This is a chapter from the Bloomsbury Professional looseleaf VAT on Construction, Land and Property, which is a practical and comprehensive guide for anyone concerned with property or construction. It covers general VAT issues from a property and construction perspective, including detailed chapters on partial exemption, the Capital Goods Scheme and issues with planning and avoidance. One section deals specifically with the rules for property, the scope of exemption, the transfer of a going concern, non-supplies and forms of property ownership. The special rules on dwellings, residential and charity buildings are also dealt with, plus the VAT issues for businesses involved in property activities such as housebuilding, purchases and sales, land ownership and hotel and leisure activities.
Table of Contents
The Directive and UK law; land/ immovable property; types of transaction; interests in land; rights over land; licences to occupy; exceptions to exemption; other exemptions
Main references: Directive, Article 135; VAT Act 1994, Sch 9 Group 1; HMRC's Notice 742 (Land and property) and VAT manual 'Land and Property'.
UK law is increasingly interpreted in terms of the Directive, and there are areas where the UK's approach is questionable. This chapter attempts to look at the European and UK rules together.
The chapter covers the following:
the overall scope of the exemption under the Directive and UK law (B1.2 and 3);
the meaning of land/immovable property (B1.4);
the types of transaction covered by exemption – in UK terms, a grant assignment or surrender (B1.5);
legal interests in land – freeholds and leases (B1.6);
other interests in land (B1.7);
rights over land (B1.8)
licences to occupy land (B1.9);
the exceptions to exemption under the Directive and UK law (B1.10);
new buildings and civil engineering works (B1.11);
parking (B1.12) and similar facilities for boats and aircraft (B1.13);
storage facilities (B1.14);
facilities for hairdressers (B1.15);
the other, limited, exemptions in this area (B1.16).
Exemption might be overridden by:
the specific exceptions noted in B1.10;
the option to tax (Chapter B2);
treatment as a transfer of a going concern (Chapter B4);
the zero-rating for dwellings and some residential and charity buildings (Chapter C1);
the standard-rating on a change of use of some residential and charity buildings (C10.4).
As a basic principle, any property transaction within the UK's property exemption should fall under one of these headings. This is, however, subject both to supposedly transitional measures, allowing exemption to be retained for the time being, and to further optional provisions in Article 15(2) of the Directive.
Member States shall exempt the following transactions:
(j) the supply of a building or parts thereof, and of the land on which it stands, other than the supply referred to in point (a) of Article 12(1);
(k) the supply of land which has not been built on other than the supply of building land as referred to in point (b) of Article 12(1);
(l) the leasing or letting of immovable property.
The following shall be excluded from the exemption provided for in point (l) of paragraph 1:
(a) the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites;
(b) the letting of premises and sites for the parking of vehicles;
(c) the letting of permanently installed equipment and machinery;
(d) the hire of safes.
Member States may apply further exclusions to the scope of the exemption referred to in point (l) of paragraph 1.
the supply needs actually to be a leasing or letting (see B1.5.2)
the subject matter needs to be immovable property (B1.4), and
the transaction needs not be caught by one of the exclusions in Article 135(2) (B1.10).
The final sentence of Article 135(2), referred to as the 'tailpiece', allows Member States to add further exclusions of their own choosing, but possible limits to this discretion are considered in B1.10.1.
But to the extent that Member States have not chosen to limit the exemption, the ECJ has held that it has an EU-wide meaning, independent of national land law.
B1.2.3 Whilst 'leasing or letting' covers revenue transactions, the 'supply' of land or buildings in Article 135(1)(j) and (k) would seem to refer to capital transactions – to outright disposals including, for example, the sale of a leasehold interest. HMRC, on the other hand, maintain that 'supply' here refers only to the freehold or equivalent, so that if the disposal of a leasehold is exempt, this must be as 'leasing or letting'.
There is perhaps some support for HMRC's position in Lubbock Fine (Box B1.5B), where the ECJ took a broad view of 'leasing or letting', and so did not need to consider whether the transaction was also a 'supply' of the building. The Court's Advocate General had, however, rejected this contention, although not entirely convincingly (again, see Box B1.5B).
The exemptions in the Directive exclude supplies of new buildings and of building land, which are therefore supposed to be taxable. This is achieved by means of cross-referencing to the provisions in Article 12(1) about what is a taxable person (see A2.6.3). Older Member States, such as the UK, do however have the benefit of transitional provisions here.
For new buildings, Article 371 allows these countries to retain exemption for the time being. The UK has not chosen to do this. It does, however, only apply the compulsory taxation of new buildings to freeholds, in line with HMRC's belief that 'supply' only refers to freeholds anyway. There is more about this in B1.10.1 and B1.11.
As regards building land, Article 371 allows the older Member States to retain exemption, and the UK has chosen to do so. This is discussed in B1.10.1.
Unlike for leasing and letting, Member States have no discretion to introduce further exclusions of their own, so that they are required to have an exemption for the supply of older buildings, and of land that is not building land. Article 370 does, however, allow older Member States to retain taxation of non-new buildings in some circumstances.
Member States may regard the following as tangible property:
(a) certain interests in immovable property;
(b) rights in rem giving the holder thereof a right of use over immovable property;
(c) shares or interests equivalent to shares giving the holder thereof de jure or de facto rights of ownership or possession over immovable property or part thereof.
This means (via Article 14) that they can be treated as supplies of goods, and it seems likely that this in turn means that Member States that avail themselves of this option have then to treat the supplies as of land or buildings, and so potentially as exempt under Article 135.
The UK has made no overt use of Article 15(2), but it may well be that (a) and (b) provide a basis for aspects of the UK provisions. HMRC do not seem to see matters in these terms, as noted in B1.7.1 and 8.1.
Paragraph (c) above would allow, say, the sale of the shares in a property SPV to be treated as a supply of the property itself. The UK has not implemented this, but see B1.7.2.
Member States may allow taxable persons a right of option for taxation in respect of the following transactions: …
(b) the supply of a building or of parts thereof, and of the land on which the building stands, other than the supply referred to in point (a) of Article 12(1);
(c) the supply of land which has not been built on other than the supply of building land referred to in point (b) of Article 12(1);
(d) the leasing or letting of immovable property.
Member States shall lay down the detailed rules governing exercise of the option under paragraph 1.
Member States may restrict the scope of that right of option.
So Member States are permitted, but not required, to allow taxpayers to opt for taxation of those transactions that are exempted by Article 135. They do, however, have considerable flexibility as to how they do this.
The UK's option to tax is discussed primarily in Chapter B2, and there is more about Article 137 in B2.1.3.
B1.2.6 In practice, Member States have considerable flexibility in this area, and their regimes vary widely. Having taken little apparent notice of this for many years, the European Commission commented in December 2010. This was in an attachment to a wide-ranging Green Paper, optimistically entitled 'On the future of VAT – towards a simpler, more robust and efficient VAT system'. Noting that 'exempting supplies to taxable persons is inefficient and jeopardises the functioning of the VAT system', it suggested that 'one approach' might be to limit exemption to:
(a) the letting of houses to private individuals;
(b) supplies of buildings that are not new and where the supplier has not recovered input VAT on the building's acquisition; and
(c) supplies of land other than building land'.
The Commission's reasoning seemed to ignore the wide extent to which commercial property transactions are in fact taxed, in almost every Member State, whether on a compulsory or an optional basis, and it may be that nothing will come of this. Certainly this approach would seem to raise some significant problems, and not just in the UK.
The Green Paper was followed in December 2011 by a summary of responses and a 'communication'. The latter included the statement that:
'Other exemptions which act as restrictions in the tax base and which might create distortions will be examined to see whether the economic, social or technical reasons for them are still valid and whether the way they are applied can be improved. In seeking to broaden the tax base, no options should be discarded at this stage.'
It is to be hoped that the Commission does not discover too much crusading zeal in reviewing the property exemption. Some other aspects of the Green Paper are noted in C1.4.3.
B1.3 UK law expresses the exemption rather differently, employing English land law terminology, with an occasional nod in the direction of Scotland. The overall effect is probably that exemption is broader than contemplated by the Directive, although the extent of this is debated.
'The grant of any interest in or right over land or of any licence to occupy land, or, in relation to land in Scotland, any personal right to call for or be granted any such interest or right.'
It then lists a series of exceptions. These are set out more fully in B1.10.2, but, very broadly, they cover:
Some freehold sales of new or uncompleted buildings or civil engineering works (see B1.11).
Parking facilities (see B1.12), and similar facilities for aircraft or boats (B1.13).
Hotel, holiday and similar accommodation (Chapter D9).
Some sports and similar facilities (D9.16).
Viewing accommodation at places of entertainment (D9.17).
The right to take game or fish or to remove standing timber (D8.5).
Rights to acquire any of the above.
Some leases granted to developers before 1 March 1997 (B1.10.2).
The provision of storage facilities (B1.14).
Facilities for hairdressers (B1.15).
So, to fall within the UK exemption, a supply must:
concern land (B1.4);
be a grant (B1.5.1);
be of an interest in or right over land (B1.6 to 8) or a licence to occupy land (B1.9) or a Scottish personal right (B1.7.2);
not be covered by any of the exceptions to exemption (B1.10.2).
apply further exclusions to the exemption for leasing and letting – such as some of the UK exceptions listed in B1.10.2;
for the time being, maintain exemption for the supply of building land, as the UK has done;
also for the time being, maintain exemption for the supply of new buildings – the UK has not chosen to do this, at least as regards freeholds.
But, beyond this, the UK law and the Directive should mean the same thing. But since the language is so different, there will clearly be times when it is not at all clear that they do.
The UK has also failed to follow the Directive in specifically taxing 'the letting of permanently installed equipment and machinery' and 'the hire of safes'. It is not entitled to exempt these as 'leasing or letting', and is in breach of the Directive if it does so.
HMRC have generally tried to deal with this by maintaining that supplies of this kind are not within the scope of the exemption in the first place, and so do not need specific exclusions from exemption. It is not clear that they are right, and there is more about this in B1.4.4. From 2012, safes would seem in any case to be taxable as 'self-storage' (B1.14).
If there is a conflict between UK law and the Directive, the theory is that the taxpayer can rely on the Directive against HMRC, but that HMRC cannot do so against the taxpayer. In practice, however, the UK has largely managed to maintain that its law does conform to the Directive, and simply to use the Directive in interpreting UK law. This tends to be the approach of the Tribunal and the courts, and – at least when it suits them – of HMRC. In a non-VAT case, Marleasing SA v La Comercial Internacional de Alimentacion SA (CJEC Case C-106/89), the ECJ held that:
'in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, as far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter.'
The primacy of the Directives has not always been recognised. In 1976, the High Court in Trewby (Hurlingham Club) ( STC 122) was able to hold that 'the words "any interest in or right over land" must be confined to a legal or equitable interest in the land'. In other words, the exemption was purely about (English) land law.
In more recent years, the ECJ has made it clear that this is not the right approach, and that words in the Directive have a Community-wide meaning independent of domestic land law. But it remains unclear quite how much difference there really is between UK law and the Directive.
During 2011, HMRC were proposing to say in guidance that the UK property exemption applied only to the extent that it was provided for by the Directive, and in the light of this to adopt a narrower interpretation of the exemption for rights over land (B1.8). Whilst this does seem valid for licences to occupy (B1.9), this seemed to stretch the point in Marleasing too far – to say that clear wording in the UK legislation could be 'interpreted' out of existence – and in the event HMRC backed off. It is, however, possible that they will be proposing amendments to the VAT Act to deal with the point.
B1.4 The exemption covers land and anything fixed to it, and not the sale or letting of loose items. There are issues here are with items or structures that are not actually loose, but which could be removed. Do they fall under the exemption? And, if not, can they nevertheless be treated as part of the exempt supply if they are sold or let along with the land or building where they stand?
Also, increasingly, case law suggests that it may not be enough for there to be a land element, even if this is the most important element, if in reality the supply is a package of services. This is considered in B1.4.5.
B1.4.1 The UK law is based essentially on (English) land law and refers simply to 'land'. This has a wide meaning, and 'land' is sufficient to cover buildings and other structures, and items incorporated into them. It also includes natural features and manmade structures attached to the land whether on, over or under it – such as walls, trees and minerals. And it includes water – such as lakes and rivers – and oil rigs fixed to the seabed.
The Directive takes a different approach and uses different wording, which the ECJ has indicated is not to be understood in terms of national land law:
In exempting the supply of land, Article 135(1)(k) of the Directive does use the word 'land'. It does not elaborate on this, and the word would seem to have its natural meaning. But, in particular, it does not seem to include buildings, since they are exempted separately.
The exemption under Article 135(1)(j) for the supply of buildings is more informative. It covers 'a building or parts thereof, and of the land on which it stands'. And for the purposes of the rules for new buildings, Article 12(2) says that 'building' 'shall mean any structure fixed to or in the ground'.
So whereas, in English land law, a building or fixed structure would normally count as part of the land, and be owned with it, this is not the approach in the Directive. Nor is it necessarily the approach in other Member States – in some European systems, it is possible to own a building without having an interest in the land on which it stands.
For leasing and letting under Article 135(1)(l), the Directive does not use the word 'land' at all, but refers instead to 'immovable property'. This is not defined, but the Directive then gives specific exclusions for 'permanently installed equipment and machinery' and for safes. So the inference is that these are, or can be, immovable property. Rather more has been revealed by case law.
B1.4.2 So for 'leasing or letting', the test under the Directive is whether something is 'immovable'. The ECJ has considered the meaning of this in the context of structures that were fixed, or placed, temporarily. The question is clearly one of degree.
In Commission v France (Box B1.4A), the ECJ held that 'immovable property' did not cover touring caravans, tents, mobile homes and light-framed leisure dwellings that were fixed to the ground. They were 'movable' since they could in fact be easily moved.
In Rudolf Maierhofer (also Box B1.4A), on the other hand, the ECJ held that demountable temporary buildings were 'immovable property'. The buildings could be dismantled and moved, but the process was too labour-intensive for them to be 'movable' in terms of the Directive. In the course of its judgment, the Court made it clear that the domestic law of the Member State was irrelevant, and that exemption did not require the lessor to have any interest in the land itself. It was enough for the structure to be 'immovable'.
HMRC have accepted this position, having been deeply concerned about the implications of Maierhofer at the time. Despite the French case, however, they continue to treat the letting on site of residential caravans and houseboats as exempt (see D9.11.4 and D9.14.2).
If these cases represent the two ends of the scale, this leaves the question as to quite where the boundary lies, but UK cases have perhaps helped to shed some light on this.
Immovable property? – case law
This box summarises case law in this area.
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Commission v France (CJEC Case C-60/96) involved infraction proceedings. The Commission maintained that France was in breach of the Directive in exempting residential lettings of touring caravans, tents, mobile homes and light-framed leisure dwellings. The ECJ agreed. The items could readily be moved, and so were not 'immovable property'.
[Note: as seen in D9.11.4, the UK continues to exempt lettings on site of residential caravans, and therefore seems also to be in breach of the Directive.]
Rudolf Maierhofer (CJEC Case C-315/00) erected pre-fabricated buildings and let them to the State Government of Bavaria, which used them to house refugees. Herr Maierhofer had no interest in the land on which the buildings stood, and the buildings were to be dismantled at the end of the letting and re-erected elsewhere. They were nevertheless set on concrete bases, on concrete foundations set into the ground, and it took eight people ten days to dismantle them.
The German authorities took the view that the buildings were not 'immovable property', so that the letting of them was taxable. The ECJ disagreed. 'Immovable property' did not have to be inseverably fixed to or in the ground, and included 'a building constructed from prefabricated components fixed to or in the ground in such a way that they cannot be either easily dismantled or easily moved'.
The ECJ made some further points:
it was irrelevant whether the letting was of both the land and the building, or just of the building built on the lessee's land: it was enough for the property to be 'immovable';
it did not matter that the buildings would be removed at the end of the lease and re-used elsewhere;
the terms of the lease were not decisive;
the meaning of 'immovable property' could not be determined in terms of the civil law of the Member State.
The UK intervention
HMRC put their own submission to the Court, arguing that the lessor did need an interest in the land to come within the exemption. Any other analysis, they said, would lead to 'extreme consequences' – it might enable a roofing contractor to present his services in such a way as to qualify for exemption. Presumably HMRC imagined that householders would be willing to lease their roofs from contractors, rather than owning them, in order to achieve a VAT saving.
The ECJ wasted little time on this, observing that to determine whether a service qualified for exemption:
'it is necessary to look at the essential features of the transaction and disregard the way in which it might be artificially presented'.
HMRC have become fond of this particular quote, deploying it in their own attempts to recharacterise transactions. And – a nice example of the way in which judgments can be selectively quoted and 'spun' – by the time of Rotherham Golf Academy Ltd (Box B1.9B), this passing rebuke to the UK could be cited by the Tribunal as 'the Maierhofer principle', as though it was the important point about the case. But, in any event, the judgment in Maierhofer does not seem to have led to an outbreak of roofing contractors moving into roof leasing.
The University of Kent (VTD 18625) leased portable units for use as temporary student accommodation. The units were pre-fabricated, were transported by lorry, and apparently rested on legs. The units had no foundations, and although they were connected to water and electricity mains their physical attachment to the land was slight. These connections could be removed, and the units taken away, in about half a day.
The Tribunal contrasted this with the facts in Maierhofer, and concluded that the units were not 'immovable property'. It also held that they were not caravans (see D9.10.2).
A Danish case, Fonden Marselisborg Lystbådehavn (CJEC Case C-428/02), concerned the mooring and storage of boats. The ECJ concluded that both fenced-off mooring berths and winter storage sites equipped with a 'cradle' were immovable property. In the case of the moorings the Court observed that the letting 'does not … concern a particular quantity of water, but a … water-covered area [which] is clearly delimited and cannot be moved'. [Other aspects of this case are mentioned in Box B1.5B and in B1.12.1.]
Argents Nurseries Ltd (VTD 20045) owned premises which it let, under informal arrangements, to its subsidiary, which carried on a horticultural business. It acquired two 'poly tunnels', installed them on the site and charged the subsidiary a separate rent for them.
The poly tunnels, also described as 'roll-air greenhouses' were large structures. They had a vaulted steel frame, to the sides of which polythene was attached. This could be mechanically rolled over the top of the tunnel, and rolled back, as conditions demanded. The upright columns were bolted onto concrete blocks – 84 of them for each tunnel – which were sunk into the ground and encased in more concrete. The tunnels could be moved, but were not designed to be moved and the Tribunal thought that doing so would be 'a considerable operation'.
The Tribunal accepted that the poly tunnels were the subject of a separate supply from the land. It was influenced here by the separate rent and by the fact that they had only been installed after the site lettings had commenced. But in the light of Maierhofer, it agreed with HMRC that this was the 'leasing or letting of immovable property'. Further aspects of this case are, however, set out in Box B1.4B.
UK Storage Company (SW) Ltd ( UKUT 359 (TCC)) provided self-storage units in an open air compound. The units rested on their own weight, but they were set into concrete surrounds, and it appeared that they could not readily be moved when empty, or at all when in use – they would have had to be dismantled, a two man-day operation, and would not necessarily be waterproof if reassembled. The First-Tier Tribunal (TC 01394) concluded that they were immovable property, and that the letting of them was exempt.
The Upper Tribunal rejected this. The units were not immovable property, because they were not fixed to or in the ground. That was enough to decide the matter, but in any case the fact that it took two man-days to remove a unit, in contrast to the 80 man-days in Maierhofer, did not mean that these units were not easily dismantled.
There is more about this case in Box B1.9B and the same material appears in Box B1.14A.
Susanne Leichenich (CJEC Case C-532/11) granted a five-year lease of a boat, permanently moored on the Rhine at Cologne, together with a plot of land, an area of the river, and a landing stage, for use as a restaurant and disco. The boat was fixed by ropes, chains and anchors, was connected to the water and electricity mains, and had an address and telephone line. It had no engine or means of propulsion, and had not been moved for some 30 years.
The initial German court decision, in finding that it was not immovable property, had noted that the boat could be moved in a few hours, albeit with preparation and the use of specialist personnel. The ECJ, for its part, thought that it could not be moved 'without effort and considerable cost', and that the degree of connection to the land and riverbed made it 'part of that space taken as a whole'. Taken as a whole, the lease was of immovable property.
The boat was also not a vehicle – on this aspect, see B1.12.1.
In English land law, a fixture is regarded as part of the land, whilst a fitting is not, and this was historically seen as a borderline for VAT purposes – there might be a separate supply of the fittings in a building, but not of the fixtures. In practice, HMRC always disregarded minor items, and the approach did not seem wholly of out of kilter with Maierhofer,
ECJ case law about single and multiple supply (Box A4.5A) does, however, seem to have moved matters on. Whilst fixtures are still unlikely to be the subject of a separate supply, this will also be the case for most fittings – applying the test in Card Protection Plan (also Box A4.5A), normal fittings are unlikely to be an aim in themselves for the typical buyer or tenant, and much more likely to be a means of better enjoying the property.
Conversely, however, there will be some cases where there is a separate supply of a fixture, as noted in B1.4.4 and as seen in Box B1.4B, particularly where a landlord installs it on property that is subject to an existing lease.
In Notice 742, HMRC say simply that:
'If fixtures and fittings are included with a building or land they are not treated as separate supplies for VAT purposes. This means that their liability is the same as that of the land or building with which they are being supplied.'
This was, however, a change in the 2012 edition – the previous version had confined this observation to fixtures, suggesting that it was not true of fittings. It may be that the revised version is too sweeping, and in practice HMRC are rather keener to see separate supplies of fittings and loose items if the property sale or letting is zero-rated rather than exempt.
So Notice 708, revised a few months earlier than 742 and redrafted as part of the same exercise, takes a completely different approach. Under the heading 'What is the liability of goods I sell to the purchaser of a zero-rated property?' it offers the view that:
'Goods that are not incorporated in the building, such as loose furniture, are liable to VAT at the standard rate.'
It seems unlikely that both notices can be right, and it is Notice 742 that appears consistent with the ECJ case law. The version in Notice 708 seems intended to cover the gap created by the fact that housebuilders etc are blocked from recovering input tax on certain items 'incorporated' in the building (C13.6), but not on other items. If they follow Notice 708, extras that they include in a new house will be taxed in one way or the other.
There is a similar issue with goods included in sales of caravans, but in this case the reliefs specifically excludes the goods (see D9.11.3). The ECJ in Talacre Beach Caravan Sales Ltd (Box A4.5A) confirmed that this could apply, so that the goods were standard-rated, even if there was a single supply of caravan and goods. This does not appear to have any application to goods included in buildings, since there is no comparable provision in legislation.
B1.4.4 Although 'the leasing or letting of immovable property' is exempt under Article 135(1)(l) of the Directive, there are exceptions for 'the letting of permanently installed equipment and machinery' and 'the hire of safes'. Such lettings should therefore be taxable.
The UK has not implemented these provisions, although from 2012 the taxation of 'self-storage' (B1.14) would seem incidentally to cover safes. For equipment and machinery, HMRC seem to have taken the view that there could only be a separate supply at all if the item was a fitting rather than a fixture. Since there was no land element with a fitting, and since the UK thought that exemption required a land element, supplies of this kind were necessarily taxable anyway. On this reasoning, there was no need actually to specify in the law that they were taxable.
Case law suggests a rather different position. As noted in B1.4.3, the distinction between fixtures and fittings no longer seems relevant, and the ECJ in Maierhofer (Box B1.4A) held that a land element was not necessary for exemption. And in both Aquarium Entertainments and Argents Nurseries (Box B1.4B) the Tribunal accepted, on the particular facts, that the leasing of items which were apparently fixtures was a separate supply, even where there was also a lease of the property between the same parties and even though in land law the items would seem to have been part of the land. Indeed, in another context UK law already specifically envisages the separate leasing and sale of fixed equipment – the rules for energy saving materials cover, in certain circumstances, the leasing and subsequent sale of a central heating system (see C15.3.6).
So it seems that, regardless of the UK provisions, the leasing of fixtures can be a separate supply, and can be within the exemption unless excluded, under the Directive, as equipment, machinery or indeed a safe.
Fixed equipment – case law
This box summarises Tribunal cases about the leasing of fixed equipment.
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Aquarium Entertainments Ltd (VTD 11845) owned and operated Brighton Aquarium. It had been required to install fire doors, alarms etc, but before doing so it granted a lease to Sea Life Centre (Holdings) Ltd. It proceeded with the installation of the equipment, and charged separate rents for the premises and various items of equipment, including the fire equipment.
The fire equipment was undoubtedly fixtures, and HMRC contended that the leasing of it was part of the exempt leasing of the building. The Tribunal disagreed and said that there was a separate supply.
One factor here was that the fire equipment was not in place when the lease was granted, so that the tenant could have chosen not to take it and could have installed its own. Another was that the Directive clearly envisaged that fixed equipment could be the subject of a separate supply: the Tribunal felt that this allowed it to ignore the fact that, in English land law, the equipment was part of the land.
The Tribunal went on to hold that the equipment leasing was taxable. This was consistent both with the Directive and with the UK approach that the exemption required a land element.
This case pre-dates Card Protection Plan (see B1.4.3), which might suggest that there was no separate supply here – the tenant may well have regarded the fire equipment as a means of better enjoying the property rather than 'an aim in itself'. Nevertheless, the same approach was taken in another case some years later, and after CPP:
Argents Nurseries Ltd (VTD 20045) owned premises which it let, under informal arrangements, to its subsidiary, which carried on a horticultural business. It acquired two 'poly tunnels', installed them on the site and charged the subsidiary a separate rent for them. The Tribunal saw these as 'immovable property' (on this aspect, see Box B1.4A), but saw a separate supply in view of the separate rent and the fact that the letting of the premises pre-dated the installation of the tunnels.
The Tribunal nevertheless decided that the supplies were taxable, being covered by the exclusion in the Directive for 'lettings of permanently installed equipment and machinery'. On the facts, they were 'permanently installed'. The Tribunal saw equipment and machinery' as similar to 'plant and machinery' in capital allowances legislation. But it rejected HMRC's analogy with a capital allowances case, where a structure at a garden centre, used as a sales outlet, had been held not to be plant or machinery, being rather premises in which the business was carried on. This could be contrasted with the poly tunnels, since these were used in the production process. The Tribunal concluded that they were 'equipment', being something with which a taxable person equips himself for use in carrying on his economic activity.
The Tribunal took no account of the UK's failure to implement the exclusion from the Directive.
Queen Mary, University of London (QM) (TC 01094) commissioned the construction of a new building. During construction, it entered into a financing arrangement with a subsidiary of a bank (LPIC). The idea was that LPIC, unlike QM, would be able to claim capital allowances on the plant and machinery element of the expenditure. This required LPIC to have an interest in the land, so QM leased the uncompleted building to LPIC, and LPIC leased it back, with LPIC responsible for procuring the plant and machinery.
The parties regarded the lease back from LPIC to QM as a property transaction, and LPIC opted to tax in order to ensure that it was taxable. Subsequently, however, QM argued that LPIC's supply was in fact of the plant and machinery, and that this was partly zero-rated under the provisions for works for people with disabilities (C14.4) and for medical equipment (C16.1).
The Tribunal agreed that the supply was of plant and machinery, and was merely 'dressed up as a lease of the land'. But in the light of CPP (B1.4.3) and other cases, it saw a single supply, which was standard-rated under Article 135(2)(c). The original VAT treatment had therefore been correct, if for the wrong reasons, and there was no scope for zero-rating.
B1.4.5 In some cases the land element is less important than the equipment (etc) that goes with it. In terms of CPP, it may be the land that provides the means of better enjoying the equipment, rather than the equipment that provides the means of better enjoying the land. This might well mean that there is a single supply, and that it is a taxable supply of the equipment rather than an exempt property supply.
Increasingly, case law has taken a similar point with services – even if there is a land element, it may be swamped by the facilities with which it is supplied.
This is primarily an issue with licences to occupy. A good example is the hire of a recording studio, which HMRC regard as a standard-rated supply of sound recording facilities, rather than ancillary to the use of the room. Box B1.9A reproduces extracts from their guidance, including paragraph 6.1.4 of the Land and Property manual, which is devoted to this sort of issue. They see the same sort of reasoning as relevant in other contexts including the hire of safes (specifically taxable under the Directive – see B1.4.4), and space for vending machines (see also B1.9.4).
The facilities argument has featured strongly in case law about the provision of workspace to self-employed individuals, as seen in the High Court judgments in Byrom, Kane & Kane, Denyer and Vigdor and Holland, all summarised in Box B1.9B. As noted more fully there, the Court in the last of these cases found that the exemption 'does not extend to a licence to occupy land which is but one element of a package of supplies' and that in this case 'the licence element in the supply is standard-rated'. The Tribunal reached a similar decision in relation to office services in Pethericks & Gillard, noted in the same box.
Clearly, however, there are plenty of marginal cases. Much of the case law features the provision of space to hairdressers, and if by 2012 HMRC seemed to have won the argument on this, they still felt it necessary to initiate a specific exclusion from exemption in legislation, both for this (see B1.15) and for self-storage (B1.14).
Earlier case law was more likely to favour apportionment between taxable and exempt elements (see Haringey and other cases in Box D4.6D), but largely pre-dates CPP.
It is less clear to what extent the point extends beyond licences to occupy, and applies to leases. A lease has greater substance than a licence, and is more likely to be the predominant element in the supply. But the Tribunal saw a single supply of equipment in Queen Mary (Box B1.4B), where the provision of the equipment was the essential point of the transaction, and it seems probable that there are cases that should be seen as a single, taxable, supply.
An example might be the leasing of a purpose-built facility housing a large piece of built-in scientific equipment. The building might well be ancillary to the equipment, its sole purpose being to keep the equipment secure and protected from the elements. And in this case, as in Queen Mary, the logic of CPP is that there is a single supply, not of the building but of the equipment.
HMRC's Land and Property manual appears to suggest that the points are the same for leases as for licences, and that the material in Box B1.9A is equally relevant here. In practice, they might be expected to take a more selective approach, and in particular to resist taxation in cases where, under the rules in Chapter B3, it would not be possible to exercise an effective option to tax.
The letting of a caravan on site would seem to be another case where the land element is incidental. The land is likely to be less 'an aim in itself' than a means of better enjoying the caravan, so that the supply is of the caravan. And in the light of Commission v France (Box B1.4A), a caravan is not 'immovable property' and the letting of it cannot be exempt in its own right. The supply should therefore be taxable.
As seen in D9.11.4, HMRC take the opposite view. The letting of a caravan on site will sometimes be taxable as holiday accommodation, but otherwise HMRC see it as exempt, apparently on the basis that it is a supply of the land, with the caravan as an incidental element.
The objective is clearly political – to give parity between residential caravans and residential buildings. But it is unclear how the UK justifies the position in terms of the Directive, particularly since France was successfully infracted against for doing the same thing.
The same points apply to the letting in situ of a houseboat (see D9.14.2), with the added point that, if the supply is of the 'land' element rather than the houseboat, it ought probably to be taxable under the rules for mooring rights.
B1.4.6 There can be further complications where the vendor or landlord is obliged to carry out building work for the purchaser or tenant. Is this one supply or two? And, if it affects the VAT liability, is the property to be considered in terms of its state at the time of supply, or in terms of the finished product? These questions will matter in different ways in different contexts.
Perhaps the best approach is to consider the contractual terms and whether the building work has been commissioned separately. If in fact the sale contract is for the completed building, and the vendor is doing the work in furtherance of its obligations under that contract, this would seem to point to a single supply. The same might be true if there is an overarching agreement, even if a separate building contract is entered into under it.
HMRC comment in their manual 'Construction', at VCONST03700, talking about a developer entering into a sale agreement together with a contract to build. They cite a 1986 ECJ case, Hans-Dieter and Ute Kerrutt (CJEC Case 73/85) as authority for the view that there are two supplies, which need to be dealt with separately. In Kerrutt, however, there would seem to have been two suppliers, with the purchasers of a plot collectively entering into a separate building contract with a contractor. So, even if HMRC are right in the basic analysis, Kerrutt would not seem to provide any particular support for it.
A much later Dutch case, Don Bosco Onroerend Goed (CJEC Case C-461/08), would seem rather more relevant. Don Bosco had agreed the purchase of a property, which it proposed to redevelop. There were existing buildings on the site, but the vendor agreed to demolish these, and the cost of the work was largely reflected in the sale price. Had the demolition been completed before the sale, the position would have been clear – Don Bosco would have simply been buying bare land. In the event, the vendor's contractors only started to demolish the buildings a few hours before the sale was completed, and had to finish the job afterwards.
The ECJ concluded that there was a single supply of the property – of the bare land resulting from the demolition – rather than separate supplies of the property and the demolition work. This was the economic purpose of the transaction, and it was not possible 'without undue contrivance' to see separate supplies. The Court also noted the temporal overlap between the demolition and sale, although this does not seem to have been decisive.
The point mattered in the Netherlands because building land is subject to VAT and exempt from transfer tax, whereas a purchase of the existing buildings would have been exempt from VAT and subject to transfer tax. Don Bosco's objection was to the assessment for transfer tax. There are different potential consequences in the UK (see eg B1.11.1 and D3.2.9). It is, however, unclear whether the ECJ would have taken the same approach had there been a separate construction contract, or whether it would have thought that the doctrine of 'fiscal neutrality' required the answer to be the same.
B1.5 The exemption covers disposals and lettings, and various other types of property transaction. In general, if the subject matter is property, it is clear that the exemption applies unless it is overridden by something else. But there are plenty of marginal cases, and it is not always clear that UK law and the Directive achieve the same result.
B1.5.1 As noted in B1.2.2, the exemption in the Directive covers the 'leasing or letting' of immovable property, and the 'supply' of land or buildings, in each case with exceptions. Member States can also treat other interests etc in immovable property as a 'supply' of it.
UK law takes an approach firmly based on land law, generally English land law. The exemption covers:
'The grant of any interest in or right over land or of any licence to occupy land, or, in relation to land in Scotland, any personal right to call for or be granted any such interest or right'.
Several points are worth noting here:
The law goes on to say that a 'grant' includes an assignment or surrender. In English land law, these are the outright disposal of an existing interest, typically a lease. A disposal back to the landlord, such that the lease is extinguished, is a 'surrender' and a disposal to anyone else, who becomes the new tenant, is an 'assignment'. These terms can be important in understanding the UK rules, and in understanding property transactions generally, and they are illustrated in Box B1.5A. Their Scottish equivalents are an assignation and a renunciation.
The law does not define an 'interest in or right over land'. As noted in B1.3.2, the High Court in Trewby (Hurlingham Club) ( STC 122) held that this meant a legal or equitable interest in terms of (English) land law. The ECJ has since indicated that the exemption cannot be construed in terms of domestic land law, so that this approach is wrong. But since Member States have some leeway over interests in immovable property, the result may not be markedly different. B1.6 to 8 look at the scope of the exemption here.
There is also no definition of a 'licence to occupy'. This has caused considerable problems, which are explored in B1.9. The exemption is now viewed in terms of the reference in the Directive to 'leasing or letting'.
In relation to Scotland, the exemption specifically covers personal rights to call for an interest or right that would itself be exempt. The point here is that English land law treats a right to acquire an interest in land as itself an interest in land, whereas Scottish land law does not.
The nature of the payment (or other consideration) does not usually matter, and exemption can cover a sale price, a lease premium or rent. B1.5.3 and 4 consider some other payments connected with land transactions.
Grant, Assignment and Surrender – example
This box illustrates the difference between a grant, an assignment and a surrender.
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Vicky, who owns the freehold, enters into a lease with a tenant, Liz. Liz subsequently disposes of the lease to Maggie. Maggie later sells the lease back to Vicky.
a grant by Vicky to Liz;
an assignment (or, in Scotland, an assignation) by Liz to Maggie; and
a surrender (or, in Scotland, a renunciation) by Maggie to Vicky.
On surrender the lease will normally be extinguished and will merge with Vicky's freehold.
B1.5.2 The Directive exempts the 'leasing or letting of immovable property', and this provides the basis for much of the UK's exemption in this area. B1.4 looks at the meaning of 'immovable property' and highlights some difficulties with the UK's approach. Both the Directive and the UK law mention exceptions to exemption, and these are looked at in B1.10.
There are also issues with the meaning of 'leasing or letting'. The ECJ, which has considered the matter a number of times, has said that this needs to be construed strictly. In its 2001 judgment in Stichting Goed Wonen, and in other cases since, it took the view that the leasing or letting of immovable property must:
relate to immovable property (see B1.4);
confer the right to occupy particular property as if the person were the owner;
confer a right to exclude anyone else from enjoyment of the right to occupy;
be for an agreed period; and
be in return for payment (or, in some versions, for rent).
But in a later case, Temco Europe SA, the Court took a slightly different view. It dismissed an agreed period as a criterion in itself, and thought that exclusivity did not need to involve a right to exclude 'anyone else', but merely to exclude anyone who had no right to be there. As in Stockholm Lindöpark, it put a greater emphasis on passivity, seeing 'leasing or letting' as arrangements which 'have as their essential object the making available, in a passive manner, of premises or parts of buildings in return for payment linked to the passage of time'.
These and other cases are summarised in Box B1.5B, and HMRC give their own version of the matter in guidance, as seen in Box B1.5C.
The ECJ has also seen the following as irrelevant:
domestic land law;
any way in which the transaction is artificially presented;
the length of the term;
whether the transaction includes the land on which the immovable property stands.
Domestic land law is, however, very much relevant in defining what rights are conferred: this point was brought out by the Court of Appeal in Abbey National plc (see B1.7.6).
Leasing and letting – ECJ case law
This box summarises cases where the ECJ has considered the meaning of 'the leasing or letting of immovable property'.
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Lubbock Fine & Co (CJEC Case C-63/92,  STC 101), a UK firm of accountants, surrendered the lease on its premises for a payment of £850k. This was in 1990, and was standard-rated under the UK legislation at the time (see Annex A, 3.1). The firm argued that this was invalid under the Directive, and that the surrender was exempt either as leasing or letting, or as the supply of a building (B1.2.1).
The ECJ held that the surrender was within the exemption for 'leasing and letting', since it was essentially a change to the lease:
'Where a given transaction, such as the letting of immovable property, which would be taxed on the basis of the rents paid, falls within the scope of an exemption provided for by the Sixth Directive, a change in the contractual relationship, such as termination of the lease for consideration, must also be regarded as falling within the scope of that exemption.'
This was not to say that the UK was not entitled to tax it anyway, under the tailpiece to what is now Article 135(2), discussed in B1.10.1, but the Court thought that this:
'cannot be construed as allowing them to tax a transaction terminating a lease where the grant of that lease was compulsorily exempt. The relations created by a lease cannot be broken up in this way.'
There is more about this aspect of the case in Box B1.10A.
So the surrender was exempt. Having reached this conclusion, the Court did not need to consider whether the surrender was also exempt as the supply of a building, but this contention had been rejected by the Advocate General:
'It is clear from the wording of this provision that "supply of goods" … covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property. Even by the surrender of a lease a tenant cannot transfer to the owner the power of disposal which the former never had and the latter never lost. Consequently, the surrender of a lease cannot be regarded as a 'supply of goods' for the purposes of Article 2.
Perhaps this was a valid point on the facts in Lubbock Fine, where the lease in question had only six years left to run. But, if it was a more general observation, it seems to create an artificial distinction, since even the freehold is not actually 'land', but only an interest in land, and since someone who has the power to dispose of the right to enjoy a property for a period of years, perhaps for several hundred years, must, in any economic sense, have the power to dispose of it as owner.
It seems possible that the Court came to the right answer for the wrong reasons. It subsequently tried (in Cantor Fitzgerald, below) to distance itself from the judgment, saying that it hinged on the particular facts of the case, and the better view may well have been that the supply was exempt as the supply of a building, despite the Advocate General's reservations.
Unfortunately, the ECJ's reference to 'a change in the contractual relationship' caused great uncertainty in the UK. It is the origin of the exemption for 'reverse surrenders' (see B1.5.3) and was argued in Cantor Fitzgerald and Mirror Group, below.
In Commission v Ireland (CJEC Case C-358/97) and Commission v United Kingdom (CJEC Case C-359/97) the ECJ did not see road tolls as leasing or letting since the motorist did not get the use of the road for a defined period. It regarded this as an essential element of letting.
Coffeeshop Siberië (CJEC Case C-158/98), a Dutch 'coffee shop', rented a table to a drug dealer. The case was primarily about whether this was outside the scope of VAT on grounds of illegality (an argument that the ECJ dismissed), but the Commission, in its observations, took the view that the supply was exempt as the leasing or letting of immovable property. The Advocate General thought that, prima facie, this was not the case, but the point was not pursued as it had not featured in the questions from the Dutch court.
Stichting Goed Wonen (CJEC Case C-326/99), a Dutch housing association, granted usufructuary rights (the right to their enjoyment) in some houses for a term of ten years. It argued that this was not exempt as leasing or letting, since Dutch civil law did not regard it as such. The ECJ disagreed – civil law was irrelevant, and the rights had the same fundamental characteristics as leasing or letting, which the Court saw as:
'conferring on the person concerned, for an agreed period and for payment, the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right'.
This has generally been taken as a list of essential ingredients of leasing or letting, although the Court has sometimes taken what has seemed like a different approach, as seen in Temco (below).
Note: A related appeal by Stichting Goed Wonen is summarised in Box A6.6A.
In a UK case, Cantor Fitzgerald International (CJEC Case C-108/99,  STC 1453) took an assignment of a lease and received payment from the outgoing tenant for doing so. It argued that its supply to the outgoing tenant was exempt 'leasing or letting' on the basis of the reference in Lubbock Fine to 'a change in the contractual relationship'.
The ECJ viewed 'leasing or letting' in the same way as it had done in Stichting Goed Wonen, a few days earlier. In these terms, the supply was clearly not 'leasing or letting' and must be taxable.
Note: B1.5.3 notes a possible limitation to the applicability of this judgment elsewhere – see also B5.5.5 and Box B5.5A.
Another UK case, Mirror Group plc (CJEC Case C-409/98), was heard with Cantor Fitzgerald. Mirror took a lease and received an inducement payment from the landlord. Much like Cantor Fitzgerald, it argued that, if it had made a supply to the landlord, this was exempt in the light of Lubbock Fine.
Again the ECJ followed its approach in Stichting Goed Wonen and concluded that this was not exempt 'leasing or letting'. The ECJ did, however, accept that there might not be a supply at all: there is more about this in B5.8 and a summary of this aspect of the case in Box B5.8A.
Stockholm Lindöpark (CJEC Case C-150/99) provided golfing facilities. The ECJ saw this as consisting of both a passive activity of making the course available and 'commercial' activities such as supervision, management and maintenance. The latter, rather than 'leasing or letting', were likely to be the main element. In any case, use of the course was likely to be restricted as regards the purpose and period of use, and the period of enjoyment was an essential element of a lease.
Wolfgang Seeling (CJEC Case C-269/00), a German sole proprietor, held his home as a business asset. His private use of it involved a supply (under rules equivalent to those in B5.4), which the German authorities saw as exempt as 'leasing or letting'. The ECJ disagreed, saying that it was 'a feature of such use not only that no rent is paid but also that there is no genuine agreement on the duration of the right of enjoyment or the right of occupation of the dwelling, or to exclude third parties' – essential features of leasing or letting'. In itself, this seemed simply to be a consequence of the fact that Herr Seeling was on both sides of the 'transaction', but in BLM (below) the Court subsequently saw the case as relevant in other circumstances. There is more about the context of this case in Box A5.7A.
Sinclair Collis Ltd (CJEC Case C-275/01) paid to install cigarette machines in UK pubs. The ECJ concluded that the supplies to it were not 'leasing and letting of immovable property' since they conveyed only limited rights of possession or control. There is a fuller summary of this case in Box B1.9B.
A Belgian company, Temco Europe SA (CJEC Case C-284/03), provided space to associated businesses. They shared the premises, there was no set duration to the arrangement, and the rent was partly dependent on their turnover and the number of employees. Previous cases might have suggested that the lack both of exclusivity and of an agreed period meant that this was not exempt 'leasing or letting'. But the ECJ did not follow through on its previous insistence on these elements, and did not see the facts as precluding exemption. Rather, it saw 'leasing or letting' as arrangements which:
'have as their essential object the making available, in a passive manner, of premises or parts of buildings in return for payment linked to the passage of time.'
In seeking to reconcile this with the earlier cases, the Court claimed, not entirely convincingly, that:
'while the Court has stressed the importance of the period of letting in those judgments, it has done so in order to distinguish a transaction comprising the letting of immovable property, which is usually a relatively passive activity linked simply to the passage of time and not generating any significant added value … from other activities which are either industrial or commercial in nature … or have as their subject-matter something which is best understood as the provision of a service rather than simply the making available of property.'
And on exclusivity it explained that:
'The presence in the contract of such restrictions on the right to occupy the premises let does not prevent that occupation being exclusive as regards all other persons not permitted by law or by the contract to exercise a right over the property.'
This last point seemed to mean that, effectively, exclusivity could be shared (compare the UK decision in Holmwood House (Box B1.9B)), and that it was enough for the world at large to be excluded from the property.
Overall, the ECJ in Temco seemed to be taking a slightly different approach, and one which devalued the tests in Stichting Goed Wonen. But the pretence is always that the Court is developing a consistent body of case law, and in practice Temco is cited along with the other cases, as though they all form part of a single picture. It is not clear that HMRC see it as any different, either – in Gosling Leisure (Box B1.9B) they chose to base an argument on Temco when, on the face of it, it was the ECJ case that least supported their position.
Following Temco, the ECJ developed the exclusivity point in a Danish case, Fonden Marselisborg Lystbådehavn (CJEC Case C-428/02), about the mooring and storage of boats. The moorings were let for a period, but if a boat owner was going to be absent for more than 24 hours his or her mooring was made available, without reimbursement, to visitors. The Court accepted that this did not preclude 'leasing or letting', saying that 'since such occasional use does not cause harm to the lessee, it cannot be regarded as altering the relationship between him and the [lessor].'
The judgment did, however, suggest that the Court did not wish to see Temco as a radical break from the earlier cases, since it cited Temco as one of authorities for the approach in Stichting Goed Wonen etc.
[Other aspects of this case are mentioned in Box B1.4A and in B1.12.1.]
CO.GE.P. Srl (CJEC Case C-174/06) took a concession from the Port of Genoa on a warehouse for the storage of mineral oils. The Italian authorities saw this as taxable. Drawing on previous case law, and in particular the passage in Stichting Goed Wonen quoted above, the ECJ had little trouble in concluding that it was exempt as 'leasing or letting'. This was not affected by the fact that this was public property, by the special legal regime governing the arrangements or by the low level of rent.
Gabriele Walderdorff (Case C-451/06) owned land in Austria, together with fishing rights over publicly owned waters. She leased these rights, and rights to fish in ponds of her own, to a local angling club. The contract was for ten years and provided for an annual rent. The parties also agreed that Ms Walderdorff herself, and one guest per day, could continue to fish there.
The tax authority concluded that this was not the 'leasing or letting of immovable property' and so was taxable. Drawing on previous case law, the ECJ agreed. First, the right merely to fish in the waters fell short of a right to occupy them. Second, the club had no right to exclude other persons. On this second point, however, it is not clear how the position really differed from that in Temco and in Marselisborg, above, and the case might imply a return to the earlier, stricter, view on exclusivity.
Macdonald Resorts Ltd (CJEC Case C-270/09) operated a 'club', through which it sold hotel and holiday accommodation via a points scheme. Purchasers acquired non-specific rights to the use of accommodation, which could then be exercised at any one of a number of properties in the UK and Spain. HMRC maintained that the sale of points was subject to UK VAT, and the Tribunal (VTD 19599) agreed. It thought that the transactions were too far removed from the provision of the accommodation to be regarded as 'leasing or letting'.
The Court of Session referred the case to the ECJ. The Court noted that the acquisition of the points was not an aim in itself for the customer – it was merely preliminary to the use of the accommodation. And, drawing on BUPA (Box A8.2A), payments on account of supplies that had not yet been clearly identified could not create a tax point. So there was only a supply when the points were redeemed against the use of specific accommodation.
This supply was the 'leasing or letting' of immovable property, in the light of the criteria in Stichting Goed Wonen (above) and other cases. Since, however, the supply was of hotel and similar accommodation, it was potentially taxable under Article 135(2)(a) (B1.10.1), and Member States were free to ensure that this was the case.
D9.8.3 comments on the implications of this case, and discusses timeshares generally.
BLM SA (CJEC Case C-436/10) provided a dwelling to its managing director and his family, free of charge. The ECJ saw this as analogous to Seeling (above), where it had held that the characteristics inherent in the application of property to private use meant that it was not 'leasing or letting'. The Belgian authorities had argued that the decision there had been based on the fact that Herr Seeling had been on both sides of the 'transaction', which was not the case here. But the Court dismissed this – rather, the Court in Seeling had focussed on the characteristics of such an arrangement: the absence of rent or of agreement on the duration of the arrangement or the exclusion of third parties, and it was these points that had led it to conclude that there was no 'leasing or letting'. There was no reason not to apply the same reasoning here. There is more about the context of this case in Box A5.7A.
Further Belgian referrals are pending in the same area – in Medicom sprl (CJEC Case C-210/11) and in Maison Patrice Alard sprl (CJEC Case C-211/11), the Court is asked whether the rent-free provision of staff accommodation can be exempt.
Leasing and letting – HMRC's interpretation
This box reproduces an extract from HMRC's manual 'Land and Property'. The original makes liberal use of bold and italics. The other material to which HMRC refer is largely considered here in terms of licences to occupy land and is discussed in B1.9, although the meaning of immovable property is discussed in B1.4.
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5.7.2 What is a leasing or letting of immovable property?
The meaning of 'leasing or letting of immovable property' (Article 135 (1) (l) of the Principal VAT Directive) has been firmly established in numerous ECJ judgements.
Essentially, a 'leasing or letting of immovable property' is 'normally a relatively passive activity, not generating any significant added value' (Goed Wonen C-326/99). The ECJ has also described it as the 'passive provision of space' (Sinclair Collis C-275/01).
To be classified as a 'leasing or letting of immovable property', a transaction must have all of the following characteristics:
1 It must relate to a defined area (paragraph 5.7.5) of immovable property (paragraph 5.7.4)
2 It must confer a right to occupy that property, which gives the tenant or licensee the right to exclude others and to occupy as owner (paragraph 5.7.6)
3 The right of occupation must be for an agreed duration (paragraph 5.7.7)
4 That right must be given for a payment for the period (paragraph 5.7.8)
These payments are not consideration for an interest in land etc and, if they are for a supply at all, the supply ought probably to be standard-rated. But there is a complicated history here, and it makes a difference whether the payment is in connection with the grant, the assignment or the surrender of a lease.
Landlords often make payments to tenants when they take on a lease. The payment might be a straightforward inducement or might, for example, be described as a contribution to fitting out works.
In most cases this does not involve a supply at all, but where it does this will generally be standard-rated. This was confirmed by the ECJ in Mirror Group (see Box B1.5B). On occasions, however, the payment might in reality be for a zero- or reduced-rated supply of building work. There is more about payments to tenants in B5.8.
It makes no difference in these cases whether either of the parties has opted to tax.
On the assignment of a lease, the outgoing tenant will sometimes make a payment to the incoming tenant for taking on the obligations under the lease, which HMRC refer to as a 'reverse assignment'. This typically happens where the rent is above current market levels. In Cantor Fitzgerald (Boxes B1.5B and B5.5A), the ECJ held that this involved a standard-rated supply by the incoming tenant. This point has been generally accepted since, including in British Eventing Ltd (also Box B5.5A), it again making no difference whether either party has opted to tax.
There may, however, be a question in these cases as to whether there is a supply at all. This was not disputed in Cantor Fitzgerald, the only argument being as to whether the supply was exempt. But some of the later case law suggests that it may have been crucial that the outgoing tenant was still potentially liable to the landlord under 'privity of contract'. If so, this might provide an argument that a payment to accept the assignment of a lease granted on or after 1 January 1996, or on property in Scotland or Northern Ireland, is in fact outside the scope of VAT. There is more about this in B5.5.5.
If a landlord takes payment to accept a surrender of a lease – again by implication an onerous lease – there is a presumption that there is a supply by the landlord to the tenant. Under UK law this supply is, in principle, exempt.
The VAT Act refers to the supply as a 'reverse surrender', apparently a term invented by HMRC, and exempts it by bringing it within the definition of a 'grant' (Sch 9 Gp 1 Notes 1 and 1A). This exemption was introduced in 1995 in the belief that the ECJ in Lubbock Fine (see Box B1.5B) had shown the supply to be exempt under the Directive, a view also taken by the Tribunal in Central Capital Corporation Ltd (VTD 13319).
Subsequent ECJ cases suggest that this was wrong and that the supply is properly taxable. It is possible that the UK will have to recognise this at some stage, and to remove the exemption.
The exemption will generally be overridden by any option to tax exercised by the landlord, or potentially by any of the exceptions to exemption listed in B1.10.2. But in practice this is not always straightforward. The exceptions to exemption in B1.10.2, and the exceptions to the option in B2.4 and Chapter B3, generally assume that it will be a tenant or purchaser that will use the property in future, whereas here it will be the landlord, or someone else entirely. This can create difficulties. HMRC have indicated that, for the purposes of the rules in Chapter B3, they think that the landlord should be considering the position purely in terms of the future use of the property, and that the outgoing tenant's use is irrelevant. This seems a very credible position, but they have suggested a different approach where the outgoing tenant is a charity, as noted in B2.4.4.
In some cases, however, the tenant's payment is not seen as consideration for a supply at all. This is, at least, relevant to dilapidations and mesne profits, and in cases where the lease already gives the tenant the right to terminate the lease. These points are discussed in B5.5.3.
Payments of this kind are occasionally made in connection with a freehold disposal, with the vendor paying the purchaser. This can happen if, for example, the land requires extensive decontamination. There is potentially a standard-rated supply by the purchaser in the same way as for the assignment of a lease. But if the purchaser is also paying the vendor, the payment by the vendor might simply be a discount and reduce the value of the supply by the vendor.
In Navydock and South Liverpool Housing (see Box B5.5A), however, payments by vendor to purchaser were found, at least in the specific circumstances, to be outside the scope of VAT.
B1.5.4 Although the exemption can normally cover any type of payment, the payment needs to be consideration for the exempt supply. It is not always clear whether a payment really is consideration for the exempt supply, or for something else. This is particularly true with leases.
As a basic principle, the exemption covers anything that the tenant or purchaser must pay to obtain the exempt supply. So, for example, it extends to a reimbursement of costs, such as legal fees, incurred by the landlord or vendor.
Service charges are more complicated, and are looked at in detail in D4.6. In general, the accepted position is that a service charge is further consideration for the lease – the tenant is paying both rent and service charge to obtain a serviced property.
In terms of the tests established by the ECJ in Card Protection Plan (Box A4.5A), the services are not 'an aim in itself' but a means of better enjoying the property. Although this position was put in doubt by the ECJ judgment in Tellmer, it was subsequently endorsed by the ECJ in Field Fisher Waterhouse, a case specifically about UK service charges. Both of these cases are summarised in Box D4.6A.
Payments under a lease are usually reserved as rent anyway, since this enables the landlord to sue for possession of the property, and not just for the money, in the event of a default.
Service charges are only exempt if they attach to exempt property supplies. So a payment by a freeholder, perhaps towards the maintenance of an estate, is outside the exemption and is usually standard-rated. But there is a concession here for residential property, explained in D4.7.2.
The services must also be supplied to the tenant by the landlord, and not by someone else, such as a separate management company.
But the contractual position here is important. If the third party's services are actually the landlord's responsibility under an exempt lease, then the presumption is that there is a (taxable) supply by the third party to the landlord, and an exempt onward supply by the landlord to the tenant, even if all payments and dealings are direct between the third party and the tenant.
There is more about this in D4.7. Again, there is a concession in relation to residential property, explained in D4.7.2.
Service charges are not exempt if the tenant has taken the property without the services, and has then chosen outside the terms of the lease to engage the landlord to provide them. One example would be where a lease makes it the tenant's responsibility to maintain the property, and the tenant decides to pay the landlord to do so instead.
This point is also illustrated by electricity charges to a tenant (see D4.6.3). If the electricity is metered, so that the tenant can choose to use, and pay for, more or less, or indeed none at all, this indicates a separate supply of electricity. But if there is simply a fixed charge for electricity this is normally seen as further payment for the lease, and exempt if the lease is exempt.
A variation to a lease, or the lifting of a restrictive covenant, is seen as the grant of an interest in land, and is exempt if the rents are exempt. In land law, a variation may strictly involve a surrender of the existing lease and the grant of a new lease, but this principle can often be ignored for VAT purposes. There is more about lease variations in B5.6.
Tenants are sometimes required to pick up the landlord's costs, such as professional fees, perhaps in connection with the lease being varied or the landlord giving the tenant consent to assign or to sub-let, or to make alterations.
The reimbursement is (further) consideration for a supply by the landlord, and is exempt if the rents are exempt. In this case the landlord cannot recover the VAT he incurs on the costs, and needs to pass them on gross of VAT to the tenant. The tenant cannot recover the VAT either, since it is not his input tax. If the rents are standard-rated, the landlord can recover the VAT on the costs but must add VAT to the recharge.
In some cases involving the termination of a lease, however, HMRC take the view that the reimbursement of costs does not involve a supply. This is looked at in B5.5.3. This does not affect the input tax position, but means in either case that output tax need not be accounted for.
B1.6 The UK exempts 'interests in and rights over land' and 'licences to occupy land' (Sch 9 Gp 1 item 1). English land law distinguishes between legal interests in land – freeholds and leases – and equitable interests. This section looks at legal interests, B1.7 at equitable interests, B1.8 at rights over land, and B1.9 at licences to occupy.
UK VAT law takes its approach to interests in land from English land law. There are cases where equivalent rights in Scotland are not interests in land, but are merely contractual or personal rights, but the law specifically accommodates these and treats them as interests in land. The approach has been to try to ensure identical VAT treatment throughout the UK.
The UK's view of interests in land is not obviously at odds with the Directive, and this section is solely concerned with the UK provisions. On the face of it, however, the UK is treating freeholds and major interest leases (see B1.6.2) as the 'supply' of land or buildings under Article 135(1)(j) or (k) of the Directive, and shorter leases as 'leasing or letting' under Article 135(1)(l).
B1.6.1 In English land law, the highest form of land ownership is the freehold. This is more formally known as the 'fee simple', and this is the term used in VAT law. Section 96(1) of the VAT Act also says that:
' "fee simple"
(a) in relation to Scotland, means the interest of the owner;
(b) in relation to Northern Ireland, includes the estate of a person who holds land under a fee farm grant;'
A fee farm grant is a freehold interest where the freeholder must nevertheless pay a rent charge to, for example, the previous owner.
Commonhold interests are also included, being a species of freehold for buildings in multiple occupation, where the common areas are held by a commonhold association comprising the individual commonholders. There is more about commonholds in D3.10.
In the absence of any single, or better understood, expression, this book refers to freeholds to cover all such interests.
B1.6.2 A lease gives the tenant the right to exclusive use of the property for a term of years etc. English land law recognises a lease as a 'legal interest', whereas in Scotland it is simply a contract for the hire of land. UK VAT recognises leases under either system as interests in land.
VAT law distinguishes between long and short leases, referring to the freehold or a long lease as a 'major interest'. This is not directly relevant to the scope of the property exemption, but it matters for zero-rating and is considered further in C5.5. Also, however, the grant of a major interest is treated as a supply of goods, whilst a lesser interest is generally a supply of services.
Section 96(1) of the VAT Act says that:
"major interest", in relation to land, means the fee simple or a tenancy for a term certain exceeding 21 years, and in relation to Scotland means the interest of the owner, or the lessee's interest under a lease for a period of not less than 20 years
The 20 year provision for Scotland is to recognise the impracticality of granting longer leases in dwellings under Scottish law.
There can be more than one lease on the same plot. Where this happens there will be a hierarchy of leases, and a terminology to go with it. VAT law does not directly concern itself with this, but the terms are useful in understanding or explaining what is happening.
Only one lease, referred to as the headlease, will be held from the freeholder (although there could of course be different headleases on different areas), the tenant under that lease being the headlessee. The next lease in the chain will be held from the headlessee, and is usually called an underlease. A lease below that is a sub-underlease, although both this and an underlease are sometimes called simply a sub-lease.
Given this hierarchy, interests in the land can be seen as superior or inferior to each other and, with extremely rare exceptions, a lease will be shorter than any superior lease, and longer than any inferior lease.
Where an interest is granted, assigned or surrendered, this is done subject to any existing inferior interest. So if a tenant has granted an underlease, he can only assign or surrender his own lease with that underlease in place, and the new owner will take over his role as the landlord under the underlease. In Scotland, however, if he renounced (surrendered) his lease, the underlease would cease unless the headlessor had consented to it being granted.
Some further points and terms – using English law and terminology – are illustrated in Box B1.6A.
Leases – terminology
This box illustrates and enlarges on points in B1.6.2. The example is concerned with English law and terminology.
* * * * *
Phil, who owns the freehold, grants a 25-year headlease to Andy.
Andy grants an underlease of 25 years, less a day, to Ed. This is the longest lease that Andy can grant – anything more would be an assignment of Andy's lease, so that he no longer had an interest in the property.
The single day at the end of Ed's lease is referred to as the reversion on that lease, so that Andy can be said to have a reversionary interest. Phil has a reversionary interest too.
Phil then grants a 99 year lease to Chas. This is subject to the lease to Andy, who becomes Chas's tenant. Phil can be said to have granted Chas an overriding lease.
So the chain now goes Phil – Chas – Andy – Ed.
If Ed sells his lease to Chas, this will operate as an assignment of Ed's lease. Chas will now have two separate interests in the land, one of them superior to Andy's lease, and one of them inferior to it.
If Andy then surrenders his lease to Chas, Andy's lease will merge with Chas's lease, and be extinguished. The same thing will happen to what was Ed's lease, since Chas is now both the landlord and the tenant under it. Alternatively, Chas can keep the other leases in existence through a declaration of non-merger.
B1.7 The UK exemption covers 'any interest' in land, and so is not confined to legal interests such as a freehold or a lease. It extends to what, in English land law, are terrned 'equitable interests'.
'Equitable' interests include beneficial ownership – the right to the income or proceeds from the property. Normally legal and beneficial ownership will be in the same hands, but they need not be: a legal owner can hold land on trust for a beneficial owner. Issues with types of ownership are considered in Chapter B6.
B1.7.1 It is not apparent that equitable interests are necessarily covered by Article 135 of the Directive either as the 'supply' of land or buildings or as the 'leasing or letting of immovable property'. This would seem to be a case where the UK to some extent relies on Article 15(2) of the Directive (B1.2.4), which allows Member States discretion over 'certain interests in immovable property'.
This does not seem to be the view of HMRC. Their manual 'Land and Property' puts matters entirely in terms of Article 135, and makes no mention of Article 15(2). But unlike for rights over land (compare B1.8.1), they have not suggested that the UK exemption is contrary to the Directive, and it seems likely that they see equitable interests as covered by the sort of broad approach to Article 135 taken by the ECJ in Lubbock Fine (Box B1.5B).
In English law, a purchaser who pays consideration on exchange of contracts acquires beneficial ownership, and a right to the property. Legal ownership then follows on completion. For VAT purposes, any supply on exchange of contracts can be exempt as being of an interest in land.
Equitable interests also include a right to acquire land subject to certain conditions being fulfilled, provided that the vendor cannot choose then not to honour the agreement. This was at issue in Latchmere Properties Ltd (Box B6.9A). Latchmere entered into an agreement with a landowner, whereby the parties co-operated in the development and sale of property. If it was not sold, Latchmere had a right to acquire it. It was held that this gave Latchmere an equitable interest in the land, and that its share of the sale proceeds was consideration for the disposal of this interest.
In Scotland, the parties enter into missives before the real right to the land is acquired by way of disposition. Although this is similar to the English process, the missives do not give the purchaser an interest in land, but only a personal right – if the vendor defaults he has no claim to the land, and can only sue for breach of contract.
In Margrie Holdings Ltd ( STC 80), the Court of Session found that Scottish rights of this kind were not covered by the exemption. VAT law (Sch 9 Gp 1 item 1) was therefore amended to include the reference to 'any personal right to call for or be granted' an interest in or right over land.
Having said this, HMRC tend to see any deposit paid on exchange of contracts or missives as part payment for the legal interest, rather than as for an equitable interest or personal right. This is helpful in that:
it facilitates zero-rating (see C5.4.4);
it means that they do not see a deposit paid to a stakeholder as creating a supply.
In Broadwell Land (VTD 10521), however, the Tribunal took a different view, seeing a deposit as consideration for a separate supply, of an equitable interest.
In a 'sub-sale', an owner A agrees the sale of a property to B, and B agrees a simultaneous onward sale to C. B might actually complete its purchase and resell, or it might direct A to transfer title straight to C.
Other than in Scotland, HMRC consider that, in either case, there is a supply by A to B and a supply by B to C. It makes no difference whether or not title passes via B, whether the purchase price passes via B or whether the price for the two transactions is the same. VAT should always be accounted for and invoiced on the basis that the supply chain is A-B-C. HMRC explain this in their manual 'Transfer of a going concern' at VTOGC4600, citing the decision in Kwik Save (Box B4.6A) as authority.
The position is perhaps less clear where B does not actually agree an onward sale to C, but nevertheless directs A to transfer title to C. This might be because C is a subsidiary of B, or a nominee for B. Here it seems more credible to treat the supply as direct by A to C, and this is generally how matters are dealt with in practice. As it happens, however, these may actually have been the facts in Kwik Save – it was not clear to the Tribunal how the transactions had been effected.
If, however, property in Scotland is transferred direct from A to C, HMRC see A's supply as to C, and B as making no supply of the property. This is because under Scottish law B will never have had an interest in land, but only a personal right.
B4.6.3 considers sub-sales in the context of TOGC treatment.
The economic ownership of property can be transferred in other ways – such as through the sale of shares in a company or partnership owning the property.
As noted in B1.2.4, Article 15(2) of the Directive allows Member States to treat these as a supply of goods, and so of the property itself. The UK has not implemented this, and such sales are exempt under the rules for financial services (see Chapter B6). This point was confirmed by the ECJ in DTZ Zadelhoff vof (CJEC Case C-259/11), considering the comparable position in the Netherlands, although it also appears to be the subject of a Spanish referral Caixa d'Estalvis i Pensions de Barcelona (CJEC Case C-139/12).
But there do seem to be limits to this. Court Barton Property plc (VTD 1903 – also D9.8.3) sold shares, each of which carried a right to a week's timeshare holiday accommodation. The price of the shares varied according to the property and the week, and in substance the payment was clearly for holiday accommodation. The Tribunal decided that £1 of the price was for the share itself, and the balance for holiday accommodation.
Other issues here are also largely about timeshares etc. The sale of a timeshare in specific accommodation is seen as a supply of the accommodation and is taxable or exempt as such (see D9.8.3) or, if the property is outside the UK, outside the scope of UK VAT. There have been greater difficulties with timeshares sold through a points or similar system. The purchaser acquires non-specific rights to the use of accommodation, which can then be exercised at any one of a number of properties. In Macdonald Resorts Ltd (Box B1.5B), however, the ECJ concluded that the sale of points did not itself create a supply, and that there was only a supply if and when the points were redeemed. Place of supply, liability etc would then be determined according to the location and nature of the particular accommodation.
There is more about timeshares, and other case law in this area, in D9.8.3.
B1.7.3 A call option, or a pre-emption right, is granted by a potential vendor, X, to a potential purchaser, Y. It gives Y a right to acquire the property on specified terms, or a right of first refusal on it. The option could be granted for £1, giving Y the right to buy the property for £1m, or it could be granted for £1m, and exercisable for £1.
Rights of this kind can be exempt as an interest in land or, in Scotland, a personal right to acquire land. This applies to an assignment or surrender of the right, as well as to its original grant. But they are only exempt if the purchase of the property itself would be exempt – a call option on, say, standard-rated fishing rights is also standard-rated.
HMRC take the view (at 20.1 in their Land and Property manual) that the liability should be considered in terms of the position at the time that the right is granted etc, and not at the time it is exercisable. This will most obviously make a difference to freehold new buildings, as discussed at B1.11.1.
A 'put option' is a different creature. It is granted by a potential purchaser, Y, to a potential vendor, X, and gives X a right to sell the property on specified terms. Effectively, Y is being paid to take the risk that he might have to buy something he will not want to buy at the time, and X is paying for the comfort that he can dispose of the property – it is a means of transferring risk.
A put option is not seen as an interest in or right over land – Y has no interest in the land out of which to grant one. Y's grant of a put option is therefore standard-rated.
The position may, however, be different if Y is X's landlord, and the exercise of the option would take effect as a surrender of X's lease. In this case Y's grant of the put option amounts to agreement to accept a 'reverse surrender', and so is potentially exempt if Y has not opted to tax.
Sometimes there is a mutual grant of put and call options, with no money passing between the parties.
X and Y might simply agree that X can require Y to buy the property for £1m in a year's time, and that Y can require X to sell the property for £1.1m in a year's time. Which, if either, of the options is exercised at the end of the year will depend on what happens to the property market in the meantime, but each of the options is potentially valuable when it is granted.
For VAT purposes, supplies ought perhaps to be seen in each direction, as in a barter transaction, but this point does not generally seem to be recognised, including by HMRC, and it would be difficult to place a value on the supplies.
B1.7.4 A mortgage, charge or, in Scotland, a standard security is an interest in land. Logically, a property owner taking out a mortgage is making a supply to the bank or building society. But HMRC do not see matters in this light, and regard the only supply as being the provision of finance by the lender. This approach was endorsed, in passing, by the High Court in MBNA Europe Bank Ltd ( EWHC 2326 (Ch)). In holding that the assignment of credit card receivables was not, in the circumstances, a supply, the Court cited 'the assignment of property to a lender as security for (ie to obtain) a loan' as one of the 'exceptional class of transactions which look prima facie like a supply, but which lose that character when viewed in their context'.
Some restrictive covenants are on plot A, but in favour of plot B. There might, for example, be an obligation not to develop plot A without the consent of the owner of plot B. In this case, the lifting of the covenant can still be exempt if the owner of plot B has opted to tax plot B. The exemption is only overridden by the option to tax if the owner of plot B has opted to tax plot A, perhaps when he previously owned it.
B1.7.6 A virtual assignment involves the transfer of the economic burdens and benefits of an interest in land, without the interest in land itself. It is used where the parties wish to assign a lease, but have not obtained the landlord's consent to do so. There may also be a 'virtual leaseback', where the 'virtual assignee' purports to let the property back to the legal owner.
In June 2006, the Court of Appeal in Abbey National (Box B1.7A) concluded that virtual leasebacks were not equivalent to actual leases, since they conveyed no occupational rights. They were therefore taxable.
The case did not directly address the treatment of virtual assignments themselves, and it remains questionable whether they can be exempt. Whilst the Court of Appeal in Clarence House v National Westminster (also Box B1.7A) ruled out various interpretations of a virtual assignment, it still seems possible that it can be treated as exempt in the same way as a call option (B1.7.3), or that any consideration should actually be seen as for the intended legal assignment. The ECJ would no doubt consider the issue from a different perspective entirely. Whilst it would perhaps not be swayed by arguments based on English land law, it might be equally uncomfortable with the idea that a virtual assignment, having the same economic effect as an actual assignment, should be treated differently. HMRC were proposing to comment in guidance in the aftermath of Abbey National, but have not in fact done so.
Further issues arise where the virtually assigned property is subject to third party lettings etc, and these are considered in B6.8.
Virtual assignments – case law
This box summarises two cases in this area – the first concerned with VAT, the second a landlord and tenant matter.
* * * * *
Abbey National plc disposed of a portfolio of properties to Mapeley, on terms that allowed it to remain in occupation of some, while others were disposed of or let by Mapeley.
The deal included some leasehold properties where Abbey required the landlord's consent to assign the lease. This might take time, or be refused, so these properties were made the subject of 'virtual assignments', pending actual assignment. Legal title remained with Abbey, but Mapeley would be responsible for the rent and other outgoings, and would be entitled to rents and disposal proceeds from third parties. Where Abbey remained in occupation there was a 'virtual leaseback', with Abbey paying 'rent' to Mapeley.
As between the parties, it was as though Mapeley had acquired the properties, but this did not affect Abbey's rights and obligations as against the world, and in particular against its landlords.
HMRC did not see the transactions as falling within the exemption and contended, in particular, that the 'rent' was for standard-rated supplies of agency and management services. Mapeley could not be granting Abbey the right to occupy the properties, since Abbey already had that right. The Tribunal (VTD 18666) accepted this, although it saw the 'rent' as partly a disbursement, with Mapeley paying rent to Abbey's landlords and obtaining reimbursement from Abbey.
On appeal, the High Court ( EWHC 831 (Ch)) concluded that the transactions were equivalent to an 'actual' assignment and leaseback, and exempt, subject to the option to tax.
The Court of Appeal ( EWCA Civ 886) rejected this and agreed with the Tribunal. Whether the supply was exempt under what is now Article 135(1)(l) of the Sixth Directive as 'leasing or letting' needed to be addressed in two stages. The first was to analyse the contractual arrangements in terms of national law; the second to consider whether those arrangements fell within the Article. The arrangements did not give Mapeley any legal or equitable interest, nor any right to occupy. It was therefore not in a position to grant such a right to Abbey – rather, Abbey continued to occupy as tenant under the existing leases. It was clear from the ECJ case law (Box B1.5B) that a right of occupation was an essential element of leasing or letting, so the supply could not be exempt under that heading. HMRC were correct in characterising it as a standard-rated supply of agency and property management services.
HMRC had also argued that the rents and sale proceeds receivable by Mapeley were consideration for supplies by Abbey, and that Mapeley's retention of them was further consideration for supplies by Mapeley to Abbey. This was rejected by both the Tribunal and the High Court, and was not appealed further. There is more about this aspect in Box B6.8A.
In Clarence House Limited v National Westminster Bank plc ( EWCA Civ 1311), the bank had entered into a virtual assignment of a number of its leasehold properties with a third party. One of its landlords alleged that this was in breach of the terms of the lease. The Court of Appeal disagreed, holding that the arrangement did not involve any of: an assignment of the lease; an underletting; a declaration of trust; or the parting with or sharing of possession of the property. At most, the third party had the power to call for an assignment, or to effect an assignment as the bank's agent.
B1.8 In English land law, rights over land cover profits à prendre – a right to remove produce from the land – and certain rights to enter or use someone else's land, such as an easement. UK VAT law exempts these, with some specific exceptions, along with their Scottish equivalents.
B1.8.1 Many rights over land seem unlikely to qualify either as the 'supply' of land or buildings, or as 'leasing or letting', under the Directive. If they are correctly exempt, this would seem to be under Article 15(2) (B1.2.4). But it is far from clear that the UK legislation is consistent with the Directive, or that the ECJ would relish the land law distinctions with, for example, easements (B1.8.3).
HMRC are conscious of this issue. In 2011, they were proposing to say in guidance that rights over land were only exempt if they amounted to 'leasing or letting' (for their view of which, see Box B1.5C). This relied on the doctrine in Marleasing (B1.3.2) – UK law had to be interpreted in line with the Directive. This seemed to be taking Marleasing too far, and HMRC were persuaded to step back from it in the final version of the guidance.
In the event, Notice 742 simply continues to state the position in UK law, whilst the manual 'Land and Property' takes a different approach, heavily stressing the importance of the Directive and of the ECJ's interpretation of the leasing or letting of immovable property, as in turn understood by HMRC (as in Box B1.5C). At 5.3 in the manual, HMRC try to reconcile these different approaches by telling their staff that:
'In most cases, it will be clear whether the grant of an interest in, right over or licence to occupy land has taken place. Notice 742 Land and property provides guidance on these terms. Where it is not clear (on the basis of the guidance in Notice 742), it may be necessary to look to the European legislation as an aid to interpreting the UK legislation.'
It follows that HMRC can be expected to see the rather brief explanation in Notice 742 as setting the limits to the exemption created by domestic land law, and in view of this Box B1.8A sets out the relevant material in full.
HMRC have, however, indicated that they intend to seek an amendment to the UK legislation in order to limit exemption in line with the Directive, and it is notable that Notice 742 says that UK law 'currently' exempts rights over land.
B1.8.2 A profit à prendre is a right to remove produce from the land. In particular, this means that the UK exemption covers the right to extract minerals, oil etc. The right to cut and remove turf – a profit of turbary – is also sometimes exempt on this basis.
In most other cases, the exemption for profits à prendre is displaced by something else. This includes:
the right to take game or fish, which is specifically standard-rated (see D8.5.1);
the right to remove standing timber, which is also specifically standard-rated (D8.5.2);
the right to remove edible crops, fruit etc, which HMRC see as a zero-rated supply of foodstuffs (D8.5.3); and
grazing rights, which by the same logic are generally seen as a zero-rated supply of animal feed (D8.6).
HMRC's manual 'Land and Property' comments at 2.7 on dealings in oil exploration and production licences. These are outside the scope of UK VAT where they relate to a field outside UK territorial waters (the 12-mile limit). Where they are onshore or within territorial waters, HMRC say that the supply 'is taxable unless the agreement has all characteristics of a 'leasing or letting of immovable property'' (as at Box B1.5C) 'or is a 'right over land'' (referring to Notice 742 – see B1.8A), 'in which case it is exempt (with the option to tax)'.
Examples are a right of way, a right to light and a right of support (eg to lean a shed against a wall), but only in particular circumstances. Both the benefits and the obligations have to attach to specific land.
If the owner of plot X grants his neighbour, the owner of plot Y, a right to pass across plot X because this provides a convenient means of access to plot Y, this is likely to qualify as an exempt easement etc. But if the parties are not neighbours this is unlikely. The plots need not adjoin, but they should be in the vicinity of one another.
And if the owner of plot Y only finds it useful to cross plot X to visit her boyfriend, and would have no other reason to do so, this is unlikely to be seen as benefiting plot Y as such, and so would not be an easement. If the owner of plot X was ungracious enough to charge for the access to his land, this would be standard-rated.
HMRC specifically accept that rights to light can be exempt, as seen in Box B1.8A. In practice, payment will be not for the right to light, but for the loss of it – such payments usually arise because a developer is depriving the neighbouring property of light. This raises a couple of further points:
Payments of this kind are often treated as compensation, and as outside the scope of VAT. This seems plausible if the development has already been built and the light already taken, but not if the matter is being negotiated in advance.
The exemption can be overridden by an option to tax, but for this to apply the owner of the neighbouring land, from which the light is being taken, would have to have opted over the developer's land. This would be rare, unless perhaps both plots had previously been in the same ownership.
B1.8.4 Rights of entry qualify as exempt rights over land. A right of entry does not have the same restrictions as an easement etc, but involves allowing someone to come onto land to perform a specific task, such as the laying of water pipes. Admission charges etc are not payment for a right of entry in these terms.
B1.8.5 Charges for the use of a road, bridge, tunnel etc, or for access to an area, are standard-rated, although charges levied under statute by public sector bodies are likely to be outside the scope of VAT as non-business. Outside the scope treatment covers congestion charges and some tolls. Where toll charges are taxable, HMRC will allow businesses to recover VAT without a tax invoice for charges up to £25.
The Tribunal in an early case, Mevagissey Harbour Trustees (VTD 111), held that charges to motorists for access to the harbour quays and jetties were taxable, but the UK long saw road tolls as exempt. This always seemed dubious under the Directive, and indeed under UK law itself, and the ECJ in Commission v UK (Box B1.5B) found that road tolls were not exempt as 'leasing or letting'. The UK accepted that private sector tolls were taxable in the light of this judgment.
Rights over land – Notice 742
This box reproduces the material in Notice 742 about rights over land.
* * * * *
2.4 What are rights over land?
Rights over land include …
rights of entry
allow an authorised person or authority to enter land. For example you might allow someone to come onto your land to perform a specific task.
grant the owner of neighbouring land a right to make their property better or more convenient, such as a right of way or right of light.
are a right of way to transport minerals extracted from land over another's land, or to lay pipes or cables over or under another's land.
profits à prendre
are rights to take produce from another's land, such as to extract minerals.
UK law currently exempts the supply of rights over land. However, these are often supplied together with freehold or leasehold interests in land and form part of a single supply. For example, a lease may be granted of a single floor in an office block with an easement over the common areas, such as reception and lifts, to allow the lessee to access his floor. In such cases the supply of the right over land (in this case the easement) will share the same tax treatment as the principal supply.
Some profits à prendre, such as the right to fell and remove timber, are standard rated under the exceptions to exemption in UK law (see section 3 for further information). In addition, the right granted to harvest and remove crops may in some cases be treated as a zero rated supply of food or animal feed stuff – see VAT Notices 701/14 Food and 701/15 Animals and animal food*
* * * * *
* On these points, see in the first instance B1.8.2.
B1.9 As well as interests in and rights over land, UK VAT law (Sch 9 Group 1 item 1) exempts licences to occupy land. A licence to occupy land, which may be written or oral, allows someone to occupy land on terms which fall short of a tenancy.
B1.9.1 VAT law does not actually define a licence to occupy land, and the concept is only partly derived from land law, so there have been a number of problems in this area. Case law has appeared inconsistent, and HMRC have historically struggled to find a line that they can hold under attack. Part of the problem is that they are challenged from both sides, defending exemption in some cases and taxation in others.
It is, however, now clear that the exemption should only cover something that is 'leasing or letting' in terms of Article 135(1)(l) of the Directive (see B1.5.2), and the ECJ has sought to define the characteristics of this in Stichting Goed Wonen and subsequent cases (see B1.5.2 and Box B1.5B), although offering a slightly different perspective in Temco. Thus, in Sinclair Collis (Box B1.9B), the ECJ found that the UK was wrong to exempt space for coin-operated machines under this heading.
HMRC have embraced this point with some enthusiasm, paraphrasing ECJ case law in Notice 742, as seen in Box B1.9A, and in their manual, as shown in Box B1.5C.
A further issue here concerns cases where facilities, as well as land, are provided. These may be the most important element, so that the supply is standard-rated – HMRC have long given the example of the letting of a recording studio. But case law increasingly suggests that, even if it is the land that is the most important single element, the overall package may well be entirely standard-rated. In Box B1.9B, this is illustrated by Byrom, Kane & Kane; Denyer; Vigdor and Holland; and Pethericks & Gillard. There is more about this general point in B1.4.5, and Box B1.9A reproduces lists of examples from HMRC's guidance.
B1.9.2 As seen in Box B1.9A, HMRC say in Notice 742 that a licence to occupy must relate to a defined area, and that the licensee must have 'the right to occupy that area as owner and to exclude others from enjoying that right'. This borrows from the general run of ECJ judgments, starting with Stichting Goed Wonen. This does not suggest that there cannot be more than one licensee – it appears that several people could have a licence to occupy the same area, with the right to exclude others applying only to those who had no business to be there. This not only fits with land law, but was the ECJ's conclusion in Temco (a case that admittedly may not entirely fit with its other judgments in this area) and the Tribunal's in both Holmwood House and Hollinshead. It now appears that Mount Edgcumbe was wrongly decided.
If this seems reasonably clear, it was not always so. HMRC originally thought that a licence to occupy had to be completely exclusive, so that there could be only one licensee. They vacillated following Abbotsley, but it still appeared that non-exclusive licences might be a way of ensuring that lettings could be taxable where an option to tax was either not possible or not desirable, and indeed this was the background to Temco, Holmwood House and Hollinshead.
Curiously, however, in 2012 HMRC themselves argued exclusivity in Gosling Leisure, choosing Temco – on the face of it the weakest ECJ authority – to do so. But since HMRC's entire conduct of the case might be regarded as curious, it seems unlikely that any significance can be attached to this.
The UK cases mentioned above are all summarised in Box B1.9B, and the ECJ cases in Box B1.5B.
B1.9.3 HMRC suggest that the right of occupation must be given for a 'payment for the period', as with rent being charged by the day, week etc. As noted in B1.5B, the ECJ offered this as a reason for concluding in Commission v Ireland that tolls were not consideration for a leasing or letting, although it appeared to backtrack in Temco.
In Bryce (Box B1.9B), charges per child were made for children's parties, and the Tribunal thought this 'wholly inconsistent' with a licence to occupy. Were this so, the point could be useful as a way of avoiding exemption where an option to tax is either undesirable or prevented by the anti-avoidance rules in Chapter B3. Perhaps unfortunately, HMRC have not embraced it, saying in their Land and Property manual (paragraph 5.7.8) that other factors can be taken into account, citing floor area, turnover and numbers of staff as factors in the rent in Temco, where the lettings were nevertheless found to be exempt. But of course precisely the same point can be made of Bryce – the charges may have been per child, but the duration of the parties was fixed, and on this point the cases appear little different, despite the opposite conclusions.
B1.9.4 HMRC say in Notice 742 that 'granting a specific space for the installation of a 'hole in the wall' cash machine (ATM)' is a licence to occupy, and that 'granting someone the right to place a free standing or wall mounted vending or gaming machine on your premises, where the location is not specified in the agreement' is not.
An ATM is more likely to be securely installed, but there is no obvious reason why space for an ATM should be inherently different from space for a vending machine. HMRC's distinction would seem to revolve around whether specific space is involved. The inference then is that the provision of space for a coin-operated machine, at any rate one fixed to the wall, could be a licence to occupy if the location was specified.
HMRC originally took the view that there was always a licence to occupy in these cases, and although the Tribunal had disagreed in Wolverhampton & Dudley Breweries (Box B1.9B), it was ultimately the ECJ judgment in Sinclair Collis (Box B1.5B) that led to a change of policy. The Court concluded that the provision of space for cigarette machines was taxable, stressing the fact that the agreements did not give the right to occupy a specific area, nor any right to limit access to it. This point would seem to provide the basis for HMRC's views now. On the other hand, the ECJ also thought that the occupation of space was merely a way of effecting the real supply – the grant of the exclusive right to sell cigarettes on the premises.
B1.9.5 The provision of salon chairs to self-employed hairdressers was a contentious area for many years. HMRC have long insisted that the supply cannot be exempt, both because there was unlikely to be exclusive use of a particular area and because any land element would be incidental to the use of other facilities. Their interest in the matter has no doubt been influenced by the fact that arrangements of this kind are sometimes connected with attempts to disaggregate a business and avoid VAT registration. The High Court judgments in Denyer and in Holland and Vigdor, together with that in Salon 24, finally tilted this debate heavily in HMRC's direction.
On the other hand, the supply might well be exempt if the owner does not share the premises with the self-employed hairdressers (as in Quaife and Taylor). This seems to be reinforced by the ECJ judgment in Temco (see Box B1.5B) and by HMRC's success in Holmwood House – the hairdressers could be seen as having exclusive use jointly.
This issue seemed to have been largely resolved by 2012, but was in any case covered by a specific provision in the legislation with effect from 1 October. This is discussed in B1.15. According to HMRC, this measure 'makes the current position clear in law, removing any opportunity for confusion, and making the tax system fairer and simpler', and it is notable that it tried to preserve exemption for cases on the lines of Quaife and Taylor.
The UK cases mentioned above are summarised in Box B1.9B.
HMRC settled for the view that this was exempt where the space was, or was in, immovable property such as a building, but not where it was in something movable, such as a shipping container, and this is reflected in their guidance in Box B1.9A. Some operators had, in any case, opted to tax, although many of these subsequently contrived to disapply the option under the anti-avoidance rules in Chapter B3, as seen in Shurgard Storage Centres (Box B3.4A).
In October 2012, however, the Upper Tribunal in UK Storage (Box B1.9B) concluded that self-storage was taxable whether or not it was provided in immovable property. This should perhaps have been enough to settle the matter, but the legislation had been amended in the meantime, from 1 October 2012, so as to ensure this result in any case. This seemed unfortunate timing – the measure had been supposedly aimed at self-storage, but in the light of UK Storage it seems that its only actual impact was to tax various other forms of storage space. HMRC have denied this implication, suggesting that the Upper Tribunal's comments were obiter. This does not seem particularly plausible, but HMRC said in December 2012 that they were considering issuing a Revenue & Customs Brief about the case.
B1.14 discusses the specific provisions introduced from 1 October 2012, and also covers place of supply issues with storage facilities.
B1.9.7 The provision of exhibition stands is likely to involve some additional services, and HMRC take the view in their manual, as seen in Box B1.9A, that in this case the supply is standard-rated. They suggest that the predominant aim is participation in the event and publicity, rather than simply the use of space, and this is consistent with the Tribunal decisions, some years ago, in Enever and Swiss National Tourist Office, summarised in Box B1.9B.
This might still suggest that the supply could be exempt as a licence to occupy land, if it really does amount to nothing more than the provision of space, but that in practice this is unlikely. There are, however, a couple of pointers in the opposite direction. One is HMRC's own views on place of supply, noted below. The other is the 2012 decision in Southport Flower Show Ltd (TC 01938), where the Tribunal thought that the licensing of trade stands was 'certainly the supply of a licence to occupy land', although this was not the substantive issue in the case, as the organisation had opted to tax.
There is, however, a separate exemption, also noted in B1.16.3, for fund-raising events organised by charities, non-profit making bodies and some other organisations. The exemption applies to most goods and services supplied by the organiser in connection with the event, and is potentially relevant here. The exemption is under Sch 9 Group 12, and HMRC comment in a 'helpsheet' at http://www.hmrc.gov.uk/charities/fund-raising-events.htm. This was the actual issue in Southport, and the Tribunal concluded that the provision of stands was exempt under this provision, overriding the option to tax.
There has been a further issue with place of supply – with whether UK exhibition services supplied to non-UK customers are within the scope of UK VAT at all. The place of supply rules are discussed, in particular, in D7.4, but under Article 47 of the Directive 'services connected with immovable property' are taxable where the property is located, and this means that lettings of land in the UK are generally within the scope of UK VAT. It has been unclear whether this includes the provision of exhibition space. If it does not, then the general place of supply rules would mean that, under Article 44, UK VAT was not chargeable to a non-UK business customer. Within the EU, however, such a customer would have to account for VAT in their own country under the reverse charge (D7.5).
The issue was brought into focus by an amendment to the Directive effective from 1 January 2011:
Prior to that date, Article 53 of the Directive treated services relating to cultural, artistic, sporting and other activities as supplied where the activities were physically carried out, and specifically referred to 'fairs and exhibitions'. So this had the same effect as Article 47.
This specific reference in Article 53 dated only from 1 January 2010, but the ECJ had anticipated it in Gillan Beach Ltd (CJEC Case C-114/05), concluding that the provision of exhibition services, including the letting of stands and moorings, were within an earlier version of this provision.
Article 53 is now confined to admission to events, and so clearly does not cover services to exhibitors. If the provision of space is within Article 47, the place of supply is still evidently where the exhibition is held; if not, it would seem to fall within the general rules, so that for a business exhibitor the place of supply is where it is established.
HMRC commented in Revenue & Customs Brief 22/12, issued on 2 August 2012, confirming that their policy had been that the supply was within Article 47, but now announcing a change. The Brief referred to 'land' and 'land related services' rather than 'services connected with immovable property', in line with the wording in UK legislation:
'Currently HMRC regards the supply of specific stand space at an exhibition or conference as a supply of land. This policy will continue where the service is restricted to the mere supply of space without any accompanying services.
However, where stand space is provided with accompanying services as a package, this package (stand and services) will no longer be seen as a supply of land with land related services but will be taxed under the general place of supply rule (customer location) when supplied to business customers.
Accompanying services provided as part of a package includes such things as the design and erection of a temporary stand, security, power, telecommunications, hire of machinery or publicity material.'
This is, logically, the same distinction as to whether the supply is of a licence to occupy land, but if so it paints a slightly broader picture of the potential for exemption than HMRC's guidance on that actual point.
The Brief also commented on the effective date of the change. The relevant material is reproduced in Box B1.14B, under the heading 'Changes of HMRC policy', and the Brief as a whole in Box D7.4C.
Licences to occupy land – HMRC's examples
This box reproduces material from HMRC Notice 742 and manual 'Land and Property', both as reissued in 2012.
Typesetter, please make n-head 6 bold and n-Head 7 italic
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2.5 What is a licence to occupy land?
A licence to occupy is a written or oral agreement which falls within the European concept of 'leasing or letting of immovable property' but falls short of being a formal lease for the purpose of UK land law.
For a licence to occupy to exist, the agreement has to have all characteristics of a 'leasing or letting of immovable property'. This is the case if the licensee is granted right of occupation of:
a defined area of land (land includes buildings - see paragraph 2.1)
for an agreed duration
in return for payment, and
has the right to occupy that area as owner and to exclude others from enjoying that right.
All of these characteristics must be present.
Where a licence to occupy is granted together with other goods and services as part of a single supply, the nature of the overarching supply will determine how it should be categorised for VAT purposes.
For examples of supplies that are licences to occupy land see paragraph 2.6. For examples of supplies that are not licences to occupy see paragraph 2.7.
2.6 Examples of supplies that are licences to occupy land
The following are examples of licences to occupy land. This list is not exhaustive:
the provision of a specific area of office accommodation, such as a bay, room or floor, together with the right to use shared areas such as reception, lifts, restaurant, rest rooms, leisure facilities and so on
the provision of a serviced office but only where the use of phones, computer systems, photocopiers etc. is incidental to the provision of office space
granting a concession to operate a shop within a shop, where the concessionaire is granted a defined area from which to sell their goods or services
granting space to erect advertising hoardings
granting space to place a fixed kiosk on a specified site, such as a newspaper kiosk or flower stand at a railway station
hiring out a hall or other accommodation for meetings or parties and so on (but not wedding or party facilities where the supplier does more than supplying accommodation, for example by assisting with entertainment and arranging catering). The use of a kitchen area, lighting and furniture can be included.
granting a catering concession, where the caterer is granted a licence to occupy a specific kitchen and restaurant area, even if the grant includes use of kitchen or catering equipment
granting traders a pitch in a market or at a car boot sale, or
granting a specific space for the installation of a 'hole in the wall' cash machine (ATM).
2.7 Examples of supplies that are NOT licences to occupy land
The following are examples of supplies that are not licences to occupy land:
the rental by a hairdressing salon of chair spaces to individual stylists, unless a clearly demarcated area is provided (such as a floor or whole salon) and no other services1,2
the hire of tables in nail bars to self employed manicurists
providing another person with access to office premises to make use of facilities, such as remote sales staff away from home having access to photocopiers and the like at another office
allowing the public to tip rubbish on your land
storing someone's goods in a warehouse without allocating any specific area for them
granting of an ambulatory concession, such as an ice cream van on the sea front or a hamburger van at a football match
allowing the public admission to premises or events, such as theatres, historic houses, swimming pools and spectator sports events
wedding facilities (including, for example, use of rooms for a ceremony, wedding breakfast and evening party)
hiring out safes to store valuables, or
granting someone the right to place a free standing or wall mounted vending or gaming machine on your premises, where the location is not specified in the agreement.
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5.8 Examples of supplies which are leasing or letting of immovable property
The following table provides examples of supplies that are likely to fall within the land exemption. The examples illustrate how the criteria described above are applied in everyday situations. Whilst some of the examples described may involve contractual arrangements that actually constitute leases, for ease the terms 'licensee', 'licence' and 'licence to occupy land' are used throughout. The examples do not override any supplies of land that are specifically excluded from the exemption for land, for example hire of sporting facilities and letting of holiday accommodation.
The provision of …
office accommodation in return for a monthly rent, with the right to use shared areas such as reception, lifts, tea points and rest rooms.
The predominant supply is the right to occupy defined office accommodation and exclude others. The fact that the licensee may have to share other parts of the building does not affect the occupational rights granted by the licence.
a specified area of office space less than a complete floor or room, such as a bank of desks in return for a periodic licence fee.
A licence to occupy land can be granted in respect of parts of rooms and floors and consequently can exist within an open plan office area. The key point is that there has to be an identifiable area of land that the licensee has an exclusive right to occupy during the period of the licence or the times specified in the licence.
specified areas of office space for periods of time that are not continuous, such as company A occupies a room each morning whilst company B occupies the same room every afternoon. Both A and B pay a separate licence fee.
Occupation does not have to be continuous. In this example both A and B have licences for the same areas of land but for different times. They both have been granted occupational rights in respect of the land and, as the licences do not temporally overlap, each company has a separate licence to occupy land.
specified areas of storage space within a building, such as a room, cupboard or marked area for which someone is granted exclusive use. For example, the provision of space in a self storage establishment, (Does not include the provision of storage space within a movable unit, such as a steel shipping container).1,2, 2
The space allocated must be specified in the licence agreement. The customer is normally the only person with access to the goods. See table at paragraph 6.1.4 for further details about supplies of storage.
a catering concession where the caterer is granted a licence to occupy a specific kitchen and restaurant area.
The licensee is able to operate his catering business from the specified areas of land covered by the licence. The licensee is granted the appropriate occupational rights, is able to exclude others and exploit the land for the purpose of the licence.
a catering concession where the caterer is granted a licence to occupy a specific kitchen area and then sells the food off the premises. The kitchen area is defined and the caterer has an exclusive right of occupation.
As with the above example, the licensee is able to operate his business from the area of land covered by the licence.
the right to run a landfill site to an operator from a specified area of land. In addition, allowing a farmer the right to graze his animals from the restored grassy areas of the site.
Even though there is some overlap in the areas occupied by the landfill site operator and the farmer, both have a licence to occupy land. The presence of the farmer on the land does not impinge upon the landfill site operator's occupational right and vice versa. The landfill site operator has a licence to occupy land for the purpose of disposing of waste whilst the farmer has a licence that allows him to occupy the grassy areas for grazing his animals.
a right to occupy a field (containing a public right of way) to a farmer for the purpose of grazing his livestock..
The right of the public to cross the field does not prevent the farmer from using the field for its designated purpose. His occupational rights are not compromised by the presence of other people on the land.
Note: The provision of grazing rights can normally be categorised as both a licence to occupy (Group 1, Schedule 9) and a supply of grass/food (Group 1, Schedule 8). Consequently, as zero rating takes precedence over any exemption, such rights are normally zero rated. For further guidance on grazing rights see VFOOD
Or hiring out …
a hall or other accommodation for meetings, parties, etc (including use of kitchen area, lighting, furniture, etc).
Most supplies of hiring out such accommodation will constitute a licence to occupy land. Access to kitchens, toilets, car parking and normal items of furniture is incidental to the predominant supply of land. However, if other services, such as catering, are provided the supply is likely to be a standard rated supply of services. See table at paragraph 6.1.4 for further details.
5.9 Examples of supplies which are not leasing or letting of immovable property
The following table gives examples of supplies which do not fall within the exemption for land supplies. As above, the list is designed to illustrate how the principles described earlier in this chapter should be applied. The examples are illustrative only and not exhaustive.
an ambulatory concession, such as an ice-cream van on the sea-front or at a sporting event.
The right granted is the right to sell ice cream anywhere along the sea-front or within the sports ground. The right granted to the concessionaire is a standard rated licence to trade and is not a grant of any occupational rights in respect of a specified area of land.
a catering concession in a pub where the caterer is permitted to use the kitchen but then sells his food to the publican's customers in the pub area.
The concessionaire is not granted a specified area from which to cook and sell food. He simply has the use of the kitchen area and access to the main pub area.
What is being supplied is the right to sell food in the pub, the access to the pub customers and the use of the kitchen and other facilities in the public house. This is a standard rated supply of facilities and not the grant of a licence to occupy land.
the right to use facilities in a hairdressing salon.1,2
Whilst supplies are often described as hairdressers' chair rentals they normally consist of a number of elements, such as booking/reception services, use of washbasins and driers, etc. The overarching supply is one of hairdressers' related services and not hire of space even if the other services are minimal. See also table at paragraph 6.1.4 and paragraph 6.1.5. The only exception to the above would be where a clearly demarcated area is granted (eg whole floor of the salon) without the addition of services.
storage space where the agreement does not specify the space allocated.1,2
Where the supplier merely agrees to store the goods in a space of his choosing, no occupational rights are granted. Removal firms may provide storage facilities within depositories without allocating specific locations or granting exclusive rights of occupation.
shared business premises (where more than one business has use of the same parts of the premises without having their own specified areas).
Neither business has occupational rights in respect of a specified area of land so that in contract or agreement neither has a guaranteed right to operate from the same part of the office, etc. This supply therefore falls short of being a licence to occupy land and is simply the provision of facilities. However, in rare circumstances where tenants, under common control, have a joint right of occupation and right to exclude others the supply may be treated as leasing or letting of immovable property (see Temco (Case C-284/03).
6.1.4 (extract) – examples of supplies which include a number of elements
The following table contains some examples of supplies which include a number of elements (including the right to occupy property). HMRC's views on the correct tax treatment are shown and where appropriate, reference is made to relevant case law. Further explanation of some of the examples is given later in this section or in following chapters.
Nature of supply
Lease of building. Landlord provides lighting and heating together with the letting for an inclusive price.
Leasing or letting of immovable property (exempt unless the landlord has opted to tax)
Lease is predominant element. Lighting and heating are ancillary.
Licence to occupy an office including use of telephones, computer system, photocopiers etc.
Leasing or letting of immovable property (exempt unless licensor has opted)
The provision of the other facilities is incidental to the predominant supply of office accommodation. However if the licensee has the right to choose what services he wants and pays for them separately there may be two supplies: an exempt supply of land (the office); and a taxable supply of services.
Licence to occupy office space, including the provision of secretarial services, such as typing, photocopying, mail sorting, etc.
Standard rated supply of office services
The inclusion of secretarial type services will normally result in the supply being characterised as the provision of "office services" and not the making available of property. See Pethericks & Gillard Ltd (VTD 20564) which supports such treatment.
Letting of a room containing specialised medical equipment or right to use a machine in a factory.
Standard rated supply of use of equipment/machine
Use of equipment is predominant feature. Lease is ancillary.
Hairdresser chair rentals. A salon rents chair space to individual stylists who have access to washbasins and reception.1,2
Standard rated supply of hairdressing facilities
This supply comprises a bundle of elements, including for example reception services and use of washbasins, which are integral to each other. The overarching supply is not a licence to occupy. Case law such as Christopher James Denyer (CH/2007/APP/0361) supports HMRC's interpretation. Further information is in paragraph 6.1.5.
Hire of space for exhibition stand
Standard rated supply
There is likely to be a package of services, but even if minimal additional services are provided, HMRC consider this to be a standard rated supply because the predominant aim of the agreement is to participate in an exhibition and benefit from the publicity of the event.
Hire of facilities for wedding functions including a room for the ceremony, wedding breakfast, overnight accommodation, flowers, music and access to hotel grounds.
Standard rated supply of wedding facilities.
This was considered by the Tribunal in Leez Priory (VTD 18185).
The supply was seen as a package of wedding services and not room hire. A similar finding was reached in Chewton Glen Hotels Ltd (VTD 20686).
Further information about wedding packages is in paragraph 11.8.
The provision of a defined area of storage space in an immovable building, including the provision of security, light and heat, with 24 hour access.1,2,2
(Storage space within movable units, such as steel storage containers, is standard rated. Note: HMRC has lost at Tribunal on this issue in David Finnamore t/a Hanbridge Storage Services TC01081 and UK Storage TC01394 but has appealed in both cases to the Upper Tier.)2
Leasing or letting of immovable property (exempt unless licensor has opted to tax).
The right to occupy the defined and secure storage space is the principal element of the supply. The additional service elements are for the better enjoyment of the space that has been made available for occupation.2
Supply by commercial organiser of sports league of the right to participate in a football or other sports league, including provision of pitch.3
Standard rated supply
Single supply consisting of a bundle of elements, including such things as the provision of referees, publication of results, allocation of teams to fixtures. Such elements are not ancillary to the supply of the pitch, they are an integral and important element of the supply. The overarching supply is of participation in a league, not merely the passive provision of land.
Hire of sound recording studio
Standard rated supply of sound recording facilities
Supply comprising a bundle of elements. The right to use the specialist equipment is an integral, important part of the supply and may be the predominant feature of the supply. It is not ancillary to the use of the room.
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1 This material pre-dates the specific provisions for 'self-storage' (B1.14) and hairdressers' facilities (B1.15).
2 But see the decision of the Upper Tribunal in UK Storage (Box B1.9B).
3 But see Goals Soccer Centres plc (D9.16.5).
Licences to occupy etc – UK case law
This box summarises some of the extensive body of UK case law in this area, broadly organised by subject matter.
Taxpayers have argued for exemption in some cases and for standard-rating in others – although a licensor could generally opt to tax, some of the cases pre-date the option, which was introduced in 1989, and in some it was disapplied by the anti-avoidance rules in Chapter B3. Other appeals have been brought by the licensee.
* * * * *
It has generally been accepted that exemption requires exclusivity, and the ECJ case law in Box B1.5Bhas supported this, although the meaning of the point has evolved, as discussed in B1.9.2.
Mount Edgcumbe Hospice Ltd (VTD 14807) allowed two subsidiaries to use its premises, but successfully argued that this was standard-rated. The Tribunal held that although the company had granted licences to occupy land, these were not exempt since they did not grant an exclusive right of occupation.
Abbotsley Golf & Squash Club Ltd (VTD 15042) granted a golf club a non-exclusive licence to occupy its courses. It successfully argued that it was an exempt licence to occupy (and also that it was not taxable as the provision of sports facilities – see Box D9.16A). The Tribunal said that an exempt licence to occupy did not have to be exclusive – a tenancy had to be, but a licence did not. More recently, however, similar arrangements for the use of a golf course were found to be taxable in James Gillan & Margaret Gillan (TC 00327) – drawing also on Stockholm Lindöpark (Box B1.5B), the Tribunal thought that the essence of the arrangement was to provide, not occupation of the land, but merely its use.
Grovewood (1998) Ltd (VTD 17125) purported to grant non-exclusive licences to associates and contended that these were taxable. The Tribunal concluded that in reality the supplies were exempt licences to occupy land.
Holmwood House School Developments (VTD 18130) granted two licences to associate entities who occupied the property together, so that neither licence was exclusive. The Tribunal accepted that an exempt licence to occupy had to involve exclusivity, but concluded that the associates were in the position of joint owners, jointly having exclusive occupation. The licences were therefore exempt.
The Trustees of the Lyndon David Hollinshead SIPP, The Trustees of the Darren Hollinshead SIPP and The Trustees of the Richard John Cox SIPP (TC 00060) granted a 20 year lease of office space to various connected companies. These companies held the lease jointly and severally, and shared the use of the whole building. The Tribunal agreed with HMRC that the lease was exempt.
Grimsby College Enterprises Limited (TC 00129 and  UKUT 141 (TCC)) was a wholly owned subsidiary of a college, established to provide certain courses. The courses were nevertheless devised and taught by college staff. The company granted a 'licence to use facilities' to the college, which it said was taxable, being both non-exclusive and primarily for the use of equipment. The case was largely concerned with who had incurred the input tax at issue, but the First Tier Tribunal concluded that the licence was exempt – in reality, it was only the college that occupied the building, and the provision of equipment was incidental. The Upper Tribunal concurred.
Gosling Leisure Ltd (TC 01866) claimed that its parent charity had granted it a licence to occupy, and that it had itself granted a licence of part of the same area back to it. For reasons that are unclear, and which formed only a minor aspect of the case, HMRC argued that the licence back could not be exempt, since there was no exclusivity, no rent and no agreed period for the licence.
It was not clear that HMRC were correct even factually, but these points might have suggested that there was no 'leasing or letting' in the terms of the tests set out by the ECJ in Stichting Goed Wonen (Box B1.5B), generally seen as the leading case on the subject. Curiously, however, HMRC chose to argue not from that case, but from Walderdorff and Temco (also Box B1.5B). This was strange, because Temco had seemed to devalue the Goed Wonen tests, and the Tribunal saw nothing in either of the cases cited by HMRC to suggest that the company had not granted an exempt licence to occupy back to the charity.
Other aspects of this case are covered in Boxes A5.2A and A6.5C.
* * * * *
HMRC generally maintained that the provision of space for coin-operated machines was exempt, until they lost Sinclair Collis in 2003. Both site owners and machine owners have argued for taxation.
The Wolverhampton & Dudley Breweries plc (VTD 5351) allowed amusement machines to be placed in pubs. It successfully argued that this was standard-rated.
British Telecommunications plc (VTD 16244) paid hospitals for the right to install payphones. It unsuccessfully argued that the supplies to it were taxable with a view to treating part of the payments as recoverable VAT. The Tribunal followed the reasoning of the Court of Appeal in Sinclair Collis (see below).
Sinclair Collis Ltd paid to install cigarette machines in pubs. It argued that the supplies to it were taxable, so that it could treat part of the payments as recoverable input tax. The Court of Appeal (CA  STC 701) held that the supply was exempt – it was simply a licence to place the machine on, or annex it to, the premises, and that was an exempt licence to occupy land. The House of Lords ( UKHL 30) did not see the arrangements as amounting to a licence to occupy:
'So what are the characteristics that distinguish a licence to occupy from a mere licence to use? There are, in my opinion, two characteristics, one or other of which must, in some sufficient degree, be present. One is possession. The other is control. If neither is present, I find it difficult to understand how the licensee could be said to "occupy". …
A "licence to occupy" is, in my opinion, to be read as meaning a licence to go into possession, not necessarily exclusive possession, or to go on to the land and take some degree of control of it. If neither of these features is present, the licence cannot, in my opinion, properly be described as a licence to occupy.'
It nevertheless referred the case to the ECJ (CJEC Case C-275/01). The ECJ was strongly influenced by the fact that Sinclair Collis did not obtain the right to occupy a specific area, nor any right to control access to the site of the machine or exclude others from it. It saw the occupation of space as merely a way of effecting the real supply – the grant of the exclusive right to sell cigarettes on the premises. The supply was therefore not the 'leasing or letting' of immovable property and was taxable.
* * * * *
Hairdressers' chairs etc
Various owners of hairdressing salons have argued that the provision of space to self-employed hairdressers was exempt. Facilities for hairdressers were specifically addressed in the legislation from 1 October 2012, as noted in B1.9.2 and discussed more fully in B1.15, but these cases remain potentially relevant in other sectors.
R Quaife (VTD 1394) owned a hairdressing salon. He did not occupy it himself, and let the chairs in it to three hairdressers, each of whom had a designated chair, basin and cupboard. The Tribunal saw the lettings as exempt.
PM & P Field (t/a Paul Field Hair and Beauty Salon) (VTD 2047) operated a hairdressing salon. He established various companies, which employed the stylists and which had the use of specified chairs and basins. The Tribunal concluded that the lettings were taxable.
GG & HK Daniels (VTD 12014) provided chairs in a hairdressing salon to individual stylists. The Tribunal found that the supplies were exempt in a period when the agreements had restricted the stylists to a specific area, but taxable in an earlier period when there had been no such restriction.
Simon Harris Hair Design Ltd (VTD 13939) provided facilities to self-employed hairdressers, each of whom had an allocated space within the salon. They paid one charge for the use of space and another for the use of facilities. The Tribunal saw both charges as for a single standard-rated supply, saying that the one was useless without the other – an argument that could surely have worked in either direction, but which anticipated some of the subsequent case law.
The Tribunal came to the same conclusion in a very similar case, W E Mallinson & M Woodridge and L J Mould (VTD 19087). It saw the facilities element as dominant because although the hairdressers needed both the facilities and a chair, they did not need to occupy a specific chair.
The appeal of MJ Taylor's Executors & Mrs P Taylor (VTD 20323) concerned the Taylors' letting of a hairdressing salon to two stylists. They had played no part in the management of the salon, and treated it simply as an investment. Noting the ECJ judgment in Temco (Box B1.5B), the Tribunal accepted that this was exempt – the Taylors had been mere passive investors. (It has been suggested that HMRC only failed to appeal this case because of Mr Taylor's death, and not because they accepted the outcome.)
Christopher James Denyer traded as a hair stylist, also providing facilities to other self-employed stylists in his salon. There were no written agreements, but the stylists were allocated a specific area and traded independently, taking their own bookings and setting their own charges. They were provided with clean towels, and could also buy shampoo etc from Mr Denyer if they wished. Mr Denyer charged them a 'chair rent', plus 75 pence per customer as a contribution towards rates, utility bills and laundry of towels.
The Tribunal (VTD 20121) did not see him as providing any further facilities or rights over the salon generally, and rejected HMRC's argument that the supply was taxable, being essentially of facilities. Rather, it saw the use of the allocated areas as 'paramount, not incidental' and thought that 'all else flows from that right and is parasitical upon it'. The supply was therefore exempt. The High Court ( All ER (D) 362 (Nov)) disagreed. Although the lettings of the individual areas might be capable of exemption, the stylists' use of the salon as a whole needed to be considered – overall there was a single taxable supply of facilities.
(There was an unpleasant aftermath to this case – having won in the High Court, HMRC then pursued Mr Denyer for a late registration penalty. A new Tribunal (VTD 20691) had the decency and sense to allow his appeal against this.)
Vigdor Ltd (t/a Michael Jane) (VTD 20322) operated a hairdressing salon, and also provided a separate room for the use of self-employed stylists. The Tribunal thought that there was a single taxable supply of 'salon facilities', but that even if the licence to use floor space were a separate supply, it was not exempt. It concluded that the stylists did not each have exclusive use of particular areas, and rejected arguments about shared use based on Temco (Box B1.5B), also seeing the activity as insufficiently passive to be exempt in terms of that case. A similar decision was reached in Andrew Holland (t/a The Studio Hair Company) (VTD 20325). On a joined appeal, these decisions were upheld by the High Court ( All ER (D) 302 (Oct)), which concluded that the exemption:
'… does not extend to a licence to occupy land which is but one element of a package of supplies made by the taxpayer/lessor to his customer in consideration of a payment or payments by that customer where the supplies in question are commercial in nature or are best understood as the provision of a service and not simply as the making available of property. If that is the nature of the supply – a service rather simply the making available of property – there is no exempt licence: the licence element in the supply is standard-rated.'
Annette Glen-Jones t/a Sophisticuts (TC 01015) operated a hairdressing salon on the ground floor of a building. The basement was also fitted out as a salon, and she let this out, under two separate licences, to two self-employed hair stylists. The licences allowed Mrs Glen-Jones unrestricted access to the basement, although the evidence was that she did not enter it during working hours. The Tribunal concluded that the supply was taxable, distinguishing Taylor, above, on the not entirely satisfactory grounds that the Taylors had never carried on their own hairdressing business on the premises.
Similar issues arose, in rather different contexts, in two other cases:
Byrom, Kane & Kane (t/a Salon 24) ( EWHC 111 (Ch)) operated a 'massage parlour', letting rooms by the day to self-employed 'masseuses' and providing them with some other facilities including telephone and reception, waiting areas, card handling and advertising for the establishment. They maintained that the supply to the masseuses was exempt as a licence to occupy.
The High Court disagreed. Whilst the provision of the room was probably the most important element, the facilities were not merely ancillary to it. Overall, the Court saw a single taxable supply of 'massage parlour services'. In any case, ECJ cases such Temco (Box B1.5B) suggested that the exemption was for comparatively passive activity, and not the more active exploitation of property.
Rotherham Golf Academy Ltd (TC 00036), held a lease on a golf driving range, which was operated by four individuals. The company purported to grant a series of three-month leases to each of them in turn, for a rent equivalent to 98% of turnover. The leases, it said, were exempt, and had the effect that it was the successive lessees that were providing the use of the facility to the public.
The Tribunal concluded that the leases did not reflect reality, which was that the company continued to operate the business – the leases, it said, were not leases, but shams. Rather, however, than seeing taxable supplies to the lessees, it looked through the leases and saw the company as continuing to make the supplies to the public. This approach was reminiscent of the 'abuse' decisions summarised in Box A8.2B, although the Tribunal preferred to cite other case law, including the ECJ's putdown of the UK in Maierhofer (Box B1.4A).
* * * * *
Taxpayers have argued both taxation and exemption here, and there can be subsidiary arguments about service elements.
Business Enterprises (UK) Ltd (VTD 3161) supplied serviced office accommodation, including cleaning and the services of a switchboard. It argued unsuccessfully that this was taxable – the entire charge was found to be exempt.
Ultimate Advisory Services Ltd (VTD 9523) allowed associated companies the use of its office facilities. It argued unsuccessfully that this was exempt – the Tribunal held that this was not a licence to occupy land, but just an informal arrangement to share facilities.
Sovereign Street Workplace Ltd (VTD 9550) supplied serviced office accommodation. This was found to be exempt, but part of the rent was standard-rated as covering mail handling and a telephone answering service. [Following CPP (B1.4.3), there would be a stronger argument for the whole charge to be exempt.]
Altman Blane & Co (VTD 12381), an accountancy firm, established a company to which it provided a room in its offices. The room was also sometimes used by the firm. The firm successfully argued that this was exempt.
Pethericks & Gillard Ltd (VTD 20564), an accountancy firm, had office premises, including separate rooms for each of its three directors. Each director carried on business both through the firm itself and through a separate company of his own, and used his room in both activities, apparently as he chose. The firm made an annual charge of £1,800 to each director's company, covering the use of the room, common parts and office facilities. There were separate charges for post, professional indemnity insurance and, at least in theory, secretarial services.
The Tribunal accepted that the provision of the room was the leasing or letting of immovable property and capable of exemption. It also thought that this was the dominant element in what was provided. But overall it thought that there was a single supply covering everything but the insurance, and that – drawing on Temco (Box B1.5B) and Byrom, Kane & Kane (above) – this was not the passive provision of land and was standard-rated.
* * * * *
Again, taxpayers have argued both taxation and exemption.
British Airports Authority (VTD 146; CA 1976,  STC 36) granted concessions at an airport to retailers, who paid it a percentage of their turnover. It argued that the supplies were taxable. The Tribunal agreed in relation to concessions that did not involve specific space, and this point was not appealed further. The Court of Appeal subsequently found that the provision of defined shop space was exempt.
Cullens Holdings plc (VTD 12376) owned shops, two of which it provided to licensees who were to stock goods provided by Cullens. Cullens claimed to be supplying taxable trading rights, rather than an exempt licence to occupy land – it was found to be providing both, so that the licensees' payments were to be apportioned. [Again, apportionment is less likely following CPP.]
HA Lovejoy (t/a HRS Recoveries) (VTD 12835) operated a vehicle recovery service and let part of his workshop to a repair business. He successfully argued that this was exempt.
PJ Lamb (t/a Footloose) (VTD 15136) was a shoe retailer who allowed a watch retailer to sell watches from his shop. The watch dealer could install display units and the use of window space, but the rest of the shop was shared. Mr Lamb argued unsuccessfully that this was exempt.
* * * * *
Stalls and stands
Once again, the cases have been argued in both directions. The provision of other facilities seems to have tipped the balance towards the supplies being taxable.
British Airports Authority (VTD 147) provided transfer desks at an airport to an airline. It successfully argued that this was taxable.
Tameside Metropolitan Borough Council (VTD 733) let market stalls on a daily basis. HMRC's policy at the time (this is a 1979 decision) was that a licence to occupy had to be for at least 24 hours, but the Tribunal rejected this and found that the lettings were exempt. HMRC subsequently accepted that there was no minimum period for a licence to occupy.
WB Enever (VTD 1537) organised antiques fairs and charged dealers for the use of tables. She argued unsuccessfully that this was exempt. (It was not disputed that admission charges to the public were taxable.)
The Swiss National Tourist Office (VTD 13192) hired a stand at an exhibition, and sublet parts of the stand to other Swiss exhibitors. The other exhibitors also got the use of shared facilities and to be included in the exhibition catalogue. The Tourist Office argued successfully that this was taxable. The Tribunal found that the supplies 'went far beyond licences to occupy land' and that 'the real substance of the supply was … the right to full participation in the Switzerland stand'.
* * * * *
Care of animals
JA King (VTD 933) owned fields in which he allowed people to place horses or ponies on a weekly basis. HMRC successfully argued that this was standard-rated and was neither an exempt licence to occupy land nor a zero-rated supply of animal feeding stuffs. [HMRC do, however, now accept both these points – the animal feeding stuffs argument takes precedence as zero-rating overrides exemption.]
John Window (VTD 17186) provided stabling and livery for horses. This was seen as a single exempt supply of a licence to occupy land.
Leander International Pet Foods Ltd t/a Arden Grange (VTD 18870) provided kennelling and quarantine facilities for cats and dogs. The Tribunal thought that any licence to occupy land was subsidiary to the provision of care etc, so that the supply was standard-rated.
There is more about these issues and cases in D8.6 and Box D8.6A.
* * * * *
Leez Priory (VTD 18185) operated as a wedding venue. Users would typically buy a package of services, each priced separately, but in all cases would pay a venue charge. Occasionally, they would hire the venue only. In this case, the Tribunal accepted that the supply was of a licence to occupy land, although it was not exempt because the property was similar to a hotel etc (on this aspect, see Box D9.4A). In other cases, the package was standard-rated anyway, the land element being subsumed in a single supply of wedding services.
Chewton Glen Hotels Ltd (VTD 20686) hired out a room for wedding ceremonies. Often it also provided further rooms, with catering, music etc and in those cases it seems to have accounted for VAT. But it treated the supply as exempt where it merely provided the single room together with drinks, or drinks and canapés, served in it. HMRC thought that this was still standard-rated.
The Tribunal agreed. Considering the matter in terms of Temco (Box B1.5B), it concluded that the supply was not a sufficiently passive activity to qualify as leasing or letting. One factor here seemed to be that the £600 charge was far more than would be expected for a passive letting. But it thought that the supply was 'far removed from the letting of property by a landlord to a tenant' and that the couples 'do not any sense occupy as owners with the right to exclude others'. Indeed, noting that customers also had the use of other facilities, such as parking, reception and the use of the grounds for photographs, the Tribunal seemed to think that the supply was also standard-rated on the few occasions where no drinks or catering whatever were provided, a point that HMRC themselves had not taken.
Note: As explained in D9.5.2, the provision of a room in a hotel etc 'for the purpose of a supply of catering' is specifically standard-rated. This was not argued here, but the case might suggest that such a supply is standard-rated anyway, and that the rule in D9.5.2 is superfluous.
Best Images Ltd (TC 00480) operated Vikram's Occasions Palace in Slough. The venue was let out for Indian weddings and other events. Although the proprietors did not generally provide catering or music, rather helping customers to arrange these, it was apparent that they took considerable care to ensure that events went well, and did much more than simply make the premises available. The Tribunal concluded that the activity was not sufficiently passive to be an exempt letting of land – customers also got a range of other benefits, and overall there was a single, taxable, supply of services.
Drumtochty Castle Ltd (TC 02111) provided the castle for use as a functions venue, principally for weddings and/or wedding receptions. Considering the active role taken by the company's staff, and previous case law, the Tribunal concluded that this did not involve a licence to occupy land. The arrangements did not confer exclusive rights of possession, occupation or control, or the right to exclude others. They were best understood as the provision of a range of commercial services, part of which was the making of the castle and its grounds available.
For further cases about wedding venues, see Boxes D9.4A and 5A.
* * * * *
Simon Packford (VTD 11626), a hotel proprietor, provided afternoon wedding receptions, with the option of the use of a function room for the evening. The Tribunal accepted that the evening room hire involved a separate supply, which was potentially exempt. But because this was a hotel, this was subject to the further question whether it was 'provided for the purpose of a supply of catering' – on this aspect, see Box D9.5A. But on apparently similar facts, and following the ECJ judgment in Card Protection Plan (Box A4.5A), the Tribunal in Willerby Manor Hotels Ltd (VTD 16673) saw a single, standard-rated, supply, without needing to consider the second point.
Diana Bryce (t/a The Barn) ran a day nursery for young children, and provided facilities for children's parties at weekends. Hirers were given the use of the hall for a period, followed by refreshments in a separate room. The First-Tier Tribunal (TC 00242) held that there was an exempt supply of the letting of the hall, and a separate taxable supply of catering. On appeal, the Upper Tribunal ( UKUT 26 (TCC)) agreed with HMRC that there was a single taxable supply of facilities for holding a party.
The Upper Tribunal also, however, revisited the question of whether a separate supply of the hire of the hall would have been exempt. It concluded that it would not. It thought that the First-Tier had attached too little significance to the availability of play equipment, but also saw an issue with the charging structure. Subject to an overall minimum, the charges were per child, which the Upper Tribunal thought 'wholly inconsistent with a right of the customer to occupy as if that person were the owner'.
* * * * *
Self-storage was specifically excluded from exemption with effect from 1 October 2012, as discussed in B1.14, so that these cases have become less relevant.
David Finnamore t/a Hanbridge Storage Services (TC 01081) owned a secure site on which there were some 184 large metal containers, of a kind used on lorries or ships. They rested on their own weight, but were movable only with specialist lifting equipment. Mr Finnamore let out the individual containers, together with the land on which they stood, as a self-storage facility.
The Tribunal concluded that this was exempt as a licence to occupy land. It did not think it relevant whether the containers were themselves 'immovable property', since the predominant element was in any case the provision of the land, not of the container. HMRC appealed, but as at December 2012 no hearing date had been fixed, and it may be that the case is not proceeding further, in view of the outcome of UK Storage.
UK Storage Company (SW) Ltd ( UKUT 359 (TCC)) provided self-storage facilities at two sites. In one case, the facilities were within a warehouse, and HMRC accepted that the letting of these was exempt. In the other, customers would rent an enclosed storage unit located in a secure open air compound. HMRC maintained that the letting of these was taxable.
Unlike in Finnamore, the First-Tier Tribunal (TC 01394) thought it relevant whether the storage units were immovable property. It concluded that they were, as discussed in Box B1.4A, and that in practice the users had exclusive use of a unit – this was a licence to occupy it, and the land on which it stood. The Tribunal dismissed HMRC's suggestion that there was a bundle of supplies, seeing the provision of security etc as ancillary to the provision of the unit, and saw no reason why the company's two facilities should be treated differently.
The Upper Tribunal rejected the idea that the units were immovable property, as also seen in Box B1.4A. But in case it was wrong about this, it also considered HMRC's further arguments, concluding that had the subject matter been immovable property there would have been a licence to occupy, but that the overall supply would still have been standard-rated, since the evidence indicated that 'for a typical customer the ability to occupy a particular unit or area of land was not an end in itself but a means of better enjoying the storage services provided.'
It followed, of course, that the facilities in the warehouse were also standard-rated. HMRC had not suggested this, but the point followed directly from their arguments. They indicated in December 2012 that they were considering issuing a Revenue & Customs Brief about the case.
This material also appears in Box B1.14A.
* * * * *
Theatres Consolidated Ltd (VTD 141) granted a licence to another company to produce a play in a theatre. It argued unsuccessfully that this was taxable.
RH Carter (t/a Protheroe Carter & Eason Ltd) (VTD 12047) allowed a property developer to swing a crane through airspace above his premises. He unsuccessfully contended that this was exempt.
Saturn Leisure Ltd (VTD 20185) managed an ice rink. The Tribunal accepted that the local authority had granted an exempt licence to it, but saw the company's claim to have granted exempt sub-licences as spurious.
Norwich Airport Ltd (TC01965) levied a charge on passengers to fund improvements to the airport. Rejecting a number of arguments, the Tribunal saw this as standard-rated as granting a right to enter land, and not to occupy it.
B1.10 This section discusses the specific exclusions from the property exemption, the normal effect of which is to make the supply standard-rated. Other transactions within the exemption may not in fact be exempt because of:
the option to tax (Chapter B2);
treatment as a transfer of a going concern (Chapter B4);
the zero-rating for dwellings and some residential and charity buildings (Chapter C1);
the standard-rating on a change of use of some residential and charity buildings (C10.4).
The supply of building land is excluded from the general exemption in Article 135(1)(k) for the supply of land, and so should be taxable. Through a cross reference to Article 12, the Directive explains that 'building land' means unimproved or improved building land as defined by the Member State.
The UK has not implemented this provision, so that sales of building land are basically exempt. Countries that had joined the EU, and were exempting building land, as at 1 January 1978 are permitted to retain exemption pending fuller harmonisation. This is under Article 371 of the Directive, and the UK is one of a number of countries that has taken advantage of it.
Newer Member States do not have this option, and in 2009 the European Commission obliged Latvia – which did not even exist as a sovereign state in 1978 – to amend its legislation accordingly. Perhaps more surprisingly, the Commission went on to challenge France, which does have the benefit of Article 371, over an exemption for sales of building land to individuals, for residential development. France amended its legislation, rather than face infraction proceedings before the ECJ.
On the other hand, the validity of the UK's position was confirmed in Norbury Developments Ltd (CJEC Case C-136/97). Norbury had neglected to opt to tax a sale of building land, and argued that the sale had been taxable anyway under the Directive. The ECJ disagreed, holding that the UK was entitled to continue to exempt building land for the time being.
The UK may at some stage have to tax sales of building land, but sees problems in defining it. The developer's self-supply (see Annex A para 4) represented a botched attempt to deal with the matter, but was abolished in 1997.
Although the supply of buildings is exempt under Article 135(1)(j) of the Directive, a cross-reference to Article 12 means that this excludes new buildings. A 'building' is stated in this context to mean any structure fixed to or in the ground.
Member States have a fair degree of flexibility in interpreting this rule and, as with building land, those that had joined the EU by 1 January 1978 can retain exemption for the time being.
The UK has, however, implemented this rule, and does tax sales of new buildings and civil engineering works. But it has done so in a limited way, excluding dwellings and some other buildings and confining itself to freehold sales. It is not entirely clear that, having chosen to tax new buildings, the UK is entitled to do so in quite so limited a way, and to exclude, say, the disposal of a long leasehold, but HMRC take the view that a dealing in anything less than the freehold is 'leasing or letting', rather than the 'supply' of land or a building, as noted in B1.2.3.
The UK rules are explained in B1.11.
Article 135(2) of the Directive lists four items that are to be excluded from the exemption for 'leasing or letting':
(a) the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites;
(b) the letting of premises and sites for the parking of vehicles;
(c) the letting of permanently installed equipment and machinery;
(d) the hire of safes.
The UK has specifically implemented exclusions (a) and (b) above and has also chosen to apply other exclusions (see B1.10.2). It has not written exclusion (c) into the legislation, apparently in the belief that any separate supply of the letting of equipment or machinery is taxable anyway. There is more about this in B1.4.4, but it is not clear that the UK is right about this. The same previously applied to (d), but from 2012 this would seem incidentally to be caught by the provision for 'self-storage' (B1.14).
Finally, a tailpiece to Article 135(2) says that 'Member States may apply further exclusions to the scope of the exemption' for leasing or letting.
The wording here might suggest that member states have complete discretion as to what further exclusions to introduce, and this was the inference from the ECJ judgment in Miguel Amengual Far v Juan Amengual Far, subject only to the point that some element of the exemption must be retained. It held that Spain was entitled to invert the structure of Article 135(2) by applying general taxation, with exemption the exception.
Box B1.10A looks at the case law on this point, including Amengual Far. That judgment apart, it would appear that exclusions under the tailpiece ought to have some of the same flavour as those in (a) to (d). Specifically, they would need to be about a more active exploitation of the land than mere passive letting, In the UK, the Court of Appeal in Colaingrove recognised this limitation, albeit describing it as peripheral, as perhaps it was to the matter at hand.
Amengual Far is undoubtedly a problem for this interpretation. But the judgment rather suggests that the Court, unlike its Advocate General, had not given the implications a great deal of thought, and that for example it was not really contemplating the sort of long term leasing that is more normal in the UK. The Court of Appeal in Colaingrove made its observations having reviewed the ECJ cases, including Amengual Far, and perhaps that judgment needs to be seen as somewhat out on a limb.
The issue surfaced briefly in 2012, when some people questioned the validity under the Directive of the proposed taxation of storage facilities (B1.14). As a general point, there seemed little doubt about this, and indeed the Court in Colaingrove had actually mentioned storage as an example of what could be taxed under the tailpiece. But this is not to say that the entire scope of the storage measure can necessarily be justified, and this is considered in B.14.1. The issue is also considered in connection with hotel and holiday accommodation in D9.2.
The exceptions cover:
Freehold sales of new or uncompleted buildings or civil engineering works (Sch 9 Gp 1 item 1 para (a))(see B1.11). This does not apply to dwellings or to certain buildings for residential or charitable use.
The provision of facilities for parking vehicles (ibid para (h)). This includes, for example, a long lease on a purpose-built car park, but not a freehold sale (B1.12).
The provision of facilities for storing/housing/mooring aircraft or boats (ibid para (k)) (B1.13).
Hotel and similar accommodation, holiday accommodation, camping facilities and temporary siting of caravans (ibid paras (d) to (g)) (Chapter D9).
The provision of facilities for sport or physical recreation (ibid para (m)) (see D9.16). There are exceptions, and there is alternative exemption in some cases under the rules discussed in D9.16.6-7.
The right to occupy a box, seat or other accommodation at a sports ground, theatre, concert hall or other place of entertainment (ibid para (l)) (D9.17).
The right to take game or fish or to remove standing timber (ibid paras (c) and (j)) (D8.5).
Storage facilities, misleadingly referred to in the legislation as 'self-storage' (ibid para (ka)) (B1.14). This has applied since 1 October 2012.
Facilities for hairdressers (ibid para (ma)) (B1.15). This too has applied since 1 October 2012.
'Developmental tenancies' created by the former developer's self-supply rules (see Annex A para 4) (ibid para (b)). Although these rules have been abolished, some leases granted before 1 March 1997 are still taxable under them. The tenant was required to notify the landlord where the rules applied. Landlords whose tenants did so should continue to charge VAT for so long as the lease continues, even if it has been assigned by the tenant in the meantime. The legislation provides for this to be repealed with effect from 1 June 2020.
Call options, pre-emption rights and Scottish personal rights (see B1.7.2) to acquire an interest etc in land which would be taxable under one of the rules above (ibid para (n)).
Also, as explained in C10.4, automatic standard-rating can apply to a sale or letting of some buildings which had previously qualified for zero-rating as for 'relevant residential' or 'relevant charitable' use.
Most of these exceptions do not – or should not – apply to outright disposals. For example, the provision of hotel accommodation is caught by them, but the outright sale of a hotel is not. This is consistent with the exceptions being authorised, or required, by Article 135(2) of the Directive (see B1.10.1) – in other words with the transactions in question being a 'leasing or letting' within Article 135(1)(l) of the Directive, rather than a supply of a building or land under Article 135(1)(j) or (k).
The position is complicated by a lack of clarity over the boundary between 'leasing or letting' and 'supply', by differences in the wording of the various exceptions, and by the fact that , for the time being, Article 370 of the Directive allows the UK to retain existing taxation of 'supplies' of buildings, although not of land. HMRC's views vary between the exceptions, but it seems that in some cases they may be wrong to see disposals, or long leases granted for a premium, as taxable.
Permitted scope of further exclusions – case law
This box notes some cases where the courts have considered what limitations might exist on member states' ability to add further exclusions to the exemption for leasing and letting, as discussed in B1.10.1. This is under a tailpiece to Article 135(2) of the Directive, but was previously under a tailpiece to Article 13B(b) of the Sixth Directive (in either case referred to here simply as 'the tailpiece'). The cases are shown in chronological order.
* * * * *
Morten Henriksen (CJEC Case 173/88) concerned the letting of garages. The Advocate General did not see this as within the compulsory taxation of parking for vehicles (the scope of which seemed inconsistent between different language versions of the Directive), and considered whether a member state could tax it under the tailpiece. He said that:
'The discretion conferred by [the tailpiece] is broad, and while that discretion is no doubt subject to certain limits, there does not seem to me to be any limitation which can be read into the Article which would preclude a Member State, if it chose to do so, from extending the exclusion provided for in respect of sites for parking vehicles so as to cover also individual closed garages of the kind in issue in this case . … However, I think it is plain from the scheme and structure of the Directive that, on the proper interpretation of its provisions, the national legislation cannot have that effect unless it contains its own specific provisions to that effect … it is not open to the national tax authorities to apply any further exclusions unless the Member State has adopted additional legislative measures [to the wording in Directive] to extend liability to VAT to such lettings.'
In the event, the Court itself took an entirely different view of the main issue, as seen in Box B1.12A, and so did not need to consider the tailpiece.
In 1989, the UK had concluded that although the Directive provided for exemption for the grant or assignment of a lease, the surrender of a lease had to be standard-rated. In Lubbock Fine & Co (CJEC Case C-63/92,  STC 101), the ECJ decided that a surrender was 'leasing or letting' (on this aspect, see Box B1.5B), but both it and the Advocate General considered whether the tailpiece to then Article 13B(b) nevertheless allowed the UK to tax it.
The European Commission had submitted that the tailpiece only allowed further exclusions if they were akin to the four compulsory exclusions (as at Art 135(2)(a)-(d), shown in B1.10.1), citing the preparatory documentation for the Sixth Directive. The Advocate General rejected this, questioning what the exclusions had in common in the first place (a question addressed, in particular, by the Advocate General in Blasi, below). But the Court itself held that:
'Article 13B allows Member States to exclude certain types of letting from the scope of the exemption and hence to subject them to tax. However, it cannot be construed as allowing them to tax a transaction terminating a lease where the grant of that lease was compulsorily exempt. The relations created by a lease cannot be broken up in this way.'
So the tailpiece was, at any rate, limited by considerations of neutrality.
Barbara A Ashworth (VTD 12924) and her husband lived in a property on which they held a 99 year lease that prohibited occupation in any February. HMRC maintained that this meant that their rent was standard-rated, and the Tribunal agreed in terms of the UK legislation. This does not seem to have been right (see Box D9.7A), but the Tribunal went on to consider the position under the Directive. It did not see that the lease was within the mandatory taxation for hotel and holiday accommodation, so that the question was whether the UK legislation (as it understood it to mean) was permitted by the tailpiece to the then Article 13B(b).
The Tribunal thought that the legislation created an inequality between Mrs Ashworth and others who held their homes leasehold, and (citing non-VAT ECJ judgments) that the UK measure was only permissible if this inequality was 'objectively justifiable'. It did not believe that this was so.
The Tribunal also noted that the four mandatory exclusions from exemption:
'… are specific descriptions of supplies. These are excluded by reference to their functions, e.g. because they relate to hotel or holiday accommodation, car parking, operation of machinery or safe deposits. The purported further exclusion introduced by [UK legislation] disqualifies from exemption supplies by way of leases of residential accommodation, not by reference to the function to which the accommodation is put, but solely on account of the tenant's right to reside in the building throughout the year being cut down. [This] does more than exclude these supplies from the scope of the exemption by reference to their function; it redefines the exemption itself. On that basis alone therefore I would conclude that the introduction of [the legislation] was an excessive exercise of the power given by Article 13B(b).'
Elisabeth Blasi (CJEC Case C-346/95) let a number of furnished flats to refugees referred by the local authority in Munich. The tax authorities said that this was taxable under the mandatory provisions for hotel and similar accommodation, now in Article 135(2)(a). They did not seek to rely on the tailpiece, but the Advocate General, unlike the Court itself, commented on whether the tailpiece might be relevant:
'The last sentence of Article 13B(b) is broadly worded so as to allow the Member States a large degree of discretion in placing limits on the scope of the exemption in Article 13B(b). … I see no Community interest in seeking to interpret narrowly the discretion granted to Member States by that provision to bring further transactions within the scope of the charge to tax. '
He concluded that the German approach might have been justifiable on the basis of the tailpiece. But, in a passage that has been much cited since, he proceeded to set out the rationale for the exemption for leasing and letting (paragraph breaks added for clarity):
'Under the Directive the supply and leasing of immovable property are in principle exempt from VAT. Those exemptions reflect the particular difficulties in applying VAT to such goods.
Unlike ordinary goods, land is not the result of a production process; moreover, buildings, once constructed, may change hands many times during their life, often without being subject to further economic activity.
Under the Directive the charge to VAT is therefore limited in principle to the supply of building land or of new buildings and the land on which they stand. The preparation of land for development entails economic activity enhancing the value of the land; and the supply of a new building marks the end of a production process.
Thereafter repeated taxation of immovable property each time it is sold would not be justified. The same applies to the letting of such property, which is normally a comparatively passive activity not entailing significant added value; although an economic activity for the purposes of Article 4 of the Directive, the letting of immovable property is therefore in principle exempt from tax.'
He went on to provide an answer to the question posed by the Advocate General in Lubbock Fine. as to what the mandatory exclusions had in common:
'Article 13B(b) also provides for exclusion of certain transactions from exemption. The common feature of those transactions is that they entail more active exploitation of the immovable property justifying further taxation in addition to that levied upon its initial sale.'
The actual issues in the case are considered in Box D9.2A.
In Miguel Amengual Far v Juan Amengual Far (CJEC Case C-12/98), Miguel had rented business premises to his brother, Juan, but then evicted him for non-payment of VAT on the rent. Remarkably, their litigation resulted in a referral to the ECJ about the validity of the Spanish legislation.
In Spain, the exemption for leasing and letting applied only to dwellings, and other lettings were taxable. This relied on the tailpiece to the then Article 13B(b), but the Spanish court was concerned as to whether it was permissible to invert the scheme of the Directive in this way, with commercial property being taxed not as an additional exclusion from exemption, but as part of a general rule. (There was the further complication that, in the Spanish version of the Directive, the tailpiece gave member states discretion to broaden the exemption, rather than the exclusions from it.)
The Advocate General considered the discretion given by the tailpiece:
'I do not agree with the … the Spanish Government … that the directive allows Member States to derogate from the exemption relating to lettings of property without any limit, if only for the reason that it make the scope of the exemptions derisive. Rather than resorting to quantitative criteria, we should consider whether the reasons on the basis of which the Council defined the cases of exemption apply. As Advocate General Jacobs observed in the Blasi case, the levying of VAT is not generally justified in regard to the letting of property, which, he stated, 'is normally a passive activity, not entailing significant added value'. Advocate General Jacobs concluded in that case that the common characteristic of the operations excluded from exemption under Article 13B(1) to (4) lies in the fact that they 'entail a more active exploitation of the immovable property, justifying further taxation, in addition to that levied upon its initial sale.
I now come to the national legislation under examination. The tax applies to an operation which is part of an active production process, following the reasoning of Jacobs. In exercising the power provided for in Article 13B to establish further exclusions from the scope of the exemption in relation to the letting of property, the Spanish legislature therefore legitimately subjected to tax the letting of premises used, in the course of business activity, for taxable operations.'
So he clearly thought that there were limits to the tailpiece, and perhaps more than had previously been suggested, but that taxation was legitimate on the facts of the actual case. Confusingly, the final part of the Opinion proposed that the Court hold that:
'The Sixth Directive allows the Member States to extend the scope of the exclusions from the exemptions to cases not provided for, which may include, as in this case, the letting of property as an economic activity.'
This would seem odd, since it is without the limitations suggested by the rest of the Opinion, and since the entire exemption is relevant only to letting of property 'as an economic activity'. But this was another text that had fallen victim to mistranslation, and in other language versions it was clear that the Advocate General was saying only that exclusions could include the letting of premises for an economic activity, or, in his original Italian:
'le locazioni di immobili destinati all'esercizio di attività economica'
The Court itself, in a remarkably brief judgment, paid little heed to the Advocate General's detailed reasoning. Referring also to Article 13C, which provided the basis for the option to tax, it concluded that:
'it is clear from the actual words of Article 13B(b) and C of the Sixth Directive that the latter* has left the Members States wide discretion as to whether the transactions concerned are to be exempt or taxed.
It is therefore immaterial that a Member State which considers it appropriate to subject to VAT all lettings of immovable property to be used otherwise than for dwelling purposes achieves this result by means of a general rule which subjects all lettings of immovable property to VAT and which exempts only lettings of immovable property for dwelling purposes or arrives at that same result by means of exceptions to a general rule exempting lettings of immovable property.'
There was no suggestion here of any limit to what a member state could consider appropriate although, given the context of the case, it was not apparent that the Court was even contemplating the existence of properties that were neither dwellings nor business premises, or that (as in the UK) the point might be relevant to very long leases.
*In Colaingrove, below, both the High Court and the Court of Appeal concluded from the context that 'the latter' referred to the Directive, and not specifically to Article 13C.
Colaingrove Ltd ( STC 712) concerned the UK's taxation of the letting of seasonal pitches at caravan sites, and its validity under the Directive. The company maintained that pitches used for residential purposes should be exempt, in the light of the policy behind the exemption in the Directive, and that the tailpiece must be subject to limitations.
Noting the Advocate General's observations in Blasi, the Court of Appeal observed that:
'Thus the policy underlying the exemption of the letting of property is to exclude from VAT transactions which involve simply the long-term, passive occupation of property rather than economic activity. After land has been developed, it is usually simply enjoyed. However, this is not necessarily the case. Where it is let for holiday or storage purposes, there would, in my judgment, be a "more active exploitation" of the property.'
'The rationale for excluding hotel and similar accommodation was explained in the explanatory memorandum accompanying the proposal for the Sixth Directive (Supp. 11/73) as follows:
"… it should be noted that in the Member States the letting of immovable property is generally exempted on technical, economic and social grounds. But the arguments that justify the exemption of lettings of premises as dwellings … no longer apply in the case of hotel premises."'
But having reviewed the case law (paragraph breaks added):
'In my judgment, the European Court of Justice in the Henriksen, Lubbock Fine, Blasi and Far cases has not itself enunciated any limits on the tailpiece member state option in article 13B(b). On the contrary, the European Court has emphasised that the option is a wide one.
I would, however, accept that there are some peripheral limits on the exercise of the option as a matter of the interpretation of the Sixth Directive.
Those limits include a restriction that, while a member state is not bound to exercise the tailpiece member state option, if it decides to do so, the member state's policy objective must be consistent with the rationale of the lettings exemption as explained in the explanatory memorandum to the proposal for the Sixth Directive and by Advocate General Jacobs in the Blasi case.
There may be other limitations arising from the general principles of the Sixth Directive: see for example the Lubbock Fine case. However, it is not suggested that there is any such general principle applicable in the present case.'
This case is also summarised in Box D9.7A.
B1.11 The freehold sale of new or uncompleted buildings or civil engineering works is standard-rated. This does not apply to dwellings or to buildings for a 'relevant residential' or 'relevant charitable' purpose.
The standard-rating (Sch 9 Gp 1 item 1 para (a)) covers:
(a) the grant of the fee simple in –
(i) a building which has not been completed and which is neither designed as a dwelling or number of dwellings nor intended for use solely for a relevant residential purpose or a relevant charitable purpose;
(ii) a new building which is neither designed as a dwelling or number of dwellings nor intended for use solely for a relevant residential purpose or a relevant charitable purpose after the grant;
(iii) a civil engineering work which has not been completed;
(iv) a new civil engineering work;
'Fee simple' means the freehold or equivalent, as explained in B1.6.1, but some further points about these rules are set out below.
The standard-rating is not confined to sales by the actual developer, and can apply to any number of sales while the building is still 'new'.
In practice, these rules are not often applied since owners of new buildings will normally have opted to tax anyway. But, for example, they are relevant where:
the building has been constructed by a leaseholder, and the freeholder then disposes of the freehold (although a disposal to a third party would often be a TOGC under the rules in Chapter B4); or
the freeholder has entered into a development agreement, under which title to the land only passes to the developer on completion of the building; or
the option to tax would be disapplied by the anti-avoidance rules in Chapter B3 – these rules are effectively overridden by the standard-rating for new freeholds, and this point has sometimes been used in VAT planning.
A building shall be taken to be completed when an architect issues a certificate of practical completion in relation to it or it is first fully occupied, whichever happens first; and a civil engineering work shall be taken to be completed when an engineer issues a certificate of completion in relation to it or it is first fully used, whichever happens first.
A building or civil engineering work is new if it was completed less than three years before the grant.
So a building or work is within the rules during construction and then for three years after completion or first occupation/use.
The three years during which the building is new runs from the earlier of the certificate of practical completion or first full occupation.
HMRC historically took the view that occupation here included a right to occupy, so that a building was 'fully occupied' if the owner had granted a lease of the whole of it, under which the tenant could go into occupation. More recently, they have suggested that the test is physical occupation, but their manual Land and Property hedges the issue at 8.1:
'The term 'fully occupied' is not defined in the law and should therefore take its normal every day meaning. You should consider both physical and constructive occupation of a building. Evidence of physical occupation could be installation of furniture and equipment in the building, whereas evidence of constructive occupation could be an agreement giving a legal entitlement to occupy the building. The extent to which a building is fully occupied will need to be considered on the facts of individual cases.'
So if, say, a lease of the whole building is granted in January, the certificate of practical completion is issued in February and the tenant moves in from March onwards, we can at any rate say that it will cease to be 'new' sometime in January or February three years later.
The law does not say at what point a building site ceases to be land and becomes an uncompleted building or civil engineering work. This would not matter if the UK taxed building land, but in the circumstances it can matter – as seen in B1.11.5, the sale of a mere serviced building plot is exempt, subject to any option to tax. HMRC are likely to see an uncompleted building once works have progressed beyond foundation level, since this is the approach in the context of zero-rating (see C5.4.3), but it is not clear that this is necessarily correct. Certainly there is no read-across from zero-rating in interpreting the word 'building', as noted in B1.11.2.
The ECJ judgment in Don Bosco (B1.4.6) might also be relevant here. If A agrees with B that it will sell a freehold site to B and then construct a building on it for B, the UK would see separate supplies – a potentially exempt land sale, followed by taxable construction services. The logic of Don Bosco, however, is that this should be seen as a single taxable supply of the new building.
Sometimes the full sale price for a freehold is not known at the time of the sale. The purchaser might, for example, agree to pay an additional sum by way of 'overage' if he obtains planning permission, or a share of his profit from a development. In these cases there is normally only a taxpoint as each payment is made or invoiced for (see D5.6.3).
In these cases, a building that is 'new' at the time of the sale may well have ceased to be 'new' by the time of any subsequent taxpoint. Section 96(10B) of the Act deals with this, and ensures that the later supplies are still standard-rated. Where a supply 'arises from the prior grant' of a freehold, the position is looked it in terms of whether there was a freehold new building at the time of that grant. So if a freehold new building was sold in 2009, an overage payment arising in 2013 is still standard-rated. Conversely, a deferred payment for the freehold sale of bare land does not become standard-rated because a new building has been built on it in the meantime.
Section 96(10B) was introduced with effect from 9 April 2003, and different rules (in section 96(10A)) continue to apply for sales before that date. In this case, the position is looked at in relation to each taxpoint. So if a freehold new building was sold in 2002, an overage payment arising now will be exempt, subject to any option to tax.
(In this particular case, it is also likely that any option to tax exercised on or before the sale in 2002 will have lapsed in 2008 under the six-year rule. Although the legislation was amended in 2009 to prevent this where overage remained payable, the change did not disturb cases where the option had already lapsed. There is more about this, and about the six-year rule generally, in B2.10.2.)
D5.6.3 says more about tax points for, and liability of, overage payments generally.
As explained in B1.7.3, call options and pre-emption rights can be exempt, but only if the main supply would be exempt.
If a commercial building was completed in 2012, it will cease to be 'new' in 2015. So the grant in 2013 of an option to purchase the freehold in 2013 is clearly standard-rated. And, in the absence of an option to tax, the grant in 2016 of an option to purchase the freehold in 2016 is exempt.
The position is less clear where the option is granted in 2013, but is not exercisable until 2016, since the actual sale in 2016 will be exempt if the vendor has not opted to tax. HMRC consider that such an option is standard-rated – that one should look to how the sale would be treated when the option is granted, not when the option is exercisable.
B1.11.2 The rules have generally been interpreted as applying only to free-standing new buildings, in line with the position for zero-rating (see, for example, C3.4). But for zero-rating, the position relies on legal provisions that do not actually apply here: UK law gives no definition of 'building' for the purposes of the standard-rating. On this basis, the Tribunal in Capital One Developments concluded that for these purposes a new building did not need to be free-standing. This case is summarised in Box B1.11A.
As seen in Box C2.3A, the Tribunal has also held in other contexts that a 'mobile home' resting on brickwork or steel legs was a building, but that houseboats, footbridges and walls were not. In the present context, however, a footbridge or wall is likely simply to be a civil engineering work instead.
Amongst the cases in Box C2.3A, the Tribunal in Dr John Parkinson (VTD 17257) took the view that a building will have a degree of permanence, and will normally be enclosed by walls and a roof, and this appears to be HMRC's line. In Upper Don Walk Trust (VTD 19476), the Tribunal suggested that:
'In our view, the word 'building' connotes an enclosure of sorts. It will enclose a volume of space or provide a place within which persons or things can be accommodated. All the structures which, in ordinary speech would undoubtedly be regarded as buildings have this characteristic in common: for example a house, a factory, a warehouse, an amphitheatre. A building will usually have walls and, although not invariably, a roof.'
Meaning of 'building' – the Capital One case
This case considered whether a structure was a building for the purposes of the rules in B1.11. Other cases on this general question are summarised in Box C2.3A, and A6.2.1 looks at another aspect of this decision.
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Capital One Developments Ltd (VTD 18642) was a member of the Capital One corporate group. It acquired some land next to an existing building that was already occupied by the group, although separated from it by a road, and built a new office block on the empty site. It then sold the new block to another group company.
The new block included a substantial link, above the road, to the existing building. The link consisted of four floors of meeting and waiting rooms, giving access at two levels to the existing building.
The Tribunal accepted that the new block would be an extension, and not a new building, under the rules for zero-rating (see, for example, C3.4). But in the absence of cross-referencing in the legislation, it did not see this as relevant. It noted that the only apparent definition of 'building' for the purposes of standard-rating new buildings was in what is now Article 12(2) of the Directive, which says that:
'building' shall mean any structure fixed to or in the ground.
This must clearly include something as substantial as the new block. An educated layman looking at the block would rightly describe it as a building, whether or not he also thought it was an extension. The sale of the freehold in the new block was therefore standard-rated.
B1.11.3 The standard-rating does not apply if a building is designed as a dwelling or a number of dwellings. The sale is potentially zero-rated if it is by the developer, under the rules in C5.2, and otherwise exempt.
'Designed as a dwelling or a number of dwellings' has the same meaning as for zero-rating, as explained in C2.3. There are some notable limitations here, as seen particularly in C2.5 and C2.6, and these can mean that the freehold sale of a new dwelling might be standard-rated if, for example, there are planning restrictions on its use.
This can apply to parts of buildings. The freehold sale of a new building consisting of a shop and a self-contained flat would be standard-rated to the extent of the shop. The sale of the flat would be zero-rated or exempt. (Apportionment here is required by Sch 8 Group 5 Note 10, which applies via Sch 9 Group 1 Note 3.)
B1.11.4 There is also an exception for buildings, or parts of buildings, intended for use 'solely' for a 'relevant residential' or 'relevant charitable' purpose (RRP or RCP). Where this applies, the sale will be potentially zero-rated if it is by the developer, under the rules in C9.3, and otherwise exempt.
There is more about this in C9.6.1, but:
RRP and RCP have the same meaning as for zero-rating, as discussed in Chapter C6. Care homes and student accommodation may be examples of RRP buildings, and RCP use involves use by a charity in non-business activities or as a village hall etc. Unlike with the similar provisions for the option to tax, there is no special rule for RCP offices (compare B2.4.4).
As discussed in C6.10, HMRC accept that 'solely' need not always mean 100%. In various other contexts they are content for it to be taken as 95%, but this does not apply here, and if the purchaser does intend a degree of non-qualifying use it will need to discuss the position with HMRC. Vendors might nevertheless want to insist on a more literal reading of 'solely' if exemption would be to their detriment.
In law, the sale is only excluded from exemption if the purchaser issues a certificate 'in such form as may be specified in a notice published by the Commissioners' (ie by HMRC). In practice, there is no such certificate, but HMRC will expect some sort of written confirmation to be provided. One possibility is to adapt the certificate for zero-rating in Box C9.5A, but a better approach may be to obtain specific warranties in the sale agreement.
On the face of it, the exception for RRP/RCP buildings can still apply, so that the sale is exempt, if the sale is to someone other than the end user – it might be to someone who will resell or let it to the actual occupier. The purchaser in this case will, however, need to be in a position to certify or warrant the occupier's intentions. At one stage, HMRC would in any case have said that the exception could not apply here because the purchaser was also using the building by letting or selling it, so that it was not 'solely' RRP/RCP. They have, however, now dropped this general stance, as discussed in C6.12, so that presumably they would not now raise this objection.
The law does not define a civil engineering work, but the basis for the standard-rating is in the Directive's definition of a building as including 'any structure fixed to or in the ground' (see B1.10.1). The provision clearly includes works such as roads, car parks, bridges and docks. HMRC also mention airfields, oil refineries and pipes for connection to mains services in Notice 742, water and electricity supplies in Notice 708, and – in connection with the Capital Goods Scheme – golf courses and running tracks in Notice 706/2.
A sale of civil engineering works is also likely to involve other land. In Notice 742, HMRC say that there is a single standard-rated supply if the land is ancillary to new or partly completed civil engineering works.
On the other hand:
'If you sell the freehold of land containing new civil engineering works but those works are a minor part of the supply, you are making a supply of exempt land (unless you have opted to tax). An example of this is the sale of a development site on which you have built roads and laid pipes for drainage. It would also be the case where you sell individual building plots on which connections to mains services have been constructed.'
In their manual 'Land and Property', at 8.2, HMRC put this in terms of whether 'the aim of the transaction is not to acquire the land but rather the new or partly completed civil engineering work on or under the land, such as an airfield or oil refinery'.
HMRC previously considered that, in these cases, there were two supplies – standard-rated civil engineering works and potentially exempt land – so that an apportionment was required. They took this approach in D & S Virtue (t/a Lammermuir Game Services) (VTD 20259) (see also Box C3.5B), about the sale of residential building plots. Although the vendors had undertaken extensive civil engineering work on the overall site, such as the construction of a road, they seem to have done little on the individual plots beyond clearance and levelling, and the Tribunal concluded that the sales were a single exempt supply. HMRC commented in Revenue & Customs Brief 64/07, reproduced in Box C3.5C.
B1.12 UK law (Sch 9 Gp 1 item 1 para (h)) says, without elaboration, that 'the grant of facilities for parking a vehicle' is standard-rated. This implements the Directive's exclusion from exemption under Article 135(2)(b) for 'the letting of premises and sites for the parking of vehicles'.
There are further points about:
the meaning of 'vehicle';
whether there is a 'grant of facilities';
whether the facilities are for parking;
whether they are incidental to something else (or vice versa); and
parking provision by local authorities.
These are covered below.
B1.12.1 Both the Directive and UK law refer to 'vehicles'. This has a broad meaning, perhaps more so than in ordinary language. They need not be motorised or capable of moving independently – the Tribunal has generally seen caravans as vehicles for these purposes (see D9.12.5) and HMRC also say that bicycles are included.
The UK does not appear to see aircraft and boats as 'vehicles', and has chosen to tax facilities for these separately (see B1.13). But other Member States do not do this, and in a couple of cases the ECJ has considered whether the term extends to boats:
In Fonden Marselisborg Lystbådehavn (Boxes B1.4A and B1.5B), a Danish case about the mooring and storage of boats, the ECJ concluded that 'vehicles' referred to all means of transport, including boats.
The Court took the same view in Susanne Leichenich (also Box B1.4A), but did not see a permanently moored boat used as a restaurant and disco as being a vehicle, since this was a question of its current use and function.
B1.12.2 The law refers to 'the grant of facilities', but in HMRC's view this covers any grant, assignment or surrender of a lease or licence, regardless of its length and whether for a premium or rent. The supply need not be to the end user – the standard-rating also covers the letting of an entire car park to a car park operator.
HMRC accept that the standard-rating for car parking does not cover freehold sales of garages or car parks. But the freehold sale of a new or uncompleted garage or car park is standard-rated under the rules in B1.11, unless zero-rated or exempt under the rules for dwellings (see C5.6.2) or for RRP/RCP buildings (see Chapter C6).
The Directive only mentions parking as an exclusion from the exemption for 'leasing or letting'. Parking facilities are therefore within the exemptions for the sale of land and the sale of buildings. This might suggest that the UK is wrong only to exclude freehold sales from taxation, and that, say, the disposal, or even the grant for a premium, of a long leasehold in a car park should also be exempt. Perhaps regrettably, the Tribunal in Internoms (Box B1.12A), in considering the grant of a 120 year lease, did not look at this aspect. The general point is considered in B1.2.3.
HMRC accepted in Revenue & Customs Brief 57/08 that penalty/excess charges were generally outside the scope of VAT – they are seen as compensation for a breach of conditions, rather than a payment for further parking. They had previously only taken this view in relation to local authority car parks (see Bristol City Council, Box B1.12C). But this did not apply in Vehicle Control Services (Box B1.12A).
Similarly, overpayments – where a ticket machine does not give change – were found to be outside the scope in Borough Council of King's Lynn and West Norfolk (TC 02342).
B1.12.3 The premises must be 'facilities for parking a vehicle'. In Notice 742, HMRC suggest that this means they must either be designed for parking vehicles, or specifically provided for that purpose, and case law (see Box B1.12A) appears to support this approach. The Notice goes on to provide examples, reproduced in Box B1.12B.
This applies to garages and car parks, taxi ranks etc or spaces in them. The presumption is that these are parking facilities unless they cannot be used as such. So a lock-up garage let for storage is still treated as parking facilities unless the lease etc specifically prohibits use for parking. If it does, it is nevertheless likely to be taxable as 'self-storage', as discussed in B.14.
If the site is not designed for parking, eg it is bare land, the presumption is that it is not parking facilities. It is seen as parking facilities only if the agreement etc refers to use for parking and that use is not merely incidental to some other use, or if it is provided for the construction of a garage or car park. But in KT Routledge (see Box B1.12A) land was held, on the facts, not to be parking facilities even though it was described as a car park.
HMRC accept that a vehicle left on land or in a building may not necessarily be 'parked', as seen in Box B1.12B. But they do say that the provision of storage for bicycles or touring caravans is standard-rated as parking. Case law suggests that the matter is less straightforward, and in B Hopcraft (VTD 18590), the Tribunal thought that the difference between parking and (mere) storage was one of availability:
'vehicles are parked when they are placed in a position where they can readily be recovered by their owners for use at short notice, whereas storage means that they are placed in a position where they can be said to have been put away because they will not be required at short notice'.
The actual length of time for which the vehicle was parked or stored was not a primary consideration. If the facility is within a building or other enclosed space it is, however, likely to be taxable as 'self-storage', as discussed in B1.14.
There is more about the storage of caravans in D9.12.5.
Parking facilities – case law
This box summarises selected case law in this area. Cases about non-business treatment of local authority parking are looked at in Box B1.12C.
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In a Danish case, Morten Henriksen (CJEC Case 173/88) owned a block of garages that had been built in conjunction with a housing development. He let out some of the garages to tenants of the houses, and others to local residents. He did not own any of the houses. The ECJ confirmed that 'premises and sites for parking vehicles' included enclosed garages (a point that was less clear in some language versions of the then Directive than in English). But it saw lettings for parking as exempt where they were 'closely linked to the [exempt] letting of immovable property for another purpose'. This was the case if the landlord and tenant were the same parties or – as was the case here – if the parking and the main property were part of a single complex.
Another aspect of this case is noted in Box B1.10A.
Trinity Factoring Services Ltd (CS  STC 504) let out lock-up garages. Some lessees used them to store goods, and the company did not charge VAT in these cases, taking the view that this was not 'facilities for parking'. The Court of Session disagreed. There was a plain implication that garages were for parking, and if the terms of a letting did not actually preclude such use it was standard-rated.
In Internoms Ltd (VTD 16527), the Tribunal, in a very brief decision, agreed with HMRC that the grant, for a premium, of a 120 year lease in two parking spaces was taxable. Whilst the tenant apparently did not use the spaces, and was thought to have taken them for their development potential, the lease only permitted use for parking.
Venuebest Ltd ( STC 433) used a car park in a contract parking business, and let spare spaces to an associated partnership, which operated pay-and-display parking. The Tribunal had held that the letting was not the provision of parking facilities, since the partnership was free to use the land as it wished. The High Court held that the fact that the land had, for many years, been a car park meant by implication that the letting was for the parking of vehicles, and was standard-rated.
In Bristol City Council (VTD 17665), the Tribunal held that penalty/excess charges in the Council's car parks were outside the scope of VAT. [Following this case, HMRC accepted this general point, initially just for local authority car parks and subsequently, in Revenue & Customs Brief 57/08, for private sector operators as well.]
KT Routledge (VTD 18395) let a piece of land to Leicester (rugby) Football Club. The agreement described it as 'the Granby Halls Car Park', so HMRC saw this as the standard-rated provision of parking facilities. The Tribunal accepted that the description was merely intended to identify the land, which had previously been (and indeed was subsequently) used as a car park, but that this did not make it parking facilities. It was not laid out as a car park, and any use for parking was trivial – it was actually used as access to the club's ground for matchgoers and for ambulances, police cars etc. The letting was therefore exempt.
Civilscent Ltd (TC 00070) constructed 97 flats, with very limited provision for parking. It granted long leases in the flats, only 11 of which included the lease of a parking space. HMRC accepted that the premiums for these leases were wholly zero-rated (see B1.12.4 and C5.6.3). The other leases made no reference to parking, but the company subsequently offered a further 11 spaces to residents. It granted separate 125 year leases in these for a premium of £11,000 and on terms which prohibited separate disposal. By now, between 10 and 20 months had elapsed since the leases had been granted on the flats. The company contended that the further leases were also zero-rated; HMRC that they were standard-rated.
The matter was argued largely in terms of Henriksen, although apparently ignoring the oddity that there had been separate suppliers in that case. HMRC suggested that Henriksen only applied if the leases were granted at the same time and constituted a single supply in terms of the later judgments in CPP and Levob (Box A4.5A). The Tribunal rejected these submissions, but it did see Henriksen as envisaging a single economic transaction. As to whether this was the case here:
'We do not consider that the fact that the grants of the leases were separately documented legal transactions or that a separate price was paid for the parking space lease to be determinative, nor the fact that there was a significant delay between the grant of the apartment lease and the parking space lease. But to establish close enough links for there to be a single economic transaction requires, in our opinion, at least an arrangement or understanding, albeit one short of a legal obligation, on the part of both parties that the elements of a single overall economic package will be completed. A mere possibility, at the time of the grant of the apartment lease, that there might subsequently be a grant to the tenant of the apartment of a parking space lease does not represent a sufficient link between the two to constitute a single economic transaction.'.
So it concluded that the parking was standard-rated not, as HMRC had contended, because of the time interval between the leases, but because there had been no real expectation that one would be followed by the other.
This seems to have ignored two alternative arguments. According to the Tribunal decision, the spaces were on 'land attached to the development', and if by this it meant that they were within the site, 125 year leases of them would have been zero-rated in their own right, as discussed in C5.6. Also, neither party argued that the supply was exempt, as linked to the continuing ground rent etc on the flats if not to a zero-rated initial grant.
Vehicle Control Services Ltd ( UKUT 130 (TCC)) provided a parking enforcement service in car parks. The company collected, and retained, income from parking infringements. It maintained that this was outside the scope of VAT, being damages for trespass. The First-Tier Tribunal (TC 00999) concluded that it did not have a sufficient interest in the land to sue for trespass, and that the company's retention of the money was payment for its taxable supply of services to the landowner. The Upper Tribunal agreed, and the company has appealed to the Court of Appeal.
In Borough Council of King's Lynn and West Norfolk (TC 02342), the Tribunal accepted that overpayments for parking, where ticket machines did not give change, were not further consideration and were outside the scope of VAT.
Parking facilities – HMRC's views
This box gives an extract from HMRC's Notice 742. This pre-dates the provisions for 'self-storage', discussed in B1.14, and some of the cases in 4.3 below are likely now to be taxable under those.
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4.2 When do I make a standard-rated supply of parking facilities?
If you make a grant of the right to use facilities which are either designed for parking vehicles or provided specifically for that purpose your supply is standard-rated except in the circumstances described in paragraphs 4.4 and 4.5. The following are examples of standard-rated supplies of parking facilities:
a letting or licence of a garage or designated parking bay or space. The letting is standard-rated even if the facilities are not used for storing a vehicle (unless the lease or licence specifically prohibits the use of facilities for parking)
a right to park vehicles (including trailers) in, for example, a car park or commercial garage
a letting or licence of land specifically for the construction of a garage, or for use solely for parking a vehicle
a letting or licence of a purpose built car park. For example, a car park let to a car park operator
a letting of a taxi rank
the provision of storage for bicycles
the provision of storage (or parking) for touring caravans,
a freehold sale of a 'new' or partly completed garage, car park or car parking facility other than in conjunction with the sale of a new dwelling (see paragraph 4.4). A garage or car park is 'new' for 3 years following the date on which it was completed (see paragraphs 3.2 and 3.3 for further details).
4.3 When will a supply be of land rather than parking facilities?
If you grant an interest in, right over or licence to occupy land in the following circumstances, your supply will be exempt, unless you have opted to tax:
letting of land or buildings (but not garages, designated parking bays or other facilities specifically designed for parking) where the conveyance or contract makes no specific reference to use for parking vehicles
letting of land or buildings where any reference to parking a vehicle is incidental to the main use
letting of land or buildings to a motor dealer for storing stock-in trade
letting of land or buildings to a vehicle transportation firm, to a vehicle distributor or to a vehicle auctioneer for use in the course of their business
letting of land, including land used at other times as a car park, for purposes such as holding a market or a car boot sale (this also includes the charge to the car owners selling their goods at a car boot sale)
letting of land for the exhibition of vehicles
letting of land to a travelling fair or circus (and the incidental parking of vehicles)
the freehold sale of garages, car parks or car parking facilities that are not new (more than 3 years have elapsed from the date on which they were completed - see paragraphs 3.2 and 3.3 for further information)
B1.12.4 The provision of parking will often be incidental to the provision of, or of space in, a building, and this is discussed below. There are similar points about the provision of parking on caravan sites and with houseboat moorings, and these are looked at in D9.12.4 and D9.14.3. Also, B1.16.2 notes the treatment parking provided by a university, college etc to its students, and B1.16.4 the possible relevance to parking of the 'cost-sharing' exemption.
B1.12.5 looks at 'park and ride' and similar schemes, where it is arguably the other elements in the package that are incidental.
General ECJ case law about single and multiple supply, as summarised in Box A4.5A, is relevant here, but there is also an ECJ case on this specific issue. In Morten Henriksen (Box B1.12A), the Court concluded that parking facilities should not be taxed as such if they were 'closely linked to' an exempt letting for some other purpose. So if a house and garage are let together, this would suggest that they are both exempt. This judgment led to changes in HMRC's policy at the time, although they have always ignored the further suggestion in Henriksen that the parking could be provided by a different landlord, so long as it was part of the same complex as the main property.
HMRC reconsidered the position in some detail following Civilscent (also Box B1.12A) and, following a period of uncertainty, they set out a revised position in Notice 742, as reissued in 2012.
Housebuilders etc may be able to zero-rate the provision of parking facilities, where this is treated as part of a zero-rated supply of a dwelling, or where there is a first grant of a major interest of the parking itself and it is on the same site as a dwelling or dwellings. There is more about this in C5.6. If the parking is disposed of freehold, that is the end of the matter. But the zero-rating does not extend to any ongoing charge for the parking, and this might be either standard-rated or exempt.
HMRC previously accepted that, where zero-rating did not apply (ie following a zero-rated grant or in the absence of one) the provision of parking was exempt if the same landlord was also letting a dwelling to the same tenant, and they were 'reasonably near' to each other. This extended to cases where the dwelling had been sold leasehold, but the purchaser was still liable to a ground rent. The parking was only generally seen as taxable where it was provided by someone else, or where the dwelling had been sold freehold and there was no ongoing rent from it.
HMRC now set out a more complicated position in Notice 742, and their views appear to be as follows. The points apply both to garages and to parking spaces:
Parking provided to freeholder owners of dwellings is standard-rated (although the first payment may have been zero-rated as at C5.6).
Parking is only ever exempt if it is provided by the same person as the dwelling, and in the circumstances set out below. If it is provided by someone else it is necessarily standard-rated. For these purposes, members of a VAT group are separate persons.
If the dwelling has been sold leasehold, and the sale agreement included the provision of parking, this is exempt if the parking is reasonably close to the dwelling and intended (presumably by the landlord) to be used in conjunction with it. (Again, the first payment may have been zero-rated as discussed in C5.6.) This includes cases where the parking is only provided at a later date, or where the agreement obliged the purchaser to take it at a later date. It does not apply to holiday accommodation where the ongoing charges for the dwelling itself are standard-rated.
In other cases where parking is provided to a leaseholder – eg because this was agreed separately following the leasehold sale – it is standard-rated.
If the parking is provided in conjunction with the letting of dwellings 'for permanent residential use (under shorthold tenancy agreements or similar)', it is exempt if it is reasonably near to the dwelling and is provided by the same landlord to the same tenant. The letting agreements for the dwelling and the parking can be entered into at different times, provided that there are periodic rental payments for the dwelling. This also applies to shared ownership properties where the purchaser is still paying rent for the remaining share in the property. It does not apply to holiday accommodation where the rent is standard-rated.
Notice 742 sets this position out at greater length.
Parking provided with, or with accommodation in, a 'relevant residential' or 'relevant charitable' building and by the developer might possibly be zero-rated. This would be subject to the detailed rules about such buildings (see Chapters C6 and C9), and there is clearly a wide range of circumstances where this could be relevant. Presumably HMRC accept this in principle, in the same way as for dwellings, but they do not comment in Notice 742.
In other cases, there is no possibility of zero-rating, but HMRC say that the same 'general principles' apply as with dwellings. It appears that, in their view, the provision of parking will be exempt if, and only if all of the following conditions are met:
A lease or other agreement for the letting of commercial premises includes the provision of the parking facilities, or requires the tenant to accept the later provision of them when they become available. This would 'normally' include cases where the actual number of parking spaces can be varied from year to year.
The letting of the commercial premises is exempt.
'The parking is within or on the premises, reasonably close, or within a complex (for example, an industrial park made up of separate units with a 'communal' car park for the use of tenants of the units and their visitors)'.
The parking is intended (presumably by the landlord) to be used in conjunction with the commercial premises.
HMRC previously took the view that the parking did not need to feature in the same lease as the commercial premises – it was enough if the parties were the same, and that the parking was nearby. This position was reflected in guidance until the revised Notice 742 was issued in 2012.
B1.12.5 HMRC accept that the transport element of a park and ride scheme 'designed to reduce traffic congestion in city centres' is zero-rated (under Sch 8 Group 8), so that any overall charge needs to be split between this and the standard-rated parking.
The legislation does, however, provide a specific exception for transport provided in connection with airport parking, where the transport is provided by the same, or a connected, person, so that the entire package is standard-rated. This was challenged in Purple Parking Ltd and Airparks Services Ltd (TC 00118).
The Tribunal concluded that there was, in any case, a single standard-rated supply. The transport element was ancillary – the pricing structure took account only of the parking element and, to the customer, a courtesy bus to the terminal was a necessary evil, to be endured, rather than an actual benefit. The companies nevertheless appealed, and the case was referred to the ECJ (CJEC Case C-117/11). For its part, the ECJ thought the case so lacking in merit that it did not even dignify it with a full hearing, holding that, in such circumstances, there was a single supply in which the parking element was predominant. In particular, it noted the pricing structure and advertising of the service, and saw the transport element as merely a consequence of the location of the car parks.
Whilst the conclusion in Purple Parking was not at all surprising, it might also raise a question about the treatment of city centre schemes.
As explained in A2.6.4, Article 13(1) of the Directive says that local authorities, and some other public bodies, are not to be treated as taxable persons 'in respect of the activities or transactions in which they engage as public authorities', unless this 'would lead to significant distortions of competition'.
In the light of this, HMRC distinguish between on-street car parking, which is a local authority monopoly, and off-street car parking. They see on-street parking as non-business, and so not subject to VAT, but off-street parking as standard-rated since there are other providers of it. This distinction might be thought questionable.
The treatment of off-street parking provided by local authorities was tested in long-running litigation by Isle of Wight Council and others, ultimately unsuccessfully, as seen in Box B1.12C.
Is local authority parking non-business? – case law
This box summarises case law on this topic.
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In a Portuguese case, Câmara Municipal do Porto (CJEC Case C-446/98,  STC 560), the ECJ held, amongst other things, that a local authority providing parking was doing so as a public authority – so that the activity was potentially non-business – if it did so 'under a special legal regime applicable to bodies governed by public law'. This was the case 'where the pursuit of the activity involves the use of public powers'.
Commission v Ireland (CJEC Case C-554/07) concerned infraction proceedings, initially prompted by a complaint from a private sector car park operator over Ireland's failure to tax off-street parking provided by local authorities. In the event, the proceedings were broadened to cover Ireland's treatment of public bodies generally, and the ECJ, in holding that national legislation was in breach of the Directive, did not comment specifically on the treatment of parking. There is more about this case in Box A2.6B.
Isle of Wight Council argued that its provision of off-street parking was a non-business activity, and outside the scope of the tax. In particular, its parking tariffs were driven mainly by traffic management considerations, rather than set to maximise revenue. The subsequent litigation, in which the Council was joined by several others, lasted eight and a half years and involved at least eight Tribunal and Court hearings.
The High Court ( STC 257) confirmed that non-business treatment was not possible under the Directive if this 'would lead to significant distortions of competition' (see B1.12.6), and the meaning of this was then considered by the ECJ (CJEC Case C-288/07). The Court held that the test needed to be looked at on a national level, rather than by reference to parking conditions specifically on the Isle of Wight. As the Advocate General had put it, it 'has the sole purpose of helping the competent national authorities to determine which activities are to be subject to VAT'. The ECJ also thought that this exercise should take account not just of actual competition, but also of realistic potential competition, and that 'significant' meant 'more than negligible'.
The Tribunal (TC 02320) eventually concluded in 2012 that non-taxation in local authority car parks would distort competition, principally in relation to pricing and outsourcing, and that the effect would be more than negligible. The activity was therefore subject to VAT.
B1.13 UK law (Sch 9 Group 1 item 1 para (k)) standard-rates 'the grant of facilities for housing, or storage of, an aircraft or for mooring, or storage of, a ship, boat or other vessel'. It also says that 'mooring' includes anchoring or berthing.
There are several further points here:
HMRC see mooring rights for houseboats, and incidental parking facilities, as exempt (see D9.14.3).
HMRC consider that the provision of mooring rights includes a case where the boat owner is simply allocated a stretch of river bank, lays down the mooring and retains title to the ground tackle.
Some of these facilities may be zero-rated, under Sch 8 Group 8 item 6, if they are provided at a port or airport recognised by HMRC – see HMRC's Notice 744C.
The rules do not cover freehold sales. In the same way as for parking (see B1.12.2), it is possible that this exception is too narrow under the Directive.
The provision of moorings by a non-profit making body may be exempt under the rules for sports facilities, if the boat owners can be seen as participating in a sport, such as sailing (see D9.16.6).
If the storage is in a building or other enclosed space, such as a boathouse or aircraft hangar, it might alternatively be taxable under the provisions for 'self-storage', discussed in B1.14.
The idea of these rules is, of course, to extend the taxation for the parking of vehicles so as to cover other means of transport. But a Danish ECJ case, Fonden Marselisborg Lystbådehavn (CJEC Case C-428/02) (see B1.12.1) indicates that 'vehicles' covers all means of transport anyway, suggesting that the UK's specific provisions are unnecessary.
B1.14 The leasing or letting of some storage facilities became automatically standard-rated with effect from 1 October 2012. The legislation refers to 'self-storage', and the Government and HMRC have consistently referred to the measure in this way, but this is highly misleading, and it is more appropriate to think of it as the taxation of storage facilities.
B1.14.1 The taxation of 'self-storage' was announced in March 2012, as part of a Budget package of VAT measures cunningly described as 'addressing borderline anomalies'. Other proposals in the same package concerned facilities for hairdressers (B1.15), listed buildings (Chapter C11), caravans (D9.11) and other matters outside the remit of this book, most famously pasties etc.
The provision of storage services was already generally standard-rated. But, as discussed in B1.9.2, HMRC had seen self-storage – where the customer rented space and stored goods in it – as generally exempt. They commented in, for example, VAT Information Sheet 14/12 (other parts of which are reproduced in Box B1.14B), saying that:
'The existing legislation has created an anomaly in the VAT treatment of storage between providers of self storage and traditional storage providers (such as removal companies). These changes will create a level playing field by ensuring that the provision of facilities for the storage of goods are taxed consistently at the standard rate of VAT.'
It might be felt that the self-storage industry and removal companies are providing very different services, and that such differences in treatment are an inevitable consequence of exemptions. VAT legislation abounds in distinctions that are far more obviously anomalous.
It appears, in any case, that there was no such anomaly anyway. In UK Storage (Box B1.14A), accepting arguments that HMRC themselves had pursued, the Upper Tribunal concluded that self-storage was already taxable. Even if the subject matter was immovable property, such as a building, the evidence was that 'for a typical customer the ability to occupy a particular unit or area of land was not an end in itself but a means of better enjoying the storage services provided'.
This decision was published barely a fortnight after the change of legislation took effect, and the hearing had taken place before the Finance Bill had received Royal Assent, so the timing might be thought unfortunate. It would seem that no change of legislation had actually been required in relation to self-storage, and that all that the change had achieved was to tax various other storage facilities, and to create a raft of new anomalies. This is potentially embarrassing for HMRC, so they have suggested that the Upper Tribunal's comments were obiter and can be disregarded. This does not seem particularly plausible, but HMRC indicated in December 2012 that they were considering issuing a Revenue & Customs Brief about the case.
Some self-storage operators had opted to tax, and in 2012 HMRC estimated that the option applied to around 30% of self-storage (apparently meaning actual self-storage, and not in the sense the term is generally used by HMRC). But opting was not obviously attractive where the customers were largely private individuals, and some operators, having previously opted, contrived to disapply the option (under the rules in Chapter B3) so that lettings to the public were exempt. One advisory firm, in particular, was seen by HMRC to be aggressively touting avoidance schemes in the sector. This formed the background to the litigation in Shurgard Storage Centres (Box B3.4A). So HMRC were also able to claim that the 2012 legislation was 'addressing tax avoidance'.
HMRC were also of the view that there was a further anomaly within the self-storage sector itself, since although they thought that most self-storage was exempt, with an option to tax, they did not see this as applying where the subject matter was something movable, such as a shipping container. Thus in UK Storage (Box B1.14A) they considered lettings to be taxable at one location and exempt at the other although, in the event, the Upper Tribunal indicated that it was taxable in either case.
HMRC may also have felt that the sector was recovering excessive input tax. This was an aspect of their thinking about supposed avoidance, but also about partial exemption methods, as seen in Lok'nstore (Box A6.5C).
Discussion and guidance about the measure have been confused by the use of the term 'self-storage', with or without a hyphen, in two distinct ways.
The legislation uses it to mean any facility where the customer can store goods, including not only something like a storage locker but also something larger, such as an entire warehouse, and this is what HMRC now mean when they refer to 'self-storage'. HMRC guidance on the subject, such as Information Sheet 14/12 'VAT: self storage', needs to be read in this light.
This might have been reasonable, had self-storage not already had a much more specific meaning in ordinary language. Thus the Oxford dictionary defines it as:
'a system whereby individuals rent containers or units of space within a large warehouse to store possessions'.
This does not sound like a letting of the whole warehouse, and the Wikipedia article on the subject (as at October 2012) suggests some further points:
'The term "self storage" is short for "self-service storage" and is also known as "mini storage." Self storage facilities rent or sometimes lease space to individuals, usually storing household goods, or to small businesses, usually storing excess inventory or archived records. The rented spaces are usually secured by the tenant's own lock and key. Unlike in a warehouse, self storage facility employees do not have casual access to the contents of the space. A self storage operator does not take possession or control of the contents of the storage rental space unless a lien is imposed for non-payment of rent.'
One result of this distortion of language is that many businesses providing other forms of storage have, entirely understandably, taken no notice of the measure, since they do not consider themselves to be providing self-storage. HMRC, for their part, do not seem to have appreciated this, professing surprise that anyone could possibly have misunderstood.
In this book, I have tried to refer to storage facilities, or to put 'self-storage' in quotes, when I mean self-storage in the HMRC sense, and only to refer to self-storage without quotes when giving the expression its normal meaning.
It seems clear that the measure was originally aimed at self-storage in the normal meaning, and that it was not actually dishonest to use the term in the legislation. It was apparent from the initial draft, released for limited consultation in March 2012, that the effect would be wider, but it initially appeared that HMRC were not trying to tax storage generally, and would consider ways of narrowing the measure if self-storage could be satisfactorily defined.
In a summary of responses to the consultation, published on 28 June, HMRC said that:
'the proposed legislation was necessarily drawn widely so that it taxed all forms of self storage to ensure that similar supplies are taxed in the same way. The legislation therefore covered all forms of self-storage and not just self storage in purpose built facilities.'
By this time, however, HMRC were using the term in their own way, so that each time they said 'self-storage', they actually meant 'storage'. It remains debatable whether they did this inadvertently, or whether they were deliberately trying to obscure the position, for whatever reason.
Perhaps the real problem was that HMRC failed to grasp that it made any real difference, given that most providers of commercial storage space would have opted to tax. Certainly HMRC's assessments of the impact seemed to be entirely about self-storage as the term is generally understood. Thus a Tax Information and Impact Note, also issued on 28 June, provided statistics that were clearly about self-storage in the normal sense, and some of which appeared to have come straight from the website of the Self Storage Association.
More regrettably, the reports in Hansard suggest that MPs understood the measure to be about self-storage in the ordinary meaning of the term, with the limited impacts set out in the Tax Information and Impact Note, and that no-one tried to disabuse them of this.
Some doubts were also expressed about the legitimacy of the measure under the Directive. In response, HMRC explained in their summary of consultation responses that they were relying on the tailpiece to Article 135(2), which allows member states to apply further exclusions from the exemption for leasing and letting, as discussed in B1.10.1.
As regards actual self-storage there seems little doubt that this was valid, and indeed the Court of Appeal in Colaingrove (Box B1.10A) had actually mentioned storage as an example of what could be taxed under the tailpiece.
It was, however, far less clear that the Directive provided the vires for taxation where it concerned essentially passive activity, such as a long lease on an entire warehouse, let alone a lease premium or the assignment of a lease, which is arguably not leasing or letting at all.
The UK Storage case
This box summarises the litigation in UK Storage. The same material appears in Box B1.9B, but is repeated here in view of its relevance to the specific legislation on storage facilities.
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UK Storage Company (SW) Ltd ( UKUT 359 (TCC)) provided self-storage facilities at two sites. In one case, the facilities were within a warehouse, and HMRC accepted that the letting of these was exempt. In the other, customers would rent an enclosed storage unit located in a secure open air compound. HMRC maintained that the letting of these was taxable.
Unlike in Finnamore (Box B1.9B), the First-Tier Tribunal (TC 01394) thought it relevant whether the storage units were immovable property. It concluded that they were, as discussed in Box B1.4A, and that in practice the users had exclusive use of a unit – this was a licence to occupy it, and the land on which it stood. The Tribunal dismissed HMRC's suggestion that there was a bundle of supplies, seeing the provision of security etc as ancillary to the provision of the unit, and saw no reason why the company's two facilities should be treated differently.
The Upper Tribunal rejected the idea that the units were immovable property, as also seen in Box B1.4A. But in case it was wrong about this, it also considered HMRC's further arguments, concluding that had the subject matter been immovable property there would have been a licence to occupy, but that the overall supply would still have been standard-rated, since the evidence indicated that 'for a typical customer the ability to occupy a particular unit or area of land was not an end in itself but a means of better enjoying the storage services provided.'
It followed, of course, that the facilities in the warehouse were also standard-rated. HMRC had not suggested this, but the point followed directly from their arguments. They indicated in December 2012 that they were considering issuing a Revenue & Customs Brief about the case.
the grant of facilities for the self storage of goods
Notes 15A and 15B explain that:
"facilities for the self storage of goods" means the use of a relevant structure for the storage of goods by the person (or persons) to whom the grant of facilities is made,
use by a person with the permission of the person (or any of the persons) to whom the grant of facilities is made counts as use by the person (or persons) to whom that grant is made.
So a letting by A to B is taxable if it is for storage by B, or with B's permission by C.
Note 15D explains that:
"relevant structure" means the whole or part of –
(a) a container or other structure that is fully enclosed, or
(b) a unit or building.
There are two general exclusions:
Note 15C(c) says that a grant of facilities does not fall within para (ka):
in a case where the relevant structure is part of a building, its use for the storage of goods by the person (or persons) to whom the grant is made is ancillary to other use of the building by that person (or those persons).
Note 15A says that:
"goods" does not include live animals.
There are further exclusions for some cases involving connected persons, and charities. These are discussed in B1.14.5 and B1.14.6.
'the grant of' 'the use of'
'the whole or part of a container or other structure that is fully enclosed, or a unit or building'
'for the storage of goods' other than 'live animals' 'by the person (or persons) to whom the grant of facilities is made' or by another person with the permission of that person, or of any of them
the area is 'part of a building' and the use for storage is 'ancillary to other use of the building' by the same person or persons.
HMRC offered their interpretation in VAT Information Sheet 14/12, the relevant part of which is reproduced in Box B1.14B. They have since provided further comments on a number of points, some of which are reflected below, and which it is hoped will appear in guidance.
The definition of 'self-storage' in the legislation is broader than in normal usage and, for example, it includes the provision of an entire building for storage purposes to a single customer. The background to this is discussed in B1.14.1, but the point has caused confusion, since HMRC persist in describing the measure as about 'self-storage'.
The Upper Tribunal decision in UK Storage (Box B1.14A) suggests, in any case, that self-storage was already taxable before the measure was introduced, so that it only actually affects other kinds of storage facility, although HMRC have denied this implication.
The provision does not apply if the letting is for something other than storage. Even genuine self-storage is sometimes let for other purposes, and other types of storage facility could be put to a range of uses. The legislation seems to suggest that what matters here is the lessor's intentions, since it refers to 'the grant of facilities for the self storage of goods'.
As seen in Box B1.14B, at 2.4, HMRC appear to consider that, if the letting is supposed to be for storage it should be treated as such, but that actual use will be the determining factor if a variety of uses is possible and is permitted under the letting agreement. In that case, they suggest that the lessor obtains written confirmation of the use from the lessee. This will not, however, protect the lessor if the reality is different, and there must be a danger that some users will provide false information in order to escape a VAT charge.
In the same way, and as also seen in Box B1.14B, HMRC suggest that, assuming that a letting other than for storage would have been exempt:
the liability of a letting will change if the actual use changes, provided that the change is permanent and permitted;
customers should notify the supplier of any change;
if suppliers make customers aware that they should do this, they need not 'actively monitor, on a regular basis the use being made of the space';
suppliers should apply the correct treatment from when they become aware of the change, unless the parties are connected and the supplier has ignored indications of a change of use.
Perhaps this is a reasonable pragmatic approach, but it is not backed up by legislation, and it does not really protect the lessor against customers failing to notify a change, or lying about the use. If there is any doubt, it seems better to insert warranties into the lease etc, either restricting permitted use or requiring notification of a change.
If a single letting covers both space for storage and space for something else, HMRC take the view that the liability follows the treatment of the principal element 'in accordance with normal rules'.
This is backed up by the specific exclusion in Note 15C(c) for storage use 'ancillary to other use of the building' by the same person. This also applies where the letting is just of the storage area, if the tenant has a separate interest in another part of the building, from which they carry on the other, main, activity.
So, for example, the letting of storage space over a shop should not be taxable under these rules, since it will be ancillary to the shop use, whether or not the shop is rented from the same person. But this only applies if the two areas are in the same building, and not for example if the letting is of an outbuilding.
The provision covers enclosed structures that are not 'buildings', but the exclusion for ancillary storage only applies where the storage facility is 'part of a building' and the main activity is carried on in the same building. So for these purposes it matters whether or not a structure is a building, and whether it is a single building or a number of buildings.
In the context of the construction of dwellings etc, and as further discussed in C2.3.3, HMRC say at VCONST02220 of their Construction manual that:
'The word 'building' is not defined in the legislation. In the absence of a definition, the word should be given its natural meaning. This means a building is a structure fixed to the ground that at its basic consists of walls (or, an alternative, such as an arrangement of columns) supporting a roof that encloses a volume of space.
Other characteristics are that it is of sufficient scale for human occupation and made of durable materials such as brick, timber, and so on.'
Box C2.3A summarises case law on the subject. None of this material is helpful in deciding whether or not something is a single building, but HMRC propose to interpret this in the same way as for the option to tax (B2.3.2).
The provision does not apply to storage in the open air, perhaps in a field. But such storage is frequently of vehicles, and so might be taxable as parking facilities, as discussed in B1.12. This can include the storage of caravans, and this is considered in D9.12.5.
'Goods' clearly includes stock, equipment and household effects. But the legislation offers no definition of the word, beyond saying that it does not include live animals.
This would seem to be a different point from whether a sale of the item is a 'supply of goods' for VAT purposes. No doubt the word takes its normal meaning, but this still leaves questions as to what that meaning might be. HMRC have suggested a broad interpretation, and that 'goods' includes water, air, gas and currency.
The exclusion for live animals may also leave room for ambiguity. Information Sheet 14/12 suggests that this is relevant only to livestock, but in fact HMRC are of the view that it covers any mammals, reptiles, birds, fish or insects.
Actual self-storage facilities are typically let for rent and on short-term arrangements, but the measure is not confined to lettings of this kind, and the legislation refers merely to 'the grant of facilities'. HMRC accept that this excludes freehold sales, but consider it to include anything short of a freehold. In their view, it extends to 999-year leases, including capital sums as well as rent, and to the assignment or surrender of a lease as well as its grant.
This is consistent with HMRC's interpretation of the same words in relation to parking facilities (B1.12.2), but it may be another matter whether it can be justified even in terms of the UK wording, let alone under the Directive, as noted at B1.14.1.
Note 15B says that:
use by a person with the permission of the person (or any of the persons) to whom the grant of facilities is made counts as use by the person (or persons) to whom that grant is made.
In the context of actual self-storage, the idea was presumably to ensure that someone could not avoid VAT by getting their friend to rent the unit and to say that they themselves were not using it for storage. But clearly the provision has other implications.
If, say, the freeholder of a storage facility, A, has granted a lease to an investor B, who in turn has leased it to user C, the use for storage by C will be 'with the permission of' B. So the lease from A to B, as well as that from B to C, is taxable under paragraph (ka). And even if B has opted to tax anyway, it is quite likely that A will not have done so.
Lessors who would otherwise have opted to tax in connection with the development or acquisition of a storage facility might now decide not to do so, and to rely on compulsory taxation of lettings, since this means that they need not treat lettings as taxable if the building is subsequently put to other use. But the more likely scenario is that they fail to realise that the provision is of any relevance to them.
Unfortunately, HMRC's Information Sheet obscures the position further:
'2.13 Do the changes affect the supply of buildings to self storage providers?
No. the sale or lease of a building to a self storage provider will only be subject to VAT if the person making the supply has made an 'option to tax'. The new rules only impact on supplies made by self storage providers to their customers.'
This seems simply wrong. HMRC have tried to explain the contradiction by suggesting that Note 15B refers (only) to a case where the user has not been granted an interest in or licence to occupy the land, and that a person who has been granted an interest does not require permission to use it for storage.
Whilst this would indeed suggest that a headlease is not covered by the provision, the explanation does not seem to bear examination. Note 15B does not contain any such limitation, and HMRC's analysis seems to ignore the impact of any permitted use clause in a lease. If the lease says that the permitted use is for warehousing, it would seem difficult to say that the tenant was not using it for warehousing 'with the permission' of the landlord. It is hoped that HMRC will either come up with a better explanation or will withdraw misleading guidance.
B1.14.4 This section considers how the rules apply in various cases, and is based on the legislation itself and on the limited commentary in VAT Information Sheet 14/12 and in HMRC's summary of responses to the consultation. HMRC are, however, intending to respond to a series of detailed questions posed by the British Property Federation, and it is hoped that their answers can be reflected here in the next issue.
Self-storage facilities as generally understood are clearly caught by paragraph (ka), as intended, and indeed the Upper Tribunal decision in UK Storage (Box B1.14A) suggests that they were already taxable anyway, although HMRC deny this.
But larger units at such facilities may well be suitable for other uses. It is less clear that the point in UK Storage applies here, whilst the provision only covers a letting 'for the storage of goods'. HMRC accepted in their Information Sheet that lettings for other purposes might be exempt, if other use was permitted, as seen at 2.4 in Box B1.14B, and said rather more in their summary of responses to the consultation:
'Some self storage operators also commented that their agreements are merely for use of the space, not for a particular use, and that their self storage units could be used for a variety of purposes (e.g. dancing classes, recording studios, photography studios, as well as for the self storage of goods) and so they cannot be sure that their units are being used for self storage. …
HMRC has looked at a number of agreements used by the larger operators and is satisfied that these are clearly for the storage of goods and so it should be straightforward in most cases to determine how the storage facility is to be used. Where this is not the case or where the use changes HMRC will accept (subject to the self storage operator obtaining evidence), that such lets are not covered by this provision. These types of situations are not new to the VAT system and HMRC is happy to work with stakeholders to develop guidance to cover such occurrences.'
The measure also applies to the letting of a safe, or of a locker at a swimming pool, railway station etc, to the extent that these would otherwise have been exempt. It seems likely that in most cases these would have been taxable anyway, as being primarily the provision of facilities or because they did not concern 'immovable property'. The taxation of 'self-storage' does, however, seem to have the incidental benefit of implementing the requirement under the Directive for 'the hire of safes' to be taxed (see B1.4.4).
Since the purpose of a warehouse is the storage of goods, there seems no room for doubt that the normal letting of a warehouse is taxable as 'self-storage', and that the use is not ancillary to any other activity in the same building.
This is also HMRC's view, but their published comments are misleading to anyone who understands self-storage in the normal sense, rather than in the way that HMRC use the term. Information Sheet 14/12 says this:
'2.10 Is the supply of a warehouse or similar building used for storage now automatically standard-rated?
Standard-rating applies when space is supplied and used for the self storage of goods by the customer. Therefore, the lease of a warehouse or storage facility, such as a lock-up, to be used for the self storage of goods by the customer, will be subject to VAT. However, the supply of a warehouse or similar building for any other purpose will not be subject to VAT under these new rules unless an 'option to tax' has been made.'
In fact, this paragraph can only be understood by reading the references to 'self-storage' as though they simply said 'storage'. It is almost as though HMRC are deliberately obscuring the position, but instead they have expressed surprise that anyone could possibly have failed to grasp what they meant here, and have confirmed that examples of use 'for any other purpose' would be to house refugees or to stage a concert.
Also, as noted in B1.14.3, Note 15B means that a head lease of a warehouse granted by A to B is likely to be standard-rated, since the occupational tenant C will be using it for storage 'with the permission' of B.
Delivery companies and others may rent premises to store packages etc prior to sorting them and delivering them, and security companies may rent facilities for the overnight storage of currency or bullion. Arrangements of this kind would seem to be taxable unless the storage can be seen as ancillary to sorting, and this is carried on in the same building. HMRC have suggested that it might alternatively be ancillary to distribution, but this activity will generally involve removing the goods from the building, rather than being carried on in it.
A lease of retail premises will typically include a storage area, even if this is just the back of the shop. Since the area is part of a building, and use for storage is clearly ancillary to the retail use, it is not caught by the measure.
This would seem to apply even where:
The storage area accounts for the majority of the space (such as with a lease to a business such as Argos), since the storage is still ancillary to the sales activity.
The letting is by a different person or under a separate lease, for example where a shop occupies the ground floor, and the owner of the upper floors lets them to the shop owner for storage.
But a letting of storage space will be taxable if is in a separate building, even if the retail activity is carried on from a building nearby, unless perhaps there is a single lease covering both buildings, and a single supply in which the storage element is incidental.
There seem to be various possible permutations here, and it is possible that HMRC will come to some different conclusions.
Storage areas in offices will almost always be ancillary to a main activity carried on in the same building, so that paragraph (ka) will not apply. Some firms do, however, have surplus office space, and may use this as additional storage. If the result is that they cease to use the building as office premises at all, perhaps hoping to reoccupy it at a later date or while they find another tenant, it appears that future rent will become taxable since the letting is now for storage. The landlord may, however, be unaware of the change and, in the absence of any specific provision in the lease, the tenant will be under no obligation to tell him.
Most lettings of garages are in any case taxable as parking facilities, as discussed in B1.12, unless perhaps provided with other accommodation (B1.12.4). But this does not apply where the lease or licence specifically prohibits use for parking, as seen in B1.12.3. Such lettings would, however, now seem to be taxable as 'self-storage', unless presumably the lease or licence prohibits use for storage at all.
The same point would seem to apply to some of the other cases mentioned as exempt in HMRC's guidance on parking facilities, as shown in Box B1.12B, Whilst, for example, HMRC accept that the letting of a building to a motor dealer for storing stock-in trade is not taxable as parking, it seems very likely to be taxable as 'self-storage'. This is, however, only the case where the storage is in 'a container or other structure that is fully enclosed, or a unit or building', and so not if the vehicles are in stored in an area that is merely fenced-off, and open to the elements.
The letting of a house or flat is not typically caught by the provision, since any use for storage is clearly ancillary to the residential use. But some dwellings are in practice rented only for storage, or may be kept on and used only for storage when residential use has ceased. These seem to be potentially within the scope of the provision. This will not apply if the storage is ancillary to some other activity carried on in the same building (such as a shop on the ground floor), but it might apply if there is no other activity or if that activity is carried on in another building (such as a shop across the road).
In these cases, the question would seem to be whether the supply is a 'grant of facilities' 'for the storage of goods', which in turn suggests that one needs to consider the intended use. In other contexts (eg B2.4.1), this would be about the intentions of the tenant, but the landlord may be entirely ignorant of these, and assume that the tenant is planning to live in the property when in fact she only plans to use it for storage.
HMRC have indicated that use for storage is not caught by the measure 'where household effects are left temporarily in a dwelling (pending a move) but the dwelling has been (or will be) used for residential accommodation'. They have also said that landlords are entitled to assume that a dwelling is being used for residential purposes unless there is evidence to the contrary.
Some residential tenants have the option of renting additional space for storage. For example, retirement developments may include secure areas (sometimes in the form of 'cages') in which residents can store surplus furniture etc that will not fit into their flat, but which they are not ready to part with.
The position here seems to depend on whether the storage area is in the same building as the flat. If it is in the basement of the same block, it will be 'ancillary to other use of the building by that person' and exempt if they get a specific area such as a 'cage'. But this will not apply if it is elsewhere. And if, say, the basement of one block is available as a storage facility to the residents of several blocks, the charges to the residents of the same block might be exempt while those to people who happened to live in other blocks would be standard-rated.
HMRC have, however, suggested that they would in any case see a single exempt supply of residential accommodation. This seems similar to their administrative treatment of incidental parking facilities (B1.12.4).
The measure is relevant not only to buildings and 'units' but to 'a container or other structure that is fully enclosed'. In an agricultural context, it therefore extends to structures such as grain silos.
For buildings, the issue may be complicated by the range of possible uses and by the exception for the 'storage' of live animals. So the letting of a barn might be:
Taxable as the provision of parking facilities. HMRC would see tractors, combine harvesters etc as 'vehicles', and in other contexts (C5.10.3) will see an entire barn as a garage even where this is only one of its uses.
Taxable as the provision of 'self-storage', if for example the lessee proposes to store equipment or produce in it. This is likely to be ancillary to other activities carried out on the surrounding land and buildings, but the exclusion for ancillary activities only applies if the main activity is in the same building.
Exempt, with the option to tax, if the lessee proposes to house live animals in it, since these are specifically excluded from the definition of 'goods'.
Exempt, with the option to tax, if the letting is for some purpose other than storage, such as for use as a workshop.
The position may be further complicated by the exceptions for connected persons and for charities (B1.14.5 and B1.14.6), but in any case the distinctions here seem to require the landlord to make enquiries about the tenant's intended use of the building. This may be fraught with difficulties – the barn might be used for a whole range of purposes, it might well be put to different uses through the course of the year, and the tenant might genuinely not know initially how the building will be used, only that he needs the use of an additional barn. It seems unlikely that HMRC expect the landlord to charge VAT during periods when produce is stored, but not when the barn is occupied by animals, but it remains to be seen whether they will comment on this.
There is a further difficulty with long leases, since it may be quite unrealistic to say whether or not a premium on, say, a 99 year lease is for the storage of crops, livestock, equipment or what.
Often a group of buildings and structures will be used together in a single activity, whilst each performing different functions. Factories and farms are likely to be examples. The legislation does not, however, require a single supply to be apportioned, and it seems clear that a lease of an entire farm that includes barns, grain silos etc is not caught by the provision. But the farm, or factory, might be held through several separate interests, so that a lease on part might well be caught if the part is a storage facility. The exclusion for ancillary storage will not assist if the main activity is not carried on from the same building, or if the storage facility is in something that is not a building.
Sch 9 Group 1 Note 15C says that:
A grant of facilities for the self storage of goods does not fall within paragraph (ka) if –
(a) the person making the grant ("P") –
(i) is doing so in circumstances where the relevant structure used is, or forms part of, a relevant capital item, and
(ii) is connected with any person who uses that relevant structure for the self storage of goods,
Again, 'relevant structure' means 'the whole or part of' 'a container or other structure that is fully enclosed, or' 'a unit or building'. And under Note 15E:
"relevant capital item" means a capital item which –
(a) is subject to adjustments of input tax deduction by P under regulations made under section 26(3), and
(b) has not yet reached the end of its prescribed period of adjustment.
So this refers to buildings etc that are covered by the Capital Goods Scheme (CGS – Chapter A7) and still within the adjustment period for this (A7.5). This is, however, subject to a specific amendment to the Scheme.
Finally here, Note 19 says that persons are connected in terms of section 1122 of the Corporation Tax Act 2010, as discussed in B3.5.2.
In their original consultation document, issued in March 2012, HMRC had outlined a scenario where a partly exempt business X commissioning a building that included 'some storage facilities' could have it built by a subsidiary Y, which leased it to X. Although any option to tax by Y would be disapplied under the rules in Chapter B3, so that the lease to X was basically exempt, a separate letting of the storage areas might be taxable, allowing Y to recover a portion of the VAT it incurred. This, they thought, was tax avoidance.
Even if this would have constituted tax avoidance, it might be thought questionable whether the potential for it was great enough to merit the complexity of a specific exception, or whether HMRC could not have tackled it in some other way.
Indeed, the addition, following the consultation, of the exception for ancillary storage meant that the arrangement that HMRC had described would not have worked anyway, since the storage element would be ancillary to X's other use of the building and the letting of it would have been exempt in any event. It would, however, still have been relevant in the (fairly rare) cases where a partly exempt business is commissioning a building primarily for storage.
The exception applies if the building etc is subject to the CGS in the hands of the lessor, and still within the adjustment period (A7.5).
The CGS applies where VAT has been incurred on capital expenditure on the property, whether building work or its acquisition, either by the person or by a previous owner prior to a TOGC. This is fully discussed in Chapter A7, but there are some further points here:
The CGS is normally subject to a threshold for the expenditure of £250k, but owners of properties affected by the 'self-storage' measure can opt in to the CGS where the expenditure was below this level. This is discussed in B1.14.8 and in A7.3.6. It appears that someone who wants the exception to apply – so that the provision of storage to a connected person is exempt – might achieve this by opting in to the CGS. But the wording of the CGS provision, reproduced in A7.3.6, suggests that they can only do this if they do actually make supplies that are taxable under the measure, perhaps in another part of the building or before opting in to the CGS.
In the context of property, the CGS applies to land, buildings and civil engineering works. Note 15E talks about it applying to the 'relevant structure' ie a building, unit, container or other fully enclosed structure, so it appears that the exception for connected persons does not apply where the owner is in the CGS only because of VAT incurred on a purchase of bare land.
It may be also be unclear whether the structure is a building, a civil engineering work or neither of these. The meaning of 'building' is discussed in this context in B1.14.3, and the meaning of 'civil engineering work' in A7.3.4. But containers, for example, seem unlikely to be either, so that the exception for connected persons does not apply. Also, alterations etc to existing civil engineering works were only brought into the CGS with effect from 1 January 2011, so that alteration work to, say, a grain silo carried out in 2010 might be within the CGS if it counts as a building, but not if it is a civil engineering work.
The CGS also covers boats, aircraft and indeed computers, and it seems possible that the provision, and the exception, might be relevant in the context of (at any rate) the letting of a moored houseboat used for storage, where this is otherwise seen as exempt (D9.14.2).
The exception does appear to deal with the scenario that HMRC described in the consultation document, and to ensure that the letting of the storage areas would remain exempt until the CGS had expired after, typically, nine to ten years. Whether this was necessary, particularly as the exception for ancillary storage would generally have achieved this anyway, is another matter, but in any case several points should be noted:
The Upper Tribunal decision in UK Storage (Box B1.14A) suggests that the exception is irrelevant to actual self-storage, since this is standard-rated anyway, but HMRC do not accept this.
If the CGS applies, the question to consider is not whether the letting is to a connected person, but whether anyone storing goods in the area in question is connected with the grantor. So the measure applies even if another party, perhaps a third party, is interposed in the leasing chain.
Unlike the anti-avoidance rules for the option to tax (Chapter B3), the test as drafted is concerned with whether, as a matter of fact, the property is used for storage by a connected person, and not with intentions or expectations. This raises particular difficulties in that the head landlord might genuinely not know who is using the building, or whether this is for storage, and in that the position might change during the term of the lease. HMRC have, however, suggested that 'uses' needs to be interpreted as including 'intends to use'.
If the test applies, this is because the landlord is connected with 'any person' who uses the 'relevant structure' for storage. The relevant structure can be just part of a building, but it appears that if A lets an entire warehouse to connected person B, and B stores its own goods in one area and lets other areas to third parties, the whole of the letting to B is within the exception and so potentially exempt, but that B's lettings to third parties are still taxable as 'self-storage'.
The exception is aimed at cases where the connected user cannot recover VAT in full, but is not confined to these – it applies equally within the context of a fully taxable corporate group. In these cases, the landlord would generally be able to opt to tax the lettings, although this is less flexible as an arrangement than being able to tax them as 'self-storage'.
The exception for connected persons expires at the end of the CGS adjustment period, so that the lettings then become taxable, subject to the exception for 'ancillary use'. In the VAT planning scenario that HMRC claimed to be addressing, they presumably imagine that lettings becoming taxable at that stage does not help with the recovery of VAT on the original expenditure. This may not be quite right. Suppose that a warehouse for X is built by its subsidiary Y, which grants it a 25 year lease. Assuming that Y expects the lease to continue for its term, it intends to make taxable supplies in the latter 15 years or so, so that the input tax it incurs is residual, rather than directly attributable to exempt supplies (see A6.2). This suggests scope for some initial input tax recovery.
B1.14.6 The provision also does not apply in some cases involving charities. In their March 2012 consultation document, HMRC gave as an example the storage of goods for famine or disaster relief, and unlike that for connected persons this exception is at least intended to be helpful.
Sch 9 Group 1 Note 15C says that:
A grant of facilities for the self storage of goods does not fall within paragraph (ka) if – …
(b) the grant is made to a charity which uses the relevant structure solely otherwise than in the course of a business
This is similar to the test for the zero-rating of charity non-business buildings (C6.8) and the exclusion from the option to tax (B2.4.4), but there is no cross-referencing and Note 15C(b) needs to be considered in its own right.
The meaning of 'charity' is discussed in C6.7, and 'non-business' in the context of zero-rating in C6.8, but there are some further issues here:
The Upper Tribunal decision in UK Storage (Box B1.14A) suggests that Note 15C(b) is actually of no benefit in relation to actual self-storage, since this is standard-rated anyway, but HMRC do not accept this point.
HMRC have confirmed that 'solely' can be taken to mean at least 95%, in line with the interpretation discussed in C6.10. They also acknowledge that the omission of the word 'solely' from the explanation in their Information Sheet was an error (see 2.12B in Box B1.14B).
Since exemption will not always be beneficial, lessors of storage space seem entitled to insist that 'solely' does mean 100% if they wish, as for the option to tax (B2.4.4).
The test is about how the charity actually uses the facility, not how it intends to use it, and the position could vary over the term of the lease since the charity might use it for a variety of purposes. HMRC have confirmed that this is the case, but indicated that they do not expect the treatment of a lease premium to be revisited – this should be considered purely in terms of the position at the time of supply.
Note 15C refers only to how the charity 'uses' the facility, which might suggest that it does not apply if the payment is made before the charity is using it at all. HMRC have confirmed that they would expect the position to be considered in terms of the charity's expected use, but it is not clear that this is warranted by the wording of the legislation. In this respect it notably contrasts with the comparable rules for zero-rating (C6.7.1).
The lessor may well not know how the charity is using the facility, and indeed the charity may have no other reason to establish whether this is non-business. In the context of zero-rating, the charity has to issue a certificate of its intended use (C7.6 and C9.5), but there is no such requirement here, and HMRC resisted the suggestion that there should be. In their summary of responses to the consultation, they said that:
'In respect of certification for charities, in line with most existing charity certification regimes within VAT, HMRC has decided not to legislate for such a regime. However, HMRC is content that charities provide written confirmation to self storage operators about the qualifying use and this will be confirmed in guidance.'
The Information Sheet referred to lessors obtaining 'evidence' of the position, but HMRC have confirmed that they see written confirmation from the charity as sufficient.
The exception does not cover lettings to intermediaries, so that if A rents storage space to B, and B rents to it Charity C, A's letting to B is likely to be taxable even if B's is exempt. This means, of course, that B will incur irrecoverable input tax.
It might be thought that HMRC's example, in the consultation document, of a charity storing goods for famine or disaster relief was well-chosen. But the effect of section 30(5) and Sch 8 Group 5 item 3 is that a charity exporting goods to a place outside the EU is engaged in a zero-rated business activity, even if they are provided as aid and free of charge.
This is intended to allow the charity to recover VAT on the goods as input tax, but it suggests that Note 15C only applies where the goods are destined for somewhere within the EU. It seems unlikely that anyone will know this until the goods are removed from storage – the goods will typically be put into storage precisely because it is not known where they will be needed. So this potentially makes a nonsense of the whole exception.
This point was drawn to HMRC's attention during the course of the consultation, but they chose to ignore it. They have since confirmed the position, and suggested that the charity should use its judgment in deciding where goods are likely to be dispatched, but it seems unlikely that the position will actually be clear unless the charity is wholly devoted to UK causes.
As with the option to tax (B2.4.4), there is a danger that charities will seek exemption retrospectively, to the detriment of the landlord. It seems unfortunate that the legislation has been designed in this way, and operators might wish to consider inserting a clause in the lease or letting agreement to protect themselves against this. In other cases, however, the points above may will give the operator sufficient ammunition to resist such a claim.
HMRC's guidance on 'self-storage'
This box reproduces an extract from HMRC's VAT Information Sheet 14/12, issued in August 2012. Part 3 of the Information Sheet comments on the Capital Goods Scheme, and is reproduced in Box A7.3B.
As discussed in B1.14.1, references here to 'self-storage' should be read as references to 'storage'.
* * * * *
2. VAT liability of supplies of self storage
2.1 What are the current rules (prior to 1 October 2012)?
Under current rules, the provision of a clearly defined space (technically known as a 'licence to occupy land') for the self storage of goods is exempt for VAT purposes. However, self storage operators can choose to 'opt to tax' their land, in which case they must charge VAT on their supplies of space for self storage. More information about the option to tax can be found in Notice 742A Opting to Tax Land and Buildings.
2.2 What are the new rules (from 1 October 2012)?
The new rules are based on use of space for the self storage of goods. The changes ensure that the provision of space used for the self storage of goods (by the customer of the provider of the self storage space) in structures ('relevant structures') such as containers, units or buildings is standard-rated. However, there are certain exceptions set out below.
2.3 What happens to supplies that straddle 1 October 2012?
Special procedures apply when there is either a change in the VAT rate or a change in the VAT liability of certain supplies, which are explained in Section 30 of Notice 700 The VAT Guide.
There are also specific anti-forestalling provisions which will apply in relation to this change of VAT liability. They provide that supplies of self storage for periods straddling 1 October 2012 will be apportioned so that supplies before 1 October 2012 are covered by the current rules, and supplies on or after 1 October 2012 are covered by the new rules. These rules are explained in the VAT Information Sheet 09/12 VAT: Anti-forestalling for approved alterations to listed buildings and the self storage sector.
2.4 What if the storage provider doesn't know how the space he is letting out is used?
The use of the space will normally be clear from the nature of the facilities, the way they are advertised and the agreements entered into. However, in some instances, facilities may be suitable for a variety of uses and agreements may not specify a particular use by the licensee (ie the licensee is free to use the space for any purpose). In such cases it will be necessary for the grantor to obtain confirmation from his customer of the use to be made of the space. Suppliers are advised to obtain such confirmation in writing and retain it with their VAT records.
2.5 What if the space is used for the self storage of goods and another purpose?
Where space is used by the customer for both the self storage of goods and another purpose, the VAT liability will follow that of the principal element of the supply in accordance with normal rules.
So, for example, if a customer uses a warehouse for the self storage of goods but also uses a small amount of the space as an office, the whole supply will be taxable, as the provision of office space is ancillary to the provision of self storage.
2.6 What if the facilities are not actually being used for the self storage of goods all of the time?
Where, during the period of an agreement or contract, the self storage facilities are not actually being used for the self storage of goods and are left empty, the supply will be standard-rated if there is an intention that they will be used for self storage in the future or have previously been used for self storage during the period of the agreement or contract.
Note: this will only be an issue if the supplier has not 'opted to tax' the property or the 'option to tax' is disapplied. If the 'option to tax' applies, the rental of space will be standard-rated whatever the customer's use of the space.
2.7 What about changes in the use of self storage facilities?
In some cases, businesses that have hired out facilities for self storage of goods may become aware that their facilities are being used permanently for something other than self storage. Where such use is permissible under agreements and would result in a different tax treatment (eg, exempt instead of taxable, where the provider has not 'opted to tax') the correct VAT treatment should be applied from the time that the supplier becomes aware of the change in use.
However, use on an occasional basis for something other than storage, during specific agreement or contract periods, will not affect the VAT treatment as the main overall use remains self storage of goods.
2.8 What if the storage provider doesn't know of changes in how the space he is letting out is used?
Suppliers should ensure that customers are aware that they should notify the supplier of any permanent changes of use in the future and that this may result in a different VAT treatment. Provided this is done there is no requirement for suppliers to actively monitor, on a regular basis the use being made of the space.
In such cases where changes of use occur resulting in a different VAT treatment, HM Revenue & Customs (HMRC) will normally accept this being applied from the date the supplier becomes aware of the change. However, HMRC will not do so if the supplier and customer are connected or the supplier has received indications of a change of use but not acted upon them.
2.9 What happens if the customer entering into the agreement with the self storage provider is not the person who actually uses the space for self storage of goods?
VAT is due on the use of space for the self storage of goods. The new rules provide that use by a person with the permission of the person (or any of the persons) to whom the provision of facilities is made counts as use by the person (or persons) to whom the provision is made. This ensures that VAT cannot be avoided where the use is by a third party.
2.10 Is the supply of a warehouse or similar building used for storage now automatically standard-rated?
Standard-rating applies when space is supplied and used for the self storage of goods by the customer. Therefore, the lease of a warehouse or storage facility, such as a lock-up, to be used for the self storage of goods by the customer, will be subject to VAT. However, the supply of a warehouse or similar building for any other purpose will not be subject to VAT under these new rules unless an 'option to tax' has been made.
Supplies of self storage that remain exempt from VAT 2.11 Is the self storage of livestock affected by these changes?
No. The self storage of livestock is specifically excluded from these changes and will remain exempt from VAT.
2.12 Are there any other circumstances where supplies of self storage remain exempt?
Yes. Supplies in scenarios A, B and C below will not be subject to VAT.
(A) Where the agreement or contract is between connected parties and the facility is a capital item
(i) The building or structure (the facility) is subject to capital goods scheme adjustments by the person making the supply and is still within its adjustment periods; and
(ii) The person making the supply and any person using the facility for self storage are connected.
This prevents partly exempt traders setting up property leasing schemes within their corporate groups in order to recover VAT on self storage facilities they construct for their own use. Further guidance on how to establish whether a supplier and user of the facilities are connected can be found in paragraph 13.7 of Notice 742A 'Opting to Tax Land and Buildings'.
(B) Where the provision is made to a charity and the charity uses the self storage facility for a non-business purpose
This is use of the facilities by a charity for non-business activities, eg, storage of goods for free distribution to beneficiaries. Sections 4 and 5 of Notice 701/1 'Charities' provide guidance to help charities decide which activities are business and non-business. The self storage operator should obtain and retain evidence from the charity of its non-business use of the facilities in order to support not taxing the supply.
(C) Where the storage is ancillary
Where the self storage facility is just part of a building which the customer uses primarily for other purposes, to which the storage is ancillary. An example would be a lease of storage facilities to a retailer within the same building as the retailer's shop. This ensures that mandatory standard rating does not apply more widely than intended.
2.13 Do the changes affect the supply of buildings to self storage providers?
No. the sale or lease of a building to a self storage provider will only be subject to VAT if the person making the supply has made an 'option to tax'. The new rules only impact on supplies made by self storage providers to their customers.
2.14 Will freehold sales of buildings become subject to VAT as a result of the changes?
No. The changes only affect leases and licences to occupy land and buildings.
2.15 What about containers used to transport goods?
A container only qualifies as a 'relevant structure' when it is being used for the self storage of goods. In these circumstances the location of the container will normally be static. Any supply of space in a container used to transport freight is part of the supply of freight transport services and will be taxed accordingly.
2.16 What about the supplies of other goods and services provided in conjunction with self storage?
Supplies of other goods and services, for example, packing cases, the use of fork lift trucks and assistance with unloading are generally subject to VAT (unless like insurance they are covered by an exemption) and this will continue to be the case.
B1.14.7 The measure applies to existing lettings, so that VAT needs to be accounted for on payments received from 1 October. This applies even if they are made in arrears, and cover a period before the change. Most suppliers are able to add VAT to the existing charge – they can only not do so if the agreement specifies otherwise. The points here are the same as for the option to tax, as discussed in B2.8.2.
Also, however, 'anti-forestalling' provisions in Schedule 27 to Finance Act 2012 applied to prevent customers making pre-payments before 1 October 2012. HMRC commented in VAT Information Sheet 09/12.
The provisions covered cases where the tax point (see D4.5, but in this case essentially payment) was between 21 March and 30 September 2012, and the storage was to be provided or to continue after 1 October. In this case, the supplier was to account for an amount equivalent to 20% VAT on the VAT return covering 1 October, but this could be added to the agreed price and recovered by a business customer as though it were VAT. The liability was reduced 'on a just and reasonable basis' if the supply spanned 1 October, and the Information Sheet suggested a straightforward time-based apportionment.
Although the provisions were presumably designed for actual self-storage, the bigger impact may well be in other cases. If, for example, someone granted an exempt 25-year lease on a warehouse on 1 July 2012, receiving a premium, it appears that 99% of the premium was subject to anti-forestalling, and that VAT on this should have been accounted for on the return covering 1 October. It seems most unlikely that it would have occurred to either party that the lease was for 'self-storage' at all. For their part, HMRC were unable in mid-December 2012 to confirm the position in these cases, so that it would seem unreasonable for them to expect the VAT to have been accounted for.
Anti-forestalling was also a feature of the increases in the standard rate in 2010 and 2011, as discussed in A4.3.7, but did not apply to normal arm's length transactions for less than £100,000. These rules do not have the same limitations, and so apply in every case.
This might be thought to be a case of HMRC having it both ways – a payment is caught by the provision if it is made on or after 1 October even if it relates to an earlier period, or if it relates to a period on or after 1 October even if it is made earlier.
A fairer and simpler arrangement might simply have been for the legislation to tax storage to the extent it was being provided from 1 October onwards, ignoring normal taxpoint rules, and making the anti-forestalling measure unnecessary. There was precedent for this in earlier provisions for the option to tax, and it would have meant that payment in October for storage in September could still be exempt.
This was suggested to HMRC during the course of the consultation. Their summary of responses noted the suggestion, and added 'however, this is how the measure will be applied anyway'. It is not, in fact, how the measure was applied, and the most charitable explanation would seem to be that HMRC simply failed to grasp the point.
B1.14.8 Input tax is recoverable where it relates to supplies that are taxable as 'self-storage', including input tax incurred before 1 October but relating to supplies made on or after that date. Storage providers affected by the change will remain partly exempt through the partial exemption year 2012-13, although with a higher level of taxable supplies than before. They may need to revisit partial exemption methods to ensure that they get the benefit of this. Partial exemption generally is considered in Chapter A6.
Businesses affected by the change may be able to recover additional VAT through the Capital Goods Scheme (CGS). This is discussed in Chapter A7. If, for example, a self-storage operator constructed a facility in 2007, and let space in it exempt, the VAT will have been irrecoverable at the time. The change potentially means that it can recover something like half of the VAT under the CGS. This would be in annual instalments of 10%, over the next five years, although there are ways of accelerating the benefit.
Ordinarily, however, the CGS only applies to property where the capital expenditure has been £250k or more, so that operators of smaller facilities would not get this benefit. In view of this, the CGS has been amended so as temporarily to allow businesses affected by the measure to opt in to the CGS where the expenditure is below £250k. This is discussed in A7.3.6.
It seems questionable, however, whether simply waiving the £250k threshold in this way wholly resolves the issue:
The CGS only covers certain types of assets, and before 1 January 2011 was limited to certain types of expenditure on these. Other assets and expenditure still cannot be brought into the CGS. An example would be a small extension to a warehouse carried out in 2010.
The CGS only applies to assets that have actually been brought into use. If someone constructed a facility in 2011, for use in (exempt) self-storage, but only brings it into use in providing (taxable) self-storage in 2013, any VAT adjustment would be not via the CGS but via regulation 109 (A6.6). But unlike the CGS, regulation 109 does not permit an adjustment on account of a change of law.
It may be that in practice HMRC will turn a blind eye to adjustments being made in cases such as these, but some further points are noted in A7.3.6.
Storage facilities – examples
This box illustrates the various exceptions to the taxation of 'self-storage'. It is perhaps worth recalling here HMRC's claim that the provisions made the VAT system 'simpler and fairer'
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Alf owns a building that consists of a workshop and storeroom. He has not opted to tax. He lets the workshop to Bert, but he has a range of options for the storeroom.
If he lets it to Bert, to store equipment he uses in the workshop, the storage will be 'ancillary to other use of the building' (Note 15C(c)) by Bert and so exempt.
If in fact Bert uses it to store furniture from his mother's house instead, this is unconnected with the workshop use and so not ancillary to it. Note 15C(c) does not apply, and the letting is taxable 'self-storage'. Of course, Alf may not know how Bert is using the storeroom, and the liability will change with Bert's use – if he later sells the furniture and uses it with the workshop again, the letting will once again be exempt. So Alf needs to keep an eye on what Bert is storing.
Alf could let the storeroom to Carol, who lives across the road. Carol is making no other use of the building, so the letting will probably be taxable. But Carol thinks the storeroom might be suitable stabling for her pony. If she does use it for that, this will be exempt, since live animals are not 'goods' by virtue of Note 15A. Again, Alf will need to know whether the room is being used for stabling or not, and to check on an ongoing basis.
Another possibility is to let the storeroom to Dave, who could do with somewhere to store tools for his gardening business. This is probably taxable. But Dave is Alf's brother, so they are 'connected persons'. Alf needs to work out whether the building is 'a relevant capital item' for the purposes of Note 15C(a), in other words whether it is subject to the Capital Goods Scheme. If it is, the letting is exempt until the end of the CGS adjustment period.
In the event, Dave does not get to put his gardening tools in the storeroom after all, because his daughter Ellie insists on using it instead. But under Note 15B, Dave is still treated as using it because Ellie's use is with his, admittedly grudging, permission. So if the building is in the CGS, the letting remains exempt for the rest of the adjustment period.
In the end, Dave persuades Ellie to take on the letting from Alf direct, so that at least he is no longer paying for it. Ellie is only Alf's niece, and so is not connected with him. Note 15C(a) no longer applies and the letting direct to Ellie is taxable. Unless, of course, she uses the storeroom to house live animals.
The local school is also interested in renting Alf's storeroom, because it collects goods to send abroad as gifts and needs somewhere to store them. It sends surplus clothing to Africa, and at Christmas it collects presents for orphans in Romania. The school has charitable status, and says that it will use the storeroom 'solely otherwise than in the course of a business', so that the letting will be exempt. Alf has doubts about this – he suspects that the school will use the storeroom for all sorts of things, and that some of these might well be in connection with its business activities. And, had he read HMRC's Notice 701/1, which he probably hasn't done, he would conclude that although sending Christmas presents to Romania was a non-business activity, sending clothing to Africa was not, and was a zero-rated business activity. So perhaps the letting will be exempt in the run-up to each Christmas, and taxable for the rest of the year.
B1.14.9 There has been a further issue with the place of supply – with whether storage services provided to non-UK customers are within the scope of UK VAT at all. The place of supply rules are discussed, in particular, in D7.4, but under Article 47 of the Directive 'services connected with immovable property' are taxable where the property is located, and this means that lettings of land in the UK are generally within the scope of UK VAT. It has been unclear whether this includes the provision of storage space. If it does not, then the general place of supply rules would mean that, under Article 44, UK VAT was not chargeable to a non-UK business customer. Within the EU, however, such a customer would have to account for VAT in their own country under the reverse charge (D7.5).
As seen in Box B1.14B, HMRC commented in Revenue & Customs Brief 22/12. This said that the supply was within Article 47 where it involved the right to use a specific area, apparently exclusively, but not otherwise. This was apparently a new distinction in this context, and HMRC had previously seen the supply as within Article 47 whether or not a specific area was provided.
It is also, logically, the same distinction as to whether the supply is of a licence to occupy land, and so within the taxation for 'self-storage' unless covered by one of the exceptions. But difficulties over this had been one aspect of the 'borderline anomaly' that the 'self-storage' measures were supposed to address. In HMRC's view, the letting of self-storage in a building was a licence to occupy, whereas self-storage in a shipping container was not, and the inference is that the Brief preserves this distinction in another context.
This suggests a position as follows:
For a specific area, the supply is within the scope of UK VAT. If it is likely to be standard-rated under the 'self-storage' provisions unless it is within one of the exceptions. Otherwise it is exempt with an option to tax.
If there is no specific area, the supply is within the scope of UK VAT, and necessarily standard-rated, in the case of a UK customer or a non-UK private customer. For a non-UK business customer, it is outside the scope of UK VAT. (These distinctions are considered in D7.4.)
There are, of course, further variations here if in fact the specific area point in the Revenue & Customs Brief is not the same as whether there is a licence to occupy land.
The ECJ is due to consider a further question in RR Donnelley Global Turnkey Solutions Poland Sp. z o.o. (CJEC Case C-155/12) – whether Article 47 applies where the storage is part of a wider package of services.
Place of supply of storage – HMRC's views
This box reproduces extracts from Revenue & Customs Brief 22/12, issued on 2 August 2012. The second part is also relevant to exhibition services, as discussed in B1.9.7.
The Brief is reproduced in full in Box D7.4C.
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Storage of goods
Current HMRC policy is to see all supplies of storage space as land related. This will change so that where a supplier grants the right to use a specific area of a UK warehouse or storage area for the exclusive use of the customer to store goods, the service will be treated as relating to land and subject to VAT in the UK. However, where the supplier agrees to store goods but does not grant a right to a specific area for the exclusive use of the customer, this will not be seen as a land related supply but will be treated as falling within the general place of supply rule. In such cases business customers who belong outside the UK will not be liable to UK VAT.
Changes of HMRC policy
Where businesses have been treating services in accordance with HMRC's earlier policy, they may continue to apply that treatment for a transitional period of up to three months from the date of this Brief in order to make adjustments to their systems and processes. However, businesses that wish to adopt the new treatment may do so immediately if they wish.
Although businesses may make adjustments for past periods, any VAT declared in accordance with HMRC's earlier policy, that would not have been due under the new interpretation, will not be entitled to a refund unless:
it can be demonstrated that the customer has not recovered the VAT charge
and any VAT repaid by HMRC will be refunded to the customer
If that is not the case then HMRC will consider the defence of unjust enrichment in deciding whether to make a repayment of the VAT declared.
B1.15 Some supplies in connection with hairdressing, and primarily the provision of facilities to individual hairdressers, became automatically standard-rated from 1 October 2012. This was essentially intended to reinforce the existing position.
B1.15.1 Hair salons frequently rent out individual chairs to self-employed hairdressers. As discussed in B1.9.2, HMRC had long maintained that such lettings were standard-rated, arguing both that the hairdressers did not get the use of a clearly defined area and that the supply was primarily one of facilities. They were also influenced by the fact that the individual hairdressers were unlikely to be VAT-registered, so that their proceeds would be escaping the VAT net.
There had been extensive litigation in this area over many years, but by 2012 the matter appeared to have been resolved in HMRC's favour, with a letting only being potentially exempt if it really was one of space, such as the letting of an entire salon. In view of this, it did not really seem necessary to amend the legislation, but proposals for the specific taxation of hairdressing facilities were nevertheless included in a package announced at Budget 2012, under the overall banner of 'borderline anomalies'. HMRC claimed that the measure 'makes the current position clear in law, removing any opportunity for confusion, and making the tax system fairer and simpler'.
The suggestion, then, was that the measure did not involve any substantive change, but this was hard to reconcile either with HMRC's projection that it would raise another £5m per annum, or with the draft legislation. In their original form, the provisions would have gone well beyond taxing space for hairdressing. They were amended following a consultation exercise and the version included in the 2012 Finance Act was far more focussed. HMRC did, however, continue to claim both that the measure was mere clarification of the existing position and that it would yield an additional £5m a year.
The provision preserved the potential for disputes in other, potentially comparable, cases. Notice 742, as reissued in 2012, asserted for the first time that 'the hire of tables in nail bars to self-employed manicurists' is not a licence to occupy, and so was standard-rated. This had evidently been an area of interest to HMRC. Case law provides other examples of the provision of workspace to the self-employed where there has been just the same issue – to 'masseuses' in Salon 24 (Box B1.9B) and to Dutch drug dealers in Coffeeshop Siberië (Box B1.5B).
Other 'borderline anomalies' in the same package concerned storage facilities (B1.14), listed buildings (Chapter C11), caravans (D9.11) and other matters outside the remit of this book, most notably pasties etc. In this case, however, there was no anti-forestalling provision, presumably because the supplies targeted by the measure were already taxable anyway.
HMRC provided brief guidance on the measure in VAT Information Sheet 13/12, and some further indications of their thinking were given in a summary of responses to the consultation, which can be found at http://www.hmrc.gov.uk/news/june.htm, as an entry for 28 June 2012.
the grant of facilities to a person who uses the facilities wholly or mainly to supply hairdressing services
This is, however, limited by Note 17:
Paragraph (ma) does not apply to a grant of facilities which provides for the exclusive use, by the person to whom the grant is made, of a whole building, a whole floor, a separate room or a clearly defined area, unless the person making the grant or a person connected with that person provides or makes available (directly or indirectly) services related to hairdressing for use by the person to whom the grant is made.
Note 18 explains that:
For the purposes of Note (17) –
(a) "services related to hairdressing" means the services of a hairdresser's assistant or cashier, the booking of appointments, the laundering of towels, the cleaning of the facilities subject to the grant, the making of refreshments and other similar services typically used in connection with hairdressing, but does not include the provision of utilities or the cleaning of shared areas in a building, and
(b) it does not matter if the services related to hairdressing are shared with other persons.
Finally, Note 19 says that persons are connected in terms of section 1122 of the Corporation Tax Act 2010, as discussed in B3.5.2.
B1.15.3 Since case law had already established that the letting of hairdressers' chairs was taxable, the measure is only really important for what else it might happen to catch. The original draft legislation was open to a great deal of criticism on this account, but the revised version is far more accurately targeted.
Subject to Note 17, paragraph (ma) applies if the grant is 'to a person who uses the facilities wholly or mainly to supply hairdressing services'. This does not seem to raise significant questions:
A 'person' clearly includes a legal person, such as a company, as well as individual.
Hairdressing services are not defined, but probably do not need to be. Other similar services – such as those of a manicurist – are not within the provision, although in HMRC's view a comparable supply to a manicurist is taxable anyway (Box B1.9A).
'Wholly or mainly' presumably means more than 50%. In other contexts, however, HMRC have maintained that it means at least 80%, and they still do so in one case (see D1.4.4). In the situations at which the provision is actually aimed, however, it seems unlikely that the use would be for such a mixture of purposes.
The provision only applies where the supply is to the end user, the person supplying hairdressing services.
Taxation depends on actual use for hairdressing, not on intended use or availability. If the hairdresser rents a chair but never actually uses it, this would not seem to be within the provision, and the same might arguably apply if she has to continue paying for it while on holiday. But on the face of it the supply in these cases would still be taxable anyway.
Although case law had indicated that lettings of individual chairs etc were taxable, the Tribunal had distinguished cases where the letting had been of the entire premises, as in Quaife and Taylor (Box B1.9B) where the lessors had not themselves provided hairdressing services.
The exception in Note 17 tries to preserve this distinction. It applies where the letting is 'for the exclusive use' 'of a whole building, a whole floor, a separate room or a clearly defined area'. It follows that if it is none of these – being perhaps a chair, a sink and an undefined area around these – then the letting is necessarily within paragraph (ma). But in other cases, where the letting does involve exclusive use of a room, clearly defined area etc, it is only taxable under the provision if 'services related to hairdressing' are also provided, whether by the same person or by someone connected with them and whether or not exclusively to the lessee.
The definition of 'services related to hairdressing' is therefore crucial, since if any of these are provided the letting is necessarily taxable. The original draft legislation cast this very widely, but the version in Note 18(a) is much more accurately targeted. In their summary of responses to the consultation document, HMRC explained that:
'In response to points made in the consultation we are clarifying the draft legislation to better describe the types of services typically provided to a hairdresser under a chair rental agreement, while excluding other services we think could legitimately be included in an exempt supply of land.'
Whilst they seem largely to have achieved this, the inclusion of 'the cleaning of the facilities' may cause problems. Although the cleaning of shared areas is excluded, and the reference seems only to be to cleaning specifically of the demised area, it is credible that the landlord should provide some cleaning services, and hardly for HMRC to suggest that this is not 'legitimate'. This might, for example, be the case where the hairdressing salon is located in a department store or a college. If the parties do not want the letting to be taxable, all cleaning needs to be the responsibility of the lessee, or at any rate not of the lessor or of anyone connected with the lessor.
B1.16.1 Sch 9 Group 14, implementing Article 136 of the Directive, exempts supplies of goods where the supplier incurred VAT on the goods and was unable to recover any of it. This also applies if the supplier acquired the goods on a TOGC and the transferor had been in this position.
The exemption does not apply if the input tax was partly recoverable, even if only 1% was recoverable and even if the supplier chose not to recover it. There is no scope for partial relief in these cases.
These rules apply to property transactions where:
the transaction is a supply of goods – ie a grant, assignment or surrender of a major interest;
it would otherwise be standard-rated, other than under the option to tax;
the vendor or lessor, or their predecessor under a TOGC, incurred VAT on the acquisition or construction etc of the property;
that VAT was wholly irrecoverable.
The exemption specifically does not override the option to tax.
In practice, the exemption rarely applies to property transactions and, where it could apply, the supplier will often prefer to opt to tax.
Box B1.16A gives an example.
Exemption for goods on which input tax was wholly irrecoverable – example
This box gives an example of the exemption explained in B1.16.1.
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A wholly exempt business acquires a freehold new building on its completion. It incurs VAT, none of which is recoverable.
Two years later, the business vacates the property and sells the freehold. This would otherwise be standard-rated since the building is still 'new' (see B1.11.1). But since this is a supply of goods, and the business incurred wholly irrecoverable VAT, the sale is exempt.
This may be beneficial if the purchaser is also wholly or largely exempt. Otherwise, the business will probably prefer to opt to tax, and recover perhaps 80% of the input tax under the Capital Goods Scheme, rather than sell on an exempt basis.
The provision of education or training by universities, colleges, private schools and some other bodies is exempt (see HMRC's Notice 701/30). The exemption also covers goods or services closely related to the supply of education or training, and for the direct use of their students, pupils or trainees. This covers both supplies made by the education provider and supplies to it, although in the latter case the supply must be by another education provider or by a public or non-profit making body.
So, for example, if a fee paying school provides pencils to its pupils, this is exempt. If it buys pencils from a stationer, this is standard-rated, but if it buys them from, say, another school or from the local education authority this is also exempt.
It is debatable to what extent this should apply to property transactions, but examples of where HMRC see it as applying are:
An institution providing residential accommodation to its students – in some cases this might otherwise be standard-rated under the rules in D9.4-5.
Perhaps less credibly, an institution providing parking facilities to its students – this would otherwise be standard-rated under the rules in B1.12.
A charitable trust owning a school's sports facilities and providing the facilities to the school.
The provision of sports facilities by a non-profit making body can be exempt under Sch 9 Group 10. This is explained briefly in D9.16.6, and in greater detail in HMRC's Notice 701/45.
There is also an exemption, under Sch 9 Group 12, for fund-raising events organised by charities, non-profit making bodies and some other organisations. HMRC comment in a 'helpsheet' at http://www.hmrc.gov.uk/charities/fund-raising-events.htm.
The exemption applies to most goods and services supplied by the organiser in connection with the event, and was held to extend to the licensing of trade stands in Southport Flower Show Ltd (TC 01938), This might have been exempt under Sch 9 Group 1 anyway, as a licence to occupy land (although see B1.9.7), and the Tribunal had no doubt that this would have applied here. But the organisation had opted to tax, overriding the Group 1 exemption. The Tribunal concluded, however, that the option did not override the Group 12 exemption, which still applied. This issue is discussed more generally in B2.4.8.
B1.16.4 Article 132(1)(f) of the Directive provides for a 'cost-sharing' exemption, and this was introduced in the UK, as Sch 9 Group 16, with effect from 17 July 2012. The exemption is intended to allow those with exempt or non-business activities, such as banks and charities, to collaborate in procuring services without creating a VAT cost. Subject to conditions, the exemption covers the supply of services by a 'cost-sharing group' (CSG) to its members.
HMRC have produced general guidance on the exemption in VAT Information Sheet 07/12. They have also confirmed that it can apply to the letting of property, although this seems to be more or less fortuitous, and they do not appear to have given the matter any serious thought.
In practice, the exemption will not be relevant to property very often. It will not apply where there is a supply of goods – a freehold sale or the grant of a lease exceeding 21 years (of more than 20 years in Scotland) – see B1.6.2. And many property lettings in these sectors are exempt anyway, with the option to tax used sparingly, or disapplied. In any case, members of a CSG only seem likely to share property where they already occupy neighbouring premises anyway. But the exemption will be relevant where, say, institutions share a car park, which they choose to hold in a CSG – the provision of parking facilities by the CSG would be exempt, rather than being standard-rated under the provisions discussed in B1.12.