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Newman College in the University of Cambridge v Customs and Excise [2005] UKVAT V18936 (14 February 2005)

18936

Landlord Property – Construction and renovation of library by College – Irrecoverable VAT – Lease of library to subsidiary company – Election to waive election – Arrangements for subsidiary company to provide library services to College – Whether election to waive exemption disapplied under Sch 10, para 2(3AA) VATA 1999 – Yes – Whether tax mitigation scheme not in accordance with Sixth Directive – yes – Appeal dismissed

LONDON TRIBUNAL CENTRE

THE PRINCIPAL AND FELLOWS OF NEWNHAM COLLEGE Appellants

IN THE UNIVERSITY OF CAMBRIDGE

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: DR KAMEEL KHAN (Chairman)

MISS SHEILA WONG CHONG FRICS

Sitting in public in London on 23-24 September 2004

Mr Andrew Hitchmough for the Appellant

Miss Phillipa Whipple for the Respondents

DECISION

Background

The Appellants are the Principal and Fellows of Newnham College at the University of Cambridge ("Appellants"), a non-profit making body. The Appellants were registered for value added tax ("VAT") on 1 April 1973 (registration number 214244306).

The Appellants make exempt supplies of educational services to students. Newnham College ("the College") is a College for women and this has not changed up to the present time. There are approximately 400 undergraduates and 130 graduate students at the College. Most of the students live in accommodation provided by the College throughout their academic studies.

In terms of its constitution, the College is a body corporate established by Royal Charter with the trustees being the Principal and Fellows of the College and is one of the Colleges within the University of Cambridge. The College is therefore part of the University of Cambridge but (like other Colleges) is run on an autonomous basis and is responsible for making all its decisions. The College itself has an exempt status for tax and is so registered with the Inland Revenue.

The first College library building, part of the subject of this appeal, was built in 1897 and stored the College books. The library is well stocked and has several rare and unique books. There is a rare book collection. The library building is called the Yates Thompson Building, after one of the College's chief benefactors. An extension to the Yates Thompson Building which was added in 1962 (the Horner Library) suffered considerable decay and the building had to be replaced. A project was developed to replace the 1962 extension while retaining the Yates Thompson, a building of some historic significance. To accommodate the renovation project, some surrounding buildings had to be demolished. The proposed new building was to provide new and important facilities for students. It would be more spacious, have more books and shelving and accommodate both the College students and outside researchers at the College.

The funding for the new library facilities came from College alumnae, donations, legacies and an endowment, built up since 1870, to provide the income needed to run the College.

By undertaking the renovations and building the new library facilities, the College took professional advice to mitigate their exposure to irrecoverable VAT arising on the costs of construction. In the words of the Bursar of the College (Mr Du Quesnay, in his Witness Statement para 8):

"As a charity providing educational facilities and as a trustee of the gifts of the alumnae and other benefactors, the College Council feels it is its duty to ensure that the College's resources are used as efficiently as possible and to employ the law to this effect. We were aware that other colleges within the University of Cambridge building new libraries had used a certain structure in order to mitigate the VAT cost of library construction. In spring/summer 2000, when planning the construction of the new library the College therefore took legal advice about ways to mitigate the VAT cost. Following that legal advice we adopted the structure described below involving the establishment of a new subsidiary company to lease and occupy the new library and provide services to the College."

The College was concerned that the VAT on construction costs would be irrecoverable given their exempt status and sought legal advice to put in place a structure to allow recovery of the irrecoverable VAT.

The structure which the College was advised to implement was as follows. The College formed a wholly owned subsidiary, Newnham College Library Company Limited (NCLCL), and funded all its setup costs. Its directors were members of the College.

The College elected to waive exemption (opted to charge VAT tax) in respect of the main College building (including the library) on the College site. This was done on 29 January 2001. At the start of the library construction works an appropriate notification of the election was provided to Customs & Excise. It is on the basis of this election that the College makes taxable supplies under the lease granted to NCLCL which allows it to recover input tax on the costs incurred in refurbishing the library. The construction work on the new library took place between June 2001 and November 2003 with the library opening for business on 12 January 2004.

An Agreement for Lease was entered into between the College and NCLCL on 22 February 2001. A formal lease was granted on completion of the building. The Agreement for Lease at a premium of £1,000 plus VAT, was later superseded by the formal lease (the draft of which was attached to the Agreement for Lease). The formal lease of the new library granted by the College to NCLCL was for 11 years from 1^st January 2004 at a basic rent of £165,000 plus VAT per annum.

In addition to the Agreement for Lease, the College entered into other agreements with NCLCL at the same time. These included:

(a) An agreement for the sale of library books and other library assets of the College;

(b) An agreement for the secondment of library staff from the College to NCLCL;

(c) An administration agreement for the running of the library (by the seconded staff); and

(d) An agreement for the management of rare books.

To complete the set of agreements required to implement the advised structure, NCLCL entered into an Agreement with the College for the Hire of Library Books in order to provide library services to the College. This was entered into on 2 July 2002.

Let us look at the structure and purpose of these various agreements. The agreement for the sale of the library books and assets provided for the sale of 76,142 books, 2,500 metres of shelving, three kick stools and a hat stand. The assets were sold for their second hand value of £10,000 plus VAT and the books were £200,000 plus VAT. The rare books collection was not transferred under this agreement. The agreement for the secondment of the existing library staff to NCLCL included the librarian, senior librarian assistant, library assistant and the library graduate trainee. The staff were seconded but their employment contract remained with the College/University to maintain their pension scheme entitlements. The administration agreement allowed the College to undertake, for an annual fee, administrative services for NCLCL including accounting, record keeping, preparing returns, financial information and support services including property management. The management of rare books agreement is self explanatory.

Under the agreement for the Hire of Library Books, NCLCL provided to the College "the Services" which are defined in the Schedule to the Agreement as being:

"The provision of the Books on hire to the College for use of the Fellows, undergraduates, graduate students and staff of the College or such other persons or authorities nominated by the College upon the terms and conditions from time to time in force. The provision of appropriate arrangements for the filing, maintenance and archiving of Books. All such incidental services as are necessary for the provision of an effective library service."

Membership of the College is necessary to use the Library.

"the Books" is defined as meaning:

"all journals, periodicals, books, booklets, brochures, pamphlets, statistics, leaflets, newspapers, theses and other publications from time to time owned by the Company (NCLCL) and held in the Premises."

The fee charged by NCLCL to the College for library services is calculated on an annual basis. It is based on NCLCL's budgeted costs including accommodation costs, staff costs, new acquisitions and overheads, with an added profit uplift. NCLCL was therefore a company carrying on trading activity and formed with a view to making profit. The fee charged under the Hire of Library Books agreement continues to be charged on this basis.

The central issue in this appeal concerns the Appellants' election to waive exemption and whether it should be disapplied. On 25 July 2000 the Appellants' solicitors, Mills & Reeve, wrote to Stephen Edwards at Customs & Excise enclosing various draft agreements and describing the proposed arrangements. Customs & Excise were therefore aware of the structure. The letter stated in the penultimate paragraph:

"We look forward to hearing from you shortly, as to whether you agree…that the College's election to waive exemption would not be disapplied under the provisions of paragraph 2(3AA) of Schedule 10 VATA 1994."

The Commissioners gave no confirmation as requested by the letter. The Commissioners later sought to disapply the election to waive exemption under paragraph 2(3AA), Schedule 10 1994 Act and this is the basis of the appeal.

The Legislation

.1 Section 31 of the Value Added Tax Act 1994 ("the 1994 Act") provides that a supply of goods or services is an exempt supply if it is of a description for the time being supplied in Schedule 9, Group 1 (certain supplies of land are exempt supplies).

.2 Section 51 of the 1994 Act provides that Schedule 10 shall have effect with respect to buildings and land. Paragraphs 2, 3 and 3A of Schedule 10 are jointly entitled "election to waive exemption". Paragraph 2 provides that an election can be made in relation to land and any grant of land which is made while the election has effect and does not fall within Schedule 9 of Group 1. In effect, the grant made is a taxable rather than an exempt supply.

3 However, paragraph 2(3AA) provides:

"(3AA) when election has been made under this paragraph in relation to any land, a supply shall not be taken by virtue of that election to be a taxable supply if -…..

(a) the grant giving rise to the supply was made by a person in ("the Grantor") who was a developer of land; and

(b) at the time of the grant…it was the intention or expectation of –

(i) the Grantor…

that the land would become exempt…or, as the case may be, would continue, for a period at least, to be such land"

The intention or expectation of the Grantor must be established at the time of the grant.

.4 Paragraph 3 and 3A of Schedule 10 contain further provisions about the election to waive exemption. Paragraph 3A(1) states that that paragraph has effect for the construction of paragraph 2(3AA). Paragraph 3A(2) states that only land and buildings which falls (or will fall) within the capital items scheme (Regulations 112-116 of the VAT regulations 1995, 1995/2418) are subject to the disapplication provisions.

5 Paragraph 3A(7) provides;

"(7) For the purposes of paragraph 2(3AA)…above and this paragraph land is exempt if… (a) the Grantor…is in occupation of the land without being in occupation of it wholly or mainly for eligible purposes."

6 Occupation for eligible purposes is defined at paragraph 3(A) (9) as;

"(9)…Occupation of the land for the purposes of making supplies which –

(a) are or are to be made in the course of furtherance of a business carried on by him; and

(b) are supplies of such a description that any input tax of his which was wholly attributable to those supplies would be input tax for which he would be entitled to a credit."

7 Paragraph 3A(13) provides:

"(13) For the purposes of this paragraph a person shall be taken to be in occupation of any land whether he occupies it alone or together with one or more persons or whether he occupies all of that land or only part of it."

Appellants' Arguments

The Appellants' main ground of appeal is outlined in their Notice of Appeal of 22 September 2003 in which they contend that their election to waive exemption in respect of the main library is not disapplied under the 1994 Act, Schedule 10 paragraph 2(3AA), and therefore supplies under the lease granted to NCLCL will fall to be standard rated for VAT and not, as the Commissioners have decided, exempt. The election makes supplies arising from the lease taxable and allows the Appellants to recover input tax on costs of refurbishment of the library buildings.

The Respondents' Argument

The Respondents' arguments are that the election to waive exemption under the 1994 Act, Schedule 10, paragraph 2(3AA) is disapplied. This means that supplies arising under the lease from the Appellants to NCLCL will be exempt supplies. If the supplies arising from the lease are treated as exempt, the Appellants will have no rights to recover input tax attributable to the refurbishment works on the library buildings. They further contend that the relevant provisions of the 1994 Act are anti-avoidance provisions and the structure implemented by the Appellants should be received with this consideration in mind. Counsel gave a clear account of European law on this point.

Decision

.1 The central question in this case is whether the Appellants' election to waive exemption on the lease which they have granted to NCLCL, its wholly owned subsidiary, should be disapplied under the provisions of Schedule 10 paragraph 2(3AA) 1994 Act.

.2 The issue turns on the interpretation of the anti-avoidance provision, Schedule 10 paragraph 2(3AA) and in effect the answer to the question: has the College remained in occupation of the new library after the grant of the lease?

.3 The Appellants argue that they are not in occupation of the new library building. Although the building is used by the students and Fellows of the College and others, this use, it was argued, is made pursuant to an agreement between the College and NCLCL and it is only a contract for the supply of services, library services, for which the property is an incidental requirement.

.4 The Respondents argue that the Appellants are in occupation for the purposes of the legislation. Their view is that occupation means physical presence, using the ordinary meaning of the word. Reliance is placed on the decision of Brambletye School Trust Limited v The Commissioners of Customs and Excise ("Brambletye") (VATD 17688) where a similar definition of the word occupation was used. In the view of that Tribunal, non-exclusive occupation is none the less occupation for the purposes of the legislation although there may not be any rights in rem attending to any such occupation. Further they argue that the legislation involved is an anti-avoidance provision and since this is a tax mitigation scheme (see Mr Du Quesnay's Witness Statement paragraph 8) it falls within the provisions and should be construed to prevent abuse.

.5 Let us look at the anti-avoidance point. VAT on commercial property was introduced from 1 April 1989. It meant that businesses which were partially exempt or exempt, such as banks, would incur an additional irrecoverable VAT cost on such expenditure as rent and construction. Various tax opportunities came onto the market, which sought to allow recovery of VAT incurred by these exempt or partially exempt businesses and in this sense mitigated the VAT cost to those businesses. The Commissioners of Customs & Excise sought to introduce various anti-avoidance provisions to combat these planning opportunities. The main idea behind the anti-avoidance legislation was to disapply the election to waive exemption (election to charge VAT) if certain circumstances were satisfied. The transaction in this appeal was restructured to add steps, which would not ordinarily be used if the VAT was recoverable without the addition of those steps. The purpose of the added steps was to allow for the recoverability of VAT.

.6 In the legislation, which applied to elections to waive exemption after March 1997, the election was disapplied if certain stated conditions were satisfied. It must be borne in mind that the mischief, which the legislation sought to attack, was to prevent partially or fully exempt business from mitigating the cost of irrecoverable VAT by restructuring a transaction.

.7 Taxpayer can arrange their affairs to take advantage of a provision or a loop hole in the legislation which allows the taxpayer to pay less tax or to derive a benefit or advantage from such provision. A person may have a legitimate expectation, a concept routed in the notions of fairness and reasonableness, to such a benefit or advantage. Tax mitigation which would not normally involve artificial steps, is allowed since the taxpayer incurs expenditure or arrange their affairs so a tax benefit is obtained. However such an expectation cannot arise if a tax scheme gives rise to tax evasion or an abuse of the legislated provisions.

.8 The legislation, in broad terms, sought to disapply an election to charge VAT, applying where a building was to be occupied by the owner, his financier or a person connected with either for a purpose or purposes which was not fully taxable.

.9 The election to charge VAT would not apply under the anti-avoidance provision 2(3AA) where:

(a) the grant giving rise to the supply was made by a person ("the Grantor") who was a developer of land (after 18 March 2004 a person other than a Grantor who makes a supply is to be treated as the Grantor for this purpose); and

(b) at the time of the grant, it was the intention or expectation of the Grantor or a person responsible for financing the Grantor's development of the land for exempt use, that the land would become exempt (either immediately, or eventually, or whether or not by virtue of the grant) or would continue, for a period at least, to be such land.

.10 In our case, the Appellant is a "Grantor" as contemplated by paragraph 2(3AA). The grant which gives rise to the supply is the Lease and Agreement for Lease of the new library between the College and NCLCL. The Lease dated 1 January 2004 was preceded by an Agreement for Lease dated 22 February 2001 and valid elections to waive exemptions were made under both the lease and the Agreement for Lease and appropriate notifications made to Customs & Excise as evidenced in the bundles of evidence. When the formal lease was granted in January 2004, pursuant to the Agreement for Lease, rent payable under the grant would be referable to the formal grant of the lease.

.11 The legislation, Schedule 10 paragraph 3(AA) states that "a Grantor" is a "developer of land" if the land in question is a "capital goods item" or the Grantor, or a person financing his development of the land for exempt use, intended or expected that the land or building would become a capital goods item in the hands of the Grantor or a person to whom the land or building was to be transferred. It is not disputed that the land and the building (library) falls within the Capital Item Scheme (VAT Reg 1995 112-116). An item is capital goods with respect to a person if it is land or a building or part of a building where the value of the interest therein supplied is not less than £250,000 and in the case of a building, it is has been constructed or reconstructed or there has been carrying out of other works. These requirements are satisfied in this case.

.12 Reference to "exempt land", Schedule 10 paragraph 3A(7), is a reference to land subject to a grant, where Grantor or Financier is in occupation of either part or all of the land without being either wholly or mainly in use for an "eligible purpose" (Schedule 10 paragraph 3A(9). The reference to "eligible purpose" means the following:

(a) that the person occupying the land is a taxable person;

(b) that the person occupying the land does so for the purposes of making supplies in the course of furtherance of a business; and

(c) that any input tax directly attributable to supplies referred to above is fully deductible.

An eligible purpose is therefore one, which results in supplies where the input tax wholly attributable to those supplies would give the supplier a credit. In other words, the question is whether the land and building is used to make taxable supplies. If the Appellants are in occupation wholly or mainly for an eligible purpose their occupation of the library would have to be for the purpose of making taxable supplies as contemplated by Schedule 10 paragraph 3A(9) 1994 Act. If the Appellants are in occupation and they are occupying the library in the course or furtherance of making exempt supplies of education to students the will not be using the library for an "eligible purpose". The concept of occupation would appear to be narrower than the concept of use for these purposes since it is possible to occupy without using. Our task therefore is a simple one to decide if the Appellants are in occupation and if so the land would be exempt land and the election to waive exemption would be disapplied.

.13 The issue of the disapplication of the election to waive election for VAT in relation to the new library buildings leased by the Appellants to their wholly owned subsidiary, NCLCL, is to be determined by reference to the anti-avoidance legislation contained in Schedule 10 paragraph 2(3AA), 3AAA and 3A 1994 Act;

.14 The Appellants argue cogently that the College is not in occupation of the new library building in the relevant sense. They contend that the students, fellows and others who use the library do so pursuant to an agreement between NCLCL and the College whereby NCLCL undertakes to supply members of the College with library facilities. This supply seeks to draw a distinction between the occupation of property and the supply of services (facilities) where the property is merely an incidental pre-requisite for the supply. This distinction exists in the case law.

.15 It is argued that the services, which were supplied to the Appellants, were provided under the Agreement for the Hire of Library Books dated 2 July 2001. Their services, as stated earlier, include books and other attendant services relating to a library. An annual fee is paid in return for these services. It is paid on a quarterly basis. The annual fee for the year-end 30 June 2002 was £166,950 (roughly equal to the rent paid by NCLCL to the college under their lease). The charge is based on the usage of the library. The relationship between the College and NCLCL worked as follows. The members of the College would sign out books or use the library in accordance with the library rules. NCLCL would file, maintain and catalogue the stock of books and provide computer facilities for central catalogue enquiries. Photocopiers would be available to all users. The Appellants would provide company, secretarial, accounting and general administration support to NCLCL, who would be charged at an hourly rate for these services under the Administration Agreement of 2 July 2001. In effect, NCLCL runs the library on a day to day basis through the librarian and staff all of whom report directly to the NCLCL Board. The librarian and four staff were seconded by the College to NCLCL pursuant to an agreement dated 2 July 2001. The College retained their employment contract with the university in order to maintain their existing employment status including membership of their existing pension scheme.

.16 In looking at the supply of services argument, it is necessary to look at the terms and conditions of the library use. NCLCL makes the library available to Fellows, undergraduates, graduate students and members of the College. The Newnham College Library Guide 2004-2005 sets out the rules and procedures for use of the New Library. The Guide is drafted by the College. Users sign an undertaking to abide by the library rules and are issued with a ticket which is shown to the library staff when requested and used for access. NCLCL also makes the library available to members of the public and visitors who are part of the wider academic community. The College and its staff effectively run the Library.

.17 Counsel for the Appellant argued that the above relationship gives rise to a supply of services. He relied on the case of the Swedish State v Stockholm Lindopark 2001 STC 103 to present the argument that the service being provided by NCLCL to the Appellants were not based on the occupation of immovable property. This view was explored by the Advocate General (Jacobs) of his Opinion where he sought to explain this the view by looking at a person using a golf course. He said that a casual golfer who came to play a round of golf on a golf course was simply having services provided rather than any rights of occupation of the land (paragraph 34 Advocate Opinion). Counsel said that the use of the library was analogous to the use of the golf course in that no underlying rights to the land was involved in making the supply.

.18 Counsel also found support for his view in the case of CCE v Sinclair Collis Limited (2001) STC 989. In that case a company sold cigarettes through vending machines which were installed in public houses. As part of the agreement with the siteholder, it was agreed that the site holder would consent to the vending machines being placed on their premises in return for a share of the profits. The machines remained the property of the supplying company but the siteowner granted the company an exclusive right and licence to provide, install, operate and maintain machines on the site. They also agreed not to allow any other machines selling similar products onto their premises. The issue in this case was what was the nature of the supply made by the siteholder to the company. The House of Lords referred the matter to the European Court with the question:

"Is the grant by the owner of the premises (the siteholder) to an owner of a cigarette vending machine, of the right to install, operate and maintain the machine in premises for a period of 2 years, in a place nominated by the site holder, in the return for a percentage of the gross profits of the sales of the cigarettes and other tobacco goods in the premises, capable of amounting to the letting of immovable property within the meaning of article 13(b) of the Sixth Directive".

.19 The European Court of Justice ("ECJ") said that the agreement did not amount to the letting of property and was not occupation because the owner of the site remained in possession and control (paragraph 78-79, 2001 STC). It would appear from this case that a non-exclusive licence does not amount to the "leasing or letting" of immovable property as contemplated by the Sixth Directive.

.20 The third case which Counsel for the Appellants highlights is Brambletye case, decided by the London VAT Tribunal. The facts of this case are simple. The school constructed a new sports hall and leased it to a wholly owned subsidiary company. The subsidiary operated a sports club and all pupils enrolled with the school were members. The school argued that when its pupils attended the sports hall for games lessons, they did so as members of the sports club of which they were members not as pupils of the school. As a result, the school was not in "occupation" of the new sports hall even though its pupils were. The Tribunal rejected this argument and decided that the hall was occupied by the school. It concluded:

"….we regard as relevant the following facts. First, that priority is given to the use of the Hall by the pupils of the Appellant during the school day in school terms; when the pupils use the Hall they are always under the supervision of a member of staff employed by the Appellants; and the members of staff have no connection with Sports. Secondly, that the use of the Hall by the pupil throughout the school day is controlled by the sports staff of the Appellants and the use is mainly for school purposes, namely to receive physical education. Thirdly, people are using the Hall remains the pupil of the school and the Appellants remains responsible for the pupil during that time, in exactly the same way as occurred when the Appellants use to hire space from privately operated sports club before the Hall was built; during such hirings the Appellants "occupied" the grounds of the private sports club and in the same way "occupies" the Hall when the pupils are being taught. Fourthly, the pupils as members of the club cannot exclude the members of the Appellant's' staff and, at all times when the Hall is being used by the pupils, the control of the use of the Hall, through the supervision of the staff, rests with the Appellants. It follows that, in our view, the Appellants had a physical presence in the Hall, at the very least through members of staff. If the pupils do not have a separate occupation as members of the club, then the Appellants are not in occupation of the hall alone but in occupation together with the pupils. For these reasons we would dismiss the appeal."

.21 Counsel for the Appellants argued that this case was wrongly decided and suggested that "occupation" should not be defined by reference to its ordinary, everyday meaning. He said that the word has different meanings in different legislative context and that the meaning varied accordingly. He further stated that the Brambletye case could be distinguished from the present case in the following ways. In Brambletye, the school staff controlled the sports hall throughout the school day wherein the present case the College has no control over the library or any supervisory role therein. In Brambletye the subsidiary sports company did not have any employees. An employee of the school acted as an administrator to manage the hall. In the present appeal, NCLCL has employees on secondment from the College to control, manage and administer the library building and the supply of library services. The sports equipment in the hall belonged to the school rather than the sports company. In contrast the College in this appeal does not own any of the assets (books, desks, computers, etc) in the main library building. All of these assets have been purchased by NCLCL.

.22 The Respondents on the other hand rely on the case of Brambletye. They argue that the case was correctly decided and the word "occupation" should take the meaning given in that case. In any event they argue that the students of the College are in occupation of the library and, as a result, the Appellants are in occupation for the purposes of the relevant legislation.

.23 In looking at all the relevant facts and circumstances of this appeal, this Tribunal concludes that the Appellants are in control of the library and are in occupation for the purposes of the relevant legislation.

Occupation is a question of fact in each case and involves physical and continuous presence and a degree of control. These requirements are satisfied in this appeal for the reasons given below.

.24 Firstly, NCLCL is a creature of the College. It was formed as an off the shelf company in January 2001 with the "intention to hive off the occupation of the library down into NCLCL as a subsidiary of the College". The College funded NCLCL's start up costs by subscribing for redeemable shares. (Witness Statement of Mr Du Quesnay paragraph 9.) The directors of NCLCL are Professors Onora O'Neill (Principal of the College), Dr Gill Sutherland (Senior Fellow of the College) and Ian Mark Le Mercier Du Quesnay (Bursar of the College). The secretary of NCLCL is the College's Accountant, Richard Robertson. In applying the relevant statutory provisions, one has to be aware that these are anti-avoidance provisions and it is encumbant in looking at the legislation to look at the reality of the structure. The transaction and documentation implementing the transaction must be able to withstand an investigation into the facts and circumstances surrounding the structure. In reality, the College controlled NCLCL. It was not an independent company, but a company set up in order to allow a taxable lease to be granted by the College, which in turn allowed the College to recover VAT on its construction costs since such VAT would ordinarily be irrevocable. The purpose of the advised structure was, as the Bursar pointed out in his Witness Statement, "to mitigate the VAT costs".

.25 Article 13(B) of the Sixth Directive states that subject to certain exceptions, Member States shall exempt "the leasing or letting of immovable property". This concept is not defined in the Directive. The expression was accepted into domestic law as "a licence to occupy land". The exemption from VAT is subject to a number of exclusions. The exclusions are transactions which member states can exclude from the exemption and which therefore may attract VAT. The question is, is this transaction one which the Directive intended should be excluded from exemption.

.26 The European Court of Justice ("ECJ") has stated that the leasing or letting of immovable property essentially involves the landlord of property assigning to the tenant, in return for rent and for an agreed price, the rights to occupy property and to exclude others from it (EC Commission v UK, case C-359/97 2000 STC 777 at 805 at paragraph 64 to 69; Sweden v Stockholm, Lindopark AB 2001 STC 103, 113-114, paragraph 38 to 40 and 126 (2.7) referred to hereinafter as Lindopark Case). The court said that the exclusions under this head "are to be interpreted strictly, since they constitute the exceptions to the general principle that VAT is to be levied on all services supplied for construction by a taxable person" (see Customs & Excise Commissioners v Cantor Fitzgerald 2001 STC 1453 at 1473H). It is known that the 1994 Act must be construed, as far as possible, with the Sixth Directive, the provisions of which it was enacted to implement. The intention of the legislation is to prevent exempt bodies recovering VAT. Such construction is to ensure that interpretations of the provisions are consistent throughout European jurisprudence which gives a uniformity of meaning within member states.

.27 One of the purposes of the relevant provisions is to prevent the avoidance of a VAT charge. The provisions are therefore widely drafted to catch a variety of transactions. Efforts have been made over the years to re-draft the provisions to stop various loopholes (see Budget Press Release 5/99). One of the ways in which the legislation seeks to prevent abuse is to reduce the instances when the option to tax is used to provide a tax advantage. In particular, in circumstances where input tax costs may be recovered by exempt bodies such as charities and banks.

.28 European law is instructive in looking at interpretations of the Directive. In the case of Gemeente Leusden, Holin Groep BV v Staatssecretaris van Financien (case C/487/01 and C/7/02), 29 April 2004 ECJ. The Court said (para 76):

"… it must be borne in mind that, under Article 13(B) of the Sixth Directive, Member States are to exempt the leasing or letting of immovable property under conditions which they are to lay down for the purpose of insuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse. That wording demonstrates that preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive".

29 The court goes on to say (paragraph 78):

"As regards abuses, the Court has held that a finding of an abuse requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the Community Rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it (case C-110/99 Emsland – Starke [2000] ECR 11569, paragraphs 52 and 53)."

.30 The Court also went on to say that one should be aware of the rights of tax payers and the concept of legitimate expectation. The Court said, (paragraph 79):

"As regards tax avoidance, although under the law of a Member State, a taxpayer cannot be censored for taking advantage of a provision or a lacuna in the legislation which, without constituting an abuse, has allowed him to pay less tax, the repeal of legislation from which a person liable to VAT as derived an advantage cannot, as such, breach a legitimate expectation based on Community Law."

.31 In the light of the comments above, one has to look at the substance and reality of the transaction and documentation. In doing so, one has to establish the chief purpose of the transaction. The purpose of the transaction in this case would appear to be to provide the taxpayer with a tax advantage without affecting their financial position. The College would be charged roughly the same amount for the provision of library services as NCLCL pays in rent for the lease. There appears to be no real transfer of economic risk and there was a certainty about the structure from start to end.

.32 It was clear when the agreements were entered into that the College would eventually obtain a benefit and would control, on its own or through its staff, the entire chain of events. The structure was devised, scripted and performed with one purpose in mind, the recovery of VAT by the College. One would not be surprised to find that NCLCL would return the entire amount which they charge for library services to the College in the form of rent under the lease (as was the case in 2001). It is clear that taken as a whole, the College has control of the library through its members on the board of NCLCL its subsidiary company and through its seconded staff who remain employees of the College. If one takes both of these entities together then it can be said that the College is in control of the library. The people who run NCLCL and the College are the same with different hats. The documents clearly show that a scheme was structured in order to recover VAT. The contracts were entered into within a very short period and it is clear that from the Bursar's witness statement that the intention was to mitigate VAT. It is clear that the College had no purpose in leasing its library, selling its books and seconding its staff other than for the recovery of VAT. To allow the election to waive exemption to stand would be to allow an abuse of the legislation and go against its spirit and intentment. The conditions for VAT recovery in the legislation should not be artificially created.

The College has a physical presence in the library through its students who use the library and who are the main users of the library. Membership of the College is a qualification for using the Library. The Appellants argued unlike the case of Brambletye, where the school staff were at all times in control of the sports hall, the College will not have control of the library and NCLCL employees on secondment from the College will control, manage and administer the library building and the supply of library services. I do not accept this. Their contract of employment remains with the College and they can be dismissed by the College I have no doubt that there are commercially structured transactions where the election to make exemption for VAT would not be disapplied but this is not one of those transactions.

In this case the students are members of the College and use the library in that capacity. They are not like members of the public who, for example, would use a golf course, restaurant or hotel on an occasional basis and where there would be a supply of services as referred to in the Lindopark Case. While it is possible to say that the College shares occupation with NCLCL, occupation for our purpose does not have to be exclusive. The students may have a non-exclusive right to use the library and still be in occupation through their presence. If the library is used by the College for students, this will not be an "eligible purpose" for the purpose of the relevant legislation since it would be an exempt use. A question arises as to whether the Sixth Directive applies only to land rights which give equivalent English Law rights which amount to a legal or equitable interest. On a strict reading of the Directive, the words leasing and letting does seem to imply exclusive possession. However those sections of the 1994 Act implementing the Sixth Directive seem to have gone further than the Directive since the concept of occupation found in the 1994 Act does imply something less than exclusive possession.

A point made by Counsel for the Appellants is that there is a distinction between occupation and use. First, the concept of leasing and letting of immovable property is not defined in the Directive. In Lindopark, the court said that a leasing or letting "necessarily involved a grant of some rights to occupy the property at one's own and to exclude or admit others a right which is, moreover linked to a defined piece or area of property." This definition would take account of the duration of the enjoyment of the property. I agree that a temporary enjoyment of property cannot be a lease or let. But in our case, the students enjoy and use the property for the entire time they are at the College and this is over a period of at least 3 years. Occupation denotes physical presence and use is a wider concept than occupation. It is only if the use is not taxable does the disapplication apply. The question of occupation is separate from use. The use gives the starting point in looking at the legislation. Paragraph 10 only deals with occupation and whether the eligible purpose has been satisfied. The use is only relevant in looking to see if there is a taxable supply or not, occupation is the real test.

We are aware that this decision may cause financial hardship to the College and this is unfortunate. We feel that in the circumstances that the College is in occupation of the library in the course and furtherance of its exempt supply of education to students and therefore will not be using the library for eligible purposes. Therefore, the College's election to waive election should be disapplied. Accordingly, the appeal should be dismissed.

DR KAMEEL KHAN

CHAIRMAN

RELEASED: 14 February 2004

LON/03/913