Newnham College In the University of Cambridge v HM Revenue & Customs

Factual and Procedural Background

This appeal arises from a decision of the VAT and Duties Tribunal concerning the validity of an election to waive exemption under paragraph 2 of schedule 10 to the Value Added Tax Act 1994 ("VATA 1994") made by a college within a university. The election related to land on which the college proposed to rebuild and refurbish its library. The Tribunal upheld the decision of the Commissioners of HM Customs and Excise that the election was of no effect by reason of sub-paragraph 2(3AA) of schedule 10, which prevented the college from recovering the VAT paid on the refurbishment works.

The college had formed a wholly owned subsidiary company to which it granted a lease of the new library building and entered into various agreements including the sale of library books and assets, the secondment of library staff to the subsidiary, and agreements for library management and services. The Tribunal found that despite these arrangements, the college remained in occupation of the library after the grant of the lease, triggering the anti-avoidance provision in paragraph 2(3AA).

The college appealed directly to the Court of Appeal on a point of law relating mainly to the construction of paragraphs 2 and 3 of schedule 10 VATA 1994, with consent from the Commissioners and leave granted by a single judge of the Court of Appeal.

Legal Issues Presented

1. Whether the election to waive exemption under paragraph 2 of schedule 10 VATA 1994 was effective in respect of the land on which the college rebuilt and refurbished its library.
2. Whether the college remained in occupation of the land after granting the lease to its wholly owned subsidiary, thereby rendering the election ineffective under sub-paragraph 2(3AA) of schedule 10.
3. The proper interpretation of "occupation" and "exempt land" within the context of schedule 10 VATA 1994 and related European Community directives.
4. Whether the Tribunal erred in its approach by considering the college’s motive of tax avoidance in interpreting the anti-avoidance provisions.
5. Whether the separate legal personality of the subsidiary company should be disregarded in determining occupation of the premises by the college.

Arguments of the Parties

Appellant's Arguments

• The college challenged the Tribunal’s conclusion that it was in occupation of the library through (i) use by students and fellows, (ii) presence of college employees seconded to the subsidiary, and (iii) control exercised over the subsidiary.
• The college argued the Tribunal wrongly allowed its interpretation of the anti-avoidance provisions to be influenced by the fact that the arrangements were entered into with the motive of tax avoidance.
• The college submitted that the subsidiary’s separate legal personality should be respected, and control over the subsidiary did not equate to occupation of the premises by the college.
• The college contended that the presence and use of the library by students and fellows did not amount to occupation by the college due to lack of control over access and use.
• The college maintained that the secondment agreement meant library staff acted under the direction of the subsidiary, not the college, negating occupation by the college through those employees.

Respondent's Arguments

• The Commissioners accepted that the college’s motive of tax avoidance was irrelevant except insofar as the legislation contained anti-avoidance provisions to be interpreted in light of their purpose.
• The Commissioners did not rely on the principle of abuse of rights or law and did not uphold the Tribunal’s reasoning to the extent it accorded undue significance to the college’s tax avoidance motive.
• The Commissioners maintained that the anti-avoidance provisions aimed to prevent recovery of VAT by exempt businesses through artificial arrangements lacking commercial purpose other than tax avoidance.
• The Commissioners argued that the college’s control of the subsidiary was relevant to occupation as the college effectively controlled the library through its board members and seconded staff.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court began by setting out the statutory framework, emphasizing that VAT is charged on taxable supplies made by taxable persons and that input tax is recoverable only if attributable to taxable supplies. The provision of education by the college is an exempt supply, meaning input tax on building works is generally irrecoverable unless an effective election to waive exemption is made.

Paragraph 2(3AA) of schedule 10 VATA 1994 is an anti-avoidance provision restricting the election to waive exemption where the grantor is a developer who intends the land to be exempt land, including where the grantor remains in occupation not wholly for eligible (taxable) purposes.

The Court analyzed whether the college remained in occupation after granting the lease to its wholly owned subsidiary. The Tribunal found that occupation involved physical presence and control, identifying three factors: use of the library by college members, involvement of college staff seconded to the subsidiary, and control exercised by the college over the subsidiary.

The Court examined these factors in detail. It rejected the argument that use by students and fellows amounted to occupation by the college, noting the absence of control over access and use by those users. It distinguished the present case from a prior tribunal decision where staff employed by the trust exercised control.

Regarding the secondment of library staff, the Court found that although the staff remained employees of the college, their duties during secondment were to be carried out under the direction of the subsidiary's board. This meant the staff acted on behalf of the subsidiary, not the college, negating occupation by the college through them.

On the issue of control over the subsidiary, the Court reaffirmed the principle of separate legal personality, holding that the college’s control of the subsidiary did not equate to occupation of the premises by the college. The Court rejected disregarding the subsidiary’s separate legal personality absent evidence of sham or façade.

The Court acknowledged the anti-avoidance purpose of paragraph 2(3AA) but emphasized that the court must interpret the legislation as enacted without extending its scope beyond the words used, even if the arrangements appear artificial or contrived.

Consequently, the Court concluded that the college was not in occupation of the library premises after the grant of the lease to its subsidiary and therefore the election to waive exemption was effective.

Holding and Implications

ALLOWING THE APPEAL

The Court set aside the decision of the VAT and Duties Tribunal and the Commissioners’ decision that the election to waive exemption was of no effect. The election made by the college under paragraph 2 of schedule 10 VATA 1994 was held to be valid.

The direct effect is that the college is entitled to recover the input tax paid on the library rebuilding and refurbishment works. The Court did not establish any new precedent on the construction of the legislation beyond applying established principles of occupation and company law. It also noted that the appeal procedure adopted deprived the Court of the benefit of a High Court factual analysis, which would have been preferable.