College — Exempt supplies — Refurbishment of library — Appellant leasing building to subsidiary and electing to waive VAT exemption — Appellant claiming deduction of input tax on construction works — Respondents applying anti-avoidance provisions — Whether appellant occupying building after grant of lease — Appeal allowed
The appellant was a body corporate that provided education. As such, it was treated as making exempt supplies for the purposes of value added tax (VAT). It proposed to partly rebuild and refurbish its library in order to make the building more spacious and to accommodate both college students and outside researchers. Since it was exempt, it could recover the VAT that it paid on the cost of the construction works because that would not be attributable to the taxable supplies that it made in the course of its business.
The appellant therefore set up a subsidiary company to which it would grant a lease of the library. It then intended to waive the VAT exemption in respect of the lease under Schedule 10(2) to the Value Added Tax Act 1994, so that VAT would be payable on the rent with the result that the appellant would be entitled to deduct input tax on the construction costs.
The respondents took the view that the proposed election was caught by the anti-avoidance provisions in para (2)(3AA) of Schedule 10, since the appellant would in fact remain in occupation of the land after the grant of the lease so that it would not be occupying that land wholly or mainly for eligible purposes. Its occupation would be for the purpose of making supplies of educational services, which would be exempt within group 6 of Schedule 9 to the Act.
The VAT and Duties Tribunal upheld that decision, but the appellant appealed. The issue was whether the appellant remained in occupation of the library after the grant of the lease, in which case the land was exempt land, as defined in para 3A(7) of Schedule 10, and the election to waiver exemption in respect of the lease had no effect.
Held: The appeal was allowed.
Occupation of land for the purposes of para 3A(7) required more than a right to use that land. Some degree of control over what those who were not also in occupation could do on the land was necessary.
Although the arrangements between the appellant and its subsidiary might be described as contrived or artificial, in that they had no commercial purpose other than to enable the appellant to recover input tax, they could not be treated as a sham or façade. They reflected the parties’ true intention and had to be given their proper legal effect: Tunstall v Steigmann (1962) 182 EG 459 and Hilton v Plustitle Ltd [1989] 1 EGLR 119; [1989] 05 EG 94 referred to.
In the absence of any control by the appellant’s students and fellows over access to and use of the library by others, it was impossible to conclude that the appellant remained in occupation. The fact that the library staff remained the appellant’s employees was insufficient to conclude that the appellant was in occupation of the library when their presence and control was as persons acting under the direction of the subsidiary.
David Milne QC and Andrew Hitchmough (instructed by Mills & Reeve, of Cambridge) appeared for the appellant; Philippa Whipple (instructed by the legal department of Revenue & Customs) appeared for the respondents.
Eileen O’Grady, barrister
