Ipsofactoj.com: International Cases [2001] Part 8 Case 7 [HL]


HOUSE OF LORDS

Coram

Sinclair Collis Ltd

- vs -

Commissioners of

Customs and Excise

LORD SLYNN OF HADLEY

LORD NICHOLLS OF BIRKENHEAD

LORD STEYN

LORD MILLETT

LORD SCOTT OF FOSCOTE

7 JUNE 2001


Judgment

Lord Slynn of Hadley

My Lords,

  1. Sinclair Collis Ltd ("SC") is a member of the Imperial Tobacco Group and part of its business is to provide, operate and maintain vending machines for the sale of cigarettes in public houses, clubs and hotels, which for the sake of brevity I refer to compendiously as "clubs". SC enters into agreements with those who control such clubs (whom I refer to as "the owners") for the provision of such machines in return for payment to the latter of an agreed percentage of the gross profits of such machines. The agreement provides that the machines are to be "positioned" in such sites as the club owner shall nominate "as being the site most likely to generate the maximum sales" but the club owner shall not unreasonably refuse his consent to the selection of such sites as SC considers will be most likely to generate the maximum sales. The cigarettes in the machines and the cash in the machines are to remain the property of SC. The owners grant SC the exclusive right to provide and operate the machines and to have access to the machines which will remain SC's property. The club owner agrees to provide sufficient electricity and not to "allow or prevent any machine dispensing similar products to the products to be placed on or annexed to the premises." In addition the owners give SC the exclusive rights to supply cigars and other tobacco products to the owners of the club.

  2. The licence is for a period of two years.

  3. It seems that machines other than those which are designed to be wall-mounted, can be moved around but this does not often happen. SC retains exclusive control of access to the machines, keeps them stocked and removes the money for sharing as agreed.

  4. The European Community Sixth Council Directive (77/388/EEC) provides that the supply of services effected for consideration within the territory of a country by a taxable person acting as such are subject to VAT. There is no contention in this case that what is done is not the supply of services or that there is no consideration for the supply of such services or that the club owners (whose supply is in question) are not taxable persons.

  5. Article 13 of the Directive provides for exemptions from liability to VAT and in particular by Article 13B(b) provides that

    Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse;

    (b)

    the leasing or letting of immovable property

    [subject to certain exclusions]

  6. That Directive was implemented in the United Kingdom by section 31 of the Value Added Tax Act 1994 which provided that a supply of services is an exempt supply if it is of a description for the time being specified in Schedule 9 to the Act. Item 1 in Group 1 of Part II of that Schedule included:

    The grant of any interest in or right over land or of any licence to occupy land.

  7. The superficially curious feature of the case, that it is the commissioners who say that the supply is exempt and that SC it seems on behalf of the club owners, say that it is taxable, is explained by the fact that if it is taxable, input tax can be set off, if it is exempt it cannot.

  8. The balance of the arguments in the case is illustrated by the fact that initially the commissioners took the view that the relevant supplies were exempt from VAT since the agreements were for licences to occupy land. On 16 March 1995 after representations were made on behalf of SC the commissioners accepted that supplies were standard rated and not exempt. In September 1995 the commissioners reversed that decision and "on balance" returned to their view that the supplies were exempt and this was confirmed by letter of 3 January 1996, the decision now under review. Moreover the tribunal decided that there was no licence to occupy lands: Lightman J and the Court of Appeal held that there was.

  9. The tribunal followed an earlier tribunal decision in Wolverhampton & Dudley Breweries plc v Customs & Excise Commissioners [1990] VATTR 131 where it was held that the "real subject" of an agreement to place amusement machines in public houses in return for payment was "the machine and not the use of or enjoyment of the land on which it stood". So here the present tribunal held that

    the substance and the reality of the agreement is that a machine will be installed and made available to customers in a position which, apart from the statutory requirements and [eg having the machine where it could be seen by the public house staff to prevent vandalism and use by children] does not matter much to either party. In my view the use or enjoyment of land as land is not a significant consideration, and for both parties the real subject of the agreement is the machine and not the use or enjoyment of the land on which it stands or the air space which it occupies for the time being.

  10. Lightman J stressed that the court's task was to interpret the language of the contract and that to look for the "substance and reality" of the agreement, a phrase used by Scarman LJ in British Airports Authority v Customs & Excise Commissioners [1977] STC 36, 41 could be unhelpful, since it suggested that it was possible to go behind the written contract even when that was not alleged to be a sham or where the agreement was said not to reflect the parties' true intention. Here, where it was accepted that there was only one supply rather than several dissociable elements, it was necessary to consider from the agreement what was the character of the main supply. Even though the grant of a restrictive covenant by which a club owner agrees not to grant a licence to any competitor, as in this case, it was clear that on the true construction of the agreement

    it is a licence to keep a machine on the site, and it is in return for that licence that the respondent has agreed to pay over a share of the profit.

    The supply was accordingly an exempt supply as the commissioners contended.

  11. The Court of Appeal in the judgment given by Ward LJ considered that the critical question was "what was the site holder supplying in consideration of taking a share in the profits of cigarette sales?" [1999] STC 701, 706 The answer was that two promises were made by the site holder (the club owner) - one to allow the machines to be provided, installed, operated and maintained at the premises and secondly to grant a restrictive covenant not to allow competition at the premises, thus ensuring exclusivity for SC's products. On the basis of authorities both of the European Court of Justice and of national courts the proper analysis, they concluded, was that there was here one main supply and that the elements of the transaction were indissociable. Properly construed the agreement provided for one relevant supply contained in the first promise of the club owners and that constituted a licence to occupy land so that the supply was exempt pursuant to section 31 of the 1994 Act and Schedule 9 of Part II Group 1.

  12. It is to be noticed that the Court of Appeal considered whether there is here "any licence to occupy land". The appellants contend in this, that they, like the judge, went astray in that they did not consider whether any "letting of immovable property" had occurred. I do not consider that this vitiates the court's decision. It is clear that

    1. the terms of the Directive are to be given a Community law meaning and

    2. that domestic legislation must be construed as far as possible so as to give effect to a Community directive which it has sought to implement.

    Moreover exemptions to liability for tax must be interpreted strictly (see Lubbock Fine & Co v Customs & Excise Commissioners (Case C-63/92) [1993] ECR I-6685).

  13. It is thus plain that the words "licence to occupy land" in the Act cannot go wider than the words "letting of immovable property" in the Directive. In the Lubbock Fine case at p 6691, Advocate General Darmon added as a footnote:

    In my view a letting for the purposes of Community law includes a lease, a licence, 'un bail' or a 'convention d'occupation prêcaire'.

  14. The European Court of Justice has given some indications, in particular factual situations, as to whether what was done there had the characteristics of a "letting".

  15. Thus, in Staatssecretaris van Financien v Coffee Shop Siberie (Case C-158/98 [1999] STC 742 where the question was whether renting out a space in a café for the sale of narcotic drugs fell within the Directive, though the issue under article 13B(b) of the Sixth Directive did not arise for a decision, Advocat General Fennelly said, at p 753, para 36:

    Suffice it to say that I would not, prima facie, be inclined to regard the renting of a table in a coffee shop as amounting to the letting of immovable property for the purposes of construing an express VAT exemption that must, in any case, be narrowly interpreted.

  16. In EC Commission v UK (C-359/97) [2000] STC 777, a case involving tolls for the use of toll roads and bridges, Advocate General Elber said, at p 791, para 74:

    There is no definition of this term [ie the leasing of immovable property] under Community law in the relevant legislation. To clarify its meaning we must, therefore, look at the context in which it is used, taking account of the general structure of the Sixth Directive.

  17. He continued in para 77:

    It is true that an identified area of space (the road travelled along) is made available to the user for an agreed period of time (the length of the journey) in exchange for payment. However, the characteristics of a lease do not predominate here, as the user's priority is to travel along a given stretch of road as quickly and as safely as possible. The use of the property, on the other hand, is of secondary importance.

  18. The court, in its judgment beginning at p 805, para 63 stressed that the exemptions "have their own independent meaning in Community law" so that they "must therefore be given a Community definition" and repeated that the terms of the exemptions must be construed strictly. The court added:

    65.

    In that regard, it must be observed that the wording of article 13B(b) of the Sixth Directive does not shed any light on the scope of the terms 'leasing or letting of immovable property'.

    66.

    The definition of 'letting of immovable property' under that provision is certainly wider in some respects than that enshrined in various national laws. For instance the article lists, in order to exclude it from the exemption, a contract for a hotel room ('the provisions of accommodation .... in the hotel sector'), which, in view of the overriding importance of the services provided by the hotelier and the control he retains over the use of the premises by patrons, is not considered, in some national laws, to be a contract to let.

    67.

    Leaving aside the specific cases expressly listed in article 13B(b) of the Sixth Directive, however, the term 'letting of immovable property' must be construed strictly. As pointed out in para. 64 of this judgment, it constitutes an exception to the general VAT rules contained in that directive.

    68.

    Accordingly, that term cannot be considered to cover contracts where, as here, the parties have not agreed on any duration for the right of enjoyment of the immovable property, which is an essential element of a contract to let.

    69.

    Where access to roads is provided, what interests the user is the possibility offered to him of making a particular journey rapidly and more safely. The duration of the use of the road is not a factor taken in to account by the parties, in particular in determining the price.

  19. In Swedish State v. Stockholm Lindopark AB (Case C-150/99) [2001] STC 103 a case which involved the use of a golf course, Advocate General Jacobs accepted that the court had not been called on to provide any comprehensive definition of the concept of leasing and letting of immovable property which itself was not defined in the Directive. He said however, at p 112, para 28, that the court had given

    one more general indication, namely that one essential element of a contract of leasing or letting is that the agreement between the parties should take account of the duration of the lessee's right to use the property, in particular with a view to determining the price paid.

  20. He again stressed the need for a Community definition and for a strict interpretation of the exemptions. He continued:

    30.

    Although it is for the national court to ascertain the precise nature of the transactions in question, I consider for at least two reasons that Lindopark's business, as it has been described to the court, did not fall within the concept of leasing or letting of immovable property.

    31.

    First, there is the general question whether the transaction should be regarded as the occupation of the immovable property or as the supply of services for which the property is an incidental, albeit essential, prerequisite.

    32.

    An example of that distinction might be provided by comparing the provision of accommodation in a hotel — which could be considered to fall within the Community definition of leasing and letting for these purposes on the ground that otherwise there would have been no need to exclude it from the exemption — with the provision of a meal in the hotel restaurant. Whereas the occupation of a hotel bedroom for one or more nights (or even for a shorter period) may well be classified as a let in various legal systems, this is unlikely ever to be the case for the consumption of a meal in the public dining room in the same hotel. In the case of the occupation of a bedroom, the dominant feature of the contract is the use of the premises, whereas in the case of the restaurant meal the dominant feature is the provision of the meal, no matter how important the décor or other facilities may be in the customer's choice of venue

  21. At p 113, para. 38, the Advocate General said:

    I would add, as salient and typical characteristics of a lease or let, that it necessarily involves the grant of some right to occupy the property as one's own and to exclude or admit others, a right which is, moreover, linked to a defined piece or area of property.

  22. At p 126, para. 26, of its judgment the court said:

    According to the case law of the Court of Justice, in order to determine the nature of a taxable transaction, regard must be had to all the circumstances in which the transaction in question takes place in order to identify its characteristic features.

  23. Most recently, in Customs & Excise Commissioners v Mirror Group Newspapers plc (Case C-409/98) in an opinion given on 23 January 2001, Advocate General Tizzano said:

    26.

    In my view, this idea that the characteristics of the lease or let must predominate in a contract in order for it to come within the exemption is highly irrelevant for our purposes. It would exclude from the exemption contracts which, while sharing a number of features with contracts of leasing and letting, are primarily concerned with the supply of services incidental to the occupation of the property ....

    27.

    In order to identify the key features of a contract, however, we must go beyond an abstract or purely formal analysis. It is necessary to find the contract's economic purpose, that is to say, the precise way in which performance satisfies the interests of the parties. In other words, we must identify the element which the legal traditions of various European countries term the cause of the contract and understand as the economic purpose, calculated to realise the parties' respective interests, lying at the heart of the contract. In the case of a lease, as noted above, this consists in the transfer by one party to another of an exclusive right to enjoy immovable property for an agreed period.

    ....

    29.

     

    That said, I would observe that the test under discussion is not without precedent in Community case law. As was seen, for example in Advocate General Elber's opinions in the road tolls cases, it was necessary to look to the 'chief purpose of the contract between the parties in order to ascertain whether the tolls were paid as consideration for the lease of the road surface or for a supply of services'. The court, too, in its judgments in those cases, regarded the purpose which a contract serves for the parties thereto as the decisive factor. As mentioned above, the court's conclusion turns on the fact that, in drawing up the terms of their contract, the parties gave no consideration to the duration of the right to use the immovable property.

  24. There is no doubt in the present case that the motivation of both parties in entering into the agreement was to sell as many cigarettes as possible. But that is not conclusive of the question whether to achieve that aim they have entered into an agreement which amounts to the letting of immovable property or a licence to occupy land. I accept that the agreement should not be categorised as two separate supplies. It is one major supply. I take the view that the essential purpose of this agreement was to enable SC to bring its machines into the club owner's premises and to have them there for two years unless the agreement was otherwise varied. Without the club owner's grant of such a right SC could not sell its cigarettes; permitting SC to sell cigarettes was consequential on the grant of the right to bring in the machines.

  25. The question remains whether that grant amounts to the letting of immovable property. For the purposes of domestic land law it may be that the grant of a right to put a machine on land as in the present case is not the leasing or letting of immovable property but it is important not to introduce particularities of domestic land law into the definition of that phrase, even though once it is defined it is for national courts to decide whether it is satisfied.

  26. The Value Added Tax legislation constitutes a special code in that code it seems tome that the "letting" of immovable property includes transactions which go beyond what are leases in the ordinary sense of the term. Whether the letting of immovable property within the Community meaning in the Directive necessarily involves the "occupation" of the land as opposed to its "use" may be debatable but even if it does, it seems to me that an agreement by which a machine may be fixed to a wall or put free-standing in a particular place in the club for a sustained period is capable of amounting to the occupation of a portion of the land. It is a right given to the exclusion of all others and an individual putting it there is occupying the land by the machine. This is quite different from sitting at a table to drink a cup of coffee or wander in or across a park or a golf course or from an usherette who walks round a cinema selling chocolates from a tray. This may to some extent be a question of fact and degree and I accept the distinction between owning a debenture or box at the Albert Hall or the Royal Opera House and merely taking a seat for one performance at a film.

  27. The fact that the machinery may under the contract be moved, even if this rarely happens, does not invalidate the conclusion that the exclusive occupation of a piece of land by a machine for a period can amount to the letting of immovable property. It merely means that concensually the land occupied has been varied.

  28. Nor do I think that the fact that payment is by a share of profits rather than by a rent fixed weekly or monthly prevents the service from falling within the exemption either as worded in the Directive or the Statute. The profits may vary from day to day but they will still be earned on a day to day basis whilst the machine occupies the space.

  29. The fact that the right to sell cigarettes is an exclusive right with a restrictive covenant against letting others bring in cigarettes is I agree important. But it is, as the judge held, a way of making the fact of the occupation of the land more valuable.

  30. Accordingly on balance I agree with the conclusion of the judge and the Court of Appeal. I recognise, however, that this is a debatable issue and that the European Court of Justice has not given a decision which as a matter of interpretation clearly prescribes or indicates what the answer must be. I therefore consider, though it is for your Lordship to decide whether there is one supply (Card Protection Plan Ltd v Customs & Excise Commissioners (Case C-349/96) [1999] 2 AC 601), that it is necessary in order to give judgment in this case, to refer pursuant to the third paragraph of article 234 of the EC Treaty to the European Court of Justice, the following question:

    Is the grant, by the owner of premises ("the Siteholder") to an owner of a cigarette vending machine, of the right to install, operate and maintain the machine in the premises for a period of two years, in a place nominated by the Siteholder, in return for a percentage of the gross profits of the sales of cigarettes and other tobacco goods in the premises, but with no other significant rights of possession or control than those set out in the written agreement between the parties, capable of amounting to the letting of immovable property within the meaning of Article 13B(b) of Council Directive No 77/388/EEC of 17th May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes; and what are the principles applicable in deciding whether an agreement amounts to the letting of immovable property within such meaning?

  31. I would accordingly adjourn final consideration of the issue in the case until the response of the European Court of Justice has been received.

    Lord Nicholls of Birkenhead

    My Lords,

  32. The first step in deciding the issue arising on this appeal is to identify the essential or dominant characteristic of the rights granted by the site owner to the tobacco company. Is this the right to sell cigarettes at the premises, the use of the vending machine being no more than an ancillary feature? Or is it the right to instal a cigarette vending machine on the premises, for the purpose of selling cigarettes?

  33. I prefer the latter characterisation of the transaction. The essence of this arrangement is, as the agreement provides, that the site owner grants to the tobacco company the 'right and licence to provide, install, operate and maintain' the machine at the premises. In return, the site owner receives the provision of a facility for his customers on his premises, together with the right to be paid a proportion of the gross profit of the cigarettes sold from the machine each month. Clearly, the purpose for which Sinclair Collis Ltd is permitted to instal the machine is to enable Sinclair Collis Ltd to sell cigarettes. That is its commercial objective. But the existence of this objective does not of itself resolve the question whether the means chosen to achieve that objective comprises a letting of immovable property. The commercial motivation is not determinative of the nature of the service supplied. For instance, if a hotelier permits a tobacco company to open a small shop or a tiny kiosk in the hotel foyer, the commercial objective is the same as with the installation of a vending machine. The tobacco company wishes to sell cigarettes, and the hotelier wishes to provide a facility for hotel guests, and to be paid for the opportunity he provides for the tobacco company. But in such a case, prima facie the transaction would fall within the letting of immovable property exemption.

  34. The next, and crucial, step is to decide whether the right to instal the vending machine constitutes a 'letting of immovable property'. The machine is sited on the site owner's premises. It occupies space on those premises. Moreover, unlike the motorist who drives along a toll road or over a toll bridge, or the golfer who plays round a golf course, the vending machine is located on the site 24 hours every day. The use made of the premises by the tobacco company is not intermittent. But those features are not conclusive. Occupation of space is a feature of every physical object. The grant of a right to occupy space by placing an object on the supplier's property is not conclusive even if the right is of some duration. If it were, a licence to place any object on the licensor's property would be within the exemption; for instance, permission to display a picture for sale on the walls of a picture gallery. That cannot be correct. Such a wide interpretation of the exemption would conflict with the established Community jurisprudence that exemptions are to be strictly construed.

  35. 'Leasing or letting of immovable property' in article 13B(b) of EC Directive 77/388/EEC (the Sixth Council Directive) is a Community concept. The concept has not been comprehensively defined in Community jurisprudence, but it does include what in English law is characterised as a licence to occupy land. In Sweden v Stockholm Lindopark AB (Case C-150/99) [2001] STC 103, 113, para 38, Advocate General Jacobs described the salient and typical characteristics of a lease or let. He said that it necessarily involves the grant of some right to 'occupy the property as one's own and to exclude or admit others, a right which is, moreover, linked to a defined piece or area of property'. With this description in mind, I think Mr Simpson, the chairman of the Manchester VAT and Duties Tribunal, hit the nail on the head. He observed that the real subject of the agreement is the machine and not the use or enjoyment of the land on which it stands or the airspace which it occupies for the time being. The parties wish to place the machine where it will maximise sales, preferably where customers will pass it. The machine will be placed where the site owner's staff can keep an eye on it and prevent vandalism and theft and the use of it by children. But subject to this, and to statutory fire and safety requirements, the position in which the machine is located does not much matter to either party. With all respect to the judge and the Court of Appeal, I agree with the chairman of the tribunal that, despite the static nature of the machines, such a licence is more naturally to be regarded as a licence to use land rather than a licence to occupy land.

  36. For these reasons, for my part I would allow this appeal. However, since the majority of your Lordships consider there is a point of principle on which the opinion of the European Court of Justice should be sought, I agree that a question should be referred accordingly.

    Lord Steyn

    My Lords,

  37. I have had the advantage of reading in draft the speech of Lord Slynn of Hadley. For the reasons he gives I would make the order which he proposes.

    Lord Millett

    My Lords,

  38. The company is a member of the Imperial Tobacco Group. It owns and operates coin-operated cigarette vending machines in public houses, clubs and hotels. For this purpose it enters into a standard form of agreement with site owners under which each site owner grants to the company

    1. the exclusive right "to provide, install, operate and maintain" machines for the sale of cigarettes at his premises and

    2. the exclusive right to supply him with cigars, cigarette papers and other tobacco products for retail sale by him. In return the company pays to the site owner a share of the profits from the sale of tobacco products.

  39. The question in this appeal is whether the supply which the site owner makes to the company falls within article 13B of the Sixth Council Directive as "the leasing or letting of immovable property", an expression which is transposed into domestic law as "a licence to occupy land" in Part II Group 1 of Schedule 9 to the Value Added Tax Act 1994. If it does, the supply is an exempt supply. The company contends that it is not an exempt supply; the commissioners contend that it is. This apparent paradox is due to the unusual circumstance that the company is not concerned in the proceedings as the taxpayer but is acting on behalf of the site owners. They are the relevant taxpayers; and what is in issue is not the company's liability to pay output tax on the supply of tobacco products, which is beyond dispute, but the deduction of input tax by the site owners.

  40. The European Court of Justice has consistently held that the exemptions contained in article 13 of the Directive are to be narrowly interpreted since they constitute exceptions to the general principle that VAT is to be charged on all services supplied by a taxable person for a consideration. It is common ground that the standard form of agreement between the site owner and the company does not constitute the grant of a lease. The question, therefore, is whether it constitutes "a letting of immovable property."

  41. This concept must be given a community interpretation but is not defined in the Directive. The recent case law of the European Court of Justice, however, provides some guidance to its meaning. The following propositions may be derived from recent decisions of the court:

    1. Agreement as to the duration of right of enjoyment of the immovable property is an essential element of a contract to let, and the duration of the right is a factor which the parties should take into account, in particular as a criterion for determining the price: (EC Commission v UK (Case 359/97) [2000] STC 777, p 805, paras 68 and 69 of the judgment of the court; and Sweden v Stockholm Lindopark AB (Case C-150/99) [2001] STC 103, 113, para 37 in the opinion of the Advocate General and p 126, para 27 in the judgment of the court.)

    2. It is a salient and typical characteristic of a letting of immovable property that it necessarily involves the grant of a right to occupy a defined area of property and to admit or exclude others: (Sweden v Stockholm Lindopark AB at pp 113 and 114, paras 38 and 40 of the opinion of the Advocate General; Commissioners of Customs & Excise v Mirror Group Newspapers plc (Case 409/98) (Unreported) at para 25 in the opinion of the Advocate General). (3) The characteristics of a letting must predominate in the contract. Where the use of the property is of secondary importance, this requirement is not satisfied. Accordingly the purpose of the contract and the importance of the use of the property to the recipient of the supply are relevant in determining whether the contract should be characterised as a letting of immovable property: (EC Commission v UK at p 791, paras 76 and 77 in the opinion of the Advocate General; Sweden v Stockholm Lindopark AB at p 126, para 26 in the judgment of the court; Faarborg-Gelting Linien A/S v Finanzamt Flensburg (Case 231/94) [1996] ECR 1-2395, 2411, para 12 in the judgment of the court).

  42. The VAT Tribunal held that the use or enjoyment of the land was of secondary importance to both parties, and that the real subject of the agreement was the machines and not the use or enjoyment of the land on which they stood for the time being. I agree with this assessment. I do not accept the contrary proposition that the company's right to sell cigarettes was merely a consequence of its right to place machines on the site owner's premises. That puts the case the wrong way round. The introduction of vending machines onto the premises was merely the means by which the parties achieved their joint objective of selling the company's cigarettes to the site owner's customers.

  43. On appeal the judge (Lightman J) and the Court of Appeal concentrated on the supply made by the site owner to the company and identified two elements:

    1. the right to instal, operate and maintain machines at the premises and

    2. a restrictive covenant not to allow competition in the sale of tobacco products at the premises.

    The parties had conceded that there was a single supply, and accordingly the question was which of the two elements was dominant. Understandably, and in agreement with the judge, the Court of Appeal held that the first was the dominant element. More doubtfully, perhaps, it held that the grant of the right to instal, operate and maintain machines constituted a letting of immovable property or a licence to occupy land. In reaching this conclusion the court was influenced primarily by the fact that each machine occupied the space where it was placed from time to time, and that its occupation of the space endured for the whole period of the agreement.

  44. I have reached the opposite conclusion. In my opinion the rights which the site owner grants to the company do not amount to a letting of immovable property or a licence to occupy land. The features of the agreements between the company and the site owners which lead me to this conclusion are these. Each agreement is described as containing, not the terms of a lease or letting of any defined part of the premises of the site owner, but the terms on which vending machines may be positioned on his premises. The premises in question are shortly described (by no more than an address) in a schedule to the agreement and a single agreement may provide for machines to be installed in several different premises belonging to the same site owner. There is no restriction on the number of machines which may be installed in any one premises. In the case of a public house, for example, it is not unlikely that one machine will be installed in the saloon bar and another in the public bar. The agreement does not mention the number of machines which it covers; this is a matter to be determined later by agreement between the site owner and the company.

  45. The agreement does not identify any defined areas, or even the rooms, where machines may be installed. The positioning of the machines (which are on wheels) is determined in the first instance by the site owner who is to select the sites most likely to generate the maximum sales; but he must not unreasonably refuse his consent to the selection of another site which the company considers to be more likely to generate maximum sales. The company, its employees and agents are given an express right of access to the machines at all reasonable times. The consideration payable by the company for the grant of these rights consists of a share of the gross profits of the products sold by the machines.

  46. Most importantly, in my opinion, while the machines remain the property of the company, it has no control over access to them. Once they are installed they are, like other fixtures and fittings on the premises, in the custody or possession of the site owner, who undertakes not to interfere with them and to take all reasonable steps to protect them from theft and vandalism. The company, its employees and agents, have merely rights of access to the machines to enable them to attend to, service, maintain and repair them. Even the stocking of the machines is carried out by the site owner. The company is responsible only for supplying the site owner with the necessary stock.

  47. In my opinion this is far removed from the letting of land. It would not be appropriate to describe the small and undefined parts of the premises on which machines are stationed at any given moment as constituting the subject matter of the agreement. The total area occupied by machines is dictated by their number and dimensions. The agreement is concerned with the installation and operation of income-producing machines, not with the use and occupation of the premises in which they are installed.

  48. As I have pointed out, each machine remains the property of the company but once installed it is in the custody and possession of the site owner. The floor under the machine is, of course, occupied by the machine, but it is impossible to describe the company as in occupation of this area. It cannot enter the area itself or admit others to do so without moving the machine, and since the subject matter of the alleged letting is the space occupied by the machine from time to time, this means that the company cannot itself enter the subject matter of the letting or admit others to do so at all. The site owner, by contrast, is in possession not only of the machine but of the floor underneath it. If he wishes to clean or renew the carpet he is free to do so and to move the machine temporarily for this purpose.

  49. The company cannot sensibly be described as occupying any part of the premises by its machine. Such a concept can hardly apply where the part of the premises in question has no independent existence of its own, being defined by the dimensions of the machine and its location from time to time. There is in my view no close analogy with a kiosk or shop counter which is capable of separate occupation by a lessee and his licensees. The agreement between the company and the site owner is not, in my view, an agreement for the letting of defined areas of land with a right to place machines on them, but a right to bring machines onto the site owner's premises and place them in suitable positions there. The site owner remains in sole occupation of the whole of his premises including the areas from time to time occupied by machines. The company for its part retains the property in the machines and has rights of access to them, but is given no right to occupy any part of the premises.

  50. I would allow the appeal and hold that the supply which the site owner makes to the company is not a letting of immovable property or a licence to occupy land and is accordingly not an exempt supply. I would not refer the case to the Court of Justice, not because I consider the outcome to be acte claire, but because I consider that the difficulty does not arise from the meaning of the Directive, but lies in the application of the Directive to the facts, which is a question for national courts. But your Lordships take a different view, and I agree that in those circumstances there should be a reference.

    Lord Scott of Foscote

    My Lords,

    THE LEGISLATION

  51. EC Directive 77/388/EEC (the Sixth Council Directive) provides under article 2 that the supply by a taxable person of goods or services for consideration attracts value added tax (VAT). The Directive provides for various exemptions to be granted. Article 13B(b) requires member states to exempt, among other transactions, "the leasing or letting of immovable property".

  52. The article 13B(b) exemption from VAT is subject to a number of permitted exclusions. These exclusions, ie transactions which member states can exclude from the exemption and which, therefore, may attract VAT, include, among other things, the provision of hotel accommodation, the letting of sites for parking vehicles, and the hire of safes.

  53. In order to implement the provisions of the Sixth Council Directive, the Value Added Tax Act 1994 was enacted. Section 1(1) provides, so far as relevant to this appeal, that:

    Value added tax shall be charged, in accordance with the provisions of this Act—

    (a)  

    on the supply of goods or services in the United Kingdom (including anything treated as such a supply) ....

    Section 5(2)(b) provides that:

    .... anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.

  54. Part II of Schedule 9 to the Act sets out the exemptions from VAT foreshadowed by article 13B of the Directive. Paragraph 1 of Schedule 9 specifies:

    The grant of any interest in or right over land or of any licence to occupy land ....

    This is, plainly, intended to reflect the reference in article 13B(b) to "the leasing or letting of immovable property".

  55. The exclusions from the paragraph 1 exemption are set out in a number of sub-paragraphs to paragraph 1. The content of these is of some assistance in indicating what Parliament had in mind in exempting "any licence to occupy land". The exclusions, more or less mirroring the exclusions referred to in article 13B(b), include:

    (d)

    the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation ....

    ....

    (h)

     

    the grant of facilities for parking a vehicle,

    (i)

    the grant of any right to occupy a box, seat or other accommodation at a sports ground, theatre, concert hall or other place of entertainment.

  56. So it seems that Parliament thought that taking a room for a night in a hotel, or reserving car parking space, or taking a seat at a theatre, sports ground etc would, or at least might, be regarded as involving the grant of a licence to occupy land.

  57. It is common ground that the 1994 Act must be construed, so far as possible, consistently with the Sixth Council Directive, the provisions of which it was enacted to implement. It is common ground, also, that the terms used to specify the exemptions provided for by article 13B, and, accordingly, the terms of the exemption in paragraph 1 of Part II of Schedule 9 to the 1994 Act, are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person (see EC Commission v UK (Case C-359/97) [2000] STC 777, 789, para 63).

  58. The issue arising on this appeal is as to the width to be given to the words "any licence to occupy land ...." The explanation for their inclusion in the paragraph 1 exemption is that the English law concept of a "letting" or a "leasing" as necessarily involving the grant of an interest in rem in land is not reflected in the legal systems of most of our Community partners. The words were included in order to try and achieve consistency across the Community and to implement, using English law terminology, the article 13B exemption relating to "the leasing or letting of immovable property". It follows, in my opinion, that the words should not be construed so as to include the grant of rights that would not, for the purposes of the Directive, constitute "the leasing or letting of immovable property".

  59. The facts of the case are not in dispute.

  60. The appellant before the House, appellant also in the Court of Appeal, is a member of the Imperial Tobacco Group. It sells cigarettes through coin-operated vending machines placed in public houses, hotels, clubs and leisure centres. The cigarette machines, which may be free standing or fixed to a wall, are installed with the permission of the proprietor of the premises in question. The terms on which the permission is granted are set out in a written agreement. The written agreements entered into by the appellant in respect of the various premises where its machines are installed differ in detail but all have broadly the same legal effect. The material terms of these agreements are conveniently set out in the judgment of Ward LJ: [1999] STC 701. The important features of these terms are, for present purposes, the following:

    1. The owner of the machine, ie the appellant, is given the right "to provide, install, operate and maintain the machine at the premises of the siteholder".

    2. The siteholder nominates where the machine is to be placed. He must select the site "most likely to generate the maximum sales" of cigarettes.

    3. In return for allowing the machine to be placed in the premises, the siteholder receives a proportion (40% in the present case) of the gross takings of the machine.

    4. The appellant is responsible for installing and maintaining it and for keeping it stocked with cigarettes.

    5. The machine, the cigarettes inside it and all cash inside it are the property of the appellant and the siteholder is required to allow the appellant access to the machine at all reasonable times.

    6. The siteholder agrees not to interfere with the machine and to take all reasonable steps to protect it.

    7. The right granted is an exclusive one. No rival machines dispensing similar products are to be installed on the premises.

    8. It is expressly agreed that nothing in the agreement should be taken to grant the appellant any interest in the premises other than a licence.

  61. The issue in the case is whether an agreement containing the terms I have described confers on the appellant a "licence to occupy land ...." within the meaning of those words in paragraph 1 of Part II of Schedule 9 to the 1994 Act. If the agreement does confer a "licence to occupy land" then the "supply of services" which the agreement constitutes under section 5(2)(b) of the Act is exempt from VAT. Surprisingly, to me at least, it is the commissioners who are arguing that the supply is exempt, and the appellant who is arguing, for the benefit as I understand it, of the siteholder, the proprietor of the premises, that the supply attracts VAT. I need not explain why it is that these stances have been adopted. It suffices to say that there are, apparently, substantial commercial reasons for them.

  62. Both the courts below found in favour of the commissioners and held that the agreement did grant a licence to occupy land. Lightman J, who reversed the Manchester VAT and Duties Tribunal, posed what he described as "the critical question, namely what upon the true construction of the agreement is the siteholder agreeing to supply?" [1998] STC 841, 848. He said: "The answer is clear; it is a licence to keep a machine on the site and it is in return for that licence that [Sinclair Collis Ltd] has agreed to pay over a share of the profits". He reformulated his answer later in his judgment, at p 849: "The answer .... is clear, namely a licence to occupy land together with certain ancillary or incidental rights". So he held the supply to be exempt.

  63. The Court of Appeal agreed. Ward LJ posed broadly the same "critical question" as Lightman J had done. He asked [1999] STC 701, 706:

    .... what was the siteholder supplying in consideration of taking a share in the profits of cigarette sales?

    His answer, expressed in paragraph 4 of his judgment, was that

    .... there are two promises exacted from the siteholder in consideration of his taking a share of the proceeds of the sales of the cigarettes, namely

    (i)

    permitting the machine to be provided, installed, operated and maintained at the premises and

    (ii)

    granting a restrictive covenant not to allow competition at the premises thus ensuring exclusivity for the company's products.

  64. This breakdown of the contractual advantages obtained by the appellant into two separate promises led to a discussion as to which of the two was dominant. Ward LJ concluded, at p 708, as I would conclude, that the restrictive covenant was "merely ancillary to or an integral part of the grant to place the machine on the premises".

  65. His conclusion on the question whether a licence to place a cigarette vending machine in a public house was a "licence to occupy land" was expressed in paragraph 9 of his judgment. He said, at pp 709-710:

    A licence to install the machine and operate it at the premises clearly is a licence .... to place the machine on or annex it to the premises. It remains there, ie it occupies its allotted space, for a term of two years .... [The] more important point is that it occupies the place where it was or even where it has from time to time been placed, and that the occupation of that space endures for the term of the agreement .... [Because] the machine was taking up its space on the premises it was occupying the land it stood on or was annexed to. Accordingly the grant of the licence to do so falls within Part II of Group 1 of Schedule 9 to the Act and is thus exempt ....

  66. I respectfully agree with Ward LJ that the first question is "what was the siteholder supplying in consideration of taking a share in the profits of cigarette sales". I agree, also, that it would be unacceptably artificial to split up this fairly simple agreement into two parts in order to try to apportion part of the consideration to an exempt supply and part to a non-exempt supply. And I agree that, taken as a whole, this agreement should be regarded as entered into for the purpose of enabling the appellant to place a vending machine in the siteholder's premises. It is an agreement for the grant of a licence (see British Airports Authority v Customs & Excise Commissioners [1977] STC 36). But is the licence a "licence to occupy land" within the meaning of those words in the 1994 Act?

  67. It is clear as a matter of common sense as well as of authority that not all licences that transform a use of the land of another from what would otherwise have been trespass into a lawful use are to be regarded as licences to occupy land. The commissioners accept, rightly in my view, that the grant of a right to place advertisements or posters on a wall is not the grant of a licence to occupy land for VAT purposes. In Staatssecretaris van Financien v Coffeeshop 'Siberie' (Case C-158/98) [1999] STC 742 the European Court held that the hiring out of a table in a coffeeshop from which the customer could make sales of narcotics to members of the public was a supply of services that attracted VAT. There was no suggestion that the hiring of the table might fall within the article 13B(b) exemption as a "leasing or letting of immovable property". For our domestic law purposes the hiring of the table would constitute a grant of a licence but, in my opinion, plainly not a "licence to occupy land".

  68. In my opinion, in order for an agreement to confer a "licence to occupy" for VAT exemption purposes, the relationship between the licensee and the land must be such as to fall within the concept of occupation. "Occupation" may, of course, have different meanings in different contexts. For present purposes, however, if the occupation is to attract VAT, it needs a quality that allows it to constitute a "leasing or letting" of the land within the meaning of those words in the Directive. The characteristics of "leasing or letting" must be present. In EC Commission v UK (Case C-359/97) [2000] STC 777,804, para 59, the European Court said:

    A wide interpretation of the concept of letting under article 13B(b) of the Sixth Directive is supported by the fact that it can be inferred from the list of exclusions from the scope of the exemption provided for by that article that transactions as short-lived as the use of a hotel room for a single night or the letting of sites for parking vehicles fall prima facie within the definition of leasing or letting.

    and, in paragraph 61, that

    .... the terms 'leasing' and 'letting' as used in article 13B(b) .... do not imply a right of exclusive occupation or a fixed duration for the right to use the goods in question. Any other interpretation is incompatible with article 13B(b)(2) .... from which it is clear that the letting of sites for parking vehicles is prima facie leasing or letting within the meaning of that provision. A contract of that type does not imply exclusive use of the car park or even of a particular space in the car park.

  69. But the court went on to emphasise, at p 805, para 64, as had been stated in a number of previous cases, that:

    .... the terms used to specify the exemptions provided for by article 13 of the Sixth Directive are to be interpreted strictly since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person.

    and, expressly, that (at para 67):

    .... the term "letting of immovable property" must be construed strictly.

  70. Having made the remarks which I have cited, the European Court concluded, at para 68, that the term "letting of immovable property"

    .... cannot be considered to cover contracts where, as here, the parties have not agreed on any duration for the right of enjoyment of the immovable property, which is an essential element of a contract to let.

  71. The cited passages from the European Court's judgment in EC Commission v UK [2000] STC 777 may lend themselves to some misinterpretation. The exclusions from the article 13B(b) exemption show a clear and unequivocal intention on the part of the Council that transactions falling within an excluded category should fall outside the VAT exemption. But the exclusions cannot reasonably be supposed to indicate the opinion of the Council that every transaction falling within an exclusion would, had it not been for the exclusion, have fallen within the exemption. The exclusions certainly do show that transactions of the sort described are capable of falling within the exemption, and that it is the intention of the Council that they should not do so. So it is not necessary to ask whether a contract under which a person who takes a bedroom in a hotel is a contract of "letting of immovable property". It might or might not be. The answer would depend on the facts. A contract under which a room were taken for a week might well constitute a letting. A contract under which a room were taken for half an hour so that a man might consort with a lady would, I suggest, be very unlikely to be held to do so. A contract for parking space might entitle the grantee to the exclusive use of a specified parking space. Or it might do no more than entitle him, together with others to whom a similar right had been granted, to enter upon a piece of land and park wherever he could find space to do so. The former might constitute a "letting". The latter arrangement could not possibly be held to do so. In my opinion, the categories of exclusion in article 13B(b) and, for the same reasons, the categories of exclusion in paragraph 1 of Part II of Schedule 9 to the 1994 Act, do no more than indicate types of transaction capable of constituting a "letting" for the purposes of the Directive or of a "licence to occupy" for the purposes of the 1994 Act. Whether, in any particular case, the transaction would, had it not fallen within one of the excluded categories, have fallen within the exemption would have depended on the facts of the particular case. EC Commission v UK [2000] STC 777 is not, in my opinion, any warrant for treating as a "letting" or as a "licence to occupy" a transaction which would not ordinarily justify being so described.

  72. Whether, in a particular case, a contract conferring a licence over land creates a relationship between the licensee and the land that can be described for VAT purposes as "occupation" is, in my opinion, a question of fact and degree. The same must, in my opinion, be true of a "letting" for the purposes of article 13B(b) of the Directive.

  73. So what are the characteristics that distinguish a licence to occupy from a mere licence to use? There are, in my opinion, two characteristics, one or other of which must, in some sufficient degree, be present. One is possession. The other is control. If neither is present, I find it difficult to understand how the licensee could be said to "occupy".

  74. There is some assistance to be gained from authority. In R v St Pancras Assessment Committee (1877) 2 QBD 581, 588, Lush J said:

    Occupation includes possession as its primary element ....

    And in Newcastle City Council v Royal Newcastle Hospital [1959] AC 248, 255, Lord Denning said:

    Occupation is matter of fact and only exists where there is sufficient measure of control to prevent strangers from interfering ....

    These two elements, possession and control, seem to me to be the important ingredients of a relationship between an individual and land apt to be described as "occupation". A "licence to occupy" is, in my opinion, to be read as meaning a licence to go into possession, not necessarily exclusive possession, or to go on to the land and take some degree of control of it. If neither of these features is present, the licence cannot, in my opinion, properly be described as a licence to occupy.

  75. Accordingly, a person entitled to place an advertisement on a wall cannot, in any meaningful sense, be described as being in occupation of the space occupied by the advertisement. The commissioners' practice in regard to advertisements is, in my opinion, correct. It is not concessionary. It is a recognition that the right granted is not a "letting" of land and that the exercise of it does not involve the occupation of land. For the same reasons the grant of a right for a salesperson with a tray suspended from his or her neck to wander around a public house or the foyer of a theatre offering for sale the contents of the tray would not constitute the grant of a licence to occupy. There would be no part of the premises of which the salesperson could be said to be in possession or control or, therefore, in occupation. Nor, in my opinion, would the result be any different if the salesperson were obliged under the agreement to be stationed in a specific corner of the premises. There would still be nothing that could reasonably be thought to constitute "occupation" or a "letting" of land.

  76. On the other hand, the grant of a licence to set up and maintain a stall or a kiosk in some defined area of the premises in order for a salesperson to sell some product or other from the stall or kiosk might create in the licensee something that could be called "occupation". There might well be a sufficient degree of control of the area in question.

  77. So how is the right to install and maintain a vending machine under the terms of such an agreement as this case involves to be regarded? A "licence to occupy" is something to be enjoyed by persons, whether natural or corporate. It is people or companies who must be in possession or exercise control, not inanimate objects like tables, kiosks, cars or vending machines. A right, for example, to use a safe deposit box at a bank does not grant the customer a "licence to occupy" the safe deposit box. It is the bank that is in possession and control of the whole of its premises, including the space taken up by the box. The customer has no more than a right to put things in the box and is not, in any meaningful sense, in occupation of the space taken up by the box.

  78. On the facts of the present case, I do not regard the relationship between the appellant and the space occupied by its vending machine as falling within the concept of "occupation". This is because, first, the owner of the premises remains in possession and control of the whole of the room in which the vending machine is placed. The appellant has the right to enter the premises to maintain and re-stock the vending machine but he needs the co-operation of the owner to exercise that right. A clear indication that it is the owner who is in control of the premises is that the owner is placed under a contractual obligation to take reasonable steps to protect the machine.

  79. Second, it seems to me unnatural to treat the room in which the vending machine is installed as being partly occupied by the owner and partly occupied by the appellant. In common sense and commercial terms the owner remains in occupation of the whole of the room.

  80. For these reasons I would allow the appeal and restore the order of the tribunal. However, since there is uncertainty as to what breadth of meaning should be ascribed to "letting" in Article 13B(b), and, in particular, uncertainty as to whether there can be a "letting" where the rights granted over the land entitle the grantee to place an object on the land for commercial purposes but give no other significant rights of possession or control, I think there should be a reference to the European Court.


Cases

Wolverhampton and Dudley Breweries plc v Customs and Excise Commissioners [1990] VATTR 131; British Airports Authority v Customs and Excise Commissioners [1977] STC 36; Lubbock Fine & Co v Customs and Excise Commissioners (Case C-63/92) [1993] ECR I-6685; Staatssecretaris van Financien v Coffee Shop Siberie (Case C-158/98 [1999] STC 742; EC Commission v UK (C-359/97) [2000] STC 777; Swedish State v. Stockholm Lindopark AB (Case C-150/99) [2001] STC 103; Customs & Excise Commissioners v Mirror Group Newspapers plc (Case C-409/98), unreported; Card Protection Plan Ltd v Customs and Excise Commissioners (Case C-349/96) [1999] 2 AC 601; Sweden v Stockholm Lindopark AB (Case C-150/99) [2001] STC 103; Faarborg-Gelting Linien A/S v Finanzamt Flensburg (Case 231/94) [1996] ECR 1-2395; British Airports Authority v Customs & Excise Commissioners [1977] STC 36; R v St Pancras Assessment Committee (1877) 2 QBD 581; Newcastle City Council v Royal Newcastle Hospital [1959] AC 248

Legislations

United Kingdom

Value Added Tax Act 1994, s.31, Sch. 9

European Community

Council Directive 77/388/EEC, Art 13(B)(b)


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