Enterprise Inns Plc and another v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 06 July 2012 |
| Neutral Citation | [2012] UKUT 240 (TCC) |
| Date | 06 July 2012 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2012] UKUT 240 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Newey J.
Andrew Hitchmough and Jonathan Bremner (instructed by Ernst & Young LLP) for the appellants.
Raymond Hill (instructed by the Solicitor to HM Revenue and Customs) for the respondents.
The following cases were referred to:
A1 Lofts Ltd v R & C CommrsUNKVAT [2009] EWHC 2694 (Ch); [2009] BVC 924
Campsa Estaciones de Servicio SA v Administración del EstadoECASVAT (Case C-285/10) [2012] BVC 258
C & E Commrs v Reed Personnel Services LtdVAT [1995] BVC 222
Edwards v BairstowELRTAX [1956] AC 14; (1955) 36 TC 207
Kuwait Petroleum (GB) Ltd v C & E CommrsVAT [2001] BVC 556
Lex Services plc v C & E CommrsUNKVAT [2003] UKHL 67; [2004] BVC 53
Procter & Gamble UK v R & C CommrsVAT [2009] BVC 461
Staatssecretaris van Financiën v Coöperative Aardappelenbewaarplaats GAECAS (Case 154/80) [1981] ECR 445
Tesco plc v C & E CommrsUNKVAT [2003] EWCA Civ 1367; [2004] BVC 3
Value added tax - Land - Option to tax - Pubs containing residential accommodation - Rent partly attributable to residential accommodation - Taxpayers could not waive exemption and pay VAT in respect of residential part - Taxpayers' appeal dismissed - Value Added Tax Act 1994, Value Added Tax Act 1994 schedule 10Sch. 10.
This was an appeal by the taxpayers against a decision of the First-tier Tribunal that part of the rent they received in respect of public houses they owned was attributable to residential areas so that the option to tax under VATA 1994, Sch. 10 was not available in respect of the portion of rent attributable to the residential accommodation.
The taxpayers were companies in the same group. They owned a large number of pubs which were operated on a leased and tenanted basis. The majority of pubs included residential accommodation which was generally occupied by the tenants and their families. The agreements under which pubs were let expressed the rent as a single sum and said nothing about whether the rent was attributable exclusively to the commercial areas or, if not, how it was to be split between commercial and residential areas.
Until 2008, the taxpayers proceeded on the basis that 10 per cent of the rent they received related to the residential areas of their pubs and they therefore accounted for VAT on 90 per cent of the rent. However they subsequently argued that the rent was derived exclusively from the commercial parts of the pubs and that the residential accommodation was provided free of charge. HMRC maintained that the rent related in part to the residential areas. The question whether any of the rent was attributable to the residential areas of the pubs arose because the taxpayers had exercised the option to tax for which VATA 1994, Sch. 10 provided. Transactions involving the leasing or letting of immovable property generally fell within VATA 1994, Sch. 9, Grp. 1 and so were potentially exempt from VAT. Schedule 10 allowed a landowner to waive exemption by opting to tax his land. However, the option was not available in relation to residential property. Where a building was partly residential but not exclusively so, an apportionment had to be made to determine the extent to which it was to be treated as available for election.
The First-tier Tribunal decided that the rent payable for the tenancy of a public house which included residential accommodation was to be apportioned to reflect the standard-rated and exempt elements of the single supply of commercial and residential accommodation. The taxpayers appealed.
Held, dismissing the taxpayers' appeal:
1.The question whether part of the rent was attributable to the residential areas could not necessarily be answered by merely construing the contracts between the taxpayers and their tenants. It was apparent from the contracts that tenants would pay rent in respect of the whole of a pub. However, it did not inevitably follow that rent was to be attributed to every part of a pub. If areas could differ in value, there was no reason why, in an appropriate case, an area might be considered not to have any value at all. The First-tier Tribunal did not need to consider how much rent was to be attributed to the residential areas because it was common ground that, if some rent was attributable to the residential areas, a 90:10 commercial/residential split was appropriate, in accordance with standard practice in the brewing sector.
2.The contracts between the taxpayers and their tenants were not inevitably decisive as to whether part of the rent was attributable to the residential areas. The FTT had not limited itself to considering the contracts. It regarded the contracts as affording evidence that rent was attributable to residential accommodation, but it also referred to other matters (e.g. rent negotiations, documentation issued to tenants and invoices). The FTT had been entitled to regard the contracts as significant. Where a tenancy extended to both residential and commercial accommodation, the rent could ordinarily be expected to relate to the residential areas as well as the commercial ones. Moreover, this was not a case in which the residential areas were inherently valueless. The taxpayers' tenants were said to be making £37,000 or £40,000 equivalent income per annum on the strength of the non-cash accommodation benefit. The fact that tenants were bound to occupy the residential accommodation did not obviously negate its value. A tenant would still be relieved of the need to obtain alternative accommodation.
3.If the contracts between the taxpayers and tenants did not of themselves automatically determine whether rent was attributable to residential areas, it was relevant to consider what both sides, and not merely the taxpayers, would be likely to have intended. It was thus appropriate for the FTT to observe that the taxpayers' evidence of the method for valuing rents of public houses was several steps removed from the actual agreement reached by the parties. It also made sense that the FTT should have highlighted that the taxpayers' assertion that the residential accommodation within public houses was provided free of charge to tenants was not corroborated by documentation issued to tenants. The extent to which intentions were communicated was of obvious significance in the context of an objective inquiry.
4.To say that rent was fixed by reference to profitability was not necessarily to say that the value of residential accommodation was ignored. A prospective tenant considering what share of anticipated profits he would be willing to pay in rent could be expected to take into account the fact that he would receive living accommodation. Accordingly, the FTT's decision could not be impugned by reference to its approach to the tenants' perspective.
5.Invoices to tenants apportioned rent between the commercial and residential areas on a 90:10 basis. The FTT considered that the invoices provided evidence of what had been agreed in relation to the rent. It was open to the FTT to attach weight to the invoices and its view was a reasonable one. In all the circumstances, the FTT had been entitled to arrive at the conclusion that rent was attributable to the residential parts of the pubs and the taxpayers had failed to establish that the FTT's conclusion was one for which there was no evidence or that it was otherwise unreasonable.
1.This case relates to rent which the Appellants, Enterprise Inns plc and Unique Pub Properties Limited, receive in respect of public houses they own. The pubs in question contain both commercial and residential accommodation, and HM Revenue and Customs ("HMRC") maintain that the rent relates in part to the residential areas. The Appellants, on the other hand, argue that the rent is derived exclusively from the commercial parts of the pubs. The issue for the First-tier Tribunal (Judge Michael Tildesley OBE and Mr Roland Presho FCMA) was thus whether any part of the rent was attributable to the residential areas. The Tribunal concluded that it was, but the Appellants appeal against that decision ("the Decision").
2.The question whether any of the rent that the Appellants receive is attributable to the residential areas of their pubs arises because the Appellants have exercised the option to tax for which Value Added Tax Act 1994 schedule 10Schedule 10 to the Value Added Tax Act 1994 ("the VATA") provides.
3.Transactions involving the leasing or letting of immovable property generally fall within Value Added Tax Act 1994 schedule 9 group 1Group 1 of Schedule 9 to the VATA and so are potentially exempt from VAT. Value Added Tax Act 1994 schedule 10Schedule 10 to the VATA allows a landowner to waive exemption by opting to tax his land. The option is not, however, available in relation to residential property. The version of Schedule 10 that was in force up to 31 May 2008 precluded an election to waive exemption being made where a lease related to "a building or part of a building intended for use as a dwelling or number of dwellings" (Value Added Tax Act 1994 schedule 10 subsec-or-para 2paragraph 2(2)(a) of the Schedule). Similarly, the current form of Schedule 10 provides (in Value Added Tax Act 1994 schedule 10 subsec-or-para 5paragraph 5(1)):
An option to tax has no effect in relation to any grant in relation to a building or part of a building if the building or part of the building is designed or adapted, and is intended, for use-
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(a) as a dwelling or number of dwellings ....
4.Where a building is partly residential but not exclusively so, Value Added Tax Act 1994 schedule 8 group 5Note (10) to Group 5 of Schedule 8 to the VATA is in point by virtue of what is now paragraph 32 of Schedule 10. Note (10) states:
Where-
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(a) part of a building that is constructed is designed as a dwelling or number of dwellings …...
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