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Cite as: [2001] EWHC Ch 462

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Ashfield District Council v. Commissioners of Customs & Excise [2001] EWHC Ch 462 (30th November, 2001)

Case No: CH/2001/APP/010434

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
30th November 2001

B e f o r e :

THE VICE-CHANCELLOR
____________________


ASHFIELD DISTRICT COUNCIL
Appellants
- and -

COMMISSIONERS OF CUSTOMS & EXCISE
Respondents
 ____________________

Mr. Andrew Hitchmough (instructed by Messrs Berger Oliver for the Appellants)
Mr. Nigel Poole (instructed by Commissioners for Customs & Excise for the Respondents)
____________________

HTML VERSION OF APPROVED JUDGMENT

 ____________________

Crown Copyright ©

    The Vice-Chancellor :

  1. Ashfield District Council (“the Council”) is a local housing authority. As such it is charged by Housing Grants Construction and Regeneration Act 1996 with the administration within its area of the scheme for grant-aiding the renewal of private sector housing for which that legislation makes provision. In some cases Ashfield paid the builders for grant-aided work done by them. Included in those payments was VAT in the aggregate sum of £83,547. Ashfield claimed that the Commissioners of Customs & Excise (“Customs”) were liable to refund that amount pursuant to s.33 VAT Act 1994. Customs disagreed and Ashfield appealed to the VAT and Duties Tribunal. The Tribunal (Mr J.D.Demack) also disagreed and Ashfield now appeals to the court pursuant to s.11 Tribunals and Enquiries Act 1993. The question is to whom did the builders supply their services: the person whose application for a grant had been approved by Ashfield or Ashfield as the person who paid the builders?

  2. Before answering that question it is essential to consider the material provisions of the scheme provided for by Housing Grants Construction and Regeneration Act 1996. The Act makes provision (s.1) for four types of grant known as renovation grants, common parts grants, disabled facilities grants and HMO (that is to say houses in multiple occupation) grants. No grant is payable (s.2) unless it has been applied for by a qualified applicant and approved by the local housing authority. S.3(2) states, as might be implied from the fact that the relevant housing is confined to that in the private sector, that no grant is payable to a local authority. There are a number of preliminary conditions to be satisfied (ss.3 to 6) in respect of any type of grant. Ss.7 to 28 impose further restrictions in relation to the four types of grant. S.29 restricts the ability of a local housing authority to approve grants for work already started. S.30 provides for a means test; ss.31 to 33 deal with amount and apportionment. S.34 requires the local housing authority to notify an applicant as to whether or not his application has been approved within a specified time.

  3. S.35 provides that where a local housing authority has approved an application it “shall pay the grant” subject to the provisions of that Chapter (ss. 1 to 59) either by instalments or in one sum at the conclusion of the works. S.39 provides

    4. “39 Payment of grant to contractor

    (1) The local housing authority may pay a grant or part of a grant -

    (a) by payment direct to the contractor, or

    (b) by delivering to the applicant an instrument of payment in a form made payable to the contractor.

    They shall not do so unless the applicant was informed before the grant application was approved that this would or might be the method of payment.

    (2) Where an amount of grant is payable, but the works in question have not been executed to the satisfaction of the applicant, the local housing authority may at the applicant's request and if they consider it appropriate to do so withhold payment from the contractor.

    If they do so, they may make the payment to the applicant instead.”

  4. S.42 provides for the repayment of the grant by the applicant in the circumstances specified in the section. S.52 entitles the local housing authority to impose conditions on the approval of the grant. Those conditions may constitute a local land charge and subject to registration will bind successors in title to the relevant property. There is no provision for the repayment of any part of a grant paid to a contractor pursuant to S. 39.

  5. I should also mention the Group Repair Schemes for which Chapter II makes provision. Ss. 61 and 62 prescribe the type of buildings and works to which such a scheme may relate. S.63 provides that if such a scheme is approved by the Secretary of State then the local housing authority “may...enter into agreements to secure the carrying out of the works specified in the scheme”. It is common ground that in relation to such a scheme the works carried out as part of it are services supplied to the local housing authority so that VAT in respect thereof is recoverable under s.25 or s.33. This concession was wrongly recorded by the Tribunal (para 3) as having been made in relation to HMO grants.

  6. S.169 Local Government and Housing Act 1989 entitles a local housing authority to provide professional, technical and administrative services for owners and occupiers of dwellings in connection with works to their dwellings of specified classes. Such services may be free or subject to such charge as the local housing authority may determine. Pursuant to that power the Council set up within its environment health department an agency called Care & Repair or CNHIA (an acronym for Central Notts Home Improvement Agency) (“CNHIA”).

  7. Ashfield provided various standard forms for the administration of the scheme under the 1996 Act. An applicant is required to complete an application form running to 49 pages. By question 1.4 the applicant is asked to give the relevant name and address “if someone else (eg a relative, friend or organisation) is handling this application on your behalf”. By question 1.15 the applicant is asked “Do you agree for any grant approved to be paid to your builder either directly or by cheque made out to your builder”. The attention of the applicant is drawn to note 11. The note records that

    8. “Under section 39, the Council may pay a grant (or part of a grant) either directly to the contractor or by cheque made out to the contractor but given to the grant applicant. The Council can do this only if, before approving the grant application, they informed the applicant that this would or might be the method of payment.”

    It should be noted that question 1.4 may be answered in the negative or by specifying, for example, an architect as an alternative to CNHIA. Question 1.15, if answered in the affirmative, applies whether or not any person has been specified in answer to question 1.4 and whether or not that person is CNHIA.

  8. If the grant application is approved then the applicant is notified of that fact and informed what are the eligible works, the amount of the costs and expenses, the amount of the grant so approved and any contribution required or condition imposed. Payments of grant by the local housing authority require specific internal authority and, where the statutory conditions are satisfied, may be made in accordance with s.39. In such cases the invoice may be rendered by the builder to the local housing authority and paid direct by the local housing authority to the builder.

  9. In cases where the applicant has specified CNHIA in answer to question 1.4 then, as found by the Tribunal:

    10. “CNHIA will...supervise the works from start to finish in that it will invite tenders for the works from interested contractors on the Council’s approved list, allocate the contract to the lowest tenderer, inspect and control the carrying out of the works, arrange for the grant moneys to be released by the Council, and pay the contractor on the works being satisfactorily completed.” (para 8)

    “Whilst the works are in progress CNHIA, if appropriate, obtains from the Council and makes any interim payment due to the contractor. On receiving the contractor’s final invoice, CNHIA checks its correctness, and that the work has been carried out satisfactorily, before arranging for the Council to release the grant (or the remainder if there has been an interim payment) for payment to the contractor.” (para 15)

  10. Before turning to the decision of the Tribunal I should refer to the decision of the House of Lords in Commissioners for Customs & Excise v Redrow Group plc [1999] STC 161 which formed the basis for the submissions made by the Council both to the Tribunal and to me. In that case the representative of a group of 21 companies involved in house construction devised a sales incentive scheme to facilitate the sale by a prospective purchaser of his existing home. The representative agreed to pay the fees of estate agents instructed by the purchaser on that sale as and when the purchase of the house built by the group was completed. The representative sought to deduct the VAT on such fees on the ground that the estate agent’s services had been supplied to the representative of the builder. The Customs contended that the services of the estate agent were supplied to the purchaser.

  11. Lord Millett with whom Lords Steyn, Goff of Chieveley and Hutton agreed, said (page 171)

    12. “The solution lies in two features of the tax to which I have already referred. The first is that anything done for a consideration which is not a supply of goods constitutes a supply of services. This makes it unnecessary to define the services in question. The second is that unless the services are rendered for a consideration they cannot constitute the subject matter of a supply. In fact, of course, there can be no question of deducting input tax unless Redrow has incurred a liability to pay it as part of the consideration payable to him for a supply of goods or services.

    In my opinion, these two factors compel the conclusion that one should start with the taxpayer's claim to deduct tax. He must identify the payment of which the tax to be deducted formed part; if the goods or services are to be paid for by someone else he has no claim to deduction. Once the taxpayer has identified the payment the question to be asked is: did he obtain anything - anything at all - used or to be used for the purposes of his business in return for that payment? This will normally consist of the supply of goods or services to the taxpayer. But it may equally consist of the right to have goods delivered or services rendered to a third party. The grant of such a right is itself a supply of services.”

    Lord Hope of Craighead, to the like effect, (page 166) observed that:

    “The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something being done for him for which, in the course of furtherance of a business carried on by him, he has to pay a consideration which has attracted VAT? The fact that someone else, in this case, the prospective purchaser, also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction.”

  12. The Tribunal, Mr Demack, set out the facts, as I have summarised them, in paragraphs 2 to 19 of the decision. He recorded the submissions made on behalf of the parties in paragraphs 20 to 40. At this stage it is important to emphasise three points: (1) The claim of the Council is limited to those cases in which CNHIA had been specified by the applicant in answer to question 1.4. (2) In those cases CNHIA will only agree to act if the applicant agrees that direct payments may be made pursuant to s.39. (3) It is the fact of such direct payments by the Council to the builder pursuant to s.39 which justifies the claim of the Council to the refund of VAT under s.33. I will return later to the implications which arise from these aspects of the submissions for the Council.

  13. In paragraphs 41 and 42 the Tribunal considered the legal nature of agency and such indications in the contractual documents as might indicate that CNHIA acted as principal. Mr Demack concluded that no document indicated that CNHIA contracted as principal in dealing with housing improvement grants. In paragraph 43 he dealt with an argument for the Council that the money with which the builder was paid came from the Council’s own resources so that it contracted as principal. With regard to that submission Mr Demack said

    14. “I am unable to accept his claim either that in paying a contractor engaged on grant works the Council does so "out of its own resources", or that the award of a grant does not confer on the applicant any rights of lien on the moneys. In my judgment, once the Council has notified a house owner of the success of his grant application, provided the necessary conditions for the making of the grant are met, he or she is legally entitled to the grant moneys. They are funds provided by statute for a particular purpose, and which the Council is merely responsible for distributing. In my judgment, such funds never form part of the Council's own resources; it can never allocate and deal with them in a way in which it could if they did form part of those resources.”

  14. In paragraph 44 Mr Demack found that the relationship between CNHIA and the builder was not that of principal and contractor. There is no appeal from that finding. In paragraph 45 he considered the five points relied on by the Council as supporting the submission that where CNHIA was acting for the applicant the Council acted as principal vis a vis the builder. In relation to the fifth point he said

    15. “Finally, [counsel for the Council] claimed that "the Council is the sole owner of the funds used to pay the building contractors; at no time does the householder have any ownership of the grant moneys". In making that claim, he merely repeated an earlier one with which I have already dealt. But it is perhaps appropriate to mention that s.[3(2)] of the 1996 Act provides that: "No grant is payable under this Chapter if the person who could otherwise qualify as the applicant for the grant is - (a) a local authority". That it seems to me is confirmation that grant moneys are not, and never can be, part of the Council's own resources; it is entrusted with them pending release to the individual house owners on their works having been carried out to the required standards and in accordance with the grant conditions. I repeat, in my judgment, in those circumstances grant moneys belong to the house owner.”

  15. In paragraph 46 Mr Demack found as a fact that in each contract in which CNHIA was instructed to act for the applicant it acted as his agent. He then referred to the decision of the House of Lords in Commissioners for Customs & Excise v Redrow Group plc [1999] STC 161 and concluded:

    16. “Having found in the present case that building contractors make no supplies to CNHIA, I do not regard their Lordships observations as relevant in the present context.”

    He agreed with the observation of counsel for Customs that

    “It would be strange indeed if grants to two neighbours having identical grant works carried out by the same contractor were to result in different VAT treatment solely because the works of one of them were supervised by CNHIA.”

  16. For the Council it is contended that the issue does not turn on whether CNHIA acted as principal or agent. Accepting as it now does that CNHIA acted throughout as agent for the house-owner the Council submits that it is still necessary to consider the two questions posed by Lord Millett in Redrow. The Council contends that the Tribunal, in its concern with the question of agency, never really grappled with these questions. It submits that the factual conclusion that the services provided by the builders were not paid for by the Council is so unreasonable as to be wrong in law. Likewise it contends that the Tribunal should have appreciated that the Council did receive a number of rights and benefits in return for its payment so as to constitute a supply of services.

  17. Counsel for Customs supported the decision and reasoning of the Tribunal. I have already pointed out that he corrected the concession wrongly recorded by Mr Demack as having been made by Customs in regard to HMO grants. It was common ground that the reference to s.2(3), which I have corrected in the quotation from the Tribunal’s decision I have quoted in paragraph 14, was likewise an error.

  18. In my judgment the Tribunal was right for substantially the reasons Mr Demack gave. The first issue is the beneficial entitlement to the grant when approved. The Council criticised the Tribunal for not accepting the evidence of Ms Dennis, a solicitor in the employment of the Council, that the Council retained ownership of the grant money when allocated and that no one else had any right to the money at that stage. This question is one of law, not fact, to which Ms Dennis' evidence was irrelevant. In any event I do not agree.

  19. In the cases with which this appeal is concerned the grant when paid must necessarily have been approved. Accordingly, the Council was under a duty to pay it, subject only to the provisions referred to in s.35. None of those provisions entitled the Council to retain the amount of the grant for use for any other of its corporate purposes. The conditions which might have been imposed by ss. 37 and 38 must have been satisfied and none of the matters with which ss.40 to 43 deal could have arisen at that stage.

  20. S.39, in the context of the Act, confers power to make direct payments to the builder. This does not entitle the Council to pay the amount of the grant for any purpose other than that for which the grant was approved. Still less does it entitle the Council to refuse to make any payment at all. In my view, the applicant/owner is entitled as against the Council to compel payment of an approved grant either to himself or direct to the builder in discharge of his obligation for which the grant was given. This view is consistent with that of the Court of Appeal in Dennis Rye Pension Fund v Sheffield CC [1998] 1 WLR 840.

  21. Counsel did not put this case before either Mr Demack or me. I heard no argument in respect of its applicability. Nevertheless, the legislation with which the court was there concerned appears to be in the same form as now appears in the 1996 Act except that there was no equivalent to s.39. At page 845 Lord Woolf said:

    22. “The statutory provisions I have cited make it clear that the legislation contains a statutory code for the approval of grants. The rule is designed to give to the person entitled to the benefit of the grant a right to payment of the grant on compliance with the conditions contained in the legislation. When this has happened the authority has no justification for refusing payment. In this situation I can see no reason why the landlord cannot bring an ordinary action to recover the amount of the grant which is unpaid as an ordinary debt.”

  22. As I have noted there may be a distinction between that case and this in that s.39 appears to have been an addition to the 1996 Act. For the reasons I have already given that provision cannot be relied on by the Council as conferring on it a right to the amount of the grant. At the most it gives it a discretion as to the mode of payment. Even then the discretion cannot arise unless the applicant has acquiesced in it as required by s.39, or agreed to it as required by the application form used by the Council.

  23. It is also necessary to consider who, immediately before payment, was liable for the builders' account. It is clear from the speeches of Lord Millett and Lord Hope of Craighead in Redrow that the person making the relevant payment must be the person who is liable in respect of the underlying obligation. Thus Lord Millett pointed out in the passage from his speech I have quoted in paragraph 11 above that “if the goods or services are to be paid for by someone else he has no claim to deduction”. Similarly Lord Hope referred to the fact that “he has to pay a consideration”. (Emphases added) In this case, on the facts as found by the Tribunal, CNHIA acted throughout as agent for the owner. Accordingly neither CNHIA nor the Council were liable to the builders.

  24. The first question posed by Lord Millett in Redrow is “what is the payment of which the tax to be [refunded] formed part?” It is true that in the cases to which this appeal applies the builders’ invoices were rendered to and paid direct by the Council. But it is not uncommon for a single movement of money to achieve the satisfaction of two or more liabilities. In my view it is quite clear that that is what happened in these cases. The Council was not liable to the builder, only the applicant/owner. The applicant/owner was liable to the builder on the contract made between them through the agency of CNHIA. In addition the applicant/owner was entitled to receive the grant from the Council unless the Council paid the builder direct. There could be no such direct payment unless the applicant/owner had agreed to or at least acquiesced in the Council having the power to do so. The direct payment by the Council to the builder with the consent of the applicant discharged both liabilities.

  25. This analysis leads to the conclusion that the relevant payment was made by the applicant through the Council as its agent. Such analysis is supported by the anomalies to which the Council’s case gives rise. I have drawn attention in paragraph 12 above to three features of the Council’s case. The Council limits its claims to cases in which both direct payments and CNHIA are involved. But the power to make direct payments under s.39 exists whether or not some one has been nominated by the applicant in response to question 1.4 and irrespective of the identity of any such nominee. It must follow that it cannot be the conjunction of both the involvement of CNHIA and the existence of the power conferred by s.39 which justifies the distinction.

  26. Likewise it cannot be the involvement of CNHIA which makes the difference because the power of nomination is unlimited. The nominee is likely to be the agent of the applicant/owner; indeed that is implicit in the form of the question. No doubt it would be possible in some cases for the nominee to act as principal with regard to the builder but the finding of fact of the Tribunal excludes that possibility in these cases. Nor can it be the power to make direct payments which justifies the distinction made by the Council for if it was then the VAT would be refundable in all cases of grant-aided building works. That would go beyond what the Council claims.

  27. For all these reasons the Council cannot, in my judgment, satisfy the first condition to which Lord Millett referred in Redrow. It follows that I agree with the Tribunal that the appeal fails and that the second question posed by Lord Millett does not arise. However in case this case goes further it may be of assistance if I indicate briefly my views on it.

  28. It has to be assumed that the payment to the builders was made by the Council out of its own resources. On that assumption the question is “whether the Council obtained anything – anything at all – in return for that payment?” The Council suggests that it obtained three rights or benefits, namely (1) the right to have the building works completed at the homes of the successful applicants, (2) the discharge of its obligations under the 1996 Act and (3) the enhancement of the quality of life of the community for which the local authority is responsible.

  29. I do not consider that any of these matters could constitute a supply of services by the builder to the local housing authority which is the statutory requirement to which Lord Millett’s two questions relate. The payment of the grant does not give rise to any right of the Council exerciseable against the builder. The obligations of the builder are due to the applicant/owner under the contract between them. Rights to repayment conferred by s.42 are exerciseable against the applicant not the builder. The obligation discharged by the payment is to make the payment. Therefore the one cannot be acquired in return for the other; they are opposite sides of the same coin. The enhancement of the quality of life, which I am prepared to assume for the purposes of the argument, is received and enjoyed by the local community not the local housing authority. It is true that an enhanced quality of life may give rise to an increase in property values, thereby entitling the local authority to more council tax. In my view there is no sufficiently direct link between the payment to the builder and the increased council tax to give rise to a liability to VAT on the part of the Council and the consequential right to a refund under s.33 VAT Act 1994.

  30. In my view the Council is not entitled to a rebate of VAT paid in respect of grant-aided work of the type with which this appeal is concerned. In my judgment the Tribunal was right. I dismiss this appeal.

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