VAT – Input tax – Construction of engineering centre at further education institute – Subsidiary of institute purchasing equipment for centre – Subsidiary taking lease of centre and purporting to grant back licence to use equipment – Claim to recover input tax on purchase of equipment disallowed – Whether exempt supply of licence to occupy land or taxable supply of equipment – Appeal dismissed
The appellant company was a wholly owned subsidiary of an educational charity that ran a further education institute. It carried out profit-making activities to supplement the institute’s funds by supplying engineering and vocational courses to third parties and donating all profits from that enterprise to the institute. The appellant had no staff, relying instead on those employed by the institute, which meant that the institute’s and the appellant’s students were often taught together.
In 2001, the institute entered into various contracts for building and consultancy services in connection with the construction of a new engineering centre on its campus. It granted a lease of the proposed new centre to the appellant for a term of 20 years from August 2002. By a written “Licence to Use Facilities”, made on the same day, the appellant purported to allow the institute to use the equipment in the new centre on a non-exclusive basis, jointly with the appellant and its licensees, for a period of one year from August 2002 and then from year to year subject to termination by three months’ notice given by either party. These arrangements were intended to allow the appellant to recover as input tax the VAT incurred on the construction of the centre.
The appellant’s claim to recover input tax was disallowed. The first-tier tax tribunal found that the supply of the construction work had been made to the institute and, although the appellant had purchased the equipment, it could not recover input tax on that purchase because the tribunal found that the August 2002 licence involved an exempt supply of a licence to occupy land, rather than a taxable supply of equipment. The appellant appealed. It contended that the licence conferred no right of occupation of the centre but granted a right to use the equipment, with the implied right of entry to the centre for that purpose being merely an ancillary or subordinate part of the supply.
Held: The appeal was dismissed.
The letting of immovable property, within article 13B(b) of the Sixth VAT Directive 77/388/EEC, involved one party conferring on another, for an agreed period and in return for payment, a right to occupy property as though it were the owner and to exclude any other party from enjoying such a right. It was characteristically a passive activity, whereby property was made available rather than a service being provided. If the letting were merely the means of effecting the supply of the principal subject matter of the relevant agreement, it might not be a letting of immovable property within article 13B(b).
Taken at face value, the licence predominantly granted the use of equipment rather than the use of the building, with a right of entry to the building being implied only because the equipment was located within it. The appellant was to retain control of the building and the institute’s use of the equipment was subject to the appellant’s right to require it to be shared with other parties. Those features would suffice to prevent the licence from constituting a licence to occupy the centre in the relevant sense: Belgium v Temco Europe SA C-284/03 [2005] STC 1451 and Sinclair Collis Ltd v Commissioners for Customs & Excise C-275/01 [2003] STC 898 applied.
However, the tribunal’s findings of fact demonstrated that the provisions of the licence did not represent the real bargain made between the parties but were an artifice: Somma v Hazelhurst [1978] 1 EGLR 69; (1978) 246 EG 311 applied. When the licence was granted, the parties had not intended that the institute should submit to the appellant’s management and control of the centre or imposed sharing of the building. The true arrangement was that the institute would, through its employed staff, control the educational activities in the centre, for the education of both its own and the appellant’s students. The appellant depended on the institute for that purpose and the institute was not acting as the appellant’s agent in that regard. The appellant did not itself occupy the centre, either through the teaching staff or the presence of its students: Principals and Fellows of Newnham College in the University of Cambridge v HM Revenue & Customs [2008] UKHL 23; [2008] 1 WLR 888 applied. Accordingly, the reality of the arrangement, masked by the terms of the licence, was that the appellant had granted the institute a right to occupy the centre rather than merely a right to use that building or the machinery in it; the use of the building was not merely ancillary to the use of the equipment.
Keith Gordon and Ximena Montes Manzano (instructed by the legal department of Grimsby College Enterprises Ltd) appeared for the appellant; James Puzey (instructed by the legal department of HM Revenue & Customs) appeared for the respondents.
Sally Dobson, barrister