[2009] UKFTT 92 (TC)

TC00060

Appeal Number: MAN/08/0409 

FIRST TIER TRIBUNAL TAX

DECISION NOTICE WITH FULL REASONS
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

VAT – EXEMPT SUPPLY – Appellants granted a lease to various connected companies – Appellants contended that they provided  facilities to the companies which was a standard rated supply – Appellants’ analysis flawed – their supply was a grant of legal interest of possession in a property which was exempt from VAT – Appeal dismissed

	THE TRUSTEES OF THE LYNDON DAVID HOLLINSHEAD 	Appellants
SIPP
THE TRUSTEES OF THE DARREN HOLLINSHEAD
SIPP
THE TRUSTEES OF THE RICHARD JOHN COX
SIPP

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 

Sitting in public at Manchester on 24 February 2009

Simon Levine, VAT Advice Line Limited, appeared for the Appellant
Jonathan Cannan counsel instructed by the Solicitor’s office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION
The Appeal
1.	The Appellants were appealing against a decision dated 11 March 2008 in which HMRC gave a ruling on the liability of a supply made by the Appellants when granting a 20 year lease to various connected companies. The ruling had been requested in a letter from the Appellants’ representative dated 6 November 2007 in which it was argued that the lease was not a licence to occupy but was rather a licence to use the premises. HMRC decision was that the lease amounted to a licence to occupy land for the purposes of item 1 group 1 schedule 9 VAT Act 1994. If the Appellants’ representative was correct the disputed supply was standard rated for VAT, in contrast to the exempt supply advocated  by HMRC. 
2.	The issue to be determined was what did the Appellants supply which essentially was a question of fact.
3.	The Tribunal heard evidence from Richard John Cox, the beneficiary of one of the self-invested personal pension trusts which granted the lease to the connected companies. Mr Cox was also a director of the connected companies. A bundle of documents was presented in evidence which included the witness statement of Ian Tustin who made the disputed decision on 11 March 2008. 
The Facts
4.	Messrs Lyndon and Darren Hollinshead and David Cox were engaged in the insurance industry and directors of various companies acting as insurance brokers. They set up self invested personal pension schemes. In early 2005 the Appellants (trustees of the pension funds) purchased a building known as Unit C, Charter Court, Wolverhampton Business Park for the purposes of a commercial let. The bank which provided some of the purchase monies insisted upon a lease for the letting of the premises.  On 24 June 2005 the Appellants granted a lease for a term of 20 years, with an annual rent of £135,324 to four limited companies (KCJ Insurance Services Group Limited; KGJ Commercial Insurance Services Limited, KGJ Insurance Services Limited, and Hallam Green Insurance Services Limited) which were connected with the insurance business of Messrs Lyndon and Darren Hollinshead and David Cox.  A firm of solicitors drew up the lease for the Appellants, and the four limited companies.
5.	Around March 2005 the Appellants elected to opt to tax the letting supplies of the property. HMRC disapplied the election under the anti-avoidance measures dealing with connected companies.
6.	Under the terms of the lease the trustees of the pension funds were the landlord. The tenants comprised the four companies named in the second part of the lease and the assigns, KGJ-Annan Financial Services Limited and Annan Insurance Services Limited. The tenants held the lease on a joint and several basis for a term of 20 years. On payment of the rent and observance of tenants’ covenants they were  entitled to hold and enjoy the demised premises during the term without any lawful interruption or disturbance from or by the landlord. The demised premises were all that premises known as Unit C Charter Court Wolverhampton Business Park under its terms to occupy the premises. The demised premises were essentially a self contained office block enjoying the benefit of a dedicated car parking area located on a prestigious business park.
7.	Clause 4.7 of the lease permitted the landlord to enter the premises for specific purposes, such as taking schedules or inventories of fixtures and fittings, and to examine the demised premises to ensure nothing has been done which may constitute a breach or non-performance of any covenants. Clause 4.24 dealt with alienation which essentially prevented the tenants from assigning or sub-letting the premises without the express permission of the landlord with such permission not to be unreasonably withheld. Under the lease the rent was payable quarterly, and reviewed at set intervals during the currency of the lease. HMRC counsel described the lease as a standard form lease for commercial premises with familiar terms. The Tribunal agreed with counsel’s description of the lease.
8.	 The tenants decided between themselves how much each of them would contribute to the rent. The holding company KGJ Insurance Services Group Limited paid no contribution towards the rent.
9.	Since the initial occupation of the premises by the tenants in June 2005, three other companies which were part of the insurance business of Messrs Lyndon and Darren Hollinshead and David Cox have started trading from the demised premises. The companies were Insureit UK Limited (September 2005), Insurance Risk and Claims Management Limited (June 2007) and Click 2 Insure Limited (September 2007).  The use of the premises by these companies was not regulated by a formal written agreement. They pay a share of the rent charged for the whole premises by the Appellants.  The tenants determined the share paid by the extra companies The total rent received by the Appellant under the lease has not increased as a result of the occupation of the premises by the extra companies. 
10.	Mr Cox believed that the Appellants were entitled under the terms of lease to allow other legal persons to use the demised premises. However, under cross examination he accepted that the Appellants had no authority under the lease to permit use of the premises by the extra companies.
11.	Mr Cox also stated that two Royal Bank of Scotland employees and three Norwich Union/Aviva employees were based at Charter Court.  Their presence yielded considerable benefits for the insurance operations carried out by the  tenants in respect of  turn-round of business and enhanced commissions. As result of those benefits the Royal Bank of Scotland and Aviva did not contribute towards the rent of the premises. 
12.	The Appellants were in negotiation with a third party company offering financial management services about the grant of office facilities at the demised premises. The Appellants evidenced draft 2 of an Offices Facilities User Agreement dated September 2008.  This agreement had not been executed at the time of the hearing and no date had been fixed for the commencement of the proposed arrangements.
13.	The companies working from the demised premises did not occupy a specific designated part of the building. The employees of the different companies would share desks, and be intermingled with one another. Hot desking was a common practice throughout the building. The companies shared the same entrance, reception area, boardroom, toilets and kitchen area.
The Parties’ Submissions
14.	The Appellants contended that their supply to the users of the demised premises was the right to use the facilities of the building rather than a grant to occupy the premises. Thus their supply was standard rated for VAT purposes, and not an exempt supply of the grant of a legal interest in land.  
15.	The Appellants supported their contention by reference to the shared working arrangements of the companies using the building.   The companies had no designated working area, and the lease was silent on which parts of the building that each company should occupy.  The Appellants had permitted three other companies to use the premises after the grant of the lease. One of those companies, Insurance Risk & Claims Management Limited, was not under the ownership of Messrs Lyndon and Darren Hollinshead and David Cox when it first started using the facilities at the demised premises. The Appellants were now contemplating allowing a third party owned company to use the facilities. The lease had not been amended to permit the use of the demised premises by these extra companies. The Appellants’ representative concluded that as the Appellant had allowed the use of the building by these extra companies, the original companies which were the parties to the lease did not have the right to occupy the property or any part of it as if it was the owner and no power to exclude anyone-else from enjoying that right.
16.	The Appellants’ representative submitted that the Tribunal should ignore the lease and focus on the reality of the situation. The representative referred to HMRC Internal Guidance part 5.17 which indicated that where a supply involved the sharing of premises by more than one business with each of those business having  no occupational rights  in respect of a specified area of land then the supply was not a licence to occupy but simply a provision of facilities. According to the representative the facts of this case were about the sharing of business premises which met exactly the situation envisaged by HMRC internal Guidance, and, therefore the Appellants’ supply was one of a provision of services, a standard rate VAT supply.
17.	HMRC counsel submitted that the Appellant’s representative had confused the underlying issue of this Appeal. The representative’s analysis of what constituted a licence to occupy was irrelevant. The Appellants’ relationship with the tenants was governed by the terms of a lease. The lease was in a standard common form and covered the whole premises. The lease granted a legal right for the tenants to enjoy jointly quiet possession of the premises. The Appellants had no authority under the lease to grant rights to other persons to use the premises. Any rights of the extra companies to use the premises were derived from the tenants which had the legal right to possession under the lease. Whatever the nature of the supply to the extra companies, it must be a supply by the companies which were the tenants under the lease, and not the Appellants.
18.	The concept of the letting of immoveable property within the meaning of  article 13B(b) of the Sixth Directive (now Article 135(1)(l) Council Directive 2006/112/EC) was essentially:
 “the conferring by a landlord on a tenant, for an agreed period and in return for payment, of the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right (see Belgium v Temco Europe SA (Case  C-284/03)[2005] STC 1451 paragraph 19 and Sinclair Collis Limited v Commissioners of Customs and Excise (Case C-275/01) [2003] STC 898 paragraph25).
19.	The Appellants’ supplies to the companies were on all fours with the concept of the letting of immoveable property. The Appellants granted the tenants possession of the demised premises for a term of 20 years in return for payment of a market rent. The amount of which did not vary when the extra companies used the building. The Appellants had no authority under the lease to give other persons rights in respect of the premises during the term of the lease. Thus the Appellants’ supplies were a grant of an interest in land and exempt under item 1 group 1 schedule 9 of the VAT Act 1994.
Reasons for the Decision
20.	The issue in this case was what did the Appellants supply to the companies. The analysis of the Appellants’ representative was flawed in material respects. First he submitted that the Tribunal should concentrate on the reality of the arrangements in place of the formal picture painted by the terms of the lease. The lease, however, was a critical part of the reality, and could not be put on one side as suggested by the representative. Second the representative ascribed business decisions taken by the owners of the insurance companies to the Appellants, which in turn portrayed a misguided view of the factual matrix for this Appeal. The Appellants were trustees of pension funds, and in that capacity had no interest or right in how Messrs Lyndon and Darren Hollinshead and David Cox organised the insurance business through their companies. 
21.	    The Tribunal finds that 
(1)	The Appellants’ supply to the six original companies comprised a lease dated 24 June 2005.
(2)	The Appellants received legal advice on the grant and form of the lease.
(3)	The bank providing some of the funds for the purchase of Charter Court required the Appellants to enter into a lease of the property. 
(4)	Under the terms of the lease the Appellant granted the companies a legal interest in possession in Charter Court for a term of 20 years in return for payment of the rent. 
(5)	On payment of the rent and observance of tenants’ covenants the companies were entitled to hold and enjoy jointly and severally the whole demised premises during the term without any lawful interruption or disturbance from or by the landlord.
(6)	The fact that the companies did not have dedicated areas in the property for their business under the terms of the lease was irrelevant. The companies held a joint tenancy of the premises, and could make their own decisions as to how they organised their business arrangements within the property.
(7)	The Appellants had no relationship with the extra companies occupying the premises. The rent under the lease was not increased as result of the occupation. The Appellants received no consideration for the use of the property by the extra companies.
(8)	The Appellants had no authority under the lease to subordinate the tenants’ right to quiet enjoyment of possession of the premises. The Appellants did not have authority to permit other legal bodies to use the premises. 
(9)	Any rights of the extra companies to use the premises were derived from the tenants which had the legal right to possession under the lease. Whatever the nature of the supply to the extra companies, it must be a supply by the companies which were the tenants under the lease, and not the Appellants.
(10)	Likewise the evidence of the draft facilities agreement with a third party owned organisation was irrelevant because the Appellants did not have the power to grant it. 
(11)	 The Appellants conferred upon the six companies the rights to occupy Charter Court and to exclude any other person from enjoyment of such a right for a term of 20 years in return for payment of rent. 
22.	The Tribunal holds upon the above findings that the Appellants’ supplies were a grant of an interest in land and exempt under item 1 group 1 schedule 9 of the VAT Act 1994. The Tribunal dismisses the Appeal and makes no order for costs.

           

                               MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 6 May 2009

MAN/
Notes
23.	The Tribunal directed that the costs regime which operated prior to 1 April 2009 applied to this Appeal. The Tribunal noted HMRC counsel’s objections to its direction.
24.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.