VAT – School granting lease of sports and leisure centre to appellant on terms that school able to use certain facilities – Respondents assessing provision of facilities as standard-rated supply by appellant for VAT purposes – Whether school’s right to use facilities properly characterised as reservation from the demise or provision of services by the appellant as consideration for lease – Method of valuing consideration – Appeal dismissed
In 2003, a school granted a lease of a leisure centre and sports fields to the appellant company at a peppercorn rent on terms that the school could continue to use the facilities in the leisure centre at certain times and on certain terms. The centre had been built by am previous tenant under a 1966 lease and, from 1988 onwards, had later been run by the appellant’s owner as a partnership under a series of leases. The 2003 lease was expressed as a demise of the entire premises, although clause 4.33 provided that: “The Tenant will permit the Landlord including their agents employees and members of [the school] access to the facilities at the Premises on the terms and in the manner set out in the Seventh Schedule.” Schedule 7 stated that: “The Tenant grants the Landlord…rights to use the sports facilities at the Premises at no cost on the following terms… .” The respondents assessed the appellant for VAT on the transaction on the assumption that the transaction involved a barter situation whereby the appellant was supplying standard-rated services at the leisure centre in return for the initial grant of the lease, which was an exempt supply.
On an appeal by the appellant, issues arose: (i) as to whether the transaction could properly be characterised as a barter or whether the school’s rights to use the leisure centre were simply rights retained by it and carved out of the demise made by the lease; and (ii) if the former was the correct analysis, what method of valuing the consideration received by the appellant for the services it provided to the school would be appropriate?
Held: The appeal was dismissed.
(1) The transaction was properly characterised as a barter. The terms of the demise were not made subject to the rights granted by Schedule 7, which was framed specifically in terms of rights being granted. Clause 4.33 was ambiguous and could be interpreted either as an exception or reservation of user rights from the lease or a grant of those rights by permission of the tenant. In the light of the other relevant lease provisions, the latter was the correct interpretation. It was, in any event, more logical since, under the terms of the rights, the appellant was obliged to provide services, such as a fully working, heated and chlorinated swimming pool, rather than rights that could merely be retained by the school as landlord. Moreover, although there was scant evidence regarding the factual background, it seemed that the appellant was succeeding to the rights of the previous tenants, and it was sensible to view the user rights as consideration in circumstances where the original deal must have involved the swap of a cheap lease in exchange for a building obligation and user rights.
(2) There was a sufficient link between the provision of the services and the receipt of the lease for the lease to constitute consideration for VAT purposes. In calculating the monetary value of that consideration, the rule was that where a monetary equivalent had been established as the value of the services being provided, the consideration constituted the amount of that money equivalent: Naturally Yours Cosmetics Ltd v Customs & Excise Commissioners [1988] STC 879 applied. Since all the services provided to the school were priced for third-party purchasers using the various recreational facilities, those prices represented the starting point. However, the respondents should also have considered the degree to which prices quoted to individual commercial users of the facilities might not be a fair indication of the consideration. The school’s user rights were an essential equivalent to those of a company taking corporate membership of a health club on behalf of its employees, to whom a substantial discount would probably be given. Moreover, the school’s take-up of the facilities varied from time to time. Attention should therefore be given, period by period, to the appellant’s “discount adjusted” current list prices for those services that the school was minded to receive from time to time.
Andre Morgan FCA (of Wildin & Co, of Lydney) appeared for the appellant; Andrea Strugo (instructed by the legal department of HM Revenue & Customs) appeared for the respondents.
Sally Dobson, barrister
