Banbury Visionplus Ltd v HM Revenue & Customs

These are appeals from the VAT and Duties Tribunal (Dr A N Brice and Mr P D Davda FCA) (“the Tribunal”). The Tribunal dismissed appeals by the Appellant taxpayers from a decision of the Respondents, HM Revenue & Customs, formerly the Commissioners of Customs and Excise (“the Commissioners”), under Regulation 102 of the Value Added Tax Regulations 1995 SI 1995 No. 2518 (“the Regulations”) to terminate, in the case of each Appellant, the use of a partial exemption special method (“a special method”) which had previously been approved in respect of that Appellant by the Commissioners under Regulation 102(1) (together “the PESM”), and so causing, in place of the PESM, the application of the partial exemption standard method under Regulation 101 (“the standard method”). The Tribunal’s Decision (“the Decision”) was first released to the parties on 26 July 2005. A subsequent version, in which commercially sensitive material was removed, was released on 26 October 2005.

The Appellant taxpayers, namely Banbury Visionplus Ltd (“Banbury”), Bletchley Specsavers Ltd (“Bletchley”), Eastbourne Visionplus Ltd (“Eastbourne”) and Litchfield Visionplus Ltd (“Litchfield”) are all companies in the Specsavers Optical Group Ltd group of companies (“the SOG”). The SOG operates a well known chain of high street opticians stores. At the time of the Decision there were some 460 stores in the SOG. There are now approximately 500 stores. Each store is run by a different retail company, which is separately registered for the purposes of Value Added Tax (“VAT”). There is no group registration.

The Commissioners’ decision to terminate was notified to each retail company within the SOG group by letters dated 2 January 2004. Each of the companies appealed from that decision. The appeals of the Appellants have been treated as lead cases.

The main trading activity of the SOG is the sale and dispensing of prescription spectacles and contact lenses.

The stores in the SOG are run under either a “dual” corporate structure or a “single” corporate structure.

Most stores have a dual structure. In those cases the store is operated by a retail company, which is a subsidiary of a wholesale company. The wholesale company purchases spectacle frames, contact lenses, solutions and accessories from Specsavers Optical Group Ltd (“Group”) and sells them at the retail price to the retail company, which, in turn, sells them to customers with the associated dispensing services. In a dual structure most invoices are submitted for the account of the wholesale company, except for staff and professional costs which are invoiced to the retail company. In particular, the wholesale company pays the shop rent and for shop-refitting, and purchases or leases any equipment that is required.

In the dual structure both the wholesale company and the retail company are separately registered for VAT. The wholesale company is fully taxable for VAT on its supplies, and so does not require a partial exemption method and was not subject to the PESM.

In the case of a single structure the store is operated by the retail company alone. In those cases the retail company purchases optical goods from Group at a price which enables the retail company to make a profit when it sells to customers with the associated dispensing services.

Two of the Appellants, Banbury and Litchfield, are retail companies in a dual structure. The other two Appellants, Bletchley and Eastbourne, operate single structure stores.

Of the total business of the retail companies in the SOG about 75% comprises the supply of dispensed spectacles, 10% comprises the supply of dispensed contact lenses, 10% comprises sight tests, and 5% comprises other supplies (including optical goods).

When an optician supplies dispensed spectacles or contact lenses to a customer two supplies are made for VAT purposes. One is a supply of the optical goods and the other is a supply of the dispensing services. The supply of the optical goods is taxable, and the supply of the dispensing services is exempt under Schedule 9 Group 7 Item 1 Note (2) of the Value Added Tax Act 1994 (“the 1994 Act”). The Association of British Dispensing Opticians has stated that the purpose of the dispensing function is to translate an optical prescription into an order for a pair of spectacles, or other optical appliance, appropriate to the individual patient’s needs. It is possible for an optician to make a taxable supply alone (for example, new spectacle frames for existing lenses) or an exempt supply alone (for example, a sight test), but most supplies in the SOG are of dispensed spectacles or contact lenses which consist of both a taxable and an exempt supply.

When both a taxable and an exempt supply are made to a customer for a single price, the price paid by the customer has to be allocated, for the purposes of calculating output VAT, in part to the taxable supply of the goods and in part to the exempt supply of the dispensing services. The SOG has agreed with the Commissioners an apportionment calculation, for this purpose. Under the agreed method, commonly referred to as the “full cost apportionment”, 33% of a supply of dispensed spectacles is taxable and 67% is exempt; in the case of contact lenses, 43% is taxable and 57% is exempt.

Similarly, in relation to any input VAT that cannot be directly attributed exclusively to taxable or exempt supplies, it is necessary to establish the proportion of input tax which is recoverable. It is the method for establishing that proportion, the “residual” input tax, which is the subject of these appeals. More precisely, the residual input tax in issue on these appeals is the VAT on the following supplies made to all the Appellants: some rent (some rent is exempt), building repairs, rates, water charges, property management, security, cleaning, insurance, light, heat, telephone, maintenance and repair of equipment, taxable staff expenses, post and stationery, software licence fees, professional fees, and advertising.

Article 17 of the Sixth Directive (77/388/EEC) contains provisions as to the origin and scope of the right to deduct input tax. Article 17.2 provides that, in so far as goods and services are used for the purposes of his taxable transactions, the taxable person is entitled to deduct, from the tax which he is liable to pay, VAT due or paid in respect of goods or services supplied to him by another taxable person. Article 17.5 provides that, where goods or services are used by a taxable person both for transactions mentioned in Article 17.2 (taxable supplies) and for transactions in respect of which input tax is not deductible (exempt supplies), only such proportion of the tax shall be deductible as is attributable to the taxable supplies. It further provides that the proportion shall be determined in accordance with Article 19.

Article 19.1 provides that the deductible proportion shall be made up of a fraction, having as its numerator the total amount of turnover each year attributable to transactions in respect of which tax is deductible under Article 17.2 and 17.3 (taxable supplies), and having as its denominator the total amount of turnover each year attributable to transactions included in the numerator and to transactions in respect of which tax is not deductible (taxable and exempt supplies). In effect, output values are used as “proxy” for attributing input tax to (respectively) taxable and exempt supplies in the case of transactions comprising both types of supply.

Article 17.5 also provides, however, that “Member States may…(c) authorise or compel the taxable person to make the deduction on the basis of use of all or part of goods or services”, that is to say by reference to actual use rather than by reference to the proxy of values of taxable and exempt supplies of the taxpayer.

The national legislation gives effect to those provisions in the following way.

Taxable persons making taxable supplies are required to charge and account for output tax: 1994 Act ss 1-4. When accounting for output tax, taxable persons are permitted, in certain circumstances, to deduct input tax: 1994 Act ss. 24-26. Section 24 defines input tax as tax on the supply to a taxable person of goods or services used for the purpose of a business carried on by him. Section 25(2) provides that a taxable person is entitled at the end of each accounting period to credit for so much of his input tax as is allowable under section 26, and to deduct that amount from any output tax that is due from him.

Section 26 of the 1994 Act provides the statutory framework for determining the deductible input tax. It provides, so far as relevant to these appeals, as follows:

“26.

Input tax allowable under section 25

(1)

The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2)

The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business-

(a)

taxable supplies;

….

(3)

The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above, and any such regulations may provide for-

(a)

determining a proportion by reference to which input tax for any prescribed accounting period is to be provisionally attributed to those supplies;…”

Accordingly, the amounts of input tax deductible in any given case are to be determined in accordance with regulations, and those regulations are to secure “a fair and reasonable attribution” of input tax to taxable supplies.

The Commissioners have made the Regulations pursuant to those provisions.

Regulation 101 provides, so far as relevant, as follows:

“Attribution of input tax to taxable supplies
    101.—(1)  Subject to regulation 102, the amount of input tax which a taxable person shall be entitled to deduct provisionally shall be that amount which is attributable to taxable supplies in accordance with this regulation.

     (2)  In respect of each prescribed accounting period—

(a)

goods imported or acquired by and goods or services supplied to, the taxable person in the period shall be identified,

(b)

there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,

(c)

no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributed to taxable supplies, and

(d)

there shall be attributed to taxable supplies such proportion of the input tax on such of those goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.

(3)

In calculating the proportion under paragraph (2)(d) above, there shall be excluded…

(4)

The ratio calculated for the purpose of paragraph (2)(d) above shall be expressed as a percentage and, if that percentage is not a whole number, it shall be rounded up to the next whole number.”

Accordingly, under Regulation 101 provision is made for the direct attribution of input tax used or to be used exclusively for making taxable supplies (which is recoverable – Regulation 101(2)(b)) and of input tax used or to be used exclusively for making exempt supplies (which is not recoverable – Regulation 101(2)(c)). Any input tax that cannot be directly attributed exclusively to taxable or exempt supplies is recoverable as to a proportion (Regulation 101(2)(d)), such proportion being calculated by reference to the whole number percentage that taxable supplies represent of total supplies (excluding various matters identified in Regulation101(3)). That is “the standard method” for calculating “residual” (or, as it is sometimes called, “non attributable”) input tax. It is a simple method of attribution, which uses value or turnover as a proxy for actual use.

In addition to the standard method in Regulation 101(2)(d), Regulation 102 empowers the Commissioners to approve or direct the use of a special method. Regulation 102 is as follows:

“Use of other methods

102.

— (1)  Subject to paragraph (2) below and regulation 103, the Commissioners may approve or direct the use by a taxable person of a method other than that specified in regulation 101…

(2)

Notwithstanding any provision of any method approved or directed to be used under this regulation which purports to have the contrary effect, in calculating the proportion of any input tax on goods or services used or to be used by the taxable person in making both taxable and exempt supplies which is to be treated as attributable to taxable supplies, the value of any supply within regulation 101(3) shall be excluded.

(3)  A taxable person using a method as approved or directed to be used by the Commissioners under paragraph (1) above shall continue to use that method unless the Commissioners approve or direct the termination of its use.

(4)

Any direction under paragraph (1) or (3) above shall take effect from the date upon which the Commissioners give such direction or from such later date as they may specify.”

As an alternative to directing the termination of a special method, where the Commissioners believe that the special method does not fairly and reasonably represent the use of inputs in making taxable supplies, they may direct a taxable person, under Regulations 102A and 102B, to account for VAT on the basis of a deduction for input tax computed by reference to actual use in making taxable supplies. Such a direction is intended to be a temporary measure pending agreement between the parties, or a direction from the Commissioners, as to a different special matter: see Business Brief 27/2003. Regulations 102A and 102B are as follows:

“102A.  - (1) Where a taxable person - 

(a)

is for the time being using a method approved or directed under regulation 102, and

(b) that method does not fairly and reasonably represent the extent to which goods or services are used by him or are to be used by him in making taxable supplies,

the Commissioners may serve on him a notice to that effect, setting out their reasons in support of that notification and stating the effect of the notice.

    (2) The effect of a notice served under this regulation is that regulation 102B shall apply to the person served with the notice in relation to - 

(a)

prescribed accounting periods commencing on or after the date of the notice or such later date as may be specified in the notice, and

(b) longer periods to the extent of that part of the longer period falling on or after the date of the notice or such later date as may be specified in the notice.

102B -(1) Where this regulation applies, a taxable person

shall calculate the difference between –

(a)

the attribution made by him in any prescribed accounting period or longer period, and

(b) an attribution which represents the extent to which the goods or services are used by him or are to be used by him in making taxable supplies.

and account for the difference on the return for that prescribed accounting period or on the return on which that longer period adjustment is required to be made, except where the Commissioners allow another return to be used for this purpose.

(2)

…”

Regulations 102A and 102B came into effect on 1 January 2004, the day before the Commissioners’ letters to the SOG companies dated 2 January 2004.

The Commissioners approved the PESM for retail companies operating single structure stores within the SOG (“single structure companies”) on 18 September 1997, and the (materially identical) PESM for retail companies operating dual stores (“dual structure companies”) on 6 October 1998.

Under the PESM the recoverable proportion of the residual input tax relating to non-rent costs was determined by reference to the formula:

For the purposes of the PESM for single structure companies, the average floor area percentages were calculated using an agreed sample of 9 single structure stores. Those stores were selected by Ms Gillian Morris, Group’s Director of Tax. Applying the fraction of taxable floor area over taxable and exempt floor area for the 9 representative stores gave a result of 66.6%. For the single structure companies this was treated as the recoverable proportion of all residual input tax, other than input tax on rent.

The PESM for single structure companies provided that the recoverable proportion of residual input tax relating to rent was to be calculated by reference to “weighted” floor areas, the weighting to be in line with commercial property zoning of rents. Using the same 9 representative sample stores the floor area calculations were weighted using the given ratios for each zone, so that more of the input tax on rental was attributed to zone A than to zone B and more for zone B than zone C and so on. On most plans, zones A and B were treated as taxable areas (for the display of spectacle frames) whilst the zones to the rear of the store were treated as mainly exempt areas (consulting rooms, pre-test rooms and test rooms, dispensing areas, contact lens teaching area and training area). The application of the weighted or zoned method gave a recovery rate of 86%, which was then treated as the recoverable proportion of all residual input tax on rent.

The PESM then provided that the rent (86%) and non-rent (66.6%) results for the 9 stores in the representative sample were to be calculated for a calendar year and a single combined average recovery rate calculated. This came to 69.2% taxable and 30.8% exempt for single structure companies. Those percentages were then to be applied to all the residual input tax of each single structure company in order to determine the amount of residual input tax to be recovered in each accounting period. Accordingly, 69.2% of all residual input tax of a single structure retail company in the SOG was recoverable.

The PESM for dual structure companies was very similar to that for the single structure companies, with one difference. This was that the PESM for dual structure companies provided for an additional step to be inserted after the attribution of input tax used exclusively in making taxable or exempt supplies and before the steps dealing with residual input tax. This additional step was that, for the purpose of calculating the residual input tax of the retail company, there was notionally re-charged to the retail company a proportion of expenditure of the wholesale company on advertising (in-store and national), rent, rent related expenditure, computers, motor expenses, shop fitting, and other overheads. The reason for the notional re-charge was that, as I have explained, overheads are invoiced to the wholesale company, except for staff and professional costs which are invoiced to the retail company; and the wholesale company purchases the optical goods, pays the rent of the shop and for shop-refitting, and purchases or leases any equipment that is required, and also arranges for advertising, some of which relates to the sales in the retail store and some of which is a share in national advertising. Accordingly, the wholesale company receives mostly taxable supplies and, as all the supplies it makes are taxable, recovers input tax in full. The retail company, on the other hand, makes some exempt supplies and cannot recover all its input tax. The Commissioners were concerned that, where supplies were made to the wholesale company, it could recover all the input tax whereas the benefit of some of those supplies also accrued to the retail company which should, they thought, bear some of the cost. 19 dual company stores were selected as an agreed representative sample. The calculations resulted in average figures of recoverable residual input tax of 89.06% for rent costs and 68.26% for non rent costs for dual structure companies within the SOG. Those separate percentages for rent costs and non-rent costs were not in practice combined to give a single average recovery rate for dual structure companies.

The letters sent by the Commissioners dated 2 January 2004 to both the single structure companies and the dual structure companies within the SOG were in similar terms. In both cases, the Commissioners expressed the following concerns about the PESM: (1) the recovery of input tax on the basis of a representative sample of stores was inappropriate; (2) the property based calculation for determining recoverable input tax was not a good proxy for goods and services, particularly those bearing no obvious link to floor area; (3) even if a floor area calculation was appropriate in principle, the Commissioners did not agree with the attribution of different floor areas to taxable and exempt use as specified in the PESM; (4) the weighting mechanism applied to the floor area calculation, based on a notional rental value adjustment, was inappropriate and had a distortive effect; (5) the wide divergence between the result of the cost apportionment method in respect of outputs (33% taxable/67% exempt for dispensed spectacles and 43% taxable/57% exempt for contact lens) and the PESM in respect of residual input tax (69.2% taxable/30.8% exempt for single structure companies and a broadly similar ratio for dual structure companies) indicated that the PESM did not provide a fair and reasonable result. A further concern was expressed in the letter to dual structure companies, namely that the notional re-charge was inappropriate since it was not a normal commercial transaction at open market value, and moreover represented costs incurred by a separate legal entity.

The letter stated that the Commissioners had decided not to direct an alternative special method since they were satisfied that the standard method gave a fair and reasonable result; and, accordingly, the amount of input tax recoverable in respect of taxable supplies made in the UK would fall to be determined under the standard method in Regulation 101.

The Appellants appealed to the Tribunal pursuant to s.83(e) of the 1994 Act, which is as follows:

“83 Appeals

Subject to section 84, an appeal shall lie to a tribunal with respect to any of the following matters…

(e)

the proportion of input tax allowable under section 26;…”

The issues before the Tribunal were as follows. First, was the jurisdiction of the Tribunal “limited”, that is to say was it confined to considering whether, in making the direction to terminate the PESM and to place the Appellants on the standard method, the Commissioners made a reasonable decision, in the sense (which I shall use throughout this judgment) that they did not take into account any irrelevant matters, they took into account all relevant matters, they made no error of law, and came to a conclusion which Commissioners properly directing themselves to the admissible evidence and the case law could have reached, or was it “full”, in the sense that, even if the disputed decision was a reasonable one, the Tribunal should itself decide whether it secured a fair and reasonable attribution of input tax within the meaning of s.26(3) of the 1994 Act? Second, if the Tribunal’s jurisdiction was “limited”, were the Commissioners’ decisions to terminate the use of the PESM and to impose the standard method, reasonable? Third, if the Tribunal’s jurisdiction was “full”, were the Commissioners’ decisions to terminate the use of the PESM and to impose the standard method, correct?

In the Decision the Tribunal determined that its jurisdiction was limited, and that the Commissioners’ decisions were reasonable. The Tribunal further decided that, even if its jurisdiction were full, the decisions of the Commissioners were correct essentially for the reasons given by the Commissioners in their letters of 2 January 2004. The Tribunal, therefore, dismissed the appeals.

On these appeals the Appellants do not challenge the decision of the Tribunal that the PESM did not secure a fair and reasonable attribution of input tax to taxable supplies, and, accordingly the Commissioners were in principle entitled to terminate the PESM. The Appellants claim, however, that the Commissioners were both unreasonable and wrong in law to conclude that, in respect of the Appellants, the standard method in Regulation 101(2)(d) secures a fair and reasonable attribution of input tax to supplies or even that the standard basis secures a fairer and more reasonable attribution than the PESM. The Appellants claim that, in either case, the Commissioners ought not to have terminated the PESM without giving, and ought now to give, notice applying the override provisions in Regulations 102A and 102B. The Appellants further claim that the Tribunal was wrong in law to conclude that its jurisdiction, on the appeals by the Appellants, was limited to consideration of whether the Commissioners had acted reasonably in deciding that the standard method should be substituted for the PESM and terminating the former PESM for that reason.

The issue whether the jurisdiction of the Tribunal was “full” or “limited” in respect of the appeals was addressed in paragraphs 90 to 100 of the Decision. It is an issue on which different conclusions have been reached in different VAT tribunal decisions. In Merchant Navy Officers Pension Fund Trustees Ltdv The Commissioners of Customs and Excise (1996) (tribunal decision 14262) paras 6-10 and 26, Cliff College Outreachv The Commissioners of Customs and Excise (2001) (tribunal decision 17301) paras 34 and 35, University of Exeter v The Commissioners of Customs and Excise (2003) (tribunal decision 18117) at paras 35-38, and Optika Ltd v The Commissioners of Customs and Excise (2003) (tribunal decision 18627) at paras 131-135, the tribunal determined or proceeded by agreement on the basis that it had a full appellate jurisdiction. On the other hand, in J.G. Whitelaw v The Commissioners of Customs and Excise (1989) (EDN/89/28), BMW (GB) Ltd v The Commissioners of Customs and Excise (1997) (tribunal decision 14823) and Aspinall’s Club Ltd v The Commissioners of Customs and Excise (2002) (tribunal decision 17797) the tribunal concluded that its jurisdiction was limited.

The Tribunal in the present case concluded that its jurisdiction was limited on the basis of the reasoning in BMW (GB) Ltd, which, the Tribunal considered, followed the principles established by the Court of Appeal in John Dee Ltd v Customs and Excise Commissioners (1995) STC 941. The Chair of the Tribunal in the present case, Dr Brice, was also the Chair in BMW (GB) Ltd.

In paragraph 94 of the Decision the Tribunal quoted paragraph 62 of BMW (GB) Ltd, which was as follows:

“62.

From the authorities which we have considered we have identified a number of principles. First, there is no right of appeal to the tribunal unless that right is given by statute. Secondly, in considering the extent of the right of appeal it is necessary to look at the statutory provisions which apply to the specific decision being appealed. Thirdly, if the statutory provisions relating to the specific decision being appealed confer a discretionary power on Customs and Excise, then the jurisdiction of the tribunal is limited to determining whether the discretionary power is properly exercised. Fourthly, to decide whether the discretionary power was properly exercised, the tribunal must look at the “statutory condition” (if any) for the exercise of the discretionary power. Fifthly, in examining whether the statutory condition was satisfied, the tribunal must consider whether Customs and Excise acted in a way in which no reasonable panel of Commissioners could have acted, or whether they took into account some irrelevant matter, or disregarded something to which they should have given weight, or whether they erred in law. Sixthly, in considering these matters the tribunal should limit itself to considering facts and matters which were known when the disputed decision was made. And, finally, the tribunal cannot exercise a fresh discretion.”

The Tribunal, having concluded that the effect of Regulation 102 is to confer a discretion on the Commissioners both to approve or direct a special method and to approve or direct its termination, and having noted that the statutory condition for the exercise of the discretionary power is “for securing a fair and reasonable attribution of input tax” within the meaning of s.26(3) of the 1994 Act, concluded that the jurisdiction of the Tribunal was limited to determining whether the discretionary power in Regulation 102 was properly, that is to say reasonably, exercised having regard to the statutory condition in s.26(3). The Tribunal concluded that, accordingly, it should consider whether the Commissioners acted in a way in which no reasonable panel of Commissioners could have acted, or whether they took into account some irrelevant matter, or disregarded something to which they should have given weight, or whether they erred in law. The Tribunal, consistently with a limited jurisdiction, held that it should limit itself to considering facts and matters known when the Commissioners’ decision was made, and that it could not exercise a fresh discretion. The Tribunal’s reasoning was set out in paragraphs 96 and 97 of the Decision as follows:

“96.

Applying those principles to the facts of the present appeal we first look to see if a right of appeal is given by statute. It was agreed that the jurisdiction of the Tribunal in this appeal derived from s.83(e) of the 1994 Act which provides that an appeal shall lie to the Tribunal with respect to “the proportion of input tax allowable under section 26”. Next we look at the statutory provisions which apply to the specific decision being appealed. These are found in regulation 102 which provides that the Respondents “may” approve or direct the use of a special method which has to be used until the Respondents approve or direct the termination of its use. In our view the effect of regulation 102 is to confer a discretion on the Respondents both to approve or direct a special method and to approve or direct the termination of its use. We next look for the statutory condition for the exercise of the discretionary power and, in this appeal, that statutory condition is “for securing a fair and reasonable attribution of input tax” within the meaning of section 26(3).

97.

In our view it follows that the jurisdiction of the tribunal is limited to determining whether the discretionary power in regulation 102 was properly exercised having regard to the statutory condition in section 26(3). We should, therefore, consider whether the Respondents acted in a way which no reasonable panel of commissioners could have acted, or whether they took into account some irrelevant matter, or disregarded something to which they should have given weight, or whether they erred in law. We should limit ourselves to considering facts and matters which were known when the disputed decision was made. And we cannot exercise a fresh discretion. It would be otherwise if there were to be an appeal against a decision relating to the operation of the standard method; there section 83(e) gives the right of appeal but the statutory provisions would be found in regulation 101 where the Respondents do not have a discretion. In such an appeal the Tribunal would have a full jurisdiction.”

In my judgment, the jurisdiction of the Tribunal on the appeals by the Appellants was not a limited jurisdiction.

No such limitation is apparent from the wording of s.83(e) of the 1994 Act, which confers a perfectly general appellate jurisdiction. Any limitation must, therefore, be found by examination of the nature of the decision from which the appeals were brought and the legislative context in which that decision was made.

What was in issue before the Tribunal in the present case was the decision of the Commissioners that the PESM should be replaced by the standard method. It is common ground that Regulation 102(3) confers on the Commissioners a discretion to terminate the use of a special method. It is also common ground, and I hold, that the discretion must be exercised so as to achieve the statutory objective in s.26(3) of the 1994 Act, that is to say to secure a fair and reasonable attribution of input tax to taxable supplies. The issue whether a decision of the Commissioners achieves the s.26(3) objective is, on the face of it, perfectly susceptible to a full appellate review.

The Tribunal appears to have concluded, on the basis of John Dee Ltd and the analysis of that case in BMW (GB) Ltd, that, since Regulation 102 confers a discretion on the Commissioners whether to approve or direct a special method and to approve or direct the termination of its use, the jurisdiction of the Tribunal was a limited one. In my judgment, there is nothing in John Dee Ltd which leads to that conclusion. In that case, the Commissioners were concerned about apparent links between the taxpayer company and a group of companies in respect of which receivers had been appointed and which had very substantial indebtedness, including arrears of VAT. The Commissioners served a notice under paragraph 5(2) of Schedule 7 to the Value Added Tax 1983 (“the 1983 Act”), requiring the taxpayer company to provide security as a condition of its making supplies. Those statutory provisions were as follows:

“Where it appears to the Commissioners requisite to do so for the protection of the revenue they may require a taxable person, as a condition of his supplying goods or services under a taxable supply, to give security, or further security, of such amount and in such manner as they may determine, for the payment of any tax which is or may become due from him.”

The taxpayer company appealed under s.40(1) of the 1983 Act. The question arose as to the approach of the tribunal on any such appeal. Neill LJ, with whom the other members of the Court of Appeal agreed, said that, in determining the powers of a tribunal, it is necessary in each case to examine the nature of the decision against which the appeal is brought. Rejecting the argument that, once the tribunal had decided that the decision of the Commissioners was flawed, it could substitute its own discretion, Neill LJ said, at p.952, that the “statutory condition” which the tribunal had to examine in an appeal under s.40(1)(n) was whether it appeared to the Commissioners requisite to require security. It was in that context that he held that the tribunal had to consider whether the Commissioners had acted in a way in which no reasonable panel of Commissioners could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight or had erred on a point of law; and that the tribunal could not exercise a fresh discretion. Further, Neill LJ added, at p. 952 j, that he did not consider that it was necessary or would be appropriate to give guidance as to other categories of appeal under s.40 (1), “other than to say that … the function and powers of a tribunal in each case will depend in large measure on the nature of the decision appealed against and of course on any special statutory provisions.”

The critical feature of John Dee Ltd was that the statutory pre-condition for the imposition by the Commissioners of security was that “it appears to the Commissioners requisite to do so for the protection of the revenue”. In other words, the legislature had expressly conferred on the Commissioners alone, and not on the tribunal or the court, the assessment of whether security was necessary for the protection of the revenue. The discretion conferred by Regulation 102(3) is, however, of a different kind. It must, as I have said, be exercised, and only be exercised, to achieve the statutory purpose in s.26(3) of the 1994 Act. I can discern nothing in the Regulations or in s.26 or in any other part of the relevant legislative framework that confers on the Commissioners alone the right to decide whether a particular method would in fact achieve the s.26(3) objective, to the exclusion of the tribunal on an appeal.

That conclusion on the jurisdiction of the Tribunal is not undermined by the fact that there may be a number of different ways in which the s.26(3) objective may be achieved, and that in every case the task of the Commissioners is to decide, when exercising their discretion under Regulation 102(1) and (3), whether the new method better secures a fair and reasonable attribution, for the purposes of s.26(3), than the existing method. As the tribunal said in Merchant Navy Officers Pension Fund Trustees Ltd at paragraph 26:

“…what is fair and reasonable is not an absolute concept and will frequently depend on the alternatives. It seems to me that when exercising their discretion under regulation 102(3) the Commissioners must consider what alternatives there are to the method proposed or the method to be terminated. The Commissioners would not be using their powers to secure a fair and reasonable attribution if the decision to terminate resulted in the use of a method which is less fair and reasonable. It seems to me that the Tribunal must do the same when exercising a full appellate jurisdiction; indeed the Tribunal would have to do the same if its jurisdiction was limited to considering whether the direction (or refusal to approve or vary a method) was unreasonable in the Corbitt sense. A decision resulting in a method which is less fair and reasonable would itself be unreasonable.”

In MBNA Europe Bank Ltd v HM Revenue and Customs (2005) (tribunal decision 19413) the tribunal, reflecting the same approach, said at paragraph 123:

“…the Merchant Navy tribunal… conceded that any method of trying to gauge the measure whereby supplies used for mixed purposes should be treated as taxable supplies could only be approximate. In those circumstances a practical solution is called for, and there may well be more than one way of arriving at a measure of estimating taxable use, each of which may be capable of producing a fair and reasonable attribution.”

I consider that the views of the tribunals which I have quoted in paragraphs 49 and 50 above reflect the legislative framework which, both under the Sixth Directive and Regulations 101 and 102, envisage a proxy for actual use, unless the tax authorities otherwise direct, and confer on the tax authorities a discretion.

I can see no practical or jurisprudential difficulty in conferring on the tribunal a full appellate jurisdiction to determine, on the basis of all the facts and matters found by it at the time of its decision, whether a decision of the Commissioners under Regulation 102 substitutes, in place of an existing method, a method which secures, or at least better secures, a fair and reasonable attribution of input tax to taxable supplies for the purposes of s26(3) of the 1994 Act. That would be consistent with the unqualified wording of the appeal provisions in s.83(e) of the 1994 Act. It imposes an objective test which, as Mr Peacock observed, is consistent with the provisions of Articles 17 and 19 of the Sixth Directive, and which the tribunal, as a body with the requisite specialist expertise, is well qualified to conduct.

The Appellants contend that the Tribunal was wrong in law to hold that the standard method secures a fair and reasonable attribution of input tax for the purposes of s.26(3). Their primary position on these appeals is that, in those circumstances, the appeals should be allowed, whether or not the standard method secures a fairer and more reasonable attribution than the PESM. Their secondary position is that the standard method does not even secure a fairer and more reasonable attribution of input tax than the PESM, and the appeals should be allowed for that reason. In either case, the Appellants contend, the Commissioners should be left to direct another special method or, as an interim measure (no other special method having been suggested by the Appellants for the consideration of the Commissioners), to apply the override provisions of Regulations 102A and 102B.

The Commissioners’ stance is that, there being no challenge on these appeals to the Tribunal’s conclusion that the PESM did not secure a fair and reasonable attribution of input tax to taxable supplies, there can be no challenge by the Appellants to the standard method, which is the starting or “default” method. Their secondary, alternative, position is that the Tribunal’s decision that the standard method secures a fair and reasonable attribution of input tax for the purposes of s.26(3) is not open to challenge since the Tribunal made no error of law in so concluding. Their third alternative position is that the standard method secures a fairer and more reasonable attribution that the PESM, and accordingly is not open to challenge, the Appellants having failed (prior to the Tribunal’s Decision) to put forward (for tactical reasons) any alternative special method for Commissioners’ consideration.

I reject the Commissioners’ starting position that it is not legally possible for the Appellants to challenge the Commissioners’ decision to move the Appellants to the standard basis even if the standard basis secures a less fair and reasonable attribution than the PESM. The point was elaborated as follows in paragraph 19 of the Commissioners’ written skeleton argument:

“This provides a degree of consistency between the position of someone who proposes an unfair PESM and someone who already operates an unfair PESM. In the latter case if the proposed PESM is not fair and reasonable then the Commissioners are in no position to approve it and the taxpayer must use the standard method. That is because unless a PESM is in place, the standard method is the statutory default method. Once a PESM has been agreed, there should be no unnecessary obstacles to the Commissioners terminating those methods where they are unfair and unreasonable as these methods undoubtedly were. They may only do so prospectively and any restrictions on their ability to terminate unsatisfactory methods risks perpetuating the defects in those methods.”

I reject that analysis in the context of these appeals. A decision by the Commissioners under Regulation 102 to place a taxpayer on a special method or to terminate a special method must be exercised so as to give effect to the statutory purpose in s.26(3) of the 1994 Act. It would not be in accordance with the statutory objective to move the taxpayer to a method which is less capable of achieving that objective than the existing method.

It is necessary, therefore, to consider whether the Tribunal made an error of law in concluding that the standard method does achieve the statutory purpose in s.26(3). If the Tribunal made no error of law, the appeals must be dismissed. I therefore turn to that issue.

The Tribunal concluded, in paragraph 160 of the Decision, that the standard method gives a fair and reasonable attribution of input tax for the reasons given by Mr Bruno Murray Giordan, a Partial Exemption Specialist Officer of the Commissioners. Those reasons were summarised as follows in paragraph 155 of the Decision:

“The reasons why Mr Giordan concluded that it was fair and reasonable for the standard method to apply were: because he considered other special methods, including methods based on transactions, inputs, input tax and staff time, but concluded that the method most reflective of the use of the input tax was the standard method based as it was on output values; because the standard method was simple for the Appellants to operate; because the standard method was simple for the Respondents to verify; because the standard method was based on the use of costs by the individual trader rather than on the activities of other traders; because the standard method produced a result similar to the apportionment for output tax purposes; and because the standard method would adapt to the changing circumstances of each business.”

Mr Peacock attacked, in particular, the first reason (“the method most reflective of the use of the input tax was the standard method based as it was on output values”) and the fifth reason (“the standard method produced a result similar to the apportionment for output tax purposes”) in paragraph 155 of the Decision.

Mr Peacock submitted that neither in theory nor in practice could the standard method be justified by any correlation between the result produced by the standard method and the apportionment for output tax purposes. He emphasised that a significant discrepancy between input and output ratios of taxable/exempt elements is to be expected in the case of the Appellants’ business since a substantial amount of costly professional time is involved in the sale of dispensed items. It was further said, for the Appellants, that the two ratios take account of different factors and measure different things, and accordingly comparison is not like with like. Ms Morris addressed this issue in paragraph 104 of her witness statement as follows:

“The cost structure of Specsavers’ businesses has to be considered. Staff costs will often account for over 50% of the total costs of a Specsavers business. Staff costs are outside the scope of VAT; however as agreed with Customs they do form a large part of the costs included in Specsavers’ spectacle apportionment calculations. Furthermore, the spectacle apportionment ratio was arrived at by expressly excluding all overhead costs from the apportionment calculation. These are the very costs on which the Specsavers PESM is based. Bearing this in mind, it seems logical that the two calculations will give a different result. It is therefore my view that it is neither fair nor reasonable to apportion input tax using a calculation largely based on using non - VATable costs.”

Mr Peacock further criticised the Tribunal for accepting, without analysing the available evidence and reaching a conclusion upon it, the assumption of Mr Giordan that the different parts of the Appellants’ business (exempt and non-exempt supplies and services) would make profits at the same rate. Mr Giordan’s evidence in cross-examination was that his calculations rested on the assumption that the rate of profit and loss on goods and services was constant or nearly constant. He said that it would be completely artificial to divide a profit on a final onward supply between the component parts if you are selling a single thing. He did not ask the SOG whether that assumption was in fact true of its business. Mr Giordan’s assumption was contradicted by Ms Morris in her oral evidence in cross examination. She said, specifically in relation to accountancy costs, that she “would expect the majority of the VAT on …. accountancy fees to relate to goods rather than to the services”. In re-examination she gave evidence that, if overheads were taken into account, a single structure store would typically make a loss on the sale of frames. Mr Giordan said in cross examination that, if his assumption about a constant rate of profit on the different elements of the onward supply was wrong, his reasoning was potentially flawed. The Tribunal reached no finding of fact on those conflicts of evidence.

That assumption of Mr Giordan was part of the analysis and support for the further assumption of the Commissioners that taxable/exempt overheads were consumed in approximately the same proportions as taxable/exempt outputs. In his witness statement, for example, Mr Giordan said as follows:

“99.

The standard method produces a result similar to the full cost outputs apportionment calculation in relation to the sales of dispensed eyewear. Whilst other supplies could distort a value-based method, for instance the sale of accessories and the eye tests, there is no reason to believe this is in fact the case. Even it was, the value of these supplies is a small proportion of the overall total, so that distortion would be minimal. In context of the size of the Individual registrations, this would be insufficient to mean that the standard method did not give a fair and reasonable result.

100.

In paragraph 111 of her witness statement Gillian Morris states that the standard method is a blunt instrument that arbitrarily divides input tax without any consideration as to how that tax is used. I disagree. For the vast majority of partially exempt businesses, the standard method produces a result that reflects the use of the input tax bearing costs. The value of supplies made reflects the use of the taxed cost components of those supplies. This is why it has been adopted as the standard method by the UK. Whilst it will not always achieve this result, it does in the case of the Appellants.”

Mr Giordan was there seeking to meet the contrary evidence of Ms Morris in paragraph 111 of her 1^st witness statement as follows:

“The standard method is a blunt instrument that arbitrarily divides input tax without any real consideration as to how that input tax is used. While it is a convenient method it must surely be preferable for taxpayers to be able to more accurately demonstrate how their inputs are used. As has been explained above, Specsavers’ apportionment of its revenue is based on a calculation using direct costs. The main direct costs involved in this calculation are staff costs which are outside the scope of VAT. It cannot be fair for Specsavers to be asked to apportion their residual input tax on the basis of costs that are not only outside the scope of VAT but bear no relation as to how Specsavers actually spent or used their residual costs.”

Again, Mr Peacock criticised the Tribunal for failing to analyse the conflicting evidence and to reach a conclusion of fact, rather than merely repeating the assumption of the Commissioners as, Mr Peacock says, the Tribunal did in paragraph 143 of the Decision as follows:

“We are of the view that there should be some consistency (although not a complete similarity) between the output tax apportionment and the input tax recovery rate; although they need not give an identical result they should be of a similar order of magnitude. As 85% of each business consisted of the supply of dispensed spectacles and contact lenses it is not unreasonable to assume that most of its overheads would be used to make those supplies in approximately similar proportions. Any difference could be explained by the fact that there was a different output tax apportionment for contact lenses and that there were also wholly taxable supplies (of optical goods) and wholly exempt supplies (eye tests).”

Mr Peacock observed that, at the time of the Commissioners’ decision, none of the large optical businesses were on the standard method.

Notwithstanding all those matters, which were attractively and skilfully advanced by Mr Peacock, on behalf of the Appellants, I am satisfied that the Tribunal made no error of law in concluding, on the evidence before it, that, in the case of the Appellants, the standard method achieves a fair and reasonable attribution of input tax for the purposes of s.26(3) of the 1994 Act.

The principal thrust of the Appellants’ case before the Tribunal was to uphold the PESM, and, on that basis, to challenge the decision of the Commissioners to terminate it. Save for the evidence of Ms Morris, to which I have referred, the Appellants did not lead evidence as to actual use and application of inputs demonstrating that the standard method does not achieve the objective in s.26(3). Mr Owain Thomas, counsel for the Commissioners, observed that Ms Morris’ comments in paragraph 111 of her witness 1^st statement were assertions which were not backed by accounts or the evidence of accountants. So far as concerns her specific evidence about accountancy overheads, he observed that they comprise only 9% of the total overheads, and moreover, evidence in relation to them was given for the first time at the hearing, and was not contained in her witness statements, and was not supported by any accounting or other documentary evidence.

So far as concerns the relative profitability of goods and services, no evidence was produced before the Tribunal by the Appellants as to different profit centres within the Appellants’ business or as to the actual allocation of costs. Further, in my judgment the issue of profitability or loss is of no significance. The critical issue is the use of inputs in the provision of outputs. There is no obvious or necessary correlation between that issue and the issue of profitability or loss.

Further, as Mr Thomas rightly observed, the Commissioners had considerable evidence (oral and written) of the actual use of the SOG’s stores, and made a site visit to the store at Eastbourne. The Tribunal was therefore in a position to form a view about the way in which those stores were actually used. It was entitled to conclude that the Appellants’ shops, and associated overheads of the business, were used by employees predominantly to make exempt supplies. The Tribunal was entitled to conclude that such evidence supported what would, in any event, have been a reasonable starting hypothesis that overheads would be likely to be applied in the provision of exempt and taxable outputs in broadly the same proportions as the direct costs; expressed a different way, as in the Commissioners’ written skeleton argument, in the absence of cogent evidence to the contrary there was no reason for the Tribunal to suppose that direct costs are applied disproportionately for exempt supplies while residual costs are applied disproportionately for taxable supplies. Even accepting Ms Morris’ evidence as to the application of accountancy costs, as I have said, such costs account for only some 9% of the total overheads.In short, on the totality of the evidence before it, the Tribunal was entitled to assume that, as 85% of each business consisted of the supply of dispensed spectacles and contact lenses, most of its overheads would be used to make those supplies in approximately similar proportions as the direct costs attributable to those supplies. The Tribunal was also, in my judgment, entitled to conclude, as it did in paragraph 143 of the Decision, that any difference between the two could be explained by the fact that there was a different output tax apportionment for contact lenses (which it would be reasonable to assume consume some residual cost) and there were wholly taxable supplies (of optical goods and accessories) and wholly exempt supplies (eye tests).

For all those reasons I reject the contention of the Appellants that the Tribunal’s decision was flawed in law in determining that the standard method achieves the statutory purpose in s.26(3). The appeals to this court must therefore be dismissed.

It is not necessary, in the circumstances, to consider the Appellants’ various alternative arguments. For the sake of completeness, however, I should record that I reject the Appellants’ alternative argument that, if the Tribunal erred in law in holding that the standard method did secure a fair and reasonable attribution of input tax, the appeals should be allowed even if the standard method better secures the statutory objective in s.26(3) than the PESM. That argument is not consistent with the statutory objective.

In my judgment, it plainly follows from the Tribunal’s analysis and decision that the standard method better secures the statutory objective than the PESM since it suffers none of the flaws which make the PESM inappropriate. I would, therefore, have dismissed the appeals on that ground in any event.

I further record that, in my judgment, the Tribunal was entitled to conclude, in paragraph 159 of the Decision, that the Commissioners had acted properly in deciding not to exercise their override powers under Regulations 102A and 102B. Mr Giordan gave evidence on this aspect. The Commissioners took the view that the imposition of an override power would have created unreasonable compliance costs for the 460 taxpayers in question. Further, in the case of dual structure companies in the SOG it would have left the problem of the notional re-charge. Under the override provisions, the PESM would have continued, but with the Appellants paying the difference between the PESM and actual use. The override powers are, in any event, as is common ground, an interim measure; and, in the present case, I am not satisfied that it would have provided a method which would have been simple or straightforward or capable of audit by the Commissioners with relative ease. Moreover, as appears from Mr Giordan’s evidence, at the time the override powers were conferred on the Commissioners by Parliament, the Commissioners gave assurances to Ministers that the powers would only be exercised in exceptional circumstances.

For the reasons I have given above I dismiss these appeals.