18750
VALUE ADDED TAX — input tax — transfer by local authority of housing stock to registered social landlord — transferee undertaking to repair, improve and maintain houses — cost of repair of tenanted dwellings — whether landlord using repair services for purpose of making taxable supply to local authority or exempt supplies of housing to tenants — consideration — whether transfer a barter arrangement — no — payment by government agency of grant to compensate for negative value of transferred houses — whether consideration for the undertaking — no — transferee making only exempt supplies of housing — appeal dismissed

MANCHESTER TRIBUNAL CENTRE
 	
				SOUTH LIVERPOOL HOUSING LIMITED	Appellant
	
- and -

			THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Colin Bishopp (Chairman)
						
Sitting in public in Manchester on 30 June, 1 and 2 July 2004 

Andrew Hitchmough and Richard Vallat, of counsel, instructed by R S M Robson Rhodes, chartered accountants, for the appellant 
Rupert Anderson QC, instructed by their solicitor’s office, for the respondents 

© CROWN COPYRIGHT 2004

DECISION

Introduction
1.	Like most local authorities of its size Liverpool City Council (LCC) has been historically the owner of large numbers of tenanted houses, colloquially known as council houses. Shortages of funds for several years had made it impossible for LCC and other such landlords to meet all of their repair obligations; still less was the money available for modernisation of the houses. As a result, by the middle of the 1990s, many such houses were in a poor state of repair and in increasingly urgent need of modernising works. LCC had two estates of houses of this description in the southern part of the city, at Garston and Speke.
2.	The government decided to make funds available, through what was then the Department for the Environment, Transport and the Regions (DETR), for the repair and modernisation of council housing estates. The funds were not, however, unlimited and there was put in place a competitive process designed to identify the most deserving cases. In addition, the funds were not made available to the local authorities themselves. They had, instead, to transfer their properties to registered social landlords (RSLs) which, though regulated, are within the private sector. The RSL then took over the landlord’s obligations. These (with some enhancement) included responsibility for the backlog of repairs and for the undertaking of refurbishment and future repairs, as well as the maintenance and management of open space and recreational areas within the estates. Because the RSLs to which such transfers were made were in the private sector, they were not subject to the restraints on borrowing which were applied to local authorities, but were instead at liberty to take commercial loans to assist them in funding the repairs and renovations which were required.
3.	The scheme by which the funds were provided was known as the Estates Renewal Challenge Fund (ERCF). An important feature of it was the recognition that the run-down estates at which it was targeted had a negative capital value, when one took into account that the houses were occupied by secure tenants paying low rents, that they were in need of modernisation, and that they were suffering from a want of repair. In order to reflect and compensate for that negative value, and to make it financially possible for the RSL to take on the estate, a large part of the total grant which was made available in accordance with the scheme consisted of a capital sum known as a dowry.
4.	LCC applied for a grant for its two estates at Garston and Speke with the intention that if its application was successful the two estates would be transferred to the appellant, South Liverpool Housing Limited (SLH), a company to be promoted by LCC for the purpose of taking over and assuming responsibility for the two estates. LCC’s application was indeed successful and in October 1999 the two estates, excluding the 28% of the houses which had been bought by their tenants under the right to buy legislation, were transferred to SLH which has, since, pursued a programme of repair and improvement: the repairs which had not been carried out by LCC (the “catch-up repairs”) have been done and SLH has improved the houses by the installation, where necessary, of double glazing, central heating, and modern bathrooms and kitchens. It has also undertaken the necessary continuing repairs.
5.	The question which arises in this appeal is whether the appellant is entitled to input tax credit for the VAT charged to it by independent contractors carrying out the catch-up repairs and improvements. It accepts that it is not entitled to credit for the input tax it has incurred on the cost of the continuing repairs, because they are attributable to the exempt supply of residential accommodation it makes to its tenants. It contends, however, that its undertaking to carry out the catch-up repairs and the improvements, which were formerly the responsibility of LCC, constitutes a taxable supply, made by SLH to LCC, of relieving LCC of that responsibility; and that the cost of the repairs and improvements is attributable to that supply. Thus, it says, the input tax it incurred when paying for the repairs is recoverable. Alternatively it represents a supply to both LCC and to the tenants, and must be apportioned between the two. It says that the dowry is the consideration for the supply from SLH to LCC; cumulatively or alternatively there was a barter arrangement by which SLH undertook to relieve LCC of its responsibility in exchange for the transfer of the estates.
6.	The Commissioners argue that the attribution for which the appellant contends is not possible. They accept that the effect of the transfer of the estates from LCC to SLH was to relieve LCC of its obligations but, they say, all of the repairs and improvements have been undertaken by SLH in its capacity of landlord and they are thus attributable entirely to its exempt supply, to what are now its own tenants, of residential accommodation. In any event, they say, even if it could be said that relieving LCC of its obligations might be capable of amounting to a supply, no consideration passed, since the dowry could not properly be regarded as consideration and such consideration, if it was properly to be so regarded, as LCC provided under the transfer agreement was negative, and negative consideration is not recognised by the scheme of VAT.
7.	That is, in outline, the background to this appeal and a very brief summary of the arguments for the parties put forward, for the appellant, by Andrew Hitchmough and Richard Vallat; and, for the respondents, by Rupert Anderson QC. The principal facts of the case were not in dispute although some of the details, about which the appellant’s Chief Executive Officer, Matthew Gardiner, gave evidence, were contentious. What follows in the next section of this decision may be taken as my findings.
The facts
8.	The two estates which were the subject of LCC’s application for grant funding under the ERCF scheme contain approximately 4,500 houses (overall LCC then owned about 47,500 houses of which 27,000 were considered to be below standard and, as I am sure, the problem it faced was formidable). The houses with which I am concerned were built at various times, but mainly shortly before and shortly after the Second World War. Because of their traditional style of construction they were regarded by tenants and prospective tenants as attractive properties but, unless the tenants had undertaken modernisation works themselves, they had kitchens and bathrooms of the styles current at the time of construction, did not have central heating, and had single glazing, in many cases in urgent need of replacement because of the condition of the wooden window frames.
9.	Most of the homes also suffered from a significant backlog of repairs, for which LCC did not have sufficient funds, with the consequence that the backlog was accumulating. By June 1996, when a survey was carried out, the aggregate cost of the catch-up repairs required by the homes on the two estates was estimated at £10.7 million. There were likewise no local or central government funds available for modernisation; the same survey estimated its cost at about £28.9 million. (A later survey put the combined cost of the catch-up repairs and improvements at £57 million and on other estimates, Mr Gardiner said, the total cost was even higher.) All of the tenants had secure tenancies. They had comprehensive rights, many conferred by statute, including the right to call upon LCC to repair the houses where necessary, at LCC’s expense. Rent levels were low and LCC’s freedom to increase them was limited. 
10.	The ERCF scheme (which I understand is no longer in operation) was designed to overcome the problems encountered by local authorities such as LCC in maintaining and improving their housing stock. A council wishing to secure a grant for any part of its housing stock had to make a proposal to the DETR demonstrating that the relevant estates were in particular need, and that the payment of grant would lead to the undertaking of the backlog of repairs and the refurbishment of the houses within a period of five years, as well as the proper maintenance of the houses in the longer term. It was necessary for the application to be made, or at least led by, the local authority which owned the houses but, as I have indicated, the local authority could not itself benefit from the grant. If the grant application was successful, the houses had to be transferred to a social landlord registered as such with the Housing Corporation in accordance with section 1 of the Housing Act 1996 (a registered social landlord or RSL); eligibility to receive grants is conferred on RSLs by section 18 of the same Act.
11.	Once a grant under the ERCF scheme was approved, it was the Housing Corporation which was responsible for making payments of grant instalments to the RSL to which the properties had been transferred and for monitoring the application of those payments: see Schedule 1 to the 1996 Act. The transfer of the houses to the RSL could take place only after payment of the grant had been approved since, without the grant, the RSL would have no funds with which to repair and improve the houses. It was, therefore, necessary to follow a chronological sequence of steps.
12.	LCC’s application for a grant was made in December 1997. Its thrust, as Mr Anderson emphasised, was the overall benefit to the tenants which would be the result of its successful implementation (and which was plainly its objective) and not any possible advantage to LCC, by relieving it of its obligations or otherwise. The application was approved in principle in February 1998. At this stage, LCC had done no more than satisfy the DETR that the condition of the Speke and Garston estates was such that they merited grant funding. In order to secure the grant, it was necessary thereafter to meet various further requirements. These included the putting in place of the structure for the transfer of the houses, the production by SLH of business and delivery plans, the obtaining of a valuation, consultation with affected tenants and the obtaining of the approval of the Secretary of State to the transfer.
13.	The appellant was formed in April 1998 as a non-charitable but non-profit making company limited by guarantee. Although it was not registered with the Housing Corporation as an RSL until September 1999 it began to take an active part in the preparation for the transfer immediately on its formation. Its directors at formation were partners of the firm of solicitors who were advising LCC, and they remained in office until May or June 1999, but a “shadow” board was appointed when the appellant was first incorporated. Its members, reflecting the composition which the board was intended to, and now does, have, included five LCC nominees, five tenant representatives and five (though at times only four) representatives of local bodies with an interest in social housing. It was in reality the shadow directors who controlled the appellant.
14.	The purpose of the business plan was to demonstrate, to the satisfaction of the DETR and the Housing Corporation, that the payment of grant would achieve the desired objectives of improving and maintaining the housing stock, and would do so in a manner which was practical financially. The plan, the first draft of which was produced in December 1998, was prepared by LCC and SLH (though it was, and was described as, SLH’s plan) with assistance from chartered accountants. It was designed to be read together with LCC’s delivery plan, which set out the background to the proposal, what it was designed to achieve and the various steps which were envisaged in order to bring it to fruition. It included a timetable which served both to justify the proposal and, in due course, as a yardstick by which SLH’s performance could be measured. Perhaps the most important feature of the business plan was the cash-flow forecast which was designed to provide an analysis of the anticipated costs of catch-up repairs, refurbishment and continuing maintenance, to explain how its income would be used to finance the catch-up repairs and refurbishment over the time-scale envisaged by the delivery plan, to show how SLH would be able to secure the necessary finance, by a combination of the grants available to it, borrowing and rent income, and to demonstrate that over a 30-year period it would be able to do all it had promised while at the end of the period it would be left with a modest surplus.
15.	Although the discussions between LCC and SLH, in the course of the preparation of these documents, were largely amicable, Mr Gardiner explained that at times there were areas of disagreement when a negotiated compromise needed to be reached; his own appointment as Chief Executive Officer was itself the source of some disagreement. He also told me that there were some disputes about the disposition of part of the grant money which was designed to pay for the transfer exercise itself; over the amount to be paid by SLH to LCC for the benefit of the rents uncollected at the date of transfer but which might be collected by SLH thereafter; and over the allocation of part of the grant which LCC had been permitted to use, in advance of the transfer, to pay for the urgent replacement of some windows. I accept that evidence, and am satisfied that, although LCC and SLH worked closely together and for the most part amicably, their interests were not identical and they negotiated at arm’s length when appropriate. There were also arm’s length negotiations about transitional arrangements, such as the transfer of staff from LCC to SLH and administrative consequences of the transfer. It is worth mentioning that while, if this appeal succeeds, LCC might perhaps itself benefit I was left with the impression that it had taken no active interest in the appeal.
16.	The valuation to which I have referred in fact consisted of three valuations, each prepared (by the same firm of independent valuers) on a distinct basis and for a different purpose, in accordance with prescribed formulae. Two are of no significance in themselves for the purposes of this decision, although one had some relevance to the business plan, bearing as it did on the long term financial stability of the project. The other, which took account of the condition of the properties and the nature of the tenancies, was relevant for the determination of the amount of the dowry included in the total grant. It showed that, allowing for those factors, the two estates had an aggregate negative value of £28.1 million. Because other factors (in particular the cost of borrowing) were also taken into account in determining its amount, the dowry awarded to SLH was £35.06 million, out of a total grant of £43.78 million. The dowry is described in the DETR’s procedural guidance as “Grant paid to the RSL principally to offset a negative value and which are [sic] not necessarily for specific works.” In effect, Mr Gardiner said, the dowry represented a balancing figure intended to make SLH’s business plan viable.
17.	Section 32 of the Housing Act 1985 provides that a local authority may not dispose of land held for housing purposes, save under the right to buy scheme, without the consent of the Secretary of State—at that time, the Secretary of State for the Environment, Transport and the Regions, who is, and was then, also the Deputy Prime Minister. There are various conditions attaching to the granting of such consent, but one in particular needs to be mentioned, namely that imposed by section 106A of the 1985 Act (inserted by the 1996 Act) which requires the Secretary of State “to have regard to the views of tenants liable as a result of the disposal to cease to be secure tenants”; Schedule 3A of the Act contains some detailed provisions.
18.	With those requirements in mind, LCC undertook a comprehensive consultation exercise with all of its tenants resident on the two estates. Each tenant received two documents, one a fairly short summary and the other a longer and detailed explanation, setting out what was proposed, and showing, in tabular form, the differences between the tenants’ rights, statutory, contractual and otherwise, as they then were, and as they would be if the transfer to the appellant were to take place. The documents, together referred to as the Consultation Document, explain the benefits of the transfer, in that it would make grant funding available for the repair and improvement of the houses, whereas no such funding (and consequently no repairs or improvement) could be expected if the transfer did not take place. They explain too, and in considerable detail, that if the transfer were to take place tenants would lose some of their existing rights but that, with limited and, as it seems to me, virtually insignificant exceptions those rights would be replaced by equivalent rights, but not always in the same way. In particular, some statutory rights (principally those conferred by the Housing Act 1985 and the Secure Tenants of Local Authorities (Right to Repair) Regulations 1994, SI 1994/133) would be lost but replaced by similar contractual rights: if the transfer took place the tenants would be required to enter into new tenancy agreements with SLH, to replace their existing agreements with LCC. It was a requirement of the Housing Corporation that, in the event of such a transfer, the tenants should have, as nearly as possible, the same rights after the transfer as they had before. There was also an indication in the Consultation Document that rent increases were likely to be lower if the transfer took place than if it did not, though it sounded the warning that the completion of improvements to each house would lead to an increase in the rent payable for it. I accept that the Consultation Document contains a series of promises to the tenants that, by agreeing to the transfer, they would lose nothing of significance but stood to gain a considerable amount.
19.	In November 1998 a ballot of the tenants was undertaken in which 78% voted; 85% of those voting—and therefore about two thirds of all the tenants—were in favour of the proposal.
20.	Confirmation was thereafter received that the grant would be paid unconditionally, save for compliance with the Housing Corporation’s monitoring requirements, and the Secretary of State’s approval to the transfer was also obtained. It was planned that the transfer would take place in July 1999 but—as Mr Gardiner explained, because of continuing disagreement between LCC and the appellant over some matters—it was delayed until 4 October 1999, immediately after the Secretary of State’s formal consent was given, and shortly after the appellant was registered as an RSL.
21.	The transfer document is long and very detailed, and much of it is of no relevance here, though some of the provisions are of significance. The principal operative clause of the document is clause 2, entitled “Agreement to Sell” which reads:
“In consideration of the covenants, conditions and other obligations on the part of the Company to be observed and performed as set out in this agreement and any contract, deed or instrument referred to herein and in further consideration of the receipt by the Company of the Dowry the Council agrees to sell and the Company agrees to purchase 
2.1	the Property; and 
2.2	the Arrears (as defined in clause 8.1).”
22.	The “Property” transferred consists of the entirety of the two estates, including the open spaces, unadopted roads and parking areas, though limited to the freehold or leasehold reversion of those properties which had already been disposed of pursuant to the right to buy legislation or any similar scheme. The “Arrears” are defined by clause 8.1 as the arrears of rent outstanding at the date of transfer. The definition in the transfer document of the term “Dowry” is that it shall mean “the award of Estates Renewal Challenge Fund monies by the Secretary of State for the Environment, Transport and the Regions bid for by the Council to offset the negative value pursuant to section 126 of the Housing Grants Construction and Regeneration Act 1996 payable after the completion date by the Housing Corporation”; the “Council” is, of course, LCC, and the “Company” is SLH.
23.	Section 126 of the Housing Grants, Construction and Regeneration Act 1996, so far as material, reads:
“(1)	The Secretary of State may, with the consent of the Treasury, give financial assistance to any person in respect of expenditure incurred in connection with activities which contribute to the regeneration or development of an area.
(2)	Activities which contribute to the regeneration or development of an area include, in particular …
(e)	providing or improving housing or social and recreational facilities, for the purpose of encouraging people to live or work in the area or of benefiting people who live there ….”
24.	It will be observed that clause 2 of the transfer document, as it is written, is difficult to understand and even on careful analysis is rather inelegant. The assumption by SLH of the obligation to observe and perform covenants, conditions and other obligations could amount (as Mr Anderson agreed) to consideration passing from SLH to LCC but the receipt by SLH of the dowry cannot be consideration of that category. Mr Hitchmough was to argue that it was to be treated as the consideration, passing from LCC to SLH, for the assumption of those various obligations. I shall return to this point later, when I come to the parties’ arguments.
25.	The obligations assumed by SLH pursuant to the agreement were set out in various places within its body and also in a separate deed of covenant. Three of the provisions, included in the schedule to that latter deed, are of particular relevance in this case. They are as follows:
“4.	Not knowingly to do or omit to do any act or thing which might result in the cancellation or withdrawal of the Company’s registration by the Housing Corporation and to comply with all reasonable requirements of the Housing Corporation.”
“8.	To comply with all promises and commitments made to former secure tenants of the Council occupying the Property as set out in the Consultation Document a copy of which is set out in annex 4 to the Principal Agreement.”
“10.	To carry out the programme of refurbishments and improvements referred to in section 4 of the Consultation Document within the respective timescales referred to in the Consultation Document.”
26.	Following the transfer to it of the two estates, SLH has, I understand, received the grant moneys and has carried out the catch-up repairs and the promised improvements to the satisfaction of the Housing Corporation. The work was done using, mainly, independent contractors; it is, of course, the input tax included within the contractors’ charges which SLH now seeks to recover.
The appellant’s case
27.	Mr Hitchmough’s argument was that the assumption by SLH of LCC’s obligation to repair and improve the houses, if supported by consideration, necessarily represented a taxable supply made by SLH to LCC. He relied for that proposition upon what was said by the European Court of Justice in Customs & Excise Commissioners v Cantor Fitzgerald International (Case C-108/99) [2001] STC 1453. In that case, Cantor Fitzgerald agreed to take an assignment of an onerous lease from the original lessee, Wako. It undertook with Wako to perform all of the tenant’s obligations under the lease and to indemnify Wako against any liability Wako might incur as the consequence of any failing on Cantor Fitzgerald’s part. Wako paid Cantor Fitzgerald £1.5 million as the consideration for its assuming those obligations. The question for determination by the Court was whether the £1.5 million was the consideration, as Cantor Fitzgerald contended, for an exempt transaction or, as the Commissioners maintained, for a taxable transaction. At paragraphs 17 to 24 of its judgment the Court said this:
“17.	It must be borne in mind that, under art 2(1) of the Sixth Directive, a supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such is subject to VAT. That is why it is necessary in every case to consider which party supplied the goods or services and which party provided the consideration. It is supplies of goods or services which are subject to VAT, rather than payments made by way of consideration for such supplies.
18.	Consequently, contrary to Cantor’s claim, it is important in a case of the kind before the national court to ascertain which of the assignor and the assignee makes the payment to the other and which of them makes the supply of services.
19.	It is therefore necessary to consider whether a supply of services such as the supply made by Cantor to Wako, in return for payment of a sum of money, is a taxable supply or whether, exceptionally, it is exempted under art 13B(b) of the Sixth Directive.
20.	As the referring court explained, the supply at issue in the main proceedings consists of a prospective tenant, as the supplier of services, agreeing to accept an assignment of a lease of property from a lessee, as the recipient. Thus, in the case before the national court, there is, contrary to the Commission’s appraisal, an identifiable supply of services, which falls within the scope of the Sixth Directive by reason of art 2(1) thereof and which is therefore taxable, unless one of the exemptions, prescribed by a particular provision of that directive, applies. Therefore, it is appropriate to consider whether that supply of services falls within art 13B(b) of the Sixth Directive.
21.	The letting of immovable property for the purposes of art 13B(b) of the Sixth Directive essentially involves the landlord of property assigning to the tenant, in return for rent and for an agreed period, the right to occupy his property and to exclude other persons from it [various cases in support were cited].
22.	The supply at issue in the main proceedings does not meet those conditions. 
23.	On the contrary, it was the new tenant, Cantor, which, by agreeing to take on the rights and obligations arising under the existing lease, supplied a service to the former tenant, Wako. Wako did not make a supply of services to Cantor, but paid consideration in cash for the service supplied by Cantor, consideration which, as such, is not liable to VAT. The landlord was the only person to effect a supply of services to Cantor within the meaning of art 2(1) of the Sixth Directive, which was exempt under art 13B(b) thereof, namely the right to occupy its property in consideration for the payment of rent.
24.	Contrary to Cantor’s assertion, art 13B(b) of the Sixth Directive applies to the grant of leases of property but not to transactions which are merely based on the leases or are ancillary thereto.”
28.	It followed that Cantor Fitzgerald’s supply to Wako was taxable. SLH’s assumption of LCC’s repair and improvement objectives was, Mr Hitchmough said, equivalent to Cantor Fitzgerald’s taking over of Wako’s liabilities and if the exemption conferred by article 13B(b) of the Sixth Directive did not apply—and it did not, for the same reason as it did not apply in Cantor Fitzgerald—the supply must be taxable.
29.	Mr Hitchmough acknowledged that the position of LCC was not identical to that of the original lessee, Wako, in Cantor Fitzgerald. There, Wako remained bound by the lease (since the assignment predated the coming into force of the Landlord and Tenant (Covenants) Act 1995 and the landlord had not otherwise released Wako from its obligations under it), and was still, contractually, required to perform the tenant’s covenants. It was reliant on Cantor Fitzgerald’s undertaking those obligations, and on its indemnifying Wako against any resultant claim by the landlord if it should fail to do so. Here, once the transfer of the properties had been effected, LCC was under no continuing legal obligation to undertake repairs or improvements. However, he said, in reality there was no distinction to be drawn between the two situations. LCC might have been relieved of its legal liability, but it nevertheless had a continuing political obligation, and it could also not avoid its responsibility of ensuring that there was an adequate supply of suitable housing within its area. It had, too, a continuing interest in the proper performance of the promises which had been made to tenants in the Consultation Document; it was for that reason that a covenant requiring SLH to honour those promises had been inserted in the transfer document. Although LCC did not run the risk that the houses would be returned to it, and again become its responsibility, if SLH should fail to carry out its obligations to the satisfaction of the Housing Corporation (in that eventuality the Housing Corporation would transfer them to another RSL: see Schedule 1 to the 1996 Act, paragraphs 14 and 15), LCC would plainly be embarrassed, if not worse, if that were to happen, and the covenant which I have set out above, requiring SLH not to compromise its relationship with the Housing Corporation, had been imposed for that reason. Thus LCC derived a substantial benefit from the arrangement and therefore satisfied the test defined by Lord Millett in Customs & Excise Commissioners v Redrow Group plc [1999] STC 161. 
30.	 There, the taxpayer, a house-building company, operated a sales incentive scheme whereby it agreed to pay the fees of estate agents it instructed in the sale of the existing house of a prospective purchaser, if and when he completed the purchase of a new home built by the taxpayer. It sought to deduct the input tax it incurred on the estate agents’ fees. The Commissioners refused the claim because, they said, the estate agents’ services were not rendered to the taxpayer but to the householders. At page 171 Lord Millett said:
“The commissioners begin by describing the services in question as the ordinary services of an estate agent instructed to market and sell his client’s house. They then ask: to whom were those services supplied? Inevitably they answer: to the householder. They concede that Redrow derived a benefit from the services supplied by the agent and was accordingly prepared to pay for them; but they insist that this is irrelevant. The question is: to whom did the agent supply his services, not who derived a benefit from them? 
But this approach begs the question to be decided. The way in which the commissioners describe the services dictates the answer. But it is equally possible to begin with the services which Redrow instructed the agents to perform. This would lead to a different definition of the services in question. They would not be the ordinary services of an agent instructed to market and sell his client’s house, but the services of an agent instructed to market and sell a third party’s house. The fact is that the nature of the services and the identity of the person to whom they are supplied cannot be determined independently of each other, for each defines the other. Where, then, should one begin?
The solution lies in two features of the tax to which I have already referred. The first is that anything done for a consideration which is not a supply of goods constitutes a supply of services. This makes it unnecessary to define the services in question. The second is that unless the services are rendered for a consideration they cannot constitute the subject matter of a supply. In fact, of course, there can be no question of deducting input tax unless Redrow has incurred a liability to pay it as part of the consideration payable by [it] for a supply of goods or services.
In my opinion, these two factors compel the conclusion that one should start with the taxpayer’s claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything—anything at all—used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally well consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services.
In the present case, Redrow did not merely derive a benefit from the services which the agents supplied to the householders and for which it paid. It chose the agents and instructed them. In return for the payment of their fees it obtained a contractual right to have the householders’ homes valued and marketed, to monitor the agents’ performance and maintain pressure for a quick sale, and to override any alteration in the agents’ instructions which the householders might be minded to give. Everything which the agents did was done at Redrow’s request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to Redrow.”
31.	It was inescapable, Mr Hitchmough said, that if one asked the question “did LCC obtain anything – anything at all?” in return for the transfer of the houses to SLH (the barter, as he described it), and in consequence of the payment of the dowry to SLH (the third party consideration on which he relied), that the answer must be “yes”. In the same context Mr Hitchmough referred also to the decision of the Court of Appeal in WHA v Customs and Excise Commissioners [2004] STC 1081, but I do not think it adds significantly, for present purposes, to what was said by Lord Millett in Redrow.
32.	Mr Hitchmough acknowledged that for there to be a supply there must be consideration and, as I have mentioned, he identified two categories of consideration: the dowry, which, he said, amounted to third party consideration; and the barter transaction, by which LCC transferred the properties to SLH. 
33.	He relied for the former on article 11(1) of the Sixth VAT Directive (77/388/EEC) which reads:
“the taxable amount shall be: 
(a) in respect of supplies of goods and services … everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies.”
34.	It was immaterial, Mr Hitchmough said, that it was not in LCC’s power to compel the Housing Corporation or the DETR to pay the dowry to SLH since the directive did not require the recipient of the supply to be in a position to do so; all that mattered was that a payment was made. The motives of the third party providing it were an irrelevant consideration. 
35.	That the ERCF dowry was capable of amounting to consideration was, he said, demonstrated by cases such as Keeping Newcastle Warm v Customs & Excise Commissioners (Case C-353/00) [2002] STC 943 in which the taxpayer, KNW, received grants from a statutory body, EAGA, towards the cost of its advising householders about improving energy efficiency in their homes. The householders had no control over the payment of the grants. It was accepted that the giving of advice was a taxable supply of services but KNW maintained that the grants did not form part of the consideration for that supply, and should not be brought into account for the purpose of calculating its VAT liability. At page 955, the Court of Justice said:
“23.	Article 11A(1)(a) of the Sixth Directive deals, inter alia, with situations where three parties are involved: the authority which grants the subsidy, the body which benefits from it and the purchaser of the goods or services delivered or supplied by the subsidised body (see, to that effect, Office des produits wallons ASBL v Belgium (Case C-184-00) [2001] ECR I-9115, para 10).
24. In that context, the sum paid by a public authority such as the EAGA to an economic operator such as KNW in connection with the service of energy advice supplied by KNW to certain categories of householders may constitute a subsidy within the meaning of Art 11A(1)(a) of the Sixth Directive.
25. In any event it must be noted that the taxable amount in respect of a supply of services is everything which makes up the consideration for the service (see, inter alia, Tolsma [1994] STC 509, [1994] ECR I-743, para 13).
26. It is clear that the sum paid by the EAGA to KNW is received by the latter in consideration for the service supplied by it to certain categories of recipient.
27. As consideration in respect of a supply, that sum forms part of the taxable amount within the meaning of art 11A(1)(a) of the Sixth Directive.” 
36.	There was, Mr Hitchmough said, an exact equivalence here: the dowry was paid by a public authority, the Housing Corporation, to an economic operator, SLH, in connection with a service rendered by that operator to others. Thus the dowry must be treated as part of the consideration for SLH’s taxable supply to LCC, of relieving it of the repairing obligation.
37.	That there was a barter transaction was apparent, he said, when one drew the distinction between this case and the decision of the tribunal in Maritime Housing Association Limited v Customs and Excise Commissioners (1999) Decision 16232. There, too, the appellant was a housing association based in Liverpool. It took leases from LCC of a number of houses. In each lease there was a covenant requiring the association to repair and refurbish the property to LCC’s satisfaction; the intention was that the houses would thereafter be let or sold for residential occupation. The appellant argued that its agreeing to undertake the repair and refurbishment amounted to a standard-rated supply of services to LCC, the consideration for which was the grant by LCC of the leases at less than market value; and it was correspondingly entitled to recover the input tax which it had incurred in making good that undertaking by effecting the repairs. The tribunal found as a fact that the leases had not been granted at less than market value and the appellant’s argument failed at the first hurdle, since no barter transaction—and correspondingly no consideration—could be established. It went on, however, to express the view that there could in any event be no supply to LCC since the works were carried out after the leases were granted, when LCC no longer had an interest, or at least a sufficient interest, in the houses.
38.	In this case, Mr Hitchmough maintained, the consideration under the barter arrangement was not the supply at an undervalue, but the transfer of the houses itself; and the taxable service SLH supplied was not the carrying out of the repairs, as such, but the relieving of LCC of its obligation to do them, at the moment of transfer. Thus the fact that the repairs and improvements were carried out after the transfer was immaterial. They had to be carried out in order to make good SLH’s undertakings to LCC; thus the cost incurred in carrying them out was attributable to those undertakings and the input tax was recoverable.
The respondents’ case
39.	For the Commissioners, Mr Anderson’s argument was the essentially simple one that the only supply SLH made was to its tenants, and that supply was the exempt supply of residential accommodation, including the performance of such repairing and improvement obligations as the relationship of landlord and tenant carried with it. The input tax which the appellant sought to deduct was incurred entirely in the making of those supplies to the tenants and could not be considered to be attributable, in whole or in part, to the supply, if that is how it should properly be regarded, of relieving LCC of its obligations. Those obligations, in any event, extended only to repair and did not include improvement, since LCC had no statutory or contractual liability to improve. Even if a supply of relieving LCC of its obligations was made, the supply was spent immediately the transfer was effected since by taking ownership of the houses, SLH assumed the liability to repair them. Nothing more needed to be done to relieve LCC of any liability; the mere fact of the transfer had that effect. The repairs and improvements were thereafter undertaken solely in discharge of SLH’s own liability to what were now its tenants. 
40.	Cantor Fitzgerald did not assist the appellant because, in that case, there was a surviving relationship between landlord and original lessee. Contrary to Mr Hitchmough’s argument, there was no equivalence here: once the transfer had taken place LCC had no continuing relationship with its former tenants, and its repairing obligation ceased to exist. Instead, one should compare this case to Maritime Housing Association Limited, which Mr Hitchmough had sought to distinguish. The tribunal had correctly come to the conclusion that, as the repairs had been undertaken after the leases were granted, the supplies were not made to LCC, because it no longer had an immediate interest in the houses. Its retained reversionary interest, some 125 years into the future, was too remote in time for it to benefit from the repairs. Here, LCC’s position was even more remote since it had no reversionary interest at all.
41.	Putting the same point another way, there was no “direct and immediate link” between the carrying out of the repairs and improvements and any supply SLH might be considered to have made to LCC, such a link being essential if the input tax were to be recoverable. Mr Anderson referred me to the observation made by the European Court of Justice in BLP Group plc v Customs & Excise Commissioners (Case C-4/94) [1995] STC 424 at 437, paragraph 19:
“Paragraph 5 [of the Sixth Directive] lays down the rules applicable to the right to deduct VAT where the VAT relates to goods or services used by the taxable person ‘both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible’. The use in that provision of the words ‘for transactions’ shows that to give the right to deduct under para 2, the goods or services in question must have a direct and immediate link with the taxable transactions, and that the ultimate aim pursued by the taxable person is irrelevant in this respect.”
42.	Support for the proposition that the direct and immediate link was absent here could be gleaned, Mr Anderson continued, from Midland Bank plc v Customs & Excise Commissioners (Case C-98/98) [2000] STC 501 at 519 where the court said, after referring to BLP Group:
“30. 	… in order to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with the taxable transactions … the right to deduct the VAT charged on such goods or services presupposes that the expenditure incurred in obtaining them was part of the cost components of the taxable transactions. Such expenditure must therefore be part of the costs of the output transactions which utilise the goods and services acquired. That is why those cost components must generally have arisen before the taxable person carried out the taxable transactions to which they relate.
31. 	It follows that, contrary to what the Midland claims, there is in general no direct and immediate link in the sense intended in BLP Group, between an output transaction and services used by a taxable person as a consequence of and following completion of the said transaction. Although the expenditure incurred in order to obtain the aforementioned services is the consequence of the output transaction, the fact remains that it is not directly part of the cost components of the output transaction, which art 2 of the First Directive nonetheless requires. Such services do not therefore have any direct and immediate link with the output transaction.
32.	It could only be otherwise if the taxable person were able to prove that, exceptionally, the costs relating to the goods or services which he has utilised as a consequence of making a deductible transaction are part of the cost components of that transaction.”
43.	That, Mr Anderson said, was the position here: all of the expenditure in respect of which input tax deduction was claimed had been incurred after the transfer of the properties to SLH. It could not be said that its undertaking the obligations to its tenants, as by then they were, had any direct or immediate link to its relieving LCC of its obligations, something which was already in the past and had not involved SLH in any expenditure. And there was nothing exceptional here which might take this case out of the general rule.
44.	Additionally, even if it could be said that SLH had made a taxable supply to LCC of relieving it of the repairing obligation, it was impossible to say that that supply had been made for an identifiable consideration. LCC had not transferred the properties in Maritime Housing Association at an undervalue, and it had not done so here—they had been transferred to SLH at their actual value, even if that was negative. If Mr Hitchmough was right in his argument that the transfer amounted to a barter transaction, the only consideration which LCC could be regarded as having given in exchange for its being relieved of the repairing obligation was the supply of the houses. It was quite contrary to the whole scheme of VAT that there could be negative consideration for a transaction: negative output tax, the consequence of Mr Hitchmough’s argument, was an impossible concept. It must follow that, for the purposes of VAT, the transfer of the houses could not amount to consideration. 
45.	So far as the dowry was concerned, he said, Mr Hitchmough’s arguments necessarily depended upon a “but for” argument – that is, “but for the payment of the dowry, SLH would not have taken the houses”. The proposition, as a proposition, was, he accepted, true; SLH could not have committed itself to the works of repair and refurbishment without the dowry since it was essential to the financial viability of its whole scheme; but that was immaterial. 
46.	He founded this argument principally upon what was said by the Court of Appeal in Customs & Excise Commissioners v Southern Primary Housing Association Limited [2004] STC 209, in which it was required to consider the effects for VAT purposes of three related transactions: the taxable purchase by the taxpayer of some land, the exempt sale by the taxpayer of the same land to a housing association, and a development contract between the taxpayer and the housing association pursuant to which the taxpayer built housing for the association on the land. It was accepted that the three transactions were commercially connected and that the supply of the land by the taxpayer to the housing association was to be considered as a supply of goods. The question was whether the taxpayer was entitled to offset the input tax it had incurred on its purchase of the land against the output tax it charged in connection with the development contract. The Commissioners refused its claim but the tribunal and the High Court concluded that it was entitled to recover the VAT because of the commercial connection between the transactions. In the Court of Appeal Melanie Hall QC, counsel for the Commissioners, advanced five arguments, contending at argument (d) that the tribunal “applied a test of attribution for which there is no authority—namely whether the input enabled the taxpayer to make a taxable supply”. At p 218, Jacob LJ, who gave the only judgment said: 
“[32] … there is substance in Mrs Hall’s remaining points which (by and large) are different ways of looking at the same question. I particularly consider that point (d) is right. The land purchase transaction was commercially necessary to make its [the development contract’s] performance commercially possible, but it was not a cost component of the contract itself in the same way as the costs of materials used. There is a link with the contract but the link was not direct and immediate. The development contract would not have been made but for the associated land purchase and sale. But ‘but for’ is not the test and does not equate to the ‘direct and immediate link’ and ‘cost component’ test.
[33] One can look at it another way. There is nothing about the development contract as such which makes the land purchase and sale essential. If the housing association had already owned the land or had bought it from some third party, the inputs of the development contract would have been just the costs of carrying it out. The fact that there were commercially linked land transactions does not mean that those transactions are directly linked to the costs of the development contract. One would not say that the cost of buying the land was a cost of the development contract itself. It follows that the input tax on that cost is not a cost of the contract.”
47.	A much closer analogy to this case, Mr Anderson argued, could be found in Mohr v Finanzamt Bad Segeberg (Case C-219/94) [1996] STC 328. There, the taxpayer was a farmer with a herd of dairy cattle who agreed to discontinue milk production in exchange for a compensation payment. The German tax authorities treated the compensation payment as the consideration for a taxable supply of services, that is the obligation to refrain from producing milk. The EC Commission argued that for a transaction to be taxable it is necessary to identify a supplier, who supplies a service which is of direct and individual benefit to a recipient. At paragraph 27 of his opinion, which was adopted by the court, the Advocate General said:
“The scope of the tax is nevertheless limited by its character as a tax on consumption. A trader must supply goods or services for consumption by identifiable customers in return for a price paid by the customer or by a third party. In the present case that requirement is not met. As is apparent from the discussion at paras 9 to 17 above, the Community, by compensating farmers through the medium of the competent national authorities for the loss of income resulting from discontinuation of milk production, does not acquire goods or services for its own use but acts in the common interest of promoting the proper functioning of the Community milk market. The present case is therefore plainly distinguishable from cases which, it has been argued, are analogous, for example the case where the vendor of a business gives an undertaking to the purchaser not to set up business in competition; there the purchaser receives a service of personal benefit to him in the form of an undertaking to refrain from certain acts. It is also distinguishable from cases in which a public authority is the direct recipient of a supply of goods or services which it uses for its public activities, for example where it purchases materials and equipment for office use or obtains land by compulsory purchase for a road-building scheme. In such cases the public authority is a consumer as in a private transaction. In the present case the public authorities, whether Community or national, cannot be regarded as consumers of a service.”
48.	Similarly, in Landboden-Agrardienste GmbH & Co KG v Finanzamt Calau (Case C-384/95) [1998] STC 171 the court concluded that a potato farming company which received compensation in exchange for an undertaking not to harvest at least 20% of its crop did not make any supply within the scope of VAT because the undertaking did not give rise to consumption, nor did it provide anything which could be regarded as a cost component of any other person in a commercial chain. 
49.	SLH was in the same position: its carrying out the repairs and improvements did not give rise to any consumption by LCC, nor did it constitute a cost component of any supply made to LCC. Similarly there was not, as Mr Hitchmough had contended, an analogy to be drawn with Keeping Newcastle Warm; so much was apparent from the opinion of the Advocate General ([2002] STC 943 at 950):
“39.	A subsidy from public funds may, however, take the most diverse forms. It could, for example, comprise a global subsidy to cover general operating costs, in which case no parties other than the donor and the recipient of the subsidy are affected in any way, or only indirectly. Or it could comprise a subsidy granted by the donor to the recipient to enable a third party to obtain a specific service (or to obtain it more cheaply). As a rule, there can only be a taxable transaction where the subsidy is of the latter type, that is to say one granted in the context of a tripartite relationship.
40.	The reason for this is that subsidies from public funds are made in the furtherance of the public interest, not to procure goods or services for the state. In order for there to be a supply, and therefore a taxable transaction for the purposes of art 2 of the Sixth Directive, the beneficiary of the supply must be a third party.”
50.	That passage, he said, was entirely consistent with the decision in Keeping Newcastle Warm itself, where the grant did not consist of a lump sum, but an amount paid for each house in respect of which advice was given, and with Mohr and Landboden-Agrardienste where, as here, the grant (the dowry in this case) fell into the first of the categories identified by the Advocate General, as a global subsidy. LCC was affected, if at all, only indirectly. It could not be said that the dowry was paid in order to enable LCC to obtain the service of being relieved of its former obligations. It was not even provided as the payment for any specific works. So much was entirely clear from the information relating to the ERCF scheme produced by the DETR, all of which tied the dowry to the negative value of the housing and which made it plain that it was paid to make the transfer financially possible, and not in order to meet the cost of repair or any other identifiable expense. Even though the negative value was, at least in part, attributable to the want of repair and improvement, there was no identifiable direct and immediate link between the estimated cost of repair and improvement and the amount of the dowry. This case, he said, came much closer to Southern Primary Housing Association than to Keeping Newcastle Warm.
51.	The analogy with Redrow, he said, was very limited. He accepted that LCC satisfied Lord Millett’s “anything—anything at all” test, but that was not enough. The “anything” had to be used by the recipient for the purposes of its business; but LCC made no supply of any kind which could be linked with its being relieved of its repairing obligations. Thus Redrow could not assist the appellant.
52.	Mr Anderson relied too on SLH’s memorandum of association, and particularly its main objects clause, which enables it to carry on business as a social landlord but makes no mention of its relieving others of their obligations; upon the terms of the various submissions made to the DETR, all of which emphasised the benefits to the tenants of bringing the houses up to standard and maintaining them thereafter, but which made no mention of any benefit, even of an ancillary or incidental nature, to LCC; and upon the fact that the payment of the instalments of the grant was entirely within the control of the Housing Corporation, and dependent on SLH’s compliance with its delivery plan and the Housing Corporation’s requirements, with no element of control or even influence by LCC. (In the event, only the first scheduled grant payment was made; the Housing Corporation then paid the entirety of the balance in a single payment, though it retained the right to recover it should SLH’s performance be unsatisfactory.) Those factors, he said, all indicated that it was at no time in the contemplation of the parties that the dowry was in some way the consideration for a supply to LCC.
Discussion
53.	In my view the greatest obstacle to the success of the appellant’s argument is the indisputable (as I see it) fact that SLH made a supply to its tenants of repairing and improving their homes. It did so pursuant to the contractual obligations it assumed on transfer of the estates, when the tenants entered into new tenancy agreements with it, to replace those they formerly had with LCC. Those new agreements required SLH to provide housing repaired and improved to an appropriate standard; in exchange the tenants gave consideration in the form of rent. The appellant fulfilled its side of the bargain by paying independent contractors to do the necessary works. The “direct and immediate link” referred to in BLP Group plc and Midland Bank plc between the supplies received by the appellant from the contractors and its onward supplies to its tenants is obvious. It made those onward supplies in the course of its business of providing residential accommodation to tenants. All the necessary ingredients of a supply recognised as such for the purposes of VAT are present.
54.	The appellant’s primary argument necessarily requires that that supply should be set aside, or disregarded, in favour of a supply instead to LCC. I do not think that is possible; nor do I think it possible to conclude that the contractors’ services were used by the appellant in making supplies both to the tenants and to LCC. The work done by the contractors was that of repairing and improving the houses in satisfaction of SLH’s obligations to the tenants. Their supplies to SLH were necessary because without them the repairs and improvements could not have been accomplished. All of the contractors’ services, and all of the materials they supplied, were used in and consumed by the repair and improvement of the houses: thus the whole of their supplies was passed on to the tenants and there was nothing left over—no residue—which could be supplied to LCC. The cost of the contractors’ supplies was not only necessarily incurred in effecting the repairs and improvements but exclusively so; there was no additional cost because SLH was, incidentally or otherwise, relieving LCC of a liability and, correspondingly, no part of the input tax SLH incurred can be attributed to any such supply, if that is what it was. It does not seem to me to be open to the appellant to argue that although it was required to, and did, incur a certain expense in meeting an obligation (and could not have met the obligation if the expense had not been incurred) the whole or even part of that expense should be treated as if it had been incurred for some other purpose.
55.	The appellant might retort that this puts the point the wrong way round; that if one looks first at its supply to LCC, the conclusion should be that the contractors’ services were entirely consumed by SLH in discharging its obligation of relieving LCC of the liability to repair and improve. Although the tenants gained the benefit of the repairs and improvements, that was an incidental benefit, and the contractors’ charges, having been wholly absorbed by the supply to LCC (since all of the repairs and improvements had to be done if SLH were to meet its obligation to LCC), cannot thereafter be attributed to that incidental benefit.
56.	The difficulty with that argument is that it does not fit the facts of the case as I find them. I am quite satisfied that the predominant purpose of the ERCF scheme, and everything which SLH and LCC did in order to take advantage of it, was to ensure that the houses within the two estates were brought up to standard—the central objective was to repair and improve them. LCC was unable to find the necessary money; the solution—the means of ensuring that the necessary works could be done—was the transfer to SLH, and the undertaking by SLH of the necessary work. Nothing in the documents, or in Mr Gardiner’s evidence, supports the conclusion that relieving LCC of a statutory, contractual or even political liability was the primary, or even a secondary, consideration. It may have been a consequence, but it can be regarded as no more than that. If one has to choose between competing candidates, it is clear that the supply to the tenants is predominant, and that to LCC, if it is a supply at all, is merely incidental.
57.	Since I have concluded that the entirety of the contractors’ work is attributable to the appellant’s supplies to its tenants, the question of apportionment between supplies to the tenants and a supply to LCC does not arise. 
58.	That is sufficient to dispose of the appeal but as I heard argument about several other issues it is appropriate I deal with them. These are, whether SLH’s relieving LCC of its obligations is capable of amounting to a supply and, if so, whether there was any consideration for such a supply; and a rather different argument which Mr Hitchmough raised to which I will come at the end of this decision.
59.	I agree with Mr Anderson that there is a distinction to be drawn between this case and Cantor Fitzgerald, and I will come to the significance of that distinction, as I see it, shortly. It does not, however, seem to me that the distinction is so fundamental that it is sufficient to defeat Mr Hitchmough’s argument that relieving LCC of its obligations is capable of amounting to a supply. It is true, as Mr Anderson said, that Wako remained contractually liable to the landlord, as original lessee, for the performance of the tenant’s covenants whereas LCC ceased to be liable to its tenants: all of its obligations as landlord ceased to exist as the properties were transferred. Nevertheless, the nature of what was obtained by LCC and by Wako seems to me to be essentially the same, the assumption by Cantor Fitzgerald and by SLH respectively of responsibility for what had hitherto been their own obligations. That in the one case there was a continuing contractual liability and in the other there was not seems to me, in this context, to be a difference of degree rather than of substance. In any event, LCC retained some interest in the observance by SLH of the terms of the transfer document. It might have been exposed to action, or at least complaint, by its former tenants in the event that the promises in the Consultation Document were not honoured. There would, as I accept, have been some political embarrassment. Nor, in my view, is any distinction to be drawn in this context because the nature of the contractual obligations to the tenants assumed by SLH differed from the mix of contractual and statutory obligations to which LCC was formerly subject. The important factor, and the essential characteristic of the transaction from this point of view, is the relieving of the obligation rather than the manner in which it was done. I am satisfied therefore that there is a sufficient analogy with Cantor Fitzgerald and that, in principle, SLH’s relieving LCC of its repairing obligations is capable of constituting a supply.
60.	One arrives at the same answer by asking Lord Millett’s first question in Redrow—did LCC gain “anything—anything at all?” from the transfer. It seems to me that its being relieved of an obligation it could not fulfil must be regarded as a real benefit, and thus something which it has gained, and that the answer to the question is yes. However, that seems to me to be the high point of the appellant’s argument. 
61.	Mr Hitchmough’s arguments necessarily imply that the supply for which he contends is summarised in the covenants incorporated in the transfer document which I have already set out, that is, to carry out the repairs and improvements, to honour the promises in the Consultation Document and to comply with the Housing Corporation’s requirements. Though I accept that the covenants could constitute a supply, I am not persuaded that they do so in this case. The transfer document, as the extract I have set out above shows, describes SLH’s covenants as part of the consideration for which the transfer was made. That, it seems to me, is a correct and, more importantly, an exhaustive description. As the Court of Justice indicated in Cantor Fitzgerald, it is necessary to identify which of the two parties has made the supply (of goods or services) and which has provided the consideration. The consideration for a supply need not, of course, be entirely monetary and the VAT system recognises barter or partial barter arrangements, such as the payment for a new car partly in cash and partly by the provision of a second hand car. However, it seems to me to be impossible to elevate what is described by the transfer document as part of the consideration for the transfer into a supply in its own right. For that, in my view, there must be an express contractual provision or a necessary implication. There is nothing in the transfer document to suggest that the covenants, and what they provided for, were regarded by LCC or SLH as a supply, nor is there any necessary implication that the covenants represent both consideration and a supply. I am satisfied that SLH’s covenants constitute consideration for the transfer, but no more, and I do not agree with Mr Hitchmough that the transfer can be regarded as a barter transaction.
62.	I have concluded, therefore, that SLH made no supply to LCC and that on this ground too the appeal must fail. Nevertheless, I will continue to deal with the other issues on which I heard argument.
63.	When one examines the judgment of the Court of Justice in Midland Bank plc it becomes apparent why the contention that the cost of the repairs and improvements is attributable to a supply (assuming there was one) to LCC is impossible to sustain. The benefit LCC obtained was that of being relieved of its repairing obligations. Of course, it was incumbent on SLH to do the repairs and improvements, but it did not do them in order to relieve LCC—it had already done that by accepting the transfer of the estates and thereby assuming the status of landlord. SLH undertook the repairs and improvements because it had acquired a contractual liability to what were now its own tenants to do them. The sums paid to the contractors were plainly a cost component of SLH’s supply of repaired and improved housing to its tenants, and the “direct and immediate link” between the cost of the repairs and the supplies to the tenants is, as I have already said, obvious. The link between the carrying out of the repairs and improvements and the relief of LCC’s now non-existent liability is, by contrast, neither direct nor immediate. The best that can be said is that it was “a consequence of and following completion” of the transfer—which, as the court indicated in Midland Bank plc, is not enough.
64.	In my judgment it cannot even properly be said that SLH’s carrying out the repairs and improvements had the effect of relieving LCC of any obligation. It is at this point that the difference between Cantor Fitzgerald and this case becomes relevant. Wako had a continuing obligation to effect repairs; Cantor Fitzgerald’s undertaking them (but not its merely agreeing to do so) relieved that obligation. Here, by the time the repairs were carried out, LCC had no obligation to effect any, since SLH’s mere agreement to do them had relieved it of that obligation. Nor could its former obligation be revived by SLH’s failure to do the repairs and improvements. For this reason too the link between the relieving of LCC’s obligations and the undertaking of the repairs is neither direct nor immediate. The assumption by SLH of LCC’s obligations was one (but not the only) cause of SLH’s carrying out the repairs, and there is, consequently, a link between the two; but if the Midland Bank test is to be satisfied it is the doing of the repairs which must have the effect of relieving the obligation. It does not seem to me that it is possible to analyse the circumstances of this case in that manner. Furthermore, it is impossible to treat SLH’s expenditure on the repairs and improvements as a cost component of its making a supply to LCC. As I have already said, it was the transfer document which conferred the benefit on LCC. The doing of the repairs did not make it possible for SLH to enter into that transaction, nor was it a condition subsequent—the transfer would not have been annulled if SLH had failed to carry them out. In this context I see little material difference between this case and Maritime Housing Association.
65.	Mr Hitchmough acknowledged that if SLH had provided to LCC something which was capable of constituting a supply, it would not, as a matter of law, amount to a supply recognised for the purposes of VAT unless consideration was given in exchange for it: see also the Sixth VAT Directive (77/388/EEC) article 2(1) and the Value Added Tax Act 1994, section 5(2)(a). Mr Hitchmough identified two possibilities—the transfer of the houses, and the dowry.
66.	Even had I concluded that the transfer could be regarded, in principle, as a barter I am satisfied that Mr Anderson’s objection, that the only possible consideration given by LCC was of negative value, defeats the appellant’s first argument. I recognise that the term “consideration” has to “be given the broadest possible meaning”: see Naturally Yours Cosmetics Limited v Customs & Excise Commissioners (Case 230/87) [1988] STC 879 at 887, paragraph 16. However, the very word “consideration” implies something of positive, even if small, value. Ordinarily consideration is given in money or money’s worth. Money, plainly, must have a positive value. Logic demands that if non-monetary consideration can be reduced to money’s worth, it too must have a positive value. Although neither the Sixth VAT Directive nor the 1994 Act states, in terms, that consideration must have a positive value, it is impossible to read article 11 of the former or section 19 of the latter, dealing with the determination of the value of a supply, in a way which accommodates negative value. It is quite obvious, too, that the whole scheme of VAT makes the assumption that supplies are made for positive consideration. A trader must, for example, account for the output tax for which he is liable after deducting the input tax for which he may claim credit. The mechanics of the scheme would fail if either of those figures could be negative. I have no doubt that the VAT system does not contemplate negative consideration, and that the transfer of properties of negative value cannot amount to the consideration for a supply so as to make it taxable.
67.	The dowry could represent the consideration for the supply—if it should be a supply—of SLH’s covenants with LCC only if the one were given in exchange for the other. It is not sufficient, as the Court of Appeal made clear in Southern Primary Housing Association, that there is a link; the connection must be more intimate. It is in my view clear from the documents provided to me that the dowry had no more than a tenuous link with the repairs, in the sense that the negative value of the houses was affected by the likely cost of the outstanding repairs and necessary improvements, and because it was assumed that the dowry would be used, in part, to pay for the works; but that is a long way from saying that the dowry was given in order to pay for the repairs, and a longer way still from saying that the dowry was in some way paid as the consideration for SLH’s relieving LCC of its liabilities. Such contentions are, furthermore, inconsistent with section 126 of the Housing Grants, Construction and Regeneration Act 1996 (which I have set out above), pursuant to which the dowry was paid. It is possible to say that, but for the dowry, SLH would not have accepted the estates, and consequently that, but for the dowry, SLH would not have been able to relieve LCC of its obligations. One cannot, however, go further; and as Jacob LJ said in Southern Primary Housing Association, “but for” is not the test. This case seems to me to come much closer to Mohr and Landboden-Agrardienste than to Keeping Newcastle Warm: it cannot be said that the dowry was paid as part of the consideration for making any identified supply.
68.	I conclude therefore that SLH received no consideration from LCC or from a third party for any supply (assuming any was made) to LCC.
The VAT shelter
69.	I come finally to another government scheme, known as the “VAT shelter incentive”, to which Mr Hitchmough referred me. It had been introduced for the same, or a very similar, purpose as that of the ERCF (to which it was a successor), that is in order to secure the improvement and maintenance of neglected local authority houses. It too depends on the transfer by a local authority of housing stock to an RSL. The scheme came into existence in early 2002, and therefore after the transfer of the two estates to SLH; it was not possible for SLH to take advantage of it. The principal feature of the VAT shelter is that it relies on what Mr Hitchmough described as an artificial arrangement in order to ensure that the RSL to which the houses are transferred can recover the input tax it incurs in effecting the catch-up repairs and improvements which are necessary (though not the input tax incurred in effecting the continuing repairs). The scheme has been approved by the Commissioners (Mr Anderson told me that the Commissioners do not consider the arrangement to be artificial) and achieves its objective, so far as VAT recovery is concerned. Mr Hitchmough’s point was that, if I were to find that his other arguments were incorrect, SLH was nevertheless entitled to succeed in this appeal since, otherwise, the effect would be that it had been placed at a competitive disadvantage (by comparison with RSLs able to use the VAT shelter) offensive to the requirement that the imposition of VAT should not distort competition and to the principle of fiscal neutrality. That argument was reinforced, he said, by the fact that LCC, had it retained the houses and undertaken the repairs and improvements itself, would have been able to recover the input tax it incurred in accordance with section 33 of the 1994 Act—and, moreover, that recovery would extend to the input tax incurred in undertaking the continuing repairs. 
70.	This argument, too, seems to me to be incorrect. It is true that the scheme, as it was presented to me, confers on those able to take advantage of it more favourable tax treatment (at least, as far as VAT is concerned) than that available to this appellant. Whether the grant aid available within the VAT shelter scheme, or its other terms, are more or less generous to its participants was not explained. It is quite possible—I have no means of knowing—that, overall, SLH has obtained more generous treatment, but even assuming the contrary, there was nothing before me, apart from Mr Hitchmough’s argument, to suggest that it had been put at a competitive disadvantage, in that, for example, it had to charge higher rents than other RSLs nearby, and was losing tenants to them, or in any other way. But even if the argument were made out, it does not seem to me to be within the power of this tribunal to deem to be a supply that which is not, or to find consideration where none exists. The principle of fiscal neutrality on which Mr Hitchmough relied enables the tribunal to interpret legislation, so far as the rules of construction allow, in a manner which eliminates or reduces any distortion of competition but it does not, in my view, permit the tribunal to disregard or manipulate the facts of a case.
Conclusions
71.	My conclusions are these:
•	SLH relieved LCC of its repairing obligation by accepting the transfer of the properties;
•	SLH did not relieve LCC of that obligation by undertaking the repairs and improvements;
•	SLH’s relieving LCC did not constitute a supply in its own right, but was part of the consideration for the transfer;
•	The cost incurred by SLH in undertaking the repairs and improvements is not attributable to any possible supply made by SLH to LCC;
•	Even if there had been a relevant supply by SLH to LCC, it was unsupported by consideration;
•	The cost incurred by SLH in undertaking the repairs and improvements is attributable wholly to its exempt supplies of residential accommodation to its tenants;
•	The foregoing conclusions are unaffected by the subsequent introduction of the VAT shelter scheme.
72.	The appeal is dismissed. There will be no direction in respect of costs.

COLIN BISHOPP
CHAIRMAN
Release Date: 3 September 2004
MAN/00/0423