19599
Supply - “points rights” to be exchanged for accommodation - provision of right to accommodation to be arranged in UK or Spain - whether lease or letting of immoveable property - whether standard rated or exempt at point of supply - yes - whether supply divisible - no - “Finest Golf Cubs of the World” not followed.. Art 13B E.C. 6th Directive;  VATA 1994 Sch.9 Group 1.

EDINBURGH TRIBUNAL CENTRE

	MACDONALD RESORTS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC
					 (Member):	  Mr K Pritchard, OBE., BL., WS

Sitting in Edinburgh on Monday 24 April 2006

for the Appellant		Amanda Brown, KPMG

for the Respondents	Gillian Carty, Shepherd & Wedderburn , WS

© CROWN COPYRIGHT 2006.

DECISION

Introductory
This is an appeal against the decision of the Respondents that “option points” supplied by the Appellant to customers where a standard rated supply taxable at the standard rate.  That decision was enunciated in the letter from the Respondents to the Appellant dated 8 March 2004.  The Appellant contended that the supply was of a leasing or letting of immovable property or alternatively that the nature of the supply was a right to a letting of immovable property at a future date.  They also raised questions about the tax treatment of the situation where contracts could be concluded either in the UK or by the Appellant’s Spanish branch.

It would appear that there are 3 legal entities involved in the transactions to be discussed.  The Appellant, a limited liability company whose registered office was said in the statement of agreed facts to be 133 Fountainbridge, Edinburgh, although in the documentation produced was said to be Whiteside House, Whiteside Industrial Estate, Bathgate, West Lothian EH48 2RX.  The latter address is also that of the Registered Office of Macdonald Hotels Plc and of a club called Options by Macdonald Hotels and Resorts, an incorporated body.

At the Hearing the Tribunal was provided with a statement of agreed facts but also heard evidence from 2 employees of the Appellant Robert Scott their Finance Director and the Appellants Sales Administration Manager, Ms Valerie Kean.  From that agreed statement supplemented by oral evidence the Tribunal found the following facts to be established and material.

The Facts
The Appellant is the successor to a timeshare resort operation first registered for VAT purposes on 1 May 1975.  It operated in the sale of selling timeshare interests in properties both in the United Kingdom and Spain.  It arranged the ongoing maintenance of the properties on behalf of the timeshare owner and also since 2003, engaged in the running of the said club known as Options by Macdonald Hotels and Resorts (The Club).  There had been previously an owners club for each of the particular resorts in which timeshares were situated.  VAT was payable at the standard rate in relation to the purchase of a timeshare week if the property was less than 3 years old and either UK or Spanish VAT was payable for maintenance charges.

In 2003 the Appellant sought to maximise the use of their entire inventory of property, some of which were unsold timeshares, and also wished to introduce a degree of flexibility in relation to the product they were offering.  As a result of that the Appellant introduced the “Options by Macdonald Hotels and Resorts” (Options) concept.  That notion has obvious advantages both for the Appellant and customers.  The Club was non-profit making and had a Constitution which was produced.  The Club’s objects were defined in para 5 as being inter alia “to secure for the members rights to reserve holiday accommodation and other ancillary benefits for specified periods in each year”.

The Appellant was described as the founder member of the Club and was responsible for appointing a trustee and entering into a trust deed with the trustee for the purpose of protecting the various rights of the parties.

The Constitution of the Club carried the following definitions, relevant for present purposes:

Accommodation means any rights of use and enjoyment of a Unit which are capable of assignation or (as the case may be) are assigned to the Trustee but where the Title to the Unit remains vested in another party;

Club means the Macdonald Vacation Club; (presumably  an error since para 2 gives the name of the Club as “Options by Macdonald Hotels and Resorts” and the Macdonald Vacation Club is not otherwise mentioned.)

Deposited Accommodation means Accommodation the Title to which has been deposited in terms of Article 12.1;

Enhanced Member means an Ordinary Member who has deposited Title to Accommodation in terms of Article 12.1 and Enhanced Membership shall be construed accordingly;

Exchange Accommodation means Accommodation available for use by Members by virtue of arrangements entered into by the Founder Member with any company providing access to an exchange programme;

Hotel Accommodation means any hotel accommodation or other benefits provided by the Founder Member in terms of Article 25;

Occupancy Rights means a contractual licence giving rights to the exclusive use and occupation of Scheme Accommodation for the duration of a Use Period subject to and in accordance with the provisions of this Constitution;

Points means the units in which the extent of Occupancy Rights to which a Member is entitled are expressed;

Points Certificate means a certificate issued by the Founder Member which will specify the number of Points Rights issued to the holder of the Points Certificate;

Points Grading means, in relation to Scheme Accommodation, the allocation of Points for Use Periods which allocation may vary according to the size and quality of the Unit and the season and demand for the relevant Use Period;

Points Rights means the right of a Member to be credited each year with Points in accordance with Article 14;

Resorts means resort developments throughout the world and where applicable shall include moveable Accommodation;

Scheme means the leisure property occupation scheme conducted in terms of this Constitution;

Scheme Accommodation means all Transferred Accommodation and Deposited Accommodation;

Scheme Accommodation Tables means the Schedules which indicate the Scheme Accommodation, the number of Points in the Scheme relative to each Resort, and descriptions of the Accommodation and the facilities available to Members in connection with such Accommodation;

Scheme Properties means Scheme Accommodation and related Moveables and Common Facilities;

Title means the exclusive entitlement to Accommodation;

Transferred Accommodation means any Accommodation the Title to which has been transferred in terms of Article 12.1;

Trust Deed means a deed of trust made by the Founder Member in favour of the Trustee for the Club for the purpose of securing Accommodation for the benefit of the Club, which deed of trust will provide for all voting rights pertaining to Scheme Accommodation to be exercisable by the Founder Member;

Trustee means the independent trustee referred to in the Trust Deed or any replacement trustee;

Trust Property means all Scheme Accommodation and any other assets held by the Trustee under the terms of the Trust Deed from time to time;

Unit means immoveable property comprising a residential unit or units such as a lodge, chalet, apartment, house, cottage, suite or room, in each case including if applicable the fixtures and fittings therein;

Use Period means, in relation to any Accommodation, a period of a day or consecutive days shown in relation to that Accommodation in the relevant Resort Points Value Guide;

Use Year means the period of one year from the first day of the calendar month following the date of Membership but where an Enhanced Member has elected to receive Points in accordance with Article 12.1 the Use Year in relation thereto will be the period of 12 months from the date he would have otherwise had a right to occupy his Deposited Accommodation.

The Parties Agreed Statement of Facts contained in the undernoted terms, the following items as the essential features of Options.

a.	“MRL as the Founder Member transferred in or about October 2003 to the Trustee its right and title to the unsold timeshare weeks.  This transferred property comprised the Scheme Accommodation at the commencement of Options.
b.	MRL became entitled to the Points Rights arising from the transferred property.
c.	The Scheme Accommodation is operated by MRL.
d.	Any person can apply for admission to the Club subject to payment of an application fee subject to taking up a Points Certificate (i.e. purchasing Points Rights).
e.	The Club is to exist for a period of 30 years from 3 October 2003, that is until 2 October 2033.
f.	The Points Certificate is issued by MRL and specifies the number of Points Rights issued by MRL to the new member.
g.	The application fee represents the price paid for the Points Rights purchased and varies by reference to the number of Points Rights purchased.  There is no separate joining fee to become a member of the Club.
h.	A new member can purchase Points Rights from MRL.  Each Points Right is sold for a sum of £2.50 (subject to such promotional incentives as may be offered from time to time).
i.	Members of the Club can redeem their Points Rights for a right to occupy Scheme Accommodation for a specified period.
j.	The number of Points Rights required to be redeemed in order to obtain a right to occupy Scheme Accommodation for a specified period will vary accordingly to the nature of the property and whether the period of occupation is high season or low season.
k.	As a result of an agreement between MRL and interval international (which is not the subject of this appeal) members of the Club having redeemed their Points Rights in relation to Scheme Accommodation are entitled to exchange that accommodation through interval international and occupy accommodation owned by or affiliated to interval international.”

Following the commencement of Options, customers who had previously purchased fixed timeshare weeks from MRL prior to October 2003 were entitled (subject to payment of an enhancement fee) to introduce by way of deposit their interest in the fixed timeshare week so that it would form part of the Scheme Accommodation.

If the customer took up this option he would become a member of the Club (an “enhancement contract member”) The enhancement contract member would remain owner of the fixed timeshare week but in exchange for depositing their interest and payment of the enhancement fee, the enhancement contract member would be entitled to receive Points Rights.  The Points Rights to be received would be determined by the Appellant (by reference to the value ascribed to the grade of accommodation and the time of the fixed week and could then be redeemed in the same manner as for new members.

An enhancement contract member can choose, on an annual basis, whether to utilise the fixed timeshare week or whether to exercise his enhanced rights acquired by way of the Points Rights and elect to occupy another property in the Scheme Accommodation.  Either the fixed week or Scheme Accommodation can be exchanged through interval international.  The enhancement contract member has a period of two months from the start of each year within which to indicate whether he wishes to utilise the fixed timeshare week failing which the fixed timeshare week will form part of the Scheme Accommodation for that year and the enhancement contract member is allocated the Points Rights relative to that fixed timeshare week for that year which he is then free to redeem in the usual manner.

In addition, however, to the opportunity given to occupy timeshare accommodation at some resort for some period corresponding with the amount of points rights held the customer could, if he wished, utilise his points rights to obtain, if available, hotel accommodation in hotels owned and operated by Macdonald Hotels Plc.  There was also a facility whereby accommodation be it of a timeshare flat or other hotel accommodation elsewhere could be arranged and paid for by points rights.

Accordingly the purchaser of points rights did not acquire at the time of purchase any specific right to any particular property or indeed any right to any property at all since the points could be expended on the hotel accommodation.

There is an important feature which is present in the whole scheme.  In each of the documents, the resale and enhancement contract, the enhancement contract, and by para 41 of the “options” constitution the governing and applicable law is stated to be the Law of Scotland.  Accordingly the definitions and terms in those documents require to be construed according to the Law of Scotland.

The Legislation
Article 13B of the Sixth Council Directive (77/388/EEC) “Sixth Directive” provides, so far as is material:

“….. Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse;

(a)	…
(b)	the leasing or letting of immovable property excluding:

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

The United Kingdom implementation of those provisions is found in VATA 1994 Schedule 9 Group 1 which provides exemption for:

“1.	The grant of any interest in or right over land or of any licence to occupy land, or, in relation to land in Scotland, any personal right to call for or be granted any such interest or right, other than –

(d)	the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering;
(e)	the grant of any interest in, right over or licence to occupy holiday accommodation.

There is no statutory definitions of “leasing” “letting” or “holiday accommodation”.

Relevant Case Law
A Tribunal under the Chairmanship of Mr Malcolm Palmer in Holmwood House School Developments, 2003 No 18130 reviewed various ECJ cases between paragraphs 23 and 29.  That review cannot be improved upon and we adopt it.

The Tribunal in Holmwood then drew the undernoted conclusions from the judgments for the purposes of Article 13B.  Their narration was:

(a)	The leasing or letting of immoveable property is a concept to be determined by the principles laid down by the ECJ.  It is not to be determined by national law rules of land law.
(b)	Those principles require a transaction, if it is to be treated as a leasing or letting of immoveable property to include the following features:

(i)	it must relate to immoveable property, that is to say, the ground itself or to property firmly, fixed to the ground;
(ii)	it must create a right to occupy a particular piece of land or property;
(iii)	that right of occupation must give the right to exclude others and to occupy as owner;
(iv)	that right of occupation must be for an agreed duration; and
(v)	that right must be given for a payment for the period.

(c)	When determining whether these features exist or whether the transaction is rather relating to construction, the provision of services or other alternative type of supply, the Tribunal should take into account its essential features and not be bound by the particular way in which it may be artificially presented.
(d)	While the concept of leasing or letting of immoveable property, being a concept in relation to an exemption, is to be construed strictly, that does not mean that an interpretation must be made which is strained when compared with what are the essential features of the transaction in reality.

This Tribunal would, however, in the light of certain Scottish cases approach with caution some of the categoric statements made and the language in which they were made.  They would prefer the term “characteristics” (as used in Sinclair Collis Ltd 2003 STC 898 paras 24-26 where there was no comprehensive interpretation, rather than “principles”.)   Indeed an “agreed duration” is not a principle.  Further they do not think that national law rules are excluded in the consideration of whether any payment is exempt.  In Scotland it should be noted that an agreed duration may be the subject of implication rather than a direct provision of the contract.  Such circumstances would be special.  The matter was discussed in Gray v Edinburgh University 1962 SC157 where the view was expressed that where parties had agreed to the lease of a specific property and the property had been possessed by the tenant, with a rent being agreed but no provision was made in relation to duration that duration for one year would arise as an implication from the actings and agreement of the parties.  It should be noted that the Court stressed this does not mean that silence on duration can be overcome to set up a lease by implying a year’s tenancy but that if parties act as landlord and tenant in relation to specific property for a indeterminate period the lease will be deemed to the duration of one year.  That is the only exception to the standard essential criteria needed to set up a contract of lease, ie definition of the parties, the property, the rent and the duration.  There is further, however the concept of “tacit relocation” which allows a lease to continue after the ish from year to year.

Finest Golf Clubs of the World Tribunal Decision (2005 No. 19347)  was cited by the Appellant for the proposition that where there were unknown future supplies they could be divided between standard rated and exempt supplies by adopting in general a proportion discovered from experience.  Paragraph 19  stated:

“We accordingly reject the revised arguments on behalf of HMRC and are left with the last remaining question of how to impose VAT at the time of supply, when it cannot be known at that time what the nature of the arranged services, the provision of games of golf by UK and non UK golf clubs, will be.  We conclude that the contentions on behalf of Finest are correct and that this should be regarded as a matter of allocation, hopefully to be agreed by the parties.  We also agree with Finest that insofar as experience has suggested that approximately 90% of the arranged games are provided outside the UK, then if there is no reason to suppose that this proportion will change markedly in the future, for the present at least, that figure would appear to be a very significant one, in arriving at the allocation.  It would follow that approximately 90% of the consideration should be assumed to relate to the provision of future arrangement services that would fall outside the scope of UK VAT, and 10% would be treated as the consideration for the supply of ordinary UK taxable supplies.  Whether the figures are correct is of course a matter for discussion between the parties, and we are not deciding that the figures just assumed are the correct figures.”

In so doing the Tribunal rejected the contention by HMRC that the right conveyed in Finest Golf Clubs was conveyed at the time of purchase and that since it could not be determined what the services were i.e. whether they were within or outwith the UK then the provision was of a right and payment for it should be standard rated.

Parties’ attention was drawn to a decision of this Tribunal - The Highland Council v Commissioners of Customs and Excise 2006 No. EDN/05/16 and also to Kennemer Golf and Country Club v Staatssecretaris van Financien 2002 ECR 13293 [2002] QB 1252.  It is noted that that latter case was not cited to the Tribunal in Finest Golf Clubs either.

Kennemer held:
That although, in circumstances such as those of the first case, a member’s annual membership fee was a fixed sum that could not be related to each individual use of the association’s facilities, the service provided by the association consisted of the making available of its facilities to members on a permanent basis, so that there was a direct link between the membership fees and the association’s services; and that, accordingly, annual membership fees paid by a sports association’s members could constitute the consideration for the association’s services even though members who did not use the association’s facilities or did not use them regularly still had to pay their annual membership fee.

Highland Council followed that decision holding that an annual fee paid for the unrestricted use of services which could be either taxable or exempt, or even not used at all, at the choice of the customer was the provision of a right, taxable at the point of supply.  Division of services according to some calculated formula which did not necessarily apply to any transaction was not in accordance with the reality of the supply.

Should Finest Golf Clubs be followed?
This Tribunal holds that particularly in the light of paragraphs 39-41 of the ECJ judgment in Kennemer, but in any event as a matter of general principle and consideration of a special transaction that the passage quoted above from Finest Golf Clubs is unsound.  We do not follow it.   It appears to this Tribunal to be clear that at the time of sale of points rights there is a supply and that regard has to be had to that supply in determining its taxable status.  Since it cannot be clearly attributed to an exempt supply the general rule that turnover tax is levied at a standard rate must apply.  To do otherwise would be to create an unreal exemption and it has been said times without number, that exemptions require to be construed strictly.

Decision on whether points rights can be comprehended within the Exemption in Article 13B
The Tribunal has no hesitation in recognising that the Point Sales Contract is a Scottish contract and as such is to be interpreted according to Scots Law.  Therefore the national provisions set out in VATA 1994 Schedule 9 Group 1 require to comply with Scots Law regarding “the grant of any interest in or right over land or of any licence to occupy land …. In Scotland.”   For there to be such a “grant” there requires to be a “conveyance” or “disposition of such land, precisely defined, for a consideration and at a specified date.  No such essential elements are contained either in the Point Sales Contract or the Constitution.

Equally the Tribunal has no hesitation in concluding that what was purchased by way of points rights was not a  purchase letting or lease of immoveable property.  At the time of purchase no property was allocated to the contract, and, in any event, points rights themselves did not require to be exchanged for occupancy of any immoveable property covered by the exemption.  The fact that hotel accommodation could be made available is fatal to the contention that the sale of points rights is an exempt supply.  There was no lease or letting at the point of supply, the tax point, whatever may have happened subsequently.  Accordingly the contended attribution of tax, being a continuation of the previous regime which only dealt with immoveable property is misconceived.  

The true supply made is of a right to be granted various facilities when surrendering points rights at the choice of the holder, but subject to availability.  There was no exclusivity in relation to the supply, which again, is a powerful argument against the transaction falling within the exemption.  Equally the enhancement contract is, insofar as cash changes hands for the acquisition of points, in precisely the same position and the location of the original property held by the purchaser is of no consequence.

Decision
The appeal is accordingly dismissed.  

Expenses
The Respondents moved for expenses in the event of success.  There having been success we find the Respondents entitled to the expenses of the appeal which, failing agreement, will require to be taxed by the Auditor of the Court of Session in terms of Rule 29(3).

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  31st DAY OF  MAY 2006.

EDN/04/36