|Judgments - The Commissioners of Customs and Excise v. Sinclair Collis Limited
37. I have had the advantage of reading in draft the speech of Lord Slynn of Hadley. For the reasons he gives I would make the order which he proposes.
LORD MILLETTMy Lords,
38. The company is a member of the Imperial Tobacco Group. It owns and operates coin-operated cigarette vending machines in public houses, clubs and hotels. For this purpose it enters into a standard form of agreement with site owners under which each site owner grants to the company (i) the exclusive right "to provide, install, operate and maintain" machines for the sale of cigarettes at his premises and (ii) the exclusive right to supply him with cigars, cigarette papers and other tobacco products for retail sale by him. In return the company pays to the site owner a share of the profits from the sale of tobacco products.
39. The question in this appeal is whether the supply which the site owner makes to the company falls within article 13B of the Sixth Council Directive as "the leasing or letting of immovable property", an expression which is transposed into domestic law as "a licence to occupy land" in Part II Group 1 of Schedule 9 to the Value Added Tax Act 1994. If it does, the supply is an exempt supply. The company contends that it is not an exempt supply; the commissioners contend that it is. This apparent paradox is due to the unusual circumstance that the company is not concerned in the proceedings as the taxpayer but is acting on behalf of the site owners. They are the relevant taxpayers; and what is in issue is not the company's liability to pay output tax on the supply of tobacco products, which is beyond dispute, but the deduction of input tax by the site owners.
40. The European Court of Justice has consistently held that the exemptions contained in article 13 of the Directive are to be narrowly interpreted since they constitute exceptions to the general principle that VAT is to be charged on all services supplied by a taxable person for a consideration. It is common ground that the standard form of agreement between the site owner and the company does not constitute the grant of a lease. The question, therefore, is whether it constitutes "a letting of immovable property."
41. This concept must be given a community interpretation but is not defined in the Directive. The recent case law of the European Court of Justice, however, provides some guidance to its meaning. The following propositions may be derived from recent decisions of the court:
(1) Agreement as to the duration of right of enjoyment of the immovable property is an essential element of a contract to let, and the duration of the right is a factor which the parties should take into account, in particular as a criterion for determining the price: (EC Commission v United Kingdom (Case 359/97)  STC 777, p 805, paras 68 and 69 of the judgment of the court; and Sweden v Stockholm Lindopark AB (Case C-150/99)  STC 103, 113, para 37 in the opinion of the Advocate General and p 126, para 27 in the judgment of the court.)(2) It is a salient and typical characteristic of a letting of immovable property that it necessarily involves the grant of a right to occupy a defined area of property and to admit or exclude others: (Sweden v Stockholm Lindopark AB at pp 113 and 114, paras 38 and 40 of the opinion of the Advocate General; Commissioners of Customs and Excise v Mirror Group Newspapers plc (Case 409/98) (Unreported) at para 25 in the opinion of the Advocate General). (3) The characteristics of a letting must predominate in the contract. Where the use of the property is of secondary importance, this requirement is not satisfied. Accordingly the purpose of the contract and the importance of the use of the property to the recipient of the supply are relevant in determining whether the contract should be characterised as a letting of immovable property: (EC Commission v United Kingdom at p 791, paras 76 and 77 in the opinion of the Advocate General; Sweden v Stockholm Lindopark AB at p 126, para 26 in the judgment of the court; Faarborg-Gelting Linien A/S v Finanzamt Flensburg (Case 231/94)  ECR 1-2395, 2411, para 12 in the judgment of the court).
42. The VAT Tribunal held that the use or enjoyment of the land was of secondary importance to both parties, and that the real subject of the agreement was the machines and not the use or enjoyment of the land on which they stood for the time being. I agree with this assessment. I do not accept the contrary proposition that the company's right to sell cigarettes was merely a consequence of its right to place machines on the site owner's premises. That puts the case the wrong way round. The introduction of vending machines onto the premises was merely the means by which the parties achieved their joint objective of selling the company's cigarettes to the site owner's customers.
43. On appeal the judge (Lightman J) and the Court of Appeal concentrated on the supply made by the site owner to the company and identified two elements: (i) the right to instal, operate and maintain machines at the premises and (ii) a restrictive covenant not to allow competition in the sale of tobacco products at the premises. The parties had conceded that there was a single supply, and accordingly the question was which of the two elements was dominant. Understandably, and in agreement with the judge, the Court of Appeal held that the first was the dominant element. More doubtfully, perhaps, it held that the grant of the right to instal, operate and maintain machines constituted a letting of immovable property or a licence to occupy land. In reaching this conclusion the court was influenced primarily by the fact that each machine occupied the space where it was placed from time to time, and that its occupation of the space endured for the whole period of the agreement.
44. I have reached the opposite conclusion. In my opinion the rights which the site owner grants to the company do not amount to a letting of immovable property or a licence to occupy land. The features of the agreements between the company and the site owners which lead me to this conclusion are these. Each agreement is described as containing, not the terms of a lease or letting of any defined part of the premises of the site owner, but the terms on which vending machines may be positioned on his premises. The premises in question are shortly described (by no more than an address) in a schedule to the agreement and a single agreement may provide for machines to be installed in several different premises belonging to the same site owner. There is no restriction on the number of machines which may be installed in any one premises. In the case of a public house, for example, it is not unlikely that one machine will be installed in the saloon bar and another in the public bar. The agreement does not mention the number of machines which it covers; this is a matter to be determined later by agreement between the site owner and the company.
45. The agreement does not identify any defined areas, or even the rooms, where machines may be installed. The positioning of the machines (which are on wheels) is determined in the first instance by the site owner who is to select the sites most likely to generate the maximum sales; but he must not unreasonably refuse his consent to the selection of another site which the company considers to be more likely to generate maximum sales. The company, its employees and agents are given an express right of access to the machines at all reasonable times. The consideration payable by the company for the grant of these rights consists of a share of the gross profits of the products sold by the machines.
46. Most importantly, in my opinion, while the machines remain the property of the company, it has no control over access to them. Once they are installed they are, like other fixtures and fittings on the premises, in the custody or possession of the site owner, who undertakes not to interfere with them and to take all reasonable steps to protect them from theft and vandalism. The company, its employees and agents, have merely rights of access to the machines to enable them to attend to, service, maintain and repair them. Even the stocking of the machines is carried out by the site owner. The company is responsible only for supplying the site owner with the necessary stock.
47. In my opinion this is far removed from the letting of land. It would not be appropriate to describe the small and undefined parts of the premises on which machines are stationed at any given moment as constituting the subject matter of the agreement. The total area occupied by machines is dictated by their number and dimensions. The agreement is concerned with the installation and operation of income-producing machines, not with the use and occupation of the premises in which they are installed.
48. As I have pointed out, each machine remains the property of the company but once installed it is in the custody and possession of the site owner. The floor under the machine is, of course, occupied by the machine, but it is impossible to describe the company as in occupation of this area. It cannot enter the area itself or admit others to do so without moving the machine, and since the subject matter of the alleged letting is the space occupied by the machine from time to time, this means that the company cannot itself enter the subject matter of the letting or admit others to do so at all. The site owner, by contrast, is in possession not only of the machine but of the floor underneath it. If he wishes to clean or renew the carpet he is free to do so and to move the machine temporarily for this purpose.
49. The company cannot sensibly be described as occupying any part of the premises by its machine. Such a concept can hardly apply where the part of the premises in question has no independent existence of its own, being defined by the dimensions of the machine and its location from time to time. There is in my view no close analogy with a kiosk or shop counter which is capable of separate occupation by a lessee and his licensees. The agreement between the company and the site owner is not, in my view, an agreement for the letting of defined areas of land with a right to place machines on them, but a right to bring machines onto the site owner's premises and place them in suitable positions there. The site owner remains in sole occupation of the whole of his premises including the areas from time to time occupied by machines. The company for its part retains the property in the machines and has rights of access to them, but is given no right to occupy any part of the premises.
50. I would allow the appeal and hold that the supply which the site owner makes to the company is not a letting of immovable property or a licence to occupy land and is accordingly not an exempt supply. I would not refer the case to the Court of Justice, not because I consider the outcome to be acte claire, but because I consider that the difficulty does not arise from the meaning of the Directive, but lies in the application of the Directive to the facts, which is a question for national courts. But your Lordships take a different view, and I agree that in those circumstances there should be a reference.
LORD SCOTT OF FOSCOTE
51. EC Directive 77/388/EEC (the Sixth Council Directive) provides under article 2 that the supply by a taxable person of goods or services for consideration attracts value added tax (VAT). The Directive provides for various exemptions to be granted. Article 13B(b) requires member states to exempt, among other transactions, "the leasing or letting of immovable property".
52. The article 13B(b) exemption from VAT is subject to a number of permitted exclusions. These exclusions, ie transactions which member states can exclude from the exemption and which, therefore, may attract VAT, include, among other things, the provision of hotel accommodation, the letting of sites for parking vehicles, and the hire of safes.
53. In order to implement the provisions of the Sixth Council Directive, the Value Added Tax Act 1994 was enacted. Section 1(1) provides, so far as relevant to this appeal, that:
Section 5(2)(b) provides that:
54. Part II of Schedule 9 to the Act sets out the exemptions from VAT foreshadowed by article 13B of the Directive. Paragraph 1 of Schedule 9 specifies:
This is, plainly, intended to reflect the reference in article 13B(b) to "the leasing or letting of immovable property".
55. The exclusions from the paragraph 1 exemption are set out in a number of sub-paragraphs to paragraph 1. The content of these is of some assistance in indicating what Parliament had in mind in exempting "any licence to occupy land". The exclusions, more or less mirroring the exclusions referred to in article 13B(b), include:
56. So it seems that Parliament thought that taking a room for a night in a hotel, or reserving car parking space, or taking a seat at a theatre, sports ground etc would, or at least might, be regarded as involving the grant of a licence to occupy land.
57. It is common ground that the 1994 Act must be construed, so far as possible, consistently with the Sixth Council Directive, the provisions of which it was enacted to implement. It is common ground, also, that the terms used to specify the exemptions provided for by article 13B, and, accordingly, the terms of the exemption in paragraph 1 of Part II of Schedule 9 to the 1994 Act, are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person (see EC Commission v United Kingdom (Case C-359/97)  STC 777, 789, para 63).
58. The issue arising on this appeal is as to the width to be given to the words "any licence to occupy land ". The explanation for their inclusion in the paragraph 1 exemption is that the English law concept of a "letting" or a "leasing" as necessarily involving the grant of an interest in rem in land is not reflected in the legal systems of most of our Community partners. The words were included in order to try and achieve consistency across the Community and to implement, using English law terminology, the article 13B exemption relating to "the leasing or letting of immovable property". It follows, in my opinion, that the words should not be construed so as to include the grant of rights that would not, for the purposes of the Directive, constitute "the leasing or letting of immovable property".
59. The facts of the case are not in dispute.
60. The appellant before the House, appellant also in the Court of Appeal, is a member of the Imperial Tobacco Group. It sells cigarettes through coin-operated vending machines placed in public houses, hotels, clubs and leisure centres. The cigarette machines, which may be free standing or fixed to a wall, are installed with the permission of the proprietor of the premises in question. The terms on which the permission is granted are set out in a written agreement. The written agreements entered into by the appellant in respect of the various premises where its machines are installed differ in detail but all have broadly the same legal effect. The material terms of these agreements are conveniently set out in the judgment of Ward LJ:  STC 701. The important features of these terms are, for present purposes, the following:
(1) The owner of the machine, ie the appellant, is given the right "to provide, install, operate and maintain the machine at the premises of the siteholder".
(2) The siteholder nominates where the machine is to be placed. He must select the site "most likely to generate the maximum sales" of cigarettes.
(3) In return for allowing the machine to be placed in the premises, the siteholder receives a proportion (40% in the present case) of the gross takings of the machine.
(4) The appellant is responsible for installing and maintaining it and for keeping it stocked with cigarettes.
(5) The machine, the cigarettes inside it and all cash inside it are the property of the appellant and the siteholder is required to allow the appellant access to the machine at all reasonable times.
(6) The siteholder agrees not to interfere with the machine and to take all reasonable steps to protect it.
(7) The right granted is an exclusive one. No rival machines dispensing similar products are to be installed on the premises.
(8) It is expressly agreed that nothing in the agreement should be taken to grant the appellant any interest in the premises other than a licence.
61. The issue in the case is whether an agreement containing the terms I have described confers on the appellant a "licence to occupy land " within the meaning of those words in paragraph 1 of Part II of Schedule 9 to the 1994 Act. If the agreement does confer a "licence to occupy land" then the "supply of services" which the agreement constitutes under section 5(2)(b) of the Act is exempt from VAT. Surprisingly, to me at least, it is the commissioners who are arguing that the supply is exempt, and the appellant who is arguing, for the benefit as I understand it, of the siteholder, the proprietor of the premises, that the supply attracts VAT. I need not explain why it is that these stances have been adopted. It suffices to say that there are, apparently, substantial commercial reasons for them.
62. Both the courts below found in favour of the commissioners and held that the agreement did grant a licence to occupy land. Lightman J, who reversed the Manchester VAT and Duties Tribunal, posed what he described as "the critical question, namely what upon the true construction of the agreement is the siteholder agreeing to supply?"  STC 841, 848. He said: "The answer is clear; it is a licence to keep a machine on the site and it is in return for that licence that [Sinclair Collis Ltd] has agreed to pay over a share of the profits". He reformulated his answer later in his judgment, at p 849: "The answer is clear, namely a licence to occupy land together with certain ancillary or incidental rights". So he held the supply to be exempt.
63. The Court of Appeal agreed. Ward LJ posed broadly the same "critical question" as Lightman J had done. He asked  STC 701, 706:
His answer, expressed in paragraph 4 of his judgment, was that
64. This breakdown of the contractual advantages obtained by the appellant into two separate promises led to a discussion as to which of the two was dominant. Ward LJ concluded, at p 708, as I would conclude, that the restrictive covenant was "merely ancillary to or an integral part of the grant to place the machine on the premises".
65. His conclusion on the question whether a licence to place a cigarette vending machine in a public house was a "licence to occupy land" was expressed in paragraph 9 of his judgment. He said, at pp 709-710:
66. I respectfully agree with Ward LJ that the first question is "what was the siteholder supplying in consideration of taking a share in the profits of cigarette sales". I agree, also, that it would be unacceptably artificial to split up this fairly simple agreement into two parts in order to try to apportion part of the consideration to an exempt supply and part to a non-exempt supply. And I agree that, taken as a whole, this agreement should be regarded as entered into for the purpose of enabling the appellant to place a vending machine in the siteholder's premises. It is an agreement for the grant of a licence (see British Airports Authority v Customs and Excise Commissioners  STC 36). But is the licence a "licence to occupy land" within the meaning of those words in the 1994 Act?
67. It is clear as a matter of common sense as well as of authority that not all licences that transform a use of the land of another from what would otherwise have been trespass into a lawful use are to be regarded as licences to occupy land. The commissioners accept, rightly in my view, that the grant of a right to place advertisements or posters on a wall is not the grant of a licence to occupy land for VAT purposes. In Staatssecretaris van Financien v Coffeeshop 'Siberie' (Case C-158/98)  STC 742 the European Court held that the hiring out of a table in a coffeeshop from which the customer could make sales of narcotics to members of the public was a supply of services that attracted VAT. There was no suggestion that the hiring of the table might fall within the article 13B(b) exemption as a "leasing or letting of immovable property". For our domestic law purposes the hiring of the table would constitute a grant of a licence but, in my opinion, plainly not a "licence to occupy land".
68. In my opinion, in order for an agreement to confer a "licence to occupy" for VAT exemption purposes, the relationship between the licensee and the land must be such as to fall within the concept of occupation. "Occupation" may, of course, have different meanings in different contexts. For present purposes, however, if the occupation is to attract VAT, it needs a quality that allows it to constitute a "leasing or letting" of the land within the meaning of those words in the Directive. The characteristics of "leasing or letting" must be present. In EC Commission v United Kingdom (Case C-359/97)  STC 777,804, para 59, the European Court said:
and, in paragraph 61, that
69. But the court went on to emphasise, at p 805, para 64, as had been stated in a number of previous cases, that:
and, expressly, that:
70. Having made the remarks which I have cited, the European Court concluded, at para 68, that the term "letting of immovable property"
71. The cited passages from the European Court's judgment in EC Commission v United Kingdom  STC 777 may lend themselves to some misinterpretation. The exclusions from the article 13B(b) exemption show a clear and unequivocal intention on the part of the Council that transactions falling within an excluded category should fall outside the VAT exemption. But the exclusions cannot reasonably be supposed to indicate the opinion of the Council that every transaction falling within an exclusion would, had it not been for the exclusion, have fallen within the exemption. The exclusions certainly do show that transactions of the sort described are capable of falling within the exemption, and that it is the intention of the Council that they should not do so. So it is not necessary to ask whether a contract under which a person who takes a bedroom in a hotel is a contract of "letting of immovable property". It might or might not be. The answer would depend on the facts. A contract under which a room were taken for a week might well constitute a letting. A contract under which a room were taken for half an hour so that a man might consort with a lady would, I suggest, be very unlikely to be held to do so. A contract for parking space might entitle the grantee to the exclusive use of a specified parking space. Or it might do no more than entitle him, together with others to whom a similar right had been granted, to enter upon a piece of land and park wherever he could find space to do so. The former might constitute a "letting". The latter arrangement could not possibly be held to do so. In my opinion, the categories of exclusion in article 13B(b) and, for the same reasons, the categories of exclusion in paragraph 1 of Part II of Schedule 9 to the 1994 Act, do no more than indicate types of transaction capable of constituting a "letting" for the purposes of the Directive or of a "licence to occupy" for the purposes of the 1994 Act. Whether, in any particular case, the transaction would, had it not fallen within one of the excluded categories, have fallen within the exemption would have depended on the facts of the particular case. EC Commission v United Kingdom  STC 777 is not, in my opinion, any warrant for treating as a "letting" or as a "licence to occupy" a transaction which would not ordinarily justify being so described.