Principal and Fellows of Newnham College v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 March 2006 |
| Date | 24 March 2006 |
| Court | Value Added Tax Tribunal |
Court of Appeal (Civil Division).
Sir Andrew Morritt C, Chadwick and Lloyd L JJ.
David Milne QC and Andrew Hitchmough (instructed by Mills & Reeve, Cambridge) for the appellant.
Philippa Whipple (instructed by the Solicitor for Revenue and Customs) for the Crown.
The following cases were referred to in the judgment:
Brambletye School Trust LtdVAT [2003] BVC 2,015
C & E Commrs v Cantor Fitzgerald InternationalTAX (Case C-108/99) [2001] BTC 5,540; [2001] ECR I-7257
C & E Commrs v Mirror Group plcTAX (Case C-409/98) [2001] BTC 5,547; [2001] ECR I-7175
C & E Commrs v Sinclair Collis LtdUNKTAX [2001] UKHL 30; [2001] BTC 5,284
EC Commission v UKTAX (Case 416/85) [1988] BTC 5,220; [1988] ECR 3127
Halifax plc v C & E CommrsTAX (Case C-255/02) [2006] BTC 5,308
Han & Yau v C & E CommrsUNKTAX [2001] EWCA Civ 1048; [2001] BTC 5,328
Hilton v Plustitle LtdUNK [1988] 3 All ER 1051
Salomon v A Salomon & Co LtdELR [1897] AC 22
Sinclair Collis Ltd v C & E CommrsTAX (Case C-275/01) [2003] BTC 5,318; [2003] ECR I-5965
Sweden v Stockholm Lindopark ABTAX (Case C-150/99) [2001] BTC 5,021; [2001] ECR I-493
Tunstall v SteigmannELR [1962] 2 QB 593
Value added tax - Exempt supplies - Land and property - Anti-avoidance provision - Construction and renovation of library by taxpayer college - Lease of library to subsidiary company - Election to waive VAT exemption - Arrangements for subsidiary to provide library services to taxpayer - Customs disapplying election to waive exemption - Whether taxpayer remaining in occupation of premises after grant of lease - Value Added Tax Act 1994, Sch. 10, Value Added Tax Act 1994 schedule 10 subsec-or-para 2para. 2(3AA).
This was an appeal by the taxpayer against a decision of the VAT and Duties Tribunal ([2005] BVC 2,374) that it was unable to recover the VAT paid on the cost of construction works carried out to rebuild and refurbish its library.
The taxpayer, a college within the University of Cambridge, was a non-profit making body providing educational services to women only. A dispute arose relating to the college library, which had been built in 1897 and extended in 1962. The extension was in a state of disrepair and a decision was made to replace it while retaining the main library, a building of significant historical interest. The new building was designed to be more spacious and to accommodate both college students and outside researchers.
The taxpayer was concerned that VAT on the project costs would be irrecoverable given its exempt status for VAT purposes and it decided to implement a structure to mitigate the cost. This involved the setting up of a subsidiary company and the grant of a lease by the college to the subsidiary. It was intended to waive exemption in respect of the lease so that VAT would be charged on the rent, thereby creating an entitlement for the college to deduct input tax on the construction costs. An agreement for lease was entered into between the college and the subsidiary on 22 February 2001, followed by the grant of a formal lease for 11 years on 1 January 2004 at a basic rent of £165,000 plus VAT per annum. Additional agreements were reached for the sale of books and other library assets to the subsidiary, the secondment of library staff to the subsidiary, and the administration of the library and the management of rare books by the subsidiary.
Customs refused to confirm that the taxpayer's election to waive exemption would not be disapplied under the anti-avoidance provisions in VATA 1994, Sch. 10, para. 2(3AA) and sought to disapply the taxpayer's election.
The taxpayer appealed to the tribunal, contending that supplies under the lease granted to the subsidiary would be standard-rated and the attributable input tax deductible. The taxpayer submitted that, for Customs to succeed, they had to show that it had remained in occupation of the new library building, whereas it was not in occupation, since it used the library pursuant to an agreement between itself and the subsidiary providing for the supply of library services, for which the property was an incidental requirement.
Customs argued that the taxpayer was in occupation of the library building for the purposes of the legislation, since it had a continuing physical presence there, and that para. 2(3AA) was an anti-avoidance provision and the structure implemented by the taxpayer should be considered with that consideration in mind.
The tribunal upheld Customs' decision, holding that the effect of the arrangements was that the taxpayer remained in occupation of the library after the grant of the lease so that the land became exempt land within VATA 1994, Sch. 10, para. 3A(7) so that the taxpayer's election to waive exemption was disapplied and input tax incurred on the refurbishment of the library buildings would be attributable to an exempt supply ([2005] BVC 2,374; Decision No. 18,936). The taxpayer appealed.
Held, allowing the appeal:
1. Council Directive 77/388 permitted an election to waive the exemption which would otherwise be afforded to the letting and leasing of immovable property. Further, the directive permitted a member state to restrict the circumstances in which that election could be exercised. The object of the restriction was to reserve the basic principle that an exempt business should bear input tax on supplies made to it by being denied the opportunity to treat that tax as allowable tax giving rise to a VAT credit. The restriction in para. 2(3AA) sought to achieve that object by denying to an exempt business the option to treat the letting of a building which it would continue to occupy (for the purpose of that business) as a taxable supply.
2. The court's task was to interpret the legislation which had been enacted; having in mind the object for which it had been enacted, but recognising that the extent to which that object had been achieved in the particular case must depend on the legislation itself. The court could not go outside the legislation and had to accept that, if the legislation failed to achieve that object in the particular case, that must be assumed to reflect Parliament's intention that it was not necessary or appropriate to do so.
3. To be in "occupation" of land for the purposes of para. 3A(7) required not only a right to use that land but also some degree of control over what those who were not also in occupation could do on the land. In the absence of any element of control by students and fellows of the taxpayer over access to and use of the library by others, it was impossible to sustain the conclusion that the taxpayer remained in occupation of the library for that reason.
4. It was common ground that the library was under the day to day control of the college librarian and her staff. But for the secondment agreement, occupation would be shared between the subsidiary, as the person entitled to possession under the lease granted by the taxpayer, and the taxpayer, whose staff were present and in control. The term "secondment" took its meaning from the context. It was not a legal term of art. The provisions of the secondment agreement in this case required that, although the librarian's actual duties which were to be carried out were unchanged, during the period of secondment they were to be carried out as librarian for the company rather than as librarian for the college. Her duties as librarian were unchanged, but were no longer to be carried out under the direction of the college council but under the direction of the board of directors of the subsidiary.
5. Under the agreed arrangements, the library staff were to be present in and in control of the library and remained employees of the taxpayer. However, the fact that the library staff remained employees of the taxpayer was not sufficient to support the conclusion that the taxpayer was in occupation of the library. Their presence and control was as persons acting under the direction of the company. It was not, of itself, indicative of presence and control by the taxpayer. (Brambletye School Trust Ltd [2003] BVC 2,015; Decision No. 17,688 distinguished.)
6. The arrangements reflected the true intent of the parties and had to be given the effect which, in law, they had. Those arrangements might be described as contrived or artificial, in the sense that they had no commercial purpose other than to enable the taxpayer to recover input tax, but they could not be treated as a façade. In all the circumstances, the court would set aside the decision of Customs, that the election to waive exemption made by the taxpayer was of no effect by reason of para. 2(3AA).
Chadwick LJ:
[1] This is an appeal from a decision of the VAT and Duties Tribunal (Dr Kameel Khan, chairman, and Miss Sheila Wong Chong FRICS) released on 14 February 2005 ([2005] BVC 2,374). The Tribunal upheld the decision of the Commissioners of HM Customs and Excise that an election to waive exemption made by the Principal and Fellows of Newnham College, Cambridge, under Value Added Tax Act 1994 schedule 10 subsec-or-para 2paragraph 2 of Schedule 10 to the Value Added Tax Act 1994 ("VATA 1994") in respect of land upon which the College proposed to rebuild (in part) and refurbish its library was of no effect by reason of sub-paragraph 2(3AA) of that Schedule. If the decision stands the College is unable to recover the value added tax which it has paid on the cost of the works which it has carried out.
[2] Value added tax ("VAT") is charged on any supply of goods or services made in the United Kingdom which is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him - Value Added Tax Act 1994 section 4 subsec-or-para 1section 4(1) of VATA 1994. "Input tax", in relation to a taxable person, includes VAT on the supply to him of any goods or...
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