England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION(CROWN OFFICE LIST)
(MR JUSTICE LIGHTMAN)

		Royal Courts of Justice Strand London WC2
		23 June 1999

LORD JUSTICE WARD: The question in this appeal is whether an agreement to install a cigarette vending machine in a public house constituted a license to occupy land and as such a supply exempt from V.A.T. within section 31 and Group 1 of Schedule 9 of the Value Added Tax Act 1994. The Commissioners of Customs and Excise said that it was; the Chairman of the Tribunal said it was not; but Lightman J restored the Commissioner's decision and gave leave to appeal to us.

The Facts:

The Appellant, a part of the Imperial Tobacco Group, sells its cigarettes through coin-operated vending machines placed in public houses, hotels, clubs and leisure centres. These machines, which may be free-standing or fixed to a wall, are installed on the premises with the permission of the publican or hotelier, the "Siteholder," pursuant to agreements which, though they differed in detail, all had the same legal effect. It is common ground between the Appellant and the Commissioners of Customs and Excise that the material terms upon which the case depends can be summarised as follows:-

"WHEREAS

(a) The owner (i.e. the Appellant) is able to supply and maintain cigarette vending machines;

(b) The Site-holder is the Owner of premises at which the Owner's cigarette vending machines can be positioned;

(c) The parties wish to enter into this agreement containing the terms on which the said vending machines will be positioned at the Siteholder's premises.

WHEREBY it is agreed as follows;

1. DEFINITIONS

....

(d) "Machines" means vending machines supplied by the Owner for the sale of Products; ...

(e) "Products" means cigarettes, cigars and tobacco products. ...

2. GRANT

The Siteholder hereby grants to the Owner the right and license during the term to provide, install, operate and maintain the Machines at the Premises of the Siteholder.

3. MACHINE POSITION

(a) The machine shall be positioned in the premises at such sites as the Siteholder shall nominate as being the sites most likely to generate the maximum sale.

(b) The Siteholder shall not unreasonably refuse his consent to the selection of such site as the Owner considers will be the most likely to generate the maximum sale.

....

7. PROFITS

....

(b) Owner shall pay the Siteholder its proportion of the gross profit for each monthly period

8. OWNERSHIP

The machines, all stocks of Products and all cash in the Machines shall at all times remain the property of the Owner.

9. SITEHOLDER'S OBLIGATIONS

The Siteholder agrees:

(a) That the Owner is hereby granted the exclusive right during the subsistence of this agreement to provide, install, operate and maintain vending machines for the sale of Products at the Premises.

(b) To allow the Owner, its authorised employees or agents access to the Machines at all reasonable times,

(c) That the Machines shall remain the property of the Owner including liability for loss or damage (notwithstanding any fixing of them to any wall, building or other structure) and that nothing contained in this Agreement shall confer or be deemed to confer any interest in the Machines on the Siteholder.

....

(e) That it will where applicable provide and maintain at its own expense good and sufficient supply of electricity.

(f) That it will not interfere with the machines.

....

(k) Not allow or permit any machine dispensing similar products to the Products to be placed on or annexed to the Premises.

(l) Not allow anything to be placed on or near the Machines which would restrict the Public's view thereof.

....

11. OTHER PRODUCTS

(a) The Siteholder grants the Owner the exclusive right to supply cigars ... cigarette papers and other tobacco products.

12. TERM

.... this Agreement shall subsist from the date hereof for a term of two years....

....

14 LICENSE

For the avoidance of doubt it is expressly agreed by the parties that nothing contained in this Agreement shall grant the Owner any interest (other than a license) in or over the Premises of the Siteholder."

The Legislation:

The sixth European Community Value Added Tax Directive lays down the general rule that VAT is to be levied on all economic activities of those supplying services. Article 13 provides for certain exemptions, Article 13(B) being as follows:

"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:

1. The provisions of accommodation ... in the hotel sector or sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites;

2. The letting of premises and sites for parking vehicles;

3. Letting of permanently installed equipment and machinery;

4. Hire of safes.

Member states may apply further exclusions to the scope of this exemption."

Section 31 of the 1994 Act (giving effect to the Directive) provides as follows:-

"31 Exempt supplies and acquisitions

(1) A supply of goods or services is exempt if it is of a description for the time being specified in Schedule 9....

Schedule 9, Part II Group 1 – Land – provides:-

"1. The grant of any interest in or right over land or of any license to occupy land..."

The decisions below:

The Chairman, Mr A.W. Simpson, decided as follows:-

"In my judgment however it makes no difference who decides where the Machine is to be put; the question is whether, however the place is chosen, the Owner grants a license to occupy land. In my judgment the substance and reality of the Agreement is that a Machine will be installed and made available to customers in a position which ... does not matter much to either party. In my view the use or enjoyment of land as land is not a significant consideration, and for both parties the real subject of the Agreement is the Machine and not the use or enjoyment of the land on which it stands or the air space which it occupies for the time being. I hold therefore that none of the Agreements in question granted a license to occupy land."

Lightman J identified as "the critical question":-

"What upon the true construction of the Agreement is the Siteholder agreeing to supply. The answer is clear: it is a license to keep a Machine on the site, and it is in return for that license that the Respondent has agreed to pay over a share of the profits. I accept that the grant of a restrictive covenant by which a Siteholder agrees not to grant any license to a competitor might, if it stood alone, constitute a supply of services (see Section 5(2)(b) of the Act). But in the context of the Agreement the restrictive covenant is merely incidental to the grant of the license and is designed to make the license more valuable and increase the profit to be shared between the parties: it is not dissociable from the license and is ancillary to it (and not the reverse as suggested by the (Owner)). ... I think that the supply in this case falls within ( Group 1 of Schedule 9 ( and is accordingly exempt.

....

The Tribunal has .... been distracted by the "substance and reality" formula (and accordingly by its perceived need to concentrate on the commercial rationale behind the parties' agreements and the relative importance in the minds of the parties of "land as land" and the Machines), even to the extent of answering the question whether there was a grant of a license in the negative; in consequence the tribunal failed to ask the correct question, namely what upon the true construction of the Agreement between the parties did the Siteholder provide in return for the consideration which he received. The answer .... is clear, namely a license to occupy land together with certain ancillary or incidental rights; and accordingly .... the supply must be exempt."

The Parties' contentions:

Mr Milne Q.C., for the Appellant, made two principal submissions. Firstly he said that the Siteholders did not grant a license to occupy land within the meaning of the Schedule. Secondly, even if it did, the license was an incidental element and the true and substantial supply was the exclusive right to sell cigarettes to the Siteholder's customers, which was a taxable supply.

Mr Anderson, for the Commissioners, submitted that the principal question to be answered was what was the nature of the supply made by the Siteholder. He submitted that the right to sell cigarettes, even exclusively, was not a supply but merely the purpose of the license. The supply was the license to occupy and thus exempt.

I have not found the case altogether easy to decide and I am grateful to Counsel for their submissions.

The proper approach:

1. The first question, indeed the critical question, is what was the Siteholder supplying in consideration of taking a share in the profits of cigarette sales. That was the starting point in British Airports Authority v. Customs and Excise Commissioners [1977] STC 36, 41 b-c, in British Railways Board v. Customs and Excise Commissioners [1977] STC 221, 229 b-g, and Customs and Excise Commissioners v. Zinn & Another [1988] STC 57, 65G.
2. In answering this question, the motive or intention both of the supplier and of whosoever receives the service is irrelevant.

"In my judgment, the transaction must be looked at objectively in order to decide whether or not the supply involved in it does or does not fall within (the Schedule):"

per Browne L.J. in British Railways Board case cited above at p. 229f.

3. Looking then to the Agreement in the matter before us, Clause 2 records the grant to the Appellant of the "right and license during the Term to provide, install, operate and maintain the Machines at the Premises of the Siteholder." This is amplified in two respects when defining the Siteholder's obligations in Clause 9(a), firstly by stipulating that the grant is of an exclusive right, and, secondly, making explicit what is in any event implicit that the purpose of providing a "vending machine" is "for the sale of" cigarettes at the premises. Clause 9(k) then expands upon the exclusivity of the grant by the Siteholder's agreeing not to allow any other Machine dispensing similar products "to be placed on or annexed to the Premises". Clause 11 furthers the exclusivity by granting the Appellant the exclusive right to supply cigarette papers in addition to the other tobacco products including cigars.
4. It seems to me to be plain that there are two promises exacted from the Siteholder in consideration of his taking a share of the proceeds of the sales of the cigarettes, namely, (i) permitting the Machine to be provided, installed, operated and maintained at the Premises and (ii) granting a restrictive covenant not to allow competition at the Premises thus ensuring exclusivity for the Appellant's products.
5. Assuming for present purposes that the former is a license to occupy land and so exempt from V.A.T., but that the latter is taxable, then the next question is whether there is a single composite supply or independent and distinct supplies separately assessed.

Some guidance has been given by the European Court of Justice. In Commission of the European Communities v. United Kingdom of Great Britain and Northern Ireland [1988] ECR 817 the test propounded was whether the supply of corrective spectacles was physically and economically dissociable from the supply of medical services. In Faaborg - Gelting Linien A/S v. Finanzamt Flensburg [1996] ECR 1/2395 the Court held that:-

".... regard must be had to all the circumstances in which the transaction in question takes place in order to identify its characteristic features."

In fact the issue there was whether there was a supply of goods or a supply of services. In Card Protection Plan Limited and Commissioners of Customs & Excise (C-349/96) the Court held on the 25^th February 1999 that:-

" 29. In this respect, taking into account, first that it follows from Article 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 not to distort the functioning of the V.A.T. 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 principle services or with a single service.

30. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal services, whilst one or more elements are to be regarded by contrast an ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied."

This test may, perhaps, beg the question which is the principal service supplied.

The English Courts have refined their approach to the problem. In British Airports Authority v. Customs & Excise Commissioners [1977] STC 36 the test adopted was whether the substance and reality of the agreement was the grant of a license to occupy land: see Scarman L.J. at p. 40c-d, 41b-c, 41g; Browne L.J. at p. 42j and Megaw L.J. at p. 43e. In British Railways Board v. Customs & Excise Commissioners [1977] STC 221 Browne L.J. added this cautionary note at p.228:-

".... on further consideration I think this (the "substance and reality" tag) may be dangerous if it suggests that one can go behind a written contact".

In British Airways PLC v. Customs & Excise Commissioners [1990] STC 643, 648G, Stuart-Smith L.J. stated the test in that case to be:-

".... in substance and reality is the in-flight catering an integral part of the transport?"

The answer, as he recognised, may often be very much a matter of first impression.

In Customs & Excise Commissioners v. Wellington Private Hospital Ltd [1997] STC 445, 462 Millett L.J. said this:-

"The issue is not whether one element of a complex commercial transaction is ancillary or incidental to, or even a necessary or integral part of, the whole, but whether one element of the transaction is merely ancillary or incidental to, or a necessary or integral part of, any other element of the transaction. The reason why the former is the wrong question is that it leaves the real issue unresolved; whether there is a single or a multiple supply. The proper enquiry is whether one element of the transaction is so dominated by another element as to lose separate identity as a supply for fiscal purposes, leaving the latter, the dominant element in the transaction, as the only supply. If the elements of the transaction are not in this relationship with each other, each remains as a supply in its own right with its own separate fiscal consequences.

In determining whether what would otherwise be two supplies should be regarded as a single supply the Court has to ask itself whether one element is an "integral part" of the other, or is "ancillary" or "incidental" to the other; or (in the decisions of the Court of Justice) whether the two elements are "physically and economically dissociable" this, however, merely replaces one question with another. In order to answer this further question, the Court must consider "what is the true and substantial nature of the consideration given for the payment" (see the Bophuthatswana case [1993] STC 702 at 708) per Nolan L.J.). There are, however, limits to this process. Where supplies are made by different suppliers, they cannot be fused together to make a single supply; and it is probably only in relatively simple transactions that the reduction of multiple to single supplies is appropriate."

6. My first and my enduring impression is, as the Judge found and as was conceded before him, that the elements of this relatively simple transaction are indissociable. From an economic point of view it would be artificial and wholly arbitrary to split the consideration and apportion part to an exempt supply and part to a taxable supply. A much more difficult question is which supply is dominant.
7. In circumstances of this case the characteristic feature of this transaction seems to me to be much as is recorded in the preamble: the Appellant's business is to sell its cigarettes through its vending machines wherever they can be placed. A public house is such a place and by the Agreement the Appellant gains access to those Premises and the right, which is exclusive, to place its Machine there. Looking at the commercial reality, and not straying outside the four corners of the contract, the true and substantial nature of the consideration is the grant of the right to bring the Machine onto the premises. The purpose is, of course, to sell cigarettes. There is an advantage to be gained and so the commercial value of the license is enhanced if there were to be no competition from other brands but the commercial reality (selling cigarettes) is that the right to have the Machine in place giving the opportunity to sell is more important than preventing competitors from selling . The primary aim is to sell cigarettes from the Machine on the premises and preventing the opposition selling their brand is a means for the better enjoyment of that, the principal, service. Making the Machine (and its contents) available to the public in the public house is the dominant element in the transaction and the grant of the restrictive covenant is merely ancillary to or an integral part of the grant to place the machine on the premises.

This accords with the structure and tenor of the Agreement itself. "The Grant" in Clause 2 is the core of the Agreement. When the Siteholder's obligations are specified in Clause 9, the Grant is enhanced by its exclusivity – Clause 9(a) Clauses 9(b) to (j) and (l) all relate to obligations undertaken with regard to the Machine. 9(k) and 11 are isolated restrictive covenants. The consideration is a percentage of the gross profits "in respect of products sold in the Machine". The payment is not for keeping competition out of, but for allowing the Machine in to, the premises.

In my judgment the right to "provide, install, operate and maintain the Machine" is the only relevant supply. The next question is whether it is an exempt supply.

8. I begin again with the European jurisprudence. Article 13B(b) of the Sixth Directive exempts "the leasing or letting of immovable property". This must be interpreted strictly: see Stichting Uitvoering Financiele Acties v. Staatssecretaris van Financien [1989] ECR 1737. The English Court must construe our domestic legislation so as to accord with the Directive and the European Court's interpretations of it if that can be done without distorting the meaning of the domestic legislation: per Lord Keith in Webb v. EMO Air Cargo (UK) Ltd [1993] 1 WLR 49, 59. In Staatssecretaris van Financien v. V.O,.F. Coffeeshop "Siberie" (C-158/98) Advocate General Fennelly did not find it necessary to express a concluded opinion about whether or not the renting of a table for selling drugs in an Amsterdam coffee shop fell within Article 13B but he did observe:-

"Suffice it to say that I would not, prima facie, be inclined to regard the renting of a table in a coffee shop as amounting to the letting of immovable property for the purposes of construing an express V.A.T. exemption that must, in any case, be narrowly interpreted."

He may well be right. On the other hand Advocate General Darmon expressed the view Lubbock Fine v. Commissioners of Customs & Excise [1993] ECR 1687:-

"39. It is common ground that a letting is a contract by which the owner transfers in return for a rent certain rights in his property, such as the right of enjoyment of property, whatever the nuances of national law on this point."

Then he added a footnote:-

"In my view .... a letting for the purposes of community law includes ... a license....".

No suggestion was made to us (nor to this Court in the British Airports Authority case) that in exempting a "license to occupy land" our V.A.T. legislation strayed outside Article 13B of the Sixth Directive. The submission was rather that, consistent with the general duty to construe the exemption narrowly, we should not find that such a license was granted in this case.

9. I agree that at first blush a license to place a cigarette vending machine in a public house seems a little removed from a letting of immovable property. But the proper question is whether it is a license to occupy land.

A license to install the Machine and operate it at the premises clearly is a license (to adopt the language of Clause 9(k)) to place the Machine on or annex it to the premises. It remains there, i.e. it occupies its allotted space, for a term of two years. Clause 14 acknowledges that a license has conferred some interest in and over the premises. The Appellant seemed to have conceded before the Judge that it was a license to occupy land.

Mr Milne Q.C. has valiantly submitted that what was granted was merely a license to use land, not to occupy land. He submits that where a person is granted a specific plot or area of land for a defined period, such as shop premises or a box at the Royal Albert Hall, the supply will be of a license to occupy land (see the British Airports Authority case and Zinn's case). By contrast, where members of a club are allowed to wander about or sit in the club grounds there is no license to occupy land within the meaning of the exemption (see Trewby (on behalf of himself and the members of Hurlingham Club) v. Customs & Excise Commissioners [1976] STC 122).

Like the Chairman of the Tribunal, I do not see that it matters who has controlling power to decide where the Machine should be sited or for how long it should remain so sited; but to my mind, the more important point is that it occupies the place where it was or even where it has from time to time been placed, and that the occupation of that space endures for the term of the Agreement. The Machine is not temporarily making use of the premises as Mr Trewby and members of the Hurlingham Club did for so long as they were enjoying the facilities for sport and recreation. The issue for Mr Zinn was whether there was a purchase of a seat at the Albert Hall or of a right to attend performances albeit seated and it was held that the grant of a permanent seat was a license to occupy land. It seems to me that the Appellant's employees may have had the right to go on to and so "use" the premises for the purpose of collecting the cash, re-stocking, servicing the Machines and so forth, but because the Machine was taking up its space on the premises it was occupying the land it stood on or was annexed to. Accordingly the grant of the license to do so falls within Part II Group 1 of Schedule 9 to the Act and is thus exempt by virtue of Section 31. I would therefore dismiss the appeal.

LORD JUSTICE SCHIEMANN: I agree.

LORD JUSTICE HENRY: I also agree.

Order: Appeal dismissed with costs. Leave to appeal to House of Lords refused.