Ardenglen Developments Ltd v Revenue & Customs [2006] UKVAT V19906 (22 November 2006) 

19906

Zero Rating; first grant by a person constructing a building intended for use solely for a relevant charitable purpose; whether lease by company established by housing association to obtain funding a supply within section 30 and Schedule 8 Group 5 Item 1(a)(ii) of the Value Added Tax Act 1994; yes

EDINBURGH TRIBUNAL CENTRE

ARDENGLEN DEVELOPMENTS LTD            Appellants

- AND –

THE COMMISSIONERS FOR HM REVENUE AND CUSTOMS
Respondents

Tribunal:  (Chairman):  J GORDON REID, QC., FCIArb
(Member):     J CRERAR, WS., NP

Sitting in Edinburgh on Monday 11 September 2006.

For the Appellant		Colin Tyre, QC

For the Respondents	Iain Artis, Advocate

CROWN COPYRIGHT 2006

DECISION

Introduction
1.	This appeal concerns the question whether a supply constituted by the grant of a twenty year lease by the Appellants to a housing association is, in the particular circumstances, zero rated falling within section 30(2) of and Item No 1(a)(ii) of Group 5 within Schedule 8 to the Value Added Tax Act 1994.
2.	At the Hearing, held at Edinburgh on 11th September 2006, the Appellants were represented by Colin Tyre Q.C.  He led the evidence of Kenneth Stocks, director of Ardenglen Housing Association Limited.  The Respondents (“Customs”) were represented by Iain Artis, Advocate.  He led no evidence.
3.	Two Joint Bundle of Productions were produced along with a Statement of Agreed Facts.

Legislation
4.	Section 30(1) & (2) and the relevant part of Group 5 of Schedule 8 to the 1994 Act provide as follows-:
30 Zero-rating
(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section— 
(a) no VAT shall be charged on the supply; but
(b) it shall in all other respects be treated as a taxable supply;
and accordingly the rate at which VAT is treated as charged on the supply shall be nil.

(2) A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in Schedule 8 or the supply is of a description for the time being so specified.

Group 5—Construction of buildings, etc

Item No
1 
The first grant by a person— 

(a) constructing a building— 
(i) designed as a dwelling or number of dwellings; or
(ii) intended for use solely for a relevant residential or a relevant charitable purpose; or

(b) converting a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings or a building intended for use solely for a relevant residential purpose,

of a major interest in, or in any part of, the building, dwelling or its site.

2 
The supply in the course of the construction of— 
(a)     a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose; or

……………………..

NOTES

(6) Use for a relevant charitable purpose means use by a charity in either or both the following ways, namely— 

(a) otherwise than in the course or furtherance of a business;
(b) as a village hall or similarly in providing social or recreational facilities for a local community.
……………………..

(12) Where all or part of a building is intended for use solely for a relevant residential purpose or a relevant charitable purpose— 

(a) a supply relating to the building (or any part of it) shall not be taken for the purposes of items 2 and 4 as relating to a building intended for such use unless it is made to a person who intends to use the building (or part) for such a purpose; and

(b) a grant or other supply relating to the building (or any part of it) shall not be taken as relating to a building intended for such use unless before it is made the person to whom it is made has given to the person making it a certificate in such form as may be specified in a notice published by the Commissioners stating that the grant or other supply (or a specified part of it) so relates.
………………………………….

(16) For the purpose of this Group, the construction of a building does not include— 

(a) the conversion, reconstruction or alteration of an existing building; or
(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or
(c) subject to Note (17) below, the construction of an annexe to an existing building.

(17) Note 16(c) above shall not apply [where the whole or a part of an annexe is intended for use solely for a relevant charitable purpose and]— 

(a) the annexe is capable of functioning independently from the existing building; and
(b) the only access or where there is more than one means of access, the main access to: 

(i) the annexe is not via the existing building; and
(ii) the existing building is not via the annexe.

Facts
5.	The Statement of Agreed facts is in the following terms:-
1.	 The Appellant is Ardenglen Developments Limited, a company incorporated under the Companies Acts (Company Number SC 257651) and having its registered office at 355 Tormusk Road, Castlemilk, Glasgow G45 0HF("Developments").

2.	Developments was incorporated on 15 October 2003.

3.	Developments was registered under VAT registration number 829 3545 05 with effect from 1 February 2004.

4.	The issued share capital of Developments is owned by Ardenglen Housing Association Limited ("AHA").

5.	The objects for which Developments was established were to carry on business as a general commercial company. 

6.	Nothing contained in the memorandum or articles of association of the company precludes Developments from making distribution of its profits to its members.

7.	AHA is a company registered under the Industrial and Provident Societies Acts. AHA is a registered charity, registered under charity number SC032542.

8.	AHA is the heritable proprietor of premises at 355 Tormusk Road, Glasgow registered in the Land Register under title number GLA126670 ("the Premises").

9.	In or about December 2003 AHA decided to construct an annexe ("the Annexe") to the Premises. The purpose of constructing the Annexe was to build additional office accommodation which in turn could be let out to local community groups.

10.	It had originally been intended that AHA would be responsible for the construction of the Annexe and that AHA would obtain funding to finance the costs of the construction of the Annexe.

11.	One of the proposed sources of funding was ERDF and a problem was encountered in that AHA did not qualify for ERDF funding. Accordingly it was proposed that AHA would incorporate a subsidiary company (Developments), that Developments would be responsible for the construction of the Annexe and that Developments would apply for funding to finance the costs of the construction of the annexe.

12.	It was further intended that, once the Annexe had been constructed, the Annexe would be leased to a charity, namely Fair Deal.

13.	Fair Deal is a company limited by guarantee and is registered as a Scottish charity under charity number SCO15513. It is an entirely separate entity from both Developments and AHA. 

14.	That the work to construct the Annexe commenced in February 2004 and was completed in September 2004. 

15.	The Annexe was disponed to Developments on 30th December 2004.

16.	The Annexe is an annexe which meets the criteria laid down in Note 17 of Group 5 of Schedule 8 to the Value Added Tax Act 1994. The Annexe can be accessed separately from the Premises and can function independently from the Premises.

17.	Developments granted a lease of the Annexe to AHA. The lease was executed on  31st January 2006. The essential terms of the lease include :

a.	That the term of the lease is 20 years running from the date of entry, that is 30th December, 2004. 
b.	That the leased premises comprise the Annexe.
c.	That the Annexe is permitted to be used only as office accommodation or as a training facility
d.	That the rent is £19,596 per annum and is to be reviewed every five years.

18.	AHA granted a sub-lease of the Annexe to Fair Deal. The essential terms of the sub-lease include :

a.	That the term of the sub-lease is 20 years running from the date of entry, that is 30th December, 2004.
b.	That the lease premises comprise the Annexe
c.	That the permitted use of the lease premises is for office accommodation and as a training facility.
d.	That the rent is £23,890 per annum and that the rent is to be reviewed every five years.

19.	The disputed decision is the decision of the Respondents contained in a letter dated 27 January 2004 and confirmed in a letter dated 8 December 2004. 

20.	The issue in dispute between the parties which falls to be decided by the tribunal is whether the lease of the Annexe by Developments in favour of AHA is a zero-rated  supply of services pursuant to Item 1(a)(ii) of Group 5 to Schedule 8 of the Value Added Tax Act 1994.

21.	It is a matter of agreement between the Appellants and the Respondents that the supplies relative to the construction of the Annexe are standard rated supplies.

22.	It is agreed that copy documents produced by the parties are the equivalent of principals, that all documents produced are what they purport to be, and that all items of correspondence produced were sent on the dates they bear and were received in the normal course of post by the addressee. 

6.	From the evidence of Mr Stocks and the documents produced we found the following additional facts to be admitted or established:-
23.	AHA, although not required to do so as a registered social landlord, is involved in a wide range of community activities including health issues, crime prevention and training, which all play a part in the social and economic regeneration of Castlemilk. [see J1/37-45, prepared by Mr Stocks].  Part of its Mission Statement is to make Ardenglen a pleasant place in which to live [J1/31]
24.	There are at least three types of organisations involved in such activities, namely First Sector organisations (local authorities), Second Sector organisations (housing associations), and Third Sector organisations (local voluntary groups or associations).  Third Sector organisations had difficulty finding office accommodation in the Castlemilk area of which the district of Ardenglen forms part.
25.	AHA had a small area of unused land at its premises at 355 Tormusk Road, Castlemilk, Glasgow.  Fair Deal did not have proper office accommodation.  AHA resolved to provide it.  It required funding to do so.  There was no intention of making a profit out of this project.  J1/30 contains an extract from AHA’s Business Plan relating to the project prepared by Mr Stocks.  The Plan records inter alia that AHA “wish to utilize a small site in their ownership to build purposely designed accommodation to rent to community organisations and projects.  This will allow these organisations to operate from a high quality local base and deliver a wider range of services directly within the communities where their client group reside and live.” [J1/32].  When the Business Plan was drawn up, it had not been confirmed that the Annexe would be used by Fair Deal.
26.	After Developments was incorporated the Annexe was conveyed to them by Disposition dated 7th December 2004 with entry on 30th December 2004 [J2/5].  The price of £1,815.34 was fixed by the District Valuer.  Developments is not a charity.  It has no independent employees.  Its only activity relates to the leasing of the Annexe.  Mr Stocks was and is a director of Developments, AHA and Fair Deal.
27.	The Annexe (355A Tormusk Road) was constructed in the course of 2004 at a cost of about £418,000 funded as follows (i) ERDF £103,000, (ii) Community Scotland £130,000, (iii) Glasgow City Council £40,000, (iv) AHA’s own reserves £145,000; the £145,000 was a loan by AHA to Developments.  But for this funding the construction and letting of the Annexe would not have taken place.
28.	The Lease of the Annexe by Developments in favour of AHA [J2/3] was granted on 31/1/06 with entry as at 30/12/04.  The lease was for a period of 20 years and was a full repairing and insuring lease.  The rent was £19,596 per annum and was subject to review every five years (clauses 15 and 16).  The basis of the review was a “fair or reasonable rent being less than an open market rent or full annual rental value taking into account the relationship of the Landlord and Tenant and representing the finance cost of the construction costs of the Premises and a reasonable sum for administration including the operating costs of the Landlord at the date of the review” (clause 15.2).  This relates to the £145,000 mentioned above.  The original rent was fixed on the basis of repayment of capital and interest over the first ten years of the lease.  This was a requirement of one of the funding bodies.  It was not a commercial rent.  After that ten year period the intention is to reduce the rent significantly.
29.	The Sub-Lease of the Annexe [J2/4] was granted by AHA in favour of Fair Deal for 20 years with entry on 30/12/04.  It, too, was a full repairing and insuring lease.  The rent was £23,890 with provision for review every five years [clause 14] based on the General Index of Retail Prices.  It is based on the head lease rent plus an estimate of future major repairs and AHA management costs organising repairs and renewals.  It is not a commercial rent.  The intention was and is that AHA made neither a loss nor a profit.  They have not made a profit.  There has never been any intention to exploit the Annexe commercially.
30.	The sub-lease is the only non-residential letting granted by AHA.  The formal grant of such a sub-lease was a condition of funding.
31.	But for certain terms and conditions of funding, Developments would not have been incorporated.  Instead AHA would have retained ownership of the land on which the Annexe was built and let it direct to Fair Deal.
32.	Fair Deal provides care services in the local community.  It has a staff of about eighty individuals who provide a variety of services, including cooking, assistance with day to day living, and social activities for residents who cannot fully look after themselves.  Most of Fair Deal’s income is expended on the salaries of its staff, who are qualified to at least SVQ level one.
33.	Messrs Shepherd, Chartered Surveyors, Glasgow, prepared a valuation in November 2005 on the instructions of Developments, as a consequence of the Tribunal’s Directions in July 2005.  The Valuation estimated the contract rent and the open market rent of the Annexe at about £26,600 [J2/6]; the open market capital value was estimated to be £240,000 assuming the same head lease terms.
34.	Mr Stocks was and is a director of Developments, AHA and Fair Deal
35.	We also record that at the outset of the hearing, counsel intimated that it was agreed that the activities of Fair Deal are charitable and are carried on otherwise than in the course or furtherance of a business.

Decision Appealed Against
7.	Customs’ decision can be found in their letter dated 8/12/04.  The letter concludes that the leases in question do not amount to non business activities and states in support of that conclusion that (i) there are three intended or actual uses being made of the building, namely the occupation by Fair Deal, the lease by the subsidiary company, and the lease by AHA; (ii) neither the subsidiary company nor Ardenglen is using the building for non business purposes, (iii) Ardenglen appear to have fulfilled the aim of helping the local community by indirectly entering into a commercial arrangement with an unconnected party (Fair Deal), (iv) there is no direct and immediate link between the supplies of leasing and the aim of Ardenglen.

Grounds of Appeal
8.	The Appellants contend that “ the building being let to AHA is being used for a relevant charitable purpose and accordingly the first grant is zero rated.”

Procedure
9.	The appeal came before a differently constituted Tribunal on 18th July 2005.  No evidence was led.  The Tribunal ordered production of the head lease and the sub-lease together with information about the rent payable under these leases.  In effect, the substantive hearing fixed for July 2005 did not take place.

Submissions
10.	Mr Tyre for the Appellants submitted that the issue was whether at the time of the grant by the Appellants (Developments) to AHA of the lease of the Annexe (the Head Lease), the Annexe was intended for use solely for charitable purposes.  If so, then the appeal must succeed.  The result would be that the supply effected by the Head Lease would be zero rated and a statutory certificate would be issued by Fair Deal.  The answer to the question posed, it was submitted, depended upon whether the granting of the sub-lease by AHA to Fair Deal is a use other than a use solely for charitable purposes.  There were two uses to consider, namely the physical use of the Annexe by Fair Deal, and the granting of the sub-lease.  There could be no dispute that Fair Deal’s use was solely for charitable purposes; thus the only question was whether the granting of the sub-lease was a use other than solely for charitable purposes.  Put another way, was the granting of the sub-lease a business use.  
11.	Mr Tyre’s principal argument was that this appeal was on all fours with C&EC v Yarburgh’s Children Trust 2002 STC 207.  The reasoning in Customs’ decision letter was wrong as the grant of the Head Lease itself cannot be one of the intended uses. The use is consequent upon the supply.  Reference was also made to Welcome Trust Ltd v C&CE 1996 STC 945 paragraph 31-41 to support the proposition that exploitation of property is not necessarily an economic activity.  Article 4 of EC Council Directive 77/388 (the Sixth Directive) which defines “Taxable person” by reference to the carrying out of any economic activity whatever the purposes or results of that activity, required consideration of the purpose for which the property was being exploited.
12.	Here the purpose of the letting was to fulfill AHA’s “mission statement”, not to exploit its own property and derive income from it; the project could not proceed without funding; the sub-lease was required because of funding conditions; the granting of such a lease was not part of AHA’s normal activities.  The rent charged was intended to make neither profit nor loss.  Thus when the Head Lease was granted there was no intended use of the Annexe which was not charitable.
13.	For Customs, Mr Artis submitted that the issue was whether, at the time of the grant of the head lease, the construction of the Annexe was intended for use solely for a relevant charitable purpose.  All uses intended for the building must be considered (Yarburgh paragraphs 6&7).  The mere fact of being a charity does not mean that there can be no economic activity.  The predominant concerns of the Appellants were irrelevant as was the fact that the rent charged was not a commercial rent.  The Head Lease was granted for a substantial rent.  The Appellants had no charitable interest.  The terms of the lease were to be implemented and were not to be regarded as a matter of form.
14.	Reference was also made to The Commission v France 1988 ECR 4797 for the application of the principle of fiscal neutrality (paragraphs 15, 20 & 21 at page 4817-8), and to BLP Group plc v CC&E 1995 STC 424.

Decision
15.	The issue we have to determine is whether the supply in question fell within the terms of Group 5, Item 1(a)(i) of Schedule 8 to the 1994 Act.  The supply here is the grant of the Head Lease by the Appellants (Developments) to AHA.  This was the first grant of a major interest in the Annexe which was constructed by or on behalf of Developments.  
16.	It is plain from our primary findings of fact that the Annexe was intended for use by a charity namely Fair Deal or some comparable body.  It is equally plain from our primary findings of fact that the use to which the Annexe was intended to be put by all concerned was use otherwise than in the course or furtherance of a business.  Fair Deal is a charity and its activities are agreed to be carried on otherwise than in the course or furtherance of a business [see finding 35 above].
17.	The statutory phrase intended for use relates to the word building.  The building must be constructed by or on behalf of the person making the supply (here, the grant of a major interest in the Annexe, namely a 20 year lease).  It is not disputed that these requirements are met here.  The supply itself is not determinative of the intended use.  We agree with Mr Tyre that intended looks to the future, i.e. what is to be done with the building following or consequent upon its supply.
18.	Prima facie, therefore, the supply is of a description specified in the relevant part of Schedule 8 and must accordingly be zero-rated.  The facts are sufficiently similar to Yarburgh to enable us to adopt the reasoning in that case.  While not binding on this Tribunal, we consider the reasoning to be sound and are content to adopt it.  No compelling reason was put forward to persuade us to depart from the reasoning or to decline to follow or apply it.  The application of the reasoning in Yarburgh is not affected by the fact that the Tribunal and the Court were concerned with Item 2 of Group 5 rather than Item 1.
19.	In Yarburgh, a charitable trust rebuilt a dilapidated building.  The costs were funded partly by the charity, the National Lottery Charities Board and a playgroup (also a registered charity) to whom the new building was subsequently let by formal lease giving the group security of tenure, a requirement of Lottery funding.  The trust sought to have the VAT on the contract with the builders zero-rated on inter alia the ground that the supply was made in the course of the construction of a building intended for use solely for a relevant charitable purpose, i.e. otherwise in the course or furtherance of a business.  Customs’ argument, which was rejected by the Tribunal and on appeal, was that the lease to the playgroup was a business activity by the trust.  In the course of his judgment, Patten J defined the issues before him as whether (i) the lease was an intended use of the building by the trust otherwise than in the course or furtherance of a business, (ii) the playgroup’s use of the building was otherwise than in the course or furtherance of a business, and (iii) whether these intended uses fall within the definition of “relevant charitable purpose” [paragraph 8].  He noted inter alia the following facts (i) the lease was for 21 years on fairly standard terms with an upward only rent review clause which was not designed to produce a market rent; the rent was regarded as nominal, although viewed in isolation the letting might constitute an economic activity and therefore a business use [paragraphs 9 and 12], (ii) the purpose of the trust was to provide day care facilities for children and the lease contained a user clause which broadly restricted use to purposes connected with the care, upbringing and education of pre-school children, and fund raising activities [paragraph 9], and iii) the building was designed or intended for use by the playgroup for its own charitable purposes [paragraph 12].  
20.	Patten J reviewed the relevant domestic and European legislation and certain authorities and concluded on the first issue noted above that (a) the balance of authority is against treating a transaction or activity as economic or as part of a business merely because it results in a consideration or produces income [paragraph 22], (b) the motive of a person who makes a supply of goods or services is not relevant to the correct tax treatment of that transaction, (c) the commercial letting of property in order to fund the charitable activities of a particular body does not make those lettings less of a business or economic activity; that is dictated by the nature of the lettings rather than the use to which the income is to be put [paragraph 24], (d) in cases of isolated or infrequent transactions, it is more rather than less important to identify the nature of the transaction from the overall context in which it takes place [paragraph 24], (e) the mere fact of letting at a rent is not sufficient in itself to render that transaction an economic or business activity [paragraph 25], (f) in the case of an isolated letting it is relevant to consider the wider circumstances of the grant including the identity and nature of the parties [paragraph 25], the tribunal was entitled to conclude that the lease to the playgroup, although at an annual rent, did not constitute the carrying out of an economic activity, because it was a letting at a low rent on the terms of a lease which only came into being in order to satisfy the requirements of lottery funding; the arrangement was designed to facilitate the use of the new building by a second charity (the playgroup) whose activities satisfied the objects of the trust, (g) this did not amount to the exploitation of the property for the purpose of obtaining income therefrom; it was a relatively informal arrangement between closely connected organisations in conformity with their respective aims [paragraph 26].
21.	On the second issue (whether the playgroup’s use of the building was otherwise than in the course or furtherance of a business), Patten J considered that it was necessary to concentrate on the nature of the operation rather than its purpose in order to determine whether it constitutes an economic activity [paragraph 28].  He concluded that (a) the operation of the playgroup was charitable [paragraph 29], (b) it was a co-operative venture which was not profit led, playschool fees being fixed to enable its operating costs to be met, and (c) it was doing nothing more than carrying out its charitable functions [paragraph 30].  In the instant appeal there is no suggestion that Fair Deal is carrying on an economic activity.
22.	The learned judge then considered the effect of the fact that the playgroup was an association or organisation for the purposes of section 94(2) of the 1994 Act but that is not relevant for present purposes [paragraphs 31-36].  Likewise, his obiter views on the third issue (the village hall provision) are not relevant to the present proceedings [paragraphs 37-39].
23.	Mr Artis argued that all uses for the intended building had to be considered.  We would prefer to express the point by stating that the legislation requires consideration of the question whether the person constructing the building intended that it be used in a way otherwise than in the course or furtherance of a business.  If there is more than one intended use then all intended uses must satisfy the statutory criteria.
24.	We consider that points (c)-(f) and (g) noted in paragraph 20 above are equally applicable here, except that in relation to (g) the arrangements here (the Head Lease and the sub-lease) appear to be more formal.  The rent provisions in the head lease and the sub-lease, while not conclusive, point in the direction of arrangements which are not commercial.  Plainly, the Appellants are not exploiting their property in order to maximise the income obtainable from it.  The structure of the arrangements was driven by the requirements of funding which made the whole exercise possible. These were isolated or one-off transactions (the head lease and the sub-lease) to enable the project to be carried into effect.  Developments had no other business and no independent employees.  AHA had no other residential letting.  Fair Deal took on the sub-lease to carry out its admittedly charitable functions.  From whatever angle one considers the supply and the intended use one returns to the intended use of the building being use for a purpose otherwise than in the course or furtherance of a business.  The fact that Developments are not a registered charity is not fatal.  The arrangement, far from being commercial or business-like in nature, was designed simply to facilitate the use of a newly constructed annexe building by a charity in a way which was consistent with the aims of organizations connected through the common directorships of Mr Stocks.
25.	Although we acknowledge the authority of the other cases cited to us by Mr Artis, we did not derive any great assistance from them as they were essentially dealing issues which were not directly related to our task which was to determine whether the supply in question here satisfied the statutory criteria set forth in Group 5 Item 1(a)(ii).  The reasoning in these cases is consistent with Yarburgh in which they were fully considered.

Result
26.	The appeal is allowed.  We give parties 28 days from the date of release of this decision to make such submissions in writing on the question of expenses, as they think fit.  If either party so requests, a Hearing on expenses will be arranged.

J GORDON REID, QC., FCIArb
CHAIRMAN
DATED THIS 22nd DAY OF NOVEMBER 2006.

EDN/05/03