Trustees of the Nell Gwynn House Maintenance Fund v Commissioners of Customs and Excise

Thursday, 21st December 1995

SIR CHRISTOPHER SLADE

This is an appeal with the leave of the Judge from a judgment of Popplewell J, delivered on the 18th October 1994 and now reported at [1994] STC 995, by which he dismissed the appellants' appeal against a decision of a value added tax tribunal released on 27th June 1994. The issue on the appeal, which we were told could be of wide interest, concerns the liability (if any) to value added tax ("VAT") of the trustees of a maintenance fund, which has been established to provide maintenance services for a block of flats, in respect of the provision of staff employed by the trustees for this purpose and remunerated out of funds provided for the purpose by the lessor and tenants.

The background

The facts are not in dispute. The appellants are the trustees of a fund known as the Nell Gwynn House Maintenance Fund ("the maintenance fund"). They are three partners in the firm of Graham Harvey, solicitors, who were appointed with effect from 1st April 1993 consequent upon the resignation of the previous trustees, Fineman Lever & Company Limited ("Fineman Lever"). The case concerns premises known as Nell Gwynn House ("the building") which is a block containing 435 luxury flats and apartments in Sloane Avenue, London S.W.3. The freeholder is Retac Properties Establishment, which has granted a lease of the whole building to NGH Apartments Limited ("the landlord"). A number of lettings in respect of individual flats and apartments in the building have been made to tenants either by way of lease directly from the freeholder or by sub-lease from the landlord.

Since 6th April 1993, Mr. M.S. Charman has been the General Manager of the building. His duties consist of the overall supervision of its administration and the letting of flats by the lessees. Letting represents an important part of his functions. 270 flats are held on long lease by lessees of the landlord, who have purchased the leases as investments, and 197 of these are let by the General Manager. There are 17 members of staff working in the building, presently under the General Manager's supervision. They include, or have included, a house manager, porters, night supervisor, accounts clerk, bookkeeper, letting clerk, maintenance engineer, head housekeeper and cleaners. Two members of the staff deal with the administration of the letting of flats, by advising tenants and collecting rents.

Both the landlord and the appellants have separate offices in the building. The landlord separately manages about 165 apartments, the letting of which is not the concern of the General Manager or his staff. However, the landlord contributes "service charges" for the maintenance fund in respect of the 165 apartments and these are collected by the General Manager. The General Manager and the staff are and were at all material times employed by the maintenance trustees in their capacity as trustees and are paid from the maintenance fund.

The form of the long leases

The leases granted by the freeholder referred to above are all substantially in the same form and made between the freeholder, the tenant and the maintenance trustees appointed by the freeholder. The most material provisions are set out in Popplewell J's judgment [1994] STC at pages 998-999. Clause 1 contains definitions of (inter alia) "the Maintenance Fund", "the Maintenance Year", "the Maintenance Trustee" (as meaning the maintenance trustee for the time being of the Maintenance Fund) and "the Maintenance Contribution" as, subject to Clauses 5 (F) and (G), meaning

"a sum equal to 1/435th of the aggregate annual maintenance provisions for the whole of the Building for each Maintenance Year (as computed in accordance with the provisions of the Third Schedule)"

By Clause 3 (3) (a), the tenant covenants with the lessor, and also with the maintenance trustee, to pay the trustee the maintenance contribution by two equal instalments in respect of every maintenance year and "a due proportion of any maintenance adjustment pursuant to paragraph (3) of the Third Schedule".

Clause 4 (6) (b) contains a covenant by the lessor with the tenant and the maintenance trustee which in effect obliges the lessor throughout the maintenance period to pay to the maintenance trustee a sum equal to the maintenance contributions which would otherwise be payable in respect of any flat in the building which is either unlet or is let without the tenant being required to pay a maintenance contribution.

Clause 5 (A) requires quotation in full:

"The Maintenance Trustee shall retain out of the sums received by it in respect of the annual maintenance provision aforesaid and the maintenance adjustment its remuneration calculated in accordance with paragraph (2) (b) of the Third Schedule, and adjusted in accordance with paragraph (3) thereof and shall pay the balance into a bank having the status of a trust corporation in an account named "the Nell Gwynn House Maintenance Fund" and shall hold such balance thereinafter called "the Maintenance Fund" which expression includes the assets in the hands of the Maintenance Trustee for the time being representing such fund and the income thereof upon trust (subject to the provisions of sub-clause (B) hereof) to apply the same until the Perpetuity Date for the purposes specified in the Fourth Schedule and subject thereto upon the trust set forth in sub clause (C) hereof."

Clauses 5 (B) and 5 (C) are immaterial for present purposes.

Clause 5 (H) obliges the maintenance trustee to place on deposit at the bank or with a local authority

"sums representing the reserve created pursuant to paragraph 2 (a) (ii) of the Third Schedule and withdraw the same from deposit as required in order to meet the expenses referred to in that paragraph or to meet any temporary deficiency in the moneys available to meet the expenditure referred to in paragraph 2 (a) (i) of that Schedule".

Clause 6 (l) is a provision which entitles the lessor to re-enter if (inter alia) the maintenance contribution is unpaid for 21 days after becoming payable.

The Third Schedule provides for the computation of the annual maintenance provision, which is to consist first (under paragraph (2) (a)) of a sum comprising primarily the expenditure estimated as likely to be incurred in the maintenance year by the maintenance trustee for the purposes mentioned in the Fourth Schedule, together with an appropriate amount as reserve for or towards the matters there mentioned, and secondly (under paragraph 2 (b)) of

"the remuneration of the Maintenance Trustee which shall be an amount equal to 3% of the sum calculated in accordance with paragraph (a) hereof after deducting from the sum calculated in accordance with the said paragraph (a) the remuneration of the Surveyor."

The Fourth Schedule designates the purposes for which the maintenance fund is to be applied. Paragraph (1) states:

"To employ and keep such staff to perform such services as the Maintenance Trustee shall think necessary in or about the Building but so that neither the Maintenance Trustee nor the Lessor shall be liable to the Tenant for any act default or omission of such staff and to use the Maintenance Trustee's best endeavours to keep up an establishment comprising a General Manager, Accounting Secretarial Staff, a Resident Supervisor, a Housekeeper, sufficient porters to provide twenty-four hour porterage at the highest practicable level of luxury together with such Maintenance Staff and Cleaners required to maintain and clean the Building and the equipment therein. So far as possible the duties to be performed by such staff will be designed to provide a complete full time luxury level of Service and will include…"

The matters included are day to day management, cleaning, normal portering services, day to day running and maintenance of the building and (in sub-paragraph (j)):

"the provision of a letting office (through which tenants may arrange fixed term furnished lettings of their flats) including the collection of rent and other payments due thereunder……and the general day-to-day management of such lettings."

A proviso to sub-paragraph (f) provides for the payment by the tenant to the maintenance fund of various sums by way of additional charge in respect of the various functions to be performed by the letting office, including "any value added tax payable [on such sums]". The Lease itself thus contemplates that the services which the maintenance trustees may supply in respect of the letting office may attract VAT. It is common ground that insofar as the letting office provides extra and separate services, these are liable to VAT.

The appointment agreement

On their appointment as trustees of the maintenance fund, the appellants ("the Trustees") entered into an agreement ("the Appointment Agreement") made between the landlord of the first part, the freeholder of the second part and themselves of the third part, by which the obligations of the Trustees under the leases were reinforced by way of a number of direct covenants entered into by them with the...