Sale and leaseback — Virtual assignment — Appellants assessing VAT on basis of no letting — Whether transaction exempt from VAT as leasing or letting of immovable property — Whether right of occupation essential feature of leasing or letting — Appeal allowed
As part of a restructuring exercise, the respondent entered into a sale and leaseback agreement under which it sold its entire property portfolio to M Ltd and took back leases, or, in the case of leasehold properties, underleases, of those properties that it still wished to occupy. Certain of the leasehold properties were subject to covenants against assigning without the landlord’s consent. The respondent was concerned that obtaining consent would take more time, and that consent might be withheld given that M Ltd was a new company without a track record in the market. To circumvent that problem, those properties were made the subject of a “virtual assignment” under which the economic benefits and burdens of the leases would be transferred to M Ltd, but without any actual assignment of the leasehold interest, and with the respondent remaining in occupation. The agreement also provided for the respondent to pay a principal fee to M Ltd that was similar to the rent that it would have paid under a formal leaseback.
The appellant commissioners assessed the respondent to VAT on the transaction on the basis that the virtual assignments were not exempt supplies involving the “leasing or letting of immovable property” within article 13B(b) of Council Directive 77/388/EC (Sixth Directive). Instead, they found that the supplies made by M Ltd to the respondent were standard-rated supplies of agency and property-management services. The VAT and Duties Tribunal upheld that decision, but its ruling was reversed on an appeal by the respondent: see [2005] EWHC 831 (Ch); [2005] 3 EGLR 73; [2005] 43 EG 190. The judge held that the transaction had the essential features of a letting, even though no right of occupation was granted, since the bundle of rights given to M Ltd had been carefully constructed to reflect, so far as legally possible, the effects of a legal assignment. He found that the principal fees were paid pursuant to an agreement under which, as between the parties, the respondent was occupying the property pending the completion of an assignment to M Ltd. The appellants appealed.
Held: The appeal was allowed.
The Community law authorities left no room for doubt that a right of occupation was an essential and fundamental element of a transaction of leasing or letting for the purposes of article 13B(b) of the Sixth Directive: Belgium v Temco Europe SA C-284/03 [2005] STC 1451 and Customs & Excise Commissioners v Cantor Fitzgerald International C-108/99 [2001] ECR I-7257 applied; Staatssecretaris van Financien v Shipping & Forwarding Safe BV C-320/88 [1991] STC 627 and Stichting Goed Wonen v Staatssecretaris van Financien C-326/99 [2003] STC 1137 considered; Meierhofer v Finanzamt Augsburg-Land C-315/00 [2003] STC 564 distinguished. Under the terms of the virtual assignment agreement, M Ltd had acquired no contractual or proprietary right to occupy the properties in question, and, accordingly, could not transfer such a right back to the respondent; the respondent continued to occupy the premises by virtue of its status as tenant. It followed that the supply made by M Ltd under the contractual arrangements was not a supply of “letting or leasing”, and had been correctly characterised by the appellants as a standard-rated supply of agency and property-management services. The contractual arrangements did not reproduce the essential features of a letting, since one essential feature, the right of occupation, was missing. The virtual assignment had been designed to avoid the grant of a proprietary interest to M Ltd, and the regrant to the respondent of a right of occupation, because of the requirement for the landlord’s consent to such a transaction. It should not be treated for VAT purposes as having done precisely what it was designed not to do.
Rupert Anderson QC and Timothy Ward (instructed by the legal department of Revenue & Customs) appeared for the appellants; David Goy QC and Claire Simpson (instructed by CMS Cameron McKenna) appeared for the respondent.
Sally Dobson, barrister
