18864

Value added tax – input tax – section 24(1) VATA 1994 – partnership of solicitors took lease of office premises in name of nominee company – lease granted to nominee company with partnership as guarantor – partnership paid rent and VAT on rent and claimed VAT as input tax – whether supply to partnership – yes – whether VAT on rent input tax of partnership – yes – Commissioners of Customs and Excise v Redrow Group plc applied - appeal allowed

LONDON TRIBUNAL CENTRE

	LESTER ALDRIDGE (a firm)	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

             Tribunal:   MR A E SADLER (Chairman)
         MRS R A WATTS-DAVIES, MHCIMA, FCIPD

Sitting in public in London on 18 and 19 October 2004

Mr Eamon Mc Nicholas of Counsel, for the Appellant

Mr George Peretz of Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

Summary of the appeal and the decision

1.	This is an appeal by the firm of Lester Aldridge which is a partnership practicing as solicitors (“the Appellant”) against a decision of the Commissioners of Customs and Excise (“the Commissioners”) dated 3 October 2003 and Notices of Assessment of VAT dated 10 August 2002 and 22 January 2004.  The amount of VAT (and interest) in dispute is £123,701.11.  The matter in dispute is whether the Appellant is entitled to recover as input tax under section 24(1) of the Value Added Tax Act 1994 (“VATA”) the VAT paid on rent where the relevant lease was granted to a “nominee” of the Appellant.
2.	In 1990 the Appellant formed a company with a nominal share capital, Lester Aldridge Nominees Limited (“LANL”).  The Appellant negotiated a lease for a term of 25 years of office premises in Bournemouth which the Appellant wished to occupy for the purposes of its business.  As a partnership, and having regard to the terms of the Law of Property Act 1925, the Appellant had the choice of taking the grant of the lease in the name of no more than four of the partners or of procuring another entity (in this instance LANL) to take the grant of the lease to hold it for the benefit of the Appellant.  The Appellant, with the agreement of the landlord, chose the latter route, so that the lease of the premises was granted to LANL on terms whereby the landlord permitted LANL to allow the Appellant to occupy the premises, and the Appellant joined in the lease to guarantee to the landlord the performance by LANL of the tenant’s covenants and to give certain other covenants to the landlord.  The Appellant paid the rent and took such other action as was required to ensure compliance by the tenant with the terms of the lease.
3.	The grant of the lease by the landlord is a taxable supply for VAT purposes (the landlord having exercised its right to waive exemption under the relevant provisions), and the Appellant claims to recover as input tax the VAT charged by the landlord on the rent payable under the lease.  The Appellant argues that LANL (which is not registered for VAT) holds the lease as nominee or bare trustee for the Appellant, simply as a technical or conveyancing device in circumstances where in law the Appellant cannot itself take a grant of the lease, so that, under domestic VAT law it is the Appellant alone which has the right to recover as input tax the VAT charged on the rent.  The Appellant also argues that if the domestic law does not give this result it is contrary to the relevant European Directive on the grounds that it discriminates against partnerships of individuals, which must, uniquely amongst business entities, adopt such an arrangement because of the constraints of English land law.
4.	The Commissioners argue that, by the terms of the lease, the relevant supply is made exclusively to LANL, so that LANL alone is entitled to recover as input tax the VAT charged on the rent.  They deny that domestic VAT law requires them to take account of any nominee or bare trustee arrangement in these circumstances.  They argue that LANL could have registered for VAT, and could have granted the Appellant a licence to occupy the premises, on terms whereby that grant was rendered a taxable supply:  had that been the case there would have been no “net” VAT cost to LANL, and the Appellant would have been entitled to recover as input tax the VAT charged to it by LANL under the licence terms.  The Commissioners deny that there is any discrimination against partnerships when partnerships can arrange their affairs in this way so as to ensure full recovery of input VAT relating to their occupancy of premises used for their business purposes.
5.	It is our decision to allow the appeal.  In our view the true nature of the arrangements between the landlord, LANL and the Appellant are such that, for VAT purposes, the landlord can properly be regarded as making a supply to the Appellant, so that the VAT paid by the Appellant on the rent is input tax, being VAT on the supply of goods used for the purposes of the Appellant’s business, and as such is recoverable by the Appellant.
The facts and the statutory provisions
6.	There was no dispute between the parties as to the facts, although the Commissioners questioned the relevance of some of the factual points made by the Appellant, and there were differences of view as to the inferences to be drawn from certain of the facts.  We had before us, on behalf of the Appellant, (i) a witness statement of Mr Roger Woolley, a solicitor and the managing partner of the Appellant, who made his statement on behalf of the partnership, and (ii) a witness statement of Mrs Valerie Hoyle, a chartered accountant who at the material times was the Director of Finance of the Appellant.  Their witness statements set out the circumstances relating to the negotiation and grant of the lease, the subsequent transactions relating to the lease and certain pre-emption rights arising under the lease, the arrangements for payment of the rent and the review by the officer of the Commissioners which led to the assessment now under appeal.  Their witness statements referred us to the bundle of documents agreed between the parties for the purposes of the appeal.  The Commissioners did not call any evidence themselves, nor did they wish to cross-examine the Appellant’s witnesses.  Accordingly, neither of the Appellant’s witnesses were called, and so we find the following facts from their statements and the agreed documents:-
(1)	The Appellant is a partnership carrying on business as solicitors and is registered for VAT.
(2)	In 1988 the Appellant began negotiations for the lease of newly-built office premises in Oxford Road, Bournemouth which it intended to occupy as the offices from which to carry on its business.  At that time there were more than twenty partners in the partnership.  The Appellant had regard to the provisions of section 34(2) of the Law of Property Act 1925 (which provides that, in effect, the grant of a legal estate in land where there are more than four persons entitled to that estate in undivided shares may be conveyed to not more than four persons who will hold as joint tenants in trust for all those entitled to an undivided share).  The Appellant considered whether the grant of the lease should be taken in the name of four of the partners (to hold on trust for all the partners), or whether the grant of the lease should be taken in the name of a company formed for the purpose which in so taking the grant of the lease would act as a “nominee” for the partners.  The eventual conclusion was that it was not appropriate that four partners should take the grant, since they would continue to have primary liability under the lease for the full term, notwithstanding that they had ceased for any reason to be partners in the partnership.  Instead, the Appellant decided that the grant of the lease would be taken by the “nominee” company, so that, by appropriate collateral arrangements, the partners from time to time would be liable for the lease obligations, and then only for the period during which they were respectively partners.
(3)	In Heads of Agreement between the landlord and the Appellant and finalised on 14 December 1988 setting out the terms of the proposed lease, the Appellant (as a partnership) is named as the Tenants.  There was subsequent discussion with the landlord’s agent, who agreed on behalf of the landlord that, “For purely technical reasons the Lease will be taken in the name of your Company [i.e. LANL], and the Partners will be treated as Guarantors.”  
(4)	Prior to the grant of the lease the Appellant acquired a “shelf” company (LANL).  The principal object of LANL, as set out in it Memorandum of Association, is “To undertake and carry out the office or offices and duties of trustee, liquidator, receiver, attorney or nominee of or for any person, company, corporation, partnership or association”.  
(5)	At all material times LANL had an issued share capital of 2 ordinary shares of £1 each (fully paid) and assets of £2 and nil liabilities.  Those shares have been held for the benefit of the Appellant.  For each accounting period material to this appeal the audited accounts of LANL included the following statement: “During the above period, the Company has been dormant within the meaning of Section 252 of the Companies Act 1985, there have been no significant accounting transactions of the Company required to be entered in its accounting records.  Any expenses have been met by the directors/members personally.”  The accounts make no reference to LANL’s role as tenant of the lease, nor to the payment of rent or the receipt of any amounts from the Appellant in relation to the occupation of the leased premises.
(6)	On 27 February 1989 there was an Agreement for Lease between (1) Rodney Taylor and Dorothy Anne Taylor (landlord); (2) LANL (tenant) and (3) the persons who at that time were the partners in the Appellant firm (the sureties).  The Agreement for Lease provided for the landlord to complete the building works by way of development of the offices and the parties were thereupon required to enter into a lease of the premises in the terms of a draft annexed to the Agreement for Lease.  This is what ensued, and the lease was entered into on 30 May 1990 (for convenience we refer to this lease as “the Russell House Lease”, Russell House being the name given to the demised premises, and referred to as such in this decision).
(7)	The Russell House Lease is in standard commercial terms, but in the context of this appeal the following provisions are relevant:-
(a)	the parties are as in the Agreement for Lease, and in particular LANL is “the Tenant” and the then partners in the Appellant firm are parties described as “the Guarantor”;
(b)	by Clause 2 the Landlord demises the premises to the Tenant for the term of 25 years from 30 May 1990 for the payment of the specified rent paid quarterly in advance;
(c)	by Clause 3(1) the Tenant covenants to pay the rent reserved by Clause 2;
(d)	by Clause 3(19)(a) the Tenant covenants not to sublet or part with possession or occupation of part of the premises, except as permitted in the third schedule to the lease (which requires the prior consent of the Landlord, and contains other conditions relating to any such sub-letting etc);
(e)	by Clause 3(19)(d) the Tenant covenants not to assign, underlet or part with possession or occupation of the whole of the premises without the prior consent of the Landlord and in any event only if certain conditions are met as to any intended assignee or underlessee;
(f)	Clause 3(19)(e) provides:  “for the avoidance of doubt it is agreed and declared that the Tenant shall be entitled to allow the Firm [i.e. the Appellant] to occupy the demised premises or any part thereof”;
(g)	By Clause 3(31) the Tenant covenants “to pay to the Landlord such amount of Value Added Tax at the rate for the time being in force as shall be legally payable in respect of all moneys covenanted to be paid by the Tenant under the terms of these presents”;
(h)	By Clause 7 the Guarantor (i.e. the partners in the Appellant firm) covenants with the Landlord that (i) the Tenant will pay the rent and perform the Tenant’s other covenants; (ii) if the Tenant defaults in its rent or other obligations the Guarantor will make good the Landlord’s loss; (iii) if for any reason the Landlord cannot recover amounts due from the Tenant, the amount will be recoverable by the Landlord from the Guarantor as principal debtor;  and (iv) if the Tenant is wound up or the lease is forfeit for non-performance by the Tenant of its obligations, then, if the Landlord so requires, four of the Guarantor partners will take a lease of the premises on corresponding terms for the residue of the term;
(i)	The Fourth Schedule to the lease provides that the Guarantor will be the partners of the Appellant firm, but so that a partner is liable only for the period he is a partner in the firm, and incoming partners are required to covenant with the Landlord in terms of the Clause 7 Guarantor obligations.  Retiring partners are not released from their Guarantor obligations if the number of liable partners falls below 21.  New partners joining the Appellant firm in subsequent years entered into the required covenant with the Landlord.
(8)	The Landlord elected to waive exemption in relation to the premises under the relevant provisions of Schedule 10, VATA, so that the grant of the lease was a taxable supply for VAT purposes, and VAT was payable on the rent reserved under the lease.  
(9)	From the outset the Landlord addressed the invoices for payment of rent to, and in the name of the Appellant, and not LANL, and VAT invoices in relation to the rent were likewise issued to, and in the name of, the Appellant, and not LANL.
(10)	In 1994 the Landlord assigned its freehold interest reversionary upon the Russell House Lease to AXA Law Life Assurance Society plc (“AXA”), and AXA, having elected to waive exemption, addressed all invoices for payment of rent, and the related VAT invoices, to, and in the name of, the Appellant, and not LANL.
(11)	In 2000 AXA assigned the freehold interest to Gil Gamesh Properties Limited (“GGPL”).  GGPL addressed all invoices for payment of rent, and the related VAT invoices, to, and in the name of LANL, and not the Appellant.  (An issue arose in the hearing as to whether GGPL, itself a trustee holding for a beneficial owner, had validly exercised an election to waive exemption.  It was agreed that the appeal would proceed on the assumption that there was in existence such a valid election by GGPL, without prejudice to the Appellant’s right to challenge the point in other proceedings.)
(12)	From the grant of the Russell House Lease all payments of rent, and all other payments due under the Russell House Lease, were made to the landlord by the Appellant from its bank account.  LANL had no bank account, and the payments of rent were not recorded in the books of account of LANL.  The Appellant claimed as input tax all the VAT charged by the landlord on the rent payments.
(13)	At all material times the Appellant occupied the premises as offices from which it carried out its business and practice as solicitors.
(14)	Contemporaneously with the Agreement for Lease the Landlord entered into a Pre-emption Agreement with LANL which granted LANL the right to purchase the Landlord’s freehold reversionary interest in the premises.  The Appellant was not a party to the Pre-emption Agreement, which was negotiated by the Appellant as part of the overall terms relating to the lease of the premises.
(15)	In 1994, when the Landlord wished to sell the freehold reversion to AXA it first offered to the Appellant to sell that interest to LANL pursuant to the Pre-emption Agreement.  The Appellant refused the offer, but AXA was not prepared to purchase the freehold reversion subject to the terms of the Pre-emption Agreement.  By a decision of the partners in the Appellant firm on 27 June 1994 the Appellant decided that the rights under the Pre-emption Agreement should be surrendered for a cash payment, and this was effected by a Deed of Release and Confirmation (the copy in the bundle was signed but undated) between [AXA, LANL and the Appellant], Clause 4 of which provides:  “In consideration of the sum of one hundred thousand pounds (£100,000) plus Value Added Tax of £17,500 (a total of £117,500) paid by [AXA] to [the Appellant] (the receipt of which [the Appellant] acknowledge [the Appellant] as beneficial owners and [LANL] by the direction of [the Appellant] as trustee release all the rights created by the Pre-emption Agreement.”
(16)	The partners in the Appellant firm accounted for the receipt of the sum paid for the release and also accounted for the VAT charged in relation to the supply comprised by the release.  No entries were made in the accounts of LANL in relation to the release or the payment for the release.
7.	The Appellant claims that it is entitled to recover the VAT charged on the rent payable under the Russell House Lease as input tax, which is defined in section 24 VATA as follows:
	(1)	Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say –
		(a)	VAT on the supply to him of any goods or services;
		(b)	…
		(c)	… ,
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.
8.	Sections 25 and 26 VATA provide for the mechanism by which input tax is recovered, but nothing turns on that in this appeal.
9.	By virtue of para. 4, Sch. 4 VATA the grant of a major interest in land is a supply of goods, and the lease granted in the present case comprises a major interest in land for these purposes, so that the supply which the Appellant claims is made to it in relation to the Russell House Lease is a supply of goods.
10.	Since the provision occasioned some discussion in the course of the argument by the parties, it is helpful to set out here the terms of para. 8(1), Sch. 10 VATA:
8(1)	Where the benefit of the consideration for the grant of an interest in, right over or licence to occupy land accrues to a person but that person is not the person making the grant – 
(a)	the person to whom the benefit accrues shall for the purposes of this Act be treated as the person making the grant; and
(b)	to the extent that any input tax of the person actually making the grant is attributable to the grant it shall be treated as input tax of the person to whom the benefit accrues.
11.	In his submissions on behalf of the Appellant Mr Mc Nicholas made some reference to certain provisions of the EC Sixth Council Directive, but it is more convenient to refer to those provisions in the context of his submissions.
The Appellant’s submissions
12.	Those submissions were made under two main grounds of appeal:  first, Mr Mc Nicholas argued that the Appellant is entitled to deduct input VAT paid on the rent on the grounds that the supply made by the landlord under the Russell House Lease is properly regarded as a supply made to the Appellant and used in its business;  secondly, Mr Mc Nicholas argued that if the Appellant is prevented by domestic law from a right to deduct such input VAT, that amounts to discrimination against the business entity of the English partnership (a nominee arrangement such as that in the present case being the only way in which such a partnership can take a leasehold interest under English law, whereas sole traders and corporate entities are not so constrained), and such discrimination is contrary to the terms of the EC Sixth Council Directive.
13.	As to the first ground of appeal, Mr Mc Nicholas argued that the Appellant’s case is within the scope of the decision of the House of Lords in Customs and Excise Commissioners v Redrow Group plc [1999] STC 161.  That case concerned a builder who instructed an estate agent to act in the sale of the current house owned by a prospective purchaser from the builder – if the prospective purchaser sold his house and purchased a house from the builder, the builder paid the estate agent’s fees (plus the VAT charged on those fees), notwithstanding that the estate agent had acted on behalf of the prospective purchaser.  The builder claimed the right to deduct as input tax the VAT it paid on the estate agent’s fees, and it was held that it was entitled to do so: the builder was liable to pay the fees to the estate agent, and in return for that payment the builder obtained a service used for the purposes of its business – what it obtained was the right to have the estate agent’s marketing and other services rendered to a third party (the prospective purchaser) in accordance with its (the builder’s) instructions.  In the present case, it is argued, the Appellant arranged the Russell House Lease granted to LANL, paid the rents and used the lease supplies in its business – the Appellant was liable to make the payment on which the relevant VAT was charged, and in return the Appellant obtained the right to occupy Russell House.
14.	Further, it was argued, it is necessary to determine the true nature of the VAT supply from all the circumstances of the case, and not simply from the contractual arrangements, especially where, as in the present case, there are more than two parties to the transactions comprising the supply: see Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 at 595.  The arrangements entered into by the Appellant are tri-partite, with the Appellant central to the very existence and working of the Russell House Lease, so that the true nature of the supply for VAT purposes is the right conferred on the Appellant by the landlord to occupy Russell House on the terms of the Russell House Lease.
15.	Mr Mc Nicholas also referred to the decision of the Tribunal in Bird Semple & Crawford Herron v The Commissioners (1986) VATTR 218, where a Scottish partnership of 	solicitors had taken a lease through the device of a nominee company, and had instructed a firm of surveyors to act in sub-letting part of the premises not immediately required for the partnership’s own business.  It was held that although the lease was in the name of the nominee company (which would grant the sub-lease), the supply made by the surveyors was made to the partnership, and was used for the purposes of their business, so that the tax on that supply was deductible input tax for the partnership.
16.	The Appellant also relied on the Tribunal decision in Halifax Plc and Others v Commissioners of Customs and Excise [2001] V&DR 73, where the Tribunal was concerned, in identifying the supplies made, and adopting the approach in Reed Personnel Services, to determine the commercial reality of the arrangements between the parties.  On that basis the role of LANL, as a nominee company with no commercial substance, should be disregarded, and the commercial reality (the Appellant having the position of tenant and paying the rent) applied to determine the Appellant’s right to recover the VAT payable on the lease rent.  Mr Mc Nicholas also referred to Glasse Brothers v Commissioners of Customs and Excise (1989) VATTR 143 and Crompton Enterprises Ltd v Commissioners of Customs and Excise (1992)VATTR 321.
17.	The Appellant’s second ground of appeal is based on a wider perspective.  It is argued that since the Appellant carries on a business and makes taxable supplies, the VAT payable in relation to the use of premises used for that business should be recoverable in full, on the same basis as any other supply to it used for its business.  By English land law the Appellant is unable to take a lease in its own name, and so must resort to an arrangement such as it entered into through the use of LANL.  If the Commissioners contend that, in order to obtain the recovery of the VAT, LANL must register for VAT, grant an interest in the premises to the Appellant, and, by electing to waive exemption, turn that supply into a taxable supply to the Appellant, then that is a burden uniquely extended to English partnerships.  It is a burden which requires LANL to adopt a different role (as principal in a chain of interests in land), with compliance and other consequences as costs.
18.	Such a requirement on the part of the Commissioners discriminates against English partnerships, as against other forms of business entity (both sole traders and corporate entities can take leases directly).  Such discrimination is contrary to fundamental EC law principles of equal treatment (see Weiser v Caisse Nationale des Barreaux Français Case C-37/38 [1990] 2395 ECJ at para 13 p 2420), and to a harmonised system of turnover tax.  Thus the ninth preamble to the EC Sixth Directive states that:-
“Whereas, to enhance the non-discriminatory nature of the tax, the term “taxable person” must be clarified to extend it to cover persons who occasionally carry out certain transactions;”
19.	To preserve fiscal neutrality and avoid distortion of the market a taxpayer must be free to choose to adopt whatever form of business entity it wishes, and anything in the domestic VAT legislation which has the effect of frustrating that principle by putting a burden in the way of a taxpayer operating through a particular type of entity is contrary to EC law (see Gregg and another v Commissioners of Customs and Excise (Case C-216/97) [1999] STC 934 at para. 20 at p 950).  This is consistent with the language of Article 4(1) of the EC Sixth Directive, which defines “taxable person” to mean “any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.”
20.	Accordingly, there must be a purposive construction of section 24(1) VATA to ensure compliance with these principles in the present case, treating LANL and the Appellant together as one “person” for VAT purposes, and entitling the Appellant, as the registered person for VAT purposes, to recover the input tax on the supply made under the Russell House Lease.  Such a purposive construction in relation to partnerships was applied in Commissioners of Customs and Excise v Glassborow and another [1974] STC 142, treating a partnership as a “person” for VAT registration purposes, and the same individuals trading in separate partnerships as the same “person”.
The Commissioners’ submissions
21.	For the Commissioners Mr Peretz had a more succinct case.  He argued that, under the clear and unambiguous terms of the Russell House Lease, LANL, exclusively, is the tenant, has the liability to pay the rent, and is the person to whom VAT invoices are issued and which must pay VAT on the rent.  The Russell House Lease contemplates that the Appellant will be permitted by LANL to occupy the premises, but the landlord confers no occupation or similar rights on the Appellant.  The partners of the Appellant firm are parties to the Russell House Lease, but in order to guarantee performance by LANL of its obligations to the landlord.  There is nothing in the terms of the Russell House Lease which can be construed as a supply from the landlord to the Appellant – the Appellant occupies Russell House by virtue of a grant of a licence by LANL to the Appellant, and the only supply the Appellant receives is that grant by LANL.  LANL alone has the right to claim as input tax the VAT charged by the landlord on the rent – or would have that right had it registered and itself made taxable supplies to the Appellant.
22.	The Commissioners argue that the decision in the Redrow case does not assist the Appellant.  Mr Peretz referred to the following passage in the speech of Lord Millett (Customs and Excise Commissioners v Redrow Group plc [1999] STC 161 at 171e):-
“In my opinion, these two factors compel the conclusion that one should start with the taxpayer’s claim to deduct tax.  He must identify the payment of which the tax to be deducted formed part;  if the goods or services are to be paid for by someone else he has no claim to deduction.  Once the taxpayer has identified the payment the question to be asked is: did he obtain anything – anything at all – used or to be used for the purposes of his business in return for that payment?  This will normally consist of the supply of goods or services to the taxpayer.  But it may equally well consist of the right to have goods delivered or services rendered to a third party.  The grant of such a right is itself a supply of services.”
Mr Peretz referred to the two questions or issues identified by Lord Millett – has the taxpayer made the payment on which the tax is charged; and, if so, did he obtain anything used for his business purposes in return for that payment?  In his submission the present appeal concerns only the first of these questions, and since the Russell House Lease required LANL to pay the rent, that disposes of the case.
23.	In contrast, the Tribunal decision in the Bird Semple case concerns only the second of Lord Millett’s questions, namely whether the services of the surveyors supplied to the partnership were supplied for the purposes of their business in circumstances where the issue was the sub-letting of premises not immediately required for use by the partnership for their practice as solicitors.  The first question (whether in that case the partnership made the payment for the services) was not in issue, since clearly the partnership had instructed the surveyors, and the surveyors made a supply to the partnership.  In the present case the principal issue is whether the supply was made by the landlord to LANL or to the Appellant, the first of Lord Millett’s questions.
24.	In answering the first of Lord Millett’s questions the issue is who is liable to make the payment, not who in fact makes the payment: see Ashfield District Council v Customs and Excise Commissioners [2001] STC 1706 at para. [23].  In the present case LANL was liable to make the payments of rent, and it is irrelevant that the Appellant chose to discharge that liability.  The contractual documentation definitively sets out LANL’s obligations and, unlike the Reed Personnel Services case it is not necessary to look beyond the contractual arrangements to determine which of the Appellant or LANL was liable to make the payments of rent.
25.	The Commissioners reject any notion that the VAT analysis should be based on the bare trust or nominee relationship between LANL and the Appellant, so that the Appellant should be regarded as the tenant for VAT purposes.  The provisions of para. 8(1), Sch. 10 VATA specifically deal with this issue in relation to the person making the supply, so that the beneficial owner, to whom the benefit of the grant accrues, is treated as the person making the supply even though he is not the person making the grant.  However, there is no express provision in like terms in relation to the person to whom the supply is made, and the fact that such a provision was thought necessary (albeit only in the case of the grantor/supplier) shows that there is no general principle to this effect which assists the Appellant.
26.	Finally, for the Commissioners, and in reply to the second ground of the Appellant’s appeal, Mr Peretz argued that there was no basis for any claim that the Appellant, as a partnership, was the subject of discrimination in relation to its right to recover input tax in respect of taxable supplies made to it which are used in its business.  With negligible cost and administrative burden it was open to the Appellant to arrange matters so that it was in receipt of taxable supplies in relation to the licence to occupy conferred on it by LANL, in which case the VAT charged to it would have been recoverable in full.  The Appellant’s difficulties arise because the arrangements were structured in a way which resulted in it receiving exempt supplies – there is no discrimination in terms of the Appellant being refused a right to recover input tax on taxable supplies made to it.  The right to recover input tax does not turn on the identity of the occupier of the premises, but on the nature of the supplies (taxable or exempt) received.
The decision
27.	It is our decision to allow the appeal.  We do so on the grounds that, viewing the arrangements entered into by the Appellant in their entirety, the Appellant can rightly be regarded as receiving for VAT purposes a taxable supply of goods by virtue of the Russell House Lease for which it made payment, and the goods so supplied were used for the purposes of the business carried on by the Appellant.  The VAT charged on the rent was therefore “input tax” of the Appellant, and recoverable as such.
28.	In taking the lease of Russell House the Appellant was faced with two difficulties arising under English land law presented to all large partnerships in such a situation, namely that, first, the tenant remains contractually liable to the landlord under the lease for the entire term of the lease even if he ceases to have an economic interest in the lease or the business for whose benefit the lease is taken (so that a partner of a partnership named as tenant continues to have such liability to the landlord – even if having the protection of a counter-indemnity from his continuing partners – beyond the time he ceases to be a partner if the lease continues beyond that time); and, secondly, section 34(2) of the Law of Property Act 1925 permits no more than four partners to take the grant under the lease, those partners holding the leasehold interest on trust for all the partners.
29.	The partners of the Appellant firm, when negotiating the terms of the Russell House Lease, were fully aware of these difficulties, and they sought to deal with them, with the full co-operation of the landlord, by the device of using a dormant company to take the grant of the lease, with special guarantee rights arranged, in effect, so that only the partners for the time being were liable to the landlord in ensuring that the terms of the lease were complied with.  Mr Peretz told us that in the experience of the Commissioners professional and other partnerships almost invariably arrange to take their leases in this way, rather than by grant to four partners.  Certainly this was the arrangement adopted by the partnership in the Bird Semple & Crawford Herron case, where the lease was granted in 1974 (although that was a partnership under Scottish law, and presumably a lease granted under Scottish law, so that different factors may have applied in that instance).
30.	The Commissioners have no quarrel with these arrangements, and can understand why they are desirable, and perhaps even necessary.  Their argument is simply that these arrangements do not amount to a supply (in this instance, because of the length of the term of the lease, a supply of goods) by the landlord to the Appellant as occupier:  they are a supply only to the dormant or nominee company named as tenant and made subject to the tenant’s obligations, and if the Appellant wishes to recover input tax in relation to the grant it can do so by the simple expediency of procuring the nominee company to formalise the grant of an occupancy licence, and electing to waive exemption so as to turn that into a taxable supply made to the Appellant.  We asked Mr Peretz what his analysis is of the situation where a partnership chooses not to use a nominee company, but instead the lease is granted to four or fewer partners.  He was rather cautious in his reply, telling us that it would be necessary in any case to look at the documents to see whether a lease in such terms can be construed as a supply to the partnership as such – presumably if it could not, the logic of the Commissioners’ case is that the tenant partners must make an on-supply to the partnership, exercising the option to tax.  Apart from a certain falsity in such arrangements, there would seem to us to be the difficulty of registering the tenant partners separately from the partnership.
31.	In the Appellant’s case also it is appropriate to look at the documents to see whether the arrangements can be construed for the purposes of VAT as a supply to the Appellant partnership as such.  It is clear that the lease was negotiated between the landlord and the Appellant with a view to the Appellant taking the lease and occupying the premises for the purposes of its practice as solicitors (see the Heads of Agreement referred to in para. 6(3) above).  LANL was acquired by the Appellant and introduced into the arrangements late in the day to overcome the land law difficulties mentioned.  The landlord was prepared to agree to this, but only on terms, negotiated at some length, whereby the partners for the time being of the Appellant firm became parties to the lease (with provision requiring future partners to accede to the lease) to covenant with the landlord that LANL would comply with its obligations, and if it failed, that nominated partners would step into its place.
32.	The key to the analysis of the arrangements entered into by the parties is Clause 7 of the Russell House Lease, headed “Guarantee” (see para. 6(6)(h) above).  The evidence shows – and in the commercial context the point is self-evident – that the landlord would not have entered into the lease without the covenant of the Appellant in these or like terms.  The covenant goes beyond a guarantee of performance of financial obligations by LANL, and in particular it imposes an obligation on the Appellant partnership (through and in the name of four partners) to take a lease of Russell House on the default of LANL, should the landlord so require.  Mr Peretz was inclined to dismiss the particular significance of this “guarantee”, or rather, of the identity of the person giving it, arguing that the landlord would have been prepared to grant the lease to LANL if a third party guarantor of sufficient standing –  the Bank of England, in his example – had given the covenants required of the Appellant by the landlord.  That, it seems to us, misses the commercial reality of the situation, for the simple truth is that no third party would be prepared to give such covenants where, as in this case, the primary obligor is demonstrably unable to meet its liabilities under the lease.  To contemplate giving such covenants the third party guarantor would, at the very least, require either a full counter-indemnity from the Appellant, or, perhaps, a sub-lease granted by LANL to the Appellant in terms matching those of the Russell House Lease.  In either case the resulting arrangements would be different in character as well as in detail from those actually entered into.  We conclude that the lease and guarantee arrangements are specific to these parties in these circumstances in the sense that each party entered into these arrangements only because of the identity, role and relationship between the other parties.
33.	Thus from the landlord’s perspective it would not have granted a lease to LANL as tenant without the covenants it had from the Appellant, which were covenants that, realistically, the Appellant alone could give.  The landlord was fully aware that LANL was a company of no substance, and that its role was simply to enable the parties to overcome the identified English land law difficulties arising where partnerships need to take an interest in land.  The landlord knew that it must look to the Appellant to fulfil the tenant’s obligations as a matter of the commercial reality of the arrangements.  The landlord tacitly acknowledged this by invoicing the rent payments to and in the name of the Appellant, as did the first assignee landlord.  (We should make the point here that neither the Appellant nor the Commissioners attached significance to the name specified on the VAT invoices in relation to the rent in terms of the name in itself determining the right or otherwise to recover the VAT as input tax.)  In similar vein, when AXA, the first assignee landlord, negotiated the release of the Pre-emption Agreement which formed part of the arrangements entered into as part of the Russell House Lease, it did so with, and made the release payment to, the Appellant.
34.	From the Appellant’s perspective it would not have countenanced the grant of the lease to LANL without the assurance that it could occupy the premises as of right without interference or objection from the landlord (provided, of course, the lease terms were complied with).  The Appellant therefore agreed terms with the landlord that permitted the Appellant to occupy the premises outside the scope of the “normal” sub-letting or assignment provisions – admittedly such right to occupy is expressed in terms of a permission conferred by the landlord on LANL to allow such occupation, in accordance with the scheme or mechanics of the grant of a lease, but in the overall context of the lease arrangements it is a right exclusive to the Appellant and which it enjoys, in effect, by virtue of the terms of the lease.  We note that this permission is expressed in the lease to be “for the avoidance of doubt” – an indication that the occupation of the premises by the Appellant was seen as an integral part of the arrangements.
35.	From the perspective of LANL and its directors, they would not have contemplated taking the grant of the lease had LANL not been the creature of the Appellant acting at the Appellant’s direction and had the Appellant not stood ready to discharge its (LANL’s) obligations under the lease.  We had no evidence of the terms of any agreement between LANL and the Appellant in relation to the liabilities of LANL, but in circumstances where the shareholders and directors were (as we assume) partners in or employees of the Appellant firm, no doubt certain indemnities or similar protection rights could be implied from the partnership or employer-employee relationship, in the absence of any express agreement.
36.	The Commissioners argue that, in identifying the supply made by the grant of the Russell House Lease we should look no further than the demise granted by the lease, which is made solely to LANL as the tenant under the lease and in consideration of which LANL alone is required to pay the rent.  For the landlord to make a supply to the Appellant, so that the Appellant can claim as input tax the VAT charged on the rent, the Commissioners require some form of demise to the Appellant direct alongside that to LANL.  Such a demise would, of course, lead to exactly the land law problems which preclude the Appellant from entering into the lease as tenant, and is most unlikely to be acceptable to a landlord seeking a marketable reversionary interest, since it could conceivably raise a number of difficult issues in landlord and tenant law as to concurrent or competing rights and obligations.
37.	We consider that this approach is too narrow, focusing as it does on the lease terms between the landlord and LANL without reference to the “guarantee” arrangements involving the Appellant, which, for the reasons given, we see as an essential component in the transaction which needs to be fully taken into account in determining the correct VAT treatment of the arrangements, and in particular in this case, the entitlement of the Appellant to recover as input tax the VAT charged on the rent payable to the landlord.
38.	The Redrow case makes it clear that, where the issue is the entitlement of the taxpayer to recover input tax, the analysis of the arrangements must be made from the viewpoint of the taxpayer, and not from the viewpoint of the person making the supply.  The mistake of the Commissioners, as we see it, has been to concentrate (and to concentrate narrowly) on what has been granted by the landlord, rather than on what has been received by the Appellant.
39.	If we apply the two questions identified by Lord Millett in the Redrow case to determine whether the Appellant has the right to claim the VAT paid as input tax, then it seems to us that the Appellant succeeds.  As to the first question (is there a payment by the Appellant of which the VAT in question forms part), our analysis of the arrangements is that the Appellant has made payment of the rent (and the VAT on the rent), not only as a matter of fact, but also pursuant to a liability imposed on the Appellant under the lease arrangements.  This is not a situation, as in the Ashfield District Council case, where the taxpayer voluntarily chose to make the payment:  the Appellant was liable to the landlord to make the payment of rent if LANL failed to do so, and since all the parties were fully aware from the outset that LANL itself was in no position to make rent payments – it was a £2 company - the Appellant was required to make those payments if it wished the lease to continue.  As to the second question (did the Appellant, in return for its payment of rent, obtain anything at all used for its business purposes), the Appellant secured the continuation of the lease by making the rent payments and thereby its right to continue to occupy Russell House from which it carried on it practice as solicitors, so that this question, too, is answered in the affirmative.
40.	We also find support for the Appellant’s case in the Reed Personnel Services case and the Halifax case.  Those cases make it clear that in some circumstances it is necessary to look beyond the strict contractual terms of the documentation between the relevant parties in order to ascertain the true nature of the arrangements entered into between the parties.  We consider that in the present case the terms of the documentation themselves make clear the true nature of the arrangements entered into by the parties, and that the VAT treatment should follow those arrangements, but in so far as those cases encourage an approach which determines the true nature of the relationships for VAT purposes in the context of the commercial reality of the transaction in question, they are relevant to, and supportive of, the Appellant’s appeal.
41.	Mr Peretz cautioned us against a decision to the general effect that if a supply is made to a bare trustee or nominee then for VAT purposes it must be regarded as made to the beneficiary of that trusteeship or nomineeship.  Our decision is based on the particular arrangements entered into by the Appellant and the other parties.  It may be that in circumstances where the bare trusteeship or nomineeship is a known and integral part of other arrangements viewed as a whole then those arrangements will be capable of a similar analysis to that we have reached in the present appeal, but we do not by this decision hold as a general proposition that for VAT purposes a bare trusteeship or nomineeship should be disregarded or looked through.
42.	Both parties made reference to the provisions of para. 8(1), Sch 10 VATA: in particular Mr Peretz argued that the fact that Parliament had found it necessary to deal explicitly with trustee/beneficiary arrangements in relation to the grantor of an interest in land was an indication that on general principles the VAT supply provisions in other situations (such as the identity of the party to whom the supply is made) should have effect by reference to the “legal”, rather than the “beneficial”, party.  That is as may be, but it is not relevant to the present appeal, where we find that there is a supply to the Appellant in its own right, and not simply because it is the beneficiary of a nominee arrangement.  It is worth noting one consequence of para. 8(1): it provides that where the grantor (who is the trustee) has any input tax attributable to the relevant grant, then it is treated as input tax of the beneficiary.  Thus if in the present case LANL were to grant a sub-lease of the Russell House premises, para. 8(1) would apply not only to treat that grant as made by the Appellant, but to treat the VAT paid by LANL as input tax of the Appellant: in short, the Appellant would be entitled to recover as input tax the VAT on the lease rentals if it sub-let the premises, but not (on the Commissioners’ view) if it occupies the premises for its own business purposes.  That consequence in itself calls into question the logic of the Commissioners’ view.
43.	The Commissioners readily accepted that there was no tax planning or similar intent on the part of the Appellant in entering into the “nominee” arrangements; but they disputed the Appellant’s contention that in taking this case they were opportunistic or seeking to gain a “windfall” benefit in terms of VAT that on any sensible and fair commercial basis should be recoverable.  They argued that the Appellant could have so structured matters (by having LANL register for VAT, and granting a taxable supply to the Appellant) that the input tax would have been recoverable in full, and that if the Appellant failed so to structure its affairs it must accept the consequences.  But that, it seems to us, is to require the Appellant to enter into a different transaction from that which it negotiated with the landlord and wished to enter into – it is to require LANL to be, legally and commercially, a principal in the transaction, with resulting accounting, compliance and other consequences.  In itself, therefore, it is not an argument which relieves the Commissioners, or ourselves, from looking carefully at the true nature, for VAT purposes, of the transaction which the Appellant for good commercial reasons did in fact enter into.
44.	This latter point (that the Appellant could have structured things differently to secure the VAT recovery) was the basis of the alternative, and wider, ground of appeal – infringement of the principle of non-discrimination – put forward by the Appellant.  We are able to reach our decision by reference to the terms of the transaction which the Appellant actually entered into, and therefore we need not consider this alternative ground of appeal, although by way of general comment we would be cautious in applying such a general principle in a case such as this where the difficulties (if such they are) arise only indirectly and by virtue of English land law – we saw some force in Mr Peretz’s point that it was not the identity of the occupier of the premises as such which (on the Commissioners’ view) resulted in the input tax being irrecoverable.
45.	The dispute between the parties related to the question of whether there was a supply to the Appellant: there was no dispute as to whether the “goods” (the leasehold interest) were used for the purpose of the business carried on by the Appellant – the Appellant entered into the lease arrangements in order to make provision for office accommodation for its practice as solicitors, and accordingly we find that the “goods” were used for the purpose of the business carried on by the Appellant.
46.	We therefore allow the appeal on the grounds that the VAT paid on the rent was input tax of the Appellant within section 24 (1) VATA, being VAT on the supply to the Appellant of goods used for the purposes of the business carried on by the Appellant.
47.	The Appellant applied for costs, and we direct that the Commissioners pay the Appellant’s costs of this appeal in the amount to be agreed on the normal basis with leave for either party to apply to the tribunal for a direction that the costs be taxed.
48.	The Appellant has paid the VAT charged in the disputed assessments, and therefore applied for a direction under section 84(8) VATA that the sums in question be repaid with interest.  We so direct, with simple interest to be payable for the period from and including the respective dates of payment of the sums assessed until the day before the date of repayment of such sums by the Commissioners, such interest to be calculated at the rate of one-half per cent per annum below the base rate from time to time during such period set by the clearing bank which is the principal bank of the Appellant, or if there is no such principal bank then the base rate set by Barclays Bank.

A E SADLER
CHAIRMAN

RELEASE DATE: 8 December 2004

LON/2003/1020

Cases referred to in skeleton arguments and not referred to in the Decision:

College of Estate Management v Commissioners of Customs and Excise [2004] EWCA Civ 1086
Cutter v Eagle Star Insurance Co Ltd [1998] 4 AER 417
EC Commission v France, Case 50/87 [1988] ECR 4797
Gabalfrisa SL v Agencia Estatal, Cases C-110/98 to 14/98 [2002] STC 535
Hoffman, Case C-144/00 [2004] STC 740