St Helen's School Northwood Ltd v Revenue & Customs

On an appeal under section 83 of the Value Added Tax Act 1994, the tribunal must decide for itself whether an attribution method produces a fair and reasonable allocation of residual input tax. A proposed special method may use physical use, including third-party use, as a proxy for the taxable person’s VAT use where that is justified by the facts. Physical use is not necessarily economic use. The court must consider the objective purpose of the expenditure, its funding and the relationship between the inputs and the taxable and exempt outputs. A direct and immediate link between construction costs and a taxable licence may exist, but that link does not itself establish the correct apportionment. The standard method override applies only where the standard attribution differs substantially from the extent of the taxable person’s economic use.

The School appealed from a decision of the VAT and Duties Tribunal concerning recovery of VAT incurred in constructing a sports complex. The School made exempt educational supplies and granted a taxable licence of the complex to its wholly owned subsidiary, St Helen’s Enterprises Ltd. It sought approval of a special method based on the hours for which the subsidiary used, or was licensed to use, the facilities. It also sought a standard method override.

The Tribunal upheld HMRC’s refusal, treating the appeal as limited and rejecting the relevance of the subsidiary’s use. The High Court considered the proper scope of the appeal, the direct and immediate link between the construction costs and the taxable licence, the fairness of the proposed special method, and whether the standard method differed substantially from the economic use of the complex in making taxable supplies.

1. Appeal jurisdiction. The court followed the approach in Banbury Visionplus Ltd v Revenue and Customs Commissioners [2006] STC 1568. An appeal under section 83 of the Value Added Tax Act 1994 is full. The tribunal must decide for itself whether the attribution secures a fair and reasonable result. It cannot devise and impose its own alternative special method. If the proposed method is fair and reasonable and more fair and reasonable than the existing method, the appeal should be allowed. If both methods are unfair or unreasonable, the appeal cannot succeed merely because the proposal is less unsatisfactory.
2. Meaning of use and proxy. The relevant “use” is VAT or economic use, not necessarily physical use. A physical-use measure may nevertheless provide a fair and reasonable proxy. The subsidiary’s use could not be excluded in limine merely because it was third-party use. However, physical use does not necessarily reflect economic use.
3. Relevant context. The objective purpose of constructing the complex, the source of funds and the intended relationship between the expenditure and the outputs were relevant to attribution. The principal economic use was the provision of exempt education; the taxable licence was secondary. The proposed hours-based method therefore did not produce an allocation more fair and reasonable than the standard method.
4. Direct link and cost components. Applying the principles in BLP Group plc v C&E Comrs [1996] 1 WLR 174 and Midland Bank plc v C&E Comrs [2000] STC 501, the construction costs had a direct and immediate link with the taxable licence and could be cost components of that supply. That conclusion did not determine the proper apportionment between taxable and exempt supplies.
5. Override and disposition. The standard method did not differ substantially from the extent of the School’s economic use in making taxable supplies. The School’s proposed calculation did not provide a proper measure of any such difference. Both appeals were dismissed.

• High Court (Chancery Division): appeals from the VAT and Duties Tribunal dismissed.