1995 (11) TMI 434 - HC - VAT and Sales Tax

Issues Involved:
1. Deductibility of input tax on construction works.
2. Application of self-supply charge under Schedule 6A.
3. Consistency of domestic legislation with the Sixth Directive.
4. Interpretation of VAT legislation in light of European Union law.

Issue-Wise Detailed Analysis:

1. Deductibility of Input Tax on Construction Works:

Robert Gordon's College constructed new playing fields and ancillary buildings, incurring VAT on the charges by contractors. Ordinarily, a business can deduct input tax from output tax, but the college's educational services were exempt, meaning no output tax was available for deduction. To create a taxable supply, the college formed a subsidiary, Countesswells Playing Fields Ltd., and leased the playing fields to it, enabling the college to deduct the input tax on the construction works. This arrangement allowed the college to use the property for educational purposes while initially benefiting from input tax deduction.

2. Application of Self-Supply Charge Under Schedule 6A:

The Commissioners argued that a further tax charge was triggered when the college began using the playing fields for educational purposes. They cited paragraphs 5 and 6 of Schedule 6A, suggesting the college was deemed to have supplied itself with the interest in the land and buildings, making the entire value taxable. The college contended that the self-supply charge applied only if it used the building as a developer, not as a licensee. The VAT tribunal accepted the college's argument, but the Court of Session disagreed, emphasizing that the self-supply charge applies if the developer uses the building within 10 years, regardless of any intermediate transactions.

3. Consistency of Domestic Legislation with the Sixth Directive:

The college argued that the interpretation of paragraphs 5 and 6 by the Court of Session was inconsistent with the Sixth Directive. The Directive aims to prevent market distortions by treating self-supplied goods or services as taxable if they would not be wholly deductible if acquired from a third party. The college's use of the playing fields was pursuant to a service (the license) supplied by Countesswells, a third party, making the self-supply charge inapplicable under the Directive. The argument highlighted that the Directive should prevail over inconsistent domestic legislation.

4. Interpretation of VAT Legislation in Light of European Union Law:

The Court of Session's interpretation was challenged based on the European Court of Justice's decision in B.L.P. Group Plc. v. Customs and Excise Commissioners, which emphasized examining each transaction separately. The college's earlier development of the land was irrelevant to the VAT on the license fee paid to Countesswells. The Lords concluded that paragraphs 5 and 6, as construed by the Court of Session, were inconsistent with the Sixth Directive, producing an arbitrary tax charge. The Directive's provisions should prevent a self-supply charge in this scenario, as the college's use of the land was based on a third-party service.

Conclusion:

The appeal was allowed, and the order was varied as proposed. The judgment emphasized that the self-supply charge under Schedule 6A should not apply when the college used the playing fields under a license from Countesswells, aligning with the Sixth Directive's intent to prevent market distortions. The decision underscored the importance of interpreting domestic VAT legislation consistently with European Union law.

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