England and Wales Lands Tribunal

[2004] EWLands ACQ_56_2002 (10 September 2004)

ACQ/56/2002

LANDS TRIBUNAL ACT 1949

Compensation – Compulsory Purchase – Equivalent reinstatement – Value Added Tax recovered by claimant - whether part of cost of works – Capital Goods Scheme.

IN THE MATTER OF A NOTICE OF REFERENCE

BETWEEN

(1) SCOUTS ASSOCIATION TRUST CORPORATION

(2) BUCKMORE PARK SCOUT CENTRE LTD

(3) BUCKMOREPARK SERVICES LTD

(4) MEDWAY SCOUTS COUNCIL

(5) STROOD DISTRICT SCOUT COUNCIL

Claimants

and

SECRETARY OF STATE

Acquiring

FOR THE ENVIRONMENT

Authority

Re:

Land at Buckmore Park

Maidstone Road

Chatham

Kent

Before: His Honour Judge Michael Rich QC

Sitting at Procession House, 10 New Bridge Street, London EC4V 6JL

On Tuesday 7 September 2004

The following cases are referred to in this decision:

Palatine Graphic Arts Co Ltd. V. Liverpool City Council [1986] 1 All ER 369

Slot v. Guildford Borough Council (1992) 32 RVR 126

Stoke-on-Trent City Council v Wood Mitchell & Co Ltd [1980] 1WLR 254

West Suffolk County Council v. W. Rought Ltd [1957] A.C. 407.

Mr Evan Price instructed by Gullands, Solicitors, for the claimants.

Mr John Litton instructed by The Treasury Solicitor, for the acquiring authority.


 


DECISION ON PRELIMINARY ISSUE

The Dispute

1. Buckmore Park in Chatham Kent has been used by the Scouts as a scouting and leisure centre since 1952. On 20^th September 1993, the Scout Association Trust Corporation ("the Tenant") was granted a lease of an area of 184 acres for a term of 35 years from 1^st January 1992. It held such lease upon trust for the Medway Scouts Council ("Medway") and the Strood District Scout Council ("Strood") to whom I will refer together as "the Scout Councils".
2. The Channel Tunnel Rail Link Act 1996 authorised the Secretary of State for Environment, Transport and Regions, who now acts through the Highway Agency, to acquire 10.5 acres of Buckmore Park, upon which buildings and facilities used for the Centre had been sited, for the improvement of the M2 motorway. The proposal was however known earlier and in 1994 the Scout Councils obtained planning permission for replacement buildings and facilities.
3. The Scout Councils also in 1996, with the agreement and advice of the Customs and Excise, set up two companies limited by guarantee which are referred to in the statement of facts agreed for the purposes of this preliminary issue as BPS and Services. I will, for the sake of clarity call Services "Services Ltd". Both were registered for VAT. The intention was that Services Ltd should be able to recover VAT paid to builders on the construction of the replacement buildings and facilities, and use it for the benefit of the centre.
4. Notices to treat were served on the Tenant, the Scout Councils and the two companies, all of whom are agreed in the statement of agreed facts to have had an interest in the land, on 26^th June 1998. It was agreed with the Highway Agency that compensation should be assessed under Rule 5 of section 5 of the Land Compensation Act 1961, namely on the basis of the cost of equivalent reinstatement of the building and facilities. This Mr Price, who appears for the claimants, accepts means the reasonable cost of such reinstatement if begun as soon as reasonably practicable and carried through with reasonable diligence. When the compensation falls to be assessed after completion of the work, the actual cost is at least prima facie the best evidence of such cost.
5. The Scout Councils decided to include in the replacement facilities, what have been called "operational enhancements" which are not part of the "equivalent reinstatement" and obtained grants from, amongst others, Sport England for such purpose. I understand that these grants amounted to some £3.5m. Services Ltd entered into contracts for the construction of the replacement facilities as so enhanced. They paid VAT on the invoices from the builders. The Highway Agency provided 100% advance payments against such invoices, insofar as they accepted that the invoices referred to the equivalent reinstatement as opposed to the enhancement of the facilities. In this way compensation amounting to £10,118,962.35 was paid, and the works of reinstatement and enhancement were duly completed by September 2001.
6. Meanwhile Services Ltd made VAT returns under which it recovered the VAT which had been paid on the builders' invoices for the reinstatement works. No doubt the VAT paid on the enhancement works was recovered at the same time, and so there is an issue as to the amount of VAT recovered on the work for equivalent reinstatement, but it is of the order of £1m to £1.5m. Even however with the benefit of such sums and the grants received, Services Ltd has been unable to discharge all the liabilities it has incurred in completing the works, let alone the money necessary to finance the operation of the enhanced facilities. Both Companies are now in administration, but they, together with the Tenant and the Scout Councils, claim that further compensation is due to them under the Reference to the Lands Tribunal dated 18^th April 2002.
7. The Highways Agency claims that they are entitled to set off against any claim for further compensation any sums already paid and that, of course, the claimants accept. That includes the amounts paid in respect of VAT as required by the invoices raised by the builders' invoices. In assessing the cost of work in order to establish the total compensation due to the claimants, however the Agency say that the VAT for which they made payment in their advance payments cannot be counted as part of the cost of the works, insofar as it has been recovered from HM Customs and Excise ("the Customs"). This the claimants dispute.

The Preliminary Issue

8. The amount of such further compensation claimed, but not admitted is said in the notice of reference to amount to just under £1.7m. Since it may not therefore exceed the amount of VAT which is in dispute, it appeared to the parties to be convenient that the position in regard to the VAT should be determined as a preliminary issue. This was formulated as:

"whether or not the cost of reinstatement includes VAT paid to the suppliers undertaking the reinstatement irrespective of the Claimant's entitlement to recover VAT from Customs and Excise."

9. The claimants, however, had difficulty in formulating both the grounds and the scope of their claim to treat the liability to pay VAT, which arises on the delivery to them of the builders' VAT invoices, as part of the cost of the work of reinstatement notwithstanding that the VAT had been repaid to them by the Customs. On 20^th February 2004, therefore I ordered that unless they complied with directions that I then made, the cost of reinstatement was to be determined on the basis that it does not include any VAT in respect of which a repayment had been made. Subject, however to the claimants serving a statement of case by the 2^nd April 2004 I directed that there should be a hearing of a preliminary issue in essentially the terms set out above.
10. The Claimants duly served a Statement of Case. It ran to 159 paragraphs and by reason of its prolixity, was not helpful in crystallising the issues between the parties. Mr Litton on behalf of the Agency however sought to encapsulate the claimants' case in a skeleton argument which he prepared for a pre-trial review on 28^th May 2004. For the purpose of identifying issues between the parties Mr Price for the claimants accepted this encapsulation subject only to comments recorded in the Order dated 28^th May 2004 and accepted that the third point would arise only if the Agency sought to recover money overpaid which is not an issue in this reference. I therefore omit reference to the third point in reproducing the claimants' contentions as follows:

"1. VAT is part of the compensation which is properly payable whether or not it can subsequently be recovered, but the VAT recovered by the claimant is not [part of the compensation].

2. Because there is a risk that the Claimant may have to repay HM Customs & Excise the VAT which it has claimed the Claimant is at risk of having to account for the money twice (i.e. by way of set-off to the Acquiring Authority and to HM Customs & Excise) [the claimant at para 104(c) of its statement of case made specific reference to the liability which could arise if the Scouts changed their intent or the use of the buildings] ….

4. It is not clear beyond peradventure from HM Custom & Excise's letters that they might not at some future date recover the VAT reclaimed by the Claimant."

Claim on behalf of Tenant and Scout Councils

11. Mr Price, in the skeleton argument prepared for the hearing of the preliminary issue sought to distinguish the position of the Tenant or the Scout Councils from that of the two companies and particularly Services Ltd. It is contended that if any of the parties were to use the facilities for a non-taxable purpose, a claim for VAT, as opposed to a claim for the recovery of the repayment of VAT repaid to Services Ltd could arise. This is not a claim that had been made as a head of compensation, and, in the circumstances, it was agreed that the preliminary issue should be determined on the basis that the second and fourth questions were to be determined by reference to whether or not there was a risk of the VAT repaid to Services Ltd could be recovered from Services Ltd.

Is VAT part of cost of reinstatement only insofar as it is not repaid?

12. The claimant's first submission is that VAT is part of the cost of the work of reinstatement, and the right to recover it is irrelevant to the compensatable cost. It is accepted that in respect of loss of profit upon which a claimant would have had to pay tax, the compensation upon which the Inland Revenue had confirmed that there would be no tax liability should be limited to the loss net of tax: see West Suffolk County Council v. W. Rought Ltd [1957] A.C. 407. In my judgement the VAT payable by a purchaser of building work is part of the cost of that work. If however the purchaser is VAT registered, with the effect that he is able to treat that tax payment as a discharge of his liability to account for tax collected on behalf of the Customs & Excise from his own customers, then, subject possibly to some loss of interest, he has not paid that tax, and it is not therefore part of the cost of the work to him. This is what Mr Hopper FRICS sitting in this Tribunal assumed in Slot v. Guildford Borough Council (1992) 32 RVR 126 and I agree with him.
13. Where the VAT- registered purchaser of the building services does not use his payment to discharge a liability to account to the Customs & Excise for tax collected from his own customers, because he has not yet collected any tax in respect of which he has to account in his quarterly return, then he is entitled, instead to obtain repayment of the tax which he has paid. If he is so repaid, then in my judgement it is clear that the tax which he has paid is not part of the cost which he has incurred in obtaining those building services.
14. Mr Price drew to my attention the decision of the Court of Appeal in Palatine Graphic Arts Co Ltd. V. Liverpool City Council [1986] 1 All ER 369, although he founded no submission on it, and I do not think that it helps his case. In that case it was held that a development grant received by the claimant on moving his business was not to be taken into account in assessing compensation for disturbance. This however was, firstly, because to take it into account would defeat the public policy purpose of awarding a grant if the developer located in a particular area and, secondly, because as Glidewell LJ put it at p.371 j:

"the loss caused by disturbance on compulsory purchase and the payment of regional development grant are different in kind. The loss on disturbance flowed from the fact that the landowner had been forced to give up possession of his land and premises as a result of the acquisition of his interest. The regional development grant was paid in respect of part of the expenditure incurred when moving into new premises."

There is no such public policy consideration justifying the claimants' being repaid VAT and at the same time being entitled to compensation based on their having paid it. Nir is the VAT which is repaid to Services Ltd different in kind from that which Services Ltd paid: it is the same sum on account of the same expenditure, identified in the same VAT invoices. It is repayable because VAT is payable only on value added.

15. Mr Price contends, however, that the position is not as simple as I have set out, because under the so-called "Capital Goods Scheme" (" the CGS") in the case of building works to a value exceeding £250,000, repayment of VAT has to be claimed on a projected basis as to the proportion of business to non-business use to which the building is to be put over the following ten years. If, in the course of the ten year period, the proportions of use are varied, the repayment has to be adjusted. It would follow from that, that any repayment of VAT in respect of building works to a value in excess of £250,000 must be treated as conditional only. It is however only if there is indeed some risk that the condition may require payment that regard must be had to such conditional nature.

Risk of Recovery under CGS

16. It may be that this risk may be a sound objection to bringing a repayment of VAT into account in a case where, as a matter of fact the CGS means that the repayment is subject to subsequent recovery. In practice so far as claims for compensation for equivalent reinstatement are concerned the circumstances where the CGS might apply would be exceptional, and will have to be considered when and if they arise.. It is only in respect of an intended business use that the VAT-registered purchaser can recover the VAT which he has paid on inputs to his business. Compensation can be assessed on an equivalent reinstatement basis only

"where land is, and but for the compulsory purchase would continue to be, devoted to a purpose of such nature that there is no general demand or market for that purpose [and] reinstatement in some other place [for such purpose] is bona fide intended".

I add "for such purpose" although the words are not found in the statutory provision, because in my judgement that must be part of a bona fide reinstatement of premises devoted to a particular purpose. It must be an exceptional case where the purpose to which the land is devoted is a business use and yet there is no general demand or market. If the intended use is not a business use then no repayment of VAT would fall to be made and no question of recovery of repayment under the CGS would arise on a change of use from business to non-business.

17. The unusual feature of the present case is that BPS and Services Ltd presented the intended use as a business use. This was given some justification by the intended opening up of the use of the facilities to the general public in accordance with the requirements of the bodies who provided grants for the enhancement of the facilities. The Customs accepted that categorisation of the intended use of the facilities. The circumstances in which this view of the intention of the two companies came to be revised however explain why the risk of recovery of the VAT repaid to Services Ltd from either company can as a matter of fact be entirely discounted.
18. I have been provided with copies of at least some of the correspondence between accountants representing the Scout Councils and the Customs which led to the establishment of the companies and the belief on the part of those advising the Councils that they could, in effect avoid paying VAT on the replacement of the scouting and leisure centre and could in respect of that part of the expenditure which would be funded by compensation in effect have the benefit of the VAT which the Acquiring Authority would pay. It depended on the Customs & Excise being satisfied that the companies would be operating a commercial undertaking. They so ruled in 1996, and on this basis made to Services Ltd the VAT repayments on the building of the replacement facilities which are the subject of the present dispute.
19. The agreed statement of facts records that on 8^th August 2002 Customs, none the less, issued an assessment to recover some part of that tax. An appeal was lodged, and in March 2003 the assessment was withdrawn. The companies withdrew their appeals accordingly and were paid their costs.
20. By letter dated 8^th August 2003, Customs recorded the Commissioners' view that

"Services, when taken together with Scouts Centre (BPS) is not operating as a commercial undertaking and is therefore a non-profit making body."

They went on however to say:

"The Commissioners now regard their ruling to the effect that Services was profit-making, the intended supplies being therefore taxable enabling full recovery of the VAT incurred on the construction of the Sports Centre, was incorrect. Under the terms of the Sheldon Doctrine .. the Commissioners confirm they will not be pursuing the VAT recovered on the construction of the Sports Centre as a result of this incorrect ruling."

The letter went on however to make clear that the position of BPS and in regard to facilities other than the Sports Centre had not been considered.

21. The parties are agreed that the Sheldon doctrine is

"a specific extra-statutory discretion .. not to collect tax (or to insist on strict imposition of tax rules) in individual cases where a taxpayer has been misled by Customs' own error or misapplication of the law. Any such Sheldon ruling will only apply to that specific taxpayer and may not be relied upon by other taxpayers. In effect, this mitigates the common law rule that estoppel does not bind the Crown."

The letter dated 8^th August 2003 would therefore, have to be construed strictly, as applying only to VAT repaid to Services Ltd on the Sports Centre as opposed to other replacement facilities. However by letter dated 23^rd September 2003 Customs wrote again that

"it is not intended to pursue the outstanding issues mentioned in my letter [of 8^th August]. This means Customs and Excise does not intend to recover any VAT repaid to Buckmore Park Services."

On the 3^rd August 2004 Customs again confirmed to the Valuation Office on behalf of the Highways Agency that "Customs will not be re-examining any of the input tax claimed by Buckmore Park Services."

22. This concession has been made on the basis that the true position as to intended use of the replacement facilities has been recognised and accepted. That true position is set out in the letter of 8^th August 2003 namely that the intended use was not the operation of a commercial undertaking, but by a non-profit making body. It appears to me to follow that there is no change of intended use which could result in a requirement that anybody using the buildings as intended for a non-business use should make a payment under the CGS. In the light however of Mr Price's having been allowed to reserve the position of the Tenant and the Scout Councils I do not at this stage decide the point. I therefore go no further than to conclude that the Customs have agreed not to recover the sums paid to Services Ltd from Services Ltd and therefore the cost to Services Ltd of providing the replacement facilities is the cost net of the VAT repaid.

Certainty of the Position

23. Mr Price none the less asserts that the Sheldon doctrine being extra-statutory cannot be binding in law, and that I should not place reliance on the Customs' assurances. He refers to Stoke-on-Trent City Council v Wood Mitchell & Co Ltd [1980] 1WLR 254 where Roskill LJ giving the judgement the Court said at p.259:

"We take the view that the principles laid down in West Suffolk County Council v W. Rought Ltd can only be applied if after examination of the relevant statutory provisions it is clear beyond peradventure that the sum in question would not be taxable in the hands of the claimants. If that is clear, then it would be wrong to require the acquiring authority to compensate the claimants beyond the amount of the loss which the claimants would in truth suffer. But if it is not, then it seems to us unjust that in a doubtful situation the acquiring authority can get the benefit of a reduced payment while leaving the claimants exposed to the risk we have mentioned."

I think however that it must be proper for the Court to accept the assurances of the Customs, if given, as they have been in this case, formally with the intention that they should be relied upon, in exactly the same way as the Court accepted the assurance of the Inland Revenue in the Rought Case.

Conclusion

24. I therefore determine upon the preliminary issue that the cost to Services Ltd of the reinstatement does not include VAT, insofar as VAT has been repaid to Services Ltd by the Customs.

Costs

25. The parties having agreed that the costs of this preliminary issue should follow the event, I award the Acquiring Authority the costs of this preliminary issue insofar as they have not already been otherwise ordered to be paid by the Claimants to be assessed by the Registrar if not agreed.

Dated 10 September 2004

His Honour Judge Michael Rich QC