Introduction

The case of Temple Finance Limited (TFL) and Temple Retail Limited (TRL) versus The Commissioners for Her Majesty's Revenue and Customs (HMRC) adjudicated by the First-tier Tribunal (Tax Chamber) on January 25, 2016, addresses complex issues surrounding Value Added Tax (VAT) assessments. Central to the dispute were allegations that TRL had supplied services to TFL below their open market value (OMV), potentially allowing the group to unlawfully recover more input tax. Additionally, the appellants contested the timeliness of HMRC's assessments, arguing they were made out of time pursuant to established statutory limits.

Summary of the Judgment

The Tribunal examined three primary decisions made by HMRC:

• A direction under Schedule 6 of the VAT Act 1994, mandating that certain services provided by TRL to TFL be valued at their OMV.
• Assessments for under-declared output tax related to these services.
• Adjustments to TFL's input tax recovery using the Standard Method Override (SMO).

After a thorough analysis, the Tribunal partially allowed the appeal. It determined that the assessments related to Advertising Services were out of time, while those related to Store Services were timely and correct. Additionally, the Tribunal upheld HMRC's approach to partial exemption calculations, rejecting the appellants' preference for the Standard Method over HMRC's Standard Method Override.

Analysis

Precedents Cited

The judgment references several key cases and EU directives that influenced its decision:

• Halifax plc v Customs and Excise Commissioners (Case C-255/02): Established that VAT legislation cannot be extended to cover abusive practices without explicit statutory backing.
• Volkswagen Financial Services Ltd v HMRC [2015]: Clarified the attribution of input tax in partial exemption scenarios, emphasizing the connection between overheads and taxable supplies.
• International Language Centres Ltd v Customs and Excise Commissioners (No. 2) [1983]: Discussed the nature of global assessments and the time limits for making VAT assessments.
• Council Directive 2006/112/EC: Particularly Articles 80 and 72, which lay down rules to prevent VAT evasion by ensuring supplies between related parties are at OMV.

Legal Reasoning

The Tribunal delved into VAT valuation rules, focusing on the necessity to determine whether TRL's charges for Store Services and Advertising Services were at OMV. Utilizing Transfer Pricing methodologies, particularly those outlined by Grant Thornton, the Tribunal assessed whether HMRC's direction under Schedule 6 was justified. The 'shop within a shop' analogy was pivotal in determining that Store Fees charged by TRL were consistent with arm's length principles.

Regarding partial exemption, the Tribunal upheld HMRC's Standard Method Override, finding that the appellants failed to substantiate their claims that the standard turnover-based method was more appropriate. The judgment underscored the importance of accurately attributing input tax to taxable and exempt supplies, aligning with EU directives to maintain fiscal neutrality.

Impact

This judgment reinforces the application of Transfer Pricing methodologies in VAT assessments, especially in intra-group transactions. It underscores the judiciary's reliance on expert reports and established economic principles to ascertain OMV, thereby setting a precedent for future cases involving complex corporate structures and VAT disputes.

Moreover, the decision delineates the boundaries between different aspects of VAT assessment—specifically Schedule 6 valuations and partial exemption calculations—providing clarity on how tribunals should approach simultaneous VAT issues within the same corporate group.

Complex Concepts Simplified

Open Market Value (OMV)

OMV refers to the price that a good or service would fetch in the open market under normal conditions. In VAT terms, when related parties (like TFL and TRL) transact, HMRC scrutinizes whether the prices are set at OMV to prevent tax avoidance through inflated or deflated intra-group prices.

Standard Method Override (SMO)

SMO is a regulatory tool that allows HMRC to adjust a company's input tax recovery beyond the standard turnover-based method if there's evidence that the standard method does not accurately reflect the use of overheads in taxable versus exempt supplies.

Partial Exemption

Partial exemption status allows VAT-registered businesses that make both taxable and exempt supplies to recover input VAT proportionally based on their taxable turnover. Accurate calculation is crucial to ensure compliance and avoid excessive or insufficient input tax recovery.

Conclusion

The Tribunal's decision in Temple Finance Ltd & Anor v Revenue and Customs serves as a significant reference for VAT practitioners dealing with intra-group transactions and partial exemption calculations. By endorsing the use of Transfer Pricing methodologies and reinforcing HMRC's evaluative approaches, the judgment promotes fairness and integrity within the VAT system.

Key takeaways include the necessity for precise documentation and justification of pricing structures within corporate groups, the judiciary's support for methodical economic assessments in VAT disputes, and the clear distinction between different VAT assessment issues within a single case.