Sale and leaseback — Virtual assignment — Whether transaction exempt from VAT as leasing or letting of immovable property — Respondents assessing VAT on basis of no letting — Appeal allowed and cross-appeal dismissed
The appellant entered into an agreement with M Ltd under which the latter would purchase the appellant’s property portfolio and then lease back any properties that the appellant wished to occupy. Problems arose with certain properties that the appellant held on leases that required the landlord’s consent for any assignment. Some were occupied by the appellant, and some were sublet. A “virtual assignment” for those properties was agreed, whereby the appellant would transfer all the benefits and burdens of the leases to M Ltd, while the appellant, or its sublessee, would remain in occupation. The agreement provided for the appellant to pay a principal fee to M Ltd similar to the rent that it would have paid under a formal leaseback, while the sublessees were to pay the rents due under the subleases direct to M Ltd.
The respondents assessed the appellant for VAT on the virtual assignment transaction on the basis that: (i) as to the properties occupied by the appellant, its supply to M Ltd was not an exempt supply of immovable property but a standard-rated supply of agency and property-management services; and (ii) as to the sublet properties, the rents paid to M Ltd constituted consideration for standard-rated supplies of agency and property-management services made by M Ltd to the appellant.
On an appeal to the VAT and Duties Tribunal, the tribunal upheld the respondents’ decision on the first point but disagreed with them on the second. It accepted the appellant’s argument that the rents under the subleases “accrued” to M Ltd for the purposes of para 8(1) of Schedule 10 to the Value Added Tax Act 1994, so that M Ltd was to be treated as the person making exempt supplies to the sublessees. The appellant appealed and the respondents cross-appealed. The central issue concerned the meaning of the phrase “leasing or letting of immovable property”, exempted from VAT by Article 13B of the Sixth Council Directive 77/388/EEC, which the relevant provisions of the 1994 Act were intended to implement.
Held: The appeal was allowed and the cross-appeal was dismissed.
In order to determine whether a transaction comprised a letting, account had to be taken of its essential features: Maierhofer v Finanzamt Augsburg-Land C-315/00 [2003] STC 564 applied. The essential features of leasing or letting should be identified by adopting a functional approach: Stichting Goed Wonen v Staatssecretaris van Financiën C-326/99 [2003] STC 1137 applied. “Letting”, in the Sixth Directive, could include a situation where no right of occupation was granted; it did not necessarily connote the grant of a right of occupation but included also the grant of a right to enjoy the fruits of the property. The bundle of rights given to M Ltd by the virtual assignment was carefully constructed to reflect, so far as legally possible, the effects of a legal assignment, and it should be equated with a legal assignment for the purposes of the Sixth Directive. As to the virtual leaseback, the relationship to be considered was that between the parties to the relevant supply. For that purpose, the relationship of either to the landlord could be ignored. The principal fee was paid pursuant to an agreement between the appellant and M Ltd under which, as between those parties, the appellant was occupying the property pending the completion of the assignment to M Ltd. The type of transaction that the parties sought to create between themselves was that which the Sixth Directive identified as a letting.
David Goy QC and Claire Simpson (instructed by Cameron McKenna) appeared for the appellant; Kenneth Parker QC and Tim Ward (instructed by the legal department of Customs & Excise) appeared for the respondents.
Sally Dobson, barrister
