Queen Mary, University of London v Revenue & Customs [2011] UKFTT 229 (TC)

FTT-Tax
Queen Mary, University of London v Revenue & Customs
[2011] UKFTT 229 (TC) · 2011-04-07
[1]This is appeal is about the nature for VAT purposes of the provision (to use a neutral word) of land and plant and machinery made to Queen Mary, University of London (“QMC”) by a subsidiary of Lloyds bank, Lloyds Property Investment Company No.5 Ltd (“LPIC”). The question is whether all or any part of that provision was zero-rated (as the Appellant contends) rather than standard rated (as HMRC contend).[2]The facts were uncontroversial. We draw them from the documents before us, the evidence of Dean Curtis, the Chief Administrative Officer at QMC, and the witness statement of Kevin Harris of Lloyds TSB:-(i) QMC is part of the University of London. It conducts medical teaching and research. In the 1990s it decided to concentrate part of its activities (broadly those relating to cell and molecular biology) at one site and to house them in a new building which came to be called the Blizard Building;(ii) the construction of this facility was arranged and contracted for by a subsidiary company of QMC, Queen Mary Developments Ltd (QMD). It procured the work, materials and plant to build the facility;(iii) work started at the end of the 1990s. By late 2003 the foundations had been laid and some of the superstructure was in place;(iv) the facility needed by QMC required a large amount of plant and equipment, specialist and otherwise (such as laboratory equipment and lifts). Of the expected total cost of some £44m, some £16m was expected to be on plant and equipment;(v) the equipment was to be permanently installed in, and substantial majority of it was to be fixed to, the site;(vi) QMC was not able to obtain the benefit of capital allowances on the plant and equipment; a company with a trade would have been able to;(vii) in December 2003 QMC entered into a financing arrangement with LPIC. The object and effect of the arrangement was to permit LPIC to claim capital allowances on the plant and equipment in the building, and for it to pass some of the benefit of those allowances on to QMC by funding the acquisition of that equipment and making charges to QMC which were lower than the costs it would have borne if it had borrowed the money by a simple loan;(viii) those arrangements were made by a set of written agreements entered into on 3 December 2003 together with a further document entered into on 10 December 2003 in pursuance of the 3 December 2003 agreements.[3]The terms of the arrangements between QMD, LPIC, and QMC are set out in six agreements. We set out some of the detail below, but in summary: QMC granted LPIC a lease of the site, LPIC agreed to grant, and then granted, QMC an underlease. QMD agreed to supply plant for incorporation in the facility to LPIC and LPIC agreed to pay for it. The rent payable by QMC was determined by reference to the cost of the plant (apart from a fixed £10,000 pa). We now turn to the documents in more detail.[4]By a lease dated 3 December 2003 QMC leased the premises which were to carry the Blizard Building (and on which the partly completed building stood) to LPIC for 75 years. LPIC agreed to pay £735,253 and an annual rent of £10,000 plus VAT.[5]On the same day LPIC entered into an Agreement for Lease with QMC to grant (back) to QMC an underlease of the same premises in 7 days time – on 10 December 2003 - for a period of 75 years less 10 days. The rent was £10,000 p.a. plus a variable rental to be determined under the “Start 2/3 Financial Agreement” described below. 6 The payment by LPIC to QMC of the £10,000 pa rent under the lease is expressed to be subject to the rents payable (by QMC to LPIC) under the underlease being paid.[7]It was clear to us that the lease and the Agreement for Lease were part of the same bargain. It was inconceivable that QMC would have leased the site to LPIC unless it was certain that it would be leased back to it : otherwise QMC would have been parting with the very site (no doubt very valuable) on which QMC’s new facility was to be constructed. It may well have been the case that the agreement for lease was executed before the lease (to stop LPIC running away after the lease was executed) but whatever the precise arrangements for execution, the lease and Agreement for Lease were part of one deal.[8]On the same day, 3 December 2003, QMC, QMD and LPIC entered into a Plant Agreement “to record the agreement between [LPIC] and [QMC] under which [LPIC] has agreed to incur capital expenditure on the provision of plant and equipment to be incorporated into the [Blizard Building].” The Recitals also record that QMC had entered into a contract with QMD to design and construct a technology and learning centre at the site. This Plant Agreement provided:- (i) in clause 2, that QMD agreed to supply the Plant (defined as plant and equipment on which capital allowances (a) were, or (b) were likely to be, available) to LPIC, and to install it at the site; (i) also in clause 2, that LPIC agreed to pay all amounts due in respect of the plant at the times specified in clause 3; (iii) in clause 3, for monthly statements to be prepared of the expenditure incurred by QMD in the preceding month, and for that expenditure to be divided into the two types of plant expenditure and other expenditure; (iv) in clause 5, that the plant became the property of LPIC when LPIC paid for it; (v) also in clause 5, for LPIC to have no responsibility for any aspect of the plant; (vi) in clause 6.2.5, that QMC and QMD should not change or terminate the contract between them for the development.[9]On the same day, 3 December 2003, LPIC entered into an agreement granting QMC an option for a new Option Lease of the site. If exercised, the Option Lease would be granted on 14 October 2014 (clause 2.6) for payment of the “Option Payment” . The Option Lease would be subject to the Underlease (clause 7.3) which meant that, assuming QMC was still the tenant under that lease, its rental obligations would in effect be subsumed into and became limited to those of the Option Lease. Those rental obligations were to pay £10,000 p.a. (the amount LPIC would then remain obliged to pay under the lease) together with a new (limited) variable rent to be determined under the Start 2/3 Financial Agreement described below (clause 2 of the Option Lease).[10]On the same day, 3 December 2003, LPIC and QMC entered into the Start 2/3 Financial Agreement. This agreement determined the variable rent which would be payable under the Underlease when it was granted, and the amount to be paid under the Option if it were executed. The agreement provides for the construction of a cashflow model under which QMC makes equal quarterly rent payments (sch.4 para 9) for a period ending on 14 October 2014 which reduce LPIC’s net investment in the project by that date to the amount of an Option Payment of some £15 million (Appendix 1). LPIC’s net investment at any time for these purposes is the amount it has expended under the Plant Agreement, plus interest costs on its investment, less the tax benefit of capital allowances (plus tax on rental profits), less the payments received from QMC. When tax rules or interest funding costs changed, it was provided that the prevailing cashflow was then to be recalculated to determine new rentals on the same basis (equal payments to the date of the Option Payment of about £15m).[11]If the option was not exercised there was provision for LPIC’s remaining net investment to be reduced to nil by rental payments over the remaining following 15 years, leaving for the residue of the lease only the £10,000 p.a. payments.[12]There is a wealth of qualification and other detail in the agreement but the summary principles set out above are all that are relevant for the appeal.[13]On 10 December 2003, in accordance with the 3 December 2003 Agreement for Lease, LPIC granted the Underlease to GMC.[14]These agreements refer to each other, they were entered into on the same day (or pursuant to agreements entered into on the same day). Together they are a single arrangement for LPIC to fund the plant and equipment part of the expenditure on the Blizard building and make a charge to GMC for so doing equivalent to its costs plus interest less tax benefits for a period extending at least to 14 October 2014. That is their economic effect.[15]But, because capital allowances are available only to a person who owns plant and machinery (see sections 11(4)(b) and 176ff Capital Allowances Act 2001) this economic effect could be achieved in relation to the capital allowances benefits only if LPIC had an interest in the land to which any plant became affixed. Mr Curtis told us, and we accept, that a large proportion of the equipment was fixed to the premises. Thus the arrangements take a legal form which includes the granting of a lease to LPIC, and its leasing to QMC. (If the plant had not been fixed the same economic result could have been achieved by leasing only the plant to QMC.)[16]The payment of £735,253 made by LPIC to QMC on the grant of the lease was treated in the Financial Agreement as if it were a payment for Plant. Mr Curtis told us, and we accept, that this was the cost of the plant and equipment installed in the building at 3 December 2003. We believe that the costs of construction already incurred on foundations and such like substantially exceeded this figure.[17]In due course the Blizard building was completed and rents were paid under the terms of the leases. The fixed £10,000 p.a. payable to LPIC under the Underlease was matched by the £10,000 p.a. payable by LPIC to QMC under the lease. The net cost of the arrangement to QMC was the payment of the variable rental reflecting the costs (including funding costs) of the plant and equipment.[18]Payments under the leases were to be made with applicable VAT. The parties opted to tax (i.e. to waive exemption under para 2 Schedule 10 VAT Act 1994) supplies of land made in connection with the Blizard site.[19]The issue on this appeal is whether the whole of the supply reflected in each rental payment is VATable at the standard rate or only part of it. Although the VAT at stake is that payable by LPIC on the rents it charged to QMC on the Underlease, it is accepted that QMC, which bears the cost of that VAT, has the necessary interest to challenge HMRC’s decision that VAT is due on the totality of the rental payments. The Relevant Legislation[20]Section 1 of VAT Act 1994 charges VAT on the supply of goods or services in the UK. By section 4 it is charged on any supply except for an exempt supply. By section 9 any supply specified in Schedule 9 is an exempt supply.[21]Schedule 8 of the Act provides for the zero-rating of certain supplies. Included in Group 12 of that Schedule is the provision of certain adaptions to a building to accommodate handicapped people, and, in Group 15, the supply of medical and other equipment for use by a charitable institution providing medical care.[22]The question as to precisely how much of any of the plant and machinery in the Blizard Building fell within the terms of those Groups of Schedule 8 was not before us. If we hold that the nature of what LPIC provided to QMC was such that some or all of it could be a supply falling within these Groups then a further debate would ensue. We make the assumption for the purposes of this decision, for which there is some justification in the analysis of the expenditure prepared by Mr Rumbles, that if there were a separate supply for VAT purposes of each of the items which were installed in the Blizard Building, some of those supplies would have fallen within those Groups.[23]Group 1 of Schedule 9 VATA contains the exemption for supplies of land. So far as relevant to the argument before us it provides for the exemption of:
“1. The grant of any interest in or right over or of any licence to occupy land, … other than … (c) the grant of any interest, right or licence consisting of a right to take game or fish … (d) the provision in an hotel … of accommodation [(f) & (g) the provision of caravan and tent pitches] (h) the grant of facilities for parking a vehicle “… Notes (8) Where a grant of an interest in, or right over or licence to occupy land includes a valuable right to take game or fish, an apportionment shall be made to determine the supply falling outside this Group by virtue of paragraph (c).”
[24]Schedule 10 provides for the exercise of an option to tax a supply of land so as to take it outside the exemption conferred by Schedule 9.[25]There was no dispute that the provisions of the VAT Act 1994 were enacted to bring the provisions of the EU Directives into UK law, or that a UK taxpayer could rely on the direct application of any provision of such a Directive which had not been properly translated into the domestic legislation. The period during which the supplies were made spans both the Sixth Directive and the new 2008/112/EC Directive. We quote below the relevant provisions of the new Directive, there being no dispute that its effect is the same as that of the Sixth Directive in this case:
“Article 135 1. Member States shall exempt the following transactions: … (j) the supply of a building or parts thereof, and of the land on which it stands … (k) the supply of land which has not been built on … (l) the leasing or letting of immoveable property. 2. The following shall be excluded from the exemption provided for in point (i) of paragraph 1:-(a) the provision of accommodation [in a hotel etc.] or holiday camps or … camping sites;(b) the letting of premises and sites for the parking of vehicles;(c) the letting of permanently installed plant and machinery;(d) the hire of safes. Member States may apply further exclusions …”
[26]It is clear that Group 1 of Schedule 9 VATA puts into domestic legislation the exemption envisaged by Art 135(1), and that the UK has taken advantage of the power given in the last sentence of Art 135(2) to exclude supplies in addition to those specifically mentioned in that Article. It is also apparent that the mandatory exclusions in Art 135(2)(a) and (b) are reflected in Group 1 Item 1 paragraphs (d), (f), (g) and (h). The mandatory exclusion in Art 135(2)(c) – the letting of permanently installed plant and machinery – is not however, directly translated into the UK VAT Act.[27]As a result of section 6 VATA and regulations made thereunder, a supply made for successive rental payments is treated as a series of separate supplies made the date each rental instalment is invoiced or paid. As a result there were quarterly supplies by LPIC to QMC on each rent date.[28]The Parties’ Arguments (a) The Respondents’ argument Mr Wastell says that on receipt of the rental payment for each quarter LPIC made a single supply to QMC. He says that from an economic perspective this was one supply and not separate supplies of the component parts of the building. His primary submission is that this single supply was a supply of land: that was its economic nature, and even if the supply were regarded as a principal supply to which other elements were ancillary, the principal supply was of land. Thus, since LPIC had opted to tax, the supply was fully VATable. His secondary submission is that, if the single supply was not of land, but was of plant and equipment within Art 135(2)(c), then that single supply remains standard rated despite the possible zero-rating of elements within the composite supply. He says that the Appellant can get home only if LPIC made multiple supplies of the elements of the building to QMC, and if some of those multiple supplies fell within the relevant Groups of Schedule 8. There is he says no warrant for dividing a single supply between zero-rated and exempt elements. He refers us to Note (8) to Group 1 Schedule 9 which, in the case of game and fish, permits an apportionment which is not permitted in relation to other headings. He says that the exceptions in Art 135(2) are not provisions which “hive off” part of a single supply, but requirements to treat a single supply which falls within any of them as outside the exemption. (b) The Appellant’s argument Mr Rumbles said that the documents and Mr Curtis’ evidence showed that this was not a supply of land. The object and effect of the arrangements was the provision of the plant and machinery on financially advantageous terms. Of that plant and machinery some 24% by value qualified for zero-rating. Article 135 was mandatory both in para (1) and para (2). The exclusion of permanently installed plant and machinery was mandatory and, although not incorporated into domestic law, could be relied upon. He relied on the approach taken in Card Protection Plan Ltd v C&E 2001 STC 336: the object of the consumer in QMC’s case was to obtain the use of the plant and machinery on good financial terms the supply of land was purely ancillary. The essential nature of the transaction was not a supply of land. Mr Rumbles points us to the approach adopted by the tribunal in Argents Nurseries Ltd v Commissioners VTD 20045. There the tribunal considered the leasing of polytunnels affixed to the ground. It concluded (a) that the polytunnels were part of the land for English land law purposes, (b) that their letting would therefore be the letting of immoveable property unless excepted, (c) that they were excepted and fell within Art 135(2)(a) as the letting of permanently installed equipment, and (d) that the supply of the letting of the polytunnels was separate from the supply of the nursery premises to which they were affixed. Mr Rumbles noted the way in which, in Talacre Beach Caravan Sales Ltd v Commissioners [2006] STC 1671 , the ECJ considered that a single supply of a fitted caravan could nevertheless be treated as partly zero-rated and partly standard rated. Mr Rumbles refers us to the approach taken by the ECJ in Don Bosco Onroerend Gad v Staatssecretaris van Financien Case C-461/08 where the question was whether the supply of land occupied by a building that was to be demolished fell within what is now Article 135(1)(j). The Court asked at [24] whether there was one single supply or two distinct supplies of the property and the demolition. The Court found that there was a single supply “having taken as a whole, the aim of supplying not the existing building but land which had not been built on.” That supply did not fall within the exemption. He says the aim of the transaction is crucial to the determination of its VAT nature Discussion[29]The first question is whether LPIC made a single supply or several distinct supplies. The test to be applied is that set out in [29] of CPP :
“… taking into account, first, that it follows from art 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical customer, with several distinct principal services or with a single service.”
In Levob Verzerkeringen BV and Another v Staatssecretaris van Financien [2006] STC 766 the Court noted two approaches to this question:
“21. … the Court has held that there is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal supply whilst one or more elements are to be regarded, by contrast, as ancillary supplies which share the tax treatment of the principal supply … “22. The same is true where two or more elements or acts supplied by the taxable persons to the customer, being a typical customer, are so closely linked that they form, objectively, a single individual economic supply which it would be artificial to split.”
[30]The Court in CPP noted that the agreement of a single price was relevant but was not decisive ([31] and Levob A-J at[25]).[31]In conducting this exercise it is important to take an overall view at the level which corresponds with economic and social reality, without over-zealous dissection ( CPP at [22]). We also note that domestic cases after Levob have emphasised that the fact that separate parts of the provision could be supplied separately from different sources is not relevant, and that the test is not whether the elements have separate value or utility in their own right.[32]What then were the essential features of the provision made by LPIC? It seems to us that they were the following:-(i) in broad economic terms QMC received a single package of financing for the plant and machinery in the Blizard Building. Its interest in the land was in substance unaffected by the transactions. The transactions did not affect the costs it bore on the structure of the building (excluding the plant and machinery). It was in economic substance paying LPIC for the plant and machinery;(ii) the monetary consideration for each rental supply was determined as £10,000 p.a. plus a single amount computed by reference to the totality of the expenditure on plant and machinery without differentiation between the specific pieces of plant and machinery;(iii) it was clearly important to QMC to obtain and retain the use of the Blizard Building as a whole including the equipment installed in it;(iv) the pieces of plant and machinery were for the most part fixtures in the building and thus used in the context of the use of the building as a whole;(v) the nature of the equipment supplied was determined by the agreement between QMD and QMC. LPIC took title to whatever QMD supplied and provided it as a whole to QMC[33]It seems to us that the elements received by QMC were so closely linked that they formed a single economic supply which it would be artificial to split. The elements of the supply were received together and used together. The provision of each bit of equipment (or bit of land to which it was affixed) would have had little practical benefit. QMC was acquiring not the benefit of lots of little bits of the site, or separate bits of equipment, but the whole package: what QMC (the only and thus the typical customer) wanted and got was the facility as a whole, not separate parts of it. The leasing to QMC was part of a single transaction. The undifferentiated consideration, although decisive, reinforces the close connection between the elements of the supply. If viewed as the provision only of plant and machinery rather than land, what QMC got and wanted was all the plant and machinery in place in the building, not separate parts of it. In broad economic terms QMC received a single supply of credit linked to its use of the plant and machinery, provided as a package through QMD, and dressed up as a lease of the land.[34]The reasoning of the tribunal in Argents Nurseries does not in our view help Mr Rumbles. There was in that case a lease of the entire land of the nursery followed, at a later date, by a new transaction, the lease of polytunnels as part of the land. By contrast what QMC got, it got under a single transaction in which each item was so closely linked as to form a single indivisible economic supply.[35]We also agree with Mr Wastell that the apportionment in Note(8) of Group 1 Schedule 9 shows that apportionment is not applicable under domestic law to other headings of that Group. If this were a single supply of land within Group 1, no division of that supply would be required by Schedule 9. If this were a single supply of something other than land, there is no domestic rule which requires its division into separate supplies.[36]Neither does the structure of Art 135 require something which is economically a single supply to be treated as separate supplies if part of the single supply falls within one of the exceptions in Art 135(2). In Skatteministeriet v Henriksen [1990] STC 768 the ECJ held at [14] and [15] that the exemption for letting of land necessarily encompassed the letting of all property accessory to that land so that a componant of the letting which fell within one of the exceptions in Art 135(2) could not be excluded from the exemption if the letting was so closely linked to the letting of immoveable property as to constitute a single economic transaction. Thus Art 135 does not require an approach different from that in other circumstances: the first question must be: is this a single economic transaction? and the second, what is the VAT nature of that transaction?[37]Thus the next question is what is the nature of that single supply? In our view it was a supply of the use of permanently installed plant and machinery. That is for the following reasons.[38]First the Directive, by exempting from Art 135(1) the supply in Art 135(2)(c), makes clear that merely because English land law would treat a supply of land and fixtures as a supply of land, the same concept is not to be read into the exemption. If a supply of land with fixtures can properly be described as a supply of permanently installed plant and machinery, it falls outside the exemption. (See also the decision of the tribunal in Aquarium Entertainments Ltd VATD 11845: “Article [135(2)(b)] seems to have cleared English land law out of the way”.)[39]Second, as a matter of the mechanics of the agreements, the plant and machinery is sold to LPIC and then let, as part of the land to QMC.[40]Third, the vast bulk of the consideration payable by QMC is directly linked only to the cost of the plant and machinery.[41]Fourth, the economic effect of the arrangements as a whole was the leasing or financing of the plant and machinery to QMC.[42]Fifth the plant and machiniery was (for the most part) permanently installed.[43]Although in legal form LPIC made periodic supplies of land to QMC under the Underlease, that Underlease was part of a composite transaction which encompased the granting of the lease to LPIC. The effect of that composite was that QMC’s interest in the land was in substance unaffected and that it acquired the use of, and paid rent for, the plant and machinery. Although VAT is a tax determined by reference to individual transactions, it seems to us that the transaction to which it is to be applied in this case is the composite transaction, and not the individual transactions evidenced only by separate documents.[44]Thus we conclude that the supply to QMC did not fall within the exception in Art 135(1) but was a single supply of permaently iinstalled palant and machinery.[45]We raised at the hearing the possibility that the true supply by LPIC to QMC was of finance rather than of any asset. (That is particularly indicated by the fact that LPIC has no responsibility for the fitness, nature or state of the plant and machinery.) In the widest economic sense that is the case since that was the net economic result of the implementation of the arrangements. But we do not believe such a broad brush may be used to describe the supply where QMC’s right to continue to use the equipment was contingent upon its payment of rentals. In these arrangements QMC is not in the same economic position as it would have been if it had bought the equipment using a loan from LPIC.[46]What is the VAT liability attributable to the supply? It is not exempt as a supply of land (and even if it were a supply of land, LPIC’s option to waive exemption would mean it was a (single) taxable supply). On the evidence before us we were not convinced that the single supply could be treated as being within one (and only one) of the zero rating provisions of Schedule 8. Mr Rumbles said that 24% of the expenditure falls within one or two of those groups. That did not indicate that this supply was principally a supply of such equipment to which all the other items were ancillary. Mr Rumbles did not seek to argue to the contrary.[47]That leaves the question of whether, as Mr Rumbles suggested, notwithstanding that these were single indivisible supplies, part of each such periodic supply may be zero-rated as falling within a relevant group of Schedule 8 on the basis of the ECJ judgment in Talacre .[48]Talacre made a single supply of a caravan together with its contents. The UK had exercised a transitional right under Art 28 of the Directive to zero-rate the supply of a caravan but had provided for certain items to be excluded from the scope of that zero-rating. The ECJ was asked whether the fact that this was a single supply of the caravan precluded a charge at the standard rate on the excluded items.[49]The Court held ([24]) that ‘The case law on the taxation of single supplies … does not relate to the exemptions with the refund of tax [ie zero rating] with which Art 28 …is concerned”. While a single supply was subject, as a rule, to a single rate of VAT, that rule did not apply where that zero rate was determined by a derogation within Art 28(2). It concluded that (a) the UK’s decision under that transitional derogation was that the caravans and not the contents should be zero-rated, and (b) that allowing apportionment in this situation did not present insurmountable difficulties so as to endanger the operation of the VAT system. In consequence splitting was permitted.[50]In this appeal Mr Rumbles relies on a zero-rating provision to split what we have found to be a single taxable supply. This is different from Talacre : there the national legislation enacted in reliance on the transitional derogation limited the zero-rating, and that limitation was upheld by splitting the supply. By contrast the single supply in this appeal is not zero rated by reason of an exemption or derogation, but taxable on broad principles. There is no reason, as there may be in the case of derogations, to construe the broad principle of taxability narrowly; rather the converse: only if the supply falls wholly and squarely within the exempting (zero-rating) provisions do they apply. To treat the exempting (zero-rating) provisions as overriding the single supply case law of CPP would rob the principles in that case of much of their force. The principle in Talacre does not in our view permit a single supply which is otherwise fully taxable to be treated as in part a zero-rated supply. Conclusion[51]We conclude that LPIC’s supply to QMC was standard rated.[52]We therefore dismiss the appeal. Rights of Appeal[53]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. CHARLES HELLIER TRIBUNAL JUDGE RELEASE DATE: 7 April 2011

Cited in 1 later judgment