Judgment - Commissioners of Customs and Excise v. Redrow Group Plc.  continued

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       My Lords, I am satisfied that this is a misreading of the decision of the Court of Justice in the B.L.P. case. In that case the taxpayer raised money by selling its shareholding in another company. It claimed to deduct the tax included in invoices submitted by bankers, solicitors and accountants for services rendered to it in connection with the sale. The claim was refused on the ground, which was not disputed, that the sale of the shares was an exempt supply. The taxpayer claimed that the shares were sold in order to raise money to pay off debts which it had incurred in the course of its business, and that its business involved making both taxable and exempt supplies. It argued that, in these circumstances, the costs of professional services supplied to it in connection with the sale should be treated in the same way as overhead costs and an appropriate proportion of the input tax deducted under Article 17(5). This argument was rejected. The services in question were supplied to the taxpayer exclusively in connection with its sale of the shares, an exempt supply, and were exhausted when the shares were sold. It followed that no part of the cost of such services could be attributed to the taxpayer's taxable supplies.

       The case was about attribution, not about the identity of the person to whom the services were supplied. The taxpayer was the only possible recipient of the services; there was no one else. The interpretation placed upon the decision by the Court of Appeal in the present case would seem to lead to the conclusion that the services of the bankers, solicitors and accountants in connection with the sale of the shares were not supplied to anyone. Yet if the sale of the shares had been a taxable supply the input tax in question would plainly have been deductible. It would also seem to lead to a denial of the right to deduct input tax in respect of overhead costs, for the services in respect of which such costs are incurred cannot be linked, whether directly and immediately or not, with any particular supplies made by the taxable person. Yet in a later part of the judgment the Court of Justice confirmed that overhead costs "for the taxable person's taxable transactions" are deductible (see paragraphs 25 and 27).

       Paragraph 19 of the judgment is concerned with the proper interpretation of Article 17(5), to which it makes express reference. This, it will be remembered, makes provision for the case where goods or services are used for both taxable and exempt supplies and cannot therefore be linked exclusively with either. In rejecting the taxpayer's claim to deduction, therefore, the Court of Justice cannot have intended to deny the right to deduct tax in respect of goods or services which cannot be "directly and immediately" linked with a particular taxable supply made by the taxpayer. Paragraph 19 of the judgment must accordingly be read as denying the right to deduct tax in respect of goods or services which are exclusively linked with an exempt output. So understood, it has no bearing on the present case.

Identifying the recipient of the services

       The Commissioners begin by describing the services in question as the ordinary services of an estate agent instructed to market and sell his client's house. They then ask: to whom were those services supplied? Inevitably they answer: to the householder. They concede that the taxpayer derived a benefit from the services supplied by the agent and was accordingly prepared to pay for them; but they insist that this is irrelevant. The question is: to whom did the agent supply his services, not who derived a benefit from them?

       But this approach begs the question to be decided. The way in which the Commissioners describe the services dictates the answer. But it is equally possible to begin with the services which the taxpayer instructed the agents to perform. This would lead to a different definition of the services in question. They would not be the ordinary services of an agent instructed to market and sell his client's house, but the services of an agent instructed to market and sell a third party's house. The fact is that the nature of the services and the identity of the person to whom they are supplied cannot be determined independently of each other, for each defines the other. Where, then, should one begin?

       The solution lies in two features of the tax to which I have already referred. The first is that anything done for a consideration which is not a supply of goods constitutes a supply of services. This makes it unnecessary to define the services in question. The second is that unless the services are rendered for a consideration they cannot constitute the subject matter of a supply. In fact, of course, there can be no question of deducting input tax unless the taxpayer has incurred a liability to pay it as part of the consideration payable by him for a supply of goods or services.

       In my opinion, these two factors compel the conclusion that one should start with the taxpayer's claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything - anything at all - used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services.

       In the present case the taxpayer did not merely derive a benefit from the services which the agents supplied to the householders and for which it paid. It chose the agents and instructed them. In return for the payment of their fees it obtained a contractual right to have the householders' homes valued and marketed, to monitor the agents' performance and maintain pressure for a quick sale, and to override any alteration in the agents' instructions which the householders might be minded to give. Everything which the agents did was done at the taxpayer's request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to the taxpayer.

       The Tribunal had the second of the two factors to which I have referred in mind when it said that it was necessary to await events and see to whom the agent makes the supply; it is only if the taxpayer becomes liable to pay the agent's fees that his services are supplied to it. The Commissioners criticised this reasoning, submitting that the destination of a supply must be ascertainable when it is made; it cannot be held in suspense to await subsequent events. But this assumes that the services rendered to the householder and those rendered to the taxpayer are the same. They are not. The services rendered to the householder are the ordinary services of an estate agent in the valuation and marketing of his house. If the householder sells his home but fails to complete the purchase of a Redrow home, he may become liable for the agent's fees. He is not, however, entitled to deduct input tax in respect of the fees because, although the services in question were supplied to him, they were not used or to be used for the purpose of any business carried on or to be carried on by him.

       The services obtained by the taxpayer are different. They consist of the right to have the householder's home valued and marketed in accordance with the taxpayer's instructions. Unless the householder sells his home and completes the purchase of a Redrow home, however, the taxpayer is not liable for the agent's fees and pays no input tax, so there is nothing in respect of which a claim to deduction may be made. What must await events is not the identity of the party to whom the services are rendered, for different services are rendered to each; but which of the parties is liable to pay for the services rendered to him and so bear the burden of the tax in respect of which a claim to deduction may arise.


       It is sufficient that the taxpayer obtained something of value in return for the payment of the agents' fees in those cases where it became liable to pay them, and that what it obtained was obtained for the purposes of the taxpayer's business. Both those conditions are satisfied in the present case. It is not necessary that there should be "a direct and immediate link" between the services supplied by the agent and the sale of a particular Redrow home, although if it were necessary then this condition too would be satisfied on the facts of the present case. From the taxpayer's standpoint, which is what matters, the agent's fees incurred in the sale of a prospective purchaser's own home are not part of the taxpayer's general overhead costs but a necessary cost of and exclusively attributable to the sale of a Redrow home to that same purchaser. If the sale of the Redrow home were an exempt supply and not merely zero- rated, the agent's fees would not be deductible for the reasons given by the Court of Justice in the B.L.P. case.

       I would allow the appeal and affirm the decision of the Value Added Tax Tribunal.


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Prepared 11 February 1999