Iliffe and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 July 1993 |
| Date | 29 July 1993 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
The following cases were referred to in the decision:
Apple and Pear Development Council v C & E Commrs VAT(Case 102/86) (1988) 3 BVC 274
Battersea Leisure Ltd; C & E Commrs v VAT[1992] BVC 23
Gleneagles Hotel plc VAT(1986) VATTR 196; (1986) 2 BVC 208,108
Hutchison Locke & Monk VAT(LON/88/1028 and LON/89/1763) No. 5212; (1990) 5 BVC 827
Neville Russell (a firm) VAT(1987) VATTR 194; (1987) 3 BVC 611
Professional Footballers' Association (Enterprises) Ltd; C & E Commrs v VAT[1993] BVC 38
Ridgeons Bulk Ltd (No. 2) VAT(LON/90/1702) No. 7655; [1992] BVC 907
Supply - Mortgage interest capping agreement - Taxpayer acquired lease and received payments from vendor to keep interest payments beneath certain level - Whether this amounted to reverse premium - section 3 subsec-or-para (2)Value Added Tax Act 1983. s. 3(2)(b); Directive 77/388, the sixth VAT directive,eu-directive 77/388 article 2(1) article 6(1)art. 2(1) and 6(1).
The issue was whether payments made to the appellants under a mortgage capping agreement supplemental to an agreement for a lease, the amount of which was expressed as being the equivalent of a stated increase in the interest rate on the lessee's (i.e. the appellants') mortgage borrowings, represented the consideration for a supply of services made by the appellants.
The appellant partnership entered into an agreement with East Mercia Developments Ltd (EMDL) under which the partners would acquire a 999 year lease of Unit 11 in a business park at a peppercorn rent. The partnership agreed to make a payment of £86,225 plus VAT to EMDL. This was paid on 5 April 1990, the completion date. At the same time as entering into this agreement the partnership entered into two further agreements with EMDL. One was an agreement that EMDL would pay to the partnership, for the period of two years from completion of the lease, an amount equivalent to the increase between an interest rate of 12.5 per cent per annum on the amount of the borrowings made by the partnership for the purpose of the purchase of Unit 11 under the agreement for the lease, and the actual rate of interest, if higher, on those borrowings. The second agreement was a rental guarantee agreement under which EMDL in effect guaranteed to the partnership the level of rent that it would receive from sub-letting Unit 11 during the two-year period from completion.
The partnership elected to waive exemption in relation to Unit 11 from completion. A number of payments were made to the appellants pursuant to the Mortgage Capping Agreement (MCA) and the commissioners raised an assessment on the basis that tax was due on supplies of services which they considered had been made and in return for which the payments were made.
The tribunal found as facts that the commercial substance of the transaction entered into between the parties was that EMDL undertook:
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1. to complete Unit 11;
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2. to grant a 999-year lease at a peppercorn rent in an agreed form when the building was completed;
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3. to protect the cash outflow of the partnership for the two year period from completion by indemnifying the appellant from any increase in its financing costs on its borrowings in excess of 12.5 per cent per annum; and
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4. to protect the partnership's incoming cash flow on completion of the building by guaranteeing the rental income that the partnership would receive in the two year period from completion.
In addition, EMDL required and took the right to find sub-tenants of Unit 11 as the partnership's agent.
The tribunal further found that, in its turn, the partnership undertook to pay the sum of £86,225 plus VAT and to nominate EMDL as its letting agent. As a matter of commercial substance, on 5 April 1990 in return for the payment of £86,225 the appellant received undertakings that would effectively enable it to acquire Unit 11 and be protected to an extent in respect of its cash flow in and out relating to that property for the two-year period following its completion. The payments giving rise to the assessment under appeal were made by EMDL in performance of the obligation it entered into on 5 April 1990 under the MCA.
The commissioners contended that the MCA, and the payments made under it, constituted an inducement offered to the appellants to enter the transaction, take the lease and get the purchaser to part with his money. The inducement constituted consideration for a supply consisting of the entry into the agreement for lease.
The appellants contended that the liability of the partnership to tax in respect of the sums received from EMDL under the MCA depended upon whether there was any link between the MCA payments and anything done by the partnership.
Held, allowing the taxpayers' appeal.
1. The wording of the definition of a supply of services ineu-directive 77/388 article 6(1)art. 6(1) of the sixth VAT directive, i.e. that it "shall mean any transaction which does not constitute a supply of goods within the meaning of article 5" was somewhat different from that contained in the Value Added Tax Act 1983. The words "any transaction" seemed to require and mean more than the mere entry into a transaction, and while signing an agreement was something "done" for the purpose of section 3 subsec-or-para (2)s. 3(2)(b) of the Value Added Tax Act 1983, it was hard to see it as separate transaction capable of constituting a supply.
2. There was no evidence either in the documents or in the extrinsic evidence of the negotiations of the need for any inducement at any agreed value for the commitment by the partnership to pay the agreed purchase price to EMDL. There was nothing done by the partnership in the form of recognisable commercial services that could be directly, or even indirectly, linked with the MCA other than the payment of the purchase price by the partnership to EMDL. The MCA was simply part of the overall transaction. The entry into the commitment to make the payments by EMDL was simply one other thing done by it in return for the consideration of the payment of the purchase price. The eventual payment of the sums that subsequently became due under that commitment was the carrying out by EMDL of what it undertook to do in return for the consideration constituted by the purchase price. Those payments were not themselves consideration for anything further done by the partnership.
[The tribunal set out the facts summarised above and continued as follows.]
The issue in my judgment is whether the entry into the Mortgage Capping Agreement and the giving of the undertaking by EMDL contained in it or the performance of that undertaking constituted some consideration for a supply by the partnership to EMDL other than the undertaking to pay and payment of the purchase price.
At this point I turn to the basic law. section 1Section 1 [of the Value Added Tax Act] 1983 provides that VAT "shall be charged in accordance with the provisions of this Act on the supply of goods and services in the UK (including anything treated as such a supply)". section 3 subsec-or-para (2)Value Added Tax Act 1983, s. 3(2) provides as follows:
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3(2) Subject to any provision made by [Schedule 2] and to Treasury orders under subsections 3(2) to (6) below-
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(a) "supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;
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(b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.
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Stopping there and without considering any submissions or relevant authorities, it would seem that in this transaction there was one overriding and clear consideration, namely the purchase price paid by the partnership to EMDL and that what was done for that consideration was the completion of Unit 11, the grant of the 999-year lease and the undertaking to supply services by way of indemnities to protect the future cash flow of the partnership. All these were services, or presumably in the case of the grant of the 999-year lease a deemed supply of goods, to be done or provided by EMDL to the partnership. The parties did not choose to apportion specifically any part of the price paid by the partnership to the undertakings in the Rental Guarantee Agreement and the Mortgage Capping Agreement. But as a matter of commercial reality the only thing done in the nature of either giving consideration or a service by the partnership, the only thing which constituted a commercial benefit to EMDL, was the payment of the purchase price of £86,225 (plus VAT). This payment happened effectively at the same time as the undertaking to do it: although in my judgment nothing here turns on the fact that the purchase price was payable and paid immediately on the giving of the undertaking that made it payable. I view the agreement to nominate EMDL as letting agent as not so much a benefit to EMDL but as a precondition required for the commitment by EMDL under the Rental Guarantee Agreement. The fulfilment of those undertakings by EMDL did not require the partnership to do anything that might normally be regarded as the performance of a further service or provision of a further benefit. EMDL simply had an obligation to perform the undertaking that it had incurred.
Mr Topping [for the commissioners] submitted that the Mortgage Capping Agreement and the payments under it were an inducement to the partnership to purchase Unit 11, and that accordingly the payments were consideration for the entry into the Agreement for Lease by the partnership and that such action by the partnership was to be treated as a service supplied for the consideration constituted by the payments. On my suggestion that the reality was one purchase price paid for several services to be provided by EMDL he submitted that I should treat the transaction as one matter and should not dissect it into various services...
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