West Lothian College SPV Ltd v The Commissioners of Customs and Excise, V 18133
| Jurisdiction | UK Non-devolved |
| Judge | T Gordon COUTTS QC |
| Judgment Date | 12 May 2003 |
| Respondent | The Commissioners of Customs and Excise |
| Appellant | West Lothian College SPV Ltd |
| Reference | V 18133 |
| Court | First-tier Tribunal (Tax Chamber) |
18133
Input Tax – attribution – Building works and Maintenance Contracts under a single contractual arrangement under P.F.I. rules – whether input tax on construction costs partly attributable to Maintenance Contract – whether Maintenance Contract “ancillary” or has direct and immediate link with the construction costs. Appeal Allowed.
WEST LOTHIAN COLLEGE SPV LTD Appellant
- and -
Tribunal: (Chairman) Mr T Gordon Coutts, QC
(Members) A W B Voge, CA., FTII
Mrs Helen Dunn, LL.B.
Sitting in Edinburgh on 8 and 9 April 2003
for the Appellants Colin Tyre, QC
for the Respondents James Campbell, QC
© CROWN COPYRIGHT 2003.
Introductory
The Appellants appeal is against a decision contained in a letter from the Respondents date 27 March 2002 ruling that VAT on costs in relation to the construction of the West Lothian College Buildings could not be treated as residual for VAT purposes. The sum in dispute is approximately £1m. In brief, the Appellants contention was that the building would be used for both exempt and taxable purposes. The Commissioners contentions were firstly that there was only one exempt supply which consisted of a principal supply and various ancillary supplies or, alternatively, that there was no direct and integral link between the building costs and the management services therein and that accordingly input tax in respect of the construction costs of the college is only attributable to an exempt supply.
Evidence
The Tribunal had before it documentary evidence and also a written statement and oral evidence from Steven Brown Solicitor. Mr Brown was personally involved with the project under discussion at all stages and was responsible for all legal advice provided in connection with that project. Mr Brown’s written statement was treated as his evidence in chief, which he supplemented in chief and cross. He was a clear and fully informed witness. His expertise was unquestioned and he presented the factual situation with fairness and care. Since the transaction which the Tribunal had to consider was factually and contractually complicated it is necessary that the background be set out at this stage by summarising the essential features of the transactions as spoken to by Mr Brown.
PFI contract negotiation generally
The PFI was introduced by the Government with the stated intention of driving out better value from the procurement of capital projects carried out by the public sector. This was to be achieved through the transfer from the public sector of risk arising from time, and also cost overruns in relation to each of the initial construction costs, maintenance and the provision of services during the life of the project. All these risks were to be transferred to the private sector contractor so allowing the public sector body accurately to budget for the long term cost of a proposed development within the approval granted by central government.
Prior to approval being granted for any PFI arrangement it must be established that it will cost less than the traditional design and build method of procurement in terms of both immediate affordability, i.e. cash paid out annually, but also in terms of overall value for money. A proposed PFI project will be assessed by reference to the net present value over 60 years, including the initial construction costs and then subsequent running costs as provided for in the contracts. These are then compared to the Public Sector Comparator (PSC) which contains equivalent predicted costs of procurement by the traditional method. While the PFI costs are largely fixed, the PSC costs are predicted, and therefore not certain.
PFI contract tenders specify precisely what is required of the contractor in considerable detail. It is not open to the tendering contractor to alter the scope of the specification either during the tendering or negotiation process or subsequently. The contract may provide for alteration of the detailed provision during negotiations, but only if the public authority requests it and only if it does not affect the substance.
Tendering process for the West Lothian Project:
During 1990 the Board of Management of West Lothian College (“the College”) published a preliminary briefing setting out their vision for the replacement of their Bathgate Campus. The document identified a desire that the new campus would be constructed, maintained and serviced under the proposals.
At the time of the preliminary briefing the College obtained from central Government an outline business case (OBC) approval for the proposed development. An OBC requires to specify what is proposed, why and how it is to be funded. The College obtained an outline approval only for the construction and maintenance of the new campus buildings due, at that stage, to the traditional public procurement method being the only one available to it at the time. Following OBC approval the College was authorised to negotiate a contract to make the capital expenditure as outlined subject to approval of a final business case (FBC).
In 1994 the College published notification in the Official Journal inviting expressions of interest for a design, build and fund project at Almondvale. However, following the introduction of the Private Finance Initiative by the Government, in October 1995, the original Official Journal notification was withdrawn and replaced by an invitation of expressions of interest for a design, build, fund and operate project.
HBG Construction Ltd responded with an expression of interest. Together with a number of unknown parties HBG Construction Ltd received an Invitation to Negotiate (ITN) together with Instructions to Tenderers and the draft concession agreement. The ITN presents a full statement of the extent of the proposed procurement specifying inter alia, the nature and style of the building, the number of students to be accommodated and the range of services to be supplied. The draft concession agreement is the first draft of the form of contract to be entered. The draft submitted to HBG at that time was and remained substantially in the same format as the Project Agreement which was finally signed.
The ITN specified that the project was to include the construction of the building and the provision of both hard and soft facilities management services. This position is reiterated in clause 2.3 of the Instructions to Tenderers and the Draft Concession Agreement. Hard services are those which are required to be undertaken in order to maintain the fabric, structure and functionality of the building so that it is continuously ‘available’ for use. Effectively, the standard of maintenance is set to ensure that the building never deteriorates and is as new throughout its life. Soft services are those by which the building is operated. An example of the interrelationship between soft and hard services would be that the replacement of a light bulb would be classified as part of the hard service provision, while the cleaning of the light fitting would be part of the soft service provision.
In March 1997 HBG Construction Ltd were appointed as the preferred bidder. West Lothian SPV Ltd (“WLSPV”) and West Lothian SPV Holdings Ltd were formed on 19 February 1999 and 19 March 1999 respectively to facilitate the HBG Group involvement in the project.
Following the appointment of HBG, in April 1997, the College began preparation of, consulted on, and later submitted in completed form, an FBC for approval by central Government. The business case set out exactly how all the requirements for the new building would be met. Prior to FBC approval being granted the proposals were analysed by reference to a number of governmental capital expenditure criteria, including risk transfer. Only once satisfied that the proposal, by reference to the contractual documentation, met the risk transfer and other criteria and in particular the requirements that it be both cheaper and better overall value for money was approval given.
The...
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