Dublin Waterworld Ltd v National Sports Campus Development Authority

• Jurisdiction: Ireland
• Judge: Mr. Justice Max Barrett
• Judgment Date: 07 November 2014
• Neutral Citation: [2014] IEHC 518
• Court: High Court
• Date: 07 November 2014

Dublin Waterworld Ltd v National Sports Campus Development Authority

Approved Judgment

No Redaction Needed

BETWEEN:

DUBLIN WATERWORLD LIMITED

PLAINTIFF

AND

NATIONAL SPORTS CAMPUS DEVELOPMENT AUTHORITY

DEFENDANT

[2014] IEHC 518

4621P/2013

THE HIGH COURT

Development – Lease – VAT – Dispute as to liability – Economic-value test – Reg.19 VAT Regulations 1979 – Mathematical formula only used "in the absence of other evidence"– Whether report of professional valuer constituted evidence or simply an estimation – High Court proceedings – Arbitration – Appeal to the Supreme Court – Ruled in favour of DWW – s.390 Companies Act 1963 – Security for costs – Connaughton applied

The parties Dublin Waterworld Ltd (DWW) is a limited liability company incorporated in Ireland. The National Sports Campus Development Authority is a statutory authority established by the National Sports Campus Development Authority Act 2006. It is the legal successor of Campus and Stadium Ireland Development Ltd (CSID).

Facts In 2000, CSID put development of the National Aquatic Centre up for tender. The successful bidder was Rohcon Ltd, chosen to undertake design and construction, and Waterworld UK Ltd, as the aquatic centre operator. DWW was to enter a 30 year Lease and operate the aquatic centre on the agreed terms following the practical completion of the centre by Rohcon. Pursuant to the Lease, DWW was obliged to pay CSID all VAT payable on the grant of the lease. It also prescribed that both parties were to deal with each other in good faith as regards complying with the obligations of the Lease. Subsequently, a dispute arose as to whether VAT was payable on grant of the lease. The Lease was subject to s.4 (3A) of VAT Act 1972. This provision brought in an anti-tax avoidance measure known as the "economic-value test". Where the market price of the VAT-able interest, i.e. the lease, is less than the economic value, i.e. the total development cost of the interest, the transaction would be VAT exempt, and the person transferring the interest (CSID) would not be entitled to charge VAT. Regulation 19 of the VAT Regulations 1979 sets out mathematical methods for calculating the value of the rent which must be used for ascertaining the "open-market price". Yet this is only used "in the absence of other evidence". CSID received a valuation report from Mr Cahill, a professional valuer within the Valuation Office. He confirmed the unencumbered rent to be €3m p/a; the open-market price of the Lease to be €35m and the total development cost to be €65m. As the open-market price of the Lease (€35m) was less than the total development cost (€66m), it was said CSID could not, pursuant to the economic-value test, charge VAT on the Lease. PwC confirmed that VAT regs could only be used "in the absence of other evidence" and that Mr Cahill"s estimation constituted such evidence. CSID later sought to rely on reg.19 (1) (c) (i) yielding an open-market value of €77m, an amount exceeding the total development cost of €68m, thus exposing DWW to VAT liability of €10m when, under the 1972 Act, its liability was zero. As a result, CSID issued an invoice and subsequently, a demand letter for said amount. The dispute was referred to arbitration. The arbitrator decided that VAT of €10m was due from DWW to CSID. He concluded Mr Cahill"s valuation was not evidence but merely an estimate, with the result that CSID were entitled to apply the mathematical formula provided for under reg.19. The Supreme Court overturned the decision of the High Court. It held Mr. Cahill"s expert opinion as to the open market value of the Lease was evidence of the value of that Lease and said the arbitrator was incorrect in concluding that Mr. Cahill"s opinion was not evidence for the purpose of reg.19. It stated neither the arbitrator nor the Revenue Commissioners had paid sufficient attention to the phrase "in the absence of other evidence" .

Held In terms of the application under s.390 1963 Act for security for costs the judge considered and applied the principles outlined in Connaughton Road Construction v. Laing O"Rourke Ireland Ltd. [2009] IEHC 7. The judge held the authority had established a prima facie defence to the claims made by DWW; and that the authority had established that DWW would not be able to pay its costs should the authority be successful. The Court ruled, by reference to the relevant case law, that there were public interest and impecuniosity grounds to justify refusal of an order for security of costs. Consequently, he refused to grant any order pursuant to s.390 Companies Act 1963.

VALUE-ADDED TAX ACT 1972 S4(3A)

VALUE-ADDED TAX ACT 1972 S10(9)

VALUE-ADDED TAX ACT 1972 S32(1)(T)

VALUE-ADDED TAX REGS 1979 SI 63/1979 REG 19

VALUE-ADDED TAX REGS 1979 SI 63/1979 REG 19(1)(D)(II)

VALUE-ADDED TAX REGS 1979 SI 63/1979 REG 19(1)(D)(I)

VALUE-ADDED TAX ACT 1972 S4A

COMPANIES ACT 1963 S214

COMPANIES ACT 1963 S390

USK DISTRICT RESIDENTS ASSOCIATION LTD v ENVIRONMENTAL PROTECTION AGENCY 2006 1 ILRM 363 2006/56/12022 2006 IESC 1

CONNAUGHTON ROAD CONSTRUCTION LTD v LAING O'ROURKE IRL LTD UNREP CLARKE 16.1.2009 2009/9/2055 2009 IEHC 7

TRIBUNE NEWSPAPERS PLC (IN RECEIVERSHIP) v ASSOCIATED NEWSPAPERS (IRL) LTD T/A IRISH MAIL ON SUNDAY UNREP FINLAY GEOGHEGAN 25.3.2011 (EX TEMPORE)

OLTECH (SYSTEMS) LTD v OLIVETTI UK LTD 2012 3 IR 396 2012/37/10865 2012 IEHC 512

LANCEFORT LTD v BORD PLEANALA & ORS 1998 2 IR 511 1998/8/2345

VILLAGE RESIDENTS ASSOCIATION LTD v BORD PLEANALA & ORS (NO 2) 2000 4 IR 321 2001 2 ILRM 22 2000/17/6590

COMCAST INTERNATIONAL HOLDINGS INC & ORS v MIN FOR PUBLIC ENTERPRISE & ORS UNREP SUPREME 17.10.2012 2012/7/1702 2012 IESC 50

MILLSTREAM RECYCLING LTD v TIERNEY & NEWTOWN LODGE LTD UNREP CHARLETON 9.3.2010 2010/34/8547 2010 IEHC 55

WEST DONEGAL LAND LEAGUE LTD v UDARAS NA GAELTACHTA & ORS 2007 ILRM 1 2006/57/12198 2006 IESC 29

1 1. This is an application for security for costs brought by the National Sports Campus Development Authority in the context of the within proceedings. Any views expressed in the judgment that follows are tentative in terms of the strength or weakness of any case that might be made by either side at plenary hearing.

I. Facts.

Background

2 2. Dublin Waterworld Limited ("DWW") is a limited liability company incorporated in Ireland. The National Sports Campus Development Authority ("the Authority") is a statutory authority established by the National Sports Campus Development Authority Act 2006. It is the legal successor of Campus and Stadium Ireland Development Limited ("CSID"). CSID was a private limited liability company established by the Government in or around 2000 to develop a sports campus at Abbottstown, Co. Dublin. It was owned by the Minister of Sports, Arts and Tourism (50%), the Minister of Finance (25%) and An Taoiseach (25%).

3 3. In or about 2000, CSID put development of the first element of the National Sports Campus, the National Aquatic Centre, up for tender. The successful bidder was a consortium comprising Rohcon Limited, as design and build contractor, and Waterworld (UK) Limited, as aquatic centre operator. It subsequently transpired that Waterworld UK was not in a position to enter into the desired 30-year lease of the proposed aquatic centre. So between 2001 and 2002, DWW entered into negotiations with CSID to enter into the 30-year lease as the aquatic centre operator. Heads of agreement were signed between CSID, Waterworld UK and Rohcon on 22 ^nd February, 2001. A project agreement was then entered into between these parties and DWW on 7 ^th February, 2002. This project agreement obliged DWW to enter into a 30-year lease and to operate the National Aquatic Centre on agreed terms following practical completion of the centre by Rohcon. On 30 ^th April, 2003, DWW and CSID entered into the lease ("the Lease") in relation to the National Aquatic Centre for a term of 30 years from 30 ^th April, 2003. Pursuant to the Lease, DWW was obliged to pay to CSID all VAT payable on the grant of the Lease. It was also a term of the Lease that the parties would deal with each other in good faith as regards complying with their obligations under the Lease. A dispute subsequently arose between the parties as to whether VAT was payable on the grant of the Lease. It is necessary to describe this dispute in some detail.

The VAT dispute

4 4. The Lease was subject to s.4(3A) of the VAT Act, 1972. This provision was introduced on the passing of the Finance Act, 2002, and brought in an anti-tax avoidance measure known as the 'economic value test'. The effect of this test was that where the market price of a potentially VAT-able interest, such as the Lease, was less than the "economic value", being the total development cost of that interest, the transaction would be VAT-exempt and the person transferring the interest, here CSID, would not be entitled to charge VAT. Under s.10(9) of the Act of 1972, the value of the potentially VAT-able interest being transferred pursuant to the Lease was defined as "the open market price" of the Lease. The "open market price" was the price which "the right to receive an unencumbered rent...for the period of the interest would fetch on the open market at the time that that interest [was] ...disposed of" Separately, s.32(1)(t) of the VAT Act, 1972, empowered the Revenue Commissioners to make regulations to give effect to that Act in relation to "the valuation of interests in or over immovable goods", a phrase that would include the Lease. Pursuant to that section, the Revenue Commissioners adopted reg.19 of the VAT Regulations 1979 ( S.I. No. 63 of 1979, as amended). Regulation 19 sets out mathematical methods for calculating the value of the rent which must be used for the purpose of ascertaining the "open market price". However, reg.19 specifically states that...