19521
	EXEMPTION —  leaseholds — waiver — legality of lease —  Value Added Tax Act 1994 Schedule 9 Group 1, Item 1, Schedule 10 paras 2 and 3 — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	ASTIM LIMITED	Appellant

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Jean Warburton (Chairman)

						

Sitting in public in Manchester on 2 March 2006

The Appellant did not appear and was not represented 

Jonathon Cannan of counsel, instructed by the Solicitor's Office HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006

DECISION

1.	This is an appeal by Astim Limited against an assessment to tax in the sum of £5,736, plus interest, dated 6 June 2005. 
2.	The Commissioners were represented by Mr J Cannan of Counsel instructed by the Solicitor’s Office of HM Revenue and Customs, who put in a bundle of copy documents.  No one appearing on behalf of the Appellant, the tribunal determined to proceed under Rule 26(2) of the Value Added Tax Tribunals Rules 1986.  A written application for postponement by the Appellant dated 23 February was refused by the tribunal and the Appellant notified in writing of that refusal by letter dated 27 February 2006.
3.	The assessment relates to output tax on sums received by the Appellant in respect of The Grant Arms Hotel in Ramsbottom between 2002 and 2005.  There are two questions at issue.  First, had a valid election to waive exemption been made for The Grant Arms Hotel?  Secondly, whether alleged irregularities in respect of the lease of The Grant Arms Hotel affect liability to VAT on the sums received.
4.	I heard evidence on oath from Robert Ian Godley a VAT Assurance Officer based at the Blackburn VAT office. From that oral evidence and the documents submitted I find the basic facts to be as follows.
5.	The Appellant was registered for VAT with effect from 5 December 2000 with the business of property dealing.  On or about 3 March 2001 the Appellant sent a Notification of Election to Waive Exemption on The Grant Arms Hotel Ramsbottom to the Commissioners to be effective from 1 April 2001.  That notification was not acknowledged. 
6.	The Appellant granted a lease of The Grant Arms Hotel to The Grant Arms Hotel Limited for a term of 21 years from 1 January 1999 at a rent of £15,000 a year.  The lease is dated 26 June 2000.  The lease at clauses 3.2 and 5.5 refers to the tenant’s liability to pay VAT on rent.  The Appellant received £300 a week in respect of The Grant Arms Hotel and those sums were not returned.  
7.	On 26 May 2005 Mr Godley visiting the registered office of the Appellant and looked at the returns of the Appellant with Mr James Hope of Longford Hope & Associates and who acted as company secretary.  Mr Godley discovered that after the first VAT return for the quarter ending 05/01 on which output tax had been declared subsequent returns showed net outputs but no output tax declared.  Mr Godley then raised the assessment dated 6 June 2005 for tax of £5,739 to cover output tax not declared on the income from The Grant Arms Hotel.
8.	The Appellant is one of a number of subsidiary companies of Thane Investment Ltd, which is itself the investment company of a trust.  A dispute arose between the founder of the trust and the trustees and directors.  Litigation in relation to the termination of the service agreement of one of the directors was heard by Judge Anthony Thompson QC sitting as a judge of the High Court in April 2002.  His decision is reported as Knopp v Thane Investment Limited [2003] 1 BCLC 380.  That decision is the subject of appeal and the bundle of documents before the tribunal included the skeleton arguments of Mark Blackett Ord QC for the Defendant. 
9.	The circumstances surrounding the purchase and lease of The Grant Arms Hotel were relevant to the above litigation and are considered in the judgment.  The Judge did not make any findings of facts in relation to the validity of the lease presumably because neither the Appellant nor the lessee were party to the action before him.  He did, however, set out a number of matters which gave rise to concern.  
10.	Paragraphs 62 to 68 of the judgment deal with the purchase of The Grant Arms Hotel by the Appellant, pointing out that the terms of the purchase were favourable to one of the then owners, Mr Malcolm Wagner.  Whilst the Appellant, in theory, acquired the property with vacant possession, Mr Wagner was allowed to stay on. 
11.	Paragraphs 78 to 88 of the judgment deal with the lease of 26 June 2000 to The Grant Arms Hotel Ltd of which Mr Malcolm Wagner was a director.  The judge noted that the basic rent was £15,000 with no provision for rent review whereas he had noted that previous negotiations with another prospective lessee had been for a rent of £33,000.  The judge also expressed concerns about the way in which the lease had been drafted and its date of execution.
12.	The Appellant in its Notice of Appeal and later correspondence submitted that there was no valid waiver of exemption to tax because no confirmation of receipt of the notification had been received.  The Appellant further submitted that the payments of £300 a week were received under an illegal lease; the lease was invalid and could not be the basis of taxable supplies. 
13.	Mr Cannan for the Respondents submitted that there was a valid election to waive exemption which took effect on 1 April 2001, the date on the Notification; there was no requirement for a notification to be acknowledged.  In support of this argument Mr Cannan referred to Notice 742A ‘Opting to Tax Land and Buildings’.  Mr Cannan further submitted that the only circumstance in which the sums received in respect of The Grant Arms Hotel could not be liable to VAT would be if they were received as damages in the form of mesne profits from a trespasser.  For this to be the case the Appellant would have to show that the lease of 26 June 2000 was either void or voidable and had been avoided and that Mr Malcolm Wagner was not in occupation on the basis of a weekly tenancy or licence.  
14.	By Group 1 Item 1 of Schedule 9 to the Value Added Tax 1994, the grant of a right to occupy land is an exempt supply but it becomes a taxable supply if an election to waive the exemption is made under paragraph 2 of Schedule 10 of the 1994 Act. The only relevant requirement in relation to an election is that written notification must be given to the Commissioners – see paragraph 3(6)(b)(i).  The Appellant sent a Notification of Election Waive Exemption to the Commissioners on 30 March 2001 signed by James Hope who was authorised to act on behalf of the Appellant.  It follows that there is in existence a valid waiver of exemption in respect of any income arising from the occupation of The Grant Arms Hotel and that such income is liable to VAT . 
15.	The onus is on the Appellant to show that the sums received in respect of The Grant Arms Hotel are not income but damages in the form of mesne profits, in other words, that Mr Wagner was a trespasser.  The Judge made no finding in Knopp v Thane Investments Ltd that the lease of 26 June 2000 was void.  There are findings in that case which indicate that the lease may be voidable but there is no evidence before the tribunal that the lease has been avoided.  There is evidence that Mr Wagner remained in possession with the concurrence of the Appellant after the property was sold to the Appellant and that regular payments were made by Mr Wagner to the Appellant which were not returned. Such evidence is consistent with an implied tenancy or license rather than trespass.   There are thus no grounds on which I can find that Mr Wagner was a trespasser and that the sums received were damages and not income.  The appeal against the assessment of £5736 is therefore dismissed. 
16.	At the conclusion of the hearing, Mr Cannan made an application that the Appellant pay a contribution in the sum of £750 in respect of the Respondents’ costs on the grounds that no evidence had been put forward to justify the appeal and the Appellant had not attended the hearing. 
17.	In view of the nature of the supply in dispute and the Appellant’s non-attendance, I direct that the sum of £750 be paid by the Appellant in respect of costs.  

JEAN WARBURTON
CHAIRMAN
Release Date: 4 April 2006
MAN/05/0498