Fortyseven Park Street Ltd v Commissioners of HM Revenue and Customs

Value added tax – Supply – Land exemption – Leasing or letting of immovable property – Appellant commissioners appealing against decision of Upper Tribunal concerning the treatment for VAT purposes of sums received by the respondent from selling fractional interests in a property – Whether grants of fractional interests in property being exempt or standard-rated supplies for purposes of VAT – Appeal allowed The respondent owned a 60-year lease, expiring on 31 October 2050, on 47 Park Street in Mayfair, London, a property which had formerly been an hotel. In 2002, the respondent refurbished the property, creating 49 self-contained apartments. Each residence included one or two bedrooms, a living room with dining area, a separate kitchen and one or two bathrooms. The respondent sold fractional interests in the apartments under a membership agreement which permitted the purchasers to exercise short-term occupancy rights and provided management services. Members had to make a reservation request prior to taking up occupancy. A dispute arose concerning the value added tax (VAT) payable on the consideration received by the respondent in exchange for the grant of the fractional interests. The First-tier Tribunal (FTT) upheld a decision of the appellant commissioners that VAT was payable on the consideration. It found that: (i) the supplies fell in principle within the exemption for the “leasing or letting of immovable property” within article 135(1) of Council Directive 2006/112; (ii) the exemption was excluded because the occupancy right was subject to a successful reservation request; and (iii) the grant of the fractional interests was the provision of relevant accommodation in a similar establishment to a hotel. Accordingly, the exclusion in article 135(2)(a), implemented in Group 1 in Part II of Schedule 9 to the Value Added tax Act 1994, operated to disapply the land exemption: [2016] UKFTT 569 (TC). The Upper Tribunal allowed the respondent’s appeal concluding that the relevant supplies were exempt as the leasing or letting of immovable property: [2018] UKUT 41 (TCC). The appellant commissioners appealed. The issues were: (i) whether the land exemption was inapplicable because the member’s right to occupy the property as an owner and exclude any other person was missing; (ii) whether the land exemption was inapplicable because the supplies did not involve merely a relatively passive activity but rather significant added value; and (iii) if the supplies might in principle fall within the land exemption, whether they were excluded from the exemption by item 1(d) in group 1 of part II of schedule 9 to the 1994 Act. Held: The appeal was allowed. (1) The respondent was able to satisfy the requirements of members as regards reserving their primary use time albeit that members might not always get their first choice of nights or might have to go on the waiting list. The Upper Tribunal had been right to see the reservation system as facilitative rather than introducing conditionality such as to make the land exemption unavailable. The economic reality was that a member gained a sufficient right to occupy from the start: Baxi Group Ltd v Revenue and Customs Commissioners [2010] STC 2651, Revenue and Customs Commissioners v Loyalty Management UK Ltd (Cases C-53/09 and C-55/09) [2013] UKSC 15, [2013] STC 784 and Revenue and Customs Commissioners v Newey (Case C-653/11) [2013] STC 2432 considered. (2) The “leasing or letting of immovable property” was usually a relatively passive activity linked simply to the passage of time and not generating any significant added value. On balance, the manager supplied its services to the respondent which, in turn, supplied them to members. The manager could not provide its services in pursuance of any contract with any member since there had never been any such contract. In contrast, an agreement existed between the manager and the respondent. Further, the respondent had not only entered into a contract with each member but undertaken to procure the provision of the manager’s services. Members were led to expect the services of a luxury hotel and, given that the manager was not itself a party to the agreement, references in the agreement to what the manager was to do would be nugatory if they did not bind the respondent. There was no reason to conclude that the economic and commercial reality did not accord with the contractual position. Therefore, the respondent itself supplied the hotel-type services provided by the manager. The supplies at issue were those for which members paid large lump sums and, from their perspective, the facilities and services to be enjoyed on occupying a residence were part and parcel of what they received as owners of a fractional interest. The grant of a fractional interest involved more than a mere letting transaction and the obligations which the respondent undertook as regards the provision of hotel-type services could not be regarded as ancillary or plainly accessory. The essential object of the transactions was the provision of a service capable of being categorised in a different way. It was pre-payment for accommodation in an environment similar to a hotel and with the services which could be expected in a hotel, repeatedly over a number of years. Accordingly, the land exemption was inapplicable because the supplies did not involve merely a relatively passive activity but rather significant added value: Belgian State v Temco Europe SA (Case C-284/03) [2005] STC 1451, [2004] ECR I-11237 and Régie communale autonome du stade Luc Varenne v Belgium (Case C-55/14) [2015] STC 922 followed. (3) Even if the respondent’s supplies were in principle capable of falling within the land exemption, they were excluded from the exemption by item 1(d) which provided that: “the provision in an hotel … or similar establishment of sleeping accommodation” was excluded from the land exemption. Whilst the Directive exemption was to be construed strictly, the hotel exclusion was to be interpreted broadly. The essential characteristic of occupation of accommodation in the hotel sector was the flexible and relatively short-term nature of a stay in premises provided with the attendant facilities and services for such short-term and/or occasional stays. The commercial reality was that a member pre-paid for the flexibility to enjoy short stays of a stated maximum amount each year, in an environment similar to a hotel and with the services which could be expected in a hotel. Hui Ling McCarthy QC (instructed by the General Counsel and Solicitor to HM Revenue and Customs) appeared for the appellants; Melanie Hall QC (instructed by KPMG LLP) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Fortyseven Park Street Ltd v Commissioners of HM Revenue and Customs