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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Cross Levels Developments Ltd v Customs and Excise [2004] UKVAT V18689 (09 July 2004) URL: http://www.bailii.org/uk/cases/UKVAT/2004/V18689.html Cite as: [2004] UKVAT V18689

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VAT – CONSTRUCTION – Time of supply – Obligations under construction agreement discharged before work completed – Lease assigned to developer – Whether assignment "payment" – Amount of payment – Whether work "performed" by reason of discharge – Parties connected – Open market direction under VATA 1994 Sch 6, para 1 – VAT Regs 1995 reg 93 – Appeal allowed in part

LONDON TRIBUNAL CENTRE

CROSS LEVELS DEVELOPMENTS LTD Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: THEODORE WALLACE (Chairman)

KENNETH MANTERFIELD FCA

Sitting in public in London on 9-13 February 2004

Emma Noble, solicitor, of Ernst & Young, chartered accountants, for the Appellant

Rebecca Haynes, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004


 


DECISION

1. This decision concerns appeals against three alternative assessments upon the Appellant arising out of supplies of construction services to a connected company under an agreement dated 24 November 1997. Both companies were controlled by Eastbourne College of Arts and Technology ("the College"). The connected company was Cross Levels Property Ltd ("CLP").
2. The initial assessment, which was issued on 28 July 1999, was for £581,825 VAT for period 06/98 with interest and was based on regulation 93(1)(a) of the VAT Regulations 1995 (SI.1995, No.2518). This assessment was made on the basis that an assignment of 24 April 1998 under which CLP transferred its leasehold interest in the property and its business to the Appellant constituted payment to the Appellant of non-monetary consideration. This was the subject of the original appeals in 1999.
3. The first alternative assessment was issued on 13 March 2000, also for £581,825 but for period 12/99 with interest being based on regulation 93(1)(c)(i) which was introduced with effect from 1 January 1998 by SI 1997, No.2887 and provided that, if not already treated as supplied, services performed after 9 December 1997 and before 9 June 1999 were treated as supplied 18 months after the date of performance..
4. The second alternative assessment was also issued on 13 March 2000. This was for £290,912 for each of periods 12/97 and 3/98 with interest and followed a direction under Schedule 6, paragraph 1 of the VAT Act 1994 dated 10 March 2000 that the value of supplies made on 1 December 1997 and 3 March 1998 should be taken to be their open market value. Those supplies were treated as taking place by reason of regulation 93(1)(b) because invoices were issued on those days.
5. The covering letter stated that the two assessments on 13 March were alternative to the preferred assessment already notified and that the Commissioners would enforce payment of only one and not while the liability is subject to litigation. These assessments were the subject of further appeals which were consolidated.

The statutory provisions

6. Regulation 93 of the VAT Regulations 1995, which provide for a deemed time of supply under section 6(14) of the VAT Act 1994 provided as follows at the relevant time,

"(1) Where services, or services together with goods, are supplied in the course of the construction … of a building … under a contract which provides for payment for such supplies to be made periodically, or from time to time, those services or goods and services shall be treated as separately and successively supplied at the earliest of the following times –

(a) each time that a payment is received by the supplier,

(b) each time the supplier issues an invoice, or

(c) to the extent that they have not already been treated as supplied by virtue of sub-paragraphs (a) and (b) above and subject to paragraph (2) below, the day which falls eighteen months after the date on which those services were performed.

(2) Sub-paragraph (1)(c) above does not apply unless the services were performed on or after 9 December 1997."

7. Schedule 6, paragraph 1(1) and (2) of the 1994 Act provide,

"1(1) Where –

(a) the value of a supply made by a taxable person for a consideration in money is (apart from this paragraph) less than its open market value, and

(b) the person making the supply and the person to whom it is made are connected, and

(c) if the supply is a taxable supply, the person to whom the supply is made is not entitled under sections 25 and 26 to credit for all the VAT on the supply,

the Commissioners may direct that the value of the supply shall be taken to be its open market value.

(2) A direction under this paragraph shall be given by notice in writing to the person making the supply, but no direction may be given more than 3 years after the time of the supply."

The evidence

8. The only witness was Mrs Elizabeth Jane Halliday who initiated the first assessment and made the alternative assessments. She produced computerised copies of visit reports following visits on 18 and 20 February 1998, 12 June 1998, 2 February 1999 and 2 July 1999. Each of the reports was made shortly after the visit in question and was not subsequently amended. She produced three pages of notes from her last visit which included lists of invoices to the Appellant from builders and architects and certificates of work executed.
9. There was a statement of agreed facts of seven paragraphs and an agreed bundle of documents. The Appellant also produced the certificates for work on the Performing Arts Block and for the ATS building. The Respondents also produced the Appellant's Financial Statements for the year to 31 July 2002.

The primary facts

10. We find the following primary facts based on the documents.
11. The College wished to build a Construction Centre, where construction trade skills would be taught, a Performing Arts Block and an ATS Block, comprising classrooms and offices, at its Campus at Cross Levels Way, Eastbourne. The College was partially exempt for VAT purposes since most of its activities were non-business or exempt. Most of the input tax on construction services supplied to it was exempt.
12. In 1995 the College appointed Bucknall Austin, Quantity Surveyor, to provide professional services on the proposed work. By 19 December 1997 Bucknall Austin had been paid £31,047.81 exclusive of VAT by the College.
13. In 1996 the College appointed Norman & Dawbarn Ltd as architects in connection with the project. By April 1997 £102,239.73 plus VAT had been invoiced to the College by Norman and Dawbarn and paid.
14. The Appellant was incorporated on 29 September 1997 and registered for VAT on 21 October 1997 with effect from 1 October. Its anticipated taxable supplies in the first 12 months were given in its registration application as £100,000.
15. Cross Levels Property Ltd ("CLP") was incorporated shortly after the Appellant and was not registered for VAT. Both companies were controlled by the College.
16. On 8 October 1997 Norman & Dawbarn Ltd, architects, issued to Dean & Dyball Construction Ltd ("Dean & Dyball") a JCT 80 certificate for executed work of £188,415.55 plus VAT after retention on account of works at ATS Building to be paid within 14 days by the Appellant; the total amount of the contract was stated as £2,231,099.25. The certificate was stated to be "under the terms of the contract dated (to be signed)."
17. On 17 November 1997 the College granted to CLP a 15 year lease of the site of the development for use as building land and for educational use at an initial rent of £1,000 a year. The lease provided for a rent review on 17 November 1998 and every third year on the basis of the rent on the open market with vacant possession on the basis that the property is in the condition required by the lease. There was a break clause (clause 14.3) enabling either party to determine the lease at the end of the first year or within 3 months of any rent review on giving not less than three months notice. In the event of termination by the College the tenant was entitled to be paid a sum calculated by the cost of improvement or other works reverting to the College less the open market rent on the property from the date of any improvement to termination. Any transfer of the property by the tenant was subject to written consent not to be unreasonably withheld.
18. Also on 17 November 1997 CLP granted a lease of 15 years less one day to the College of the same site with the building erected or to be erected at the same initial rent. The lease provided for a review on 17 November 1998 or, if earlier, on Practical Completion of the last of the buildings and every three years thereafter. The reviews were to be based on the best yearly rent on the open market with vacant possession.
19. On 24 November 1997 the directors of the Appellant and CLP signed an agreement under which the Appellant was engaged to perform construction services on behalf of CLP in relation to the ATS Block, the Performing Arts Block and the Construction Centre. Under clause 3, in respect of the ATS Block and the Performing Arts Block, the Appellant adopted the existing designs and specifications dated March 1997 prepared by Norman & Dawbarn, who had been appointed as Architects and Consulting Engineers, and also the documents prepared by Bucknall Austin, who had been appointed as Quantity Surveyors. In respect of the Construction Centre, the Appellant adopted the documents dated March 1997 prepared by Bucknall Austin as Employer's Agent. Clause 4.1 provided that the fees for the Services performed by the Appellant were specified in Part 1 of Schedule 3 and that CLP would pay by stage payments in accordance with Part 2 of the Schedule. Under Clause 1.1 "Services" include "all construction services necessary for the completion of the Buildings" with related services. Schedule 3 included the following in Part 1,

"In consideration of performance of the Services under the Agreement, the Contractor shall be paid in accordance with the cost to it of providing such Services (as agreed between the parties) plus 2% …"

Part 2 "Stage Payments" provided,

"As payments on account of sums payable … under Part 1 …, the Employer shall pay to the Contractor the sum of £50,000 on 1 December 1997 and thereafter the sum of £50,000 at 3 calendar monthly intervals until such time as a Certificate of Practical Completion has been issued in respect of the ATS block and Performing Arts Block and Notice of Practical Completion has been issued in respect of the Construction Centre. Thereafter the balance of the total remuneration under Part 1 … shall become payable within 14 days after"

Part 3 of Schedule 3 covered Remuneration for additional work on a cost plus 5% basis. Clause 13.1 and 13.2 provided,

"13.1 The Employer or Contractor may terminate this Agreement at any time upon 14 days notice in writing.

2 Upon termination of this Agreement under clause 13.1 the Contractor shall be entitled to a proportion of its fees calculated on a quantum meruit basis."

20. Before the date of that agreement Norman & Dawbarn Ltd, Architects, had issued a second certificate dated 17 November 1997 to Dean & Dyball for payment of £205,021 plus VAT by the Appellant.
21. Dean & Dyball issued VAT invoices on 13 October and 19 November to the Appellant in respect of the certificates; both had been paid by 4 December 1997 when a further VAT invoice for the balance of the contract sum, namely £1,837,663 plus VAT, was issued. The next certificate by Norman & Dawbarn Ltd dated 15 December 1997 valued the total work then executed on the ATS Building at £584,516.
22. On 15 December 1997 in consideration of Dean & Dyball entering into a JCT construction contract with the Appellant, the College guaranteed the Appellant's payment obligations under the contract.
23. On 5 December 1997 the College issued an invoice to the Appellant for £162,946.24 for professional fees "in respect of developments undertaken by" the Appellant. An attached schedule listed invoices issued by Bucknall Austin and Norman & Dawbarn including those referred to at paragraphs 12 and 13 above. The invoice was paid by the Appellant in December 1997.
24. Following the hearing, at the request of the Tribunal a contract between the Appellant and Dean & Dyball was produced dated 5 February 1998. This was a JCT Standard Form of Building Contract (1980 edition with amendments to 1995). The agreement provided for Dean & Dyball to be given possession of the ATS site on 22 August 1997 and for completion on 21 August 1998. Clause 30 provided for monthly interim certificates of the value of work done subject to a retention of 3 per cent with a final certificate after expiry of the Defects Liability Period. The page headed "Articles of Agreement" contains the name of the College crossed out and the Appellant's name substituted.
25. An Undated JCT Contract (1981 edition) with Llewellyn was produced for the Construction Centre also with the College crossed out and the Appellant's name substituted. This provided for possession of the site on 29 September 1997. Interim payments were by specified stages with the balance of £336,617.71 on practical completion, this being the contract sum.
26. Another undated JCT contract (1980 edition) with Dean & Dyball covered the Performing Arts Block. This referred to a contractor's letter of 6 February 1998. The contract sum was £575,000. The date of possession was 16 February 1998 and the completion date was 31 August 1998. It provided for monthly interim certificates and a 3% retention.
27. Prior to 3 December 1997 a similar signed guarantee had been sent by the College to Walter Llewellyn & Sons Ltd ("Llewellyn"). On 3 December Bucknall Austin wrote to Llewellyn asking them to submit an invoice for the whole Construction Centre contract sum of £336,617 plus £58,907.98 VAT and a request for payment of the sum shown on the first certificate £47,153; the letter said that payment on the £58,907.68 VAT plus the £47,153 would then be authorised. Llewellyn issued an invoice for £336,617 plus VAT on 19 December 1997 for work on the Construction Block.
28. On 19 December 1997 the College entered into a Novation Agreement with Bucknall Austin to substitute the Appellant for the College in the agreement for the services of Bucknall Austin as quantity surveyors. The Appellant accepted liability for all claims against the College arising out of the appointment of Bucknall Austin in 1995 whether arising before or after the Novation Agreement. The existing claims already paid were specified as £31,047.81 (see paragraph 12 above).
29. The Appellant submitted its VAT return for the period to December 1997 on 13 January 1998 reclaiming £475,826.38 VAT. The outputs shown were the stage payment of £50,000 invoiced by the Appellant on 1 December, on which VAT was £8,750. Inputs shown were £2,769,007 with VAT of £484,576.38. The inputs were based on 14 invoices: the three Dean & Dyball invoices for the ATS building, the Llewellyn invoice for the Construction Block, nine invoices from Bucknall Austin and one invoice from the College for £162,946.24 plus VAT.
30. On 29 January 1998 the Appellant wrote to Customs stating (inter alia) that the Appellant had been established with a view to "drip feeding" the VAT charges so delaying tax points and that the new 18 month rule and the ability to sell capital allowances might cause the role of CPL to be reviewed. Customs repaid the VAT in the beginning of February 1998.
31. Mrs Halliday and Carol Mulligan, the officer who issued the first assessment, visited the campus on 18 and 20 February 1998 to visit the College and to consider the Appellant's repayment return. The Performing Arts Extension work had not started. Mrs Halliday noted the lease and leaseback arrangements and the agreement of 24 November 1997 between the Appellant and CLP giving a cashflow advantage until practical completion when any balance would become due. She noted that the Appellant had access to a loan from the College to fund the work.
32. On 3 March 1998 the Appellant issued a further invoice for £50,000 plus VAT to CLP; this was never in fact paid. A certificate on 11 March showed the executed work on the ATS Building at £1,174,573.59 and a further certificate on 8 April showed executed work at £1,392,553.08. On 13 March Dean & Dyball issued an invoice of £575,000 plus VAT for the Performing Arts Block; this was the entire contract price. The initial certificate for £73,206 for that Block was issued on 8 April showing £83,436.54 after VAT and retentions as the "amount now due"..
33. On 25 March 1998 the Appellant provided a list of payments to contractors financed by loan from the College totalling £1,533,522.
34. The VAT Return for the period to March 1998 showing outputs as £50,000 with £8,750 VAT inputs as £582,560 with £101,948 VAT was submitted on 6 April 1998 involving a repayment claim of £93,198.
35. On 26 March 1998 Stephen Hutchinson, a director of the Appellant, and at the time Assistant Principal of the College, wrote to CLP on behalf of the directors of the Appellant offering £100,000 to acquire the existing lease together with all CLP's assets, liabilities and obligations for £1. The letter continued,

"This is an offer only and does not in any way prejudice the arrangements under our existing Construction Agreement in relation to the construction of the properties at Cross Levels Way dated 24 November 1997. This agreement will remain in full force until such time as you assign your lease to us."

The letter stated that the offer would lapse on 1 June.

36. The offer was accepted by CLP as vendor and an assignment was executed on 24 April 1998. The Assignment included the following provisions,

"1. In consideration of the … sum of … £100,000 now paid by the Purchaser to the Vendor (the receipt whereof the Vendor hereby acknowledges) the vendor HEREBY ASSIGNS with Full Title Guarantee the Property to the Purchaser TO HOLD the same unto the Purchaser for all the unexpired residue of the term granted by the Lease …

…

1 The Vendor shall sell and the Purchaser shall purchase as a going concern at the Transfer Date the Business for the sum of One Pound (£1);

2 an obligation on the part of the Purchaser to assume, pay, satisfy, discharge, fulfil and indemnity the Vendor against all debts, liabilities, contracts and engagements whatsoever and wheresoever of the Vendor in connection with the Business existing at the Transfer Date other than liabilities in respect of taxation."

The "Business" was earlier defined as "The Business carried on by the Vendor and the goodwill and all other property, rights and assets of the Vendor in connection therewith subsisting on the date hereof." There was no evidence that CLP had any other activity apart from that of developing and letting the property.

37. Meanwhile on 23 April 1998 Bucknall Austin had issued a Certificate of Practical Completion of the Construction Centre Works on 9 April 1998. These were the works invoiced by Llewellyn on 19 December 1997 for £336,617 (see paragraph 27 above). As at 24 April the latest certificates for work executed showed £1,392,553 for the ATS Building and £73,206 for the Preliminary Arts Block. The total work certified as executed was therefore £1,802,376. This did not include work since the latest certificates.
38. On 12 June 1998 Mrs Halliday visited the Campus again and saw Mr Hutchinson. She saw the contract for the ATS Block with Dean & Dyball, which was a JCT 1980 Edition dated 5 February 1998; she had seen this before. She saw an undated JCT with Contractor's Design 1981 edition contract for the Construction Learning Centre with Llewellyn. She scheduled architect's certificates for the ATS Block and the Performing Arts Block. She was informed of the assignment of the lease by CLP to the Appellant and noted the fact that the March invoice to CLP was unpaid. She was told that the Appellant would complete the buildings but would not charge any further construction services as those would be to itself. She was told that the leases were to be extended to 40 years for Capital Allowances reasons and that amendments were being drawn up.
39. By an agreement signed by it on 30 July 1998 the College agreed to provide a loan facility to the Appellant of up to £2.1 million to assist in funding the construction work. The Appellant drew down on the loan to pay for the services of Dean & Dyball and Llewellyn.
40. Completion of the ATS Block and the Performing Arts Block on 30 October 1998 was certified on 13 November 1998. The executed work on the ATS Block was certified at £2,661,162.99. Certificate No.7 on the Performing Arts Block dated 8 December 1998 was for £628,383; the Final Certificate dated 14 May 2002 was for £633,220.
41. On 4 March 1999 Mrs Halliday wrote to the College asking for all documents formal and informal in relation to the arrangements between the College, the Appellant and CLP and between each of them and Dean & Dyball, Llewellyn, Bucknall Austin and any other party to the arrangements in relation to the construction services. She listed documents already held which included those described at paragraphs 17 to 19, the guarantees referred to at paragraphs 22 and 27, the Novation Agreement referred to at paragraph 28, the Assignment described at paragraph 36, the loan agreement (paragraph 39) and the Certificates of Practical Completion.
42. The College replied on 25 March 1999 providing revised certificates of completion and a letter from the architects regarding an error. Mrs Halliday said in evidence that, having sought advice, she felt that there was not enough information for an assessment and visited the Appellant again on 2 July 1999 to view additional documents and to ascertain what had been invoiced by suppliers to the Appellant. She produced photocopies of her notes at the visit with schedules of invoices and architects' certificates. Mr Bassett confirmed that no invoice had been raised by the Appellant for the termination fee. She concluded that an assessment could be raised.
43. On 28 July 1999 the first assessment was issued on the basis that the value of the construction services supplied by the Appellant was the costs of £3,357,564.58 incurred by it up to the assignment on 24 April 1998 plus 2 per cent, of which £100,000 only had been invoiced by the Appellant, VAT on the balance being £581,825.
44. On 10 March 2000 the Commissioners made a Direction under Schedule 6, paragraph 1 as follows,

"that the value of the supplies of construction services made by you on 1 December 1997 and 3 March 1998 and which were made:

(a) for consideration in money less than its open market value, and

(b) to [CLP] …

shall be taken to be their open market value."

45. Two further alternative assessments were issued on 13 March 2000. The first was on the basis that by 9 April 1998 the services on the Construction Centre were performed and that the services on the other projects were performed when the transfer on 24 April 1998 terminated the Appellant's obligations; this assessment (see paragraph 3) was for £581,825 calculated as under paragraph 43 above.
46. The second alternative assessment (see paragraph 4) was based on the Direction and attributed the sum of £581,825 equally between the two invoices issued by the Appellant on 1 December 1997 and 3 March 1998.
47. The Appellant's audited financial statements for the year to 31 July 2002 showed the cost before depreciation of short leasehold property at 1 August 2001 as £4,015,780; this did not include approximately £580,000 VAT which is the subject of this appeal. The accounts showed £2,828,456 "due to parent undertaking" at 1 August 2001. Turnover was £332,000 for both 2001/02 and the previous year; this was attributable to rent. Rent paid was £1,000 (see Note 1).

Appellant's submissions

48. Miss Noble did not challenge the right of the Commissioners to make alternative assessments in the light of the decision of the Court of Session in University Court of the University of Glasgow v Customs and Excise Commissioners [2003] STC 495 nor did she seek to distinguish the present case on the facts.
49. She said that the assignment of the lease and transfer of the business of CPL to the Appellant on 24 April 1998 discharged the construction contract and the obligations of CPL and did not perfect the performance of those obligations. The assignment did not terminate the construction agreement so as to bring clause 13.2 into effect because clause 13 only applied when there was a unilateral termination with 14 days written notice. The assignment of the lease was directly linked to the payment of £100,000 and should be viewed separately from the cessation of the obligations under the construction agreement. She referred to Staatssecretaris van Financiën v Cooperatieve Vereniging Cooperatieve Aardappelenbewarsplaats GA (Case 154/80) [1981] ECR 445 ("the Dutch Potato case") at paragraphs 12-14 and Apple and Pear Development Council v Customs and Excise Commissioners (Case 102/86) [1988] STC 221 at paragraphs 11 and 12. She said there was no quid pro quo between the assignment and the construction services performed or to be performed. There was nothing to suggest that the parties perceived the assignment as payment for construction services.
50. Miss Noble said that on 24 April 1998 no contractual payment was due whether for a stage payment or following completion of works or under clause 13.2 or by variation of the contract. If there was no contractual debt, payment under regulation 93(1)(a) did not arise. Under Schedule 3 of the construction agreement 14 days must elapse from the last certificate before the balance of the total remuneration over the stage payments was due. The assessment was based on a contractual liability. Even if there had been a contractual debt there was no link between the assignment of the lease and the construction services supplied.
51. She said that, if, contrary to her submission, Customs could rely on the assignment of the lease as constituting payment for the services, the assessment under regulation 93(1)(a) was excessive. Further, if the agreement of 24 April 1998 did engage clause 13.2 it could only be on the basis of the work done up to that date.
52. In relation to the regulation 93(1)(c) assessment, Miss Noble said that no tax point arose on 24 April 1998 in respect of the ATS Block and the Performing Arts Block which were not completed at that date. The word "performed" in paragraph (1)(c) means physically completed. VAT Information Sheet 7199 (June 1999) correctly treated "performed" as meaning "completed", see paragraph 5.1. The quantum of the assessment could not be correct because the two Blocks were not completed until later. The Appellant could not make supplies to CLP after the assignment of the lease.
53. Miss Noble said that the regulation 93(1)(b) assessments assume that the invoiced stage payments of £50,000 were less than open market value within Schedule 6, paragraph 1. The assessments ignored the tax point under regulation 93(1)(c) on completion of the Construction Block and ignored the fact that the work was incomplete at the time of the invoices.
54. Miss Noble submitted that the regulation 93(1)(b) assessment for period 12/97 was out of time under section 73(6). She submitted that the Notice of Direction was not itself evidence of facts. She said that all the relevant facts for period 12/97 were provided to Mrs Halliday by the visit of 12 June 1998 and at the latest by 2 February 1999; she referred to the documents held by Mrs Halliday on 4 March 1999 (see paragraph 41 above).

Commissioners' submissions

55. Miss Haynes said that it was clear that the Appellant had made supplies under the construction agreement and that by virtue of being invoiced by its suppliers, the Appellant had incurred costs. The Appellant had advanced no evidence that the costs invoiced to the Appellant had not been incurred or any evidence as to what costs were incurred up to 24 April 1998. The certificates were only evidence of work done by suppliers to the Appellant not of the costs incurred by the Appellant. In the absence of contrary evidence, the unusual invoicing practice suggested an obligation to pay. The Appellant had accepted the validity of the invoices by claiming input tax on them. There was no right to input tax except as a cost component of supplies. The Appellant's argument ignored the fact that supplies were made by it for which consideration was due. The Appellant's fees under the contract were based on costs incurred by the Appellant rather than on work performed by contractors. The certificates merely determined when the remuneration was payable. She accepted that the Appellant was only entitled to be paid the balance after the last certificate was issued.
56. She said that clause 13 of the construction agreement showed a clear intention that if either party terminated the contract the Appellant was entitled to a proportion of its fees on a quantum meruit basis being the fees for services provided to date. The reference to "quantum meruit" merely confirmed the right to fees on a costs plus 2 per cent basis. She said that the agreement was terminated pursuant to clause 13.1 and resulted in a contractual debt within clause 13.2 based on the costs invoiced to the Appellant by its suppliers. The letter of 26 March 1998, which stated that the agreement remained in force until assignment, implied that the agreement would terminate on the assignment. Alternatively, she submitted that the parties must have agreed to waive the requirement for notice, thus leaving clause 13.2 to operate. The Appellant could not rely on its failure to comply with clause 13.1 so as to avoid clause 13.2. There was no evidence of a collateral agreement to cancel the contract without payment for the Appellant's services.
57. Miss Haynes said that it was not clear what clause 3.2 of the assignment agreement meant. It was not grammatically connected with clause 3.1 and made no sense on its own. If clause 3.2 meant anything it supported Customs' contentions that the assignment agreement effected or constituted payment under the contract. The discharge of the liability of CLP to pay the Appellant constituted payment within regulation 93(1)(a).
58. She said that in Ufficio IVA di Trapani v Itallica Spa (Case C-144/94) [1995] STC 1059 the Court of Justice confirmed that Member States could determine that the receipt of the price was a chargeable event; that covered payment under regulation 93(1)(a). She said that payment occurs when the customer's liability to pay is discharged. In Customs and Excise Commissioners v Faith Construction Ltd [1989] STC 539, the Court of Appeal held that payment had been received because the liability to pay had been discharged, see Parker LJ at page 542 and Bingham LJ at page 545. That decision was endorsed by Lord Hoffman at paragraph 69 of MacNiven v Westmoreland Investments Ltd [2001] STC 237.
59. Miss Haynes said that the necessary consequence of the assignment agreement discharging the liabilities of CLP was that the transfer constituted non-monetary payment in respect of the services. The necessary direct link between the supply of services and the consideration was present because the parties determined that the assignment would terminate the contractual obligation to pay. The assignment of the lease was the payment. The value attributed by the parties to the lease was the difference between the fees due under the construction contract and the sums actually paid, see Naturally Yours Cosmetics Ltd v Customs and Excise Commissioners (No.2) (Case 230/87) [1988] STC 879 at paragraph 17. Here the assignment of the lease extinguished a debt of £3,424,715. The Appellant's accounts to July 2002 showed the cost of the lease at over £4 million and the rent for the year as £332,000: in view of this accounting treatment it is clear that the lease had a value.
60. The preferred assessment under regulation 93(1)(a) was on the footing that the transfer of the lease was payment of non-monetary consideration and that the consideration represented by the transfer was amount due under the contract regardless of how much physical work was outstanding.
61. Miss Haynes said that, if contrary to her submission the assignment of the lease was not "payment" within regulation 93(1)(a), the construction services were "performed" in April 1998 within regulation 93(1)(c). She said that the services were "performed" when the relevant duty to perform was discharged. In the case of the Construction Centre this was on 9 April 1998, the date of Practical Completion. In relation to the other work the Appellant's obligation to perform construction services for CLP was discharged when CLP ceased to have an interest in the property. She said that if the parties to a construction contract abandon an uncompleted building contract there must be performance within regulation 93(1)(c) when it is abandoned. The tax point under regulation 93(1)(c) was eighteen months after performance. She said that the value of the supplies was the same as under regulation 93(1)(a), the value of the services being the same.
62. Turning to the second alternative assessment, she said that in RBS Leasing and Services (No.1) Ltd v Customs and Excise Commissioners [2000] V&DR 83 the President held that Schedule 6, paragraph 1 was a valid derogation from Article 10.2 of the Sixth Directive under Article 27.1.
63. She said that, although the original construction agreement was not at undervalue, if the agreement terminated the contract with no further payment, this was on a proper analysis a retrospective agreement that the contract price was not cost plus 2 per cent but only £100,000 and thus retrospectively applied an undervalue. Because there had been two tax points the payments of £100,000 were treated as satisfying the price. On the footing that the assignment of the lease was not "payment" and that the services were not "performed" when the contract was discharged, the Direction of 10 March 2000 and the assessment substituted full value for the two supplies of £50,000 each. If the assessments under regulation 93(1)(a) or 93(1)(c) were valid, Customs did not seek to rely on the regulation 93(1)(b) assessment. Schedule 6, paragraph 1(2) specifically envisaged retrospective Directions.
64. She said that the best evidence of the open market value of the supplies was the contract basis of cost plus 2 per cent. As with the other assessments this depended on the invoices to the Appellant giving rise to a legal liability and being costs within the agreement. She said that standard-form contracts could be varied; an invoice is a demand; the invoices were demands for pre-payment and indicated a variation. The legal effect of the invoices to the Appellant was relevant to all the assessments.
65. Miss Haynes said that the sensible apportionment of the open market value between the invoices for regulation 93(1)(b) was equally between them. Such apportionment was valid as to best judgment. If the contract had run its course the full price would have been paid to the Appellant being reflected in its declared output tax and Schedule 6 paragraph 1 would not have come into play.
66. She said that if more than one of the bases of assessment was correct, the earliest applied.
67. Miss Haynes said that she was leaving the time limit point until she heard what further the Appellant said. The Tribunal stated that we both considered Mrs Halliday to be a good witness who had prepared clear reports.

Appellant's Reply

68. Miss Noble said that on the basis of paragraph 15 of Pegasus Birds Ltd v Customs and Excise Commissioners [2000] STC 91 the Tribunal must decide when the last piece of evidence of facts thought to justify the assessment for 12/97 came to the knowledge of Customs. She said that what was obtained by Mrs Halliday in July 1999 was not fresh evidence of facts but only confirmatory evidence of facts which had already come to the knowledge of Customs. Customs had delayed until March 2000 before issuing the assessment for 12/97. If the visit of July 1999 was crucial to the assessment she asked why it had not been included in Customs' List of Documents.
69. Miss Noble said that in Faith Construction the customer discharged the liability by a transfer of money; that was quite different from the present case. Here nothing was done actively in return for construction services so that there was no direct link. Customs' submission would result in output tax on any third party event discharging a contract, including frustration.
70. She said that it was not the Appellant's case that there was a collateral agreement to discharge the construction contract or that either party actively cancelled it. Nothing which CLP did on 24 April could be construed as consideration for construction services. If the Tribunal concluded that there was on 24 April an accruing liability to pay for work done, the termination of that liability was not directly linked to the services.

Conclusions

71. Since all three alternative assessments depend on the legal effect of the agreement of 24 April 1998 it is convenient to consider that first. This however depends on the rights and obligations of the Appellant immediately before that agreement.
72. Under the construction agreement of 24 November 1997 with CLP the Appellant undertook to perform all the construction services necessary for the completion of the Construction Centre, the ATS Block and the Performing Arts Block on the basis of designs and specifications prepared by Norman & Dawbarn and Bucknall Austin for the College which had granted a 15 year lease to CLP a week earlier on 17 November. The Appellant was to be paid on the basis of "the cost to it of providing" the services plus 2 per cent with quarterly stage payments of £50,000 and the balance 14 days after Certificates of Practical Completion for the two Blocks and Notice of Practical Completion of the Construction Centre.
73. Work had in fact started on the ATS Block and the Construction Centre well before 24 November 1997. Dean & Dyball were given possession of the ATS Block site on 22 August 1997, more than a month before the Appellant was incorporated. A JCT 80 certificate referring to an unsigned contract was issued by the architects to Dean & Dyball on 8 October in respect of the ATS Block for £188,415.55 for payment by the Appellant. We infer from this that Norman & Dawbarn had been informed that the Appellant was employing Dean & Dyball under a JCT 80 contract as yet unsigned and that since Norman and Dawbarn themselves were originally engaged by the College, Norman & Dawbarn had been informed that the College was employing the Appellant. We also infer that the employer under the original draft JCT 80 contract was the College. A further certificate in respect of the ATS Block were issued on 17 November. On 13 October and 19 November Dean & Dyball submitted invoices to the Appellant. The work certified up to 19 November as £393,436 and invoiced to the Appellant cannot have represented costs of services by the Appellant to CLP because CLP had no interest in the property at that time.
74. Llewellyn were given possession of the Construction Centre site on 29 September. The original draft JCT contract named the College as employer. On 3 December an initial Certificate for £47,153 was issued by Bucknall Austin. Most of this work must have preceded the contract between the Appellant and CLP on 24 November.
75. The contract between the Appellant and CLP contains nothing which would have the effect of treating the cost to the Appellant of providing services to the College as being costs of providing services to CLP. The words "services necessary for the completion of the Buildings" in clause 1.1 do not in our judgment cover work done for a third party before CLP acquired a leasehold interest on 17 November. Whereas the word "completion" is apt to cover the entirety of the work on a new project, its natural meaning when work has already commenced is in relation to the work necessary to finish the project. There is no evidence of an assignment by the College to CLP of its obligation to pay the Appellant for services provided to the College before 17 November. Nor is it easy to see how any such assignment could make the costs of those services costs of services provided to CLP.
76. Miss Haynes is clearly correct in her submission that the Appellant made supplies under the agreement with CLP. It is clear that the Appellant incurred costs for the purpose of making those supplies. However it does not follow that the amount of the costs of providing services to CLP was the same as the amount invoiced by suppliers to the Appellant. We have already pointed out that sums were invoiced to the Appellant in respect of work done before CLP was even in existence and further sums invoiced were for work before CLP had any interest in the property. The services carried out by Appellant at that stage can only have been supplied to the College.
77. Even assuming that the letter by Bucknall Austin of 3 December 1997 was written on behalf of the Appellant, we do not consider that that letter can be construed as a waiver or variation by the Appellant of the whole basis of the contract to which it refers. The letter followed Certificate No.1, although this was not in the bundle, and specifically envisaged payment of the amount on Certificate No.1 together with the VAT on the invoice. If the whole sum became due immediately, the interim certificate procedure was without purpose. We do not accept that by inviting the issue of a VAT invoice for the full contract sum the Appellant made itself liable to pay the full sum regardless of whether the work was carried out or not. Nor do we accept that by claiming input tax credit on its VAT return (see paragraph 29 above) the Appellant thereby made itself legally liable to pay for work which was not certified.
78. Work on the Performing Arts Block was not started until after CLP acquired its lease, possession being given to the contractor on 16 February 1998. The invoice of 13 March 1998 for the full contract sum preceded the first certificate on 8 April 1998. However again we do not accept that the invoice supplanted the certification procedure.
79. As at the date of the agreement of 24 April 1998 the latest certificates for work executed by Dean & Dyball and Llewellyn were as follows –

Construction Centre : Certificate of Practical Completion on 9 April 1998,

issued on 23 April; there is no evidence of variation

of the original price of £336,617.

ATS Block : Certificate No.7 to 8 April 1998 for work valued at

£1,392,553 before retentions. The amount of the contract was £2,231,099.25.

Performing Arts Block : Certificate No.1 to 8 April 1998 for £73,206 before

retentions. The amount of the contract was £575,000.

Total work certified by the contractors at 24 April 1998 was therefore £1,802,376. On the basis of the contract prices, £1,339,340 of work still remained to be done at the date of the certificates. Work done between 8 April and 24 April was presumably around £200,000. In addition Bucknall Austin and Norman & Dawbarn had invoiced the Appellant for £51,902 plus VAT for their fees and the College had invoiced the Appellant on 5 December 1997 for fees totalling £162,946 (see paragraph 23).

80. The entitlement of the Appellant under Schedule 3 Part 1 was "the cost to it of providing" the construction services necessary to complete the buildings under the Agreement. Payment was governed by Part 2 providing for stage payments with the balance being due on completion of all buildings. The Appellant's remuneration was based on the cost to it of the services provided by it. In our judgment the Appellant did not at 24 April have any entitlement to be paid even in the future for work not done or for costs not yet incurred. Nor was the Appellant entitled to be paid by CLP for work previously done by the Appellant for the College, since such work was not "Services under the Agreement".
81. The assessments and thus the appeals are not concerned with sums which the Appellant might have been able to recover from the College. All of the alternative assessments depend on the contractual rights and obligations between the Appellant and CLP immediately before the agreement of 24 April 1998.
82. At that point the Appellant had incurred costs in respect of the amounts due for work by the contractors which had been certified and had incurred a contingent liability for retentions and for work done but not yet certified. The Appellant was entitled to be paid those costs together with professional fees plus 2 per cent although apart from stage payments this entitlement was deferred until final certificates. The Appellant had not however incurred costs in respect of work not yet done and had no entitlement to be paid in advance for such work.
83. If the Appellant's accounting date had been immediately before the agreement of 24 April 1998 it would have been proper to recognise in the accounts a figure for the work done for the Appellant as a liability insofar as not paid for and a valuation of the costs incurred as an asset. It would have been contrary to accounting standards to recognise the work not yet done at that date.
84. We now turn to the effect of the agreement of 24 April 1998, see paragraph 36 above.
85. Although clause 3.2 is poorly drafted and clearly omits words to connect it with clause 3.1, it was clearly intended to be read with clause 3.1. Words such as "the sale of the said Business shall be subject to" must be read into the opening of clause 3.2. Unless wording to this effect is implied, we cannot see that clause 3.2 has any effect.
86. The business of CLP was letting and developing the sites leased from the College. The obligation to pay the Appellant the sums due under the contract of 24 November was clearly a liability or engagement in connection with the business at 24 April 1998. Clause 3.2 therefore discharged all liabilities of CLP to the Appellant under the construction agreement. Since the leasehold interests in the sites were assigned to the Appellant so that CLP no longer had any interest in the performance of the construction agreement, even without clause 3 the assignment had the effect of discharging the future obligations of the Appellant to perform the services under the agreement.
87. Both the Appellant and CLP conducted themselves on the footing that the obligations under the contract of 24 November 1997 were discharged. We consider that this was the direct result of the agreement of 24 April rather than by a collateral contract. We do not consider that the construction agreement was terminated under clause 13 since no notice was given under clause 13.1, however if it was so terminated it seems to us that the quantum meruit basis would be on the basis of the remuneration on a cost plus 2 per cent basis for the work done at 24 April.
88. The first assessment was on the basis that the transfer of the lease constituted payment of non-monetary consideration for the construction services supplied by the Appellant. It is trite law that consideration does not have to consist of money, see section 19(3) of the VAT Act 1994. The submission of Miss Noble was that the necessary direct link between the performance of services by the Appellant and the transfer of lease by CLP were not present. We do not agree. The leasehold interest of CLP in the sites on which the Construction Centre was already erected and the two Blocks were being built was clearly in excess of the figure of £100,000 attributed to the assignment of the lease under clause 1. The liabilities discharged by the Appellant under clause 3.2 were clearly substantial so that read on its own clause 3 would have been wholly uncommercial. In our judgment the agreement of 24 April 1999 only made commercial sense when read as a whole and on that basis the necessary direct link between the assignment of the lease and the performance of the construction services is present. It would be absurd if accepting a cheque for a sum due for services was receipt of payment but an agreement to accept an asset in return for discharging the liability to pay the sum was not receipt of payment. The reality is that the Appellant took an assignment of the lease in return for paying £100,000 and discharging CLP from the liability to make any further payment for the work done by the Appellant for CLP. The lease was non-monetary consideration. The value attributed by the parties to the lease was the amount of the liability discharged plus £100,000. The receipt of that non-monetary consideration constituted the receipt of "payment" by the Appellant written regulation 93(1)(a) on 24 April 1998.
89. We leave the calculation of the amount of the payment to the parties to agree with liberty to apply if this proves impossible. However the liability discharged can only be the cost to the Appellant of the services performed by it for CLP plus 2 per cent; since all liabilities were discharged there will be no deduction for retentions.
90. Turning to the regulation 93(1)(c) assessment, we consider that construction services are performed when the obligations under a construction agreement are discharged for whatever reason. Normally this will be because the works are completed. However where as here the obligation to perform the work is discharged as a consequence of an agreement between the parties, we hold that the date of discharge is the date of performance that being the date at which no services remain to be performed.
91. The consideration for the performance of services for which payment has not been made can only be the consideration due under the contract insofar as not varied by any agreement including that discharging the contract. In Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689 Lord Diplock at page 717B described a building contract as "… an entire contract for the sale of goods and work and labour for a lump sum price payable by instalments as the goods are delivered and the work is done" (see Chitty, 28^th ed (1999) at para 37-004). It seems to us that the quantum of the alternative assessment is the same as that under regulation 93(1)(a). We can see no legal basis on which the Appellant can be treated as having performed services for CLP which were carried out for the College rather than CLP or as having performed services which had not in fact been performed. We are satisfied that the regulation 93(1)(c) assessment cannot be greater than that under regulation 93(1)(a). That assessment is therefore academic since the regulation 93(1)(a) tax point occurred first.
92. The final alternative assessment was that under regulation 93(1)(b) and Schedule 6, paragraph 1.
93. It was not the case for Customs that the original construction agreement of 24 November 1997 was not a genuine agreement or that the stage payments under the agreement were for less than open market value.
94. Miss Haynes' submission was that the agreement of 24 April 1998 retrospectively varied the earlier agreement so that the stage payments became the entire consideration which thus became less than open market value.
95. If the Appellant had succeeded in resisting both the assessment under regulation 93(1)(a) and that under regulation 93(1)(c), there would have been considerable force in this submission. We note that it is clear from Schedule 6, paragraph 1(2) that a direction can change the value of a supply retrospectively.
96. However on the basis of our conclusions as to regulation 93(1)(a) we do not consider that there was a variation making the stage payments the only consideration. Once account is taken of the non-monetary consideration, there was no undervalue of the supplies made. We do not consider in any event that an assessment under regulation 93(1)(b) and Schedule 6, paragraph 1 could in the present case result in a higher assessment than under regulation 93(1)(a) or (c).
97. For the sake of completeness we do not accept that the regulation 93(1)(b) assessment for period 12/97 would have been out of time. We accept the evidence of Mrs Halliday (see paragraph 42) that she considered that she needed further information in order to make the assessment and in view of the decision of the Court of Appeal in Pegasus Birds Ltd v Customs and Excise Commissioners [2000] STC 91 that is decisive.
98. Our conclusion is that the preferred assessment under regulation 93(1)(a) falls to be reduced substantially but is otherwise affirmed.
99. We direct that the parties notify the Tribunal if agreement as to quantum has not been reached in two months in which case the matter will be relisted on this aspect.

THEODORE WALLACE

CHAIRMAN

RELEASED:

LON/99/909

LON/00/402