Rotherham Golf Academy Ltd v Revenue & Customs [2009] UKFTT 57 (TC)

FTT-Tax
Rotherham Golf Academy Ltd v Revenue & Customs
[2009] UKFTT 57 (TC) · 2009-04-24
[1]TC00036 Appeal number MAN/08/0072 VALUE ADDED TAX - exemption - agreements purporting to be leases- held not to be. FIRST-TIER TRIBUNAL TAX ROTHERHAM GOLF ACADEMY LTD Appellant - and - THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS (VAT) Respondents TRIBUNAL: Richard Barlow Sitting in public in Manchester on 16 February 2009 Jeremy Woolf of counsel instructed by Barber Harrison and Platt accountants for the Appellant Richard Chapman of counsel instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents © CROWN COPYRIGHT 2009 DECISION This is an appeal against assessments totalling £37,636 for prescribed accounting periods ending August 2004 to August 2005 and notices of amendment to VAT returns for prescribed accounting periods ending November 2005 to August 2007. The total amount in dispute is £64,791.36 or thereabouts and as I was asked to give a ruling on a point of law only I will give leave to the parties to revert to the Tribunal if quantum cannot be agreed.[2]The issue is whether the appellant made supplies to the public of services consisting of the use of a golf driving range, which were taxable at the standard rate, as HMRC contend, or whether the appellant's supplies were exempt supplies of rights to occupy the driving range granted to independent third parties who operated the driving range as their businesses and who then made supplies to the public.[3]Mr Andrew Clark, director, gave evidence on behalf of the company and I was referred to correspondence and documents, in particular "lease agreements" and invoices between the appellant and the other parties to the lease agreements as well as to the financial accounts of the appellant. Mr Clark was cross examined and I find the facts to be as follows.[4]The driving range is situated next to a municipally owned golf course in Rotherham and the appellant had acquired, from Rotherham MDC, a 99 year lease of land adjacent to the golf course and developed a driving range which opened for business in 1998. The existing golf professional at the golf course was given the right to operate a shop at the driving range and he employed several staff there. The appellant arranged with the golf professional that his staff would sell tokens for use of the driving range to the public on behalf of the appellant. As the appellant's directors did not live near Rotherham this was beneficial to them. Those staff also picked up the balls and returned them to the driving areas as necessary and, in effect, ran the driving range. Mr Clark described the day to day running of the range as being very straightforward.[5]There came a time when the golf professional's staff sought payment for the extra work involved in, in effect, running the driving range and the appellant decided that the best way to deal with this would be to appoint one of those staff to run the range at any one time and that, as there were four of them, they would rotate quarterly.[6]Mr Clark asserted that his fellow director Mr Mark Jones had " … come up with the idea of granting a lease to the staff. He appreciated that the rental payments should be exempt from VAT. However, it is wrong to suggest that the leases performed no commercial purpose". Mr Clark laid emphasis on the contention that the staff had wanted to be sure what their responsibilities were as well as seeking some payment for what they saw as the extra work of running the range.[7]Later, a well known golf professional called Peter Cowan bought the shares in the appellant and invested in improvements including a teaching facility which was run separately from the driving range. The appellant also now runs the shop and a bar at the premises. The driving range closed while the improvements were made and re-opened in 2004. All of the disputed tax relates to periods after the improvements and re-opening. From that time on the driving range has been operated in a similar way to that already described but some of the parties to the leases have been employees of the appellant rather than of the golf professional at the municipal course and some have been self employed people associated with the teaching facility opened in 2004. Two of them are relatives of Mr Cowan.[8]The relevant terms of the documents which the appellant calls lease agreements are the following:
"This LEASE AGREEMENT is made the … day of … . BETWEEN [name] of PCGA (hereinafter referred to as "
The Lessee") and Peter Cowan Golf Academy [address] (hereinafter referred to as "The Landlord"). DEFINITIONS 'The property' Shall mean the Peter Cowan Golf Academy situated at … and comprising a 32 bay floodlit driving range, car park and associated golf facilities. 'The term' Shall mean a continuous period of 3 months commencing on the date hereof and terminating automatically on the … day of … . 'Hours of business' Shall mean 10am to 10pm Monday to Friday and 9am to 8pm Saturday and Sunday. WHEREBY IT IS AGREED 1. That in consideration of the Lessee paying a rent to the Landlord the Lessee is granted sole unencumbered use of the Property for the duration of this Agreement. 2. The rent payable by the lessee shall equate to 98% of all revenue from the sale of range balls and shall be paid weekly in arrears to the Landlord following submission by the Landlord of the appropriate invoice relating thereto. … 5. The price of a basket of range balls shall be determined from time to time by the Landlord and that such price shall be charged by the Lessee. 6. The Landlord is responsible for maintaining an adequate Schedule of Insurances in relation to the Property. 7. The lessee shall at all times present the Property in a clean and tidy manner and inform the Landlord immediately of any necessary repairs or renewals which are the obligations of the Landlord. 8. The apportionment of operating costs associated with the Property are agreed between the parties and are not governed by this Agreement. 9. The Lessee is responsible for ensuring that the Property is open on a daily basis during normal business hours".[9]Mr Woolf drew my attention to correspondence consisting of a letter from Mr Jones to Customs and Excise dated 8 July 1998 which refers to a telephone call to the enquiry office and asks for confirmation that letting of facilities for sport and physical recreation, being the granting of a lease of a driving range facility to an individual for a continuous period of over 24 hours, would be an exempt supply. The reply was that it would be provided that the lessee had exclusive control of the facilities. Mr Woolf said it was unfair that the commissioners were now assessing on the basis that there were taxable supplies. I do not agree that the correspondence was such as to give the commissioners enough information for any unfairness to arise. The commissioners were simply asked to confirm what the legal position is where a grant of that type is made but that correspondence does not suggest that they were told the details of the leases and the related circumstances. Mr Jones did not give evidence about the content of the conversation with the enquiry office. Mr Woolf also said the commissioners had in effect misled the appellant by their silence, amounting to agreement that the appellant's supplies were exempt, when an officer visited in 2001, again the evidence does not establish exactly what that officer was told on that visit, though the appellant asserts that the officer was shown the leases. Mr Woolf also said that it should have been obvious to the commissioners that the appellant was granting leases because its taxable supplies reduced to virtually nil. I did not understand Mr Woolf to suggest that any such unfairness actually made any difference to the legal position in an appeal before the Tribunal.[10]It is apparent from its terms that the agreement had not been well thought out. The definition of the property suggests that the lessee was given a right to occupy the "associated golf facilities" which are not defined but which could have been taken to mean the teaching facilities, shop, bar and putting course that the appellant had opened next to the driving range. In fact no such thing was intended nor did it happen. The address of the lessee was given as PCGA in the examples I saw. That clearly refers to Peter Cowan Golf Academy (which was the appellant's trading name by then) and is indicative of the fact that the parties were aware of the fact that the lessees were only lessees because of their employment or association with the appellant. Mr Clark was asked what would have happened if a lessee left the employment, or ceased to be self employed and working at the appellant's premises, during the period covered by the agreement. He said that had not happened but that the lease would have come to an end, though clearly that is not provided for in the lease. Asked why the Landlord was responsible for insurance despite the fact that the lessee was supposed to be in occupation of the whole premises Mr Clark was unable to give a satisfactory explanation. The 2% of takings for the range paid to or retained by the lessee was collected together with the 98% supposedly paid to the appellant as rent. It was collected by the staff in the shop and the appellant accounted to the lessees for the 2% due to them by paying that to the lessees rather than the lessees paying the appellant the 98% and retaining the 2%. That was obviously convenient but it is not provided for in the agreement.[11]The commissioners had contended that the appellant had agreed this was a tax avoidance scheme but Mr Woolf took issue with that and as the relevant witnesses were not called I will proceed on the basis that the appellant did not admit the arrangements were a tax avoidance scheme. The appellant's evidence was that although it believed that the arrangements it had with the lessees had a VAT advantage that was not the reason for entering into the arrangements. It has subsequently been said on behalf of the appellant, in correspondence, that the driving range would not be a viable business if it had to charge VAT but Mr Clark said that he did not know that and that it did not form part of the appellant's thinking in setting in place the arrangements.[12]Mr Chapman pointed out that the description of the company's principal activities in the annual accounts for 2005:
"… continued to be the operation of sport and leisure facilities"
. Whilst that clearly omits the letting out of the driving range, which the appellant contends it does, it does encompass the teaching and putting course facilities and I attach little significance to it.[13]The following authorities were cited to me: BLP -v- Customs and Excise [1995] STC 424 , Customs and Excise -v- Reed Personnel Services [1995] STC 588, Express and Echo -v- Tanton [1999] ICR 693 , Eastbourne Town Radio Cars Association -v- Customs and Excise [2001] 1 WLR 794 , Rudolph Maierhofer -v- Finanzamt Augsburg-Land (Case C-315/00), Kieran Mullin -v- Customs and Excise [2003] STC 274 , Ringside Refreshments -v- Customs and Excise [2004] STC 426, Telewest Communications -v- Customs and Excise [2005] STC 481, Lumar Developments Ltd (VAT Case 19729) and Spearmint Rhino -v- Customs and Excise [2007] STC 1252.[14]Several of those authorities were cited only for points of detail or really as examples of how other cases were dealt with on other facts and I do not propose to deal with all of them in detail.[15]The legal principles on which I will decide this case are as follows.[16]Laws J held at page 591g-h of Reed Personnel that, where an issue turns wholly on the construction of a document having legal consequences, the construction of the document is a matter of law but that, given that a supply for VAT purposes is not identical to the performance of a contractual obligation, the true construction of the document may not give the answer to what was the true nature of the supply. If the construction of the document does not give the answer there is a question of fact to be decided. He expanded on this at page 595a-d pointing out in particular that where third parties are concerned it may well be necessary to have regard to all the facts to determine what the true nature of the supply is, always bearing in mind that the application of the statutory provisions to the facts is what determines the issue.[17]In Telewest [86] Arden LJ said :
"… at least where it appears that the relevant transaction is artificially presented by the parties, the Court of Justice will look at the essential features of a transaction in order to identify the reality of the situation. … This approach is consistent with the principle of Community law, which is common ground in this case, that parties cannot mandate the application of a particular Community concept simply by the labels they use"
. That reflects the judgement of the ECJ at [39] in Maierhofer : "… it is appropriate to point out that article 13B(b) of the Sixth Directive defines exempt transactions by reference to the nature of the transactions effected. In order to determine whether a transaction comprises a letting or construction or repair work, account must be taken of its essential features … irrespective of the way in which it might be artificially presented".[18]Generalised appeals to the economic reality of a transaction are not relevant ( Telewest [87]).[19]Applying those principles, I hold that the lease agreements do not provide a basis on which the Tribunal could decide the nature of the transactions in this case without reference to the facts. Firstly the transactions do involve third parties in the sense referred to in Reed Personnel . The customers at the range are in the same position as the Hospitals in Reed Personnel and, although the transactions are very different, the appellant and the lessees can be broadly speaking equated respectively to Reed and the nurses in that case. Secondly the lease agreements do not provide an exhaustive framework for the relations between the appellant and the lessees. The apportionment of operating costs is left to be determined outside the terms of the agreement but, more importantly, the relevance of the apportionment is not even hinted at and indeed it appears that paragraph 8 of the agreement is effectively meaningless. Although paragraph 2 requires the Landlord to produce an invoice nothing is said about how it will know what the takings are in order to do so. The "golf facilities" included in the definition of the property to be let are not defined. Thirdly, although the agreement in called a lease, in reality taken at face value, it is more like a franchise agreement as it purports to grant to the lessees the right or obligation to operate the business.[20]This being a case where the facts have to be considered in order to reach a conclusion about the nature of the supply I find as follows. Although the agreements purport to be leases that is not their effect. They contain provisions for the operation of the driving range business mainly for the benefit of the appellant. The lessees have no real say in the operation of the range from a business point of view. The prices and opening times are set by the appellant and the agreement respectively. The lessees receive a fixed percentage of the takings and are neither at risk of making a loss nor able to increase their share of the takings. The appellant is in effect in full control of the business.[21]The arrangement by which the purported lessees rotate every three months is designed to avoid their exceeding the VAT registration threshold. That was acknowledged by Mr Clark when he agreed that it was a result, though not the main purpose, of the arrangements that VAT was not charged when customers used the driving range. The lessees, if they were truly making supplies, would have made taxable supplies and without the rotation a single individual would have exceeded the registration limit whereas by rotating every three months that was avoided.[22]I reject the appellant's contention that the purpose of the arrangement was to clarify who was responsible for the day to day operation of the range. It made no sense to change the member of staff or associated self-employed person who ran the range every three months so that for example for one period of three months a golf teacher would run the range and then be replaced by the bar manager or a shop assistant and so on, as the appellant contended was the case, regardless of their managerial abilities. It also made no sense as a means of paying the staff for the extra work they had collectively taken on that they should be paid for it for three months and then not paid at all for a long period until their turn came round. After the business re-opened there were more than four staff and associated self-employed people involved, so that the three month periods in which any single person benefitted from the agreements were further apart.[23]Whilst I would not make my finding about the true nature of the transaction just because it did not make sense to operate as the appellant claims it chose to do, I find it to be relevant to consider the sense of the transaction because Mr Clark showed himself, when giving evidence, to be a professional and intelligent businessman and everything else I was told about the appellant made it clear that its other directors were also in that category. I am sure the directors knew precisely why the agreements took the form they did and that the true reason was to attempt to make it the case that the appellant was making exempt supplies. That they intended that to be the case does not mean that it was so.[24]I find that the agreement was not a lease. The case comes within the Maierhofer principle. It is a transaction artificially presented in one way but in fact having a different characteristic. As Arden LJ said in Telewest the parties cannot mandate the application of a particular Community concept by the labels they use.[25]The result of my findings is that the agreements are shams. I should make it clear that although that term is sometimes seen as a rather pejorative one it is not necessarily the case. A sham is simply something that is not what it purports or appears to be and it may well be that the persons concerned genuinely regarded it as what it purported to be and were in no sense dishonest or duplicitous in putting it forward. No such finding is necessary and I do not make it.[26]Rather than being leases the agreements were means by which the appellant delegated the day to day running of its own business.[27]The result is that the appeal is dismissed. For the avoidance of doubt, although it is sufficient for me to rule that the supplies made were not exempt supplies, my holding is that the supplies were in fact made by the appellant to the public through the operations of the 'lessees'. If any issues of quantum remain unresolved in light of my finding I give leave to either party to apply to the Tribunal for a further hearing to resolve them. Any such application is to be made within three months of the release of this Decision. RICHARD BARLOW TRIBUNAL JUDGE RELEASE DATE: 22 April 2009