VAT – Exempt supplies – Refurbishment of college library – Appellant leasing building to subsidiary and electing to waive VAT exemption – Appellant claiming deduction of input tax on construction works – Respondent applying anti-avoidance provisions and concluding election to waive exemption having no effect – Paras 2 and 3A(7) of Schedule 10 to Value Added Tax Act 1994 – Whether appellant in occupation of library after grant of lease – Appeal dismissed
The respondents were members of an educational institution that made exempt supplies for the purposes of VAT. In 2000, they decided to build a new library. The institution’s VAT-exempt status meant that it was note entitled to recover VAT on costs incurred in the course of its business, and, accordingly, VAT would not be recoverable on the cost of constructing the library.
The respondents were advised of a scheme to enable the college to recover the VAT by: (i) setting up a subsidiary company, of which the college owned all the shares and whose members formed its board of directors; (ii) granting a lease of the new library, on its completion, to the company for a term of 11 years at a reviewable rent of £165,000; and (iii) opting to waive the VAT exemption in respect of the lease pursuant to para 2 of Schedule 10 to the Value Added Tax Act 1994. The intention was that the lease would become a taxable supply, so that the respondents would be able to recover all the input tax attributable to making that supply, namely the VAT on the cost of building the library.
Under the scheme, the respondents sold all the books, fixtures and fittings and equipment in the library to the company, which agreed to hire books to and provide library services for the college. The respondents agreed to second employees to work as librarian and assistants for the company. College members could access the library using electronic cards, while members of the public could also be admitted with the librarian’s permission.
The appellant took the view that the proposed election was caught by the anti-avoidance provisions inserted into Schedule 10 by section 37 of the Finance Act 1997. It relied upon para 3A(7), which provided that land would be exempt if, at the relevant time, “the grantor… is in occupation of the land” and such occupation was not wholly or mainly for eligible purposes. It considered that the respondents would remain in occupation of the land after the grant of the lease for the purpose of making supplies of exempt educational services, such that the election to waive exemption in respect of the lease had no effect. That decision was upheld by the VAT and Duties Tribunal but reversed by the Court of Appeal. The appellant appealed.
Held (Lord Walker and Lord Neuberger dissenting): The appeal was dismissed.
Case law on the meaning of “occupy” in Schedule 9 was relevant to the meaning of “occupation” in para 3A(7) of Schedule 10: Sinclair Collis Ltd v Commissioners for Customs & Excise C-275/01 [2003] STC 898, Sweden v Stockholm Lindopark AB C-150/99 [2001] STC 103 and Belgium v Temco Europe San C-284/03 [2005] STC 1451 considered. “Occupation” was a concept with a well understood meaning, and mere physical presence on land for the purpose of making use of it would not suffice.
The lease gave exclusive possession of the library to the company. The company did not, whether by agreement or de facto, allow occupation or joint occupation by the respondents. The college was entitled to the provision of services for its members but could not be said to occupy the library. Nothing in the arrangements, either in law or practice, contradicted or displaced the right of exclusive occupation granted to the company by the lease. The practical physical control of the library was in the hands of the librarian and her staff, who acted on behalf of the company and had the right, not shared with the respondents, to exclude persons from the library. The respondents’ contractual right to have its members of good standing admitted and provided with books and other services were not rights of occupation. The right was essentially a right to the use of the books, and the right to enter onto the premises for the purpose of taking those books was ancillary. Whether acts attributable to a body like a school or college amounted to collective occupation of premises was a question of degree to be answered by reference to the particular facts of the case; in the instant case, they did not: Brambletye School Trust Ltd v Commissioners for Customs & Excise [2003] BVC 2015 distinguished.
Nigel Pleming QC and Philippa Whipple (instructed by the legal department of Revenue & Customs) appeared for the appellant; David Milne QC and Andrew Hitchmough (instructed by Mills & Reeve, of Cambridge) appeared for the respondents.
Sally Dobson, barrister
