[2012] UKFTT 93 (TC)
TC01789
Appeal number: TC/2010/07126
Value
Added Tax – deductibility of input tax – stabilisation works to Harewood Castle – whether directly attributable to taxable supplies or residual – appeal
allowed.
FIRST-TIER TRIBUNAL
TAX
THE
HAREWOOD ESTATE Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
LADY MITTING (TRIBUNAL JUDGE) SUSAN
STOTT (MEMBER)
Sitting in public in Manchester on 11 January 2012.
Nigel Gibbon for the Appellant
Richard Mansell, instructed by
the General Counsel and Solicitor to HM Revenue and Customs, for the
Respondents
© CROWN COPYRIGHT
2012
DECISION
1. The
Harewood Estate (“the Estate”) appeals against the Review Decision of the
Commissioners notified by letter dated 27 January 2010 that the input tax
incurred in a project to stabilise Harewood Castle (“the Castle”) should be
regarded as residual and subject to partial exemption apportionment.
2. We heard
oral evidence on behalf of the Estate from Mr Christopher Ussher, the Estate’s
resident agent, and Mr Richard Fuller, a chartered accountant in independent
private practice who advised the Estate and acted in the capacity of its
financial controller. The Commissioners called no oral evidence.
The Estate and the Project
3. The
Estate is owned in his personal capacity by Lord Harewood who at the relevant
time was Viscount Lascelles, his father being the then Earl. Throughout this
Decision, all references to Lord Harewood refer to the current Earl. Lord
Harewood is registered for VAT as a sole trader and he runs the Estate as a
profit making business. Harewood House Trust (“the Trust”) is a separate legal
entity being a charitable trust and comprising Harewood House, its gardens and grounds.
The Estate generates income from a number of diverse activities utilising the
Estate’s resources. Its principal income streams include:
·
Rental income from commercial and business units created out of a
conversion of redundant farm buildings.
·
Rental income from residential properties, let in the main we
understand to Estate workers.
·
Farming.
·
Revenue from films and TV companies.
·
Hosting a varied and diverse number of events including concerts,
game fairs, a stage of the RAC Rally and a Girl Guide jamboree.
The VAT liability of these income streams is that all are
taxable with the exception of the residential rents which are exempt.
Responsible for masterminding and co-ordinating all the Estate activities and
for ensuring that its potential is maximised is Mr Ussher, Lord Harewood’s
resident agent.
4. On
the Estate stands Harewood Castle, a Grade I listed building and a scheduled
ancient monument, built in 1366 as a fortified manor house and last occupied
just before the Civil War. The Castle is visually atmospheric and romantic and
has been the subject over the years of a number of paintings including one by
Turner. The derelict state of the Castle had been a matter of concern to a
number of people for many years. Mr Ussher recalled his father, the then Earl’s
land agent from the 1960s to the 1980s discussing their own concerns about the
safety of the Castle. Lord Harewood and Mr Ussher were equally concerned but
the Estate quite simply did not have the necessary funding to carry out the structural
work to make it safe. English Heritage had their own concerns about the
building and in 2001 placed it on the Buildings at Risk Register. English
Heritage were however unable to enforce repairs due to the Castle’s status as a
scheduled ancient monument. Not only was the Castle dangerous in itself but
its poor state of repair had been the direct cause of the Estate losing a film
contract for the remaking of Robin Hood because the Castle had been a necessary
set but was too dangerous to be used. There was in effect a stalemate.
Everyone wanted to be able to carry out the restoration work but no-one could
afford it. The breakthrough came at the end of the 1990s when what is now
Yorkshire Television sought to move and create its entire set for Emmerdale
Farm on to the Estate. The original agreement with Yorkshire Television was
for ten years from 1997 to 2007 with a five year break clause. From 2007 to
2010, negotiations were ongoing for the renewal of the agreement with no
guarantee that terms could be agreed and therefore no certainty as to the
continued income from it. Agreement was however then reached for a renewal of
the contract and in 2010 a twenty year agreement with a ten year break was
signed. In the manner described below, the signing of the lucrative Emmerdale
contract in 1997 opened the way for a release of funding to enable works on the
Castle to be carried out.
5. An
agreement under Section 106 of the Town and Country Planning Act 1990 required
that the Estate should deposit monies with the Local Authority as part of the
process of granting planning permission for the Emmerdale Village site. The
monies were then to be used for such purposes as the planning authorities
deemed or agreed to be necessary to enhance or improve the surrounding
environment. In this case it was agreed by all parties that the monies were to
be used to fund the Castle works. With the ability of the Estate through its
section 106 fund to put in a substantial sum towards the works, English
Heritage agreed to match the Estate’s contribution. Estimated costs were
fractionally under £1 million to which English Heritage contributed half with
the remaining half coming from the section 106 fund. The English Heritage
grant was subject to a number of conditions, principally, for the purposes of
the issue before us, that the Castle should be opened to access by members of
the public for a minimum of sixty days per year, although the manner of that
access was a matter for the Estate. The purpose of the work was to create from
an unsafe ruin a safe ruin. There was never any intent to carry out a
wholesale restoration but to conserve and stabilise the surviving structure.
Work on this stabilisation project got off the ground in approximately 2002 and
lasted some years as it was a meticulous and painstaking and highly specialised
task. There was a hiatus in the completion of the project during the 2007-10
negotiations with Yorkshire Television because of the uncertainty that they
created over the continuation of funding. With the signing of the new
agreement in 2010 came completion of the works on the ruin itself and
importantly the access to the site. The opening up of the Castle is to be
launched in Spring 2012 to coincide with the annual opening by the Trust of Harewood
House.
The VAT Position
6. As
the works progressed, quarter by quarter the Estate sought to recover the input
tax on the cost of the project, it being the view of the Estate that the tax
was wholly recoverable. The dispute between the parties as to the
recoverability of the input tax arose on a routine visit to the Estate by Officer
David Adams on 1 March 2006. Mr Adams did not give evidence but we did have
his visit report in front of us. Mr Gibbon pointed out that the report would
not have been made up contemporaneously, suggesting therefore a question mark
over the accuracy of what had been written. We do not know when it was
compiled but we have no reason to doubt that it accurately recorded Mr Adams’
notes and his understanding of what he was told at the time. His interview had
been with Mr Fullerton and covered a number of topics including the tax
treatment of the Castle project. The relevant part of Mr Adams’ note reads as
follows:
“b) Substantial costs
incurred in connection with the restoration of Harewood Castle. Again there
appears to be no business activity here. Mr Fullerton thought it might be the
intention to rent it to Harewood House Trust who run Harewood House stately
home and gardens. In which case as there is no Option to Tax in place this
would be an exempt supply and all related I/t would be non deductible. Mr
Fullerton thought that the I/t had been agreed with Customs. No record in the
EF Documents section downloaded to my laptop. Mr Fullerton to research the
matter prior to my return visit in two weeks. On my return visit I was
informed that when the grants to restore the castle were obtained one of the
main conditions was that the castle would be made available to the general
public. The logical way to do this was for it to be done through Harewood
House Trust Ltd as part of their commercial activities. The intention has
always therefore been to rent the castle to HHTL and prior to making any rent
charge to put an Option to Tax in place. This is to be done in the near future.
Requested sight of evidence to show that at the time input tax was reclaimed
there was in place an intention to make taxable supplies, i.e. tax advisers
advice, business plan, etc. “
An option to tax the Castle site was applied for on 24
March 2006 and granted with effect from 23 March 2006. A further visit took
place on 17 July 2007 when Officer Katherine Chapman visited the Castle itself
and again met with Mr Fullerton. Her note records.
“Mr Fullerton advised that
admission to the general public was not the intention (and given the access
difficulties it’s not hard to see why). Instead the Castle would be open for
accompanied tours to special interest groups (local history, academic etc) and
would be available for this purpose for 60 days a year (this is a condition of
the English Heritage grant funding). Mr Fullerton advised that ‘narrow
advertising’ would take place to attract such visitors.
There would be no such thing
as a formal rent between my trader and the Trust but there will be some form of
commercial relationship. This has been described as a ‘facility fee’ for
things like parking, staff time etc. and will be charged in both directions.
Details to be confirmed by letter.
The other prospective
business use was hiring the Castle out as a filming location. Details to be
confirmed by letter.”
7. Throughout
the period from the first visit to the final review decision, there took place
protracted correspondence between the parties which we were taken through by Mr
Gibbon and Mr Mansell. It is not necessary to record it at length here but
certain themes are detectable. It is clear that in the light of what Mr Adams
understood to be the position regarding the use to which the Castle was to be
put, the Commissioners had doubts over a number of issues: Was there any
business purpose? Having concluded that there was, did the cultural exemption
apply if the Castle was to be rented out to the Trust? Repeated requests were
made for evidence as to intended use including for example a business plan.
Although information and documentation were at stages provided to the
Commissioners, they never received sufficient evidence to be able to be
satisfied that the Estate should be entitled to recover its input tax in full.
The Commissioners’ final position was set out in the following terms in their
review letter of 27 January 2010 and this became the principal argument put
forward by Mr Mansell before the Tribunal.
“The conclusion is that costs
involved in this case are by way of running the business as a whole rather than
just the project alone. Therefore the VAT incurred on this project should be
treated as residual income tax and it will therefore be necessary to apportion
the input tax in the same proportion as the input tax already claimed on your
client’s Returns for the periods involved”.
Oral Evidence
8. Mr
Ussher’s evidence focused on the intended use of the Castle once the work had
been completed. As far as Mr Ussher was concerned, every Estate asset has to
be considered in the light of what it can produce for the Estate. There had
never been any intention that the Castle would not be used to generate income
once the works had been carried out although when running any large estate commercially,
the income streams vary and evolve. It was this concept of evolution that made
the preparation of a cogent business plan back in 2002 unrealistic and
unhelpful. There were a number of core income generating activities which Mr
Ussher and Lord Harewood had always had in mind for the Castle from the very beginning.
It had always been the intention of the Estate to allow paying public access
although how that access would be managed was not to be resolved for a number
of years. Equally, it had always been intended that, once safe, the Castle
could and would be used for film shoots and the production of plays. It was
Lord Harewood’s intention that DVDs should be produced of the Castle. These
activities were always present in the minds of Lord Harewood and Mr Ussher, but
as Mr Ussher pointed out, for as long as the Castle was enveloped in
scaffolding it could not properly be marketed. Once that scaffolding was
removed then the Estate could begin to market its potential much more
actively. Further opportunities for its use were evidenced by correspondence put
before the Tribunal. A letter dated 20 October 2011 from the York Archaeological
Trust suggested a dig. A letter dated 16 November 2011 from the Senior
Locations Manager for Emmerdale sought permission to use the Castle in an up
and coming storyline and also asked if its details as a location could be
passed on to the planners of other programmes. The potential uses were many
and varied and evolving but, said Mr Ussher, all would be charged for and
nothing would be free. Much thought was given to how the public access could
be administered because this was not something within the expertise of the
Estate. The favoured idea was that the Trust with their depth of expertise
would take on the day to day management of the public access and how this could
work and its costings were evidenced by a letter from Jennifer Auty, the
Trust’s Head of Learning dated 21 October 2011. Mr Ussher was adamant that
there had never been any intention of renting the Castle out to the Trust. Mr
Ussher pointed out that this could never happen because every other activity
which the Estate had planned would thereby be frustrated if the Estate had
surrendered its interest to the Trust. The Trust was merely to be the conduit
through which visitor access was to be handled.
9. Mr Fullerton
also repeated in his evidence that there was never any intention to rent the
Castle out to the Trust. The Trust’s involvement would merely be one of
administration. He denied that he had ever told Officer Adams that the Estate
intended to rent out the Castle and said that Mr Adams’ recorded note was
inaccurate.
Documentary Evidence
10. In addition to the
correspondence between the parties the Estate put into evidence a draft news
release dated 6 November 2001, an undated newsletter and an extract from the
Yorkshire Post dated 30 July 2005. Although marked draft, we have no reason to
believe the final version of the news release differed from the draft. The
news release quotes Mr Ussher as saying:
“We are delighted to receive
confirmation of this substantial grant to what we consider to be a historical
project that will be of great interest to a wide number of people. We are now
fine tuning a strategic plan to ensure the money is spent to best effect over
the next three years. We are committed to a tasteful renovation, avoiding
turnstiles and all the usual trappings of tourist attractions. However, the
scheme is also considering various interpretive packages that will allow the
site to be seen and approached by a wider audience, through personal visits and
via the internet. “
11. Although undated, the
newsletter would appear to date from 2001/2002 as it begins by saying “you
will, I am sure, have seen that scaffolding has appeared around the Castle….”
This must date it to the very beginning of the structural works. The
newsletter describes the objective of the works as being to “consolidate the
structure and preserve it as is, keeping it as the magical ruin you come upon
in the woods”. It goes on to say:
“The final objective is to
facilitate access to the Castle once the work has been completed. How this
access will be operated on a day to day basis has yet to be finally agreed
between the Estate and English Heritage. Once agreed, however, it is likely
that Harewood House Trust will take on the day to day management of the access
and also offer extensive interpretation of the Castle and its immediate
surroundings, both on and off site, through computer graphics and virtual
reality. This is, indeed, something to look forward to in the not too distant
future.”
The extract from the Yorkshire Post concludes again with
a quote from Mr Ussher:
“We hope that we will not only be able to take
people to the Castle, but offer ‘off-site’ access and interpretation through
the use of computer technology as well. Our access plans will hopefully be
published towards the end of the year.”
The Law
12. Sec. 26 (1)and(2) VAT
Act 1994 entitles a taxable person to credit for so much of his input tax as is
allowable by regulation as being attributable to taxable supplies made or to be
made by the taxable person in the course of furtherance of his business.
13. Regulation 101 (1) VAT
Regulations 1995 provides that the amount of input tax which a taxable person
shall be entitled to deduct shall be the amount which is attributable to
taxable supplies in accordance with the Regulation.
14. Regulation 101(2) (b)
provides that there shall be attributable to taxable supplies the whole of the
input tax on such supplies as are used or to be used by him exclusively in
making taxable supplies.
15. Regulation 101(2) (c)
provides that no part of the input tax on such goods or services as are used or
to be used by him exclusively in making exempt supplies shall be attributable
to taxable supplies.
16. Regulation 101(2) (d) goes
on to provide that there shall be an attribution to taxable supplies such proportion
of the residual input tax as the value of his taxable supplies bears to the
value of all his supplies.
Submissions
17. By the time the case reached
hearing, the Commissioners had accepted that the Castle was a business asset
and that the VAT incurred on the cost of the stabilization project was input
tax and therefore deductible by the Estate. The Commissioners however
contended that the costs of the work were attributable to the business purposes
of the Estate as a whole and should therefore be treated as residual and
apportioned in accordance with the standard partial exemption method used by
the Estate. By contrast it was the contention of the Estate that the costs
were incurred in relation solely and exclusively to the Castle and the taxable
supplies to be made from it and the input tax and was therefore wholly
deductible. This was the nub of the issue before the Tribunal and the approach
to be taken by the Tribunal was agreed by both parties, namely, that we should
look at the intention of the Estate in carrying out the project at the time
when it was being carried out. We now set out in rather more detail the
contentions of each party.
18. Mr Gibbon, for the Estate,
put his argument that the input tax recoverable in its entirety in two
alternative ways. His primary submission was that it had always been the
intention of the Estate to make taxable supplies using the Castle and that
there was a direct and immediate link between the works done and that
intention. Whilst accepting that it had not been possible to date to make any
taxable supplies, that was not relevant as the intention had always been there
and it was sufficient that there should be a direct and immediate link to
intended supplies. In the alternative, if the Tribunal were to find that it
had not been the intention of the Estate to make taxable supplies from the
Castle but the Castle was merely a part of the Estate, an Estate run for
business purposes, then one had to carry out a Section 101 attribution before
looking at the pot. If one does that the only possible benefit of the Castle
to the Estate would be in the making of taxable supplies and there would
therefore be a direct attribution. All the events which the Estate would be
able to put on, using the Castle, would be taxable supplies and the presence of
a safe Castle on the Estate could therefore only be attributed to activities
which are taxable. The only exempt supplies made by the Estate are the
residential lettings and there could be no attribution whatsoever to those.
Even in that event therefore the input tax had to be fully recoverable.
19. Mr Mansell in his submission
began by asking two questions. What was the intention at the time the costs
were incurred and in incurring the costs to what was there a direct and
immediate link? He referred us to the case of Midland Bank Plc v Customs
and Excise Commissioners [2000] STC 501. This was an ECJ case which
concluded in paragraph 35 as follows:
“2. It is for the national
court to apply the ‘direct and immediate link’ test to the facts of each case
before it. A taxable person who makes transactions in respect of which VAT is
deductible and transactions in respect of which it is not may deduct the VAT in
respect of the goods or services acquired by him, provided that such goods or
services have a direct and immediate link with the output transactions in
respect of which VAT is deductible, without it being necessary to take into
account art 17(2), (3) or (5) of the Sixth Directive. However, such a taxable
person cannot deduct in its entirety the VAT charges on input services where
they have been utilised not for the purpose of carrying out a deductible
transaction but in the context of activities which are no more than the consequence
of making such a transaction, unless that person can show by means of objective
evidence that the expenditure involved in the acquisition of such services is
part of the various cost components of the output transaction.”
20. Mr Mansell contended that
the Castle was merely part and parcel of the Estate and the works to the Castle
were carried out as part and parcel of the business of running the Estate. The
input tax was therefore deductible only to the extent that the costs upon which
it was incurred were to be used in making taxable supplies. Mr Mansell pointed
out that there had in fact been no taxable supplies made and he contended that
there was insufficient evidence of intention. He highlighted the notes of Officer
Adams indicating that exempt supplies were to be made and as there had been no
option to tax in place at the time, an attribution would have to be to those
exempt supplies. Mr Mansell further submitted that the work to the Castle was
in fact only carried out at the behest of English Heritage executing its
responsibility to ensure that listed buildings were preserved. The aim of the
works was only to make the Castle safe, not to carry out any intended or
specific economic activity. The works carried out were attributable to the
business purposes of the Estate as a whole and were therefore residual.
Conclusions
21. We begin by saying that we
accept without reservation the entirety of the oral evidence of Mr Ussher and
Mr Fullerton. The facts in the main were uncontentious, the only area of difference
between the parties being on the contents of the discussion between Mr
Fullerton and Officer Adams on the Officer’s first visit to the Estate. We
accept that Mr Fullerton at no time told Mr Adams that it was the intention of
the Estate to rent the Castle out to the Trust. This is not to imply any
deliberate mis-recording by Mr Adams. It may be that Mr Fullerton did not make
himself clear or that Mr Adams misunderstood what Mr Fullerton was telling
him. We also find as a fact that there was never any intention that the Castle
would be rented out to the Trust. As Mr Ussher said, if the Estate were to
surrender its interest in the Castle to the Trust, all the other income
generating activities which the Estate were considering would be frustrated.
The inter-action between the Estate and the Trust in regard to the Castle would
be one of day to day management only.
22. Mr Mansell makes a powerful
argument that the works were carried out only at the behest of English Heritage
and thus with the sole purpose of making the structure safe. It is not
however an argument which we accept. As Mr Ussher again pointed out, the
Estate was putting a vast sum of money into the remedial works and the Castle
had to make itself pay. The Estate had already lost a film contract because
the Castle was unusable. Its business potential was huge but the structure had
to be safe and sound before that potential could be realised. In committing
its funds to the works, we find that the Estate at all times intended that the
Castle should be used as an income generating asset and it was wholly and
exclusively to that end that the works were carried out.
23. We can again see the point
of Mr Mansell’s case that nothing appeared to be concrete, and the plans were
nebulous but as we were told in oral evidence, they had to be because who knew
what opportunities were going to arise for the Castle? We accept that from the
beginning the intention was to open it to the paying public and make it
available to film and television companies. We appreciate the Commissioners’
frustration at the lack of any cogent business plan but we accept the evidence
we heard that any attempt to put a business plan in place would be unrealistic
and would serve no useful purpose.
24. The oral evidence alone is
sufficient for us to reach the conclusions we have just set out but that oral
evidence is supported by the press release, the newsletter and the news
report. The power of these documents is that they were all prepared
contemporaneously with the work being carried out. They all refer to the
intention to open the Castle to paying public access and for wider artistic and
creative activities. We find the combination of the oral and documentary
evidence compelling and we conclude that the intention of the Estate in
carrying out the works was to enable the Castle to be used for income
generating activities, all of which would be taxable supplies. There is
therefore a direct and immediate link between the works and the intended
supplies. The involvement of English Heritage was to make the plan possible.
Their monetary intervention allowed the rectification work to be carried out.
.
25. We conclude by commenting on
the reference to the cultural exemption. This was an argument raised by the
Commissioners in early correspondence and we can understand how it arose, given
Mr Adams’ belief that the Castle was to be rented out to the charitable Trust.
This argument appeared to have been abandoned in correspondence and was not
referred to in the Commissioners’ Statement of Case. However, it was referred
to by Mr Mansell in his closing arguments and we were uncertain as to whether
or not it was still being treated by the Commissioners as a live issue. For
the avoidance of any doubt therefore we should make it clear that given that
there was never any intention to rent out the Castle to the Trust, and that the
intention was that the Castle would at all times be operated by the Estate
being run purely and simply as a profit making business, the cultural exemption
could never apply.
26. For all the reasons given
above the appeal is allowed.
27. 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 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules
2009. The application must be received by this Tribunal not later than 56
days after this decision is sent to that party. 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.
TRIBUNAL JUDGE
RELEASE DATE: 31 January 2012
