Halifax PLC Country Wide Properrty Investments Ltd & Anor v Revenue & Customs [2001] UKVAT V17124 (05 July 2001) 

                                                                                          17124

Tax avoidance – Input tax – Partially exempt trader – Building works required for that trader’s business – Trader’s input tax recovery rate restricted - Scheme for fully taxable subsidiary of trader to incur expenditure on building works – Meaning of expressions “supply”, “economic activities” and “business” – Transaction carried out for tax avoidance purposes with no business purpose – Whether transactions designed to incur input tax in subsidiary qualify as supplies – No - Appeals dismissed – EC 6th Dir. Arts. 2 and 4
LONDON TRIBUNAL CENTRE

HALIFAX plc	Appellants
COUNTRY WIDE PROPERTY INVESTMENTS LIMITED
LEEDS PERMANENT DEVELOPMENT SERVICES LIMITED

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

Tribunal:	STEPHEN OLIVER QC (Chairman)
PRAFUL DAVDA  FCA

Sitting in public in London on 29, 30 and 31 January and 1 February 2001

Dr Paul Lasok QC and Michael Patchett-Joyce, counsel, instructed by Addleshaw Booth & Co, Solicitors,  for the Appellants

Jonathan Peacock, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2001

DECISION

1.	The three Appellants are companies in The Halifax Plc Group. They are referred to as The Halifax, CWPI and LPDS respectively. CWPI and LPDS appeal against decisions of the Commissioners in letters dated 4 July and 7 July 2000 so far as those decisions operate to disallow claims for recovery of  or relief for input tax.  The Halifax appeals against the decisions so far as they operate to treat it as having received taxable supplies of construction services which, The Halifax claims, should have been treated as supplies to CWPS.

2.	To give an understanding of the transactions we start by identifying what Halifax perceived to be its tax problem and the solution that was offered to it by its tax consultants.  We shall then summarize the steps taken to implement the solution and identify the tax results sought from those steps.  The introduction to our decision will conclude with an explanation of the effects of the decisions that the Commissioners have taken.  

The problem

3.	The Halifax is a bank.  Because its supplies are, for VAT purposes, largely exempt its recovery rate at the relevant time was less than 5%.  (The “partial exemption” rule in the VAT code produces this result.  That rule is designed to ensure that VAT is borne by a partially exempt taxable person, such as The Halifax, to the extent that he does not make taxable supplies; he is thereby treated to that  extent as a final consumer.)  The Halifax needed to construct “call centres” for the purposes of its business at sites in Northern Ireland, Scotland and North East England.  These are referred to as “the Sites” or “the Site” as appropriate.  Had The Halifax done so directly, it would have suffered input tax on the construction costs and this would have been largely irrecoverable.  

The proposed solution, in summary

4.	The solution involved using three other companies with separate VAT registrations in The Halifax “Companies Act” group.  

5.	The first of these companies would agree to take an interest in the Sites from The Halifax and would then engage the second company to carry out the construction works.  The contract for the construction works and payment to the second company would take place in a prescribed accounting period falling shortly before the end of the first company’s “partial exemption year”.  The first company would make a relatively low value standard rated supply during that prescribed accounting period.  Thus when the first company’s accounting period ended it would have incurred recoverable input VAT relating to the construction works; its only supply during that accounting period and during its partial exemption year would have been the small standard rated supply made by it.  It could on that basis claim recovery of the excess of input tax over output tax for the accounting period.  The amount reclaimed would be greater than the amount of VAT relief that would have been available to The Halifax had it engaged the contractors and paid for the construction works itself. 

6.	The second company would discharge its obligations to carry out the construction works by itself engaging arms length builders etc.  It would account for the VAT that it had charged on the invoice issued to the first company and in due course recover the VAT charged by the builders.  

7.	In the next partial exemption year of the first company, it would transfer its interests in the Sites to the third company (thereby making substantial exempt supplies) and the third company would lease them back to the Halifax.

8.	For the solution to be effective –

•	The Halifax and the first and the second company had each to be separately registered for VAT:

•	throughout its partial exemption year, the first company’s standard rated outputs should be as high a proportion of its total outputs as was possible; to this end the first company’s exempt supply, made when it assigned its interests in the Sites to the third company, had to be delayed until a later partial exemption year and

•	the property interests in the Sites vested in the first company had to be designed so that they did not rank as capital items; had they been capital items, adjustments to the first company’s recovery position would have been due when it transferred those interests on  to the third company.

The actual arrangements in outline

9.	At the start of 2000 The Halifax owned the following land interest in the Sites:

(i)	a lease with about 125 years to run of land at Cromac Wood, Belfast (“the Cromac Wood Site”);

(ii)	a fee simple interest in land at Dundonald (“the Dundonald Site”); 

(iii)	a fee simple interest in land at Livingston (“the Livingston Site”) and

(iv)	the freehold in land at Leeds (“the Leeds Site”).

Transactions relating to the Cromac Wood, the Dundonald and the Livingston Sites

10.	The appeal proceeded, by prior agreement between the parties, almost entirely on a Statement of Agreed Facts which referred to agreed documents.  The only area left to primary fact-finding by the Tribunal related to the events that took place at board meetings of LPDS and CWPI (see paragraphs 31-37 below).

11.	The Halifax had, on 17 December 1999, contracted with Cusp Ltd, an arms length property development and contracting company, for the development of the Cromac Wood Site.  This is referred to “the Cusp Agreement”. 

12.	The company taking the role of  the first company in the solution was LPDS.  The role of the second company was allocated to CWPI.  Both were wholly owned subsidiaries of The Halifax : both had their own VAT registrations.  The role of the third company was taken by Halifax Property Investment Ltd (“HPIL”),  another wholly owned subsidiary of The Halifax; it was unregistered for VAT.  The solution required the second company (CWPI) to contract with the arms length builders etc for construction works.  Consequently The Halifax had first to be disengaged from the Cusp Agreement.  This was achieved by a novation agreement dated Monday 28 February 2000 (“the Novation Agreement”) by which the Cusp Agreement was novated from that date so that The Halifax’s rights and obligations became those of CWPI.

The transactions of  Tuesday 29 February 2000 (in summary)

13A.	The Halifax entered into three loan agreements (“the Initial Loan Agreements”), one for each of the Cromac Wood, the Dundonald and the Livingston Sites.  Under these The Halifax agreed to lend to LPDS up to the following amounts for the purposes of acquisition of an interest in and the development of the Sites.  The total facility in respect of each Site was –

Cromac Wood	-£32m	
Dundonald	-£ 9m	
Livingston	-£18m	

LPDS issued a debenture to The Halifax securing those loans.  

13B.	The Halifax and LPDS entered into an Agreement for Works (“the First Agreement for Works”) under which LPDS agreed to carry out certain construction works for The Halifax at the Cromac Wood Site, at the Dundonald Site and Livingston Site.  LPDS was paid by The Halifax £104,085.12 plus VAT of £18,214.88, totalling £122,300 for those construction works. The works to be carried out by LPDS  covered certain specific tasks such as installing a damp proof underflow membrane at Cromac Wood, piped services at Dundonald and an air handling steelwork package at Livingston.  LPDS issued three receipted VAT invoices to the Halifax for that amount in total on 29 February.  

13C.	The Halifax entered into an agreement to grant to LPDS leases (the “Agreement for Leases”) of the Cromac Wood Site, the Dundonald Site and the Livingston Site, each for a term of 20 years from completion of the respective lease  at a premium.  The lessee was to have an option to extend each lease to 99 years.  

13D.	LPDS entered into a development and funding agreement (the “First CWPI Agreement”) with CWPI under which CWPI was to carry out or procure the carrying out of construction work on the Cromac Wood Site, the Dundonald Site and the Livingston Site.  Included within the works to be carried out under that agreement were those works which LPDS had agreed to carry out or procure under the First Agreement for Works.  

13E.	Under the terms of the respective Initial Loan Agreements the following initial advances were made by The Halifax to LPDS in respect to the following sites:

Cromac Wood	£25,114,100	
Dundonald	£  5,989,600	
Livingston	£13,589,000	

The total of those initial advances, being the sum of £44,692,700, together with the £122,300 payable by The Halifax to LPDS for the works to be carried out under the First Agreement for Works, £44,815,000 in aggregate, was paid by The Halifax into a client account at Addleshaw Booth & Co, solicitors, who were instructed by The Halifax to deal with it at the direction of LPDS.  On instructions from LPDS payment was made to CWPI of £38,140,425.54 plus VAT of £6,674,574.48 totalling £44,815,000 by inter-account transfer; this was acknowledged by letters from Addleshaw Booth & Co to LPDS and CWPI later that day.  The funds were later placed on overnight deposit with Yorkshire Bank plc in the name of  Addleshaw Booth & Co.  The payment to CWPI was an advance payment for the works carried out or procured by CWPI under the First CWPI Agreement, in respect of which CWPI issued a receipted VAT invoice to LPDS on that date.

14.	29 February 2000 was the last day of LPDS’s prescribed accounting period 2/00.  Later in the month it submitted a VAT return claiming recovery of VAT of £6,656,359.58.

15.	On 1 March 2000 Addleshaw Booth & Co transferred the sum of £44,815,000 plus accrued interest to an account in CWPI’s name at Lloyds TSB Bank Plc, Mincing Lane EC3 branch.  

The transactions of 6 April 2000

16.	These followed a Board meeting of LPDS on Monday 3 April.  

16A.	The Halifax granted to LPDS leases of the following sites for the following premiums pursuant to the Agreement for Leases, each of which was treated as an exempt supply for VAT purposes:

Cromac Wood Site	£3,957,581	
Dundonald Site	£1,440,400	
Livingston Site	£1,991,000	
	£7,388,981	

Each premium was funded by LPDS by a further draw-down under the respective Initial Loan Agreement.

16B.	LPDS entered into an agreement to sell and assign each of the leases to HPIL with completion of each assignment to take place the first working day following completion of the works to that particular Site to be carried out by CWPI for LPDS under the First CWPI Agreement.  The consideration payable on each of the assignments to HPIL was to be calculated by reference to a formula such that it was expected that LPDS would generate  the following profits from those assignments:

Cromac Wood	£70,000	
Dundonald	£55,000	
Livingston	£55,000	

16C.	HPIL entered into agreements to under-let premises at the Cromac Wood Site, the Dundonald Site and the Livingston Site to The Halifax, in each case for a premium to be calculated by reference to the price to be paid by HPIL to LPDS for the assignment of LPDS’ lease of the particular Site plus a profit.  The profit to be achieved by HPIL from under-letting these premises was expected to be as follows:

Cromac Wood	 £35,000	
Dundonald	£25,000	
Livingston	£25,000	

Transactions relating to the Leeds Site

17.	On 13 March 2000, following meetings of the Boards of Directors of LPDS and CWPI, a substantially similar series of transactions took place in relation to the Leeds Site as had taken place in relation to the other Sites.  These can be summarized as follows:

(i)	Agreements for Works between The Halifax and LPDS “the Second Agreement for Works”;

(ii)	Loan Agreement between The Halifax and LPDS;

(iii)	Agreement for Lease between The Halifax and LPDS of the Leeds Site;

(iv)	Payment by The Halifax to LPDS and issue of receipted VAT invoice in relation to the initial works under the Agreement for Works in the sum of £35,659.58 plus VAT of £6,240.42 totalling £41,900; 

(v)	First advance of  funds totalling £3,017,602 under the Loan Agreement;

(vi)	Development and funding agreement (the “Second CWPI Agreement”) between LPDS and CWPI;

(vii)	Pre-payment by LPDS to CWPI and issue of receipted VAT invoices in relation to works under Second CWPI Agreement in the sum of £2,603,831.50 plus VAT of £455,670.50 totalling £3,059,502.

18.	In its return for the March 2000 accounting period LPDS claimed recovery of £453,659 of input tax.

19.	On 6 April 2000, following a meeting of the Board of LPDS on 3 April, the following transactions took place in relation to the Leeds Site:

(i)	Lease of the Leeds Site by Halifax to LPDS;

(ii)	Agreement  to sell and assign that Lease from LPDS to HPIL and 

(iii)	Agreement by HPIL to grant an underlease to The Halifax.

20.	CWPI engaged, or in relation to novation agreements with The Halifax in relation to the Cromac Wood Site, assumed obligations with, unconnected main contractors and unconnected third party professionals, including architects, project managers, quantity surveyors, planning supervisors, structural engineers, mechanical and electrical services engineers for the carrying out of  the works under the First CWPI Agreement and the Second CWPI Agreement. For convenience we refer to those contractors and professionals as “the arm’s length builders”. CWPI entered into an agreement with The Halifax on 29 February 2000 for the services of two named individuals “for and in connection with the Development at the rate of £100 per month (excluding VAT).”  Some undated agreements with the arm’s length builders were in evidence.  We understand that they have been entered into by stages in 2000 and thereafter.  Those that we saw were accompanied by separate agreements to which The Halifax was a party.  In those separate agreements the arm’s length builder “warrants” to The Halifax that, among other things, “he has carried out and will carry out the duties and obligations on his part to be performed under and in connection with (his) Appointment”. 

The tax results sought from the above arrangements

21.	Assuming the solution achieved its tax objectives:

(i)	The Halifax would obtain input tax relief for the deductible proportion of the VAT of £18,214 on LPDS’s supply under the Agreement for Works of 29 February 2000 and of the VAT charged on LPDS’s supply under the Agreement for Works of 13 March 2000 relating to the West Bank Site.

(ii)	LPDS would (as noted above) claim repayment of VAT of £6,656,359 for its 2/00 period being the VAT shown on the invoice issued to it by CWPI on 29 February 2000 relating to the First CWPI Agreement and £453,659 for its 3/00 period being the VAT shown on the invoice issued to it by CWPI on 13 March 2000 relating to the Second CWPI Agreement.

(iii)	CWPI would account for output VAT on the whole of the VAT shown on the invoices issued by it to LPDS in respect of the First and the Second CWPI Agreements.

(iv)	CWPI would deduct the input tax shown on the invoices issued by stages over the construction period by the arm’s length builders.

(v)	LPDS’s agreements to sell and assign the leases of the Sites to HPIL on 6 April 2000 would be exempt transactions; but, because they took place in a different partial exemption year, those supplies would not cause any adjustments to LPDS’s input tax recovery position for the prescribed accounting periods 2/00 and 3/00 which fell within its partial exemption year ended on 31 March 2000.

Subsequent events

22.	The Commissioners questioned both claims in a letter dated 4 May to Mr R F Boyes, the group financial director of Halifax Group plc; they asked for documents, for copies of the advice received and for a statement of Mr Boyes’ “own view of what the purpose of entering into these arrangements was, supported by relevant contemporaneous documents”.  On 23 June 2000 Mr Boyes responded by letter.  Mr Boyes did not attend the hearing.  We therefore set out the relevant parts of his letter.  (The reference to “Andrew” is to Andrew Cox, tax manager of The Halifax.)  The letter reads –

“Andrew has told me that you regard the purpose of Halifax plc, LPDS and CWPI in entering into various transactions relating to the facilities of Belfast, Dundonald, Livingston and West Bank as being relevant in determining the VAT treatment of those transactions.  As you know, Halifax, LPDS and CWPI disagree strongly with your view ... 

However, in order to facilitate your consideration at these issues, I thought it helpful to set out my thoughts on the purposes underlying these transactions.  

For the avoidance of any doubt, Halifax was driven by commercial imperative to expand its call centre facilities by obtaining additional facilities at Belfast, Dundonald and Livingston and to maintain and extend its existing facility at West Bank.  Satisfying that commercial requirement is therefore the overriding objective of the transactions.  

In considering the possible approaches to procurement of those facilities, Halifax, like any commercial entity, has an obligation to minimize as far as possible the cost to it of the provision and operation of them.  In your position, you will be well aware that it is a duty of a company’s  directors to ensure as far as possible that the company’s businesses are managed effectively and efficiently in its best interests and those of its shareholders.  As part of that process, it was natural for Halifax plc to consider the possibility of  mitigating the incidence of the cost which would derive from it incurring irrecoverable input VAT.

Halifax plc therefore considered with its advisers how it might reduce or mitigate that cost.  The transactions entered into were approved in outline by Halifax plc with that aim, and referred to the directors of LPDS and CWPI to consider their implementation.

On a VAT-inclusive basis the way in which Halifax plc has procured the facilities is more cost-effective than other ways of doing so, and this is a direct result of the way in which the VAT legislation impacts on the transactions.  We do not deny that this was the prime consideration of Halifax plc in referring the matter to the directors of LPDS and CWPI.

The directors of those companies were, of course, obliged to act purely in the interests of those companies.  The purpose of LPDS and CWPI in entering into the transactions was to make a profit.  I understand that you have already seen the minutes of the relevant Board meetings confirming this.”

23.	The Commissioners responded to Addleshaw Booth & Co, the solicitors for the Appellants, on 28 June 2000 asking, among other things –

“... If you would confirm in terms, please, whether it is accurate to say that Halifax plc’s sole purpose in arranging the insertion of LPDS and CWPI contractually between itself and the arm’s length construction contractors was to procure (in group terms) the recovery of substantially all of the VAT on the construction works, when otherwise most of that VAT would have been irrecoverable.”

Addleshaw Booth & Co replied for the Appellant on 29 June 2000 confirming that The Halifax’s sole purpose in arranging the insertion of LPDS and CWPI contractually between itself and the arm’s length construction contractors was to procure (in group terms) the recovery of substantially all the VAT on the construction works, when otherwise most of that VAT would have been irrecoverable.

24.	The Commissioners refused LPDS’s claims  and those of CWPI in relation to VAT charged to it by the arm’s length contractors and professionals.  These refusals, contained in the letters of 4 and 7 July 2000, are the subject of the Appellants’ appeals.

Effects of decisions appealed against

25.	The effect of the Commissioners’ decisions, if correct, can be summarized as follows:

•	LPDS made no supplies of construction works to The Halifax under the Agreements for Works dated 29 February 2000 and 13 March 2000.  No output tax is therefore due from LPDS.

•	LPDS obtained no supplies of construction works from CWPI under either the First or the Second CWPI Agreements.  No output tax is, therefore, due from CWPI : and LPDS incurred no input tax which it can recover.  

•	The Halifax incurred no input tax under either of the Agreements for Works which it can recover.  

•	On the proper analysis of the arrangements as a whole The Halifax received supplies from the arm’s length builders and not from LPDS; it could recover the tax shown on the invoices applying its normal partial exemption recovery percentage.

Short statement of contentions

26.	The case for the Appellants, put positively, was that all the transactions forming part of the arrangements with which these appeals are concerned were genuine; they resulted in supplies that had genuinely been made.  The supplies of the arm’s length builders self-evidently served commercial  purposes.  So also did CWPI’s supplies of construction services and LPDS’s supplies of construction services and land. Each of those two companies and HPIL were to earn  profits from their participation in the arrangements.  Those factors formed part of the commercial considerations behind the arrangements. The Appellants accepted that the arrangements had been structured so as to achieve an advantageous fiscal result.  But, it was argued, the VAT system imposed a charge to tax on a transaction by transaction basis; genuine transactions such as these could not be disregarded for any reason.  

27.	The Commissioners’ first submission was that a transaction entered into solely for the purposes of  VAT avoidance was neither itself a “supply” nor a  step taken in the course or furtherance of an “economic activity” as those terms in the Sixth Directive (and the equivalent terms in the VAT Act 1994) are properly to be interpreted.  The application of this principle of interpretation to the present arrangements meant that LPDS’s undertakings to The Halifax in the Agreements for Works did not count as supplies; nor did CWPI’s undertakings to LPDS in the First and Second CWPI Agreements.  The Commissioners’ second submission was that transactions entered into solely for the purpose of VAT avoidance should, in accordance with the general principle of EC law preventing “abuse of rights”, be disregarded and, instead, the terms of the Sixth Directive (and, here, the provisions of VAT Act 1994 which implement the Directive) be applied to the true nature of the transactions in issue.  The reality of the arrangements, whichever approach be adopted, was that the only true supplies of construction services were those provided by the arm’s length builders etc. and those supplies were made direct to The Halifax.

Were the relevant transactions entered into solely for the purposes of VAT avoidance?

28.	The Commissioners’ submissions, whether they be right or wrong as a matter  of principle, depend on findings of fact that the impugned transactions were carried out solely for the purposes of VAT avoidance.  We have to determine this.  To do so we need first to examine the agreed facts, the documents and particularly the minutes of meetings of LPDS and CWPI, the evidence of the directors present at those meetings and Mr Boyes’ letter of 23 June 2000 (set out above).

The execution of  the solution

29.	We heard evidence from Matthew Lodge, divisional secretary for Halifax Group Treasury, from Rodger Fleming, head of  group property with the Halifax,  from Richard Spellman, chief executive, retail financial services, from Stephen Barker, asset manager at Halifax Plc and from Donald McPherson, deputy secretary at Halifax Plc.  Mr Lodge  had conduct of the Board meetings of LPDS and CWPI on 29 February, 10 March and 3 April.  The other four gentlemen were directors of one or other of those two companies.  Mr Fleming and Mr Spellman provided us with additional information about the background to the transactions.  We read a short statement produced by Jonathan Lloyd, a director of LPDS, confirming that he had attended a board meeting on 29 February 2000

30.	In 1995 The Halifax had set up a call centre for its banking and finance business at West Bank, Leeds.  By 1999 The Halifax had decided to increase its call centres.  The rest of the West Bank site had become available and the Leeds call centre was to be extended into that.  The sites at Cromac Wood, Dundonald and Livingston had been identified as suitable sites for other call centres.  Cromac Wood was to be occupied by the “Halifax Direct” division.  Planning permission had been obtained in the late 1990s, professionals had been engaged and suitable contractors had been identified.  

31.	By the end of 1999 the Cromac Wood arrangements for the construction of that call centre were well under way.  In December 1999 The Halifax entered into a development agreement for the Cromac Wood Site (the Cusp Agreement) and other contractors had been appointed.  Also in December 1999 The Halifax accepted in principle a tender for the development of the Dundonald Site to be carried out by Farons Construction.  On 27 January 2000 The Halifax appointed Faithful & Gould to do construction work at the Cromac Wood Site.  

32.	At the same time Mr Boyes was concerned to solve the irrecoverable VAT problem that arose from The Halifax’s status as a partially exempt trader.  Ernst & Young, accountants, were instructed to advise and to work with Mr Cox, the Halifax’s tax manager.  The solution, as already noted, required input tax on the development services to be incurred by a company which was not part of the Halifax VAT group: and it had to be incurred in a partial exemption year when that company had made no or minimal exempt supplies.  LPDS was chosen as a suitable company; it had, in the past, carried out special projects such as managing development projects.  As the steps in the solution required LPDS to take interests in the Sites from The Halifax and to pass them on to another company in The Halifax group by exempt supplies, all its zero-rated input tax had (as noted in paragraph 8 above) to be incurred before Saturday 1 April 2000; LPDS  would then be able to make the exempt supplies in its next partial exemption year. 

33.	At some time in the week starting 21 February 2000 Mr Boyes approved the scheme designed as the solution to The Halifax’s partial exemption problems.  Mr Fleming explained that he had written to Mr Boyes setting out the proposal and asking for his approval. Addleshaw Booth & Co were instructed to produce the documentation and the necessary board minutes.  The meetings of the boards of LPDS and CWPI were convened for Tuesday 29 February 2000, starting at 4.10pm.  At the end of the previous week Mr McPherson had been appointed to CWPI’s Board and Mr Barker had been appointed to LPDS’s Board.  But first a problem had to be cleared out of the way.  The Halifax were already committed to Cusp Ltd their Cromac Wood contractors.  On Monday 28 February 2000, therefore, The Halifax, CWPI and  Cusp Ltd entered into a novation agreement under which the agreement with Cusp of 17 December 1999 was novated so that The Halifax’s rights and obligations thereunder became those of CWPI.

34.	Shortly before 4.10pm on Tuesday 29 February the representatives from Addleshaw Booth arrived and handed to Mr Lodge and the four directors the minutes for the meetings.  Mr Andrew Cox, the tax manager, was also present.  The documents to be executed were laid out in readiness.  Mr Lodge conducted the proceedings.  None of the directors had seen the minutes before, nor had they read the agreements.  The minutes were fully and completely drafted and were used as agendas.

35.	The CWPI meeting started at 4.10pm.  For about five minutes Mr Lodge read out portions of the minutes.  The minutes recorded, among other things –

•	the novation of the agreement with Cusp Ltd which had, the previous day, made CWPI a party to that agreement:
•	that CWPI was to enter into the first CWPI agreement with LPDS;

•	that a service agreement would be entered into concerning the provision of Halifax Plc personnel to CWPI and

•	that a profit of £100,000 should result from the first CWPI agreement.

The minutes record “due and careful” consideration following which the meeting was adjourned to enable the signing of the seven documents presented to the Board.  Consideration, Mr Fleming and  Mr McPherson accepted, had taken 2-3 minutes.  They had not discussed the risks and rewards of the construction works that they were undertaking, said Mr Fleming.  The profit figure had been written into the minutes when they arrived or, to use his words, it had been “built into the scheme in advance”.  Mr Fleming said that his principal concern had been with the propriety and legality of entering into the transactions covered by the minutes.  When the meeting resumed, the board  noted the records set out in the minutes that –

•	some £44.8m held by Addleshaw Booth to the account of LPDS was to be transferred on the same day to be held to CWPI’s account; 
•	CWPI was forthwith to issue a VAT invoice to LPDS in respect of  the receipt of that amount and
•	that £44.8m was to be transferred to Lloyds TSB Bank London EC3 and placed a deposit “taking into account the Company’s obligations to pay for the carrying out of the developments at the Properties”.

The CWPI board meeting then came to an end

36.	At 4.20pm on 29 February 2000 the LPDS meeting was held under the eye of Mr Lodge who again took the directors through the minutes.   Mr Lloyd and Mr Barker are recorded as the directors present.  Mr Lloyd is recorded as having read out the minutes –

•	recording novation of the Cusp Ltd agreement with CWPI and
•	noting that the meeting was to consider the agreements with The Halifax for leases  of the four Sites, the Initial Loan Agreement and the First Agreement for Works.

The minutes recorded that the Cromac Wood lease was to be granted for a premium of some £3.9m being an amount equal to a market value premium for a 99 year lease for the Cromac Wood Site.  The minute records the board as having considered “that the intention of the company was to identify a suitable purchaser of the leasehold interest to be acquired by the company under (that) lease as soon as possible following the execution of the Agreement for Lease”.  The chairman is recorded as having noted the company’s intention as being to enter into an agreement for sale with that purchaser as soon as it was identified, with the sale being completed once the development had been completed, the aim being for the company to realize a profit from the sale.  Minutes in similar form cover the Agreements for Lease of the Dundonald Site and of the Livingston Site.  None of the directors recalled knowing who had determined the amounts of the premiums stated as payable on grant of the leases of the three Sites.  The minutes go on to record that the chairman had noted that “it was anticipated that CWPI would accept appointment by the company to carry out the development of the properties.”  The minute then records the fact that it had been brought to the attention of the meeting that the Agreement for Works provided for LPDS to supply construction services to Halifax  plc to a value of £122,300.

37.	That was followed by “due and careful consideration” (2-3 minutes) after which it was resolved that the agreements be approved.  The documents were then executed.  It was then noted in the minutes that LPDS was, later that day, to receive payment under the Agreement for Works of £122,300 from The Halifax in return for which it would issue a VAT invoice.  The minutes conclude by noting that LPDS was to make a payment to CWPI under the terms of the First CWPI Agreement of some £44.8m and that it expected to receive a VAT invoice on the same day.  

38.	On 10 March 2000 meetings of  LPDS and CWPI took place.  These dealt with the West Bank Site.  In form they were substantially similar to the minutes of the meetings of 29 February 2000.   They  record payment by The Halifax to LPDS and issue of a receipted VAT invoice in relation to the initial works under the Second Agreement for Works in the sum of some £35,600 plus VAT of some £6,200; they further record prepayment by LPDS to CWPI and the issue of receipted VAT invoices in relation to works under the second CWPI Agreement in the sum of some £2.6m plus VAT of  some £455,600.  Mr Spellman, chief executive, retail financial services, who chaired the LPDS board meeting which had taken from 4.00pm until 4.05pm, was questioned about what commercial considerations the board had taken into account and about the profit that had been built into the transactions for LPDS.  He explained that LPDS was a “special purpose company”.  He said “... if a process which I know is understood and supported by the group finance director has been put in place,  I do not choose to question whether he has got it right”. 

39.	On Monday 3 April, the first working day of LPDS’s next partial exemption year, its directors (Mr Fleming and Mr Barker) met.  The minutes record Mr Fleming as reporting that a suitable purchaser has been found for the Sites.  The directors approve the agreements to assign LPDS’ property interests to HPIL as purchaser.  It is noted that the sale should result in an aggregate profit to LDPS of some £102,000.  The documents were approved.  The minutes end with a resolution that LPDS should apply to The Halifax for the draw-down of funds sufficient to pay the premiums on the leases (totalling in aggregate some £26.7m).  Completion date of  the leases was to be 6 April.

40.	On 6 April The Halifax granted LPDS leases of all four sites and LPDS entered into agreements with HPIL to sell and assign these to HPIL with completion to take place as and when the works on each particular Site had itself been completed.

Were the transactions carried out for tax avoidance reasons?

41.	Common to both arguments advanced for the Commissioners is the proposition that the transactions comprised in the solution were steps in a tax avoidance scheme and, viewing them individually and collectively, those transactions had no business or economic function other than to facilitate the solution to The Halifax’s partial exemption problem.  Before addressing the arguments on their merits, we shall start by setting out our understanding of the concept of “tax avoidance” in the Sixth Schedule.  In Direct Cosmetics v Customs and Excise Commissioners [1988] STC 540 (Case 5/984) the ECJ considered “tax avoidance” in the context of the Sixth Directive generally and specifically in the context of Article 27.1, which enables the Council to authorize Member States to introduce special measures to prevent tax evasion or avoidance.  The following are passages (found on page 568) of the decision of the Court:

“20.	The concept of tax avoidance as expressed in Article 27.1 of the Sixth Directive is a concept of Community law.  Hence the definition of that concept is not left to the discretion of the Member States.

21.	The wording of Article 27, in all the language versions, draws a distinction between the concept of avoidance, which represents a purely objective phenomenon, and that of evasion, which involves an element of intent.

22.	That distinction is confirmed by the historical background to Article 27.  Whilst the Second Council Directive ... referred exclusively to the concept of “fraud”, the Sixth Directive mentions in addition the concept of tax avoidance.  This means that the legislature intended to introduce a new element in relation to the pre-existing concept of tax evasion.  The element lies in the inherently objective nature of tax avoidance; intention on the part of the taxpayer, which constitutes an essential element of  evasion, is not required as a condition for the existence of avoidance.

23.	That interpretation is in conformity with the principle governing the system of value added tax according to which the factors which may lead to distortions of competition at national and Community level are to be eliminated and a tax which is as neutral as possible and covers all the stages of production and distribution is to be imposed. ...  It follows that the system of value added tax is concerned principally with objective effects, whatever the intentions of the taxable person may be. ”

Our task, therefore, is to identify what the solution was designed to achieve and to examine the steps taken in implementation of the solution and from those to conclude, one way or the other, whether those factors possess the inherently objective characteristics of tax avoidance.

42.	We have already identified The Halifax’s  problem.  The scheme of the United Kingdom VAT partial exemption code, which, it is accepted, fully complies with the principles of the Sixth Directive, has the effect of restricting The Halifax’s ability to reclaim input tax on its own “purchases” of goods and services.  In The Halifax’s case the partial exemption recovery rate was some 5%.  It shared this VAT status with other institutions providing similar financial services.  The solution was designed to produce the same economic result to The Halifax (Companies Act) group as would have been available to The Halifax had it not suffered the restriction imposed by the VAT partial exemption code.   Mr Boyes, group financial director of Halifax Group, accepted that The Halifax adopted and implemented the solution as a means of “mitigating the incidence of the cost which would derive from it incurring irrecoverable input VAT”: see paragraph 22 above.

43.	Focussing on the participation of LPDS and CWPI, the other main participators in the scheme, we are satisfied that the functions they played were dictated exclusively by the demands of the purported tax solution.  The following, among other factors, have led us to that conclusion:

•	The funding arrangements were designed to enable LPDS to make the single lump sum payments to CWPI on 29 February 2000 ( and on 10 March in respective of the Second CWPI Agreement): see, for example, paragraph 14(1) of the minutes of the LPDS board meeting of 29 February. They were designed also to enable LPDS to pay the premiums on the leases of all sites in LPDS’s next partial exemption year and so to enable it to on-sell and assign those leases  to HPIL forthwith.  

•	LPDS obtains its leases from The Halifax over all the Sites on 6 April 2000 and immediately agrees to sell or assign them to HPIL which in its turn immediately agrees to grant the sub-leases back to The Halifax.  Those transactions ensure that The Halifax is never out of possession of the Sites and the benefit of the construction works carried on the Sites.  Although LPDS purports to have obtained the benefit of the construction services from CWPI (under the First and the Second CWPI Agreements), it never gets any interests of substance in the land or in the works on the land because of the immediate agreements for the onward sales and assignments to HPIL; instead it stood to get back the sums that it paid to CWPI by operation of the price formula in the sale and assignment documents plus a small margin.  Its participation in the scheme is purely to enable the purported tax solution to be achieved.  The profit margin is, we conclude,  inserted to enable the directors to vote on the minutes without  exposing them to allegations of impropriety.  

•	The “warranty” or “warranties” whereby the arm’s length builders agreed with The Halifax directly that they would carry out all the undertakings given by them under the contracts for their services (see paragraph 20 above) were designed to put The Halifax in the same position as it would have been if it had contracted with the builders in the first place.  (In the case of the Cromac Wood construction agreements, The Halifax had started out as contracting party and, by virtue of the warranty, its position as such was effectively preserved.)

•	Nothing was left to chance.  The minutes were all drafted in advance.  The novation agreement of 28 February 2000 made CWPI the immediate contracting party under the Cromac Wood Site “Cusp Agreement”.  That pre-empted the CWPI board’s considerations on 29 February.  Moreover, we infer, there never was any real chance that LPDS would fail to find a purchaser for the lease which had agreed to take under the Agreements for Lease.  It was all part of the scheme that The Halifax should remain in possession.

•	CWPI’s participation was essential to the solution.  LPDS, as mentioned, had to have contracts for construction services backed up by VAT invoices, all done well before the end of its partial exemption year.  It would have been unthinkable for LPDS, which was destined to drop out of the scheme as soon as it had obtained and agreed to assign the leases to HPIL (on 6 April), to have paid the arm’s length builders in advance.  The sums transferred to CWPI remained in The Halifax group (in CWPI’s accounts at Lloyds TSB bank in Mincing Lane EC3) until used to pay the arm’s length builders.  But for the implementation of the scheme, there would have been no need for CWPI’s participation.

•	LPDS’s agreement of 29 February to do £104,000 of construction works at Cromac Wood, Dundonald and Livingston and some £35,000 of works at West Bank were immediately “sub-contracted” to CWPI.  Absent the solution, there is no evident reason why The Halifax should not have carried out those works itself.  No reason has been put forward for this step in the solution, save that it serves to generate standard-rated services in LPDS in its 2/00 and 3/00 prescribed accounting periods.

44.	We have not been able to discern any business or “commercial” rationale for any of the transactions referred to in paragraph 41 above, save that they were required to make the scheme work.  Moreover, if the scheme works it will “cause distortions of competition at National and Community level” : see paragraph 23 of Direct Cosmetics.  This follows from the fact that The Halifax’s “competitors” who do not adopt an avoidance scheme having similar effect will be at a disadvantage in economic terms as compared with The Halifax.  With those points in mind and in the light of the objective that the solution was designed to achieve, we conclude that the scheme implementing the solution and every step and every transaction involved in it were “tax avoidance” in the sense contemplated by the Sixth Directive.  They were “tax avoidance” in the UK sense of that expression as explained by Lord Nolan in IRC v Willoughby (HL) [1997] STC 995 at 1003h.  By entering into the scheme The Halifax and the other participating companies reduced the incidence of VAT “without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in” its tax burden. With that conclusion in place,  we now turn to the questions of construction.

Did LPDS and CWPI make “taxable” supplies of construction services?

45.	Expressed in terms of Article 2 of the Sixth Directive, the question is whether each purported supply involved in the tax avoidance scheme implementing the solution was –

“the supply of goods or services effected for consideration by a taxable person acting as such”.

This in turn raises the question whether the person making the purported supply, e.g. LPDS and CWPI as the case may be, was a taxable person within Article 4.1 being a 

“... person who independently carries out ... any economic activities specified in paragraph 2 whatever the purpose or results of that activity.”

Article 4.2 specifies that economic activities are to –

“... comprise all activities of producers, traders and persons supplying services including mining activities and activities of the professions”.

The questions of interpretations here are whether, as the Appellants contend, LPDS’s purported supplies of services to The Halifax under the First and Second Agreements for Works and CWPI’s purported supplies of services to LPDS under the First and Second CWPI Agreements rank as supplies by LPDS and CWPI, being supplies by those two companies as taxable persons acting as such; these in turn require us to determine whether those purported supplies, whatever their purpose or  results, were carried out as economic activities.

46.	The VAT Act 1994 section 1 directs that VAT is to be charged “on the supply of goods or services”; by section 4(1) –

“VAT shall be charged on any supply of goods or services ... where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him”.

By section 3(1) a “taxable person” is a person who is required to be registered; and by section 94(1) the term “business” is defined to include “any trade, profession or vocation.”

47.	Both CWPI and LPDS were registered for VAT and so ranked as taxable persons in their own right.  The issue for us, expressed in the language used in the UK VAT code, is whether LPDS’s and CWPI’s purported supplies, rank as supplies for purposes of section 4(1) and this in turn requires us to determine whether those purported supplies were made in the course or furtherance of any businesses carried on  respectively by LPDS and CWPI.

48.	It is well established that a purposive construction must be given to EC legislation.  It necessarily follows that UK legislation (the VAT Act 1994) which implements EC legislation must be construed in conformity with EC law: see Marleasing [1990] ECR 1-4135 at 4159.  It is therefore necessary to identify the purpose of the Sixth Directive since this governs both the Directive and the VAT Act 1994.   There was no real dispute that the purpose of the Sixth Directive is to apply to goods and services a tax on consumption exactly proportional to the price of those goods and services, to be borne by the final consumer; Article 2 of the First Directive.  Specifically, the purpose of the “partial exemption” rules is to ensure that VAT is borne by a taxable person to the extent that he does not make taxable supplies and is thus to be regarded as a final consumer, thereby respecting the principle of fiscal neutrality.  Nor is there any real dispute that the scheme comprised in the solution adopted by The Halifax was designed to achieve a result that violated the purpose of the Sixth Directive.

49.	The legal basis for the Appellants’ argument on the construction of the Sixth Directive was that a taxable person’s purposes in entering into a transaction is immaterial to the question of whether that transaction amounts to a supply or whether the person in question has carried out an economic activity.  The aim or purpose for which the transaction (or series of transactions) were carried out is not in point: see cases such as Customs and Excise Commissioners v Robert Gordon’s College [1995] STC 1093, BLP Group Plc v Customs and Excise Commissioners (Case C-4/94) [1995] STC 424 and Customs and Excise Commissioners v Thorn Materials Supply Ltd [1998] STC 725.  If supplies are not genuine they can properly be disregarded for all VAT purposes; if, on the other hand, they have genuinely been made, they must be given their due tax consequences and if the authorities want to deny these, they must seek a change in the law.

50.	That these transactions were genuine, we have no doubt.  The oral evidence made this clear.  The problem is that each one plays a key role in The Halifax’s tax avoidance solution and owes its existence to that and nothing else.

51.	Were this a matter of UK law alone, the transactions comprised in The Halifax’s tax avoidance solution would not , we think, be classed as taxable supplies.  This is because they would not have been made in the course or furtherance of the businesses of either LPDS or CWPI.  The House of Lords in F A & A B Ltd v Lupton [1972] AC 634 concluded that if the sole object of a transaction was tax avoidance, it was not a trading transaction for purposes of tax on corporate profits.  That was so even if, as here, there was a profit built into the scheme: see Thomson v Gurneville Securities [1972] AC 661.  A similar robust approach would, we think, be applied where the issues concerned businesses as distinct from trades.  This is particularly so because here the term “business” is defined to include “any trade”.  But domestic law that purports to implement EC legislation must be construed in conformity with EC law and we therefore move on to determine whether, as a matter of EC law, the same approach is to be applied.

52.	This brings us to what we see as the central question.  Can transactions, such as those that formed part of the scheme comprised in The Halifax’s tax avoidance solution, properly be classed as “supplies” effected by a taxable person (such as LPDS, and CWPI) carrying out an “economic activity”, as those expressions are used in the Sixth Directive?  The answer depends on the proper construction of those expressions in the context in which they are found; the context is a statutory code designed to impose VAT without producing distortion of competition.  

53.	Certain activities are excluded from ranking as economic activities with the result that the transactions involved will not qualify as supplies.  

54.	Unlawful trading activities will be excluded so long as their exclusion will not produce unfair competition between unlawful and lawful activities in the same area of trade.  The ECJ in Mol (Case 269/86) [1988] ECR 3627 and in Vereniging Happy Family Rustenburgerstraat (Case 289/86) [1988] ECR 3655 ruled that trafficking in narcotic drugs was not an economic activity.  Because of the total prohibition on trafficking in all Member States, the exclusion of supplies from the ambit of VAT could not put suppliers in a privileged position.  By contrast Fischer (Case C-283/95) [1988] STC 708 decides that unlicensed gambling transactions can rank as economic activities because to do otherwise would infringe the principle of fiscal neutrality and create unfair competition between unlicensed and licensed gambling sectors.  The Halifax’s tax avoidance scheme contains transactions that have no business purpose and which were inserted solely for tax avoidance reasons.  To exclude these from the ranks of economic activities could not possibly create unfair competition.  Indeed to allow them to qualify as economic activities would, as we observed in paragraph 42 above, put The Halifax at an unfair advantage over comparable financial institutions that did not adopt such schemes.   Regulatory activities conducted by an outside body on behalf of the State are another example of activities excluded from the scope of economic activities.  That was the effect of the decision of  the House of Lords in Institute of Chartered Accountants in England and Wales v Customs and Excise Commissioners [1999] STC 398.  In that case the Institute’s regulatory activities were provided in return for payment by the members of the profession seeking approval.  It is not enough, as Lord Slynn observed at page 404, that what was done could be described as an activity “of the professions” for purposes of Article 4.2; so here it is not enough that the construction services described in the First and Second Agreements for Works and in the First and Second CWPI Agreements are “activities of traders and persons supplying services” (see the words of Article 4.2).  

55.	The ICAEW decision and the other cases cited in Lord Slynn’s speech show that, in deciding whether an activity is an economic activity, it is, to use the words of the Advocate General (Lenz) in Wellcome Trust Ltd (C-155/94) [1996] STC 945, “... the inherent nature of the activity itself that is the vital consideration”.  The inherent nature of the transactions with which the present appeal is concerned is, taking those transactions collectively and individually, tax avoidance.  There was no business purpose.  Even the profits allowed to LPDS and CWPI, which are emphasized in the minutes of the meetings, were (to use Mr Fleming’s words referred to in paragraph 33 above) “built into the scheme”; they were not based on any real business activity. Adapting the Sixth Directive terms, The Halifax’s tax avoidance activities were, we think, “counter-economic activities”.  They were, to use the ECJ’s words in Fischer, supra, at page 722 (paragraph 19), ... “wholly alien to the provisions of the Sixth Directive and do not give rise to any tax debt”.

56.	This conclusion is essentially in line with the contentions advanced by Jonathan Peacock for the Commissioners.  We have reached it with the arguments for the Appellants, advanced by Dr Lasok QC, in mind.  The Appellants’ challenge to the Commissioners’ approach is levelled at what they see to be its subjective nature.  To say of a transaction that it has no commercial purpose or that it has been carried out for tax avoidance reasons necessarily involves making a judgment as to the purpose of the person who has instigated it.  That, the Appellants argue, is at odds with the directions of the ECJ in BLP, supra, which specifically laid down that, in the context of input tax deduction, the relevant question is whether or not the inputs had a direct and immediate link with taxable transactions “and that the ultimate aim pursued by the taxable person is irrelevant in this respect” (paragraph 19 of the judgment).  We cannot accept that argument.  The BLP case was not concerned with the question of whether a transaction fell within the expressions “supply” or “economic activity” as they are to be construed here.  It was concerned with the different question of whether a trader’s expenditure could be attributed to standard rated trading supplies that were the ultimate aim of that expenditure or whether, on the proper interpretation of  Article 17.2 and 17.5, that expenditure had to be attributed to the immediate exempt supplies to which it was directly linked.  

57.	Dr Lasok then draw our attention to Lord Hoffman’s warning against excising steps in a composite transaction where they were inserted without commercial purpose except the avoidance of tax.  In Thorn Materials at page 739h he said that the approach “must fail because it involves taking a ‘global view’ of what are accepted to have been genuine contracts between outside suppliers and  Materials and between Materials and Home”.  (“Home” and “Materials” were affiliated companies in the Thorn Group.)  We note that Lord Nolan, at 733g, and two other members of the House of Lords declined to express a view on that aspect of the case.  Nonetheless, for what it is worth, we are not (as we see it) adopting the global approach, nor are we seeking to ignore valid supplies to and from independent third parties.  We are, quite simply, taking the law as we find it and adopting constructions of the statutory expressions “supply”, “economic activity” and “business” which recognize, as links in the chain of supply, transactions that in their context have some economic or business character and which do not recognize tax avoidance transactions that lack that character.

To whom did the arm’s length builders make their supplies?

58.	Lord Hoffman’s warning is, of course, germane to the supplies of construction works by the arm’s length builders.  Those supplies are wholly commercial.  But were they made to CWPI, as the documentation says?  The decision appealed against by The Halifax and CWPI (in the Commissioners’ letter of  4 July 2000) is this:

“It is the Commissioners’ view that, on a proper construction of the statute, the transactions involving the arm’s length builders, CWPI, LPDS and Halifax plc amount for VAT purposes to supplies of construction services from the arm’s length builders to Halifax plc.”

59.	The Commissioners argue that this issue must be resolved by reference to the commercial reality of the situation and not solely by reference to any contracts entered into by the parties.  The Appellants say that CWPI had a genuine arm’s length relationship with the arm’s length builders.  CWPI’s directors had considered the transactions on their merits at the meetings of 29 February and 10 March 2000 and noted that they stood to earn £100,000 and £20,000 respectively. The objective reality of the arrangements was, it was argued for the Appellants, that CWPI paid the arm’s length builders and received all the supplies from them in return.

60.	In Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 Laws J, at 591f-h, observed that where the issue turns wholly on the construction of  a legal document, the exercise of construction will be one of law for the judge.  But to that, he said, there were two qualifications:

“The first is that the concept of making a supply for the purposes of VAT is not identical with the performance of an obligation for the purposes of  the law of contract, even where the obligation consists in the provision of goods or services.  The second is that, in consequence, the true construction of a contractual document may not always answer the question – what was the nature of VAT supply in the case?  Insofar as the answer to that question is not concluded by the legal process of construing the documents, there remains a question of  fact; and for the purposes of an appeal of this kind, as I have made clear, the Wednesbury rule must therefore guide this Court’s approach in relation to it.”

He returned to the point on page 595f-g in a passage that is directly relevant here where there are three parties involved, i.e. the arm’s length builders, CWPI as contracting party under  the various construction agreements and The Halifax as the party whose land and business interests were directly affected by the supply.  The passage reads as follows:

“Where the facts involve only two parties there is necessarily little or no room for argument over who supplies what to whom.  Where there are three (or more), the position may be very different.  It should in my judgment be recognized that in that situation the parties’ contractual arrangements, even though exhaustive for the purposes of  their private law obligations, may not – as indeed they need not – define and conclude issues arising as to supplies under the 1983 Act; and where they do not, the resolution of such issues remains a question of fact for the tribunal.”

Those observations were, we note, endorsed by the Court of Appeal in Eastbourne Taxi Radio Cars v Customs and Excise Commissioners  [1988] STC 669 and nothing in the Customs and Excise Commissioners v Redrow Group Plc [1999] STC 161 questions their validity.

61.	With those principles in mind we now set out what we see as the relevant considerations in determining the question of to whom the arm’s length builders’ supplies were made.  In the first place it was, as Mr Boyes said in the letter set out in paragraph 22 above, Halifax’s commercial imperative to expand its call centre facilities by obtaining additional facilities at Cromac Wood, Dundonald and Livingston and to maintain and extend its existing facility at West Bank.  Secondly, The Halifax provided interest-free funding for the whole scheme and the development.  The minutes of the board meetings of LPDS record this.  Thirdly, The Halifax remained in occupation of all four sites throughout the scheme period (i.e. from 29 February until 6 April) and thereafter by virtue of  its interests in the Sites. The benefit of the building works enured to The Halifax by reason of its property interest. Fourthly, The Halifax had direct contractual relations with the arm’s length builders.  The warranties gave The Halifax immediate enforceable rights against those builders to ensure compliance with their respective construction agreements.  Fifthly, CWPI, by contrast, had no property interests.  Its function was to carry out the First and Second CWPI Agreements with LPDS which, as we have observed, have no VAT significance.  LPDS, for whose benefit CWPI contracted for the construction work, had no proprietary interests in any of the sites other than the agreements for lease; it practically disappeared from the scene as soon as its partial exemption year ended on 31 March 2000.  On 6 April the grants of the leases to LPDS by The Halifax took effect, but it forthwith agreed to sell and assign them to HPIL which forthwith agreed to underlet the premises back to The Halifax.  In the light of these factors we conclude that no part of the construction works carried out by the arm’s length builders have been used for the purposes of the businesses of either LPDS or CWPI.

62.	The nature and destination of the arm’s length builders’ VAT supplies are, applying Laws J’s approach in the Reed Personnel case, .to be determined from all the relevant considerations of which the paperwork will be one.  The only item of 

paperwork that gives any credibility to the possibility of  CWPI being a link in the chain of supplies from the arm’s length builders are the Service Agreements (between The Halifax and CWPI dated 29 February and 10 March 2000) by which The Halifax agreed to supply two people to CWPI at £100 a month to handle the four developments.  We see those as make-weights.  The absence of reality is demonstrated by the ephemeral nature of the scheme, the property interests of LPDS, the funding arrangements and the warranties.  Adopting the Reed Personnel approach the only conclusion that we can draw from these is that the supplies of construction works were made by the arm’s length builders direct to The Halifax.

Conclusions

63.	For those reasons we conclude as follows:

(i)	LPDS made no standard rated supplies to The Halifax;

(ii)	CWPI made no standard rated supplies to LPDS and 

(iii)	the arm’s length builders’ supplies were made direct to The Halifax.

64.	It follows that LPDS incurred no input tax under either the First or the Second CWPI Agreements which it could recover.  LPDS incurred no output tax liability under either the First or the Second Agreements for Works and consequently The Halifax incurred no input tax which it could recover.  (The Halifax did, however, still incur input tax on supplies to it by the arm’s length builders, such input tax to be recoverable at The Halifax’s partial exemption rate.)

65.	For those reasons we dismiss all three appeals.

66.	The conclusions we have reached are based entirely on the construction that the expressions “supply” and “in the course or furtherance of a business” in the UK legislation and “supply” and “economic activities” in EC law.  The Appellants gained no rights from the scheme adopted as The Halifax’s  solution.  Consequently they had no rights to abuse.  For that reason the Commissioners’ second argument that the transactions comprised in the scheme should, in accordance with the EC “abuse of right” principle, be disregarded does not arise.  It would, we think, be unnecessary, inconsistent and potentially misleading if we were to express views on the hypothetical application of that principle to the present circumstances.  

67.	We award the Commissioners their costs of an amount to be agreed; if not agreed the matter should be referred back to us for further determination.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 5 July 2001

LON/00/977-HAL.OLI