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TMI Blog1995 (11) TMI 434X X X X Extracts X X X X X X X X Extracts X X X X ..... , too, would allow the appeal and vary the order as proposed. LORD HOFFMANN. My Lords, Robert Gordon's College is an independent school in Aberdeen. It carries on the business of providing educational services. In 1990-91 it constructed new playing fields and ancillary buildings on land near the college at Countesswells. The charges made by the contractors for their services and materials were subject to value added tax. A person carrying on a business is ordinarily entitled to deduct the tax on goods or services supplied to him for the purposes of his business ("input tax") from the tax payable on the goods or services which he supplies ("output tax"). But the services supplied by the college were educational and therefore exempt: see item 1 in Group 6 of Schedule 6 to the Value Added Tax Act 1983. Consequently, the college's ordinary business had no output tax from which the tax on the cost of the works could be deducted. It was in the same position as a consumer, who has to bear the accumulated tax charged at each stage of the chain of transactions which ends in the supply of goods or services to him. The college therefore entered into a transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Communities v. United Kingdom (Case 416/85) [1990] 2 QB 130, 149C-H the Court of Justice decided that zero-rating of the construction of dwelling houses satisfied these criteria but not the construction of other buildings and works. Parliament was therefore obliged to amend the law to comply with the Directive as construed by the court. The Finance Act 1989 confined zero-rating to the construction of buildings designed as dwellings or intended to be used solely for residential or certain charitable purposes. Likewise, the sale by the builder of the freehold or a long lease in such buildings remained zero-rated: see Group 8 of Schedule 5 to the Act of 1983, as substituted by section 18 of, and paragraph 1 of Schedule 3 to, the Finance Act 1989. The supply of services and materials for the construction of other buildings became subject to tax at the standard rate. Hence the charge upon the construction of the new playing fields for the college. In the case of dealings in land, however, the new provisions were rather more complicated. The grant of a fee simple in new building or buildings under construction or new civil engineering works was made subject to tax at the standard rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pute about the effect of the transactions between the college and Countesswells. The Commissioners say, however, that a further charge to tax upon the college was triggered when, after the grant of lease and licence, the college began to use the playing fields for its educational purposes. It says that when that event took place, the effect of paragraphs 5 and 6 of Schedule 6A is that the college was deemed to have supplied itself with its interest in the land and buildings for the purposes of its business. This meant that tax was payable upon the whole value of the land and buildings and, since the business for which the supply was deemed to have been made was educational, no input tax would thereafter be deductible. The relevant parts of paragraphs 5 and 6 provides: "5(1) Paragraph 6 below shall apply on the first occasion during the period beginning with the day when the construction of a building or work within sub-paragraph (2) below is first planned and ending 10 years after the completion of the building or work on which a person who is a developer in relation to the building or work--(a) grants an interest in, right over or licence to occupy the building or work (o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able supply and the value of the supply shall be the aggregate of-- (a) the value of grants relating to the land on which the building or work is constructed made or to be made to the developer, other than any grants to be made for consideration in the form of rent the value of which cannot be ascertained by the developer when the supply is treated as made; and (b) the value of all the taxable supplies of goods and services, other than any that are zero-rated, made or to be made for or in connection with the construction of the building or work." The purpose of this "self-supply" charge was to prevent the new charge upon non-domestic construction from distorting the market in land and buildings. If the construction and sale of new buildings was brought into tax without also taxing the sale of building land, it would be cheaper to buy the land (free of tax) and construct the building oneself, rather than to buy the land with the building and pay tax upon the value of the whole. On the other hand, one could not easily say, before any building had been erected, whether a particular piece of land was destined for housing use (and should therefore be zero-rated) or comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who buys the land with the building from someone else. But the college had not built for its own use. It had built to grant a fully taxable lease to Countesswells. Its use was not as developer but as licensee. The value added tax tribunal accepted this argument but the Court of Session [1994] S.T.C. 698 rejected it. In so doing, it placed considerable weight upon paragraph 5(3)(b), which excludes the self-supply charge if "a grant of the fee simple" in circumstances which would attract a standard rate charge had been made before the use of the works by the developer. The implication was that the grant of any interest less than the fee simple would not exclude the self-supply charge if there was a subsequent use by the developer within the 10-year period. In your Lordships' House Mr. Milne, who appeared for the college, accepted that according to the usual principles of construction applied in the United Kingdom, the Court of Session was right. It is therefore, unnecessary to express any opinion on the point. But Mr. Milne submitted that a provision having such an effect was outside the scope article 5(7)(a) of the Sixth Directive. It is common ground that the Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be no room for a self-supply charge within the terms of the Sixth Directive. The hypothesis could not apply. In the Court of Session the Lord Justice Clerk, Lord Ross, dealt with this problem by going back up the chain of supply and taking into account the fact that the college had originally developed the land and then granted the lease of Countesswells. He said [1994] S.T.C. 698, 706C, that the question of input tax had to be looked at "against the totality of the transactions involving the development" and, at p. 706E, that it was "appropriate to look not merely at the situation which arose when the self-supply provisions were activated but at the whole events commencing with the development by the college of the playing field facilities." At the time of his interlocutor, the Lord Justice Clerk did not have the benefit of the judgment of the Court of Justice in B.L.P. Group Plc. v. Customs and Excise Commissioners [1996] 1 WLR 174, which was not delivered until some nine months later. But that decision makes it clear that for the purposes of European value added tax legislation, it is not permissible to take a global view of a series of transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Directive itself could not be applied since Directives do not have horizontal effect. This is a dispute between the taxpayer and the commissioners, in which it is conceded that if there is inconsistency between the Directive and Schedule 6A, the Directive must prevail. I delivered until some nine months later. But that decision makes it clear that for the purposes of European value added tax legislation, it is not permissible to take a global view of a series of transactions in the chain of supply. In considering whether or not the college used the land as a service supplied by a third party, it is irrelevant that it had developed the land at an earlier stage. Lord Penrose, on the other hand, seems at this point in his interlocutor to have concentrated on the lease by the college to Countesswells and to have held that value added tax on the construction work would not have been fully deductible because the "college had the character of exempt supplier " at the relevant date: see pp. 715-716. It is true that the college did make exempt supplies, but the whole of the expenditure on the works was attributable to the taxable supply to Countesswells and the input ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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