First-tier Tribunal (Tax)

[2011] UKFTT 390 (TC)

TC01245

 

 

 

Appeal number: TC/2009/14338

 

 

Value Added Tax – A supply of lease of land and a supply of cold water by the landlord – Whether a single supply or two separate supplies – Two supplies – Principle of “fiscal neutrality” – Appeal allowed

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

THE HONOURABLE SOCIETY OF MIDDLE TEMPLE Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

 

TRIBUNAL: DR K KHAN

JOHN AGBOOLA FCA, MBA

 

 

Sitting in public in London on 16 March 2011

 

Mr Richard Bramwell QC, and Michael Collins, for the Appellant

 

Mr Raymond Hill of counsel, instructed by the Solicitor to HM Revenue and Customs, for the Respondents

 

 

© CROWN COPYRIGHT 2011

 

 

DECISION

 

Introduction

 

1. This case is concerned with whether the grant of a lease of land and the provision of a supply of cold water by the landlord to the tenant is a single supply or two separate supplies.  The Appellant contends it’s the latter.

 

2. The appeal is against a Decision contained in a letter dated 9 June 2009 provided by the Respondents to the Appellant.

 

3. In that letter it is stated:

 

“By making a recharge of water cost, the landlord is passing on the cost he incurs in making his rental supplies.  Therefore, the recharge for water cost would take on the VAT liability of the rent and be exempt if the rent is exempt or standard rated if the rent is subject to an option to tax.  In this instance given in your letter, you state that the commercial property is subject to an option to tax therefore the rent and the water recharge would be subject to standard rate VAT”.

 

4. This is a reply to a letter written by the Appellant on 22 May 2009 where they sought a ruling from the Commissioners of Her Majesty’s Revenue and Customs  (“the Commissioners”) in relation to the supply of water, to the tenants of its commercial officer accommodation, which had been opted to tax.  The letter stated:

 

“When invoicing tenants for the quarterly rent, we separately identify an amount for, amongst other things, the provision of unheated water.  As the tenants’ water usage is not metred, this charge is calculated by splitting the Middle Temple’s invoice from Thames Water between commercial tenants based on the area of the Middle Temple occupied by each business.

Our question is whether this unmetered supply of water should be treated as:

 

1. A separate supply of unheated water …

2. A further consideration payable by the tenant for the provision of standard-rated service and thereby treated as rent …”.

 

5. The Appellant has always maintained that the supply of water was a separate supply from the leasing of the office accommodation.  They relied on the Court of Justice decision in case C-2007/07 RLRE Tellmer [2009] ECR I-4983 (“Tellmer”).

 

 

 

 

The relevant facts

 

6. The parties have agreed the statement of facts, which are as follows:

 

1. The Appellant holds land and buildings known as the Middle Temple, London under a Royal Charter dating from 1608.  Most of the buildings are not occupied by the Appellant but are let.  The appeal is concerned with the premises let as Chambers to Barristers and for which the Appellant has elected to charge VAT on the rent.

2. Cold water is supplied to the premises via a network of underground pipes in the Middle Temple which is owned by the Appellant.  Cold water is supplied to this network by Thames Water.  The supply is metered and charged to the Appellant.

3. The cold water supplied by the Appellant to each tenant is not metered.  The amount of charge to each tenant is calculated annually by reference to the area of each lease as a proportion of the Middle Temple.  The calculation is made in arrears so that the amount paid by the Appellant in one year is recharged to the tenants in the next.  Each tenant is given a quarterly invoice which separately itemises rent and the cold water charge.  A specimen invoice was provided to the Tribunal.  For the period covered by the determination under appeal the Appellant did not charge VAT on the amount charged for cold water.

4. The tenants of the Appellant have no practical alternative to taking their supply of cold water from the Appellant.

5. The Tribunal was provided with a specimen lease as representative of all leases.  The invoice provided was treated as a specimen for all invoices.

6. The lease specifically defines a “Cold Water Charge” as follows “in each year in proportion to the cost to the Landlord of providing cold water (where supplied) to the Chambers such cost and the amount of any increase to be certified by the Under Treasurer whose certificate shall be final save in case of manifest.”

 

7. The lease provides in Clause 2 as follows:

 

“The Landlord demises the Chambers to the Tenant to Hold for the Term paying the Rent and by way of further rent where applicable the cold water charge and the heating and/or hot water charge during the Term without any deduction (except as required by any Act) by equal quarterly payments in advance and on the usual quarters days the first payment for the period from the beginning of the term until the quarter day next after the date of this Lease to be made upon execution of this Lease.

 

 

 

Clause 7 of the Lease provides:

 

“If:

(a) the Rent or any part thereof shall be in arrears for 14 days after becoming payable (whether formally demanded or not) or there shall be any breach non-performance or non-observation of any of the Tenants covenants …

 

the Term shall determine but without prejudice to any rights of action of the Landlord or the Tenant in respect of any antecedent breach by the other of any of the covenants in this Lease”.

 

The law

 

8. Value Added Tax Act 1994 (“the VATA”) Schedule 8 (zero-rating):

Group 2 Sewerage Services and Water (zero-rated)

Item 2 “the supply … of water”

 

The supply of water is zero-rated

 

VATA 1994 Schedule 10 (the Option to Tax)

 

Para 2:  The grant of an interest in land in respect of which the option to tax has been exercised

 

Cases referred to are:

 

Case C-349/96 Card Protection Plan [1999] ECR 1-973; [1999] STC 270 (“Card Protection Plan”)

Case C-41/04 Levob [2005] ECR 1-9433; [2006] STC 766 (“Levob”)

David Baxendale Ltd [2009] EWCA Civ 831; [2009] STC 2578 (“David Baxendale Ltd”)

Case C-207/07 RLRE Tellmer [2009] ECR 1-4983; [2009] STC 2006 (“Tellmer”)

American Express [2010] EWHC 120, [2010] STC 1023 (“American Express”)

Decision TC00480 Best Images Limited [2010] UKFTT 175 (“Best Images”)

Purple Parking Ltd v HMRC [2009] UKFTT 152

Case C-111/05 Akiebolaget NN [2007] ECR 1-2697 (“Akiebolaget”)

Case C-425/06 Part Service [2008] ECR 1-897

Case C-461/08 Don Bosco [2009] ECR 1-11079 (“Don Bosco”)

Case C-88/09 Graphic Procédé, judgment of 11 February 2010

Case C-175/09 AXA, judgment of 28 October 2010

Case C-276/09 Everything Everywhere formerly T-Mobile, judgment of 2 December 2010

Joined Cases C-497/09, C-499/09, C-501/00 and C-502/09 Bog, judgment of 10 March 2011

Airparks/Purple Parking Order for Reference, Order of Upper Tribunal – February 2011.

 

Appellant’s submissions

 

9. The Appellant says that the supply of both premises and water is simply an accident of history and from an economic standpoint produces exactly the same result as if the tenants took the water directly from Thames Water.  There is nothing artificial about the separation of the supplies and it is self-evident that the grant of a tenancy and the supply of cold water are separate supplies.

 

10. The Appellant says that the relevant test is the economic divisibility test which is based on an objective view of the transaction from the consumers’ perspective.  In simple terms, it means that there is a single supply except where the consumer can be taken to perceive an economic advantage in obtaining two or more elements as part of a package.

 

11. The Appellant starts by looking at the contract and asks why the two elements are in the same contract, what is the purpose of the contractual linkage and does it confer an economic advantage to the consumer.  In the present case the answer is clearly “no”.  The consumer is in the same economic situation as if the accommodation and the water were provided by different suppliers, as occurs in all letting situations.  The contractual link is being forced upon the parties by an accident of history.  They draw reference to the fact that the Middle Temple is designated a local authority in law with a similar status to the Inner London Boroughs.

 

12. The Appellant says that by treating the water charge as additional rent, the lease confers an advantage on the landlord, who in addition to the usual contractual relief for non-payment is able to forfeit the lease.  This is not a relevant factor in the economic divisibility test since the circumstances must be looked at objectively from the perspective of the typical customer rather than from the perspective of the supplier and the linkage between the suppliers must be considered from an economic point of view only.

 

13. The Appellant draws reference to various cases and rely on the reasoning in Tellmer.

 

14. In summary, the Appellant says that there are no economic consequences of the packaging of water and premises.  The items supplied do not loose their identity.  The water is invoiced separately; it is simply allocated and apportioned.  There is no linking of the supply of water with premises in the contract, for some economic purpose.  It is a matter of contractual expediency not economic necessity ( Levob ) 

 

 

The Respondents’ submissions

 

15. The Respondents’ core contention is that the Appellant receives a single supply of both premises and services which are so closely related that they form, objectively, a single, indivisible economic supply, which it would be artificial to split, or alternatively the supplies provided by the landlord are “ancillary” to the principal supply, being the leasing of land.

 

16. The Respondents agree that the main dispute in this case involves a proper interpretation and application of the European Court of Justice Decision in Tellmer and other similar judgments on single/multiple supplies.

 

17. The Respondents’ submissions, rather longer than the Appellant’s, is that the two elements supplied by the Appellant are both supplied as part of a package under the same lease.  The services will be of no use to the Appellant if the Appellant did not lease the premises and the economic purpose of the services supplied by the landlord is to enhance the lease of the premises.

 

18. The Respondents in looking at the case law prior to Tellmer draws reference to the ECJ’s judgment in Card Protection Plan which states that “a service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied” (paragraph 30)..

 

19. They also draw reference to the case of Levob where the Court explained  another scenario where there could be a single supply.  This is where “two or more elements or acts supplied by the taxable person to the customer, being a typical customer, are so closely linked that they form objectively, a single indivisible economic supply, which it would be artificial to split”.  This forms the basis of the economic divisibility test.  The Respondents say that the supply of the lease and cold water are so closely linked that they form a single economic supply.  The lease is economically useless without a supply of cold water and conversely the supply of cold water cannot be enjoyed at all by a prospective tenant unless the prospective tenant takes the lease.  They say that the commercial office accommodation and the cold water are offered as a “package” so the Tellmer decision does not apply.  In that case,  the Court said that the leasing of the property and the cleaning did not form a package since the tenants had the option of obtaining cleaning services from suppliers other than the landlord and the letting and cleaning cannot be regarded as constituting a single transaction.

 

20. They also draw reference to the case of David Baxindale Ltd  and Best Images Ltd  and the case of Don Bosco among others.

 

 

 

21. Finally, the Respondents say that the principle of fiscal neutrality cannot be applied when comparing the tax treatment of a single supply with two elements in one package with the tax treatment of the same elements supplied separately.

 

Middle Temple

 

22. A word about Middle Temple.  This is the name commonly used to refer to the Honourable Society of Middle Temple, one of the Inns of Court, whose members are students of law studying to become barristers or barristers, members of the English Bar.

 

23. The Under Treasurer of Middle Temple is designated a local authority with a status equivalent to the Inner London Boroughs.  Although situated within the boundaries of the City of London, they are not subject to the jurisdiction of the Mayor and Corporation of London.  It is one of few remaining “liberties” (independent geographical area). 

 

24. Under the Temple’s Order 1971, the Inner Temple was defined as a local authority with the same powers and responsibilities as the Inner London Boroughs under the London Government Act 1963.  While the Middle Temple is largely concerned with legal education and training for pupil barristers, most of the Inn is occupied by barristers’ offices known as Chambers.

 

25. We are concerned here with the commercial leases granted to these barristers.  The landlord is defined in the lease the “trustees of the Honourable Society of the Middle Temple” who act on behalf of the Under Secretary of the Middle Temple.

 

26. The landlord grants a lease of “Chambers” which is defined as the “unfurnished suite of rooms” in a part of the building. The tenant pays rent and pays “further rent”, quarterly payments (where applicable) for cold water, hot water, and heating.

 

Discussion

 

27. The situations where the Court will treat more than one supply as being a single supply is established in the case law of the ECJ  and arises where:

 

(1) One or more services can be regarded as “ancillary” to the principal supply; or

(2) Two or more elements supplied are so closely linked that they form objectively a “single indivisible economic supply which it would be artificial to split”.

 

 

 

 

 

(Tellmer)

 

28. The Court in Levob formulated the legal principles as follows:

 

“19. According to the Court’s case law, where a transaction comprises a bundle of features and acts, regard must be had to all the circumstances in which the transaction takes place in order to determine, firstly, if there were two or more distinct supplies or one single supply and secondly, whether in the latter case, that single supply is to be regarded as a supply of services (see, to that effect, Faaborg-Gelting Linien AS  v Finanzamt Flensburg (Case C-231/94 [1996] STC 774, [1996] ECR I-2395, paras 12 to 14, and Card Protection Plan [1999] STC 270, [1999] 2 AC 601, para 26 and 29.

 

20. Taking into account, first, that it follows from art 2(1) of the Sixth Directive that every transaction must normally be regarded as distinct and independent and, secondly, that a transaction which comprises a single supply from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must in the first place be ascertained in order to determine whether the taxable person is making to the customer, being a typical consumer, several distinct principal supplies or a single supply (see, by analogy; Card Protection Plan [1999] STC 270, [1999] 2 AC 601, para 29.

 

21. In that regard, the Court has held that there is a single supply in particular in cases where one or more elements are to be regarded as continuing the principal supply, whilst one or more elements are to be regarded, by contrast, as ancillary supplies which share the tax treatment of the principal supply (Card Protection Plan (1999) STXC 270, [1999] 2 AC 601, para 30, and Customs and Excise Commissioners v Primback Ltd  (Case C-34/99) [2001] 1 WLR 1693, para 45.

 

22. The same is true where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single, indivisible economic supply; which it would be artificial to split.”

 

29. In Levob, the Court had to consider whether the supply of standard software and its subsequent customisation to the purchaser’s specific requirements was a single supply or two separate supplies.  The Court said that there was one supply which was an indivisible economic supply.  The Respondents rely on this case and say that the two elements supplied to the Appellant are both supplied as part of a package under the same lease.  There can be no lease without water and vice versa. The Appellant says that this is not correct since the water supplied could be provided by a third party supplier and they rely on the case of Tellmer.

 

30. The relevant part of the decision in Telmer which the Appellant uses to support their contention is contained in paragraphs 20-25 of the Decision.  It states as follows:

 

“20. It should be remembered at the outset that the letting of immovable property within the meaning of art 138(b) of the Sixth Directive essentially consists in the conferring by a landlord on a tenant, for an agreed period and in return for payment, of the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right (see, to that effect, Stichting ‘Goed Wonen’ v Staatssecretaris van Financiën  (Case C-326/99) [2003] STC 1137, [2001] ECR I-6831, para 55); Customs and Excise Commissioners v Mirror Group plc; Customs and Excise Commissioners v Cantor Fitzgerald International (Case C-108/99) [2001] STC 1453, [2002] QB 546, para 31, Seeling v Finanzamt Starnberg (Case C-269/00) [2003] STC 805, [2003] ECR-I-401, para 48, and Belgian State v Temco Europe SA (Case C-284/03) [2005] STC 1451, [2004] ECR I-11/237, para 19).

 

21. Thus, even if the cleaning services of the common parts of an apartment block accompany the use of the property let, they do not necessarily fall within the concept of letting for the purposes of art 138(b) of the Sixth Directive.

 

22. It is, moreover, undisputed that the cleaning services of the common parts of an apartment block can be supplied in various ways, such as, for example, a third party invoicing the cost of the service direct to the tenants or by the landlord employing his own staff for the purpose or using a cleaning company.

 

23. It should be noted that, in this case, RLRE Tellmer Property invoices the cleaning services to the tenants separately from the rent.

 

24. Also, since the letting of apartments and the cleaning of the common parts of an apartment block can, in circumstances such as those at issue in the main proceedings, be separated from each other, such letting and such cleaning cannot be regarded as constituting a single transaction within the meaning of the case law of the court.

 

25. Having regard to the whole of the above considerations, the answer to the first question must be that, for the purposes of applying art 138(b) of the Sixth Directive, the letting of immovable property and the cleaning service of the common parts of the latter must, in circumstances such as those at issue in the main proceedings be regarded as independent, mutually divisible operations, so that the said service does not fall within that provision.”

 

31. In the Tellmer case, the Advocate General outlined three sets of circumstances where the cleaning of the building can be undertaken.  These are, tenants clean the common parts, the common parts are cleaned by outside contractors or the landlord cleans the common parts either using his own staff or outside contractors. Paragraph 41 of the Advocate General’s opinion states:

 

“41. Leaving that on one side, to distinguish between the economic activity of letting dwellings and the activity of cleaning of the common parts does not constitute the splitting of a single, indivisible economic supply.  Both activities are not so closely linked that to separate them would seem artificial, especially as, generally speaking, it is for the parties concerned, exercising their contractual freedom, to allocate that task in a particular case.  As the Czech government argues, referring to current practice in the Czech Republic, in principle, cleaning of the common parts can be organised in three different ways: (1) the tenants themselves assume that task, (2) cleaning services are supplied by a third party which subsequently invoices the tenants for that supply; (3) the landlord ensures the cleaning of the common parts, whether through his own employees (for example, caretaking staff) or a cleaning firm commissioned to perform the task.  The multiplicity of potential arrangements demonstrates that neither the right of use nor the actual opportunity to use dwellings for their intended purposes is severely prejudiced if cleaning services, exceptionally, are not assumed by the landlord.”

32. The Advocate General then goes on to distinguish the different set of circumstances regarding cleaning and stated the third set of circumstances “constitutes the facts at issue in the main proceedings, may be distinguished from the second example only by reason of the fact that the provider of the cleaning service is, at the same time, the landlord”.

 

33. The Advocate General’s opinion was that the circumstances outlined as (1) and (2) where tenants themselves clean and cleaning services provided by third party must be treated the same way under the principle of fiscal neutrality.  The point being made by Mr Bramwell is that fiscal neutrality permeates all the law of VAT and the tenants of the Middle Temple should not be treated differently to tenants outside the Middle Temple simply because they are in that area. 

 

34. In support of their case the Appellant draws reference to the Advocate General’s opinion in Tellmer at paragraph 47, which states:

 

“47. Inasmuch as the Czech government asserts in that regard that this third variant potentially may be supplemented with additional features, making it increasingly difficult to reach an assessment in an individual case, that contention must be upheld, for example, the situation is conceivable in which a landlord supplies cleaning services also in other buildings which are not let by that party.  None the less, the service supplied by such person is, in essence, the same as that at issue in the main proceedings.  Therefore, in my view, it would undermine both the principle of fiscal neutrality and the coherence of the common system of VAT if the two variants mentioned above were treated differently depending on whether the landlord or a third party assumes the cleaning services in question.  The uncertainty connected with each individual case would unnecessarily overcomplicate the application of the provisions on VAT and make the decisions of the national tax authorities correspondingly less practicable for the taxpayer.”

 

35. The Appellant says that the comparison between inside the Middle Temple and outside the Middle Temple, with the supply of water being zero-rated outside and standard-rated inside is not fiscally neutral.  Both supplies must be treated in the same way for there to be fiscal neutrality.  The Respondents dismissed this argument.  They say that a package deal is offered to the tenants and it is necessary to focus on the elements actually offered and not whether the tenants could have obtained those elements separately had they contracted with different suppliers of office accommodation and cold water.

 

36. The Appellant says that what is important is that generic evidence is used to establish that in some cases the tenants have a choice, it is not required that there be a choice for the observance of the principle of fiscal neutrality.

 

37. The Tribunal agrees that the principle of fiscal neutrality requires that all economic activity, identified by reference to objective characteristics, must be taxed in the same way.  The point is that fiscal neutrality requires that similar goods and supplies of services be treated in the same way for VAT purposes, in order to combat distortions in competition.  The Tribunal will no doubt have difficulties in treating the supply of water under a commercial lease granted by the Middle Temple to its tenants as a standard rated supply because they receive their water, not directly from Thames Water, but through pipes established hundreds of years ago. Commercial tenants receiving the very same supply of water and not based in the Middle Temple would not pay VAT on their water supplies.  To treat the barristers of Middle Temple differently because of a historical accident, as it were, cannot be correct.  It will be an economic distortion to tax at the standard rate the supply of water within the Inn and to zero-rate the supply of water to Tenants outside. This will constitute an infringement of the principal of fiscal neutrality since it would treat similar businesses differently for tax purposes.

 

38. The Respondents rely principally on the case of Levob.  In that case the ECJ had to consider whether the supply of standard software and its subsequent customisation to the purchaser’ specification was a single supply or two supplies. The ECJ held that there was one supply.  The case identified two circumstances where there will be a single supply.  The first is where the service does not constitute for customers an “aim in itself, but the means of better enjoying the principal service supplied”.  The second was where both services were essential but where “two or more elements or acts supplied by the taxable person to the customer, being a typical customer, were so closely linked as they form, objectively, a single indivisible economic supply, which it would be artificial to split”.  The idea of the single supply, with a principal and an ancillary service, was explored in the case of Card protection Plan . The Court said:

 

“There is a single supply in particular in cases where one or more elements are to be reported as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service.  A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal services supplied (see Customs and Excise Commissioners v Madgett and Baldwin (trading as Howden Court Hotel (Joined cases C-308/96 and C-94/97) [1998] STC 1189 at 1206, para 24).

 

39. The Respondents say that the correct approach is an economic approach taking into account substance and reality.  The two elements supplied to the Appellant are both supplied as part of a package under the same lease.  The services would be of no use if the Appellant did not lease the premises and the economic purpose of the services supplied by the landlord is to enhance the lease of the premises.

 

40. A lease of one of the Inns buildings is economically useless without a supply of cold water and conversely the supply of cold water cannot be enjoyed at all by a prospective tenant unless the prospective tenant takes a lease.  Using the reasoning in Levob, the Respondents say that cold water supplied by the Appellant to their commercial tenants is so closely linked to the lease that it forms objectively a single indivisible economic supply with those leases.  The Respondents further say that a tenant cannot lease a building without cold water – and the cold water supply cannot be regarded as a separate supply, it was the cold water supply which alone made the lease of the building useful to the tenant.  In this sense, the lease and the cold water supply “form part of a single economic transaction”.  They draw reference to the case of Aktibolaget NN [2007] ECR 2697 in support of their contention.  This case produced a similar outcome to Levob, where the ECJ said there was a single supply of fibre-optic cable linking Sweden and another country.  The Court looked at the contact which showed that “all the elements of the transaction at issue … appears to be necessary to its completion” and all are “closely linked”.  The Respondents, relying on Levob and Aktibolaget NN conclude that “taking each of the two elements in isolation, do not have the necessary practical benefit for customers”.  Therefore, they form objectively a single economic supply, which it would be artificial to split.

 

41. The Respondents also rely on the case of David Baxindale. The Court of Appeal had to consider an appeal relating to the correct tax treatment of a weight loss programme, which included the supply of both food packages and counselling services.  The Commissioners argued that this was a single standard rated supply of services, whereas the taxpayer argued that it made separate supplies of food and counselling services.  Similarly, in analysing the Tellmer case, Patten LJ noted at paragraph 19 “the landlord (in the Tellmer case) contended that the letting and cleaning services were economically indivisible. The response of the Czech government was that the tenants were not required to have cleaning services provided by the landlord.  They can organise the cleaning of the common parts through a third party unconnected to the landlord who would invoice them direct for the services provided.  It was not therefore right to treat the provision of the services as part of the letting and therefore within that exempt supply even when they were provided by the landlord.  The judge went on to say that “the exemption from VAT for lettings should be restricted to the economic activity of the letting unless the cleaning was included in the letting agreement as ancillary supply”.  Further, he stated that “letting and cleaning cannot be regarded as economically indivisible given the absence of any necessary contractual link between the lettingand the cleaning arrangements”.  The Court of Appeal judgment in David Baxindale has since been applied in American Express (at para 29 and 30).

 

42. In the First-tier Tribunal FTT in decision TC00480 Best Images   [2010] UKFTT 175 (April 2010), the Tribunal had to consider whether the supplies of facilities for Indian wedding receptions involve a single supply of standard rated wedding services or whether it involves multiple supplies, including an exempt supply of land.  The Appellant in that case relied upon Tellmer in support of its case that there were multiple supplies. However this was rejected by the Tribunal.  They argued that the premises for weddings and the additional support services (introduction of customers to supplies of food, flowers, live music, Indian dancers and bridal outfitters, liaison with other suppliers, provision of chairs and drinks, cleaning and security and general organisation) were so closely linked that they constituted a single supply “because the benefit provided by the additional services was part of what the customer sought from the use of the premises … and because, for the typical customer, the additional support was no use without the premises and the premises will not be so desirable without the support and care of Mr and Mrs Baines” (paragraph 30).  The Respondents say that the cold water supply is part of what the tenant seeks for the use of the premises – the cold water supply would be of no use without a lease.  They say that the proper economic approach is to look at whether the various elements actually supplied were offered as a single package and not to consider whether they could have been supplied separately.

 

43. The Respondents also draw reference to the Court of Justice most recent case on single and multiple supplies Case C-461/08 Don Bosco,[2009] ECR I-1079.  In that case, a vendor sold two dilapidated buildings to Don Bosco.  It was agreed that the price paid by Don Bosco would include the cost of demolition of the building.  In their judgment, the Court of Justice referred to Levob, and Tellmer, before holding at paragraph 38 that there was a single supply because “the demolition work and the supply of a plot of land as such actually overlapped.  The economic purpose of these actions was to supply land ready for construction.  In this respect, it is not possible, without undue contrivance, to take the view that Don Bosco acquired from the same person first an old building and the ground it stood on which, as it happen, was of no economic use to him, and only subsequently, the supplies in connection with the demolition of the buildings, which alone could render a land economically useful …”.  The Court held that there was a single supply in spite of the normal practice for demolition work to be undertaking by a party other than the vendor of the land.  The aim of the transaction was to supply land which was clear and not land with buildings.An interesting view of the concept of building land.

 

44. In the case referred to as Case C-88/09 Graphic Procédé, (11 February 2010) the Court held that there was a single supply of reprographics where a company made copies of documents, files and maps at the request of firms of architects, design offices, museums, publishers and others where “those reprographics activities are not limited to the mere reproduction of original documents, but involve also the selection and programming of photocopiers, the compilation and binding of the documents and the sorting of the copies”.  The Court of Justice, referring to the case of Levob stated that the “economic purpose” of those activities was a single supply.  The court did not decide that photocopying was separately provided from the document binding.

 

45. The Respondents use these cases to argue that the lease and the provision of cold water are one economic supply.  They say that based on the decision of Tellmer, where there was multiple supplies and the tenants had a choice whether to obtain the cleaning from the third party or from the landlord, that is not what obtains in this case.  In the Card Protection case an economic approach had to be applied, so that there will be a single supply where, as in this case, the tenants can only accept the relevant services (cold water) from their landlord.

 

46. The Tribunal notes that all the cases cited by the Respondents provides examples of transactions which cannot be split into component parts without artificiality and where the consumer agrees to pay a single price for the services provided.

 

47. Let us look at the submissions.  The first point is that the contract between the parties, which all parties accept, provides two supplies in the same contract which arethe supply of accommodation and cold water.  The linkage in the contractual document of these two services is by reason of historical antecedents, which is to say, the system of pipes which underlie the Middle Temple.  Do they confer an economic advantage?  The answer has to be “no”.  The consumer is in the very same position as if the accommodation and the water were provided by different suppliers, as is normally the case.  It is not unique to the Middle Temple that water is supplied as part of the accommodation. The supply of cold water is a separate supply for all buildings which would be not rentable without such a supply.  In this case, it is supplied by the Middle Temple because there is no practical choice of a supply of cold water from other than the Appellant, who are also the landlord.

 

48. The question of a single composite supply or two separate supplies has to be determined objectively.  Let us start by saying that there is nothing artificial about having a separate supply of accommodation and a separate supply of water.  Indeed this is the normal case with most lettings.  In the Tellmer case, the Court carried out an objective assessment of the cleaning services and concluded that the cleaning services was not inherent in the supply of the right to occupy property.  It is normally the case that a supply of water to a lessee should not be made under a lease.  The lease would normally be silent on that matter.  Though leases typically provide that the pipes belong to the landlord, a tenant would normally arrange their own supply of water since the tenant requires water for their own needs whether or not they were tenants.

 

49. In the David Baxindale case, the slimming programme was dependent on the quality and type of food and support services which were provided in combination since the intended result was to provide the customer with a loss of weight.  The food was inherently part of the service being provided.  In this case, the supply by the Appellant of both premises and water is simply, as Richard Bramwell QC pointed out, an “accident of history” and from an economic standpoint produces exactly the same result as if the tenant took the water directly from Thames Water.  The Respondents have accepted that if the water was separately metered it would be a separate supply.  In HMRC Notice 701/16 at paragraph 24 it is stated that the supply of water to domestic and non-industrial users is zero-rated and that the provision of water against payment of an un-measured charge, standing charge, or other availability charge to the suppliers is also zero-rated.  In this case, the charge is based on the amount of space provided to the tenant.  This seems a sensible way to allocate the charges in the absence of metering since the amount allocated to each tenant is quantified on a fair and reasonable basis.  It is clear that pipes were installed at the Middle Temple some hundreds of years ago and this permitted the connection of the areas water system to the network of pipes provided by Thames Water.  In other words, the Middle Temple had their own pipe system which was in turn connected to the mains connection of Thames Water and so provided a supply network for the tenants of the Inner Temple.  This is a unique system and arises from a historical position.  There is no inherent economic value being provided by the Middle Temple by virtue of provision of pipes through which water flows from Thames Water and to suggest otherwise would go against the principle of fiscal neutrality inherent to the common system of VAT.  If anything, by treating the water charge as an additional rent, the lease confers an advantage on the landlord, who, under the usual contractual remedy for non-payment, are able to forfeit the lease. 

 

50. We are concerned to look only at the position of economic divisibility from the point of view of the consumer and, as noted in the American Express case, the circumstances must be looked at “objectively from the perspective of the typical customer rather than the supplier”.

 

51. The tenants of the Middle Temple have no interest in who supplies their water.  They simply need water as any other tenant does.  The supply of water is, as it were, an aim in itself and water is required for human life regardless of whether one is a tenant of the Inn or not.  There is no better proof of it being an aim in itself than its sustenance of human life.  Indeed, in looking at the economic divisibility test it would seem artificial to aggregate the supply of water with the supply of accommodation in the manner contemplated by the Respondents.  This is a fundamentally different position from the idea of the “single package” of services (which are not economically divisible) and indeed most tenants of the Middle Temple may not even be aware whether their water comes from Thames Water or indeed from Middle Temple.  In the case law, the Court has looked at treating single economic supplies as one joint supply where the joint supply hasa greater economic value than the single supplies.  In this case, there is simply the recharging of the water, which to the mind of the Tribunal does not change the nature of the supply.  The Tribunal was referred in correspondence to the case of Adams, Woskett & Partners (VTR 9647) where a caravan park owner who supplied caravan sites and electricity to visitors charged a flat rate for the electricity supply and this was held to be a separate supply from the supplier of the caravan site.  This was a case where the supply was unmetered but where the allocation of charge was on a fair and reasonable basis.

 

52. The Respondents make the most of the fact that the two supplies were in a package under one contractual document, the lease granted by the Middle Temple.  However, the packaging has not altered the respective services.  The case law is quite clear that the packaging of the product must result in something which is no longer distinct but a compound service.  (Levob para 73).  In this case the packaging of the water and the premises does not result in either of the services losing their identity; indeed, it is a matter of indifference whether the water comes from Middle Temple or elsewhere.  There are further no economic consequences of this packaging indeed; the packaging seems more a matter of commercial and contractual convenience.  The adding of the water charge to the lease means that the Middle Temple can obtain vacant possession for non-payment of water charges.  This is not a matter which is relevant for VAT purposes but has to do with the relationship between the landlord and the tenant.  It does not alter the economic nature of the supply being made.  It is correct to say that the lease will not have practical utility without the supply of water but then that is true of any commercial lease, not only leases provided by the Middle Temple.

 

53. The Respondents note the contractual link between supplies.  There is a contractual link but it does not have its basis in any particular economic purpose.  It is simply that the two supplies have been put into the same contract for convenience.  In the Levob case, there is an economic consequence to the supplies being put together in one contract but in this case, it is more a matter of contractual expediency since the supplies are not linked for an economic purpose.  It is possible for tenants of the Middle Temple to have agreed, at the time of taking their leases, to have separate meteres for their water supplies and in that sense the water would have been provided by a third party and invoiced by that third party once the meteres had been read.  It must be remembered that in the Tellmer case the Court considered the question of economic divisibility of lettings and services in general terms, which is to say, it included cases where the lease did not oblige the landlord to carry out the cleaning.  In the case of David Baxindale, the Court of Appeal in looking at the Tellmer decision felt that letting and cleaning could not be regarded as economically indivisible given the “absence of any necessary contractual link between the letting and the cleaning arrangements”.  It is clear that in Tellmer there was a contractual link in that the cleaning services were supplied by the landlord under the lease which also provided for the lettings.  It is correct, however, that this question be looked at in general terms given the doctrine of fiscal neutrality and as pointed out by Paton LJ in David Baxindale the test remains that of “economic indivisibility based on an objective view of the transaction from the consumer’s perspective”.  (Paragraph 33).

 

54. The fact that two supplies are provided under one contract is not conclusive of a composite supply being made.  It is important to consider all factors objectively.  In particular,, whether the combining of the supplies into one would breach the principle of fiscal neutrality.  A supply may be capable of being supplied outside the contract, separately priced and invoiced and its absence from the contract may not significantly impact on the  packaged contractual price being supplied.  Such a supply would clearly be a stand alone supply.

 

55. Finally, there is a sui generis category, of a supply being made, which due to a historical accident means the supply has to be made or packaged in a certain way.  Such a situation is different to where supplies are commercially required to be combined and this, on its own, should not cause a non-taxable supply to become taxable.

 

General conclusions

 

56. The Tribunal would allow this appeal since the elements involved, the letting of property and the supply of water are treated differently in our tax legislation.  Objectively, the supply of water can be made by a third party, Thames Water, under a  separately metered system which can be separately priced and separately invoiced.  The nature of the supply is not changed by the Appellant recharging for the supply of water.

 

57. The including of the water supply in the package provided to tenants is an accident of history. The pipes which supplied the water and which are in turn connected to the mains of Thames Water were laid several hundred years ago.  The water flows from Thames Water through the pipes of the Middle Temple to the Chambers of the barristers and in doing so provides no economic benefit other than that which would be supplied to tenants who obtain cold water directly from Thames Water for premises which are situated outside of the Middle Temple.  Indeed Middle Temple has premises outside of the area defined as the Middle Temple and it is presumed that those tenants would have water supply by Thames Water which would be zero-rated.

 

58. Mr Hill should be commended for his thorough research and the presentation of a blurred range of cases.  Mr Bramwell QC for his brevity.  In the circumstances, the appeal is allowed and the grant of a lease of land and the provision of a supply of cold water should be treated as two separate supplies and not a single supply, as the Respondents contend.

 

59. The parties may apply to the Tribunal separately on matters of costs.

 

60. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

 

 

 

DR K KHAN

TRIBUNAL JUDGE

RELEASE DATE: 10 June 2011