HOUSE OF LORDS
Lord Slynn of Hadley
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE
TRUSTEES OF THE NELL GWYNN HOUSE MAINTENANCE FUND
COMMISSIONERS OF CUSTOMS AND EXCISE
ON 16 DECEMBER 1998
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Slynn of Hadley. For the reasons which he gives I would allow this appeal.
LORD SLYNN OF HADLEY
This is an appeal by the Commissioners of Customs and Excise from a decision of the Court of Appeal that the respondents were not liable to pay the amount of value added tax assessed by the Commissioners in respect of services provided at a block of flats known as Nell Gwynn House in London. In so deciding the Court of Appeal reversed the decision of Popplewell J. who had upheld the decision of a VAT tribunal that the tax was payable.
The respondents to the appeal are three partners in a firm of solicitors, Graham Harvey, who are, and who have since 1993 been, Trustees of the Nell Gwynn House Maintenance Fund. By an undated agreement of appointment made between the superior lessor of the premises (NGH Apartments Ltd.), the freeholder thereof (Retac Properties Establishment) and Graham Harvey, the latter as Trustee of the Maintenance Fund undertook to:
"apply all sums received by it as part of the Maintenance Fund (as defined in clause 5(A)) of the [standard form of lease annexed to the agreement] for the purposes specified in the Fourth Schedule to the Lease and subject thereto in accordance with the trust contained in clause 5(C) of the Lease."
Graham Harvey was to be entitled to retain as its remuneration a sum not exceeding per annum £17,000 plus VAT.
By clause 2 of the agreement Graham Harvey undertook to arrange for the collection of certain rents and to consider applications for alterations by the tenants of the flats. By sub-clause 2(5):
"Notwithstanding the terms of the Lease [Graham Harvey] shall undertake the following obligations which shall not be in derogation of any obligation placed upon [Graham Harvey] either by the lease or by statute; . . .
(j) To use best endeavours to ensure that there is at all times within the Building a competent office and porterage staff in such satisfactory number as shall be prior agreed with Lessor bearing in mind present staffing levels and to keep their work under review and supervision. To ensure each member of staff has a detailed contract of employment setting out the work that they are required to do and to ensure that there are proper procedures in place for the employment of staff.
(k) To properly supervise all outside contractors who may work at the Building in particular cleaning contractors."
Leases made between the freeholder ("the lessor") the Maintenance Trustee and the tenant are substantially in the same form and provide:
"1. IN this Lease:
(o) The Maintenance Contribution shall (subject to clauses 5(F) and (G)) mean a sum equal to one four hundred and thirty fifth of the aggregate annual maintenance provisions for the whole of the Building for each Maintenance Year (as computed in accordance with the provisions of the Third Schedule)."
By clause 3 of the lease the tenant covenanted with the Lessor and with the Maintenance Trustee to pay the rent and, in respect of every maintenance year, to pay the maintenance contribution to the Maintenance Trustee by two equal instalments. By clause 4(6)(b) the Lessor covenanted with the Tenant and with the Maintenance Trustee that throughout the maintenance period the Lessor would, in respect of a period in which any flat in the building is let without the tenant being required to pay a maintenance contribution, or for the period during which any flat in the building is unlet, pay a sum equal to the maintenance contribution, such sums paid by the Lessor being dealt with for all purposes as if they were a maintenance contribution paid by the tenant of the flat.
By clause 5 it was provided that:
"(A) The Maintenance Trustee shall retain out of the sums received by it in respect of the annual maintenance provision aforesaid and the maintenance adjustment its remuneration calculated in accordance with paragraph 2(2)(ii) of Part III of the Third Schedule and adjusted in accordance with paragraph 3 thereof and shall pay the balance into a bank having the status of a trust corporation in an account named 'the Nell Gwynn House Maintenance Fund' and shall hold such balance (hereafter called 'the Maintenance Fund' which expression includes the assets in the hands of the Maintenance Trustee for the time being representing such fund and the income thereof) upon trust (subject to the provisions of sub-clause (B) hereof) to apply the same until the Perpetuity Date for the purposes specified in the Fourth Schedule and subject thereto upon the trust set forth in sub-clause (C) hereof.
(H) The Maintenance Trustee shall place on deposit at the bank or with a local authority sums representing the reserve created pursuant to paragraph 2(a)(ii) of the Third Schedule and withdraw the same from deposit as required in order to meet the expenses referred to in that paragraph or to meet any temporary deficiency in the moneys available to meet the expenditure referred to in paragraph 2(a)(i) of that Schedule."
By clause 6(7)
"The Tenant accepts the obligations of the Maintenance Trustee for the performance of the matter specified in the Fourth Schedule in substitution for and to the entire exclusion of any implied obligations on the part of the Lessor as respects any of the matters specified in that Schedule."
Paragraph 2 of the Third Schedule provided that the annual maintenance provision should consist of (i) a sum comprising the expenditure estimated as likely to be incurred in the maintenance year by the Maintenance Trustee for the purposes mentioned in the Fourth Schedule, (ii) an appropriate amount as reserve in respect of the matters there mentioned and certain other sums together with (iii) pursuant to paragraph 2(b) the remuneration of the Maintenance Trustee:
"which shall be an amount equal to three per cent. of the sum calculated in accordance with paragraph (a) hereof after deducting from the sum calculated in accordance with the said paragraph (a) the remuneration of the Surveyor."
The Fourth Schedule lists the purposes for which the Maintenance Fund is to be applied. By paragraph (1):
"To employ and keep such staff to perform such services as the Maintenance Trustee shall think necessary in or about the Building but so that neither the Maintenance Trustee nor the Lessor shall be liable to the Tenant for any act default or omission of such staff and to use the Maintenance Trustee's best endeavours to keep up an establishment comprising a General Manager, Accounting Secretarial Staff, a resident Supervisor, a Housekeeper, sufficient porters to provide twenty-four hour porterage at the highest practicable level of luxury together with such Maintenance Staff and Cleaners required to maintain and clean the Building and the equipment therein. So far as possible the duties to be performed by such staff will be designed to provide a complete full time luxury level of Service and will include: [the day to day management of the building, the cleaning of parts of the residential premises, the running and maintenance of the building, the provision of a telephone answering service and the provision of a letting office including the collection of rent and other payments due thereunder]."
There is a proviso to paragraph (1) that there shall be payable by the Tenant to the Maintenance Trustee by way of additional charge to be credited to the Maintenance Fund certain sums including any value added tax payable on such sums.
In the block there are 435 flats, 270 of which are let by the landlords or their predecessors.
At the time of the Tribunal hearing the staff consisted of a general manager and 17 other persons working under the general manager's supervision including a house manager, porters, night supervisor, clerks, engineer and cleaners. An important part of the functions of the general manager and his administration staff consisted of sub-letting on short leases 197 of the 270 flats which were held on long leases by lessees of the Landlords.
It is common ground that the general manager and the staff were at all material times employed by the Maintenance Trustee expressly in its capacity as Maintenance Trustee and were paid from the Maintenance Fund. Moreover in carrying out its functions it is accepted that the Maintenance Trustee was acting in the course of a business which it carried on in respect of which it is a taxable person for the purposes of VAT separate from the Lessor.
In addition to the flats sub-let on behalf of tenants the Landlord himself separately managed 165 flats in respect of which the Landlord paid "service charges" to the Maintenance Fund through the general manager. The general manager and his staff are not concerned in any way with the letting of these latter flats.