Use-based input tax apportionment valid for foreign supplies; domestic taxable supplies rule did not extend to out-of-country supplies.

The VAT regulations validly created a separate use-based regime for attributing input tax to out-of-country supplies because the Sixth Directive permitted deduction by reference to use. Regulation 32 was therefore not merely ancillary to the general apportionment rule, but a distinct mechanism for foreign and specified supplies. On proper construction, "taxable supplies" in regulation 30 retained its domestic meaning and did not extend to supplies made outside the United Kingdom. As a result, those out-of-country supplies fell within regulation 32, not regulation 30(2)(d), and the taxpayer's challenge failed.

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Issues: Whether regulation 32 of the Value Added Tax (General) Regulations 1985 created a valid separate regime for apportioning input tax attributable to out-of-country supplies, and whether those supplies were to be treated as taxable supplies for the purposes of regulation 30(2)(d).

Analysis: The statutory scheme under the Value Added Tax Act 1983 and the 1985 Regulations distinguished between taxable supplies in the United Kingdom and supplies outside the United Kingdom which would be taxable if made domestically. Article 17(5) of the Sixth Council Directive 77/388/EEC permitted member states to authorise deduction on the basis of use, so the domestic use-based attribution in regulation 32 was not inconsistent with the Directive even though article 19 generally used a value-based formula. Regulation 32 was directed specifically to foreign and specified supplies and was not merely ancillary to regulation 30. On the proper construction of regulation 30, the expression "taxable supplies" retained its domestic meaning and did not extend to out-of-country supplies. Those foreign supplies were dealt with under regulation 32, and "all supplies" in regulation 30(2)(d) did not include them.

Conclusion: Regulation 32 was valid and operated as a separate regime. Out-of-country supplies were not to be treated as taxable supplies under regulation 30(2)(d), and the taxpayer's challenge failed.

Final Conclusion: The appeal failed because the domestic regulations validly applied a distinct use-based method to foreign supplies, leaving regulation 30 to govern domestic taxable supplies only.

Ratio Decidendi: Where the governing directive permits apportionment on the basis of use, domestic regulations may validly create a separate use-based attribution regime for foreign supplies without treating those supplies as taxable supplies for the general value-based apportionment rule.

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