© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
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N1. Standard method for partial exemption
IDENTIFYING RESIUDAL INPUT VAT​
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Two kinds
"[26]...Input tax on services may fall within the partial exemption rules, first, where it has a direct link, and is therefore attributable, to both taxable and exempt supplies; or, secondly, where it has a direct link to neither, in other words it is "non-attributable". Both may be described as "residual". The second category, also well-established in the case-law, appears to be more usually (and more helpfully) described by the term "overheads"." (HMRC v. Mayflower Theatre Trust Ltd [2007] EWCA Civ 116, Carnwath LJ)
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(1) Dually attributable: input supplies with a direct & immediate link to both taxable + exempt outputs
"(10) In this regulation “residual input tax” means input tax incurred by a taxable person on goods or services which are used or to be used by him in making both taxable and exempt supplies." (SI 1995/2518, r.101(10))
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- Specific attribution to both proximate and more remote supplies: sufficient link not closest link
"[42] In Dial-a-Phone Ltd v Customs and Excise Commissioners [2004] EWCA Civ 603, [2004] STC 987, this court held, affirming the decisions below, that advertising and marketing costs for the sale of mobile phones were directly and immediately linked both to the sale of airtime contracts, which were taxable supplies, and to the provision of insurance intermediary services, which were exempt. It may be noted that at [74]-[75], Jonathan Parker LJ (with whom Waller and Dyson LJJ agreed) said that a link with one supply may exist even though there may be an even closer link with another supply. What was required was a sufficient link, not the closest link. It therefore did not matter that one supply may be viewed in a commercial sense as secondary to another supply." (Royal Opera House Covent Garden Foundation v. HMRC [2021] EWCA Civ 910, David Richards LJ)
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- Chains of supplies: linking to supplies down the chain
"[90] The UT agreed with the FTT that the sales of tickets and the catering supplies were separate supplies and not links in a chain of transactions. HMRC ran an alternative case that, if there were a direct and immediate link between the Production Costs and the catering supplies, it could only be because the supplies of tickets for performances were promotional of the catering supplies and were thus links in a chain of transactions. By a respondent's notice, HMRC repeat this alternative submission before us.
[91] I am willing to decide this appeal on the same basis as the UT, but I see great force in HMRC's alternative analysis. High Production Costs lead to performances of prestigious and high-quality productions for which customers buy tickets and are thereby encouraged to make use of the catering supplies. This link between the Production Costs and the catering supplies is not perhaps as striking as that between the recreation path and the retail supplies in Sveda or the retail vouchers and newspaper sales in ANL. Nevertheless, if one postulates a situation in which the tickets to performances are supplied free of charge, it would be arguable on the basis of Sveda that a direct and immediate link existed between the Production Costs and the catering supplies, although it would depend on all the circumstances of such a startlingly different counter-factual situation. As in fact the supply of tickets was exempt, such a link could not be made, as passages from Sveda quoted above make clear. However, I do not reach my conclusion on the basis of HMRC's respondent's notice and I need say no more about it." (Royal Opera House Covent Garden Foundation v. HMRC [2021] EWCA Civ 910, David Richards LJ)
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- Input providing the raw content for two supplies is directly attributable to both (show production costs directly attributable to both tickets and programme sales)
"[43] ... I would in any event be prepared to go further, if necessary, and say that, applying the BLP test correctly, the only reasonable view is that there was a direct and immediate link between the production services and the programmes. It is true that the production companies were not directly responsible for the programmes, other than the provision of information. But the productions for which they were responsible, and which provided the subject-matter of the contracts, also provided the subject-matter of the programmes. To that extent, they were as much part of the raw material used in preparing the programmes, as the paper and ink from which they were physically made. That in my view is an objective link, sufficiently close to satisfy the test." (HMRC v. Mayflower Theatre Trust Ltd [2007] EWCA Civ 116, Carnwath LJ)
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- Promotional link not sufficient (show production costs directly attributable to ticket sales but not catering supplies)
"[85] In its decision at [81], the FTT said that, like the programmes in Mayflower, the catering supplies by the ROH were separate supplies, rather than links in the same chain. I will come back to the question of links in a chain but, on the facts, I would observe a clear distinction between the programmes and the catering supplies. This court in Mayflower held that a direct and immediate link existed between the costs of buying in productions and the programmes because the former provided the content for the latter. It was not a promotional link.
...
[88] I accept the criticisms of this approach made by the UT in its decision at [98]. For the reasons given by the UT, there was no direct and immediate link between the Production Costs and the catering supplies." (Royal Opera House Covent Garden Foundation v. HMRC [2021] EWCA Civ 910, David Richards LJ)
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Same applies to general merchandise
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"[49] ... Even if one accepts it, however, the precise nature of the link remains unclear. I infer that the "show-specific" merchandise is part of the production company's general stock, rather than (like the programmes) being produced for the particular production which is the subject-matter of the contract. If that is correct, the tribunal would have been entitled in my view to conclude that the link was not sufficiently direct." (HMRC v. Mayflower Theatre Trust Ltd [2007] EWCA Civ 116, Carnwath LJ)
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- Marketing costs for mobile phone directly linked to sale of phone and provision of insurance intermediary services
"[74] As to Mr Anderson's submissions directed at the factual relationship between the insurance intermediary services and the taxable supplies made by DaP (and in particular his submissions regarding timing), it is important to bear in mind that (as the Advocate-General observed in Abbey National (see paragraph 29 above)) a 'direct and immediate link' may exist between the marketing and advertising costs and the insurance intermediary services despite the fact that there may be an even closer link between those costs and DaP's taxable supplies. In other words, the quest is not for the closest link, but for a sufficient link.
[75] It follows that it matters not that the insurance intermediary services may be viewed as being in a commercial sense secondary to the making of the taxable supplies, or even that they may be provided only after a taxable supply has been made, provided that a sufficient 'direct and immediate link' exists between them and the marketing and advertising costs." (Dial-A-Phone Ltd v. CCE [2004] EWCA Civ 603, Parker LJ)
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- Rugby pitch directly attributable to both tickets and advertising
"[22]... It is our finding that there was a direct and immediate link between the cost of the development of the pitch and the taxable supply of advertising rights..." (Cirencester RFC v. HMRC [2010] UKFTT 453 (TC))
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(2) Overheads: input tax on supplies not directly & immediately linked to any specific outputs
"[34] It follows that the various services acquired by the transferor in order to effect the transfer of a totality of assets or part thereof do not have a direct and immediate link with one or more output transactions giving rise to the right to deduct.
[35] However, the costs of those services form part of the taxable person's overheads, and as such are cost components of the products of a business. Even in the case of a transfer of a totality of assets, where the taxable person no longer effects transactions after using those services, their costs must be regarded as part of the economic activity of the business as a whole before the transfer. Any other interpretation of Article 17 of the Sixth Directive would be contrary to the principle that the VAT system must be completely neutral as regards the tax burden on all the economic activities of a business provided that they are themselves subject to VAT, and would make the economic operator liable to pay VAT in the context of his economic activity without giving him the possibility of deducting it (see, to that effect, Gabalfrisa, paragraph 45). An arbitrary distinction would thus be drawn between expenditure incurred for the purposes of a business before it is actually operated and that incurred during its operation, on the one hand, and, on the other hand, the expenditure incurred in order to terminate its operation.
[36] Thus in principle the various services used by the transferor for the purposes of the transfer of a totality of assets or part thereof have a direct and immediate link with the whole economic activity of that taxable person." (Abbey National Plc C-408/98)
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"[28] ... Thus, in relation to "overheads" which cannot be attributed to particular supplies, it is enough to establish the appropriate link with the "whole economic activity" of the taxable person. This apparent exception to the ordinary rule seems to be justified by the need to ensure that the VAT system is "completely neutral"." (HMRC v. Mayflower Theatre Trust Ltd [2007] EWCA Civ 116, Carnwath LJ)
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ATTRIBUTION OF RESIDUAL INPUT VAT (DOMESTIC SUPPLIES)​
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Provisional standard method calculation​
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- No immediately preceding longer period: taxable supplies/total supplies in period
"(2) Subject to paragraph (8) below and regulation 107(1)(g)(ii), in respect of each prescribed accounting period—
[...]
(d) where a taxable person does not have an immediately preceding longer period and subject to subparagraph (e) below, there shall be attributed to taxable supplies such proportion of the residual input tax as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period." (SI 1995/2518, r.101(2))
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- Early stages/change of activity: alternative to calculate based on intended use
"(2) Subject to paragraph (8) below and regulation 107(1)(g)(ii), in respect of each prescribed accounting period—
[...]
(d) where a taxable person does not have an immediately preceding longer period and subject to subparagraph (e) below, there shall be attributed to taxable supplies such proportion of the residual input tax as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period.
(e) the attribution required by subparagraph (d) above may be made on the basis of the extent to which the goods or services are used or to be used by him in making taxable supplies," (SI 1995/2518, r.101(2) - this will be relevant where the business is relatively new or has recently started making exempt/taxable supplies for the first time)
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- Immediately preceding longer period: choice between preceding period recovery rate or using supplies in period
"(2) Subject to paragraph (8) below and regulation 107(1)(g)(ii), in respect of each prescribed accounting period—
[...]
(f) where a taxable person has an immediately preceding longer period and subject to subparagraph (g) below, his residual input tax shall be attributed to taxable supplies by reference to the percentage recovery rate for that immediately preceding longer period, and
(g) the attribution required by subparagraph (f) above may be made using the calculation specified in subparagraph (d) above provided that that calculation is used for all the prescribed accounting periods which fall within any longer period applicable to a taxable person." (SI 1995/2518, r.101(2))
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- Rounding up (to next whole number or 2dp)
"(5) The percentage shall be rounded up—
(a) where in any prescribed accounting period or longer period which is applied the amount of input tax which is available for attribution under paragraph 2(d), (e) or (g) above prior to any such attribution being made does not amount to more than £400,000 per month on average, to the next whole number, and
(b) in any other case, to two decimal places." (SI 1995/2518, r.101(5))
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Longer period adjustment​
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- Apply standard method to figures for longer period
" (1) Subject to regulation 105A(1)(b), where a taxable person to whom a longer period is applicable has provisionally attributed an amount of input tax to taxable supplies in accordance with a method or treated an amount of input tax as attributable to taxable supplies under regulation 105A(1)(a) or regulation 106ZA(1) and save as the Commissioners may dispense with the following requirement to adjust, he —
(a) shall, subject to sub-paragraphs (b), (c), (d) and (da) below, determine for the longer period the amount of input tax which is attributable to taxable supplies according to the method used in the prescribed accounting periods,
[...]
(d) shall, where he has provisionally attributed residual input tax under regulation 101(2)(f), determine for the longer period the amount of residual input tax which is attributable to taxable supplies using the calculation specified in regulation 101(2)(d) subject to the provisions of regulation 101(3) to (5)" (SI 1995/2518, r.107)
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- Requirement/option to apply use basis for early stage/changed businesses
" (1) Subject to regulation 105A(1)(b), where a taxable person to whom a longer period is applicable has provisionally attributed an amount of input tax to taxable supplies in accordance with a method or treated an amount of input tax as attributable to taxable supplies under regulation 105A(1)(a) or regulation 106ZA(1) and save as the Commissioners may dispense with the following requirement to adjust, he —
[...]
(b)shall, where he has provisionally attributed input tax in accordance with regulation 101(2)(e) in any prescribed accounting period, determine for the longer period the amount of residual input tax which is attributable to taxable supplies on the basis of the extent to which the goods or services are used or to be used by him in making taxable supplies,
(c)may, where he has not provisionally attributed input tax in accordance with regulation 101(2)(e) but was nevertheless entitled to do so, determine for the longer period the amount of residual input tax which is attributable to taxable supplies on the basis of the extent to which the goods or services are used or to be used by him in making taxable supplies,..." (SI 1995/2518, r.107)
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- Include adjustment in last return for longer period/first return for next period
" (1) Subject to regulation 105A(1)(b), where a taxable person to whom a longer period is applicable has provisionally attributed an amount of input tax to taxable supplies in accordance with a method or treated an amount of input tax as attributable to taxable supplies under regulation 105A(1)(a) or regulation 106ZA(1) and save as the Commissioners may dispense with the following requirement to adjust, he —
[...]
(f) shall calculate the difference between the amount of input tax determined to be attributable to taxable supplies under subparagraphs (a) to (e) above and the amounts of input tax, if any, which were deducted in the returns for the prescribed accounting periods, and
(g) shall include any such amount of over-deduction or under-deduction in a return for—
(i) the first prescribed accounting period next following the longer period, or
(ii) the last prescribed accounting period in the longer period,
except where the Commissioners allow another return to be used.
(2) Where a taxable person makes no adjustment as required by paragraph (1) above, the requirement shall be that the adjustment is made in the return for the first prescribed accounting period next following the longer period." (SI 1995/2518, r.107)
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- Or final return
"(3) But where a registered person has his registration cancelled at or before the end of a longer period, he shall account for any adjustment under this regulation on his final return." (SI 1995/2518, r.107)
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EXCLUSIONS FROM THE CALCULATION ​
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(a) Supplies of capital goods used for business​
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- Exclusion for supplies of capital goods
"(3) In calculating the proportion under paragraph (2)(d) or (g) above, there shall be excluded—
(a) any sum receivable by the taxable person in respect of any supply of capital goods used by him for the purposes of his business,..." (SI 1995/2518, r.101(3))
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- Purpose: exclude sales of an unusual nature not using inputs in proportion to turnover generated
"[24] By adopting the provisions of Article 19(2) of the Sixth Directive, the Community legislature thus intended to exclude from the calculation of the proportion the turnover attributable to a sale of goods where that sale is of an unusual nature in relation to the normal activities of the taxable person concerned and does not therefore require the use of goods or services for mixed use in a way that is proportionate to the turnover which it generates. As the Advocate General stated in point 68 of his Opinion, the inclusion of that turnover in the calculation of the deductible proportion would distort the resultant figure in the sense that it would no longer reflect the division of use of goods or services for mixed use as between taxable and exempt activities respectively." (Nordania Finans C-98/07)
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- Cannot exclude sales of goods that are a normal part of business (different meaning of capital goods)
"In those circumstances, the notion of ‘capital goods used by the taxable person for the purposes of his business’ within the meaning of Article 19(2) of the Sixth Directive cannot include capital goods the sale of which is, for the taxable person concerned, in the nature of a normal business activity. For the party concerned, the purchase and subsequent sale of such goods means that it has to use goods and services for mixed use on an everyday basis. Since that sale is part of the normal taxable activities of the taxable person, the turnover attributable to it must be taken into account in the calculation of the deductible proportion in order for that proportion to reflect as accurately as possible the division of use, in respect of those activities, of the goods and services put to mixed use, since otherwise there would be a failure to have regard to the objective of the neutrality of the common system of VAT." (Nordania Finans C-98/07)
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- Does not include sale of goods on termination of leasing contracts
"[26] Therefore, if, as in the case in the main proceedings, the sale, on termination of the leasing contracts, of the vehicles covered by those contracts is in the nature of a normal activity for the taxable person concerned, who carries out that activity by way of business and as a matter of course, it would be contrary to that objective of neutrality if that taxable person were not actually relieved of the portion of VAT imposed on the overall costs incurred to effect that sale and thus to carry on its usual taxable business activity. It follows that the turnover attributable to such a sale cannot be considered to relate to ‘capital goods used by the taxable person for the purposes of his business’ within the meaning of Article 19(2) of the Sixth Directive.
[...]
[29]To exclude generally from the calculation of the deductible proportion goods which are used for the purposes of a business activity and are indeed distinguishable by their durable nature and their value, such that the acquisition costs are not normally treated as current expenditure but are written off over several years, without taking account of the fact that the sale of those goods, at the end of the leasing contracts, is an integral part of the normal activity of the taxable person, would run directly counter to the objective of neutrality of the common system of VAT.
[30] That is why the definition of the capital goods referred to in Article 19(2) of the Sixth Directive, which establishes the specific rules for the calculation of the deductible proportion, is not necessarily the same as that which was used in respect of the application of the general scheme of deduction established by the Second Directive." (Nordania Finans C-98/07)
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(b) Incidental supplies​
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- Exclusion for incidental supplies
"(3) In calculating the proportion under paragraph (2)(d) or (g) above, there shall be excluded—
[...]
(b) any sum receivable by the taxable person in respect of any of the following descriptions of supplies made by him, where such supplies are incidental to one or more of his business activities—
(i) any supply of a description falling within Group 5 of Schedule 9 to the Act,,
(ii) any other financial transaction, and
(iii) any real estate transaction..." (SI 1995/2518, r.101(3))
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- Ancillary transactions of secondary importance in relation to turnover and not part of usual business activity
"[34] ... According to that memorandum, ‘such is the case with sales of capital items and real estate and financial transactions which are only ancillary operations, that is to say are only of secondary importance in relation to the total turnover of the business’. The memorandum stipulates that ‘these factors are only excluded if they are not part of the usual business activity of the taxable person’ (judgment of 29 October 2009, NCC Construction Danmark, C‑174/08, EU:C:2009:669, paragraph 30).
...
[38] Therefore, the concept of ‘ancillary transactions’ refers to certain transactions which are not part of the taxable person’s usual business activity.
...
[43] In situations other than the one set out in the preceding paragraph, the decisive factor is whether or not the real estate transaction was carried out in the context of the taxable person’s usual business activity, a factor which must be assessed by the tax authorities and, where appropriate, by the national courts." (CT C-716/18)
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- Purpose: outputs using very limited inputs distorting calculation
"[23] In that regard, the Court has already held that the purpose of excluding incidental financial transactions from the denominator of the fraction used to calculate the deductible proportion in accordance with Article 19 of the Sixth Directive is to comply with the objective of complete neutrality guaranteed by the common system of VAT. If all receipts from a taxable person’s financial transactions linked to a taxable activity were to be included in that denominator, even where the creation of such receipts did not entail the use of goods or services subject to VAT or, at least, entailed only their very limited use, calculation of the deduction would be distorted (Case C-306/94 Régie dauphinoise [1996] ECR I-3695, paragraph 21)." (Nordania Finans C-98/07)
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"[21] The purpose of excluding incidental financial transactions from the denominator of the fraction used to calculate the deductible proportion in accordance with Article 19 of the Sixth Directive is to comply with the objective of complete neutrality guaranteed by the common system of VAT. As the Advocate General has observed at point 39 of his Opinion, if all receipts from a taxable person's financial transactions linked to a taxable activity were to be included in that denominator, even where the creation of such receipts did not entail the use of goods or services subject to VAT or, at least, entailed only their very limited use, calculation of the deduction would be distorted." (Régie Dauphinoise C-306/94)
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- Unusual transactions which make drastic changes in turnover
"[35]...In accordance with that memorandum, ‘it excludes unusual transactions which may make drastic changes in the turnover within one year’ and ‘it also disregards operations which, as in the case of the transfer of debts, do not indicate the actual size of the undertaking’." (CT C-716/18)
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- Larger income than main activity does not preclude being incidental
"[77] In that regard, it is appropriate to observe that the scale of the income generated by financial transactions within the scope of the Sixth Directive may be an indication that those transactions should not be regarded as incidental within the meaning of the second sentence of Article 19(2). However, the fact that income greater than that produced by the activity stated to be its main activity by the undertaking concerned is generated by such transactions does not suffice to preclude their classification as ‘incidental transactions’ within the meaning of that provision. As the Commission correctly observed, in a situation such as that in the main proceedings, in which the activity of prospecting is profitable in the medium term only or may even prove to be unprofitable and the turnover from transactions in respect of which VAT is deductible may, as a result, be very small, the inclusion of those transactions solely because of the extent of the income they produce would clearly result in distortion of the calculation of the deduction." (EDM C-77/01)
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- Not incidental if a direct, permanent and necessary extension of the usual business activity
"[42] It should be noted that, in respect of the current provisions of Article 174(2) of the VAT Directive, the Court has held that an economic activity cannot be classified as ‘incidental’ if it constitutes the direct, permanent and necessary extension of the usual business activity of the enterprise concerned (see, to that effect, judgment of 29 October 2009, NCC Construction Danmark, C‑174/08, EU:C:2009:669, paragraph 31)." (CT C-716/18)
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- Not incidental if it entails significant use of goods and services subject to VAT
"[31] In that regard, as is apparent from the case-law of the Court in which it took that objective as its basis, an economic activity cannot be classified as ‘incidental’ for the purposes of Article 19(2) of the Sixth Directive if it constitutes the direct, permanent and necessary extension of the business (Case C‑306/94 Régie dauphinoise [1996] ECR I‑3695, paragraph 22), or if it entails a significant use of goods and services subject to VAT (Case C‑77/01 EDM [2004] ECR I‑4295, paragraph 76)." (NCC Construction Danmark A/S C-174/08)
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- Sale of buildings company constructed on its own account not incidental to business of constructing buildings for third parties
"[33] With regard to the fulfilment of the first condition, the sale of buildings that a building company has built on its own account cannot be regarded as an activity incidental to its taxable business activity, which consists of the construction of buildings on behalf of third parties or on its own account. Indeed, as it arises from the same construction activity, it is a direct extension thereof. The general organisation of its activities requires it, from the start and on a regular and permanent basis, to plan the construction of a certain number of buildings on its own account, however few they may be, which it intends subsequently to sell itself. The resulting activity of sales of real estate does not therefore appear to be incidental, but is the necessary consequence of a deliberate intention on the part of the company to develop in the context of its business, the activity of selling buildings which it has constructed on its own account. It contributes to the business objectives of the taxable person and is carried out with a commercial purpose (see, by analogy, EDM, paragraph 67)." (NCC Construction Danmark A/S C-174/08)
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- Loans to subsidiaries incidental if only very limited use of inputs
"[78] It follows from the foregoing that the annual granting of loans by a holding company to companies in which it has a shareholding and placements in bank deposits or in securities such as Treasury notes or certificates of deposit, in so far as those transactions involve only very limited use of assets or services subject to VAT, are to be regarded as incidental transactions within the meaning of the second sentence of Article 19(2) of the Sixth Directive. In that regard, although the scale of the income generated by financial transactions within the scope of the Sixth Directive may be an indication that those transactions should not be regarded as incidental within the meaning of that provision, the fact that income greater than that produced by the activity stated by the undertaking concerned to be its main activity is generated by such transactions does not suffice to preclude their classification as ‘incidental transactions’.
"[79] It is for the national court to establish whether the transactions concerned in the main proceedings involve only very limited use of assets or services subject to VAT and, if so, to exclude interest generated by those transactions from the denominator of the fraction used to calculate the deductible proportion." (EDM C-77/01)
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- Interest received by investing money advanced by customers of property management business not incidental
"[22] However, placements by property management companies are the consequence of advances to them by co-owners and lessees for whom they manage their properties. With the consent of their clients, those companies are able to place these monies for their own account with financial institutions. That is why, as the Court has pointed out at paragraph 18 of this judgment, the receipt of interest from those placements constitutes the direct, permanent and necessary extension of the taxable activity of property management companies. Such placements cannot therefore be characterized as incidental financial transactions within the meaning of Article 19(2) of the Sixth Directive. To take them into account in order to calculate the deductible proportion would not be such as to affect the neutrality of the system of value added tax." (Régie Dauphinoise C-306/94)
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Self-supplies ​
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Securities supplies and dealings with money​
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- Independent calculation
Reg 101(8))
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OVERSEAS SUPPLIES​
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- Outside standard method, recover according to use (unless included in PESM)
"(1) Other than where it falls to be attributed under regulation 101 or a method approved or directed by the Commissioners under regulation 102, subject to paragraph (1A) input tax incurred by a taxable person in any prescribed accounting period on goods imported or acquired by, or goods or services supplied to, him which are used or to be used by him in whole or in part in making—
(a)supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom, or
(b)supplies specified in an Order under section 26(2)(c) of the Act, other than supplies of a description falling within regulation 103A below,
shall be attributed to taxable supplies to the extent that the goods or services are so used or to be used expressed as a proportion of the whole use or intended use.
(1A) In calculating the proportion of any input tax incurred on goods or services used or to be used by a taxable person in making both taxable and exempt supplies which is to be attributed or treated as attributed to taxable supplies, the calculation—
(a)may be based on sectors provided that the calculation reflects the use made of the goods and services in the business and each sector reflects—
(i)the use made of the goods and services in that sector,
(ii)the structure of the business, and
(ii)the type of activity undertaken by that sector; and
(b)must exclude the value of supplies made from an establishment situated outside the United Kingdom where the calculation is not based on sectors." (SI 1995/2518, r.103)
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HMRC may agree method of applying r.103
"[127] In Customs and Excise Commissioners v Liverpool Institute for Performing Arts [2001] UKHL 28 [2001] STC 891, the House of Lords held, by reference to the statutory predecessors to Regulations 101-103, that Regulation 101 was limited in its effect to attribution of inputs to supplies made in the UK ("in-country supplies"), and Regulation 103 to attribution of inputs to foreign supplies ("out of country supplies"). Subject to any Special Method or "PESM" agreed or directed under Regulation 102, Regulation 101 directs a rigid value based formula for apportionment of residual inputs to in-country supplies. By contrast, Regulation 103 directs no formula at all, but simply requires attribution in accordance with use. Regulation 102 expressly permits the rigidity of Regulation 101 to be overridden by a Special Method. It is common ground that the Commissioners' general powers also enable them to agree a particular formula by way of a reasonable proxy for use in relation to out of country supplies under Regulation 103. The difference between the two is that whereas a Special Method replaces the Regulation 101 formula by something else, an agreement in relation to out of country supplies merely implements Regulation 103 in an agreed way." (MBNA Europe Bank Limited v. HMRC [2006] EWHC 2326 (Ch), Briggs J)
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