Judgments - Principal and Fellows of Newnham College in the University of Cambridge (Respondents) v Her Majesty's Revenue and Customs (Appellants)

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28.  I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann. I agree with it, and for the reasons he gives I too would dismiss the appeal.

29.  The question is whether the college remained in “occupation” of the library for the purposes of para 3A (7) of Schedule 10 to the Value Added Tax Act 1994 after granting the lease to the company. If it did, the land is exempt land for the purposes of para 2 (3AA) and the grant of the lease is not to be taken as a taxable supply notwithstanding the college’s election under para 2(1) of the Schedule that its grant of the land to the company was to be a taxable supply. As Lord Hoffmann has explained, the Commissioners have not argued that the transaction was a sham or that the college was abusing the legislative provisions which allow taxpayers who make exempt supplies to opt for taxation in relation to any land. The Commissioners do not seek to uphold the reasoning of the tribunal in so far as it may have been influenced by the fact the college was plainly seeking to avoid tax. Their case is that the exemption was designed to prevent tax avoidance, that it must be strictly construed, and that the disqualification from the exemption which it creates applies here. The scheme that was entered into, which was specific to the use by an academic institution of land for academic purposes, failed to satisfy the conditions of the exemption.

30.  Although the legislative provisions are rather complicated, the issue in the end turns on the meaning that is to be given in this context to the words “in occupation of the land” in para 3A (7). Mr Pleming QC for the Commissioners submitted that they meant that a grantor who was intended or expected at the time of the grant to be physically present on the land was to be taken to be in occupation of it. This reading of the words gave effect to the central policy objective of the VAT system that persons making exempt supplies should not recover VAT incurred by them in the course of their businesses. The college was in occupation of the land by means of the physical presence in the library of its fellows, students, staff and other persons authorised by the college to be there. This was part of the package of the exempt services that were provided to them by the college. The fact that they were there in the enjoyment of those services was sufficient. It would be wrong in this context to confine the concept of occupation to the meaning that would be given to it in other contexts, such in the phrase “licence to occupy” as used in item 1 of Group 1 in Schedule 9 to describe exempt supplies in relation to land.

31.  I do not think that there is much doubt about what the word “occupation” means, although it may be more difficult to apply its ordinary meaning to the facts in some contexts than it is in others. In its ordinary meaning it requires more than just a right to use the land or to enjoy the facilities that are to be found there. Physical presence is an essential element. But there is more to it than that. It requires actual possession of the land, and the possession must have some degree of permanence. In the Court of Appeal [2006] STC 1010, para 36, Chadwick LJ drew on the guidance that the House derived from decisions of the European Court of Justice about the meaning to be given to the concept in the context of the Sixth Directive in Customs and Excise Commissioners v Sinclair Collis Ltd [2001] STC 989. He said that to be in “occupation” of land for the purposes of para 3A(7) requires more than a right to use that land. He then added this important sentence:

“It requires some degree of control over the user by others - that is to say, some degree of control over what those who are not also in occupation of the land can do on the land.”

32.  The sentence which I have quoted directs attention to what I would regard as the central issue in this case. The question is not whether the college is in control of the company. It is whether the college is to any degree in control of the use of the land. This is not an insignificant test. Para 3A(13) of Schedule 10 provides that, for the purposes of the paragraph, a person is to be taken to be in occupation of any land whether he occupies it alone or together with one or more other persons and whether he occupies all of that land or only part of it. Its effect is to remove the requirement of exclusive occupation which is usually inherent in a grant of an interest in or a right over land or a licence to occupy. The usual requirement of exclusive occupation would be too easy for tax avoidance. So occupation by the college to any extent will be sufficient to disqualify the scheme from the exemption.

33.  The college and the company both, to some degree, have a presence on the land. The land is the building that contains the library. The college, through its members, goes to the library to make use of its services. The company, through the librarian and other members of the staff seconded to it by the college, provides the services that are available there. The lease gives the company the exclusive right to occupy the land, and the college sold all its books and other library assets to the company. The company entered into a back-to-back agreement to provide those books on hire to the college or other persons or authorities nominated by it, along with other incidental services. The arrangements that it entered into between the company and the college for the use of the library must be seen as a whole. The question which they give rise to is this. Was there a sufficient element of control by the college over access to and use of the land to show that, to some degree at least, the college was in occupation of it?

34.  As Lord Russell of Killowen observed in Westminster City Council v Southern Railway Co [1936] AC 511, 529, in every case where there may be a rival occupancy in some person who to some extent may be thought to have occupancy rights over the premises, the question is one of fact. The issue there was whether the railway company or the various companies to whom they were let out were in rateable occupation of bookstalls and other tenements within the area of a railway station. Here too the question is essentially one of fact, once the right test has been identified. And, in contrast to the rating cases, exclusive occupation is not required. Mr Pleming, very properly, did not seek to rely on the decision of the tribunal on the facts, although it was in the Commissioners’ favour. This was because the tribunal may have been unduly influenced by its view that the scheme was an abuse. The Court of Appeal also held that its reasons were unsatisfactory, so it formed its own judgment on the issue. I would be reluctant to interfere with that decision as our function is to deal with issues of law, not issues of fact. But, like Lord Hoffmann, I agree with it.

35.  The Commissioners submit that, if control is an element of “occupation” for the purposes of para 3A(7), a sufficient degree of control was retained by the college by means of the individual members of the college who use the library for study or research and by its librarian and other members of the library staff who run the library. But, as Chadwick LJ pointed out in para 37, the members of the college have no control over access to and use of the library by others. The library is under the day-to-day control of the librarian and her staff, and admission of others is at her discretion and under her control. The college bursar described how the system works in practice in his witness statement. Only persons authorised by her can use the proximity cards that open the doors of the library during staff hours. She can add or remove names from the library’s database. Users who are in breach of the rules of the library may be removed by the library staff, and their authorisation to use it may be withdrawn by the librarian. Members of the college who are present in the library every day have no control over these arrangements.

36.  The contractual position between the college and the company as to the librarian and her staff provides the answer to the question whether the college is in control of these arrangements. Under the secondment agreement the library staff were retained in the employment of the college. This was to maintain their existing employment status, including their membership of the pension scheme. But, as the bursar explained, they are for all practical purposes under the control and direction of the company. The contractual change which this brought about was described in a letter which the college wrote to the librarian when, on the date when the various agreements were entered into, she was invited to accept secondment to the company. She was told that she would resume her duties as librarian for the college on the termination of the secondment, but that during the secondment she was to act as librarian for the company.

37.  The effect of this arrangement was that during the period of the secondment her duties as librarian were to be carried out under the direction of the board of directors of the company. She was to be answerable to the company, and not the college, for the way she controlled access to the library. The Commissioners say that the college retained ultimate control because the librarian and the staff are their employees and because the books were hired back to the college. But access to the books is controlled by the librarian, and the secondment agreement places the day-to-day control over her activities and those of her staff in the hands of the company. The fact that the company is controlled by the college does not permit one to ignore the effect of this agreement. The college and the company are separate entities. I would give all the weight that is due to this concept, which lies at the heart of the entire arrangement. In my opinion the college is not to any degree in occupation of the library.

LORD WALKER OF GESTINGTHORPE

My Lords,

38.  I have the misfortune to differ from the majority of your Lordships as to how this appeal should be disposed of. In view of recent developments in the Court of Justice of the European Communities (see Halifax Plc v Customs & Excise Commissioners (Case C-255/02) [2006] STC 919) the general importance of this appeal has been greatly diminished. It may now be of importance only to the parties. It is not therefore appropriate for me to express my dissent at any length. I will set out my reasons as briefly as possible.

39.  The appeal turns on the correct construction, in its statutory context, of the expression “in occupation of [land and premises]", and its application to the facts of the case (which are not in dispute). That expression has no precise or inflexible meaning and it is used in many different statutory contexts, including rating, tax, occupier’s liability for dangerous premises, and the protection of the rights of tenants and mortgagors. It is in general taken to import an element of physical presence and some element of control over the presence of others. But these generalities are strongly influenced by the statutory context and purpose.

40.  The relevant context in this case is occupation of land and premises for particular business purposes (that is “eligible purposes” within VATA 1994 Schedule 10, para 3A(7) and (9)). The identifying feature of eligible business purposes is that they do not attract exemption from output tax. Exemption is, in this particular context, not a target but something to be avoided, as is more fully explained in the opinion of my noble and learned friend Lord Hoffmann. What Newnham College aimed to avoid, in its skilfully-prepared and carefully-executed plan, was that the College should be in occupation of its new library for its exempt educational purposes.

41.  I would accept, as do the rest of your Lordships, that the meaning of Schedule 10 to VATA 1994 (dealing with the election to waive exemption on a grant of land, or of rights over land) is necessarily connected with, and informed by, the provisions of Schedule 9, Group 1 (general exemption for grants of land, or of rights over land). The jurisprudence of the Court of Justice deals with cases on the borderline between what 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.”

The language is that of Advocate General Jacobs in Swedish State v Stockholm Lindopark AB (Case C-150/99) [2001] STC 103, para 31, a case about a commercially-run golf course. But the distinction becomes much more elusive and problematical, I think, in a case like this, in which the taxpayer has chosen to carve out of the built environment of the College (a composite entity used for the many different activities which contribute to residential tertiary education) a part used for a single activity (selecting and reading books and other written research materials). The plan which the College adopted was artificial, regardless of its admitted intention of avoiding tax, because it tried to dissect out one important constituent part of its functional land and premises—the library, of which the College is justly proud—and to separate its occupation from that of the rest of the College buildings.

42.  The artificiality is important because when it comes to applying the expression “in occupation of” to a particular set of facts, its meaning is also strongly influenced by the nature of the premises in question. Acts which amount to occupation of a stretch of entirely undeveloped land (perhaps a protected site of special scientific interest as in Southern Water Authority v Nature Conservancy Council [1992] 1 WLR 775) are obviously of a different quality from those which amount to occupation of an inner-city flat. Moreover some premises are designed for particular specialised purposes (unmanned bank premises were mentioned in argument, to which one might add unmanned launderettes and indeed unmanned public lavatories). Such premises may be physically occupied, to all outward appearances, only by the customers or members of the public, and the element of control may be correspondingly tenuous.

43.   The College’s plan was a step which no academic institution—especially one as illustrious as Newnham—would take lightly, and the evidence indicates that the arrangements were such as to secure (reassuringly, no doubt, for the College’s Governing Body) that in practice everything would continue as before. Undergraduate and graduate students (and from time to time, no doubt, fellows) would continue to use the library as before, under the supervision of library staff chosen and employed by the College, as before, though the library staff were seconded to Newnham College Library Company Limited (“the Company”); the library was still under the control of the Governing Body, as before, although that control was formally exercised through the College’s controlling shareholding in the Company, and its control, by three very senior members of the College, of the Company’s board of directors.

44.  That is to my mind the fatal difficulty in the College’s case. It is a body incorporated by Royal Charter, and its corporators include some junior, as well as senior members of the College. Students who are not corporators are still in a real sense members of the College: see Oakes v Sidney Sussex College, Cambridge [1988] 1 WLR 431, 440. Students who use the library do so as members of the College. They are no doubt also contractual licensees of a sort, but “customers” would not be an appropriate term, any more than it would be in relation to members of the Athenaeum or the Garrick when they are enjoying the facilities of those members’ clubs (the golfers at the Stockholm Lindopark, by contrast, were customers). In my view the College occupied the new library immediately before the lease was granted on 4 March 2004, and it continued to occupy it by the continuing physical presence in the library, during its long opening hours (7 am to 1 am) of a fluctuating population of its senior and junior members and staff. The staff (the visible means by which control was exercised over persons using the library) continued to be employed by the College, although they were seconded to the Company. That secondment may have meant that they acted on behalf of the Company (I am less clear about that than my noble and learned friend Lord Hoffmann) but in any event it did not stop them acting on behalf of the College also.

45.  That is not to say that the Company, or the lease and the contractual arrangements which the College made with it, were shams, or that the Company’s separate juristic personality is to be disregarded. The Company is a separate legal person, and the lease and contractual arrangements created real legal obligations. It appears from the evidence that those obligations have been meticulously observed, with no corners cut. But (bearing in mind para 3A(13) of Schedule 10) I do not see that as excluding continuing control by the College. In the field of educational charities the Court has been inclined to minimise the distinction between a body incorporated for charitable purposes and a company whose share capital is held on charitable trusts: see Girls’ Public Day School Trust Ltd v Ereaut [1931] AC 12, Re Girls’ Public Day School Trust Ltd [1951] Ch 400 (where the preference shares were held on non-charitable trusts) and Abbey Malvern Wells Ltd v Ministry of Local Government and Planning [1951] Ch 728, especially the observations of Danckwerts J at p738-739. Those observations are relevant here. The principal, vice-principal and bursar of the College could act as directors of the Company only if they are confident, as no doubt they are confident, that no conflict of interest could ever arise between the College and the Company. The Company is a separate entity, but its interests coincide with those of the College; it is controlled by the College; and the College, through the Company, exercises control over the library.

46.  For these reasons I would, for my part, allow the appeal.

LORD MANCE

My Lords,

47.  I have had the advantage of reading in draft the speeches of my noble and learned friends, Lord Hoffmann and Lord Hope of Craighead, with which I find myself in full agreement. Their reasoning also substantially corresponds with that in the judgment given in the Court of Appeal by Chadwick LJ, with which I also agree.

48.  The starting point is that there is an important distinction between occupation of land and merely using it, and the appeal turns upon whether the College as well as the library company can be said to have been in possession of the library. I agree with Lord Hoffmann and Lord Hope that it has not been shown to be.

49.  I have considered, but am not persuaded by, the contrary views advanced in the opinions prepared by my noble and learned friends, Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury. The Commissioners’ primary case before your Lordships’ House was that the College was in occupation of the library through its fellows, students and staff using the library and through the College’s employment of the library staff seconded to the library company. Before the Court of Appeal it was also argued that, by virtue of its share ownership and membership of the Board of the library company, the College had absolute control over the library company and “thus …. occupies the library through the very fact of [the library company’s] presence". This alternative argument was not renewed before your Lordships. Instead it was simply argued that, if and so far as a degree of control was necessary for occupation, the College had such control through (a) the termly meetings between its executive committee and the library users’ group, (b) the incurring of expenditure on books performed by the seconded librarian in consultation with the College’s director of studies and (c) the running of the library by staff employed by the College and seconded to the library company.

50.  I am unable to accept the argument that the identity of the interests of the College and the library company and their respective staffs should in these circumstances be treated as sufficient to justify treating the College as in possession of the library. I am equally unable to accept the more detailed and fact-intensive argument that a combination of factors, all essentially related to the closeness of the relationship and cooperation between the College and the library company, mean that the former should be treated as sharing possession with the College. As Lord Walker observes, all the indications are that the terms of the agreements between the College and library company were meticulously observed.

51.  Under those terms, the library was leased to the library company and was occupied and administered by the library company through the seconded staff, while the library company provided services to the College. The services included the provision on hire to the College “upon the terms and conditions from time to time in force” of the library books which were sold by the College to the library company. The reference to “terms and conditions from time to time in force” must be to the terms and conditions, including those for use of the library, set from time to time and administered by the librarian on behalf of the library company. I do not see the agreement for “hire” of the books (a term which appears itself to have been used with a tax advantage in mind, which may or may not be achieved) as amounting to more in reality than an agreement to make the books available under ordinary library conditions, set by the library company.

52.  The library company’s separate agreement to “manage” the College’s rare books also appears to me of no real assistance on the question whether the College was in possession of the library. This is so even apart from the fact that the rare books were kept in the Katharine Stephen Room, which was not, it appears, part of the library leased to the library company, since the agreement for their management contains express permission by the College to the library company “to have such access to the Katharine Stephen Room as is necessary to fulfil its obligations” to manage the rare books in that room.

53.  For all the reasons contained in the speeches of Lord Hoffmann and Lord Hope, together with these short supplementary reasons, I too would dismiss this appeal.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

54.  I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hoffmann, and I gratefully adopt his description of the relevant legal and factual background.

55.  As he explains, there are two issues which divide the parties on this appeal. The first issue is one of statutory interpretation, namely the meaning of the expression “in occupation of the land” in para 3A (7) of schedule 10 to the 1994 Act. The second issue, which turns on the facts of this case, is whether the college has, since the completion of the lease, been “in occupation of” the library for the purposes of para 3A (7).

56.  As to the first issue, I agree with all your Lordships that, for the reasons given by Lord Hoffmann, the words “in occupation of the land” should be interpreted in accordance with the principles laid down by the European Court of Justice and the majority of this House in the Sinclair Collis case, [2003] STC 898 [2001] STC 989. “Occupation” can have a variety of different meanings, some of which can vary quite subtly from others, and its precise meaning in any case is thus particularly prone to be governed by its context. This reinforces what appears to me to be a sound prima facie view, namely that the draftsman of para 3A(7), and indeed of various other paragraphs in schedule 10, intended that “occupy", and derivative nouns verbs and adjectives, should have a consistent meaning when used in connection with the “land exemption” from VAT, the issue with which this case and a number of other cases, such as the Sinclair Collis case, have been concerned.

57.  More particularly, the word “occupy” and its derivatives should be given a consistent meaning throughout schedule 10. Paras 5(1) and (5) both refer to the granting of “an interest in, right over or licence to occupy". That is precisely the expression used in Item No 1 of “Group 1 - Land” in part 2 of schedule 9, which was under consideration in the Sinclair Collis case. Further, the draftsman used the word “occupation” in para 5(1) - and “occupying” in para 5(5) - and it is unlikely that “occupation” - or “occupying” - and “occupy” were intended to convey different concepts in the same sub-paragraph. If “occupation” has a particular meaning in para 5(1), it is unlikely to have a different meaning in para 3A(7). This conclusion is also supported by the contrast between “occupation” and “use” in para 5(1), and in other paragraphs of schedule 10.

58.  I turn to the second issue, namely whether the college is indeed “in occupation of” the library. I find the resolution of that issue is difficult, and this is probably attributable to three factors. The first is the artificiality of the arrangements entered into between the college and the company. There can be no question but that the unusual nature of these arrangements arises because they were constructed and drafted (perfectly properly) with a view to achieving a substantial tax benefit for the college. Their almost palpable artificiality makes it hard to work out their practical and legal consequences. Secondly, as Lord Hoffmann points out, your Lordships must proceed on the basis that the principle laid down by the European Court in the Halifax case does not apply, although, at least on the face of it, as Mr David Milne QC for the college engagingly accepted, the Commissioners would appear to have a very strong case for applying that principle in the present case. Thirdly, (presumably because this is the point of principal concern to them) the Commissioners’ argument concentrated on the first issue, namely the meaning of “in occupation of the land", rather than on what appears to me to be the much more difficult issue, namely whether the college is “in occupation of” the library.

 
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