VAT – EXEMPT SUPPLIES – Land – Equitable interest – Agreement between Appellant and owner of land under which Appellant developed land and sale proceeds divided – Appellant to purchase if no sale to third party – Whether proceeds of sale consideration for interest in land or supply of construction services – VAT 1994 Sch 9, Group 1, item 1 and Sch 10, para 8 – Appeal allowed

LONDON TRIBUNAL CENTRE

	LATCHMERE PROPERTIES LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	THEODORE WALLACE   (Chairman)
						 MRS J N NEILL, ACA

Sitting in public in London on 12 and 13 January 2004

David Goy QC, instructed by Deloitte and Touche, chartered accountants, for the Appellant 

Kenneth Parker QC and Raymond Hill, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This appeal concerns assessments totalling £123,695 on the Appellant made on the basis that sums received on the sale of certain properties at Pyrford, Surrey, were consideration for standard-rated supplies of construction services to Burhill Estates Company Ltd (“Burhill”) which was the legal owner of the properties and which received the balance of the sale consideration.

2.	The Appellant contended that, under the development contract between it and Burhill, it acquired an equitable interest in the land and that the receipts were exempt supplies within item 1 of Schedule 9, Group 1 of the VAT Act 1994.  Item 1 provides,

“1.	The grant of any interest in or right over land or of any licence to occupy land … other than - …”

None of the exceptions to item 1 was material.  Note (1) reads,

“(1)	‘Grant’ includes an assignment or surrender …”

3.	There was one witness, Richard Eshelby FRICS, the chairman and principal shareholder.  He read a statement which was not challenged and which we accept.  Cross-examination was brief, being directed to two letters which he did not write.

4.	There was a bundle of documents of which the most important were an agreement between Burhill and the Appellant dated 5 May 1998 with a supplemental agreement dated 29 October 1998 and the Agreement for Sale of one of the properties to which the parties were Burhill, the Appellant and a Mr and Mrs Lawrence.

The facts

5.	The Appellant was engaged in the business of property development including refurbishment and conversion work.  Burhill owned property on the Pyrford Court Estate of the Earl of Iveagh.  We assume that the shares in Burhill were held by trustees for family trusts.  The property with which this appeal is concerned was thus part of a much larger estate.

6.	In the early 1990s due to the collapse in the property market it was not easy to obtain finance for property development.  The Appellant made an arrangement to redevelop redundant buildings at The Bothy on the estate on the basis that the purchase consideration was left outstanding until the properties were sold.  This was successful and discussions took place for two further projects one of which was at Lady Place, a group of redundant barns at Church Farm and four derelict period cottages which used to form part of the Guinness Dairy.  The site lay on the edge of open countryside on the fringes of a picturesque village.  In June 1996 the Appellant instructed the Barlow Black Partnership, architects, to prepare and submit a detailed planning application.

7.	On 5 May 1998 the Appellant entered into two agreements with Burhill, one relating to Church Barn Farm and the other to the properties with which this appeal is concerned.  Initially it was contemplated that six residential units would be formed.  However detailed planning permission and listed building consent had not yet been obtained and following discussions with the local planning authority the application was amended to omit one unit. The agreement with which the Tribunal was concerned was varied by a supplemental agreement on 29 October 1998.

8.	The agreement was made between Burhill, described as “the Owner”, and the Appellant, described as “the Developer”.  The recitals included at (5)(vi) 

“‘Purchaser’ shall mean a person persons body or corporation (other than the Developer) who shall take a Transfer of the property or a dwelling forming part of the Property pursuant to Clause 5.2 of the Agreement for a price not less than the minimum price.” 

The recitals provided at (6) that the agreement was conditional upon certain Conditions which included the grant of detailed planning permission and any relevant listed building consents.  The material provisions of the agreement as varied by the supplemental agreement were as follows:

“1.	Subject to the provisions of Clause 5.2 not applying the Owner shall sell and the Developer shall buy the Property in the terms of the draft Transfer annexed … subject to the issue of the Certificate of Practical Completion pursuant to Clause 25 and satisfaction of the Conditions

2.1	The Consideration payable by the Developer to the Owner shall be calculated in accordance with Clause 22 of this Agreement
…

5.1	Subject to the terms of the Schedule to this Agreement completion of the sale and purchase shall take place … on the date which is twelve months following the issue of the Owner’s Certificate on the last of the Properties …
5.2	The Developer shall not be required to complete the purchase of any of Unit 1 or Unit 2 or Unit 3 or Unit 4 or Unit 6 respectively in accordance with Clause 5.1 of this Agreement if prior to the completion date referred to in Clause 5.1
5.2.1	The provisions of Clause 25 have been fully observed and the Owners confirmation referred to in Clause 25 has been issued
5.2.2	The Owner and the Developer shall enter into a binding contract for the sale and purchase of the relevant Unit or any … of them with a purchaser or purchasers … substantially in the form of the draft Agreement annexed hereto and that binding contract is actually completed in accordance with the said agreement on the Completion Date referred to therein
5.2.3	Such Unit shall be transferred to the Purchaser pursuant to the foregoing agreement … substantially in accordance with the terms of the draft Transfer annexed hereto
5.2.4	Upon completion of the sale in accordance with such binding contract as referred to in Clause 5.2.2 the Developer shall pay or cause to be paid to the Owner all sums due to be paid and calculated in accordance with the provisions of Clause 22 of this Agreement and … all the provisions of Clause 5.1 shall continue to apply to any of the relevant units which do not fall to be dealt with pursuant to the provisions of Clause 5.2
…

12.1	The Developer hereby covenants with the Owner that it shall commence the Works within one month of the date that [detailed planning permission and other consents are given] … (the Developer using its best endeavours to commence the Works at the earliest opportunity) and shall thereafter proceed with all proper speed and diligence and complete the Works in accordance with the following provisions of this Agreement
12.2	… the Works shall be completed no later than Fifteen Months from the later of [the Owner’s approval or] the grant of building regulation consent …
…

15.1	The Developer shall occupy (but not so as to enjoy exclusive possession) the Property as licensee for the purpose of carrying out the Works in its present condition and shall execute the Works at the Developer’s own cost and risk and shall at all times during the execution of the Works properly supervise the Works
…

16.1	The Developer may do all things in connection with the sales of the Dwelling as it reasonably considers necessary including (inter alia)
16.1.1	choosing appointing and dismissing contractors estate agents and solicitors.
16.1.2	 negotiating and dealing with prospective purchasers of the Dwelling and their solicitors throughout the transaction and accepting offers for the purchase of the Dwelling … [and] use its best endeavours to achieve at least the Minimum Price … as defined in Clause 22.1 … and the purchase price shall in any event be subject to the approval of the Owner (such approval not to be unreasonably withheld or delayed) …
16.1.3	authorising the solicitors acting on the sale …
…

18.	The Owner shall not dispose of any part of the Property or grant any rights or licences in respect thereof other than as provided for in this Agreement.
…

20.	The Developer shall not assign mortgage or charge the benefit of this Agreement or any part thereof [except with consent to raise finance for the work] …

21.	The Developer shall be entitled to carry out the Works by itself or by way of contractors …

22.1	In this clause ‘the Minimum Price’ shall mean the minimum price for each Dwelling as set out below … and the Developer shall use its best endeavours to obtain the Minimum Price
	Unit 1		£150,000
	Unit 2		£165,000
	Unit 3		£240,000
	Unit 4		£220,000
	Unit 6		£130,000
22.2.1	Upon the completion of [any of the units] respectively to a Purchaser in accordance with the provisions of Clause 5.2 the Developer shall pay or cause to be paid to the Owner from the proceeds of sale the following sums …
	Unit 1		£93,750
	Unit 2		£88,390
	Unit 3		£85,710
	Unit 4		£78,570
	Unit 6		£80,000
22.2.2	Upon the Developer completing the purchase in accordance with Clause 5.1 of this Agreement the Developer shall pay to the Owner the [same] sums in respect of any Unit which shall at the date of completion not have been sold to a purchaser …
…
and on a subsequent sale on or before 4th day of May 2003 by the Developer of a Unit the Developer shall pay to the Owner the additional sum for that Unit referred to in this Clause and the balance of the sale price of a Unit sold as aforesaid shall belong to the Developer PROVIDED THAT if the gross proceeds of sale to any Purchaser or Purchasers on or before 4th day of May 2003 … exceed the … sum of £1.13 million (hereinafter called ‘the Excess’) then the Developer shall after deducting 3% of the Excess towards legal and 
agents fees pay 50% of the balance of the Excess to the Owner …
…
22.2.3	On completion of the sale of each Unit the Developer shall pay 50% of the excess above the Minimum Price into an account entitled “the Burhill Estates Company Limited Account” to be set up by the Developer’s solicitors …                        
23.   The owner hereby grants unto the Developer right licence and permission until completion of the Works to enter onto (i) the Property … and to  …
23.4 	… carry out the Works and all other obligations under this Agreement
23.5.1	Provided that upon entry onto the Property the Developer shall become responsible for … all rates taxes duties charges assessments and outgoings whatsoever …
…

25.1	The Developer may commence marketing of the Dwellings or any of them at any time after the date of this Agreement
…
25.3	… Where the Owner is satisfied that Practical Completion of the Works has taken place it shall issue a certificate (‘the Owner’s Certificate’) to that effect …
…

30.	The parties hereto agree to conduct themselves with the utmost good faith at all times towards the others in respect of all aspects of this Agreement …

31.	Any consideration expressed in this Agreement is exclusive of Value Added Tax …

32.	The parties hereto agree that this Agreement constitutes the entire agreement between them …
…
33.	From the date this contract shall become unconditional the Developer shall be responsible for the payment … [of] all outgoings rates and taxes relating to the Property …
…

9.	The agreement for the sale of Unit 2 to Mr and Mrs Lawrence dated 6 December 1999 was exhibited.  The draft agreement annexed to the agreement under clause 5.2 was not exhibited but Mr Goy accepted that the agreement with Mr & Mrs Lawrence was in the same form.

10.	This agreement, which we call “the Lawrence Agreement”, included the following provisions,

“1.	Subject to the terms of clause 11 of this Agreement the owner will sell the Property with the dwelling thereon … and the Purchaser will purchase the same at the price of £450,000 payable as to:-

1.1	the sum of £78,570 to the Owner in respect of the transfer of the Property and
1.2	as to £371,430 to the Developer in respect of the Works carried out to the dwelling on the Property …
of which a sum equal to 5 per cent shall be paid as a deposit … to the Developer’s solicitors as Agents 
…
2.	The Owner sells the Property with full title guarantee and subject to completion by the Developer of the Works …
…

5.	The sale and purchase of the premises shall be completed and the balance of the purchase money … shall be paid to the Developer’s solicitors or as they may direct … on the 20th day of December 1999

…
11.	The Owner has entered into this Agreement purely for the purpose of conveying the legal estate in the premises to the Purchaser and on condition that the Developer has fully complied with the terms of the Agreement dated 5th May 1998 and gives no warranty in respect of the dwelling … or the Works carried out thereto which shall be entirely the responsibility of the Developer …
…
15.	The Developer shall hand to the Purchaser on completion:-

1.	A release of the restriction contained in Entry 52 of the Charges Register of title number SY373471
…
16.	The Developer hereby agrees with the Purchaser that it will rectify as quickly as practicable at its own expense any defects notified to it by the Purchaser … due to faulty workmanship or faulty materials within one year of completion …”

It is to be noted that the unit sold to Mr and Mrs Lawrence was that described as Unit 4 in the agreement of 5 May 1998.  Entry 52 on the Register was as follows:

“(12 June 1998) option to purchase the land edged and numbered 27 and 28 in blue on the filed plan contained in an Agreement dated 5 May 1998 made between Burhill Estates Company Limited and Latchmere Properties Limited.”

11.	The Transfer to Mr and Mrs Lawrence also followed the form of the draft Transfer annexed to the agreement of 5 May 1998 and provided that in consideration of the payment of £450,000 by the Purchaser as to £78,570 to the Vendor (Burhill) and as to £371,430 to the Developer (the Appellant), 

“the Vendor hereby transfers with full title guarantee to the Purchaser and the Developer hereby confirms and transfers to the extent of its interest (if any) in the Premises hereby transferred ALL THAT the Premises …”

12.	Mr Eshelby’s statement said that it was not contemplated that the land would be transferred to the Appellant but rather that it would enter onto the land to carry out construction work and would sell the completed units to third parties; Burhill would receive its sale price for the land as final sale of the completed units to third parties; Burhill would receive a share of the “overage”.  This type of agreement was not uncommon and involved only one charge to stamp duty. It enabled the Appellant to develop the property without having to pay over the purchase price. This evidence was not challenged and we accept it.

13.	It appears from statements prepared by the Appellant’s solicitors that the gross sale proceeds were £1,516,500 of which £613,873 was due to Burhill and the balance to the Appellant. An initial assessment of £123,965 was notified on 4 January 2001. A misdeclaration penalty based on tax of £144,298 was notified on 15 March 2001 and an amended assessment in the same sum as the original assessment but varying the periods to £41,232 for 12/99 and £82,463 for 03/00 was notified on 2 April 2002.  The Appellant appealed against each of those.  The misdeclaration penalty was withdrawn on 13 June 2001.

14.	The statement of case stated that the tax assessed was calculated on the basis of 7/47ths of the amount received by the Appellant. The apparent discrepancy between the tax assessed and the figures was not explained to us.  It appears that no allowance was made for input tax due if the supplies were taxable or for zero-rating of the converted barn.  These and other issues potentially arising were held over until the issue of principle was decided.

Appellant’s submissions

15.	Mr Goy submitted that under the agreement with Burhill the Appellant acquired an interest in land; the construction work was for the Appellant’s own benefit increasing the value of its interest in the land and the sums received by it on the sales were attributable to supplies of interests in land and therefore exempt under Schedule 9 Group 1 of the VAT Act 1994.  He said that the sums were not consideration for supplies of construction services to Burhill.  He said that if clause 5.1 had operated there would simply have been an agreement to buy the land and no question of a supply of construction services would have arisen.  At the time of construction it was not possible to know whether clause 5.2 would apply.  The possibility that clause 5.2 might apply did not mean that the Appellant was supplying construction services. Although clauses 12 to 15 set out obligations regarding building works, it did not follow that there were supplies to Burhill for consideration.  The work was at the Appellant’s cost and risk, see clause 15.1.  Under clause 5.2.4 the Appellant paid Burhill.  The fact that Burhill benefited from the work did not mean that services were supplied to it for a consideration.  All units were sold within 12 months of completion and accordingly clause 22.2.1 applied.

16.	He said that the agreement gave the Appellant a conditional contract to purchase.  The conditions were not dependent on the permission of Burhill which had to sell if the work was satisfactorily completed and there were no third party sales.  Such an interest in land came within the exemption under Group 1, see Trewby v Customs and Excise Commissioners [1976] STC 122.  The agreement gave the Appellant an equitable interest in the land, see Property Discount Corpn Ltd v Lyon Group Ltd [1981] 1 WLR 300 at pages 304G-305C and Pritchard v Briggs [1980] 1 Ch 338 per Goff LJ at pages 388G-389F.  The condition was not subject to the volition of the vendor who could not prevent a sale to the Appellant.  It was not necessary that the Appellant should be able to get immediate specific performance.  The charges had been duly registered.

17.	Mr Goy said that under clause 5 the Appellant either purchased the land for a small proportion of its developed value or received a large part of the proceeds of a sale to a third party.  Either way the Appellant had a valuable interest.  The interest of Burhill was heavily encumbered; it could not sell without the Appellant’s agreement.  On sale the purchasers got a freehold interest, the Appellant’s rights were extinguished and the charges were removed.  The consideration received by the Appellant was in return for the release and was covered by Note (1).  It was exempt whether the supply of the interest in land was to the purchaser or to Burhill.

18.	In the alternative, Mr Goy submitted that the Appellant was a person to whom a benefit accrued within Schedule 10, paragraph 8(1)(a) of the VAT Act 1994.  “Benefit” meant economic interest and both the Appellant and Burhill had economic interests in the properties sold.  He said that on any view the Appellant was entitled to a share in the sale proceeds.  References to “person” in paragraph 8 could be read in the plural under section 6 of the Interpretation Act 1978; paragraph 8 must apply to a case where land is sold by two trustees.  He submitted that paragraph 8 applied if the Tribunal concluded that the payments received were not consideration for giving up an interest in land either (1) because the consideration was not in return for the surrender of an equitable interest or (2) because the Appellant had no valuable interest in the land at all.

Customs’ submissions

19.	Mr Parker said that the letter by the company secretary of 5 May 2000 was evidence of how the Appellant looked upon the agreement.  He submitted that the Appellant did not acquire an equitable interest in the land.  He accepted the tests in Property Discount Corporation and Pritchard v Briggs but said that the interest of the Appellant was subject to the volition of Burhill.  The Appellant’s right to buy under clause 5.1 was subject to no sale taking place under clause 5.2.   Although “the Developer” was excluded from the definition of “Purchaser” in recital (5)(vi), Burhill as owner was not excluded nor was its agent or nominee; a transfer to a nominee under an agreement within clause 5.2.2 would comply with clause 5.2.3; if towards the end of the twelve month period under clause 5.1 there had been no sale, Burhill could make a minimum offer under clause 22.1; such an offer would not be in breach of clause 30. While a nominee of the Appellant would be excluded by clause 30, there was no reason why a nominee of Burhill should be excluded.

20.	Mr Parker said that, if contrary to his submission above, the Appellant did have an equitable interest, the sum received by the Appellant on sale was consideration for the construction services rather than for such equitable interest.  Clause 1.2 of the Lawrence Agreement expressly attributed the £371,430 payable to the Appellant to the works carried out; clause 15.1 was an ancillary clause not tied to the payments under clause 1.2.  That was the subjective value attributed by the parties to the construction services, see Naturally Yours Cosmetics Ltd v Customs and Excise Commissioners (Case 230/87) [1988] STC 879, Empire Stores Ltd v Customs and Excise Commissioners  (Case C-33/93) [1994] STC 623, Rosgill Group Ltd v Customs and Excise Commissioners [1997] STC 811, CA, Customs and Excise Commissioners v Westmorland Motorway Services Ltd  [1998] STC 431 and the latest case, Hartwell   v Customs and Excise Commissioners [2003] STC 396, CA.  There was no suggestion that the agreement was a sham.  If the Appellant said that something else was intended, compelling evidence was needed.  Clause 1.2 was the mechanism by which the Appellant was paid for the construction services supplied to Burhill.

21.	He said that Schedule 10, paragraph 8 did not apply because the only relevant grant of an interest in land was by Burhill and the whole benefit of the consideration accrued to Burhill under clause 1 of the Lawrence Agreement.  Further, he submitted that paragraph 8(1) is drafted to cover a single consideration received by one person; there is no reference to part of the benefit and no provision for apportionment, see per Lord Slynn in Nell Gwyn House Maintenance Fund Trustees v Customs and Excise Commissioners [1999] STC 79 at 93d-g.  Paragraph 8 referred to “person” in the singular. He accepted that for the purchaser the whole consideration was for an interest in land, but as between the Appellant and Burhill the attribution was that under clause 1 which represented the commercial reality.  There was nothing unusual in the Appellant suffering VAT on the profit element attributable to the appreciation in the value of the land.

Appellant’s Reply

22.	In reply Mr Goy said that Burhill could not defeat the Appellant’s rights under clause 5.1 except by deception.  Clause 5.2 contemplated a sale to a third party not to Burhill or its nominee or agent.  The transfer under clause 5.2.3 was the transfer of the legal interest; Burhill could not transfer the legal interest to itself.  If Burhill sought to sell to a nominee or agent at the minimum price, the Appellant could refuse to enter into the contract under clause 5.2.2 on the grounds that Burhill was seeking to get round the agreement. The Appellant might consider that the market would improve and that it could sell itself later.  Burhill could not invoke clause 30 in those circumstances.  The agreement of both Burhill and the Appellant was required; unless it could be shown that the Appellant was not acting in good faith, it could not be compelled to agree to a sale.  It followed that the Appellant did acquire an interest in land which could not be defeated at the volition of Burhill.

23.	He said that in deciding whether the Appellant was providing construction services to Burhill, it was necessary to look at the agreement as a whole.  The fact that the Appellant acquired an interest in land was a clear indication that it was building for itself.  It must be possible to determine whether construction services were being provided to Burhill at the time when the work was being done.  If the Appellant had purchased the land under clause 5.1 there could have been no supply of construction to Burhill.  How could the position be changed by the fact that sales occurred under clause 5.2?  When the land was developed Burhill did not own an interest worth the value of the developed land but an interest worth only a proportion.  Before the Lawrence Agreement the Appellant owned a valuable interest in the land.  On the sale the Appellant’s interest disappeared and the Appellant received a payment. That payment was consideration for the Appellant’s equitable interest.

24.	Mr Goy said that the terms of the Lawrence Agreement did not alter the character of the supplies by the Appellant.  He accepted that the Lawrence Agreement followed the agreement annexed under clause 5.2.2.  It was impossible to say that only £78,570 was for an interest in land because part of the sum of £371,430 was due to Burhill as overage under clause 22.2.2.  Clause 1 of the Lawrence Agreement did not therefore describe what the owner, Burhill, would get.  Clause 1.2 said “in respect of the works” not “in consideration of the works.”  The release under clause 5.1 was not just a formality : the purchasers were buying the land unencumbered by the Appellant’s rights which were released when the Appellant received payment on completion.  That payment was consideration for an exempt supply of an interest in land.

25.	As to Schedule 10, paragraph 8, Mr Goy said that Nell Gwyn should be distinguished since there the persons paying the consideration received a supply of maintenance.  The only real argument against paragraph 8 applying was that “person” was not in the plural.  However it must be read in the plural where there are two beneficiaries and one or more trustees.  Paragraph 8 was important if the Tribunal had difficulty in attributing the consideration to the Appellant giving up its interest in the land.  There had been no suggestion that the payments received were in consideration of any supplies other than exempt land or construction.

Conclusions

26.	We start by considering whether the Appellant obtained “any interest in or right over land” within item 1 of Group 1 by reason of the agreement of 5 May 1998.  It is clear that an equitable interest in land is covered by the exemption.  Clause 5.1 gave the Appellant a right or rather obligation to buy the land in specified circumstances. There were both positive and negative conditions. The positive condition was that twelve months must have elapsed from the issue of the Owner’s Certificate which in turn depended on the work being done. The negative condition was that within that twelve month period there had been no sale under clause 5.2.

27.	Mr Parker did not suggest that the fact that clause 5.1 was binding on the Appellant as well as Burhill was relevant; nor did he suggest that the fact that there were negative conditions was relevant. His submission was that the conditions in clause 5.2 left “the grantee’s interest subject to the volition of the granter” to adopt the words of Goff LJ in Pritchard v Briggs [1980] Ch 338 at 389F. His submission was that Burhill could have offered the minimum price either itself or through a subsidiary company or an agent or a nominee once it was clear that no offer was coming from a third party.

28.	While it is correct that the definition of “Purchaser” in the recital does not expressly exclude Burhill, when the agreement is considered as a whole together with the annexed agreement and Transfer, it is clear that clause 5.2 does not contemplate the Owner as a possible purchaser.  Burhill could not transfer to itself, which is no doubt why the Owner was not expressly excluded from the definition of Purchaser.  Mr Parker met this problem by submitting that the sale and Transfer could be to a subsidiary company or nominee of Burhill.  This however would distort the clear intended effect of the agreement since, whereas the Developer would have had to account to the Owner under clause 22.2.2 on a sale in excess of £1.13 million before 4 May 2003, there would be no corresponding obligation if the Owner’s nominee sold on.  In our judgment the Appellant could have refused to join in a contract to sell to Burhill’s subsidiary, nominee or agent and any attempt by Burhill to invoke clause 30 would have been hopeless. No doubt if the Appellant had failed to market the properties properly Burhill would have had a remedy but not under clause 5.  If Burhill arranged a covert offer from a nominee that would in our view be contrary to clause 30.  We hold that the agreement did give the Appellant an interest in the land.  That being so, there is no doubt that the release or surrender of that interest was a grant by reason of Note (1). 

29.	That leads to the question whether the sums received by the Appellant on the sales to purchasers were consideration for construction services or for the Appellant’s interest in the land.  There was no suggestion that a supply of construction services was made to the purchasers.  The supply to them was clearly the grant of an interest in land.  If there was a supply of construction services, it could only be to Burhill but with third party consideration within Article 11.1(a) of the Sixth Directive or, put another way, the purchasers discharged Burhill’s obligation to pay the Appellant; on this analysis, on sale the Appellant released its interest in the land to Burhill to enable Burhill to grant the whole interest in the land to the purchasers. This was not quite the way in which Mr Parker put it, however it seems to us to be the logic of his argument.

30.	Mr Goy’s submission, that the sums received by the Appellant were consideration from the purchasers for its interest in the land or for the release of its interest with the construction services being in effect a self-supply, raises the question, “What did the Appellant give for that valuable interest in land?”  The answer must be that such interest had no value unless the Appellant developed the land at its own cost as it was obliged to do under the agreement.

31.	It seems to us that neither analysis is without difficulties.  Mr Parker’s analysis has the difficulty emphasised by Mr Goy that if no sale had been achieved within 12 months the Appellant would have acquired the land under clause 5.1, it would have received no payment and it could have made no supply of construction services.  It also has the difficulty that, given that sales did occur, the consideration for any construction services varied depending upon the total sale prices obtained so that a rise in property values in the area resulted in a higher consideration for the construction services already performed.  It also involves the proposition that the Appellant received no consideration for the grant of its equitable interest in the land.  Mr Goy’s analysis has the difficulty that although the Appellant was obliged under the agreement to develop the land so enhancing the value of Burhill’s interest there was no supply of construction services to Burhill at all and the Appellant provided no consideration for the acquisition of its interest in the land which impinged on Burhill’s interest in the land.  

32.	Neither party suggested that the consideration received by the Appellant should be apportioned nor is it easy to see how this could be done.  It seems clear however that the sums under clause 22.2.1 represented the basic development value with planning consent, that the difference between those sums and the Minimum Prices represented the anticipated construction and other costs with a basic profit margin and that the overage represented the surplus.  The Appellant was enabled to develop the property and to obtain a considerable part of the appreciation in its value without having to pay for the land unless no sale was achieved within the specified time.

33.	The analysis for VAT purposes must depend on an analysis of the agreement of May 1998 together with the Lawrence Agreement which was in the form of the draft agreement annexed to the May agreement.  We do not consider that the wording of clause 1 of the Lawrence Agreement can be ignored, however the sum of £371,430 in clause 1.2 cannot constitute the consideration payable by Burhill for construction services since one-half of the excess of the £450,000 sale price over £230,000 was payable into the account under clause 22.2.3 and was subject to the overage agreement.  Furthermore, as Mr Goy stressed, clause 1.2 said “in respect of” and not “in consideration of” the works carried out.  If clause 1.2 was intended to attribute a sum to the construction services, it attributed a figure which cannot be correct.  While clause 15.1 was not tied expressly to clause 1.2, the agreement did involve a release of the Appellant’s equitable interest and under clause 11 it was provided that the Owner entered into the agreement purely for the purpose of conveying the legal estate.  Read literally, if as Mr Parker submitted the Appellant’s release was merely ancillary, the agreement did not cover the beneficial interest in the property.

34.	On balance we have concluded that the sums payable to the Appellant under clause 1.2 of the Lawrence Agreement and the other sale agreements were consideration for the Appellant’s equitable interest albeit that the Appellant was in fact subsequently accountable to Burhill for part of those sums as overage.  We are strengthened in this conclusion by the fact that under the agreement between the Appellant and Burhill the risk in relation to a change in land values clearly lay primarily on the Appellant.

35.	There was no suggestion that the Appellant received a non-monetary consideration for construction services in the form of an interest in the land.  The only consideration identified was the money received from purchasers.  In our judgment the crucial question is whether that was in return for the Appellant’s equitable interest in the land or whether it was third party consideration for construction services. It is well established that there must be a direct link between the services provided and the consideration received if the service is to be taxable, see Naturally Yours Cosmetics Ltd v Customs and Excise Commissioners (Case 230/87) [1988] STC 819 at paragraphs 11 and 12.  Where there are two alternative supplies to which consideration may be attributable, it seems to us that it must be attributed to the supply with which there is the more direct  link.  In our judgment the link with the equitable interest in land is the more direct.  Quite apart from the fact that it was direct consideration from the purchasers as opposed to third party consideration, the construction analysis involves a consideration which clearly exceeded the value of Burhill’s interest in the land and only makes sense on the basis that the entire purchase consideration was attributable to Burhill’s supply of the land although Burhill never incurred a liability to pay for the construction.

36.	In view of our conclusion that the payments received by the Appellant were consideration for exempt supplies of land, the question of the applicability of Schedule 10, paragraph 8(1) does not arise.  However if we had not held that the Appellant had an equitable in the land, it is not clear to us how paragraph 8 could have operated to prevent the consideration received being attributable to construction services.  This is in spite of the fact that we accept that paragraph 8 must apply where there are two trustees or two beneficiaries since otherwise it would not apply on a sale of land held by individual trustees.

37.	The result is that the appeal succeeds.  The Appellant is entitled to its costs.  In the event that costs are not agreed within three months we direct that they be taxed on the standard basis under Rule 29(1)(b).

THEODORE WALLACE
CHAIRMAN

RELEASED:

LON/01/165