a sufficient link, not the closest possible link. Input costs may have a direct and immediate link with an exempt supply even where the link with a taxable supply is closer. The exempt service being commercially secondary, or being supplied after a taxable transaction, is not conclusive. The Tribunal was entitled to infer from the undisputed facts that the advertising formed part of a package which promoted both mobile-phone and airtime supplies and insurance intermediary services. The Tribunal had not applied a mere but-for test. The factual circumstances in Customs & Excise Commissioners v Southern Primary Housing Association Ltd [2003] EWCA Civ 1662, [2004] STC 209 were distinguishable. Royal Agricultural College v Customs & Excise Commissioners decision no. 17508, unreported, 11 January 2002 did not assist Dial-A-Phone.
4. The insurance-intermediary service was supplied to Cornhill under the contractual arrangements. Commission calculated by reference to premiums and a share of profits constituted consideration from Cornhill. The distinction between that consideration and premiums paid by individual customers was material. The time and manner of remuneration, including a customer’s cancellation or failure to pay a later premium, did not negate the existence or nature of the consideration.
5. The possibility that the intermediary service included promotional elements did not affect whether the direct and immediate link test was satisfied. Note (7) to Schedule 9 of the Value Added Tax Act 1994 was therefore irrelevant to the attribution question.
6. The marketing and advertising input tax was attributable to both taxable and exempt supplies. It was consequently residual tax under regulation 101(2)(d), rather than input tax attributable exclusively to taxable supplies under regulation 101(2)(b). The appeal was dismissed and the appellant was ordered to pay costs of £7,842.50.

1. Court of Appeal (Civil Division): dismissed Dial-A-Phone’s appeal and ordered it to pay the Commissioners’ costs.
2. High Court, Chancery Division: Blackburne J dismissed Dial-A-Phone’s appeal on 13 December 2002.
3. Value Added Tax and Duties Tribunal: dismissed Dial-A-Phone’s appeal against the Commissioners’ ruling, in a decision promulgated on 1 March 2002.