Navy Dock Ltd v Customs & Excise [2003] UKVAT V18281 (12 August 2003)

VAT ASSESSMENT on alleged supply of services for a consideration; contaminated building site; tripartite transaction; who supplied what to whom?

LONDON TRIBUNAL CENTRE

	NAVYDOCK LIMITED	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Peter H Lawson (Chairman)
					 	Ray Battersby

Sitting in public in London on 17 and 18 June 2003

David Milne QC, for the Appellant

Rupert Anderson QC, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	This is an appeal by Navydock Limited (“the Appellant”) against an assessment to output tax of £406,885 made by the Commissioners and dated 18 March 2002.
2.	There was no agreed Statement of Facts in this case but we shall indicate as we proceed the sources of the facts which we accept.
3.	The Appellant company applied for VAT registration with effect from 1 May 2001 but the Commissioners considered that the correct effective date for registration was 3 January 2001 and registered the Appellant company accordingly.
4.	A Witness Statement was lodged by Mr Julian Harper and he supplemented this by giving oral evidence also.  Mr Harper lives at 22 Hills Road, Cambridge CB2 1JP and is a director and the company secretary of the Appellant company.  The only other director is Simon Peck .  The facts stated in this paragraph 4 and the following paragraphs 5 to 34 are from Mr Harper’s Witness Statement and are accepted by us as correct.  There was no other oral evidence.
5.	The Appellant company was incorporated on 18 December 1996 and is a special purpose vehicle set up solely to acquire the former Anglian Water Public Station site at Riverside, Cambridge (“the Site”).  It has no employees.
6.	Mr Harper has worked with Mr Peck for several years on various property projects.  They seek out pieces of land on which they can increase the development potential through the planning process.
7.	The Site is about 3.4 acres in size and was owned by Anglian Water (“AW”).  It is located about 15 minutes walk from the centre of Cambridge.  It is, therefore, very conveniently placed for shops and other amenities.
8.	When Mr Harper and Mr Peck started looking at the Site in 1995 it was being marketed as a contaminated site with development potential.  Although it had been zoned by the Local Authority for housing, it had been contaminated by its previous use as a landfill site.  In particular waste products, mainly ash and domestic waste, had been dumped on the land over a period of many years.
9.	As a clean development opportunity, however, Mr Harper and Mr Peck considered that the Site was potentially very valuable.  Mr Harper set out in his Statement the reasons for this but they are not directly relevant to this appeal.
10.	The Site was being marketed by Savills, as property agents acting for AW.  The ground conditions of the Site were described in a report compiled by M J Carter & Associates as part of the sales particulars provided by Savills.  The report estimated that the cost of the proposed form of decontaminating the Site was approximately £560,000.
11.	At the time Mr Harper understood that Savills had advised AW to decontaminate the Site before selling it.  However, AW preferred to sell the Site as it was and negotiate a purchase price which reflected the amount a purchaser would have to spend to decontaminate it.
12.	During 1995, AW contacted a number of prospective purchasers of the Site, of which Navydock was one.  AW was offering to sell the Site either on a conditional or on an unconditional basis.  However, it was clear that they would receive more from the sale of the Site if they sold it on a conditional basis.  The reason for this was that any unconditional offer for the Site would be reduced to reflect the risk associated with the generally accepted negative public perception of residential development on contaminated land.
13.	Mr Harper and his colleague spent a great deal of time compiling an offer to put forward to AW to purchase the Site.  They put forward two options for the type of planning permission they would seek, one being residential accommodation and the other being student accommodation, in order to maximise the future potential profits and optimise the chances of success for their offer.  AW accepted the premise that planning dictates value and their offer was constructed to reflect that.  By maximising the planning, they would be maximising the eventual sale price for AW because they had introduced an incentive mechanism into their offer which linked the developable square footage achieved by them through planning with the eventual price paid for the land to AW.  They submitted their offer on 17 January 1996.
14.	By May 1996 Mr Harper and his colleague had learnt that their offer was successful and Navydock agreed to purchase the Site for a minimum price of £1,302,540 plus an overage payment arrived at by a planning gain formula.  Eventually the formula meant that Navydock paid a total of £1,660,120 for the Site.
15.	The purchase price agreed took into account the information contained in the Marion Carter Report regarding the tests which had been performed on the Site and the condition of the Site.  Navydock’s solicitors, Wood & Co, in raising preliminary enquiries about the Site prior to exchange of contracts had asked whether Navydock could rely on the information provided in the Marion Carter Report.  The solicitor for AW confirmed in a letter dated 2 October 1996 that this information was “full and complete”.
16.	Contracts for the purchase of the Site were exchanged on 31 January 1997.  At the time the projected time scale between Navydock exchanging contracts on the purchase and completion was 18 months.  The contract was conditional on Navydock obtaining planning permission for the development of either residential accommodation or student accommodation.  However, Mr Harper knew that such planning permission would only be conditional until the Site had been decontaminated.
17.	The contamination aspect fell within the jurisdiction of the Environment Agency (the “EA”).
18.	There was a relatively long gap between exchange of contracts and submission of the planning application.  This was because a great deal of research had been done to see exactly what the Local Authority were looking for in Navydock’s application for planning permission.  The application was finally submitted in September 1997.  Once Navydock had submitted the planning application, it approached the EA with a Method Statement setting out how it proposed to decontaminate the Site.  Mr Harper and his colleague believed that it was going to be a straightforward matter to obtain approval of the Method Statement from the EA but found that this was not the case.  The reason for this was that it had become apparent that the methane gas in the Site was travelling in a “plume” over the Site.  The cause of this was that the contamination was in the groundwater of the Site.  It became apparent that the testing of the Site by M J Carter & Associates was far from satisfactory and the interpretation of the results were consequently flawed.  Therefore, the reports from AW were insufficient to support an approval of Navydock’s Method Statement from the EA.
19.	At this point, Navydock was technically in breach of clause 14.5 of the contract which the parties had entered into in January 1997, because the 18 months allowed for decontamination had already elapsed.  However, AW recognised the difficulty and extended the time limit by waiving the condition.
20.	Navydock finally agreed an amended methodology of works with the EA which would enable the EA to approve the development of the Site.  This was bioremediation.  The EA placed conditions on their support for this proposed methodology and, therefore, for Navydock it was potentially a high risk strategy.
21.	On 26 May 1999, the Cambridge Planning Sub Committee passed a Resolution to grant planning permission conditionally on the bioremediation method of cleaning up the Site.
22.	When Mr Harper and his colleague realised the extent of the problem, he called a meeting with AW at Savills Cambridge office on 23 July 1999.  At the meeting he stated that Navydock felt very aggrieved about the situation arising from the EA’s stance on the contamination and its impact on the planning.  AW, in answering preliminary enquiries, had represented that the information in respect of the ground conditions contained in the Marion Carter Report were full and complete.  Consequently, Navydock had relied upon it but the EA considered the Marion Carter Report deficient.  AW accepted this and, after much discussion, offered to compensate Navydock by assisting Navydock in securing a suitable planning consent.  Consequently, a further Agreement (“the Collateral Contract”) was entered into and signed on 29 October 1999.  Under this agreement, AW agreed that they would pay the amount by which the decontamination costs based on a full clean-up of the Site (the “Approved Method Statement”) exceeded £560,000.  That figure was what Navydock would have expected to pay at the time of the exchange of contracts nearly three years before.  Even though this figure was effectively a 1995 costing, it was agreed that Navydock’s contribution should be fixed at this level.
23.	Mr Harper and his colleague were happy to enter into the Collateral Contract because the alternative to entering into the agreement would have been a dispute over the misrepresentation contained in the Marion Carter Report and it settled the issue of whether AW were in breach of the original contract and, primarily, it enabled Navydock to secure a suitable planning consent and capped Navydock’s cost contribution to those works at £560,000.
24.	The Collateral Contract was signed by AW on 29 October 1999 and countersigned by Navydock on 17 November 1999.
25.	On 12 January 2000 the Planning Sub Committee of the Cambridge City Council passed a second Resolution to grant planning permission conditional on the Approved Method Statement.
26.	Navydock put the decontamination work out to tender.  The tender process was slow and costly.  Quantity Surveyors were employed to draw up the tender document so that there could be no doubt as to which works were included in the contract.  This document was sent to six contractors on 24 March 2000 and responses to the tender were to be submitted by 3 May 2000.
27.	The Project Management team recommended that VHE Construction Plc (the “Contractor”) would be the best firm for the work as theirs was the most competitive and compliant tender.  Navydock, therefore, put this quotation forward to AW for their approval but no response was forthcoming and for a number of weeks AW, despite repeated reminders, were still considering their position.
28.	Navydock discovered that there was an internal dispute at AW whether AW should honour its obligations.  Thereafter, AW did everything it could to renege on the Collateral Contract.  They appointed their own specialist environmental consultants to question Navydock on why it had opted for the Approved Method Statement of cleaning up the Site.  These consultants called numerous meetings at which they suggested that Navydock should use a different method to clean up the Site which would be less expensive.  The EA confirmed to AW that the different methods suggested would have been irrelevant for the purposes of Navydock’s planning consent.  
29.	Nothing happened for about two months.  Navydock eventually sought and obtained an order for specific performance from the High Court against AW.  The order stipulated that:
(i)	the purchase contract of 31 January 1997 must be carried out.  In other words, the Site must be transferred to Navydock by AW;
(ii)	Navydock could enter into a contract or contracts for decontamination services to be carried out on the Site, notwithstanding the absence of approval by AW;
(iii)	Navydock were liable to pay only the first £560,000 of the cost of the works and AW must pay the balance;
(iv)	an enquiry must be made into whether Navydock had suffered any loss as a result of the delay by AW in completing the Sale Agreement of 31 January 1997;
(v)	AW must pay Navydock’s costs of the action.
30.	The date of the order for specific performance was 12 October 2000.
31.	Following the Court Order, the director of Ambury, a part of AW, Mr Peter Copley, offered compensation in place of the High Court’s order for specific performance.  This offer subsequently escalated to £2,000,000 plus the expenses which Mr Harper and his colleague had incurred.  Mr Copley wanted Navydock to accept the money in return for ripping up the Sale Agreement so that AW would be free to do a form of clean up which would be cheaper, but which the EA had told AW they might support.  AW would then be in a position to sell the Site themselves, either as it stood or having had it cleaned up.  Navydock turned down this offer.
32.	A “Settlement Agreement” was entered into between AW and Navydock.  The Agreement was dated 3 January 2001.  AW requested, and were granted, a charge over the Site on the basis that it would be released when the Site had been decontaminated.  Clearly, this was required to ensure that Navydock did not abscond with the compensation paid and that the works were completed in accordance with the Approved Method Statement.
33.	Navydock’s solicitors, Wood & Co, gave an undertaking to AW that they would hold the money and only issue payments in respect of the works against certificates issued by the Project Manager.
34.	The Site was decontaminated and this took 15 months to complete.
35.	Navydock ultimately sold the Site in June 2002 at a substantial profit.
36.	Mr Milne, for the Appellant, said that the issue between the parties was the correct characterisation of (i) the payment of £2,731,948 by Anglian Water (“AW”); and (ii) (possibly) the waiver by AW of the sum of £1,661,760 due to it from the Appellant, i.e. the clean up cost.
37.	The Commissioners of Customs and Excise (“the Respondents”) maintained that the payment represented consideration for a taxable supply of services by the Appellant to AW, but the Appellant submitted that it represented damages for misrepresentation by AW or alternatively (so far as the £1,661,760 is concerned) a reduction in the consideration for an exempt supply of land from AW to the Appellant; and that no supply was made by the Appellant to AW, save as to a supply of works to the value of £32,509 referred to in paragraph 42 below.
38.	By the agreement dated 31 January 1997 (“the Sale Agreement”), AW agreed to sell the site (“the Site”) to the Appellant.  Completion of the Sale Agreement was conditional on the grant of a ‘suitable planning consent’ as defined in clause 14.1 of the Sale Agreement.  The price payable by the Appellant was determined by a formula based on the number of square feet for which the Appellant obtained planning permission.  In the events that happened, the price according to the formula was calculated to be £1,661,760.
39.	Clause 11 of the Sale Agreement provided:

”[The Appellant] shall take [the Site] in the state and condition it is in at the date of Completion and in the knowledge that it may have been used by [AW] in connection with its operations as a statutory water and sewerage undertaker and may have been the subject of excavation and infilling and [the Appellant] shall be responsible for any work necessary to [the Site] to render it fit for his purpose and shall indemnify [AW] in respect of claims of any kind arising out of the use of the land by [AW] or generally’.
40.	In entering into the Sale Agreement, Mr Milne went on, the Appellant relied upon representations on behalf of AW that the MJ Carter report on the contamination was full and complete and that the cost of the necessary remedial works would be about £560,000.  This turned out to be a serious underestimate for the type of development which the Appellant was planning to carry out.  It transpired that the necessary works would cost several million pounds.  AW recognised an unlimited liability to compensate the Appellant for this misrepresentation in the Collateral Agreement dated 29 October 1999; and subsequently in the consent order dated 12 October 2000 (see para 30 above).
41.	The Settlement Agreement (see para 32 above) was entered into between the Appellant and AW, replacing the Collateral Agreement and the Consent Order, and capping AW’s liability for remedial works at £4,393,708 (being £2,731,948, which was transferred on that day by AW to the Appellant’s then solicitor, Wood and Co, plus the purchase price, £1,661,760, to be foregone).  By a letter dated the same day, Wood and Co set out the terms upon which they were to hold and release the sum of £2,731,948.
42.	Under clause 16 of the Sale Agreement, AW had agreed at its own expense to procure that an electrical substation be relocated within the Sire in accordance with the Appellant’s requirements, and clause 4.2 of the Settlement Agreement makes clear that the payment of £2,731,848 includes the sum of £32,509 being ‘the agreed costs of AW complying with its obligations under clause 16 of the Sale Agreement’.  The Appellant accepted that the sum of £32,509 was consideration for a supply of services to AW, since AW received a benefit from the making of the payment of that sum, namely the satisfaction of its contractual obligation under clause 16 of the Sale Agreement.
43.	As far as the balance is concerned, however – that is, the balance of the sum paid by AW to Wood and Co (£2,731,948 - £32,509 = £2,699,439) and the waived purchase price of £1,661,760 – Mr Milne submitted that it was not consideration for any supply by the Appellant to AW, because AW did not obtain any corresponding benefit in the relevant sense – there is no ‘quid pro quo’.
44.	For a payment to be ‘consideration’ for a ‘supply’ for VAT purposes, there must be a corresponding benefit accruing to the payer.  As it was put in CCE v Battersea Leisure Ltd [1992] STC 213 at 216f:

”Nothing in the way of money or money’s worth will constitute consideration unless it has a direct link with a benefit accruing to the provider of the money or money’s worth.”

Mr Milne relied also on the ECJ judgment in Apple & Pear Development Council v CCE [1998] STC 221 for this proposition, and on the recent analysis by the Court of Appeal in CCE v Church Schools Foundation [2001] STC 1661, particularly paragraphs 40 to 48 of the judgment of Sir Andrew Morritt V-C – on the meaning of the requirement that the consideration received constitutes the value ‘for’ the alleged service – and paragraphs 95 to 100 of the judgment of Arden LJ on the importance of identifying the corresponding benefit received by the payer of the alleged consideration.
45.	Mr Milne submitted that in the present case there was either no benefit at all derived by AW from payment of the money or money’s worth in dispute, or if there was a benefit (in that possibly some residual obligation under environmental law would otherwise have been left with AW) there was no direct link between the alleged consideration (which paid for the very substantial operations needed to make the Site suitable for the Appellant’s residential development) and the benefit received (if any) by AW.
46.	The reality was, Mr Milne said, that AW was paying these sums because it accepted that it had made a misrepresentation to the Appellant at the time of the Sale Agreement, and, as was recited at Recital (5) of the Settlement Agreement:
”The parties now wish to settle all outstanding claims each might have against the other arising out of the [Sale] Agreement, the Collateral Agreement, the High Court Action number HCO4115 .... as set out below”.
47.	In these circumstances, Mr Milne submitted that the case most in point was the decision of the VAT Tribunal in Holiday Inns (UK) Ltd (Trib Ref 10609), in which the Tribunal applied and somewhat widened HM Customs and Excise’s Press Notice 82/87, reproduced at p.22 of the Tribunal decision, in which Customs confirmed that if a payment was made to settle court proceedings, and was essentially compensatory in nature, and did not relate directly to supplies of goods or services (to the payer), it is not ‘consideration’ for any supply by the recipient even if, as here, the plaintiff expressly abandons his right to bring legal proceedings.
48.	The Respondents had argued in correspondence that this case is on all fours with Battersea Leisure(supra); however, on analysis, Mr Milne submitted that the two cases are fundamentally different.
49.	In Battersea Leisure, there was a direct link between the consideration paid by the CEGB and the corresponding benefit received by the CEGB.  The CEGB was under a statutory liability to remove the asbestos; Battersea Leisure Ltd accepted a contractual obligation to arrange for the removal of the asbestos, and the CEGB was relieved of that obligation: see Kennedy J at [1992] STC 213 at 219a.  In return for the consideration paid by CEGB, therefore, Battersea Leisure Ltd did the very thing which the CEGB was statutorily obliged to do – i.e. remove the asbestos.
50.	The present case is fundamentally different, Mr Milne continued, albeit complicated by changes in environmental law between the dates of the original contract (the Sale Agreement of 31 January 1997) and completion (the Settlement Agreement of 3 January 2001).  As the law stood at 31 January 1997, clause 11 of the Sale Agreement (under which inter alia it was provided that the Appellant would be responsible for any work necessary to the Site to render it fit for the development proposed, and that the Appellant would indemnify AW in respect of claims of any kind arising out of the use of the land by AW) was effective to relieve AW of any obligation in respect of any contamination; and in any event, AW were not under a positive obligation to remediate the land and could simply have retained it in its then current state (although AW would have had to carry out certain works if they wanted to obtain any planning permission).
51.	Between the dates of the Sale Agreement and the Settlement Agreement, however, the contaminated land provisions of Part IIA of the Environmental Protection Act 1990 (“EPA”) had come into force on 1 April 2000.  These provisions imposed duties on enforcing authorities (principally local authorities) to identify ‘contaminated land’ in their areas and secure its remediation.  If the Site was ‘contaminated land’, and if AW was a person who had ‘caused’ or ‘knowingly permitted’ the contamination, and if the Appellant had not agreed to take over liability in clause 11 of the Sale Agreement, AW might have become subject to a liability to carry out some remedial action on the Site.
52.	But, Mr Milne continued, no formal action has ever been taken in relation to the Site by the local authority or the Environment Agency, and it is not indeed clear that the Site constituted ‘contaminated land’ as defined by section 78A(2) of the EPA – this requires there to be (a) a contaminant (i.e. a substance which has the potential to cause harm); (b) a receptor (i.e. an organism, ecological system or other piece of property which could be harmed by the contaminant); and (c) a pathway (i.e. a route or routes by or through which a receptor is or could be exposed to or affected by a contaminant).
53.	In any event – and this Mr Milne submitted is the important point – even if AW had retained the Site and action had been taken against it by the authorities, the remedial action which could have been taken against it (requiring AW, as the Appellant understood it, to stop the source of the pollution and take steps to ensure that it did not contaminate a ‘receptor’ – action which AW in fact said they had already taken) would have borne no relation to the works eventually carried out by the Appellant to render it suitable for the type of development the Appellant wished to carry out – the works described in the Method Statement, which essentially involved removing the entire landfill material in the former clay pits to a licensed waste disposal facility, and backfilling the pits with imported ‘clean’ material.
54.	There was therefore, Mr Milne submitted, no direct link between the payments made by AW and any benefit received by it as a result of the works carried out by the Appellant.
55.	We agree with Mr Milne that the present case is distinguishable from the Battersea Leisure case simply because there was an obligation in the Battersea Leisure case on the CEGB to remove the asbestos.  In this case there was no obligation on Anglia Water to remove anything.
56.	Mr Anderson, for the Commissioners, referred to the Settlement Agreement dated 3 January 2001 under which it was agreed that the Collateral Agreement and the Consent Order should cease to have any effect and that – 

a) In consideration of the acknowledgement by Navydock of the purchase price (£1,661,760) as a debt due to AW, AW would transfer the land to Navydock;

b) payment would be deferred until completion of the remedial works specified in the Method Statement;

c) Navydock would execute a charge over the land in AW’s favour to secure the payment of the purchase price; 

d)  AW would transfer to the account of Navydock’s solicitors £2,731,948 to be held and released in accordance with the terms of an undertaking contained in a letter from those solicitors of 3 January 2001.

e)  Navydock would enter into a contract with suitable contractors to effect the works specified in the Method Statement and to take all reasonable steps to ensure the works were completed with all due diligence.

f)  Navydock were entitled to draw on the money held by its solicitors to meet or provide for the costs of the works.

g)  Navydock would keep AW informed of the progress of the works and provide AW with a certificate of completion from the environmental consultant appointed by the Cambridge Planning authority.
57.	By an undertaking dated 3 January 2001 Navydock’s solicitors undertook to hold the sum of £2,731,948 in an interest bearing account and to apply it only in respect of the remedial works and remit the balance, if any, to AW on completion of the works.
58.	The above arrangements were put into effect.
59.	By contract dated 15 March 2001 Navydock engaged VHE Construction plc to undertake the work set out in the Method Statement.  The work was undertaken and Navydock has since sold the site.
60.	Mr Anderson submitted that the effect of the above arrangement was that in consideration for the payment of £2,731,948 to Navydock’s solicitors under the terms of the Settlement Agreement and Undertaking, Navydock supplied services to AW.  It was not necessary for the Commissioners to define the precise nature of those services, but the essential character was clear, namely Navydock undertook to AW to engage contractors to undertake the remedial work required under the Method Statement, and in return AW agreed to pay Navydock for that work to the extent that the cost exceeded £560,000 (up to a cap).
61.	The Settlement Agreement sets out the parties’ respective obligations.  The agreement governs the contractual position, and in accordance with well recognised principles the terms of the Settlement Agreement identify the parties’ respective obligations.
62.	Navydock argued that the payment of the £2,731,948 did not represent consideration for a supply by Navydock to AW, but is to be characterised as “compensation” for AW's “misrepresentation” that the cost of decontaminating the land would be about £560,000.  That argument cannot succeed for the following reasons, Mr Anderson said.
63.	Firstly, any such argument cannot succeed on the face of the Settlement Agreement, which sets out exhaustively the parties’ rights and obligations.  Under that Agreement Navydock undertook to effect the works through suitable contactors and AW agreed to pay for that work through the funds deposited with Navydock’s solicitors.  It is not permissible to seek to augment the terms of that Agreement by reference to extrinsic evidence (see CCE v Battersea Leisure Limited [1992] STC 213 per Kennedy J at pp 217-218).
64.	There was a direct link between the payment of the money by AW and the carrying out of the work, the benefit of which accrued in large part to AW.  At the time of the Settlement Agreement AW was the owner of the land, and in the absence of arranging to have the remedial work undertaken and paying for it, AW would in all probability not have been able to dispose of the land in the light of the information emerging from the EA’s investigations and the contents of the Method Statement.  There is a direct analogy with the position in the Battersea Leisure case.
65.	By the time of the Settlement Agreement responsibility for the environmental condition of the site had not been transferred to Navydock.  On the contrary, clause 11 of the Original Sale Agreement merely provided that the site would be taken “as found” and that Navydock would be responsible for any work necessary to render the property fit for its purpose.  However, that was subject to clause 14, and in any event was subject to further negotiation and agreement culminating in the Settlement Agreement.
66.	Furthermore, Mr Anderson continued, it is apparent from the nature of the contamination, and AW’s historical use of the land as a sewage pumping works, that statutory obligations on AW are likely to have arisen under sections 78A-G of the Environmental Protection Act 1990 and sections 90-94 of the Water Industries Act 1991.  The arrangements with Navydock ensured that any such obligations would be discharged.  This is confirmed by a letter from AW to Paul Harney Associates of 8 February 1999 (copied to the EA and the Cambridge Planning Department).
67.	There is no contemporaneous evidence to suggest AW ever accepted that they had misrepresented the position or had accepted any liability for any such misrepresentation.  Indeed prior to this appeal there was no such contention put in writing ever made against AW.  The Collateral Contract, the Particulars of Claim and the Consent Order are all inconsistent with any such argument.  It is apparent from those documents that Navydock’s concern was to effect the transfer on renegotiated terms, and not to seek compensation for misrepresentation.  It is further clear from those documents that AW merely agreed to pay for the works to the extent that the price exceeded £560,000 and Navydock undertook to have the works carried out.
68.	In any event, Mr Anderson submitted, at no stage prior to the Collateral Contract had Navydock obtained suitable planning permission within the meaning of the Original Sale Agreement.  Accordingly it was apparent before the Collateral Contract and before completion that the necessary remedial work would render the proposed development uneconomic within the meaning of clause 14 of the Original Sale Agreement, unless there was a further agreement between the parties.  It was accordingly in the interests of both parties to enter into new agreements.
69.	Even if, which is not accepted, there had been any material misrepresentation, Mr Anderson continued, that was overtaken by events, in particular the subsequent agreement between the parties.  There is simply no basis upon which to categorise the payment by AW as “compensation”.
70.	In the circumstances the Commissioners submitted that a taxable supply was made by Navydock to AW and the appeal should be dismissed.
71.	Commenting on Mr Milne’s submission that there must be a direct link between the amounts of the payment and the benefit, Mr Anderson said that AW had obtained a significant benefit but in the Apple and Pears case the context was whether there was any benefit attributable to an individual grower and the answer was in the negative.  Charges arising by virtue, not of a contractual, but of a statutory obligation are always recoverable from each individual grower as a debt due to the Council, whether or not it had given service of the Council or confers benefit upon him.  Therefore it did not constitute consideration having a direct link with the benefits accruing to individual growers.  But where there is a contract the correlation is in the agreement and there is reciprocity.  There is no  problem in the present case, Mr Anderson said, because it is not concerned with valuing the benefit in the hands of the recipient.  In the Church Schools Foundation case, we should not consider what could have happened with the actual contract.  The ECJ decision in the Tolsma case stated that a supply of services is effected “for consideration” within the meaning of Article 2(1) of the Sixth Directive, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient, pursuant to which there is reciprocal performance, the arrangement received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.
72.	Mr Milne had said that the money was “for” the development, but Mr Anderson said that was a bad point.  The true position was that AW was engaging Navydock and Navydock was getting the contractors to undertake the work.
73.	Mr Anderson also referred to the Redrow case (Customs and Excise Comrs v Redrow Group Plc [1999] STC 161.)  The case concerned an incentive scheme under which Redrow instructed an agent to value a prospective purchaser’s existing home and handle the sale.  Redrow paid the agent’s fee on the sale of the prospective purchaser’s home provided the prospective purchaser completed the purchase of the Redrow home.  The question was to whom did the agent supply his services?  The House of Lords  (Lord Millett) decided that the services were supplied to Redrow.  Mr Anderson drew attention to the breadth of the potential benefit and the kinds of benefit which can be taken into account in light of the Redrow Decision.  It was not necessary, he said, for the Tribunal to identify specifically the nature of the benefit nor to engage in an exercise to work out the amount of the consideration.  In this case the parties have entered into an agreement and that is that.  Mr Anderson also referred to the Battersea Leisure case was a direct link between payment and the decontamination.  The fact of the Agreement was sufficient.
74.	In the present case, Mr Anderson said, we have a contractual obligation.  There may be doubt about whether AW was under a statutory obligation but, even without it, there is sufficient to create a direct link.  The contractual obligation removed any statutory obligation which AW may have been bound by.
75.	It cannot be said that there was no benefit to AW; there were several benefits, the value of them was the price paid to enable the deal to go ahead.  (AW had a let-out because if no planning permission was granted they could walk away.)
76.	The obligation to decontaminate, Mr Anderson said, gave rise to the Collateral Agreement.  It was in the interests of both parties to renegotiate.  Both sides accepted additional obligations.  Navydock obtained a let-out by getting AW to pay for the decontamination, so that under the Settlement Agreement there was a cap and therefore the possibility of repayment of any balance of overpayment.  It was a safeguard having the money in the hands of the solicitors.  It was a mechanism for ensuring that the decontamination work would be done.
77.	What AW acquired was the fulfilment of the agreement so that they could dispose of the Site in the knowledge that it would be decontaminated and so cover any potential future problems.  One of those was the Environmental Protection Act.  It the land is contaminated the authority can require an appropriate person to take remediation action.  Only AW could be the appropriate person.  There was a possibility that AW could have had action taken against it under the Environmental Protection Act but the benefit it obtained was the removal of any potential action under this Act.
78.	It was wrong to say simply that the land had been transferred to Navydock; it was transferred but subject to an obligation to decontaminate, but Navydock could accept this obligation because it had obtained from AW the cost of decontamination.
79.	In reply to Mr Anderson’s submissions, Mr Milne referred to clause 4.2 of the Agreement dated 3 January 2001 which records that the payment of £2,731,948 included the sum of £32,509 agreed costs of AW complying with its obligations under clause 16 of the Purchase Agreement entered into by the parties on 30 January 1997.  Mr Milne said that that sum was a clear “quid pro quo”.  The rest of the document was a “quid cum quo”.  The fact that there was a balance due did not mean that there was a supply for VAT purposes.
80.	Mr Milne referred to para 41 of the Church Schools Foundation case where Sir Andrew Morritt VC said that in each case the requirement is that the supply must be ‘for’ consideration; for example a loan facility provided by a bank to a property company for use on a specific development, gives rise to both a legal relationship, debtor/creditor, and reciprocal performance, drawdown/application.  There is a direct link between the carrying out of the development and the drawdown of the loan.  The development is not a supply of services ‘for’ the loan.  Rather it is effected ‘with’ the loan.  It is not a “quid pro quo” but a “quid cum quo”.  The fact that there is a tie to specific expenditure is not enough to provide consideration.  What it does is settle all disputes; in this case, it is not a consideration for a supply by AW to Navydock.  The key point is that AW were receiving no benefit: therefore, there was no consideration for any supply.
81.	Mr Milne also referred to the Redrow case.  The question there was whether the payments made to estate agents were for the purposes of Redrow’s business (that was an input tax case whereas Church Schools Foundation was an output tax case).
82.	The Battersea Leisure case was parallel to the present in the sense that the CEGB were relieved of an obligation to remove asbestos.  In the present case, the supply of land is exempt .  If there was no benefit to AW, there was no consideration for a supply.
83.	The Environmental Protection Act came into force between the dates of contract and completion.  AW had no need to carry out remediation work required in relation to redevelopment .  There was no free standing obligation to carry out remediation at all if they were going to retain the land.  The problem was methane gas.  That was only a problem if it was emerging from development land.  There was no free standing obligation on AW to carry out work to remove the methane.  There was no correlation of benefit; there was no link between the payment made and the benefit received; for example the fact that Navydock paid the first £560,000 was no benefit to AW.  They already had an open ended obligation to Navydock.
84.	We come to our conclusions.  We note, first, that under the original Sale Agreement no party was obliged to carry out any remedial works.  AW was not under any statutory or contractual duty to carry them out.  Secondly, AW received no benefit from the services provided by VHE (via Navydock’s solicitors) although AW were paying the cost of those services.  The benefit of VHE’s services were received by the landowner, Navydock.
85.	The supply of land from AW to Navydock was exempt.  The remedial works carried out by VHE for the benefit of Navydock was a taxable supply and that is not disputed.  The more important point is that on the facts, there was no supply of any kind by Navydock to AW.  AW received no benefit itself from the carrying out of the works by VHE.  Nor were AW receiving any benefit from anything done for them by Navydock.  They did not make any payments to Navydock.  The solicitors gave an undertaking only to release money to VHE as and when the remedial works were carried out.  By paying the agreed sum to Wood & Co, AW settled their liability to pay damages.  They did not make the payment in consideration for any “supply” by Navydock to AW.
86.	It should not be overlooked that Navydock made an input tax recovery claim for the quarterly period ended 31 July 2001 amounting to £230,669.81.  This will not now be payable.
87.	Our conclusion, therefore, is that the appeal must be allowed.  The Commissioners must pay the Appellant’s reasonable costs of the appeal.

PETER H LAWSON
CHAIRMAN

RELEASED:

LON/2002/316