1999 (3) TMI 623 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Application of Regulation 34(1)(b) of the Value Added Tax (General) Regulations 1985.
2. Interpretation of section 29(1) of the Value Added Tax Act 1983.
3. Determination of the time of supply under Regulation 23(1).
4. Attribution of input tax to taxable supplies.
5. Impact of VAT group registration on the supply of services.

Issue-wise Detailed Analysis:

1. Application of Regulation 34(1)(b) of the Value Added Tax (General) Regulations 1985:
The primary issue was whether Svenska had "used or appropriated for use" the supplies received in making exempt supplies after the London branch joined the VAT group. The court analyzed Regulation 34(1)(b), which applies when a taxable person has been credited with input tax attributed to an intended taxable supply but later uses it for an exempt supply. The court concluded that the supplies received by Svenska were used in making exempt supplies to the customers of the London branch after it joined the VAT group, thus satisfying the conditions of Regulation 34(1)(b).

2. Interpretation of section 29(1) of the Value Added Tax Act 1983:
Section 29(1) was crucial in determining that any business carried on by a member of the VAT group should be treated as carried on by the representative member. The court held that after the London branch joined the VAT group, the supplies provided by Svenska to the London branch were to be disregarded, and any supplies made by the London branch were to be treated as made by Svenska. This interpretation was pivotal in concluding that Svenska had used the supplies in making exempt supplies.

3. Determination of the time of supply under Regulation 23(1):
Regulation 23(1) provides that continuous supplies of services are treated as supplied at the earlier of the time when payment is received or a tax invoice is issued. Svenska did not issue an invoice or receive payment until after the London branch joined the VAT group. Therefore, the court held that no supplies were treated as made for VAT purposes between 1987 and 1 August 1991, and the supplies were only treated as made when the invoice was issued in 1992.

4. Attribution of input tax to taxable supplies:
Under sections 14 and 15 of the Act, Svenska was entitled to credit for input tax on inward supplies against output tax on taxable supplies. The court found that the input tax credited to Svenska was initially attributed to an intended taxable supply to the London branch. However, after the London branch joined the VAT group, the supplies were used in making exempt supplies, triggering the application of Regulation 34(1)(b).

5. Impact of VAT group registration on the supply of services:
The change in VAT group status altered the accounting treatment of supplies between Svenska and the London branch. The court agreed with the commissioners that the supplies provided by Svenska to the London branch before it joined the VAT group were to be treated as used in making exempt supplies after the group registration. This change in accounting provisions led to the conclusion that Svenska had used the supplies in making exempt supplies, thus requiring an adjustment under Regulation 34(1)(b).

Conclusion:
The court dismissed the appeal, holding that Svenska had used the supplies received in making exempt supplies after the London branch joined the VAT group. The court's interpretation of Regulation 34(1)(b), section 29(1), and Regulation 23(1) led to the conclusion that the input tax credited to Svenska was subject to adjustment. The appeal was dismissed with costs.