United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18864

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Lester Aldridge (a firm) v Customs and Excise [2004] UKVAT V18864 (08 December 2004)

18864

Value added tax – input tax – section 24(1) VATA 1994 – partnership of solicitors took lease of office premises in name of nominee company – lease granted to nominee company with partnership as guarantor – partnership paid rent and VAT on rent and claimed VAT as input tax – whether supply to partnership – yes – whether VAT on rent input tax of partnership – yes – Commissioners of Customs and Excise v Redrow Group plc applied - appeal allowed

LONDON TRIBUNAL CENTRE

LESTER ALDRIDGE (a firm) Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MR A E SADLER (Chairman)

MRS R A WATTS-DAVIES, MHCIMA, FCIPD

Sitting in public in London on 18 and 19 October 2004

Mr Eamon Mc Nicholas of Counsel, for the Appellant

Mr George Peretz of Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

Summary of the appeal and the decision

This is an appeal by the firm of Lester Aldridge which is a partnership practicing as solicitors ("the Appellant") against a decision of the Commissioners of Customs and Excise ("the Commissioners") dated 3 October 2003 and Notices of Assessment of VAT dated 10 August 2002 and 22 January 2004. The amount of VAT (and interest) in dispute is £123,701.11. The matter in dispute is whether the Appellant is entitled to recover as input tax under section 24(1) of the Value Added Tax Act 1994 ("VATA") the VAT paid on rent where the relevant lease was granted to a "nominee" of the Appellant.

In 1990 the Appellant formed a company with a nominal share capital, Lester Aldridge Nominees Limited ("LANL"). The Appellant negotiated a lease for a term of 25 years of office premises in Bournemouth which the Appellant wished to occupy for the purposes of its business. As a partnership, and having regard to the terms of the Law of Property Act 1925, the Appellant had the choice of taking the grant of the lease in the name of no more than four of the partners or of procuring another entity (in this instance LANL) to take the grant of the lease to hold it for the benefit of the Appellant. The Appellant, with the agreement of the landlord, chose the latter route, so that the lease of the premises was granted to LANL on terms whereby the landlord permitted LANL to allow the Appellant to occupy the premises, and the Appellant joined in the lease to guarantee to the landlord the performance by LANL of the tenant's covenants and to give certain other covenants to the landlord. The Appellant paid the rent and took such other action as was required to ensure compliance by the tenant with the terms of the lease.

The grant of the lease by the landlord is a taxable supply for VAT purposes (the landlord having exercised its right to waive exemption under the relevant provisions), and the Appellant claims to recover as input tax the VAT charged by the landlord on the rent payable under the lease. The Appellant argues that LANL (which is not registered for VAT) holds the lease as nominee or bare trustee for the Appellant, simply as a technical or conveyancing device in circumstances where in law the Appellant cannot itself take a grant of the lease, so that, under domestic VAT law it is the Appellant alone which has the right to recover as input tax the VAT charged on the rent. The Appellant also argues that if the domestic law does not give this result it is contrary to the relevant European Directive on the grounds that it discriminates against partnerships of individuals, which must, uniquely amongst business entities, adopt such an arrangement because of the constraints of English land law.

The Commissioners argue that, by the terms of the lease, the relevant supply is made exclusively to LANL, so that LANL alone is entitled to recover as input tax the VAT charged on the rent. They deny that domestic VAT law requires them to take account of any nominee or bare trustee arrangement in these circumstances. They argue that LANL could have registered for VAT, and could have granted the Appellant a licence to occupy the premises, on terms whereby that grant was rendered a taxable supply: had that been the case there would have been no "net" VAT cost to LANL, and the Appellant would have been entitled to recover as input tax the VAT charged to it by LANL under the licence terms. The Commissioners deny that there is any discrimination against partnerships when partnerships can arrange their affairs in this way so as to ensure full recovery of input VAT relating to their occupancy of premises used for their business purposes.

It is our decision to allow the appeal. In our view the true nature of the arrangements between the landlord, LANL and the Appellant are such that, for VAT purposes, the landlord can properly be regarded as making a supply to the Appellant, so that the VAT paid by the Appellant on the rent is input tax, being VAT on the supply of goods used for the purposes of the Appellant's business, and as such is recoverable by the Appellant.

The facts and the statutory provisions

There was no dispute between the parties as to the facts, although the Commissioners questioned the relevance of some of the factual points made by the Appellant, and there were differences of view as to the inferences to be drawn from certain of the facts. We had before us, on behalf of the Appellant, (i) a witness statement of Mr Roger Woolley, a solicitor and the managing partner of the Appellant, who made his statement on behalf of the partnership, and (ii) a witness statement of Mrs Valerie Hoyle, a chartered accountant who at the material times was the Director of Finance of the Appellant. Their witness statements set out the circumstances relating to the negotiation and grant of the lease, the subsequent transactions relating to the lease and certain pre-emption rights arising under the lease, the arrangements for payment of the rent and the review by the officer of the Commissioners which led to the assessment now under appeal. Their witness statements referred us to the bundle of documents agreed between the parties for the purposes of the appeal. The Commissioners did not call any evidence themselves, nor did they wish to cross-examine the Appellant's witnesses. Accordingly, neither of the Appellant's witnesses were called, and so we find the following facts from their statements and the agreed documents:-

(1) The Appellant is a partnership carrying on business as solicitors and is registered for VAT.

(2) In 1988 the Appellant began negotiations for the lease of newly-built office premises in Oxford Road, Bournemouth which it intended to occupy as the offices from which to carry on its business. At that time there were more than twenty partners in the partnership. The Appellant had regard to the provisions of section 34(2) of the Law of Property Act 1925 (which provides that, in effect, the grant of a legal estate in land where there are more than four persons entitled to that estate in undivided shares may be conveyed to not more than four persons who will hold as joint tenants in trust for all those entitled to an undivided share). The Appellant considered whether the grant of the lease should be taken in the name of four of the partners (to hold on trust for all the partners), or whether the grant of the lease should be taken in the name of a company formed for the purpose which in so taking the grant of the lease would act as a "nominee" for the partners. The eventual conclusion was that it was not appropriate that four partners should take the grant, since they would continue to have primary liability under the lease for the full term, notwithstanding that they had ceased for any reason to be partners in the partnership. Instead, the Appellant decided that the grant of the lease would be taken by the "nominee" company, so that, by appropriate collateral arrangements, the partners from time to time would be liable for the lease obligations, and then only for the period during which they were respectively partners.

(3) In Heads of Agreement between the landlord and the Appellant and finalised on 14 December 1988 setting out the terms of the proposed lease, the Appellant (as a partnership) is named as the Tenants. There was subsequent discussion with the landlord's agent, who agreed on behalf of the landlord that, "For purely technical reasons the Lease will be taken in the name of your Company [i.e. LANL], and the Partners will be treated as Guarantors."

(4) Prior to the grant of the lease the Appellant acquired a "shelf" company (LANL). The principal object of LANL, as set out in it Memorandum of Association, is "To undertake and carry out the office or offices and duties of trustee, liquidator, receiver, attorney or nominee of or for any person, company, corporation, partnership or association".

(5) At all material times LANL had an issued share capital of 2 ordinary shares of £1 each (fully paid) and assets of £2 and nil liabilities. Those shares have been held for the benefit of the Appellant. For each accounting period material to this appeal the audited accounts of LANL included the following statement: "During the above period, the Company has been dormant within the meaning of Section 252 of the Companies Act 1985, there have been no significant accounting transactions of the Company required to be entered in its accounting records. Any expenses have been met by the directors/members personally." The accounts make no reference to LANL's role as tenant of the lease, nor to the payment of rent or the receipt of any amounts from the Appellant in relation to the occupation of the leased premises.

(6) On 27 February 1989 there was an Agreement for Lease between (1) Rodney Taylor and Dorothy Anne Taylor (landlord); (2) LANL (tenant) and (3) the persons who at that time were the partners in the Appellant firm (the sureties). The Agreement for Lease provided for the landlord to complete the building works by way of development of the offices and the parties were thereupon required to enter into a lease of the premises in the terms of a draft annexed to the Agreement for Lease. This is what ensued, and the lease was entered into on 30 May 1990 (for convenience we refer to this lease as "the Russell House Lease", Russell House being the name given to the demised premises, and referred to as such in this decision).

(7) The Russell House Lease is in standard commercial terms, but in the context of this appeal the following provisions are relevant:-

(a) the parties are as in the Agreement for Lease, and in particular LANL is "the Tenant" and the then partners in the Appellant firm are parties described as "the Guarantor";

(b) by Clause 2 the Landlord demises the premises to the Tenant for the term of 25 years from 30 May 1990 for the payment of the specified rent paid quarterly in advance;

(c) by Clause 3(1) the Tenant covenants to pay the rent reserved by Clause 2;

(d) by Clause 3(19)(a) the Tenant covenants not to sublet or part with possession or occupation of part of the premises, except as permitted in the third schedule to the lease (which requires the prior consent of the Landlord, and contains other conditions relating to any such sub-letting etc);

(e) by Clause 3(19)(d) the Tenant covenants not to assign, underlet or part with possession or occupation of the whole of the premises without the prior consent of the Landlord and in any event only if certain conditions are met as to any intended assignee or underlessee;

(f) Clause 3(19)(e) provides: "for the avoidance of doubt it is agreed and declared that the Tenant shall be entitled to allow the Firm [i.e. the Appellant] to occupy the demised premises or any part thereof";

(g) By Clause 3(31) the Tenant covenants "to pay to the Landlord such amount of Value Added Tax at the rate for the time being in force as shall be legally payable in respect of all moneys covenanted to be paid by the Tenant under the terms of these presents";

(h) By Clause 7 the Guarantor (i.e. the partners in the Appellant firm) covenants with the Landlord that (i) the Tenant will pay the rent and perform the Tenant's other covenants; (ii) if the Tenant defaults in its rent or other obligations the Guarantor will make good the Landlord's loss; (iii) if for any reason the Landlord cannot recover amounts due from the Tenant, the amount will be recoverable by the Landlord from the Guarantor as principal debtor; and (iv) if the Tenant is wound up or the lease is forfeit for non-performance by the Tenant of its obligations, then, if the Landlord so requires, four of the Guarantor partners will take a lease of the premises on corresponding terms for the residue of the term;

(i) The Fourth Schedule to the lease provides that the Guarantor will be the partners of the Appellant firm, but so that a partner is liable only for the period he is a partner in the firm, and incoming partners are required to covenant with the Landlord in terms of the Clause 7 Guarantor obligations. Retiring partners are not released from their Guarantor obligations if the number of liable partners falls below 21. New partners joining the Appellant firm in subsequent years entered into the required covenant with the Landlord.

(8) The Landlord elected to waive exemption in relation to the premises under the relevant provisions of Schedule 10, VATA, so that the grant of the lease was a taxable supply for VAT purposes, and VAT was payable on the rent reserved under the lease.

(9) From the outset the Landlord addressed the invoices for payment of rent to, and in the name of the Appellant, and not LANL, and VAT invoices in relation to the rent were likewise issued to, and in the name of, the Appellant, and not LANL.

(10) In 1994 the Landlord assigned its freehold interest reversionary upon the Russell House Lease to AXA Law Life Assurance Society plc ("AXA"), and AXA, having elected to waive exemption, addressed all invoices for payment of rent, and the related VAT invoices, to, and in the name of, the Appellant, and not LANL.

(11) In 2000 AXA assigned the freehold interest to Gil Gamesh Properties Limited ("GGPL"). GGPL addressed all invoices for payment of rent, and the related VAT invoices, to, and in the name of LANL, and not the Appellant. (An issue arose in the hearing as to whether GGPL, itself a trustee holding for a beneficial owner, had validly exercised an election to waive exemption. It was agreed that the appeal would proceed on the assumption that there was in existence such a valid election by GGPL, without prejudice to the Appellant's right to challenge the point in other proceedings.)

(12) From the grant of the Russell House Lease all payments of rent, and all other payments due under the Russell House Lease, were made to the landlord by the Appellant from its bank account. LANL had no bank account, and the payments of rent were not recorded in the books of account of LANL. The Appellant claimed as input tax all the VAT charged by the landlord on the rent payments.

(13) At all material times the Appellant occupied the premises as offices from which it carried out its business and practice as solicitors.

(14) Contemporaneously with the Agreement for Lease the Landlord entered into a Pre-emption Agreement with LANL which granted LANL the right to purchase the Landlord's freehold reversionary interest in the premises. The Appellant was not a party to the Pre-emption Agreement, which was negotiated by the Appellant as part of the overall terms relating to the lease of the premises.

(15) In 1994, when the Landlord wished to sell the freehold reversion to AXA it first offered to the Appellant to sell that interest to LANL pursuant to the Pre-emption Agreement. The Appellant refused the offer, but AXA was not prepared to purchase the freehold reversion subject to the terms of the Pre-emption Agreement. By a decision of the partners in the Appellant firm on 27 June 1994 the Appellant decided that the rights under the Pre-emption Agreement should be surrendered for a cash payment, and this was effected by a Deed of Release and Confirmation (the copy in the bundle was signed but undated) between [AXA, LANL and the Appellant], Clause 4 of which provides: "In consideration of the sum of one hundred thousand pounds (£100,000) plus Value Added Tax of £17,500 (a total of £117,500) paid by [AXA] to [the Appellant] (the receipt of which [the Appellant] acknowledge [the Appellant] as beneficial owners and [LANL] by the direction of [the Appellant] as trustee release all the rights created by the Pre-emption Agreement."

(16) The partners in the Appellant firm accounted for the receipt of the sum paid for the release and also accounted for the VAT charged in relation to the supply comprised by the release. No entries were made in the accounts of LANL in relation to the release or the payment for the release.

The Appellant claims that it is entitled to recover the VAT charged on the rent payable under the Russell House Lease as input tax, which is defined in section 24 VATA as follows:

(1) Subject to the following provisions of this section, "input tax", in relation to a taxable person, means the following tax, that is to say –

(a) VAT on the supply to him of any goods or services;

(b) …

(c) … ,

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

Sections 25 and 26 VATA provide for the mechanism by which input tax is recovered, but nothing turns on that in this appeal.

By virtue of para. 4, Sch. 4 VATA the grant of a major interest in land is a supply of goods, and the lease granted in the present case comprises a major interest in land for these purposes, so that the supply which the Appellant claims is made to it in relation to the Russell House Lease is a supply of goods.

Since the provision occasioned some discussion in the course of the argument by the parties, it is helpful to set out here the terms of para. 8(1), Sch. 10 VATA:

8(1) Where the benefit of the consideration for the grant of an interest in, right over or licence to occupy land accrues to a person but that person is not the person making the grant –

(a) the person to whom the benefit accrues shall for the purposes of this Act be treated as the person making the grant; and

(b) to the extent that any input tax of the person actually making the grant is attributable to the grant it shall be treated as input tax of the person to whom the benefit accrues.

In his submissions on behalf of the Appellant Mr Mc Nicholas made some reference to certain provisions of the EC Sixth Council Directive, but it is more convenient to refer to those provisions in the context of his submissions.

The Appellant's submissions

Those submissions were made under two main grounds of appeal: first, Mr Mc Nicholas argued that the Appellant is entitled to deduct input VAT paid on the rent on the grounds that the supply made by the landlord under the Russell House Lease is properly regarded as a supply made to the Appellant and used in its business; secondly, Mr Mc Nicholas argued that if the Appellant is prevented by domestic law from a right to deduct such input VAT, that amounts to discrimination against the business entity of the English partnership (a nominee arrangement such as that in the present case being the only way in which such a partnership can take a leasehold interest under English law, whereas sole traders and corporate entities are not so constrained), and such discrimination is contrary to the terms of the EC Sixth Council Directive.

As to the first ground of appeal, Mr Mc Nicholas argued that the Appellant's case is within the scope of the decision of the House of Lords in Customs and Excise Commissioners v Redrow Group plc [1999] STC 161. That case concerned a builder who instructed an estate agent to act in the sale of the current house owned by a prospective purchaser from the builder – if the prospective purchaser sold his house and purchased a house from the builder, the builder paid the estate agent's fees (plus the VAT charged on those fees), notwithstanding that the estate agent had acted on behalf of the prospective purchaser. The builder claimed the right to deduct as input tax the VAT it paid on the estate agent's fees, and it was held that it was entitled to do so: the builder was liable to pay the fees to the estate agent, and in return for that payment the builder obtained a service used for the purposes of its business – what it obtained was the right to have the estate agent's marketing and other services rendered to a third party (the prospective purchaser) in accordance with its (the builder's) instructions. In the present case, it is argued, the Appellant arranged the Russell House Lease granted to LANL, paid the rents and used the lease supplies in its business – the Appellant was liable to make the payment on which the relevant VAT was charged, and in return the Appellant obtained the right to occupy Russell House.

Further, it was argued, it is necessary to determine the true nature of the VAT supply from all the circumstances of the case, and not simply from the contractual arrangements, especially where, as in the present case, there are more than two parties to the transactions comprising the supply: see Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 at 595. The arrangements entered into by the Appellant are tri-partite, with the Appellant central to the very existence and working of the Russell House Lease, so that the true nature of the supply for VAT purposes is the right conferred on the Appellant by the landlord to occupy Russell House on the terms of the Russell House Lease.

Mr Mc Nicholas also referred to the decision of the Tribunal in Bird Semple & Crawford Herron v The Commissioners (1986) VATTR 218, where a Scottish partnership of solicitors had taken a lease through the device of a nominee company, and had instructed a firm of surveyors to act in sub-letting part of the premises not immediately required for the partnership's own business. It was held that although the lease was in the name of the nominee company (which would grant the sub-lease), the supply made by the surveyors was made to the partnership, and was used for the purposes of their business, so that the tax on that supply was deductible input tax for the partnership.

The Appellant also relied on the Tribunal decision in Halifax Plc and Others v Commissioners of Customs and Excise [2001] V&DR 73, where the Tribunal was concerned, in identifying the supplies made, and adopting the approach in Reed Personnel Services, to determine the commercial reality of the arrangements between the parties. On that basis the role of LANL, as a nominee company with no commercial substance, should be disregarded, and the commercial reality (the Appellant having the position of tenant and paying the rent) applied to determine the Appellant's right to recover the VAT payable on the lease rent. Mr Mc Nicholas also referred to Glasse Brothers v Commissioners of Customs and Excise (1989) VATTR 143 and Crompton Enterprises Ltd v Commissioners of Customs and Excise (1992)VATTR 321.

The Appellant's second ground of appeal is based on a wider perspective. It is argued that since the Appellant carries on a business and makes taxable supplies, the VAT payable in relation to the use of premises used for that business should be recoverable in full, on the same basis as any other supply to it used for its business. By English land law the Appellant is unable to take a lease in its own name, and so must resort to an arrangement such as it entered into through the use of LANL. If the Commissioners contend that, in order to obtain the recovery of the VAT, LANL must register for VAT, grant an interest in the premises to the Appellant, and, by electing to waive exemption, turn that supply into a taxable supply to the Appellant, then that is a burden uniquely extended to English partnerships. It is a burden which requires LANL to adopt a different role (as principal in a chain of interests in land), with compliance and other consequences as costs.

Such a requirement on the part of the Commissioners discriminates against English partnerships, as against other forms of business entity (both sole traders and corporate entities can take leases directly). Such discrimination is contrary to fundamental EC law principles of equal treatment (see Weiser v Caisse Nationale des Barreaux Français Case C-37/38 [1990] 2395 ECJ at para 13 p 2420), and to a harmonised system of turnover tax. Thus the ninth preamble to the EC Sixth Directive states that:-

"Whereas, to enhance the non-discriminatory nature of the tax, the term "taxable person" must be clarified to extend it to cover persons who occasionally carry out certain transactions;"

To preserve fiscal neutrality and avoid distortion of the market a taxpayer must be free to choose to adopt whatever form of business entity it wishes, and anything in the domestic VAT legislation which has the effect of frustrating that principle by putting a burden in the way of a taxpayer operating through a particular type of entity is contrary to EC law (see Gregg and another v Commissioners of Customs and Excise (Case C-216/97) [1999] STC 934 at para. 20 at p 950). This is consistent with the language of Article 4(1) of the EC Sixth Directive, which defines "taxable person" to mean "any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity."

Accordingly, there must be a purposive construction of section 24(1) VATA to ensure compliance with these principles in the present case, treating LANL and the Appellant together as one "person" for VAT purposes, and entitling the Appellant, as the registered person for VAT purposes, to recover the input tax on the supply made under the Russell House Lease. Such a purposive construction in relation to partnerships was applied in Commissioners of Customs and Excise v Glassborow and another [1974] STC 142, treating a partnership as a "person" for VAT registration purposes, and the same individuals trading in separate partnerships as the same "person".

The Commissioners' submissions

For the Commissioners Mr Peretz had a more succinct case. He argued that, under the clear and unambiguous terms of the Russell House Lease, LANL, exclusively, is the tenant, has the liability to pay the rent, and is the person to whom VAT invoices are issued and which must pay VAT on the rent. The Russell House Lease contemplates that the Appellant will be permitted by LANL to occupy the premises, but the landlord confers no occupation or similar rights on the Appellant. The partners of the Appellant firm are parties to the Russell House Lease, but in order to guarantee performance by LANL of its obligations to the landlord. There is nothing in the terms of the Russell House Lease which can be construed as a supply from the landlord to the Appellant – the Appellant occupies Russell House by virtue of a grant of a licence by LANL to the Appellant, and the only supply the Appellant receives is that grant by LANL. LANL alone has the right to claim as input tax the VAT charged by the landlord on the rent – or would have that right had it registered and itself made taxable supplies to the Appellant.

The Commissioners argue that the decision in the Redrow case does not assist the Appellant. Mr Peretz referred to the following passage in the speech of Lord Millett (Customs and Excise Commissioners v Redrow Group plc [1999] STC 161 at 171e):-

"In my opinion, these two factors compel the conclusion that one should start with the taxpayer's claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything – anything at all – used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services."

Mr Peretz referred to the two questions or issues identified by Lord Millett – has the taxpayer made the payment on which the tax is charged; and, if so, did he obtain anything used for his business purposes in return for that payment? In his submission the present appeal concerns only the first of these questions, and since the Russell House Lease required LANL to pay the rent, that disposes of the case.