Jerzynek v Customs and Excise

Factual and Procedural Background

The appellant appealed part of an assessment seeking to recover £1,288 claimed as input tax in the VAT return for the period ending March 2002, which was her first VAT period after registering effective 1 December 2001. The remaining part of the assessment, concerning motor scale charges, was undisputed. The appellant had become proprietor of a furniture retail business on 1 August 2001, transferred from her husband who was not VAT registered. Between 1 August 2001 and 30 November 2001, the appellant traded in the business, purchasing stock and holding stock valued over £20,000 (ex VAT) by 30 November 2001. During this period, she paid £1,288 VAT on rent for business premises. It was undisputed that had she been registered for VAT from 1 August 2001, she could have claimed this amount as input tax because all supplies were taxable at the standard rate and the rent was linked to taxable outputs as a cost component. However, she claimed the amount as input tax under regulation 111(1)(a) of the VAT Regulations 1995, which allows certain pre-registration VAT claims under specified conditions.

Legal Issues Presented

1. Whether the appellant was entitled to claim input tax on VAT paid before registration under regulation 111(1)(a) of the VAT Regulations 1995.
2. Whether the VAT on rent paid before registration was attributable to taxable supplies made after registration, thus qualifying for input tax recovery.
3. Whether the Commissioners had discretion to refuse the claim under regulation 111(1)(a) despite the appellant meeting the regulatory conditions.

Arguments of the Parties

Appellant's Arguments

• The appellant contended that it is not necessary to be a taxable person to make taxable supplies, relying on section 4(2) of the VAT Act which defines taxable supplies as supplies other than exempt supplies.
• She argued that the rent paid before registration related to the business to be carried on after registration and was therefore recoverable under regulation 111(1)(a).
• The appellant asserted that regulation 111(2) excludes only certain pre-registration inputs, and since the rent was not specifically excluded, it remained recoverable.
• She further argued that the silence of regulation 111(2) on services consumed before registration implies services are not excluded, contrasting with the explicit exclusion of goods consumed before registration.
• She relied on the Commissioners’ internal guidance which deems services obtained within six months before registration as relating to business activity carried on at registration.
• Regarding discretion, the appellant contended that even if the Commissioners had discretion to refuse claims, it would be unreasonable to refuse a claim falling within the regulations and published guidance.

Commissioners' Arguments

• The Commissioners argued that input tax claimed pre-registration must be attributable to taxable supplies and cost components of such supplies.
• They contended the rent related to the period before taxable supplies were made and thus was not attributable to taxable supplies, disqualifying it from input tax recovery under regulation 111(1)(a).
• They relied on the case of Schemepanel Trading Ltd v Customs and Excise Commissioners [1996] STC 871 to support their position that input tax is only recoverable where output tax is payable on the related supplies.
• The Commissioners argued that input tax can only be claimed if it is a cost component of taxable supplies by a taxable person.
• They contended that the rent was analogous to goods consumed before registration, which are excluded from input tax recovery under regulation 111(2)(a)(ii).
• They further argued that the use of the word "may" in regulation 111(1)(a) confers a discretion on the Commissioners to refuse claims, which the tribunal could only override if unreasonable.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by examining the statutory framework, noting that only a taxable person can claim input tax under sections 24 to 26 of the VAT Act 1994. Regulation 111(1)(a) provides a special rule allowing some input tax claims for VAT paid before registration. The court interpreted regulation 111(2) as excluding certain pre-registration inputs from recovery but allowing others if they relate to the business carried on or to be carried on at the time of supply.

The court analyzed whether the VAT on rent was attributable to the business and taxable supplies. It found the rent constituted a general and specific overhead for the business, including holding stock for sale after registration and business development. Although some rent related to supplies before registration (excluded by regulation 111(2)(a)(i)), other parts related to the ongoing business and future taxable supplies.

The court reasoned that the exclusions in regulation 111(2)(a) to (d) are alternatives, so the most applicable exclusion should be applied. It favored the six-month limitation in regulation 111(2)(d), consistent with the Commissioners’ internal guidance, which treats services obtained within six months before registration as relating to business activity at registration.

Regarding the Commissioners’ discretion, the court considered the legislative purpose and vires of regulation 111, concluding it is unlikely that an unfettered discretion to refuse claims exists. Even if such discretion exists, it would be unreasonable to refuse the claim here, which falls within the terms of the regulation and the Commissioners’ published guidance.

Accordingly, the court held the appellant was entitled to recover the disputed input tax.

Holding and Implications

The appeal is allowed.

The court held that the appellant was entitled to claim input tax on VAT paid on rent before registration under regulation 111(1)(a) of the VAT Regulations 1995, as the rent related to the business carried on and to be carried on, including taxable supplies after registration. The Commissioners could not reasonably refuse the claim. The decision directs recovery of the disputed amount and orders costs to be determined if not agreed. No new precedent was established beyond the application of existing statutory interpretation and regulatory provisions to the facts of this case.