20260

VAT – leasing by Guernsey Company – whether fixed establishment in the UK? No on the facts – appeal allowed

LONDON TRIBUNAL CENTRE						   LON/2006/0763

HEALTHCARE LEASING LIMITED	Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS	Respondents

Tribunal:	ADRIAN SHIPWRIGHT (Chairman)
Mrs LM SALISBURY

Sitting in public in London on 12, 13 and 14 March 2007

David Milne QC and Richard Vallat, Counsel, for the Appellant

Rebecca Haynes, Counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

	DECISION

Introduction
1.	This is an appeal by Healthcare Leasing Limited (“HLL”) against the Respondent’s (“HMRC”) decision that HLL must be taken to make supplies in the UK by reason of its fixed establishment in the UK. Six assessments were raised on this basis and HLL’s claim for repayment was denied. This was notified to HLL by letters dated 23 March 2006 and for March and April 2006 by letter dated 30 May 2006. HLL appealed.

The Issue
2.	The issue here is whether the supplies in question made by HLL are supplies made, or are to be treated as made, in the UK.

3.	This raises a number of questions including the following:
(a)	What are the supplies in question?
(b)	Are these prima facie made by HLL from Guernsey?
(c)	Does HLL have a fixed establishment in the UK?
(d)	If so, are the supplies in question from the fixed establishment in the UK?

4.	There is also a requirement of rationality which may need to be considered.  No issue was raised as to abuse or as to HLL’s supply being other than access to the goods, a letting of goods on hire other than means of transport.  Accordingly, they are not considered in this decision in accordance with the parties’ wishes.

The Law
The Legislation
5.	The relevant law is found in Articles 43-59 and 193-205 of Council Directive 2006/1123/EC which recast Articles 9 and 21 of the Sixth Directive. In so far as they are relevant these provide as follows
6.	Recital (17) provides “Determination of the place where taxable transactions are carried out may engender conflicts concerning jurisdiction as between Member States, in particular as regards the supply of goods for assembly or the supply of services. Although the place where a supply of services is carried out should in principle be fixed as the place where the supplier has established his place of business, it should be defined as being in the Member State of the customer, in particular in the case of certain services supplied between taxable persons where the cost of the services is included in the price of the goods.
7.	Chapter 3 of the recast directive provides:
“Place of supply of services
Section 1
General rule
Article 43
The place of supply of services shall be deemed to be the place
where the supplier has established his business or has a fixed
establishment from which the service is supplied, or, in the
absence of such a place of business or fixed establishment, the
place where he has his permanent address or usually resides”.
(see L 347/16 EN Official Journal of the European Union 11.12.2006)

8.	The UK provisions are found in sections 7-9 and Schedule 5 VATA. These provide (so far as relevant): 
“7 Place of supply
(1) This section shall apply (subject to sections 14, 18 and 18B) for determining, for the purposes of this Act, whether goods or services are supplied in the United Kingdom.
(10) A supply of services shall be treated as made—
(a)     in the United Kingdom if the supplier belongs in the United Kingdom; and
(b)     in another country (and not in the United Kingdom) if the supplier belongs in that other country.
(11) The Treasury may by order provide, in relation to goods or services generally or to particular goods or services specified in the order, for varying the rules for determining where a supply of goods or services is made.

8 Reverse charge on supplies received from abroad
(1) Subject to subsection (3) below, where relevant services are—
(a)     supplied by a person who belongs in a country other than the United Kingdom, and
(b)     received by a person (“the recipient”) who belongs in the United Kingdom for the purposes of any business carried on by him,
then all the same consequences shall follow under this Act (and particularly so much as charges VAT on a supply and entitles a taxable person to credit for input tax) as if the recipient had himself supplied the services in the United Kingdom in the course or furtherance of his business, and that supply were a taxable supply.
(2) In this section “relevant services” means services of any of the descriptions specified in Schedule 5, not being services within any of the descriptions specified in Schedule 9.….
9 Place where supplier or recipient of services belongs
(1) Subsection (2) below shall apply for determining, in relation to any supply of services, whether the supplier belongs in one country or another and subsections (3) and (4) below shall apply (subject to any provision made under section 8(6)) for determining, in relation to any supply of services, whether the recipient belongs in one country or another.
(2) The supplier of services shall be treated as belonging in a country if—
(a)     he has there a business establishment or some other fixed establishment and no such establishment elsewhere; or
(b)     he has no such establishment (there or elsewhere) but his usual place of residence is there; or
(c)     he has such establishments both in that country and elsewhere and the establishment of his which is most directly concerned with the supply is there.
(3) If the supply of services is made to an individual and received by him otherwise than for the purposes of any business carried on by him, he shall be treated as belonging in whatever country he has his usual place of residence.
(4) Where subsection (3) above does not apply, the person to whom the supply is made shall be treated as belonging in a country if—
(a)     either of the conditions mentioned in paragraphs (a) and (b) of subsection (2) above is satisfied; or
(b)     he has such establishments as are mentioned in subsection (2) above both in that country and elsewhere and the establishment of his at which, or for the purposes of which, the services are most directly used or to be used is in that country.
(5) For the purposes of this section (but not for any other purposes)—
(a)     a person carrying on a business through a branch or agency in any country shall be treated as having a business establishment there; and
(b)     “usual place of residence”, in relation to a body corporate, means the place where it is legally constituted.

Schedule 5 Services supplied where received
….
7   The letting on hire of goods other than means of transport”.
The Authorities
9.	We were supplied with copies of the following authorities which we have read and considered:
Berkholz v Finanzamt Hamburg-Mitte-Allstadt (Case 168/84) [1985] ECR 2251
Faaborg-GeltingLinien A/S v Finanzamt Flensburg (Case C-231/94) [1996] STC 774
CEC v DFDS A/S (Case C-280/95) [1997] STC 384
ARO Lease BV v Inspecteur der Balastingdient Grote Ondernemingen, Amsterdam (Case C-190/95) [1997] STC 1272
C EC v Chinese Channel (Hong Kong) Ltd [1998] STC 347
Commission v French Republic (Case C-429/97) [2001] STC 156
RAL (Channel Islands) Ltd v CCE (Case C-452/03) [2005] STC 1025
HMRC v IDT Card Services Limited [2006] STC 1252
HMRC v Zurich Insurance Company [2006] STC 1694

10.	We were informed that the Court of Appeal was to give judgment in the Zurich case on the day after the hearing finished.  We gave leave for the parties to make such representations in writing (if any) as they wished on the Court of Appeal’s decision in writing within 14 days of the Court of Appeal giving its decision.  We requested that the parties let us know if they did not wish to make any representations within 14 days.  Such representations and/or notice was to be served on the Tribunal and the other party to the proceedings.  
 
11.	Both parties made representations but essentially they did not change the cases put forward. We are grateful to the parties for these further submissions.

The Evidence
12.	We were provided with an agreed bundle of documents.  No objection was taken to any of the documents and they were all admitted in evidence.

13.	We heard oral evidence from:
(a)	Claire Lee Pearce, director, company secretary and lease administration manager, HLL
(b)	Robert Alan Summercell, director, HLL.

Witness statements were provided for each of them and they were cross examined.

Findings of Fact
14.	From the evidence we make the following findings of facts:

HLL- General Information
15.	HLL is a company incorporated in Guernsey in 2000. Guernsey is the place where HLL is legally constituted.

16.	HLL operates and operated from premises in Guernsey. It is resident in Guernsey.

17.	The directors held meetings in Guernsey concerning Healthcare’s affairs and their implementation.

18.	HLL started trading in April 2001. HLL carried on the business of leasing dental related equipment to dentists who are predominantly in the UK. It is the letting on hire of goods other than means of transport.
 
19.	HLL has an agreement with Gilt Finance and Leasing Limited (“GF”) under which certain services are provided as discussed below.

20.	HLL was registered as an overseas trader for UK VAT purposes with effect from 9 April 2001 at the Aberdeen VAT Office. This was to recover VAT incurred on the purchase of equipment and to account for VAT on sales of medical equipment.

21.	The directors of HLL are: 
	Roy Self, 
	Alan Summercell; and 
	Claire Pearce.

22.	Claire Pearce is a Guernsey resident whereas Roy Self and Alan Summercell  are resident in the UK.

23.	The beneficial shareholders in HLL are 
Roy Self	35% 	
Alan Summercell   	35%	
Sir Nicholas Bacon 	12½% 	
Dr Arasu	12½%	
Zabrina Akhtar	   5 %	
Some of the shares are held through nominees.

Lease Administration and the running of HLL
i	More Recent Position
24.	Mrs Pearce as well as being a director is also employed by HLL as lease administration manager. She works in the company’s Guernsey offices.  There is one other employee, Louise Kresovic who is the company accountant.  Together they run Healthcare’s day to day business.

ii      Start Up
25.	At first HLL’s operations were run from the home of Mrs Kresovic. Mrs Kresovic was then a director and the only employee of the company. She was the lease administration manager.

26.	As lease administration manager it was Mrs Kresovic’s responsibility to appraise new lease proposals received by HLL from brokers according to the underwriting guidelines applied by HLL.  If appropriate, she would finalise and process the lease agreement with the corresponding dentist.  She also kept existing leases under review and made sure all payments had been duly received. 
 
27.	Mrs Kresovic also carried out the duties of company accountant and company secretary

28.	As HLL’s business expanded, Mrs Kresovic’s workload increased accordingly. By October 2002 it had reached a level she was unable to deal with it in the time she had available.
  
iii.  Mrs Pearce – January 2003- date
29.	In January 2003, Mrs Pearce was hired to take over the function of lease administrator on a part-time basis.  From February 2006 she worked at a rate of 20 hours per week. She has since become a full-time employee.  She replaced Mrs Kresovic as company secretary. She was also appointed a director of HLL.

iv. New Offices
30.	In October 2005, HLL moved into its new offices. Its business has been conducted since then from these offices.  HLL rents these premises from a Guernsey landlord, Active Service Management Ltd.  The lease agreement provides for additional services such as access to a shared meeting room. 
 
31.	Mrs Pearce has worked from the new offices since the move.  Board meetings are held there.  Whilst continuing to work from home, Mrs Kresovic regularly comes to the office as the company accounting and other data are kept on the computers there.

GF- General Information
32.	GF is a company incorporated in England. GF is a UK resident company. 
  
33.	GF has carried on business since the late 1980s, as a leasing broker specialising in arranging equipment leases to nursing homes in the UK. 
 
34.	The directors of GF are Mr Summercell, Mr Self and Mrs Summercell.
35.	The beneficial shareholdings in GF include:
R Summercell	25%	
R Self	25%	
Mrs Summercell	25%	
Mrs Self	25%	

36.	There are thus common shareholders and directors in both GF and HLL.  They would appear (although we do not decide this) to be under common control (Messrs Self and Summercell own 70% of HLL and 50% of GF with their wives owning the rest).
The Agreement between HLL and GF
37.	An agreement (“the Agreement”) was entered into between HLL and GF on 14 September 2000. 

38.	The Agreement provided that GF would supply certain services to HLL. These included: 
(a)	The promotion and marketing of HLL’s leasing services in the European Union;
(b)	The provision of a telephone support service for HLL’s customers. The terms relating to this service were to be as may be agreed between the parties from time to time;
(c)	Acting for HLL in the UK to ensure HL complied with the requirements of The Consumer Credit Act 1974;
(d)	The provision of any other services incidental to the above as may be agreed between the parties from time to time.

39.	Further services including the obtaining offers of bank finance were undertaken by GF. None of the services amounted to the supply of leasing services by GF rather than HLL.

40.	The Agreement further provided that GF was not “to conclude, agree or finalise a binding contract on behalf of or otherwise between HL and any other party”.  GF was licensed under the Consumer Credit Act 1974 to act as customer contact point.

GF’s Remuneration
41.	Originally, it had been agreed that GF would be paid by reference to a percentage of the turnover its involvement generated for HLL.  This proved unsustainable and a new method was negotiated whereby GF was paid a fixed fee of £2000 per month and a performance related annual bonus.  One such bonus payment of £30,000 was made in 2004.

42.	On 1 October 2006 the contract with GF was terminated.  Since that date, HLL has been in direct contact with brokers and continues to operate on the UK market without any intermediary. At all times, GF carried on its existing brokerage business in the nursing home sector.

43.	In the period of 31st August 2003 to 31st August 2004 GF’s turnover was £169,208. Only £54,000 came from its business with HLL.

Typical Transaction during period in question
44.	We were told (and accept) that rather than meet the capital cost themselves dentists typically lease certain equipment as the rentalised cost can give a lower effective rate of interest. The equipment in question usually has a useful economic life of between 2 and 5 years, from providers such as HLL.
  
45.	We were told that the following sets out a typical leasing transaction with HLL. We find that factually this was the way the business operated during the period in question.

46.	After the dentist in question had identified a product and preferred supplier, either the dentist or the supplier would contact a specialist broker to organise funding.  The broker would consider suitable companies and where the best terms for the particular item could be obtained. 
 
47.	If the broker chose to approach HLL the broker would prepare a proposal form and submit the proposal form to GF.  GF carried out various factual inquiries, such as the existence of the nominated dentist and his practice, and, after collating the information, forwarded the proposal to HLL in Guernsey for consideration by HLL.

48.	The documentation received from GF was considered by the lease administration manager.  She checked that all required information has been obtained and then evaluated the proposal according to HLL’s internal underwriting criteria. From the oral evidence we find this was done and done thoroughly and carefully in Guernsey. 

49.	If any queries arose at the evaluation stage the lease administration manager could refer them to GF to make further inquiries of the broker or make further inquiries herself.

50.	If and when she was satisfied that all requirements were met the lease administration manager issued an approval letter from HLL in Guernsey to the broker in respect of the proposed deal.  This was not a final agreement and acceptance by HLL was provisional and subject to certain conditions being met on or before installation of the equipment.

51.	The dentist then contacted the supplier to arrange for delivery and installation of the equipment.  Once installation was complete, the broker prepared a Certificate of Acceptance and Leasing Agreement on HLL standard forms and arranged for the dentist to sign them.  The broker then forwarded these documents to HLL. The broker sent at the same time his commission invoice, the supplier’s invoice and a cheque for the first lease payment to HLL.

52.	The lease administrator at HLL in Guernsey checked the final documentation received in Guernsey from the broker to ensure it still conformed to HLL’s approval criteria.  Occasionally, a proposal was rejected at this stage. For example this might be because it appeared that the equipment was of a kind HLL did not cover, despite the fact that delivery and, if relevant, installation had already occurred.  

53.	If the HLL lease administration manager was satisfied with the documents she countersigned the Leasing Agreement in Guernsey on behalf of HLL. She then issued a letter of confirmation to the dentist and sent a copy of the signed agreement with it to the dentist.  

54.	Finally, the lease administration manager authorised payment of the supplier’s invoice and the title to the equipment then generally passed to HLL.

55.	During the lease period, GF acted as UK contact point for HLL clients for the purposes of the Consumer Credit Act 1974. This was a statutory requirement   GF forwarded any query or issue to the lease administration manager for consideration.  This happened very infrequently.

56.	Payments were made to HLL in Guernsey and dealt with there.

57.	At the end of the lease, the equipment usually remained in place and was sold to the broker originally involved for a small fee.  HLL did account for VAT on that supply.  It was open to HLL to sell the equipment to other parties and sometimes it was sold to GF. This was accepted as giving rise to a supply in the UK for VAT purposes. It is not a matter of dispute in these proceedings.

Summary 
58.	We find, in summary, that:
a.	The contracts were concluded in Guernsey by HLL and not in the UK;
b.	HLL was the lessor in fact and law. HLL made the leasing supplies.
c.	GF did not make leasing supplies. It made introductions to HLL for which it was paid a commission or a fee.
d.	HLL and GF were related entities but were commercial and legally separate entities doing different things from different places. GF did preparatory work but did not make the leasing supplies. The leasing supplies were made by HLL from Guernsey as HLL had no fixed establishment in the UK.
e.	HLL’s supplies were made from Guernsey. They were not from a fixed establishment of HLL in the UK. They could not have been because as a matter of fact HLL did not have a fixed establishment of HLL in the UK from which such supplies could be made.
f.	GF was not a fixed establishment of HLL from which leasing supplies were in the UK by HLL.

59.	We considered that an objective observer would consider it rational to treat the supply as made from Guernsey. We also consider that this accords with the factual and economic reality of the situation and we so find.

Submissions of the Parties in Outline
Submissions for the Appellant in outline
60.	It was argued on behalf of HLL that, based on the Berkholtz hierarchy, there were three questions to consider which would decide this case.  These were:
i.	whether treating the supply as made from Guernsey gives a rational result.  

If not:
ii.	Does HLL have a fixed establishment in the UK;
iii.	Was this the establishment from which the supply was made?  The supply to be taxable must be made from a fixed establishment in the UK if the supplier, HLL, belongs in Guernsey.

61.	The supply was made by HLL from Guernsey.  Treating the supply as made from Guernsey was both factually correct and rational.  This was recognized by the reverse charge mechanism the existence of which showed that such an approach was recognized as rational by European law.

62.	There was no fixed establishment of HLL in the UK.  GF was not a fixed establishment of HLL in the UK;

63.	Even if there were such an establishment, which was not admitted, the supply was not made from GF. There was no supply in the UK from a fixed establishment of HLL in the UK. The supply was from HLL in Guernsey.

64.	All that GF did was at most preparatory.  GF did not make the supply of leasing the equipment to the lessees.  HLL did that from Guernsey.

65.	Accordingly, the supply was made by HLL from Guernsey and as it did not have a fixed establishment in the UK from which the supply was made that could not be changed to a supply in the UK.  This was a perfectly rational result which accorded with the factual reality of the situation.

66.	No supply of leasing services was made by GF. What GF did was not leasing but at most preparatory to it.

67.	This case was factually different from Zurich.

68.	Accordingly the appeal should be allowed with costs.

Submissions for the Respondents in outline
69.	It was argued on behalf of HMRC that:
(a)	the economic reality here was that the use and the supply of equipment was in the UK by HLL through its fixed establishment, GF.
(b)	There were common owners and controlling minds of both HLL and GF in Messrs Summercell and Self.  There was thus a lack of independence.
(c)	GF/HLL source of funding for these transactions was in the UK.  Funding is crucial to leasing transactions. GF procured it.  
(d)	GF was the main point of control both of suppliers and brokers.  The reality was that HLL obtained and concluded deals in the UK through GF.

70.	The evidence in the company minutes showed that GF did more than was required under the agreement.  There is nothing in the Agreements about sourcing funding, arranging legal work, setting brokers terms or new market expansion.
  
71.	As is clear from Mr Summercell's evidence GF and HLL were interchangeable to him -- at best there was a blurred edge.  HLL was not independent from GF.

72.	The only rational conclusion was that GF was HLL's fixed establishment in the UK.

73.	Accordingly, as the reality was that HLL was making supplies in the UK through its fixed establishment GF the appeal should be dismissed.

74.	Further submissions were made following the Court of Appeal’s decision in Zurich as noted above. However, they did not change the essence of the parties’ cases.

Discussion
Introductory Matters 
75.	We remind ourselves that the provisions of the UK legislation are to be interpreted in accordance with the Directive notwithstanding that the provisions of the Directive dealing with the place of supply of services are not identical with those of sections 7 and 9 of the VATA (see Collins LJ at paragraph 57 in Zurich).

76.	The submissions of the parties raise a number of questions including the following.

(a)	Does the Berkholz hierarchy apply or is there a ‘more modern’ approach?
If Berkholz applies then:
(b)	What was the supply?
(c)	What entity made that supply?
(d)	Did that entity have more than one fixed place of business?
(e)	Was that result rational?
(f)	Was there a distortion of competition?

Does the Berkholz hierarchy apply or is there a ‘more modern’ approach?
77.	We have considered the cases cited to us carefully but find most help in the recent Court of Appeal decision in Zurich as to how to approach the issue. We remind ourselves of some of what was said there.

78.	Collins LJ said in Zurich:
“58. There have been several rulings by the European Court on Article 9, the most significant of which for the purposes of this appeal are Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Alstadt [1985] ECR 2251 and Case C-260/95 Customs and Excise Commissioners v DFDS A/S [1997] ECR I-1005, [1997] STC 384. Most of the decisions concern Article 9(1) and not the special rules in Article 9(2), but the relevant wording is identical and nothing turns in this appeal on the differences between the provisions”.

79.	It seems to us that the Court of Appeal considers that the Berholz hierarchy is still the correct approach in cases such as this notwithstanding Ms Hayne’s attractive argument to the contrary. 

80.	Collins LJ said:
“59. The ruling in Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Alstadt [1985] ECR 2251 concerned the place of supply by a German company of gaming services on board a ship which sailed in Danish waters. One of the questions raised by the Finanzgericht was whether Article 9(1) should be interpreted to mean that the term “fixed establishment” also covered facilities for conducting a business (for example the operation of gaming machines) on board a ship sailing on the high seas outside the national territory, and, if so, what were the relevant criteria for the existence of a “fixed establishment”.
60. In answering the question the European Court said (paragraph 14):
  “14. ...Article 9 is designed to secure the rational delimitation of the respective areas covered by national VAT rules by determining in a uniform manner the place where services are deemed to be provided for tax purposes. Article 9(2) sets out a number of specific instances of places where certain services are deemed to be supplied, whilst Article 9(1) lays down the general rule on the matter. The object of those provisions is to avoid, first, conflicts of jurisdiction, which may result in double taxation, and secondly non-taxation, as Article 9(3) indicates, albeit only as regards specific situations.
  ...
  17. ... [I]t is for the tax authorities in each Member State to determine from the range of options set forth in the directive which point of reference is most appropriate to determine tax jurisdiction over a given service. According to Article 9(1), the place where the supplier has established his business is a primary point of reference in as much as regard is to be had to another establishment from which the services are supplied only if the reference to the place where the supplier has established his business does not lead to a rational result for tax purposes or creates a conflict with another Member State.
  18. It appears from the context of the concepts employed in Article 9 and from its aim, as stated above, that services cannot be deemed to be supplied at an establishment other than the place where the supplier has established his business unless that establishment is of a certain minimum size and both the human and technical resources necessary for the provision of the services are permanently present. It does not appear that the installation on board a seagoing ship of gaming machines, which are maintained intermittently, is capable of constituting such an establishment, especially if tax may appropriately be charged at the place where the operator of the machines has his permanent business establishment.
  19. ... Article 9(1) ... must be interpreted as meaning that an installation for carrying on a commercial activity, such as the operation of gaming machines, on board a ship sailing on the high seas outside the national territory may be regarded as a fixed establishment within the meaning of that provision only if the establishment entails the permanent presence of both the human and technical resources necessary for the provision of those services and it is not appropriate to deem those services to have been provided at the place where the supplier has established his business.”
61. Advocate General Mancini (page 2255) said that in determining which of the two main criteria laid down in Article 9(1) should be relied on where the place where the supplier had established his business did not coincide with the fixed establishment, said that he proposed to rely on the general principle that VAT should be charged at the place of consumption and therefore preference should be given to the criterion which enabled the supply of services to be located more accurately. There was no doubt that the more appropriate of the two for that purpose was the criterion of the “fixed establishment” which was clearly more precise”.
81.	His Lordship then considered Case C-260/95 Customs and Excise Commissioners v DFDS A/S [1997] ECR I-1005, [1997] STC 384. A case which was referred to the ECJ. He said:
“68. Applying Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Altstadt [1985] ECR 2251 the European Court said that, for the purposes of Article 9(1), the place where the supplier had established his business was a primary point of reference inasmuch as regard was to be had to another establishment from which the services were supplied only if the reference to the place where the supplier had established his business did not lead to a rational result for tax purposes or created; and services could not be deemed to be supplied at an establishment other than the place where the supplier had established his business unless that establishment was of a certain minimum size and both the human and technical resources necessary for the provision of the services were permanently present: paras 18-20. 
69. The approach of the European Court was to consider, first, what the hierarchy would be if the tour operator had a fixed establishment from which it marketed tours and that establishment was in a State other than the State in which it had established its business, and then, second, whether it had such a fixed establishment”.
70. On the first question, the Berkholz hierarchy, the Court said that to treat, for tax purposes, all the services provided by a tour operator, including those supplied in other Member States through undertakings operating on his behalf, as being supplied from the place where the tour operator had established his business, would have the clear advantage of having a single place of taxation for all the business of that operator covered by Article 26 of the Sixth Directive: para 21. But, the Court said (para 22), 
“that treatment would not lead to a rational result for tax purposes in that it takes no account of the actual place where the tours are marketed which, whatever the customer's destination, the national authorities have good reason to take into consideration as the most appropriate point of reference.”
71. Approving the Advocate General, the Court said that consideration of the actual economic situation was a fundamental criterion for the application of the common VAT system. The alternative approach for determining the place of taxation of the services of travel agents, based on the fixed establishment from which these services were supplied, was specifically intended to take account of the possible diversification of travel agents' activities in different places within the Community. Systematic reliance on the place where the supplier had established his business could lead to distortions of competition, in that it might encourage undertakings trading in one Member State to establish their businesses, in order to avoid taxation, in another Member State which had availed itself of the possibility of maintaining the VAT exemption for the services in question: para 23.
…
He continued at paragraph 76 “… the answer was that Article 26(2) was to be interpreted as meaning that, where a tour operator established in one Member State provided services to travellers through the intermediary of a company operating as an agent in another Member State, VAT was payable on those services in the latter State if that company, which acted as a mere auxiliary organ of the tour operator, had the human and technical resources characteristic of a fixed establishment”.
He noted at paragraph 79 
“It was for the competent authority in each State to determine to what extent one of the two criteria should be applied rather than the other. The European Court was called on to explain and oversee fulfilment of the requirements on which the choice of one criterion rather than the other should be based. Thus attention had to be focused on the consequences that would flow from the general criterion of the place where the supplier had established his business. If the result was rational, as intended by the directive, that is the rule to be preferred. There was no need for the other, which concerned the place of the fixed establishment. 

80. The Advocate General aligned himself with the view advanced by the United Kingdom Government, which was that the problem was to be resolved by reference to the general principles laid down in Community tax legislation, including the requirement that VAT be levied at the place where the service was provided. Reference to the place where the supplier had established his business did not lead to a rational result. The first consequence of such an approach would in fact be failure to apply the legislative criterion that the place of taxation must fundamentally coincide with that at which the service was supplied to the consumer. The VAT system had to be applied in a manner as far as possible in harmony with the actual economic situation.

81. Application of the place where the supplier had established his business would exacerbate the problems, rather than simplifying them. If undertakings in the sector were allowed freely to determine, by choosing the location of their registered office, the place at which the services provided by them were to be taxed, there would be distortion of freedom of competition and other, more wide-ranging, repercussions for the business world. 
…
83. The Advocate General concluded that the scope of Berkholz must not be unjustifiably extended by construing it as meaning that the criterion of the establishment from which the services were provided is necessarily merely residual.
84. In Case C-190/95 ARO Lease BV v Inspecteur der Belastingdienst Grote Ondernemingen [1997] ECR I-4383, [1997] STC 1372 a Dutch car financing company (ARO) leased cars, mainly to Dutch customers, but also to some Belgian customers. All leasing agreements were drawn up in the Netherlands. ARO had no office in Belgium and customers were introduced to it through Belgian self-employed intermediaries. The Belgian tax authorities considered that VAT should be paid on the basis that the presence of a fleet of cars in Belgium meant that ARO had a fixed establishment there, and therefore Belgium was to be treated as the place of supply. The Netherlands tax authorities refused to reimburse the VAT, disputing that ARO had a fixed place of business in Belgium. The European Court noted (para 18) that the services supplied in the leasing of vehicles consisted principally in negotiating, drawing up, signing and administering the agreements and making the vehicles physically available. The Court ruled that when a leasing company did not possess either its own staff or a structure which had a sufficient degree of permanence to provide a framework in which agreements might be drawn up or management decisions taken and thus enable the services in question to be supplied on an independent basis, it could not be regarded as having a fixed establishment in that sense: para 19. Advocate General Fennelly expressed the view that the essence of the service comprised the conclusion of the contracts: para 31. See also Case C-429/97 EC Commission v France, [1993] ECR I-5881, [2001] STC 156 (composite supply to be taken as being from the Member State in which the supplier has established his business).
85. Neither of the other rulings to which we were referred involved any consideration of the factual places of supply of services Case C-452/03 RAL (Channel Islands) v Customs and Excise Commissioners [2005] ECR I-3947, [2005] STC 1025; Case C-231/94 Faaborg-Gelting Linien A/S v Finanzamt Flensburg [1996] ECR I-2395, [1996] STC 774. 
86. The only decision to which we were referred which was directly on place of supply was the decision in Customs and Excise Commissioners v Chinese Channel (Hong Kong) Ltd [1998] STC 347 (Moses J). In that case the issue for the Tribunal was whether Chinese language satellite programmes provided to subscribers in England were supplied from a Hong Kong company or whether they were supplied from its United Kingdom affiliate as a fixed establishment. The Hong Kong company held the broadcasting licence, made arrangements for transmission and selected programmes. The English company marketed subscriptions, checked subscribers' credit ratings, collected subscriptions and received and edited tapes of programmes to be broadcast. The Tribunal decided on the facts that the service was provided from Hong Kong and not from the United Kingdom. Moses J held that the decision was one of degree for the Tribunal, and one with which the court would not interfere. 
Of the particular circumstances before the Court of Appeal he said:
“88. In the present case, for the purposes of Article 9 Switzerland is the place where ZIC has established its business. Nor can there be any doubt that ZIC(UK) is a fixed establishment of ZIC. Mr Prosser QC for ZIC virtually conceded that if the United Kingdom is the place to which the services were provided there is no basis for the place where ZIC has established its business (Switzerland) being regarded as the place where the service is deemed to be supplied for the purposes of Article 9(2)(e) under the Berkholz hierarchy”.

82.	We respectfully adopt what Collins LJ said. Accordingly in our view following 
the Court of Appeal’s decision in Zurich, the Berkholz hierarchy does apply and there is not a ‘more modern’ or different approach that should be applied.

What was the supply?
83.	No issue was raised as to HLL’s supply being other than access to the goods ie the letting of goods other than means of transport.  Accordingly, we treat the supplies as being access to the goods which were the subject of the lease which falls within paragraph 7 of Schedule 5 VATA..

What entity made that supply?
84.	We have found that the supply was made by HLL and not GF. We have also found that HLL had no fixed place of business in the UK. Accordingly we find that the entity that made the supply was HLL in Guernsey.

Did that entity have more than one fixed place of business?
85.	We have found that HLL has a fixed establishment in Guernsey and does not have a fixed base in the UK or elsewhere outside Guernsey. GF was not a fixed place of business of HLL in the UK. Accordingly we find that HLL did not have more than one fixed place of business and in particular no fixed place of business in the UK.  

Was that result rational?
86.	Although the introduction may have been made by GF to HLL the contract was entered into by HLL in Guernsey, after deciding whether to sign the contract in Guernsey, [payment was received in Guernsey direct from he lessee], the lease was administered in Guernsey. It seems to us rational result to treat the supply as made in Guernsey and we so find. The existence of the reverse charge confirms us in that view.

Was there a distortion of competition?
87.	There was no evidence lead that there was a distortion of competition. We do not find that there was a distortion of competition. Further it seems to us that the purpose of the reverse charge is to deal with circumstances where services are received from outside the UK and would not otherwise be subject to VAT and prevent competition.
Conclusion
88.	We have found that:
(1)	 The supplies were made by HLL from Guernsey and not in the UK by GF or anyone else as a fixed establishment of HLL in the UK.  
(2)	HLL had no fixed establishment in the UK 
(3)	HLL accordingly could not and did not make any supplies from a fixed establishment in the UK.
(4)	An objective observer would consider it rational to treat the supply as made from Guernsey. This accords with the factual and economic reality of the situation and we so find. No distortion of competition was shown.

89.	Accordingly, the appeal is allowed with costs.

ADRIAN SHIPWRIGHT

CHAIRMAN
RELEASE DATE: 20 July 2007

LON/2006/0763