First-tier Tribunal (Tax)

[2009] UKFTT 167 (TC)

Grimsby College Enterprises Limited v Her Majesty's Revenue & Customs [2009] UKFTT 167 (TC) (15 July 2009)
VAT - INPUT TAX
Attribution

TC00129

Appeal numbers MAN/05/0274

MAN/05/0553

VALUE ADDED TAX — input tax — academic institution with commercial subsidiary — construction of new teaching block — whether contracts novated from institute to subsidiary — no — whether supplies between subsidiary and institution so organised as to allow for recovery of input tax — no — appeal dismissed

FIRST-TIER TRIBUNAL

TAX

GRIMSBY COLLEGE ENTERPRISES LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

TRIBUNAL: Judge Colin Bishopp

Sitting in public in Manchester on 15, 16 and 17 April 2009

Patrick Hamlin, Keith Gordon and Ximena Montes Manzano, counsel, instructed by Wilkin Chapman, solicitors, for the Appellant

James Puzey, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009


 


DECISION

1. The issue in these two joined appeals is whether input tax incurred in the construction and equipment of a new building, an engineering teaching block, at an academic institution is recoverable. As in many similar cases, the underlying question is whether contractual arrangements succeed in their objective of providing a basis for the recovery of the input tax which, in the absence of those arrangements, would be recoverable to a limited extent or not at all.
2. The appellant, Grimsby College Enterprises Limited ("the Company") contends that the construction and equipment costs were the consideration for supplies made to it. In its VAT returns for the relevant period, from 2002 to 2005, it claimed credit for the input tax it maintains it had incurred. The respondents were told by the Company of the development and made enquiries about it. At first they were evidently of the view that the Company was right in its belief that it could properly claim credit for the tax, but further investigation and, it seems, a closer understanding of the facts led them to the view that the supplies had in truth been made to the Corporation of Grimsby Institute of Further and Higher Education ("the Institute"), the body which owns all the Company's shares. On 31 March 2005 they made an assessment to recover the input tax of £304,711 incurred on the bulk of the construction costs and the management fees for which the Company had claimed relief, and on 3 August 2005 they made a second assessment, to recover the input tax of £83,208 which the Company had incurred on the cost of equipping the building, and on a small residue of the construction costs. The Company appealed, separately, against each assessment. There is no dispute about the arithmetic of the assessments.
3. The respondents advance in addition an alternative argument, should it be found after all that the supplies of construction and equipment were made to the Company, that the Company used those supplies not, as it contends, in the making of taxable supplies of tuition, but in the exempt supply to the Institute of the letting of immovable property—the new building—and that the input tax the Company incurred is consequently not deductible.
4. The Institute made a voluntary disclosure designed to recover the same input tax, should it be determined that the respondents were correct in their first contention, that is that it was the true recipient of the supplies. The respondents refused to accept the voluntary disclosure, relying on the supposed artificial and abusive nature of the contractual arrangements, and the Institute appealed against that refusal. However, subsequent correspondence between the parties, the decision of the Institute that the building, despite its recent construction, should be demolished within 10 years (a course which would negate what the Commissioners perceived to be an impermissible tax advantage of the arrangements) and the decision of the Court of Justice in Vereniging Noordelijke Land- en Tuinbouw Organisatie v Staatssecretaris van Financiën (Case C-515/07) [2009] STC 935 led the respondents to withdraw their decision and in consequence the Institute's appeal was withdrawn.
5. The Company was represented before me by Patrick Hamlin, Keith Gordon and Ximena Montes Manzano of counsel and the respondents by James Puzey, also of counsel. Both parties provided very helpful skeleton arguments. I heard the oral evidence of Professor Daniel Khan, the principal of the Institute, and of Alan Bird, at the relevant time its financial accountant and, latterly, its executive director in charge of finance and purchasing, who is also the appellant's company secretary. In addition it was agreed I should read the statements of Allan Hargreaves and Alan Parkin, the latter being Mr Bird's immediate predecessor; the respondents did not adduce any evidence. I had copies of the relevant documents. Most of the factual background to the appeal was not controversial, but there were some matters which were disputed, and the parties took very different positions about the inferences which should be drawn from the available evidence.
6. The Institute was founded in 1944, assuming its current title in 2004, but it is commonly referred to as Grimsby College. It is a body regulated by the Further and Higher Education Act 1992. Mr Hargreaves, who spent several years with what was then the Inland Revenue and later joined the accountants KPMG as director of their charities taxation division, dealt with the background to the passing of that Act and its effect on further education colleges, including the Institute, which ceased to be under local authority control and became self-governing. Such bodies became exempt charities, in that they were exempt from registration with the Charity Commissioners, and were regulated instead by the Further Education Funding Council. An additional consequence of the Act and the manner of its implementation was that further education establishments needed in future to generate income from commercial activities, since they faced reductions in grant funding. Some further education colleges already engaged in commercial activities, by offering what are known as "full cost courses", that is courses whose cost the participant must meet in full since even before the passing of the 1992 Act they were not subsidised by the local authority. Some were, and are, vocational, leading to a recognised qualification, others purely recreational (examples Mr Hargreaves gave are yoga and flower arranging).
7. The Institute decided (in common with most other establishments of its type) to undertake its commercial activities by means of a wholly-owned subsidiary, and the Company was formed in 1993 for that purpose. Mr Hargreaves' evidence was that such companies were established, not for any reason connected with taxation, but because it was thought that some of the commercial activities further education establishments might engage in could compromise their charitable status if the establishments undertook them directly, particularly if they were seen to have secured a competitive advantage over rival, wholly commercial, organisations. The Company's business is the supply of engineering and vocational courses to third parties (mainly local employers requiring training for their employees). Its annual turnover is now about £1 million; its annual profits of about £150,000 are paid to the Institute. The Company's directors are all governors of the Institute, which of course controls it.
8. It became clear during the course of, particularly, Professor Khan's evidence that there have been changes in government policy and in the manner and extent to which state funding of educational courses is available. At one time there was a clear distinction between one type of course and another; more recently the distinction has, in some cases, become blurred. I find, however, that the manner in which the Institute and the Company provided the courses is not unusual, that it was not driven by any desire to achieve a tax advantage, and that the changes in funding provisions are not a material factor in this case.
9. It is common ground that the Institute is an eligible body within the meaning of the Value Added Tax Act 1994, Sch 9, Group 6, item 1 and that its supplies of education are either outside the scope of VAT (if wholly funded by the Learning and Skills Council) or exempt, if the students pay fees covering some or all of the cost of the courses. The Company is not an eligible body, and the supplies of education it makes are consequently standard-rated. Nothing turns on the detail of the legislation, so far as it relates to supplies of education. The Institute makes some taxable supplies and it has been registered for VAT since 1973. The Company registered for VAT immediately following its formation.
10. The Institute owns and occupies land at several sites in Lincolnshire, but its main campus is at Nuns Corner, Grimsby on which stand several buildings used for various educational purposes, essentially the teaching of technology and arts. The Institute is the freehold owner of the site.
11. Most of the courses offered are eligible for complete or partial grant funding and are provided by the Institute. There is no controversy about those courses. There is, however, controversy about the manner in which the Company's courses are to be viewed. The Company has no teaching staff (or, indeed, any employees) of its own. Its case is that it secures the services of the Institute's teachers, who are required by their contracts of employment with the Institute to teach students of its subsidiaries, and that by doing so it is able to provide courses of its own. Professor Khan explained the reasons for the practice. Teaching staff employed by bodies such as the Institute are entitled to various rights, particularly pension entitlements, which they would lose if they transferred their employment to a commercial organisation such as the Company, and it is, he said, unlikely that they would wish to transfer; it was thus more practical for the Institute to employ and provide the teachers. The tax advisers had suggested that the teachers be employed by both the Institute and the Company, but the suggestion had been rejected because it was believed the teachers would not agree. Additionally, because it is difficult to predict in advance the quantity of course materials which the Institute and the Company respectively will need, it is simpler for the Institute to buy all the materials and make onward supplies to the Company as necessary, rather than each buy in its own supplies. The supplies by the Institute to the Company of teaching staff and course materials are made at cost plus a small mark-up, and treated as standard-rated.
12. Sometimes Institute students are taught alongside students to whom courses are being provided by the Company; in other cases, the Company provides "closed" courses, which are courses available only to the employees of a particular employer. Conversely, some of the Institute's courses, being designed for 16- to 18-year old pupils, are not attended by the Company's students.
13. The respondents' position is that the Company plays no active role in the provision of educational courses. They point to the facts, which are undisputed, that the courses are devised by the Institute, which uses its own teachers to deliver them and mark the examination papers, that it is the Institute which awards the diplomas and certificates which successful students earn, and that the courses are promoted by the Institute's brochure and website, neither of which refers to the Company. They say that the Company, since it lacks employees, is able to do no more than buy in taught courses from the Institute and make onward supplies of those taught courses to its own customers. I shall return to this dispute.
14. In 2001 (at about the time Professor Khan became its principal) the Institute's governing body decided to replace its existing, inadequate, engineering facility by erecting the new block of relevance to this appeal on the Nuns Corner site. The Company's case is that the main motive for the replacement was that it would enable it to increase the scope for providing fee-paying courses, and in consequence to increase its profits, though it accepts that improvement of the campus was an additional factor. I was shown a feasibility report, prepared in advance of the decision to proceed with the project, and accept that improving the Company's ability to promote its courses, and consequently its profitability, was a material consideration.
15. Mr Parkin and Professor Khan both said that the governors assumed that the construction work would be zero-rated and did not give much thought to the matter before the Institute entered into a building contract, on 19 December 2001, with an independent building company, Linpave Building Ltd ("Linpave"), for the construction of the new block. The Institute also appointed consultants, Siddle Grimley Hage Ltd ("SGH"), who provided engineering, architectural and quantity surveying services. The building contract and consultancy agreement were entered into by "Grimsby College", which the Company agrees meant the Institute rather than itself.
16. After it had entered into the two contracts the Institute decided to obtain tax advice. It realised, in the light of that advice, that the supplies to it of construction and equipment services would, contrary to its earlier expectation, be taxable. Its tax advisers recommended arrangements which, they said, could result in the VAT charged by the builders and consultants becoming recoverable input tax in the Company's hands. The arrangements required, first, that the two contracts for construction and consultancy services be novated to the Company, and that the Institute and the Company enter into formal arrangements for the use by them of the new building. On 11 February 2002 the proposal was put before the Institute's Finance and Personnel Committee. The minute of the meeting records a discussion of the discovery that the development would be standard-rated and that "It was therefore proposed that development costs be charged through [the Company] who would recover VAT input tax …". The Committee approved the scheme, and that decision was later ratified by the Institute's governors.
17. Linpave issued its first invoice on 12 February 2002; it was addressed to the Company. The Company's case is that the decision to novate the agreements was communicated orally to Linpave, shortly before that invoice was rendered (and, it appears, before the Committee had approved the arrangement), that Linpave had agreed to the novation (I shall return to this contention), and that the fact that it addressed all its invoices to the Company rather than to the Institute was clear evidence that it had done so.
18. On 12 April 2002 Mr Parkin wrote to a firm of solicitors to instruct them to prepare various documents relevant to the arrangements, including novation agreements. Why there was a delay of two months between the committee meeting and Mr Parkin's letter did not emerge. The letter contains the following passage:

"It is proposed that the contracts be novated to [the Company], which is a wholly owned subsidiary of Grimsby College.

Despite the contract being placed with Grimsby College, Linpave Building Ltd agreed to invoice [the Company] and the 2 invoices received to date have been paid by that company. SGH invoices … have been invoiced to and paid by Grimsby College."

19. By that time the Company had paid two invoices amounting to about £480,000 plus VAT rendered by Linpave, and the Institute had received and paid four invoices rendered by SGH amounting in all to just under £100,000 plus VAT; although the Company claims that they were later re-charged to it, it is not certain that they were.
20. It was necessary to channel money to the Company, which did not have funds of its own sufficient to pay for the new building. There was a further agreement (though the only evidence of it which was produced is a letter of as late as 20 July 2004 from the Institute to the College) that the Institute would provide the necessary funds by way of loan to the Company. I record in passing Mr Puzey's observation, which the Company acknowledges to be correct, that the letter of 20 July 2004 makes no mention of the repayment of capital. Mr Bird's evidence was that it was understood that capital payments would be made as the Company could afford them, and that some of the capital had been repaid.
21. Most of the finance consisted, ultimately, of grants and loans made to the Institute. Mr Puzey pointed out that in its letter of 16 February 2001 to the Institute, offering grant assistance and setting out the conditions attaching to it, the Further Education Funding Council stipulated (among other conditions) that its prior written consent must be obtained if there were to be any material changes to the nature or funding of the project, and that on completion the building might be used only for the provision by the College (in its context, that meant the Institute) of education within ss 2 and 3 of the 1992 Act, that is education for respectively 16- to 18-year olds and those over 18. It was accepted by the Company that the Council's consent to the change in the structuring of the arrangements had not been obtained, though it did not accept Mr Puzey's argument that its use of the building was in breach of the second condition. In my view the fact that the Institute might have contravened the first of the conditions of its grant funding (I should make it clear that I make no finding that it did) is irrelevant to the issue of whether, for VAT purposes, the supplies of construction and consultancy services were to the Institute or the College, and I leave that point out of account. I will return to the significance, if any, of the second point.
22. The solicitors duly prepared novation agreements but for reasons Mr Parkin could not recall they were never executed. He thought it might be that, because he believed both Linpave and SGH had agreed orally to the novation, he put the agreements on one side and overlooked them, but after seven years, he said, he could not be sure. Mr Bird found them some time later, unsigned. Linpave continued to address all its invoices to the Company, while SGH continued to send them to "Grimsby College", and to treat "Grimsby College" as the employer in documents such as stage payment certificates which it produced as the work progressed. The later invoices, whether addressed to the Company or the Institute, were paid by the Company, if necessary after it had drawn part of the loan made to it by the Institute. The contracts for the purchase and installation of the equipment, principally engineering machinery, were placed by the Company, which the respondents do not dispute. They also accept that the Company paid for those supplies, although it used money provided by the Institute to do so.
23. On 23 June 2004 there was a meeting between Mr Bird and two HMRC officers at which, among other topics, the new building was discussed. The minute of the meeting records that Mr Bird indicated that "Although it was the intention that [the Company] would enter the contract it was in fact [the Institute] that entered the contract with Linpave" and that "The construction contract was never cancelled nor novated in [the Company's] favour". On 3 November 2004 an officer wrote a lengthy and detailed letter to Mr Bird, clearly drawing on the matters discussed at that meeting, in which he recited that "The construction contract was never cancelled, nor novated in [the Company's] favour". Mr Bird's response, in a letter of 30 March 2005, was "Incorrect, with the agreement of [Linpave] the invoices were raised to, and settled by, [the Company]. We are advised that this itself amounts to an agreed novation between the parties".
24. The second feature of the arrangements was that, in order to make them good, the Institute should grant the Company a lease of the site of the new block. Its case is that it did so, additionally if not principally, because the block was to be used for the making by the Company of its supplies of "full cost courses". The lease was executed on 1 August 2002; by then the building work was nearly complete and the block was in the process of being equipped. Nevertheless, the "Demised Premises" were described as "the site of the proposed New Engineering Centre … including all buildings now or hereafter constructed thereon", and the lease is in the form of a development lease.
25. I was told that it had been intended to enter into the lease as soon as the decision to novate the building contracts was made, and that the delay was due to dilatoriness on the part of the solicitors instructed to prepare the documents. That does not seem to me to be right; the solicitors sent the lease, apparently in its final form, to Mr Parkin on 27 May 2002, with instructions about its execution (including instructions on the minuting of a board meeting of the Company approving the lease), and I had no explanation of the time which elapsed before the lease was in fact executed. I saw no evidence of a board meeting, nor indeed of any meeting of the Institute's governors at which the lease and its implications were discussed.
26. The term of the lease was 20 years from 1 August 2002, at an initial annual rent of £4500, subject to five-yearly upward only review. The rent was fixed on the basis of advice obtained from independent valuers. Although their advice was not followed exactly it does not seem that anything turns on the precise rent; it is, however, a ground rent rather than a fair rent for the finished building, and its amount is therefore consistent with the Company's case that it rather than the Institute was the developer. There is no dispute that the Institute had not opted to tax the site of the new building (that is, it had not availed itself of the right conferred by para 2 of Sch 10 to the 1994 Act) and that the lease accordingly constituted an exempt supply by the Institute to the Company.
27. On the same day the Company granted a "licence to use facilities" to the Institute. The licence provided that in return for a fee the Institute was entitled to share "the Facilities on a non-exclusive basis jointly with the Company and all others authorised by the Company". The Facilities were defined as "The use of all specialist equipment furniture and other facilities contained within the Centre including but not limited to the facilities and equipment set out in the Schedule hereto". The Schedule contains a list of engineering equipment, computers and peripherals, software and teaching materials. It is not clear what other facilities and equipment might have been in contemplation. The licence also provided that "Nothing in this licence shall operate as a demise of any part of the Centre and the [Institute] shall at no time throughout the Period enjoy exclusive possession or occupation of any part of the Centre or any Facilities".
28. The licence was expressed to be for one year (the "Initial Period"), then from year to year (by "Academic Year" running from 1 August in one year to 31 July in the next) unless terminated. The annual fee for the licence was calculated at the rate of £12 per student, with a minimum annual total of £55,000 (in each case plus VAT). For reasons which none of the witnesses could explain the annual charge paid by the Institute was rather less, at £51,900 plus VAT, but it does not seem that the difference is material. A student was defined as

"each person whether or not a student of the [Institute] or otherwise allowed by the [Institute] to use the Facilities at any time during the Initial Period and in subsequent Academic Years."

29. That definition is rather oddly worded, and the parties accepted that it was ambiguous. Mr Hamlin argued that, despite its ambiguity, it must exclude the Company's students, and it seems to me that it must have been the draftsman's intention to distinguish between the Company's students on the one hand and all others authorised by the Institute on the other, since there could be no possible reason for the Company to grant a licence enabling its own students to enter a building of which it was the tenant. I do not think that much, if anything, turns on this point, which I take to be an infelicity of drafting rather than a matter of significance.
30. The first, and most important, issue is whether the input tax incurred in the construction of the new building is proper to the Institute or the Company. It is common ground that if it is proper to the Institute, it is not recoverable since it was wholly consumed in the exempt supply of the lease. Other questions arise if I should find that the input tax, or any of it, was incurred by the Company.
31. On the first issue the Company's case is the simple one that the two contracts for construction and consultancy services were novated to it, that it bought and paid for the equipment, and that all of the VAT paid in obtaining those supplies is accordingly input tax in its hands.
32. Mr Hamlin accepted, for the appellant, that the documentary evidence supporting the contention that there had been an effective novation was poor but, he said, that was not fatal to the appellant's case. A novation need not be in writing; all that is required is that the parties to the original contract and the party to which the rights and obligations of one of the original parties are to be transferred agree. He relied for that proposition on comments made in the 2008 edition of Chitty on Contracts at paras 19-086 to 19-088, on the decision of the Court of Appeal in Telewest Communications plc v Customs and Excise Commissioners [2005] STC 481 (in which the transfer of contractual obligations from one supplier to another was found to be an effective novation where the customer had done no more than acquiesce in the transfer) and the recent decision of Sales J in Community Housing Association Ltd v Revenue and Customs Commissioners [2009] STC 1324 in which he found (though the point was not disputed) that there had been an effective novation when the rights and obligations transferred were those of the customer, and it was the supplier which had acquiesced in the transfer.
33. He relied, as evidence of acquiescence, on the fact that Linpave had addressed its invoices to the Company and on the belief of Mr Parkin and Mr Bird, tempered though it was by the passage of several years, that the builders and consultants had agreed, and on the fact that the lease and licence had been entered into, a step which would have served no purpose had there been no novation. He also pointed out that one of the main reasons, if not the main reason, for the construction of the new block was that it would enable to Company to provide more "full cost courses", maximising its income.
34. The respondents' argument is that the contracts were not novated, as a matter of fact: they maintain that such evidence as has been adduced is insufficient to show that Linpave and SGH agreed to the transfer of the Institute's obligations to the Company. If there was no novation, they say, it inevitably follows (irrespective of whether it was the Company or the Institute which paid the invoices) that the supplies of construction and consultancy services were made to the Institute. Although the Company bought and paid for the equipment it did so using the Institute's money and the reality, they say, is that the supplies were made to the Institute.
35. Mr Puzey's position was that the mere fact that Linpave had addressed its invoices to the Company rather than "Grimsby College" fell far short of demonstrating a novation. The surrounding evidence showed no more than an intention to novate the contracts: it did not show that the novation had actually been effected. This was, moreover, not a case of acquiescence, but one in which positive agreement was, necessarily, asserted; there must be evidence of more than mere inaction.
36. In my view Mr Puzey is right, and for the reasons he gave. It seems to me extraordinary that the evidence supporting an effective novation, critical to the Company's case, was almost non-existent, even though its tax advisers, as Mr Bird accepted, had made it clear to the Institute that the arrangements should be properly documented. The value of the building contract was about £1.7 million and SGH's fees amounted to about £250,000. The transfer of the Institute's obligations to the Company, if it had occurred, would have been significant for those bodies and more significant still for Linpave and SGH. It is surprising, if no more, that, if they truly agreed to novation (rather than, in Linpave's case, merely to addressing their invoices differently) they did not seek a guarantee of payment from the Institute which, unlike the Company, had access to grant funding. There was, however, not even an exchange of letters. In my judgment the absence of any contemporaneous written confirmation by Linpave and SGH of their agreement to the novation is inconsistent with the claim that they did so agree.
37. The passage in Chitty on Contracts I was invited to consider certainly supports the proposition that novation may be inferred from conduct. However, the pertinent sentence indicates that "acceptance may be inferred from acts and conduct, but ordinarily it is not to be inferred from conduct without some distinct request", citing authorities in support. The difficulty facing the Company is that there is no reliable evidence of a "distinct request". Mr Parkin could not remember whether he or Mr Bird had spoken to Linpave and SGH, and if it was he, to whom he had spoken. Mr Bird's statement contains the sentence "My understanding is that the decision to novate was put in place and implemented", which does not suggest that he was himself involved in the implementation, and when he gave oral evidence he too said he could not remember whether he or Mr Parkin had spoken to Linpave and SGH. Again, there is no contemporaneous written evidence of the supposed telephone calls; one would, at the least, expect to see a file note of such important conversations, but none could be produced.
38. The wording of the minute of the Finance and Personnel Committee, to which I have already referred, is also revealing. It appears to record a simple and informal course of action, and does not suggest that it was the rather more significant step of novation, and the transfer of the Institute's rights and obligations, which were considered and approved. In addition, Mr Parkin's letter to the solicitors, of which an extract appears above, suggests a future novation, not one which Mr Parkin believed had already been concluded. If, as his statement suggests, he put the novation agreements on one side because he believed novations had been agreed in (on the Company's case) February 2002, it is difficult to understand why, in April, he instructed the solicitors to prepare agreements he considered unnecessary. His failure to arrange for the agreements to be signed is all the more difficult to understand in the light of the tax advisers' recommendation that the arrangements should be properly documented. Though it is understandable that, between the Institute and the Company, the matter was dealt with informally—which I accept may be sufficient to explain the late and casual record of the loan from the Institute to the Company—the absence of any clear contemporaneous evidence of the agreement of Linpave and SGH to the novation which the Company claims is in my view fatal to the Company's case.
39. On the very limited evidence which is available, I have concluded that it is not possible to find any more than that Linpave were asked, and agreed, to address their invoices to the Company. That is consistent with the minute, recording that the costs should be "charged through" the Company, but is a long way short of agreement to a novation. I suspect that the Institute's officers did not fully understand what a novation meant, and thought it enough that the Company paid invoices addressed to it. There is no evidence, beyond Mr Parkin's and Mr Bird's rather shaky recollection, that SGH agreed to any change at all. As I have said, all the documents they prepared, including for example the certificate of practical completion of the building works, referred to "Grimsby College" as the employer for the purposes of the building contract. I do not agree with Mr Hamlin that the execution of the lease and licence amounts to evidence of novation; it merely supports the conclusion that the officials thought that agreement to redirection of invoices was enough. It also does not seem to me that it helps the Company to argue that the new block was to be used by it to provide standard-rated courses; had that been a determining factor the decision would have been made, before work began, that the new building should be commissioned by the Company. The reality, as Mr Hamlin candidly accepted, was that the changes in the contractual structure were proposed for no other purpose than to recover the input tax. Unfortunately for the Institute and the Company I cannot be satisfied that there was a novation and that, as a matter of fact, the scheme was effectively implemented. It follows that the input tax incurred, as I have found, by the Institute is not recoverable since it was wholly consumed in making the exempt supply of the lease.
40. That finding does not entirely dispose of this aspect of the appeals, since there is no dispute that it was the Company which placed the orders, and paid, for the supplies of equipment. The Company's case is that in those circumstances the VAT charged on the supplies is input tax in its hands, the Commissioners' that the supplies were in reality made to the Institute, the placing of the orders and the making of payment by the Company being no more than a device by which the VAT could be recovered. They point to the fact that the Company was wholly dependent on the Institute for the funds with which the payments were made, and that the equipment was installed (if I am right in my first finding) in a building which had itself been supplied to the Institute. If the respondents are correct, the Company is effectively to be treated as having made the purchases as the Institute's agent.
41. On this point I prefer the Company's argument. Although there is a logical attraction, in the light of my first finding, to conclude that the Institute merely used the Company as a conduit for the purchase of the equipment as it had for the construction of the building, it does not seem to me that, absent an allegation of abuse in the sense developed in Halifax plc v Customs and Excise Commissioners (Case C-255/02) [2006] STC 919 (and the Commissioners do not now advance an argument of that kind), there is any scope, as in Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588, for me to find that the VAT analysis differs from the contractual analysis. That the Company borrowed the money from its parent, even on ill-defined terms, is not sufficient to displace the fact that the Company contracted for the acquisition of equipment to be installed in a building in which it had, or was about to obtain, a leasehold interest, and of which it was in turn to make a supply, whatever the nature of that supply might be. The VAT charged on the supplies of equipment was, I conclude, input tax in the Company's hands. That is not to say that it is recoverable, the issue to which I now come.
42. The Company's contention is that the licence which it granted to the Institute permits the latter's students to use the facilities within the building, a taxable supply, and is not a letting of immovable property, which it accepts would constitute an exempt supply. It points to the express exclusion in the licence agreement of a demise and of the right of sole occupation, both features which are necessary if there is to be a letting of land. The Institute's students must be allowed to enter the building in order to use the facilities in it, but it is implicit, it says, that they may do so only for that purpose. In other words, access to the building is a necessary incidental to the use of the equipment, but no more. It is true, as the respondents have pointed out, that the capital value of the building is greater than that of the equipment, but if value is a criterion, the better approach is to compare the annual depreciation costs of the building and of the equipment, those of the equipment being significantly larger.
43. If instead the proper conclusion is that two supplies are made, of rights of access and of use of the equipment, it is clear, the Company says, that the latter is dominant. Access to the building is not an end in itself, but merely the means by which use of the equipment becomes possible; thus, applying the principles expounded by the Court of Justice in Card Protection Plan Ltd v Customs and Excise Commissioners (Case C-349/96) [1999] STC 270 and Levob Verzekering BV v Staatssecretaris van Financiën (Case C-41/04) [2006] STC 766, and by the House of Lords in Dr Beynon and Partners v Customs and Excise Commissioners [2005] STC 55, it follows that the supply of the right to occupy land, if there was such a supply at all, was merely ancillary to the supply of the use of the equipment, and the Company is to be treated as having made a single, taxable supply.
44. Mr Hamlin relied too on the observation of Warren J in Byrom and others (trading as Salon 24) v Revenue and Customs Commissioners [2006] STC 992 at [52] and [53] that

"[52] … There is case law of the ECJ on the scope of the exemption for the letting and leasing of immovable property. This exemption reflects the fact that letting is normally a comparatively passive activity, not entailing significant added value. Transactions (or some at least) which entail more active exploitation of property are specifically excluded from the exemption, such as hotel services: see for instance the opinion of the Advocate General (Jacobs) in Blasi v Finanzamt München I (Case C-346/95) [1998] STC 336 at paragraphs 15 to 20 and the decision of the ECJ in Belgian State v Temco Europe SA (Case C-284/03) [2005] STC 151 at paragraphs 19, 20 and 27.

[53] In paragraph 20 of Temco, a distinction was drawn between letting of immovable property from other activities which are either industrial or commercial in nature or have as their subject-matter something which is best understood as the provision of a service rather than simply the making available of property. Or, as it was put in paragraph 27, it is a matter for the national court 'to establish whether the contracts, as performed, have as their essential object the making available, in a passive manner, of premises or parts of buildings in exchange for a payment linked to the passage of time, or whether they give rise to provisions of a service capable of being categorised in a particular way.'"

45. The distinction between passive lettings and lettings in which the supply of services forms an important part was formerly made in art 13B(b) of the Sixth VAT Directive, now art 135(2) of the Principal VAT Directive (2006/112/EC), and is reflected in exceptions (d) to (h) to item 1 of Group 1 of Sch 8 to the Value Added Tax Act 1994. Warren J went on to point out, as is well-established, that exemptions are to be construed strictly. From that it followed that a supply should be treated as exempt only if it clearly fell within the exempting provision; here there was active use of the facilities in exchange for a fee which reflected use, since it was determined by reference to the number of students, rather than the passage of time. That factor, too, pointed to the conclusion that this was a supply of the use of facilities rather than a letting of immovable property. Mr Hamlin relied additionally on the decision of the House of Lords in Revenue and Customs Commissioners v Newnham College [2008] STC 1225, in which the College made arrangements, with some similarity to those in this case, by which a subsidiary took a lease of the College's new library and purchased the books held within it, allowing use of the books to members of the College in return for fees. The College was found not to be in occupation of the library.
46. For the respondents Mr Puzey argued that Mr Hamlin's description of the use of the building was not borne out by the facts. As the Company was incapable of delivering courses to students, being wholly dependent for that purpose on the Institute, the proper view was that it allowed the Institute access to the building in order that the Institute could make the entire supply of education, some to its own students and some to the Company for onward supply to those paying full fees. This was not a case comparable to Newnham College, because in that case the subsidiary did undertake the administration of the library. Here, the Company did nothing beyond buying in the supplies made to it by the Institute, and selling them on. It was unrealistic to claim that the Company occupied the building at all; it was not a case of the Institute sharing the building with the Company, but of the Institute alone being in occupation.
47. It seems to me that the respondents' argument is right. If the Company is in occupation of the building, it is in no more than the notional sense that it is a lessee. It has no physical presence of its own, by employees or otherwise; the facility is used, in my judgment, in the manner Mr Puzey suggested, that is by the Institute, and the Institute exclusively, to teach students of its own and to make supplies of taught courses to the Company. I do not find it a significant pointer to that conclusion that the second of the two conditions imposed by the Higher Education Funding Council requires the Institute to use the facility itself, although it does appear to be a consequence of my conclusion that the Institute is not in breach of it. If the Company were to organise courses for its own students, buying in only the time and skill of the Institute's teachers, it would be realistic to say that the Company is in occupation of the building but, as it accepts, it is the Institute which devises the courses and deals with all the incidentals, such as the examinations. The Company is, I do not doubt, an appropriate vehicle for the provision of commercial courses, but it is no more than a device by which the Institute is able to segregate its two classes of activity. The only body in occupation of the building, in any real sense of the term, is the Institute. I agree that this case is to be distinguished from Newnham College; the facts there were quite different.
48. I cannot accept Mr Hamlin's further argument that the essence of the licence is the use of the equipment, the right to enter the building being merely ancillary. It is in my view quite unrealistic to view the use of the building in that way. Doubtless the equipment is important, to the extent that some of the courses could not be effectively taught without it, but the only reasonable view is that the Institute has constructed a teaching facility consisting of a building which, because of the nature of the courses to be taught in it, houses engineering equipment. The proper conclusion, in my judgment, is that the equipment is incidental to the main purpose of the building, that is the teaching of engineering courses by the Institute. The fact that the charge is assessed otherwise than by time alone does not seem to me to be important; what is decisive is that the Company performs no service of any kind. It does no more than passively allow the Institute to use the building and the equipment within it for the teaching of courses. The true nature of the licence, I am satisfied, is a letting of immovable property. That supply is exempt and, consequently, the input tax incurred by the Company is irrecoverable.
49. I have some sympathy with the Company and the Institute which, if they had organised (and documented) their affairs rather better, might have been able to achieve a tax saving. As it is, however, I am bound to conclude that they have failed in that objective, and that the appeal must be dismissed. Mr Puzey did not ask for a direction in the Commissioners' favour in respect of costs.
50. I should conclude, even if out of an excess of caution, with a minor point raised by the Company, though not pursued at the hearing. It was that HMRC had approved the arrangements, and had later changed their minds. The argument rests on an exchange of letters between Mr Bird and the officer then dealing with the matter, a Mr Hartley. On 23 December 2002 Mr Bird wrote explaining that the "development has been undertaken by [the Company]" and to outline the intended arrangements by which the Company would make taxable supplies to the Institute. Mr Hartley replied on 24 January 2003, saying that "I can confirm my agreement to your proposals". However, his agreement is plainly based on his acceptance of Mr Bird's statement that it was the Company which had undertaken the development; at that stage HMRC had not enquired into the detail of the arrangements, and the explanation which Mr Bird offered did not provide a complete picture. I do not find in the exchange of letters an agreement that the arrangements have the effect for which the Company contends.

COLIN BISHOPP

TRIBUNAL JUDGE

RELEASE DATE: 15 July 2009