Principal and Fellows of Newnham College in the University of Cambridge (Respondents) v Her Majesty's Revenue and Customs (Appellants)

For the option-to-tax provisions governing land, occupation requires more than physical presence or a right to use facilities. It entails actual possession with some permanence and a sufficient degree of control over others’ use of the land.

Occupation may be shared or confined to part of the land. The court must therefore examine the parties’ legal rights and what occurs in practice. Where a tenant retains exclusive possession and its staff control access on its behalf, contractual rights enabling the landlord’s members to use services on the premises do not amount to occupation by the landlord.

The tax-avoidance purpose or artificiality of an arrangement cannot determine that issue where no sham or applicable abuse-of-rights case is advanced.

Newnham College constructed a library and leased it to a wholly owned company after electing under paragraph 2 of Schedule 10 to the Value Added Tax Act 1994 to treat the lease as taxable. The intended consequence was recovery of the input tax incurred on construction.

The statutory election would be ineffective if the college, as developer and grantor, remained in occupation of the library so that it was exempt land under paragraphs 2(3AA) and 3A(7). The VAT tribunal found that the college remained in occupation, but the Court of Appeal, [2006] EWCA Civ 285, concluded that occupation by the college had not been established.

HM Revenue and Customs appealed. It disclaimed reliance on any general abuse-of-rights principle. The central issue was whether the college’s members’ use of the library, its employment of the seconded staff and its relationship with the company placed the college in occupation of the premises.

1. Appeal dismissed by a majority of three to two. Lord Hoffmann delivered the leading speech. Lord Hope and Lord Mance agreed that the college was not in occupation of the library. Lord Walker and Lord Neuberger dissented on the application of the agreed legal principles.

2. Per Lord Hoffmann, occupation under paragraph 3A(7) of Schedule 10 to the Value Added Tax Act 1994 must be distinguished from the mere use of land or facilities. The statutory context linked occupation in Schedule 10 with a licence to occupy under Schedule 9. The relevant characteristic was a right to possess property as an owner would and to exclude others. Lord Hope expressed the test as requiring physical presence, actual possession with some permanence, and some degree of control over others’ use. Lord Mance agreed that occupation required possession rather than mere use.

3. Paragraph 3A(13) removed any requirement that occupation be exclusive. Occupation jointly with another person, or of only part of the land, was sufficient. The question was therefore whether the college retained any sufficient degree of possession or control alongside the company.

4. The lease granted the company exclusive possession. The company owned the ordinary library books and equipment, provided library services to the college and controlled the premises through the seconded librarian and staff. Although those staff remained employees of the college, they performed their library functions on behalf of and under the direction of the company. Members of the college had contractual rights to admission and services, but neither they nor the college controlled access by others. Those rights amounted to use of the library’s services, not occupation.

5. The company’s separate legal personality and the agreements had to be respected because no sham or abuse case was advanced. The tribunal had allowed the admitted tax-avoidance purpose to influence its assessment improperly. The Halifax abuse principle was not considered because HM Revenue and Customs expressly disclaimed reliance on it.

6. Lord Walker and Lord Neuberger would have allowed the appeal. They considered that the college’s members, hired books, employment of the staff, control of access and effective control of the company together established shared possession and control. The majority rejected that factual assessment. The Court of Appeal’s order accordingly stood.

1. House of Lords: By a majority of three to two, dismissed HM Revenue and Customs’ appeal and affirmed the Court of Appeal’s conclusion that the college was not in occupation of the library.
2. Court of Appeal: In [2006] EWCA Civ 285, reported at [2006] STC 1010, concluded that occupation by the college had not been established and rejected the tribunal’s analysis.
3. VAT tribunal: Found that the college remained in occupation. Its reasoning was materially influenced by the tax-avoidance purpose of the arrangements and by treating the college and company together.