ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION
Hart J
CH/2004/APP/0496
Royal Courts of Justice
Strand, London, WC2A 2LL
Before:
LORD JUSTICE MAY
LORD JUSTICE JONATHAN PARKER
and
SIR PETER GIBSON
Between:
THE COMMISSIONERS OF REVENUE AND CUSTOMS (FORMERLY THE COMMISSIONERS OF CUSTOMS & EXCISE) | Appellant |
- and - | |
ABBEY NATIONAL PLC | Respondent |
(Transcript of the Handed Down Judgment of
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Rupert Anderson QC and Tim Ward (instructed by The Solicitor for Revenue & Customs) for the Appellant
David Goy QC and Claire Simpson (instructed by CMS Cameron McKenna) for the Respondent
Judgment
Lord Justice Jonathan Parker:
INTRODUCTION
This is an appeal by the Commissioners of Customs & Excise, now HM Revenue & Customs, (“the Commissioners”) against an order made by Hart J on 6 May 2005 on appeal from a Decision of the VAT & Duties Tribunal (Dr Nuala Brice and Mrs L. M. Salisbury) released on 21 June 2004. The neutral citation number of the judge’s judgment is [2005] EWHC 831 (Ch).
By letter dated 7 March 2003 the Commissioners notified Abbey National plc (“Abbey”) of two decisions relating to Abbey’s liability for value added tax (“VAT”), both of which decisions were adverse to Abbey. The first decision was that a supply made to Abbey by a third party, Mapeley Columbus Ltd (“Mapeley”), under the terms of contractual arrangements entered into between them relating to a number of leasehold properties owned by Abbey was not an exempt supply for VAT purposes since it did not constitute “the leasing or letting of immovable property” within the meaning of Article 13B(b) of the Sixth Council Directive 77/388/EC of 17 May 1977 (“the Sixth Directive”). The second decision related to the VAT treatment of rents payable under underleases of properties let to Abbey.
Abbey appealed to the VAT & Duties Tribunal against both decisions. The Tribunal dismissed Abbey’s appeal against the first of the Commissioners’ decisions, but allowed its appeal against the second. Abbey appealed to the High Court; the Commissioners cross-appealed.
By his Order dated 6 May 2005 Hart J allowed Abbey’s appeal and dismissed the Commissioners’ cross-appeal. The Commissioners now appeal to this court against Hart J’s decision to allow Abbey’s appeal against the Tribunal’s dismissal of its appeal against the first of their decisions. They do not appeal against Hart J’s dismissal of their cross-appeal relating to the second of their decisions. So the only issue on this appeal is as to the applicability of the exemption contained in Article 13B(b) in the circumstances of the instant case (“the Article 13B(b) issue”).
Permission for a second appeal was granted by Jacob LJ on the papers on 29 July 2005.
In essence, the Article 13B(b) issue is whether a contractual arrangement relating to real property which, under domestic law, falls short (and is intended to fall short) of being a transaction of leasing or letting is nevertheless to be treated as if it were such a transaction for VAT purposes, with the consequence that it is an exempt supply. The resolution of that issue depends firstly on the precise nature of the contractual arrangement in question, and secondly on the meaning of the expression “leasing or letting of immovable property” in Article 13B(b).
The Article 13B(b) issue arises in this way. In early 2000 Abbey was looking to reorganise and restructure its large portfolio of freehold and leasehold properties. To that end it entered into a sale and leaseback arrangement with Mapeley under which all its properties were to be sold to Mapeley, with Abbey taking leases (or, in the case of leasehold properties, underleases) back from Mapeley of those properties which it wished to continue to occupy. The arrangement was embodied in a Master Agreement dated 18 October 2000 (“the Master Agreement”).
The leases of a number of the leasehold properties in Abbey’s portfolio contained covenants against assigning or parting with possession of the demised property without the consent of the landlord. These properties were given separate treatment in the Master Agreement. There were two reasons for this. The first was that in the case of these properties more time would be required before completion in order to obtain the requisite consents. The second was that there was a perceived risk that landlords might be unwilling to consent to assignments or transfers of possession to Mapeley, given that Mapeley was a new company without a track record in the market. To overcome these difficulties, Abbey and Mapeley devised the concept of a ‘virtual assignment’, under which all the economic benefits and burdens of the leases in question would be transferred to Mapeley, but without any (actual) assignment of the leasehold interest, and with Abbey continuing to occupy the properties.
Hence the resolution of the Article 13B(b) issue depends on whether the effect of the Master Agreement, and in particular of the ‘virtual assignment’, is to create, for VAT purposes, a supply by Mapeley to Abbey of ‘the leasing or letting of immovable property’ within the meaning of Article 13B(b).
ARTICLE 13B
Article 13B is in the following terms (so far as material):
“Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:
....
(b) the leasing or letting of immovable property, excluding:
1. the provisions of accommodation, as defined in the laws of Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites; ....”
Article 13B(b) is incorporated into national law by the Value Added Tax Act 1994 (see Item 1 of Group 1 in Part II of Schedule 9 to the Act). However, since the Sixth Directive has direct effect it is not necessary for present purposes to refer to that provision.
THE FACTS
The background
The background facts are set out by the Tribunal in paragraphs 12 to 15 of its Decision, as follows:
“12. For the purposes of its business [Abbey] came to own a large number of properties both freehold and leasehold. By the late 1990’s [Abbey] owned approximately 1,000 such properties of which about half were freehold and half leasehold. Some of the freeholds were very valuable and some of the leaseholds were virtually worthless tenancies of shop-like premises occupied by [Abbey’s] branches. We saw a typical lease dated 23 December 1993 under which a landlord leased to [Abbey] certain premises for the term of twenty-five years. The lease contained a covenant by [Abbey] with the landlord “not to mortgage charge assign transfer underlet or part with the whole or underlet the whole or part of the demised premises without the consent of the landlord such consent not to be unreasonably withheld.” The lease also contained a provision that if there were any breach of the covenants on the part of [Abbey] the landlord could re-enter the demised premises and the term should cease.
13. In early 2000 [Abbey] considered a sale and leaseback arrangement under which it would sell most of its property portfolio (freeholds and leaseholds) to a third party who would then lease back to Abbey such of the premises as [Abbey] wished to occupy. The commercial advantages of such an arrangement for [Abbey] were: that it released capital which could be invested elsewhere in the business; that it transferred the property risk to a third party; and that it aligned [Abbey’s] property liability more closely with its business needs because it permitted [Abbey] to vacate leasehold property which was surplus to its needs before the term of the lease expired. It was also intended that, after the transfer of the properties, the new owner would manage the whole portfolio. Negotiations were held with a number of parties and ultimately agreement was reached with [Mapeley].
14. There was no difficulty in [Abbey] transferring the freehold properties to Mapeley nor was there any difficulty in [Abbey] assigning its long leasehold interests to Mapeley where there was no requirement to obtain the consent of the landlord to such assignment. However, two difficulties arose in respect of those shorter leases where the consent of the landlord to the assignment was required. First, a number of such consents was required and they would take more time to obtain than was available. Secondly, it was thought to be unlikely that the landlords would consent to assignments to Mapeley which was a new company without a track record of financial strength. In order to overcome these difficulties the concept of a virtual assignment was developed. Under such a virtual assignment [Abbey] would transfer all the economic benefits and burdens of the shorter leases to Mapeley and [Abbey] would remain in occupation of the premises and would pay a principal fee to Mapeley which was similar to the rent it would have paid if there had been a formal lease back. Most of the shorter leasehold properties were the subject of the virtual assignment.
15. The legal position of [Abbey] and Mapeley was regulated by a Master Agreement dated 18 October 2000.”
The Master Agreement
In paragraphs 16 and 25 of its Decision the Tribunal set out the relevant provisions of the Master Agreement, as follows:
“16. Under the Master Agreement, in return for the consideration of £457,250,000, [Abbey] agreed to sell its properties (freehold and leasehold) to Mapeley and in return Mapeley agreed to grant to [Abbey] leases for such of the properties as [Abbey] wished to occupy, for such terms as [Abbey] wished, and at a current market rent which escalated every six months by a fixed percentage (3% per annum). We call this the indexed rent. Of the total consideration a nominal £1 was paid for each lease. The Master Agreement commenced on 25 December 2000 and was for a term of twenty years. The following clauses of the Master Agreement are relevant:
Clause 4 provided that [Abbey] agreed to sell and Mapeley agreed to buy the transferred properties. On the completion date [Abbey] would transfer the freehold properties and would assign the leasehold properties to Mapeley. If, for any reason, an assignment were not completed on the completion date, then [Abbey] would execute a virtual assignment pending completion of the lawful assignment of that property to Mapeley.
Clause 8 provided that Mapeley agreed to grant leases of the transferred properties to [Abbey] each for a term which was the lesser of (a) a period expiring on the Hold Date for those premises or (b), in the case of a property with a lease from a landlord, the remaining term of that lease less three days. The Hold Date was the date upon which [Abbey] wished to cease to occupy the property. There was a separate Hold Date for each property which was stated in Schedule 10 of the Master Agreement.
Schedule 10 was divided into three parts. Part I listed the freehold properties the subject of the Master Agreement. Part II listed the long leasehold properties where the consent of the landlord to assign or underlet was not required. Part III listed properties where the landlord’s consent to assign or underlet was required. It excluded vacant properties. In respect of each property a different Hold Date was specified.
Clause 8.4 provided that, in relation to properties mentioned in Schedule 10 Part III, [Abbey] would occupy the premises pursuant to the virtual assignment until such time as the assignments were completed.
Clause 8.7 provided that the standard occupancy regulations (as set out in Schedule 11) should be the occupancy regulations for the purposes of the leases by Mapeley to [Abbey] and to the occupancy of the premises the subject of the virtual assignments. However, if [Abbey] was in occupation of the premises then the Abbey National occupancy regulations (as set out in Schedule 12) applied.
Schedule 11 contained the standard occupancy regulations which applied where [Abbey] was not in occupation of the premises. These regulations contained obligations by the tenant to pay rent and outgoings and other obligations similar to the tenant’s covenants normally contained in a lease (for example, [Abbey] had to have the consent of Mapeley before carrying out alterations). The standard occupancy regulations also contained obligations on the part of Mapeley (called the landlord) which were similar to the landlord’s covenants normally contained in a lease. Appendix 1 of Schedule 11 contained the provisions for increasing the rents or the principal fees.
Schedule 12 contained the Abbey National occupancy regulations which applied if [Abbey] was in occupation of a property. They were similar to the standard occupancy regulations with some changes; for example, under these regulations [Abbey] could carry out alterations after giving notice to Mapeley.
Clause 8.16 provided that, in respect of vacant properties, [Abbey] was a licensee of Mapeley and for a period of twelve months was obliged to pay a licence fee to Mapeley. However, clause 8.17 provided that Mapeley was at liberty during that twelve month period to let, underlet or otherwise deal with the vacant properties and any rent or other monies receivable by Mapeley from a third party in that period belonged to Mapeley absolutely.
Clauses 11 to 22 provided that Mapeley would provide estate property management services to [Abbey] including lease renewals and the collection of payments of rent.
Clause 11 provided that Mapeley should retain the services of Nelson Bakewell (who had previously provided estate property management services to [Abbey]) for the purpose of the performance of the estate management services mentioned in the agreement. A summary of estate management standards was set out in Schedule 14 and those standards applied to all of the properties the subject of the Master Agreement, including freehold and long leasehold properties as well as those the subject of the virtual assignment.
Clause 16 provided that Mapeley covenanted with [Abbey] that where any lease from a landlord was due to expire before the Hold Date then Mapeley would use its best endeavours to obtain a new lease in its name on terms that Mapeley could then grant a lease to [Abbey].
Clause 17 provided that, if a lease renewal were not available, Mapeley had to find alternative premises for [Abbey].
Clause 18 provided that [Abbey] had to pay Mapeley one rent for each quarter and any service charge due in that quarter. Thus [Abbey] was obliged to pay Mapeley a single sum each quarter for all properties, whether freehold or long leasehold with a lease back, or a virtual assignment with continuing occupation. Mapeley was liable to pay all the rates in respect of all the properties.
Clause 19.1 provided that [Abbey] could vacate any premises on the Hold Date without compensation or prior notice to Mapeley but “must give vacant possession” of the relevant premises. If [Abbey] wished to vacate any premises prior to the Hold Date then it had to give notice to Mapeley and pay compensation. It also had to give vacant possession of the premises to be vacated on or before the date it wished to vacate.
Clause 23 contained provisions about the expiry of the Master Agreement which was after a period of twenty years. On expiry [Abbey] had the option to buy back the freehold interests of some specified properties or to remain in occupation with the agreement of Mapeley. There was also an option to terminate the virtual assignment.
Schedule 2 paragraph 4 provided that, where a transfer or assignment of any transferred property was not completed on the completion date because of the need to obtain the consent of any landlord, then [Abbey] and Mapeley should enter into a virtual assignment in respect of such properties. It also provided that until completion took place, “where legally possible”, [Abbey] should hold the benefit of any under lease in trust for Mapeley in all respects. It went on to provide that Mapeley should act as the agent of [Abbey] for the purpose of obtaining the consents of the landlords to the assignments or transfers and should use its reasonable endeavours to obtain the consents of the landlords to the assignments or transfers. [Abbey] was entitled to identify any leasehold properties which had been vacated by [Abbey] where Mapeley had to attempt to seek and obtain the consent of the landlords so as to enable the assignment of the relevant leasehold property to be completed.
Schedule 2 paragraph 13 provided that [Abbey] irrevocably appointed Mapeley to be its agent to act on its behalf and in its name in all dealings connected with the landlords for the purpose of any aspect of the Master Agreement.
Schedule 2 paragraph 22 provided that Mapeley was responsible for all payments of rent becoming due to landlords after the commencement date.
Schedule 5 contained a form of virtual assignment. The virtual assignment was executed on 24 October 2000 and is considered in more detail below.
Schedule 6 contained forms of powers of attorney to be given by [Abbey] in favour of Mapeley. The powers of attorney are considered in more detail below.
Schedule 9 contained a form of lease to be used when Mapeley leased back to [Abbey] freehold or long leasehold properties which had been transferred or assigned by [Abbey] to Mapeley. The form of lease contained provisions similar to those in the virtual assignment. For example, it incorporated the occupancy regulations and gave [Abbey] options to determine, extend or renew the lease or to purchase the reversion. It also contained schedules I, II and III which were identical to those in the virtual assignment. On the other hand it also contained provisions which were not in the virtual assignment. For example, it contained a provision that if [Abbey] failed to pay any rent due or to observe and perform the covenants in the lease then Mapeley could re-enter the premises and terminate the lease. It also contained a provision that the parties could agree that certain statutory provisions should be excluded in relation to the tenancy created by the lease.
…….
25. Schedule 6 of the Master Agreement contained forms of powers of attorney to be given by [Abbey] in favour of Mapeley. In respect of each of the properties the subject of the virtual assignment [Abbey] entered into a power of attorney. Clause 6 of each power of attorney provided that [Abbey] irrevocably appointed Mapeley to be its attorney with very wide powers to do all acts and things on behalf of [Abbey] and in its name to give proper effect to the provisions of the Master Agreement and of the documents entered into pursuant to the Master Agreement so far as they related to the sale, purchase, and leasing of the properties including the power to execute agreements, deeds, documents and other notices.”
The virtual assignment
In paragraphs 17 to 24 of its Decision the Tribunal set out the relevant provisions of the virtual assignment, as follows:
“17. As mentioned, clause 4 of the Master Agreement provided that if, for any reason, a sale was not completed on the completion date, [Abbey] and Mapeley would execute a virtual assignment pending completion of the lawful assignment of that property to Mapeley. The form of the virtual assignment was included as Schedule 5 of the Master Agreement.
18. On 24 October 2000 [Abbey] and Mapeley (called the Purchaser) entered into the virtual assignment. Instead of formal assignments by [Abbey] to Mapeley of some leasehold interests Clause 4 of the virtual assignment provided:
‘4. The intention of the Virtual Assignment is to pass to the Purchaser all of the economic benefits and burdens of the Leases and Underleases in respect of the Properties, together with the obligation to manage all dealings with the Landlords and Undertenants as if the Properties had been assigned to the Purchaser but without this Virtual Assignment creating, vesting or granting any legal or equitable estate in the Premises to the Purchaser. To this end, any monies from any Undertenants pursuant to any Underleases, together with all proceeds of any disposal of the Leases or for the surrender of any Underleases, shall belong to the Purchaser.’
19. Instead of formal lease-backs from Mapeley to [Abbey] Clause 2 of the virtual assignment provided:
‘2. Abbey National shall be entitled to occupy all or any part of the Premises (subject to the Master Agreement) for the Term, and in consideration of the agreements on the part of the Purchaser contained in this Virtual Assignment, shall pay to the Purchaser the Principal Fee as described in the Particulars, subject to review in accordance with the Occupancy Regulations. Abbey National shall be deemed to have the benefit of the rights set out in Schedule I, and shall be subject to the rights set out in Schedule II, in the same way as if such rights had been granted. Abbey National’s occupation shall be subject to the matters set out in Schedule III.’
20. The particulars consisted of a schedule of all the properties the subject of the virtual assignment and, in respect of each property, a different principal fee was stated.
21. Clause 3 of the virtual assignment incorporated the occupancy regulations from the Master Agreement. Clause 5 provided that Mapeley would pay to the landlords all the rents on the relevant dates and would observe all the covenants in the leases. Under Clause 6 [Abbey] appointed Mapeley to be its agent to act on its behalf in all dealings connected with the properties including the payment of rent and service charges, applying for permissions, licences and consents, granting new underleases, and negotiating and completed surrenders or renewals of the leases. Mapeley was to have full discretion in the conduct of negotiations with third parties and the terms of agreements with third parties.
22. Schedule I of the virtual assignment set out rights granted to [Abbey] which included rights normally given to tenants such as rights relating to the common parts of premises; Schedule II set out the rights reserved to Mapeley which included rights normally reserved to a landlord; and Schedule III set out matters to which the virtual assignment was subject which included matters such as the covenants contained or referred to in the documents of title to each property.
23. A separate form of virtual assignment was used where property was vacant. Such a virtual assignment had a clause containing a statement of intention to pass the economic benefits and burdens to Mapeley but did not give [Abbey] any rights of occupation and did not oblige [Abbey] to pay any fee to Mapeley.
24. In a few cases real assignments of leases were made by [Abbey] to Mapeley after the virtual assignment.”
Subsequent correspondence
In paragraphs 26 to 28 of its Decision the Tribunal referred to a letter from Abbey to its landlords and to letters from Nelson Bakewell, Mapeley’s managing agent, to Abbey’s landlords and tenants, as follows:
“26. On 30 November 2000 [Abbey] wrote to its landlords about the disposal of its property portfolio by way of sale and leaseback. The letter which was sent where there had been a virtual assignment read:
‘We are writing to reassure you that nothing has changed to affect the landlord and tenant relationship already existing between us in relation to the above property and that any necessary consents required from you to an assignment or an underletting will be requested in the usual way in accordance with the terms of the lease.
However, from 25 December 2000 the day-to-day running and property management of the property will be carried out for us by Mapeley … who has appointed Nelson Bakewell as their managing agent. In particular Mapeley has directed Nelson Bakewell on our behalf to pay the rent due and owing to you from time to time and also Mapeley … has our authority to deal with you direct as our agent on all matters relating to the lease of the property.’
27. This letter gave rise to a number of requests for clarification and in reply Nelson Bakewell wrote in the following way:
‘Mapeley … has acquired from [Abbey] the benefit of any income stream being produced from the estate. In addition, they now have responsibility for day-to-day running of the estate including the payment of rent due and owing to you from time to time. Mapeley has authority to deal with you direct as agent to [Abbey] on all matters relating to the lease of the property. In turn, Mapeley has appointed Nelson Bakewell as their managing agent.”
28. On 18 December 2000 Nelson Bakewell wrote to each of [Abbey’s] tenants to say that the new landlord would be Mapeley but that there would be no change in the individuals at Nelson Bakewell dealing with the property. The same letter was sent both to tenants whose lease was formally assigned by [Abbey] to Mapeley and also to tenants where there was a virtual assignment from [Abbey] to Mapeley.”
The implementation of the arrangement
In paragraphs 29 to 31 of its Decision the Tribunal turned to the implementation of the arrangement, saying this:
“29. The effect of the Master Agreement was that both the risk and the reward of [Abbey’s] property portfolio passed to Mapeley. Legal title to the properties was transferred to Mapeley where this was possible but, where it was not, the position was governed by the virtual assignment. At the business level Mapeley did not distinguish between properties where legal title had been transferred on the one hand and properties the subject of the virtual assignment on the other.
30. Thus it was Mapeley who paid the rent to landlords who had granted leases to [Abbey]. Where there had been a legal assignment to Mapeley [Abbey] paid the indexed rent to Mapeley until the Hold Date for that property. If [Abbey] ceased to occupy such a property at the Hold Date there was no longer any liability to pay the indexed rent to Mapeley. Similarly, if [Abbey] ceased to occupy any property the subject of a virtual assignment at the Hold Date it no longer had any liability to pay any principal fee to Mapeley but in each case Mapeley continued to pay the rent to the landlord until the expiry of the lease. However, Mapeley could decide how to deal with vacant property (either by under-letting or assignment with the consent of the landlord) using the power of attorney. Mapeley advertised such properties for sale on its own instructions.
31. Mapeley also managed all dealings not only with landlords but also with tenants. This included negotiating and granting new leases, surrenders and assignments and collecting and keeping rents and assignment premiums. Where under tenants were in default Mapeley took enforcement action using the power of attorney and without recourse to [Abbey]. Mapeley also negotiated rent reviews in respect of the leasehold property whether formally assigned or the subject of the virtual assignment. For example, under the virtual assignment [Abbey] paid Mapeley a principal fee of £183,468 per annum for a property which it planned to vacate in 2004. Following a rent review the rent payable to the landlord was increased to £311,000 per annum from 24 October 2001. Mapeley paid the increased rent to the landlord and will do so until the lease expires in 2006. Thus in respect of this property Mapeley made a loss. In another property the rent paid by Mapeley to the landlord was less than the indexed rent paid by [Abbey] to Mapeley so in respect of that property Mapeley made a profit. In yet another case a rent review was negotiated entirely by Mapeley including the arbitration hearing and High Court proceedings.”
THE TRIBUNAL’S REASONING
The position under national law
In paragraph 38 of its Decision the Tribunal considered the position under national law, concluding (on the authority of Warmington v. Miller [1973] 1 QB 877, Central Trust and Safe Deposit Co v. Snider [1916] 1 AC 266, Rosen v. Trustees of Camden Charities [2002] 2 All ER 399, and Chronopoulos v. Caltex Oil (Australia) Pty Ltd (1982) 70 FLR 8) that following the signing of the virtual assignment Abbey remained the tenant of the properties in question, both at law and in equity.
In paragraph 39 of its Decision the Tribunal noted that this conclusion was accepted by Abbey, “who also accepted that it was not possible to ignore the rights and obligations of the landlords and [Abbey] under the leases to [Abbey]”.
Community law principles
The Tribunal then turned to the relevant principles of Community law. It did so in the context of Abbey’s contentions that its rights as tenant under the leases had been modified by its personal contract with Mapeley to the point where, although it retained what it described as bare legal rights and obligations, “it was not, as a matter of reality, entitled to those rights nor subject to those burdens”; and that the position under English land law was not relevant in the light of the principles established by the European Court of Justice (“the ECJ”).
In paragraphs 40 to 45 of its Decision, the Tribunal undertook a detailed analysis of six authorities in which the ECJ has considered the scope of Article 13B(b). Those six authorities are (in chronological order):
Lubbock Fine v. Customs and Excise Commissioners (Case C-63/92) [1994] STC 101 (“Lubbock Fine”);
EC Commission v. United Kingdom (Case C-359/97) [2000] STC 777 (“Commission v. UK”);
Stichting “Goed Wonen” v. Staatsecretaris van Financien (Case C-326/99) [2003] STC 1137 (“Goed Wonen”);
Customs & Excise Commissioners v. Mirror Group plc (Case C-409/98) [2001] STC 1453 (“Mirror Group”);
Maierhofer v. Finanzamt (Case C-315/00) [2003] STC 564 (“Maierhofer”); and
Wolfgang Seeling v. Finanzamt Starnberg (Case C-269/00) [2003] ECR I-04101 (“Wolfgang Seeling”).
In paragraph 46 of its Decision, the Tribunal set out the principles which it derived from those six authorities, as follows:
“46. From these authorities we derive a number of principles. The exemptions in Article 13 have their own independent meaning in Community law and must be given a Community definition. The meaning of “the leasing or letting of immovable property” is wider in some respects than the meaning in some national laws because the exclusions from the exemption (for example, a contract for hotel accommodation) would not be considered in some national laws to be a contract to let. That aside, the term has to be construed strictly. A lease or letting is a contract by which the owner transfers in return for rent certain rights in his property, such as the right of enjoyment of the property, whatever the nuances of national law. The right of enjoyment may either be a right of occupation or the right to underlet or otherwise take profits from the property. A leasing or letting must be of an agreed duration and must be in exchange for remuneration linked to that duration. A letting in Community law includes a lease and a licence and also a grant of a right in rem. Not every contract which has some characteristics of a lease is automatically covered by the term; the requirement is that the characteristics of a lease should predominate in the contract. A functional approach should be adopted as this guarantees the equal treatment of taxable persons who in economic terms perform equivalent transactions and such an approach also facilitates the uniform application of the exemptions throughout the Community.”
The Tribunal’s application of Community law principles to the facts of the case
In paragraphs 47 to 51 of its Decision the Tribunal applied the principles of Community law which it had identified to the facts of the case.
In paragraph 48 the Tribunal noted that the virtual assignment did not pass any legal or equitable estate in land to Mapeley, and that Abbey “already had the right to occupy the properties, and to take profits from them by way of assignment or under-letting, under the terms of its leases”. The Tribunal also considered it relevant that, absent the landlord’s consent, no person other than Abbey – and certainly not Mapeley – had the right to occupy the properties.
The Tribunal continued as follows (in paragraph 49 of the Decision):
“It seems to us, therefore, that whatever rights were supplied by Mapeley to [Abbey] under the virtual assignment they did not include the right of occupation nor the right to assign or underlet or take profits from the property. [Abbey] already had these rights; it was prohibited from transferring them to Mapeley; and so Mapeley could not transfer them back to [Abbey]. The transaction thus lacks two of the most important elements of a lease or letting (the right to occupy or the right to take profits from the property). In addition, Mapeley was not the owner of the property and so the transaction between Mapeley and [Abbey] did not meet a third requirement of a lease or letting which is that the owner should transfer rights in his property.”
In paragraph 50 of the Decision the Tribunal accepted that the rights granted by Mapeley to Abbey had some of the characteristics of a lease; in particular, the rights were granted for an agreed duration and in exchange for remuneration linked to that duration. The Tribunal also acknowledged that it had been attracted by the argument that, adopting a functional approach, equal treatment should be given to transactions which, in economic terms, were equivalent transactions. However, it concluded that such an argument was contrary to the principles established by the ECJ in the following two respects:
“The first is that not every contract which has some characteristics of a lease is covered by that term and the requirement is that the characteristics of a lease should predominate in the contract. In our view, the major requirements of the grant by the owner of property of a right of occupation or a right to enjoy the profits of the property are lacking in what was supplied by Mapeley to [Abbey] under the virtual assignment, and so the characteristics of a lease do not predominate in the contract. Secondly, the exemptions must be narrowly construed and the argument would widen them considerably.”
In paragraph 51 of its Decision, the Tribunal acknowledged that it had also been attracted by the argument that it should ask what the Principal Fee under the virtual assignment was paid for, and that the answer was that it was paid for Abbey’s entitlement to occupy the properties since Abbey had no obligation to pay a Principal Fee in respect of a property which it did not wish to continue to occupy. However, this further argument was also rejected by the Tribunal.
The Tribunal continued as follows (in paragraphs 52 to 56 of its Decision):
“52. The single answer to these two attractive arguments is that [Abbey’s] right of occupation, and the right to enjoy the properties by assignment or underletting, derived from the lease with its landlord and not from the virtual assignment. The virtual assignment was a personal collateral agreement between [Abbey] and Mapeley which did not grant rights of occupation but which did regulate how certain rights were to be exercised but only as between [Abbey] and Mapeley. The fact that [Abbey] agreed with Mapeley that [Abbey] would occupy the premises subject to the occupancy regulations made no difference. The regulation of the right to occupy is not the same as the grant of a right to occupy. The right to occupy was given by the lease and the occupancy regulations were merely an agreement as to how the rights of occupation should be exercised as between [Abbey] and Mapeley.
53. We are confirmed in our view by a number of other considerations. Under the virtual assignment Mapeley had no rights to dispose of the leases; only [Abbey] could assign or underlet them with the consent of the landlords; all Mapeley could do was to act as [Abbey’s] agent. Also, if a renewal or extension of a lease were required the only person who could apply to the landlord for such renewal or extension was [Abbey] and if Mapeley made such an application it was as agent for [Abbey]. After the virtual assignment [Abbey] and not Mapeley remained liable for payments of rent to the landlord. Although as between Mapeley and [Abbey] Mapeley agreed that it would pay the rent that did not absolve [Abbey] from its liability and if, for example, Mapeley had become insolvent, [Abbey’s] liability would remain. Also, when under the virtual assignment [Abbey] vacated a property on a Hold Date which was before the termination of the lease, [Abbey] remained liable to the landlord for the rent although as between [Abbey] and Mapeley that obligation was assumed by Mapeley. Further, Mapeley had no right to occupy the vacated property until the consent of the landlord had been obtained. Again, as far as rent reviews were concerned, only [Abbey] could request such a review although Mapeley could act for [Abbey] in negotiations. The letter to landlords of 30 November 2000, and the subsequent letter of clarification from Nelson Bakewell, say it all; what Mapeley acquired from [Abbey] was an income stream but not rights under the leases and so Mapeley could not make a supply of leasing or letting to [Abbey].
54. We therefore conclude that under the virtual assignment the supply by Mapeley to [Abbey] was not an exempt supply of the leasing or letting of immovable property within the meaning of Article 13B(b).
55. That conclusion only deals with the first part of the first issue. The second part is whether the principal fee was paid in return for agency and property management services. In analysing what the payment by [Abbey] to Mapeley was for we have concluded that it was not a payment for a leasing or letting of immovable property. However, in our view neither was the whole of the payment for property management and agency services. Although Mapeley did have the responsibility to manage the property that applied to property the subject of the legal assignments as well as to the virtual assignments. The rents due under the leases back where there had been a legal transfer of title could not be charges for agency and property management services and the same principle should apply to the principal fees under the virtual assignment.
56. Clause 2 of the virtual assignment provided that the principal fee was to be paid by [Abbey] to Mapeley “in consideration of the agreements on the part of [Mapeley] contained in this virtual assignment”. These agreements included the agreement under clause 5 of the virtual assignment under which Mapeley undertook to discharge [Abbey’s] obligations to the landlords for the rents. (Where there had been a legal assignment of a lease Mapeley became liable instead of [Abbey] as a result of that assignment to pay the rent to the landlord). Under the virtual assignment the payments of rent by Mapeley to the landlords were in connection with exempt supplies by the landlords to [Abbey] although paid by Mapeley for [Abbey]. In our view, therefore, the principal fees paid by [Abbey] to Mapeley were in part payments to Mapeley to be used by Mapeley primarily in discharging [Abbey’s] obligations to the landlords, the remainder being for agency and property management services.”
The Tribunal’s conclusion
The Tribunal expressed its conclusion on the Article 13B(b) issue in paragraph 57 of its Decision, as follows:
“Our conclusion on the first issue for determination in the appeal is that under the virtual assignment the supply by Mapeley to [Abbey] was not an exempt supply of the leasing or letting of immovable property within the meaning of Article 13B(b) and that the principal fee paid by [Abbey] to Mapeley was partly for the payments of rents due to landlords by [Abbey] the rest being for standard-rated supplies of agency and property management services.”
THE JUDGE’S JUDGMENT
As noted earlier, we are concerned only with the judge’s decision on the Article 13B(b) issue.
Having set out the facts (by reference to the Decision), and having identified the relevant legislation, the judge turned to the European authorities. He referred to Lubbock Fine, Commission v. UK, Mirror Group, Goed Wonen, Maierhofer (all of which had been considered by the Tribunal), and to Customs & Excise Commissioners v. Cantor Fitzgerald International (Case C-108/99) [2001] ECR I-7257 (“Cantor Fitzgerald”) (which had not been considered by the Tribunal).
In paragraphs 10 to 15 of his judgment he set out the principles which derived from those authorities, as follows:
“10. First, the meaning of the expression "leasing or letting of immovable property" cannot be determined by the interpretation given to such an expression by the law of a Member State, but has an independent meaning in Community law: see Maierhofer at p.577 paragraphs. 25 and 26; Commission v UK at p.805 para.63.
11. Secondly, the expression must be construed strictly since it constitutes an exception to the general principle that VAT is to be levied on all services supplied for a consideration by a taxable person: See Commission v. UK supra at p. 805, paragraphs 63 and 67 and Mirror Group at paragraph 30.
12. Thirdly, the definition of "leasing or letting of immovable property" may be wider than such a concept under national laws. The availability of the exemption is not, for example, dependent upon whether the right acquired as a result of a supply is a right in property or is a purely personal right as against the person making the supply. This is apparent from the exclusion from the exemption for certain supplies in the hotel sector (see Commission v UK supra at p.805 para.66). The UK legislation itself provides exemption for the grant of licences to occupy land, and in Scotland for the grant of personal rights to call for or be granted an interest in land.
13. Fourthly, in order to determine whether a transaction comprises a letting, account must be taken of its "essential features". In Maierhofer, where the question related rather to the question whether the letting of a prefabricated demountable building amounted to the letting of "immovable property", the court rejected the argument of the UK government that significance had to be attached to the question of whether land as well as buildings were included in the letting so as to avoid the risk of construction or repair work being dressed up to look like an exempt transaction, saying at p.578 para.39
‘…[I]t is appropriate to point out that art 13B(b) of the Sixth Directive defines exempt transactions by reference to the nature of the transactions effected. In order to determine whether a transaction comprises a letting or construction or repair work, account must be taken of its essential features (see as regards art 2(1) of the Sixth Directive, Card Protection Plan Ltd v. Customs and Excise Comrs (Case C-349/96 , [1999] 2 AC 601 , para 29) irrespective of the way in which it might be artificially presented.’
14. Fifthly, the "essential features" of leasing or letting should be identified by adopting a functional approach. Applying that approach Advocate General Jacobs in Goed Wonen, after referring to Advocate General Darmon's formulation in Lubbock Fine at paragraph 39, ventured the following as a definition:
‘84. 'Leasing or letting of immovable property' within the meaning of Article 13B(b) includes in my view agreements whereby one party grants the other the right to occupy a defined immovable property as his own and to use or even take profits from that property for an agreed (definite or indefinite) duration in exchange for remuneration linked to that duration.’
15. In this connection it should be noted that in Goed Wonen, where the question was whether the grant of a usufruct could fall within the exempting provisions, the usufruct in that case gave the right to use the property, including the right to sublet it and retain the rent received. The Commission sought to argue that the rights acquired were different from those acquired on a letting for a number of reasons, one of which was that the usufructuary acquired not merely the right to use the property in question but also the right to enjoy the fruits of it. That argument was not accepted by the court.”
The judge went on to refer to the salient provisions of the relevant documentation, and to summarise the rival submissions which had been addressed to him on the Article 13B(b) issue. He continued (in paragraphs 23 to 29 of his judgment):
“23. As between those two sets of rival submissions there is one fundamental area of disagreement, namely the extent to which Abbey's right of occupation under the Virtual Assignment can be said to be a right accorded to it by Mapeley and thus a 'letting' by Mapeley for the purposes of the Sixth Directive. That area of disagreement has two aspects. First there is the question whether a 'letting' for the purposes of the Sixth Directive necessarily connotes the grant of a right of occupation or whether it includes also a grant of a right to enjoy the fruits of the property. The second aspect is whether, on the facts of this case, the relevant right has been created. This second aspect has to be considered both in relation to the rights conferred by Abbey on Mapeley in relation to the properties, and in relation to those conferred by Mapeley on Abbey.
24. So far as the first question is concerned, I do not think there can be much doubt that "letting" in the Sixth Directive can include a situation where no right of occupation is in fact granted. Mr Goy QC for Abbey gave the example of a freeholder who has granted a lease of property to a lessee at a rent and who then grants a further lease for a shorter period subject to and with the benefit of the original lease to a third party. The third party will acquire no more than the right to enjoy the rent from the original lessee, but there is no reason to doubt that there will have been a letting to the third party.
25. The second aspect of the question is that which presents the difficulty. So far as the first part of the transaction is concerned (the Virtual Assignment), there is less difficulty in accepting Abbey's submissions than there is in relation to the second (the virtual lease-back). What Mapeley gets under the virtual assignment are all the rights listed at paragraph 17 above, i.e. the right to have assigned to it the leases, the rights to all rents paid by underlessees, the right to payment in respect of Abbey's occupation, and the right to deal with the leases in all respects as if it were the legal owner (subject to Abbey's right of occupation). This bundle of rights, carefully constructed so as to reflect, so far as legally possible, the effects of a legal assignment, can and in my judgment should be equated with a legal assignment for the purposes of the Sixth Directive. They reproduce the essential features of a letting as identified by the decisions of the ECJ to which I have referred.
26. The reason why it is harder so to analyse the "virtual leaseback" side of the transaction lies in the incontrovertible fact that if one asks, as a matter of national law, by what right Abbey continues in occupation pending the execution of a legal assignment, the only answer which can be given is that the right of occupation is ascribable to Abbey's rights under the lease: Mapeley never itself having had a right of occupation cannot have conferred one on Abbey. If that is the correct analysis for VAT purposes, the result must follow that the nature of Mapeley's supply to Abbey will differ according to whether a legal assignment and leaseback has been executed or not, even though the economic pattern of the transaction is identical in both cases and, on a Hohfeldian analysis, the legal relationship between Abbey and Mapeley (although not those between Abbey, Mapeley and the landlords) is practically identical.
27. In my judgment such a consequence is not inevitable, nor is it correct. The relationship to be considered is that between the parties to the relevant supply. For that purpose the relationship of either of those parties to the landlord can be ignored. The answer to the question "for what supply is the Principal Fee paid?" is that it is paid pursuant to an agreement between Mapeley and Abbey under which, as between those parties, Abbey is occupying the property pending the completion of the assignment to Mapeley on which the latter can insist. In my judgment the Tribunal's conclusion that it was being paid in part in connection with the exempt supply to Abbey by the landlord (to the extent of the rent payable by Mapeley on Abbey's behalf to the landlord) and as to the balance for agency and management services provided by Mapeley was wrong. The essential nature of Mapeley's supply to Abbey does not change on execution of the legal assignment by virtue of Mapeley then enjoying, for a scintilla of time, a right of occupation of the premises.
28. I derive some support for that conclusion from the principle of neutrality relied on by Mr Goy. The dangers of being too ready to resort to that principle to the exclusion of others (such as the objective of legal certainty) have recently been elaborated by Lord Walker of Gestingthorpe in his speech in Lex Services plc v. Customs & Excise Commissioners [2004] STC 73 at paragraphs 27 to 31. In my judgment this is not a case where application of the principle of neutrality causes an unacceptable degree of damage to the objective of legal certainty: as I have sought to demonstrate the type of transaction which the parties sought to create between themselves was that which the Sixth Directive identifies as a "letting".
29. Both parties invited me, in the case of doubt, to refer a question to the ECJ. I do not claim to have found my decision on the point an easy one. Nevertheless my hesitation has not been as a result of any doubt on the interpretation of the Sixth Directive but rather as to how the relevant provisions should be applied to a complex of rights and obligations which are very much the creature of the national law. In those circumstances it appears to me from the decision of the ECJ in Staatssecretaris van Financien v. Shipping and Forwarding Enterprise Safe BV, Case C-320/88 [1991] STC 627 that a reference would be inappropriate. In that case a Dutch company (A) had contracted to sell immovable property to another (B) but, rather than completing the transfer, had given B an irrevocable power of attorney to transfer the property. The Hoge Raad asked the ECJ (1) whether a supply of goods only took place where legal ownership was transferred and (2) whether it took place in the circumstances of that case. The ECJ answered the first question in the negative but directed that the second was a matter for the national court”.
THE COMMISSIONERS’ GROUNDS OF APPEAL
By their amended grounds of appeal the Commissioners contend (1) that the Master Agreement is an agency agreement and not a transfer of an interest in land; (2) that the VAT position should reflect the fact that under national law Abbey remains the legal and equitable lessee of the properties, and hence that the supply of leasing and letting is made not by Mapeley but by Abbey’s landlords; and (3) that Mapeley obtains no right of occupation under the Master Agreement and hence cannot in turn confer a right of occupation on Abbey.
THE ARGUMENTS ON THIS APPEAL
The arguments on behalf of the Commissioners
The argument of Mr Rupert Anderson QC (leading Mr Tim Ward, for the Commissioners) is straightforward. He submits that, on a true analysis, the contractual arrangements between Abbey and Mapeley embodied in the Master Agreement and the virtual assignment do not transfer any right of occupancy of the properties the subject of the virtual assignment from Abbey to Mapeley; and (relying on Belgian State v. Temco Europe SA (Case C-284/03) [2005] STC 1451 (“Temco”) and Cantor Fitzgerald, in addition to the European authorities considered by the Tribunal) that this is fatal to Abbey’s contention that such arrangements amount to a supply of leasing or letting by Mapeley to Abbey since the transfer of a right of occupation is an essential characteristic of a leasing or letting for the purposes of Article 13B(b).
He submits that the Tribunal were correct to conclude that the effect of the contractual arrangements is not to grant a right of occupation to Mapeley, but rather to regulate, as between Abbey and Mapeley, Abbey’s (retained) right of occupation as tenant under the leases.
Relying in particular on Cantor Fitzgerald, Mr Anderson submits that the fact that the virtual assignment may have the same economic consequences as an actual assignment does not lead to the conclusion that it should be treated as an actual assignment for VAT purposes.
He submits that, properly analysed, the supply by Mapeley to Abbey under the contractual arrangements between them is a standard-rated supply of agency and property management services.
The arguments for Abbey
Mr David Goy QC (leading Ms Claire Simpson, for Abbey) submits that for VAT purposes the execution of a formal assignment of Abbey’s leasehold interest in the properties the subject of the virtual assignment to Mapeley would effect no relevant change in the relationship between them, since the Master Agreement does not envisage Mapeley having a right of occupation of those properties but rather an entitlement to the fruits of the properties in the shape of a right to enjoy an income stream derived from them.
Relying in particular on Goed Wonen, Mr Goy submits that for VAT purposes the transfer of such a right of enjoyment is tantamount to the transfer of a right of occupation, and hence that in agreeing that Abbey should continue in occupation of the properties Mapeley is to be treated, for VAT purposes, as if it were a landlord leasing or letting the properties to Abbey – i.e. making an exempt supply to Abbey. Mr Goy repeats the example which he gave to the judge, to which the judge refers in paragraph 24 of his judgment (quoted in paragraph 32 above).
Mr Goy accordingly submits that, following the virtual assignment, Abbey is to be treated for VAT purposes as in occupation of the properties pursuant to a lease back by Mapeley, notwithstanding that no formal (i.e. actual) assignment of Abbey’s leasehold interest to Mapeley has yet taken place and that in the absence of such an assignment no (actual) lease back could be effected.
He submits that the European authorities referred to by the judge and by the Tribunal support the proposition that the VAT regime recognises the economic realities of the transaction in question: economic realities which, in the instant case, are precisely the same as if actual completion had taken place.
Mr Goy cites the decision of the ECJ in Staatssecretaris van Financien v. Shipping and Forwarding Safe BV (Case C-320/88) [1991] STC 627 (“Safe”) in support of the proposition that a supplier of leasing or letting for VAT purposes need not be the legal owner of the property in question, provided he has power to dispose of the property as if he were the legal owner. Mr Goy submits that, by virtue of the Master Agreement and the virtual assignment, Mapeley is in that position in the instant case.
Neither Mr Anderson nor Mr Goy invited us to refer a question to the ECJ for a preliminary ruling. Each submitted that the European authorities were clear and the result of applying those authorities to the facts of the instant case obvious (although, inevitably, they differed as to what that result should be).
CONCLUSIONS
A reference to the ECJ for a preliminary ruling?
In 1990, the ECJ said this (in paragraph 11 of its judgment in Safe):
“Under the division of functions provided for by art. 177 (now art. 234) of the EEC Treaty … it is for the national court to apply the rules of Community law, as interpreted by this court, to an individual case.”
Almost 15 years later, the ECJ made the same point in paragraph 26 of its judgment in Temco, saying this:
“As regards the transaction at issue in the main proceedings, it is for the national court to consider all the circumstances surrounding it in order to establish its characteristics and to assess whether it can be treated as a ‘letting of immovable property’ within the meaning of Article 13B(b) of the Sixth Directive.”
In the course of those 15 years, the ECJ entertained numerous references for preliminary rulings from national courts directed at the correct interpretation of the expression ‘leasing or letting’ in Article 13B(b), including those which have been cited in the instant case. In giving its rulings on those references the ECJ has, as I read its judgments, provided clear and consistent guidance to national courts as to the meaning of the expression ‘leasing or letting’ in Article 13B(b), to the point where, so far as I can see, yet another preliminary ruling on the same issue would be unlikely to add materially to the existing corpus of learning which the ECJ has already provided on the subject.
Accordingly, in respectful agreement with the judge, I would not for my part refer a question to the ECJ for a preliminary ruling.
The approach to be adopted
The Article 13B(b) issue has to be addressed in two stages. The first stage is to analyse the nature and effect of the contractual arrangements between Abbey and Mapeley (i.e. the Master Agreement and the virtual assignment). The second stage is to determine whether contractual arrangements of that nature and having that effect fall within Article 13B(b). The first stage is exclusively a matter of national law; the second, by definition, is exclusively a matter of Community law.
The first stage: national law
I start, then, by considering the nature and effect under English law of the contractual arrangements contained in the Master Agreement and the virtual assignment.
As noted earlier, it is common ground that these contractual arrangements did not involve the transfer of any proprietary interest in the properties in question from Abbey to Mapeley, whether at law or in equity. Further, it is rightly accepted by Mr Goy that they did not, and were not intended to, transfer to Mapeley any contractual right to occupy the properties (for obvious reasons, given the existence of covenants against parting with possession without the consent of the landlord). In consequence, Abbey’s status as tenant remained the same after as before the execution of the virtual assignment: it continued to occupy the properties the subject of the virtual assignment in right of its status as tenant under the leases. It follows as night follows day that since Mapeley had itself no proprietary or contractual right to occupy the properties in question, it was not in a position to ‘lease back’ (in the sense of re-transfer) such a right to Abbey. As the Tribunal rightly concluded (see paragraph 52 of its Decision, quoted in paragraph 27 above), the contractual arrangements between Abbey and Mapeley were effective merely to regulate, as between the two of them, Abbey’s exercise of its continuing right (qua tenant) to occupy the properties.
Mr Goy’s example of a purchaser under a sale and lease back transaction, which the judge appears to have accepted as an example of a situation in which a letting occurs without any right of occupation having in fact been granted (see paragraph 24 of his judgment, quoted in paragraph 32 above) seems to me, with respect, to be a flawed example when placed in the context of English land law. Under English land law, the purchaser under such a transaction acquires a right of occupation of the property, albeit a right which is subject to the lease back to the vendor.
I appreciate, of course, that the judge was considering the example in the context of Community law, but in doing so he seems to me to have conflated the two stages to which I referred earlier. Community law cannot, in the context of Article 13B(b), supply a right of occupation which does not exist under national law. It may or may not regard the existence of a right of occupation as an essential element of a transaction of leasing or letting within the meaning of Article 13B(b); but that is a different question. That is the second stage of the inquiry, to which I now turn.
The second stage: Community law
It is clear on the face of Article 13B(b) (quoted in paragraph 10 above) that the expression “leasing or letting” when used in the article has a wider meaning than it does under English law (see, for example, the exclusion of hotel accommodation). At the same time, the European authorities stress repeatedly that the exemptions in Article 13B are to be interpreted strictly. I confess that, to my mind, the notion of interpreting a loose expression strictly presents something of a paradox. At all events, the pragmatic approach must, I think, be to examine the relevant European authorities in order to see how the ECJ has interpreted the article, and not to interpret it in a way which appears to go beyond the limits of the ECJ’s interpretation.
The authorities
I accordingly return to the European authorities, in order to examine (a) whether under Community law the transfer of a right of occupation under national law is an essential element of a transaction of leasing or letting within the meaning of Article 13B(b); and (b), if not, whether the transaction in the instant case (under which, for reasons already given, no such right was transferred by Mapeley to Abbey) falls within the Article. In so doing, I pay tribute to the Tribunal’s analysis of the authorities which were cited before it: an analysis which was, in terms of general principles, effectively adopted by the judge, and with which I would respectfully agree. However, since we have had the benefit of some further citation of European authorities in this court, I shall attempt to tread my own path.
I will consider the relevant authorities in chronological order.
(1) Safe (decided on 8 February 1990)
Safe, a Netherlands company, agreed to sell to another Netherlands company the rights to a house and land. In the contract, Safe undertook to transfer the legal title to the property to the purchaser when required by the purchaser, and granted the purchaser an irrevocable power of attorney to execute the necessary transfer. The contract further provided that in the meantime any changes in the value of the property and all profits and outgoings were for the account of the purchaser. Before the sale was completed the purchaser went bankrupt and its trustees in bankruptcy sold all its rights in the property to a third party. Safe subsequently transferred the legal title to the property to the third party. The Netherlands Supreme Court referred to the ECJ for a preliminary ruling the question whether for the purposes of Article 5(1) of the Sixth Directive a supply took place only where legal ownership of the property the subject of the supply was transferred. The ECJ held (see paragraph 7 of its judgment) that the reference in Article 5(1) to ‘a supply of goods’:
“… does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property.”
For present purposes, the only relevance of Safe is that it establishes that a supply of ‘leasing or letting’ within Article 13B(b) may exist notwithstanding that no transfer of a proprietary interest under national law has taken place, provided that there has been “a transfer of tangible property” by the supplier: a proposition which is non-contentious in the instant case.
(2) Lubbock Fine (decided on 15 December 1993)
In Lubbock Fine the taxpayer surrendered the residue of a lease of office premises. The Commissioners assessed the taxpayer to VAT on the basis that, while the grant or assignment of a lease were in principle exempt transactions, the surrender of a lease was not. The VAT and Duties Tribunal referred to the ECJ for a preliminary ruling the question whether the surrender of a lease fell within Article 13B(b). In paragraphs 38 and 39 of his opinion, the Advocate-General (Darmon) said this:
“38. As already stated …, the terms used in Community directives concerning VAT must be given a Community definition.
39. It is common ground that a letting is a contract by which the owner transfers in return for rent certain rights in his property, such as the right of enjoyment of the property, whatever the nuances of national law on this point. ….”
The ECJ did not find it necessary to consider the nature of a letting; it decided the case on the simple basis that where an exempt transaction, such as a transaction of letting, is terminated, the termination is also exempt (see paragraph 9 of its judgment).
Given the nature of the issue in Lubbock Fine, and the fact that it was not in dispute that the original transaction was exempt under Article 13B(b), it does not seem to me that in referring to a “right of enjoyment of the property” the Advocate-General is to be regarded as drawing any distinction between a right of occupation on the one hand and a right to the fruits of the property on the other. The significance of a right of occupation was simply not in issue in that case.
(3) Commission v. UK (decided on 12 September 1997)
The issue in Commission v. UK was whether VAT was chargeable on road and bridge tolls. The UK treated such tolls as exempt from VAT, but the Commission applied to the ECJ for a declaration that by not subjecting the tolls to VAT the UK had failed to fulfil its obligations under Articles 2 and 4 of the Sixth Directive. (Article 2 provides that a supply of goods or services effected for consideration within the territory of a member state by a taxable person acting as such shall be subject to VAT; Article 4 defines the expression ‘taxable person’ by reference to the carrying out of economic activities.) The UK contended (among other things) that even if the tolls would otherwise have been taxable, they were exempt under Article 13B(b). The ECJ held that the tolls were taxable under Articles 2 and 4, and that the exemption in Article 13B(b) did not apply since there was no agreement as to the duration of the right of enjoyment which was an essential element of a contract of letting (the UK having argued, somewhat implausibly one may think, that the relevant duration was the length of time it took to travel along the particular toll road or to cross the particular toll bridge).
In the course of his opinion, the Advocate-General (Alber) said this (in paragraphs 75 and 76):
“75. It is clear from the spirit and purpose of the Sixth Directive and the wording of art. 2 in particular that the fundamental principle of the Sixth Directive is that all supplies of goods and services made by a taxable person for consideration are subject to VAT unless they are specifically exempted. The provisions regarding exemption are therefore to be interpreted narrowly as they are an exception to the fundamental principle of the Sixth Directive.
76. This means that the term ‘leasing … of immovable property’ must be defined according to its usual meaning. Not every contract which has some characteristics of a lease is automatically covered by the term. This would constitute a wide interpretation of the exemptions from tax which is precisely what is not intended. The requirement is, therefore, that the characteristics of a lease should predominate in the contract.”
These sentiments were echoed by the ECJ in paragraphs 63, 64 and 67 of its judgment, although the ECJ also pointed out (in paragraph 66 of its judgment) that, as already noted, the list of exclusions from exemption contained in Article 13B itself (e.g. the reference to a contract for a hotel room) indicates that the meaning of the expression ‘letting of immovable property’ is “certainly wider in some respects than that enshrined in various national laws”. In paragraph 68 of its judgment the ECJ concluded that the expression could not be interpreted as including contracts where the parties had not agreed “on any duration for the right of enjoyment of the immoveable property”, describing agreement as to duration as “an essential element of a contract to let”.
I do not derive any direct assistance from Commission v. UK on the crucial question whether a right of occupation is an essential element of a lease or letting for the purposes of Article 13B(b), not least because the facts or that case were so very different from those of the instant case.
(4) Goed Wonen (decided on 4 October 2001: not 24 October 2001, as stated in paragraph 43 of the Decision)
In Goed Wonen a Netherlands housing association acquired a number of new dwellings designed for letting. The association set up a foundation and granted to it, for a consideration, the exclusive right in rem to use and take the fruits of the new dwellings for a term of ten years (i.e. a usufructuary right under Netherlands law). Under Netherlands law, for VAT purposes the expression ‘letting of immovable property’ was to be taken to include ‘any other form in which immovable property is made available for use otherwise than by way of the supply thereof’.
The Netherlands court referred two questions to the ECJ for a preliminary ruling, the second of which asked whether Article 13B(b) was to be interpreted as meaning that a national legislature may treat the terms ‘leasing or letting’ as covering not only leasing and/or letting in the sense applied to those terms by civil law but also any other form in which immovable property is made available for use otherwise than by the supply thereof. The ECJ answered that question in the affirmative. It held that the fundamental characteristic of the grant of a right in rem lay in conferring on the grantee, for an agreed period and for payment, the exclusive right to occupy property as if that person were the owner; that that was also the fundamental characteristic of a transaction of leasing or letting; and that accordingly the application of principles of neutrality and consistency led to the conclusion that, for the purposes of Article 13B(b), a member state could treat the grant of such a right as leasing or letting.
In the course of his opinion the Advocate-General (Jacobs QC) observed that the autonomous Community definition of ‘leasing or letting’ could not be found by simply referring to legal concepts adopted by only some member states (see paragraph 72). He went on to point to significant differences between the legal institutions used in different member states, concluding (in paragraph 77) that the authors of the Sixth Directive “did not have a purely formalistic idea of the concept of ‘leasing or letting’” and (in paragraph 78) that the ECJ’s case law on the concept of leasing and letting took “a functional approach which takes into account the context in which the concept is used and the general structure of the Sixth Directive”. In paragraph 80 of his Opinion, he said this:
“80. A functional interpretation of the concept of ‘leasing or letting of immovable property’ moreover guarantees the equal treatment of taxable persons … who in economic terms perform equivalent transactions and facilitates the uniform application of exemptions throughout the Community ….”
After referring to the definition of the expression ‘leasing or letting of immovable property’ in paragraph 39 of the Opinion of Advocate-General Darmon in Lubbock Fine (quoted in paragraph 58 above), Advocate-General Jacobs QC continued (in paragraphs 83 to 85 of his Opinion):
“83. In the light of the court’s subsequent case law I would tentatively suggest a more specific interpretation which takes into account the different language versions of article 13B(b) and the divergences between the laws of the member states.
84. ‘[L]easing or letting of immovable property’ within the meaning of article 13B(b) includes in my view agreements whereby one party grants the other the right to occupy a defined immovable property as his own and to use or even take profits from that property for an agreed (definite or indefinite) duration in exchange for remuneration linked to that duration.
85. If one applies that interpretation to the present case the grant of a usufructuary right as in issue in the main proceedings can properly be considered as exempted ‘leasing or letting of immovable property’.”
In paragraphs 52 to 54 of its judgment the ECJ concluded that the grant of a right in rem conferring on its holder a right of user of immovable property was consistent with the general aims of the Sixth Directive. The ECJ continued:
“55. The fundamental characteristic of such a transaction, which it has in common with leasing, lies in conferring on the person concerned, for an agreed period and for payment, the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right.
56. Consequently, observance of the principle of the neutrality of VAT and the requirement for a consistent application of the provisions of the Sixth Directive, in particular the proper, simple and uniform application of the exemptions provided for …, entail treating the grant of a right such as the usufructuary right in question in the present case like leasing and letting, for the purposes of the application of art. 13B(b) ….
57. As the Netherlands government has rightly pointed out, treating such a form of use of immovable property as letting prevents any abusive creation of a right to deduct input tax on immovable property, which is an aim expressly provided for by art. 13 of the Sixth Directive.
58. That interpretation is not affected by the fact … that in the civil law of many member states usufruct has characteristics which distinguish it from leasing or letting. As the Advocate General points out in paras 87 to 91 of his opinion, those points are not relevant to the determination of the present case. The particularities in question, arising from the fact that these legal institutions belong to distinct legal categories, are secondary in relation to the fact that, economically, a right such as the usufructuary right in question in the present case and leasing and letting present the essential common characteristic mentioned in para. 55 above.”
As I read the above passage in its judgment, the ECJ is saying that notwithstanding that in form a usufructuary right such as was in issue in that case differs in a number of respects from leasing or letting, in substance it may be considered the same since (and this is the important point for present purposes) it shares the “essential common characteristic” – also described in paragraph 55 of the judgment as “the fundamental characteristic” – that it confers on the grantee, for an agreed period and for payment, a right of exclusive occupation of the property as if it were the owner: i.e. as if it were the grantor. What it is not saying, as I read the judgment, is that a mere right to receive an income stream from property, which is neither accompanied by nor derived from any right of occupation, is to be treated as a leasing or letting within the meaning of Article 13B(b). Nor do I find that in the least surprising, since such an interpretation of Article 13B(b) would in my judgment extend its scope far beyond the limits of any “strict” interpretation, wherever precisely such limits may be set.
Accordingly in my judgment Goed Wonen does not, on analysis, afford any support for Abbey’s contentions in the instant case: rather, it supports the contrary contentions put forward by the Commissioners.
(5) Mirror Group (decided on 9 October 2001)
Mirror Group agreed to take a lease of office premises at Canary Wharf, in consideration of the landlord paying to it a substantial sum expressed to be by way of inducement to Mirror Group to take the lease. The VAT and Duties Tribunal referred to the ECJ for a preliminary ruling the question whether the payment constituted consideration for a supply of services by Mirror Group to the landlord which, in the light of the decision in Lubbock Fine, was exempt under Article 13B(b). The ECJ answered that question in the negative. In paragraphs 31 and 32 of its judgment, the ECJ said this:
“31. The letting of immovable property for the purposes of Article 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 ….
32. It is thus the landlord who makes a taxable supply of services and the tenant who, in return for the supply, pays consideration. That is not the case in the proceedings before the national court.”
I see nothing in that decision which suggests that, for the purposes of Article 13B(b), a leasing or letting can exist in the absence of a transfer of a right of occupation to the tenant.
(5) Cantor Fitzgerald (also decided on 9 October 2001)
In Cantor Fitzgerald a lessee (Wako) entered into an agreement with a third party (CFI) for an assignment of the lease without the landlord’s consent (such consent being required under the terms of the lease). The agreement provided for a payment by Wako to CFI as consideration for CFI taking the assignment. The High Court referred to the ECJ for a preliminary ruling the question whether, following Lubbock Fine, Article 13B(b) exempted a supply made by a person in the position of CFI.
In argument before the ECJ, CFI contended that Article 13B(b) exempted from VAT not only the initial letting but also all subsequent transactions based on that letting or ancillary to it; that the exemption would undoubtedly have applied if the payment had been by CFI to Wako; and that the fact that it was Wako which was making the payment was merely a reflection of market conditions. The UK and Germany, on the other hand, contended that for Article 13B(b) to apply there must be a supply by the owner of property of rights of occupation of that property. The European Commission initially allied itself with the UK and Germany, but at the hearing it changed course and contended that the principle of neutrality required the transaction at issue to be exempt.
The ECJ answered the question in the negative. In paragraphs 20 to 33 of its judgment, the ECJ said this:
“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 Article 2(1) thereof and which is therefore taxable, unless one of the exemptions prescribed by a particular provision of the directive applies. It is therefore appropriate to consider whether that supply of services falls within Article 13B(b) of the Sixth Directive.
21. The letting of immovable property for the purposes of Article 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 (see, to that effect, …. Goed Wonen para 55).
22. The supply at issue in the main proceedings does not meet those conditions.
23. On the contrary, it was the new tenant, CFI, 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 CFI but paid consideration in cash for the service supplied by CFI, consideration which, as such, is not liable to VAT. The landlord was the only person to effect a supply of services to CFI within the meaning of Article 2(1) of the Sixth Directive, which was exempt under Article 13B(b) thereof, namely the right to occupy its property in consideration of the payment of rent.
24. Contrary to CFI’s assertion, Article 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 and which have not been effected by the landlord itself.
25. The broad interpretation advocated by CFI is at variance with the settled case-law of the Court, according to which the terms used to specify the exemptions provided by Article 13 of the Sixth Directive, and in particular ‘the leasing or letting of immovable property’, are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person. ….
26. That does not conflict with the Court’s interpretation of Article 13B(b) of the Sixth Directive in Lubbock Fine.
27. It is true that in that case the Court ruled that ‘the leasing or letting of immovable property’ for the purposes of Article 13B(b) of the Sixth Directive covers the case where a tenant surrenders his lease and returns the immovable property to his immediate landlord.
28. However, the Court must make clear that that judgment was given in respect of a tenant who returned the immovable property leased to his landlord and who, consequently, for the purposes of taxation, assigned his right to occupy the property back to the landlord by surrendering it. That is why the Court ruled … that the tenant’s surrender of the supply of services made by the landlord, which involved a change in the contractual relationship, has to be exempt where the supply itself is exempt.
29. The factual and legal context of the judgment in Lubbock Fine was thus quite different from that of the case before the national court and therefore CFI cannot usefully rely on it in support of its arguments.
30. Further, contrary to the assertions made by the Commission at the hearing, the principle of neutrality of VAT which must be applied in interpreting the Sixth Directive does not require Article 13B(b) of that directive to be broadly interpreted so that ‘the leasing or letting of immovable property’ covers a transaction like the one carried out by CFI.
31. It is true that Wako could have remained a tenant and sub-let the property to CFI for a lower rent than that which it had to pay the landlord, or that it could have paid compensation to the landlord so that the latter would accept early termination of the lease. In both cases, the economic impact would have been comparable to that of the transaction at issue in the main proceedings, without the parties concerned having to pay VAT.
32. However, that does not justify interpreting Article 13B(b) of the Sixth Directive so as to mean that it also applies to a supply of services that does not include the assignment of a right to occupy property.
33. An approach of this kind would be contrary to the VAT system’s objectives of ensuring legal certainty and a correct and coherent application of the exemptions provided for in Article 13 of the Sixth Directive. …. The principle of neutrality of VAT does not mean that a taxable person with a choice between two transactions may choose one of them and avail himself of the effects of the other.” (My emphasis)
The above passage is of direct relevance to the instant case in so far as it establishes that the principle of neutrality of VAT does not dictate that the mere fact that two transactions have similar economic consequences should lead to the conclusion that they must be treated in the same way for VAT purposes.
The ECJ’s judgment in Cantor Fitzgerald is also of assistance in the instant case as affording yet another example of the importance placed by the ECJ on the existence of a right of occupation as an essential element of a transaction of leasing or letting for the purposes of Article 13B(b).
(7) Maierhofer (decided on 16 January 2003)
The issue in Maierhofer was whether prefabricated buildings fixed to the ground constituted immovable property for the purposes of Article 13B(b), notwithstanding that they might be dismantled and removed on the termination of the lease. The ECJ held that they did. In its judgment, the ECJ stressed once again that the expression ‘immovable property’ in Article 13B(b) must have an autonomous Community meaning. In paragraph 39 of its judgment it observed that in order to determine whether or not a transaction comprises a letting, “account must be taken of its essential features”. Beyond that, the decision is of no direct assistance in the instant case.
(8) Wolfgang Seeling (decided on 8 May 2003)
In Wolfgang Seeling the taxable person erected a building which he treated as forming, in its entirety, part of the assets of his business. In the event, he used the building partly for business and partly for residential purposes. He sought to deduct the full amount of the VAT on the cost of acquiring the building as input tax, on the basis that his use of part of the building was taxable. The German government contended that his personal use was exempt from VAT and accordingly refused the corresponding deductions. The German court referred to the ECJ for a preliminary ruling the question whether Article 13B(b) prevented a member state from enacting a national law which treated the private use by a taxable person of part of a building forming, in its entirety, part of the assets of his business as tax exempt under Article 13B(b): in effect, whether such use constituted ‘leasing or letting’ for the purposes of the article.
The ECJ stressed once again that the exceptions in Article 13B(b) were to be interpreted strictly, and could not be applied by analogy. In paragraphs 49 to 51 of its judgment, the ECJ said this:
“49. The letting of immovable property for the purposes of Article 13B(b) of the Sixth Directive essentially involves the landlord or 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 (see … Mirror Group … and … Cantor Fitzgerald …).
50. The private use by the taxable person of a dwelling in a building which he has treated as forming, in its entirety, part of the assets of his business does not satisfy those conditions.
51. It is a feature of such use not only that no rent is paid but also that there is no genuine agreement on the duration of the right of enjoyment or the right of occupation of the dwelling, or to exclude third parties.”
Wolfgang Seeling is therefore a further extension of an already long line of Community authority to the effect that a right of occupation is an essential element of a transaction of leasing or letting for the purposes of Article 13B(b).
(9) Temco (decided on 18 November 2004)
Temco, a Belgian company, entered into contracts with three associated companies which allowed the companies to occupy a building owned by Temco on terms that the companies had no individual rights over any specific parts of the building, with rent being calculated according to turnover, and with Temco being entitled to require the companies to vacate at any time without notice.
The Belgian court referred to the ECJ for a preliminary ruling the question whether such arrangements fell within the exemption in Article 13B(b). The ECJ held that they did. In paragraph 19 of its judgment the ECJ observed that in numerous cases it had defined the concept of the letting of immovable property within the meaning of Article 13B(b) “as essentially the conferring by a landlord on a tenant, for an agreed period and in return for payment, the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right”. In that context, the ECJ referred (among other authorities) to Goed Wonen, Mirror Group, Cantor Fitzgerald and Wolfang Seeling.
In Temco, therefore, one finds a further reiteration of the principle that a right of occupation is an essential element of a transaction of leasing or letting for the purposes of Article 13B(b).
The application of Community law to the facts of this case
In my judgment the Community law authorities which I have examined leave no room for doubt that a right of occupation is an essential and fundamental element of a transaction of leasing or letting for the purposes of Article 13B(b). It follows that since, for reasons given earlier, Mapeley acquired no right of occupation of the properties the subject of the virtual assignment, and hence was never in a position to transfer such a right back to Abbey, the supply made by Mapeley to Abbey under the contractual arrangements in question is not a supply of ‘leasing or letting’ within the meaning of Article 13B(b) and hence is not exempt from VAT. In my judgment the Commissioners are correct in characterising the supply by Mapeley as a standard-rated supply of agency and property management services.
In paragraph 24 of his judgment (quoted in paragraph 32 above) the judge said that he did not think there could be much doubt that Article 13B(b) could include a situation where no right of occupation is in fact granted. For the reasons I have given, I respectfully disagree.
I must also disagree with the judge’s conclusion (in paragraph 25 of his judgment, also quoted in paragraph 32 above) that the contractual arrangements between Abbey and Mapeley “reproduce the essential features of a letting”. In my judgment they do not, since one essential feature of a letting is missing, viz. a right of occupation.
In the instant case Abbey is, in my judgment, attempting to have it both ways in just the manner described by the ECJ in the last sentence of paragraph 33 of its judgment in Cantor Fitzgerald (quoted in paragraph 76 above). Any grant by Abbey to Mapeley of a proprietary interest in the properties in question required its landlords’ consent, as did any conferring by Abbey on Mapeley of a contractual right of occupation of those properties. Hence, given the absence of such consent, the need to resort to the device of a virtual assignment designed to produce the same commercial results, but without involving Abbey in doing either of those things. Yet Abbey is now contending that for VAT purposes it is to be treated as having done precisely that which the virtual assignment was specifically designed not to do.
In respectful disagreement with the judge, therefore, I conclude that the Tribunal reached the right decision on the Article 13B(b) issue, and that it did so for the right reasons.
RESULT
I would allow this appeal.
Sir Peter Gibson:
Although we are differing from the judge, there is nothing which I would wish to add to the judgment of Jonathan Parker LJ with which I am in entire agreement.
Lord Justice May:
I also agree.