Judgment - Trustees of the Nell Gwynn House Maintenance Fund v. Commissioners of Customs and Excise  continued

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    Glawe Spiel was followed in Customs and Excise Commissioners v. First National Bank of Chicago [1998] S.T.C. 850 where the Bank dealt in foreign exchange not charging a commission, but relying on the profit it made over a period between the prices at which respectively it bought and sold the currency. The Bank contended that the foreign exchange transactions were subject to VAT as supplies effected for a consideration and that the value of the consideration was the full value of the currency received in exchange for that provided by the Bank. The European Court held that the supply of foreign currency being legal tender was not the supply of tangible property, but of a service. The supply of foreign currencies in the way described was the provision of a service for consideration being the difference between what it paid and what it received for the currency. The currencies received by the Bank were not the remuneration it received. That consisted in what the Bank could keep for itself, calculated as the net result of all transactions over a given period of time. In Customs and Excise Commissioners v. Plantiford (Judgment 5 November 1998, Laws, J.), the question arose as to whether a sum for packing and postage which the purchaser agreed to pay had to be added to the price of the goods for the purpose of constituting the consideration for the supply of such goods by the plaintiff. Laws, J. held that the moneys received by Plantiford, Ltd. were not received by it to hold on behalf of Parcelforce who were actually to deliver the goods. The sum of £2.50 (being postage of £1.63 plus packing of 0.87p) was received by Plantiford for itself, even though its expenses would include the sum of £1.63 for postage. It was therefore necessary to count it as part of the consideration received by Plantiford for the services it provided. It thus formed part of the turnover.

    It does not seem to me that these cases resolve the present question. In the Glawe Spiel case the owner of the gaming machines did not receive for his own use the money earmarked in the reserve box for winnings. It was only the balance which he kept which was to be taken as a consideration for making available the gaming machines. The Chicago case involved quite simply the question as to how the remuneration for the services provided should be calculated. Cases involving simply the exchange of money on which a profit is made are really in a category of their own. And it seems to me that the European Court were really doing no more than following Glawe Spiel in principle. In Plantiford Ltd., the question again was to calculate the money which the company received as its own rather than money which it received on behalf of somebody else.

    As to the Argos case it does not seem to me to follow that, because the moneys in the present case were stamped with a trust when first received, they could not be treated as part of the consideration or as part of turnover when subsequently used to pay staff wages. The commercial reality is that, when the respondents take the moneys which are in the Maintenance Fund in order to pay the staff to carry out the Trustee's obligations pursuant to paragraph 1 of the Fourth Schedule, the respondents are receiving the moneys beneficially in consideration of the services provided. When the Trustee applies the moneys in the trust fund for these purposes (as by clause 2(1) of the Appointment Agreement they are entitled to do) they ceased to be trust moneys. That is the time of supply for the purposes of section 5 of the Value Added Tax 1983 unless an earlier tax invoice is issued (Regulation 23(1) of the VAT (General) Regulations 1985 S.I. 1985 No. 886).

    The respondents object that if this is so there is no reason why the claim for VAT should be restricted to staff wages. It should apply equally to all other costs incurred in fulfilling obligations under paragraph 1 of the Fourth Schedule. This may well be right but the Commissioners limited their claim in this way and will not seek to include other matters if they succeed on this claim.

    In these circumstances, since in my view the appellants succeed on their first approach it is unnecessary to consider the appellants' alternative argument that the respondents' activities in applying moneys which belong in law to them, but which are impressed with a trust, constitute economic activities within the Sixth Council Directive and that the consideration for such activities is the net payment of service charges plus letting office fees paid into the Fund. It follows that it is not necessary to refer any questions to the European Court of Justice on this point under Article 177 of the Treaty of Rome.

The Fourth Issue

    The respondents contend that even if they are wrong as to what is the supply and as to what is the consideration, the effect of Article 11 A(3)(c) of the Sixth Council Directive is to exclude amounts beyond the specified remuneration from the taxable amount. Secondly they say that any supplies of maintenance, upkeep and cleaning of the building would be exempt from the imposition of VAT pursuant to group 1, item 1 of Schedule Six to the 1983 Act.

    As to the first point, Article 11 A(3)(c) provides:

     "The taxable amount shall not include: . . . (c) the amounts received by a taxable person from his purchaser or customer as repayment for expenses paid out in the name and for the account of the latter and which are entered in his books in a suspense account."

    The appellants issued Customs & Excise Notice 700 (revised 1 August 1991) setting out their practice as to "Disbursements for VAT purposes." This document deals inter alia with "supplies made by or through agents". It recites that a payment to a third party may be treated as a disbursement for VAT purposes if the taxpayer acted as agent for his client when making the payment to a third party. The respondents say that this provision as to agents is not to be found in the article and that the present case falls within the article since (1) the Trustees were not engaging staff for their own account but on behalf of others; (2) they kept the trust money separately; (3) there was here clearly a reimbursement of expenses. The respondents were thus entitled to claim reimbursement of expenses "paid out in the name and for the account of" the purchaser or customer. Sir Christopher Slade, though assuming that the argument that Article 11 A(3)(c) was not to be restricted to a relationship of agency was right, still rejected the appellants' conclusion. He said:

     "VAT law draws a clear distinction in principle between (i) the case when the relevant expenses paid to a third party C have been incurred by A in the course of making his own supply of services to B and as part of the whole of the services rendered by him to B; and (ii) the case where specific services have been supplied by the third party C to B (not A) and A has merely acted as B's known and authorised representative in paying C. Only in case (ii) can the amounts of the payments to C qualify for treatment as disbursements for VAT purposes, and on this account as constituting no part of the consideration for A's own services to B . . . If therefore, contrary to my earlier conclusion, all the contributions to the maintenance fund made in respect of payments by the trustees to staff fall within Article 11 A(1)(a), Article 11 (A)(3)(c) would not in my judgment exempt them from being treated as part of 'the taxable amount'; on this footing the consideration received by the trustees for the supply will be treated as including the contributions made to the Maintenance Fund to cover their costs in making the supply."

    I agree with Sir Christopher. It is to my mind clear that once it is established as it is here that the staff being paid were employed by the appellants by means of moneys which became their moneys beneficially for the purpose of paying the appellants' employees, they were not the "repayment for expenses paid out in the name and for the account of" the purchasers or customers. The respondents cannot rely on Article 11(A)(3)(c).  As to the second point, Group 1, item 1 of Schedule 6 to the Act of 1983 exempts from VAT "the grant of any interest in or right over land or of any licence to occupy land . . . other than" certain categories. This was to implement Article 13(B) of the Sixth Council Directive which provides:

     "Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse: . . .   (b) The leasing or letting of immovable property excluding: . . . .  Member States may apply further exclusions to the scope of this exemption."

    The parties agree that this provision would exempt the provision of maintenance services if made by the lessor to the lessee; the services would be part of the grant of the leasehold interest. See also British Airways Plc. v. Customs & Excise Commissioners [1990] S.T.C. 643. The supplies of services (in our case maintenance services standard rated) the leasehold interest (exempt) would be treated as one composite supply of services (exempt supply). It would seem that since 1 April 1994 by a concession made by the Commissioners the exemption would be treated as applying to maintenance services provided by others if they would have been treated as exempt if supplied by the lessor. That does not apply to the present case. The respondents contend, however, that where there is a close link between the supply by two suppliers it will be treated as a composite supply and if one is exempt the whole should be exempt. In Skatteministeriet v. Henriksen (case 173/880 [1989] E.C.R. 2763) the court was concerned with the provision in Article 13B(b) of the Sixth Council Directive that the 'premises and sites for parking vehicles' were excluded from the exemption given to "the leasing or letting of immoveable property." This provision was however to be interpreted as meaning that the letting of places to be used for parking vehicles was not excluded from the exemption in favour of the leasing of immoveable property "where the letting thereof is closely linked to the letting of immoveable property to be used for another purpose such as residential or commercial property, which is itself exempt so that the two lettings constitute a single economic transaction." The European Court added (page 2782):

     "that is so, on the one hand if the parking place and the immoveable property are to be used for another purpose as part of a single complex and, on the other, if both properties are let to the tenant by the same landlord."

    It is said in the present case that there is the necessary close linkage since the maintenance contribution is part of the consideration for the grant of the lease of exempt land. Therefore the supply by the Maintenance Trustee is itself exempt.

    It can certainly be said that the service charge is part of the consideration for the grant of the lease as well as of the maintenance services. To that extent there is a close link between the grant of the right to occupy the land and the right to receive the services. However, it is to be noted that the Henrikson case was concerned with the letting of two different immoveable properties, residential properties and garages, and not with the supply of immoveable property and of services as here. In Henriksen one of the lettings was exempt as a letting of immoveable property and the other letting was excluded from the exemption as "premises and sites used for parking vehicles". The issue was how one interpreted the exemption read with the exclusion in a situation where there was a close relationship between the two lettings. In the present case we are dealing with immoveable property in Article 13 B(b) which is exempt but not with any of the exclusions from the exemption. The supply of services is quite separate from any of the exclusions and is by a different taxpayer. Accordingly, it does not seem to me that the linking of two services so as to treat them as one arises.