Thursday Law Report: Housebuilder credited with input tax

18 February 1999

Commissioners of Customs and Excise v Redrow Group plc

House of Lords (Lord Steyn, Lord Goff of Chieveley, Lord Hope of Craighead, Lord Hutton and Lord Millett) 11 February 1999

WHERE A housebuilder paid estate agents' fees charged in connection with sales of the existing homes of purchasers of the housebuilder's houses, it was entitled to be credited with input tax for Value Added Tax purposes in respect of those fees.

The House of Lords allowed the appeal of the Redrow Group plc against a decision of the Court of Appeal that it was not entitled to be credited with input tax in respect of estate agents' fees.

The taxpayer was the representative member of a group of companies involved in constructing new houses. It operated a sales incentive scheme by which it would instruct an estate agent to handle the sale of the existing home of a prospective purchaser of one of its houses. If that purchaser completed the purchase of one of the taxpayer's houses, the taxpayer would pay the estate agent's fee.

The taxpayer deducted input tax in respect of the estate agent's fees, but the Commissioners disputed the deduction.

The taxpayer's appeal against the assessment was allowed by the Value Added Tax Tribunal, which concluded that on the evidence the agents' services were supplied to both the taxpayer and the individual purchasers, although in each particular case it was necessary to await events and see to whom the agent had made the supply, since it was only if the taxpayer became liable to pay the agent's fees that the agent's services were supplied to it.

The Commissioners' appeal to the High Court was dismissed, but that decision was reversed by the Court of Appeal, which held that, in determining whether the tax borne on any services was creditable input tax, the services in question must have a direct and immediate link with the taxpayer's taxable transactions and, viewed objectively, the estate agent's services were directly and immediately linked to the sale of an individual purchaser's home and not to the concurrent sale of a Redrow house. The taxpayer appealed.

Richard Bramwell QC and John Dick (Trowers and Hamlins) for the taxpayer; Paul Lasok QC and Melanie Hall (Solicitor to Customs and Excise) for the Commissioners.

Lord Millett said that in BLP Group plc v Customs and Excise Commissioners [1996] 1 WLR 174 the European Court of Justice had said that in order to give the right to deduct input tax under Article 17(2) of Council Directive (EEC) 77/388, the goods or services referred to in Article 17(5) had to "have a direct and immediate link with the taxable transactions".

The Court of Appeal in the present case had treated that as determinative, not merely of the question whether the agent's service was attributable to the taxpayer's taxable supplies, but also of the identity of the person to whom the supplies were made.

That was, however, a misreading of the decision in the BLP case, in which the taxpayer's claim to deduct tax, which included professional fees in connection with the sale of its shareholding in another company, was refused on the ground that the sale of the shares was an exempt supply. It followed that no part of the cost of the services in question could be attributed to the taxpayer's taxable supplies.

The starting point should be the taxpayer's claim to deduct tax. Once he had identified the payment of which the tax to be deducted formed part, the question was whether he had obtained anything used or to be used for the purpose of his business in return for that payment. That might consist of the right to have goods delivered or services rendered to a third party, and the grant of such a right was itself a supply of services. Those conditions were satisfied in the present case. It was not necessary that there should be "a direct and immediate link" between the service supplied by the agent and sale of a particular Redrow home.