Robert Gordon's College v Commissioners of Customs and Excise

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE

For the reasons given in the speech to be delivered by my noble and learned friend, Lord Hoffmann, which I have read in draft and with which I agree, I would allow this appeal

I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Hoffmann. I agree with it, and for the reasons he gives I too would allow the appeal.

I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Hoffmann. I agree with it, and would allow the appeal accordingly.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Hoffmann. For the reasons he gives I too would allow the appeal and vary the order as proposed.

Robert Gordon's College is an independent school in Aberdeen. It carries on the business of providing educational services. In 1990–91 it constructed new playing fields and ancillary buildings on land near the College at Countesswells. The charges made by the contractors for their services and materials were subject to value added tax. A person carrying on a business is ordinarily entitled to deduct the tax on goods or services supplied to him for the purposes of his business ("input tax") from the tax payable on the goods or services which he supplies ("output tax"). But the services supplied by the College were educational and therefore exempt: see item 1 in Group 6 of Schedule 6 to the Value Added Tax Act 1983. Consequently, the College's ordinary business had no output tax from which the tax on the cost of the works could be deducted. It was in the same position as a consumer, who has to bear the accumulated tax charged at each stage of the chain of transactions which ends in the supply of goods or services to him.

The College therefore entered into a transaction which was at least in part for the purpose of creating a taxable supply against which the input tax could be deducted. It incorporated a subsidiary called Countesswells Playing Fields Ltd. ("Countesswells") and granted it a lease of the playing fields and buildings for a term of 12 years in return for a premium of £187,000 and an annual rent of £30,000. In return, Countesswells gave the College a licence to use the premises in return for an annual licence fee. The licence was not exclusive: Countesswells retained the right to exploit the property by charging fees for its use by other organisations. But the College was thereby enabled to use the property for the primary purpose originally intended, namely, for the provision of educational services to its pupils. Such user began at the end of 1991, just after the lease and licence had been formally agreed.

Until the Finance Act 1989, the problem for the College with which this transaction was intended to deal would not have arisen. The supply of services or materials in the course of the construction of any building or civil engineering work was zero-rated: see Group 8, items 2 and 3 of Schedule 5 to the Act of 1983, as originally enacted. So was the sale by the builder of the freehold or a long lease in a building he had erected: see item 1. Zero-rating meant that not only was no tax charged upon the supply, but the contractor could obtain repayment of all the value added tax previously paid upon the goods and services which he had acquired for the purposes of the work.

This favourable treatment of the construction industry and its customers was ended in 1989 because it had been held by the European Court of Justice to be in conflict with the Sixth Council Directive of 17 May 1977 (77/388/E.E.C.) on the harmonisation of the laws of the member states relating to turnover taxes. Because variations in the laws relating to taxes on goods and services are capable of distorting trade between member states of the European Union, such taxes have been subject to a series of Directives aimed at progressive harmonisation. The Sixth Directive permitted member states to retain any zero-rating which was in force on 31 December 1975 provided that it satisfied the criteria of being "for clearly defined social reasons and for the benefit of the final consumer." In Commission of the European Communities v. United Kingdom Case 416/85 ( Case 416/85) [1990] 2 Q.B. 130, 149 C-H the European Court of Justice decided that zero-rating of the construction of dwelling houses satisfied these criteria but not the construction of other buildings and works. Parliament was therefore obliged to amend the law to comply with the Directive as construed by the court.

The Finance Act 1989 confined zero-rating to the construction of buildings designed as dwellings or intended to be used solely for residential or certain charitable purposes. Likewise, the sale by the builder of the freehold or a long lease in such buildings remained zero-rated: see Group 8 of Schedule 5 to the Act of 1983, as substituted by section 18 of, and paragraph 1 of Schedule 3, to the Finance Act 1989. The supply of services and materials for the construction of other buildings became subject to tax at the standard rate. Hence the charge upon the construction of the new playing fields for the College. In the case of dealings in land, however, the new provisions were rather more complicated. The grant of a fee simple in new buildings or buildings under construction or new civil engineering works was made subject to tax at the standard rate: item 1 of Group 1 of Schedule 6, as substituted by section 18 of, and paragraph 4 of Schedule 3, to the Act of 1989. But the grant of any other kind of interest in land (such as a long lease) or a licence to occupy land was made exempt: i.e. the grantor was not chargeable to tax but could not recover any of the tax previously paid on the goods or services supplied for the purposes of the construction of the buildings or works. This exemption was in turn subject to a right of waiver contained in paragraph 2 of a new Schedule 6A to the Act of 1983, as inserted by paragraph 6(2) of Schedule 3 to the Act of 1989. Waiver of the exemption brought the grant of an interest less than the freehold (or a licence to occupy) into the charge to tax at the standard rate and carried with it the right to deduct any input tax. The grantor of a lease or licence was therefore in effect given an option to be taxed which he could exercise if it seemed to him advantageous to be able to deduct the input tax.

In the present case, the College elected to waive exemption upon the grant of the lease to Countesswells and Countesswells elected to waive exemption upon the grant of the licence to the College. It is common ground that the effect upon these transactions was as follows. The College became taxable at the standard rate upon the premium and rent payable by Countesswells, but was entitled to deduct the whole of the input tax payable upon the construction works. This was because although the principal business of the College consisted in making exempt educational supplies, the whole of the construction works were comprised in the lease and the cost of those works was therefore exclusively attributable to making a taxable supply. Countesswells in turn was liable to tax on the licence fee paid by the College. Against this tax there could be no deduction because the College used the property under the licence for the purpose of its educational activities, that is, for the purpose of making exempt supplies. Thus although the lease and licence back gave the College a taxable supply against which it could in the first instance deduct value added tax, it would in the end have to pay that tax in the form of a charge on the licence fees from Countesswells. The advantage was to the College's cash flow rather than its ultimate liability to tax.

Thus far, as I have said, there is no dispute about the effect of the transactions between the College and Countesswells. The Commissioners say, however, that a further charge to tax upon the College was triggered when, after the grant of lease and licence, the College began to use the playing fields for its educational purposes. It says that when that event took place, the effect of paragraphs 5 and 6 of Schedule 6A is that the College was deemed to have supplied itself with its interest in the land and buildings for the purposes of its business. This meant that tax was payable upon the whole value of the land and buildings and, since the business for which the supply was deemed to have been made was educational, no input tax would thereafter be deductible.

The relevant parts of paragraphs 5 and 6 read as follows:

"5(1) Paragraph 6 below shall apply on the first occasion during the period beginning with the day when the construction of a building or work within sub-paragraph (2) below is first planned and ending 10 years after the completion of the building or work on which a person who is a developer in...