20045
EXEMPTION – Land – Lease of Poly Tunnels – Whether lease or letting of immoveable property – Yes – Whether excluded from exemption as being letting of permanently installed equipment and machinery – Yes – Sixth Directive – Article 13B(b), excluded item 3
LONDON TRIBUNAL CENTRE
ARGENTS NURSERIES LTD Appellant
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: SIR STEPHEN OLIVER QC (Chairman)
RUTH WATTS DAVIES MHCIMA, FCIPD
Sitting in public in London on 13 and 14 February 2007
Philip Ronn, director, for the Appellant
Nicola Shaw, counsel, instructed by the acting solicitor for HMRC, for the Respondents
© CROWN COPYRIGHT 2007
DECISION
- This decision covers, as a preliminary point, the question whether supplies by the Appellant, Argents Nurseries Ltd ("Argents Nurseries") to its non-VAT group subsidiary, Argents Ltd, are, as Customs contend, exempt supplies or, as Argents Nurseries contends, standard rated. The supplies were invoiced quarterly by Argents Nurseries to Argents as standard rated supplies of "plant and equipment". The plant and equipment refers to so-called "Poly Tunnels". These are giant metal frames with polythene coverings that can be drawn over them to protect growing plants against rain, hail and extremes of climate.
- Argents Nurseries claimed credit for input tax borne by it on supplies to it of equipment in 2001 and in 2003. In 2004 Customs issued the assessments appealed against; these sought to recover that input tax on the basis that that input tax was attributable to exempt supplies of land (VAT Act 1994 Schedule 9 Group 1 item 1) or, in Community Law terminology, of immoveable property (Article 13B(b)). As the appeal proceedings have progressed, other issues have arisen, the outcome of which should be determined once this one central question has been resolved. We have identified that central question as follows:
"What is the nature for VAT purposes of the supplies described in the quarterly invoices (issued by Argents Nurseries to Argents) as supplies of plant and equipment? Are they properly to be characterized as supplies of land or immoveable property, as the Customs contend, or as equipment leasings as Argents Nurseries contends?"
- We made a site visit. We heard evidence from Philip Ronn who owns and runs Argents Nurseries.
- We start by recording the information we have about the poly tunnels. This is obtained from manufacturers' brochures, from photographs and from our own observations. We then explain the role that poly tunnels have in the plant nursery business. That will be followed by an explanation of how Argents Nurseries came to be making supplies to Argents.
The legal background
- Item 1 of Group 1 of Schedule 9 of VAT Act 1994 provides for the exemption of :
"The grant of any interest in or right over land or of any licence to occupy land …"
That provision covers the exemption in Article 13B(b) of the Sixth Directive (77/377/EEC) which provides for the exemption of:
"The leasing or letting of immoveable property excluding
- the provision of "holiday" accommodation
- the letting of premises and sites for parking vehicles
- lettings of permanently installed equipment and machinery
- hire of safes."
- Referring to the exemptions provided for in Article 13 the Advocate General (Jacobs) in Maierhofer v Finanzamt Augsburg-Land (Case C-315/00) [2003] STC 564 advised (in paragraph 34) that they should "have their own meanings which must in principle be independent of the civil law concepts of individual Member States". In particular, "the term used to specify the exemption in Article 13B(b) must be given a Community definition". Nothing in the Court's judgment detracts from that advice. We therefore follow the Community law guidelines (mainly Maierhofer) paying respect to, but not actually basing our decision on, the English Law cases.
- The English Law cases have focused on the question whether or not a chattel has become part of the land or remains a chattel. This arises where, for example, an object has been affixed to the land by a tenant. Can it be removed at the end of the term by the tenant? Does the Housing Act 1988 cover the letting of a houseboat? In Chelsea Yacht & Boat Company Ltd v Pope [2000] EWCA Civ 426 the Court of Appeal decided that it did not because there was insufficient degree of annexation to the land. Are greenhouses standing on dollies, supported by their own weight and not bolted to or otherwise affixed to the ground, to be included in a sale of the land? That was the point in Dibble Ltd v Moore [1970] 2 QB 181 where the Court of Appeal decided that the greenhouses were not "erections" within section 62(1) of the Law of Property Act 1925 with the result that they did not pass to the purchaser. Did a chalet resting on concrete foundation blocks but not physically attached to the land remain a chattel, with the result that the occupant was unprotected by the Rent Act 1977, or had it become part and parcel of the land on which it stood, in which case protection was available? That had been the issue in Elitestone Ltd v Morris [1997] 2 All ER 513 where the House of Lords decided that because the chalet could only be enjoyed in situ and could not be removed save by destruction, it formed part of the realty and should therefore cease to be a chattel.
- None of the English cases was concerned with the present question of whether there was a grant of an interest over land or licence to occupy land. But they all relate to the question of whether the chattel in question has become part of the land. In all those cases the degree of attachment has been the determinative feature. Maierhofer was concerned with whether there had been a leasing or letting of immoveable property (within Article 13B(b)). Mr Maierhofer had constructed buildings on land in Germany and leased them for use as temporary housing for asylum seekers. The buildings were made from prefabricated components. They were assembled and bolted onto a concrete apron. They could be dismantled by eight persons in ten days and they could be re-erected elsewhere. The Advocate General suggested as the correct criterion whether a building or similar structure constitutes immoveable property as being "… whether the structure is firmly fixed to or in the ground": see paragraph 38. His advice in paragraph 42 is as follows:
"In my view, buildings such as those in issue must be regarded as firmly fixed to or in the ground within the meaning of the suggested criterion. The buildings stand on a concrete base erected on concrete foundations sunk into the ground and are secured by bolts embedded in those foundations. It appears that they were solidly built in order to last at least five years. It would take a team, of eight persons a period of ten days to dismantle them. They may thus be distinguished from tents, caravans and mobile homes which are both inherently mobile and less firmly attached to the ground."
The Court's conclusion of whether there had been a "letting of immoveable property" by Mr Maierhofer was expressed in paragraph 35 of the Judgment as follows:
"The answer to the … question must therefore be that the letting of a building constructed from prefabricated components fixed to or in the ground in such a way that they cannot be either easily dismantled or easily moved constitutes a letting of immoveable property for the purposes of Article 13B(b) of the Sixth Directive, even if the building is to be removed at the end of the lease and re-used on another site."
In reaching that conclusion the Court had observed that the property in issue in EC Commission v France (Case C-60/96) [1999] STC 480 (where the Court had proceeded on the basis that the supplies were not of immoveable property) had been caravans, tents, mobile homes and light framed leisure dwellings; a characteristic of those items of property having been their mobility or the ease with which they could be moved.
- The task for us therefore is to examine the poly tunnels from all aspects, physical and functional, and to determine whether they have been fixed to the ground in such a way that they cannot be easily dismantled or easily moved. If that leads to the conclusion that the relevant supply by Argents Nurseries to Argents falls within the expression "leasing or letting of immoveable property" (Article 13B(b)), we then have to address the question whether the supply is excluded from exemption on the basis that it is a letting of permanently installed equipment and machinery falling within excluded item 3 to Article 13B(b).
The Poly Tunnels
- The manufacturer's name for these is "Multi Rovero Roll-Air" ("MRRA"). The manufacturer's brochure describes the poly tunnel as follows:
"ONE HUNDRED PER CENT VENTILATION
ONE HUNDRED PER CENT CLIMATE CONTROL
Exclusive open-roof technology with previously unknown possibilities for complete climate control. Roll-Air greenhouses give the optimal cultivation and growth climate to your plants.
A more compact crop, improved colour and a higher quality!
The Roll-Air greenhouse quickly pays for itself!"
For the dimensions we take the MRRA 800. This comes in modules, each covering 8 metres by 4.5 metres of horizontal space. The wider part of the module supports a double barrel-vaulted structure at the top. The height to the top of the vaulting is 5.75 metres and the height to the base of the vaulting is 4.55 metres.
- Each module is supported by upright columns. Each upright column is bolted onto a "dollie". The dollie is an individual concrete block. It is about 1.5 feet deep and is sunk into the ground; the top of the block is flush with the ground. Emerging from the top of the dollie is a short bar with holes for the bolts used for attaching it to the upright column. Each poly tunnel in the present case has 84 dollies. (This appeal is concerned with two poly tunnels.) Philip Ronn expressed the view that poly tunnel structures needed to be fastened to the ground to prevent them from blowing away. He said also that all the upright columns had to be and remain on an absolutely level plane. We have inferred that the firm and level base afforded by the 84 separately installed dollies is an essential ingredient in the overall structure.
- When the modules are erected they are joined together to make four long aisles with the barrel vaulting stretching from one end of the aisle to the other. Across the aisles are light steel trusses that are supported by the corner columns of each module. Each end of the structure is covered by a fixed polythene material. The sides have a stronger polythene material that can be lifted from the ground or lowered to suit the requirements of the nursery.
- At the bottom of each side of each barrel vault is a roll of tough polythene. This can be unrolled to provide a covering over the top of the poly tunnel. Machinery to roll out and roll back the covering is situated at one or more points in the premises covered by the poly tunnel.
- The poly tunnel (MRRA) system comes with ventilation and cooling fans and a shading attachment.
- The first stage in the process of erecting the poly tunnel is the sinking of the dollies. Holes are created with an auger (a large drill); this, said Philip Ronn, took about a day. The holes are then bedded with hard core and the dollies are fitted, each one being surrounded by a small amount of concrete. Fitting dollies to support one module takes about two hours. The kit is assembled later. Mr Ronn explained that this is a quite quick process, taking about two days.
- The entire poly tunnel could, said Philip Ronn, be quite easily removed in modules of threes and fours at a time. There were no present plans to move the two poly tunnels. But moving them might become necessary if, e.g., the land were to be sold for development or the planning authorities created difficulties.
- The first of the poly tunnels was erected in mid-2001. Planning permission had been obtained for the erection of one poly tunnel to replace existing glasshouses. Planning permission was needed, Philip Ronn explained, because the poly tunnels were to be in place for more than twelve months. The second poly tunnel was erected in mid-2003. Both remain in place now.
- The poly tunnel has a recommended life of ten years. Some joints to the present two poly tunnels have been replaced since they were erected. After seven to eight years the steel tubes start to come apart or collapse. None of the polythene parts has, as yet, needed replacing.
- The two poly tunnels cover what appears to us to be less than one-twelfth of the total ground area occupied for the nursery business.
The Nursery business
- Argent's business is that of the propagation and supply by wholesale of plants.
- The process starts with propagation. This includes growing plants from seed or producing more plants by separating existing mature plants. When ready, the plants are potted and the "growing on" process (to use Mr Ronn's expression) starts. Those plants that require protected cover are placed in their pots on the ground in the protected cover areas. They remain there until the growing process has made them ready for transfer to the retailer.
- These protected cover areas include parts of the nursery where massive moveable greenhouses on rollers cover the plants or, when rolled back, expose them to the open air as required. The poly tunnels have replaced some of those mobile greenhouses. The poly tunnels do the same thing but make better use of the ground space. 80% of the time they are completely open at the top. The growing plants need to be open to the elements as much as possible in the course of their growth to make them durable and to avoid their flowering too soon. But they can be damaged by rain, hail and (in some cases) by intense cold. On those occasions the poly tunnel covering the barrel vaulting is rolled out.
- The growing plants in their pots are placed in squares in the poly tunnel, separated by access strips. The base of each square is covered by a dark fabric. As far as we could see, no use is made of the underlying soil in the area covered by the poly tunnel during the course of the production process. The plants are serviced by regular inspection and watering. The sprays are attached to moveable hoses leading from tap points fixed to the watering system. When the plants are ready to move on to the retail outlets, they are placed on trays. The trays are fitted into the shelves of trolleys that are towed up the walkways by tractors and on to the loading area at the front of the nursery. At the loading area are Argents lorries or lorries hired in for distribution purposes. Argents then on load the trays of plants and deliver them to the retail outlets where they are transferred to the retailer.
The transactions to which the assessments relate
- Argents Nurseries supplies "management support" services and "equipment hire" to Argents, its subsidiary. Argents is a wholesale nursery growing bedding, perennial and vegetable plants at Edney Common near Chelmsford.
- In the 02/01 period Argents and Argents Nurseries took part in a sale and lease back transaction. Argents transferred business assets, including the land on which the nursery activities are carried on, to Argents Nurseries. In September 2001, following the erecting of the first poly tunnel, Argents Nurseries leased it to Argents. In or about September 2003, and following the erection of the second poly tunnel, Argents Nurseries leased it to Argents.
- The precise nature of the transactions between Argents Nurseries and Argents is not clear. There is nothing in writing. The Statement of Case states that the "greenhouses" were leased back by Argents Nurseries to Argents and that, according to the invoices, the rent payable by Argents to Argents Nurseries was broken down into two elements being (i) an amount in respect of the land and (ii) an amount in respect of the "greenhouses" themselves. Argents Nurseries refers to the items in question as poly tunnels and not as "greenhouses". There was no challenge to Mr Ronn's evidence that the poly tunnels had been erected and leased to Argents some months after the original sale and lease back transaction had taken place in the 02/01 period. For the avoidance of doubt, we find as a fact that the first poly tunnel was erected in the summer of 2001 and leased by Argents Nurseries to Argents in September 2001; the second poly tunnel was erected in the summer of 2003 and leased by Argents Nurseries to Argents in September 2003.
The case for Argents Nurseries
- The supplies of the poly tunnels are, Mr Ronn argued, wholly standard rated supplies. They are not, having regard to the minimal degree of annexation of the poly tunnels to the ground, supplies "of any interest in or right over land or of any licence to occupy land" within Schedule 9 Group 1 item 1. Nor, for the same reason, can they be regarded as the lettings or leasing of immoveable property within Article 13B(b).
The case for Customs
- Customs, represented by Nicola Shaw, say that the supply comprising the poly tunnels is an exempt lease of "land" within Schedule 9 Group 1 item 1. The term "land" includes "buildings and other structures" by virtue of Schedule 1 to the Interpretation Act 1978. The poly tunnels are sufficiently annexed to the land on which they stand to rank as land for the purposes of the English land law. They are sufficiently fixed to or in the ground to be regarded as immoveable property; the transaction is therefore a lease or licence of immoveable property for purposes of Article 13B(b) (as interpreted and applied in Maierhofer, see above).
- Nor, Customs argued, are the supplies excluded from exemption by Article 13B(b), Excluded item 3 on the basis that they comprise "lettings of permanently installed equipment and machinery". By analogy with the "planteria" in Gray v Seymours Garden Centre (Horticulture) (1995) 67 TC 401 at 408 (CA) which failed to qualify as "plant" or "machinery" for capital allowances purposes because they were premises in which the business was carried on, the poly tunnels cannot properly be regarded as "equipment" or as "machinery". In any event there was a single exempt supply by Argents Nurseries to Argents and that was the supply of the land or, in Community law terms, of the immoveable property; there was no separate supply of the poly tunnels.
Conclusions
- We think that the poly tunnels are sufficiently fixed to the ground to bring Argents Nurseries' supplies of them to Argents within the expression "the leasing or letting of immoveable property" – in principle and for the purposes of the opening words of Article 13B(b). The poly tunnels have to be fixed to the ground because they could be blown away or damaged by strong winds and they have to be attached to the dollies to provide a solid and absolutely level base to make the poly tunnels function properly. The dollies and the manner in which they fixed into the ground are, for so long as the poly tunnels remain standing, ingredient parts of the whole structure. The dollies are sunk into the holes in the ground and are encased by a small amount of concrete. The upright columns are bolted to the dollies and remain permanently bolted down. The function of the poly tunnel, once erected, is not, in contrast to a marquee or a light framed leisure dwelling referred to by the Court in EC Commission v France, supra, to be moved. They can be moved but dismantling, moving and re-erecting them would, we think, be a considerable operation. Moreover they are not designed to be moved.
- For those reasons we think that the polytunnels have been the subject of lettings or leasings of immoveable property.
- That does not determine the matter. We still have to decide whether Argents Nurseries' supplies of the poly tunnels are within Excluded item 3 of Article 13B(b), i.e. "lettings of permanently installed equipment and machinery". This raises three issues. First, are the poly tunnels "equipment and machinery"? Second, are they permanently installed? Third, is the supply one of equipment leasing falling within excepted item 3, or is it really a part and parcel of a single supply of the immoveable property?
- The expression "equipment and machinery" resonates closely with "plant" or "machinery". Expenditure on plant or machinery may qualify the trader for capital allowances in computing his income for direct tax purposes. We think that the poly tunnels are not excluded from qualifying as plant or machinery on the strength of the reasoning in the Seymours Garden Centre case. The "planteria" in issue in that case was a structure to which plants were brought already in a saleable condition and once there they were available for selection by customers. It was a purpose-built retail sales outlet which contained special features installed to enable plants to be tended on site for considerable periods and to be given special treatment. It was, on that basis and notwithstanding those special features, part of the premises in which the retail business was carried on. Here, as has been pointed out in the part of the Decision headed "the Nursery Business", the poly tunnels function as part of the production process. By the time the plants are brought to the poly tunnel area, they will have been propagated and placed in pots. Once in the poly tunnel they are left to harden in the open air but protected where necessary from rain, hail and extremes of temperature by the roll-up mechanism of the structure. Then, when mature, the plants move on to the next stage in the business, i.e. the loading and distribution to the retailers' premises. In our view the poly tunnels can properly be described as plant, i.e. structures with which the business is carried on.
- The poly tunnels, we think, fall fairly within the words "equipment and machinery". In common with "plant", "equipment" connotes something with which a trader or taxable person equips himself for use in carrying on his economic activity.
- Are the poly tunnels equipment that has been "permanently installed"? The context is a letting or leasing of immoveable property. As we read the provision the condition for exemption is that the equipment be installed in the immoveable property to function on a permanent basis; equipment installed on occasions or on a temporary basis are not within excluded item 3. These poly tunnels have been installed for use until they have to be replaced, or unless something unexpected such as a sale takes place. They are, we think, permanently installed.
- The final issue is whether the supplies by way of leases of the poly tunnels are comprised in the single exempt supply of the nursery land. In this connection it will be recalled that the entire nursery premises were leased back by Argents Nurseries to Argents in the 02/01 period. The first poly tunnel was installed and let in 09/01 and the second poly tunnel was installed and let in 09/03. The two equipment leases relate to an area of land that, as we have noted, covers barely one-twelfth of the entire nursery premises. The consideration for the leases of the land has been identified in the quarterly invoices from Argents Nurseries to Argents separately from the consideration for the use of the equipment. We have no written agreements to go on, but the equipment leases appear to be concerned with a different arrangement from the original leases of the nursery land. The subject-matter of the original land lease is distinct from that of the two equipment leases. With those features in mind, we do not think that the leases of the two items of equipment can be joined with the land lease to make them a single supply of immoveable property. In the words of the Court in Levob v Staatssecretaris van Financien (Case C-41/04) [2006] STC 766 at page 788 (paragraph 22) those leases are not "so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split."
- For those reasons we are satisfied that the equipment leases relating to the two poly tunnels granted by Argents Nurseries to Argents are standard rated supplies and are not exempt supplies.
- We therefore conclude the preliminary issue in Argents Nurseries' favour. We award Argents Nurseries their costs of an amount to be agreed. If the outstanding matters cannot be agreed, they should be referred back to us within six months for a further determination.
SIR STEPHEN OLIVER QC
CHAIRMAN
RELEASED: 10 March 2007
LON 04/1069
