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Holmwood House School Development v Customs and Excise [2003] UKVAT V18130 (12 May 2003)

EXEMPTION – school granting peppercorn lease of site for proposed new building - lessee and constructor of school building entering into two licences to school and to associated partnership – whether exempt as leasing or letting of building – Article 13B Sixth Directive – Maierhofer (ECJ decision in Case C-315/00) considered – whether essential features of two separate licences together constitute joint leasing or letting of new school building – yes – appeal dismissed

LONDON TRIBUNAL CENTRE

HOLMWOOD HOUSE SCHOOL DEVELOPMENTS Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MALCOLM J F PALMER (Chairman)

PRAFUL DAVDA FCA

Sitting in public in London on 10 February 2003

Mr L Allen, Counsel, instructed by Messrs Davies Mayers, Accountants, for the Appellant

Mr Raymond Hill, Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

The appeal

This is an appeal by Holmwood House School Developments ("Developments") against the decision of Customs and Excise given in letters dated 23 January 2002 and resulting assessments. This decision was effectively that the relevant activities of Developments were exempt and that accordingly input tax claimed in the periods ended 28 February, 31 May, 31 August and 30 November 2001 was not creditable.

The principal issue

The principal issue for us is whether two agreements entered into by Developments under which, in the one case a partnership known as Holmwood House School ("the School") and in the other case another partnership known as Holmwood House Junior Assisted Places Scheme ("Assisted Places"), each acquired rights in respect of a new school building constructed by Developments, were a licence or licences to occupy land for the purposes of Group 1, Item 1 of Schedule 9 to the Value Added Tax Act 1994 ("VATA 1994").

The evidence

We were given two bundles of documents. The first is of 192 pages ("Bundle A") which includes in particular copies of the relevant partnership agreements, a lease to Developments, three agreements described as licences to use facilities and copies of correspondence between the parties. The second bundle ("Bundle B") is of 60 pages including copies of various accounts and other documents relating to the businesses of the partnerships. Oral evidence was given by Mr Henry Thackrah who is the headmaster of the School.

The facts

The School is a co-educational prep school. It was originally founded in 1922 by Mr & Mrs Duncan as a boy's prep school. It is owned and run by a partnership trading under the name Holmwood House School. The current partners are Mr Thackrah, the headmaster who has been a partner since 1988, Mr David Appleyard who joined the partnership in the early 1990s, and Mr J R Lucas, who was Mr Thackrah's immediate predecessor as headmaster. There is no formal written partnership agreement, although Mr Thackrah's evidence was clear that Mr Lucas's interest, which had originally been 50/50, was reduced to 3% in 1998. Negotiations are in progress that may reduce this further. This partnership and School is registered for VAT under registration number 676 8002 17.

During its history the School has changed in a number of ways. It was originally only for boys; now it is co-educational. Before it went co-educational there were 210 pupils: now there are 410. Originally it took children aged 8 to 13: now the pre-preparatory part takes in children aged 4. Previously it had children of many overseas parents: now there are no overseas pupils and fewer boarding facilities are needed.

The expansion of the School meant that it needed new classrooms and other facilities, in particular for the pre-prep part of the School. Planning permission for a new pre-prep department with class rooms and assembly hall was obtained by the School in April 1999. In November 2000 expenditure of some £666,000 was forecast. It was agreed that Mr Lucas would not be involved in the heavy personal financial commitment that this expansion would mean, and has meant, for Mr Thackrah and Mr Appleyard. Mr Thackrah and Mr Appleyard, therefore, agreed to form a new partnership, Developments, between only the two of them. Mr Lucas has no share in Developments. Developments, which is the appellant in this appeal, registered for VAT on November 2000 with registration number 759 8647 56. Its business is building development and the reason for its establishment was the building of a new two storey school building ("the New Pre-Preparatory Department") with 9 new class rooms and other related facilities immediately alongside the existing school buildings.

Invoices inclusive of VAT for £84,000, £74,025 and £75,200 for the building works became due for payment in January, February and March 2001.

When the Government assisted places scheme came to an end the School considered that it needed to establish some mechanism to help cover the cost of the teaching of children whose parents could not afford the School's fees. A charitable trust had been established to try and raise funds for the education of children of parents of limited means. But this had been unsuccessful in raising significant funds. The School did have a scheme for helping juniors and in September 2001 at a partnership meeting of the School it was decided to use this scheme as the vehicle that might in the long term attract funds to enable it to widen the scope for provision of assisted places.

Assisted Places was formed as a separate partnership consisting of Mr Thackrah, Glenys Thackrah, who is a qualified teacher, matron and with training in teaching children with special needs, and thirdly Christine Appleyard, who plays an administrative role. The partnership agreement describes its business as that of "administrators of the junior assisted places scheme at Holmwood House".

Currently the scheme administrated by Assisted Places mainly provides for reduced fees for some 14 of 136 children in the three junior years using the New Pr-Preparatory Department. These are principally sibling discounts. Also included are staff children. It is intended that income generated for Assisted Places will mean that bursaries can be granted to other children deserving help. Invoices for the fees for these children are from Assisted Places. The fees for other pupils are invoiced by the School. On 3 September 2001 Mr Thackrah wrote to all members of staff informing them that with effect from 1 September 2001 they would each be jointly employed by the School and Assisted Places.

A number of other companies with differing partners and partnership interests have been formed to carry out various activities connected with the School. These include a partnership to run the school shop, Holmwood House Language in Action which is run by Mrs Hollington to provide exchange with French pupils, Holmwood House of Fun which runs a one week summer school and Home at Holm which provides a boarding language school for foreign pupils out of term.

In September 2001 the following agreements were signed and put into place to give effect to these arrangements for the New Pre-Preparatory Department and the operations of Assisted Places:

(a) A Deed of Partnership dated 10 September 2001 between Mr Thackrah and Mr Appleyard setting out the terms of the partnership for the establishment of Developments (pages 41 to 61 of Bundle A) ("Developments Partnership Deed");

(b) A 20 year lease at a peppercorn rent from the School to Developments of the site of the new Pre-Preparatory Department and some adjoining land (pages 62 to 76 and 78 of Bundle A) ("the Lease");

(c) A Deed of Partnership dated 10 September 2001 between Mr Thackrah, Glenys Thackrah and Christine Appleyard for the establishment of Assisted Places (pages 21 to 40 of Bundle A) (the "Assisted Places Partnership Deed");

(d) An agreement, described as a licence to use facilities, between Developments and the School for an initial period of one year from 1 September 2001 for a minimum annual fee of £59,895, which is calculated at the termly rate of £165 per pupil and which is payable in three equal parts at the beginning of each term (pages 93 to 99 of Bundle A) ("The School Licence").

(e) An agreement, also described as a licence to use facilities, between Developments and Assisted Places for an initial term of one year from 1 September 2001 for a minimum annual fee of £6,930, which is also calculated at the termly rate of £165 per pupil and which is also payable in three equal parts at the beginning of each term (pages 100 to 106 of Bundle A) ("Assisted Places Licence").

All these five agreements were executed or signed on 10 September 2001. The Developments Partnership Deed was agreed to have effect from 1 November 2000. The Lease and the two Licences are undated but were agreed to be entered into with effect from 1 September 2001.

The operative provisions of each of the two Licences are essentially the same. In each Developments grants the right, described as a licence, to share the defined facilities jointly with "all others authorised [by] the Developer or such part or parts thereof as the Developer shall reasonably determine from time to time for the Period." Each Licence declares that nothing in it "shall operate as a demise" of any part of the New Pre-Preparatory Department. The School and Assisted Places in their respective Licence each agree to allow the other to " share the Facilities for the purpose of educating and training the Students and for such other purposes as [it] and the Developer shall from time to time agree."

The Facilities are defined comprehensively and to include "educational facilities … with all associated Equipment". The Equipment is defined to mean all the equipment provided by Developments in the New Pre-Preparatory Department including the items listed with great detail in a schedule and any replacements. The schedule of items runs for five pages and ranges from sets of work books to many items of furniture. The two Licences are each described as granting the right to share the equipment and facilities in the New Pre-Prep Department. Although the equipment is listed and described in great detail, it is clear that by far and away the major cost to Developments in building and making the educational facilities of that Department available was the cost of the bricks and mortar of the building. It is also clear that these two Licences are intended to be, and act as, the right and authority for the School and Assisted Places to educate in the New Pre-Preparatory Department the pupils whose fees are paid to either of them.

No distinction is made in any way for the teaching of the pupils of Assisted Places from the teaching of pupils whose fees are paid to the School. All pupils are mingled together in the various classes taught in the New Pre-Preparatory Department. The teachers, who are told they are employed by, and whose salaries are ultimately charged to, both partnerships, do not necessarily know who are all the pupils whose fees are paid to Assisted Places. There are no defined areas of the new building used only by one or other of the two types of pupils. In practice it is inconceivable that any question or dispute could arise as to how the two types of pupils will use the new building or its facilities. The two agreements operate at all times side by side together.

Developments claimed credits for input tax totalling £105,099.13 in its VAT returns for the periods ended 28 February, 31 May, 31 August and 30 November 2001. On 23 January 2002 Customs and Excise rejected Developments claims for input tax on the grounds that it was making exempt supplies of licences to occupy land to the School and to Assisted Places and that no valid election made in respect of this land and made adjustments to the returns for the periods ended 28 February, 31 May and 31 August 2001. Shortly after that Customs and Excise also issued a notice of assessment repaying £994 in output tax accounted for by Developments in the period ended 30 November 2000 and deregistered Developments with effect from 1 November 2000.

The legislative background

Community Law – The Sixth Directive

(a) Article 2 provides so far as relevant

"the following shall be subject to value added tax:

The supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;"

(b) Article 13B provides so far as relevant

"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(b) the leasing or letting of immovable property excluding:

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

2 the letting of premises and sites for parking vehicles;

3 lettings of permanently installed equipment and machinery;

4 hire of safes.

Member States may apply further exclusions to the scope of this exemption;"

National Law - The Value Added Tax Act 1994

(a) Section 31 provides so far as relevant

"A supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 …"

Schedule 9 Part II Group I – Land provides as follows so far as relevant

"Item No

1 The grant of any interest in or right over land or of any licence to occupy land …"

The submissions for the Appellant

The principal submissions by Mr Allen for Developments in his skeleton argument and at the hearing included the following points.

(a) Citing the opinion of Advocate General Alber and the judgment of the court in EC Commission v United Kingdom (Case C-359/97) [2000] STC 777, ECJ (the Road Tolls case), Mr Allen submitted that the meaning of the exemption of income from the leasing or letting of immoveable property in Article 13B must be interpreted strictly.

(b) Citing Swedish State v Stockholm Lindöpark AB; Stockholm Lindöpark AB v Swedish State: (Case C-150/99) [2001] STC 103, ECJ, EC Commission v United Kingdom, Stichting 'Goed Wonen v Staatssecretaris van Financiën (Case C-326/99) and Commissioners of Customs and Excise v Mirror Group plc (Case C-409/98) [2001] STC 453, Mr Allen submitted that a lease or letting within Article 13B necessarily involves a right to occupy a defined piece of property as ones own for an agreed period. It must be an exclusive right. Neither the School Licence nor the Assisted Places Licence had these qualities.

(c) In each of these two Licences the essential element is the right to use facilities. The two Licences are outside the scope of a mere right over land.

(d) There is no reason why the two licences should be read together. Each has legal substance and is a separate supply in its own right. The School and Assisted Places do not have joint liability for the total fees. Their obligations are separate. Citing Customs and Excise Commissioners v Robert Gordon's College [1995] STC 1093, HL, Mr Allen submitted that each separate Licence should be considered separately to determine the liability of Developments for the supply.

The submissions for Customs and Excise

The principal submissions of Mr Hill for Customs and Excise in his skeleton argument and at the hearing included the following points.

(a) The chief purpose of the School and of Assisted Places in entering into its respective Licence was to get the right to occupy the newly built building and use it to educate their respective pupils.

(b) Except for the fact that both the School and Assisted Places occupy the New Pre-Preparatory Department and, therefore, neither of them has exclusive occupation, each of the two Licences qualifies as a lease or letting for the purposes of Article 13B.

(c) Citing Goed Wonen and Customs and Excise Commissioners v Sinclair Collis Ltd [2001] STC 989, HL, Mr Hill submitted that the concepts of leasing and letting for the purposes of Article 13B are independent concepts of Community law. It is not, therefore, an issue whether as a matter of English law the Licences give any right to exclusive occupation or possession. He submitted, citing Rudolf Maierhofer v Finanzamt Augsburg-Land (Case C-315/00) (delivered by the European Court of Justice on 16 January 2003) that the issue is whether in fact or in substance and reality the School and Assisted Places have the right to occupy the new building as if they are owners and to exclude others.

(d) Mr Hill cited the tribunal decision in Grovewood (1998) Ltd v Commissioners of Customs and Excise (2001) (Decision No.17125) as an example of the right approach to be taken by the tribunal when considering whether there is a leasing or letting of immoveable property for the purposes of Article 13B. That approach is to look at the essential nature of the transaction and consider what in substance and reality is being supplied.

(e) Together the School and Assisted Places have in substance and reality such a right. Although there are two separate partnerships and Licences there is only one school in reality in the sense of one body of teachers teaching pupils without distinction between those paying fees to each partnership. The School and Assisted Places do, therefore, have in substance and reality joint exclusive occupation.

Our conclusions and the reasons for them

We first review briefly each of the principal European Court of Justice cases cited to us.

In EC Commission v United Kingdom one issue was whether the levy of road tolls on drivers was an exempt supply on the grounds that it constituted the leasing of immovable property. The United Kingdom in its submissions likened an agreement to allow passage for a toll, being a licence to pass over land, to a licence to occupy a hotel room, expressly excluded from the exemption in paragraph (b)2 of Article 13B, but, therefore, within the concept of leasing or letting. However, the European Court of Justice in paragraphs 68 and 69 of its judgment stated, when referring to the term in Article 13B "leasing or letting of immoveable property",

"68. Accordingly, that term cannot be considered to cover contracts where, as here, the parties have not agreed any duration for the right of enjoyment of the immovable property, which is an essential element of a contract to let.

Where access to roads is provided, what interests the user is the possibility offered to him of making a particular journey rapidly and more safely. The duration of the use of the road is not a factor taken into account by the parties, in particular in determining the price."

In Stockholm Lindopark the tax payer was a development company that runs a golf course for the exclusive use of businesses, which are therefore able to offer staff and customers opportunity to play golf on the course. One issue was whether the activities of letting out of a golf course to clients could constitute the letting and leasing of immoveable property for the purposes of Article 13B, with the result that a particular exemption in Swedish law would be available. In paragraphs 26 and 27 of its judgment the European Court of Justice gave the following guidance to the national court:

"26. Second, services linked to the practice of sport or physical education must, so far as is possible, be considered as a whole. According to case law of the court of Justice, in order to determine the nature of a taxable transaction, regard must be had to all the circumstances in which the transaction in question takes place in order to identify its characteristic features … As the commission has rightly pointed out, the activity of running a golf course generally entails not only the passive activity of making the course available but also a large number of commercial activities, such as supervision, management and continuing maintenance by the service provider, provision of other facilities and so forth. In the absence of quite exceptional circumstances, letting out a golf course cannot therefore constitute the main service supplied.

Finally account should be taken of the fact that permission to use a golf course will normally be restricted as regards the purpose for which it is to be used and the period of its use. According to the case law of the court, the period of enjoyment of immoveable property is an essential element of a lease …"

In Goed Wonen an issue was whether the grant of a usufructury right for ten years in respect of immoveable property under Netherlands law, which under Netherlands law, being a right in rem and not a letting or leasing of property, (which under that law creates rights in personam), is exempted as a letting or leasing under the provisions of Article 13B. In coming to its conclusion that the grant for an agreed period and for payment of a right in rem over immoveable property, such as a Netherlands usufruct, is to be treated as the leasing or letting of immoveable property for the purposes of Article 13B, the European court of Justice in paragraph 55 of its judgment stated:

"55. The fundamental characteristic of such a transaction, which it has in common with leasing, lies in conferring on the person concerned, for an agreed period for payment, the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right."

In Mirror Group the issue related to the treatment of inducement payments to an anchor tenant. The European Court of Justice in paragraph 31 of its judgment stated:

"31. The letting of immovable property for the purposes of Article 13B(b) of the Sixth Directive essentially involves the landlord of property assigning to the tenant, in return for rent and for an agreed period, the right to occupy his property and to exclude other persons from it …"

The issue in the saga of Sinclair Collis, which stems from a decision of this tribunal as long ago as June 1997, was referred to the European Court of Justice by the House of Lords. The issue in the saga is whether an agreement for the installation of cigarette vending machines in a public house is an agreement for the "letting of immovable property". That issue has not, or at any rate at the date of the hearing had not, reached the stage of a decision in the European Court of Justice. However, Mr Hill cited to us the opinion of Advocate General Huber. This opinion, which was delivered on 10 October 2002, and which would probably not surprise the original tribunal, is that such an agreement does not "entail occupation of a particular piece of land or the ancillary right to exclude others from access to that piece of land". The opinion includes the following guidance:

"35. What is uncertain with regard to the contract at issue in this case, however, is whether the agreement includes the right to occupy a particular piece of property and to refuse others access to that property…

Moreover, under the agreement in this case, unlike a classic lease of property, the actual site is immaterial. It is only relevant in so far as it is intended to generate maximum sales. In this case the occupation of a particular site is therefore not an end of the contract in itself, but a means to that end. …

The United Kingdom and Lord Slynn are right to say that the machine occupies the space where it stands. But that is not sufficient for it to be deemed to occupy a particular piece of land, since it is a feature of every physical object that it occupies space. This is persuasively argued by Lord Nicholls in his speech.

It is clear from all the foregoing that the principal element of the agreement in this case is not the occupation of a specific piece of land but the supply of a service, namely installation of the machine, for which the land itself is an incidental, albeit essential, prerequisite."

The most recent judgment of the European Court of Justice cited to us is in the case of Maierhofer. The issue in this case related to the taxability or exemption of rental income from the letting of prefabricated buildings supplied by Mr Maierhofer to a governmental authority. These prefabricated buildings, while being capable of being dismantled and moved after appropriate work that would take eight persons up to ten days, were firmly fixed to the land on which they were erected. In some cases, but it seems not all, the land was owned by Mr Maierhofer.

The judgment concludes, firstly, that the letting of such movable prefabricated buildings "fixed to or in the ground in such a way that they cannot easily be dismantled or easily moved constitutes a letting of immoveable property". Secondly, the court held that whether Mr Maierhofer, the lessor, "makes available both the building and the land on which it is erected, or merely the building which he has erected on the lessee's land, is irrelevant in determining whether a letting constitutes a letting of immoveable property for the purposes of Article 13B(b)." In paragraph 39 of its judgment the Court gave this guidance:

"39. In that regard, it is appropriate to point out that Article 13B(b) of the Sixth Directive defines exempt transactions by reference to the nature of the transactions effected. In order to determine whether a transaction comprises a letting or construction or repair work, account must be taken of its essential features … irrespective of the way in which it might be artificially presented."

We draw the following conclusions from these European Court of Justice judgments on the principles to be followed when determining whether a particular transaction is or is not an exempt leasing or letting of immoveable property for the purposes of article 13B:

(a) The leasing or letting of immoveable property is a concept to be determined by the principles laid down by the ECJ. It is not to be determined by national law rules of land law.

(b) Those principles require a transaction, if it is to be treated as a leasing or letting of immoveable property to include the following features:

(i) It must relate to immoveable property, that is to say, the ground itself or to property firmly fixed to the ground;

(ii) It must create a right to occupy a particular piece of land or property;

(iii) That right of occupation must give the right to exclude others and to occupy as owner;

(iv) That right of occupation must be for an agreed duration; and

(v) That right must be given for a payment for the period.

(c) When determining whether these features exist or whether the transaction is rather relating to construction, the provision of services or other alternative type of supply, the tribunal should take into account its essential features and not be bound by the particular way in which it may be artificially presented.

(d) While the concept of leasing or letting of immoveable property, being a concept in relation to an exemption, is to be construed strictly, that does not mean that an interpretation must be made which is strained when compared with what are the essential features of the transaction in reality.

We accept Mr Hill's submission that the tribunal in Grovewood stated correctly the manner in which these principles are to be applied. There, at paragraph 46 of the decision the tribunal stated

"It is also clear, in our judgment, that we must look at all the facts and circumstances surrounding these licences, the factual matrix, in order to determine the essential nature of the transactions: what in substance and reality is being provided in return for the fee paid. That it is referred to as a fee and not rent and that the licence is described as being one to use facilities may be pointers but, of course, cannot be determinative of the issue we have to decide."

The first issue for us to consider under these principles and in that way is whether the two Licences or either of them relate to immoveable property. They are carefully drafted to emphasise the extent to which the rights they give relate to facilities and movable equipment. But we are satisfied that these were the documents that give, and were intended by the parties to give, the School and Assisted Places the right to occupy the New Pre-Preparatory Department, and in particular its building of classrooms and ancillary features. They are first and foremost agreements that give the right to occupy a building firmly built on the site leased to Developments. Without the ability to use the building the right to use the equipment would be of no practical use. Furthermore, looked at from the point of view of Developments, far the greater part of the expenditure it incurred on building, preparing and equipping the New Pre-Preparatory Department for teaching was expended on the bricks and mortar. We had no evidence of any significant other source of income for Developments for recovery of its ongoing costs and cash flow of funding the cost of constructing that building. Nor did we have any evidence of any significant ongoing services to be supplied by Developments other than the provision of access to the building and the equipment in it. Thus the first two features we have listed are clearly present: the Licences relate to immovable property and they each give the right to occupy a definite piece of land and the building and other features on it.

Nor is there any doubt in our minds whether there is the necessary agreed duration and payment. It is clear to us from the evidence of Mr Thackrah that there can be no likelihood of any dispute between Developments, the School and Assisted Places, or any two of them, that the school and Assisted Paces would each be entitled to occupy the New Pre-Preparatory Department at all times during normal school working days and hours. That department, or parts of it, might be used by summer schools or language classes or ballet groups, but this would not be allowed to interfere with the proper running of the education of the pupils of both the School and Assisted Places during term time in the property.

The key issue for us is whether the fact that there are two licences, one to the School and the other to Assisted Places means that neither of them have the necessary exclusivity to meet the tests for a leasing or letting. Neither of them, because of the occupation of the other, but solely because of the occupation of the other, can be said either to have sole exclusive occupation or to occupy the department as sole owner with the right to exclude others.

We take it as axiomatic that a leasing or letting can be to joint tenants. A lease or letting of a house is no less a lease or letting of immovable property because it is made to both husband and wife jointly. If a lease or letting can be joint to husband and wife, so surely can it be joint to business partners or associated businesses.

As we see it the issue for us is whether, looking at the essential features of the two Licences, and not simply at the particular way in which they have been drafted and presented, they constitute the giving of joint rights to the School and Assisted Places so that they jointly have exclusive occupation and occupy the New Pre-Preparatory Department as joint owners.

We have little hesitation in coming to the conclusion that essentially the two Licences are agreements conferring joint rights of occupation of the New Pre-Preparatory Department to the School and to Assisted Places as if joint owners. In coming to this conclusion we take into account a number of factors. These include the following points:

(i) The Licences are each expressed to be self standing non exclusive licences.

(ii) It is not asserted by Customs and Excise that the partnership of Assisted Places is a sham. We accept that it may earn profits that are genuinely intended to be divided in some different way to the profits of the School. Its independent existence has been made known to both parents and teachers when they enter into commitments relating to Holmwood School.

(iii) However, activities under both agreements are, and must always have been intended to be, wholly merged together. The pupils are taught side by side together at the same time and in the same classes by the same teachers. For so long as there are pupils who are being educated by Assisted Places the joint presence of both employers and educational organisations in the New Pre-Preparatory Department at the same times is essential.

(iv) The agreements were concluded at the same time and have the same duration.

(v) The financial obligations are admittedly different. They have to make different minimum payments each term. But the possible additional amounts are fixed in the same way. The payments are effectively calculated on a per pupil basis. If an extra pupil taught as an Assisted Places pupil drops out, his or her place can be taken up by an additional pupil taught as a School pupil with no loss of income to Developments. While, therefore, all the obligations may not be joint and several, nevertheless the right of occupation is effectively joint.

(vi) There is no real possibility of any dispute between Assisted Places and the School as to their joint exercise of their respective rights under each individual Licence. At all times they have the same reasons and objectives for occupying the building and will do so in the same way.

We do not see that Robert Gordon's College helps Mr Allen. That decision is authority for the view that we should not take a global view of a series of links in a chain of supplies: each link in the chain must be considered separately. But here we are not considering separate links, but rather two agreements which together make one single link. We accept that the insertion of Developments into the process for the construction of the New Pre-Preparatory Department with the Lease was for genuine commercial reasons. It removed any risk for Mr Lucas in the arrangements for financing and constructing the New Pre-Preparatory Department.

Nor do we consider that the fact that there are two separate agreements with the School and Assisted Places means that there are two separate supplies each of which must therefore be non exclusive. The reality is that there is one supply of the letting or leasing of the department building with its ancillary facilities and equipment to the two partnerships jointly, who together occupy the building as joint owners with effective power to exclude others from the site when used by them for the joint purposes of the School and Assisted Places.

For these reasons we conclude that on the particular facts in this case Developments is making with the two Licences an exempt supply of the leasing or letting of the New Pre-Preparatory Department for the purposes of Article 13B(b) of the Sixth Directive. Accordingly, on a proper construction of Item 1 of Schedule 9 Part II Group 1, VATA 1994, there is an exempt supply. The appeal, therefore, is dismissed. Customs and Excise did not ask for costs.

MALCOLM J F PALMER

CHAIRMAN

RELEASED:

LON/2002/0088