[2010] UKFTT 177

TC00482
VAT – input tax – transfer by local authority of housing stock to Registered Social Landlord – refurbishment of the stock by RSL pursuant to agreement between RSL and local authority – was RSL supplying service of refurbishment work to council – no – therefore no taxable supply to local authority – appeal dismissed

FIRST-TIER TRIBUNAL
TAX

 	
					LHA-ASRA GROUP LTD	Appellant
(PREVIOUSLY LEICESTER HOUSING ASSOCIATION LTD)

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Lady Mitting (Judge)
		Roger Freeston FRICS (Member)
			
Sitting in public in Birmingham on 16 & 17 February 2010

Glyn Everett CTA, VAT consultant, for the Appellant

Christiaan Zwart, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2010
DECISION

1.	The decision under appeal is that of the Commissioners dated 2 February 2006, upheld on review dated 11 July 2008, that the Appellant was not concerned in making a taxable supply of services to Leicester City Council, the consequence of which was the Commissioners’ refusal to accept the Appellant’s Voluntary Declaration of 20 October 2005.
2.	We heard oral evidence from Mr. Vinod Naik, former Group Head of Finance on behalf of the Appellant and from Mr. David Powell, the decision maker, for the Commissioners.
3.	The Leicester Housing Association (“LHA”) is a Registered Social Landlord (“RSL”) in the business of providing affordable housing.  It does not have charitable status but is non-profit-making.
4.	The appeal concerns the redevelopment and refurbishment of the Six Streets Housing Estate in the Braunstone area of Leicester (“the estate”).  The estate, which was owned by Leicester City Council (“LCC”) had over the years become run down with the properties becoming derelict and many were vacant.  In 1999 the Braunstone Community Association (“BCA”) was formed, its purpose being to receive and use funding under the Government’s “New Deal for the Communities” scheme.  In this capacity, BCA receives substantial government funding to deliver social and environment improvements to the residents of Braunstone.  LHA is the Accountable Body, responsible for monitoring, processing and safeguarding the public funds awarded to BCA.  LHA does not receive the funds for its own use but merely holds and distributes them on behalf of BCA.  
5.	It had been LCC’s intention that the estate should be demolished.  However, BCA then balloted the tenants, who voted in favour of a refurbishment programme rather than demolition.  We heard no oral evidence on behalf of LCC and Mr. Naik had not been a party to any of the negotiations.  What went on between LCC, BCA and LHA is not therefore known but it appears to be the case that LCC accepted the tenants’ wishes but were themselves unable financially to undertake the necessary works.  A scheme was therefore proposed under which the properties would be transferred to LHA, in its capacity as a Registered Social Landlord, who would be responsible for the refurbishment and who would then transfer them to a Community Social Landlord which would be established under the auspices of BCA.  On 18 October 2002 LHA and LCC entered into an agreement (“the Agreement”).  Clauses 1 to 3 provided as follows:
“1. The Council will sell and the Association will purchase on a phased basis in the manner hereinafter appearing and subject as follows all those lands and premises situated at Braunstone Leicester and described in Part 1 of the First Schedule hereto (“the Property”) at the price of One Pound (£1.00)
		2. The phased basis of completion shall be as follows:
i) On or before the 21st October 2002 those parts of the Property set out in Part 2 of the First Schedule (“Type 1”)
ii) Upon fourteen days notice in writing from the Council to the Association and given before the 31st day of December 2004 such of the parts of the Property listed in Part 3 of the first Schedule as shall be specified in such notice as having been vacated (“Type 2”)
3. The Council will sell with Full Title Guarantee under the provisions of the Housing Act 1985 and every other power them enabling.”
Clause 7(a) of the Agreement was an extensive and somewhat long-winded clause.  It defined the Development Period within which the refurbishment works for both Type 1 and Type 2 had to be carried out.  The clause further provided that the Council had to agree the standard to which the work had to be carried out which, at a minimum, was to be no less than the Government’s Decent Homes Standard.  Further, LHA was given the right to vary the Regeneration Scheme subject to the approval of LCC’s Director of Housing, which was not to be unreasonably withheld.  Clause 8(6) restricted the power of LHA to dispose of the property.  On completion, the property was to be transferred “to a Community Social Landlord which shall have been established and constituted under the auspices of the Braunstone Community Association”.  Clause 9 provided that if LHA had not completed the Regeneration Scheme within the development period, the undeveloped part was to be offered back for resale to LCC at cost.  Clause 16 gave LCC 50% nomination rights which meant that the LCC was eligible to nominate tenants from its own housing list for up to 50% of the completed properties.
6.	The Agreement was followed up by a formal Transfer registered as HM Land Registry.  The covenants and restrictions contained in the agreement were carried forward into the Transfer.  The property was transferred by reference to a plan in which the land was hatched red and was transferred under one single title number, LT33119.
7.	The division of the properties into Type 1 and Type 2 reflected whether or not the properties were occupied.  The Type 1 properties were unoccupied on the date of the Agreement.  Over the following months, LCC re-housed the tenants of the Type 2 properties and the Type 2 completion was therefore of the balance of the previously occupied properties that were now unoccupied.  LHA at no time took over any tenanted properties, all properties being vacant on transfer.  There was no evidence and it was not known whether or not LCC did exercise any control over the standard of work and no evidence was led as to whether or not they took up their 50% nomination rights.  Neither LCC nor the Government provided any funding to LHA for the refurbishment.  LHA had to raise the entire sum privately on the commercial market, mostly by way of mortgage from the High Street banks.  As the properties were completed, LHA let them out, all incoming tenants being tenants of LHA even where they had been nominated by LCC.  All tenants entered into a similar tenancy agreement with LHA who was landlord for them all, LCC retaining no control whatsoever over the properties or the tenants.  We were shown two newspaper cuttings dated July 2004 and February 2005 reporting the refurbishment operation.  The latter report detailed the near completion of the site as follows:
“Over the past two years LHA has invested £7 million of its own money, transforming more than two hundred of its empty and derelict houses… into some of the most in-demand… properties in the city.”
The main contractor had been New Life Regeneration Construction and an average of £25,000 was reported as having been spent on each property.  We were told by Mr. Naik that the refurbishment work commenced in early 2002 and was completed by 2005.  The properties had begun to be let from early 2003.  BCA, to this day, has not been in a financial position to set up the Community Social Landlord and the properties therefore remain in the ownership of LHA and their occupants remain tenants of LHA.  The VAT treatment of the refurbishment work has been the subject of prolonged correspondence and negotiation between LHA and the Commissioners.  It was expressly agreed by the parties that the works should take place outside the “VAT shelter scheme”.  Through their accountants, Bentley Jennison, LHA sought an early ruling from the Commissioners as to the Vat liability of the works.  The approach to the Commissioners was made by Bentley Jennison by way of submission in November 2002.  The submission set out the nature of the arrangement between the parties and expressed the parties’ concern that the contractual arrangements “will result in LHA providing a service liable to VAT to the Council”.  The submission went on to say that the Agreement had not been couched or drafted with that intent and that it was “a matter of coincidence that the agreement between the Council and LHA is drafted in terms that so nearly coincide with the prescribed format to cause concern whether LHA will be making a taxable supply”.  The submission concluded at paragraph 6.1:
“We conclude that the agreement is drafted and couched in such terms to invite the conclusion that LHA will be making a taxable supply of services to the Council of a value equal to the subsidy granted by the Council, despite the reluctance of both parties to that agreement to create such a situation.”
By letter dated 5 December 2002, the Commissioners ruled that LHA was making a taxable supply to LCC.
8.	There followed protracted correspondence attempting to agree a partial exemption method, this to depend upon the value of a “subsidy”, LHA defining the “subsidy” as the “difference between the market value and the one pound”.  By letter dated 3 October 2003, LHA informed the Commissioners that the District Valuer had valued the stock prior to transfer at £4 million and that sum was therefore the value of the subsidy.  It should be said at this stage that on the first day of the hearing Mr. Everett informed the tribunal and the Commissioners that no record could be found of any valuation by the District Valuer and he accepted there had been none.  The source of LHA’s original contention that the District Valuer had carried out a valuation was unknown and evidence of a valuation was not presented.
9.	During the course of the negotiations between LHA and the Commissioners, LHA had sought the view of LCC as to whether or not there was a taxable supply.  LCC had responded by email dated 17 June 2004.  It was the expressed view of LCC in this email that no supply had been made by LHA to LCC and LCC would not agree to paying any VAT-only invoice issued by LHA in respect of the refurbishment works.  It further pointed out that the refurbishment works were undertaken subsequent to the transfer of ownership and there could therefore be no supply to LCC of the works, LCC no longer having any interest in the houses at the time of the supply of the work.  Further if LCC had believed it was receiving a supply of the works there would have been certain implications to this including the obligation upon LCC to go out to competitive tender and legal liability issues concerning the standard of the work.  Further LCC believed it arguable that the properties were not even transferred at an under-value.  This email was “for reasons unknown” not released to the Commissioners.  We should at this stage specifically exonerate Mr. Naik from any blame for failure to disclose it as we believe his evidence that he had not even been aware of the email until the day of the hearing.  The email only came to Mr. Powell’s attention on 15 Decembet 2005 when passed to him by colleagues in a different department.  On receipt of this further information, Mr. Powell reconsidered the whole nature of the transactions and concluded in the light of all the information then in his possession that LHA had not made a taxable supply of refurbishment to LCC, his view being that the refurbishment works had been undertaken after the transfer of ownership and equated to the upgrading of LHA’s own assets.
10.	It was the Appellant’s contention that the consideration for the supply of the refurbishment services was the under-value by which the properties were transferred to LHA.  To evidence the sale at an under-value, Mr. Everett put in a letter dated 17 June 2002 from the Office of the Deputy Prime Minister to LCC.  The letter contained the following paragraph:
“2. I am directed by the Secretary of State to say that, in exercise of his powers under section 25 of the Local Government Act 1988 and of all other powers enabling him in that behalf, he hereby consents to the disposal by the Council to the Company of the Property described in the Agreement and to the provision of financial assistance, indemnities and guarantees within the meaning of section 24 of the Local Government Act 1988 in each case as described in the Agreement on, or substantially on, the terms set out in the Agreement.  No further consent of the Secretary of State in respect of anything in the Agreement to which section 25 of the Local Government Act 1988 applies is required by virtue of any of the enactments mentioned in section 26(5) of the 1988 Act.”
Legislation
11.	Under section 4(1) VAT Act 1994, VAT is charged on any supply of goods or services made in the UK where it is a taxable supply made by a taxable person in the course of furtherance of any business carried on by him.  Section 5(2)(b) defines a supply of services as “anything that is not a supply of goods but is done for consideration…”.
12.	Section 24 Local Government Act 1988 provides:
“24. Power to provide financial assistance for privately let housing accommodation
(1) Subject to section 25 below, a local housing authority shall have power to provide any person with financial assistance for the purposes of, or in connection with, the acquisition, construction, conversion, rehabilitation, improvement, maintenance or management (whether by that person or by another) of any property which is or is intended to be privately let as housing accommodation.
(2) For the purposes of this section and section 25 below a local authority provide a person with financial assistance if they do or agree to do any of the following, that is to say – 
	(a) make a grant or loan to that person;
(b) guarantee or join in guaranteeing the performance of any obligation owed to or by that person;
(c) indemnify or join in indemnifying that person in respect of any liabilities, loss or damage; or
(d) if that person is a body corporate, acquire share or loan capital in that person”
13.	Section 25(1) LGA provides as follows:
“(1) Subject to the following provisions of this section, a local authority shall neither – 
(a)	exercise the power conferred by section 24 above; nor
(b)	so exercise any other power as to provide any person, for the purposes of or in connection with the matter mentioned in subsection (1) of that section, with any financial assistance or with any gratuitous benefit,
	except under and in accordance with a consent given by the Secretary of State.”
14.	Section 25(5) provides:
“(5) For the purposes of this section a local authority provide a person with a gratuitous benefit if – 
(a)	they provide that person, or agree to provide that person, with a benefit consisting in the disposal to any person of any land or other property, in the provision to any person of any good, service or facilities, in the carrying out for an person of any works or in the making to any person of any payment; and
(b)	that benefit is or is to be provided either for no consideration or for a consideration which has a value in money or money’s worth which is significantly less than the value, in money or money’s worth, of the benefit which is or is to be provided by the authority.”
Case law
15.	We were referred by the parties to the following cases:
•	Midland Bank PLC v Commissioners of Customs & Excise 2000 STC 501
•	South Liverpool Housing Ltd v Commissioners of Customs & Excise 2004 UK VAT V18750
The Appellant’s submissions
16.	It was Mr. Everett’s contention that LHA made a supply of construction services to LCC, the consideration for the supply being the value of the “subsidy” or the under-value at which the land was transferred.  The construction service provided was the refurbishment of the 218 dwellings on the land.  It was accepted by Mr. Everett that title and ownership had passed to LHA by the time the refurbishment commenced and that the properties were transferred with vacant possession.  The purpose of the Agreement, submitted Mr. Everett, was for the housing stock to be refurbished to a standard that would allow it to be transferred to a Council-nominated Community Social Landlord.  It was LCC’s legal obligation that this standard should be met, hence the obligations placed upon LHA in the Agreement.  In spite of the transfer of title, LCC retained an interest in the properties in that it controlled the ultimate ownership of them; it retained 50% nomination rights and had the power to repurchase the properties if it wished if LHA failed to meet the criteria set out in the Agreement.  Mr. Everett likened the position of LHA to that of a “middle man” facilitating the refurbishment and ultimate transfer of the properties from LCC to the CSL.
17.	The consideration for the provision of the refurbishment services was the value of the subsidy, evidenced by the Secretary of State’s consent under section 25 LGA 1988.  Mr. Everett accepted that none of the factors contained in section 24(2) LGA were present and therefore the consent by the Secretary of State under section 25 had to reflect a gratuitous benefit which in accordance with the definition in section 25(5)(b) was the under-value.  Without the under-value, LHA would not have been able to afford to undertake the works which it has been contracted to do.  The under-value was therefore directly linked to the contractual conditions placed upon LHA.  The provision of the services and the expenditure incurred in fulfilling them are linked to the contractual obligations effective on and after 18 October 2002.  Thos contractual obligations were between LCC and LHA and as such the refurbishment works have a direct and immediate link with the services provided in fulfilling the contractual obligation.
The Commissioners’ submissions
18.	Mr. Zwart’s basic contention was that LHA provided no service to LCC but if we were to find that they had there was in any event no consideration and hence no supply.  The refurbishment works carried out by LHA were carried out pursuant to an obligation which arose consequently upon and subsequently in time to the completion of the purchase by LHA.  As the works were carried out post-completion, LHA was in effect providing construction services to itself alone by virtue of its improving its own land holding.  LHA improved its own land to enable it to let its own land to its own tenants who would pay to it a rent.  Consequently there was not the direct and immediate link required to engender the entitlement claimed by LHA (BLP Group and Midland Bank Plc).
19.	Mr. Zwart made a detailed written response to Mr. Everett’s contentions with regard to consideration (the letter from the Deputy Prime Minister having been submitted post-hearing).  Given our findings on whether or not LHA did provide any service at all to LCC, it is not necessary for us to detail here those submissions.
Conclusions
20.	We were referred by both parties to the case of South Liverpool Housing Ltd.  Although there are clear differences between the two cases, the underlying principle remains much the same.  In South Liverpool Housing Ltd, Liverpool City Council had a statutory obligation to carry out repairs to its housing stock.  Unable to meet the cost, it transferred the properties to SLH which, under the terms of the transfer, assumed responsibility for the repairs.  In that case however the transfer was accompanied by a government grant (“the dowry”) which would enable SLH to pay for the repairs.  SLH contended that in undertaking to carry out the repairs and improvements which had formerly been the responsibility of the Council, SLH was making a taxable supply to the Council of relieving it of its responsibility.  The cost of the repairs and improvements were directly attributable to that supply and the dowry constituted the consideration for the supply.  The obvious distinction between the two cases is that the supply contended for in SLH was that of relieving LCC of its statutory obligations whereas here LHA is contending that its supply is the refurbishment services.  The financial arrangements were also clearly quite different.  Beyond that however, Mr. Bishopp considered the principles and in dismissing the Appellant’s appeal, he stated as follows at paragraph 63:
“63. When one examines the judgment of the Court of Justice in Midland Bank plc it becomes apparent why the contention that the cost of the repairs and improvements is attributable to a supply (assuming there was one) to LCC is impossible to sustain.  The benefit LCC obtained was that of being relieved of its repairing obligations.  Of course, it was incumbent on SLH to do the repairs and improvements, but it did not do them in order to relieve LCC – it had already done that by accepting the transfer of the estates and thereby assuming the status of landlord.  SLH undertook the repairs and improvements because it had acquired a contractual liability to what were now its own tenants to do them.  The sums paid to the contractors were plainly a cost component of SLH’s supply of repaired and improved housing to its tenants, and the “direct and immediate link” between the cost of the repairs and the supplies to the tenants is, as I have already said, obvious.  The link between the carrying out of the repairs and improvements and the relief of LCC’s now non-existent liability is, by contrast, neither direct nor immediate.  The best that can be said is that it was “a consequence of and following completion” of the transfer – which, as the court indicated in Midland Bank plc, is not enough.”
21.	In the present case, LCC had had a statutory obligation to refurbish and update its housing stock.  In transferring the land and the stock which stood upon it to LHA upon the terms set out in the Agreement, in our view LCC divested itself not only of the land but of its obligations.  Under the terms of the Agreement, from 18 October 2002 LHA assumed title to and ownership of the land and sole responsibility for carrying out the repairs.  In assuming ownership of the properties, LHA, in carrying out the repairs, was carrying them out to its own stock.  What the Agreement did was to transfer to LHA the land and a package of obligations.  Pursuant to that agreement, LHA have carried out the repairs.  Through no fault of its own it has not yet been able to transfer the properties to a CSL but that is neither here nor there.  None of the properties were tenanted when they came into the phased ownership of LHA.  Repairs were therefore carried out to empty houses and, again on a phased basis, once the repairs were completed the properties were let out by LHA to tenants who entered into a tenancy agreement with LHA.  We accept that once the properties were renovated LCC had the right to nominate the tenants for 50% of the properties but even those tenants were not tenants of LCC, they were tenants of LHA under the exact same terms as all other tenants.  LHA upgraded and refurbished its own housing stock and let it out under its own tenancy agreements to its own tenants.  There is nothing in the refurbishment work which was provided to LCC.
22.	We did not hear any oral evidence from LCC but we did have before us the email of 17 June 2004 from Mr. Harris of LCC.  He totally refuted the suggestion that any supply had been made to LCC and if LCC did not believe it was receiving a supply of refurbishment services, it is very difficult to see how one could beimposed upon them.  Mr. Harris’s view that there was no supply is strengthened by the third paragraph of his email in which he sets out the implications which there would have been had there been a supply of refurbishments works, for example the need to put the works out to tender and the legal liability for standard of works.  These were just not issues that arose because LCC had divested itself of the land and its obligations.
23.	We also accept Mr. Zwart’s contention that there was no sufficient direct and immediate link for the reasons set out by Mr. Bishopp in paragraph 63 of SLH.
24.	For all these reasons we find that LHA did not provide refurbishment services to LCC.  In view of this finding there is no need for us to consider the question of consideration.  The appeal is dismissed.
25.	The Respondents made no application for costs and no order is made.
26.	The Appellant has a right to apply for permission to appeal against this decision in accordance with rule 39 of the Rules.  The parties are referred to “Guidance to accompany a decision from the First-Tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.
MAN/2005/0735

LADY MITTING
JUDGE
Release Date: 20 April 2010