Fengate Developments (A Partnership) v Customs & Excise

Fengate Developments is a partnership involved in property development. The partnership assets included land south east of Fengate, near Peterborough. 2½ acres of the Fengate land was zoned for industrial development (the Red Land) and registered under Title No. CB 146423. The registered proprietors of the Red Land were the two partners in Fengate, Mr Anthony Darlow and his present wife, Mrs Lena Darlow.

The market value of the Red Land at the relevant date was £250,000. On 8 July 1999 two payments totalling £250,000 were paid into Fengate’s bank account with HSBC. Mr Darlow paid in £125,000. Another £125,000 was paid in by Mrs Darlow. On the same date both Mr & Mrs Darlow executed a Land Registry Form TR1 (“transfer of whole registered title”), in which the “Property” transferred was stated to be Title No. CB 146423, as identified on the attached plan. That was the Red Land. The “Transferor” of the property was stated to be Mr & Mrs Darlow. The “Transferee” of the property was stated to be Mr Darlow & Mrs Deanna Brawn. The consideration section in Box 9 of the TR1 stated that “the Transferor has received from the Transferee for the property the sum of …£125,000.”

Mrs Deanna Brawn is Mr Darlow’s former wife. She and Mr Darlow were partners in a firm of potato merchants called Darlows. At the time of the transfer Mrs Brawn drew £125,000 out of Darlows’ bank account. Mr Darlow did the same.

The Commissioners of Customs and Excise claimed that Fengate, which had been registered for VAT since 25 October 1996, was liable to pay VAT on the transfer of the Red Land. As a general rule, a transfer of an interest in land is an exempt supply for VAT purposes: VATA 1994, Schedule 9 Group 1. Fengate had, however, elected to waive the exemption by a document signed by Mr Darlow, in his capacity as a partner in Fengate, on 25 October 1996 pursuant to Schedule 10 paragraph 2(1) VATA 1994. As might be expected, there are tax advantages, as well as tax disadvantages, in making the election (recovering input tax on future development of the land is the obvious advantage). Fengate did not pay any VAT in respect of the transfer of the Red Land. On 29 June 2001 the Commissioners served an assessment to VAT calculated on the basis that Fengate had made a taxable supply of an interest in land, in respect of which exemption had been waived by Fengate, at a VAT inclusive price of £250,000. The sum assessed was £37,234 plus interest, making a total of £42,429.19.

Fengate’s appeal against the assessment was dismissed by the Value Added Tax and Duties Tribunal on 9 September 2003. Its appeal to the High Court was dismissed by Evans-Lombe J on 6 February 2004. Permission to appeal to this court was obtained from Carnwath LJ on a renewed application on 7 April 2004. It is a second appeal.

The issue for the VAT and Duties Tribunal was whether Fengate had made a supply of the Red Land on 8 July 1999. If it had, VAT was due from Fengate. The Tribunal concluded that Fengate had made a supply of the Red Land and that it was liable for output tax. It rejected Fengate's contentions that the transaction was a transfer only by Mrs Darlow, who was not a taxable person, of her beneficial share in the Red Land; that the two payments of £125,000 to Fengate on the same day were not consideration for the Red Land, but were, according to the evidence of Mr & Mrs Darlow, injections of capital into the firm by each of the partners in order to reduce the overdraft built up as a result of drawings by the partners to fund personal expenditure; and that there was no transfer of any interest in the Red Land by Fengate and therefore no “supply” for VAT purposes.

It was the function of the Tribunal to hear the evidence and to ascertain from the whole facts of the case whether there was a supply by Fengate of an interest in land for VAT purposes : see Customs & Excise Commissioners v. Reed Personnel Services Ltd [1995] STC 588 at 595d. There is no appeal against the primary findings of fact by the tribunal on a proper self-direction of law. The facts included relevant legal documents, in particular the transfer form TR1. I do not agree with Fengate that the case is “wholly [my italics] based upon a land transfer document” (see paragraph 11 of Fengate’s amended skeleton argument.) The TR1 fell to be construed in its factual and legal environment. Construction does not turn solely on a consideration of the language of the document itself. I agree that an error of law by the tribunal in the construction of the TR1 could vitiate a finding of fact on which the tribunal based its decision. Such an error could constitute a ground on which the High Court or this court would be entitled to interfere with the decision of the tribunal, but it is only in that sense that the appeal turns on the construction of the TR1.

The ground of Fengate’s appeal is that the tribunal and Evans-Lombe J fundamentally misconstrued the TR1 as a transfer of the Red Land by Fengate. They incorrectly “doubled up” the two distinct and legally separate payments of £125,000 to a consideration of £250,000 and then “doubled up” the subject matter of the transfer from a half share to the whole of the Red Land. That approach, it was argued, was a fundamental misunderstanding of conveyancing law and procedure. It cast uncertainty over numerous registered land transactions involving the sale of beneficial interests in land. It was submitted that, on its correct construction, the TR1 was only a transfer by Mrs Darlow of her beneficial half share in the Red Land for £125,000. She alone received the consideration. The precedent books on registered conveyancing showed that the Land Registry Form TR1 was an appropriate form to use for the transfer of a legal estate where there was a sale to a third party of a beneficial interest by one of two registered co-proprietors. Unlike Mrs Darlow, Mr Darlow did not make any transfer for a consideration. His beneficial interest in the Red Land stayed where it was, as an asset of Fengate.

Further, the tribunal had not acted on the “unchallenged evidence” which Mr and Mrs Darlow gave orally and in writing that the payments into Fengate’s bank account were injections of capital by them into the partnership: they were not consideration for a supply of a partnership asset by Fengate.

The tribunal heard evidence over several days from Mr and Mrs Darlow, Mrs Brawn and her daughter, Mrs Harvey, who was employed as the bookkeeper of Fengate and Darlows. There was also a bundle of documents, which included Land Registry documents, correspondence, VAT returns and documents, bank statements and Fengate’s accounting documents.

In a very detailed and careful decision the tribunal made important findings relevant to the question whether Fengate had made a vatable supply of the Red Land and concluded that Fengate received £250,000 for the sale of the Red Land (paragraph 69). The key primary findings of fact, taken mainly from paragraphs 63 and 65 of the decision, may be very shortly stated.

Construing the TR1 in the context of the facts found about the surrounding circumstances, the tribunal concluded that Fengate transferred the whole legal title and beneficial interest in the Red Land held by Mr and Mrs Darlow, the partners, as joint tenants and that it did not just transfer the interest of Mrs Darlow (paragraphs 61, 62, 63 and 65). Referring to Fengate’s accounts and to its findings about Mr Darlow’s payment of £125,000 into Fengate’s bank account on 8 July 1999, it held that the section of the TR1 dealing with the consideration (£125,000) and other information in the TR1 did not “represent the whole picture regarding the sale of the Red Land.” (paragraph 62).

Fengate’s appeal focused on specific terms of the TR1 and the evidence given by Mr and Mrs Darlow. A number of points were made.

Box 12 on the second page of the TR1 contained the following “Additional Provision”-

It was submitted that the Tribunal misconstrued the TR1 by failing to give effect to the agreement and intentions of the parties, as expressed in the additional provision. Like the Commissioners, the tribunal and the judge had only looked at the first page of the TR1 and had failed to take account of Box 12 on the next page. Box 12 recorded the true position in fact that Mr and Mrs Darlow only intended the transfer by the TR1 to apply to Mrs Darlow’s beneficial interest in the Red Land for the sum of £125,000 stated in Box 9. Although, as a matter of law, Mr Darlow was required to be a party as transferor, the legal title being vested in both of them as beneficial joint tenants, there was no agreement, intention or need for Mr Darlow to transfer his beneficial interest in the Red Land to himself and Mrs Brawn. Mr Darlow did not transfer a beneficial share.

Further, the fact that the Red Land was a partnership asset of Fengate held in the joint names of Mr and Mrs Darlow did not mean that Fengate was the transferor of the Red Land. The legal position was that Mr and Mrs Darlow were entitled to agree that the Red Land should no longer be an asset of the partnership, in which case they would be entitled to deal with it like any other husband and wife who were jointly entitled to property and as if it had never been a partnership asset of Fengate. Assets can be transferred into or out of the partnership with the agreement of solvent partners: Lindley & Banks on Partnership (18^th ed) paragraph 18-45.

In my judgement, there was no error of law in the tribunal’s construction of the TR1. First, there were indications in the document itself, read as a whole and not just by reference to an additional provision in Box 12, that, despite whatever Mr and Mrs Darlow and their advisers thought would be the legal effect of the document, it took effect as a transfer of the whole of the Red Land. The property to be transferred by the transferor to the transferee was identified as the whole of the Red Land (Boxes 2, 3 and 8), as registered at the Land Registry, and not just a beneficial half share in it. Secondly, the tribunal was entitled to rely on its findings about the acquisition and holding of the Red Land by Mr and Mrs Darlow as a partnership asset of Fengate, about the true amount of the consideration for the transfer and about the destination of the consideration. Its findings on all those matters clearly pointed to a transfer of the whole of the Red Land as a partnership asset of Fengate. The suggestions that Mr and Mrs Darlow agreed between themselves to take the Red Land out of the partnership assets, treat it as their separate property, transfer only Mrs Darlow’s beneficial half share and then pay contributions of capital amounting to £125,000 each into Fengate’s bank account on the same date as the transfer by the TR1 are all contrary to the facts found by the tribunal.

It was submitted that the tribunal erred in law in not applying the following provisions in paragraph 8 of Schedule 10 to the 1994 Act-

The tribunal had reservations about the applicability to this case of these provisions, which are concerned with situations where the grantor of the land and the beneficiary of the consideration for the grant are different persons. Its reservations were well founded. In my judgment the provisions do not apply to the facts found by the tribunal: for the reasons already explained there was no mismatch between the person making the grant and the person to whom the benefit of the consideration for the grant accrued. Fengate made a transfer of a partnership asset via Mr and Mrs Darlow, in whom the Red Land was vested for the purposes of the partnership. Fengate received, via the Darlows, the full benefit of the consideration for the transfer. Even if, contrary to the conclusion of the tribunal, the transfer was of a beneficial half share in the Red Land by Mrs Darlow as a non-taxable person, the provisions in paragraph 8 would not apply: the benefit of the consideration of £125,000 for the half share was received by Mrs Darlow as her separate property. She then injected it as capital into the partnership.

At some points in the argument Fengate appeared to be asserting that it could rely on these provisions because it made a grant of an interest in the Red Land through Mr and Mrs Darlow; that the consideration of £125,000 was received by Mrs Darlow; and that Mr Darlow’s share in the Red Land remained in Fengate. I am unable to agree. Once it is accepted that Fengate made the grant of the Red Land, it is impossible to resist the inference that Fengate received the benefit of the consideration of £250,000 for that grant of a partnership asset and paragraph 8 would not apply.

Box 11 of the TR1 covers the case where there is more than one transferee. The transferees (Mr Darlow and Mrs Brawn) opted for the provision that-

In his judgment (now reported at [2004] STC 772) paragraph 16 Evans-Lombe J concluded that the provisions of Boxes 11 and 12 of the TR1 were mutually inconsistent, that the provisions of Box 12 “could only be reconciled with the provisions of the remainder of the transfer by construing them as a transfer of Mrs Darlow’s beneficial interest in the Red Land after it had ceased, as a result of the transfer, to be an asset of the Fengate partnership, to Mrs Brawn against payment of £125,000” and that Box 11 was “ also effective to transfer Mr Darlow’s interest in the Red Land so that it was held beneficially by himself and Mrs Brawn as tenants in common.” It was contended that Box 11 was of no relevance in determining the subject matter of the transfer or the identity of the transferor and that the judge’s construction of the TR1 was therefore erroneous.

I have some difficulty in following the thread of the judge’s reasoning on this point. I agree with Fengate that Box 11 is irrelevant to the issue on this appeal as to the nature of the supply and who made it. The provision in Box 11 is only concerned with how whatever property is transferred is to be held as between the transferees where there is more than one of them. The judge’s error on this point is not, however, a ground which would justify this court in interfering with the decision of the tribunal. The tribunal’s findings of fact justify the conclusion it reached without the need to rely on the declaration of trust provisions affecting transferees in Box 11. It is unnecessary on this appeal to determine whether or not, in the hands of Mr Darlow and Mrs Brawn, the Red Land is held for the purposes of the potato partnership, Darlows, or otherwise.

There was no error of law in the decision of the tribunal. I would dismiss the appeal.

I agree.

I also agree.

The appeal be dismissed

The appellant to pay the respondent’s their costs of and occasioned by the appeal and their costs of and occasioned by the appellant’s appeal to the High Court, such costs to be the subject of a detailed assessment if not agreed.

Permission to appeal to the House of Lords is refused.