18863
VALUE ADDED TAX — contract parking and pay and display parking businesses carried on from same site by Appellant and a partnership of its sole director and her husband — direction to treat Appellant and partnership as a single taxable person — VATA1994 Sch 1 paras 1A, 2 – s 84(7) —whether direction reasonably made — yes— appeal dismissed
MANCHESTER TRIBUNAL CENTRE
VENUEBEST LIMITED Appellant
- and -
THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents
Tribunal: Colin Bishopp (Chairman)
Marjorie Kostick BA FCA CTA
Sitting in public in Birmingham on 10 November 2004
Andrew Young, counsel, instructed by Vincent Curley & Co for the Appellant
Nicola Preston, counsel, instructed by the Solicitor's Office of HM Customs and Excise for the Respondents
© CROWN COPYRIGHT 2004
DECISION
- These are linked appeals by Venuebest Limited ("Venuebest") against two decisions of the respondents. The first is a direction, made in accordance with paragraph 2 of Schedule 1 to the Value Added Tax Act 1994 to the effect that Venuebest and a partnership carried on between Karen Lock and her husband, David Lock ("the partnership") are to be treated as a single taxable person. The direction was made on 23 November 2000, and was to take effect from 22 December 2000. In the second appeal, Venuebest challenges the Commissioners' decision to cancel its own registration for value added tax. If the direction is correct, it follows as (both parties agreed) that Venuebest cannot remain individually registered (see paragraph 2(5) of the Schedule), whereas, if the direction was invalid, the decision to cancel Venuebest's registration must fail with it. Accordingly, we are required to determine only whether or not the direction was properly made.
- The Appellant was represented by Andrew Young of counsel, and the Respondents by Nicola Preston, also of counsel. We had a bundle of documents, and heard the evidence of the Customs officer whose decision it was to issue the direction, Robert Mintoft. We heard no evidence from the Appellant or from the partnership but the relationship between the two, in one respect significant in these appeals, was considered by this tribunal on an earlier occasion (see (2002) Decision 17685). Although the tribunal's decision was reversed by the High Court (see Customs and Excise Commissioners v Venuebest Limited [2003] STC 433), it was reversed on a question of law only and we were invited by the parties to, and do, adopt that tribunal's findings of fact. So far as they are relevant to this appeal those facts (augmented by Mr Mintoft's evidence and the documents produced to us) are as follows.
- The issue between the parties revolves around the use of a car park in Leicester. A leasehold interest in the site of the car park was assigned to Venuebest in April 1999. The assignor (of which David Lock was a director) had previously carried on the business of car rental and contract car parking on the site. In about 1995 or 1996, the assignor had entered into an agreement with the partnership, trading as Leicester Central Car Park, enabling the partnership to operate a "pay and display" car park on the site, although the partnership was able to use only those spaces on the car park which had not already been let for contract parking. No copy of the agreement was available to us and its precise terms are somewhat obscure, as they were to the previous tribunal. Such evidence as there was indicated that at the time of the agreement, about ten spaces out of a total of 90 available on the site were let on contract hire.
- On 3 May 1999, shortly after it had taken the assignment of the site, Venuebest entered into a further tenancy agreement with the partnership. It is a somewhat amateurish document, and does not, in particular, indicate in terms that it was intended to replace the earlier agreement between the assignor and the partnership, but we take it that this was the intention. In exchange for an annual rent of £30,000 plus the cost of insurance and rates, Venuebest let to the partnership, for a term of three years, the entirety of the car parking site. Nothing is said in the agreement about the exclusion of any parking spaces already subject to contact hire agreements although the plan attached to the document is endorsed with the words "excluding all reserved spaces MW"; MW are the initials of another of the directors of the assignor to Venuebest.
- Although the agreement made no provision for it, it was clear from the evidence heard by the previous tribunal, as it is recorded in its findings, that Venuebest did continue to carry on its predecessor's contract car parking business, while the partnership undertook only pay and display car parking. The earlier tribunal put it in these terms:
"The working relationship between the two is that, as stated, [Venuebest] operates a contract parking business and the partnership a pay and display business. Priority for the spaces is given to [Venuebest] and there is available to the partnership only such spaces as are at any given time not needed by [Venuebest]. [Venuebest] grants contracts for parking for varying length periods and the contracts themselves can be for either five day or seven day parking. Some spaces are thus used for both contract and pay and display parking on different days of the week. There are no set spaces reserved for [Venuebest]'s contract parking, all spaces on the site being available for [Venuebest]'s use. To differentiate those spaces not available for pay and display [Venuebest] erect signage to show the space is reserved for contract parking which, where appropriate, will indicate the availability of an otherwise reserved space for pay and display at weekends.
The rent payable by the partnership under the agreement is £2,500 per month. It does not vary according to the number of spaces available to the partnership. We were told the rent was subject to increases in line with the rental increases payable by [Venuebest] to the head landlord and Mr Lock agreed that the partnership could thus be paying increasing rent for a reducing number of spaces. This, we were told, would be reflected in the rent on the signing of the new agreement on the expiration of the current one."
- The previous tribunal also found that by April 2002, when the appeal was heard, as many as 70 of the 90 spaces might be the subject of contract hiring agreements, although it is also apparent from their findings that the precise number would vary depending upon the number of contract hire customers at any one time. There was, incidentally, no evidence before us about what, if anything, had been done on the expiry of the three-year term granted by the agreement, though we recognise that the direction under appeal had by then come into effect.
- On the same day as that on which it took the sub-lease of the site, the partnership entered into a further agreement with a Mr Neil Jenkins, by which Mr Jenkins undertook the day to day maintenance of the car park (by clearing litter, unblocking drains and the like), the emptying of the machine by which pay and display customers bought tickets and the banking of the monies removed from the machine, in exchange for the right to clamp vehicles found within the car park whose owners had not paid the requisite charge, or who had parked improperly. Mr Jenkins was entitled to keep the fees charged for removing clamps. Mr Young accepted that Venuebest benefited from some of Mr Jenkins' obligations, though it had no agreement of its own with him.
- Although Venuebest's principal activity was the contract car parking business, it also imported new cars from Belgium. At all material times, its only director was Karen Lock. The documents shown to us indicate that David Lock was a director for a short period, following the formation of the company, before resigning. It appears that Mr and Mrs Lock have one each of the two issued shares, though we should add that we do not consider this a significant factor. The partnership's principal business is the running of care homes. The evidence available to us indicated that that business was of a substantial nature, with an annual turnover exceeding £1 million. That activity is exempt for VAT purposes. We deduce, though we heard no direct evidence on the subject, that the partnership's income from the pay and display car park has at all times remained below the threshold which would require the partnership, apart from the direction which is the subject of this appeal, to register for VAT. By contrast, Venuebest has at all material times been registered for VAT and it has charged and accounted for VAT on its supplies of contract parking which, for the most part, are made to business customers.
- Mr Mintoft's evidence dealt with his enquiries into the relationship between Venuebest and the partnership and their respective business activities, and with his discussions and correspondence with Mr and Mrs Lock and their advisers. Much of the factual part of Mr Mintoft's evidence was of little consequence (most of it is in any event contained within what we have already set out) though we should mention that, during the course of his enquiries, he discovered that the invoice for the pay and display ticket machine had been paid by Venuebest which had also claimed credit for the VAT included in the charge. We will need to return to Mr Mintoft's reasons for deciding that the direction should be made at a later stage.
- The starting point for a consideration of the relevant law is Article 4 of the Sixth VAT Directive (77/388/EEC), the relevant parts of which are in these terms:
"1. 'A taxable person' shall mean any person who independently carries out in any place any economic activity …
- … subject to the consultations provided for in Article 29, each member state may treat as a single taxable or person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links."
Those provisions are implemented in the United Kingdom's domestic legislation by paragraphs 1A and 2 of Schedule 1 to the 1994 Act. So far as material to this decision, those provisions read as follows:
"1A—(1) Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in avoidance in VAT.
(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.
2—(1) Without prejudice to paragraph 1 above, if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction and that taxable person shall be liable to be registered under this Schedule with effect from the date of the direction or, if the direction so provides, from such later date as may be specified therein.
(2) The Commissioners shall not make a direction under this paragraph naming any person unless they are satisfied—
(a) that he is making or has made taxable supplies; and
(b) that the activities in the course of which he makes or made those taxable supplies form only part of certain activities, the other activities being carried on concurrently or previously (or both) by one or more other persons; and
(c) that, if all the taxable supplies the business described in the direction were taken into account, a person carrying on that business would at the time of the direction be liable to be registered by virtue of paragraph 1 above … "
- As Mr Young pointed out, the domestic legislation indicates that a direction is to be made only if the "separation of business activities" is artificial and the test is correspondingly stricter than that imposed by article 4(4) of the Sixth Directive, which does not import the notion of artificiality. We accept that submission.
- The tribunal's jurisdiction in an appeal of this type is conferred on it by section 83(u) of the 1994 Act, but it is subject to the provisions of section 84(7) which reads:
"Where there is an appeal against a decision to make such a direction as is mentioned in section 83(u), the tribunal shall not allow the appeal unless it considers that the Commissioners could not reasonably have been satisfied that there were grounds for making the direction."
- Mr Young accepted, accordingly, that we could allow the appeal only if we were satisfied that Mr Mintoft, acting as a representative of the Commissioners, could not reasonably have concluded that it was appropriate to make a direction; it was not sufficient that we might ourselves, considering the matter at large, have reached a different conclusion. Strictly speaking, Mr Mintoft did not make the decision – he merely made a recommendation to another officer – but it was plainly as a result of Mr Mintoft's recommendation that the direction was made and, consequently, Venuebest's existing registration was cancelled, and we treat the decision as one effectively reached by Mr Mintoft.
- Mr Mintoft's evidence was that his primary focus was the activities carried on by Venuebest and the partnership. He did not disregard the relationship between the two – that is, Mrs Lock being one of the partners and the sole director of Venuebest – and he paid attention to some other factors, but it was the fact that both Venuebest and the partnership were carrying on the business of making car parking available to the public, from the same premises, which led him to the conclusion that the separation of those activities, into contract parking on the one hand and pay and display parking on the other, was artificial and that it resulted in a saving of VAT. He acknowledged that there were distinctions to be drawn between contract parking and pay and display parking but they were nevertheless, he considered, essentially the same activity. He was not much influenced by the fact that Venuebest had another business interest of buying and selling cars, in which the partnership did not engage, and he did not take into account the fact that the partnership had a substantial care home business, since it was not until some time after he had made the decision that he became aware of that activity. He was willing to accept that the partnership and Venuebest were, and were genuinely, separate entities and he agreed that it would not have been appropriate to issue an assessment seeking to recover arrears of tax upon the basis that there was, in truth, only a single business.
- The other factors which he had taken into account were, first, the agreement with Mr Jenkins, which had been entered into by the partnership alone, although it was also for the benefit of Venuebest; the fact that the same person undertook the accounting function for both Venuebest and the partnership without any evidence that a charge had been made by Venuebest, whose employee she was, to the partnership; that the pay and display ticket machine had been paid for by Venuebest; and that the appearance of the car park, which was shown (albeit not very well) on some photographs which were produced to us, suggested that only a single car parking business was being carried on the site.
- Mr Young argued that we were constrained by the finding of the earlier tribunal, and the decision of the High Court, that there was a supply from Venuebest to the partnership. The issue in that case had been whether the supply was (as the tribunal found) an exempt supply of land or (as the High Court determined) a grant of facilities for parking vehicles, which by virtue of Item 1(h) of Group 1 of Schedule 9 to the 1994 Act was standard-rated. The tax treatment of the supply was immaterial, he said; the important point was that there was a supply which of itself indicated the separation of the two activities. Since the supply was made for valuable and not merely nominal consideration, it, and in consequence the separation, could not be regarded as artificial.
- We are not persuaded that Mr Young's argument is correct. In the earlier appeal, the tribunal was required to assume that a supply had been made and to determine the proper tax treatment of it. It was irrelevant to that decision whether the supply was artificial. In any event, it does not seem to us material that there was a supply from Venuebest to the partnership. The test to be applied by an officer such as Mr Mintoft is whether two business activities have been artificially separated. Though the character of a supply made by one participant to another would not necessarily be an irrelevant consideration, we are by no means satisfied that it is a decisive consideration and particularly so when, as in a case such as this, it is necessary for one participant to make a supply to the other if the separation of the activity is to succeed. Here, the partnership could not lawfully have carried on a pay and display car parking business if Venuebest had not granted it some form of licence permitting it to do so over the land of which Venuebest was the tenant.
- Mr Young quite rightly emphasised the requirement, reflected both in the directive and in the domestic legislation, that Venuebest and the partnership be "closely bound to one another by financial, economic and organisational links". We are, however, satisfied that the requirement is met. The two were sharing a source of income, the car park. They were sharing resources in exploiting the car park, those resources being Mr Jenkins' services and those of the book-keeper, while the notices on display at the car park served the interests of both Venuebest and the partnership. Though it is a relatively minor point and may have been due to an accounting error, we think it is nevertheless pertinent that Venuebest paid for the pay and display ticket machine. While we accept it is by no means a decisive factor and in some circumstances might be of no consequence at all, we do not think it can be overlooked in this case that Mrs Lock was both the sole director of Venuebest and one of the partners. In our view, all of these factors point firmly to the conclusion that Venuebest and the partnership had financial, economic and organisational links.
- We have, therefore, to consider whether the separation of the car park into its two functions of providing contract parking for some and pay and display parking for others is to be regarded as artificial. Though it might not be appropriate to do so in every case, we think in this case we should ask ourselves first whether the relationship between Venuebest and the partnership was one into which two entities, trading entirely at arm's length, might enter. If the answer to that question is no, we next need to consider whether there are any factors in the case, peculiar to the parties involved, which cast a different light on the matter. Lastly, we must ask whether the separation of the activity has the result that VAT is avoided. The statutory wording indicates that intention need not be established, though an intention to avoid VAT, if demonstrated, would inevitably be relevant.
- From the point of view of Venuebest, the arrangement was quite beneficial; it could use as many of the available spaces as it wished for the purpose of its contract parking business and in return for those spaces which remained available to it, the partnership paid a substantial rent and in addition took upon itself (albeit through the medium of Mr Jenkins) the day to day maintenance and policing of the site. The only service Venuebest undertook in return was to provide its book-keeper to maintain the partnership's car parking records. When viewed from the partnership's perspective, however, it is quite impossible to regard the bargain as one into which it would have entered on a true arm's length basis. It was liable to pay a substantial rent, as well as insurance and rates, for an unspecified number of spaces with no prospect that the rent and its other costs would diminish when, as in fact was the case, the number of spaces available to it was reduced. No sensible businessman would conceivably enter into an arrangement of that kind. We could detect no special circumstances which might put a different complexion on the matter in this case. The care home business, it emerged, was operated from sites remote from the car parks and, although there is no reason in principle why the partnership should carry on more than one business, there was no evident reason – certainly none was suggested – why it should take on part of a business which could easily have been carried on by Venuebest (or why it should have done so when Venuebest's predecessor, of which one of the partners was also a director, was the lessee of the site).
- In our view it is an inevitable conclusion that the separation of the car parking business into contract and pay and display categories was artificial, and that it had the result that VAT was avoided (because, as we have assumed, the turnover of the pay and display car park was below the registration threshold). We do not think it necessary to make any finding about intention, though it is difficult to conceive of any motive for the arrangement other than the avoidance of tax.
- It is in our view quite impossible to say that the Commissioners' decision to make a direction was unreasonable, and the appeal against the direction must be dismissed. As we have indicated, the second appeal is dependent upon the outcome of the first, and it too must be dismissed.
- Mrs Preston did not seek a direction in respect of costs and none will be made.
COLIN BISHOPP
CHAIRMAN
Release Date: 30 November 2004
MAN/2000/0996 & MAN/2001/0219
