Riverside Sports & Leisure Ltd v Revenue & Customs [2008] UKVAT V20848 (28 October 2008)

20848

Value Added Tax  -  Barter transaction asserted to involve provision of services in return for lease -  whether rights were retained by the counter-party school or whether they were the consideration for the lease  -  how to value the consideration for the services  -  points of principle to be followed in valuing the consideration  -  Appeal dismissed

LONDON TRIBUNAL CENTRE

	RIVERSIDE SPORTS & LEISURE LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M NOWLAN (Chairman)
						PAUL F ADAMS, FCA

Sitting in public in Bristol on 15 October 2008

André S Morgan, FCA of Wildin & Co, accountants, for the Appellant

Andrea Lindsay Strugo, counsel, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

1.    This was an interesting case.  It involved the grant of a lease over some sports fields by King’s School, Gloucester to the Appellant company, under which the school received a peppercorn rent, and under which the school were entitled to use the facilities in a sports and leisure centre (which otherwise the Appellant exploited commercially) at certain defined times and in certain respects. The assessments made by HMRC were based on the notion that the transaction was a barter transaction such that the Appellant was really supplying the services at the leisure centre in return for the initial grant of the lease. Since the services rendered were standard rated, whereas the grant of the lease was an exempt transaction, the barter analysis resulted in various assessments being made on the Appellant. Thus, just as if the school had received say £20,000 rent, and in return the Appellant had received £20,000 for the provision of sporting facilities, whereupon the £20,000 for the facilities would have been the consideration for a taxable supply, and the rent paid would have been an exempt input, so the same was asserted in this case, notwithstanding that no cash passed in either direction. 

2.     The two questions for our determination were whether there was indeed a barter transaction, or whether the school’s user rights were simply something retained by the school and carved out of the demise made under the lease. The second question only arose if the conclusion was that the transaction was a barter transaction, and that question was how then to value the consideration received by the Appellant for the service rendered to the school. 

3.   We have decided both questions essentially in favour of the Respondents, although we have, as requested, added some comments on how in particular we consider that the consideration should be calculated. 

The facts in more detail

4.   On 3 December 2002 The King’s School Gloucester granted a Lease over “the Riverside Sports Club, Gloucester”, to two individuals, Phillip and Gillian Taylor trading as “The Riverside Sports Club, Gloucester”. Under this lease there were three clauses or three or four sets of provision of relevance to the tax question before us. 

5.   Without going into detail, early clauses in the Lease granted a full demise of the whole property on which seemingly the sports facility stood. The only rights reserved in the early clauses and retained by the landlord, the School, were rights geared to inspection, drains, and other such matters, relevant to retained adjacent land of the school. 

6.   Under various clauses the tenants were required to maintain the facilities in good working order, and were they to fail to do so, the landlord could determine the lease. 

7.      Clause 4.33 then provided as follows:

“The tenant will permit the Landlord including their agents employees and members of Kings School Gloucester access to the facilities at the Premises on the terms and in the manner set out in the Seventh Schedule”.   

8.     Finally the Seventh Schedule commenced with the following words:

“Landlord’s rights to use the facilities at the Premises

The Tenant grants the Landlord (which expression shall include their agents employees (but in respect of employees to no more than 30 in any one year) and members of Kings School Gloucester) rights to use the sports facilities at the Premises at no cost on the following terms (or such other terms as shall be agreed or substituted between the Landlord and the Tenant (acting reasonably)”.

There then followed a long list indicating the various times at which the squash courts, the gym, the swimming pool and the soft play area could be used either exclusively or to some extent by members of the school.  Another clause of the Seventh Schedule gave “free membership of all the sports and social facilities at the Premises for all of the school staff up to a maximum of 30 persons at any one time”.   Another gave “a discount of no less than 15% to each pupil of the School wishing to use independently of the school any of the facilities at the Premises”. 

9.   Both parties could only give vague information about the background to the current lease. This was unfortunate because for reasons that we will refer to below we consider that the facts that seem most likely to have occurred in the past would actually have reinforced the Respondents’ case in relation to the first question for decision. 

10.   One of the certain facts is that the first lease taken by Philip and Gillian Taylor was taken in 1988, and that from 1988 until 1 April 2003 they carried on the leisure club business as partners. On 1 April 2003 the Appellant took over the business, and doubtless took an assignment of the lease. When Philip and Gillian Taylor took their lease in 1988, there had been an earlier lease and an earlier operator. The first operator seemingly acquired a lease in 1966 and built the sports and leisure complex.    Philip and Gillian Taylor built further facilities after their acquisition in 1988, because we were told that the business was expanded to include “a swimming pool and other additional facilities”. No-one knew the facts but it seemed likely that the swimming pool had been built before the 2002 lease was granted in that that lease referred to a swimming pool as if it existed. Whether of course it was a previous or inferior pool we do not know, but for present purposes we assume that the present pool was constructed prior to the grant of the present lease. 

The contentions on behalf of the Appellant

11.      It was contended on behalf of the Appellant that:

•	the barter analysis advanced by HMRC was wrong because the school’s rights of occupation derived not from consideration given by the Appellant in return for the lease, but from the exclusion of those rights from the grant of the lease, such that they were retained rights; and
•	if the first argument was wrong, then the consideration given for the grant of the user rights could not exceed £15,000 because the Appellant had obtained an indicative valuation that the ground rent for the demised premises would be “something in the region of £15,000”.

The contentions on behalf of the Respondents

12.     It was contended on behalf of the Respondents that:

•	the grant of the lease by the school was clearly a grant of the whole premises, with no rights carved out and retained, and the wording of Schedule 7 was inconsistent with anything other than a grant back by the Appellant of user rights to the school, so that there was a barter transaction of the grant of the lease in return for the grant of certain user rights; and
•	the correct way in which to value the consideration received by the Appellant in a case where there was evidence from other transactions of what the user rights would fetch was to pay regard to that other evidence;
•	in this case there were list prices for membership and entrance fees to the squash courts, swimming pool and gym, so that regard should be paid to these in valuing the consideration (consisting of the initial grant of the lease for the peppercorn rent) received by the Appellant for the user rights;
•	if the previous valuation propositions were wrong, the authorities then indicated that one should next look to the cost to the Appellant of providing the facilities; so that
•	calculating the cost by reference to the third party fees forfeited on account of the user rights granted to the school, one ended up with essentially the same calculation since the forfeited  third party receipts were the same listed prices for the use of the facilities to which regard had to be paid on the first valuation approach.
•	Finally it was pertinent to note that the valuation obtained by the Appellant was only an indicative valuation and that the valuation of the proper ground rent for the lease was a far more nebulous matter than the ascertainable prices, and thus values for, the user rights.

Our decision

Whether the school derives its user rights as consideration for the grant of the lease, or as an interest retained, and not comprised within the grant.

13.   We initially found the drafting of the Lease somewhat confusing in relation to the determination of whether the user rights were something retained by the school and never granted to the Appellant or alternatively the consideration for the grant of the Lease.  The wording of Clause 4.33, which we have already quoted, appeared at least to be consistent with an exception or reservation from the lease, and although the Seventh Schedule was framed in terms of the Tenant granting various rights, it appeared not to have been executed as a licence from the Tenant back to the Landlord, but rather to be in the form of the defined matters to which Clause 4.33 referred. 

14.    We accept however that the Respondents argument on this matter is correct and that the user rights were granted as the consideration for the lease. We confirm that the terms of the demise in Clause 3, albeit made subject to various reserved rights of the Landlord in relation to matters such as drains, pipes and wiring and so forth, were not made subject to the rights granted by Schedule 7. We also accept that Schedule 7 itself was framed quite specifically in terms of rights being granted. Furthermore, at best for the Appellant, Clause 4.33 was ambiguous. It could perfectly consistently be interpreted to involve the grant, by permission, of user rights, rather than the reservation of user rights. And in the light of the total demise in Clause 3 and the clear drafting of Schedule Seven, we decide that this is indeed the correct interpretation. 

15.  This conclusion is fortified by two further considerations, one of which the Respondents advanced and the other of which (albeit regrettably based on speculation by us) points to the strong logic of treating the user rights as the consideration for the grant of the lease. 

16.   The argument that the Respondents advanced, with which we agree, is that the terms of the rights granted by the Appellant involved the provision of services, such as the provision of a fully working, heated, and chlorinated swimming-pool, and in most part, not rights that could sensibly just be retained by the Landlord. They were certainly rights that the Tenant that operated the recreation centre could obviously grant in return for the lease, however, since they involved the provision of the same services as the Appellant provided to the public. 

17.   We place little reliance on the last point that we mention because we confirm that although we asked both parties to give us background information in relation to this matter, no-one at the hearing had any information at all about the relevant facts, and counsel for the Respondents argued (as in fact we have accepted in paragraphs 14 and 16 above) that we could reach our decision on the barter point, without understanding the background. Whilst that may be so, the 2002 lease was obviously somewhat curious because it made no reference to the question of why, if all the relevant facilities were in place, and presumably vested in the Landlord, in 2002, the Landlord, the school, granted a peppercorn lease to the Tenants when the Tenants had no building obligation whatsoever under the lease. On the face of it, the rental that the school might have commanded was not one geared to a ground rent for an undeveloped site, but a rent for a completed leisure centre that would enable a commercial company to operate the centre and make profits of £150,000 to £250,000 a year, merely for maintaining and staffing a substantial existing developed site. The seemingly obvious answer to this is that doubtless back in 1966, the initial deal with the first tenant would have been on the basis that the tenant got a lease at a pepper-corn rent, and undertook to build the first complex and to grant user rights back to the school. Viewed in that manner the user rights would plainly be the consideration because they would be bound up with the building obligation and could not possibly be retained rights. It must then follow that when Philip and Gillian Taylor came on the scene in 1988, they would in some way have bought the centre off the first tenant, albeit that for some reason a new lease was granted. Whether that lease included the obligation to build the swimming pool we do not know, but it seems that the school were plainly accepting the reality that the Taylors could succeed to the value and the rights and assets that the first tenant had earned, and it was not the case that in 1988 the whole value of the developed site dropped back absolutely into the hands of the school. Similarly in 2002, although a new lease was granted, the absence of very substantial consideration beyond the peppercorn and the user rights must have been explained by the fact that the school, whilst formally granting a new lease, must have acknowledged that the Taylors had much of the capital value of the existing facilities, in right of their pre-existing lease, and whatever rights they had bought from the first tenant. Viewed in this way, in other words in the sense that the present tenant must somehow be succeeding to the role of the earlier tenants, it makes more sense to see the user rights as consideration, since the original deal (to which others have succeeded) must have involved the swap of a cheap lease in exchange for a building obligation and user rights. 

18.   For these reasons, and placing little reliance on the speculation referred to in paragraph 17 (albeit that this makes sense of everything) we decide the first “barter” issue in favour of the Respondents. We have already mentioned in the Introduction above, that whilst it may seem odd that the Appellant is rendering a taxable service with a VAT liability when no money passes in either direction, we repeat that this is not at all strange. Indeed the result would be identical if the parties had paid cash consideration in both directions for the lease and the user rights, since the service supplied by the Appellant would have been taxable, and the related input would have been an exempt item. 

19.   We might mention that there was one argument advanced by the Respondents that we did not accept, though in the event this is of no consequence. It was asserted that the issue of whether the user rights acquired or retained by the school were the consideration for the grant of the lease or alternatively rights reserved from the initial grant was resolved for VAT purposes by the rule that anything done for a consideration is to be treated as a supply of services for VAT purposes. We entirely accept that the nature of the services indicated (as we accepted in paragraph 16 above) was that they were active services being supplied to the school, and we also accept that this is consistent with any sensible assumption as to the background facts (as indicated in paragraph 17 above), but we consider that if the right analysis had been that the school had simply carved its retained user rights out of the grant of the lease in the first place, then the right analysis would have been that less had been transferred; correspondingly less or no consideration would be expected, and the user rights would be something held all along, and not consideration for a supply by the tenant. 

Whether the consideration was given in return for the grant of the lease

20.   We turn briefly to the different question of whether there was a sufficient link between the provision of the services and the receipt of the lease for the grant of the lease to constitute consideration for VAT purposes. In other words we address the type of question considered in Apple and Pear Development Council v. C&E Commissioners [1988] STC 221, where it was held that the charges imposed by statute on the various growers were not in the requisite sense consideration. 

21.    Not least because the Appellant did not even assert the contrary, we are quite clear that the grant of the lease was the consideration for the provision of the services in the requisite manner. 

How to measure the amount of the consideration received by the Appellant for the provision of the user rights

22.   This takes us to the final question of how to calculate the monetary value of the consideration received by the Appellant for VAT purposes. Having considered in detail the various authorities on which the Respondents relied, in particular Naturally Yours Cosmetics Ltd v. C&E Commissioners [1988] STC 879, we accept that where a monetary equivalent has been established as the value of the services being provided, then when goods or services are supplied the consideration is the amount of that monetary equivalent. Thus in the Naturally Yours Cosmetics case where some particular cosmetic product could be purchased for £10.14, and it was provided to hostesses in return for £1.50 and certain slightly nebulous services in return, the consideration received by the supplier was in total £10.14, made up of the cash and the remaining consideration as to the balance up to £10.14. Thus in this case we accept that because all the services rendered to the school were priced for third party purchasers of the various recreational services, those prices are at least the starting point in calculating the monetary value of the consideration received by the Appellant. 

23.   The Appellant had argued that the consideration could not be more that the indicative value placed on the likely ground rent attributable to the lease, an independent valuer having said that he would expect the valuation to be somewhere in the region of £15,000 per annum. We certainly accept that one would expect there to be a correlation between the consideration, viewed from each side of the deal (albeit that we will have to refer shortly an a situation where the two could diverge). After all the deal, albeit now buried in historical background of which we were regrettably ignorant, had presumably been an arm’s length deal. Nevertheless the Appellant’s argument paid no regard to the authorities, such as Naturally Yours Cosmetics and indeed several others; the valuation was one given, without charge, simply as a rough indication, and finally the valuation made no reference to the oddities of the transaction in 2002 to which we have referred in paragraph 17 above. We have no doubt that the valuer would have assumed realistically that the Appellant should be treated as entitled to the value contributed by the various tenants, and that the rental commanded by the school should just therefore be confined to a ground rent, but we found it a little odd that even this assumption was not stated in the valuation letter. 

24.   We were requested to give our decision, first and foremost on the two points of principle, as to whether the grant of the lease was the consideration for the user rights, and whether the Respondents were fundamentally right in their approach to the valuation of the consideration. We repeat that we decide those two points in favour of the Respondents.  

25.  We were however asked if we would give any indications we thought appropriate in relation to how the parties should approach the detailed calculation of the consideration, and in this context we wish to make two points. 

26.  First, without our having been given much detail as to how the claimed calculation of consideration advanced by the Respondents had been arrived at, we consider that it would certainly be appropriate for the Respondents to dwell on the degree to which the quoted prices to commercial users of the sports centre might not be a fair indication of the consideration in this case. We certainly imagine that the individual prices quoted for entry to the swimming pool for one person would be very considerably higher than a block booking for say a company with numerous employees or indeed a school with numerous pupils who might use the pool in large numbers at just a few pre-arranged times. We do not suggest that the type of “bulk discount” point removes this case altogether from the Naturally Yours line of authorities, and we understand that certain discounts are already being conceded.   However we just emphasise that this seems entirely appropriate to us. Another consideration is perhaps the likelihood that the school might well want to use the facilities at times when other school children would be likely to be at their respective schools and not therefore able to use the facilities, and also not at times (in other words in the evening) when third party members who might well work in the day might wish to use the facilities. All these factors seem to us in fairness to be relevant, in that the school’s user rights are essentially equivalent to those of a company taking corporate membership on behalf of all of its employees of a health club, and we imagine that the corporate member would be given a very substantial discount.     

27.    The second factor that we wish to mention is whether the consideration for the user rights is something that might be seen to fluctuate in different periods. The Respondents somewhat seemed to be trying to “have it both ways” in this regard, in that they accepted on the one hand that what had to be valued was the actual rights used in each period, as distinct from user rights some of which were not being taken up at all, but at the same time the Respondents said that because the lease had been taken in 2002, some aspects of the valuation should be fixed at 2002 levels. On this point we consider that what is relevant is the value, in each period, of the services actually being provided. Thus if it is clear (as apparently it is) that the school does not want to take up its right to use the soft play area, the user of that should be ignored (as indeed it is rightly being ignored at present). This approach would have no effect of course in relation to user of some facility that the school might generally want to use if on occasions no pupils use an available facility. 

28.    It seems to us to be consistent with the proposition that one should be looking to the actual facts, and to the services being provided in each period that one should also fix the consideration period by period, albeit that hopefully variations would be marginal. In response to the possible objection that it might be said that the consideration given, the grant of the lease, was surely something that would not fluctuate, we note that this case seems to be somewhat analogous to that of the supply of a free meal and cigarettes to coach drivers who brought 20 passengers into a motorway services station for 30 minutes or more in C&E Commissioners v.  Westmorland Motorway Services Ltd [1998] STC 431.  Although two different coach drivers each bringing the same number of passengers into the motorway services for the same period might appear to give identical consideration, the measure of the consideration for the supply of the meals was still the list price of either an expensive meal or a cheap meal, as chosen by each coach driver. So it seems to us that in this case the attention should be given, period by period, to the “discount adjusted” current list prices at which similar services are being provided by the Appellant for those services, that the school is minded to receive from time to time. 

HOWARD M NOWLAN
CHAIRMAN

RELEASED: 28 October 2008

LON 2007/1598