[2014] UKFTT 157 (TC)
TC03295
Appeal number: TC/2012/01013
VALUE
ADDED TAX – zero rating – donation of an interest in land to charity – whether
goods for the purposes of Item 2 Group 15 Schedule 9 Value Added Tax Act 1996 –
no – appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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RONDINI LIMITED
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Appellant
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- and -
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THE TREASURY OF
THE ISLE OF MAN
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Respondent
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TRIBUNAL:
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JUDGE JONATHAN CANNAN
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MR MAURICE TRACE FCA
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Sitting at Murray House,
Douglas on 20 January 2014
Mr Watkin Gittins of
Montpellier Group (Tax Consultants) Limited for the Appellant
Mr Peter Mantle of counsel for
the Respondent
© CROWN COPYRIGHT
2014
DECISION
Background
1.
Rondini Limited is an Isle of Man company registered for VAT in the Isle of Man with effect from 12 December 2006. The issue on this appeal is whether or not a
supply by Rondini in the form a gift of an interest in land to a charity is
zero rated or standard rated for VAT purposes.
2.
There was no issue as to the facts on this appeal and we did not hear
oral evidence. We make the following findings of fact based on the parties’
submissions and the documents before us.
3.
On or about 16 November 2006 Rondini purchased a 999 year lease of land
known as Unit 4, Yew Tree Way, Stonecross Business Park, Golborne, Lancashire
(“the Land”). It opted to tax the Land for VAT purposes and constructed an
industrial unit on it. Rondini recovered input tax on the purchase of the Land
and on construction of the unit. It then sub-let the unit and accounted to the
Treasury for output tax on the rental income.
4.
On or about 31 March 2010 Rondini sold part of its interest in the Land
to two individuals. It is accepted by Rondini that output tax must be accounted
for on those supplies.
5.
On or about 1 April 2010 Rondini transferred by way of gift its
remaining interest in the Land to a charity, the Achna Charitable Trust. There
was initially an issue as to whether the Achna Charitable Trust was a charity.
However well before the hearing the Treasury conceded for all relevant purposes
in this appeal that it was a charity.
6.
Rondini considered that the supply to the Achna Charitable Trust was
zero rated pursuant to the provisions we shall now consider. On 2 August 2010
Rondini de-registered for VAT. Broadly the issue can be described as whether
the supply of an interest in land is a supply of goods for the purposes of the relevant
zero rating provision.
Statutory Provisions
7.
All references in this decision are to the Isle of Man legislation and
secondary legislation, save where otherwise stated.
8.
In his skeleton argument served prior to the hearing Mr Gittins, who
appeared on behalf of Rondini, submitted that because the Land was situated in
the UK when Rondini transferred its interest in the Land, there was no supply
for the purposes of section 1 Value Added Tax Act 1996 (“VATA 1996”). During
the course of the hearing he indicated to us that he did not pursue that
argument and we say no more about it.
9.
Section 94(1) VATA 1996 defines a major interest in land as
follows:
“ ‘major interest’, in
relation to land, means the fee simple or a tenancy for a term certain
exceeding 21 years;”
10.
Schedule 5 VATA 1996 deals with matters to be treated as a supply
of goods or services. It provides as follows:
“4 The grant,
assignment or surrender of a major interest in land is treated as
a supply of goods.
5 (1) Subject to
sub-paragraph (2), where goods forming part of the assets of a business are
transferred or disposed of by or under the directions of a person carrying on
the business so as no longer to form part of those assets, whether or not for a
consideration, that is a supply by him of goods.
…
9 (1) Subject
to sub-paragraphs (2) and (3), paragraphs 5 to 8 have effect in relation to
land forming part of the assets of, or held or used for the purposes of, a
business as if it were goods forming part of the assets of, or
held or used for the purposes of, a business.
(2) In
the application of those paragraphs by virtue of sub- paragraph (1), references
to transfer, disposition or sale shall have effect as references to the grant
or assignment of any interest in, right over or licence to occupy the land
concerned.
(3) Except
in relation to -
(a) the
grant or assignment or a major interest; or
(b) a
grant or assignment otherwise than for a consideration,
in the application of
paragraph 5(1) by virtue of sub-paragraph (1) the reference to a supply of
goods shall have effect as a reference to a supply of services.”
(Emphasis
added)
11.
The UK equivalent of Paragraph 4 is contained in Paragraph 4
Schedule 4 Value Added Tax Act 1994 (“VATA 1994”). It provides as follows:
“4. The grant,
assignment or surrender of a major interest in land is a supply
of goods.”
(Emphasis
added)
12.
Schedule 9 VATA 1996 covers zero rating, and in particular Group
15 relates to charities. Item 2 zero rates the following supplies:
“ The
donation of any goods for any one or more of the following purposes -
(a) sale
by a charity or a taxable person who is a profits-to-charity person in respect
of the goods;
(b) export
by a charity or such a taxable person;
(c) letting
by a charity or such a taxable person.”
13.
Section 94(6) VATA 1996 provides that Schedule 9 is to be
interpreted in accordance with the notes contained in that schedule.
14.
Note 1F to Item 2 provides as follows:
“ In items 1, 1A and 2,
and any Notes relating to any of those items, “goods” means goods (and, in
particular, does not include anything that is not goods even though provision
made by or under an enactment provides for a supply of that thing to be, or be
treated as, a supply of goods).”
15.
Zero rating under Item 2 and Note 1F were introduced by
the Value Added Tax (Charities and Aids for the Handicapped) Order 2000.
The UK secondary legislation in an order of the same name made identical
provision in Item 2 and Note 1F as the Isle of Man order,
although in the UK they appear in Group 15 Schedule 8 VATA 1994.
16.
In addition to the legislation set out above, both parties relied on the
terms of an agreement dated 15 October 1979 between the Governments of the Isle
of Man and the UK in relation to customs and excise matters. This is known as
“the Common Purse Agreement” and reflects the fact that subject to
certain exceptions there is intended to be a customs union between the Isle of
Man and the UK pursuant to which the Isle of Man administers and collects
duties and VAT in the Isle of Man and receives a share of those revenues.
17.
For present purposes we need only refer to paragraphs 3 and 13 of the
Common Purse Agreement:
“3. Except as provided
for in this Agreement or as may otherwise be agreed, the Isle of Man Government
agrees to keep the law relating to the management of the Customs & Excise
revenues and associated control functions correspondent with that of the United
Kingdom and to legislate to maintain that correspondence whenever necessary
and, in particular, when changes are made in relevant United Kingdom law.
…
13. The Governments
agree that the United Kingdom and the Isle of Man shall be treated as a single
tax area for the purposes of value added tax, but that each Government will
continue to provide separately for the care and management of the tax …”
Decision
18.
Both parties were agreed that the policy behind zero rating in the
present context is to encourage donations to charity, removing liability for
output tax even where input tax credit has previously been obtained.
19.
There is no doubt that the interest which was gifted to charity by the
appellant was a major interest.
20.
Paragraph 4 Schedule 5 VATA 1996 provides that any supply of a
major interest is treated as a supply of goods. Plainly in the ordinary meaning
of the words land is not goods and Paragraph 4 is a deeming provision.
21.
Mr Gittins noted the different language used in the Isle of Man
provision to the equivalent provision in the UK. In Paragraph 4 Schedule 5
VATA 1996 (“is treated as a supply of goods”) compared to the UK provision in Paragraph 4 Schedule 4 VATA 1994 (“is a supply of goods”). At
the same time he pointed to paragraph 3 of the Common Purse Agreement, and
submitted that the Isle of Man provision was not correspondent with the UK provision. In the light of the Isle of Man’s obligation under the Common Purse Agreement
he submitted that the Treasury could not rely on the Isle of Man provision, but
must rely on the UK provision. Hence he argued that the supply was a supply of
goods, and was not just treated as a supply of goods.
22.
Mr Gittins submitted that the effect of that analysis was that the
restriction to zero rating in Note 1F was not engaged. The supply was a
supply of goods and was not simply treated as a supply of goods.
23.
Mr Mantle submitted that the purpose of Note 1F was to restrict
the meaning of the term “goods” as it is otherwise used in the VAT legislation
of both the Isle of Man and the UK. For the purposes of zero rating under Item
2, the term goods is to bear its ordinary, non-technical meaning.
24.
Mr Mantle submitted that both under Paragraph 4 Schedule 4 VATA 1996
and Paragraph 4 Schedule 4 VATA 1994 land was deemed to be goods for the
general purposes of VAT. The difference in language was not significant.
25.
It seems to us that Mr Mantle’s submissions are clearly correct. The
Isle of Man legislation and the UK legislation deem land to be goods. Such
deeming provisions are common and create what might be described as a
“statutory fiction”. A fact or state of affairs is deemed to exist where it
would not otherwise exist. It is clear that by saying the assignment of a major
interest “is” a supply of goods or “is treated as” a supply of
goods the effect is the same. In each case the legislation creates the same
statutory fiction. In substance there is no difference in the effect of the
terminology.
26.
It is also clear, as Mr Mantle submitted, that Note 1F disapplies
that statutory fiction in the case of zero rating donations to charity. For
those purposes goods “does not include anything that is not goods even
though provision made by or under an enactment provides for a supply of that
thing to be, or be treated as, a supply of goods”.
Note 1F plainly covers the language of both Paragraph 4 Schedule 4
VATA 1994 which provides that the assignment of a major interest is
a supply of goods and Para 4 Schedule 4 VATA 1996, which provides
for the assignment of a major interest to be treated as a supply
of goods.
27.
Mr Gittins referred us to the Explanatory Note issued with the Isle of
Man Order introducing Item 2 and Note 1F. The Explanatory Note
states as follows:
“Note 1F excludes land
(and other things deemed to be goods for the purposes of the VAT law) from
zero-rating under items 1, 1A and 2. ”
28.
Both parties agreed that we could take into account the Explanatory Note
as an aid to construing the provisions of Item 2 and Note 1F (See
Bennion on Statutory Interpretation 5th edition Sections 60 and
219). An Explanatory Note is an aid to construction, in particular where
it casts light on the objective setting or contextual scene of the instrument
being construed, or the mischief at which the instrument is aimed. However in
construing the instrument, the intention expressed by the words enacted cannot
be altered by an Explanatory Note. See Tarlochan Singh Flora v Wakom
(Heathrow) Ltd [2006] EWCA Civ 1103 at [15]-[17].
29.
Both parties also agreed that the terms of the Explanatory Note to the Isle
of Man order were identical to the UK order.
30.
For the reasons given above we do not consider it necessary to have
regard to the terms of the Explanatory Note in construing the scope of zero
rating. It is clear that land is excluded from zero rating by the terms of Note
1F.
31.
In any event, the Explanatory Note supports the Treasury’s case. There
is no mention of the term ‘land’ in either Item 2 or Note 1F. The
only mention of land in this context comes in the Explanatory Note which states
that gifts of land are excluded from zero rating.
32.
Mr Gittins argued that Rondini transferred an interest in land, as
opposed to land itself. As such, he submitted it was significant that the
Explanatory Note restricted the exclusion to land and not an interest in land. He
further submitted that an interest in land was not covered by the term “other
things deemed to be goods” in the Explanatory Note.
33.
We do not accept Mr Gittins submissions in relation to the Explanatory
Note. Mr Mantle referred us to meaning of the term ‘land’ in a statutory
context. Section 3(1) Interpretation Act 1976 defines land as follows:
“ ‘land’ includes
messuages, tenements and heraditaments, houses and buildings of any tenure, and
any interest in land, and any easement or right in, to or over
land. ” (Emphasis
added)
34.
We should also mention that the UK Interpretation Act 1978 defines land
in similar terms, and in particular as including “any estate, interest … in
or over land”.
35.
There is no reason to expect the draughtsman of the Explanatory Note to
have used a more limited meaning of the term land. Indeed there is no rationale
to distinguish between land and an interest in land in the present context.
36.
We have already rejected Mr Gittins’ further submission in relation to
the Explanatory Note. Land is deemed to be goods and the Explanatory Note
confirms it is to be excluded from zero rating when donated to a charity.
37.
Our construction of the statutory provisions, including our conclusion
that the IOM legislation and the UK legislation have the same effect, is enough
to dispose of this appeal. We do not need to consider therefore what the
position might have been if the Isle of Man legislation did not correspond to
the UK legislation.
38.
For the sake of completeness we also briefly set out further submissions
made by Mr Mantle in support of the Treasury’s position.
39.
Firstly, Mr Mantle submitted and Mr Gittins accepted that a provision
for zero rating is an exemption from VAT and as a general rule must be strictly
construed (See Stichting
Uitvoering Financiële Acties v Staatsecretaris van Financiën (Case 348/87) [1989] ECR 1737). Hence Item
2 is to be strictly construed and Note 1F, which limits the
exclusion, is to be broadly construed. In the present context that would
support the conclusion we have reached above that excludes land or an interest
in land from zero rating.
40.
Secondly, there is no policy reason why the gift of a 999 year lease of
land should be zero rated and the gift of a freehold interest in land should be
standard rated. As appears above, we accept that submission
41.
Thirdly, it is not necessary for the Isle of Man VAT legislation to
repeat word for word the UK legislation in order to comply with the Common
Purse Agreement. The two will correspond where they have the same effect. Mr
Gittins on the other had suggested that they must correspond word for word. We
can see the strength of Mr Mantle’s submission, but strictly it is not
necessary for us to express any view on this issue and we prefer not to do so.
42.
In this context Mr Mantle pointed to the derivation of the Isle of Man
provision, in particular that it was the same form of words as had been used in
the UK in section 5(6) Finance Act 1972. Without seeing precisely how section
5(6) came to be Paragraph 4 Schedule 4 VATA 1994 and the history of
the Isle of Man legislation we cannot attach significance to this derivation.
43.
Fourthly, Mr Mantle submitted that the UK provisions must implement the
terms of the EU Principal VAT Directive (2006/112/EC). Article 14
of that Directive provides as follows:
“ ‘Supply of goods’ shall
mean the transfer of the right to dispose of tangible property as owner.”
44.
Article 15(2) then provides that:
“Member States may regard the following as
tangible property:
(a) certain interests in
immovable property; ”
45.
We accept that the UK is permitted by the Principal VAT Directive to
treat interests in land as tangible property. In turn, the Isle of Man is bound
by the Common Purse Agreement to have corresponding legislation.
46.
Fifthly, Mr Mantle drew our attention to Paragraph 5(1) Schedule 5
VATA 1996 which provides that where goods forming part of the assets of a
business are transferred so that they no longer form part of the assets of the
business then that is a supply of goods. In effect that applies whether or not
there is a consideration for the transfer. Paragraph 9(1) then refers to
the effect of Paragraph 5(1) in relation to land. In particular it is to
have effect “as if [the land] were goods forming part of the assets …”.
47.
Paragraph 5(1 applies to the transfer not because an interest in
land falls within the meaning of “goods”, but because Paragraph 9(1)
deems it to be goods.
Conclusion
48.
For the reasons given above we are satisfied that the transfer by the
appellant of its interest in the Land to the Achna Charitable Trust was not
zero rated. In those circumstances we must dismiss the appeal.
49.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 14.19A of the Rules of the
High Court of Justice 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party.
JONATHAN CANNAN
TRIBUNAL JUDGE
RELEASE DATE: 30 January 2014
