Principal and Fellows of Newnham College v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judge | LORD NEUBERGER OF ABBOTSBURY,LORD WALKER OF GESTINGTHORPE,LORD HOPE OF CRAIGHEAD,LORD HOFFMANN,LORD MANCE |
| Judgment Date | 16 April 2008 |
| Neutral Citation | [2008] UKHL 23 |
| Court | House of Lords |
| Date | 16 April 2008 |
[2008] UKHL 23
HOUSE OF LORDS
Appellate Committee
Lord Hoffmann
Lord Hope of Craighead
Lord Walker of Gestingthorpe
Lord Mance
Lord Neuberger of Abbotsbury
Appellants:
Nigel Pleming QC
Philippa Whipple
(Instructed by Her Majesty's Revenue & Customs)
Respondents:
David Milne QC
Andrew Hitchmough
(Instructed by Mills & Reeve LLP)
My Lords,
In 2000, Newnham College decided to build a new library at a cost of about £7.5m. As an educational institution, Newnham makes exempt supplies for the purpose of VAT. Making exempt supplies is all very well for the recipients, because they pay no VAT. It is less attractive if you are the supplier, because you are not credited with the input tax on the goods and services on which you have been charged VAT. For a famously poor women's college, the VAT on the cost of the library was a large sum of money.
The college therefore took advice on a scheme which would enable it to recover the VAT. The first step was to acquire a shelf company and call it Newnham College Library Company Ltd ("the company"). The college held all the shares and members of the college formed the board of directors. On the completion of the new library, the college leased it to the company for a term of 11 years at a reviewable rent of £165,000 a year. That in itself would have done the college no good, because a lease of land is also an exempt supply. However, the Sixth Directive, which requires member states to exempt leases, also gives them an option to allow taxpayers a "right of option for taxation": article 13C(a). The United Kingdom has availed itself of this option in paragraph 2 of Schedule 10 to the Value Added Tax Act 1994:
"Subject to sub-paragraph.…[(3AA)]…below, where an election under this paragraph has effect in relation to any land, if and to the extent that any grant made in relation to it at a time when the election has effect by the person who made the election…would (apart from this sub-paragraph) fall within Group 1 of Schedule 9, the grant shall not fall within that Group."
The college gave notice of election under this paragraph. The intention was that the lease to the company would thereby become a taxable supply and the college would be entitled to recover all the input tax attributable to making that supply, namely, the VAT on the cost of building the library.
This was the essence of the scheme, but it was complicated by the need to achieve two potentially conflicting objectives. The first was that notwithstanding the lease which granted exclusive possession of the library to the company, the senior and junior members of Newnham had to be able to go on using it in much the same way as before. The second was that the arrangements should not fall foul of various anti-avoidance provisions which had been introduced into Schedule 10 to counteract certain schemes of this kind.
The relevant provisions were inserted into Schedule 10 by section 37 of the Finance Act 1997:
"2 … (3AA) Where an election has been made under this paragraph in relation to any land, a supply shall not be taken by virtue of that election to be a taxable supply if—
(a) the grant giving rise to the supply was made by a person ('the grantor') who was a developer of the land; and
(b) at the time of the grant, it was the intention or expectation of… the grantor…that the land would become exempt land (whether immediately or eventually and whether or not by virtue of the grant) or, as the case may be, would continue, for a period at least, to be such land….
"3A …
(7) For the purposes of paragraph 2(3AA) above and this paragraph land is exempt land if, at [the relevant] time …—
(a) the grantor…or
(c) a person connected with the grantor…
is in occupation of the land without being in occupation of it wholly or mainly for eligible purposes.
(8) For the purposes of this paragraph…a person's occupation at any time of any land is not capable of being occupation for eligible purposes unless he is a taxable person at that time.
(9) …a taxable person in occupation of any land shall be taken for the purposes of this paragraph to be in occupation of that land for eligible purposes to the extent only that his occupation of that land is for the purpose of making supplies which—
(a) are or are to be made in the course or furtherance of a business carried on by him; and
(b) are supplies of such a description that any input tax of his which was wholly attributable to those supplies would be input tax for which he would be entitled to a credit.…
(13) For the purposes of this paragraph a person shall be taken to be in occupation of any land whether he occupies it alone or together with one or more other persons and whether he occupies all of that land or only part of it."
These are very detailed provisions but the issue to which they give rise in this case is relatively straightforward. The college, as grantor of the lease, was the developer of the land. If, since the grant of the lease, it has been "in occupation" of the library within the meaning of paragraph 3A(7), the library is "exempt land" as defined in that paragraph and the grant of the lease is not a taxable supply. So the question is whether the college is "in occupation" of the library, either alone or together with the company.
It is important to emphasise the narrow scope of the issue before the House. At no stage has it been argued by the Commissioners that the company is "a person connected with the grantor" within the meaning of paragraph 3A(7) and that the company's occupation for ineligible purposes makes the library exempt land. Nor have the Commissioners attempted to rely upon any general overarching anti-avoidance principle. In Halifax plc v Customs and Excise Commissioners( Case C-255/02) [2006] STC 919 the European Court of Justice, in three cases bearing some resemblance to this one, propounded a general anti-avoidance principle based upon the civilian doctrine of "abuse of rights":
"69 The application of Community legislation cannot be extended to cover abusive practices by economic operators, that is to say transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law…
70 That principle of prohibiting abusive practices also applies to the sphere of VAT…
74 [But] it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
75 Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage…
76 It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether action constituting such an abusive practice has taken place in the case before it …"
This judgment was delivered on 21 February 2006, a week after this case had been argued in the Court of Appeal. But, as Chadwick LJ noted in his judgment delivered on 24 March 2006, the Commissioners expressly disclaimed reliance upon this principle and they have maintained this position before your Lordships. They say that they wish to test the efficacy of the existing anti-avoidance provisions. I therefore do not invite your Lordships to speculate on whether the Halifax principle would have applied.
The question, therefore is whether the college is in occupation of the library. For this purpose one must, I think, begin by considering what the statute means by "occupation". It has often been remarked that this is a word which can mean different things in different contexts: see, for example, Viscount Cave in Madrassa Anjuman Islamia v Johannesburg Municipal Council [1922] 1 AC 500, 504 ("a word of uncertain meaning") and Lord Mustill in Southern Water Authority v Nature Conservancy Council [1992] 1 WLR 775, 781. I start, therefore, with the context in which the word is used.
Paragraph 2 of Schedule 10 operates as an exception to the general provision in Group 1, paragraph 1 of Schedule 9 which provides that "the grant of any interest in or right over land or of any licence to occupy land" shall be an exempt supply. The election under paragraph 2(1) of Schedule 10 has effect only if the grant would otherwise have fallen within paragraph 1 of Group 1. This context suggests that a "licence to occupy" in Schedule 9 and "occupation" in Schedule 10 refer to the same concept.
On the question of what amounts to a licence to occupy within Schedule 9, we have the recent guidance of the Court of Justice in Sinclair Collis Ltd v Customs and Excise Commissioners ( Case C-275/01) [2003] STC 898. The question in this case was whether the grant of a right to maintain a cigarette vending machine in a public house was a "letting of immovable property" within article 13B (b) of the Sixth Directive. This concept had been transposed in Schedule 9 to include a "licence to occupy land". The Court of Justice decided that it was not. It stated the principle at pp. 909-910, para 25:
"The fundamental characteristic of a letting of immoveable property for the purposes of article 13B(b) of the Sixth Directive lies in conferring on the person concerned, for an agreed period and for payment, the right to occupy property as if that person were the owner and to exclude...
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