JP Morgan takes #2m VAT hit

US banking giant JP Morgan has failed to limit its VAT liability after the special commissioners ruled a refurbishment of a subsidiary’s central London office was liable for a tax bill of nearly #2m.

The case, which experts believe will have widespread knock-on effects, shows the entitlement to input credit on the full supply of a service is jeopardised if a member of a VAT group moves out.

Penny Hamilton, Coopers & Lybrand’s VAT partner, said: ‘It is an important tribunal but it is not the end of the story. It relies on two judgements that are going to the House of Lords and could be overturned.’

The two cases – Kingfisher and Thorn Materials – both follow intra-VAT group transactions. Hamilton said all companies in the exempt sector, which includes banks, tried to minimise their VATable supplies and would be disappointed at the result.

Morgan’s dispute with Customs followed the refurbishment of the bank’s offices near Blackfriars Bridge in 1994. A previously dormant company called JP Morgan Trading and Finance (MTF) was put in charge of the refurbishment because it doubted the financial stability of the property developers.

JP Morgan Property Development, a new member of the VAT group, carried out the works. Morgan Guarantee Trust company, a subsidiary that wanted the office space, then set up a series of leases with MTF.

The dispute centred on Section 43 of the VAT Act 1994 which Price Waterhouse, acting for the bank, said was clear in its support of the bank’s case. Chris Tailby, a partner in PW’s Birmingham office, said the law said that supplies within a VAT group will be disregarded for the purposes of VAT.

The commissioners agreed that ‘on first reading the natural and ordinary meaning of the Act, the transaction should be disregarded’.

But they said the transactions went against the spirit of the EU’s Sixth Directive and highlighted another case, called Svenska, which they argued showed ‘an intra-group transaction is not necessarily devoid of VAT consequences’.

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