20185
VAT – Exempt supplies – Land – Ice rink – Contract with Council for Appellant to operate Ice rink – Contract provided for Council to supply Ice Rink premises – Agreement not assignable – Whether Appellant able to licence premises to hirers – Purported short term licences to occupy granted to hirers with contracts for Appellant to manage for hirers – Whether exempt licences granted – Appellant assessed on admission fees – Held that Appellant failed to establish that agreements with hirers made – No reasonable excuse or mitigation of misdeclaration penalties – Appeals dismissed
LONDON TRIBUNAL CENTRE
SATURN LEISURE LTD Appellant
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: THEODORE WALLACE (Chairman)
DIANA WILSON
Sitting in public in London on 23-25 April 2007
Richard Barlow, counsel, for the Appellant
Sarabjit Singh, counsel, instructed by the Solicitor for the Respondents
© CROWN COPYRIGHT 2007
DECISION
- This was an appeal against an assessment on the Appellant which was the operator of Romford Ice Rink under an agreement with Havering Council based on sums received from customers.
- The Appellant contended that the sums were received by the Appellant as manager acting for a series of hirers under consecutive licence agreements and management agreements under which the hirers were entitled to the takings but employed the Appellant as manager, the Appellant collecting takings and retaining them in consideration of the exempt licences of the rink.
- The assessments were on the footing that the supplies to customers were by the Appellant and not by the consecutive hirers. Alternatively, Customs contended that the payments by the hirers were not for exempt supplies within Schedule 9, Group 1, item 1 of the VAT Act 1994.
- The preferred assessment was for the period from 6 May 2002 to 14 February 2004 and totalled £106,085 after a reduction. The appeal also concerned misdeclaration penalties.
- There were three witnesses : Philip Jinks, director of the parent company of the Appellant, Mirage Marketing Ltd; Mrs Lorna Wyrill, financial controller of the Appellant, and Miss Hilary Elms, personal assistant to Mr Jinks. There were no witnesses for Customs.
- There was a bundle of documents including a management agreement dated 1 August 2003 with Havering, a series of agreements headed "Short Term Licence to Occupy", a series of agreements headed "Management Contract" and invoices by the Appellant to hirers.
- The agreement with Havering Council followed an earlier agreement and was expressed to run from 1 May 2003. The Appellant had been managing the ice rink for some years previously.
- Clauses 1 and 2 provided that the Appellant would "act as manager of the Premises and Ice Rink operation relating thereto" and manage the rink in a proper and businesslike manner. Clause 3(3) provided that the Company shall,
"(3) Throughout the management period pay to the Council a percentage of the annual net profit of the Company in respect of the operation of the ice rink calculated by deduction of expenditure from the annual gross income (as defined in the First Schedule hereto) to be calculated as follows ?
(i) Up to £52,000 – 77%
(ii) £52,000 – and above – 70%"
The gross income under the First Schedule effectively included all income from operation of the rink including admission, tuition, skate hire and refreshments; expenditure included all salaries and wages reasonably incurred in the operation of the ice rink, rates and utility bills. Clause 3(3) and (4) also provided for estimated accounts to be sent to the Council quarterly and that a final audited account be sent on termination of the agreement. Clause 3 obliged the Appellant to open the rink daily from 10.00am to 11.00pm except for Christmas and Boxing Day, provide a food and beverage service in the cafeteria and a licensed bar, maintain all equipment and machinery, employ sufficient staff at all times and maintain a third party insurance policy. Clause 3(17) required the Appellant to provide a full programme of ice rink activities including instruction with a reasonable programme to be agreed with the Council in advance and provided that "Charges for the use of the facilities shall be reasonable" and that the Council should be supplied with a list of current charges.
- Clause 4(1) provided that the Council should,
"Supply the Ice Rink premises together with the fixtures, fittings, furniture and equipment (all of which shall remain the sole property of the Council) …"
Clause 6 provided,
"This Agreement shall not be assigned by the Company or used by it as collateral security for a loan."
- Clause 12 provided that the Appellant should not interfere with the Council, its officers or servants and all other persons lawfully entitled to enter the premises. Clause 13 required the Council wherever possible to give 24 hours notice to the Appellant of its intention to inspect the condition of the Ice Rink and provided,
"The Company's right to occupy the premises under this Agreement shall be in common with the Council …"
Clause 22 provided that the Agreement was to be construed,
"As a licence to use such parts of the premises as may be necessary to enable the Company to comply with all other terms and conditions herein stated and that possession of all parts of the premises remains with the Council … [T]here is no intention to grant the Company exclusive occupation of or to create a tenancy in respect of the whole or any part of the premises."
Clause 23 provided,
"The right of the Company to use the premises of the Council under this Agreement shall cease on termination of this Agreement."
- No payments were in fact made to the Council because there was no net profit.
- Eleven agreements headed "Short Term Licence to Occupy" were produced. Apart from the first two agreements expressed to be with Venturecore Ltd and Regal Entertainments Ltd, all were on identical forms. The agreements contained the following provisions, the Appellant being referred to as "the Company":
"1.0 WHEREAS the Hirer has agreed to rent [the ice arena] from the Company.
2.0 NOW IT IS HEREBY AGREED as follows:
During the period beginning on [date] and expiring at 24.00 hours no later than 91 days from the above date.
- 1 The Hirer shall pay to the Company the sum of £54,999 in the manner specified in Section 5.0.
- 0 This Agreement may be terminated by either party giving one weeks written notice, or immediately upon breach of these conditions by the Hirer.
- 1 This Agreement forms the terms of an exempt supply for VAT purposes.
- 0 The Hirer shall:
…
- 1
Ensure that the premises shall not remain closed for more than 24 hours without prior written permission from the Company.
…
- 3 Ensure that the Company, as Management Contractor, employs sufficient persons of abilities and skills for the proper performance of services.
- 4 Ensure that the Company, as Management Contractor and its employees will maintain the highest standards of cleanliness, presentation and customer care at all times …
- 5
…
The Hirer shall, when requested, provide the Company with evidence of his Third Party Indemnity Insurance Cover.
…
- 7 The Hirer shall maintain all equipment belonging to the Company and return them to the Company in their present condition …
- 0
…
- 1 Where contracted to do so (Ticket Sales, Bar, Cafeteria) as part of this Agreement, the Company shall ensure that all monies are accounted for and banked in the name of the Hirer, or if not practical, shall provide such banking facilities as necessary.
- 2 Provide a Statement of Account no later than 28 days from the termination of hire."
- Eleven agreements headed "Management Contract" were produced, all bearing the same dates as the Short Term Licences. The Appellant was referred to as "the Contractor" and the hirers under the licence agreements were referred to as "the Client". The Short Term Licences were referred to as "STLOs". They contained the following provisions:
"This Contract shall be in force only to the precise and exact term and extent of a Short Term Licence to Occupy (STLO) existing in favour of the Client.
…
The Contractor shall receive on behalf of the Client, and be liable to the Client, for all, and only, … income from All Sales, Admission Sales, Ticket Office Sales, Secondary Sales, Advertising Revenues.
All other income shall remain the property of the Contractor.
CONSIDERATION FOR THIS CONTRACT
Shall be in the form of a Management Fee, payable by the Client to the Contractor within 7 days of the termination of the STLO
The Management Fee for this Contract shall be … 1 per cent of sales of the Client …
…
THE CONTRACTOR
- As experts shall manage the premises … They shall perform all the duties and obligations demanded of the Client, known as 'The Hirer' within the STLO to which this agreement applies
…
- Shall provide a Ticket Office Service for the collection, safe storage and security of the Client's money and property.
- Shall pay to the Client's authorised agent all monies due within 7 days of invoice from the Client
- Shall insure the premises and hold the Client free of all claims by way of third party claims arising out of the operation of the facility
…
THE CLIENT
- Shall only employ the services of the Contractor
…
- Shall not visit the premises or claim any association with the premises or Contractor unless required by law.
…
- Shall be free to assign this Contract as will
…"
- The agreements dates at intervals varying from 16 days to 82 days. The Hirer shown in the first STLO dated 7 May 2002 was Venturecore Ltd and the next Hirer in an STLO dated 19 July 2002 was Regal Entertainments Ltd both of which were companies related to the Appellant. Both agreements were expressed as being made by Mirage Marketing on behalf of the hirers and signed by Miss Elms. A management agreement dated 7 May 2002 was between Mirage Marketing Ltd and the Appellant, being signed by Mrs Wyrill for the hirer and Mr Jinks for the Appellant; the same persons signed a management agreement dated 19 July 2002 between Mirage Marketing Ltd and the Appellant.
- A schedule produced by the Appellant listed agreements with D Negoescu from 31 August 2002 and 16 November 2003 and with M Negoescu from 22 October 2002 and 24 December 2003. No agreements with them signed by the Appellant were produced; Mr Jinks produced the final page of four agreements which he identified as signed by Dan and Mihaela Negoescu.
- Nine sets of agreements with Hirers having Spanish addresses were produced. None was signed by the Hirer. All were signed by Mrs Wyrill for the Appellant. The names and starting dates were as follows: Caroline Barlow, 1 December 2002; Gary John Edwards, 12 January 2003; Penny Ann Nesbitt, 13 February 2003; Jennifer Mary Barlow, 1 March 2003. A fax from Chris Bettis to Mr Jinks, dated 14 January 2003, included this, "Reference our telephone conversation last night following is four names and addresses hope those are okay" and gave the above names. The above four agreements were followed by: Cristina Munoz, 6 April 2003; Filipe Fernandez, 16 May 2003 and Enrique Lopez, 5 July 2003. These three names with addresses were provided in a fax from Chris Bettis on 23 June 2003 which included this, "Have noted all dates for rentals". Two further agreements were expressed as with M Petcu, 27 August 2003, and Julian Dascalu, 17October 2003. These names were provided by e-mail on 9 October 2003.
- A schedule produced by the Appellant showed the calculation of amounts due from hirers. We take Penny Nesbitt as an example. It showed the rental inclusive of 1% as £50,246.93; this was in fact the same figure as shown on a schedule of takings from admissions, skate hire, shop rent, hockey rent and other for the period from 13 to 28 February 2003. That figure was apportioned 100:1 between rental and management charge of 1% and VAT was applied to the management charge. The sum of the apportioned rental, management charge and VAT, £50,333.99, was showed in an invoice dated 28 February 2003 to P Nesbitt. A statement addressed to Peter and Christine Bettis in respect of P Nesbitt showed the £50,333.99 as charges to be paid by the hirer and
"Revenue received by the hirer 50,246.93
Amount due to hirer (via Agent) 200.00"
Although the statement did not give the figure, £112.94 would have been due to the hirer.
- In each case the invoices showed the hire charge due from the hirer as 100/101ths of the takings rather than £54,999 or a proportion calculated by reference to the number of days. 1/101th of the takings were attributed to management charges and VAT was calculated on that figure. The gross amount shown as due from hirers was thus in all invoices a figure equal to the takings plus the VAT on the management charge. The takings were inevitably be less than that figure. In each case a further £200 was shown as due to the hirer. Since the VAT was always less than £100, a net amount was shown as due to the hirer of just over £100.
- If the rent fixed under the agreements had been charged to hirers the deficit before the £200 would have been larger. P Nesbitt would have been charged £54,999 plus 1% of £50,246.93 which is £502.47 plus VAT of £87.93 giving a shortfall of £5,342.47 before the £200 credit which appeared nowhere in the agreements. This would have been the highest deficit. That for Daniel Negoescu in 2002 would have been £1,788.79, the takings having been £53,842.85.
The witnesses
- Mr Jinks said that he had been general manager of Romford Ice Rink since 1989; since 1999 he had been acting for the Appellant, being a director of its parent company, Mirage Marketing Ltd. Attendances had been falling since 1990 and the Appellant had made little profit. The Council had no money to spend on the ice rink.
- He said that in 2002 it was decided to enter into short-term licences with Venturecore Ltd and Regal Entertainments Ltd on the basis that the Appellant would manage the facility for a fee. He referred to the minutes of a board meeting on 8 May 2002 where it was recorded that he outlined the possibility of renting the building on a short-term basis to related companies which would be exempt from VAT; he confirmed this by telephone with Customs during the meeting. The taxable turnover for both Venturecore Ltd and Regal Entertainments Ltd remained below the VAT threshold.
- He said that it was then decided to make arrangements with non-resident individuals. He had known Daniel and Mihaela Negoescu for many years and had long standing authority to enter into business contracts on their behalf. He said that presumably he used this authority to contract for Daniel Negoescu when Lorna Wyrill asked him for an individual's name; £50 was an enormous sum for him. He said that the signed pages referred to at paragraph 15 above had come in an envelope from Mr Negoescu; the envelope was postmarked 31 March 2004. He did not know to which times those related. When he entered into the contracts, he did not contact them before doing so.
- On 24 October 2002 Mr Eyres from Customs had visited the Appellant and had taken away copies of the draft agreements.
- Mr Jinks said that Christine and Peter Bettis acted as letting agents in Spain for Mirage Marketing Ltd. He travelled to Spain with Mr Walters on 25 November 2002 to ask them to find people to enter into short-term licences and management agreements; he explained the arrangements. Mrs Bettis would identify potential hirers and would divide £200 between themselves as commission and the hirer's as an inducement. There was no written agreement with Mr and Mrs Bettis. They were to provide names and addresses by telephone or fax of hirers who had signed up; some were prospective because it was in advance. It was taken as agreed that Mr and Mrs Bettis had authority to act for the Appellant. The Appellant had no prior contact with the hirers. Mr and Mrs Bettis retained the agreements signed by hirers. In late 2003 when it appeared that they had moved duplicate contracts had been sent to hirers by recorded post. He believed that he spoke to one hirer afterwards but he did not know which. In practice hirers were not charged for any balance due on termination.
- Cross-examined, he said that he signed the agreement dated 7 May 2002 with Venturecore Ltd on behalf of the Appellant, Mrs Wyrill signed for the hirer. He did not know why she appeared as Lorna Whitehead on the minutes of 8 May 2002 and L Wyrill on the agreement of 7 May 2002; the agreements could have been signed some time after 7 May; it was possible that she was practising her future married signature.
- He agreed that the names of Caroline Barlow and Gary Edwards were only faxed after the dates on the agreements. He said that there might have been a prior telephone conversation with Mrs Bettis. He agreed that Caroline Barlow could only have agreed to hire after the dates given. He could not show that Mr Edwards agreed from 12 January 2003. Asked about "have noted all dates for rentals" (paragraph 16 above), he said that perhaps Mrs Bettis was already aware of the rental dates and was only confirming who actually was the hirer. She may have already contacted Cristina Munoz: the management contact dated 6 April 2003 would have been completed in England. He said that Mrs Bettis never produced the agreements to the Appellant. After a time he went out to Spain to chase Mr and Mrs Bettis but they had moved house. The Appellant never received the contracts signed by hirers and never sent to the hirers the copies signed by the Appellant.
- Asked about an e-mail dated 26 March 2004 signed by Dan Negoescu included the following:
"I have received the explanations yesterday evening. … thank you very much for remembering me and Mihaela for that agreement and for the amount (gorgeous) of spondoulicks that you are planning to send us. I am waiting for the papers to come out …"
Mr Jinks said that they were not asked to sign until March 2004 because he had the understanding that he was authorised to agree on their behalf. He said that he did not have a power of attorney. He asked them to sign as a mere formality to show that the Appellant had the paperwork.
- Mr Jinks said that he believed that the Appellant had produced everything which it had. There were no variations to the agreements. The Appellant had no agreements signed by hirers. The Appellant had terminated each agreement immediately before the registration threshold of the hirer had been reached, otherwise it would have been in breach of an implied term. The object would have been defeated if a hirer had become liable to register. Hirers did not want to be registered. Mr Jinks said that he could say this with his Venturecore hat on. Although Mr Petcu would have earned much more if his agreement had not been terminated after 50 days, he would have had to pay VAT and the profit would have been eaten up by the need to employ expensive accountants. He said that Mr and Mrs Bettis were told that hirers were not to be registered; this was apparent from the Questions and Answers on the Sports Rental Scheme. He said that he was not aware of notice of termination being given to hirers, but the Appellant was managing on behalf of hirers and once it concluded that a hirer would go over the limit it was obliged to terminate on the hirer's behalf.
- He agreed that termination without notice was outside clause 3. He agreed that under the contract a hirer would be liable to pay £54,999 if the Appellant terminated after a week. He said that the hirers accepted the two contracts together. He said that the rental figures were never varied. He agreed that the management fee was calculated wrongly. He said that clause 1 of the management agreement empowered the Appellant to vary the rent to keep under £54,999: the rent was the same as the turnover. He agreed that in every single case the hirer would end up owing money to the Appellant unless the Appellant wrote it off. He did not know whether any part of the £200 payments to Mr and Mrs Bettis were given to hirers: he said that they could have passed on the whole amount.
- Mr Jinks agreed with Mr Singh that Customs had never approved the arrangements with Venturecore Ltd.
- He told the Tribunal that he had drafted the agreements himself and had keyed them although Miss Elms would have checked them. He said that the figures "10/02" at the top of the licence to Venturecore might have indicated October 2002 reflecting an earlier oral agreement. In re-examination he said that he did not know that "10/02" was a date.
- Mrs Wyrill produced documents indicating payments to Mr and Mrs Bettis, including £400 for two names sent on 5 November 2003 and a receipt for £650 after 31 March 2003. She produced the schedule referred to at paragraph 17.
- She told Mr Singh that she was married on 10 August 2002. The agreements with Venturecore would have been signed after she was married but she could not say when. The £400 was sent on Mr Jinks' instructions. The figure in the "rental" column of her schedule was the turnover figure. She had read clause 2.1 wrongly as meaning up to £54,999. She agreed that the management charge should have been 1% of turnover.
- She said that she was basically the bookkeeper. She received a telephone call each morning at the office near Maidstone giving the previous day's takings which she entered on a spreadsheet. If she considered that the threshold would be exceeded she commenced a new hiring. She did not notify either the old hirer or the new hirer: she did not see any need to do so. Asked about clause 3 she said that she thought that if the agreement had run its course there was no need to terminate. No quarterly accounts had in fact been sent to the Council but they did get the annual accounts.
- Miss Elms told Mr Singh that she assumed that she asked for the names provided by Mrs Bettis on 23 June 2003 shortly before that date. She had requested two further names by e-mail on 8 October 2003; the names of Mr Petcu and Mr Dascalu were given in reply. She was concerned with getting names not with whether the individuals had agreed. She had nothing to do with the hire side.
Appellant's Submissions
- Mr Barlow submitted that the Appellant had the right under its agreement with Havering Council to occupy and operate the premises in return for paying the Council a share of the profits. In order to perform its obligations under the agreement the Appellant had to have a licence to occupy. The prohibition on assignment of the agreement did not prevent the Appellant from performing its obligations vicariously or granting sub-licences. The Appellant had a right of occupation capable of being passed on within the exemption under Group 1.
- He accepted that a licence to occupy land in item 1 of Group 1 cannot go wider than "leasing and letting of immovable property" in Article 13B(b) of the Sixth Directive. He referred to Sinclair Collis Ltd v Customs and Excise Commissioners (Case C-275/01) [2003] STC 898 at [25]. The words "as owner" could not mean absolute owner. In Belgian State v Temco Europe SA (Case C-284/03) [2005] STC 1451 the Court said at [24] that the tenant's right of exclusive occupation could be subject to the landlord's right to visit and could cover common use of parts. Here hirers could exclude any customer without cause. The licence and management contracts were analogous to a sale and leaseback. He referred to Abbey National plc v Customs and Excise Commissioners [2006] STC 1961, CA
- Mr Barlow accepted that the agreements were not operated to the letter. He said that it is necessary to look at what supplies were actually made rather than the strict contractual position. The Tribunal should look at the way in which the agreements were operated in fact. The inference was that Mr and Mrs Bettis did sign up real people and were paid for this. Acting as manager under the management agreements the Appellant terminated the agreements on behalf of the hirers before the registration threshold was passed. No money was due to hirers after taking account of rent. The inference was that no sums were due from the hirers because the Appellant did not seek to recover any. He said that it was intended by the Appellant that hirers would not have to pay anything even if Mr and Mrs Bettis did not give them any of the £200. The agreements with Venturecore and Regal Entertainments were undertaken on the basis that they would be operated so as not to involve them in paying anything. They did not want to go over the registration limit. The takings were to be used to pay the hire and would stop at the hire level of £54,999. Even if the licence and management agreements were to be treated as a single agreement they still gave rise to separate supplies.
- Mr Barlow said that if the appeal against the assessment failed, there was a reasonable excuse within section 63(10) or the penalty should be mitigated. Mr Jinks had telephoned Customs at the outset on 8 May 2002 and inquired about a short-term licence. Mr Eyres had visited the Appellant on 24 October 2002 for 3 hours and had been given copies of the agreements. There had then been complete inaction by Customs until 29 September 2003; no decision had been given for a year thereafter. If Mr Eyres had raised questions after his visit, the assessment and penalty would have been for a shorter period.
Submissions for Customs
- Mr Singh submitted that the agreement with the Council did not give the Appellant a licence to occupy so as to come with Article 13B(b). The Appellant was entitled to operate the business on its own account but did not have a right to occupy, being no more than a contractor. Clause 6 meant that the Appellant had to manage the business itself and prohibited sub-contracting. Under clause 13 the right to occupy was in common with the Council and not exclusive. Clause 22 made it clear that the Appellant was only entitled to use the premises to manage and run the business. The Appellant was only able to grant exempt licences to hirers if it was letting or leasing from the Council.
- He said that even if the Appellant was granted a licence to occupy by the Council, no such licence was granted to the hirers. The Appellant was prevented by clause 6 from assigning. The position was akin to that in Abbey National [2006] STC 1961 where there was a virtual assignment. Under the management agreement the hirer was prevented from visiting the premises. The licences were not shortened by mutual agreement, see Temco at [22].
- He said that the Appellant at all times ran the business on its own account as it had done before May 2002; nothing changed. If the Appellant was acting as agent for the hirers it would have got more than 1%. From 31 August 2002 there was no credible evidence that the hirers had entered into the agreements. The licence agreements were terminated unilaterally outside clause 3. No duty to terminate the agreements could be implied: it was contrary to the hirers' interests. It was not credible that the hirers would wish to forego the takings because of VAT. There was no evidence that the hirers agreed that the rent would be the same as the turnover. Miss Elms had only asked for names from Mr and Mrs Bettis : that was all that the Appellant wanted. There was no evidence that hirers in Spain had received anything. They had no interest in the business whether legal, economic or in fact. The only evidence of hirings being agreed was in respect of Venturecore and Regal Entertainment.
- Turning to the penalties, he said that the focus should be on the Appellant's conduct. Customs accepted that the Appellant acted in good faith, however that was not relevant to mitigation, see section 70(4)(c). The penalty was a maximum of 15 per cent; exclusion of good faith as a factor in mitigation was not incompatible with Community law. There was no delay warranting mitigation. It could not sensibly be said that the Appellant had been misled.
Conclusions
- This was a most unsatisfactory case. All of the agreements including that with Havering Council were to put it mildly badly drafted. The documentary evidence produced by the Appellant to support a complex avoidance scheme was seriously deficient. Those implementing the scheme did not understand the legal effect of the agreements. Although the two officers who visited the Appellant were in court neither gave evidence. There was no allegation of dishonesty by Customs. Although there was an issue as to whether the hirers in fact entered into agreements, it was acknowledged that they were real people with real addresses.
- The analysis of the written agreements themselves is not without difficulty, furthermore it is clear that the written agreements between the Appellant and the hirers were not performed according to their terms; indeed the existence of any agreements between the Appellant and the various hirers depends on extraneous evidence as do the terms of any such agreements.
- It is clear from Belgian State v Temco Europe SA [2005] STC 1451 at [27] that the Tribunal must consider the contracts as performed.
- We find it convenient to consider first the scope of the exemption under item 1 of Group 1 for "The grant of any interest in or right over land or of any licence to occupy land." This exemption must be interpreted in accordance with the exemption under Article 13B(b) of the Sixth Directive and cannot go wider than the Directive, see per Lord Slynn in Customs and Excise Commissioners v Sinclair Collis Ltd [2001] STC 989 at [13]. Article 13B(b) exempts "the leasing or letting of immovable property" with certain exclusions.
- In Temco at [19] the Court said that the concept of the letting of immovable property is:
"essentially the conferring by a landlord on a tenant, for an agreed period and in return for a payment, of the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right."
The reference to ownership cannot be to absolute ownership since a tenant is not absolute owner and the exclusions under Article 13B(b) cover a number of much more limited interests including the provision of hotel accommodation and the letting of parking sites. It is clear that the exemption covers underleases, see Customs and Excise Commissioners v Cantor Fitzgerald International (Case C-108/99 [2001] STC 1453.
- In Temco the Court said at [24] that the right of exclusive occupation can be restricted in the contract with the landlord and that the landlord may reserve the right to visit the property regularly. Further, the use of the property may be in common with other occupiers. In Abbey National plc v Customs and Excise Commissioners [2006] STC 1961, the Court of Appeal having reviewed the European authorities, said a right of occupation is an essential and fundamental element of a transaction of leasing or letting within Article 13B(b).
- In Temco it was also stated that the actual period of letting may be brief and need not be fixed at the outset, see [21] and [22].
- At [23] in Temco the Court said this in relation to payment,
"Furthermore, while a payment to the landlord which is strictly linked to the period of occupation of the property by the tenant appears best to reflect the passive nature of a letting transaction, it is not to be inferred from that that a payment which takes into account other factors has the effect of precluding a 'letting of immovable property' within the meaning of Article 13B(b) of the Sixth Directive, particularly where the other factors taken into account are plainly necessary in light of the part of the payment linked to the passage of time or pay for no service other than the simple making available of the property."
- In Sinclair Collis Ltd v Customs and Excise Commissioners [2003] STC 898 the Court of Justice decided that the grant to an owner of a cigarette vending machine of the right to install and operate the machine in the premises for 2 years in return for a percentage of gross profits on the cigarette sales, but with no rights of possession or control being granted to the owner of the machine other than those expressly set out in the agreement between the parties, did not amount to a letting of immovable property within Article 13B(b). Although the reply by the Court referred to the basis of calculating the payment, this reflected the question referred. The Advocate General whose suggested reply was adopted almost verbatim said at paragraph 31 that the fact that the consideration was a percentage of the profits was irrelevant to the classification.
- Mr Singh did not submit that the fact that the agreement with the Council provided for the payment to be based on net profits precluded it from being a letting within Article 13B(b).
- It is of importance that the role of the Council under the agreement was passive and did not involve the provision of any service other than making the ice rink and premises available.
- On balance, in spite of the somewhat opaque wording of [23] in Temco, we conclude that on the basis of the opinion of the Advocate General in Sinclair Collis, the fact that the consideration payable to the Council is based on net profits does not mean that the transaction cannot be a letting.
- Temco establishes that the right of occupation can be restricted and is not inconsistent with the landlord's right to visit the property. Clauses 13 and 22 specifically provide for occupation and in our view the provision that the Appellant should not have exclusive occupation mirrors the provision in Clause 13 that occupation should be in common with the Council. It would have been impossible for the Appellant to discharge its obligations under the contract without being in occupation. It is significant that the Appellant was liable for rates. We conclude that the Appellant did have sufficient rights under the contract with the Council to constitute a licence to occupy land within item 1.
- We next consider the submission of Mr Singh that clause 6 prevented the Appellant from granting licences to the hirers. The agreements with hirers did not purport to assign the agreement with the Council even for a short term and did not have that effect. The agreements made no reference whatsoever to the agreement with the Council and had no effect on the Appellant's obligations to the Council. We do not accept the submission that clause 6 even prevented the Appellant from sub-contracting. Some of the Appellant's obligations could only be discharged by a contractor, such as maintenance of security equipment.
- We now turn to the agreements with hirers. We find it convenient to consider the Negoescu agreements first. The evidence of Mr Jinks was that he acted on their behalf in agreeing all four contracts. It is clear from the e-mail of 26 March 2004 that Mr and Mrs Negoescu had not even seen the contracts. It is also clear that no sums had been paid either by or to the Negoescus and that it was a surprise to them. Mr Jinks provided no evidence to support his assertion that he had authority to contract on their behalf and said that "presumably" he used this authority. He did not even sign any agreements on their behalf. The pages signed by Mr and Mrs Negoescu were loose which made it impossible to see the dates. Furthermore since the written agreements were on any view not performed according to their terms, Mr Jinks would have had to agree on their behalf to variations. It is noteworthy that although Mr Jinks produced copies of e-mails from them, he produced no copies of any e-mails or faxes to them. We are not satisfied that Mr Jinks did have authority to contract for Mr and Mrs Negoescu. It follows that no licences were granted to them.
- We next consider the contracts with Spanish hirers. The Appellant did not produce a single contract signed by any of them. We find this quite extraordinary. On the Appellant's case there were ten licence agreements with management agreements involving nine different hirers starting between 1 December 2002 and 22 January 2004, yet the Appellant never chased Mr and Mrs Bettis for the contracts until they had moved house; not one contract signed by the Appellant was sent to a hirer until late 2003.
- The names of Caroline Barlow and Gary Edwards were not provided to the Appellant until after the licences were supposed to have started. The same is true of the names of Christina Munoz, Felipe Fernandez and M Petcu. On the Appellant's case, the Appellant granted a series of licences to persons of whose existence it was unaware at the time of the grant. It is clear that Mrs Wyrill cannot have filled in their names until after the dates appearing on the agreements.
- Just as with the other agreements, not one of the agreements with Spanish hirers was performed according to its terms. The Appellant treated each agreement successively as terminated before the expiry of 91 days without any written notice and without informing the hirer in question. We regard the suggestion by Mr Jinks that the Appellant as manager was obliged to terminate the licences to prevent the hirers going over the registration limit as absurd. If the agreements had been performed in accordance with their terms each hirer would have made a substantial profit. We return to the example of Penny Nesbitt at paragraph 17 above. If the licence had not been terminated after only 16 days the takings over 92 days from the Schedule produced by Mrs Wyrill would have come to £154,060, say £153,385 for 91 days, on which the management charge at 1 per cent would have been £1,533 plus VAT, leaving a profit after the rent of £96,585. She would not have been liable to register for VAT until the end of the second month. VAT on one-third of £153,385 at 7/47ths would have been £7,615 before any input tax deduction. Termination therefore had the effect of depriving Penny Nesbitt of a profit of around £90,000. It is inconceivable that she would have agreed to this. Any accountants' charges would only have been a fraction of this sum. Termination was clearly contrary to her interests.
- The evidence of Mr Jinks was that Mr and Mrs Bettis had authority to act for the Appellant in entering into the agreements with the hirers. Mr Jinks gave evidence that he explained the arrangements to be made with hirers to Mr and Mrs Bettis on a visit to Spain in November 2002. He gave virtually no evidence as to what he told Mr and Mrs Bettis. In particular he gave no evidence that they were told that the agreements were to be terminated without notice before takings reached £55,000 without a pro rata reduction in the rent of £54,999. Nor was there any evidence that prospective hirers were told that no sums would be paid to hirers and no sums demanded from them, although statements would be produced showing sums due. It would have been quite extraordinary if Mr and Mrs Bettis were to ask hirers to sign written agreements but agree orally that central terms of that agreement were not to apply. There was no evidence whatsoever that Mr and Mrs Bettis at any time told the Appellant that they had entered into agreements with hirers on behalf of the Appellant before providing the names to Miss Elms. In any event unless told by Miss Elms they could not know when each licence was supposed to start. Even on the footing (which Customs accepted) that the names on the agreements were names of real people, the Appellant has failed to satisfy us that Mr and Mrs Bettis entered into agreements with any of them let alone what the terms of any agreements were in fact.
- Mr Barlow submitted that it is necessary to look at what supplies were actually made rather than the strict contractual position. However, unless there were effective licences to the hirers, they had no entitlement to the takings and the supplies to customers of the ice rink were by the Appellant. Since the Appellant has failed to establish that there were licences either to Mr and Mrs Negoescu or to the hirers with Spanish addresses, it follows that the supplies to customers during the periods covered by those agreements were by the Appellant.
- We turn finally to the agreements with Mirage Marketing dated 7 May 2002 on behalf of Venturecore Ltd and dated 19 July 2002 on behalf of Regal Entertainments ltd.
- We are satisfied that no agreement was made on 7 May 2002. The Board minutes of the Appellant on 8 May referred to "possible new operational procedures" and make no mention of an agreement having been made. The management agreement dated 7 May was signed by Mrs Wyrill in her married name and she accepted that it was signed at some date after her marriage on 10 August 2002. The only evidence of involvement of Venturecare Ltd was the schedule produced by Mrs Wyrill from the spreadsheet which she kept. However since she treated other hirings as starting before she was given the names of the hirers, that does not assist. The management contract with Mirage Marketing on behalf of Regal Entertainments Ltd was also dated before Mrs Wyrill was married but signed in her married name. That was also clearly backdated.
- There should have been no difficulty in the Appellant producing clear evidence of the arrangements with those two companies and of payments passing between them. There was not even evidence of book entries. Those agreements were again not performed in accordance with their basic terms. There was no evidence of any variation of those terms or of any collateral oral agreements.
- We found Mr Jink to be a most unsatisfactory witness. He constantly avoided questions in cross-examination and conducted himself more like an advocate than a witness.
- The Appellant has not established that any of the hirers entered into licence agreements with the Appellant or that the admission fees and other ice rink receipts ceased to be supplies by the Appellant for which the Appellant was liable to VAT.
- We turn finally to the misdeclaration penalties. The Appellant has not shown any reasonable excuse. If the result had turned on a conclusion that the agreement with Havering Council did not enable the Appellant to grant an exempt licence, that might have given rise to a reasonable excuse on the basis that it was a matter of some difficulty. However the appeal failed for the quite different reason that the arrangements purportedly put in place where never properly implemented. It is quite clear that the arrangements cannot have been fully or correctly explained to Customs. The Appellant and its staff appear to have been totally confused as to what they were doing. There is no basis for any realistic suggestion that the Appellant was misled. While the Customs officers were surprisingly slow in pursuing their inquiries, the material which they were given was incomplete : an example of this was the single pages of the Negoescu agreements. We see no ground to mitigate the penalties.
THEODORE WALLACE
CHAIRMAN
RELEASED: 1 June 2007
LON/2005/532
