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Judgments - Principal and Fellows of Newnham College in the University of Cambridge (Respondents) v Her Majesty's Revenue and Customs (Appellants)

HOUSE OF LORDS

SESSION 2007-08

[2008] UKHL 23

on appeal from: [2006]EWCA Civ 285

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Principal and Fellows of Newnham College in the University of Cambridge (Respondents) v Her Majesty’s Revenue and Customs (Appellants)

Appellate Committee

Lord Hoffmann

Lord Hope of Craighead

Lord Walker of Gestingthorpe

Lord Mance

Lord Neuberger of Abbotsbury

Counsel

Appellants:

Nigel Pleming QC

Philippa Whipple

(Instructed by Her Majesty’s Revenue & Customs )

Respondents:

David Milne QC

Andrew Hitchmough

(Instructed by Mills & Reeve LLP)

Hearing dates:

3-4 MARCH 2008

ON

WEDNESDAY 16 APRIL 2008

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Principal and Fellows of Newnham College in the University of Cambridge (respondents) v Her majesty’s Revenue and Customs (Appellants)

[2008] UKHL 23

LORD HOFFMANN

My Lords,

1.  In 2000, Newnham College decided to build a new library at a cost of about £7.5m. As an educational institution, Newnham makes exempt supplies for the purpose of VAT. Making exempt supplies is all very well for the recipients, because they pay no VAT. It is less attractive if you are the supplier, because you are not credited with the input tax on the goods and services on which you have been charged VAT. For a famously poor women’s college, the VAT on the cost of the library was a large sum of money.

2.  The college therefore took advice on a scheme which would enable it to recover the VAT. The first step was to acquire a shelf company and call it Newnham College Library Company Ltd (“the company”). The college held all the shares and members of the college formed the board of directors. On the completion of the new library, the college leased it to the company for a term of 11 years at a reviewable rent of £165,000 a year. That in itself would have done the college no good, because a lease of land is also an exempt supply. However, the Sixth Directive, which requires member states to exempt leases, also gives them an option to allow taxpayers a “right of option for taxation": article 13C(a). The United Kingdom has availed itself of this option in paragraph 2 of Schedule 10 to the Value Added Tax Act 1994:

“Subject to sub-paragraph.…[(3AA)]…below, where an election under this paragraph has effect in relation to any land, if and to the extent that any grant made in relation to it at a time when the election has effect by the person who made the election…would (apart from this sub-paragraph) fall within Group 1 of Schedule 9, the grant shall not fall within that Group.”

3.  The college gave notice of election under this paragraph. The intention was that the lease to the company would thereby become a taxable supply and the college would be entitled to recover all the input tax attributable to making that supply, namely, the VAT on the cost of building the library.

4.  This was the essence of the scheme, but it was complicated by the need to achieve two potentially conflicting objectives. The first was that notwithstanding the lease which granted exclusive possession of the library to the company, the senior and junior members of Newnham had to be able to go on using it in much the same way as before. The second was that the arrangements should not fall foul of various anti-avoidance provisions which had been introduced into Schedule 10 to counteract certain schemes of this kind.

5.  The relevant provisions were inserted into Schedule 10 by section 37 of the Finance Act 1997:

“2 … (3AA) Where an election has been made under this paragraph in relation to any land, a supply shall not be taken by virtue of that election to be a taxable supply if—

(a) the grant giving rise to the supply was made by a person (‘the grantor’) who was a developer of the land; and

(b) at the time of the grant, it was the intention or expectation of… the grantor…that the land would become exempt land (whether immediately or eventually and whether or not by virtue of the grant) or, as the case may be, would continue, for a period at least, to be such land….

“3A …

(7) For the purposes of paragraph 2(3AA) above and this paragraph land is exempt land if, at [the relevant] time … —

(a)  the grantor…or

( c) a person connected with the grantor…

is in occupation of the land without being in occupation of it wholly or mainly for eligible purposes.

(8) For the purposes of this paragraph…a person’s occupation at any time of any land is not capable of being occupation for eligible purposes unless he is a taxable person at that time.

(9) …a taxable person in occupation of any land shall be taken for the purposes of this paragraph to be in occupation of that land for eligible purposes to the extent only that his occupation of that land is for the purpose of making supplies which—

(a)  are or are to be made in the course or furtherance of a business carried on by him; and

(b)  are supplies of such a description that any input tax of his which was wholly attributable to those supplies would be input tax for which he would be entitled to a credit.…

(13) For the purposes of this paragraph a person shall be taken to be in occupation of any land whether he occupies it alone or together with one or more other persons and whether he occupies all of that land or only part of it.”

6.  These are very detailed provisions but the issue to which they give rise in this case is relatively straightforward. The college, as grantor of the lease, was the developer of the land. If, since the grant of the lease, it has been “in occupation” of the library within the meaning of paragraph 3A(7), the library is “exempt land” as defined in that paragraph and the grant of the lease is not a taxable supply. So the question is whether the college is “in occupation” of the library, either alone or together with the company.

7.  It is important to emphasise the narrow scope of the issue before the House. At no stage has it been argued by the Commissioners that the company is “a person connected with the grantor” within the meaning of paragraph 3A(7) and that the company’s occupation for ineligible purposes makes the library exempt land. Nor have the Commissioners attempted to rely upon any general overarching anti-avoidance principle. In Halifax plc v Customs and Excise Commissioners (Case C-255/02) [2006] STC 919 the European Court of Justice, in three cases bearing some resemblance to this one, propounded a general anti-avoidance principle based upon the civilian doctrine of “abuse of rights":

“69 The application of Community legislation cannot be extended to cover abusive practices by economic operators, that is to say transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law…

70 That principle of prohibiting abusive practices also applies to the sphere of VAT…

74 [But] it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.

75 Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage…

76 It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether action constituting such an abusive practice has taken place in the case before it …”

8.  This judgment was delivered on 21 February 2006, a week after this case had been argued in the Court of Appeal. But, as Chadwick LJ noted in his judgment delivered on 24 March 2006, the Commissioners expressly disclaimed reliance upon this principle and they have maintained this position before your Lordships. They say that they wish to test the efficacy of the existing anti-avoidance provisions. I therefore do not invite your Lordships to speculate on whether the Halifax principle would have applied.

9.  The question, therefore is whether the college is in occupation of the library. For this purpose one must, I think, begin by considering what the statute means by “occupation". It has often been remarked that this is a word which can mean different things in different contexts: see, for example, Viscount Cave in Madrassa Anjuman Islamia v Johannesburg Municipal Council [1922] 1 AC 500, 504 (“a word of uncertain meaning”) and Lord Mustill in Southern Water Authority v Nature Conservancy Council [1992] 1 WLR 775, 781. I start, therefore, with the context in which the word is used.

10.  Paragraph 2 of Schedule 10 operates as an exception to the general provision in Group 1, paragraph 1 of Schedule 9 which provides that “the grant of any interest in or right over land or of any licence to occupy land” shall be an exempt supply. The election under paragraph 2(1) of Schedule 10 has effect only if the grant would otherwise have fallen within paragraph 1 of Group 1. This context suggests that a “licence to occupy” in Schedule 9 and “occupation” in Schedule 10 refer to the same concept.

11.  On the question of what amounts to a licence to occupy within Schedule 9, we have the recent guidance of the Court of Justice in Sinclair Collis Ltd v Customs and Excise Commissioners (Case C-275/01) [2003] STC 898. The question in this case was whether the grant of a right to maintain a cigarette vending machine in a public house was a “letting of immovable property” within article 13B (b) of the Sixth Directive. This concept had been transposed in Schedule 9 to include a “licence to occupy land". The Court of Justice decided that it was not. It stated the principle at pp. 909-910, para 25:

“The fundamental characteristic of a letting of immoveable property for the purposes of article 13B(b) of the Sixth Directive lies in conferring on the person concerned, for an agreed period and for payment, the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right.”

12.  In formulating the test in this way, the Court was echoing the opinions expressed by Lord Nicholls of Birkenhead, Lord Millett and Lord Scott of Foscote when the case was before the House of Lords: see [2001] UKHL 30; [2001] STC 989. Lord Nicholls said (at p. 998, para 35) that the licence was “more naturally to be regarded as a licence to use land rather than a licence to occupy land.” Lord Scott (at p. 1006, para 77) gave the example of a right to use a safe deposit box in a bank. The bank remained in occupation of the whole of its premises, including the space taken up by the box.

“The customer has no more than a right to put things in the box and is not, in any meaningful sense, in occupation of the space taken up by the box.”

13.  The same distinction between occupying land and merely using it had previously been made by Advocate General Jacobs in Swedish State v Stockholm Lindöpark AB (Case C-150/99) [2001] STC 103. Lindöpark owned golf courses and provided golfing facilities for the staff and clients of companies who joined and paid a fee. The question was whether this was a letting of the golf course within the meaning of article 13B (b). The Advocate General thought it was not:

“34. …Where … an individual pays an entrance fee to gain transient access, amongst other individuals, to a public swimming pool, it would be stretching the concept beyond any reasonable limit to regard such a transaction as leasing or letting.

35.  …If a person or entity were to pay for the exclusive use of a course for a specified period - say, in order to organise a tournament or championship - with a concomitant right to charge entrance fees for players and/or spectators, that would appear to partake fairly clearly of the nature of a lease or let. The same would not apply, however, to the casual golfer or group of golfers coming to play a round…A golfer may be thought of not as occupying the course in any sense but as traversing it.”

14.  The Court agreed. More recently, in Belgian State v Temco Europe SA (Case C- 284/03) [2005] STC 1451, 1469 it summed up these cases (in para 20) by saying that it was necessary to distinguish the “relatively passive” activity of letting immoveable property from transactions which—

“have as their subject matter something which is best understood as the provision of a service rather than simply the making available of property…”

15.  The Commissioners say that these cases on the meaning of “occupy” for the purposes of Schedule 9 have no application to the meaning of “occupation” in paragraph 3A(7) of Schedule 10. The latter is an anti-avoidance provision which should be given a wide meaning. The policy of the 1997 amendments was that exempt suppliers should not be able to create a taxable supply of the land by the grant of a lease and still use it for the purposes of making exempt supplies. “Occupation” should therefore be interpreted to mean any physical presence on the land by which the grantor continues to use it.

16.  I do not agree. In choosing the concept of occupation, Parliament must have been aware that it came with a well-understood meaning. The Commissioners say that it was only after 1997 that the concept was clarified in cases like Lindöpark and Sinclair Collis. But I do not think that there was ever a time when a mere physical presence on land for the purpose of making use of it, like playing a round of golf, would have been regarded as occupation. Furthermore, other parts of Schedule 10 show the Parliament was well aware that “occupation” of land and “use” of land are different concepts. For example, in paragraph 5(5), (which was in the original 1994 Act), the definition of a developer of a building or work includes a person who constructs it—

“with a view to granting an interest in, right over or licence to occupy it (or any part of it) or to occupying or using it (or any part of it) for his own purposes.”

17.  The question is therefore whether the college has, as the Court of Justice said in Sinclair Collis, “the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right.” For this purpose it is necessary to examine the arrangements under which its members are able to use the library. This appears from the lease, four agreements made between the college and the company on 2 July 2001 and the unchallenged evidence of the college Bursar, Mr du Quesnay, who is also a director of the company.

18.  The lease gives the company exclusive possession of the library, the sole right to occupy the library and exclude others. That of course is not enough to answer the statutory question. One must also ask whether the company actually exercises this sole right or whether, by agreement or de facto, it allows occupation, or joint occupation, by the college. For this purpose it is necessary to examine the agreements and see whether the rights which they confer upon the college are rights of occupation or merely rights to use the services and facilities provided by the library and its staff. One must also ascertain what is actually done in relation to the premises and ask whether the acts which can be attributed to the college are acts of occupation or merely use of the library facilities, referable to the rights granted by the agreements.

19.  The first agreement is a sale by the college to the company of all the books, fixtures, fittings and equipment in the library. The second is called “agreement for the hire of library books", although the subject matter of the agreement is rather more extensive. The company agrees in return for a fee to provide the college with “the services” listed in a schedule. These include the provision of books on hire to the college for the use of senior and junior members, “the provision of appropriate arrangements for the filing, maintenance and archiving of the books” and “such incidental services as are necessary for the provision of an effective library service.”

20.  The way this works in practice is that the library staff look after the books. They catalogue and maintain them so as to be available to members of the college. There are some tables and chairs at which senior or junior members may consult reference books and some students may like to work in the ambience of the library, but for the most part, fellows and undergraduates borrow the books and work in their own rooms. Members of the college have access to the building by means of electronic cards but the librarian may disable the cards of those whom she excludes for breaking the rules. Disciplinary powers are exercised by the librarian in her own discretion after consultation with the college. On week-days during normal business hours the library is open and members of the public may enter and ask the permission of library staff to use it. The admission of non-members of the college is a matter for the discretion of the librarian.

21.  The third relevant agreement is for the secondment of staff. The college agrees to second to the company certain employees to work for the company as librarian and assistants and so enable the company to perform its obligations to the college. The terms of secondment are contained in a specimen letter to the employee scheduled to the agreement. It provides that during secondment the employee will act in the specified capacity (librarian, assistant librarian, etc) for the company and be responsible for the provision of services to members of the college. The employees remain employed by the college, are paid by the college and can be dismissed only by the college, but they perform services for the company.

22.  Finally, there is an administration agreement under which the college agrees to provide certain administrative services for the company.

23.  Despite the close links between the college and the company, the Commissioners do not suggest that the separate personality of the company should be ignored or that the agreements should not be taken at face value. On that basis, it seems to me clear that the college is entitled to the provision of services for its members but cannot be said to be in occupation of the library. There is nothing in the arrangements, whether in law or in practice, which contradicts or displaces the right of exclusive occupation granted to the company by the lease. The practical physical control of the library premises is in the hands of the librarian and her staff, who act on behalf of the company. It is they who have the right to admit or exclude persons from the library and they do not share this right with the college. The college is contractually entitled to have its members in good standing admitted and provided with books and other services, but these rights cannot be characterised as rights of occupation any more than the rights of the Swedish golfers or their companies to the use of the course. The services provided by the company to the college are by no means “relatively passive": acquiring and cataloguing the books, maintaining them upon the shelves and assisting the users are activities which require the full time services of the librarian, her two assistants and a graduate trainee. In my opinion it is impossible to say that the college either had in law or exercised in practice “the right to occupy [the] property as if [it] were the owner and to exclude any other person from enjoyment of such a right". The essence of the right conferred on the college is the right to the use of the books. The right to enter on the premises for the purpose of taking them out or consulting them is only ancillary to this primary right.

24.  The Tribunal, which took a contrary view, appears to have been considerably influenced by the fact that the arrangements were plainly and confessedly a scheme of tax avoidance. They said the scheme was “devised, scripted and performed” with the purpose of avoiding VAT, the people who “ran” the college and the company were “the same people with different hats” and that allowing the scheme to succeed would be “an abuse of the legislation and go against its spirit and intendment". All this would have been very relevant if the Commissioners had been claiming that the scheme should be disregarded as an abusive practice. Indeed, the language of the Tribunal reads remarkably like a statement avant la lettre of the Halifax doctrine. But it has little relevance to the question of whether, taking the arrangements at face value, it could be said that the college was in occupation of the library premises.

25.  In the end it seemed to me that the argument for the Commissioners, despite their disclaimer of Halifax doctrine, could be sustained only on that basis. They relied, for example, on the fact that the library is run by the college’s own staff (“albeit on secondment”) over whom the college exercises “ultimate control", presumably in the sense that they can dismiss them. But the only question is whether the acts of the staff which are alleged to constitute acts of occupation are attributable to the college. For that purpose they must be performed on behalf of the college. But the effect of the secondment is quite clearly that they are performed on behalf of the company. Once one reaches that conclusion, the arrangements for employment of the staff have no further relevance. The question of “ultimate control” and the general look-and-feel of the arrangements are material only to establishing the admittedly tax avoiding nature of the scheme.

26.  The Commissioners relied upon an earlier decision of the Tribunal in Brambletye School Trust Ltd v Commissioners of Customs and Excise (2002) VAT Decision 17688. This concerned a somewhat similar scheme used in connection with the construction of a new sports hall for a preparatory school. The Tribunal found that the school was in occupation of the hall because whenever the children used the hall, they were under the supervision of teachers employed by the school. It was the teachers who exercised control over the premises.

27.  In my opinion a decision as to whether acts attributable to a body like the school or college amount to occupation of premises is a question of degree, sensitive to the particular constellation of facts. An appellate court must pay considerable respect to the opinion of the fact-finding body: compare Designers Guild Ltd v Russell Williams (Textiles) Ltd [2000] 1 WLR 2416. I would therefore not question the decision of the Tribunal in the Brambletye case. In this case, the Tribunal did not really consider whether the facts amounted to occupation by the college rather than (or in addition to) occupation by the company because they simply lumped the two bodies together. The Court of Appeal, however, did consider this question and came to the conclusion that occupation by the college had not been established. I would not have disturbed this judgment, even if I had been inclined myself to take a different view. In fact, however, I am on complete agreement with the judgment of Chadwick LJ, whose reasoning is largely reflected in this opinion. I would therefore dismiss the appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

 
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