Commissioners of Customs and Excise v West Yorkshire Independent Hospital (Contract Services) Ltd

JurisdictionEngland & Wales
Judgment Date10 March 1988
Date10 March 1988
CourtCrown Court

Queen's Bench Division (Crown Office List).

Customs and Excise Commissioners
and
West Yorkshire Independent Hospital (Contract Services) Ltd

Mr. John Laws (instructed by the Solicitor for Customs and Excise) for the Crown.

Mr. Roderick Cordara (instructed by A.V. Hammond, Bradford) for the taxpayer.

Before: Henry J.

The following cases were referred to in the judgment:

Craven (H.M.I.T.) v. White TAX[1987] BTC 226

C. & E. Commrs. v. Faith Construction Ltd. TAX[1987] BTC 5111

Edwards (H.M.I.T.) v. Bairstow & Anor. ELR[1956] A.C. 14

Furniss (H.M.I.T.) v. Dawson & Ors. ELRTAX[1984] A.C. 474; [1984] BTC 71

I.R. Commrs. v. Duke of Westminster ELR[1936] A.C. 1

Ramsay (W.T.) Ltd. v. I.R. Commrs. ELR[1982] A.C. 300

Value added tax - Zero-rating - Alteration or enlargement of existing building - Standard-rating from 1 June 1984 - Contract price of hospital extension paid in advance before 1 June 1984 under scheme to take advantage of zero-rating - Whether work in fact paid for in advance - Whether payment should be disregarded for VAT purposes - Value Added Tax Act 1983 section 5 subsec-or-para (1) schedule 5 group 8Value Added Tax Act 1983, sec. 5(1), Sch. 5, Grp. 8, Note (1A).

This was an appeal by the Commissioners of Customs and Excise from the decision of a VAT Tribunal that the cost of building an extension to a hospital was paid for in advance before zero-rating for such work was withdrawn on 1 June 1984.

In late 1983 it was decided to build an extension to a private hospital at a cost approaching £1m. The Chancellor announced in his 1984 Budget speech that the alteration or extension of an existing building, previously zero-rated, would be standard-rated from 1 June 1984. However, work paid for in advance before 1 June, even if it had not been started before that date, would still be zero-rated. The hospital company therefore made the following arrangements with the co-operation of its bankers. Two subsidiaries were incorporated, a building company and a finance company. On 30 May 1984 the hospital company drew a cheque for £1m in favour of the building company in full payment in advance for the building work; the building company lent £1m to the finance company; and the finance company lent £1m to the hospital company. On the same day the building company registered for VAT.

In November 1984 a tender for the work was accepted by the building company and as the work progressed the building company, to meet the stage payments under the building contract, called in the loan to the finance company which in turn called in its loan to the hospital.

An assessment for VAT was raised on the building company by the Commissioners on the ground that the payment of £1m by the hospital company to the building company was not in reality a payment in advance for its services, but that the hospital company paid for the building work when the loans were repaid to meet the stage payments, after 1 June 1984.

The building company appealed to the VAT Tribunal. Having found that the scheme as a whole had been adopted for the sole purpose of avoiding payment of VAT and that the transactions were pre-ordained from the beginning, the Tribunal allowed the appeal on the ground that the three transactions of 30 May 1984 were genuine and the extension work had been paid for on 30 May 1984. The Commissioners appealed to the High Court.

The issues were, first, whether the building company received payment for the extension work within the meaning of the Value Added Tax Act 1983 section 5 subsec-or-para (1)Value Added Tax Act 1983, sec. 5(1) when the hospital company's cheque was credited to its account on 30 May 1984, and second, whether the payment by the hospital company on 30 May and the two loan transactions should be disregarded as steps inserted into a pre-ordained series of transactions which had no commercial purpose other than the avoidance of tax.

The Commissioners contended that the building company received no payment under the contract until it was put in funds to meet the stage payments long after 1 June. "Payment" was an ordinary English word understood by laymen as money received by the payee without fetter. Here, pursuant to the scheme, the building company lent the £1m to the finance company, receiving nothing to increase its liquidity until the stage payments were made. The words "receives…payment" inValue Added Tax Act 1983 section 5sec. 5 of the 1983 Act meant the transfer of money from one person to another in circumstances where the future control of the money passed to the payee, excluding cases such as the present where the amount of the payment was loaned back to the payer.

The Commissioners further contended that if the £1m paid to the building company was effectively a payment for the work, the Ramsay principle applied so that the payment should be disregarded: it was one of a pre-ordained series of transactions and had no purpose other than the avoidance of a liability to pay VAT.

Held, dismissing the Commissioners' appeal:

1. Payment for the work was made in advance on 30 May 1984 under a legally binding contract which was not a sham.

2. A construction of "payment" rejecting the lawyer's accurate use of the word and preferring the layman's inaccurate use should not be adopted. A narrow definition of the word, excluding cases where the money was loaned back to the payer and limiting it to the unfettered receipt by the payee would not accord with the well recognised legal concept of a payment. Such a definition would exclude the not unusual case of a loan by a vendor to a purchaser and payment by way of a bill of exchange.

3. The building company relied only on the single event of the payment. The remainder of the "pre-ordained" series of transactions related to what was to be done with the proceeds of payment, but only the fact of payment was significant for VAT purposes. There was thus only a single transaction to be considered. (W.T. Ramsay Ltd. v. I.R. Commrs. ELR[1982] A.C. 300 and Furniss (H.M.I.T.) v. Dawson & Ors. TAX[1984] BTC 71, distinguished; I.R. Commrs. v. Duke of Westminster ELR[1936] A.C. 1 and C. & E. Commrs. v. Faith Construction Ltd. TAX[1987] BTC 5111,followed.)

Per Curiam: It was doubtful whether the Ramsay principle applied in the field of VAT. It could be dangerous and undesirable to introduce the inevitable uncertainty resulting from the application of the principle into the relative simplicity of the VAT legislation. That was only justified in fields where complex and artificial tax avoidance schemes were to be dealt with.

NOTICE OF MOTION

By a notice of motion dated 1 September 1986 the Commissioners of Customs and Excise appealed against the decision of a VAT Tribunal given on 7 August 1986. The grounds of the appeal were that the Tribunal erred in law:

  1. (2) In holding that the work carried out by the respondent, West Yorkshire Independent Hospital (Contract Services) Ltd., in connection with the building of an extension to a hospital was supplied prior to 1 June 1984 and was chargeable to tax at the zero rate under the provisions of Value Added Tax Act 1983 schedule 5 group 8Sch. 5, Grp. 8 to the Value Added Tax Act 1983.

  2. (3) In failing to hold that such work was supplied after 1 June 1984 and was chargeable to tax at the standard rate.

  3. (4) In holding that a cheque for £1m given by West Yorkshire Independent Hospital plc to the respondent was a genuine transaction and constituted payment for supplies made.

  4. (5) In failing to hold that the transaction involving the passing of the cheque was one which should be ignored in accordance with the principles set out in the speeches of the members of the House of Lords in W.T. Ramsay v. I.R. Commrs. and Furniss (H.M.I.T.) v. Dawson as being a step in a pre-ordained series of transactions or a single composite transaction which step had no commercial purpose apart from avoidance of VAT.

JUDGMENT

Henry J.: The Commissioners bring this appeal from the decision of the Manchester VAT Tribunal whereby the Tribunal allowed the respondents' appeal against assessments contained in a letter of 23 July 1985. The appeal lies on a point of law only.

The facts of the matter are these. The clinic is a private hospital, run by the West Yorkshire Independent Hospital plc ("the hospital company"). In late 1983 they decided to build an extension to the clinic, and by March 1984 sketch plans had been prepared, and it was recognised that the works would cost at least £800,000. At this time supplies made in the course of alterations to buildings were zero-rated for VAT purposes.

But the budget changed all that, the Chancellor announcing in mid-March that all such work would become standard-rated with effect from 1 June. There was no chance of any of the proposed work on the extension being done before that date. In their explanatory notice the Commissioners explained: "Work not started before 1 June This is liable to the tax except to the extent that the customer pays before 1 June.," and then later:

Alternatively if your customer agrees to pay for the whole job before 1 June, then the whole job attracts the zero rate.

Wishing to avail themselves of the zero rate while it lasted, the hospital company looked to a method whereby they could pay for the whole contemplated extension before 1 June, that is to say before any of the building work had actually been done. It is stating the obvious to say that to pay 100 per cent of the cost of building works in advance is not only unusual but unheard of, and would certainly not happen between companies at arm's length in any readily imaginable situation.

Before I consider how they set out to achieve this, it is necessary to set out the scheme of the Value Added Tax Act 1983. VAT is charged on the supply of goods or services where that supply is made within the UK by a taxable person in the course or furtherance of any trade or business carried on by him. The time at which that tax must be charged is at the...

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3 cases
  • MacNiven v Westmoreland Investments Ltd
    • United Kingdom
    • Court of Appeal (Civil Division)
    • 23 October 1998
    ...& E Commrs v Faith Construction Ltd TAX[1989] BTC 5121 C & E Commrs v West Yorkshire Independent Hospital (Contract Services) Ltd TAXTAX[1988] BTC 5095 (QBD); [1989] BTC 5121 (CA) Cairns v MacDiarmid (HMIT) TAXTAX[1982] BTC 74; (1982) 56 TC 556 Ensign Tankers (Leasing) Ltd v Stokes (HMIT) T......
  • Commissioners of Customs and Excise v Faith Construction Ltd
    • United Kingdom
    • Court of Appeal (Civil Division)
    • 26 May 1989
    ...(1)sec. 5(1) to secure zero-rating for the alterations. In Faith Construction ([1987] BTC 5111) and West Yorkshire Hospital ([1988] BTC 5095) the contract price was paid under arrangements whereby the same amount was either directly or indirectly lent back forthwith to the building owner or......
  • Nevisbrook Ltd v Commissioners of Customs and Excise
    • United Kingdom
    • Queen's Bench Division
    • 2 December 1988
    ...Commrs. v. Faith Construction Ltd. TAX[1987] BTC 5111 C. & E. Commrs. v. West Yorkshire Independent Hospital (Contract Services) Ltd. TAX[1988] BTC 5095 Dan & Roden (MAN/85/247) No. 2103 Dormers Builders London Ltd. v. C. & E. Commrs. TAX[1988] BTC 5126 Furniss (H.M.I.T.) v. Dawson & Ors. E......

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