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Judgments - The Commissioners of Customs and Excise v. Sinclair Collis Limited


Lord Slynn of Hadley Lord Nicholls of Birkenhead Lord Steyn Lord Millett Lord Scott of Foscote








ON 7 JUNE 2001

[2001] UKHL 30


My Lords,

    1. Sinclair Collis Ltd ("SC") is a member of the Imperial Tobacco Group and part of its business is to provide, operate and maintain vending machines for the sale of cigarettes in public houses, clubs and hotels, which for the sake of brevity I refer to compendiously as "clubs". SC enters into agreements with those who control such clubs (whom I refer to as "the owners") for the provision of such machines in return for payment to the latter of an agreed percentage of the gross profits of such machines. The agreement provides that the machines are to be "positioned" in such sites as the club owner shall nominate "as being the site most likely to generate the maximum sales" but the club owner shall not unreasonably refuse his consent to the selection of such sites as SC considers will be most likely to generate the maximum sales. The cigarettes in the machines and the cash in the machines are to remain the property of SC. The owners grant SC the exclusive right to provide and operate the machines and to have access to the machines which will remain SC's property. The club owner agrees to provide sufficient electricity and not to "allow or prevent any machine dispensing similar products to the products to be placed on or annexed to the premises." In addition the owners give SC the exclusive rights to supply cigars and other tobacco products to the owners of the club.

    2. The licence is for a period of two years.

    3. It seems that machines other than those which are designed to be wall-mounted, can be moved around but this does not often happen. SC retains exclusive control of access to the machines, keeps them stocked and removes the money for sharing as agreed.

    4. The European Community Sixth Council Directive (77/388/EEC) provides that the supply of services effected for consideration within the territory of a country by a taxable person acting as such are subject to VAT. There is no contention in this case that what is done is not the supply of services or that there is no consideration for the supply of such services or that the club owners (whose supply is in question) are not taxable persons.

    5. Article 13 of the Directive provides for exemptions from liability to VAT and in particular by Article 13(B)(b) provides that

    "Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse;


      the leasing or letting of immovable property

      [subject to certain exclusions]"

    6. That Directive was implemented in the United Kingdom by section 31 of the Value Added Tax Act 1994 which provided that a supply of services is an exempt supply if it is of a description for the time being specified in Schedule 9 to the Act. Item 1 in Group 1 of Part II of that Schedule included:

    "The grant of any interest in or right over land or of any licence to occupy land".

    7. The superficially curious feature of the case, that it is the commissioners who say that the supply is exempt and that SC it seems on behalf of the club owners, say that it is taxable, is explained by the fact that if it is taxable, input tax can be set off, if it is exempt it cannot.

    8. The balance of the arguments in the case is illustrated by the fact that initially the commissioners took the view that the relevant supplies were exempt from VAT since the agreements were for licences to occupy land. On 16 March 1995 after representations were made on behalf of SC the commissioners accepted that supplies were standard rated and not exempt. In September 1995 the commissioners reversed that decision and "on balance" returned to their view that the supplies were exempt and this was confirmed by letter of 3 January 1996, the decision now under review. Moreover the tribunal decided that there was no licence to occupy lands: Lightman J and the Court of Appeal held that there was.

    9. The tribunal followed an earlier tribunal decision in Wolverhampton and Dudley Breweries plc v Customs and Excise Commissioners [1990] VATTR 131 where it was held that the "real subject" of an agreement to place amusement machines in public houses in return for payment was "the machine and not the use of or enjoyment of the land on which it stood". So here the present tribunal held that

    "the substance and the reality of the agreement is that a machine will be installed and made available to customers in a position which, apart from the statutory requirements and [eg having the machine where it could be seen by the public house staff to prevent vandalism and use by children] does not matter much to either party. In my view the use or enjoyment of land as land is not a significant consideration, and for both parties the real subject of the agreement is the machine and not the use or enjoyment of the land on which it stands or the air space which it occupies for the time being".

    10. Lightman J stressed that the court's task was to interpret the language of the contract and that to look for the "substance and reality" of the agreement, a phrase used by Scarman LJ in British Airports Authority v Customs and Excise Commissioners [1977] STC 36, 41 could be unhelpful, since it suggested that it was possible to go behind the written contract even when that was not alleged to be a sham or where the agreement was said not to reflect the parties' true intention. Here, where it was accepted that there was only one supply rather than several dissociable elements, it was necessary to consider from the agreement what was the character of the main supply. Even though the grant of a restrictive covenant by which a club owner agrees not to grant a licence to any competitor, as in this case, it was clear that on the true construction of the agreement "it is a licence to keep a machine on the site, and it is in return for that licence that the respondent has agreed to pay over a share of the profit". The supply was accordingly an exempt supply as the commissioners contended.

    11. The Court of Appeal in the judgment given by Ward LJ considered that the critical question was "what was the site holder supplying in consideration of taking a share in the profits of cigarette sales?" [1999] STC 701, 706 The answer was that two promises were made by the site holder (the club owner) - one to allow the machines to be provided, installed, operated and maintained at the premises and secondly to grant a restrictive covenant not to allow competition at the premises, thus ensuring exclusivity for SC's products. On the basis of authorities both of the European Court of Justice and of national courts the proper analysis, they concluded, was that there was here one main supply and that the elements of the transaction were indissociable. Properly construed the agreement provided for one relevant supply contained in the first promise of the club owners and that constituted a licence to occupy land so that the supply was exempt pursuant to section 31 of the 1994 Act and Schedule 9 of Part II Group 1.

    12. It is to be noticed that the Court of Appeal considered whether there is here "any licence to occupy land". The appellants contend in this, that they, like the judge, went astray in that they did not consider whether any "letting of immovable property" had occurred. I do not consider that this vitiates the court's decision. It is clear that (a) the terms of the Directive are to be given a Community law meaning and (b) that domestic legislation must be construed as far as possible so as to give effect to a Community directive which it has sought to implement. Moreover exemptions to liability for tax must be interpreted strictly (see Lubbock Fine & Co v Customs and Excise Commissioners (Case C-63/92) [1993] ECR I-6685).

    13. It is thus plain that the words "licence to occupy land" in the Act cannot go wider than the words "letting of immovable property" in the Directive. In the Lubbock Fine case at p 6691, Advocate General Darmon added as a footnote:

    "In my view a letting for the purposes of Community law includes a lease, a licence, 'un bail' or a 'convention d'occupation prêcaire'."

    14. The European Court of Justice has given some indications, in particular factual situations, as to whether what was done there had the characteristics of a "letting".

    15. Thus, in Staatssecretaris van Financien v Coffee Shop Siberie (Case C-158/98 [1999] STC 742 where the question was whether renting out a space in a café for the sale of narcotic drugs fell within the Directive, though the issue under article 13 (B) (b) of the Sixth Directive did not arise for a decision, Advocat General Fennelly said, at p 753, para 36:

    "Suffice it to say that I would not, prima facie, be inclined to regard the renting of a table in a coffee shop as amounting to the letting of immovable property for the purposes of construing an express VAT exemption that must, in any case, be narrowly interpreted".

    16. In EC Commission v United Kingdom (C-359/97) [2000] STC 777, a case involving tolls for the use of toll roads and bridges, Advocat General Elber said, at p 791, para 74:

    "There is no definition of this term [ie the leasing of immovable property] under Community law in the relevant legislation. To clarify its meaning we must, therefore, look at the context in which it is used, taking account of the general structure of the Sixth Directive".

    17. He continued in para 77:

    "It is true that an identified area of space (the road travelled along) is made available to the user for an agreed period of time (the length of the journey) in exchange for payment. However, the characteristics of a lease do not predominate here, as the user's priority is to travel along a given stretch of road as quickly and as safely as possible. The use of the property, on the other hand, is of secondary importance".

    18. The court, in its judgment beginning at p 805, para 63 stressed that the exemptions "have their own independent meaning in Community law" so that they "must therefore be given a Community definition" and repeated that the terms of the exemptions must be construed strictly. The court added:

    "65 In that regard, it must be observed that the wording of article 13B (b) of the Sixth Directive does not shed any light on the scope of the terms 'leasing or letting of immovable property'.

    "66 The definition of 'letting of immovable property' under that provision is certainly wider in some respects than that enshrined in various national laws. For instance the article lists, in order to exclude it from the exemption, a contract for a hotel room ('the provisions of accommodation…in the hotel sector'), which, in view of the overriding importance of the services provided by the hotelier and the control he retains over the use of the premises by patrons, is not considered, in some national laws, to be a contract to let.

    "67 Leaving aside the specific cases expressly listed in article 13B(b) of the Sixth Directive, however, the term 'letting of immovable property' must be construed strictly. As pointed out in para. 64 of this judgment, it constitutes an exception to the general VAT rules contained in that directive.

    "68 Accordingly, that term cannot be considered to cover contracts where, as here, the parties have not agreed on any duration for the right of enjoyment of the immovable property, which is an essential element of a contract to let.

    "69 Where access to roads is provided, what interests the user is the possibility offered to him of making a particular journey rapidly and more safely. The duration of the use of the road is not a factor taken in to account by the parties, in particular in determining the price."

    19. In Swedish State v. Stockholm Lindopark AB (Case C-150/99) [2001] STC 103 a case which involved the use of a golf course, Advocate General Jacobs accepted that the court had not been called on to provide any comprehensive definition of the concept of leasing and letting of immovable property which itself was not defined in the Directive. He said however, at p 112, para 28, that the court had given

    "one more general indication, namely that one essential element of a contract of leasing or letting is that the agreement between the parties should take account of the duration of the lessee's right to use the property, in particular with a view to determining the price paid".

    20. He again stressed the need for a Community definition and for a strict interpretation of the exemptions. He continued:

    "30 Although it is for the national court to ascertain the precise nature of the transactions in question, I consider for at least two reasons that Lindopark's business, as it has been described to the court, did not fall within the concept of leasing or letting of immovable property.

    "31 First, there is the general question whether the transaction should be regarded as the occupation of the immovable property or as the supply of services for which the property is an incidental, albeit essential, prerequisite.

    "32 An example of that distinction might be provided by comparing the provision of accommodation in a hotel—which could be considered to fall within the Community definition of leasing and letting for these purposes on the ground that otherwise there would have been no need to exclude it from the exemption—with the provision of a meal in the hotel restaurant. Whereas the occupation of a hotel bedroom for one or more nights (or even for a shorter period) may well be classified as a let in various legal systems, this is unlikely ever to be the case for the consumption of a meal in the public dining room in the same hotel. In the case of the occupation of a bedroom, the dominant feature of the contract is the use of the premises, whereas in the case of the restaurant meal the dominant feature is the provision of the meal, no matter how important the décor or other facilities may be in the customer's choice of venue".

    21. At p 113, para. 38, the Advocate General said:

    "I would add, as salient and typical characteristics of a lease or let, that it necessarily involves the grant of some right to occupy the property as one's own and to exclude or admit others, a right which is, moreover, linked to a defined piece or area of property".

    22. At p 126, para. 26, of its judgment the court said:

    "According to the case law of the Court of Justice, in order to determine the nature of a taxable transaction, regard must be had to all the circumstances in which the transaction in question takes place in order to identify its characteristic features".

    23. Most recently, in Customs and Excise Commissioners v Mirror Group Newspapers plc (Case C-409/98) in an opinion given on 23 January 2001, Advocate General Tizzano said:

    "26 In my view, this idea that the characteristics of the lease or let must predominate in a contract in order for it to come within the exemption is highly irrelevant for our purposes. It would exclude from the exemption contracts which, while sharing a number of features with contracts of leasing and letting, are primarily concerned with the supply of services incidental to the occupation of the property… .

    "27 In order to identify the key features of a contract, however, we must go beyond an abstract or purely formal analysis. It is necessary to find the contract's economic purpose, that is to say, the precise way in which performance satisfies the interests of the parties. In other words, we must identify the element which the legal traditions of various European countries term the cause of the contract and understand as the economic purpose, calculated to realise the parties' respective interests, lying at the heart of the contract. In the case of a lease, as noted above, this consists in the transfer by one party to another of an exclusive right to enjoy immovable property for an agreed period.

    "29 That said, I would observe that the test under discussion is not without precedent in Community case law. As was seen, for example in Advocate General Elber's opinions in the road tolls cases, it was necessary to look to the 'chief purpose of the contract between the parties in order to ascertain whether the tolls were paid as consideration for the lease of the road surface or for a supply of services. The court, too, in its judgments in those cases, regarded the purpose which a contract serves for the parties thereto as the decisive factor. As mentioned above, the court's conclusion turns on the fact that, in drawing up the terms of their contract, the parties gave no consideration to the duration of the right to use the immovable property".

    24. There is no doubt in the present case that the motivation of both parties in entering into the agreement was to sell as many cigarettes as possible. But that is not conclusive of the question whether to achieve that aim they have entered into an agreement which amounts to the letting of immovable property or a licence to occupy land. I accept that the agreement should not be categorised as two separate supplies. It is one major supply. I take the view that the essential purpose of this agreement was to enable SC to bring its machines into the club owner's premises and to have them there for two years unless the agreement was otherwise varied. Without the club owner's grant of such a right SC could not sell its cigarettes; permitting SC to sell cigarettes was consequential on the grant of the right to bring in the machines.

    25. The question remains whether that grant amounts to the letting of immovable property. For the purposes of domestic land law it may be that the grant of a right to put a machine on land as in the present case is not the leasing or letting of immovable property but it is important not to introduce particularities of domestic land law into the definition of that phrase, even though once it is defined it is for national courts to decide whether it is satisfied.

    26. The Value Added Tax legislation constitutes a special code in that code it seems tome that the "letting" of immovable property includes transactions which go beyond what are leases in the ordinary sense of the term. Whether the letting of immovable property within the Community meaning in the Directive necessarily involves the "occupation" of the land as opposed to its "use" may be debatable but even if it does, it seems to me that an agreement by which a machine may be fixed to a wall or put free-standing in a particular place in the club for a sustained period is capable of amounting to the occupation of a portion of the land. It is a right given to the exclusion of all others and an individual putting it there is occupying the land by the machine. This is quite different from sitting at a table to drink a cup of coffee or wander in or across a park or a golf course or from an usherette who walks round a cinema selling chocolates from a tray. This may to some extent be a question of fact and degree and I accept the distinction between owning a debenture or box at the Albert Hall or the Royal Opera House and merely taking a seat for one performance at a film.

    27. The fact that the machinery may under the contract be moved, even if this rarely happens, does not invalidate the conclusion that the exclusive occupation of a piece of land by a machine for a period can amount to the letting of immovable property. It merely means that concensually the land occupied has been varied.

    28. Nor do I think that the fact that payment is by a share of profits rather than by a rent fixed weekly or monthly prevents the service from falling within the exemption either as worded in the Directive or the Statute. The profits may vary from day to day but they will still be earned on a day to day basis whilst the machine occupies the space.

    29. The fact that the right to sell cigarettes is an exclusive right with a restrictive covenant against letting others bring in cigarettes is I agree important. But it is, as the judge held, a way of making the fact of the occupation of the land more valuable.

    30. Accordingly on balance I agree with the conclusion of the judge and the Court of Appeal. I recognise, however, that this is a debatable issue and that the European Court of Justice has not given a decision which as a matter of interpretation clearly prescribes or indicates what the answer must be. I therefore consider, though it is for your Lordship to decide whether there is one supply (Card Protection Plan Ltd v Customs and Excise Commissioners (Case C-349/96) [1999] 2 AC 601), that it is necessary in order to give judgment in this case, to refer pursuant to the third paragraph of article 234 of the EC Treaty to the European Court of Justice, the following question: Is the grant, by the owner of premises ("the Siteholder") to an owner of a cigarette vending machine, of the right to install, operate and maintain the machine in the premises for a period of two years, in a place nominated by the Siteholder, in return for a percentage of the gross profits of the sales of cigarettes and other tobacco goods in the premises, but with no other significant rights of possession or control than those set out in the written agreement between the parties, capable of amounting to the letting of immovable property within the meaning of Article 13B(b) of Council Directive No 77/388/EEC of 17th May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes; and what are the principles applicable in deciding whether an agreement amounts to the letting of immovable property within such meaning?

    31. I would accordingly adjourn final consideration of the issue in the case until the response of the European Court of Justice has been received.


    32. The first step in deciding the issue arising on this appeal is to identify the essential or dominant characteristic of the rights granted by the site owner to the tobacco company. Is this the right to sell cigarettes at the premises, the use of the vending machine being no more than an ancillary feature? Or is it the right to instal a cigarette vending machine on the premises, for the purpose of selling cigarettes?

    33. I prefer the latter characterisation of the transaction. The essence of this arrangement is, as the agreement provides, that the site owner grants to the tobacco company the 'right and licence to provide, install, operate and maintain' the machine at the premises. In return, the site owner receives the provision of a facility for his customers on his premises, together with the right to be paid a proportion of the gross profit of the cigarettes sold from the machine each month. Clearly, the purpose for which Sinclair Collis Ltd is permitted to instal the machine is to enable Sinclair Collis Ltd to sell cigarettes. That is its commercial objective. But the existence of this objective does not of itself resolve the question whether the means chosen to achieve that objective comprises a letting of immovable property. The commercial motivation is not determinative of the nature of the service supplied. For instance, if a hotelier permits a tobacco company to open a small shop or a tiny kiosk in the hotel foyer, the commercial objective is the same as with the installation of a vending machine. The tobacco company wishes to sell cigarettes, and the hotelier wishes to provide a facility for hotel guests, and to be paid for the opportunity he provides for the tobacco company. But in such a case, prima facie the transaction would fall within the letting of immovable property exemption.

    34. The next, and crucial, step is to decide whether the right to instal the vending machine constitutes a 'letting of immovable property'. The machine is sited on the site owner's premises. It occupies space on those premises. Moreover, unlike the motorist who drives along a toll road or over a toll bridge, or the golfer who plays round a golf course, the vending machine is located on the site 24 hours every day. The use made of the premises by the tobacco company is not intermittent. But those features are not conclusive. Occupation of space is a feature of every physical object. The grant of a right to occupy space by placing an object on the supplier's property is not conclusive even if the right is of some duration. If it were, a licence to place any object on the licensor's property would be within the exemption; for instance, permission to display a picture for sale on the walls of a picture gallery. That cannot be correct. Such a wide interpretation of the exemption would conflict with the established Community jurisprudence that exemptions are to be strictly construed.

    35. 'Leasing or letting of immovable property' in article 13B(b) of EC Directive 77/388/EEC (the Sixth Council Directive) is a Community concept. The concept has not been comprehensively defined in Community jurisprudence, but it does include what in English law is characterised as a licence to occupy land. In Sweden v Stockholm Lindopark AB (Case C-150/99) [2001] STC 103, 113, para 38, Advocate General Jacobs described the salient and typical characteristics of a lease or let. He said that it necessarily involves the grant of some right to 'occupy the property as one's own and to exclude or admit others, a right which is, moreover, linked to a defined piece or area of property'. With this description in mind, I think Mr Simpson, the chairman of the Manchester VAT and Duties Tribunal, hit the nail on the head. He observed that the real subject of the agreement is the machine and not the use or enjoyment of the land on which it stands or the airspace which it occupies for the time being. The parties wish to place the machine where it will maximise sales, preferably where customers will pass it. The machine will be placed where the site owner's staff can keep an eye on it and prevent vandalism and theft and the use of it by children. But subject to this, and to statutory fire and safety requirements, the position in which the machine is located does not much matter to either party. With all respect to the judge and the Court of Appeal, I agree with the chairman of the tribunal that, despite the static nature of the machines, such a licence is more naturally to be regarded as a licence to use land rather than a licence to occupy land.

    36. For these reasons, for my part I would allow this appeal. However, since the majority of your Lordships consider there is a point of principle on which the opinion of the European Court of Justice should be sought, I agree that a question should be referred accordingly.