18171
Value Added Tax; exemptions; whether lease of refurbished and furnished flats an exempt supply; Value Added Tax Act 1994, Schedule 9 Group 1, Item 1(d), and Note 9.

EDINBURGH TRIBUNAL CENTRE

	ASINGTON LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	       Respondents

			Tribunal:	 (Chairman)   J Gordon Reid, QC., F.C.I.Arb.,
					 (Member)	 James D Crerar, WS., NP

Sitting in Edinburgh on Monday 28 April 2003

for the Appellants		Colin Tyre, QC

for the Respondents	Andrew R W Young, Advocate

© CROWN COPYRIGHT 2003.

DECISION

Introduction
This is an appeal against the decision of the Respondents (“Customs”) refusing to allow the Appellant (“Asington”) credit for input tax of £38,701.69.  The dispute concerns the letting by the Appellant of a group of refurbished and furnished flats at Grindlay Street Edinburgh to Triple Crown Properties Ltd (“TCP”), an Edinburgh company, who were entitled to use them as serviced residential flats.  The broad issue is whether the supply by Asington is exempt or standard rated; if standard rated then credit for the input tax would be allowed.  It is not disputed that the supply of fully serviced accommodation by TCP to its customers is standard rated.

A Hearing took place on 28/4/03.  Mr Colin Tyre Q.C. appeared on behalf of the Appellant and led the evidence of Mr Tom Flaherty, the former managing director of Asington.  Mr Andrew Young, advocate, appeared on behalf Customs.  Mr Young led no oral evidence but produced a witness statement by Ian Shand a director of Triple Crown Properties Ltd, referred to below, to which there was no objection.  Each party produced a bundle of documents.  There was no dispute about the authenticity, and where appropriate, the transmission and receipt of these documents.   

Legal Framework
The issue is whether the supply by Asington to TCP is a taxable supply falling within Item 1(d) in Group 1 of Schedule 9 to the Value Added Tax.  If it is then the supply is taxable and the input tax referred to above is agreed to be reclaimable.  If it is not then the supply is exempt and the input tax cannot be reclaimed.  The relevant provisions of Group 1 are as follows:-

1.  The grant of any interest in or right over land or of any licence to occupy land, or, in relation to land in Scotland, any personal right to call for or be granted any such interest or right, other than-
………….
(d) the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purposes of a supply of catering;

NOTES
…………..
(9) “Similar establishment” includes premises in which there is provided furnished sleeping accommodation, whether with or without the provision of board or facilities for the preparation of food, which are used by or held out as being suitable for use by visitors or travellers”.

The basis upon which these provisions were enacted is to be found in Article 13B of the EC Sixth Council Directive 77/388/EEC which provides inter alia 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 immovable property excluding:

1	the provisions of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping;”

Facts
Asington is a family controlled property investment company.  It was registered for the purposes of VAT with effect from 7/6/01, notification having been given by Customs on 26/4/02.  Mr Flaherty is the majority shareholder.  The directors are his wife and daughter.  Between 1983 and 1993, Asington acquired the heritable property known as 36 Grindlay Street, Edinburgh.  It comprised four separately owned flats.  Asington refurbished the property and converted it into eight self contained flats.  A further flat, possibly part of the conversion work was and is now owned by a third party.  Before carrying out and completing this work, Asington carried out market research.  They thought that the self-service flat market was becoming popular.  They contacted Triple Crown Properties Ltd, (“TCP”) an Edinburgh company who were experts in this field, and discussed matters with them.  This led ultimately to the grant of a lease in 2002 to TCP of seven of the eight self contained flats which were by then fully furnished.  The eighth flat was retained by Asington for its own use.  

The lease contained many usual commercial terms including in summary, following:-
i.	Duration one year from 1/4/02;(clause 3); 
ii.	rent £54,000 per annum (clause 4);
iii.	Vacant possession  (Clause 6, Schedule Part III clause 1)
iv.	Full insuring, maintenance and repairing obligations (Clause 6 and part II of the Schedule; Clause 6 and Schedule part III- landlord’s obligations; part II and 2.1-3, 13 & 16- tenant’s obligations); 
v.	Entitlement to use the premises as serviced residential flats or such other purposes as Asington might approve (Clause 1.3.8; Schedule part II para 2.10);
vi.	Payment by TCP of utility charges (Schedule Part II para 1).

The group of flats were let to TCP fully furnished together with all necessary linen, towels, kitchen equipment, utensils, crockery, glasses, telephone and cable television.  In short, each flat or apartment was “kitted out” by the Appellant, as part of their arrangement with TCP, for immediate occupation.  TCP established an office and reception area in a nearby building at 122 Grove Street, Edinburgh; they did not provide room service but had a coffee bar.  The telephone system installed was sophisticated and enabled TCP to identify the individual calls made from each apartment and to present the occupant with a telephone account on departure.  Incoming calls were directed through their reception at Grove Street.

TCP advertised the premises through a website, the Scottish Tourist Board and through local businesses.  They described them in a brochure (R/49) as Fountain Court, Quality Serviced Apartments in the Heart of Edinburgh.  TCP let the apartments to a mixture of holiday makers and travellers such as businessmen.  The duration of the lets varied between one night and about eight weeks.  TCP’s housekeeping team serviced the apartments.  Fax and email facilities, personal laundry and dry cleaning services, the delivery of provisions, and arrangements for airport transfers were all facilities and services provided by TCP.  They also provided Welcome Provisions, but there was no evidence as to what this comprised.  The Tribunal declines to speculate.  TCP also made arrangements for customers to use health and fitness facilities nearby.  Rent and a deposit, presumably for breakages and telephone charges, were paid in advance by customers.  Corporate lets were invoiced in arrears.  Keys were to be collected by customers at the Fountain Court office at Grove Street.  TCP also provided car parking facilities for their customers.  

On its first VAT Return Asington claimed repayment of the sum of £38,701.69.  Correspondence ensued between the parties.  By letter dated 24/9/02, Customs informed Asington that the letting of the premises at Grindlay Street to TCP was an exempt supply.  Asington sought reconsideration of that decision.  The decision was confirmed by Customs in letters dated 11/10/02, and 14/11/02.

In March 2003 the arrangements between Asington and TCP changed.  There is now an agency agreement between them and no lease.  The terms of the agency agreement were not disclosed.  In the course of his examination-in-chief, Mr Flaherty was asked whether an agency arrangement would have made any practical difference.  He did not answer that question but simply stated that an agency agreement would be acceptable and that such an arrangement was now in place.

We conclude on the facts that what TCP provided to its customers was furnished sleeping accommodation, with facilities for the preparation of food, which are used or held out as being suitable for use by visitors or travellers.  Fountain Court as operated by TCP in conjunction with their office at Grove Street is an establishment which is similar (but not identical) to the provision in an hotel, inn or boarding house of sleeping accommodation.  The similarities are, apart from the provision of furnished accommodation, the provision of services such as housekeeping and reception services and facilities.  By contrast, we find as fact that Asington provided no such housekeeping or reception services.  They created the infrastructure which, when such facilities and services were provided, would enable furnished sleeping accommodation to be provided.  We find as fact that what Asington provided could not be used and would not be suitable for use by visitors or travellers without the provision of some form of housekeeping services, however limited, and/or some form of reception facilities, to arrange the proper changeover from one transient visitor to another i.e. change of laundry, cleaning of premises and handover of key and the like.

Submissions
Mr Young, on behalf of Customs, submitted that the lease between Asington and TCP was a standard commercial lease; there was no obligation to provide additional services or facilities beyond the normal landlord/tenant relationship; the standard commercial terms and a duration of one year embracing all seven flats would not be expected in an agreement between a visitor and a hotel or hostel.  These additional services are provided by TCP, namely housekeeping, car parking, personal laundry services, office, reception and airport transfer facilities.  Without these services, there is simply an ordinary exempt supply of furnished property by one business entity to another.  The permitted user clause does not define the nature of the supply by Asington to TCP; it merely facilitates the supply of sleeping accommodation by TCP to its customers.  One should focus on the first transaction in the chain i.e. the supply by Asington to TCP rather than by TCP to its customers.  Mr Young also referred us to Blasi v Finanzamt Munchen 1998 STC 336 paras 23 and the Advocate General’s Opinion at para 19, Stichting Goed Wonen v Staatssecretaris van Financien 4/10/01 para 50-53, and the Advocate General’s Opinion at para 77, CC&E v Trinity Factoring Services Ltd 1995 SLT 1136 at 1139A-B, and Acorn Management Services Ltd v CC&E 31/7/01 (LON/00/534; Chairman, Judith Powell) page 18.

Mr Tyre, on behalf of Asington, submitted that the first issue was whether the property was a similar establishment within Item 1(d), and that it was, whether one considered the supply by Asington to TCP or by TCP to its customers.  The exclusion from the exemption should be construed broadly (Blasi at paras 18-19).  The lease defined the permitted use as serviced residential flats (clause 1.3.8).  According to Mr Flaherty, said Mr Tyre, an agency agreement instead of a lease would have been acceptable.  The second issue was whether Asington were providing sleeping accommodation in a similar establishment.  They were and there was no material difference between what Asington supplied to TCP and what TCP supplied to customers.  Whether or not board was provided carried no weight (Note (9) above).  If sleeping accommodation is provided then the property is a similar establishment.  Nothing more is needed to fall within the exclusion from the exemption.  In Trinity the Appellant failed because he was trying to read into the lease a practical restriction that was not present.  Acorn was concerned with the first issue described above.

Decision
We are of the view that the answer to the issues raised in this appeal should be determined by (i) identifying the nature of the supply, and (ii) determining whether that supply falls within Item 1(d) properly construed.

(i) Nature of the Supply
We begin with an examination of the lease.  Our findings disclose that it is essentially a commercial lease of furnished residential property with some restriction on the use by the tenant TCP.  There is no additional element of service supplied as one invariably finds in the hotel and allied sectors of trade, such as cleaning, however limited, or change of bedding to make the sleeping accommodation suitable for and capable of use by a succession of short term or transient residents.  The main differences between the supply by Asington and the supply by TCP are (i) Asington supplied seven apartments in one supply to one person for a period of a year; (ii) TCP supply individual apartments to different individuals for different periods all generally short and less than eight weeks; (iii) Asington supplied the building and the furnishings.  TCP supply the same building and furnishings to individual customers and, in addition, they supply a significant package of services with a built-in infrastructure which included reception, car parking, and housemaid services, office facilities, and individual telephone billing for each apartment.  The provision of temporary accommodation by TCP to its customers is in potential competition with that provided by the hotel and allied sectors of trade; in our view, the provision of seven apartments in one supply for a period of a year is not.  In our opinion, therefore, the nature of the supply by Asington is the provision of furnished residential accommodation without any additional element of service.  It is that additional element of service which makes the difference between a let of furnished residential accommodation and the provision in an hotel, inn or boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation.  In an hotel or similar establishment in that sector of trade, the stay is generally short; a cleaned room and a bed and fresh linen or duvet are generally expected to be provided for each new visitor or traveller; that is the very nature of furnished sleeping accommodation in the hotel and allied sectors of trade; Asington had no infrastructure to enable them to provide such facilities.  That is an important difference between the supply by Asington to TCP on the one hand and the supplies by TCP to its customers whether it be one corporate customer with a succession of employees travelling to Edinburgh on business from time to time throughout the duration of the let to TCP, or a mixture of holiday makers and other travellers, business or otherwise.

(ii) Does the supply fall within Item 1(d)?
It is clear on the authorities that the essential features or common characteristics of supplies falling within Item 1(d) include (i) temporary furnished sleeping accommodation, (ii) occupation by a transient resident who is away from home for one reason or another, and (iii) some related element of service, whether it simply be a change of bedding from time to time or minimal cleaning on change of occupant or a more extensive range of housekeeping and other services.  All such features are present when accommodation is provided by an hotel, boarding house, inn and allied trades.  They were not present in the premises as supplied by Asington to TCP.  All such features are generally present or should be present when furnished sleeping accommodation is provided for use by visitors or travellers.  The nature of the use by visitors or travellers is transient; they seek only temporary accommodation; the turnover of visitors requires that the furnished sleeping accommodation be kept clean and thus made suitable for use by a succession of travellers or visitors.  Unless some element of service is provided the supply is unlikely to be in potential competition with the hotel and allied sectors of trade, and may not be capable of being provided at all.

From the findings of fact which we have made and our findings on the nature of the supply in question, we must conclude that the supply by Asington to TCP does not fall within Item 1(d) having regard to the inclusive definition of Similar establishment in Note (9).  Similar establishment is defined by reference to the provision of furnished sleeping accommodation.  We have already concluded that the nature of the supply by Asington to TCP was such that furnished sleeping accommodation, properly construed, was not supplied.  It therefore follows that the seven apartments, in a question between Asington and TCP were not premises falling within the definition of similar establishment as that phrase is used in Item 1(d).  We are confirmed in that view by the discussion of this general topic in some of the authorities cited to us.

In Blasi, the issue was whether the provision of short term accommodation for guests constituted the provision of accommodation in sectors with a function similar to that of the hotel sector, within the exclusion from the exemption in Article 13B(b)(1) of the Sixth Directive and whether the criterion of the duration of the letting agreement (irrespective of actual duration) for distinguishing between taxable and exempt transactions was compatible with that article.  These issues arose in the context of the lettings of accommodation for refugee families which were always concluded for a period of less than six months but which generally endured for about 14 months.  Fully furnished accommodation was provided and the landlady provided fresh bedding every 14 days and cleaned the stairs, landings, baths and lavatories; there were no lounges, common rooms or reception area.  The German statutory provision excluded from the statutory exemption of letting property lettings for the short term accommodation of guests.  The Court held that the exemptions were to be interpreted strictly, but the exclusions from the exemptions were not [para 18 and 19].  The exclusion under consideration was to be broadly construed as its purpose was to ensure that the provision of accommodation similar to and hence in potential competition with that in the hotel sector was subject to tax [para 20].  In the course of his Opinion, the Advocate General (Jacobs) examined the rationale behind the general exemption of the supply of immovable property; land is not the result of a production process; buildings once constructed may change hands many times without being subject to further economic activity; the letting of such property is a passive activity not entailing significant added value.  The common feature of the exclusions from the exemption was that they entailed more active exploitation of the immovable property (see also Stichting Goed Wonen at paras 52-53).  The Court, in Blasi, also observed {para 23 and 27] that, in general, a stay in accommodation similar to that of the hotel sector tends to be rather short and that in a rented flat fairly long. 

We construe Item 1(d) and Note (9) in the light of and having regard to the purpose of Article 13B(b)(1) of the Sixth Directive.  The underlying rationale as explained in Blasi is of assistance and helps to underline the distinction between the supply by Asington on the one hand and the supplies by TCP on the other hand.  There is, in our view, no material difference between the supply by Asington to TCP and the letting of a furnished flat for a similar period (one year); the letting of such a flat would not fall within the exception to the exemption.

We were also referred to Acorn Management.  There, the issue was whether accommodation provided to American students attending courses was a taxable or exempt supply.  The Tribunal held that the Appellant provided accommodation for gain as its main purpose, and that it provided sleeping accommodation to students.  In addition to providing clean linen at the beginning of the student’s stay, superficial weekly cleaning, and an emergency telephone number to allow access, the Appellant provided accommodation and a booking service tailored to the needs of foreign universities; various rules and regulations were imposed on the students which were consistent with hostel living and inconsistent with rules imposed by landlords on their tenants.  The premises were therefore a similar establishment to an hotel etc.  The Tribunal went on to consider the meaning of travellers and visitors concluding that the students were visitors; but that issue does not arise in the instant appeal.  The Tribunal in Acorn finally concluded that the purpose of the exception contained in Article 13B(b)(1) was to subject to tax supplies which are similar to and in competition with the hotel trade.  The supplies in question were therefore taxable.  We consider that our approach to the instant appeal and our conclusions are consistent with the Tribunal’s analysis in Acorn.

Finally we record that we did not derive great assistance from Trinity Factoring where it was held that the purpose to which certain lockup garages could be put was to be derived from the terms of the leases in question.  The leases appeared to be less formal than the lease granted by Asington.  We have identified the supply in question from Asington’s lease.  There was no grant in the lease of furnished sleeping accommodation within the meaning of Item 1(d) and Note (9).  The premises were not an establishment similar to an hotel, inn or boarding house.

Summary
1.	By granting the lease to TCP Asington were not providing in an hotel, inn, boarding house or similar establishment sleeping accommodation or accommodation in rooms which are provided in conjunction with sleeping accommodation within the meaning of Schedule 9 Group 1 Item 1(d) as amplified by Note (9) to the Value Added Tax Act 1994.  
2.	The supply by Asington to TCP was an exempt supply.
3.	Customs’ decision to refuse to allow Asington credit for input tax in the sum of £38,701.69, confirmed on review, is upheld and the appeal to this Tribunal is therefore dismissed.

J GORDON REID, QC., F.C.I.Arb.,

CHAIRMAN

RELEASE:  6 JUNE 2003 

EDN/02/176