[2009] UKFTT 102 (TC)

TC00070
Appeal number: LON/2008/1096

 ZERO-RATING – whether grants of leases of parking spaces were sufficiently closely linked with grants of leases of residential apartments – single economic transaction - no

FIRST-TIER TRIBUNAL

TAX 

	CIVILSCENT LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

		
Tribunal:	ROGER BERNER	(Judge)	
	JOHN BROWN CBE FCA CTA	(Member)	

Sitting in public in London on 22 April 2009

Alison Sampson, VAT Consultant, Mazars LLP for the Appellant
Richard Smith, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This is an appeal of Civilscent Limited against a decision (contained in a Decision Letter of 19 February 2007) that Cable Street Regeneration Limited (“Cable Street”), a member of the VAT group of which Civilscent Limited is the representative member, had made taxable supplies of certain car parking spaces.  Assessments pursuant to section 73 of the Value Added Tax Act 1994 (“VATA”) forming the subject of this appeal were raised in February 2008 and November 2008 and total £18,019.
The Evidence
2.	Oral evidence was given on behalf of the Appellant by Mr Paul Wright, the Group Finance Director of the Rydon Group, of which both Civilscent Limited and Cable Street are members.  No oral evidence was given on behalf of HMRC.  We also received in evidence an agreed bundle of documents.
The Issue
3.	The issue before the Tribunal is whether, in the circumstances of this case, the grants by Cable Street of leases of certain parking spaces (“the parking space leases”) are standard rated or zero-rated supplies for VAT purposes.  It was not argued that the supplies should be exempt.  The Appellant contends that the supplies made by Cable Street were closely linked to grants of leases of residential apartments (“the apartment leases”), which were themselves (and it is accepted) zero-rated supplies, and that accordingly the grants of the parking space leases should also be zero-rated supplies.  HMRC argue that the grants of the parking space leases are standard rated supplies.
The Facts 
4.	The facts are not in dispute.  As part of the Cable Street Urban Regeneration Scheme three blocks of apartments at Devonport Street, London E1 were built by and on behalf of Cable Street.  These three blocks comprised 97 apartments in all.  The apartments were marketed and long leases were granted by Cable Street to tenants in late 2005 and early to mid 2006.  Each apartment lease (we refer to leases here, although the legal form was in each case an underlease) was granted for a term of 125 years less 10 days commencing on 25 March 2004.
5.	Planning permission for the development was granted by the local authority, Tower Hamlets Council, on 10 July 2003.  One of the conditions of that permission was that the whole of the vehicle parking accommodation that was shown on the approved drawings was to be provided and retained permanently for the accommodation of vehicles of the occupiers of residential accommodation in the development unless otherwise agreed in writing by the local planning authority.  The reason for this condition was to ensure the permanent retention of the space for parking purposes only and in consequence to ensure that the use of the apartments did not add to traffic congestion.  No on street parking permits were to be made available to occupiers of the apartments.
6.	The original plan had been for 56 parking spaces to be provided on land attached to the development.  Even at that number there would have been insufficient parking spaces to allocate one per apartment.  Prospective tenants were advised only that limited parking would be available.  In the event, through circumstances outside the control of Cable Street, and which are not material to our decision, it was possible to provide only 22 parking spaces.  Of these, only 11 were available at such a time that leases of those parking spaces were granted at the same time as the leases of the apartments to which those spaces had been allocated.  There is no dispute that these contemporaneous grants of parking space leases were properly zero-rated.
7.	Eleven of the 22 parking spaces were not available in time for leases of those parking spaces to be granted at the same time as apartment leases.  A letter was sent to tenants of the apartments on 22 June 2006 informing them of a proposed sale of some or all of the then available spaces.  As the number of available spaces was limited the letter requested at that stage only an indication of interest in buying a space, at a cost at that time said to be in the region of £20,000 per space, and stated that in the event of over-subscription names would be drawn randomly with preference being given to the owners of two-bedroomed apartments in the first instance.  In his evidence Mr Wright explained that this method of allocation would have also been adopted had there been no delays or difficulties and if all the parking spaces had been available to be leased to tenants of the apartments at the same time as the apartment leases.  Some form of allocation would have been needed in any event.
8.	Leases of the 11 parking spaces that were not granted at the same time as apartment leases were granted to existing tenants of apartments on the development on dates between January 2007 and August 2007.  In the case of these leases the gap between the grant of the apartment lease and the grant of the parking space lease was between 10 and 20 months.
9.	All the leases of the parking spaces were identical, whether granted at the same time as the grant of an apartment lease or later than the grant of the relevant apartment lease.  The parking space lease was, like the apartment lease, an underlease and had a term of 125 years less 10 days commencing on 25 March 2004, co-extensive with the apartment lease granted to the same tenant.  The parking space lease contained the following covenant on the part of the tenant:
“not to assign or part with possession of the Parking Space as a whole save to a person or persons that is then a Lessee of a flat in the Development and subject to the Landlord’s written consent (the consent not to be unreasonably withheld…)”
10.	The reference in the parking space lease to the Development referred to the three blocks of apartments built by Cable Street.
11.	In the cases where parking space leases were granted at the same time as the apartment leases the contract for the sale and purchase of the apartment referred to the property to be sold as including both the apartment and the parking space.  A single global purchase price was payable for the apartment and the parking space and on completion a nominal £1 was allocated to the grant of the parking space lease.  The sale and purchase contract for an apartment where there was no contemporaneous grant of a parking space lease did not contain any reference to a parking space.  On the subsequent grant of the parking space leases to certain tenants of apartments a premium of £11,000 per lease was paid, which was lower than the indicative price of £20,000 referred to in the letter of 22 June 2006.
The Law
12.	It is common ground that if zero-rating does not apply in the case of the non-contemporaneous grants of the parking space leases, those grants will be standard rated supplies.  We are therefore concerned in this appeal with the following provisions of the VATA that provide for zero-rating.
13.	Section 30 VATA provides:
(1) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section –
(a) no VAT shall be charged on the supply; but
(b) it shall in all other respects be treated as a taxable supply;
and accordingly the rate at which VAT is treated as charged on the supply shall be nil.
(2) A supply of goods or services is zero-rated by virtue of  this subsection if the goods or services are of a description for the time being specified in Schedule 8…
14.	Group 5 of Schedule 8 VATA specifies the following supplies as being zero-rated at Item 1:
The first grant by a person –
(a) constructing a building –
(i)designed as a dwelling or number of dwellings; or
(ii) intended for use solely for a relevant residential purpose or a relevant charitable purpose; or
(b)converting a non-residential building or a non-residential part of a building into a building designed as a dwelling or number of dwellings or a building intended for use solely for a relevant residential purpose;
of a major interest in, or in any part of, the building, dwelling or its site.
15.	A “major interest” is defined in section 96(1) VATA as follows:
“‘major interest’, in relation to land, means the fee simple or a tenancy for a term certain exceeding 21 years…” 
Discussion
16.	At the outset we should say that in the course of argument we were referred to a number of HMRC publications setting out guidance directed at the VAT treatment of parking facilities associated with dwellings.  However, we do not regard statements in publications of this nature as relevant to our decision, which must be based solely on the law as we find it.  We have therefore disregarded those publications.
17.	Both Mrs Sampson and Mr Smith referred us to the ECJ case of  Skatterministeriet v Henriksen (Case 173/88) reported at [1990] STC 768.  That case concerned blocks of garages that were erected in conjunction with a building development of houses.  Some of the garages were let to residents of that development and others to neighbouring residents.  One of the questions considered by the Court of Justice concerned the extent to which lettings of places designed to be used for parking vehicles were exempt from VAT under Article 13B of EC Council Directive 77/388 of 17 May 1977 (“the Sixth Directive”) (now Article 135(1) of the Principal VAT Directive 2006/112/EC).
18.	Article 13B of the Sixth Directive provides as follows:
“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 immoveable property excluding…2. the letting of premises and sites for parking vehicles…”
19.	Article 13B relates to exemption.  By contrast zero-rating is a creature of domestic law, permitted as a transitional measure by Article 28(2) of the Sixth Directive if it applied on 1 January 1991.  Nevertheless, we consider that the scope of the domestic UK zero-rating provision as regards the grant of the leases of parking places in this case is governed by the principles of EU law as applied in Henriksen to the analogous exemption, and the appeal was argued before us by both sides on that basis.
20.	We now turn to the judgment of the Court of Justice in Henriksen.  Because of their significance we think it is right that we should set out in full paragraphs 14 to 16 of that judgment:
“14. However it should be pointed out that the phrase ‘leasing or letting of immoveable property’, which is the subject of the exemption laid down in art 13B(b) of the Sixth Directive, necessarily also encompasses, in addition to the letting of the property which is the principal subject to the transaction, the letting of all property which is accessory to it.
15. Thus, the letting of premises and sites for parking vehicles cannot be excluded from the exemption where the letting thereof is closely linked to the letting of immoveable property to be used for another purpose, such as residential or commercial property, which is itself exempt, so that the two lettings constitute a single economic transaction.
16. That is so, on the one hand, if the parking place and the immoveable property to be used for another purpose are part of a single complex and, on the other, if both properties are let to the tenant by the same landlord.”
21.	In relation to paragraph 15 of Henriksen Mrs Sampson argued that it was not a separate condition of the exemption (and so, by extension to this case, the zero-rating) that there be a single economic transaction.  What paragraph 15 says, she argued, is that if the leasing of a parking space is closely linked to the leasing of an apartment then the two are thereby to be regarded as a single economic transaction.  We do not agree.  We consider that the proper analysis of paragraph 15 is that the degree of linkage must be sufficient that there is a single economic transaction: the link must be close enough to satisfy that requirement.
22.	It was not argued that paragraph 16 of Henriksen has the effect that if either the parking place and the apartment are part of the same complex, or the parking place and the apartment are let to the tenant by the same landlord then the close link is automatically satisfied.  We consider that paragraph 16 is merely setting out circumstances in which the test set out in paragraph 15 might be applied.  In each case, therefore, for zero-rating to apply there must be a sufficiently close link between the grants of the parking space lease and the apartment lease to constitute the two grants a single economic transaction.
23.	Mr Smith referred us to the report of the Judge Rapporteur (M Zuleeg) in Henriksen, in particular to the following passage:
“In this case, it is reasonable to interpret Article 13B(b) in such a way as to conclude that the separate taxation of income from garages or parking places made available to the tenants of immovable property when the place in the garage is merely accessory to the purpose of the lease so-called.  Thus, value added tax should be levied in respect of parking spaces or garages only when a separate price is specified for the letting thereof.  On the other hand, when the letting of a garage is an integral part of a letting of immovable property exempt from value added tax, without a separate price being fixed for it in the lease, it comes within the scope of the exemption provided for in respect of the letting of immovable property.”
24.	Whilst not arguing in this case that the existence of a separate price for the grant of the non-contemporaneous parking space leases should determine the supply to be standard rated, Mr Smith submitted that the report of the Judge Rapporteur envisaged that, to qualify for zero-rating the grants of the leases of the parking spaces would need to have been at the same time.  He argued that the reasoning of the Judge Rapporteur had been adopted by the Court of Justice itself.  We do not agree.  First, we do not read the report of the Judge Rapporteur as imposing any requirement for the lettings to take place at the same time.  Secondly, we consider that we should follow the “closely linked” and “single economic transaction” tests in the judgment of the Court of Justice in preference to the formulation in the report of the Judge Rapporteur.
25.	Mr Smith also argued, by reference to the ECJ decision in Card Protection Plan Ltd v Customs and Excise Commissioners [199] STC 270 and Levob Verzekeringen BV and another v Staatsecretaris van Financiën [2006] STC 766, that in order for zero-rating to apply to the grant of a parking space lease that grant must be part of a single supply including the grant of the apartment lease.  He submitted that Henriksen should be read in the light of Card Protection Plan in order to understand what the Court of Justice meant by “close link” sufficient for the two lettings to be seen as a “single economic transaction”.  We do not consider that the test formulated in Henriksen must be construed by reference to Card Protection Plan.  Henriksen does not approach the question by reference to whether there is a single supply or more than one supply; and since the concept of supply is fundamental to the value added tax we do not believe that the Court of Justice would not have expressed itself in terms of a single supply if it had considered that to be the correct test.  Furthermore, Levob was a case in which it was held that where two or more elements or acts supplied by a taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single indivisible economic supply which it would be artificial to split, that is a single supply.  It does not follow from this that the close link required on the formulation set out in Henriksen must itself result in a single supply.
26.	From all this we regard the following as the proper test we should apply:  Were the grants of the parking space leases sufficiently closely linked to the grants of the apartment leases as to constitute a single economic transaction?  We consider that this requires an exercise in weighing the links between those two grants of leases against the factors that separate them.
27.	There are a number of factors that link the grants of the leases: the apartments and the parking spaces are part of the same development; the planning permission included a condition that the parking spaces continue to be used by occupiers of the apartments; it was always intended that leases of the parking spaces be granted to tenants of the apartments; the tenants were aware of this intention; parking space leases were ultimately granted to tenants of the apartments; those leases were for a term co-extensive with that of the apartment leases already granted; and the parking space leases contained a restriction on transfer otherwise than to other tenants of apartments in the same development.
28.	Factors that tend away from the close links are: the grants of the leases of the apartments and the parking spaces were separate legal transactions; no tenant of an apartment who had been granted an apartment lease without at the same time being granted a parking space lease had any legal right or could have any expectation beyond a hope that they would be offered a parking space; there was no certainty on the part of Cable Street that any particular tenant would take up the grant of a parking space lease if offered; the parking space lease when granted was not required to be assigned to the same assignee as the apartment lease; a separate consideration was set independently of the price for the apartment lease; and there was a material passage of time between the grant of the apartment lease and the grant of the parking space lease in each case.
29.	In weighing the position some factors are more material than others.  Taking everything into account we have decided that the factors that link the grants of the parking space leases with the grants of the apartment leases are not sufficient to create close enough links so as to constitute the grants of the two leases a single economic transaction.  It is not the links between the parking spaces and the apartments themselves that are material in this case, but the links between the grants of the leases.
30.	We do not consider that the fact that the grants of the leases were separately documented legal transactions or that a separate price was paid for the parking space lease to be determinative, nor the fact that there was a significant delay between the grant of the apartment lease and the parking space lease.  But to establish close enough links for there to be a single economic transaction requires, in our opinion, at least an arrangement or understanding, albeit one short of a legal obligation, on the part of both parties that the elements of a single overall economic package will be completed.  A mere possibility, at the time of the grant of the apartment lease, that there might subsequently be a grant to the tenant of the apartment of a parking space lease does not represent a sufficient link between the two to constitute a single economic transaction.
31.	Here there was no arrangement or understanding, even one short of a legal commitment, that at the time of the grant of an apartment lease a grant of a parking space lease would follow that grant.  The grant of the parking space lease, when it was made, was a separate economic transaction from the grant of the apartment lease.  Whilst the grant of a parking space lease in each case had to be to a person who was an occupier of an apartment, it did not necessarily follow that any such grant would be made in any particular case.  There was a separate offer, separate acceptance and separate agreement as to price for the grant of the parking space lease.  Weighed against these factors, although there were links between the apartment lease and the parking space lease as we have described, those links, taken together, were not sufficient to render the separate grants of the leases a single economic transaction.  The factors that separate the grants go more to the issue of the economic nexus – or lack of it – between the grants than those which link them.
32.	For these reasons, we dismiss the appeal.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

					Signed

ROGER BERNER
Tribunal Judge
Release Date: 14 May 2009