VAT grouping and time-of-supply rules can trigger input tax clawback on services later treated as partly exempt inputs.

VAT input tax credited on services intended for onward supply could be clawed back under regulation 34 where the time-of-supply rules in regulation 23 deferred the taxable supply until invoice or payment, so the supplies were not yet treated as made when group registration began. The statutory grouping rules then deemed the representative member to carry on the branch business and disregarded intra-group supplies, with the result that later partly exempt outputs were treated as the representative member's outputs. On that reconstructed VAT basis, the earlier inward supplies were treated as used in making exempt supplies after group registration, and the relevant proportion of input tax was recoverable.

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Issues: (i) Whether input tax credited on services intended for onward supply could be clawed back under regulation 34 of the Value Added Tax (General) Regulations 1985 when the onward supply was delayed by the time-of-supply rules and the parties later entered the same VAT group; (ii) whether, after group registration, the inward supplies were to be treated as used or appropriated for use in making exempt supplies so as to trigger repayment of input tax.

Issue (i): Whether input tax credited on services intended for onward supply could be clawed back under regulation 34 of the Value Added Tax (General) Regulations 1985 when the onward supply was delayed by the time-of-supply rules and the parties later entered the same VAT group.

Analysis: The statutory scheme required regulation 34 to be read with regulation 23 and the grouping provision in section 29(1) of the Value Added Tax Act 1983. For continuous supplies of services, regulation 23 postponed the time when the supply was treated as made until payment or issue of a tax invoice. On that footing, the intended taxable supply had not yet been treated as made when group status commenced. The legislation therefore had to be applied on its own artificial VAT assumptions rather than by reference to the commercial reality of earlier physical use.

Conclusion: Regulation 34 was capable of applying on the facts and the clawback provisions were not excluded merely because the services had been physically used before the invoice date.

Issue (ii): Whether, after group registration, the inward supplies were to be treated as used or appropriated for use in making exempt supplies so as to trigger repayment of input tax.

Analysis: Once the London branch became part of the VAT group, section 29(1) treated the business carried on by the branch as carried on by the representative member and disregarded intra-group supplies. Read with regulation 34, this meant that the later partly exempt outputs of the branch were treated as outputs of the representative member. The inward supplies previously credited as input tax were therefore treated, for VAT purposes, as having been used in making partly exempt supplies after group registration. The scheme did not require a separate fresh physical act by the taxpayer; the statutory reconstruction itself supplied the relevant use.

Conclusion: The requirements of regulation 34 were satisfied and the Commissioners were entitled to recover the relevant proportion of input tax.

Final Conclusion: The appeal failed because, on a proper reading of the VAT legislation as a whole, the input tax adjustment provisions applied once the branch joined the VAT group and the supplies were treated as used in making partly exempt outputs.

Ratio Decidendi: Where a VAT statute and regulations require continuous supplies to be treated as supplied only on invoice or payment, and grouping rules deem the representative member to carry on the grouped business, the statutory reconstruction may constitute a later use or appropriation for use of previously credited input tax for the purposes of the clawback provisions.

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