2001 (5) TMI 935 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Validity and interpretation of Regulation 32 of the Value Added Tax (General) Regulations 1985.
2. Relationship between Regulation 30 and Regulation 32.
3. Compliance of domestic regulations with the Sixth Council Directive (77/388/EEC).

Issue-wise Detailed Analysis:

1. Validity and Interpretation of Regulation 32:
The primary issue in this appeal was the method for calculating the amount of input tax for which the Liverpool Institute for Performing Arts (LIPA) was entitled to credit when making VAT returns. This issue revolved around the interpretation of Regulations 30 and 32 of the Value Added Tax (General) Regulations 1985. Regulation 32 provides a separate code for determining the amount of input tax relevant to the making of out-of-country supplies, distinct from the code in Regulation 30. Lord Slynn of Hadley emphasized that Regulation 32 is consistent with Article 17(5) of the Sixth Council Directive (77/388/EEC), which allows member states discretion in determining the recoverable proportion of residual input tax. The appeal was dismissed on the grounds that Regulation 32 was valid and provided a separate regime for out-of-country supplies.

2. Relationship between Regulation 30 and Regulation 32:
Regulation 30 deals with the attribution of input tax to taxable supplies within the UK, while Regulation 32 addresses the attribution of input tax to foreign and specified supplies. The Court of Appeal held that Regulation 32 constitutes a separate regime for out-of-country supplies, distinct from the regime under Regulation 30. This interpretation was upheld by the House of Lords. Lord Hope of Craighead noted that Regulation 32 provides a use-based apportionment method, contrasting with the value-based method in Regulation 30(2)(d). The tribunal and Carnwath J initially treated out-of-country supplies as taxable supplies under Regulation 30, but the Court of Appeal disagreed, and the House of Lords affirmed this position.

3. Compliance with the Sixth Council Directive (77/388/EEC):
The appellant argued that Regulation 32 was inconsistent with Articles 17(5) and 19 of the Sixth Council Directive, which propose a value-based apportionment method for residual input tax. However, Article 17(5)(c) allows member states to adopt a use-based apportionment method. The House of Lords found that Regulation 32's use-based apportionment for out-of-country supplies was consistent with the Directive. Lord Scott of Foscote explained that Article 17(5)(c) permits multiple apportionment methods, and Regulation 32 does not conflict with the Directive's scheme. Thus, the attack on the validity of Regulation 32 failed, and the appeal was dismissed.

Conclusion:
The House of Lords dismissed the appeal, affirming that Regulation 32 provides a separate and valid regime for the attribution of input tax to out-of-country supplies. This regime is consistent with the Sixth Council Directive, and the interpretation of "taxable supplies" in Regulation 30 excludes out-of-country supplies. The decision upheld the Court of Appeal's judgment and clarified the distinct roles of Regulations 30 and 32 in the VAT framework. The appeal was dismissed with costs.