England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL
LON/03/0913

		Royal Courts of Justice Strand, London, WC2A 2LL
		24th March 2006

Lord Justice Chadwick :

1. This is an appeal from a decision of the VAT and Duties Tribunal (Dr Kameel Khan, chairman, and Miss Sheila Wong Chong FRICS) released on 14 February 2005. The Tribunal upheld the decision of the Commissioners of HM Customs and Excise that an election to waive exemption made by the Principal and Fellows of Newnham College, Cambridge, under paragraph 2 of schedule 10 to the Value Added Tax Act 1994 ("VATA 1994") in respect of land upon which the College proposed to rebuild (in part) and refurbish its library was of no effect by reason of sub-paragraph 2(3AA) of that schedule. If the decision stands the College is unable to recover the value added tax which it has paid on the cost of the works which it has carried out.

The statutory framework

2. Value added tax ("VAT") is charged on any supply of goods or services made in the United Kingdom which is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him – section 4(1) VATA 1994. "Input tax", in relation to a taxable person, includes VAT on the supply to him of any goods or services – section 24(1); "output tax" means VAT on supplies which he makes – section 24(2) VATA 1994. A taxable person is required to account for and pay VAT by reference to prescribed accounting periods – section 25(1); and he is entitled at the end of each prescribed accounting period to credit for, and to deduct from any output tax due from him, so much of his input tax as is allowable - section 25(2). If the amount of the credit to which he is entitled exceeds the amount of the output tax for which he must account, he is to be paid the excess by the Commissioners. He is entitled to require payment of the "VAT credit" – section 25(3) VATA 1994.
3. Input tax is allowable for that purpose only if attributable to supplies which the taxable person makes in the course or furtherance of his business – section 26(1); and then only if those supplies are themselves taxable supplies – section 26(2) VATA 1994. Generally, a person will have no ability to recover the tax charged on supplies made to him if the supplies which he does make in the course of his business are not taxable supplies – because, in such a case, his input tax will not be allowable (section 26(2) VATA 1994). That will be the position where the supplies made by him are exempt supplies within section 31 and schedule 9 VATA 1994. The provision of education by an eligible body is an exempt supply – item 1 in Group 6 of schedule 9. An eligible body includes a United Kingdom university and a college of such a university – note (1)(b) to item 1, Group 6.
4. It follows that an eligible body whose business is the provision of education and who carries out works to a building will, generally, bear the burden of the VAT charged on the supply of goods and services in connection with those works. The VAT on the supply of those goods and services (input tax) will not be allowable under section 26(2) VATA 1994 because it will not be attributable to taxable supplies made by that body in the course of its business. Further – absent an election under paragraph 2 of schedule 10 VATA 1994 - it would not make a taxable supply if it were to let the building for educational purposes. That is because – absent an election – a lease of the building would be the grant of an interest in land within item 1 in Group 1 of schedule 9 and would not be taken out of that item by the exceptions described in paragraphs (a) to (m). The grant would, itself, be an exempt supply.
5. Sub-paragraph 2(1) in schedule 10 VATA 1994 is in these terms (so far as material):

"Subject to sub-paragraphs (2), (3) and (3A) and paragraph 3 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."

If an effective election can be made under paragraph 2 of schedule 10, the grant of a lease of the building will not be treated as an exempt supply by virtue of section 31 and schedule 9 VATA 1994. The grant will be a taxable supply. The input tax on goods and services supplied in connection with the development will be attributable to that supply; and so the input tax will be allowable. The person making the election will be entitled to receive payment of a VAT credit. It is that result which the College sought to achieve by the arrangements which I shall describe in a subsequent section of this judgment.

6. Whether that result has been achieved in the present case turns on the application of sub-paragraph 2(3AA) in schedule 10 VATA 1994 to those arrangements. The sub-paragraph is in these terms (so far as material):

"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 –

(i) the grantor, or

(ii) . . .

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."

7. Paragraph 2(3AA) in schedule 10 VATA 1994 must be read with paragraphs 3A(7), 3A(9) and 3A(13):

"3A(7) For the purposes of paragraph 2(3AA) . . . land is exempt land if . . . –

(a) the grantor,

(b) . . . , 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.

. . .

3A(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

. . .

3A(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."

It is common ground that, if the College is in occupation of the land in respect of which it is the grantor, it is not in occupation of that land wholly or mainly for eligible purposes – because its occupation would be for the purpose of making supplies (educational services) which would be exempt supplies within Group 6 of schedule 9 VATA 1994.

8. The issue is whether the College remained in occupation after the grant of the lease. If so, the land is exempt land within paragraph 3A(7); and is exempt land for the purposes of paragraph 2(3AA). Notwithstanding the election under paragraph 2(1) of schedule 10 VATA 1994 the grant of the lease is not to be taken as a taxable supply.

The underlying facts

9. The College is a body corporate established by Royal Charter. Although within the University of Cambridge, it is autonomous in relation to the management of its own property. The educational services which it provides are exempt supplies for the purposes of VATA 1994.
10. The Tribunal described the background against which the College decided to rebuild and refurbish its library:

"4. The first College library building, part of the subject of this appeal, was built in 1897 and stored the College books. The library is well stocked and has several rare and unique books. There is a rare book collection. The library building is called the Yates Thompson Building, after one of the College's chief benefactors. An extension to the Yates Thompson Building which was added in 1962 (the Horner Library) suffered considerable decay and the building had to be replaced. A project was developed to replace the 1962 extension while retaining the Yates Thompson, a building of some historic significance. To accommodate the renovation project, some surrounding buildings had to be demolished. The proposed new building was to provide new and important facilities for students. It would be more spacious, have more books and shelving and accommodate both the College students and outside researchers at the College.

5. The funding for the new library facilities came from College alumnae, donations, legacies and an endowment, built up since 1870, to provide the income needed to run the College."

11. The College was concerned that, given its exempt status, the value added tax on the cost of the works to be carried out would not be recovered. It sought professional advice. Pursuant to that advice the College took the steps described by the Tribunal at paragraphs 7 to 10 of its decision:

"7. . . . The College formed a wholly owned subsidiary, Newnham College Library Company Limited (NCLCL), and funded all its setup costs. Its directors were members of the College.

8. The College elected to waive exemption (opted to charge VAT tax) in respect of the main College building (including the library) on the College site. This was done on 29 January 2001. At the start of the library construction works an appropriate notification of the election was provided to Customs & Excise. . . . The construction work on the new library took place between June 2001 and November 2003 with the library opening for business on 12 January 2004.

9. An Agreement for Lease was entered into between the College and NCLCL on 22 February 2001. A formal lease was granted on completion of the building. The Agreement for Lease at a premium of £1,000 plus VAT, was later superseded by the formal lease (the draft of which was attached to the Agreement for Lease). The formal lease of the new library granted by the College to NCLCL was for 11 years from 1^st January 2004 at a basic rent of £165,000 plus VAT per annum.

10. In addition to the Agreement for Lease, the College entered into other agreements with NCLCL at the same time. These included:

(a) An agreement for the sale of library books and other library assets of the College;

(b) An agreement for the secondment of library staff from the College to NCLCL;

(c) An administration agreement for the running of the library (by the seconded staff); and

(d) An agreement for the management of rare books.

To complete the set of agreements required to implement the advised structure, NCLCL entered into an Agreement with the College for the Hire of Library Books in order to provide library services to the College. This was entered into on 2 July 2002 (sic)."

The agreement for the hire of library books – and the other agreements to which the Tribunal referred in paragraph 10 of its decision – was made on 2 July 2001.

12. The Tribunal went on (at paragraph 10 of its decision) to describe the agreements for the sale of library books and other assets and the secondment of staff and the administration agreement:

"The agreement for the sale of the library books and other library assets provided for the sale of 76,142 books, 2,500 metres of shelving, three kick stools and a hat stand. The assets were sold for their second hand value of £10,000 plus VAT and the books were [sold for] £200,000 plus VAT. The rare books collection was not transferred under this agreement.

The agreement for the secondment of the existing library staff to NCLCL included the librarian, senior librarian assistant, library assistant and the library graduate trainee. The staff were seconded but their employment contract remained with the College/University to maintain their pension scheme entitlements.

The administration agreement allowed the College to undertake, for an annual fee, administrative services for NCLCL including accounting, record keeping, preparing returns, financial information and support services including property management."

It observed that the management of rare books agreement was self explanatory. In relation to the agreement for the hire of library books, the Tribunal said this:

"Under the agreement for the Hire of Library Books, NCLCL provided to the College "the Services" which are defined in the Schedule to the Agreement as being:

'The provision of the Books on hire to the College for use of the Fellows, undergraduates, graduate students and staff of the College or such other persons or authorities nominated by the College upon the terms and conditions from time to time in force. The provision of appropriate arrangements for the filing, maintenance and archiving of Books. All such incidental services as are necessary for the provision of an effective library service.'

…

"The Books" is defined as meaning:

'all journals, periodicals, books, booklets, brochures, pamphlets, statistics, leaflets, newspapers, theses and other publications from time to time owned by the Company (NCLCL) and held in the Premises.'

The fee charged by NCLCL to the College for library services is calculated on an annual basis. It is based on NCLCL's budgeted costs including accommodation costs, staff costs, new acquisitions and overheads, with an added profit uplift. NCLCL was therefore a company carrying on trading activity and formed with a view to making profit. The fee charged under the Hire of Library Books agreement continues to be charged on this basis."

13. There is no dispute that the arrangements which the Tribunal described were made with a view to enabling the College to treat the input tax paid on the cost of the building and refurbishment works as allowable for the purposes of section 25 VATA 1994. The College solicitors had written to Customs and Excise some months in advance of the agreement for the lease to invite confirmation that an election to waive exemption would not be disapplied under paragraph 2(3AA) in schedule 10, VATA 1994. That confirmation was not obtained. In the event, notice of election was given on 21 February 2001 – the day before the agreement for the lease was executed. The decision to treat the election as disapplied was notified by Customs and Excise to the College by letter dated 23 August 2003. Notice of appeal to the Tribunal was given on 22 September 2003. As appears from that notice, the amount of the tax which – if the decision stands – the College will be unable to recover is not insubstantial.

The proceedings before the Tribunal

14. The appeal was heard by the Tribunal on 23 and 24 September 2004. It gave its decision in writing on 14 February 2005. As I have said, the Tribunal upheld the Commissioners' decision; holding that the effect of the arrangements was that the College remained in occupation of the library after the grant of the lease (on 4 March 2004). More precisely, I think, the Tribunal must be taken to have concluded that, in law, the effect of the arrangements was that, following the grant, the land would become exempt land - because the College would be in occupation for the purposes of paragraph 3A(7) in schedule 10 VATA 1994 – and that the intention or expectation which must be attributed to the College (as grantor of the lease) in the context of paragraph 2(3AA) in schedule 10 is that the arrangements would have their true legal effect. The fact that the College believed, at the time when it entered into those arrangements, that the arrangements would not have that effect was irrelevant. It has not been suggested that the Tribunal was wrong to approach the issue on that basis.
15. The Tribunal directed itself that "occupation" was a question of fact in each case; and that it involved "physical and continuous presence and a degree of control." It is possible to identify in the Tribunal's decision three reasons why the Tribunal reached the conclusion that that test was satisfied. First, there was the use of the library by members of the College. Second, there was the involvement of College staff (on secondment) in the day to day running of the library. Third, there was the control which the College exercised over NCLCL. The relevant passages in the Tribunal's decision are set out below.
16. First, as to the use of the library by members of the College, the Tribunal said this, at paragraph 14.32 of the decision:

"The College has a physical presence in the library through its students who use the library and who are the main users of the library. Membership of the College is a qualification for using the Library. . . .

In this case the students are members of the College and use the library in that capacity. They are not like members of the public who, for example, would use a golf course, restaurant or hotel on an occasional basis . . . . While it is possible to say that the College shares occupation with NCLCL, occupation for our purpose does not have to be exclusive. The students may have a non-exclusive right to use the library and still be in occupation through their presence. . . ."

Second, as to the involvement of College staff (also at paragraph 14.32):

"The Appellants argued [that] . . . NCLCL employees on secondment from the College will control, manage and administer the library building and the supply of library services. I do not accept this. Their contract of employment remains with the College and they can be dismissed by the College."

Third, as to the powers of control retained by the College (at paragraphs 14.24 and 14.32):

". . . NCLCL is a creature of the College. It was formed as an off the shelf company in January 2001 with the 'intention to hive off the occupation of the library down into NCLCL as a subsidiary of the College'. The College funded NCLCL's start up costs by subscribing for redeemable shares. . . . The directors of NCLCL are Professors Onora O'Neill (Principal of the College), Dr Gill Sutherland (Senior Fellow of the College) and Ian Mark Le Mercier Du Quesnay (Bursar of the College). The secretary of NCLCL is the College's Accountant, Richard Robertson. . . . In reality, the College controlled NCLCL. It was not an independent company . . ."

"It was clear when the agreements were entered into that the College would . . . control, on its own or through its staff, the entire chain of events. . . . It is clear that taken as a whole, the College has control of the library through its members on the board of NCLCL its subsidiary company and through its seconded staff who remain employees of the College. If one takes both of these entities together then it can be said that the College is in control of the library. The people who run NCLCL and the College are the same with different hats. . . ."

17. It is clear that the Tribunal took the view that paragraph 2(3AA) in schedule 10 VATA 1994 was an anti-avoidance provision; and that the interpretation of that paragraph had to be approached with that feature in mind. These two themes run through the numerous sub-paragraphs of paragraph 14 of the decision. They can be seen in the following passages:

"VAT on commercial property was introduced from 1 April 1989. It meant that businesses which were partially exempt or exempt, such as banks, would incur an additional irrecoverable VAT cost on such expenditure as rent and construction. Various tax opportunities came onto the market, which sought to allow recovery of VAT incurred by these exempt or partially exempt businesses and in this sense mitigated the VAT cost to those businesses. The Commissioners of Customs & Excise sought to introduce various anti-avoidance provisions to combat these planning opportunities. The main idea behind the anti-avoidance legislation was to disapply the election to waive exemption (election to charge VAT) if certain circumstances were satisfied. . . ." [paragraph 14.5]

"In the legislation, which applied to elections to waive exemption after March 1997, the election was disapplied if certain stated conditions were satisfied. It must be borne in mind that the mischief, which the legislation sought to attack, was to prevent partially or fully exempt business from mitigating the cost of irrecoverable VAT by restructuring a transaction." [paragraph 14.6]

"The legislation, in broad terms, sought to disapply an election to charge VAT, applying where a building was to be occupied by the owner, his financier or a person connected with either for a purpose or purposes which was not fully taxable." [paragraph 14.8]

"The issue of the disapplication of the election to waive election for VAT in relation to the new library buildings leased by the Appellants to their wholly owned subsidiary, NCLCL, is to be determined by reference to the anti-avoidance legislation contained in Schedule 10 paragraph 2(3AA), . . . and 3A 1994 Act;" [paragraph 14.13]

"In applying the relevant statutory provisions, one has to be aware that these are anti-avoidance provisions and it is encumbant (sic) in looking at the legislation to look at the reality of the structure. The transaction and documentation implementing the transaction must be able to withstand an investigation into the facts and circumstances surrounding the structure. . . . [NCLCL] . . . was . . . a company set up in order to allow a taxable lease to be granted by the College, which in turn allowed the College to recover VAT on its construction costs since such VAT would ordinarily be [irrecoverable]" [paragraph 14.24]

". . . one has to look at the substance and reality of the transaction and documentation. In doing so, one has to establish the chief purpose of the transaction. The purpose of the transaction in this case would appear to be to provide the taxpayer with a tax advantage without affecting their financial position. The College would be charged roughly the same amount for the provision of library services as NCLCL pays in rent for the lease. There appears to be no real transfer of economic risk and there was a certainty about the structure from start to end." [paragraph 14.31]

". . . It is clear that the College had no purpose in leasing its library, selling its books and seconding its staff other than for the recovery of VAT. To allow the election to waive exemption to stand would be to allow an abuse of the legislation and go against its spirit and intentment (sic). The conditions for VAT recovery in the legislation should not be artificially created." [paragraph 14.32]

This appeal

18. An appeal from a decision of the VAT and Duties Tribunal to the High Court on a point of law lies under section 11(1) of the Tribunals and Inquiries Act 1992. But a party may appeal direct to the Court of Appeal if the three conditions set out in article 2 of the Value Added Tax Tribunals Order 1986 (SI 1986/2288) are satisfied. Those conditions are (a) that the parties consent, (b) that the tribunal endorses its decision with a certificate that the decision involves a point of law relating wholly or mainly to the construction of an enactment, or of a statutory instrument, or of any of the Community Treaties or any of the Community Instruments, which has been fully argued before it and fully considered by it, and (c) that the leave of a single judge of this Court has been obtained pursuant to section 54(6) of the Supreme Court Act 1981.
19. On 4 March 2005 solicitors acting for the College sought a certificate from the Tribunal under article 2(b) of the 1986 Order on the grounds that the Tribunal's decision involved a point of law relating wholly or mainly to the construction of an enactment "namely paragraphs 2 and 3 of Schedule 10 to the Value Added Tax Act 1994" and that "the true construction of that enactment is a matter of general importance for the understanding of the law relating to Value Added Tax". A certificate was given by the chairman of the Tribunal on 18 May 2005. On 7 June 2005 the Commissioners gave their consent to an appeal direct to this Court. On 22 July 2005 leave was obtained from a single judge of this Court (Lord Justice Laws) who expressed himself satisfied, after consideration on the papers, that the case was "plainly fit for a direct appeal from the Tribunal to the Court of Appeal". So it is that the matter comes before this Court without having been considered by a judge of the High Court. This Court does not have the advantage (which it usually enjoys on a VAT appeal) of the analysis which a judgment of the High Court would provide.
20. In its grounds of appeal the College challenges each of the three elements in the reasoning which led the Tribunal to the conclusion that the College was in occupation of the library: (i) use by students and fellows, (ii) the presence of College employees on secondment to NCLCL and (iii) the control which the College was able to exercise over NCLCL. But there is a challenge, also, to the approach which the Tribunal adopted to the interpretation of what it saw as the anti-avoidance provision in paragraphs 2(3AA) and 3A(7) of schedule 10 VATA 1994. In particular it is said that the Tribunal was wrong to allow its interpretation of the legislative provisions to be influenced by the fact that the object of the arrangements into which the College had entered – and the motive of the College in entering into those arrangements – was to avoid payment of output tax.
21. The Commissioners do not seek to uphold the reasoning of the Tribunal in so far as it was based on a perception that the College was engaged in an abuse of the legislative provisions – as might appear from the passage at paragraph 14.32 which I have set out above. The position taken by the Commissioners is set out at paragraph 71 of the skeleton argument lodged on their behalf:

"However it appears that the Tribunal may have been particularly influenced by the (admitted) fact that the Appellants were engaged in tax avoidance. Tax avoidance is relevant to this appeal only to the extent that Schedule 10 contains anti-avoidance provisions which should be construed where possible to achieve the legislative purpose . . . The Commissioners do not seek to uphold the Tribunal's reasoning to the extent (if any) that it accorded the tax avoidance motive a wider significance. Moreover, the Commissioners do not (and did not below) rely upon the principle of abuse of rights or abuse of law."

That makes it unnecessary to address the submissions advanced by the College in support of its contention that the Tribunal was wrong to allow itself to be influenced by the fact that the motive of the College in entering into the arrangements was to avoid payment of tax. It makes it unnecessary, also, to consider the judgment of the Court of Justice of the European Community in Halifax plc v Commissioners of Customs and Excise (Case C-255/02) and other joined cases, decided on 21 February 2006, after the hearing of this appeal. But, although it is accepted that the tax-payer's motive is irrelevant, the Commissioners maintain their submission that the object of the legislative provisions is to prevent the avoidance of tax by arrangements which have no underlying commercial purpose (other than the avoidance of tax) and that the provisions should be interpreted with that in mind.

The legislative purpose

22. VAT is a Community tax in the sense that it was introduced to give effect to EC Council Directives on the harmonisation of the legislation of Member States concerning turnover taxes – in particular, to give effect to the Sixth Council Directive of 17 May 1977 (77/388/EC). Article 13 provides for the exemption from tax of certain categories of supply within the territory of the Member State. Article 13A requires the exemption of certain activities in the public interest – amongst which is education. Article 13B requires the exemption of certain other activities – amongst which is the leasing or letting of immovable property (subject to specified exceptions and other exceptions which the Member State may apply). Article 13C is in these terms (so far as material):

"Member States may allow taxpayers a right of option for taxation in cases of

(a) letting and leasing of immovable property;

(b) the transactions covered in B(d), (g) and (h) above.

Member States may restrict the scope of this right of option and shall fix the details of its use"

23. Section 31 VATA 1994, read with schedule 9, is intended to give effect to the obligations imposed on the United Kingdom by Articles 13A and 13B of the Sixth Directive. In particular Item 1, Group 1 in Part II of schedule 9 exempts "the grant of any interest in or right over land or of any licence to occupy land . . ." other than the specified exceptions set out in paragraphs (a) to (m). Section 51 VATA 1994, read with paragraphs 2 to 4 of schedule 10 ("Election to waive exemption"), gives effect to Article 13C. The paragraphs allow taxpayers "a right of option for taxation"; and they include (at sub-paragraph 2(3) and, now, at sub-paragraph 2(3AA)) provisions restricting the scope of that right of option.
24. The provisions now enacted in schedule 10 VATA 1994 were first introduced by the Finance Act 1989 – as schedule 6A to the Value Added Tax Act 1983. We were told that the provisions were introduced in response to the decision of the European Court of Justice in EC Commission v United Kingdom (Case 416/85) [1988] STC 456; but nothing turns on that. VATA 1994 was enacted on 5 July 1994.
25. Shortly thereafter schedule 10 was amended by the VAT (Buildings and Land) Order 1994 (SI 1994/3013). The 1994 Order introduced (with effect from 30 November 1994) two new sub-paragraphs – paragraphs 2(3A) and 3(8A) – into schedule 10 VATA 1994. Paragraph 2(3A) was in these terms:

"Sub-paragraph (1) above shall not apply in relation to a grant made on or after 30th November 1994 if –

(a) the person making the grant and the person to whom the grant is made are connected persons; and

(b) either of them is not a fully taxable person."

We were told that the purpose of that restriction was to deny the election to waive exemption in cases where an exempt business sought to recover output tax on development costs by a sale and leaseback between associated companies. Paragraph 3(8A) defined "connected persons" (by reference to section 829 of the Income and Corporation Taxes Act 1988) and "fully taxable person". It is, I think, common ground that paragraph 2(3A) (read with paragraph 3(8A)) would have been apt to disapply an election under paragraph 2(1) on the facts in the present case. But those paragraphs were repealed (with effect from 26 November 1996) by section 37(1) of the Finance Act 1997.

26. Sub-paragraphs 2(3AA) and paragraph 3A were introduced into schedule 10 VATA 1994 by section 37(2) of the Finance Act 1997. Curiously, Parliament seems to have neglected to make the appropriate amendment to paragraph 2(1) of the schedule which (in terms) continues to be subject to paragraph 2(3A) rather than to paragraph 2(3AA). The mischief which the change was intended to meet was explained in News Release B4/96 (noted in Simon's Tax Intelligence 1996, Issue 49, 26 November 1996):

"A scheme widely used in the banking and insurance sectors to avoid VAT on the property they use for business purposes is to be stopped. This will increase revenue by £110 million in the first full year.

The basic principle of VAT is that exempt businesses should not recover the tax on their inputs but businesses which make VATable supplies can. Businesses in the exempt sector have been getting round this by exploiting a feature of the law known as "the option to tax" to recover the VAT on commercial property up-front and only pay tax on the rent. This can result in a substantial loss to the Exchequer.

The new measure provides that, from the date of Royal Assent, where property is not used mainly for taxable business purposes, the option to tax will no longer be available. . . ."

A further indication of the thinking which lay behind the change appears in News Release 6/97 issued on 4 March 1997 (noted in Simon's Tax Intelligence 1997, Issue 10, 13 March 1997):

"Exchequer Secretary Philip Oppenheim today announced an amendment to the Finance Bill which will meet the concerns of industry and effectively counter VAT avoidance schemes on commercial property.

Mr Oppenheim said –

'When I met with the property industry in January I accepted that although this clause was intended to affect exempt sector avoiders such as banks and financial institutions, the property sector itself might take some of the hit. That is why I gave an assurance that we would bend over backwards to try and tighten the definitions to target better the real avoiders.'

The changes will mean a much more tightly focussed approach to counter VAT avoidance, which will not impact on businesses leasing property who have no intention of reclaiming VAT they are not entitled to. They result from a lengthy and constructive dialogue between Government and the trade which should secure the projected £100 million annual revenue yield and end VAT avoidance by large companies in this area.

However, the new law now relies upon a test of intention. Mr Oppenheim warned that Customs & Excise would be watching carefully for any evidence of continued avoidance by any manipulation of the test, and he would have no hesitation in reverting to a wider measure and introducing it by order if necessary. "

The intended effect of the changes was explained in an update to Notice 742, issued at the time of the enactment of the 1997 Act:

"The restriction on the option to tax between connected parties . . . has been removed . . . In its place, a new restriction has been introduced with effect from 19 March 1997 which applies where a property is a capital item for VAT purposes which will be used by a person who acquired it, or financed its acquisition, with a view to occupying it other than for taxable business purposes."

27. We were taken to further amendments to schedule 10 VATA 1994, made by the VAT (Buildings and Land) Order 1999 (SI 199/593) – which took the legislation into the form in which it was at the time of the grant of the lease in the present case - and by the VAT (Buildings and Land) Order 2004 (SI 2004/778). Save that they provide further illustration of the incremental approach to legislation in this field, those amendments are not material in the context of this appeal.
28. I have set out the legislative history in deference to the careful arguments that were addressed to the Court by counsel for the Commissioners. But I am not persuaded that an understanding of that history is of any real assistance in the determination of the issues which are now before the Court. It is plain that the Sixth Directive permits an election to waive the exemption which would otherwise be afforded to the letting and leasing of immoveable property. It is equally plain that the Sixth Directive permits a Member State to restrict the circumstances in which that election can be exercised. Paragraph 2(1) of schedule 10 VATA 1994 confers the right to elect: paragraph 2(3AA) seeks to restrict that right.
29. It is clear that the object of the restriction is to preserve the basic principle that an exempt business should bear input tax on supplies made to it by being denied the opportunity to treat that tax as allowable tax giving rise to a VAT credit. The restriction in paragraph 2(3AA) seeks to achieve that object by denying to an exempt business the option to treat the letting of a building which it will continue to occupy (for the purpose of that business) as a taxable supply. But that appears from a reading of paragraph 2(3AA) in the context of the other provisions in paragraphs 2 and 3A of schedule 10. The legislative history illustrates the difficulties encountered by the United Kingdom government in promoting legislation which achieves that object without giving rise to unintended consequences. But it does not, I think, throw light on the question which the Court has to determine on the present appeal.
30. The task of the Court is to interpret the legislation which has been enacted; having in mind the object for which it has been enacted, but recognising that the extent to which that object has been achieved in the particular case must depend on the legislation itself. The Court cannot go outside the legislation. It must accept that, if the legislation fails to achieve that object in the particular case, that must be assumed to reflect Parliament's intention that it was not necessary or appropriate to do so.

Occupation

31. We were referred to two decisions of the Court of Justice on the scope of the exemption – in the context of article 13B of the Sixth Directive – in respect of "the leasing or letting of immovable property". It was said that those decisions threw light on the meaning to be given to "occupy" or "occupation" of land in schedule 10 VATA 1994.
32. The two decisions of the Court of Justice to which we were taken – in Sweden v Stockholm Lindöpark AB (Case C-150/99) [2001] STC 103 and in the joined cases of Customs and Excise Commissioners v Mirror Group plc (Case C-409/98) and Customs and Excise Commissioners v Cantor Fitzgerald International (Case C-108/99) [2001] STC 1453 – were considered by the House of Lords in Customs and Excise Commissioners v Sinclair Collis Ltd [2001] UKHL 30, [2001] STC 989. The propositions to be derived from those decisions were summarised by Lord Millett in Sinclair Collis ([2001] UKHL 30, [41], [2001] STC 989, 999b-f). It is, I think, sufficient to set out that summary:

"This concept [a letting of immovable property] must be given a community interpretation but is not defined in the Directive. The recent case law of the European Court of Justice, however, provides some guidance to its meaning. The following propositions may be derived from recent decisions of the court: (1) Agreement as to the duration of the right of enjoyment of the immovable property is an essential element of a contract to let, and the duration of the right is a factor which the parties should take into account, in particular as a criterion for determining the price: (EC Commission v United Kingdom (Case 359/97) [2000] STC 777, p 805, paras 68 and 69 of the judgment of the court; and Sweden v Stockholm Lindöpark AB (Case C-150/99) [2001] STC 101 113, para 37 in the opinion of the Advocate General and p 126, para 27 in the judgment of the court.). (2) It is a salient and typical characteristic of a letting of immovable property that it necessarily involves the grant of a right to occupy a defined area of property and to admit or exclude others: (Sweden v Stockholm Lindöpark AB at pp 113 and 114, paras 38 and 40 of the opinion of the Advocate General; Commissioners of Customs and Excise v Mirror Group Newspapers plc (Case 409/98) (Unreported) at para 25 in the opinion of the Advocate General). (3) The characteristics of a letting must predominate in the contract. Where the use of the property is of secondary importance, this requirement is not satisfied. Accordingly the purpose of the contract and the importance of the use of the property to the recipient of the supply are relevant in determining whether the contract should be characterised as a letting of immovable property: (EC Commission v United Kingdom at p 791, paras 76 and 77 in the opinion of the Advocate General; Sweden v Stockholm Lindöpark AB at p 126, para 26 in the judgment of the court; Faarborg-Gelting Linien A/S v Finanzamt Flensburg (Case 231/94) [1996] ECR 1-2395, 2411, para 12 in the judgment of the court)."

33. The question before the House of Lords in Sinclair Collis was whether the grant by the owner of premises (the siteholder) to an owner of a cigarette vending machine of the right to install, operate and maintain the machine on the premises for a period of two years, in a place nominated by the siteholder and in return for a percentage of the gross profits of the sale of cigarettes and other tobacco goods on the premises, was capable of amounting to the letting of immovable property within the meaning of article 13B. The House of Lords referred that question to the European Court of Justice. The Court answered the question in the negative – (Case C-275/01) [2003] STC 898.
34. The answer given by the European Court of Justice was in accord with the views expressed by Lord Millett and Lord Scott of Foscote in the House of Lords. Although concurring in the decision to refer, neither had been in doubt as to what the answer should be. Lord Millett had said this, at [2001] UKHL 30, [49]:

"The company cannot sensibly be described as occupying any part of the premises by its machine. Such a concept can hardly apply where the part of the premises in question has no independent existence of its own, being defined by the dimensions of the machine and its location from time to time. There is in my view no close analogy with a kiosk or shop counter which is capable of separate occupation by a lessee and his licensees. The agreement between the company and the site owner is not, in my view, an agreement for the letting of defined areas of land with a right to place machines on them, but a right to bring machines onto the site owner's premises and place them in suitable positions there. The site owner remains in sole occupation of the whole of his premises including the areas from time to time occupied by machines. The company for its part retains the property in the machines and has rights of access to them, but is given no right to occupy any part of the premises."

35. Lord Scott had explained that not all licences that transform a use of the land of another from what would otherwise have been trespass into a lawful use are to be regarded as licences to occupy land. He pointed out that "occupation" may have different meanings in different contexts; but that, if the occupation were to attract exemption from VAT, the characteristics of "leasing or letting" must be present. He went on to say this (ibid, [72] – [74]):

"72. Whether, in a particular case, a contract conferring a licence over land creates a relationship between the licensee and the land that can be described for VAT purposes as "occupation" is, in my opinion, a question of fact and degree. The same must, in my opinion, be true of a "letting" for the purposes of article 13B(b) of the Directive.

  73. So what are the characteristics that distinguish a licence to occupy from a mere licence to use? There are, in my opinion, two characteristics, one or other of which must, in some sufficient degree, be present. One is possession. The other is control. If neither is present, I find it difficult to understand how the licensee could be said to "occupy".

  74. There is some assistance to be gained from authority. In R v St Pancras Assessment Committee (1877) 2 QBD 581, 588, Lush J said: 'Occupation includes possession as its primary element …' And in Newcastle City Council v Royal Newcastle Hospital [1959] AC 248, 255, Lord Denning said: 'Occupation is matter of fact and only exists where there is sufficient measure of control to prevent strangers from interfering …' These two elements, possession and control, seem to me to be the important ingredients of a relationship between an individual and land apt to be described as 'occupation'. A 'licence to occupy' is, in my opinion, to be read as meaning a licence to go into possession, not necessarily exclusive possession, or to go on to the land and take some degree of control of it. If neither of these features is present, the licence cannot, in my opinion, properly be described as a licence to occupy."

36. It is, of course, important to keep in mind that the question in Sinclair Collis - and in the earlier case of Stockholm Lindöpark – was whether the licence to use land was to be treated as a "letting" of that land for the purposes of Article 13B of the Sixth Directive. It was in that context that the Court of Justice determined that it was necessary to distinguish between a licence to use and a licence to occupy. But the power to allow a right of option to taxation, conferred by article 13C(a), is a power exercisable only in cases of letting or leasing of immovable property; and paragraphs 2, 3 and 3A of schedule 10 VATA 1994 – which are enacted pursuant to that power - must be interpreted with that in mind. For my part, therefore, I think there is force in the submission, made on behalf of the College, that the meaning to be given to "occupy" and "occupation" in schedule 10 should be consistent with the approach in the decisions of the Court of Justice to which we were referred; and consistent with the approach of the House of Lords in Sinclair Collis. I would accept, therefore, that to be in "occupation" of land for the purposes of paragraph 3A(7) requires more than a right to use that land. It requires some degree of control over the user by others – that is to say, some degree of control over what those who are not also in occupation of the land can do on the land.

Use of the library by students and fellows

37. It is the absence of any element of control by students and fellows of the College over access to and use of the library by others which – as it seems to me – makes it impossible to sustain the first of the reasons given by the tribunal in this case. There is an additional difficulty in that it is by no means self-evident – at least to me - that, even if it could be said that the students and fellows of the college who use the library could be said to be in occupation of the library, their occupation would be occupation by or on behalf of the College. But it is unnecessary to confront that difficulty unless their use has the necessary quality of occupation.
38. In that context the Commissioners rely on the earlier decision of the tribunal (Dr Nuala Brice, chairman, and Mr S K Das) in Brambletye School Trust Limited v Commissioners of Customs and Excise (Tribunal Decision No 17688, 31 May 2002). The facts in that case are close to (but not indistinguishable from) those in the present case. Brambletye School was an independent boarding school for pupils between the ages of seven and thirteen years. The school was run by the appellant, Brambletye School Trust Limited. In 1999 and 2000 the Trust constructed a new sports hall for use by the pupils. It incorporated a subsidiary company, Brambletye Sports Limited, which it controlled. The Trust granted a lease of the sports hall to its subsidiary. The subsidiary ran the Brambletye Sports Club. Membership of the club was open to pupils and staff at the school, family members, and members of the public. All pupils were, in fact, members of the club; their membership fees being collected each term as part of the school fees. The Trustee sought to elect, under paragraph 2(1) of schedule 10 VATA 1994, to treat the grant of the lease as a taxable supply. The Commissioners sought to disapply that election under paragraph 2(3AA) of schedule 10. The issue turned on whether the Trust was in occupation of the sports hall.
39. The tribunal directed itself that the ordinary meaning of the word "occupy" is "to be present in"; that "occupation" was a less formal concept than possession; and that the word "occupation" was a general and wide term. It went on, at paragraph 34 of its decision, to say this:

"Applying those principles to the facts of the present appeal we regard as relevant the following facts. First, that priority is given to the use of the Hall by the pupils of the Appellant during the school day in school terms; when the pupils use the Hall they are always under the supervision of a member of staff employed by the Appellant; and the members of staff have no connection with [Brambletye Sports Limited]. Secondly, that the use of the Hall by the pupil throughout the school day is controlled by the sports staff of the Appellant and the use is mainly for school purposes, namely to receive physical education. Thirdly, a pupil using the Hall remains the pupil of the school and the Appellant remains responsible for the pupil during that time, in exactly the same way as occurred when the Appellant used to hire space from the privately operated sports club before the Hall was built; during such hirings the Appellant 'occupied' the grounds of the private sports club and in the same way 'occupies' the Hall when the pupils are being taught. Fourthly, the pupils as members of the club cannot exclude the members of the Appellant's staff and, at all times when the Hall is being used by the pupils, the control of the use of the Hall, through the supervision of the staff, rests with the Appellant. It follows that, in our view, the Appellant had a physical presence in the Hall, at the very least through the members of staff. If the pupils do not have a separate occupation as members of the club, then the Appellant is not in occupation of the Hall alone but in occupation together with the pupils."

It was for those reasons that the tribunal dismissed the appeal in Brambletye.

40. The College does not suggest that the decision in Brambletye was wrong. But it points to the findings by the tribunal (i) that use by the pupils during the school day was always under the supervision of a member of staff employed by the Trust, (ii) that members of staff had no connection with Brambletye Sports Limited and (iii) that, when the hall was being used by the pupils, the control of the use of the hall rested with the Trust as employer of the staff. Those findings, it is said, support a conclusion that - at least during the periods that the hall was in use by the pupils during the school day - the hall was occupied by the Trust through its staff. There was the necessary combination of physical presence and control. But those findings do not support a conclusion that the Trust was in occupation through the pupils. Indeed, it is not clear that the tribunal reached that conclusion. The observation that "If the pupils do have a separate occupation as members of the club, then the Appellant is . . . in occupation together with the pupils" is (at best) tentative.
41. In my view the College is correct to submit that the decision in Brambletye does not support a conclusion that the Trust was in occupation of the sports hall through the pupils. Further, I am satisfied that the tribunal would have been wrong to reach that conclusion on the facts in that case. The tax-avoidance scheme adopted by the Trust in that case failed because, in the course of delivering educational services to the pupils of Brambletye School – in the form of physical education and sports – through its own staff, the Trust was, necessarily, in occupation of the new sports hall.

The presence of College employees in the Library

42. It is common ground that the Library is under the day to day control of the College Librarian and her staff – a Senior Library Assistant, a Library Assistant and a Library Graduate Trainee. The position is explained at paragraphs 26 and 27 of the witness statement made by the College Bursar:

"26. . . . Physical access to the library is controlled by locks which may be overridden by Library staff during staff hours. The main doors (inner and outer) have electronic locks which are opened by a plastic 'proximity' card next to the adjacent card readers. Cards with appropriate authorisation will then cause the doors to unlock at any time during Library opening hours, which are from 7.00 am to 12.45 am seven days a week. . . . [O]nly those people authorised by the Librarian will be able to use the 'proximity' card to open the Library door. There is a separate database controlling access to the Library. The Librarian manages this database and can add and remove names as required. . . . If for any reason an undergraduate is denied access to the Library the Librarian can use the system to bar access. . . .

27. The Newnham College Library Guide sets out the rules which people must observe when they use the Library. More generally all users of the Library are required to use it considerately. Users who are in breach of these rules may be removed from the Library by the library staff and their authorisation to use the Library may be withdrawn by the Librarian. . . ."

43. Further, as might be expected, the Library includes, on the ground floor, a Librarian's Office and a Main Office for the exclusive use of the Librarian and her staff. There can be no doubt, as it seems to me, that the Librarian and her staff are in occupation of those parts of the Library. Nor, I think, could there be any doubt that – but for the secondment agreement of 2 July 2001 – the College, as the employer of the library staff, would be in occupation of the Library through those employees. But for the secondment agreement, the position would be indistinguishable from that in Brambletye. Occupation would be shared between NCLCL – as the person entitled to possession under the lease granted by the College – and the College, whose staff were present and in control.
44. It was, perhaps, to avoid that result that the College – while retaining the library staff in its employment – entered into the secondment agreement of 2 July 2001. The object of that agreement is explained by the Bursar at paragraph 18 of his witness statement:

"The College entered into an agreement to second four of its staff to NCLCL with effect from 2 July 2001. . . . The College seconded staff rather than terminating their contracts in order to maintain their existing employment status including their membership of the pension scheme. For all practical purposes these secondees have been under the control and direction of the Board of NCLCL. . . ."

It is necessary, therefore, to examine the contractual position (i) as between the College and its employees, (ii) as between the College and NCLCL in relation to those employees and (iii) as between NCLCL and those employees.

45. The position between the College and its employees turns, of course, on the particular terms and conditions under which each employee was engaged; but may fairly be illustrated by examining the contractual documentation affecting the Librarian, Ms Hodder. She was offered employment by the College, in the post of College Librarian, by a letter dated 30 March 1992. The appointment was for an initial period of three years from 1 April 1992, with the expectation of re-appointment for successive periods of five years until retirement at age 65 years. The duties of the appointee were set out in an invitation to apply to which she had responded:

"The College Librarian will be responsible, under the direction of the College Council, for the management of one of Cambridge's largest College Libraries. . . . The bulk of the collection of some 80,000 items is for undergraduate use and is in the process of being computerized. In addition there is a small collection of rare books, appropriately housed. Among the major tasks to be faced when the current computerization project is complete is the reclassification of the whole collection."

The terms and conditions of employment were set out in a letter dated 22 June 1992 (of which there is no copy in the papers before the Court).

46. By a letter dated 21 February 1995 Ms Hodder was re-appointed as College Librarian for a further period of five years with effect from 1 October 1995. Save that the letter indicated that "The College Librarian is expected also to manage the leave arrangements of Library staff so as to ensure that an appropriate level of service is maintained throughout the academic year", there was no change to the duties which she was expected to undertake. It is clear that she was again re-appointed in or about March 2000.
47. On 2 July 2001 the College wrote to her in these terms:

"Further to our recent discussions we are writing to invite you to accept secondment to Newnham College Library Company Limited (the 'Company') on the terms set out below.

You will remain an employee of Newnham College (the 'College') throughout the period of the secondment and the period of your secondment will count as part of the period of your continuous employment with the College.

Your terms and conditions of employment as set out in the letter dated 22 June 1992 and your reappointment to retirement dated 3 March 2000 and in particular your job description and duties which you are to perform will remain unchanged.

The purpose of this letter is to confirm the various issues we have discussed in relation to your secondment. If there is any inconsistency between the terms of this letter and your contract of employment the terms of your contract of employment will prevail. If any changes are made to your contract of employment during the term of the secondment then the secondment will be on the terms of your revised contract of employment and this letter.

1. The secondment takes effect from 1 July 2001 and will continue subject as provided in this letter.

2. On the termination of the secondment you will resume your duties as Librarian for the College.

3. During the secondment you will act as Librarian for the Company and be responsible with other members of staff for the provision of library services to members of the College.

4. At all times during the secondment you will use all reasonable skill and care in the performance of your duties and will meet associated quality standards in accordance with your contract of employment.

5. During the secondment your salary will actually be paid by the Company, but it will continue to be reviewed by the College and all other contractual benefits will continue in accordance with the terms of your employment with the College.

6. The secondment will terminate immediately:

(a) if you cease to be employed by the College for whatever reason (including dismissal without notice and your own voluntary resignation); or

(b) if the College issues you with written notice to that effect.

7. The College will have the right to terminate your employment immediately by notice in writing to you in respect of any conduct which, if the Company rather than the College was your employer upon the terms and conditions of your employment, would constitute a breach of those terms and conditions and entitle the Company to terminate your employment immediately.

8. Any difficulty of a disciplinary or grievance nature which arises during the secondment will be dealt with by the College in accordance with its usual procedures

9. All documents and other work (including without limitation all letters, reports, memoranda, notes of meetings and working papers) prepared by you while providing services to the Company will belong to the Company.

10 Nothing in this letter will create the relationship of employer and employee between you and the Company and you will not hold yourself out as such.

11. As this is a secondment the provisions of the Transfer of Undertakings (Protection of Employment) Regulations 1981 do not apply.

Please sign, date and return to the Bursar the attached copy of this letter to indicate your acceptance of the secondment and your agreement to the terms and conditions of this letter."

Ms Hodder countersigned that letter on 7 July 2001 under the endorsement:

"I hereby accept the secondment to Newnham College Library Company Limited on the terms and conditions set out in the above letter.

I acknowledge that I shall remain an employee of the College throughout the secondment."

48. The term "secondment" must take its meaning from the context. It is not a legal term of art. It is clear that, in agreeing to accept secondment to NCLCL on the terms of the letter of 2 July 2001, Ms Hodder did not agree to any change in her employment status or in the terms and conditions of her employment. Those remained as they had been since 1992 (subject to periodic increases in stipend). Nor, as it seems to me, did she agree to any change in her job description or in the duties which she was to perform: it is made clear in the letter of 2 July 2001 that "your job description and duties which you are to perform will remain unchanged". Her responsibility "for the management of one of Cambridge's largest College Libraries" – assumed when she accepted appointment as College Librarian in 1992 - remained unaltered. She remained "responsible with other members of staff [but as head of the library team] for the provision of library services to members of the College". And, although paragraph 5 of the letter of 2 July 2001 records that "During your secondment your salary will actually be paid by the Company", it could not be said that the College did not remain liable, as her employer, for payment of her salary in the event of default by NCLCL. The contractual change lies in the provisions in paragraphs 2 and 3 of the letter:

"2. On the termination of the secondment you will resume your duties as Librarian for the College."

3. During the secondment you will act as Librarian for the Company . . ."

Those provisions require that – although the actual duties which are to be carried out are unchanged – during the period of secondment they are to be carried out "as Librarian for the Company" rather than "as Librarian for the College".

49. The question, then, is what did Ms Hodder and her employer, the College, intend should be the effect of their agreement that, during the period of secondment, her duties should be carried out as "Librarian for the Company" rather than as "Librarian for the College". The answer must be that they intended that, during the period of secondment, her duties as librarian – with responsibility for the management of the library – should no longer be carried out under the direction of the College Council; those duties - the same duties as librarian of the same library – should be carried under the direction of the board of directors of NCLCL.
50. I turn, therefore, to the agreement for the secondment of staff made between the College and NCLCL. That agreement, dated 2 July 2001, must be read with another of the agreements of the same date – the agreement for the hire of library books. Under the latter agreement NCLCL agreed to supply to the College the services set out in schedule 1. Those services were:

"1.The provision of the Books on hire to the College for the use of the Fellows, undergraduates, graduate students and staff of the College or such other persons or authorities nominated by the College upon the terms and conditions from time to time in force.

2. The provision of appropriate arrangements for the filing, maintenance and archiving of the Books.

3. All such incidental services as are necessary for the provision of an effective library service."

In that context, "the Books" means all journals, periodicals, books, etc owned by NCLCL and held in the Premises; and "the Premises" means the library building leased by the College to NCLCL. Clause 5.1 of the agreement for the hire of library books required NCLCL to procure and ensure that "at all times the Premises are properly staffed and managed and conducted in such a way as to meet its obligations under this Agreement".

51. The purpose of the agreement for the secondment of staff (as appears from recital (B) to that agreement) is to permit NCLCL to comply with its obligations under clause 5.1 of the agreement for the hire of library books. The "Employees" who were to be seconded under the agreement for the secondment of staff were those whose names (and job titles) were set out in schedule 1 – that is to say, Ms Hodder (the Librarian), the Senior Assistant Librarian, the Library Assistant and the Library Graduate Trainee. Clause 3.1 required the College to replace one of the named Employees by another "suitably qualified and experienced" in the event that the named employee ceased to be employed by the College or ceased to be on secondment. Clauses 4 and 5 of the agreement contained the following provisions (so far as material):

"4 Services

4.1 The College will second the Employees to act in the respective capacities set beside their names in Schedule 1.

4.2 The College will procure that the Employees will devote such of their time, attention and skill as shall be necessary for the proper performance by the Company of its obligations under the Hire of Library Books Agreement.

5 Duties of the Company and the College

5.1 Unless otherwise agreed the College will second the Employees to the Company on the terms and conditions under which they are from time to time employed by the College (copies of which terms and conditions have been provided to the Company). The College will notify the Company of any changes to the terms and conditions of employment of the Employees.

5.2 The Company agrees that it will observe the terms under which the Employees are employed by the College as if it were the employer of the Employees.

5.3 The Company agrees that it will not do or omit to do anything which would cause any Employee to breach any of its obligations to the College, particularly, but without limitation, in relation to the provision of library services to undergraduates, graduate students, Fellows and other members of the College.

. . .

5.10 It is agreed that the College alone has the power to discipline and dismiss any Employee.

5.11 The College agrees to send a letter to each of the Employees at the date hereof substantially in the form set out in Schedule 2."

The letter of 2 July 2001 to Ms Hodder – which I have set out – was in the terms required by clause 5.11. Letters in similar terms were sent to other members of the library staff.

52. There was no agreement between NCLCL and the College employee on secondment. But, in January 2004, NCLCL issued a job description in respect of each member of the library staff. That included a detailed list of "job activities". Each member of the library staff (other than the librarian) was said to be responsible to the "Librarian". The Librarian was said to be responsible to "The Board of the Company". Her "outline of job" included the following:

"The Library Company has contracted with Newnham College to run the library and to manage the rare books collection. The Librarian is responsible, under the direction of the Board of Directors of Newnham College Library Company Limited, for the management of Newnham College Library. Newnham College Library is one of Cambridge's largest college libraries, housing a total of over 80,000 volumes. The Librarian is also custodian for Newnham College's rare books collection, which is housed in a rare books room adjacent to the working library. . . ."

That summary gives effect to the position agreed between the Librarian and the College. Her duties as librarian were unchanged, but were no longer to be carried out under the direction of the College Council. Those duties were to be carried under the direction of the board of directors of NCLCL.

53. There can be no doubt that, under the arrangements that were agreed, the library staff were to be present in and in control of the library. And there can be no doubt that the library staff were to remain employees of the College. The College alone was to have the power to discipline and dismiss them. But, subject to that, the library staff were required, under the terms which each agreed with the College on countersigning the secondment letter, to carry out their duties under the direction of NCLCL. During secondment the library staff were to be answerable to NCLCL – and only indirectly to the College - for what they were to do in the library.
54. It is that – as it seems to me - which distinguishes the position in the present case from that which was considered in Brambletye. In my view the fact that the library staff remain employees of the College is not sufficient to support the conclusion that the College is in occupation of the library. Their presence and control is as persons acting under the direction of NCLCL. It is not, of itself, indicative of presence and control by the College.

The control of NCLC by the College

55. NCLCL is incorporated under the Companies Act 1985 as a company limited by shares. All the shares are held by or for the College. The directors of NCLCL are the Principal, the Bursar and a senior Fellow of the College. As the Tribunal put it: "In reality, the College controlled NCLCL." And the Tribunal went on to hold (at paragraph 14.32 of its decision, in a passage set out earlier in this judgment) that:

"It is clear that taken as a whole, the College has control of the library through its members on the board of NCLCL its subsidiary company . . . If one takes both of these entities together then it can be said that the College is in control of the library. The people who run NCLCL and the College are the same with different hats. . . ."

56. It is accepted on behalf of the Commissioners that they had not put their case to the Tribunal on the basis that the separate legal personality of NCLCL could be disregarded in determining whether the College was in occupation of the library premises. But, in this Court, the Commissioners do seek to rely on this strand in the Tribunal's reasoning. At paragraph 68 of the skeleton argument lodged on behalf of the Commissioners it is said:

"By the combination of its share ownership and membership of the Board of [NCLCL], the College has absolute control over [NCLCL]. Thus the College occupies the Library through the very fact of [NCLCL]'s presence."

57. No authority was cited to support a submission that there was some principle of Community law which required – or enabled – the Court to disregard the separate legal personality of NCLCL in determining whether the College was in occupation of the library premises; or to support a submission that Community law required the Court to hold that the College was present and in control of those premises by reason only that, through its control of the constitutional organs of NCLCL, the College could dictate the decisions to be taken by NCLCL. I do not find the absence of Community authority to that effect in the least surprising. As I have said, article 13C of the Sixth Directive makes it plain that it is for each Member State to decide whether it will allow a right of option for taxation in cases of letting and leasing of immoveable property; and to decide whether (and in what circumstances) any right of option that is allowed under domestic legislation should be restricted.
58. The autonomy of the United Kingdom government in that respect is well illustrated by the legislative history which I have already set out. Paragraph 2(3A) of schedule 10 VATA 1994 (introduced by SI 1994/3013) did restrict the right of option for taxation conferred by paragraph 2(1) of schedule 10 by denying that right in cases where the lease was made between connected persons. But paragraph 2(3A) of schedule 10 was repealed by section 37(1) of the Finance Act 1997. The question whether the new restriction in paragraph 2(3AA) read with paragraph 3A(7) (both introduced by section 37(2) of the Finance Act 1997) requires or enables the Court to disregard the separate legal personality of NCLCL in determining whether the College was in occupation of the library premises is – as it seems to me – a matter for domestic law.
59. No authority in domestic law was cited to us on that question. The underlying principle in domestic law is that a company incorporated under the Companies Acts is distinct from the corporators – Salomon v A Salomon and Company Limited [1897] AC 22, 42, 51. It has been held in this Court that occupation of premises by a company would not be occupation by the controlling shareholder (the landlord) so as to entitle the latter to oppose the grant of a new tenancy under section 30(1)(g) of the Landlord and Tenant Act 1954 – Tunstall v Steigmann [1962] 2 QB 593. Lord Justice Ormerod said this (ibid, 601):

"It has been argued in the course of this case that there have been a number of departures from the principle of Salomon v Salomon & Co Ltd in order that the courts may give effect to what has been described as the reality of the situation, and it is submitted in these circumstances that the court should look at the realities of the situation and that those realities are that the business will in future be carried on by the landlord as it has been carried on in the past. We were referred to In re Yenidje Tobacco Co Ltd [[1916] 2 Ch 426] . . . [and] . . . to a number of cases arising under the Trading with the Enemy legislation of the 1914-18 war . . . particularly . . . to Daimler Co Ltd v Continental Tyre & Rubber (Great Britain) Ltd [[1916] 2 AC 307] . . . In addition it was submitted that in applying the Rent Restriction Acts the court has always looked to the reality of the transaction and would not allow the purpose of the Acts to be defeated by the use of the Companies Acts. In support of that contention we were referred to Samrose Properties Ltd v Gibbard [[1958] 1 WLR 235].

While it may be argued that in the above circumstances the courts have departed from a strict observance of the principle laid down in Salomon v Salomon & Co Ltd, it is true to say that any departure, if indeed any of the instances given can be treated as a departure, has been made to deal with special circumstances when a limited company might well be a façade concealing the real facts. Counsel was unable to point to any special circumstances in this case other than that the landlord has complete control of the company. In my judgment that is not enough. . . ."

There are observations to the like effect in the judgments of the other members of the Court, Lord Justice Willmer and Lord Justice Danckwerts (ibid, 604, 606, 607-8). An example, in the context of the protection given to tenants under the Rent Acts, in which the interposition of a limited company between the landlord and the actual occupier (who controlled the company) was held not to be a sham or façade - with the consequence that the letting to the company could not be treated as a letting to the actual occupier – can be found in Hilton v Plustitle Ltd and another [1988] 3 All ER 1051.

60. The Commissioners do not suggest that the arrangements made between the College and NCLCL in the present case can be treated as a sham or façade. It is accepted that those arrangements reflect the true intent of the parties and must be given the effect which, in law, they have. What is said is that the court must look at "the realities" of the situation; and that the reality is that "The last thing intended by the College was that it should divest itself of the Library altogether, since the existence of a modern and well-stocked Library, available to its members, is central to its ability to attract students and professors to the College in the first place."
61. I see force in the submission that the arrangements may be described as contrived or artificial – in the sense that they have no commercial purpose other than to enable the College to recover input tax – but the Commissioners are right to accept that they cannot be treated as a façade. To submit that, by looking at "the realities" of the situation, the arrangements must be given some legal effect which differs from that which they would otherwise have is, I think, to seek to resurrect the argument which was rejected by this Court in Tunstall v Steigmann.
62. I am conscious that the Court has not had the benefit of full argument – with the citation of authority – on the question which I have addressed in this section of my judgment. But the authorities are well known. They are collected in the current edition of Buckley on the Companies Acts at paragraphs [13.6] to [13.24]. And the principles are not, I think, in doubt – at least in this Court. If I may say so, I suspect that the reason why the point was not taken by the Commissioners before the Tribunal – and was not developed in argument in this Court – was that the Commissioners and their legal advisers appreciated that a case based on sham was not open to them; and that, absent an allegation of sham, the hurdle presented by established principles was insurmountable.

Conclusion

63. For the reasons which I have set out, I would allow this appeal. I would set aside the decision of the Tribunal; and I would set aside the decision of the Commissioners, in their letter of 23 August 2003, that the election to waive exemption made by the College under paragraph 2 of schedule 10 VATA 1994 by notice given on 21 February 2001 was of no effect by reason of sub-paragraph 2(3AA) of that schedule.

Postscript

64. This appeal was brought to this Court under the procedure for which article 2 of SI 1986/2288 provides on the basis that it would raise a point of law relating wholly or mainly to the construction of paragraphs 2 and 3 of schedule 10 VATA 1994, the determination of which was said to be a matter of general importance for the understanding of the law relating to VAT. That did not prove to be the case. The construction of paragraphs 2 and 3 of schedule 10 VATA 1994 was not seriously in issue. The parties were in broad agreement as to the elements needed to support a conclusion that the College was in occupation of its library. The dispute was whether those elements were established on the particular facts in this case. The Tribunal should, I think, have recognised that this was not an appropriate case for a certificate under article 2(b) of the 1986 Order. The effect of the procedure that was adopted has been that this Court has not had the advantage of the analysis of the facts which a judgment of the High Court would have provided. Such an analysis would have been of substantial value in the present case. The circumstances in which it is appropriate to deny this Court the benefit which it can expect to derive from consideration of the issues in the High Court should be seen as exceptional. An example of such a case can be found in Commissioners of Customs and Excise v Han [2001] EWCA Civ 1040, [2001] STC 1188. This was not such a case.

Lord Justice Lloyd:

65. I agree.

The Chancellor:

66. I agree with the judgment of Lord Justice Chadwick and have nothing to add.