Nell Gwynn House Maintenance Fund v. Commissioners of Customs and Excise [1998] UKHL 50; [1999] 1 All ER 385; [1999] 1 WLR 174 (15th December, 1998)

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	United Kingdom House of Lords Decisions
You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Nell Gwynn House Maintenance Fund v. Commissioners of Customs and Excise [1998] UKHL 50; [1999] 1 All ER 385; [1999] 1 WLR 174 (15th December, 1998) URL: http://www.bailii.org/uk/cases/UKHL/1998/50.html Cite as: [1999] 1 All ER 385, [1998] UKHL 50, [1999] 1 WLR 174, [1999] WLR 174

I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Slynn of Hadley. For the reasons which he gives I would allow this appeal.

This is an appeal by the Commissioners of Customs and Excise from a decision of the Court of Appeal that the respondents were not liable to pay the amount of value added tax assessed by the Commissioners in respect of services provided at a block of flats known as Nell Gwynn House in London. In so deciding the Court of Appeal reversed the decision of Popplewell J. who had upheld the decision of a VAT tribunal that the tax was payable.

The respondents to the appeal are three partners in a firm of solicitors, Graham Harvey, who are, and who have since 1993 been, Trustees of the Nell Gwynn House Maintenance Fund. By an undated agreement of appointment made between the superior lessor of the premises (NGH Apartments Ltd.), the freeholder thereof (Retac Properties Establishment) and Graham Harvey, the latter as Trustee of the Maintenance Fund undertook to:

Graham Harvey was to be entitled to retain as its remuneration a sum not exceeding per annum £17,000 plus VAT.

By clause 2 of the agreement Graham Harvey undertook to arrange for the collection of certain rents and to consider applications for alterations by the tenants of the flats. By sub-clause 2(5):

Leases made between the freeholder ("the lessor") the Maintenance Trustee and the tenant are substantially in the same form and provide:

By clause 3 of the lease the tenant covenanted with the Lessor and with the Maintenance Trustee to pay the rent and, in respect of every maintenance year, to pay the maintenance contribution to the Maintenance Trustee by two equal instalments. By clause 4(6)(b) the Lessor covenanted with the Tenant and with the Maintenance Trustee that throughout the maintenance period the Lessor would, in respect of a period in which any flat in the building is let without the tenant being required to pay a maintenance contribution, or for the period during which any flat in the building is unlet, pay a sum equal to the maintenance contribution, such sums paid by the Lessor being dealt with for all purposes as if they were a maintenance contribution paid by the tenant of the flat.

Paragraph 2 of the Third Schedule provided that the annual maintenance provision should consist of (i) a sum comprising the expenditure estimated as likely to be incurred in the maintenance year by the Maintenance Trustee for the purposes mentioned in the Fourth Schedule, (ii) an appropriate amount as reserve in respect of the matters there mentioned and certain other sums together with (iii) pursuant to paragraph 2(b) the remuneration of the Maintenance Trustee:

The Fourth Schedule lists the purposes for which the Maintenance Fund is to be applied. By paragraph (1):

In the block there are 435 flats, 270 of which are let by the landlords or their predecessors.

At the time of the Tribunal hearing the staff consisted of a general manager and 17 other persons working under the general manager's supervision including a house manager, porters, night supervisor, clerks, engineer and cleaners. An important part of the functions of the general manager and his administration staff consisted of sub-letting on short leases 197 of the 270 flats which were held on long leases by lessees of the Landlords.

It is common ground that the general manager and the staff were at all material times employed by the Maintenance Trustee expressly in its capacity as Maintenance Trustee and were paid from the Maintenance Fund. Moreover in carrying out its functions it is accepted that the Maintenance Trustee was acting in the course of a business which it carried on in respect of which it is a taxable person for the purposes of VAT separate from the Lessor.

In addition to the flats sub-let on behalf of tenants the Landlord himself separately managed 165 flats in respect of which the Landlord paid "service charges" to the Maintenance Fund through the general manager. The general manager and his staff are not concerned in any way with the letting of these latter flats.

Shortly before handing over to Graham Harvey the previous Maintenance Trustee disclosed to the Commissioners voluntarily that there had been an underpayment of VAT in respect of salaries and wages of staff employed by the Maintenance Trustee for the period 10 June 1990--31 March 1993 in the sum of £134,064.47. This sum was paid out of the Maintenance Fund but it was made clear that the Maintenance Trustee would seek repayment should it be found that the voluntary disclosure was incorrect. On 1 November 1993 the Commissioners made an assessment in respect of salaries and wages of staff employed by the Maintenance Trustee for the period 1 March 1993--31 August 1993 in the sum of £21,786.26. The Commissioners also on 3 November 1993 ruled that the voluntary disclosure had been correctly made. It was from that decision that the Maintenance Trustee appealed to the VAT Tribunal which upheld the Commissioners' ruling.

The dispute between the parties is said to raise five issues. The first is whether the Maintenance Trustee merely supplied a service consisting of the arranging for staff to be provided, to carry out the purposes for which the Maintenance Fund is to be applied under the Fourth Schedule, or whether the Maintenance Trustee itself supplied the services in the form of the activities carried out by the staff for such purpose. The second issue is whether the consideration received by the Maintenance Trustee for whichever of these two alternative services they supplied was the whole amount by way of maintenance contribution, in so far as attributable to staff salaries and wages, or whether it was only the Maintenance Trustee's remuneration, being three per cent of the maintenance contributions, or whether it was some other amount. The third question is whether it makes any difference to liability for VAT that the maintenance contributions are, after deduction of their own remuneration, held by the Maintenance Trustee on trust.

These first three issues are, as the respondents contend, closely related. They say in their written case that: "If their submissions on the proper supply are correct, then so are their submissions on the proper consideration and vice versa". I agree and consider them together.

Article 2 of the Sixth VAT Directive (E.C. Council Directive 77/388) provides that there shall be subject to VAT "the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such." In section 2 of the Value Added Tax Act 1993, passed to give effect to the Directive, as amended it is provided that:

As to the nature of the supply it is plain, as the appellant and the respondents agree, that for the purposes of VAT there is a distinction between the case where A pays B for services to be provided by B and the case where A puts B in funds so that B can arrange for C to provide the services. In one case it is the provision of services which constitutes the supply; in the other it is the arranging for services to be provided which constitutes the supply.

Payments made under clause 4(6)(b) and (c) of the lease fell into the same category.

The Tribunal also found that there was a supply to the lessor by the provision of such services, the lessor paying the sums equal to maintenance contributions under clause 4(6)(b) and (c). Popplewell J. having considered the respondents' contention that there could be no consideration for the supply of services since the Maintenance Trustees, who accepted money to apply it as provided under the agreements, could not be said to fulfil its own obligations other than as Trustee, concluded that the decision of the Tribunal was correct. He said, at [1994] S.T.C. 995, 1003 b-c:

Sir Christopher Slade, with whom Swinton Thomas L.J. and Butler Sloss L.J. agreed, concluded, at [1996] S.T.C. 310, 321 e-f that "the relevant supply of services in the present case is the arrangement by the trustees for staff to supply services to the tenants and the lessor, not the sale by the trustees of staff services."

In my opinion the Tribunal's analysis of the position is the correct one. It may well be that the Maintenance Trustee could have fulfilled its obligations under paragraph (1) of the Fourth Schedule to the Lease "To employ and keep such staff to perform such services as the Maintenance Trustee shall think necessary in and about the building" by contracting with third parties for the provision of those services. Then they would simply have arranged for those services to be provided. But they did not do this. They entered into contracts of employment, or service, with individual members of the staff. Three such contracts (treated, as I understand it, as representative) have been produced on this appeal and it is plain that the individuals were employed directly by the Maintenance Trustee; they were not independent contractors, they were not said to be employed by the landlords or by the tenants and there was nothing to indicate that they were so employed. Had they needed to sue for wages or for breach of an employer's duty the Maintenance Trustee would have been the appropriate defendant. Conversely it was the Maintenance Trustee who engaged and who could have sacked the employees. The fact that the three solicitors concerned are described as the "Maintenance Trustee" does not prevent them from contracting as employers with the staff they engage to carry out the services. Moreover it seems to be wrong and artificial to regard the suppliers of the services as the individual employees.

I do not consider that the provision in paragraph (1) of the Fourth Schedule "but so that neither the Maintenance Trustee nor the lessor shall be liable to the Tenant for any act, default or omission of such staff" indicates that the Maintenance Trustee was simply arranging for services to be provided. On the contrary it seems to me that that provision is put in primarily, so far as the Maintenance Trustee is concerned, in order to protect the Maintenance Trustee from the usual liability of a master for the acts or omissions of his servants. The obligation of the Maintenance Trustee to use its "best endeavours" to keep up an establishment comprising certain specified staff is not in any event inconsistent with the staff employed in the fulfilment of the obligation to use best endeavours being engaged directly under contracts of service.

Nor do I consider that the obligation of the Maintenance Trustee under clause 2(1) of the Appointment Agreement to "apply all sums received by it as part of the Maintenance Fund . . . for the purposes specified in the Fourth Schedule and subject thereto in accordance with the trust contained in clause 5(C) of the lease," or the provisions of clause 5(A) of the lease, are inconsistent with what seems to me to be the clear position on the facts that the Managing Trustee was supplying the services rather than merely arranging for them to be supplied.

It is agreed that the taxable amount for such supplies is, by Article 11 A(1)(a) of the Sixth Council Directive, "everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser" and that consideration means "everything received in return for the supply of services or the provision of services" (Second Council Directive Annex A paragraph 13) and Apple and Pear Development Council v. Customs & Excise Commission [1988] STC 221. In the ordinary way the taxable amount would be the payment made to the person who provides the services which here would be the Managing Trustee. In the present case however it is said that that cannot apply firstly since the respondents only arranged for the provision of services and cannot be, and are not, remunerated for anything above that and secondly because the respondents are trustees receiving and holding moneys on trust and these cannot constitute consideration for the supply of services. VAT being a tax on turnover can only be levied on moneys properly regarded as part of turnover, which these moneys when received by the Trustees were not since they were not received actually and beneficially by the Trustee.

In support of the second argument the respondents rely in particular on two decisions of the European Court of Justice. The first is case C-38/93 H.J. Glawe Speil-und Unterhaltungsgerate Aufstellungsgesellsdraft mbtt & Co. KG v. Finanzamt Hamburg-Barmbek-Uhlenhorst [1994] S.T.C. 543 which raised the question as to the proper taxable amount in respect of moneys put into gaming machines where the owner was required to ensure that about 60 per cent. of the moneys put into the machines were paid out as winnings. The court held that "The consideration actually received by the operator in return for making the machines available consist only of the proportion of the stakes which he can actually take for himself." As Advocate General Jacob said this was the commercial reality and was consistent with the aim of the Directive to tax the turnover which a trader "earns from his supplies of his goods and services" (1994 S.T.C. page 547F-H). The same principle was illustrated in Argos Distributors Ltd. v. Commissioners of Customs and Excise (C-288/94) [1996] STC 1359, 1372 f-g where it was said "According to the court's settled case law, the taxable amount for the supply of goods or services is represented by the consideration actually received for them." In this case it is said by the respondents that the only amount which they received and were entitled to retain for their benefit was the amount of their remuneration and they accept that VAT is payable on that.

Glawe Spiel was followed in Customs and Excise Commissioners v. First National Bank of Chicago [1998] S.T.C. 850 where the Bank dealt in foreign exchange not charging a commission, but relying on the profit it made over a period between the prices at which respectively it bought and sold the currency. The Bank contended that the foreign exchange transactions were subject to VAT as supplies effected for a consideration and that the value of the consideration was the full value of the currency received in exchange for that provided by the Bank. The European Court held that the supply of foreign currency being legal tender was not the supply of tangible property, but of a service. The supply of foreign currencies in the way described was the provision of a service for consideration being the difference between what it paid and what it received for the currency. The currencies received by the Bank were not the remuneration it received. That consisted in what the Bank could keep for itself, calculated as the net result of all transactions over a given period of time. In Customs and Excise Commissioners v. Plantiford (Judgment 5 November 1998, Laws, J.), the question arose as to whether a sum for packing and postage which the purchaser agreed to pay had to be added to the price of the goods for the purpose of constituting the consideration for the supply of such goods by the plaintiff. Laws, J. held that the moneys received by Plantiford, Ltd. were not received by it to hold on behalf of Parcelforce who were actually to deliver the goods. The sum of £2.50 (being postage of £1.63 plus packing of 0.87p) was received by Plantiford for itself, even though its expenses would include the sum of £1.63 for postage. It was therefore necessary to count it as part of the consideration received by Plantiford for the services it provided. It thus formed part of the turnover.

It does not seem to me that these cases resolve the present question. In the Glawe Spiel case the owner of the gaming machines did not receive for his own use the money earmarked in the reserve box for winnings. It was only the balance which he kept which was to be taken as a consideration for making available the gaming machines. The Chicago case involved quite simply the question as to how the remuneration for the services provided should be calculated. Cases involving simply the exchange of money on which a profit is made are really in a category of their own. And it seems to me that the European Court were really doing no more than following Glawe Spiel in principle. In Plantiford Ltd., the question again was to calculate the money which the company received as its own rather than money which it received on behalf of somebody else.

As to the Argos case it does not seem to me to follow that, because the moneys in the present case were stamped with a trust when first received, they could not be treated as part of the consideration or as part of turnover when subsequently used to pay staff wages. The commercial reality is that, when the respondents take the moneys which are in the Maintenance Fund in order to pay the staff to carry out the Trustee's obligations pursuant to paragraph 1 of the Fourth Schedule, the respondents are receiving the moneys beneficially in consideration of the services provided. When the Trustee applies the moneys in the trust fund for these purposes (as by clause 2(1) of the Appointment Agreement they are entitled to do) they ceased to be trust moneys. That is the time of supply for the purposes of section 5 of the Value Added Tax 1983 unless an earlier tax invoice is issued (Regulation 23(1) of the VAT (General) Regulations 1985 S.I. 1985 No. 886).

The respondents object that if this is so there is no reason why the claim for VAT should be restricted to staff wages. It should apply equally to all other costs incurred in fulfilling obligations under paragraph 1 of the Fourth Schedule. This may well be right but the Commissioners limited their claim in this way and will not seek to include other matters if they succeed on this claim.

In these circumstances, since in my view the appellants succeed on their first approach it is unnecessary to consider the appellants' alternative argument that the respondents' activities in applying moneys which belong in law to them, but which are impressed with a trust, constitute economic activities within the Sixth Council Directive and that the consideration for such activities is the net payment of service charges plus letting office fees paid into the Fund. It follows that it is not necessary to refer any questions to the European Court of Justice on this point under Article 177 of the Treaty of Rome.

The respondents contend that even if they are wrong as to what is the supply and as to what is the consideration, the effect of Article 11 A(3)(c) of the Sixth Council Directive is to exclude amounts beyond the specified remuneration from the taxable amount. Secondly they say that any supplies of maintenance, upkeep and cleaning of the building would be exempt from the imposition of VAT pursuant to group 1, item 1 of Schedule Six to the 1983 Act.

The appellants issued Customs & Excise Notice 700 (revised 1 August 1991) setting out their practice as to "Disbursements for VAT purposes." This document deals inter alia with "supplies made by or through agents". It recites that a payment to a third party may be treated as a disbursement for VAT purposes if the taxpayer acted as agent for his client when making the payment to a third party. The respondents say that this provision as to agents is not to be found in the article and that the present case falls within the article since (1) the Trustees were not engaging staff for their own account but on behalf of others; (2) they kept the trust money separately; (3) there was here clearly a reimbursement of expenses. The respondents were thus entitled to claim reimbursement of expenses "paid out in the name and for the account of" the purchaser or customer. Sir Christopher Slade, though assuming that the argument that Article 11 A(3)(c) was not to be restricted to a relationship of agency was right, still rejected the appellants' conclusion. He said:

I agree with Sir Christopher. It is to my mind clear that once it is established as it is here that the staff being paid were employed by the appellants by means of moneys which became their moneys beneficially for the purpose of paying the appellants' employees, they were not the "repayment for expenses paid out in the name and for the account of" the purchasers or customers. The respondents cannot rely on Article 11(A)(3)(c). As to the second point, Group 1, item 1 of Schedule 6 to the Act of 1983 exempts from VAT "the grant of any interest in or right over land or of any licence to occupy land . . . other than" certain categories. This was to implement Article 13(B) of the Sixth Council Directive which provides:

The parties agree that this provision would exempt the provision of maintenance services if made by the lessor to the lessee; the services would be part of the grant of the leasehold interest. See also British Airways Plc. v. Customs & Excise Commissioners [1990] S.T.C. 643. The supplies of services (in our case maintenance services standard rated) the leasehold interest (exempt) would be treated as one composite supply of services (exempt supply). It would seem that since 1 April 1994 by a concession made by the Commissioners the exemption would be treated as applying to maintenance services provided by others if they would have been treated as exempt if supplied by the lessor. That does not apply to the present case. The respondents contend, however, that where there is a close link between the supply by two suppliers it will be treated as a composite supply and if one is exempt the whole should be exempt. In Skatteministeriet v. Henriksen (case 173/880 [1989] E.C.R. 2763) the court was concerned with the provision in Article 13B(b) of the Sixth Council Directive that the 'premises and sites for parking vehicles' were excluded from the exemption given to "the leasing or letting of immoveable property." This provision was however to be interpreted as meaning that the letting of places to be used for parking vehicles was not excluded from the exemption in favour of the leasing of immoveable property "where the letting thereof is closely linked to the letting of immoveable property to be used for another purpose such as residential or commercial property, which is itself exempt so that the two lettings constitute a single economic transaction." The European Court added (page 2782):

It is said in the present case that there is the necessary close linkage since the maintenance contribution is part of the consideration for the grant of the lease of exempt land. Therefore the supply by the Maintenance Trustee is itself exempt.

It can certainly be said that the service charge is part of the consideration for the grant of the lease as well as of the maintenance services. To that extent there is a close link between the grant of the right to occupy the land and the right to receive the services. However, it is to be noted that the Henrikson case was concerned with the letting of two different immoveable properties, residential properties and garages, and not with the supply of immoveable property and of services as here. In Henriksen one of the lettings was exempt as a letting of immoveable property and the other letting was excluded from the exemption as "premises and sites used for parking vehicles". The issue was how one interpreted the exemption read with the exclusion in a situation where there was a close relationship between the two lettings. In the present case we are dealing with immoveable property in Article 13 B(b) which is exempt but not with any of the exclusions from the exemption. The supply of services is quite separate from any of the exclusions and is by a different taxpayer. Accordingly, it does not seem to me that the linking of two services so as to treat them as one arises.

In CEC v. Wellington Hospital [1997] S.T.C. 445 at page 462 (d) to (f) Millett, L.J. said:

Moreover, as the appellants point out, Article 13(B)(b) of the Directive and Group 1, item 1 of Schedule 6 to the 1983 Act refers specifically to the grant of any interest in or right over land and not any provision comparable with the provision in Article 13(A)(c) "hospital and medical care and closely related activities" and Article 13(B)(a) "reinsurance ... transactions including related services performed by insurance brokers and insurance agents".

There is nothing in Article 13(B)(b) which indicates that Group 1, item 1 of Schedule 6 of the Act ought to be construed more widely.

Fifthly, it is said that the provisions of Schedule 6A, paragraph 7 of the Act of 1983 can be relied on by the respondents. That paragraph provides as follows:

It is said that it follows that in the present case the respondent is to be treated as if making the grant of the lease.

This provision was adopted by the Finance Act 1989 pursuant to Article 13(C)(a) of the Sixth Council Directive, the latter providing that:

Whether paragraph 7 of the Act is within the powers of Article 13(C)(a) of the Directive is a question of Community law: what paragraph 7 of Schedule 6A of the Act means is a question of domestic law, no doubt interpreted in the light of the Directive.

The respondents say that if maintenance contributions or part of them "are considered to have accrued to the benefit of the Respondents" and such moneys must be seen as part of the consideration for the grant of the lease, the respondents must for the purposes of the Act be treated as if they were themselves making the grant of the lease. Accordingly, paragraph 7 of Schedule 6A by a legislative fiction removes the separate supplier problem by treating the respondents as if they were making the grant of the lease (respondents' case, paragraph 52).

With respect to the ingenious and able arguments of Mr. de Cordara, Q.C., I do not consider that this paragraph has any relevance to the present case.

Schedule 6A is concerned with the removal or waiving of tax on taxable supplies. Thus paragraph 1 provides that the grant of certain lands which is zero-rated is to be taken to be a taxable supply in the course of a business which is not zero-rated by virtue of Group 8 of Schedule 5 to the Act. Paragraphs 2 to 4 deal with the election to waive exemption in respect of land. Paragraphs 5 and 6 deal with the developers of certain non- residential buildings, eg in paragraph 6 certain rights in land are to be treated as a supply to the developer for the purpose of a business carried on by him and the paragraph deals with consequential tax liability and the recovering of input tax, so in these cases, land which was zero-rated or exempt becomes taxable no doubt with an important impact on the recovery of input tax.

Paragraph 7 of the Schedule is general, but it seems to me that it is really aimed at the situation where the legal title is in one person, so that he can make a grant of an interest in the land, but the beneficial interest is in another person, so he receives any rent or other payment for the grant of the lease.

When the lessor in this case grants a lease, he receives beneficially the rent and other payments specifically for the interest in the land: the benefit of those payments does not accrue to the Management Trustees. They receive the maintenance moneys for the services to be provided of each, e.g. cleaning and providing porterage services and maintaining the building.

Moreover, two parties receive money consequent on the grant of the lease. One is the landlord and the other is the Management Trustees. The paragraph makes no reference as to how the grant of the interest in the land is to be divided between them as it would have to be if the respondents' contention was right and I do not consider that any such division was contemplated. Moreover, the section makes no provision as to whether the effect of applying it is to make the deemed supply taxable or exempt.

Accordingly, I think, as the Court of Appeal "were inclined to think", that paragraph 7 is directed to the case where Trustees grant an interest in land on behalf of the beneficiary and the benefit of the consideration for the grant accrues to the beneficiary.

I have considered whether the European Court's judgment in Card Protection (in which a reference was made by the United Kingdom on 15 October 1996) is likely in the light of the Advocate General's Opinion delivered on 11 June 1998 to be directly relevant to the issues in this case. I do not consider that it is and since it seems to me that the answers to the issues raised in the appeal are clear, I would allow the appeal.

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Slynn of Hadley. For the reasons which he gives I too would allow this appeal.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Slynn of Hadley. For the reasons which he gives I would allow this appeal.

United Kingdom House of Lords Decisions

Nell Gwynn House Maintenance Fund v. Commissioners of Customs and Excise [1998] UKHL 50; [1999] 1 All ER 385; [1999] 1 WLR 174 (15th December, 1998)