Places for People Homes Limited v The Commissioners for HMRC

The background facts are not in dispute, and we find them to be as follows.

The framework for the leasing of the flats in the 25 Properties within the scope of this appeal is similar, although there are points of difference in some of the details. The parties therefore agreed that the Tribunal could base its decision on the leases and ancillary documents relating to the leasing of flats in four of the Properties – namely Ashton Court, Brompton Park Crescent, Carlton House Terrace, and Swan Court.

All the flats are demised under leases, to which the Lessee, the Lessor and an MTC are parties. All 25 of the Properties have an arrangement engaging an express trust in relation to their maintenance: a Maintenance Trust is created over a Maintenance Fund, with the MTC as trustee. In the case of Swan Court and Carlton House Terrace the trust is declared in the lease itself. In the case of Ashton Court and Brompton Park Crescent there is a separate trust deed, to which the lease refers. In each case, the terms of the trust restrict the use of the Maintenance Fund to the maintenance and management of the Property in question.

Since 1987, a trust has been imposed by s42 Landlord and Tenant Act 1987 (“LTA 1987”). The trust imposed by s 42(3)(a) is:

A “service charge” is defined for these purposes in s18, LTA 1985 as an:

The Lessees pay service charges to the MTCs on a periodic basis. The provisions relating to service charges differ between the Properties, and can include different elements. But it is not necessary for the purposes of this decision to differentiate between the various elements, and it is convenient to refer to the payments in aggregate as the “Maintenance Contributions”. The amount of a Maintenance Contribution is (in broad terms) determined by reference to an estimate of the expenditure likely to be incurred by the MTC in maintaining the Property (including creating reserves for substantial items of anticipated future expenditure) and on account of the remuneration of the MTC itself. This is subject to periodic adjustment – the precise basis on which the Maintenance Contribution is calculated and apportioned between the flats in a Property is not relevant to the issues under appeal.

The MTCs’ remuneration is retained by them from Maintenance Contributions, and only the balance is contributed into the Maintenance Funds. The MTCs withdraw the costs incurred in maintaining the Properties from the Maintenance Funds. HMRC submit that both the retained fees and the withdrawn expenditures constitute consideration for services supplied to the Lessor and are therefore subject to VAT. The Appellant submits that these amounts are additional consideration for the supply of residential land to the Lessees and are exempt. Alternatively, the Appellant submits that withdrawals from a Maintenance Fund in respects of expenditure incurred by the MTCs on employing their own staff represent “disbursements” incurred by the MTC.

We were provided with copies of the following sample occupational leases for the Properties:

In the case of Ashton Court and Brompton Park Crescent, the terms of the corresponding Maintenance Trust are set out in a trust deed. In the case of Carlton House Terrace and Swan Court, the terms of the trust are set out in the leases.

We were provided with the copy of the title documents relating to one flat in Ashton Court. These comprised the lease of the flat and a separate trust deed.

The lease was dated 14 September 1988 and is for a term of 99 years from 24 June 1987 and expiring in 2086. The parties to the lease are the Lessee, the MTC, and the Lessor. The ground rent is £50 per annum for the first 33 years of the term, £100 per annum for the next 33 years, and £150 per annum for the remainder of the term. The underlease was granted for a premium of £55,950.

The demise is defined by reference to a plan attached to the lease. The demise includes the plaster work of the bounding and internal walls and ceilings of the flat, window glass, floor screeds, doors, and door frames. The demise extends to conduits throughout the Property that exclusively serve the flat. The demise excludes parts above the ceiling and below the floor surfaces, structural elements of the Property, windows and window frames (other than the glass), and the conduits that do not exclusively service the flat. The Lessee is given rights of passage over the entrance hall, passages, and staircases, and to use the lift. The Lessee is given the right to use the garden, laundry, lounge, and guest suite. The Lessee is granted rights of passage for utilities through conduits, and rights to support from the remainder of the development.

The Lessee’s covenants include:

Following the expiry of the perpetuity period of the Maintenance Trust, the lease provides that any reference in it to the MTC in the schedules setting out the various rights, covenants and regulations is to be treated as a reference to the Lessor.

The MTC’s covenants to the Lessee include:

The MTC’s obligations continue only for so long as it is the trustee of the Maintenance Fund, but it remains liable for any breaches that occur whilst it was the trustee.

The Lessor’s covenants to the Lessee include:

The Lessor has a power of re-entry if the ground rent or the Maintenance Contribution is unpaid for 21 days or more, of if the Lessee’s covenants are not performed and observed.

The trust deed was dated 22 December 1987 and is expressed to be between the Lessor and the MTC.

The recitals include the following term:

The perpetuity period of the trust expires on the first to occur of:

Clause 2.1 of the trust deed provides that the MTC shall retain its remuneration out of the Maintenance Contributions, and the balance (including any income) is held by the MTC:

Clause 2.2 provides that on the expiry of the perpetuity period:

The First Schedule sets out the purposes for which the Maintenance Fund can be applied as including:

The lease provides that the Lessee accepts performance by the MTC of the matters set out in the First Schedule of the trust deed in substitution for any obligation of the Lessor as follows:

The Second Schedule sets out the percentage of the total annual maintenance costs that are allocated to each flat as their Maintenance Contribution. The Third Schedule sets out the terms on which the Maintenance Contribution is calculated. Broadly it is the sum of several elements which represent estimates of the annual maintenance costs to be incurred in the year in question, plus an amount representing a reserve for costs which are of a long term nature (such as painting of the common parts and the exterior). These are then subject to adjustment to reflect the difference between actual amounts incurred and the estimates.

The Lessor covenants with the MTC to undertake various administrative matters that have no consequence for this decision, such as the provision of information, access to the Property, and endeavouring to keep the Property fully let to respectable Lessees. The Lessor also covenants to pay the Maintenance Contribution for any unlet flats.

The MTC’s covenants to the Lessor include:

The statutory power to appoint a replacement MTC is vested in the MTC, save that if:

We were provided with the copy of the title documents relating to one flat in Block 5 of Brompton Park Crescent. These comprised the lease of the flat and a separate trust deed.

The lease was dated 5 June 1985 and was for a term of 999 years from 29 September 1985 (less the last three days) and expiring in 2984. The ground rent is £50 per annum. The lease was granted for a premium of £87,000.

The demise is defined by reference to a plan attached to the lease. The demise includes the plaster work of the bounding and internal walls and ceilings of the flat, floorboards, doors and door frames, the glass in the windows, and surfaces of the floors of any adjoining balconies and patios. The demise extends to conduits throughout the Property that exclusively serve the flat. The demise excludes parts above the ceiling and floor surfaces, structural elements of the Property, windows and window frames (other than the glass), structural parts and railings of balconies, and the conduits that do not exclusively service the flat. The Lessee is granted rights of passage over the drives and forecourt of the estate, and the entrance hall, staircases, and passages of the block. The Lessee is given the right to use the lifts. The Lessee is granted rights of passage for utilities through conduits, and is granted rights to subjacent and lateral support. The Lessee is also given rights to use the sports complex on the estate (subject to payment of the relevant fees). The Lessee is granted rights to use the garden areas, and is given exclusive use of a car parking space.

The Lessee’s covenants include:

Following the expiry of the perpetuity period of the Maintenance Trust, the lease provides that any reference in it to the MTC in the schedules setting out various rights, covenants, and regulations is to be treated as a reference to the Lessor.

The MTC’s covenants to the Lessee include:

The MTC’s obligations continue only for so long as it is the trustee of the Maintenance Fund, but it shall remain liable for any breaches that occurred whilst it was the trustee.

The Lessor’s covenants to the Lessee include:

The Lessor has a power of re-entry if the ground rent or the Maintenance Contribution is unpaid for 21 days or more, or if the Lessee’s covenants are not performed and observed.

The trust deed was dated 17 October 1984 and is expressed to be between the Lessor and the MTC.

The recitals include the following term:

The perpetuity period of the trust expires on the first to occur of:

Clause 2.1 of the trust deed provides that the MTC shall retain its remuneration out of the Maintenance Contributions, and the balance (including any income) is held by the MTC:

Clause 2.2 provides that:

The First Schedule sets out the purposes for which the Maintenance Fund can be applied as including:

The lease provides that the Lessee accepts performance by the MTC of the matters set out in the First Schedule of the trust deed in substitution for any obligation of the Lessor as follows:

The Second Schedule is stated to set out the percentage of the total annual maintenance costs that are allocated to each flat as their Maintenance Contribution; however, those allocations were missing from the copy included in the Hearing Bundle. The Third Schedule sets out the terms on which the Maintenance Contribution is calculated. Broadly it is the sum of several elements which represent estimates of the annual maintenance costs to be incurred in the year in question, plus an amount representing a reserve for costs which are of a long term nature (such as painting of the common parts and the exterior). These are then subject to adjustment to reflect the difference between actual amounts incurred and the estimates.

The Lessor covenants with the MTC to undertake various administrative matters that have no consequence for this decision, such as the provision of information, access to the Property, and endeavouring to keep the Property fully let to respectable Lessees. The Lessor also covenants to pay the Maintenance Contribution for any unlet flats.

The MTC’s covenants to the Lessor include:

The statutory power to appoint a replacement MTC is vested in the MTC, save that if:

In his skeleton argument, Mr Southern notes that the Fifth Schedule of the Trust Deed (which addresses administrative provisions to be observed by the Lessor) describes the Maintenance Contribution as being “rent”. We do not agree. The provisions of the Sixth Schedule to the Trust Deed appoint the MTC as the Lessor’s agent to collect the ground rent from Lessees (amongst other things), and we find that the references to “rent” in the Fifth Schedule are to the rent (properly so called) being collected by the MTC on behalf of the Lessor, and not to the Maintenance Contribution. Mr Southern also states in his skeleton that paragraph 2 of the Third Schedule to the lease provides for the Maintenance Contribution to be recovered as rent. Again, we disagree as to the effect of paragraph 2 which provides for interest to be paid on late payments of rent and the Maintenance Contribution. However, we note that the provisions for interest are expressly without prejudice to the proviso for re-entry in the event of non-payment of rent or the Maintenance Contribution as provided elsewhere in the lease.

We were provided with the copy of the title documents relating to two flats in 24 Carlton House Terrace. There is no separate trust deed, and the terms of the trust are included in the leases.

The title to the Carlton House Terrace building is complicated. The freehold of Carlton House Terrace is vested in the Crown Estate which has granted a headlease of the Property to a company. That company then granted an underlease to one of its associated companies. That associated company then granted sub-underleases to the occupational Lessees.

The Property comprises both residential and commercial areas, and the provisions relating to maintenance contributions and some of the other provisions distinguish between the residential part of the Property and the commercial elements.

In the case of one of the flats, the Lessee obtained a new lease under the provisions of LRHUDA. It appears from the recitals in the new lease that one of the intermediate leases had previously been surrendered, so that in the case of this flat, the freehold continued to be vested in the Crown Estate, with an intermediate headlease in favour of a company, from whom the Lessee underlet the flat. By operation of LRHUDA, there was a surrender of the intermediate headlease immediately before the grant of the new occupational lease, and a regrant of the headlease immediately after the grant of the new occupational lease.

In this decision, in the case of the first flat, it is convenient to refer to the lessee under the underlease as the Lessor, the lessee under the occupational sub-underlease as the Lessee, and to refer to the occupational sub-underlease as the lease.

The first lease is dated 5 May 1976 and is for a term of 95 years from 1 January 1975 and expiring in 2070. The ground rent is £200 for the first 30 years, £300 for the next 30 years, and £400 for the remainder of the term. The parties to the first lease are the Lessee, the MTC, and the Lessor.

The second lease is of the penthouse and is dated 7 April 2011 and is for a term of 150 years from 1 January 2010 expiring on 31 December 2159. The ground rent is one peppercorn (if demanded). The parties to the second lease are the Lessee, the MTC, and the freeholder (the Crown Estate).

In the case of both leases, the demise is defined by reference to a plan attached to the lease. The demise includes the plaster work of the bounding walls and ceilings of the flat, screed surfaces to the floors, doors and door frames, the windows and window frame, the internal walls, suspended ceilings, and surfaces of the floors of any adjoining balconies and patios. The demise extends to conduits throughout the Property that exclusively serve the flat. The demise excludes parts above the suspended ceilings and below the floor surfaces, structural elements of the Property, structural columns and the bounding walls, the structural elements, glass panels and railings of balconies, and the conduits that do not exclusively service the flat – save that in the case of the penthouse flat, the demise extends to the “roof topping” laid over the concrete roof slab. The Lessee is given rights of passage over the entrance hall (and steps thereto), staircases, and passages of the block. The Lessee is given the right to use the lifts. The Lessee is granted rights of passage for utilities through conduits, and is granted rights to support from the remainder of the Property. The Lessee is granted rights to use the garden areas.

The Lessees’ covenants include:

The Lessor’s covenants to the Lessees include:

The Lessor has a power of re-entry if the ground rent or the Maintenance Contribution is unpaid for 21 days or more, or if the Lessees’ covenants are not performed and observed.

The terms of the Maintenance Trust are included in the leases.

The perpetuity period of the Maintenance Trust expires in the case of the first lease on the first to occur of:

The perpetuity period of the Maintenance Trust expires in the case of the penthouse lease on the first to occur of:

Clause 5(A) of the lease of the first flat provides that the MTC shall retain its remuneration out of the Maintenance Contributions, and the balance (including any income) is held by the MTC:

Clause 5(C) provides that:

The Fifth Schedule sets out the purposes for which the Maintenance Fund can be applied as including:

The terms of the Maintenance Trust as regards the penthouse flat are set out in clause 5.1 as follows:

The provisions of clause 5.3 and Schedule 5 are substantially the same as those in clause 5(C) and the Fifth Schedule of the lease of the first flat.

The first lease provides that the Lessee accepts performance by the MTC of the matters set out in the Fifth Schedule in substitution for any obligation of the Lessor as follows:

The lease of the penthouse flat includes a substantially similar provision as follows:

In the case of the first lease, the Lessor covenants with the MTC to undertake various administrative matters that have no consequence for this decision, such as the provision of information, access to the Property, and endeavouring to keep the Property fully let to respectable Lessees. The Lessor also covenants to pay the Maintenance Contribution for any unlet flats.

In the case of the first flat, the statutory power to appoint a replacement MTC is vested in the Lessor. In the case of the penthouse flat, the statutory power to appoint a new MTC is vested in the Crown Estate.

In the case of the first lease, the Fourth Schedule sets out the percentage of the total annual maintenance costs that are allocated to each flat as their Maintenance Contribution. It also sets out the terms on which the Maintenance Contribution is calculated. Broadly it is the sum of several elements which represent estimates of the annual maintenance costs to be incurred in the year in question, plus an amount representing a reserve for costs which are of a long term nature (such as painting of the common parts and the exterior). These are then subject to adjustment to reflect the difference between actual amounts incurred and the estimates. There are equivalent corresponding provisions in the case of the lease of the penthouse flat in Schedule 4.

We were provided with the copy of the title documents relating to two flats in at Swan Court, London SW3. There is no separate trust deed, and the terms of the trust are included in the leases.

The title to the Swan Court building is complicated. The entries in the title register at HM Land Registry in 2020 and 2022 show that the freehold is held by Cadogan Holdings Ltd, and that they are entitled to the reversion of the flats on the expiry of the occupational leases. However, the recitals and parties to the two leases would suggest that when originally granted, there was at least one intermediate person or company holding an interest under a headlease. In this decision, it is convenient to refer to the grantors of the occupational underleases as the Lessor, and the lessee under the occupational underleases as the Lessee, and to refer to the occupational underlease as the lease.

The first lease is dated 31 July 1978 and is for a term of 65 years from 29 September 1976 (less the last three days) and expiring in 2041. The ground rent is £30 until 29 September 1997, £60 until 29 September 2018, and £90 for the remainder of the term. The parties to the first lease are the Lessee, the MTC, and the Lessor.

The second lease is dated 16 January 1991 and is for a term of 75 years from 25 December 1989 expiring on 24 December 2064. The ground rent is £100 until 25 December 2014, £200 until 25 December 2039, and £400 for the remainder of the term. The parties to the second lease include the Lessee, the MTC, and the Lessor. There are a number of other parties to the second lease, including a guarantor of the obligations of the Lessee, and Cadogan Holdings Ltd (under its previous name, Cadogan Holdings Company), and Chelsea Land Ltd (which appears to be associated with Cadogan Holdings Ltd)

In the case of both leases, the demise is defined by reference to a plan attached to the lease. The demise includes the plaster work of the bounding and internal walls of the flat, doors and door frames, the metal parts of the windows and the window glass (but not the wooden frames of the windows), the internal walls, plastered surfaces of the ceilings, and the floorboards. The demise extends to conduits throughout the Property that exclusively serve the flat. The demise excludes parts above the plastered surfaces of the ceilings and below the floor surfaces, structural elements of the Property, the wooden window frames, the main timbers and joists of the building, balconies, and the conduits that do not exclusively service the flat. The Lessee is given rights of passage over the entrances and courtyard, and the entrance hall, staircases, and passages of the block. The Lessee is given the right to use the lifts. The Lessee is granted rights of passage for utilities through conduits, and is granted rights to support from the remainder of the Property. The Lessee is granted the right to park a car for short periods in the car park (subject to space being available).

In the case of the first flat, the Lessee’s covenants to Lessor and to the MTC include covenants to pay the ground rent, to pay the Maintenance Contribution to the MTC to maintain the flat and keep it clean and in good repair, and to periodically decorate the interior of the flat.

In the case of the second flat, the Lessee’s covenants to the Lessor, the MTC and various companies associated with the Lessor include to pay the ground rent and Maintenance Contribution, to maintain the flat and keep it clean and in good repair, and to periodically decorate the interior of the flat.

The Lessor’s covenants to the Lessee and the MTC include:

The Lessor has a power of re-entry if the ground rent or the Maintenance Contribution is unpaid for 21 days or more, or if the Lessee’s covenants are not performed and observed.

The terms of the Maintenance Trust are included in the lease.

The perpetuity period of the Maintenance Trust expires in the case of the first lease on the first to occur of:

The perpetuity period of the Maintenance Trust expires in the case of the second lease on 25 December 2064. Unless the lease is extended (for example under the LRHUDA), the lease will not extend beyond the perpetuity period.

Clause 5(A) of the lease of the first flat provides that the MTC shall retain its remuneration out of the Maintenance Contributions, and the balance (including any income) is held by the MTC upon trust to apply the Maintenance Fund for the purposes set out in the Fifth Schedule until the expiry of the perpetuity period, and then on the terms of clause 5(C).

Clause 5(C) provides that:

The Fifth Schedule sets out the purposes for which the Maintenance Fund can be applied as including:

The terms of the Maintenance Trust as regards the second flat are set out in clause 4(A) in substantially similar terms to the provisions of clause 5(A) of the lease of the first flat. The provisions of Schedule 5 (which sets out the purposes for which the Maintenance Fund can be applied) are substantially similar to the provisions of the Fifth Schedule of the first flat.

However, the provisions of clause 4(C) of the lease of the second flat, which sets out the trust arising on the expiry of the perpetuity period, are different. It provides as follows:

The provisions of the Fifth Schedule are substantially the same as those in the Fifth Schedule of the lease of the first flat.

The lease of the first flat provides that the Lessee accepts performance by the MTC of the matters set out in the Fifth Schedule in substitution for any obligation of the Lessor as follows:

In the case of both flats, the statutory power to appoint and remove the MTC is vested in the Lessor, save that the Lessor is not permitted to appoint itself of any of its subsidiaries as MTC.

In the case of both flats, the Fourth Schedule sets out the percentage of the total annual maintenance costs that are allocated to each flat as their Maintenance Contribution. It also sets out the terms on which the Maintenance Contribution is calculated. Broadly it is the sum of several elements which represent estimates of the annual maintenance costs to be incurred in the year in question, plus an amount representing a reserve for costs which are of a long term nature (such as painting of the common parts and the exterior). These are then subject to adjustment to reflect the difference between actual amounts incurred and the estimates.

There are a number of key features that are common to all the leases.

The Lessee pays a ground rent to the Lessor (although in some of the leases, the ground rent is collected by the MTC on behalf of the Lessor). The ground rent is small.

The demise of the flat includes the (a) the surfaces of the walls, floors, and ceilings; (b) doors, doorframes, and window glass; and (c) conduits exclusively serving the flat. In some cases, the demise also extends to interior walls. The Lessee is granted rights of passage over common parts giving access to the flat (such as entrances, passageways, and stairs). The Lessee is given a right to use the lift. The demise always excludes the structural elements of the block.

In the case of those leases where the perpetuity period of the Maintenance Trust is not shorter than the term of the lease, the Lessee pays a Maintenance Contribution to the MTC. In the case of those leases where the perpetuity period expires before the term of the lease, the Lessee pays a Maintenance Contribution to the MTC until the expiry of the perpetuity period. After the expiry of the perpetuity period, the Maintenance Contribution is payable to the Lessor.

The MTC deducts its remuneration from the Maintenance Contribution, and the balance of the Maintenance Contribution is subject to the terms of the Maintenance Trust.

The Maintenance Fund is applied to maintain the structure of the Property, the common parts, and the lift. It is also used to meet other outgoings, such as insurance, salaries, and administrative expenses. The Maintenance Contributions is calculated prospectively as the amount that is estimated to be incurred by the MTC in carrying out the terms of the Maintenance Trust plus its remuneration for acting as trustee. This is calculated to cover the costs incurred by the MTC in each year, plus a reserve for longer term expenses and repairs (such as painting of common parts and exterior).

Other than the second lease of Swan Court, on the expiry of the Perpetuity Period, the balance of the Maintenance Fund is payable first to the Lessor in respect of the amount owed to the freeholder/head lessor in respect of dilapidations (or where the Lessor is the freeholder, the amount required to put the building into good repair), and the residue is then payable to the Lessees in the same proportions as they pay their Maintenance Contributions. In the case of the second lease of Swan Court, the balance of the Maintenance Fund is payable only to the Lessees.

The Lessor has a right of re-entry if the ground rent or the Maintenance Contribution is unpaid.

In every case, the Lessee accepts the obligations of the MTC for the performance of the Maintenance Trust in substitution for and to the entire exclusion of any implied obligations on the part of the Lessor as regards the purposes for which the Maintenance Fund can be applied.

RMG owns all the shares in each of the MTCs. RMG is in the same VAT group as the MTCs and acts as managing agent for all of the Properties. RMG employs staff itself, and also engages third parties (such as gardening contractors) to provide maintenance services in respect of the Properties. RMG’s fees (which include the costs of employing its own staff) are recovered from the Maintenance Funds.

In addition to the staff employed by RMG and by third parties, the MTCs directly employ the staff that are based on-site at Properties (such as porters). In practice one of the MTCs (Wood Management Trust Limited (“WMTL”)) employs all of the staff on behalf of the other MTCs, and is reimbursed by the other MTCs out of the Maintenance Funds for those costs.

The expenditure incurred out of the Maintenance Contributions can be categorised as follows:

The Maintenance Contributions do not appear in the financial statements of either RMG or any of the MTCs, because the Maintenance Funds are not beneficially owned by either RMG or the MTCs.

The demands for payment of ground rent and Maintenance Contributions are issued by RMG as managing agent. Included in the hearing bundle were examples of service charge demands issued by RMG in respect of Brompton Park Crescent, Carlton House Terrace, and Swan Court. In each case the demand states that notices should be served on the named Lessee and the “client” is named as the relevant MTC. The demand includes a summary of the rights and obligations of the Lessee, including the following statement:

At all material times, RMG has been in the same VAT group as the MTCs. The various fees due to RMG from the MTCs relating to RMG's role as managing agent are therefore disregarded for VAT purposes. Mr Williams’ evidence was that there may be examples of invoices from RMG to the MTCs which suggest that RMG was charging the MTCs VAT on some of its fees prior to November 2020. However, his evidence was that he believed that this was due to an anomaly or data entry error in RMG’s accounting systems, and no VAT had actually been charged.

Prior to November 2018, the MTCs treated their trustee fees, the staff salary costs incurred by them and the ancillary staff costs incurred by the MTCs as exempt supplies in accordance with their understanding of the VAT treatment of residential service charges and the application of ESC 3.18 (which is described below). The MTCs did not levy VAT on these amounts when they were passed on to the Lessees through the Maintenance Contributions.

In November 2018 HMRC updated its guidance on its understanding of the application of VAT to residential service charges and the application of ESC 3.18. The guidance can be found in:

In response to the updated guidance issued by HMRC, RMG sought clarification from HMRC on how the Appellant should account for VAT in respect of the Maintenance Contributions. HMRC advised that the Appellant should account for VAT on the MTCs’ trustee fees, the staff salary costs incurred by the MTCs, the third-party charges incurred by the MTCs, and RMG’s fees for acting as managing agent (when passed onto Lessees). It took until about November 2020 for final clarification to be provided by HMRC, and from November 2020 the MTCs levied VAT on these supplies when they were passed through to Lessees.

Mr Alexander’s evidence was to the effect that the vast majority of RMG’s clients are not structured in the manner that is under appeal. Mr Alexander’s evidence was that the vast majority of RMG's clients are either landlords of blocks of flats (over 50% of RMG’s clients) or management companies controlled by dwelling holders responsible for blocks of flats or freehold estates. The maintenance trustee framework is uncommon. RMG would typically supply maintenance services to the landlord or to a managing agent owned by the flat owners. In the latter case the managing agent then makes a corresponding supply to the landlord. In both cases there would be an onward supply by the landlord to the tenants.

The supplies under appeal took place before Brexit, and are therefore subject to EU law, including the general principles of EU law such as legitimate expectation and legal certainty.

The Principal VAT Directive (2006/112/EC) (“PVD”) provides for exemptions for supplies of interests in land (namely that no output tax chargeable, but no input tax recoverable):

These provisions of the PVD have been translated into UK law by the VAT Act.

Paragraph 34, Schedule 4, VAT Act provides that the “grant, assignment, or surrender of a major interest in land is a supply of goods”. “Major interest” is defined in s96(1) VAT Act as a freehold estate or leasehold estate with a term exceeding 21 years.

The first grant of a major interest in a dwelling is a zero-rated supply: item 1, Group 5, Sch 8, VAT Act. The supply of other interests in dwellings is an exempt supply: item 1, Group 1, Schedule 9, VAT Act which provides as follows:

HMRC has issued an extra statutory concession relating to the supply of maintenance services relating to dwellings. This was introduced in Customs and Excise Brief 03/94 of February 1994. This concession provided that, with effect from 1 April 1994, maintenance services provided by a management company would in certain circumstances be treated as an exempt supply if they would have been exempt if they had been provided by the landlord:

The concession was set out in VAT Public Notice 48 (Extra Statutory Concessions) as follows:

The case of Nell Gwynn Maintenance Fund Trustee v HMCE [1999] STC 79 concerned a tripartite lease in a similar form to those under consideration in this appeal. The parties to the lease were the landlord, the tenant and the maintenance trust company. Under the terms of the lease the tenant covenanted with the landlord and the maintenance trust company to pay the rent and the maintenance contribution. The lease included a provision of the kind included in the leases under appeal to the effect that only the maintenance trust company was responsible for the provision of maintenance services, and that any obligation on the part of the landlord was excluded.

The issue in Nell Gwynn was the VAT treatment of the costs incurred by the maintenance trust company in employing staff as principal, which were passed through to the tenants in the maintenance contribution. The House of Lords noted that with effect from 1 April 1994, the extra statutory concession would apply to treat this supply as exempt. But in relation to the supplies under appeal (which were made prior to 1 April 1994) the House of Lords held that when the costs of employing the staff were passed on to the tenants, this was a taxable supply. Lord Slynn (with whom the others all agreed) went on to say that there is no reason to restrict this analysis to staff wages:

HMRC have restricted the application of the extra statutory concession with effect from 1 November 2018. In Revenue and Customs Brief 6 (2018): VAT exemption for all domestic service charges (published 7 September 2018) HMRC stated that:

VAT Information Sheet 07/18: Applying the correct VAT liability on residential domestic service charges (also published on 7 September 2018) went into more detail:

VAT Information Sheet 07/18 cross-refers to section 12 of VAT Notice 742 (Land and Property). Paragraph 12.1 deals with the “basic position”:

Mr Southern notes that where a lease provides for payment of both maintenance contributions and rent directly to the landlord, HMRC treats the corresponding supplies as being exempt composite supplies. He says that the issue in this appeal is whether two suppliers (the Lessor and the MTC) can together make supplies which are treated for VAT purposes as a single exempt composite supply of land.

Mr Southern submitted that the MTCs were independent contracting parties to the lease, and under the terms of the lease provided Maintenance Services in consideration for payment by the Lessees. He submitted that the MTCs were trustees, and that the essence of a trusteeship is independence and the ability to exercise discretion. A trustee cannot be beholden to anyone else, and cannot therefore be an agent. Mr Southern initially submitted that the Lessors were not beneficiaries of the Maintenance Trusts, that the MTCs could therefore not provide any benefit to the Lessors, and that the Lessors had no right of access to the Maintenance Fund. It was therefore impossible for the MTCs to supply services to the Lessors. However, Mr Southern later recognised that this submission was not sustainable in the light of the fact that the Lessors were beneficiaries of the Maintenance Trusts under the terms of most of the trust deeds and leases.

Mr Southern breaks down his submissions into five elements:

He concludes that the Maintenance Contributions are to be characterised as consideration for the supply of residential land and are therefore exempt.

Alternatively, he submits that the MTC acts as the agent for the Lessor, and the costs it incurs in connection with the employment of staff are disbursements for VAT purposes, and excluded from the MTC’s liability to account for VAT.

Mr Southern submits that property services and service charges (such as the Maintenance Contributions) are inseparable from the grant of the lease. In cases where the service charge is paid directly to a landlord, the service charges are normally further consideration for the letting as a matter of law in a landlord/tenant relationship, and the terms of a lease will normally characterise annual service charges as additional rent. The service charge is so related to the subject matter of the demise as to be part of the consideration for the premises demised. The land cannot be supplied or enjoyed without the services.

Mr Southern submitted that as a matter of general law the position of an MTC is assimilated to that of a landlord. He referred us to s621A, Housing Act 1985 and (more relevantly) s18 and s30, LTA 1985:

Mr Southern referred us to the decision of the Court of Appeal in Property Holding Co Ltd v Clark [1948] 1 All ER 165. The terms of the lease in that case provided for an annual rent plus a further annual “additional sum” which related to the provision of various fittings (which would normally be provided by the tenant, such as a cooker) and other services (such as furnishing and lighting the common parts). The rent of the flat was subject to statutory controls, and the issue to be determined by the court was whether the “additional sum” was properly to be characterised as “rent” for the purposes of the Rent Restrictions Act 1939. Under the terms of the lease, the “rent” was restricted to the grant of the lease over the demised flat. However, the terms of the lease also granted the tenant the right to use the common parts and fittings (such as a gas cooker) that were not normally included in a lease. The terms of the lease provided that landlord’s covenant of quiet enjoyment was conditioned upon payment of both the rent and the additional sum, and non-payment of either amount gave the landlord a right of re-entry. The Court of Appeal held that even though the “additional sum” was not expressed to be “rent” in the lease (and the drafting of the lease was careful to distinguish between the rent and the additional sum), as a matter of substance, the additional sum was rent for the purposes of the Rent Restrictions Act 1939. In his judgment, Scott LJ said:

Mr Southern submits that the leases of the Properties provide that enforcement of non-payment of the Maintenance Contributions allows for forfeiture of the Lessee’s lease through a right of re-entry. Accordingly, the Maintenance Contributions are “rent” for the purposes of property law. And by virtue of s30, LTA 1985, the MTC (being a person who has a right to enforce payment of a service charge) is a landlord.

In Royal & Sun Alliance Insurance Group Plc v HMCE [2000] STC 933 at 947g, the High Court held that service charges expressed to be recoverable as rent fall to be treated in for VAT purposes in the same way as rent itself. We were also referred to the decision of the CJEU in Card Protection Plan v HMCE (Case C-349/96) in which the CJEU considered the distinction between composite and multiple supplies (at [29]-[30]):

Mr Southern submits that the residual interest of the Lessor in the Property underlies the legal right to enforce payment of Maintenance Contributions by forfeiture of the lease for non-payment. While not decisive, Mr Southern submits that this is a strong indication that the Maintenance Contributions are simply part of the rent which the Lessee pays for the benefit of his lease and should attract the same VAT treatment. We were referred to the decision of the CJEU in Field Fisher Waterhouse [2013] STC 136 at [28] where the court said:

Mr Southern submits that it makes no difference whether the grant to the Lessee of its leasehold interest in the Property is made through a bilateral lease between the Lessor and the Lessee or by a tripartite lease between the Lessor, the Lessee and the MTC. The supplies of the right to use the Property and the supply of Maintenance Services are factually, economically, and legally unified. It is not sensible to separate them for VAT purposes, depending upon whether the lease is bilateral or tripartite. The services provided through the MTC are integral to the use and enjoyment as a residence of the Lessee’s property interest and they are so closely connected as to become part of the leasing or letting of immovable property. In consequence they are supplies of residential property and are exempt.

Mr Southern’s submissions on whether two suppliers can made supplies which are treated as a single composite supply are addressed below.

Mr Southern submits that under the terms of the leases that are subject to this appeal, both the Lessor and the MTC covenant to provide property services to the Lessees, and the Lessees covenant to pay both the Lessor and the MTC for these services. The Lessee’s legal rights and obligations derive from a single legal transaction which is implemented through the tripartite lease. The Lessor and MTC both covenant directly with the Lessee to provide the services, and the Lessee covenants directly with both the Lessor and the MTC to perform the obligations of the lease, including the payment of the Maintenance Contributions. There is nothing in the terms of any of the leases, submits Mr Southern, which suggests that the MTC is making supplies to the Lessor, for which it receives payment from the Lessee. As a practical matter, the primary obligation is by and to the MTC, and the Lessor acts as a backstop. Although the Lessor’s interest in enforcing payment of the Maintenance Contributions may be residual, Mr Southern submits that it is nonetheless crucial as it underlies the enforceability of payment by the Lessor having a right to forfeit the lease for non-payment.

We were again referred to Field Fisher Waterhousev HMRC at [28] in support of his submission that the fact that the lease can be forfeited for non-payment of service charges is a strong indication that service charges (such as the Maintenance Contributions payable in the case of the leases under appeal) are part of the rent payable by the Lessee, and should attract the same VAT treatment.

Mr Southern submits that any VAT analysis must have as its starting point the contractual relationship between the parties. In the cases of the leases under appeal, there is a single tripartite contract, rather than separate bilateral agreements between each of the parties. A covenant by both X and Y to Z (and a corresponding obligation by Z to both X and Y) cannot be analysed as separate obligations between X and Z, and between Y and Z separately. The contractual relationship between the parties in the case of the leases under appeal derives from a single transaction implemented through a tripartite agreement, and that there is nothing in the terms of the leases to suggest that the MTC is making a supply to the Lessor for which it receives payment from the Lessee. The Lessor and MTC covenant directly with the Lessee to provide the services, and the Lessee covenants directly with both the Lessor and the MTC to perform the obligations of the lease, including the payment of Maintenance Contributions. The services are ancillary to the supply of the land. The supply and enjoyment of the land carries with it the obligation to pay both rent and the Maintenance Contribution. Not only are the two inseparable, but the Lessee cannot pick and choose which services he chooses to utilise - they can only be supplied and enjoyed as a package.

Mr Southern acknowledges that while the contractual terms are the starting point for the VAT analysis, it is well established under VAT law that the contractual arrangements are not determinative, and regard must be had to the economic reality. Mr Southern submits that in relation to the leases under appeal, the contractual analysis coincides with the economic reality and produce the same VAT consequences, namely that the supply of the interest in land and the associated services is one overall supply.

Mr Southern submits that VAT is a civil law system (namely one derived from principles of Roman law) rather than a common law system – and that Roman law did not have a concept of agency. For VAT purposes, the issue to be determined is whether a supplier is an independent contractor.

Mr Southern referred us to a statement in VAT Public Notice 742 as follows:

Mr Southern submits that the MTC is not providing Maintenance Services to Lessees as agent for the Lessor. Agency requires an agency agreement, and in this case there is no agency agreement between the Lessor and the MTC – the MTC enters into the tripartite lease as an independent contractor. It is independently registered for VAT and does not use the same VAT number as the Lessor. The tripartite leases under appeal do not appoint the MTC as an agent for the Lessor. Further, the MTC is acting as a trustee, and as a matter of trust law, independence and discretion are inherent in the role of a trustee – in other words, a trustee cannot be an agent.

In the case of an outsourcing contract, the contractor to whom work is outsourced has contractual obligations to the outsourcer, but deals with the outsourcer’s customers not as agent, but in his own independent capacity. However, he has no direct contractual relationship with the customers.

Mr Southern analyses a contractual relationship in the case of outsourced services under a residential lease as follows:

In contrast, under the tripartite leases the MTC is neither an agent of the Lessor nor a person to whom responsibilities of the Lessor have been outsourced, but an independent contractor. The MTC has a direct contractual relationship with both Lessor and Lessee. The MTC’s supply to the Lessor is a contract fulfilment service, namely, to undertake to supply to the Lessees the property services which the Lessor has also undertaken to supply.

Mr Southern referred us to Card Protection Plan at [29] (cited above) in support of his submission that for VAT purposes the perception of the typical consumer is of central importance. A typical tenant would regard the Maintenance Services as supplied by the MTC, because that is the person he has to pay and that is the person he contacts when the lifts break down.

Mr Southern submits that there are two potential ways of analysing the supplies made under the tripartite leases in this appeal. Either:

Mr Southern acknowledged that there were a number of decisions of the higher courts which provided that where supplies were made by a number of different entities, there could not be a single composite supply. He referred us to the decision of the Court of Appeal in HMCE v Wellington Private Hospital and ors [1997] STC 445 at 462f where Millett LJ stated:

In Telewest Communications plc v HMCE [2005] EWCA Civ 102, a monthly magazine was included within the cost of a cable TV subscription, but was supplied by a different entity to the supplier of the cable TV service. The cable TV supplier collected the fee for the magazine as agent for the magazine publisher. HMCE argued that the supply of the magazine was ancillary to the supply of cable TV services, and therefore was not zero rated. The Court of Appeal held that two separate suppliers could not make a single overall supply, and that the concept of principal and ancillary supplies could not be applied where there were two separate suppliers.

However, Mr Southern submitted that these decisions now had to be considered in the light of the subsequent decisions of the CJEU in Bookit Ltd v HMRC (Case C-607/14) and National Exhibition Centre v HMRC (Case C-130/15). In both cases, where a customer paid for a ticket using a credit card, the purchase price was split between a card handling fee (charged by one company) and the price for the ticket (charged by a different company). Notably, the total price paid by the customer would be the same if the customer paid in cash. The taxpayers argued that the card handing fee was an exempt financial service, separate from the standard-rated ticket. HMRC submitted (and the CJEU held) that there was a single supply of the ticket.

In Bookit, the CJEU said:

The CJEU went on to hold that the provision of the card handling service provided in the case of Bookit fell outside the exemption for financial services as it was not a financial transaction, but related merely to the exchange of information between the taxpayer and its merchant acquirer. A similar decision was reached in the National Exhibition Centre case.

In summary, submitted Mr Southern, although the CJEU concluded that the supply of the card handling service fell outside the exemption, this was on the basis that either two different suppliers had made one overall supply or that there were a principal supply and an ancillary supply. It was for the national court to decide which analysis was appropriate in a particular case. Mr Southern noted that the decision of the CJEU was not grounded on the basis that the arrangements were abusive in any way.

The decisions of the CJEU were followed by the Upper Tribunal in SilverDoor Ltd v HMRC [2024] UKUT 147 (TCC) which concerned the VAT treatment of a card handling fee charged by a letting agent if the Lessee paid rent using a credit card. It collected payment for the property owner and charged a card handling fee if the customer of the property owner chose to pay by credit card. The taxpayer submitted that this fee took the VAT status of the supply of credit by the card issuer, and so was exempt. The Upper Tribunal noted at [45] that:

Mr Southern submits that it has been the consistent policy of the UK to exclude VAT from housing costs – hence the zero rating of new housing, and the exemption of other supplies of residential property transactions. The evident intention of Parliament is to prevent VAT from being applied to the cost of residential accommodation. The principle of fiscal neutrality requires that the same or substantially similar supplies should be taxed in the same way. In consequence, says Mr Southern, as the Maintenance Services are inseparable from the supply of residential property under the lease, they should be exempt from VAT in the same way as is the rent.

Mr Southern submitted that in the circumstances of this appeal, the Maintenance Contribution could be assimilated with the supply of land by the Lessor to create a single exempt supply.

Alternatively, he submitted that there was a single supply of residential management services by the MTC made under common legal obligations with the Lessor. The characterisation of those services was not altered by reason of the person to whom those services were supplied. The provision of those services provided benefits both to the Lessor and the Lessees. The supply of those services was ancillary to the supply of land to Lessees by the Lessors, and took on its exempt character for VAT purposes.

Mr Southern makes this submission in the event that we find that the MTCs are supplying Maintenance Services to the Lessors. He submits that the MTCs act as agent for the Lessors, and the costs they incur in employing their own staff are disbursements for VAT purposes, and excluded from the MTC's liability to account for VAT.

It is not disputed that VAT Notice 742, para 12(4)(b) provides the basis for disbursement treatment:

The meaning of the term “disbursement” is addressed in various HMRC publications, including VAT Notice 700, VAT Notice 742 and in HMRC’s manuals at VTAXPER38000:

In the circumstances of this appeal, any fiscal benefit to be derived from disbursement treatment would be restricted to employment costs. This is because the fees charged by third parties and by RMG (as managing agent) will attract VAT in any event, and if disbursement treatment is applied, the input tax incurred will not be recoverable by the MTCs. It is only the costs incurred by the MTCs in employing their own staff that are outside the scope of VAT, and which do not attract any VAT. For this reason, the submissions of Mr Southern focussed on the treatment of staff costs.

Mr Southern submits that the expenditure incurred by the MTCs in employing their own staff should be regarded as disbursements. The staff (such as porters working at the Properties) are not, he submits, engaged in conducting the MTCs’ own business of acting as trustees. Rather the costs of their employment are costs that the Lessors would otherwise have to meet themselves. Mr Southern submits that they are engaged as agents for the Lessor.

Mr Southern submits that if the MTC is the agent of the Lessor (as HMRC argue), then employment costs incurred should be regarded in the same way as the items already recognized as disbursements. Together with employment costs, these meet all HMRC’s requirements for classification as disbursements.

HMRC contend that Maintenance Services are taxable for either of two reasons (each of which would be sufficient of themselves):

As regards the Appellant’s submission on disbursements, HMRC submit that the MTCs have incurred these costs in order to undertake their Maintenance Services, rather than as agent for the Lessors - and the costs do not therefore qualify as disbursements.

Mr Donmall makes the following submissions by reference to the arrangements applying to Brompton Park Crescent (corresponding submissions would apply in the case of Ashton Court):

He makes the following submission by reference to the Carlton House Terrace leases (corresponding submissions would apply in the case of the Swan Court leases):

Mr Donmall submits that the economic reality is that in all cases the Lessor is supplying Maintenance Services to the Lessees, which it fulfils by way of the Maintenance Services supplied by the MTC to the Lessor:

The fact that the Lessees benefit from the services supplied by the MTC does not mean that those services are necessarily supplied to them by the MTC for VAT purposes. Mr Donmall referred us to HMCE v Redrow [1999] 1 WLR 408. Redrow developed new homes. When someone purchased a new home from Redrow, Redrow agreed to pay the estate agent costs incurred by the purchaser in selling their existing home. Redrow selected the estate agent and maintained pressure on the agent to secure a sale. The House of Lords held that the fact that the purchaser obtained a benefit from the sale of their existing home did not mean that Redrow were not able to obtain an input tax credit in respect of the estate agent’s fee.

Mr Donmall submitted that the principle of fiscal neutrality is not engaged when considering whether there are multiple supplies or a single supply because the treatment of several services as a single supply for VAT is necessarily different from the treatment which applies if those services are supplied separately. We were referred to the decision of the Upper Tribunal in Middle Temple v HMRC [2013] UKUT 0250 (TCC) at [39] which related to the charge by the landlord for the supply of cold running water:

A similar conclusion was reached by the CJEU in WEG Tevesstrasse v Finanzamt Villingen-Schwenningen (Case C-449/19) which concerned a combined heat and power plant operated by a property owners association on its land. The electricity produced by the plant was sold to the energy distributor, and the heat was supplied to the property owners who were members of the association. The CJEU held that the supply of heat did not come within the exemption for supplies of residential land. The Court went on to say:

Mr Donmall submits it is incorrect to regard supplies of Maintenance Services as the same or substantially the same irrespective of whether they are supplied by the Lessor or a third party – not least because small differences in the factual matrix can render significant differences in the legal analysis - see for example HMRC v Loyalty Management [2013] UKSC 15 at [37] and [38] where the Supreme Court referred to the limited nature of the reference to the CJEU in the light of the fact that neither the question referred by the UK court nor the submissions made to the CJEU touched upon the relationship between the underlying parties, and regard must be had to all the circumstances in which a transaction takes place in any analysis. Further, Mr Donmall submits that even if the Lessor provided the Maintenance Services, it would not necessarily cost the Lessees any more; assuming that the Lessor engaged a managing agent (or the MTC) to supply those services – the managing agent would charge VAT on its services, which the Lessor would pass through to the Lessees in the Maintenance Contribution.

Mr Donmall submits that there is nothing unusual about HMRC’s analysis. Mr Alexander’s evidence was that the vast majority of RMG’s clients are other landlords. In other words, in the vast majority of cases, RMG’s customer is the landlord, and it is the landlord that supplies the maintenance of common parts to the tenant. In the same way in the present case, RMG is making supplies to the MTC, the MTC then supplies the Lessor, and it is the Lessor that is supplying the maintenance of common parts to the Lessee.

Mr Donmall submitted that even if the Tribunal were to find for the Appellant in relation to the direction of supply issue, the appeal should in any even be dismissed because the MTC’s supplies to Lessees are separate, taxable, supplies, from the exempt supply of residential land by the Lessor.

Mr Donmall submits that it is well established that it is not possible to join supplies from two suppliers into a single supply for VAT purposes. In addition to the references to Nell Gwynn and Telewest Communications, cited by Mr Southern and referred to above, Mr Donmall referred us also to RLRE Tellmer Property sro v Financní reditelství v Ústí nad Labem [2009] STC 2006, Lower Mill Estate Ltd v HMRC [2011] STC 636, and Kumon Educational UK Co Ltd [2014] UKFTT 109 (TC).

RLRE Tellmer Property sro was a decision of the CJEU addressing whether the costs of cleaning common parts fell within the VAT exemption for the letting of residential property. The Advocate General in her opinion said:

At [19] the Court said:

Mr Donmall submitted that the Appellant’s argument that there was a single supply rested on the decision of the CJEU in Bookit and National Exhibition Centre. Both cases considered whether a “fee” for card handling services was a separate supply from the sale of a ticket. Mr Donmall referred to the decision of the CJEU in Bookit at [23] where the Court observed that additional charges levied by a supplier do not constitute consideration for a supply of services distinct from the principal supply for which payment is made. Mr Donmall submits that the underlying reasoning is that it is inherent in a supply for consideration that the supplier should make appropriate efforts to ensure that a customer can make effective payment – there was no wider statement of principle.

Mr Donmall also referred us to the provisions of Article 42 of the EU Council Implementing Regulation (EU) No 282/2011:

As regards SilverDoor, the Upper Tribunal, submits Mr Donmall, made obiter comments relating to Bookit. Mr Donmall noted that this was another example of a card handling fee, and the Upper Tribunal recognised that Bookit appeared to be at odds with the decision of the Court of Appeal in Telewest, but went on to say that on the facts of the case, this was not an issue which they needed to explore.

Mr Donmall submitted that Bookit and National Exhibition Centre need to be treated with caution as laying down any general principle allowing the fusion of supplies.

As regards the Appellant’s argument that the costs incurred by the MTC in employing staff are disbursements, Mr Donmall submits that this submission is misconceived. The contracts of employment of the staff concerned are with the MTCs. The MTCs are not acting as agent for the Lessors in relation to their employment. The requirements for the treatment of these costs as disbursements are not met. Mr Donmall referred us to the speech of Lord Slynn in Nell Gwynn at 90c to 91b:

Mr Donmall submits that in relation to the supplies made by the MTC’s own staff, the MTC is supplying their services rather than merely arranging for those services to be supplied (see also Nell Gwynn at [88c])

There are two principal issues which we need to resolve which were described by Mr Donmall as (a) the Direction of Supply Issue; and (b) the Fusion of Supply Issue. For the Appellant to succeed in their contention that the supplies made by the MTCs are exempt supplies of land, they must succeed in relation both to the Direction of Supply Issue and the Fusion of Supply Issue.

If we find for HMRC in relation to the principal issues, we need to go on to determine whether the costs incurred by the MTCs in employing their own staff can be characterised as “disbursements” for VAT purposes.

Mr Southern submits that the MTCs have direct contractual obligations with the Lessees to provide Maintenance Services, and that they do so as independent contractors, and not agents for the Lessors. Mr Donmall submits that the Lessors retain ownership and control over the common parts of the Properties to which the Maintenance Services relate. In consequence, the MTCs’ supply of Maintenance Services are made to the Lessors and not to the Lessees.

We agree with Mr Donmall for the reasons he gives and find that the supplies made by the MTCs are to the Lessors and not to the Lessees – notwithstanding that the MTCs are parties to the leases between the Lessors and the Lessees.

We reach this conclusion for the following reasons:

We find that the structure of the Maintenance Trusts is the mechanism through which the Lessors fulfil their obligations to the Lessees to ensure that the common parts and structural elements of the Properties are maintained and kept in good condition. We find that the payments of the Maintenance Contributions are made in return for the fulfilment of these obligations by the Lessor.

We are supported in this finding by the terms of the Maintenance Trusts (other than the trust relating to the second of the Swan Court flats). The beneficiaries of the Maintenance Trusts are expressed to be both the Lessors and the Lessees, and not exclusively the Lessees (as Mr Southern initially submitted). In the case of Ashton Court, Brompton Park Crescent Maintenance Trusts are expressly stated to be for the benefit of the Lessor and the Lessees. In the case of these trusts, they provide that on the expiry of the perpetuity period the Maintenance Fund is payable in the first instance to the Lessor in such amount as is required to put the building and grounds in good repair. In the case of the leases of Carlton House Terrace and the first lease of Swan Court, the terms of the Maintenance Trust provide that on the perpetuity date the Maintenance Fund is charged with payment to the Lessor of amounts required by it to pay for dilapidations under the headlease (and the Lessor is therefore a beneficiary of the Maintenance Trust). Given that the amount of the Maintenance Contribution is calculated to correspond to the costs of keeping the Property in good repair (including a reserve for substantial expenditure), it seems highly likely to us that the whole (or certainly a very substantial part) of the Maintenance Fund would be payable to the Lessor. It would only be in the case where the Maintenance Contributions had been miscalculated would any excess arise to be returned to the Lessees. We find that the person principally benefitting from the Maintenance Trust is the Lessor because (a) the Maintenance Fund is to be used in maintaining those elements of the Property that are not demised to the Lessees, and (b) on the expiry of the perpetuity period, all (or a substantial part) of the Maintenance Fund will become payable to the Lessor.

We note that in the case of Ashton Court and Brompton Park Crescent (where there are separate trust deeds) the trusts were created some eight or nine months before the grant of the sample lease. So, at the time the trusts were created, supplies by the relevant MTCs could only have been made to the Lessor, and the Lessor was the only beneficiary of the Maintenance Trusts. We find that the economic reality in relation to the other Properties is similar – the relationship between the Lessor and the MTCs must have been established prior to the grant of the leases of the flats. This can be seen from the standard terms adopted in the leases, and the fact that it appears that although the terms of the trusts are set out in the leases (and not in a separate trust deed) they are substantially similar for all of the flats in a particular Property – notwithstanding that the flats would have been demised on different dates.

We also note that the Lessors will be liable for the Maintenance Contributions arising in respect of flats that are unlet, or which are occupied without any liability to make Maintenance Contributions.

We note that all the service charge demands included in the hearing bundle provide in the summary of the Lessee’s obligations that the Maintenance Contributions are payable to the landlord. However, the Service Charges (Summary of Rights and Obligations, and Transitional Provision) (England) Regulations 2007 prescribes the form this summary must take, and requires that the summary must state that the service charge is payable to the “landlord”. RMG (as managing agent) has no discretion to amend the wording and we therefore we place no weight on the reference to the service charge being payable to the landlord.

Although some of the contractual terms applying to Brompton Park Crescent and to Carlton House Terrace might be read as suggesting that the MTC is supplying services to the Lessees (such as provisions allowing the MTC to discontinue services if it is in the general interest of the Lessees) we agree with Mr Donmall that the economic reality is that the Lessors are procuring the maintenance of the common parts and structural elements of the Properties from the MTCs for their benefit, as would be the case where the lease does not have an MTC as a party.

We find that the fact that a Lessee pays the MTC the rent for his flat, or notifies the MTC that a lift is broken is not a relevant factor in determining the direction of supply. Whilst the perception of a typical consumer is a relevant consideration, it is not determinative of the economic reality. And we note that in the case of a bilateral lease (where only the landlord and tenant are parties), a landlord of a substantial property might well engage a managing agent, and a tenant would pay rent and service charges to the managing agent (on behalf of the landlord) and it would be the managing agent to whom defects would be notified. Even though the tenant is paying his rent and service charge to the managing agent, and notifying the managing agent of any defects, there is no doubt that in these circumstances, the recipient of the managing agents’ supplies is the landlord.

We reach our conclusion without having to determine that the MTCs are acting as agent for the Lessors with regard to the maintenance of the Properties, or that the Lessors are outsourcing their obligations. Rather the MTCs are supplying services to the Lessors as principal. We acknowledge that the Lessees benefit from the provision of these services – but that does not mean that the services are supplied to them for VAT purposes by the MTCs (perRedrow).

We recognise that there are some circumstances in which the MTCs act as the agent of the Lessor – for example under the terms of the Ashston Court and Brompton Park Crescent trusts, the MTC is responsible for arranging for the collection of rents and reviewing on behalf of the Lessor any applications by Lessees for licences for alterations – and these activities are clearly undertaken by the MTC as agent for the Lessors. But neither HMRC nor the Appellant have submitted that these administrative provisions have any relevance to the direction of supply issue.

We note that as a matter of landlord and tenant law, an appropriate remedy for failure by the MTC to undertake maintenance services may be an order for the enforcement of the trust (see Woodfall: Landlord and Tenant at 7.186). Woodfall also states that there will not generally be any term implied into a lease that if a maintenance trustee company does not provide services, then the landlord will. However, Mr Southern submits that in the leases under appeal both the Lessor and the MTCs covenant to provide the Maintenance Services to the Lessees (although the Lessor does so as a backstop). But we agree with Mr Donmall that considerations of landlord and tenant law and of the law of trusts do not determine the direction of a supply for VAT purposes – which ultimately turns on the economic reality of the arrangements.

The House of Lords in Nell Gwynn agreed with the finding of the VAT and Duties Tribunal that the maintenance trustee company in that case was making supplies to the tenants (see the speech of Lord Slynn at 87g) as well as to the landlord. However, the decision is primarily about the nature of the supply of the MTC’s staff for VAT purposes, rather than to whom the staff are supplied – and the direction of supply does not appear to have ever been properly argued. We agree with Mr Donmall that it is a case on its own facts, and preceded many of the cases which have stressed the pre-eminent importance of economic reality. In Chelsea Cloisters the FTT held that the management company made direct supplies to the tenants – however that finding was obiter and does not bind us and is also subject to appeal. We note that there are some significant differences in the structure of the leases in Chelsea Cloisters when compared with the leases in this appeal – in particular under the Chelsea Cloister leases, CCML enters into an express covenant with the tenants and the landlord to keep the building in good repair, rather than merely acting as a trustee of the maintenance contributions and undertaking (under the terms of the trust) to apply the trust funds in keeping the building in repair. We find in the circumstances of this case that the economic reality of the arrangements is that the supplies made by the MTC are to the Lessors for VAT purposes and not to the Lessees.

We consider that neither Property Holding Co nor Royal & Sun Alliance have the breadth of application as suggested by Mr Southern. Property Holding Co concerned the application of rent controls to payments made in respect of a tenancy of a flat, and the fact that the service charge was brought within the meaning of “rent” for the purpose of rent controls does not, in our view, have wider application. The Royal & Sun Alliance decision (at least as regards the paragraphs to which Mr Southern referred us) related to the attribution of income under a sub-letting by RSA to the rent and service charges paid by RSA under its headlease, and the treatment of those outputs when the property was vacant (but was intended to be sub-let). The decision in Royal & Sun Alliance does not, in our view, provide any assistance in analysing whether Maintenance Contributions payable to an MTC are a supply of land. In the Field Fisher Waterhouse case, there was no tripartite agreement with a separate maintenance trustee, and the maintenance services were provided by the landlord. We found Card Protection Plan also to be of little assistance, as it is concerned with a whether a single supplier is making composite or multiple supplies and does not address the question of whether different suppliers can together make a single supply.

We found Mr Southern’s reference to Roman law to be bizarre. Our knowledge of Roman law is now sketchy, but we are prepared to accept that it did not have a concept of agency. We are also prepared to accept that France (a civil law jurisdiction) was one of the first countries to adopt a value added tax, and that the authors of the Neumark Report (the precursor to the early EEC VAT directives) were influenced by the system of French VAT. But civil law has developed considerably since the days of Justinian, and we believe that the French civil code includes provisions dealing with agency (and we are aware that Scottish law (also a civil law system) also has a law of agency). But just because France was an early adopter of VAT does not make the tax a “civil law system”. We are aware that Thomas S Adams (an American economist) proposed, unsuccessfully, to the US Congress in the 1920s that the USA (a common law jurisdiction) adopt a form of value added tax. Further, the system of VAT in the PVD (with which we are concerned) was adopted by the European Union when the UK and Ireland were both member states, and it is designed to operate independently of the nature of the legal system of member states.

Mr Southern submits that the Maintenance Contributions can be assimilated with the supply of land by the Lessors to create a single exempt supply. Alternatively, he submits that the supply of Maintenance Services by the MTCs were ancillary to the supply of land to Lessees by the Lessors, and took on their exempt character for VAT purposes. Mr Donmall submitted that the MTCs’ supplies to Lessees are separate, taxable, supplies, from the exempt supply of residential land by the Lessors.

We agree with Mr Donmall and find that the supplies by the MTCs neither form a part of a single supply of land by the Lessor to the Lessees, nor are the supplies by the MTCs ancillary to the Lessors’ supply of land such that the MTCs’ supplies take on their exempt character for VAT purposes.

Other than the decisions of the CJEU in Bookit and National Exhibition Centre (and the decision of the Upper Tribunal in SilverDoor) all the authorities cited to us have decided that it is not possible to fuse supplies by two suppliers into a single supply for VAT purposes. This was acknowledged by Mr Southern when he cited the decisions of the courts in Wellington Private Hospital, Nell Gwynn, and Telewest. We would also add Lower Mill v HMRC [2010] UKUT 463 (TCC) where the Upper Tribunal said:

We agree with Mr Donmall that the decisions of the CJEU in both Bookit and National Exhibition Centre must be given careful analysis. Although the decisions were not based on the doctrine of abuse of rights, the background to both cases was tax avoidance, where the supplier group sought to recharacterise part of the consideration payable for tickets as a (VAT exempt) card processing charge. We agree with Mr Donmall that the CJEU’s decision is based on the principle that the charges incurred in the process used by a supplier to structure receipt of payments forms part of the consideration for the supply. We consider, and find, that the CJEU was making no wider statement of principle.

In SilverDoor, the Upper Tribunal was bound to follow the decision of the CJEU in relation to card handling fees, and it observed that the decision of the CJEU in Bookit was difficult to reconcile with the decision of the Court of Appeal in Telewest. However, that difficulty is addressed by Article 42 of the Implementing Regulations. These provisions provide an explanation as to why card processing payments are treated as an integral part of the consideration for the principal supply.

We agree with Mr Donmall that the EU principle of fiscal neutrality is not engaged for the reasons he gave, since the treatment of several services as a single composite supply for VAT is necessarily different from the treatment that applies if those services are treated as being multiple supplies.

We find that neither Bookit nor National Exhibition Centre have altered the general principle that it is not possible to combine supplies by two suppliers under two contracts to result in one supply for VAT purposes. We find that the supplies of land made by the Lessors and the supplies of Maintenance Services made by the MTCs are separate.

We also find that as the supplier of the Maintenance Services is not also the supplier of the land, the supply of Maintenance Services is not ancillary to a supply of land and cannot take on the character of an exempt supply of land. In reaching this conclusion we have also borne in mind that VAT exemptions are to be construed strictly.

Mr Southern submits that even if HMRC are correct that the supplies of Maintenance Services are made by the MTC to the Lessors, the costs incurred by the MTC in employing its own staff should be treated as disbursements. Mr Donmall disagrees; he submits that these costs were incurred by the MTCs while fulfilling their own obligations and do not represent payments made as agents for the Lessors. Accordingly, such costs form part of the consideration for the MTCs’ taxable supplies to the Lessor.

We agree with Mr Donmall. For Mr Southern to succeed in his submission, he would need to demonstrate that, in substance, the MTCs are acting as the agent of the Lessors in employing staff. This is manifestly not the case. The evidence is that the staff employed by the MTCs (such as caretakers and porters) are all employed by WMTL for itself and on behalf of the other MTCs. And this analysis accords with the legal framework within which the MTCs operate. The only way in which an MTC can incur costs is in compliance with the requirements of the relevant Maintenance Trust is to utilise the Maintenance Fund for the purposes specified in the relevant trust deed or lease. It therefore incurs the costs of employing staff in its own name, as principal, in order to make its own (taxable) supplies to the Lessor. These costs are therefore not disbursements.

Subject to the outstanding point on the EU law principles of legitimate expectation and legal certainty, for the Appellant to succeed in its appeal we would need to find in its favour on both the direction issue and the fusion issue. We have found against the Appellant on both issues.

We have also found that the costs incurred by the MTCs in employing their own staff are not disbursements for VAT purposes.

We stay this appeal pending the release of the decision of the Upper Tribunal in Chelsea Cloisters Management Limited.

We invite the parties to agree draft directions for a separate hearing to address the EU law matters and any ancillary issues (in the light of the Upper Tribunal’s decision). The agreed draft directions must be filed with the Tribunal within 30 days of the release of this decision. If the parties are unable to reach agreement on draft directions by that date, they are each directed to file drafts of the directions that they submit should be adopted by the Tribunal.

This document contains full findings of fact and reasons for this interim decision. Any party dissatisfied with this preliminary decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The Tribunal hereby directs that the 56 days within which a party may send or deliver an application for permission to appeal against a decision that disposes of this interim decision shall run from the date of the decision that disposes of all issues in the proceedings. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.