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Judgment - Trustees of the Nell Gwynn House Maintenance Fund v. Commissioners of Customs and Excise  continued

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    Shortly before handing over to Graham Harvey the previous Maintenance Trustee disclosed to the Commissioners voluntarily that there had been an underpayment of VAT in respect of salaries and wages of staff employed by the Maintenance Trustee for the period 10 June 1990--31 March 1993 in the sum of £134,064.47. This sum was paid out of the Maintenance Fund but it was made clear that the Maintenance Trustee would seek repayment should it be found that the voluntary disclosure was incorrect. On 1 November 1993 the Commissioners made an assessment in respect of salaries and wages of staff employed by the Maintenance Trustee for the period 1 March 1993--31 August 1993 in the sum of £21,786.26. The Commissioners also on 3 November 1993 ruled that the voluntary disclosure had been correctly made. It was from that decision that the Maintenance Trustee appealed to the VAT Tribunal which upheld the Commissioners' ruling.

    The dispute between the parties is said to raise five issues. The first is whether the Maintenance Trustee merely supplied a service consisting of the arranging for staff to be provided, to carry out the purposes for which the Maintenance Fund is to be applied under the Fourth Schedule, or whether the Maintenance Trustee itself supplied the services in the form of the activities carried out by the staff for such purpose. The second issue is whether the consideration received by the Maintenance Trustee for whichever of these two alternative services they supplied was the whole amount by way of maintenance contribution, in so far as attributable to staff salaries and wages, or whether it was only the Maintenance Trustee's remuneration, being three per cent of the maintenance contributions, or whether it was some other amount. The third question is whether it makes any difference to liability for VAT that the maintenance contributions are, after deduction of their own remuneration, held by the Maintenance Trustee on trust.

    These first three issues are, as the respondents contend, closely related. They say in their written case that: "If their submissions on the proper supply are correct, then so are their submissions on the proper consideration and vice versa". I agree and consider them together.

    Article 2 of the Sixth VAT Directive (E.C. Council Directive 77/388) provides that there shall be subject to VAT "the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such." In section 2 of the Value Added Tax Act 1993, passed to give effect to the Directive, as amended it is provided that:

     "(1) Tax shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. (2). . . a taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply."

    As to the nature of the supply it is plain, as the appellant and the respondents agree, that for the purposes of VAT there is a distinction between the case where A pays B for services to be provided by B and the case where A puts B in funds so that B can arrange for C to provide the services. In one case it is the provision of services which constitutes the supply; in the other it is the arranging for services to be provided which constitutes the supply.

    The Tribunal found that the:

     "Maintenance Trustees made and make a supply to the tenants who occupy Nell Gwynn House by supplying the services of staff, as . . . provided for by the Fourth Schedule to the leases, and which enhance the enjoyment and amenity of the flats and the building as a whole." (page 14).

    It was also satisfied that:

     "the maintenance contributions paid by the tenants (which inter alia provided the trustee's management fees) are in law capable of amounting to, and the Tribunal finds did amount to, consideration for provision of services by the Maintenance Trustees to the tenants." (page 13).

Payments made under clause 4(6)(b) and (c) of the lease fell into the same category.

    The Tribunal also found that there was a supply to the lessor by the provision of such services, the lessor paying the sums equal to maintenance contributions under clause 4(6)(b) and (c).  Popplewell J. having considered the respondents' contention that there could be no consideration for the supply of services since the Maintenance Trustees, who accepted money to apply it as provided under the agreements, could not be said to fulfil its own obligations other than as Trustee, concluded that the decision of the Tribunal was correct. He said, at [1994] S.T.C. 995, 1003 b-c:

     "While there is a formidable and legal argument in relation to trusts it is necessary I believe to look at the substance and commercial reality of the agreement between the parties . . .  I am satisfied that this was a supply of services both to the lessor and to the tenant and that it was done for a consideration. There are various ways in which that can be put. Payment from the maintenance fund for the supply of services made by the appellants to the lessor. Alternatively the maintenance contribution made by the tenants under the lease and/or by the lessor also under the lease. The remuneration of the Trustees provided for by the lease is in my judgment capable of and does constitute consideration."

    Sir Christopher Slade, with whom Swinton Thomas L.J. and Butler Sloss L.J. agreed, concluded, at [1996] S.T.C. 310, 321 e-f that "the relevant supply of services in the present case is the arrangement by the trustees for staff to supply services to the tenants and the lessor, not the sale by the trustees of staff services."

    In my opinion the Tribunal's analysis of the position is the correct one. It may well be that the Maintenance Trustee could have fulfilled its obligations under paragraph (1) of the Fourth Schedule to the Lease "To employ and keep such staff to perform such services as the Maintenance Trustee shall think necessary in and about the building" by contracting with third parties for the provision of those services. Then they would simply have arranged for those services to be provided. But they did not do this. They entered into contracts of employment, or service, with individual members of the staff. Three such contracts (treated, as I understand it, as representative) have been produced on this appeal and it is plain that the individuals were employed directly by the Maintenance Trustee; they were not independent contractors, they were not said to be employed by the landlords or by the tenants and there was nothing to indicate that they were so employed. Had they needed to sue for wages or for breach of an employer's duty the Maintenance Trustee would have been the appropriate defendant. Conversely it was the Maintenance Trustee who engaged and who could have sacked the employees. The fact that the three solicitors concerned are described as the "Maintenance Trustee" does not prevent them from contracting as employers with the staff they engage to carry out the services. Moreover it seems to be wrong and artificial to regard the suppliers of the services as the individual employees.

    I do not consider that the provision in paragraph (1) of the Fourth Schedule "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" indicates that the Maintenance Trustee was simply arranging for services to be provided. On the contrary it seems to me that that provision is put in primarily, so far as the Maintenance Trustee is concerned, in order to protect the Maintenance Trustee from the usual liability of a master for the acts or omissions of his servants. The obligation of the Maintenance Trustee to use its "best endeavours" to keep up an establishment comprising certain specified staff is not in any event inconsistent with the staff employed in the fulfilment of the obligation to use best endeavours being engaged directly under contracts of service.

    Nor do I consider that the obligation of the Maintenance Trustee under clause 2(1) of the Appointment Agreement to "apply all sums received by it as part of the Maintenance Fund . . . for the purposes specified in the Fourth Schedule and subject thereto in accordance with the trust contained in clause 5(C) of the lease," or the provisions of clause 5(A) of the lease, are inconsistent with what seems to me to be the clear position on the facts that the Managing Trustee was supplying the services rather than merely arranging for them to be supplied.

    It is agreed that the taxable amount for such supplies is, by Article 11 A(1)(a) of the Sixth Council Directive, "everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser" and that consideration means "everything received in return for the supply of services or the provision of services" (Second Council Directive Annex A paragraph 13) and Apple and Pear Development Council v. Customs & Excise Commission [1988] S.T.C. 221. In the ordinary way the taxable amount would be the payment made to the person who provides the services which here would be the Managing Trustee. In the present case however it is said that that cannot apply firstly since the respondents only arranged for the provision of services and cannot be, and are not, remunerated for anything above that and secondly because the respondents are trustees receiving and holding moneys on trust and these cannot constitute consideration for the supply of services. VAT being a tax on turnover can only be levied on moneys properly regarded as part of turnover, which these moneys when received by the Trustees were not since they were not received actually and beneficially by the Trustee.

    In support of the second argument the respondents rely in particular on two decisions of the European Court of Justice. The first is case C-38/93 H.J. Glawe Speil-und Unterhaltungsgerate Aufstellungsgesellsdraft mbtt & Co. KG v. Finanzamt Hamburg-Barmbek-Uhlenhorst [1994] S.T.C. 543 which raised the question as to the proper taxable amount in respect of moneys put into gaming machines where the owner was required to ensure that about 60 per cent. of the moneys put into the machines were paid out as winnings. The court held that "The consideration actually received by the operator in return for making the machines available consist only of the proportion of the stakes which he can actually take for himself." As Advocate General Jacob said this was the commercial reality and was consistent with the aim of the Directive to tax the turnover which a trader "earns from his supplies of his goods and services" (1994 S.T.C. page 547F-H). The same principle was illustrated in Argos Distributors Ltd. v. Commissioners of Customs and Excise (C-288/94) [1996] S.T.C. 1359, 1372 f-g where it was said "According to the court's settled case law, the taxable amount for the supply of goods or services is represented by the consideration actually received for them." In this case it is said by the respondents that the only amount which they received and were entitled to retain for their benefit was the amount of their remuneration and they accept that VAT is payable on that.