The Court of Appeal held that a university college was entitled to waive exemption from VAT, as part of a tax mitigation scheme, in respect of land upon which it proposed to rebuild a library, with the result that it would be able to recover the VAT paid in respect of the construction works.

Facts

The taxpayer, a college within the University of Cambridge, was a non-profit making body providing educational services. The college library had been built in 1897 and extended in 1962. The extension was in a state of disrepair and a decision was made to replace it while retaining the main library, a building of significant historical interest. The new building was designed to be more spacious and to accommodate both college students and outside researchers.

The taxpayer was concerned that VAT on the project costs would be irrecoverable given its exempt status for VAT purposes and it decided to implement a structure to mitigate the cost. That involved the setting up of a subsidiary company and the grant of a lease by the college to the subsidiary. It was intended to waive exemption in respect of the lease so that VAT would be charged on the rent, thereby creating an entitlement for the college to deduct input tax on the construction costs. An agreement for lease was entered into between the college and the subsidiary followed by the grant of a formal lease. Additional agreements were reached for the sale of books and other library assets to the subsidiary, the secondment of library staff to the subsidiary, and the administration of the library by the subsidiary.

Customs sought to disapply the taxpayer's election under the anti-avoidance provisions in the Value Added Tax Act 1994, Sch. 10, para. 2(3AA). Customs argued that the taxpayer remained in occupation of the library building for the purposes of para. 3A of Sch. 10. The tribunal upheld Customs’ decision, holding that the effect of the arrangements was that the taxpayer remained in occupation of the library after the grant of the lease so that the land was exempt land ([2005] BVC 2,374; Decision No. 18,936).

Issue

Whether the taxpayer remained in occupation of the library after the grant of the lease.

Decision

Chadwick LJ (Lloyd LJ and Sir Andrew Morritt C agreeing) said that to be in ‘occupation’ of land for the purposes of para. 3A(7) required more than a right to use that land. It required some degree of control over what those who were not also in occupation of the land could do on the land. In the absence of any element of control by students and fellows of the taxpayer over access to and use of the library by others, it was impossible to sustain the conclusion that the taxpayer remained in occupation of the library for that reason.

It was common ground that the library was under the day to day control of the college librarian and her staff and, but for the secondment agreement, occupation would be shared between the subsidiary, as the person entitled to possession under the lease granted by the taxpayer, and the taxpayer, whose staff were present and in control.

The term ‘secondment’ took its meaning from the context. It was not a legal term of art. The provisions of the secondment agreement in this case required that, although the librarian's actual duties which were to be carried out were unchanged, during the period of secondment they were to be carried out ‘as librarian for the company’ rather than ‘as librarian for the college’. Her duties as librarian were unchanged, but were no longer to be carried out under the direction of the college council but under the direction of the board of directors of the subsidiary.

There could be no doubt that, under the arrangements that were agreed, the library staff were to be present in and in control of the library. And there could be no doubt that the library staff were to remain employees of the taxpayer. The taxpayer alone was to have the power to discipline and dismiss them. But, subject to that, the library staff were required, under the terms which each agreed with the taxpayer on countersigning the secondment letter, to carry out their duties under the direction of the subsidiary. During secondment the library staff were to be answerable to that company, and only indirectly to the taxpayer, for what they were to do in the library. The fact that the library staff remained employees of the taxpayer was not sufficient to support the conclusion that the taxpayer was in occupation of the library. Their presence and control was as persons acting under the direction of the company. It was not, of itself, indicative of presence and control by the taxpayer ( Brambletye School Trust Ltd [2003] BVC 2,015; Decision No. 17,688 distinguished).

It was accepted that the arrangements reflected the true intent of the parties and had to be given the effect which, in law, they had. Those arrangements might be described as contrived or artificial, in the sense that they had no commercial purpose other than to enable the taxpayer to recover input tax, but they could not be treated as a façade. There was no warrant for disregarding the separate legal personality of the subsidiary. In all the circumstances, the court would set aside the decision of Customs, that the election to waive exemption made by the taxpayer was of no effect by reason of para. 2(3AA).

Court of Appeal (Civil Division).

Judgment delivered 24 March 2006.