VAT Tribunals

JOHN T NEWTH FCA, FTII, FIIT, ATT considers some recent appeals.

Not predominantly tax avoidance

A well-known bank had a wholly owned subsidiary, RBS Property Developments Limited. The subsidiary was not included in the VAT group of which the bank was the representative member.

The appeal was concerned with a scheme in connection with the construction of a building now known as the Younger Building, Edinburgh. The sequence of events was that the bank sold the land to the development company. The development company then completed the construction of the building. The bank then repurchased the completed development, but on the basis that it paid by instalments.

The original scheme, on the advice of a leading firm of accountants, was that the payments by instalments for the first three years should be limited to £50,000 a year. However, the board of the bank considered that this was too aggressive as regards tax planning and the instalments were fixed at £2 million for each of the first three years and those sums were paid with VAT.

Customs and Excise attacked the scheme on the basis that:

• the transactions were entered into solely for tax avoidance;


• the transactions were 'predominantly' for tax avoidance;


• there was an abuse of rights.

The tribunal was chaired by Mr T Gordon Coutts QC, and contained two other tribunal members and both appellants and respondents were represented by Queen's Counsel and one other. A total of 186 documents were produced during the five days of the tribunal hearing, of which there is a 28-page determination.

Interested readers may wish to study the whole of the tribunal report, but it is interesting to note that the tribunal in the current case considered that the tribunal in Blackqueen Limited was in error in its assertion of 'need for a uniform basis of assessment of value added tax throughout the community'. A report on Blackqueen was published in Taxation on 12 December 2002 at pages 267 and 268.

The summary of the findings of the tribunal were that:

• the entire series of transactions, if required to be considered as a whole, had some business purpose. They were not solely directed to tax avoidance. That finding might not have applied to an assessment raised for output tax on the re-conveyance only, but none was so raised;


• of the three stages of the scheme, stages one and two would have proceeded regardless of any tax planning. It was only in relation to the matter of re-conveyance to the bank and the payment by instalments that any suspected mitigation of tax liability could occur;


• there was a business purpose in the development being carried out by RBS Property Developments Limited. Both objectively and subjectively Developments and the Group had business reasons for structuring the development in the way they did;


• as a matter of fact, Customs and Excise failed to demonstrate that the sole purpose of the transactions they had called into question were those of tax avoidance. The mitigation of the incidence of tax was a consideration of substance which was, however, established by the evidence.

The argument by Customs based on an alleged principle that an entitlement to relief could be negated if the claim in the case was 'abusive' was also dismissed.

Because the tribunal had held that the transactions did have an independent business purpose, the reference to the Halifax case (see [2002] STI 39) was irrelevant. Accordingly, the assessments made on the appellants were discharged.

( RBS Property Developments Limited and the Royal Bank of Scotland Group Plc (17789).

Separate businesses

The appellant company traded as a public house in East Anglia. The wife of the director carried on a catering business as sole proprietrix and there was a third entity, a marina company, which also traded from the same premises as a mooring business.

Customs considered that all three business activities should be considered to be a single business and issued a notice of direction under paragraph 2(1) of Schedule 1 to the VAT Act 1994.

The record of the appeal to the VAT tribunal, of which Mr Angus Nicol was the chairman, runs to 30 pages, much of which is devoted to the very detailed facts of the case. In essence Mr Kiernan, the director of the appellant company, contended that the three businesses were never separated, because each had been started separately and they had never been joined together.

His contention, which was accepted by the tribunal, was that the facts ascertained by Customs and Excise were flawed and that the direction should be cancelled.

Paragraphs 1A and 2 of Schedule 1 to the VAT Act 1994 were relevant to the case, as was Article 4.4 of the European Community Sixth Directive. In addition, the jurisdiction of the tribunal is laid out in sections 83 and 84, VAT Act 1994.

The result of this was that the tribunal exercised a supervisory jurisdiction in the appeal. It was for the appellant to show that the Commissioners could not reasonably have reached the decision which they did reach. The well-known case of Associated Provincial Picture Houses Limited v Wednesbury Corporation [1948] 1KB 223 was relevant.

There was a somewhat convoluted family history relating to the case, but basically Mr Kiernan ran the pub, the Fish and Duck Inn, and was a director of the marina company. Customs and Excise had withdrawn their contentions that the marina company should be combined with the other two businesses. Mrs Kiernan, who was a qualified caterer, ran a business known as Ducks Off Catering Company. This business was run from the same premises as the pub, but the records were kept entirely separate and in fact Mr and Mrs Kiernan were in the throes of a divorce.

The director of the appellant company, in his evidence, drew attention to the eight criteria set out in De Voil Indirect Taxation Service at V2.223 on page 2328. The tribunal accepted that at least some of these criteria were satisfied, and also considered that the facts and matters which Customs and Excise considered to be the necessary financial, economic and organisational links fell short of establishing such links.

The tribunal therefore came to the conclusion, not without some hesitation, that the matters which Customs and Excise took into account included a number of important things that were not accurate. Accordingly, the appeal was allowed.

( Mike Kiernan's Beer Tent Company Limited (trading as Fish and Duck) (17794).)

The meaning of dwelling

The appellant was the representative member of a group comprising two relevant housing associations. The appeal concerned a decision letter that certain building works converting two properties were not zero rated. The issue in the case was whether the two buildings before conversion consisting of bed-sits were non-residential within Item 3 of Group 5 of Schedule 8 to the VAT Act 1994. The facts in the case were effectively the same as those in Look Ahead Housing Association (decision number 16816). In that case it was decided that bed-sits with shared kitchen and bathroom facilities in the pre-conversion building were not dwellings and therefore the use of the building was non-residential so that the conversion to flats was zero rated.

Accordingly, the current appeal was an attempt by Customs and Excise to persuade the tribunal that Look Ahead was wrongly decided in the light of the House of Lords' decision in Uratemp Ventures Limited v Collins [2001] 3WLR 806.

The tribunal, under the chairmanship of Dr. John Avery-Jones, considered the ordinary meaning of dwelling, as decided in University of Bath (14235). The tribunal decided that, in its view, the bed-sits before conversion were where the occupants lived, treating it as home, and were therefore dwellings. The pre-conversion buildings were accordingly designed for use as dwellings. Although it was clearly desirable that tribunals should follow each others' decisions, in this case the tribunal did not consider that the Look Ahead case required the tribunal to depart from the conclusion reached purely on the construction of the legislation and the ordinary meaning of 'dwelling'. Accordingly, the appeal was dismissed.

( Amicus Group Limited (17693).)

Enlarged school building

A charity owned the buildings of a voluntary-aided local authority primary school in Cornwall. The original buildings fell into disrepair and agreement was reached for the old school to be demolished and in its place a new school building to be erected which would contain six classrooms.

The new building was financed partly by the Department of Education, partly by the local education authority and partly by the appellant.

It was agreed that the supplies of building work carried out were supplies in the course of a construction of a building in accordance with Item No 2, Group 5 of Schedule 8 to the VAT Act 1994.

Subsequently, for various reasons, it was found necessary to provide two further classrooms and a plan was agreed for a second storey to be erected on part of the existing school building to provide those facilities. The cost of the additional works was paid for partly by the appellant charity and partly by two other charities connected with the company.

Customs and Excise contended that the supplies in connection with the construction of the additional classrooms were standard rated as being supplies in the course of the enlargement of an existing building. This is covered by Note 16 to Group 5 of Schedule 8 to the VAT Act 1994 which excludes from zero rating any enlargement of, or extension to, an existing building except where the work creates a new dwelling. The appellants, however, submitted that the supplies were zero rated in connection with Item 2 of Group 5. There was a gap of ten years between the conception of the original building works and the building of the additional classrooms.

The relevant case considered by the tribunal, which was chaired by Dr Nuala Brice, was Commissioners of Customs and Excise v St Mary's RC High School [1996] STC 1091. Mr Justice Jowitt had held that there had to be a temporal connection with the additional works in order to help the original building to function in accordance with its purpose. The judge in that case had decided that a gap of eleven years was too long and, in the view of the tribunal, the delay in the current case was too long and there was not a sufficient temporal link between the 1989 works and the 1998 works. Accordingly, the tribunal concluded that the 1998 works were the enlargement of an existing building and not the continuation of the construction of a building.

The tribunal members concluded their determination by stating that they were impressed by the evidence of the good work done by the appellant for the children of the village, especially those children under the age of five years old and those with special needs. The tribunal adopted the words of Mr Justice Jowitt at the conclusion of the judgment in St Mary's and expressed their sympathy with the appellant that it had to find the money out of its own funds to pay the VAT.

While these sentiments were no doubt appreciated by the appellants, the decision demonstrated yet again that the law can be extremely unfair, even where charities are involved.

( The Trustee of the Sir Robert Geffery's School Charity (17667).)

Issue: 3896 / Categories: