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	First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Lower Mill Estate Limited & Anor v Her Majesty's Revenue & Customs [2009] UKFTT 38 (TC) (02 April 2009) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00016.html Cite as: [2009] STI 1937, [2009] UKFTT 38 (TC), [2009] UKFTT 00016 (TC)

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TC00016

Value Added Tax – Land and Property – Supply of holiday home – Whether separate supplies of land and construction services – Zero-rated or standard rated – Group 5, Sch 8 VATA 1994 – Whether abusive practice – Yes – transaction redefined as one supply – Standard rated – Appeal dismissed

LONDON TRIBUNAL CENTRE

(1) LOWER MILL ESTATE LIMITED

(2) CONSERVATION BUILDERS LIMITED Appellants

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: DR K KHAN (Chairman)

MR P DAVDA FCA

Sitting in public in London on 19-23 January 2009

Mr Jonathan Peacock QC, and Jolyon Maugham, for the Appellants

Mr Malcolm Gammie QC, and Mr Vikram Sachdeva, for the Respondents

© CROWN COPYRIGHT 2009


 


DECISION

Introduction

1. The Lower Mill Estate Ltd ("LME") and Conservation Builders Ltd ("CBL") (together "the Appellants") are appealing against assessments raised by HMRC on 18 February 2008 for the period 1 January 2005 to 30 June 2007 ("the Assessed Period").
2. The parties have been unable to agree a Statement of Agreed Facts.
3. The relevant facts are outlined below.
4. LME is a company registered for VAT with registration number 642 2528 54. It was incorporated on 6 February 1997 and is the freeholder of land at Somerford Keynes, Cirencester ("the Site"). It was previously known as Parkroof Ltd and J M Paxton Ltd. Its shares are wholly owned by Jeremy Michael Paxton ("JMP").
5. CBL is a company registered for VAT with the registration number 736 6223 31. It was incorporated on 3 February 1999 and supplies construction services. It has previously been known as Fernbridge Data Ltd and JM Paxton Builders Ltd. Its shares are wholly owned by JMP.
6. The Site comprises 158 hectares of land and benefits from planning permission for the construction of up to 575 residential homes subject to the condition that these homes shall not be occupied as a principal place of residence. This means that they can be occupied for 11 of 12 months in any one year. The plots of land are sold to customers who then contract to construct a house on their plot. The land is bought with the benefit of planning permission which would have been obtained in advance by LME.
7. The planning permission was given on the basis that a number of purpose built holiday homes would be constructed on the Site. The planning permission states,

"The holiday units to be erected as part of the development shall be occupied for holiday accommodation only and for the avoidance of doubt shall not be occupied as a permanent unrestricted residential accommodation or as a principal or primary place of business …"

and,

"The holiday units to be erected … will not be occupied from the 6th January until the 5^th February inclusive in each year."

8. The infrastructure development (roads, power, water, drainage and leisure facilities) of the Site was undertaken by LME (through sub-contractors) with private funding provided by a third party. As part of the planning approval, a section 106 Town and Country Planning Act, 1990 agreement was entered into with the local authority.
9. The development was undertaken in phases and constructed around a network of small "villages" (fixed number of plots) which were in effect the marked areas of development. The villages which have been constructed to date are:

(a) Mill Village which is the first constructed and which is now completed with all plots of land sold and the relevant construction of houses completed. They are approximately 80 holiday homes ranging from 2-4 bedrooms.

(b) The Clearwater Village was the second village to be constructed. In this village, there is planning permission for approximately 100 homes. By June 2007, approximately 90 of the plots had been sold and construction had been completed on approximately 74 properties.

(c) Howells Mere Village which is the third village to be constructed and comprises approximately 125 holiday homes. The development work in this village commenced in June 2007 and this appeal is not concerned with supplies made in connection with that particular village.

10. The houses are different styles and designs. There is a mix of eleven different two to four bedroom detached houses. There are also "landmark" properties which are individually designed by some of the leading architects and these properties achieve the highest price for both plots and houses. The detailed planning permission for the Site specifies the external design of the house.
11. The infrastructure development was undertaken in phases, depending on the particular village which was being developed. The development of the infrastructure work and house building was carried out by CBL, using third party contractors. CBL engages the services of contractors under what can be described as over-arching agreements in anticipation of the completion of the sale of a specified number of plot of lands. CBL would engage contractors under a blank contract for a specified amount of labour and material and for a specified number of houses. However, contractors were only paid for work actually undertaken and invoiced by CBL, which may or may not be all the work specified in the contract. In this sense, the contract was similar to a tender document which sought to attract best prices from contractors. The contracts were not signed but allowed CBL to have an indication of the prices which the sub-contractor would charge for specified work without creating an obligation on the contractor to actually carry out the work.
12. The holiday homes in each "village" are marketed by LME before and during construction. Plots of land are allocated for sale to buyers before or during construction of holiday homes, depending on when the buyer purchases or signs up to purchase.
13. There are two categories of sales. In the first category, "Category One", which covered over 90% of sales, construction of a holiday home took place on a vacant plot of land. In such a case, the sale of a plot of land would be standard rated for VAT purposes and there would be no construction on the land at the time of the sale.
14. In "Category Two", construction (under a licence to build granted by LME to CBL) of a holiday home would have started on the plot of land but would not have been completed before a long lease on the plot is purchased. The invoice for the purchase would show a sum of money for the purchase of the plot and a sum of money for the building works both of which would be standard rated. There was a third category "Category Three" where two show houses were completed on plots of land and these were sold separately. They were standard rated sales.
15. It is important to explain how the sales were actually undertaken. This point by point explanation illustrates the sales process:

(a) The on-site sale operations were run by LME. Customers coming to the on-site sale shop would make enquiries of plots of land and would be informed, at the same time, of the construction services offered by CBL. The customer therefore agreed to purchase a holiday home but it is treated as two transactions – the sale of land and the purchase of construction services.

(b) The customer is asked to pay what is called a "reservation fee" of approximately £2000-£5000 as a deposit on the holiday home purchased. After payment, the sales office would provide a letter to the customer outlining the terms and conditions of the sale together with a timetable for payment. Where the customer elects to use CBL, the letter would refer to the construction service agreement with CBL. ("Build Agreement").

(c) The lawyers for the parties would then get involved in the transactions. The customers' lawyer would receive a proposed agreement for lease (and later a lease) ("Agreement for lease" and "Lease") which are to be entered into with LME. Since the letter requesting the deposit was subject to a contract, in principle, a customer could enter into the Lease with LME and not the Build Agreement with CBL.

(d) While outline planning permission was given for the holiday homes customers often requested variations to the internal fixtures, fittings and decorations which meant that the construction price would have to be varied. The planning permission was given with respect to the structure and external appearance of the home. Customers frequently requested CBL to apply to change the permission which had been given. The planning permission was applied for by LME as freeholder. In this sense, many homes were custom-built for the customer and incorporated their own requirements into the holiday home.

(e) Once an Agreement for Lease has been signed with LME, an invoice was issued for the price attributable to the premium paid for the Lease plus VAT and this sum was paid to LME on completion of the plot purchased.

(f) Under the Build Agreement entered into with CBL, (after the completion of the Agreement for Lease), CBL starts construction work on the basis of six defined stages of construction and payments for each of those defined stages on production of an architect's certificate of completion for that stage. Payment is made to CBL. No VAT is charged to the customer as the services are treated as zero-rated. Normally the period of time between the grant of the lease and the final stage payment for building will be 12-18 months.

(g) Where construction of a holiday home had started (Category Two) before the Lease was signed, an invoice is issued by LME to the customer for the total value of all stage payments. LME treats the payment as VAT inclusive and issues a VAT invoice to the customer.

16. The price of a plot of land started at £15,000 (inclusive of VAT) and rose to over £200,000 plus VAT. An annotated graph was provided to show the annual average plot prices from the commencement of sales in 1999 to 2008. This shows a gradual increase in plot prices over that period. Total prices (house and land) ranged from £278,200 (Clearwater 43) to £1,000,000 (Clearwater 4).
17. The relevant assessments which were raised by the Commissioners under section 73(1) Value Added Tax Act 1974 ("VATA") are:

(i) against LME in respect of VAT said to be under-declared and in the sum of £2,867,539 and

(ii) against CBL in respect of VAT said to be under-declared and in the sum of £2,867,539.

18. There is no calculation of interest or penalties under these assessments.
19. Extracts from the Commissioners' Notification of Assessment letter of 18 February 2008 outlining relevant facts and their arguments (later changed in the Amended Statement of Case, 7 January 2009) and the Appellant's reply are outlined below to give a complete picture of the relevant facts and arguments raised by both parties. These are provided given there is no agreed statement of facts.
20. HMRC's letter of 18 February 2008 ("18 February letter")

"The main Decision that for each holiday home that is sold, LMEL makes a single supply of a completed holiday home to the purchaser (being the standard rated grant of a major interest in leasehold holiday accommodation).

The Commissioners consider that CBL does not make a supply of construction services to the holiday home purchasers (the customers). Rather, CBL makes a supply of construction services to LMEL (being the onward supply of construction services which CBL receives from its sub-contractors). This supply by CBL to LMEL is zero-rated by virtue of Item 2(a), Group 5, Schedule 8 to the VATA 1994. LMEL then supplies the completed holiday homes to the customers.

You contend that the customers receive two separate supplies: a supply of land by LMEL and a supply of construction services by CBL. You rely on the contractual documents to support this contention.

In this context the Commissioners note:

(a) The concept of supply for VAT purposes may not be identical with that of contractual obligation and the contractual form of the transactions will not necessarily determine the supply analysis (Reed Personnel Services Ltd (1995) STC 588);

(b) In the case of Rudolph Malerhofer v Finanzamt Augsburg-Land (Case C-315/00) the ECJ held that "…Article 13B(b) of the Sixth Directive defines exempt transactions by reference to the nature of the transactions effected. In order to determine whether a transaction comprises a letting or construction or repair work, account must be taken of its essential features … irrespective of the way in which it might be artificially presented" (paragraph 39 of the judgment refers);

With regard to the essential features of the transaction (rather than the way it is artificially presented) the Commissioners consider that those essential features include (or can be discerned from) inter alia the following:-

(a) there are construction contracts between CBL and its sub-contractors under which the sub-contractors carry out a particular stage of construction on a specified number of plots for a fixed price. In this way each 'village' is constructed in phases with each phase comprising a certain number of plots. The construction work in each phase proceeds irrespective of whether a purchaser had been found for any particular plot;

(b) LMEL has not supplied any plots to customers as bare land on which they can have a home constructed by a contractor other than CBL;

(c) there is no evidence of a home purchaser engaging a contractor other than CBL to carry out the construction of the home;

(d) the letter issued by LMEL to each purchaser when the deposit is paid (see annex 1, para 62 and examples in annexes 3 and 4) demonstrates that the intention of both parties is that the purchaser will acquire a completed holiday home and not a plot of bare land;

(e) homes are built according to planning permission granted to LMEL and in accordance with detailed plans of the whole development site. A purchaser of a home does not have a choice about the design of the structure of the building. The fabric and external appearance of the homes must comply with the detailed plans agreed between LMEL as the developer and the Local Authority at the outset of the development;

(f) all homes are pre-designed on an exclusively managed recreation facility. Homes are not built to individual specifications (save for minor internal cosmetic details. They are supplied architecturally designed and purpose built to meet predetermined planning agreements.

(g) in reality the plots of land are not capable of being used separately;

(h) the way in which the development is marketed (the website, for example) shows that the essential nature of the development is the provision of holiday homes on a gated leisure development.

When the essential features of the relevant transactions are considered it is clear that the home purchasers intend to (and do) obtain one supply, notwithstanding the contracts, and this supply can be described as the acquiring of a holiday home. By attempting to separate this supply into two parts you have sought to artificially split what is in reality a single supply of a completed holiday home.

Therefore, properly understood, the essential features of this case demonstrate that the true nature of the transaction is the grant of a major interest in leasehold holiday accommodation (the completed home) by LMEL to the customer.

The Alternative Decision

If the Commissioners' main argument is held to be incorrect such that CBL does not make a supply of construction services to LMEL but instead makes a supply to the customer, then the supply made by CBL is not of construction services but is instead the supply of a completed building.

In Malerhofer the ECJ held that whether Mr Malerhofer, the lessor:

"makes available both the building and the land on which it is erected, or merely the building which he has erected on the lessee's land, is irrelevant in determining whether a letting constitutes a letting of immoveable property for the purposes of Article 13B(b)" (at paragraph 41).

The contracts between CBL and its sub-contractors and the nature of the development as the phased construction of holiday homes to a pre-determined plan show that it is an artificial presentation of the facts to suggest that the supplies made by CBL to the customers are of construction services. If supplies are made by CBL to customers then they are supplies of completed holiday homes.

The supply of the completed home by CBL is standard-rated as it is excluded from zero-rating by virtue of Note 13 to Item 1(a), Group 5, Schedule 8 to the VATA 1994 and it is excluded from exemption by virtue of Note 11 to Item 1(e), Group 1, Schedule 9 to the VATA 1994.

The consideration for this supply includes sums payable by the customer which are described as "stage payments" in the Building Agreement.

The Further Alternative Decision

In its judgment in the Halifax case the ECJ stated (at paragraph 86);

"For it to be found that an abusive practice exists, it is necessary, first, that the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and of national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage."

The ECJ elaborated on the second criteria (at paragraph 81):

As regards the second element, whereby the transactions concerned must essentially seek to obtain a tax advantage, it must be borne in mind that it is the responsibility of the national court to determine the real substance and significance of the transactions concerned. In so doing, it may take account of the purely artificial nature of those transactions and the links of a legal, economic and/or personal nature between the operators involved in the scheme for reduction of the tax burden (see, to that effect, Emsland Stärke, paragraph 58)."

In the Commissioners' view the arrangements in this instance satisfy the test set out by the ECJ for an abusive practice.

The purpose of the EU VAT legislation is inter alia to:

(a) eliminate distortions of competition (the 4^th preamble to the Sixth Directive refers); and;

(b) ensure that the taxable amount includes everything which has been paid in return for the supply (Sixth Directive, Article 11A refers: "The taxable amount shall be … everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies …") and;

(c) provide for a general tax on consumption which is exactly proportionate to the price of goods and services (Article 2 of the First VAT Directive (67/227/EEC) states: "The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged …")

The arrangements in this case insert transactions with the aim of minimising the VAT actually being charged to the final consumer when VAT should be properly charged exactly in proportion to the consideration received for the holiday home. Specifically, you have sought to account for VAT only on the amount that you decided to attribute as the value of the plot of land alone (where buyers were found before construction started). This result is contrary to the purposes of Community VAT legislation and distorts conditions of competition.

As the ECJ pointed out in the recently decided case of Talacre Beach Holidays (Case C-251/05) the zero rate provisions (or in EU terms "exemptions with refund of the tax") relied upon by LMEL and CBL in this case are subject to a number of conditions. The ECJ said in that case at paragraph 18 of its judgment:

"It is apparent, secondly, from the wording of Article 28(2)(a) of the Sixth Directive that the application of exemptions with refund of the tax paid is subject to a number of conditions. Those exemptions must have been in force on 1 January 1991. In addition, they must be in accordance with Community law and satisfy the conditions stated in the last indent of Article 17 of the Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of member States concerning turnover taxes – Structure and procedures for application of the common system of value added tax (OJ, English Special Edition 1967, p.16), now repealed, which provided that exemptions with refund of the tax paid could only be established for clearly defined social reasons and for the benefit of the final consumer."

There are no clearly defined social reasons for the supply of a holiday home to be zero-rated so, if LMEL and CBL were to succeed by this arrangement in making zero-rated supplies of holiday homes, then the purpose of the VAT Directives and the UK provisions intended to implement them would have been defeated.

For these reasons the first limb of the test set by the ECJ is therefore satisfied.

Turning to the second limb of the test "the essential aim of the transactions" refers to the reasons why each step in a series of transactions was chosen to give effect to the economic ends pursued by the parties. Any commercial benefits relied upon in this context must amount to a sufficient explanation for the adoption of those steps in the series of transactions. An alleged commercial benefit which is too slight to cause a reasonable business person to adopt the legal structure in question is not a "justification" of "explanation" of it.

The Commissioners can see no objective evidence of a substantive commercial aim to the arrangements but there is clear evidence that the arrangements gave rise to a significant VAT advantage.

It is also relevant that the explanatory document issued to potential customers (entitled "Scheme Summary & Frequently Asked Questions") includes the following item:

"Q. Why are the land and construction contracted separately?

A. Because the land sale is subject to VAT but the construction works on the new dwelling by Conservation Builders Limited is free of VAT (zero-rated)".

The Commissioners therefore conclude that, viewed objectively, the essential aim of the arrangements is to obtain a VAT advantage. The second limb of the ECJ test is therefore also satisfied.

As both limbs of the test set out by the ECJ are satisfied, the arrangements amount to an abusive practice.

At paragraph 94 of Halifax the ECJ set out the consequences which flow from a finding that a scheme is abusive:

"It follows that transactions involved in an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice."

The transactions under the arrangements involving LMEL and CBL must therefore be redefined so as to re-establish the position that would have prevailed without the abusive transactions. The situation that would have prevailed without the abusive transactions is that LMEL, as the owner and developer of the land, would have made, in respect of each holiday home, a supply of the completed building together with the land upon which it stands. This supply would have been standard rated by virtue of Note 13 to Item 1, Group 5, Schedule 8, VATA 1994 and Item 1(e), Group 1, Schedule 9, VATA 1994."

21. Appellant's Response to 18 February 2008 letter

The Appellant replied on 3 June 2008 through their tax adviser (Stephen James) to provide a summary of points in rebuttal of the arguments raised in the 18 February 2008 letter. They are:

"1. CBL and LME are separate companies, not in the same corporate group. Jeremy Paxton ("JP") owns the shares of both companies.

2. Note – using companies in common ownership, but not in a corporate group (e.g. where one owns the other) is not the most efficient approach for direct tax issues and illustrates there were other significant considerations for the use of two separate companies.

3. When JP commenced development of the Lower Mill site he was advised by various professional advisers to manage the risks associated with operating a building company by keeping the land interest in a separate company and not involving the land owning company in the construction operation in order to protect his investment in the land.

4. When JP required finance to develop the Lower Mill site his investor only agreed to invest in LME on condition that any construction activities were kept in a separate company. This was the only investor, of a number approached (including JP's own bank) that would provide the essential funds to allow the purchase and subsequent expenditure to proceed.

5. Careful consideration was given to the business model to be adopted by JP considering the matter from both the perspective of the developer and from the viewpoint of the customers. The business was always to sell plots of land on long leases onto which houses could be built by private individuals. This model provided essential early cashflow to LME. It was clear from a very early stage that unless a high quality, reliable builder could be found to provide the services to the private buyers of the long leases that the sales effort would be adversely affected.

6. The structure and arrangements that were adopted involved the use of two companies with the land owning company granting leases in the plots for the development of the holiday homes and the construction company taking responsibility for the supply of the construction services to the customer.

7. Apart from the management of risk, the development of the business model also had a very positive cashflow benefit to both LME and CBL. This is because by granting leases in plots to buyers in advance of construction LME was able to receive payment of the lease premium from those customers at an early stage. In a similar way CBL was able to charge those customers for the building services during the course of construction in the form of stage payments. If the business model had been for the sale of completed holiday homes neither of these 'early' payments would have been acceptable to the buyers and the more normal payment terms for the purchase of property, i.e. payment of a deposit at exchange with full payment on completion, would have been required. As the period between the grant of the lease and the completion of construction is typically several months and can be as long as two years the company (or companies) would have required significantly more working capital than has been the case if the business model were the sale of completed holiday homes. The company would have been unable to finance this cashflow gap.

8. JP also considered that using a separate company to undertake the building works would provide other commercial benefits and opportunities including:

(i) greater flexibility to raise capital in future, a process that was being advanced before the assessment of the 18th February 2008 which is fully explained in the application for expedition of the judicial review;

(ii) ability to provide equity incentives to employees without diluting the holding in LME;

(iii) more potential for developing CBL's activities beyond the Lower Mill site;

(iv) the ability to separately sell or list on the stock exchange the share capital of CBL.

9. It is accepted that there is a VAT consequence of the business model that was adopted and it would be wrong to say this was not considered when the arrangements were established in 1998/9, indeed, it would have been commercially irresponsible not to have fully considered it. However, the business model that has been used would have been adopted in any case for the sound commercial reasons outlined in paragraphs 3, 4, 7 & 8 above.

10. Since the development of the site commenced in 1999 the construction operations have been undertaken by or through CBL so there can be no suggestion that the arrangements have been altered to achieve a 'VAT advantage'. The arrangements have been in place since the business was established and as outlined above were not established with the sole or principal purpose of obtaining a 'VAT advantage'. There is therefore no immediate re-definition of the transactions without resorting to an artificial presentation of the various supplies.

11. Potential customers have always been advised at the outset of their enquiries that the land owning and building operations are kept separate as can be seen from the scheme Summary and Frequently Asked Questions (FAQ) documents which the Commissioners have seen on various occasions.

12. There is no specific requirement on tenants of LME to use CBL as their builder and although all lessees so far have used CBL to construct their homes, due largely and not unsurprisingly to the much greater risk of using a contractor that does not have the proven track record. Many, however, have used other contractors for subsequent works.

13. The presentation of the prices to customers has varied over the period of the development. At times the construction cost has been shown as a separate cost to the land cost and at times only an inclusive sum has been shown in the marketing material. However, throughout the development potential customers have been advised as soon as they express an interest that LME will sell the land and CBL could build their holiday home. This early notification is critical because of the consequent payment requirements as outlined at 7 above.

14. The mention of VAT as being a reason for the separation of the supply of land and building services in the later FAQ's arises because of questions asked by potential buyers and was considered to be a more acceptable way of explaining the position to them, than telling them it was a way of financing the business in the beginning, to manage risk for the proprietor of LME and to achieve a better cashflow for the businesses. Customers are after all more likely to be comforted if they feel they are making a saving (particularly in VAT) than if they are paying in a manner which may appear to be to the advantage of the suppliers.

15. It is seen as a key selling point that customers are having a holiday home built for the, rather than buying the financial article. This allows the customers to take an interest in the development of their home and allows them to personalise it and to specify adaptation to the design. It is possible for customers to require variations to the plans and so far over 20 bespoke planning applications have been made on behalf of clients.

16. It is also considered that a key part of the sale to prospective purchasers of leases at the Lower Mill site is the greater confidence they have in LME because they can see that it is debt free and risk free in its role a landlord and this confidence means they are more likely to complete their purchase. Whereas if they saw the company with debt on its balance sheet and the potential for liabilities arising from construction activities they would be more reluctant to enter into a long term relationship (i.e. a long lease) with that company.

17. It was concluded that the leases granted in the plots by LME would be subject to VAT at the standard rate in accordance with Item 1(c) and Note 11 to Group 1, Schedule 9, VATA, but that the construction of the holiday homes by CBL would be zero-rated in accordance with Items 2 & 4 of Group 5, Schedule 8, VATA.

18. The UK VAT legislation allows the construction of holiday homes to be zero-rated, provided these qualify as dwellings and this is endorsed by HMRC in its published guidance (Notice 708 and Notice 709/3).

19. If Parliament had intended that the construction of holiday homes should not benefit from zero-rating this could easily have been achieved by slight amendment to the UK VAT legislation.

20. Confirmation of the VAT treatment outlined above and of certain issues relating specifically to the development of the first phase of the Mill Village was sought from HMRC in 1998. Confirmation was given that the interpretation of LME was correct.

21. Confirmation that the VAT treatment applied by LME and CBL was correct was again obtained from HMRC in 1999.

22. HMRC carried out thorough inspections of the records, the site and the activities of CBL and LME during 2000 and 2001 and accepted the VAT treatment that had been applied.

23. HMRC carried out a further inspection in 2005 and raised questions about the operation of the businesses, but did not suggest that any changes to the VAT treatment were required. HMRC did not pursue matters until 2007.

24. In order to ensure the VAT treatment was sound, despite the confirmation from HMRC, opinions were taken from Tax Counsel in 1999 and Leading Tax Counsel in 2001. In both cases counsel endorsed the arrangements.

25. The documentation used to confirm the transactions that occur between the parties, i.e. the Agreement to Lease, the Building Agreement and the Lease was prepared by property lawyers and has been reviewed and approved by Tax Counsel and leading Tax Counsel.

26. The transactions between LME and its tenant and CBL and its customer are subject to the legal agreements which are prepared by the lawyers acting for LME and CBL and are subject to review and approval by the many firms of lawyers which have acted for the various clients.

27. It is understood that many of the mortgages that are taken out by buyers are termed "self build" mortgages, reflecting the way LME sells plots to people – the dream of self building their holiday home with none of the usual risks, as LME is able to recommend a profitable, award winning proven builder of substance with a good track record.

28. The agreements are enforceable legal agreements of substance involving considerable sums of money and penalties for failure to perform. The parties have entered into these agreements in full knowledge of their intention and effect and with the benefit of legal representation.

29. Samples of these agreements were provided to HMRC in 2000 and 2001 and no criticism was made of them or of their effect.

30. The building agreement provides that the lessee can put the lease on CBL if CBL fails to perform and that CBL can call for the lease if the lease fails to make the required payments. This provides protection for both parties. However, if CBL failed to perform and went into liquidation the lessee may be unable to secure payment for his lease and is therefore taking a commercial risk by using CBL as a builder; a risk that would not arise if the customer were simply buying a completed holiday home from LME.

31. In the vast majority of cases LME grants leases in plots before construction of the dwelling begins. Excluding the 9 properties developed by GDL, of the first 170 holiday homes on the site, 3 have been sold after completion of the construction, 12 have been sold during the course of construction and 155 were built by CBL after LME had granted leases to the tenants.

32. In those cases where completed or partly completed holiday homes have been sold by LME VAT has been accounted for by LME on the full price that it has received. Where CBL has then completed the construction for the lessee it has treated its services as zero-rated in accordance with the guidance given in Notice 708.

33. If HMRC had alerted LME or CBL to its concerns about the VAT treatment in advance of raising any assessments the companies would have taken steps to mitigate the potential exposure. The companies are not now in a position where they can approach their respective tenants or customers for the VAT that has not been charged to them.

34. It is considered that the Court of Appeal decisions in Telewest and Southern Primary Housing support the VAT treatment that has been applied.

35. It is maintained that the structure of operation of the companies and specifically the provision of construction services after the sale of land by a connected party or by the same party is normal business model land support for this is drawn from the reported tax cases of Southern Primary Housing and prudential Assurance.

36. It is considered that the arrangements do not amount to an 'abusive practice' as defined by the ECJ in Halifax or as further considered by the ECJ in Part Service, because the arrangements are not derived from a primary aim of achieving a tax advantage, they do not offend the purpose of the EC VAT legislation and they are not in any way artificial.

37. Although under common ownership and sharing some common management LME and CBL operate independently. Each has its own operational staff and each is financially independent making its own reasonable profit from its own endeavours. There is no cross-subsidisation between the companies and any and all charges between them are for services provided at a market rate.

38. The plots are subject to periodic independent valuation and values are maintained at a reasonably constant price to keep the market stable. If JP had wished to minimise the companies exposure to VAT he could have agreed with buyers to reduce the values of the premiums for the plots from LME and increased the building costs from CBL.

39. Where it has proved necessary to raise finance for development of the infrastructure of the site, in order to keep LME 'debt free', this has been done by establishing a separate company (GDL) which has taken leases on a number of plots from LME at market value and secured loans against the subsequent development or disposal of those plots.

40. At no stage in the sale or development process does CBL take an interest in the land to enable it to make a sale of a completed holiday home, as the Commissioners suggest in their alternative argument. If CBL did take an interest in the land from LME this would need to be registered with the land registry and would result in a payment of SDLT and this has demonstrably not happened.

41. Case law has established on many occasions that a taxpayer is not obliged to structure its arrangements to maximise the payment of tax. This can be seen most recently in the ECJ decision in Part Service at paragraph 47."

The law

22. The interest in land

Schedule 4 para 4 VATA provides:

"The grant, assignment or surrender of a major interest in land is a supply of goods."

A lease for 999 years is a major interest in land: section 96(1).

Schedule 8, Group 5 item 1 zero rates, relevantly:

"The first grant by a person –

(a) constructing a building –

(i) designed as a dwelling –

of a major interest in, or in any part of, the building, dwelling or its site."

Note (13) to group 5 also provides:

"The grant of an interest in –

(a) a building designed as a dwelling …; or

(b) the site of such a building.

Is not within item 1 if –

(i) the interest granted is such that the grantee is not entitled to reside in the building …

throughout the year; or

(ii) residence there throughout the year, or the use of a building or part as the grantee's principal private residence, is prevented by the terms of a covenant, statutory planning consent or similar permission."

In the present case, the grant of the 999 year lease is a taxable and not a zero-rated supply.

The construction services

Schedule 8, Group 5 item 2 VATA zero rates, relevantly:

"The supply in the course of construction of –

(a) a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose …

of any services related to the construction other than the services of an architect, surveyor or any person acting as a consultant or in a supervisory capacity."

And Item 4 zero rates, relevantly:

"The supply of building materials to a person to whom the supplier is supplying services within item 2 … of this Group which includes the incorporation of the materials into the building )or its site) in question."

It is common ground that a supply of services or materials in the course of construction of domestic (including second or holiday) accommodation qualifies for zero rating.

Time of supply

Regulation 85(1) provides, relevantly:

""[W]here the grant of a tenancy or lease is a supply of goods by virtue of paragraph 4 of Schedule 4 to the Act, and the whole or part of the consideration for that grant is payable periodically or from time to time, goods shall be treated as separately and successively supplied at the earlier of the following times –

(a) each time that a part of the consideration is received by the supplier; and

(b) each time that the supplier issues a VAT invoice relating to the grant, (emphasis added)"

And Regulation 93 provides, relevantly:

"Where services, or services together with goods, are supplied in the course of the construction, alteration, demolition, repair of maintenance of a building or any civil engineering work under a contract which provides for payment for such services to be made periodically of from time to time, those services or goods and services shall be treated as separately and successively supplies at the earliest of the following times -

(a) each time that a payment is received by the supplier, or

(b) each time that the supplied issues a VAT invoice … (emphasis added)"

The Council Directive on the common system of value added tax (2006/112/EC) (the "Principal VAT Directive") provides, relevantly

" 'Supply of goods' shall mean the transfer of the right to dispose of tangible property as owner."

And:

"'Supply of services' shall mean any transaction which does not constitute a supply of goods."

Cases referred to

Prudential Assurance Co Ltd v IRC [1992] STC 863

Reed Personnel Services [1995] STC 588

Case C-308/96 and C-94/97 C&E Commissioners v Madgett & Baldwin [1998] STC 1189

Case C-349/96 Card Protection Plan [1999] STC 270

Kuwait Petroleum v C&E Commissioners [1999] STC 488

Case C-315/00 Rudolf Maierhofer v Finanzamt Augsburg-Land [2003] STC 564

Case C-284/03 Belgian State v Temco Europe SA [2005] STC 1451

College of Estate Management v Customs and Excise Commissioners [2005] STC 1597

Case C-111/05 Aktiebolaget NN

Case C-442/05 Finanzamt Oschatz v Zweckverband zur Trinkwasserversargung and Abwassewrbeseitigung Torgau Westelbien

MMO2 VAT Tribunal Decision 195514

Telewest Communications v Customs and Excise Commissioners [2005] STC 481

Debenhams Retail v C&E Commissioners [2005] STC 1155

Case C-41/04 Levob Verzekeringen [2006] STC 766

Case C-255/02 Halifax v Customs and Excise Commissioners [2006] STC 919

Case C-251/05 Talacre Beach Caravan Sales v Customs and Excise Commissioners [2006] STC 1671

Tumble Tots (UK) Limited v HMRC [2007] STC 1171

Case C-425/06 Ministero dell'Economia e delle Finanze v Part Service Sri (decision of the ECJ of 21 February 2008)

HMRC Publications

HMRC Notice 708 'Buildings and Construction'

HMRC Notice 719 VAT Refunds for Do It Yourself Builders and Converters

Witnesses and Documents

(a) For the Appellant

1. Jeremy Michael Paxton ("JMP"), the sole shareholder of each of the Appellants;

2. Gavin William Johnson ("GJ"), a quantity surveyor and adviser to JMP;

3. Derek Howard Fieldman ("DF"), an accountant and adviser to JMP; and

4. Moshe Ganzi ("MG"), a businessman and an investor in LME

(b) For the Respondents

1. Andrea Wedley ("AW"), higher officer of HM Revenue and Customs;

2. Donna Louise Fracchiolla ("DF"), officer of HM Revenue and Customs; and

3. Emma Louise Mary Cox ("EC"), senior officer of HM Revenue and Customs.

23. There were nine volumes of documents provided to the Tribunal. There was a DVD recording showing the marketing presentation for the Site. Each party provided a separate paper on material evidence points.

The Appellant's arguments

24. The concept of a "supply" for VAT purposes is not the same as the contractual obligations between the parties (Customs & Excise Commissioners v Reed Personnel Services [1995] STC 568 at 595 see 591 F-H "Reed Personnel Services"). The concept is wider in that one has to look at the legal relationship between the parties and the reciprocal obligations and their effect for VAT purposes (Kuwait Petroleum v Customs & Excise Commissioners) [1999] STC 488 at p.509 para 26 "Kuwait Petroleum"). The relevant analysis here is that there are two reciprocal arrangements, one between LME and the customer for a supply of land and another between CBL and the customer for a supply of construction services. There is no sense, whether "legally, commercially or economically" in which LME or CBL "really" supply an interest in a completed home to the customer.
25. There can be separate supplies, separately taxable to the same customer of, first, land and, second, building services and materials. References made to support this position is HMRC's Notice 719 (VAT Refunds for "Do it Yourself" Builders and Converters) which is predicated upon the construction of buildings on land which is already owned. There is recognised difference in the VAT treatment of building services/materials supplied in the construction of a home (including a holiday home) and the sale of that home (including a holiday home) (HMRC Notice 708 "Buildings and Construction" at para 4.4).
26. The Appellant says it is not possible to treat two supplies by two suppliers as if they were one supply made by one of them or possibly one supply made by both of them. There is authority for this proposition in the Court of Appeal decision in Telewest Communications plc v Customs and Excise Commissioners [2005] STC 1155 ("Telewest") and secondly, it is only possible to treat two supplies or what would otherwise be two supplies as if they were one in certain circumstances, those circumstances being if the criteria identified by the European Court in Card Protection Plan Ltd v Customs and Excise Commissioners, Case C-349/96 ("Card Protection Plan") are satisfied. In their view, these criteria are not satisfied.
27. The Appellant says that there are three key contracts: the Agreement for Lease between LME and the customer, the Lease between LME and the customer and the Build Agreement between CBL and the customer. The Agreement for Lease does not create or envisage a supply by LME of building services but only of land and it imposes no obligation on the customer to use CBL to construct a holiday home on the plot. The Lease has similar provisions. In this sense, the Agreement for Lease and Lease effect a "transfer of the right to dispose of tangible property as owner," at the date of the lease. They effect the completed supply of goods (an interest in land) by LME to the customer. The time of that supply of land will be, at the latest, the time when the completion invoice is issued.
28. The Build Agreement (under Category one) concluded between CBL and the customer effects a succession of supplies by CBL of goods and services which are "treated as separately and successively supplied … each time that a payment is received by CBL" (Regulation 93(1)(a)).
29. The contracts are reciprocal agreements, not between group companies but associated companies independent of each other making separate supplies. The contract contemplates a "self-build" type of arrangement where the customer would build their own home after purchasing the land.
30. The Appellant says that the business model subscribed to was the selling of plots of land and a self-build contract. The loan creditor, MG, wanted to keep the land owning company free of liability and the biggest single liability would have been the building risk liability i.e. future claims for defective buildings. Two companies were therefore created. They were not formed for tax purposes but for commercial reasons. Tax advice was sought some one year after the companies were formed.
31. The re-characterising of the supply of building services made by CBL to the customer as a supply made by CBL to LME and then by redefining the supply of land made by LME to the customer as a supply of a completed holiday home is a contention without foundation.
32. There is no legal relationship between CBL and LME for a supply of building services in return for a fee (i.e nothing requiring reciprocal performance) and hence there can be no supply. There is no contractual obligation inter se and no consideration to be paid by LME to CBL for those services. Further, there is no commercial relationship between the parties which would enable a supply to be inferred from the contract. Moreover, even if the supplies made by CBL to the customer were to be redirected to LME, the onward supplies by LME to the customer would be a zero-rated supplies of building services rather than standard rated supplies of land.
33. It is not possible, on the facts, to conflate the supplies of land made by LME with the supply of construction services made by CBL. In order to conflate the supplies in this way there must be a principal service and an ancillary service and the two supplies must be so closely linked that they form, objectively, a single indivisible economic supply which it would "be artificial to split" (Card Protection Plan v Customs and Excise Commissioners [2001] STC 174 para 22 ("ChargeCard HL").
34. The Appellant says that neither supply can be ancillary to the other because both are substantial nor can they be made into a single supply since they are both profitable. These are two supplies for separate prices made by separate supplies for distinct and separate subject matter. Further, the plot sales are more profitable and cannot be viewed as an ancillary supply nor can the construction services which is substantial and double the turnover of the land sales (Madgett and Baldwin v Customs and Excise Commissioners Cases C-308/19 and C 94-97 "Madgett and Baldwin"). The Commissioners main decision therefore cannot stand.
35. In reply to the Commissioners' second argument, the Appellants say there is no joint supply by CBL and LME of a completed holiday home. Like the first argument, there is no abuse argument here and the assessment is against CBL. The only supply CBL makes is of construction services.
36. There is nothing in the evidence or in the facts which requires the commercial matrix (separate supplies of separate items by separate suppliers) to be recast as the Commissioners suggest, and there is nothing in law to support such recasting.
37. The Appellant says that the Respondents have not supported this argument with any legal authority and this argument should be abandoned. The VAT world knows no such thing as a joint supply by two persons of one interest inland, more so, where only one owns the interest in land.
38. The last argument put forward by the Appellant concerns abusive practice under the Halifax principle.
39. The Appellant says that the transactions do not constitute an abusive practice under the principles in the Halifax case. The trader made a choice to structure the transaction so as to pay less VAT than would otherwise be paid. The essential aim of the transaction was not to obtain such an advantage. The relevant facts cannot be used to satisfy the two criteria which have to be established to apply the abusive practice doctrine. These criteria are the accrual of the tax advantage contrary to the purpose of the Directive ("anti-purposive") and that "the essential aim" of the transaction as established from objective evidence, was to obtain a tax advantage. Further, it was commercially desirable, from a risk point of view, to separate the two supplies.
40. The Appellant says that the manner in which the supplies were made did not undermine the purposes of the Principal VAT Directive. The Commissioners (originally) argued that zero-rating can only be established for clearly defined "social reasons" according to the case. The Appellant gives two reasons. First, there is no zero-rated supply by CBL of a holiday home. It is the supply of construction services, which is zero-rated in all cases where buildings are designed as dwellings. Secondly, the zero-rating of supplies of fitted caravans in holiday home parks, recognised in the Talacre Beach Caravan Sales v Customs and Excise Commissioners [2006] STC 1671 ("Talacre Beach Caravan") had been for social reasons and cannot be distinguished from holiday homes which provide long term accommodation. (The social reasons argument was later replaced by the Appellant to a distortion of competition argument). The Appellant says that CBL, who provided the zero-rated building services, accounts at the appropriate rate for tax on all considerations it receives, and therefore there is nothing anti-purposive which undermines the Directive.
41. The Halifax principle cannot be applied where a taxpayer chooses to conduct a transaction in a way which leads to less tax being paid notwithstanding that such may create market distortions and it may only benefit the taxpayer. The fact that the transaction leads to the payment of less tax does not ipso facto mean that the Halifax principle applies. The purpose of the transaction is not to avoid VAT.
42. The Appellant says that the Commissioners contend that the transactions are being challenged because the suppliers are related parties. There is no basis for such a contention and indeed, if the Commissioners' contention was correct, there will be an artificial disincentive to using one supplier rather than another.
43. Counsel for the Appellant said that the distortions in the market were created by the UK's flawed legislative regime which zero-rates construction of all homes, zero-rates supply of a completed non-holiday home by the builder but treats as standard-rated supplies of completed holiday home by the builder. This was a function of domestic law rather than community law.
44. The Appellant further submits that the business model used by the Appellant has always, for completely non-tax reasons, set out to create self-build housing and to sell plots of land. The business model was created first and the tax advice was sought later. The business model required that the building operation should be carried out in a separate company to the company which owned the land and this was a requirement of the funder, MG. The sale of land has been more profitable that the sale of construction services and there has always been an attempt to maximise the sale of plots of land, which is standard rated. The sale of construction services and materials is only marginally profitable (3%-5%). In this sense, there is no evidence that there has been "value-shifting" away from the standard rated plot sales towards zero-rated sales of construction services and materials. If this were the case, there would be an argument that the essential aim of the transaction was tax avoidance but it is not the case in this appeal.
45. The VAT rules dealing with the time of supply do not support the Commissioners' case that each home that is sold is a single supply of a completed holiday home. The payments to CBL were six stage payments over a period of time and the assessment proceeds on the basis that each time CBL receives a payment there is a supply of a completed holiday. There cannot be six supplies of holiday homes when there is one home. Further, the land sale takes place when payment is made. The supply by CBL can therefore only be for construction services under the VAT sales.
46. The Appellant maintains that the relationship between the parties is reciprocal or bipartite and not tripartite. It is reciprocal because there is a legal relationship between the customer and LME and CBL individually, which entails reciprocal performances, the supply of goods or services in return for the price paid. There are individual supplies to the customer. The relationship does not support a recasting. There is no legal relationship or other commercial relationship between LME and CBL and no fees payable between the parties and therefore there can be no inferred contract. They have individual relationships with the customer. The Appellant reiterates that the creation of two entities for making supplies was done for purely commercial and risk management issues as supported by the evidence of the various witnesses.
47. Finally, the Appellant says that the fact that the DVD was created in 2006 and 2007 cannot be used to show an intention to seek a tax advantage in 1997 when the corporate structure was implemented.

The Respondents' arguments

48. The Respondents' arguments can be neatly summarised from the amended Statement of Case as follows:

(a) The main decision

For each home that is sold, LME makes a supply of the completed holiday home to the purchaser (being the grant of a major interest in leasehold holiday accommodation). The consideration for that supply includes all sums payable by the purchaser under the 999 year Lease and the Build Agreement, a linked contract, whoever they are paid or payable to. The substance of the transactions is that there is a single supply of holiday homes by LME. The supply by LME is liable to tax at the standard rate as it is excluded from zero-rating by virtue of Note 13 to Item 1, Group 5, Schedule 8 VATA and it is excluded from exemption by virtue of Item 1(e), Group 1, Schedule 9 VATA. The time of supply is the time at which each purchaser makes a stage payment.

(b) The alternative decision

The Commissioners say that if their main decision is incorrect, such that LME alone does not make a supply of the holiday home to the purchaser, then both LME and CBL make a joint supply of the completed holiday home to the consumer. The proportion of the supply for which CBL is responsible is the value of the construction services. The joint supply is standard rated as it is excluded from the zero-rating as per the relevant sections as outlined above. The consideration for that supply includes all sums payable by the purchaser under the linked contract. The time of supply is the time at which each purchaser makes a stage payment.

(c) The further alternative decision

If the Commissioners' main and alternative decisions are held to be incorrect such that the relevant arrangements formally have the effect claimed by the Appellant, the Commissioners contend that those arrangements amount to an "abusive practice" as defined by the ECJ in Halifax and confirmed in Part Service (Case C-425/06, Decision of the ECJ of 21 February 2008). The consequences of this argument are the same as that of the main decision, which is to say the holiday homes are supplied by LME to the consumers and those supplies are standard rated.

49. The Respondents say that JMP was aware of the need to minimise VAT at the end of 1997 and by mid 1998 had approached a VAT adviser, Mr Stephen James ("SJ"), to advise on this matter. An intention was formed around the same time to develop standard documentation comprising a draft lease, agreement for lease and building supply contract which were settled with solicitors, lenders and selling agents before the end of 1998.
50. The first land valuation report (Perry and Chambers) obtained was intended solely to support the sale price for the plots of land which were valued at £15,000 each. The "reservation letter", designed to record the key points of the transaction and to avoid misunderstanding, envisaged that the purchaser will acquire land and enter into a building agreement at the start. Further, the marketing was as a sale of holiday homes rather than the sale of plots of development land with a right to contract any builder. Homes were bought "off plan" to one of several agreed designs. The intention was clearly shown by the advertising and marketing material which contained repeated reference to holiday homes being constructed.
51. The Respondents say that there was substantial inter-company payment from CBL to LME in the period 2002 to 2006 amounting to approximately £1.5m. These figures were not taken into account in the evidence used in determining the profitability of each company. Doubts therefore arise on the accuracy of that information and company profitability figures and raises issues of the relationship between the parties.
52. The Respondents say that the agreed documentation shows the manner of development was agreed and planned before purchasers were found. The sub-contracts were unsigned, but were the contracts which were performed and used to develop the Site. This reflects a pre-planning and agreed work schedules before purchasers for land were found. The purchasers of land all used these contractors through CBL.
53. The land valuations obtained did not reflect the real value of the land. Plots were initially sold for approximately £12,235 for plots of similar size but most plots sold between April 2003 and December 2004 were sold for £100,000. When the Commissioners expressed an interest in the business, prices increased after March 2005. It was difficult to establish the profits arising in LME for land sales or for individual plots since the figures provided did not take account of the infrastructure costs which was significant (over £5m). The Respondents say it was difficult to ascertain CBL's profitability given that the "actual bill costs" figures appear not to be accurate (in the Master Schedule presented).
54. The Respondents say that the DVD, prepared as a marketing presentation by the business, clearly showed that the intention was to sell houses to prospective purchasers .
55. For community law purposes the Respondents look to the real nature of the supply made to the customer, which is a completed house. The domestic UK land and contract law rules may not be as helpful in undertaking this exercise. The nature of the supply and relevant statutory provisions must be considered in the light of the approach taken by the ECJ to supplies of land and buildings and relevant case law.
56. It is important to point out at the start that the Halifax argument is used with regard to LME and not CBL.
57. The transactions which constitute an abusive practice may be "redefined" so as to establish the situation that would have prevailed in the absence of the transaction constituting that abusive practice (see Case C-255/02 Halifax [2006] STC 919 at paragraph 93).
58. It is now proposed to look at the respective arguments raised by the parties. The analysis would follow the headings used by the Respondents – Main Decision, Alternative Decision, and Further Alternative Decision.

The Main Decision – Single Supply of a Holiday Home

59. The Respondents' main argument is that LME makes a single supply of a completed holiday home to the customer (the standard rated grant of a major interest in leasehold holiday accommodation) the consideration for which supply includes all sums payable by the purchaser under both the Lease and the Build Agreement (the linked contracts).
60. This argument is not dependent on the allegation of abuse but rather is made on the basis of European jurisprudence and from the approach of the ECJ which looks at the substance of the transaction. The substance of the transaction is that there is a single supply of holiday homes by LME. The time of the supply is at the time when the purchaser makes a stage payment (and there are six such payments).
61. Mr Gammie for the Respondents says that the grant for major interest in the land and the construction of holiday homes on the land were so closely linked as to form, objectively, a single, indivisible economic supply.
62. The Appellant argues that in order for a transaction to be exempt under the Sixth Directive one must consider the essential features and the nature of the supply "irrespective of the way in which it might be artificially presented" (Rudolf Maierhofer v Finanzamt Augsburg-Land C-315/00, para 39)
63. In deciding on the true nature of the supply and in cases where the transaction comprises of a bundle of features and acts, regard must first be had to all the circumstances on which the transaction takes place. This is explained in the Card Protection Plan v Customs and Excise Commissioners (Case C-349/96, [1999] STC 270 ("ChargeCard ECJ")) where the ECJ stated:

"29. In this respect, taking into account, first, that it follows from Article 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.

30. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (see Commissioners of Customs and Excise v Madgett and Baldwin [1998] STC 1189 at 1206 paragraph 24).

31. In those circumstances, the fact that a single price is charged is not decisive. Admittedly, if the service provided to customers consists of several elements for a single price, the single price may suggest that there is a single service. However, notwithstanding the single price, if circumstances such as those described in paragraphs 7 to 10 above indicated that the customers intended to purchase two distinct services, namely an insurance supply and a card registration service, then it would be necessary to identify the part of the single price which related to the insurance supply, which would remain exempt in any event. The simplest possible method of calculation or assessment should be used for this (see, to that effect, Madgett and Baldwin, paragraphs 45 and 46)."

64. The approach of the ECJ in evaluating the character of the transaction is commented on in the House of Lords (Card Protection Plan v Customs and Excise Commissioners [2001] STC 174 at 183 where Lord Slynn states:

"22. It is clear from the Court of Justice's judgment that the national court's task is to have regard to the 'essential features of the transaction' to see whether it is 'several distinct principal services' or a single service and that what from an economic point of view is in reality a single service should not be 'artificially split'. It seems that an overall view should be taken and over-zealous dissecting and analysis of particular clauses should be avoided.

…

25. If one asks what is the essential feature of the scheme or its dominant purpose, perhaps why objectively people are likely to want to join it, I have no doubt it is to obtain a provision of insurance cover against loss arising from the misuse of credit cards or other documents. That is why CPP is obliged to, and does, arrange, through brokers, with an insurance company like Continental for that cover to be available."

65. The approach explained above is illustrated in the case of Levob Verzekeringer BV and OV Bank NV v Staatssecretaris van Financien ("Levob") (Case C-41/04 [2006] STC 766). In this case, a Dutch Insurance Company contracted with a US company to purchase software for the administration of insurance policies. To use the software in the Netherlands changes had to be made. This meant that the transaction between the parties included a software package, adaption of the software and training and installation services. The question arose whether this was a multiple goods and services supply or a single supply. The Court concluded that the services were closely linked and therefore constituted a single supply for VAT purposes. This case suggests that the principles for determining whether there is a single composite supply or two or more distinct supplies are not confined to situations in which one element of the supply can be categorised as ancillary to the other but can arise if services are "economically linked." The ECJ said:

"21. In that regard, the Court has held that there is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal supply, whilst one or more elements are to be regarded, by contrast, as ancillary supplies which share the tax treatment of the principal supply (CPP, cited above, paragraph 30, and Case C-34/99 Primback [2001] STC 803, paragraph 45).

22. The same is true where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split."

66. The ECJ in ChargeCard, refined in Levob, while recognising that each supply is distinct and independent said that the functioning of the VAT system would be distorted if a single supply could be artificially split. The transaction must be analysed where all the circumstances are considered and the essential features ascertained to determine whether the customer is receiving several distinct supplies or a single supply. The price, whether it be single or separate, is not decisive for this purpose. It may be that there is a principal and an ancillary supply, the latter being one which does not constitute for the customer an aim in itself but a means of better enjoying the principal service and so part of the principal supply. It is also possible to have a distinct part of the transaction, which is not ancillary and which may nevertheless be "closely linked from an economic perspective" so as to be treated as a single supply. The ECJ is saying that one needs to look at the substance and reality of the supply in deciding whether there is a single supply. The transaction has to be factually analysed and its underlying economic purpose identified.
67. If one applies this approach to the case in question, there are two elements, land and construction which are needed in order to supply customers with holiday homes. One must ask whether they are so closely linked as to form, objectively from an economic point of view, a single supply.
68. The Appellant says that there is only one supply made by LME to the customer and that is of an interest in land. The only supply made by CBL is of construction services and again this is to the customer. There is no legal, commercial or economic argument in saying that LME or CBL "really" supply an interest in a completed holiday home to the customer for the total sum paid by the customer. There are two reciprocal relationships with the customer, one between LME and the customer and one between CBL and the customer and both are independent transactions (Kuwait Petroleum v C&E Commissioners 1999 STC 488 at para 26).
69. Mr Peacock says for the Appellant that, unlike the cases referred to where there is one supplier, where there are two suppliers there can only be two supplies to an individual customer. These cannot be treated as a single supply by one of the suppliers, in this case LME, to the customer. He says that there is strong precedent in UK law that two suppliers can only make two supplies and in any event, the circumstances in which two supplies can be made by a single supplier are not present in this case. Separate supplies made by a single supplier will only be linked together where (a) one is ancillary to the other (Card Protection Plan ECJ at para 30) or (b) the transactions are so closely linked that they form, objectively, a single and indivisible economic supply which it would be artificial to split (Levob).
70. The Appellants find support for their proposition in the Court of Appeal in Telewest ...at para 72) where Arden LJ said:

"… There is no suggestion in this part of the judgment of the Court of Justice that the concept of principal and ancillary contracts can apply where there is more than one supplier."

71. In the Telewest case, the taxpayer company, Telewest, had a business of providing television programmes by cable. Another group company, Publications, supplied cable listings magazines to customers of Telewest. In their contract with Telewest, customers agreed to take a supply from Publications of the cable listings magazine. A supply of television programmes was standard rated. A supply of magazines was zero-rated. It is correct to say, as in the Telewest case, there are two suppliers and two supplies. It is not possible, given the legal and commercial relationship, to say that there is a single conflated supply by LME and CBL to the customer and to recast the supply of building services made by CBL to the customer as a supply made by CBL to LME and then to treat the supply by LME to the customer as a supply of a completed holiday home. Further there is no legal relationship between CBL and LME for the supply of building services in return for a fee and there can therefore be no supply where such contractual relationship does not exist. In the absence of the contractual obligations, there is no consideration to be paid by LME to CBL and therefore no supply can be inferred in the face of the contract.
72. The construction services business cannot, on the face of it, be ancillary to the land sales business since it is a "substantial" business in its own right (twice the turnover of the land business). The Advocate General in Madgett and Baldwin (at para 36 and 38) observed,

"36. I consider that a service is ancillary if, first, it contributes to the proper performance of the principal service and, second, it takes up a marginal proportion of the package price compared to the principal service. It does not constitute an object for customers or a service sought for its own sake, but a means of better enjoying the principal service.

…

38. By contrast, a service may be categorised as a service equivalent to the principal service provided by the trader if its relative share of the total amount paid by the traveller is substantial, so that it cannot be regarded as ancillary, compared with the other services supplied, whether by its price or its value from the customer's point of view. It should be added that to deserve that categorisation the service must be supplied with a certain frequency, as if it is merely occasional it is in the nature of an ancillary service."

We cannot therefore find support for the recasting of the supply of construction services as being ancillary to the supply of land.

73. The case of Levob was referred to by the Respondents to support the "economic linkage" argument. However, Levob had only one supplier while here we have two suppliers making two different supplies under separate contracts. Given that the abusive practice argument does not concern the Main Decision of the Respondents, and taking a tax technical step by step approach to understanding the transaction, the commercial contracts reveals separate supplies of land and construction services within the broad terms of the VAT legislation. The legal relationship between LME, CBL respectively and the customer shows separate reciprocal supplies. The transactions are independent.
74. It is more likely that the contractual relationship would show a principal and an ancillary supply where there is one rather than two supply contracts. The recasting of the supply as a single economic supply is also less likely where there are two suppliers. The Court in Telewest was more concerned about one supply being split into two than two supplies being recast as one. We must start with the supplies being distinct and separate and only join them if one is ancillary to the other or there is a single indivisible economic supply. Putting notions of "abuse" aside, the conditions for treating the supplies otherwise than separate, are not present. The Tribunal considers that, as regards the Main Decision, it is not possible to treat the supply of the land by LME and the supply of the construction services by CBL as one single economic supply by LME. It is not possible to recast the supply of building services made by CBL to the customer as a supply made by CBL to LME, which is required, if one is to redefine the supply of land made by LME to the customer as a supply of a completed holiday home. There is no contractual relationship between LME and CBL and, on the face of it, there are reciprocal contractual relations between LME and CBL and the customer.
75. Mr Gammie for the Respondents says that the Part Service case suggests, that even without an abusive practice, the fact that there are two or more suppliers does not dictate the nature of the supply being made. On a first reading of the Ministero dell'Economia e delle Finanze v Part Service Srl (Case C-425/06, ECJ, 21 Feb. 2008 "Part Service") case, the relevant paragraphs (46-56), would suggest that the discussion on several distinct services and supplies being considered as a single supply or transaction takes place within the broader confines of the abuse argument only. This is considered later in the decision.

Alternative Decision – Joint Supply by LME and CBL

76. The Respondents say that both LME and CBL make a joint supply of the completed holiday home to the customer. The joint supply is standard rated and the consideration for the supply includes all sums payable by the purchaser under the two contracts (i.e. Lease and Build Agreement). The time of supply is when each stage payment is made.
77. The Commissioners original argument in their Assessment Letter and the original Statement of Case was that CBL had made the supply of a completed holiday home to the customer. The Appellant pointed out that this was not possible since CBL did not have an interest in land and so could not supply a house and land The Commissioners amended their case (amended Statement of Case of 7 January 2009) to "if LME alone" did not make a supply of a completed holiday home, then LME and CBL made a joint supply of the completed holiday home to the customer. The Appellant says that there can be no joint supply by two persons of one interest in land and there should be no recasting of the supplies in this way.
78. LME makes a supply of land which is effective when the lease is granted. There is a supply of goods (interest in land) by LME to the customer. Under Regulation 85 Value Added Tax Regulations 1995, the time of the supply is the earlier of payment or issue of the VAT invoice. CBL has no land and it supplies construction services. The supply of construction services under Regulation 93 Value Added Tax Regulations 1995, would be made each time a payment is made or invoice issued for each of the stage payments. The time of supply rules would not allow there to be a joint supply. The supplies and the transactions are completed at different times under the VAT supply rules and the argument being made by the Respondents is incompatible with these rules. It is not possible to say that there is joint supply of a holiday home at each of the six stage payments. There is only one supply of a completed holiday home. Further, it is difficult to find any rules for the making of joint supplies by two persons of one interest in land.
79. The contractual document (Lease and Agreement for Lease) makes a supply of an interest in land. Given the length of the lease, Article 14 Principal VAT Directive makes this a supply of goods as "the transfer of the right to dispose of tangible property as owner". With Category 1 sales (construction is yet to start) the invoice shows a sum payable in respect of the plot and VAT at the standard rate is charged. For example, Clearwater 48 is sold for a price of £117,500 with the price of the land being £100,000 and 17,500 being VAT. The supply takes place when the price is paid or invoice issued. In Category 2 sales, (partly built houses) for example, Clearwater 69, the invoice shows a sum attributable to the plot and building works both of which should be standard rated. The time of the supply would be at a time of payment or invoice. Category 3 are not the subject of this assessment.
80. In the Build Agreement with CBL (e.g Clearwater 87) there are six stage payments on presentation of certificates of completion. The supply is of goods and construction services with successive supplies being made each time the payment is received by CBL. Regulation 93 Principal VAT Directive, treats each payments as a separate supply.
81. Given the time of supply rules, there can be no joint supply. Further, to recast both reciprocal transactions as a single transaction would be difficult given that goods are supplied for "consideration" (Article 2(1) Principal VAT Directive) arising from a legal relationship between the supplier and the purchaser requiring reciprocal performance. There are two reciprocal transactions for supplies and the respective prices constituting the value given in return for the goods supplied in each case (Kuwait Petroleum v Customs and Excise Commissioners 1996 STC 488 at para 26). The Tribunal is therefore not convinced by the Alternative Decision of the Respondents and cannot fit the Respondents' arguments within the time of supply rules.

Further Alternative Decision – Abusive Practice

82. The Respondents further alternative decision, which arises if the Main or Alternative Decisions are held to be incorrect, is that the arrangements amount to an "abusive practice" as defined by the ECJ in Halifax plc v Customs and Excise Commissioners, (Case C-255/02. "Halifax") and elaborated in Part Service. The consequences of this argument are the same as that of the Main Decision, which is to say, that the holiday homes are supplied by LME to customers and those supplies are standard rated by virtue of Item 1(e) Group 1, Schedule 9 to the VATA.
83. The criteria for establishing abusive practice in a transaction was laid down in Halifax (para 73-75) which states:

"73. Moreover, it is clear from the case law that a trader's choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system (see, in particular, BLP Group [1995] STC 424, [1996] 1 WLR 174, para 26, and Customs and Excise Commissioners v Cantor Fitzgerald International (Case C-108/99) [2001] STC 1453, [2002] QB 546, para 33). Where the taxable person chooses one of two transactions,, the Sixth Directive does not require him to choose the one which involves paying the highest amount of VAT. On the contrary, as the Advocate General observed in para 85 of his opinion, taxpayers may choose to structure their business so as to limit their tax liability.

74. In view of the foregoing considerations, it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.

75. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. As the Advocate General observed in para 89 of his opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.

76. It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether action constituting such an abusive practice has taken place in the case before it (see Eiichsfelder Schalchtbetrieb (Case C-515/03) [2005] All ER (D) 306 (Jul), para 40).

84. The obtaining of a tax advantage on its own is insufficient to bring a transaction within the principle and, by extension, a taxpayer has freedom to structure their transactions to reduce their tax bill. It is important that a taxpayer structures the transaction in such a way as to remain within the objectives of the legislation.
85. The two conditions laid down in order to establish whether there has been an abusive practice, are first, that an advantage is obtained that is contrary to the purpose of the Principal VAT Directive, and second, objective evidence must establish that the essential aim of the transaction is to obtain a tax advantage.
86. In this sense, the taxpayer's right to arrange their affairs is subject to it not being an abusive practice. If what is being done is contrary to the purpose of the Principal VAT Directive, then the taxpayer forfeits their right to plead that they are simply structuring their affairs in their best interest.
87. It may be that the structure adopted by the taxpayer, normally after advice has been received from professionals, is technically correct. This means that if one looks at the transaction from a tax technical or step by step point of view, it would fit neatly within the legislation. The Tribunal must look to see whether the scheme as a whole produces a result which is contrary to the purpose of the Principal VAT Directive and whether there is a tax avoidance purpose rather than a commercial purpose to the transaction. If there is, then the transaction can be redefined to establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.
88. It is important to establish the true nature and purpose of the transaction. The taxpayer must not be able to obtain the benefit of exemption provided in the Principal VAT Directive by creating artificially the conditions laid down for obtaining such benefit. Technically, a transaction may work but it is necessary to apply the abusive practice principle in assessing the transaction as a whole to establish the true nature of the transaction and to see whether it should be taxed differently.
89. What are the objectives and purpose of the Principal VAT Directive? The preamble states:-

"The attainment of the objective of establishing an internal market presupposes the application in Member States of legislation on turnover taxes that does not distort conditions of competition or hinder the free movement of goods and services. It is therefore necessary to achieve such harmonisation of legislation on turnover taxes by means of a system of value added tax (VAT), such as will eliminate, as far as possible, factors which may distort conditions of competition whether at national or Community level."

90. The primary objective is to prevent distortions and to create fiscal neutrality, which means the elimination of distortions in competition arising from different VAT treatment. Such distortion can arise where the supplies are treated differently or unequally, for VAT purposes. A taxable person carrying out the same transaction can be expected to be treated equally with a competitor in relation to the levying of VAT.
91. Article 11(A) of the Principal VAT Directive states:

"The taxable amount shall be … (a) … everything which constitutes the consideration … obtained by the supplier from the purchaser."

This seeks to guarantee uniformity of the taxable amount and to ensure that taxable persons will not be treated differently in taxing similar transactions. The taxable amount is the consideration for supplies of goods and services.

92. Article 2 of the Principal VAT Directive requires VAT to be "a general tax on consumption exactly proportional to the price of goods and services." The tax must be correctly applied to the price for the goods or services.
93. The clear objective of the Principal VAT Directive is fiscal neutrality. Businesses carrying out the same transactions must not be treated differently or unequally. The tax should be applied in a fair and proportional manner.
94. To be an abusive practice, the transaction in question must first result in an advantage to the taxpayer that is contrary to the purpose of the Principal VAT Directive. VAT planning may result in the accrual of a tax advantage. However, we are only concerned with transactions where the advantage obtained is contrary to the purposes of the Principal VAT Directive. We have explained those purposes.
95. The Respondents' original argument, which was later changed, was that the first condition of Halifax was not satisfied since zero-rating was only permitted by the Principal VAT Directive, where there were clearly defined social reasons. The case Talacre Beach Caravan Sales Ltd v Customs and Excise Commissioners (Case C-251/05) ("Talacre Beach") was cited. Let us look at this point briefly.
96. Talacre Beach is about a holiday park operator in Wales providing self-fitted caravans for sale. The caravans are normally permanent mobile homes. The purchase of a caravan is zero-rated but the fittings are standard rated. In this case, a caravan and the fittings were provided in a single transaction for a single price and treated as a zero-rated supply even though the fittings would have been standard rated if supplied separately. The ECJ decided that even though there was one supply, it was possible to zero-rate the caravan and standard rate fittings. The ECJ said at paragraph 18,

"It is apparent, secondly, from the wording of art 28(2)(a) of the Sixth Directive that the application of exemptions with refund of the tax paid is subject to a number of conditions. Those exemptions must have been in force on 1 January 1991. In addition, they must be in accordance with Community law and satisfy the conditions stated in the last indent of art 17 of the Second Council Directive 67/228 of 11 April 1967 on the harmonisation of legislation of member states concerning turnover tax – structure and procedures for application of the common system of value added tax (JO L 71 14.4 67 p.1303 (Stdn 1967 p.16)), now repealed, which provided that exemptions with refund of the tax paid could only be established for clearly defined social reasons and for the benefit of the final consumer".

97. The Appellant says that there is no sensible basis upon which the supply of holiday homes can be distinguished from the supply of fitted caravans and therefore the social reasons argument is satisfied. The Tribunal does not have to decide this point since it was withdrawn by the Respondents.
98. The social reasons argument was replaced in the amended Statement of Case of the Respondents by the argument that the transactions produce a result which is contrary to the purposes of the Principal VAT Directive and as a result distorts competition. The zero-rating of the construction services means that not everything that is paid by the customer for the supply is properly taxed. The Appellant should have to account for VAT on the amount that is paid for the holiday home, which is to say, the land and the construction services.
99. The parties agree that a distortion of competition would be anti-purposive. A saving of tax is not a distortion but a saving that is contrary to the intention of the legislation would be a distortion.
100. The Appellant says there is no distortion. Rather, that the UK has a flawed legislative regime in that sales of a non-holiday home is a zero-rated supply but the sale of a holiday home is a standard rated supply. If a person buys a piece of land and engages a builder to build a holiday home then this would result in less VAT payable than if one buys a completed holiday home. The Appellants argue that this shows a legislative regime which is flawed in the application of VAT charges to holiday and non-holiday homes and the building of holiday homes by those owning land.
101. Where does the distortion, if any, lie? The financial model used by the Appellant to deliver the Site is self build, which involves selling plots of land and building houses separately on the land that has been purchased. Most commercial property developers would sell a completely built house. They would not separate the sale of the land from the building of the house. We heard evidence from Gavin Johnson, a surveyor and adviser to JMP, who said that large property development companies cannot separate the construction and land owning parts of their business. He said that they build and sell holiday homes as a complete package. This is the comparable house building market we need to examine to see if an unfair advantage would arise to the Appellant when compared to other commercial developers in the holiday homes market. Developers would build houses on a speculative basis and try to sell those houses to purchasers during the course of their construction. If a developer is able to build and sell a holiday home using a contractual arrangement which saves VAT then this would be an advantage to that developer. It would be an advantage since the cost of constructing the home would be less than that of the competitor given the tax saving afforded by the contractual arrangements. The purchaser in both cases would be receiving a completely built holiday home. The splitting of the contract in this way creates unequal treatment in the levying of VAT in a similar transaction and so creates a market distortion. A distortion arises where a supply of goods or services provided by competitors are treated unequally or differently for the purposes of VAT.
102. If taken together, LME and CBL, provide a finished house to the customer. The Tribunal, in determining the real substance and significance of the transaction, must consider the "links of a legal, economic and/or personal relationship between the operators involved in the scheme for reduction of the tax burden" (Halifax, para 81). This would mean the relationship between LME and CBL operating together and jointly owned. It seems to the Tribunal, that the contractual arrangements between LME and CBL and the customer creates a relationship which allows the customer to receive a finished house and to pay less VAT on the goods and services provided in building that house. The house is sold to the customer for a price that is broken down into a specified amount for land and a specified amount for construction services. The contractual arrangements creates the separation of supplies and consequently the tax saving.
103. Let us look more closely at the relationship between the parties. The Frequently Asked Questions (FAQ) document states:

"The land is owned and maintained by Lower Mill Estate Ltd, but a specialist building company, Conservation Builders Ltd, has been engaged to construct the homes on the Estate. One of the advantages to you in this arrangement is that although Lower Mill Estate must charge VAT on the land and the services it provides, Conservation Builders does not charge VAT as it is able to zero-rate the construction of your new home".

104. The FAQ identifies and advertises the tax savings. A holiday home built by LME and CBL, taken together, has a clear advantage over a holiday home built by a commercial property developer who sells the completed home rather than the land and the construction services. A supply of a holiday home structured around the relationship between the Appellant and the customer gives a tax saving where otherwise there will be a tax charge. The contractual arrangement and relationship therefore creates a market distortion.
105. The advantage obtained is a reduction in the payment of output tax by reducing the taxable amount. We know that the Principal VAT Directive seeks to create equality of treatment between taxable persons by guaranteeing a uniformity in the taxable amount for similar transactions. The Directive requires that VAT should be "exactly proportional" to the price paid by the customer. If part of the consideration paid for the holiday home is VAT free then this would be against the objective of the Directive in guaranteeing uniformity of the taxable amount.
106. Let us now look at the second condition to be satisfied for the application of the Halifax abuse argument.
107. The second condition required for establishing the Halifax abuse argument is that objective evidence must establish that the essential aim of the arrangements is to obtain a tax advantage. The essential aim is taken by the ECJ to mean the sole or main aim. This is a question of degree. If a transaction had a clear commercial purpose, the fact that there was also a tax advantage in undertaking the transaction would not be fatal to the transaction itself. A transaction may have strong or weak commercial reasons for structuring in a particular way. If the commercial reasons are substantial and make commercial sense then the essential aim of the transaction can be considered to be commercial. If, however, the evidence of commerciality is limited or minimal but there is a substantial tax advantage to be obtained, then the essential aim of the structure would be to obtain a tax advantage. The Tribunal must look objectively at all the evidence to establish whether or not a tax avoidance motive exist. The Appellant may establish their subjective purpose in undertaking and structuring the transaction but it is the objective assessment of the evidence which is the relevant consideration. The evidence which the Tribunal would have to consider is, various company material including marketing documents, board minutes, minutes of meetings with advisers, planning meetings, memoranda and oral evidence among others. In establishing whether tax avoidance was objectively intended, the subjective intention of those undertaking the scheme becomes irrelevant.
108. In looking at the second condition of Halifax, the ECJ in Part Service (para 62) had this to say:

"As regards the second criterion, the national court, in the assessment which it must carry out, may take account of the purely artificial nature of the transactions and the links of a legal, economic and/or personal nature between the operators involved (Halifax and Others, paragraph 81), those aspects being such as to demonstrate that the accrual of a tax advantage constitutes the principal aim pursued, notwithstanding the possible existence, in addition, of economic objectives arising from, for example, marketing, organisation or guarantee considerations."

109. Let us look at the evidence. JMP had a business plan to provide a "self-build made easy" operation for prospective holiday home owners. The model is used in Australia and the United States among other countries. In this model, a plot of land with planning permission is purchased and the plot owner either builds a house himself, hires contractors to build the house or has a house built under a turn key contract. If the house is built by a house builder, it is well known in the industry that there is a VAT saving. Material and labour used in building are free from VAT. Individuals select the self-build option because it gives them more control over the project.
110. The Appellant says that while self-build is well known on the continent, it is relatively unknown in the UK. He saw a gap in the market and sought to develop the Site on the basis of this model. The idea was to sell plots of land to enable money to be raised which would be used to finance the infrastructure development of the Site.
111. The principal investor, MG, was prepared to invest on the condition that the building operations were carried out in a separate company from the land owning company. He said it was a condition of his investment that this split structure be used. However, the loan agreement between the parties did not state the purpose for which the money was lent nor did it state this requirement. JMP also received advice from his advisers, GJ and DF to create a separate construction entity from the land owning company. This was established in oral evidence. The idea was that there would be a ring fencing of the risky business of house building from the less risky business of land owning and these were to be managed in two separate companies, which were not in a group but were associated. The initial corporate structure was agreed in 1997. The Appellant said that he did not take tax advice at that point but did some months later. He said the structure was not tax driven. It would seem strange in structuring a transaction commercially for such a relatively large project that tax was not considered when it is well known in the self-build industry that a major VAT benefit was available if the transaction was properly structured.
112. On 3 November 1997, JMP wrote to MG outlining the various issues which would need to be addressed before an application was made seeking planning permission for the Site. He stated, inter alia,

"VAT advice (leading to an acceptable letter from HM Customs and Excise) to minimise the VAT charged on the units and land."

113. The Appellant was aware at this time of the need to minimise VAT and to agree the position with HM Customs and Excise. This would be normal practice. On 13 July 1998, Eldora Business Corporation ("EBS"), the investment vehicle of MG, agreed to convert its loan (£750,000) into preference shares and to have a consultancy agreement to receive payments when units of land were sold by LME. The loan was repayable on or after 1 September 1999, (the preference shares were partly redeemed in April 2005 for £472k). As stated earlier, the loan agreement did not specify terms and conditions but it was wholly used to acquire the Site and to obtain planning permission. The conversion of the loan into preference shares in 1998 meant that when the development of the Site really got off the ground (about a year later) MG was a relatively passive investor in the company .
114. The first planning permission on the Site was granted on 22 July 1998. On 23 July 1998, JMP met with his VAT adviser, Stephen James (SJ), who created an agenda and notes of the meeting with the following entry:

"Potential plot sales value - £10,000

Potential unit of construction costs - £85,000

Commerciality of split supply OK – see lawyer

Use of 2 - or more - companies OK to be set up."

115. On 23 July 1998, JMP wrote to lawyers and SJ to provide an agreed timetable as follows:

"1. SJ writes to JG with structure and draft of C&E letter by 30.7.98

2. SJ, JG and JP will settle the C&E letter by 5.8.98

3. SJ will get C&E written clearance by 5.9.98

4. JG will draft lease, agreement for lease and building supply contract, settle the same with JP and then with "panel" firms (2) of solicitors, lenders and selling agents by 5.9.98."

116. It is clear from the above information that there was an intention to develop standard documentation, agree a VAT efficient structure, obtain clearance from Customs and Excise, explore splitting the supplies, agree valuation for plots and construction costs and have agreed the lenders and selling agents all by 5 September 1998. All the advisers were appointed and the corporate structure was agreed.
117. CBL was incorporated on 3 February 1999 and is wholly owned by JMP. It is an associated company of LME.
118. LME was granted outline planning permission for 389 holiday homes and various amenities on 4 February 1999. On 5 July 1999, a "Scheme Summary" (first draft March 1999) was prepared by the Appellant and advisers. It outlined the VAT position regarding the development of the Site. In a section headed "Document Summary" it states:

"The supply of the land attracts VAT at the current rate of 17.5%. As the dwelling is supplied by a separate company for the new lessee, and after the land has been sold, its supply does not attract VAT whatsoever.

The enclosed documentation provides for the land to be supplied through the Lower Mill Estate Limited (the Landlord) and for the dwelling to be built for the lessee by Conservation Builders Ltd (the Builder). This documentation has been approved in writing by HM Customs and Excise.

The net effect to the buyer is that they pay VAT only on the land and not on the dwelling. As the land is to be sold at £15,000 including VAT and is the only element of the sale that attracts VAT, it means that the VAT payable by the buyer is only £2,234. The balance is for the dwelling which does not attract VAT".

119. This document shows that the initial advice provided by SJ relating to split supply was followed. The price of the land to be sold was fixed at £15,000 (inclusive of VAT). On 1 November 1999, approximately four months after the Scheme Summary, a valuation of £15,000 was obtained from the valuers Perry and Chambers. The valuation and the value given in the Scheme Summary are the same.
120. Let us look at the contractual relationship with the customer and the sales procedure.
121. An interested customer signs a reservation letter recording the key points of the proposed transaction and pays an initial down payment. The letter identifies the vendor and purchaser and their respective solicitors, the price to be paid for the land including VAT and the price of construction for the house. The initial deposit is between £2,000 and £5,000. There are three main agreements: the Agreement for Lease and Lease, which is between LME and the customer and a Build Agreement between CBL and the customer. From the documentation (Clearwater 48), the Agreement for Lease is in standard form. There is a deposit of 10% of the purchase price of £100,000 for a plot of land. The deposit is paid at the time of signing and the balance of the payment paid at the date of completion of the Lease. The date for completion of the purchase is given as 30 April 2004. The Agreement for Lease is signed on 16 April 2004. The Build Agreement was signed on 16 April 2004.
122. There is a sales office on Site which is manned by employees of LME. The office deals with the sale of holiday homes which includes the sale of plots of land and the construction of houses. Customers entering the sales office would discuss both the purchase of land and the construction of houses. According to the evidence of JMP, a customer was free to choose the builder to construct their house. Since there was no obligation in the contract for a house to be built on the plot of land, a customer may purchase a plot of land only.
123. The reality however is somewhat different. CBL constructed all the houses on the Site and there is no evidence that any customer used a builder other than CBL. Customers were presented with several standard designs for houses as agreed in the outline planning permission, and there was a facility to apply for new planning to alter the design or the internal configuration. The requisite planning would be obtained by LME as the freeholder. There was a procedure where on payment of a fee, a planning application would be made either individually or collectively on behalf of householders. There was clearly a close relationship between LME and CBL in dealing with sales, contracts, customer concerns and planning application. Where LME was successful in getting a customer to sign up to a Build Agreement, a commission payment was made by CBL to LME.
124. Customers wishing to have a holiday home would approach the sales office, normally, after having read or viewed the marketing material either in hard copy or on the Company's website. The marketing material included brochures, FAQs, press cuttings and details of the Site. The marketing material makes several references to homes being built. The references include the following: "60 houses and cottages … all the second homes have open fires, fitted kitchens and a choice of wooden floors"; "The Estate building company will undertake the construction of your dwelling at a fixed price … You buy the land now and enter into a building contract with our construction company to build your home" and "second homes are offered for sale …". The advertising material asks, "Who will build my house?", with the answer, "When you exchange contracts on the land you enter a contractual agreement with Conservation Builders Ltd who will build your house". The customer is clearly invited to have a home built.
125. Further material is available in the promotional video, where JMP states:

"I think all of us love the idea of building our own home. Something that works for our lifestyle both inside and outside but we don't want all the hassle of dealing with builders cost overruns planning authorities and we take all of that away from you, so that we sell you a house and a piece of land that's got detailed planning permission, and we build that house exactly as you want it, inside and outside, for a fix price, and within a fixed timescale; so that what starts off being a dream, ends up being a dream in reality rather than a complete nightmare".

126. The marketing material shows a close business working relationship between the CBL and LME. The Site appears to be jointly marketed as the sale of holiday homes rather than the sale of plots of land to customers to develop. It is not clear to the customer that they have an absolute right to do whatever they wish with the plot, including contracting with a builder of their choice or even choosing not to build at all. It seems strange that all customers selected CBL as the builder of choice. It appears from the evidence, that CBL was the appointed builder and had to be contracted with to build the holiday home. The close business relationship between the companies is evident from the substantial commission payments, which were made by CBL to LME for obtaining Build Agreements on their behalf. The payments were as follows £348,360 (2002); £348,360 (2004); £324,234 (2005) and £230,293 (2006). The figures were produced in the accounts and the payments were confirmed by JMP. The Tribunal was not provided with any evidence to show whether these payments were market rate commission payments.
127. If one takes an overview, there seems to be an established timeline for agreeing documentation and a pre prepared set of documents which were presented to the customer at the start of the sales process. The documents, presented as a package, were standard form and presented jointly on behalf of LME and CBL. LME seems to operate as a conduit between the parties i.e. LME, CBL and the customer. It procured the services of CBL and arranges the Build Agreement. They acted as a sort of broker in bringing CBL, and the customer together. It warranted to the customer, through the marketing material, that they would have a home built. It seems to guarantee that its efforts would be successful. Their role is not dissimilar to a head contractor, who together with CBL create a supply relationship with the customer. The relationship appears to be triangular and linked.
128. The Tribunal is not looking to disregard the contracts between the parties. However, the evidence presented creates a doubt as to the true nature of the supply between the parties. This doubt leads the Tribunal to look outside the contract for the true supply. The supply being made to the customer is a holiday home. It must be remembered that VAT is a tax on supplies not on contracts.
129. CBL did not actually build the houses. They engaged sub-contractors under a "white card system" where a detailed works schedule contract was sent to contractors to provide a price for the work to be undertaken. The contract was not signed by CBL but by contractors and became an agreed document once signed by CBL. In evidence, it was explained that draft contracts allowed the best price to be obtained for proposed work without CBL giving a clear commitment to the builder. The contracts were akin to tender documents where the contractor tendered for work at a specified price. The sample contracts presented in evidence were signed or placed for tender before April 2004. A great majority of the plots of land was sold after that date. The evidence is not clear as to whether these contracts were performed but suffice it to say that no other contracts in respect of works were provided to the Tribunal. The question should be asked whether the negotiation of these detailed contracts would indicate an intention, even before plots were sold, to construct houses on the Site. The Tribunal believes that from the evidence presented, it is evident that customers believed at the start that CBL would be the builder of their home pursuant to the signed Build Agreement and CBL had in place at that time signed sub-contractors' agreements for undertaking the work which was agreed in the Build Agreement. It was part of the package offered to the customer. It gave certainty to the transaction.
130. The valuation of the plots of land would normally be undertaken to determine their sale price and profit. Four valuations were obtained between 1999 and 2004 for the land. The valuations of 1 November 1999 by Perry and Chambers gave a valuation of £15,000 per plot. The 3 February 2005 valuation by Strutt & Parker valued the plots at £123,000. The 5 January 2006 valuation by Humberts valued the plots at approximately £277,777 and the last valuation, by Humberts, in November 2007, valued the plots at £162,5000. In spite of the valuation, most plots sold between April 2003-December 2004 were sold at £100,000 per plot plus VAT.
131. The Strutt & Parker valuation was secured for lending purposes and the Humberts valuation (06) was obtained "in connection with the payment of VAT on the plots being sold which attracts VAT, but not on the houses constructed therein". The last Humberts valuation was for the purpose of "advancing funds for secure lending purposes".
132. The valuations were largely obtained to satisfy the bank that there was sufficient security for the making of loans. Such a valuation would be different from a valuation conducted to achieve the best price for the plot. We know from oral evidence it was JMP's desire to obtain the maximum price for plots of land since the selling of land was his key objective – however the valuations obtained appear not to be directed as achieving this objective. If the valuations obtained for pricing the plots of land were not used in setting their sale price, a question does arise on the value attributed to the plots sold. It is not an unfair conclusion that the sales price for plots of land were fixed in advance. This would minimise the VAT charged on sale and in turn distort competition.
133. In establishing the profitability of the land sales, we know that the total sales were in the region of £16.5m. We were told that profits were significant. However from the Master Schedule provided showing date order for sale of plots, price and build costs, there is no indication of the infrastructure cost. This would have to be deducted from the land sales in arriving at the actual profits. We know that the infrastructure costs were significant – perhaps as much as £5m. We are therefore unable to establish clearly from the figures provided whether the land sale was profitable or indeed as profitable as JPM explained in his evidence. Further, while there were inter company commission payments, the Tribunal is unable to say conclusively whether these payments amounted to value shifting between the companies.
134. What we can deduce is that the contractual arrangements and the companies involved are linked. There is joint marketing, standard form documentation, a clear time chronology for agreeing contracts, commission payments inter se, common ownership and common staff. The objective evidence, obtained from the minutes of meetings, notes, correspondence and marketing materials together with the tax advice provided indicates that the essential aim of the transaction was to obtain a tax advantage. The evidence indicating the obtaining of a tax advantage is strong when compared to the weaker and limited evidence of commerciality (ring-fencing of risk and self build model). The companies appeared to be inter-dependent on each other for their trading activity. CBL only constructs homes for customers of LME. The contractual arrangement has been constructed such that there is a VAT advantage to be obtained in the building of holiday homes. Without the splitting of land and construction supplies there would have a greater VAT liability. There may be perfectly legitimate marketing and organisational reasons for splitting the contract between different companies. However, notwithstanding the existence of those particular justifications for splitting the supply, if the principal aim is to secure a tax advantage, then those justifications would not have helped the Appellant to rebut the abusive practice argument. The evidence in this case established that the "minimum threshold" for establishing an abusive practice was met.
135. The fact that one company owns land and another company provides construction services is not itself artificial but the artificiality lies in how the contractual arrangements have been constructed. The way in which that holiday home is provided by the Appellant making two separate supplies and the reason the supplies are so structured is because there is a VAT advantage to be obtained. The nature of the contemporaneous documentation and packaging of the supplies through the contracts in one bundle meant that both strands of the supply, land and construction services, would be supplied together. The Appellant created the conditions under which a VAT relief would be obtained and this is against the intention of the Principal VAT Directive. At all times the customer had the certainty of knowing that a complete holiday home would be provided and less VAT would be payable.
136. The ECJ decision in Part Service provided a number of characteristics of the transaction in issue which were considered in establishing whether there was an abusive practice (paragraph 57). Two factors considered were, the economic viability of a business when "considered in isolation" and the margin of profit realised from the business. First, it is questionable whether CBL, separated out and operating without LME, would be a viable business on its own. Secondly, the profits of CBL (3-5%) were marginal and slightly higher than the costs of providing its services. It was a business that JMP did not want to keep because of its small profit margin. In assessing the "purely artificial nature of the transactions" as Part Service explained, it is questionable whether the CBL business is independent. It appears to be fully linked to the LMC business and without their customer base, would not be economically viable or profitable. This "stand alone" test is helpful when looking at commerciality and assessing objectively the essential aim of the transaction.
137. This leaves us with the remedy. The ECJ has provided some guidelines in this respect by saying one has to redefine the transaction to establish the situation that would have obtained but for the transaction that constituted the abusive practice. The ECJ in Halifax said:

"It follows that transactions involving an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of the transaction constituting that abusive practice".

138. The Commissioners would need to "re-establish the situation" that would have prevailed before the transactions constituting the abuse took place. This means that the abusive transactions or series of transactions must be unpicked to reveal the situation that would have prevailed in the absence of the abuse.
139. What then are the true facts of this case? The supply of a holiday home, in the re-established situation where the abuse is removed, would see one supply from LME to the customer of a holiday home. The redefinition of the transaction would mean that it will be necessary to work out the VAT consequences of the transaction as if it were a single supply from LME to the customer. LME, as the owner and developer of the land would have made a single supply of a holiday home. The supply would be standard rated and the consideration for that supply would be the total sums payable for the land and construction services taken together.
140. The Appeal is therefore dismissed. The parties may apply to settle matters of costs.

DR K KHAN

CHAIRMAN

RELEASED: 2 April 2009

LON 2008/0593